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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, 1996 Commission file number: 0-26076
SINCLAIR BROADCAST GROUP, INC.
(Exact name of Registrant as specified in its charter)
---------------------
Maryland 52-1494660
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 WEST 41ST STREET
BALTIMORE, MARYLAND 21211
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(410) 467-5005
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Class A Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing sale price of $25.25 per share as of February 24, 1997, the
aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $174.0 million.
As of February 25, 1997, there were 6,911,880 shares of Class A Common Stock,
$.01 par value, 27,850,581 shares of Class B Common Stock, $.01 par value and
1,138,318 shares of Series B Preferred Stock, $.01 par value, of the Registrant
issued and outstanding.
PART I
The matters discussed in this Form 10-K include forward-looking statements.
Such statements are subject to a number of risks and uncertainties, such as the
impact of changes in national and regional economies, successful integration of
acquired television and radio stations (including achievement of synergies and
cost reductions), pricing fluctuations in local and national advertising and
volatility in programming costs. Additional risk factors regarding the Company
are set forth in the Company's registration statement on Form S-3 filed with the
Securities and Exchange Commission on November 7, 1996 (as amended).
ITEM 1. BUSINESS
The Company is a diversified broadcasting company that owns or provides
programming services to more television stations than any other commercial
broadcasting group in the United States. The Company currently owns or provides
programming services to 28 television stations and has agreed to acquire one
additional television station. The Company believes it is also one of the top 20
radio groups in the United States, when measured by the total number of radio
stations owned, programmed or with which the Company has Joint Sales Agreements
("JSAs"). (For a description of JSAs see - Federal Regulation of Television and
Radio Broadcasting - Ownership Matters - Radio - Local Marketing Agreements.)
The Company owns or provides programming services to 23 radio stations, has
pending acquisitions of two radio stations (with both of which it has JSAs), has
a JSA with one additional radio station and has options to acquire an additional
seven radio stations.
The 28 television stations the Company owns or programs pursuant to Local
Marketing Agreements ("LMAs") are located in 20 geographically diverse markets,
with 23 of the stations in the top 51 television Designated Market Areas
("DMAs") in the United States. (For a description of LMAs see - Federal
Regulation of Television and Radio Broadcasting - Ownership Matters - Local
Marketing Agreements. A DMA is one of 211 generally-recognized television market
areas.) The Company's television station group is diverse in network affiliation
with ten stations affiliated with Fox, 11 with UPN, two with ABC, two with
Warner Brothers and one with CBS. Two stations operate as Independents.
The Company's radio station group is also geographically diverse with a
variety of programming formats including country, urban, news/talk/sports,
album/progressive rock and adult contemporary. Of the 26 stations owned,
programmed or with which the Company has a JSA, 12 broadcast on the AM band and
14 on the FM band. The Company owns or programs from two to seven stations in
all but one of the radio markets it serves.
The Company has undergone rapid and significant growth over the course of the
last six years. Beginning with the acquisition of WPGH in Pittsburgh in 1991,
the Company has increased the number of television stations it owns or programs
from three to 28. From 1991 to 1996, net broadcast revenues and operating cash
flow increased from $39.7 million to $346.5 million, and from $15.5 million to
$180.3 million. Pro forma for the acquisitions described below, 1996 net
broadcasting revenue and operating cash flow would have been $445.0 million and
$206.5 million, respectively.
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TELEVISION BROADCASTING
The Company owns and operates, provides programming services to, or has
agreed to acquire the following television stations:
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
- ----------------------- -------- ---------- ----------- --------- ------------- -------------- --------- --------------
Pittsburgh,
Pennsylvania......... 19 WPGH O&O 53 FOX 6 4 8/1/99
WPTT LMA 22 UPN 5 8/1/99
St. Louis, Missouri ... 20 KDNL LMA(e) 30 ABC 7 5 2/1/98
Sacramento,
California........... 21 KOVR LMA(e) 13 CBS 8 3 2/1/99
Baltimore, Maryland ... 23 WBFF O&O 45 FOX 5 4 10/1/01
WNUV LMA 54 UPN 5 10/1/01
Indianapolis, Indiana.. 25 WTTV LMA(e) 4 UPN 8 4 8/1/97
WTTK LMA(e)(f) 29 UPN 4 8/1/97
Cincinnati, Ohio....... 29 WSTR O&O 64 UPN 5 5 10/1/97
Raleigh-Durham,
North Carolina....... 30 WLFL O&O 22 FOX 7 3 12/1/01
WRDC LMA 28 UPN 5 12/1/01
Milwaukee, Wisconsin .. 31 WCGV O&O 24 UPN 6 4 12/1/97
WVTV LMA 18 WB 5 12/1/97
Kansas City, Missouri . 32 KSMO O&O 62 UPN 7 5 2/1/98
Columbus, Ohio......... 34 WTTE O&O 28 FOX 5 4 10/1/97
Asheville, North
Carolina and
Greenville/
Spartanburg/Anderson,
South Carolina....... 35 WFBC LMA(g) 40 IND(i) 6 5 12/1/01
WLOS LMA(e) 13 ABC 6 3 12/0/01
San Antonio, Texas .... 37 KABB LMA(e) 29 FOX 7 4 8/1/98
KRRT LMA(h) 35 UPN 6 8/1/98
Norfolk, Virginia...... 40 WTVZ O&O 33 FOX 6 4 10/1/01
Oklahoma City,
Oklahoma............. 43 KOCB O&O 34 UPN 7 5 6/1/98
Birmingham, Alabama ... 51 WTTO O&O 21 WB 5 4 4/1/97
WABM LMA 68 UPN 5 4/1/97
Flint/Saginaw/Bay
City, Michigan....... 60 WSMH O&O 66 FOX 5 4 10/1/97
Las Vegas, Nevada...... 64 KUPN Pending 21 UPN 8 5 10/1/98
Lexington, Kentucky ... 68 WDKY O&O 56 FOX 5 4 8/1/97
Des Moines, Iowa....... 72 KDSM LMA(e) 17 FOX 4 4 2/1/98
Peoria/Bloomington,
Illinois............. 109 WYZZ O&O 43 FOX 4 4 12/1/97
Tuscaloosa, Alabama ... 187 WDBB LMA 17 IND(i) 2 2 4/1/97
- ----------
(a) Rankings are based on the relative size of a station's DMA among the 211
generally recognized DMAs in the United States as estimated by Nielsen.
(b) "O&O" refers to stations owned and operated by the Company, "LMA" refers to
stations to which the Company provides programming services pursuant to an
LMA and "Pending" refers to stations the Company has agreed to acquire.
(c) Represents the number of television stations designed by Nielsen as "local"
to the DMA, excluding public television stations and stations which do not
meet the minimum Nielsen reporting standards (weekly cumulative audience of
at least 2.5%) for the Sunday- Saturday, 6:00 a.m. to 2:00 a.m. time period.
(Footnotes continued on following page)
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(d) The rank of each station in its market is based upon the November 1996
Nielsen estimates of the percentage of persons tuned to each station in the
market from 6:00 a.m. to 2:00 a.m., Sunday-Saturday.
(e) Non-License Assets (as defined herein) acquired from River City
Broadcasting, L.P. and its controlled entities and option exercised to
acquire License Assets (as defined herein). Will become owned and operated
upon FCC approval of transfer of License Assets and closing of acquisition
of License Assets.
(f) WTTK currently simulcasts all of the programming aired on WTTV and the
station rank applies to the combined viewership of these stations.
(g) Non-License Assets acquired from River City. License Assets to be acquired
by Glencairn, Ltd., subject to the Company's LMA, upon FCC approval of
transfer of License Assets.
(h) River City provided programming to this station pursuant to an LMA. The
Company acquired River City's rights under the LMA from River City and the
Non-License Assets from the owners of this station. The License Assets are
to be transferred to Glencairn upon FCC approval of transfer of assets.
(i) "IND" or "Independent" refers to a station that is not affiliated with any
of ABC, CBS, NBC, Fox, UPN or Warner Brothers.
OPERATING STRATEGY
The Company's television operating strategy includes the following key
elements.
ATTRACTING VIEWERSHIP
Popular Programming. The Company believes that an important factor in
attracting viewership to its stations is their network affiliations with Fox,
UPN, ABC, CBS and WB. These affiliations enable the Company to attract viewers
by virtue of the quality first-run original programming provided by these
networks and the networks' promotion of such programming. The Company also seeks
to obtain, at attractive prices, popular syndicated programming that is
complementary to the station's network affiliation. Examples of popular
syndicated programming obtained by the Company for broadcast on its Fox, WB and
UPN affiliates and independent stations are "Mad About You," "Frasier," "The
Simpsons," "Home Improvement" and "Seinfeld." In addition to network
programming, the Company's ABC and CBS affiliates broadcast news magazine, talk
show, and game show programming such as "Hard Copy," "Entertainment Tonight,"
"Regis and Kathie Lee," "Wheel of Fortune" and "Jeopardy."
Children's Programming. The Company seeks to be a leader in children's
programming in each of its respective DMAs. The Company's nationally recognized
"Kids Club" was the forerunner and model for the Fox network-wide marketing
efforts promoting children's programming. Sinclair carries the Fox Children's
Network ("FCN") and UPN's childrens' programming, both of which include
significant amounts of animated programming throughout the week. In those
markets where the Company owns or programs ABC or CBS affiliates, the Company
broadcasts those networks' animated programming during weekends. In addition to
this animated programming, the Company broadcasts other forms of children's
programming, which may be produced by the Company or by an affiliated network.
Counter-Programming. The Company's programming strategy on its Fox, UPN and
Independent stations also includes "counter-programming," which consists of
broadcasting programs that are alternatives to the types of programs being shown
concurrently on competing stations. This strategy is designed to attract
additional audience share in demographic groups not served by concurrent
programming on competing stations. The Company believes that implementation of
this strategy enables its stations to achieve competitive rankings in households
in the 18-49 and 25-54 demographics and to offer greater diversity of
programming in each of its DMAs.
Local News. The Company believes that the production and broadcasting of
local news can be an important link to the community and an aid to the station's
efforts to expand its viewership. In addition, local news programming can
provide access to advertising sources targeted specifically to local news. The
Company carefully assesses the anticipated benefits and costs of producing local
news prior to introduction at a Company station because a significant investment
in capital equipment is required and substantial operating expenses are incurred
in introducing, developing and producing local news programming. The Company
currently provides local news programming at WBFF in Baltimore, WLFL in
Raleigh/Durham, KDNL in St. Louis, KABB in San Antonio, KOVR in Sacramento, WPGH
in Pittsburgh and WLOS in Asheville. The Company also broadcasts news programs
on WDKY in Lexington, which are produced in part by the Company and in part
through the purchase of production services from an independent third party and
on
4
WTTV in Indianapolis, which are produced by a third party in exchange for a
limited number of advertising spots. River City Broadcasting, L.P. and its
controlled entities (collectively, "River City") provide the Company news
production services with respect to the production of news programming and on
air talent on WTTE. Pursuant to an agreement, River City provides certain
services to the Company in return for a fee equal to approximately $416,000 per
year. The possible introduction of local news at the other Company stations is
reviewed periodically. The Company's policy is to institute local news
programming at a specific station only if the expected benefits of local news
programming at the station are believed to exceed the associated costs after an
appropriate start-up period.
Popular Sporting Events. The Company attempts to capture a portion of
advertising dollars designated to sports programming in selected DMAs. The
Company's independent and UPN affiliated stations generally face fewer
restrictions on broadcasting live local sporting events than do their
competitors that are affiliates of the major networks and Fox since affiliates
of the major networks are subject to prohibitions against preemptions of network
programming. The Company has been able to acquire the local television broadcast
rights for certain sporting events, such as NBA basketball, Major League
Baseball, NFL football, NHL hockey, ACC basketball, Big Ten football and
basketball, and SEC football. The Company seeks to expand its sports
broadcasting in DMAs as profitable opportunities arise. In addition, the
Company's stations that are affiliated with Fox broadcast certain Major League
Baseball games, NFL football games and NHL hockey games.
INNOVATIVE LOCAL SALES AND MARKETING
The Company believes that it is able to attract new advertisers to its
stations and increase its share of existing customers' advertising budgets by
creating a sense of partnership with those advertisers. The Company develops
such relationships by training its sales forces to offer new marketing ideas and
campaigns to advertisers. These campaigns often involve the sponsorship by
advertisers of local promotional events that capitalize on the station's local
identity and programming franchises. For example, several of the Company's
stations stage local Kids Fairs which allow station advertisers to reinforce
their on-air advertising with their target audience. Through its strong local
sales and marketing focus, the Company seeks to capture an increasing share of
its revenues from local sources, which are generally more stable than national
advertising.
CONTROL OF OPERATING AND PROGRAMMING COSTS
By employing a disciplined approach to managing programming acquisition and
other costs, the Company has been able to achieve operating margins that the
Company believes are among the highest in the television broadcast industry. The
Company has sought in the past 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 28 stations in 20 DMAs reaching
approximately 14% of U.S. television households, the Company believes that it is
able to negotiate favorable terms for the acquisition of programming. Moreover,
the Company emphasizes control of each of its stations' programming and
operating costs through program-specific profit analysis, detailed budgeting,
tight control over staffing levels and detailed long-term planning models.
ATTRACT AND RETAIN HIGH QUALITY MANAGEMENT
The Company believes that much of its success is due to its ability to
attract and retain highly skilled and motivated managers, both at the corporate
and local station levels. A portion of the compensation provided to general
managers, sales managers and other station managers is based on their achieving
certain operating results. The Company also provides its corporate and station
managers with deferred compensation plans offering options to acquire Class A
Common Stock.
COMMUNITY INVOLVEMENT
Each of the Company's stations actively participates in various community
activities and offers many community services. The Company's activities include
broadcasting programming of local interest and sponsorship of community and
charitable events. The Company also encourages its station employees to become
5
active members of their communities and to promote involvement in community and
charitable affairs. The Company believes that active community involvement by
its stations provides its stations with increased exposure in their respective
DMAs and ultimately increases viewership and advertising support.
ESTABLISH LMAS
- --------------
The Company believes that it can attain significant growth in operating cash
flow through the utilization of LMAs. By expanding its presence in a market in
which it owns a station, the Company can improve its competitive position with
respect to a demographic sector. In addition, by providing programming services
to an additional station in a market, the Company is able to realize significant
economies of scale in marketing, programming, overhead and capital expenditures.
The Company provides programming services pursuant to an LMA to an additional
station in seven of its 20 television markets.
PROGRAMMING AND AFFILIATIONS
The Company continually reviews its existing programming inventory and seeks
to purchase the most profitable and cost-effective syndicated programs available
for each time period. In developing its selection of syndicated programming, the
Company balances the cost of available syndicated programs with their potential
to increase advertising revenue and the risk of their reduced popularity during
the term of the program contract. The Company seeks to purchase only those
programs with contractual periods that permit programming flexibility and which
complement a station's overall programming strategy 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.
Twenty-six of the 28 television stations owned or provided programming
services by the Company operate as affiliates of Fox (ten stations), UPN (eleven
stations), ABC (two stations), WB (two stations) and CBS (one station). The
networks produce and distribute programming in exchange for each station's
commitment to air the programming at specified times and for commercial
announcement time during the programming. In addition, networks other than Fox
and UPN pay each affiliated station a fee for each network-sponsored program
broadcast by the stations.
On August 21, 1996, the Company entered into an agreement with Fox (the "Fox
Agreement") which, among other things, provides that the affiliation agreements
between Fox and eight stations owned or provided programming services by the
Company (except as noted below) would be amended to have new five-year terms
commencing on the date of the Fox Agreement. Fox has the option to extend the
affiliation agreements for an additional five-year term 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 the Company will have the right
to purchase, for fair market value, any station Fox acquires in a market
currently served by a Company owned Fox affiliate (other than the Norfolk and
Raleigh-Durham markets) if Fox determines to terminate the affiliation agreement
with the Company's station in that market and operate the station acquired by
Fox as a Fox affiliate. The agreement confirmed that the affiliation agreement
for WTTO (Birmingham, Alabama) would terminate on September 1, 1996, and that
affiliation agreements for WTVZ (Norfolk, Virginia) and WLFL (Raleigh, North
Carolina) will terminate August 31, 1998. The Fox Agreement also includes
provisions limiting the ability of the Company to preempt Fox programming except
where it has existing programming conflicts or where the Company preempts to
serve a public purpose.
The Company's affiliation agreement with ABC for WLOS in Asheville has a term
which expires in September 1998 but which automatically renews for two-year
periods unless either party elects to terminate on six months notice, and its
affiliation agreement with CBS for KOVR in Sacramento has a 10-year term
expiring in 2005. Each of the Company's UPN affiliation agreements is for three
years, and expires in January 1998.
Each of the affiliation agreements relating to stations involved in the
Company's acquisition, agreed to on April 10, 1996, of certain assets of River
City ( the "River City Acquisition") (other than River City's Fox affiliates) is
terminable by the network upon transfer of the License Assets (as defined
herein) of the station. In addition, KDNL (St. Louis) is being operated as an
ABC
6
affiliate pursuant to terms negotiated with ABC, but no affiliation agreement
has been signed and ABC is not paying affiliation fees, and WLOS (Asheville) is
being operated pursuant to terms negotiated with ABC to replace an existing
agreement, but the new agreement has not been signed and ABC is paying the lower
affiliation fees called for under the old agreement.
RADIO BROADCASTING
The following table sets forth certain information regarding the radio
stations (i) programmed by the Company, (ii) with which the Company has JSAs,
(iii) or which the Company has an option to acquire. Except as indicated, the
Company owns the Non-License Assets (as defined herein) of the following
stations, and the Company programs these stations pursuant to an LMA with River
City.
RANKING OF STATION RANK EXPIRATION
GEOGRAPHIC STATION'S STATION PRIMARY IN PRIMARY DATE OF
MARKET MARKET BY PROGRAMMING DEMOGRAPHIC DEMOGRAPHIC FCC
SERVED(A) REVENUE(B) FORMAT TARGET(C) TARGET(D) LICENSE
- ---------------- ------------ ------------------------- -------------- -------------- -------------
Los Angeles 2
KBLA-AM (e) Korean NA N/A 12/1/97
St. Louis 17
KPNT-FM Alternative Rock Adults 18-34 4 2/1/04
WVRV-FM Modern Adult
Contemporary Adults 18-34 7 12/1/03
New Orleans 38
WLMG-FM Adult Contemporary Women 25-54 2 6/1/03
KMEZ-FM Urban Oldies Women 25-54 6 6/1/03
WWL-AM News/Talk/Sports Adults 35-64 1 6/1/03
WSMB-AM Talk/Sports Adults 35-64 19 6/1/03
Buffalo 40
WMJQ-FM Adult Contemporary Women 25-54 2 6/1/98
WKSE-FM Contemporary Hit Radio Women 18-49 1 6/1/98
WBEN-AM News/Talk/Sports Adults 35-64 1 6/1/98
WWKB-AM Country Adults 35-64 16 6/1/98
WGR-AM(f)(g) Sports Adults 25-54 10 6/1/98
WWWS-AM(f)(g) Urban Oldies Women 25-54 12 6/1/98
Memphis 43
WRVR-FM Soft Adult Contemporary Women 25-54 3 8/1/03
WJCE-AM Urban Oldies Women 25-54 11 8/1/03
WOGY-FM Country Adults 25-54 10 8/1/03
Nashville 44
WLAC-FM Adult Contemporary Women 25-54 6 8/1/03
WJZC-FM Smooth Jazz Women 25-54 9 8/1/03
WLAC-AM News/Talk/Sports Adults 35-64 11 8/1/03
Greenville/
Spartanburg 59
WFBC-FM (h) Contemporary Hit Radio Women 18-49 6 12/1/02
WORD-AM (h) News/Talk Adults 35-64 9 12/1/02
WFBC-AM (h) News/Talk Adults 35-64 9 12/1/02
WSPA-AM(h) Full Service/Talk Adults 35-64 15 12/1/02
WSPA-FM(h) Soft Adult Contemporary Women 25-54 2 12/1/02
WOLI-FM(h)(i) Oldies Adults 25-54 9 12/1/02
WOLT-FM(h)(j) Oldies Adults 25-54 10 12/1/02
Wilkes-Barre/
Scranton 61
WKRZ-FM Contemporary Hit Radio Adults 18-49 1 8/1/98
WGGY-FM Country Adults 25-54 3 8/1/98
WILK-AM (k) News/Talk/Sports Adults 35-64 6 8/1/98
WGBI-AM(k) News/Talk/Sports Adults 35-64 31 8/1/98
WWSH-FM(f Soft Hits Women 25-54 7 8/1/98
WILP-AM(l) News/Talk/Sports Adults 35-64 31 8/1/98
WWFH-FM(m) Soft Hits Women 25-54 17 8/1/98
(Footnotes on following page)
7
- ----------
(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 1995 aggregate gross radio broadcast revenue according to
1996 Broadcasting & Cable Yearbook.
(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) ll information concerning ratings and audience listening information is
derived from the Fall 1996 Arbitron Metro Area Ratings Survey (the "Fall
1996 Arbitron"). Arbitron is the generally accepted industry source for
statistical information concerning audience ratings. Due to the nature of
listener surveys, other radio ratings services may report different
rankings; however, the Company does not believe that any radio ratings
service other than Arbitron is accorded significant weight in the radio
broadcast industry. "Station Rank in Primary Demographic Target" is the
ranking of the station among all radio stations in its market that are
ranked in its target demographic group and is based on the station's average
persons share in the primary demographic target in the applicable Metro
Survey Area. Source: Average Quarter Hour Estimates, Monday through Sunday,
6:00 a.m. to midnight, Fall 1996 Arbitron.
(e) Programming is provided to this station by a third party pursuant to an LMA.
(f) The Company sells advertising time on these stations pursuant to a JSA.
(g) The Company has agreed to acquire these stations, subject to FCC approval of
the transfer of the related licenses.
(h) The Company has an option to acquire Keymarket of South Carolina, Inc.,
which owns and operates WFBC-AM, WORD-AM and WFBC-FM, has an option to
acquire and provides programming services pursuant to an LMA to WSPA-AM and
WSPA-FM, and provides sales services pursuant to a JSA and has an option to
acquire WOLI-FM and WOLT-FM.
(i) WOLI-FM was formerly WXWX-FM.
(j) WOLT-FM was formerly WXWZ-FM.
(k) WILK-AM and WGBI-AM simulcast their programming.
(l) WILP-AM was formerly WXPX-AM.
(m) WWFH-FM was formerly WQEQ-FM.
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Radio Operating Strategy
The Company's radio strategy is to operate a cluster of radio stations in
each of a variety of geographic markets throughout the country. In each
geographic market, the Company employs broadly diversified programming formats
to appeal to a variety of demographic groups within the market. The Company
seeks to strengthen the identity of each of its stations through its programming
and promotional efforts, and emphasizes that identity to a far greater degree
than the identity of any local radio personality.
The Company believes that its strategy of appealing to diverse demographic
groups in a variety of geographic markets allows it to reach a larger share of
the overall advertising market while realizing economies of scale and avoiding
dependence on one demographic or geographic market. The Company realizes
economies of scale by combining sales and marketing forces, back office
operations and general management in each geographic market. At the same time,
the geographic diversity of its portfolio of radio stations helps lessen the
potential impact of economic downturns in specific markets and the diversity of
target audiences served helps lessen the impact of changes in listening
preferences. In addition, the geographic and demographic diversity allows the
Company to avoid dependence on any one or any small group of advertisers.
The Company's group of radio stations includes the top billing station group
in two markets and one of the top three billing station groups in each of its
markets other than Los Angeles, St. Louis and Nashville. Through ownership or
LMAs, the group also includes duopolies in six of its seven markets and, upon
exercise of options to acquire stations in the Greenville/Spartanburg market,
the Company will have duopolies in seven of its eight markets.
Depending on the programming format of a particular station, there are a
predetermined number of advertisements broadcast each hour. The Company
determines the optimum number of advertisements available for sale during each
hour without jeopardizing listening levels (and the resulting ratings). Although
there may be shifts from time to time in the number of advertisements available
for sale during a particular time of day, the total number of advertisements
available for sale on a particular station normally does not vary significantly.
Any change in net radio broadcasting revenue, with the exception of those
instances where stations are acquired or sold, is generally the result of
pricing adjustments made to ensure that the station effectively uses advertising
time available for sale, an increase in the number of commercials sold or a
combination of these two factors.
Large, well-trained local sales forces are maintained by the Company in each
of its radio markets. The Company's principal goal in its sales efforts is to
develop long-standing customer relationships through frequent direct contacts,
which the Company believes provides it with a competitive advantage.
Additionally, in some radio markets, duopolies permit the Company to offer
creative advertising packages to local, regional and national advertisers. Each
radio station programmed by the Company also engages a national independent
sales representative to assist it in obtaining national advertising revenues.
These representatives obtain advertising through national advertising agencies
and receive a commission from the radio station based on its gross revenue from
the advertising obtained.
BROADCASTING ACQUISITION STRATEGY
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Act") was
signed into law. The 1996 Act represents the most sweeping overhaul of the
country's telecommunications laws since the Communications Act of 1934 (as
amended, the "Communicatons Act"). The 1996 Act relaxes the broadcast ownership
rules and simplifies the process for renewal of broadcast station licenses.
The Company believes that the enactment of the 1996 Act presents a unique
opportunity to build a larger and more diversified broadcasting company.
Additionally, the Company expects that the opportunity to act as one of the
consolidators of the industry will enable the Company to gain additional
influence with program suppliers, television networks, other vendors, and
alternative delivery media. The Company also believes that the additions to its
management team as a result of the River City Acquisition will give it
additional resources to take advantage of these developments.
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In implementing its acquisition strategy, the Company seeks to identify and
pursue favorable station or group acquisition opportunities primarily in the
15th to 75th largest DMAs and Metro Survey Areas as defined by the audience
measuring service Arbitron ("MSAs"). In assessing potential acquisitions, the
Company examines opportunities to improve revenue share, audience share and/or
cost control. Additional factors considered by the Company in a potential
acquisition include geographic location, demographic characteristics and
competitive dynamics of the market.
In furtherance of its acquisition strategy, the Company routinely reviews,
and conducts investigations of, potential television and radio station
acquisitions. When the Company believes a favorable opportunity exists, the
Company seeks to enter into discussions with the owners of such stations
regarding the possibility of an acquisition by the Company. At any given time,
the Company may be in discussions with one or more such station owners.
Since the 1996 Act became effective, the Company has acquired, obtained
options to acquire or has acquired the right to program or provide sales
services to 16 television and 33 radio stations for an aggregate consideration
of approximately $1.3 billion. Certain terms of these acquisitions are described
below.
River City Acquisition. On May 31, 1996, pursuant to the Amended and Restated
Asset Purchase Agreement, the Company acquired all of the Non-License Assets of
River City other than the assets relating to WSYX-TV in Columbus, Ohio.
Simultaneously, the Company entered into a 10-year LMA with River City with
respect to all of River City's License Assets (with the exception of the License
Assets relating to WSYX) and was granted: (i) a 10-year option (the "License
Assets Option") to acquire River City's License Assets (with the exception of
the License Assets relating to WSYX); and (ii) a three-year option to acquire
the assets relating to WSYX-TV (both the License and Non-License Assets,
collectively the "Columbus Option"). The exercise price for the License Assets
Option is $20 million and the Company is required to pay an extension fee with
respect to the License Assets Option as follows: (1) 8% of $20 million for the
first year following the closing of the River City Acquisition; (2) 15% of $20
million for the second year following such closing; and (3) 25% of $20 million
for each following year. The Non-License Assets acquired from River City relate
to eight television stations and 21 radio stations owned and operated by River
City. In addition, the Company acquired from another party the Non-License
Assets relating to one additional television station (KRRT) to which River City
provided programming pursuant to an LMA. The Company assigned its option to
acquire the License Assets of one television station (WFBC) to Glencairn, and
Glencairn also acquired the option to acquire the License Assets of KRRT. The
Company also acquired River City's rights under LMAs with respect to KRRT and
four radio stations to which River City provided programming or sales services.
The Company has exercised the License Assets Option and has acquired the License
Assets of all but the two radio stations in the St. Louis market. Acquisition of
the remaining License Assets is now subject to FCC approval of transfer of such
License Assets. There can be no assurance that this approval will be obtained.
Applications for transfer of the License Assets were filed in July and August
1996, except application for transfer of the License Assets relating to WTTV and
WTTK which was filed in November 1996. The applications with respect to the two
radio stations in the St. Louis market are pending, and require a special waiver
because of the Company's pending acquisition of a television station (KDNL) in
the market.
The Company paid an aggregate of approximately $1.0 billion for the
Non-License Assets and the License Assets Option consisting of $847.6 million in
cash and 1,150,000 shares of Series A Convertible Preferred Stock of the Company
and 1,382,435 stock options. The Series A Convertible Preferred Stock has been
exchanged for 1,150,000 shares of Series B Convertible Preferred Stock of the
Company, which at issuance had an aggregate liquidation value of $115 million,
and are convertible at any time, at the option of the holders, into an aggregate
of 4,181,818 shares of Class A Common Stock of the Company (which had a market
value on May 31, 1996 of approximately $125.1 million). The exercise price for
the Columbus Option is approximately $130 million plus the amount of
indebtedness secured by the WSYX assets on the date of exercise (not to exceed
the amount outstanding on the date of closing of $105 million) and the Company
is required to pay an extension fee with respect to the Columbus Option as
follows: (1) 8% of $130 million for the first year following the closing of the
River City Acquisition; (2) 15% of $130 million for the second year following
the closing; and (3) 25% of $130 million for each
10
following year. The extension fee accrues beginning on the date of closing, and
is payable (beginning December 31, 1996) at the end of each calendar quarter
until such time as the option is exercised or River City sells WSYX to a third
party. The Company paid the extension fee due December 31, 1996. Pursuant to the
LMAs with River City and the owner of KRRT, the Company is required to provide
at least 166 hours per week of programming to each television and radio station
and, subject to certain exceptions, River City and the owner of KRRT are
required to broadcast all programming provided by the Company. The Company is
required to pay River City and the owner of KRRT monthly fees under the LMAs in
an amount sufficient to cover specified expenses of operating the stations,
which are currently approximately $134,000 per month for all River City
television and radio stations the Company programs (including KRRT). The Company
has the right to sell advertising time on the stations during the hours
programmed by the Company.
