PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

 

		As of June 30,			As of December 31,
		2006			2005
					(Restated - See Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	7,610		$	9,655
Accounts receivable, net of allowance for doubtful accounts of $4,540 and $4,596, respectively		127,678			127,913
Affiliate receivable		4,263			14
Current portion of program contract costs		46,983			51,528
Income taxes receivable		3,260			—
Prepaid expenses and other current assets		13,033			17,616
Deferred barter costs		3,121			2,027
Assets held for sale		—			3,678
Deferred tax assets		8,617			10,591
Total current assets		214,565			223,022
PROGRAM CONTRACT COSTS, less current portion		49,617			36,494
PROPERTY AND EQUIPMENT, net		287,854			304,355
GOODWILL, net		1,040,234			1,040,234
BROADCAST LICENSES, net		409,620			409,620
DEFINITE-LIVED INTANGIBLE ASSETS, net		217,574			224,673
OTHER ASSETS		38,545			44,907
Total assets		$	2,258,009		$	2,283,305
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	2,857		$	3,799
Income taxes payable		—			2,662
Accrued liabilities		85,968			84,623
Current portion notes payable, capital leases and commercial bank financing		33,649			33,802
Current portion of notes and capital leases payable to affiliates		1,999			4,135
Current portion of program contracts payable		67,539			88,510
Deferred barter revenues		3,464			2,501
Deferred gain on sale of broadcast assets		—			3,249
Liabilities held for sale		—			1,407
Total current liabilities		195,476			224,688
LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing, less current portion		1,358,871			1,397,649
Notes payable and capital leases to affiliates, less current portion		15,608			15,152
Program contracts payable, less current portion		87,441			65,239
Deferred tax liabilities		294,547			277,451
Other long-term liabilities		50,250			52,438
Total liabilities		2,002,193			2,032,617
MINORITY INTEREST IN CONSOLIDATED ENTITIES		823			966
SHAREHOLDERS’ EQUITY:
Class A Common Stock, $.01 par value, 500,000,000 shares authorized, 47,357,792 and 47,122,407 shares issued and outstanding, respectively		474			471
Class B Common Stock, $.01 par value, 140,000,000 shares authorized, 38,348,331 shares issued and outstanding, convertible into Class A Common Stock		383			383
Additional paid-in capital		595,213			593,259
Accumulated deficit		(341,077		)	(344,391		)
Total shareholders’ equity		254,993			249,722
Total liabilities and shareholders’ equity		$	2,258,009		$	2,283,305

 

