ITEM 1. BUSINESS
THE COMPANY
The Company is an operator of television stations located in middle to small markets, ranging generally from the 50th to the 150th largest DMAs in the United States. Since the Company's formation in March 1997, it has undergone rapid and significant growth. This growth has resulted primarily from a series of carefully selected acquisitions and dispositions of network-affiliated television stations and the implementation of the Company's business strategies. Since January 1998, the Company has grown from five stations to 13 stations, including satellite stations.
History
The Company was organized by its current management and Hicks Muse in 1997 with the goal of becoming a leading owner and operator of network-affiliated television stations, serving select middle-to-small markets (i.e., those DMAs ranked from approximately 50 to 150 by Nielsen). The following chart sets forth certain information regarding the Company's currently owned and operated broadcast stations (collectively, the Stations):
The Company acquired WEYI, WTOV, WROC and KSBW (together, the Jupiter/Smith Stations) from Jupiter/Smith TV Holdings, L.P. (Jupiter/Smith) and Smith Broadcasting Partners, L.P. (SBP) for approximately $163.2 million. SBP is a partnership between Smith Broadcasting Group, Inc. (SBG), Sandy DiPasquale, John Purcell, and David Fitz. The majority owner of SBG is Robert Smith. These four individuals operated the Jupiter/Smith Stations from January 1996 until the sale to the Company on March 1, 1997. All four individuals continue as senior management of the Company.
The Company acquired all of the outstanding stock of WJAC, Incorporated on October 1, 1997 for approximately $36.1 million including working capital of $1.4 million. WJAC, Incorporated owned and operated WJAC, the NBC affiliate for Johnstown, Pennsylvania.
On April 1, 1998, the Company acquired 100% of the outstanding stock of Abilene Radio and Television Company (ARTC) for approximately $8.2 million. ARTC operated television stations KRBC and KACB, NBC affiliates for Abilene and San Angelo, Texas.
In a series of transactions, the Company acquired certain assets from Hearst-Argyle Stations, Inc., (Hearst) through transactions structured as an exchange of assets (the Hearst Transaction). On February 3, 1998, the Company acquired WPTZ, WNNE, and a local marketing agreement (LMA) for WFFF from Sinclair Broadcast Group, Inc. for $72.0 million, with the intention of using these assets in the Hearst Transaction. WPTZ and WNNE are the NBC affiliates and WFFF is the FOX affiliate serving the Burlington, Vermont, and Plattsburgh, New York television market. On February 18, 1998, the Company agreed with Hearst to trade KSBW, the NBC affiliate for Salinas, California, WPTZ, and WNNE for WDTN, the ABC affiliate in Dayton, Ohio, WNAC, the FOX affiliate in Providence, Rhode Island, WNAC's interest in a Joint Marketing Programming Agreement with WPRI, the CBS affiliate in Providence, Rhode Island, and approximately $22.0 million in cash. On April 24, 1998, the Company completed a purchase of the non-license assets (all operating assets other than FCC licenses and other minor equipment) of WPTZ, WNNE, and WFFF for $70.0 million. WFFF was sold by the Company to a related party on April 24, 1998 (see Item 13 "Certain Relationships and Related Transactions"). Funds to complete this acquisition were provided by Hearst. The assets acquired were pledged to Hearst under the related loan agreement and the loan was repaid on July 3, 1998.
Effective June 1, 1998, the Company received via contract rights the benefits of the operation of stations WDTN and WNAC and WNAC's joint operating agreement with WPRI. The Company recorded a book gain of approximately $17.5 million on the asset swap. On July 3, 1998 the Company consummated the Hearst transaction.
On November 1, 1998, the Company acquired substantially all of the assets of KVLY, KFYR, KUMV, KMOT, and KQCD (the Meyer Stations) from Meyer Broadcasting for approximately $65.3 million. The Meyer Stations are all NBC affiliates serving Fargo, Bismarck, Williston, Minot, and Dickinson, North Dakota.
On February 5, 1999, the Company acquired substantially all the assets of WUPW from Raycom Media, Inc. for approximately $74.4 million, including fees and expenses. WUPW, Channel 36, is the FOX-affiliated station serving Toledo, Ohio.
On March 3, 1999, the Company, STC License Company, a subsidiary of the Company, and Nexstar Broadcasting of Rochester, Inc. (Nexstar) entered into an asset purchase agreement (the Rochester Agreement) pursuant to which the Company would sell to Nexstar the television broadcast license and operating assets of WROC, Rochester, New York for approximately $46.0 million subject to adjustment for certain customary proration amounts. On April 1, 1999, the Company completed the non-license sale of WROC assets to Nexstar for $43.0 million and entered into a Time Brokerage Agreement with Nexstar under which Nexstar programmed most of the available time of WROC and retained the revenues from the sale of advertising time through the license closing on December 23, 1999. The Company recognized a gain of $4.5 million from the transaction.
THE STATIONS
The markets in which the Company currently operates offer geographic diversity that reduces the impact on the Company of changes in respective market economies and provide favorable competitive operating environments. The Company believes that the Stations are well positioned to achieve long-term growth in audience share and revenue share because of: (i) the limited competition for viewers from other over-the-air television broadcasters in these markets; (ii) the strength of the Company's management; and (iii) the Stations' favorable and/or improving rankings within their DMAs. Management believes that the limited number of other television broadcast stations in these markets enables the Company to purchase syndicated programming at favorable rates.
The following table summarizes additional information regarding each Station and its respective DMA.
(1) BIA's Investing in Television 1999, 4th Edition (2) As of November 1999, Sunday through Saturday 6 a.m to 2 a.m. Nielsen Household Shares (3) Satellite stations are counted as one with the main station (4) Represents approximately 50% of the broadcast cash flow of WNAC and WPRI less certain adjustments (5) Includes KRBC and KACB
MARKET PROFILES
The following household trends for various stations in the market profiles are found in the Nielsen rating books for the time period 7:00 AM to 1:00 AM Monday through Sunday. Information included in the market overview is provided by BIA's Investing in Television 1999 4th Edition.
WNAC/WPRI (Providence, Rhode-Island - New Bedford, Massachusetts)
Market Overview. Providence, Rhode Island-New Bedford, Massachusetts is the 50th largest DMA in the United States, with a population of approximately 1,502,000 and approximately 565,000 television households. Cable penetration in the Providence-New Bedford market is estimated to be 78%. The Providence-New Bedford market experienced compound annual revenue growth of approximately 5.9% from 1992 through 1998, and BIA has projected this market to grow at a compound annual rate of 4.2% from 1998 through 2002. Average household income was approximately $43,000.
The table below provides an overview of the competitive stations serving the Providence-New Bedford market.
WDTN (Dayton, Ohio)
Market Overview. Dayton, Ohio is the 56th largest DMA in the United States with a population of approximately 1,334,000 and approximately 508,000 television households. Cable penetration in the Dayton market is estimated to be 71%. The Dayton market experienced compound annual revenue growth of approximately 4.6% from 1992 through 1998, and BIA has projected this market to grow at a compound annual rate of 2.0% from 1998 through 2002. Average household income was approximately $43,000.
The table below provides an overview of the competitive stations serving the Dayton market:
WEYI (Flint-Saginaw-Bay City, Michigan)
Market Overview. Flint-Saginaw-Bay City, Michigan is the 64th largest DMA in the United States, with a population of approximately 1,194,000 and approximately 446,000 television households. Cable penetration in the Flint-Saginaw-Bay City market is estimated to be 65%. The Flint-Saginaw-Bay City market experienced compound annual revenue growth of approximately 6.4% from 1992 through 1998, and BIA has projected this market to grow at a compound annual rate of 2.7% from 1998 through 2002. Average household income was approximately $37,000.
The table below provides an overview of the competitive stations serving the Flint-Saginaw-Bay City market:
WUPW (Toledo, Ohio)
Market Overview. Toledo, Ohio is the 67th largest DMA in the United States, with a population of approximately 1,106,000 and approximately 412,000 television households. Cable penetration in the Toledo market is estimated to be 68%. The Toledo market experienced compound annual revenue growth of approximately 5.6% from 1992 through 1998, and BIA has projected this market to grow at a compound annual rate of 4.5% from 1998 through 2002. Average household income was approximately $42,000.
The table below provides an overview of the competitive stations serving the Toledo market.
WJAC (Johnstown-Altoona, Pennsylvania)
Market Overview. Johnstown-Altoona, Pennsylvania is the 95th largest DMA in the United States, with a population of approximately 783,000 and approximately 294,000 television households. Cable penetration in the Johnstown-Altoona market is estimated to be 81%. The Johnstown-Altoona market experienced compound annual revenue growth of approximately 6.5% from 1992 through 1998, and BIA projects this market to grow at a compound annual rate of 5.6% from 1998 through 2002. Average household income was approximately $36,000.
The table below provides an overview of the competitive stations serving the Johnstown-Altoona market.
KVLY (Fargo-Valley City, North Dakota)
Market Overview. Fargo-Valley City, North Dakota is the 119th largest DMA in the United States, with a population of approximately 584,000 and approximately 224,000 television households. Cable penetration in the Fargo-Valley City market is estimated to be 63%. The Fargo-Valley City market experienced compound annual revenue growth of approximately 6.2% from 1992 through 1998, and BIA projects this market to grow at a compound annual rate of 4.2% from 1998 through 2002. Average household income was approximately $36,000.
The table below provides an overview of the competitive stations serving the Fargo-Valley City market.
WTOV (Wheeling, West Virginia-Steubenville, Ohio)
Market Overview. Wheeling, West Virginia-Steubenville, Ohio is the 140th largest DMA in the United States, with a population of approximately 404,000 and approximately 159,000 television households. Cable penetration in the Wheeling, West Virginia-Steubenville, Ohio market is estimated to be 78%. The Wheeling, West Virginia-Steubenville, Ohio market experienced compound annual revenue growth of approximately 6.2% from 1992 through 1998, and BIA projects this market to grow at a compound annual rate of 5.7% from 1998 through 2002. Average household income was approximately $33,000.
The table below provides an overview of the competitive station serving the Wheeling, West Virginia-Steubenville, Ohio market:
(1) In addition, WTOV and the CBS affiliate are secondary ABC affiliates. However, WTOV has the right of first refusal to carry ABC programming events.
KFYR (Minot-Bismarck-Dickinson, North Dakota)
Market Overview. Minot-Bismarck-Dickinson, North Dakota is the 152nd largest DMA in the United States, with a population of approximately 353,000 and approximately 136,000 television households. Cable penetration in the Minot-Bismarck-Dickinson market is estimated to be 63%. The Minot-Bismarck-Dickinson market experienced compound annual revenue growth of approximately 6.3% from 1992 through 1998, and BIA projects this market to grow at a compound annual rate of 4.0% from 1998 through 2002. Average household income was approximately $39,000.
The table below provides an overview of the competitive stations serving the Minot-Bismarck-Dickinson market.
KRBC (Abilene-Sweetwater, Texas)
Market Overview. Abilene-Sweetwater, Texas is the 163rd largest DMA in the United States, with a population of approximately 304,000 and approximately 114,000 television households. Cable penetration in the Abilene-Sweetwater market is estimated to be 72%. The Abilene-Sweetwater market experienced compound annual revenue growth of approximately 6.3% from 1992 through 1998, and BIA projects this market to grow at a compound annual rate of 3.0% from 1998 through 2002. Average household income was approximately $32,000.
The table below provides an overview of the competitive stations serving the Abilene-Sweetwater market:
KACB (San Angelo, Texas)
Market Overview. San Angelo, Texas is the 196th largest DMA in the United States, with a population of approximately 142,000 and approximately 51,000 television households. Cable penetration in the San Angelo market is estimated to be 77%. The San Angelo market experienced compound annual revenue growth of approximately 12.9% from 1992 through 1998, and BIA projects this market to grow at a compound annual rate of 4.7% from 1998 through 2002. Average household income was approximately $37,000.
The table below provides an overview of the competitive stations serving the San Angelo market:
BUSINESS STRATEGY
The Company's business strategy is to acquire and operate television broadcast stations and maximize operating cash flow through both revenue growth and improved cost control. The Company believes that revenue growth and cost control may be achieved simultaneously, principally because many of the costs associated with operating a television station are fixed. Key components of the Company's business strategy include:
Management.
The Company believes that one of its most important assets is its experienced management team. The Stations' general managers are responsible for the day-to-day operations of their respective stations. The Company believes that the autonomy of its station management enables it to attract top quality managers capable of implementing an aggressive marketing strategy and reacting to competition in the local markets. As an incentive, a portion of each station general manager's compensation is based on the performance of the station for which he or she is responsible.
Controlling Costs.
The Company seeks to selectively reduce costs at newly acquired stations without adversely affecting growth. After acquiring a station, management implements a cost control strategy stressing the elimination of unnecessary costs, budgeting, accountability and disciplined credit and collection procedures. The Company's management believes that it can create an operating structure that will accommodate both revenue growth and cost reductions.
Intensifying Sales Efforts.
The Company implements an aggressive approach to sales and marketing designed to increase market revenue share. The Company's management believes that increases in revenue share are not necessarily dependent on increases in audience share.
Building on Local News Franchises.
The Company seeks to increase revenues by developing a highly-rated, well-differentiated local news product designed to build viewer loyalty and target specific demographic audiences that appeal to advertisers.
Managing Program Selection.
Each Station seeks to cost effectively purchase first-run and off-network syndicated programming to target specific demographic audiences. The Stations have been able to purchase syndicated programming at rates that Company's management believes are attractive, in part because of the limited competition for such programming in the Stations' DMAs.
Positioning and Branding Stations.
The Company seeks to increase revenues by developing and maintaining a unique, local "brand image" for each Station within its respective market with which viewers and advertisers can identify. This strategy integrates local news, programming, promotion, and sales efforts for each Station based on its market's demographics, competition, dynamics, and opportunities.
Pursuing Selective Acquisitions.
The Company actively seeks to acquire television stations that management believes can benefit from its business strategy. Targeted stations generally have one or more of the following characteristics: (i) attractive acquisition terms, which may include station-for-station exchanges; (ii) opportunities to implement effective cost controls; (iii) opportunities for increased advertising revenue; (iv) opportunities
for increased audience share through improved newscasts and programming; (v) limited competition from other television broadcasters; and (vi) market locations that possess attractive projected growth in advertising revenues. The Company generally targets network-affiliated stations, which typically have established audiences for their news, sports and entertainment programming, located in DMAs generally ranked from 50 to 150.
NETWORK AFFILIATIONS.
Each of the Stations is affiliated with a major broadcast network pursuant to a long-term affiliation agreement. Each affiliation agreement generally provides the Station with the right to broadcast all programs transmitted by the network with which the Station is affiliated. In return, the network has the right to sell a substantial amount of the advertising time during its broadcasts in exchange, in the case of networks other than FOX, for a specified network compensation fee payable to the Station. These payments are negotiated on a station-by-station basis and are subject to increases or decreases by the network during the term of an affiliation agreement with provisions for advance notice and a right of termination by the Station in the event of a reduction. The agreements generally are long-term in nature, and contain customary renewal provisions, which generally provide for automatic renewal for successive terms, subject to either party's right to terminate the agreement at the end of any term upon proper notice.
During 1999, each of the major networks publicly indicated that it is reviewing the economic and other terms under which it provides programming to network affiliates like the Stations. Proposed changes (which could be implemented during the term of pending affiliation agreements) that have been publicly discussed include: (i) reducing or eliminating the cash payments paid by networks to affiliates, (ii) reducing the period of exclusivity with respect to popular programming, (iii) reducing the amount of advertising time made available for sale by affiliates during network programming and (iv) requiring affiliates to share part of the costs of producing popular or special programming. In response to declining revenues, some networks have suggested that they may search for alternative methods of distribution for their programming, such as satellite and cable channels. Any of such changes could materially adversely affect the Company's asset values and operating margins.
The following table summarizes the network affiliation agreements for the Stations, as well as for WPRI:
(1) The Company is negotiating with FOX on renewal of the WNAC affiliation agreement. The contract remains in effect while negotiations proceed.
ADVERTISING SALES
General.
Television station revenues are primarily derived from the sale of local and national advertising. Television stations compete for advertising revenues primarily with other broadcast television stations, radio stations, cable system operators and programmers, and newspapers serving the same market. All
network-affiliated stations are required to carry spot advertising sold by their networks which reduces the amount of advertising spots available for sale by the Stations. The Stations directly sell all of the remaining advertising to be inserted in network programming and all of the advertising in non-network programming, retaining all of the revenues received from these sales. A national syndicated program distributor typically retains a portion of the available advertising time for programming it supplies in exchange for no fees or reduced fees charged to the stations for such programming.
Advertisers wishing to reach a national audience usually purchase time directly from the networks, or advertise nationwide on an ad hoc basis. National advertisers who wish to reach a particular region or local audience often buy advertising time directly from local stations through national advertising sales representative firms. Local businesses purchase advertising time directly from the stations' local sales staffs.
Advertising rates are based upon a program's popularity among the viewers that an advertiser wishes to target, the number of advertisers competing for the available time, the size and the demographic composition of the market served by the station, the availability of alternative advertising media in the market area, and the effectiveness of the stations' sales force. Advertising rates are also determined by a station's overall ability to attract viewers in its market area, as well as the station's ability to attract viewers among particular demographic groups that an advertiser may be targeting. Advertising revenues are positively affected by strong local economies, national and regional political election campaigns, and certain events such as the Olympic Games or the Super Bowl. Because television broadcast stations rely on advertising revenues, declines in advertising budgets, particularly in recessionary periods, adversely affect the broadcast industry, and as a result may contribute to a decrease in the revenues of broadcast television stations. Conversely, increases in advertising budgets targeting specific demographic groups are based upon superior coverage or the dominant competitive position of the Stations. The Company seeks to manage its advertising spot inventory efficiently to maximize advertising revenues and its return on programming costs.
Local Sales.
Local advertising time is sold by each Station's local sales staff who call upon advertising agencies and local businesses, which typically include car dealerships, retail stores and restaurants. Compared to revenues from national advertising accounts, revenues from local advertising generally are more stable and, due to a lower cost of sales, more profitable. The Company seeks to attract new advertisers to television, and to increase the amount of advertising time sold to existing local advertisers by relying on experienced local sales forces with strong community ties, producing news and other programming with local advertising appeal and sponsoring or co-promoting local events and activities. The Company places a strong emphasis on experience of its local sales staff and maintains an on-going training program for sales personnel. To increase accountability of the Stations' sales forces, management has implemented initiatives whereby sales managers are responsible for the effective management of commercial inventory using input from account executives who are responsible for preparing detailed reports and projections.
National Sales.
National advertising time is sold through national sales representative firms which call upon businesses, which typically include automobile manufacturers and dealer groups, telecommunications companies, fast food franchisers, and national retailers (some of which may advertise locally). Each Station has a manager assigned to work with the national sales representative to increase advertising expenditures with the Stations.
INDUSTRY BACKGROUND
General.
Commercial television broadcasting began in the United States on a regular basis in the 1940s over a portion of the broadcast spectrum commonly known as the "VHF Band" (very-high frequency
broadcast channels numbered 2 through 13). Television channels were later assigned by the FCC under additional broadcast spectrum commonly known as the "UHF Band" (ultra-high frequency broadcast channels numbered 14 through 83; channels 70 through 83 have since been reallocated to non-broadcast services). The license to operate a broadcast station is granted by the FCC, and due to spacing requirements and other considerations, the number of licenses allocated to any one market is limited.
