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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER: 000-26076
SINCLAIR BROADCAST GROUP, INC.
(Exact name of Registrant as specified in its charter)
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MARYLAND 52-1494660
(State of incorporation) (I.R.S. Employer Identification No.)
10706 BEAVER DAM ROAD
COCKEYSVILLE, MD 21030
(Address of principal executive offices)
(410) 568-1500
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Class A common stock, par value $.01 per share
Series D preferred stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be files by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Based on the closing sale price of $9.375 per share as of March 24, 2000,
the aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $429.1 million.
As of March 24, 2000, there were 45,765,811 shares of class A common stock,
$.01 par value; 47,570,886 shares of class B common stock, and 3,450,000 shares
of series D preferred stock, $.01 par value, convertible into 7,561,644 shares
of class A common stock of the registrant issued and outstanding.
In addition, 2,000,000 shares of $200 million aggregate liquidation value
of 11 5/8% High Yield Trust Offered Preferred Securities of Sinclair Capital, a
subsidiary trust of Sinclair Broadcast Group, Inc., are issued and outstanding.
Documents Incorporated by Reference
Portions of the definitive proxy statement to be delivered to shareholders
in connection with the 2000 annual meeting of shareholders are incorporated by
reference into Part III.
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PART I
FORWARD-LOOKING STATEMENTS
This report includes or incorporates forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
risks, uncertainties and assumptions about us, including, among other things:
o the impact of changes in national and regional economies,
o our ability to service our outstanding debt,
o successful integration of acquired television stations, including
achievement of synergies and cost reductions,
o pricing fluctuations in local and national advertising,
o volatility in programming costs, and
o the effects of governmental regulation of broadcasting.
Other matters set forth in this report, including the risk factors set
forth in Item 7 of this report, or in the documents incorporated by reference
may also cause actual results in the future to differ materially from those
described in the forward-looking statements. We undertake no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this report might not
occur.
ITEM 1. BUSINESS
We are a diversified broadcasting company that owns or provides programming
services pursuant to local marketing agreements (LMAs) to more television
stations than any other commercial broadcasting group in the United States. We
currently own, or provide programming services pursuant to LMAs to, 61
television stations and 11 radio stations. During 1999, we sold the majority of
our radio stations and we have entered into agreements to sell, or intend to
sell in the future, our remaining radio stations. In addition, we own equity
interests in three Internet-related companies.
The 61 television stations that we own or program pursuant to LMAs are
located in 40 geographically diverse markets, with 33 of the stations in the top
47 television designated market areas (DMAs) in the United States. Our
television station group is diverse in network affiliation with 20 stations
affiliated with Fox Broadcasting Company (Fox), 18 with The WB Television
Network (WB), eight with United Paramount Television Network Partnership (UPN),
seven with ABC, four with NBC and three with CBS. One station operates as an
independent.
Through our wholly owned subsidiary, Sinclair Ventures, Inc., we own or
have options to acquire equity interests in three Internet-related companies,
namely NetFanatics, Inc., a web developer offering e-business solutions and
applications; Synergy Brands, Inc., an incubator of on-line consumer product
companies; and BeautyBuys.com, Inc., an e-tailer of brand name health and beauty
products and also a majority-owned subsidiary of Synergy Brands.
In July 1999, we entered into an agreement to sell 46 of our 52 radio
stations in nine of our ten markets to Entercom Communications Corporation
(Entercom). In December 1999, we completed the sale of 41 of our radio stations
in eight markets to Entercom. The sale of the remaining five stations is
expected to close in the third quarter of 2000. We are currently engaged in
litigation relating to the sale of the six radio properties and one television
station in the St. Louis market.
We underwent rapid and significant growth from 1991 to 1999. Since 1991, we
have increased the number of stations we own or provide services to from three
television stations to 61 television stations. From 1991 to 1999, net broadcast
revenues and Adjusted EBITDA [as defined in Item 6, Statement of Operations
Data, note (g)], increased from $39.7 million to $670.3 million, and from $15.5
million to $313.3 million, respectively.
2
During 1999, we modified our business strategy by:
o departing from our historical television broadcast asset acquisition
strategy,
o refocusing on the consolidation of operations of television broadcast
assets acquired in previous years by reinvesting in these businesses,
o developing our Internet division as it complements our television
broadcast platform, and
o divesting our radio broadcast division.
We believe that our new business strategy will allow us to focus on
maximizing the potential of the broadcast assets we currently operate while
exploring Internet opportunities provided by our platform.
We are a Maryland corporation formed in 1986. Our principal offices are
located at 10706 Beaver Dam Road, Cockeysville, MD 21030, and our telephone
number is (410) 568-1500.
TELEVISION BROADCASTING
We own and operate, provide programming services to, or have agreed to
acquire the following television stations:
MARKET
MARKET RANK (A) STATIONS STATUS (B) CHANNEL
- ------------------------------------- ---------- ---------- ------------ ---------
Tampa, Florida ...................... 13 WTTA LMA 38
Minneapolis/St. Paul, Minnesota ..... 14 KMWB O&O 23
Sacramento, California .............. 19 KOVR O&O 13
Pittsburgh, Pennsylvania ............ 20 WPGH O&O 53
WCWB LMA (e) 22
St. Louis, Missouri ................. 21 KDNL O&O 30
Baltimore, Maryland ................. 24 WBFF O&O 45
WNUV LMA 54
Indianapolis, Indiana ............... 26 WTTV O&O 4
WTTK O&O 29
Raleigh-Durham, North Carolina ...... 29 WLFL O&O 22
WRDC LMA (g) 28
Nashville, Tennessee ................ 30 WZTV LMA (h) 17
WUXP LMA (i) 30
Kansas City, Missouri ............... 31 KSMO O&O 62
Cincinnati, Ohio .................... 32 WSTR O&O 64
Milwaukee, Wisconsin ................ 33 WCGV O&O 24
WVTV LMA (g) 18
Columbus, Ohio ...................... 34 WSYX O&O 6
WTTE LMA 28
Asheville, North Carolina and
Greenville/Spartanburg/
Anderson, South Carolina ........... 35 WBSC LMA (g) 40
WLOS O&O 13
San Antonio, Texas .................. 37 KABB O&O 29
KRRT LMA (g) 35
Birmingham, Alabama ................. 39 WTTO O&O 21
WABM LMA (g) 68
WDBB LMA (k) 17
Norfolk, Virginia ................... 42 WTVZ O&O 33
Buffalo, New York ................... 44 WUTV LMA (h) 29
Oklahoma City, Oklahoma ............. 45 KOCB O&O 34
KOKH LMA (l) 25
Greensboro/Winston-Salem,
Salem/Highpoint,
North Carolina ..................... 47 WXLV LMA (h) 45
WUPN LMA (m) 48
Las Vegas, Nevada ................... 53 KVWB O&O 21
KFBT LMA (n) 33
Dayton, Ohio ........................ 56 WKEF O&O 22
WRGT LMA 45
NUMBER OF
COMMERCIAL EXPIRATION
STATIONS IN STATION DATE OF
MARKET AFFILIATION THE MARKET (C) RANK (D) FCC LICENSE
- ------------------------------------- ------------- ---------------- ---------- ------------
Tampa, Florida ...................... WB 7 7 2/1/05
Minneapolis/St. Paul, Minnesota ..... WB 6 5 4/1/06
Sacramento, California .............. CBS 6 3 12/1/06
Pittsburgh, Pennsylvania ............ FOX 6 4 8/1/07
WB 5 8/1/07
St. Louis, Missouri ................. ABC 6 5 2/1/06
Baltimore, Maryland ................. FOX 6 5 10/1/04
WB 4 10/1/04
Indianapolis, Indiana ............... WB 9 4 8/1/05
WB 4 (f) 8/1/05
Raleigh-Durham, North Carolina ...... WB 7 3 12/1/04
UPN 3 12/1/04
Nashville, Tennessee ................ FOX 7 4 8/1/05
UPN 5 8/1/05
Kansas City, Missouri ............... WB 8 5 2/1/06
Cincinnati, Ohio .................... WB 5 5 10/1/05
Milwaukee, Wisconsin ................ UPN 7 6 12/1/05
WB 5 12/1/05
Columbus, Ohio ...................... ABC 5 3 10/1/05
FOX 4 10/1/05
Asheville, North Carolina and
Greenville/Spartanburg/
Anderson, South Carolina ........... WB 5 5 12/1/04
ABC 6 3 12/1/04
San Antonio, Texas .................. FOX 5 3 8/1/98 (j)
WB 4 8/1/98 (j)
Birmingham, Alabama ................. WB 8 4 4/1/05
UPN 6 4/1/05
WB 2 6 4/1/05
Norfolk, Virginia ................... WB 6 4 10/1/04
Buffalo, New York ................... FOX 5 4 6/1/07
Oklahoma City, Oklahoma ............. WB 6 4 6/1/06
FOX 4 6/1/06
Greensboro/Winston-Salem,
Salem/Highpoint,
North Carolina ..................... ABC 8 4 12/1/04
UPN 5 5 12/1/04
Las Vegas, Nevada ................... WB 6 5 10/1/06
IND (o) 6 10/1/06
Dayton, Ohio ........................ NBC 4 3 10/1/05
FOX 4 10/1/05
3
NUMBER OF
COMMERCIAL EXPIRATION
MARKET STATIONS IN STATION DATE OF
MARKET RANK (A) STATIONS STATUS (B) CHANNEL AFFILIATION THE MARKET (C) RANK (D) FCC LICENSE
- -------------------------------------- -------- ---------- ----------- ------- ----------- ---------------- ---------- ------------
Charleston and Huntington,
West Virginia ...................... 59 WCHS O&O 8 ABC 4 3 10/1/04
WVAH LMA 11 FOX 4 10/1/04
Richmond, Virginia .................. 60 WRLH LMA (h) 35 FOX 5 4 10/1/04
Mobile, Alabama and
Pensacola, Florida ................. 62 WEAR O&O 3 ABC 6 2 2/1/05
WFGX LMA 35 WB 6 2/1/05
Flint/Saginaw/Bay City,
Michigan ........................... 64 WSMH O&O 66 FOX 4 4 10/1/05
Lexington, Kentucky ................. 66 WDKY O&O 56 FOX 5 4 8/1/05
Des Moines, Iowa .................... 70 KDSM O&O 17 FOX 4 4 2/1/06
Paducah, Kentucky/
Cape Girardeau, Missouri ........... 74 KBSI O&O 23 FOX 5 4 2/1/06
WDKA LMA 49 UPN 5 8/1/05
Syracuse, New York .................. 76 WSYT O&O 68 FOX 5 4 6/1/07
WNYS LMA 43 UPN 5 6/1/07
Rochester, New York ................. 77 WUHF LMA 31 FOX 4 4 6/1/07
Portland, Maine ..................... 80 WGME O&O 13 CBS 5 2 4/1/07
Springfield/Champaign, Illinois ..... 83 WICS O&O 20 NBC 4 2 12/1/05
WICD O&O 15 NBC 2 12/1/05
Madison, Wisconsin .................. 85 WMSN LMA (h) 47 FOX 4 4 12/1/05
Cedar Rapids, Iowa .................. 90 KGAN O&O 2 CBS 5 3 2/1/06
Tri-Cities, Tennessee ............... 92 WEMT O&O 39 FOX 5 4 8/1/05
Charleston, South Carolina .......... 104 WMMP O&O 36 UPN 5 5 12/1/04
WTAT LMA 24 FOX 4 12/1/04
Springfield, Massachusetts .......... 105 WGGB O&O 40 ABC 4 2 4/1/07
Tyler-Longview, Texas ............... 107 KETK O&O(p) 56 NBC 3 2 8/1/06
Tallahassee, Florida ................ 109 WTWC O&O 40 NBC 4 3 12/1/05
Peoria/Bloomington, Illinois ........ 110 WYZZ O&O 43 FOX 4 4 12/1/05
- ----------
(a) Rankings are based on the relative size of a station's DMA among the 211
generally recognized DMAs in the United States as estimated by Nielsen.