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

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

		Three Months Ended June 30,						Six Months Ended June 30,
		2006			2005			2006			2005
					(Restated - See Note 1)						(Restated - See Note 1)
REVENUES:
Station broadcast revenues, net of agency commissions		$	163,771		$	163,117		$	311,696		$	307,545
Revenues realized from station barter arrangements		13,629			15,001			25,434			29,512
Other operating divisions’ revenues		7,692			5,515			11,429			10,436
Total revenues		185,092			183,633			348,559			347,493
OPERATING EXPENSES:
Station production expenses		37,046			39,067			75,155			76,991
Station selling, general and administrative expenses		34,574			34,373			68,720			69,150
Expenses recognized from station barter arrangements		12,503			13,884			23,328			27,289
Amortization of program contract costs and net realizable value adjustments		22,683			16,425			41,306			33,544
Other operating divisions’ expenses		7,773			5,248			11,762			10,301
Depreciation of property and equipment		12,686			13,136			24,974			26,163
Corporate general and administrative expenses		6,211			4,633			12,017			10,086
Amortization of definite-lived intangible assets and other assets		4,435			4,527			8,760			9,054
Total operating expenses		137,911			131,293			266,022			262,578
Operating income		47,181			52,340			82,537			84,915
OTHER INCOME (EXPENSE):
Interest expense and amortization of debt discount and deferred financing costs		(28,625		)	(28,866		)	(58,335		)	(57,837		)
Interest income		304			108			350			229
Gain (loss) from sale of assets		18			11			(269		)	—
Loss from extinguishment of debt		(256		)	(1,631		)	(879		)	(1,631		)
Unrealized gain from derivative instruments		26			2,827			2,907			11,726
Income (loss) from equity and cost investees		36			(1,592		)	6,135			(413		)
Gain on insurance proceeds		—			401			—			401
Other income, net		607			71			482			148
Total other expense		(27,890		)	(28,671		)	(49,609		)	(47,377		)
Income from continuing operations before income taxes		19,291			23,669			32,928			37,538
INCOME TAX PROVISION		(8,498		)	(8,320		)	(15,059		)	(13,741		)
Income from continuing operations		10,793			15,349			17,869			23,797
DISCONTINUED OPERATIONS:
(Loss) income from discontinued operations, net of related income tax (provision) benefit of ($510), ($550), $604 and ($2,070), respectively		(510		)	1,279			658			4,140
Gain from discontinued operations, net of related income tax provision of $0, $69,508, $885 and $69,508, respectively		—			128,516			1,774			128,516
NET INCOME		10,283			145,144			20,301			156,453
PREFERRED STOCK DIVIDENDS		—			(2,502		)	—			(5,004		)
EXCESS OF PREFERRED STOCK CARRYING VALUE OVER REDEMPTION VALUE		—			26,201			—			26,201
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	10,283		$	168,843		$	20,301		$	177,650
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Basic earnings per common share from continuing operations		$	0.13		$	0.46		$	0.21		$	0.52
Basic (loss) earnings per common share from discontinued operations		$	(0.01	)	$	1.52		$	0.03		$	1.56
Basic earnings per common share		$	0.12		$	1.98		$	0.24		$	2.08
Diluted earnings per common share from continuing operations		$	0.13		$	0.43		$	0.21		$	0.51
Diluted (loss) earnings per common share from discontinued operations		$	(0.01	)	$	1.31		$	0.03		$	1.44
Diluted earnings per common share		$	0.12		$	1.74		$	0.24		$	1.95
Weighted average shares outstanding		85,692			85,395			85,593			85,315
Weighted average shares and equivalent shares outstanding		85,734			99,418			85,634			92,023
Dividends declared per share		$	0.10		$	0.075		$	0.20		$	0.125

 

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 SIX MONTHS ENDED JUNE 30, 2006
(in thousands) (Unaudited)

 

		Class A Common Stock			Class B Common Stock			Additional Paid-In Capital			Accumulated Deficit			Total Shareholders’ Equity
BALANCE, December 31, 2005 (Restated – See Note 1)		$	471		$	383		$	593,259		$	(344,391	)	$	249,722
Dividends declared on Class A and Class B Common Stock		—			—			—			(16,987		)	(16,987		)
Class A Common Stock issued pursuant to stock-based compensation plans		3			—			1,954			—			1,957
Net income		—			—			—			20,301			20,301
BALANCE, June 30, 2006		$	474		$	383		$	595,213		$	(341,077	)	$	254,993

 

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)

 

