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 September 30, 2006

 

OR

 

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

 

For the transition period from                             to                           .

 

Commission File Number: 000-26076

 

SINCLAIR BROADCAST GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

 

(410) 568-1500

(Registrant’s telephone number, including area code)

 

None

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

 

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

Yes x                    No o

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

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

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

Yes o                    No x

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

 

 

SINCLAIR BROADCAST GROUP, INC.

FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2006

TABLE OF CONTENTS

PART I.		FINANCIAL INFORMATION
ITEM 1.				FINANCIAL STATEMENTS
				CONSOLIDATED BALANCE SHEETS
				CONSOLIDATED STATEMENTS OF OPERATIONS
				CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
				CONSOLIDATED STATEMENTS OF CASH FLOWS
				NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2.				MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3.				QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.				CONTROLS AND PROCEDURES
PART II.		OTHER INFORMATION
ITEM 1.				LEGAL PROCEEDINGS
ITEM 1A.				RISK FACTORS
ITEM 6.				EXHIBITS
SIGNATURE
EXHIBIT INDEX

 

2

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

		As of September 30,			As of December 31,
		2006			2005
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	32,495		$	9,655
Accounts receivable, net of allowance for doubtful accounts of $3,773 and $4,596, respectively		118,004			127,913
Affiliate receivable		4,263			14
Current portion of program contract costs		74,728			51,528
Income taxes receivable		2,581			—
Prepaid expenses and other current assets		8,938			17,616
Deferred barter costs		2,942			2,027
Assets held for sale		—			3,678
Deferred tax assets		9,446			10,591
Total current assets		253,397			223,022
PROGRAM CONTRACT COSTS, less current portion		59,302			36,494
PROPERTY AND EQUIPMENT, net		283,732			304,355
GOODWILL, net		1,017,524			1,040,234
BROADCAST LICENSES, net		409,620			409,620
DEFINITE-LIVED INTANGIBLE ASSETS, net		212,820			224,673
OTHER ASSETS		37,788			44,907
Total assets		$	2,274,183		$	2,283,305
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	2,543		$	3,799
Income taxes payable		—			2,662
Accrued liabilities		79,508			84,623
Current portion of notes payable, capital leases and commercial bank financing		33,848			33,802
Current portion of notes and capital leases payable to affiliates		4,238			4,135
Current portion of program contracts payable		94,196			88,510
Deferred barter revenues		3,230			2,501
Deferred gain on sale of broadcast assets		—			3,249
Liabilities held for sale		—			1,407
Total current liabilities		217,563			224,688
LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing, less current portion		1,354,432			1,397,649
Notes payable and capital leases to affiliates, less current portion		15,179			15,152
Program contracts payable, less current portion		103,438			65,239
Deferred tax liabilities		284,186			277,451
Other long-term liabilities		31,586			52,438
Total liabilities		2,006,384			2,032,617
MINORITY INTEREST IN CONSOLIDATED ENTITIES		728			966
SHAREHOLDERS’ EQUITY:
Class A Common Stock, $.01 par value, 500,000,000 shares authorized, 47,375,788 and 47,122,407 shares issued and outstanding, respectively		474			471
Class B Common Stock, $.01 par value, 140,000,000 shares authorized, 38,348,331 shares issued and outstanding, convertible into Class A Common Stock		383			383
Additional paid-in capital		595,372			593,259
Accumulated deficit		(329,158		)	(344,391		)
Total shareholders’ equity		267,071			249,722
Total liabilities and shareholders’ equity		$	2,274,183		$	2,283,305

 

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

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

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
REVENUES:
Station broadcast revenues, net of agency commissions		$	152,362		$	149,027		$	464,058		$	456,572
Revenues realized from station barter arrangements		12,772			12,039			38,206			41,551
Other operating divisions’ revenues		3,324			4,724			14,753			15,160
Total revenues		168,458			165,790			517,017			513,283
OPERATING EXPENSES:
Station production expenses		36,148			35,605			111,342			112,597
Station selling, general and administrative expenses		34,853			34,541			103,633			103,691
Expenses recognized from station barter arrangements		11,451			11,158			34,779			38,447
Amortization of program contract costs and net realizable value adjustments		24,122			18,587			65,428			52,131
Other operating divisions’ expenses		3,346			3,699			15,108			14,000
Depreciation of property and equipment		10,907			12,175			35,881			38,337
Corporate general and administrative expenses		5,141			5,259			17,059			15,345
Amortization of definite-lived intangible assets and other assets		4,435			4,475			13,195			13,529
Total operating expenses		130,403			125,499			396,425			388,077
Operating income		38,055			40,291			120,592			125,206
OTHER INCOME (EXPENSE):
Interest expense and amortization of debt discount and deferred financing costs		(28,448		)	(31,113		)	(86,783		)	(88,950		)
Interest income		913			187			1,263			416
Gain (loss) from sale of assets		4			(69		)	(265		)	(69		)
Loss from extinguishment of debt		(25		)	—			(904		)	(1,631		)
Unrealized gain from derivative instruments		—			5,761			2,907			17,487
Income (loss) from equity and cost investees		57			24			6,192			(389		)
Other (expense) income, net		(34		)	206			448			755
Total other expense		(27,533		)	(25,004		)	(77,142		)	(72,381		)
Income from continuing operations before income taxes		10,522			15,287			43,450			52,825
INCOME TAX BENEFIT (PROVISION)		12,318			(2,267		)	(2,741		)	(16,008		)
Income from continuing operations		22,840			13,020			40,709			36,817
DISCONTINUED OPERATIONS:
(Loss) income from discontinued operations, net of related income tax (provision) benefit of ($275), ($343), $329 and ($2,413), respectively		(275		)	701			383			4,841
Gain from discontinued operations, net of related income tax (provision) benefit of $0, ($10,494), $259 and ($80,002), respectively		—			17,508			1,774			146,024
NET INCOME		22,565			31,229			42,866			187,682
PREFERRED STOCK DIVIDENDS		—			—			—			(5,004		)
EXCESS OF PREFERRED STOCK CARRYING VALUE OVER REDEMPTION VALUE		—			—			—			26,201
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	22,565		$	31,229		$	42,866		$	208,879
BASIC AND DILUTED EARNINGS PER COMMON SHARE:
Basic earnings per share from continuing operations		$	0.27		$	0.15		$	0.48		$	0.68
Basic earnings per share from discontinued operations		$	—		$	0.21		$	0.03		$	1.76
Basic earnings per share		$	0.26		$	0.36		$	0.50		$	2.44
Diluted earnings per share from continuing operations		$	0.26		$	0.15		$	0.48		$	0.67
Diluted earnings per share from discontinued operations		$	—		$	0.21		$	0.03		$	1.64
Diluted earnings per share		$	0.25		$	0.36		$	0.50		$	2.31
Weighted average shares outstanding		85,719			85,428			85,650			85,353
Weighted average shares and equivalent shares outstanding		99,149			85,448			85,655			92,065
Dividends declared per share		$	0.125		$	0.075		$	0.325		$	0.200

