UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10–K/A

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

 

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. ý

 

Based on the closing sales price of $9.83 per share as of February 14, 2003, the aggregate market value of the voting and non-voting common equity of the Registrant held by non-affiliates was approximately $429.7 million.

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Act).  Yes ý No o

 

Based on the closing price of $14.56 per share as June 28, 2002, the aggregate market value of the voting and  non-voting common equity of the registrant held by non-affiliates was $620.8 million.

 

As of February 14, 2003, there were 43,887,663 shares of class A common stock, $.01 par value; 41,705,678 shares of class B common stock $.01 par value, and 3,450,000 shares of series D preferred stock, $.01 par value, convertible into 7,561,644 shares of class A common stock at a conversion price of $22.813 per share, of the registrant issued and outstanding.

 

In addition, 2,000,000 shares of $200 million aggregate liquidation value of 11.625% 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 - None

 

 

ITEM 6. SELECTED FINANCIAL DATA

 

The selected consolidated financial data for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from our audited consolidated financial statements. The consolidated financial statements for the years ended December 31, 2002, 2001 and 2000 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.

 

STATEMENT OF OPERATIONS DATA

(dollars in thousands, except per share data)

 

		Years Ended December 31,
		2002			2001			2000			1999			1998
Statement of Operations Data:
Net broadcast revenues(a)		$	670,534		$	623,837		$	699,422		$	643,088		$	537,793
Barter revenues		60,911			53,889			54,595			60,052			55,276
Other revenues		4,344			6,925			4,494			—			—
Total revenues		735,789			684,651			758,511			703,140			593,069
Operating costs(b)		309,254			311,494			320,817			276,092			213,192
Expenses from barter arrangements		54,567			48,159			48,543			54,463			49,805
Depreciation and amortization(c)(d)		185,939			260,526			230,889			204,612			158,653
Stock-based compensation		1,399			1,559			1,762			2,467			2,873
Impairment and write down charge of long-lived assets		¾			16,075			—			—			—
Restructuring costs		¾			3,700			—			—			—
Contract termination costs		¾			5,135			—			—			—
Cumulative adjustment for change in assets held for sale		¾			—			619			—			—
Operating income		184,630			38,003			155,881			165,506			168,546
Interest expense(d)		(126,500		)	(143,574		)	(152,219		)	(181,569		)	(141,704		)
Subsidiary trust minority interest expense(e)		(23,890		)	(23,890		)	(23,890		)	(23,890		)	(23,923		)
Gain (loss) on sale of broadcast assets		(478		)	204			—			(418		)	1,232
Unrealized (loss) gain on derivative instrument		(30,939		)	(32,220		)	(296		)	15,747			(9,050		)
Loss related to investments		(1,189		)	(7,616		)	(16,764		)	—			—
Interest and other income		3,585			3,758			2,812			3,082			6,631
Income (loss) before income taxes		5,219			(165,335		)	(34,476		)	(21,542		)	1,732
(Provision) benefit for income taxes		(1,369		)	51,875			(3,355		)	(23,281		)	(30,811		)
Income (loss) from continuing operations		3,850			(113,460		)	(37,831		)	(44,823		)	(29,079		)
Discontinued Operations:
Income (loss) from discontinued operations, net of related income taxes		372			(52		)	6,932			20,235			16,980
Gain on sale of broadcast assets, net of related income taxes		7,519			—			108,264			192,372			6,282
Extraordinary item:
Loss on early extinguishment of debt, net of related income taxes		(9,831		)	(14,210		)	—			—			(11,063		)
Cumulative adjustment for change in accounting principle net of related income taxes		(566,404		)	¾			¾			¾			¾
Net (loss) income		$	(564,494	)	$	(127,722	)	$	77,365		$	167,784		$	(16,880	)
Net (loss) income available to common Shareholders		$	(574,844	)	$	(138,072	)	$	67,015		$	157,434		$	(27,230	)
Other Data:
Broadcast cash flow(f)(m)		$	293,548		$	255,519		$	329,907		$	321,673		$	294,581
Broadcast cash flow margin(g)		43.8		%	41.0		%	47.2		%	50.0		%	54.8		%
Adjusted EBITDA(h)(m)		$	273,753		$	235,769		$	307,602		$	303,027		$	277,988
Adjusted EBITDA margin(g)		40.8		%	37.8		%	44.0		%	47.1		%	51.7		%
After tax cash flow(i)(m)		$	143,703		$	91,262		$	145,469		$	137,245		$	149,760
Program contract payments(j)		$	99,922		$	91,267		$	84,131		$	69,558		$	52,084
Corporate overhead expense		$	19,795		$	19,750		$	22,305		$	18,646		$	16,593
Capital expenditures		$	62,909		$	29,017		$	33,256		$	30,861		$	19,426
Cash flows from operating activities		$	149,615		$	58,888		$	69,127		$	130,665		$	150,480
Cash flows from (used in) investing activities		$	52,822		$	(33,338	)	$	209,820		$	452,499		$	(1,812,682	)
Cash flows (used in) from financing activities		$	(229,173	)	$	2,422		$	(291,264	)	$	(570,024	)	$	1,526,143
Per Share Data:
Basic loss per share from continuing operations		$	(0.08	)	$	(1.47	)	$	(0.53	)	$	(0.57	)	$	(0.42	)
Basic earnings per share from discontinued operations		$	0.09		—			$	1.26		$	2.20		$	0.25
Basic loss per share from extraordinary item		$	(0.12	)	$	(0.17	)	—			—			$	(0.12	)
Basic loss per share from cumulative effect of accounting change		$	(6.64	)	¾			¾			¾			¾
Basic net income (loss) per share		$	(6.74	)	$	(1.64	)	$	0.73		$	1.63		$	(0.29	)
Diluted loss per share from continuing operations		$	(0.08	)	$	(1.47	)	$	(0.53	)	$	(0.57	)	$	(0.42	)
Diluted earnings per share from discontinued operations		$	0.09		—			$	1.26		$	2.20		$	0.25

 

Diluted loss per share from extraordinary item		$	(0.12	)	$	(0.17	)	—			—			$	(0.12	)
Diluted loss per share from cumulative effect of accounting change		$	(6.64	)	¾			¾			¾			¾
Diluted net income (loss) per share		$	(6.74	)	$	(1.64	)	$	0.73		$	1.63		$	(0.29	)
Balance Sheet Data:
Cash and cash equivalents		$	5,327		$	32,063		$	4,091		$	16,408		$	3,268
Total assets		$	2,606,773		$	3,289,426		$	3,400,640		$	3,619,510		$	3,852,752
Total debt(k)		$	1,551,970		$	1,685,630		$	1,616,426		$	1,792,339		$	2,327,221
HYTOPS(l)		$	200,000		$	200,000		$	200,000		$	200,000		$	200,000
Total stockholders’ equity		$	211,180		$	771,960		$	912,530		$	974,917		$	816,043

 

 

2

 

(a)          “Net broadcast revenues” are defined as broadcast revenues net of agency commissions.

 

(b)         Operating costs include program and production expenses and selling, general and administrative expenses.

 

(c)          Depreciation and amortization includes amortization of program contract costs and net realizable value adjustments, depreciation and amortization of property and equipment, and amortization of acquired intangible broadcasting assets, other assets and costs related to excess syndicated programming.

 

(d)         Depreciation and amortization and interest expense amounts differ from prior presentations for the fiscal years ended December 31, 2000, 1999, and 1998. Previously the amortized costs associated with the issuance of indebtedness had been classified as depreciation and amortization instead of being classified as interest expense. Accordingly, we reclassified $3,313, $3,288 and $2,752 as interest expense for the fiscal years ended December 31, 2000, 1999 and 1998, respectively.

 

(e)          Subsidiary trust minority interest expense represents the distributions on the HYTOPS and amortization of deferred finance costs.  See footnote k.

 

(f)            “Broadcast cash flow” (BCF) is defined as operating income plus corporate expenses, selling, general and administrative expenses related to software development and consulting operations, stock-based compensation, depreciation, and amortization (including film amortization, and amortization of deferred compensation), restructuring charges, contract termination costs, impairment and write down of long-lived assets, cumulative adjustment for change in assets held for sale, less other revenue and cash payments for program rights. Cash program payments represent cash payments made for current programs payable and do not necessarily correspond to program usage.  We believe these data are comparable to the data provided by the other companies in the industry, but there can be no assurance that it is comparable.  BCF does not purport to represent cash provided by operating activities as reflected in our consolidated statements of cash flows and is not a

 

3

measure of financial performance under generally accepted accounting principles.  In addition, BCF should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles.  Management believes the presentation of BCF is relevant and useful because  1) it is a measurement utilized by management and lenders to measure our ability to service our debt, 2) it is a measurement utilized by management and industry analysts to determine a private market value of our television stations and 3) it is a measurement management and industry analysts utilize when determining our operating performance.