		Six Months Ended June 30,
		2006			2005
					(Restated - See Note 1)
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income		$	20,301		$	156,453
Adjustments to reconcile net income to net cash flows from operating activities:
Amortization of debt discount, net of (debt premium)		889			(416		)
Depreciation of property and equipment		24,974			26,678
Recognition of deferred revenue		(2,819		)	(2,471		)
Accretion of capital leases		275			334
(Income) loss from equity and cost investees		(6,135		)	413
Loss on sale of property		269			—
Gain on sale of broadcast assets related to discontinued operations		(2,659		)	(198,205		)
Unrealized gain from derivative instruments		(2,907		)	(11,726		)
Amortization of definite-lived intangible assets and other assets		8,760			9,080
Amortization of program contract costs and net realizable value adjustments		41,306			33,910
Amortization of deferred financing costs		1,366			1,354
Stock-based compensation		1,020			676
Loss on extinguishment of debt, non-cash portion		831			1,079
Amortization of derivative instruments		269			270
Deferred tax provision related to operations		17,528			17,406
Deferred tax (benefit) provision related to discontinued operations		(1,177		)	22,672
Net effect of change in deferred barter revenues and deferred barter costs		(131		)	(156		)
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Decrease (increase) in accounts receivable, net		235			(3,360		)
Increase in affiliate receivable		(4,250		)	—
(Increase) decrease in taxes receivable		(2,431		)	624
Decrease (increase) in prepaid expenses and other current assets		4,618			(1,298		)
Decrease in other long-term assets		403			5,295
Increase in accounts payable and accrued liabilities		4,498			1,152
(Decrease) increase in income taxes payable		(772		)	44,289
Decrease in other long-term liabilities		(1,675		)	(1,123		)
Dividends and distributions from equity and cost investees		6,219			1,000
Payments on program contracts payable		(49,052		)	(55,688		)
Increase (decrease) in minority interest		38			(315		)
Net cash flows from operating activities		59,791			47,927
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of property and equipment		(9,536		)	(8,667		)
Payments for acquisition of television stations		(1,710		)	(8,250		)
Investments in equity and cost investees		(131		)	(367		)
Proceeds from the sale of assets		1,376			33
Proceeds from the sale of broadcast assets related to discontinued operations		1,400			289,419
Proceeds from insurance settlement		—			401
Loans to affiliates		(71		)	(64		)
Proceeds from loans to affiliates		69			62
Net cash flows (used in) from investing activities		(8,603		)	272,567
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases		69,000			16,500
Repayments of notes payable, commercial bank financing and capital leases		(99,403		)	(327,222		)
Proceeds from exercise of stock options		—			18
Payments for deferred financing costs		—			(1,913		)
Dividends paid on Series D Convertible Exchangeable Preferred Stock		—			(5,004		)
Dividends paid on Class A and Class B Common Stock		(16,960		)	(6,398		)
Payments for derivative terminations		(3,750		)	—
Repayments of notes and capital leases to affiliates		(2,120		)	(2,320		)
Net cash flows used in financing activities		(53,233		)	(326,339		)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(2,045		)	(5,845		)
CASH AND CASH EQUIVALENTS, beginning of period		9,655			10,491
CASH AND CASH EQUIVALENTS, end of period		$	7,610		$	4,646

 

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.  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.

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 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. We now believe 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 be treated as a redemption for accounting purposes.  Accordingly, the Company 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 be recorded as a discount on the Debentures and amortize 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 this correction on our balance sheet is shown below (in thousands) (unaudited):

		As of December 31, 2005
		As Reported			Adjustment			As Restated
Total current assets		$	223,022		$	—		$	223,022
Total long-term assets		2,062,631			(2,348		)	2,060,283
Total assets		$	2,285,653		$	(2,348	)	$	2,283,305
Total current liabilities		$	224,688		$	—		$	224,688
Notes payable, capital leases and commercial bank financing, less current portion		1,426,754			(29,105		)	1,397,649
Notes payable and capital leases to affiliates, less current portion		15,152			—			15,152
Deferred tax liabilities		278,399			(948		)	277,451
Other long-term liabilities		117,677			—			117,677
Total liabilities		2,062,670			(30,053		)	2,032,617
Minority interest in consolidated entities		966			—			966
Class A and Class B Common Stock		854			—			854
Additional paid-in capital		590,377			2,882			593,259
Accumulated deficit		(369,214		)	24,823			(344,391		)
Total shareholders’ equity		222,017			27,705			249,722
Total liabilities and shareholders’ equity		$	2,285,653		$	(2,348	)	$	2,283,305

 

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A summary of the aggregate effect of this correction on our unaudited consolidated statements of operations for the three and six months ended June 30, 2005 is shown below (in thousands, except per share data):

