10-K 1 a04-2752_110k.htm 10-K

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

 

 

 

 

 

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 of incorporation)

 

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

 

 

 

10706 Beaver Dam Road
Hunt Valley, MD 21030

(Address of principal executive offices)

 

(410) 568-1500

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12 (b) of the Act: None

Securities registered pursuant to Section 12 (g) of the Act:

Class A common stock, par value $.01 per share

Series D preferred stock, par value $.01 per share

 

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  ý  No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this report, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Based on the closing sales price of $11.62 per share as of June 30, 2003, the aggregate market value of the voting and non-voting common equity of the Registrant held by non-affiliates was approximately $536.5 million.

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Act).  Yes  ý No  o

 

As of February 13, 2004, there were 45,891,484 shares of class A common stock, $.01 par value; 40,035,350 shares of class B common stock $.01 par value, and 3,450,000 shares of series D preferred stock, $.01 par value, convertible into 7,561,644 shares of class A common stock at a conversion price of $22.813 per share, of the registrant issued and outstanding.

 

Documents Incorporated by Reference – Portions of our definitive Proxy Statement relating to the 2003 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. We anticipate that our Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2003.

 

 



 

PART I

 

FORWARD-LOOKING STATEMENTS

 

This report includes or incorporates forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events.  These forward-looking statements are subject to risks, uncertainties and assumptions about us, including, among other things:

 

      the impact of changes in national and regional economies,

      volatility of programming costs,

      marketplace acceptance of our direct mail initiative,

      the effectiveness of new sales people,

      pricing and demand fluctuations in local and national advertising,

      the popularity of our programming and our News Central strategy,

      successful integration of outsourcing agreements,

      our ability to attract and maintain our local and national advertising,

      our ability to service our outstanding debt,

      changes in the makeup of the population in the areas where our stations are located,

      the activities of our competitors,

      the effects of governmental regulation of broadcasting or changes in those regulations and court actions interpreting those regulations, and

       our ability to maintain our affiliation agreements with the relevant networks.

 

Other matters set forth in this report, including the risk factors set forth in Item 7 of this report, and/or in the documents incorporated by reference may also cause actual results in the future to differ materially from those described in the forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.

 

ITEM 1.  BUSINESS

 

We are a diversified television broadcasting company that owns, provides programming and operating services pursuant to local marketing agreements (LMAs) or provides sales services pursuant to outsourcing agreements to more television stations than all but one other commercial broadcasting group in the United States. We currently own, provide programming and operating services pursuant to LMAs or provide sales services to 62 television stations in 39 markets and for purposes of this report, these 62 stations are referred to as “our” stations (or are similarly designated). We currently have duopolies, where we own and operate two stations, in ten markets; own and operate a station and provide programming and operating services to a second station in nine markets; own a station or stations and provide or are provided sales, operational and managerial services to another station in four markets.

 

We broadcast free over-the-air programming to television viewing audiences in the communities we serve through our local television stations. The programming that we provide consists of network provided programs, locally and centrally produced news, syndicated local sporting events and syndicated entertainment programs. We provide network produced programming at all but two of our stations, which we re-broadcast pursuant to our agreements with the network with which the station is affiliated. We produce news at 38 stations in 31 markets, with 13 of those stations in 11 markets operating with our News Central format and five stations with a local news sharing arrangement.  We provide popular local sporting events at many of our stations by acquiring the local television broadcast rights for these events. Additionally, we purchase syndicated programming from third parties to be shown on our television stations. See Operating Strategy for more information regarding the programming that we provide.

 

Our primary source of revenue is the sale of commercial air time on our television stations to our advertising customers. Our objective is to meet the needs of our advertising customers by delivering large audiences in key demographics. Our strategy is to achieve this objective by providing quality local news programming and popular network and syndicated programs to our viewing audience. We attract our national television advertisers through a single national marketing representation firm, who communicates the benefits of advertising in our 39 markets to national advertisers. Our local television advertisers are attracted through the efforts of our local sales force, which encourage local advertisers to purchase airtime on our stations in order to sell their products and services to our viewing audience.

 

2



 

We seek to own, operate or engage in operating service agreements with multiple television stations in the markets we serve in order to increase revenues and improve margins through increased economies of scale. We have entered into LMAs in nine of our markets where, for a variety of reasons, we do not own the broadcast license related to the second station and in one market in which we do not own a television station. Under LMAs, we provide substantial portions of the broadcast programming for airing on another station in the same market as our station and sell advertising time during such program segments for that station. Our strategy for attracting viewers and advertisers for our LMA television stations is essentially the same as for our owned and operated television stations. In order to further improve our margins, we have entered into outsourcing agreements in four of our markets in which our stations are provided, or provide, various non-programming related services such as sales, operational and managerial services to or by other stations. See Operating Strategy for more information regarding our LMAs, duopolies and outsourcing agreements.

 

We have a mid-size market focus and 47 of our 62 stations are located in television designated market areas (DMAs) that rank between the 13th and 75th largest in the United States. Our television station group is diverse in network affiliation with 20 stations affiliated with FOX, 19 with The WB, eight with ABC, six with UPN, four with NBC and three with CBS. Two stations are not affiliated with any network.

 

We underwent rapid and significant growth from 1991 to 2000, most of which occurred prior to the end of 1999. Since 1991, we have increased the number of television stations we own or provide services to from three television stations to 62 television stations. Prior to September 1999, we also owned, operated and/or programmed up to 52 radio stations in ten markets. We sold all of our interests in radio stations in 1999 and 2000.

 

In January 1999, we acquired approximately 35% of Acrodyne Communications, Inc. (Acrodyne), a publicly held company that manufactures UHF transmitters for the television industry. Along with this investment, Sinclair hired a team of highly qualified individuals to develop the next generation of UHF transmitters. We have assigned the rights to this technology to Acrodyne and it is manufacturing most of our transmitters. In January 2003, our ownership interest increased to 82.43% as a result of a restructuring of our investment in Acrodyne in which we forgave indebtedness of Acrodyne and invested an additional $1.0 million.

 

In November 1999, we acquired an 82.5% equity interest in an entity that is now known as G1440 Holdings, Inc which has since grown to 89.6%. G1440 Holdings, Inc. and its subsidiaries (G1440) provide single-source, end-to-end e-Business solutions and a number of services and products, including a homebuilder application, an immigration tracking tool application, a syndicated television program management and scheduling application and a procurement application.

 

We are a Maryland corporation formed in 1986. Our principal offices are located at 10706 Beaver Dam Road, Hunt Valley, MD 21030. Our telephone number is (410) 568-1500 and our website address is www.sbgi.net.

 

TELEVISION BROADCASTING

 

Markets and Stations

 

We own and operate, provide programming services to, provide sales services to or have agreed to acquire the following television stations:

 

Market

 

Market
Rank (a)

 

Stations

 

Status (b)

 

Channel

 

Affiliation

 

Number of
Commercial

Stations in
the Market (c)

 

Station
Rank (d)

 

Digital
Broadcast
Status (e)

 

Expiration
Date of
FCC License

 

Tampa, Florida

 

13

 

WTTA

 

LMA

 

38

 

WB

 

9

 

6

 

D

 

2/01/05

 

Minneapolis/St. Paul, Minnesota

 

14

 

KMWB

 

O&O

 

23

 

WB

 

7

 

6

 

D

 

4/01/06

 

Sacramento, California

 

19

 

KOVR

 

O&O

 

13

 

CBS

 

7

 

2

 

D

 

12/01/06

 

St. Louis, Missouri

 

21

 

KDNL

 

O&O

 

30

 

ABC

 

7

 

4

 

D

 

2/01/06

 

Pittsburgh, Pennsylvania

 

22

 

WPGH
WCWB

 

O&O
O&O

 

53
22

 

FOX
WB

 

8

 

4
5

 

D
D

 

8/01/07
8/01/07

 

Baltimore, Maryland

 

23

 

WBFF
WNUV

 

O&O
LMA (f)

 

45
54

 

FOX
WB

 

6

 

4
5

 

D
D

 

10/01/04
10/01/04

 

Raleigh-Durham, North Carolina

 

29

 

WLFL
WRDC

 

O&O
O&O

 

22
28

 

WB
UPN

 

7

 

6
5

 

D
D

 

12/01/04
12/01/04

 

Nashville, Tennessee

 

30

 

WZTV
WUXP
WNAB

 

O&O
O&O
OSA(g)

 

17
30
58

 

FOX
UPN
WB

 

8

 

4
5
6

 

D
D
D

 

8/01/05
8/01/05
8/01/05

 

Kansas City, Missouri

 

31

 

KSMO

 

O&O

 

62

 

WB

 

7

 

5

 

D

 

2/01/06

 

Cincinnati, Ohio

 

32

 

WSTR

 

O&O

 

64

 

WB

 

6

 

5

 

D

 

10/01/05

 

Milwaukee, Wisconsin

 

33

 

WCGV
WVTV

 

O&O
O&O

 

24
18

 

UPN
WB

 

8

 

5
6

 

D
D

 

12/01/05
12/01/05

 

 

3



 

Market

 

Market
Rank (a)

 

Stations

 

Status (b)

 

Channel

 

Affiliation

 

Number of
Commercial

Stations in
the Market (c)

 

Station
Rank (d)

 

Digital
Broadcast
Status (e)

 

Expiration
Date of
FCC License

 

Columbus, Ohio

 

34

 

WSYX
WTTE

 

O&O
LMA (f)

 

6
28

 

ABC
FOX

 

5

 

2
4

 

D
D

 

10/01/05
10/01/05

 

Greenville/Spartanburg/
Anderson, South Carolina

 

35

 

WLOS
WBSC

 

O&O
LMA(f)

 

13
40

 

ABC
WB

 

8

 

3
5

 

D
D

 

12/01/04
12/01/04

 

San Antonio, Texas

 

37

 

KABB
KRRT

 

O&O
O&O

 

29
35

 

FOX
WB

 

7

 

4
5

 

D
P

 

8/01/06
8/01/06

 

Birmingham, Alabama

 

40

 

WTTO
WABM
WDBB

 

O&O
O&O
LMA (h)

 

21
68
17

 

WB
UPN
WB

 

7

 

5
6
5

 

D
D
D

 

4/01/05
4/01/05
4/01/05

 

Norfolk, Virginia

 

41

 

WTVZ

 

O&O

 

33

 

WB

 

7

 

5

 

D

 

10/01/04

 

Buffalo, New York

 

44

 

WUTV
WNYO

 

O&O
O&O

 

29
49

 

FOX
WB

 

8

 

4
5

 

P
P

 

6/01/07
6/01/07

 

Oklahoma City, Oklahoma

 

45

 

KOCB
KOKH

 

O&O
O&O

 

34
25

 

WB
FOX

 

10

 

5
4

 

D
D

 

6/01/06
6/01/06

 

Greensboro/Winston-Salem/
Highpoint, North Carolina

 

46

 

WXLV
WUPN

 

O&O
O&O

 

45
48

 

ABC
UPN

 

7

 

4
6

 

D
D

 

12/01/04
12/01/04

 

Las Vegas, Nevada

 

51

 

KVWB
KFBT

 

O&O
O&O

 

21
33

 

WB
IND (i)

 

7

 

5
7

 

D
D

 

10/01/06
10/01/06

 

Richmond, Virginia

 

58

 

WRLH

 

O&O

 

35

 

FOX

 

5

 

4

 

D

 

10/01/04

 

Dayton, Ohio

 

59

 

WKEF
WRGT

 

O&O
LMA (f)

 

22
45

 

NBC
FOX

 

8

 

3
4

 

D
D

 

10/01/05
10/01/05

 

Mobile, Alabama and
Pensacola, Florida

 

62

 

WEAR
WFGX

 

O&O
LMA (j)

 

3
35

 

ABC
IND (i)

 

9

 

2
8

 

D
P

 

2/01/05
2/01/05

 

Charleston and Huntington,
West Virginia

 

63

 

WCHS
WVAH

 

O&O
LMA (f)

 

8
11

 

ABC
FOX

 

6

 

3
4

 

D
P

 

10/01/04
10/01/04

 

Flint/Saginaw/Bay City, Michigan

 

64

 

WSMH

 

O&O

 

66

 

FOX

 

5

 

4

 

P

 

10/01/05

 

Lexington, Kentucky

 

65

 

WDKY

 

O&O

 

56

 

FOX

 

7

 

4

 

D

 

8/01/05

 

Des Moines, Iowa

 

73

 

KDSM

 

O&O

 

17

 

FOX

 

5

 

4

 

D

 

2/01/06

 

Portland, Maine

 

74

 

WGME

 

O&O

 

13

 

CBS

 

6

 

2

 

D

 

4/01/07

 

Rochester, New York

 

75

 

WUHF

 

O&O

 

31

 

FOX

 

6

 

4

 

P

 

6/01/07

 

Cape Girardeau, Missouri/
Paducah, Kentucky

 

76

 

KBSI
WDKA

 

O&O
LMA

 

23
49

 

FOX
WB

 

7

 

4
5

 

D
D

 

2/01/06
8/01/05

 

Syracuse, New York

 

79

 

WSYT
WNYS

 

O&O
LMA

 

68
43

 

FOX
WB

 

6

 

4
5

 

D
P

 

6/01/07
6/01/07

 

Springfield/Champaign, Illinois

 

82

 

WICS
WICD

 

O&O
O&O

 

20
15

 

NBC
NBC

 

6

 

2
2 (k)

 

D
D

 

12/01/05
12/01/05

 

Madison, Wisconsin

 

85

 

WMSN

 

O&O

 

47

 

FOX

 

6

 

4

 

D

 

12/01/05

 

Cedar Rapids, Iowa

 

88

 

KGAN

 

O&O(l)

 

2

 

CBS

 

5

 

3

 

D

 

2/01/06

 

Tri-Cities, Tennessee

 

91

 

WEMT

 

O&O

 

39

 

FOX

 

6

 

4

 

D

 

8/01/05

 

Charleston, South Carolina

 

104

 

WMMP
WTAT

 

O&O
LMA (f)

 

36
24

 

UPN
FOX

 

5

 

5
4

 

D
D

 

12/01/04
12/01/04

 

Springfield, Massachusetts

 

106

 

WGGB

 

O&O

 

40

 

ABC

 

2

 

2

 

D

 

4/01/07

 

Tallahassee, Florida

 

111

 

WTWC
WTXL

 

O&O
OSA(m)

 

40
27

 

NBC
ABC

 

5

 

3
2

 

D
D

 

2/01/05
2/01/05

 

Peoria/Bloomington, Illinois

 

117

 

WYZZ

 

O&O(n)

 

43

 

FOX

 

5

 

4

 

D

 

12/01/05

 

 


a)     Rankings are based on the relative size of a station’s designated market area (DMA) among the 210 generally recognized DMAs in the United States as estimated by Nielsen as of November 2003.

 

b)    “O & O” refers to stations that we own and operate. “LMA” refers to stations to which we provide programming services pursuant to a local marketing agreement. “OSA” refers to stations to which we provide sales services pursuant to an outsourcing agreement.

 

c)     Represents the estimated number of television stations designated by Nielsen as “local” to the DMA, excluding public television stations and stations that do not meet the minimum Nielsen reporting standards (weekly cumulative audience of at least 0.1%) for the Monday-Sunday, 7:00 a.m. to 1:00 a.m. time period as of November 2003.

 

d)    The rank of each station in its market is based upon the November 2003 Nielsen estimates of the percentage of persons tuned to each station in the market from 7:00 a.m. to 1:00 a.m., Monday-Sunday.

 

e)     All stations currently broadcast an analog signal. In addition, many stations broadcast a digital signal. “D” refers to stations that currently broadcast a digital signal. “P” refers to stations which have not commenced digital operations because they are awaiting grant of construction permits from the FCC or are awaiting delivery of equipment or are awaiting approval from the FCC to operate at low power.

 

4



 

f)     The license assets for these stations are currently owned by Cunningham Broadcasting Corporation, a related party or one of its subsidiaries. In December 2001, the FCC denied our application to acquire the license of WBSC-TV. We filed a petition for reconsideration of that decision and recently amended our application to acquire the license in light of the FCC’s new multiple ownership rules adopted in June 2003.  However, the new rules have been stayed by the U.S. Court of Appeals for the Third Circuit, pending its review of the rules.  We also filed applications in November 2003 to acquire the license assets of the remaining five Cunningham stations.  These applications are pending and may also be impacted by the existence of the stay of the FCC’s new multiple ownership rules.  The Rainbow/PUSH Coalition has filed a petition to deny these five applications and to revoke all of Sinclair’s licenses.  We believe the petition is without merit and, as with past petitions filed by Rainbow/PUSH, will not result in the revocation of any of Sinclair’s licenses.

 

g)    Sinclair has entered into an outsourcing agreement with the unrelated third party owner of WNAB-TV to provide certain non-programming related sales, operational and administrative services to WNAB-TV.

 

h)    WDBB-TV simulcasts the programming broadcast on WTTO-TV pursuant to a programming services agreement.

 

i)      “IND” or “Independent” refers to a station that is not affiliated with any of ABC, CBS, NBC, Fox, WB, or UPN.

 

j)      In November 2003, following our exercise of an option to acquire the intangible assets of WFGX-TV, we filed an assignment application with the FCC to obtain its consent for the transfer of the WFGX-TV broadcast license from an unrelated third party to us.  The assignment application is currently pending.

 

k)     WICD-TV, a satellite of WICS-TV, under FCC rules, simulcasts all of the programming aired on WICS-TV and the station rank applies to the combined viewership of these stations.

 

l)      Sinclair has entered into a five-year outsourcing agreement with an unrelated third party under which the unrelated third party provides certain non-programming related sales, operational and managerial services to KGAN-TV. Sinclair continues to own all of the assets of KGAN-TV and to program and control the station’s operations.

 

m)    Sinclair has entered into an outsourcing agreement with the unrelated third party owner of WTXL-TV to provide certain non-programming related sales, operational and managerial services for WTXL-TV.

 

n)    Sinclair has entered into an outsourcing agreement with an unrelated third party, under which the unrelated third party provides certain non-programming related sales, operational and managerial services to WYZZ-TV. Sinclair continues to own all of the assets of WYZZ-TV and to program and control the station’s operations.

 

Operating Strategy

 

Our operating strategy includes the following elements:

 

Programming to Attract Viewership.  We seek to target our programming offerings to attract viewership, to meet the needs of the communities in which we serve and to meet the needs of our advertising customers.  In pursuit of this strategy we seek to obtain, at attractive prices, popular syndicated programming that is complementary to each station’s network programming. We also seek to broadcast live local and national sporting events that would appeal to a large segment of the local community.  Moreover, we produce and/or broadcast local news at 38 of our television stations in 31 separate markets. In October 2002, we launched our News Central strategy, which is a project that allows us to add, in a cost-effective manner, local news programming at many of our stations by using a central support operation providing national and regional news coverage in coordination with local news operations at the station level.

 

Developing Local Franchises.  We believe that the greatest opportunity for a sustainable and growing customer base lies within our local communities. We have therefore focused on developing a strong local sales force at each of our television stations.  For the year ended December 31, 2003, 60.3% of our time sales, excluding political advertising revenue, were local compared to 58.9% for the prior year.  Our goal is to continue to grow our share of local revenues.

 

5



 

Development of Direct Mail.  In general, the local direct mail advertising category is approximately three to four times larger than the local television advertising category.  We believe that we can convert direct mail advertisers to become our customers by offering greater value and return for their advertising investment.  We can provide both the exposure and branding intrinsic with television advertising while at the same time, including them in a direct mail piece that is sophisticated and compelling to the consumer.  While there is significant complexity in developing this business, we believe that over time this effort, if successful, would provide our stations and account executives with a decisive competitive advantage over our competitors.  The initiative has resulted in generating new business on our television platform using our existing sales force as well as newly hired sales staff.

 

Control of Operating and Programming Costs.  By employing a disciplined approach to managing programming acquisition and other costs, we have been able to achieve operating margins that we believe are very competitive within the television broadcast industry. We believe our national reach of approximately 24% of the country provides us with a strong position to negotiate with programming providers and, as a result, the opportunity to purchase high quality programming at more favorable prices. Moreover, we emphasize control of each of our stations’ programming and operating costs through program-specific profit analysis, detailed budgeting, tight control over staffing levels and detailed long-term planning models.

 

Utilization of Local Marketing Agreements and Duopolies.  We have sought to increase our revenues and improve our margins by providing programming services pursuant to an LMA to a second station in selected DMAs where we already own one station or by owning two stations in a single DMA. We believe that we can improve growth in operating cash flow through the utilization of such duopolies. Duopolies allow us to realize significant economies of scale in marketing, programming, overhead and capital expenditures. We also believe that these arrangements assist stations whose operations may have been marginally profitable to continue to air popular programming and contribute to the diversity of programming in their respective DMAs. Although under the new FCC ownership rules, we would be allowed to continue to program most of the stations with which we have an LMA, in the absence of a waiver, the new rules would require us to terminate or modify three of our LMAs in markets where both the stations we own and the station with which we have an LMA are ranked among the top four stations in their particular DMA.  The FCC’s new ownership rules include specific provisions permitting waivers of this “top four restriction.”  Although there can be no assurances, we have studied the application of the new rules to our markets and believe we are qualified for waivers.  As discussed in Risk Factors -  Changes in Rules on Television Ownership, because the effectiveness of the new rules has been stayed and the FCC concluded the old rules could not be justified as necessary to the public interest, an issue exists regarding whether the FCC has any current legal right to enforce any rules prohibiting the acquisition of television stations.  See Risk Factors—The FCC’s multiple ownership rules limit our ability to operate multiple television stations in some markets and may result in a reduction in our revenue or prevent us from reducing costs. Changes in these rules may threaten our existing strategic approach to certain television markets.

 

Use of Outsourcing Agreements.  In addition to our LMAs and duopolies, we have entered into four (and may seek opportunities for additional) outsourcing agreements in which our stations provide or are provided various non-programming related services such as sales, operational and managerial services to or by other stations. Pursuant to these agreements, our stations currently provide services to other stations in Tallahassee, Florida and Nashville, Tennessee and other parties provide services to our stations in Peoria/Bloomington, Illinois and in Cedar Rapids, Iowa. We believe this structure allows stations to achieve operational efficiencies and economies of scale, which should otherwise improve broadcast cash flow and competitive positions. While television joint sales agreements (JSAs) are not currently attributable, the FCC has announced that it intends to issue a Notice of Proposed Rulemaking to seek comments on whether or not to make television JSAs attributable.  We may continue to seek additional opportunities for entering into outsourcing agreements in the future.