(b) "O&O" refers to stations that we own and operate. "LMA" refers to stations
to which we provide programming services pursuant to a local marketing
agreement.
(c) Represents the number of television stations designated by Nielsen as
"local" to the DMA, excluding public television stations and stations that
do not meet the minimum Nielsen reporting standards (weekly cumulative
audience of at least 2.5%) for the Sunday-Saturday, 6:00 a.m. to 2:00 a.m.
time period.
(d) The rank of each station in its market is based upon the November 1999
Nielsen estimates of the percentage of persons tuned to each station in the
market from 6:00 a.m. to 2:00 a.m., Sunday-Saturday.
(e) The License Assets for this station are currently owned by WPTT, Inc., and
we intend to acquire these assets upon FCC approval.
(f) WTTK, a satellite of WTTV under the Federal Communications Commission (FCC)
rules, simulcasts all of the programming aired on WTTV and the station rank
applies to the combined viewership of these stations.
(g) The License Assets for these stations are currently owned by Glencairn,
Ltd. or one of its subsidiaries and we intend to acquire these assets upon
FCC approval.
(h) The License Assets for these stations are currently owned by Sullivan
Broadcasting Company II, Inc. and we intend to acquire these assets upon
FCC approval.
(i) The License Assets for this station are currently owned by Mission
Broadcasting I, Inc., and we intend to acquire these assets upon FCC
approval.
(j) License renewal application pending.
(k) WDBB simulcasts the programming broadcast on WTTO pursuant to a local
marketing agreement.
(l) The License Assets for this station are currently owned by Sullivan
Broadcasting Company III, Inc., and we intend to acquire these assets upon
FCC approval.
(m) The License Assets for this station are currently owned by Mission
Broadcasting II, Inc., and we intend to acquire this asset upon FCC
approval.
(n) The License Assets for these stations are currently owned by Channel 33,
Inc., and we intend to acquire these assets when FCC approval has become
final.
(o) "IND" or "Independent" refers to a station that is not affiliated with any
of ABC, CBS, NBC, Fox, WB or UPN.
(p) Although Sinclair has sold all of the Non-License Assets of this station,
Sinclair still owns its License Assets. See "--1999 Acquisition and
Dispositions."
4
OPERATING STRATEGY
Our television operating strategy includes the following key elements:
ATTRACTING VIEWERSHIP
We seek to attract viewership and expand our audience share through
selective, high-quality programming.
Popular Programming. We seek to obtain, at attractive prices, popular
syndicated programming that is complementary to the station's network
affiliation. We also believe that an important factor in attracting viewership
to our stations is their network affiliations with Fox, WB, ABC, CBS, NBC and
UPN. These affiliations enable us to attract viewers by virtue of the quality
first-run original programming provided by these networks and the networks'
promotion of such programming. We focus on obtaining popular syndicated
programming for key programming periods (generally 6:00 p.m. to 8:00 p.m.) for
broadcast on our Fox, WB and UPN affiliates. Examples of this programming
include "Friends," "Frasier," "3rd Rock From the Sun," "The Simpsons," "Drew
Carey" and "Seinfeld." In addition to network programming, our network
affiliates broadcast news magazine, talk show, and game show programming such as
"Hard Copy," "Entertainment Tonight," "Regis and Kathie Lee," "Rosie O'Donnell,"
"Wheel of Fortune" and "Jeopardy."
Local News. We believe that the production and broadcasting of local news
is an important link to the community and an aid to the station's efforts to
expand its viewership. In addition, local news programming can provide access to
advertising sources targeted specifically to local news viewers. We carefully
assess the anticipated benefits and costs of producing local news prior to
introduction at one of our stations because a significant investment in capital
equipment is required and substantial operating expenses are incurred in
introducing, developing and producing local news programming. We currently
provide local news programming at 31 of the television stations we own or
program located in 26 separate markets. The possible introduction of local news
at our other stations is reviewed periodically and we have recently expanded our
news programming in some of the markets in which we program a second station
pursuant to an LMA. We can produce news programming in these markets at
relatively low cost per hour of programming and the programming serves the local
community by providing additional news outlets in these markets, some of which
are broadcast at different times. Our policy is to institute local news
programming at a specific station only if the expected benefits of local news
programming at the station are believed to exceed the associated costs after an
appropriate start-up period.
Popular Sporting Events. Our WB and UPN affiliated and independent stations
generally face fewer restrictions on broadcasting live local sporting events
than do their competitors that are affiliates of Fox, ABC, NBC and CBS which are
subject to certain prohibitions against preemptions of network programming. We
have been able to acquire the local television broadcast rights for certain
sporting events, including NBA basketball, Major League Baseball, NFL football,
NHL hockey, ACC basketball, Big Ten football and basketball, and SEC football.
We seek to expand our sports broadcasting in DMAs as profitable opportunities
arise. In addition, our stations that are affiliated with FOX, ABC, NBC and CBS
broadcast certain Major League Baseball games, NFL football games and NHL hockey
games as well as other popular sporting events.
Counter-Programming. Our programming strategy on our Fox, WB, UPN and
independent stations also includes "counter-programming," which consists of
broadcasting programs that are alternatives to the types of programs being shown
concurrently on competing stations. This strategy is designed to attract
additional audience share in demographic groups not served by concurrent
programming on competing stations. We believe that implementation of this
strategy enables our stations to achieve competitive rankings in households in
the 18-49 and 25-54 demographics and to offer greater diversity of programming
in each of our DMAs.
5
CONTROL OF OPERATING AND PROGRAMMING COSTS
By employing a disciplined approach to managing programming acquisition and
other costs, we have been able to achieve operating margins that we believe are
among the highest in the television broadcast industry. We have sought and will
continue to seek to acquire quality programming for prices at or below prices
paid in the past. As an owner or provider of programming services to 61 stations
in 40 DMAs reaching approximately 25% of U.S. television households, we believe
that we are able to negotiate favorable terms for the acquisition of
programming. Moreover, we emphasize control of each of our stations' programming
and operating costs through program-specific profit analysis, detailed
budgeting, tight control over staffing levels and detailed long-term planning
models.
ATTRACT AND RETAIN HIGH QUALITY MANAGEMENT
We believe that much of our success is due to our ability to attract and
retain highly skilled and motivated managers at both the corporate and local
station levels. A portion of the compensation provided to general managers,
sales managers and other station managers is based on their achieving certain
operating results. We also provide our corporate and station managers with
deferred compensation plans offering options to acquire class A common stock.
COMMUNITY INVOLVEMENT
Each of our stations actively participates in various community activities
and offers many community services. Our activities include broadcasting
programming of local interest and sponsorship of community and charitable
events. We also encourage our station employees to become active members of
their communities and to promote involvement in community and charitable
affairs. We believe that active community involvement by our stations provides
our stations with increased exposure in their respective DMAs and ultimately
increases viewership and advertising support.
LOCAL MARKETING AGREEMENTS AND DUOPOLIES
In the past, we have sought to increase our revenues and improve our
margins by providing programming services pursuant to an LMA to a second station
in selected DMAs where we already own one station. In certain instances, single
station operators and stations operated by smaller ownership groups do not have
the management expertise or the operating efficiencies available to us as a
multi-station broadcaster. In addition to providing additional revenue
opportunities, we believe that these arrangements assist stations whose
operations may have been marginally profitable to continue to air popular
programming and contribute to diversity of programming in their respective DMAs.
As a result of the FCC's recent revision of its duopoly rules to permit the
ownership of up to two television stations in a market in certain instances, we
have entered into agreements to acquire several stations we have been
programming pursuant to LMA's in markets where duopolies are permitted by the
FCC's rules.
We also enter into LMA arrangements in connection with a station whose
acquisition by us is pending FCC approval. In these transactions, we first
obtain an option to acquire the station assets essential for broadcasting a
television or radio signal in compliance with regulatory guidelines, generally
consisting of the FCC license, transmitter, transmission lines, technical
equipment, call letters and trademarks, and certain furniture, fixtures and
equipment (the License Assets) and then acquire the remaining assets (the
Non-License Assets) at the time we enter into the option. Following acquisition
of the Non-License Assets, the License Assets continue to be owned by the
owner-operator and holder of the FCC license, which enters into an LMA with us.
After FCC approval for transfer of the License Assets is obtained, we acquire
the License Assets and the LMA arrangement is terminated.
ESTABLISHING DUOPOLIES
We believe that we can attain significant growth in operating cash flow
through the utilization of duopolies. By expanding our presence in certain of
our markets in which we already own a station, we can improve our competitive
position with respect to a demographic sector. In addition, by programming
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two stations, we are able to realize significant economies of scale in
marketing, programming, overhead and capital expenditures. Upon the completion
of all pending acquisitions, we will own duopolies in 12 markets and operate a
second station pursuant to an LMA in eight markets. We currently are permitted
under FCC guidelines to establish new duopolies in the Minneapolis, Tampa,
Indianapolis and Sacramento markets, if suitable acquisitions can be identified
and negotiated under acceptable terms.
