Edgar Filing: SINCLAIR BROADCAST GROUP INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2010

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		52-1494660
(State or other jurisdiction of Incorporation or organization)		(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 o 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 o		Accelerated filer x

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 April 30, 2010
Class A Common Stock		48,805,309
Class B Common Stock		31,497,859

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SINCLAIR BROADCAST GROUP, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2010

TABLE OF CONTENTS

PART 1. FINANCIAL INFORMATION	3

ITEM 1. FINANCIAL STATEMENTS	3

CONSOLIDATED BALANCE SHEETS	3

CONSOLIDATED STATEMENTS OF OPERATIONS	4

CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)	5

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	5

CONSOLIDATED STATEMENTS OF CASH FLOWS	6

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26

ITEM 4. CONTROLS AND PROCEDURES	26

PART II. OTHER INFORMATION	28

ITEM 1. LEGAL PROCEEDINGS	28

ITEM 1A. RISK FACTORS	28

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	28

ITEM 3. DEFAULTS UPON SENIOR SECURITIES	28

ITEM 4. REMOVED AND RESERVED	28

ITEM 5. OTHER INFORMATION	28

ITEM 6. EXHIBITS	29

SIGNATURE	30

EXHIBIT INDEX	31

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PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED BALANCE SHEETS

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

	As of March 31, 2010			As of December 31, 2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	52,334		$	23,224
Current portion of restricted cash	37,843			27,667
Accounts receivable, net of allowance for doubtful accounts of $2,854 and $2,932, respectively	102,762			106,792
Affiliate receivable	56			69
Current portion of program contract costs	35,857			43,741
Income taxes receivable	7,894			8,073
Prepaid expenses and other current assets	5,555			6,130
Deferred barter costs	3,280			2,825
Deferred tax assets	7,277			7,277
Total current assets	252,858			225,798

PROGRAM CONTRACT COSTS, less current portion	15,820			16,417
PROPERTY AND EQUIPMENT, net	286,565			296,227
RESTRICTED CASH, less current portion	484			37,216
GOODWILL	660,017			660,017
BROADCAST LICENSES	51,988			51,988
DEFINITE-LIVED INTANGIBLE ASSETS, net	189,521			193,405
OTHER ASSETS	119,301			116,653
Total assets	$	1,576,554		$	1,597,721

LIABILITIES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable	$	3,155		$	3,746
Accrued liabilities	67,211			60,523
Current portion of notes payable, capital leases and commercial bank financing	51,355			40,632
Current portion of notes and capital leases payable to affiliates	3,070			2,995
Current portion of program contracts payable	76,684			91,995
Deferred barter revenues	3,305			2,810
Total current liabilities	204,780			202,701

LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing, less current portion	1,261,569			1,297,964
Notes payable and capital leases to affiliates, less current portion	22,105			24,717
Program contracts payable, less current portion	43,804			48,448
Deferred tax liabilities	183,950			177,219
Other long-term liabilities	48,113			48,894
Total liabilities	1,764,321			1,799,943

EQUITY (DEFICIT):
SINCLAIR BROADCAST GROUP SHAREHOLDERS’ EQUITY (DEFICIT):
Class A Common Stock, $.01 par value, 500,000,000 shares authorized, 48,787,139 and 47,375,437 shares issued and outstanding, respectively	488			474
Class B Common Stock, $.01 par value, 140,000,000 shares authorized, 31,497,859 and 32,453,859 shares issued and outstanding, respectively, convertible into Class A Common Stock	315			325
Additional paid-in capital	608,725			605,340
Accumulated deficit	(802,356		)	(813,876		)
Other comprehensive loss	(4,141		)	(4,213		)
Total Sinclair Broadcast Group shareholders’ deficit	(196,969		)	(211,950		)
Noncontrolling interests	9,202			9,728
Total deficit	(187,767		)	(202,222		)
Total liabilities and equity (deficit)	$	1,576,554		$	1,597,721

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 March 31,
	2010			2009
REVENUES:
Station broadcast revenues, net of agency commissions	$	147,922		$	131,305
Revenues realized from station barter arrangements	14,776			11,898
Other operating divisions revenues	6,930			11,535
Total revenues	169,628			154,738

OPERATING EXPENSES:
Station production expenses	35,918			34,943
Station selling, general and administrative expenses	30,642			30,910
Expenses recognized from station barter arrangements	13,231			10,228
Amortization of program contract costs and net realizable value adjustments	15,914			20,758
Other operating divisions expenses	6,777			12,251
Depreciation of property and equipment	9,625			11,933
Corporate general and administrative expenses	6,577			6,359
Amortization of definite-lived intangible assets and other assets	4,717			5,201
Gain on asset exchange	—			(1,236		)
Impairment of goodwill, intangible and other assets	—			130,098
Total operating expenses	123,401			261,445
Operating income (loss)	46,227			(106,707		)

