SBGI 10-Q Quarter ended March 31, 2013

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

OR

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

For the transition period from                      to                       .

COMMISSION FILE NUMBER: 000-26076

SINCLAIR BROADCAST GROUP, INC.

(Exact name of Registrant as specified in its charter)

10706 Beaver Dam Road

Hunt Valley, Maryland 21030

(Address of principal executive office, zip code)

(410) 568-1500

(Registrant’s telephone number, including area code)

None

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

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

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

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

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

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

Title of each class		Number of shares outstanding as of April 30, 2013
Class A Common Stock		54,428,925
Class B Common Stock		27,446,259

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SINCLAIR BROADCAST GROUP, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2013

TABLE OF CONTENTS

PART 1. FINANCIAL INFORMATION	3
ITEM 1. FINANCIAL STATEMENTS	3
CONSOLIDATED BALANCE SHEETS	3
CONSOLIDATED STATEMENTS OF OPERATIONS	4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	5
CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)	6
CONSOLIDATED STATEMENTS OF CASH FLOWS	7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	38
ITEM 4. CONTROLS AND PROCEDURES	39
PART II. OTHER INFORMATION	40
ITEM 1. LEGAL PROCEEDINGS	40
ITEM 1A. RISK FACTORS	40
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	40
ITEM 4. MINE SAFETY DISCLOSURES	40
ITEM 5. OTHER INFORMATION	40
ITEM 6. EXHIBITS	41
SIGNATURE	42
EXHIBIT INDEX	43

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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, 2013			As of December 31, 2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	25,825		$	22,865
Accounts receivable, net of allowance for doubtful accounts of $2,894 and $3,091, respectively		196,898			183,480
Affiliate receivable		1,210			416
Current portion of program contract costs		39,265			56,581
Prepaid expenses and other current assets		9,936			7,404
Deferred barter costs		4,084			3,345
Assets held for sale		15,714			30,357
Total current assets		292,932			304,448
PROGRAM CONTRACT COSTS, less current portion		11,173			12,767
PROPERTY AND EQUIPMENT, net		431,542			439,713
RESTRICTED CASH		25,170			225
GOODWILL		1,067,330			1,074,032
BROADCAST LICENSES		85,686			85,122
DEFINITE-LIVED INTANGIBLE ASSETS, net		624,982			623,406
OTHER ASSETS		195,713			189,984
Total assets (a)		$	2,734,528		$	2,729,697
LIABILITIES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable		$	9,208		$	10,086
Accrued liabilities		167,044			143,731
Income taxes payable		8,636			9,939
Current portion of notes payable, capital leases and commercial bank financing		46,366			47,622
Current portion of notes and capital leases payable to affiliates		2,090			1,704
Current portion of program contracts payable		66,712			88,015
Deferred barter revenues		4,492			3,499
Deferred tax liabilities		4,668			607
Liabilities held for sale		1,948			2,397
Total current liabilities		311,164			307,600
LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing, less current portion		2,201,629			2,210,866
Notes payable and capital leases to affiliates, less current portion		20,777			13,187
Program contracts payable, less current portion		15,417			16,341
Deferred tax liabilities		229,688			233,465
Other long-term liabilities		53,140			48,291
Total liabilities (a)		2,831,815			2,829,750
COMMITMENTS AND CONTINGENCIES (See Note 3 )
EQUITY (DEFICIT):
SINCLAIR BROADCAST GROUP SHAREHOLDERS’ EQUITY (DEFICIT):
Class A Common Stock, $.01 par value, 500,000,000 shares authorized, 52,878,992 and 52,332,012 shares issued and outstanding, respectively		529			523
Class B Common Stock, $.01 par value, 140,000,000 shares authorized, 28,846,259 and 28,933,859 shares issued and outstanding, respectively, convertible into Class A Common Stock		288			289
Additional paid-in capital		608,235			600,928
Accumulated deficit		(708,748		)	(713,697		)
Accumulated other comprehensive loss		(5,032		)	(4,993		)
Total Sinclair Broadcast Group shareholders’ deficit		(104,728		)	(116,950		)
Noncontrolling interests		7,441			16,897
Total deficit		(97,287		)	(100,053		)
Total liabilities and equity (deficit)		$	2,734,528		$	2,729,697

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

(a) Our consolidated total assets as of March 31, 2013 and December 31, 2012 include total assets of variable interest entities (VIEs) of $113.0 million and $107.9 million, respectively, which can only be used to settle the obligations of the VIEs.  Our consolidated total liabilities as of March 31, 2013 and December 31, 2012 include total liabilities of the VIEs of $13.0 million and $7.9 million, respectively, for which the creditors of the VIEs have no recourse to us.  See Note 1. Summary of Significant Accounting Policies .

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SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

		Three Months Ended March 31,
		2013			2012
REVENUES:
Station broadcast revenues, net of agency commissions		$	252,925		$	190,888
Revenues realized from station barter arrangements		18,230			17,538
Other operating divisions revenues		11,463			13,948
Total revenues		282,618			222,374
OPERATING EXPENSES:
Station production expenses		80,433			59,797
Station selling, general and administrative expenses		51,938			35,712
Expenses recognized from station barter arrangements		16,014			16,124
Amortization of program contract costs and net realizable value adjustments		18,861			14,100
Other operating divisions expenses		9,869			12,290
Depreciation of property and equipment		14,595			9,271
Corporate general and administrative expenses		11,250			9,367
Amortization of definite-lived intangible assets		16,002			5,819
Total operating expenses		218,962			162,480
Operating income		63,656			59,894
OTHER INCOME (EXPENSE):
Interest expense and amortization of debt discount and deferred financing costs		(37,697		)	(27,387		)
Loss from extinguishment of debt		—			(335		)
(Loss) income from equity and cost method investments		(1,052		)	1,276
Other income, net		457			471
Total other expense, net		(38,292		)	(25,975		)
Income from continuing operations before income taxes		25,364			33,919
INCOME TAX PROVISION		(8,849		)	(4,794		)
Income from continuing operations		16,515			29,125
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations, includes income tax provision of $292 and $77, respectively		355			(51		)
NET INCOME		16,870			29,074
Net loss attributable to the noncontrolling interests		127			285
NET INCOME ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP		$	16,997		$	29,359
Dividends declared per share		$	0.15		$	0.12
BASIC AND DILUTED EARNINGS PER COMMON SHARE ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP:
Earnings per share from continuing operations		$	0.20		$	0.36
Earnings per share		$	0.21		$	0.36
Weighted average common shares outstanding		81,191			80,852
Weighted average common and common equivalent shares outstanding		82,064			81,127
AMOUNTS ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP COMMON SHAREHOLDERS:
Income from continuing operations, net of tax		$	16,642		$	29,410
Income (loss) from discontinued operations, net of tax		355			(51		)
Net income		$	16,997		$	29,359

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

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SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) (Unaudited)

		Three months ended March 31,
		2013			2012
Net income		$	16,870		$	29,074
Amortization of net periodic pension benefit costs, net of taxes		(39		)	104
Comprehensive income		16,831			29,178
Comprehensive loss attributable to the noncontrolling interests		127			285
Comprehensive income attributable to Sinclair Broadcast Group		$	16,958		$	29,463

