UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2007
		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)

 

(410) 568-1500

(Registrant’s telephone number, including area code)

None

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x      No o

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

Large accelerated filer o      Accelerated filer x      Non-accelerated filer 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 x

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

 

 

SINCLAIR BROADCAST GROUP, INC.

FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007

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 RESULTS OF OPERATIONS
		ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
		ITEM 4.	CONTROLS AND PROCEDURES
PART II.		OTHER INFORMATION
		ITEM 1.	LEGAL PROCEEDINGS
		ITEM 1A.	RISK FACTORS
		ITEM 6.	EXHIBITS
SIGNATURE
EXHIBIT INDEX

 

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PART I. FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

SINCLAIR BROADCAST GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

		As of March 31, 2007			As of December 31, 2006
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	15,450		$	67,408
Accounts receivable, net of allowance for doubtful accounts of $3,523 and $3,985, respectively		120,315			130,227
Affiliate receivable		14			12
Current portion of program contract costs		53,999			65,322
Income taxes receivable		7,812			3,625
Prepaid expenses and other current assets		7,223			12,904
Deferred barter costs		2,968			2,509
Deferred tax assets		8,340			8,340
Total current assets		216,121			290,347
PROGRAM CONTRACT COSTS, less current portion		40,286			49,187
PROPERTY AND EQUIPMENT, net		270,538			274,962
GOODWILL, net		1,007,268			1,007,268
BROADCAST LICENSES, net		409,620			409,620
DEFINITE-LIVED INTANGIBLE ASSETS, net		199,093			205,147
OTHER ASSETS		43,880			35,049
Total assets		$	2,186,806		$	2,271,580
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	3,657		$	4,849
Accrued liabilities		65,725			89,695
Current portion of notes payable, capital leases and commercial bank financing		38,881			98,265
Current portion of notes and capital leases payable to affiliates		3,727			3,985
Current portion of program contracts payable		76,385			85,746
Deferred barter revenues		2,799			2,388
Total current liabilities		191,174			284,928
LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing, less current portion		1,284,909			1,290,899
Notes payable and capital leases to affiliates, less current portion		19,754			20,474
Program contracts payable, less current portion		87,337			97,369
Deferred tax liabilities		274,960			282,317
Other long-term liabilities		63,382			28,263
Total liabilities		1,921,516			2,004,250
MINORITY INTEREST IN CONSOLIDATED ENTITIES		724			685
SHAREHOLDERS’ EQUITY:
Class A Common Stock, $.01 par value, 500,000,000 shares authorized, 50,783,075 and 47,552,682 shares issued and outstanding, respectively		508			476
Class B Common Stock, $.01 par value, 140,000,000 shares authorized, 36,252,312 and 38,348,331 shares issued and outstanding, respectively, convertible into Class A Common Stock		362			383
Additional paid-in capital		610,437			596,667
Accumulated deficit		(344,326		)	(328,406		)
Accumulated other comprehensive loss		(2,415		)	(2,475		)
Total shareholders’ equity		264,566			266,645
Total liabilities and shareholders’ equity		$	2,186,806		$	2,271,580

 

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

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SINCLAIR BROADCAST GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)

		Three Months Ended March 31,
		2007			2006
REVENUES:
Station broadcast revenues, net of agency commissions		$	150,169		$	147,925
Revenues realized from station barter arrangements		13,799			11,805
Other operating divisions’ revenues		2,887			3,737
Total revenues		166,855			163,467
OPERATING EXPENSES:
Station production expenses		36,626			38,109
Station selling, general and administrative expenses		34,278			34,146
Expenses recognized from station barter arrangements		12,465			10,825
Amortization of program contract costs and net realizable value adjustments		21,384			18,623
Other operating divisions’ expenses		3,546			3,989
Depreciation of property and equipment		10,897			12,288
Corporate general and administrative expenses		5,964			5,806
Amortization of definite-lived intangible assets and other assets		4,367			4,325
Total operating expenses		129,527			128,111
Operating income		37,328			35,356
OTHER INCOME (EXPENSE):
Interest expense and amortization of debt discount and deferred financing costs		(26,382		)	(29,710		)
Interest income		388			46
Loss from sale of assets		(12		)	(287		)
Loss from extinguishment of debt		(15,681		)	(623		)
Unrealized gain from derivative instruments		1,057			2,881
(Loss) income from equity and cost investees		(12		)	6,099
Other income (expense), net		221			(125		)
Total other expense		(40,421		)	(21,719		)
(Loss) income from continuing operations before income taxes		(3,093		)	13,637
INCOME TAX BENEFIT (PROVISION)		843			(6,561		)
(Loss) income from continuing operations		(2,250		)	7,076
DISCONTINUED OPERATIONS:
(Loss) income from discontinued operations, net of related income tax provision of $139 and tax benefit of $1,114 respectively		(139		)	1,168
Gain from discontinued operations, net of related income tax provision of $885		—			1,774
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	(2,389	)	$	10,018
BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE:
(Loss) earnings per common share from continuing operations		$	(0.03	)	$	0.08
Earnings per common share from discontinued operations		$	—		$	0.03
(Loss) earnings per common share		$	(0.03	)	$	0.11
Weighted average common shares outstanding		86,140			85,533
Weighted average common and common equivalent shares outstanding		86,140			85,535
Dividends declared per common share		$	0.15		$	0.10

