FSCI Fisher Communications, Inc. (MM)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of Fisher Communications, Inc. and its wholly-owned subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included in the periods presented. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013, or for any other period. The unaudited condensed consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements at that date but does not include all of the information and disclosures required by GAAP for annual financial statements. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”).

The significant accounting policies used in preparation of the unaudited condensed consolidated financial statements are disclosed in the Company’s 2012 Form 10-K. Except as described below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three and six months ended June 30, 2013, as compared to the recent accounting pronouncements described in the Company’s 2012 Form 10-K, that are of significance, or potential significance, to the Company.

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02: Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income . This update requires the Company to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The amendments require the Company to present the effects on income statement line items of certain significant amounts reclassified from accumulated other comprehensive income/loss. The standard is effective for public entities for annual periods, and interim periods within those periods, beginning after December 15, 2012. The Company adopted the amended accounting guidance, which did not have a material impact on the Company’s consolidated financial position or results of operations.

2. Fair Value Measurements

The Company measures certain financial assets at fair value on a recurring basis. The fair value of these financial assets was determined based on three levels of inputs, of which, the first two levels are considered observable and the last unobservable. The three levels of inputs that may be used to measure fair value are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or the fair value is determined through the use of models or other valuation methodologies.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The inputs to determine fair value require significant management judgment or estimation.

Assets and liabilities measured at fair value on a recurring basis consist of cash equivalents, marketable securities and debt security investments. As of June 30, 2013 and December 31, 2012, the reported fair value of marketable securities, using Level 1 inputs, was $592,000 and $600,000, respectively. Marketable securities are included in other assets on the Company’s unaudited condensed consolidated balance sheets. As of June 30, 2013, the Company no longer held debt security investments included in restricted cash. During March 2013, the Company sold the remainder of its debt security investments to be included in cash equivalents. The reported fair value of debt security investments as of December 31, 2012, using Level 1 inputs, was $3.5 million and is included in restricted cash on the Company’s unaudited condensed consolidated balance sheets.

The Company had no cash equivalents as of June 30, 2013. As of December 31, 2012, cash equivalents consisted of $5.0 million, for which the fair value is measured using Level 1 inputs. The carrying amount of cash equivalents approximates fair value.

At June 30, 2013, the Company reported $1.7 million of variable interest rate long-term debt for which the fair value is measured using Level 2 inputs. There was no long-term debt outstanding as of December 31, 2012. The fair value of long-term debt is based on estimates made by investment bankers based on the fair value of the Company’s variable rate long-term debt. For variable rate debt, interest rate changes do not impact financial position, operations or cash flows.

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3. Acquisitions

Sinclair Acquisition

In April 2013, Sinclair Broadcast Group, Inc. (“Sinclair”), Sinclair Television of Seattle, Inc. (“Merger Sub”) and the Company announced that they had entered into a definitive merger agreement (the “Merger Agreement”) whereby Sinclair will acquire the Company in a merger transaction valued at approximately $373.3 million (the “Merger”).

Under the terms of the Merger Agreement, assuming the conditions to closing are satisfied or waived, Merger Sub will merge with and into the Company and the Company’s shareholders will receive $41.00 in cash for each share of the Company’s common stock they own. The Company currently expects the Merger to close during the third quarter of 2013, subject to the satisfaction or waiver of certain closing conditions, such as: (i) the approval of the Merger Agreement by the holders of two-thirds or more of the Company’s outstanding common stock, as required under Washington law, (ii) the grant by the FCC of consent to the transfer of control of the Company and its subsidiaries to Sinclair, (iii) the absence of any law or order that is in effect and that restrains, enjoins or otherwise prohibits the Merger and (iv) the receipt of consents under certain of the Company’s contracts. The consummation of the Merger is not subject to a financing condition.

The Merger Agreement contains certain termination rights for both Sinclair and the Company, including if the Merger is not completed on or before April 11, 2014 or if the approval of the Merger Agreement by the Company’s shareholders is not obtained. In addition, among other termination rights, Sinclair may terminate the Merger Agreement if the Company’s Board of Directors takes certain actions that result in a recommendation adverse to the Merger and the Company may terminate the Merger Agreement, subject to certain conditions, to accept a proposal that is superior to the terms and conditions of the Merger. The Merger Agreement also provides that, upon termination of the Merger Agreement under certain circumstances, the Company may be required to pay Sinclair a termination fee of $11.2 million.

For the six months ended June 30, 2013, the Company has incurred approximately $4.7 million in transaction related costs associated with the Merger. These costs have been expensed as incurred and are included within selling, general and administrative expense in the unaudited condensed consolidated statement of operations for the six months ended of June 30, 2013.

In connection with the announcement of the Merger Agreement, on April 17, 2013, a purported class action lawsuit was filed against the Company and its Board of Directors in King County Superior Court in the State of Washington, docketed as Halberstam v. Fisher Communications, Inc.., et al. , Case No. 13-2-17171-6 SEA. An amended complaint was filed on April 23, 2013, and a second amended complaint was filed on June 3, 2013. The lawsuit alleges, among other things, that the Company’s Board of Directors breached its fiduciary duties to shareholders by failing to take steps to maximize shareholder value or to engage in a fair sale process before approving the proposed acquisition of the Company by Sinclair. The lawsuit also alleges that the Schedule 14A Preliminary Proxy Statement filed by the Company on May 16, 2013 omits and/or misrepresents certain purportedly material information. The plaintiff seeks relief that includes, among other things, an injunction prohibiting the consummation of the proposed Merger, damages for the breaches of fiduciary duty, and the payment of plaintiff’s attorneys’ fees and costs. The Company believes the lawsuit is without merit and intends to defend against it vigorously. There can be no assurance, however, with regard to the outcome. See Note 15. Subsequent Events for additional disclosure.

KMTR TV

On June 3, 2013, the Company’s wholly-owned subsidiary, Fisher Broadcasting – Oregon TV, L.L.C. (“Fisher Broadcasting”), completed the previously announced acquisition of assets of the television station KMTR (TV), together with certain related satellite stations (collectively the “Station”), which serve the Eugene, Oregon Nielsen Designated Market Area, for a total purchase price of $8.5 million from Newport Television LLC and Newport Television License LLC (together “Newport”). Concurrent with the execution of the Asset Purchase Agreement dated November 19, 2012, between Fisher Broadcasting and Newport, Fisher Broadcasting assigned to Roberts Media, LLC, an unrelated third party (“Roberts Media”), its rights under the Asset Purchase Agreement to acquire the FCC licenses with respect to the Station together with certain other of the Station’s operating and programming assets. Such assets are held by KMTR Television, LLC (“KMTR TV”), which is a wholly owned subsidiary of Roberts Media.

Concurrently with the completion of the acquisition of the Station, KMTR TV obtained third-party financing for its acquisition of the Station assets of $1.7 million (the “KMTR Credit Facility”) due in 2017. The Company has agreed to guarantee (the “Guarantee”) the KMTR Credit Facility to finance its portion of the acquisition through 2017. Borrowings under the KMTR Credit Facility will accrue interest at a variable rate. The interest rate is calculated using either an Alternate Base Rate (“ABR”) or the Eurodollar Rate, plus, in each case, an applicable margin determined by the Company’s leverage ratio in accordance with the terms of the Credit Agreement. The ABR is equal to the highest of (i) the rate of interest publicly announced by JPMorgan Chase Bank, N.A. as its prime rate in effect at its principal office in New York City (the “Prime Rate”), (ii) the federal funds effective rate from time to time plus 0.50% and (iii) the Eurodollar Rate applicable for an interest period of one month plus 1.00%.

The KMTR Credit Facility contains customary affirmative and negative covenants for comparable financings, including but not limited to, limitations on liens, indebtedness, investments, mergers and other fundamental changes, sales and other dispositions and dividends and other distributions.

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In connection with the closing, the Company entered into an amendment (the “First Amendment”) to the credit agreement dated November 19, 2012, between the Company and JPMorgan Chase Bank, N.A. as Administrative Agent and Lender and the lenders party thereto (the “Credit Agreement”). The First Amendment provides that (i) a default under the KMTR Credit Facility (including a default by the Company under the Guarantee) will constitute a default under the Credit Agreement, and (ii) that the collateral pledged to secure the obligations of the Company under the Credit Facility will constitute collateral to secure the obligations under the KMTR Credit Facility.

For financial reporting purposes, the Company is consolidating the operating activities, assets and liabilities of KMTR TV as the Company is the primary beneficiary and has the power to direct the activities impacting the economic performance, obligation to absorb losses and right to receive returns that would be significant to KMTR TV. At closing, in addition to the $1.7 million KMTR Credit Facility, the Company paid the Station $5.9 million plus $850,000 cash escrow previously paid in November 2012, less net assumed liabilities of $92,000.

Under the acquisition method of accounting the purchase price has been allocated to the acquired consolidated assets and assumed liabilities based on estimated fair values (in thousands):

The final allocation presented above is based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The Company expects that goodwill will be deductible for tax purposes.

4. Variable Interest Entities

As of June 30, 2013 the Company had variable interests in three broadcast entities, inclusive of the addition of KMTR TV (as mentioned in Note 3) and two broadcast entities as of December 31, 2012 for which it is the primary beneficiary of these Variable Interest Entities (“VIEs”). The Company holds the power to direct activities that significantly impact the economic performance of the VIEs and can participate in returns that would be considered significant to the VIEs and therefore consolidates the assets and liabilities of these stations.

The $750,000 investment in South Sound Broadcasting LLC (“South Sound”) in connection with the Local Marketing Agreement qualifies as a VIE. The Company is not considered the primary beneficiary of this VIE and the 7.5% ownership interest in the station is accounted for using the cost method of accounting. The Company’s maximum exposure to losses as of June 30, 2013 and December 31, 2012 was $1.4 million.

The carrying amount of the investments in the VIEs for which the Company is the primary beneficiary as of June 30, 2013 and December 31, 2012 is as follows (in thousands):

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5. Goodwill and Intangible Assets

The following table summarizes the carrying amount of goodwill and intangible assets (in thousands):

The Company tests goodwill and intangible assets for impairment at least annually, as of October 1 ^st of each year, or whenever events indicate that impairment may exist. The Company has determined that the impairment test should be conducted at the reporting unit level, which, with respect to the broadcast operations, requires separate assessment of each of the Company’s television and radio station groups. The Company determines fair value based on valuation methodologies that include an analysis of market transactions for comparable businesses, discounted cash flows, and a review of the underlying assets of the reporting unit.

The following table presents the estimated amortization expense for the Company’s intangible assets subject to amortization for the remainder of 2013 and each of the next five years and thereafter (in thousands):

6. Debt

Extinguishment of senior notes

In January 2012, the Company redeemed the remaining $61.8 million aggregate principal amount of its 8.625% Senior Notes due in 2014 (“Senior Notes”) for a total consideration of $62.7 million in cash plus accrued interest of $1.8 million. The Company recorded a loss on extinguishment of debt of $1.5 million, including a charge for related unamortized debt issuance costs of approximately $594,000. As a result of the redemption of the remaining outstanding Senior Notes, the Company is no longer subject to provisions contained in the Senior Notes indenture, including various debt covenants and other restrictions, and the Company no longer is required to report financial information for its subsidiary guarantors of the Senior Notes.

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Credit facility

In November 2012, the Company entered into a credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as Administrative Agent and Lender, for a $30 million senior secured revolving credit facility (the “Credit Facility”). The Credit Facility will mature in 2017. In addition to the $30 million revolving credit facility, the Credit Agreement provides for a subfacility for the issuance of standby letters of credit in an amount to be determined by JPMorgan and the Company. Borrowings under the Credit Facility will accrue interest at a variable rate. The interest rate will be calculated using either an Alternate Base Rate (“ABR”) or the Eurodollar Rate, plus, in each case, an applicable margin determined by the Company’s leverage ratio in accordance with the terms of the Credit Agreement. The ABR is equal to the highest of (i) the rate of interest publicly announced by JPMorgan Chase Bank, N.A. as its prime rate in effect at its principal office in New York City (the “Prime Rate”), (ii) the federal funds effective rate from time to time plus 0.50% and (iii) the Eurodollar Rate applicable for an interest period of one month plus 1.00%.

The Credit Agreement contains customary affirmative and negative covenants for comparable financings, including but not limited to, limitations on liens, indebtedness, investments, mergers and other fundamental changes, sales and other dispositions and dividends and other distributions. The Credit Agreement also contains customary events of default and remedies in the event of an occurrence of an event of default, including the acceleration of any amounts outstanding under the Credit Agreement. Additionally, the Credit Agreement includes certain customary conditions that must be met for the Company to borrow under the Credit Facility.

Under the Credit Agreement, the Company is required to maintain certain financial ratios, including a leverage ratio and fixed charge coverage ratio. As of June 30, 2013, the Company incurred costs of approximately $264,000 directly related to obtaining the Credit Facility. These costs have been deferred on the unaudited condensed consolidated balance sheet in “other assets” and are being amortized to interest expense over the life of the Credit Facility. As described in Note 3, in connection with the acquisition of the broadcast assets of Newport, the Company entered into an amendment to the Credit Agreement (“the First Amendment”). The First Amendment provides, among other things, that (i) a default under the KMTR Credit Facility (including a default by the Company under the Guarantee) will constitute a default under the Credit Agreement, and (ii) that the collateral pledged to secure the obligations of the Company under the Credit Facility will constitute collateral to secure the obligations under the KMTR Credit Facility. As of June 30, 2013, the Company had no outstanding indebtedness under the Credit Facility.

7. Broadcast Rights and Other Commitments

Broadcast Rights

The Company acquires broadcast rights during the ordinary course of business. The impact of such contracts on the Company’s overall financial results is dependent on a number of factors, including popularity of the program, increased competition from other programming, and strength of the advertising market. It is possible that the cost of commitments for program rights may ultimately exceed direct revenue from the program. Estimates of future revenue can change significantly and, accordingly, are reviewed periodically to determine whether the broadcast right is impaired.

As of June 30, 2013, the Company had commitments under various agreements of $30.9 million for future rights to broadcast television programs, rights to sell available advertising time on a third party radio station and commitments under certain network affiliate agreements.

Hines Lease Commitment

In December 2011, in connection with its lease of space at Fisher Plaza, Seattle, Washington, the Company entered into a reimbursement agreement with Hines Global REIT (“Hines”) whereby the Company may be required to reimburse Hines up to $1.5 million if the power and/or chiller consumption by certain existing Fisher Plaza tenants, including the Company, exceeds specified levels and Hines is required to install additional power and/or chiller facilities. This reimbursement agreement expires on December 31, 2023.

8. Retirement Benefits

The Company maintains a noncontributory supplemental retirement program that was established for key management. No new participants have been admitted to this program since 2001 and the benefits of active participants were frozen in 2005. The program participants do not include any of the Company’s current executive officers. The supplemental retirement program requires continued employment or disability through the date of expected retirement. The cost of the program is accrued over the average expected future lifetime of the participants. The program provides for vesting of benefits under certain circumstances. Funding is not required, but the Company has made investments in annuity contracts and maintains life insurance policies on the lives of the individual participants to assist in payment of retirement benefits. The Company is the owner and beneficiary of the annuity contracts and life insurance

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policies; accordingly, the cash value of the annuity contracts and the cash surrender value of the life insurance policies are reported on the unaudited condensed consolidated balance sheet and the appreciation is included in the unaudited condensed consolidated statement of operations.

In June 2005, the program was amended to freeze accrual of all benefits to active participants provided under the program. The Company continues to recognize periodic pension cost related to the program, but the amount is lower as a result of the curtailment.

The net periodic pension cost for the Company’s supplemental retirement program is as follows (in thousands):

The discount rate used to determine net periodic pension cost was 3.55% for both the three and six months ended June 30, 2013. The discount rate used to determine net periodic pension cost was 4.48% for both the three and six months ended June 30, 2012.

9. Net Income (Loss) per Share

Net income (loss) per share is based upon the net income (loss) divided by weighted average number of shares outstanding during the period. Common stock options and restricted stock rights/units are converted using the treasury stock method.

Basic and diluted net income (loss) per share has been computed as follows (in thousands, except per-share amounts):

For the three months ended June 30, 2013, the effect of two restricted stock rights/units and options to purchase 41,143 shares are excluded from the calculation of weighted average shares outstanding because such rights/units and options were anti-dilutive. For the six months ended June 30, 2013, the effect of 157,342 restricted stock rights/units and options to purchase 251,130 shares are excluded from the calculation of weighted average shares outstanding because such rights/units and options were anti-dilutive.

For the three months ended June 30, 2012, the effect of zero restricted stock rights/units and options to purchase 263,740 shares are excluded from the calculation of weighted average shares outstanding because such rights/units and options were anti-dilutive. For the six months ended June 30, 2012, the effect of zero restricted stock rights/units and options to purchase 257,257 shares are excluded from the calculation of weighted average shares outstanding because such rights/units and options were anti-dilutive.

10. Stock-Based Compensation

Stock-based compensation expense for the three and six months ended June 30, 2013 was $593,000 and $1.4 million, respectively. Stock-based compensation expense for the three and six months ended June 30, 2012 was $374,000 and $826,000, respectively. Stock-based compensation expense is included in selling, general and administrative expenses in the Company’s unaudited condensed consolidated statements of operations.

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11. Income Taxes

The Company records an income tax provision or benefit based upon its estimated annual effective tax rate, which is estimated at 39.7% and 40.8% for the six months ended June 30, 2013 and 2012, respectively.

As of June 30, 2013 and December 31, 2012, the Company had $632,000 of unrecognized tax benefits and no penalties or interest was accrued. If the unrecognized tax benefits were recognized, $410,000 would impact the effective tax rate.

A reconciliation of the change in the amount of gross unrecognized income tax benefits is as follows (in thousands):

Although the timing and outcome of income tax audits is uncertain, it is possible that unrecognized tax benefits may be reduced as a result of the lapse of the applicable statutes of limitations in federal and state jurisdictions within the next 12 months. Currently, the Company cannot reasonably estimate the amount of reductions, if any, during the next 12 months. Any such reduction could be impacted by other changes in unrecognized tax benefits and could result in changes in the Company’s tax obligations.

The State of California and the State of Oregon conducted an examination of the Company’s 2007 and 2008 state income tax returns. In October 2012, the Company received letters from the State of California, including a Closing Letter agreeing with the Company’s non-business income position subject to additional review, and an additional letter closing the 2007 examination. In connection with the State of Oregon audit, in November 2011, the Company received a Proposed Auditor’s Report from the State of Oregon seeking approximately $800,000 in unpaid taxes, interest and penalties in connection with the Company’s treatment of the proceeds from its 2007 and 2008 sales of Safeco Corporation stock and dividends received. Although the Company has engaged in discussions with the State of Oregon regarding this assessment, it continues to oppose the State of Oregon’s position. The final disposition of the proposed audit adjustments could require the Company to make additional payments of taxes, interest and penalties, which could materially affect its effective tax rate.

In May 2013, the Company received notification from the IRS that its 2011 tax return was chosen for field examination. The Company continues to respond to IRS data request inquiries.

The determination of the Company’s provision for income taxes and valuation allowance requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. In assessing whether and to what extent deferred income tax assets can be realized, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.

The Company assesses the likelihood of the realizability of its deferred tax assets on a quarterly basis. As of June 30, 2013 and December 31, 2012, the Company had a valuation allowance of approximately $411,000 on certain of its deferred income tax assets. The amount of net deferred income tax assets considered realizable, however, could be reduced in the future if the Company’s projections of future taxable income are reduced or if the Company does not perform at the levels that it is projecting. This could result in an increase in the Company’s valuation allowance for deferred income tax assets.

12. Segment Information

The Company reports financial data for two segments: television and radio. The television segment includes the operations of the Company’s 23 owned and operated television and radio stations (including a 50%-owned station) and internet business. The radio reportable segment includes the operations of the Company’s three Seattle radio stations and one managed radio station.

The Company discloses information about its reportable segments based on measures it uses in assessing the performance of its reportable segments. The Company uses “segment income from operations” to measure the operating performance of its segments which represents income from operations before depreciation and amortization and loss (gain) on sale of real estate, net. Additionally, the performance metric for segment income from operations excludes the allocation of corporate costs and Fisher Plaza rent expense. The non-segment expenses include corporate and administrative expenses that have not been allocated to the operations of the television or radio segments.

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Operating results and other financial data for each segment are as follows: