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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, 2014

 

OR

 

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

 

For the transition period from                 to               .

 

COMMISSION FILE NUMBER: 000-26076

 

SINCLAIR BROADCAST GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

10706 Beaver Dam Road

Hunt Valley, Maryland 21030

(Address of principal executive office, zip code)

 

(410) 568-1500

(Registrant’s telephone number, including area code)

 

None

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

 

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

 

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

 

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

 

 

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

 

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

 

Title of each class		Number of shares outstanding as of April 30, 2014
Class A Common Stock		71,366,645
Class B Common Stock		26,028,357

 

 

 

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SINCLAIR BROADCAST GROUP, INC.

 

FORM 10-Q

FOR THE QUARTER ENDED March 31, 2014

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION		3
ITEM 1.	FINANCIAL STATEMENTS	3
	CONSOLIDATED BALANCE SHEETS	3
	CONSOLIDATED STATEMENTS OF OPERATIONS	4
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	5
	CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)	6
	CONSOLIDATED STATEMENTS OF CASH FLOWS	8
	NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	9
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34
ITEM 4.	CONTROLS AND PROCEDURES	34
PART II. OTHER INFORMATION		35
ITEM 1.	LEGAL PROCEEDINGS	35
ITEM 1A.	RISK FACTORS	35
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	36
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	36
ITEM 4.	MINE SAFETY DISCLOSURES	36
ITEM 5.	OTHER INFORMATION	36
ITEM 6.	EXHIBITS	37
SIGNATURE		38
EXHIBIT INDEX		39

 

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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) (Unaudited)

 

		As of March 31, 2014			As of December 31, 2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	317,811		$	280,104
Accounts receivable, net of allowance for doubtful accounts of $3,016 and $3,379, respectively		285,260			308,974
Affiliate receivable		206			182
Current portion of program contract costs		53,475			74,324
Prepaid expenses and other current assets		25,136			30,599
Deferred barter costs		5,958			3,688
Assets held for sale		97,909			—
Total current assets		785,755			697,871
PROGRAM CONTRACT COSTS, less current portion		20,264			24,708
PROPERTY AND EQUIPMENT, net		574,091			596,071
RESTRICTED CASH		12,426			11,747
GOODWILL		1,336,748			1,380,082
BROADCAST LICENSES		97,446			101,029
DEFINITE-LIVED INTANGIBLE ASSETS, net		1,077,769			1,127,755
OTHER ASSETS		205,614			208,209
Total assets (a)		$	4,110,113		$	4,147,472
LIABILITIES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable		$	8,303		$	13,989
Accrued liabilities		225,033			182,185
Income taxes payable		19,118			2,504
Current portion of notes payable, capital leases and commercial bank financing		52,696			46,346
Current portion of notes and capital leases payable to affiliates		2,466			2,367
Current portion of program contracts payable		69,586			90,933
Deferred barter revenues		5,864			3,319
Liabilities held for sale		10,335			—
Deferred tax liabilities		4,480			1,738
Total current liabilities		397,881			343,381
LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing, less current portion		2,954,108			2,966,402
Notes payable and capital leases to affiliates, less current portion		18,290			18,925
Program contracts payable, less current portion		29,710			34,681
Deferred tax liabilities		300,938			311,041
Other long-term liabilities		66,819			67,338
Total liabilities (a)		3,767,746			3,741,768
COMMITMENTS AND CONTINGENCIES (See Note 3 )
EQUITY:
SINCLAIR BROADCAST GROUP SHAREHOLDERS’ EQUITY:
Class A Common Stock, $.01 par value, 500,000,000 shares authorized, 71,341,916 and 74,145,569 shares issued and outstanding, respectively		713			741
Class B Common Stock, $.01 par value, 140,000,000 shares authorized, 26,028,357 and 26,028,357 shares issued and outstanding, respectively, convertible into Class A Common Stock		260			260
Additional paid-in capital		1,018,869			1,094,918
Accumulated deficit		(684,534		)	(696,996		)
Accumulated other comprehensive loss		(2,514		)	(2,553		)
Total Sinclair Broadcast Group shareholders’ equity		332,794			396,370
Noncontrolling interests		9,573			9,334
Total equity		342,367			405,704
Total liabilities and equity		$	4,110,113		$	4,147,472

 

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

 

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(a)          Our consolidated total assets as of March 31, 2014 and December 31, 2013 include total assets of variable interest entities (VIEs) of $192.4 million and $194.1 million, respectively, which can only be used to settle the obligations of the VIEs.  Our consolidated total liabilities as of March 31, 2014 and December 31, 2013 include total liabilities of the VIEs of $26.0 million and $31.6 million, respectively, for which the creditors of the VIEs have no recourse to us.  See Note 1. Summary of Significant Accounting Policies .

 

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SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

		Three Months Ended March 31,
		2014			2013
REVENUES:
Station broadcast revenues, net of agency commissions		$	373,881		$	252,925
Revenues realized from station barter arrangements		24,025			18,230
Other operating divisions revenues		14,742			11,463
Total revenues		412,648			282,618
OPERATING EXPENSES:
Station production expenses		127,039			80,433
Station selling, general and administrative expenses		81,925			51,938
Expenses recognized from station barter arrangements		21,477			16,014
Amortization of program contract costs and net realizable value adjustments		23,941			18,861
Other operating divisions expenses		12,325			9,869
Depreciation of property and equipment		24,378			14,595
Corporate general and administrative expenses		15,835			11,250
Amortization of definite-lived intangible assets		24,728			16,002
Total operating expenses		331,648			218,962
Operating income		81,000			63,656
OTHER INCOME (EXPENSE):
Interest expense and amortization of debt discount and deferred financing costs		(39,538		)	(37,697		)
Income (loss) from equity and cost method investments		98			(1,052		)
Other income, net		917			457
Total other expense, net		(38,523		)	(38,292		)
Income from continuing operations before income taxes		42,477			25,364
INCOME TAX PROVISION		(14,820		)	(8,849		)
Income from continuing operations		27,657			16,515
DISCONTINUED OPERATIONS:
Income from discontinued operations, includes income tax provision of $0 and $292, respectively		—			355
NET INCOME		27,657			16,870
Net (income) loss attributable to the noncontrolling interests		(499		)	127
NET INCOME ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP		$	27,158		$	16,997
Dividends declared per share		$	0.15		$	0.15
BASIC AND DILUTED EARNINGS PER COMMON SHARE ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP:
Basic earnings per share from continuing operations		$	0.27		$	0.20
Basic earnings per share		$	0.27		$	0.21
Diluted earnings per share from continuing operation		$	0.27		$	0.20
Diluted earnings per share		$	0.27		$	0.21
Weighted average common shares outstanding		98,824			81,191
Weighted average common and common equivalent shares outstanding		99,502			82,064
AMOUNTS ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP COMMON SHAREHOLDERS:
Income from continuing operations, net of tax		$	27,158		$	16,642
Income from discontinued operations, net of tax		—			355
Net income		$	27,158		$	16,997