 

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

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SINCLAIR BROADCAST GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(in thousands) (Unaudited)

		Class A Common Stock			Class B Common Stock			Additional Paid-In Capital			Accumulated Deficit			Total Shareholders’ Equity
BALANCE, December 31, 2005		$	471		$	383		$	593,259		$	(344,391	)	$	249,722
Dividends declared on Class A and Class B Common Stock		—			—			—			(27,633		)	(27,633		)
Class A Common Stock issued pursuant to stock-based compensation plans		3			—			2,113			—			2,116
Net income		—			—			—			42,866			42,866
BALANCE, September 30, 2006		$	474		$	383		$	595,372		$	(329,158	)	$	267,071

 

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

5

 

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

		Nine Months Ended September 30,
		2006			2005
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income		$	42,866		$	187,682
Adjustments to reconcile net income to net cash flows from operating activities:
Amortization of debt discount, net of debt premium		1,563			86
Depreciation of property and equipment		35,881			38,879
Recognition of deferred revenue		(5,728		)	(3,706		)
Accretion of capital leases		335			529
(Income) loss from equity and cost investees		(6,192		)	389
Loss on sale of property		265			69
Gain on sale of broadcast assets related to discontinued operations		(2,659		)	(226,026		)
Unrealized gain from derivative instruments		(2,907		)	(17,487		)
Amortization of definite-lived intangible assets and other assets		13,195			13,551
Amortization of program contract costs and net realizable value adjustments		65,428			52,737
Amortization of deferred financing costs		1,953			1,933
Stock-based compensation		1,442			1,160
Loss from extinguishment of debt, non-cash portion		854			1,079
Amortization of derivative instruments		403			404
Deferred tax provision related to operations		7,750			24,376
Deferred tax (benefit) provision related to discontinued operations		(1,177		)	31,874
Net effect of change in deferred barter revenues and deferred barter costs		(186		)	(247		)
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Decrease in accounts receivable, net		9,957			13,280
Increase in affiliate receivable		(4,250		)	—
Decrease in taxes receivable		(3,040		)	624
Decrease in prepaid expenses and other current assets		8,718			7,101
Decrease in other long-term assets		500			5,221
Decrease in accounts payable and accrued liabilities		(1,513		)	(22,083		)
Increase in income taxes payable		7,822			17,627
Decrease in other long-term liabilities		(2,267		)	(1,272		)
Decrease in minority interest		(57		)	(334		)
Dividends and distributions from equity and cost investees		6,355			1,707
Payments on program contracts payable		(68,170		)	(79,103		)
Net cash flows from operating activities		107,141			50,050
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of property and equipment		(13,492		)	(12,240		)
Payments for acquisition of television stations		(1,710		)	(11,040		)
Investments in equity and cost investees		(153		)	(970		)
Proceeds from the sale of assets		1,394			59
Proceeds from the sale of broadcast assets related to discontinued operations		1,400			295,190
Proceeds from the sale of equity investees		—			21,500
Proceeds from insurance settlement		—			404
Loans to affiliates		(107		)	(95		)
Proceeds from loans to affiliates		105			93
Net cash flows (used in) from investing activities		(12,563		)	292,901
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases		75,000			35,500
Repayments of notes payable, commercial bank financing and capital leases		(114,294		)	(346,279		)
Proceeds from exercise of stock options		—			73
Payments for deferred financing costs		—			(1,913		)
Dividends paid on Series D Convertible Exchangeable Preferred Stock		—			(5,004		)
Dividends paid on Class A and Class B Common Stock		(25,458		)	(12,803		)
Payments for derivative terminations		(3,750		)	—
Repayments of notes and capital leases to affiliates		(3,236		)	(4,890		)
Net cash flows used in financing activities		(71,738		)	(335,316		)
NET INCREASE IN CASH AND CASH EQUIVALENTS		22,840			7,635
CASH AND CASH EQUIVALENTS, beginning of period		9,655			10,491
CASH AND CASH EQUIVALENTS, end of period		$	32,495		$	18,126

 

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

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

1.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of Sinclair Broadcast Group, Inc. and those of our wholly-owned and majority-owned subsidiaries and variable interest entities where we are deemed the primary beneficiary.  Minority interest represents a minority owner’s proportionate share of the equity in certain of our consolidated entities.  All significant intercompany transactions and account balances have been eliminated in consolidation.