 

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

 

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SINCLAIR BROADCAST GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2007
(In thousands) (Unaudited)

		Class A Common Stock			Class B Common Stock			Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
BALANCE, December 31, 2006		$	476		$	383		$	596,667		$	(328,406	)	$	(2,475	)	$	266,645
Adjustment related to adoption of FIN 48, effective January 1, 2007		—			—			—			(589		)	—			(589		)
Dividends declared on Class A and Class B Common Stock		—			—			—			(12,942		)	—			(12,942		)
Class A Common Stock issued pursuant to employee benefit plans		11			—			12,196			—			—			12,207
Class B Common Stock converted into Class A Common Stock		21			(21		)	—			—			—			—
Tax benefit of nonqualified stock options exercised		—			—			1,574			—			—			1,574
Amortization of net periodic pension benefit costs		—			—			—			—			60			60
Net loss		—			—			—			(2,389		)	—			(2,389		)
BALANCE, March 31, 2007		$	508		$	362		$	610,437		$	(344,326	)	$	(2,415	)	$	264,566
Other comprehensive loss:
Net loss		$	—		$	—		$	—		$	(2,389	)	$	—		$	(2,389	)
Amortization of net periodic pension benefit costs		—			—			—			—			60			60
Comprehensive (loss) income		$	—		$	—		$	—		$	(2,389	)	$	60		$	(2,329	)

 

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

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SINCLAIR BROADCAST GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)

		Three Months Ended March 31,
		2007			2006
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net (loss) income		$	(2,389	)	$	10,018
Adjustments to reconcile net (loss) income to net cash flows from operating activities:
Amortization of debt discount, net of debt premium		702			480
Depreciation of property and equipment		10,897			12,288
Recognition of deferred revenue		(57		)	(1,235		)
Accretion of capital leases		231			152
Loss (income) from equity and cost investees		180			(6,099		)
Loss on sale of property		12			287
Gain on sale of broadcast assets related to discontinued operations		—			(2,659		)
Unrealized gain from derivative instruments		(1,057		)	(2,881		)
Amortization of definite-lived intangible assets and other assets		4,367			4,325
Amortization of program contract costs and net realizable value adjustments		21,384			18,623
Amortization of deferred financing costs		539			661
Stock-based compensation		698			499
Excess tax benefits for stock options exercised		(1,574		)	—
Loss on extinguishment of debt, non-cash portion		2,232			989
Amortization of net periodic pension benefit costs		60			—
Amortization of derivative instruments		134			134
Deferred tax provision related to operations		877			8,018
Deferred tax benefit related to discontinued operations		—			(1,177		)
Net effect of change in deferred barter revenues and deferred barter costs		(48		)	(39		)
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Decrease in accounts receivable, net		10,370			9,737
Increase in taxes receivable		(2,012		)	(2,072		)
Decrease in prepaid expenses and other current assets		6,729			10,993
(Increase) decrease in other assets		(964		)	177
Decrease in accounts payable and accrued liabilities		(7,497		)	(14,822		)
Decrease in income taxes payable		—			(772		)
Decrease in other long-term liabilities		(146		)	(1,851		)
Increase (decrease) in minority interest		39			(19		)
Dividends and distributions from equity and cost investees		88			6,000
Payments on program contracts payable		(20,553		)	(26,289		)
Net cash flows from operating activities		23,242			23,466
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of property and equipment		(6,535		)	(4,717		)
Payments for acquisition of television station		—			(1,710		)
Dividends and distributions from cost investees		435			—
Investments in equity and cost investees		—			(59		)
Proceeds from the sale of assets		11			1,358
Proceeds from the sale of broadcast assets related to discontinued operations		—			1,400
Loans to affiliates		(37		)	(35		)
Proceeds from loans to affiliates		35			34
Net cash flows used in investing activities		(6,091		)	(3,729		)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases		276,500			49,000
Repayments of notes payable, commercial bank financing and capital leases		(345,232		)	(61,114		)
Proceeds from exercise of stock options		11,357			—
Dividends paid on Class A and Class B Common Stock		(10,624		)	(8,470		)
Repayments of notes and capital leases to affiliates		(1,110		)	(1,055		)
Net cash flows used in financing activities		(69,109		)	(21,639		)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(51,958		)	(1,902		)
CASH AND CASH EQUIVALENTS, beginning of period		67,408			9,655
CASH AND CASH EQUIVALENTS, end of period		$	15,450		$	7,753