 

Strategic Realignment of Station Portfolio  We continue to examine our television station group portfolio due to the FCC’s recently adopted broadcasting ownership rules which, among other things:

 

      increase the number of stations a group may own nationally by increasing the audience reach cap from 35% to 45%;(See, however, discussion under National Ownership Rule regarding recent congressional action changing the cap to 39%);

      increase the number of stations an entity can own or control in many local markets, subject to restrictions including the number of stations an entity can own or control which are ranked among the top four in their DMA;

      repeal the newspaper-broadcast limits and replace them with general cross media limits which would permit owners of daily newspapers to own one or more television stations in the same market as the newspaper’s city of publication in many markets; and

      repeal the radio-television broadcast ownership limits and replace them with new general cross media limits.

 

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The new rules have yet to take effect as a result of numerous legal challenges, including one filed by us.  If these rules become law, broadcast television owners would be permitted to own more television stations, both locally and nationally, potentially affecting our competitive position.  Our objective is to build our local franchises in the markets we deem strategic.  We routinely review and conduct investigations of potential television station acquisitions, dispositions and station swaps. At any given time, we may be in discussions with one or more station owners. On July 24, 2002, we completed the sale of the television station WTTV-TV in Bloomington, Indiana and its satellite station, WTTK-TV in Kokomo, Indiana to a third party. We previously entered into an agreement with a third party to purchase certain non-license television broadcast assets of WNAB-TV in Nashville, Tennessee under which we made a non-refundable deposit against the purchase price of the put or call option on such non-license assets in return for a reduction in the monthly fees we pay pursuant to our outsourcing agreement with the third party owner of WNAB-TV. We also provide a financial incentive in the form of broadcast cash flow sharing with the third party owner. In November 2003, following our exercise of an option to acquire the intangible assets of WFGX-TV, we filed an assignment application with the FCC to obtain its consent for the transfer of the WFGX-TV broadcast license from a third party to us.  The assignment application is currently pending.

 

On November 15, 1999, we entered into five separate plans and agreements of merger, pursuant to which we would acquire through merger with subsidiaries of Cunningham, a related party, television broadcast stations WABM-TV, Birmingham, Alabama, KRRT-TV, San Antonio, Texas, WVTV-TV, Milwaukee, Wisconsin, WRDC-TV, Raleigh, North Carolina and WBSC-TV (formerly WFBC-TV), Anderson, South Carolina.  In December 2001, we received FCC approval on all the transactions except WBSC-TV.  Accordingly, on February 1, 2002, we closed on the purchase of the FCC license and related assets of WABM-TV, KRRT-TV, WVTV-TV, and WRDC-TV.  We have filed a petition for reconsideration with the FCC to reconsider its denial of the acquisition of WBSC-TV and recently amended our application to acquire the license in light of the FCC’s new multiple ownership rules adopted in June 2003.  However, the new rules have been stayed by the U.S. Court of Appeals for the Third Circuit, pending its review of the rules.  We also filed applications in November 2003 to acquire the license assets of the remaining five Cunningham stations, WRGT-TV, Dayton Ohio, WTAT-TV, Charleston, South Carolina, WVAH-TV, Charleston, West Virginia, WNUV-TV, Baltimore, Maryland, and WTTE-TV, Columbus, Ohio.  These applications are pending and may also be impacted by the existence of the stay of the FCC’s new multiple ownership rules.  At this time, we have not otherwise entered into any agreements or understandings with respect to any transaction and there can be no assurance that any transactions will be completed. See Risk Factors—The FCC’s multiple ownership rules limit our ability to operate multiple television stations and may result in a reduction in our revenue or prevent us from reducing costs. Changes in these rules may threaten our existing strategic approach to certain television markets.

 

Local News.  We believe that the production and broadcasting of local news is an important link to the community and an aid to a station’s efforts to expand its viewership. In addition, local news programming can provide access to advertising sources targeted specifically to local news viewers.  We carefully assess the anticipated benefits and costs of producing local news prior to introduction at our stations because a significant investment in capital equipment is required and substantial operating expenses are incurred in introducing, developing and producing local news programming. We are seeking to provide cost effective local news programming through the News Central format described below. We also continuously review the performance of our existing news operations to make sure that they are economically viable. We currently provide local news programming at 38 of our television stations located in 31 separate markets. We have instituted our News Central project to increase, in a cost-effective manner, local news programming at many of our stations by using a central support operation which provides national and regional news coverage in coordination with local news operations at the station level.  Our News Central format serves the local community by providing additional news with an alternative view in these markets.  Our News Central product has been rolled out to thirteen of our television stations starting in October 2002 through to the present.

 

Popular Sporting Events.  Our WB and UPN affiliated and independent stations generally face fewer restrictions on broadcasting live local sporting events than do their competitors that are affiliates of FOX, ABC, NBC and CBS, which are required to broadcast a greater number of hours of programming supplied by the networks. At some of our stations we have been able to acquire the local television broadcast rights for certain sporting events, including NBA basketball, Major League Baseball, NFL football, NHL hockey, ACC basketball, Big Ten football and basketball and SEC football. We seek to expand our sports broadcasting in DMAs only as profitable opportunities arise. In addition, our stations that are affiliated with FOX, ABC, NBC and CBS broadcast certain Major League Baseball games, NFL football games, NHL hockey games, NASCAR races as well as other popular sporting events.

 

Attract and Retain High Quality Management.  We believe that much of our success is due to our ability to attract and retain highly skilled and motivated managers at both the corporate and local station levels. A significant portion of the compensation available to group general managers, sales managers and other station managers is based on their exceeding certain operating

 

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results.  We also provide some of our corporate and station managers with deferred compensation plans offering options to acquire Sinclair class A common stock.

 

Community Involvement.  Each of our stations actively participates in various community activities and offers many community services. Our activities include broadcasting programming of local interest and sponsorship of community and charitable events. We also encourage our station employees to become active members of their communities and to promote involvement in community and charitable affairs. We believe that active community involvement by our stations provides our stations with increased exposure in their respective DMAs and is our responsibility as stewards of the community’s broadcast license.

 

Investment Strategy

 

Sinclair Ventures, Inc. Sinclair Ventures Inc., (SVI) is our wholly-owned subsidiary that is charged with seeking out business opportunities that have the possibility of equity investment, acquisition or barter transactions.  SVI’s primary focus is on businesses that add value related to our core television business.  At any given time, we may be in discussions with one or more parties.  We cannot be assured that any of these negotiations will lead to definitive agreements or if agreements are reached that any transactions would be consummated and completed.

 

G1440.  Although we have continued to see a decrease in the value of Internet-related and wireless businesses that began in 2000, we continue to explore opportunities for television broadcasters to work with these businesses to increase their profitability and to use the resources of the Internet and wireless outlets to enhance the offerings and value of our broadcast stations. Currently we hold an 89.6% equity interest in G1440 which is a single-source, end-to-end e-Business solutions provider engaged in developing and providing web-based applications. The accounts of G1440 are included in our consolidated financial statements. G1440 provides a variety of services and products which include a homebuilder application, an immigration tracking tool application, a syndicated television program management and scheduling application and a procurement application.

 

Acrodyne.  We have a controlling interest in and a strategic alliance with Acrodyne Communications, Inc., a manufacturer of television transmitters and other television broadcast equipment.  The financial statements of Acrodyne have been consolidated for the year ended December 31, 2003.

 

Summa Holdings, Ltd.  On December 30, 2002, we invested $20.0 million in Summa Holdings, Ltd. (Summa) resulting in a 17.5% equity interest.  Summa is a holding company which owns automobile dealerships and a leasing company. David D. Smith, our President and Chief Executive Officer, has a controlling interest in Summa and is on the Board of Directors. We have significant influence over the operating and financial policies of Summa by holding a board seat (in addition to the board seat held personally by David D. Smith); therefore, we account for this investment under the equity method of accounting.

 

FEDERAL REGULATION OF TELEVISION BROADCASTING

 

The ownership, operation and sale of television stations are subject to the jurisdiction of the FCC, which acts under authority granted by the Communications Act of 1934, as amended (Communications Act). Among other things, the FCC assigns frequency bands for broadcasting; determines the particular frequencies, locations and operating power of stations; issues, renews, revokes and modifies station licenses; regulates equipment used by stations; adopts and implements regulations and policies that directly or indirectly affect the ownership, operation and employment practices of stations; and has the power to impose penalties for violations of its rules or the Communications Act.

 

The following is a brief summary of certain provisions of the Communications Act, the Telecommunications Act of 1996 (the 1996 Act) and specific FCC regulations and policies.  Reference should be made to the Communications Act, the 1996 Act, FCC rules and the public notices and rulings of the FCC for further information concerning the nature and extent of federal regulation of broadcast stations.

 

License Grant and Renewal

 

Television stations operate pursuant to broadcasting licenses that are granted by the FCC for maximum terms of eight years and are subject to renewal upon application to the FCC. During certain periods when renewal applications are pending, petitions to deny license renewals can be filed by interested parties, including members of the public. The FCC will generally grant a renewal application if it finds:

 

      that the station has served the public interest, convenience and necessity;

 

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      that there have been no serious violations by the licensee of the Communications Act or the rules and regulations of the FCC; and

 

      that there have been no other violations by the licensee of the Communications Act or the rules and regulations of the FCC that, when taken together, would constitute a pattern of misconduct.

 

All of the stations that we currently own and operate or provide programming services to pursuant to LMAs, are presently operating under regular licenses, which expire as to each station on the dates set forth under Television Broadcasting above. Although renewal of a license is granted in the vast majority of cases even when petitions to deny are filed, there can be no assurance that the license of any station will be renewed.

 

Ownership Matters

 

General.  The Communications Act prohibits the assignment of a broadcast license or the transfer of control of a broadcast license without the prior approval of the FCC. In determining whether to permit the assignment or transfer of control of, or the grant or renewal of, a broadcast license, the FCC considers a number of factors pertaining to the licensee, including compliance with various rules limiting common ownership of media properties, the “character” of the licensee and those persons holding “attributable” interests in that licensee and compliance with the Communications Act’s limitations on alien ownership.

 

To obtain the FCC’s prior consent to assign a broadcast license or transfer control of a broadcast license, appropriate applications must be filed with the FCC. If the application involves a “substantial change” in ownership or control, the application must be placed on public notice for a period of approximately 30 days during which petitions to deny the application may be filed by interested parties, including members of the public. If the application does not involve a “substantial change” in ownership or control, it is a “pro forma” application. The “pro forma” application is not subject to petitions to deny or a mandatory waiting period, but is nevertheless subject to having informal objections filed against it. If the FCC grants an assignment or transfer application, interested parties have approximately 30 days from public notice of the grant to seek reconsideration or review of the grant. Generally, parties that do not file initial petitions to deny or informal objections against the application face difficulty in seeking reconsideration or review of the grant. The FCC normally has approximately an additional 10 days to set aside such grant on its own motion. When passing on an assignment or transfer application, the FCC is prohibited from considering whether the public interest might be served by an assignment or transfer to any party other than the assignee or transferee specified in the application.

 

The FCC generally applies its ownership limits to “attributable” interests held by an individual, corporation, partnership or other association. In the case of corporations holding, or through subsidiaries controlling, broadcast licenses, the interests of officers, directors and those who, directly or indirectly, have the right to vote 5% or more of the corporation’s stock (or 20% or more of such stock in the case of insurance companies, investment companies and bank trust departments that are passive investors) are generally attributable. In August 1999, the FCC revised its attribution and multiple ownership rules, and adopted the equity-debt-plus rule that causes certain creditors or investors to be attributable owners of a station. Under this rule, a major programming supplier (any programming supplier that provides more than 15% of the station’s weekly programming hours) or same-market media entity will be an attributable owner of a station if the supplier or same-market media entity holds debt or equity, or both, in the station that is greater than 33% of the value of the station’s total debt plus equity. For purposes of this rule, equity includes all stock, whether voting or non-voting, and equity held by insulated limited partners in partnerships. Debt includes all liabilities whether long-term or short-term. In addition, under the 1999 ownership rules, LMAs are attributable where a licensee owns a television station and programs a television station in the same market.

 

The Communications Act prohibits the issuance of broadcast licenses to, or the holding of a broadcast license by, any corporation of which more than 20% of the capital stock is owned of record or voted by non-U.S. citizens or their representatives or by a foreign government or a representative thereof, or by any corporation organized under the laws of a foreign country (collectively, aliens). The Communications Act also authorizes the FCC, if the FCC determines that it would be in the public interest, to prohibit the issuance of a broadcast license to, or the holding of a broadcast license by, any corporation directly or indirectly controlled by any other corporation of which more than 25% of the capital stock is owned of record or voted by aliens. The FCC has issued interpretations of existing law under which these restrictions in modified form apply to other forms of business organizations, including partnerships.

 

As a result of these provisions, the licenses granted to our subsidiaries by the FCC could be revoked if, among other restrictions imposed by the FCC, more than 25% of our stock were directly or indirectly owned or voted by aliens. Sinclair and its subsidiaries are domestic corporations, and the members of the Smith family (who together hold almost 90% of the common

 

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voting rights of Sinclair) are all United States citizens. The amended and restated Articles of Incorporation of Sinclair (“the amended certificate”) contain limitations on alien ownership and control that are substantially similar to those contained in the Communications Act. Pursuant to the amended certificate, Sinclair has the right to repurchase alien-owned shares at their fair market value to the extent necessary, in the judgment of its board of directors, to comply with the alien ownership restrictions.

 

In June 2003, the FCC adopted a Report and Order modifying its multiple ownership rules.  These new rules have been stayed by the U.S. Court of Appeals for the Third Circuit.  During the pendency of the court’s review of the rules, the Third Circuit has ordered the FCC to continue to apply the existing ownership rules.  The new rules, among other things:

 

      increase the number of stations an entity may own nationally by increasing the national audience reach cap from 35% to 45% and leave unchanged the method of calculating an entity’s audience reach (Congress recently passed a bill requiring the FCC to establish a national audience reach cap of 39%.  See discussion below in National Ownership Rule);

      increase the number of stations an entity can own or control in many local markets, subject to restrictions including the number of stations an entity can own or control which are ranked among the top four in their DMA;

      repeal the newspaper-broadcast ownership limits and replace them with general cross media limits, which would permit in many markets owners of daily newspapers to own one or more television stations and/or radio stations in the same market as the newspaper’s city of publication; and

      repeal the radio-television broadcast ownership limits and replace them with new general cross media limits.

 

If the new rules become law, broadcast television owners would be permitted to own more television stations, both locally and nationally, potentially affecting our competitive position.  The Third Circuit Court of Appeals has stayed the application of the new rules as a result of numerous legal challenges, including one filed by Sinclair.  Oral argument regarding the legality of the new rules was held on February 11, 2004 and a decision is currently pending.   During the pendency of the review, the Third Circuit has ordered the FCC to continue to apply the existing ownership rules.  Following is a description of these FCC ownership rules:

 

Radio/Television Cross-Ownership Rule.  The FCC’s radio/television cross-ownership rule (the “one to a market” rule) generally permits a party to own a combination of up to two television stations and six radio stations in the same market depending on the number of independent media voices in the market.

 

Broadcast/Daily Newspaper Cross-Ownership Rule.  The FCC’s rules prohibit the common ownership of a radio or television broadcast station and a daily newspaper in the same market.

 

Dual Network Rule.  The four major television networks, ABC, CBS, NBC and FOX, are prohibited, absent a waiver, from merging with each other. In May 2001, the FCC amended its dual network rule to permit the four major television networks to own, operate, maintain or control the UPN and/or The WB television network.

 

National Ownership Rule.  The FCC’s current national ownership rule states that no individual or entity may have an attributable interest in television stations reaching more than 35% of the national television viewing audience. However, Congress recently passed a bill requiring the FCC to establish a national audience reach cap of 39% and President Bush signed the bill into law on January 23, 2004.  Under this rule, where an individual or entity has an attributable interest in more than one television station in a market, the percentage of the national television viewing audience encompassed within that market is only counted once. Since, historically, VHF stations (channels 2 through 13) have shared a larger portion of the market than UHF stations (channels 14 through 69), only half of the households in the market area of any UHF station are included when calculating an entity’s national television viewing audience (commonly referred to as the “UHF discount”).

 

All but eight of the stations owned and operated by us, or to which we provide programming services, are UHF. We reach approximately 24% of U.S. television households or 14% taking into account the FCC’s UHF discount.

 

Local Television (Duopoly) Rule.  A party may own two television stations in adjoining markets, even if there is Grade B overlap between the two stations’ signals, and generally may own two stations in the same market:

 

      if there is no Grade B overlap between the stations; or

 

      if the market containing both the stations contains at least eight independently owned full-power television stations (the “eight voices test”) and not more than one station is among the top-four ranked stations in the market.

 

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In addition, a party may request a waiver of the rule to acquire a second station in the market if the station to be acquired is economically distressed or not yet constructed and there is no party who does not own a local television station who would purchase the station for a reasonable price.

 

Antitrust Regulation.  The Department of Justice (DOJ) and the Federal Trade Commission (FTC) have increased their scrutiny of the television industry since the adoption of the 1996 Act, and have reviewed matters related to the concentration of ownership within markets (including LMAs) even when the ownership or LMA in question is permitted under the laws administered by the FCC or by FCC rules and regulations. The DOJ takes the position that an LMA entered into in anticipation of a station’s acquisition with the proposed buyer of the station constitutes a change in beneficial ownership of the station which, if subject to filing under the Hart-Scott-Rodino Anti Trust Improvements Act (HSR Act), cannot be implemented until the waiting period required by that statute has ended or been terminated.

 

Expansion of our broadcast operations on both a local and national level will continue to be subject to the FCC’s ownership rules and any changes the FCC or Congress may adopt. Concomitantly, any further relaxation of the FCC’s ownership rules, including as a result of the recently enacted rules becoming effective, may increase the level of competition in one or more of the markets in which our stations are located, more specifically to the extent that any of our competitors may have greater resources and thereby be in a superior position to take advantage of such changes.

 

Local Marketing Agreements

 

Certain of our stations have entered into what have commonly been referred to as local marketing agreements or LMAs.  One typical type of LMA is a programming agreement between two separately owned television stations serving the same market, whereby the licensee of one station programs substantial portions of the broadcast day and sells advertising time during such program segments on the other licensee’s station subject to the ultimate editorial and other controls being exercised by the latter licensee.  We believe these arrangements allow us to reduce our operating expenses and enhance profitability.  Although under the new FCC ownership rules we would be allowed to continue to program most of the stations with which we have an LMA, in the absence of a waiver, the new rules would require us to terminate or modify three of our LMAs in markets where both the stations we own and the station with which we have an LMA are ranked among the top four stations in their particular DMA.  The FCC’s new ownership rules include specific provisions permitting waivers of this “top four restriction.”  Although there can be no assurances, we have studied the application of the new rules to our markets and believe we are qualified for waivers.  As discussed in Risk Factors - The FCC’s multiple ownership rules limit our ability to operate multiple television stations in some markets and may result in a reduction in our revenue or prevent us from reducing costs.  Changes in these rules may threaten our existing strategic approach to certain television markets, because the effectiveness of the new rules has been stayed and the FCC concluded the old rules could not be justified as necessary to the public interest, an issue exists regarding whether the FCC has any current legal right to enforce any rules prohibiting the acquisition of television stations.  The Third Circuit Court of Appeals has stayed the application of the new rules as a result of numerous legal challenges, including one filed by us.  Oral argument regarding the legality of the new rules was held on February 11, 2004 and a decision is currently pending.  During the pendency of the review, the Third Circuit has ordered the FCC to continue to apply the existing ownership rules.

 

On November 15, 1999, we entered into five separate plans and agreements of merger, pursuant to which we would acquire through merger with subsidiaries of Cunningham, a related party, television broadcast stations WABM-TV, Birmingham, Alabama, KRRT-TV, San Antonio, Texas, WVTV-TV, Milwaukee, Wisconsin, WRDC-TV, Raleigh, North Carolina and WBSC-TV (formerly WFBC-TV), Anderson, South Carolina.  The consideration for these mergers was the issuance to Cunningham, of shares of our Class A Common voting stock.  In December 2001, we received FCC approval on all the transactions except WBSC-TV.  Accordingly, on February 1, 2002, we closed on the purchase of the FCC license and related assets of WABM-TV, KRRT-TV, WVTV-TV, and WRDC-TV.  The total value of the shares issued in consideration for the approved mergers was $7.7 million.  We have filed a petition for reconsideration with the FCC to reconsider its denial of the acquisition of WBSC-TV and recently amended our application to acquire the license in light of the FCC’s new multiple ownership rules adopted in June 2003.  However, the new rules have been stayed by the U.S. Court of Appeals for the Third Circuit, pending its review of the rules.  We also filed applications in November 2003 to acquire the license assets of the remaining five Cunningham stations, WRGT-TV, Dayton, Ohio, WTAT-TV, Charleston, South Carolina, WVAH-TV, Charleston, West Virginia, WNUV-TV, Baltimore, Maryland, and WTTE-TV, Columbus, Ohio.  These applications are pending and may also be impacted by the existence of the stay of the FCC’s new multiple ownership rules.  The Rainbow/PUSH Coalition has again filed a petition against Sinclair to deny these five applications and to revoke all of our licenses.  We believe the petition is without merit and, as with past petitions filed by Rainbow/PUSH, will not result in the revocation of any of our licenses.

 

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In January 2002, the Rainbow/PUSH Coalition filed an appeal of the FCC’s decision to grant a number of Sinclair applications to transfer control of television broadcast licenses to subsidiaries of Sinclair Broadcast Group, Inc. with the US Court of Appeals for the DC Circuit.  The stations affected by the appeal were WNUV-TV, WTTE-TV, WRGT-TV, WTAT-TV, WVAH-TV, KOKH-TV, KRRT-TV, WVTV-TV, WRDC-TV, WABM-TV, WBSC-TV, WCWB-TV, WLOS-TV and KABB-TV.  On June 10, 2003, a panel of the US Court of Appeals for the DC Circuit dismissed the Rainbow/PUSH Coalition’s appeal, ruling that Rainbow/PUSH did not have standing to appeal the Commission’s earlier decision.  Rainbow/PUSH filed a motion for the panel of the DC Circuit to reconsider the dismissal, which was denied by the court on September 10, 2003 and may no longer be appealed.

 

The Satellite Home Viewer Improvement Act (SHVIA)

 

In 1988, Congress enacted the Satellite Home Viewer Act (SHVA), which enabled satellite carriers to provide broadcast programming to those satellite subscribers who were unable to obtain broadcast network programming over-the-air. SHVA did not permit satellite carriers to retransmit local broadcast television signals directly to their subscribers. The Satellite Home Viewer Improvement Act of 1999 (SHVIA) revised SHVA to reflect changes in the satellite and broadcasting industry. This legislation allows satellite carriers to provide local television signals by satellite within a station market, and effective January 1, 2002, required satellite carriers to carry all local signals in any market where it carries any local signals. On or before July 1, 2001, SHVIA required all television stations to elect to exercise certain “must carry” or “retransmission consent” rights in connection with their carriage by satellite carriers.  We have entered into compensation agreements granting the two primary satellite carriers retransmission consent to carry all of our stations.

