Sinclair Broadcast Group, LLC - Quarter Report: 2014 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, 2014

 

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 x  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, 2014

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION	3
ITEM 1. FINANCIAL STATEMENTS	3
CONSOLIDATED BALANCE SHEETS	3
CONSOLIDATED STATEMENTS OF OPERATIONS	4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	5
CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)	7
CONSOLIDATED STATEMENTS OF CASH FLOWS	8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	9
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42
ITEM 4. CONTROLS AND PROCEDURES	42
PART II. OTHER INFORMATION	43
ITEM 1. LEGAL PROCEEDINGS	43
ITEM 1A. RISK FACTORS	43
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	44
ITEM 4. MINE SAFETY DISCLOSURES	44
ITEM 5. OTHER INFORMATION	44
ITEM 6. EXHIBITS	45
SIGNATURE	46
EXHIBIT INDEX	47

 

2

Table of Contents

 

PART I. 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, 2014			As of December 31, 2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	99,350		$	280,104
Accounts receivable, net of allowance for doubtful accounts of $3,422 and $3,379, respectively		327,618			308,974
Affiliate receivable		25			182
Current portion of program contract costs		107,403			74,324
Prepaid expenses and other current assets		32,473			30,599
Deferred barter costs		6,407			3,688
Total current assets		573,276			697,871
ASSETS HELD FOR SALE		40,848			—
PROGRAM CONTRACT COSTS, less current portion		42,917			24,708
PROPERTY AND EQUIPMENT, net		712,677			596,071
RESTRICTED CASH		104,330			11,747
GOODWILL		1,820,042			1,380,082
BROADCAST LICENSES		125,330			101,029
DEFINITE-LIVED INTANGIBLE ASSETS, net		1,652,634			1,127,755
OTHER ASSETS		222,202			208,209
Total assets (a)		$	5,294,256		$	4,147,472
LIABILITIES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable		$	18,814		$	13,989
Accrued liabilities		263,836			182,185
Income taxes payable		10,002			2,504
Current portion of notes payable, capital leases and commercial bank financing		43,130			46,346
Current portion of notes and capital leases payable to affiliates		2,676			2,367
Current portion of program contracts payable		118,300			90,933
Deferred barter revenues		6,226			3,319
Deferred tax liabilities		43			1,738
Total current liabilities		463,027			343,381
LONG-TERM LIABILITIES:
Liabilities held for sale		4,310			—
Notes payable, capital leases and commercial bank financing, less current portion		3,725,185			2,966,402
Notes payable and capital leases to affiliates, less current portion		16,901			18,925
Program contracts payable, less current portion		63,806			34,681
Deferred tax liabilities		592,866			311,041
Other long-term liabilities		73,718			67,338
Total liabilities (a)		4,939,813			3,741,768
COMMITMENTS AND CONTINGENCIES (See Note 3)
EQUITY:
SINCLAIR BROADCAST GROUP SHAREHOLDERS’ EQUITY:
Class A Common Stock, $.01 par value, 500,000,000 shares authorized, 70,466,653 and 74,145,569 shares issued and outstanding, respectively		705			741
Class B Common Stock, $.01 par value, 140,000,000 shares authorized, 25,978,357 and 26,028,357 shares issued and outstanding, respectively, convertible into Class A Common Stock		260			260
Additional paid-in capital		1,001,947			1,094,918
Accumulated deficit		(625,484		)	(696,996		)
Accumulated other comprehensive loss		(2,693		)	(2,553		)
Total Sinclair Broadcast Group shareholders’ equity		374,735			396,370
Noncontrolling interests		(20,292		)	9,334
Total equity		354,443			405,704
Total liabilities and equity		$	5,294,256		$	4,147,472

 

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

 

(a)

Our consolidated total assets as of September 30, 2014 and December 31, 2013 include total assets of variable interest entities (VIEs) of $160.9 million and $194.1 million, respectively, which can only be used to settle the obligations of the VIEs. Our consolidated total liabilities as of September 30, 2014 and December 31, 2013 include total liabilities of the VIEs of $35.0 million and $31.6 million, respectively, for which the creditors of the VIEs have no recourse to us. See Note 1. Summary of Significant Accounting Policies.

