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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2015

 

OR

 

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

 

For the transition period from                      to                       .

 

COMMISSION FILE NUMBER: 000-26076

 

SINCLAIR BROADCAST GROUP, INC.

(Exact name of Registrant as specified in its charter)

 


 

Maryland

(State or other jurisdiction of

Incorporation or organization)

 

52-1494660

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

 

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):

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

 

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

Yes o

 

No x

 

Indicate the number of 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
May 4, 2015

Class A Common Stock

 

69,518,193

Class B Common Stock

 

25,928,357

 

 

 



Table of Contents

 

SINCLAIR BROADCAST GROUP, INC.

 

FORM 10-Q

FOR THE QUARTER ENDED March 31, 2015

 

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

26

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

33

 

 

ITEM 4. CONTROLS AND PROCEDURES

33

 

 

PART II. OTHER INFORMATION

34

 

 

ITEM 1. LEGAL PROCEEDINGS

34

 

 

ITEM 1A. RISK FACTORS

34

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

35

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

35

 

 

ITEM 4. MINE SAFETY DISCLOSURES

35

 

 

ITEM 5. OTHER INFORMATION

35

 

 

ITEM 6. EXHIBITS

36

 

 

SIGNATURE

37

 

 

EXHIBIT INDEX

38

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED BALANCE SHEETS

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

 

 

 

As of March 31,
2015

 

As of December 31,
2014

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

57,843

 

$

17,682

 

Accounts receivable, net of allowance for doubtful accounts of $4,387 and $4,246, respectively

 

368,696

 

383,503

 

Current portion of program contract costs

 

66,405

 

88,198

 

Income taxes receivable

 

 

3,314

 

Prepaid expenses and other current assets

 

33,213

 

21,338

 

Deferred barter costs

 

7,620

 

5,626

 

Assets held for sale

 

 

6,504

 

Total current assets

 

533,777

 

526,165

 

ASSETS HELD FOR SALE

 

1,843

 

8,817

 

PROGRAM CONTRACT COSTS, less current portion

 

30,703

 

38,531

 

PROPERTY AND EQUIPMENT, net

 

742,397

 

752,538

 

GOODWILL

 

1,951,074

 

1,964,553

 

BROADCAST LICENSES

 

130,915

 

135,075

 

DEFINITE-LIVED INTANGIBLE ASSETS, net

 

1,822,211

 

1,818,263

 

OTHER ASSETS

 

204,559

 

208,230

 

Total assets (a)

 

$

5,417,479

 

$

5,452,172

 

LIABILITIES AND EQUITY (DEFICIT)

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

7,346

 

$

12,248

 

Accrued liabilities

 

237,709

 

246,123

 

Income taxes payable

 

26,431

 

 

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

 

58,826

 

113,116

 

Current portion of notes and capital leases payable to affiliates

 

2,778

 

2,625

 

Current portion of program contracts payable

 

83,632

 

104,922

 

Deferred barter revenues

 

7,768

 

5,806

 

Deferred tax liabilities

 

6,689

 

6,689

 

Liabilities held for sale

 

 

2,477

 

Total current liabilities

 

431,179

 

494,006

 

LONG-TERM LIABILITIES:

 

 

 

 

 

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

 

3,831,823

 

3,796,666

 

Notes payable and capital leases to affiliates, less current portion

 

17,605

 

16,309

 

Program contracts payable, less current portion

 

55,013

 

60,605

 

Deferred tax liabilities

 

591,245

 

602,243

 

Other long-term liabilities

 

78,174

 

77,000

 

Total liabilities (a)

 

5,005,039

 

5,046,829

 

COMMITMENTS AND CONTINGENCIES (See Note 4)

 

 

 

 

 

EQUITY:

 

 

 

 

 

SINCLAIR BROADCAST GROUP SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Class A Common Stock, $.01 par value, 500,000,000 shares authorized, 69,491,915 and 69,578,899 shares issued and outstanding, respectively

 

695

 

696

 

Class B Common Stock, $.01 par value, 140,000,000 shares authorized, 25,928,357 and 25,928,357 shares issued and outstanding, respectively, convertible into Class A Common Stock

 

259

 

259

 

Additional paid-in capital

 

979,914

 

979,202

 

Accumulated deficit

 

(537,253

)

(545,820

)

Accumulated other comprehensive loss

 

(6,371

)

(6,455

)

Total Sinclair Broadcast Group shareholders’ equity

 

437,244

 

427,882

 

Noncontrolling interests

 

(24,804

)

(22,539

)

Total equity

 

412,440

 

405,343

 

Total liabilities and equity

 

$

5,417,479

 

$

5,452,172

 

 

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

 


(a)         Our consolidated total assets as of March 31, 2015 and December 31, 2014 include total assets of variable interest entities (VIEs) of $159.1 million and $163.3 million, respectively, which can only be used to settle the obligations of the VIEs.  Our consolidated total liabilities as of March 31, 2015 and December 31, 2014 include total liabilities of the VIEs of $31.6 million and $30.0 million, respectively, for which the creditors of the VIEs have no recourse to us.  See Note 1. Summary of Significant Accounting Policies.

 

3



Table of Contents

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

REVENUES:

 

 

 

 

 

Station broadcast revenues, net of agency commissions

 

$

464,163

 

$

373,881

 

Revenues realized from station barter arrangements

 

20,959

 

24,025

 

Other operating divisions revenues

 

19,653

 

14,742

 

Total revenues

 

504,775

 

412,648

 

OPERATING EXPENSES:

 

 

 

 

 

Station production expenses

 

171,015

 

127,039

 

Station selling, general and administrative expenses

 

101,887

 

81,925

 

Expenses recognized from station barter arrangements

 

17,412

 

21,477

 

Amortization of program contract costs and net realizable value adjustments

 

30,391

 

23,941

 

Other operating divisions expenses

 

15,823

 

12,325

 

Depreciation of property and equipment

 

25,189

 

24,378

 

Corporate general and administrative expenses

 

16,016

 

15,835

 

Amortization of definite-lived intangible assets

 

39,980

 

24,728

 

Research and development expenses

 

2,515

 

 

Total operating expenses

 

420,228

 