INNOVATIVE LOCAL SALES AND MARKETING
We recognize that the national market for advertising has softened due to
increased competition from other forms of media, such as cable and the Internet.
We believe that we can ultimately grow faster by concentrating our sales efforts
on enhancing local customer relationships for the long-term. Our goal is to
shift our revenue mix so that 75% of our time sales are derived in the local
markets by 2006. For 1999, 54% of time sales were local. Increasing our local
market penetration requires increasing the number of account executives calling
on customers. We believe that we need to add one to two additional salespersons
at each station, approximately 100 new account executives company-wide.
Currently, we have filled over half those positions. Achieving our goal also
requires training and providing a forum to exchange best practices. For our
sales managers, we have added programs to facilitate cross-pollinization of
ideas. We are also providing organizational training programs to our sales
managers and increasing the number of sales training programs for our account
executives. We believe our efforts will afford the stations the resources and
methodology to attract new advertisers and retain them for the long term by
developing a sense of partnership and offering new marketing ideas and
promotional campaigns.
PROGRAMMING AND AFFILIATIONS
We continually review our existing programming inventory and seek to
purchase the most profitable and cost-effective syndicated programs available
for each time period. In developing our selection of syndicated programming, we
balance the cost of available syndicated programs with their potential to
increase advertising revenue and the risk of their reduced popularity during the
term of the program contract. We seek to purchase programs with contractual
periods that permit programming flexibility and which complement a station's
overall programming and counter-programming strategy. Programs that can perform
successfully in more than one time period are more attractive due to the long
lead time and multi-year commitments inherent in program purchasing.
Sixty of the 61 television stations that we own or to which we provide
programming services currently operate as affiliates of Fox (20 stations), WB
(18 stations), ABC (seven stations), NBC (four stations), UPN (eight stations),
or CBS (three stations). The networks produce and distribute programming in
exchange for each station's commitment to air the programming at specified times
and for commercial announcement time during the programming. In addition,
networks other than Fox, WB and UPN pay each affiliated station a fee for each
network-sponsored program broadcast by the station.
On August 21, 1996, we entered into an agreement with Fox (the Fox
Agreement) which, among other things, provides that the affiliation agreements
between Fox and eight stations then owned or provided programming services by us
would be amended to have new five-year terms commencing on the date of the Fox
Agreement. The eight affected stations are: WPGH-TV in Pittsburgh, Pennsylvania,
WBFF-TV in Baltimore, Maryland, KABB-TV in San Antonio, Texas, WTTE-TV in
Columbus, Ohio (which has been sold to a subsidiary of Glencairn, Ltd. and is
programmed by Sinclair pursuant to an LMA), WSMH-TV in Flint, Michigan, KDSM-TV
in Des Moines, Iowa, WDKY-TV in Lexington, Kentucky and WYZZ-TV in Peoria,
Illinois. Fox has the option to extend the affiliation agreements for additional
five-year terms and must extend all of the affiliation agreements if it extends
any, except that Fox may selectively renew affiliation agreements if any station
has breached its affiliation agreement. The Fox Agreement also provides that,
during the term of the affiliation agreements, we will have the right to
purchase and operate as a Fox affiliate, for fair market value, any station Fox
acquires in any of the foregoing markets if Fox determines to terminate the
affiliation agreement with our station in that market and operate the station
being acquired by Fox as a Fox affiliate.
The Fox-affiliated stations acquired, to be acquired or being programmed by
us as a result of the Sullivan Acquisition and Max Media Acquisition continue to
carry Fox programming notwithstanding the fact that their affiliation agreements
have expired. Although we are not currently negotiating with Fox
7
to secure long term affiliation agreements, we do not believe that Fox has any
current plans to terminate the affiliation of any of these stations. In
addition, the affiliation agreements of three ABC stations (WEAR-TV, in
Pensacola, Florida, WCHS-TV, in Charleston, West Virginia and WXLV-TV, in
Greensboro/Winston-Salem, North Carolina) have expired. Sinclair and ABC have
discussed long term extensions of these agreements.
On July 4, 1997, we entered into an agreement with WB (the WB Agreement),
pursuant to which we agreed to affiliate certain of our stations with WB for a
ten-year term expiring January 15, 2008. Under the terms of the WB Agreement, as
modified by the subsequent letter agreement entered into between WB and us on
May 18, 1998, WB agreed to pay us $64 million in aggregate amount in monthly
installments during the first eight years commencing on January 16, 1998 in
consideration for entering into affiliation agreements with WB.
USE OF DIGITAL TELEVISION TECHNOLOGY
We believe that television broadcasting may be enhanced significantly by
the development and increased availability of digital broadcasting service
technology. This technology has the potential to permit us to provide viewers
multiple channels of digital television over each of our existing standard
channels, to provide certain programming in a high definition television format
(HDTV) and to deliver various forms of data, including data on the Internet, to
home and business computers. These additional capabilities may provide us with
additional sources of revenue although we may incur significant additional costs
to do so.
Implementation of digital television can improve the technical quality of
television signals received by viewers. Under certain circumstances, however,
conversion to digital operation may reduce a station's geographic coverage area
or result in some increased interference.
Testing in Baltimore and Philadelphia, using the FCC-mandated 8-vestigial
sideband (8-VSB) standard, indicated that reception with simple antennas was
highly problematic. These reception problems prompted us to explore an
alternative transmission standard. In June 1999, we conducted a study of the
comparative ability of Coded Orthogonal Frequency Division Multiplexing (COFDM)
and 8-VSB systems to deliver HDTV service to simple consumer grade antennas both
indoors and outdoors under real-world conditions. This study demonstrated to us
that while an 8-VSB signal cannot be received reliably today with a simple
indoor antenna, use of COFDM technology eliminates interference from moving
objects and permits robust reception with simple antennas even in highly dynamic
environments. In October 1999, we filed a Petition for Rulemaking with the FCC
urging it to permit broadcasters the flexibility to use COFDM modulation as an
alternative to the current 8-VSB standard. Although the FCC dismissed the
Petition, it is considering the current status of the 8-VSB standard as part of
its biennial review of the digital television transition process. Absent
improvement in DTV receivers, continued reliance on the 8-VSB standard may not
allow us to provide the same reception coverage with our digital signals as we
can with our current analog signals.
We cannot predict what future actions the FCC or Congress might take with
respect to DTV, nor can we predict the effect of the FCC's present DTV
implementation plan or such future actions on our business. DTV technology
currently is available in some of the top thirty viewing markets. A successful
transition from the current analog broadcast format to a digital format may take
many years. There can be no assurance that our efforts to take advantage of the
new technology will be commercially successful.
8
RADIO BROADCASTING
We own the following radio stations:
RANKING OF STATION RANK EXPIRATION
STATION'S STATION PRIMARY IN PRIMARY DATE
GEOGRAPHIC MARKET MARKET BY PROGRAMMING DEMOGRAPHIC DEMOGRAPHIC OF FCC
SERVED (A) REVENUE (B) FORMAT TARGET (C) TARGET (D) LICENSE
- --------------------------- ------------- --------------------------- -------------- -------------- -----------
St. Louis, Missouri (e) 18
KPNT-FM Alternative Rock Adults 18-34 4 2/1/05
KXOK-FM Classic Rock Adults 25-54 13 2/1/05
WVRV-FM Modern Adult Contemporary Adults 18-34 11 12/1/04
WRTH-AM Adult Standards Adults 35-64 20 2/1/05
WIL-FM Country Adults 25-54 3 2/1/05
KIHT-FM 70s Rock Adults 25-54 7 2/1/05
Kansas City, Missouri 29
KCFX-FM (f) 70s Rock Adults 25-54 3 2/1/05
KQRC-FM (f) Active Rock Adults 18-34 1 6/1/05
KCIY-FM (f) Smooth Jazz Adults 25-54 11 2/1/05
KXTR-FM (f) Classical Adults 25-54 15 2/1/05
Wilkes-Barre/Scranton, 69
Pennsylvania WKRF-FM (g) Contemporary Hit Radio Adults 18-49 n/a 8/1/06
- ----------
(a) Actual city of license may differ from the geographic market served.
(b) Ranking of the principal radio market served by the station among all U.S.
radio markets by 1998 aggregate gross radio broadcast revenue according to
Duncan's Radio Market Guide -- 1999 Edition.
(c) Due to variations that may exist within programming formats, the primary
demographic target of stations with the same programming format may be
different.
(d) All information concerning ratings and audience listening information is
derived from the Fall 1999 Arbitron Metro Area Ratings Survey (the Fall
1999 Arbitron). Arbitron is the generally accepted industry source for
statistical information concerning audience ratings. Due to the nature of
listener surveys, other radio ratings services may report different
rankings; however, we do not believe that any radio ratings service other
than Arbitron is accorded significant weight in the radio broadcast
industry. "Station Rank in Primary Demographic Target" is the ranking of
the station among all radio stations in its market that are ranked in its
target demographic group and is based on the station's average person's
share in the primary demographic target in the applicable Metro Survey
Area. Source: Average Quarter Hour Estimates, Monday through Sunday, 6:00
a.m. to midnight, Fall 1999 Arbitron.
(e) See "--Pending Dispositions" for a discussion of the St. Louis purchase
option.
(f) We have entered into an agreement to sell substantially all the assets of
the Kansas City radio stations to Entercom Communications Inc. and the
consummation of the sale will occur following FCC approval.
(g) We have entered into an agreement to sell substantially all the assets of
this station to Entercom Communications Inc. Entercom currently is
providing programming, sales and marketing services to this station
pursuant to an LMA.
INTERNET INVESTMENT STRATEGY
We believe that there are substantial opportunities for television
broadcasters to work with Internet related businesses to increase the
profitability of Internet-related businesses and to use the resources of the
Internet to enhance the offerings and value of broadcast stations. Accordingly,
in 1999, we began to
9
invest in Internet related businesses. Our strategy includes expanding this
involvement and working with the businesses in which we invest to enhance their
value and to develop combined broadcast and Internet products.
During 1999, we acquired equity interests in three Internet-related
companies. Through our wholly owned subsidiary, Sinclair Ventures, Inc., we own
or have options to acquire equity interests in the following Internet-related
companies: NetFanatics, Inc., a web developer offering e-business solutions and
applications; Synergy Brands, Inc., an incubator of on-line consumer product
companies; and BeautyBuys.com, Inc., an e-tailer of brand name health and beauty
products and also a majority owned subsidiary of Synergy Brands. We acquired
these interests for a combination of cash and the award of advertising time on
our stations to the Internet businesses.
In furtherance of our Internet strategy, we routinely review and conduct
investigations of potential Internet-related acquisitions. When we believe a
favorable opportunity exists, we seek to enter into discussions with the owners
of Internet-related businesses regarding the possibility of an acquisition,
equity investment or barter transaction. At any given time, we may be in
discussions with one or more parties. We cannot assure you that any of these or
other negotiations will lead to definitive agreements or if agreements are
reached that any transactions would be consummated.
1999 ACQUISITIONS AND DISPOSITIONS
Guy Gannett Acquisition. In September 1998, we agreed to acquire from Guy
Gannett Communications its television broadcasting assets for a purchase price
of $317 million in cash (the Guy Gannett Acquisition). In April, 1999, we
acquired from Guy Gannett Communications WGME-TV in Portland, Maine, WGGB-TV in
Springfield, Massachusetts, WTWC-TV in Tallahassee, Florida and WOKR-TV in
Rochester, New York. In July, 1999, we completed the acquisition of the Guy
Gannett stations by acquiring WICD-TV in Champaign, Illinois, WICS-TV in
Springfield, Illinois and KGAN-TV in Cedar Rapids, Iowa. We financed the
acquisition with a combination of bank borrowings and the use of cash proceeds
resulting from our disposition of certain broadcast assets.
Ackerley Disposition. In April 1999, we completed the sale of WOKR-TV in
Rochester, New York to Central NY News, Inc. for a sales price of $125 million
(the Ackerley Disposition). We acquired WOKR-TV as part of the Guy Gannett
Acquisition.
CCA Disposition. In April 1999, we sold to Communications Corporation of
America (CCA) the Non-License Assets of KETK-TV and KLSB-TV in Tyler-Longview,
Texas for a sales price of $36 million (the CCA Disposition). In addition, CCA
has an option to acquire the License Assets of KETK-TV for an option purchase
price of $2 million.
St. Louis Radio Acquisition. In August 1999, we completed the purchase of
radio station KXOK-FM in St. Louis, Missouri from WPNT, Inc. for a purchase
price of $14.1 million in cash.
Barnstable Disposition. In August 1999, we completed the sale of radio
stations WFOG-FM and WGH-AM/FM serving the Norfolk, Virginia market to
Barnstable Broadcasting, Inc. (the Barnstable Disposition) for a sales price of
$23.7 million.
Entercom Disposition. In August 1999, we entered into an agreement to sell
46 radio stations in nine markets to Entercom Communications Corporation
(Entercom) for $824.5 million in cash. The transaction does not include our
radio stations in the St. Louis market which were subject to the St. Louis
Purchase Option described in "--Pending Dispositions" below. In December 1999,
we closed on the sale of 41 radio stations in eight markets for a purchase price
of $700.4 million. We expect to close on the remaining $124.1 million during
2000 which represents the Kansas City radio stations and the License Assets of
WKRF-FM in Wilkes-Barre. The Entercom transaction contemplated our sale to
Entercom of shares of stock we held in a company called USA Digital Radio, Inc.
(USADR). The exercise of preemptive rights to buy stock by USADR shareholders
precluded our completing the sale of the shares to Entercom in its entirety,
leading Entercom to assert a claim against us of approximately $1 million.
Although we cannot predict the outcome of this claim, we believe we have certain
defenses available to us which may eliminate or reduce any potential liability.
10
PENDING ACQUISITIONS AND DISPOSITIONS
Glencairn/WPTT, Inc. Acquisitions. On November 15, 1999, we entered into an
agreement to purchase substantially all of the assets of television station
WCWB-TV, Channel 22, Pittsburgh, Pennsylvania, with the owner of that television
station WPTT, Inc. for a purchase price of $17.8 million. The waiting period
under the Hart-Scott-Rodino Antitrust Act of 1976 has expired and closing on
this transaction is subject to FCC approval. A petition to deny was filed with
the FCC against the application. We have filed an opposition to the petition to
deny, which remains pending at the FCC.
On November 15, 1999, we entered into five separate plans and agreements of
merger, pursuant to which we would acquire through merger with subsidiaries of
Glencairn, Ltd., television broadcast stations WABM-TV, Birmingham, Alabama,
KRRT-TV, San Antonio, Texas, WVTV-TV, Milwaukee, Wisconsin, WRDC-TV, Raleigh,
North Carolina, and WBSC-TV (formerly WFBC-TV), Andersen, South Carolina. The
consideration for these mergers is the issuance to Glencairn shares of class A
common voting stock of the Company. The total value of the shares to be issued
in consideration for all the mergers is $8.0 million. A petition to deny was
filed with the FCC against these applications. We have filed an opposition to
the petition to deny, which remains pending at the FCC.
We currently program each of the stations we have agreed to acquire from
WPTT, Inc. and Glencairn Ltd. pursuant to local market agreements. As described
more fully in the material incorporated by reference in Item 13, officers,
directors and shareholders of Sinclair (or their families) have interests in
WPTT, Inc. and Glencairn Ltd.
Sullivan IV Acquisition. In November 1999, we filed an application to
acquire the stock of Sullivan Broadcasting Company IV, Inc. which has obtained
FCC approval to acquire KOKH-TV, Oklahoma City, Oklahoma from Sullivan
Broadcasting Company III, Inc. A petition to deny was filed with the FCC against
our application. We have filed an opposition to the petition to deny, which
remains pending at the FCC.
Montecito Acquisition. In February 1998, we entered into a Stock Purchase
Agreement with Montecito Broadcasting Corporation (Montecito) and its
stockholders to acquire all of the issued and outstanding stock of Montecito
which owns the FCC License for television broadcast station KFBT-TV. The FCC has
granted initial approval to the transaction, which shall become final in April
2000. We anticipate acquiring the stock of Montecito in the second quarter of
2000.
Mission Option. Pursuant to our merger with Sullivan Broadcast Holdings,
Inc., which was effective July 1, 1998, we acquired options to acquire
television broadcast station WUXP-TV in Nashville, Tennessee from Mission
Broadcasting I, Inc. and television broadcast station WUPN-TV in Greensboro,
North Carolina from Mission Broadcasting II, Inc. On November 15, 1999, we
exercised our option to acquire both of the foregoing stations. This acquisition
is subject to FCC approval.
St. Louis Purchase Option. In connection with our 1996 acquisition of the
broadcasting assets of River City Broadcasting, L.P. (River City), we entered
into a five year agreement (the Baker Agreement) with Barry Baker, the Chief
Executive Officer of River City pursuant to which Mr. Baker served as a
consultant to us and would have become an officer of Sinclair if certain
conditions were satisfied. As of February 8, 1999, the conditions to Mr. Baker
becoming an officer of Sinclair had not been satisfied, and on that date we
entered into an amendment to the Baker Agreement which terminated Mr. Baker's
services effective March 8, 1999. Mr. Baker had certain rights as a consequence
of termination of the Baker Agreement, including the right to purchase at fair
market value our television and radio stations that serve the St. Louis,
Missouri market (the St. Louis purchase option).
In June 1999, we received a letter from Mr. Baker stating that he elected
to exercise his St. Louis purchase option. In his letter, Mr. Baker named Emmis
Communications Corporation (Emmis) as his designee to exercise the St. Louis
purchase option. Notwithstanding our belief that Emmis was not an appropriate
designee of Mr. Baker, we negotiated in good faith with Emmis regarding the
potential sale of the St. Louis properties. Following unsuccessful negotiations,
however, on January 18, 2000, we filed suit in the Circuit Court of Baltimore
County, Maryland against Mr. Baker and Emmis claiming, alternatively, that Mr.
Baker's designation of Emmis was invalid, that the St. Louis purchase option is
void for vagueness and/or that Emmis breached a duty that it owed to us by
refusing to negotiate the acquisition agreement in good faith. We have requested
that the court grant us declaratory relief and/or monetary damages.
11
On March 17, 2000, Emmis and Mr. Baker filed a joint answer and
counterclaim generally denying the allegations made by Sinclair in its lawsuit
and claiming that Sinclair has acted in bad faith in failing to fulfill its
contractual obligations, has mismanaged the St. Louis properties and has
interfered with the contract between Mr. Baker and Emmis in which Mr. Baker
purportedly designated Emmis as the transferee of the properties. The
counterclaim seeks compensatory and punitive damages, the appointment of a
special receiver to manage the St. Louis broadcast properties and a declaratory
judgment requiring Sinclair to complete the sale of those properties to Emmis.
We believe we have valid defenses to the Emmis counterclaims and intend to
vigorously contest the claims, although there can be no assurances regarding the
outcome of this litigation.
In light of this ongoing lawsuit, we do not expect the transaction
contemplated by the St. Louis purchase option to be consummated. We do intend,
however, to sell our remaining six radio stations serving the St. Louis market
which were, in part, the subject of the St. Louis purchase option.
Entercom Disposition. In August 1999, we entered into an agreement to sell
46 radio stations in nine markets to Entercom for $824.5 million in cash. The
transaction does not include our radio stations in the St. Louis markets which
were subject to the St. Louis purchase option. In December 1999, we closed on
the sale of 41 radio stations in eight markets for a purchase price of $700.4
million. We expect to close on the remaining $124.1 million during 2000 which
represents the Kansas City radio stations and the License Assets of WKRF-FM in
Wilkes-Barre. The completion of the Kansas City transaction is subject to FCC
and Department of Justice approval. The completion of the sale of WKRF-FM is
subject only to FCC approval and the outcome of pending litigation in which a
former licensee is seeking the return of the WKRF-FM license based on a
fraudulent conveyance claim; pending the receipt of these approvals Entercom is
providing programming, sales and marketing services to WKRF-FM pursuant to an
LMA. The Entercom transaction contemplated our sale to Entercom of shares of
stock we held in USADR. The exercise of preemptive rights to buy stock by USADR
shareholders precluded our completing the sale of the shares to Entercom in its
entirety, leading Entercom to assert a claim against us of approximately $1
million. Although we cannot predict the outcome of this claim, we believe we
have certain defenses available to us which may eliminate or reduce any
potential liability.
FEDERAL REGULATION OF TELEVISION AND RADIO BROADCASTING
The ownership, operation and sale of television and radio stations are
subject to the jurisdiction of the FCC, which acts under authority granted by
the Communications Act of 1934, as amended (Communications Act). Among other
things, the FCC; assigns frequency bands for broadcasting; determines the
particular frequencies, locations and operating power of stations; issues,
renews, revokes and modifies station licenses; regulates equipment used by
stations; adopts and implements regulations and policies that directly or
indirectly affect the ownership, operation and employment practices of stations;
and has the power to impose penalties for violations of its rules or the
Communications Act.