 

3

Table of Contents

 

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,
		2014			2013			2014			2013
REVENUES:
Station broadcast revenues, net of agency commissions		$	448,056		$	303,028		$	1,226,088		$	835,223
Revenues realized from station barter arrangements		28,482			20,653			85,843			60,930
Other operating divisions revenues		18,418			14,963			50,809			39,263
Total revenues		494,956			338,644			1,362,740			935,416
OPERATING EXPENSES:
Station production expenses		150,263			98,939			411,605			265,066
Station selling, general and administrative expenses		97,303			66,115			261,823			171,350
Expenses recognized from station barter arrangements		24,764			18,082			75,769			53,478
Amortization of program contract costs and net realizable value adjustments		28,622			19,229			76,137			56,746
Other operating divisions expenses		14,919			12,746			41,697			33,351
Depreciation of property and equipment		25,342			17,408			74,972			47,108
Corporate general and administrative expenses		16,991			16,109			50,229			38,806
Amortization of definite-lived intangible and other assets		34,478			17,168			84,195			48,727
Loss on asset dispositions		611			—			611			—
Total operating expenses		393,293			265,796			1,077,038			714,632
Operating income		101,663			72,848			285,702			220,784
OTHER INCOME (EXPENSE):
Interest expense and amortization of debt discount and deferred financing costs		(47,950		)	(39,867		)	(127,609		)	(123,029		)
Loss from extinguishment of debt		—			—			—			(16,283		)
Income from equity and cost method investments		1,928			1,571			2,768			115
Other income, net		651			488			2,583			1,427
Total other expense		(45,371		)	(37,808		)	(122,258		)	(137,770		)
Income from continuing operations before income taxes		56,292			35,040			163,444			83,014
INCOME TAX PROVISION		(7,524		)	(4,489		)	(45,418		)	(22,992		)
Income from continuing operations		48,768			30,551			118,026			60,022
DISCONTINUED OPERATIONS:
Income from discontinued operations, includes income tax benefit of $0, $6,107, $0 and $10,806, respectively		—			6,100			—			11,558
NET INCOME		48,768			36,651			118,026			71,580
Net income attributable to the noncontrolling interests		(427		)	(309		)	(1,192		)	(415		)
NET INCOME ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP		$	48,341		$	36,342		$	116,834		$	71,165
Dividends declared per share		$	0.165		$	0.15		$	0.465		$	0.45
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP:
Basic earnings per share from continuing operations		$	0.50		$	0.30		$	1.20		$	0.66
Basic earnings per share from discontinued operations		$	—		$	0.06		$	—		$	0.13
Basic earnings per share		$	0.50		$	0.37		$	1.20		$	0.78
Diluted earnings per share from continuing operations		$	0.49		$	0.30		$	1.19		$	0.65
Diluted earnings per share from discontinued operations		$	—		$	0.06		$	—		$	0.13
Diluted earnings per share		$	0.49		$	0.36		$	1.19		$	0.78
Weighted average common shares outstanding		97,154			99,473			97,712			90,982
Weighted average common and common equivalent shares outstanding		97,896			100,239			98,414			91,549
AMOUNTS ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP COMMON SHAREHOLDERS:
Income from continuing operations, net of tax		$	48,341		$	30,242		$	116,834		$	59,607
Income from discontinued operations, net of tax		—			6,100			—			11,558
Net income		$	48,341		$	36,342		$	116,834		$	71,165

 

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

 

4

Table of Contents

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) (Unaudited)

 

		Three months ended September 30,						Nine months ended September 30,
		2014			2013			2014			2013
Net income		$	48,768		$	36,651		$	118,026		$	71,580
Amortization of net periodic pension benefit costs, net of taxes		41			(38		)	121			(116		)
Unrealized (loss) gain on investments, net of taxes		(319		)	—			285			—
Comprehensive income		48,490			36,613			118,432			71,464
Comprehensive income attributable to the noncontrolling interests		(427		)	(309		)	(1,192		)	(415		)
Comprehensive income attributable to Sinclair Broadcast Group		$	48,063		$	36,304		$	117,240		$	71,049

 

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

 

5

Table of Contents

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)

 

(In thousands) (Unaudited)

 

		Sinclair Broadcast Group Shareholders
		Class A Common Stock					Class B Common Stock					Additional Paid-In			Accumulated			Accumulated Other Comprehensive			Noncontrolling			Total Equity
		Shares		Values			Shares		Values			Capital			Deficit			Loss			Interests			(Deficit)
BALANCE, December 31, 2012		52,332,012		$	523		28,933,859		$	289		$	600,928		$	(713,697	)	$	(4,993	)	$	16,897		$	(100,053	)
Dividends declared on Class A and Class B Common Stock		—		—			—		—			—			(41,938		)	—			—			(41,938		)
Issuance of common stock, net of issuance costs		18,000,000		180			—		—			472,220			—			—			—			472,400
Class B Common Stock converted into Class A Common Stock		2,671,649		27			(2,671,649	)	(27		)	—			—			—			—			—
4.875% Convertible Debentures converted into Class A Common Stock, net of taxes		338,632		3			—		—			7,310			—			—			—			7,313
Class A Common Stock issued pursuant to employee benefit plans		558,149		6			—		—			9,129			—			—			344			9,479
Tax benefit on share based awards		—		—			—		—			503			—			—			—			503
Distributions to noncontrolling interests		—		—			—		—			—			—			—			(9,939		)	(9,939		)
Class A Common Stock sold by variable interest entity, net of taxes		—		—			—		—			7,008			—			—			—			7,008
Amortization of net periodic pension benefit costs, net of taxes		—		—			—		—			—			—			(116		)	—			(116		)
Net income		—		—			—		—			—			71,165			—			415			71,580
BALANCE, September 30, 2013		73,900,442		$	739		26,262,210		$	263		$	1,097,098		$	(684,470	)	$	(5,109	)	$	7,717		$	416,238