 

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

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SINCLAIR BROADCAST GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

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

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 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; therefore, amounts for certain captions will not agree with the accompanying consolidated balance sheets and consolidated statements of operations.  The operating results of WEMT-TV are not included in our consolidated results from continuing operations for the quarters ended March 31, 2007 and 2006.  See Note 9. Discontinued Operations, for additional information.

Interim Financial Statements

The consolidated financial statements for the three months ended March 31, 2007 and 2006 are unaudited.  In the opinion of management, such financial statements have been presented on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations and consolidated statements of 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 for the year ended December 31, 2006 filed with the Securities and Exchange Commission.  The consolidated statements of operations presented in the accompanying consolidated financial statements are not necessarily representative of operations for an entire year.

Recent Accounting Pronouncements

In February 2007, the Financial Standards Accounting Board issued Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (SFAS 159). The fair value option established by this statement permits all entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are to be reported in earnings at each subsequent reporting date. This statement is effective for our fiscal year beginning January 1, 2008. We are currently evaluating the impact that adoption of SFAS 159 will have on our consolidated financial statements.

Use of Estimates

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

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Restructuring Costs

During the year ended December 31, 2006, we incurred costs associated with restructuring the news operations at certain of our stations.  Specifically, on or before March 31, 2006, we ceased our locally-produced news broadcasts in nine of our markets and consequently let go our news employees and cancelled our news-related contracts.

We recorded restructuring charges in station production expenses.  The major components of the restructuring charges and the remaining accrual balance related to the restructuring plan as of March 31, 2007 follow (in thousands):

		Salary and Severance Costs			Contract Expenses			Other Exit Costs			Total
Balance at December 31, 2006		$	—		$	79		$	34		$	113
Amounts utilized		—			(45		)	(14		)	(59		)
Balance at March 31, 2007		$	—		$	34		$	20		$	54

 

All restructuring costs were associated with our broadcast segment.

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 balance sheets, consolidated statements of operations or consolidated statements of cash flows.

Changes in the Rules on Television Ownership and Local Marketing Agreements

There have been no material changes to the Federal Communications Commission (FCC) rules on television ownership and local marketing agreements during the three months ended March 31, 2007.  Please refer to Note 11. Commitments and Contingencies in our Annual Report on Form 10-K for the year ended December 31, 2006.

Children’s Television Programming

Television stations are required to broadcast a minimum of three hours per week of “core” children’s educational programming, which the FCC defines as programming that:

·                  has the significant purpose of serving the educational and informational needs of children 16 years of age and under;

·                  is regularly scheduled weekly and at least 30 minutes in duration; and

·                  is aired between the hours of 7:00 a.m. and 10:00 p.m. local time.

In addition, the FCC concluded that starting on January 2, 2007 a digital broadcaster must air an additional half hour of “core” children’s programming per every increment of 1 to 28 hours of free video programming provided in addition to the main DTV program stream.  Furthermore, “core” children’s educational programs, in order to qualify as such, are required to be identified as educational and informational programs over the air at the time they are broadcast and are required to be identified in the children’s programming reports, which are required to be placed quarterly in stations’ public inspection files and filed quarterly with the FCC.

On April 17, 2007, the FCC requested comments on the status of children’s television programming and compliance with the Children’s Television Act and the FCC’s rules.

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Other FCC Adjudicatory Proceedings

On April 26, 2007, the FCC sent letters to two of our stations, WUHF-TV in Rochester, New York and WSYX-TV in Columbus, Ohio, requesting information regarding the broadcast of certain video news releases without proper sponsorship identification in alleged violation of federal law and the FCC’s rules.  We have until June 25, 2007 to respond.