 

Must-Carry/Retransmission Consent

 

Pursuant to the Cable Act of 1992, television broadcasters are required to make triennial elections to exercise either certain “must-carry” or “retransmission consent” rights in connection with their carriage by cable systems in each broadcaster’s local market. By electing the must-carry rights, a broadcaster demands carriage on a specified channel on cable systems within its DMA, in general as defined by the Nielsen DMA Market and Demographic Rank Report of the prior year. These must-carry rights are not absolute, and their exercise is dependent on variables such as:

 

      the number of activated channels on a cable system,

 

      the location and size of a cable system, and

 

      the amount of programming on a broadcast station that duplicates the programming of another broadcast station carried by the cable system.

 

Therefore, under certain circumstances, a cable system may decline to carry a given station. Alternatively, if a broadcaster chooses to exercise retransmission consent rights, it can prohibit cable systems from carrying its signal or grant the appropriate cable system the authority to retransmit the broadcast signal for a fee or other consideration. In October 2002, we elected must-carry or retransmission consent with respect to each of our stations based on our evaluation of the respective markets and the position of our owned or programmed station(s) within the market. Our stations continue to be carried on all pertinent cable systems and we do not believe that our elections have resulted in the shifting of our stations to less desirable cable channel locations. Many of the agreements we have negotiated for cable carriage are short term, subject to month-to-month extensions.

 

In 2001, the FCC tentatively determined not to apply must-carry rules to require cable companies to carry both the analog and digital signals of local broadcasters during the DTV transition period between 2002 and 2006 when television stations will be broadcasting both signals. At the same time, the FCC issued a further notice of proposed rulemaking to gather additional information regarding dual analog and digital must carry and may reconsider its decision. Thus, presently only television stations operating solely with digital signals are entitled to mandatory carriage of their digital signal by cable companies.  In addition, it is technically possible for a television station to broadcast more than one channel of programming using its digital signal.  The FCC has concluded that mandatory carriage of a digital television station requires only the carriage of a single video programming stream and related programming material.  As a result of these decisions by the FCC, cable customers in our broadcast markets currently may not receive the full digital signal or even part of the digital signal of any of our television stations.

 

Many of the viewers of our television stations receive the signals of the stations via cable television service.  Cable television systems generally transmit our signals pursuant to permission granted by us in retransmission consent agreements.  A material portion of these agreements have no definite term and may be terminated either by us or by the applicable cable

 

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television company on very short notice (typically 45 or 60 days). We are currently engaged in negotiations with respect to these agreements with several major cable television companies.  There can be no assurance that the results of these negotiations will be advantageous to Sinclair or that we or the cable companies might not determine to terminate some or all of these agreements.  A termination of our retransmission agreements would make it more difficult for our viewers to watch our programming and could result in lower ratings and a negative financial impact on us.  In addition, we generally have not provided the major cable television companies with the right to transmit our stations’ digital signals.  Although the lack of carriage of these signals does not at this time have a material impact on our results of operations, this could change as the number of households in the United States with the capability of viewing digital and high definition television increases.  There can be no assurance that we will be able to negotiate mutually acceptable retransmission agreements in the future relating to the carriage of our digital signals.

 

Syndicated Exclusivity/Territorial Exclusivity

 

The FCC’s syndicated exclusivity rules allow local broadcast television stations to demand that cable operators black out syndicated non-network programming carried on “distant signals” (i.e., signals of broadcast stations, including so-called “superstations,” which serve areas substantially removed from the cable system’s local community). The FCC’s network non-duplication rules allow local broadcast network television affiliates to require that cable operators black out duplicating network programming carried on distant signals. However, in a number of markets in which we own or program stations affiliated with a network, a station that is affiliated with the same network in a nearby market is carried on cable systems in our market. This is not necessarily in violation of the FCC’s network non-duplication rules. However, the carriage of two network stations on the same cable system could result in a decline of viewership adversely affecting the revenues of our owned or programmed stations.

 

Digital Television

 

The FCC has taken a number of steps to implement digital television (DTV) broadcasting services. The FCC has adopted an allotment table that provides all authorized television stations with a second channel on which to broadcast a DTV signal. The FCC has attempted to provide DTV coverage areas that are comparable to stations’ existing service areas. The FCC has ruled that television broadcast licensees may use their digital channels for a wide variety of services such as high-definition television, multiple standard definition television programming, audio, data, and other types of communications, subject to the requirement that each broadcaster provide at least one free video channel equal in quality to the current technical standard and further subject to the requirement that broadcasters pay a fee of 5% of gross revenues on all DTV subscription services.

 

DTV channels are generally located in the range of channels from channel 2 through channel 51. The FCC required that affiliates of ABC, CBS, FOX and NBC in the top 10 television markets begin digital broadcasting by May 1, 1999 and that affiliates of these networks in markets 11 through 30 begin digital broadcasting by November 1999. All other commercial stations were required to begin digital broadcasting by May 1, 2002.

 

Under the FCC’s rules, a network-affiliated station in the top 30 markets must operate its DTV station at any time that the associated analog station is operating.  All other DTV stations are required only to operate during prime time hours.  As of April 2003, all stations were required to simulcast 50% of the video programming of the analog channel on the DTV channel.  By April 2004, stations must simulcast 75% of their programming. Failure to comply with FCC requirements may subject a station to sanctions.

 

At present, DTV stations are required only to provide coverage to their community of license.  By December 31, 2004, the signal strength of this coverage for commercial stations is required to meet more stringent FCC-specified parameters.  By the end of 2006, unless the FCC extends the end of the digital transition, a DTV station must replicate its analog service area or lose interference protection for its DTV service area.  There are no guarantees that our stations will be able to meet these requirements.  Loss of interference protection for any of our stations could reduce the number of viewers of that station and could adversely impact revenues for that station.

 

Of the television stations that we own and operate, as of December 31, 2003, six are operating at their full digital television power, forty are operating their DTV facilities at low power as permitted by the FCC pursuant to special temporary authority.  Five stations have applications for digital construction permits pending before the FCC, and one station, which is operating at low power, has an outstanding construction permit for full power operation.  All of the Cunningham stations with which we have LMAs are operating their DTV facilities at low power pursuant to special temporary authority.  The tower of one of those stations fell in an ice storm, and its digital signal is off the air pending construction of a new tower.  Of the other LMA stations, WTTA-TV and WDBB-TV are operating at low power pursuant to special temporary authority, WDKA-TV has been granted a modification of its special temporary authority to operate at low power, WFGX-TV has received an extension of time

 

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to construct its digital facility pending the filing of an application to substitute another DTV channel, and WNYS-TV has a digital application pending.

 

On February 19, 2003, the tower for Cunningham station WVAH-TV, Charleston, West Virginia was irreparably damaged in a severe ice storm.  Because the digital equipment was also destroyed in the disaster, the FCC permits this station to broadcast an analog signal only from their temporary placement on the WCHS-TV tower.  A new tower and building will be constructed at the WCHS site, which will support the operations of both WCHS-TV and WVAH-TV.  Construction of the new facility has begun and is scheduled to be completed in July 2004.  Once the new tower is complete, WVAH-TV will resume broadcasting a full service digital and analog signal.

 

In April 2003, the FCC adopted a policy of graduated sanctions to be imposed upon licensees who do not meet the FCC’s DTV build-out schedule. Under the policy, the stations could face monetary fines and possible loss of any digital construction permits for non-compliance with the build-out schedule.

 

After completion of the transition period, the FCC will reclaim the non-digital channels. Subject to an extension period (discussed below), the FCC’s plan calls for the DTV transition period to end December 31, 2006, at which time the FCC expects that television broadcasters will cease non-digital broadcasting and return one of their two channels to the government, allowing that spectrum to be recovered for other uses. During the transition period, each existing analog television station will be permitted to operate a second station that will broadcast using the digital standard.

 

By statute, Congress has instructed the FCC to extend the 2006 deadline for reclamation of a television station’s analog channel if, in any given case:

 

      one or more television stations affiliated with ABC, CBS, NBC or FOX in a market is not broadcasting digitally, and the FCC determines that each such station has “exercised due diligence” in attempting to convert to digital broadcasting and satisfies the conditions for an extension of the FCC’s applicable construction deadlines for DTV service in that market;

 

      digital-to-analog converter technology is not generally available in such market; or

 

      15% or more of the television households in such market do not subscribe to a multichannel video service (cable, wireless cable or direct-to-home broadcast satellite television) that carries at least one digital channel from each of the local stations in that market and cannot receive digital signals using either a television receiver capable of receiving digital signals or a receiver equipped with a digital-to-analog converter.

 

On January 27, 2003, the FCC initiated its second periodic review of its rules on the conversion to digital television, releasing a notice of proposed rulemaking. The notice invited comments on the difficulties broadcasters face in building their DTV stations and on the interpretation of the statutory language concerning the 2006 deadline.

 

Implementation of digital television has imposed substantial additional costs on television stations because of the need to replace equipment and because some stations will need to operate at higher utility costs. There can be no assurance that our television stations will be able to increase revenue to offset such costs. In addition, the FCC has proposed imposing new public interest requirements on television licensees in exchange for their receipt of DTV channels.

 

There is considerable uncertainty about the final form of the FCC digital regulations. Even so, we believe that these new developments may have the following effects on us:

 

Reclamation of analog channels.  Congress directed the FCC to begin auctioning analog channels 60-69 in 2001, even though the FCC is not to reclaim them until 2006. The channel 60-69 auction was scheduled to be held in January 2003, but has been delayed and no new auction date has been established. Congress further permitted broadcasters to bid on the non-digital channels in cities with populations over 400,000. If the channels are owned by our competitors, they may exert increased competitive pressure on our operations. In addition, the FCC reallocated the spectrum band, currently comprising television channels 52-59, to permit both wireless services and certain new broadcast operations. The FCC completed auctions for part of this spectrum in September 2002 and July 2003. With respect to the remaining spectrum, the FCC has not yet established an auction date. Analog broadcasters are required to cease operation on this spectrum by the end of 2006 unless the FCC extends the end of the digital transition. The FCC envisions that this band will be used for a variety of broadcast-type applications including two-way interactive services

 

14



 

and services using Coded Orthogonal Frequency Division Multiplexing (COFDM) technology. We cannot predict how the development of this spectrum will affect our television operations.

 

Signal quality issues.  Our tests have indicated that the digital standard mandated by the FCC, 8-level vestigial sideband (8-VSB), is currently unable to provide for reliable reception of a DTV signal through a simple indoor antenna. Absent improvements in DTV receivers, or an FCC ruling allowing us to use an alternative standard, continued reliance on the 8-VSB digital standard may not allow us to provide the same reception coverage with our digital signals as we can with our current analog signals. Furthermore, the FCC generally has made available much higher power allocations to digital stations that will replace stations on existing VHF channels 2 through 13 than digital stations that will replace existing channels 14 through 69. The majority of our analog facilities operate between channels 14 through 69. This power disparity could put us at a disadvantage to our competitors that now operate on channels 2 through 13.

 

In August 2002, the FCC adopted regulations requiring new television receivers to include over-the-air DTV tuners. In November 2002, we filed a petition for further reconsideration requesting that the FCC ensure that these over-the-air DTV tuners are capable of adequately receiving digital television signals. The FCC dismissed that petition in March 2003, but initiated a notice of inquiry proceeding requesting comments on issues similar to those we had raised in our petition for reconsideration.  If DTV tuners are not able to receive digital television signals adequately, we may be forced to rely on cable television or other alternative means of transmission to deliver our digital signals to all of the viewers we are able to reach with our current analog signals.

 

Digital must carry.  While the FCC ruled that cable companies are required to carry the signals of digital-only television stations, the agency has tentatively concluded, subject to additional inquiry in a pending rulemaking proceeding, that cable companies should not be required to carry both the analog and digital signals of stations during the transition period when stations will be broadcasting in both modes. If the FCC does not require this, cable customers in our broadcast markets may only be able to receive our digital signal over the air, which could negatively impact our stations.

 

Many of the viewers of our television stations receive the signals of the stations via cable television service.  Cable television systems generally transmit our signals pursuant to permission granted by us in retransmission consent agreements.  A material portion of these agreements have no definite term and may be terminated either by us or by the applicable cable television company on very short notice (typically 45 or 60 days). We are currently engaged in negotiations with respect to these agreements with several major cable television companies.  There can be no assurance that the results of these negotiations will be advantageous to Sinclair or that we or the cable companies might not determine to terminate some or all of these agreements.  A termination of our retransmission agreements would make it more difficult for our viewers to watch our programming and could result in lower ratings and a negative financial impact on us.  In addition, we generally have not provided the major cable television companies with the right to transmit our stations’ digital signals.  Although the lack of carriage of these signals does not at this time have a material impact on our results of operations, this could change as the number of households in the United States with the capability of viewing digital and high definition television increases.  There can be no assurance that we will be able to negotiate mutually acceptable retransmission agreements in the future relating to the carriage of our digital signals.

 

Capital and operating costs.  We have incurred and will continue to incur costs to replace equipment in our stations in order to provide digital television. Some of our stations will also incur increased utilities costs as a result of converting to digital operations. We cannot be certain we will be able to increase revenues to offset these additional costs.

 

Restrictions on Broadcast Programming

 

Advertising of cigarettes and certain other tobacco products on broadcast stations has been banned for many years. Various states also restrict the advertising of alcoholic beverages and from time to time certain members of Congress have contemplated legislation to place restrictions on the advertisement of such alcoholic beverage products. FCC rules also restrict the amount and type of advertising which can appear in programming broadcast primarily for an audience of children twelve years old and younger.   In addition, the FTC recently announced a program intended to help media outlets voluntarily screen out weight loss product advertisements that are misleading.

 

15



 

The Communications Act and FCC rules also place restrictions on the broadcasting of advertisements by legally qualified candidates for elective office.  These restrictions state that:

 

      stations must provide “reasonable access” for the purchase of time by legally qualified candidates for federal office;

 

      stations must provide “equal opportunities” for the purchase of equivalent amounts of comparable broadcast time by opposing candidates for the same elective office; and

 

      during the 45 days preceding a primary or primary run-off election and during the 60 days preceding a general or special election, legally qualified candidates for elective office may be charged no more than the station’s “lowest unit charge” for the same class of advertisement, length of advertisement and daypart.

 

We cannot predict the effect of legislation on our station’s advertising revenues. During March 2002, legislation passed in Congress and was signed into law by the President that revised the laws regarding the requirements legally qualified candidates for office must meet in order to receive the lowest unit charge for the purchase of airtime on television stations.  The legislation also changed the rules regarding “soft money” advertising and advocacy advertising by labor unions and corporations. These laws were upheld by the Supreme Court in December 2003.

 

Programming and Operation

 

General.  The Communications Act requires broadcasters to serve the “public interest.” The FCC has relaxed or eliminated many of the more formalized procedures it had developed in the past to promote the broadcast of certain types of programming responsive to the needs of a station’s community of license. FCC licensees continue to be required, however, to present programming that is responsive to the needs and interests of their communities and to maintain certain records demonstrating such responsiveness. Complaints from viewers concerning a station’s programming may be considered by the FCC when it evaluates renewal applications of a licensee, although such complaints may be filed at any time and generally may be considered by the FCC at any time. Stations also must pay regulatory and application fees and follow various rules promulgated under the Communications Act that regulate, among other things, political advertising, sponsorship identifications, obscene and indecent broadcasts and technical operations, including limits on radio frequency radiation.

 

Indecency.  It is a violation of federal law and FCC regulations to broadcast obscene or indecent programming.  FCC licensees are in general responsible for the contents of their broadcast programming, including that supplied by television networks.  Accordingly, there is a risk of being fined as a result of our broadcast of programming, including network programming.  The maximum forfeiture amount for the broadcast of indecent or obscene material is $27,500 for each violation.  Congress is currently considering a bill which would raise that maximum forfeiture amount to $275,000 for each violation or each day of a continuing violation, except that the amount assessed for any continuing violation shall not exceed a total of $3,000,000 for any single act or failure to act.

 

Equal Employment Opportunity.  On November 20, 2002, the FCC adopted new rules requiring licensees to create equal employment opportunity outreach programs and maintain records and make filings with the FCC evidencing such efforts. The FCC simultaneously released a notice of proposed rulemaking seeking comments on whether and how to apply the new rules and policies to part-time positions, defined as less than 30 hours per week.

 

Children’s Television Programming.  Television stations are required to broadcast a minimum of three hours per week of “core” children’s educational programming, which the FCC defines as programming that:

 

      has the significant purpose of serving the educational and informational needs of children 16 years of age and under;

 

      is regularly scheduled weekly and at least 30 minutes in duration; and

 

      is aired between the hours of 7:00 a.m. and 10:00 p.m.

 

Furthermore, “core” children’s educational programs, in order to qualify as such, are required to be identified as educational and informational programs over the air at the time they are broadcast, and are required to be identified in the children’s programming reports required to be placed quarterly in stations’ public inspection files and filed quarterly with the FCC.

 

16



 

Additionally, television stations are required to identify and provide information concerning “core” children’s programming to publishers of program guides. The FCC is considering whether or not to require the use of the digital broadcast spectrum for the broadcast of additional amounts of “core” children’s programming.

 

Television Program Content.  The television industry has developed a ratings system that has been approved by the FCC that is designed to provide parents with information regarding the content of the programming being aired. Furthermore, the FCC requires certain television sets to include the so-called “V-chip,” a computer chip that allows blocking of rated programming.

 

Pending Matters

 

The Congress and the FCC have under consideration and in the future may consider and adopt, new laws, regulations and policies regarding a wide variety of matters that could affect, directly or indirectly, the operation, ownership and profitability of our broadcast stations, result in the loss of audience share and advertising revenues for our broadcast stations and affect our ability to acquire additional broadcast stations or finance such acquisitions.

 

Other matters that could affect our broadcast properties include technological innovations and developments generally affecting competition in the mass communications industry, such as direct television broadcast satellite service, Class A television service, the continued establishment of wireless cable systems and low power television stations, digital television technologies, the Internet and the advent of telephone company participation in the provision of video programming service.

 

Other Considerations

 

The foregoing summary does not purport to be a complete discussion of all provisions of the Communications Act, the 1996 Act or other congressional acts or of the regulations and policies of the FCC. For further information, reference should be made to the Communications Act, the 1996 Act, other congressional acts and regulations and public notices promulgated from time to time by the FCC. There are additional regulations and policies of the FCC and other federal agencies that govern political broadcasts, advertising, equal employment opportunity and other matters affecting our business and operations.

 

ENVIRONMENTAL REGULATION

 

Prior to our ownership or operation of our facilities, substances or waste that are or might be considered hazardous under applicable environmental laws may have been generated, used, stored or disposed of at certain of those facilities. In addition, environmental conditions relating to the soil and groundwater at or under our facilities may be affected by the proximity of nearby properties that have generated, used, stored or disposed of hazardous substances. As a result, it is possible that we could become subject to environmental liabilities in the future in connection with these facilities under applicable environmental laws and regulations. Although we believe that we are in substantial compliance with such environmental requirements and have not in the past been required to incur significant costs in connection therewith, there can be no assurance that our costs to comply with such requirements will not increase in the future.  We presently believe that none of our properties have any condition that is likely to have a material adverse effect on our financial condition or results of operations.

 

COMPETITION

 

Our television stations compete for audience share and advertising revenue with other television stations in their respective DMAs, as well as with other advertising media, such as radio, newspapers, magazines, outdoor advertising, transit advertising, Internet, yellow page directories, direct mail, satellite television, local cable television and wireless video.  Some competitors are part of larger organizations with substantially greater financial, technical and other resources than we have.

 

Television Competition.  Competition in the television broadcasting industry occurs primarily in individual DMAs. Generally, a television broadcasting station in one DMA does not compete with stations in other DMAs. Our television stations are located in highly competitive DMAs. In addition, certain of our DMAs are overlapped by both over-the-air and cable carriage of stations in adjacent DMAs, which tends to spread viewership and advertising expenditures over a larger number of television stations.

 

Broadcast television stations compete for advertising revenues primarily with other broadcast television stations, radio stations, cable channels and cable system operators serving the same market, as well as with newspapers, the Internet, yellow page directories, outdoor advertising operators and transit advertisers.  Traditional network programming generally achieves higher household audience levels than FOX, WB and UPN programming and syndicated programming aired by our independent stations. This can be attributed to a combination of factors, including the traditional networks’ efforts to reach a broader audience, generally better signal carriage available when broadcasting over VHF channels 2 through 13 versus broadcasting over UHF channels 14 through 69 and the higher number of hours of traditional network programming being broadcast weekly.

 

17



 

However, greater amounts of advertising time are available for sale on our FOX, UPN and WB affilitated stations, and as a result we believe that our programming typically achieves a share of television market advertising revenues greater than its share of the market’s audience.

 

Television stations compete for audience share primarily on the basis of program popularity, which has a direct effect on advertising rates. Our affiliated stations are largely dependent upon the performance of the networks’ programs in attracting viewers. Non-network time periods are programmed by the station primarily with syndicated programs purchased for cash, cash and barter, or barter-only and also through self-produced news, public affairs programs, live local sporting events and other entertainment programming.

 

Television advertising rates are based upon factors which include the size of the DMA in which the station operates, a program’s popularity among the viewers that an advertiser wishes to attract, the number of advertisers competing for the available time, the demographic makeup of the DMA served by the station, the availability of alternative advertising media in the DMA including radio, cable, newspapers and yellow page directories, direct mail, the aggressiveness and knowledge of sales forces in the DMA and development of projects, features and programs that tie advertiser messages to programming. We believe that our sales and programming strategies allow us to compete effectively for advertising revenues within our DMAs.

 

Other factors that are material to a television station’s competitive position include signal coverage, local program acceptance, network affiliation, audience characteristics and assigned broadcast frequency. Historically, our UHF broadcast stations have suffered a competitive disadvantage in comparison to stations with VHF broadcast frequencies. This historic disadvantage has gradually declined through:

 

      carriage on cable systems, and in certain markets, direct broadcast satellite;

 

      improvement in television receivers;

 

      improvement in television transmitters;

 

      wider use of all channel antennae;

 

      increased availability of programming; and

 

      the development of new networks such as FOX, WB and UPN.

