UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(mark one)

FORM 10-K

 

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

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM                          TO                          .

 

COMMISSION FILE NUMBER:  000-26076

 

SINCLAIR BROADCAST GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

Maryland

(State or other jurisdiction of

incorporation or organization)

52-1494660

(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:

 

Title of each class

 

Name of each exchange on which registered

Class A Common Stock, par value $0.01 per share

 

The NASDAQ Stock Market LLC

 

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o   No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, 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

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

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

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

Based on the closing sales price of $8.56 per share as of June 30, 2006, the aggregate market value of the voting and non-voting common equity of the Registrant held by non-affiliates was approximately $408.6 million.

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

 

Number of shares outstanding as of

Title of each class

 

March 5, 2007

Class A Common Stock

 

48,780,162

Class B Common Stock

 

37,534,960

 

Documents Incorporated by Reference - Portions of our definitive Proxy Statement relating to our 2007 Annual Meeting of Shareholders 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, 2006.

 




SINCLAIR BROADCAST GROUP, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006

TABLE OF CONTENTS

PART I

 

 

 

 

ITEM 1.

 

BUSINESS

 

 

ITEM 1A.

 

RISK FACTORS

 

 

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

 

 

ITEM 2.

 

PROPERTIES

 

 

ITEM 3.

 

LEGAL PROCEEDINGS

 

 

ITEM 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

 

 

 

 

 

PART II

 

 

 

 

ITEM 5.

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

 

ITEM 6.

 

SELECTED FINANCIAL DATA

 

 

ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

 

ITEM 9A.

 

CONTROLS AND PROCEDURES

 

 

ITEM 9B.

 

OTHER INFORMATION

 

 

 

 

 

 

 

PART III

 

 

 

 

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

 

ITEM 11.

 

EXECUTIVE COMPENSATION

 

 

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

 

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

 

ITEM 14.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

 

 

 

 

 

 

 

PART IV

 

 

 

 

ITEM 15.

 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

 

 

 

 

 

 

SIGNATURES

 

 

 

2




FORWARD-LOOKING STATEMENTS

This report includes or incorporates forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  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 following risks:

General risks

·                  the impact of changes in national and regional economies;

·                  the activities of our competitors;

·                  terrorist acts of violence or war and other geopolitical events;

Industry risks

·                  the business conditions of our advertisers;

·                  competition with other broadcast television stations, radio stations, multi-channel video programming distributors and internet and broadband content providers serving in the same markets;

·                  availability and cost of programming;

·                  the effects of governmental regulation of broadcasting or changes in those regulations and court actions interpreting those regulations, including ownership regulations, indecency regulations, retransmission regulations, political advertising restrictions and regulations and timing regarding the transition from analog to digital over-the-air broadcasting;

·                  the continued viability of networks and syndicators that provide us with programming content;

Risks specific to us

·                  the effectiveness of our management;

·                  our ability to successfully negotiate retransmission consent agreements;

·                  our ability to attract and maintain local and national advertising;

·                  our ability to service our outstanding debt;

·                  FCC license renewals;

·                  our ability to maintain our affiliation agreements with the top four networks;

·                  the popularity of syndicated programming we purchase and network programming that we air;

·                  successful integration of outsourcing and news share agreements;

·                  the strength of ratings for our local news broadcasts;

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

·                  acceptance by viewers and advertisers of The CW Television Network and MyNetworkTV; and

·                  the success of our multi-channel broadcasting initiatives.

Other matters set forth in this report, including the Risk Factors set forth in Item 1A 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 statements discussed in this report might not occur.

3




PART I

ITEM 1.                    BUSINESS

We are a diversified television broadcasting company that owns or provides certain programming, operating or sales services to more television stations than any other commercial broadcasting group in the United States.  We currently own, provide programming and operating services pursuant to local marketing agreements (LMAs) or provide (or are provided) sales services pursuant to outsourcing agreements to 58 television stations in 36 markets.  For the purpose of this report, these 58 stations are referred to as “our” stations.  We currently have 11 duopoly markets where we own and operate at least two stations within the same market.  We have ten LMA markets where, with one exception, we own and operate one station in the market and provide or are provided programming and operating services to, or by, another station within that market.  In the remaining 15 markets, we own and operate a single television station.

We have a mid-size market focus and 44 of our 58 stations are located in television designated markets areas (DMAs) that rank between the 12th and 75th largest in the United States.  Our television station group is diverse in network affiliation: FOX (19 stations); MyNetworkTV (17 stations); ABC (10 stations); The CW (9 stations); CBS (2 stations) and NBC (1 station).  Refer to our Markets and Stations table later in this section for more information.

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, news produced locally, local sporting events and syndicated entertainment programs.  We provide network produced programming, which we broadcast pursuant to our agreements with the network with which the stations are affiliated.  We produce news at 19 stations in 13 markets including two stations which have a local news sharing arrangement with a competitive station in that market.  We have 13 stations which have local news sharing arrangements with a competitive station in that market, which produces the news aired on our station.  We provide live local sporting events on many of our stations by acquiring the local television broadcast rights for these events.  Additionally, we purchase and barter for popular syndicated programming from third parties.  See Operating Strategy later in this Item for more information regarding the programming we provide.

Our primary source of revenue is the sale of commercial inventory on our television stations to our advertising customers.  Our objective is to meet the needs of our advertising customers by delivering significant 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 with offices in New York City, Los Angeles, Chicago and Atlanta.  Our local television advertisers are attracted through the use of a local sales force at each of our television stations, which is comprised of approximately 490 account executives company-wide.

Our operating results are subject to seasonal fluctuations.  The second and fourth quarter operating results are typically higher than the first and third quarters due to increased advertising revenues.  The second quarter operating results are typically higher than the first and third quarters primarily because advertising expenditures are increased in anticipation of consumer spending on “summer related” items such as home improvements, lawn care and travel plans.  The fourth quarter operating results are typically the highest in anticipation of holiday season spending by consumers.  Our operating results are usually subject to cyclical fluctuations from political advertising.  In the past, political spending has been significantly higher in the even-number years due to the cyclicality of political advertising.  In addition, every four years, political spending is elevated further due to the advertising revenue preceding the presidential election. We believe political advertising is one of the fastest growing advertising category in our industry.  Broadcast television’s share of political advertising in 2006 (a non-presidential election year) is expected to increase 8.8% and 73.0% over 2004 (a presidential election year) and 2002 (a non-presidential election year), respectively, according to PQ Media’s October 2006 report, “Political Media Buying 2006: Analysis of advertising & marketing spending on nine key media and its impact on the major media companies in the U.S.”  Previously, there has been a significant difference in our operating results when comparing even-number years’ performance to the odd-number years’ performance.  However, we expect the television industry to begin to generate increased revenues in odd-number years preceding presidential election years due to earlier state primary dates and an increase in political advertising budgets.

Over the last few years, we have been earning revenue from our retransmission consent agreements through payments from the multi-channel video programming distributors (MVPDs) in our markets.  The MVPDs are local cable companies, satellite television and local telecommunication video providers.  The revenues primarily represent payments from the MVPDs for access to our signal so they may rebroadcast directly to and charge their subscribers.  We have seen this revenue category grow significantly as we successfully renew our retransmission consent agreements with the MVPDs.

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

4




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)

 

Former

Affiliation (c)

 

Affiliation as

of September

2006 (c) (d)

 

Station

Rank in

Market (e)

 

Expiration

Date of FCC

License

 

Tampa, Florida

 

12

 

WTTA

 

LMA(f)

 

WB

 

MNT

 

6 of 8

 

02/01/13

 

Minneapolis/St. Paul, Minnesota

 

15

 

WUCW(g)

 

O&O

 

WB

 

CW

 

6 of 7

 

04/01/06 (h)

 

St. Louis, Missouri

 

21

 

KDNL

 

O&O

 

ABC

 

ABC

 

4 of 8

 

02/01/06 (h)

 

Pittsburgh, Pennsylvania

 

22

 

WPGH

WPMY(g)

 

O&O

O&O

 

FOX

WB

 

FOX

MNT

 

4 of 9

6 of 9

 

08/01/07

08/01/07

 

Baltimore, Maryland

 

24

 

WBFF

WNUV

 

O&O

LMA(i)

 

FOX

WB

 

FOX

CW

 

3 of 5

4 of 5

 

10/01/04 (h)

10/01/12

 

Raleigh/Durham, North Carolina

 

29

 

WLFL

WRDC

 

O&O

O&O

 

WB

UPN

 

CW

MNT

 

5 of 7

6 of 7

 

12/01/04 (h)

12/01/04 (h)

 

Nashville, Tennessee

 

30

 

WZTV

WUXP

WNAB

 

O&O

O&O

OSA(j)

 

FOX

UPN

WB

 

FOX

MNT

CW

 

4 of 8

5 of 8

6 of 8

 

08/01/05 (h)

08/01/05 (h)

08/01/05 (j)

 

Columbus, Ohio

 

32

 

WSYX

WTTE

 

O&O

LMA(i)

 

ABC

FOX

 

ABC

FOX

 

3 of 6

4 of 6

 

10/01/05 (h)

10/01/05 (h)

 

Cincinnati, Ohio

 

33

 

WSTR

 

O&O

 

WB

 

MNT

 

5 of 8

 

10/01/05 (h)

 

Milwaukee, Wisconsin

 

34

 

WCGV

WVTV

 

O&O

O&O

 

UPN

WB

 

MNT

CW

 

5 of 9

6 of 9

 

12/01/05 (h)

12/01/05 (h)

 

Asheville, North Carolina/ Greenville/Spartanburg/ Anderson, South Carolina

 

36

 

WLOS

WMYA(g)

 

O&O

LMA(i)

 

ABC

WB

 

ABC

MNT

 

3 of 7

6 of 7

 

12/01/04 (h)

12/01/04 (h)

 

San Antonio, Texas

 

37

 

KABB

KMYS(g)

 

O&O

O&O

 

FOX

WB

 

FOX

MNT

 

4 of 7

5 of 7

 

08/01/06 (h)

08/01/06 (h)

 

Birmingham, Alabama

 

40

 

WTTO

WABM

WDBB

 

O&O

O&O

LMA

 

WB

UPN

WB

 

CW

MNT

CW

 

5 of 9

6 of 9

5 of 9(k)

 

04/01/05 (h)

04/01/05 (h)

04/01/13

 

Norfolk, Virginia

 

42

 

WTVZ

 

O&O

 

WB

 

MNT

 

6 of 8

 

10/01/12

 

Las Vegas, Nevada

 

43

 

KVCW(g)

KVMY(g)

 

O&O

O&O

 

IND

WB

 

CW

MNT

 

5 of 7

6 of 7

 

10/01/14

10/01/06 (h)

 

Oklahoma City, Oklahoma

 

46

 

KOKH

KOCB

 

O&O

O&O

 

FOX

WB

 

FOX

CW

 

4 of 9

5 of 9

 

06/01/06 (h)

06/01/06 (h)

 

Greensboro/Winston-Salem/ Highpoint, North Carolina

 

47

 

WXLV

WMYV(g)

 

O&O

O&O

 

ABC

UPN

 

ABC

MNT

 

4 of 7

6 of 7

 

12/01/04 (h)

12/01/04 (h)

 

Buffalo, New York

 

49

 

WUTV

WNYO

 

O&O

O&O

 

FOX

WB

 

FOX

MNT

 

4 of 9

6 of 9

 

06/01/07

06/01/07

 

Dayton, Ohio

 

58

 

WKEF

WRGT

 

O&O

LMA(i)

 

ABC

FOX

 

ABC

FOX

 

2 of 8

4 of 8

 

10/01/05 (h)

10/01/05 (h)

 

Mobile, Alabama/
Pensacola, Florida

 

59

 

WEAR

WFGX

 

O&O

O&O

 

ABC

IND

 

ABC

MNT

 

2 of 9

not rated

 

02/01/05 (h)

02/01/13

 

Richmond, Virginia

 

61

 

WRLH

 

O&O

 

FOX

 

FOX

 

4 of 5

 

10/01/04 (h)

 

Lexington, Kentucky

 

63

 

WDKY

 

O&O

 

FOX

 

FOX

 

4 of 6

 

08/01/05 (h)

 

Charleston/Huntington,
West Virginia

 

65

 

WCHS

WVAH

 

O&O

LMA(i)

 

ABC

FOX

 

ABC

FOX

 

3 of 7

4 of 7

 

10/01/12

10/01/04 (h)

 

Flint/Saginaw/Bay City, Michigan

 

66

 

WSMH

 

O&O

 

FOX

 

FOX

 

4 of 7

 

10/01/05 (h)

 

Des Moines, Iowa

 

73

 

KDSM

 

O&O

 

FOX

 

FOX

 

4 of 5

 

02/01/06 (h)

 

Portland, Maine

 

74

 

WGME

 