On May 1, 2007, the FCC sent a letter to WRLH-TV, Richmond, Virginia, requesting information regarding the alleged broadcast of indecent material during an advertisement.  We have until May 31, 2007 to respond.

3. SUPPLEMENTAL CASH FLOW INFORMATION:

During the three months ended March 31, 2007 and 2006, our supplemental cash flow information was as follows (in thousands):

		Three Months Ended March 31,
		2007			2006
Income taxes paid related to continuing operations		$	—		$	26
Income taxes paid related to sale of discontinued operations		$	—		$	4,028
Income tax refunds received related to continuing operations		$	25		$	78
Income tax refunds received related to sale of discontinued operations		$	134		$	88
Interest paid		$	40,290		$	21,675
Payments related to extinguishment of debt		$	13,449		$	366

 

Non-cash barter and trade expense are presented in the consolidated statements of operations.  Non-cash transactions related to capital lease obligations were less than $0.1 million and $0.4 million for the quarters ended March 31, 2007 and 2006, respectively.

4. NOTES PAYABLE:

On January 19, 2007, we borrowed net proceeds of $225.0 million under our Term Loan A-1 pursuant to our amended and restated Bank Credit Agreement.  On January 22, 2007, we used these proceeds along with $59.4 million of cash on hand and additional borrowings of $23.0 million under our Revolving Credit Facility to redeem the aggregate principal amount of $307.4 million of our 8.75% Senior Subordinated Notes, due 2011 (2011 Notes).  The redemption was effected in accordance with the terms of the indenture governing the 2011 Notes at a redemption price of 104.375% of the principal amount of the 2011 Notes plus accrued and unpaid interest. As a result of the redemption, we recorded a loss from extinguishment of debt of $15.7 million representing the redemption premium and write-off of certain debt acquisition costs.

5. DERIVATIVE INSTRUMENTS:

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.  We account for our derivative instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended.

As of March 31, 2007, we had two derivative instruments.  Both of these instruments are interest rate swap agreements.  One of these swap agreements with a notional amount of $180.0 million and expiring on March 15, 2012 is accounted for as a fair value hedge; therefore, any changes in its fair market value are reflected as an adjustment to the carrying value of our 8.0% Senior Subordinated Notes, due 2012 which is the underlying debt being hedged.  During 2006, the other interest rate swap agreement was undesignated as a fair value hedge due to a reassignment of the counterparty; therefore, any subsequent changes in the fair market value are reflected as an adjustment to income.  The notional amount of this swap agreement is $120.0 million and it expires on March 15, 2012.  The interest we pay on both interest rate swap agreements is floating based on the three-month London Interbank Offered Rate (LIBOR) plus 2.28% and the interest we receive is 8.0%.  The fair market value of these agreements is estimated by obtaining quotations from the international financial institution which is a party to the contract.  The fair value is an estimate of the net amount that we would pay on the balance sheet date if we cancelled the contracts or transferred them to other parties and includes net accrued interest receivable.  This amount was a net asset of $3.0 million and $5.6 million as of March 31, 2007 and December 31, 2006, respectively.

During May 2003, we completed an issuance of $150.0 million aggregate principal amount of 4.875% Convertible Senior Notes, due 2018.  Under certain circumstances, we will pay contingent cash interest to the holders of the convertible notes commencing on January 15, 2011.  This contingent cash interest feature is an embedded derivative which had a negligible fair value as of March 31, 2007.

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6. INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE:

Our income tax provision for all periods consists of federal and state income taxes.  The tax provision for the three months ended March 31, 2007 is based on the estimated effective tax rate applicable for the full year, which is expected to be 45.7%.  Our effective income tax rate differs from the federal statutory rate of 35% and can vary from period to period due to fluctuations in operating results, new or revised tax legislation and accounting pronouncements, state taxes, changes in the valuation of deferred tax assets and liabilities, accruals related to contingent tax liabilities, and the results of audits and examinations of previously filed tax returns.  Both the first quarter and estimated annual 2007 effective rates are different from the statutory rate due primarily to the impact of state income taxes, certain items not deductible for tax purposes and our contingent tax liability accrual.