The following is a brief summary of certain provisions of the
Communications Act, the Telecommunications Act of 1996 (the 1996 Act) and
specific FCC regulations and policies. Reference should be made to the
Communications Act, the 1996 Act, FCC rules and the public notices and rulings
of the FCC for further information concerning the nature and extent of federal
regulation of broadcast stations.
GENERAL
License Grant and Renewal. Television and radio stations operate pursuant
to broadcasting licenses that are granted by the FCC for maximum terms of eight
years and are subject to renewal upon application to the FCC. During certain
periods when renewal applications are pending, petitions to deny license
renewals can be filed by interested parties, including members of the public.
The FCC will generally grant a renewal application if it finds:
o that the station has served the public interest, convenience and
necessity;
o that there have been no serious violations by the licensee of the
Communications Act or the rules and regulations of the FCC; and
o that there have been no other violations by the licensee of the
Communications Act or the rules and regulations of the FCC that, when
taken together, would constitute a pattern of abuse.
12
All of the stations that we currently own and operate or provide
programming services to pursuant to LMAs, or intend to acquire or provide
programming services pursuant to LMAs in connection with pending acquisitions,
are presently operating under regular licenses, which expire as to each station
on the dates set forth under "--Television Broadcasting" and "--Radio
Broadcasting" above. Although renewal of a license is granted in the vast
majority of cases even when petitions to deny are filed, there can be no
assurance that the licenses of a station will be renewed.
General Ownership Matters. The Communications Act prohibits the assignment
of a broadcast license or the transfer of control of a broadcast licensee
without the prior approval of the FCC. In determining whether to permit the
assignment or transfer of control of, or the grant or renewal of, a broadcast
license, the FCC considers a number of factors pertaining to the licensee,
including compliance with various rules limiting common ownership of media
properties, the "character" of the licensee and those persons holding
"attributable" interests in that licensee, and compliance with the
Communications Act's limitations on alien ownership.
To obtain the FCC's prior consent to assign a broadcast license or transfer
control of a broadcast licensee, appropriate applications must be filed with the
FCC. If the application involves a "substantial change" in ownership or control,
the application must be placed on public notice for a period of approximately 30
days during which petitions to deny the application may be filed by interested
parties, including members of the public. If the application does not involve a
"substantial change" in ownership or control, it is a "pro forma" application.
The "pro forma" application is not subject to petitions to deny or a mandatory
waiting period, but is nevertheless subject to having informal objections filed
against it. If the FCC grants an assignment or transfer application, interested
parties have approximately 30 days from public notice of the grant to seek
reconsideration or review of the grant. Generally, parties that do not file
initial petitions to deny or informal objections against the application face
difficulty in seeking reconsideration or review of the grant. The FCC normally
has approximately an additional 10 days to set aside such grant on its own
motion. When passing on an assignment or transfer application, the FCC is
prohibited from considering whether the public interest might be served by an
assignment or transfer to any party other than the assignee or transferee
specified in the application.
The FCC generally applies its ownership limits to "attributable" interests
held by an individual, corporation, partnership or other association. In the
case of corporations holding, or through subsidiaries controlling, broadcast
licenses, the interests of officers, directors and those who, directly or
indirectly, have the right to vote 5% or more of the corporation's stock (or 20%
or more of such stock in the case of insurance companies, investment companies
and bank trust departments that are passive investors) are generally
attributable, except that, in general, no minority voting stock interest will be
attributable if there is a single holder of more than 50% of the outstanding
voting power of the corporation. In August, 1999, the FCC revised its
attribution and multiple ownership rules, and adopted the equity-debt-plus rule
that causes certain creditors or investors to be attributable owners of a
station, regardless of whether there is a single majority stockholder or other
applicable exception to the FCC's attribution rules. Under this new rule, a
major programming supplier (any programming supplier that provides more than 15%
of the station's weekly programming hours) or same-market media entity will be
an attributable owner of a station if the supplier or same-market media entity
holds debt or equity, or both, in the station that is greater than 33% of the
value of the station's total debt plus equity. For purposes of this rule, equity
includes all stock, whether voting or non-voting, and equity held by insulated
limited partners in partnerships. Debt includes all liabilities whether
long-term or short-term.
The Communications Act prohibits the issuance of broadcast licenses to, or
the holding of a broadcast license by, any corporation of which more than 20% of
the capital stock is owned of record or voted by non-U.S. citizens or their
representatives or by a foreign government or a representative thereof, or by
any corporation organized under the laws of a foreign country (collectively,
aliens). The Communications Act also authorizes the FCC, if the FCC determines
that it would be in the public interest, to prohibit the issuance of a broadcast
license to, or the holding of a broadcast license by, any corporation directly
or indirectly controlled by any other corporation of which more than 25% of the
capital stock is owned of record or voted by aliens. The FCC has issued
interpretations of existing law under which these restrictions in modified form
apply to other forms of business organizations, including partnerships.
13
As a result of these provisions, the licenses granted to our subsidiaries
by the FCC could be revoked if, among other restrictions imposed by the FCC,
more than 25% of our stock were directly or indirectly owned or voted by aliens.
Sinclair and its subsidiaries are domestic corporations, and the members of the
Smith family (who together hold over 90% of the common voting rights of
Sinclair) are all United States citizens. The amended and restated articles of
incorporation of Sinclair (the amended certificate) contain limitations on alien
ownership and control that are substantially similar to those contained in the
Communications Act. Pursuant to the amended certificate, Sinclair has the right
to repurchase alien-owned shares at their fair market value to the extent
necessary, in the judgment of its board of directors, to comply with the alien
ownership restrictions.
Radio/Television Cross-Ownership Rule. The FCC's radio/television
cross-ownership rule (the "one to a market" rule) generally permits a party to
own a combination of up to two television stations and six radio stations
depending on the number of independent media voices in the market.
Local Television/Cable Cross-Ownership Rule. While the 1996 Act eliminates
a previous statutory prohibition against the common ownership of a television
broadcast station and a cable system that serve the same local market, the 1996
Act leaves the current FCC rule in place. The legislative history of the Act
indicates that the repeal of the statutory ban should not prejudge the outcome
of any FCC review of the rule.
Broadcast Network/Cable Cross-Ownership Rule. The 1996 Act directs the FCC
to eliminate its rules which formerly prohibited the common ownership of a
broadcast network and a cable system, subject to the provision that the FCC
revise its rules as necessary to ensure carriage, channel positioning, and
non-discriminatory treatment of non-affiliated broadcast stations by cable
systems affiliated with a broadcast network. In March 1996, the FCC issued an
order implementing this legislative change.
Broadcast/Daily Newspaper Cross-Ownership Rule. The FCC's rules prohibit
the common ownership of a radio or television broadcast station and a daily
newspaper in the same market. In October 1996, the FCC initiated a rulemaking
proceeding to determine whether it should liberalize its waiver policy with
respect to cross-ownership of a daily newspaper and one or more radio stations
in the same market.
Dual Network Rule. A network entity is permitted to operate more than one
television network, provided, however, that ABC, CBS, NBC, and/or Fox are
currently prohibited from merging with each other or with another network
television entity such as WB or UPN.
Antitrust Regulation. The DOJ and the Federal Trade Commission have
increased their scrutiny of the television and radio industry since the adoption
of the 1996 Act, and have reviewed matters related to the concentration of
ownership within markets (including LMAs and JSAs) even when the ownership or
LMA or JSA in question is permitted under the laws administered by the FCC or by
FCC rules and regulations. For instance, the DOJ has for some time taken the
position that an LMA entered into in anticipation of a station's acquisition
with the proposed buyer of the station constitutes a change in beneficial
ownership of the station which, if subject to filing under the HSR Act, cannot
be implemented until the waiting period required by that statute has ended or
been terminated.
Expansion of our broadcast operations on both a local and national level
will continue to be subject to the FCC's ownership rules and any changes the FCC
or Congress may adopt. Concomitantly, any further relaxation of the FCC's
ownership rules may increase the level of competition in one or more of the
markets in which our stations are located, more specifically to the extent that
any of our competitors may have greater resources and thereby be in a superior
position to take advantage of such changes.
TELEVISION
National Ownership Rule. No individual or entity may have an attributable
interest in television stations reaching more than 35% of the national
television viewing audience. Historically, VHF stations have shared a larger
portion of the market than UHF stations. Therefore, only half of the households
in the market area of any UHF station are included when calculating whether an
entity or individual owns television stations reaching more than 35% of the
national television viewing audience. All but seven of
14
the stations owned and operated by us, or to which we provide programming
services, are UHF. Upon completion of all pending acquisitions and dispositions,
we will reach approximately 25% of U.S. television households or 15% taking into
account the FCC's UHF discount.
Duopoly Rule. Under the FCC's new local television ownership rules, a
party may own two television stations in the same market:
o if there is no Grade B overlap between the stations;
o if the stations are in two different Nielsen Designated Market Areas;
or
o if the market containing both the stations contains at least eight
separately-owned full-power television stations and not more than one
station is among the top-four rated stations in the market.
In addition, a party may request a waiver of the rule to acquire a second
station in the market if the station to be acquired is economically distressed
or unbuilt and there is no party who does not own a local television station who
would purchase the station for a reasonable price.
Local Marketing Agreements. A number of television stations, including
certain of our stations, have entered into what have commonly been referred to
as local marketing agreements or LMAs. While these agreements may take varying
forms, one typical type of LMA is a programming agreement between two separately
owned television stations serving a common service area, whereby the licensee of
one station programs substantial portions of the broadcast day and sells
advertising time during such program segments on the other licensee's station
subject to ultimate editorial and other controls being exercised by the latter
licensee. The licensee of the station which is being substantially programmed by
another entity must maintain complete responsibility for and control over the
programming, financing, personnel and operations of its broadcast station and is
responsible for compliance with applicable FCC rules and policies. If the FCC
were to find that the owners/licensees of the stations with which we have LMAs
failed to maintain control over their operations as required by FCC rules and
policies, the licensee of the LMA station and/or Sinclair could be fined or set
for hearing, the outcome of which could be a monetary forfeiture or, under
certain circumstances, loss of the applicable FCC license.
15
In the past, a licensee could own one station and program another station
pursuant to an LMA in the same market because LMAs were not considered
attributable interests. However, under the new ownership rules, LMAs are now
attributable where a licensee owns a television station and programs a
television station in the same market. The new rules provide that LMAs entered
into on or after November 5, 1996 have until August 5, 2001 to come into
compliance with the new ownership rules, otherwise such LMAs will terminate.