 

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

 

6

Table of Contents

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENT OF EQUITY

(In thousands) (Unaudited)

 

		Sinclair Broadcast Group Shareholders
		Class A Common Stock					Class B Common Stock					Additional Paid-In			Accumulated			Accumulated Other Comprehensive			Noncontrolling
		Shares		Values			Shares		Values			Capital			Deficit			Loss			Interests			Total Equity
BALANCE, December 31, 2013		74,145,569		$	741		26,028,357		$	260		$	1,094,918		$	(696,996	)	$	(2,553	)	$	9,334		$	405,704
Dividends declared and paid on Class A and Class B Common Stock		—		—			—		—			—			(45,322		)	—			—			(45,322		)
Class B Common Stock converted into Class A Common Stock		50,000		—			(50,000	)	—			—			—			—			—			—
Repurchases of Class A Common Stock		(3,914,506	)	(38		)	—		—			(108,438		)	—			—			—			(108,476		)
Class A Common Stock issued pursuant to employee benefit plans		185,590		2			—		—			9,550			—			—			—			9,552
Tax benefit on share based awards		—		—			—		—			1,399			—			—			—			1,399
Distributions to noncontrolling interests		—		—			—		—			—			—			—			(3,046		)	(3,046		)
Deconsolidation of variable interest entity		—		—			—		—			4,518			—			(546		)	(27,772		)	(23,800		)
Other comprehensive income		—		—			—		—			—			—			406			—			406
Net income		—		—			—		—			—			116,834			—			1,192			118,026
BALANCE, September 30, 2014		70,466,653		$	705		25,978,357		$	260		$	1,001,947		$	(625,484	)	$	(2,693	)	$	(20,292	)	$	354,443

 

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

 

7

Table of Contents

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

		Nine Months Ended September 30,
		2014			2013
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income		$	118,026		$	71,580
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation of property and equipment		74,972			47,108
Amortization of definite-lived intangible and other assets		84,195			48,727
Amortization of program contract costs and net realizable value adjustments		76,137			56,746
Loss on extinguishment of debt		—			16,283
Stock-based compensation		11,433			8,321
Deferred tax benefit		(23,214		)	(1,486		)
Change in assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable, net		17,376			(37,359		)
Increase in prepaid expenses and other current assets		(13,570		)	(3,925		)
Increase in accounts payable and accrued liabilities		76,381			28,024
Increase (decrease) in income taxes payable		21,569			(1,182		)
Payments on program contracts payable		(69,505		)	(67,407		)
Original debt issuance discount paid		—			(10,285		)
Other, net		(15,403		)	(4,506		)
Net cash flows from operating activities		358,397			150,639
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of property and equipment		(58,151		)	(28,776		)
Payments for acquisition of television stations		(1,071,428		)	(495,440		)
Payments for acquisition of assets in other operating divisions		(8,273		)	(4,650		)
Purchase of alarm monitoring contracts		(15,647		)	(11,928		)
Proceeds from sale of broadcast assets		83,200			27,992
Increase in restricted cash		(92,583		)	(41,032		)
Investments in equity and cost method investees		(7,958		)	(10,205		)
Proceeds from termination of life insurance policies		17,042			—
Other, net		6,936			7,297
Net cash flows used in investing activities		(1,146,862		)	(556,742		)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases		1,061,490			1,198,815
Repayments of notes payable, commercial bank financing and capital leases		(286,417		)	(998,085		)
Proceeds from the sale of Class A Common Stock		—			472,400
Repurchase of outstanding Class A Common Stock		(108,438		)	—
Dividends paid on Class A and Class B Common Stock		(45,322		)	(41,938		)
Payments for deferred financing costs		(15,010		)	(20,205		)
Proceeds from Class A Common Stock sold by variable interest entity		—			10,908
Noncontrolling interests distributions		(4,294		)	(9,939		)
Other, net		5,702			276
Net cash flows from financing activities		607,711			612,232
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(180,754		)	206,129
CASH AND CASH EQUIVALENTS, beginning of period		280,104			22,865
CASH AND CASH EQUIVALENTS, end of period		$	99,350		$	228,994

 

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

 

8

Table of Contents

 

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 VIEs for which we are the primary beneficiary.  Noncontrolling interests represents a minority owner’s proportionate share of the equity in certain of our consolidated entities.  All intercompany transactions and account balances have been eliminated in consolidation.

