INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On March 1, 2022, Sinclair Broadcast Group’s (“SBG” or the “Company”) subsidiary, Diamond Sports Intermediate Holdings LLC, and certain direct and indirect subsidiaries (collectively “DSIH”) completed a series of transactions (the “Transaction”) which are expected to provide DSIH with approximately $1.0 billion of liquidity enhancement over the next five years. As part of this transaction, DSIH agreed to changes to the composition of its Board of Managers, which changes took effect on May 1, 2022. As a result of this transaction and applicable U.S. generally accepted accounting principles, the Company has concluded that DSIH will be deconsolidated from the Company’s consolidated financial statements effective as of March 1, 2022.
The following unaudited pro forma condensed consolidated financial information has been prepared in accordance with Article 11 of Regulation S-X. The unaudited condensed consolidated pro forma balance sheet data as of December 31, 2021 is presented as if the deconsolidation of DSIH had occurred on December 31, 2021. The unaudited condensed consolidated pro forma statement of operations data for the year ended December 31, 2021 is presented as if the deconsolidation of DSIH had occurred as of January 1, 2021. For purposes of the pro forma financial information, the Company has determined the fair value of DSIH to be equal to zero. The unaudited condensed consolidated pro forma financial information is subject to adjustment and is presented for informational purposes only and does not purport to represent what the Company’s results of operations or financial position would actually have been if deconsolidation had in fact occurred on the dates discussed above. It also does not project or forecast the Company’s condensed consolidated results of operations or financial position for any future date or period.
Through March 1, 2022, DSIH’s results continue to be consolidated into the Company’s financial statements. Following deconsolidation, SBG will account for its interest in DSIH using the equity method of accounting and initially record its investment at the estimated fair value as of March 1, 2022. In connection with the deconsolidation, SBG expects to record, in the first quarter of 2022, a gain to recognize the difference between the carrying value and estimated fair value of its interest in DSIH as of March 1, 2022.
The pro forma condensed consolidated financial information of SBG should be read in conjunction with the historical consolidated financial statements of SBG and the related notes included in our 2021 Annual Report on Form 10-K.
SINCLAIR BROADCAST GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2021
(In millions) (Unaudited)
| Historical SBG Consolidated | Less: Deconsolidation of DSIH | Transaction Accounting Adjustments | Pro Forma SBG Consolidated | |||||||||||||||||
| ASSETS | ||||||||||||||||||||
| CURRENT ASSETS: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 816 | $ | (479) | (a) | $ | — | $ | 337 | |||||||||||
| Accounts receivable, net | 1,245 | (559) | (a) | — | 686 | |||||||||||||||
| Income taxes receivable | 152 | — | — | 152 | ||||||||||||||||
| Prepaid sports rights | 85 | (85) | (a) | — | — | |||||||||||||||
| Prepaid expenses and other current assets | 173 | (27) | (a) | 30 | (d) | 176 | ||||||||||||||
| Total current assets | 2,471 | (1,150) | 30 | 1,351 | ||||||||||||||||
| Property and equipment, net | 833 | (106) | (a) | — | 727 | |||||||||||||||
| Operating lease assets | 207 | (53) | (a) | — | 154 | |||||||||||||||
| Deferred tax assets | 293 | — | (293) | (i) | — | |||||||||||||||
| Restricted cash | 3 | (3) | (a) | — | — | |||||||||||||||
| Goodwill | 2,088 | — | — | 2,088 | ||||||||||||||||
| Indefinite-lived intangible assets | 150 | — | — | 150 | ||||||||||||||||
| Customer relationships, net | 3,904 | (3,380) | (a) | — | 524 | |||||||||||||||
| Other definite-lived intangible assets, net | 1,184 | (589) | (a) | — | 595 | |||||||||||||||
| Other assets | 1,408 | (462) | (a) | 214 | (d) / (g) | 1,160 | ||||||||||||||
| Total assets | $ | 12,541 | $ | (5,743) | $ | (49) | $ | 6,749 | ||||||||||||
| LIABILITIES , REDEEMABLE NON-CONTROLLING INTERESTS, AND EQUITY | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable and accrued liabilities | $ | 655 | $ | (261) | (a) | $ | 2 | (d) | $ | 396 | ||||||||||
| Current portion of notes payable, finance leases, and commercial bank financing | 69 | (33) | (a) | — | 36 | |||||||||||||||
| Current portion of operating lease liabilities | 35 | (14) | (a) | — | 21 | |||||||||||||||
| Current portion of program contracts payable | 97 | — | — | 97 | ||||||||||||||||
| Other current liabilities | 346 | (300) | (a) | 30 | (d) | 76 | ||||||||||||||
| Total current liabilities | 1,202 | (608) | 32 | 626 | ||||||||||||||||
| Notes payable, finance leases, and commercial bank financing, less current portion | 12,271 | (7,905) | (a) | — | 4,366 | |||||||||||||||
| Deferred tax liabilities | — | — | 575 | (i) | 575 | |||||||||||||||
| Operating lease liabilities, less current portion | 205 | (41) | (a) | — | 164 | |||||||||||||||
| Program contracts payable, less current portion | 21 | — | — | 21 | ||||||||||||||||
| Other long-term liabilities | 351 | (312) | (a) | 212 | (d) | 251 | ||||||||||||||
| Total liabilities | 14,050 | (8,866) | 819 | 6,003 | ||||||||||||||||
| Commitments and Contingencies | ||||||||||||||||||||
| Redeemable noncontrolling interests | 197 | (16) | (a) | — | 181 | |||||||||||||||
| Shareholders' Equity: | ||||||||||||||||||||
| Class A Common Stock | 1 | — | — | 1 | ||||||||||||||||
| Class B Common Stock | — | — | — | — | ||||||||||||||||
| Additional paid-in capital | 691 | (1,467) | (b) | 1,467 | (b)/(d) | 691 | ||||||||||||||
| (Accumulated deficit) Retained earnings | (2,460) | 4,729 | (b)/(e) | (2,335) | (b) | (66) | ||||||||||||||
| Accumulated other comprehensive loss | (2) | — | — | (2) | ||||||||||||||||
| Total Sinclair Broadcast Group shareholders’ deficit | (1,770) | 3,262 | (b) | (868) | (b) | 624 | ||||||||||||||
| Noncontrolling interests | 64 | (123) | (a) | (59) | ||||||||||||||||
| Total (deficit) equity | (1,706) | 3,139 | (868) | 565 | ||||||||||||||||
| Total liabilities, redeemable noncontrolling interests, and equity | $ | 12,541 | $ | (5,743) | $ | (49) | $ | 6,749 | ||||||||||||
SINCLAIR BROADCAST GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2021
(In millions, except per share data) (Unaudited)
| Historical SBG Consolidated | Less: Deconsolidation of DSIH | Transaction Accounting Adjustments (e) | Pro Forma SBG Consolidated | |||||||||||||||||
| REVENUES: | ||||||||||||||||||||
| Media revenues | $ | 6,083 | $ | (3,056) | (c) | $ | 109 | (d) | $ | 3,136 | ||||||||||
| Non-media revenues | 51 | — | 51 | |||||||||||||||||
| Total revenues | 6,134 | (3,056) | 109 | 3,187 | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||||
| Media programming and production expenses | 4,291 | (2,793) | (c) | — | 1,498 | |||||||||||||||
| Media selling, general and administrative expenses | 908 | (297) | (c) | 109 | (d) | 720 | ||||||||||||||
| Amortization of program contract costs | 93 | — | — | 93 | ||||||||||||||||
| Non-media expenses | 57 | — | — | 57 | ||||||||||||||||
| Depreciation of property and equipment | 114 | (12) | (c) | — | 102 | |||||||||||||||
| Corporate general and administrative expenses | 170 | (10) | (c) | — | 160 | |||||||||||||||
| Amortization of definite-lived intangible and other assets | 477 | (304) | (c) | — | 173 | |||||||||||||||
| Gain on asset dispositions and other, net of impairment | (71) | 43 | (c) | (3,262) | (f) | (3,290) | ||||||||||||||
| Total operating expenses | 6,039 | (3,373) | (3,153) | (487) | ||||||||||||||||
| Operating income (loss) | 95 | 317 | 3,262 | 3,674 | ||||||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||||||
| Interest expense including amortization of debt discount and deferred financing costs | (618) | 436 | (c) | (2) | (d) | (184) | ||||||||||||||
| Loss on extinguishment of debt | (7) | — | — | (7) | ||||||||||||||||
| Income (loss) from equity method investments | 45 | (49) | (c) | — | (g) | (4) | ||||||||||||||
| Other (expense) income, net | (14) | (15) | (c) | 2 | (d) | (27) | ||||||||||||||
| Total other expense, net | (594) | 372 | — | (222) | ||||||||||||||||
| (Loss) income before income taxes | (499) | 689 | 3,262 | 3,452 | ||||||||||||||||
| INCOME TAX BENEFIT (PROVISION) | 173 | — | (868) | (h) | $ | (695) | ||||||||||||||
| NET (LOSS) INCOME | (326) | 689 | 2,394 | 2,757 | ||||||||||||||||
| Net income attributable to the redeemable noncontrolling interests | (18) | 2 | (c) | — | (16) | |||||||||||||||
| Net (income) loss attributable to the noncontrolling interests | (70) | 65 | (c) | — | (5) | |||||||||||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP | $ | (414) | $ | 756 | $ | 2,394 | $ | 2,736 | ||||||||||||
| EARNINGS PER COMMON SHARE ATTRIBUTABLE TO SINCLAIR BROADCAST GROUP: | ||||||||||||||||||||
| Basic (loss) earnings per share | $ | (5.51) | $ | 36.46 | ||||||||||||||||
| Diluted (loss) earnings per share | $ | (5.51) | $ | 36.42 | ||||||||||||||||
| Basic weighted average common shares outstanding (in thousands) | 75,050 | 75,050 | ||||||||||||||||||
| Diluted weighted average common and common equivalent shares outstanding (in thousands) | 75,050 | 75,133 | ||||||||||||||||||
SINCLAIR BROADCAST GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Note 1 - Basis of Presentation
The unaudited pro forma condensed consolidated financial information is based on the historical consolidated financial statements of SBG and DSIH. The unaudited pro forma condensed consolidated balance sheet as of December 31, 2021 gives effect to the Transaction as if it had occurred on December 31, 2021. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2021 gives effect to the Transaction as if it had occurred on January 1, 2021. The historical consolidated financial statements of SBG have been adjusted in the unaudited pro forma condensed consolidated financial information to reflect the accounting for the Transaction under Generally Accepted Accounting Principles (GAAP) and in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.”
Note 2 - Transaction Accounting Adjustments
The following transaction accounting adjustments have been made to reflect the Transaction as if it had occurred on December 31, 2021 for the unaudited pro forma condensed consolidated balance sheet and January 1, 2021 for the unaudited pro forma condensed consolidated statement of operations:
(a) To eliminate assets, liabilities and noncontrolling interests related to the deconsolidation of DSIH, including deferred taxes related to the outside basis difference for the Company’s investment in DSIH.
(b) To adjust shareholders’ equity and recognize a gain upon the deconsolidation of DSIH at an estimated fair value of zero. The total impact on shareholders’ equity was the amount of gain recognized, less the income tax effect, as shown below:
| Calculation of Deconsolidation Gain | |||||
| DSIH total assets | $ | 5,743 | |||
| DSIH total liabilities | $ | (8,866) | |||
| DSIH redeemable noncontrolling interest | $ | (16) | |||
| DSIH noncontrolling interests | $ | (123) | |||
| Deconsolidation gain | $ | 3,262 | |||
| Less: Income tax impact | $ | (868) | |||
| Net impact on shareholder’s equity | $ | 2,394 | |||
| Shareholders’ Equity Reconciliation | |||||
| SBG historical shareholders’ equity | $ | (1,770) | |||
| Net pro forma impact on shareholder’s equity | $ | 2,394 | |||
| SBG pro forma shareholders’ equity | $ | 624 | |||
(c) To eliminate revenues, expenses and noncontrolling interests related to the deconsolidation of DSIH.
(d) Represents adjustments to remove the effect of intercompany amounts and transactions that were included in DSIH’s historical consolidated financial statements and adjustments to include the effect of intercompany amounts and transactions that were excluded from SBG’s historical consolidated financial statements.
(e) The deconsolidation did not represent a strategic shift that will have a major effect on the Company's operations or financial results and therefore did not meet the criteria to be reported as discontinued operations, and as such, we did not include any pro forma adjustments to that effect.
(f) The gain on deconsolidation is considered non-recurring and should be evaluated as such when analyzing the overall results of the deconsolidation.
(g) We did not include a pro forma adjustment for an equity method loss related to our investment in DSIH because the carrying value of the investment is zero and SBG is not obligated to fund losses incurred by DSIH.
(h) The income tax provision adjustment was calculated as follows:
| Pro forma income before income taxes | $ | 3,452 | |||
| Effective tax rate | 20.1 | % | |||
| Pro forma income tax provision | $ | (695) | |||
| Less: SBG historical income tax benefit | $ | 173 | |||
| Pro forma income tax provision adjustment | $ | (868) | |||
(i) Adjustment to record the deferred tax impact associated with the deconsolidation at an effective tax rate of 20.1%.