LMAs entered into before November 5, 1996 will be grandfathered until the
conclusion of the FCC's 2004 biennial review. In certain cases, parties with
grandfathered LMAs, may be able to rely on the circumstances at the time the LMA
was entered into in advancing any proposal for co-ownership of the station. We
currently program 26 television stations pursuant to LMAs. We have entered into
agreements to acquire 16 of the stations that we program pursuant to an LMA. See
"-- 1999 Acquisitions and Dispositions" and "-- Pending Acquisitions and
Dispositions". Once we acquire these stations, the LMAs will terminate. Of the
remaining 10 stations, 5 LMAs were entered into before November 5, 1996, and 5
LMAs were entered into on or after November 5, 1996. Petitions for
reconsideration of the new rules, including a petition submitted by us, are
currently pending before the FCC. We cannot predict the outcome of these
petitions.
The Satellite Home Viewer Act (SHVA). In 1988, Congress enacted SHVA which
enabled satellite carriers to provide broadcast programming to those satellite
subscribers who were unable to obtain broadcast network programming
over-the-air. SHVA did not permit satellite carriers to retransmit local
broadcast television signals directly to their subscribers. The Satellite Home
Viewer Improvement Act of 1999 (SHVIA) revised SHVA to reflect changes in the
satellite and broadcasting industry. This new legislation allows satellite
carriers to provide local television signals by satellite within a station
market, but does not require satellite carriers to carry all local signals in a
market until 2002. Satellite carriers now are permitted to carry these local
television station signals without the express consent of broadcasters for a
six-month period until the end of May 2000. During that six-month period,
broadcasters are required to participate in good faith in retransmission consent
negotiations with satellite carriers and other multichannel video programming
distributors. If an agreement has not been reached by the end of the six-month
period, the television station signal may not be carried without the express
consent of the broadcaster. We cannot predict the impact of SHVIA or any
modifications of the FCC's regulations as a result of those changes.
Must-Carry/Retransmission Consent. Pursuant to the Cable Act of 1992,
television broadcasters are required to make triennial elections to exercise
either certain "must-carry" or "retransmission consent" rights in connection
with their carriage by cable systems in each broadcaster's local market. By
electing the must-carry rights, a broadcaster demands carriage on a specified
channel on cable systems within its Designated Market Area, in general as
defined by the Nielsen DMA Market and Demographic Rank Report of the prior year.
These must-carry rights are not absolute, and their exercise is dependent on
variables such as
o the number of activated channels on a cable system,
o the location and size of a cable system, and
o the amount of programming on a broadcast station that duplicates the
programming of another broadcast station carried by the cable system.
Therefore, under certain circumstances, a cable system may decline to carry
a given station. Alternatively, if a broadcaster chooses to exercise
retransmission consent rights, it can prohibit cable systems from carrying its
signal or grant the appropriate cable system the authority to retransmit the
broadcast signal for a fee or other consideration. In October 1999, we elected
must-carry or retransmission consent with respect to each of the non-Fox
affiliated stations based on our evaluation of the respective markets and the
position of our owned or programmed station(s) within the market. Our stations
continue to be carried on all pertinent cable systems, and we do not believe
that our elections have resulted in the shifting of our stations to less
desirable cable channel locations. Many of the agreements we have negotiated for
cable carriage are short term, subject to month-to-month extensions.
Accordingly, we may need to negotiate new long term retransmission consent
agreements for our stations to ensure carriage on those relevant cable systems
for the balance of this triennial period (i.e., through December 31, 2002).
16
The FCC has initiated a rulemaking proceeding to consider whether to apply
must-carry rules to require cable companies to carry both the analog and digital
signals of local broadcasters during the DTV transition period between 2002 and
2006 when television stations will be broadcasting both signals. If the FCC does
not require DTV must-carry, cable customers in our broadcast markets may not
receive the station's digital signal.
Syndicated Exclusivity/Territorial Exclusivity. The FCC's syndicated
exclusivity rules allow local broadcast television stations to demand that cable
operators black out syndicated non-network programming carried on "distant
signals" (i.e., signals of broadcast stations, including so-called
"superstations," which serve areas substantially removed from the cable system's
local community). The FCC's network non-duplication rules allow local broadcast
network television affiliates to require that cable operators black out
duplicating network programming carried on distant signals. However, in a number
of markets in which we own or program stations affiliated with a network, a
station that is affiliated with the same network in a nearby market is carried
on cable systems in our market. This is not in violation of the FCC's network
non-duplication rules. However, the carriage of two network stations on the same
cable system could result in a decline of viewership adversely affecting the
revenues of our owned or programmed station.
DIGITAL TELEVISION
The FCC has taken a number of steps to implement digital television (DTV)
broadcasting services. The FCC has adopted an allotment table that provides all
authorized television stations with a second channel on which to broadcast a DTV
signal. The FCC has attempted to provide DTV coverage areas that are comparable
to stations' existing service areas. The FCC has ruled that television broadcast
licensees may use their digital channels for a wide variety of services such as
high-definition television, multiple standard definition television programming,
audio, data, and other types of communications, subject to the requirement that
each broadcaster provide at least one free video channel equal in quality to the
current technical standard and further subject to the requirement that
broadcasters pay a fee of 5% of gross revenues on all DTV subscription services.
DTV channels are generally located in the range of channels from channel 2
through channel 51. The FCC required that affiliates of ABC, CBS, Fox and NBC in
the top 10 television markets begin digital broadcasting by May 1, 1999 and that
affiliates of these networks in markets 11 through 30 begin digital broadcasting
by November 1999. All other commercial stations are required to begin digital
broadcasting by May 1, 2002. The majority of our stations are required to
commence digital operations by May 1, 2002. Applications for digital facilities
for all of our stations were filed by November 1, 1999. The FCC's plan calls for
the DTV transition period to end in the year 2006, at which time the FCC expects
that television broadcasters will cease non-digital broadcasting and return one
of their two channels to the government, allowing that spectrum to be recovered
for other uses. The FCC has been authorized by Congress to extend the December
31, 2006 deadline for reclamation of a television station's non-digital channel
if, in any given case:
o one or more television stations affiliated with ABC, CBS, NBC or Fox
in a market is not broadcasting digitally, and the FCC determines that
such stations have "exercised due diligence" in attempting to convert
to digital broadcasting, or
o less than 85% of the television households in the station's market
subscribe to a multichannel video service (cable, wireless cable or
direct-to-home broadcast satellite television ("DBS")) that carries at
least one digital channel from each of the local stations in that
market, or
o less than 85% of the television households in the market can receive
digital signals off the air using either a set-top converter box for
an analog television set or a new DTV television set.
Congress directed the FCC to auction channels 60-69 for commercial and
public safety services no sooner than January 1, 2001. However, Congress
recently amended this directive to allow for the auction of these channels this
year. Five of our television stations currently operate their analog facilities
on
17
channels between 60-69. Although not required to return these channels until the
end of the DTV transition period (December 31 2006), the FCC is encouraging
broadcasters to consider surrendering these analog channels sooner. We cannot
predict the outcome of these changes.
Congress directed the FCC to auction the remaining non-digital channels by
September 30, 2002 even though they are not to be reclaimed by the government
until at least December 31, 2006. Broadcasters are permitted to bid on the
non-digital channels in cities with populations greater than 400,000, provided
the channels are used for DTV. The FCC has initiated separate proceedings to
consider the surrender of existing television channels and how these frequencies
will be used after they are eventually recovered from broadcasters.
Implementation of digital television will also impose substantial
additional costs on television stations because of the need to replace equipment
and because some stations will need to operate at higher utility costs and there
can be no assurance that our television stations will be able to increase
revenue to offset such costs. The FCC has proposed imposing new public interest
requirements on television licensees in exchange for their receipt of DTV
channels. In addition, Congress has held hearings on broadcasters' plans for the
use of their digital spectrum. As part of its first biennial review of the DTV
transition process, the FCC has issued a rulemaking seeking comments on a number
of issues effecting the transition, including a review of the digital
transmission standard.
RADIO
National Ownership Rule. There are no limits on the number of radio
stations a single individual or entity may own nationwide.
Local Ownership Rules. The limits on the number of radio stations one
entity may own locally are as follows:
o in a market with 45 or more commercial radio stations, an entity may
own up to eight commercial radio stations, not more than five of which
are in the same service (AM or FM);
o in a market with between 30 and 44 (inclusive) commercial radio
stations, an entity may own up to seven commercial radio stations, not
more than four of which are in the same service;
o in a market with between 15 and 29 (inclusive) commercial radio
stations, an entity may own up to six commercial radio stations, not
more than four of which are in the same service; and
o in a market with 14 or fewer commercial radio stations, an entity may
own up to five commercial radio stations, not more than three of which
are in the same service, except that an entity may not own more than
50% of the stations in such market.
These numerical limits apply regardless of the aggregate audience share of
the stations sought to be commonly owned. FCC ownership rules continue to permit
an entity to own one FM and one AM station in a local market regardless of
market size. Irrespective of FCC rules governing radio ownership, however, the
Department of Justice and the Federal Trade Commission have the authority to
determine, and in certain radio transactions have determined, that a particular
transaction presents antitrust concerns. Moreover, in certain cases the FCC
examined issues of market concentration notwithstanding a transaction's
compliance with the numerical station limits. The FCC has also indicated that it
may propose further revisions to its radio multiple ownership rules.
Local Marketing Agreements. As in television, a number of radio stations
have entered into LMAs. The FCC's multiple ownership rules specifically permit
radio station LMAs to be entered into and implemented, so long as the licensee
of the station which is being programmed under the LMA maintains ultimate
responsibility for and control over programming and operations of its broadcast
station and assures compliance with applicable FCC rules and policies. For the
purposes of the multiple ownership rules, in general, a radio station being
programmed pursuant to an LMA by an entity is not considered an attributable
ownership interest of that entity unless that entity already owns a radio
station in the same market. However, a licensee that owns a radio station in a
market, and brokers more than 15% of the time on another station serving the
same market (i.e. a station whose principal community contour
18
overlaps that of the owned market), is considered to have an attributable
ownership interest in the brokered station for purposes of the FCC's multiple
ownership rules. As a result, in a market in which we own a radio station, we
would not be permitted to enter into an LMA with another local radio station
which we could not own under the local ownership rules, unless our programming
constituted 15% or less of the other local station's programming time on a
weekly basis.