OTHER INCOME (EXPENSE):
Interest expense and amortization of debt discount and deferred financing costs	(28,974		)	(18,374		)
(Loss) gain from extinguishment of debt	(289		)	18,986
Income (loss) from equity and cost method investments	543			(445		)
Other income, net	639			701
Total other (expense) income	(28,081		)	868
Income (loss) from continuing operations before income taxes	18,146			(105,839		)
INCOME TAX (PROVISION) BENEFIT	(7,086		)	18,800
Income (loss) from continuing operations	11,060			(87,039		)
DISCONTINUED OPERATIONS:
Loss from discontinued operations, includes income tax provision of $66 and $108, respectively	(66		)	(108		)
NET INCOME (LOSS)	10,994			(87,147		)
Net loss attributable to the noncontrolling interests	526			1,492
NET INCOME (LOSS) ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP	$	11,520		$	(85,655	)

BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP:
Earnings (loss) per share from continuing operations	$	0.14		$	(1.06	)
Earnings (loss) per share	$	0.14		$	(1.06	)
Weighted average common shares outstanding	79,957			80,815
Weighted average common and common equivalent shares outstanding	79,957			80,815

AMOUNTS ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP COMMON SHAREHOLDERS:
Income (loss) from continuing operations	$	11,586		$	(85,547	)
Loss from discontinued operations	(66		)	(108		)
Net income (loss)	$	11,520		$	(85,655	)

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

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SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)

FOR THE THREE MONTHS ENDED MARCH 31, 2010

(In thousands) (Unaudited)

	Sinclair Broadcast Group Shareholders
	Class A Common Stock		Class B Common Stock			Additional Paid-In Capital		Accumulated Deficit			Other Comprehensive Loss			Noncontrolling Interests			Total Equity (Deficit)

BALANCE, December 31, 2009	$	474	$	325		$	605,340	$	(813,876	)	$	(4,213	)	$	9,728		$	(202,222	)
Class A Common Stock issued pursuant to employee benefit plans	4		—			3,385		—			—			—			3,389
Class B Common Stock converted into Class A Common Stock	10		(10		)	—		—			—			—			—
Amortization of net periodic pension benefit costs	—		—			—		—			72			—			72
Net income (loss)	—		—			—		11,520			—			(526		)	10,994
BALANCE, March 31, 2010	$	488	$	315		$	608,725	$	(802,356	)	$	(4,141	)	$	9,202		$	(187,767	)

SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) (Unaudited)

	Three months ended March 31,
	2010		2009

Net income (loss)	$	10,994	$	(87,147	)
Amortization of net periodic pension benefit costs	72		53
Comprehensive income (loss)	11,066		(87,094		)
Comprehensive loss attributable to the noncontrolling interests	526		1,492
Comprehensive income (loss) attributable to Sinclair Broadcast Group	$	11,592	$	(85,602	)

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

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SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

	Three Months Ended March 31,
	2010			2009
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)	$	10,994		$	(87,147	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Amortization of debt discount, net of debt premium	1,307			2,861
Depreciation of property and equipment	9,691			12,054
Recognition of deferred revenue	(3,867		)	(7,176		)
Impairment of goodwill, intangible and other assets	—			130,098
Amortization of definite-lived intangible and other assets	4,717			5,201
Amortization of program contract costs and net realizable value adjustments	15,914			20,758
Stock-based compensation	2,321			289
Loss (gain) on extinguishment of debt, non-cash portion	289			(18,986		)
Deferred tax provision (benefit) related to operations	6,682			(18,664		)
Change in assets and liabilities:
Decrease in accounts receivable, net	5,392			16,926
Decrease (increase) in income taxes receivable	179			(34		)
Decrease in prepaid expenses and other current assets	672			722
Increase in other assets	(841		)	(356		)
Increase (decrease) in accounts payable and accrued liabilities	10,845			(8,275		)
Decrease in other long-term liabilities	(169		)	(769		)
Dividends and distributions from equity and cost method investees	21			286
Payments on program contracts payable	(27,399		)	(23,656		)
Other, net	(798		)	(360		)
Net cash flows from operating activities	35,950			23,772
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of property and equipment	(1,759		)	(2,832		)
Purchase of alarm monitoring contracts	(1,199		)	(3,221		)
Decrease in restricted cash	26,556			—
Dividends and distributions from equity and cost method investees	41			1,197
Investments in equity and cost method investees	(2,972		)	(4,696		)
Proceeds from the sale of assets	—			28
Loans to affiliates	(33		)	(41		)
Proceeds from loans to affiliates	46			42
Net cash flows from (used in) investing activities	20,680			(9,523		)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases	4,845			89,084
Repayments of notes payable, commercial bank financing and capital leases	(30,427		)	(88,580		)
Purchase of subsidiary shares from noncontrolling interests	—			(2,000		)
Repurchase of Class A Common Stock	—			(1,454		)
Dividends paid on Class A and Class B Common Stock	—			(16,038		)
Payments for deferred financing costs	(1,221		)	(17		)
Noncontrolling interests contributions	—			226
Repayments of notes and capital leases to affiliates	(717		)	(708		)
Net cash flows used in financing activities	(27,520		)	(19,487		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	29,110			(5,238		)
CASH AND CASH EQUIVALENTS, beginning of period	23,224			16,470
CASH AND CASH EQUIVALENTS, end of period	$	52,334		$	11,232