O&O

 

CBS

 

CBS

 

2 of 6

 

04/01/07

 

Rochester, New York

 

78

 

WUHF

 

O&O(l)

 

FOX

 

FOX

 

4 of 6

 

06/01/07

 

Syracuse, New York

 

79

 

WSYT

WNYS

 

O&O

LMA

 

FOX

WB

 

FOX

MNT

 

4 of 6

6 of 6

 

06/01/07

06/01/07

 

Cape Girardeau, Missouri/
Paducah, Kentucky

 

80

 

KBSI

WDKA

 

O&O

LMA

 

FOX

WB

 

FOX

MNT

 

4 of 7

6 of 7

 

02/01/06 (h)

08/01/13

 

Springfield/Champaign, Illinois

 

82

 

WICS

WICD

 

O&O

O&O

 

ABC

ABC

 

ABC

ABC

 

2 of 6

2 of 6(m)

 

12/01/05 (h)

12/01/05 (h)

 

Madison, Wisconsin

 

85

 

WMSN

 

O&O

 

FOX

 

FOX

 

4 of 6

 

12/01/05 (h)

 

Cedar Rapids, Iowa

 

89

 

KGAN

 

O&O(l)

 

CBS

 

CBS

 

3 of 6

 

02/01/06 (h)

 

Charleston, South Carolina

 

100

 

WTAT

WMMP

 

LMA(i)

O&O

 

FOX

UPN

 

FOX

MNT

 

4 of 6

6 of 6

 

12/01/04 (h)

12/01/04 (h)

 

Tallahassee, Florida

 

108

 

WTWC

 

O&O

 

NBC

 

NBC

 

3 of 8

 

02/01/05 (h)

 

Springfield, Massachusetts

 

109

 

WGGB

 

O&O

 

ABC

 

ABC

 

2 of 6

 

04/01/07

 

Peoria/Bloomington, Illinois

 

116

 

WYZZ

 

O&O(l)

 

FOX

 

FOX

 

4 of 6

 

12/01/05 (h)

 

 

5




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 2006.

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 or receive sales services pursuant to an outsourcing agreement.

c)                 On March 17, 2006, we announced that all of our stations previously affiliated with UPN, one of our stations that previously had no affiliation and certain stations that were previously affiliated with The WB entered into an agreement with MyNetworkTV.  On May 2, 2006, we announced that certain of our stations that had been affiliated with The WB and one of our stations that was previously not affiliated with any network entered into an affiliation agreement with The CW.  Beginning September 2006, we began airing programming content provided under these new affiliation agreements.

d)                When we negotiate the terms of our affiliation agreements with each network, we negotiate on behalf of all of our stations affiliated with that network simultaneously.  This results in substantially similar terms for our stations, including the expiration date of the affiliation agreement.  A summary of these expiration dates is as follows:

Affiliate

 

Expiration Date

FOX

 

All 19 agreements expire on March 6, 2012

MNT

 

All 17 agreements expire on September 4, 2011

ABC

 

All 10 agreements expire on December 31, 2009

CW

 

All 9 agreements expire on August 31, 2010

CBS

 

Both agreements expire on December 31, 2007

NBC

 

Agreement expires on December 31, 2016

 

e)                 The first number represents the rank of each station in its market and is based upon the November 2006 Nielsen estimates of the percentage of persons tuned into each station in the market from 7:00 a.m. to 1:00 a.m., Monday through Sunday.  The second number 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 through Sunday 7:00 a.m. to 1:00 a.m. time period as of November 2006.  This information is provided to us in a summary report by Katz Television Group.

f)                   The license assets for this station are currently owned by Bay Television, Inc., a related party.  See Note 12. Related Person Transactions, in the Notes to our Consolidated Financial Statements for more information.

g)                The call letters of some of our stations, and one LMA station, were changed in June 2006 as a result of our new affiliation agreements with  MyNetworkTV and The CW:

Market

 

New Call Letters

 

Former Call Letters

 

Minneapolis, MN

 

WUCW

 

KMWB

 

Pittsburgh, PA

 

WPMY

 

WCWB

 

Greenville/Anderson, SC

 

WMYA

 

WBSC

 

San Antonio, TX

 

KMYS

 

KRRT

 

Greensboro/Winston-Salem, NC

 

WMYV

 

WUPN

 

Las Vegas, NV

 

KVMY

KVCW

 

KVWB

KFBT

 

 

h)                We, or subsidiaries of Cunningham Broadcasting Company (Cunningham), timely filed applications for renewal of these licenses with the FCC.  Unrelated third parties have filed petitions to deny or informal objections against such applications.  We opposed the petitions to deny and the informal objections and those applications are currently pending.  See Note 11. Commitments and Contingencies, in the Notes to our Consolidated Financial Statements for more information.

i)                    The license assets for these stations are currently owned by a subsidiary of Cunningham.

j)                    We have 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.  Our application to acquire this FCC license is pending FCC approval.

k)                 WDBB-TV simulcasts the programming broadcast on WTTO-TV pursuant to a programming services agreement.  The station rank applies to the combined viewership of these stations.

l)                    We have entered into outsourcing agreements with unrelated third parties, under which the unrelated third parties provide certain non-programming related sales, operational and managerial services to these stations.  We continue to own all of the assets of these stations and to program and control each station’s operations.

m)              WICD-TV, a satellite of WICS-TV under FCC rules, simulcasts all of the programming aired on WICS-TV except the news broadcasts.  WICD-TV airs its own news broadcasts.  The station rank applies to the combined viewership of these stations.

6




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 news at 19 stations in 13 markets, including two stations which have a local news sharing agreement with a competitive station in that market.  We have 13 stations which have local news sharing arrangements with a competitive station in that market, which produces the news aired on our station.

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.  We provide, a combination of base salary, long-term incentive compensation and, where appropriate, cash bonus pay designed to be competitive with comparable employers in the television broadcast industry.  A significant portion of the compensation available to our Chief Operating Officer, sales vice presidents, group managers, general managers, sales managers and other station managers is based on their exceeding certain operating results.  We also provide some of our corporate and station managers with deferred compensation plans.

Developing Local Franchises.  We believe the greatest opportunity for a sustainable and growing customer base lies within our local communities.  Therefore, we have focused on developing a strong local sales force at each of our television stations, which is comprised of approximately 490 account executives company-wide.  Excluding political advertising revenue, 64.8% of our net time sales were local for the year ended December 31, 2006, up from 62.7% in 2005.  Our goal is to grow our local revenues by increasing our market share and by developing new business opportunities.

Developing New Business.  We are always striving to develop new business models to complement or enhance our existing television broadcast business.  During the past few years, we have built a profitable direct mail business at many of our stations using, for the most part, our existing sales force.  With the success of our direct mail program, which generated $8.7 million in revenues in 2006 and margins of 30.2% to 66.4%, we have developed other initiatives that will give us an additional competitive advantage.

These new business iniatives include A Better Life, a self-improvement program, starring Meredith Baxter.  This type of programming connects to a wide array of viewers, which provides an opportunity for advertisers that have not traditionally focused on television advertising to effectively reach their potential customers.  A Better Life has resulted in advertising revenues, net of agency commission, of $6.0 million for the year ended December 31, 2006.  In 2007, we expect to add MDTV and E-Trimdown.com (aka Perfectly You) to our new business programs.

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 assess the anticipated benefits and costs of producing local news prior to the introduction of local news 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 also continuously review the performance of our existing news operations to make sure they are economically viable.

Our local news initiatives are an important part of our strategy that has resulted in our entering into 16 local news sharing arrangements with other television broadcasters.  We are the provider of news services in some instances; however, in most of our news share arrangements, we are the recipient of services.  We believe news share arrangements generally provide both higher viewer ratings and revenues for the station receiving the news and generate a profit for the news share provider.  Generally, both parties and the local community are beneficiaries of these arrangements.

Monetizing Retransmission Consent Agreements.  As the competition for programming content increases among the many cable, satellite and telecommunications companies, we are in a position to realize significant additional revenues.  We have retransmission consent agreements with MVPDs, such as cable, satellite and telecommunications operators in our markets.  Previously, most of these agreements allowed the MVPDs to air our programming to their subscribers without compensating us.  We believe that these companies should compensate us for the right to retransmit our broadcast  signals.  As such, as these agreements come up for renewal or as we renegotiate existing agreements, which are terminable on short notice, we are including terms which provide us with a revenue stream from these agreements.  Additionally, as the portable device service providers develop their infrastructure to deliver programming content to television sets, cell phones and other hand-held devices using our spectrum capacity, we may be able to generate additional revenue streams through agreements with them.

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Ownership Duopolies and Utilization of Local Marketing Agreements.  We have sought to increase our revenues and improve our margins through the ownership of two stations in a single market, called a duopoly, and by providing programming services pursuant to an LMA to a second station in eight DMAs where we already own one station.  Duopolies and LMAs allow us to realize significant economies of scale in marketing, programming, overhead and capital expenditures.  We also believe these arrangements enable us to air popular programming and contribute to the diversity of programming within each DMA.  Although under the FCC ownership rules released in June 2003, we would be allowed to continue to program most of the stations with which we have an LMA, in the absence of a waiver, the 2003 rules would require us to terminate or modify three of our LMAs.  Although there can be no assurances, we have studied the application of the 2003 rules to our markets and believe we are qualified for waivers.  For additional information, refer to Risk Factors - Changes in Rules on Television Ownership, and 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, we currently operate under 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 in Nashville, Tennessee currently provide services to another station in the market and other parties provide services to our stations in Peoria/Bloomington, Illinois, Cedar Rapids, Iowa and Rochester, New York.  As a result of a change in ownership of the unrelated third party, we terminated our outsourcing agreement in Tallahassee, Florida on February 19, 2006.  We believe the outsourcing 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, as that term is defined by the FCC, on August 2, 2004, the FCC released a notice of proposed rulemaking seeking comments on its tentative conclusion that television joint sales agreements should be attributable.  We cannot predict the outcome of this proceeding, nor can we predict how many changes, together with possible changes to ownership rules, would apply to our existing outsourcing agreements.

Multi-Channel Digital Broadcasting.  FCC rules allow broadcasters to transmit additional digital channels within the spectrum allocated to each FCC license holder.  This provides viewers with additional programming alternatives at no additional cost to them.  Four of our television stations are experimenting with broadcasting a second digital channel in accordance with these rules, airing various alternative programming formats.  In Baltimore, where our corporate offices are located, we are airing a secondary digital channel comprised of classic television programming and religious programming.  In the three other markets, we have a similar format along with MyNetwork TV programming.  In addition, we had been airing the Tube Network in 29 of our markets on a secondary digital channel.  This effort ended on December 30, 2006.

During the January 2007 Consumer Electronics Show in Las Vegas, Samsung partnered with us to demonstrate the viability of the digital modulation standard known as Advanced-Vestigial Side-Band (A-VSB).  This modification developed by Samsung allows for dynamic mobility of the stations broadcast signal.  This development is in its earliest stages.

We expect to continue to consider other alternative programming formats that we could air using our multi-channel digital spectrum space when it makes financial sense.

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 22% 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 station’s programming and operating costs through program-specific profit analysis, detailed budgeting, regionalization of staff and detailed long-term planning models.

Popular Sporting Events.  Our CW and MyNetworkTV affiliated stations generally face fewer restrictions on broadcasting live local sporting events compared with FOX, ABC, CBS and NBC affiliates, 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 local television broadcast rights for certain sporting events, including NBA basketball, Major League Baseball, NFL football, NHL hockey, ACC basketball and both Big Ten and SEC football and basketball.  We seek to expand our sports broadcasting in DMAs only as profitable opportunities arise.  In addition, our stations that are affiliated with FOX, ABC, CBS and NBC broadcast certain NBA basketball, Major League Baseball games, NFL football games, NHL hockey games and NASCAR races, as well as other popular sporting events.

Strategic Realignment of Station Portfolio.  We continue to examine our television station group portfolio in light of the FCC’s broadcast ownership rules adopted in 2003.  For a summary of these rules, refer to Ownership Matters, discussed in the Federal Regulation of Television Broadcasting.  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 television station owners.  For more information related to station sales, see Note 13. Discontinued Operations, in the Notes to our Consolidated Financial Statements.

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Community Involvement. Each of our stations actively participates in various community activities and offers many community services.  Our activities include broadcast 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.  After Hurricane Ivan affected their community, WEAR-TV in Pensacola, Florida compiled their news footage of the hurricane into a DVD entitled “In Focus: Hurricane Ivan Special.”  Approximately $180,000 of the proceeds from the sale of the DVDs was donated to various charities including Habitat for Humanity and United Way.  In response to the Tsunami tragedy in Southeast Asia during 2004, our employees generously donated over $17,000; we matched this amount with a contribution to the American Red Cross.  In response to the disaster caused by Hurricane Katrina, the Sinclair Relief Fund (the Fund) was formed by David D. Smith, Frederick Smith, J. Duncan Smith, three of our controlling shareholders, and Barry M. Faber, our Vice President and General Counsel.  The Fund is a qualified charitable organization formed to provide monetary aid and relief to the victims of natural disasters.  Our employees and viewers generously donated over $208,000 to the Fund and we made an additional contribution of $50,000.  The Fund distributed the contributions to various organizations including the American Red Cross, the Salvation Army, Feed the Children and USA Harvest.  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.