The Company and River City filed notification under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), with respect to
the Company's acquisition of all River City assets prior to closing the
acquisition. After the United States Justice Department ("DOJ") indicated that
it would request additional information regarding the antitrust implications of
the acquisition of WSYX by the Company in light of the Company's ownership of
WTTE, the Company and River City agreed to submit separate notifications with
respect to the WSYX assets and the other River City assets. The DOJ then granted
early termination of the waiting period with respect to the transfer of the
River City assets other than WSYX, permitting the acquisition of those assets to
proceed. The Company and River City agreed to notify the DOJ 30 days before
entering into an LMA or similar agreement with respect to WSYX and agreed not to
enter into such an agreement until 20 days after substantially complying with
any request for information from DOJ regarding the transaction. The Company is
in the process of preparing a submission to the DOJ regarding the competitive
effects of entering into an LMA arrangement in Columbus. The Company has agreed
to sell the License Assets of WTTE to Glencairn and to enter into an LMA with
Glencairn to provide programming services to WTTE, but the Company does not
believe that this transaction will be completed unless the Company acquires
WSYX.
In the River City Acquisition, the Company also acquired an option held by
River City to purchase either (i) all of the assets of Keymarket of South
Carolina, Inc. ("KSC") for the forgiveness of debt held by the Company in an
aggregate principal amount of approximately $7.4 million as of August 22, 1996,
plus payment of approximately $1,000,000 less certain adjustments or (ii) all of
the stock of KSC for $1,000,000 less certain adjustments. KSC owns and operates
three radio stations in the Greenville/Spartanburg, South Carolina MSA (WFBC-FM,
WFBC-AM and WORD-AM). The options to acquire the assets and stock of KSC expire
on December 31, 1997. KSC also holds an option to acquire from Spartan
Radiocasting, Inc. certain assets relating to two additional stations (WSPA-AM
and WSPA-FM) in the Greenville/Spartanburg MSA and which KSC currently programs
pursuant to an LMA. KSC's option to acquire these assets is exercisable for
$5.15 million and expires in January 2000, subject to extension to the extent
the applicable LMA is extended beyond that date. KSC also has an option to
acquire assets of Palm Broadcasting Company, L.P., which owns two additional
stations in the Greenville/Spartanburg MSA (WOLI-FM and WOLT-FM) in an amount
equal to the outstanding debt of Palm Broadcasting Company, L.P. to the Company,
which was approximately $3.0 million as of June 30, 1996. This option expires in
April 2001. KSC has a JSA with Palm Broadcasting Company, L.P., but does not
provide programming for WOLI or WOLT.
Superior Acquisition. On May 8, 1996, the Company acquired WDKY-TV
(Lexington, Kentucky) and KOCB-TV (Oklahoma City, Oklahoma) by acquiring the
stock of Superior Communications, Inc. for approximately $63.5 million.
Flint Acquisition. On February 27, 1996 the Company acquired the assets of
WSMH-TV (Flint, Michigan) for approximately $35.8 million by exercising options
granted in 1995.
Cincinnati/Kansas City Acquisitions. On July 1, 1996, the Company acquired
the assets of KSMO-TV (Kansas City, Missouri) and on August 1, 1996, it acquired
the assets of WSTR-TV (Cincinnati, Ohio) for approximately $34.2 million.
Peoria/Bloomington Acquisition. On July 1, 1996, the Company acquired the
assets of WYZZ-TV (Peoria/Bloomington, Illinois) for approximately $21.2
million.
11
1997 ACQUISITIONS
Since the end of 1996, the Company has entered into agreements to acquire one
television station and two radio stations, and has completed the acquisition of
two radio stations. On January 30, 1997, the Company entered into an agreement
to acquire the assets of KUPN-TV, the UPN affiliate in Las Vegas, Nevada, for
$87.0 million. The Company also entered into an agreement on January 29, 1997 to
acquire the assets of WGR-AM and WWWS-AM in Buffalo, New York for $1.5 million.
The Company's acquisition of these stations is subject to FCC approval of
applications to assign the licenses of these stations. The Company currently
sells the commercial air time of WGR-AM and WWWS-AM pursuant to a JSA. On
January 31, 1997, the Company completed the acquisition of the assets of WWSH-FM
and WILP-AM, each in Wilkes-Barre, Pennsylvania, for aggregate consideration of
approximately $773,000.
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 the LMAs 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 FCC license, the
owner-operator retains full control and responsibility for the operation of the
station, including control over all programming broadcast on the station.
The Company currently has LMA arrangements with stations in five markets in
which it owns a television station: Pittsburgh, Pennsylvania (WPTT), Baltimore,
Maryland (WNUV), Raleigh/Durham, North Carolina (WRDC), Milwaukee, Wisconsin
(WVTV) and Birmingham, Alabama (WABM). The Company also has LMA arrangements in
two markets (San Antonio and Asheville/Greenville/Spartanburg) in which the
Company will own a station upon completion of the acquisition of License Assets
from River City. In addition, the Company has an LMA arrangement with a station
in the Tuscaloosa, Alabama market (WDBB), which is adjacent to Birmingham. In
each of these markets, other than Pittsburgh and Tuscaloosa, the LMA arrangement
is (or will be after transfer of License Assets from River City) with Glencairn
and the Company owns the Non-License Assets (as defined below) of the stations.
The Company owns the assets of one radio station (KBLA-AM in Los Angeles) which
an independent third party programs pursuant to an LMA.
The Company believes that it is able to increase its revenues and improve its
margins by providing programming services to stations in selected DMAs and MSAs
where the Company already owns a station. In certain instances, single station
operators and stations operated by smaller ownership groups do not have the
management expertise or the operating efficiencies available to the Company as a
multi-station broadcaster. The Company seeks to identify such stations in
selected markets and to provide such stations with programming services pursuant
to LMAs. In addition to providing the Company with additional revenue
opportunities, the Company believes that these LMA arrangements have assisted
certain stations whose operations may have been marginally profitable to
continue to air popular programming and contribute to diversity of programming
in their respective DMAs and MSAs.
In cases where the Company enters into LMA arrangements in connection with a
station whose acquisition by the Company is pending FCC approval, the Company
(i) obtains an option to acquire the station assets essential for broadcasting a
television or radio signal in compliance with regulatory guidelines, generally
consisting of the FCC license, transmitter, transmission lines, technical
equipment, call letters and trademarks, and certain furniture, fixtures and
equipment (the "License Assets") and (ii) acquires the remaining assets (the
"Non-License Assets") at the time it enters into the option. Following
acquisition of the Non-License Assets, the License Assets continue to be owned
by the owner-operator and holder of the FCC license, which enters into an LMA
with the Company. After FCC approval for transfer of the License Assets is
obtained, the Company exercises its option to acquire the License Assets and
become the owner-operator of the station, and the LMA arrangement is terminated.
In connection with the River City Acquisition, the Company entered into an
LMA in the form of time brokerage agreements ("TBAs") with River City and the
owner of KRRT with respect to each of the nine television (including KDSM-TV)
and 21 radio stations with respect to which the Company
12
acquired Non-License Assets. The TBAs are for a ten-year term, which corresponds
with the term of the option the Company holds to acquire the related River City
License Assets. Pursuant to the TBA, the Company pays River City and the owner
of KRRT fees in return for which the Company acquires all of the inventory of
broadcast time of the stations and the right to sell 100% of each station's
inventory of advertising time. The Company has filed applications with respect
to the transfer of the License Assets of seven of the nine television stations
and the 21 radio stations with respect to which the Company acquired Non-License
Assets in the River City Acquisition. Such applications have been granted with
respect to 19 of the 21 radio stations, and the Company has acquired the license
assets of each of the 19 radio stations. Upon grant of FCC approval of the
transfer of License Assets with respect to the remaining stations, the Company
intends to acquire the License Assets, and thereafter the LMAs will terminate
and the Company will operate the stations. With respect to the remaining two
television stations, Glencairn has applied for transfer of the License Assets of
these stations, and the Company intends to program these stations under LMAs
with Glencairn upon FCC approval of the transfer of the License Assets to
Glencairn. Petitions to deny or informal objections have been filed against
these applications by third parties.
In addition to its LMAs, the Company sells commercial air time for (but does
not provide programming to) three radio stations pursuant to JSAs in MSAs in
which it has interests in other radio stations. Under the Company's JSAs, the
Company has obtained the right, for a fee paid to the owner and operator of the
station, to sell substantially all of the commercial advertising on the station.
FEDERAL REGULATION OF TELEVISION AND RADIO BROADCASTING
The ownership, operation and sale of television and radio stations are
subject to the jurisdiction of the FCC, which acts under authority granted by
the Communications Act. Among other things, the FCC assigns frequency bands for
broadcasting; determines the particular frequencies, locations and operating
power of stations; issues, renews, revokes and modifies station licenses;
regulates equipment used by stations; adopts and implements regulations and
policies that directly or indirectly affect the ownership, operation and
employment practices of stations; and has the power to impose penalties for
violations of its rules or the Communications Act.
The following is a brief summary of certain provisions of the Communications
Act, the recently-enacted 1996 Act and specific FCC regulations and policies.
Reference should be made to the Communications Act, FCC rules and the public
notices and rulings of the FCC for further information concerning the nature and
extent of federal regulation of broadcast stations.
License Grant and Renewal. Television stations operate pursuant to
broadcasting licenses that formerly were granted by the FCC for maximum terms of
five years, and radio stations operate pursuant to broadcasting licenses that
formerly were granted by the FCC for maximum terms of seven years. The 1996 Act
authorizes the FCC to grant all broadcast licenses (both television and radio)
for maximum terms of eight years, and the FCC has issued an order directing its
staff to implement this statutory change.
Television and radio station licenses are subject to renewal upon application
to the FCC. During certain periods when renewal applications are pending,
competing applicants may file for the radio or television frequency being used
by the renewal applicant. During the same periods, petitions to deny license
renewal applications may be filed by interested parties, including members of
the public. Prior to the 1996 Act, the FCC was generally required to hold
hearings on renewal applications if a competing application against a renewal
application was filed, if the FCC was unable to determine that renewal of a
license would serve the public interest, convenience and necessity, or if a
petition to deny raised a "substantial and material question of fact" as to
whether the grant of the renewal application would be prima facie consistent
with the public interest, convenience and necessity.
The 1996 Act does not prohibit either the filing of petitions to deny license
renewals or the filing of competing applications. Under the 1996 Act, the FCC is
still required to hold hearings on renewal applications if it is unable to
determine that renewal of a license would serve the public interest, convenience
or necessity, or if a petition to deny raises a "substantial and material
question of fact" as to whether the grant of the renewal application would be
prima facie inconsistent with the public interest,
13
convenience and necessity. Pursuant to the 1996 Act, however, the FCC is
prohibited from considering competing applications for a renewal applicant's
frequency, and is required to grant the renewal application, if the FCC finds
(i) that the station has served the public interest, convenience and necessity;
(ii) that there have been no serious violations by the licensee of the
Communications Act or the rules and regulations of the FCC; and (iii) there have
been no other violations by the licensee of the Communications Act or the rules
and regulations of the FCC that, when taken together, would constitute a pattern
of abuse.
All of the stations that the Company (i) owns and operates; (ii) intends to
acquire pursuant to the River City Acquisition and other acquisitions; (iii)
currently provides programming services to pursuant to an LMA or (iv) currently
sells commercial air time pursuant to a JSA, are presently operating under
regular licenses, which expire as to each station on the dates set forth under
"Television Broadcasting" and "Radio Broadcasting," above. Although renewal of
license is granted in the vast majority of cases even when petitions to deny are
filed, there can be no assurance that the licenses of such stations will be
renewed.
OWNERSHIP MATTERS
General
The Communications Act prohibits the assignment of a broadcast license or the
transfer of control of a broadcast licensee without the prior approval of the
FCC. In determining whether to permit the assignment or transfer, or the grant
or renewal of, a broadcast license, the FCC considers a number of factors
pertaining to the licensee, including compliance with various rules limiting
common ownership of media properties, the "character" of the licensee and those
persons holding "attributable" interests therein, and compliance with the
Communications Act's limitations on Alien (as defined herein) ownership.
To obtain the FCC's prior consent to assign or transfer a broadcast license,
appropriate applications must be filed with the FCC. If the application involves
the assignment of the license or a "substantial change" in ownership or control
(i.e., the transfer of more than 50% of the voting stock), 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 an assignment application does not involve new
parties, or if a transfer application does not involve a "substantial change" in
ownership or control, it is a "pro forma" application. The "pro forma"
application 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 of that grant. Generally, parties that do not file initial
petitions to deny or informal objections against the application face a high
hurdle in seeking reconsideration of the grant. The FCC normally has
approximately an additional 10 days to set aside such grant on its own motion.
When passing on an assignment or transfer application, the FCC is prohibited
from considering whether the public interest might be served by an assignment or
transfer to any party other than the assignee or transferee specified in the
application.
The FCC generally applies its ownership limits to "attributable" interests
held by an individual, corporation, partnership or other association. In the
case of corporations holding, or through subsidiaries controlling, broadcast
licenses, the interests of officers, directors and those who, directly or
indirectly, have the right to vote 5% or more of the corporation's stock (or 10%
or more of such stock in the case of insurance companies, investment companies
and bank trust departments that are passive investors) are generally
attributable, except that, in general, no minority voting stock interest will be
attributable if there is a single holder of more than 50% of the outstanding
voting power of the corporation. The FCC has a pending rulemaking proceeding
that, among other things, seeks comment on whether the FCC should modify its
attribution rules by, among other things, (i) raising the attribution stock
benchmark from 5% to 10%; (ii) raising the attribution stock benchmark for
passive investors from 10% to 20%; (iii) restricting the availability of the
single majority shareholder exemption; and (iv) attributing certain interests
such as non-voting stock, debt and certain holdings by limited liability
corporations in certain circumstances. More recently, the FCC has solicited
comment on proposed rules that would (i) treat an
14
otherwise nonattributable equity or debt interest in a licensee as an
attributable interest where the interest holder is a program supplier or the
owner of a broadcast station in the same market and the equity and/or debt
holding is greater than a specified benchmark; (ii) treat a licensee of a
television station which, under an LMA, brokers more than 15% of the time on
another television station serving the same market, as having an attributable
interest in the brokered station; and (iii) in certain circumstances, treat the
licensee of a broadcast station that sells advertising time on another station
in the same market pursuant to a JSA as having an attributable interest in the
station whose advertising is being sold.
The Controlling Stockholders hold attributable interests in two entities
owning media properties, namely: Channel 63, Inc., licensee of WIIB-TV, a UHF
television station in Bloomington, Indiana, and Bay Television, Inc., licensee
of WTTA-TV, a UHF television station in St. Petersburg, Florida. All of the
issued and outstanding shares of Channel 63, Inc. are owned by the Controlling
Stockholders. All the issued and outstanding shares of Bay Television, Inc. are
owned by the Controlling Stockholders (75%) and Robert L. Simmons (25%), a
former stockholder of the Company. The Controlling Stockholders have agreed to
divest their attributable interests in Channel 63, Inc. and the Company believes
that, after doing so, such holdings will not materially restrict its ability to
acquire or program additional broadcast stations.
Under its "cross-interest" policy, the FCC considers certain "meaningful"
relationships among competing media outlets in the same market, even if the
ownership rules do not specifically prohibit the relationship. Under this
policy, the FCC may consider significant equity interests combined with an
attributable interest in a media outlet in the same market, joint ventures, and
common key employees among competitors. The cross-interest policy does not
necessarily prohibit all of these interests, but requires that the FCC consider
whether, in a particular market, the "meaningful" relationships between
competitors could have a significant adverse effect upon economic competition
and program diversity. Heretofore, the FCC has not applied its cross-interest
policy to LMAs and JSAs between broadcast stations. In its ongoing rulemaking
proceeding concerning the attribution rules, the FCC has sought comment on,
among other things, (i) whether the cross-interest policy should be applied only
in smaller markets, and (ii) whether non-equity financial relationships such as
debt, when combined with multiple business interrelationships such as LMAs and
JSAs, raise concerns under the cross-interest policy. Moreover, in its most
recent proposals in its ongoing attribution rulemaking proceeding, the FCC has
proposed treating television LMAs, JSAs, and debt or equity interests as
attributable interests in certain circumstances without regard to the
cross-interest policy.
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 Company has been
advised that the FCC staff has interpreted this provision to require a finding
that such grant or holding would be in the public interest before a broadcast
license may be granted to or held by any such corporation and that the FCC staff
has made such a finding only in limited circumstances. The FCC has issued
interpretations of existing law under which these restrictions in modified form
apply to other forms of business organizations, including partnerships. As a
result of these provisions, the licenses granted to subsidiaries of the Company
by the FCC could be rescinded if, among other restrictions imposed by the FCC,
more than 25% of the Company's stock were owned or voted by Aliens. The Company
and the subsidiaries are domestic corporations, and the Controlling Stockholders
are all United States citizens. The Amended and Restated Articles of
Incorporation of the Company (the "Amended Certificate") contains limitations on
Alien ownership and control that are substantially similar to those contained in
the Communications Act. Pursuant to the Amended Certificate, the Company has the
right to repurchase Alien-owned shares at their fair market value to the extent
necessary, in the judgment of the Board of Directors, to comply with the Alien
ownership restrictions.
15
TELEVISION
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National Ownership Rule. Prior to the 1996 Act, FCC rules generally
prohibited an individual or entity from having an attributable interest in more
than 12 television stations nationwide, or in television stations reaching more
than 25% of the national television viewing audience. Pursuant to the 1996 Act,
the FCC has modified its rules to eliminate any limitation on the number of
television stations an individual or entity may own nationwide, subject to the
restriction that 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 three of the stations owned and operated by the
Company, or to which the Company provides programming services, are UHF.
Duopoly Rule. On a local level, the television "duopoly" rule generally
prohibits a single individual or entity from having an attributable interest in
two or more television stations with overlapping Grade B service areas. While
the 1996 Act has not eliminated the TV duopoly rule, it does direct the FCC to
initiate a rulemaking proceeding to determine whether to retain, modify, or
eliminate the rule. The FCC has pending a rulemaking proceeding in which it has
proposed to modify the television duopoly rule to permit the common ownership of
television stations in different DMAs, so long as the Grade A signal contours of
the stations do not overlap. Pending resolution of its rulemaking proceeding,
the FCC has adopted an interim waiver policy that permits the common ownership
of television stations in different DMAs with no overlapping Grade A signal
contours, conditioned on the final outcome of the rulemaking proceeding. The FCC
has also sought comment on whether common ownership of two television stations
in a market should be permitted (i) where one or more of the commonly owned
stations is UHF, (ii) where one of the stations is in bankruptcy or has been off
the air for a substantial period of time and (iii) where the commonly owned
stations have very small audience or advertising shares, are located in a very
large market, and/or a specified number of independently owned media voices
would remain after the acquisition.
Local Marketing Agreements. Over the past few years, a number of television
stations, including certain of the Company's stations, have entered into what
have commonly been referred to as LMAs. While these agreements may take varying
forms, pursuant to a typical LMA, separately owned and licensed television
stations agree to enter into cooperative arrangements of varying sorts, subject
to compliance with the requirements of antitrust laws and with the FCC's rules
and policies. Under these types of arrangements, separately-owned stations could
agree to function cooperatively in terms of programming, advertising sales,
etc., subject to the requirement that the licensee of each station shall
maintain independent control over the programming and operations of its own
station. One typical type of LMA is a programming agreement between two
separately-owned television stations serving a common service area, whereby the
licensee of one station programs substantial portions of the broadcast day on
the other licensee's station, subject to ultimate editorial and other controls
being exercised by the latter licensee, and sells advertising time during such
program segments. Such arrangements are an extension of the concept of "time
brokerage" agreements, under which a licensee of a station sells blocks of time
on its station to an entity or entities which program the blocks of time and
which sell their own commercial advertising announcements during the time
periods in question. Over the past few years, the staff of the FCC's Mass Media
Bureau has held that LMAs are not contrary to the Communications Act, provided
that the licensee of the station which is being substantially programmed by
another entity maintains complete responsibility for and control over
programming and operations of its broadcast station and assures compliance with
applicable FCC rules and policies.
At present, FCC rules permit television station LMAs, and the licensee of a
television station brokering time on another television station is not
considered to have an attributable interest in the brokered station. However, in
connection with its ongoing rulemaking proceeding regarding the television
duopoly rule, the FCC has proposed to adopt rules providing that the licensee of
a television station which brokers more than 15% of the time on another
television station serving the same market would be deemed to have an
attributable interest in the brokered station for purposes of the national and
local multiple ownership rules.
16
The 1996 Act provides that nothing therein "shall be construed to prohibit
the origination, continuation, or renewal of any television local marketing
agreement that is in compliance with the regulations of the [FCC]." The
legislative history of the 1996 Act reflects that this provision was intended to
grandfather television LMAs that were in existence upon enactment of the 1996
Act, and to allow television LMAs consistent with the FCC's rules subsequent to
enactment of the 1996 Act. In its pending rulemaking proceeding regarding the
television duopoly rule, the FCC has proposed to adopt a grandfathering policy
providing that, in the event that television LMAs become attributable interests,
LMAs that are in compliance with existing FCC rules and policies and were
entered into before November 5, 1996, would be permitted to continue in force
until the original term of the LMA expires. Under the FCC's proposal, television
LMAs that are entered into or renewed after November 5, 1996 would have to be
terminated if LMAs are made attributable interests and the LMA in question
resulted in a violation of the television multiple ownership rules. The
Company's LMAs with television stations WPTT in Pittsburgh, Pennsylvania, WNUV
in Baltimore, Maryland, WVTV in Milwaukee, Wisconsin, WRDC in Raleigh/Durham,
North Carolina, WABM in Birmingham, Alabama, and WDBB in Tuscaloosa, Alabama,
were in existence on both the date of enactment of the 1996 Act and November 5,
1996. The Company's LMAs with television stations KDNL in St. Louis, Missouri,
KOVR in Sacramento, California, WTTV and WTTK in Indianapolis, Indiana, WLOS in
Asheville, North Carolina, WFBC in Greenville-Spartanburg, South Carolina, KABB
in San Antonio, Texas, and KDSM in Des Moines, Iowa, were entered into
subsequent to the date of enactment of the 1996 Act but prior to November 5,
1996. The Company's LMA with television station KRRT in Kerrville, Texas was in
existence on the date of enactment of the 1996 Act, but was assumed by the
Company subsequent to that date but prior to November 5, 1996.
The TV duopoly rule currently prevents the Company from acquiring the
licenses of television stations with which it has LMAs in those markets where
the Company owns a television station. As a result, if the FCC were to decide
that the provider of programming services under a television LMA should be
treated as having an attributable interest in the brokered station, and if it
did not relax its television duopoly rule, the Company could be required to
modify or terminate those of its LMAs that were not in existence on the date of
enactment of the 1996 Act or on November 5, 1996. Furthermore, if the FCC adopts
its present proposal with respect to the grandfathering of television LMAs, the
Company could be required to terminate even those LMAs that were in effect prior
to the date of enactment of the 1996 Act or prior to November 5, 1996, after the
initial term of the LMA or upon assignment of the LMA. In such an event, the
Company could be required to pay termination penalties under certain of such
LMAs. Further, if the FCC were to find, in connection with any of the Company's
LMAs, that the owners/licensees of the stations with which the Company has LMAs
failed to maintain control over their operations as required by FCC rules and
policies, the licensee of the LMA station and/or the Company could be fined or
set for hearing, the outcome of which could be a monetary forfeiture or, under
certain circumstances, loss of the applicable FCC license. The Company is unable
to predict the ultimate outcome of possible changes to these FCC rules and the
impact such FCC rules may have on its broadcasting operations.
On June 1, 1995, the Chief of the FCC's Mass Media Bureau released a Public
Notice concerning the processing of television assignment and transfer
applications proposing LMAs. Due to the pendency of the ongoing rulemaking
proceeding concerning attribution of ownership, the Mass Media Bureau has placed
certain restrictions on the types of television assignment and transfer
applications involving LMAs that it will approve during the pendency of the
rulemaking. Specifically, the Mass Media Bureau has stated that it will not
approve arrangements where a time broker seeks to finance a station acquisition
and hold an option to purchase the station in the future. The Company believes
that none of the Company's LMAs or TBAs fall within the ambit of this Public
Notice.
RADIO
National Ownership Rule. Prior to the 1996 Act, the FCC's rules limited an
individual or entity from holding attributable interests in more than 20 AM and
20 FM radio stations nationwide. Pursuant to the 1996 Act, the FCC has modified
its rules to eliminate any limitation on the number of radio stations a single
individual or entity may own nationwide.
17
Local Ownership Rule. Prior to the 1996 Act, the FCC's rules generally
permitted an individual or entity to hold attributable interests in no more than
four radio stations in a local market (no more than two of which could be in the
same service (AM or FM)), and then only if the aggregate audience share of the
commonly owned stations did not exceed 25%. In markets with fewer than 15
commercial radio stations, an individual or entity could hold an attributable
interest in no more than three radio stations in the market (no more than two of
which could be in the same service), and then only if the number of the commonly
owned stations did not exceed 50% of the total number of commercial radio
stations in the market.
Pursuant to the 1996 Act, the limits on the number of radio stations one
entity may own locally have been increased as follows: (i) in a market with 45
or more commercial radio stations, an entity may own up to eight commercial
radio stations, not more than five of which are in the same service (AM or FM);
(ii) in a market with between 30 and 44 (inclusive) commercial radio stations,
an entity may own up to seven commercial radio stations, not more than four of
which are in the same service; (iii) in a market with between 15 and 29
(inclusive) commercial radio stations, an entity may own up to six commercial
radio stations, not more than four of which are in the same service; and (iv) in
a market with 14 or fewer commercial radio stations, an entity may own up to
five commercial radio stations, not more than three of which are in the same
service, except that an entity may not own more than 50% of the stations in such
market. These numerical limits apply regardless of the aggregate audience share
of the stations sought to be commonly owned. FCC ownership rules continue to
permit an entity to own one FM and one AM station in a local market regardless
of market size. Irrespective of FCC rules governing radio ownership, however,
the Department of Justice and the Federal Trade Commission have the authority to
determine, and in certain recent radio transactions not involving the Company
have determined, that a particular transaction presents antitrust concerns.
Local Marketing Agreements. As in television, a number of radio stations have
entered into LMAs. The Company has entered into LMAs with certain radio stations
in connection with the River City Acquisition.
The FCC's multiple ownership rules specifically permit radio station LMAs to
be entered into and implemented, so long as the licensee of the station which is
being programmed under the LMA maintains complete responsibility for and control
over programming and operations of its broadcast station and assures compliance
with applicable FCC rules and policies. For the purposes of the multiple
ownership rules, in general, a radio station being programmed pursuant to an LMA
by an entity is not considered an attributable ownership interest of that entity
unless that entity already owns a radio station in the same market. However, a
licensee that owns a radio station in a market, and brokers more than 15% of the
time on another station serving the same market, is considered to have an
attributable ownership interest in the brokered station for purposes of the
FCC's multiple ownership rules. As a result, in a market in which the Company
owns a radio station, the Company would not be permitted to enter into an LMA
with another local radio station which it could not own under the local
ownership rules, unless the Company's programming constituted 15% or less of the
other local station's programming time on a weekly basis. The FCC's rules also
prohibit a broadcast licensee from simulcasting more than 25% of its programming
on another station in the same broadcast service (i.e., AM-AM or FM-FM) through
a time brokerage or LMA arrangement where the brokered and brokering stations
serve substantially the same area.
Joint Sales Agreements. Over the past few years, 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. In connection with the River City Acquisition, the
Company has assumed River City's rights under JSAs with three radio stations.
18
The FCC has determined that issues of joint advertising sales should be left
to enforcement by antitrust authorities, and therefore does not generally
regulate joint sales practices between stations. Currently, stations for which a
licensee sells time under a JSA are not deemed by the FCC to be attributable
interests of that licensee. However, in connection with its ongoing rulemaking
proceeding concerning the attribution rules, the FCC is considering whether JSAs
should be considered attributable interests or within the scope of the FCC's
cross-interest policy, particularly when JSAs contain provisions for the supply
of programming services and/or other elements typically associated with LMAs. If
JSAs become attributable interests as a result of changes in the FCC rules, the
Company may be required to terminate any JSA it might have with a radio station
which the Company could not own under the FCC's multiple ownership rules.
OTHER OWNERSHIP MATTERS
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There remain in place after the 1996 Act a number of additional
cross-ownership rules and prohibitions pertaining to licensees of television and
radio stations. FCC rules, the Communications Act, or both generally prohibit an
individual or entity from having an attributable interest in both a television
station and a radio station, a daily newspaper, or a cable television system
that is located in or serves the same market area.
Antitrust Regulation.The Department of Justice and the Federal Trade
Commission have recently increased their scrutiny of the television and radio
industry, and have indicated their intention to review matters related to the
concentration of ownership within markets (including LMAs and JSAs) even when
the ownership or LMA or JSA in question is permitted under the laws administered
by the FCC or by FCC rules and regulations.
Radio/Television Cross-Ownership Rule. The FCC's radio/television
cross-ownership rule (the "one to a market" rule) generally prohibits a single
individual or entity from having an attributable interest in a television
station and a radio station serving the same market. However, in each of the 25
largest local markets in the United States, provided that there are at least 30
separately owned stations in the particular market, the FCC has traditionally
employed a policy that presumptively allows waivers of the one to a market rule
to permit the common ownership of one AM, one FM and one TV station in the
market. The 1996 Act directs the FCC to extend this policy to each of the top 50
markets. Moreover, the FCC has pending a rulemaking proceeding in which it has
solicited comment on whether the one to a market rule should be eliminated
altogether.
However, the FCC does not apply its presumptive waiver policy in cases
involving the common ownership of one television station, and two or more radio
stations in the same service (AM or FM), in the same market. Pending its ongoing
rulemaking proceeding to reexamine the one to a market rule, the FCC has stated
that it will consider waivers of the rule in such instances on a case-by-case
basis, considering (i) the public service benefits that will arise from the
joint operation of the facilities such as economies of scale, cost savings and
programming and service benefits; (ii) the types of facilities involved; (iii)
the number of media outlets owned by the applicant in the relevant market; (iv)
the financial difficulties of the stations involved; and (v) the nature of the
relevant market in light of the level of competition and diversity after joint
operation is implemented. The FCC has stated that it expects that any such
waivers that are granted will be conditioned on the outcome of the rulemaking
proceeding. The Company has applied for such a waiver with respect to ownership
of a television station and radio stations in the St. Louis market, and there
can be no assurance that this waiver will be granted.
In its ongoing rulemaking proceeding to reexamine the one to a market rule,
the FCC has proposed the following options for modifying the rule in the event
it is not eliminated: (i) extending the presumptive waiver policy to any
television market in which a specified number of independently owned voices
would remain after common ownership of a television station and one or more
radio stations is effectuated; (ii) extending the presumptive waiver policy to
entities that seek to own more than one FM and/or one AM radio station; (iii)
reducing the minimum number of independently owned voices that must remain after
a transaction is effectuated; and (iv) modifying the five-factor case-by-case
test for waivers.
