UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

(Mark One)

ý

 

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

 

 

For the quarterly period ended September 30, 2005

 

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)

 


 

Maryland

52-1494660

(State or other jurisdiction of Incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

10706 Beaver Dam Road

Hunt Valley, Maryland 21030

(Address of principal executive offices)

 

(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 ý     No o

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý     No o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No ý

 

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

 

Title of each class

 

Number of shares outstanding as of
November 3, 2005

 

Class A Common Stock

 

46,871,918

 

Class B Common Stock

 

38,587,571

 

 

 



 

SINCLAIR BROADCAST GROUP, INC.

 

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2005

 

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

 

 

 

 

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

 

 

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

 

 

 

 

 

ITEM 5.

OTHER INFORMATION

 

 

 

 

 

 

ITEM 6.

EXHIBITS

 

 

 

 

 

SIGNATURE

 

 

 

 

 

EXHIBIT INDEX

 

 

 

2



 

EXPLANATORY NOTE

 

We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, as originally filed with the SEC on November 9, 2005, to restate our financial statements and corresponding financial information for the three and nine months ended September 30, 2005.

 

We are restating the financial statements and corresponding financial information due to an error made in the accounting treatment for the exchange of our Series D Convertible Exchangeable Preferred Stock (the Preferred Stock) into 6% Convertible Debentures, due 2012 (the Debentures) in June 2005.  In previously reported consolidated financial statements, we accounted for this transaction as an exchange and our auditors concurred with this treatment.  We now believe, and our auditors concur, that the most appropriate accounting guidance to apply to this exchange is EITF Topic D-42, “The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,” and that the exchange should have been treated as a redemption for accounting purposes.  Accordingly, we should have recorded the Debentures at fair value upon issuance and the excess of the carrying amount of the Preferred Stock over the fair value of the Debentures should have been added to net earnings to arrive at net earnings available to common shareholders.  The difference in the carrying amount of the Preferred Stock and the fair value of the Debentures should have been recorded as a discount on the Debentures and amortized over the life of the Debentures using the effective interest method.  Additionally, in calculating and accounting for the carrying amount of the Preferred Stock, all of the issuance costs of the Preferred Stock should have been charged directly to accumulated deficit rather than a portion of these costs recorded as “unamortized costs relating to securities issuances” and amortized over the remaining term of the Debentures.  For additional information regarding our accounting treatment, see Note 1. Summary of Significant Accounting Policies, in the Notes to our Unaudited Consolidated Financial Statements.

 

In addition, we have revised Item 4. Controls and Procedures to discuss the facts and circumstances surrounding the restatement and to disclose the effect of the restatement on the adequacy of our disclosure controls and procedures as of September 30, 2005.

 

This Amendment No. 1 continues to speak as of the date of the original Form 10-Q for the three and nine months ended September 30, 2005 and we have not updated or amended the disclosures contained herein to reflect events that have occurred since the filing of the original Form 10-Q, or modified or updated those disclosures in any way other than as described in the preceding paragraphs. Accordingly, this Amendment No. 1 should be read in conjunction with our filings made with the SEC subsequent to the filing of the original Form 10-Q on November 9, 2005.

 

3



 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

September 30,
2005

 

December 31,
2004

 

 

 

(Unaudited)

 

 

 

 

 

(Restated-See
Note 1)

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

18,126

 

$

10,491

 

Accounts receivable, net of allowance for doubtful accounts of $4,292 and $4,518, respectively

 

113,407

 

132,062

 

Current portion of program contract costs

 

58,711

 

48,805

 

Income taxes receivable

 

 

624

 

Prepaid expenses and other current assets

 

9,869

 

17,509

 

Deferred barter costs

 

2,384

 

2,173

 

Assets held for sale

 

3,683

 

103,523

 

Deferred tax assets

 

11,653

 

20,354

 

Total current assets

 

217,833

 

335,541

 

 

 

 

 

 

 

PROGRAM CONTRACT COSTS, less current portion

 

42,459

 

26,951

 

LOANS TO AFFILIATES

 

15

 

13

 

PROPERTY AND EQUIPMENT, net

 

312,002

 

336,538

 

GOODWILL, net

 

1,047,958

 

1,041,452

 

BROADCAST LICENSES, net

 

409,620

 

405,416

 

DEFINITE-LIVED INTANGIBLE ASSETS, net

 

229,550

 

237,324

 

OTHER ASSETS

 

50,591

 

82,428

 

Total assets

 

$

2,310,028

 

$

2,465,663

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

3,922

 

$

7,056

 

Income taxes payable

 

19,291

 

 

Accrued liabilities

 

66,992

 

77,291

 

Current portion of notes payable, capital leases and commercial bank financing

 

33,775

 

43,737

 

Current portion of notes and capital leases payable to affiliates

 

4,218

 

5,209

 

Current portion of program contracts payable

 

103,797

 

112,471

 

Deferred barter revenues

 

2,660

 

2,655

 

Deferred gain on sale of broadcast assets

 

3,249

 

26,129

 

Liabilities held for sale

 

1,460

 

14,698

 

Total current liabilities

 

239,364

 

289,246

 

LONG-TERM LIABILITIES:

 

 

 

 

 

Notes payable, capital leases and commercial bank financing, less current portion

 

1,397,005

 

1,571,346

 

Notes and capital leases payable to affiliates, less current portion

 

16,120

 

19,323

 

Program contracts payable, less current portion

 

69,123

 

60,197

 

Deferred tax liabilities

 

263,387

 

216,937

 

Other long-term liabilities

 

59,507

 

80,796

 

Total liabilities

 

2,044,506

 

2,237,845

 

 

 

 

 

 

 

MINORITY INTEREST IN CONSOLIDATED ENTITIES

 

5,782

 

1,267

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Series D Preferred Stock, $0.01 par value, 3,450,000 shares authorized, 0 and 3,337,033 issued and outstanding, respectively

 

 

33

 

Class A Common Stock, $0.01 par value, 500,000,000 shares authorized, 46,853,634 and 46,018,574 shares issued and outstanding, respectively

 

469

 

460

 

Class B Common Stock, $0.01 par value, 140,000,000 shares authorized, 38,587,671 and 39,150,828 shares issued and outstanding, respectively, convertible into Class A Common Stock

 

385

 

391

 

Additional paid-in capital

 

593,040

 

752,130

 

Accumulated deficit

 

(334,154

)

(526,463

)

Total shareholders’ equity

 

259,740

 

226,551

 

Total liabilities and shareholders’ equity

 

$

2,310,028

 

$

2,465,663

 

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

 

 

4



 

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,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(Restated-See
Note 1)

 

 

 

(Restated-See
Note 1)

 

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

Station broadcast revenues, net of agency commissions

 

$

149,027

 

$

151,648

 

$

456,572

 

$

463,874

 

Revenues realized from station barter arrangements

 

12,039

 

13,617

 

41,551

 

43,388

 

Other operating divisions’ revenues

 

4,724

 

2,845

 

15,160

 

10,779

 

Total revenues

 

165,790

 

168,110

 

513,283

 

518,041

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Station production expenses

 

35,486

 

37,147

 

112,170

 

114,551

 

Station selling, general and administrative expenses

 

34,218

 

35,319

 

103,123

 

106,691

 

Expenses recognized from station barter arrangements

 

11,158

 

12,619

 

38,447

 

40,147

 

Amortization of program contract costs and net realizable value adjustments

 

18,587

 

23,840

 

52,131

 

70,217

 

Stock-based compensation expense

 

502

 

293

 

1,160

 

1,207

 

Other operating divisions’ expenses

 

3,699

 

3,506

 

14,000

 

12,656

 

Depreciation and amortization of property and equipment

 

12,175

 

11,859

 

38,337

 

36,038

 

Corporate general and administrative expenses

 

5,199

 

4,559

 

15,180

 

15,494

 

Amortization of definite-lived intangible assets and other assets

 

4,475

 

4,621

 

13,529

 

13,955

 

Total operating expenses

 

125,499

 

133,763

 

388,077

 

410,956

 

Operating income

 

40,291

 

34,347

 

125,206

 

107,085

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest expense and amortization of debt discount and deferred financing costs

 

(31,113

)

(29,889

)

(88,950

)

(91,575

)

Interest income

 

187

 

23

 

416

 

140

 

Loss from sale of assets

 

(69

)

(12

)

(69

)

(45

)

Loss from extinguishment of debt

 

 

 

(1,631

)

(2,453

)

Unrealized gain from derivative instruments

 

5,761

 

1,602

 

17,487

 

20,576

 

Income (loss) from equity and cost investees

 

24

 

(3,124

)

(389

)

255

 

Other income, net

 

206

 

183

 

755

 

572

 

Total other expense

 

(25,004

)

(31,217

)

(72,381

)

(72,530

)

Income from continuing operations before income taxes

 

15,287

 

3,130

 

52,825

 

34,555

 

INCOME TAX PROVISION

 

(2,267

)

(1,196

)

(16,008

)

(13,914

)

Income from continuing operations

 

13,020

 

1,934

 

36,817

 

20,641

 

DISCONTINUED OPERATIONS:

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of related income tax provision of $343, $1,133, $2,413 and $3,893, respectively

 

701

 

1,574

 

4,841

 

5,967

 

Gain from sale of discontinued operations, net of related income tax provision of $10,494 and $80,002, respectively

 

17,508

 

 

146,024

 

 

NET INCOME

 

31,229

 

3,508

 

187,682

 

26,608

 

PREFERRED STOCK DIVIDENDS

 

 

(2,503

)

(5,004

)

(7,678

)

EXCESS OF PREFERRED STOCK CARRYING VALUE OVER REDEMPTION VALUE

 

 

 

26,201

 

 

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

 

$

31,229

 

$

1,005

 

$

208,879

 

$

18,930

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share from continuing operations

 

$

0.15

 

$

(0.01

)

$

0.68

 

$

0.15

 

Basic earnings per common share from discontinued operations

 

$

0.21

 

$

0.02

 

$

1.76

 

$

0.07

 

Basic earnings per common share

 

$

0.36

 

$

0.01

 

$

2.44

 

$

0.22

 

Diluted earnings (loss) per common share from continuing operations

 

$

0.15

 

$

(0.01

)

$

0.67

 

$

0.15

 

Diluted earnings per common share from discontinued operations

 

$

0.21

 

$

0.02

 

$

1.64

 

$

0.07

 

Diluted earnings per common share

 

$

0.36

 

$

0.01

 

$

2.31

 

$

0.22

 

Weighted average common shares outstanding

 

85,428

 

85,311

 

85,353

 

85,733

 

Weighted average common and common equivalent shares outstanding

 

85,448

 

85,311

 

92,065

 

85,883

 

Dividends per common share

 

$

0.075

 

$

0.025

 

$

0.200

 

$

0.050

 

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

 

 

5



 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

(In thousands) (Unaudited)

 

 

 

 

Series D Preferred Stock

 

Class A Common Stock

 

Class B Common Stock

 

Additional Paid-In Capital

 

Accumulated Deficit

 

Total Shareholders’ Equity

 

BALANCE, December 31, 2004

 

$

33

 

$

460

 

$

391

 

$

752,130

 

$

(526,463

)

$

226,551

 

Dividends declared on common stock

 

 

 

 

 

(16,987

)

(16,987

)

Dividends paid on Series D Preferred Stock

 

 

 

 

 

(4,587

)

(4,587

)

Class A Common Stock issued pursuant to employee benefit plans and stock options exercised

 

 

3

 

 

2,207

 

 

2,210

 

Class B Common Stock converted into Class A Common Stock

 

 

6

 

(6

)

 

 

 

Redemption of Series D Preferred Stock (a)

 

(33

)

 

 

(161,302

)

26,201

 

(135,134

)

Amortization of deferred compensation

 

 

 

 

5

 

 

5

 

Net income (a)

 

 

 

 

 

187,682

 

187,682

 

BALANCE, September 30, 2005

 

$

 

$

469

 

$

385

 

$

593,040

 

$

(334,154

)

$

259,740

 

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

 


(a)   Amounts for 2005 have been restated.  See Note 1. Summary of Significant Accounting Policies, in the Notes to our Unaudited Consolidated Financial Statements, for additional information.

6



SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2005

 

2004

 

 

 

(Restated-See
Note 1)

 

 

 

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

187,682

 

$

26,608

 

Adjustments to reconcile net income to net cash flows from operating activities:

 

 

 

 

 

Amortization of debt discount, net of (debt premium)

 

86

 

(811

)

Depreciation and amortization of property and equipment

 

38,879

 

38,073

 

Recognition of deferred revenue

 

(3,706

)

(3,693

)

Accretion of capital leases

 

529

 

532

 

(Income) loss from equity and cost investees

 

389

 

(255

)

Loss on sale of property

 

69

 

45

 

Gain on sale of broadcast assets related to discontinued operations

 

(226,026

)

 

Amortization of deferred compensation

 

1,160

 

125

 

Unrealized gain from derivative instruments

 

(17,487

)

(20,576

)

Amortization of definite-lived intangible assets and other assets

 

13,551

 

14,369

 

Amortization of program contract costs and net realizable value adjustments

 

52,737

 

74,406

 

Amortization of deferred financing costs

 

1,933

 

2,185

 

Loss on extinguishment of debt, non-cash portion

 

1,079

 

1,289

 

Amortization of derivative instruments

 

404

 

963

 

Deferred tax provision related to operations

 

24,376

 

17,115

 

Deferred tax provision related to discontinued operations

 

31,874

 

 

Net effect of change in deferred barter revenues and deferred barter costs

 

(247

)

(278

)

Changes in assets and liabilities, net of effects of acquisitions and dispositions:

 

 

 

 

 

Increase in minority interest

 

(334

)

(183

)

Decrease in accounts receivables, net

 

13,280

 

15,065

 

Decrease in taxes receivable

 

624

 

1,541

 

Decrease in prepaid expenses and other current assets

 

7,101

 

4,367

 

Decrease in other long term assets

 

5,221

 

514

 

Decrease in accounts payable and accrued liabilities

 

(22,083

)

(9,134

)

Increase in income taxes payable

 

17,627

 

 

Decrease in other long-term liabilities

 

(1,272

)

(1,029

)

Dividends and distributions from equity and cost investees

 

1,608

 

1,320

 

Payments on program contracts

 

(79,103

)

(83,186

)

Net cash flows from operating activities

 

49,951

 

79,372

 

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:

 

 

 

 

 

Acquisition of property and equipment

 

(12,240

)

(36,529

)

Payment for acquisition of television stations

 

(11,040

)

 

Consolidation of variable interest entity

 

 

239

 

Distribution from equity investments

 

99

 

 

Contributions in equity and cost investees

 

(970

)

(4,620

)

Proceeds from the sale of property

 

59

 

23

 

Proceeds from the sale of broadcast assets related to discontinued operations

 

295,190

 

 

Proceeds from the sale of equity investees

 

21,500

 

 

Proceeds from insurance settlement

 

404

 

 

Loans to affiliates

 

(95

)

(828

)

Proceeds from loans to affiliates

 

93

 

2,182

 

Net cash flows from (used in) investing activities

 

293,000

 

(39,533

)

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:

 

 

 

 

 

Repayments of notes payable, commercial bank financing and capital leases

 

(346,279

)

(543,400

)

Proceeds from commercial bank financing and notes payable

 

35,500

 

511,000

 

Proceeds from exercise of stock options

 

73

 

1,152

 

Payments for deferred financing costs

 

(1,913

)

(953

)

Dividends paid on Series D Convertible Preferred Stock

 

(5,004

)

(7,678

)

Dividends paid on Class A Common Stock

 

(12,803

)

(2,143

)

Repurchase of Series D Convertible Preferred Stock

 

 

(4,752

)

Repurchase of Class A Common Stock

 

 

(9,550

)

Repayments of notes and capital leases to affiliates

 

(4,890

)

(3,149

)

Net cash flows used in financing activities

 

(335,316

)

(59,473

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

7,635

 

(19,634

)

CASH AND CASH EQUIVALENTS, beginning of period

 

10,491

 

28,730

 

CASH AND CASH EQUIVALENTS, end of period

 

$

18,126

 

$

9,096

 

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

 

 

7



SINCLAIR BROADCAST GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Principles of Consolidation

 

The accompanying unaudited consolidated financial statements include the accounts of Sinclair Broadcast Group, Inc. and those of our wholly-owned and majority-owned subsidiaries and variable interest entities.