 

(g)         “Broadcast cash flow margin” is defined as broadcast cash flow divided by net broadcast revenues.  “Adjusted EBITDA margin” is defined as Adjusted EBITDA divided by net broadcast revenues.

 

(h)         “Adjusted EBITDA” is defined as broadcast cash flow less corporate expenses and is a commonly used measure of performance for broadcast companies.  We believe these data are comparable to the data provided by other companies in the industry, but there can be no assurances that it is comparable.  Adjusted EBITDA does not purport to represent cash provided by operating activities as reflected in our consolidated statements of cash flows and is not a measure of financial performance under generally accepted accounting principles.  In addition, Adjusted EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles.  Management believes the presentation of Adjusted EBITDA is relevant and useful because (1) it is a measurement utilized by management and lenders to measure our ability to service our debt, (2) it is a measurement utilized by management and industry analysts to determine a private market value of our television stations and (3) it is a measurement management and industry analysts utilize when determining our operating performance.

 

(i)             “After tax cash flow” (ATCF) is defined as net income (loss) available to common shareholders, plus extraordinary items (before the effect of related tax benefits) plus depreciation and amortization (excluding film amortization), stock-based compensation, amortization of deferred financing costs, restructuring charges, contract termination costs, impairment and write down of long-lived assets, the cumulative adjustment for change in assets held for sale, the loss of equity investments (or minus the gain), unrealized loss on derivative instruments (or minus the gain), the deferred tax provision related to operations or minus the deferred tax benefit, the cumulative affect of change in accounting principle, the loss on the sale of discontinued operations (or minus the gain) and loss on sale of assets (or minus the gain) and minus deferred NOL carrybacks.  We have presented ATCF data, which we believe is comparable to the data provided by other companies in the industry, because such data are commonly used as a measure of performance for broadcast companies; however, there can be no assurances that it is comparable. ATCF is presented here not as a measure of operating results and does not purport to represent cash provided by operating activities. ATCF should not be considered in isolation or as substitute for measures of performance prepared in accordance with generally accepted accounting principles. Management believes the presentation of ATCF is relevant and useful because ATCF is a measurement utilized by management and industry analysts to determine a public market value of our television stations and ATCF is a measurement management and analysts utilize when determining our operating performance.

 

(j)             Program contract payments do not include payments related to WTTV-TV, which we sold on July 24, 2002.   Program contract payments related to WTTV-TV for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 were $6,405, $10,989, $10,171, $9,915, and $9,023, respectively.

 

(k)          “Total debt” is defined as long-term debt, net of unamortized discount, and capital lease obligations, including the current portion thereof.  Total debt does not include the HYTOPS or our preferred stock.

 

(l)             HYTOPS represents our Obligated Mandatorily Redeemable Security of Subsidiary Trust Holding Solely KDSM Senior Debentures representing $200 million aggregate liquidation value.

 

(m)       The following table shows the calculation of Broadcast Cash Flow, Adjusted EBITDA and After-tax Cash Flow.

 

		For the Year ended December 31,
		2002			2001			2000			1999			1998
Broadcast Cash Flow & Adjusted EBITDA Calculation:
Operating income		$	184,630		$	38,003		$	155,881		$	165,506		$	168,546
Corporate expenses		19,795			19,750			22,305			18,646			16,593
Other revenue		(4,344		)	(6,925		)	(4,494		)	¾			¾
G1440 sales, general and administrative expenses		6,051			8,963			7,076			¾			¾
Stock based compensation		1,399			1,559			1,762			2,467			2,873
Impairment of assets		¾			16,075			¾			¾			¾
Restructuring costs		¾			3,700			¾			¾			¾
Contract termination costs		¾			5,135			¾			¾			¾
Cumulative adjustment- Assets Held for Sale		¾			¾			619			¾			¾
Depreciation and amortization		41,219			37,802			37,081			31,072			24,340
Amortization of intangibles		19,456			112,459			104,685			97,730			76,229
Amortization of film		125,264			110,265			89,123			75,810			58,084
Less: (Cash film payments)		(99,922		)	(91,267		)	(84,131		)	(69,558		)	(52,084		)
Broadcast Cash Flow		$	293,548		$	255,519		$	329,907		$	321,673		$	294,581
Less: Corporate expenses		(19,795		)	(19,750		)	(22,305		)	(18,646		)	(16,593		)
Adjusted EBITDA		$	273,753		$	235,769		$	307,602		$	303,027		$	277,988
After tax cash flow calculation:
Net income (loss) available to common shareholders		$	(574,844	)	$	(138,072	)	$	67,015		$	157,434		$	(27,230	)
Extraordinary item		9,831			14,210			¾			¾			11,063
Depreciation and amortization of property and equipment		41,219			37,802			37,081			$	31,072		24,340
Amortization of intangibles		19,456			112,459			104,685			$	97,730		76,229
Amortization of deferred financing costs		4,256			4,072			3,953			3,928			3,425
Stock based compensation		1,399			1,559			1,762			$	2,467		2,873

4

 

Unrealized loss (gain) on derivative instrument		30,939			32,220			296			(15,747		)	9,050
Impairment of asset		¾			16,075			¾			¾			¾
Restructuring costs		¾			3,700			¾			¾			¾
Contract termination costs		¾			5,135			¾			¾			¾
Cumulative adjustment for change in assets held for sale		¾			¾			619			¾			¾
Loss from equity investments		1,189			7,616			16,764			¾			¾
(Gain)/ Loss on sale of assets		478			(204		)	¾			418			(1,232		)
Cumulative adjustment for change in accounting principle		566,404			¾			¾			¾			¾
Discontinued Operations:
Depreciation and Amortization		293			1,200			6,252			23,095			20,630
Amortization of intangibles		124			3,924			3,508			3,995			2,901
Stock based compensation		¾			25			38			28			410
Restructuring costs		¾			136			¾			¾			¾
Gain on sale of discontinued operations		(7,519		)	¾			(108,264		)	(192,372		)	(6,282		)
Add deferred taxes provision (benefit)		50,478			(10,595		)	11,760			25,197			33,583
After Tax Cash Flow		$	143,703		$	91,262		$	145,469		$	137,245		$	149,760

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

We are a diversified broadcasting company that owns and operates, provides programming services pursuant to LMAs or provides sales services pursuant to outsourcing agreements to more television stations than all but one other commercial broadcasting group in the United States. We currently own, provide programming services pursuant to LMAs or provide sales services to 62 television stations in 39 markets.  We currently have duopolies where we own and operate two stations in ten markets; own and operate a station and provide programming and operating services to a second station in nine markets; and own a station and provide or are provided sales, operational and managerial services to a second station in four markets.

 

Our operating revenues are derived from local and national advertisers and, to a much lesser extent, from political advertisers and television network compensation. Our revenues from local advertisers have continued to trend upward and revenues from national advertisers have continued to trend downward when measured as a percentage of gross broadcast revenue. We believe this trend is primarily the result of our focus on increasing local advertising revenues as a percentage of total advertising revenues, from a decrease in overall spending by national advertisers and from an increase in the number of media outlets providing national advertisers a means by which to advertise their goods or services. Our efforts to mitigate the effect of increasing national media outlets include continuing our efforts to increase local revenues and developing innovative marketing strategies to sell traditional and non-traditional services to national advertisers.

 

Our primary operating expenses are syndicated program rights fees, commissions on revenues, employee salaries, and newsgathering and station promotional costs. Amortization and depreciation of costs associated with the acquisition of the stations and interest carrying charges are significant factors in determining our overall profitability.

 

5

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to bad debts, income taxes, program contract costs, property and equipment, intangible assets, investments, and derivative contracts.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

 

We have identified the policies below as critical to our business operations and the understanding of our results of operations.  For a detailed discussion on the application of these and other accounting policies, see the Notes to the Consolidated Financial Statements.

 

Allowance for Doubtful Accounts.  We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  If the economy and /or the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make their payments, additional allowances may be required.

 

Program Contract Costs.  We have agreements with distributors for the rights to television programming over contract periods, which generally run from one to seven years.  Contract payments are made in installments over terms that are generally shorter than the contract period.  Each contract is recorded as an asset and a liability at an amount equal to its gross contractual commitment when the license period begins and the program is available for its first showing.  The portion of program contracts which become payable within one year is reflected as a current liability in the Consolidated Balance Sheets.