Local Television/Cable Cross-Ownership Rule. While the 1996 Act eliminates a
previous statutory prohibition against the common ownership of a television
broadcast station and a cable system that
19
serve the same local market, the 1996 Act leaves the current FCC rule in place.
The legislative history of the Act indicates that the repeal of the statutory
ban should not prejudge the outcome of any FCC review of the rule.
Broadcast Network/Cable Cross-Ownership Rule. The 1996 Act directs the FCC to
eliminate its rules which formerly prohibited the common ownership of a
broadcast network and a cable system, subject to the provision that the FCC
revise its rules as necessary to ensure carriage, channel positioning, and
non-discriminatory treatment of non-affiliated broadcast stations by cable
systems affiliated with a broadcast network. In March 1996, the FCC issued an
order implementing this legislative change.
Broadcast/Daily Newspaper Cross-Ownership Rule. The FCC's rules prohibit the
common ownership of a radio or television broadcast station and a daily
newspaper in the same market. The 1996 Act does not eliminate or modify this
prohibition. In October 1996, however, the FCC initiated a rulemaking proceeding
to determine whether it should liberalize its waiver policy with respect to
cross-ownership of a daily newspaper and one or more radio stations in the same
market.
Dual Network Rule. The 1996 Act directs the FCC to repeal its rule which
formerly prohibited an entity from operating more than one television network.
In March 1996, the FCC issued an order implementing this legislative change.
Under the modified rule, a network entity is permitted to operate more than one
television network, provided, however, that ABC, CBS, NBC, and/or Fox are
prohibited from merging with each other or with another network television
entity such as UPN or Warner Brothers.
Expansion of the Company's broadcast operations on both a local and national
level will continue to be subject to the FCC's ownership rules and any changes
the FCC or Congress may adopt. Concomitantly, any further relaxation of the
FCC's ownership rules may increase the level of competition in one or more of
the markets in which the Company's stations are located, more specifically to
the extent that any of the Company's competitors may have greater resources and
thereby be in a superior position to take advantage of such changes.
MUST-CARRY/RETRANSMISSION CONSENT
Pursuant to the Cable Act of 1992, television broadcasters are required to
make triennial elections to exercise either certain "must-carry" or
"retransmission consent" rights in connection with their carriage by cable
systems in each broadcaster's local market. By electing the must-carry rights, a
broadcaster demands carriage on a specified channel on cable systems within its
Area of Dominant Influence, in general as defined by the Arbitron 1991-92
Television Market Guide. These must-carry rights are not absolute, and their
exercise is dependent on variables such as (i) the number of activated channels
on a cable system; (ii) the location and size of a cable system; and (iii) the
amount of programming on a broadcast station that duplicates the programming of
another broadcast station carried by the cable system. Therefore, under certain
circumstances, a cable system may decline to carry a given station.
Alternatively, if a broadcaster chooses to exercise retransmission consent
rights, it can prohibit cable systems from carrying its signal or grant the
appropriate cable system the authority to retransmit the broadcast signal for a
fee or other consideration. In October 1996, the Company elected must-carry or
retransmission consent with respect to each of its markets based on its
evaluation of the respective markets and the position of the Company's station
within the market. The Company's stations continue to be carried on all
pertinent cable systems, and the Company does not believe that its election has
resulted in the shifting of its stations to less desirable cable channel
locations. Certain of the Company's stations affiliated with Fox are required to
elect retransmission consent, because Fox's retransmission consent negotiations
on behalf of the Company resulted in agreements which extend into 1998.
Therefore, the Company will need to negotiate retransmission consent agreements
for these Fox-affiliated stations to attain carriage on those relevant cable
systems for the balance of this triennial period (i.e., through December 31,
1999). For subsequent elections beginning with the election to be made by
October 1, 1999, the must-carry market will be the station's DMA, in general as
defined by the Nielsen DMA Market and Demographic Rank Report of the prior year.
The must-carry rules have been subject to judicial scrutiny. In April 1993,
the United States District Court for the District of Columbia summarily upheld
the constitutionality of the legislative must-carry provisions under a First
Amendment challenge. However, in June 1994, the Supreme Court remanded the case
to the lower court with instructions to test the constitutionality of the
must-carry rules under an
20
"intermediate scrutiny" standard. In a decision issued in December 1995, a
closely divided three-judge District Court panel ruled that the record showed
that there was substantial evidence before Congress from which it could draw the
reasonable inferences that (1) the must-carry rules were necessary to protect
the local broadcast industry; and (2) the burdens on cable systems with rapidly
increasing channel capacity would be quite small. Accordingly, the District
Court panel ruled that Congress had not violated the First Amendment in enacting
the "must-carry" provisions. The case is once again on appeal to the Supreme
Court, which heard oral arguments in October 1996. The Company cannot predict
the final outcome of the Supreme Court case or how it may affect the Company's
cable contracts.
SYNDICATED EXCLUSIVITY/TERRITORIAL EXCLUSIVITY
The FCC has imposed syndicated exclusivity rules and expanded existing
network nonduplication rules. The syndicated exclusivity rules allow local
broadcast television stations to demand that cable operators black out
syndicated non-network programming carried on "distant signals" (i.e., signals
of broadcast stations, including so-called "superstations," which serve areas
substantially removed from the cable system's local community). The network
non-duplication rules allow local broadcast network television affiliates to
require that cable operators black out duplicating network programming carried
on distant signals. However, in a number of markets in which the Company owns or
programs stations affiliated with a network, a station that is affiliated with
the same network in a nearby market is carried on cable systems in the Company's
market. This is not in violation of the FCC's syndicated exclusivity rules.
However, the carriage of two network stations on the same cable system could
result in a decline of viewership adversely affecting the revenues of the
Company owned or programmed station.
RESTRICTIONS ON BROADCAST ADVERTISING
Advertising of cigarettes and certain other tobacco products on broadcast
stations has been banned for many years. Various states restrict the advertising
of alcoholic beverages. Congressional committees have recently examined
legislation proposals which may eliminate or severely restrict the advertising
of beer and wine. Although no prediction can be made as to whether any or all of
the present proposals will be enacted into law, the elimination of all beer and
wine advertising would have an adverse effect upon the revenues of the Company's
stations, as well as the revenues of other stations which carry beer and wine
advertising.
The FCC has imposed commercial time limitations in children's television
programming pursuant to legislation. In television programs designed for viewing
by children of 12 years of age and under, commercial matter is limited to 12
minutes per hour on weekdays and 10.5 minutes per hour on weekends. In granting
renewal of the license for WBFF-TV, the FCC imposed a fine of $10,000 on the
Company alleging that the station had exceeded these limitations.
The Communications Act and FCC rules also place restrictions on the
broadcasting of advertisements by legally qualified candidates for elective
office. Among other things, (i) stations must provide "reasonable access" for
the purchase of time by legally qualified candidates for federal office; (ii)
stations must provide "equal opportunities" for the purchase of equivalent
amounts of comparable broadcast time by opposing candidates for the same
elective office; and (iii) during the 45 days preceding a primary or primary
run-off election and during the 60 days preceding a general or special election,
legally qualified candidates for elective office may be charged no more than the
station's "lowest unit charge" for the same class of advertisement, length of
advertisement, and daypart.
PROGRAMMING AND OPERATION
General. The Communications Act requires broadcasters to serve the "public
interest." The FCC gradually 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 community issues, and to maintain certain records
demonstrating such responsiveness. Complaints from viewers concerning a
station's programming often will be considered by the FCC when it evaluates
renewal applications of a licensee, although such complaints may be filed at any
time and
21
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
radiofrequency radiation. In addition, licensees must develop and implement
affirmative action programs designed to promote equal employment opportunities,
and must submit reports to the FCC with respect to these matters on an annual
basis and in connection with a renewal application. Failure to observe these or
other rules and policies can result in the imposition of various sanctions,
including monetary forfeitures, or the grant of a "short" (i.e., less than the
full) renewal term or, for particularly egregious violations, the denial of a
license renewal application or the revocation of a license.
Children's Television Programming. Pursuant to legislation enacted in 1991,
all television stations have been required to broadcast some television
programming designed to meet the educational and informational needs of children
16 years of age and under. In August 1996, the FCC adopted new rules setting
forth more stringent children's programming requirements. Specifically, as of
September 1, 1997, television stations will be required to broadcast a minimum
of three hours per week of "core" children's educational programming, which the
FCC defines as programming that (i) has serving the educational and
informational needs of children 16 years of age and under as a significant
purpose; (ii) is regularly scheduled, weekly and at least 30 minutes in
duration; and (iii) is aired between the hours of 7:00 a.m. and 10:00 p.m.
Furthermore, since January 2, 1997, "core" children's educational programs, in
order to qualify as such, are required to be identified as educational and
informational programs over the air at the time they are broadcast, and are
required to be identified in the children's programming reports required to be
placed in stations' public inspection files. Additionally, since January 2,
1997, television stations are required to identify and provide information
concerning "core" children's programming to publishers of program guides and
listings.
Television Violence. The 1996 Act contains a number of provisions relating to
television violence. First, pursuant to the 1996 Act, the television industry
has developed a ratings system, and the FCC has recently solicited public
comment on that system. Furthermore, the 1996 Act provides that all television
sets larger than 13 inches that are manufactured one year after enactment of the
1996 Act must include the so-called "V-chip," a computer chip that allows
blocking of rated programming. In addition, the 1996 Act requires that all
television license renewal applications filed after May 1, 1995 contain
summaries of written comments and suggestions received by the station from the
public regarding violent programming.
Closed Captioning. The 1996 Act directs the FCC to adopt rules requiring
closed captioning of all broadcast television programming, except where
captioning would be "economically burdensome." The FCC has recently instituted a
rulemaking proceeding to implement such rules.
PROPOSED CHANGES
The Congress and the FCC have under consideration, and in the future may
consider and adopt, new laws, regulations and policies regarding a wide variety
of matters that could affect, directly or indirectly, the operation, ownership
and profitability of the Company's broadcast stations, result in the loss of
audience share and advertising revenues for the Company's broadcast stations,
and affect the ability of the Company to acquire additional broadcast stations
or finance such acquisitions. In addition to the changes and proposed changes
noted above, such matters include, for example, the license renewal process,
spectrum use fees, political advertising rates, potential restrictions on the
advertising of certain products (beer, wine and hard liquor, for example), and
the rules and policies to be applied in enforcing the FCC's equal employment
opportunity regulations. Other matters that could affect the Company's broadcast
properties include technological innovations and developments generally
affecting competition in the mass communications industry, such as direct radio
and television broadcast satellite service, the continued establishment of
wireless cable systems and low power television stations, digital television and
radio technologies, and the advent of telephone company participation in the
provision of video programming service.
22
OTHER CONSIDERATIONS
The foregoing summary does not purport to be a complete discussion of all
provisions of the Communications Act or other congressional acts or of the
regulations and policies of the FCC. For further information, reference should
be made to the Communications Act, other congressional acts, and regulations and
public notices promulgated from time to time by the FCC. There are additional
regulations and policies of the FCC and other federal agencies that govern
political broadcasts, public affairs programming, equal employment opportunity,
and other matters affecting the Company's business and operations.
ENVIRONMENTAL REGULATION
Prior to the Company's ownership or operation of its facilities, substances
or waste that are or might be considered hazardous under applicable
environmental laws may have been generated, used, stored or disposed of at
certain of those facilities. In addition, environmental conditions relating to
the soil and groundwater at or under the Company's facilities may be affected by
the proximity of nearby properties that have generated, used, stored or disposed
of hazardous substances. As a result, it is possible that the Company could
become subject to environmental liabilities in the future in connection with
these facilities under applicable environmental laws and regulations. Although
the Company believes that it is in substantial compliance with such
environmental requirements, and has not in the past been required to incur
significant costs in connection therewith, there can be no assurance that the
Company's costs to comply with such requirements will not increase in the
future. The Company presently believes that none of its properties have any
condition that is likely to have a material adverse effect on the Company's
financial condition or results of operations.
COMPETITION
The Company's television and radio stations compete for audience share and
advertising revenue with other television and radio stations in their respective
DMAs, as well as with other advertising media, such as newspapers, magazines,
outdoor advertising, transit advertising, yellow page directories, direct mail
and local cable and wireless cable systems. Some competitors are part of larger
organizations with substantially greater financial, technical and other
resources than the Company.
Television Competition. Competition in the television broadcasting industry
occurs primarily in individual DMAs. Generally, a television broadcasting
station in one DMA does not compete with stations in other DMAs. The Company's
television stations are located in highly competitive DMAs. In addition, certain
of the Company's DMAs are overlapped by both over-the-air and cable carriage of
stations in adjacent DMAs, which tends to spread viewership and advertising
expenditures over a larger number of television stations.
Broadcast television stations compete for advertising revenues primarily with
other broadcast television stations, radio stations and cable system operators
serving the same market. Major Network programming generally achieves higher
household audience levels than Fox, UPN and WB programming and syndicated
programming aired by independent stations. This can be attributed to a
combination of factors, including the Major 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 Major Network programming being broadcast weekly.
However, greater amounts of advertising time are available for sale during Fox,
UPN and WB programming and non-network syndicated programming, and as a result
the Company believes that the Company's programming typically achieves a share
of television market advertising revenues greater than its share of the market's
audience.
Television stations compete for audience share primarily on the basis of
program popularity, which has a direct effect on advertising rates. A large
amount of the Company's prime time programming is supplied by Fox and to a
lesser extent UPN, WB, ABC and CBS. In those periods, the Company's affiliated
stations are totally dependent upon the performance of the networks'
23
programs in attracting viewers. Non-network time periods are programmed by the
station primarily with syndicated programs purchased for cash, cash and barter,
or barter-only, and also through self-produced news, public affairs and other
entertainment programming.
Television advertising rates are based upon factors which include the size of
the DMA in which the station operates, a program's popularity among the viewers
that an advertiser wishes to attract, the number of advertisers competing for
the available time, the demographic makeup of the DMA served by the station, the
availability of alternative advertising media in the DMA (including radio and
cable), the aggressiveness and knowledge of sales forces in the DMA and
development of projects, features and programs that tie advertiser messages to
programming. The Company believes that its sales and programming strategies
allow it to compete effectively for advertising within its DMAs.
Other factors that are material to a television station's competitive
position include signal coverage, local program acceptance, network affiliation,
audience characteristics and assigned broadcast frequency. Historically, the
Company's UHF broadcast stations have suffered a competitive disadvantage in
comparison to stations with VHF broadcast frequencies. This historic
disadvantage has gradually declined through (i) carriage on cable systems, (ii)
improvement in television receivers, (iii) improvement in television
transmitters, (iv) wider use of all channel antennae, (v) increased availability
of programming, and (vi) the development of new networks such as Fox, UPN and
WB.
The broadcasting industry is continuously faced with technical changes and
innovations, the popularity of competing entertainment and communications media,
changes in labor conditions, and governmental restrictions or actions of Federal
regulatory bodies, including the FCC, any of which could possibly have a
material effect on a television station's operations and profits. There are
sources of video service other than conventional television stations, the most
common being cable television, which can increase competition for a broadcast
television station by bringing into its market distant broadcasting signals not
otherwise available to the station's audience, serving as a distribution system
for national satellite-delivered programming and other non-broadcast programming
originated on a cable system and selling advertising time to local advertisers.
Other principal sources of competition include home video exhibition,
direct-to-home broadcast satellite television ("DBS") entertainment services and
multichannel multipoint distribution services ("MMDS"). Moreover, technology
advances and regulatory changes affecting programming delivery through fiber
optic telephone lines and video compression could lower entry barriers for new
video channels and encourage the development of increasingly specialized "niche"
programming. The 1996 Act permits telephone companies to provide video
distribution services via radio communication, on a common carrier basis, as
"cable systems" or as "open video systems," each pursuant to different
regulatory schemes. The Company is unable to predict the effect that
technological and regulatory changes will have on the broadcast television
industry and on the future profitability and value of a particular broadcast
television station.
The FCC authorizes DBS services throughout the United States. Currently, two
FCC permitees, DirecTV and United States Satellite Broadcasting, provide
subscription DBS services via high-power communications satellites and small
dish receivers, and other companies provide direct-to-home video service using
lower powered satellites and larger receivers. Additional companies are expected
to commence direct-to-home operations in the near future. DBS and MMDS, as well
as other new technologies, will further increase competition in the delivery of
video programming.
The Company cannot predict what other matters might be considered in the
future, nor can it judge in advance what impact, if any, the implementation of
any of these proposals or changes might have on its business.
The Company is exploring ways in which it might take advantage of new
technology, including the delivery of additional content and services via the
broadcast spectrum. There can be no assurance that any such efforts will result
in the development of technology or services that are commercially successful.
The Company also competes for programming, which involves negotiating with
national program distributors or syndicators that sell first-run and rerun
packages of programming. The Company's stations compete for exclusive access to
those programs against in-market broadcast station competitors for syndicated
products. Cable systems generally do not compete with local stations for
programming, al
24
though various national cable 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 had increased because of an increase in
the number of new Independent stations and a shortage of quality programming.
However, the Company believes that over the past five years program prices have
stabilized and, in some instances, have declined as a result of recent increases
in the supply of programming and the failure of some Independent stations.
The Company believes it competes favorably against other television stations
because of its management skill and experience, the ability of the Company
historically to generate revenue share greater than its audience share, the
network affiliations and its local program acceptance. In addition, the Company
believes that it benefits from the operation of multiple broadcast properties,
affording it certain nonquantifiable economies of scale and competitive
advantages in the purchase of programming.
Radio Competition. Radio broadcasting is a highly competitive business, and
each of the radio stations operated by the Company competes for audience share
and advertising revenue directly with other radio stations in its geographic
market, as well as with other media, including television, cable television,
newspapers, magazines, direct mail and billboard advertising. The audience
ratings and advertising revenue of each of such stations are subject to change,
and any adverse change in a particular market could have a material adverse
effect on the revenue of such radio stations located in that market. There can
be no assurance that any one of the Company's radio stations will be able to
maintain or increase its current audience ratings and radio advertising revenue
market share.
The Company will attempt to improve each radio station's competitive position
with promotional campaigns designed to enhance and reinforce its identities with
the listening public. Extensive market research is conducted in order to
identify specific demographic groups and design a programming format for those
groups. The Company seeks to build a strong listener base composed of specific
demographic groups in each market, and thereby attract advertisers seeking to
reach these listeners. Aside from building its stations' identities and
targeting its programming at specific demographic groups, management believes
that the Company also obtains a competitive advantage by operating duopolies or
multiple stations in the nation's larger mid-size markets.
The radio broadcasting industry is also subject to competition from new media
technologies that are being developed or introduced, such as the delivery of
audio programming by cable television systems and by digital audio broadcasting
("DAB"). DAB may provide a medium for the delivery by satellite or terrestrial
means of multiple new audio programming formats to local and national audiences.
Historically, the radio broadcasting industry has grown in terms of total
revenues despite the introduction of new technologies for the delivery of
entertainment and information, such as television broadcasting, cable
television, audio tapes and compact disks. There can be no assurance, however,
that the development or introduction in the future of any new media technology
will not have an adverse effect on the radio broadcast industry.
EMPLOYEES
As of December 31, 1996, the Company had approximately 2,359 employees. With
the exception of certain of the employees of KOVR-TV, KDNL-TV, WBEN-AM and
WWL-AM, none of the employees are represented by labor unions under any
collective bargaining agreement. No significant labor problems have been
experienced by the Company, and the Company considers its overall labor
relations to be good.
ITEM 2. PROPERTIES
Generally, each of the Company's stations has facilities consisting of
offices, studios and tower sites. Transmitter and tower sites are located to
provide maximum signal coverage of the stations' markets. The following table
generally describes the Company's principal owned and leased real property in
each of its markets of operation:
25
APPROXIMATE
TELEVISION PROPERTIES TYPE OF FACILITY AND USE OWNED OR LEASED(A) SIZE (SQ. FEET)
- ---------------------- -------------------------------------------------- ---------------------------- ----------------
Pittsburgh Market Station Site for WPTT Owned 30,000
Station Site for WPGH Leased (expires 10/01/2028) 25,500
Space on WPGH Tower Site Leased (expires 02/23/2039) On site of station
Baltimore Market Old WBFF Studio Leased (month to month) 2,000
WBFF Studio and Company Offices Leased (expires 09/01/2011) 39,000
WBFF Parking Lot Leased (month to month) N/A
Space on Main WBFF Tower for Antenna Leased (expires 04/01/2007) N/A
Space on Main WBFF Tower for Transmission Disks Leased (expires 04/01/2011) N/A
Space on Main WBFF Tower for Receivers Leased (expires 04/01/2012) N/A
Space on Backup WBFF Tower for Antenna Leased (expires 03/15/2000) N/A
Milwaukee Market WVTV Studio Site Owned 37,800
WVTV Transmitter Site Land Leased (expires 01/30/2030) N/A
WVTV Transmitter Site Building Owned 6,200
WCGV Studio Site Owned 22,296
WCGV Studio & Transmitter Site Leased (expires 12/31/2029) N/A
Raleigh/Durham Mkt WLFL/WRDC Studio Site Leased (expires 07/29/2021) 26,600
WLFL Tower Site Land Leased (expires 12/31/2018) 1,800
Columbus Market WTTE Studio Site Leased (expires 12/31/2002) 14,400
WTTE Office Space Leased (expires 06/01/2003) 4,500
WTTE Tower Site Leased (month to month) 1,000
Norfolk Market WTVZ Studio Site Leased (expires 07/31/2009) 15,000
Space on WHRD Tower Leased (expires 09/30/97)
Birmingham Market WTTO Tower and Old WTTO Studio Owned 9,500
WTTO Studio Site Leased (expires 1/31/2016) 9,750
WABM Studio Site Leased (expires 1/31/2016) 9,750
Flint/Saginaw/Bay
City Market WSMH Studio & Office Site Owned 13,800
WSMH Sales Office Site Leased (month to month) 525
WSMH Transmitter Site Leased (expires 11/13/2004)
Tuscaloosa Market WDBB Studio & Office Site Leased (month to month) 4,605
WDBB Transmitter Site Leased (month to month) 678
Kansas City Market KSMO Studio & Office Site Leased (expires 02/28/2011) 10,867
KSMO Transmitter Site Leased (expires 07/12/2013) 1,250
Cincinnati Market WSTR Studio & Office Site Owned 14,800
WSTR Transmitter Site Owned 6,600
W66AQ Translator Leased (month to month) N/A
Peoria Market WYZZ Studio & Office Site Owned 6,000
WYZZ Transmitter Site -- real property only Leased (expires 12/01/2001) 600
WYZZ Transmitter Site -- tower, transmitter, Owned N/A
building, & equipment
Oklahoma City
Market KOCB Studio & Office Site Owned 12,000
KOCB Transmitter Site Owned Included above
Lexington Market WDKY Studio & Office Site Leased (expires 12/31/2010) 12,000
WDKY Transmitter Site Owned 2,900
26
APPROXIMATE
TELEVISION PROPERTIES TYPE OF FACILITY AND USE OWNED OR LEASED(A) SIZE (SQ. FEET)
- ---------------------- -------------------------------------------------- ---------------------------- ----------------
Indianapolis Market WTTV/WTTK Studio & Office Site (building) Owned 19,900
WTTV/WTTK Studio & Office Site (lot) Owned 18.5 acres
WTTV Transmitter Site Owned 2,730
WTTK Transmitter Site Owned 800
Bloomington microwave site Leased (expires 07/05/2077) 216
Sacramento Market KOVR Studio & Office Site Owned 42,600
KOVR Stockton Office Site Leased (expires 03/31/1999) 1,000
KOVR Transmitter Site 50% Ownership N/A
KOVR Back-up Transmitter Site 1/3 Ownership N/A
Mt. Oso Microwave Site Leased (month to month) N/A
Volmer Peak Microwave Site Leased (expires 06/30/2000) N/A
Downtown Sacramento Microwave Site Leased (expires 05/31/1999) N/A
Elverta Microwave Site Leased (expires 07/31/1999) N/A
San Antonio Market KABB/KRRT Studio & Office Site Owned by KABB 22,460
KABB/KRRT Transmitter building/tower Owned 1200/1200
KABB/KRRT Transmitter land Leased (expires 06/30/2007) 35.562 acres
Asheville/Spartanburg WFBC/WLOS Studio & Office Site Owned by WLOS 28,000
Market WLOS Transmitter tower, building, land Leased (expires 12/31/2001) N/A
WFBC Transmitter Site Owned by WFBC 45.6 acres
WFBC/WAXA studio Owned 6,000
St. Louis Market KDNL Studio & Office (Lot) Owned 53,550
KDNL Studio & Office (building) Owned 41,372
KDNL Transmitter Site (2 buildings) Owned 1,600 & 1,330
Des Moines Market KDSM Studio & Office Site Leased (expired) 13,000
KDSM Transmitter building/tower Owned 2,000
KDSM Transmitter land Leased (expires 11/08/2034) 40 Acres
APPROXIMATE
RADIO PROPERTIES TYPE OF FACILITY AND USE OWNED OR LEASED(A) SIZE (SQ. FEET)
- ----------------------- ------------------------------------------ --------------------------- ----------------
Buffalo Market WWKB/WKSE Studio & Office Site Leased (expires 09/30/1998) 5,000
WWKB/WKSE Office Site Leased (expires 09/30/1998) 5,200
WBEN/WMJQ Studio & Office Site Leased (expires 12/31/1998) 7,750
WBEN Transmitter Site Owned 1,024
WWKB Transmitter Site Owned 2,600
WMJQ Transmitter Site Leased (expires 12/31/1998) 825
WKSE Transmitter Site Owned 6,722
Memphis Market WJCE/WRVR/WOGY Studio & Office Site Leased (expires 12/02/98) 10,000
WJCE Transmitter Site Leased (expires 03/27/2035) 2,262
WRVR Transmitter Site Leased (expires 12/31/2003) 169
WOGY Transmitter Site (on 4.5 acres) Owned 340
New Orleans Market WWL/WSMB/WLMG/KMEZ Leased (expires 08/31/2002) 11,553
Studio & Office Site
WWL Transmitter Site Owned 64.62 acres
WSMB Transmitter Site Owned 3,600
WLMG Transmitter Site Leased (expires 10/27/2014) N/A
KMEZ Transmitter Site Leased (expires 03/14/2001) N/A
Nashville/Russellville WLAC-AM/WLAC-FM/WJZC/Road Gang/IRN Leased (expires 06/30/1999) 18,800
Market Studio & Office Site
WLAC-AM Transmitter Site Owned 27.69 acres
WLAC-FM Transmitter Site 1/3 Owned (3-way ownership) 18.12 acres
WJZC Transmitter Site (land) Leased (expires 09/27/2019) 400
WJZC Transmitter Site (tower & building) Owned 1,324
27
APPROXIMATE
RADIO PROPERTIES TYPE OF FACILITY AND USE OWNED OR LEASED(A) SIZE (SQ. FEET)
- ----------------------- ------------------------------------------ --------------------------- ----------------
Wilkes Barre/Scranton WILK/WGBI/WGGY/WKRZ Leased (expires 12/31/1998) 14,000
Market Studio & Office Site
WILK Transmitter Site Leased (expires 08/31/1999) 1,000
WGBI Transmitter Site Leased (expires 02/28/2000) 1,000
WGGY Transmitter Site Leased (expires 02/28/2000) 300
WKRZ Transmitter Site (bldg) Owned 4,052
St. Louis Market KPNT/WVRV Studio & Office Site Owned 1,753
KPNT Transmitter Site Owned 7450
WVRV Transmitter Site Owned 7,278
WVRV back up building Owned 240
Los Angeles Market KBLA Studio & Office Site-building Owned 6,000
KBLA Transmitter Site - land Owned 3 acres
================
(a) Lease expiration dates assume exercise of all renewal options of the
lessee.
The Company believes that all of its properties, both owned and leased, are
generally in good operating condition, subject to normal wear and tear, and are
suitable and adequate for the Company's current business operations.
ITEM 3. LEGAL PROCEEDINGS
Lawsuits and claims are filed against the Company from time to time in the
ordinary course of business. Management, after reviewing developments to date
with legal counsel, is of the opinion that the outcome of such matters will not
have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1996.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Effective June 13, 1995, the common stock of the Company was 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.
1995 High Low
----- -------- ---------
Second Quarter (from June 13)....... $29.00 $ 23.500
Third Quarter....................... 31.00 27.375
Fourth Quarter...................... 27.75 16.250
1996 High Low
---- -------- ---------
First Quarter....................... $26.50 $16.875
Second Quarter...................... 43.50 25.500
Third Quarter....................... 46.50 36.125
Fourth Quarter...................... 43.75 23.000
As of February 25, 1997, there were approximately 55 stockholders of record
of the common stock of the Company. This number does not include beneficial
owners holding shares through nominee names. Based on information available to
it, the Company believes it has more than 1,500 beneficial owners of its Class A
Common Stock.
The Company generally has not paid a dividend on its common stock and does
not expect to pay dividends on its common stock in the foreseeable future. The
Bank Credit Agreement and certain subordinated debt of the Company generally
prohibit the Company from paying dividends on its common stock. Under the
indentures governing the Company's 10% Senior Subordinated Notes due 2003 and
the Company's 10% Senior Subordinated Notes due 2005 (the "Indentures"), the
Company is not permitted to pay dividends on its common stock unless certain
specified conditions are satisfied, including that (i) no event of default then
exists under the Indentures or certain other specified agreements relating to
indebtedness of the Company and (ii) the Company, after taking account of the
dividend, is in compliance with certain net cash flow requirements contained in
the Indentures. In addition, under certain senior unsecured debt of the Company,
the payment of dividends is not permissible during a default thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for the years ended December 31,
1992, 1993, 1994, 1995 and 1996 have been derived from the Company's audited
Consolidated Financial Statements. The Consolidated Financial Statements for the
years ended December 31, 1994, 1995 and 1996 are included elsewhere in this Form
10-K.
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements included elsewhere in this Form 10-K.