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, 2013

(In thousands) (Unaudited)

		Sinclair Broadcast Group Shareholders
		Class A Common Stock					Class B Common Stock					Additional Paid-In			Accumulated			Accumulated Other Comprehensive			Noncontrolling			Total Equity
		Shares		Values			Shares		Values			Capital			Deficit			Loss			Interests			(Deficit)
BALANCE, December 31, 2012		52,332,012		$	523		28,933,859		$	289		$	600,928		$	(713,697	)	$	(4,993	)	$	16,897		$	(100,053	)
Dividends declared on Class A and Class B Common Stock		—		—			—		—			—			(12,048		)	—			—			(12,048		)
Class A Common Stock issued pursuant to employee benefit plans		386,380		4			—		—			1,866			—			—			—			1,870
Class B Common Stock converted into Class A Common Stock		87,600		1			(87,600	)	(1		)	—			—			—			—			—
Class A Common Stock issued upon exercise of stock options		73,000		1			—		—			853			—			—			—			854
Class A Common Stock sold by variable interest entity		—		—			—		—			1,045			—			—			—			1,045
Issuance of stocks settled appreciation rights		—		—			—		—			3,155			—			—			—			3,155
Tax benefit on share based award		—		—			—		—			388			—			—			—			388
Distributions to noncontrolling interests		—		—			—		—			—			—			—			(9,329		)	(9,329		)
Amortization of net periodic pension benefit costs, net of taxes		—		—			—		—			—			—			(39		)	—			(39		)
Net income		—		—			—		—			—			16,997			—			(127		)	16,870
BALANCE, March 31, 2013		52,878,992		$	529		28,846,259		$	288		$	608,235		$	(708,748	)	$	(5,032	)	$	7,441		$	(97,287	)

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

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SINCLAIR BROADCAST GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

		Three Months Ended March 31,
		2013			2012
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income		$	16,870		$	29,074
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation of property and equipment		14,659			9,630
Amortization of definite-lived intangible and other assets		16,002			5,899
Amortization of program contract costs and net realizable value adjustments		19,025			14,280
Deferred tax benefit		(847		)	(5,984		)
Change in assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable, net		(13,858		)	8,370
Decrease in income taxes receivable		—			225
Increase in prepaid expenses and other current assets		(3,961		)	(9,153		)
(Increase) decrease in other assets		(490		)	395
Increase in accounts payable and accrued liabilities		13,689			16,347
Increase in income taxes payable		441			10,016
Increase (decrease) in other long-term liabilities		2,202			(88		)
Payments on program contracts payable		(22,363		)	(16,620		)
Other, net		8,333			5,092
Net cash flows from operating activities		49,702			67,483
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of property and equipment		(7,482		)	(6,736		)
Payments for acquisitions of television stations		—			(205,622		)
Purchase of alarm monitoring contracts		(1,924		)	(3,035		)
Proceeds from sale of broadcast assets		14,312			—
(Increase) decrease in restricted cash		(24,945		)	20,000
Distributions from equity and cost method investees		2,228			—
Investments in equity and cost method investees		(1,758		)	(5,503		)
Investment in marketable securities		(1,195		)	—
Proceeds from the sale of real estate investment		5,516			—
Loans to affiliates		(42		)	(500		)
Proceeds from loans to affiliates		13			417
Other investing activities		335			19
Net cash flows used in investing activities		(14,942		)	(200,960		)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from notes payable, commercial bank financing and capital leases		101,128			184,482
Repayments of notes payable, commercial bank financing and capital leases		(112,623		)	(23,529		)
Proceeds from exercise of stock options, including excess tax benefits of share based payments of $0.4 million and $0.2 million, respectively		1,242			279
Dividends paid on Class A and Class B Common Stock		(12,048		)	(9,588		)
Payments for deferred financing costs		(801		)	(3,519		)
Proceeds from Class A Common Stock sold by variable interest entity		1,045			—
Noncontrolling interests distributions		(9,329		)	(88		)
Repayments of notes and capital leases to affiliates		(414		)	(725		)
Net cash flows (used in) from financing activities		(31,800		)	147,312
NET INCREASE IN CASH AND CASH EQUIVALENTS		2,960			13,835
CASH AND CASH EQUIVALENTS, beginning of period		22,865			12,967
CASH AND CASH EQUIVALENTS, end of period		$	25,825		$	26,802

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 VIEs for which we are the primary beneficiary.  Noncontrolling interests represents a minority owner’s proportionate share of the equity in certain of our consolidated entities.  All intercompany transactions and account balances have been eliminated in consolidation.

Discontinued Operations

In accordance with Financial Accounting Standards Board’s (FASB) guidance on reporting assets held for sale, we reported the financial position and results of operations of our stations in Lansing, Michigan (WLAJ-TV) and Providence, Rhode Island (WLWC-TV), as assets and liabilities held for sale in the accompanying consolidated balance sheets and consolidated statements of operations.  Discontinued operations have not been segregated in the consolidated statements of cash flows and, therefore, amounts for certain captions will not agree with the accompanying consolidated balance sheets and consolidated statements of operations. WLAJ-TV was recently acquired in the second quarter of 2012 in connection with the acquisition of the television stations from Freedom Communications (Freedom). WLWC-TV was recently acquired in the first quarter of 2012 in connection with the acquisition of the television stations from Four Points Media Group LLC (Four Points). See Note 2. Acquisitions for more information.  In October 2012, we entered into an agreement to sell all the assets of WLAJ-TV to an unrelated third party for $14.4 million.  In January 2013, we entered into an agreement to sell the assets of WLWC-TV to an unrelated third party for $13.8 million.  The operating results of WLAJ-TV, which was sold effective March 1, 2013, and WLWC-TV, which was sold effective April 1, 2013, are not included in our consolidated results of operations from continuing operations for the quarter ended March 31, 2013. As of March 31, 2013, assets held for sale and liabilities held for sale included $1.3 million of negative working capital and programming contracts payable, $1.6 million of property and equipment, net, $0.8 million of broadcast licenses, $7.2 million of goodwill and $5.5 million of definite-lived intangible assets for WLWC-TV.  Total revenues for WLAJ-TV and WLWC-TV, which are included in discontinued operations for the quarter ended March 31, 2013 are $0.6 million and $1.6 million, respectively, and total revenues of WLWC-TV, which are included in discontinued operations for the quarter ended March 31, 2012, was $1.5 million.  Total income before taxes for WLAJ-TV and WLWC-TV, which are included in discontinued operations for the quarter ended March 31, 2013, are $0.2 million and $0.4 million, respectively, and total income before taxes of WLWC-TV, which are included in discontinued operations for the quarter ended March 31, 2012, was less than $0.1 million.  The sale of WLAJ-TV effective March 1, 2013, resulted in a gain of $0.1 million.  Basic and diluted earnings per share from discontinued operations was less than $0.01 per share for the quarters ended March 31, 2013 and 2012.

Interim Financial Statements

The consolidated financial statements for the three months ended March 31, 2013 and 2012 are unaudited.  In the opinion of management, such financial statements have been presented on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income 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, 2012 filed with the SEC.  The consolidated statements of operations presented in the accompanying consolidated financial statements are not necessarily representative of operations for an entire year.

Variable Interest Entities

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

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We have entered into local marketing agreements (LMAs) to provide programming, sales and managerial services for television stations of Cunningham Broadcasting Company (Cunningham), the license owner of seven television stations as of March 31, 2013.  We pay LMA fees to Cunningham and also reimburse all operating expenses.  We also have an acquisition agreement in which we have a purchase option to buy the license assets of the television stations which includes the FCC license and certain other assets used to operate the station (License Assets).  Our applications to acquire the FCC licenses are pending approval.  We own the majority of the non-license assets of the Cunningham stations and our Bank Credit Agreement contains certain default provisions whereby insolvency of Cunningham would cause an event of default under our Bank Credit Agreement.  We have determined that the Cunningham stations are VIEs and that based on the terms of the agreements, the significance of our investment in the stations and the cross-default provisions with our Bank Credit Agreement, we are the primary beneficiary of the variable interests because, subject to the ultimate control of the licensees, we have the power to direct the activities which significantly impact the economic performance of the VIEs through the sales and managerial services we provide and we absorb losses and returns that would be considered significant to Cunningham.  See Note 6. Related Person Transactions for more information on our arrangements with Cunningham.  Included in the accompanying consolidated statements of operations for the quarters ended March 31, 2013 and 2012 are net broadcast revenues of $24.6 million and $23.3 million, respectively, which relates to LMAs with Cunningham.

Effective December 1, 2012, we have entered into joint sales agreements (JSAs) and shared services agreements (SSAs) to provide certain non-programming related sales, operational and administrative services for the television stations of Deerfield, the license owner of six television stations as of March 31, 2013.  The initial term is for eight years from the commencement and the agreement may be automatically renewed for successive eight year renewal terms.  We also have a purchase option to buy the license assets of the television stations. We own the majority of the non-license assets of the Deerfield stations and we have also guaranteed the debt of Deerfield.  Additionally, there is a lease in place whereby Deerfield leases assets owned by us in order to perform its duties under FCC rules. We have determined that the Deerfield stations are VIEs and that based on the terms of the agreements, the significance of our investment in the stations and our guarantee of Deerfield’s debt, we are the primary beneficiary of the variable interests because, subject to the ultimate control of the licensees, we have the power to direct the activities which significantly impact the economic performance of the VIEs through the sales and managerial services we provide and we absorb losses and returns that would be considered significant to Deerfield.  Included in the accompanying consolidated statements of operations for the quarter ended March 31, 2013 are net revenues of $15.7 million that relate to agreements with Deerfield.

We have outsourcing agreements with certain other license owners, under which we provide certain non-programming related sales, operational and administrative services.  We pay a fee to the license owners 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.  We have determined that the License Assets of these stations are VIEs, and, based on the terms of the agreements and the significance of our investment in the stations, we are the primary beneficiary of the variable interests because, subject to the ultimate control of the licensees, we have the power to direct the activities which significantly impact the economic performance of the VIE through the sales and managerial services we provide and because we absorb losses and returns that would be considered significant to the VIEs.  Included in the accompanying consolidated statements of operations for the quarters ended March 31, 2013 and 2012 are net revenues of $8.5 million and $3.7 million, respectively, which relates to these arrangements.

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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 as of March 31, 2013 and 2012 were as follows (in thousands):

		As of March 31, 2013			As of December 31, 2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	3,005		$	3,805
Accounts receivable		124			110
Income taxes receivable		166			94
Current portion of program contract costs		5,566			6,113
Prepaid expenses and other current assets		101			124
Total current asset		8,962			10,246
PROGRAM CONTRACT COSTS, less current portion		1,409			1,484
PROPERTY AND EQUIPMENT, net		8,330			10,806
GOODWILL		6,357			6,357
BROADCAST LICENSES		15,492			14,927
DEFINITE-LIVED INTANGIBLE ASSETS, net		58,603			51,368
OTHER ASSETS		13,848			12,723
Total assets		$	113,001		$	107,911
LIABILITIES
CURRENT LIABILITIES:
Accounts payable		$	15		$	15
Accrued liabilities		256			186
Current portion of notes payable, capital leases and commercial bank financing		2,728			2,123
Current portion of program contracts payable		8,337			8,991
Total current liabilities		11,336			11,315
LONG-TERM LIABILITIES:
Notes payable, capital leases and commercial bank financing, less current portion		24,954			20,238
Program contracts payable, less current portion		2,018			2,080
Total liabilities		$	38,308		$	33,633

The amounts above represent the consolidated assets and liabilities of the VIEs related to our LMAs with Cunningham, JSAs and SSAs with Deerfield and certain outsourcing agreements, for which we are the primary beneficiary, and have been aggregated as they all relate to our broadcast business.  Excluded from the amounts above are payments made to Cunningham under the LMA which are treated as a prepayment of the purchase price of the stations and capital leases between us and Cunningham which are eliminated in consolidation.  The total payment made under these LMAs as of March 31, 2013 and December 31, 2012, which are excluded from liabilities above, were $30.6 million and $29.8 million, respectively.  The total capital lease assets excluded from above were $11.7 million and $11.7 million as of March 31, 2013 and December 31, 2012, respectively.  The risk and reward characteristics of the VIEs are similar.

In the fourth quarter of 2011, we began providing sales, programming and management services to the Freedom stations pursuant to a LMA.  Effective April 1, 2012, we completed the acquisition of the Freedom stations and the LMA was terminated. We determined that the Freedom stations were VIEs during the period of the LMA based on the terms of the agreement.  We were not the primary beneficiary because the owner of the stations had the power to direct the activities of the VIEs that most significantly impacted the economic performance of the VIEs.  In the consolidated statements of operations for the quarter ended March 31, 2012 are net broadcast revenues of $10.0 million and station production expenses of $7.8 million related to the Freedom LMAs.

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

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The carrying amounts of our investments in these VIEs for which we are not the primary beneficiary for the periods presented (in thousands):

		As of March 31, 2013						As of December  31, 2012
		Carrying amount			Maximum exposure			Carrying amount			Maximum exposure
Investments in real estate ventures		$	3,621		$	3,621		$	3,648		$	3,648
Investments in investment companies		28,282			28,282			27,335			27,335
Total		$	31,903		$	31,903		$	30,983		$	30,983

The carrying amounts above are included in other assets in the consolidated balance sheets.  The income and loss related to these investments are recorded in income from equity and cost method investments in the consolidated statement of operations.  We recorded income of $0.4 million and $1.4 million in the three months ended March 31, 2013 and 2012, respectively.

Our maximum exposure is equal to the carrying value of our investments.  As of March 31, 2013 and December 31, 2012, our unfunded commitments related to private equity investment funds totaled $17.9 million and $8.9 million, respectively.