331,648

 

Operating income

 

84,547

 

81,000

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

Interest expense and amortization of debt discount and deferred financing costs

 

(46,648

)

(39,538

)

Income from equity and cost method investments

 

3,146

 

98

 

Other income, net

 

218

 

917

 

Total other expense, net

 

(43,284

)

(38,523

)

Income before income taxes

 

41,263

 

42,477

 

INCOME TAX PROVISION

 

(16,427

)

(14,820

)

NET INCOME

 

24,836

 

27,657

 

Net income attributable to the noncontrolling interests

 

(554

)

(499

)

NET INCOME ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP

 

$

24,282

 

$

27,158

 

Dividends declared per share

 

$

0.165

 

$

0.15

 

 

 

 

 

 

 

BASIC AND DILUTED EARNINGS PER COMMON SHARE ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP:

 

 

 

 

 

Basic earnings per share

 

$

0.26

 

$

0.27

 

Diluted earnings per share

 

$

0.25

 

$

0.27

 

Weighted average common shares outstanding

 

95,131

 

98,824

 

Weighted average common and common equivalent shares outstanding

 

95,771

 

99,502

 

 

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

 

4



Table of Contents

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) (Unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Net income

 

$

24,836

 

$

27,657

 

Amortization of net periodic pension benefit costs, net of taxes

 

84

 

(86

)

Unrealized gain on investments, net of taxes

 

 

125

 

Comprehensive income

 

24,920

 

27,696

 

Comprehensive (income) loss attributable to the noncontrolling interests

 

(554

)

(499

)

Comprehensive income attributable to Sinclair Broadcast Group

 

$

24,366

 

$

27,197

 

 

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

 

5



Table of Contents

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)

(In thousands) (Unaudited)

 

 

 

Sinclair Broadcast Group Shareholders

 

 

 

 

 

 

 

Class A
Common Stock

 

Class B
Common Stock

 

Additional
Paid-In

 

Accumulated

 

Accumulated
Other
Comprehensive

 

Noncontrolling

 

Total Equity

 

 

 

Shares

 

Values

 

Shares

 

Values

 

Capital

 

Deficit

 

Loss

 

Interests

 

(Deficit)

 

BALANCE, December 31, 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.

 

6



Table of Contents

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)

(In thousands) (Unaudited)

 

 

 

Sinclair Broadcast Group Shareholders

 

 

 

 

 

 

 

Class A
Common Stock

 

Class B
Common Stock

 

Additional
Paid-In

 

Accumulated

 

Accumulated
Other
Comprehensive

 

Noncontrolling

 

Total Equity

 

 

 

Shares

 

Values

 

Shares

 

Values

 

Capital

 

Deficit

 

Loss

 

Interests

 

(Deficit)

 

BALANCE, December 31, 2014

 

69,578,899

 

$

696

 

25,928,357

 

$

259

 

$

979,202

 

$

(545,820

)

$

(6,455

)

$

(22,539

)

$

405,343

 

Dividends declared and paid on Class A and Class B Common Stock

 

 

 

 

 

 

(15,715

)

 

 

(15,715

)

Repurchases of Class A Common Stock

 

(304,787

)

(3

)

 

 

(7,800

)

 

 

 

(7,803

)

Class A Common Stock issued pursuant to employee benefit plans

 

217,803

 

2

 

 

 

7,824

 

 

 

 

7,826

 

Tax benefit on share based awards

 

 

 

 

 

688

 

 

 

 

688

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

(2,819

)

(2,819

)

Other comprehensive income

 

 

 

 

 

 

 

84

 

 

84

 

Net income

 

 

 

 

 

 

24,282

 

 

554

 

24,836

 

BALANCE, March 31, 2015

 

69,491,915

 

$

695

 

25,928,357

 

$

259

 

$

979,914

 

$

(537,253

)

$

(6,371

)

$

(24,804

)

$

412,440

 

 

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

 

7



Table of Contents

 

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

24,836

 

$

27,657

 

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

 

 

 

 

 

Depreciation of property and equipment

 

25,189

 

24,378

 

Amortization of definite-lived intangible and other assets

 

39,980

 

24,728

 

Amortization of program contract costs and net realizable value adjustments

 

30,391

 

23,941

 

Stock-based compensation expense

 

7,057

 

4,769

 

Deferred tax benefit

 

(9,963

)

(7,361

)

Change in assets and liabilities, net of acquisitions:

 

 

 

 

 

Decrease in accounts receivable

 

19,619

 

17,498

 

(Decrease) increase in prepaid expenses and other current assets

 

(10,472

)

37,997

 

(Decrease) increase in accounts payable and accrued liabilities

 

(15,418

)

16,626

 

Increase (decrease) in income taxes payable

 

29,786

 

(11,517

)

Payments on program contracts payable

 

(27,624

)

(23,966

)

Real estate held for development and sale

 

(3,006

)

(2,349

)

Other, net

 

1,244

 

3,859

 

Net cash flows from operating activities

 

111,619

 

136,260

 

 

 

 

 

 

 

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:

 

 

 

 

 

Acquisition of property and equipment

 

(23,648

)

(11,907

)

Purchase of alarm monitoring contracts

 

(5,744

)

(4,323

)

Distributions from equity and cost method investees

 

4,152

 

739

 

Investments in equity and cost method investees

 

(2,945

)

(2,154

)

Proceeds from termination of life insurance policies

 

 

17,042

 

Other, net

 

272

 

(1,363

)

Net cash flows used in investing activities

 

(27,913

)

(1,966

)

 

 

 

 

 

 

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from notes payable, commercial bank financing and capital leases

 

7,866

 

5,885

 

Repayments of notes payable, commercial bank financing and capital leases

 

(25,055

)

(6,396

)

Dividends paid on Class A and Class B Common Stock

 

(15,715

)

(14,696

)

Repurchase of outstanding Class A Common Stock

 

(7,803

)

(82,371

)

Noncontrolling interests distributions

 

(2,819

)

(260

)

Other, net

 

(19

)

1,251

 

Net cash flows used in financing activities

 

(43,545

)

(96,587

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

40,161

 

37,707

 

CASH AND CASH EQUIVALENTS, beginning of period

 

17,682

 

280,104

 

CASH AND CASH EQUIVALENTS, end of period

 

$

57,843

 

$

317,811

 

 

8



Table of Contents

 

SINCLAIR BROADCAST GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Principles of Consolidation

 

The consolidated financial statements include our accounts and those of our wholly-owned and majority-owned subsidiaries and variable interest entities (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.