FEDERAL REGULATION OF TELEVISION BROADCASTING

The ownership, operation and sale of television stations are subject to the jurisdiction of the FCC, which acts under the 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;

·                  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 or sales services to, pursuant to LMAs or other agreements, 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.

In 2004, we filed with the FCC an application for the license renewal of WBFF-TV in Baltimore, Maryland.  Subsequently, an individual named Richard D’Amato filed a petition to deny the application.  In 2004, we also filed with the FCC applications for the license renewal of television stations: WXLV-TV, Winston-Salem, North Carolina; WMYV-TV, Greensboro, North Carolina; WLFL-TV, Raleigh/Durham, North Carolina; WRDC-TV, Raleigh/Durham, North Carolina; WLOS-TV, Asheville, North Carolina and WMMP-TV, Charleston, South Carolina.  An organization calling itself “Free Press” filed a petition to deny the renewal applications of these stations and also the renewal applications of two other stations in those markets, which we program pursuant to LMAs: WTAT-TV, Charleston, South Carolina and WMYA-TV, Anderson, South Carolina.  Several individuals and an organization named “Sinclair Media Watch” also filed informal objections to the license renewal applications of WLOS-TV and WMYA-TV, raising essentially the same arguments presented in the Free Press petition.  The FCC is currently in the process of considering these renewal applications and we believe the objections have no merit.

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On October 12, 2004, the FCC issued a Notice of Apparent Liability for Forfeiture (NAL) in the amount of $7,000 per station to virtually every FOX station, including the 15 FOX affiliates presently licensed to us and the four FOX affiliates programmed by us and one FOX affiliate we sold in 2005.  The NAL alleged that the stations broadcast indecent material contained in an episode of a FOX network program that aired on April 7, 2003.  We, as well as other parties including the FOX network, filed oppositions to the NAL.  That proceeding is still pending.  Although we cannot predict the outcome of that proceeding or the effect of any adverse outcome on the stations’ license renewal applications, the FOX network has agreed to indemnify its affiliates for the full amount of this liability.

On July 21, 2005, we filed with the FCC an application to acquire WNAB-TV in Nashville, Tennessee.  Rainbow/PUSH filed a petition to deny that application and also requested that the FCC initiate a hearing to investigate whether WNAB-TV was improperly operated with WZTV-TV and WUXP-TV, two of our stations located in the same market as WNAB-TV.  That proceeding is currently pending and we believe the petition has no merit.

On August 1, 2005, we filed applications with the FCC requesting renewal of the broadcast licenses for WICS-TV and WICD-TV in Springfield/Champaign, Illinois.  Subsequently, various viewers filed informal objections requesting that the FCC deny these renewal applications.  Also on August 1, 2005, we filed applications with the FCC requesting renewal of the broadcast licenses for WCGV-TV and WVTV-TV in Milwaukee, Wisconsin.  On November 1, 2005, the Milwaukee Public Interest Media Coalition filed a petition with the FCC to deny these renewal applications.  On September 30, 2005, we filed an application with the FCC for the renewal of the broadcast license for KGAN-TV in Cedar Rapids, Iowa.  On December 28, 2005, an organization calling itself “Iowans for Better Local Television” filed a petition to deny that application.  The FCC is currently in the process of considering these renewal applications and we believe the objections and petitions requesting denial have no merit.

On March 15, 2006, the FCC issued an NAL in the amount of $32,500 per station to a number of CBS affiliated and owned and operated stations, including KGAN-TV in Cedar Rapids, Iowa.  The NAL alleged that the stations broadcast indecent material contained in an episode of “Without a Trace,” a CBS network program that aired on December 31, 2004 at 9:00 pm.  CBS opposed the NAL but has not agreed to indemnify its affiliates for the full amount of this liability, if any.  We cannot predict the outcome of this proceeding or the effect of any adverse outcome on the station’s license renewal application.

On October 17, 2006, Mediacom Communications Corporation (Mediacom), in connection with a retransmission consent dispute with us, filed a pleading opposing the grant of the pending license renewal applications of thirty-nine stations licensed to us or to which we provide services.  On February 2, 2007, we reached a retransmission consent agreement with Mediacom, and on February 6, 2007, Mediacom submitted a motion to withdraw and dismiss its pleading with prejudice.

Action on many license renewal applications, including those we have filed, has been delayed because of the pendency of complaints that programming aired by the various networks contained indecent material.  We cannot predict when the FCC will address these complaints and act on the renewal applications.

Recent actions by the FCC have also made it difficult for us to predict the impact on our license renewals from allegations related to the airing of indecent material that may arise in the ordinary course of our business.  For example, on Veterans’ Day in November 2004, we preempted (did not air) “Saving Private Ryan”, a program that was aired during ABC’s network programming time.  We were concerned that since the program contained the use of the “F” word (indecent material as defined by the FCC) airing the programming could result in a fine or other negative consequences for one or more of our ABC stations.  In February 2005, the FCC dismissed all complaints filed against ABC stations regarding this program.  The FCC’s decision justified what some may consider indecent material as appropriate in the context of the program.  Although this ruling has expanded the programming opportunities of our stations, it still leaves us at risk because what might be determined as legitimate context by us may not be deemed so by the FCC and the FCC will not rule beforehand as this may be considered a restriction of free speech.  For example, in September 2006, we preempted a CBS network documentary on the events that happened on September 11, 2001 because the program contained what some have argued is indecent material and the FCC would not provide, in advance of the airing of the documentary, any guidance on whether that material was appropriate in the context of the program.  The result of this is that we only know that “Saving Private Ryan” and “Schindler’s List” are allowed to be aired in their unedited entirety under current FCC rulings.

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.

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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 an additional ten 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 the 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, LMAs are attributable where a licensee owns a television station and programs more than 15% of another television station in the same market.

The Communications Act prohibits the issuance of a broadcast license 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 approximately 82% of the common voting rights of Sinclair) are all United States citizens.  Our amended and restated Articles of Incorporation (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, we have the right to repurchase alien-owned shares at their fair market value to the extent necessary, in the judgment of the 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.  The 2003 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 subsequently 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 media cross-ownership limits which, in many markets, would permit 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 media cross-ownership limits.

If these rules become law, broadcast television owners would be permitted to own more television stations, potentially affecting our competitive position.  The Third Circuit Court of Appeals has stayed the application of the 2003 rules as a result of numerous legal challenges, including one we filed.  In July 2004, the Court issued a decision holding, among other things, that the numerical limits established by the FCC’s 2003 local television ownership rule were patently unreasonable and not consistent with

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the record evidence.  The Court remanded the numerical limits for the FCC to justify or modify and left the stay in effect pending the FCC’s action on remand.  Several parties, including us, filed petitions with the Supreme Court of the United States seeking review of the Third Circuit decision, but the Supreme Court denied the petitions in June 2005.  In July 2006, as part of the FCC’s statutorily required quadrennial review of its media ownership rules, the FCC released a Further Notice of Proposed Rule Making seeking comment on how to address the issues raised by the Third Circuit’s decision, among other things, remanding the local television ownership rule.  During the pendency of the remand, the Third Circuit has ordered the FCC to continue to apply the ownership rules in effect prior to the adoption of the 2003 rules.  The FCC ownership rules currently being applied are described below:

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, FOX, ABC, CBS and NBC, 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 other television networks, such as The CW or MyNetworkTV.

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 39% of the national television viewing audience.  Congress 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 seven of the stations we own and operate, or to which we provide programming services, are UHF.  We reach approximately 22% of U. S. television households or 12.5% taking into account the FCC’s UHF discount.

Local Television (Duopoly) Rule.  A party may own television stations in adjoining markets, even if there is Grade B (discussed below) overlap between the two stations’ analog 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 will contain at least eight independently owned full-power television stations post-merger (the “eight voices test”) and not more than one station is among the top-four ranked stations in the market.

In addition, a party may request a waiver of the rule to acquire a second or third 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.

There are three grades of service for traditional television broadcasts, City (strongest), Grade A and Grade B (least strong); and the signal decreases in strength the further away the viewer is from the broadcast antenna tower.  Generally, it is not as easy for viewers with properly installed outdoor antennas to receive a Grade B signal, as it is to receive a Grade A or City Grade signal.

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 ownership or the 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.  At the same time, any further relaxation of the FCC’s ownership rules, which could occur if the rules adopted in 2003 become effective, may increase the level of competition in one or more 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.

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Local Marketing Agreements

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

Under the FCC ownership rules adopted in 2003, we would be allowed to continue to program most of the stations with which we have an LMA.  In the absence of a waiver, the 2003 ownership rules would require us to terminate or modify three of our LMAs in markets where both the station we own and the station with which we have an LMA are ranked among the top four stations in their particular designated market area.  The FCC’s 2003 ownership rules include specific provisions permitting waivers of this “top four restriction”.  Although there can be no assurances, we have studied the application of the 2003 ownership rules to our markets and believe we are qualified for waivers.  The effective date of the 2003 ownership rules has been stayed by the U. S. Court of Appeals for the Third Circuit and the rules are on remand to the FCC.  Several parties, including us, filed petitions with the Supreme Court of the United States seeking review of the Third Circuit decision, but the Supreme Court denied the petitions.  In July 2006, as part of the FCC’s statutorily required quadrennial review of its media ownership rules, the FCC released a Further Notice of Proposed Rule Making seeking comment on how to address the issues raised by the Third Circuit’s decision, among other things, remanding the local television ownership rules.  We cannot predict the outcome of that proceeding, which could significantly impact our business.

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

Because the effective date of the 2003 ownership rules has been stayed and, in connection with the adoption of those rules, the FCC concluded the old rules could not be justified as necessary in 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.  The FCC, however, dismissed our applications to acquire certain LMA stations.  We filed an application for review of that decision, which is still pending.  In 2005, we filed a petition with the U. S. Court of Appeals for the D.C. Circuit requesting that the Court direct the FCC to take final action on our applications, but that petition was denied.  On January 6, 2006, we submitted a motion to the FCC requesting that it take final action on our applications and that request is pending.

On November 15, 1999, we entered into a plan and agreement of merger to acquire through merger WMYA-TV (formerly WBSC-TV) in Anderson, South Carolina from Cunningham, but that transaction was denied by the FCC.  In light of the change in the 2003 ownership rules, we have filed a petition for reconsideration with the FCC and amended our application to acquire the license of WMYA-TV.  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.  Rainbow/PUSH filed a petition to deny these five applications and to revoke all of our licenses.  The FCC dismissed our applications in light of the stay of the 2003 ownership rules and also denied the Rainbow/PUSH petition.  Rainbow/PUSH filed a petition for reconsideration of that denial and we filed an application for review of the dismissal, which may be impacted by the remand of the FCC’s 2003 ownership rules.  In 2005, we filed a petition with the U. S. Court of Appeals for the D. C. Circuit requesting that the Court direct the FCC to take final action on our applications, but that petition was dismissed.  On January 6, 2006, we submitted a motion to the FCC requesting that it take final action on our applications.  Both the applications and the associated petition to deny are still pending.  We believe the Rainbow/PUSH petition is without merit.

The Satellite Home Viewer Act (SHVA), The Satellite Home Viewer Improvement Act (SHVIA) and the Satellite Home Viewer Extension and Reauthorization Act (SHVERA)

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 allowed satellite carriers, until December 31, 2004, 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 they carry any local signals.  On or before July 1, 2001, SHVIA required all television stations to elect to exercise certain “must carry” or “retransmission consent”

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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 our stations.  In December 2004, President Bush signed into law the Satellite Home Viewer Extension and Reauthorization Act (SHVERA).  SHVERA extended, until December 31, 2009, the rights of broadcasters and satellite carriers under SHVIA to retransmit local television signals by satellite.  SHVERA also authorized satellite delivery of distant network signals, significantly viewed signals and local low-power television station signals into local markets under defined circumstances.  With respect to digital signals, SHVERA established a process to allow satellite carriers to retransmit distant network signals and significantly viewed signals to subscribers under certain circumstances.  In November 2005, the FCC completed a rulemaking proceeding enabling the satellite carriage of “significantly viewed” signals.  In December 2005, the FCC concluded a study, as required by SHVERA, regarding the applicable technical standards for determining when a subscriber may receive a distant digital network signal.  The carriage of programming from two network stations to a local market on the same satellite system could result in a decline in viewership of the local network station, adversely impacting the revenues of our affected owned and programmed 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 specific 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 2005, we elected retransmission consent with respect to all of our stations.  Some of these retransmission consent agreements had been negotiated for cable carriage of our analog and/or digital signal and are short-term and subject to month-to-month extensions.