Although UHF and VHF stations compete in the same market, UHF stations historically have suffered a competitive disadvantage, in part because: (i) receivers of many households were originally designed only for VHF reception; (ii) UHF signals were more affected by terrain and other obstructions than VHF signals; and (iii) VHF stations were able to provide higher quality signals to a wider area. This historic disadvantage of UHF stations has gradually declined through: (a) carriage on cable system; (b) improvements in television receivers; (c) improvement in television transmitters; (d) wider use of all channel antennae; (e) increased availability of programming; and (f) the development of new networks such as FOX, UPN and the WB, which typically broadcast through UHF stations.
All television stations throughout the United States are grouped into 211 generally recognized DMAs, which are ranked in size according to various formulae based upon actual or potential audience. Each DMA is defined as an exclusive geographic area consisting of all counties in which the home-market commercial stations receive the greatest percentage of total viewing hours.
Television Networks.
A majority of commercial television stations in the United States are affiliated with ABC, CBS, FOX, or NBC. The affiliation by a station with one of the four major networks has a significant impact on the composition of the station's programming, revenues, expenses, and operations. ABC, CBS, and NBC provide the majority of its affiliates' programming each day without charge in exchange for nearly all of the available advertising time in the programs supplied, and sells this advertising time, and retains the revenues. The affiliate receives compensation from the three networks and retains the revenue from time sold by the affiliate during breaks in and between network programs and in programming the affiliate produces or purchases from non-network sources.
FOX has established an affiliation of independent stations which operates on a basis similar to ABC, CBS and NBC. However, the number of hours per week of programming supplied by FOX to its affiliates is significantly less than the number of hours supplied by ABC, CBS, and NBC, and the network compensation, if any, is normally less. As a result, FOX affiliates retain a significantly higher portion of the available inventory of broadcast time for their own use but must, however, purchase or produce a greater amount of their own programming, resulting in generally higher programming costs.
In contrast to stations affiliated with major networks, an independent station supplies over-the-air programming through the acquisition of broadcast programs through syndication. This syndicated programming is generally acquired by the independent stations for cash and/or barter. Independent stations that acquire a program through syndication are usually given exclusive rights to show the program in the station's market for either a period of years or a number of episodes agreed upon between the independent station and the syndicator of the programming. Types of syndicated programs aired on the independent stations include feature films, popular series previously shown on network television, and series produced for direct distribution to television stations.
During 1994, UPN and WB each established a network of independent stations that began broadcasting in January 1995 and operating on a basis similar to FOX. However, UPN and WB currently supply fewer hours of programming per week to their affiliates than any of the four major networks. As a result, UPN and WB affiliates retain a significantly higher portion of the available inventory of broadcast time for their own use than affiliates of any of the four major networks.
Television Viewing Audience.
Nielsen is a national audience measuring service that periodically publishes data on estimated
audiences for television stations in various DMAs throughout the country. The estimates are expressed in terms of the percentage of the total potential audience in the DMA viewing a station, referred to as the station's "rating," and of the percentage of the audience actually watching the television station, referred to as the station's "share." This rating service provides such data on the basis of total television households and of selected demographic groupings in the media markets being measured. Nielsen uses one of two methods to measure the station's actual viewership. In larger DMAs, ratings are determined by a combination of meters connected directly to selected television sets, and periodic surveys of television viewing, while in smaller DMAs only periodic surveys are completed. During 1999, all of the DMAs in which the Company operated were survey markets except Providence, Rhode Island.
COMPETITION
Competition in the television industry exists on several levels, including competition for audience, advertisers, and programming (including local news). Competition is continually affected by technological change and innovation, fluctuation in the popularity of competing entertainment and communications media (including newspapers, magazine, internet, and direct mail), and governmental restrictions or actions by Congress and federal regulatory bodies. Any of these factors could have a material adverse effect on the Company's operations. Competition in the television broadcasting industry occurs primarily in individual DMAs. Generally, a television broadcast station in one DMA does not compete with television broadcast stations in other DMAs. Certain market competitors who are part of larger organizations have substantially greater financial, technical, and programming resources than the Company.
Audience.
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 Stations' prime time programming is supplied by the networks, and is therefore dependent upon the performance of such network programs in attracting viewers. Non-network time periods are programmed by the Station primarily with syndicated programs, and locally produced news.
The development of methods of video transmission other than over-the-air broadcasting has significantly altered competition for audience share in the television industry. These other transmission methods can increase competition faced by a broadcast station by bringing into its market distant broadcasting signals not otherwise available to the station's audience, and by serving as a distribution system for programming that originates on the cable and satellite systems.
Other sources of competition for audience include home entertainment systems (including video cassette recorder and playback systems, videodiscs and television game devices), multichannel multipoint distribution systems, and internet services. Stations face competition from high-powered direct broadcast satellite services that transmit programming directly to homes equipped with special receiving antennas or to cable television systems for transmission to their subscribers.
Further advances in technology may increase competition for household audiences and advertisers. Video compression techniques, now under development for use with current cable channels and direct broadcast satellites, are expected to reduce the bandwidth required for television signal transmission. These compression techniques, as well as other technological developments, are applicable to all video delivery systems, including over-the-air broadcasting, and have the potential to provide vastly expanded programming to highly targeted audiences. Reduction in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized "niche" programming. This ability to reach very defined audiences may alter the competitive dynamics for advertising expenditures. The Company is unable to predict the effect that technological changes will have on the broadcast television industry or the future results of the Company's operations.
Advertising.
Stations compete for advertising revenues, primarily with other broadcast television stations and, to a lesser extent, with radio stations, cable system operators and programmers, and newspapers serving the same market. Advertising revenues and advertising rates are based upon factors that 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, aggressive and knowledgeable sales forces and developments of projects, features and programs that tie advertiser messages to programming.
Historically, cable operators generally have not sought to compete with over-the-air broadcast stations for a share of the local news audience in the size of the markets that the Company targets. To the extent they elect to do so, increased competition from cable operators for local news audiences could have a material adverse effect on the Company's advertising revenues. Cable operators have, however, started competing with the Stations by selling advertising spots on certain cable channels. Cable penetration in each of the Company's markets generally exceeds 60%.
As cable-originated programming has emerged as a competitor for viewers of over-the-air broadcast television programming, the advertising share of cable networks has increased significantly, although no single cable programming network regularly attains audience levels amounting to more than a small fraction of any over-the-air programming. Notwithstanding such increases in cable viewership and advertising, over-the-air broadcasting remains the dominant distribution system for mass market television advertising.
Programming.
The Company competes for programming, which involves negotiating with national program distributors or syndicators that sell first-run and rerun packages of programming. The Stations compete for exclusive access to those programs against in-market broadcast station competitors for syndicated products. Cable systems generally do not compete with local stations for programming, although various national cable networks have become more active in acquiring programs that would have otherwise been offered to local television stations. In addition, a television station may acquire programming through barter arrangements. Under barter arrangements, which are becoming increasingly popular with both network affiliates and independents, a national program distributor can receive advertising time in exchange for the programming it supplies, with the station paying no fee or a reduced fee for such programming.
FEDERAL REGULATION OF TELEVISION BROADCASTING
General.
The ownership, operation and sale of television stations are subject to the jurisdiction of the Federal Communications Commission (FCC) which acts under authority granted by the Communications Act of 1934, as amended (Communications Act). Among other things, the FCC assigns frequency bands for broadcasting; determines the particular frequencies, locations and operating power of stations; issues, renews, revokes and modifies station licenses; regulates equipment used by stations; adopts and implements regulations and policies that directly or indirectly affect the ownership and operation of stations; and has the power to impose penalties for violations of its rules or the Communications Act.
The following is a brief summary of certain provisions of the Communications Act, the Telecommunications Act of 1996 (the Telecommunications Act) and specific FCC regulations and policies. Further information concerning the nature and extent of federal regulation of broadcast stations is found in the Communications Act, the Telecommunications Act, FCC rules and the public notices and rulings of the FCC.
License Grant and Renewal.
Television stations operate pursuant to broadcasting licenses that usually are granted by the FCC for a maximum permitted term of eight years.
Television licenses are subject to renewal upon application to the FCC. Under the Communications Act, the FCC is required to grant a renewal application if it finds that (1) the station has served the public interest, convenience and necessity; (2) there have been no serious violations by the licensee of the Communications Act or the rules and regulations of the FCC; and (3) 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 are presently operating under licenses with terms expiring as follows: April 1, 2007 (WNAC), August 1, 2007 (WJAC), October 1, 2005 (WEYI, WDTN, WTOV, WUPW), April 1, 2006 (KFYR, KMOT, KQCD, KUMV, KVLY) and August 1, 2006 (KRBC, KACB). WPRI's license expires April 1, 2007. There can be no assurance that any of the licenses of such stations will be renewed.
Ownership Matters
FCC Issues.
On August 5, 1999, the FCC adopted changes in several of its broadcast ownership rules (collectively, the FCC Ownership Rules). These rule changes became effective on November 16, 1999; however, several petitions have been filed with the FCC seeking reconsideration of the new rules, so the rules may change. While the following discussion does not describe all of the ownership rules or rule changes, it attempts to summarize those rules that appear to be most relevant to the Company.
The FCC relaxed its "television duopoly" rule, which barred any entity from having an attributable interest in more than one television station with overlapping service areas. Under the new rules, one entity may have attributable interests in two television stations in the same Nielsen Designated Market Area (DMA) provided that: (1) one of the two stations is not among the top four in audience share and (2) at least eight independently owned and operated commercial and noncommercial television stations will remain in the DMA if the proposed transaction is consummated. The new rules also permit common ownership of television stations in the same DMA where one of the stations to be commonly owned has failed, is failing or is unbuilt or where extraordinary public interest factors are present. In order to transfer ownership in two commonly owned television stations in the same DMA, it will be necessary to once again demonstrate compliance with the new rules. Lastly, the new rules authorize the common ownership of television stations with overlapping signal contours as long as the stations to be commonly owned are located in different DMAs.
Similarly, the FCC relaxed its "one-to-a-market" rule, which restricts the common ownership of television and radio stations in the same market. One entity now may own up to two television stations and six radio stations or one television station and seven radio stations in the same market provided that (1) 20 independent media voices (including certain newspapers and a single cable system) will remain in the relevant market following consummation of the proposed transaction, and (2) the proposed combination is consistent with the television duopoly and local radio ownership rules. If fewer than 20 but more than 9 independent voices will remain in a market following a proposed transaction, and the proposed combination is otherwise consistent with the Commission's rules, a single entity may have attributable interests in up to two television stations and four radio stations. If these various "independent voices" tests are not met, a party generally may have an attributable interest in no more than one television station and one radio station in a market.
The FCC made other changes to its rules that determine what constitutes "cognizable interest" in applying the FCC Ownership Rules (the Attribution Rules). Under the new Attribution Rules, a party will be deemed to have a cognizable interest in a television or radio station, cable system or daily newspaper that triggers the FCC's cross-ownership restrictions if (1) it is a non-passive investor and it owns 5% or more of the voting stock in the media outlet; (2) it is a passive investor (i.e., bank trust department,
insurance company or mutual fund) and it owns 20% or more of the voting stock; or (3) its interests (which may be in the form of debt or equity (even if non-voting), or both) exceeds 33% of the total asset value of the media outlet and it either (i) supplies at least 15% of a station's weekly broadcast hours or (ii) has an attributable interest in another media outlet in the same market.
The FCC also declared that local marketing agreements (LMAs) now will be attributable interests for purposes of the FCC Ownership Rules. The FCC will grandfather LMAs that were in effect prior to November 5, 1996, until it has completed the review of its attribution regulations in 2004. Parties may seek the permanent grandfathering of such an LMA, on a non-transferable basis, by demonstrating that the LMA is in the public interest and that it otherwise complies with FCC Rules.
Finally, the FCC eliminated its "cross interest" policy, which had prohibited common ownership of a cognizable interest in one media outlet and a "meaningful" non-cognizable interest in another media outlet serving essentially the same market.
It is difficult to assess how these changes in the FCC ownership restrictions will affect the Company's broadcast business.
The recent changes to the FCC Ownership Rules may affect the Company's relationship with Smith Acquisition Company (SAC). The Company owns a substantial non-voting equity stake in SAC, which, together with a wholly owned subsidiary, owns WNAC-TV, Providence, Rhode Island, and WTOV-TV, Steubenville, Ohio. Under the new FCC Ownership Rules, the Company's formerly non-attributable interest in SAC has become attributable. Accordingly, the Company, and parties to the Company, must consider whether its other broadcast interests, when viewed in combination with those of SAC, are consistent with all relevant FCC Ownership Rules. The Company is in the process of conducting that review. To the extent the recent changes require the Company to modify its broadcast interests or ownership structure, the Company expects to act as necessary to remain in compliance with all relevant FCC Ownership Rules.
With the changes in the FCC Ownership Rules, the Company no longer needs to maintain its waiver to own both KRBC-TV, Abilene, Texas, and KACB-TV, San Angelo, Texas, as the common ownership of these stations is now consistent with the Commission's Rules.
On October 2, 1999, AMFM Inc. (AMFM) entered into an Agreement and Plan of Merger with Clear Channel Communications, Inc. (Clear Channel) and CCU Merger Sub, Inc. (Merger Sub), pursuant to which AMFM will be merged with and into Merger Sub and will become a wholly-owned subsidiary of Clear Channel (the AMFM Merger). Thomas O. Hicks, who is the Company's ultimate controlling shareholder, has an attributable interest in AMFM and currently is the Chairman and Chief Executive Officer of AMFM. AMFM and Clear Channel have announced that Mr. Hicks will serve as Vice Chairman of the combined entity. The Company is in the process of analyzing the impact of this AMFM Merger on the Company's operations and regulatory obligations.
Alien Ownership.
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 beneficially or nominally owned 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 beneficially or nominally owned or voted by Aliens. The FCC has issued interpretations of existing law under which these restrictions in modified form apply to other forms of business organizations, including partnerships. The Company and its subsidiaries are domestic corporations, and the Company's ultimate controlling stockholder is a United States citizen. The Certificate of Incorporation of each of the Company and Sunrise contain limitations on Alien ownership and control that are substantially similar to those contained in the Communications Act. Pursuant to the Certificate of Incorporation, the Company,
has the right to purchase any Alien-owned shares of the Company's capital stock at their fair market value to the extent necessary, in the judgment of the Board of Directors, to comply with the Alien ownership restrictions.
Local Television/Cable Cross-Ownership Rule.
While the Telecommunications Act eliminated a previous statutory prohibition against the common ownership of a television broadcast station and a cable system that serves the same local market, the Telecommunications Act left a similar FCC rule in place. The legislative history of the Act indicates that its repeal of the statutory ban should not prejudge the outcome of any FCC review of the rule. The FCC has pending a rulemaking proceeding in which it has solicited comment on retention of its proscription on television-cable cross-ownership.
OTHER MATTERS
Must-Carry Retransmission Consent.
Pursuant to the Cable Act of 1992, television broadcasters are required to make triennial elections to exercise either "must-carry" or "retransmission consent" rights in connection with their carriage by cable systems in each broadcaster's local market. By electing must-carry rights, a broadcaster demands carriage on a specified channel on cable systems within its DMA, as defined by the Nielson 1997-98 DMA Market and Demographic Rank Report. 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 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.
The most recent election date for must-carry or retransmission consent was October 1, 1999, such election to be effective for the three-year period from January 1, 2000 through December 31, 2002.
The FCC currently is conducting a rulemaking proceeding to determine carriage requirements for digital broadcast television stations on cable systems during and following the transition from analog to digital broadcasting, including carriage requirements with respect to ancillary and supplementary services that may be provided by broadcast stations over their digital spectrum.
SHVIA.
On November 29, 1999, the President signed the Satellite Home Improvement Act (SHVIA). Among other things, SHVIA provides for a statutory copyright license to enable satellite carriers to retransmit local television broadcast stations into the stations' respective local markets. After May 27, 2000, satellite carriers will be prohibited from delivering a local signal into its local markets - so called "local-into-local" service - without the consent or must-carry election of such station, but stations will be obligated to engage in good faith retransmission consent negotiations with the carriers. SHVIA does not require satellite carriers to carry local stations, but provides that carriers that choose to do so must comply with certain mandatory signal carriage requirements by a date certain, as defined by the Act or as-yet to be drafted FCC regulations. Further, the Act authorizes satellite carriers to continue to provide certain network signals to unserved households, as defined in SHVIA and FCC rules, except that carriers may not provide more than two same-network stations to a household in a single day. Also, households that do not receive a signal of Grade A intensity from any of a particular network's affiliates may continue to receive distant station signals for that network until December 31, 2004, under certain conditions. The FCC has initiated several rule making proceedings, as required by SHVIA, to implement certain aspects of the act, such as standards for good faith retransmission consent negotiations, must-carry procedures, exclusivity protection for local stations against certain distant signals, and enforcement.
Digital Television.
The FCC has taken a number of steps to implement digital television service (DTV) (including high-definition television) in the United States. On February 17, 1998, the FCC adopted a final table of digital channel allotments and rules for the implementation of DTV. The table of digital allotments provides each existing television station licensee or permittee with a second broadcast channel to be used during the transition to DTV, conditioned upon the surrender of one of the channels at the end of the DTV transition period. Implementation of DTV will improve the technical quality of television. Furthermore, the implementing rules permit broadcasters to use their assigned digital spectrum flexibly to provide either standard or high definition video signals and additional services, including, for example, data transfer, subscription video, interactive materials, and audio signals subject to the requirement that they continue to provide at least one free, over the air television service. Conversion to DTV may reduce the geographic reach of the Company's stations or result in increased interference, with, in either case, a corresponding loss of population coverage. DTV implementation will impose additional costs on the Company, primarily due to the capital costs associated with construction of DTV facilities and increased operating costs both during and after the transition period. The FCC has adopted rules that require broadcasters to pay a fee of 5% of gross revenues received from ancillary or supplementary uses of the digital spectrum for which they receive subscription fees or compensation other than advertising revenues derived from free over-the-air broadcasting services. Pursuant to the FCC's rules, the Company's Stations filed DTV construction permit applications on or before the November 1, 1999 deadline. The Company plans to complete construction of DTV facilities by the May 1, 2002 deadline. The FCC has set a target date of 2006 for expiration of the transition period, subject to biennial reviews to evaluate the progress of DTV, including the rate of consumer acceptance. Management of the Company believes that its conversion to DTV will commence in 2000 for all of the Company's markets. Future capital expenditures by the Company will be compatible with the new technology requirements to the extent they are not constrained by financial debt covenants included in the Company's debt agreements. Presently, no Company Station is broadcasting in DTV format.
PROGRAMMING AND OPERATION
General.
The Communications Act requires broadcasters to serve the "public interest." The FCC has relaxed or eliminated many of the more formalized procedures it had developed in the past to promote the broadcast of certain types of programming responsive to the needs of a station's community of license. FCC licensees continue to be required, however, to present programming that is responsive to 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 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, pursuant to FCC rules which became effective on February 16, 1999, broadcast licensees will be required to disclose on a biennial basis information regarding the race, ethnic background and gender of persons with attributable positions or ownership interests in the licensee. 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) license 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 1990, the amount of commercial matter broadcast during programming designated for children 12 years of age and under is limited to 12.0 minutes per hour on weekdays and 10.5 minutes per hour on weekends. In addition, television stations are required to broadcast a minimum of three hours per week of "core" children's educational programming, which, among other things, must have a significant purpose of servicing the educational and informational needs
of children 16 years of age and under. A television station found not to have complied with the "core" programming requirements or the children's commercial limitations could face sanctions, including monetary fines and the possible non-renewal of its broadcasting license. The FCC has indicated its intent to enforce its children's television rules strictly.
Television Violence.
Pursuant to a directive in the Telecommunications Act, the broadcast and cable television industries have adopted, and the FCC has approved, a voluntary content ratings system which, when used in conjunction with V-Chip technology, would permit the blocking of programs with a common rating. The FCC has directed that all television receiver models with picture screens 13 inches or greater be equipped with V-Chip technology under a phased implementation beginning on July 1, 1999. The Company cannot predict how the implementation of the ratings system and V-Chip technology will affect the Company's business.