Joint Sales Agreements. A number of radio (and television) stations have
entered into cooperative arrangements commonly known as joint sales agreements,
or JSAs. While these agreements may take varying forms, under the typical JSA, a
station licensee obtains, for a fee, the right to sell substantially all of the
commercial advertising on a separately-owned and licensed station in the same
market. The typical JSA also customarily involves the provision by the selling
licensee of certain sales, accounting, and "back office" services to the station
whose advertising is being sold. The typical JSA is distinct from an LMA in that
a JSA (unlike an LMA) normally does not involve programming.
The FCC has determined that issues of joint advertising sales should be
left to enforcement by antitrust authorities, and therefore does not generally
regulate joint sales practices between stations. Stations for which a licensee
sells time under a JSA are not deemed by the FCC to be attributable interests of
that licensee.
RESTRICTIONS ON BROADCAST ADVERTISING
Advertising of cigarettes and certain other tobacco products on broadcast
stations has been banned for many years. Various states also restrict the
advertising of alcoholic beverages.
The Communications Act and FCC rules also place restrictions on the
broadcasting of advertisements by legally qualified candidates for elective
office. Among other things,
o stations must provide "reasonable access" for the purchase of time by
legally qualified candidates for federal office,
o stations must provide "equal opportunities" for the purchase of
equivalent amounts of comparable broadcast time by opposing candidates
for the same elective office, and
o during the 45 days preceding a primary or primary run-off election and
during the 60 days preceding a general or special election, legally
qualified candidates for elective office may be charged no more than
the station's "lowest unit charge" for the same class of
advertisement, length of advertisement, and daypart.
Both the President of the United States and the Chairman of the FCC have called
for rules that would require broadcast stations to provide free airtime to
political candidates. We cannot predict the effect of such a requirement on our
stations' advertising revenues.
PROGRAMMING AND OPERATION
General. The Communications Act requires broadcasters to serve the "public
interest." The FCC has relaxed or eliminated many of the more formalized
procedures it had developed in the past to promote the broadcast of certain
types of programming responsive to the needs of a station's community of
license. FCC licensees continue to be required, however, to present programming
that is responsive to their communities' issues, and to maintain certain records
demonstrating such responsiveness. Complaints from viewers concerning a
station's programming may be considered by the FCC when it evaluates renewal
applications of a licensee, although such complaints may be filed at any time
and generally may be considered by the FCC at any time. Stations also must pay
regulatory and application fees, and follow various rules promulgated under the
Communications Act that regulate, among other things, political advertising,
sponsorship identifications, the advertisement of contests and lotteries,
obscene and indecent broadcasts, and technical operations, including limits on
radio frequency radiation. The FCC recently adopted rules reaffirming its
authority to have an Equal Employment Opportunity (EEO) nondiscrimination rule
and policies and to require broadcast licensees to create equal employment
outreach programs and maintain records and make filings with the FCC evidencing
such efforts.
19
Children's Television Programming. Television stations are required to
broadcast a minimum of three hours per week of "core" children's educational
programming, which the FCC defines as programming that
o services the educational and informational needs of children 16 years
of age and under as a significant purpose;
o is regularly scheduled, weekly and at least 30 minutes in duration;
and
o is aired between the hours of 7:00 a.m. and 10:00 p.m. Furthermore,
"core" children's educational programs, in order to qualify as such,
are required to be identified as educational and informational
programs over the air at the time they are broadcast, and are required
to be identified in the children's programming reports required to be
placed quarterly in stations' public inspection files and filed
annually with the FCC.
Additionally, television stations are required to identify and provide
information concerning "core" children's programming to publishers of program
guides and listings.
Television Violence. The television industry has developed a ratings system
that has been approved by the FCC. Furthermore, the FCC requires certain
television sets to include the so-called "V-chip," a computer chip that allows
blocking of rated programming.
PENDING MATTERS
The Congress and the FCC have under consideration, and in the future may
consider and adopt, new laws, regulations and policies regarding a wide variety
of matters that could affect, directly or indirectly, the operation, ownership
and profitability of our broadcast stations, result in the loss of audience
share and advertising revenues for our broadcast stations, and affect our
ability to acquire additional broadcast stations or finance such acquisitions.
In addition to the changes and proposed changes noted above, such matters may
include, for example, the license renewal process, spectrum use fees, political
advertising rates, potential restrictions on the advertising of certain products
(beer, wine and hard liquor, for example), and the rules and policies to be
applied in enforcing the FCC's equal employment opportunity regulations.
Other matters that could affect our broadcast properties include
technological innovations and developments generally affecting competition in
the mass communications industry, such as direct radio and television broadcast
satellite service, creation of low power radio and class A television services,
the continued establishment of wireless cable systems and low power television
stations, digital television and radio technologies, the Internet and the advent
of telephone company participation in the provision of video programming
service.
OTHER CONSIDERATIONS
The foregoing summary does not purport to be a complete discussion of all
provisions of the Communications Act or other congressional acts or of the
regulations and policies of the FCC. For further information, reference should
be made to the Communications Act, other congressional acts, and regulations and
public notices promulgated from time to time by the FCC. There are additional
regulations and policies of the FCC and other federal agencies that govern
political broadcasts, advertising, equal employment opportunity, and other
matters affecting our business and operations.
ENVIRONMENTAL REGULATION
Prior to our ownership or operation of our facilities, substances or waste
that are or might be considered hazardous under applicable environmental laws
may have been generated, used, stored or disposed of at certain of those
facilities. In addition, environmental conditions relating to the soil and
groundwater at or under our facilities may be affected by the proximity of
nearby properties that have generated, used, stored or disposed of hazardous
substances. As a result, it is possible that we could become subject to
environmental liabilities in the future in connection with these facilities
under
20
applicable environmental laws and regulations. Although we believe that we are
in substantial compliance with such environmental requirements, and have not in
the past been required to incur significant costs in connection therewith, there
can be no assurance that our costs to comply with such requirements will not
increase in the future. We presently believe that none of our properties have
any condition that is likely to have a material adverse effect on our financial
condition or results of operations.
COMPETITION
Our television and radio stations compete for audience share and
advertising revenue with other television and radio stations in their respective
DMAs or MSAs, as well as with other advertising media, such as newspapers,
magazines, outdoor advertising, transit advertising, yellow page directories,
direct mail, satellite and local cable and wireless cable systems. Some
competitors are part of larger organizations with substantially greater
financial, technical and other resources than we have.
Television Competition. Competition in the television broadcasting industry
occurs primarily in individual DMAs. Generally, a television broadcasting
station in one DMA does not compete with stations in other DMAs. Our television
stations are located in highly competitive DMAs. In addition, certain of our
DMAs are overlapped by both over-the-air and cable carriage of stations in
adjacent DMAs, which tends to spread viewership and advertising expenditures
over a larger number of television stations.
Broadcast television stations compete for advertising revenues primarily
with other broadcast television stations, radio stations, cable channels and
cable system operators serving the same market. Traditional network programming
generally achieves higher household audience levels than Fox, WB and UPN
programming and syndicated programming aired by independent stations. This can
be attributed to a combination of factors, including the traditional networks'
efforts to reach a broader audience, generally better signal carriage available
when broadcasting over VHF channels 2 through 13 versus broadcasting over UHF
channels 14 through 69 and the higher number of hours of traditional network
programming being broadcast weekly. However, greater amounts of advertising time
are available for sale during Fox, UPN and WB programming and non-network
syndicated programming, and as a result we believe that our programming
typically achieves a share of television market advertising revenues greater
than its share of the market's audience.
Television stations compete for audience share primarily on the basis of
program popularity, which has a direct effect on advertising rates. A large
amount of a station's prime time programming is supplied by Fox, ABC, NBC and
CBS, and to a lesser extent WB and UPN. In those periods, our affiliated
stations are totally dependent upon the performance of the networks' programs in
attracting viewers. Non-network time periods are programmed by the station
primarily with syndicated programs purchased for cash, cash and barter, or
barter-only, and also through self-produced news, public affairs and other
entertainment programming.
Television advertising rates are based upon factors which include the size
of the DMA in which the station operates, a program's popularity among the
viewers that an advertiser wishes to attract, the number of advertisers
competing for the available time, the demographic makeup of the DMA served by
the station, the availability of alternative advertising media in the DMA
including radio and cable, the aggressiveness and knowledge of sales forces in
the DMA and development of projects, features and programs that tie advertiser
messages to programming. We believe that our sales and programming strategies
allow us to compete effectively for advertising within our DMAs.
Other factors that are material to a television station's competitive
position include signal coverage, local program acceptance, network affiliation,
audience characteristics and assigned broadcast frequency. Historically, our UHF
broadcast stations have suffered a competitive disadvantage in comparison to
stations with VHF broadcast frequencies. This historic disadvantage has
gradually declined through
o carriage on cable systems,
o improvement in television receivers,
o improvement in television transmitters,
21
o wider use of all channel antennae,
o increased availability of programming, and
o the development of new networks such as Fox, WB and UPN.
The broadcasting industry is continuously faced with technical changes and
innovations, the popularity of competing entertainment and communications media,
changes in labor conditions, and governmental restrictions or actions of federal
regulatory bodies, including the FCC, any of which could possibly have a
material effect on a television station's operations and profits. For instance,
the FCC currently is conducting a rule making concerning the implementation of a
Class A television service for qualifying low power television stations. A low
power television station that qualifies for Class A status would have certain
rights currently accorded to full-power television stations, which may allow
them to compete more effectively with full power stations. We cannot predict the
outcome of this proceeding or the effect of Class A television stations in
markets where have full-power television stations.
There are sources of video service other than conventional television
stations, the most common being cable television, which can increase competition
for a broadcast television station by bringing into its market distant
broadcasting signals not otherwise available to the station's audience, serving
as a distribution system for national satellite-delivered programming and other
non-broadcast programming originated on a cable system and selling advertising
time to local advertisers. Other principal sources of competition include home
video exhibition and Direct Broadcast Satellite services and multichannel
multipoint distribution services (MMDS). DBS and cable operators in particular
are competing more aggressively than in the past for advertising revenues in our
TV stations' markets. This competition could adversely affect our stations'
revenues and performance in the future.
In addition, SHVIA could also have an adverse effect on our broadcast
stations' audience share and advertising revenue because it may allow satellite
carriers to provide the signal of distant stations with the same network
affiliation as our stations to more television viewers in our markets than would
have been permitted under previous law. The legislation also allows satellite
carriers to provide local television signals by satellite within a station
market, but does not require satellite carriers to carry all local stations in a
market until 2002. Satellite carriers could decide to carry other stations in
our markets, but not our stations, which could adversely affect our stations'
audience share.