29
STATEMENT OF OPERATIONS DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ----------- ------------ ---------- ------------
Net broadcast revenues (a)..................... $ 61,081 $ 69,532 $118,611 $187,934 $ 346,459
Barter revenues................................ 8,805 6,892 10,743 18,200 32,029
---------- ----------- ------------ ---------- ------------
Total revenues................................. 69,886 76,424 129,354 206,134 378,488
Operating expenses, excluding depreciation and
amortization and special bonuses paid to
executive officers........................... 32,993 32,295 50,545 80,446 167,765
Depreciation and amortization (b).............. 30,943 22,486 55,587 80,410 121,081
Amortization of deferred compensation ......... -- -- -- -- 739
Special bonuses paid to executive officers .... -- 10,000 3,638 -- --
---------- ----------- ------------ ---------- ------------
Broadcast operating income..................... 5,950 11,643 19,584 45,278 88,903
Interest and amortization of debt discount
expense..................................... 12,997 12,852 25,418 39,253 84,314
Interest and other income...................... 1,207 2,131 2,447 4,163 3,478
---------- ----------- ------------ ---------- ------------
Income (loss) before provision (benefit) for
income taxes and extraordinary items......... $ (5,840) $ 922 $ (3,387) $ 10,188 $ 8,067
========== =========== ============ ========== ============
Net income (loss).............................. $ (4,651) $ (7,945) $ (2,740) $ 76 $ 1,131
========== =========== ============ ========== ============
Other Data:
Broadcast cash flow (c)....................... $ 28,019 $ 37,498 $ 67,519 $111,124 $ 189,216
Broadcast cash flow margin (d)................ 45.9% 53.9% 56.9% 59.1% 54.6%
Operating cash flow (e)....................... $ 26,466 $ 35,406 $ 64,547 $105,750 $ 180,272
Operating cash flow margin (d)................ 43.3% 50.9% 54.4% 56.3% 52.0%
After tax cash flow (f)....................... $ 15,865 $ 23,725 $ 42,223 $ 65,460 $ 92,500
After tax cash flow margin (d)................ 26.0% 34.1% 35.6% 34.8% 26.7%
Program contract payments..................... $ 10,427 $ 8,723 $ 14,262 $ 19,938 $ 30,451
Capital expenditures.......................... 426 528 2,352 1,702 12,609
Corporate expense............................. 1,553 2,092 2,972 5,374 8,944
Per Share Data:
After tax cash flow per share (g)............. 0.55 0.82 1.46 2.03 2.47
Net income (loss) per share before
extraordinary items.......................... (0.16) -- (0.09) 0.15 0.03
Net income (loss) per common share............ (0.16) (0.27) (0.09) -- 0.03
Balance Sheet Data:
Cash and cash equivalents..................... 1,823 18,036 2,446 112,450 2,341
Total assets.................................. 140,366 242,917 399,328 605,272 1,707,297
Total debt (h) ............................... 110,659 224,646 346,270 418,171 1,288,147
Total stockholders' equity (deficit).......... (3,127) (11,024) (13,723) 96,374 237,253
(a) Net broadcast revenues are defined as broadcast revenues net of agency
commissions.
(b) 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.
(c) "Broadcast cash flow" is defined as broadcast operating income plus
corporate expenses, special bonuses paid to executive officers, depreciation
and amortization (including film amortization and amortization of deferred
compensation and excess syndicated programming), 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.
Special bonuses paid to executive officers are
30
considered non-recurring. The Company has presented broadcast cash flow
data, which the Company believes are 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, broadcast cash flow
does not purport to represent cash provided by operating activities as
reflected in the Company's consolidated statements of cash flows, is not a
measure of financial performance under generally accepted accounting
principles and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles.
(d) "Broadcast cash flow margin" is defined as broadcast cash flow divided by
net broadcast revenues. "Operating cash flow margin" is defined as operating
cash flow divided by net broadcast revenues. "After tax cash flow margin" is
defined as after tax cash flow divided by net broadcast revenues.
(e) "Operating cash flow" is defined as broadcast cash flow less corporate
expenses and is a commonly used measure of performance for broadcast
companies. Operating cash flow does not purport to represent cash provided
by operating activities as reflected in the Company's consolidated
statements of cash flows, is not a measure of financial performance under
generally accepted accounting principles and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
(f) "After tax cash flow" is defined as net income (loss) before extraordinary
items plus depreciation and amortization (including film amortization and
amortization of deferred compensation and excess syndicated programming)
plus special bonuses paid to executive officers, less program contract
payments. After tax cash flow is presented here not as a measure of
operating results and does not purport to represent cash provided by
operating activities. After tax cash flow should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
(g) "After tax cash flow per share" is defined as after tax cash flow divided by
weighted average common and common equivalent shares outstanding.
(h) "Total debt" is defined as long-term debt, net of unamortized discount, and
capital lease obligations, including current portion thereof. In 1992 total
debt included warrants outstanding which were redeemable outside the control
of the Company. The warrants were purchased by the Company for $10.4 million
in 1993. Total debt as of December 31, 1993 included $100.0 million in
principal amount of the Company's 10% Senior Subordinated Notes due 2003
(the "1993 Notes"), the proceeds of which were held in escrow to provide a
source of financing for acquisitions that were subsequently consummated in
1994 utilizing borrowings under the Bank Credit Agreement. $100 million of
the 1993 Notes was redeemed from the escrow in the first quarter of 1994.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
- ------------
As of December 31, 1996, the Company owned and operated or programmed 28
television stations in twenty geographically diverse markets and 21 radio
stations in seven geographically diverse markets in the United States. Thirteen
of the television stations are owned and 15 are provided programming services by
the Company through LMAs. The LMA arrangements for seven of these stations
acquired in the River City acquisition will be terminated after FCC approval for
transfer of these stations' License Assets is obtained. The Company owns 21
radio stations, provides programming services to two radio stations pursuant to
LMAs, has pending acquisitions of two radio stations (with both of which it has
JSAs), has a JSA with one additional radio station and has options to acquire an
additional seven radio stations. The LMA arrangements for two remaining radio
stations acquired in the River City Acquisition will be terminated and the
License Assets will be transferred after FCC approval is obtained, which
approval requires a waiver of FCC cross-ownership rules. In January 1997, the
Company entered into a purchase agreement to acquire the License and Non-License
Assets of KUPN, a television station in Las Vegas, Nevada for approximately
$87.0 million. The Company anticipates the consummation of the agreement upon
FCC approval in 1997.
The operating revenues of the Company are derived from local and national
advertisers and, to a much lesser extent, from television network compensation.
The Company's primary operating expenses involved in owning, operating or
programming the television and radio stations are syndicated program rights
fees, commissions on revenues, employee salaries, news-gathering and promotion.
Amortization and depreciation of costs associated with the acquisition of the
stations and interest carrying charges are significant factors in determining
the Company's overall profitability.
Set forth below are the principal types of broadcast revenues received by the
Company's stations for the periods indicated and the percentage contribution of
each type to the Company's total gross broadcast revenues:
BROADCAST REVENUES
------------------
(DOLLARS IN THOUSANDS)
----------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1995 1996
------------------- ------------------- -------------------
Local/regional
advertising............. $ 67,881 48.6% $104,299 47.5% $199,029 49.4%
National advertising ..... 69,374 49.6% 113,678 51.7% 191,449 47.6%
Network compensation ..... 302 0.2% 442 0.2% 3,907 1.0%
Political advertising .... 1,593 1.1% 197 0.1% 6,972 1.7%
Production................ 696 0.5% 1,115 0.5% 1,142 0.3%
---------- -------- ---------- -------- ---------- --------
Broadcast revenues........ 139,846 100.0% 219,731 100.0% 402,499 100.0%
====== ====== ======
Less: agency commissions . (21,235) (31,797) (56,040)
---------- ---------- ----------
Broadcast revenues, net .. 118,611 187,934 346,459
Barter revenues........... 10,743 18,200 32,029
---------- ---------- ----------
Total revenues............ $129,354 $206,134 $378,488
========== ========== ==========
The Company's primary types of programming and their approximate percentages
of 1996 net broadcast revenues were network programming (14.1%), children's
programming (7.4%) and other syndicated programming (56.7%). Similarly, the
Company's three largest categories of advertising and their approximate
percentages of 1996 net broadcast revenues were automotive (17.4%), fast food
advertising (9.2%) and movies (5.5%). No other advertising category accounted
for more than 5% of the Company's net broadcast revenues in 1996. No individual
advertiser accounted for more than 5% of any of the Company's individual
station's net broadcast revenues in 1996.
32
The following table sets forth certain operating data of the Company for the
years ended December 31, 1994, 1995 and 1996:
OPERATING DATA
--------------
(DOLLARS IN THOUSANDS)
----------------------
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
---------- ---------- ----------
Net broadcast revenues......................................... $118,611 $187,934 $346,459
Barter revenues................................................ 10,743 18,200 32,029
---------- ---------- ----------
Total revenues................................................. 129,354 206,134 378,488
---------- ---------- ----------
Operating expenses, excluding depreciation and amortization
and special bonuses paid to executive officers................. 50,545 80,446 167,765
Depreciation and amortization.................................. 55,587 80,410 118,038
Amortization of deferred compensation.......................... -- -- 739
Amortization of excess syndicated programming.................. -- -- 3,043
Special bonuses to executive officers.......................... 3,638 -- --
---------- ---------- ----------
Broadcast operating income..................................... $ 19,584 $ 45,278 $ 88,903
========== ========== ==========
BROADCAST CASH FLOW (BCF) DATA:
Television BCF (a)............................................. $ 67,519 $111,124 $175,212
Radio BCF (a).................................................. -- -- 14,004
---------- ---------- ----------
Consolidated BCF (a)........................................... $ 67,519 $111,124 $189,216
========== ========== ==========
Television BCF margin.......................................... 56.9% 59.1% 56.7%
Radio BCF margin............................................... -- -- 37.3%
Consolidated BCF margin........................................ 56.9% 59.1% 54.6%
OTHER DATA:
Operating cash flow (b)........................................ $ 64,547 $105,750 $180,272
Operating cash flow margin..................................... 54.4% 56.3% 52.0%
After tax cash flow (c)........................................ $ 42,223 $ 65,460 $ 92,500
After tax cash flow per share (d).............................. $ 1.46 $ 2.03 $ 2.47
Program contract payments...................................... $ 14,262 $ 19,938 $ 30,451
Corporate expense.............................................. $ 2,972 $ 5,374 $ 8,944
- ----------
(a) "Broadcast cash flow" is defined as broadcast operating income plus
corporate expenses, special bonuses paid to executive officers, depreciation
and amortization (including film amortization and amortization of deferred
compensation and excess syndicated programming), less cash payments for
program contract rights. Cash program payments represent cash payments made
for current program payables and do not necessarily correspond to program
usage. Special bonuses to executive officers are considered non-recurring
expenses. The company has presented broadcast cash flow data, which the
Company believes are 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, broadcast cash flow does not
purport to represent cash provided by operating activities as reflected in
the Company's consolidated statements of cash flows, is not a measure of
financial performance under generally accepted accounting principles and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
(b) "Operating cash flow" is defined as broadcast cash flow less corporate
expenses and is a commonly used measure of performance for broadcast
companies. Operating cash flow does not purport to represent cash provided
by operating activities as reflected in the Company's consolidated
statements of cash flows, is not a measure of financial performance under
generally accepted accounting principles and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
(c) "After tax cash flow" is defined as net income (loss) before extraordinary
items plus depreciation and amortization (including film amortization and
amortization of deferred compensation and excess syndicated programming),
plus special bonuses paid to executive officers less program contract
payments. After tax cash flow is presented here not as a measure of
operating results and does not purport to represent cash provided by
operating activities. After tax cash flow should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
(d) "After tax cash flow per share" is defined as after tax cash flow divided by
weighted average common and common equivalent shares outstanding.
33
RESULTS OF OPERATIONS
- ---------------------
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------
Total revenues increased to $378.5 million for the year ended December 31,
1996 from $206.1 million for the year ended December 31, 1995, or 83.6%.
Excluding the effects of non-cash barter transactions, net broadcast revenues
for the year ended December 31, 1996 increased by 84.4% over the year ended
December 31, 1995. The increase in broadcast revenues was primarily the result
of acquisitions and LMA transactions consummated by the Company in 1995 and 1996
(collectively, the "Acquisitions"). For stations owned, operated or programmed
throughout 1995 and 1996, television broadcast revenue grew 2.1% for the year
ended December 31, 1996 when compared to the year ended December 31, 1995. For
stations owned, operated or programmed throughout 1994 and 1995, television
broadcast revenue grew 12.8% for the year ended December 31, 1995 when compared
to the year ended December 31, 1994. The decrease in 1996 revenue growth as
compared to 1995 revenue growth primarily resulted from the loss in 1996 of the
Fox affiliation at WTTO in the Birmingham market, the loss of the NBC
affiliation at WRDC in the Raleigh market and decreases in ratings at WCGV and
WNUV in the Milwaukee and Baltimore markets, respectively.
Operating expenses excluding depreciation, amortization of intangible assets
and amortization of deferred compensation and excess syndicated programming
costs increased to $167.8 million for the year ended December 31, 1996 from
$80.4 million for the year ended December 31, 1995 or 108.7%. The increase in
expenses for the year ended December 31, 1996 as compared to the year ended
December 31, 1995 was largely attributable to operating costs associated with
the Acquisitions, an increase in LMA fees resulting from LMA transactions and an
increase in corporate overhead expenses.
Broadcast operating income increased to $88.9 million for the year ended
December 31, 1996, from $45.3 million for the year ended December 31, 1995, or
96.2%. The increase in broadcast operating income for the year ended December
31, 1996 as compared to the year ended December 31, 1995 was primarily
attributable to the Acquisitions.
Interest expense increased to $84.3 million for the year ended December 31,
1996 from $39.3 million for the year ended December 31, 1995, or 114.5%. The
increase in interest expense for the year ended December 31, 1996 was primarily
related to senior bank indebtedness incurred by the Company to finance the River
City Acquisition and other acquisitions.
Interest and other income decreased to $3.5 million for the year ended
December 31, 1996 from $4.2 million for the year ended December 31, 1995, or
16.7%. The decrease for the year ended December 31, 1996 was primarily due to
lower cash balances and related interest income resulting from cash payments
made in February 1996 when the Company made a $34.4 million payment relating to
the WSMH acquisition and April 1996 when the company made a $60 million down
payment relating to the River City acquisition. The decrease in interest income
was offset by an increase in other income resulting from the Acquisitions.
For the reasons described above, net income for the year ended December 31,
1996 was $1.1 million or $0.03 per share compared to net income of $5.0 million
or $0.15 per share for the year ended December 31, 1995 before the extraordinary
loss on early extinguishment of debt.
Broadcast cash flow increased to $189.2 million for the year ended December
31, 1996 from $111.1 million for the year ended December 31, 1995, or 70.3%. The
increase in broadcast cash flow for the year ended December 31, 1996 as compared
to the year ended December 31, 1995 primarily resulted from the Acquisitions.
For stations owned, operated or programmed throughout 1995 and 1996, broadcast
cash flow grew 1.3% for the year ended December 31, 1996 when compared to the
year ended December 31, 1995. For stations owned, operated or programmed
throughout 1994 and 1995, broadcast cash flow grew 23.7% for the year ended
December 31, 1995 when compared to the year ended December 31, 1994. The
decrease in 1996 broadcast cash flow growth as compared to 1995 broadcast cash
flow growth primarily resulted from the loss in 1996 of the Fox affiliation at
WTTO in the Birmingham market, the loss of the NBC affiliation at WRDC in the
Raleigh market and decreases in ratings at WCGV and WNUV in the Milwaukee and
Baltimore markets, respectively. The Company's broadcast
34
cash flow margin decreased to 54.6% for the year ended December 31, 1996 from
59.1% for the year ended December 31, 1995. Excluding the effect of radio
station broadcast cash flow, television station broadcast cash flow margin
decreased to 56.7% for the year ended December 31, 1996 as compared to 59.1% for
the year ended December 31, 1995. The decrease in broadcast cash flow margins
for the year ended December 31, 1996 as compared to the year ended December 31,
1995 primarily resulted from the lower margins of the acquired radio
broadcasting assets and lower margins of certain of the acquired television
stations. For stations owned, operated or programmed throughout 1996 and 1995,
broadcast cash flow margins were unchanged when comparing the years ended
December 31, 1996 and 1995. The Company believes that margins of certain of the
acquired stations will improve as operating and programming synergies are
implemented.
Operating cash flow increased to $180.3 million for the year ended December
31, 1996 from $105.8 million for the year ended December 31, 1995, or 70.4%. The
increase in operating cash flow for the year ended December 31, 1996 as compared
to the year ended December 31, 1995 resulted from the Acquisitions. The
Company's operating cash flow margin decreased to 52.0% for the year ended
December 31, 1996 from 56.3% for the year ended December 31, 1995. The decrease
in operating cash flow margins for the year ended December 31, 1996 as compared
to the year ended December 31, 1995 primarily resulted from higher operating
costs at certain of the acquired stations. The Company has begun to implement
and will continue to implement operating and programming synergies throughout
the businesses acquired in and prior to 1996. The Company believes that the
benefits of the implementation of these methods will result in improvement in
broadcast cash flow and operating cash flow margins in future periods.
After tax cash flow increased to $92.5 million for the year ended December
31, 1996 from $65.5 million for the year ended December 31, 1995, or 41.2%. The
increase in after tax cash flow for the year ended December 31, 1996 as compared
to the year ended December 31, 1995 primarily resulted from the Acquisitions
offset by interest expense on the debt incurred to consummate the Acquisitions.
After tax cash flow per share increased to $2.47 for the year ended December 31,
1996 from $2.03 for the year ended December 31, 1995.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total revenues increased to $206.1 million for the year ended December 31,
1995, from $129.4 million for the year ended December 31, 1994, or 59.3%. This
increase includes revenues from the acquisitions of WTVZ and WLFL and the
entering into LMA agreements with WABM and WDBB (the "1995 Acquisitions"). This
increase also includes the first full year of revenues from the acquisition of
WCGV and WTTO and the entering into LMA agreements with WNUV, WVTV and FSFA (the
"1994 Acquisitions"). Excluding the effect of non-cash barter transactions, net
broadcast revenues increased to $187.9 million for the year ended December 31,
1995 from $118.6 million for the year ended December 31, 1994, or 58.4%.
These increases in net broadcast revenues were primarily a result of the 1994
and 1995 Acquisitions and LMA transactions consummated by the Company, as well
as television broadcast revenue growth in each of the Company's markets. WPGH,
the Pittsburgh Fox affiliate, achieved in excess of 14% net broadcast revenue
growth for the year ended December 31, 1995 as compared to the year ended
December 31, 1994. This increase was primarily attributable to a new metered
rating service that began in May 1995 which significantly improved WPGH's market
rating. WBFF, the Fox affiliate in Baltimore and WCGV, the former Fox affiliate,
now UPN affiliate in Milwaukee, both achieved in excess of 10% net broadcast
revenue growth as these stations began to realize the advantages of having an
LMA in these markets.
Operating expenses excluding depreciation and amortization and special
bonuses paid to executive officers increased to $80.4 million for the year ended
December 31, 1995 from $50.5 million for the year ended December 31, 1994. These
increases in expenses were primarily attributable to increases in operating
expenses relating to the 1994 and 1995 Acquisitions, including the payment of
LMA fees which increased to approximately $5.6 million for the year ended
December 31, 1995 as compared to $1.1 million for the year ended December 31,
1994. Corporate overhead expenses increased 80.8% for the
35
year ended December 31, 1995 as compared to the year ended December 31, 1994.
This increase was primarily due to expenses associated with being a public
company (i.e. directors and officers insurance, travel expenses and professional
fees) and executive bonus accruals for bonuses which were paid based on
achieving in excess of 20% growth percentages in pro forma broadcast cash flow
for the year 1995 compared to 1994.
Broadcast operating income increased to $45.3 million for the year ended
December 31, 1995 from $19.6 million for the year ended December 31, 1994, or
131.1%. This increase in broadcast operating income was primarily a result of
the 1994 and 1995 Acquisitions and an increase in television broadcast revenues
in each of the Company's markets, partially offset by increased amortization
expenses related to the Acquisitions.
Interest expense increased to $39.3 million for the year ended December 31,
1995 from $25.4 million for the year ended December 31, 1994, or 54.7%. The
major component of this increase in interest expense was increased borrowings
under the Company's existiong bank credit facility, which is governed by an
agreement with Chase Manhattan Bank, as Agent (the "Bank Credit Agreement") to
finance the 1994 and 1995 Acquisitions. During August 1995, the Company issued
$300 million of senior subordinated notes and used a portion of the net proceeds
to repay outstanding indebtedness under the Bank Credit Agreement and the
remainder provided an increase to the Company's cash balances of approximately
$91.4 million. The interest expense related to these notes was approximately
$10.0 million in 1995. This increase was partially offset by the application of
the net proceeds of an offering of Class A Common Stock to reduce a portion of
the indebtedness under the Bank Credit Agreement during June 1995. Interest
expense was also reduced as a result of the application of net cash flow from
operating activities to further decrease borrowings under the Bank Credit
Agreement.
Interest and other income increased to $4.2 million for the year ended
December 31, 1995 from $2.4 million for the year ended December 31, 1994, or
75.0%. This increase in interest income primarily resulted from an increase in
cash balances that remained from the proceeds of Senior Subordinated Notes
issued in August 1995. Income (loss) before benefit (provision) for income taxes
and extraordinary item increased to income of $10.2 million for the year ended
December 31, 1995 from a loss of $3.4 million for the year ended December 31,
1994.
Net income available to common shareholders improved to income of $76,000 for
the year ended December 31, 1995 from a loss of $2.7 million for the year ended
December 31, 1994. In August 1995, the Company consummated the sale of $300
million of Senior Subordinated Notes generating net proceeds to the Company of
$293.2 million. The net proceeds of this offering were utilized to repay
outstanding indebtedness under the Bank Credit Agreement of $201.8 million with
the remainder being retained for general corporate purposes including potential
future acquisitions. In conjunction with the early retirement of the
indebtedness under the Bank Credit Agreement, the Company recorded an
extraordinary loss of $4.9 million net of a tax benefit of $3.4 million, related
to the write off of deferred financing costs under the Bank Credit Agreement.
Broadcast cash flow increased to $111.1 million for the year ended December
31, 1995 from $67.5 million for the year ended December 31, 1994, or 64.6%. This
increase in broadcast cash flow was primarily due to the 1994 and 1995
Acquisitions, growth in market revenues and a reduction in program payments as a
percentage of net broadcast revenues to 10.6% for the year ended December 31,
1995 from 12.0% for the year ended December 31, 1994.
Operating cash flow increased to $105.8 million for the year ended December
31, 1995 from $64.6 million for the year ended December 31, 1994, or 63.8%,
consistent with the growth in broadcast cash flow. After tax cash flow increased
to $65.5 million for the year ended December 31, 1995 from $42.2 million for the
year ended December 31, 1994, or 55.2%.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had $2.3 million in cash balances, and
current liabilities were in excess of current assets by approximately $5.9
million. The Company's decrease in cash to $2.3 million at December 31, 1996
from $112.5 million at December 31, 1995 primarily resulted from cash payments
made relating to the 1996 Acquisitions and repayments of bank debt. As of
February 25, 1997,
36
approximately $27.5 million was available for borrowing under the Bank Credit
Agreement. The Company is obligated to pay approximately $82.0 million to
complete the acquisition of KUPN and expects to make this payment from
borrowings under the Bank Credit Agreement and/or from proceeds of an offering
of securities. See "Item l. Business -- 1997 Acquisitions."
Net cash flows from operating activities increased to $69.0 million for the
year ended December 31, 1996 from $55.9 million for the year ended December 31,
1995. The Company made income tax payments of $6.8 million for the year ended
December 31, 1996 as compared to $7.9 million for the year ended December 31,
1995. This decrease was due to anticipated tax benefits generated by the 1996
Acquisitions. The Company made interest payments on outstanding indebtedness of
$82.8 million during the year ended December 31, 1996 as compared to $24.8
million for the year ended December 31, 1995. Additional interest payments for
the year ended December 31, 1996 as compared to the year ended December 31, 1995
primarily related to additional interest costs associated with the Company's
public debt offering in August 1995 and indebtedness incurred to finance the
1996 Acquisitions. Program rights payments increased to $30.5 million for the
year ended December 31, 1996 from $19.9 million for the year ended December 31,
1995, primarily as a result of the 1996 Acquisitions.
Net cash flows used in investing activities increased to $1.0 billion for the
year ended December 31, 1996 from $119.2 million for the year ended December 31,
1995. During February 1996, the Company purchased the License and Non-License
Assets of WSMH for $35.4 million at which time the balance due to the seller of
$34.4 million was paid from existing cash balances. In January 1996, the Company
made a cash payment of $1.0 million relating to the acquisition of the License
and Non-License Assets of WYZZ. In July 1996, the Company consummated the
acquisition for a purchase price of approximately $21.1 million. In May 1996,
the Company purchased the outstanding stock of Superior and made cash payments
totaling $63.5 million relating to the transaction. Also in May 1996, the
Company acquired certain Non-License assets of River City and KRRT and made
related cash payments totaling $818.1 million and $29.5 million, respectively.
In September 1996, the Company exercised its options to acquire certain FCC
licenses relating to the River City Acquisition for a cash payment of $6.9
million. In July 1996, the Company purchased the License and Non-License Assets
of KSMO and made net cash payments totaling $10.0 million. In August 1996, the
Company purchased the License and Non-License Assets of WSTR and made net cash
payments totaling $8.7 million. In December 1996, the Company made purchase
option extension payments of $7.0 million relating to WSYX. The Company made
payments for property and equipment of $12.6 million for the year ended December
31, 1996. Approximately $7.0 million of these payments related to the purchase
of property and equipment for the development of local news programming at WPGH
in Pittsburgh, Pennsylvania.
Net cash flows from financing activities increased to $832.8 million for the
year ended December 31, 1996 from $173.3 million for the year ended December 31,
1995. In May 1996, the Company utilized available indebtedness of $63.0 million
for the acquisition of Superior and simultaneously repaid indebtedness of $25.0
million. Also in May 1996, the Company utilized available indebtedness of $835.0
for the acquisition of the Non-License Assets of River City and KRRT and
simultaneously repaid indebtedness of $36.0 million. In September 1996, the
Company exercised its options to acquire certain FCC licenses relating to the
River City Acquisition for a cash payment of $6.9 million by utilizing
indebtedness under the Bank Credit Agreement. In July 1996, the Company utilized
available indebtedness under its Bank Credit Agreement totaling $30.6 million
for the acquisitions of WYZZ and KSMO. In August 1996, the Company utilized
available indebtedness totaling $9.9 million for the acquisition of WSTR. In
December 1996, the Company made purchase option extension payments of $7.0
million relating to WSYX utilizing indebtedness under the Bank Credit Agreement.
The Company also made a $20.0 million payment of debt acquisition costs relating
to the financing required to consummate the River City and KRRT acquisitions. In
the fourth quarter of 1996, the Company negotiated the prepayment of syndicated
program contract liabilities relating to excess syndicated programming assets
and made cash payments of $15.1 million utilizing indebtedness under its Bank
Credit Agreement of $10.0 million with the remainder being paid from existing
cash balances.
The Company anticipates that funds from operations, existing cash balances
and availability of the revolving credit facility under the Bank Credit
Agreement will be sufficient to meet its working capital, capital expenditures
and debt service requirements for the foreseeable future. However, to the extent
37
such funds are not sufficient, the Company may need to incur additional
indebtedness, refinance existing indebtedness or raise funds from the sale of
additional equity. The Bank Credit Agreement and the indentures (the "Existing
Indentures") relating to the Company's 10% Senior Subordinated Notes and 10%
Senior Subordniated Notes due 2003 (the "1995 Notes) would restrict the
incurrence of additional indebtedness and the use of proceeds of an equity
issuance. In 1996, the Company filed a registration statement with the
Securities and Exchange Commission with respect to the sale by the Company of
5,750,000 shares of Class A Common Stock. The Company has not yet made such an
offering but continues to intend to make such an offering at such time as it
believes market conditions warrant, but there can be no assurance as to the
timing of such an offering or whether such an offering will in fact occur.
INCOME TAXES
- ------------
The Company's income tax provision increased to $6.9 million for the year
ended December 31, 1996 from $5.2 million for the year ended December 31, 1995.
The Company's effective tax rate increased to 86% for the year ended December
31, 1996 from 51% for the year ended December 31, 1995. The increase for the
year ended December 31, 1996 as compared to the year ended December 31, 1995
primarily related to certain financial reporting and income tax differences
attributable to certain 1995 and 1996 Acquisitions, and state franchise taxes
which are independent of pre-tax income. Management believes that as pre-tax
income increases in future years, the Company's effective tax rate will
decrease. See Note 9 to the Company's Consolidated Financial Statements.
The net deferred tax asset decreased to $782,000 as of December 31, 1996 from
$21.0 million at December 31, 1995. The decrease in the Company's net deferred
tax asset as of December 31, 1996 as compared to December 31, 1995 is primarily
due to the Company recording deferred tax liabilities of $18.1 million relating
to the acquisition of all of the outstanding stock of Superior Communications,
Inc. (Superior) in May 1996, adjustments related to certain 1995 acquisitions,
and resulting differences between the book and tax basis of the underlying
assets.
A $1.8 million net tax provision and a $647,000 tax benefit was recognized
for the years ended December 31, 1995 and December 31, 1994, respectively. The
provision for the year ended December 31, 1995 was comprised of $5.2 million
provision relating to the Company's income before provision for income taxes and
extraordinary item offset by a $3.4 million income tax benefit relating to the
extraordinary loss on early extinguishment of debt. The $5.2 million tax
provision reflects a 51% effective tax rate for the year ended December 31,
1995, which is higher than the statutory rate primarily due to the
non-deductibility of goodwill relating to the repurchase of Common Stock in
1990. The income tax benefit for the year ended December 31, 1994 was 19.1% of
the Company's loss before income taxes, which is lower than the benefit
calculated at statutory rates primarily due to non-deductible goodwill
amortization. After giving effect to these changes the Company had net deferred
tax assets of $21.0 million at December 31, 1995 and $12.5 million at December
31, 1994, respectively.
SEASONALITY
- -----------
The Company's results usually are subject to seasonal fluctuations, which
result in fourth quarter broadcast operating income usually being greater 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.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information relating to the Company's executive
officers, directors, certain key employees and persons expected to become
executive officers, directors or key employees.