		Three Months Ended June 30, 2005									Six Months Ended June 30, 2005
		As Reported			Adjustment			As Restated			As Reported			Adjustment			As Restated
Total revenues		$	183,633		$	—		$	183,633		$	347,493		$	—		$	347,493
Total operating expenses		131,293			—			131,293			262,578			—			262,578
Operating income		52,340			—			52,340			84,915			—			84,915
Interest expense and amortization of debt discount and deferred financing costs		(28,742		)	(124		)	(28,866		)	(57,713		)	(124		)	(57,837		)
Other income, net		195			—			195			10,460			—			10,460
Total other expense		(28,547		)	(124		)	(28,671		)	(47,253		)	(124		)	(47,377		)
Income from continuing operations before income taxes		23,793			(124		)	23,669			37,662			(124		)	37,538
Income tax (provision) benefit		(8,448		)	128			(8,320		)	(13,869		)	128			(13,741		)
Income from continuing operations		15,345			4			15,349			23,793			4			23,797
Income and gain related to discontinued operations, net of taxes		129,795			—			129,795			132,656			—			132,656
Net income		145,140			4			145,144			156,449			4			156,453
Preferred stock dividend		(2,502		)	—			(2,502		)	(5,004		)	—			(5,004		)
Excess of preferred stock carrying value over redemption value		—			26,201			26,201			—			26,201			26,201
Net income available to common shareholders		$	142,638		$	26,205		$	168,843		$	151,445		$	26,205		$	177,650
Basic earnings per common share:
Earnings per common share from continuing operations		$	0.15		$	0.31		$	0.46		$	0.22		$	0.30		$	0.52
Earnings per common share from discontinued operations		$	1.52		$	—		$	1.52		$	1.56		$	—		$	1.56
Earnings per common share		$	1.67		$	0.31		$	1.98		$	1.78		$	0.30		$	2.08
Diluted earnings per common share:
Earnings per common share from continuing operations		$	0.15		$	0.28		$	0.43		$	0.22		$	0.29		$	0.51
Earnings (loss) per common share from discontinued operations		$	1.52		$	(0.21	)	$	1.31		$	1.56		$	(0.12	)	$	1.44
Earnings per common share		$	1.67		$	0.07		$	1.74		$	1.78		$	0.17		$	1.95
Weighted average shares outstanding		85,395			—			85,395			85,315			—			85,315
Weighted average shares and equivalent shares outstanding		85,399			14,019			99,418			85,318			6,705			92,023

 

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

 

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 six months ended June 30, 2006 and 2005.  In accordance with Emerging Issues Task Force Issue No. 87-24, Allocation of Interest to Discontinued Operations , we have allocated $0.9 million and $3.6 million of interest expense to discontinued operations for the three and six months ended June 30, 2005, respectively.  No interest expense was allocated for the three and six months ended June 30, 2006.  See Note 8. Discontinued Operations, for additional information.

Interim Financial Statements

The consolidated financial statements for the three and six months ended June 30, 2006 and 2005 are unaudited.  In the opinion of management, such financial statements have been presented on the same basis as the annual consolidated financial statements, as restated, 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, as restated, and notes thereto in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2005, which we intend to file with the Securities and Exchange Commission as soon as reasonably practicable.  The consolidated statements of operations presented in the accompanying consolidated financial statements are not necessarily representative of operations for an entire year.

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Recent Accounting Pronouncements

On January 1, 2006, we adopted Statement of Financial Accounting Standard (SFAS) No. 123R, Share-Based Payment (SFAS 123R).  SFAS 123R requires us to expense the fair value of grants of various stock-based compensation programs over the vesting period of the awards.  We elected to adopt the “Modified Prospective Application” transition method which does not result in the restatement of previously issued consolidated financial statements.  For additional information regarding our accounting under SFAS 123R, see Note 2. Stock-Based Compensation .

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes . It prescribes the minimum recognition threshold a tax position must meet before being recognized in the financial statements and also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  In addition, FIN 48 replaces income tax guidance from FASB Statement No. 5, Accounting for Contingencies.   This interpretation will be effective beginning on January 1, 2007. We are currently evaluating the effect this FIN will have on our consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows.

In June 2006, the FASB ratified the consensuses in the Emerging Issues Task Force (EITF) Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). The guidance requires that presentation of any tax assessed by a governmental authority on a gross or net basis is an accounting policy decision and should be disclosed pursuant to APB Opinion No. 22. The taxes may be directly imposed on a revenue-producing transaction between a seller and a customer and may include, but are not limited to sales, use, value added and some excise taxes.  In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The disclosure of those taxes can be done on an aggregate basis. This guidance will be effective beginning on January 1, 2007. If a company wishes to change its historical presentation for such taxes, such a change must be justified as preferable and would be subject to the requirements of FASB Statement No. 154, Accounting Changes and Error Corrections . We are currently evaluating the effect this EITF will have on our consolidated statements of operations and related disclosures.