Moreover, technology advances and regulatory changes affecting programming
delivery through fiber optic telephone lines and video compression could lower
entry barriers for new video channels and encourage the development of
increasingly specialized "niche" programming. Telephone companies are permitted
to provide video distribution services via radio communication, on a common
carrier basis, as "cable systems" or as "open video systems," each pursuant to
different regulatory schemes. We are unable to predict what other video
technologies might be considered in the future, or the effect that technological
and regulatory changes will have on the broadcast television industry and on the
future profitability and value of a particular broadcast television station.
We believe that television broadcasting may be enhanced significantly by
the development and increased availability of DTV technology. This technology
has the potential to permit us to provide viewers multiple channels of digital
television over each of our existing standard channels, to provide certain
programming in a high definition television format and to deliver various forms
of data, including data on the Internet, to PCs and handheld devices. These
additional capabilities may provide us with additional sources of revenue as
well as additional competition.
While DTV technology is currently available in the top thirty viewing
markets, a successful transition from the current analog broadcast format to a
digital format may take many years. We cannot assure you that our efforts to
take advantage of the new technology will be commercially successful.
We also compete for programming, which involves negotiating with national
program distributors or syndicators that sell first-run and rerun packages of
programming. Our stations compete for exclusive access to those programs against
in-market broadcast station competitors for syndicated products. Cable systems
generally do not compete with local stations for programming, although various
national cable
22
networks from time to time have acquired programs that would have otherwise been
offered to local television stations. Public broadcasting stations generally
compete with commercial broadcasters for viewers but not for advertising
dollars.
Historically, the cost of programming has increased because of an increase
in the number of new independent stations and a shortage of quality programming.
However, we believe that over the past five years program prices generally have
stabilized or fallen on a per station basis, but aggregate programming costs
have risen as we have attempted to improve the quality of our stations'
programming line-ups.
We believe we compete favorably against other television stations because
of our management skill and experience, our ability historically to generate
revenue share greater than our audience share, our network affiliations and our
local program acceptance. In addition, we believe that we benefit from the
operation of multiple broadcast properties, affording us certain
non-quantifiable economies of scale and competitive advantages in the purchase
of programming.
Radio Competition. Radio broadcasting is a highly competitive business, and
each of the radio stations operated by us competes for audience share and
advertising revenue directly with other radio stations in our geographic market,
as well as with other media, including television, cable television, newspapers,
magazines, direct mail and billboard advertising. The audience ratings and
advertising revenue of each of such stations are subject to change, and any
adverse change in a particular market could have a material adverse effect on
the revenue of such radio stations located in that market. We cannot assure you
that any one of our radio stations will be able to maintain or increase its
current audience ratings and radio advertising revenue market share.
The radio broadcasting industry is also subject to competition from new
media technologies that are being developed or introduced, such as the delivery
of audio programming by cable television systems and by digital audio
broadcasting (DAB). DAB may provide a medium for the delivery by satellite or
terrestrial means of multiple new audio programming formats to local and
national audiences. Also, new technology has introduced the broadcast of radio
programming over the Internet. This new capability may provide an additional
source of competition in some of our markets. In addition, the FCC has created a
new low-power FM radio service, which may create new competition in some of our
radio markets.
EMPLOYEES
As of December 31, 1999, we had approximately 3,700 employees. With the
exception of certain employees of KOVR-TV, KDNL-TV, WSYX-TV, WCHS-TV, WGGB-TV,
WGME-TV, KGAN-TV, WICS-TV and certain employees at two radio stations in St.
Louis (totaling approximately 280 employees), none of our employees is
represented by labor unions under any collective bargaining agreement. We have
not experienced any significant labor problems and consider our overall labor
relations to be good.
ITEM 2. PROPERTIES
Generally, each of our stations has facilities consisting of offices,
studios and tower sites. Transmitter and tower sites are located to provide
maximum signal coverage of our stations' markets. The following is a summary of
our principal owned and leased real properties as we believe that no one
property represents a material amount of the total properties owned or leased.
OWNED LEASED
----------------- ----------------
Office and Studio Building .................... 481,000 sq. ft. 323,000 sq. ft.
Office and Studio Land ........................ 60 acres --
Transmitter Building Site ..................... 58,000 sq. ft. 22,000 sq. ft.
Transmitter and Tower Land .................... 805 acres 265 acres
We believe that all of our properties, both owned and leased, are generally
in good operating condition, subject to normal wear and tear, and are suitable
and adequate for our current business operations.
23
ITEM 3. LEGAL PROCEEDINGS
Lawsuits and claims are filed against us from time to time in the ordinary
course of business. These actions are in various preliminary stages and no
judgments or decisions have been rendered by hearing boards or courts. We do not
believe that these actions, individually or in the aggregate, will have a
material adverse affect on our financial condition or results of operations. In
addition to certain actions arising in the ordinary course, two actions relating
to disposition of assets have been asserted as described more fully in "Item 1
- -- Business--Pending Dispositions."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of 1999.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our class A common stock is listed for trading on the Nasdaq stock market
under the symbol SBGI. The following table sets forth for the periods indicated
the high and low sales prices on the Nasdaq stock market.
1998 HIGH LOW
--------------------------------------- ------------- -------------
First Quarter ......................... $ 29.250 $ 21.438
Second Quarter ........................ 31.125 23.313
Third Quarter ......................... 30.125 15.875
Fourth Quarter ........................ 20.000 6.750
1999 HIGH LOW
--------------------------------------- ------------- -------------
First Quarter ......................... $ 20.125 $ 13.250
Second Quarter ........................ 17.000 9.250
Third Quarter ......................... 21.500 9.000
Fourth Quarter ........................ 12.875 7.938
As of March 24, 2000, there were approximately 101 stockholders of record
of our common stock. This number does not include beneficial owners holding
shares through nominee names. Based on information available to us, we believe
we have more than 5,000 beneficial owners of our class A common stock.
We generally have not paid a dividend on our common stock and do not expect
to pay dividends on our common stock in the foreseeable future. Our 1998 bank
credit agreement and certain of our subordinated debt generally prohibits us
from paying dividends on our common stock. Under the indentures governing our
10% senior subordinated notes due 2005, 9% senior subordinated notes due 2007
and 8 3/4% senior subordinated notes due 2007, we are not permitted to pay
dividends on our common stock unless certain specified conditions are satisfied,
including that
o no event of default then exists under the indenture or certain other
specified agreements relating to our indebtedness and
o we, after taking account of the dividend, are in compliance with
certain net cash flow requirements contained in the indenture. In
addition, under certain of our senior unsecured debt, the payment of
dividends is not permissible during a default thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for the years ended December 31,
1995, 1996, 1997, 1998, and 1999 have been derived from our audited consolidated
financial statements. The consolidated financial statements for the years ended
December 31, 1997, 1998 and 1999 are included elsewhere in this report.
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements included elsewhere in this report.
25
STATEMENT OF OPERATIONS DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ --------------- ------------- --------------- -------------
STATEMENT OF OPERATIONS DATA:
Net broadcast revenues(a) ................... $ 187,934 $ 308,888 $ 407,410 $ 564,727 $ 670,252
Barter revenues ............................. 18,200 29,707 42,468 59,697 63,387
---------- ------------ ---------- ------------ ----------
Total revenues .............................. 206,134 338,595 449,878 624,424 733,639
---------- ------------ ---------- ------------ ----------
Operating costs(b) .......................... 64,326 117,129 153,935 220,538 283,334
Expenses from barter arrangements ........... 16,120 25,189 38,114 54,067 57,561
Depreciation and amortization(c) ............ 80,410 113,848 137,286 177,224 224,553
Stock-based compensation .................... -- 739 1,410 2,908 2,494
---------- ------------ ---------- ------------ ----------
Broadcast operating income .................. 45,278 81,690 119,133 169,687 165,697
Interest expense ............................ (39,253) (84,314) (98,393) (138,952) (178,281)
Subsidiary trust minority interest
expense(d) ................................ -- -- (18,600) (23,250) (23,250)
Gain (loss) on sale of broadcast assets ..... -- -- -- 1,232 (418)
Unrealized (loss) gain on derivative
instrument ................................ -- -- -- (9,050) 15,747
Interest and other income ................... 4,163 3,478 2,231 6,694 3,486
---------- ------------ ---------- ------------ ----------
Income (loss) before income taxes ........... 10,188 854 4,371 6,361 (17,019)
Provision for income taxes .................. (5,200) (4,130) (13,201) (32,562) (25,107)
---------- ------------ ---------- ------------ ----------
Net income (loss) from continuing
operations ................................ 4,988 (3,276) (8,830) (26,201) (42,126)
Discontinued operations:
Net income from discontinued
operations, net of related income
taxes ..................................... -- 4,407 4,466 14,102 17,538
Gain (loss) on sale of broadcast assets,
net of related income taxes ............... -- -- (132) 6,282 192,372
Extraordinary item:
Loss on early extinguishment of debt,
net of related income tax benefit ......... (4,912) (6,070) (11,063) --
---------- ------------ ---------- ------------ ----------
Net income (loss) ........................... $ 76 $ 1,131 $ (10,566) $ (16,880) $ 167,784
========== ============ ========== ============ ==========
Net income (loss) available to common
shareholders .............................. $ 76 $ 1,131 $ (13,329) $ (27,230) $ 157,434
========== ============ ========== ============ ==========
OTHER DATA:
Broadcast cash flow(e) ...................... $ 111,124 $ 175,211 $ 221,631 $ 305,304 $ 332,307
Broadcast cash flow margin(f) ............... 59.1% 56.7% 54.4% 54.1% 49.6%
Adjusted EBITDA(g) .......................... $ 105,750 $ 167,441 $ 209,220 $ 288,712 $ 313,271
Adjusted EBITDA margin(f) ................... 56.3% 54.2% 51.4% 51.1% 46.7%
After tax cash flow(h) ...................... $ 54,645 $ 77,484 $ 104,884 $ 149,759 $ 137,245
Program contract payments ................... 19,938 28,836 48,609 61,107 79,473
Corporate overhead expense .................. 5,374 7,770 12,411 16,592 19,036
Capital expenditures ........................ 1,702 12,609 19,425 19,426 30,861
Cash flows from operating activities ........ 55,986 69,298 96,625 150,480 130,161
Cash flows from investing activities ........ (119,320) (1,019,853) (218,990) (1,812,682) 453,003
Cash flows from financing activities .