NAME AGE TITLE
- --------------------- ----- ---------------------------------------------------
David D. Smith....... 46 President, Chief Executive Officer, Director and
Chairman of the Board
Frederick G. Smith .. 47 Vice President and Director
J. Duncan Smith...... 43 Vice President, Secretary and Director
Robert E. Smith...... 33 Vice President, Treasurer and Director
David B. Amy......... 44 Chief Financial Officer
Barry Drake.......... 45 Chief Operating Officer, SCI Radio
Alan B. Frank........ 46 Regional Director, SCI
Michael Granados .... 42 Regional Director, SCI
Steven M. Marks...... 40 Regional Director, SCI
John T. Quigley...... 53 Regional Director, SCI
Frank Quitoni........ 52 Regional Director, SCI
M. William Butler ... 44 Vice President/Group Program Director, SCI
Michael Draman....... 48 Vice President/TV Sales and Marketing, SCI
Stephen A. Eisenberg. 55 Vice President/Director of National Sales, SCI
Delbert R. Parks,III. 44 Director of Operations and Engineering, SCI
Robert E. Quicksilver 41 General Counsel, SCI
Thomas E. Severson .. 33 Corporate Controller
Michael E. Sileck ... 36 Vice President/Finance, SCI
Robin A. Smith....... 40 Chief Financial Officer, SCI Radio
Patrick J. Talamantes 32 Director of Corporate Finance
William E. Brock .... 66 Director
Lawrence E. McCanna . 53 Director
Basil A. Thomas...... 81 Director
In addition to the foregoing, the following persons have agreed to serve as
executive officers and/or directors of the Company as soon as permissible under
the rules of the FCC and applicable laws.
NAME AGE TITLE
- -------------------- ----- ---------------------------------------------
Barry Baker......... 44 Executive Vice President of the Company,
Chief Executive Officer of SCI and Director
Kerby Confer........ 56 Chief Executive Officer, SCI Radio
Roy F. Coppedge, III 48 Director
In connection with the River City Acquisition, the Company agreed to increase
the size of the Board of Directors from seven members to nine to accommodate the
prospective appointment of each of Barry Baker and Roy F. Coppedge, III or such
other designee as Boston Ventures may select. Mr. Baker and Mr. Confer currently
serve as consultants to the Company.
39
Members of the Board of Directors are elected for one-year terms and until
their successors are duly elected and qualified. Executive officers are
appointed by the Board of Directors annually to serve for one year-terms and
until their successors are duly appointed and qualified.
David D. Smith has served as President, Chief Executive Officer and Chairman
of the Board since September 1990. Prior to that, he served as General Manager
of WPTT from 1984, and assumed the financial and engineering responsibility for
the Company, including the construction of WTTE in 1984. In 1980, Mr. Smith
founded Comark Television, Inc., which applied for and was granted the permit
for WPXT-TV in Portland, Maine and which purchased WDSI-TV in Chattanooga,
Tennessee. WPXT-TV was sold one year after construction and WDSI-TV was sold two
years after its acquisition. From 1978 to 1986, Mr. Smith co-founded and served
as an officer and director of Comark Communications, Inc., a company engaged in
the manufacture of high power transmitters for UHF television stations. His
television career began with WBFF in Baltimore, where he helped in the
construction of the station and was in charge of technical maintenance until
1978. David D. Smith, Frederick G. Smith, J. Duncan Smith and Robert E. Smith
are brothers.
Frederick G. Smith has served as Vice President of the Company since 1990 and
as a Director since 1986. Prior to joining the Company in 1990, Mr. Smith was an
oral and maxillofacial surgeon engaged in private practice and was employed by
Frederick G. Smith, M.S., D.D.S., P.A., a professional corporation of which Mr.
Smith was the sole officer, director and stockholder.
J. Duncan Smith has served as Vice President, Secretary and a Director of the
Company since 1988. Prior to that, he worked for Comark Communications, Inc.
installing UHF transmitters. In addition, he also worked extensively on the
construction of WPTT in Pittsburgh, WTTE in Columbus, WIIB in Bloomington and
WTTA in St. Petersburg, as well as on the renovation of the new studio, offices
and news facility for WBFF in Baltimore.
Robert E. Smith has served as Vice President, Secretary and a Director of the
Company since 1988. Prior to that, he served as Program Director at WBFF from
1986 to 1988. Prior to that, he assisted in the construction of WTTE and also
worked for Comark Communications, Inc. installing UHF transmitters.
David B. Amy has served as Chief Financial Officer ("CFO") since October of
1994 and prior to his appointment as CFO served as the Controller of the Company
beginning in 1986. Before that, he served as the Business Manager for WPTT.
Prior to joining the Company in 1984, Mr. Amy was an accounting manager of Penn
Athletic Products Company in Pittsburgh, Pennsylvania. Mr. Amy received an MBA
degree from the University of Pittsburgh in 1981.
Barry Drake has served as Chief Operating Officer of SCI Radio since
completion of the River City Acquisition. Prior to that time, he was Chief
Operating Officer--Keymarket Radio Division of River City since July 1995. Prior
to that time, he was President and Chief Operating Officer of Keymarket since
1988. From 1985 through 1988, Mr. Drake performed the duties of the President of
each of the Keymarket broadcasting entities, with responsibility for three
stations located in Houston, St. Louis and Detroit.
Alan B. Frank has served as Regional Director for the Company since May 1994.
As Regional Director, Mr. Frank is responsible for the Pittsburgh, Milwaukee,
Kansas City and Raleigh-Durham markets. Prior to his appointment to Regional
Director, Mr. Frank served as General Manager of WPGH beginning in September
1991.
Michael Granados has served as a Regional Director of the Company since July
1996. As a Regional Director, Mr. Granados is responsible for the San Antonio,
Des Moines, Peoria and, upon completion of the KUPN acquisition, Las Vegas
markets. Prior to July 1996, Mr. Granados has served in various positions with
the Company and, before the River City Acquisition, with River City. He served
as the General Sales Manager of KABB from 1989 to 1993, the Station Manager and
Director of Sales of WTTV from 1993 to 1994 and the General Manager of WTTV
prior to his appointment as Regional Director in 1996.
Steven M. Marks has served as Regional Director for the Company since October
1994. As Regional Director, Mr. Marks is responsible for the Baltimore, Norfolk,
Flint and Birmingham markets. Prior to his appointment as Regional Director, Mr.
Marks served as General Manager for WBFF since July 1991. From 1986 until
joining WBFF in 1991, Mr. Marks served as General Manager at WTTE. Prior to that
time, he was national sales manager for WFLX-TV in West Palm Beach, Florida.
40
John T. Quigley has served as a Regional Director of the Company since June
1996. As Regional Director, Mr. Quigley is responsible for the Columbus,
Cincinnati, and Oklahoma City markets. Prior to that time, Mr. Quigley served as
general manager of WTTE since July 1985. Prior to joining WTTE, Mr. Quigley
served in broadcast management positions at WCPO-TV in Cincinnati, Ohio and
WPTV-TV in West Palm Beach, Florida.
Frank Quitoni has served as a Regional Director since completion of the River
City Acquisition. As Regional Director, Mr. Quitoni is responsible for the St.
Louis, Sacramento, Indianapolis and Asheville/Greenville/Spartanburg markets.
Prior to joining the Company, he was Vice President of Operations for River City
since 1995. Mr. Quitoni had served as the Director of Operations and Engineering
for River City since 1994. Prior thereto Mr. Quitoni served as a consultant to
CBS beginning in 1989. Mr. Quitoni was the Director of Olympic Operations for
CBS Sports for the 1992 Winter Olympic Games and consulted with CBS for the 1994
Winter Olympic Games. Mr. Quitoni was awarded the Technical Achievement Emmy for
the 1992 and 1994 CBS Olympic broadcasts.
M. William Butler has served as Vice President/Group Program Director, SCI
since 1997. Prior to joining the Company, he served as Director of Programming
at KCAL, the Walt Disney Company station in Los Angeles, California. Before
that, he was Director of Marketing and Programming at WTXF in Philadelphia,
Pennsylvania and WLVI in Boston, Massachusetts. Mr. Butler attended the Graduate
Business School of the University of Cincinnati from 1975 to 1976.
Michael Draman has served as Vice President/TV Sales and Marketing, SCI since
1997. Prior to joining the Company, he served as Vice President of Revenue
Development for New World Television. Before that, he was Director of Sales and
Marketing for WSVN in Miami, Florida. Mr. Draman attended The American
University and The Harvard Business School and served with the U.S.
Marine Corps in Vietnam.
Stephen A. Eisenberg has served as Director of National Sales, SCI since
November 1996. Prior to joining the Company, he served as Vice
President/Director of Sales for Petry Television, with total national sales
responsibility for KTTV in Los Angeles, California, KCPQ-TV in Seattle,
Washington, WTNH-TV in New Haven, Connecticut, WKYC-TV in Cleveland, Ohio,
WBIR-TV in Knoxville, Tennessee, WKEF-TV in Dayton, Ohio and WTMJ-TV in
Milwaukee, Wisconsin. His career at Petry Television spanned 21 years. Mr.
Eisenberg received an MS degree in Journalism from Northwestern's Medill School
and a BA degree from Brooklyn College.
Delbert R. Parks III has served as Vice President of Operations and
Engineering since the completion of the River City Acquisition. Prior to that
time, he was Director of Operations and Engineering for WBFF and Sinclair since
1985, and has been with the Company for 25 years. He is responsible for
planning, organizing and implementing operational and engineering policies and
strategies as they relate to television and computer systems. Currently, he is
consolidating facilities for Sinclair's television stations and has just
completed a digital facility for Sinclair's news and technical operation in
Pittsburgh. Mr. Parks is also a Lieutenant Colonel in the Maryland Army National
Guard and commands the 1st Battalion, 175th Infantry (Light).
Robert E. Quicksilver has served as General Counsel, SCI since completion of
the River City Acquisition. Prior to that time he served as General Counsel of
River City since September 1994. Prior to joining River City, Mr. Quicksilver
was with the law firm of Rosenblum, Goldenhersh, Silverstein and Zafft, P.C. in
St. Louis, where he was a partner for six years. Mr. Quicksilver holds a B.A.
from Dartmouth College and a J.D. from the University of Michigan.
Thomas E. Severson has served as Corporate Controller since 1997. Before
that, Mr. Severson served as Assistant Controller of the Company since 1995.
Prior to joining the Company, Mr. Severson held positions in the audit
departments of KPMG Peat Marwick LLP and Deloitte & Touche LLP from 1991 to
1995. Mr. Severson is a graduate of the University of Baltimore and is a
Certified Public Accountant.
Michael E. Sileck has served as Vice President/Finance of SCI since
completion of the River City Acquisition. Prior to that time he served as the
Director of Finance for River City since 1993. Mr. Sileck joined River City in
July 1990 as Director of Finance and Business Affairs for KDNL-TV. Mr. Sileck is
41
an active member of the Broadcast Cable Financial Management Association
("BCFM") and was a Director of BCFM from 1993 to 1996. Mr. Sileck, a Certified
Public Accountant, received a B.S. degree in Accounting from Wayne State
University and an M.B.A. in Finance from Oklahoma City University.
Robin A. Smith has served as Chief Financial Officer, SCI Radio since June
1996. Prior to joining the Company, she served as Vice President and Chief
Financial Officer of the Park Lane Group of Menlo Park, California, which owned
and operated small market radio stations. Before that, she served as Vice
President and Treasurer of Edens Broadcasting, Inc. in Phoenix, Arizona, which
owns and operates radio stations in major markets. Ms. Smith is a graduate of
Arizona State University and is a Certified Public Accountant.
Patrick Talamantes has served as Director of Corporate Finance since
completion of the River City Acquisition. Prior to that time he served as
Treasurer for River City since April 1995. From 1991 to 1995, he was a Vice
President with Chemical Bank, where he completed financings for clients in the
cable, broadcasting, publishing and entertainment industries. Mr. Talamantes
holds a B.A. degree from Stanford University and an M.B.A. from the Wharton
School at the University of Pennsylvania.
William E. Brock has served as a Director of the Company since July 1995. Mr.
Brock served as chairman of The Brock Group from 1989 until January 1994, and as
chairman emeritus from 1994 to 1996. Mr. Brock currently serves as chairman of
Intellectual Development Systems. Mr. Brock served as a United States Senator
from Tennessee from 1971 to 1977 and as a member of the U.S. House of
Representatives from 1962 to 1970. Mr. Brock served as a member of President
Reagan's cabinet from 1981 to 1987, as U.S. Trade Representative from 1981 to
1985 and as Secretary of Labor from 1985 to 1987. Mr. Brock was National
Chairman of the Republican Party from 1977 to 1981.
Lawrence E. McCanna has served as a Director of the Company since July 1995.
Mr. McCanna has been a partner of the accounting firm of Gross, Mendelsohn &
Associates, P.A., since 1972 and has served as its managing partner since 1982.
Mr. McCanna has served on various committees of the Maryland Association of
Certified Public Accountants and was chairman of the Management of the
Accounting Practice Committee. He is also a former member of the Management of
an Accounting Practice Committee of the American Institute of Certified Public
Accountants. Mr. McCanna is a member of the board of directors of Maryland
Special Olympics.
Basil A. Thomas has served as a Director of the Company since November 1993.
He is of counsel to the Baltimore law firm of Thomas & Libowitz, P.A. and has
been in the private practice of law since 1983. From 1961 to 1968, Judge Thomas
served as an Associate Judge on the Municipal Court of Baltimore City and, from
1968 to 1983, he served as an Associate Judge of the Supreme Bench of Baltimore
City. Judge Thomas is a trustee of the University of Baltimore and a member of
the American Bar Association and the Maryland State Bar Association. Judge
Thomas attended the College of William & Mary and received his L.L.B. from the
University of Baltimore. Judge Thomas is the father of Steven A. Thomas, a
senior attorney and founder of Thomas & Libowitz, counsel to the Company.
Barry Baker has been the Chief Executive Officer of River City since 1989,
and is the President of the corporate general partner of River City, Better
Communications, Inc. ("BCI"). The principal business of both River City and BCI
is television and radio broadcasting. In connection with the River City
Acquisition, the Company agreed to appoint Mr. Baker Executive Vice President of
the Company and to elect him as a Director at such time as he is eligible to
hold those positions under applicable FCC regulations. He currently serves as a
consultant to the Company.
Kerby Confer served as a member of the Board of Representatives and Chief
Executive Officer-- Keymarket Radio Division of River City since July 1995.
Prior thereto, Mr. Confer served as Chairman of the Board and Chief Executive
Officer of Keymarket since its founding in December 1981. Prior to engaging in
the acquisition of various radio stations in 1975, Mr. Confer held a number of
jobs in the broadcast business, including serving as Managing Partner of a radio
station in Annapolis, Maryland from 1969 to 1975. From 1966 to 1969, he hosted a
pop music television show on WBAL-TV (Baltimore) and WDCA-TV (Washington, D.C.).
Prior thereto, Mr. Confer served as program director or producer/director for
radio and television stations owned by Susquehanna Broadcasting and Plough
Broadcasting Company, Inc. Mr. Confer currently provides services to the Company
and is expected to become Chief Executive Officer of SCI Radio at such time as
he is eligible to hold this position under applicable FCC regulations.
42
Roy F. Coppedge, III is a general partner of the general partner of each of
the Boston Ventures partnerships, limited partnerships primarily involved in the
business of investments. Mr. Coppedge is a director of Continental Cablevision,
Inc., and American Media, Inc. and a member of the Board of Representatives of
Falcon Holding Group, L.P. In connection with the River City Acquisition, the
Company agreed to elect Mr. Coppedge as a Director at such time as he is
eligible to hold that position under applicable FCC regulations.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and
long-term compensation by the Company for services rendered in all capacities
during the years ended December 31, 1994, 1995 and 1996 by the Chief Executive
Officer and the four other executive officers of the Company as to whom the
total annual salary and bonus exceeded $100,000 (the "Named Executive Officers")
in 1996:
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
SECURITIES ALL OTHER
NAME AND UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS GRANTED (#) (A)
------ ---------- ----------- -------------------- ---------------
David D. Smith,
President and Chief Executive
Officer.............................. 1996 $767,308 $ 317,913 -- $ 6,748
1995 450,000 343,213 -- 4,592
1994 317,913 1,300,000 -- 3,841
Frederick G. Smith,
Vice President....................... 1996 260,000 233,054 -- 6,704
1995 260,000 258,354 -- 20,361
1994 233,054 900,000 -- 18,960
J. Duncan Smith,
Secretary............................ 1996 270,000 243,485 -- 18,494
1995 270,000 268,354 -- 21,467
1994 243,485 900,000 -- 16,418
Robert E. Smith,
Treasurer............................ 1996 250,000 233,054 -- 6,300
1995 250,000 258,354 -- 4,592
1994 233,054 900,000 -- 13,238
David B. Amy,
Chief Financial Officer.............. 1996 173,582 20,000 25,000 7,766
1995 132,310 31,000 7,500 7,868
1994 122,400 20,000 -- 5,011
(a) All other compensation consists of income deemed received for personal use
of Company-leased automobiles, the Company's 401 (k) contribution, life
insurance and long-term disability coverage.
In addition to the foregoing, Mr. Barry Baker and Mr. Kerby Confer have
agreed to serve as executive officers and/or directors of the Company as soon as
permissible under the rules of the FCC and applicable laws and received
consulting fees during the year ended December 31, 1996 of $527,976 and
$162,500, respectively.
43
STOCK OPTIONS
The following table sets forth information concerning each grant of stock
options made during 1996 to each of the Named Executive Officers:
VALUE OF
OPTIONS
NUMBER OF PERCENT OF AT DATE OF
SECURITIES TOTAL OPTIONS GRANT
UNDERLYING GRANTED TO EXERCISE BASED ON BLACK-
OPTIONS EMPLOYEES IN PRICE EXPIRATION SCHOLES OPTION
NAME GRANTED(#) FISCAL YEAR PER SHARE DATE PRICING MODEL
- ----------------- ------------ --------------- ----------- ------------ ----------------
David D. Smith .. -- --% $ -- -- $ --
Frederick G.
Smith............ -- -- -- -- --
J. Duncan Smith . -- -- -- -- --
Robert E. Smith . -- -- -- -- --
David B. Amy..... 10,000 * 37.75 5/31/2006 160,419
15,000 * 30.11 5/31/2006 287,319
* Less than one percent.
The following table shows the number of stock options exercised during 1996
and the 1996 year-end value of the stock options held by the Named Executive
Officers:
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS "IN-THE-MONEY" OPTIONS
ACQUIRED VALUE AT DECEMBER 31, 1996 AT DECEMBER 31, 1996(A)
---------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------- --------------- ---------- ------------- -------------- ----------- -------------
David D. Smith .. -- $ -- -- -- $ -- $ --
Frederick G.
Smith ............ -- -- -- -- -- --
J. Duncan Smith . -- -- -- -- -- --
Robert E. Smith . -- -- -- -- -- --
David B. Amy ..... -- -- 3,750 28,750 -- 37,500
(a) An "In-the-Money" option is an option for which the option price of the
underlying stock is less than the market price at December 31, 1996, and all of
the value shown reflects stock price appreciation since the granting of the
option.
DIRECTOR COMPENSATION
Directors of the Company who also are employees of the Company serve without
additional compensation. Independent directors receive $15,000 annually. These
independent directors also receive $1,000 for each meeting of the Board of
Directors attended and $500 for each committee meeting attended. In addition,
the independent directors are reimbursed for any expenses incurred in connection
with their attendance at such meetings.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with David D. Smith,
President and Chief Executive Officer of the Company. David Smith's employment
agreement has an initial term of three years and is renewable for additional
one-year terms, unless either party gives notice of termination not less than 60
days prior to the expiration of the then current term. The Company's
Compensation Committee has approved an increase in Mr. Smith's total
compensation to $1,200,000. Mr. Smith is also entitled to participate in the
Company's Executive Bonus Plan based upon the performance of the Company during
the year. The employment agreement provides that the Company may terminate Mr.
Smith's employment prior to expiration of the agreement's term as a result of
(i) a breach by Mr. Smith of any material covenant, promise or agreement
contained in the employment agreement; (ii) a dissolution or winding up of the
Company; (iii) the disability of Mr. Smith for more than 210 days in any twelve
month period (as determined under the employment agreement); or (iv) for cause,
which includes conviction of certain crimes, breach of a fiduciary duty to the
Company or the stockholders, or repeated failure to exercise or undertake his
duties as an officer of the Company (each, a "Termination Event").
44
In June 1995, the Company entered into an employment agreement with Frederick
G. Smith, Vice President of the Company. Frederick Smith's employment agreement
has an initial term of three years and is renewable for additional one-year
terms, unless either party gives notice of termination not less than 60 days
prior to the expiration of the then current term. Under the agreement, Mr. Smith
receives a base salary of $260,000 and is also entitled to participate in the
Company's Executive Bonus Plan based upon the performance of the Company and Mr.
Smith during the year. The employment agreement provides that the Company may
terminate Mr. Smith's employment prior to expiration of the agreement's term as
a result of a Termination Event.
In June 1995, the Company entered into an employment agreement with J. Duncan
Smith, Vice President and Secretary of the Company. J. Duncan Smith's employment
agreement has an initial term of three years and is renewable for additional
one-year terms, unless either party gives notice of termination not less than 60
days prior to the expiration of the then current term. Under the agreement, Mr.
Smith receives a base salary of $270,000 and is also entitled to participate in
the Company's Executive Bonus Plan based upon the performance of the Company and
Mr. Smith during the year. The employment agreement provides that the Company
may terminate Mr. Smith's employment prior to expiration of the agreement's term
as a result of a Termination Event.
In June 1995, the Company entered into an employment agreement with Robert E.
Smith, Vice President and Treasurer of the Company. Robert E. Smith's employment
agreement has an initial term of three years and is renewable for additional
one-year terms, unless either party gives notice of termination not less than 60
days prior to the expiration of the then current term. Under the agreement, Mr.
Smith receives a base salary of $250,000 and is also entitled to participate in
the Company's Executive Bonus Plan based upon the performance of the Company and
Mr. Smith during the year. The employment agreement provides that the Company
may terminate Mr. Smith's employment prior to expiration of the agreement's term
as a result of a Termination Event.
In connection with the River City Acquisition, the Company entered into an
employment agreement (the "Baker Employment Agreement") with Barry Baker
pursuant to which Mr. Baker will become President and Chief Executive Officer of
SCI and Executive Vice President of the Company at such time as Mr. Baker is
able to hold those positions consistent with applicable FCC regulations. Until
such time as Mr. Baker is able to become an officer of the Company, he serves as
a consultant to the Company pursuant to a consulting agreement and receives
compensation that he would be entitled to as an officer under the Baker
Employment Agreement. While Mr. Baker acts as consultant to the Company he will
not direct employees of Sinclair in the operation of its television stations and
will not perform services relating to any shareholder, bank financing or
regulatory compliance matters with respect to the Company. In addition, Mr.
Baker will remain the Chief Executive Officer of River City and will devote a
substantial amount of his business time and energies to those services. Pursuant
to the Baker Employment Agreement, Mr. Baker receives a base salary of
approximately $1,056,000 per year, subject to annual increases of 7-1/2% January
1 each year beginning January 1, 1997. Mr. Baker is also entitled to receive a
bonus equal to 2% of the amount by which the Broadcast Cash Flow (as defined in
the Baker Employment Agreement) of SCI for a year exceeds the Broadcast Cash
Flow for the immediately preceding year. Pursuant to the Baker Employment
Agreement, Mr. Baker has received options to acquire 1,382,435 shares of the
Class A Common Stock (or 3.33% of the common equity of Sinclair determined on a
fully diluted basis). The option became exercisable with respect to 50% of the
shares upon closing of the River City Acquisition, and becomes exercisable with
respect to 25% of the shares on the first anniversary of the closing of the
River City Acquisition, and 25% on the second anniversary of the River City
Acquisition. The exercise price of the option is approximately $30.11 per share.
The term of the Baker Employment Agreement extends until May 31, 2001, and is
automatically extended to the third anniversary of any Change of Control (as
defined in the Baker Employment Agreement). If the Baker Employment Agreement is
terminated as a result of a Series B Trigger Event (as defined below), then Mr.
Baker shall be entitled to a termination payment equal to the amount that would
have been paid in base salary for the remainder of the term of the agreement
plus bonuses that would be paid for such period based on the average bonus paid
to Mr. Baker for the previous three years, and all options shall vest
immediately upon such termination. In addition, upon such a termination, Mr.
Baker shall have the option to purchase from the Company for the fair market
value thereof either (i) all broadcast operations of Sinclair in the St. Louis,
Missouri DMA or (at the option of Mr. Baker) the Asheville-Greenville-
45
Spartanburg, South Carolina DMA or (ii) all of the Company's radio broadcast
operations. Mr. Baker shall also have the right following such a termination to
receive quarterly payments (which may be paid either in cash or, at the
Company's option, in additional shares of Class A Common Stock) equal to 5.00%
of the fair market value (on the date of each payment) of all stock options and
common stock issued pursuant to exercise of such stock options or pursuant to
payments of this obligation in shares and held by him at the time of such
payment (except that the first such payment shall be 3.75% of such value). The
fair market value of unexercised options for such purpose shall be equal to the
market price of underlying shares less the exercise price of the options.
Following termination of Mr. Baker's employment agreement, the Company shall
have the option to purchase the options and shares from Mr. Baker at their
market value. A "Series B Trigger Event" means the termination of Barry Baker's
employment with the Company prior to the expiration of the initial five-year
term of his employment agreement (i) by the Company for any reason other than
"for cause" (as defined in the Baker Employment Agreement) or (ii) by Barry
Baker under certain circumstances, including (a) on 60 days' prior written
notice given at any time within 180 days following a Change of Control (as
defined in the Baker Employment Agreement; (b) if Mr. Baker is not elected (and
continued) as a director of Sinclair or SCI, as President and Chief Executive
Officer of SCI or as Executive Vice President of Sinclair, or Mr. Baker shall be
removed from any such board or office; (c) upon a material breach by Sinclair or
SCI of the Baker Employment Agreement which is not cured; (d) if there shall be
a material diminution in Mr. Baker's authority or responsibility, or certain of
his economic benefits are materially reduced, or Mr. Baker shall be required to
work outside Baltimore; or (e) the effective date of his employment as
contemplated by clause (b) shall not have occurred by August 31, 1997. Mr. Baker
cannot be appointed to such positions with the Company or SCI until the Company
or SCI takes certain actions with respect to WTTV and WTTK in Indianapolis or
WTTE or WSYX in Columbus.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Other than as follows, no Named Executive Officer is a director of a
corporation that has a director or executive officer who is also a director of
the Company. Each of David D. Smith, Frederick G. Smith, J. Duncan Smith and
Robert E. Smith (the "Controlling Stockholders", (all of whom are directors of
the Company and Named Executive Officers) is a director and/or executive officer
of each of various other corporations controlled by the Controlling
Stockholders.
During 1996, none of the Named Executive Officers participated in any
deliberations of the Company's Board of Directors or the Compensation Committee
relating to compensation of the Named Executive Officers.
The members of the Compensation Committee are Messrs. Thomas, Brock and
McCanna. Mr. Thomas is of counsel to the law firm of Thomas & Libowitz, and is
the father of Steven A. Thomas, a senior attorney and founder of Thomas &
Libowitz, P.A. During 1996, Thomas & Libowitz, P.A., billed the Company
approximately $900,000 in fees and expenses for legal services.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of the date hereof the number and
percentage of outstanding shares of the Company's Common Stock beneficially
owned by (i) all persons known by the Company to beneficially own more than 5%
of the Company's Common Stock, (ii) each director and each Named Executive
Officer who is a stockholder, and (iii) all directors and executive officers as
a group. Unless noted otherwise, the business address of each of the following
is 2000 West 41st Street, Baltimore, MD 21211:
SHARES OF CLASS B SHARES OF SERIES B SHARES OF CLASS A PERCENT OF
COMMON STOCK PREFERRED STOCK COMMON STOCK TOTAL
BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED VOTING
------------------ ------------------- ------------------
NAME NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT POWER (A)
--------- -------- -------- -------- ------- -------- -------- ----------
David D. Smith (b).............. 7,249,999 26.0% 7,259,999 51.2% 25.0%
Frederick G. Smith (b)(c) ...... 6,864,944 24.6% 6,868,944 49.8% 23.7%
J. Duncan Smith (b)(d).......... 6,999,994 25.1% 6,999,994 50.3% 24.2%
Robert E. Smith (b)(e).......... 6,735,644 24.2% 6,735,644 49.4% 23.3%
46
SHARES OF CLASS B SHARES OF SERIES B SHARES OF CLASS A PERCENT OF
COMMON STOCK PREFERRED STOCK COMMON STOCK TOTAL
BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED VOTING
------------------ ------------------- ------------------
NAME NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT POWER (A)
--------- -------- -------- -------- ------- -------- -------- ----------
David B. Amy (f)................ 34,700 * *
Basil A. Thomas................. 2,000 * *
Lawrence E. McCanna............. 300 * *
William E. Brock................ 2,500 * *
Barry Baker (g)(h).............. 72,016 6.3% 1,644,311 19.2% *
Putnam Investments, Inc......... 2,175,000 31.5% *
One Post Office Square
Boston, Massachusetts 02109
T. Rowe Price Associates,
Inc. (i)...................... 425,000 6.1% *
100 East Pratt Street
Baltimore, Maryland 21202.....
Better Communications, Inc.(h). 134,858 11.8% 490,883 6.6% *
1215 Cole Street
St. Louis, Missouri 63106
BancBoston Investments (h).... 150,335 13.2% 547,219 7.3% *
150 Royal Street
Canton, Massachusetts 02021
Pyramid Ventures, Inc. (h).... 152,995 13.4% 556,902 7.4% *
1215 Cole Street
St. Louis, Missouri 63106
Boston Ventures Limited
Partnership IV (h).............. 253,800 22.3% 923,832 11.8% *
21 Custom House Street
10th Floor
Boston, Massachusetts 02110
Boston Ventures Limited
Partnership IVA (h) ............ 142,745 12.5% 519,592 7.0% *
21 Custom House Street
10th Floor
Boston, Massachusetts 02110
All directors and executive
officers as a group (8
persons)........................ 27,850,581 100.0% -- -- 27,904,081 80.2% 96.2%
47
* Less than 1%
(a) Holders of Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to ten votes per share except for
votes relating to "going private" and certain other transactions. The Class A
Common Stock, the Class B Common Stock and the Series B Preferred Stock vote
together as a single class except as otherwise may be required by Maryland law
on all matters presented for a vote, with each share of Series B Preferred Stock
entitled to 3.64 votes on all such matters. Holders of Class B Common Stock may
at any time convert their shares into the same number of shares of Class A
Common Stock and holders of Series B Preferred Stock may at any time convert
each share of Series B Preferred Stock into 3.64 shares of Class A Common Stock.
(b) Shares of Class A Common Stock beneficially owned includes shares of
Class B Common Stock beneficially owned, each of which is convertible into one
share of Class A Common Stock.
(c) Includes 532,645 shares held in irrevocable trusts established by
Frederick G. Smith for the benefit of his children and as to which Mr. Smith has
the power to acquire by substitution of trust property. Absent such
substitution, Mr. Smith would have no power to vote or dispose of the shares.
(d) Includes 521,695 shares held in irrevocable trusts established by J.