 

Discontinued Operations

 

In accordance with Financial Accounting Standards Board’s (FASB) guidance on reporting assets held for sale, we reported the results of operations of our stations in Lansing, Michigan (WLAJ-TV) and Providence, Rhode Island (WLWC-TV), as discontinued operations in the consolidated statements of operations.  Discontinued operations have not been segregated in the consolidated statements of cash flows and, therefore, amounts for certain captions will not agree with the accompanying consolidated statements of operations.  The operating results of WLAJ-TV, which was sold effective March 1, 2013 for $14.4 million, and WLWC-TV, which was sold effective April 1, 2013 for $13.8 million, are not included in our consolidated results of operations from continuing operations for the three and nine months ending September 30, 2013. Total revenues for WLAJ-TV and WLWC-TV, which are included in discontinued operations for the nine months ending September 30, 2013, were $0.6 million and $1.6 million, respectively.  Total income before taxes for WLAJ-TV and WLWC-TV, which are included in discontinued operations for the nine months ending September 30, 2013, are $0.2 million and $0.4 million, respectively. The resulting gain on the sale of these stations in 2013 was negligible.  Basic and diluted earnings per share from discontinued operations was less than $0.01 per share for the quarter ended September 30, 2013.

 

Assets Held for Sale

 

As discussed in Note 3. Commitments and Contingencies - Pending Acquisitions, we expect to sell the license and certain related assets of our stations in Tampa, FL - WTTA (MNT), and Colorado Springs, CO — KXRM (FOX) / KXTU (CW).

 

In accordance with Financial Accounting Standards Board’s (FASB) guidance on reporting assets held for sale, we reported our assets and liabilities related to WTTA and KXRM/KXTU as held for sale in the accompanying consolidated balance sheet as of September 30, 2014.  We expect the sale of the stations will occur in the fourth quarter of 2014.  The results of operations of these stations are included within the results from continuing operations as the criteria for classification as discontinued operations was not met.

 

As of September 30, 2014, the major classes of assets and liabilities of the group reported as held for sale on the accompanying condensed consolidated balance sheet are shown below:

 

		September 30, 2014
Assets:
Program contract costs		$	3,626
Property and equipment		4,744
Goodwill		7,924
Broadcast licenses		45
Definite-lived intangible assets		24,509
Assets held for sale		$	40,848
Liabilities:
Program contracts payable		$	4,310
Liabilities held for sale		$	4,310

 

9

Table of Contents

 

Interim Financial Statements

 

The consolidated financial statements for the three and nine months ended September 30, 2014 and 2013 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, consolidated statements of comprehensive income, consolidated statement of equity (deficit) 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, 2013 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 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 each of our consolidated VIEs can only be used to settle the obligations of the VIE.  All the liabilities are non-recourse to us except for certain debt of VIEs which we guarantee.

 

As of September 30, 2014, certain of our stations provide programming, sales and managerial services pursuant to LMAs to six of the Cunningham stations: WNUV-TV, WRGT-TV, WVAH-TV, WMYA-TV, WTTE-TV, and WDBB-TV (collectively, the Cunningham LMA Stations). We pay LMA fees to Cunningham and also reimburse all operating expenses.  We also have executed acquisition agreements to buy the license assets of these television stations which includes the FCC license and certain other assets used to operate the station (License Assets).  Our applications to acquire these FCC license related assets are pending FCC approval.  We also perform sales and other non-programming support services to two other stations owned by Cunningham (acquired in November 2013) pursuant to joint sales agreements (JSAs) and shared services agreements (SSAs).  We have purchase options to acquire the license assets of these stations.  We own the majority of the non-license assets of these Cunningham stations and we have guaranteed the debt related to the stations.  We have determined that these stations are VIEs and that based on the terms of the agreements and the significance of our investment in the stations, we are the primary beneficiary of the variable interests because, subject to the ultimate control of the licensees, we have the power to direct the activities which significantly impact the economic performance of the VIEs through the services we provide and we absorb losses and returns that would be considered significant to the VIEs.