 

Interim Financial Statements

 

The consolidated financial statements for the three months ended March 31, 2015 and 2014 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, 2014 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.

 

Third-party station licensees.  Certain of our stations provide services to other station owners within the same respective market, such as LMAs, where we provide programming, sales, operational and administrative services, and JSAs and SSAs, where we provide non-programming, sales, operational and administrative services.  In certain cases, we have also entered into purchase agreements or options to purchase, the license related assets of the licensee.  We typically own the majority of the non-license assets of the stations and in some cases where the licensee acquired the license assets concurrent with our acquisition of the non-license assets of the station, we have provided guarantees to the bank for the licensee’s acquisition financing.  The terms of the agreements vary, but generally have initial terms of over five years with several optional renewal terms. As of March 31, 2015 and December 31, 2014, we have concluded that 37 of these licensees are VIEs.  Based on the terms of the agreements and the significance of our investment in the stations, we are the primary beneficiary of the variable interests because, subject to the ultimate control of the licensees, we have the power to direct the activities which significantly impact the economic performance of the VIE through the services we provide and because we absorb losses and returns that would be considered significant to the VIEs.  Several of these VIEs are owned by a related party, Cunningham Broadcasting Corporation (Cunningham).  See Note 6. Related Person Transactions for more information about the arrangements with Cunningham. The net revenues of the stations which we consolidate were $64.8 million, and $66.5 million for the three months ended March 31, 2015, and 2014, respectively.  The fees paid between us and the licensees pursuant to these arrangements are eliminated in consolidation.  See Changes in the Rules of Television Ownership and Joint Sale Agreements within Note 4. Commitment and Contingencies for discussion of recent changes in FCC rules related to JSAs.

 

Up until third quarter of 2014, we had consolidated Cunningham (parent entity), in addition to their stations that we perform services for, as we had previously determined that it was a VIE because it had insufficient equity at risk.  As of September 30, 2014, we concluded that Cunningham was no longer a VIE given its significant equity at risk in assets that we have no involvement with, and deconsolidated this entity, along with WTAT and WYZZ, stations that Cunningham acquired from us in July 2014 and November 2013, respectively, with which we have no continuing involvement.  As a result of the deconsolidation, we recorded the difference between the proceeds received from Cunningham for the sale of WTAT and WYZZ to additional paid in capital in the consolidated balance sheet, as well as reflected the noncontrolling interest deficit of the remaining Cunningham VIEs which represents their significant cumulative distributions made to Cunningham (parent entity) that were previously eliminated in consolidation.

 

9



Table of Contents

 

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

 

 

 

March 31,
2015

 

December 31,
2014

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

492

 

$

491

 

Accounts receivable

 

18,186

 

19,521

 

Current portion of program contract costs

 

9,171

 

9,544

 

Prepaid expenses and other current assets

 

411

 

297

 

Total current assets

 

28,260

 

29,853

 

 

 

 

 

 

 

PROGRAM CONTRACT COSTS, less current portion

 

6,649

 

6,922

 

PROPERTY AND EQUIPMENT, net

 

9,291

 

9,716

 

GOODWILL

 

787

 

787

 

BROADCAST LICENSES

 

16,935

 

16,935

 

DEFINITE-LIVED INTANGIBLE ASSETS, net

 

94,799

 

96,732

 

OTHER ASSETS

 

2,340

 

2,376

 

Total assets

 

$

159,061

 

$

163,321

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

66

 

$

68

 

Accrued liabilities

 

1,356

 

1,297

 

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

 

3,666

 

3,659

 

Current portion of program contracts payable

 

9,127

 

9,714

 

Total current liabilities

 

14,215

 

14,738

 

 

 

 

 

 

 

LONG-TERM LIABILITIES:

 

 

 

 

 

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

 

27,721

 

28,640

 

Program contracts payable, less current portion

 

11,381

 

10,161

 

Long term liabilities

 

9,718

 

8,739

 

Total liabilities

 

$

63,035

 

$

62,278

 

 

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 LMA 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, 2015 and December 31, 2014, which are excluded from liabilities above, were $35.2 million and $34.4 million, respectively.  The total capital lease liabilities, net of capital lease assets, excluded from the above were $4.3 million for March 31, 2015 and December 31, 2014.  Also excluded from the amounts above are liabilities associated with the certain outsourcing agreements and purchase options with certain VIEs totaling $78.0 million and $78.1 million as of March 31, 2015 and December 31, 2014, respectively, as these amounts are eliminated in consolidation.  The risk and reward characteristics of the VIEs are similar.

 

Other investments.  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, 2015 and December 31, 2014 was $21.5 million and $22.7 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 $3.3 million, and $0.2 million for the three months ended March 31, 2015 and 2014, respectively, related to these investments.

 

Recent Accounting Pronouncements

 

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

 

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

 

In February 2015, the FASB issued new guidance that amends the current consolidation guidance on the determination of whether an entity is a variable interest entity.  This new standard is effective for the annual period beginning after December 15, 2016.  Early adoption is allowed, including in any interim period.  We are currently evaluating the impact of this new guidance on our financial statements.

 

In April 2015, the FASB issued new guidance that amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability. This new standard is effective for fiscal years beginning after December 15, 2015. We are currently evaluating the impact of this new guidance on our financial statements.

 

Use of Estimates

 

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

 

Revenue Recognition

 

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

 

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

 

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

 

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

 

Share Repurchase Program

 

On October 28, 1999, we announced a $150.0 million share repurchase program, which was renewed on February 6, 2008.  On March 20, 2014, the Board of Directors authorized an additional $150.0 million share repurchase authorization. There is no expiration date and currently, management has no plans to terminate this program.  For the three months ended March 31, 2015, we have purchased approximately 0.3 million shares for $7.8 million.  As of March 31, 2015, the total remaining authorization was $126.6 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, 2015 and 2014 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, 2015 would have exceeded the statutory rate primarily due to an increase in income tax provision resulting from a settlement of a state income tax positions. Our effective income tax rate for the three months ended March 31, 2014 approximated the statutory rate.