 

Restatement

 

On August 11, 2006, the Audit Committee of our Board of Directors determined that our financial statements for the quarters ended June 30, 2005, September 30, 2005, and March 31, 2006 and for the year ended December 31, 2005 should be restated.  The restated financial statements result from an error made in the accounting treatment for the exchange of our Series D Convertible Exchangeable Preferred Stock (the Preferred Stock) into 6% Convertible Debentures, due 2012 (the Debentures) in June 2005.  In previously reported consolidated financial statements, we accounted for this transaction as an exchange and our auditors concurred with this treatment.  We now believe, and our auditors concur, that the most appropriate accounting guidance to apply to this exchange is EITF Topic D-42, “The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,” and that the exchange should have been treated as a redemption for accounting purposes.  Accordingly, we should have recorded the Debentures at fair value upon issuance and the excess of the carrying amount of the Preferred Stock over the fair value of the Debentures should have been added to net earnings to arrive at net earnings available to common shareholders.  The difference in the carrying amount of the Preferred Stock and the fair value of the Debentures should have been recorded as a discount on the Debentures and amortized over the life of the Debentures using the effective interest method.  Additionally, in calculating and accounting for the carrying amount of the Preferred Stock, all of the issuance costs of the Preferred Stock should have been charged directly to accumulated deficit rather than a portion of these costs recorded as “unamortized costs relating to securities issuances” and amortized over the remaining term of the Debentures.

 

A summary of the aggregate effect of these restatements on our unaudited consolidated balance sheet is shown below (in thousands):

 

 

 

As of September 30, 2005

 

 

 

As Reported

 

Adjustment

 

As Restated

 

 

 

 

 

 

 

 

 

Total current assets

 

$

217,833

 

$

 

$

217,833

 

Total long-term assets

 

2,094,708

 

(2,513

)

2,092,195

 

Total assets

 

$

2,312,541

 

$

(2,513

)

$

2,310,028

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

239,364

 

$

 

$

239,364

 

Notes payable, capital leases and commercial bank financing, less current portion

 

1,427,810

 

(30,805

)

1,397,005

 

Notes payable and capital leases to affiliates, less current portion

 

16,120

 

 

16,120

 

Deferred tax liabilities

 

263,833

 

(446

)

263,387

 

Other long-term liabilities

 

128,630

 

 

128,630

 

Total liabilities

 

2,075,757

 

(31,251

)

2,044,506

 

 

 

 

 

 

 

 

 

Minority interest in consolidated entities

 

5,782

 

 

5,782

 

 

 

 

 

 

 

 

 

Class A and Class B Common Stock

 

854

 

 

854

 

Additional paid-in capital

 

590,158

 

2,882

 

593,040

 

Accumulated deficit

 

(360,010

)

25,856

 

(334,154

)

Total shareholders’ equity

 

231,002

 

28,738

 

259,740

 

Total liabilities and shareholders’ equity

 

$

2,312,541

 

$

(2,513

)

$

2,310,028

 

 

8



 

A summary of the aggregate effect of these restatements on our unaudited consolidated statements of operations is shown below (in thousands, except per share data):

 

 

 

Three Months Ended September 30, 2005

 

Nine Months Ended September 30, 2005

 

 

 

As Reported

 

Adjustment

 

As Restated

 

As Reported

 

Adjustment

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

165,790

 

$

 

$

165,790

 

$

513,283

 

$

 

$

513,283

 

Total operating expenses

 

125,499

 

 

125,499

 

388,077

 

 

388,077

 

Operating income

 

40,291

 

 

40,291

 

125,206

 

 

125,206

 

Interest expense and amortization of debt discount and deferred financing costs

 

(30,446

)

(667

)

(31,113

)

(88,159

)

(791

)

(88,950

)

Other income, net

 

6,109

 

 

6,109

 

16,569

 

 

16,569

 

Total other expense

 

(24,337

)

(667

)

(25,004

)

(71,590

)

(791

)

(72,381

)

Income from continuing operations before income taxes

 

15,954

 

(667

)

15,287

 

53,616

 

(791

)

52,825

 

Income tax (provision) benefit

 

(2,585

)

318

 

(2,267

)

(16,454

)

446

 

(16,008

)

Income from continuing operations

 

13,369

 

(349

)

13,020

 

37,162

 

(345

)

36,817

 

Income and gain related to discontinued operations, net of taxes

 

18,209

 

 

18,209

 

150,865

 

 

150,865

 

Net income

 

31,578

 

(349

)

31,229

 

188,027

 

(345

)

187,682

 

Preferred stock dividends

 

 

 

 

(5,004

)

 

(5,004

)

Excess of preferred stock carrying value over redemption value

 

 

 

 

 

26,201

 

26,201

 

Net income available to common shareholders

 

$

31,578

 

$

(349

)

$

31,229

 

$

183,023

 

$

25,856

 

$

208,879

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share from continuing operations

 

$

0.16

 

$

(0.01

)

$

0.15

 

$

0.38

 

$

0.30

 

$

0.68

 

Earnings per common share from discontinued operations

 

$

0.21

 

$

 

$

0.21

 

$

1.76

 

$

 

$

1.76

 

Earnings per common share

 

$

0.37

 

$

(0.01

)

$

0.36

 

$

2.14

 

$

0.30

 

$

2.44

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share from continuing operations

 

$

0.16

 

$

(0.01

)

$

0.15

 

$

0.38

 

$

0.29

 

$

0.67

 

Earnings (loss) per common share from discontinued operations

 

$

0.21

 

$

 

$

0.21

 

$

1.76

 

$

(0.12

)

$

1.64

 

Earnings per common share

 

$

0.37

 

$

(0.01

)

$

0.36

 

$

2.14

 

$

0.17

 

$

2.31

 

Weighted average common shares outstanding

 

85,428

 

 

85,428

 

85,353

 

 

85,353

 

Weighted average common and common equivalent shares outstanding

 

85,448

 

 

85,448

 

85,360

 

6,705

 

92,065

 

 

The effects of the error on the consolidated statement of cash flows for the nine months ended September 30, 2005 were not material.

 

9



 

Discontinued Operations

 

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we reported the financial position and results of operations of KOVR-TV in Sacramento, California, KSMO-TV in Kansas City, Missouri and WEMT-TV in Tri-Cities, Tennessee as discontinued operations in the accompanying consolidated balance sheets and 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 balance sheets and consolidated statements of operations.  The operating results of KOVR, KSMO and WEMT are not included in our consolidated results from continuing operations for the three and nine months ended September 30, 2005 and 2004.  In accordance with Emerging Issues Task Force (EITF) Issue No. 87-24, Allocation of Interest to Discontinued Operations, we have allocated $2.0 million of interest expense to discontinued operations for the three months ended September 30, 2004 and $3.6 million and $5.4 million for the nine months ended September 30, 2005 and 2004, respectively.  No interest was allocated for the three months ended September 30, 2005.  This represents interest on the amount of debt that has been paid down under the Bank Credit Agreement with the proceeds from the sales of KOVR, KSMO and WEMT.  See Note 7. Discontinued Operations for additional information.

 

Interim Financial Statements

 

The consolidated financial statements for the three and nine months ended September 30, 2005 and 2004 are unaudited.  In the opinion of management, such financial statements have been presented on the same basis as the annual consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the consolidated financial position, consolidated results of operations and consolidated cash flows for these periods.

 

As permitted under the applicable rules and regulations of the Securities and Exchange Commission, 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, as amended, for the year ended December 31, 2004 filed with the Securities and Exchange Commission.  The consolidated results of operations presented in the accompanying consolidated financial statements are not necessarily representative of operations for an entire year.

 

Retransmission Revenue

 

During the third quarter of 2005, as a result of recently renegotiated retransmission agreements, we recorded approximately $2.9 million in additional net broadcast revenue, reflecting a one-time adjustment to previously estimated retransmission revenue.

 

Recent Accounting Pronouncements

 

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R (SFAS 123R), Share-Based Payment as a revision to FASB Statement No. 123, Accounting for Stock-Based Compensation.  We will adopt SFAS 123R on January 1, 2006.  SFAS 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.  This standard requires that all share-based payments, including grants of employee stock options and our employee stock purchase plan, be recognized in the income statement as compensation expense based on their fair values.  On April 21, 2005, we accelerated the vesting of 390,039 stock options, which was all of our outstanding unvested options at that time.  The acceleration of the vesting effectively resulted in a modification to the original options.  In accordance with FASB Interpretation No.44, Accounting for Certain Transactions Involving Stock Based Compensation, we recorded an immaterial compensation charge based on the intrinsic value of the awards as measured on the modification date.  The acceleration of vesting will reduce our future compensation expense related to these options by $0.8 million (pre-tax), in aggregate, for the years 2006 through 2008, the original remaining vesting period. SFAS 123R will require us to recognize a compensation charge for our Employee Stock Purchase Plan.  For the year ended December 31, 2004, we estimate that this amount would have been $0.3 million and we expect to incur similar amounts in 2005 and in future years.

 

10



 

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143, (FIN 47) which clarifies the term “conditional asset retirement obligation” as used in SFAS No. 143, Accounting for Asset Retirement Obligations.  FIN 47 provides that an asset retirement obligation is conditional when either the timing and (or) method of settling the obligation is conditioned on a future event.  Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated.  Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists.  This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.  FIN 47 is effective for fiscal years ending after December 15, 2005.  We do not expect the adoption of FIN 47 to have a material impact on our consolidated financial position, consolidated results of operations and consolidated cash flows.

 

Other Recent Developments

 

On June 30, 2005, the Governor of the state of Ohio signed the Ohio Biennial Budget Bill.  The bill replaces the Ohio income and franchise tax with a commercial activity tax, among other changes in Ohio law.  During the three months ended September 30, 2005, we recorded a deferred tax benefit of $5.0 million for continuing operations to reflect an adjustment to our net deferred tax liabilities as a result of this tax law change.

 

Liquidity Assurance

 

On May 26, 2005, we entered into a twelve-month limited scope liquidity assurance with Acrodyne Communications, Inc. (Acrodyne), one of our majority-owned subsidiaries.  Pursuant to this agreement, we will provide to them sufficient funding to cover any necessary working capital needs through May 25, 2006 should Acrodyne not be able to provide that funding on its own.  The exposure to us in this liquidity assurance cannot be estimated nor can its probability of occurrence be estimated.  In connection with this liquidity assurance, we established a $0.5 million line of credit for Acrodyne.  Interest on any unpaid indebtedness will be calculated on a daily basis at LIBOR plus 225 basis points per annum.  As of September 30, 2005, Acrodyne had borrowed $0.1 million under this line of credit.  In October 2005, Acrodyne borrowed an additional $0.2 million.  We do not believe the liquidity assurance will have a material impact to our consolidated financial position, consolidated results of operations or consolidated cash flows and, therefore, we have not recorded any liability related to it.

 

Variable Interest Entities

 

We have determined that we have a variable interest in WTXL-TV in Tallahassee, Florida as a result of the terms of the outsourcing agreement with the unrelated third-party owner of WTXL.  However, we have determined that we are not the primary beneficiary of the variable interests and, therefore, we are not required to consolidate WTXL under the provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51.  We believe that we do not have a material exposure to loss as a result of our involvement with WTXL.

 

11



 

Pro Forma Information Related To Stock-Based Compensation

 

As permitted under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), we measure compensation expense for our stock-based employee compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and provide pro forma disclosures of income and earnings per share as if the fair value-based method prescribed by SFAS 123 had been applied in measuring compensation expense.

 

 Had compensation expense related to our grants for stock-based compensation plans been determined consistent with SFAS 123, our net income available to common shareholders for the three and nine months ended September 30, 2005 and 2004, respectively, would approximate the pro forma amounts below (in thousands, except per share data):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(Restated-See Note 1)

 

(Restated-See Note 1)

 

Income available to common shareholders

 

$

31,229

 

$

1,005

 

$

208,879

 

$

18,930

 

Add: Stock-based employee compensation expense included in net income, net of related tax effects

 

502

 

293

 

1,160

 

1,207

 

Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

(548

)

(689

)

(2,219

)

(2,852

)

Net income, pro forma

 

$

31,183

 

$

609

 

$

207,820

 

$

17,285

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic — as reported

 

$

0.36

 

$

0.01

 

$

2.44

 

$

0.22

 

Diluted — as reported

 

$

0.36

 

$

0.01

 

$

2.31

 

$

0.22

 

Basic — pro forma

 

$

0.37

 

$

0.01

 

$

2.43

 

$

0.20

 

Diluted — pro forma

 

$

0.36

 

$

0.01

 

$

2.29

 

$

0.20

 

 

 

We have computed for pro forma disclosure purposes the value of all options granted during the three and nine months ended September 30, 2005 and 2004, respectively, using the Black-Scholes option pricing model as prescribed by SFAS 123 using the following weighted average assumptions:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Risk-free interest rate

 

N/A

 

3.57%

 

3.10%

 

3.08%

 

Expected lives

 

N/A

 

5 years

 

5 years

 

5 years

 

Expected volatility

 

N/A

 

44%

 

48%

 

44%

 

Dividend yield

 

N/A

 

 

2.2%

 

 

Weighted average fair value

 

N/A

 

$4.07

 

$5.48

 

$5.63

 

 

Adjustments are made for options forfeited prior to vesting.  No options were granted during the three months ended September 30, 2005 and all options were vested as of April 21, 2005.  Therefore, there are not any applicable assumptions to be listed for the three months ended September 30, 2005.

 

Reclassifications

 

Certain reclassifications have been made to the prior periods consolidated financial statements to conform with the current period’s presentation.

 

 

2.              COMMITMENTS AND CONTINGENCIES:

 

Litigation

 

We are a 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 financial position, consolidated results of operations or consolidated cash flows.

 

12



 

Operating Leases

 

As of September 30, 2005, we had outstanding letters of credit of $1.1 million under our revolving credit facility.  The letters of credit act as guarantees of lease payments for the property occupied by WTTA-TV in Tampa, Florida pursuant to the terms and conditions of the lease agreement and as support of the purchase of the license assets of WNYS-TV in Syracuse, New York pursuant to an Asset Purchase Agreement.

 

Network Affiliation Agreements

 

Fifty-eight of the 60 television stations that we own and operate, or to which we provide programming services or sales services, currently operate as affiliates of FOX (20 stations), WB (18 stations), ABC (11 stations), UPN (6 stations), CBS (2 stations) and NBC (1 station).  The remaining two stations are independent.  The networks produce and distribute programming in exchange for each station’s commitment to air the programming at specified times and for commercial announcement time during the programming.