 

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

 

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SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) (Unaudited)

 

		Three months ended March 31,
		2014			2013
Net income		$	27,657		$	16,870
Amortization of net periodic pension benefit costs, net of taxes		(86		)	(39		)
Unrealized gain on investments, net of taxes		125			—
Comprehensive income		27,696			16,831
Comprehensive (income) loss attributable to the noncontrolling interests		(499		)	127
Comprehensive income attributable to Sinclair Broadcast Group		$	27,197		$	16,958

 

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

 

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SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)

(In thousands) (Unaudited)

 

		Sinclair Broadcast Group Shareholders
		Class A Common Stock					Class B Common Stock					Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Noncontrolling Interests			Total Equity (Deficit)
		Shares		Values			Shares		Values
BALANCE, December 31, 2012		52,332,012		$	523		28,933,859		$	289		$	600,928		$	(713,697	)	$	(4,993	)	$	16,897		$	(100,053	)
Dividends declared and paid on Class A and Class B Common Stock		—		—			—		—			—			(12,048		)	—			—			(12,048		)
Class A Common Stock issued pursuant to employee benefit plans		386,380		4			—		—			5,021			—			—			—			5,025
Class B Common Stock converted into Class A Common Stock		87,600		1			(87,600	)	(1		)	—			—			—			—			—
Class A Common Stock issued upon exercise of stock options		73,000		1			—		—			853			—			—			—			854
Class A Common Stock sold by variable interest entity		—		—			—		—			1,045			—			—			—			1,045
Tax benefit on share based awards		—		—			—		—			388			—			—			—			388
Distributions to noncontrolling interests		—		—			—		—			—			—			—			(9,329		)	(9,329		)
Other comprehensive income		—		—			—		—			—			—			(39		)	—			(39		)
Net income		—		—			—		—			—			16,997			—			(127		)	16,870
BALANCE, March 31, 2013		52,878,992		$	529		28,846,259		$	288		$	608,235		$	(708,748	)	$	(5,032	)	$	7,441		$	(97,287	)

 

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

 

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SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)

 (In thousands) (Unaudited)

 

		Sinclair Broadcast Group Shareholders
		Class A Common Stock					Class B Common Stock					Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Noncontrolling Interests			Total Equity (Deficit)
		Shares		Values			Shares		Values
BALANCE, December 31, 2013		74,145,569		$	741		26,028,357		$	260		$	1,094,918		$	(696,996	)	$	(2,553	)	$	9,334		$	405,704
Dividends declared and paid on Class A and Class B Common Stock		—		—			—		—			—			(14,696		)	—			—			(14,696		)
Repurchases of Class A Common Stock		(2,910,106	)	(29		)	—		—			(82,342		)	—			—			—			(82,371		)
Class A Common Stock issued pursuant to employee benefit plans		106,453		1			—		—			4,951			—			—			—			4,952
Tax benefit on share based awards		—		—			—		—			1,342			—			—			—			1,342
Distributions to noncontrolling interests		—		—			—		—			—			—			—			(260		)	(260		)
Other comprehensive income		—		—			—		—			—			—			39			—			39
Net income		—		—			—		—			—			27,158			—			499			27,657
BALANCE, March 31, 2014		71,341,916		$	713		26,028,357		$	260		$	1,018,869		$	(684,534	)	$	(2,514	)	$	9,573		$	342,367

 

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,
		2014			2013
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income		$	27,657		$	16,870
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation of property and equipment		24,378			14,659
Amortization of definite-lived intangible and other assets		24,728			16,002
Amortization of program contract costs and net realizable value adjustments		23,941			19,025
Deferred tax benefit		(7,361		)	(847		)
Change in assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable, net		17,498			(13,858		)
Increase in prepaid expenses and other current assets		(11,517		)	(3,961		)
Increase in accounts payable and accrued liabilities		37,997			13,689
Increase in income taxes payable		16,626			441
Payments on program contracts payable		(23,966		)	(22,363		)
Other, net		6,279			10,045
Net cash flows from operating activities		136,260			49,702
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of property and equipment		(11,907		)	(7,482		)
Purchase of alarm monitoring contracts		(4,323		)	(1,924		)
Proceeds from sale of broadcast assets		—			14,312
Increase in restricted cash		(679		)	(24,945		)
Distributions from equity and cost method investees		739			2,228
Investments in equity and cost method investees		(2,154		)	(1,758		)
Proceeds from termination of life insurance policies		17,042			—
Proceeds from the sale of real estate investment		—			5,516
Other, net		(684		)	(889		)
Net cash flows used in investing activities		(1,966		)	(14,942		)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases		5,885			101,128
Repayments of notes payable, commercial bank financing and capital leases		(6,396		)	(112,623		)
Dividends paid on Class A and Class B Common Stock		(14,696		)	(12,048		)
Repurchase of outstanding Class A Common Stock		(82,371		)	—
Noncontrolling interests distributions		(260		)	(9,329		)
Repayments of notes and capital leases to affiliates		(565		)	(414		)
Other, net		1,816			1,486
Net cash flows used in financing activities		(96,587		)	(31,800		)
NET INCREASE IN CASH AND CASH EQUIVALENTS		37,707			2,960
CASH AND CASH EQUIVALENTS, beginning of period		280,104			22,865
CASH AND CASH EQUIVALENTS, end of period		$	317,811		$	25,825