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 consolidated financial statements include our accounts and those of our wholly-owned and majority-owned subsidiaries and variable interest entities (VIEs) for which we are the primary beneficiary. Noncontrolling interests represent 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.

Interim Financial Statements

The consolidated financial statements for the three months ended March 31, 2010 and 2009 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 presentation of the consolidated balance sheets, consolidated statements of operations 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, 2009 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 June 2009, the Financial Accounting Standards Board (FASB) issued amended guidance on the consolidation of variable interest entities (VIEs). The intent of this guidance is to improve financial reporting by enterprises involved with VIEs and to provide more relevant and reliable information to users of financial statements. The new guidance will require a number of new disclosures and companies are required to perform ongoing reassessments of whether they are the primary beneficiary of a VIE for financial reporting purposes. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.

In determining whether we are the primary beneficiary of a VIE for financial reporting purposes, we consider whether we have the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and whether we have the obligation to absorb losses or the right to receive returns that would be significant to the VIE. We consolidate VIEs when we are the primary beneficiary. The assets of the consolidated VIEs can only be used to settle the obligations of the VIE. All the liabilities including debt held by our VIEs are non-recourse to us. However, certain VIE debt contains cross-default provisions under our senior secured credit facility (Bank Credit Agreement). See Note 4, Related Person Transactions for more information.

We have a Local Marketing Agreement (LMA) to provide programming, sales and managerial services to Cunningham Broadcasting Corporation (Cunningham), the license owner for six television stations. We pay an LMA fee to Cunningham and also reimburse all operating expenses. We also have an acquisition agreement in which we have a purchase option to buy the license assets of the television stations. Our applications to acquire the Federal Communications Commission (FCC) licenses are pending approval. We have determined that the license assets are VIEs and that based on the terms of the agreements, we are the primary beneficiary of the variable interests because we have the power to direct the activities which significantly impact the economic performance of the VIE through the sales and managerial services we provide and we absorb losses and returns that would be considered significant to Cunningham. See Note 4, Related Person Transactions for more information on our arrangements with Cunningham.

We have outsourcing agreements with license owners, which we provide certain non-programming related sales, operational and administrative services. We pay a fee to the license owner based on a percentage of broadcast cash flow and we reimburse all operating expenses. We also have a purchase option to buy the license assets. Our applications to acquire these FCC licenses are pending FCC approval. For the same reasons noted above regarding the LMA, we have determined that the license assets are VIEs and we are the primary beneficiary.

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

	As of March 31, 2010		As of December 31, 2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	4,444	$	4,127
Income taxes receivable	30		33
Current portion of program contract costs	420		430
Prepaid expenses and other current assets	176		129
Deferred tax assets	27		27
Total current asset	5,097		4,746

PROGRAM CONTRACT COSTS, less current portion	586		649
PROPERTY AND EQUIPMENT, net	8,043		8,239
GOODWILL	6,357		6,357
BROADCAST LICENSES	4,320		4,320
DEFINITE-LIVED INTANGIBLE ASSETS, net	7,309		7,393
OTHER ASSETS	225		213
Total assets	$	31,937	$	31,917

LIABILITIES
CURRENT LIABILITIES:
Accounts payable	$	7	$	37
Accrued liabilities	544		774
Current portion of notes payable, capital leases and commercial bank financing	11,043		11,039
Current portion of program contracts payable	572		576
Total current liabilities	12,166		12,426

LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing, less current portion	21,778		24,540
Program contracts payable, less current portion	350		444
Deferred tax liabilities	218		218
Total liabilities	$	34,512	$	37,628

The amounts above represent the consolidated assets and liabilities of the VIEs related to our LMA and outsourcing agreements and have been aggregated as they all relate to our broadcast business and the risk and reward characteristics of the VIEs are similar.

Under the previously applicable accounting guidance for consolidation, we had determined that we had a variable interest in four real estate ventures and that we were the primary beneficiary of those VIEs and should consolidate the assets and liabilities of those entities. However, under the new accounting guidance for consolidation which is effective January 1, 2010, we no longer consider one of these investments to be a VIE since the investment does not meet the VIE criteria under the new accounting guidance. We still consolidate the assets and liabilities of this entity pursuant to other accounting guidance based on voting-interests. Under the new accounting guidance for consolidation, we no longer consider ourselves the primary beneficiary of the other three real estate ventures since as the manager of the venture, the other partner holds the power to direct activities that significantly impact the economic performance of the VIE and can participate in returns that would be considered significant to the VIE. The effect of this change is not material to our consolidated financial statements.

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

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The carrying amounts of our investments in these VIEs for which we are not the primary beneficiary as of March 31, 2010 and December 31, 2009 are as follows (in thousands):

	As of March 31, 2010				As of December 31, 2009
	Carrying amount		Maximum exposure		Carrying amount		Maximum exposure
Investments in real estate ventures	$	8,742	$	8,742	$	8,796	$	8,796
Investments in investment companies	24,087		38,887		21,108		37,908
Total	$	32,829	$	47,629	$	29,904	$	46,704

The carrying amounts above are included in other assets in the consolidated balance sheets. We recorded income (loss) of $0.9 million and ($0.6) million in the quarters ended March 31, 2010 and 2009, respectively, related to these investments in income (loss) from equity and cost method investments in the consolidated statements of operations.

Our maximum exposure is equal to the carrying value of our investments plus any unfunded commitments. As of March 31, 2010 and December 31, 2009, these outstanding commitments totaled $14.8 million and $16.8 million, respectively.

Recent Accounting Pronouncements

In September 2009, the FASB ratified the Emerging Issues Task Force’s amended guidance on accounting for revenue arrangements with multiple deliverables. The amended guidance allows the use of an estimated selling price for the undelivered units of accounting in transactions in which vendor-specific objective evidence (VSOE) or third-party evidence (TPE) does not exist. The amended guidance no longer allows the use of the residual method when allocating arrangement consideration between the delivered and undelivered units of accounting if VSOE and TPE of selling price does not exist for all units of accounting. Entities are required to estimate the selling price of the deliverables, when VSOE and TPE are not available, and then allocate the consideration based on the relative selling prices of the deliverables. This guidance also requires additional disclosures including the amount of revenue recognized each reporting period and the amount of deferred revenue as of the end of each reporting period under this guidance. This guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010 and should be applied on a prospective basis. We have not determined the impact that this guidance will have on our consolidated financial statements.

In January 2010, the FASB amended the guidance on fair value measurements and disclosures to add two new disclosure provisions to the current fair value disclosure guidance, including (1) details of transfers in and out of level 1 and level 2 measurements, and (2) gross presentation of activity within the level 3 roll forward. The guidance also amends two existing fair value disclosure requirements so that entities are required to disclose (1) the valuation techniques and inputs used to develop fair value measurements for assets and liabilities that are measured at fair value on both a recurring basis and nonrecurring basis in periods subsequent to initial recognition and (2) fair value measurement disclosures for each class of assets and liabilities. A class is defined as a subset of assets or liabilities within a line item in the statement of financial position. The guidance is for interim and annual reporting periods beginning after December 15, 2009, except for the changes to the level 3 roll forward which are effective for fiscal years beginning after December 15, 2010. We have added the required disclosures under this guidance to our consolidated financial statements beginning with the first quarter of 2010.

Use of Estimates

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

Restricted Cash and Debt Redemptions

During the first quarter of 2010, we completed tender offers to purchase for cash any and all of the outstanding 3.0% Convertible Senior Notes due 2027 (the 3.0% Notes) and 4.875% Convertible Senior Notes due 2018 (the 4.875% Notes) at 100% of the face value of such notes. We used $26.6 million of restricted cash to pay for such redemptions. We redeemed approximately $12.3 million and $14.3 million of the 3.0% and 4.875% Notes, respectively. As of March 31, 2010, we held $37.8 million in a restricted cash collateral account to be used for the redemption of the remaining $15.4 million aggregate principal amount of 3.0% Notes and $22.7 million aggregate principal amount of 4.875% Notes. Any unused funds with respect to each series of notes held in the cash collateral account will be released to us and used for general corporate purposes after the expiration of the put options in May 2010 for the 3.0% Notes and in January 2011 for the 4.875% Notes. All of the restricted cash classified as current as of March 31, 2010 relates to the May 2010 and January 2011 put options. Additionally, under the terms of certain lease agreements, we are required to hold $0.5 million of restricted cash related to the removal of analog equipment from some of our leased towers.

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Stock-Based Compensation

On March 12, 2010, 300,000 stock-settled appreciation rights (SARs) were granted to David Smith, our President and Chief Executive Officer, pursuant to the 1996 Long-Term Incentive Plan. The SARs have a 10-year term and are fully vested upon grant. The SARs had a grant date fair value of $1.6 million. We valued the SARs using the Black-Scholes model and the following assumptions:

Risk-free interest rate		3.847%
Expected life		10 years
Expected volatility		110.38%
Annual dividend yield		0.0%

We recorded compensation expense of $1.6 million related to this grant in the first quarter 2010. This expense reduces our consolidated income, but has no effect on our consolidated cash flows.