Recent Accounting Pronouncements

In July 2012, the FASB issued new guidance for testing indefinite-lived intangible assets for impairment.  The new guidance allows companies to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar to the approach now applied to goodwill.  Companies can first determine based on certain qualitative factors whether it is “more likely than not” (a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired.  The new standard is intended to reduce the cost and complexity of testing indefinite-lived intangible assets for impairment.  The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 30, 2012 and early adoption is permitted. We adopted this new guidance in the fourth quarter of 2012 when completing our annual impairment analysis. This guidance impacted how we perform our annual impairment testing for indefinite-lived intangible assets and changed our related disclosures for 2012; however, it does not have an impact on our consolidated financial statements as the guidance does not impact the timing or amount of any resulting impairment charges.

In February 2013, the FASB issued new guidance requiring disclosure of items reclassified out of accumulated other comprehensive income (AOCI).  This new guidance requires entities to present (either on the face of the income statement or in the notes) the effects on the line items of the income statement for amounts reclassified out of AOCI.  The new guidance is effective for annual and interim periods beginning after December 15, 2012.  This guidance does not have a material impact on our financial statements.

Use of Estimates

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

Restricted Cash

During the three months ended March 31, 2013, we deposited a total of $25.0 million into escrow accounts upon entering into agreements to purchase certain television stations, as further discussed under Pending Acquisitions in Note 3. Commitments and Contingencies. These escrow deposits are classified as restricted cash within noncurrent assets in the consolidated balance sheet as of March 31, 2013.

Under the terms of certain lease agreements, as of March 31, 2013 and December 31, 2012, we were required to hold $0.2 million of restricted cash related to the removal of analog equipment from some of our leased towers.

Revenue Recognition

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

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

Our retransmission consent agreements contain both advertising and retransmission consent elements.  We have determined that our retransmission consent agreements are revenue arrangements with multiple deliverables.  Advertising and retransmission consent deliverables sold under our agreements are separated into different units of accounting at fair value.  Revenue applicable to

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the advertising element of the arrangement is recognized similar to the advertising revenue policy noted above.  Revenue applicable to the retransmission consent element of the arrangement is recognized over the life of the agreement.

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

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, 2013 and 2012 is based on the estimated effective tax rate applicable for the full year after taking into account discrete tax items and the effects of the noncontrolling interests. We provide a valuation allowance for deferred tax assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized.  In evaluating our ability to realize net deferred tax assets, we consider all available evidence, both positive and negative, including our past operating results, tax planning strategies and forecasts of future taxable income.  In considering these sources of taxable income, we must make certain judgments that are based on the plans and estimates used to manage our underlying businesses on a long-term basis.  A valuation allowance has been provided for deferred tax assets related to a substantial portion of our available state net operating loss carryforwards, based on past operating results, expected timing of the reversals of existing temporary book/tax basis differences, alternative tax strategies and projected future taxable income.

Our effective income tax rate for the three months ended March 31, 2013 approximated the statutory rate. Our effective income tax rate for the three months ended March 31, 2012 was lower than the statutory rate primarily due to a release of valuation allowance of $7.7 million related to certain deferred tax assets of Cunningham, one of our consolidated VIEs, as the weight of all available evidence supports realization of the deferred tax assets. The valuation allowance release determination was based primarily on the sufficiency of forecasted taxable income necessary to utilize NOLs expiring in years 2022 — 2030.  This VIE files separate income tax returns.  Any resulting tax liabilities are nonrecourse to us and we are not entitled to any benefit resulting from the deferred tax assets of the VIE.

We believe it is reasonably possible that our liability for unrecognized tax benefits related to continuing and certain discontinued operations will be reduced by $0.6 and $5.1 million, respectively, in the next twelve months as a result of expected statute of limitations expirations, the application of limits under available state administrative practice exceptions, and the resolution of examination issues and settlements with federal and certain state tax authorities. On April 3, 2013, we entered into a settlement agreement with the Internal Revenue Service’s Appeals Office with respect to our 2006 and 2007 federal income tax returns. We do not expect any material impact on our financial statements as a result of that settlement.

Subsequent events

In April 2013, we commenced a public offering of 18.0 million primary shares of Class A common stock.  Certain selling stockholders also intend to grant the underwriters a 30-day option to purchase up to an additional 2.7 million shares on the same terms and conditions. Net proceeds are intended to fund pending and future potential television station acquisitions and for general corporate purposes. The offering was priced at $27.25 per share on May 1, 2013.  The offering is expected to close on May 7, 2013.

Reclassifications

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

2. ACQUISITIONS

Four Points

Effective January 1, 2012, we completed the acquisition of the broadcast assets of Four Points, which we had previously operated pursuant to a LMA since October 1, 2011.  The acquired assets consist of the following seven stations in four markets along with the respective network affiliation or program service arrangements: KUTV (CBS) and KMYU (MNT / This TV) in Salt Lake City / St. George, UT; KEYE (CBS) in Austin, TX; WTVX (CW), WTCN (MNT) and WWHB (Azteca) in West Palm Beach / Fort Pierce / Stuart, FL; and WLWC (CW) in Providence, RI / New Bedford, MA.  This acquisition provides expansion into additional markets and increases value based on the synergies we can achieve.

We paid Four Points $200.0 million in cash, less a working capital adjustment of $0.9 million.  The acquisition was financed with a $180.0 million draw under an incremental Term B Loan commitment under our amended Bank Credit Agreement plus a $20.0 million cash escrow previously paid in September 2011.

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Under the acquisition method of accounting, the results of the acquired operations are included in the financial statements of the Company beginning January 1, 2012.  The purchase price has been allocated to the acquired assets and assumed liabilities based on estimated fair values.  The allocated fair value of acquired assets and assumed liabilities is summarized as follows (in thousands):

Prepaid expenses and other current assets		$	456
Program contract costs		3,731
Property and equipment		34,578
Broadcast licenses		10,658
Definite-lived intangible assets		93,800
Other assets		548
Accrued liabilities		(381		)
Program contracts payable		(5,157		)
Fair value of identifiable net assets acquired		138,233
Goodwill		60,843
Total		$	199,076

The final allocation presented above is based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches.  In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.  The amount allocated to definite-lived intangible assets represents the estimated fair values of network affiliations of $66.9 million, the decaying advertiser base of $9.8 million, and other intangible assets of $17.1 million. These intangible assets will be amortized over the estimated remaining useful lives of 15 years for network affiliations, 10 years for the decaying advertiser base and a weighted average of 14 years for the other intangible assets.  Acquired property and equipment will be depreciated on a straight-line basis over the respective estimated remaining useful lives.  Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and noncontractual relationships, as well as expected future synergies.  We expect that goodwill will be deductible for tax purposes.  Certain measurement period adjustments have been made since the initial allocation in the first quarter of 2012, which were not material to the consolidated financial statements.

Prior to the acquisition, since October 1, 2011, we provided sales, programming and management services to the stations pursuant to an LMA.  During that period, we funded the working capital needs of the stations, which totaled $8.1 million as of December 31, 2011 and was reflected as cash flows used in operating activities within the consolidated statement of cash flows for that period.  This working capital is not reflected in the purchase price allocation presented above.