 

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SINCLAIR BROADCAST GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Principles of Consolidation

 

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

 

Discontinued Operations

 

In accordance with Financial Accounting Standards Board’s (FASB) guidance on reporting assets held for sale, we reported the financial position and results of operations of our stations in Lansing, Michigan (WLAJ-TV) and Providence, Rhode Island (WLWC-TV), as assets and liabilities held for sale in the accompanying consolidated balance sheets and discontinued operations 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 WLAJ-TV, which was sold effective March 1, 2013 for $14.4 million, and WLWC-TV, which was sold effective April 1, 2013 for $13.8 million, are not included in our consolidated results of operations from continuing operations for the three months ending March 31, 2013. Total revenues for WLAJ-TV and WLWC-TV, which are included in discontinued operations for the three months ending March 31, 2013, were $0.6 million and $1.6 million, respectively.  Total income before taxes for WLAJ-TV and WLWC-TV, which are included in discontinued operations for the three months ending March 31, 2013 are $0.2 million and $0.4 million, respectively.  The resulting gain on the sale of these stations in 2013 was negligible.  Basic and diluted earnings per share from discontinued operations was less than $0.01 per share for the quarter ended March 31, 2013.

 

Assets Held of Sale

 

As discussed in Note 3. Commitments and Contingencies - Pending Acquisitions , we expect to sell the license and certain related assets of our stations in Birmingham, AL - WABM (MNT), Harrisburg/Lancaster/Lebanon/York, PA - WHP (CBS), Charleston, SC - WMMP (MNT) and assets related to our LMAs to provide services to Harrisburg/Lancaster/Lebanon/York, PA — WLYH (CW) and Charleston, SC — WTAT (FOX).

 

In accordance with Financial Accounting Standards Board’s (FASB) guidance on reporting assets held for sale, we reported our assets and liabilities related to WABM, WHP, WMMP, WLYH, and WTAT as held for sale in the accompanying consolidated balance sheet as of March 31, 2014.  We expect the sale of the stations will occur in the third quarter of 2014.  The results of operations of these stations are included within the results from continuing operations as the criteria for classification as discontinued operations was not met.

 

As of March 31, 2014, the major classes of assets and liabilities of the group reported as held for sale and included in other current assets and other current liabilities on the accompanying condensed consolidated balance sheet are shown below:

 

		March 31, 2014
Assets:
Accounts receivable		$	5,701
Program contract costs		1,902
Other current assets		302
Property and equipment		11,798
Goodwill		42,153
Broadcast licenses		3,583
Definite-lived intangible assets		32,470
Assets held for sale		$	97,909
Liabilities:
Accounts payable and accrued liabilities		$	1,272
Program contracts payable		2,912
Capital leases payable		5,640
Other liabilities		511
Liabilities held for sale		$	10,335

 

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Interim Financial Statements

 

The consolidated financial statements for the three months ended March 31, 2014 and 2013 are unaudited.  In the opinion of management, such financial statements have been presented on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income, consolidated statement of equity (deficit) and consolidated statements of cash flows for these periods as adjusted for the adoption of recent accounting pronouncements discussed below.

 

As permitted under the applicable rules and regulations of the Securities and Exchange Commission (SEC), the consolidated financial statements do not include all disclosures normally included with audited consolidated financial statements and, accordingly, should be read together with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC.  The consolidated statements of operations presented in the accompanying consolidated financial statements are not necessarily representative of operations for an entire year.

 

Variable Interest Entities

 

In determining whether we are the primary beneficiary of a VIE for financial reporting purposes, we consider whether we have the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and whether we have the obligation to absorb losses or the right to receive returns that would be significant to the VIE.  We consolidate VIEs when we are the primary beneficiary.  The assets of each of our consolidated VIEs can only be used to settle the obligations of the VIE.  All the liabilities are non-recourse to us except for certain debt of VIEs which we guarantee.

 

We have entered into LMAs to provide programming, sales and managerial services for seven television stations of Cunningham Broadcasting Company (Cunningham), the license owner of these television stations as of December 31, 2013.  We pay LMA fees to Cunningham and also reimburse all operating expenses.  We also have an acquisition agreement in which we have a purchase option to buy the license assets of these television stations which includes the FCC license and certain other assets used to operate the station (License Assets).  Our applications to acquire these FCC license related assets are pending FCC approval.  We also perform sales and other non-programming support services to two other stations owned by Cunningham (acquired in November 2013) pursuant to joint sales agreements (JSAs) and shared services agreements (SSAs).  We have purchase options to acquire the license assets of these stations.  We own the majority of the non-license assets of these nine Cunningham stations and we have guaranteed the debt of Cunningham.  We have determined that Cunningham and these nine stations are VIEs and that based on the terms of the agreements, the significance of our investment in the stations and our guarantee of the debt of Cunningham, we are the primary beneficiary of the variable interests because, subject to the ultimate control of the licensees, we have the power to direct the activities which significantly impact the economic performance of the VIEs through the services we provide pursuant to the LMAs, and other outsourcing agreements, and we absorb losses and returns that would be considered significant to Cunningham.  See Note 5. Related Person Transactions for more information on our arrangements with Cunningham.  The net revenues of these stations which we consolidate were $27.8 million and $24.6 million for the three months ended March 31, 2014 and 2013, respectively.  The fees paid between us and Cunningham pursuant to these arrangements are eliminated in consolidation.  See Changes in the Rules of Television Ownership and Joint Sale Agreements in Note 3. Commitment and Contingencies for discussion of recent changes in FCC rules related to JSAs.