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) on January 1, 2007. The adoption of FIN 48 did not cause a material change to our contingent liability for unrecognized tax benefits.  We decreased the January 1, 2007 balance of retained earnings by $0.6 million to apply the cumulative effect of FIN 48 adoption.  As of the date of adoption, we had $32.9 million of gross unrecognized tax benefits.  Of this total, $17.6 million (net of federal effect on state tax issues) and $7.8 million (net of federal effect on state tax issues) represent the amounts of unrecognized tax benefits that, if recognized, would favorably affect our effective tax rates from continuing operations and discontinued operations, respectively.  At March 31, 2007, we had $33.1 million of gross unrecognized tax benefits.  Of this total, $17.7 million (net of federal effect on state tax issues) and $7.8 million (net of federal effect on state tax issues) represent the amounts of unrecognized tax benefits that, if recognized, would favorably affect our effective tax rates from continuing operations and discontinued operations, respectively.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.  We had $6.7 million and $0 accrued for interest and penalties, respectively, at January 1, 2007.  We recognized $0.7 million of income tax expense for interest related to uncertain tax positions during the quarter ended March 31, 2007.

We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions.  All of our 2003 and subsequent federal and state tax returns remain subject to examination by various tax authorities.  Some of our pre-2003 state tax returns may also be subject to examination.  In addition, several of our subsidiaries are currently under state examinations for various years.  We do not anticipate the resolution of these matters will result in a material change to our consolidated financial statements.  In addition, it is reasonably possible that various state statutes of limitations could expire by March 31, 2008.  Such expirations, if any, could result in a reduction of the total amounts of unrecognized tax benefits by up to $4.2 million.

7. EARNINGS PER SHARE:

The following table reconciles income (numerator) and shares (denominator) used in our computations of earnings per share for the three months ended March 31, 2007 and 2006 (in thousands):

		As of March 31,
		2007			2006
Income (Numerator)
(Loss) income from continuing operations		$	(2,250	)	$	7,076
(Loss) income from discontinued operations, including gain on sale of broadcast assets related to discontinued operations		$	(139	)	$	2,942
Net (loss) income available to common shareholders		$	(2,389	)	$	10,018
Shares (Denominator)
Weighted-average common shares outstanding		86,140			85,533
Dilutive effect of outstanding stock options		—			2
Weighted-average common and common equivalent shares outstanding		86,140			85,535

 

We applied the treasury stock method to measure the dilutive effect of our outstanding stock options and restricted stock awards and include the respective common share equivalents in the denominator of the diluted EPS computation.  For the three months ended March 31, 2007, our outstanding stock options and restricted stock and for each of the three months ended March 31, 2007 and 2006, our 6% Convertible Debentures, due 2012 and 4.875% Convertible Senior Notes, due 2018 were anti-dilutive; therefore, they were not included in the computation of diluted EPS.

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8. RELATED PERSON TRANSACTIONS:

David, Frederick, Duncan and Robert Smith (collectively, the controlling shareholders) are brothers and hold substantially all of the Class B Common Stock.

Certain assets used by us and our operating subsidiaries are leased from Cunningham Communications Inc., Keyser Investment Group, Gerstell Development Limited Partnership and Beaver Dam, LLC (entities owned by the controlling shareholders).  Lease payments made to these entities were $1.3 million and $1.1 million for each of the three months ended March 31, 2007 and 2006, respectively.

In January 1999, we entered into a local marketing agreement (LMA) with Bay Television, Inc. (Bay TV), which owns the television station WTTA-TV in Tampa, Florida.  Our controlling shareholders own a substantial portion of the equity of Bay TV.  The LMA provides that we deliver television programming to Bay TV, which broadcasts the programming in return for a monthly fee to Bay TV of $143,500.  We must also make an annual payment equal to 50% of the adjusted annual broadcast cash flow of the station (as defined in the LMA) that is in excess of $1.7 million.  Lease payments made to Bay TV were $0.4 million for the three months ended March 31, 2007 and 2006.

David D. Smith, our President and Chief Executive Officer, has a controlling interest in Atlantic Automotive and is a member of the Board of Directors.  Atlantic Automotive Corporation is a holding company which owns automobile dealerships and a leasing company.  We sold advertising time to Atlantic Automotive on our stations in Baltimore, Maryland and Norfolk, Virginia and received payments totaling $0.2 million and $0.1 million during the three months ended March 31, 2007 and 2006, respectively.  We purchased a total of $0.2 million and $0.4 million in vehicles and related vehicle services from Atlantic Automotive during the three months ended March 31, 2007 and 2006, respectively.

9. DISCONTINUED OPERATIONS:

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 December 31, 2005 consolidated balance sheet.  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 February 8, 2006 for a cash price of approximately $1.4 million.  We recorded $1.8 million, net of $0.9 million in taxes, as gain from discontinued operations in our consolidated statements of operations for the quarter ended March 31, 2006.  The gain is comprised of the previously deferred gain of $2.1 million and the loss of $0.3 million from the sale of the license assets, net of taxes, respectively.  The net cash proceeds were used in the normal course of operations and for capital expenditures.

