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EX-32.2 - EXHIBIT 32.2 - SINCLAIR BROADCAST GROUP INCa2016q310-qexhibit322.htm
EX-32.1 - EXHIBIT 32.1 - SINCLAIR BROADCAST GROUP INCa2016q310-qexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - SINCLAIR BROADCAST GROUP INCa2015q310-qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - SINCLAIR BROADCAST GROUP INCa2016q310-qexhibit311.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2016
 
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
November 4, 2016
Class A Common Stock
 
64,706,034
Class B Common Stock
 
25,928,357



SINCLAIR BROADCAST GROUP, INC.
 
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2016
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
 

3


SINCLAIR BROADCAST GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) (Unaudited) 
 
As of September 30,
2016
 
As of December 31,
2015
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and cash equivalents
$
104,545

 
$
149,972

Accounts receivable, net of allowance for doubtful accounts of $2,838 and $4,495, respectively
519,662

 
424,608

Current portion of program contract costs
110,228

 
91,466

Income taxes receivable
9,234

 
823

Prepaid expenses and other current assets
37,909

 
26,903

Deferred barter costs
8,512

 
7,991

Total current assets
790,090

 
701,763

PROGRAM CONTRACT COSTS, less current portion
12,245

 
18,996

PROPERTY AND EQUIPMENT, net
713,088

 
717,137

RESTRICTED CASH

 
3,725

GOODWILL
1,989,578

 
1,931,093

INDEFINITE-LIVED INTANGIBLE ASSETS
153,125

 
132,465

DEFINITE-LIVED INTANGIBLE ASSETS, net
1,983,326

 
1,751,570

OTHER ASSETS
224,736

 
175,566

Total assets (a)
$
5,866,188

 
$
5,432,315

LIABILITIES AND EQUITY (DEFICIT)
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable and accrued liabilities
$
291,213

 
$
251,313

Current portion of notes payable, capital leases and commercial bank financing
165,238

 
164,184

Current portion of notes and capital leases payable to affiliates
3,599

 
3,166

Current portion of program contracts payable
131,553

 
108,260

Deferred barter revenues
8,142

 
8,080

Total current liabilities
599,745

 
535,003

LONG-TERM LIABILITIES:
 

 
 

Notes payable, capital leases and commercial bank financing, less current portion
4,022,437

 
3,669,160

Notes payable and capital leases to affiliates, less current portion
15,036

 
17,850

Program contracts payable, less current portion
57,724

 
56,921

Deferred tax liabilities
612,961

 
585,072

Other long-term liabilities
71,619

 
68,631

Total liabilities (a)
5,379,522

 
4,932,637

COMMITMENTS AND CONTINGENCIES (See Note 4)


 


EQUITY:
 

 
 

SINCLAIR BROADCAST GROUP SHAREHOLDERS’ EQUITY:
 

 
 

Class A Common Stock, $.01 par value, 500,000,000 shares authorized, 65,546,601 and 68,792,483 shares issued and outstanding, respectively
655

 
688

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
876,895

 
962,726

Accumulated deficit
(360,459
)
 
(437,029
)
Accumulated other comprehensive loss
(834
)
 
(834
)
Total Sinclair Broadcast Group shareholders’ equity
516,516

 
525,810

Noncontrolling interests
(29,850
)
 
(26,132
)
Total equity
486,666

 
499,678

Total liabilities and equity
$
5,866,188

 
$
5,432,315

 
The accompanying notes are an integral part of these unaudited consolidated financial statements. 
 
(a)
Our consolidated total assets as of September 30, 2016 and December 31, 2015 include total assets of variable interest entities (VIEs) of $151.1 million and $152.4 million, respectively, which can only be used to settle the obligations of the VIEs.  Our consolidated total liabilities as of September 30, 2016 and December 31, 2015 include total liabilities of the VIEs of $41.1 million and $35.6 million, respectively, for which the creditors of the VIEs have no recourse to us.  See Note 1. Nature of Operations and Summary of Significant Accounting Policies.


4


SINCLAIR BROADCAST GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) (Unaudited) 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
REVENUES:
 

 
 

 
 
 
 
Media revenues
$
635,269

 
$
498,167

 
$
1,772,860

 
$
1,466,088

Revenues realized from station barter arrangements
32,061

 
28,618

 
92,574

 
79,950

Other non-media revenues
26,505

 
21,619

 
73,824

 
61,308

Total revenues
693,835

 
548,404

 
1,939,258

 
1,607,346

OPERATING EXPENSES:
 

 
 

 
 
 
 
Media production expenses
242,880

 
187,173

 
702,377

 
540,554

Media selling, general and administrative expenses
126,672

 
105,622

 
370,169

 
311,088

Expenses realized from barter arrangements
27,181

 
23,105

 
79,365

 
66,898

Amortization of program contract costs and net realizable value adjustments
32,441

 
29,841

 
96,722

 
90,014

Other non-media expenses
20,488

 
16,555

 
57,946

 
46,988

Depreciation of property and equipment
25,886

 
25,476

 
74,330

 
75,938

Corporate general and administrative expenses
19,052

 
16,464

 
54,672

 
46,685

Amortization of definite-lived intangible and other assets
47,807

 
40,014

 
137,197

 
119,439

Research and development expenses
745

 
4,803

 
3,055

 
11,555

Gain on asset dispositions
(3,311
)
 
(255
)
 
(5,982
)
 
(306
)
Total operating expenses
539,841

 
448,798

 
1,569,851

 
1,308,853

Operating income
153,994

 
99,606

 
369,407

 
298,493

OTHER INCOME (EXPENSE):
 

 
 

 
 
 
 
Interest expense and amortization of debt discount and deferred financing costs
(53,488
)
 
(48,566
)
 
(156,819
)
 
(142,878
)
Loss from extinguishment of debt
(23,699
)
 

 
(23,699
)
 

Income from equity investments
1,423

 
252

 
2,789

 
5,405

Other income (expense)
789

 
(48
)
 
2,355

 
1,220

Total other expense, net
(74,975
)
 
(48,362
)
 
(175,374
)
 
(136,253
)
Income before income taxes
79,019

 
51,244

 
194,033

 
162,240

INCOME TAX PROVISION
(26,986
)
 
(7,210
)
 
(65,771
)
 