 

We have certain outsourcing agreements, including certain JSAs and SSAs, with certain other license owners under which we provide certain non-programming related sales, operational and administrative services.  The terms of the agreements vary, but generally have initial terms of over five years with several optional renewal terms.  We own the majority of the non-license assets of these stations and in certain cases have guaranteed the debt of licensee.  We also have purchase options to buy the assets of the licensees.  We have determined that these licensees (18 and 10 licenses as of March 31, 2014 and 2013, respectively) are VIEs, and, based on the terms of the agreements and the significance of our investment in the stations, we are the primary beneficiary of the variable interests because, subject to the ultimate control of the licensees, we have the power to direct the activities which significantly impact the economic performance of the VIE through the sales and managerial services we provide and because we absorb losses and returns that would be considered significant to the VIEs.  The net revenues of these stations which we consolidate were $38.7 million and $24.2 million for the three months ended March 31, 2014 and 2013, respectively.  The fees paid between us and other license owners pursuant to these arrangements are eliminated in consolidation.  See Changes in the Rules of Television Ownership and Joint Sale Agreements in Note 3. Commitment and Contingencies for discussion of recent changes in FCC rules related to JSAs.

 

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

 

		March 31, 2014			December 31, 2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	7,401		$	4,916
Accounts receivable		17,833			18,468
Current portion of program contract costs		8,111			10,725
Prepaid expenses and other current assets		467			247
Assets held for sale		3,944			—
Total current assets		37,756			34,356
PROGRAM CONTRACT COSTS, less current portion		4,883			5,075
PROPERTY AND EQUIPMENT, net		10,579			11,081
GOODWILL		6,357			6,357
BROADCAST LICENSES		14,828			16,768
DEFINITE-LIVED INTANGIBLE ASSETS, net		93,975			97,496
OTHER ASSETS		23,988			22,935
Total assets		$	192,366		$	194,068
LIABILITIES
CURRENT LIABILITIES:
Accounts payable		$	—		$	86
Accrued liabilities		1,990			2,536
Current portion of notes payable, capital leases and commercial bank financing		5,731			5,731
Current portion of program contracts payable		8,103			11,552
Total current liabilities		15,824			19,905
LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing, less current portion		48,392			49,850
Program contracts payable, less current portion		5,326			6,597
Long term liabilities		10,563			10,838
Total liabilities		$	80,105		$	87,190

 

The amounts above represent the consolidated assets and liabilities of the VIEs described above, for which we are the primary beneficiary, and have been aggregated as they all relate to our broadcast business.  Excluded from the amounts above are payments made to Cunningham under the LMAs which are treated as a prepayment of the purchase price of the stations and capital leases between us and Cunningham which are eliminated in consolidation.  The total payments made under these LMAs as of March 31, 2014 and December 31, 2013, which are excluded from liabilities above, were $33.4 million and $32.4 million, respectively.  The total capital lease liabilities excluded from above were $11.2 million as of March 31, 2014 and December 31, 2013, respectively.  Also excluded from the amounts above are liabilities associated with the certain outsourcing agreements and purchase options with certain VIEs totaling $58.9 million and $59.9 million as of March 31, 2014 and December 31, 2013, respectively, as these amounts are eliminated in consolidation.  The risk and reward characteristics of the VIEs are similar.

 

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

 

The carrying amounts of our investments in these VIEs for which we are not the primary beneficiary as of March 31, 2014 and December 31, 2013 was $25.1 million and $26.7 million, respectively, which are included in other assets in the consolidated balance sheets.  Our maximum exposure is equal to the carrying value of our investments.  The income and loss related to these investments are recorded in income from equity and cost method investments in the consolidated statement of operations.  We recorded income of $0.2 million and $0.4 million in the three months ended March 31, 2014 and 2013, respectively.

 

Recent Accounting Pronouncements

 

In July 2013, the FASB issued new guidance requiring new disclosure of unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If a company does not have: (i) a net operating loss carryforward; (ii) a similar tax loss; or (iii) a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The authoritative guidance is effective for fiscal years and the interim periods within those fiscal years beginning on or after December 15, 2013 and should be applied on a prospective basis. This guidance does not have a material impact on our financial statements.

 

In April 2014, the FASB issued new guidance that changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of and represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. The revised guidance will become effective for annual fiscal periods beginning after December 15, 2014.  Under the revised guidance, we expect that it will be less likely for any future sales of assets, asset groups, or stations to be considered discontinued operations because such sales would need to represent a strategic shift and

 

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have a major effect on our future operations.  Historically, under the previous guidance, sales of minor components of our business were required to be classified as discontinued operations.

 

Use of Estimates

 

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

 

Restricted Cash

 

During 2013, we entered into certain definitive agreements to purchase the assets of pending acquisitions, which required certain deposits to be made into escrow accounts. As of March 31, 2014 and December 31, 2013, we held $12.4 million and $11.4 million, respectively, in restricted cash classified as noncurrent related to the amounts held in escrow for these acquisitions.

 

Revenue Recognition

 

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

 

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

 

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

 

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

 

Share Repurchase Program

 

On February 6, 2008, the Board of Directors renewed a $150.0 million share repurchase program. On March 20, 2014, the Board of Directors authorized an additional $150.0 million share repurchase authorization. There is no expiration date and currently, management has no plans to terminate this program. For the three months ended March 31, 2014, we have purchased approximately 2.9 million shares for $82.4 million. As of March 31, 2014, the total remaining authorization was $185.1 million.

 

Income Taxes

 

Our income tax provision for all periods consists of federal and state income taxes.  The tax provision for the three months ended March 31, 2014 and 2013 is based on the estimated effective tax rate applicable for the full year after taking into account discrete tax items and the effects of the noncontrolling interests. We provide a valuation allowance for deferred tax assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized.  In evaluating our ability to realize net deferred tax assets, we consider all available evidence, both positive and negative, including our past operating results, tax planning strategies and forecasts of future taxable income.  In considering these sources of taxable income, we must make certain judgments that are based on the plans and estimates used to manage our underlying businesses on a long-term basis.  A valuation allowance has been provided for deferred tax assets related to a substantial portion of our available state net operating loss (NOL) carryforwards, based on past operating results, expected timing of the reversals of existing temporary book/tax basis differences, alternative tax strategies and projected future taxable income.