Duncan Smith for the benefit of his children and as to which Mr. Smith has the
power to acquire by substitution of trust property. Absent such substitution,
Mr. Smith would have no power to vote or dispose of the shares.
(e) Includes 1,009,745 shares held in irrevocable trusts established by
Robert E. Smith for the benefit of his children and as to which Mr. Smith has
the power to acquire by substitution of trust property. Absent such
substitution, Mr. Smith would have no power to vote or dispose of the shares.
(f) Includes 32,500 shares of Class A Common Stock that may be acquired upon
exercise of options granted in 1995 and 1996 pursuant to the Incentive Stock
Option Plan and Long Term Incentive Plan.
(g) Consists of 1,382,435 shares of Class A Common Stock that may be acquired
upon exercise of options granted in 1996 pursuant to the Long Term Incentive
Plan.
(h) Shares of Class A Common Stock beneficially owned includes 3.64 shares
for each share of Series B Preferred Stock beneficially owned as each share of
Series B Preferred Stock is immediately convertible into approximately 3.64
shares of Class A Common Stock.
(i) These securities are owned by various individual and institutional
investors to which T. Rowe Price Associates, Inc. ("Price Associates") serves as
investment advisor with power to direct investments and/or sole voting power to
vote the securities. For purposes of the reporting requirements of the
Securities Exchange Act of 1934, Price Associates is deemed to be a beneficial
owner of such securities; however, Price Associates expressly disclaims that it
is, in fact, beneficial owner of such securities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since December 31, 1995, the Company has engaged in the following
transactions with persons who are, or are members of the immediate family of,
directors, persons expected to become a director, officers or beneficial owners
of 5% or more of the issued and outstanding Common Stock, or with entities in
which such persons or certain of their relatives have interests.
WPTT NOTE
In connection with the sale of WPTT in Pittsburgh by the Company to WPTT,
Inc., WPTT, Inc., issued to the Company a 15-year senior secured term note of
$6.0 million (the "WPTT Note"). The Company subsequently sold the WPTT Note to
the late Julian S. Smith and Carolyn C. Smith, the parents of the Controlling
Stockholders and both former stockholders of the Company, in exchange for the
payment of $50,000 and the issuance of a $6.6 million note, which bears interest
at 7.21% per annum and requires payments of interest only through September
2001. Monthly principal payments of $109,317 plus interest are payable with
respect to this note commencing in November 2001 and ending in September 2006,
at which time the remaining principal balance plus accrued interest, if any, is
due. During the year ended December 31, 1996, the Company received $473,000 in
interest payments on this note. At December 31, 1996, the balance on this note
was $6,559,000.
WIIB NOTE
In September 1990, the Company sold all the stock of Channel 63, Inc., the
owner of WIIB in Bloomington, Indiana, to the Controlling Stockholders for $1.5
million. The purchase price was delivered in the form of a note issued to the
Company which was refinanced in June 1992 (the "WIIB Note"). The WIIB Note bears
interest at 6.88% per annum, is payable in monthly principal and interest
payments of $16,000 until September 30, 2000, at which time a final payment of
approximately $431,000 is due. Principal and interest paid in 1996 on the WIIB
Note was $174,000. At December 31, 1996, $1.0 million in principal amount of the
WIIB Note remained outstanding.
48
BAY CREDIT FACILITY
In connection with the capitalization of Bay Television, Inc., the Company
agreed on May 17, 1990 to loan the Controlling Stockholders up to $3.0 million
(the "Bay Credit Facility"). Each of the loans to the Controlling Stockholders
pursuant to the Bay Credit Facility is evidenced by an amended and restated
secured note totaling $2.6 million due December 31, 1999 accruing interest at a
fixed rate equal to 6.88%. Principal and interest are payable over six years
commencing on March 31, 1994, and are required to be repaid quarterly and
$480,000 was paid in 1996. $600,000 is payable in 1997, $660,000 is payable in
1998 and $718,000 is payable in 1999. As of December 31, 1996, approximately
$1.8 million in principal amount was outstanding under this note.
AFFILIATED LEASES
From 1987 to 1992, the Company entered into five lease transactions with CCI,
a corporation wholly owned by the Controlling Stockholders, to lease certain
facilities from CCI. Four of these leases are 10-year leases for rental space on
broadcast towers, two of which are capital leases having renewable terms of 10
years. The other lease is a month-to-month lease for a portion of studio and
office space at which certain satellite dishes are located. Aggregate annual
rental payments related to these leases were $498,000 in 1996. The aggregate
annual rental payments related to these leases are scheduled to be $454,000 in
1997 and $474,000 in 1998.
In January 1991, CTI entered into a 10-year capital lease with KIG, a
corporation wholly owned by the Controlling Stockholders, pursuant to which CTI
leases both an administrative facility and studios for station WBFF and the
Company's present corporate offices. Additionally, in June 1991, CTI entered
into a one-year renewable lease with KIG pursuant to which CTI leases parking
facilities at the administrative facility. Payments under these leases with KIG
were $559,300 in 1996. The aggregate annual rental payments related to the
administrative facility are scheduled to be $616,400 in 1997 and $636,400 in
1998. During 1996, the Company chartered airplanes owned by certain companies
controlled by the Controlling Stockholders and incurred expenses of
approximately $336,000 related to these charters.
TRANSACTIONS WITH GERSTELL
Gerstell LP, an entity wholly owned by the Controlling Stockholders, was
formed in April 1993 to acquire certain personal and real property interests of
the Company in Pennsylvania. In a transaction that was completed in September
1993, Gerstell LP acquired the WPGH office/studio, transmitter and tower site
for an aggregate purchase price of $2.2 million. The purchase price was financed
in part by a $2.1 million note from Gerstell LP bearing interest at 6.18% with
principal payments beginning on November 1, 1994 and a final maturity date of
October 1, 2013. Principal and interest paid in 1996 on the note was $188,000.
At December 31, 1996, $2.0 million in principal amount of the note remained
outstanding. Following the acquisition, Gerstell LP leased the office/studio,
transmitter and tower site to WPGH, Inc. (a subsidiary of the Company) for
$14,875 per month and $25,000 per month, respectively. The leases have terms of
seven years, with four seven-year renewal periods. Aggregate annual rental
payment related to these leases was $534,000 in 1996. Gerstell LP has arranged
for a $2.0 million loan (the "Gerstell Loan") from a bank lender to provide for
construction at the studio/transmitter site of an expansion to the existing
office building/television studio located there and for construction of a new
tower having an aggregate estimated cost of $1.5 million. The Company has
guaranteed the Gerstell Loan. As of December 31, 1996, $885,000 was outstanding
under the Gerstell Loan. The completed office building/television studio and the
new tower is leased from Gerstell LP by WPGH, Inc., a subsidiary of the Company.
The Company believes that the leases with Gerstell LP are on terms and
conditions customary in similar leases with independent third parties.
STOCK REDEMPTIONS
On September 30, 1990, the Company issued certain notes (the "Founders'
Notes") maturing on May 31, 2005, payable to the late Julian S. Smith and
Carolyn C. Smith, former majority owners of the Company and the parents of the
Controlling Stockholders. The Founders' Notes, which were issued in
49
consideration for stock redemptions equal to 72.65% of the then outstanding
stock of the Company, have principal amounts of $7.5 million and $6.7 million,
respectively. The Founders' Notes include stated interest rates of 8.75%, which
were payable annually from October 1990 until October 1992, then payable monthly
commencing April 1993 to December 1996, and then semiannually thereafter until
maturity. The effective interest rate approximates 9.4%. The Founders' Notes are
secured by security interests in substantially all of the assets of the Company
and its Subsidiaries, and are personally guaranteed by the Controlling
Stockholders.
Principal and interest payments on the Founders' Note issued to the estate of
Julian S. Smith are payable, in various amounts, each April and October,
beginning October 1991 until October 2004, with a balloon payment due at
maturity in the amount of $5.0 million. Additionally, monthly interest payments
commenced on April 1993 and continued until December 1996. Principal and
interest paid in 1996 on this Founders' Note was $860,000 At December 31, 1996,
$6.0 million in principal amount of this Founders' Note remained outstanding.
Principal payments on the Founders' Note issued to Carolyn C. Smith are
payable, in various amounts, each April and October, beginning October 1991
until October 2002. Principal and interest paid in 1996 on this Founders' Note
was $1.1 million. At December 31, 1996, $4.5 million in principal amount of this
Founders' Note remained outstanding.
RELATIONSHIP WITH GLENCAIRN
Glencairn is a corporation owned by (i) Edwin L. Edwards, Sr. (3%), (ii)
Carolyn C. Smith, the mother of the Controlling Stockholders (7%), and (iii)
certain trusts established by Carolyn C. Smith for the benefit of her
grandchildren (the "Glencairn Trusts") (90%). The 90% equity interest in
Glencairn owned by the Glencairn Trusts is held through the ownership of
non-voting common stock. The 7% equity interest in Glencairn owned by Carolyn C.
Smith is held through the ownership of common stock that is generally
non-voting, except with respect to certain specified extraordinary corporate
matters as to which this 7% equity interest has the controlling vote. Edwin L.
Edwards, Sr. owns a 3% equity interest in Glencairn through ownership of all of
the issued and outstanding voting stock of Glencairn and is Chairman of the
Board, President and Chief Executive Officer of Glencairn.
There have been, and the Company expects that in the future there will be,
transactions between the Company and Glencairn. Glencairn is the owner-operator
and FCC licensee of WNUV in Baltimore, WVTV in Milwaukee, WRDC in Raleigh/Durham
and WABM in Birmingham. The Company has entered into LMAs with Glencairn
relating to WNUV, WVTV, WRDC and WABM pursuant to which the Company provides
programming to Glencairn for airing on WNUV, WVTV, WRDC and WABM, respectively,
during the hours of 6:00 a.m. to 2:00 a.m. each day and has the right to sell
advertising during this period, all in exchange for the payment by the Company
to Glencairn of monthly fees totaling $446,000.
In June 1995, the Company acquired options from certain stockholders of
Glencairn (the "Glencairn Options") which grant to the Company the right to
acquire, subject to applicable FCC rules and regulations, stock comprising up to
a 97% equity interest in Glencairn. Of the stock subject to the Glencairn
Options, a 90% equity interest is non-voting and the remaining 7% equity
interest is non-voting, except with respect to certain extraordinary matters as
to which this 7% equity interest has the controlling vote. Each Glencairn Option
was purchased by the Company for $1,000 ($5,000 in the aggregate) and is
exercisable only upon the Company's payment of an option exercise price
generally equal to the optionor's proportionate share of the aggregate
acquisition cost of all stations owned by Glencairn on the date of exercise
(plus interest at a rate of 10% from the respective acquisition date). The
Company estimates that the aggregate option exercise price for the Glencairn
Options, if currently exercised, would be approximately $9.7 million.
In connection with the River City Acquisition, the Company assigned to
Glencairn its option to purchase certain assets relating to WFBC, Anderson,
South Carolina, one of the River City stations. In addition, the Company has
agreed (subject to FCC approval) to sell to Glencairn for $2,000,000 the License
Assets of WTTE in Columbus, Ohio, which the Company currently owns. The Company
50
has applied with the FCC to acquire the License Assets of a television station
from River City located in the same market as WFBC. In addition, the Company has
an option to acquire from River City the assets of WSYX, which is in the same
market as WTTE. See "Business--Broadcasting Acquisition Strategy." The Company
intends to enter into LMAs with Glencairn relating to WFBC and WTTE pursuant to
which the Company will supply programming to Glencairn, obtain the right to sell
advertising during the periods covered by the supplied programming and make
payments to Glencairn in amounts to be negotiated.
Also in connection with the River City Acquisition, Glencairn has been
granted an option to acquire from the current owner of the License Assets of
KRRT, Kerrville, Texas, which is in the same market as a station the Company
will acquire from River City. The Company will acquire the Non-License Assets of
KRRT, and is expected to enter into an LMA with Glencairn with respect to KRRT
pursuant to which the Company will supply programming to Glencairn, obtain the
right to sell advertising during the periods covered by the supplied programming
and make payments to Glencairn in amounts to be negotiated.
RIVER CITY TRANSACTIONS
Roy F. Coppedge, who will become a director of the Company upon satisfaction
of certain conditions, and Barry Baker, who will become a director and executive
officer of the Company as soon as permissible under the rules of the FCC and
applicable laws, each have a direct or indirect equity interest in River City
Partners, L.P. Therefore, Messrs. Coppedge and Baker have an interest in the
River City Acquisition, which is described above in "Business --Broadcasting
Acquisition Strategy." During 1996, the Company made LMA payments of $1.4
million to River City. In September 1996, the Company entered into a five-year
agreement with River City pursuant to which River City will provide to the
Company certain production services. Pursuant to this agreement, River City will
provide certain services to the Company in return for an annual fee of $416,000,
subject to certain adjustments on each anniversary date.
KEYMARKET OF SOUTH CAROLINA
Kerby Confer, who is expected to become an executive officer of the Company
as soon as permissible under the rules of the FCC and applicable laws, is the
owner of 100% of the common stock of Keymarket of South Carolina, Inc. ("KSC"),
and the Company has an option to acquire either (i) all of the assets of KSC for
forgiveness of debt in an aggregate principal amount of approximately $7.4
million, plus payment of approximately $1.0 million, less certain adjustments or
(ii) all of the stock of KSC for $1.0 million, less certain adjustments. In
addition, the Company leases two properties from Mr. Confer, pursuant to which
the Company paid Mr. Confer $144,000 in 1996. The Company is required to
purchase each of the properties during the term of the applicable lease for an
aggregate purchase price of approximately $1.75 million.
BEAVER DAM LIMITED LIABILITY COMPANY
In May 1996, the Company, along with the Controlling Stockholders, formed
Beaver Dam Limited Liability Company ("BDLLC"), of which the Company owns a 45%
interest. BDLLC was formed for the purpose of constructing and owning a building
which may be the site for the Company's corporate headquarters. The Company made
capital contributions to BDLLC in 1996 of approximately $380,000.
HERITAGE AUTOMATIVE GROUP
In January, 1997, David D. Smith, the Company's President and Chief Executive
Officer and one of the Controlling Shareholders, made a substantial investment
in, and became a member of the board of directors of, Summa Holdings, Ltd.
which, through wholly owned subsidiaries, owns the Heritage Automotive Group
("Heritage") and Allstate Leasing ("Allstate"). Mr. Smith is not an officer, nor
does he actively participate in the management, of Summa Holdings, Ltd.,
Heritage, or Allstate. Heritage owns
51
and operates new and used car dealerships in the Baltimore metropolitan area.
Allstate owns and operates an automobile and equipment leasing business with
offices in the Baltimore, Richmond, Houston, and Atlanta metropolitan areas. The
Company sells Heritage and Allstate advertising time on WBFF and WNUV, the
television stations operated by the Company serving the Baltimore DMA. The
Company believes that the terms of the transactions between the Company and
Heritage and the Company and Allstate are and will be comparable to those
prevailing in similar transactions with or involving unaffiliated parties.
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this report.
Index to Financial Statements
PAGE
-------
Index to Financial Statements...................................... F-1
Report of Arthur Andersen LLP, Independent Public Accountants ..... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 ...... F-3
Consolidated Statements of Operations for the Years Ended December
31, 1994, 1995 and 1996............................................ F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1994, 1995 and 1996............................. F-5
Consolidated Statements of Cash Flows for the Years Ended December
31, 1994, 1995 and 1996............................................ F-6,7
Notes to Consolidated Financial Statements......................... F-8
(a) (2) Index to Financial Statement Schedules
The financial statement 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 Arthur Andersen LLP, Independent Public
Accountants.................................................. S-2
Schedule II - Valuation and Qualifying Account............... S-3
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements of the notes
thereto.
53
(a) (3) Index to Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ ------------
3.1...........Amended and Restated Certificate of Incorporation (1)
3.2...........By-laws (2)
4.2...........Indenture, dated as of December 9, 1993, among Sinclair Broadcast Group, Inc., its wholly-owned
subsideries and First Union National Banks of North Carolina, as trustee. (2)
4.2...........Indenture, dated as of August 28, 1995, among Sinclair Broadcast Group, Inc., its wholly-owned
subsidiaries and the United States Trust Company of New York as trustee. (2
10.1..........Asset Purchase Agreement dated as of April 10, 1996 by and between River City Broadcasting, L.P. as
seller and Sinclair Broadcast Group, Inc. as buyer dated as of April 10, 1996. (3)
10.2..........Option Agreement, dated as of April 10, 1996, by and among River City Broadcasting, L.P., as sellers
and Sinclair Broadcast Group, Inc. dated as of April 10, 1996. (3)
10.3..........Modification Agreement , dated as of April 10, 1996,by and between River City Broadcast Group, L.P.
as seller, and Sinclair Broadcast Group, Inc. as buyer, with reference to Asset Purchase Agreement (3)
10.4..........Second Amended and Restated Credit Agreement, dated as of May 31, 1996, by and among Sinclair
Broadcast Group, Inc., Subsidiary Guarantors and The Chase Manhattan Bank (National
Association) as Agent. (1)
10.5..........Employment Agreement, dated as of April 10, 1996, with Barry Baker. (1)
10.6..........Indemnification Agreement, dated as of April 10, 1996, with Barry Baker. (1)
10.7..........Time Brokerage Agreement, dated as of May 31, 1996, by and among Sinclair Communications, Inc.,
River City Broadcasting, L.P. and River City License Partnership and Sinclair Broadcast Group, Inc. (1)
10.8..........Registration Rights Agreement, dated as of May 31, 1996, by and between Sinclair Broadcast
Group, Inc. and River City Broadcasting, L.P. (1)
10.9..........Time Brokerage Agreement, dated as of August 3, 1995, by and between River City Broadcasting,
L.P. and KRRT, Inc. and Assignment and Assumption Agreement dated as of May 31, 1996 by and
among KRRT, Inc., River City Broadcasting, L.P. and KABB, Inc. (as Assignee of Sinclair
Broadcast Group, Inc.). (1)
10.10.........Loan Agreement, dated as of July 7, 1995, by and between Keymarket of South Carolina, Inc. and
River City Broadcasting, L.P. and First Amendment to Loan Agreement dated as of May 24, 1996. (1)
10.11.........Option Agreement, dated as of July 7, 1995, by and among Keymarket of South Carolina, Kerby E.
Confer and River City Broadcasting, L.P. (1)
10.12.........Letter Agreement, dated August 20, 1996, between Sinclair Broadcast Group, Inc., River City
Broadcasting, L.P. and Fox Broadcasting Company. (4)
10.13.........Asset Purchase Agreement, dated January 31, 1997, by and between Channel 21, L.P. and KUPN, Inc.
10.14.........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). (5)
10.15.........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). (6)
54
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.16.........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)
10.17.........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) (5)
10.18.........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) (5)
10.19.........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) (5)
10.20.........Management Agreement dated as of January 6, 1992 between Keyser Communications, Inc. and WPGH,Inc. (5)
10.21.........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) (5)
10.22.........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) (5)
10.23.........Restatement of Stock Redemption Agreement by and among Sinclair Broadcast Group, Inc. and
Chesapeake Television, Inc., et al. dated June 19, 1990 (5)
10.24.........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) (5)
10.25.........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) (5)
10.26.........Assignment of Leases dated as of September 22, 1993 between WPGH, Inc. (as assignee) and
Commercial Radio Institute, Inc. (as assignor) (5)
10.27.........Assignment of Leases dated as of September 22, 1993 between Commercial Radio Institute, Inc.
(as assignor) and Gerstell Development Limited Partnership (as assignee) (5)
10.28.........Assignment of Leases dated as of September 22, 1993 between Commercial Radio Institute, Inc.
(as assignor) and Gerstell Development Limited Partnership (as assignee) (5)
10.29.........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) (5)
10.30.........Lease dated as of September 23, 1993, between Gerstell Development Limited Partnership and
WPGH, Inc. (2)
10.31.........Lease Agreement dated as of September 23, 1993 between Gerstell Development Limited
Partnership and WPGH, Inc. (2)
10.32.........Lease dated January 1, 1991 between Keyser Investment Group, Inc. and Chesapeake Television, Inc. (5)
10.33.........Lease Agreement dated as of April 2, 1987 between Cunningham Communications, Inc. and
Chesapeake Television, Inc. as amended on September 23, 1993 (5)
55
EXHIBIT
NUMBER DESCRIPTION
------ ------------
10.34.........Lease Agreement dated as of April 1, 1992 between Cunningham Communications, Inc. and
Chesapeake Television, Inc. as amended on September 23, 1993 (5)
10.35.........Lease Agreement dated as of June 1, 1991 between Cunningham Communications, Inc. and
Chesapeake Television, Inc. as amended on September 23, 1993 (5)
10.36.........Lease Agreement dated March 8, 1979 between 525 Properties Limited
and B&F Broadcasting, Inc., as amended on April 30, 1979 and
September 18, 1986, and as assigned on September 22, 1986 by
B&F Broadcasting, Inc. to HR Broadcasting Corporation of Milwaukee, Inc. (2)
10.37.........Incentive Stock Option Plan for Designated Participants (2)
11............Computation of Earnings Per Share
12............Computation of Ratio of Earnings to Fixed Charges
21............Subsidiaries of the Company
23............Consent of Independent Public Accountants
27............Financial Data Schedule
===========================
(1) Incorporated by reference from the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1996
(2) Incorporated by reference from Registration Statement on Form S-1, No.
33-90682
(3) Incorporated by reference from the Company's Report on Form 10-Q for the
quarterly period ended March 31, 1996
(4) Incorporated by reference from the Company's Report on Form 10-Q for the
quarterly period ended September 30, 1996.
(5) Incorporated by reference from the Company's Registration Statement on
Form S-1, No. 33-69482
(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, 1996.
56
SIGNATURES
Pursuant to the requirements of Section 14 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, thereto duly authorized on February
25, 1997.
SINCLAIR BROADCAST GROUP, INC.
By: /s/ David B. Amy
----------------------------------
David B. Amy
Chief Financial Officer
Principal Accounting Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant in the
capacities indicated on February 25, 1997.
SIGNATURE TITLE
--------- -----
/s/ David D. Smith President, Chief Executive Officer, Director,
- ------------------------- Chairman and Principal Executive Officer
David D. Smith
/s/ Frederick G. Smith Vice President, Assistant Secretary and Director
- -------------------------
Frederick G. Smith
/s/ J. Duncan Smith Vice President, Secretary and Director
- -------------------------
J. Duncan Smith
/s/ Robert E. Smith Vice President, Treasurer and Director
- -------------------------
Robert E. Smith
/s/ Basil A. Thomas Director
- -------------------------
Basil A. Thomas
/s/ Lawrence E. McCanna Director
- -------------------------
Lawrence E. McCanna
/s/ William E. Brock Director
- -------------------------
William E. Brock
57
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, 1995 and 1996......................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and
1996................................................................................ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994
1995 and 1996....................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996................................................................................ F-6, F-7
Notes to Consolidated Financial Statements .......................................... F-8
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, 1995 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1994, 1995
and 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sinclair Broadcast Group, Inc.
and Subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1994, 1995 and
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Baltimore, Maryland,
February 7, 1997
F-2
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF DECEMBER 31,
------------------
1995 1996
--------- ------------
ASSETS
CURRENT ASSETS:
Cash, including cash equivalents of $108,720 and $-0-, respectively................... $112,450 $ 2,341
Accounts receivable, net of allowance for doubtful accounts of $1,066 and $2,472,
respectively......................................................................... 50,022 112,313
Current portion of program contract costs............................................. 18,036 44,526
Prepaid expenses and other current assets............................................. 1,972 3,704
Deferred barter costs................................................................. 1,268 3,641
Deferred tax assets .................................................................. 4,565 1,245
---------- ------------
Total current assets................................................................. 188,313 167,770
PROGRAM CONTRACT COSTS, less current portion........................................... 19,277 43,037
LOANS TO OFFICERS AND AFFILIATES....................................................... 11,900 11,426
PROPERTY AND EQUIPMENT, net............................................................ 42,797 154,333
NON-COMPETE AND CONSULTING AGREEMENTS, net of accumulated amortization of $34,000 and
$54,236, respectively................................................................. 30,379 10,193
DEFERRED TAX ASSET..................................................................... 16,462 --
OTHER ASSETS........................................................................... 27,355 64,235
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net of accumulated amortization of $49,746
and $85,155, respectively............................................................. 268,789 1,256,303
---------- ------------
Total Assets.......................................................................... $605,272 $1,707,297
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................................... $ 2,187 $ 11,886
Income taxes payable.................................................................. 3,944 730
Accrued liabilities................................................................... 20,720 35,030
Current portion of long-term liabilities-
Notes payable and commercial bank financing.......................................... 1,133 62,144
Capital leases payable............................................................... 524 44
Notes and capital leases payable to affiliates....................................... 1,867 1,774
Program contracts payable............................................................ 26,395 58,461
Deferred barter revenues.............................................................. 1,752 3,576
---------- ------------
Total current liabilities............................................................ 58,522 173,645
LONG-TERM LIABILITIES:
Notes payable and commercial bank financing........................................... 400,644 1,212,000
Capital leases payable................................................................ 44 --
Notes and capital leases payable to affiliates........................................ 13,959 12,185
Program contracts payable............................................................. 30,942 56,194
Deferred tax liability................................................................ -- 463
Other long-term liabilities........................................................... 2,442 2,739
---------- ------------
Total liabilities.................................................................... 506,553 1,457,226
---------- ------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES......................................... 2,345 3,880
---------- ------------
COMMITMENTS AND CONTINGENCIES
EQUITY PUT OPTIONS..................................................................... -- 8,938
---------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 and 10,000,000 shares authorized and -0-
and 1,138,318 issued and outstanding................................................. -- 11
Class A Common stock, $.01 par value, 35,000,000 and 100,000,000 shares authorized and
5,750,000 and 6,911,880 shares issued and outstanding, respectively.................. 58 70
Class B Common stock, $.01 par value, 35,000,000 shares authorized and 29,000,000 and
27,850,581 shares issued and outstanding............................................. 290 279
Additional paid-in capital............................................................ 116,089 231,170
Accumulated deficit................................................................... (20,063) (18,932)
Additional paid-in capital -- stock options........................................... -- 25,784
Deferred compensation................................................................. -- (1,129)
---------- ------------
Total stockholders' equity........................................................... 96,374 237,253
---------- ------------
Total Liabilities and Stockholders' Equity........................................... $605,272 $1,707,297
========== ============
The accompanying notes are an integral part of these consolidated balance sheets.
F-3
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1994 1995 1996
---------- ---------- ----------
REVENUES:
Station broadcast revenues, net of agency commissions of
$21,235, $31,797 and $56,040, respectively................... $118,611 $187,934 $346,459
Revenues realized from station barter arrangements............ 10,743 18,200 32,029
---------- ---------- ----------
Total revenues............................................... 129,354 206,134 378,488
---------- ---------- ----------
OPERATING EXPENSES:
Program and production........................................ 15,760 28,152 66,652
Selling, general and administrative........................... 25,578 36,174 75,924
Expenses realized from station barter arrangements............ 9,207 16,120 25,189
Amortization of program contract costs and net realizable
value adjustments............................................ 22,360 29,021 47,797
Amortization of deferred compensation......................... -- -- 739
Depreciation and amortization of property and equipment....... 3,841 5,400 11,711
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets....... 29,386 45,989 58,530
Special bonuses to executive officers......................... 3,638 -- --
Amortization of excess syndicated programming................. -- -- 3,043
---------- ---------- ----------
Total operating expenses..................................... 109,770 160,856 289,585
---------- ---------- ----------
Broadcast operating income................................... 19,584 45,278 88,903
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest and amortization of debt discount expense............ (25,418) (39,253) (84,314)
Interest income............................................... 2,033 3,942 3,136
Other income ................................................. 414 221 342
---------- ---------- ----------
Income (loss) before provision (benefit) for income taxes and
extraordinary item.......................................... (3,387) 10,188 8,067
PROVISION (BENEFIT) FOR INCOME TAXES........................... (647) 5,200 6,936
---------- ---------- ----------
Net income (loss) before extraordinary item................... (2,740) 4,988 1,131
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of related income
tax benefit of $3,357........................................ -- (4,912) --
---------- ---------- ----------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS ............ $ (2,740) $ 76 $ 1,131
========== ========== ==========
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE .......
Net income (loss) before extraordinary items.................. $ (.09) $ .15 $ .03
Extraordinary item ........................................... -- (.15) --
---------- ---------- ----------
Net income (loss) per common and common equivalent share ..... $ (.09) $ -- $ .03
========== ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ................................ 29,000 32,205 37,381
========== ========== ==========
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, 1994, 1995 AND 1996
(IN THOUSANDS)
ADDITIONAL
RETAINED PAID-IN
SERIES A SERIES B CLASS A CLASS B ADDITIONAL EARNINGS CAPITAL-
PREFERRED PREFERRED COMMON COMMON PAID-IN (ACCUMULATED STOCK
STOCK STOCK STOCK STOCK CAPITAL DEFICIT) OPTIONS
--------- --------- ------- ------- ---------- ----------- ----------
BALANCE, December 31, 1993..................... $ -- $ -- $ -- $ 290 $ 4,733 $(16,047) $ --
Realization of deferred gain.................. -- -- -- -- 41 -- --
Net loss...................................... -- -- -- -- -- (2,740) --
--------- --------- ------- ------- ---------- ----------- ----------
BALANCE, December 31, 1994..................... -- -- -- 290 4,774 (18,787) --
Issuance of common shares, net of related
expenses of $9,288........................... -- -- 58 -- 111,403 -- --
Non-cash distribution prior to KCI merger..... -- -- -- -- (109) (1,352) --
Realization of deferred gain.................. -- -- -- -- 21 -- --
Net income.................................... -- -- -- -- -- 76 --
--------- --------- ------- ------- ---------- ----------- ----------
BALANCE, December 31, 1995..................... -- -- 58 290 116,089 (20,063) --
Class B Common Stock converted into Class A
Common Stock................................. -- -- 11 (11) -- -- --
Issuance of Series A Preferred Stock.......... 12 -- -- -- 125,067 -- --
Series A Preferred Stock converted into Series
B Preferred Stock............................ (12) 12 -- -- -- -- --
Series B Preferred Stock converted into Class
A Common Stock............................... -- (1) 1 -- -- -- --
Repurchase of 30,000 shares of Class A Common
Stock........................................ -- -- -- -- (748) -- --
Stock option grants........................... -- -- -- -- -- -- 25,784
Income tax provision for deferred
compensation................................. -- -- -- -- (300) -- --
Equity put options............................ -- -- -- -- (8,938) -- --
Amortization of deferred compensation......... -- -- -- -- -- -- --
Net income.................................... -- -- -- -- -- 1,131 --
--------- --------- ------- ------- ---------- ----------- ----------
BALANCE, December 31, 1996..................... $ -- $ 11 $ 70 $ 279 $ 231,170 $(18,932) $25,784
========= ========= ======= ======= ========== =========== ==========
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------ ---------------
BALANCE, December 31, 1993..................... $ -- $(11,024)
Realization of deferred gain.................. -- 41
Net loss...................................... -- (2,740)
------------ -------------
BALANCE, December 31, 1994..................... -- (13,723)
Issuance of common shares, net of related
expenses of $9,288........................... -- 111,461
Non-cash distribution prior to KCI merger..... -- (1,461)
Realization of deferred gain.................. -- 21
Net income.................................... -- 76
------------ -------------
BALANCE, December 31, 1995..................... -- 96,374
Class B Common Stock converted into Class A
Common Stock................................. -- --
Issuance of Series A Preferred Stock.......... -- 125,079
Series A Preferred Stock converted into Series
B Preferred Stock............................ -- --
Series B Preferred Stock converted into Class
A Common Stock............................... -- --
Repurchase of 30,000 shares of Class A Common
Stock........................................ -- (748)
Stock option grants........................... (1,868) 23,916
Income tax provision for deferred
compensation................................. -- (300)
Equity put options............................ -- (8,938)
Amortization of deferred compensation......... 739 739
Net income.................................... -- 1,131
------------ -------------
BALANCE, December 31, 1996..................... $(1,129) $237,253
============ =============
The accompanying notes are an integral part of these consolidated statements.