 

The broadcasting industry is continuously faced with technical changes and innovations, competing entertainment and communications media, changes in labor conditions and governmental restrictions or actions of federal regulatory bodies, including the FCC, any of which could possibly have a material effect on a television station’s operations and profits. For instance, the FCC has established Class A television service for qualifying low power television stations. A low power television station that qualifies for Class A television service is granted certain rights currently accorded to full-power television stations, which may allow them to compete more effectively with full power stations. We cannot predict the effect of increased competition from Class A television stations in markets where we have full-power television stations.

 

There are sources of video service other than conventional television stations, the most common being cable television, which can increase competition for a broadcast television station by bringing into its market distant broadcasting signals not otherwise available to the station’s audience, serving as a distribution system for national satellite-delivered programming and other non-broadcast programming originated on a cable system and selling advertising time to local advertisers. Other principal sources of competition include home video exhibition and Direct Broadcast Satellite (DBS) services and multichannel multipoint distribution services (“MMDS”). DBS and cable operators in particular are competing more aggressively than in the past for advertising revenues. This competition could adversely affect our stations’ revenues and performance in the future.

 

In addition, SHVIA allows on a limited basis, satellite carriers to provide distant stations’ signals with the same network affiliation as our stations to their subscribers.

 

Moreover, technology advances and regulatory changes affecting programming delivery through fiber optic telephone lines and video compression could lower entry barriers for new video channels and encourage the development of increasingly specialized “niche” programming. Telephone companies are permitted to provide video distribution services via radio communication, on a

 

18



 

common carrier basis, as “cable systems” or as “open video systems,” each pursuant to different regulatory schemes. Additionally, in January 2004, the FCC concluded an auction for licenses operating in the 12 GHz band that can be used to provide multichannel video programming distribution.  We are unable to predict what other video technologies might be considered in the future or the effect that technological and regulatory changes will have on the broadcast television industry and on the future profitability and value of a particular broadcast television station.

 

We are currently exploring whether or not television broadcasting will be enhanced significantly by the development and increased availability of DTV technology. This technology has the potential to permit us to provide viewers multiple channels of digital television over each of our existing standard channels, to provide certain programming in a high definition television format and to deliver various forms of data, including data on the Internet, to PCs and handheld devices. These additional capabilities may provide us with additional sources of revenue as well as additional competition.   In addition, emerging technologies that will allow viewers to digitally record and play back television programming may decrease viewership of commercials and, as a result, lower our advertising revenues.

 

While DTV technology is currently available in a large number of viewing markets, a successful transition from the current analog broadcast format to a digital format may take many years. We cannot be assured that our efforts to take advantage of the new technology will be commercially successful.

 

We also compete for programming, which involves negotiating with national program distributors or syndicators that sell first-run and rerun packages of programming. Our stations compete for exclusive access to those programs against in-market broadcast station competitors for syndicated products. Although historically cable systems did not generally compete with local stations for programming, more recently national cable networks have more frequently acquired programs that would have otherwise been offered to local television stations. Public broadcasting stations generally compete with commercial broadcasters for viewers but not for advertising dollars.

 

We believe that programming prices are rising for quality half-hour entertainment syndicated programming as the network industry has become less reliant on the sitcom format to attract viewers.  We believe that this will result in greater amounts of independently produced programming aimed at filling the programming needs of television broadcasters.  It is not clear how this will affect the viewing levels and programming costs of out stations in the future.

 

We believe we compete favorably against other television stations because of our management skill and experience, our ability historically to generate revenue share greater than our audience share, our network affiliations and our local program acceptance. In addition, we believe that we benefit from the operation of multiple broadcast properties, affording us certain non-quantifiable economies of scale and competitive advantages in the purchase of programming.

 

EMPLOYEES

 

As of December 31, 2003, we had approximately 3,266 employees. Approximately 146 employees at eight of our television stations are represented by labor unions under certain collective bargaining agreements. We have not experienced any significant labor problems and consider our overall labor relations to be good.

 

AVAILABLE INFORMATION

 

Our Internet address is: www.sbgi.net. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed or furnished with the SEC.  We have made these filings available since prior to November 15, 2002.  In addition, our quarterly earnings conference calls are web cast until the subsequent quarter’s earnings call via our website.

 

19



 

ITEM 2.          PROPERTIES

 

Generally, each of our stations has facilities consisting of offices, studios and tower sites. Transmitter and tower sites are located to provide maximum signal coverage of our stations’ markets. The following is a summary of our principal owned and leased real properties as we believe that no one property represents a material amount of the total properties owned or leased.

 

 

 

OWNED

 

LEASED

 

Office and Studio Buildings

 

610,840 square feet

 

472,492 square feet

 

Office and Studio Land

 

54 acres

 

4 acres

 

Transmitter Building Site

 

65,909 square feet

 

52,545 square feet

 

Transmitter and Tower Land

 

1,350 acres

 

3,212 acres

 

 

We believe that all of our properties, both owned and leased, are generally in good operating condition, subject to normal wear and tear and are suitable and adequate for our current business operations.

 

ITEM 3.          LEGAL PROCEEDINGS

 

Lawsuits and claims are filed against us from time to time in the ordinary course of business. These actions are in various preliminary stages and no judgments or decisions have been rendered by hearing boards or courts. We do not believe that these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

 

We have filed a petition for reconsideration with the FCC to reconsider its denial of the acquisition of WBSC-TV and recently amended our application to acquire the license in light of the FCC’s new multiple ownership rules adopted in June 2003.  However, the new rules have been stayed by the U.S. Court of Appeals for the Third Circuit, pending its review of the rules.  We also filed applications in November 2003 to acquire the license assets of the remaining five Cunningham stations, WRGT-TV, Dayton, Ohio, WTAT-TV, Charleston, South Carolina, WVAH-TV, Charleston, West Virginia, WNUV-TV, Baltimore, Maryland, and WTTE-TV, Columbus, Ohio.  These applications are pending and may also be impacted by the existence of the stay of the FCC’s new multiple ownership rules.  The Rainbow/PUSH Coalition has filed a petition to deny these five applications and to revoke all of Sinclair’s licenses.  We believe the petition is without merit and, as with past petitions filed by Rainbow/PUSH, will not result in the revocation of any of Sinclair’s licenses.

 

ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of our shareholders during the fourth quarter of 2003.

 

20



 

PART II

 

ITEM 5.          MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

 

Our class A common stock is listed for trading on the NASDAQ stock market under the symbol SBGI. The following table sets forth for the periods indicated the high and low sales prices on the NASDAQ stock market.

 

2003

 

High

 

Low

 

First Quarter

 

$

12.02

 

$

7.68

 

Second Quarter

 

13.24

 

7.76

 

Third Quarter

 

12.20

 

9.63

 

Fourth Quarter

 

15.43

 

10.12

 

 

2002

 

High

 

Low

 

First Quarter

 

$

13.78

 

$

9.00

 

Second Quarter

 

17.75

 

11.95

 

Third Quarter

 

14.97

 

9.97

 

Fourth Quarter

 

14.16

 

10.35

 

 

As of February 13, 2004, there were approximately 71 shareholders of record of our common stock. This number does not include beneficial owners holding shares through nominee names.  Based on information available to us, we believe we have more than 5,000 beneficial owners of our class A common stock.

 

We generally have not paid a dividend on our common stock and do not expect to pay dividends on our common stock in the foreseeable future.  Our 2002 Bank Credit Agreement and some of our subordinated debt instruments generally restrict us from paying dividends on our common stock.  Under the indentures governing our 8.75% senior subordinated notes due 2011 and 8% senior subordinated notes due 2012, we are restricted from paying dividends on our  common stock unless certain specified conditions are satisfied, including that:

 

      no event of default then exists under the indenture or certain other specified agreements relating to our indebtedness; and

 

      we, after taking account of the dividend, are in compliance with certain net cash flow requirements contained in the indenture. In addition, under certain of our senior unsecured debt, the payment of dividends is not permissible during a default thereunder.

 

ITEM 6.          SELECTED FINANCIAL DATA

 

The selected consolidated financial data for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 have been derived from our audited consolidated financial statements. The consolidated financial statements for the years ended December 31, 2003, 2002 and 2001 are included elsewhere in this report.

 

21



 

The information below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements included elsewhere in this report.

 

STATEMENT OF OPERATIONS DATA

(dollars in thousands, except per share data)

 

 

 

Years Ended December 31,

 

 

 

2003

 

2002

 

2001

 

2000

 

1999

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Net broadcast revenues (a)

 

661,778

 

$

670,534

 

$

623,837

 

$

699,422

 

$

643,088

 

Revenues realized from station barter arrangements

 

62,395

 

60,911

 

53,889

 

54,595

 

60,052

 

Other operating divisions’ revenues

 

14,568

 

4,344

 

6,925

 

4,494

 

 

Total revenues

 

738,741

 

735,789

 

684,651

 

758,511

 

703,140

 

Station production expenses

 

147,937

 

140,060

 

142,696

 

149,048

 

140,651

 

Station selling, general and administrative expenses

 

145,895

 

143,348

 

140,138

 

142,388

 

116,795

 

Expenses recognized from station barter arrangements

 

57,365

 

54,567

 

48,159

 

48,543

 

54,463

 

Depreciation and amortization (b) (c)

 

171,393

 

185,939

 

260,526

 

230,889

 

204,612

 

Stock-based compensation

 

1,498

 

1,399

 

1,559

 

1,762

 

2,467

 

Other divisions’ operating expenses

 

16,375

 

6,051

 

8,910

 

7,076

 

 

Corporate general and administrative expenses

 

25,255

 

19,795

 

19,750

 

22,305

 

18,646

 

Impairment and write down charge of long-lived assets

 

 

 

16,075

 

 

 

Restructuring costs

 

 

 

3,700

 

 

 

Contract termination costs

 

 

 

5,135

 

 

 

Cumulative adjustment for change in assets held for sale

 

 

 

 

619

 

 

Operating income

 

173,023

 

184,630

 

38,003

 

155,881

 

165,506

 

Interest expense (c)

 

(128,228

)

(126,500

)

(143,574

)

(152,219

)

(181,569

)

Subsidiary trust minority interest expense (d)

 

(11,246

)

(23,890

)

(23,890

)

(23,890

)

(23,890

)

Net (loss) gain on sale of broadcast assets

 

(517

)

(478

)

204

 

 

(418

)

Unrealized gain (loss) on derivative instrument

 

17,354

 

(30,939

)

(32,220

)

(296

)

15,747

 

Loss from extinguishment of securities

 

(15,187

)

(15,362

)

(22,010

)

 

 

Income (loss) related to investments

 

1,193

 

(1,189

)

(7,616

)

(16,764

)

 

Interest and other income

 

2,028

 

3,585

 

3,758

 

2,812

 

3,082

 

Income (loss) before income taxes

 

38,420

 

(10,143

)

(187,345

)

(34,476

)

(21,542

)

(Provision) benefit for income taxes

 

(15,669

)

4,162

 

59,675

 

(3,355

)

(23,281

)

Income (loss) from continuing operations

 

22,751

 

(5,981

)

(127,670

)

(37,831

)

(44,823

)

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of related income taxes

 

1,641

 

372

 

(52

)

6,932

 

20,235

 

Gain on sale of broadcast assets, net of related income taxes

 

 

7,519

 

 

108,264

 

192,372

 

Cumulative adjustment for change in accounting principle, net of related income taxes

 

 

(566,404

)

 

 

 

Net income (loss)

 

$

24,392

 

$

(564,494

)

$

(127,722

)

$

77,365

 

$

167,784

 

Net income (loss) available to common shareholders

 

$

14,042

 

$

(574,844

)

$

(138,072

)

$

67,015

 

$

157,434

 

 

22



 

 

 

Years Ended December 31,

 

 

 

2003

 

2002

 

2001

 

2000

 

1999

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share from continuing operations

 

$

0.14

 

$

(0.19

)

$

(1.64

)

$

(0.53

)

$

(0.57

)

Basic earnings per share from discontinued operations

 

$

0.02

 

$

0.09

 

$

 

$

1.26

 

$

2.20

 

Basic loss per share from cumulative effect of accounting change

 

$

 

$

(6.64

)

$

 

$

 

$

 

Basic earnings (loss) per share

 

$

0.16

 

$

(6.74

)

$

(1.64

)

$

0.73

 

$

1.63

 

Diluted earnings (loss) per share from continuing operations

 

$

0.14

 

$

(0.19

)

$

(1.64

)

$

(0.53

)

$

(0.57

)

Diluted earnings per share from discontinued operations

 

$

0.02

 

$

0.09

 

$

 

$

1.26

 

$

2.20

 

Diluted loss per share from cumulative effect of accounting change

 

$

 

$

(6.64

)

$

 

$

 

$

 

Diluted earnings (loss) per share

 

$

0.16

 

$

(6.74

)

$

(1.64

)

$

0.73

 

$

1.63

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,730

 

$

5,327

 

$

32,063

 

$

4,091

 

$

16,408

 

Total assets

 

$

2,564,582

 

$

2,606,773

 

$

3,289,426

 

$

3,324,435

 

$

3,543,305

 

Total debt (e)

 

$

1,732,457

 

$

1,551,970

 

$

1,685,630

 

$

1,616,426

 

$

1,792,339

 

HYTOPS (f)

 

$

 

$

200,000

 

$

200,000

 

$

200,000

 

$

200,000

 

Total shareholders’ equity

 

$

229,005

 

$

211,180

 

$

771,960

 

$

912,530

 

$

974,917

 

 


(a)           “Net broadcast revenues” are defined as broadcast revenues net of agency commissions.

 

(b)           Depreciation and amortization includes amortization of program contract costs and net realizable value adjustments, depreciation and amortization of property and equipment and amortization of acquired intangible broadcasting assets, other assets and costs related to excess syndicated programming.

 

(c)           Depreciation and amortization and interest expense amounts differ from prior presentations for the fiscal years ended December 31, 2000 and 1999. Previously the amortized costs associated with the issuance of indebtedness had been classified as depreciation and amortization instead of being classified as interest expense. Accordingly, we reclassified $3,313 and $3,288 as interest expense for the fiscal years ended December 31, 2000 and 1999, respectively.

 

(d)           Subsidiary trust minority interest expense represents the distributions on the HYTOPS and amortization of deferred finance costs. See footnote (f).

 

(e)           “Total debt” is defined as long-term debt, net of unamortized discount and capital lease obligations, including the current portion thereof. Total debt does not include the HYTOPS or our preferred stock.

 

(f)            HYTOPS represents our high yield trust originated preferred securities representing $200 million aggregate liquidation value, which were redeemed in 2003.

 

ITEM 7.          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

We are a diversified television broadcasting company that owns and operates, provides programming services pursuant to LMAs or provides sales services pursuant to outsourcing agreements to more television stations than all but one other commercial broadcasting group in the United States. We currently own, provide programming services pursuant to LMAs or provide sales services to 62 television stations in 39 markets. We currently have duopolies, where we own and operate two stations, in ten markets; own and operate a station and provide programming and operating services to a second station in nine markets; and own a station and provide or are provided sales, operational and managerial services to a second station in four markets.

 

Our operating revenues are derived from local and national advertisers and, to a much lesser extent, from political advertisers and television network compensation. Our revenues from local advertisers have continued to trend upward and revenues from national advertisers have continued to trend downward when measured as a percentage of gross broadcast revenue. We believe

 

23



 

this trend is the result of our focus on increasing local advertising revenues as a percentage of total advertising revenues, from a decrease in overall spending by national advertisers and from a competitive increase in the number of media outlets providing national advertisers a means by which to advertise their goods or services. Our efforts to mitigate the effect of increasing national media outlets include continuing our efforts to increase local revenues and developing innovative marketing strategies to sell traditional and non-traditional services to our advertisers.

 

Our primary operating expenses are syndicated program rights fees, commissions on revenues, employee salaries and newsgathering and station promotional costs.  Amortization and depreciation of costs other than goodwill associated with the acquisition of the stations and interest carrying charges are significant factors in determining our overall profitability.

 

Sinclair Television Group, Inc. (STG) is a wholly owned subsidiary of Sinclair Broadcast Group, Inc. that we created in 2003.  As part of our redemption of our HYTOPS, on September 30, 2003, we completed the creation of a modified holding company structure, whereby we transferred substantially all of our television broadcast assets and liabilities to STG. As such, STG has become the primary obligor under our existing Bank Credit Agreement, the 8.75% Senior Subordinated Notes due 2011 and the 8% Senior Subordinated Notes due 2012.  Our class A Common Stock, class B Common Stock, Series D Convertible Exchangeable Preferred Stock and the 4.875% Convertible Senior Subordinated Notes remain at Sinclair Broadcast Group, Inc. and are not obligations or securities of STG.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, income taxes, program contract costs, property and equipment, intangible assets, investments and derivative contracts. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We have identified the policies below as critical to our business operations and the understanding of our results of operations. For a detailed discussion on the application of these and other accounting policies, see the Notes to the Consolidated Financial Statements.

 

Allowance for Doubtful Accounts.  We maintain an allowance for doubtful accounts for estimated losses resulting from extending credit to our customers that are unable to make required payments. If the economy and/or the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make their payments, additional allowances may be required.

 

Program Contract Costs.  We have agreements with distributors for the rights to television programming over contract periods, which generally run from one to seven years. Contract payments are made in installments over terms that are generally equal to or shorter than the contract period. Each contract is recorded as an asset and a liability at an amount equal to its gross contractual commitment when the license period begins and the program is available for its first showing. The portion of program contracts which become payable within one year is reflected as a current liability in the Consolidated Balance Sheets.

 

The rights to program materials are reflected in the Consolidated Balance Sheets at the lower of unamortized cost or estimated net realizable value (NRV). Estimated net realizable values are based upon management’s expectation of future advertising revenues net of sales commissions to be generated by the remaining program material. Amortization of program contract costs is generally computed using either a four year accelerated method or based on usage, whichever yields the greater amortization for each program. Program contract costs, estimated by management to be amortized in the succeeding year, are classified as current assets. Payments of program contract liabilities are typically paid on a scheduled basis and are not affected by adjustments for amortization or estimated net realizable value. If our estimate of future advertising revenues declines, then additional writedowns to net realizable value may be required.

 

Valuation of Goodwill, Long-Lived Assets and Intangible Assets.  We periodically evaluate our goodwill, broadcast licenses, long-lived assets and intangible assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on estimated future cash flows, market conditions, operational performance of our stations and legal factors.

 

24



 

Future events could cause us to conclude that impairment indicators exist and that the net book value of long-lived assets and intangible assets is impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

 

We have determined our broadcast licenses to be indefinite-lived intangible assets under SFAS No. 142, which requires such assets to be tested for impairment on an annual basis. We test our broadcast licenses by estimating the fair market value of each FCC license using a discounted cash flow model. We then compare the estimated fair market value to the book value to determine if an impairment exists.  Our discounted cash flow model is based on our judgment of future market conditions within the designated marketing area of each broadcast license as well as discount rates that would be used by market participants in an arms-length transaction. Future events could cause us to conclude that market conditions have declined or discount rates have increased to the extent that our broadcast licenses could be impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

 

Income Taxes.  We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. A valuation allowance has been provided for deferred tax assets relating to various state net operating loss (NOL) carryforwards based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. Although realization is not assured for the remaining deferred tax assets, we believe that it is more likely than not that they will be realized through future taxable earnings or alternative tax strategies. If we are unable to generate sufficient taxable income, if there is a material change in our projected future taxable income or if there is a change in our ability to utilize the state NOL carryforwards due to changes in state laws, we will make any necessary adjustments to the valuation allowance. This may result in a substantial increase in our effective tax rate and a material adverse impact on our financial condition and results of operation.  Management periodically performs a comprehensive review of our tax positions and accrues amounts for tax contingencies.  Based on these reviews, the status of ongoing audits and the expiration of applicable statute of limitations, accruals are adjusted as necessary. The resolution of audits is unpredictable and could result in tax liabilities that are significantly higher or lower than that which has been provided by us.

 

Set forth below are the principal types of broadcast revenues received by our stations for the periods indicated and the percentage contribution of each type to our total gross broadcast revenues:

 

BROADCAST REVENUE

(dollars in thousands)

 

 

 

Years ended December 31,

 

 

 

2003

 

2002

 

2001

 

Local/regional advertising

 

$

437,380

 

57.3

%

$

413,428

 

53.3

%

$

391,872

 

54.3

%

National advertising

 

300,198

 

39.3

%

309,923

 

40.0

%

307,514

 

42.7

%

Network compensation

 

17,436

 

2.3

%

16,450

 

2.1

%

16,754

 

2.3

%

Political advertising

 

6,506

 

0.9

%

33,176

 

4.3

%

2,559

 

0.4

%

Production

 

1,817

 

0.2

%

1,966

 

0.3

%

2,069

 

0.3

%

Broadcast revenues

 

763,337

 

100.0

%

774,943

 

100.0

%

720,768

 

100.0

%

Less: agency commissions

 

(101,560

)

 

 

(104,409

)

 

 

(96,931

)

 

 

Broadcast revenues, net

 

661,778

 

 

 

670,534

 

 

 

623,837

 

 

 

Barter revenues

 

62,395

 

 

 

60,911

 

 

 

53,889

 

 

 

Other revenues

 

14,568

 

 

 

4,344

 

 

 

6,925

 

 

 

Total revenues

 

$

738,741

 

 

 

$

735,789

 

 

 

$

684,651

 

 

 

 

Our primary types of programming and their approximate percentages of 2003 net broadcast revenues were syndicated programming (43.5%), network programming (29.4%), news (14.5%), direct advertising programming (7.1%), sports programming (3.0%), children’s programming (0.5%) and other programming (2.0%). Similarly, our five largest categories of advertising and their approximate percentages of 2003 net broadcast revenues were automotive (24.0%), professional services (11.5%), fast food (6.4%), paid programming including religious programming (8.2%) and retail department stores (6.2%).  No other advertising category accounted for more than 4.2% of our broadcast revenues in 2003. No individual advertiser accounted for more than 3.0% of our consolidated net broadcast revenues in 2003.

 

25



 

The following table sets forth certain of our operating data for the years ended December 31, 2003, 2002 and 2001.  For definitions of items, see footnotes to table in Item 6. Selected Financial Data.