 

On June 30, 2005, the affiliation agreements for our FOX affiliates expired.  On August 22, 2005, we entered into an agreement that caused these expired agreements to continue in full force and effect until terminated by either party.  We are currently in negotiations to renew with long-term FOX affiliation agreements.  At this time, we cannot predict the final outcome of these negotiations and any impact they may have on our consolidated financial position, consolidated results of operations or consolidated cash flows.  As of September 30, 2005, the aggregate net book value of these affiliation agreements were $37.9 million.

 

On October 24, 2005, NBC informed us that they intend to terminate our affiliation with WTWC-TV in Tallahassee, Florida.  This notice is contractually required to avoid automatic renewal of the existing agreement which expires January 1, 2007.  NBC has stated it is willing to continue its affiliation with WTWC if revised terms and conditions can be agreed upon.  As of September 30, 2005, the net book value of this affiliation agreement was $2.3 million.  We plan to enter into negotiations with NBC regarding our affiliation and at this time, we cannot predict the final outcome of these negotiations and any impact they may have on our consolidated financial position, consolidated results of operations and consolidated cash flows.

 

The non-renewal or termination of any of our network affiliation agreements would prevent us from being able to carry programming of the relevant network.  This loss of programming would require us to obtain replacement programming, which may involve higher costs and which may not be as attractive to our target audiences, resulting in reduced revenues.  Upon the termination of any of the above affiliation agreements, we would be required to establish a new affiliation agreement with another network or operate as an independent station.  At such time, the remaining value of the network affiliation asset could become impaired and we would be required to write down the value of the asset.

 

Changes in the Rules on Television Ownership and Local Marketing Agreements

 

In 1999, the Federal Communications Commission (FCC) decided to attribute Local Marketing Agreements (LMAs) for ownership purposes but grandfathered LMAs that were entered into prior to November 5, 1996, permitting the LMAs to continue pending the FCC’s case-by-case review of each LMA.  The FCC has neither begun its review of grandfathered LMAs nor indicated when it will begin that review.

 

Under the FCC’s 2003 ownership rules, we would be allowed to continue to program most of the stations with which we have an LMA.  However, the FCC’s 2003 ownership rules have been stayed by the U.S. Court of Appeals for the Third Circuit and are still on remand to the FCC.  The petitions by several parties, including us, seeking review of the Third Circuit decision were recently denied by the Supreme Court of the United States.  The FCC announced that it is considering a Further Notice of Proposed Rulemaking concerning the broadcast ownership rules, but it has not yet commenced any such proceeding.  Accordingly, it is not clear if we will be required to terminate or modify our LMAs in markets where we have such arrangements.

 

If we are required by the FCC to terminate or modify our LMAs, our business could be affected in the following ways:

 

Losses on investments.  As part of our LMA arrangements, we own the non-license assets used by the stations with which we have LMAs.  If certain of these LMA arrangements are no longer permitted, we could be forced to sell these assets, restructure our agreements or find another use for them.  If this happens, the market for such assets may not be as strong as when we purchased them and, therefore, we cannot be certain that we will recoup our original investments.

 

13



 

Termination penalties.  If the FCC requires us to modify or terminate our existing LMAs before the terms of the LMAs expire, or under certain circumstances, we elect not to extend the term of the LMAs, we may be forced to pay termination penalties under the terms of some of our LMAs.  Any such termination penalty could be material to our consolidated financial position.

 

WNAB Options

 

In 2003, we entered into option agreements with an unrelated third party to purchase certain license and non-license television broadcast assets of WNAB-TV in Nashville, Tennessee.  On March 25, 2005, we exercised the option agreements to acquire certain license and non-license assets for $5.0 million and $8.3 million, respectively.  On May 31, 2005, we completed the purchase of the non-license broadcast assets.  The closing on the license assets is pending approval by the FCC.  If the FCC has not granted approval by December 23, 2005, we will be required to pay $4.5 million of the exercise price and if approval is not granted by December 22, 2006, we will be required to pay the remaining $0.5 million to the unrelated third party.  On August 25, 2005, the Rainbow/PUSH Coalition filed a petition with the FCC to deny the transfer of the WNAB broadcast license to us.  The FCC is currently in the process of considering the transfer of the broadcast license and we believe the Rainbow/PUSH petition has no merit.

 

We have determined that WNAB continues to be a variable interest entity (VIE) and that we remain the primary beneficiary of the variable interests as a result of the terms of our outsourcing agreement and the remaining option.  As a result, we continue to consolidate the assets and liabilities of WNAB at their fair values, which have been adjusted to reflect an appraisal prepared in connection with the closing of the non-license assets.  Goodwill and FCC license book values were increased by $5.9 million and $4.2 million upon the closing of the non-license assets, respectively.

 

FCC License Renewals

 

On August 1, 2005, we filed applications with the FCC requesting renewal of the broadcast licenses for WICS-TV and WICD-TV in Springfield/Champaign, Illinois.  Subsequently, various viewers filed informal objections requesting that the FCC deny these renewal applications.  Also on August 1, 2005, we filed applications with the FCC requesting renewal of the broadcast licenses for WCGV-TV and WVTV-TV in Milwaukee, Wisconsin.  On November 1, 2005, the Milwaukee Public Interest Media Coalition filed a petition with the FCC to deny these renewal applications.  The FCC is currently in the process of considering all of these renewal applications and we believe the objections and petition requesting denial have no merit.

 

 

3.              SUPPLEMENTAL CASH FLOW INFORMATION (in thousands):

 

During the nine months ended September 30, 2005 and 2004, our supplemental cash flow information was as follows:

 

 

 

Nine Months Ended September 30,

 

 

 

2005

 

2004

 

Income taxes paid from continuing operations

 

$

678

 

$

1,737

 

Income taxes paid related to discontinued operations

 

$

23,256

 

$

256

 

Income tax refunds received

 

$

383

 

$

1,340

 

Interest payments

 

$

90,312

 

$

99,289

 

 

14



 

4.              DERIVATIVE INSTRUMENTS:

 

We enter into derivative instruments primarily to reduce the impact of changing interest rates on our floating rate debt and to reduce the impact of changing fair market values on our fixed rate debt.

 

Our losses resulting from prior year terminations of fixed to floating interest rate agreements are reflected as a discount on our fixed rate debt and are being amortized to interest expense through December 15, 2007, the original expiration date of the terminated swap agreements.  For the nine months ended September 30, 2005 and 2004, amortization of the discount of $0.4 million was recorded as interest expense.

 

As of September 30, 2005, we held the following derivative instruments (in millions):

 

Notional Amount

 

Expiration Date

 

Interest Payable

 

Interest Receivable

 

FMV Asset
(Liability)(4)

 

$375.0(1)

 

June 5, 2006

 

6.25

7.00%

 

LIBOR(3)

 

$(4.6)

 

$200.0(1)

 

June 5, 2006

 

6.25

7.00%

 

LIBOR(3)

 

$(2.6)

 

$300.0(2)

 

March 12, 2012

 

LIBOR

+

2.28%(3)

 

8.00%

 

$7.3

 

$100.0(2)

 

March 15, 2012

 

LIBOR

+

3.095%(3)

 

8.00%

 

$(1.0)

 

 

 

 

 

 

 

 

 

$(0.9)

 


 

(1)          These swap agreements do not qualify for hedge accounting treatment under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133); therefore, changes in their fair market values are reflected currently in earnings as an unrealized gain from derivative instruments.  We recorded an unrealized gain related to these instruments of $5.8 million and $1.6 million for the three months ended September 30, 2005 and 2004, respectively, and $17.5 million and $20.6 million for the nine months ended September 30, 2005 and 2004, respectively.

 

(2)          These swaps are accounted for as hedges in accordance with SFAS 133; therefore, changes in their fair market values are reflected as adjustments to the carrying value of the underlying debt being hedged.

 

(3)          Represents a floating rate based on the three-month London Interbank Offered Rate (LIBOR).

 

(4)          The fair market value (FMV) of the interest rate swap agreements is estimated by obtaining quotations from the international financial institutions party to each derivative contract.  The fair value is an estimate of the net amount that we would (pay) receive on September 30, 2005, if we cancelled the contracts or transferred them to other parties.

 

During May 2003, we completed an issuance of $150.0 million aggregate principal amount of 4.875% Convertible Senior Notes.  Under certain circumstances, we will pay contingent cash interest to the holder of the convertible notes during any six month period from January 15 to July 14 and from July 15 to January 14, commencing with the six month period beginning January 15, 2011.  The contingent interest feature is an embedded derivative which had a negligible fair value as of September 30, 2005.

 

 

15



 

5.              EARNINGS PER SHARE:

 

The following table reconciles income (numerator) and shares (denominator) used in our computations of earnings (loss) per share for the three and nine months ended September 30, 2005 and 2004 (in thousands, except per share data):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(Restated-See
Note 1)

 

 

 

(Restated-See
Note 1)

 

 

 

Income (Numerator)

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

13,020

 

$

1,934

 

$

36,817

 

$

20,641

 

Income impact of assumed conversion of 4.875% Convertible Senior Subordinated Notes, due 2018, net of taxes

 

 

 

3,291

 

 

Preferred stock dividends

 

 

(2,503

)

(5,004

)

(7,678

)

Excess of preferred stock carrying value over redemption value

 

 

 

26,201

 

 

Numerator for diluted earnings per common share from continuing operations

 

13,020

 

(569

)

61,305

 

12,963

 

Income from discontinued operations, including gain on sale of broadcast assets related to discontinued operations, net of taxes

 

18,209

 

1,574

 

150,865

 

5,967

 

Numerator for diluted earnings per common share

 

$

31,229

 

$

1,005

 

$

212,170

 

$

18,930

 

 

 

 

 

 

 

 

 

 

 

Shares (Denominator)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

85,428

 

85,311

 

85,353

 

85,733

 

Dilutive effect of outstanding stock options and restricted stock

 

20

 

 

7

 

150

 

Dilutive effect of 4.875% Convertible Senior Subordinated Notes, due 2018

 

 

 

6,705

 

 

Weighted average common and common equivalent shares outstanding

 

85,448

 

85,311

 

92,065

 

85,883

 

 

We apply the treasury stock method to measure the dilutive effect of our outstanding stock options and include the respective common share equivalents in the denominator of the diluted EPS computation.  For the three and nine months ended September 30, 2005, our 6% Convertible Debentures, due 2012, were anti-dilutive; therefore, they were not included in the computation of diluted EPS.  For the three months ended September 30, 2005 and for each of the three and nine months ended September 30, 2004, our 4.875% Convertible Senior Subordinated Notes, due 2018, were anti-dilutive; therefore, they were not included in the computation of diluted EPS. For the three and nine months ended September 30, 2004, our Series D Convertible Exchangeable Preferred Stock, was anti-dilutive; therefore, they were not included in the computation of diluted EPS.

 

6.              RELATED PARTY TRANSACTIONS:

 

On May 31, 2005, we entered into an agreement with Auto Properties LLC, an affiliate of Atlantic Automotive Corporation (“Atlantic Automotive,” formerly Summa Holdings, Ltd.), pursuant to which we had agreed to sell our 17.5% equity interest, or 21.22 shares, in Atlantic Automotive to Auto Properties LLC for approximately $21.5 million in cash.  David D. Smith, our President, Chief Executive Officer and Director, has a controlling interest in Atlantic Automotive Corporation and a 50% interest in Auto Properties LLC. On May 31, 2005, we recorded a loss from equity investees of $0.7 million on our consolidated statements of operations for the difference between this sales price and the adjusted net book value of our equity investment, including an adjustment for accrued, but unpaid, dividends.

 

On August 2, 2005, the agreement between us and Auto Properties LLC was nullified and we entered into new stock purchase agreements with David D. Smith and Steven B. Fader, an unrelated third party, and entered into a stock redemption agreement with Atlantic Automotive, totaling approximately $21.5 million.  Pursuant to the stock purchase agreements, 9.87 shares were sold to each party for $10.0 million in cash and pursuant to the stock redemption agreements, Atlantic Automotive redeemed the remaining 1.48 shares of our equity interest for $1.5 million in cash.

 

On July 1, 2005, Sinclair Communications, LLC (Sinclair Communications), a subsidiary of Sinclair Broadcast Group, Inc. (SBG), and Cunningham Communications, Inc. (Cunningham Communications) entered into Amendment No. 2 (the Amendment) to an original Lease Agreement (the Lease), dated July 1, 1987, as amended July 1, 1997.  The Amendment

 

16



 

became effective July 1, 2005 and expires on June 30, 2007.  Cunningham Communications is owned by David D. Smith, SBG’s President, Chief Executive Officer and Director, as well as Frederick Smith, J. Duncan Smith and Robert Smith, members of SBG’s Board of Directors.  The Smith brothers are the controlling shareholders of SBG. The Amendment includes the lease of tower and building space that Sinclair Communications utilizes for digital television transmission.  The Lease was amended to increase the monthly rent by $25,357 for a total current monthly rent of $82,860.  The monthly rent will increase by 5% in July of 2006.  In addition, the Amendment required Sinclair Communications to make a lump sum payment of $565,800 to Cunningham Communications upon the execution of the Amendment.

 

        In response to the disaster caused by hurricane Katrina, the Sinclair Relief Fund (the Fund) was formed by David D. Smith, Frederick Smith, J. Duncan Smith, each controlling shareholders, and Barry M. Faber, our Vice President and General Counsel.  The Fund is a qualified charitable organization formed to provide monetary aid and relief to the victims of natural disasters.  On September 21, 2005, we made a $50,000 contribution to the Fund.  This contribution was ratified and authorized by the Audit Committee.

 

On September 30, 2005, we fully redeemed the founders note due to the late Julian S. Smith with a final payment of $1.5 million.  This note was issued on September 30, 1990 at a principal amount of $7.5 million and we have been making periodic interest and principal payments since issuance.  Refer to Note 11. Related Party Transactions in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2004 for additional information regarding this note.

 

 

7.              DISCONTINUED OPERATIONS:

 

Accounts receivable related to all of our discontinued operations is included in the accompanying consolidated balance sheets, net of allowance for doubtful accounts, for all periods presented.  This is because we continue to own the rights to collect the amounts due to us through the closing dates of the non-license television broadcast assets.  Such amounts were $0.2 million (net of allowance of $0.4 million) and $9.8 million (net of allowance of $0.4 million) as of September 30, 2005 and December 31, 2004, respectively.

 

WEMT Disposition

 

On May 16, 2005, we entered into an agreement to sell WEMT-TV in Tri-Cities, Tennessee, including the FCC license (the broadcast license) to an unrelated third party for $7.0 million.  On the same day, we completed the sale of the WEMT non-license television broadcast assets for $5.6 million of the total $7.0 million sales price and recorded a deferred gain of $3.2 million, which is stated separately on the consolidated balance sheets.  We are currently operating WEMT under a joint sales agreement.  Upon closing of the broadcast license, which is pending approval by the FCC, we will recognize the gain, net of $1.1 million in taxes.  We expect to receive FCC approval prior to May 16, 2006, which is the one year anniversary of the date we entered into the agreement to sell WEMT.  Net assets and liabilities held for sale related to WEMT were $1.8 million and $4.5 million as of September 30, 2005 and December 31, 2004, respectively.

 

KOVR Disposition

 

On December 2, 2004, we entered into an agreement to sell KOVR-TV in Sacramento, California, including the FCC license and our investment in KOVR Joint Venture to an unrelated third party.  The FCC approved the transfer of the license to the unrelated third party and we completed the sale on April 29, 2005 for a cash purchase price of $285.0 million.  We recorded a gain of $129.5 million, net of $70.0 million of taxes, as gain on sale of discontinued operations in our consolidated statements of operations for the three and nine months ended September 30, 2005.  The net proceeds were used to repay bank debt.