Closed Captioning.
Under rules which became effective January 1, 1998, programming distributors, including television stations, are generally responsible for compliance with an on-screen captioning requirement with respect to the vast majority of video programming. The rules divide programming into two groups: pre-rule programming (which is defined to be programming that was first published or exhibited on or before January 1, 1998 by any distribution method) and new programming (programming that was first published or exhibited after that date). Pre-rule programming is subject to no specific requirements until the first calendar quarter of 2003. In that quarter, 30% of all pre-rule programming actually aired is required to be captioned. In the first quarter of 2008, the percentage of pre-rule programming that must be captioned will rise to 75%. In the first calendar quarter of 2000, new programming that is not otherwise exempt from captioning requirements became subject to a series of increasing quarterly benchmarks, until January 1, 2006, when 100% of all new non-exempt programming is to be captioned.
EEO.
On January 20, 2000, the Commission approved new equal employment opportunity and outreach requirements that will apply to all broadcast licensees (and cable operators). Although the Commission has not yet released the text of these rules, the key elements are: (1) licensees will be required to implement a minority outreach program; (2) licensees with five or more full-time employees must place a report regarding their outreach efforts in their public inspection file annually, and, if they have more than 10 full-time employees, they must submit the last four years of these reports to the Commission at the halfway point and endpoint of their license terms, which will be subject to Commission review; (3) licensees with five or more full-time employees also must file with the Commission a "Statement of Compliance" with regard to their outreach efforts every two years; and (4) licensees with five or more full-time employees also must file annual employment reports, of the sort filed prior to 1998, which the Commission will use only to monitor minority employment.
Proposed Changes.
The United States 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 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, 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 radio and television direct 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.
The Telecommunications Act eliminated the overall ban on the offering of video services by telephone companies and eliminated the prohibition on the ownership of cable television companies by telephone companies in their service areas (or vice versa) in certain circumstances. Telephone companies providing such video services will be regulated according to the transmission technology they use. The Telecommunications Act also permits telephone companies to hold an ownership interest in the programming carried over such systems. Although the Company cannot predict the effect of the removal of these barriers to telephone company participation in the video services industry, it may have the effect of increasing competition in the television broadcasting industry in which the Company operates.
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 opportunity employment and other matters affecting the Company's business and operations.
EMPLOYEES
As of December 31, 1999, the Company had approximately 623 full-time and 81 part-time employees. WEYI has a contract with United Auto Workers that expires on September 30, 2002 with respect to 42 employees. WTOV has a contract with AFTRA that expires January 29, 2002 and a contract with International Brotherhood of Electrical Workers (IBEW) that expires on November 30, 2000 with respect to 27 and 18 employees, respectively. WJAC has a contract with International Alliance of Theatrical Stage Employees that expires on September 30, 2002 with respect to 50 employees. WDTN has a contract with the IBEW that expires July 1, 2003 with respect to 52 employees. KFYR has a contract with IBEW that expires on September 9, 2003 with respect to 10 employees. No significant labor problems have been experienced by the Stations. The Company considers its overall labor relations to be good. However, there can be no assurance that the Company's collective bargaining agreements will be renewed in the future or that the Company will not experience a prolonged labor dispute, which could have a material adverse effect on the Company's business, financial condition, or results of operations.
ENVIRONMENTAL REGULATION
Prior to the Company's ownership or operation of its facilities, substances or wastes 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.
PENDING ACQUISITION
On March 16, 1999, the Company and Sinclair Communications, Inc. (Sinclair) entered into a purchase agreement (the Sinclair Agreement). Pursuant to the Sinclair Agreement, the Company agreed to
purchase from Sinclair: WICS, Channel 20, Springfield, Illinois; WICD, Channel 15, Champaign, Illinois; and KGAN, Channel 2, Cedar Rapids, Iowa for a total purchase price of $87.0 million, including working capital, fees and expenses. WICS and WICD are NBC affiliates and KGAN is a CBS affiliate. Closing of this purchase is subject to customary conditions, including review by the Department of Justice and the Federal Communications Commission (FCC). In April 1999, the Antitrust Division of the United States Department of Justice (DOJ) issued various requests for additional information under the Hart-Scott-Rodino Antitrust Improvement Act (HSR Act) in connection with the acquisition. The Company and Sinclair are in discussions with the DOJ regarding this transaction, and the waiting period under the HSR Act has been extended pending completion of these discussions. While the resolution of these discussions remains uncertain, it appears likely that, if the acquisition is consummated as contemplated under the Sinclair Agreement, the Company would be required by the DOJ to sell, or enter into a local marketing agreement with respect to, WICS and WICD substantially concurrently with the closing of the acquisition of those stations, if it occurs at all. Under the terms of the Sinclair Agreement, either the Company or Sinclair (to the extent they are not in breach) may terminate the Sinclair Agreement if the closing has not occurred on or prior to March 16, 2000. The Company is presently exploring a variety of alternatives, including possibly a sale of WICS and WICD, but cannot be sure of the terms on which this transaction will be completed, if at all.
The Company has assigned the right to acquire the broadcast licenses and other license assets of the Sinclair Stations to SDF Television License Corp. (SDF), an entity separate from the Company, but owned by members of the Company's senior management team. On April 2, 1999, SDF filed applications seeking FCC consent to the assignment of the licenses of WICS, WICD and KGAN. The application has been accepted for filing, and no petitions to deny were filed by the May 13, 1999 deadline, although informal objections advocating denial of the applications may be filed up until the date that the FCC grants the applications. The application is still pending before the FCC, and accordingly, the Company cannot be sure when the application will be granted, if at all.
ITEM 2.
ITEM 2. PROPERTIES
Each Station's real properties generally include main offices, studios and transmitter/antenna sites. The transmitter/antenna sites generally are located to provide maximum signal strength and market coverage. The Company generally considers its facilities and equipment to be suitable for its current operations, and generally in good condition. The Company does not anticipate any difficulties leasing or purchasing additional space. The Company continues to evaluate potential upgrades in its facilities and equipment.
The principal executive offices of the Company are located at 720 2nd Avenue South, St. Petersburg, Florida 33701. The telephone number of the Company at that address is (727) 821-7900. The following table generally describes the Company's principal properties in each of the markets of operation:
(1) Main office/studio and tower/antenna site are at the same location. (2) WNAC owns significant additional assets that are co-located at WPRI studio site in Providence, Rhode Island. (3) The North Dakota Stations are interconnected with a significant number of microwave towers.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Lawsuits and claims are filed against the Company from time to time in the ordinary course of business. Management believes that the outcome of any such pending matters will not materially affect the financial position or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's common stock, par value $0.01 per share (the Common Stock). All of the Company's Common Stock is held by Sunrise Television Corp. (Sunrise). The Company has never paid a cash dividend with respect to its Common Stock. The
Company's Senior Credit Agreement generally prohibits the Company from paying dividends on its Common Stock.
On February 24, 1997, the Company issued 1,000 shares of its Common Stock to Sunrise in a private transaction for a cash purchase price of $50.0 million in reliance on the exemption, set forth in Section 4(2) of the Securities Act of 1933, as amended (the Securities Act), from the registration requirement set forth in Section 5 of the Securities Act.
On February 28, 1997, the Company sold 300,000 shares of its 14% Redeemable Preferred Stock Series A in a private placement in reliance on Section 4(2) of the Securities Act for a cash purchase price of $28.95 million, with an aggregate liquidation preference of $30.0 million, or $100 per share, in connection with the acquisition of the Jupiter/Smith Stations. These shares are entitled to quarterly dividends and accrue at a rate per annum of 14%. Prior to February 28, 2002, dividends may be paid in either additional whole shares of Redeemable Preferred Stock Series A or cash, at the Company's option, and only in cash following that date.
On March 25, 1997, the Company sold $100.0 million aggregate principal amount of its 11% Senior Subordinated Notes due 2007 (the Notes) in reliance on Rule 144A of the Securities Act to Chase Securities, Inc., NationsBanc Capital Markets, Inc., and Schroder Wertheim & Co. as the initial purchasers. The Company paid discounts to the initial purchasers of 3% of the aggregate principal amount of the Notes sold.
On February 5, 1999, the Company entered into a $90.0 million Redeemable Preferred Stock Series B bridge financing agreement (Preferred Agreement) with three purchasers, two of which are participants in the Senior Credit Agreement and sold $37.5 million of Redeemable Preferred Stock Series B to fund the WUPW purchase in a private transaction for cash in reliance on the exemption set forth in Section 4(2) of the Securities Act from the registration requirement set forth in Section 5 of the Securities Act. On August 5, 1999, the Company repaid all amounts outstanding under the Preferred Agreement, and the availability for selling additional preferred stock under the Preferred Agreement was cancelled.
On December 30, 1999, the Company issued and sold 25,000 shares of its 14% Redeemable Preferred Stock Series B to Sunrise in a private transaction for an aggregate cash purchase price of $25.0 million in reliance on the exemption set forth in Section 4(2) of the Securities Act from the registration requirement set forth in Section 5 of the Securities Act.
ITEM 6.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth the selected historical information of the Company as of the dates and for the periods indicated. Information for the Company for the two years ended December 31, 1999 and 1998 and the ten months ended December 31, 1997 was derived from the financial statements of the Company, which have been audited by Arthur Andersen, LLP and are included in Item 8 (excluding the consolidated balance sheet as of December 31, 1997, which was previously filed). Predecessor historical information for the two months ended February 28, 1997 and the year ended December 31, 1996 were derived from the audited financial statements of the Jupiter/Smith Stations which have been audited by Arthur Andersen, LLP and included in Item 8. Predecessor historical financial information for the year ended December 31, 1995, has been derived from the audited financials of the Jupiter/Smith Stations, which were audited by Arthur Andersen, LLP. Statement of Operations Data below station operating income, as well as Balance Sheet Data, for the Jupiter/Smith Stations for the year ended December 31, 1995 have not been presented because such information is not meaningful for the following reasons: (i) during such period the Stations were owned and/or operated by persons other than the Company and/or management; (ii) they were not owned or operated as a single unit for any such periods; and (iii) they were operated as part of larger units and therefore, allocations of corporate expenses, interest, and long term debt cannot be made to the Stations.
NOTES TO SELECTED HISTORICAL FINANCIAL DATA (Dollars in thousands)
(1) Financial statements for periods presented are at the various predecessor cost bases.
(2) Financial information for the year ended December 31, 1996 and the two months ended February 28, 1997 refers to the period that the Jupiter/Smith Stations were owned by Jupiter and operated by SBP, an affiliate of Robert N. Smith.
(3) Includes revenues resulting from the Joint Marketing Agreement between the Company and Clear Channel Communications (CCC) pursuant to which CCC operates both WNAC, which is owned by the Company and WPRI, which is owned by CCC. The Company and CCC share equally the cash flow from these stations subject to certain adjustments.
(4) Includes amortization of program rights.
(5) Represents book gain on the swap of television stations WPTZ, WNNE, and KSBW with Hearst-Argyle Stations, Inc. for television stations WDTN and WNAC and the interest of WNAC in the Joint Marketing Agreement with CCC.
(6) Consists primarily of approximately $1.5 million of non-recurring revenues for consulting services provided during 1996 and $825 expenses incurred in cancelled debt offering in 1999.
(7) Reflects dividend requirement and accretion on the Series A and Series B redeemable preferred stock.
(8) Broadcast cash flow consists of operating income (loss) plus depreciation of property and equipment, amortization of intangible assets and other assets, amortization of program rights, and corporate expense minus payments on program rights.
(9) Broadcast cash flow margin is broadcast cash flow divided by net revenues expressed as a percentage.
(10) EBITDA is defined as broadcast cash flow less corporate expenses.
(11) For purposes of this calculation, "earnings" consist of net loss applicable to common stock before income tax (benefit) and fixed charges. "Fixed charges" consist of interest expense, amortization of deferred financing costs, the component of rental expense believed by management to be representative of the interest factor thereon and preferred stock dividend requirements and related accretion. If the ratio is less than 1.0x, the deficiency is shown.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The operating revenues of the Stations are derived primarily from advertising revenues and, to a much lesser extent, compensation paid by the networks to the Stations for broadcasting network programming. The Stations' primary operating expenses are employee compensation and related benefits, news gathering costs, film and syndicated programming expenditures and promotional costs. A significant proportion of the operating expenses of the Stations are fixed.
The Stations receive revenues from advertising sold for placement within and adjoining its local programming and network programming. Advertising is sold in time increments and is priced primarily on the basis of a program's popularity within the demographic group an advertiser desires to reach, as measured principally by audience surveys conducted in February, May and November of each year. The ratings of local television stations affiliated with a national television network can be affected by ratings of network programming. Advertising rates are affected by the number of advertisers competing for the available time, the size and demographic makeup of the markets served by the television station and the availability of alternative advertising media in the market areas. Advertising rates are highest during the most desirable viewing hours, generally during local news programming, access (the hour before prime time), early fringe (3:00 p.m. to 5:00 p.m.) and prime time.
Most advertising contracts are short-term and generally run for only a few weeks. A majority of the revenues of the Stations are generated from local advertising, which is sold primarily by a Station's sales staff, and the remainder of the advertising revenues represents national advertising, which is sold by independent national advertising sales representatives. The Stations generally pay commissions to advertising agencies on local and national advertising, and on national advertising the Stations pay commissions to the national sales representatives operating under 9 agreements that provide for exclusive representation within the particular Station market. In 1999, local advertising comprised 62.0% of the Company's gross spot revenues (excluding political advertising), and national advertising comprised 38.0% of the Company's gross spot revenues (excluding political advertising). The gross spot broadcast revenues of the Stations are generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to and including the holiday season. Advertising spending by political candidates is typically heaviest during the fourth quarter. In 1998, the Stations' advertising revenues benefited from local and congressional elections and the Winter Olympic Games on CBS.
"Broadcast Cash Flow" is defined as operating income (loss) plus depreciation of property and equipment, amortization of intangible assets and other assets, amortization of program rights, and corporate expenses less payments for program rights. EBITDA is defined as Broadcast Cash Flow less corporate expenses. The Company has included Broadcast Cash Flow and EBITDA data because such data are commonly used as a measure of performance for broadcast companies and are used by investors to measure a company's ability to service debt. Broadcast Cash Flow and EBITDA are not, and should not be used as an indicator or alternative to operating income, net loss or cash flow as reflected in the accompanying financial statements, is not intended to represent funds available for debt service, dividends, reinvestment or other discretionary uses, 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.
This Annual Report on Form 10-K contains forward-looking statements. All statements other than statements of historical facts included herein may constitute forward-looking statements. The Company has based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that our assumptions and expectations will prove to have been correct. These forward-looking statements are subject to various risks, uncertainties and assumptions including increased competition, increased costs, changes in network compensation agreements, impact of future acquisitions and dispositions, loss or retirement of key members of management, inability to realize our acquisition strategy, increases in costs of borrowings, unavailability of additional debt and equity capital, adverse state or federal legislation or changes in Federal Communications Commissions policies, and changes in general economic conditions. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
HISTORICAL PERFORMANCE (ALL DOLLARS PRESENTED IN TABLES ARE SHOWN IN THOUSANDS)
BROADCAST CASH FLOW
The following table sets forth certain data for the three years ended December 31, 1999.
NET REVENUES
Set forth below are the principal types of television revenues that the Company has generated for the periods indicated and the percentage contribution of each to total revenues.
(1) Represents approximately 50% of the broadcast cash flow of WNAC and WPRI less certain adjustments.
RESULTS OF OPERATIONS
Set forth below is a summary of the operations of the Company for the years indicated and their percentages of net revenues.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
In the discussion comparing the years ended December 31, 1999 and 1998, WTOV, WEYI, and WJAC will be referred to as the Core Stations. The acquisition of television stations KVLY, KFYR, KUMV, KQCD, KMOT (the Meyer Stations), and KRBC, KACB and WUPW will be referred to as the Station Acquisitions. The KRBC and KACB acquisition closed on April 1, 1998, the Meyer Stations acquisition closed on November 1, 1998, and the WUPW acquisition closed on February 1, 1999. The Company continues to own all of the stations acquired in the Station Acquisitions. The acquisition of WPTZ and WNNE from Sinclair, and the transfer to Hearst-Argyle Television, Inc. (Hearst) of KSBW, WPTZ and WNNE in exchange for WDTN, WNAC and WNAC's interest in a Joint Marketing Agreement with WPRI, will be referred to as the Swap Transaction. The sale of the non-license assets of WROC, and the entering into of a time brokerage agreement, will be referred to as the WROC Sale.
The following table details how the above transactions affected operating income.
Core Stations
A decrease of $1.1 million in net sales was the result of less political sales during 1999 compared to 1998. The remaining decrease in sales in 1999 was due to a decrease in General Motors advertising and market specific softness. A decrease of $0.2 million in selling, general and administrative expense is a result of decreased sales costs. An increase of $0.2 million in depreciation is attributable to the increased capital spending and the $0.3 million reduction in amortization is attributable to the write off of loan costs during 1998. Corporate expenses increased by $1.2 million due to higher salary costs, additional staff and related benefits, new office space and increased professional service costs.
Interest Expense
Interest expense increased by $4.3 million to $20.6 million for the year ended December 31, 1999 from $16.3 million for the year ended December 31, 1998. An increase of $5.3 million is due to higher outstanding balances on the Senior Loan Agreement and higher interest rates. A decrease of approximately $0.9 million was due to no 1999 comparable amounts outstanding under the Hearst-Argyle loan.
Gain on Sale of WROC
Gain on the sale of WROC was $4.5 million for the year ended December 31, 1999 with no amount for the year ended December 31, 1998.
Expenses Incurred in Cancelled Debt Offering
During the second quarter of 1999, the Company and Sunrise contemplated selling either debt securities of Sunrise or preferred stock of the Company in a private placement to fund the acquisition under the Sinclair Agreement and repay the outstanding amounts under the Preferred Agreement. Sunrise and the Company subsequently determined that they would attempt to fund the Sinclair Agreement through an additional borrowing under the Senior Credit Agreement and by an additional capital contribution by Sunrise. The year ended December 31, 1999 includes an $0.8 million charge for the cancelled offering.
Income Tax Benefit
Income tax benefit increased by $9.3 million to $7.5 million for the year ended December 31, 1999 from an expense of $1.8 million for the year ended December 31, 1998. This increase is mainly attributable to deferred tax assets being generated by the Company's net operating loss carryforwards.
Redeemable Preferred Stock Dividends and Accretion
Redeemable preferred stock dividends and accretion increased $2.3 million to $7.4 million for the year ended December 31, 1999 from $5.1 million for the year ended December 31, 1998. An increase of $1.6 million is a result of the initial issuance of the Series B preferred stock during 1999 and the remainder of the increase resulted from higher outstanding balances on the Series A preferred stock.
Net Loss Applicable to Common Stock
Net loss applicable to common stock increased by $13.6 million to $20.5 million for the year ended December 31, 1999 from a loss of $6.9 million for the period ended December 31, 1998 due to the reasons outlined above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
In the discussion comparing the year ended December 31, 1998 to 1997, WTOV, WEYI and
WROC will be referred to as the Core Stations. The effect of the acquisition of television stations WJAC, KRBC, KACB, and the Meyer Stations will be referred to as the Station Acquisitions. The WJAC acquisition closed on October 1, 1997, KRBC and KACB acquisition closed on April 1, 1998, and the Meyer acquisition closed on November 1, 1998. The net change resulting from the transactions with Sinclair and Hearst (acquisition of WDTN, WNAC and its joint operating agreement with WPRI, and the disposition of KSBW, WPTZ and WNNE) will be referred to as the Swap Transaction.