 

Our effective income tax rate for the three months ended March 31, 2014 and 2013 approximated the statutory rate.

 

We believe it is reasonably possible that our liability for unrecognized tax benefits related to continuing operations could be reduced by up to $10.5 million, in the next twelve months, as a result of expected statute of limitations expirations, the application of limits under available state administrative practice exceptions, and the resolution of examination issues and settlements with federal and certain state tax authorities.

 

Reclassifications

 

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

 

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2.               ACQUISITIONS

 

Fisher Communications

 

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

 

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

 

Cash		$	13,531
Accounts receivable		29,962
Prepaid expenses and other current assets		19,337
Program contract costs		10,968
Property and equipment		48,616
Broadcast licenses		11,058
Definite-lived intangible assets		155,073
Other assets		8,348
Assets held for sale		6,339
Accounts payable and accrued liabilities		(20,384		)
Program contracts payable		(10,977		)
Deferred tax liability		(51,024		)
Other long-term liabilities		(22,127		)
Fair value of identifiable net assets acquired		198,720
Goodwill		174,476
Total		$	373,196

 

The preliminary allocation presented above is based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches.  In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.  The amount allocated to definite-lived intangible assets represents the estimated fair values of network affiliations of $100.6 million, the decaying advertiser base of $15.0 million, and other intangible assets of $39.5 million.  These intangible assets will be amortized over the estimated remaining useful lives of 15 years for network affiliations, 10 years for the decaying advertiser base and a weighted average life of 15 years for the other intangible assets.  Acquired property and equipment will be depreciated on a straight-line basis over the respective estimated remaining useful lives.  Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and noncontractual relationships, as well as expected future synergies.  We expect that goodwill deductible for tax purposes will be approximately $11.1 million.  The initial purchase price allocation is based upon all information available to us at the present time and is subject to change, and such changes could be material.  Certain measurement period adjustments have been made since the initial allocation in the third quarter of 2013, which were not material to our consolidated financial statements.

 

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Net broadcast revenues and operating income of the Fisher stations included in our consolidated statements of operations, were $39.1 million and $0.5 million for the three months ended March 31, 2014.

Barrington

 

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

 

Concurrent with the Barrington acquisition, due to FCC conflict ownership rules, we sold our station, WSYT (FOX), and assigned its LMA with WNYS-TV (MNT), in Syracuse, NY to a third party for $15 million, and recognized a loss on sale of approximately $3.3 million.  We also sold our station, WYZZ (FOX) in Peoria, IL, which currently receives non-programming related sales, operational and administrative services from Nexstar Broadcasting pursuant to certain outsourcing agreements, to Cunningham for $22.0 million. Although we have no continuing involvement in the operations of this station, because Cunningham is a consolidated VIE and we have a purchase plan option to acquire these assets from Cunningham, the assets of WYZZ were not derecognized and the transaction was accounted for as a transaction between parties under common control.  Thus no gain or loss has been recognized in the consolidated statement of operations for sale of WYZZ.

 

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

 

Prepaid expenses and other current assets		$	681
Program contract costs		3,813
Property and equipment		67,519
Broadcast licenses		719
Definite-lived intangible assets		220,535
Accounts payable and accrued liabilities		(2,725		)
Program contracts payable		(3,813		)
Other long-term liabilities		(65		)
Fair value of identifiable net assets acquired		286,664
Goodwill		81,022
Total		$	367,686

 

The preliminary allocation presented above is based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches.  In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.  The amount allocated to definite-lived intangible assets represents the estimated fair values of network affiliations of $99.3 million, the decaying advertiser base of $43.8 million, and other intangible assets of $77.4 million.  These intangible assets will be amortized over the estimated remaining useful lives of 15 years for network affiliations, 10 years for the decaying advertiser base and a weighted average life of 14 years for the other intangible assets.  Acquired property and equipment will be depreciated on a straight-line basis over the respective estimated remaining useful lives.  Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and noncontractual relationships, as well as expected future synergies.  We expect that goodwill will be deductible for tax purposes.  The initial purchase price allocation is based upon all information available to us at the present time and is subject to change, and such changes could be material.

 

Net broadcast revenues and operating income of the Barrington stations included in our consolidated statements of operations, were $39.1 million and $10.2 million for the three months ended March 31, 2014.

 

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Pro Forma Information

 

The following table sets forth unaudited pro forma results of continuing operations for the three months ended March 31, 2013, assuming that the acquisitions of the Fisher and Barrington stations discussed above, along with transactions necessary to finance the acquisitions, occurred at the beginning of the annual period presented (in thousands, except per share data):

 

		(Unaudited)
		2013
Total Revenues		$	351,105
Net Income		10,843
Net Income attributable to Sinclair Broadcast Group		10,970
Basic and diluted earnings per share attributable to Sinclair Broadcast Group		$	0.13

 

This pro forma financial information is based on historical results of operations, adjusted for the allocation of the purchase price and other acquisition accounting adjustments, and is not indicative of what our results would have been had we operated the businesses since the beginning of the annual period presented because the pro forma results do not reflect expected synergies.  The pro forma adjustments reflect depreciation expense, amortization of intangibles and amortization of program contract costs related to the fair value adjustments of the assets acquired, additional interest expense related to the financing of the transactions, exclusion of nonrecurring financing and transaction related costs, alignment of accounting policies and the related tax effects of the adjustments. Depreciation and amortization expense are higher than amounts recorded in the historical financial statements of the acquirees due to the fair value adjustments recorded for long-lived tangibles and intangible assets in purchase accounting. The pro forma revenues exclude the revenues of WLAJ-TV and WLWC-TV which are classified as discontinued operations in the consolidated statements of operations.