Other Dispositions

During the three months ended March 31, 2007, we recognized a $0.1 million tax provision relating to an adjustment of certain state tax contingencies.

11

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10. SEGMENT DATA

We have one reportable operating segment, “Broadcast”, that is disclosed separately from our corporate and other business activities.  “Corporate and Other” primarily includes our costs to operate as a public company and to operate our corporate headquarters location, our investment activity and our other operating divisions’ activities.  Our other operating divisions primarily earn revenues from internet technology and transmitter manufacturing.  Transactions between our operating segment and “Corporate and Other” are not material.

Financial information for our operating segment is included in the following tables for the three months ended March 31, 2007 and 2006 (in thousands):

For the three months ended March 31, 2007				Broadcast		Corporate and Other		Consolidated
Revenue				$163,968		$2,887		$166,855
Depreciation of property and equipment				10,356		541		10,897
Amortization of definite-lived intangible assets and other assets				4,367		—		4,367
Amortization of program contract costs and net realizable value adjustments				21,384		—		21,384
General and administrative overhead expenses				2,042		3,922		5,964
Operating income (loss)				42,547		(5,219	)	37,328
Loss from equity and cost investees				—		(12	)	(12	)

 

 

For the three months ended March 31, 2006				Broadcast		Corporate and Other		Consolidated
Revenue				$159,730		$3,737		$163,467
Depreciation of property and equipment				11,747		541		12,288
Amortization of definite-lived intangible assets and other assets				4,325		—		4,325
Amortization of program contract costs and net realizable value adjustments				18,623		—		18,623
General and administrative overhead expenses				1,841		3,965		5,806
Operating income (loss)				40,279		(4,923	)	35,356
Income from equity and cost investees				—		6,099		6,099

 

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11. 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 existing Bank Credit Agreement, as amended, the 8.75% Senior Subordinated Notes, due 2011, which were redeemed in full on January 22, 2007, and the 8% Senior Subordinated Notes, due 2012.  Our Class A Common Stock, Class B Common Stock, the 6.0% Convertible Debentures, due 2012 and the 4.875% Convertible Senior Notes, due 2018 remain obligations or securities of SBG and are not obligations or securities of STG.

SBG, KDSM, LLC, a wholly-owned subsidiary of SBG, and STG’s wholly-owned subsidiaries (guarantor subsidiaries), have fully and unconditionally guaranteed all of STG’s obligations.  Those guarantees are joint and several.  There are certain contractual 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 consolidating financial statements present the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows of SBG, STG, KDSM, LLC and the guarantor subsidiaries, 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.

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CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2007
(in thousands) (unaudited)

		Sinclair  Broadcast Group, Inc.			Sinclair Television Group, Inc.			Guarantor Subsidiaries and KDSM, LLC			Non- Guarantor Subsidiaries			Eliminations			Sinclair Consolidated
Cash		$	—		$	—		$	13,315		$	2,795		$	(660	)	$	15,450
Accounts and other receivables		10,843			37,176			78,349			3,958			(2,185		)	128,141
Other current assets		1,333			1,301			66,151			4,280			(535		)	72,530
Total current assets		12,176			38,477			157,815			11,033			(3,380		)	216,121
Property and equipment, net		7,296			1,428			261,581			24,756			(24,523		)	270,538
Investment in consolidated subsidiaries		538,580			1,435,568			—			—			(1,974,148		)	—
Other long-term assets		26,073			44,256			43,495			14,206			(43,864		)	84,166
Total other long-term assets		564,653			1,479,824			43,495			14,206			(2,018,012		)	84,166
Acquired intangible assets		—			24,555			1,536,482			46,344			8,600			1,615,981
Total assets		$	584,125		$	1,544,284		$	1,999,373		$	96,339		$	(2,037,315	)	$	2,186,806
Accounts payable and accrued liabilities		$	16,934		$	9,477		$	39,153		$	46,553		$	(42,735	)	$	69,382
Current portion of long-term debt		1,375			5,000			2,733			34,292			(792		)	42,608
Other current liabilities		—			—			78,780			404			—			79,184
Total current liabilities		18,309			14,477			120,666			81,249			(43,527		)	191,174
Long-term debt		284,275			955,887			64,481			28,443			(28,423		)	1,304,663
Other liabilities		6,927			37,186			380,482			1,100			708			426,403
Total liabilities		309,511			1,007,550			565,629			110,792			(71,242		)	1,922,240
Common stock		870			—			11			761			(772		)	870
Additional paid-in capital		610,437			280,721			1,060,194			76,221			(1,417,136		)	610,437
Accumulated deficit		(336,693		)	254,363			377,604			(94,039		)	(545,561		)	(344,326		)
Accumulated other comprehensive income (loss)		—			1,650			(4,065		)	2,604			(2,604		)	(2,415		)
Total shareholders’ equity		274,614			536,734			1,433,744			(14,453		)	(1,966,073		)	264,566
Total liabilities and shareholders’ equity		$	584,125		$	1,544,284		$	1,999,373		$	96,339		$	(2,037,315	)	$	2,186,806