The results of operations for the quarter ended March 31, 2012 include the results of the Four Points stations since January 1, 2012.  Net broadcast revenues and operating income of the Four Points stations included in our consolidated statements of operations, were $17.7 million and $4.3 million for the quarter ended March 31, 2013, respectively, and $16.5 million and $4.5 million for the quarter ended March 31, 2012, respectively.  These amounts exclude the operations of WLWC-TV which are classified as discontinued operations in the consolidated statements of operations.  See Note 1 . Nature of Operations and Summary of Significant Accounting Policies .  Net broadcast revenues and operating income of WLWC-TV were $1.3 million and $0.4 million, respectively, for the quarter ended March 31, 2013 and $1.3 million and $0.03 million for the quarter ended March 31, 2012, respectively.

Freedom

Effective April 1, 2012, we completed the acquisition of the broadcast assets of Freedom, which we had previously operated pursuant to a LMA since December 1, 2011. The acquired assets consist of the following eight stations in seven markets along with the respective network affiliation or program service arrangements: WPEC (CBS) in West Palm Beach, FL; WWMT (CBS) in Grand Rapids/Kalamazoo/Battle Creek, MI;  WRGB (CBS) and WCWN (CW) in Albany, NY; WTVC (ABC) in Chattanooga, TN; WLAJ (ABC) in Lansing, MI; KTVL (CBS) in Medford-Klamath Falls, OR; and KFDM (CBS) in Beaumont/Port Arthur/Orange, TX.  This acquisition provides expansion into additional markets and increases value based on the synergies we can achieve.

We paid Freedom $385.0 million plus a working capital adjustment of $0.3 million.  The acquisition was financed with a draw under a $157.5 million incremental Term Loan A and a $192.5 million incremental Term B Loan commitment under our amended Bank Credit Agreement, plus a $38.5 million cash escrow previously paid in November 2011.

Under the acquisition method of accounting, the results of the acquired operations are included in the financial statements of the Company beginning April 1, 2012.  The purchase price has been allocated to the acquired assets and assumed liabilities based on estimated fair values.  The allocated fair value of acquired assets and assumed liabilities is summarized as follows (in thousands):

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Prepaid expenses and other current assets		$	373
Program contract costs		3,520
Property and equipment		54,109
Broadcast licenses		10,424
Definite-lived intangible assets		140,963
Other assets		278
Accrued liabilities		(589		)
Program contracts payable		(3,404		)
Fair value of identifiable net assets acquired		205,674
Goodwill		179,609
Total		$	385,283

The final allocation presented above is based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches.  In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.  The amount allocated to definite-lived intangible assets represents the estimated fair values of network affiliations of $93.1 million, the decaying advertiser base of $25.1 million, and other intangible assets of $22.8 million.  These intangible assets will be amortized over the estimated remaining useful lives of 15 years for network affiliations, 10 years for the decaying advertiser base and a weighted average life of 16 years for the other intangible assets.  Acquired property and equipment will be depreciated on a straight-line basis over the respective estimated remaining useful lives.  Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and noncontractual relationships, as well as expected future synergies.  We expect that goodwill will be deductible for tax purposes.  Certain measurement period adjustments have been made since the initial allocation in the second quarter of 2012, which were not material to the consolidated financial statements

Prior to the acquisition, since December 1, 2011, we provided sales, programming and management services to the stations pursuant to an LMA.  During that period, we funded the working capital needs of the stations, which totaled $1.5 million as of December 31, 2011 and $9.6 million as of March 31, 2012 and was reflected as cash flows used in operating activities within the consolidated statement of cash flows for those periods.  This working capital is not reflected in the purchase price allocation presented above.

The results of operations for the quarter ended March 31, 2012 do not include the results of the Freedom stations since the stations were acquired April 1, 2012.  Net broadcast revenues and operating income of the Freedom stations included in our consolidated statements of operations, were $26.3 million and $5.9 million for the quarter ended March 31, 2013, respectively. These amounts exclude the operations of WLAJ-TV which are classified as discontinued operations in the consolidated statements of operations.  See Note 1. Nature of Operations and Summary of Significant Accounting Policies .  Net broadcast revenues and operating losses of WLAJ-TV were $0.6 million and $0.2 million, respectively, for the quarter ended March 31, 2013.  Additionally, during the first quarter 2012, prior to the acquisition, we recorded net broadcast revenues of $10.0 million related to the Freedom LMAs.

Newport

Effective December 1, 2012, we completed the acquisition of certain broadcast assets of Newport Television (Newport). The acquired assets relate to the following seven stations in six markets along with the respective network affiliation or program service arrangements: WKRC (CBS) in Cincinnati, OH; WOAI (NBC) in San Antonio, TX; WHP (CBS) in Harrisburg/Lancaster/Lebanon/York, PA; WPMI (NBC) and WJTC (IND) in Mobile, AL/Pensacola, FL; KSAS (FOX) in Wichita/Hutchinson, KS; and WHAM (ABC) in Rochester, NY.  We also acquired Newport’s rights under the local marketing agreements with WLYH (CW) in Harrisburg, PA and KMTW (MNT) in Wichita, KS, as well as options to acquire the license assets.  This acquisition provides expansion into additional markets and increases value based on the synergies we can achieve.

We paid Newport $460.5 million in cash, less a working capital adjustment of $1.3 million.  We financed the $460.5 million purchase price, less the $41.3 million in escrow with the net proceeds from the 6.125% Notes issued in October 2012.

Our right to acquire certain of the license assets of WPMI and WJTC in Mobile, AL was assigned to Deerfield and Deerfield acquired these assets effective December 1, 2012 for $6.0 million. Additionally, Deerfield acquired the license assets of WHAM in Rochester, NY effective February 1, 2013 for $6.0 million, using borrowings under its bank credit facility. Prior to Deerfield’s acquisition of the assets of WHAM, the assets were owned by Newport.  Concurrent with the acquisition of WKRC in Cincinnati, OH and WOAI in San Antonio, TX from Newport, we sold to Deerfield the license assets of two of our existing stations located in Cincinnati, OH (WSTR MNT) and San Antonio, TX (KMYS CW) for a total of $10.7 million. Deerfield financed these purchases with third party bank financing which we have guaranteed. We have assignable purchase option agreements with Deerfield to acquire the license assets upon FCC approval and operate the stations pursuant to shared services and joint sales agreements with

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Deerfield. We consolidate the license assets owned by Deerfield because the licensee companies are VIEs and we are the primary beneficiary. Prior to Deerfield acquiring the license assets of WHAM in Rochester, NY on February 1, 2013, we operated the station pursuant to a shared services and joint sales agreement with Newport. We consolidated the license assets owned by Newport from December 1, 2012 to January 31, 2013 because the licensee company was a VIE and the Company is the primary beneficiary. See Variable Interest Entities in Note 1.  Nature of Operations and Summary of Significant Accounting Policies. The purchase of the license assets by Deerfield in February 2013 was accounted for as a transaction between parties under common control.