(46,971
)
NET INCOME
52,033

 
44,034

 
128,262

 
115,269

Net income attributable to the noncontrolling interests
(1,188
)
 
(779
)
 
(3,858
)
 
(1,945
)
NET INCOME ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP
$
50,845

 
$
43,255

 
$
124,404

 
$
113,324

Dividends declared per share
$
0.180

 
$
0.165

 
$
0.525

 
$
0.345

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

 
 

 
 
 
 
Basic earnings per share
$
0.54

 
$
0.46

 
$
1.32

 
$
1.19

Diluted earnings per share
$
0.54

 
$
0.45

 
$
1.30

 
$
1.18

Weighted average common shares outstanding
93,948

 
95,002

 
94,595

 
95,146

Weighted average common and common equivalent shares outstanding
94,766

 
95,692

 
95,465

 
95,837

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


5


SINCLAIR BROADCAST GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) (Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
52,033

 
$
44,034

 
$
128,262

 
$
115,269

Amortization of net periodic pension benefit costs, net of taxes

 
10

 

 
178

Comprehensive income
52,033

 
44,044

 
128,262

 
115,447

Comprehensive income attributable to the noncontrolling interests
(1,188
)
 
(779
)
 
(3,858
)
 
(1,945
)
Comprehensive income attributable to Sinclair Broadcast Group
$
50,845

 
$
43,265

 
$
124,404

 
$
113,502

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


6


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, 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

 

 

 

 

 
(47,104
)
 

 

 
(47,104
)
Repurchases of Class A Common Stock
(1,107,887
)
 
(11
)
 

 

 
(28,812
)
 

 

 

 
(28,823
)
Class A Common Stock issued pursuant to employee benefit plans
291,911

 
3

 

 

 
10,616

 

 

 

 
10,619

Tax benefit on share based awards

 

 

 

 
703

 

 

 

 
703

Distributions to noncontrolling interests, net

 

 

 

 

 

 

 
(6,655
)
 
(6,655
)
Other comprehensive income

 

 

 

 

 

 
178

 

 
178

Issuance of subsidiary stock awards

 

 

 

 

 

 

 
1,731

 
1,731

Net income

 

 

 

 

 
113,324

 

 
1,945

 
115,269

BALANCE, September 30, 2015
68,762,923

 
$
688

 
25,928,357

 
$
259

 
$
961,709

 
$
(479,600
)
 
$
(6,277
)
 
$
(25,518
)
 
$
451,261

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



7


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, 2015
68,792,483

 
$
688

 
25,928,357

 
$
259

 
$
962,726

 
$
(437,029
)
 
$
(834
)
 
$
(26,132
)
 
$
499,678

Cumulative effect of adoption of new accounting standard (see Note 1)

 

 

 

 
431

 
1,833

 

 

 
2,264

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

 

 

 

 

 
(49,667
)
 

 

 
(49,667
)
Repurchases of Class A Common Stock
(3,610,201
)
 
(37
)
 

 

 
(101,127
)
 

 

 

 
(101,164
)
Class A Common Stock issued pursuant to employee benefit plans
364,319

 
4

 

 

 
14,865

 

 

 

 
14,869

Distributions to noncontrolling interests, net

 

 

 

 

 

 

 
(8,363
)
 
(8,363
)
Issuance of subsidiary stock awards

 

 

 

 

 

 

 
787

 
787

Net income

 

 

 

 

 
124,404

 

 
3,858

 
128,262

BALANCE, September 30, 2016
65,546,601

 
$
655

 
25,928,357

 
$
259

 
$
876,895

 
$
(360,459
)
 
$
(834
)
 
$
(29,850
)
 
$
486,666

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


8


SINCLAIR BROADCAST GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Unaudited)
 
 
Nine Months Ended September 30,
 
2016
 
2015
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
 

 
 

Net income
$
128,262

 
$
115,269

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

 
 

Depreciation of property and equipment
74,330

 
75,938

Amortization of definite-lived intangible and other assets
137,197

 
119,439

Amortization of program contract costs and net realizable value adjustments
96,722

 
90,014

Loss on extinguishment of debt, non-cash portion
3,875

 

Stock-based compensation expense
13,470

 
14,778

Deferred tax benefit
6,631

 
(19,623
)
Change in assets and liabilities, net of acquisitions:
 

 
 

(Increase) decrease in accounts receivable
(77,118
)
 
563

Increase in prepaid expenses and other current assets
(4,344
)
 
(11,643
)
Increase in accounts payable and accrued liabilities
36,286

 
8,128

Net change in net income taxes payable/receivable
(8,411
)
 
5,623

Payments on program contracts payable
(84,625
)
 
(82,594
)
Other, net
7,985

 
(2,171
)
Net cash flows from operating activities
330,260

 
313,721

 
 
 
 
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
 

 
 

Acquisition of property and equipment
(68,601
)
 
(72,476
)
Acquisition of businesses, net of cash acquired
(425,856
)
 
(15,514
)
Purchase of alarm monitoring contracts
(29,143
)
 
(31,340
)
Proceeds from sale of assets
16,396

 
23,650

Investments in equity and cost method investees
(34,224
)
 
(43,068
)
Loans to affiliates
(19,500
)
 

Other, net
3,401

 
11,215

Net cash flows used in investing activities
(557,527
)
 
(127,533
)
 
 
 
 
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
 

 
 

Proceeds from notes payable and commercial bank financing
1,011,312

 
379,481

Repayments of notes payable, commercial bank financing and capital leases
(653,987
)
 
(375,104
)
Dividends paid on Class A and Class B Common Stock
(49,667
)
 
(47,104
)
Repurchase of outstanding Class A Common Stock
(101,164
)
 
(28,823
)
Payments for deferred financing cost
(15,598
)
 
(3,847
)
Other, net
(9,056
)
 
(9,084
)
Net cash flows from (used in) financing activities
181,840

 
(84,481
)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(45,427
)
 
101,707

CASH AND CASH EQUIVALENTS, beginning of period
149,972

 
17,682

CASH AND CASH EQUIVALENTS, end of period
$
104,545

 
$
119,389


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


9


SINCLAIR BROADCAST GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.              NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
Nature of Operations

Sinclair Broadcast Group, Inc. is a diversified television broadcasting company with national reach with a strong focus on providing high-quality content on our local television stations and digital platforms. The content, distributed through our broadcast platform, consists of programming provided by third-party networks and syndicators, local news, and other original programming produced by us. We also distribute our original programming, and owned and operated network affiliates, on other third-party platforms. Additionally, we own digital media products that are complementary to our extensive portfolio of television station related digital properties. Outside of our media related businesses, we operate technical services companies focused on supply and maintenance of broadcast transmission systems as well as research and development for the advancement of broadcast technology, and we manage other non-media related investments.