The Jupiter/Smith Stations operations are presented on a pre- acquisition cost basis and are not comparable with the Company's operations for periods subsequent to March 1, 1997. The 1997 financial information is a combination of the Company financial statements of the ten months ended December 31, 1997, and the Jupiter/Smith Stations financial statements for the two months ended February 28, 1997.
The following table details how the above transactions affected operating income.
Core Stations.
An increase of $2.3 million in net revenue is a result of political advertising revenue. An increase of $0.5 million in station operating expense is attributable to increased costs at WEYI and WROC for expanded spending on news. An increase of $0.4 million in selling, general and administrative expenses was a result of increased sales costs and promotion. An increase of $0.2 million in depreciation expense is attributable to increased capital expenditures and an increase of $0.2 million in amortization is attributable to the revaluation of assets at the time of purchase by the Company on March 1, 1997. Corporate expenses increased by $0.8 million related to higher salary costs, additional staff and related benefits.
Operating Income.
Operating income increased by $1.1 million or 154.5% to $1.7 million for the year ended December 31, 1998 from $0.6 million for the year ended December 31, 1997 due to the reasons outlined above.
Interest Expense.
Interest expense increased by $5.8 million to $16.3 million for the year ended December 31, 1998 from $10.5 million for the year ended December 31, 1997. An increase of $1.8 million is due to higher average outstanding balances of the Senior Subordinated Notes resulting from the issuance in March of 1997. An increase of $2.0 million is due to higher outstanding balances on the Senior Credit Agreement resulting from Station Acquisitions, an increase of $0.9 million is due to interest payable to Hearst on the purchase of WPTZ, WNNE, and WFFF and operations of the stations through closing on May 31, 1998, and an increase of $1.1 million resulting from the Swap Transactions.
Income Tax.
Income tax increased by $2.1 million to $1.8 million for the year ended December 31, 1998 from a benefit of $0.3 million for the year ended December 31, 1997. This increase is attributable to the acquisition of WJAC, KRBC, and KACB, and the related amortization of the step up in basis of their assets for purchase accounting offset by the gain on asset swap.
Gain on Asset Swap.
Gain on asset swap was $17.5 million for the year ended December 31, 1998 with no gain for the year ended December 31, 1997. $7.9 million of the gain is attributable to the non-license assets of KSBW, $1.6 million is attributable to the non-license assets of WPTZ and WNNE, and $8.0 million is attributable to the FCC licenses of KSBW, WPTZ, and WNNE.
Extraordinary Item.
Extraordinary charge for early retirement of debt was $2.9 million for the year ended December 31, 1998 with no extraordinary item for the period ended December 31, 1997. The charge consists of $2.4 million of write offs related to the unamortized costs incurred on the issuance of the former Bank Credit Agreement and $2.2 million of fees incurred on the issuance of the Senior Credit Agreement, net of $1.7 million of taxes.
Redeemable Preferred Stock Dividends and Accretion.
Redeemable preferred stock dividends and accretion increased by $1.3 million to $5.1 million for the year ended December 31, 1998 from $3.8 million for the period ended December 31, 1997. The increase is attributable to twelve months in 1998 versus ten months in 1997 and higher average outstanding balances during 1998.
Net Loss Applicable to Common Stock.
Net loss applicable to common stock decreased by $4.7 million to $6.9 million for the year ended December 31, 1998 from a loss of $11.6 million for the period ended December 31, 1997 due to the reasons outlined above.
Liquidity and Capital Resources
As of December 31, 1999, the Company had $3.9 million in cash balances and net working capital of approximately $4.1 million. The Company's primary sources of liquidity are cash provided by operations, availability under the Senior Credit Agreement and the equity contributions by Sunrise.
Net cash flows provided by operating activities decreased by $7.8 million to $6.1 million for the year ended December 31, 1999 from $13.9 million for the year ended December 31, 1998. The Company made interest and film payments of $20.6 million and $6.4 million, respectively, during the year ended December 31, 1999 compared to $16.3 million and $5.7 million, respectively for the year ended December 31, 1998.
Net cash flows used in investing activities decreased by $103.3 million to $34.0 million for the year ended December 31, 1999 from $137.3 million for the year ended December 31, 1998. In 1999, the Company purchased WUPW for approximately $74.5 million, spent $5.8 million on capital expenditures and generated $46.0 million for the sale of WROC.
Net cash flows provided by financing activities decreased by $100.6 million to $26.5 million for the year ended December 31, 1999 from $127.1 million for the year ended December 31, 1998. In 1999, the Company received a capital contribution of $15.0 million from Sunrise, sold $61.4 million of redeemable preferred stock Series B, redeemed $37.5 million of redeemable preferred stock Series B, paid $1.2
million of dividends on redeemable preferred stock Series B and decreased borrowings under the Senior Credit Agreement by a net of $11.3 million.
The Company's liquidity needs consist primarily of debt service requirements for the Senior Credit Agreement and the 11% Senior Subordinated Notes (Senior Subordinated Notes), working capital needs, the funding of capital expenditures and potential acquisitions. The Company may incur additional indebtedness in the future, subject to certain limitations contained in the Senior Credit Agreement and the Senior Subordinated Notes and intends to do so in order to fund future acquisitions as part of its business strategy. The Company has historically funded acquisitions through a combination of borrowings and the receipt of capital contributions from Sunrise.
Principal and interest payments under the Senior Credit Agreement and the Senior Subordinated Notes will represent significant liquidity requirements for the Company in the future. Loans under the Senior Credit Agreement bear interest at floating rates based upon the interest rate option selected by the Company. The Senior Credit Agreement and the Senior Subordinated Notes limit the Company's ability to pay cash dividends prior to 2002. The Senior Credit Agreement and the Senior Subordinated Notes impose certain limitations on the ability of the Company and its subsidiaries to, among other things, pay dividends or make restricted payments, consummate certain asset sales, enter into transactions with affiliates, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to Sunrise, merge or consolidate with any person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company.
In 1997, the Company completed a private placement of $100.0 million principal amount of its Senior Subordinated Notes, which subsequently were exchanged for registered Senior Subordinated Notes having substantially identical terms. Interest on the Senior Subordinated Notes is payable on March 15 and September 15 of each year.
On July 2, 1998, the Company entered into a Senior Credit Agreement with various lenders which provides a $100.0 million Term Loan Facility and $65.0 million Revolving Credit Facility. The term loan facility is payable in quarterly installments commencing on September 30, 1999 and ending June 3, 2006. The revolving loan facility requires scheduled annual reductions of the commitment amount commencing on September 30, 2001. At December 31, 1999, the Company had outstanding $98.5 million on the term loan facility and $1.25 million under the revolving loan facility.
The Senior Credit Agreement provides for first priority security interest in all of the tangible and intangible assets of the Company and its direct and indirect subsidiaries. Any loans under the Senior Credit Agreement are guaranteed by Sunrise and the Company's current direct and indirect and any future subsidiaries. The Senior Credit Agreement and the Senior Subordinated Notes contain certain financial operating maintenance covenants including a maximum consolidation leverage ratio (currently 7.0:1), a minimum consolidated fixed charge coverage ratio (currently 1.05:1), and a consolidated interest coverage ratio (currently 1.3:1). The Company is limited in the amount of annual payments that may be made for capital expenditures and corporate overheard.
The operating covenants of the Senior Credit Agreement and the Senior Subordinated Notes include limitations on the ability of the Company to (i) incur additional indebtedness, other than certain permitted indebtedness; (ii) permit additional liens or encumbrances, other than certain permitted liens; (iii) make any investments in other persons, other than certain permitted investments; (iv) become obligated with respect to contingent obligations, other than certain permitted contingent obligations; and (v) make restricted payments (including dividends on its common stock). The operating covenants include restrictions on certain specified fundamental changes, such as mergers and asset sales, transactions with shareholders and affiliates and transactions outside the ordinary course of business as currently conducted, amendments or waivers of certain specified agreements and the issuance of guarantees or other credit enhancements. At December 31, 1999, the Company was in compliance with the financing and operating covenants of both the Senior Credit Agreement and the Senior Subordinated Notes.
On March 1, 1997, the Company issued 300,000 shares of Redeemable Preferred Stock Series A
with an aggregate liquidation preference of $30.0 million, or $100 per share, which are entitled to quarterly dividends that will accrue at a rate per annum of 14%. Prior to February 28, 2002, dividends may be paid in either additional whole shares of Redeemable Preferred Stock Series A or cash, at the Company's option, and only in cash following that date. The Senior Subordinated Notes and the Senior Credit Agreement prohibit the payment of cash dividends until May 31, 2002.
On February 5, 1999, the Company entered into an agreement (the Preferred Agreement) to sell up to $90.0 million of Redeemable Preferred Stock Series B to finance acquisitions by the Company from time to time. An aggregate of $37.5 million of Redeemable Preferred Stock was sold on February 5, 1999 to finance the acquisition of WUPW ($35.0 million) and to fund an escrow account ($2.5 million) to pay dividends on such Redeemable Preferred Stock Series B. On August 5, 1999, the Company repaid all amounts outstanding under the Preferred Agreement by borrowing $21.0 million under the Senior Credit Agreement, receiving a $15.0 million capital contribution from Sunrise and using $1.5 million in available cash. The borrowing availability under the Preferred Agreement was cancelled.
On December 30, 1999, the Company issued and sold to Sunrise 25,000 shares of Redeemable Preferred Stock Series B with an aggregate liquidation preference of $25.0 million. Each share is entitled to quarterly dividends that will accrue at a 14% rate per annum. The Company's Senior Credit Agreement and Senior Subordinated Notes prohibit the payment of cash dividends until May 31, 2002.
The Certificates of Designation for the Redeemable Preferred Stock Series A and B contain covenants customary for comparable securities including covenants that restrict the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends and make certain other restricted payments, to merge or consolidate with any other person or to sell, assign, transfer, lease, convey, or otherwise dispose of all or substantially all of the assets of the Company. Such covenants are substantially identical to those covenants contained in the Senior Subordinated Notes.
Based on the current level of operations, anticipated future internally generated growth, additional borrowings under the Senior Credit Agreement and additional equity contributions from Sunrise, the Company anticipates that it will have sufficient funds to meet its anticipated requirements for working capital, capital expenditures, interest payments, and have funds available for additional acquisitions. The Company's future operating performance and ability to service or refinance the Senior Subordinate Notes and to extend or refinance the Senior Credit Agreement and Redeemable Preferred Stock Series A and B will be subject to future economic conditions and to financial, business, and other factors, many of which are beyond the control of the Company. The ability of the Company to implement its business strategy, and to consummate future acquisitions will require additional debt and significant equity capital, and no assurance can be given as to whether, and on what terms, such additional debt and/or equity capital will be available, including additional equity contributions from Sunrise. The degree to which the Company is leveraged could have a significant effect on its results of operations.
Credit and Interest Rate Risks
The Company's financial instruments that constitute exposed credit risks consist primarily of cash equivalents and trade receivables. The Company's cash equivalents consist solely of high quality securities. Concentrations of credit risks with respect to receivables are somewhat limited due to the large number of customers and to their dispersion across the geographic areas served by the Stations. No single customer amounts to 10% of the Company's total outstanding receivables.
The Company was exposed to minimal market risk related to interest rates as of December 31, 1999. The Company's Senior Subordinate Debt is fixed at 11% and is due and payable on March 15, 2007. On September 11, 1998, the Company entered into a three year interest rate swap agreement to reduce the impact of changing interest rates on $70.0 million of its variable rate borrowings under the Senior Credit Agreement. The base interest rate was fixed at 5.15% plus the applicable borrowing margin (currently 2.125%) for an overall borrowing rate of 7.275% at December 31, 1999. On February 9, 1999, the Company entered into a two-year interest rate swap agreement, which was extendable by either party for an additional two years, to reduce the impact of changing interest rates on $40.0 million of its floating
rate borrowings from the Senior Credit Agreement. The interest rate was fixed at 5.06% plus applicable borrowing margin. Due to the issuance by the Company on December 30, 1999 of $25.0 million of Redeemable Preferred Stock Series B to Sunrise and the subsequent reduction in outstanding balances under the Senior Credit Agreement, the Company terminated the swap agreement, but simultaneously entered into a new swap agreement that fixed the interest rate on $25.0 million of its floating rate borrowings for 18 months at 5%, plus the applicable borrowing margin (currently 2.125%), for an overall borrowing rate of 7.125% at December 31, 1999. The variable interest rates on these interest rate swap contracts are based upon the three month London Interbank Offered Rate (LIBOR) and the measurement and settlement is performed quarterly. The quarterly settlements of this agreement will be recorded as an adjustment to interest expense and are not anticipated to have a material effect on the operations of the Company. The counter party to the new interest rate swap agreement is one of the lenders under the Senior Credit Agreement.
Capital Expenditures
Capital expenditures were $5.8 million and $5.6 million for the years ended December 31, 1999 and 1998, respectively. Maintenance capital expenditures for the Company are estimated to be approximately $6.0 million per year beginning in 2000. In addition, we anticipate that the adoption of digital television will require a minimum capital expenditure of approximately $1.5 to $2.5 million per station to develop facilities necessary for transmitting a digital signal with the initial expenditures beginning in 2000.
Depreciation, Amortization and Interest
Because the Company has incurred substantial indebtedness in the acquisition of stations, for which it will have significant debt service requirements, and because the Company will have significant non-cash charges relating to the depreciation and amortization expense of the property, equipment, and intangibles that were acquired in the multiple station acquisitions, the Company expects that it will report net losses for the foreseeable future.
Inflation
The Company believes that its business is affected by inflation to an extent no greater than other businesses are generally affected.
Current Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Management has not determined what effect this statement will have on the Company's consolidated financial statements.
Network Affiliation Agreements
In July 1999, the FOX Network entered into an agreement with WNAC and WUPW which required these affiliates to buy prime time spots from the FOX network. The Company's agreements with Fox Network commenced on July 15, 1999 and will terminate on June 30, 2002. Finalization of WNAC's network agreement is pending. As a result of these agreements, the Company does not expect its operating income with respect to such stations to decrease by a significant amount.
In July 1999, the ABC Network entered into an agreement with WDTN-TV which required that WDTN contribute approximately $0.3 million to the network in return for additional prime time spots. The agreement contains certain additional items related to children clearances, NFL inventory, the Soap
Channel cable revenue sharing, entertainment, sports and news exclusivity. The agreement has a term of three years beginning August 1, 1999. As a result of this agreement, the Company does not expect its operating income with respect to WDTN to decrease by a significant amount.
FCC Issues
On August 5, 1999, the FCC adopted changes in several of its broadcast ownership rules (collectively, the FCC Ownership Rules). These rule changes became effective on November 16, 1999; however, several petitions have been filed with the FCC seeking reconsideration of the new rules, so the rules may change. While the following discussion does not describe all of the ownership rules or rule changes, it attempts to summarize those rules that appear to be most relevant to the Company.
The FCC relaxed its "television duopoly" rule, which barred any entity from having an attributable interest in more than one television station with overlapping service areas. Under the new rules, one entity may have attributable interests in two television stations in the same Nielsen Designated Market Area (DMA) provided that: (1) one of the two stations is not among the top four in audience share and (2) at least eight independently owned and operated commercial and noncommercial television stations will remain in the DMA if the proposed transaction is consummated. The new rules also permit common ownership of television stations in the same DMA where one of the stations to be commonly owned has failed, is failing or is unbuilt or where extraordinary public interest factors are present. In order to transfer ownership in two commonly owned television stations in the same DMA, it will be necessary to once again demonstrate compliance with the new rules. Lastly, the new rules authorize the common ownership of television stations with overlapping signal contours as long as the stations to be commonly owned are located in different DMAs.
Similarly, the FCC relaxed its "one-to-a-market" rule, which restricts the common ownership of television and radio stations in the same market. One entity now may own up to two television stations and six radio stations or one television station and seven radio stations in the same market provided that (1) 20 independent media voices (including certain newspapers and a single cable system) will remain in the relevant market following consummation of the proposed transaction, and (2) the proposed combination is consistent with the television duopoly and local radio ownership rules. If fewer than 20 but more than 9 independent voices will remain in a market following a proposed transaction, and the proposed combination is otherwise consistent with the Commission's rules, a single entity may have attributable interests in up to two television stations and four radio stations. If these various "independent voices" tests are not met, a party generally may have an attributable interest in no more than one television station and one radio station in a market.
The FCC made other changes to its rules that determine what constitutes "cognizable interest" in applying the FCC Ownership Rules (the Attribution Rules). Under the new Attribution Rules, a party will be deemed to have a cognizable interest in a television or radio station, cable system or daily newspaper that triggers the FCC's cross-ownership restrictions if (1) it is a non-passive investor and it owns 5% or more of the voting stock in the media outlet; (2) it is a passive investor (i.e., bank trust department, insurance company or mutual fund) and it owns 20% or more of the voting stock; or (3) its interests (which may be in the form of debt or equity (even if non-voting), or both) exceeds 33% of the total asset value of the media outlet and it either (i) supplies at least 15% of a station's weekly broadcast hours or (ii) has an attributable interest in another media outlet in the same market.
The FCC also declared that local marketing agreements (LMAs) now will be attributable interests for purposes of the FCC Ownership Rules. The FCC will grandfather LMAs that were in effect prior to November 5, 1996, until it has completed the review of its attribution regulations in 2004. Parties may seek the permanent grandfathering of such an LMA, on a non-transferable basis, by demonstrating that the LMA is in the public interest and that it otherwise complies with FCC Rules.
Finally, the FCC eliminated its "cross interest" policy, which had prohibited common ownership of a cognizable interest in one media outlet and a "meaningful" non-cognizable interest in another media outlet serving essentially the same market.
It is difficult to assess how these changes in the FCC ownership restrictions will affect the Company's broadcast business.
The recent changes to the FCC Ownership Rules may effect the Company's relationship with Smith Acquisition Company (SAC). The Company owns a substantial non-voting equity stake in SAC, which, together with a wholly owned subsidiary, owns WNAC-TV, Providence, Rhode Island, and WTOV-TV, Steubenville, Ohio. Under the new FCC Ownership Rules, the Company's formerly non-attributable interest in SAC has become attributable. Accordingly, the Company, and parties to the Company, must consider whether its other broadcast interests, when viewed in combination with those of SAC, are consistent with all relevant FCC Ownership Rules. The Company is in the process of conducting that review. To the extent the recent changes require the Company to modify its broadcast interests or ownership structure, the Company expects to act as necessary to remain in compliance with all relevant FCC Ownership Rules.
With the changes in the FCC Ownership Rules, the Company no longer needs to maintain its waiver to own both KRBC-TV, Abilene, Texas, and KACB-TV, San Angelo, Texas, as the common ownership of these stations is now consistent with the Commission's Rules.
On October 2, 1999, AMFM Inc. (AMFM) entered into an Agreement and Plan of Merger with Clear Channel Communications, Inc. (Clear Channel) and CCU Merger Sub, Inc. (Merger Sub), pursuant to which AMFM will be merged with and into Merger Sub and will become a wholly-owned subsidiary of Clear Channel (the AMFM Merger). Thomas O. Hicks, who is the Company's ultimate controlling shareholder, has an attributable interest in AMFM and currently is the Chairman and Chief Executive Officer of AMFM. AMFM and Clear Channel have announced that Mr. Hicks will serve as Vice Chairman of the combined entity. The Company is in the process of analyzing the impact of this AMFM Merger on the Company's operations and regulatory obligations.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures that may create an inability for the Stations to broadcast their daily programming and generate revenues.
Since its inception, the Company has been replacing and enhancing its computer systems acquired in station acquisitions to gain significant operational efficiencies and, through these same efforts, year 2000 compliant equipment and applications have been installed.
