Sinclair Broadcast Group, LLC - Quarter Report: 2010 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2010

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                       .

 

COMMISSION FILE NUMBER: 000-26076

 

SINCLAIR BROADCAST GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

10706 Beaver Dam Road

Hunt Valley, Maryland 21030

(Address of principal executive office, zip code)

 

(410) 568-1500

(Registrant’s telephone number, including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such file).  Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

Indicate the number of share outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

 

 

Table of Contents

 

SINCLAIR BROADCAST GROUP, INC.

 

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2010

 

TABLE OF CONTENTS

 

PART 1. FINANCIAL INFORMATION		3
ITEM 1. FINANCIAL STATEMENTS		3
CONSOLIDATED BALANCE SHEETS		3
CONSOLIDATED STATEMENTS OF OPERATIONS		4
CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)		5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)		5
CONSOLIDATED STATEMENTS OF CASH FLOWS		6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS		7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		31
ITEM 4. CONTROLS AND PROCEDURES		31
PART II. OTHER INFORMATION		33
ITEM 1. LEGAL PROCEEDINGS		33
ITEM 1A. RISK FACTORS		33
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		33
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		33
ITEM 4. REMOVED AND RESERVED		33
ITEM 5. OTHER INFORMATION		33
ITEM 6. EXHIBITS		34
SIGNATURE		35
EXHIBIT INDEX		36

 

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PART 1. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data) (Unaudited)

 

		As of September 30, 2010			As of December 31, 2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	41,497		$	23,224
Current portion of restricted cash		5,121			27,667
Accounts receivable, net of allowance for doubtful accounts of $2,967 and $2,932, respectively		106,032			106,792
Affiliate receivable		56			69
Current portion of program contract costs		47,830			43,741
Income taxes receivable		8,572			8,073
Prepaid expenses and other current assets		6,959			6,130
Deferred barter costs		3,987			2,825
Deferred tax assets		7,277			7,277
Total current assets		227,331			225,798
PROGRAM CONTRACT COSTS, less current portion		11,544			16,417
PROPERTY AND EQUIPMENT, net		278,018			296,227
RESTRICTED CASH, less current portion		223			37,216
GOODWILL		660,017			660,017
BROADCAST LICENSES		51,988			51,988
DEFINITE-LIVED INTANGIBLE ASSETS, net		186,033			193,405
OTHER ASSETS		121,010			116,653
Total assets		$	1,536,164		$	1,597,721
LIABILITIES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable		$	2,605		$	3,746
Accrued liabilities		75,707			60,523
Current portion of notes payable, capital leases and commercial bank financing		20,914			40,632
Current portion of notes and capital leases payable to affiliates		3,323			2,995
Current portion of program contracts payable		83,544			91,995
Deferred barter revenues		3,462			2,810
Total current liabilities		189,555			202,701
LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing, less current portion		1,201,870			1,297,964
Notes payable and capital leases to affiliates, less current portion		20,270			24,717
Program contracts payable, less current portion		34,206			48,448
Deferred tax liabilities		199,101			177,219
Other long-term liabilities		47,135			48,894
Total liabilities		1,692,137			1,799,943
EQUITY (DEFICIT):
SINCLAIR BROADCAST GROUP SHAREHOLDERS’ EQUITY (DEFICIT):
Class A Common Stock, $.01 par value, 500,000,000 shares authorized, 49,349,586 and 47,375,437 shares issued and outstanding, respectively		493			474
Class B Common Stock, $.01 par value, 140,000,000 shares authorized, 30,997,859 and 32,453,859 shares issued and outstanding, respectively, convertible into Class A Common Stock		310			325
Additional paid-in capital		609,452			605,340
Accumulated deficit		(770,807		)	(813,876		)
Other comprehensive loss		(3,996		)	(4,213		)
Total Sinclair Broadcast Group shareholders’ deficit		(164,548		)	(211,950		)
Noncontrolling interests		8,575			9,728
Total deficit		(155,973		)	(202,222		)
Total liabilities and equity (deficit)		$	1,536,164		$	1,597,721