 

KSMO Disposition

 

On November 12, 2004, we entered into an agreement to sell KSMO-TV in Kansas City, Missouri, including the FCC license (the broadcast license) to an unrelated third party for $33.5 million.  On the same day, we completed the sale of the KSMO non-license television broadcast assets for $26.8 million of the total $33.5 million sale price.  The FCC approved the transfer of the broadcast license to the unrelated third party and we completed the sale of the license assets, including the broadcast license, on September 29, 2005 for a cash price of approximately $6.7 million.  We recorded $16.5 million, net of $10.0 million in taxes, as gain on the sale of discontinued operations in our consolidated statements of operations for the three and nine months ended September 30, 2005.  The gain is comprised of the previously deferred gain of $26.1 million and the gain of $0.4 million from the sale of the license assets, net of taxes, respectively.

 

17



 

8.              CONDENSED CONSOLIDATING FINANCIAL STATEMENTS:

 

Sinclair Television Group, Inc. (STG),  a wholly-owned subsidiary of Sinclair Broadcast Group, Inc. (SBG), is the primary obligor under our Bank Credit Agreement, the 8.75% Senior Subordinated Notes due 2011 and the 8% Senior Subordinated Notes due 2012.  Our Class A Common Stock, Class B Common Stock, 6% Convertible Debentures due 2012 and the 4.875% Convertible Senior Notes due 2018 remain at SBG and are neither obligations nor securities of STG.

 

SBG and KDSM, LLC, a wholly-owned subsidiary of SBG, have fully and unconditionally guaranteed all of STG’s obligations.  Those guarantees are joint and several.  There are no significant restrictions on the ability of SBG, STG or KDSM, LLC to obtain funds from their subsidiaries in the form of dividends or loans.

 

The following condensed consolidated financial statements present the financial position, results of operations and cash flows of SBG, STG, KDSM, LLC, the direct and indirect non-guarantor subsidiaries of SBG and the eliminations necessary to arrive at our information on a consolidated basis.  These statements are presented in accordance with the disclosure requirements under Securities and Exchange Commission Regulation S-X, Rule 3-10.

 

 

18



 

CONDENSED CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 30, 2005

(In thousands) (Unaudited) (Restated-See Note 1)

 

 

 

 

 

Guarantor Subsidiaries

 

 

 

 

 

 

 

 

 

Sinclair Broadcast Group, Inc.

 

Sinclair Television Group, Inc.

 

KDSM, LLC

 

Non-Guarantor Subsidiaries

 

Eliminations

 

Sinclair Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

 

$

16,655

 

$

28

 

$

1,443

 

$

 

$

18,126

 

Accounts receivable

 

173

 

109,340

 

1,071

 

2,823

 

 

113,407

 

Other current assets

 

828

 

76,996

 

575

 

4,218

 

 

82,617

 

Assets held for sale

 

 

3,683

 

 

 

 

3,683

 

Total current assets

 

1,001

 

206,674

 

1,674

 

8,484

 

 

217,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

9,493

 

294,104

 

4,664

 

3,741

 

 

312,002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in consolidated subsidiaries

 

527,034

 

 

 

 

(527,034

)

 

Other long-term assets

 

19,915

 

66,934

 

614

 

7,190

 

(1,588

)

93,065

 

Total other long-term assets

 

546,949

 

66,934

 

614

 

7,190

 

(528,622

)

93,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired intangible assets

 

 

1,623,971

 

5,626

 

57,531

 

 

1,687,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

557,443

 

$

2,191,683

 

$

12,578

 

$

76,946

 

$

(528,622

)

$

2,310,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

4,195

 

$

80,684

 

$

418

 

$

4,908

 

$

 

$

90,205

 

Current portion of long-term debt

 

1,162

 

3,331

 

 

33,500

 

 

37,993

 

Other current liabilities

 

 

107,570

 

1,330

 

806

 

 

109,706

 

Liabilities held for sale

 

 

1,460

 

 

 

 

1,460

 

Total current liabilities

 

5,357

 

193,045

 

1,748

 

39,214

 

 

239,364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

292,794

 

1,118,014

 

2,317

 

 

 

1,413,125

 

Other liabilities

 

(448

)

388,713

 

1,189

 

9,933

 

(1,588

)

397,799

 

Total liabilities

 

297,703

 

1,699,772

 

5,254

 

49,147

 

(1,588

)

2,050,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

854

 

 

 

 

 

854

 

Additional paid-in capital

 

593,040

 

596,366

 

18,186

 

71,380

 

(685,932

)

593,040

 

Accumulated deficit

 

(334,154

)

(104,455

)

(10,862

)

(43,581

)

158,898

 

(334,154

)

Total shareholders’ equity

 

259,740

 

491,911

 

7,324

 

27,799

 

(527,034

)

259,740

 

Total liabilities and shareholders’ equity

 

$

557,443

 

$

2,191,683

 

$

12,578

 

$

76,946

 

$

(528,622

)

$

2,310,028

 

 

19



 

CONDENSED CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2004

(In thousands) (Unaudited)

 

 

 

 

 

Guarantor Subsidiaries

 

 

 

 

 

 

 

 

 

Sinclair Broadcast Group, Inc.

 

Sinclair Television Group, Inc.

 

KDSM, LLC

 

Non-Guarantor Subsidiaries

 

Eliminations

 

Sinclair Consolidated

 

Cash

 

$

 

$

7,861

 

$

27

 

$

2,603

 

$

 

$

10,491

 

Accounts receivable

 

179

 

127,327

 

1,482

 

3,074

 

 

132,062

 

Other current assets

 

741

 

83,288

 

866

 

4,692

 

(122

)

89,465

 

Assets held for sale

 

 

103,523

 

 

 

 

103,523

 

Total current assets

 

920

 

321,999

 

2,375

 

10,369

 

(122

)

335,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

10,957

 

317,625

 

5,119

 

2,837

 

 

336,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in consolidated subsidiaries

 

342,874

 

 

 

 

(342,874

)

 

Other long-term assets

 

42,875

 

60,008

 

428

 

9,252

 

(3,171

)

109,392

 

Total other long-term assets

 

385,749

 

60,008

 

428

 

9,252

 

(346,045

)

109,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired intangible assets

 

 

1,630,840

 

5,749

 

47,603

 

 

1,684,192

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

397,626

 

$

2,330,472

 

$

13,671

 

$

70,061

 

$

(346,167

)

$

2,465,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

10,365

 

$

65,360

 

$

467

 

$

8,277

 

$

(122

)

$

84,347

 

Current portion of long-term debt

 

3,080

 

12,366

 

 

33,500

 

 

48,946

 

Other current liabilities

 

 

138,515

 

1,871

 

869

 

 

141,255

 

Liabilities held for sale

 

 

14,698

 

 

 

 

14,698

 

Total current liabilities

 

13,445

 

230,939

 

2,338

 

42,646

 

(122

)

289,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

157,629

 

1,430,758

 

2,282

 

 

 

1,590,669

 

Other liabilities

 

1

 

355,288

 

997

 

6,082

 

(3,171

)

359,197

 

Total liabilities

 

171,075

 

2,016,985

 

5,617

 

48,728

 

(3,293

)

2,239,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

33

 

 

 

 

 

33

 

Common stock

 

851

 

 

 

 

 

851

 

Additional paid-in capital

 

752,130

 

614,723

 

19,783

 

62,975

 

(697,481

)

752,130

 

Accumulated deficit

 

(526,463

)

(301,236

)

(11,729

)

(41,642

)

354,607

 

(526,463

)

Total shareholders’ equity

 

226,551

 

313,487

 

8,054

 

21,333

 

(342,874

)

226,551

 

Total liabilities and shareholders’ equity

 

$

397,626

 

$

2,330,472

 

$

13,671

 

$

70,061

 

$

(346,167

)

$

2,465,663

 

 

20



 

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005

(In thousands) (Unaudited) (Restated-See Note 1)

 

 

 

 

 

Guarantor Subsidiaries

 

 

 

 

 

 

 

 

 

Sinclair Broadcast Group, Inc.

 

Sinclair Television Group, Inc.

 

KDSM, LLC

 

Non-Guarantor Subsidiaries

 

Eliminations

 

Sinclair Consolidated

 

Net revenue

 

$

 

$

159,141

 

$

1,925

 

$

4,724

 

$

 

$

165,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Program and production

 

 

35,063

 

423

 

 

 

35,486

 

Selling, general and administrative

 

3,878

 

34,406

 

524

 

609

 

 

39,417

 

Depreciation, amortization and other operating expenses

 

613

 

45,160

 

863

 

3,960

 

 

50,596

 

Total operating expenses

 

4,491

 

114,629

 

1,810

 

4,569

 

 

125,499

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(4,491

)

44,512

 

115

 

155

 

 

40,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

35,616

 

 

 

 

(35,616

)

 

Interest income

 

 

172

 

 

1

 

14

 

187

 

Interest expense

 

(6,534

)

(24,037

)

(66

)

(462

)

(14

)

(31,113

)

Other income (expense)

 

4,125

 

1,944

 

49

 

(196

)

 

5,922

 

Total other income (expense)

 

33,207

 

(21,921

)

(17

)

(657

)

(35,616

)

(25,004

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (provision)

 

2,513

 

(4,650

)

 

(130

)

 

(2,267

)

Income from discontinued operations

 

 

701

 

 

 

 

701

 

Gain on sale of discontinued operations

 

 

17,508

 

 

 

 

17,508

 

Net income (loss)

 

$

31,229

 

$

36,150

 

$

98

 

$

(632

)

$

(35,616

)

$

31,229

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

(In thousands) (Unaudited) (Restated-See Note 1)

 

 

 

 

 

Guarantor Subsidiaries

 

 

 

 

 

 

 

 

 

Sinclair Broadcast Group, Inc.

 

Sinclair Television Group, Inc.

 

KDSM, LLC

 

Non-Guarantor Subsidiaries

 

Eliminations

 

Sinclair Consolidated

 

Net revenue

 

$

 

$

492,001

 

$

6,122

 

$

15,160

 

$

 

$

513,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Program and production

 

 

110,853

 

1,317

 

 

 

112,170

 

Selling, general and administrative

 

11,164

 

103,776

 

1,606

 

1,757

 

 

118,303

 

Depreciation, amortization and other operating expenses

 

1,758

 

138,940

 

2,272

 

14,634

 

 

157,604

 

Total operating expenses

 

12,922

 

353,569

 

5,195

 

16,391

 

 

388,077

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(12,922

)

138,432

 

927

 

(1,231

)

 

125,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

195,711

 

 

 

 

(195,711

)

 

Interest income

 

 

411

 

 

5

 

 

416

 

Interest expense

 

(11,401

)

(75,987

)

(198

)

(1,364

)

 

(88,950

)

Other income (expense)

 

11,605

 

5,036

 

138

 

(626

)

 

16,153

 

Total other income (expense)

 

195,915

 

(70,540

)

(60

)

(1,985

)

(195,711

)

(72,381

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (provision)

 

4,689

 

(21,975

)

 

1,278

 

 

(16,008

)

Income from discontinued operations

 

 

4,841

 

 

 

 

4,841

 

Gain on sale of discontinued operations

 

 

146,024

 

 

 

 

146,024

 

Net income (loss)

 

$

187,682

 

$

196,782

 

$

867

 

$

(1,938

)

$

(195,711

)

$

187,682

 

 

21



 

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004

(In thousands) (Unaudited)

 

 

 

 

 

Guarantor Subsidiaries

 

 

 

 

 

 

 

 

 

Sinclair Broadcast Group, Inc.

 

Sinclair Television Group, Inc.

 

KDSM,
LLC

 

Non-Guarantor Subsidiaries

 

Eliminations

 

Sinclair Consolidated

 

Net revenue

 

$

 

$

163,311

 

$

1,954

 

$

2,845

 

$

 

$

168,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Program and production

 

 

36,771

 

376

 

 

 

37,147

 

Selling, general and administrative

 

3,382

 

35,315

 

529

 

652

 

 

39,878

 

Depreciation, amortization and other operating expenses

 

525

 

51,828

 

527

 

3,858

 

 

56,738

 

Total operating expenses

 

3,907

 

123,914

 

1,432

 

4,510

 

 

133,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(3,907

)

39,397

 

522

 

(1,665

)

 

34,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

8,695

 

 

 

 

(8,695

)

 

Interest income

 

8

 

21

 

 

(6

)

 

23

 

Interest expense

 

(2,182

)

(27,288

)

(65

)

(354

)

 

(29,889

)

Other income (expense)

 

872

 

1,604

 

124

 

(3,951

)

 

(1,351

)

Total other income (expense)

 

7,393

 

(25,663

)

59

 

(4,311

)

(8,695

)

(31,217

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (provision)

 

22

 

(2,592

)

 

1,374

 

 

(1,196

)

Income from discontinued operations

 

 

1,574

 

 

 

 

1,574

 

Net income (loss)

 

$

3,508

 

$

12,716

 

$

581

 

$

(4,602

)

$

(8,695

)

$

3,508

 

 

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

(In thousands) (Unaudited)

 

 

 

 

 

Guarantor Subsidiaries

 

 

 

 

 

 

 

 

 

Sinclair Broadcast Group, Inc.

 

Sinclair Television Group, Inc.

 

KDSM, LLC

 

Non-Guarantor Subsidiaries

 

Eliminations

 

Sinclair Consolidated

 

Net revenue

 

$

 

$

501,514

 

$

5,748

 

$

10,779

 

$

 

$

518,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Program and production

 

 

113,364

 

1,187

 

 

 

114,551

 

Selling, general and administrative

 

11,129

 

107,367

 

1,766

 

1,923

 

 

122,185

 

Depreciation, amortization and other operating expenses

 

1,754

 

156,912

 

1,877

 

13,677

 

 

174,220

 

Total operating expenses

 

12,883

 

377,643

 

4,830

 

15,600

 

 

410,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(12,883

)

123,871

 

918

 

(4,821

)

 

107,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

39,020

 

 

 

 

(39,020

)

 

Interest income

 

21

 

119

 

 

 

 

140

 

Interest expense

 

(6,525

)

(83,542

)

(194

)

(1,314

)

 

(91,575

)

Other income (expense)

 

5,123

 

18,289

 

195

 

(4,702

)

 

18,905

 

Total other income (expense)

 

37,639

 

(65,134

)

1

 

(6,016

)

(39,020

)

(72,530

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (provision)

 

1,852

 

(18,138

)

 

2,372

 

 

(13,914

)

Income from discontinued operations

 

 

5,967

 

 

 

 

5,967

 

Net income (loss)

 

$

26,608

 

$

46,566

 

$

919

 

$

(8,465

)

$

(39,020

)

$

26,608

 

 

22



 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

(In thousands) (Unaudited)

 

 

 

 

 

Guarantor Subsidiaries

 

 

 

 

 

 

 

 

 

Sinclair Broadcast Group, Inc.

 

Sinclair Television Group, Inc.

 

KDSM, LLC

 

Non-Guarantor Subsidiaries

 

Eliminations

 

Sinclair Consolidated

 

NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES

 

$

(11,554

)

$

64,734

 

$

1,609

 

$

(4,838

)

$

 

$

49,951

 

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(192

)

(11,999

)

(11

)

(38

)

 

(12,240

)

Payment for acquisition of television stations

 

 

(11,040

)

 

 

 

(11,040

)

Variable interest entity elimination entries

 

 

4,302

 

 

(4,302

)

 

 

Distributions from equity investments

 

 

99

 

 

 

 

99

 

Contributions in equity and cost investees

 

(670

)

 

 

(300

)

 

(970

)

Proceeds from the sale of property

 

 

59

 

 

 

 

59

 

Proceeds from the sale of broadcast assets related to discontinued operations

 

 

295,190

 

 

 

 

295,190

 

Proceeds from the sale of equity investees

 

21,500

 

 

 

 

 

21,500

 

Proceeds from insurance settlement

 

 

404

 

 

 

 

404

 

Loans to affiliates

 

(95

)

 

 

 

 

(95

)

Proceeds from loans to affiliates

 

93

 

 

 

 

 

93

 

Net cash flows from (used in) investing activities

 

20,636

 

277,015

 

(11

)

(4,640

)

 

293,000

 

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of notes payable, commercial bank financing and capital leases

 

(93

)

(346,186

)

 

 

 

(346,279

)

Proceeds from commercial bank financing and notes payable

 

 

35,500

 

 

 

 

35,500

 

Proceeds from exercise of stock options

 

73

 

 

 

 

 

73

 

Payments for deferred financing costs

 

(100

)

(1,726

)

 

(87

)

 

(1,913

)

Increase (decrease) in intercompany payables

 

11,551

 

(18,359

)

(1,597

)

8,405

 

 

 

Dividends paid on Series D Convertible Preferred Stock

 

(5,004

)

 

 

 

 

(5,004

)

Dividends paid on Class A Common Stock

 

(12,803

)

 

 

 

 

(12,803

)

Repayments of notes and capital leases to affiliates

 

(2,706

)

(2,184

)

 

 

 

(4,890

)

Net cash flows (used in) from financing activities

 

(9,082

)

(332,955

)

(1,597

)

8,318

 

 

(335,316

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

8,794

 

1

 

(1,160

)

 

7,635

 

CASH AND CASH EQUIVALENTS, beginning of period

 

 

7,861

 

27

 

2,603

 

 

10,491

 

CASH AND CASH EQUIVALENTS, end of period

 

$

 

$

16,655

 

$

28

 

$

1,443

 

$

 

$

18,126

 

 

23



 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

(In thousands) (Unaudited)

 

 

 

 

 

Guarantor Subsidiaries

 

 

 

 

 

 

 

 

 

Sinclair Broadcast Group, Inc.

 

Sinclair Television Group, Inc.

 

KDSM, LLC

 

Non-Guarantor Subsidiaries

 

Eliminations

 

Sinclair Consolidated

 

NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES

 

$

(14,502

)

$

101,690

 

$

1,487

 

$

(9,303

)

$

 

$

79,372

 

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(897

)

(35,385

)

(243

)

(4

)

 

(36,529

)

Variable interest entity elimination entries

 

 

18,249

 

 

(18,249

)

 

 

Consolidation of variable interest entity

 

 

 

 

239

 

 

239

 

Contributions in equity and cost investees

 

(2,464

)

(2,156

)

 

 

 

(4,620

)

Proceeds from the sale of property

 

 

23

 

 

 

 

23

 

Loans to affiliates

 

(828

)

 

 

 

 

(828

)

Proceeds from loans to affiliates

 

2,182

 

 

 

 

 

2,182

 

Net cash flows used in investing activities

 

(2,007

)

(19,269

)

(243

)

(18,014

)

 

(39,533

)

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of notes payable, commercial bank financing and capital leases

 

(1,158

)

(540,742

)

 

(1,500

)

 

(543,400

)

Proceeds from commercial bank financing and notes payable

 

 

511,000

 

 

 

 

511,000

 

Proceeds from exercise of stock options

 

1,152

 

 

 

 

 

1,152

 

Payments for deferred financing costs

 

(6

)

(818

)

 

(129

)

 

(953

)

Increase (decrease) in intercompany payables

 

40,644

 

(66,399

)

(1,265

)

27,020

 

 

 

Dividends paid on Series D Convertible Preferred Stock

 

(7,678

)

 

 

 

 

(7,678

)

Dividends paid on Class A Common Stock

 

(2,143

)

 

 

 

 

(2,143

)

Repurchase of Series D Convertible Preferred Stock

 

(4,752

)

 

 

 

 

(4,752

)

Repurchase of Class A Common Stock

 

(9,550

)

 

 

 

 

(9,550

)

Repayments of notes and capital leases to affiliates

 

 

(3,149

)

 

 

 

(3,149

)

Net cash flows from (used in) financing activities

 

16,509

 

(100,108

)

(1,265

)

25,391

 

 

(59,473

)

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(17,687

)

(21

)

(1,926

)

 

(19,634

)

CASH AND CASH EQUIVALENTS, beginning of period

 

 

25,440

 

44

 

3,246

 

 

28,730

 

CASH AND CASH EQUIVALENTS, end of period

 

$

 —

 

$

 7,753

 

$

 23

 

$

 1,320

 

$

 —

 

$

 9,096

 

 

 

24



 

ITEM 2.             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

On August 11, 2006, the Audit Committee of our Board of Directors determined that our financial statements for the quarters ended June 30, 2005, September 30, 2005, and March 31, 2006 and for the year ended December 31, 2005 should be restated.  The restated financial statements result from an error made in the accounting treatment for the exchange of our Series D Convertible Exchangeable Preferred Stock (the Preferred Stock) into 6% Convertible Debentures, due 2012 (the Debentures) in June 2005.  In previously reported consolidated financial statements, we accounted for this transaction as an exchange and our auditors concurred with this treatment.  We now believe, and our auditors concur, that the most appropriate accounting guidance to apply to this exchange is EITF Topic D-42, “The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,” and that the exchange should have been treated as a redemption for accounting purposes.  Accordingly, we should have recorded the Debentures at fair value upon issuance and the excess of the carrying amount of the Preferred Stock over the fair value of the Debentures should have been added to net earnings to arrive at net earnings available to common shareholders.  The difference in the carrying amount of the Preferred Stock and the fair value of the Debentures should have been recorded as a discount on the Debentures and amortized over the life of the Debentures using the effective interest method.  Additionally, in calculating and accounting for the carrying amount of the Preferred Stock, all of the issuance costs of the Preferred Stock should have been charged directly to accumulated deficit rather than a portion of these costs recorded as “unamortized costs relating to securities issuances” and amortized over the remaining term of the Debentures.  For additional information regarding our accounting treatment, see Note 1. Summary of Significant Accounting Policies, in the Notes to our Unaudited Consolidated Financial Statements. 

 

FORWARD-LOOKING STATEMENTS

 

The following information should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this quarterly report and the audited financial statements and notes thereto and Management’s Discussion and Analysis contained in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2004.

 

This report includes or incorporates forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  We have based these forward-looking statements on our current expectations and projections about future events.  These forward-looking statements are subject to risks, uncertainties and assumptions about us, including among other things, the following risks:

 

General risks

 

                  the impact of changes in national and regional economies;

                  terrorist acts of violence or war and other geopolitical events;

                  the activities of competitors;

 

Industry risks

 

                  the business conditions of our advertisers;

                  competition with other broadcast television stations, radio stations, satellite providers, cable channels, cable system operators and telecommunications providers serving in the same markets;

                  pricing and demand fluctuations in local and national advertising;

                  availability of programming and volatility of programming costs;

                  the effects of governmental regulation of broadcasting or changes in those regulations and court actions interpreting those regulations, including ownership regulations, indecency regulations and regulations regarding the transition from analog to digital over the air broadcasting;

                  the timely adoption of digital television over analog by the viewing public;

 

Risks specific to Sinclair Broadcast Group

 

                  the effectiveness of our management;

                  our ability to attract and maintain local and national advertising;

                  the popularity of syndicated programming we purchase and network programming that we air;

                  the strength of ratings for our news broadcasts;

                  our ability to maintain our affiliation agreements with the relevant networks;

                  our ability to service our outstanding debt;

                  changes in the makeup of the population in the areas where our stations are located;

                  successful integration of outsourcing agreements; and

                  FCC license renewals.

 

Other matters set forth in this report, including the Risk Factors set forth in this quarterly report and in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2004 filed with the Securities and Exchange Commission, may also cause actual results in the future to differ materially from those described in the forward-looking statements.  We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur.

 

 

25



The following table sets forth certain operating data for the three and nine months ended September 30, 2005 and 2004:

 

STATEMENT OF OPERATIONS DATA

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2005(a)

 

2004

 

2005(a)

 

2004

 

 

 

 

 

 

 

 

 

 

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

Net broadcast revenues(b)

 

$

149,027

 

$

151,648

 

$

456,572

 

$

463,874

 

Revenues realized from station barter arrangements

 

12,039

 

13,617

 

41,551

 

43,388

 

Other operating divisions’ revenues

 

4,724

 

2,845

 

15,160

 

10,779

 

Total revenues

 

165,790

 

168,110

 

513,283

 

518,041

 

 

 

 

 

 

 

 

 

 

 

Station production expenses

 

35,486

 

37,147

 

112,170

 

114,551

 

Station selling, general and administrative expenses

 

34,218

 

35,319

 

103,123

 

106,691

 

Expenses recognized from station barter arrangements

 

11,158

 

12,619

 

38,447

 

40,147

 

Amortization of program contract costs and net realizable value adjustments

 

18,587

 

23,840

 

52,131

 

70,217

 

Depreciation and amortization expenses(c)

 

16,650

 

16,480

 

51,866

 

49,993

 

Stock-based compensation expense

 

502

 

293

 

1,160

 

1,207

 

Other operating divisions’ expenses

 

3,699

 

3,506

 

14,000

 

12,656

 

Corporate general and administrative expenses

 

5,199

 

4,559

 

15,180

 

15,494

 

Operating income

 

40,291

 

34,347

 

125,206

 

107,085

 

 

 

 

 

 

 

 

 

 

 

Interest expense(d)

 

(31,113

)

(29,889

)

(88,950

)

(91,575

)

Interest income

 

187

 

23

 

416

 

140

 

Loss from sale of assets

 

(69

)

(12

)

(69

)

(45

)

Loss from extinguishment of debt

 

 

 

(1,631

)

(2,453

)

Unrealized gain from derivative instruments

 

5,761

 

1,602

 

17,487

 

20,576

 

Income (loss) from equity and cost investees

 

24

 

(3,124

)

(389

)

255

 

Other income, net

 

206

 

183

 

755

 

572

 

Income from continuing operations before income taxes

 

15,287

 

3,130

 

52,825

 

34,555

 

Income tax provision

 

(2,267

)

(1,196

)

(16,008

)

(13,914

)

Income from continuing operations

 

13,020

 

1,934

 

36,817

 

20,641

 

Income from discontinued operations, net of taxes

 

701

 

1,574

 

4,841

 

5,967

 

Gain from sale of discontinued operations, net of taxes

 

17,508

 

 

146,024

 

 

Net income

 

$

31,229

 

$

3,508

 

$

187,682

 

$

26,608

 

Net income available to common shareholders per common share

 

$

31,229

 

$

1,005

 

$

208,879

 

$

18,930

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings (Loss) Per Common Share:

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share from continuing operations

 

$

0.15

 

$

(0.01

)

$

0.68

 

$

0.15

 

Basic earnings per common share from discontinued operations

 

$

0.21

 

$

0.02

 

$

1.76

 

$

0.07

 

Basic earnings per common share

 

$

0.36

 

$

0.01

 

$

2.44

 

$

0.22

 

Diluted earnings (loss) per common share from continuing operations

 

$

0.15

 

$

(0.01

)

$

0.67

 

$

0.15

 

Diluted earnings per common share from discontinued operations

 

$

0.21

 

$

0.02

 

$

1.64

 

$

0.07

 

Diluted earnings per common share

 

$

0.36

 

$

0.01

 

$

2.31

 

$

0.22

 

Weighted average common shares outstanding

 

85,428

 

85,311

 

85,353

 

85,733

 

Weighted average common equivalent shares outstanding

 

85,448

 

85,311

 

92,065

 

85,883

 

Dividends per common share

 

$

0.075

 

$

0.025

 

$

0.200

 

$

0.050

 

 

 

 

September 30, 2005(a)

 

December 31, 2004

 

Balance Sheet Data:

 

 

 

 

 

Cash and cash equivalents

 

$

18,126

 

$

10,491

 

Total assets

 

$

2,310,028

 

$

2,465,663

 

Total liabilities (e)

 

$

2,044,506

 

$

2,237,845

 

Total shareholders’ equity

 

$

259,740

 

$

226,551

 

 


(a)          Amounts for 2005 have been restated. See Note 1. Summary of Significant Accounting Policies, in the Notes to our Unaudited Consolidated Financial Statements for additional information.

 

(b)         “Net broadcast revenues” is defined as station broadcast revenues, net of agency commissions.

 

(c)          Depreciation and amortization includes depreciation and amortization of property and equipment and amortization of definite-lived intangible assets and other assets.

 

(d)         Interest expense for the three and nine months ended September 30, 2004 is less than what was previously reported because $2.0 million and $5.4 million, respectively, was reclassified to discontinued operations in accordance with applicable accounting rules.  For the nine months ended September 30, 2005, interest expense of $3.6 million was reclassified to discontinued operations.  No interest was reclassified to discontinued operations for the three months ended September 30, 2005.

 

(e)          Includes long-term debt, net of unamortized discount and capital lease obligations.  Total liabilities does not include our preferred stock for the year ended December 31, 2004.

 

26



 

RESULTS OF OPERATIONS

 

Overview

 

Unlike 2004, 2005 is not an election year.  Therefore, 2005 political revenues are significantly lower than in 2004 and we expect this to remain true for the remainder of this year.

 

Although our net broadcast revenues were lower in the third quarter of 2005 when compared to the same period last year, the improvement in our local core time sales and higher retransmission fee revenues along with cost reductions helped us improve our operating income from the third quarter of 2005 as compared to the third quarter of 2004.  During the quarter, we implemented several new business initiatives to bring new local advertisers to television.  Excluding a one-time adjustment of $2.9 million, we realized a $2.7 million increase in retransmission fee revenues over the third quarter of last year and we expect to see a similar increase in the fourth quarter when compared to the fourth quarter of last year.  We are also realizing the impact of ratings increases by our ABC and FOX stations in the form of market share growth at the local and national level in many of our markets.  Meanwhile, automotive spending, our single largest advertising category, remains soft and we expect this category to remain soft into the fourth quarter and 2006.

 

On November 2, 2005, we announced that our Board of Directors approved an increase to our annual common stock dividend, beginning with the dividend payable in January 2006, bringing our total annual common stock dividend per share to $0.40.  On September 29, 2005, we closed on the remaining $6.7 million of the $33.5 million sale of KSMO-TV, our WB affiliate in Kansas City, Missouri.  During the quarter, we restructured the operations of some of our television stations, such as entering into a joint sales and shared services agreement with Nexstar Broadcasting in Rochester, New York and a news share arrangement with the CBS affiliate in Birmingham, Alabama, in order to improve station performance.  We believe that all of these events will enhance shareholder value.

 

Unless otherwise indicated, references in this discussion and analysis to the third quarter of 2005 and 2004 refer to the three months ended September 30, 2005 and 2004, respectively.  Additionally, any references to the first, second or fourth quarter are to the three months ended March 31, June 30 and December 31, respectively, for the year being discussed.

 

27



 

Operating Results

 

The following table presents our revenues from continuing operations, net of agency commissions, for the three and nine months ended September 30, 2005 and 2004 (in millions):

 

 

 

For the Three Months Ended September 30,

 

For the Nine Months Ended September 30,

 

 

 

2005

 

2004

 

Percent Change

 

2005

 

2004

 

Percent Change

 

Local revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-political

 

$

86.8

 

$

84.7

 

2.5

%

$

265.6

 

$

262.2

 

1.3

%

Political

 

0.2

 

1.5

 

(86.7

)%

0.5

 

3.6

 

(86.1

)%

Total local

 

87.0

 

86.2

 

0.9

%

266.1

 

265.8

 

0.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

National revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-political

 

49.1

 

52.9

 

(7.2

)%

160.6

 

166.3

 

(3.4

)%

Political

 

0.1

 

5.3

 

(98.1

)%

0.2

 

9.7

 

(97.9

)%

Total national

 

49.2

 

58.2

 

(15.5

)%

160.8

 

176.0

 

(8.6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other revenues

 

12.8

 

7.2

 

77.8

%

29.7

 

22.1

 

34.4

%

Total net broadcast revenues

 

$

149.0

 

$

151.6

 

(1.7

)%

$

456.6

 

$

463.9

 

(1.6

)%

 

Net broadcast revenues

 

From a revenue category standpoint, the quarter ended September 30, 2005, when compared to the same period in 2004, was negatively impacted by a decrease of advertising revenues generated from the political, automotive, movies, soft drinks, furniture and restaurants-other sectors, offset by increases in the services, schools and retail-department stores, fast food and travel/leisure sectors.  Automotive, our largest category, representing 23.0% of the quarter’s net time sales, was down 7.5%.

 

During the nine months ended September 30, 2005, when compared to the same period in 2004, the political, automotive, movies, telecommunications and food-breakfast sectors decreased, while the services, schools and entertainment sectors increased.  Automotive, which represented 24.1% of net time sales for the nine months ended September 30, 2005, was down 5.4%.

 

From a network affiliate perspective, broadcast revenue including political revenue from time sales at our FOX affiliates, which represent our largest affiliation at 39.3% of the quarter’s total net time sales, declined 5.0% for the three months ended September 30, 2005 as compared to the same period in 2004.  In addition, our WB (25.8% of the total net time sales), ABC (20.8% of the total net time sales) and UPN (8.3% of the total net time sales) affiliates experienced declines of 6.5%, 7.4% and 1.4%, respectively,  compared with the same period in 2004.  Our NBC (2.9% of the total net time sales) and CBS (1.8% of the total net time sales) affiliates experienced declines of 15.1% and 17.5%, respectively, compared with the same period in 2004.  Our independent stations (1.2% of the total net time sales) experienced 3.5% revenue growth for the quarter ended September 30, 2005 compared with the same period in 2004.

 

For the nine months ended September 30, 2005, broadcast revenue from time sales at our FOX affiliates, which represented 40.8% of the period’s total net time sales, was down 1.2% as compared to 2004.  Revenue from our FOX stations included revenue of $4.0 million related to the Super Bowl, which was carried on our FOX network affiliates during the first quarter of 2005.  In addition, our WB (25.6% of the total net time sales), ABC (19.8% of the total net time sales), NBC (2.8% of the total net time sales) and CBS (1.8% of the total net time sales) affiliates experienced declines of 7.1%, 4.7%, 9.6% and 20.2%, respectively, for the nine months ended September 30, 2005 when compared with the same period in 2004.  Our UPN (8.0% of the total net time sales) and independent stations (1.1% of the total net time sales) affiliates experienced revenue growth of 1.5% and 8.2%, respectively, compared with 2004.

 

Political Revenues

 

Both local and national political revenues were the primary drivers of higher revenue in 2004, compared to 2005.  We attribute this to the fact that we have stations in nine of the 16 so called “battleground states,” including five stations in Ohio and multiple stations in each of Florida, Iowa, Missouri and Wisconsin.  We do not expect political revenues to be significant in 2005 because it is not an election year.

 

28



 

Local Revenues

 

Our revenues from local advertisers, excluding political revenues, increased during the three and nine months ended September 30, 2005 when compared to 2004.  We continue to focus on increasing local advertising revenues through innovative sales and marketing strategies in our markets.  Revenues from our new business initiatives increased by $3.1 million during the quarter ended September 30, 2005 to $6.8 million from $3.7 million during the same period in 2004.  For the nine months ended September 30, 2005, revenues from our new business initiatives increased $8.0 million to $18.6 million from $10.6 million during the nine months ended September 30, 2004.  Additionally, during 2004, we implemented an enhanced sales training course for all of our salespeople with a focus on local revenue sales and we have continued these efforts throughout 2005.

 

National Revenues

 

Our revenues from national advertisers, excluding political revenues, have continued to trend downward over time.  We believe this trend represents a shift in the way national advertising dollars are being spent and we believe it has recently begun accelerating.  Advertisers in major categories like automotive, soft drink and packaged goods are shifting significant portions of their advertising budgets away from spot television into non-traditional media, in-store promotions and product placement in network shows.  We expect this trend to continue into the fourth quarter.

 

Other Revenues

 

Our other revenues consist primarily of network compensation, revenues from retransmission agreements with cable and satellite providers, production revenues and revenues from our outsourcing agreements.  Compared to the same periods in 2004, other revenues increased $5.6 million and $7.6 million during the three and nine months ended September 30, 2005, respectively.  The increase in other revenues is primarily related to increased retransmission revenues, including a one-time adjustment of $2.9 million.  We expect other revenues to continue to trend upward over time as a result of increased revenues from retransmission agreements.

 

The following table presents our significant expense categories for the three and nine months ended September 30, 2005 and 2004 (in millions):

 

 

 

For the Three Months Ended September 30,

 

For the Nine Months Ended September 30,

 

 

 

2005

 

2004

 

Percent Change

 

2005

 

2004

 

Percent Change

 

Station production expenses

 

$

35.5

 

$

37.1

 

(4.3

)%

$

112.2

 

$

114.6

 

(2.1

)%

Station selling, general and administrative expenses

 

$

34.2

 

$

35.3

 

(3.1

)%

$

103.1

 

$

106.7

 

(3.4

)%

Depreciation of property and equipment

 

$

12.2

 

$

11.9

 

2.5

%

$

38.3

 

$

36.0

 

6.4

%

Amortization of program contract costs

 

$

18.6

 

$

23.8

 

(21.8

)%

$

52.1

 

$

70.2

 

(25.8

)%

Amortization of definite-lived intangible assets and other assets

 

$

4.5

 

$

4.6

 

(2.2

)%

$

13.5

 

$

14.0

 

3.6

%

Corporate general and administrative expenses

 

$

5.2

 

$

4.6

 

13.0

%

$

15.2

 

$

15.5

 

(1.9

)%

Interest expense(a)

 

$

31.1

 

$

29.9

 

4.0

%

$

89.0

 

$

91.6

 

(2.8

)%

Unrealized gain from derivative instruments

 

$

5.8

 

$

1.6

 

262.5

%

$

17.5

 

$

20.6

 

(15.0

)%

Income tax provision(a)

 

$

2.3

 

$

1.2

 

91.7

%

$

16.0

 

$

13.9

 

15.1

%

 


(a)   Amounts for 2005 have been restated.  See Note 1. Summary of Significant Accounting Policies, in the Notes to our Unaudited Consolidated Financial Statements, for additional information.

 

Station Production Expenses

 

Station production expenses decreased during the quarter ended September 30, 2005 compared to the same period in 2004 primarily due to decreases in costs related to LMAs and outsourcing agreements of $1.0 million, news costs of $0.4 million, music license fees of $0.2 million and production expenses of $0.1 million.  These decreases were offset by a $0.1 million increase in rating service fees.  We do not expect similar decreases in costs related to LMAs and outsourcing agreements in future periods.

 

Station production expenses for the nine months ended September 30, 2005 decreased compared to the same period in 2004.  Similar to the quarter, for the nine months ended September 30, 2005, we experienced a decrease in costs related to LMAs and outsourcing agreements of $2.1 million.  In addition, there were also decreases in promotion expenses due to cutbacks in promotional plans amounting to $1.4 million, news costs of $0.7 million, music license fees of $0.5 million and other miscellaneous expenses of $0.1 million.  These decreases were offset by increases in engineering expenses of $1.0 million, rating service fees of $0.9 million and programming expenses of $0.5 million.

 

29



 

Station Selling, General and Administrative Expenses

 

Station selling, general and administrative expenses decreased during the quarter ended September 30, 2005 compared to the quarter ended September 30, 2004 as a result of a workers compensation refund of $0.6 million, decreases in sales expenses related to direct mailers of $1.1 million, expenses related to an annual sales trip of $0.5 million, salary expense of $0.4 million and sales commissions of $0.2 million.  These decreases were offset by a third quarter 2005 adjustment to our self-insured healthcare plan of $1.0 million as well as increases in management bonuses of $0.6 million and other miscellaneous expenses of $0.1 million.

 

Station selling, general and administrative expense for the nine months ended September 30, 2005 decreased when compared to the same period in 2004 as a result of the $0.6 million workers compensation refund during the third quarter of 2005, as well as decreases in sales promotion expense of $2.6 million, national sales commissions of $1.3 million and other miscellaneous expenses of $0.1 million. These decreases were offset by the $1.0 million adjustment to our self-insured healthcare plan during the third quarter of 2005.

 

Depreciation of Property and Equipment

 

The depreciation of property and equipment was $12.2 million for the quarter ended September 30, 2005 and $11.9 million for the same period in 2004.  Depreciation for the nine months ended September 30, 2005 was $38.3 million and $36.0 million for the same period in 2004.  These increases are primarily related to capital expenditures of $12.3 million being placed into service during the year as well as a $1.1 million impairment of certain capitalized software costs that became obsolete as a result of our conversion to a new revenue billing system during the second quarter of 2005.  We expect these expenses to remain stable in the fourth quarter 2005.

 

Amortization of Program Contract Cost

 

The amortization of program contract costs was $18.6 million for the quarter ended September 30, 2005 and $23.8 million for the same period in 2004.  Amortization of program contract costs was $52.1 million for the nine months ended September 30, 2005 and $70.2 million for the same period in 2004.  The decrease in amortization expense is primarily a result of lower program costs than we had in prior years.  We expect amortization for the fourth quarter of 2005 to be lower than it was in the fourth quarter of 2004.

 

Amortization of Definite-lived Intangible Assets

 

The amortization of definite-lived intangibles was $4.5 million for the quarter ended September 30, 2005 and $4.6 million for the same period in 2004.  Amortization of definite-lived intangibles was $15.2 million for the nine months ended September 30, 2005 and $15.5 million for the same period in 2004.  This expense is decreasing slightly over time as a result of certain intangible assets becoming fully amortized each year and we expect this trend to continue.

 

Corporate General and Administrative Expenses

 

Corporate general and administrative expenses represent the costs to operate our corporate headquarters location.  Such costs include, among other things, corporate departmental salaries, bonuses and fringe benefits, directors’ and officers’ life insurance, rent, telephone, consulting fees, legal, accounting and director fees.  Corporate departments include executive, treasury, finance and accounting, human resources, technology, corporate relations, legal, sales, operations and purchasing.

 

During the quarter ended September 30, 2005, there was an increase of $0.6 million from the same period in 2004 due to an increase in expense of $0.2 million related to compliance with the Sarbanes-Oxley Act of 2002 as well as increases in legal fees of $0.2 million and salary expense of $0.1 million.  In addition to these increases, charitable contributions increased $0.1 million during the third quarter primarily due to our contribution to the Sinclair Relief Fund, a related party charitable organization established in response to the disaster caused by hurricane Katrina.

 

During the nine months ended September 30, 2005, corporate general and administrative expenses declined by $0.3 million due to decreases in salary expense of $0.4 million, training and education expenses of $0.3 million, management consulting fees of $0.2 million, tax contract and consulting fees of $0.2 million, telephone costs of $0.1 million and other miscellaneous expenses of $0.2 million.  These decreases were offset by an increase of expense of $1.0 million related to compliance with the Sarbanes-Oxley Act of 2002, as well as the $0.1 million increase related to our charitable contributions to the Sinclair Relief Fund.

 

30



 

Interest Expense

 

Interest expense presented in the financial statements is related to continuing operations.  Interest expense increased $1.2 million during the third quarter ended September 30, 2005 when compared to the third quarter ended September 30, 2004. The increase is due to unfavorable interest rate changes during the quarter as well as additional interest expense resulting from the accretion of a debt discount due to the exchange of our $3.00 Series D Convertible Exchangeable Preferred Stock for 6% Convertible Debentures on June 15, 2005, offset by the net proceeds from the sale of television stations.

 

Interest expense decreased $2.6 million during the nine months ended September 30, 2005 when compared to the same period in 2004.  The decrease is the result of refinancing we did in June of 2004 and May of 2005 in an effort to reduce our overall interest costs as well as our use of proceeds from the sale of KOVR-TV in Sacramento, California to pay down indebtedness.  The decrease was slightly offset by interest expense resulting from the accretion of a debt discount due to the exchange of our $3.00 Series D Convertible Exchangeable Preferred Stock for 6% Convertible Debentures on June 15, 2005.

 

Derivative Instruments

 

We record gains and losses related to certain of our derivative instruments.  We entered into these instruments prior to implementing the Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities and due to the way they were structured, they did not qualify as effective hedges (as that term is defined in the accounting guidance).  Generally, when derivative instruments are not effective, the change in the fair value of the instruments is recorded in the statement of earnings for each respective period.  The fair value of our derivative instruments is primarily based on the future interest rate curves at the end of each period.  During the quarter ended September 30, 2005, the future interest rate curves reflected increasing interest rates and, therefore, we recorded an unrealized gain from derivative instruments in our consolidated statements of operations.  During the nine months ended September 30, 2005, the future interest rate curves also reflected increasing interest rates and, therefore, we recorded an unrealized gain from derivative instruments in our consolidated statements of operations.  Although for the nine months ended September 30, 2005, these rates were lower than interest rates from the same period in 2004.

 

Income Tax Provision

 

The income tax provision from continuing operations increased to $2.3 million for the quarter ended September 30, 2005 from an income tax provision of $1.2 million during the same period in 2004.  The effective tax rate for the quarter ended September 30, 2005 was 14.8% as compared to 38.2% during the same period in 2004.  The decrease in the effective tax rate for the three month period is due to the impact of a deferred tax benefit of $5.0 million that was recognized during the quarter as a result of an Ohio tax law change (see Note 1 to the Unaudited Consolidated Financial Statements).

 

The income tax provision from continuing operations increased to $16.0 million for the nine months ended September 30, 2005 from an income tax provision of $13.9 million during the same period in 2004.  The effective tax rate for the nine months ended September 30, 2005 was 30.3% as compared to 40.3% during the same period in 2004.  The decrease in the effective tax rate for the nine month period is also due to the impact of the deferred tax benefit of $5.0 million recognized during the third quarter of 2005 as well as the effect of a permanent book/tax difference related to a charitable contribution deduction recognized during the second quarter of 2005.

 

Other Operating Divisions’ Revenue and Expense

 

During the quarter ended September 30, 2005, the other operating divisions’ revenue that related to G1440, our software development and consulting company, increased by $1.3 million to $3.0 million or 76.5%, from $1.7 million for the same period last year.  G1440’s operating expenses increased by $0.4 million to $2.1 million for 2005 as compared to $1.7 million for 2004.  Other operating divisions’ revenue related to our ownership interest in Acrodyne increased by $0.6 million to $1.7 million or 54.5%, from revenues of $1.1 million in 2004.  Acrodyne’s operating expenses decreased by $0.2 million to $1.6 million for 2005 as compared to $1.8 million for 2004.

 

During the nine months ended September 30, 2005, G1440’s revenue increased by $2.1 million to $6.8 million or 44.7%, from $4.7 million for the same period last year.  G1440’s operating expenses increased by $1.4 million to $5.9 million for 2005 as compared to $4.5 million for 2004.  Acrodyne’s revenue increased by $2.3 million to $8.4 million or 37.7%, from revenues of $6.1 million in 2004.  Acrodyne’s operating expenses remained flat at $8.1 million for both years.

 

31



 

Liquidity and Capital Resources

 

Our primary sources of liquidity are cash provided by operations and availability under our Bank Credit Agreement (the Bank Credit Agreement).  On May 12, 2005, we amended and restated the Bank Credit Agreement, lowering our annual interest rate.  The Bank Credit Agreement includes a Term Loan A Facility (the Term Loan) of $100.0 million and a Revolving Commitment (the Revolver) of $175.0 million maturing on December 31, 2011 and June 30, 2011, respectively.  As part of the amendment, we fully redeemed our $150.0 million Term Loan A Facility and $250.0 million Term Loan C Facility with proceeds from the sales of KOVR-TV in Sacramento, California and WEMT-TV in Tri-Cities, Tennessee, cash on hand, working capital and the new, $100.0 million Term Loan.

 

Scheduled payments on the Term Loan and Revolver are calculated at the London Interbank Offered Rate plus 1.25%, with step-downs tied to a leverage grid.  We have the right to terminate the Term Loan or Revolver at any time without prepayment penalty.  The Term Loan is repayable in quarterly installments, amortizing as follows:

 

                  1.25% per quarter commencing March 31, 2007 to December 31, 2008

                  3.75% per quarter commencing March 31, 2009 to December 31, 2010

                  15.0% per quarter commencing March 31, 2011 and continuing through its maturity on December 31, 2011.

 

As a result of amending the Bank Credit Agreement, during 2005, we incurred debt acquisition costs of $2.0 million and recognized a loss of $1.6 million, which represents the write-off of certain debt acquisition costs associated with indebtedness replaced by the new facilities.  The loss was computed in accordance with EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments.

 

Availability under the Revolver does not reduce incrementally and terminates at maturity.  We are required to prepay the Term Loan and reduce the Revolver with (i) 100% of the net proceeds of any casualty loss or condemnation and (ii) 100% of the net proceeds of any sale or other disposition of our assets in excess of $5.0 million in the aggregate in any 12 month period, to the extent not used to acquire new assets.

 

As of September 30, 2005, we had $18.1 million in cash balances and negative working capital of approximately $21.9 million.  We anticipate that cash flow from our operations and revolving credit facility will be sufficient to satisfy our debt service obligations, capital expenditure requirements and working capital needs for the next year.  As of September 30, 2005, we had fully redeemed our $400.0 million Term Loan A and Term Loan C Facilities, borrowed a net of $100.0 million on our new Term Loan A and had no borrowings outstanding under our Revolver.  The remaining balance available under the Revolver was $175.0 million as of September 30, 2005.  Our ability to draw down our Revolver is based on pro forma trailing cash flow levels as defined in our Bank Credit Agreement and for the three months ended September 30, 2005, we had approximately $175.0 million available of current borrowing capacity under our Revolver.

 

On April 19, 2002, we filed a $350.0 million universal shelf registration statement with the Securities and Exchange Commission which will permit us to offer and sell various types of securities from time to time.  Offered securities may include common stock, debt securities, preferred stock, depository shares or any combination thereof in amounts, prices and on terms to be announced when the securities are offered.  If we decide to offer any securities under our shelf registration, we intend to use the proceeds for general corporate purposes, including, but not limited to, the reduction, redemption or refinancing of debt or other obligations, acquisitions, capital expenditures and working capital.  We have $350.0 million of availability under this shelf registration.

 

Sinclair Television Group (STG) is the primary obligor under our Bank Credit Agreement, our 8.75% Senior Subordinated Notes due 2011 and our 8% Senior Subordinated Notes due 2012.  Sinclair Broadcast Group, Inc. (SBG) and KDSM, LLC have fully and unconditionally guaranteed these securities.  SBG is the primary obligor under our 4.875% Convertible Senior Notes and our 6% Convertible Debentures due 2012.  (See Note 8 in our consolidated financial statements for the condensed consolidating financial statements of our guarantor and non-guarantor subsidiaries).  Neither of SBG, STG, KDSM, LLC nor any other subsidiary guarantors have any significant restrictions on their ability to obtain funds from their subsidiaries in the form of dividends or loans.

 

We hold two interest rate swap agreements that have a total notional amount of $575.0 million that expire on June 5, 2006.  Neither agreement can be terminated prior to expiration.  We estimate the fair market value of the $375.0 million and $200.0 million agreements at September 30, 2005 to be a liability of $4.6 million and $2.6 million, respectively, based on quotations from the counterparty.  These amounts are reflected as a component of other long-term liabilities on our consolidated balance sheets as of September 30, 2005.

 

Net cash flows from operating activities decreased to $50.0 million for the nine months ended September 30, 2005 from $79.4 million for the nine months ended September 30, 2004.  We paid income tax, net of refunds, of $18.3 million for the nine

 

32



 

months ended September 30, 2005 as compared to income tax refunds, net of payments, of $1.5 million for the nine months ended September 30, 2004.  Interest payments on outstanding indebtedness decreased $8.7 million to $90.3 million from $99.0 million for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004.  Program rights payments, including those related to discontinued operations, decreased 4.9% to $79.1 million for the nine months ended September 30, 2005 from $83.2 million for the nine months ended September 30, 2004.

 

Net cash flows from investing activities were $293.0 million for the nine months ended September 30, 2005 as compared to net cash flows used in investing activities of $39.5 million for the nine months ended September 30, 2004.  This increase is primarily a result of an increase in cash proceeds of $295.2 million from the sale of discontinued operations during the nine months ended September 30, 2005 as compared to the same period last year.  During the nine months ended September 30, 2005, we made a cash payment of $8.3 million to acquire WNAB-TV in Nashville, Tennessee and a cash payment of $2.7 million to enter into a purchase option to acquire WNYS-TV, Syracuse, New York’s FCC license.  During the nine months ended September 30, 2005, we made cash payments of $12.2 million for property and equipment, of which $5.6 million related to digital conversion costs and $0.2 million related to our News Central format.  During the nine months ended September 30, 2004, we made cash payments for property and equipment of $36.5 million, of which $17.0 million related to digital conversion costs and $7.1 million related to our News Central format.  During the nine months ended September 30, 2005 and 2004, we made cash payments of $1.0 million and $4.6 million, respectively, for the purchase of equity and cost investments.  We funded these investing activities using cash provided by operating activities.  Net loans to affiliates were minimal for the nine months ended September 2005 compared to net proceeds from loans to affiliates of $1.4 million for 2004.

 

For the three months ended December 31, 2005, we anticipate capital expenditures to be $9.1 million and approximately $21.5 million for the year ended December 31, 2005.  Capital expenditures include station maintenance, equipment replacement and consolidation of building and tower needs in some markets.  In addition, we anticipate that future requirements for expenditures will include expenditures incurred during the ordinary course of business and additional strategic station acquisitions and equity investments, if suitable investments can be identified on acceptable terms.  We expect to fund such capital expenditures with cash generated from operating activities and borrowings under our Bank Credit Agreement or an issuance of securities.

 

Net cash flows used in financing activities was $335.3 million for the nine months ended September 30, 2005 compared to $59.5 million for the nine months ended September 30, 2004.  During the nine months ended September 30, 2005, we repaid $346.3 million of indebtedness, whereas in the comparable period in 2004, we repaid $543.4 million of indebtedness.  We received proceeds from the exercise of stock options of $0.1 million and $1.2 million for the nine months ended September 30, 2005 and 2004, respectively.  For the nine months ended September 30, 2005 and 2004, we paid quarterly dividends of $5.0 million and $7.7 million on our Series D Convertible Preferred Stock, respectively.  We will not incur these dividend payments in the future due to the conversion of the Series D Convertible Preferred Stock into debt.  During the nine months ended September 30, 2005 and 2004, we paid quarterly dividends of $12.8 million and $2.1 million, respectively, on our common stock.  We declared a quarterly cash dividend of $0.075 per share on our common stock, which was paid on October 17, 2005.  On November 1, 2005, the Board of Directors increased the annual dividend paid on our Class A and Class B Common Stock from $0.30 per share to $0.40 per share.  We expect to continue to pay the current quarterly dividend rate of $0.10 in each of our future quarters beginning January 2006 and to fund these dividends with cash generated from operating activities and borrowings under our Bank Credit Agreement.

 

Seasonality/Cyclicality

 

Our operating results are usually subject to seasonal fluctuations.  Usually, the second and fourth quarter operating results are higher than the first and third quarters because advertising expenditures are increased in anticipation of certain seasonal and holiday spending by consumers.

 

Our operating results are usually subject to fluctuations from political advertising.  In even years, political spending is usually significantly higher than in odd years due to advertising expenditures preceding local and national elections.  Additionally, every four years, political spending is elevated further due to advertising expenditures preceding the presidential election.

 

Indebtedness and Other Commitments

 

Indebtedness under the Bank Credit Agreement, as amended.  As of September 30, 2005, we owed $100.0 million under the Bank Credit Agreement, as amended, and had a $175.0 million available balance, all of which was available under our current borrowing capacity.

 

 

33



Indebtedness under notes.  We have issued and outstanding two series of senior subordinated notes and one series of senior convertible notes with aggregate principal amount issued and outstanding of $1.1 billion.  During the second quarter, we repurchased, in the open market, $8.0 million of our 8.0% Senior Subordinated Notes due 2012 at face value.  Additionally, we repurchased, in the open market, $2.6 million of our 8.75% Senior Subordinated Notes due 2011 at face value.  The $0.4 million in costs related to these repurchases have been recorded as loss from extinguishment of debt in our consolidated statements of operations.  We did not repurchase any of our outstanding debt during either of the first or third quarters.

 

Series D Convertible Exchangeable Preferred Stock.  On June 15, 2005, we completed an exchange of the $3.00 Series D Convertible Exchangeable Preferred Stock into Convertible Debentures.  Pursuant to the terms of the Preferred Stock, a holder of the Preferred Stock received $1,000 principal amount of Convertible Debentures for each $1,000 of liquidation preference of Preferred Stock held by such holder at the Exchange Date, plus accrued but unpaid dividends through the Exchange Date.

 

The Convertible Debentures mature September 15, 2012 and bear interest at a rate of 6% per annum, payable quarterly on each March 15, June 15, September 15 and December 15, which began on September 15, 2005.  The Convertible Debentures are convertible into Class A Common Stock on substantially the same conversion terms as the Preferred Stock.  The Convertible Debentures are part of long-term liabilities on the balance sheet with a principal balance of $166.9 million.

 

Program contracts payable and programming commitments.  Total current and long-term program contracts payable at September 30, 2005 and September 30, 2004 were $172.9 million and $172.7 million, respectively.  In addition, we entered into commitments to purchase future programming.  Under these commitments, we were obligated on September 30, 2005 to make future payments totaling $169.0 million.

 

Other.  Our commitments also include capital leases, operating leases, sports programming, personnel contracts and other liabilities.  The amount of these commitments may be material.

 

Recent Accounting Pronouncements

 

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R (SFAS 123R), Share-Based Payment as a revision to FASB Statement No. 123, Accounting for Stock-Based Compensation.  We will adopt SFAS 123R on January 1, 2006.  SFAS 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.  This standard requires that all share-based payments, including grants of employee stock options and our employee stock purchase plan, be recognized in the income statement as compensation expense based on their fair values.  On April 21, 2005, we accelerated the vesting of 390,039 stock options, which was all of our outstanding unvested options at that time.  There is no material impact to earnings as a result of this acceleration because most options had an exercise price that was above the trading price on the vesting date.  The acceleration of the vesting effectively resulted in a modification to the original options.  In accordance with FASB Interpretation No.44, Accounting for Certain Transaction involving Stock Based Compensation, we recorded an immaterial compensation charge based on the intrinsic value of the awards as measured on the modification date.  The acceleration of vesting will reduce our future compensation expense related to these options by $0.8 million (pre-tax), in aggregate, for the years 2006 through 2008, the original remaining vesting period.  SFAS 123R will also require us to recognize a compensation charge for our Employee Stock Purchase Plan.  For the year ended December 31, 2004, this amount would have been $0.3 million and we expect to incur similar amounts in the future.

 

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143, (FIN 47) which clarifies the term “conditional asset retirement obligation” as used in SFAS No. 143, Accounting for Asset Retirement Obligations.  FIN 47 provides that an asset retirement obligation is conditional when either the timing and (or) method of settling the obligation is conditioned on a future event.  Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated.  Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists.  This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.  FIN 47 is effective for fiscal years ending after December 15, 2005.  We do not expect the adoption of FIN 47 to have a material impact on our consolidated financial position, consolidated results of operations and consolidated cash flows.

 

34



CONTRACTUAL CASH OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS

 

In 2003, we entered into option agreements with an unrelated third party to purchase certain license and non-license television broadcast assets of WNAB-TV in Nashville, Tennessee.  On March 25, 2005, we exercised our option agreements for $5.0 million and $8.3 million, respectively.  The closing for the license assets is pending approval by the Federal Communications Commission (FCC).  If the FCC has not granted approval by December 23, 2005, we will be required to pay $4.5 million of the exercise price and if approval is not granted by December 22, 2006, we will be required to pay the remaining $0.5 million to the unrelated third party.  On May 31, 2005, we completed the purchase of the non-license broadcast assets.  This exercise of the call option decreased our off balance sheet arrangement obligation for purchase options from $22.0 million, in the aggregate, for all years after 2004 to $5.0 million.

 

We have determined that WNAB continues to be a variable interest entity (VIE) and that we remain the primary beneficiary of the variable interests as a result of the terms of our outsourcing agreement and the remaining option.  As a result, we continue to consolidate the assets and liabilities of WNAB at their fair values, which have been adjusted to reflect an appraisal prepared in connection with the closing of the non-license assets.

 

On May 26, 2005, we entered into a twelve-month limited scope liquidity assurance with Acrodyne Communications, Inc. (Acrodyne), one of our majority-owned subsidiaries.  Pursuant to this agreement, we shall provide to them sufficient funding to cover any necessary working capital needs through May 25, 2006 should Acrodyne not be able to provide that funding on its own.  The exposure to us in this liquidity assurance cannot be estimated nor can its probability of occurrence be estimated.  In connection with this liquidity assurance, we established a $0.5 million line of credit for Acrodyne.  Interest on any unpaid indebtedness will be calculated on a daily basis at LIBOR plus 225 basis points per annum.  As of September 30, 2005, Acrodyne had borrowed $0.1 million under this line of credit.  In October 2005, Acrodyne borrowed an additional $0.2 million.   We do not believe the liquidity assurance will have a material impact on our consolidated financial position, consolidated results of operations or consolidated cash flows and, therefore, we have not recorded any liability related to it.

 

RISK FACTORS

 

The following sections entitled Network Affiliation Agreements, Changes in Rules on Television Ownership, Changes in Rules on Local Marketing Agreements and Use of Outsourcing Agreements represent an update to these sections within Risk Factors contained in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2004.