As of September 30, 2016, our broadcast distribution platform is a single reportable segment for accounting purposes. It consists primarily of our broadcast television stations, which we own, provide programming and operating services pursuant to agreements commonly referred to as local marketing agreements (LMAs), or provide sales services and other non-programming operating services pursuant to other outsourcing agreements (such as joint sales agreements (JSAs) and shared services agreements (SSAs)) to 173 stations in 81 markets. These stations broadcast 482 channels, as of September 30, 2016. For the purpose of this report, these 173 stations and 482 channels are referred to as “our” stations and channels.

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 interest 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 and nine months ended September 30, 2016 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, 2015 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. 
 
Third-party station licensees.  Certain of our stations provide services to other station owners within the same respective market through agreements, 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 September 30,

10


2016 and December 31, 2015, respectively, 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 7. Related Person Transactions for more information about the arrangements with Cunningham. The net revenues of the stations which we consolidate were $79.1 million and $227.4 million for the three and nine months ended September 30, 2016, and $71 million and $207.6 million for the three and nine months ended September 30, 2015, 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, Joint Sales Agreements, Retransmission Consent Negotiations, and National Ownership Cap within Note 4. Commitments and Contingencies for discussion of recent changes in FCC rules related to JSAs.
 

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):
 
 
September 30,
2016
 
December 31,
2015
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and cash equivalents
$
490

 
$
490

Accounts receivable
24,945

 
21,719

Current portion of program contract costs
14,895

 
13,287

Prepaid expenses and other current assets
318

 
331

Total current assets
40,648

 
35,827

 
 
 
 
PROGRAM CONTRACT COSTS, less current portion
3,078

 
4,541

PROPERTY AND EQUIPMENT, net
3,301

 
7,609

GOODWILL
791

 
787

INDEFINITE-LIVED INTANGIBLE ASSETS
15,684

 
17,599

DEFINITE-LIVED INTANGIBLE ASSETS, net
80,693

 
79,086

OTHER ASSETS
6,924

 
6,924

Total assets
$
151,119

 
$
152,373

 
 
 
 
LIABILITIES
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable and accrued liabilities
$
1,112

 
$
1,240

Current portion of notes payable, capital leases and commercial bank financing
3,710

 
3,687

Current portion of program contracts payable
16,573

 
12,627

Total current liabilities
21,395

 
17,554

 
 
 
 
LONG-TERM LIABILITIES:
 

 
 

Notes payable, capital leases and commercial bank financing, less current portion
21,944

 
24,594

Program contracts payable, less current portion
14,036

 
13,679

Other long-term liabilities
9,364

 
8,067

Total liabilities
$
66,739

 
$
63,894

 

11


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 and certain JSAs 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 and certain JSAs as of September 30, 2016 and December 31, 2015, which are excluded from liabilities above, were $40.0 million and $37.6 million, respectively.  The total capital lease liabilities, net of capital lease assets, excluded from the above were $4.5 million for both September 30, 2016 and December 31, 2015.  Also excluded from the amounts above are liabilities associated with certain outsourcing agreements and purchase options with certain VIEs totaling $77.8 million and $72.5 million as of September 30, 2016 and December 31, 2015, respectively, as these amounts are eliminated in consolidation.  The assets of each of these 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. The risk and reward characteristics of the VIEs are similar.
 
Other investments.  We have investments in 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 September 30, 2016 and December 31, 2015 are $119.9 million and $18.1 million, respectively, and are included in other assets in the consolidated balance sheets. The increase in 2016 was due to the adoption of the revised accounting guidance during the first quarter of 2016 related to consolidation as discussed under Recent Accounting Pronouncements below, which resulted in additional investments being considered VIEs. 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 $1.4 million and $2.8 million for the three and nine months ended September 30, 2016, and income of $0.7 million and $6.5 million for the three and nine months ended September 30, 2015 respectively.

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.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued 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 the annual reporting period beginning after December 15, 2017, however, early adoption is permitted. 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 consolidated financial statements.

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 will be adopting this guidance beginning December 31, 2016, which will involve adding policies and procedures around our assessments to continue as a going concern.

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.  The new standard is effective for the interim and annual periods beginning after December 15, 2015. We adopted this revised guidance on a modified retrospective basis during the three months ended March 31, 2016. As disclosed under Other investments under Variable Interest Entities above, the adoption of the revised guidance resulted in additional investments in real estate ventures and investment companies being considered VIEs, however, we concluded that we were not the primary beneficiary of these investments. The revised guidance did not have any other impact on our consolidation conclusions.

In February 2016, the FASB issued new guidance related to accounting for leases, which requires the assets and liabilities that arise from leases to be recognized on the balance sheet. Currently only capital leases are recorded on the balance sheet. This update will require the lessee to recognize a lease liability equal to the present value of the lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases longer than 12 months. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease

12


assets and liabilities and recognize the lease expense for such leases generally on a straight-line basis over the lease term. This new guidance will be effective for fiscal periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.

In March 2016, the FASB issued new guidance that simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income tax effects, forfeitures, the impact of employee income tax withholdings and classification of certain related items in the statement of cash flows. We early adopted this guidance effective January 1, 2016, which did not have a material effect on the consolidated financial statements. The adoption of the various changes in the guidance were applied as required by the guidance either on the prospective, modified retrospective, or full retrospective basis. As shown in the consolidated statement of stockholders' equity, upon adoption, we recorded a $0.4 million increase to additional paid in capital and a $1.8 million decrease in accumulated deficit, net of taxes, to record the cumulative effect of changing the classification of certain liability awards to equity classification. Additionally, for the nine months ended September 30, 2015, we reclassified $2.2 million from net cash flows from operating activities to net cash flows from financing activities in our consolidated statement of cash flows related to cash payments made to taxing authorities on certain employees' behalf for shares withheld.

In August 2016, the FASB issued new guidance related to the classification of certain cash receipts and cash payments. The new standard, which includes eight specific cash flow issues with the objective of reducing the existing diversity in practice as to how cash receipts and cash payments are represented in the statement of cash flow. The new standard is effective for fiscal year beginning after December 15, 2017, including the interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.

Revenue Recognition
 
Total revenues include: (i) cash and barter advertising revenues, net of agency commissions; (ii) retransmission consent fees; (iii) network compensation; (iv) other media revenues and (v) revenues from our other businesses.
 
Advertising revenues, net of agency commissions, are recognized in the period during which advertisements are placed.

Some of our retransmission consent agreements contain both advertising and retransmission consent elements.  We have determined that these 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 significant revenues are recognized as services are provided.

Income Taxes

Our income tax provision for all periods consists of federal and state income taxes.  The tax provision for the nine months ended September 30, 2016 and 2015 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 and nine months ended September 30, 2016 approximated the statutory rate. Our effective income tax rate for the three and nine months ended September 30, 2015 was less than the statutory rate primarily due to 1) a reduction in liability for unrecognized tax benefits of $5.7 million, in the third quarter of 2015, as a result of statute of limitations expiration and 2) a $3.3 million adjustment to the income tax provision upon finalization of the 2014 federal income tax return, primarily related to greater than originally projected available income tax deductions and credits.





13



Share Repurchase Program

On March 20, 2014, the Board of Directors authorized a $150.0 million share repurchase authorization. On September 6, 2016 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 September 30, 2016, we purchased approximately 3.2 million shares of Class A Common Stock for $90.0 million. For the nine months ended September 30, 2016, we purchased approximately 3.6 million shares of Class A Common Stock for $101.2 million. As of September 30, 2016, the total remaining authorization was $154.3 million. In October and November 2016, we repurchased an additional 1.1 million shares of Class A Common Stock for $31.1 million.

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

14


2.              ACQUISITIONS:

Tennis Channel. In March 2016, we acquired all of the outstanding common stock of Tennis Channel (Tennis), a cable network which includes coverage of the top 100 tennis tournaments and original professional sport and tennis lifestyle shows, for $350.0 million plus a working capital adjustment of $9.2 million. This was funded through cash on hand and a draw on the Bank Credit Agreement. The acquisition provides an expansion of our network business and increases value based on the synergies we can achieve. Tennis is reported within Other within Note 6. Segment Data.

The following table summarizes the allocated fair value of acquired assets and assumed liabilities (in thousands):

Cash
$
5,111

Accounts receivable
17,629

Prepaid expenses and other current assets
6,518

Property and equipment
5,964

Definite-lived intangible assets
272,686

Indefinite-lived intangible assets
23,400

Other assets
619

Accounts payable and accrued liabilities
(7,414
)
Capital leases
(115
)
Deferred tax liability
(20,056
)
Other long term liabilities
(1,669
)
Fair value of identifiable net assets acquired
302,673

Goodwill
56,492

Total
$
359,165

 
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 purchase price has been allocated to the acquired assets and assumed liabilities based on estimated fair values. The allocation is preliminary pending a final determination of the fair values of the assets and liabilities.
 
During the three months ended September 30, 2016, we made certain measurement period adjustments to the initial purchase accounting: an increase to definite-lived intangible assets of $45.6 million, a decrease to indefinite-lived intangible assets of $1.5 million, a decrease to deferred taxes assets of $16.1 million resulting in a net deferred tax liability, a decrease to goodwill of $25.3 million, and an increase to amortization of $1.1 million during the three months ended September 30, 2016.

Indefinite-lived intangible assets are comprised of trade names. Customer relationships, which represent existing advertiser relationships and contractual relationships with MVPDs, will be amortized over the estimated remaining useful lives of 10 to 15 years.  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 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.  Goodwill will not be deductible for tax purposes. Other intangible assets will be amortized over the respective weighted average useful lives ranging from 1 to 3 years. The following table summarizes the amounts allocated to definite-lived intangible assets representing the estimated fair values (in thousands):

        
Customer relationships
$
269,300

Other intangible assets
3,386

Fair value of identifiable definite-lived intangible assets acquired
$
272,686

 
In connection with the acquisitions, for the nine months ended September 30, 2016, we incurred a total of $0.2 million 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. For the three months ended September 30, 2016, net revenues

15


and operating income of Tennis were $27.4 million and $1.3 million, respectively. For the nine months ended September 30, 2016, net revenues and an operating loss of Tennis were $62.5 million and $9.6 million, respectively.

Pro Forma Information
 
The following table sets forth unaudited results of operations for the three and nine months ended September 30, 2016 and 2015 assuming that Tennis, along with transactions necessary to finance the acquisition, occurred at the beginning of the year preceding the year of acquisition. The pro forma results exclude the acquisition of television station acquisitions discussed below, as they were deemed not material both individually and in the aggregate (in thousands, except per share data):

 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Total revenues
 
$
693,835

 
$
571,437

 
$
1,953,750

 
$
1,678,800

Net Income
 
$
79,019

 
$
40,911

 
$
127,222

 
$
107,312

Net Income attributable to Sinclair Broadcast Group
 
$
50,845

 
$
40,132

 
$
123,364

 
$
105,367

Basic earnings per share attributable to Sinclair Broadcast Group
 
$
0.54

 
$
0.42

 
$
1.30

 
$
1.11

Diluted earnings per share attributable to Sinclair Broadcast Group
 
$
0.54

 
$
0.42

 
$
1.29

 
$
1.10


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 Tennis 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 and amortization of intangible assets 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 tangible and intangible assets in purchase accounting. 

Television Station Acquisitions. During the nine months ended September 30, 2016, we acquired certain television station related assets for an aggregate purchase price of $72.0 million less working capital of $0.2 million. In conjunction with the acquisition of certain television stations, we simultaneously sold broadcast assets of certain stations. During the three and nine months ended September 30, 2016, we recognized a gain on sale of those broadcast assets of $1.8 million and $2.6 million, respectively.

3.              NOTES PAYABLE AND COMMERCIAL BANK FINANCING:

5.125% Senior Notes, due 2027

On August 30, 2016, we issued $400.0 million of senior unsecured notes, which bear interest at a rate of 5.125% per annum and mature on February 15, 2027 (the 5.125% Notes), pursuant to an indenture dated August 30, 2016 (the 5.125% Indenture). The 5.125% Notes were priced at 100% of their par value and interest is payable semi-annually on February 15 and August 15, commencing on February15, 2017. Prior to August 15, 2021, we may redeem the 5.125% Notes, in whole or in part, at any time or from time to time at a price equal to 100% of the principal amount of the 5.125% Notes plus accrued and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium as set forth in the 5.125% Indenture. In addition, on or prior to August 15, 2019, we may redeem up to 35% of the 5.125% Notes, using proceeds of certain equity offerings. If we sell certain of our assets or experience specific kinds of changes of control, the holders of the 5.125% Notes may require us to repurchase some or all of the notes. There are no registration rights associated with the 5.125% Notes. The net proceeds of the 5.125% Notes were used to redeem $350.0 million aggregate principal amount of STG's 6.375% senior unsecured notes due 2021 (the 6.375% Notes) and for general corporate purposes. The redemption price, including the outstanding principal amount of the 6.375% Notes, accrued and unpaid interest, and a make-whole premium, totaled $377.2 million. We recorded a loss on extinguishment of debt of $23.7 million related to this redemption. We incurred $6.6 million of deferred financing costs in connection with the issuance of the 5.125% Notes as of September 30, 2016.


16


5.875% Senior Notes, due 2026

On March 23, 2016, we issued $350.0 million of senior unsecured notes, which bear interest at a rate of 5.875% per annum and mature on March 15, 2026 (the 5.875% Notes), pursuant to an indenture dated March 23, 2016 (the 5.875% Indenture). The 5.875% Notes were priced at 100% of their par value and interest is payable semi-annually on March 15 and September 15, commencing on September 15, 2016. Prior to March 15, 2021, we may redeem the 5.875% Notes, in whole or in part, at any time or from time to time at a price equal to 100% of the principal amount of the 5.875% Notes plus accrued and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium as set forth in the 5.875% Indenture. In addition, on or prior to March 15, 2019, we may redeem up to 35% of the 5.875% Notes, using proceeds of certain equity offerings. If we sell certain of our assets or experience specific kinds of changes of control, the holders of the 5.875% Notes may require us to repurchase some or all of the notes. There are no registration rights associated with the 5.875% Notes. The proceeds from the offering of the 5.875% Notes, were used to repay amounts under our revolving credit facility and for other general corporate purposes. We incurred $5.9 million of deferred financing costs in connection with the issuance of the 5.875% Notes.

As discussed in Note 2. Acquisitions, we completed the acquisition of Tennis in March 2016. The acquisition was funded, in part, by a draw on our revolving line of credit which was repaid using the proceeds from the 5.875% Notes discussed above.

Bank Credit Agreement

On July 19, 2016, we entered into an amendment and extension of our bank credit agreement. Pursuant to the amendment, the maturity date applicable to $485.2 million in revolving commitments and $139.5 million of term loan A loans were extended to July 31, 2021. The remaining $153.5 million of outstanding term loan A loans will mature April 9, 2018. In connection with the transaction, we also amended certain pricing terms related to the loans. We incurred approximately $2.6 million of financing costs in connection with the amendment, of which $0.3 million was expensed and the remaining $2.3 million was capitalized as deferred financing cost as of September 30, 2016.

As of September 30, 2016 and December 31, 2015, there was no outstanding balance under our revolving credit facility. As of September 30, 2016, we had $483.3 million borrowing capacity under our revolving credit facility.

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 none of our pending and threatened matters are material. The FCC has undertaken an investigation in response to a complaint it received alleging possible violations of the FCC’s sponsorship identification rules by the Company and certain of its subsidiaries. We cannot predict the outcome of any potential FCC action related to this matter but it is possible that such action could include fines and/or compliance programs.

Changes in the Rules of Television Ownership, Joint Sales Agreements, Retransmission Consent Negotiations, and National Ownership Cap
 
In March, 2014, the FCC issued a public notice indicating that it will closely scrutinize any broadcast assignment or transfer application proposing sharing arrangements (such as JSAs, LMAs and other shared services agreements) and contingent interests (such as options). 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, in August, 2016, the FCC completed both its 2010 and 2014 quadrennial reviews of its media ownership rules and issued an order which left most of the existing multiple ownership rules intact, but amended the rules to provide that, for JSAs 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 order provides that JSAs that existed prior to March 31, 2014, may remain in place until October 1, 2025, at which point they must be terminated, amended or otherwise come into compliance with the rules. In addition, these "grandfathered" JSAs may be transferred or assigned without losing grandfathering status. These new rules could limit our future ability to create duopolies or other two station operations in certain markets. The revenues of these JSA arrangements we earned were $16.0 million and $11.5 million for the three months ended September 30, 2016 and 2015 and $42.5 million and $34.2 million for the nine months ended September 30, 2016 and 2015, respectively.

17



In February 2015, the FCC issued an order implementing certain statutorily required changes to its rules governing the duty to negotiate retransmission consent agreements in good faith. With these changes, a television broadcast station is prohibited from negotiating retransmission consent jointly with another television station in the same market unless the “stations are directly or indirectly under common de jure control permitted under the regulations of the Commission.” During a 2015 retransmission consent negotiation, an MVPD filed a complaint with the FCC accusing us of violating this rule. Although we reached agreement with the MVPD and they withdrew their complaint, the FCC undertook its own internal investigation regarding the allegations made by the MVPD and whether we negotiated in good faith as defined by the rules. In order to resolve the issues raised by the investigation described above and all other pending matters before the FCC's Media Bureau (Bureau), the Company, on July 29, 2016, without any admission of liability, entered into a consent decree with the FCC pursuant to which the Bureau agreed (i) to terminate their investigation regarding the retransmission consent negotiations described above as well as any other investigations pending before the Bureau, (ii) to dismiss with prejudice or deny any outstanding adversarial pleadings against the Company pending before the Bureau, (iii) to cancel outstanding forfeiture orders issued by the Bureau relating to the Company, and (iv) to grant all of the Company’s pending license renewals, subject to a payment by the Company to the United States Treasury in the amount of $9.5 million which was paid in September 2016. In addition, pursuant to the terms of the consent decree, the Company agreed to be subject to ongoing compliance monitoring by the FCC for a period of 36 months.

Further, in September 2015, the FCC released a Notice of Proposed Rulemaking in response to a Congressional directive in STELAR to examine the “totality of the circumstances test” for good-faith negotiations of retransmission consent. The proposed rulemaking seeks comment on new factors and evidence to consider in its evaluation of claims of bad faith negotiation, including service interruptions prior to a “marquee sports or entertainment event,” restrictions on online access to broadcast programming during negotiation impasses, broadcasters’ ability to offer bundles of broadcast signals with other broadcast stations or cable networks, and broadcasters’ ability to invoke the FCC’s exclusivity rules during service interruptions. On July 14, 2016, the FCC’s Chairman announced that the FCC would not, at this time, proceed to adopt additional rules governing good faith negotiations of retransmission consent. No formal action has yet been taken on this Notice of Proposed Rulemaking, and we cannot predict if the full Commission will agree to terminate the Rulemaking without action.

On September 6, 2016, the FCC released an order eliminating the UHF discount. The UHF discount allowed television station owners to discount the coverage of UHF stations when calculating compliance with the FCC’s national ownership cap, which prohibits a single entity from owning television stations that reach, in total, more than 39% of all the television households in the nation. All but 28 of the stations we own and operate, or to which we provide programming services are UHF. As a result of the elimination of the UHF discount, counting all our present stations and pending transactions, we reach over 37% of U.S. households. The changes to the national ownership cap could limit our future ability to make television station acquisitions.


18


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

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
Income (Numerator)
 

 
 

 
 
 
 
 
Net Income
$
52,033

 
$
44,034

 
$
128,262

 
$
115,269

 
Net income attributable to noncontrolling interests
(1,188
)
 
(779
)
 
(3,858
)
 
(1,945
)
 
Numerator for diluted earnings per common share available to common shareholders
$
50,845

 
$
43,255

 
$
124,404

 
$
113,324

 
 
 
 
 
 
 
 
 
 
Shares (Denominator)
 

 
 

 
 
 
 
 
Weighted-average common shares outstanding
93,948

 
95,002

 
94,595

 
95,146

 
Dilutive effect of stock-settled appreciation rights, restricted stock awards and outstanding stock options
818

 
690

 
870

 
691

 
Weighted-average common and common equivalent shares outstanding
94,766

 
95,692

 
95,465

 
95,837

 

There were 525,000 shares for the three and nine months ended September 30, 2016, and 200,000 shares for the three and nine months ended September 30, 2015 which had an anti-dilutive effect on the equivalent shares outstanding and therefore excluded from the diluted effect above.

6.              SEGMENT DATA:
 
We measure segment performance based on operating income (loss).  Our broadcast segment includes stations in 81 markets located throughout the continental United States. Other primarily consists of original networks and content, digital and internet solutions, technical services and other non-media investments. All of our businesses 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 and Corporate are not reportable segments but are included for reconciliation purposes. 

We had approximately $226.5 million and $226.0 million of intercompany loans between the broadcast segment, other, and corporate as of September 30, 2016 and 2015, respectively.  We had $6.1 million in intercompany interest expense related to intercompany loans between the broadcast segment, other, and corporate for the three months ended September 30, 2016 and 2015. We had $18.3 million and $16.9 million in intercompany interest expense for the nine months ended September 30, 2016 and 2015, respectively. All other intercompany transactions are immaterial.
 

19


Segment financial information is included in the following tables for the periods presented (in thousands):
 
For the three months ended September 30, 2016
 
Broadcast
 
Other
 
Corporate
 
Consolidated
Revenue
 
$
635,559

 
$
58,276

 
$

 
$
693,835

Depreciation of property and equipment
 
24,195

 
1,425

 
266

 
25,886

Amortization of definite-lived intangible assets and other assets
 
38,717

 
9,090

 

 
47,807

Amortization of program contract costs and net realizable value adjustments
 
32,441

 

 

 
32,441

General and administrative overhead expenses
 
17,530

 
247

 
1,275

 
19,052

Research and development
 

 
745

 

 
745

Operating income (loss)
 
158,666

 
(3,077
)
 
(1,595
)
 
153,994

Interest expense
 
1,404

 
1,664

 
50,420

 
53,488

Income from equity and cost method investments
 

 
611

 
812

 
1,423

Assets
 
4,901,549

 
825,996

 
138,643

 
5,866,188

 
For the three months ended September 30, 2015
 
Broadcast
 
Other
 
Corporate
 
Consolidated
Revenue
 
$
525,529

 
$
22,875

 
$

 
$
548,404

Depreciation of property and equipment
 
24,489

 
708

 
279

 
25,476

Amortization of definite-lived intangible assets and other assets
 
37,601

 
2,413

 

 
40,014

Amortization of program contract costs and net realizable value adjustments
 
29,841

 

 

 
29,841

General and administrative overhead expenses
 
14,378

 
1,087

 
999

 
16,464

Research and development
 

 
4,803

 

 
4,803

Operating income (loss)
 
109,231

 
(7,653
)
 
(1,972
)
 
99,606

Interest expense
 

 
1,305

 
47,261

 
48,566

Income from equity and cost method investments
 

 
252

 

 
252


For the nine months ended September 30, 2016
 
Broadcast
 
Other
 
Corporate
 
Consolidated
Revenue
 
1,790,561

 
148,697

 

 
1,939,258

Depreciation of property and equipment
 
69,469

 
4,063

 
798

 
74,330

Amortization of definite-lived intangible assets and other assets
 
117,038

 
20,159

 

 
137,197

Amortization of program contract costs and net realizable value adjustments
 
96,722

 

 

 
96,722

General and administrative overhead expenses
 
50,320

 
1,075

 
3,277

 
54,672

Research and development
 

 
3,055

 

 
3,055

Operating income (loss)
 
402,236

 
(28,699
)
 
(4,130
)
 
369,407

Interest expense
 
4,297

 
4,695

 
147,827

 
156,819

Income from equity and cost method investments
 

 
414

 
2,375

 
2,789





20


For the nine months ended September 30, 2015
 
Broadcast
 
Other
 
Corporate
 
Consolidated
Revenue
 
$
1,542,943

 
$
64,403

 
$

 
$
1,607,346

Depreciation of property and equipment
 
73,028

 
2,073

 
837

 
75,938

Amortization of definite-lived intangible assets and other assets
 
112,724

 
6,715

 

 
119,439

Amortization of program contract costs and net realizable value adjustments
 
90,014

 

 

 
90,014

General and administrative overhead expenses
 
40,637

 
2,611

 
3,437

 
46,685

Research and development
 

 
11,555

 

 
11,555

Operating income (loss)
 
323,336

 
(20,498
)
 
(4,345
)
 
298,493

Interest expense
 

 
3,541

 
139,337

 
142,878

Income from equity and cost method investments
 

 
5,405

 

 
5,405







21



7.              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 $1.3 million for both the three months ended September 30, 2016 and 2015, and $3.8 million and $3.9 million for nine months ended September 30, 2016 and 2015, respectively.
 
In September 2015, we were granted authority by the Federal Communications Commission (FCC) to operate an experimental facility in Washington D.C. and Baltimore markets to implement a Single Frequency Network (SFN) using the base elements of the new ATSC 3.0 transmission standard.  In conjunction with this experimental facility, Cunningham Communications, Inc. provides tower space without charge.

Charter Aircraft.  We lease aircraft owned by certain controlling shareholders, including a new lease agreement as of February 2016 for the term of thirty months and will be renewed thereafter for successive terms of twelve months. For all leases, we incurred expenses of $0.3 million and $0.4 million for the three months ended September 30, 2016 and 2015, and $1.0 million for both the nine months ended September 30, 2016 and 2015, respectively.

Cunningham Broadcasting Corporation
 
Cunningham owns a portfolio of television stations including: WNUV-TV Baltimore, Maryland; WRGT-TV Dayton, Ohio; WVH-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). Certain of our stations provide services to these Cunningham Stations pursuant to LMAs or JSAs and SSAs. See Note 1. Nature of Operations and Summary of Significant Accounting Policies, for further discussion of the scope of services provided under these types of arrangements.
 
The estate of Carolyn C. Smith, the mother of our controlling shareholders, currently owns all of the voting stock of the Cunningham Stations.  The sale of the voting stock by the estate to an unrelated party is pending approval of the FCC. All of the non-voting stock is owned by trusts for the benefit of the children of our controlling shareholders.  We consolidate certain subsidiaries of Cunningham, with which we have variable interests through various arrangements related to the Cunningham Stations discussed further below.

The services provided to WNUV-TV, WMYA-TV, WTTE-TV, WRGT-TV and WVAH-TV are governed by a master agreement which has a current term that expires on July 1, 2023 and there are two additional 5- year renewal terms remaining with final expiration on July 1, 2033. 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. Pursuant to the terms of this agreement we are obligated to pay Cunningham an annual fee for the television stations equal to the greater of (i) 3% of each station’s annual net broadcast revenue and (ii) $4.7 million. The aggregate purchase price of these television stations increases by 6% annually. A portion of the fee is required to be applied to the purchase price to the extent of the 6% increase. The remaining aggregate purchase price of these stations as of September 30, 2016 was approximately $53.6 million. Additionally, we provide services to WDBB-TV pursuant to an LMA, which expires April 22, 2025. We paid Cunningham under these agreements, $2.1 million and $2.1 million for the three months ended September 30, 2016 and 2015, respectively and $6.6 million and $7.8 million for nine months ended September 30, 2016 and 2015, respectively.

The agreements with WBSF-TV and WGTU-TV/WGTQ-TV expire in November 2021 and August 2023, respectively, and each has renewal provisions for successive eight year periods. We earned $1.4 million and $1.5 million from the services we performed for these stations for the three months ended September 30, 2016 and 2015, respectively, and $3.9 million and $4.2 million for the nine months ended September 30, 2016 and 2015, respectively.

As we consolidate the licensees as VIEs, the amounts we earn or pay under the arrangements are eliminated in consolidation

22


and the gross revenues of the stations are reported within our consolidated statement of operations. Our consolidated revenues related to the Cunningham Stations include $29.4 million and $25.8 million for the three months ended September 30, 2016 and 2015, respectively, and $83.8 million and $74.8 million for the nine months ended September 30, 2016 and 2015, respectively.

During January 2016, Cunningham entered into a promissory note to borrow $19.5 million from us. The note bears interest at a fixed rate of 5.0% per annum (the 5.0% Notes), which is payable quarterly, commencing March 31, 2016. The note matures in January 2021, with additional one year renewal periods upon our approval.

In April 2016, we entered into an agreement with Cunningham to provide master control equipment and provide master control services to a station in Johnstown, PA with which they have an LMA that expires in April 2019, Cunningham will pay us an initial fee of $0.7 million and $0.2 million annually for master control services plus the cost to maintain and repair the equipment. Also, in August 2016, we entered into an agreement, expiring October 2021, with Cunningham to provide a news share service with their station in Johnstown, PA beginning in October 2016 for an annual fee of $1.0 million per year.

Atlantic Automotive Corporation
 
We sell advertising time to 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 $0.3 million and $0.1 million for the three months ended September 30, 2016 and 2015, and $0.6 million and $0.3 million for the nine months ended September 30, 2016 and 2015, respectively.  Additionally, Atlantic Automotive leases office space owned by one of our consolidated real estate ventures in Towson, Maryland. Atlantic Automotive paid $0.3 million in rent during both the three months ended September 30, 2016 and 2015, and $0.8 million and $0.9 million for the nine months ended September 30, 2016 and 2015, 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 $0.2 million for both the three months ended September 30, 2016 and 2015, and $0.5 million for both the nine months ended September 30, 2016 and 2015. 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 September 30, 2016 and 2015, and $0.2 million and $0.3 million for the nine months ended September 30, 2016 and 2015, respectively.

Payments for services provided by these three restaurants to us was less than $0.1 million for the three and nine months ended September 30, 2016 and 2015, respectively.


23


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 September 30, 2016
 
As of December 31, 2015
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Level 2:
 

 
 

 
 

 
 

6.375% Senior Unsecured Notes due 2021 (a)
$

 
$

 
$
350,000

 
$
367,325

6.125% Senior Unsecured Notes due 2022
500,000

 
526,910

 
500,000

 
512,500

5.875% Senior Unsecured Notes due 2026 (b)
350,000

 
364,000

 

 

5.625% Senior Unsecured Notes due 2024
550,000

 
563,750

 
550,000

 
539,000

5.375% Senior Unsecured Notes due 2021
600,000

 
623,250

 
600,000

 
605,658

5.125% Senior Unsecured Notes due 2027 (c)
400,000

 
392,356

 

 

Term Loan A
282,573

 
283,280

 
313,620

 
308,916

Term Loan B
1,366,117

 
1,378,636

 
1,376,007

 
1,365,461

Debt of variable interest entities
24,069

 
24,069

 
26,682

 
26,682

Debt of other operating divisions
123,599

 
123,599

 
120,969

 
120,969


(a) In August 2016, we redeemed our 6.375% Senior Unsecured Notes due 2021. See Note 3. Notes Payable and Commercial Bank Financing, for additional information.

(b) In March 2016, we issued $350 million in senior unsecured notes, which bear interest at a rate of 5.875% per annum and maturing in 2026. See Note 3. Notes Payable and Commercial Bank Financing, for additional information.

(c) In August 2016, we issued $400 million in senior unsecured notes, which bear interest at a rate of 5.125% per annum and maturing in 2027. See Note 3. Notes Payable and Commercial Bank Financing, for additional information.




24


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, 5.875% Notes, 5.125% Notes, and until they were redeemed, the 6.375% Notes. Our Class A Common Stock and Class B Common Stock as of September 30, 2016, 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, 5.875% Notes, 6.125% Notes, and until they were redeemed, the 6.375% Notes. As of September 30, 2016, our consolidated total debt, net of deferred financing costs and debt discounts, of $4,206.3 million included $4,078.7 million related to STG and its subsidiaries of which SBG guaranteed $4,030.9 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.


25


CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2016
(in thousands) (unaudited)

 
Sinclair
Broadcast
Group, Inc.
 
Sinclair
Television
Group, Inc.
 
Guarantor
Subsidiaries
and KDSM,
LLC
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Sinclair
Consolidated
Cash
$

 
$
81,671

 
$
4,550

 
$
18,324

 
$

 
$
104,545

Accounts receivable

 

 
483,686

 
37,237

 
(1,261
)
 
519,662

Other current assets
3,371

 
6,457

 
132,250

 
27,434

 
(3,629
)
 
165,883

Total current assets
3,371

 
88,128

 
620,486

 
82,995

 
(4,890
)
 
790,090

 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
2,086

 
17,710

 
566,633

 
130,309

 
(3,650
)
 
713,088

 
 
 
 
 
 
 
 
 
 
 
 
Investment in consolidated subsidiaries
483,523

 
3,696,504

 
4,180

 

 
(4,184,207
)
 

Goodwill

 

 
1,985,299

 
4,279

 

 
1,989,578

Indefinite-lived intangible assets

 

 
137,416

 
15,709

 

 
153,125

Definite-lived intangible assets

 

 
1,816,553

 
227,351

 
(60,578
)
 
1,983,326

Other long-term assets
52,116

 
782,850

 
105,247

 
160,180

 
(863,412
)
 
236,981

Total assets
$
541,096

 
$
4,585,192

 
$
5,235,814

 
$
620,823

 
$
(5,116,737
)
 
$
5,866,188

 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
102

 
$
55,484

 
$
211,362

 
$
28,427

 
$
(4,162
)
 
$
291,213

Current portion of long-term debt

 
55,500

 
1,803

 
107,935

 

 
165,238

Current portion of affiliate long-term debt
1,804

 

 
1,569

 
2,258

 
(2,032
)
 
3,599

Other current liabilities

 

 
123,020

 
16,675

 

 
139,695

Total current liabilities
1,906

 
110,984

 
337,754

 
155,295

 
(6,194
)
 
599,745

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt

 
3,951,479

 
31,521

 
39,437

 

 
4,022,437

Affiliate long-term debt
479

 

 
12,977

 
384,174

 
(382,594
)
 
15,036

Other liabilities
22,196

 
31,612

 
1,173,805

 
177,155

 
(662,464
)
 
742,304

Total liabilities
24,581

 
4,094,075

 
1,556,057

 
756,061

 
(1,051,252
)
 
5,379,522

 
 
 
 
 
 
 
 
 
 
 
 
Total Sinclair Broadcast Group equity (deficit)
516,515

 
491,117

 
3,679,757

 
(101,024
)
 
(4,069,849
)
 
516,516

Noncontrolling interests in consolidated subsidiaries

 

 

 
(34,214
)
 
4,364

 
(29,850
)
Total liabilities and equity (deficit)
$
541,096

 
$
4,585,192

 
$
5,235,814

 
$
620,823

 
$
(5,116,737
)
 
$
5,866,188


26


CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2015
(in thousands)
  
 
Sinclair
Broadcast
Group, Inc.
 
Sinclair
Television
Group, Inc.
 
Guarantor
Subsidiaries
and KDSM,
LLC
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Sinclair
Consolidated
Cash
$

 
$
115,771

 
$
235

 
$
33,966

 
$

 
$
149,972

Accounts receivable

 
1,775

 
390,142

 
33,949

 
(1,258
)
 
424,608

Other current assets
3,648

 
5,172

 
99,118

 
23,278

 
(4,033
)
 
127,183

Total current assets
3,648

 
122,718

 
489,495

 
91,193

 
(5,291
)
 
701,763

 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
2,884

 
20,336

 
559,042

 
143,667

 
(8,792
)
 
717,137

 
 
 
 
 
 
 
 
 
 
 
 
Investment in consolidated subsidiaries
497,262

 
3,430,434

 
4,179

 

 
(3,931,875
)
 

Goodwill

 

 
1,926,814

 
4,279

 

 
1,931,093

Indefinite-lived intangible assets

 

 
114,841

 
17,624

 

 
132,465

Definite-lived intangible assets

 

 
1,602,454

 
206,975

 
(57,859
)
 
1,751,570

Other long-term assets
52,128

 
673,915

 
110,507

 
140,910

 
(779,173
)
 
198,287

Total assets
$
555,922

 
$
4,247,403

 
$
4,807,332

 
$
604,648

 
$
(4,782,990
)
 
$
5,432,315

 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
104