Under the acquisition method of accounting, the results of the acquired operations are included in the financial statements of the Company beginning December 1, 2012. The initial purchase price has been allocated to the acquired assets and assumed liabilities based on estimated fair values. The initial purchase price allocated includes $460.5 million paid for certain broadcast assets of the seven stations from Newport and the rights under the LMAs with the two other stations, $6.0 million paid by Deerfield for the license assets of WPMI and WJTC and $6.0 million paid by Deerfield for the license assets of WHAM, and $0.2 million of noncontrolling interests related to the WLYH VIE, less a working capital adjustment of $1.3 million. The sale of the license assets of WSTR in Cincinnati, OH and KMYS in San Antonio, TX was considered a transaction between parties under common control and therefore was not included in the purchase price allocation. The purchase price allocation is preliminary pending a final determination of the fair values of the assets and liabilities. The initial allocated fair value of acquired assets and assumed liabilities, including the assets owned by VIEs, is summarized as follows (in thousands):

Prepaid expenses and other current assets		$	1,390
Program contract costs		10,378
Property and equipment		53,883
Broadcast licenses		15,581
Definite-lived intangible assets		240,013
Other assets		1,097
Accrued liabilities		(3,928		)
Program contracts payable		(11,634		)
Fair value of identifiable net assets acquired		306,780
Goodwill		164,621
Total		$	471,401

The preliminary allocation presented above is based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches.  In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.  The amount allocated to definite-lived intangible assets represents the estimated fair values of network affiliations of $176.0 million, the decaying advertiser base of $23.7 million, and other intangible assets of $40.3 million. These intangible assets will be amortized over the estimated remaining useful lives of 15 years for network affiliations, 10 years for the decaying advertiser base and a weighted average of 14 years for the other intangible assets.  Acquired property and equipment will be depreciated on a straight-line basis over the respective estimated remaining useful lives.  Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and noncontractual relationships, as well as expected future synergies.  We expect that goodwill will be deductible for tax purposes.  The preliminary purchase price allocation is based upon all information available to us at the present time and is subject to change, and such changes could be material.  Certain measurement period adjustments have been made since the initial allocation in the fourth quarter of 2012, which were not material to our consolidated financial statements.

The results of operations for the year ended December 31, 2012 include the results of the Newport stations since December 1, 2012. Net broadcast revenues and operating income of the Newport stations included in our consolidated statements of operations, were $34.9 million and $8.3 million for the quarter ended March 31, 2013, respectively.

Pro Forma Information

The following table sets forth unaudited pro forma results of operations for the quarter ended March 31, 2012, assuming that the acquisitions of the Freedom and Newport stations discussed above, along with transactions necessary to finance the acquisitions, occurred at the beginning of the annual period presented (in thousands, except per share data):

		(Unaudited)
		2012
Total revenues		$	267,076
Net Income		$	27,366
Net Income attributable to Sinclair Broadcast Group		$	27,613
Basic and diluted earnings per share attributable to Sinclair Broadcast Group		$	0.34

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The results of operations of the Four Points stations was included in our consolidated statements of operations for the quarters ended March 31, 2013 and 2012.  The results of operations, of all of the aforementioned acquired stations, were included in our consolidated statement of operations for the quarter ended March 31, 2013.

This pro forma financial information is based on historical results of operations, adjusted for the allocation of the purchase price and other acquisition accounting adjustments, and is not necessarily indicative of what our results would have been had we operated the businesses since the beginning of the annual period presented.  The pro forma adjustments reflect depreciation expense, amortization of intangibles and amortization of program contract costs related to the fair value adjustments of the assets acquired, additional interest expense related to the financing of the transactions, exclusion of nonrecurring financing and transaction related costs, alignment of accounting policies and the related tax effects of the adjustments.  The pro forma revenues exclude the revenues of WLAJ-TV which are classified as discontinued operations in the consolidated statements of operations.  Total revenues of WLAJ-TV which are excluded from the pro forma results above are $1.0 million for the quarter ended March 31, 2012.

In connection with these acquisitions, we incurred a total of $1.9 million of costs primarily related to legal and other professional services, which we expensed as incurred.  For the quarters ended March 31, 2013 and 2012, such costs were incurred in corporate, general and administrative expenses in the consolidated statements of operations and totaled $0.2 million and $0.4 million, respectively.  These costs were not included in the pro forma amounts above as they are nonrecurring in nature.

Other Acquisitions

We acquired five other television stations during the year ended 2012 in three markets.  The initial purchase price allocated includes $45.1 million paid for certain broadcast assets of these stations, less working capital adjustments of $0.7 million, and $4.4 million of noncontrolling interests related to the license assets of certain of these stations owned by variable interest entities that we consolidate. We allocated the total purchase price of these five stations as follows:

Prepaid expenses and other current assets		$	160
Program contract costs		2,487
Property and equipment		17,309
Broadcast licenses		2,825
Definite-lived intangible assets		17,990
Accrued liabilities		(1,178		)
Program contracts payable		(4,900		)
Fair value of identifiable net assets acquired		34,693
Goodwill		14,106
Total		$	48,799

In conjunction with these acquisitions, we incurred transaction costs of approximately $0.6 million, which are reported in general and administrative expenses in the accompanying consolidated statements of operations. There were no transaction costs incurred in the quarter ended March 31, 2013 for these acquisitions.  Net broadcast revenues and operating income of these stations included in our consolidated statement of operations for the quarter ended March 31, 2013 were $6.6 million and $1.6 million, respectively.

In December 2012, we acquired the license assets of WTTA-TV in Tampa/St. Petersburg, Florida from Bay Television, Inc. (Bay TV). Prior to December 1, 2012, we performed sales, programming and other management services to the station pursuant to an LMA which was terminated upon closing. As discussed in Note 6. Related Person Transactions , our controlling shareholders own a controlling interest in Bay TV. As this was considered a transaction between entities under common control, the acquisition method of accounting was not applied, and the assets acquired were recorded at their historical cost basis and the difference between the purchase price and the historical cost basis of the assets of $23.6 million, net of taxes of $15.6 million, was recorded as a reduction in additional paid-in capital. A substantial portion of the purchase price will be deductible for tax purposes in future periods.

3. 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.

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

Network Affiliations

On May 14, 2012, the Company and the licensees of stations to which we provide services, representing 20 affiliates of Fox Broadcast Company (FOX), extended the network affiliation agreements with FOX from the existing term of December 31, 2012 to December 31, 2017.  Concurrently, we entered into an assignable option agreement with Fox Television Stations, Inc. (FTS) giving us or our assignee the right to purchase substantially all the assets of the WUTB station (Baltimore, MD) owned by FTS, which has a program service arrangement with MyNetworkTV, for $2.7 million.  In October 2012, we exercised our option and entered into an agreement to purchase the assets of WUTB and we expect the sale to close in the second quarter of 2013 subject to FCC approval and other closing conditions.  As part of this transaction, we also granted options to FTS to purchase the assets of television stations we own in up to three out of four designated markets, which options expired unexercised.  In the second quarter of 2012, we paid $25.0 million to FOX pursuant to the agreements and we recorded $50.0 million in other assets and $25.0 million of other accrued liabilities within the consolidated balance sheet, representing the additional obligation due to FOX which was paid in April 2013.  The $50.0 million asset is being amortized through the current term of the affiliation agreement ending on December 31, 2017.  Approximately $2.2 million of amortization expense has been recorded in the consolidated statement of operations for the quarter ended March 31, 2013.  In addition, we are required to pay to FOX programming payments under the terms of the affiliation agreements.  These payments are recorded in station production expenses as incurred.