 

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CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2006
(in thousands)

		Sinclair Broadcast Group, Inc.			Sinclair Television Group, Inc.			Guarantor Subsidiaries and KDSM, LLC			Non- Guarantor Subsidiaries			Eliminations			Sinclair Consolidated
Cash		$	—		$	60,303		$	4,737		$	2,368		$	—		$	67,408
Accounts and other receivables		8,636			28,863			89,387			9,135			(2,157		)	133,864
Other current assets		4,770			8,278			75,679			3,795			(3,447		)	89,075
Total current assets		13,406			97,444			169,803			15,298			(5,604		)	290,347
Property and equipment, net		7,771			1,135			265,962			25,005			(24,911		)	274,962
Investment in consolidated subsidiaries		540,684			1,446,021			—			—			(1,986,705		)	—
Other long-term assets		25,795			35,391			52,325			13,299			(42,574		)	84,236
Total other long-term assets		566,479			1,481,412			52,325			13,299			(2,029,279		)	84,236
Acquired intangible assets		—			24,555			1,542,550			44,674			10,256			1,622,035
Total assets		$	587,656		$	1,604,546		$	2,030,640		$	98,276		$	(2,049,538	)	$	2,271,580
Accounts payable and accrued liabilities		$	17,041		$	20,939		$	50,404		$	44,327		$	(38,167	)	$	94,544
Current portion of long-term debt		1,337			64,400			3,013			34,358			(858		)	102,250
Other current liabilities		—			—			87,632			502			—			88,134
Total current liabilities		18,378			85,339			141,049			79,187			(39,025		)	284,928
Long-term debt		283,830			962,701			64,842			28,570			(28,570		)	1,311,373
Other liabilities		6,438			20,854			380,051			9,844			(8,553		)	408,634
Total liabilities		308,646			1,068,894			585,942			117,601			(76,148		)	2,004,935
Common stock		859			—			11			761			(772		)	859
Additional paid-in capital		596,667			281,829			1,111,489			69,891			(1,463,209		)	596,667
Accumulated deficit		(318,516		)	252,173			337,323			(90,231		)	(509,155		)	(328,406		)
Accumulated other comprehensive income (loss)		—			1,650			(4,125		)	254			(254		)	(2,475		)
Total shareholders’ equity		279,010			535,652			1,444,698			(19,325		)	(1,973,390		)	266,645
Total liabilities and shareholders’ equity		$	587,656		$	1,604,546		$	2,030,640		$	98,276		$	(2,049,538	)	$	2,271,580

 

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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2007
(in thousands) (unaudited)

		Sinclair Broadcast Group, Inc.			Sinclair Television Group, Inc.			Guarantor Subsidiaries and KDSM, LLC			Non- Guarantor Subsidiaries			Eliminations			Sinclair Consolidated
Net revenue		$	—		$	—		$	164,578		$	5,078		$	(2,801	)	$	166,855
Program and production		—			354			38,426			—			(2,154		)	36,626
Selling, general and administrative		4,005			1,749			33,542			1,009			(63		)	40,242
Depreciation, amortization and other operating expenses		514			83			48,299			4,284			(521		)	52,659
Total operating expenses		4,519			2,186			120,267			5,293			(2,738		)	129,527
Operating (loss) income		(4,519		)	(2,186		)	44,311			(215		)	(63		)	37,328
Equity in earnings of subsidiaries		1,253			24,955			—			—			(26,208		)	—
Interest income		212			383			3			2			(212		)	388
Interest expense		(5,149		)	(19,124		)	(1,533		)	(1,349		)	773			(26,382		)
Other income (expense)		4,366			(14,607		)	(3,658		)	(226		)	(302		)	(14,427		)
Total other income (expense)		682			(8,393		)	(5,188		)	(1,573		)	(25,949		)	(40,421		)
Income tax benefit (provision)		1,751			12,423			(13,804		)	473			—			843
Income from discontinued operations, net of taxes		—			—			(139		)	—			—			(139		)
Net income (loss)		$	(2,086	)	$	1,844		$	25,180		$	(1,315	)	$	(26,012	)	$	(2,389	)