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data) (Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
REVENUES:
Station broadcast revenues, net of agency commissions		$	158,809		$	136,427		$	465,440		$	400,740
Revenues realized from station barter arrangements		17,812			13,010			50,573			38,827
Other operating divisions revenues		9,831			10,690			25,618			33,570
Total revenues		186,452			160,127			541,631			473,137
OPERATING EXPENSES:
Station production expenses		38,619			34,368			113,182			106,200
Station selling, general and administrative expenses		32,230			28,484			93,426			91,387
Expenses recognized from station barter arrangements		15,716			11,164			44,695			32,685
Amortization of program contract costs and net realizable value adjustments		15,945			17,021			47,162			57,644
Other operating divisions expenses		7,902			11,280			22,259			34,422
Depreciation of property and equipment		9,022			9,995			27,744			32,456
Corporate general and administrative expenses		6,236			6,109			20,063			18,485
Amortization of definite-lived intangible assets and other assets		4,687			6,230			14,087			17,683
Gain on asset exchange		—			(500		)	—			(3,016		)
Impairment of goodwill, intangible and other assets		—			243			—			130,341
Total operating expenses		130,357			124,394			382,618			518,287
Operating income (loss)		56,095			35,733			159,013			(45,150		)
OTHER INCOME (EXPENSE):
Interest expense and amortization of debt discount and deferred financing costs		(31,349		)	(17,466		)	(88,700		)	(53,486		)
(Loss) gain from extinguishment of debt		(3,939		)	—			(4,377		)	18,986
(Loss) income from equity and cost method investments		(1,997		)	453			(2,478		)	471
Other income, net		557			448			1,767			1,561
Total other expense		(36,728		)	(16,565		)	(93,788		)	(32,468		)
Income (loss) from continuing operations before income taxes		19,367			19,168			65,225			(77,618		)
INCOME TAX (PROVISION) BENEFIT		(5,154		)	(3,313		)	(22,932		)	9,129
Income (loss) from continuing operations		14,213			15,855			42,293			(68,489		)
DISCONTINUED OPERATIONS:
(Loss) income from discontinued operations, includes income tax provision of $68, $24, $202 and $241, respectively		(68		)	245			(202		)	28
NET INCOME (LOSS)		14,145			16,100			42,091			(68,461		)
Net loss (income) attributable to the noncontrolling interests		131			(1,162		)	978			527
NET INCOME (LOSS) ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP		$	14,276		$	14,938		$	43,069		$	(67,934	)
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP:
Earnings (loss) per share from continuing operations		$	0.18		$	0.18		$	0.54		$	(0.85	)
Earnings (loss) per share		$	0.18		$	0.19		$	0.54		$	(0.85	)
Weighted average common shares outstanding		80,344			79,739			80,204			80,036
Weighted average common and common equivalent shares outstanding		80,627			86,155			80,480			80,036
AMOUNTS ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP COMMON SHAREHOLDERS:
Income (loss) from continuing operations		$	14,344		$	14,693		$	43,271		$	(67,962	)
(Loss) income from discontinued operations		(68		)	245			(202		)	28
Net income (loss)		$	14,276		$	14,938		$	43,069		$	(67,934	)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(In thousands) (Unaudited)

 

		Sinclair Broadcast Group Shareholders
		Class A Common Stock			Class B Common Stock			Additional Paid-In Capital			Accumulated Deficit			Other Comprehensive Loss			Noncontrolling Interests			Total Equity (Deficit)
BALANCE, December 31, 2009		$	474		$	325		$	605,340		$	(813,876	)	$	(4,213	)	$	9,728		$	(202,222	)
Class A Common Stock issued pursuant to employee benefit plans		4			—			4,112			—			—			—			4,116
Class B Common Stock converted into Class A Common Stock		15			(15		)	—			—			—			—			—
Distributions to noncontrolling interest		—			—			—			—			—			(175		)	(175		)
Amortization of net periodic pension benefit costs		—			—			—			—			217			—			217
Net income (loss)		—			—			—			43,069			—			(978		)	42,091
BALANCE, September 30, 2010		$	493		$	310		$	609,452		$	(770,807	)	$	(3,996	)	$	8,575		$	(155,973	)

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) (Unaudited)

 

		Three months ended September 30,						Nine months ended September 30,
		2010			2009			2010			2009
Net income (loss)		$	14,145		$	16,100		$	42,091		$	(68,461	)
Amortization of net periodic pension benefit costs		72			53			217			158
Comprehensive income (loss)		14,217			16,153			42,308			(68,303		)
Comprehensive loss (income) attributable to the noncontrolling interests		131			(1,162		)	978			527
Comprehensive income (loss) attributable to Sinclair Broadcast Group		$	14,348		$	14,991		$	43,286		$	(67,776	)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

		Nine Months Ended September 30,
		2010			2009
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)		$	42,091		$	(68,461	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Amortization of debt discount, net of debt premium		3,723			8,346
Depreciation of property and equipment		27,938			32,713
Recognition of deferred revenue		(18,039		)	(19,538		)
Impairment of goodwill, intangible and other assets		—			130,341
Amortization of definite-lived intangible and other assets		14,087			17,683
Amortization of program contract costs and net realizable value adjustments		47,162			57,644
Loss (gain) on extinguishment of debt, non-cash portion		3,552			(18,986		)
Deferred tax provision (benefit) related to operations		21,749			(9,100		)
Change in assets and liabilities:
Decrease in accounts receivable, net		757			12,515
(Increase) decrease in income taxes receivable		(499		)	2,016
(Increase) decrease in prepaid expenses and other current assets		(731		)	1,460
Decrease (increase) in other assets		4,230			(123		)
Increase (decrease) in accounts payable and accrued liabilities		25,918			(2,019		)
Decrease in other long-term liabilities		(57		)	(466		)
Payments on program contracts payable		(69,080		)	(60,822		)
Other, net		4,134			372
Net cash flows from operating activities		106,935			83,575
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of property and equipment		(9,798		)	(7,023		)
Purchase of alarm monitoring contracts		(7,656		)	(8,876		)
Decrease in restricted cash		59,539			—
Dividends and distributions from equity and cost method investees		894			1,460
Investments in equity and cost method investees		(10,509		)	(9,361		)
Proceeds from the sale of assets		—			102
Loans to affiliates		(102		)	(123		)
Proceeds from loans to affiliates		115			153
Net cash flows from (used in) investing activities		32,483			(23,668		)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases		33,056			131,767
Repayments of notes payable, commercial bank financing and capital leases		(150,423		)	(169,959		)
Purchase of subsidiary shares from noncontrolling interests		—			(4,000		)
Repurchase of Class A Common Stock		—			(1,454		)
Dividends paid on Class A and Class B Common Stock		—			(16,038		)
Payments for deferred financing costs		(1,304		)	(4,419		)
Noncontrolling interests (distributions) contributions		(175		)	126
Repayments of notes and capital leases to affiliates		(2,299		)	(2,176		)
Net cash flows used in financing activities		(121,145		)	(66,153		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		18,273			(6,246		)
CASH AND CASH EQUIVALENTS, beginning of period		23,224			16,470
CASH AND CASH EQUIVALENTS, end of period		$	41,497		$	10,224

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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SINCLAIR BROADCAST GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Principles of Consolidation

 

The consolidated financial statements include our accounts and those of our wholly-owned and majority-owned subsidiaries and variable interest entities (VIEs) for which we are the primary beneficiary.  Noncontrolling interests represent a minority owner’s proportionate share of the equity in certain of our consolidated entities.  All significant intercompany transactions and account balances have been eliminated in consolidation.

 

Interim Financial Statements

 

The consolidated financial statements for the three and nine months ended September 30, 2010 and 2009 are unaudited.  In the opinion of management, such financial statements have been presented on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows for these periods as adjusted for the adoption of recent accounting pronouncements discussed below.

 

As permitted under the applicable rules and regulations of the Securities and Exchange Commission (SEC), the consolidated financial statements do not include all disclosures normally included with audited consolidated financial statements and, accordingly, should be read together with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC.  The consolidated statements of operations presented in the accompanying consolidated financial statements are not necessarily representative of operations for an entire year.

 

Variable Interest Entities

 

In June 2009, the Financial Accounting Standards Board (FASB) issued amended guidance on the consolidation of variable interest entities (VIEs).  The intent of this guidance is to improve financial reporting by enterprises involved with VIEs and to provide more relevant and reliable information to users of financial statements.  The new guidance will require a number of new disclosures and companies are required to perform ongoing reassessments of whether they are the primary beneficiary of a VIE for financial reporting purposes.  This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.

 

In determining whether we are the primary beneficiary of a VIE for financial reporting purposes, we consider whether we have the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and whether we have the obligation to absorb losses or the right to receive returns that would be significant to the VIE.  We consolidate VIEs when we are the primary beneficiary.  The assets of our consolidated VIEs can only be used to settle the obligations of the VIE.  All the liabilities including debt held by our VIEs are non-recourse to us.  However the VIE debt of Cunningham Broadcasting Corporation (Cunningham) contains cross-default provisions under our senior secured credit facility (Bank Credit Agreement).  See Note 5, Related Person Transactions for more information.

 

We have a Local Marketing Agreement (LMA) to provide programming, sales and managerial services to Cunningham, the license owner for six television stations.  We pay LMA fees to Cunningham and also reimburse all operating expenses.  We also have an acquisition agreement in which we have a purchase option to buy the license assets of the television stations which includes the FCC license and certain other assets used to operate the station (License Assets).  Our applications to acquire the Federal Communications Commission (FCC) licenses are pending approval.  We have determined that the Cunningham stations are VIEs and that based on the terms of the agreements, we are the primary beneficiary of the variable interests because we have the power to direct the activities which significantly impact the economic performance of the VIE through the sales and managerial services we provide and we absorb losses and returns that would be considered significant to Cunningham.  See Note 5, Related Person Transactions for more information on our arrangements with Cunningham.

 

We have outsourcing agreements with other license owners, which we provide certain non-programming related sales, operational and administrative services.  We pay a fee to the license owner based on a percentage of broadcast cash flow and we reimburse all operating expenses.  We also have a purchase option to buy the License Assets.  For the same reasons noted above regarding the LMA, we have determined that the outsourced license station assets are VIEs and we are the primary beneficiary.

 

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As of the dates indicated, the carrying amounts and classification of the assets and liabilities of the VIEs mentioned above which have been included in our consolidated balance sheets were as follows (in thousands):

 

		As of September 30, 2010			As of December 31, 2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	4,994		$	4,127
Income taxes receivable		29			33
Current portion of program contract costs		528			430
Prepaid expenses and other current assets		223			129
Deferred tax assets		27			27
Total current asset		5,801			4,746
PROGRAM CONTRACT COSTS, less current portion		448			649
PROPERTY AND EQUIPMENT, net		7,652			8,239
GOODWILL		6,357			6,357
BROADCAST LICENSES		4,320			4,320
DEFINITE-LIVED INTANGIBLE ASSETS, net		7,141			7,393
OTHER ASSETS		158			213
Total assets		$	31,877		$	31,917
LIABILITIES
CURRENT LIABILITIES:
Accounts payable		$	37		$	37
Accrued liabilities		500			774
Current portion of notes payable, capital leases and commercial bank financing		11,051			11,039
Current portion of program contracts payable		691			576
Total current liabilities		12,279			12,426
LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing, less current portion		16,250			24,540
Program contracts payable, less current portion		170			444
Deferred tax liabilities		218			218
Total liabilities		$	28,917		$	37,628

 

The amounts above represent the consolidated assets and liabilities of the VIEs related to our LMA and outsourcing agreements and have been aggregated as they all relate to our broadcast business.  In addition the risk and reward characteristics of the VIEs are similar.

 

Under the previously applicable accounting guidance for consolidation, we had determined that we had a variable interest in four real estate ventures and that we were the primary beneficiary of those VIEs and should consolidate the assets and liabilities of those entities.  However, under the new accounting guidance for consolidation which is effective January 1, 2010, we no longer consider one of these investments to be a VIE since the investment does not meet the VIE criteria under the new accounting guidance.  We still consolidate the assets and liabilities of this entity pursuant to other accounting guidance based on voting-interests.  Under the new accounting guidance for consolidation, we no longer consider ourselves the primary beneficiary of the other three real estate ventures since as the manager of the venture, the other partner holds the power to direct activities that significantly impact the economic performance of the VIE and can participate in returns that would be considered significant to the VIE.  The effect of this change is not material to our consolidated financial statements.

 

We have investments in other real estate ventures and investment companies which are considered VIEs.  However, we do not participate in the management of these entities including the day-to-day operating decisions or other decisions which allow us to control the entity, and therefore, we are not considered the primary beneficiary of the VIE.  We account for these entities using the equity or cost method of accounting.

 

The carrying amounts of our investments in these VIEs for which we are not the primary beneficiary as of September 30, 2010 and December 31, 2009 are as follows (in thousands):

 

		As of September 30, 2010						As of December 31, 2009
		Carrying amount			Maximum exposure			Carrying amount			Maximum exposure
Investments in real estate ventures		$	7,734		$	7,734		$	8,796		$	8,796
Investments in investment companies		24,347			24,347			21,108			21,108
Total		$	32,081		$	32,081		$	29,904		$	29,904

 

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The carrying amounts above are included in other assets in the consolidated balance sheets.  The income and loss related to these investments are recorded in (loss) income from equity and cost method investments in the consolidated statement of operations.  We recorded income of $0.6 million and $0.3 million in the quarters ended September 30, 2010 and 2009, respectively.  We recorded income of $1.1 million and a loss of $0.2 million for the nine months ended September 30, 2010 and 2009, respectively.

 

Our maximum exposure is equal to the carrying value of our investments.  As of September 30, 2010 and December 31, 2009, our unfunded commitments totaled $15.0 million and $16.8 million, respectively.

 

Recent Accounting Pronouncements

 

In September 2009, the FASB ratified the Emerging Issues Task Force’s amended guidance on accounting for revenue arrangements with multiple deliverables.  The amended guidance allows the use of an estimated selling price for the undelivered units of accounting in transactions in which vendor-specific objective evidence (VSOE) or third-party evidence (TPE) does not exist.  The amended guidance no longer allows the use of the residual method when allocating arrangement consideration between the delivered and undelivered units of accounting if VSOE and TPE of selling price does not exist for all units of accounting.  Entities are required to estimate the selling price of the deliverables, when VSOE and TPE are not available, and then allocate the consideration based on the relative selling prices of the deliverables.  This guidance also requires additional disclosures including the amount of revenue recognized each reporting period and the amount of deferred revenue as of the end of each reporting period under this guidance.  This guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010 and should be applied on a prospective basis.  We have not determined the impact that this guidance will have on our consolidated financial statements.

 

In January 2010, the FASB amended the guidance on fair value measurements and disclosures to add two new disclosure provisions to the current fair value disclosure guidance, including (1) details of transfers in and out of level 1 and level 2 measurements, and (2) gross presentation of activity within the level 3 roll forward.  The guidance also amends two existing fair value disclosure requirements so that entities are required to disclose (1) the valuation techniques and inputs used to develop fair value measurements for assets and liabilities that are measured at fair value on both a recurring basis and nonrecurring basis in periods subsequent to initial recognition and (2) fair value measurement disclosures for each class of assets and liabilities.  A class is defined as a subset of assets or liabilities within a line item in the statement of financial position.  The guidance is for interim and annual reporting periods beginning after December 15, 2009, except for the changes to the level 3 roll forward which are effective for fiscal years beginning after December 15, 2010.  We have added the required disclosures under this guidance to our consolidated financial statements beginning with the first quarter of 2010.

 

Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the consolidated financial statements and in the disclosures of contingent assets and liabilities.  Actual results could differ from those estimates.

 

Restricted Cash

 

In October 2009, we established a cash collateral account with the proceeds from the sale of 9.25% Senior Secured Second Lien Notes due 2017 (the 9.25% Notes).  The cash collateral account restricted the use of cash therein to repurchase our 3.0% Convertible Senior Notes due 2027 (the 3.0% Notes) and 4.875% Convertible Senior Notes due 2018 (the 4.875% Notes) upon, or prior to, the expiration of the put periods for such notes in May 2010 and January 2011, respectively.  Upon expiration of such put periods, the unused cash is released to us to be used for general corporate purposes.  During 2010, we used $53.6 million of restricted cash to redeem the 3.0% and 4.875% Notes.  See Note 3, Notes Payable and Commercial Bank Financing for more information.  As of September 30, 2010, we held $5.1 million in the restricted cash collateral account to be used for the redemption of the remaining $5.7 million aggregate principal amount of 4.875% Notes.  As of September 30, 2010, primarily all of the restricted cash classified as current relates to the January 2011 put option.

 

Additionally, under the terms of certain lease agreements, as of September 30, 2010, we are required to hold $0.4 million of restricted cash related to the removal of analog equipment from some of our leased towers.  As of December 31, 2009, we were required to hold $0.5 million of restricted cash related to the removal of analog tower equipment.

 

Dividends

 

In November 2010, our Board of Directors declared a $0.43 per share common stock dividend payable on December 15, 2010 to holders of record on December 1, 2010.

 

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Income Taxes

 

Our income tax provision for all periods consists of federal and state income taxes.  The tax provision for the three and nine months ended September 30, 2010 and 2009, is based on the estimated effective tax rate applicable for the full year after taking into account discrete tax items and the effects of the noncontrolling interests.

 

Our effective income tax rate for the three months ended September 30, 2010 was lower than the statutory rate primarily due to a $2.3 million benefit predominantly resulting from a change in estimate related to an increased deduction for the recovery of historical losses attributable to a disposition that took place in 2009.  Our effective income tax rate for the nine months ended September 30, 2010 approximated the statutory rate.

 

In October 2010, we received a $8.4 million federal income tax cash refund.

 

Reclassifications

 

Certain reclassifications have been made to prior years’ consolidated financial statements to conform to the current year’s presentation.

 

2.              COMMITMENTS AND CONTINGENCIES:

 

Litigation

 

We are party to lawsuits and claims from time to time in the ordinary course of business.  Actions currently pending are in various preliminary stages and no judgments or decisions have been rendered by hearing boards or courts in connection with such actions.  After reviewing developments to date with legal counsel, our management is of the opinion that the outcome of our pending and threatened matters will not have a material adverse effect on our consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows.

 

FCC License Renewals

 

In May 2010, the FCC granted the license renewal application of WUCW-TV in Minneapolis/St. Paul, Minnesota.

 

Network Affiliation Agreements

 

Our ABC network affiliation agreements were scheduled to expire December 31, 2009.  We extended these affiliation agreements until March 31, 2010, while we continued negotiations.  On March 25, 2010, we agreed to terms on a renewal of the ABC network affiliation agreements, expiring August 31, 2015.  Pursuant to the terms we are required to pay an annual license fee to ABC for network programming.

 

Our FOX affiliation agreements require us to receive FOX’s consent prior to entering into retransmission consent agreements that include content provided by FOX.  FOX has recently begun conditioning its consent on its affiliates agreeing to pay FOX compensation related to such retransmission consent agreements.  Sinclair, and other FOX affiliates, are currently negotiating with FOX on this issue.  As of September 30, 2010, the net book value of our FOX network affiliation assets was $31.1 million.

 

On August 31, 2010, the FOX affiliation agreement with KFXA-TV in Cedar Rapids, Iowa, expired.  The licensee of KFXA, to which we provide services under an outsourcing agreement, continues to operate the station as a FOX affiliate pursuant to an informal month-to-month extension, while negotiations with FOX continue.

 

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3.              NOTES PAYABLE AND COMMERCIAL BANK FINANCING

 

Debt Redemptions

 

During the first quarter of 2010, we completed tender offers to purchase for cash any and all of the outstanding 3.0% Notes and 4.875% Notes at 100% of the face value of such notes.  We used $26.6 million of restricted cash to pay for such redemptions.  We redeemed approximately $12.3 million and $14.3 million of the 3.0% and 4.875% Notes, respectively.  During the second quarter of 2010, the put right period for the 3.0% Notes expired and holders representing $10.0 million in principal amount of the 3.0% Notes exercised their put rights.  We used $10.0 million of restricted cash to pay for such exercises.  After the expiration of the 3.0% Notes put rights $5.4 million of unused funds from the cash collateral account was released to us for general corporate purposes.  During the third quarter of 2010, we redeemed $17.0 million of the 4.875% Notes in a private transaction.  We used $17.0 million of restricted cash to pay for the purchase.  As of September 30, 2010, the face amount of the outstanding 3.0% and 4.875% Notes was $5.4 million and $5.7 million, respectively.

 

During the nine months ended September 30, 2010, we repurchased, on the open market, $6.1 million in principal amount of the 6.0% Convertible Debentures, due 2012 (the 6.0% Notes).  On September 20, 2010, we commenced tender offers to purchase for cash up to $60.0 million in principal amount of the outstanding 6.0% Notes and any and all of the outstanding 8.0% Senior Subordinated Notes, due 2012 (the 8.0% Notes). We offered to purchase the 6.0% Notes at a purchase price of $987.50 per $1,000 principal amount plus accrued and unpaid interest.  We offered to purchase the 8.0% Notes at a purchase price of $1,002.50 per $1,000 principal amount, if tendered within the first ten business days of the tender offer period or $972.50 per $1,000 principal amount if tendered after such time, plus accrued and unpaid interest.  The tender offers expired October 19, 2010 and approximately, $58.0 million and $175.7 million principal amount of the 6.0% and 8.0% Notes, respectively, were tendered and purchased.  The net proceeds from the offering of the 8.375% Senior Unsecured Notes, due 2018 (the 8.375% Notes), discussed below, were used to fund these tender offers.  As of September 30, 2010, the face amount of the outstanding 6.0% and 8.0% Notes was $128.0 million and $224.7 million, respectively, and are classified as long-term in our consolidated balance sheets.  We will redeem the remaining $49.0 million of the 8.0% Notes in cash on November 19, 2010 at a purchase price of 100% of the principal amount of the 8.0% Notes plus accrued and unpaid interest.

 

Bank Credit Agreement

 

On August 19, 2010, we entered into an amendment (the Amendment) of our Bank Credit Agreement.  Under the Amendment, we paid down $35.0 million of the outstanding $305.0 million balance under the Term Loan B facility (Term Loan B) and repriced the remaining $270.0 million outstanding.  The final terms of the Amendment are as follows:

 

·                  The Term Loan B will initially bear interest at LIBOR plus 4.00% with a 1.5% LIBOR floor and will continue to amortize principal at a rate of 0.25% per quarter commencing on March 31, 2011, continuing until the scheduled final payment on October 29, 2015 with 95.25% due at maturity or upon earlier termination of the Term Loan B pursuant to the terms in the Bank Credit Agreement.

·                  We have the right to prepay the Term Loan B at any time; provided, however, that if we prepay, reprice downward or otherwise refinance all or any portion of the Term Loan B prior to August 19, 2011, then we will be required to pay the Term Loan B lenders a prepayment premium equal to 1.00% of the aggregate amount prepaid, repriced or otherwise refinanced.

·                  Provision for additional incremental term loan capacity up to $100.0 million.

·                  The terms of the Revolving Credit Facility were not materially affected by the Amendment.

 

8.375% Senior Unsecured Notes, due 2018

 

On October 4, 2010, we issued $250.0 million aggregate principal amount of 8.375% Notes due October 15, 2018 at 98.567% of their par value pursuant to an indenture, dated as of October 4, 2010 (the Indenture).  Interest on the 8.375% Notes will be paid on April 15 and October 15 of each year, beginning April 15, 2011.  Prior to October 15, 2014, we may redeem the 8.375% Notes in whole or in part, at any time or from time to time at a price equal to 100% of the principal amount of the 8.375% Notes plus accrued and unpaid interest, plus a “make-whole premium” as set forth in the Indenture.  Beginning on October 15, 2014, we may redeem some or all of the 8.375% Notes at any time or from time to time at the redemption prices set forth in the Indenture.  In addition, on or prior to October 15, 2013, we may redeem up to 35% of the 8.375% Notes using the proceeds of certain equity offerings.  Upon certain changes of control, we must offer to purchase the 8.375% Notes at a price equal to 101% of the face amount of the Notes plus accrued and unpaid interest.  The net proceeds from the offering of the 8.375% Notes were used to fund the tender offers for our 6.0% and 8.0% Notes described above.  Concurrent to entering into the Indenture we also entered into a registration rights agreement requiring us to complete an offer of an exchange of the 8.375% Notes for registered securities with the SEC by July 1, 2011.

 

In conjunction with the Amendment of the Bank Credit Agreement, the 8.375% Notes issuance, and the 6.0% and 8.0% Notes tenders, both Moody’s and Standard & Poor’s raised our credit ratings.

 

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4.              EARNINGS (LOSS) PER SHARE

 

The following table reconciles income (loss) (numerator) and shares (denominator) used in our computations of earnings (loss) per share for the three and nine months ended September 30, 2010 and 2009 (in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
Income (Loss) (Numerator)
Income (loss) from continuing operations		$	14,213		$	15,855		$	42,293		$	(68,489	)
Income impact of assumed conversion of the 4.875% Notes, net of taxes		42			1,049			125			—
Net loss (income) attributable to noncontrolling interests included in continuing operations		131			(1,162		)	978			527
Numerator for diluted earnings (loss) per common share from continuing operations		14,386			15,742			43,396			(67,962		)
(Loss) income from discontinued operations		(68		)	245			(202		)	28
Numerator for diluted earnings (loss) attributable to Sinclair Broadcast Group		$	14,318		$	15,987		$	43,194		$	(67,934	)
Shares (Denominator)
Weighted-average common shares outstanding		80,344			79,739			80,204			80,036
Dilutive effect of stock-settled appreciation rights		28			—			21			—
Dilutive effect of 4.875% Notes		255			6,416			255			—
Weighted-average common and common equivalent shares outstanding		80,627			86,155			80,480			80,036

 

Potentially dilutive securities representing 7.0 million and 21.8 million for the three months ended September 30, 2010 and 2009, respectively, and 7.0 million and 28.2 million for the nine months ended September 30, 2010 and 2009, respectively, were excluded from the computation of diluted earnings (loss) per common share for these periods because their effect would have been antidilutive.  The decrease in potentially dilutive securities is primarily related to the partial redemption of our 3.0% Notes and the inclusion of the 4.875% Notes in dilutive earnings (loss) per share.  The net income (loss) per share amounts are the same for Class A and Class B Common Stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

 

5.              RELATED PERSON TRANSACTIONS

 

David, Frederick, Duncan and Robert Smith (collectively, the controlling shareholders) are brothers and hold substantially all of the Class B Common Stock and some of our Class A Common Stock.  Since the end of our last fiscal year, we engaged in the following transactions with them and/or entities in which they have substantial interests.

 

Cunningham Broadcasting Corporation.  We have options from trusts established by Carolyn C. Smith, a parent of our controlling shareholders, for the benefit of her grandchildren that will grant us the right to acquire, subject to applicable FCC rules and regulations, 100% of the capital stock of Cunningham Broadcasting Corporation (Cunningham) or 100% of the capital stock or assets of Cunningham’s individual subsidiaries.  Cunningham is the owner-operator and FCC licensee of: WNUV-TV in Baltimore, Maryland; WRGT-TV in Dayton, Ohio; WVAH-TV in Charleston, West Virginia; WTAT-TV in Charleston, South Carolina; WMYA-TV in Anderson, South Carolina; and WTTE-TV in Columbus, Ohio.

 

We made payments to Cunningham under the LMAs and acquisition agreements of $4.4 million and $1.5 million for the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, we made payments to Cunningham of $13.2 million and $4.6 million, respectively, related to the LMAs.

 

For the three and nine months ended September 30, 2010, Cunningham’s stations provided us with approximately $22.5 million and $67.8 million, respectively, of total revenue.  The financial statements for Cunningham are included in our consolidated financial statements for all periods presented.  Our Bank Credit Agreement contains certain cross-default provisions with certain material third-party licensees.  As of September 30, 2010, Cunningham was the sole material third-party licensee.

 

Related Person Leases.  Certain assets used by us and our operating subsidiaries are leased from Cunningham Communications, Inc., Keyser Investment Group, Gerstell Development Limited Partnership and Beaver Dam, LLC (entities owned by some or all of the controlling shareholders).  Lease payments made to these entities were $1.5 million and $1.2 million for the three months ended

 

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September 30, 2010 and 2009.  Lease payments made to these entities were $3.8 million and $3.5 million for the nine months ended September 30, 2010 and 2009, respectively.

 

Bay TV.  In January 1999, we entered into a LMA with Bay Television, Inc. (Bay TV), which owns the television station WTTA-TV in Tampa/St. Petersburg, Florida market.  Our controlling shareholders own a substantial portion of the equity of Bay TV.  Payments made to Bay TV were $0.5 million for each of the three months ended September 30, 2010 and 2009, respectively, and $1.2 million and $2.6 million for the nine months ended September 30, 2010 and 2009, respectively.  We received $0.1 million for each of the three months ended September 30, 2010 and 2009 and $0.4 million for each of the nine months ended September 30, 2010 and 2009 from Bay TV for certain equipment leases.

 

Atlantic Automotive Corporation.  We sold advertising time to and purchased vehicles and related vehicle services from Atlantic Automotive Corporation (Atlantic Automotive), a holding company which owns automobile dealerships and an automobile leasing company.  David Smith, our President and Chief Executive Officer, has a controlling interest in, and is a member of the Board of Directors of Atlantic Automotive.  Our stations in Baltimore, Maryland and Norfolk, Virginia received payments for advertising time totaling less than $0.1 million for each of the three months ended September 30, 2010 and 2009.  For each of the nine months ended September 30, 2010 and 2009, we received payments for advertising time totaling $0.2 million.  We paid $0.2 million and $0.1 million for vehicles and related vehicle services from Atlantic Automotive during the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, we paid $0.5 million and $0.3 million, respectively, for vehicles and related vehicle services.

 

Thomas & Libowitz P.A.  Basil A. Thomas, a member of our Board of Directors, is the father of a partner and founder of Thomas & Libowitz, P.A., a law firm providing legal services to us on an ongoing basis.  We paid fees of less than $0.1 million and $0.4 million to Thomas & Libowitz during the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, we paid fees of $0.4 million and $1.0 million to Thomas & Libowitz, respectively.

 

6.              SEGMENT DATA:

 

We measure segment performance based on operating income (loss).  Our broadcast segment includes stations in 35 markets located predominately in the eastern, mid-western and southern United States.  Our other operating divisions segment primarily earned revenues from sign design and fabrication; regional security alarm operating and bulk acquisitions; and real estate ventures.  All of our other operating divisions are located within the United States.  Corporate costs primarily include our costs to operate as a public company and to operate our corporate headquarters location.  Corporate is not a reportable segment.  We had $166.4 million and $109.0 million of intercompany loans between the broadcast segment, operating divisions segment and corporate as of September 30, 2010 and 2009, respectively.  We had $4.9 million and $3.2 million in intercompany interest expense related to intercompany loans between the broadcast segment, other operating divisions segment and corporate for the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, we had $14.4 million and $9.3 million in intercompany interest expense.  Intercompany loans and interest expense are excluded from the tables below.  All other intercompany transactions are immaterial.

 

Financial information for our operating segments are included in the following tables for the three and nine months ended September 30, 2010 and 2009 (in thousands).

 

For the three months ended September 30, 2010		Broadcast			Other Operating Divisions			Corporate			Consolidated
Revenue		$	176,621		$	9,831		$	—		$	186,452
Depreciation of property and equipment		8,220			321			481			9,022
Amortization of definite-lived intangible assets and other assets		3,961			726			—			4,687
Amortization of program contract costs and net realizable value adjustments		15,945			—			—			15,945
General and administrative overhead expenses		5,508			232			496			6,236
Operating income (loss)		56,468			605			(978		)	56,095
Interest expense		—			551			30,798			31,349
Loss from equity and cost method investments		—			(1,997		)	—			(1,997		)

 

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For the three months ended September 30, 2009		Broadcast			Other Operating Divisions			Corporate			Consolidated
Revenue		$	149,437		$	10,690		$	—		$	160,127
Depreciation of property and equipment		9,242			280			473			9,995
Amortization of definite-lived intangible assets and other assets		5,659			571			—			6,230
Amortization of program contract costs and net realizable value adjustments		17,021			—			—			17,021
Impairment of goodwill, intangible and other assets		—			—			243			243
General and administrative overhead expenses		1,809			237			4,063			6,109
Operating income (loss)		42,401			(1,682		)	(4,986		)	35,733
Interest expense		—			376			17,090			17,466
Income from equity and cost method investments		—			453			—			453

 

For the nine months ended September 30, 2010		Broadcast			Other Operating Divisions			Corporate			Consolidated
Revenue		$	516,013		$	25,618		$	—		$	541,631
Depreciation of property and equipment		25,460			942			1,342			27,744
Amortization of definite-lived intangible assets and other assets		12,017			2,070			—			14,087
Amortization of program contract costs and net realizable value adjustments		47,162			—			—			47,162
General and administrative overhead expenses		17,771			675			1,617			20,063
Operating income (loss)		162,508			(530		)	(2,965		)	159,013
Interest expense		—			1,299			87,401			88,700
Loss from equity and cost method investments		—			(2,478		)	—			(2,478		)

 

For the nine months ended September 30, 2009		Broadcast			Other Operating Divisions			Corporate			Consolidated
Revenue		$	439,567		$	33,570		$	—		$	473,137
Depreciation of property and equipment		30,275			755			1,426			32,456
Amortization of definite-lived intangible assets and other assets		16,172			1,511			—			17,683
Amortization of program contract costs and net realizable value adjustments		57,644			—			—			57,644
Impairment of goodwill, intangible and other assets		130,098			—			243			130,341
General and administrative overhead expenses		5,523			823			12,139			18,485
Operating loss		(27,152		)	(3,978		)	(14,020		)	(45,150		)
Interest expense		—			994			52,492			53,486
Income from equity and cost method investments		—			471			—			471

 

7.              FAIR VALUE MEASUREMENTS:

 

Accounting guidance provides for valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost).  A fair value hierarchy using three broad levels prioritizes the inputs to valuation techniques used to measure fair value.  The following is a brief description of those three levels:

 

·                  Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

·                  Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

·                  Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

 

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