F-5
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES PAGE 1 OF 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994 1995 1996
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................... $ (2,740) $ 76 $ 1,131
Adjustments to reconcile net income (loss) to net cash flows from
operating activities-
Extraordinary loss................................................. -- 8,269 --
Amortization of excess syndicated programming...................... -- -- 3,043
Gain on sales of assets............................................ -- (221) --
Depreciation and amortization of property and equipment............ 3,841 5,400 11,711
Amortization of acquired intangible broadcasting assets,
non-compete and consulting agreements and other assets ........... 29,386 45,989 58,530
Amortization of program contract costs and net realizable value
adjustments....................................................... 22,360 29,021 47,797
Amortization of deferred compensation.............................. -- -- 739
Deferred tax benefit............................................... (9,177) (5,089) 2,330
Realization of deferred gain....................................... (152) (42) --
Changes in assets and liabilities, net of effects of acquisitions
and dispositions-
Increase in accounts receivable, net............................... (19,726) (12,245) (41,310)
Increase in prepaid expenses and other current assets.............. (1,057) (273) (217)
(Increase) decrease in other assets and acquired intangible
broadcasting assets............................................... 910 (77) (328)
Increase in accounts payable and accrued liabilities............... 6,556 7,274 19,941
Increase (decrease) in income taxes payable........................ 5,481 (2,427) (3,214)
Net effect of change in deferred barter revenues and deferred
barter costs...................................................... 103 230 (908)
Increase in other long-term liabilities............................ -- -- 297
Decrease in minority interest...................................... -- (38) (121)
Payments on program contracts payable............................... (14,262) (19,938) (30,451)
Payments for consulting agreements.................................. (742) -- --
---------- ---------- ----------
Net cash flows from operating activities.......................... $ 20,781 $ 55,909 $ 68,970
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated statements.
F-6
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES PAGE 2 OF 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994 1995 1996
----------- ----------- -------------
NET CASH FLOWS FROM OPERATING ACTIVITIES........................ $ 20,781 $ 55,909 $ 68,970
----------- ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment......................... (2,352) (1,702) (12,609)
Payments for acquisition of television stations............... (160,795) (101,000) (74,593)
Payments related to the acquisition of the non-license assets
of River City Broadcasting................................... -- -- (818,083)
Prepaid local marketing agreement fee......................... (1,500) -- --
Payments for acquisition of certain other non-license assets.. -- (14,283) (29,532)
Payments for the purchase of outstanding stock of Superior
Communications Group, Inc.................................... -- -- (63,504)
Payments to exercise options to acquire certain FCC licenses.. -- -- (6,894)
Purchase option extension payments relating to WSYX........... -- -- (6,960)
Payments for purchase of investments.......................... (502) -- --
Payment for WSTR subordinated note............................ (4,800) -- --
Payments for consulting and non-compete agreements............ (59,970) (1,000) (50)
Payments for purchase options ................................ (17,500) (9,000) --
Payment to exercise purchase option........................... -- (1,000) --
Distributions (investments) in joint ventures................. -- 240 (380)
Proceeds from disposal of property and equipment.............. -- 3,330 --
Proceeds from assignment of license purchase options.......... -- 4,200 --
Payment for WPTT subordinated convertible debenture........... -- (1,000) --
Loans to officers and affiliates.............................. (50) (205) (854)
Repayments of loans to officers and affiliates................ 386 2,177 1,562
Payments for organization of new subsidiaries................. (198) -- --
Fees paid relating to subsequent acquisitions................. (2,500) -- --
----------- ----------- -------------
Net cash flows used in investing activities.................. (249,781) (119,243) (1,011,897)
----------- ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and commercial bank financing..... 224,985 138,000 982,500
Repayments of notes payable, commercial bank financing and
capital leases............................................... (102,069) (362,928) (110,657)
Payments of costs related to debt offering.................... -- (824) --
Payments of costs related to financing........................ (7,083) (3,200) (20,009)
Payments for interest rate derivative agreements.............. (1,137) -- (851)
Repurchases of the Company's Class A Common Stock............. -- -- (748)
Prepayments of excess syndicated program contract liabilities. -- -- (15,116)
Payments for costs related to preferred stock offering not yet
consummated.................................................. -- -- (434)
Release of cash in escrow..................................... 100,000 -- --
Proceeds from debt offering, net of $6,000 underwriters'
discount..................................................... -- 294,000 --
Repayments of notes and capital leases to affiliates.......... (1,286) (3,171) (1,867)
Net proceeds from issuance of common shares................... -- 111,461 --
----------- ----------- -------------
Net cash flows from financing activities..................... 213,410 173,338 832,818
----------- ----------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........... (15,590) 110,004 (110,109)
CASH AND CASH EQUIVALENTS, beginning of period ................. 18,036 2,446 112,450
----------- ----------- -------------
CASH AND CASH EQUIVALENTS, end of period........................ $ 2,446 $ 112,450 $ 2,341
=========== =========== =============
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................................. $ 27,102 $ 24,770 $ 82,814
=========== =========== =============
Income taxes paid.............................................. $ 4,921 $ 7,941 $ 6,837
=========== =========== =============
The accompanying notes are an integral part of these consolidated statements.
F-7
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Sinclair Broadcast Group, Inc., Sinclair Communications, Inc. and all other
consolidated subsidiaries, which are collectively referred to hereafter as "the
Company, Companies or SBG." The Company owns and operates television and radio
stations throughout the United States. Additionally, included in the
accompanying consolidated financial statements are the results of operations of
certain television stations pursuant to local marketing agreements (LMAs) and
radio stations pursuant to joint sales agreements (JSAs).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all its wholly-owned and majority-owned subsidiaries. Minority interest
represents a minority owner's proportionate share of the equity in two of the
Company's subsidiaries. In addition, the Company uses the equity method of
accounting for 20% to 50% ownership investments. All significant intercompany
transactions and account balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses in the
financial statements and in the disclosures of contingent assets and
liabilities. While actual results could differ from those estimates, management
believes that actual results will not be materially different from amounts
provided in the accompanying consolidated financial statements.
CASH EQUIVALENTS
Cash equivalents are stated at cost plus accrued interest, which approximates
fair value. Cash equivalents are highly liquid investment grade debt instruments
with an original maturity of three months or less and consist of time deposits
with a number of consumer banks with high credit ratings.
PROGRAMMING
The Companies have agreements with distributors for the rights to television
programming over contract periods which generally run from one to seven years.
Contract payments are made in installments over terms that are generally shorter
than the contract period. Each contract is recorded as an asset and a liability
when the license period begins and the program is available for its first
showing. The portion of the program contracts payable within one year is
reflected as a current liability in the accompanying consolidated balance
sheets.
The rights to program materials are reflected in the accompanying consolidated
balance sheets at the lower of unamortized cost or estimated net realizable
value. Estimated net realizable values are based upon management's expectation
of future advertising revenues net of sales commissions to be generated by the
program material. Amortization of program contract costs is generally computed
under either a four year accelerated method or based on usage, whichever yields
the greater amortization for each program. Program contract costs, estimated by
management to be amortized in the succeeding year, are classified as current
assets. Payments of program contract liabilities are typically paid on a
scheduled basis and are not affected by adjustments for amortization or
estimated net realizable value.
On August 21, 1996, the Company entered into an agreement (the "Fox Agreement")
with Fox Broadcasting Company, Inc. ("Fox") which, among other things, provides
that affiliation agreements between Fox would be amended to have new five-year
terms commencing on the date of the Fox Agreement.
F-8
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Fox Agreement also provides that the Company will have the right to
purchase, for fair market value, any station Fox acquires in a market currently
served by a Company owned Fox affiliate if Fox determines to terminate the
affiliation agreement with the Company's station in that market and operate the
station acquired by Fox as a Fox affiliate.
In October 1996, WTTO did not renew its Fox affiliation and is now operated as a
WB affiliate. In addition, the Company has been notified by Fox of Fox's
intention to terminate WLFL's affiliation with Fox in the Raleigh-Durham market
and WTVZ's affiliation with Fox in the Norfolk market, effective August 31,
1998.
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, 1995 and 1996 consist of the following (in
thousands):
1995 1996
--------- ---------
Unamortized debt acquisition costs. $ 9,049 $26,453
Investments in limited
partnerships..................... 2,435 3,039
Notes receivable................... 4,775 10,773
Purchase options................... 10,000 22,902
Offering costs..................... -- 434
Other.............................. 1,096 634
--------- ---------
$27,355 $64,235
========= =========
NON-COMPETE AND CONSULTING AGREEMENTS
The Company has entered into non-compete and consulting agreements with various
parties. These agreements range from two to three years. Amounts paid under
these agreements are amortized over the life of the agreement.
ACQUIRED INTANGIBLE BROADCASTING ASSETS
Acquired intangible broadcasting assets are being amortized over periods of 1 to
40 years. These amounts result from the acquisition of certain television and
radio station license and non-license assets (see Note 12). 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.
F-9
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible assets, at cost, as of December 31, 1995 and 1996, consist of the
following (in thousands):
AMORTIZATION
PERIOD 1995 1996
--------------- ---------- ------------
Goodwill...................... 40 years $109,772 $ 676,219
Intangibles related to LMAs .. 15 years 103,437 120,787
Decaying advertiser base ..... 1 -- 15 years 38,424 93,896
FCC licenses.................. 25 years 44,564 370,533
Network affiliations.......... 1 -- 25 years 17,482 55,966
Other......................... 1 -- 40 years 4,856 24,057
---------- ------------
318,535 1,341,458
Less- Accumulated
amortization................ (49,746) (85,155)
---------- ------------
$268,789 $1,256,303
========== ============
ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31, 1995 and 1996
(in thousands):
1995 1996
--------- ---------
Compensation ................. $ 4,847 $10,850
Interest...................... 11,104 11,915
Other......................... 4,769 12,265
--------- ---------
$20,720 $35,030
========= =========
NON-CASH TRANSACTIONS
During 1994, 1995 and 1996 the Company entered into the following non-cash
transactions (in thousands):
1994 1995 1996
--------- --------- ---------
Purchase accounting adjustments related
to deferred taxes (Note 9).................. $ -- $ 3,400 $17,615
========= ========= =========
Program contract costs acquired............... $20,750 $26,918 $51,296
========= ========= =========
Distribution prior to KCI merger (Note 12).... $ -- $ 1,461 $ --
========= ========= =========
LOCAL MARKETING AGREEMENTS
The Company generally enters into LMAs, JSAs and similar arrangements with
stations located in markets in which the Company already owns and operates a
station, and in connection with acquisitions, pending regulatory approval of
transfer of License Assets. Under the terms of these agreements, the Company
makes specified periodic payments to the owner-operator in exchange for the
grant to the Company of the right to program and sell advertising on a specified
portion of the station's inventory of broadcast time. Nevertheless, as the
holder of the FCC license, the owner-operator retains full control and
responsibility for the operation of the station, including control over all
programming broadcast on the station.
Included in the accompanying consolidated statements of operations for the years
ended December 31, 1994, 1995 and 1996, are net revenues of $25.0 million, $49.5
million and $153.0 million (including $103.3 million relating to River City),
respectively, that relate to LMAs, JSAs and time brokerage agreements ("TBAs").
F-10
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with the River City Acquisition, the Company entered into an LMA
in the form of TBAs with River City and the owner of KRRT with respect to each
of the nine television and 21 radio stations with respect to which the Company
acquired Non-License Assets. The TBAs are for a ten-year term, which corresponds
with the term of the option the Company holds to acquire the related River City
License Assets. The Company has filed applications with respect to the transfer
of the License Assets of seven of the nine television stations and the 21 radio
stations for which the Company acquired Non-License Assets in the River City
Acquisition. Such applications have been granted and the transfer of the License
Assets has been consummated with respect to 19 of the 21 radio stations. The
approval of the transfer of the two remaining radio licenses is subject to
waiver of FCC cross-ownership rules. Upon grant of FCC approval of the transfer
of License Assets with respect to these stations, the Company intends to acquire
the License Assets, and thereafter the LMAs will terminate and the Company will
own and operate the stations. With respect to the remaining two television
stations, Glencairn has applied for transfer of the License Assets of these
stations, and the Company intends to enter into LMAs with Glencairn Ltd.
("Glencairn", see Note 8) with respect to these stations upon FCC approval of
the transfer of the License Assets to Glencairn. Petitions to deny or informal
objections have been filed against certain of these applications by third
parties. Management believes the Company will ultimately prevail on these
petitions.
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
Property and equipment and autos under capital leases .. Shorter of 10 years
or the lease term
Property and equipment consisted of the following as of December 31, 1995 and
1996 (in thousands):
1995 1996
---------- ----------
Land and improvements.......................... $ 1,768 $ 9,795
Buildings and improvements..................... 17,515 39,008
Station equipment.............................. 36,949 112,994
Office furniture and equipment................. 3,451 10,140
Leasehold improvements......................... 2,564 3,377
Automotive equipment........................... 677 3,280
Construction in progress....................... -- 6,923
---------- ----------
62,924 185,517
Less- Accumulated depreciation and
amortization.................................. (20,127) (31,184)
---------- ----------
$ 42,797 $154,333
========== ==========
F-11
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INTEREST RATE DERIVATIVE AGREEMENTS:
The Company entered into interest rate derivative agreements to reduce the
impact of changing interest rates on its floating rate debt, primarily relating
to the Bank Credit Agreement. In May 1996, the Company amended its Bank Credit
Agreement. The agreement requires the Company to enter into Interest Rate
Protection Agreements at rates not to exceed 9.5% per annum as to a notional
principal amount at least equal to 66 2/3 % of the Tranche A term loans
scheduled to be outstanding from time to time and 9.75% per annum as to a
notional principal amount of 66 2/3 % of the aggregate amount of Tranche B term
loans scheduled to be outstanding from time to time.
At December 31, 1996, the Company had several interest rate swap agreements
relating to the Bank Credit Agreement which expire from March 31, 1997 to June
30, 2000. The swap agreements set rates in the range of 5.84% to 7.00%. The
notional amounts related to these agreements were $955.0 million at December 31,
1996, and decrease to $50.0 million through the expiration dates. 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 floating interest rates are based upon the three month London Interbank
Offered Rate (LIBOR) rate, and the measurement and settlement is performed
quarterly. Settlements of these agreements are recorded as adjustments to
interest expense in the relevant periods. Premiums paid under these agreements
were approximately $1.1 million in 1994 and $851,000 in 1996 and are amortized
over the life of the agreements. The counterparties to these agreements are
major national financial institutions. The Company estimates the aggregate cost
to retire these instruments at December 31, 1996 to be $2.3 million.
4. NOTES PAYABLE AND COMMERCIAL BANK FINANCING:
BANK CREDIT AGREEMENT
In connection with the 1994 Acquisitions (see Note 12), the Company entered into
a Bank Credit Agreement. The Bank Credit Agreement consisted of three classes:
Facility A Revolving Credit and Term Loan, Facility B Credit Loan and Facility C
Term Loan. In August 1995, the Company utilized the net proceeds from the Public
Debt Offering mentioned below to repay amounts outstanding under the Bank Credit
Agreement.
The weighted average interest rates during 1994 and as of December 31, 1994 were
7.48% and 8.56%, respectively, and during 1995 while amounts were outstanding
and as of August 28, 1995, when outstanding indebtedness relating to Bank Credit
Agreement were repaid, were 8.44% and 7.63%, respectively. Interest expense
relating to the Bank Credit Agreement was $9.4 million, $15.6 million and $-0-
for the years ended December 31, 1994, 1995 and 1996, respectively.
Simultaneously with the acquisition of the non-license assets of River City, the
aforementioned Bank Credit Agreement was amended and replaced with new terms as
outlined below.
BANK CREDIT AGREEMENT AS AMENDED
In order to finance the acquisition of the non-license assets of River City and
potential future acquisitions, the Company amended its Bank Credit Agreement on
May 31, 1996. The Bank Credit Agreement consists of three classes: Tranche A
Term Loan, Tranche B Term Loan and a Revolving Credit Commitment.
The Tranche A Term Loan is a term loan in a principal amount not to exceed $550
million and is scheduled to be paid in quarterly installments beginning December
31, 1996 through December 31, 2002. The Tranche B Term Loan is a term loan in a
principal amount not to exceed $200 million and is scheduled to be paid in
quarterly installments beginning December 31, 1996 through November 2003. The
Revolving Credit Commitment is a revolving credit facility in a principal amount
not to exceed $250 million and is scheduled to have reduced availability
quarterly beginning March 31, 1999 through
F-12
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 30, 2003. As of December 31, 1996, outstanding indebtedness under the
Tranche A Term Loan, Tranche B Term Loan and the Revolving Credit Commitment
were $520 million, $198.5 million and $155 million, respectively. The Company
incurred debt acquisition costs of approximately $20 million associated with
this indebtedness which are being amortized over the life of the debt.
The applicable interest rate for the Tranche A Term Loan and the Revolving
Credit Tranche is either LIBOR plus 1.25% to 2.5% or the base rate plus zero to
1.25%. The applicable interest rate for the Tranche A Term Loan and the
Revolving Credit Tranche is adjusted based on the ratio of total debt to four
quarters trailing earnings before interest, taxes, depreciation and
amortization. The applicable interest rate for Tranche B is either LIBOR plus
2.75% or the base rate plus 1.75%. The weighted average interest rates for
outstanding indebtedness relating to the current Bank Credit Agreement during
1996 and as of December 31, 1996, were 8.08% and 8.12%, respectively. Interest
expense relating to the Bank Credit Agreement was $40.4 million for the year
ended December 31, 1996.
The fair value of the Company's outstanding indebtedness under the Bank Credit
Agreement approximated its carrying value at December 31, 1996.
The Company is required to maintain certain debt covenants in connection with
the Bank Credit Agreement. As of December 31, 1996, the Company is in compliance
with all debt covenants.
PUBLIC DEBT OFFERING
In August 1995, the Company consummated the sale of $300.0 million of 10% Senior
Subordinated Notes (the Notes), due 2005, generating net proceeds to the Company
of $293.2 million. The net proceeds of this offering were utilized to repay
outstanding indebtedness under the then existing Bank Credit Agreement of $201.8
million with the remainder being retained and eventually utilized to make
payments related to certain acquisitions consummated during 1996. In conjunction
with the repayment of outstanding indebtedness under the Bank Credit Agreement,
the Company recorded an extraordinary loss of $4.9 million, net of a tax benefit
of $3.4 million.
Interest on the Notes is payable semiannually on March 30 and September 30 of
each year, commencing March 30, 1996. Interest expense for the year ended
December 31, 1995 and 1996, was $10.4 million and $30.0 million, respectively.
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.
The Company has the option to redeem the notes at any time on or after September
30, 2000. Redemption prices are as follows:
REDEMPTION PRICE
REDEMPTION DATE (AS A % OF PRINCIPAL AMOUNT)
------------------------------ --------------------------
On or after September 30, 2000... 105%
2001... 103%
2002... 102%
Furthermore, at any time on or prior to September 30, 1998, the Company may
redeem up to 25% of the original principal amount of the Notes with the net
proceeds of a public equity offering at 110% of the principal amount. The Notes
also may be redeemed by the holder at 101% of the principal amount upon
occurrence of a change of control, as defined in the Indenture.
Based upon the quoted market price, the fair value of the Notes as of December
31, 1996 is $306 million.
F-13
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under the terms of the Indenture, the Notes are guaranteed by the Company and
substantially all of its subsidiaries (the guarantors). The guarantors are
wholly-owned, any non-guarantors are inconsequential to the consolidated
financial statements and the guarantees are full, unconditional, and joint and
several.
The Indenture contains covenants limiting indebtedness, transactions with
affiliates, liens, sales of assets, issuances of guarantees of, and pledges for,
indebtedness, transfer of assets, dividends, mergers and consolidations.
SENIOR SUBORDINATED NOTES
In December 1993, the Company raised $200.0 million through the issuance 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. The remaining portion of the proceeds of the 1993 Notes was
used to repay a secured debt facility and for general corporate purposes.
Interest on the 1993 Notes is payable semiannually on June 15 and December 15 of
each year. Interest expense for the years ended December 31, 1994, 1995 and
1996, was $12.6 million, $10.0 million and $10.0 million, respectively. The 1993
Notes are issued under an Indenture among SBG, its subsidiaries (the guarantors)
and the trustee. Costs associated with the offering totaled $5.1 million,
including an underwriting discount of $4.0 million. These costs, less the $1.0
million refund related to the redemption, were capitalized and are being
amortized over the life of the debt.
The 1993 Notes may be redeemed by the holder at 101% of the principal amount
upon occurrence of a change of control, as defined in the Indenture. The Company
has the option to redeem the 1993 Notes any time after December 15, 1998.
Redemption prices are as follows:
REDEMPTION PRICE
REDEMPTION DATE (AS A % OF PRINCIPAL AMOUNT)
----------------------------- -----------------------------
On or after December 15, 1998......... 105%
1999......... 104%
2000......... 103%
2001......... 100%
Based upon the quoted market price, the fair value of the 1993 Notes as of
December 31, 1996, is $102 million.
Under the terms of the Indenture, the 1993 Notes are guaranteed by the Company
and substantially each of its subsidiaries (the guarantors). The guarantors are
wholly-owned, any non-guarantors are inconsequential to the consolidated
financial statements and the guarantees are full, unconditional, and joint and
several.
The Indenture contains covenants limiting indebtedness, transactions with
affiliates, liens, sales of assets, issuances of guarantees of, and pledges for,
indebtedness, transfer of assets, dividends, mergers and consolidations.
F-14
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY
Notes payable and commercial bank financing consisted of the following as of
December 31, 1995 and 1996 (in thousands):
1995 1996
---------- ------------
Bank Credit Agreement, Tranche A Term Loan............................ $ -- $ 520,000
Bank Credit Agreement, Tranche B Term Loan............................ -- 198,500
Bank Credit Agreement, Revolving Credit Commitment.................... -- 155,000
Senior subordinated notes due 2003, interest at 10%................... 100,000 100,000
Senior subordinated notes due 2005, interest at 10%................... 300,000 300,000
Unsecured installment notes to former minority stockholders of CRI
and WBFF, interest at 18%............................................ 1,777 644
---------- ------------
401,777 1,274,144
Less: Current portion................................................. (1,133) (62,144)
---------- ------------
$400,644 $1,212,000
========== ============
The Revolving Credit Commitment is a revolving credit facility in a principal
amount not to exceed $250 million and is scheduled to have reduced availability
quarterly beginning March 31, 1999 through November 30, 2003. Indebtedness under
Tranche A and Tranche B of the Bank Credit Agreement and notes payable as of
December 31, 1996, mature as follows (in thousands):
1997........................ $ 62,144
1998........................ 71,500
1999........................ 91,500
2000........................ 101,500
2001........................ 101,500
2002 and thereafter......... 691,000
------------
$ 1,119,144
============
Substantially all of the Company's assets have been pledged as security for
notes payable and commercial bank financing. In addition, the Class B
stockholders have pledged their stock in SBG to the commercial bank and have
delivered mortgages and security agreements as additional collateral. Further,
Cunningham Communications, Inc. (Cunningham), Keyser Investment Group, Inc.
(KIG) and Gerstell Development Limited Partnership (Gerstell), all businesses
that are owned and controlled by these Class B stockholders, were required to
guarantee obligations to the commercial bank.
In January 1997, the Company made the final payment of $644,000 repaying the
remaining indebtedness to the former minority stockholders.
F-15
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. NOTES AND CAPITAL LEASES PAYABLE TO AFFILIATES:
Notes and capital leases payable to affiliates consisted of the following as of
December 31, 1995 and 1996 (in thousands):
1995 1996
--------- ---------
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 ............ $11,442 $10,448
Capital lease for building, interest at 17.5%................................ 1,500 1,372
Capital leases for broadcasting tower facilities, interest rates averaging
10%.......................................................................... 632 249
Capital leases for building and tower, interest at 8.25%..................... 2,252 1,890
--------- ---------
15,826 13,959
Less: Current portion........................................................ (1,867) (1,774)
--------- ---------
$13,959 $12,185
========= =========
Notes and capital leases payable to affiliates, as of December 31, 1996, mature
as follows (in thousands):
1997.................................................... $ 2,856
1998.................................................... 2,654
1999.................................................... 2,666
2000.................................................... 2,540
2001.................................................... 1,920
2002 and thereafter..................................... 7,872
---------
Total minimum payments due.............................. 20,508
Less: Amount representing interest...................... (6,549)
---------
Present value of future notes and capital lease
payments................................................ $13,959
=========
6. PROGRAM CONTRACTS PAYABLE:
Future payments required under program contracts payable as of December 31,
1996, are as follows (in thousands):
1997....................................... $ 58,461
1998....................................... 33,216
1999....................................... 18,331
2000....................................... 3,665
2001....................................... 430
2002 and thereafter........................ 552
----------
114,655
Less: Current portion...................... (58,461)
----------
Long-term portion of program contracts
payable.................................... $ 56,194
==========
F-16
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in the current portion amounts are payments due in arrears of $10.9
million. In addition, the Companies have entered into noncancelable commitments
for future program rights aggregating $60.5 million as of December 31, 1996.
The Company has estimated the fair value of its program contract payables and
noncancelable commitments at approximately $51.3 million and $29.0 million,
respectively, as of December 31, 1995, and $102.7 million and $43.1 million,
respectively, at December 31, 1996, based on future cash flows discounted at the
Company's current borrowing rate.
7. PREPAYMENT OF SYNDICATED PROGRAM CONTRACT LIABILITIES:
In connection with the 1996 Acquisitions (see Note 12), the Company assumed
certain syndicated program contracts payable for which the underlying value of
the associated syndicated program assets was determined, by management, to be of
little or no value. The Company negotiated the prepayment of syndicated program
contracts payable for certain of the 1996 Acquisitions, as well as certain other
of the Company's subsidiaries. The Company made cash payments totaling $15.1
million relating to these syndicated program contracts payable. For subsidiaries
owned prior to 1996, the Company recognized related amortization of excess
syndicated programming of $3.0 million.
8. RELATED PARTY TRANSACTIONS:
During 1990, WBFF sold certain station equipment to an affiliate for $512,000.
The sale is accounted for on an installment basis since the affiliate is in the
start-up phase. The note is to be paid over five years and earns annual interest
at 11%. In connection with the start-up of this affiliate, 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, 1995 and 1996, the balance
outstanding was approximately $2.0 and $1.8 million, respectively.
During 1990, SBG lent $1.5 million to certain Class B Stockholders pursuant to a
note. The note bears interest at 6.88% per annum and is payable in monthly
principal and interest payments through September 2000 with a balloon payment in
September 2000. As of December 31, 1995 and 1996, the balance outstanding was
approximately $1.1 million and $1.0 million respectively.
During the year ended December 31, 1993, the Company loaned Gerstell Development
Limited Partnership (a partnership owned by Class B Stockholders) $2.1 million.
The note bears interest at 6.18%, with principal payments beginning on November
1, 1994, and a final maturity date of October 1, 2013. As of December 31, 1995
and 1996, the balance outstanding was approximately $2.0 million. In addition,
Gerstell has arranged for a $2.0 million loan from a commercial bank, which is
guaranteed by the Company.
During 1993, SBG lent $6.6 million to a former majority owner pursuant to a
note. The note bears interest at 7.21% per annum and requires payments of
interest only through September 2001. Monthly principal and interest payments
with respect to this note commence in November 2001 and end in September 2006.
During 1994, the Company assigned its options to purchase the license assets of
WNUV and WVTV to Glencairn for $4.2 million which was paid in 1995, and sold the
license assets of WRDC to Glencairn for $2.0 million. Subsequently, Glencairn
exercised its options to purchase the licenses of WNUV and WVTV. Glencairn is a
corporation of which a former shareholder of SBG, who is also the holder of the
$6.6 million note described above, and trusts established by this shareholder
hold the majority of the equity interests in Glencairn. The Company has entered
into five-year LMA agreements (with five-year renewal options) with Glencairn
for the right to program and sell advertising. During 1995 and 1996, the Company
made payments of $5.6 million and $5.4 million, respectively, to Glencairn under
these LMA agreements.
F-17
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Concurrently with the initial public offering (see Note 13), the Company
acquired options from certain stockholders of 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 options were
purchased by the Company for nominal consideration and will be exercisable only
upon payment of an aggregate price equal to Glencairn's cost for the underlying
stations, plus a 10% annual return.
During 1995 and 1996, the Company from time to time entered into charter
arrangements to lease airplanes owned by certain Class B Stockholders. During
1995 and 1996, the Company incurred expenses of approximately $489,000 and
$336,000 related to these arrangements, respectively.
In May 1996, the Company acquired certain assets from River City, obtained
options to acquire other assets from River City and entered into an LMA to
provide programming services to certain television and radio stations, of which
River City is the owner of the License Assets. Certain individuals who have
direct or indirect beneficial owners of equity interests in River City are
affiliates of the Company. During 1996, the Company made LMA payments of $1.4
million to River City.
In September 1996, the Company entered into a five-year agreement with River
City pursuant to which River City will provide to the Company certain production
services. Pursuant to this agreement, River City will provide certain services
to the Company in return for an annual fee of $416,000, subject to certain
adjustments on each anniversary date.