 

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We believe it is reasonably possible that our liability for unrecognized tax benefits related to continuing operations could be reduced by up to $6.7 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.

 

Subsequent Events

 

Effective April 30, 2015, we entered into an amendment and restatement of our bank credit agreement. Pursuant to the Amendment, we raised an additional $350.0 million of incremental term loan B commitments, which mature in July 2021 and bear interest at LIBOR plus 2.75% with a 0.75% LIBOR floor. The proceeds, net of issuance costs, from the amendment of term loan B were used to pay down the outstanding balance under our revolving credit facility, and for general corporate purposes. As of April 30, 2015, we had $483.0 million borrowing capacity under our revolving credit facility.

 

2.              ACQUISITIONS

 

During 2014, we acquired a total of 21 stations in 15 markets for a purchase price of $1,434.5 million plus working capital of $47.3 million. All of these acquisitions provide expansion into additional markets and increases value based on the synergies we are achieving.

 

2014 Acquisitions

 

Allbritton.  Effective August 1, 2014, we completed the acquisition of all of the outstanding common stock of Perpetual Corporation and equity interest of Charleston Television, LLC (together the “Allbritton Companies”) for $985.0 million plus working capital of $50.2 million.  The Allbritton Companies owned and operated nine television stations in the following seven markets, all of which were affiliated with ABC: Washington, DC; Birmingham, AL; Harrisburg, PA; Little Rock / Pine Bluff, AR; Tulsa, OK; Roanoke / Lynchburg, VA; and Charleston, SC. Also included in the purchase was NewsChannel 8, a 24-hour cable/satellite news network covering the Washington, D.C. metropolitan area.  We financed the total purchase price with proceeds from the issuance of 5.625% senior unsecured notes, a draw on our amended bank credit agreement, and cash on hand. In connection with the acquisition, we sold the acquired assets related to the Harrisburg, PA station effective September 1, 2014.  See Note 3. Dispositions of Assets for further discussion.

 

MEG Stations.  Effective December 19, 2014, we completed the acquisition of four television stations in three markets from Media General, Inc. (MEG Stations) for a purchase price of $207.5 million less working capital of $1.6 million.  The acquired stations are located in the following markets: Providence, RI / New Bedford, MA; Green Bay / Appleton, WI; and Savannah, GA. We financed the purchase price with cash on hand and borrowing under our revolving credit facility. Simultaneously, we sold to Media General, our television stations in Tampa, FL and Colorado Springs, CO.  See Note 3. Dispositions of Assets for further discussion.  We financed the purchase price, net of the proceeds received from the sale of those stations, with borrowings under our revolving credit facility.

 

KSNV.  Effective November 1, 2014, we completed the acquisition of certain of assets of KSNV (NBC) in Las Vegas, NV from Intermountain West Communications Company (Intermountain West) for $118.5 million less working capital of $0.2 million.  In conjunction with the purchase, we assumed the rights under the affiliation agreement with NBC and swapped our KVMY call letters for the KSNV call letters.  Intermountain West continues to own and operate the station under the KVMY call letters and we do not provide any programming or sales services to this station. We financed the total purchase price with cash on hand and borrowings under our revolving credit facility.

 

Other 2014 Acquisitions.  During the year ended December 31, 2014, we acquired certain assets related to eight other television stations in the following four markets: Wilkes Barre / Scranton, PA; Tallahassee, FL; Gainesville, FL; and Macon, GA.  The purchase price for these stations was $123.5 million less working capital of $1.1 million which was financed with cash on hand and borrowings under our revolving credit facility.

 

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The following tables summarize the allocated fair value of acquired assets and assumed liabilities, including the net assets of consolidated VIEs (in thousands):

 

 

 

MEG
Stations

 

KSNV

 

Allbritton

 

Other

 

Total 2014
acquisitions

 

Accounts receivable

 

$

 

$

 

$

38,542

 

$

 

$

38,542

 

Prepaid expenses and other current assets

 

476

 

67

 

19,890

 

79

 

20,512

 

Program contract costs

 

1,954

 

482

 

1,204

 

2,561

 

6,201

 

Property and equipment

 

23,462

 

8,300

 

46,600

 

8,400

 

86,762

 

Broadcast licenses

 

100

 

 

13,700

 

125

 

13,925

 

Definite-lived intangible assets

 

125,200

 

62,700

 

564,100

 

71,025

 

823,025

 

Other assets

 

 

 

20,352

 

1,500

 

21,852

 

Assets held for sale

 

 

 

83,200

 

 

83,200

 

Accounts payable and accrued liabilities

 

(2,085

)

(277

)

(8,351

)

(1,143

)

(11,856

)

Program contracts payable

 

(1,914

)

(481

)

(1,140

)

(2,554

)

(6,089

)

Deferred tax liability

 

 

 

(261,393

)

 

(261,393

)

Other long term liabilities

 

 

(1,200

)

(17,025

)

 

(18,225

)

Fair value of identifiable net assets acquired

 

147,193

 

69,591

 

499,679

 

79,993

 

796,456

 

Goodwill

 

58,698

 

48,699

 

535,558

 

42,443

 

685,398

 

Total

 

$

205,891

 

$

118,290

 

$

1,035,237

 

$

122,436

 

$

1,481,854

 

 

The allocations presented above are 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 purchase prices have been allocated to the acquired assets and assumed liabilities based on estimated fair values.  The allocations related to the acquisitions are preliminary pending a final determination of the fair values of the assets and liabilities.

 

During the quarter ended March 31, 2015, we made certain immaterial measurement period adjustments to the initial purchase accounting for the acquisitions in 2014, resulting in reclassifications between certain noncurrent assets and noncurrent liabilities, including an decrease to property and equipment of approximately $12.5 million, an decrease to broadcast licenses of $4.1 million, an increase to definite-lived intangible assets of $33.0 million, and a decrease to goodwill of $16.5 million, as well as a corresponding decrease to depreciation of $0.6 million and an increase to amortization of $0.3 million, during the quarter ended March 31, 2015. The comparable historical periods were not adjusted for these measurement period adjustments as they were not considered to be material.

 

These intangible assets will be amortized over the estimated remaining useful lives of 15 years for network affiliations and 10 years for the decaying advertiser base.  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.  Other intangible assets will be amortized over the respective weighted average useful lives ranging from 14 to 16 years. The following tables summarize the amounts allocated to definite-lived intangible assets representing the estimated fair values and estimated goodwill deductible for tax purposes (in thousands):

 

 

 

MEG
Stations

 

KSNV

 

Allbritton

 

Other

 

Total 2014
acquisitions

 

Network affiliations

 

$

54,300

 

$

44,775

 

$

356,900

 

$

42,625

 

$

498,600

 

Decaying advertiser base

 

19,200

 

12,100

 

38,500

 

9,100

 

78,900

 

Other intangible assets

 

51,700

 

5,825

 

168,700

 

19,300

 

245,525

 

Fair value of identifiable definite-lived intangible assets acquired

 

$

125,200

 

$

62,700

 

$

564,100

 

$

71,025

 

$

823,025

 

Estimated goodwill deductible for tax purposes

 

$

58,698

 

$

48,699

 

$

 

$

42,443

 

$

149,840

 

 

In connection with the acquisitions, for the three months ended March 31, 2015 and 2014, we incurred a total of $0.1 million, and $1.0 million, respectively, of costs primarily related to legal and other professional services, which we expensed as incurred and classified as corporate general and administrative expenses in the consolidated statements of operations.

 

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Pro Forma Information

 

The following table sets forth unaudited pro forma results of operations for the three months ended March 31, 2014, assuming that the above acquisitions, along with transactions necessary to finance the acquisitions, occurred at the beginning of the year preceding the year of acquisition. The pro forma results exclude acquisitions presented under Other above, as they were deemed not material both individually and in the aggregate (in thousands, except per share data):

 

 

 

(Unaudited)

 

 

 

2014

 

Total revenues

 

$

474,222

 

Net Income

 

$

18,401

 

Net Income attributable to Sinclair Broadcast Group

 

$

17,902

 

Basic earnings per share attributable to Sinclair Broadcast Group

 

$

0.18

 

Diluted earnings per share attributable to Sinclair Broadcast Group

 

$

0.18

 

 

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, and exclusion of nonrecurring financing and transaction related costs. 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 WHTM-TV (ABC) in Harrisburg/Lancaster/York, PA, WTTA-TV (MNT) in Tampa, FL, and KXRM/KXTU (FOX) in Colorado Springs, CO which were sold in connection with the above acquisitions.

 

3.              DISPOSITION OF ASSETS:

 

Dispositions related to station acquisitions

 

As discussed in Note 2. Acquisitions, in the fourth quarter of 2014, we completed the acquisition of certain broadcast assets from Media General.  Simultaneously, we sold to Media General the broadcast assets of WTTA (MNT) in Tampa, FL and KXRM/KXTU (FOX) in Colorado Springs, CO for $93.1 million less working capital of $0.6 million.

 

Concurrent with the acquisition of the Allbritton companies discussed in Note 2. Acquisitions, due to FCC multiple ownership rules, we sold WHTM (ABC) in Harrisburg/Lancaster/York, PA to Media General in September 2014 for $83.4 million, less working capital of $0.2 million and the non-license assets of WTAT (FOX) in Charleston, SC to Cunningham for $14.0 million, effective August 1, 2014.  WHTM was acquired from the Allbritton companies and assets of WHTM were classified as assets held for sale in the Allbritton purchase price allocation.  We did not recognize a gain or loss on this transaction. Prior to the sale of WTAT, we operated the station under an LMA and purchase agreement with Cunningham.  This sale was accounted for as a transaction between parties under common control.  See Note 6. Related Person Transaction for further discussion.

 

Assets Held for Sale

 

In accordance with Financial Accounting Standards Board’s (FASB) guidance on reporting assets held for sale, we reported our assets and liabilities related to Triangle Sign & Service, LLC (Triangle) as held for sale in the accompanying consolidated balance sheet as of December 31, 2014. It is no longer our intent to divest of Triangle and therefore the assets and liabilities were no longer classified as held for sale as of March 31, 2015. The results of operations related to Triangle are included within the results of continuing operations as the criteria for classification as discontinued operations was not met.

 

As of December 31, 2014, the major classes of assets and liabilities of the group reported as held for sale on the accompanying consolidated balance sheet are shown below:

 

 

 

December 31, 2014

 

Assets:

 

 

 

Accounts receivable

 

$

5,101

 

Prepaid expenses and other current assets

 

1,403

 

Total current assets held for sale

 

6,504

 

 

 

 

 

Property and equipment (a)

 

1,036

 

Goodwill

 

2,975

 

Definite-lived intangible assets

 

2,962

 

Total assets held for sale

 

$

13,477

 

Liabilities:

 

 

 

Accounts payable

 

$

1,096

 

Accrued liabilities

 

1,360

 

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

 

21

 

Total liabilities held for sale

 

$

2,477

 

 

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(a)                           Excluded from the above is $1.8 million in held for sale assets as of March 31, 2015 and December 31, 2014 related to certain real estate assets within our broadcast segment.

 

4.              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; WCIV-TV, Charleston, South Carolina (formerly WMMP-TV); WMYA-TV, Anderson, South Carolina; WICS-TV Springfield, Illinois; WBFF-TV, Baltimore, Maryland; WTTE-TV, Columbus, Ohio; WRGT-TV, Dayton, Ohio; WVAH-TV, Charleston / Huntington, West Virginia; WCGV-TV, Milwaukee, Wisconsin; and WTTO-TV in Birmingham, AL. 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 on the processing of broadcast television applications proposing sharing arrangements and contingent interests.  The public notice indicated that the FCC will closely scrutinize any broadcast assignment or transfer 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 future transactions.  In addition, on April 15, 2014, the FCC issued an order amending its multiple ownership rules to provide that, where two television stations are located in the same market, and a party with an attributable interest in one station sells more than 15% of the ad time per week of the other station, the party selling such ad time shall be treated as if it had an attributable ownership interest in the second station.  The imputed ownership interest would be evaluated to determine whether it complies with the FCC’s ownership rules that limit the number of stations in which parties may hold attributable interests.  The amended rule also requires that every JSA contain certain certifications that the licensee maintains ultimate control of the station subject to such contract, and that such JSAs be filed with the Commission and made available for public review.  That amended rule is the subject of an appeal to the United States Court of Appeals for the District of Columbia Circuit.  We cannot predict the outcome of that appeal.  Under the Satellite Television Extension and Localism Act Reauthorization (STELAR), which became law on December 4, 2014,  parties to preexisting JSAs have until December 19, 2016 to come into compliance with these new rules by.   A bill has been introduced into Congress proposing to permanently grandfather preexisting JSAs, but we cannot predict its likelihood of enactment.  Among other things, the law could limit our ability to create duopolies or other two-station operations in certain markets.  We are currently evaluating whether to seek one or more waivers of the new rules, or to modify or terminate our current JSAs. We cannot predict whether we will be able to terminate or restructure such arrangements on terms that are as advantageous to us as the current arrangements.  The revenues of these JSA arrangements we earned for the three months ended March 31, 2015 and 2014 were $10.9 million and $11.0 million, respectively.

 

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5.              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,

 

 

 

2015

 

2014

 

Income (Numerator)

 

 

 

 

 

Net Income

 

$

24,836

 

$

27,657

 

Net (income) loss attributable to noncontrolling interests

 

(554

)

(499

)

Numerator for diluted earnings per common share available to common shareholders

 

$

24,282

 

$

27,158

 

 

 

 

 

 

 

Shares (Denominator)

 

 

 

 

 

Weighted-average common shares outstanding

 

95,131

 

98,824

 

Dilutive effect of stock-settled appreciation rights, restricted stock awards and outstanding stock options

 

640

 

678

 

Weighted-average common and common equivalent shares outstanding

 

95,771

 

99,502

 

 

Potentially dilutive securities which would have an anti-dilutive effect were 0.3 million shares of common stock for the three months ended March 31, 2015.  There were no anti-dilutive shares for the three months ended March 31, 2014. The increase in anti-dilutive securities is primarily related to stock-settled appreciation rights and outstanding stock options with exercise prices less than the share price as of March 31, 2015.

 

6.              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 $1.4 million and $1.5 million for the three months ended March 31, 2015 and 2014, respectively.

 

Charter Aircraft.  We lease aircraft owned by certain controlling shareholders.  We incurred expenses of $0.3 million during both the three months ended March 31, 2015 and 2014, respectively.

 

Cunningham Broadcasting Corporation

 

As of March 31, 2015, Cunningham was the owner-operator and FCC licensee of: WNUV-TV Baltimore, Maryland; WRGT-TV Dayton, Ohio; WVAH-TV Charleston, West Virginia; 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), as well as WTAT-TV Charleston, South Carolina, and WYZZ Peoria/Bloomington, IL.

 

During the first quarter of 2013, the estate of Carolyn C. Smith, a mother 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.  During the second quarter of 2014, Cunningham purchased the remaining amount of non-voting stock from the controlling shareholders for an aggregate purchase price of $2.0 million.  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 also had options from the trusts, which granted us the right to acquire, subject to applicable FCC rules and regulations, 100% of the voting and nonvoting stock of Cunningham, up until September 30, 2014, when these options were terminated. As discussed under Variable Interest Entities in Note 1: Summary of Significant Accounting Policies, during the third quarter of 2014, we deconsolidated Cunningham Broadcasting Corporation as we determined it was no longer a VIE.  We continue to consolidate certain of its subsidiaries with which we continue to have variable interests through various arrangements related to the Cunningham Stations discussed further below.

 

As of March 31, 2015, certain of our stations provide programming, sales and managerial services pursuant to LMAs to six of the Cunningham stations: WNUV-TV, WRGT-TV, WVAH-TV, WMYA-TV, WTTE-TV, and WDBB-TV (collectively, the

 

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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. We also executed purchase agreements to acquire the license related assets of these stations from Cunningham, 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 these individual subsidiaries of Cunningham.  Our applications to acquire these license related assets are pending FCC approval.  The LMA and purchase agreement with WTAT-TV was terminated concurrent with Cunningham’s purchase of the non-license assets of this station from us for $14.0 million, effective August 1, 2014.  We no longer have any continuing involvement in the operations of this station.

 

Pursuant to the terms of the LMAs, options and other agreements, beginning on January 1, 2013, we were 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. 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, of $29.1 million in the aggregate. Additionally, we reimburse these Cunningham LMA Stations for 100% of their operating costs. In July 2014, concurrent with the termination of the LMA with WTAT-TV, the total LMA fee for the remaining Cunningham LMA Stations was reduced by $4.7 million to remove the fee associated with WTAT-TV.  The remaining aggregate purchase price of these stations, excluding WTAT-TV, as of March 31, 2015 was approximately $53.6 million.

 

We made payments to Cunningham under our LMAs with these stations of $2.3 million and $3.3 million for the three months ended March 31, 2015 and 2014, respectively. For the three months ended March 31, 2015 and 2014, Cunningham LMA Stations provided us with approximately $21.7 million and $27.2 million, respectively, of total revenue.

 

Cunningham owns the license related assets of WBSF-TV and WGTU-TV/WGTQ-TV. We provide certain non-programming related sales, operational and administrative services to these stations pursuant to certain outsourcing agreements. The agreements with WBSF-TV and WGTU-TV/WGTQ-TV expire in November 2021 and August 2015, respectively, and each has renewal provisions for successive eight year periods. Additionally, we have provided a guarantee on the bank debt of these licensees of $3.0 million as of March 31, 2015. Under these arrangements, we earned $1.3 million and $0.8 million from the services we perform for these stations for the three months ended March 31, 2015 and 2014, respectively. 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, 2015 and 2014, our consolidated revenues include $1.7 million and $1.5 million related to these stations, respectively.

 

Atlantic Automotive Corporation

 

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 totaling $0.4 million and less than $0.1 million during the three months ended March 31, 2015 and 2014, respectively.  No payments for vehicles or vehicles related services from Atlantic Automotive were paid during the three months ended March 31, 2015 and 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. Atlantic Automotive paid $0.1 million and $0.3 million in rent during the three months ended March 31, 2015 and 2014.

 

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 for both the three months ended March 31, 2015 and 2014, 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.  This investment received $0.1 million in rent pursuant to the lease for both the three months ended March 31, 2015 and 2014, respectively.

 

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7.              SEGMENT DATA

 

We measure segment performance based on operating income (loss).  Our broadcast segment includes stations in 79 markets located throughout the continental United States. Our other operating divisions primarily consist of sign design and fabrication; regional security alarm operating and bulk acquisitions; manufacturing and service of broadcast antennas; service of broadcast 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 $207.0 million and $172.0 million of intercompany loans between the broadcast segment, other operating divisions and corporate as of March 31, 2015 and 2014, respectively.  We had $5.2 million and $4.9 million in intercompany interest expense related to intercompany loans between the broadcast segment, other operating divisions and corporate for the three months ending March 31, 2015 and 2014, 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, 2015

 

Broadcast

 

Other
Operating
Divisions

 

Corporate

 

Consolidated

 

Revenue

 

$

485,122

 

$

19,653

 

$

 

$

504,775

 

Depreciation of property and equipment

 

24,185

 

725

 

279

 

25,189

 

Amortization of definite-lived intangible assets and other assets

 

37,891

 

2,089

 

 

39,980

 

Amortization of program contract costs and net realizable value adjustments

 

30,391

 

 

 

30,391

 

General and administrative overhead expenses

 

14,905

 

259

 

852

 

16,016

 

Operating income (loss)

 

87,449

 

744

 

(3,646

)

84,547

 

Interest expense

 

 

1,075

 

45,573

 

46,648

 

Income from equity and cost method investments

 

 

3,146

 

 

3,146

 

Assets

 

4,865,380

 

366,307

 

185,792

 

5,417,479

 

 

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

 

 

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8.              FAIR VALUE MEASUREMENTS:

 

Accounting guidance provides for valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost).  A fair value hierarchy using three broad levels prioritizes the inputs to valuation techniques used to measure fair value.  The following is a brief description of those three levels:

 

·                  Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

·                  Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

·                  Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

 

The carrying value and fair value of our notes and debentures for the periods presented (in thousands):

 

 

 

As of March 31, 2015

 

As of December 31, 2014

 

 

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Level 2:

 

 

 

 

 

 

 

 

 

6.375% Senior Unsecured Notes due 2021

 

$

350,000

 

$

370,563

 

$

350,000

 

$

355,800

 

6.125% Senior Unsecured Notes due 2022

 

500,000

 

523,005

 

500,000

 

503,475

 

5.625% Senior Unsecured Notes due 2024

 

550,000

 

562,375

 

550,000

 

532,813

 

5.375% Senior Unsecured Notes due 2021

 

600,000

 

616,500

 

600,000

 

595,068

 

Term Loan A

 

341,183

 

334,359

 

348,073

 

341,982

 

Term Loan B

 

1,034,450

 

1,036,559

 

1,035,883

 

1,029,997

 

Revolver credit facility

 

323,000

 

323,000

 

338,000

 

338,000

 

Debt of variable interest entities

 

29,296

 

29,296

 

30,167

 

30,167

 

Debt of other operating divisions

 

126,502

 

126,502

 

118,822

 

118,822

 

 

9.              CONDENSED CONSOLIDATING FINANCIAL STATEMENTS:

 

Sinclair Television Group, Inc. (STG), a wholly-owned subsidiary and the television operating subsidiary of Sinclair Broadcast Group, Inc. (SBG), is the primary obligor under the Bank Credit Agreement, the 5.375% Notes, the 5.625% Notes, 6.125% Notes, and 6.375% Notes. Our Class A Common Stock and Class B Common Stock as of March 31, 2015, were obligations or securities of SBG and not obligations or securities of STG.  SBG is a guarantor under the Bank Credit Agreement, the 5.375% Notes, 5.625% Notes, 6.125% Notes, and 6.375% Notes. As of March 31, 2015, our consolidated total debt of $3,911.0 million included $3,779.0 million of debt related to STG and its subsidiaries of which SBG guaranteed $3,727.9 million.

 

SBG, KDSM, LLC, a wholly-owned subsidiary of SBG, and STG’s wholly-owned subsidiaries (guarantor subsidiaries), have fully and unconditionally guaranteed, subject to certain customary automatic release provisions, all of STG’s obligations.  Those guarantees are joint and several.  There are certain contractual restrictions on the ability of SBG, STG or KDSM, LLC to obtain funds from their subsidiaries in the form of dividends or loans.

 

The following condensed consolidating financial statements present the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows of SBG, STG, KDSM, LLC and the guarantor subsidiaries, the direct and indirect non-guarantor subsidiaries of SBG and the eliminations necessary to arrive at our information on a consolidated basis.

 

These statements are presented in accordance with the disclosure requirements under SEC Regulation S-X, Rule 3-10.

 

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CONDENSED CONSOLIDATING BALANCE SHEET

AS OF MARCH 31, 2015

(in thousands) (unaudited)

 

 

 

Sinclair
Broadcast
Group, Inc.

 

Sinclair
Television
Group, Inc.