Discontinued Operations

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we reported the financial position and results of operations of KOVR-TV in Sacramento, California, KSMO-TV in Kansas City, Missouri and WEMT-TV in Tri-Cities, Tennessee as discontinued operations in the accompanying consolidated balance sheets and consolidated statements of operations.  Discontinued operations have not been segregated in the consolidated statements of cash flows; therefore, amounts for certain captions will not agree with the accompanying consolidated balance sheets and consolidated statements of operations.  The operating results of KOVR, KSMO and WEMT are not included in our consolidated results from continuing operations for the three and nine months ended September 30, 2006 and 2005.  In accordance with Emerging Issues Task Force Issue (EITF) No. 87-24, Allocation of Interest to Discontinued Operations, we have allocated $3.6 million of interest expense to discontinued operations for the nine months ended September 30, 2005.  No interest expense was allocated for the three months ended September 30, 2006 and 2005 and for the nine months ended September 30, 2006.  See Note 9. Discontinued Operations, for additional information.

Interim Financial Statements

The consolidated financial statements for the three and nine months ended September 30, 2006 and 2005 are unaudited.  In the opinion of management, such financial statements have been presented on the same basis as the annual consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows for these periods.

As permitted under the applicable rules and regulations of the Securities and Exchange Commission, the consolidated financial statements do not include all disclosures normally included with audited consolidated financial statements and, accordingly, should be read together with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2005.  The consolidated statements of operations presented in the accompanying consolidated financial statements are not necessarily representative of operations for an entire year.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the effect this statement will have on our consolidated financial statements.

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

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

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Use of Estimates

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

Network Compensation

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

On May 2, 2006, we entered into a Release and Settlement Agreement with The WB and UPN, in which we released The WB and UPN, and The WB and UPN released us, from any claims or other liabilities we or The WB or UPN may have arising out of or in connection with (a) any agreement, including any affiliation agreements entered into by us with The WB or UPN, and (b) any services previously performed by any one of the parties to the Release and Settlement Agreement for any other party to the Release and Settlement Agreement.  As a result of this agreement, we have changed the revenue recognition period from an end date of July 31, 2007 to an end date of September 30, 2006, when UPN ceased broadcasting.  For the three and nine months ended September 30, 2006, we recorded UPN network compensation of $0.2 million and $0.5 million, respectively.

Restructuring Costs

During the nine months ended September 30, 2006, we incurred costs associated with restructuring the news operations at certain of our stations.  Specifically, on or before March 31, 2006, we ceased our locally produced news broadcasts in nine of our markets and consequently let go our news employees and cancelled our news-related contracts.  The total one-time employee benefit costs related to this restructuring were $0.5 million and the total one-time contract cancellation and other exit costs were $0.5 million, all of which were recorded as station production expenses for the three months ended March 31, 2006.

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

		Salary and Severance Costs			Contract Expenses			Other Exit Costs			Total
Balance at December 31, 2005		$	—		$	—		$	—		$	—
Restructuring charges		525			362			274			1,161
Amounts utilized		(342		)	(7		)	(47		)	(396		)
Balance at March 31, 2006		$	183		$	355		$	227		$	765
Restructuring charges		—			3			27			30
Amounts utilized		(183		)	(175		)	(157		)	(515		)
Balance at June 30, 2006		$	—		$	183		$	97		$	280
Restructuring charges		—			—			—			—
Amounts utilized		—			(67		)	(48		)	(115		)
Balance at September 30, 2006		$	—		$	116		$	49		$	165

 

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Reclassifications

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

2.              STOCK-BASED COMPENSATION:

Description of Awards

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

Options.  In June 1996, our Board of Directors adopted, upon approval of the shareholders by proxy, the 1996 Long-Term Incentive Plan (LTIP).  The purpose of the LTIP is to reward key individuals for making major contributions to our success and the success of our subsidiaries and to attract and retain the services of qualified and capable employees.  Options granted pursuant to the LTIP must be exercised within 10 years following the grant date.  A total of 14,000,000 shares of Class A Common Stock are reserved for awards under this plan.  As of September 30, 2006, 9,913,684 shares (including forfeited shares) were available for future grants.

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

 The summary of changes in outstanding options included in the footnotes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2005, as amended, included information related to these plans.  The following is a summary of changes in outstanding stock options:

 

		Options		Weighted-Average Exercise Price			Exercisable		Weighted-Average Exercise Price
Outstanding at end of 2005		6,352,720		$	15.78		6,352,720		$	15.78
2006 Activity:
Granted		—		—			—		—
Exercised		—		—			—		—
Forfeited		(3,107,570	)	$	15.08		—		—
Outstanding at September 30, 2006		3,245,150		$	16.24		3,245,150		$	16.24

 

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

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

RSAs.  RSAs are granted to employees pursuant to the LTIP.  RSAs have certain restrictions that lapse over three years at 25%, 25% and 50%, respectively.  As the restrictions lapse, the stock may be freely traded on the open market.  On April 3, 2006, we awarded 40,000 RSAs that had a fair value of $7.81 per share, which was the value of the stock on the trading date immediately prior to the grant date.  For the three and nine months ended September 30, 2006, we recorded expense of less than $0.1 million and we will continue to record an expense related to this grant using a straight-line methodology over the 3-year lapse period.  This expense will reduce our consolidated income, but it will have no effect on our consolidated cash flows.  Additionally, any RSAs for which the restrictions have lapsed will be included in total shares outstanding, which will have a dilutive effect on our basic earnings per share.  Any RSAs for which the restrictions have not lapsed will be included in total equivalent shares outstanding, based on the treasury stock method, which could have a dilutive effect on our diluted earnings per share.