In October of 1998, Company management initiated a company-wide program to prepare the Company's operations for the year 2000. The Company's program consisted of two phases. The first phase was an assessment of the Company's systems with respect to year 2000 compliance and the formulation of an action plan. During the assessment phase, the Company reviewed individual applications, as well as the computer hardware and satellite delivery systems. The assessment included information technology ("IT") and non-information technology systems. A comprehensive review and inventory was completed in the first quarter of 1999. This phase involved an assessment of the readiness of third party vendors and suppliers. The Company issued year 2000 readiness questionnaires to vendors. However, responses to these inquiries were limited or qualified. The assessment of the Company's IT and non-IT systems, and an action plan for remediation was substantially completed by June 30, 1999. The second phase of the Company's program was the implementation and testing of the remediations required based upon the conclusions reached from the assessments completed during the first phase.
It is difficult for the Company to estimate all costs incurred to date related specifically to remediating year 2000 issues, since the Company has been replacing and enhancing its computer systems in the ordinary course of business. Total expenditures at December 31, 1999 amount to less
than $2.0 million for the replacement and enhancement of these systems. Estimated future costs of remediation, if any, are not considered material to the Company's financial position and results of operations.
To date, the Company has not experienced any significant computer or system problems during the first months of the year 2000 and has not recorded any reserve for future liability related to year 2000 readiness.
The preceding Year 2000 disclosure is designated a "Year 2000 Readiness Disclosure" under the Year 2000 Information and Readiness Disclosure Act.
PRO FORMA BASIS
The pro forma financial information presents the results of operations of the Stations owned by the Company at December 31, 1999. The following pro forma financial information is not indicative of the actual results that would have been achieved had each station been owned on January 1, 1998, nor is it indicative of future results of operations.
Pro Forma Net Revenues.
Set forth below are the principal types of pro forma television revenues that the Company has generated for the periods indicated and the percentage contribution of each to total revenues.
Pro Forma Results of Operations
Set forth below is a summary of the pro forma results of operations of the Company for the periods indicated and their percentages of net revenue.
Pro Forma Broadcast Cash Flow and EBITDA:
The following table sets forth a computation of pro forma Broadcast Cash Flow and EBITDA.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
On September 11, 1998, the Company entered into a three year interest rate swap agreement to reduce the impact of changing interest rates on $70.0 million of its variable rate borrowings under the Senior Credit Agreement. The base interest rate was fixed at 5.15% plus the applicable borrowing margin (currently 2.125%) for an overall borrowing rate of 7.275% at December 31, 1999.
On February 9, 1999, the Company entered into a two-year interest rate swap agreement, which was extendable by either party for an additional two years, to reduce the impact of changing interest rates on $40.0 million of its floating rate borrowings from the Senior Credit Agreement. The interest rate was fixed at 5.06% plus applicable borrowing margin. Due to the issuance by the Company on December 30, 1999 of $25.0 million of Redeemable Preferred Stock Series B to Sunrise and the subsequent reduction in outstanding balances under the Senior Credit agreement, the Company was forced to terminate the swap agreement, but simultaneously entered into a new swap agreement that fixed the interest rate on $25.0 million of its floating rate borrowings for 18 months at 5% plus the applicable borrowing margin (currently 2.125%) for an overall borrowing rate of 7.125% at December 31, 1999.
The variable interest rates on both contracts are based upon the three month LIBOR and the measurement and settlement is performed quarterly. The quarterly settlements of this agreement will be recorded as an adjustment to interest expense and are not anticipated to have a material effect on the consolidated financial statements of the Company. The counter party to this agreement is one of the lenders under the Senior Credit Agreement.
PART III
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Certified Public Accountants
To the Stockholder of STC Broadcasting, Inc.:
We have audited the accompanying consolidated balance sheets of STC Broadcasting, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholder's equity and cash flows for the years ended December 31, 1999 and 1998, and the ten months ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of STC Broadcasting, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998 and the ten months ended December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tampa, Florida February 18, 2000
STC BROADCASTING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
See accompanying notes to consolidated financial statements.
STC BROADCASTING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
STC BROADCASTING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (Dollars in thousands)
See accompanying notes to consolidated financial statements.
STC BROADCASTING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
See accompanying notes to consolidated financial statements.
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1. ORGANIZATION AND NATURE OF OPERATIONS:
The accompanying financial statements present the consolidated financial statements of STC Broadcasting, Inc. and subsidiaries (the Company). STC Broadcasting, Inc. was incorporated on November 1, 1996, in the state of Delaware, commenced operations on March 1, 1997, and is a wholly owned subsidiary of Sunrise Television Corp. (Sunrise). All of the common stock of Sunrise is owned by Sunrise Television Partners, L.P., of which the managing general partner is Thomas O. Hicks, an affiliate of Hicks, Muse, Tate and Furst, Incorporated (Hicks Muse). The Company operates the following commercial television stations (the Stations) at December 31, 1999:
Various subsidiaries hold the assets of the Stations. One subsidiary, Smith Acquisition Company (SAC) has a one percent equity interest controlled by Smith Broadcasting Group, Inc., (SBG). SBG is controlled by Robert N. Smith, the Chief Executive Officer and a Director of Sunrise and the Company. SBG's interest in SAC, which includes the assets of WTOV and WNAC, represents an insignificant portion of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying consolidated financial statements include the consolidated accounts of the Company. All material intercompany items and transactions have been eliminated.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 financial statements to conform to the current year's presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Concentration of Risk and Accounts Receivable
The Company serves the markets shown in Note 1 and accordingly, the revenue potential of the Company is dependent on the economy in these markets. The Company monitors the collectibility of its accounts receivable through continuing credit evaluations. Credit risk is limited due to the large number of customers comprising the Company's customer base and their dispersion across different geographic areas. Total provision for losses on doubtful accounts amounted to approximately $403, $351 and $34 for the years ended December 31, 1999 and 1998, and the ten months ended December 31, 1997, respectively.
Program Rights
The Company has agreements with distributors for the rights to television programming over contract periods which generally run from one to four years. Each contract is recorded as an asset and liability when the license agreement is signed or committed to by the Company. Program rights and the corresponding obligation are classified as current or long-term based on the estimated usage and payment terms.
The capitalized cost of program rights for one-time only programs is amortized on a straight-line basis over the period of the program rights agreements. The capitalized cost of program rights for multiple showing syndicated program material is amortized on an accelerated basis over the period of the program rights agreements. Program rights are reflected in the 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. Payments of program rights liabilities are typically paid on a scheduled basis and are not affected by adjustments for amortization or estimated net realizable value.
Program Barter and Trade Transactions
The Company purchases certain programming, which includes advertising time of the syndicator during the airing of the programs. The estimated fair value of advertising revenue received in program barter transactions is recognized as revenue and a corresponding program cost when the airtime is used by the advertiser. The Company broadcasts certain customers' advertising in exchange for equipment, merchandise, or services. The estimated fair value of the equipment, merchandise or services received is recorded as deferred trade costs, the corresponding obligation to broadcast advertising is recorded as deferred trade revenues, resulting in a net current asset or net current liability. The deferred trade costs are expensed or capitalized as they are used, consumed or received. Deferred trade revenues are recognized as the related advertising is aired.
The following table summarizes program barter revenue and trade revenue.
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Property and Equipment
Property and equipment of the Stations acquired were recorded at the estimate of fair value based upon independent appraisals, and property and equipment acquired subsequent thereto is recorded at cost. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets, as follows:
Expenditures for maintenance and repairs are charged to operations as incurred, whereas expenditures for renewals and betterments are capitalized.
The major classes of property and equipment are as follows:
Intangible Assets
Intangible assets consist principally of values assigned to the Federal Communications Commission (FCC) licenses and network affiliation agreements of the Stations. Intangible assets are being amortized on the straight-line basis over 15 years.
Intangible assets consist of the following:
Other Assets
Other assets consist of values assigned to deferred financing and acquisition costs and the non-current portion of program rights. Deferred financing costs are amortized over the applicable loan period (seven or ten years) on a straight-line basis, and deferred acquisition and organization costs are amortized over a five year period on a straight-line basis.
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other assets consist of the following:
Revenue Recognition
The Company's primary source of revenue is the sale of television time to advertisers. Revenue is recorded when the advertisements are broadcast and are net of agency and national representative commissions.
Joint Operating Agreement
The Company has a Joint Marketing and Programming Agreement with Clear Channel Communications (CCC) under which CCC programs certain airtime, including news programming for WNAC and manages the sale of commercial air time on WNAC and WPRI, the CBS station in Providence, for an initial period of ten years commencing July 1, 1996. The Company and CCC each receive 50% of the broadcast cash flow generated by the two stations subject to certain adjustments, as defined. This amount is recorded by the Company in income from joint operating agreement in the accompanying consolidated statements of operations.
Income Taxes
Income taxes are provided using the liability method in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Long-Lived Assets
Long-lived assets and identifiable intangibles are reviewed periodically for impairment if events or changes in circumstances indicate that the carrying amount should be addressed. The Company has determined that there has been no impairment in the carrying value of long-lived assets of the Stations, as of December 31, 1999 and 1998.
Fair Value of Financial Instruments
The book value of all financial instruments approximates their fair value as of December 31, 1999 and 1998.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Basic and Diluted Net Loss per Common Share
Net loss per common share is computed as net loss applicable to common stockholder divided by
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the weighted average number of shares of common stock outstanding.
Current Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS 133, as amended by SFAS No. 137, is effective for all fiscal years beginning after June 15, 2000. Management has not determined what effect this statement will have on the Company's consolidated financial statements.
3. ACQUISITIONS AND DISPOSALS:
1999 Transactions
On February 5, 1999, the Company acquired substantially all of the assets related to WUPW from Raycom Media, Inc. for approximately $74,487. WUPW, Channel 36, is the UHF FOX-affiliated television station serving the Toledo, Ohio market. The accompanying consolidated financial statements reflect the acquisition under the purchase method of accounting and include the results of operations from February 5, 1999. The acquired assets and assumed liabilities were recorded at fair value as of the date of acquisition. The approximate purchase price was allocated as follows:
The acquisition was funded with $40,000 of borrowing under the Senior Credit Agreement (see Note 6) and the sale of $35,000 Redeemable Preferred Stock Series B (see Note 7).
On March 3, 1999, the Company, STC License Company, a subsidiary of the Company, and Nexstar Broadcasting of Rochester, Inc. (Nexstar) entered into an asset purchase agreement (the Rochester Agreement) to sell to Nexstar the television broadcast license and operating assets of WROC, Rochester New York for approximately $46,000 subject to adjustment for certain customary proration amounts. On April 1, 1999, the Company completed the non-license sale of WROC assets to Nexstar for $43,000 and entered into a Time Brokerage Agreement with Nexstar under which Nexstar programmed most of the available time of WROC and retained the revenues from the sale of advertising time through the license closing on December 23, 1999. The Company recognized a gain of $4,500 from the sale.
The results of operations for the years ended December 31, 1999 and 1998, include operations of each station acquired from the respective date of acquisition and exclude operations after stations have been disposed. The following table summarizes the unaudited condensed consolidated pro forma results of operations for the years ended December 31, 1999 and 1998 assuming the WUPW acquisition and the WROC sale had occurred on January 1, 1998.
The pro forma information above is presented in response to applicable accounting rules relating to business acquisitions and is not necessarily indicative of the actual results that would have been achieved had each of the Stations been acquired at the beginning of 1998, nor is it indicative of the future results of operations.
1998 Transactions
On April 1, 1998, the Company acquired 100% of the outstanding stock of Abilene Radio and Television Company (ARTC) for approximately $8,172. ARTC operated television stations KRBC and KACB, NBC affiliates for Abilene and San Angelo, Texas. The accompanying consolidated financial statements reflect the acquisition under the purchase method of accounting and include the results of operations from April 1, 1998. The acquired assets and assumed liabilities were recorded at fair value as of the date of acquisition. The approximate purchase price was allocated as follows:
The acquisition was funded by borrowings under the Credit Agreement (see Note 6).
In a series of transactions, the Company acquired certain assets from Hearst-Argyle Stations, Inc., (Hearst) through transactions structured as an exchange of assets (the Hearst Transaction). On February 3, 1998, the Company agreed to acquire WPTZ, WNNE, and a local marketing agreement (LMA) for WFFF from Sinclair Broadcast Group, Inc. for $72,000, with the intention of using these assets in the Hearst Transaction. WPTZ and WNNE are the NBC affiliates and WFFF is the FOX affiliate serving the Burlington, Vermont and Plattsburgh, New York television market. On February 18, 1998, the Company agreed with Hearst to trade KSBW, the NBC affiliate in Salinas, California, WPTZ and WNNE for WDTN, the ABC affiliate in Dayton, Ohio, WNAC, the FOX affiliate in Providence, Rhode Island, WNAC's interest in a Joint Marketing Programming Agreement with WPRI, the CBS affiliate in Providence, Rhode Island, and approximately $22,000 in cash. On April 24, 1998, the Company completed a purchase of non-license assets (all operating assets other than FCC licenses and other minor equipment) of WPTZ, WNNE and WFFF for $70,000. WFFF was sold by the Company to a related party on April 24, 1998 (see Note 8). Under the purchase method of accounting, the accompanying financial statements reflect the results of operations of WPTZ and WNNE for the period April 24, 1998 to May 31, 1998. Funds to complete the acquisition of WPTZ, WNNE, and WFFF were provided by Hearst. The assets acquired were pledged to Hearst under the related loan agreement which was repaid on July 3, 1998, the date the transaction closed.
On June 1, 1998, the Company contractually received the benefits of the operation of stations WDTN, and WNAC and WNAC's joint operating agreement with WPRI. The accompanying consolidated financial statements reflect the asset swap using the purchase method of accounting and include the
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
results of operations from June 1, 1998. The Company recorded a book gain of approximately $17,457 on the asset swap.
The fair value of the WDTN and WNAC assets were allocated as follows:
The asset swap was funded by borrowings of $72,500 under the Senior Credit Agreement, $10,400 of additional contributed capital from Sunrise and available cash.
On November 1, 1998, the Company acquired substantially all of the assets of KVLY, KFYR, KUMV, KMOT, and KQCD (the Meyer Stations) from Meyer Broadcasting for approximately $65,259. The accompanying consolidated financial statements reflect the acquisition under the purchase method of accounting and include results of operations from November 1, 1998. The acquired assets and assumed liabilities were recorded at fair value as of the date of acquisition. The purchase price was allocated as follows:
The acquisition was funded by $43,500 of borrowing under the Senior Credit Agreement, $22,800 of additional contributed capital from Sunrise and available cash on hand.
1997 Transactions
On March 1, 1997 , the Company acquired substantially all of the assets of WEYI, WROC, KSBW, and WTOV (the Jupiter/Smith Stations) from Jupiter/Smith TV Holdings, L.P. and Smith Broadcasting Partners, L.P. for approximately $163,176. The accompanying consolidated financial statements reflect the acquisition under the purchase method of accounting. Accordingly, the acquired assets and assumed liabilities were recorded at fair value as of the date of acquisition. The purchase price was allocated as follows:
The acquisition was funded by $90,800 in borrowings under the Credit Agreement and the sale of preferred and common stock in the approximate amount of $77,500.
On October 1, 1997, the Company acquired 100% of the outstanding stock of WJAC, Incorporated (WJAC) for approximately $36,078. The accompanying consolidated financial statements reflect the acquisition under the purchase method of accounting. Accordingly, the acquired assets and assumed
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
liabilities were recorded at fair value as of the date of acquisition. The purchase price was allocated as follows:
The acquisition was funded by $17,000 of borrowing under the Credit Agreement, $15,000 of additional contributed capital from Sunrise, and available cash on hand.
4. ACCRUED EXPENSES:
Accrued expenses consist of the following:
5. OBLIGATIONS FOR PROGRAM RIGHTS:
The aggregate scheduled maturities of program rights obligations subsequent to December 31, 1999 are as follows:
6. LONG-TERM DEBT:
To finance the Jupiter/Smith acquisition described in Note 3, the Company entered into a Credit Agreement with Chase Manhattan Bank and NationsBank of Texas, N.A., (the Credit Agreement), as agents for borrowings up to $95,000. The Credit Agreement provided for: (i) a seven-year term loan facility in the amount of $60,000 (the Term Loan Facility); and (ii) a seven-year revolving credit facility in the amount of $35,000 (the Revolving Credit Facility) both expiring on February 27, 2004. On March 25,
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1997, the Company completed a private placement of $100,000 principal amount of its 11% Senior Subordinated Notes due March 15, 2007. Proceeds from the sale were used to repay all outstanding borrowings under the Credit Agreement and the Term Loan Facility was cancelled. The remaining net proceeds were available for general working capital purposes. On September 26, 1997, the Company completed an exchange offer in which all the original notes were exchanged for registered 11% Senior Subordinated Notes (Senior Subordinated Notes) of the Company having substantially the identical terms.
On July 2, 1998, the Company entered into an Amended and Restated Credit Agreement (the Senior Credit Agreement) with various lenders which provides a $100,000 term loan facility and $65,000 revolving credit facility. On July 3, 1998, the Company borrowed $72,500 from the Senior Credit Agreement to fund the amounts owed Hearst under the Hearst Transaction, retire outstanding amounts under the Credit Agreement, pay transaction fees and provide for working capital needs. The Company recorded a pretax extraordinary loss of $4,586 on the retirement of the Credit Agreement. The loss consisted of $2,422 of previously unamortized costs incurred on the Credit Agreement and $2,164 of financing fees paid to the lenders of the Senior Credit Agreement.
The Senior Credit Agreement bears interest at an annual rate, at the Company's option, equal to the applicable borrowing rate plus the applicable margin as defined in the Senior Credit Agreement (9.375% at December 31, 1999), or the Eurodollar Rate plus the applicable margin as defined in the Senior Credit Agreement (8.305% at December 31, 1999). Interest rates may be reduced in the event the Company meets certain financial tests relating to consolidated leverage.
The Senior Credit Agreement provides for first priority security interests in all of the tangible and intangible assets of the Company and its direct and indirect subsidiaries. In addition, the loans under the Senior Credit Agreement are guaranteed by Sunrise and the Company's current direct and indirect and any future subsidiaries. The Senior Credit Agreement and the Senior Subordinate Notes contain certain financial and operating maintenance covenants including a maximum consolidation leverage ratio (currently 7.0:1), a minimum consolidated fixed charge coverage ratio (currently 1.05:1), and a consolidated interest coverage ratio (currently 1.3:1). The Company is limited in the amount of annual payments that may be made for capital expenditures and corporate expenses.
The operating covenants of the Senior Credit Agreement and the Senior Subordinate Notes include limitations on the ability of the Company to: (i) incur additional indebtedness, other than certain permitted indebtedness; (ii) permit additional liens or encumbrances, other than certain permitted liens; (iii) make any investments in other persons, other than certain permitted investments; (iv) become obligated with respect to contingent obligations, other than certain permitted contingent obligations; and (v) make restricted payments (including dividends on its common stock). The operating covenants also include restrictions on certain specified fundamental changes, such as mergers and asset sales, transactions with shareholders and affiliates and transactions outside the ordinary course of business as currently conducted, amendments or waivers of certain specified agreements and the issuance of guarantees or other credit enhancements. At December 31, 1999, the Company was in compliance with the financing and operating covenants of both the Senior Credit Agreement and the Senior Subordinate Notes.