 

OPERATING DATA

(dollars in thousands)

 

 

 

Years ended December 31,

 

 

 

2003

 

2002

 

2001

 

Net broadcast revenue

 

$

661,778

 

$

670,534

 

$

623,837

 

Revenues realized from station barter arrangements

 

62,395

 

60,911

 

53,889

 

Other operating divisions’ revenue

 

14,568

 

4,344

 

6,925

 

Total revenue

 

738,741

 

735,789

 

684,651

 

Station production expenses

 

147,937

 

140,060

 

142,696

 

Station selling, general and administrative expenses

 

145,895

 

143,348

 

140,138

 

Expenses recognized from station barter arrangements

 

57,365

 

54,567

 

48,159

 

Depreciation and amortization

 

171,393

 

185,939

 

260,526

 

Stock-based compensation

 

1,498

 

1,399

 

1,559

 

Other operating divisions’ expenses

 

16,375

 

6,051

 

8,910

 

Corporate general and administrative expenses

 

25,255

 

19,795

 

19,750

 

Impairment and write down charge of long-lived assets

 

 

 

16,075

 

Restructuring costs

 

 

 

3,700

 

Contract termination costs

 

 

 

5,135

 

Operating income

 

$

173,023

 

$

184,630

 

$

38,003

 

Cumulative effect of change in accounting principle

 

$

 

$

(566,404

)

$

 

Net income (loss)

 

$

24,392

 

$

(564,494

)

$

(127,722

)

Net income (loss) available to common shareholders

 

$

14,042

 

$

(574,844

)

$

(138,072

)

 

26



 

RESULTS OF OPERATIONS

 

Overview

 

During the beginning of 2003, our operating results reflected an overall increase in advertising revenues experienced by the broadcasting industry, partially offset by the negative effect of the war in Iraq.  Excluding the effect of political advertising revenue, we continued to see an increase in local advertising spending primarily due to our direct mail initiatives and growth in our largest categories of automotive and services.  National sales declined due to lower advertising spending primarily by soft drink, fast food and movie advertisers.    Due to the biennial cycle for political races and elections, we expect to benefit in 2004 from additional political revenues due to the Presidential and other federal, state and local elections, as well as benefit from additional revenues from our direct mail initiatives.

 

Our results also include increased expenses reflecting continued expansion of our News Central operations, our direct mail sales effort and our continued expenditures related to our conversion to digital television.  Using our News Central model we continued to implement local news programming, which brought our total news franchise to 38 stations in 31 markets with 13 of those stations in 11 markets operating under News Central.  Our focus for 2004 will primarily be on adding additional news dayparts and converting certain existing news stations to the more cost effective News Central model.  We continue to target direct mail advertisers and introduce the direct mail advertisers to television as a medium to reach their customers.  We are expanding our direct mail initiatives with plans to add more mailings during 2004.  We expect capital expenditures for the year of approximately $40 million, as described later in this section under the heading, Liquidity and Capital Resources.

 

Years Ended December 31, 2003 and 2002

 

Net income available to common shareholders for the year ended December 31, 2003 was $14.0 million or $0.16 per share, compared to a net loss of $574.8 million or a loss of $6.74 per common share for the year ended December 31, 2002.  The primary reason for the reduction in the net loss was the adoption of SFAS No. 142, Goodwill and Other Intangible Assets during the first quarter of 2002.  As a result of adopting SFAS No. 142, we recorded an impairment charge of $566.4 million, related to our broadcast licenses and goodwill, which was reflected as a cumulative effect of a change in accounting principle in our consolidated statement of operations, net of related tax benefit of $30.4 million during the first quarter of 2002.  We also recorded an unrealized gain on derivative instruments of $17.4 million for the year ended December 31, 2003 compared to an unrealized loss on derivative instruments of $30.9 million for the year ended December 31, 2002.   These were non-cash charges which had no effect on our liquidity or capital resources currently or prospectively.  (See Note 1, Summary of Significant Accounting Policies, Note 3, Goodwill and Other Intangible Assets and Note 7, Derivative Instruments in the Notes to our Consolidated Financial Statements.)

 

Net broadcast revenues decreased to $661.8 million for the year ended December 31, 2003 from $670.5 million for the year ended December 31, 2002, or 1.3%.  During the year ended December 31, 2003, we had decreased revenue due to cyclical or non-recurring events as follows:  $2.2 million related to the war in Iraq, $23.1 million related to political advertising, $1.6 million related to the Super Bowl and $1.0 million related to the Olympics.  The decline in Super Bowl revenue occurred because the Super Bowl aired on our eight ABC stations during 2003 versus our twenty FOX stations during 2002.  The Super Bowl aired on our three CBS stations in 2004 and will air on our twenty Fox stations in 2005 and on our eight ABC stations in 2006.  The decreased revenue due to cyclical or non-recurring events was greatly offset by increased revenue of $14.7 million related to our direct mail initiative.  From a revenue category standpoint, the year ended December 31, 2003 was positively impacted by higher advertising revenue generated from the automotive, professional service, school, paid programming, restaurant and home product sectors, offset by decreases in political, soft drink, fast food, movie, telecommunication and retail sectors.

 

During the year ended December 31, 2003, national revenues decreased to $251.9 million or 7.4%, from $271.9 million during the same period last year.  National political revenues decreased $16.5 million or 82.1%.  During the year ended December 31, 2003, local revenues increased to $379.2 million or 2.8% from $369.0 million during the same period last year.  Local political revenues decreased $6.5 million or 79.8%, offsetting 1.8% of the increase in total local revenues.  The decrease in political revenues was primarily the result of many more elections held during the 2002 period, as compared to the same period in 2003.

 

National revenues, excluding political revenues, decreased $3.4 million to $248.3 million or 1.4%, during the year ended December 31, 2003 from $251.7 million for the same period last year.  Local revenues, excluding political revenues, increased $16.7 million to $377.5 million or 4.6%, during the year ended December 31, 2003 from $360.8 million for the same period last year.  Excluding political revenues, national revenues declined due to lower advertising spending primarily in the soft drink, fast food, telecommunications, and movie sectors.  The increase in local revenues is related to our continued

 

27



 

focus on local sales and our direct mail conversion initiative that, as noted above, generated increased revenues of $14.7 million during the year ended December 31, 2003, as compared to the same period last year.

 

From a network affiliate perspective, broadcast revenue from time sales at our FOX affiliates, which represents 37.6% of the total, decreased $3.8 million to $237.1 million, or 1.6% during the year ended December 31, 2003 from $240.9 million for the same period last year.  Excluding the political revenue decrease of $4.7 million in the year ended December 31, 2003 as compared to the same period last year, our FOX affiliate would have experienced growth of 0.4%.  Our ABC, CBS, and NBC network affiliates, representing 16.6%, 7.4%, and 4.2%, respectively of total net time sales experienced similar results.  Excluding political revenue decreases in the year ended December 31, 2003 as compared to the same period last year of $9.5 million, $4.5 million, and $2.9 million, respectively, ABC, CBS, and NBC affiliates would have experienced growth of 2.6%, 2.5%, and 5.5%.  Our UPN and WB affiliates experienced growth for the year ended December 31, 2003 excluding political revenue, of 9.4% and 2.2%, respectively, compared with the year ended December 31, 2002.

 

During the year ended December 31, 2003, the G1440 operating divisions’ revenue that related to software development and consulting increased by $0.4 million to $4.7 million, or 9.3%, from $4.3 million for the same period last year.  Other operating divisions’ revenue related to our interest in Acrodyne increased by $9.9 million because beginning January 1, 2003, we commenced consolidating the financial statements of Acrodyne and discontinued accounting for the investments under the equity method of accounting.  Other operating divisions’ expenses increased by $10.3 million, of which $11.4 million resulted from the consolidation of Acrodyne, offset by a decrease in general and administrative costs of $1.1 million for G1440, primarily related to the consolidation from three offices to one office and continued focus on cost reduction, for the year ended December 31, 2003, as compared to the year ended December 31, 2002.

 

Station production expenses were $147.9 million for the year ended December 31, 2003 compared to $140.1 million for the year ended December 31, 2002, an increase of $7.8 million, or 5.6%.  The increase in station production costs primarily related to an increase in promotion costs of $3.3 million during the February 2003 ratings sweeps compared to February 2002, when we reduced our spending due to direct competition from the Olympics, offset by decreased promotional spending in the second and third quarter of $0.3 million in six of our markets.  We also experienced increases in spending of $2.6 million for the News Central expansions in our Tampa, Flint, Milwaukee, Birmingham, Las Vegas, Cincinnati, and Greensboro markets, Nielsen rating service fees of $1.1 million related to new contracts for eleven stations, $1.1 million in affiliate fees, engineering costs of $0.5 million related to news expansions in the fourth quarter, the full year effect of the addition of our WNAB-TV outsourcing agreement during the second quarter of 2002, and increased electricity costs related to digital TV of $0.4 million.  These increases were offset by a decrease in programming and production costs of $0.5 million related to our outsourcing and LMA agreements, a decrease in music license fees of $0.3 million, and other miscellaneous decreases of $0.1 million. Going forward we will continue our news expansion by bringing news to new markets, converting certain existing news stations to the more cost effective News Central model, and adding additional news dayparts at other stations.

 

Station selling, general and administrative expenses were $145.9 million for the year ended December 31, 2003 compared to $143.3 million for the year ended December 31, 2002, an increase of $2.6 million, or 1.8%. We experienced increases in direct mail marketing campaign costs of $3.2 million, sales expense for the addition of our WNAB-TV outsourcing agreement of $0.5 million, an increase in sales compensation costs of $2.9 million, legal fees of $0.5 million, and miscellaneous general and administrative costs of $0.1 million.  We will continue our direct mail initiative with plans to add additional mailings during 2004.  These increases were offset by a decrease in selling, general and administrative expenses related to a reduction of $2.4 million in bad debt expense as a result of improvements in the economy, national commissions of $0.9 million, expenses for Cunningham of $0.6 million, trade expense of $0.3 million, property taxes of $0.3 million, and vacation expense of $0.1 million.

 

Depreciation and amortization decreased $14.5 million to $171.4 million for the year ended December 31, 2003 from $185.9 million for the year ended December 31, 2002.  The decrease in depreciation and amortization for the year ended December 31, 2003, as compared to the year ended December 31, 2002 was related to a decrease in amortization of $20.2 million related to our program contract costs and NRV adjustments as a result of a lower cost of additions of new programming during 2003 as compared to 2002 and a decrease in NRV adjustments, offset by an increase in fixed asset depreciation of $5.7 million related to our property additions, primarily resulting from our digital television conversion and centralized news investments.   We expect amortization related to our program contract costs will decrease from 2003 but it will be a smaller decrease than we had from 2002 to 2003.  We will have additional property additions in 2004 related to the completion of our digital roll-out and the expansion of our news.

 

Corporate general and administrative expenses increased $5.5 million to $25.3 million for the year ended December 31, 2003 from $19.8 million for the year ended December 31, 2002, or 27.8%. Corporate general and administrative expense

 

28



 

represents the cost to operate our corporate headquarters location.  Such costs include corporate departmental salaries, bonuses and fringe benefits, directors and officers’ liability insurance, rent, telecommunications, consulting fees, legal and accounting fees and director fees.  Corporate departments include executive committee, treasury, finance and accounting, human resources, technology, corporate relations, legal, sales, operations, purchasing, programming, corporate direct mail administration and centralized news.  The increase in corporate general and administrative expenses primarily relates to an increase of $3.2 million for the launch of our centralized news and weather format as well as the centralization of our promotion and programming operations, consulting fees of $0.9 million, increased costs for telecommunications related to upgrades of $0.5 million, insurance costs of $0.5 million, administrative expenses related to our direct mail initiative of $0.2 million and other miscellaneous increases in expense of $0.2 million.

 

Interest expense increased to $128.2 million for the year ended December 31, 2003 from $126.5 million for the year ended December 31, 2002 or 1.3%.  The increase in interest expense resulted from the higher interest expense from the redemption of HYTOPS, offset by financing of indebtedness at lower interest rates during July, November, and December 2002 and May 2003.  Subsidiary trust minority interest expense decreased to $11.2 million for the year ended December 31, 2003 from $23.9 million for the year ended December 31, 2002, or 53.1%, as a result of the redemption of HYTOPS in June of 2003.

 

Our income tax provision was $15.7 million for the year ended December 31, 2003 compared to an income tax provision of $4.2 million for the year ended December 31, 2002.  Our tax rate changed to a provision in 2003, from a benefit in 2002, because we reported taxable net income in 2003, compared to a net loss in 2002.  The effective tax rate from continuing operations decreased slightly to 40.8% for the year ended December 31, 2003 from 41.0% for the year ended December 31, 2002.

 

Years Ended December 31, 2002 and 2001

 

During 2002, we continued to see strengthening in our broadcast business even without regard to the significant inflow of political advertising revenues. Net broadcast revenues, excluding political revenues, grew despite the economy not being in a full recovery and a threat of war looming. The growth came from both the local and national markets. Throughout 2002, our quarterly revenues, excluding political, grew at successively higher growth rates.

 

Net loss available to shareholders for the year ended December 31, 2002 was $574.8 million or net loss of $6.74 per share compared to net loss of $138.1 million or loss of $1.64 per share for the year ended December 31, 2001. The net loss for the year ended December 31, 2002 was largely the result of the cumulative effect of change in accounting principle of $566.4 million net of taxes.

 

As a result of adopting SFAS No. 142, we recorded an impairment charge of $566.4 million related to our broadcast licenses and goodwill reflected as a cumulative effect of a change in accounting principle on our consolidated statement of operations, net of the related tax benefit of $30.4 million during the first quarter 2002. This was a non-cash charge which had no effect on our liquidity or capital resources currently or prospectively. Without this charge, our net loss available to shareholders during the year ended December 31, 2002 would have been $8.4 million. (See Note 3, Goodwill and Other Intangible Assets, in our Notes to our Consolidated Financial Statements.)

 

Net broadcast revenues increased to $670.5 million for the year ended December 31, 2002 from $623.8 million for the year ended December 31, 2001 or 7.5%. The year ending December 31, 2002 was positively impacted by higher advertising revenues generated from the political, automotive, services, restaurants, home products, schools and beer/wine, offset by weakness in the fast food and soft drink sectors. During the year ended December 31, 2002, national revenues increased to $271.9 million or 7.0%, from $254.0 million during 2001. National political revenues increased $19.1 million or 1,888.0%. During the year ended December 31, 2002, local revenues increased to $369.0 million, or 8.3%, from $340.6 million during 2001. Local political revenues increased $6.9 million, or 556.0%, representing 2.0% of the increase in total local revenues. The increase in political revenues was primarily the result of the several primary and general elections during 2002. During the year ended December 31, 2002, we had increased revenue of $6.6 million related to our direct mail initiative, $2.2 million related to the Super Bowl and $1.0 million related to the Olympics. During the year ended December 31, 2001 we estimate that we had decreased revenues of $5.4 million related to the terrorist attacks of September 11, 2001.

 

National revenues, excluding political revenues, declined $1.3 million to $251.7 million or 0.5%, during the year ended December 31, 2002 from $253.0 million during the year ended December 31, 2001. Local revenues, excluding political revenues, increased $21.5 million to $360.8 million, or 6.3%, during the year ended December 31, 2002 from $339.3 million during 2001.

 

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Same station basis is a comparison of only the stations that we owned or provided programming and operating services pursuant to an LMA for both entire years ending December 31, 2002 and 2001. Comparing results on a “same stations basis” enhances the understanding of our business and revenue growth because we are able to disclose our ability to grow revenue at television stations owned and operated during the two most recent fiscal years. This enables us to eliminate the impact of partial year activity of acquisitions and dispositions occurring during the two most recent fiscal years. While reporting actual historical results for all stations owned and operated during the fiscal year is vital to understanding our performance, we believe that it is important to analyze stations owned during both fiscal years as a measure of our operating performance. On a same station basis for the year ended December 31, 2002, national revenues including political revenues increased $17.2 million, or 6.8%, and local sales increased $29.4 million, or 8.8%, over 2001. The increase in national revenues was primarily due to the increase in political revenues. The increase in local revenues is related to our continued focus on developing a strong local sales force at each of our stations.

 

In addition, for the year ended December 31, 2001, the events of September 11, 2001 had a direct impact on the revenues of media related businesses. The terrorist attacks led to the pre-emption and cancellation of advertisements, which caused an estimated $5.4 million revenue loss during 2001.

 

The network affiliations that experienced the largest revenue growth for the year ended December 31, 2002 were our NBC and CBS affiliates which increased 21.3% and 19.3%, respectively, compared with the year ended December 31, 2001. Our ABC and FOX affiliates experienced revenue growth of 11.3% and 9.1%, respectively, for the year ended December 31, 2002 as compared to the year ended December 31, 2001. The WB affiliates’ revenue increased 2.0% for the year ended December 31, 2002 as compared to the year ended December 31, 2001. The UPN affiliates’ revenue decreased 1.7% for the year ended December 31, 2002 as compared to the year ended December 31, 2001.

 

Other revenue decreased to $4.3 million for the year ended December 31, 2002 from $6.9 million for the year ended December 31, 2001 or 37.7%. The decrease in revenue relates to a decreased demand for services from our software development and consulting company, due to the slow economy and a decrease in revenue of $0.4 million related to the closing of the San Francisco office during the first quarter 2001.

 

Station production expenses decreased $2.6 million to $140.1 million for the year ended December 31, 2002 from $142.7 million for the year ended December 31, 2001. The decrease in operating costs related to a decrease of $6.5 million related to our LMA fees, due to the acquisition of 15 television broadcast licenses during the three months ended March 31, 2002. Our results of operations from LMA stations are typically lower than they would have been if we had owned the televisions stations. The results of operations of our LMA stations was lower because of higher programming and production expenses due to the incurrence of the LMA fees.  News costs decreased by $3.5 million related to the discontinuation of news at our stations KDNL-TV, St. Louis, Missouri and WXLV-TV, Winston-Salem, North Carolina. In addition, other miscellaneous production expense decreased by $0.4 million. These decreases were offset by increases of $2.1 million in engineering costs, $1.7 million related to music license fees, $1.5 million in programming fees related to increased costs for affiliate agreements, $1.3 million in rating service fees, and $1.2 million related to increased promotional spending during the May Sweeps.

 

Station selling, general and administrative expenses increased $0.4 million to $149.4 million for the year ended December 31, 2002 from $149.0 million for the year ended December 31, 2001. Sales commissions increased by $3.3 million as a result of improved sales. This increase was offset by decreases of $1.6 million related to a decrease in national representation commissions, $1.2 million related to a reduction in bad debt expense, and $0.1 million related to traffic costs.

 

Depreciation and amortization decreased $74.6 million to $185.9 million for the year ended December 31, 2002 from $260.5 million for the year ended December 31, 2001. The decrease in depreciation and amortization for the year ended December 31, 2002 as compared to the year ended December 31, 2001 was related to the adoption of SFAS No. 142 which resulted in the discontinuation of amortization of our goodwill and broadcast licenses. Amortization of intangible assets decreased by $93.0 million, offset by an increase aggregating $15.0 million related to amortization of our program contract costs and net realizable value adjustments related to our addition of new programming primarily consisting of Dharma & Greg and Will & Grace as well as write downs primarily related to additional seasons for Frasier, Drew Carey, Spin City, Just Shoot Me, and Third Rock from the Sun and an increase in fixed asset depreciation of $3.4 million related to our property additions, primarily resulting from our digital television conversion.

 

For the year ended December 31, 2002, we did not incur any restructuring charges, impairment and write-down of long-lived assets (except for the impact of adopting SFAS No. 142) or contract termination costs. During the three months ended March 31, 2001, we offered a voluntary early retirement program to our eligible employees and implemented a restructuring program to

 

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reduce operating and overhead costs. As a result, we reduced our staff by 186 employees and incurred a restructuring charge of $2.3 million, which is included in the accompanying consolidated statements of operations. During September 2001, our station KDNL-TV in St. Louis, Missouri, discontinued programming its local news broadcast. As a result, we incurred a restructuring charge of $1.1 million. During December 2001, WXLV-TV in Winston-Salem, North Carolina discontinued programming its local news broadcast. As a result we incurred a restructuring charge of $0.3 million. The restructuring charges related to severance and operating contract termination costs. During the year ended December 31, 2001, we incurred an impairment and write-down of long-lived assets of $5.5 million and contract termination costs of $5.1 million.

 

Operating income increased $146.6 million to $184.6 million for the year ended December 31, 2002 from $38.0 million for the year ended December 31, 2001, or 385.8%. The net increase in operating income for the year ended December 31, 2002 as compared to the year ended December 31, 2001 was primarily attributable to a decrease in amortization due to the adoption of SFAS No. 142 which resulted in the discontinuation of amortization of our goodwill and FCC licenses offset by an increase in program contract amortization expense and property and equipment depreciation expense as discussed above. Operating income was also affected by a decrease in program and production expenses due to the acquisition of 15 television broadcast licenses resulting in our ability to operate at a cost lower than operating those stations as LMA structures and reduced spending for sweeps promotion due to direct competition from the Olympics. During the year ended December 31, 2001, we incurred a loss of $16.1 million related to a write down charge of long-lived assets. This charge is comprised of goodwill related to our software development company and our station KBSI-TV in Paducah, Kentucky, and a write off of fixed assets which represent the net book value of damaged, obsolete or abandoned property. We also incurred contract termination costs of $5.1 million and restructuring charges of $3.7 million as a result of a voluntary early retirement program and cancellation of local news programs during the year ended December 2001. We did not incur any write-down charge of long-lived assets, contract termination or restructuring charges for the year ended December 31, 2002.

 

Interest expense decreased to $126.5 million for the year ended December 31, 2002 from $143.6 million for the year ended December 31, 2001, or 11.9%. The decrease in interest expense for the year ended December 31, 2002 resulted from the refinancing of indebtedness at lower interest rates during December 2001, March 2002, July 2002, November 2002 and December 2002 and an overall lower interest rate environment.

 

Our income tax provision was $4.2 million for the year ended December 31, 2002 compared to an income tax benefit of $59.6 million for the year ended December 31, 2001. The effective tax rate from continuing operations increased to 41.0% for the year ended December 31, 2002, from 31.3% for the year ended December 31, 2001.  The increase is primarily because (prior to the implementation of SFAS No. 142 for 2002) our reported income in 2001 was reduced by amortization of goodwill, which was non-deductible for tax purposes.

 

Loss related to investments decreased to $1.2 million for the year ended December 31, 2002 as compared to $7.6 million for the year ended December 31, 2001. The loss related to investments for the year ended December 31, 2002 primarily relates to a loss of $1.4 million as a result of a write down of our investment in Allegiance Capital, a loss of $0.1 million from the sale of our interest in Synergy Brands, Inc., offset by a gain of $0.3 million related to proceeds of a settlement to shareholders of Acrodyne.

 

We recognized income from discontinued operations of $7.9 million, which includes a gain on the sale of WTTV-TV in Indianapolis, Indiana of $7.5 million for the year ended December 31, 2002 as compared to a loss from discontinued operations of $52,000 for the year ended December 31, 2001.