 

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(in thousands) (unaudited)

		Sinclair Broadcast Group, Inc.			Sinclair Television Group, Inc.			Guarantor Subsidiaries and KDSM, LLC			Non- Guarantor Subsidiaries			Eliminations			Sinclair  Consolidated
Net revenue		$	—		$	—		$	160,286		$	6,093		$	(2,912	)	$	163,467
Program and production		—			399			39,726			—			(2,016		)	38,109
Selling, general and administrative		4,077			1,938			33,308			692			(63		)	39,952
Depreciation, amortization and other operating expenses		520			568			44,844			4,866			(748		)	50,050
Total operating expenses		4,597			2,905			117,878			5,558			(2,827		)	128,111
Operating (loss) income		(4,597		)	(2,905		)	42,408			535			(85		)	35,356
Equity in earnings of subsidiaries		10,069			24,276			—			—			(34,345		)	—
Interest income		157			45			—			1			(157		)	46
Interest expense		(5,160		)	(22,561		)	(1,421		)	(1,280		)	712			(29,710		)
Other income (expense)		9,969			4,191			(5,404		)	(288		)	(523		)	7,945
Total other income (expense)		15,035			5,951			(6,825		)	(1,567		)	(34,313		)	(21,719		)
Income tax benefit (provision)		(117		)	7,432			(14,238		)	362			—			(6,561		)
Income from discontinued operations, net of taxes		—			—			1,168			—			—			1,168
Gain from sale of discontinued operations, net of taxes		—			—			1,774			—			—			1,774
Net income (loss)		$	10,321		$	10,478		$	24,287		$	(670	)	$	(34,398	)	$	10,018

 

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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007
(in thousands) (unaudited)

		Sinclair Broadcast Group, Inc.			Sinclair Television Group, Inc.			Guarantor Subsidiaries and KDSM, LLC			Non- Guarantor Subsidiaries			Eliminations			Sinclair Consolidated
NET CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES		$	(2,696	)	$	(25,923	)	$	52,611		$	(3,688	)	$	2,938		$	23,242
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of property and equipment		(7		)	(376		)	(5,918		)	(234		)	—			(6,535		)
Investments in equity and cost investees		435			—			—			—			—			435
Proceeds from sale of property		—			—			11			—			—			11
Loans to affiliates		(37		)	—			—			—			—			(37		)
Proceeds from loans to affiliates		35			—			—			—			—			35
Net cash flows (used in) from investing activities		426			(376		)	(5,907		)	(234		)	—			(6,091		)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases		—			276,500			—			—			—			276,500
Repayments of notes payable, commercial bank financing and capital leases		(45		)	(345,150		)	(37		)	—			—			(345,232		)
Proceeds from exercise of stock options		11,357			—			—			—			—			11,357
Increase (decrease) in intercompany payables		1,856			34,646			(37,253		)	4,561			(3,810		)	—
Dividends paid on Class A and Class B Common Stock		(10,624		)	—			—			—			—			(10,624		)
Repayments of notes and capital leases to affiliates		(274		)	—			(836		)	(212		)	212			(1,110		)
Net cash flows from (used in) financing activities		2,270			(34,004		)	(38,126		)	4,349			(3,598		)	(69,109		)
NET INCREASE IN CASH AND CASH EQUIVALENTS		—			(60,303		)	8,578			427			(660		)	(51,958		)
CASH AND CASH EQUIVALENTS, beginning of period		—			60,303			4,737			2,368			—			67,408
CASH AND CASH EQUIVALENTS, end of period		$	—		$	—		$	13,315		$	2,795		$	(660	)	$	15,450

 

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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(in thousands) (unaudited)

		Sinclair Broadcast Group, Inc.			Sinclair  Television Group, Inc.			Guarantor Subsidiaries and KDSM, LLC			Non- Guarantor Subsidiaries			Eliminations			Sinclair Consolidated
NET CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES		$	5,259		$	8,273		$	10,001		$	1,635		$	(1,702	)	$	23,466
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of property and equipment		(44		)	(4		)	(4,628		)	(41		)	—			(4,717		)
Payment for acquisition of television stations