On September 11, 1998, the Company entered into a three year interest rate swap agreement to reduce the impact of changing interest rates on $70,000 of its variable rate borrowings under the Senior Credit Agreement. The base interest rate was fixed at 5.15% plus the applicable borrowing margin (currently 2.125%) for an overall borrowing rate of 7.275% at December 31, 1999. On February 9, 1999, the Company entered into a two year interest rate swap agreement, which was extendable by the other party for an additional two years, to reduce the impact of changing interest rates on $40,000 of its floating rate borrowings from the Senior Credit Agreement. The interest rate was fixed at 5.06% plus the applicable borrowing margin. Due to the issuance by the Company on December 30, 1999 of $25,000 of Redeemable Preferred Stock Series B to Sunrise and the subsequent reduction in outstanding balances under the Senior Credit agreement, the Company terminated the swap agreement, but simultaneously
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
entered into a new swap agreement that fixed the interest rate on $25,000 of its floating rate borrowings for 18 months at 5%, plus the applicable borrowing margin (currently 2.125%), an overall borrowing rate of 7.125% at December 31, 1999. The variable interest rates on these contracts are based upon the three month London Inter Bank Offered Rate (LIBOR) and the measurement and settlement is performed quarterly. The quarterly settlements of this agreement will be recorded as an adjustment to interest expense and are not anticipated to have a material effect on the consolidated financial statements of the Company. The counter party to the new interest rate swap agreement is one of the lenders under the Senior Credit Agreement.
Interest on the Senior Subordinate Notes is payable semiannually on March 15 and September 15 of each year. The Senior Subordinate Notes will mature on March 15, 2007. Except as described below, the Company may not redeem the Senior Subordinate Notes prior to March 15, 2002. On and after such date, the Company may redeem the Senior Subordinate Notes, in whole or in part, together with accrued and unpaid interest, if any, to the redemption date. In addition, at any time on or prior to March 15, 2000, the Company may, subject to certain requirements, redeem up to 25% of the aggregate principal amount of the Senior Subordinate Notes with the net cash proceeds from one or more Public Equity Offerings at a redemption price equal to 111% of the principal amount thereof plus accrued and unpaid interest, if any, to the redemption date, provided that after any such redemption, at least 75% of the aggregate principal amount of the Senior Subordinate Notes originally issued remain outstanding immediately after each such redemption. The Senior Subordinate Notes will not be subject to any sinking fund requirements. Upon a change of control, as defined, the Company will have the option, at any time on or prior to March 15, 2002, to redeem the Senior Subordinate Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest plus the applicable premium and if the Senior Subordinate Notes are not redeemed or if such change of control occurs after March 15, 2002, the Company will be required to offer to repurchase the Senior Subordinate Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the repurchase date.
The Senior Subordinate Notes are unsecured and subordinated in right of payment to all existing and future senior indebtedness of the Company. The Senior Subordinate Notes rank pari passu with any future senior subordinated indebtedness of the Company and will rank senior to all other subordinated indebtedness of the Company. The indenture under which the Senior Subordinate Notes were issued permits the Company to incur additional indebtedness, including senior indebtedness subject to certain limitations.
Long-term debt consists of the following:
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table shows scheduled payments on long-term debt:
The following table shows interest expense for the periods indicated:
7. REDEEMABLE PREFERRED STOCK:
Redeemable Preferred Stock consisted of the following:
Redeemable Preferred Stock dividend and accretion consisted of the following:
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Series A
In connection with the Jupiter/Smith Stations acquisition, the Company issued 300,000 shares of Redeemable Preferred Stock Series A with an aggregate liquidation preference of $30,000, or $100 per share, which is entitled to quarterly dividends that will accrue at a rate per annum of 14%. Prior to February 28, 2002, dividends may be paid in either additional whole shares of Redeemable Preferred Stock Series A or cash, at the Company's option, and only in cash following that date. The Senior Subordinate Notes and the Senior Credit Agreement prohibit the payment of cash dividends until May 31, 2002.
The Redeemable Preferred Stock Series A is subject to mandatory redemption (subject to contractual and other restrictions with respect thereto and to the legal availability of funds therefor) in whole on February 28, 2008, at a price equal to the then effective liquidation preference thereof, plus all accumulated and unpaid dividends to the date of redemption. Prior to February 28, 2008, the Company has various options on redemption of the Redeemable Preferred Stock Series A at various redemption prices exceeding the liquidation preference.
The Company may, at its option, subject to certain conditions, including its ability to incur additional indebtedness under the Senior Subordinate Notes and the Senior Credit Agreement, on any scheduled dividend payment date, exchange the Redeemable Preferred Stock Series A, in whole but not in part, for the Company's 14% subordinated exchange debentures due 2008 (the Exchange Debentures). Holders of the Redeemable Preferred Stock Series A will be entitled to receive $1.00 principal amount of Exchange Debentures for each $1.00 in liquidation preference of Redeemable Preferred Stock Series A.
Holders of the Redeemable Preferred Stock Series A have no voting rights, except as otherwise required by law; however, the holders of the Redeemable Preferred Stock Series A, voting together as a single class, shall have the right to elect the lesser of the two directors or 25% of the total number of directors constituting the Board of Directors of the Company upon the occurrence of certain events, including but not limited to, the failure by the Company on or after February 28, 2002, to pay cash dividends in full on the Redeemable Preferred Stock Series A for six or more quarterly dividend periods, the failure by the Company to discharge any mandatory redemption or repayment obligation with respect to the Redeemable Preferred Stock Series A, the breach or violation of one or more of the covenants contained in the Certificate of Designation, or the failure by the Company to repay at final stated maturity, or the acceleration of the final stated maturity of, certain indebtedness of the Company.
The Certificate of Designation for the Redeemable Preferred Stock Series A and the indenture for the Exchange Debentures contain covenants customary for securities comparable to the Redeemable Preferred Stock Series A and the Exchange Debentures, including covenants that restrict the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends and make certain other restricted payments, to merge or consolidate with any other person or to sell, assign, transfer, lease, convey, or otherwise dispose of all or substantially all of the assets of the Company. Such covenants are substantially identical to those covenants contained in the Senior Subordinate Notes.
Series B
On February 5, 1999, the Company entered into a $90,000 Redeemable Preferred Stock Series B bridge financing agreement (the Preferred Agreement) with three purchasers, two of which are participants in the Senior Credit Agreement, and sold $35,000 or 35,000 shares of Redeemable Preferred Stock Series B to fund the WUPW purchase, and $2,500 or 2,500 shares to fund an escrow account to pay dividends on the stock.
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On August 5, 1999, the Company repaid all amounts outstanding under the Preferred Agreement by a borrowing of $21,000 under the Senior Credit Agreement, a $15,000 capital contribution from Sunrise, and $1,500 of available cash. The availability for selling additional preferred stock under the Preferred Agreement was cancelled.
On December 30, 1999, the Company sold to Sunrise 25,000 shares of Redeemable Preferred Stock Series B with an aggregate liquidation preference of $25,000. Each share is entitled to quarterly dividends that will accrue at 14% rate per annum. The Company's Senior Credit Agreement and Senior Subordinated Notes prohibit the payment of cash dividends until May 31, 2002.
The Redeemable Preferred Stock Series B is subject to mandatory redemption in whole on February 28, 2008 at a price equal to the then effective liquidation preference per share plus an amount in cash equal to all accumulated and unpaid dividends per share. Prior to February 28, 2008, the Company can redeem the Redeemable Preferred Stock Series B at the then effective liquidation preference per share plus an amount in cash equal to all accumulated and unpaid dividend per share. In the event of a Change of Control (as defined in the Certificate of Designation for the Redeemable Preferred Stock Series B), the Company must offer to purchase all outstanding shares at the then effective liquidation preference per share plus an amount in cash equal to all accumulated and unpaid dividends per share.
With respect to dividends and distributions upon liquidation, winding-up and dissolution of the Company, the Redeemable Preferred Stock Series B ranks senior to all classes of common stock of the Company and the Redeemable Preferred Stock Series A of the Company.
Holders of the Redeemable Preferred Stock Series B have no voting rights, except as otherwise required by law or as expressly provided in the Certificate of Designation for the Redeemable Preferred Stock Series B; however, the holders of the Redeemable Preferred Stock Series B, voting together as a single class, shall have the right to elect the lesser of two directors or 25% of the total number of directors constituting the Board of Directors of the Company upon the occurrence of certain events, including but not limited to, the failure by the Company on or after February 28, 2002, to pay cash dividends in full on the Redeemable Preferred Stock Series B for six or more quarterly dividend periods or the failure by the Company to discharge any mandatory redemption or repayment obligation with respect to the Redeemable Preferred Stock Series B or the breach or violation of one or more of the covenants contained in the Certificate of Designation or the failure by the Company to repay at final stated maturity, or the acceleration of the final stated maturity of, certain indebtedness of the Company.
The Certificate of Designation for the Redeemable Preferred Stock Series B contains covenants customary for securities comparable to the Redeemable Preferred Stock Series B, including covenants that restrict the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends and make certain other restricted payments, to merge or consolidate with any other person or to sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Such covenants are substantially identical to those covenants contained in the Senior Subordinated Notes.
8. TRANSACTIONS WITH AFFILIATES:
On March 1, 1997, Sunrise and the Company entered into a ten-year agreement (the Monitoring and Oversight Agreement) with an affiliate of Hicks Muse (Hicks Muse Partners) pursuant to which Sunrise and the Company have agreed to pay Hicks Muse Partners an annual fee payable quarterly for oversight and monitoring services to the Company. The annual fee is adjustable on January 1, of each calendar year to an amount equal to 0.2% of the budgeted consolidated annual net revenues of the Company and its subsidiaries for the then-current fiscal year plus reimbursement of certain expenses.
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Monitoring and Oversight Agreement makes available the resources of Hicks Muse Partners concerning a variety of financial and operational matters. The Company does not believe that the services that have been, and will continue to be, provided to the Company by Hicks Muse Partners could otherwise be obtained by the Company without the addition of personnel or the engagement of outside professional advisors. In the Company's opinion, the fees provided for under the Monitoring and Oversight Agreement reasonably reflect the benefits received, and to be received, by Sunrise and the Company. Total payments related to this agreement amounted to approximately $233, $201 and $139 for the years ended December 31, 1999, 1998 and the ten months ended December 31, 1997, respectively.
On March 1, 1997, Sunrise and the Company entered into a ten-year agreement (the Financial Advisory Agreement) pursuant to which Hicks Muse Partners received a financial advisory fee of 1.5% of the transaction value at the closing of the Jupiter/Smith acquisition as compensation for its services as financial advisor to the Company. Hicks Muse Partners is entitled to receive a fee equal to 1.5% of the "transaction value" for each "add-on transaction" in which the Company is involved. The term "transaction value" means the total value of the add-on transaction including, without limitation, the aggregate amount of the funds required to complete the add-on transaction (excluding any fees payable pursuant to the Financial Advisory Agreement), including the amount of any indebtedness, preferred stock or similar terms assumed (or remaining outstanding). The term "add-on transaction" means any future proposal for a tender offer, acquisition, sale, merger, exchange offer, recapitalization, restructuring or other similar transaction directly involving the Company or any of its subsidiaries, and any other person or entity. The Financial Advisory Agreement makes available the resources of Hicks Muse Partners concerning a variety of financial and operational matters. The Company does not believe that the services that have been, and will continue to be provided by Hicks Muse Partners could otherwise be obtained by the Company without the addition of personnel or the engagement of outside professional advisors. In the Company's opinion, the fees provided for under the Financial Advisory Agreement reasonably reflect the benefits received and to be received by the Company. Total fees paid under this agreement for the years ended December 31, 1999, 1998 and the ten month period ended December 31, 1997 were $1,764, $2,723 and $3,356, respectively, and were capitalized as cost of acquisition or netted against preferred stock.
On March 1, 1997, affiliates of Hicks Muse purchased 250,000 shares of the Redeemable Preferred Stock Series A for a purchase price of approximately $24,100 (or 96.5% of the initial liquidation preference of such shares) and received in connection therewith warrants to purchase shares of common stock of Sunrise. The Hicks Muse affiliates, along with the other purchaser of the Redeemable Preferred Stock Series A and warrants, received certain registration rights with respect to the shares of common stock of Sunrise issuable upon exercise of the warrants.
The Company has elected to participate in a Hicks Muse affiliate insurance program which covers vehicles, buildings, equipment, libel and slander, liability and earthquake damage. The Company pays actual invoice costs and no employee of Hicks Muse is compensated for these services other than through the above Monitoring and Oversight Agreement. Management believes the amounts paid are representative of the services provided.
The Company has elected to participate in the Sunrise health, life, vision and dental program, long and short-term disability, travel accident and long-term care program. Management believes the amounts paid are representative of the services provided.
A defined contribution 401(k) savings plan is provided to employees of the Company by Sunrise. Employees of the Company who have been employed for six months and who have attained the age of 21 years are generally eligible to participate. Certain employees represented by one union have elected not to participate in the Plan and have established their own plan. Total contributions by the
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company to the defined contribution 401(k) savings plan were approximately $492, $341 and $135 for the years ended December 31, 1999 and 1998, and the ten months ended December 31, 1997, respectively.
The Company has contracts with national representation firms to sell advertising time. During 1998, entities controlled by Hicks Muse acquired certain of these firms. In 1999, the Company entered into extensions of certain of these contracts in the normal course of business on terms and conditions which the Company considered representative of current market conditions.
On April 24, 1998, the Company sold to Robert N. Smith the assets and certain rights and obligations related to WFFF for $500. The purchase price was secured by a note and liens on all of the assets sold and on July 23, 1998, the Company received full payment on the note.
9. PENSION PLAN:
In October 1997, the Company approved the termination of two WJAC non-contributory, defined benefit pension plans (the Plans) covering principally all full-time salaried and hourly employees and certain part-time employees of WJAC. Effective December 31, 1997, the Company froze pension benefits at the current level and suspended future benefit accruals. The Company terminated the Plans during 1998. Final distribution to current and former employees and expenses related to the termination were paid out of the Plans' assets in 1998.
10. INCOME TAXES:
STC Broadcasting, Inc. files a consolidated federal income tax return with all qualified subsidiaries. All nonqualifying subsidiaries file a separate federal income tax return. STC Broadcasting, Inc. and certain subsidiaries file separate state income tax returns. The provision (benefit) for income taxes consists of the following for the years ended December 31, 1999 and 1998 and the ten months ended December 31, 1997:
Deferred taxes reflect the tax effect on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Company's net deferred tax liability as of December 31, 1999 and 1998, are as follows:
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has federal and state NOL carryforwards which expire from 2012 through 2019. During the years ended December 31, 1999 and 1998 and the ten months ended December 31, 1997, the Company created $1,509, $588, and $392, respectively, of valuation allowance to reserve for deferred tax assets resulting from nonqualifying subsidiaries' NOLs for the tax reporting period and for other deferred tax assets.
During 1997, the Company created approximately $2,453 in valuation allowance to reserve for deferred tax assets created as a result of STC Broadcasting, Inc. and qualified subsidiaries' NOLs. This valuation allowance was reversed as a result of the WJAC acquisition and the reversal was charged against the intangible assets of WJAC in accordance with the provisions of SFAS No. 109 "Accounting for Income Taxes."
The reconciliation of the income tax provision (benefit) based on the federal statutory income tax rate (34 percent) to the Company's income tax provision (benefit) is as follows for the years ended December 31, 1999 and 1998 and for the ten months ended December 31, 1997:
11. COMMITMENT AND CONTINGENCIES:
Legal Proceedings
The Company is subject to legal proceedings and claims in the normal course of business. In the opinion of management, after discussion with legal counsel, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the Company.
Management Contracts
On March 1, 1997, the Company entered into five-year employment agreements with four members of senior management for minimum base compensation of $250 and an annual bonus
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
based upon criteria established by the Board of Directors. If prior to the fourth anniversary of the executive officers employment date, the executive officer terminates his employment for good reason, as defined, or Sunrise or the Company terminate his employment for any reason other than for cause, as defined, then such executive officer shall be paid his salary and shall continue to be covered by certain employee benefit plans for 12 months or until the third anniversary of the employment date, whichever period is longer; provided, however, that continued coverage under any employee benefit plan of Sunrise or the Company shall terminate upon such executive officer becoming eligible for comparable benefits pursuant to new employment. In the event of a change of control (as defined in the employment agreements) prior to the fourth anniversary of the employment date, either Sunrise, the Company, or the executive officer may terminate the employment agreement concurrently with sale and receive the salary and benefits on the same terms described in the preceding sentence.
Employees
At December 31, 1999, the Company had 623 full time and 81 part time employees. The Company had 199 employees represented by six different union locals with these union contracts expiring as follows: two in 2000, three in 2002, and one in 2003. No significant labor problems have been experienced by the Stations. The Company considers its overall labor relations to be good, however, there can be no assurance that the Company's collective bargaining agreements will be renewed in the future or that the Company will not experience a prolonged labor dispute which could have a material adverse effect on the Company's business, financial position and/or results of operations.
FCC Issues
On August 5, 1999, the FCC adopted changes in several of its broadcast ownership rules (collectively, the FCC Ownership Rules). These rule changes became effective on November 16, 1999; however, several petitions have been filed with the FCC seeking reconsideration of the new rules, so the rules may change. While the following discussion does not describe all of the ownership rules or rule changes, it attempts to summarize those rules that appear to be most relevant to the Company.
The FCC relaxed its "television duopoly" rule, which barred any entity from having an attributable interest in more than one television station with overlapping service areas. Under the new rules, one entity may have attributable interests in two television stations in the same Nielsen Designated Market Area (DMA) provided that: (1) one of the two stations is not among the top four in audience share and (2) at least eight independently owned and operated commercial and noncommercial television stations will remain in the DMA if the proposed transaction is consummated. The new rules also permit common ownership of television stations in the same DMA where one of the stations to be commonly owned has failed, is failing or is unbuilt or where extraordinary public interest factors are present. In order to transfer ownership in two commonly owned television stations in the same DMA, it will be necessary to once again demonstrate compliance with the new rules. Lastly, the new rules authorize the common ownership of television stations with overlapping signal contours as long as the stations to be commonly owned are located in different DMAs.
Similarly, the FCC relaxed its "one-to-a-market" rule, which restricts the common ownership of television and radio stations in the same market. One entity now may own up to two television stations and six radio stations or one television station and seven radio stations in the same market provided that (1) 20 independent media voices (including certain newspapers and a single cable system) will remain in the relevant market following consummation of the proposed transaction, and (2) the proposed combination is consistent with the television duopoly and local radio ownership rules. If fewer than 20 but more than 9 independent voices will remain in a market following a proposed transaction, and the proposed combination is otherwise consistent with the FCC's rules, a single entity may have
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
attributable interests in up to two television stations and four radio stations. If these various "independent voices" tests are not met, a party generally may have an attributable interest in no more than one television station and one radio station in a market.
The FCC made other changes to its rules that determine what constitutes "cognizable interest" in applying the FCC Ownership Rules (the Attribution Rules). Under the Attribution Rules, a party will be deemed to have a cognizable interest in a television or radio station, cable system or daily newspaper that triggers the FCC's cross-ownership restrictions if: (1) it is a non-passive investor and it owns 5% or more of the voting stock in the media outlet; (2) it is a passive investor (i.e., bank trust department, insurance company or mutual fund) and it owns 20% or more of the voting stock; or (3) its interests (which may be in the form of debt or equity (even if non-voting), or both) exceeds 33% of the total asset value of the media outlet and it either (i) supplies at least 15% of a station's weekly broadcast hours or (ii) has an attributable interest in another media outlet in the same market.
The FCC also declared that local marketing agreements (LMAs) now will be attributable interests for purposes of the FCC Ownership Rules. The FCC will grandfather LMAs that were in effect prior to November 5, 1996, until it has completed the review of its attribution regulations in 2004. Parties may seek the permanent grandfathering of such an LMA, on a non-transferable basis, by demonstrating that the LMA is in the public interest and that it otherwise complies with FCC Rules.
Finally, the FCC eliminated its "cross interest" policy, which had prohibited common ownership of a cognizable interest in one media outlet and a "meaningful" non-cognizable interest in another media outlet serving essentially the same market.