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

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

 

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

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

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

The value of the Match is based on the level of elective deferrals into the 401(k) plan.  The amount of shares of our Class A Common Stock used to make the Match is determined using the closing price on or about March 1st of each year for the previous calendar year’s Match.  The Match is equal to a maximum of 50% of the first 4% of elective deferrals by eligible employees.  On March 7, 2006, we made the 2005 Match of $1.5 million of 182,868 shares of Class A Common Stock.  Additionally, we have recorded an expense related to the 2006 Match of $0.4 million and $1.2 million for the three and nine months ended September 30, 2006, respectively, which will be made using our Class A Common Stock in March 2007.  There has been no change in the method of accounting for the Match as a result of adopting SFAS 123R.  Therefore, there will be no changes in the effect of the Match on our consolidated income, cash flows and basic and diluted earnings per share in future periods as compared to previous periods.

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Stock Grants to Non-Employee Directors.  In addition to their base compensation, on the date of each of our annual meetings of shareholders, each non-employee director receives a grant of 2,000 shares of Class A Common Stock pursuant to the LTIP.  On May 11, 2006, we granted 10,000 shares that had a fair value of $8.09 per share, which was the closing value of the stock on the date of grant.  We recorded an expense of $80,900 on the date of grant and this expense reduced our consolidated income, but it had no effect on our consolidated cash flows.  Additionally, these shares are included in the total shares outstanding, which results in a dilutive effect on our basic and diluted earnings per share.

Compensation Summary

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

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

RSAs.  For each of the three and nine months ended September 30, 2006, we recorded less than $0.1 million of compensation expense related to RSAs.  We did not issue any RSAs in 2005.

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

Match.  For the three months ended September 30, 2006 and 2005, we recorded $0.4 million and $0.5 million, respectively.  For each of the nine months ended September 30, 2006 and 2005, we recorded $1.2 million in compensation expenses related to our Match.

Stock Grants to Non-Employee Directors.  For the nine months ended September 30, 2006, we recorded less than $0.1 million in compensation expenses related to stock grants to non-employee directors.  We did not record any compensation expenses related to stock grants to non-employee directors for the three months ended September 30, 2006.

We have accounted for stock-based compensation in accordance with interpretive guidance provided by the Securities and Exchange Commission in Staff Accounting Bulletin No. 107.  The following table presents the stock-based compensation classified as station production, station selling, general and administrative and corporate general and administrative expenses (in thousands):

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
Station production expenses		$	36,007		$	35,416		$	110,904		$	112,170
Stock-based compensation		141			189			438			427
Station production expenses, as reported		$	36,148		$	35,605		$	111,342		$	112,597
Station selling, general and administrative expenses		$	34,631		$	34,288		$	102,956		$	103,123
Stock-based compensation		222			253			677			568
Station selling, general and administrative expenses, as reported		$	34,853		$	34,541		$	103,633		$	103,691
Corporate general and administrative expenses		$	5,082		$	5,199		$	16,732		$	15,180
Stock-based compensation		59			60			327			165
Corporate general and administrative expenses, as reported		$	5,141		$	5,259		$	17,059		$	15,345

 

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2005 Pro-Forma Compensation

For the three and nine months ended September 30, 2005, we applied the intrinsic value method of accounting for stock options as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which was permitted by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123).  Accordingly, no expense was recognized for our options or shares granted under the ESPP.  Had compensation expense related to our stock options and shares under the ESPP been determined consistent with SFAS 123, our net income available to common shareholders for the three and nine months ended September 30, 2005 would approximate the pro forma amounts below (in thousands, except per share data):

		Three Months Ended September 30,			Nine Months Ended September 30,
		2005			2005
Net income available to common shareholders		$	31,229		$	208,879
Add: Stock-based employee compensation expense included in net income, net of related tax effects		428			808
Less: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects		(467		)	(1,547		)
Net income available to common shareholders, pro forma		$	31,190		$	208,140
Earnings per share:
Basic — as reported		$	0.36		$	2.44
Diluted — as reported		$	0.36		$	2.31
Basic — pro forma		$	0.36		$	2.44
Diluted — pro forma		$	0.36		$	2.30

 

We have computed, for pro forma disclosure purposes, the value of all options granted during the three and nine months ended September 30, 2005, using the Black-Scholes option pricing model as prescribed by SFAS 123 using the following weighted average assumptions:

 

3.              COMMITMENTS AND CONTINGENCIES:

Litigation

We are a party to lawsuits and claims from time to time in the ordinary course of business.  Actions currently pending are in various preliminary stages and no judgments or decisions have been rendered by hearing boards or courts in connection with such actions.  After reviewing developments to date with legal counsel, our management is of the opinion that the outcome of our pending and threatened matters will not have a material adverse effect on our consolidated financial statements.

In October 2006, Mediacom Communications Corporation (Mediacom) filed a complaint and motion for preliminary injunction in federal court asserting that we had violated the federal antitrust laws, conducted tortuous interference with contracts and business expectations and engaged in unfair competition.  We responded to and opposed the filings.  Subsequently, the court issued an order denying Mediacom’s motion seeking an injunction to permit it to continue to retransmit the signals of certain of our television stations after Mediacom’s contractual right to do so terminates on November 30, 2006.  Mediacom has appealed the decision.  Mediacom has also filed with the Federal Communication Commission (FCC) (1) an Opposition to all of our pending license renewal applications, and (2) a complaint alleging violations by us of our obligation to negotiate retransmission consent in good faith.  We have filed an opposition to the license renewal Opposition filed by Mediacom, a letter addressing the good faith complaint and will shortly be filing a formal response to Mediacom’s good faith complaint.

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Network Affiliation Agreements

Beginning in September 2006, our 58 television stations that we own and operate, or to which we provide programming services or sales services, are affiliated as follows: FOX (19 stations); MyNetworkTV (17 stations); ABC (10 stations); The CW (9 stations); CBS (2 stations) and NBC (1 station).  We no longer have independent stations.  Prior to September 2006, of the 58 television stations that we owned and operated, or to which we provided programming services or sales services, 56 were affiliated as follows: FOX (19 stations); WB (18 stations); ABC (10 stations); UPN (6 stations); CBS (2 stations) and NBC (1 station).  The remaining two stations were independent.  The networks produce and distribute programming in exchange for each station’s commitment to air the programming at specified times and for commercial announcement time during programming.  The amount and quality of programming provided by each network varies.

On October 24, 2005, NBC informed us that they intend to terminate our affiliation with WTWC-TV in Tallahassee, Florida.  This notice is contractually required to avoid automatic renewal of the existing agreement which expires January 1, 2007.  NBC has stated it is willing to continue its affiliation with WTWC if revised terms and conditions can be agreed upon.  As of September 30, 2006, the net book value of this affiliation agreement was $2.2 million.  We continue to negotiate with NBC regarding our affiliation agreement.

On March 2, 2006, we entered into an agreement with Twentieth Television, Inc. to air MyNetworkTV primetime programming on 17 of our stations.  This agreement became effective on September 5, 2006 and expires on September 4, 2011.  We have concluded that this represents a network affiliation agreement for accounting purposes.  As of September 30, 2006, the net book value of the affiliation agreements related to our former WB and UPN affiliate stations that are now airing MyNetworkTV programming was $5.8 million.  The estimated fair value of the new affiliation exceeded the net book value of the terminated affiliation agreement and therefore, no loss was recognized accordingly.

On May 1, 2006, we entered into an agreement with FOX to renew all of our FOX affiliation agreements.  These agreements expire on March 6, 2012.  As of September 30, 2006, the net book value of these affiliation agreements was $35.2 million.

On May 2, 2006, we entered into an affiliation agreement with The CW Television Network to air their programming on nine of our stations.  This agreement became effective on September 1, 2006 and expires on August 31, 2010.  As of September 30, 2006, the net book value of the affiliation agreements related to our former WB affiliate stations that are now airing CW programming was $2.6 million.  The estimated fair value of the new affiliation exceeded the net book value of the terminated affiliation agreement and therefore, no loss was recognized accordingly.

Changes in the Rules on Television Ownership and Local Marketing Agreements

Certain of our stations have entered into what have commonly been referred to as local marketing agreements or LMAs.  One typical type of LMA is a programming agreement between two separately owned television stations serving the same market, whereby the licensee of one station programs substantial portions of the broadcast day and sells advertising time during such programming segments on the other licensee’s station subject to the ultimate editorial and other controls being exercised by the latter licensee.  We believe these arrangements allow us to reduce our operating expenses and enhance profitability.

Under the FCC ownership rules adopted in 2003, we would be allowed to continue to program most of the stations with which we have an LMA.  In the absence of a waiver, the 2003 ownership rules would require us to terminate or modify three of our LMAs in markets where both the station we own and the station with which we have an LMA are ranked among the top four stations in their particular designated market area.  The FCC’s 2003 ownership rules include specific provisions permitting waivers of this “top four restriction”.  Although there can be no assurances, we have studied the application of the 2003 ownership rules to our markets and believe we are qualified for waivers.  The effective date of the 2003 ownership rules has been stayed by the U. S. Court of Appeals for the Third Circuit and the rules are on remand to the FCC.  Several parties, including us, filed petitions with the Supreme Court of the United States seeking review of the Third Circuit decision, but the Supreme Court denied the petitions in June 2005.

In July 2006, as part of the FCC’s statutorily required quadrennial review of its media ownership rules, the FCC released a Further Notice of Proposed Rule Making seeking comment on how to address the issues raised by the Third Circuit’s decision, among other things, remanding the local television ownership rule.  The ultimate outcome of that proceeding could significantly impact our business.

When the FCC decided to attribute LMAs for ownership purposes in 1999, it grandfathered our LMAs that were entered into prior to November 5, 1996, permitting the applicable stations to continue operations pursuant to the LMAs until the conclusion of the FCC’s 2004 biennial review.  The FCC stated it would conduct a case-by-case review of grandfathered LMAs and assess the appropriateness of extending the grandfathering periods.  Subsequently, the FCC invited comments as to whether, instead of beginning the review of the grandfathered LMAs in 2004, it should do so in 2006.  The FCC did not initiate any review of grandfathered LMAs in 2004 and has not indicated it would do so as part of its 2006 quadrennial review.  We do not know when, or if, the FCC will conduct any such review of grandfathered LMAs.

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License Grant and Renewal

In August 2006, the FCC sent a letter to us requesting information regarding the broadcast of video news releases by seven stations licensed to us without sponsorship identification in alleged violation of federal law and the FCC’s rules.  We timely responded and denied that the stations violated federal law or the FCC’s rules. None of our stations received any form of compensation for airing the video news releases.

4.              SUPPLEMENTAL CASH FLOW INFORMATION:

During the nine months ended September 30, 2006 and 2005, our supplemental cash flow information was as follows (in thousands):

		Nine Months Ended September 30,
		2006			2005
Income taxes paid related to continuing operations		$	640		$	673
Income taxes paid related to sale of discontinued operations		$	4,028		$	23,261
Income tax refunds received related to continuing operations		$	4,938		$	302
Income tax refunds received related to sale of discontinued operations		$	6,670		$	81
Interest paid		$	74,917		$	90,312
Payments related to extinguishment of debt		$	50		$	552

 

Non-cash barter and trade expense are presented in the consolidated statements of operations.  Non-cash transactions related to capital lease obligations were $3.3 million and $1.0 million for the nine months ended September 30, 2006 and 2005, respectively.

5.              DERIVATIVE INSTRUMENTS:

We enter into derivative instruments primarily to reduce the impact of changing interest rates on our floating rate debt and to reduce the impact of changing fair market values on our fixed rate debt.

We account for derivative instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133 and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133 (collectively, SFAS 133).

On April 20, 2006, we terminated two of our derivative instruments with a cash payment of $3.8 million, the aggregate fair value of the derivative liabilities on that date.  These swap agreements were accounted for as fair value hedges in accordance with SFAS 133 and changes in their fair market values were reflected as adjustments to the carrying value of the underlying debt that was being hedged.  Therefore, on the termination date, the carrying value of the underlying debt was adjusted to reflect the $3.8 million payment and that amount will be treated as a discount on the underlying debt that was being hedged and will be amortized over its remaining life, in accordance with SFAS 133.

On June 5, 2006, two of our derivative instruments expired.  These expired swap agreements did not qualify for hedge accounting treatment under SFAS 133 and, therefore, the changes in their fair market values were reflected in historical earnings as an unrealized gain from derivative instruments through the expiration date.  For the nine months ended September 30, 2006 and 2005, we recorded an unrealized gain of $2.9 million and $17.5 million, respectively.

As of September 30, 2006, we had two remaining derivative instruments.  These swap agreements are accounted for as fair value hedges in accordance with SFAS 133; therefore, any changes in their fair market value are reflected as adjustments to the carrying value of the underlying debt being hedged.  The notional amount of these swap agreements is $300.0 million and they expire on March 15, 2012.  The interest we pay is floating based on the three-month London Interbank Offered Rate (LIBOR) plus 2.28% and the interest we receive is at 8%.  The fair market value of these agreements is estimated by obtaining quotations from the international financial institution party to the contract.  This fair value is an estimate of the net amount that we would pay on September 30, 2006 if we cancelled the contracts or transferred them to other parties.  This amount was a net liability of $0.4 million on September 30, 2006 compared to a net asset of $4.6 million on December 31, 2005.

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During May 2003, we completed an issuance of $150.0 million aggregate principal amount of 4.875% Convertible Senior Notes, due 2018.  Under certain circumstances, we will pay contingent cash interest to the holders of the convertible notes commencing on January 15, 2011.  This contingent cash interest feature is an embedded derivative which had a negligible fair value as of September 30, 2006.

6.              INCOME TAXES:

Our income tax provision for all periods consists of federal and state income taxes.  The tax provision for the three and nine months ended September 30, 2006 is based on the estimated effective tax rate applicable for the full year after taking into account discrete tax items.  Our estimated effective tax rate is expected to be 20.3% for 2006, including discrete items.  Our effective income tax rate differs from the federal statutory rate of 35.0% and can vary from period to period due to fluctuations in operating results, state income taxes, new or revised tax legislation and accounting pronouncements, expiration of applicable statutes of limitation and other discrete tax items.  Both the third quarter and estimated annual 2006 effective rates are significantly lower than the statutory rate primarily due to the release of discrete tax and related interest reserves, offset in part by an increase in our state net operating loss valuation allowance and an increase in our income tax provision as the result of a statute expiration.  Below is a more detailed explanation of these changes.

In the third quarter of 2006, the statute of limitations expired for the Federal income tax returns for 1999 through 2002.  As a result, we released $39.9 million of discrete tax and related interest reserves, of which $14.4 million was recorded as a reduction to goodwill, $0.2 million reduced other identifiable intangible assets and $25.3 million was recorded as a reduction of our income tax provision. We have adjusted goodwill and other identifiable intangibles to the extent the statute of limitations expired for the exposures related to items on which reserves were recorded in purchase accounting at the time of the related acquisitions.   In addition, during the third quarter we (1) received a net refund of approximately $4.3 million related to the abovementioned tax years which resulted in a reduction of goodwill and deferred tax assets of $8.3 million and $0.8 million, respectively, and an increase in income tax provision of $4.8 million and (2) recorded a $2.3 million adjustment for an over-accrual of 2005 income tax expense.  These amounts were offset in part by an increase in our state net operating loss valuation allowance of $8.2 million.

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7.              EARNINGS PER SHARE:

The following table reconciles income (numerator) and shares (denominator) used in our computations of earnings per share for the three and nine months ended September 30, 2006 and 2005 (in thousands):

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
Income (Numerator)
Income from continuing operations		$	22,840		$	13,020		$	40,709		$	36,817
Income impact of assumed conversion of 4.875% Convertible Senior Notes, due 2018, net of taxes		1,097			—			—			3,291
Income impact of assumed conversion of 6% Convertible Debentures, due 2012, net of taxes		1,379			—			—			—
Preferred stock dividends		—			—			—			(5,004		)
Excess of preferred stock carrying value over redemption value		—			—			—			26,201
Numerator for diluted earnings per common share from continuing operations		25,316			13,020			40,709			61,305
(Loss) income from discontinued operations, including gain on sale of broadcast assets related to discontinued operations, net of taxes		(275		)	18,209			2,157			150,865
Numerator for diluted earnings per common share		$	25,041		$	31,229		$	42,866		$	212,170
Shares (Denominator)
Weighted average shares outstanding		85,719			85,428			85,650			85,353
Dilutive effect of outstanding stock options and restricted stock		7			20			5			7
Dilutive effect of 4.875% Convertible Senior Notes, due 2018		6,705			—			—			6,705
Dilutive effect of 6% Convertible Debentures, due 2012		6,718			—			—			—
Weighted average shares and equivalent shares outstanding		99,149			85,448			85,655			92,065

 

In each period presented, the numerators for basic earnings per share exclude the income impact of assumed conversions.  We apply the treasury stock method to measure the dilutive effect of our outstanding stock options and include the respective common share equivalents in the denominator of the diluted EPS computation.  For the nine months ended September 30, 2006 and the three months ended September 30, 2005, our 6% Convertible Debentures, due 2012 and 4.875% Convertible Senior Notes, due 2018 were anti-dilutive; therefore, they were not included in the computation of diluted EPS.  For the nine months ended September 30, 2005, our 6% Convertible Debentures, due 2012, were anti-dilutive; therefore, they were not included in the computation of diluted EPS.

8.              RELATED PARTY TRANSACTIONS:

From time to time, we charter aircraft owned by certain controlling shareholders.  We incurred less than $0.1 million related to these arrangements for each of the three months ended September 30, 2006 and 2005.  For each of the nine months ended September 30, 2006 and 2005, we incurred less than $0.1 million related to these arrangements.

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 our controlling shareholders).  Lease payments made to these entities were $1.2 million and $1.1 million for the third quarter 2006 and 2005, respectively.  Lease payments made to these entities were $3.6 million and $3.4 million for the nine months ended September 30, 2006 and 2005, respectively.

David D. Smith, our President and Chief Executive Officer, has a controlling interest in Atlantic Automotive Corporation and is a member of its board of directors.  Atlantic Automotive is a holding company which owns automobile dealerships and a leasing company.  We sold advertising time to Atlantic Automotive on our stations in Baltimore, Maryland and Norfolk, Virginia and received payments totaling $0.1 million and $0.3 million during the three and nine months ended September 30, 2006, respectively and $0.1 million and $0.4 million during the three and nine months ended September 30, 2005, respectively.  We paid $0.2 million and $0.9 million for vehicles and related vehicle services from Atlantic Automotive during the three and nine months ended September 30, 2006, respectively.  We paid $0.2 million and $0.7 million for vehicles and related vehicle services during the three and nine months ended September 30, 2005, respectively.

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In August 1999, we established a small business investment company called Allegiance Capital Limited Partnership (Allegiance) with an investment of $2.4 million.  Our controlling shareholders and our Chief Financial Officer and Executive Vice President are also limited partners in Allegiance, along with Allegiance Capital Management Corporation (ACMC), the general partner.  ACMC controls all decision making, investing and management of operations of Allegiance in exchange for a monthly management fee based on actual expenses incurred which currently averages approximately $0.1 million and which is paid by the limited partners.  Allegiance distributed $6.0 million to us during fiscal 2006.  No distributions were received in 2005.  We have invested $9.2 million as of September 30, 2006 and we are committed to invest up to a total of $14.6 million.

In January 1999, we entered into a local marketing agreement (LMA) with Bay Television, Inc. (Bay TV), which owns the television station WTTA-TV in Tampa, Florida.  Our controlling shareholders own a substantial portion of the equity of Bay TV.  The LMA provides that we deliver television programming to Bay TV, which broadcasts the programming in return for a monthly fee to Bay TV of $143,500.  We must also make an annual payment equal to 50% of the adjusted annual broadcast cash flow of the station (as defined in the LMA) that is in excess of $1.7 million.  The additional payment is reduced by 50% of the adjusted broadcast cash flow of the station that was below zero in prior calendar years until that amount is recaptured.  Additional payments of $0.9 million were made during the nine months ended September 30, 2006.  An additional payment of $0.4 million was made during the nine months ended September 30, 2005 related to the excess adjusted broadcast cash flow for the year ended December 31, 2004.  Lease payments made to Bay TV were $0.4 million for each of the three months ended September 30, 2006 and 2005 and $1.3 million for each of the nine months ended September 30, 2006 and 2005.

In connection with our 1997 negotiations with The WB to obtain affiliation agreements for a number of our stations, we discussed an opportunity to obtain The WB affiliation in Tampa, Florida for WTTA-TV, which is owned by Bay TV as described above. We did this in anticipation of entering into a LMA with Bay TV to program WTTA, which was then operating as a non-affiliated independent television station airing entertainment and paid programming. In 1998, in order to obtain The WB affiliation for WTTA, we and Bay TV each agreed to make payments in the future to The WB of $10.0 million or $20.0 million in total. Our agreement to make such payments was conditioned upon Bay TV entering into the aforementioned LMA agreement, which we subsequently entered into in January 1999.

Our obligation to make a $10.0 million payment to The WB was structured as a $5.0 million reduction of each of the payments owed to us by The WB under our multi-station affiliation agreement in January of each of 2006 and 2007, assuming that The WB was still operating a television network at the time such payments were due. Additionally, Bay TV agreed to make $5.0 million cash payments to The WB in January 2006 and January 2007 pursuant to the granting of The WB affiliation for WTTA. Additionally, our multi-station WB affiliation agreement provided that The WB’s obligation to make a $5.0 million payment to us in each of January 2006 and 2007 was expressly conditioned upon receipt by The WB of corresponding payments from Bay TV.

After Bay TV failed to make the first $5.0 million payment to The WB on its due date January 16, 2006, The WB withheld $5.0 million from the amount due to us pursuant to our multi-station affiliation agreement. On January 24, 2006, The WB announced that it was combining with the UPN television network to form the CW Television Network.  As a result, we entered into negotiations with The WB regarding a number of issues surrounding The WB’s announcement, including the impact of the elimination of WTTA’s WB network affiliation and the amount we and Bay TV agreed to pay for the affiliation in Tampa.

As a result of such negotiations, on May 2, 2006, we entered into primary affiliation agreements with the CW Television Network.  Concurrently, we entered into a release and settlement agreement between us and Bay TV, on one side, and The WB and UPN, on the other side (the Release and Settlement Agreement).  Pursuant to the Release and Settlement Agreement, we and Bay TV agreed to release The WB and UPN, and The WB and UPN agreed to release us and Bay TV, from any claims or other liabilities we or Bay TV, or The WB or UPN, may have arising out of or in connection with (a) any agreement, including any affiliation agreements entered into by us or Bay TV with The WB or UPN, and (b) any services previously performed by any one of the parties to the Release and Settlement Agreement for any other party to the Release and Settlement Agreement.   In addition, pursuant to the Release and Settlement Agreement, The WB assigned to us all of The WB’s rights to receive a $5.0 million payment from Bay TV on January 16, 2006.   In connection with executing the Release and Settlement Agreement and entering into the CW Television Network affiliation agreements, The WB and UPN agreed to make a payment to us and, on May 2, 2006, we entered into an agreement with Bay TV (the “Bay TV Agreement”) in which we agreed to pay Bay TV $750,000, representing Bay TV’s share of the payment made to us by The WB and UPN.  This payment will be made by reducing by $750,000 Bay TV’s obligation to pay us $5.0 million, which obligation was assigned to us by The WB as described above.  The $4.3 million remaining obligation is recorded as an affiliate receivable on our consolidated balance sheet as of September 30, 2006.

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9.              DISCONTINUED OPERATIONS:

Accounts receivable related to all of our discontinued operations is included in the accompanying consolidated balance sheets, net of allowance for doubtful accounts, for all periods presented.  This is because we continue to own the rights to collect the amounts due to us through the closing dates of the non-license television broadcast assets.  As of September 30, 2006, there was no outstanding accounts receivable related to our discontinued operations.  Accounts receivable related to discontinued operations was $0.2 million (net of allowance of $0.4 million) as of December 31, 2005.

WEMT Disposition

On May 16, 2005, we entered into an agreement to sell WEMT-TV in Tri-Cities, Tennessee, including the FCC license (the broadcast license) to an unrelated third party for $7.0 million.  On the same day, we completed the sale of the WEMT non-license television broadcast assets for $5.6 million of the total $7.0 million sales price and recorded a deferred gain of $3.2 million, which is stated separately on the December 31, 2005 consolidated balance sheet.  The FCC approved the transfer of the broadcast license to the unrelated third party and we completed the sale of the license assets, including the broadcast license, on February 8, 2006 for a cash price of approximately $1.4 million.  We recorded $1.8 million, net of $0.9 million in taxes, as gain from discontinued operations in our consolidated statements of operations for the three months ended March 31, 2006.  The gain is comprised of the previously deferred gain of $2.1 million and the loss of $0.3 million from the sale of the license assets, net of taxes, respectively.  The net cash proceeds were used in the normal course of operations and for capital expenditures.

Other Dispositions

During the three months and nine months ended September 30, 2006, we recognized a $0.3 million net tax provision and $0.3 million net tax benefit, respectively, primarily relating to an adjustment of certain state tax contingencies and a settlement regarding certain state tax returns related to discontinued operations in 1999.

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10.       CONDENSED CONSOLIDATING FINANCIAL STATEMENTS:

Sinclair Television Group, Inc. (STG), a wholly-owned subsidiary of Sinclair Broadcast Group, Inc. (SBG), is the primary obligor under our Bank Credit Agreement, as amended and restated on May 12, 2005, the 8.75% Senior Subordinated Notes, due 2011 and the 8% Senior Subordinated Notes, due 2012.  Our Class A Common Stock, Class B Common Stock, 6% Convertible Debentures, due 2012 and the 4.875% Convertible Senior Notes, due 2018 remain obligations or securities of SBG and are neither obligations nor securities of STG.

SBG and KDSM, LLC, a wholly-owned subsidiary of SBG, have fully and unconditionally guaranteed all of STG’s obligations.  Those guarantees are joint and several.  There are no significant 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, the direct and indirect non-guarantor subsidiaries of SBG and the eliminations necessary to arrive at our information on a consolidated basis.  These statements are presented in accordance with the disclosure requirements under Securities and Exchange Commission Regulation S-X, Rule 3-10.

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