Income Taxes

Our income tax provision for all periods consists of federal and state income taxes. The tax provision for the three months ended March 31, 2010, 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.

Reclassifications

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

2. COMMITMENTS AND CONTINGENCIES:

Litigation

We are 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 balance sheets, consolidated statements of operations or consolidated statements of cash flows.

Network Affiliation Agreements

Our ABC network affiliation agreements were scheduled to expire December 31, 2009. We extended these affiliation agreements until March 31, 2010, while we continued negotiations. On March 25, 2010, we agreed to terms on a renewal of the ABC network affiliation agreements, expiring August 31, 2015. Pursuant to the terms we are required to pay an annual license fee to ABC for network programming.

Our FOX affiliation agreements require us to receive FOX’s consent prior to entering into retransmission consent agreements that include content provided by FOX. FOX has recently begun conditioning its consent on its affiliates agreeing to pay FOX compensation related to such retransmission consent agreements. Sinclair, and other FOX affiliates, are currently negotiating with FOX on this issue. As of March 31, 2010, the net book value of our FOX network affiliation assets was $32.4 million.

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3. EARNINGS (LOSS) PER SHARE

The following table reconciles income (loss) (numerator) and shares (denominator) used in our computations of earnings (loss) per share for the three months ended March 31, 2010 and 2009 (in thousands):

	Three Months Ended March 31,
	2010			2009
Income (Loss) (Numerator)
Income (loss) from continuing operations	$	11,060		$	(87,039	)
Net loss attributable to noncontrolling interests included in continuing operations	526			1,492
Numerator for diluted earnings (loss) per common share from continuing operations available to common shareholders	11,586			(85,547		)
Loss from discontinued operations	(66		)	(108		)
Numerator for diluted earnings (loss) available to common shareholders	$	11,520		$	(85,655	)

Shares (Denominator)
Weighted-average common shares outstanding	79,957			80,815
Weighted-average common and common equivalent shares outstanding	79,957			80,815

Potentially dilutive securities representing 8.9 million and 28.3 million for the three months ended March 31, 2010 and 2009, respectively, were excluded from the computation of diluted earnings (loss) per common share for these periods because their effect would have been antidilutive. The net income (loss) per share amounts are the same for Class A and Class B Common Stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

4. RELATED PERSON TRANSACTIONS

David, Frederick, 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. Since the end of our last fiscal year, we engaged in the following transactions with them and/or entities in which they have substantial interests.

Cunningham Broadcasting Corporation. Concurrently with our initial public offering, we acquired options from trusts established by Carolyn C. Smith, a parent of our controlling shareholders, for the benefit of her grandchildren that will grant us the right to acquire, subject to applicable FCC rules and regulations, 100% of the capital stock of Cunningham. Cunningham is the owner-operator and FCC licensee of: WNUV-TV in Baltimore, Maryland; WRGT-TV in Dayton, Ohio; WVAH-TV in Charleston, West Virginia; WTAT-TV in Charleston, South Carolina; WMYA-TV in Anderson, South Carolina; and WTTE-TV in Columbus, Ohio.

We made payments to Cunningham under the LMA agreements of $4.5 million and $1.7 million for the three months ended March 31, 2010 and 2009, respectively.

For the three months ended March 31, 2010, Cunningham’s stations provided us with approximately $22.0 million of total revenue. The financial statements for Cunningham are included in our consolidated financial statements for all periods presented. Our Bank Credit Agreement contains certain cross-default provisions with certain material third-party licensees. As of March 31, 2010, Cunningham was the sole material third-party licensee.

Related Person 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 some or all of the controlling shareholders). Lease payments made to these entities were $1.2 million for each of the three months ended March 31, 2010 and 2009.

Bay TV. In January 1999, we entered into a LMA with Bay Television, Inc. (Bay TV), which owns the television station WTTA-TV in Tampa/St. Petersburg, Florida market. Our controlling shareholders own a substantial portion of the equity of Bay TV. Payments made to Bay TV were $0.4 million and $1.7 million for the three months ended March 31, 2010 and 2009 respectively. We received $0.1 million for each of the three months ended March 31, 2010 and 2009 from Bay TV for certain equipment leases.

Atlantic Automotive Corporation. We sold advertising time to and purchased vehicles and related vehicle services from Atlantic Automotive Corporation (Atlantic Automotive), a holding company which owns automobile dealerships and an automobile leasing

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company. David Smith, our President and Chief Executive Officer, has a controlling interest in, and is a member of the Board of Directors of Atlantic Automotive. Our stations in Baltimore, Maryland and Norfolk, Virginia received payments for advertising time totaling less than $0.1 million for each of the three months ended March 31, 2010 and 2009. We paid $0.1 million for vehicles and related vehicle services from Atlantic Automotive during each of the three months ended March 31, 2010 and 2009.