 

Other Acquisitions

 

In addition to the Fisher and Barrington acquisitions, we acquired nineteen television stations during the year ended December 31, 2013 in ten markets, of which five stations in four of the ten markets were acquired from Cox Media Group in May 2013. Additionally, ten of the nineteen stations were acquired in four markets from TTBG LLC (TTBG) during September 2013 and October 2013. The initial purchase price allocated includes $272.7 million paid for certain broadcast assets of these stations, working capital of $9.5 million, and $0.7 million paid by certain VIEs for the license assets of certain of these stations owned by VIEs that we consolidate.  The purchase price allocations are preliminary pending a final determination of the fair values of the assets and liabilities. The allocated fair value of acquired assets and assumed liabilities is summarized as follows (in thousands):

 

Accounts receivable		$	8,226
Prepaid expenses and other current assets		5,217
Program contract costs		6,182
Property and equipment		54,148
Deferred tax asset		3,888
Broadcast licenses		3,736
Definite-lived intangible assets		147,191
Accrued liabilities		(3,926		)
Program contracts payable		(6,331		)
Other long term liabilities		(10,300		)
Fair value of identifiable net assets acquired		208,031
Goodwill		74,847
Total		$	282,878

 

The initial purchase price allocations are based upon all information available to us at the present time and is subject to change.  Certain measurement period adjustments have been made since the initial allocation in 2013, which were not material to our consolidated financial statements.  The definite-lived intangible assets in the table above, will be amortized over the remaining useful lives of 15 years for network affiliations, 10 years for decaying advertiser base, and a weighted average of 14 years for the other intangible assets. In conjunction with these acquisitions, for the years ended December 31, 2013, we incurred transaction costs of approximately $0.6 million, which are reported in general and administrative expenses in the accompanying consolidated statements of operations for the years ended December 31, 2013.  Net broadcast revenues and operating income for the three months ended March 31, 2014 related to stations acquired in 2013 were $30.8 million and $4.0 million.

 

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3.               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 stages and no material 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.

 

Various parties have filed petitions to deny our applications or our LMA partners’ applications for the following stations’ license renewals: WXLV-TV, Winston-Salem, North Carolina; WMYV-TV, Greensboro, North Carolina; WLFL-TV, Raleigh / Durham, North Carolina; WRDC-TV, Raleigh / Durham, North Carolina; WLOS-TV, Asheville, North Carolina, WMMP-TV, Charleston, South Carolina; WTAT-TV, Charleston, South Carolina; WMYA-TV, Anderson, South Carolina; WICS-TV Springfield, Illinois; WBFF-TV, Baltimore, Maryland; KGAN-TV, Cedar Rapids, Iowa; WTTE-TV, Columbus, Ohio; WRGT-TV, Dayton, Ohio; WVAH-TV, Charleston / Huntington, West Virginia; WCGV-TV, Milwaukee, Wisconsin; WTTO-TV, Birmingham, AL; KXVO-TV, Omaha, NE (acquired on October 1, 2013); WPMI-TV, Mobile, AL; WWHO-TV, Chillicothe, OH and WUTB-TV in Baltimore, MD. The FCC is in the process of considering the renewal applications and we believe the petitions have no merit.

 

Changes in the Rules of Television Ownership and Joint Sale Agreements

 

On March 12, 2014, the FCC issued a public notice with respect to the processing of broadcast television applications proposing sharing arrangements and contingent interests.  The public notice indicated that the FCC will closely scrutinize any application that proposes that two or more stations in the same market that will enter into an agreement to share facilities, employees and/or services or to jointly acquire programming or sell advertising including through a JSA, LMA or similar agreement and enter into an option, right of first refusal, put/call arrangement or other similar contingent interest, or a loan guarantee. We cannot now predict what actions the FCC may require in connection with the processing of applications for FCC consent to pending transactions.  In addition, on March 31, 2014, the FCC issued proposed rules that would consider a company an owner of a station if it has a JSA that allows for sale of more than 15% of the ad time on a particular station. Stations with current arrangements that would put them in violation of the new rules will have two years from the date on which the rules become effective to amend or terminate those arrangements, unless they are able to obtain a waiver of such rules.  We cannot now predict whether or when the proposed rule will be adopted.  If adopted as written, among other things, the proposed rule would limit our ability to create duopolies or other two-station operations in certain markets.  During the three months ended March 31, 2014 and 2013, we earned $11.0 million and $6.9 million of revenue, respectively, from JSAs arrangements.

 

Pending Acquisitions

 

In July 2013, we entered into a definitive agreement to purchase the stock of Perpetual Corporation and the equity interest of Charleston Television, LLC, both owned and controlled by the Allbritton family (Allbritton), for an aggregate purchase price of $985.0 million. The Allbritton stations consist of seven ABC Network affiliates and NewsChannel 8, a 24-hour cable/satellite news network covering the Washington D.C. metropolitan area.  The transaction is expected to close during the third quarter of 2014, subject to approval of the FCC, antitrust clearance, and other customary closing conditions.  We expect to fund the purchase price at closing through our bank credit facility and/or debt capital markets.  We expect to sell the license and certain related assets of existing stations in Birmingham, AL - WABM (MNT), Harrisburg/Lancaster/Lebanon/York, PA - WHP (CBS), Charleston, SC - WMMP (MNT) and assets related to our LMAs to provide services to Harrisburg/Lancaster/Lebanon/York, PA — WLYH (CW) and Charleston, SC — WTAT (FOX).

 

In September 2013, we entered into a definitive agreement to purchase the broadcast assets of eight television stations owned by New Age Media located in three markets, for an aggregate purchase price of $90.0 million. The original contemplated transaction involved Wilkes/Barre/Scranton, PA — WSWB, Tallahassee, FL — WTLH and WTLF and Gainesville, FL — WNBW to be purchased by a third party and  we would provide sales and other non-programming support services to each of these stations, pursuant to customary shared services and joint sales agreements.  We expect that this transaction will be modified in order to comply with a recently issued FCC order. The transaction is expected to close during the second half of 2014, subject to approval of the FCC and other customary closing conditions.  We expect to fund the purchase price through cash on hand and/or our bank credit facility.