 

On July 31, 2014, we terminated the LMA with WTAT (FOX) in Charleston, SC and sold to Cunningham, the license owner of WTAT, the non-license assets related to this station.  We no longer have any continuing involvement in the operations of this station.  Up until third quarter of 2014, we had consolidated Cunningham Broadcasting Corporation (parent entity), in addition to their stations that we perform services for, as we had previously determined that it was a VIE because it had insufficient equity at risk.  As of September 30, 2014, we concluded that Cunningham Broadcasting Corporation was no longer a VIE given its significant equity at risk in assets that we have no involvement with, and deconsolidated this entity, along with WTAT and WYZZ, a station that Cunningham acquired from us in November, with which we have no continuing involvement.  As a result of the deconsolidation, we recorded the difference between the proceeds received from Cunningham for the sale of WTAT and WYZZ to additional paid in capital in the consolidated balance sheet, as well as reflected the noncontrolling interest deficit of the remaining Cunningham VIEs which represents their significant cumulative distributions made to Cunningham that were previously eliminated in consolidation.  See Note 6. Related Person Transactions for more information on our arrangements with Cunningham. The net revenues of the stations which we consolidated were $26.0 million and $25.9 million for the three months ended September 30, 2014 and 2013, respectively.  The net revenues of the stations which we consolidate were $82.5 million and $80.3 million for the nine months ended September 30, 2014 and 2013, respectively. The fees paid between us and Cunningham pursuant to these arrangements are eliminated in consolidation.  See Changes in the Rules of Television Ownership and Joint Sale Agreements in Note 3. Commitment and Contingencies for discussion of recent changes in FCC rules related to JSAs.

 

We have certain LMAs and outsourcing agreements, including certain JSAs and SSAs, with certain other license owners under which we provide certain non-programming related sales, operational and administrative services, and programming for these LMAs.  The terms of the agreements vary, but generally have initial terms of over five years with several optional renewal terms.  We own the majority of the non-license assets of these stations and in certain cases have guaranteed the debt of the licensee.  We also have purchase options to buy the assets of the licensees.  We have determined that these licensees (19 and 13 licenses as of September 30, 2014 and 2013, respectively) are VIEs, and, based on the terms of the agreements and the significance of our investment in the stations, we are the primary beneficiary of the variable interests because, subject to the ultimate control of the licensees, we have the power to direct the activities which significantly impact the economic performance of the VIE through the services we provide and because we absorb losses and returns that would be considered significant to the VIEs.  The net revenues of these stations which we consolidate were $42.9 million and $31.9 million for the three months ended September 30, 2014 and 2013, respectively. The net revenues of these stations which we consolidate were $124.7 million and $90.1 million for the nine months ended September 30, 2014 and 2013, respectively.  The fees paid between us and other license owners pursuant to these arrangements are eliminated in consolidation.  See Changes in the Rules of Television Ownership and Joint Sale Agreements in Note 3. Commitment and Contingencies for discussion of recent changes in FCC rules related to JSAs.

 

10

Table of Contents

 

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 for the periods presented (in thousands):

 

		September 30, 2014			December 31, 2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	2,891		$	4,916
Accounts receivable		17,426			18,468
Current portion of program contract costs		12,207			10,725
Prepaid expenses and other current assets		1,627			247
Total current assets		34,151			34,356
PROGRAM CONTRACT COSTS, less current portion		6,786			5,075
PROPERTY AND EQUIPMENT, net		10,389			11,081
GOODWILL		800			6,357
BROADCAST LICENSES		16,860			16,768
DEFINITE-LIVED INTANGIBLE ASSETS, net		90,702			97,496
OTHER ASSETS		1,212			22,935
Total assets		$	160,900		$	194,068
LIABILITIES
CURRENT LIABILITIES:
Accounts payable		$	892		$	86
Accrued liabilities		3,969			2,536
Current portion of notes payable, capital leases and commercial bank financing		3,484			5,731
Current portion of program contracts payable		10,502			11,552
Total current liabilities		18,847			19,905
LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing, less current portion		27,553			49,850
Program contracts payable, less current portion		9,933			6,597
Long term liabilities		9,705			10,838
Total liabilities		$	66,038		$	87,190

 

The amounts above represent the consolidated assets and liabilities of the VIEs described above, for which we are the primary beneficiary, and have been aggregated as they all relate to our broadcast business.  Excluded from the amounts above are payments made to the Cunningham VIEs under the LMAs, a portion of which is treated as a prepayment of the purchase price of the stations, and capital leases between us and Cunningham VIEs which are eliminated in consolidation.  The total cumulative payments made under these LMAs as of September 30, 2014 and December 31, 2013, which are excluded from liabilities above, were $33.5 million and $32.4 million, respectively.  The total capital lease liabilities excluded from above were $8.7 and $11.2 as of September 30, 2014 and as of December 31, 2013, respectively.  Also excluded from the amounts above are liabilities associated with the certain LMAs and outsourcing agreements and purchase options with certain VIEs totaling $67.2 million and $59.9 million as of September 30, 2014 and December 31, 2013, respectively, as these amounts are eliminated in consolidation.  The risk and reward characteristics of the VIEs are similar.

 

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 would allow us to control the entity, and therefore, we are not considered the primary beneficiary of these VIEs.  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, 2014 and December 31, 2013 was $24.2 million and $26.7 million, respectively, which are included in other assets in the consolidated balance sheets.  Our maximum exposure is equal to the carrying value of our investments.  The income and loss related to these investments are recorded in income from equity and cost method investments in the consolidated statement of operations.  We recorded income of $2.2 million and $3.1 million in the three and nine months ended September 30, 2014 and $0.7 million and $1.4 million in the three and nine months ended September 30 2013, respectively.

 

11

Table of Contents

 

Recent Accounting Pronouncements

 

In April 2014, the FASB issued new guidance that changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of and represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. Under the revised guidance, it is less likely for any future sales of assets, asset groups, or stations to be considered discontinued operations because such sales would need to represent a strategic shift and have a major effect on our future operations.  Historically, under the previous guidance, sales of minor components of our business were required to be classified as discontinued operations.  We early adopted this new guidance effective July 1, 2014.  If this guidance were effective for the 2013 discontinued operations discussed in Discontinued Operations, then the sale of those stations would not have met the criteria under the new guidance.

 

In May 2014, the FASB issued new guidance on revenue recognition for revenue from contracts with customers. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and will replace most existing revenue recognition guidance when it becomes effective. This new standard is effective for annual reporting periods beginning after December 15, 2016. Early application is not permitted and the standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact of this requirement on our financial statements.

 

In August 2014, the FASB issued guidance on disclosure of uncertainties about an entity’s ability to continue as a going concern. The new standard is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. We are currently evaluating the impact of this requirement on our financial statements.

 

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

 

During 2014 and 2013, we entered into certain definitive agreements to purchase assets of certain stations discussed in Pending Acquisitions in Note 3. Commitment and Contingencies, which required certain deposits to be made into escrow accounts. As of September 30, 2014 and December 31, 2013, we held $104.3 million and $11.4 million, respectively, in restricted cash classified as noncurrent related to the amounts held in escrow for these acquisitions. Included in restricted cash as of September 30, 2014, are the proceeds from the sale of WHTM of $83.2 million, which is held in escrow for the pending acquisitions.

 

Revenue Recognition

 

Total revenues include: (i) cash and barter advertising revenues, net of agency commissions; (ii) retransmission consent fees; (iii) network compensation; (iv) other broadcast revenues and (v) revenues from our other operating divisions.

 

Advertising revenues, net of agency commissions, are recognized in the period during which time spots are aired.

 

Our retransmission consent agreements contain both advertising and retransmission consent elements.  We have determined that our retransmission consent agreements are revenue arrangements with multiple deliverables.  Advertising and retransmission consent deliverables sold under our agreements are separated into different units of accounting at fair value.   Revenue applicable to the advertising element of the arrangement is recognized similar to the advertising revenue policy noted above.  Revenue applicable to the retransmission consent element of the arrangement is recognized over the life of the agreement.

 

Network compensation revenue is recognized over the term of the contract. All other revenues are recognized as services are provided.

 

Share Repurchase Program

 

On October 28, 1999, we announced a $150.0 million share repurchase program, which was renewed on February 6, 2008.   On March 20, 2014, the Board of Directors authorized an additional $150.0 million share repurchase authorization. There is no expiration date, and currently management has no plans to terminate this program.  For the nine months ended September 30, 2014, we have purchased approximately 3.9 million shares for $108.5 million.  For the three months ended September 30, 2014, we purchased 1.0 million shares for $26.1 million.  As of September 30, 2014, the total remaining authorization was $159.0 million.  In October 2014, we purchased an additional 0.9 million shares for $24.2 million.

 

12

Table of Contents

 

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, 2014 and 2013 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. We provide a valuation allowance for deferred tax assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized.  In evaluating our ability to realize net deferred tax assets, we consider all available evidence, both positive and negative, including our past operating results, tax planning strategies and forecasts of future taxable income.  In considering these sources of taxable income, we must make certain judgments that are based on the plans and estimates used to manage our underlying businesses on a long-term basis.  A valuation allowance has been provided for deferred tax assets related to a substantial portion of our available state net operating loss (NOL) carryforwards, based on past operating results, expected timing of the reversals of existing temporary book/tax basis differences, alternative tax strategies and projected future taxable income.

 

Our effective income tax rate for the three and nine months ended September 30, 2014 was less than the statutory rate primarily due to a reduction in liability for unrecognized tax benefits of $11.0 million in the third quarter, as a result of statute of limitations expiration.

 

Our effective income tax rate for the three months and nine months ended September 30, 2013 was lower than the statutory rate primarily due to: 1) a release of a valuation allowance related to state NOL carryforwards, of $5.3 million, net of taxes, due to a law change in a state tax jurisdiction, effective for years beginning after December 31, 2014, which we expect will significantly increase the forecasted future taxable income attributable to that state and result in utilization of the state NOL carryforwards and 2) a $2.2 million adjustment to the income tax provision upon finalization of the 2012 federal income tax return, primarily related to higher than originally projected available income tax deductions.

 

We believe it is reasonably possible that our liability for unrecognized tax benefits related to continuing operations could be reduced by up to $7.8 million, in the next twelve months, as a result of expected statute of limitations expirations, the application of limits under available state administrative practice exceptions, and the resolution of examination issues and settlements with federal and certain state tax authorities.

 

Reclassifications

 

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

 

13

Table of Contents

 

2.              ACQUISITIONS

 

Fisher Communications

 

Effective August 8, 2013, we completed the acquisition of all of the outstanding common stock of Fisher Communications, Inc. (Fisher). We paid $373.2 million to the shareholders of the Fisher common stock, representing $41.0 per common share. We financed the total purchase price with cash on hand. Fisher owned certain broadcast assets related to the following twenty-two stations, and four radio stations in 8 markets along with the respective network affiliation or program service arrangements: KOMO (ABC) and KUNS (Univision) in Seattle-Tacoma, WA; KATU (ABC), KUNP(Univision), and KUNP-LP (Univision) in Portland, OR; KLEW (CBS) in Spokane, WA; KBOI (CBS) and KYUU-LD (CW) in Boise, ID; KVAL (CBS), KCBY (CBS), KPIC (CBS), KMTR (NBC), KMCB (NBC), and KTCW (NBC) in Eugene, OR; KIMA (CBS), KEPR (CBS), KUNW-CD (Univision), and KVVK-CD (Univision), in Yakima/Pasco/Richland/Kennewick, WA; KBAK (CBS) and KBFX-CD (FOX) in Bakersfield, CA; as well as KIDK (CBS/FOX) and KXPI (FOX) in Idaho Falls/Pocatello, ID. The four radio stations are: KOMO (AM/FM), KPLZ (FM) and KVI (AM) in the Seattle/Tacoma, WA market.  This acquisition provides expansion into additional markets and increases value based on the synergies we can achieve.

 

The results of the acquired operations are included in the financial statements of the Company beginning on August 8, 2013.  Under the acquisition method of accounting, the purchase price has been allocated to the acquired assets and assumed liabilities based on estimated fair values.  The allocation reflects the consolidation of net assets of the third party which owns the license and related assets of KMTR in Eugene, OR, which we have consolidated, as the licensee is considered to be a VIE and we are the primary beneficiary of the variable interests. Additionally, another third party that performs certain services pursuant to an outsourcing agreement to our stations in Idaho Falls, ID  (KIDK and KXPI), exercised an existing purchase option to purchase the broadcast assets of the two stations for $6.3 million, which closed in November 2013.  The assets of these stations were classified as assets held for sale in the purchase price allocation.  The allocated fair value of acquired assets and assumed liabilities is summarized as follows (in thousands):

 

Cash		$	13,531
Accounts receivable		29,485
Prepaid expenses and other current assets		19,133
Program contract costs		11,427
Property and equipment		73,968
Broadcast licenses		29,771
Definite-lived intangible assets		166,378
Other assets		7,683
Assets held for sale		6,339
Accounts payable and accrued liabilities		(20,127		)
Program contracts payable		(10,977		)
Deferred tax liability		(74,177		)
Other long-term liabilities		(22,127		)
Fair value of identifiable net assets acquired		230,307
Goodwill		143,942
Less: fair value of non-controlling interests		(1,053		)
Total		$	373,196

 

The final allocation presented above is based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches.  In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.  The amount allocated to definite-lived intangible assets represents the estimated fair values of network affiliations of $117.5 million, the decaying advertiser base of $18.1 million, and other intangible assets of $30.8 million.  These intangible assets will be amortized over the estimated remaining useful lives of 15 years for network affiliations, 10 years for the decaying advertiser base and a weighted average life of 14 years for the other intangible assets.  Acquired property and equipment will be depreciated on a straight-line basis over the respective estimated remaining useful lives.  Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and noncontractual relationships, as well as expected future synergies.  We expect that goodwill deductible for tax purposes will be approximately $11.1 million.  Certain measurement period adjustments have been made since the initial allocation in the third quarter of 2013, which were not material to our consolidated financial statements.

 

Net broadcast revenues and operating income of the Fisher stations included in our consolidated statements of operations, were $45.3 million and $6.1 million and $25.9 million and $8.2 million for the three months ended September 30, 2014 and 2013, respectively.  Net broadcast revenues and operating income of the stations were and $129.6 million and $12.6 million and $25.9 million and $8.2 million for the nine months ended September 30, 2014 and 2013, respectively.