 

For the year ended December 31, 2002, we reported a $9.8 million loss related to the call premium and write-off of deferred financing costs and interest, net of taxes, resulting from the repayment of our $300.0 million Term Loan Facility and 1998 Bank Credit Agreement and the early redemption of our 9% senior subordinated notes due 2007 and our 8.75% senior subordinated notes due 2007.

 

For the year ended December 31, 2001, we reported a $14.2 million loss related to the call premium and write-off of deferred financing costs and interest, net of taxes, resulting from the early redemption of our 10% senior subordinated notes due 2005, and amendments to our bank credit agreement.

 

As a result of the implementation of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, one of our derivatives does not qualify for special hedge accounting treatment. Therefore, this derivative must be recognized in the balance sheet at fair market value and the changes in fair market value are reflected in earnings. As a result, we recognized $32.2 million of losses during 2001 and $30.9 million of losses during 2002.

 

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Recent Accounting Pronouncements

 

We adopted Statement of Financial Accounting Standard (SFAS) No. 145, Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No,. 13 and Technical Corrections on January 1, 2003.  SFAS No. 145 requires us to record gains and losses on extinguishment of debt as a component of income from continuing operations rather than as an extraordinary item and we have reclassified such items for all periods presented.  There are other provisions contained in SFAS No. 145 that do not have a material effect on our financial statements.  For the year ended December 31, 2002, net loss from continuing operations increased to $6.0 million from net income of $3.9 million and the related loss per share increased to $0.19 per share from $0.08 loss per share after we reclassified our extraordinary item.

 

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51 (FIN 46).  FIN 46 introduces the variable interest consolidation model, which determines control and consolidation based on potential variability in gains and losses of the entity being evaluated for consolidation.  The FASB delayed the effective date of FIN 46 for certain variable interest entities until the first interim period ending after December 15, 2003  We are currently assessing various transactions to determine whether they could be considered a variable interest entity (VIE) and whether we would be the primary beneficiary under the amended guidance of FIN 46.

 

We have determined that the unrelated third-party owner of WNAB-TV in Nashville may be a VIE and that we may be the primary beneficiary of the variable interests as a result of the terms of our outsourcing agreement, put options and call options. As a result, we may be required to consolidate the assets and liabilities of WNAB-TV at their fair market values as of March 31, 2004 and we are currently assessing the impact of consolidating WNAB-TV on our results of operations.  We have not completed our analysis at this timeWe made payments to the unrelated third party owner of WNAB-TV of $2.3 million and $2.8 million related to our outsourcing agreement for the twelve months ended December 31, 2003 and December 31, 2002, respectively.  On January 2, 2003, we made an $18.0 million non-refundable deposit against the purchase price of the put or call option on the non-license assets.  We believe that our maximum exposure to loss as a result of our involvement with WNAB-TV consists of the fees that we pay related to the outsourcing agreement as well as any payments that we would be required to make under the put options held by the current owner related to the license and non-license assets.  (See Note 9, Commitments and Contingencies, WNAB Options in the Notes to our Consolidated Financial Statements.).

 

We have determined that Cunningham Broadcasting Corporation (Cunningham) is a VIE and that we are the primary beneficiary of the variable interests.  We already consolidate Cunningham; therefore, the implementation of FIN 46 will not have a material effect on our financial statements with respect to our variable interest in Cunningham. We made LMA payments to Cunningham of $4.7 million, $4.0 million, and $11.8 million for the years ended December 31, 2003, 2002 and 2001, respectively.  We received payments from Cunningham of $0.5 million and $0.2 million for the years ended December 31, 2003 and 2002, respectively. We believe that our maximum exposure to loss as a result of our involvement with Cunningham consists of the fees that we pay related to the LMA agreements as well as payments that we would make as a result of exercising our option to acquire Cunningham, which provides for an option exercise price based on a formula that provides a 10% annual return to Cunningham. (See Note 9, Commitments and Contingencies in the Notes to our Consolidated Financial Statements.)

 

We are currently evaluating the applicability of FIN 46 on our LMAs and outsourcing agreements and the possible impact on our results of operations and financial position.  We are currently reviewing these agreements to determine if the licensor represents a variable interest entity to us.  We believe the exposure to loss because of our involvement with the license holder for each station is minimal and can be measured by the incremental depreciation expense from the addition of the fixed assets of the license holder.

 

In January 2003, the Emerging Issues Task Force (EITF) issued EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.  EITF 00-21 addresses the determination of whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement.  EITF 00-21 does not otherwise change the applicable revenue recognition criteria.  We adopted issue 00-21 on July 1, 2003 and have determined that our direct mail agreements constitute revenue arrangements with multiple deliverables that contain more than one unit of accounting. Consequently, we allocate the consideration that we receive for certain of these agreements between television accounting units and direct mail accounting units and we recognize the revenue and related expenses when the television spots are aired and when the direct mail pieces are mailed, respectively.

 

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Liquidity and Capital Resources

 

Our primary sources of liquidity are cash provided by operations and availability under our 2002 Bank Credit Agreement. The 2002 Bank Credit Agreement consists of a $225.0 million Revolving Credit Facility maturing on June 30, 2008 and a $500.0 million Term Loan B Facility repayable in consecutive quarterly installments, amortizing 0.25% per quarter, commencing June 30, 2004 and continuing through its maturity on December 31, 2009.  The applicable interest rate on the Revolving Credit Facility is either LIBOR plus 1.25% to 2.25% or the alternative base rate plus 0.25% to 1.25% adjusted quarterly based on the ratio of total debt, net of cash, to four quarters’ trailing earnings before interest, taxes, depreciation and amortization, as adjusted in accordance with the 2002 Bank Credit Agreement.  The applicable interest rate on the Term Loan B Facility is either LIBOR plus 2.25% or the alternative base rate plus 1.25%.  Availability under the Revolving Credit Facility does not reduce incrementally and terminates at maturity.  We are required to prepay the Term Loan Facility and reduce the Revolving Credit Facility with (i) 100% of the net proceeds of any casualty loss or condemnation and; (ii) 100% of the net proceeds of any sale or other disposition of our assets in excess of $100 million in the aggregate for any fiscal year, to the extent not used to acquire new assets.

 

As of December 31, 2003, we had $28.7 million in cash balances and working capital of approximately $15.6 million. We anticipate that cash flow from our operations and revolving credit facility will be sufficient to satisfy our debt service obligations, dividend requirements, capital expenditure requirements and operating cash needs for the next year.  As of February 13, 2004, we had borrowed $460.9 million under our Term Loan B Facility and had not borrowed under our revolving credit facility. The remaining balance available under the revolving credit facility was $225.0 million as of February 13, 2004. Our ability to draw down our line of credit is based on pro forma trailing cash flow levels as defined in our 2002 Bank Credit Agreement and for the twelve months ended December 31, 2003, we had approximately $225.0 million available of current borrowing capacity under our revolving credit facility.

 

On April 19, 2002, we filed a $350.0 million universal shelf registration statement with the Securities and Exchange Commission which will permit us to offer and sell various types of securities from time to time. Offered securities may include common stock, debt securities, preferred stock, depositary shares or any combination thereof in amounts, prices and on terms to be announced when the securities are offered. If we determine it is in our best interest to offer any such securities, we intend to use the proceeds for general corporate purposes, including, but not limited to, the reduction, redemption or refinancing of debt or other obligations, acquisitions, capital expenditures, and working capital.

 

During May 2003, we completed a private placement of $150.0 million aggregate principal amount of 4.875% Convertible Senior Subordinated Notes due 2018 (Convertible Notes).  The Convertible Notes were issued at par, mature on July 15, 2018, and have the following characteristics:

 

      The notes are convertible into shares of our Class A common stock at the option of the holder upon certain circumstances.  The conversion price is $22.37 until March 31, 2011 at which time the conversion price increases quarterly until reaching $28.07 on July 15, 2018.

      The notes may be put to us at par on January 15, 2011, or called thereafter by us.

      The notes bear cash interest at an annual rate of 4.875% until January 15, 2011 and bear cash interest at an annual rate of 2.00% from January 15, 2011 through maturity.

      The principal amount of the notes will accrete to 125.66% of the original par amount from January 15, 2011 to maturity so that when combined with the cash interest, the yield to maturity of the notes will be 4.875% per year.

      Under certain circumstances, we will pay contingent cash interest to the holders of the Convertible Notes during any six month period from January 15 to July 14 and from July 15 to January 14, commencing with the six month period beginning January 15, 2011.  This contingent interest feature is an embedded derivative which had a negligible fair value as of December 31, 2003.

 

We used the net proceeds from this private placement, along with the net proceeds from the issuance of $100.0 million of 8% Senior Subordinated Notes due 2012, to finance the redemption of the 11.625% High Yield Trust Originated Preferred Securities due 2009 (HYTOPS) to repay debt outstanding under our bank credit agreement and for general corporate purposes.  Net costs associated with the offering totaled $4.7 million.  These costs were capitalized and are being amortized as interest expense over the term of the Convertible Notes.

 

During May 2003, we completed a private placement of $100.0 million aggregate principal amount of Senior Subordinated Notes, which was an add-on issuance under the indenture relating to our 8% Senior Subordinated Notes due 2012.  The Senior Subordinated Notes were issued at a price of $105.3359 plus accrued interest from March 15, 2003 to May 28, 2003, yielding a rate of 7.00%.  We used the net proceeds, along with the net proceeds received in connection with our issuance of

 

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the Convertible Notes, to finance the redemption of the HYTOPS and for general corporate purposes.  Net costs associated with the offering totaled $1.4 million.  These costs were capitalized and are being amortized to interest expense over the term of the Senior Subordinated Notes.

 

On June 20, 2003, we redeemed the $200.0 million aggregate principal amount of the HYTOPS, plus the associated 4.65% call premium and accrued interest thereon.  The redemption was funded through the issuance of the 8% Senior Subordinated Notes due 2012 and the Convertible Notes.  We recognized a loss on debt extinguishment of $15.2 million consisting of a $9.3 million call premium, a write-off of the previous debt acquisition costs of $3.7 million and consideration and other fees of $2.2 million.

 

The guarantors of our registered debt securities are 100% owned by the parent and are comprised of certain of our subsidiaries whose guarantees are full and unconditional and joint and several. (See Note 18 in our consolidated financial statements for the condensed consolidating financial statements of our guarantor and non-guarantor subsidiaries.) Neither the parent nor the guarantors have any significant restrictions on their ability to obtain funds from their subsidiaries in the form of dividends or loans.

 

We hold two interest rate swap agreements that have a total notional amount of $575 million that expire on June 5, 2006.  During June 2003, we assigned $200 million of the notional amount to a second financial institution.  The instrument with a notional amount of $375 million contains a European style (that is, exercisable only on the expiration date) termination option and can be terminated partially or in full by the counterparty on June 3, 2004 and June 3, 2005 at its fair market value.   We estimate the fair market value of the $375 million agreement at December 31, 2003 to be $35.1 million based on a quotation from the counterparty and this amount is reflected as a component of other long-term liabilities on our consolidated balance sheet as of December 31, 2003.  If the counterparty chooses to partially or fully exercise its option to terminate the agreement, we will fund the payment from cash generated from our operating activities and/or borrowings under our bank credit agreement.

 

The weighted average interest rates for outstanding indebtedness relating to our Bank Credit Agreement during 2002 and as of December 31, 2002 were 5.14% and 4.12%, respectively. The weighted average interest rates of our Bank Credit Agreement during 2003 and as of December 31, 2003 were 3.64% and 3.41%, respectively.  During 2003, the interest expense relating to the Bank Credit Agreements was $18.0 million.  This trend primarily relates to a lower interest rate environment and there can be no assurances that this trend will continue.

 

Net cash flows from operating activities decreased to $148.8 million for the year ended December 31, 2003 from $149.6 million for the year ended December 31, 2002. We received income tax refunds net of payments of $38.3 million for the year ended December 31, 2003 as compared to income tax refunds, net of payments of $44.1 million for the year ended December 31, 2002. Interest payments on outstanding indebtedness and payments for subsidiary trust minority interest expense decreased $15.0 million, to $127.9 million for the year ended December 31, 2003 as compared to $142.9 million for the year ended December 31, 2002.  The decrease in interest payments was primarily due to the refinancing of indebtedness during November 2002, December 2002, and May 2003 and the lower rates on our Bank Credit Agreement described above.  (See Note 4 — Notes Payable and Commercial Bank Financing in our Notes to our Consolidated Financial Statements for more details regarding the refinancing of our indebtedness.)  Program rights payments decreased to $105.5 million for the year ended December 31, 2003 from $106.3 million for the year ended December 31, 2002, or 0.8%.

 

Net cash flows used in investing activities were $93.0 million for the year ended December 31, 2003 as compared to net cash flows from investing activities of $52.8 million for the year ended December 31, 2002. The positive cash flow from investing activities for the year ended December 31, 2002 was primarily due to the sale of WTTV-TV broadcast assets and repayments of notes receivable.  For the year ended December 31, 2002, we received proceeds of $124.5 million from the sale of WTTV-TV, $0.7 million related to the sale of broadcast assets, and $30.3 million for the repayment of notes receivable. During 2003, there was no similar activity.

 

During the year ended December 31, 2003, we made cash payments of $18.0 million for the acquisition of broadcast assets, $5.7 million for the purchase of equity investments, and payments for property and equipment of $69.5 million, of which $30.9 million related to digital conversion costs and $24.1 million related to implementation of our News Central format.  During the year ended December 31, 2002, we made equity investments of approximately $25.8 million and we made payments for property and equipment of $62.9 million of which $49.6 million related to digital conversion costs.  We funded these acquisitions using cash provided by operating activities and borrowings under our Revolving Credit Facility.

 

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For 2004, we anticipate incurring approximately $40.0 million of capital expenditures, of which approximately $18.0 million is intended to substantially complete our digital television roll-out, $10.0 million is for station maintenance and equipment replacement, $8.0 million is to consolidate building and tower needs in some markets and $4.0 million is for the addition of News Central in two additional markets.  In addition, we anticipate that future requirements for expenditures will include expenditures incurred during the ordinary course of business and additional strategic station acquisitions and equity investments if suitable investments can be identified on acceptable terms. We expect to fund such capital expenditures with cash generated from operating activities and funding from our Revolving Credit Facility, issuance of securities pursuant to our universal shelf-registration statement described above or a private placement of securities.

 

Net cash flows used in financing activities were $32.4 million for the year ended December 31, 2003 compared to net cash flows used in financing activities of $229.2 million for the year ended December 31, 2002.  During the year ended December 31, 2003, we repaid a net of $10.8 million, whereas in the comparable period in 2002, we repaid a net of $229.5 million in indebtedness.  We incurred deferred financing costs of $7.4 million related to the add-on issuance of our 8% Senior Subordinated Notes and issuance of our Convertible Notes, we redeemed $200.0 million aggregate principal amount of the HYTOPS utilizing $209.3 million from the net issuances for the HYTOPS principal and call premium, and we repurchased $1.5 million of our Class A common stock for the year ended December 31, 2003.  In comparison, during the year ended December 31, 2002, we paid deferred financing costs of $10.5 million.  During the year ended December 31, 2002, we received $21.8 million related to the termination of two of our derivative instruments with no similar activity occurring during 2003.  For the year ended December 31, 2003 and 2002, we paid quarterly dividends of $10.4 million on our Series D Preferred Stock.  We expect to incur these dividend payments in each of our future quarters and expect to fund these dividends with cash generated from operating activities and borrowings under our Bank Credit Agreement.

 

Income Taxes

 

The income tax provision from continuing operations increased to $15.7 million for the year ended December 31, 2003, from a benefit of $4.2 million for the year ended December 31, 2002.  For the year ended December 31, 2003, our pre-tax book income from continuing operations was $38.4 million and for the year ended December 31, 2002, our pre-tax book loss from continuing operations was $10.1 million.

 

As of December 31, 2003, we have a net deferred tax liability of $178.2 million as compared to a net deferred tax liability of $167.2 million as of December 31, 2002.  The increase in deferred taxes primarily relates to deferred tax liabilities associated with book and tax differences relating to the amortization and depreciation of intangible assets and fixed assets, offset by deferred tax assets resulting from Federal and state net operating losses (NOLs) generated during 2003.  Our tax rate changed to a provision in 2003 from a benefit in 2002 because we reported net income in 2003 compared to a net loss in 2002.  The effective tax rate from continuing operations decreased to 40.8% for the year ended December 31, 2003 from 41.0% for the year ended December 31, 2002.

 

Seasonality/Cyclicality

 

Our results usually are subject to seasonal fluctuations, which usually cause fourth quarter operating income to be greater than first, second and third quarter operating income.  This seasonality is primarily attributable to increased expenditures by advertisers in anticipation of holiday season spending and an increase in viewership during this period.  In addition, revenues from political advertising and the Olympics are higher in even numbered years.

 

Indebtedness and Other Commitments

 

Indebtedness under the bank credit agreement, as amended.  As of December 31, 2003, we owed $485.9 million under the bank credit agreement, as amended, and had a $225.0 million remaining balance available.

 

Indebtedness under notes.  We have issued and outstanding three series of senior subordinated notes with aggregate principal amount issued and outstanding of $1.1 billion.

 

Series D convertible exchangeable preferred stock.  We have issued 3,450,000 shares of series D convertible exchangeable preferred stock with an aggregate liquidation preference of approximately $172.5 million. The liquidation preference means we would be required to pay the holders of series D convertible exchangeable preferred stock $172.5 million before we paid holders of common stock (or any other stock that is junior to the series D convertible exchangeable preferred stock) in any liquidation of Sinclair. We are not obligated to buy back or retire the series D convertible exchangeable preferred stock, but may do so at our option at a conversion rate of $22.8125 per share. In some circumstances, we may also exchange the series D convertible exchangeable preferred stock for 6% subordinated debentures due 2012 with an aggregate principal amount of $172.5 million.

 

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Program contracts payable and programming commitments.  Total current and long-term program contracts payable at December 31, 2003 were $120.9 million and $92.3 million, respectively. In addition, we enter into commitments to purchase future programming. Under these commitments, we were obligated on December 31, 2003 to make future payments totaling $120.5 million.

 

Other.  Our commitments also include capital leases, operating leases, sports programming, personnel contracts and other liabilities. The amount of these commitments may be material.

 

CONTRACTUAL CASH OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTS

 

We have various contractual obligations which are recorded as liabilities in our consolidated financial statements.  Other items, such as certain purchase commitments and other executory contracts are not recognized as liabilities in our consolidated financial statements but are required to be disclosed.  For example, we are contractually committed to acquire future programming and make certain minimum lease payments for the use of property under operating lease agreements.

 

The following tables reflect a summary of our contractual cash obligations and other commercial commitments as of December 31, 2003:

 

 

 

2004

 

2005

 

2006

 

2007 and
thereafter

 

Total

 

 

 

(in thousands)

 

Notes payable, capital leases, and commercial bank financing (1)

 

62,514

 

63,863

 

63,957

 

2,016,688

 

2,207,022

 

Notes and capital leases payable to affiliates

 

6,737

 

7,661

 

5,303

 

28,367

 

48,068

 

Fixed rate derivative instrument

 

36,078

 

36,078

 

15,633

 

 

87,789

 

Operating leases

 

3,539

 

3,047

 

2,675

 

13,263

 

22,524

 

Employment contracts

 

7,694

 

2,678

 

449

 

5

 

10,826

 

Film liability – active

 

120,873

 

57,645

 

27,141

 

7,513

 

213,172

 

Film liability – future (2)

 

9,730

 

31,995

 

30,731

 

48,030

 

120,486

 

Programming services

 

14,243

 

3,520

 

971

 

1,416

 

20,150

 

Maintenance and support

 

3,810

 

1,696

 

344

 

1,623

 

7,473

 

Other operating contracts

 

3,657

 

1,866

 

1,257

 

2,758

 

9,538

 

Total contractual cash obligations

 

$

268,875

 

$

210,049

 

$

148,461

 

$

2,119,663

 

$

2,747,048

 

 

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Payments Due by Year

 

 

 

2004

 

2005

 

2006

 

2007 and thereafter

 

Total

 

 

 

( in thousands)

 

Other Commercial Commitments

 

 

 

 

 

 

 

 

 

 

 

Letters of credit

 

$

82

 

$

82

 

$

82

 

$

734

 

$

980

 

Guarantees

 

119

 

122

 

31

 

 

272

 

Investments (3)

 

9,045

 

 

 

 

9,045

 

Network affiliation agreements

 

12,810

 

7,423

 

1,874

 

1,893

 

24,000

 

Purchase options (4)

 

 

13,250

 

5,000

 

4,000

 

22,250

 

LMA and outsourcing agreements (5)

 

7,637

 

5,020

 

3,375

 

3,282

 

19,314

 

Total other commercial commitments

 

$

29,693

 

$

25,897

 

$

10,362

 

$

9,909

 

$

75,861

 

 


(1)   Only includes interest on fixed rate debt.

 

(2)   Future film liabilities reflect a license agreement for program material that is not yet available for its first showing or telecast.  Per SFAS No. 63, Financial Reporting for Broadcasters, an asset and a liability for the rights acquired and obligations incurred under a license agreement are reported on the balance sheet when the cost of each program is known or reasonably determinable, the program material has been accepted by the licensee in accordance with the conditions of the license agreement and the program is available for its first showing or telecast.

 

(3)   Commitments to contribute capital to Allegiance Capital, LP and Sterling Ventures Partners, LP.

 

(4)   We have entered into an agreement with a third party, whereby the third party may require us to purchase certain license and non-license broadcast assets at the option of the third party, no earlier than July 1, 2005.  The contractual commitment for 2006 and beyond represents the increase in purchase option price should the exercise occur in 2006 or 2007.

 

(5)   Certain LMAs require us to reimburse the licensee owner their operating costs.  Certain outsourcing agreements require us to pay a fee to another station for providing non-programming services.  The amount will vary each month and, accordingly, these amounts were estimated through the date of the agreements’ expiration, based on historical cost experience.

 

Risk Factors

 

We cannot identify nor can we control all circumstances that could occur in the future that may adversely affect our business and results of operations. Some of the circumstances that may occur and may impair our business are described below. If any of the following circumstances were to occur, our business could be materially adversely affected.

 

Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt obligations.

 

We have a high level of debt (totaling $1,732.5 million) compared to the book value of shareholders’ equity of $229.0 million. Our relatively high level of debt poses the following risks , particularly in periods of declining revenues:

 

      We use a significant portion of our cash flow to pay principal and interest on our outstanding debt and to pay dividends on preferred stock, limiting the amount available for working capital, capital expenditures and other general corporate purposes.

 

      Our lenders may not be as willing to lend additional amounts to us for future working capital needs, additional acquisitions, or other purposes.

 

      The interest rate under the bank credit agreement, as amended, is a floating rate, and will increase if general interest rates increase. This will reduce the funds available to repay our obligations and for operations and future business opportunities, and will make us more vulnerable to the consequences of our leveraged capital structure.

 

      We may be more vulnerable to adverse economic conditions than less leveraged competitors and thus less able to withstand competitive pressures.

 

      If our cash flow were inadequate to make interest and principal payments, we might have to refinance our indebtedness or sell one or more of our stations to reduce debt service obligations.

 

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      Our ability to finance our working capital needs and general corporate purposes for the public and private markets, as well as the associated cost of funding is dependent, in part, by out credit ratings.  As of December 31, 2003, our credit ratings, as assigned by Moody’s Investor Services (Moody’s) and Standard & Poor’s Ratings Services (S&P) are:

 

 

 

Moody’s

 

S&P

 

Senior Secured Credit Facilities

 

Ba2

 

BB

 

Senior Implied

 

Ba3

 

 

 

Senior Unsecured Issuer

 

Ba3

 

 

 

Corporate Credit

 

 

 

BB-

 

Senior Subordinated Notes

 

B2

 

B

 

Convertible Senior Subordinated Notes

 

B3

 

B

 

Convertible Preferred Stock

 

Caa1

 

B-

 

 

Any of these events could reduce our ability to generate cash available for investment or debt repayment or to make improvements or respond to events that would enhance profitability

 

We may be able to incur significantly more debt in the future, which will increase each of the foregoing risks related to our indebtedness.

 

At December 31, 2003, we had an additional $225.0 million available (subject to certain borrowing conditions) for additional borrowings under the bank credit agreement. In addition, under the terms of our debt instruments, we may be able to incur substantial additional indebtedness in the future, including additional senior debt and in some cases secured debt. Provided we meet certain financial and other covenants, the terms of the indenture governing our outstanding notes do not prohibit us from incurring such additional indebtedness. If we incur additional indebtedness, the risks described above relating to having substantial debt could intensify.

 

Our advertising revenue can vary substantially from period to period based on many factors beyond our control. This volatility affects our operating results and may reduce our ability to repay indebtedness or reduce the market value of our securities.

 

We rely on sales of advertising time for substantially all of our revenues and as a result, our operating results are sensitive to the amount of advertising revenue we generate. If we generate less revenue, it may be more difficult for us to repay our indebtedness and the value of all our business may decline. Our ability to sell advertising time depends on:

 

      the health of the economy in the areas where our stations are located and in the nation as a whole;

 

      the popularity of our programming;

 

      changes in the makeup of the population in the areas where our stations are located;

 

      pricing fluctuations in local and national advertising;

 

      the activities of our competitors, including increased competition from other forms of advertising-based mediums, particularly network, cable television, direct satellite television, internet and radio;

 

      the decreased demand for political advertising in non-election years; and

 

      other factors that may be beyond our control.

 

As a result of the foregoing factors, our advertising revenue has decreased significantly from levels prior to 2001 and our revenues and earnings have been, and may continue to be, adversely affected.

 

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The Iraq War resulted in a decline in advertising revenues and negatively impacted our operating results. Future conflicts may have a similar effect.

 

The war in Iraq resulted in a reduction in advertising revenues as a result of uninterrupted news coverage and general economic uncertainty. During the first quarter 2003, we experienced $2.2 million in advertiser cancellations and preemptions, which resulted in lower earnings than we would have experienced without this disruption. If the United States becomes engaged in similar conflicts in the future, they may have a similar adverse impact on our results of operations.

 

Promises we have made to our lenders limit our ability to take actions that could increase the value of our securities or may require us to take actions that decrease the value of our securities.

 

Our existing financing agreements prevent us from taking certain actions and require us to meet certain tests. These restrictions and tests may require us to conduct our business in ways that make it more difficult for us to repay our indebtedness or decrease the value of our business. These restrictions and tests include the following:

 

      Restrictions on additional debt,

 

      Restrictions on our ability to pledge our assets as security for our indebtedness,

 

      Restrictions on payment of dividends, the repurchase of stock and other payments relating to capital stock,

 

      Restrictions on some sales of assets and the use of proceeds of asset sales,

 

      Restrictions on mergers and other acquisitions, satisfaction of conditions for acquisitions, and a limit on the total amount of acquisitions without consent of bank lenders,

 

      Restrictions on the type of businesses we and our subsidiaries may be in,

 

      Restrictions on the type and amounts of investments we and our subsidiaries may make, and

 

      Financial ratio and condition tests including the ratio of earnings before interest, taxes, depreciation and amortization, as adjusted (adjusted EBITDA) to total interest expense, the ratio of adjusted EBITDA to certain of our fixed expenses, and the ratio of indebtedness to adjusted EBITDA.

 

Future financing arrangements may contain additional restrictions and tests. All of these restrictive covenants may restrict our ability to pursue our business strategies, prevent us from taking action that could increase the value of our securities, or may require actions that decrease the value of our securities. In addition, we may fail to meet the tests and thereby default on one or more of our obligations (particularly if the economy continues to soften and thereby reduces our advertising revenues). If we default on our obligations, creditors could require immediate payment of the obligations or foreclose on collateral. If this happened, we could be forced to sell assets or take other action that would reduce significantly the value of our securities and we may not have sufficient assets or funds to pay our debt obligations.

 

Key officers and directors have financial interests that are different and sometimes opposite to those of Sinclair and Sinclair may engage in transactions with these officers and directors that may benefit them to the detriment of other securityholders.

 

Some of our officers, directors and majority shareholders own stock or partnership interests in businesses that engage in television broadcasting, do business with us, or otherwise do business that conflicts with our interests. They may transact some business with us even when there is a conflict of interest or they may engage in business competitive to our business and those transactions may benefit the officers, directors or majority shareholders to the detriment of our other securityholders. David D. Smith, Frederick G. Smith, and J. Duncan Smith are each an officer and director of Sinclair, and Robert E. Smith is a director of Sinclair. Together, the Smiths hold shares of our common stock that control the outcome of most matters submitted to a vote of shareholders. The Smiths own a television station which is programmed pursuant to an LMA with us. The Smiths also own businesses that lease real property and tower space to

 

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us, buy advertising time from us, and engage in other transactions with us.  In addition, David D. Smith, our President and Chief Executive Officer, has a controlling interest in and is a member of the Board of Directors of Summa Holdings, Ltd., a company in which we hold a 17.5% equity interest and exercise significant influence over Summa by virtue of David D. Smith’s board seat and our board seat.  David D. Smith, Frederick G. Smith, J. Duncan Smith and Robert E. Smith and David B. Amy, our Executive Vice President and Chief Financial Officer together own less than 2.2% of Allegiance Capital Limited Partnership, a limited partnership in which we hold a 76.3% interest.  Also, David D. Smith, Frederick G. Smith, J. Duncan Smith and Robert E. Smith together own less than 1% of the stock of G1440, a company of which Sinclair owns approximately 90%.  We can give no assurance that these transactions, or any transactions that we may enter into in the future with our officers, directors or majority shareholders, have been, or will be, negotiated on terms as favorable to us as we would obtain from unrelated parties.

 

Maryland law and our financing agreements limit the extent to which our officers, directors and majority shareholders may transact business with us and pursue business opportunities that Sinclair might pursue. These limitations do not, however, prohibit all such transactions.

 

The Smiths exercise control over most matters submitted to a stockholder vote, and may have interests that differ from yours. They may, therefore, take actions that are not in the interests of other securityholders.

 

David D. Smith, Frederick G. Smith, J. Duncan Smith and Robert E. Smith hold shares representing almost 90% of the vote and therefore control the outcome of most matters submitted to a vote of shareholders, including, but not limited to, electing directors, adopting amendments to our certificate of incorporation and approving corporate transactions. The Smiths hold class B common stock, which generally has 10 votes per share. Our class A common stock has only one vote per share. Our other series of preferred stock generally do not have voting rights.

 

Circumstances may occur in which the interests of the Smiths, as the controlling equity holders, could be in conflict with the interests of the minority shareholders and the Smiths would have the ability to cause Sinclair to take actions in their interest. In addition, the Smiths could pursue acquisitions, divestitures or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to other Sinclair security holders. See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Certain features of our capital structure that discourage others from attempting to acquire Sinclair may prevent our securityholders from receiving a premium on their securities or result in a lower price for our securities.

 

The control the Smiths have over shareholder votes may discourage other companies from trying to acquire us. In addition, our board of directors can issue additional shares of preferred stock with rights that might further discourage other companies from trying to acquire us. Anyone trying to acquire us would likely offer to pay more for shares of class A common stock than the amount those shares were trading for in the market at the time of the offer. If the voting rights of the Smiths or the right to issue preferred stock discourage such takeover attempts, shareholders may be denied the opportunity to receive such a premium. The general level of prices for class A common stock might also be lower than it would be if these deterrents to takeovers did not exist.

 

We must purchase television programming in advance and may therefore incur programming costs that we cannot cover with revenue from the programs. If this happens, we could experience losses that make our securities less valuable.

 

One of our most significant costs is television programming and our ability to generate revenue to cover this cost may affect the value of our securities. If a particular program is not popular in relation to its costs, we may not be able to sell enough advertising time to cover the costs of the program. Since we generally purchase programming content from others rather than produce it ourselves, we also have little control over the costs of programming. We usually must purchase programming several years in advance, and may have to commit to purchase more than one year’s worth of programming. Finally, we may replace programs that are doing poorly before we have recaptured any significant portion of the costs we incurred, or accounted fully for the costs on our books for financial reporting purposes. Any of these factors could reduce our revenues or otherwise cause our costs to escalate relative to revenues. These factors are exacerbated during a weak advertising market. Additionally, our business is subject to the popularity of the programs provided by the networks with which we have affiliation agreements or which provide us programming. Excluding

 

40



 

political revenue, each of our affiliation groups experienced revenue increases in 2003, but this trend may not continue in the future.

 

We may lose a large amount of programming if a network terminates its affiliation with us, which could increase our costs and/or reduce our revenue.

 

The NBC affiliation agreements with WICS/WICD (Champaign/Springfield, Illinois) and WKEF-TV (Dayton, Ohio) are scheduled to expire on April 1, 2004.  NBC recently informed us that they intend to terminate our affiliations in Dayton and Champaign/Springfield effective on or about September 2004 and September 2005, respectively, in order to affiliate with another station in each of those markets.  We are currently engaged in discussions with the ABC Television Network regarding affiliating with ABC in those two markets since the stations which are scheduled to acquire the NBC affiliations in Dayton and Champaign/Springfield are currently ABC affiliates and will be giving up that affiliation in order to become NBC affiliates.

 

The affiliation agreements of three ABC stations (WEAR-TV in Pensacola, Florida, WCHS-TV in Charleston, West Virginia, and WXLV-TV in Greensboro/Winston-Salem, North Carolina) have expired.  We continue to operate these stations as ABC affiliates and we do not believe ABC has any current plans to terminate the affiliation agreements with any of these stations although we cannot assure that ABC will do so.

 

The following affiliate agreements are scheduled to expire during 2004.  The ABC affiliate agreements with WLOS-TV and WSYX-TV, are scheduled to expire on September 8, 2004.  The UPN affiliate agreements with WABM-TV, WMMP-TV, WCGV-TV, WUXP-TV, and WRDC-TV are scheduled to expire on July, 31, 2004.  The UPN affiliate agreement with WUPN-TV is scheduled to expire in June 2004. The CBS affiliate agreement with KGAN-TV and WGME-TV are scheduled to expire on December 31, 2004.

 

The non-renewal or termination of one or more of these or any of our other network affiliation agreements would result in us no longer being able to carry programming of the relevant network. This loss of programming would require us to obtain replacement programming, which may involve higher costs and which may not be as attractive to our target audiences, resulting in reduced revenues.

 

Competition from other broadcasters and changes in technology may cause a reduction in our advertising revenues and/or an increase in our operating costs.

 

The television industry is highly competitive and this competition can draw viewers and advertisers from our stations, which reduces our revenue, or requires us to pay more for programming, which increases our costs. We face intense competition from the following:

 

New technology and the subdivision of markets

 

Cable providers and direct broadcast satellite companies are developing new techniques that allow them to transmit more channels on their existing equipment to highly targeted audiences, reducing the cost of creating channels and potentially leading to the division of the television industry into ever more specialized niche markets. Competitors who target programming to such sharply defined markets may gain an advantage over us for television advertising revenues. Lowering the cost of creating channels may also encourage new competitors to enter our markets and compete with us for advertising revenue. In addition, emerging technologies that will allow viewers to digitally record, store and play back television programming may decrease viewership of commercials and, as a result, lower our advertising revenues.

 

In-market competition

 

We also face more conventional competition from rivals that may be larger and have greater resources than we have. These include:

 

      other local free over-the-air broadcast stations, and

 

      other media, such as newspapers, periodicals and cable systems.

 

Deregulation

 

The Telecommunications Act of 1996 and subsequent actions by the FCC have removed some limits on station ownership, allowing telephone, cable and some other companies to provide video services in competition with us. In addition, the FCC has reallocated a portion of the spectrum for new services including fixed and mobile wireless services and digital broadcast services. As a result of these changes, new companies are able to enter our markets and compete with us.

 

41



 

The phased introduction of digital television will increase our costs, due to increased equipment and operational costs, and could have a variety of other adverse effects on our business.

 

The FCC has adopted rules for implementing digital (including high definition) television (“DTV”) service in the United States. Under the rules, our stations are required to begin DTV operations over a transition period. In addition, we expect that the FCC will reclaim our non-digital channels at the end of the transition period. We believe that the transition to DTV may have the following effects on us, which could increase our costs or reduce our revenue.

 

42



 

Conversion and programming costs

 

We expect to incur approximately $150.0 million in costs, of which we have incurred $129.1 million through December 31, 2003, to convert our stations from the current analog format to digital format. However, our costs may be higher than this estimate. We expect to continue to incur significant costs to convert our stations to digital format. In addition, we may incur additional costs to obtain programming for the additional channels made available by digital technology and higher utilities costs as a result of converting to digital operations. Increased revenues from the additional channels may not make up for the conversion cost and additional programming expenses.

 

Possible Sanctions

 

The FCC has adopted a series of graduated sanctions to be imposed upon licensees who do not meet the FCC’s DTV build-out schedule. Some of our stations could face monetary fines and possible loss of any digital construction permits if they cannot comply with the DTV build-out schedule.

 

Reclamation of analog channels

 

Congress directed the FCC to auction analog channels when the current holders convert to digital transmission. In addition, the FCC has reallocated a portion of the spectrum band to permit both wireless services and to allow new broadcast operations. If the channels are owned or programmed by our competitors, they may exert increased competitive pressure on our operations.

 

Signal quality issues

 

Our signal quality under digital transmission may be lower relative to our competitors, and we may lose viewers and thereby lose revenue, or be forced to rely on cable television or other alternative means of transmission with higher costs to deliver our digital signals to all of the viewers we are able to reach with our current analog signals.

 

Digital must carry

 

If the FCC does not require cable companies to carry both analog and digital signals of stations during the digital transition period, cable customers in our broadcast markets may not receive our digital signal, which could negatively impact our stations by reducing revenue.

 

Subscription fees

 

The FCC has determined to assess a fee in the amount of 5% of gross revenues on digital television subscription services. If we provide subscription services and are unable to pass this cost through to our subscribers, this fee will reduce our earnings from any digital television subscription services we implement in the future.

 

Given this climate of market uncertainty and regulatory change, we cannot be sure what impact the FCC’s actions might have on our plans and results in the area of digital television. See Item 1. Business—Federal Regulation of Television Broadcasting.

 

Federal regulation of the broadcasting industry limits our operating flexibility, which may affect our ability to generate revenue or reduce our costs.

 

The FCC regulates our business, just as it does all other companies in the broadcasting industry. We must ask the FCC’s approval whenever we need a new license, seek to renew, or assign, or modify a license, purchase a new station, or transfer the control of one of our subsidiaries that holds a license. Our FCC licenses and those of the stations we program pursuant to LMAs are critical to our operations; we cannot operate without them. We cannot be certain that the FCC will renew these licenses in the future, or approve new acquisitions. If licenses were not renewed or acquisitions approved, we may lose revenue that we otherwise could have earned.

 

In addition, Congress and the FCC may in the future adopt new laws, regulations and policies regarding a wide variety of matters (including technological changes) that could, directly or indirectly, materially and adversely affect the operation and ownership of our broadcast properties.

 

43



 

The FCC’s multiple ownership rules limit our ability to operate multiple television stations in some markets and may result in a reduction in our revenue or prevent us from reducing costs.  Changes in these rules may threaten our existing strategic approach to certain television markets.

 

General limitations

 

The ownership rules currently being applied by the FCC limit us from having “attributable interests” in television stations that reach more than 35% (using a calculation method specified by the FCC) of all television households in the U.S. We reach approximately 24% of U.S. television households on an actual basis or, under the FCC’s current method for calculating this limit, approximately 14%. Congress recently passed a bill requiring the FCC to establish a national audience reach cap of 39%, and President Bush signed the bill into law on January 23, 2004.  Additionally, the FCC’s ownership rules limit the number of television stations an entity can own or control in a local market. Our ability to expand through the acquisition of additional stations is limited by these rules, and this may prevent us from engaging in acquisitions that could increase our revenue or our operating margins.

 

The FCC has adopted new multiple ownership rules.  The Court of Appeals for the Third Circuit has stayed the effective date of the new FCC ownership rules pending its review of those rules.  We cannot predict the outcome of that decision.  Changes to the rules imposed by the Third Circuit or by the FCC on remand could significantly impact our business. If the new rules become law, broadcast television owners would be permitted to own more television stations, both locally and nationally, potentially affecting our competitive position.

 

Changes in the rules on television ownership and local marketing agreements

 

Certain of our stations have entered into what have commonly been referred to as local marketing agreements or LMAs.  One typical type of LMA is a programming agreement between two separately owned television stations serving the same market, whereby the licensee of one station programs substantial portions of the broadcast day and sells advertising time during such program segments on the other licensee’s station subject to the ultimate editorial and other controls being exercised by the latter licensee.  We believe these arrangements allow us to reduce our operating expenses and enhance profitability.  Although under the new FCC ownership rules, which have been stayed pending judicial review, we would be allowed to continue to program most of the stations with which we have an LMA, in the absence of a waiver, the new rules would require us to terminate or modify three of our LMAs in markets where both the stations we own and the station with which we have an LMA are ranked among the top four stations in their particular DMA.  The FCC’s new ownership rules include specific provisions permitting waivers of this “top four restriction.”  Although there can be no assurances, we have studied the application of the new rules to our markets and believe we are qualified for waivers.  Because the effectiveness of the new rules has been stayed and the FCC concluded the old rules could not be justified as necessary to the public interest, we have taken the position that an issue exists regarding whether the FCC has any current legal right to enforce any rules prohibiting the acquisition of television stations.  If we are required to terminate or modify our LMAs, our business could be affected in the following ways:

 

      Losses on investments.  As part of our LMA arrangements, we own the non-license assets used by the stations with which we have LMAs.  If certain of these LMA arrangements are no longer permitted, we would be forced to sell these assets, restructure our agreements or find another use for them.  If LMAs are prohibited, the market for such assets may not be as good as when we purchased them and we would need to sell the assets to the owner or purchaser of the related license assets.  Therefore, we cannot be certain we will recoup our investments.

 

      Termination penalties.  If the FCC requires us to modify or terminate existing LMAs before the terms of the LMAs expire, or under certain circumstances, we elect not to extend the term of the LMAs, we may be forced to pay termination penalties under the terms of some of our LMAs.  Any such termination penalty could be material.

 

Failure of owner/licensee to exercise control

 

The FCC requires the owner/licensee of a station to maintain independent control over the programming and operations of the station.  As a result, the owners/licensees of those stations with which we have LMAs or outsourcing agreements can exert their control in ways that may counter our interests, including the right to preempt or terminate programming in certain instances.  The preemption and termination rights cause some uncertainty as to whether we will be able to air all of the programming that we have purchased, and therefore, uncertainty about the

 

44



 

advertising revenue that we will receive from such programming.  In addition, if the FCC determines that the owner/licensee is not exercising sufficient control, it may penalize the owner/licensee by a fine, revocation of the license for the station or a denial of the renewal of that license.  Any one of these scenarios might result in a reduction of our cash flow and an increase in our operating costs or margins, especially the revocation of or denial of renewal of a license.  In addition, penalties might also affect our qualifications to hold FCC licenses and thus put those licenses at risk.

 

We have lost money in two of the last five years, and may continue to incur losses in the future, which may impair our ability to pay our debt obligations.

 

We reported earnings in 2003, but we have suffered net losses in two of the last five years. In 1999 and 2000, we reported earnings, but this was largely due to a gain on the sale of our radio stations. Our losses are due to a variety of cash and non-cash expenses which may or may not recur. Our net losses may therefore continue indefinitely and as a result, we may not have sufficient funds to operate our business.

 

ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates. To manage our exposure to changes in interest rates, we enter into interest rate derivative hedging agreements.

 

Interest Rate Risks

 

We are exposed to market risk from changes in interest rates, which arise from our floating rate debt. As of December 31, 2003, we were obligated on $485.9 million of indebtedness carrying a floating interest rate. We enter into interest rate derivative agreements to reduce the impact of changing interest rates on our floating rate debt.

 

As of December 31, 2003, we had two floating-to-fixed interest rate swap agreements, which expire on June 5, 2006. The swap agreements effectively set fixed rates on our floating rate debt in the range of 6.25% to 7.00%. Floating interest rates are based upon the three month LIBOR, and the measurement and settlement is performed quarterly. Settlements of these agreements are recorded as adjustments to interest expense in the relevant periods. The notional amount related to these agreements was $575.0 million at December 31, 2003. In addition, as of December 31, 2003, we had four fixed-to-floating rate derivatives with notional amounts of $180.0 million, $120.0 million and two at $50.0 million.  At December 31, 2003, we had $485.9 million of floating rate debt all which was effectively converted to fixed rate debt by way of a swap. Additionally, we had $1.1 billion of fixed rate debt at December 31, 2003 of which $400.0 million was converted to floating rate debt by way of a swap.  Consequently, we had $400.0 million of floating rate debt at December 31, 2003 and a 1.0% increase in LIBOR rate would result in annualized interest expense of approximately $4.0 million.

 

We are also exposed to risk from a change in interest rates to the extent we are required to refinance existing fixed rate indebtedness at rates higher than those prevailing at the time the existing indebtedness was incurred. As of December 31, 2003, we had senior subordinated notes totaling $310.0 million , $650.0 million and $150.0 million expiring in the years 2011, 2012 and 2018, respectively. Based upon the quoted market price, the fair value of the notes was $1.2 billion as of December 31, 2003. Generally, the fair market value of the notes will decrease as interest rates rise and increase as interest rates fall. We estimate that a 1.0% increase from prevailing interest rates would result in a decrease in fair value of the notes by approximately $73.4 million as of December 31, 2003.

 

We are exposed to market risk from changes in interest rates related to one of our derivative instruments.  Our $575.0 million notional amount interest rate swap agreement does not qualify for hedge accounting treatment under SFAS No. 133; therefore, changes in its fair market value are reflected currently in earnings as unrealized gain (loss) on derivative instruments.  We incurred an unrealized gain of $17.4 million during the year ended December 31, 2003 and an unrealized loss of $30.9 million during the year ended December 31, 2002.  We estimate that a 1.0% increase in interest rates would result in a gain of $14.4 million, while a 1.0% decrease would result in a loss of $14.4 million.

 

ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements and supplementary data required by this item are filed as exhibits to this report, are listed under Item 15(a)(1) and (2), and are incorporated by reference in this report.

 

45



 

ITEM 9.          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There were no changes in and/or disagreements with accountants on accounting and financial disclosure during the year ended December 31, 2003.

 

ITEM 9A.       CONTROLS AND PROCEDURES

 

We carried out an evaluation, under the supervision and with the participation of our Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-(e)) as of December 31, 2003. In designing and evaluating the disclosure controls and procedures, we and our management recognize that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objective. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of December 31, 2003 in providing reasonable assurance that material information required to be included in our periodic SEC reports is identified and communicated on a timely basis.

 

In addition, there were no changes in our internal control over financial reporting identified in connection with the evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

46



 

PART III

 

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The information required by this Item will be included in our Proxy statement for the 2004 annual meeting of shareholders under the caption, “Directors and Executive Officers” which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2003 and is incorporated by reference in this report.

 

ITEM 11.       EXECUTIVE COMPENSATION

 

The information required by this Item will be included in our proxy statement for the 2004 annual meeting of shareholders under the caption, “Executive Compensation” which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2003 and is incorporated by reference in this report.

 

ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this Item will be included in our proxy statement for the 2004 annual meeting of shareholders under the caption, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2003 and is incorporated by reference in this report.

 

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

The information required by this Item will be included in our proxy statement for the 2004 annual meeting of shareholders under the caption, “Certain Relationships and Related Transactions” which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2003 and is incorporated by reference in this report.

 

ITEM 14.       PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information required by this Item will be included in our proxy statement for the 2004 annual meeting of shareholders under the caption, “Principal Accountant Fees and Services” which will be filed with the SEC no later than 120 days after the close of the fiscal year ended December 31, 2003 and is incorporated by reference in this report.

 

47



 

ITEM 15.               EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

 

(a) (1) Financial Statements

 

The following financial statements required by this item are submitted in a separate section beginning on page F-1 of this report.

 

Sinclair Broadcast Group, Inc. Financial Statements:

 

Report of Independent Public Accountants

 

 

 

 

 

Consolidated Balance Sheets As of December 31, 2003 and 2002

 

 

 

 

 

Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001

 

 

 

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

(a)   (2)  Financial Statements Schedules

 

The following financial statements schedules required by this item are submitted on pages S-1 through S-3 of this Report.

 

Index to Schedules

 

 

Report of Independent Public Accountants

 

 

Schedule II-Valuation and Qualifying Accounts

 

 

 

All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the accompanying notes.

 

(a) (3) Exhibits

 

The exhibit index in Item 15(c) is incorporated by reference in this report.

 

(b) Reports on Form 8-K

 

October 1, 2003

 

We filed a report on Form 8-K on October 1, 2003.  Such report included our press release (dated September 30, 2003) titled, “Sinclair Completes Modified Holding Company Structure, Transfers Substantially All Assets and Liabilities to Wholly-Owned Subsidiary.”

 

 

 

November 6, 2003

 

We furnished a report on Form 8-K on November 6, 2003.  Such report included our press release (dated November 6, 2003) titled, “Sinclair Reports Third Quarter 2003 Results.”

 

48



 

(c) Exhibits

 

The following exhibits are filed with this report:

 

EXHIBIT
NO.

 

EXHIBIT DESCRIPTION

 

 

 

3.1

 

Amended and Restated Certificate of Incorporation(1)

3.2

 

By-laws(2)

3.3

 

Informal Action of the Board of Directors of Sinclair Broadcast Group, Inc., dated March 31, 2003. (25)

4.1

 

Indenture, dated as of August 28, 1995, among Sinclair Broadcast Group, Inc., its wholly-owned subsidiaries and the United States Trust Company of New York as trustee.(2)

4.2

 

First Supplemental Indenture, dated as of December 17, 1997, among Sinclair Broadcast Group, Inc., the Guarantors named therein and First Union National Bank, as trustee, including Form of Note.(3)

4.3

 

Indenture, dated as of December 10, 2001, among Sinclair Broadcast Group, Inc., the Guarantors named therein, and First Union National Bank as trustee. (24)

4.4

 

First Supplemental Indenture, dated as of April 4, 2002, among Sinclair Broadcast Group, Inc., the Guarantors named therein and First Union National Bank, as trustee.(21)

4.5

 

Second Supplemental Indenture, dated as of July 26, 2002, among Sinclair Broadcast Group, Inc., the Guarantors named therein and Wachovia Bank, National Association (formerly known as First Union National Bank), as trustee. (21)

4.6

 

Third Supplemental Indenture, dated as of January 17, 2003, among Sinclair Broadcast Group, Inc., the Guarantors named therein and Wachovia Bank, National Association (formerly known as First Union National Bank), as trustee (21)

4.7

 

Fourth Supplemental Indenture, dated as of May 9, 2003, among Sinclair Broadcast Group, Inc., the Guarantors named therein and Wachovia Bank, National Association (formerly known as First Union National Bank), as trustee.(21)

4.8

 

Fifth Supplemental Indenture, dated as of July 17, 2003, among Sinclair Broadcast Group, Inc., the Guarantors named therein and Wachovia Bank, National Association (formerly known as First Union National Bank), as trustee.(21)

4.9

 

Indenture, dated as of March 14, 2002, among Sinclair Broadcast Group, Inc., the Guarantors named therein, and First Union National Bank as trustee. (24)

4.10

 

First Supplemental Indenture, dated as of July 26, 2002, among Sinclair Broadcast Group, Inc., the Guarantors named therein and Wachovia Bank, National Association (formerly known as First Union National Bank) as trustee.(23)

4.11

 

Second Supplemental Indenture, dated as of November 8, 2002, among Sinclair Broadcast Group, Inc., the Guarantors named therein and Wachovia Bank, National Association (formerly known as First Union National Bank), as trustee.(23)

4.12

 

Indenture, dated as of May 20, 2003, between Sinclair Broadcast Group, Inc. and Wachovia Bank, National Association. (21)

4.13

 

Registration Rights Agreement, dated as of May 20, 2003, between Sinclair Broadcast Group, Inc., and Bear, Stearns & Co., Inc., UBS Warburg LLC, J.P. Morgan Securities Inc., Deutsche Bank Securities Inc., and Wachovia Securities, Inc. (21)

4.14

 

Registration Rights Agreement, dated as of May 29, 2003, by and among Sinclair Broadcast Group, Inc., the Guarantors named therein, and J.P. Morgan Securities Inc., Deutsche Bank Securities Inc., Wachovia Securities, Inc., Bear, Stearns & Co. Inc., and UBS Warburg LLC (21)

10.1

 

Stock Option Agreement, dated April 10, 1996 by and between Sinclair Broadcast Group, Inc. and Barry Baker.(4)

10.2

 

Termination Agreement by and between Sinclair Broadcast Group, Inc., and Barry Baker, dated February 8, 1999. (6)

10.3

 

Registration Rights Agreement, dated as of May 31, 1996, by and between Sinclair Broadcast Group Inc. and River City Broadcasting, L.P.(5)

10.4

 

Letter Agreement, dated August 20, 1996, between Sinclair Broadcast Group, Inc., and River City Broadcasting, L.P. and FOX Broadcasting Company.(7)

10.5

 

Term Note, dated as of September 30, 1990, in the principal amount of $7,515,000 between Sinclair Broadcast Group, Inc. (as borrower) and Julian S Smith (as lender).(9)

 

49



 

10.6

 

Replacement Term Note, dated as of September 30, 1990 in the principal amount of $6,700,000 between Sinclair Broadcast Group, Inc. (as borrower) and Carolyn C. Smith (as lender).(2)

10.7

 

Term Note, dated August 1, 1992 in the principal amount of $900,000 between Frederick G. Smith, David D. Smith, J. Duncan Smith and Robert E. Smith (as borrowers) and Commercial Radio Institute, Inc. (as lender).(8)

10.8

 

Promissory Note, dated as of December 28, 1986 in the principal amount of $6,421,483.53 between Sinclair Broadcast Group, Inc. (as maker) and Frederick H. Himes, B. Stanley Resnick and Edward A. Johnson (as representatives for the holders).(8)

10.9

 

Restatement of Stock Redemption Agreement by and among Sinclair Broadcast Group, Inc. and Chesapeake Television, Inc., et al., dated June 19, 1990.(8)

10.10

 

Corporate Guaranty Agreement, dated as of September 30, 1990 by Chesapeake Television, Inc., Commercial Radio, Inc., Channel 63, Inc. and WTTE, Channel 28, Inc. (as guarantors) to Julian S. Smith and Carolyn C. Smith (as lenders).(8)

10.11

 

Security Agreement, dated as of September 30, 1999 among Sinclair Broadcast Group, Inc., Chesapeake Television, Inc., Commercial Radio Institute, Inc., WTTE, Channel 28, Inc. and Channel 63, Inc. (as borrowers and subsidiaries of the borrower) and Julian S. Smith and Carolyn C. Smith (as lenders).(8)

10.12

 

Term Note, dated as of September 22, 1993, in the principal amount of $1,900,000 between Gerstell Development Limited Partnership (as maker-borrower) and Sinclair Broadcast Group, Inc. (as holder-lender).(8)

10.13

 

Credit Agreement, dated as of May 28, 1998, by and among Sinclair Broadcast Group, Inc., Certain Subsidiary Guarantors, Certain Lenders, the Chase Manhattan Bank as Administrative Agent, Nations Bank of Texas, N.A. as Documentation Agent and Chase Securities Inc. as Arranger.(1)

10.14

 

Incentive Stock Option Plan for Designated Participants.(2)

10.15

 

Incentive Stock Option Plan of Sinclair Broadcast Group, Inc.(2)

10.16

 

First Amendment to Incentive Stock Option Plan of Sinclair Broadcast Group, Inc., adopted April 10, 1996.(4)

10.17

 

Second Amendment to Incentive Stock Option Plan of Sinclair Broadcast Group, Inc., adopted May 31, 1996.(4)

10.18

 

1996 Long Term Incentive Plan of Sinclair Broadcast Group, Inc.(4)

10.19

 

First Amendment to 1996 Long Term Incentive Plan of Sinclair Broadcast Group, Inc.(10)

10.20

 

Primary Television Affiliation Agreement, dated as of March 24, 1997 by and between American Broadcasting Companies, Inc., River City Broadcasting, L.P. and Chesapeake Television, Inc.(11)

10.21

 

Primary Television Affiliation Agreement, dated as of March 24, 1997 by and between American Broadcasting Companies, Inc., River City Broadcasting, L.P. and WPGH, Inc.(11)

10.22

 

Stock Purchase Agreement by and among the sole shareholders of Montecito Broadcasting Corporation, Montecito Broadcasting Corporation and Sinclair Communications, Inc. dated as of February 3, 1998.(12)

10.23

 

Agreement and Plan of Merger among Sullivan Broadcasting Company II, Inc., Sinclair Broadcast Group, Inc., and ABRY Partners, Inc. Effective as of February 23, 1998.(11).

10.24

 

Agreement and Plan of Merger among Sullivan Broadcasting Holdings, Inc., Sinclair Broadcast Group, Inc., and ABRY Partners, Inc. Effective as of February 23, 1998.(11).

10.25

 

Employment Agreement by and between Sinclair Broadcast Group, Inc. and Frederick G. Smith, dated June 12, 1998.(12)

10.26

 

Employment Agreement by and between Sinclair Broadcast Group, Inc. and J. Duncan Smith, dated June 12, 1998.(12)

10.27

 

Employment Agreement by and between Sinclair Broadcast Group, Inc. and David B. Amy, dated September 15, 1998.(12)

10.28

 

Employment Agreement by and between Sinclair Communications, Inc. and Barry Drake, dated February 21, 1997.(12)

10.29

 

First Amendment to Employment Agreement, by and between Sinclair Broadcast Group, Inc. and Barry Baker, dated May 1998.(6)

10.30

 

Purchase Agreement by and between Sinclair Communications, Inc. and STC Broadcasting, Inc. dated as of March 5, 1999.(6)

10.31

 

Second Modification Agreement dated April 30, 1999 by and between Guy Gannett Communications and Sinclair Communications, Inc., to modify the Purchase Agreement dated September 4, 1998 by and between Guy Gannett Communications and Sinclair Communications Inc., as thereafter amended and modified.(13)

10.32

 

Asset Purchase Agreement dated August 18, 1999 by and between Sinclair Communications, Inc. and certain of its affiliates named therein and Entercom Communications Corp.(13)

10.33

 

Asset Purchase Agreement dated August 20, 1999 among Sinclair Communications, Inc., Sinclair Media III, Inc., Sinclair Radio of Kansas City Licensee, LLC and Entercom Communications Corp.(13)

10.34

 

Amendment to Purchase Agreement, dated March 16, 1999, to amend Purchase Agreement dated as of September 4, 1998 by and between Guy Gannett Communications and Sinclair Communications, Inc.(13)

 

50



 

10.35

 

Modification Agreement dated April 12, 1999 by and between Guy Gannett Communications and Sinclair Communications, Inc., to modify the Purchase Agreement dated September 4, 1998 by and between Guy Gannett Communications and Sinclair Communications, Inc., as thereafter amended.(13)

10.36

 

Purchase Agreement dated March 16, 1999, by and between Sinclair Communications, Inc. and STC Broadcasting, Inc.(13)

10.37

 

Amended and Restated Purchase Agreement dated August 20, 1999 among Sinclair Communications, Inc. and certain of its affiliates named therein and Entercom Communications Corp.(13)

10.38

 

Asset Purchase Agreement among Sinclair Broadcast Group, Inc. and Sinclair Radio of St. Louis, Inc. and Sinclair Radio of St. Louis Licensee, LLC as Sellers, and Emmis Communications Corporation as Buyer dated June 21, 2000.(14)

10.39

 

Amendment and Restatement Credit Agreement, dated May 9, 2001.(15)

10.40

 

Amendment No. 1-1998 Bank Credit Agreement Amendment dated October 31, 2001.(16)

10.41

 

Asset Purchase Agreement dated April 18, 2002 among Sinclair Broadcast Group, Inc., Sinclair Communications, Inc., Sinclair Media II, Inc., and SCI-Indiana Licensee, LLC, as sellers and Tribune Broadcasting Company as buyer.(17)

10.42

 

Credit Agreement dated as of July 15, 2002, between Sinclair Broadcast Group, Inc., the Subsidiary Guarantors Party Hereto, the Lenders Party Hereto, JP Morgan Chase Bank, as Administrative Agent.(18)

10.43

 

Registration Rights Agreement, dated as of November 8, 2002, by and among Sinclair Broadcast Group, Inc., the Guarantors, and Deutsche Bank Securities Inc., Wachovia Securities, Inc., J.P. Morgan Securities Inc., BNP Paribas Securities Corp., LehmanBrothers Inc., and UBS Warburg LLC.(19)

10.44

 

Registration Rights Agreement, dated as of December 31, 2002, by and among Sinclair Broadcast Group, Inc., the Guarantors, and J.P. Morgan Securities Inc., Deutsche Bank Securities Inc., Wachovia Securities, Inc. and UBS Warburg LLC.(19)

10.45

 

Series A-1 Incremental Loan Amendment dated as of December 31, 2002 to the Credit Agreement, between Sinclair Broadcast Group, Inc., the Series A-1 Incremental Lenders party hereto and to said Credit Agreement (including each Person that becomes a Series A-1 Incremental Lender pursuant to a Lender Addendum), and JPMorgan Chase Bank, as Administrative Agent.(19)

10.46

 

Subscription Agreement, effective as of January 1, 2003 by and between Acrodyne Communications, Inc., a Delaware corporation, and Sinclair Broadcast Group, Inc., a Maryland corporation.(20)

10.47

 

Modification Agreement dated as of January 2, 2003, by and among Nashville Broadcasting Limited Partnership, a Tennessee limited partnership, Nashville License Holdings, LLC, a Delaware limited liability company, and Sinclair Television of Nashville, Inc., a Tennessee corporation.(19)

10.48

 

Series A Preferred Stock Purchase Agreement dated as of December 23, 2002 is entered into by and among Summa Holdings, Ltd., a Maryland corporation, and Sinclair Broadcast Group, Inc., a Maryland corporation.(19)

10.49

 

Employment Agreement dated as of February 28, 2000, between Sinclair Communications, Inc., a Maryland corporation, and Barry M. Faber.(19)

10.50

 

Employment Agreement dated as of February 21, 1997, between Sinclair Communications, Inc., a Maryland corporation, and Steven Marks.(19)

10.51

 

Form of Fox Broadcasting Company Station Affiliation Agreement.(19)

10.52

 

Amendment No. 1 dated May 28, 2003 to the Credit Agreement between Sinclair Broadcast Group, Inc.; the Subsidiary Guarantors party to the Credit Agreement; and JP Morgan Chase Bank, as Administrative Agent thereunder.  (22)

11

 

Statement re computation of per share earnings

12

 

Computation of Ratio of Earnings to Fixed Charges

21

 

Subsidiaries of the Registrant

23

 

Consent of Independent Public Accountants (Sinclair Broadcast Group, Inc.)

31.1

 

Certification by David D. Smith, as Chief Executive Officer of Sinclair Broadcast Group, Inc., pursuant to § 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)

31.2

 

Certification by David B. Amy, as Chief Financial Officer of Sinclair Broadcast Group, Inc., pursuant to § 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)

32.1

 

Certification by David D. Smith, as Chief Executive Officer of Sinclair Broadcast Group, Inc., pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

32.2

 

Certification by David B. Amy, as Chief Financial Officer of Sinclair Broadcast Group, Inc., pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

 

51



 


(1)           Incorporated by reference from Sinclair’s Report on Form 10-Q for the quarter ended June 30, 1998

 

(2)           Incorporated by reference from Sinclair’s Registration Statement on Form S-1, No. 33-90682

 

(3)           Incorporated by reference from Sinclair’s Current Report on Form 8-K, dated as of December 16, 1997.

 

(4)           Incorporated by reference from Sinclair’s Report on Form 10-K for the year ended December 31, 1996.

 

(5)           Incorporated by reference from Sinclair’s Report on Form 10-Q for the quarter ended June 30, 1996.

 

(6)           Incorporated by reference from Sinclair’s Report on Form 10-K for the year ended December 31, 1998.

 

(7)           Incorporated by reference from Sinclair’s Report on Form 10-Q for the quarter ended September 30, 1996.

 

(8)           Incorporated by reference from Sinclair’s Registration Statement on Form S-1, No. 33-69482.

 

(9)           Incorporated by reference from Sinclair’s Report on Form 10-K for the year ended December 31, 1995.

 

(10)         Incorporated by reference from Sinclair’s Proxy Statement for the 1998 Annual Meeting filed on Schedule 14A.

 

(11)         Incorporated by reference from Sinclair’s Report on Form 10-K for the year ended December 31, 1997

 

(12)         Incorporated by reference from Sinclair’s Report on Form 10-Q for the quarter ended September 30, 1998

 

(13)         Incorporated by reference from Sinclair’s Report on Form 10-Q for the quarter ended September 20, 1999.

 

(14)         Incorporated by reference from Sinclair’s Report on Form 10-K for the year ended December 31, 2000.

 

(15)         Incorporated by reference from Sinclair’s Report on Form 8-K filed on September 26, 2001.

 

(16)         Incorporated by reference from Sinclair’s Report on Form 10-Q for the quarter ended September 30, 2001.

 

(17)         Incorporated by reference from Sinclair’s Report on Form 10-Q for the quarter ended March 31, 2002.

 

(18)         Incorporated by reference from Sinclair’s Report on Form 10-Q for the quarter ended June 30, 2002.

 

(19)         Incorporated by reference from Sinclair’s Report on Form 10-K for the year ended December 31, 2002.

 

(20)         Incorporated by reference from Sinclair’s report on Schedule 13D, dated January 8, 2003

 

(21)         Incorporated by reference to our Registration Statement on Form S-4 filed on July 31, 2003 (File No. 333-107522).

 

(22)         Incorporated by reference from Sinclair’s Report on Form 8-K filed on May 28, 2003.

 

(23)         Incorporated by reference from Sinclair’s Report on Form S-4 filed on March 7, 2003, No. 333-103681.

 

(24)         Incorporated by reference from Sinclair’s Report on Form 10-K for the year ended December 31, 2001.

 

(25)         Incorporated by reference from Sinclair’s Report on Form 10-K/A for the year ended December 31, 2002.

 

(d)           Financial Statements Schedules

 

The financial statement schedules required by this Item are listed under Item 15 (a) (2).

 

52



 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on this 27th day of February 2004.

 

 

SINCLAIR BROADCAST GROUP, INC.

 

 

 

By:

/s/ David D. Smith

 

 

 

David D. Smith

 

 

Chief Executive Officer

 

POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below under the heading “Signature” constitutes and appoints David B. Amy as his true and lawful attorney-in-fact each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead in any and all capacities to sign any or all amendments to this 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact, or their substitutes, each acting alone, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/ David D. Smith

 

Chairman of the Board, President and

 

 

David D. Smith

 

Chief Executive Officer

 

February 27, 2004

 

 

 

 

 

/s/ David B. Amy

 

Executive Vice President and

 

 

David B. Amy

 

Chief Financial Officer

 

February 27, 2004

 

 

 

 

 

/s/ Frederick G. Smith

 

 

 

 

Frederick G. Smith

 

Director

 

February 27, 2004

 

 

 

 

 

/s/ J. Duncan Smith

 

 

 

 

J. Duncan Smith

 

Director

 

February 27, 2004

 

 

 

 

 

/s/ Robert E. Smith

 

 

 

 

Robert E. Smith

 

Director

 

February 27, 2004

 

 

 

 

 

/s/ Basil A. Thomas