 

The rights to program materials are reflected in the Consolidated Balance Sheets at the lower of unamortized cost or estimated net realizable value.  Estimated net realizable values are based upon management’s expectation of future advertising revenues net of sale commissions to be generated by the program material.  Amortization of program contract costs is generally computed using either a four year accelerated method or based on usage, whichever yields the greater amortization for each program.  Program contract costs, estimated by management to be amortized in the succeeding year, are classified as current assets.  Payments of program contract liabilities are typically paid on a scheduled basis and are not affected by adjustments for amortization or estimated net realizable value. If we are unable to realize management’s estimate of future advertising revenues, additional writedowns to net realizable value may be required.

 

Valuation of Goodwill, Long-Lived Assets and Intangible Assets.  We periodically evaluate our goodwill, long-lived assets and intangible assets for potential impairment indicators.  Our judgments regarding the existence of impairment indicators are based on estimated future cash flows, market conditions, operational performance of our stations and legal factors.  Future events could cause us to conclude that impairment indicators exist and that the net book value of long-lived assets and intangible assets is impaired.  Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

 

Income Taxes.  We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities.  We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences.   If we are unable to generate sufficient taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.

 

6

 

Set forth below are the principal types of broadcast revenues received by our stations for the periods indicated and the percentage contribution of each type to our total gross broadcast revenues:

 

BROADCAST REVENUE

(dollars in thousands)

 

		Years ended December 31,
		2002					2001					2000
Local/regional advertising		$	413,428		53.3	%	$	391,872		54.3	%	$	405,134		49.9	%
National advertising		309,923			40.0	%	307,514			42.7	%	355,697			43.9	%
Network compensation		16,450			2.1	%	16,754			2.3	%	17,656			2.2	%
Political advertising		33,176			4.3	%	2,559			0.4	%	29,990			3.7	%
Production		1,966			0.3	%	2,069			0.3	%	2,379			0.3	%
Broadcast revenues		774,943			100.0	%	720,768			100.0	%	810,856			100.0	%
Less: agency commissions		(104,409		)			(96,931		)			(111,434		)
Broadcast revenues, net		670,534					623,837					699,422
Barter revenues		60,911					53,889					54,595
Other revenues		4,344					6,925					4,494
Total revenues		$	735,789				$	684,651				$	758,511

 

Our primary types of programming and their approximate percentages of 2002 net broadcast revenues were syndicated programming (51.5%), network programming (24.9%), news (13.8%), direct advertising programming (6.6%), sports programming (2.6%) and children’s programming (0.6%). Similarly, our five largest categories of advertising and their approximate percentages of 2002 net time sales were automotive (23.2%), professional services (10.7%), fast food advertising (7.4%), retail department stores (6.7%), and paid programming (6.7%). No other advertising category accounted for more than 4.5% of our net time sales in 2002. No individual advertiser accounted for more than 2.7% of our consolidated net broadcast revenues in 2002.

 

7

 

The following table sets forth certain of our operating data for the years ended December 31, 2002, 2001 and 2000.  For definitions of items, see footnotes to table in “Item 6. Selected Financial Data”.

 

OPERATING DATA

(dollars in thousands)

 

		Years ended December 31,
		2002			2001				2000
Net broadcast revenue		$	670,534		$		623,837		$	699,422
Barter revenue		60,911			53,889				54,595
Other revenue		4,344			6,925				4,494
Total revenue		735,789			684,651				758,511
Operating costs		309,254			311,494				320,817
Expenses from barter arrangements		54,567			48,159				48,543
Depreciation and amortization		185,939			260,526				230,889
Stock-based compensation		1,399			1,559				1,762
Impairment and write down charge of long-lived assets		¾			16,075				—
Restructuring costs		¾			3,700				—
Contract termination costs		¾			5,135				—
Cumulative adjustment for change in assets held for sale		¾			—				619
Operating income		$	184,630		$		38,003		$	155,881
Cumulative effect of change in accounting principle		$	(566,404	)	$	—			$	—
Net income (loss)		$	(564,494	)	$		(127,722	)	$	77,365
Net income (loss) available to common shareholders		$	(574,844	)	$		(138,072	)	$	67,015
Other Data:
Broadcast cash flow(a)		$	293,548		$		255,519		$	329,907
BCF margin		43.8		%	41.0			%	47.2		%
Adjusted EBITDA(a)		$	273,753		$		235,769		$	307,602
Adjusted EBITDA margin		40.8		%	37.8			%	44.0		%
After tax cash flow(a)		$	143,703		$		91,262		$	145,469
Program contract payments		99,922			91,267				84,131