In February 2005, the FCC adopted an order stating that cable television systems are not required to carry both a station’s analog and digital signals during the digital transition period.  Thus, 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 same FCC order clarified that cable systems need only carry a broadcast station’s primary video stream and not any of the station’s other programming streams in those situations where a station chooses to transmit multiple programming streams.

Many of the viewers of our television stations receive the signal 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 portion of these retransmission consent agreements have no definite term and may be terminated either by us or by the applicable cable television company on very short notice (usually 45 to 60 days).  We are currently engaged in negotiations with respect to these agreements with certain cable television companies.  There can be no assurance that the results of these negotiations will be advantageous to us or that we or the cable companies might not determine to terminate some or all of these agreements.  A termination of our retransmission consent 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.  Although the lack of carriage of these signals does not, at this time, have a material impact on our financial statements, 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 assurances that we will be able to negotiate mutually acceptable retransmission consent agreements in the future relating to the carriage of our digital signals.  However, we have entered into retransmission consent agreements with a significant number of MVPDs.  These retransmission consent agreements generally have expiration dates in December 2009.

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 systems’ local community).  The FCC’s network non-

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duplication rules allow local broadcast, network affiliated stations to require that cable operators black out duplicate 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 markets.  This is not necessarily a 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.

In December 2004, President Bush signed into law the Satellite Home Viewer Extension and Reauthorization Act (SHVERA).  Among other things, SHVERA allows satellite carriers to transmit distant signals and the signals of “significantly viewed” stations under certain circumstances.  In November 2005, the FCC completed a rulemaking proceeding enabling the satellite carriage of “significantly viewed” signals.  In December 2005, the FCC concluded a study, as required by SHVERA, regarding the applicable technical standards for determining when a subscriber may receive a distant digital network signal.  The carriage of programming of two network stations to a local market on the same satellite system could result in a decline in viewership of the local network station, adversely impacting the revenues of our affected owned and 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 from any DTV ancillary or supplementary service for which there is a subscription fee or for which the licensee receives a fee from a third party.

DTV channels are generally located in the range of channels from channel 2 through channel 51.  All commercial stations were required to begin digital broadcasting on May 1, 2002.  Under the FCC’s rules, all DTV stations are required to operate at all times in which their analog stations are operating.  In September 2004, the FCC eliminated its requirement that a digital station simulcast a certain percentage of the programming transmitted on its associated analog station.

As of December 31, 2004, DTV stations were required to meet a certain signal strength standard for the digital signal coverage in their communities of license.  By July 2005, a DTV licensee affiliated with a top four network (i.e, FOX, ABC, CBS or NBC) that is located in one of the top 100 markets was required to meet a higher replication standard or lose interference protection for those areas not covered by the digital signal.  For a station subject to this deadline which had not yet received a construction permit, the FCC required that such station build a “checklist” facility by August 2005.  For all other commercial DTV licensees, as well as non-commercial DTV licensees, that have received construction permits, the deadline for meeting a higher replication standard was July 2006.  We filed requests, that are pending, for extensions and/or waivers of these deadlines for WSMH-DT, Flint, Michigan and WSTR-DT, Cincinnati, Ohio.  There are no guarantees that our extension and waiver requests will be granted.  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.

We operate our television stations at different power levels pursuant to our FCC licenses, applicable permits or special temporary authority granted by the FCC.  The following table is a summary of our operating status as of December 31, 2006:

DTV Operating Status

 

# of Stations

 

Operating with approved digital license

 

 

21

 

 

Operating at full power, pending license approval

 

 

23

 

 

Operating at low power with special temporary authority

 

 

2

 

 

Applications pending for construction permits

 

 

1

 

 

LMA/JSA stations operating with approved digital license

 

 

3

 

 

LMA/JSA stations operating at full power, pending license approval

 

 

6

 

 

LMA/JSA stations operating at low power with special temporary authority

 

 

2

 

 

 

 

 

58

 

 

 

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.  Congress passed legislation establishing a hard deadline of February 17, 2009 by which broadcasters must cease using their analog channel.  There can be no assurance that the stations we own or program will be fully transitioned to digital broadcasts by this deadline.  A station’s failure to

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meet the deadline could result in a loss of interference protection or the applicable FCC license, adversely impacting the revenues of our owned and programmed stations and LMA/JSA stations.

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.  Analog broadcasters are required to cease operation on their assigned analog spectrum by February 17, 2009.  At that time, the FCC will reclaim this spectrum from broadcasters and make it available to the entities who have been assigned the spectrum through FCC auctions.  The FCC envisions that the reclaimed band will be used for a variety of broadcast-type applications including two-way interactive services and services using Coded Orthogonal Frequency Division Multiplexing technology.  We cannot predict how the development of this spectrum will affect our television operations.

Digital must carry.  In February 2005, the FCC adopted an order stating that cable television systems are not required to carry both a station’s analog and digital signals during the digital transition.  The same order also clarified that a cable system must only carry a broadcast station’s primary video stream but is not required to carry any of the station’s other programming streams in those situations where a station chooses to transmit multiple programming streams.

Multi-Channel Digital Broadcasting.  FCC rules allow broadcasters to transmit additional digital signals within the spectrum allocated to each FCC license holder.  We are currently broadcasting a single digital signal for all but four of our television stations.  During 2006, we began broadcasting a second digital signal in Baltimore, Maryland on which we are currently airing various programs including religious, paid-programming and “classic” syndicated programming.  We also entered into agreements with MyNetworkTV to air prime-time programming on the second digital signal in Columbus, Ohio, Dayton, Ohio and Richmond, Virginia.  During non prime-time hours these stations air religious, paid-programming and “classic” syndicated programming.

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 broadcasting both analog and digital signals during the transition period.

Children’s programming.  In 2004, the FCC established children’s educational and informational programming obligations for digital multicast broadcasters and placed restrictions on the increasing commercialization of children’s programming on both analog and digital broadcast and cable television systems.  In addition to imposing its limit as to the amount of commercial matter in children’s programming (10.5 minutes per hour on weekends and 12 minutes per hour on weekdays) on all digital or video programming, free or pay, directed to children 12 years old and younger, the FCC also mandated that digital broadcasters air an additional half hour of “core” children’s programming per every increment of 1 to 28 hours of free video programming provided in addition to the main DTV program stream.  The additional core children’s programming requirement for digital broadcasters took effect on January 2, 2007.

Emergency Alert System.  In November 2005, the FCC adopted an order requiring that digital broadcasters comply with the FCC’s present Emergency Alert System (EAS) rules.  It also issued a further notice of proposed rulemaking seeking comments on what actions the FCC should take to expedite the development of a digitally based public alert and warning system.  Any additional EAS requirements on digital broadcasters could increase our 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 beverages.  FCC rules also restrict the amount and type of advertising which can appear in a program broadcast primarily for an audience of children 12 years old and younger.  In addition, the Federal Trade Commission issued guidelines in December 2003 and continues to provide advice to help media outlets voluntarily screen out weight loss product advertisements that are misleading.

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The Communications Act and FCC rules also place restrictions on the broadcasting of advertisements by legally qualified candidates for elective office.  Those 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 and amount of time for the same period.

It is a violation of federal law and FCC regulations to broadcast obscene or indecent programming.  FCC licensees are, in general, responsible for the content of their broadcast programming, including that supplied by television networks.  Accordingly, there is a risk of being fined as a result of our broadcast programming, including network programming.  As a result of legislation passed in June 2006, the maximum forfeiture amount for the broadcast of indecent or obscene material was increased to $325,000 from $32,500 for each violation.

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.

Equal Employment Opportunity.  On November 20, 2002, the FCC adopted rules, effective March 10, 2003, 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 these rules and policies to part-time positions, defined as less than 30 hours per week.  That rulemaking is still pending.

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. local time.

In addition and as noted above under Digital Television, the FCC concluded that starting on January 2, 2007 a digital broadcaster must air an additional half hour of “core” children’s programming per every increment of 1 to 28 hours of free video programming provided in addition to the main DTV program stream.

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, which are required to be placed quarterly in stations’ public inspection files and filed quarterly with the FCC.

In 2004, the FCC initiated a notice of inquiry seeking comments on issues relating to the presentation of violent programming on television and its impact on children.  That proceeding is still pending.

Television Program Content.  The television industry has developed an FCC approved ratings system 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 the blocking of rated programming.

In 2004, the FCC initiated a notice of inquiry seeking comments on what actions, if any, it should take to ensure that licensees air programming that is responsive to the interests and needs of their communities of license.  That proceeding is still pending.

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Closed Captioning.  Effective January 1, 2006, all new nonexempt analog and digital English language programming was required to be captioned.  Additionally, the FCC, in July 2005, initiated a rulemaking to determine whether any revisions should be made to enhance the effectiveness of its closed captioning rules, including monitoring compliance and the establishment of a base forfeiture amount for noncompliance.

Pending Matters

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 mobility and portability of our broadcast signal to hand-held devices.

For example, in October 2006, the FCC adopted an order taking the initial steps toward allowing new low power devices to operate in the broadcast television spectrum at locations where channels in that spectrum are not in use.  The operation of such devices could cause harmful interference to our broadcast signals adversely affecting the operation and profitability of our stations.  In December 2006, the FCC adopted an order prohibiting franchising authorities from unreasonably refusing to award competitive franchises for the provision of cable services.  The order could facilitate the provision of such services by telephone companies, increasing competition to our stations.

Other Considerations

The preceding summary is not 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 circulated 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 consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows.

COMPETITION

Our television stations compete for audience share and advertising revenue with other television stations in their respective designated market areas (DMAs), as well as with other advertising media such as radio, newspapers, magazines, outdoor advertising, transit advertising, telecommunications providers, internet, yellow page directories, direct mail, MVPDs and wireless video.  Some competitors are part of larger organizations with substantially greater financial, technical and other resources than we have.  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.

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 over-the-air and MVPDs of stations in adjacent DMAs, which tends to spread viewership and advertising expenditures over a larger number of television stations.

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Broadcast television stations compete for advertising revenues primarily with other broadcast television stations, radio stations, cable channels, MVPDs serving the same market, as well as with newspapers, the internet, yellow page directories, direct mail, outdoor advertising operators and transit advertisers.  Television stations compete for audience share primarily on the basis of program popularity, which has a direct effect on advertising rates.  Our big four affiliated stations: WTTA-TV, Tampa, Florida; WUCW-TV, Minneapolis/St. Paul, Minnesota; KDNL-TV, St. Louis, Missouri and WPGH-TV, Pittsburgh, Pennsylvania 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, as well as through self-produced news, public affairs programs, live local sporting events, paid-programming 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, MVPDs, internet, newspapers and yellow page directories, direct mail, the aggressiveness and knowledge of the 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.

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 affect on a television station’s operations and profits.  For instance, the FCC has established Class A television service for qualifying low power television stations.  This Class A designation provides low power television stations, which ordinarily have no broadcast frequency rights when the low power signal conflicts with a signal from any full power stations, some additional frequency rights.  These rights may allow low power stations 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 additional program channels.  These narrow program channels serve as low rated, expensive programs to local advertisers.  Other principal sources of competition include home video exhibition and Direct Broadcast Satellite (DBS) services and Broadband Radio Service (BRS).  DBS and cable operators, in particular, compete aggressively for advertising revenues.

Moreover, technology advances and regulatory changes affecting programming delivery though fiber optic telephone lines and video compression could lower entry barriers for new video channels and encourage the further development of increasingly specialized “niche” programming.  Telephone companies are permitted to provide video distribution services via radio communication, on a 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 multi-channel video programming distribution.  Those licenses were granted in July 2004.  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.

While DTV technology is currently available in most viewing markets, the transition of our viewers from the current analog broadcast format to a digital format is scheduled to occur on February 17, 2009.  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 high definition television format and to deliver various forms of data and programming to the internet, to PCs and mobile handheld devices.  These additional capabilities may provide us with additional sources of revenue, as well as additional competition.  In addition, emerging technologies that allow viewers to digitally record and play back television programming have increased the number of hours people spend watching television.

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 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.

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EMPLOYEES

As of March 5, 2007, we had approximately 2,786 employees.  Approximately 182 employees at six 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 of 1934 as soon as reasonably practicable after such documents are electronically submitted to the SEC.  In addition, a replay of each of our quarterly earnings conference calls is available on our website until the subsequent quarter’s earnings call.

ITEM 1A.           RISK FACTORS

You should carefully consider the risks described below before investing in our securities.  Our business is also subject to the risks that affect many other companies such as general economic conditions, geopolitical events, competition, technological obsolescence and employee relations.  The risks described below, along with risks not currently known to us or that we currently believe are immaterial, may impair our business operations and our liquidity in an adverse way.