In April 2006, FASB issued FASB Staff Position (FSP) FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R). This FSP addresses how a reporting enterprise should determine the variability to be considered in applying FIN 46(R). The variability that is considered in applying FIN 46(R) affects the determination of (a) whether the entity is a variable interest entity or VIE, (b) which interests are “variable interests” in the entity and (c) which party, if any, is the primary beneficiary of the VIE. That variability will affect any calculation of expected losses and expected residual returns if such a calculation is necessary. FSP FIN 46(R)-6 is applicable prospectively to all entities beginning the first day of the first reporting period beginning after June 15, 2006. Early application is permitted for periods for which financial statements have not yet been issued. Retrospective application to the date of the initial application of FIN 46(R) is permitted but not required. Retrospective application, if elected, must be completed no later than the end of the first annual reporting period ending after July 15, 2006. The application of this FSP is not expected to have any effect on our consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments- an Amendment of FASB Statements No. 133 (SFAS 133) and 140 (SFAS 140) . This SFAS permits fair value remeasurement for any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation in accordance with SFAS 133, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133 and requires the evaluation of interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. This statement amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The statement is effective beginning on January 1, 2007 and application of this SFAS is not expected to have a significant impact on our consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows.

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.

Network Compensation

On January 24, 2006, CBS Corporation (CBS) and Warner Bros. Entertainment (Warner Bros.) announced their intent to merge the operations of their respective networks, UPN and The WB, under a broadcasting network to be called The CW.  On August 1, 2004, we entered into an affiliation agreement with UPN (for six stations) which expires July 31, 2007.  The agreement was for the networks to produce and distribute programming in exchange for each station’s commitment to air the programming at specified times and for commercial announcement time during programming.  Under this agreement, UPN was to pay us a fixed amount as revenue for each station during the first two years, in equal installments at the beginning of each month.  No payment was due from UPN in the third year of the agreement.  The amount received from UPN had been recognized over the term of the agreement and a pro-rata portion of the revenue had been deferred to be recognized in the third year.

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On May 2, 2006, we entered into a Release and Settlement Agreement with The WB and UPN, in which we released The WB and UPN, and The WB and UPN released us, from any claims or other liabilities we or The WB or UPN may have arising out of or in connection with (a) any agreement, including any affiliation agreements entered into by us with The WB or UPN, and (b) any services previously performed by any one of the parties to the Release and Settlement Agreement for any other party to the Release and Settlement Agreement.  As a result of this agreement, we have changed the revenue recognition period from an end date of July 31, 2007 to an end date of September 30, 2006, when UPN will cease broadcasting.  For the three and six months ended June 30, 2006, we recorded UPN network compensation of $0.3 million.

Restructuring Costs

During the six months ended June 30, 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, terminated the news employees and cancelled our news-related contracts.  The total one-time terminated employee benefit costs related to this restructuring were $0.5 million and the total one-time contract cancellation costs were $0.5 million, all of which were recorded as station production expenses for the three months ended March 31, 2006.

The major components of the restructuring charges and the remaining accrual balance related to the restructuring plan as of June 30, 2006 follow (in thousands):

		Salary and Severance Costs			Contract Expenses			Other Exit Costs			Total
Initial accrual		$	524,967		$	359,094		$	101,664		$	985,725
Restructuring charges		—			3,393			171,550			174,943
Amounts utilized		(341,906		)	(6,864		)	(46,650		)	(395,420		)
Balance at March 31, 2006		$	183,061		$	355,623		$	226,564		$	765,248
Restructuring charges		—			3,432			26,704			30,136
Amounts utilized		(183,061		)	(175,479		)	(157,311		)	(515,851		)
Balance at June 30, 2006		$	—		$	183,576		$	95,957		$	279,533

 

In addition, we have and expect to incur costs through March 31, 2007 associated with the transfer of certain news broadcast assets to our other stations that continue to produce local news; these costs will be expensed in the period in which they are incurred.  We expect these costs to be minimal.

Income Taxes

Our income tax provision for all periods consists of federal and state income taxes.  The tax provision for the three and six months ended June 30, 2006 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 35.0% and can vary from period to period due to fluctuations in operating results, new or revised tax legislation and accounting pronouncements and state income taxes.  Both the second quarter and estimated annual 2006 effective rates are higher than the statutory rate due primarily to the impact of state income taxes and certain items not deductible for tax purposes, offset by the net deferred tax benefit related to a Texas law change that occurred on May 18, 2006, as discussed below.

On May 18, 2006, the Governor of the state of Texas signed into law House Bill 3.  This bill revises the existing franchise tax by changing the tax base, lowering the rate and extending coverage to all active businesses receiving the state law liability protection.  Changes made by the new tax law are effective for 2007 franchise tax reports originally due on or after January 1, 2008.  As a result, we recorded a deferred tax benefit of $1.5 million in continuing operations to reflect an adjustment to our net deferred tax liabilities stemming from this tax law change.

Reclassifications

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

2.   STOCK-BASED COMPENSATION:

On January 1, 2006, we adopted Statement of Financial Accounting Standard No. 123R, Share-Based Payment (SFAS 123R).  SFAS 123R requires us to expense the fair value of grants of various stock-based compensation programs over the vesting period of the awards.  We elected to adopt the “Modified Prospective Application” transition method, which does not result in the restatement of previously issued consolidated financial statements.  SFAS 123R also requires us to classify income tax deductions in excess of the compensation cost recognized on stock options exercised during the period as financing cash flows.

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Description of Awards

We have six types of stock-based compensation awards: compensatory stock options (options), restricted stock awards (RSAs), an employee stock purchase plan (ESPP), employer matching contributions (the Match) for participants in our 401(k) plan, stock grants to our non-employee directors and G1440 Stock Appreciation Rights.  Below is a summary of the key terms and methods of valuation of our stock-based compensation awards:

Options.  In June 1996, our Board of Directors adopted, upon approval of the shareholders by proxy, the 1996 Long-Term Incentive Plan (LTIP).  The purpose of the LTIP is to reward key individuals for making major contributions to our success and the success of our subsidiaries and to attract and retain the services of qualified and capable employees.  Options granted pursuant to the LTIP must be exercised within 10 years following the grant date.  A total of 14,000,000 shares of Class A Common Stock are reserved for awards under this plan.  As of June 30, 2006, 9,724,984 shares (including forfeited shares) were available for future grants.

On April 21, 2005, we accelerated the vesting of 390,039 stock options, which were all of our outstanding unvested options at that time.  We accelerated the vesting of these options to prevent recognizing an expense of approximately $0.8 million, before taxes, in 2006 and future periods.  The acceleration of the vesting resulted in a modification to the original options.  In accordance with FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock-Based Compensation (FIN 44), we recorded an immaterial compensation charge based on the intrinsic value of the awards (as defined by FIN 44) as measured on the modification date.  The exercise prices of these options range from $7.39 to $15.19 per share and there was 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.  We have not issued any options subsequent to accelerating the vesting.  There were no options exercised during the six months ended June 30, 2006.

Certain of our stock based compensation plans that were established in connection with our initial public offering in June 1995 expired in June 2005.  The summary of changes in outstanding stock options included in the footnotes to our consolidated financial statements in the 2005 Annual Report on Form 10-K, as amended, which we intend to file with the Securities and Exchange Commission as soon as reasonably practicable, included information related to these plans.  The following is a summary of changes in outstanding stock options:

 

		Options		Weighted-Average Exercise Price			Exercisable		Weighted-Average Exercise Price
Outstanding at end of 2005		6,198,720		$	15.69		6,198,720		$	15.69
2006 Activity:
Granted		—		—			—		—
Exercised		—		—			—		—
Forfeited		(2,764,870	)	$	15.06		—		—
Outstanding at June 30, 2006		3,433,850		$	16.20		3,433,850		$	16.20

 

We do not expect to issue options in future periods, and instead, we expect to issue RSAs, discussed below.  Therefore, the adoption of SFAS 123R did not have a material effect on our consolidated income, cash flows and basic and diluted earnings per share.

In the event the Board of Directors decides to issue options, we would be required to determine the method we would use to estimate the fair value, such as the Black-Scholes method or a lattice method.  Additionally, we would be required to estimate certain assumptions, including expected volatility and estimated forfeitures.

RSAs.  RSAs are granted to employees pursuant to the LTIP and do not have an expiration.  RSAs do have certain restrictions that lapse over three years at 25%, 25% and 50%, respectively.  During this three-year period, all RSAs have voting rights similar to any unrestricted shares and are eligible for dividends subject to our normal dividend policies.  As the restrictions lapse, the stock may be freely traded on the open market.  On April 3, 2006, we awarded 40,000 RSAs that had a fair value of $7.81 per share, which was the value of the stock on the trading date immediately prior to the grant date.  We recorded an expense of less than $0.1 million for the three months ended June 30, 2006 and we will continue to record an

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expense related to this grant using a straight-line methodology over the 3-year lapse period.  This expense will reduce our consolidated income, but it will have no effect on our consolidated cash flows.  Additionally, any RSAs for which the restrictions have lapsed will be included in total shares outstanding, which will have a dilutive effect on our basic earnings per share.  Any RSAs for which the restrictions have not lapsed will be included in total equivalent shares outstanding, based on the treasury stock method, which could have a dilutive effect on our diluted earnings per share.

ESPP.   In March 1998, the Board of Directors adopted, subject to approval of the shareholders, the 1998 Employee Stock Purchase Plan (the ESPP).  The ESPP provides our employees with an opportunity to become shareholders through a convenient arrangement for purchasing shares of Class A Common Stock.    On the first day of each payroll deduction period, each participating employee receives options to purchase a number of shares of our common stock with money that is withheld from his or her paycheck. The number of shares available to the participating employee is determined at the end of the payroll deduction period by dividing the total amount of money withheld during the payroll deduction period by the exercise price of the options (as described below). Options granted under the ESPP to employees are automatically exercised to purchase shares on the last day of the payroll deduction period unless the participating employee has, at least thirty days earlier, requested that his or her payroll contributions stop.  Any cash accumulated in an employee’s account for a period in which an employee elects not to participate is distributed to the employee.

The initial exercise price for options under the ESPP is 85% of the lesser of the fair market value of the common stock as of the first day of the payroll deduction period and as of the last day of that period. No participant can purchase more than $25,000 worth of our common stock in all payroll deduction periods ending during the same calendar year.  We value the stock options under the ESPP using the Black-Scholes option pricing model, which incorporates the following assumptions as of June 30, 2006:

 

		2006
Risk-free interest rate		5.000	%
Expected life		90 days
Expected volatility		33.378	%
Annual dividend yield		5.19	%

 

We use the Black-Scholes model as opposed to a lattice pricing model because employee exercise patterns are not relevant to this plan.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.  The expected life is based on the number of days in the quarter.  The expected volatility is based on our historical stock prices over the previous 90-day period.  The annual dividend yield is based on the annual dividend per share divided by the share price on the grant date.

The stock-based compensation expense recorded related to the ESPP for the three and six months ended June 30, 2006 was less than $0.1 million and $0.1 million, respectively, for the less than 0.1 million shares issued to employees in each period.  This expense reduced our consolidated income, but it had no effect on our consolidated cash flows.  Additionally, options issued under the ESPP are included in the total shares outstanding at the end of each period, which results in a dilutive effect on our basic and diluted earnings per share.

Match.   The Sinclair Broadcast Group, Inc. 401(k) Profit Sharing Plan and Trust (the 401(k) Plan) is available as a benefit for our eligible employees.  Contributions made to the 401(k) Plan include an employee elected salary reduction amount, company-matching contributions (the Match) and an additional discretionary amount determined each year by the Board of Directors.  The Match and any discretionary contributions may be made using our Class A Common Stock if the Board of Directors so chooses.  In general, we make the Match using our Class A Common Stock.

The value of the Match is based on the level of elective deferrals into the 401(k) plan.  The amount of shares of our Class A Common Stock used to make the Match is determined using the closing price on or about March 1 st of each year for the previous year’s Match.  The Match is equal to a maximum of 50% of the first 4% of elective deferrals by eligible employees.  On March 7, 2006, we made the 2005 Match of $1.5 million.  Additionally, we recorded an expense related to the 2006 Match of $0.4 million and $0.8 million for the three and six months ended June 30, 2006, respectively, which will be made using our Class A Common Stock in March of 2007.  There has been no change in the method of accounting for the Match as a result of adopting SFAS 123R.  Therefore, there will be no changes in the effect of the Match on our consolidated income, cash flows and basic and diluted earnings per share in future periods as compared to previous periods.

Stock Grants to Non-Employee Directors.   In addition to their base compensation, on the date of each of our annual meetings of shareholders, each non-employee director receives a grant of 2,000 shares of Class A Common Stock pursuant to the LTIP.  On May 11, 2006, we granted 10,000 shares that had a fair value of $8.09 per share, which was the closing value of the stock on the date of grant.  We recorded an expense of $80,900 on the date of grant and this expense reduced our

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consolidated income, but it had no effect on our consolidated cash flows.  Additionally, these shares are included in the total shares outstanding, which results in a dilutive effect on our basic and diluted earnings per share.

G1440 Stock Appreciation Rights (SAR’s).  On January 1, 2005 the board of directors of G1440 Holdings Inc. (G1440), a subsidiary of Sinclair Broadcast Group, Inc., pursuant to the provisions of its 2000 Long Term Incentive Plan (the Plan), approved a certain number of SAR’s to be awarded to its employees.  Only G1440 employees are eligible to participate in this Plan.  The SAR’s were created to attract and retain capable officers and key management employees and to provide employees with incentives to promote the best interest of G1440.  Upon exercise, vested SAR’s holders are entitled to receive from G1440 the greater of the most recently determined valuation share price or the pre-established share price set by the board of directors on the effective date at $0.09 per share.  The SAR’s vest 20% on the second, fourth, sixth, eighth and tenth anniversaries of the effective date.  The holder can exercise a portion of or all of the vested SAR’s between August 15 th  and September 15 th  of each year beginning with the first vesting period which occurs in 2006.  The expense related to these SAR’s was less than $0.1 million for each of the three months ended June 30, 2006 and 2005, respectively and $0.1 million and less than $0.1 million for the six months ended June 30, 2006 and 2005, respectively.  We will continue to record an expense in other operating divisions’ expenses related to this grant using a straight-line methodology over the 10-year vesting period.  This expense will reduce our consolidated income but it will have no effect on our consolidated cash flows.

Compensation Summary

A brief description of the compensation recorded in the consolidated statements of operations is as follows for each type of stock-based compensation award:

Options.  For the three and six months ended June 30, 2006, we did not record any expense related to our outstanding options.  All options were previously vested, as disclosed above, and no options were awarded during the period.  See 2005 Pro-Forma Compensation below for our accounting treatment during the three and six months ended June 30, 2005.

RSAs.  For the three and six months ended June 30, 2006, we recorded less than $0.1 million of compensation expense related to RSAs.

ESPP.  For the three and six months ended June 30, 2006, we recorded less than $0.1 million and $0.1 million, respectively, in compensation expenses related to our ESPP.  See 2005 Pro-Forma Compensation below for our accounting treatment during the three and six months ended June 30, 2005.

Match.  For each of the three months ended June 30, 2006 and 2005, we recorded $0.4 million and for the six months ended June 30, 2006 and 2005, we recorded $0.8 million and $0.7 million, respectively, in compensation expenses related to our Match.

Stock Grants to Non-Employee Directors.  For the three and six months ended June 30, 2006, we recorded less than $0.1 million in compensation expenses related to stock grants to non-employee directors.

G1440 SARs.  For each of the three months ended June 30, 2006 and 2005, we recorded less than $0.1 million in compensation expenses and for the six months ended June 30, 2006 and 2005, we recorded $0.1 million and less than $0.1 million, respectively, in compensation expenses related to stock appreciation rights for employees of G1440, one of our majority-owned subsidiaries.

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