 

14

Table of Contents

 

Barrington

 

Effective November 22, 2013, we completed the acquisition of the broadcast assets of Barrington Broadcasting Company, LLC for $370.0 million, less working capital of $2.4 million, and entered into agreements to operate or provide sales and administrative services to another five stations.  The purchase price includes $7.5 million paid by third parties for the license related assets of certain stations. The acquired assets relate to the following twenty four stations located in fifteen markets along with the respective network affiliation or program service arrangements: WEYI (NBC) and WBSF (CW) in Flint/Saginaw/Bay City/Midland, MI; WNWO (NBC) in Toledo, OH; WACH (FOX) in Columbia, SC; WSTM (NBC), WTVH (CBS) and WSTQ (CW) in Syracuse, NY; KGBT (CBS) in Harlingen/Weslaco/Brownsville/McAllen, TX; KXRM (FOX) and KXTU (CW) in Colorado Springs, CO; WPDE (ABC) and WWMB (CW) in Myrtle Beach/Florence, SC; WHOI (ABC) in Peoria/Bloomington, IL; WPBN/WTOM (NBC),  and WGTU/WGTQ (ABC) in Traverse City/Cadillac, MI; KVII (ABC) and KVIH (ABC) in Amarillo, TX; KRCG (CBS) in Columbia/Jefferson City, MO; WFXL (FOX) in Albany, GA; KHQA (CBS) in Quincy, IL/Hannibal, MO/Keokuk, IA; WLUC (NBC) in Marquette, MI; and KTVO (ABC) in Ottumwa, IA/Kirksville, MO.

 

The results of the acquired operations are included in the financial statements of the Company beginning on November 22, 2013. Under the acquisition method of accounting, the initial purchase price has been allocated to the acquired assets and assumed liabilities based on estimated fair values.  The allocation reflects the consolidation of net assets of the third party licensees which own the license and related assets of WEYI and WBSF in Flint, MI, WWMB in Myrtle Beach, SC and WGTU/WGTQ in Traverse City, MI, which we have consolidated, as the licensees are considered to be VIEs and we are the primary beneficiary of the variable interests.  The purchase price allocation is preliminary pending a final determination of the fair values of the assets and liabilities. The allocated fair value of acquired assets and assumed liabilities is summarized as follows (in thousands):

 

Prepaid expenses and other current assets		$	681
Program contract costs		3,960
Property and equipment		73,621
Broadcast licenses		2,948
Definite-lived intangible assets		217,818
Accounts payable and accrued liabilities		(2,725		)
Program contracts payable		(3,813		)
Other long-term liabilities		(65		)
Fair value of identifiable net assets acquired		292,425
Goodwill		75,261
Total		$	367,686

 

The preliminary allocation presented above is based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches.  In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.  The amount allocated to definite-lived intangible assets represents the estimated fair values of network affiliations of $101.0 million, the decaying advertiser base of $42.0 million, and other intangible assets of $74.8 million.  These intangible assets will be amortized over the estimated remaining useful lives of 15 years for network affiliations, 10 years for the decaying advertiser base and a weighted average life of 15 years for the other intangible assets.  Acquired property and equipment will be depreciated on a straight-line basis over the respective estimated remaining useful lives.  Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and noncontractual relationships, as well as expected future synergies.  We expect that goodwill will be deductible for tax purposes.  The initial purchase price allocation is based upon all information available to us at the present time and is subject to change, and such changes could be material.

 

Net broadcast revenues and operating income of the Barrington stations included in our consolidated statements of operations, were $42.8 million and $6.5 million for the three months ended September 30, 2014, and $123.2 million and $22.2 million for the nine months ended September 30, 2014, respectively.

 

Allbritton

 

Effective August 1, 2014, we completed the acquisition of all of the outstanding common stock of Perpetual Corporation and equity interest of Charleston Television, LLC (“together the “Allbritton Companies”) for $985.0 million plus working capital of $52.1 million.  We financed the total purchase price with proceeds from the issuance of 5.625% senior unsecured notes, a draw on our amended bank credit agreement, and cash on hand.  See Note 4. Notes Payable and Commercial Bank Financing.  Allbritton owned certain broadcast assets related to the following nine stations along with the respective network affiliation or program service arrangements: WHTM (ABC) in Harrisburg/Lancaster/York, PA; WJLA (ABC) in Washington, DC; WBMA(ABC), WCFT (ABC), and WJSU(ABC), in Birmingham, AL; KATV (ABC) in Little Rock/Pine Bluff, AR; KTUL (ABC) in Tulsa, OK; WSET (ABC) in Roanoke/Lynchburg, VA; and WCIV (ABC), Charleston, SC markets, and NewsChannel 8, a 24-hour cable/satellite news network covering the Washington, D.C. metropolitan area. In order to comply with regulatory requirements, we completed the sale of the license and related assets of WHTM to Media General Operations, Inc. (Media General) effective September 3, 2014 for $83.4 million, less working capital of $0.2 million. This acquisition provides expansion into additional markets and increases value based on the synergies we expect to achieve.

 

15