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 our business may decline.  Our ability to sell advertising time depends on:

·                  the levels of automobile advertising, which generally represents about one fourth of our advertising revenue;

·                  the health of the economy in the area where our television 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;

·                  the activities of our competitors, including increased competition from other forms of advertising-based mediums, such as other broadcast television stations, radio stations, satellite television providers, internet content providers, cable system operators and telecommunication providers serving in the same markets; and

·                  other factors that may be beyond our control.

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 $1.4 billion at December 31, 2006, compared to the book value of shareholders’ equity of $266.6 million on the same date.  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, limiting the amount available for working capital, capital expenditures, dividends 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;

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·                  the interest rate under our Bank Credit Agreement is a floating rate and will increase as 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;

·                  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; and

·                  our ability to finance 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 our credit ratings.  As of December 31, 2006, our credit ratings, as assigned by Moody’s Investor Services (Moody’s) and Standard & Poor’s Ratings Services (S&P) were:

 

Moody’s

 

S&P

 

Senior Secured Credit Facilities

 

Baa3

 

BB

 

Corporate Credit

 

Ba3

 

BB-

 

Senior Subordinated Notes

 

B1

 

B

 

Convertible Senior Notes

 

B2

 

B

 

 

The credit ratings previously stated are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal by the assigning rating organization.  Each rating should be evaluated independently of any other rating.

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

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, 2006, we had $175.0 million available (subject to certain borrowing conditions) for additional borrowings under the Bank Credit Agreement, all of which was available under our current borrowing capacity.  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 indentures 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.

We must purchase television programming in advance based on expectations about future revenues.  Actual revenues may be lower than our expectations.  If this happens, we could experience losses that may make our securities less valuable.

One of our most significant costs is television programming.  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 have limited control over the costs of the 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 before we have fully amortized the costs.  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 network affiliation agreements or which provide us programming.

Commitments 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;

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·                  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 from asset sales;

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

·                  restrictions on the type of business we and our subsidiaries may operate in; and

·                  financial ratio and condition tests including the ratio of earnings before interest, tax, depreciation and amortization, as adjusted (adjusted EBITDA) to certain of our fixed expenses, the ratio of indebtedness to adjusted EBITDA, adjusted EBITDA to senior indebtedness and adjusted EBITDA to operating company indebtedness.

Future financing arrangements may contain additional restrictions and tests.  All of these restrictive covenants may limit 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 were to soften and thereby reduce our advertising revenues).  If we default on our obligations, creditors could require immediate payment of the obligations or foreclose on collateral.  If this happens, we could be forced to sell assets or take other actions that could significantly reduce the value of our securities and we may not have sufficient assets or funds to pay our debt obligations.

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

Network Affiliation Agreements

Beginning in September 2006, our 58 television stations that we own and operate, or to which we provide programming services or sales services, are affiliated as follows: FOX (19 stations); MyNetworkTV (17 stations); ABC (10 stations); The CW (9 stations); CBS (2 stations) and NBC (1 station).  Prior to September 2006, of the 58 television stations that we owned and operated, or to which we provided programming services or sales services, 56 were affiliated as follows: FOX (19 stations); WB (18 stations); ABC (10 stations); UPN (6 stations); CBS (2 stations) and NBC (1 station).  The remaining two stations were independent.  The networks produce and distribute programming in exchange for each station’s commitment to air the programming at specified times and for commercial announcement time during programming.  The amount and quality of programming provided by each network varies.

On December 22, 2006, NBC agreed to renew our affiliation agreement for WTWC-TV in Tallahassee, Florida.  The agreement has a ten-year term that will expire on December 31, 2016.  As of December 31, 2006, the net book value of this affiliation agreement was $2.1 million.

The non-renewal or termination of any of our network affiliation agreements would prevent us from 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

22




reduced revenues.  Upon the termination of any of the above affiliation agreements, we would be required to establish a new affiliation agreement with another network or operate as an independent station.  At such time, the remaining value of the network affiliation asset could become impaired and we would be required to write down the value of the asset.  At this time, we cannot predict the final outcome of future negotiations and what impact, if any, they may have on our consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows. See Item 1. Business, Television Broadcasting table for further information regarding our affiliation agreements.

A change in a critical accounting estimate that affects the accounting treatment of goodwill and FCC licenses could cause material future losses due to asset impairment.

In June 2001, the Financial Accounting Standards Board (FASB) approved SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142).  SFAS 142 requires companies to cease amortizing goodwill and certain other intangible assets including FCC licenses.  SFAS 142 also establishes a method of testing goodwill and FCC licenses for impairment on an annual basis, or on an interim basis if an event occurs that would reduce the fair value of a reporting unit below its carrying value.

We test our goodwill and FCC licenses for impairment.  To perform this test, we estimate the fair values of our station assets and liabilities using a combination of observed prices paid for similar assets and liabilities, discounted cash flow models and appraisals.  We make certain critical estimates about the future revenue growth rates within each of our markets as well as the discount rates that would be used by market participants in an arms-length transaction.  If these growth rates decline or if the discount rate increases, our goodwill and/or FCC licenses could be impaired.  An impairment of some or all of the value of these assets could result in a material effect on the consolidated statements of operations.

Key officers and directors have financial interests that are different and sometimes opposite our own and we 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 upon approval by the independent members of our Board of Directors even if 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 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 controlling interest in a television station which we program pursuant to an LMA.  The Smiths also own businesses that lease real property and tower space to us and engage in other transactions with us.  David D. Smith, Frederick G. Smith, J. Duncan Smith, Robert E. Smith and David B. Amy, our Executive Vice President and Chief Financial Officer, together own less than 2.8% of Allegiance Capital Limited Partnership, a limited partnership in which we hold a 97.0% interest.  Also, David D. Smith, Frederick G. Smith, J. Duncan Smith and Robert E. Smith together own less than 1.0% of the stock of G1440, a company of which we own approximately 94.0% and David D. Smith owns less than 0.1% of Acrodyne Communications, Inc., a company of which we own approximately 82.3%.  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 we might pursue.  These limitations do not, however, prohibit all such transactions.

For additional information regarding our related person transactions, see Note 12. Related Person Transactions, in the Notes to our Consolidated Financial Statements.

The Smiths exercise control over most matters submitted to a shareholder 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 approximately 82% of the common stock voting rights 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 substantially all of the Class B Common Stock, which have ten votes per share.  Our Class A Common Stock has only one vote per share.  In addition, the Smiths hold half our board of directors’ seats and, therefore, have the power to exert significant influence over our corporate management and policies.  The Smiths have entered into a stockholders’ agreement pursuant to which they have agreed to vote for each other as candidates for election to the board of directors until June 13, 2015.

23




Circumstances may occur in which the interests of the Smiths, as the controlling security holders, could be in conflict with the interests of other securityholders and the Smiths would have the ability to cause us 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 our other securityholders.  (See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters and Item 13. Certain Relationships and Related Transactions, which will be included as part of our Proxy Statement for our 2007 Annual Meeting.)

Certain features of our capital structure that discourage others from attempting to acquire our company 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 parties 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 open market at the time of the offer.  If the voting rights of the Smiths 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 otherwise be if these deterrents to takeovers did not exist.

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, assign or modify a license, purchase a new station, sell an existing 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 are 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.  (See Item 1. Business.)

It is a violation of federal law and FCC regulations to broadcast obscene or indecent programming.  In the past few years, the FCC has intensified its scrutiny of allegedly indecent and obscene programming.  FCC licensees are, in general, responsible for the content of their broadcast programming, including content supplied by television networks.  Accordingly, there is a risk of being fined as a result of our broadcast programming, including network programming.

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.

Changes in Rules on Television Ownership

Congress 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.  This law permits broadcast television owners to own more television stations nationally, potentially affecting our competitive position.

In June 2003, the FCC adopted new multiple ownership rules.  In July 2004, the Court of Appeals for the Third Circuit issued a decision which upheld a portion of such rules and remanded the matter to the FCC for further justification of the rules.  The court also issued a stay of the 2003 rules pending the remand.  Several parties, including us, filed petitions with the Supreme Court of the United States seeking review of the Third Circuit decision, but the Supreme Court denied the petitions in June 2005.  In July 2006, as part of the FCC’s statutorily required quadrennial review of its media ownership rules, the FCC released a Further Notice of Proposed Rule Making seeking comment on how to address the issues raised by the Third Circuit’s decision, among other things, remanding the local television ownership rule.  We cannot predict the outcome of that proceeding, which could significantly impact our business.

Changes in Rules on Local Marketing Agreements

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

24




Under the FCC ownership rules adopted in 2003, we would be allowed to continue to program most of the stations with which we have an LMA.  In the absence of a waiver, the 2003 ownership rules would require us to terminate or modify three of our LMAs in markets where both the station we own and the station with which we have an LMA are ranked among the top four stations in their particular designated market area.  The FCC’s 2003 ownership rules include specific provisions permitting waivers of this “top four restriction”.  Although there can be no assurances, we have studied the application of the 2003 ownership rules to our markets and believe we are qualified for waivers.  The effective date of the 2003 ownership rules has been stayed by the U. S. Court of Appeals for the Third Circuit and the rules are on remand to the FCC.  Several parties, including us, filed petitions with the Supreme Court of the United States seeking review of the Third Circuit decision, but the Supreme Court denied the petitions in June 2005.  In July 2006, as part of the FCC’s statutorily required quadrennial review of its media ownership rules, the FCC released a Further Notice of Proposed Rule Making seeking comment on how to address the issues raised by the Third Circuit’s decision, among other things, remanding the local television ownership rule.    We cannot predict the outcome of that proceeding, which could significantly impact our business.

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

Because the effective date of the 2003 ownership rules has been stayed and, in connection with the adoption of those rules, 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.  The FCC, however, dismissed our applications to acquire certain LMA stations.  On November 15, 1999, we entered into a plan and agreement of merger to acquire through merger WMYA-TV (formerly WBSC-TV) in Anderson, South Carolina from Cunningham Broadcasting Corporation (Cunningham), but that transaction was denied by the FCC.  In light of the change in the 2003 ownership rules, we have filed a petition for reconsideration with the FCC and amended our application to acquire the license of WMYA-TV.  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.  The Rainbow/PUSH Coalition (Rainbow/PUSH) filed a petition to deny these five applications and to revoke all of our licenses.  The FCC dismissed our applications in light of the stay of the 2003 rules and also denied the Rainbow/PUSH petition.  Rainbow/PUSH filed a petition for reconsideration of that denial and we filed an application for review of the dismissal, which may be impacted by the remand of the FCC’s 2003 ownership rules.  In 2005, we filed a petition with the U. S. Court of Appeals for the D. C. Circuit requesting that the Court direct the FCC to take final action on our applications, but that petition was dismissed.  On January 6, 2006, we submitted a motion to the FCC requesting that it take final action on our applications.  Both the applications and the associated petition to deny are still pending.  We believe the Rainbow/PUSH petition is without merit.

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 this happens, the market for such assets may not be as good as when we purchased them and, therefore, we cannot be certain of a favorable return on our original 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 terms of the LMAs, we may be forced to pay termination penalties under the terms of some of our LMAs.  Any such termination penalties could be material.

Use of outsourcing agreements

In addition to our LMAs, 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, one of our stations in Nashville, Tennessee currently provides services to another station in the market and other parties provide services to our stations in Peoria/Bloomington, Illinois, Cedar Rapids, Iowa and Rochester, New York.  We believe this structure

25




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, on August 2, 2004, the FCC released a notice of proposed rulemaking seeking comments on its tentative conclusion that television joint sales agreements should be attributable.  We cannot predict the outcome of this proceeding, nor can we predict how any changes, together with possible changes to the ownership rules, would apply to our existing outsourcing agreements.

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 be counter to 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 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, putting our own licenses at risk.

Competition from other broadcasters or other content providers 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, direct broadcast satellite companies and telecommunication companies are developing new technology that allows 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.  The decreased 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.

Types of competitors

We also face competition from rivals that may have greater resources than we have.  These include:

·                  other local free over-the-air broadcast television and radio stations;

·                  telecommunication companies;

·                  cable and satellite system operators;

·                  print media providers such as newspapers, direct mail and periodicals;

·                  internet providers; and

·                  competition from other emerging technologies.

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.

26




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

The commencement of the war in Iraq resulted in a reduction of advertising revenues as a result of uninterrupted news coverage and general economic uncertainty.  During the first quarter of 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, there may be a similar adverse effect on our results of operations.

Unrelated third parties may claim that we infringe on their rights based on the nature and content of information posted on websites maintained by us.

We host internet services that enable individuals and businesses to exchange information, generate content, advertise products and services, conduct business and engage in various online activities.  The law relating to the liability of providers of these online services for activities of their users is currently unsettled both within the United States and internationally.  Claims may be brought against us for defamation, negligence, copyright or trademark infringement, unlawful activity, tort, including personal injury, fraud, or other theories based on the nature and content of information that we provide links to or that may be posted online or generated by our users.  Our defense of such actions could be costly and involve significant time and attention of our management and other resources.

ITEM 1B.           UNRESOLVED STAFF COMMENTS

None.

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.  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.  The following is a summary of our principal owned and leased real properties.  We believe that no one property represents a material amount of the total properties owned or leased.  See Item 1. Business, for a listing of our station locations.

 

OWNED

 

LEASED

 

Office and Studio Buildings

 

535,243 square feet

 

403,537 square feet

 

Office and Studio Land

 

373 acres

 

4 acres

 

Transmitter Building Sites

 

82,388 square feet

 

59,402 square feet

 

Transmitter and Tower Land

 

1,279 acres

 

1,434 acres

 

 

ITEM 3.                    LEGAL PROCEEDINGS

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

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 2006.

27




PART II

ITEM 5.

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our Class A Common Stock is listed for trading on the NASDAQ stock market under the symbol SBGI.  Our Class B Common Stock is not traded on a market.  The following tables set forth for the periods indicated the high and low closing sales prices on the NASDAQ stock market.

 

2006

 

High

 

Low

 

 

 

 

First Quarter

 

$

9.56

 

$

7.19

 

 

 

 

 

Second Quarter

 

$

8.75

 

$

7.70

 

 

 

 

Third Quarter

 

$

8.68

 

$

7.51

 

 

 

 

 

Fourth Quarter

 

$

10.91

 

$

7.76

 

 

 

 

 

2005

 

High

 

Low

 

 

 

 

First Quarter

 

$

9.14

 

$

7.48

 

 

 

 

 

Second Quarter

 

$

9.13

 

$

7.45

 

 

 

 

Third Quarte

 

$

9.57

 

$

8.71

 

 

 

 

 

Fourth Quarter

 

$

10.00

 

$

8.22

 

 

 

 

As of March 5, 2007, there were approximately 94 shareholders of record of our common stock.  This number does not include beneficial owners holding shares through nominee names.

We did not repurchase any Class A Common Stock during 2006.

Dividend Policy

Future dividends on our common shares, if any, will be at the discretion of our Board of Directors and will depend on several factors including our results of operations, cash requirements and surplus, financial condition, covenant restrictions and other factors that the Board of Directors may deem relevant.  Our Bank Credit Agreement and some of our subordinated debt instruments have general restrictions on the amount of dividends that may be paid.  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

·                  after taking account of the dividend, we are within certain restricted payment 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.

Our current dividend of $0.15 per share per quarter is not in excess of any applicable restrictions or conditions contained within the indentures of our various senior subordinated notes and our Bank Credit Agreement.  We expect to continue to pay a dividend in the foreseeable future.

In May 2004, we declared a quarterly cash dividend on our Class A and Class B Common Stock for the first time in our company’s history.  For the quarters ended June 30, 2004, September 30, 2004 and December 31, 2004, we paid dividends of $0.025 per share of our common stock.  During 2005, the Board of Directors voted to increase that dividend on three occasions.  The 2005 dividends declared were as follows:

For the quarter ended

 

Quarterly Dividend
Per Share

 

Annual Dividend
Per Share

 

Date dividends were paid

 

March 31, 2005

 

$

0.050

 

$

0.200

 

April 15, 2005

 

June 30, 2005

 

$

0.075

 

$

0.300

 

July 15, 2005

 

September 30, 2005

 

$

0.075

 

$

0.300

 

October 14, 2005

 

December 31, 2005

 

$

0.100

 

$

0.400

 

January 13, 2006

 

 

28




During 2006, the Board of Directors voted to increase the dividend once.  On February 14, 2007, we announced that our Board of Directors approved an increase to our annual dividend to $0.60 per share from $0.50 per share.  We will begin paying this dividend rate beginning in the second quarter 2007 and intend to continue in each future quarter.  The 2006 dividends declared were as follows:

 

For the quarter ended

 

Quarterly Dividend
Per Share

 

Annual Dividend
Per Share

 

Date dividends were paid

 

March 31, 2006

 

$

0.100

 

$

0.400

 

April 13, 2006

 

June 30, 2006

 

$

0.100

 

$

0.400

 

July 13, 2006

 

September 30, 2006

 

$

0.125

 

$

0.500

 

October 12, 2006

 

December 31, 2006

 

$

0.125

 

$

0.500

 

January 12, 2007

 

 

Convertible Bond Repurchases

During the year ended December 31, 2006, we repurchased, in the open market, $23.7 million in face value of our 8% Senior Subordinated Notes, due 2012 and $8.6 million in face value of our 6% Convertible Debenture, due 2012.

ITEM 6.                    SELECTED FINANCIAL DATA

The selected consolidated financial data for the years ended December 31, 2006, 2005, 2004, 2003 and 2002 have been derived from our audited consolidated financial statements.  The consolidated financial statements for the years ended December 31, 2006, 2005 and 2004 are included elsewhere in this report.

29




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.

STATEMENTS OF OPERTIONS DATA

(In thousands, except per share data)

 

 

 

Years Ended December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Net broadcast revenues (a)

 

$

635,842

 

$

614,436

 

$

634,609

 

$

611,893

 

$

621,561

 

Revenues realized from station barter arrangements

 

54,686

 

55,034

 

57,814

 

58,845

 

57,318

 

Other operating divisions’ revenues

 

24,610

 

22,597

 

13,054

 

14,568

 

4,344

 

Total revenues

 

715,138

 

692,067

 

705,477

 

685,306

 

683,223

 

 

 

 

 

 

 

 

 

 

 

 

 

Station production expenses

 

148,276

 

152,771

 

155,276

 

149,073

 

137,600

 

Station selling, general and administrative expenses

 

140,579

 

138,304

 

146,373

 

130,619

 

128,336

 

Expenses recognized from station barter arrangements

 

49,508

 

50,460

 

53,358

 

54,104

 

51,117

 

Depreciation and amortization (b)

 

155,015

 

138,913

 

155,793

 

160,677

 

173,539

 

Other operating divisions’ expenses

 

24,193

 

20,944

 

14,932

 

16,375

 

6,051

 

Corporate general and administrative expenses

 

22,795

 

21,220

 

21,496

 

19,745

 

17,953

 

Impairment of intangibles

 

15,589

 

 

44,055

 

 

 

Operating income

 

159,183

 

169,455

 

114,194

 

154,713

 

168,627

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and amortization of debt discount and deferred financing cost

 

(115,217

)

(120,002

)

(120,400

)

(121,165

)

(118,114

)

Subsidiary trust minority interest expense (c)

 

 

 

 

(11,246

)

(23,890

)

Interest income

 

2,008

 

650

 

191

 

560

 

1,484

 

Gain (loss) from sale of assets

 

143

 

(80

)

(52

)

(452

)

(54

)

Loss from extinguishment of debt

 

(904

)

(1,937

)

(2,453

)

(15,187

)

(15,362

)

Unrealized gain (loss) from derivative instrument

 

2,907

 

21,778

 

29,388

 

17,354

 

(30,939

)

Income (loss) from equity and cost investees

 

6,338

 

(1,426

)

1,100

 

1,193

 

(1,189

)

Gain on insurance settlement

 

 

1,193

 

3,341

 

 

 

Other income

 

1,159

 

721

 

894

 

1,189

 

1,811

 

Income (loss) from continuing operations before income taxes

 

55,617

 

70,352

 

26,203

 

26,959

 

(17,626

)

Income tax (provision) benefit

 

(6,970

)

(36,115

)

(11,522

)

(10,817

)

7,498

 

Net income (loss) from continuing operations

 

48,647

 

34,237

 

14,681

 

16,142

 

(10,128

)

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of related income taxes

 

3,556

 

5,671

 

9,341

 

8,250

 

4,519

 

Gain on sale of discontinued operations, net of related income taxes

 

1,774

 

146,024

 

 

 

7,519

 

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

 

 

 

 

 

(566,404

)

Net income (loss)

 

$

53,977

 

$

185,932

 

$

24,022

 

$

24,392

 

$

(564,494

)

Net income (loss) available to common shareholders

 

$

53,977

 

$

207,129

 

$

13,842

 

$

14,042

 

$

(574,844

)

 

30




 

 

 

Years Ended December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

Per Common Share Data:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per share from continuing operations

 

$

0.57

 

$

0.65

 

$

0.05

 

$

0.07

 

$

(0.24

)

Basic and diluted earnings per share from discontinued operations

 

$

0.06

 

$

1.78

 

$

0.11

 

$

0.09

 

$

0.14

 

Basic and diluted loss per share from cumulative effect of change in accounting principle

 

$

 

$

 

$

 

$

 

$

(6.64

)

Basic and diluted earnings (loss) per share

 

$

0.63

 

$

2.43

 

$

0.16

 

$

0.16

 

$

(6.74

)

Dividends declared per share

 

$

0.450

 

$

0.300

 

$

0.075

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

67,408

 

$

9,655

 

$

10,491

 

$

28,730

 

$

5,315

 

Total assets

 

$

2,272,598

 

$

2,283,305

 

$

2,465,663

 

$

2,567,106

 

$

2,599,713

 

Total debt (d)

 

$

1,413,623

 

$

1,450,738

 

$

1,639,615

 

$

1,729,921

 

$

1,548,050

 

HYTOPS (e)

 

$

 

$

 

$

 

$

 

$

200,000

 

Total shareholders’ equity

 

$

266,645

 

$

249,722

 

$

226,551

 

$

229,005

 

$

219,678

 


(a)             “Net broadcast revenues” is 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 definite-lived intangible broadcasting assets, other assets and costs related to excess syndicated programming.

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

(d)            “Total debt” is defined as notes payable, capital leases and commercial bank financing, including the current and long-term portions.  Total debt does not include HYTOPS (see footnote (e)) or our preferred stock, in applicable years related balances were outstanding including 2004, 2003 and 2002.

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

(f)               The cumulative adjustment relates to an impairment charge taken in conjunction with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets.

ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis provides qualitative and quantitative information about our financial performance and condition and should be read in conjunction with our consolidated financial statements and the accompanying notes to those statements.  This discussion consists of the following sections:

Executive Overview — a description of our business, financial highlights from 2006, information about industry trends and sources of revenues and operating costs;

Critical Accounting Policies and Estimates — a discussion of the accounting policies that are most important in understanding the assumptions and judgments incorporated in the consolidated financial statements and a summary of recent accounting pronouncements;

Results of Operations — a summary of the components of our revenues by category and by network affiliation, a summary of other operating data and an analysis of our revenues and expenses for 2006, as restated for certain expenses, 2005 and 2004, including comparisons between years and expectations for 2007; and

31




Liquidity and Capital Resources — a discussion of our primary sources of liquidity, an analysis of our cash flows from or used in operating activities, investing activities and financing activities, a discussion of our dividend policy and a summary of our contractual cash obligations and off-balance sheet arrangements.

EXECUTIVE OVERVIEW

We believe that we are one of the largest and most diversified television broadcasting companies in the United States.  We currently own, provide programming and operating services pursuant to local marketing agreements (LMAs) or provide, or are provided, sales services pursuant to outsourcing agreements to 58 television stations in 36 markets.  For the purpose of this report, these 58 stations are referred to as “our” stations.  We currently have 11 duopoly markets where we own and operate two stations within the same market.  We have ten LMA markets where, with one exception, we own and operate one station in the market and provide or are provided programming and operating services to, or by, another station within the market.  In the remaining 15 markets, we own and operate a single television station.

We believe that owning duopolies and operating stations under LMAs enables us to accomplish two very important strategic business objectives: increasing our share of revenues available in each market and operating television stations more efficiently by minimizing costs.  We constantly monitor revenue share and cost efficiencies and we aggressively pursue opportunities to improve both by using new technology and by sharing best practices among our station groups.

Sinclair Television Group, Inc. (STG), a wholly owned subsidiary of Sinclair Broadcast Group, Inc. (SBG), is the primary obligor under our existing Bank Credit Agreement, as amended, the 8.75% Senior Subordinated Notes, due 2011, which were redeemed in full on January 22, 2007, and the 8% Senior Subordinated Notes, due 2012.  Our Class A Common Stock, Class B Common Stock, the 6.0% Convertible Debentures, due 2012 and the 4.875% Convertible Senior Notes, due 2018 remain obligations or securities of SBG and are not obligations or securities of STG.

2006 Highlights

·                  During 2006, we continued to monetize our retransmission consent agreements.  Our retransmission consent agreements generated $25.4 million in broadcast revenues during 2006, an increase of 32.3% over 2005.  The incremental value created from our agreements is expected to grow in 2007 through further monetization.  We expect total revenue generation from our agreements to be significantly greater in 2007.