 

Network Affiliation Agreements

Fifty-eight of the 60 television stations that we own and operate, or to which we provide programming services or sales services, currently operate as affiliates of FOX (20 stations), WB (18 stations), ABC (11 stations), UPN (6 stations), CBS (2 stations) and NBC (1 station).  The remaining two stations are independent.  The networks produce and distribute programming in exchange for each station’s commitment to air the programming at specified times and for commercial announcement time during the programming.

 

On June 30, 2005, the affiliation agreements for our FOX affiliates expired.  On August 22, 2005, we entered into an agreement that caused these expired agreements to continue in full force and effect until terminated by either party.  We are currently in negotiations to renew with long-term FOX affiliation agreements.  At this time, we cannot predict the final outcome of these negotiations and any impact they may have on our consolidated financial position, consolidated results of operations and consolidated cash flows.  As of September 30, 2005, the aggregate net book value of these affiliation agreements were $37.9 million.

 

On October 24, 2005, NBC informed us that they intend to terminate our affiliation with WTWC-TV in Tallahassee, Florida.  This notice is contractually required to avoid automatic renewal of the existing agreement which expires January 1, 2007.  NBC has stated it is willing to continue its affiliation with WTWC if revised terms and conditions can be agreed upon.  As of September 30, 2005, the net book value of this affiliation agreement was $2.3 million. We plan to enter into negotiations with NBC regarding our affiliation and at this time, we cannot predict the final outcome of these negotiations and any impact they may have on our consolidated financial position, consolidated results of operations and consolidated cash flows.

 

The non-renewal or termination of any of our network affiliation agreements would prevent us from being able to carry programming of the relevant network.  This loss of programming would require us to obtain replacement programming, which may involve higher costs and which may not be as attractive to our target audiences, resulting in reduced revenues.  Upon the termination of any of our affiliation agreements, we would be required to establish new affiliation agreements with other networks or operate as an independent station.  At such time, the remaining value of the network affiliation asset could become impaired and we would be required to write down the value of the asset.

 

35



 

Changes in Rules on Television Ownership

In June 2004, the Court of Appeals for the Third Circuit issued a decision which upheld a portion of the ownership rules established by the Federal Communications Commission (FCC) in 2003 and remanded the matter to the FCC for further justification of the rules.  Several parties, including us, have filed petitions with the Supreme Court of the United States seeking review of the Third Circuit decision.  The Supreme Court recently denied those petitions.  The FCC has not commenced its proceeding on remand, and, we cannot predict the outcome of that proceeding, which could significantly impact our business.

 

Changes in Rules on Local Marketing Agreements

In 1999, the FCC decided to attribute Local Marketing Agreements (LMAs) for ownership purposes but grandfathered LMAs that were entered into prior to November 5, 1996, permitting the LMAs to continue pending the FCC’s case-by-case review of each LMA.  The FCC has not yet begun its review of grandfathered LMAs nor indicated when it will begin that review and we cannot predict the outcome of such a review.

 

Under the FCC’s 2003 ownership rules, we would be allowed to continue to program most of the stations with which we have an LMA.  However, the FCC’s 2003 ownership rules have been stayed by the U.S. Court of Appeals for the Third Circuit and are still on remand to the FCC.  The petitions by several parties, including us, seeking review of the Third Circuit decision were recently denied by the Supreme Court of the United States.  The FCC has announced that it is considering a Further Notice of Proposed Rulemaking concerning the broadcast ownership rules, but it has not yet commenced any such proceeding.  Accordingly, it is not clear if we will be required to terminate or modify our LMAs in markets where we have such arrangements.

 

In 2003, the FCC dismissed our applications to acquire certain LMA stations.  We filed an application for review of that decision, which is still pending.  We filed a petition with the U.S. Court of Appeals for the D.C. Circuit requesting that the Court direct the FCC to take final action on our applications.  The Court recently denied that petition.

 

If we are required by the FCC to terminate or modify our LMAs, our business could be affected in the following ways:

 

Losses on investments.  As part of our LMA arrangements, we own the non-license assets used by the stations with which we have LMAs.  If certain of these LMA arrangements are no longer permitted, we could be forced to sell these assets, restructure our agreements or find another use for them.  If this happens, the market for such assets may not be as strong as when we purchased them and, therefore, we cannot be certain that we will recoup our original investments.

 

Termination penalties.  If the FCC requires us to modify or terminate our existing LMAs before the terms of the LMAs expire, or under certain circumstances, we elect not to extend the term of the LMAs, we may be forced to pay termination penalties under the terms of some of our LMAs.  Any such termination penalty could be material.

 

Use of Outsourcing Agreements

On August 2, 2004, the FCC released a Further Notice of Proposed Rulemaking seeking comments on its tentative conclusion that television Joint Sales Agreements should be attributable for ownership purposes.  That proceeding is still pending.  We cannot predict the outcome of this proceeding, nor can we predict how any changes, together with possible changes to the ownership rules, would apply to our existing outsourcing agreements.

 

Indecent Broadcast Restrictions

It is a violation of federal law and FCC regulations to broadcast obscene or indecent programming.  FCC licensees are, in general, responsible for the content of their broadcast programming, including content supplied by television networks.  Accordingly, there is a risk of being fined as a result of our broadcast programming, including network programming.  The maximum forfeiture amount for the broadcast of indecent or obscene material is $32,500 for each violation.  In the past few years, the FCC has intensified its scrutiny of allegedly indecent and obscene programming.  The FCC’s review of complaints regarding allegedly indecent or obscene network programming broadcast on some of our FOX and WB affiliates may be delaying the grant of the applications for license renewal of those stations.

 

Recently, the House of Representatives approved a bill raising the maximum forfeiture amount to $500,000 per violation, subject to some limitations.  Additionally, the proposed law would expressly permit the FCC to consider such violations in the context of license renewal proceedings, proceedings for new licenses or permits and assignment or transfer of control proceedings.  The proposed law would also require the FCC to commence a license revocation proceeding against a licensee after three violations.  The Senate has not yet acted on this bill.

 

36



 

On October 12, 2004, the FCC issued a Notice of Apparent Liability for Forfeiture (NAL) in the amount of $7,000 per station to virtually every FOX station, including the 16 FOX affiliates licensed to us and the four FOX affiliates programmed by us.  The NAL alleged that the stations broadcast indecent material contained in an episode of a FOX network program that aired on April 7, 2003.  We, as well as other parties including the FOX network, filed oppositions to the NAL.  That proceeding is still pending.  Although we cannot predict the outcome of that proceeding or the effect of any adverse outcome on the stations license renewal applications, the FOX network has agreed to indemnify its affiliates for the full amount of this liability.

 

 

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk from changes in interest rates.  We enter into derivative instruments primarily for the purpose of reducing the impact of changing interest rates on our floating rate debt and to reduce the impact of changing fair market values on our fixed rate debt.

 

Interest Rate Risks

 

As of September 30, 2005, we held the following derivative instruments (amounts in millions):

 

 

 

 

 

 

 

 

 

 

 

Pro Forma FMV

 

Notional
Amount

 

Expiration
Date

 

Interest
Payable

 

Interest
Receivable

 

FMV Asset
(Liability)(4)

 

1% Rate
Increase(5)

 

1% Rate
Decrease(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

375.0

(1)

June 5, 2006

 

6.25

7.00%

 

LIBOR(3)

 

$

(4.6

)

$

(2.1

)

$

(6.7

)

$

200.0

(1)

June 5, 2006

 

6.25

7.00%

 

LIBOR(3)

 

(2.6

)

(1.2

)

(3.6

)

$

300.0

(2)

March 12, 2012

 

LIBOR

+

2.28%(3)

 

8.00%

 

7.3

 

(4.1

)

16.5

 

$

100.0

(2)

March 15, 2012

 

LIBOR

+

3.095%(3)

 

8.00%

 

(1.0

)

(5.2

)

2.7

 

 

 

 

 

 

 

 

 

 

 

$

(0.9

)

$

(12.6

)

$

8.9

 

 


 

(1)          These swap agreements do not qualify for hedge accounting treatment under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133); therefore, changes in their fair market values are reflected currently in earnings as an unrealized gain from derivative instruments.  We recorded an unrealized gain related to these instruments of $17.5 million and $20.6 million for the nine months ended September 30, 2005 and 2004, respectively.

 

(2)          These swaps are accounted for as hedges in accordance with SFAS 133; therefore, changes in their fair market values are reflected as adjustments to the carrying value of the underlying debt being hedged.

 

(3)          Represents a floating rate based on the three-month London Interbank Offered Rate (LIBOR).

 

(4)          The fair market value (FMV) of the interest rate swap agreements is estimated by obtaining quotations from the international financial institutions party to each derivative contract.  The fair value is an estimate of the net amount that we would (pay) receive on September 30, 2005 if we cancelled the contracts or transferred them to other parties.

 

(5)          Represents the estimated pro forma FMV of each derivative instrument as of September 30, 2005 if current interest rates were higher by 1% or lower by 1%, which indicates the relative sensitivity of these instruments to changes in interest rates.

 

We are also exposed to risk from a change in interest rates to the extent we are required to refinance existing fixed rate indebtedness at rates higher than those prevailing at the time the existing indebtedness was incurred.  As of September 30, 2005, we had senior subordinated notes totaling $307.4 million, $808.9 million and $150.0 million expiring in the years 2011, 2012 and 2018, respectively.  Based upon the quoted market price, the fair value of the notes was $1.3 billion as of September 30, 2005.  Generally, the fair market value of the notes will decrease as interest rates rise and increase as interest rates fall.  We estimate that a 1.0% increase from prevailing interest rates would result in a decrease in fair value of the notes by approximately $66.4 million as of September 30, 2005.  The estimates related to the increase or decrease of interest rates are based on assumptions for forecasted future interest rates.

 

37



 

ITEM 4.      CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2005.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosure controls and procedures as of September 30, 2005, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Effect of Restatement on Disclosure Controls

 

As discussed in Note 1. Summary of Significant Accounting Policies and as previously disclosed in our Form 8-K filed on August 14, 2006 (the Restatement 8-K), the Audit Committee of our Board of Directors authorized us to amend and restate our financial statements and other financial information for the quarters ended June 30, 2005, September 30, 2005 and March 31, 2006 and for the year ended December 31, 2005 as a result of a change in judgment regarding the accounting treatment for our exchange of our Series D Convertible Exchangeable Preferred Stock (the Preferred Stock) for 6% Convertible Debentures due 2012 (the Debentures). 

 

As described in this report and in our previous Exchange Act reports, disclosure controls and procedures can only provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules.   Our management believes that, notwithstanding that an incorrect judgment, with which our independent auditors concurred, regarding a technical accounting issue led to an error requiring the restatement, under the circumstances described below and in the Restatement 8-K, the error is not indicative of inadequate disclosure controls and procedures.  Management believes that the procedures it has in place to produce and report financial statements in accordance with GAAP did provide and continue to provide reasonable assurance as defined in the Commission’s rules.

 

In connection with the restatement, our Chief Executive Officer and our Chief Financial Officer considered the effect of the error on the adequacy of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q for the period ended September 30, 2005. The certifying officers determined that the error had no effect on the adequacy of our disclosure controls and procedures as of September 30, 2005.

 

Changes in Internal Control over Financial Reporting

 

On October 1, 2005, we substantially completed the implementation of a new fixed asset system that management believes will enhance certain operating efficiencies at all of our locations.  Any changes related to this system have not materially affected, and are not reasonably likely to materially affect, our internal control over financial reporting.  There have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during or subsequent to the quarter ended September 30, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

38



PART II.  OTHER INFORMATION

 

 

ITEM 1.      LEGAL PROCEEDINGS

 

We are a 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 financial position, consolidated results of operations or consolidated cash flows.

 

 

ITEM 5.      OTHER INFORMATION

 

(a) Information required to be disclosed in a report on form 8-K, but not reported.

 

Item 1.01 Entry into a Material Definitive Agreement

 

On August 22, 2005, we, along with Cunningham and FOX Broadcasting Company (FOX) entered into an Amendment (the Amendment) to each of the original FOX Affiliation Agreements dated July 1, 2002 (collectively, the Agreements), which had expired on June 30, 2005.  The Amendment was effective as of August 22, 2005.  Pursuant to the terms of the Amendment, the Agreements will continue in full force and effect until terminated by FOX, or by us or Cunningham (as applicable for its subsidiary stations), in such party’s sole discretion.

 

 

ITEM 6.      EXHIBITS

 

Exhibit
Number

 

Description

 

 

 

10.1†

 

Amendment to the FOX Broadcasting Company Station Affiliation Agreement

 

 

 

31.1†

 

Certification by David D. Smith, as Chairman and Chief Executive Officer of Sinclair Broadcast Group, Inc., pursuant to § 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)

 

 

 

31.2†

 

Certification by David B. Amy, as Chief Financial Officer of Sinclair Broadcast Group, Inc., pursuant to § 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)

 

 

 

31.3

 

Certification by David D. Smith, as Chairman and Chief Executive Officer of Sinclair Broadcast Group, Inc., pursuant to § 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C § 7241)

 

 

 

31.4

 

Certification by David B. Amy, as Chief Financial Officer of Sinclair Broadcast Group, Inc., pursuant to § 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C § 7241)

 

 

 

32.1†

 

Certification by David D. Smith, as Chairman and Chief Executive Officer of Sinclair Broadcast Group, Inc., pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C § 1350)

 

 

 

32.2†

 

Certification by David B. Amy, as Chief Financial Officer of Sinclair Broadcast Group, Inc., pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C § 1350)

 

 

 

32.3

 

Certification by David D. Smith, as Chairman and Chief Executive Officer of Sinclair Broadcast Group, Inc., pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C § 1350)

 

 

 

32.4

 

Certification by David B. Amy, as Chief Financial Officer of Sinclair Broadcast Group, Inc., pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C § 1350)

 


Previously filed

39



 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized on the 1st day of September 2006.

 

 

 

SINCLAIR BROADCAST GROUP, INC.

 

 

 

 

 

By:

/s/ David R. Bochenek

 

 

David R. Bochenek

 

 

Vice President/Chief Accounting Officer

 

40



 

EXHIBIT INDEX

 

Exhibit
Number

 

Description

 

 

 

10.1†

 

Amendment to the FOX Broadcasting Company Station Affiliation Agreement

 

 

 

31.1†

 

Certification by David D. Smith, as Chairman and Chief Executive Officer of Sinclair Broadcast Group, Inc., pursuant to § 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)

 

 

 

31.2†

 

Certification by David B. Amy, as Chief Financial Officer of Sinclair Broadcast Group, Inc., pursuant to § 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)

 

 

 

31.3

 

Certification by David D. Smith, as Chairman and Chief Executive Officer of Sinclair Broadcast Group, Inc., pursuant to § 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C § 7241)

 

 

 

31.4

 

Certification by David B. Amy, as Chief Financial Officer of Sinclair Broadcast Group, Inc., pursuant to § 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C § 7241)

 

 

 

32.1†

 

Certification by David D. Smith, as Chairman and Chief Executive Officer of Sinclair Broadcast Group, Inc., pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C § 1350)

 

 

 

32.2†

 

Certification by David B. Amy, as Chief Financial Officer of Sinclair Broadcast Group, Inc., pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C § 1350)

 

 

 

32.3

 

Certification by David D. Smith, as Chairman and Chief Executive Officer of Sinclair Broadcast Group, Inc., pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C § 1350)

 

 

 

32.4

 

Certification by David B. Amy, as Chief Financial Officer of Sinclair Broadcast Group, Inc., pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C § 1350)

 


Previously filed

 

41