The recent changes to the FCC Ownership Rules may effect the Company's relationship with Smith Acquisition Company (SAC). The Company owns a substantial non-voting equity stake in SAC, which, together with a wholly owned subsidiary, owns WNAC-TV, Providence, Rhode Island, and WTOV-TV, Steubenville, Ohio. Under the new FCC Ownership Rules, the Company's formerly non-attributable interest in SAC has become attributable. Accordingly, the Company, and parties to the Company, must consider whether its other broadcast interests, when viewed in combination with those of SAC, are consistent with all relevant FCC Ownership Rules. The Company is in the process of conducting that review. To the extent the recent changes require the Company to modify its broadcast interests or ownership structure, the Company expects to act as necessary to remain in compliance with all relevant FCC Ownership Rules.
With the changes in the FCC Ownership Rules, the Company no longer needs to maintain its waiver to own both KRBC-TV, Abilene, Texas, and KACB-TV, San Angelo, Texas, as the common ownership of these stations is now consistent with the FCC's Rules.
On October 2, 1999, AMFM Inc. (AMFM) entered into an Agreement and Plan of Merger with CCC and CCU Merger Sub, Inc. (Merger Sub), pursuant to which AMFM will be merged with and into Merger Sub and will become a wholly-owned subsidiary of CCC (the AMFM Merger). Thomas O. Hicks, who is the Company's ultimate controlling shareholder, has an attributable interest in AMFM and currently is the Chairman and Chief Executive Officer of AMFM. AMFM and CCC have announced that Mr. Hicks will serve as Vice Chairman of the combined entity. The Company is in the process of analyzing the impact of this AMFM Merger on the Company's operations and regulatory obligations.
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Lease Commitments
The Company leases certain tower and studio facilities, satellite sales and news offices and corporate offices. Total rental expense was approximately $421, $132 and $98 for the years ended December 31, 1999 and 1998, and the ten months ended December 31, 1997, respectively.
At December 31, 1999, the total minimum annual rental commitments under non cancelable leases for studio, transmitter, satellite sales and news offices, and corporate offices excluding minor translator sites, are as follows:
The lease on the WUPW transmitter site is a 99 year lease with an end date of December 2, 2089. The Company has an option to purchase the property on August 1, 2018 at fair market value. The above lease commitment disclosure includes the monthly payments, (presently $5 a month plus an annual 3% increase) through the option date.
13. CANCELLED PRIVATE PLACEMENT
During 1999, the Company and Sunrise had plans to sell debt securities of Sunrise or preferred stock of the Company in a private placement to complete the Sinclair Agreement (see Note 15) and repay the outstanding amounts under the Preferred Agreement. Sunrise and the Company subsequently determined that they would attempt to fund the Sinclair Agreement through an additional borrowing under the Senior Credit Agreement and by an additional capital contribution by Sunrise. The results of operations for the year ended December 31, 1999 include a charge of $825 for expenses incurred in the cancelled private placement.
14. SEGMENT INFORMATION
The Company has 11 reportable segments, two license corporations and a corporate office in accordance with SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." These segments are television stations in designated market areas (DMA) as defined by A. C. Nielsen Company. The majority of each segments' revenues are broadcast related.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating income before interest income, interest expense, income taxes, nonrecurring gains and losses, and extraordinary items.
The Company has no significant intersegment sales or transfers other than interest that is allocated to subsidiaries but not divisions. All segments have local distinct management separate from corporate management. Each management team is evaluated based upon the results of operations of their station.
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following tables set forth information by segments, aggregated with segments that have similar economic characteristics, and reconciles segment information to the consolidated financial statements.
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) The extraordinary loss of early retirement of debt and tax provision and benefit were allocated entirely to the corporate office. (2) Interest expense is allocated to various subsidiaries, which own WJAC, KRBC, KACB, WTOV and WNAC.
STC BROADCASTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. PENDING SINCLAIR ACQUISITIONS:
On March 16, 1999, the Company and Sinclair Communications, Inc. (Sinclair) entered into a purchase agreement (the Sinclair Agreement). Pursuant to the Sinclair Agreement, the Company agreed to purchase from Sinclair: WICS, Channel 20, Springfield, Illinois; WICD, Channel 15, Champaign, Illinois; and KGAN, Channel 2, Cedar Rapids, Iowa for a total purchase price of $87.0 million, including working capital, fees and expenses. WICS and WICD are NBC affiliates and KGAN is a CBS affiliate. Closing of this purchase is subject to customary conditions, including review by the Department of Justice and the Federal Communications Commission (FCC). In April 1999, the Antitrust Division of the United States Department of Justice (DOJ) issued various requests for additional information under the Hart-Scott-Rodino Antitrust Improvement Act (HSR Act) in connection with the acquisition. The Company and Sinclair are in discussions with the DOJ regarding this transaction, and the waiting period under the HSR Act has been extended pending completion of these discussions. While the resolution of these discussions remains uncertain, it appears likely that, if the acquisition is consummated as contemplated under the Sinclair Agreement, the Company would be required by the DOJ to sell, or enter into a local marketing agreement with respect to, WICS and WICD substantially concurrently with the closing of the acquisition of those stations, if it occurs at all. Under the terms of the Sinclair Agreement, either the Company or Sinclair (to the extent they are not in breach) may terminate the Sinclair Agreement if the closing has not occurred on or prior to March 16, 2000. The Company is presently exploring a variety of alternatives, including possibly a sale of WICS and WICD, but cannot be sure of the terms on which this transaction will be completed, if at all.
The Company has assigned the right to acquire the broadcast licenses and other license assets of the Sinclair Stations to SDF Television License Corp. (SDF), an entity separate from the Company, but owned by members of the Company's senior management team. On April 2, 1999, SDF filed applications seeking FCC consent to the assignment of the licenses of WICS, WICD and KGAN. The application has been accepted for filing, and no petitions to deny were filed by the May 13, 1999 deadline, although informal objections advocating denial of the applications may be filed up until the date that the FCC grants the applications. The application is still pending before the FCC, and accordingly, the Company cannot be sure when the application will be granted, if at all.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Jupiter/Smith TV Holdings, L.P.:
We have audited the accompanying combined statements of operations, partners' equity and cash flows of Smith Television of Michigan, L.P., Smith Television of Rochester, L.P., Smith Television - WTOV, L.P. and Smith Television of Salinas-Monterey, L.P., and their respective licensed subsidiaries, (collectively, the Partnerships) for the two months ended February 28, 1997, and the year ended December 31, 1996. These financial statements are the responsibility of the Partnerships' 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 combined financial statements referred to above present fairly, in all material respects, the results of the Partnerships' operations and cash flows for the two months ended February 28, 1997, and the year ended December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 2, on March 1, 1997, Jupiter/Smith TV Holdings, LP. and Smith Broadcasting Partners, L.P. sold substantially all of the assets of the Partnerships to STC Broadcasting, Inc. and Smith Acquisition Company.
Arthur Andersen, LLP
Tampa, Florida February 18, 1998
SMITH TELEVISION OF MICHIGAN, L.P. SMITH TELEVISION OF ROCHESTER, L.P. SMITH TELEVISION - WTOV, L.P., AND SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
COMBINED STATEMENTS OF OPERATIONS
See accompanying notes to combined financial statements.
SMITH TELEVISION OF MICHIGAN, L.P. SMITH TELEVISION OF ROCHESTER, L.P. SMITH TELEVISION - WTOV, L.P., AND SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
COMBINED STATEMENTS OF PARTNERS' EQUITY
See accompanying notes to combined financial statements.
SMITH TELEVISION OF MICHIGAN, L.P. SMITH TELEVISION OF ROCHESTER, L.P. SMITH TELEVISION - WTOV, L.P., AND SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
COMBINED STATEMENTS OF CASH FLOWS
See accompanying notes to combined financial statements.
SMITH TELEVISION OF MICHIGAN, L.P. SMITH TELEVISION OF ROCHESTER, L.P. SMITH TELEVISION - WTOV, L.P., AND SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND FEBRUARY 28, 1997
1. ORGANIZATION AND NATURE OF OPERATIONS:
The accompanying financial statements present the combined results of operations, partners' equity, and cash flows for the year ended December 31, 1996 and the two months ended February 28, 1997 of four limited partnerships: Smith Television of Michigan, L.P., Smith Television of Rochester, L.P., Smith Television - WTOV, L.P. and Smith Television of Salinas-Monterey, L.P., and their respective licensed subsidiaries, (collectively, the Partnerships). The Partnerships own the following commercial television stations: WEYI, Saginaw, Flint and Bay City, Michigan; WROC, Rochester, New York; WTOV, Wheeling, West Virginia and Steubenville, Ohio; and KSBW, Monterey-Salinas, California (collectively, the Stations). Stations WEYI, WTOV and KSBW are NBC affiliates and station WROC is a CBS affiliate. The Partnerships are controlled by Jupiter/Smith TV Holdings, L.P. (Jupiter/Smith) and Smith Broadcasting Partners, L.P. (SBP). Under the terms of the Partnerships' agreements, SBP is the managing general partner. Income and loss is generally allocated based on capital contribution percentages. The Partnerships were formed on December 13, 1995 and acquired the Stations in January 1996 for a total purchase price of approximately $105,400,000, including transaction fees and working capital.
The combined financial statements reflect the acquisitions of the Stations under the purchase method of accounting. Accordingly, the acquired assets and liabilities were recorded at fair value as of the date of acquisition. The acquisition price of approximately $105,400,000 was allocated based upon appraised values resulting in approximately $27,600,000, $71,800,000 and $6,000,000 being assigned to property and equipment, intangibles (including deferred financing and organizational costs), and working capital, respectively. The transaction was funded by the Credit Agreement and partners' contributions. Management does not consider the results of operations of the Stations from January 1, 1996, to the dates the Stations were acquired to be significant.
2. SALE OF THE ASSETS OF THE PARTNERSHIPS:
On March 1, 1997, Jupiter/Smith and SBP completed the sale of substantially all of the assets of the Partnerships to STC Broadcasting, Inc. (STC) and Smith Acquisition Company (SAC) for an aggregate sales price of approximately $157,000,000. In connection with the sale, STC and SAC will assume the Partnerships' television programming obligations, certain accounts payable and accrued liabilities, and certain other obligations relating to the operations of the Stations after the closing date. The Partnerships will retain all other liabilities of the Partnerships, including the Credit Agreement with Chase Manhattan Bank.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statements include the combined accounts of the Partnerships. The Partnerships are combined because of common ownership, management and relationship of operations. All material items and transactions between the Partnerships have been eliminated.
Cash and Cash Equivalents
The Partnerships consider all highly liquid investments with a maturity of three months or less to be cash equivalents.
SMITH TELEVISION OF MICHIGAN, L.P. SMITH TELEVISION OF ROCHESTER, L.P. SMITH TELEVISION - WTOV, L.P., AND SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Concentration of Risk and Accounts Receivable
The Partnerships serve the Saginaw, Flint and Bay City, Michigan; Rochester, New York; Wheeling, West Virginia and Steubenville, Ohio; and Monterey and Salinas, California, demographic areas. Accordingly, the revenue potential of the Partnerships is dependent on the economy in these diverse areas. The Partnerships monitor their accounts receivable through continuing credit evaluations. Historically, the Partnerships have not had significant uncollectible accounts.
Program Rights
The Partnerships have agreements with distributors for the rights to television programming over contract periods which generally run from one to four years. Each contract is recorded as an asset and liability when the license agreement is signed. The capitalized cost of program rights for one-time only programs is amortized on a straight-line basis over the period of the program rights agreements. The capitalized cost of program rights for multiple showing syndicated program material is amortized on an accelerated basis over the period of the program rights agreement. Program rights are reflected in the consolidated financial statements at the lower of unamortized cost or estimated net expectation of future advertising revenues net of sales commissions to be generated by the program material.
Property and Equipment
Property and equipment acquired in purchase transactions are recorded at the estimate of fair value based upon independent appraisals and property and equipment acquired subsequent thereto are recorded at cost. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, as follows:
Expenditures for maintenance and repairs are charged to operations as incurred, whereas expenditures for renewals and betterments are capitalized.
Intangible Assets
Intangible assets consist principally of values assigned to the Federal Communications Commission (FCC) licenses and network affiliation agreements of the Stations. Intangible assets are being amortized on the straight-line basis primarily over 15 years.
Revenue Recognition
The Company's primary source of revenue is the sale of television time to advertisers. Revenue is recorded when the advertisements are broadcast.
SMITH TELEVISION OF MICHIGAN L.P. SMITH TELEVISION OF ROCHESTER, L.P. SMITH TELEVISION - WTOV, L.P. AND SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Impairment of Long-Lived Assets
Long-lived assets and identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed. The Partnerships have determined there has been no impairment in the carrying value of long-lived assets of Stations as of December 31, 1996 or February 28, 1997.
Deferred Charges
Deferred charges are being amortized over the applicable loan period (84 month period) on a straight-line basis, and organization costs are being amortized over a 60-month period on a straight-line basis.
Trade/Barter Transactions
Trade/barter transactions involve the exchange of advertising time for products and/or services. Trade/barter transactions are recorded based on the fair market value of the products and/or services received. Revenue is recorded when advertising schedules air and expense is recognized when products and/or services are used or received.
Income Taxes
No income tax provision has been included in the financial statements since income or loss of the Partnerships is required to be reported by the partners on their respective income tax returns.
Allocation of Partnerships' Loss
The Partnerships' loss for the year ended December 31, 1996 and the two months ended February 28, 1997, is allocated as described by the Partnership Agreement.
Supplemental Cash Flow Disclosures
Cash paid for interest during 1996 was $5,974,847 and $0 for the two months ended February 28, 1997. In addition, the Partnerships acquired new contracts for television program obligations in the amount of $698,861 during 1996 and $0 for the two months ended February 28, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The preparation of financial statements in conformity with generally accepted accounting principles also requires management to make estimates and assumptions that affect the disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
SMITH TELEVISION OF MICHIGAN L.P. SMITH TELEVISION OF ROCHESTER, L.P. SMITH TELEVISION - WTOV, L.P. AND SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
4. CREDIT AGREEMENT
To finance the acquisitions described in Note 1 and to provide for future operating capital, the Partnerships entered into a Credit Agreement with Chase Manhattan Bank, N.A. (the Credit Agreement), as administrative agent for borrowings of up to $72,000,000. The borrowings are collateralized by all of the Partnerships' assets and outstanding Partnership interests.
Under the Credit Agreement, the Partnerships have the option to maintain domestic and Eurodollar loans. Interest on borrowings under this agreement are at varying rates based, at the Partnerships' option, on the banks' prime rate or the London Interbank Offering Rate (LIBOR), plus a fixed percent, and are adjusted based upon the ratio of total debt to earnings before interest, taxes, depreciation, and amortization. The weighted average interest rate during 1996 and the two months ended February 28, 1997, was 9.08% and 8.9%, respectively. Additionally, commitment fees of 0.5% are payable quarterly.
Under the existing Credit Agreement, the Partnerships agree to abide by restrictive covenants which place limitations upon payments of cash distributions, issuance of Partnership interest, investment transactions and the incurrence of additional obligations. In addition, the Partnerships must maintain specified levels of operating cash flow and comply with other financial covenants.
Upon the sale of assets on February 28, 1997, the Credit Agreement was paid in full from the proceeds.
5. AFFILIATE TRANSACTIONS:
The Partnerships pay SBP, the general partner of the Partnerships, to provide certain management services. The Partnerships recorded expense of $840,135 in 1996 and $146,000 for the two months ended February 28, 1997 for these services. Management believes these amounts are reasonable and representative of the services provided. The agreement terminates upon the sale of the Stations' assets.
The Partnerships have elected to participate in an affiliate insurance program which covers automobiles, buildings, equipment, libel and slander, liability and earthquake damage. The Partnerships pay actual invoice costs and no employee of the affiliate or SBP is compensated for these services other than through the above management fee. Management believes the amounts paid are reasonable and representative of the services provided.
The Partnerships have elected to participate in an affiliate health, life, vision and dental program, long and short term disability, travel accident and long-term care program. The Partnerships are charged the same costs as any other participating affiliate. No employee of the affiliate or SBP is compensated for these services other than through the above management fee. Management believes the amounts paid are reasonable and representative of the services provided.
A defined contribution savings plan (401k) (the Plan) is provided to employees of the Partnerships by an affiliate. Employees of the Partnerships who have been employed for six months, who have attained the age of 21 years and who have completed 1,000 hours of service are generally eligible to participate. Certain employees represented by various unions have elected not to participate in the Plan
SMITH TELEVISION OF MICHIGAN L.P. SMITH TELEVISION OF ROCHESTER, L.P. SMITH TELEVISION - WTOV, L.P. AND SMITH TELEVISION OF SALINAS-MONTEREY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
or have established their own plans. Amounts contributed to the Plan by the Partnerships amounted to $131,429 in 1996 and $35,682 for the two months ended February 28, 1997.
Management believes the costs incurred in connection with the above affiliate programs approximate the costs that would be incurred if the Partnerships procured such services on a stand-alone basis.
OTHER INCOME:
Other income for the periods indicated consisted of the following:
During 1996, the Partnerships agreed to provide certain services to an unaffiliated national television network and agreed to potentially swap one of its Stations for one of the unaffiliated network's stations. The Partnerships have provided all services required by the network. The Partnerships received $1,500,000 for these services.
7. CONTINGENCIES:
The Partnerships are subject to legal proceedings and claims in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the Partnerships.
SCHEDULE II
STC BROADCASTING, INC. AND SUBSIDIARIES
TELEVISION STATIONS WEYI, WROC, WTOV AND KSBW
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
(1) Amounts represent allowance for doubtful account balances purchased in connection with the acquisition of certain television stations.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None to Report
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive officers and directors of Sunrise and the Company as of March 1, 1999.
ROBERT N. SMITH has served in the broadcast industry for 20 years and served as President of Sunrise and Chief Executive Officer and Director of Sunrise and the Company since their formation.
Since 1985, Mr. Smith has served as President and majority stockholder of SBG, which owns, operates and manages seven television stations in addition to the Company's Stations, and has served as Chief Executive Officer of SBP, an affiliate of SBG. From 1983 to 1985, Mr. Smith served as an officer, director and part owner of Heritage Broadcasting Company, which was the licensee of WCTI-TV, New Bern, North Carolina. Mr. Smith first became involved with the television broadcast industry as an attorney in the Broadcast Bureau of the FCC from 1971 to 1974. Thereafter, Mr. Smith's career included substantial government service, including serving on the White House Staff in 1977 and as Assistant Director for Community Services Administration from 1977 to 1979, prior to returning full time to the broadcast industry in 1983.
SANDY DIPASQUALE has served in the broadcast industry for 20 years and served as President of the Company and Executive Vice President and Chief Operating Officer of Sunrise since their formation. From January of 1996 through February of 1997, Mr. DiPasquale served as Chief Operating Officer of SBP and was responsible for the day-to-day operations and from November 1994 to January 1996 was associated with SBG. From 1989 to 1994, Mr. DiPasquale served as President, Chief Executive Officer and was a part owner of SD Communications, Inc., KBS, Limited Partnership and KBS, Inc., which were the owners of KWCH-TV, Wichita, Kansas, and its affiliated stations in Hays, Goodland and Dodge City, Kansas. From 1986 to 1988, Mr. DiPasquale served as President and General Manager and was a partner in WGRZ-TV, Buffalo, New York. Prior to such time, Mr. DiPasquale served in sales and management positions at various television broadcast stations in the Buffalo area.