An individual who is an affiliate of the Company is the owner of 100% of the
common stock of Keymarket of South Carolina, Inc. ("KSC"), and the Company has
an option to acquire either (i) all of the assets of KSC for forgiveness of debt
in an aggregate principal amount of approximately $7.4 million, plus payment of
approximately $1.0 million, less certain adjustments or (ii) all of the stock of
KSC for $1.0 million, less certain adjustments. The Company is required to
purchase each of the properties during the term of the applicable lease for an
aggregate purchase price of approximately $1.75 million.
In May 1996, the Company, along with the Class B Stockholders, formed Beaver Dam
Limited Liability Company (BDLLC), of which the Company owns a 45% interest.
BDLLC was formed for the purpose of constructing and owning a building which may
be the site for the Company's corporate headquarters. The Company made capital
contributions of approximately $380,000.
Certain assets used by the Company's operating subsidiaries are leased from
Cunningham, KIG and Gerstell (entities owned by the Class B Stockholders). Lease
payments made to these entities were $1.2 million, $1.3 million, and $1.3
million for the years ended December 31, 1994, 1995 and 1996, respectively.
9. 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, 1994, 1995 and 1996 (in thousands):
1994 1995 1996
--------- --------- --------
Provision (benefit) for income taxes before extraordinary
item........................................................ $ (647) $ 5,200 $6,936
Income tax effect of extraordinary item...................... -- (3,357) --
--------- --------- --------
$ (647) $ 1,843 $6,936
========= ========= ========
Current:
Federal..................................................... $ 7,090 $ 5,374 $ 127
State....................................................... 1,440 1,558 4,479
--------- --------- --------
8,530 6,932 4,606
--------- --------- --------
Deferred:
Federal .................................................... (7,650) (4,119) 2,065
State....................................................... (1,527) (970) 265
--------- --------- --------
(9,177) (5,089) 2,330
--------- --------- --------
$ (647) $ 1,843 $6,936
========= ========= ========
F-18
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a reconciliation of federal income taxes at the applicable
statutory rate to the recorded provision (benefit):
1994 1995 1996
--------- ------- -------
Statutory federal income taxes.............. (34.0)% 34.0% 34.0%
Adjustments-
State income taxes, net of federal effect.. 1.8 1.7 8.1
State franchise taxes, net of federal
effect.................................... 0.8 1.1 10.8
Non-deductible goodwill amortization....... 14.1 11.9 25.2
Non-deductible expense items .............. 6.3 3.0 6.4
Income of pooled S corporation (Note 12) .. (7.6) -- --
Other...................................... (0.5) (0.7) 1.5
--------- ------- -------
Provision (benefit) for income taxes....... (19.1)% 51.0% 86.0%
========= ======= =======
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 asset of $21.0 million and $782,000 as of December 31, 1995
and 1996, 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. This belief is based on taxable income for the year ended
December 31, 1996 and its projection of future years' results.
The Company has total available federal NOL's of approximately $15.0 million as
of December 31, 1996, which expire during various years from 2004 to 2011.
Certain NOL's are limited to use within a specific entity, and certain NOL's are
subject to annual limitations under Internal Revenue Code Section 382 and
similar state provisions.
Total deferred tax assets and deferred tax liabilities as of December 31, 1995
and 1996, including the effects of businesses acquired, and the sources of the
difference between financial accounting and tax bases of the Company's assets
and liabilities which give rise to the deferred tax assets and deferred tax
liabilities and the tax effects of each are as follows (in thousands):
1995 1996
--------- ---------
Deferred Tax Assets:
Accruals and reserves.......... $ 1,110 $ 2,195
Loss on disposal of fixed
assets........................ 619 --
Net operating losses........... 2,676 4,829
Program contracts.............. 4,575 2,734
Fixed assets and intangibles .. 14,500 --
Other.......................... 373 713
--------- ---------
$23,853 $10,471
========= =========
Deferred Tax Liabilities:
FCC license.................... $ 1,656 $ 2,613
Hedging instruments ........... -- 188
Fixed assets and intangibles... -- 4,430
Capital lease accounting....... 988 1,304
Affiliation agreement ......... -- 691
Investment in partnerships .... -- 209
Other.......................... 182 254
--------- ---------
$ 2,826 $ 9,689
========= =========
F-19
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 1995, the Company made a $3.4 million deferred tax adjustment to decrease
its deferred tax asset and increase goodwill under the purchase accounting
guidelines of APB 16 and in accordance with SFAS 109 related to the opening
deferred tax asset balances of certain 1994 acquisitions. During 1996, the
Company made a $1.1 million deferred tax adjustment to decrease its deferred tax
asset and increase goodwill under the purchase accounting guidelines of APB 16
and in accordance with SFAS 109 related to the opening deferred tax asset
balances of certain 1995 acquisitions.
10. 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, 1994,
1995 and 1996, was $274,000, $271,000 and $657,000, respectively. There were no
discretionary contributions during these periods.
11. 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 or results of operations.
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, 1994, 1995 and 1996, aggregated approximately $625,000,
$1.1 million and $3.1 million, respectively.
Future minimum payments under the leases are as follows (in thousands):
1997............... $ 3,672
1998............... 3,055
1999............... 2,244
2000............... 1,789
2001............... 1,206
2002 and
thereafter......... 5,430
---------
$17,396
=========
CERTAIN AFFILIATION AGREEMENTS
The Company generally operates its television stations under affiliation
agreements with Fox, ABC, UPN, WB and CBS. These agreements range in terms from
one to five years and in certain circumstances have renewable options. The
Company has the option to acquire the FCC licenses of certain stations being
operated as LMAs. The networks affiliated with these stations, other than Fox,
have the right to terminate the affiliations upon transfer of the license. In
addition, KDNL (St. Louis) is being operated as an ABC affiliate pursuant to
terms negotiated with ABC, but no affiliation agreement has been signed and ABC
is not paying affiliation fees, and WLOS (Asheville) is being operated pursuant
to
F-20
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
terms negotiated with ABC to replace an existing agreement, but the new
agreement has not been signed and ABC is paying the lower affiliation fees
called for under the old agreement. The Company has accrued ABC affiliation fees
for KDNL and WLOS based on the anticipated settlement.
12. ACQUISITIONS:
1994 ACQUISITIONS
In May 1994, the Company acquired WCGV and WTTO for an aggregate purchase price
of $60.0 million. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to the fair market value of
the assets purchased and the liabilities assumed. Based upon an independent
appraisal, $11.7 million was allocated to property and programming costs and
$29.9 million was allocated to acquired broadcasting assets. The excess of the
purchase price over the acquired assets of $18.4 million was allocated to other
intangible assets, and is being amortized over 40 years. The Company made an
additional investment of $56.0 million for covenants not-to-compete and
consulting agreements in these and the Company's current markets, which are
being amortized over the lives of the respective agreements.
Simultaneous with the acquisition of WCGV and WTTO, the Company acquired the
non-license assets of WNUV and WVTV for approximately $66.8 million and entered
into LMAs with the owner of the licenses of WNUV and WVTV. The acquisition was
accounted for under the purchase method of accounting whereby $14.8 million of
the purchase price was allocated to property and programming costs and $700,000
of the purchase price was allocated to deferred tax liabilities, with the
remainder being allocated to other intangible assets. The intangible assets are
being amortized over 15 years.
Simultaneous with the acquisitions of the non-license assets of WNUV and WVTV,
the Company acquired the options to purchase the license assets of these
stations for $8.0 million and intangible assets related to the LMAs for $9.5
million, for a total purchase price of $17.5 million. The Company subsequently
assigned the options to Glencairn for $4.2 million. The Company is amortizing
the difference between the total amount paid for the options by the Company and
the amount allocated to the value of the options over the estimated life of the
LMA, which is 15 years.
In August 1994, the Company acquired 100% of the non-voting stock representing a
98% ownership interest in F.S.F. Acquisition Corporation (FSFA), the corporate
parent of WRDC, for $34.0 million. The investment also includes a controlling
interest in a joint venture which owns the studio and office building and a
minority interest in a partnership that owns the TV broadcast tower. The joint
venture has been consolidated, with the other owners' share of equity shown as a
minority interest, while the partnership interest has been presented as an
investment and is included in other assets. The purchase 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 $10.0 million, $7.0 million and $17.0 million,
respectively, based upon an independent appraisal. Intangible assets are being
amortized over periods of 10 to 15 years. Simultaneous with the purchase of the
nonvoting stock of FSFA, the Company acquired an option to acquire the voting
common stock of FSFA. Additionally, the Company entered into two year consulting
and non-compete agreements with the former owner of the voting common stock of
FSFA for $4.0 million.
1995 ACQUISITIONS AND DISPOSITIONS
In January and May 1995, the Company acquired the non-license and license
assets, respectively, of WTVZ in Norfolk, Virginia for a purchase price of $49.0
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
$1.4 million, $12.6 million and $35.0 million, respectively, based upon an
independent appraisal. Intangible assets are being amortized over 1 to 40 years.
F-21
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 1995, the Company acquired the license and non-license assets of the
Paramount Station Group of Raleigh/Durham, Inc. which owned and operated WLFL in
Raleigh-Durham, North Carolina for $55.5 million, plus the assumption of $3.7
million in liabilities. 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 $8.6 million, $15.9 million and $34.7 million, respectively, based
upon an independent appraisal. Intangible assets are being amortized over
periods of 1 to 40 years.
On March 31, 1995, the Company exercised its option to acquire 100% of the
voting stock of FSFA for the exercise price of $100. FSFA was merged into WLFL,
Inc. and became a wholly-owned subsidiary of the Company. Simultaneously, the
Company sold the license assets of FSFA to Glencairn for $2.0 million, and
entered into a five-year LMA (with a five-year renewal option) with Glencairn
(see Note 8).
On May 5, 1995, Keyser Communications, Inc. (KCI), an affiliated entity
wholly-owned by the stockholders of the Company, was merged into the Company for
common stock. Certain assets and liabilities of KCI (other than programming
items, an LMA agreement and consulting agreements), were distributed to the KCI
shareholders immediately prior to the merger. The merger of KCI is being treated
as a reorganization and has been accounted for as a pooling of interests
transaction. Accordingly, the consolidated financial statements for all periods
presented have been restated to include the accounts of KCI.
Combined and separate results of the Company and KCI (through May 5, 1995,
merger date) during the period presented are as follows (in thousands):
COMPANY KCI COMBINED
---------- --------- -----------
Twelve months ended December 31, 1994:
Net broadcast revenues........................ $113,728 $4,883 $118,611
Income (loss) before provision for income
taxes........................................ (4,147) 760 (3,387)
Net income (loss)............................. (3,500) 760 (2,740)
Twelve months ended December 31, 1995:
Net broadcast revenues........................ $186,031 $1,903 $187,934
Income (loss) before provision for income
taxes........................................ 10,592 (404) 10,188
Net income (loss)............................. 480 (404) 76
In July 1995, the Company acquired the non-license assets of WABM in Birmingham,
Alabama for a purchase price of $2.5 million. The acquisition was accounted for
under the purchase method of accounting whereby $1.1 million of the purchase
price was allocated to property and program assets, based upon an independent
appraisal. The excess of the purchase price over the acquired assets of
approximately $1.4 million was allocated to other intangible assets and is being
amortized over 15 years. Simultaneously with the purchase, the Company entered
into a five-year LMA agreement (with a five-year renewal option) with Glencairn.
In November 1995, the Company acquired the non-license assets of WDBB in
Tuscaloosa, Alabama for a purchase price of $400,000. In addition, the Company
made "Option Grant Payments" of $11.3 million to certain parties for options to
purchase the issued and outstanding stock of WDBB, Inc., which holds the license
assets of WDBB. The option agreement further provides for the payment of option
grant installments of $2.6 million over five years and a final option exercise
price of $100,000. The acquisition was accounted for under the purchase method
of accounting whereby $1.3 million was allocated to the property and program
assets based upon an independent appraisal. The total of Option Grant Payments
paid and grant installments accrued of $13.1 million was allocated to other
intangible assets and is being amortized over 15 years.
F-22
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1996 ACQUISITIONS
RIVER CITY ACQUISITION
In April 1996, the Company entered into an agreement to purchase certain
non-license assets of River City. In May 1996, the Company closed the
transaction for a purchase price of $967.1 million, providing as consideration
1,150,000 shares of Series A Convertible Preferred Stock with a fair market
value of $125.1 million, 1,382,435 stock options with a fair market value of
$23.9 million and cash payments totaling $818.1 million. The Company utilized
indebtedness under its Bank Credit Agreement to finance the transaction. The
acquisition was accounted for under the purchase method of accounting whereby
the purchase price was allocated to property and programming assets, acquired
intangible broadcasting assets and other intangible assets for $82.8 million,
$375.6 million and $508.7 million, respectively, based upon an independent
appraisal. Intangible assets are being amortized over 1 to 40 years.
Simultaneously, the Company entered into option agreements to purchase certain
license assets for an aggregate option exercise price of $20 million. In
September 1996, after receiving FCC approval for license transfer, the Company
made a cash payment of $6.9 million to acquire certain of the radio station FCC
licenses.
Also, simultaneously with the acquisition, the Company entered into an option
agreement to purchase the license and non-license assets of WSYX in Columbus,
Ohio, for the option purchase price of $130 million plus the amount of River
City indebtedness secured by the WSYX assets on the exercise date (not to exceed
the amount at the date of closing of $105 million). Pursuant to the WSYX option
agreement, the Company is required to make certain "Option Extension Fees", as
defined. These fees are required to begin quarterly beginning with December 31,
1996, through the earlier of the "Option Grant Date" or the expiration date of
June 30, 1999. The Option Extension Fees are calculated as 8% per annum of the
option purchase price through the first anniversary of the Option Grant Date,
15% per annum of the option purchase price through the second anniversary of the
Option Grant Date and 25% per annum of the option purchase price through the
expiration of the WSYX option agreement. On December 31, 1996, the Company made
an Option Extension Fee payment of $7.0 million which was recorded within Other
Assets in the accompanying balance sheets.
In conjunction with the River City acquisition, the Company entered into an
agreement to purchase the non-license assets of KRRT, Inc., a television station
in San Antonio, Texas, for a purchase price of $29.5 million. The acquisition
was accounted for under the purchase method of accounting whereby the purchase
price was allocated to property and programming assets, acquired intangible
broadcasting assets and other intangible assets for $3.8 million, $0.4 million
and $25.3 million, respectively, based upon an independent appraisal. Intangible
assets are being amortized over 1 to 15 years.
In connection with the River City acquisition, the Company consummated the
following transactions concurrent with or subsequent to the closing:
1.In June 1996, the Board of Directors of the Company adopted, upon
approval of the stockholders by proxy, an amendment to the Company's
amended and restated charter. This amendment increased the number of Class
A Common Stock shares authorized to be issued by the Company from
35,000,000 shares to 100,000,000 shares. The amendment also increased the
number of shares of preferred stock authorized from 5,000,000 shares to
10,000,000 shares.
2.Series A Preferred Stock -- As partial consideration for the acquisition
of the non-license assets of River City, the Company issued 1,150,000
shares of Series A Preferred Stock. In June 1996, the Board of Directors
of the Company adopted, upon approval of the stockholders by proxy, an
amendment to the Company's amended and restated charter at which time
Series A Preferred Stock was exchanged for and converted into Series B
Preferred Stock. The Company
F-23
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recorded the issuance of Series A Preferred Stock based on the fair market
value at the date the River City acquisition was announced at the exchange
rate of 3.64 shares of Class A Common Stock for each share of Series A
Preferred Stock.
3.Series B Preferred Stock -- Shares of Series B Preferred Stock are
convertible at any time into shares of Class A Common Stock, with each
share of Series B Preferred Stock convertible into approximately 3.64
shares of Series A Common Stock. The Company may redeem shares of Series B
Preferred Stock only after the occurrence of certain events. If the
Company seeks to redeem shares of Series B Preferred Stock and the
stockholder elects to retain the shares, the shares will automatically be
converted into common stock on the proposed redemption date. All shares of
Series B Preferred stock remaining outstanding as of May 31, 2001, will
automatically convert into Class A Common Stock. Series B Preferred Stock
is entitled to 3.64 votes on all matters with respect to which Class A
Common Stock has a vote.
4. Stock Options and Awards:
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. A total of 2,073,673 shares of Class A Common Stock is
reserved and available for awards under the plan. In connection with the
River City acquisition, 244,500 options were granted to certain employees
and 1,382,435 were granted to Barry Baker (see Executive Employment
Agreement below) under this plan with an exercise price of $30.11 per
share.
The Company recorded deferred compensation of $1.9 million as additional
paid-in capital at the stock option grant date. During the year ended
December 31, 1996, compensation expense of $739,000 was recorded relating
to the options issued under the LTIP. The remaining deferred compensation
of approximately $1.2 million will be recognized as expense on a
straight-line basis over the vesting period.
Incentive Stock Option Plan-
In June 1996, the Board of Directors adopted, upon approval of the
stockholders by proxy, certain amendments to the Company's Incentive Stock
Option Plan. The purpose of the amendments was (i) to increase the number
of shares of Class A Common Stock approved for issuance under the plan
from 400,000 to 500,000, (ii) to delegate to Barry Baker the authority to
grant certain options, (iii) to lengthen from two years to three the
period after date of grant before options become exercisable, (iv) and to
provide immediate termination and three-year ratable vesting of options in
certain circumstances. In connection with the River City acquisition, the
Company granted 287,000 options to key management employees at an exercise
price of $37.75, the fair market value at the date of grant.
5. Executive Employment Agreement
In connection with the acquisition of River City, the Company entered into
a five-year employment agreement (the "Baker Employment Agreement") with
Barry Baker, pursuant to which Mr. Baker will become President and Chief
Executive Officer of SCI and Executive Vice President of the Company, at
such time as Mr. Baker is able to hold those positions consistent with
applicable FCC regulations. Until such time as Mr. Baker is able to become
an officer of the Company, he serves as a consultant to the Company
pursuant to a consulting agreement and received compensation that he would
be entitled to as an officer under the Baker Employment Agreement. If the
Baker Employment Agreement is terminated by the Company other than for
F-24
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cause (as defined) or by Mr. Baker for good cause (constituting certain
occurrences specified in the agreement), Mr. Baker shall be entitled to
certain termination payments entitling him to his salary and bonuses which
would have been paid under the agreement, to purchase certain television
or radio assets acquired by the Company from River City at fair market
value, and all stock options held by Mr. Baker shall vest immediately.
OTHER ACQUISITIONS
In May 1995, the Company entered into option agreements to acquire all of the
license and non-license assets of WSMH-TV in Flint, Michigan (WSMH). In July
1995, the Company paid the $1.0 million option exercise price to exercise its
option and in February 1996, the Company consummated the acquisition for a
purchase price of $35.4 million. The acquisition was accounted for under the
purchase method of accounting whereby the purchase price was allocated to
property and programming assets, acquired intangible broadcasting assets and
other intangible assets for $1.9 million, $6.0 million and $27.5 million,
respectively, based upon an independent appraisal. Intangible assets are being
amortized over 1 to 40 years.
In March 1996, the Company entered into an agreement to acquire the outstanding
stock of Superior Communications Group, Inc. (Superior) which owns the license
and non-license assets of television stations KOCB in Oklahoma City, Oklahoma
and WDKY in Lexington, Kentucky. In May 1996, the Company consummated the
acquisition for a purchase price of $63.5 million. The acquisition was accounted
for under the purchase method of accounting whereby the purchase price was
allocated to property and programming assets, acquired intangible broadcasting
assets and other intangible assets for $7.3 million, $20.4 million and $35.8
million, respectively, based upon an independent appraisal. Intangible assets
are being amortized over 1 to 40 years.
In January 1996, the Company entered into an agreement to acquire license and
non-license assets of television station WYZZ in Peoria, Illinois. In July 1996,
the Company consummated the acquisition for a purchase price of $21.1 million.
The acquisition was accounted for under the purchase method of accounting
whereby the purchase price was allocated to property and programming assets,
acquired intangible broadcasting assets and other intangible assets for $2.2
million, $4.3 million and $14.6 million, respectively, based upon an independent
appraisal. Intangible assets are being amortized over 1 to 40 years.
In July 1996, the Company entered into an agreement to acquire license and
non-license assets of television station KSMO in Kansas City, Missouri through
the exercise of its options described in Note 13 for a total purchase price of
$10.0 million. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to property and programming
assets and acquired intangible broadcasting assets for $4.6 million and $5.4
million, respectively, based upon an independent appraisal. Intangible assets
are being amortized over 1 to 25 years.
In August 1996, the Company acquired the license and non-license assets of
television station WSTR in Cincinnati, Ohio for a total purchase price of $8.7
million. The acquisition was accounted for under the purchase method of
accounting whereby the purchase price was allocated to property and programming
assets and acquired intangible broadcasting assets for $6.2 million and $2.5
million, respectively, based upon an independent appraisal. Intangible assets
are being amortized over 1 to 25 years.
F-25
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. INITIAL PUBLIC OFFERING:
In June 1995, the Company consummated an initial public offering of 5,750,000
shares of Class A Common Stock at an initial public offering price of $21.00 per
share realizing net proceeds of approximately $111.5 million. The net proceeds
to the Company from this offering were used to reduce long-term indebtedness.
The Company consummated the following transactions concurrent with or prior to
the offering:
1.The Company purchased the options to acquire the partnership interests of
KSMO in Kansas City, Missouri and WSTR in Cincinnati, Ohio ("Option
Stations") from the stockholders for an aggregate purchase price was $9.0
million. The stockholders also assigned to the Company their rights and
obligations under an option agreement among the stockholders and a
commercial bank which held secured debt of KSMO and WSTR.
2.The stockholders assigned the subordinated convertible debenture relating
to the sale of WPTT to the Company in exchange for $1.0 million, a portion
of which was used to retire the outstanding balance of a note due from the
controlling stockholders.
3.The Company acquired options from certain stockholders of 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.
4.The Board of Directors of the Company adopted Amended and Restated
Articles of Incorporation to authorize up to 35,000,000 shares of Class A
Common Stock, par value $.01 per share, 35,000,000 shares of Class B
Common Stock, par value $.01 per share and 5,000,000 shares of Preferred
Stock, par value $.01 per share; completed a reclassification and
conversion of its outstanding common stock into shares of Class B Common
Stock; and effected an approximately 49.1 for 1 stock split of the
Company's common stock (resulting in 29,000,000 shares of Class B Common
Stock outstanding). The reclassification, conversion and stock split have
been retroactively reflected in the accompanying consolidated balance
sheets and statements of stockholders' equity. In June 1996, the Company
amended its charter, increasing the number of shares of Class A Common
Stock authorized to be issued from 35,000,000 to 100,000,000 (see Note
12).
5.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 will be
granted to certain designated employees of the Company upon adoption.
6.On March 27, 1995, the Board of Directors of the Company adopted an
Incentive Stock Option Plan (the Stock Option Plan) pursuant to which
options for shares of Class A Common Stock may be granted to certain
designated classes of employees of the Company. The Stock Option Plan
provides that the maximum number of shares of Class A Common Stock
reserved for issuance under the Stock Option Plan is 500,000, as amended,
and that options to purchase Class A Common Stock may be granted under the
plan until the tenth anniversary of its adoption.
F-26
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Conti
nued)
14. STOCK-BASED COMPENSATION PLANS:
As permitted under SFAS 123, "Accounting for Stock-Based Compensation," the
Company measures compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and provides pro
forma disclosures of net income and earnings per share as if the fair
value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
A summary of changes in outstanding stock options follows:
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE EXERCISE
OPTIONS EXERCISE PRICE EXERCISABLE PRICE
----------- --------------- -------------- -----------
Outstanding at end of
1994..................... -- $ -- -- $ --
1995 Activity:
Granted................. 68,000 21.00 -- $ --
----------- --------------- -------------- -----------
Outstanding at end of
1995..................... 68,000 21.00 -- --
1996 Activity:
Granted................. 1,904,785 31.50 736,218 --
Exercised............... -- -- -- --
Forfeited............... (3,750) 21.00 -- --
----------- --------------- -------------- -----------
Outstanding at end of
1996..................... 1,969,035 $31.16 736,218 $30.11
=========== =============== ============== ===========
Additional information regarding stock options outstanding at December 31, 1996,
follows:
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
REMAINING REMAINING WEIGHTED-
VESTING CONTRACTUAL AVERAGE
RANGE OF EXERCISE PERIOD LIFE EXERCISE
EXERCISE PRICES OUTSTANDING PRICE (IN YEARS) (IN YEARS) EXERCISABLE PRICE
- ---------------- -------------- ----------- ------------ -------------- -------------- ------------
$21.00.......... 64,250 $21.00 0.71 8.43 -- $ --
30.11.......... 1,562,435 30.11 1.53 9.41 736,218 30.11
37.75.......... 342,350 37.85 2.41 9.41 -- --
-------------- ----------- ------------ -------------- -------------- ------------
$21.00 to 37.75.... 1,969,035 $31.16 1.66 9.38 736,218 $ 30.11
============== =========== ============ ============== ============== ============
Had compensation cost for the Company's 1995 and 1996 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 1995 and 1996 would approximate the pro forma
amounts below (in thousands except per share data):
1995 1996
------------------------- --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ----------- ------------- ------------
Net income (loss) before extraordinary item ......... $4,988 $4,799 $1,131 $(1,639)
============= =========== ============= ============
Net income (loss) available to common shareholders .. $ 76 $ (113) $1,131 $(1,639)
============= =========== ============= ============
Net income (loss) per share before extraordinary
item............................................... $ .15 $ .15 $ .03 $ (.04)
============= =========== ============= ============
Net income (loss) per share.......................... $ -- $ -- $ .03 $ (.04)
============= =========== ============= ============
F-27
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. EQUITY PUT AND CALL OPTIONS:
During December 1996, the Company entered into physically settled Put and Call
Options related to the Company's common stock. These option arrangements were
entered into for the purpose of hedging the dilution of the Company's common
stock upon the exercise of stock options granted. The Company entered into
250,000 call options for common stock and 320,600 put options for common stock,
with a strike price of $37.75 and $27.61 per common share, respectively. Upon
the exercise of Put and Call Options, sales and purchases will be recorded as a
component of stockholders' equity. Subsequent changes in the fair value of the
option contracts are not recognized. To the extent that the Company entered into
Put Options, the additional paid-in capital amounts have been adjusted
accordingly and amounts are reflected as Equity Put Options in the accompanying
balance sheets. All Equity Put and Call Options expire May 31, 1999.
16. REGISTRATION STATEMENTS:
In September 1996, the Company filed and in November 1996 obtained effectiveness
of a registration statement on Form S-3 with the Securities and Exchange
Commission with respect to the sale by certain selling stockholders of 5,564,253
shares of Class A Common Stock. These shares represent 4,181,818 shares of Class
A Common Stock issuable upon conversion of Series B Preferred Stock and
1,382,435 shares of Class A Common Stock issuable upon exercise of options held
by Barry Baker.
In September 1996, the Company filed a registration statement on Form S-3 with
the Securities and Exchange Commission with respect to the sale of up to
5,750,000 shares of Class A Common Stock by the Company, and subsequently
amended the registration statement to increase the number of shares that may be
sold by the Company to 5,937,500 shares and to cover the sale of 1,250,000
shares by certain selling stockholders. On November 1, 1996, the Company
announced that it was withdrawing the offering and that it intended to
reconsider an offering in the future when market conditions are more favorable.
The Company also announced that it was considering purchasing outstanding shares
of its Class A Common Stock pursuant to previous authorization by the Board of
Directors.
17. FINANCIAL INFORMATION BY SEGMENT:
Prior to the River City Acquisition in May 1996, the Company did not own or
operate radio stations. As of December 31, 1996 the Company consisted of two
principal business segments -- television broadcasting and radio broadcasting.
The television segment included 13 television stations for which the Company is
the licensee and 15 stations which are operated under local marketing
agreements. These 28 stations operate in 20 different markets in the continental
United States.
The radio segment included 19 stations for which the Company is the licensee and
two stations operated under local marketing agreements. These 21 stations
operate in seven different markets. Substantially all revenues represent income
from unaffiliated companies.
1996
(IN THOUSANDS)
TELEVISION RADIO CONSOLIDATED
------------ ---------- ---------------
Total revenues......................................... $ 338,467 $ 40,021 $ 378,488
Station operating expenses............................. 142,231 25,534 167,765
Depreciation, program amortization and deferred
compensation.......................................... 56,420 3,827 60,247
Amortization of intangibles and other assets .......... 55,063 3,467 58,530
Amortization of excess syndicated programming ......... 3,043 -- 3,043
------------ ---------- ---------------
Station broadcast operating income..................... $ 81,710 $ 7,193 $ 88,903
============ ========== ===============
Total assets........................................... $1,400,521 $306,776 $1,707,297
============ ========== ===============
Capital expenditures................................... $ 12,335 $ 274 $ 12,609
============ ========== ===============
F-28
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. UNAUDITED PRO FORMA SUMMARY RESULTS OF OPERATIONS:
The unaudited pro forma summary consolidated results of operations for the years
ended December 31, 1995 and 1996, assuming the 1995 and 1996 acquisitions had
been consummated on January 1, 1995, are as follows (in thousands, except per
share data):
(UNAUDITED) (UNAUDITED)
1995 1996
------------ ------------
Revenues, net............................... $430,762 $481,073
============ ============
Net loss before extraordinary item.......... $(34,345) $(10,719)
============ ============
Net loss available to common shareholders .. $(39,257) $(10,719)
============ ============
Net loss per share before extraordinary
item....................................... $ (0.94) $ (0.27)
============ ============
Net loss per share.......................... $ (1.08) $ (0.27)
============ ============
19. SUBSEQUENT EVENT:
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 million. Upon entering into this agreement,
the Company made a cash deposit payment of $5 million. The Company plans to
consummate the transaction following FCC approval.
F-29
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
INDEX TO SCHEDULES
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 generally accepted auditing standards, the
consolidated balance sheets, statements of operations, changes in stockholders'
equity and cash flows of Sinclair Broadcast Group, Inc. and Subsidiaries
included in this Form 10K and have issued our report thereon dated February 7,
1997. Our audit was made for the purpose of forming an opinion on the basic
financial 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 7, 1997
S-2
SCHEDULE II
SINCLAIR BROADCAST GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------- ------------- ------------- ----------- ------------- ------------
1994
Allowance for doubtful
accounts..................... $ 505 $ 445 $ -- $ 95 $ 855
1995
Allowance for doubtful
accounts..................... 855 978 -- 767 1,066
1996
Allowance for doubtful
accounts..................... 1,066 1,563 575((1)) 732 2,472
- ----------
(1) Amount represents allowance for doubtful account balances purchased in
connection with the acquisition of certain television stations during 1996.
S-3