Thomas & Libowitz P.A. Basil A. Thomas, a member of our Board of Directors, is the father of a partner and founder of Thomas & Libowitz, P.A., a law firm providing legal services to us on an ongoing basis. We paid fees of $0.2 million to Thomas & Libowitz during each of the three months ended March 31, 2010 and 2009.

5. SEGMENT DATA:

We measure segment performance based on operating income (loss). Our broadcast segment includes stations in 35 markets located predominately in the eastern, mid-western and southern United States. Our other operating divisions segment primarily earned revenues from sign design and fabrication; regional security alarm operating and bulk acquisitions; and real estate ventures. All of our other operating divisions are located within the United States. Corporate costs primarily include our costs to operate as a public company and to operate our corporate headquarters location. Corporate is not a reportable segment. We had $163.1 million and $114.6 million of intercompany loans between the broadcast segment, operating divisions segment and corporate as of March 31, 2010 and 2009, respectively. We had $4.7 million and $3.0 million in intercompany interest expense related to intercompany loans between the broadcast segment, other operating divisions segment and corporate for the three months ended March 31, 2010 and 2009, respectively. All other intercompany transactions are immaterial.

Financial information for our operating segments are included in the following tables for the three months ended March 31, 2010 and 2009 (in thousands).

For the three months ended March 31, 2010	Broadcast		Other Operating Divisions			Corporate			Consolidated
Revenue	$	162,698	$	6,930		$	—		$	169,628
Depreciation of property and equipment	8,890		303			432			9,625
Amortization of definite-lived intangible assets and other assets	4,055		662			—			4,717
Amortization of program contract costs and net realizable value adjustments	15,914		—			—			15,914
General and administrative overhead expenses	5,880		211			486			6,577
Operating income (loss)	48,238		(1,089		)	(922		)	46,227
Interest expense	—		544			28,430			28,974
Income from equity and cost method investments	—		543			—			543

For the three months ended March 31, 2009	Broadcast			Other Operating Divisions			Corporate			Consolidated
Revenue	$	143,203		$	11,535		$	—		$	154,738
Depreciation of property and equipment	11,218			237			478			11,933
Amortization of definite-lived intangible assets and other assets	4,770			431			—			5,201
Amortization of program contract costs and net realizable value adjustments	20,758			—			—			20,758
Impairment of goodwill, intangible and other assets	130,098			—			—			130,098
General and administrative overhead expenses	1,952			314			4,093			6,359
Operating loss	(100,315		)	(1,753		)	(4,639		)	(106,707		)
Interest expense	—			289			18,085			18,374
Loss from equity and cost method investments	—			(445		)	—			(445		)

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6. 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, debentures, program contracts payable and non-cancelable commitments as of March 31, 2010 and December 31, 2009 were as follows (in thousands):

	March 31, 2010				December 31, 2009
	Carrying Value		Fair Value		Carrying Value		Fair Value
8.0% Senior Subordinated Notes, due 2012	$	225,395	$	222,978	$	225,488	$	220,731
6.0% Convertible Debentures, due 2012	123,421		127,080		122,482		111,991
4.875% Convertible Senior Notes, due 2018	22,685		22,118		37,016		36,091
3.0% Convertible Senior Notes, due 2027	15,352		15,057		27,383		27,044
9.25% Senior Secured Second Lien Notes, due 2017	486,806		525,000		486,519		518,125
Bank Credit Agreement, Term Loan B	323,783		351,625		323,551		314,306
Cunningham Bank Credit Facility	30,158		30,653		32,900		32,900
Active program contracts payable	120,488		105,139		140,443		124,951
Future program liabilities (a)	79,973		63,665		70,038		56,202
Total fair value	$	1,428,061	$	1,463,315	$	1,465,820	$	1,442,341

(a) Future program liabilities reflect a license agreement for program material that is not yet available for its first showing or telecast and is, therefore, not recorded as an asset or liability on our balance sheet.

Our notes and debentures payable are fair valued using Level 1 hierarchy inputs described above. Our Term Loan B and Cunningham’s bank credit facility are fair valued using Level 2 hierarchy inputs described above.

Our estimates of active program contracts payable and future program liabilities were based on discounted cash flows using Level 3 inputs described above. The discount rate represents an estimate of a market participants return and risk applicable to program contracts.

7. 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, as amended, the 9.25% Senior Secured Second Lien Notes, due 2017 (the 9.25% Notes) and the 8.0% Senior Subordinated Notes, due 2012 (the 8.0% Notes). Our Class A Common Stock, Class B Common Stock, the 6.0% Debentures, the 4.875% Notes and the 3.0% Notes remain obligations or securities of SBG and are not obligations or securities of STG. As of March 31, 2010, our consolidated total debt of $1,338.1 million included $1,090.6 million of debt related to STG and its subsidiaries of which SBG guaranteed $810.6 million.