DAVID A. FITZ has served in the broadcast industry for 22 years and served as Senior Vice President and Chief Financial Officer of Sunrise and the Company since their formation. From January 1996 through February 1997, Mr. Fitz served as Chief Financial Officer of SBP and as an officer and director of each of the SBG affiliated companies. Mr. Fitz has held various positions with SBG affiliated companies since 1986. Prior to joining SBG, Mr. Fitz served for nine years as Executive Vice President and Chief Financial Officer of the Broadcast Division of Gulf Broadcast Company, which at that time owned six television and eight radio broadcast stations. Prior to that time, Mr. Fitz was a manager with KPMG Peat Marwick, which he joined in 1969.
JOHN M. PURCELL has served in the broadcast industry for 37 years and served as Regional Vice President of Sunrise and the Company and as General Manager of WROC-TV, Rochester, New York, from March 1997 to April 1, 1999. From January 1996, through February 1997, Mr. Purcell served as Senior Vice President of SBP and General Manager of WROC-TV, Rochester, New York. From November 1994, to January 1996, Mr. Purcell was associated with SBG. From 1986 to September 1994, Mr. Purcell served as Vice President and General Manager of WHTM-TV, Harrisburg, Pennsylvania, an SBG-owned station. Prior to such time, Mr. Purcell served as President and General Manager of WGHP-TV, Greensboro, North Carolina, and as Vice President and Director of Sales of WTSP-TV, Tampa/St. Petersburg, Florida.
JOHN R. MUSE has served as Chairman of the Board of Directors of the Company and Sunrise since its formation. Mr. Muse is Chief Operating Officer and Partner of Hicks, Muse, and co-founded the firm in 1989. At Hicks, Muse, Mr. Muse has been actively involved in originating, structuring, and monitoring Hicks Muse's investments. From 1984 to 1989, Mr. Muse headed the merchant/investment banking operations of Prudential Securities for the Southwestern region of the United States. From 1980 to 1984, Mr. Muse served as Senior Vice President and a Director of Schneider, Bernet & Hickman, Inc., in Dallas, and was responsible for that firm's investment banking activities. Mr. Muse serves as a director of Premier International Foods plc, Financlare Movlins de Champagne, Glass's Information Services, Arnold Palmer Gold Management Co., LIN Television, Media Capital Soc. Gestora de Participacoes Sociasi, S.A., G.H. Mumm & Cie, Champagne Perrier-Jouet, Premier International Foods plc, Hillsdown Holdings plc, Glass's Information Services, Regal Cinemas, Inc., and Suiza Food Corporation. Mr. Muse also serves on the Board of Directors for Goodwill Industries, SMU Edwin L. Cox School of Business, the UCLA Anderson School Board of Visitors and the Board of Trustees of St. Mark's School of Texas.
MICHAEL J. LEVITT has served as a director of the Company and Sunrise since its formation. Mr. Levitt has been a partner of Hicks Muse since 1996, and is involved in originating, structuring, executing,
and monitoring Hicks Muse's investments as well as building relationships with investment and commercial banking firms. Prior to joining Hicks Muse, Mr. Levitt served as a Managing Director and Deputy Head of Investment Banking with Smith Barney, Inc. from 1993 through 1995. He was also a member of the investment committee of Greenwich State Capital, the merchant banking arm of the Travelers Group. From 1986 through 1995, Mr. Levitt was a Managing Director with Morgan Stanley & Co. responsible for corporate finance, merger and acquisition and high yield activities with leveraged buyout firms and non-investment grade companies. Mr. Levitt serves as director of AMFM Corp., AMFMi Corp., Award.com Inc., El Sitio, Inc., G.H. Mumm/Perrier Jouet & Cie., Globix Corporation, iParty Corp., Ibero American Media Partners, L.P., International Home Foods, Inc., PeopleLink, Inc., RCN Corporation, RealPulse.com, Inc., StreetZebra.com, Inc. and Rhythms NetConnections, Inc. In addition, Mr. Levitt has been named interim Chief Executive Officer of AMFMi Corp. Mr. Levitt is the Chairman of the Make-A-Wish Foundation of Metro New York, a member of the Board of the Hope and Heroes Children's Cancer Fund, and a Trustee of the Elizabeth Morrow School.
JOHN H. MASSEY has served as a director of the Company and Sunrise since its formation. Until August 2, 1996, Mr. Massey served as the Chairman of the Board and Chief Executive Officer of Life Partners Group, Inc., an insurance holding company, having assumed those offices in October 1994. Prior to joining Life Partners, he served, since 1992, as the Chairman of the Board of, and currently serves as a director of, FSW Holdings, Inc., a regional investment banking firm. Since 1986, Mr. Massey has served as a director of Gulf-California Broadcast Company, a private holding company, that was sold in May 1996. From 1986 to 1992, he also was President of Gulf-California Broadcast Company. From 1976 to 1986, Mr. Massey was President of Gulf Broadcast Company, which owned and operated 6 television stations and 11 radio stations in major markets in the United States. Mr. Massey currently serves as a director of AMFM Corp., Central Texas Bankshare Holdings, Inc., Hill Bank and Trust Co., Hill Bancshares Holdings, Inc., Bank of the Southwest of Dallas, Texas, Columbus State Bank, Columbine JDS Systems, Inc., and the Paragon Group, Inc.
ERIC C. NEUMAN has served as a director of Sunrise and STC Broadcasting since May 1999. Mr. Neuman is Vice President and a director of LIN Television. Mr. Neuman resumed his position as an officer of Hicks Muse in April 1999 and currently serves as a Principal. Mr. Neuman was the Senior Vice President of Strategic Development for Chancellor from July 1998 to March 1999. From May 1993 to July 1, 1998, Mr. Neuman served as an officer of Hicks Muse. From 1985 to 1993 Mr. Neuman served as a Managing General Partner of Communications Partner, Ltd., a Dallas-based private investment firm specializing in media and communications businesses.
All directors hold office for one year terms and until their successors are duly elected and qualified. The Board of Directors of the Company established an Executive Committee to which Messrs. Massey, Muse and Levitt have been appointed, and an Audit Committee and Compensation Committee to which Messrs. Levitt, Massey and Muse have been appointed. Directors of the Company are elected by Sunrise, the sole stockholder of the Company.
Director Compensation
Directors of Sunrise who are employees of Sunrise, STC Broadcasting or Hicks Muse serve without additional compensation. Independent directors receive an annual retainer of $12,000. These independent directors receive an additional $1,000 for each meeting of the Board of Directors and each committee meeting attended. Independent directors are reimbursed for any expenses incurred in connection with their attendance at such meetings. Currently, John H. Massey is Sunrise's only independent director.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to its Chief Executive Officer and each of its four most highly compensated executive officers.
(1) Dollar value of premiums for life insurance reimbursed by the Company. (2) Represents amounts contributed by the Company to the Sunrise 401(k) Savings Plan. (3) Represents amount of deferred compensation included in employment letter.
Employment Agreements
On March 1, 1997, Sunrise and the Company entered into five-year employment agreements with Robert Smith, Sandy DiPasquale, David Fitz and John Purcell. Each employment agreement is subject to automatic successive one-year renewal terms that take effect unless notice of non-renewal is given by either party to the agreement at least 120 days prior to the expiration of the initial term or annual extension, as the case may be. The compensation provided Messrs. Smith, DiPasquale, Fitz and Purcell under their respective agreements includes minimum annual base salary of $250,000 each, subject to adjustment at the sole discretion of the Board of Directors of Sunrise, and an annual bonus based upon criteria to be established by the Board of Directors at the beginning of each fiscal year. These executives are entitled to participate in certain benefit plans. If prior to the fourth anniversary of the Employment Date, the executive officer terminates his employment for good reason (as defined) or Sunrise or the Company terminate his employment for any reason other than for cause (as defined), then such executive officer shall be paid his salary and shall continue to be covered by certain employee benefit plans for 12 months. In the event of a change of control (as defined in the agreements) prior to the fourth anniversary of the Employment Date, either Sunrise, the Company or the executive officer may terminate the employment agreement concurrently with sale and receive the salary and benefits on the same terms described in the preceding sentence.
Mr. Smith's employment agreement requires him to devote his best efforts and such time, attention, knowledge and skill to the operation of the Stations as is necessary to manage and supervise the Stations and the Company. Mr. Fitz's employment agreement requires him to devote his best efforts and his working time, attention, knowledge and skill solely to the operation of the Stations; provided, however, that Mr. Fitz is permitted to devote reasonable time in advisory services and oversight duties in connection with Mr. Smith's investments in other business enterprises having an interest in or operating a television station within certain excluded markets in which Mr. Smith currently holds an interest in a television station (the Excluded Markets) and any acquisition or investment in up to three additional excluded stations (the Excluded Stations).
Each employment agreement contains a noncompetition provision, which provides that during the term of each agreement and for a period of two years thereafter (or one year, if Hicks Muse or its affiliates cease to own any of the Stations) and during any period in which the executive officer is receiving severance payments pursuant to the employment agreement, such executive officer will not engage in the television broadcast business within the DMA of any Station. Mr. Smith's employment agreement permits him to invest in, become employed by or otherwise render services to or for (i) another business enterprise (other than the Company) having an interest in or operating a television station within the Excluded Markets and (ii) after an opportunity to acquire or invest shall have been presented to the Company and the Company shall have declined in writing to make such acquisition or investment, the Excluded Stations.
401(k) Savings Plan
Effective as of March 1, 1997, the Company became a participating subsidiary in the Sunrise 401(k) Savings Plan (the Plan), which covers employees of the Company and subsidiaries who have attained the age of 21, and completed six months of service. An employee may contribute up to an aggregate of 15% of annual compensation to the Plan, subject to statutory limitations and top heavy limitations. The Company will match 100% of each employee's contribution up to 3% of employee compensation or $3,000 which ever is less. Contributions are allocated to each employee's individual account, which is intended to be invested in various funds according to the direction of the employee. All five highly compensated executive officers participate in the Plan.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has 1000 shares of Common Stock, $0.01 par value per share, issued and outstanding, all of which are owned by Sunrise, whose address is 720 2nd Avenue South, St. Petersburg, Florida 33701. All of the capital stock of Sunrise is owned by Sunrise Television Partners, L.P. (the Partnership) of which the ultimate managing partner is Thomas O. Hicks, an affiliate of Hicks Muse.
Affiliates of Hicks Muse have purchased $25.0 million of the Company's Redeemable Preferred Stock Series A for a price of approximately $24.1 million (or 96.5% of the initial liquidation preferences of such shares) and received, in connection therewith, warrants to purchase shares of common stock of Sunrise. The Hicks Muse affiliates, along with the other purchasers of the Redeemable Preferred Stock Series A and warrants, received certain registration rights with respect to the shares of common stock of Sunrise issuable upon exercise of the warrants.
Robert N. Smith (through SBG), Sandy DiPasquale, David A. Fitz and John M. Purcell own 100% of the Class B limited partnership interest in the Partnership, and together with others have invested $2.7 million in Class A interest of the Partnership. The return on the Class B ownership interest is based on the performance of Sunrise and the Company. Neither the Class A nor Class B interest owned by limited partners have any rights to participate in the management or control of the Partnership or its business.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 1, 1997, Sunrise and the Company entered into a ten-year agreement (the Monitoring and Oversight Agreement) with an affiliate of Hicks Muse (Hicks Muse Partners) pursuant to which Sunrise and the Company have agreed to pay Hicks Muse Partners an annual fee payable quarterly for oversight and monitoring services to the Company. The annual fee is adjustable on January 1, of each calendar year to an amount equal to 0.2% of the budgeted consolidated annual net revenues of the Company and its subsidiaries for the then-current fiscal year plus reimbursement of certain expenses.
The Monitoring and Oversight Agreement makes available the resources of Hicks Muse Partners concerning a variety of financial and operational matters. The Company does not believe that the services that have been, and will continue to be provided to the Company by Hicks Muse Partners could otherwise be obtained by the Company without the addition of personnel or the engagement of outside professional advisors. In the Company's opinion, the fees provided for under the Monitoring and Oversight Agreement reasonably reflect the benefits received, and to be received, by Sunrise and the
Company. Total payments related to this agreement amount to $0.2 million, $0.2 million and $0.1 million for the years ended December 31, 1999 and 1998, and the ten months ended December 31, 1997, respectively.
On March 1, 1997, Sunrise and the Company entered into a ten-year agreement (the Financial Advisory Agreement) pursuant to which Hicks Muse Partners received a financial advisory fee of 1.5% of the transaction value at the closing of the Jupiter/Smith acquisition as compensation for its services as financial advisor to the Company. Hicks Muse Partners is entitled to receive a fee equal to 1.5% of the "transaction value" for each "add-on transaction" in which the Company is involved. The term "transaction value" means the total value of the add-on transaction including, without limitation, the aggregate amount of the funds required to complete the add-on transaction (excluding any fees payable pursuant to the Financial Advisory Agreement), including the amount of any indebtedness, preferred stock or similar terms assumed (or remaining outstanding). The term "add-on transaction" means any future proposal for a tender offer, acquisition, sale, merger, exchange offer, recapitalization, restructuring or other similar transaction directly involving the Company or any of its subsidiaries, and any other person or entity. The Financial Advisory Agreement makes available the resources of Hicks Muse Partners concerning a variety of financial and operational matters. The Company does not believe that the services that have been, and will continue to be provided by Hicks Muse Partners could otherwise be obtained by the Company without the addition of personnel or the engagement of outside professional advisors. In the Company's opinion, the fees provided for under the Financial Advisory Agreement reasonably reflect the benefits received and to be received by the Company. Total fees paid under this agreement for the years ended December 31, 1999 and 1998, and the ten month period ended December 31, 1997 were $1.8 million, $2.7 million and $3.4 million, respectively, and were capitalized as cost of acquisition or netted against preferred stock.
On March 1, 1997, affiliates of Hicks Muse purchased $25.0 million of the Redeemable Preferred Stock Series A for a purchase price of approximately $24.1 million (or 96.5% of the initial liquidation preference of such shares) and received in connection therewith warrants to purchase shares of common stock of Sunrise. The Hicks Muse affiliates, along with the other purchaser of the Redeemable Preferred Stock Series A and warrants, received certain registration rights with respect to the shares of common stock of Sunrise issuable upon exercise of the warrants.
The Company has elected to participate in a Hicks Muse affiliate insurance program which covers vehicles, buildings, equipment, libel and slander, liability and earthquake damage. The Company pays actual invoice costs and no employee of Hicks Muse is compensated for these services other than through the above Monitoring and Oversight Agreement. Management believes the amounts paid are attractive and representative of the services provided.
The Company has elected to participate in the Sunrise health, life, vision and dental program, long and short-term disability, travel accident and long-term care program. Management believes the amounts paid are attractive and representative of the services provided.
A defined contribution 401(k) savings plan is provided to employees of the Company by Sunrise. Employees of the Company who have been employed for six months and who have attained the age of 21 years are generally eligible to participate. Certain employees represented by various unions have elected not to participate in the Plan or have established their own plans. Total contributions by the Company to defined contribution 401(k) savings plan were approximately $0.5 million, $0.3 million and $0.1 million for the years ended December 31, 1999 and 1998, and the ten months ended December 31, 1997, respectively.
The Company has contracts with national representation firms to sell advertising time. During 1998, entities controlled by Hicks Muse acquired certain of these firms. In 1999, the Company entered into extensions of certain of these contracts in the normal course of business on terms and conditions which the Company considered attractive and representative of current market conditions.
On April 24, 1998, the Company sold to Robert N. Smith, the Chief Executive Officer and a Director of Sunrise and the Company, the assets and certain rights and obligations related to WFFF for
$0.5 million. The purchase price was secured by a note and liens on all of the assets sold and on July 23, 1998, the Company received full payment on the note.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
STC Broadcasting, Inc. Report of Independent Certified Public Accountants Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Operations for the years ended December 31, 1999 and 1998 and ten months ended December 31, 1997 Consolidated Statements of Stockholder's Equity for the years ended December 31, 1999 and 1998 and ten months ended December 31, 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998 and ten months ended December 31, 1997 Notes to Consolidated Financial Statements
Smith Television of Michigan, L.P. Smith Television of Rochester, L.P. Smith Television - WTOV, L.P. Smith Television of Salinas-Monterey, L.P. Report of Independent Certified Public Accountants Combined Statements of Operations for the year ended December 31, 1996 and the two months ended February 28, 1997 Combined Statements of Partners' Equity for the year ended December 31, 1996 and the two months ended February 28, 1997 Combined Statements of Cash Flows for the year ended December 31,1996 and the two months ended February 28,1997 Notes to Combined Financial Statements
a(2) Financial Statement Schedule Schedule II Valuation and Qualifying Accounts
a(3) Exhibits
2.1 Asset Purchase Agreement by and between Elcom of Ohio, Inc., and STC Broadcasting, Inc. dated as of July 24, 1998. (1)
2.2 Asset Purchase Agreement by and among STC Broadcasting, Inc. and STC License Company and Nexstar Broadcasting of Rochester, Inc. dated March 3, 1999. (2)
2.3 Purchase Agreement by and among Sinclair Communications, Inc., and STC Broadcasting, Inc., dated March 16, 1999 (2)
3.1 Certificate of Designation of the Powers, Preferences and Relative Participating, optional and other special rights of Preferred Stock, Series B dated February 5, 1999. (2)
3.2 Certificate of Elimination with respect to the Preferred Stock, Series B of STC Broadcasting, Inc. dated December 28, 1999. (3)
3.3 Certificate of Designation of the Powers, Preferences and Relative Participating, Optical and Other Special Rights of Preferred Stock, Series B and Qualifications, Limitations and Restrictions thereof of STC Broadcasting, Inc. dated December 28, 1999. (3)
10.1 Securities Purchase Agreement by and among the Company and Chase Manhattan Corporation, Credit Suisse First Boston Corporation, and Salomon Brothers Holding Company, Inc. dated February 5, 1999 (2)
10.2 Fourth Amendment to the Amended and Restated Credit Agreement dated as of December 21, 1999. (3)
10.3 Preferred Stock Purchase Agreement dated December 30, 1999 by and between Sunrise Television Corp. and STC Broadcasting, Inc. (3)
10.4 Senior Subordinated Note Purchase Agreement by and among Sunrise Television Corp. and Hicks Muse, Tate & Furst Equity Fund III, L.P., HM3 Coinvestors, L.P. and Chase Equity Associates, L.P. dated December 30, 1999. (3)
10.5 Agreement between STC Broadcasting, Inc. and the International Brotherhood of Electrical Workers dated September 15, 1999 representing certain employees of television station KFYR in Bismarck, North Dakota. (4)
12 Statement of fixed charge ratio (4) 21.1 Subsidiaries of STC Broadcasting, Inc. (4) 27.2 Financial Data Schedule (4)
(1) Incorporated by reference to the Form 10-Q of STC Broadcasting, Inc. for the period April 1, 1998 to June 30, 1998. (2) Incorporated by reference to the Form 10K of STC Broadcasting, Inc. for the year ended December 31, 1998. (3) Incorporated by reference to the Form 8K of STC Broadcasting, Inc. dated January 6, 2000. (4) Filed herewith.
Reports on Form 8-K
Nothing to report for period October 1, 1999 to December 31, 1999. The Company filed an 8K report on January 6, 2000 related to the license closing on the sale of WROC and the sale of $25.0 million of Redeemable Preferred Stock Series B.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Petersburg, State of Florida, on the 1st day of March, 2000.
STC Broadcasting, Inc.
By: /s/ Robert N. Smith ------------------- Robert N. Smith Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated:
EXHIBIT INDEX
(1) Incorporated by reference to the Form 10-Q of STC Broadcasting, Inc. for the period April 1, 1998 to June 30, 1998. (2) Incorporated by reference to the Form 10K of STC Broadcasting, Inc. for the year ended December 31, 1998. (3) Incorporated by reference to the Form 8K of STC Broadcasting, Inc. dated January 6, 2000. (4) Filed herewith.