 

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4.               EARNINGS PER SHARE

 

The following table reconciles income (numerator) and shares (denominator) used in our computations of diluted earnings per share for the periods presented (in thousands):

 

		Three Months Ended March 31,
		2014			2013
Income (Numerator)
Income from continuing operations		$	27,657		$	16,515
Income impact of assumed conversion of the 4.875% Notes, net of taxes		—			45
Income impact of assumed conversion of the 3.0% Notes, net of taxes		—			26
Net (income) loss attributable to noncontrolling interests included in continuing operations		(499		)	127
Numerator for diluted earnings per common share from continuing operations available to common shareholders		27,158			16,713
Income from discontinued operations, net of taxes		—			355
Numerator for diluted earnings available to common shareholders		$	27,158		$	17,068
Shares (Denominator)
Weighted-average common shares outstanding		98,824			81,191
Dilutive effect of stock-settled appreciation rights, restricted stock awards and outstanding stock options		678			223
Dilutive effect of 4.875% Notes		—			339
Dilutive effect of 3.0% Notes		—			311
Weighted-average common and common equivalent shares outstanding		99,502			82,064

 

Potentially dilutive securities representing zero and 1.6 million shares of common stock for the three months ended March 31, 2014 and 2013, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been antidilutive.  The decrease in potentially dilutive securities is primarily related to the increase in share price since March 31, 2013 as well the redemption of the 4.875% and 3.0% Notes.

 

5.               RELATED PERSON TRANSACTIONS

 

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

 

Leases.  Certain assets used by us and our operating subsidiaries are leased from Cunningham Communications Inc., Keyser Investment Group, Gerstell Development Limited Partnership and Beaver Dam, LLC (entities owned by the controlling shareholders).  Lease payments made to these entities were $1.5 million and $1.1 million for the three months ended March 31, 2014 and 2013, respectively.

 

Charter Aircraft.   From time to time, we charter aircraft owned by certain controlling shareholders.  We incurred $0.3 million and less than $0.1 million for the three months ended March 31, 2014 and 2013, respectively.

 

Cunningham Broadcasting Corporation .  As of March 31, 2014, Cunningham was the owner-operator and FCC licensee of:

WNUV-TV Baltimore, Maryland; WRGT-TV Dayton, Ohio; WVAH-TV Charleston, West Virginia; WTAT-TV Charleston, South

Carolina; WMYA-TV Anderson, South Carolina; WTTE-TV Columbus, Ohio; WDBB-TV Birmingham, Alabama; WBSF-TV Flint, Michigan; and WGTU-TV/WGTQ-TV Traverse City/Cadillac, Michigan (collectively, the Cunningham Stations) and WYZZ Peoria/Bloomington, IL.

 

During the first quarter of 2013, the estate of Carolyn C. Smith, a parent of our controlling shareholders, distributed all of the non-voting stock owned by the estate to our controlling shareholders, and a portion was repurchased by Cunningham for $1.7 million in the aggregate.  As of March 31, 2014, our controlling shareholders own approximately 4.4% of the total capital stock of Cunningham, none of which have voting rights.  The remaining amount of non-voting stock is owned by trusts established for the benefit of the children of our controlling shareholders.  The estate of Mrs. Smith currently owns all of the voting stock.  The sale of the voting stock by the estate to an unrelated party is pending approval of the FCC.  We have options from the trusts, which grant us the right to acquire, subject to applicable FCC rules and regulations, 100% of the voting and nonvoting stock of Cunningham.

 

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We also have options from each of Cunningham’s subsidiaries, which are the FCC licensees of the Cunningham stations, which grant us the right to acquire, and grant Cunningham the right to require us to acquire, subject to applicable FCC rules and regulations, 100% of the capital stock or the assets of Cunningham’s individual subsidiaries.

 

In addition to the option agreements, certain of our stations provide programming, sales and managerial services pursuant to LMAs to seven of their stations: WNUV-TV, WRGT-TV, WVAH-TV, WTAT-TV, WMYA-TV, WTTE-TV, and WDBB-TV (collectively, the Cunningham LMA Stations). Each of these LMAs has a current term that expires on July 1, 2016 and there are three additional 5- year renewal terms remaining with final expiration on July 1, 2031. Effective November 5, 2009, we entered into amendments and/or restatements of the following agreements between Cunningham and us: (i) the LMAs, (ii) option agreements to acquire Cunningham stock and (iii) certain acquisition or merger agreements relating to the Cunningham LMA Stations.

 

Pursuant to the terms of the LMAs, options and other agreements, beginning on January 1, 2010 and ending on July 1, 2012, we were obligated to pay Cunningham the sum of approximately $29.1 million in 10 quarterly installments of $2.75 million and one quarterly payment of approximately $1.6 million, which amounts were used to pay down Cunningham’s bank credit facility and which amounts were credited toward the purchase price for each Cunningham station. An additional $1.2 million was paid on July 1, 2012 and another installment of $2.75 million was paid on October 1, 2012 as an additional LMA fee and was used to pay off the remaining balance of Cunningham’s bank credit facility. The aggregate purchase price of the television stations, which was originally $78.5 million pursuant to certain acquisition or merger agreements subject to 6% annual increases, was decreased by each payment made by us to Cunningham, through 2012, up to $29.1 million in the aggregate, pursuant to the foregoing transactions with Cunningham as such payments were made. Beginning on January 1, 2013, we are obligated to pay Cunningham an annual LMA fee for the television stations equal to the greater of (i) 3% of each station’s annual net broadcast revenue and (ii) $5.0 million, of which a portion of this fee will be credited toward the purchase price to the extent of the annual 6% increase. The remaining purchase price as of March 31, 2014 was approximately $57.1 million. Additionally, we reimburse Cunningham for 100% of its operating costs.

 

We made payments to Cunningham under these LMAs and other agreements with the Cunningham LMA Stations of $4.5 million, and $1.9 million for the three months ended March 31, 2014 and 2013, respectively. For the three months ended March 31, 2014 and 2013, Cunningham LMA Stations provided us with approximately $27.2 million, and $24.6 million, respectively, of total revenue. The financial statements for Cunningham are included in our consolidated financial statements for all periods presented.

 

In November 2013, concurrent with our acquisition of the Barrington stations, Cunningham acquired the license related assets of WBSF-TV and WGTU-TV/WGTQ-TV, which was funded by bank debt, for which we have provided a guarantee. We provide certain non-programming related sales, operational and administrative services to these stations pursuant to certain outsourcing agreements. The agreements for WBSF-TV and WGTU-TV/WGTQ-TV expire in November 2021 and August 2015, respectively, and each have renewal provisions for successive eight year periods. Under these arrangements, we earned $0.8 million from the services we perform for these stations for the three months ended March 31, 2014. As we consolidate the licensees as VIEs, the amounts we earn under the arrangements are eliminated in consolidation and the gross revenues of the stations are reported within our consolidated statement of operations. For the three months ended March 31, 2014, our consolidated revenues include $1.5 million related to these stations.

 

Also, concurrent with the Barrington acquisition, we also sold our station, WYZZ (FOX) in Peoria, IL, which currently receives non-programming related sales, operational and administrative services from Nexstar Broadcasting pursuant to certain outsourcing agreements, to Cunningham for $22 million. Although we have no continuing involvement in the operations of this station, because Cunningham is a consolidated VIE and we have a purchase plan option to acquire these assets from Cunningham, the assets of WYZZ were not derecognized and the transaction was accounted for a transaction between parties under common control, therefore no gain or loss was recognized in the consolidated statement of operations upon sale to Cunningham.

 

During October 2013, we purchased the outstanding membership interests of KDBC-TV from Cunningham for $21.2 million, plus a working capital adjustment of $0.2 million. See Other Acquisitions within Note 2. Acquisitions , for further information.

 

Atlantic Automotive.  We sold advertising time to and purchased vehicles and related vehicle services from Atlantic Automotive Corporation (Atlantic Automotive), a holding company that owns automobile dealerships and an automobile leasing company.  David D. Smith, our President and Chief Executive Officer, has a controlling interest in, and is a member of the Board of Directors of Atlantic Automotive. We received payments for advertising time totaling less than $0.1 million for both the three months ended March 31, 2014 and 2013. We paid $0.4 million for vehicles and related vehicle services from Atlantic Automotive for the three months ended March 31, 2013. No payments were made for the three months ended March 31, 2014. Additionally, in August 2011, Atlantic Automotive entered into an office lease agreement with Towson City Center, LLC (Towson City Center), a subsidiary of one of our real estate ventures, and began occupying the space in June 2012.  Atlantic Automotive paid $0.3 million and $0.2 million in rent during the three months ended March 31, 2014 and 2013, respectively.

 

Leased property by real estate ventures. Certain of our real estate ventures have entered into leases with entities owned by David Smith to lease restaurant space. There are leases for three restaurants in a building owned by one of our consolidated real estate ventures in Baltimore, MD.  Total rent received under these leases was $0.1 million and less than $0.1 million for the three months ended

 

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March 31, 2014 and 2013, respectively. There is also one lease for a restaurant in a building owned by one of our real estate ventures, accounted for under the equity method, in Towson, MD. We received under this lease $0.1 million for the three months ending March 31, 2014. No payments related to this property were received for the three months ended March 31, 2013.

 

Thomas & Libowitz P.A.   Steven A. Thomas, a partner and founder of Thomas & Libowitz, P.A. (Thomas & Libowitz), a law firm providing legal services to us on an ongoing basis, is the son of a former member of the Board of Directors, Basil A. Thomas. Mr. Thomas resigned from Board of Directors effective September 2013. We paid fees of $0.4 million to Thomas & Libowitz for the three months ended March 31, 2013.

 

6.               SEGMENT DATA

 

We measure segment performance based on operating income (loss).  Excluding discontinued operations, our broadcast segment includes stations in 71 markets located throughout the continental United States. The operating results of WLAJ-TV and WLWC-TV, which were sold effective March 1, 2013 and April 1, 2013, respectively, are classified as discontinued operations and are not included in our consolidated results of continuing operations for the three months ended March 31, 2013. Our other operating divisions primarily consist of sign design and fabrication; regional security alarm operating and bulk acquisitions; manufacturing and service of broadcast antennas and transmitters; and real estate ventures. All of our other operating divisions are located within the United States.  Corporate costs primarily include our costs to operate as a public company and to operate our corporate headquarters location.  Other Operating Divisions and Corporate are not reportable segments but are included for reconciliation purposes.  We had approximately $172.0 million and $171.5 million of intercompany loans between the broadcast segment, other operating divisions and corporate as of March 31, 2014 and 2013, respectively.  We had $4.9 million in intercompany interest expense related to intercompany loans between the broadcast segment, other operating divisions and corporate for both the three months ending March 31, 2014 and 2013, respectively. All other intercompany transactions are immaterial.

 

Segment financial information is included in the following tables for the periods presented (in thousands):

 

For the three months ended March 31, 2014		Broadcast			Other Operating Divisions			Corporate			Consolidated
Revenue		$	397,906		$	14,742		$	—		$	412,648
Depreciation of property and equipment		23,517			594			267			24,378
Amortization of definite-lived intangible assets and other assets		23,163			1,565			—			24,728
Amortization of program contract costs and net realizable value adjustments		23,941			—			—			23,941
General and administrative overhead expenses		14,730			251			854			15,835
Operating income (loss)		82,121			1			(1,122		)	81,000
Interest expense		—			919			38,619			39,538
Income from equity and cost method investments		—			98			—			98
Assets		3,388,139			303,786			418,188			4,110,113

 

For the three months ended March 31, 2013		Broadcast			Other Operating Divisions			Corporate			Consolidated
Revenue		$	271,155		$	11,463		$	—		$	282,618
Depreciation of property and equipment		13,784			469			342			14,595
Amortization of definite-lived intangible assets and other assets		14,867			1,135			—			16,002
Amortization of program contract costs and net realizable value adjustments		18,861			—			—			18,861
General and administrative overhead expenses		10,129			297			824			11,250
Operating income (loss)		65,132			(309		)	(1,167		)	63,656
Interest expense		—			730			36,967			37,697
Loss from equity and cost method investments		—			(1,052		)	—			(1,052		)

 

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