Pending Acquisitions and Divestments

Effective April 1, 2013, we sold all of the assets of WLWC-TV in Providence, Rhode Island to OTA Broadcasting LLC for $13.8 million.  As of March 31, 2013, the station is classified as held for sale and the results of operations are classified as discontinued operations during the three months ended March 31, 2013 and 2012. Since we acquired the station in January 2012, we believe the sale price approximates the fair value of the station on the original acquisition date. Therefore we do not expect to record a gain or loss upon sale of the station.

In February 2013, we entered into an agreement to purchase the broadcast assets of eighteen television stations owned by Barrington Broadcasting Group, LLC (Barrington) for $370.0 million, less amounts to be paid by third parties, and entered into agreements to operate or provide sales services to another six stations. The twenty-four stations are located in fifteen markets. Also, the Company will sell its station WSYT-TV (FOX) and assign its LMA with WNYS-TV (MNT) in Syracuse, NY, and sell its station in Peoria IL, WYZZ-TV (FOX) to Cunningham for $47.0 million due to FCC conflict ownership rules. The transaction is expected to close in the late second quarter or early third quarter of 2013 subject to the approval of the FCC and customary antitrust clearance.

In April 2013, we entered into a definitive merger agreement with Fisher Communications, Inc. (Fisher) to acquire Fisher in a merger transaction valued at approximately $373.3 million.  Fisher owns twenty television stations in eight markets and four radio stations in the Seattle market.  Additionally, Fisher previously entered into an agreement to provide certain operating services for three TV stations, including two simulcasts, pending regulatory approval.  The transaction is expected to close in the second or third quarter of 2013, subject to approval of the FCC, antitrust clearance, affirmative vote of two-thirds of Fisher’s outstanding shares and other customary conditions.

Effective May 1, 2013, we completed the acquisition of certain stock and/or broadcast assets of four television stations, located in four markets, owned by Cox Media Group (Cox) for $99.0 million, less $4.3 million of working capital adjustments and $0.4 million paid by Deerfield for the purchase of the license assets of one other station for which we will operate pursuant to shared services and joint sales agreements.

4. NOTES PAYABLE AND COMMERCIAL BANK FINANCING

6.125% Senior Unsecured Notes, due 2022

Concurrent with entering into an indenture for the 6.125% Notes in October 2012, we also entered into a registration rights agreement requiring us to complete an offer of an exchange of the 6.125% Notes for registered securities with the Securities and Exchange Commission (the SEC) by July 8, 2013.  We filed a registration statement on Form S-4 with the SEC on April 4, 2013 which became effective on April 16, 2013, and we expect the exchange offer to commence in the second quarter of 2013.

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5.375% Senior Unsecured Notes, due 2021

On April 2, 2013, we issued $600.0 million of senior unsecured notes, which bear interest at a rate of 5.375% per annum and mature on April 1, 2021 (the 5.375% Notes), pursuant to an indenture dated April 2, 2013 (the 2013 Indenture).  The 5.375% Notes were priced at 100% of their par value and interest is payable semi-annually on April 1 and October 1, commencing on October 1, 2013.  Prior to April 1, 2016, we may redeem the 5.375% Notes, in whole or in part, at any time or from time to time at a price equal to 100% of the principal amount of the 5.375% Notes plus accrued and unpaid interest, if any, to the redemption date, plus a “make-whole” premium as set forth in the 2013 Indenture.  Beginning on April 1, 2016, we may redeem some or all of the 5.375% Notes at any time or from time to time at a redemption price set forth in the 2013 Indenture.  In addition, on or prior to April 1, 2016, we may redeem up to 35% of the 5.375% Notes using proceeds of certain equity offerings.  Upon the sale of certain of our assets or certain changes of control, the holders of the 5.375% Notes may require us to repurchase some or all of the notes.  The net proceeds from the offering of the 5.375% Notes were used to pay down outstanding indebtedness under our bank credit facility. We filed a registration statement on Form S-4 with the SEC on April 4, 2013, which became effective on April 16, 2013, and we expect the exchange offer to commence in the second quarter of 2013.  As of March 31, 2013, we capitalized $10.4 million in estimated fees to deferred financing costs, which are included in other assets in our consolidated financial statements.

Bank Credit Agreement

On April 9, 2013, we entered into an amendment and restatement (the Amendment) of our credit agreement (as amended, the Bank Credit Agreement).  Pursuant to the Amendment, we refinanced the existing facility and replaced the existing term loans under the facility with a new $500.0 million term loan A facility (Term Loan A), maturing April 2018 and priced at LIBOR plus 2.25%; and a $400.0 million term loan B facility (Term Loan B), maturing April 2020 and priced at LIBOR plus 2.25% with a LIBOR floor of 0.75%.  In addition, we replaced our existing revolving line of credit with a new $100.0 million revolving line of credit maturing April 2018 and priced at LIBOR plus 2.25%.  The proceeds from the term loans, along with cash on hand and/or a draw under the revolving line of credit, will be used to fund future acquisitions. Due to timing related to the closing and funding of the acquisitions, approximately $445.0 million of the new Term Loan A will be drawn on a delayed basis.  We also amended certain terms of the Bank Credit Agreement, including increased uncommitted incremental loan capacity, increased television station acquisition capacity and increased flexibility under the restrictive covenants.

We expect to recognize a loss on extinguishment of the old facility, primarily related to the repayment of the previous term loan B with proceeds from the 5.375% Notes, of approximately $16 million, consisting of deferred financing costs and debt discount.  Of the estimated financing costs to be paid in the second quarter of 2013 related to the amendment, we expect approximately $7 million will be capitalized as deferred financing costs and approximately $5 million will be charged to interest expense.

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5. EARNINGS PER SHARE

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

		Three Months Ended March 31,
		2013			2012
Income (Numerator)
Income from continuing operations		$	16,515		$	29,125
Income impact of assumed conversion of the 4.875% Notes, net of taxes		45			45
Income impact of assumed conversion of the 3.0% Notes, net of taxes		26			—
Net loss attributable to noncontrolling interests included in continuing operations		127			285
Numerator for diluted earnings per common share from continuing operations available to common shareholders		16,713			29,455
Income (loss) from discontinued operations, net of taxes		355			(51		)
Numerator for diluted earnings available to common shareholders		$	17,068		$	29,404
Shares (Denominator)
Weighted-average common shares outstanding		81,191			80,852
Dilutive effect of stock-settled appreciation rights, restricted stock awards and outstanding stock options		223			21
Dilutive effect of 4.875% Notes		339			254
Dilutive effect of 3.0% Notes		311			—
Weighted-average common and common equivalent shares outstanding		82,064			81,127

Potentially dilutive securities representing 1.6 million and 1.5 million shares of common stock for the three months ended March 31, 2013 and 2012, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been antidilutive.  The increase in potentially dilutive securities is primarily related to the issuance of new stock-settled appreciation rights in February 2013.  The net income 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.