 

Guarantor
Subsidiaries
and KDSM,
LLC

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Sinclair
Consolidated

 

Cash

 

$

 

$

35,551

 

$

936

 

$

21,356

 

$

 

$

57,843

 

Accounts and other receivables

 

 

 

341,056

 

28,861

 

(1,221

)

368,696

 

Other current assets

 

1,627

 

16,261

 

86,304

 

21,758

 

(18,712

)

107,238

 

Total current assets

 

1,627

 

51,812

 

428,296

 

71,975

 

(19,933

)

533,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

3,683

 

19,618

 

554,338

 

172,105

 

(7,347

)

742,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in consolidated subsidiaries

 

412,044

 

3,519,449

 

4,129

 

 

(3,935,622

)

 

Other long-term assets

 

63,286

 

628,279

 

82,312

 

115,725

 

(652,497

)

237,105

 

Total other long-term assets

 

475,330

 

4,147,728

 

86,441

 

115,725

 

(4,588,119

)

237,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangible assets

 

 

 

3,800,607

 

217,368

 

(113,775

)

3,904,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

480,640

 

$

4,219,158

 

$

4,869,682

 

$

577,173

 

$

(4,729,174

)

$

5,417,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

1,812

 

$

57,224

 

$

178,665

 

$

28,595

 

$

(21,241

)

$

245,055

 

Current portion of long-term debt

 

375

 

46,250

 

1,371

 

10,830

 

 

58,826

 

Current portion of affiliate long-term debt

 

1,509

 

 

1,086

 

1,402

 

(1,219

)

2,778

 

Other current liabilities

 

3,026

 

 

113,656

 

9,323

 

(1,485

)

124,520

 

Total current liabilities

 

6,722

 

103,474

 

294,778

 

50,150

 

(23,945

)

431,179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

3,652,382

 

33,971

 

145,470

 

 

3,831,823

 

Affiliate long-term debt

 

3,109

 

 

12,587

 

334,367

 

(332,458

)

17,605

 

Other liabilities

 

33,565

 

28,261

 

1,007,725

 

170,858

 

(515,977

)

724,432

 

Total liabilities

 

43,396

 

3,784,117

 

1,349,061

 

700,845

 

(872,380

)

5,005,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Sinclair Broadcast Group equity (deficit)

 

437,244

 

435,041

 

3,520,621

 

(94,620

)

(3,861,042

)

437,244

 

Noncontrolling interests in consolidated subsidiaries

 

 

 

 

(29,052

)

4,248

 

(24,804

)

Total liabilities and equity (deficit)

 

$

480,640

 

$

4,219,158

 

$

4,869,682

 

$

577,173

 

$

(4,729,174

)

$

5,417,479

 

 

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CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2014

(in thousands)

 

 

 

Sinclair
Broadcast
Group,
Inc.

 

Sinclair
Television
Group, Inc.

 

Guarantor
Subsidiaries
and KDSM,
LLC

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Sinclair
Consolidated

 

Cash

 

$

 

$

3,394

 

$

1,749

 

$

12,539

 

$

 

$

17,682

 

Accounts and other receivables

 

 

164

 

359,486

 

25,111

 

(1,258

)

383,503

 

Other current assets

 

5,741

 

12,996

 

98,751

 

12,721

 

(11,733

)

118,476

 

Assets held for sale

 

 

 

 

6,504

 

 

6,504

 

Total current assets

 

5,741

 

16,554

 

459,986

 

56,875

 

(12,991

)

526,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

3,949

 

17,554

 

569,372

 

168,762

 

(7,099

)

752,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

 

 

1,843

 

6,974

 

 

8,817

 

Investment in consolidated subsidiaries

 

395,225

 

3,585,037

 

3,978

 

 

(3,984,240

)

 

Other long-term assets

 

65,988

 

595,112

 

90,914

 

115,375

 

(620,628

)

246,761

 

Total other long-term assets

 

461,213

 

4,180,149

 

96,735

 

122,349

 

(4,604,868

)

255,578

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangible assets

 

 

1,483

 

3,821,985

 

209,724

 

(115,301

)

3,917,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

470,903

 

$

4,215,740

 

$

4,948,078

 

$

557,710

 

$

(4,740,259

)

$

5,452,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

541

 

$

46,083

 

$

201,102

 

$

24,325

 

$

(13,680

)

$

258,371

 

Current portion of long-term debt

 

529

 

42,953

 

1,302

 

68,332

 

 

113,116

 

Current portion of affiliate long-term debt

 

1,464

 

 

1,182

 

1,026

 

(1,047

)

2,625

 

Other current liabilities

 

1,208

 

 

107,867

 

9,749

 

(1,407

)

117,417

 

Liabilities held for sale

 

 

 

 

2,477

 

 

2,477

 

Total current liabilities

 

3,742

 

89,036

 

311,453

 

105,909

 

(16,134

)

494,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

3,679,004

 

34,338

 

83,324

 

 

3,796,666

 

Affiliate long-term debt

 

3,508

 

 

12,802

 

319,901

 

(319,902

)

16,309

 

Other liabilities

 

35,771

 

28,856

 

1,003,213

 

169,935

 

(497,927

)

739,848

 

Total liabilities

 

43,021

 

3,796,896

 

1,361,806

 

679,069

 

(833,963

)

5,046,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Sinclair Broadcast Group equity (deficit)

 

427,882

 

418,844

 

3,586,272

 

(94,632

)

(3,910,484

)

427,882

 

Noncontrolling interests in consolidated subsidiaries

 

 

 

 

(26,727

)

4,188

 

(22,539

)

Total liabilities and equity (deficit)

 

$

470,903

 

$

4,215,740

 

$

4,948,078

 

$

557,710

 

$

(4,740,259

)

$

5,452,172

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2015

(in thousands) (unaudited)

 

 

 

Sinclair
Broadcast
Group, Inc.

 

Sinclair
Television
Group, Inc.

 

Guarantor
Subsidiaries
and KDSM,
LLC

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Sinclair
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

 

$

 

$

476,670

 

$

47,004

 

$

(18,899

)

$

504,775

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Program and production

 

 

 

169,693

 

19,849

 

(18,527

)

171,015

 

Selling, general and administrative

 

1,045

 

14,783

 

99,347

 

2,640

 

88

 

117,903

 

Depreciation, amortization and other operating expenses

 

266

 

775

 

102,360

 

28,250

 

(341

)

131,310

 

Total operating expenses

 

1,311

 

15,558

 

371,400

 

50,739

 

(18,780

)

420,228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(1,311

)

(15,558

)

105,270

 

(3,735

)

(119

)

84,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries

 

24,325

 

64,465

 

(50

)

 

(88,740

)

 

Interest expense

 

(102

)

(43,873

)

(1,176

)

(6,706

)

5,209

 

(46,648

)

Other income (expense)

 

1,350

 

(154

)

64

 

2,104

 

 

3,364

 

Total other income (expense)

 

25,573

 

20,438

 

(1,162

)

(4,602

)