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

The following condensed consolidating financial statements present the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows of SBG, STG, KDSM, LLC and the guarantor subsidiaries, the direct and indirect non-guarantor subsidiaries of SBG and the eliminations necessary to arrive at our information on a consolidated basis. These statements are presented in accordance with the disclosure requirements under SEC Regulation S-X, Rule 3-10.

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CONDENSED CONSOLIDATING BALANCE SHEET

AS OF MARCH 31, 2010

(in thousands) (unaudited)

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

Cash	$	—		$	38,308		$	376		$	13,650		$	—		$	52,334
Restricted cash — current	—			37,843			—			—			—			37,843
Accounts and other receivables	62			221			107,375			3,430			(376		)	110,712
Other current assets	20			2,285			47,528			2,422			(286		)	51,969
Total current assets	82			78,657			155,279			19,502			(662		)	252,858

Property and equipment, net	11,165			1,996			184,102			96,307			(7,005		)	286,565

Investment in consolidated subsidiaries	—			671,017			—			—			(671,017		)	—
Restricted cash — long-term	—			—			484			—			—			484
Other long-term assets	76,485			290,008			25,700			89,644			(346,716		)	135,121
Total other long-term assets	76,485			961,025			26,184			89,644			(1,017,733		)	135,605

Acquired intangible assets	—			—			837,776			57,683			6,067			901,526

Total assets	$	87,732		$	1,041,678		$	1,203,341		$	263,136		$	(1,019,333	)	$	1,576,554

Accounts payable and accrued liabilities	$	2,046		$	26,016		$	35,404		$	7,366		$	(466	)	$	70,366
Current portion of long-term debt	39,142			—			2,617			12,647			19			54,425
Other current liabilities	—			—			79,417			572			—			79,989
Total current liabilities	41,188			26,016			117,438			20,585			(447		)	204,780

Long-term debt	134,746			1,037,679			50,259			266,624			(205,634		)	1,283,674
Dividends in excess of investment in consolidated subsidiaries	73,326			—			—			—			(73,326		)	—
Other liabilities	35,441			1,981			365,429			39,471			(166,455		)	275,867
Total liabilities	284,701			1,065,676			533,126			326,680			(445,862		)	1,764,321

Common stock	803			—			10			282			(292		)	803
Additional paid-in capital	608,725			251,450			621,833			74,655			(947,938		)	608,725
Accumulated (deficit) earnings	(802,356		)	(272,909		)	50,404			(136,163		)	358,668			(802,356		)
Accumulated other comprehensive loss	(4,141		)	(2,539		)	(2,032		)	(2,318		)	6,889			(4,141		)
Total Sinclair Broadcast Group (deficit) equity	(196,969		)	(23,998		)	670,215			(63,544		)	(582,673		)	(196,969		)
Noncontrolling interests in consolidated subsidiaries	—			—			—			—			9,202			9,202
Total liabilities and equity (deficit)	$	87,732		$	1,041,678		$	1,203,341		$	263,136		$	(1,019,333	)	$	1,576,554

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CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2009

(in thousands) (unaudited)

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

Cash	$	—		$	10,364		$	217		$	12,643		$	—		$	23,224
Restricted cash — current	—			27,667			—			—			—			27,667
Accounts and other receivables	232			6,014			110,733			4,045			(6,090		)	114,934
Other current assets	639			2,558			54,546			2,513			(283		)	59,973
Total current assets	871			46,603			165,496			19,201			(6,373		)	225,798

Property and equipment, net	11,597			2,135			194,139			95,437			(7,081		)	296,227

Investment in consolidated subsidiaries	—			691,578			—			—			(691,578		)	—
Restricted cash — long term	—			36,732			484			—			—			37,216
Other long-term assets	69,876			273,806			26,271			58,342			(295,225		)	133,070
Total other long-term assets	69,876			1,002,116			26,755			58,342			(986,803		)	170,286

Acquired intangible assets	—			—			838,998			57,512			8,900			905,410

Total assets	$	82,344		$	1,050,854		$	1,225,388		$	230,492		$	(991,357	)	$	1,597,721

Accounts payable and accrued liabilities	$	2,887		$	20,742		$	32,200		$	19,373		$	(10,933	)	$	64,269
Current portion of long-term debt	28,448			—			2,530			12,646			3			43,627
Other current liabilities	—			—			94,229			576			—			94,805
Total current liabilities	31,335			20,742			128,959			32,595			(10,930		)	202,701

Long-term debt	171,120			1,037,467			53,192			253,138			(192,236		)	1,322,681
Dividends in excess of investment in consolidated subsidiaries	59,402			—			—			—			(59,402		)	—
Other liabilities	32,437			1,979			352,567			37,147			(149,569		)	274,561
Total liabilities	294,294			1,060,188			534,718			322,880			(412,137		)	1,799,943