·                  During 2006, a non-presidential election year, political revenues were $32.0 million, which is substantially the same amount we earned in the 2004 presidential election year;

·                  Operating income decreased 6.1% in 2006 due to an impairment of $15.6 million related to a market’s goodwill and definite-lived intangible assets;

·                  We increased our quarterly dividend rate from $0.10 to $0.125 per share beginning with the October dividend payment.  The quarterly dividend rate per share increased again to $0.15 on February 13, 2007;

·                  We repurchased, in the open market, $8.6 million face value of our 6% Convertible Debentures, due 2012 and $23.7 million face value of our 8% Senior Subordinated Notes, due 2012;

·                  We renewed our affiliation agreement with the FOX network for our 19 FOX affiliates for another six years;

·                  We entered into affiliation agreements, which expire August 31, 2010 with CW Television Network for nine of our former WB and independent stations;

·                  We entered into affiliation agreements, which expire September 4, 2011 with MyNetworkTV for 17 of our former WB, UPN and independent stations;

·                  Our television station in Baltimore, Maryland, WBFF-TV, went live on May 1, 2006 with WBFF-DT Channel 45-2, the market’s first multi-digital channel to carry syndicated and other local programming;

·                  We entered into a news share arrangement in which our television station in Springfield/Champaign, Illinois (WICS/WICD-TV) began producing an evening news program for television stations in Springfield, Illinois (WRSP-TV) and Urbana, Illinois (WCCU-TV) effective September 2006;

·                  Our FOX affiliate, KBSI-TV in Cape Girardeau, Paducah and Harrisburg, entered into a news share arrangement with the NBC affiliate, WPSD-TV in the same market effective October 2006;

·                  We entered into a news share arrangement in which our CBS affiliate, WGME-TV in Portland, Maine began producing a 10:00pm newscast for Portland’s FOX affiliate, WPFO-TV, beginning February 2007;

·                  Our FOX affiliate, WDKY-TV in Lexington, Kentucky expanded its news share arrangement with WKYT-TV, the CBS affiliate in that market, to add a one-hour morning newscast beginning at 7:00am, effective March 2007.

·                  We launched morning news programming in Dayton, Ohio on WKEF-TV and WRGT-TV as an expansion of the stations’ already successful evening news programming;

·                  We redefined the mission of our News Central operations to improve the quality, profitability and competitiveness of our local newscasts; and

·                  We announced the redemption of our 8.75% Senior Subordinated Notes, due 2011, which we redeemed, in full, on January 22, 2007.

32




Industry Trends

·                  Political advertising increases in even-numbered years, such as 2006, due to the advertising expenditures from candidates running in local and national elections.   In every fourth year, such as 2004, political advertising is elevated further due to the presidential election;

·                  Seasonal advertising increases in the second and fourth quarters due to the advertising expenditures related to the anticipation of certain seasonal and holiday spending by consumers;

·                  Not all cable system operators and satellite providers pay for the analog or digital signals they receive from broadcasters, but we expect more operators and providers will be paying for these signals in the future as alternative competing video delivery providers increase;

·                  Compensation from networks to their affiliates in exchange for broadcasting of network programming has significantly declined in recent years and may be eliminated in the future in lieu of alternative network and affiliate relationships;

·                  Automotive-related advertising is a significant portion of our total net revenues in all periods presented and these revenues have been trending downward in recent years and we expect this trend to continue in 2007;

·                  The Federal Communications Commission (FCC) has mandated that beginning February 17, 2009, all broadcast television stations must broadcast using only a digital signal and will no longer be able to broadcast using an analog signal;

·                  The FCC has permitted broadcast television stations to use their digital spectrum for a wide variety of services including multi-channel broadcasts.  The FCC “must carry” rules only apply to a station’s primary digital stream.  We have launched several digital channels using our TV stations’ digital signal during 2006;

·                  Many broadcasters are enhancing/upgrading their websites to use the internet to deliver rich media content, such as newscasts and weather updates, to attract advertisers; and

·                  Retransmission consent rules provide a mechanism for broadcasters to seek payment from multi-channel video programming distributors (MVPDs) who carry broadcasters’ signals.  Recognition of the value provided by broadcasters, including digital and high definition signals and popular network programming, in addition to increased competition among video delivery providers, has increased this payment stream.  We expect this trend to continue as the demand for high definition signals grows and competition among video delivery providers continues in the market.

Sources of Revenues and Costs

Most of our revenues are generated from the transactional spot market rather than the traditional “up front” and “scatter” markets that networks access. These operating revenues are derived from local and national advertisers and, to a much lesser extent, from political advertisers.  Recently, we have begun to generate revenues from our retransmission consent agreements.  These agreements have helped to produce a new, viable revenue stream that has replaced the steady decline in revenues from television network compensation.  We expect further monetization of our agreements and strong revenue growth over the next fiscal year.  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 this trend is the result of our focus on increasing local advertising revenues as a percentage of total advertising revenues, combined with a decrease in overall spending by national advertisers and an increase in the number of competitive media outlets providing national advertisers multiple alternatives in which to advertise their goods or services.  Our efforts to mitigate the effect of these increasing competitive media outlets for national advertisers include continuing our efforts to increase local revenues and developing innovative sales and marketing strategies to sell traditional and non-traditional services to our advertisers.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This discussion and analysis of our financial condition and results of operations is 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, program contract costs, intangible assets, income taxes, property and equipment, 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.  These estimates have been consistently applied for all years presented in this report and in the past we have not experienced material differences between these estimates and actual

33




results.  However, because future events and their effects cannot be determined with certainty, actual results could differ from our estimates and such differences could be material.

We have identified the policies below as critical to our business operations and to the understanding of our results of operations.  For a detailed discussion of the application of these and other accounting policies, see Note 1. Nature of Operations and Summary of Significant Accounting Policies, in the Notes to our Consolidated Financial Statements.

Revenue Recognition.  Advertising revenues, net of agency and national representatives’ commissions, are recognized in the period during which time spots are aired.  All other revenues are recognized as services are provided.  The revenues realized from station barter arrangements are recorded as the programs are aired at the estimated fair value of the advertising airtime given in exchange for the program rights.

Our retransmission consent agreements contain both advertising and retransmission consent elements that are paid in cash.  We have determined that our agreements are revenue arrangements with multiple deliverables and fall within the scope of EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21).  Advertising and retransmission consent deliverables sold under our agreements are separated into different units of accounting based on fair value.   Revenue applicable to the advertising element of the arrangement is recognized consistent with the advertising revenue policy noted above.  Revenue applicable to the retransmission consent element of the arrangement is recognized ratably over the life of the agreement.

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 payments, additional allowances may be required.  For example, a 10% increase of the balance of our allowance for doubtful accounts as of December 31, 2006, would reduce net income available to common shareholders by approximately $0.4 million.

Program Contract Costs.  We have agreements with distributors for the rights to televise 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 cash 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 programming rights are reflected in the consolidated balance sheets at the lower of unamortized cost or estimated net realizable value (NRV).  Estimated NRVs are based on management’s expectation of future advertising revenue, net of sales commissions, to be generated by the remaining program material available under the contract terms.  In conjunction with our NRV analysis of programming rights reflected in our consolidated balance sheets, we perform similar analysis on future programming rights yet to be reflected in our consolidated balance sheets and establish allowances when future payments exceed the estimated NRV.  Amortization of program contract costs is generally computed using a four-year accelerated method or a straight-line method, depending on the length of the contract.  Program contract costs estimated by management to be amortized within one year are classified as current assets.  Program contract liabilities are typically paid on a scheduled basis and are not reflected by adjustments for amortization or estimated NRV.  If our estimate of future advertising revenues declines, then additional write downs to NRV 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, operating performance of our stations and legal factors.  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 consolidated balance sheets and consolidated statements of operations.

We have determined our broadcast licenses to be indefinite-lived intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets, which requires such assets to be tested for impairment on an annual basis along with our goodwill.  We test our broadcast licenses and goodwill by estimating the fair market value of the broadcast licenses, or the net assets for each of our markets in the case of goodwill, using a combination of quoted market prices, observed earnings multiples paid for comparable television stations, discounted cash flow models and appraisals.  We then compare the estimated fair market value to the book value of these assets to determine if an impairment exists.  Our discounted cash flow model is based on our judgment of future market conditions within each designated marketing area, 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 and/or goodwill could be impaired.  Any resulting impairment loss could have a material adverse impact on our consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows.

34




Income Taxes.  We recognize deferred tax assets and liabilities based on the differences between the financial statements carrying amounts and the tax bases of assets and liabilities.  We provide a valuation allowance for deferred tax assets relating to various federal and state net operating losses (NOL) that are carried forward.  As of December 31, 2006, valuation allowances have been provided for a substantial amount of our available federal and state NOLs.  We evaluate the need and extent of a valuation allowance based on the expected timing of the reversals of existing temporary book/tax differences, alternative tax strategies and projected future taxable income.  If we are unable to generate sufficient taxable income, if there is a material change in our projected taxable income, or if there is a change in our ability to use NOL carryforwards due to changes in federal and state laws, we will make any necessary adjustments to the valuation allowance.  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.

Restructuring Costs

During the year ended December 31, 2006, we incurred costs associated with restructuring the news operations at certain of our stations.  Specifically, on or before March 31, 2006, we ceased our locally produced news broadcasts in nine of our markets and consequently let go our news employees and cancelled our news-related contracts.

We recorded restructuring charges in station production expenses.  The major components of the restructuring charges and the remaining accrual balance related to the restructuring plan as of December 31, 2006 follow (in thousands):

 

 

Salary and
Severance Costs

 

Contract
Expenses

 

Other
Exit Costs

 

Total

 

Balance at December 31, 2005

 

$

 

$

 

$

 

$

 

Restructuring charges

 

525

 

365

 

306

 

1,196

 

Amounts utilized

 

(525

)

(286

)

(272

)

(1,083

)

Balance at December 31, 2006

 

$

 

$

79

 

$

34

 

$

113

 

 

All restructuring costs were associated with our broadcast segment.

Recent Accounting Pronouncements

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

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48).  FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition of positions taken or expected to be taken in income tax returns.  Only tax positions meeting a “more-likely-than-not” threshold of being sustained are recognized under FIN 48.  FIN 48 also provides guidance on derecognition, classification of interest and penalties and accounting and disclosures for annual and interim financial statements.  FIN 48 is effective for our fiscal year beginning January 1, 2007.  The cumulative effect of any changes arising from the initial application of FIN 48 is required to be reported as an adjustment to the opening balance of retained earnings in the period of adoption.  We are currently evaluating the impact that the adoption of FIN 48 will have on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement will be effective for the year ending December 31, 2008. We are currently evaluating the effect this statement will have on our consolidated financial statements.

In September 2006, the FASB issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS 158).  SFAS 158 required us to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of our pension plan in our December 31, 2006 consolidated financial statements, with a corresponding adjustment to accumulated other comprehensive loss, net of tax.  At adoption, the adjustment to accumulated other comprehensive loss of $2.5 million (net of taxes of $1.7 million) represented the net unrecognized actuarial losses which we previously netted against the plan’s funded status in our consolidated financial statements pursuant to the provisions of Statement 87.  This amount will be subsequently recognized as net periodic pension cost pursuant to our historical accounting policy for amortizing such amounts.  Further, actuarial gains and losses that arise in subsequent periods and are not recognized as a component of net periodic pension cost are recognized as increases or decreases in accumulated other

35




comprehensive loss.  These gains or losses will be adjusted as they are subsequently recognized as a component of net periodic pension costs.  As of December 31, 2006, we have also recognized a liability of $0.4 million representing the under funded status of our defined benefit pension plan, which is included in other long-term liabilities in the accompanying consolidated balance sheet.  We do not expect the adoption of SFAS 158 to have a material impact on our consolidated financial statements in future years.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108).  SAB 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify misstatements using both a balance sheet and an income statement approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The two methods for evaluating misstatements are referred to as the “rollover” method and the “iron curtain” method.  The rollover method quantifies misstatements based on the effects of correcting the misstatements that exist in the current year income statement, including misstatements that arose in the current year, as well as, the reversal or correction of the misstatements that arose in prior years.  The iron curtain method quantifies misstatements based on the effects of correcting the misstatements that exist in the balance sheet at the end of the current year, regardless of the misstatement’s year of origin.

SAB 108 does not change the guidance in SAB 99, Materiality (SAB 99), when evaluating the materiality of misstatements.  Upon initial application, SAB 108 permits a one-time cumulative effect adjustment to beginning retained earnings to correct prior year misstatements.

We adopted SAB 108 during 2006 and recorded a cumulative effect adjustment of $0.2 million (net of income taxes of $6.0 million), to increase retained earnings as of January 1, 2006.  The adjustment was comprised of the following components (in millions):

 

 

 

Increase (decrease)
to net income

 

Years affected

 

Cumulative amortization expense not recognized due to the misapplication of useful lives related to a definite-lived intangible asset and leasehold improvements

 

$

(6.4

)

1999-2005

 

Increase to operating income resulting from the over-accrual of accrued liabilities and deferred revenue

 

1.7

 

2001-2005

 

Decreases to other income due to an error in the accounting for the consolidation of one of our variable interest entities

 

(1.1

)

2004-2005

 

Tax effects attributable to above adjustments at our applicable effective tax rates

 

1.9

 

 

 

 

 

(3.9

)

 

 

Decrease in provision for income taxes resulting from the over-accrual of tax reserves and balance sheet book to tax basis differences

 

4.1

 

2001-2005

 

Net impact on January 1, 2006 retained earnings

 

$

0.2

 

 

 

 

Under the rollover method of evaluating misstatements, we previously concluded that the misstatements noted above were immaterial to all prior years’ results.  The misstatements under the iron curtain method described in SAB 108, as well as, the provisions of SAB 99, are material to 2006 results and therefore, have been reflected as a cumulative effect adjustment to retained earnings as of January 1, 2006.

RESULTS OF OPERATIONS

In general, this discussion is related to the results of our continuing operations, except for discussions regarding our cash flows (which also include the results of our discontinued operations).  Unless otherwise indicated, references in this discussion to 2006, 2005 and 2004 are to our fiscal years ended December 31, 2006, 2005 and 2004, respectively.  Additionally, any references to the first, second, third or fourth quarters are to the three months ended March 31, June 30, September 30 and December 31, respectively, for the year being discussed.

36




Broadcast Revenues

Set forth below are the principal types of broadcast revenues from continuing operations received by our stations for the periods indicated and the percentage contribution of each type to our total gross broadcast revenues (in millions):

 

 

 

Years Ended December 31,

 

 

 

2006

 

2005

 

2004

 

Local/regional advertising (a)

 

$

416.4

 

57.0

%

$

413.1

 

58.5

%

$

406.2

 

55.5

%

National advertising

 

231.9

 

31.8

%

251.4

 

35.6

%

258.3

 

35.3

%

Political advertising

 

37.6

 

5.2

%

2.4

 

0.3

%

38.0

 

5.2

%

Network compensation

 

9.5

 

1.3

%

13.3

 

1.9

%

14.3

 

1.9

%

Retransmission consent

 

20.5

 

2.8

%

15.2

 

2.2

%

3.5

 

0.5

%

Other station revenues

 

14.1

 

1.9

%

10.4

 

1.5

%

12.1

 

1.6

%

Gross broadcast revenues

 

730.0

 

100.0

%

705.8

 

100.0

%

732.4

 

100.0

%

Less: agency commissions

 

(94.2

)

 

 

(91.3

)

 

 

(97.8

)

 

 

Net broadcast revenues

 

635.8

 

 

 

614.5

 

 

 

634.6

 

 

 

Revenues realized from station barter arrangements

 

54.7

 

 

 

55.0

 

 

 

57.8

 

 

 

Other operating divisions’ revenues

 

24.6

 

 

 

22.6

 

 

 

13.1

 

 

 

Total revenues

 

$

715.1

 

 

 

$

692.1

 

 

 

$

705.5

 

 

 


(a)             In 2006 and 2005, an additional $4.9 million and $4.0 million, respectively, in revenues generated from our retransmission consent agreements are categorized as local/regional advertising pursuant to EITF 00-21.

Our primary types of programming and their approximate percentages of 2006 net broadcast revenues from continuing operations were syndicated programming (39.5%), network programming (26.6%), news (15.1%), direct advertising programming (7.6%), sports programming (5.8%) and other programming (5.4%).

The following table presents our time sales revenue from continuing operations, net of agency commissions, by network affiliates for the past three years (in millions):

 

 

 

# of

 

Percent of
Sales

 

Net Time Sales (a)

 

Percent Change

 

 

 

Stations

 

2006

 

2006

 

2005 (b)

 

2004

 

‘06 vs. ‘05

 

‘05 vs. ‘04

 

FOX

 

19

(c)

39.8

%

$

235.3

 

$

230.4

 

$

237.4

 

 

2.1

%

 

 

(3.0

%)

 

MyNetworkTV(d)

 

17

(c)

20.4

%

120.8

 

123.0

 

127.4

 

 

(1.8

%)

 

 

(3.5

%)

 

ABC

 

10

 

24.3

%

144.1

 

130.2

 

140.7

 

 

10.7

%

 

 

(7.5

%)

 

The CW (d)

 

9

 

12.9

%

76.6

 

77.7

 

81.4

 

 

(1.4

%)

 

 

(4.6

%)

 

CBS

 

2

(c)

1.8

%

10.5

 

10.7

 

13.6

 

 

(1.9

%)

 

 

(21.3

%)

 

NBC

 

1

 

0.7

%

4.3

 

3.5

 

4.2

 

 

22.9

%

 

 

(16.7

%)

 

Digital (e)

 

4

 

0.1

%

0.4

 

 

 

 

100.0

%

 

 

%

 

Total

 

62

(c)

 

 

$

592.0

 

$

575.5

 

$

604.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(a)             During 2006 and 2005, several of our stations switched affiliations.  We have reclassified the revenue from those stations in prior years for comparability.

(b)            2006 and 2004 include significantly more political revenue than 2005 for most of our affiliates.

(c)             During 2004, we entered into agreements to sell our CBS station in Sacramento, California and our WB station in Kansas City, Missouri.  During 2005, we entered into an agreement to sell our FOX station in Tri-Cities, Tennessee.  The time sales from these stations are not included in this table because they are accounted for as time sales from discontinued operations.

(d)            In September 2006, our composition of network affiliates changed as a result of our agreement to air MyNetworkTV programming and the merger of UPN and The WB into a network called The CW.  Refer to our Markets and Stations table on page 5 for additional information.

(e)             Some of our television stations are broadcasting a second digital signal in accordance with FCC rules.

37




Operating Data

The following table sets forth certain of our operating data from continuing operations for the years ended December 31, 2006, 2005 and 2004 (in millions).  For definitions of terms, see the footnotes to the table in Item 6. Selected Financial Data.

 

 

 

Years Ended December 31,

 

 

 

2006

 

2005

 

2004

 

Net broadcast revenues

 

$

635.8

 

$

614.5

 

$

634.6

 

Revenues realized from station barter arrangements

 

54.7

 

55.0

 

57.8

 

Other operating divisions’ revenues

 

24.6

 

22.6

 

13.1

 

Total revenues

 

715.1

 

692.1

 

705.5

 

Station production expenses

 

148.3

 

152.8

 

155.3

 

Station selling, general and administrative expenses

 

140.6

 

138.3

 

146.4

 

Expenses recognized from station barter arrangements

 

49.5

 

50.5

 

53.4

 

Depreciation and amortization

 

154.9

 

138.9

 

155.8

 

Other operating divisions’ expenses

 

24.2

 

20.9

 

14.9

 

Corporate general and administrative expenses

 

22.8

 

21.2

 

21.5

 

Impairment of intangibles

 

15.6

 

 

44.0

 

Operating income

 

$

159.2

 

$

169.5

 

$

114.2

 

Net income

 

$

54.0

 

$

185.9

 

$

24.0

 

Net income available to common shareholders

 

$

54.0

 

$

207.1

 

$

13.8

 

 

Revenue Discussion and Analysis

The following table presents our revenues from continuing operations, net of agency commissions, for the three years ended December 31, 2006, 2005 and 2004 (in millions):

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

2006

 

2005

 

2004

 

‘06 vs. ‘05

 

‘05 vs. ‘04

 

Local revenues:

 

 

 

 

 

 

 

 

 

 

 

Non-Political (a)

 

$

362.7

 

$

359.6

 

$

352.9

 

0.9

%

1.9

%

Political

 

10.2

 

1.2

 

9.4

 

(b)

 

(b)

 

Total Local

 

372.9

 

360.8

 

362.3

 

3.4

%

(0.4

%)

National revenues:

 

 

 

 

 

 

 

 

 

 

 

Non-Political

 

197.3

 

213.9

 

219.7

 

(7.8

%)

(2.6

%)

Political

 

21.8

 

0.8

 

22.7

 

(b)

 

(b)

 

Total National

 

219.1

 

214.7

 

242.4

 

2.1

%

(11.4

%)

Net Time Sales

 

592.0

 

575.5

 

604.7

 

2.9

%

(4.8

%)

Other revenues

 

43.8

 

39.0

 

29.9

 

12.3

%

30.4

%

Total Broadcasting Revenues

 

$

635.8

 

$

614.5

 

$

634.6

 

3.5

%

(3.2

%)

 

 

 

 

 

 

 

 

 

 

 

 


(a)             Revenues of $4.9 million and $4.0 million in 2006 and 2005, respectively, generated from our retransmission consent agreements are categorized as local/regional advertising pursuant to EITF 00-21.

(b)            Political revenue is not comparable from year to year due to the cyclicality of elections.  See Political Revenues below for more information.

Our largest categories of advertising and their approximate percentages of 2006 net time sales were automotive (21.3%), professional services (13.6%), paid programming (6.8%), fast food (6.7%), schools (6.3%), retail (6.1%) and political (5.4%).  No other advertising category accounted for more than 5.0% of our net time sales in 2006.  Along with the industry, we have seen softness in the automotive advertising category and we expect this to continue in 2007.  We conduct business with thousands of advertisers. Other than advertisers from our automotive category, no other advertiser accounted for more than 1.0% of our consolidated net time sales in 2006.

38




Net Broadcast Revenues.  From a revenue category standpoint, the year ended December 31, 2006, when compared to 2005, was impacted by an increase of advertising revenues generated from the political, telecommunications, restaurant-other, schools, movies and home products sectors, offset by decreases in the internet, toys/games, food-breakfast, soft drinks and travel/leisure sectors.  Automotive, our single largest category, representing 21.3% of the year’s net time sales, was down 7.7%.  We expect automotive sales to trend downward during 2007.

Political Revenues.  Both local and national political revenues were the primary drivers of higher revenue in 2006 and 2004, compared to 2005 because 2004 and 2006 were election years.  In fact, during 2004, we owned television stations in 11 of the 16 so called “Battleground States,” including multiple stations in Ohio, Florida and West Virginia.  We expect political revenues to decrease in 2007 from 2006 levels, because 2007 is not an election year.

Local Revenues.  Our revenues from local advertisers, excluding political revenues, increased during the last three years.  We continue to focus on increasing local advertising revenues through innovative sales and marketing strategies in our markets.  Revenues from our new business initiatives increased $2.1 million during 2006 to $28.5 million from $26.4 million in 2005. Revenues from our new business initiatives increased by $11.0 million in 2005 from $15.4 million during 2004.  We expect to continue our focus on new business revenues in 2007.  Additionally, during 2004, we implemented an enhanced sales training course for all of our salespeople with a focus on local revenue sales.  We have continued these efforts throughout 2006 and will continue these efforts in 2007.

National Revenues.  Our revenues from national advertisers, excluding political revenues, have continued to trend downward over time.  We believe this trend represents a shift in the way national advertising dollars are being spent and we believe it has recently begun accelerating.  Advertisers in major categories like automotive, soft drink and packaged goods are shifting significant portions of their advertising budgets away from spot television into non-traditional media, in-store promotions and product placement in network shows.  Automotive decreases are due to automotive companies reducing advertising budgets and shifting advertising to specific markets.  We expect this trend to continue into 2007.

Other Revenues and Expenses.  Our other revenues consist primarily of revenues from retransmission consent agreements with cable and satellite providers, network compensation, production revenues and revenues from our outsourcing agreements.  Our retransmission consent agreements, including the advertising component, generated $25.4 million in total broadcast revenues during 2006 compared with $19.2 million in 2005 and $3.5 million in 2004.  This growth trend is the result of our ability to monetize our existing relationships as cable providers struggle with increased competition from alternative video delivery providers and have begun to recognize the value of our digital and high definition signals and network programming.  Pursuant to EITF 00-21, during 2006, $20.5 million of the total $25.4 million in revenues generated from our retransmission consent agreements are included in other revenues while the remaining $4.9 million is included in net time sales.  During 2005, $15.2 million of the total $19.2 million in revenues generated from our retransmission consent agreements are included in other revenues while the remaining $4.0 million is included in net time sales.  We expect further monetization of our agreements in 2007.  Network compensation decreased by $3.8 million during 2006 and $1.0 million during 2005.  We expect further decreases in revenues from network compensation in 2007.

39




Expense Discussion and Analysis

The following table presents our significant expense categories for the three years ended December 31, 2006, 2005 and 2004 (in millions):

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

2006

 

2005

 

2004

 

‘06 vs. ‘05