6. RELATED PERSON TRANSACTIONS

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

Leases. Certain assets used by us and our operating subsidiaries are leased from Cunningham Communications Inc., Keyser Investment Group, Gerstell Development Limited Partnership and Beaver Dam, LLC (entities owned by the controlling shareholders).  Lease payments made to these entities were $1.1 million for each of the three months ended March 31, 2013 and 2012.

Bay TV .  In January 1999, we entered into a LMA with Bay TV, which owns the television station WTTA-TV in Tampa / St. Petersburg, Florida market.  Each of our controlling shareholders owns a substantial portion of the equity of Bay TV and collectively has controlling interests.  Payments made to Bay TV were $1.8 million for the quarter ended March 31, 2012.

On December 1, 2012, we purchased substantially all of the assets of Bay TV for $40.0 million. Our board of directors obtained a fairness opinion on the purchase price from a third party valuation firm. Concurrent with the acquisition, our LMA with Bay TV was terminated.

Charter Aircraft. From time to time, we charter aircraft owned by certain controlling shareholders.  We incurred less than $0.1 million and $0.1 million for the three months ended March 31, 2013 and 2012, respectively, related to these arrangements.

Cunningham Broadcasting Corporation .  As of March 31, 2013, Cunningham was the owner-operator and FCC licensee of: WNUV-TV Baltimore, Maryland; WRGT-TV Dayton, Ohio; WVAH-TV Charleston, West Virginia; WTAT-TV Charleston, South Carolina; WMYA-TV Anderson, South Carolina; WTTE-TV Columbus, Ohio; and WDBB-TV Birmingham, Alabama (collectively, the Cunningham Stations).

During the three months ended March 31, 2013, the estate of Carolyn C. Smith, a parent of our controlling shareholders, distributed all of the non-voting stock owned by the estate to our controlling shareholders, and a portion was repurchased by

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Cunningham for $1.7 million in the aggregate.  As of March 31, 2013, our controlling shareholders own approximately 4.4% of the total capital stock of Cunningham, none of which have voting rights.  The remaining amount of non-voting stock is owned by trusts established for the benefit of the children of our controlling shareholders.  The estate of Mrs. Smith currently owns all of the voting stock.  The sale of the voting stock by the estate to an unrelated party is pending approval of the FCC.  We have options from the trusts, which grant us the right to acquire, subject to applicable FCC rules and regulations, 100% of the voting and nonvoting stock of Cunningham. We also have options from each of Cunningham’s subsidiaries, which are the FCC licensees of the Cunningham stations, which grant us the right to acquire, and grant Cunningham the right to require us to acquire, subject to applicable FCC rules and regulations, 100% of the capital stock or the assets of Cunningham’s individual subsidiaries.

In addition to the option agreements, we have LMAs with the Cunningham stations to provide programming, sales and managerial services to the stations.  Each of the LMAs has a current term that expires on July 1, 2016 and there are three additional 5-year renewal terms remaining with final expiration on July 1, 2031.

Effective November 5, 2009, we entered into amendments and/or restatements of the following agreements between Cunningham and us: (i) the LMAs, (ii) option agreements to acquire Cunningham stock and (iii) certain acquisition or merger agreements relating to the Cunningham Stations.

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

Additionally, we reimburse Cunningham for 100% of its operating costs, and paid Cunningham a monthly payment of $50,000 through December 2012 as an LMA fee.

We made payments to Cunningham under these LMAs and other agreements of $1.9 million and $3.9 million for the three months ended March 31, 2013 and 2012 respectively.  For the three months ended March 31, 2013 and 2012, Cunningham’s stations provided us with approximately $24.6 million and $23.3 million, respectively, 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 licenses.  As of March 31, 2013, Cunningham was the sole material third-party licensee.

In April 2013, Cunningham entered into an agreement to purchase the stock of TTBG El Paso OpCo, LLC, the owner of KDBC-TV in El Paso, TX for $21.0 million, before any working capital adjustments, subject to FCC approval and customary closing conditions.  Pursuant to the agreement, if Cunningham is unable to close on the purchase, we will be required to fund the purchase price or assign the rights to another party.

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

Leased property by real estate ventures. Certain of our real estate ventures have entered into leases with entities owned by David Smith to lease restaurant space. There are leases for three restaurants in a building owned by one of our consolidated real estate ventures in Baltimore, MD.  Total rent received under these leases was less than $0.1 million for each of the three months ended March 31, 2013 and 2012. There is also one lease for a restaurant in a building owned by one of our real estate ventures, accounted for under the equity method, in Towson, MD. Annual rent under this lease will be approximately $0.2 million once the restaurant is opened in 2013.

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Thomas & Libowitz, P.A. Basil A. Thomas, a member of our Board of Directors, is the father of Steven A. Thomas, a partner and founder of Thomas & Libowitz, P.A. (Thomas & Libowitz), a law firm providing legal services to us on an ongoing basis.  We paid fees of $0.4 million and $0.2 million to Thomas & Libowitz for the three months ended March 31, 2013 and 2012, respectively.

7. SEGMENT DATA

We measure segment performance based on operating income (loss). Excluding discontinued operations our broadcast segment includes stations in 45 markets located predominately in the eastern, mid-western and southern United States. In 2012, we determined that the operating results of WLAJ-TV and WLWC-TV should be accounted for as discontinued operations and are not included in our consolidated results of continuing operations for the three months ended March 31, 2013 and 2012. 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 approximately $171.5 million and $170.8 million of intercompany loans between the broadcast segment, other operating divisions segment and corporate as of March 31, 2013 and 2012, respectively. We had $4.9 million and $5.0 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, 2013, and 2012, respectively. Intercompany loans and interest expense are excluded from the tables below. All other intercompany transactions are immaterial.

Financial information for our operating segments are included in the following tables for the periods presented (in thousands):

For the three months ended March 31, 2013		Broadcast			Other Operating Divisions			Corporate			Consolidated
Revenue		$	271,155		$	11,463		$	—		$	282,618
Depreciation of property and equipment		13,784			469			342			14,595
Amortization of definite-lived intangible assets and other assets		14,867			1,135			—			16,002
Amortization of program contract costs and net realizable value adjustments		18,861			—			—			18,861
General and administrative overhead expenses		10,129			297			824			11,250
Operating income (loss)		65,132			(309		)	(1,167		)	63,656
Interest expense		—			730			36,967			37,697
(Loss) from equity and cost method investments		—			(1,052		)	—			(1,052		)
For the three months ended March 31, 2012		Broadcast			Other Operating Divisions			Corporate			Consolidated
Revenue		$	208,426		$	13,948		$	—		$	222,374
Depreciation of property and equipment		8,481			407			383			9,271
Amortization of definite-lived intangible assets and other assets		4,487			1,332			—			5,819
Amortization of program contract costs and net realizable value adjustments		14,100			—			—			14,100
General and administrative overhead expenses		7,903			611			853			9,367
Operating income (loss)		61,802			(672		)	(1,236		)	59,894
Interest expense		—			854			26,533			27,387
Income from equity and cost method investments		—			1,276			—			1,276

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