Common stock	799			—			10			282			(292		)	799
Additional paid-in capital	605,340			279,664			670,863			41,824			(992,351		)	605,340
Accumulated (deficit) earnings	(813,876		)	(286,414		)	21,904			(131,677		)	396,187			(813,876		)
Accumulated other comprehensive loss	(4,213		)	(2,584		)	(2,107		)	(2,817		)	7,508			(4,213		)
Total Sinclair Broadcast Group shareholders’ (deficit) equity	(211,950		)	(9,334		)	690,670			(92,388		)	(588,948		)	(211,950		)
Noncontrolling interests in consolidated subsidiaries	—			—			—			—			9,728			9,728
Total liabilities and equity (deficit)	$	82,344		$	1,050,854		$	1,225,388		$	230,492		$	(991,357	)	$	1,597,721

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2010

(in thousands) (unaudited)

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

Net revenue	$	—		$	—		$	163,002		$	9,519		$	(2,893	)	$	169,628

Program and production	—			292			38,036			82			(2,492		)	35,918
Selling, general and administrative	490			5,865			30,222			834			(192		)	37,219
Depreciation, amortization and other operating expenses	431			79			41,517			8,231			6			50,264
Total operating expenses	921			6,236			109,775			9,147			(2,678		)	123,401

Operating (loss) income	(921		)	(6,236		)	53,227			372			(215		)	46,227

Equity in earnings of consolidated subsidiaries	14,039			27,380			—			—			(41,419		)	—
Interest expense	(4,024		)	(23,125		)	(1,380		)	(5,344		)	4,899			(28,974		)
Other income (expense)	1,083			5,426			(5,152		)	(442		)	(22		)	893
Total other income (expense)	11,098			9,681			(6,532		)	(5,786		)	(36,542		)	(28,081		)

Income tax benefit (provision)	1,343			8,969			(18,325		)	927			—			(7,086		)
Loss from discontinued operations	—			—			(66		)	—			—			(66		)
Net income (loss)	11,520			12,414			28,304			(4,487		)	(36,757		)	10,994
Net loss attributable to the noncontrolling interests	—			—			—			—			526			526
Net income (loss) attributable to Sinclair Broadcast Group	$	11,520		$	12,414		$	28,304		$	(4,487	)	$	(36,231	)	$	11,520

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2009

(in thousands) (unaudited)

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

Net revenue	$	—		$	—		$	143,494		$	13,664		$	(2,420	)	$	154,738

Program and production	—			173			36,778			64			(2,072		)	34,943
Selling, general and administrative	4,172			1,998			29,817			1,368			(86		)	37,269
Depreciation, amortization and other operating expenses	479			88			181,016			17,922			(10,272		)	189,233
Total operating expenses	4,651			2,259			247,611			19,354			(12,430		)	261,445

Operating loss	(4,651		)	(2,259		)	(104,117		)	(5,690		)	10,010			(106,707		)

Equity in earnings of consolidated subsidiaries	(88,811		)	(89,787		)	—			—			178,598			—
Interest expense	(10,155		)	(6,176		)	(1,603		)	(3,964		)	3,524			(18,374		)
Other income (expense)	19,815			8,257			(5,250		)	(265		)	(3,315		)	19,242
Total other income (expense)	(79,151		)	(87,706		)	(6,853		)	(4,229		)	178,807			868

Income tax (provision) benefit	(1,745		)	1,167			21,703			(2,325		)	—			18,800
Loss from discontinued operations	(108		)	—			—			—			—			(108		)
Net loss	(85,655		)	(88,798		)	(89,267		)	(12,244		)	188,817			(87,147		)
Net income attributable to the noncontrolling interests	—			—			—			—			1,492			1,492
Net (loss) income attributable to Sinclair Broadcast Group	$	(85,655	)	$	(88,798	)	$	(89,267	)	$	(12,244	)	$	190,309		$	(85,655	)

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2010

(in thousands) (unaudited)

	Sinclair Broadcast Group, Inc.			Sinclair Television Group, Inc.			Guarantor Subsidiaries and KDSM, LLC			Non- Guarantor Subsidiaries			Eliminations		Sinclair Consolidated
NET CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES	$	(3,810	)	$	(15,583	)	$	55,655		$	(4,449	)	$	4,137	$	35,950
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Acquisition of property and equipment	—			(34		)	(766		)	(959		)	—		(1,759		)
Purchase of alarm monitoring contracts	—			—			—			(1,199		)	—		(1,199		)
Distributions from investments	—			—			—			41			—		41
Investment in equity and cost method investees	(2,000		)	—			—			(972		)	—		(2,972		)
Change in restricted cash	—			26,556			—			—			—		26,556
Loans to affiliates	(33		)	—			—			—			—		(33		)
Proceeds from loans to affiliates	46			—			—			—			—		46
Net cash flows (used in) from investing activities	(1,987		)	26,522			(766		)	(3,089		)	—		20,680

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: