Item 1. Business
Overview
LIN TV Corp. is a local television and digital media company, owning and/or operating 28 television stations and interactive television station and niche web sites in 17 U.S. markets. Our highly-rated stations deliver superior local news and community stories, along with top-rated sports and entertainment programming, to 8% of U.S. television homes, reaching an average of 9.7 million households per week. All of our television stations are affiliated with a national broadcast network. We are a leader in the convergence of local broadcast television and the Internet through our television station web sites and a growing number of local interactive initiatives and Internet-based products and services. Our stations are primarily located in the top 75 Designated Market Areas (“DMA”) as measured by Nielsen Media Research (“Nielsen”). In this report, the terms “Company,” “LIN TV”, “we”, “us” or “our” mean LIN TV Corp. and all subsidiaries included in our consolidated financial statements. Our class A common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “TVL”.
We provide free, over-the-air broadcasts of our programming 24 hours per day to the communities we are licensed to serve. We are committed to serving the public interest by providing free daily local news coverage, making public service announcements and providing advertising time to political candidates.
We seek to have the largest local media presence in each of our local markets by combining strong network and syndicated programming with leading local news, and by pursuing our multi-channel strategy. This multi-channel strategy enables us to increase our audience share by operating multiple stations on multiple platforms in the same market. We currently deliver content over the air, on-line and on mobile applications. We also operate multiple stations in nine of our markets.
Development of Our Business
Ownership and organizational structure
Our Company (including its predecessors) has owned and operated television stations since 1966 and was incorporated on February 11, 1998. A group of investors led by the predecessor of HMC acquired LIN Television Corporation, our wholly-owned subsidiary, on March 3, 1998 and was incorporated on June 18, 1990. On May 3, 2002, we completed our initial public offering and our class A common stock began trading on the NYSE. Our corporate offices are at One West Exchange Street, Suite 5A, Providence, Rhode Island 02903.
We have three classes of common stock. The class A common stock and the class C common stock are both voting common stock, with the class C common stock having 70% of the aggregate voting power. The class B common stock is held by affiliates of HMC and has no voting rights, except that without the consent of a majority of the class B common stock, we cannot enter into a wide range of corporate transactions.
This capital structure allowed us to issue voting stock while preserving the pre-existing ownership structure in which the class B stockholders did not have an attributable ownership interest in our television broadcast licenses pursuant to the rules of the Federal Communications Commission (“FCC”).
The following diagram summarizes our corporate structure as of March 3, 2010:
Class A Common
Stock
29,407,317 shares outstanding
listed on the NYSE under the
symbol “TVL”
30% voting power
Class B Common
Stock
23,502,059 shares
outstanding, all of which are
currently held by affiliates or
former affiliates of HMC
Non-voting
Class C Common
Stock
2 shares outstanding, 1 of
which is held by affiliates of
Mr. Royal W. Carson III, a
director, and the other by HMC
70% voting power
LIN TV Corp.
LIN Television Corporation
Television Stations
and
Digital Operations
Joint Ventures
All of the shares of our class B common stock are held by affiliates of HMC or former affiliates of HMC. The class B common stock is convertible into class A common stock or class C common stock in various circumstances. The class C common stock is also convertible into class A common stock in certain circumstances. If affiliates of HMC converted their shares of class B common stock into shares of class A common stock and the shares of class C common stock were converted into shares of class A common stock as of March 3, 2010, the holders of the converted shares of class C common stock would own less than 0.01% of the total outstanding shares of class A common stock and resulting voting power, and the affiliates of HMC would own 44.4% of the total outstanding shares of class A common stock and resulting voting power.
HMC has advised us that it has no current intention of converting its shares of class B common stock into shares of class A voting common stock or shares of class C voting common stock.
Our television stations
We own, operate and/or program 28 stations, including two stations pursuant to local marketing agreements and one low-power station, which operates as a stand-alone station. We also have an equity investment in other stations through a joint venture. The following table lists the stations that we own, operate and/or program, or in which we have an equity investment:
(1)
DMA estimates and rankings are taken from Nielsen Local Universe Estimates for the 2009-2010 Broadcast Season, effective September 21, 2009. There are 210 DMAs in the United States. All Nielsen data included in this report represents Nielsen’s estimates, and Nielsen has neither reviewed nor approved the data included in this report.
(2)
All of our stations are owned and operated except for those stations noted as “LMA” which indicates stations to which we provide services under a local marketing agreement (see “Distribution of Programming - local marketing agreements” for a description of these agreements) and noted as “JV” which indicates a station owned and operated by a joint venture to which we are a party.
(3)
WISH-TV includes a low-power station, WIIH-CA. WOOD-TV, WAVY-TV, KNVA-TV, WLUK-TV each include a group of low-power stations. KRQE-TV includes two satellite stations, KBIM-TV and KREZ-TV. We own and operate all of these satellite stations and low-power stations, which broadcast identical programming as the primary station.
(4)
KBVO-TV is a satellite station of KXAN-TV on which programming is provided through MyNetworkTV’s program service.
(5)
License renewal applications have been filed with the FCC and are currently pending.
For more information about our joint venture with NBC Universal, see “Joint Venture with NBC Universal” below and Item 1A.
Item 1A. Risk Factors
Risks Associated with Our Business Activities
Our operating results are primarily dependent on advertising revenues, which can vary substantially from period-to-period based on many factors beyond our control, including economic downturns and viewer preferences.
Our operations and performance are materially affected by a number of factors beyond our control, including economic conditions and viewer preferences. For example, the economic downturn adversely affected local and national advertising revenues across all of our stations during 2009. Advertising revenue, including local, national and political advertising revenues, consisted of approximately 84%, 90% and 92% of our total revenues for the years ended December 31, 2009, 2008 and 2007, respectively. Local advertising revenues decreased 13% and 9% for the years ended December 31, 2009 and 2008, respectively, compared to their respective prior periods. National advertising revenues decreased 17%, 16% and 1% for the years ended December 31, 2009, 2008 and 2007, respectively, compared to their respective prior periods. This volatility in advertising revenues results in decreased revenues and weaker results of operations for us. While we have seen some signs of recovery, continued weakness in advertising revenues caused by economic conditions could have a material adverse effect on our financial condition, cash flows and results of operations, which could impair our ability to comply with the covenants in our debt instruments, as more fully described below.
In addition to economic conditions, our ability to generate advertising revenues depends on factors such as:
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the relative popularity of the programming on our stations;
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the demographic characteristics of our markets; and
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the activities of our competitors.
Our programming may not attract sufficient targeted viewership or we may not achieve favorable ratings. Our ratings depend partly upon unpredictable and volatile factors beyond our control, such as viewer preferences, competing programming and the availability of other entertainment activities. A shift in viewer preferences could cause our programming not to gain popularity or to decline in popularity, which could cause our advertising revenues to decline. We, and those on whom we rely for programming, may not be able to anticipate and react effectively to shifts in viewer tastes and interests of our local markets. In addition, political advertising revenue from elections and advertising revenues from Olympic Games, which generally occur in the even years, create large fluctuations in our operating results on a year-to-year basis. For example, during 2009, we had political advertising revenues of $13.2 million, compared to $47.0 million in the prior year.
We depend to a significant degree on automotive advertising.
Approximately 19%, 24% and 28% of our net advertising revenues for the years ended December 31, 2009, 2008, and 2007, respectively, consisted of automotive advertising. A significant decrease in these revenues in the future could have a material adverse effect on our results of operations and cash flows, which could affect our ability to fund operations and service our debt obligations and affect the value of our common stock. Automotive advertising continues to be adversely affected by the difficulties experienced by the automotive industry.
The GECC Note could result in significant liabilities, including (i) requiring us to make short term cash payments to the NBC Universal joint venture to fund interest payments, and (ii) potentially giving rise to a change of control under our existing indebtedness, which would cause such existing indebtedness to become immediately due and payable.
We may be required to make cash payments to the joint venture to fund interest payments on the GECC Note. Our joint venture with NBC Universal has been adversely impacted by the current economic downturn. Under the Original Shortfall Funding Agreement, we may be required to provide shortfall loans to the joint venture, in an amount based on our approximately 20% economic interest in the joint venture, if the joint venture does not have sufficient cash to fund interest obligations under the GECC Note through April 1, 2010. As of March 15, 2010, we have not yet provided any funding under the Original Shortfall Funding Agreement.
Because of anticipated future cash shortfalls at the joint venture, on March 9, 2010, NBC Universal and we entered into the 2010 Shortfall Funding Agreement covering the period through April 1, 2011. Under the 2010 Shortfall Funding Agreement: a) the joint venture may continue to access any portion of its existing debt service reserve cash balances to fund interest payments; b) NBC will continue to defer the payment of 2008 and 2009 management fees and will defer payment of 2010 management fees through March 31, 2011; and c) we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2011, we and NBC Universal would each provide the joint venture with a shortfall loan on the basis of our percentage of economic interest in the joint venture. Under the terms of the Original Shortfall Funding Agreement and the 2010 Shortfall Funding Agreement, we estimate our share of shortfall funding could be $5.0 million to $7.0 million through the April 1, 2011 expiry of the 2010 Shortfall Funding Agreement. However, our actual cash shortfall funding could exceed our estimate.
Our ability to honor our shortfall loan obligations under the Original Shortfall Funding Agreement and the 2010 Shortfall Funding Agreement is subject to compliance with restrictions under our senior credit facility and the indentures governing our senior notes. Based on the 2010 budget provided by joint venture management, and our forecast of total leverage and consolidated EBITDA during 2010 and 2011, we expect to have the capacity within these restrictions to provide shortfall funding under the 2010 Shortfall Funding Agreement in proportion to our approximately 20 percent economic interest in the joint venture through the April 1, 2011 expiration of the 2010 Shortfall Funding Agreement. However, there can be no assurance that we will have the capacity within these restrictions to provide such funding. If we are required to fund a portion of a shortfall loan, we plan to use our available cash balances or available borrowings under our credit facility. In addition, if the joint venture experiences further cash shortfalls beyond April 1, 2011, we may decide to fund such cash shortfalls, or to fund such shortfalls through further loans or equity contributions to the joint venture. If we are unable to make payments under the Original Shortfall Funding Agreement or 2010 Shortfall Funding Agreement, the joint venture may be unable to fund interest obligations under the GECC Note, resulting in an event of default.
An event of default under the GECC Note will occur if the joint venture fails to make any scheduled interest payment within 90 days of the date due and payable, or to pay the principal amount on the maturity date. If the joint venture fails to pay interest on the GECC Note, and neither NBC Universal nor we make a shortfall loan to fund the interest payment within 90 days of the date due and payable, an event of default would occur and GECC could accelerate the maturity of the entire amount due under the GECC Note. Other than the acceleration of the principal amount upon an event of default, prepayment of the principal of the note is prohibited unless agreed upon by both NBC Universal and us. Upon an event of default under the GECC Note, GECC’s only recourse would be to the joint venture, our equity interest in the joint venture and, after exhausting all remedies against the assets of the joint venture and the other equity interests in the joint venture, to LIN TV pursuant to its guarantee of the GECC Note.
Under the terms of its guarantee of the GECC Note, LIN TV would be required to make a payment for an amount to be determined upon occurrence of the following events: a) there is an event of default; b) neither NBC Universal or us remedy the default; and c) after GECC exhausts all remedies against the assets of the joint venture, the total amount realized upon exercise of those remedies is less than the $815.5 million principal amount of the GECC Note. Upon the occurrence of such events, the amount owed by LIN TV to GECC pursuant to the guarantee would be equal to the difference between i) the total amount for which the joint venture’s assets were sold and ii) the principal amount and any unpaid interest due under the GECC Note. As of December 31, 2009, we estimate the fair value of the television stations in the joint venture to be approximately $366 million less than the outstanding balance of the GECC note of $815.5 million.
If an event of default occurs under the GECC Note, LIN TV, which conducts all of its operations through its subsidiaries, could experience material adverse consequences, including:
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GECC, after exhausting all remedies against the joint venture, could enforce its rights under the guarantee, which could cause LIN TV to determine that LIN Television should seek to sell material assets owned by it in order to satisfy LIN TV’s obligations under the guarantee;
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GECC’s initiation of proceedings against LIN TV under the guarantee could result in a change of control or other material adverse consequences to LIN Television, which could cause an acceleration of LIN Television’s credit facility and other outstanding indebtedness; and
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if the GECC Note is prepaid because of an acceleration on default or otherwise, we would incur a substantial tax liability of approximately $273.6 million related to our deferred gain associated with the formation of the joint venture, exclusive of any potential NOL utilization.
We have a substantial amount of debt, which could adversely affect our financial condition, liquidity and results of operations, reduce our operating flexibility and put us at greater risk for default and acceleration of our debt.
As of December 31, 2009, we had approximately $683.0 million of consolidated indebtedness and a deficit of $169.2 million of consolidated stockholders’ equity. Our outstanding debt under our credit facility is due November 14, 2011 and all of our 6½% senior subordinated notes are due May 15, 2013. Subject to the limitations in our senior credit facility and the indentures governing the senior subordinated notes, we may incur additional material indebtedness in the future, and we may become more leveraged. Accordingly, we now have and will continue to have significant debt service obligations. We have also guaranteed the $815.5 million GECC Note as described above.
Our large amount of indebtedness could, for example:
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require us to use a substantial portion of our cash flow from operations to pay interest and principal on indebtedness and reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate activities;
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require us to dispose of television stations or other assets at times or on terms that may be less advantageous than those we might otherwise be able to obtain;
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limit our ability to obtain additional financing in the future;
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expose us to greater interest rate risk, because the interest rates on our credit facility vary; and
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impair our ability to successfully withstand a sustained downturn in our business or the economy in general and place us at a disadvantage relative to our less leveraged competitors.
The indentures governing our senior subordinated notes also contain change of control provisions which may require us to purchase all or a portion of our 6½% senior subordinated notes at a price equal to 101% of the principal amount of the notes, together with accrued and unpaid interest.
Any of these consequences could have a material adverse effect on our business, liquidity and results of operations.
We could fail to comply with our financial covenants, which would adversely affect our financial condition.
Our debt instruments require us to comply with financial covenants, including, among others, leverage ratios and interest coverage tests. These covenants restrict the manner in which we conduct our business and may impact our operating results. Further, weak results of operations due to reduced advertising revenues may make it harder for us to comply with such covenants. Our failure to comply with these covenants could result in events of default, which, if not cured or waived, would permit acceleration of our indebtedness under our debt agreements or under other instruments that contain cross-acceleration or cross-default provisions. In the past, we have obtained amendments with respect to compliance with financial ratio tests in our credit facility. For example, on July 31, 2009, we entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent, and banks and financial institutions party thereto, as a result of the continued declines in revenues during 2009 and to address continued compliance with the financial covenants in our credit agreement. For further information on the Amended Credit Agreement see “Description of Indebtedness”. Consents or amendments that may be required in the future may not be available on reasonable terms, or at all.
Our debt instruments also contain certain other restrictions on our business and operations, including, for example, covenants that restrict our ability to dispose of assets, incur additional indebtedness, pay dividends, make investments, make acquisitions, engage in mergers or consolidations and make capital expenditures.
We may not be able to generate sufficient cash flow to meet our debt service obligations, forcing us to refinance all or a portion of our indebtedness, sell assets or obtain additional financing, which we may not be able to do on commercially reasonable terms.
Our ability to make scheduled payments of principal and interest on our indebtedness and our ability to refinance our indebtedness will depend on our future performance, which, to a certain extent, will be subject to economic, financial, competitive and other factors beyond our control. Cash interest paid during the years ended December 31, 2009, 2008 and 2007 was $40.1 million, $48.8 million and $55.6 million, respectively. Our required payments of principal were $15.9 million, $202.0 million and $120.1 million for the years ended December 31, 2009, 2008 and 2007, respectively. Our business may not continue to generate sufficient cash flow from operations in the future to pay our debt service obligations or to fund our other liquidity needs. As a result, we may need to refinance all or a portion of our indebtedness, on or before maturity, sell assets or obtain additional financing. We may not be able to refinance any of our indebtedness or sell assets on commercially reasonable terms, if at all. If we are unable to generate sufficient cash flow, or refinance our indebtedness, or sell assets on commercially reasonable terms, we may have to seek to restructure our remaining debt obligations, which could have a material adverse effect on the value of our class A common stock and the market, if any, for our debt. The current volatility in the capital markets may also impact our ability to refinance our debt or to refinance our debt on terms similar to our existing debt agreements.
Additionally, we have a history of net losses and a substantial accumulated deficit. We had net losses of $830.4 million and $234.5 million for the years ended December 31, 2008 and 2006, respectively, primarily as a result of impairment of our broadcast licenses and goodwill, and interest expense. As of December 31, 2009, we had an accumulated deficit of $1.2 billion. These losses may or may not recur, and our accumulated deficit may therefore continue indefinitely.
We have a material amount of intangible assets and we have recorded substantial impairments of these assets. Future write-downs of intangible assets would reduce net income or increase net loss, which could have a material adverse effect on our results of operations and the value of our class A common stock.
Future impairment charges could have a significant adverse effect on our reported results of operations and stockholders’ equity. Approximately $516.1 million or 65% of our total assets as of December 31, 2009 consisted of indefinite-lived intangible assets. Intangible assets principally include broadcast licenses and goodwill, which are required to be tested for impairment at least annually, with impairment being measured as the excess of the carrying value of the goodwill or the intangible asset over its fair value. In addition, goodwill and intangible assets will be tested more often for impairment as circumstances warrant.
We recorded an impairment of our broadcast licenses of $37.2 million and $599.6 million during the years ended December 31, 2009 and 2008, respectively, and we recorded an impairment of goodwill of $2.7 million and $420.9 million during the years ended December 31, 2009 and 2008, respectively. For further details see Note 6 - "Intangible Assets".
If we determine in a future period, as part of our testing for impairment of intangible assets and goodwill, that the carrying amount of our intangible assets exceeds the fair value of these assets, we may incur an impairment charge that could have a material adverse effect on our results of operations and the value of our class A common stock.
Our strategy has historically included growth through acquisitions, which could pose various risks and increase our leverage.
We have pursued and intend to selectively continue to pursue strategic acquisitions, subject to market conditions, our liquidity, and the availability of attractive acquisition candidates, with the goal of improving our business. We may not be successful in identifying attractive acquisition targets nor have the financial capacity to complete future acquisitions. Acquisitions involve inherent risks, such as increasing leverage and debt service requirements and combining company cultures and facilities, which could have a material adverse effect on our operating results, particularly during the period immediately following any acquisition. We may not be able to successfully implement effective cost controls or increase revenues as a result of any acquisition. In addition, future acquisitions may result in our assumption of unexpected liabilities and may result in the diversion of management’s attention from the operation of our core business.
Certain acquisitions, such as television stations, are subject to the approval of the FCC and, potentially, other regulatory authorities. The need for FCC and other regulatory approvals could restrict our ability to consummate future transactions and potentially require us to divest some television stations if the FCC believes that a proposed acquisition would result in excessive concentration in a market, even if the proposed combinations may otherwise comply with FCC ownership limitations.
HMC and its affiliates, whose interests may differ from your interests, have approval rights with respect to significant transactions and could convert their equity interests in our Company into a block of substantial voting power, thereby reducing the voting power of our other shareholders.
HMC and its affiliates own one share of our class C common stock, which represents 35% of our outstanding voting power, and also have the ability to convert shares of our non-voting class B common stock into class A common stock, subject to FCC approval. Upon the conversion of the majority of the non-voting class B common stock into class A common stock, the class C common stock will automatically convert into an equal number of shares of class A common stock. If this occurs, affiliates of HMC would own approximately 44.4% of our voting equity interests and will effectively have the ability to elect the entire board of directors and to approve or disapprove any corporate transaction or other matters submitted to our shareholders for approval, including the approval of mergers or other significant corporate transactions. The interests of HMC and its affiliates may differ from the interests of our other stockholders and HMC and its affiliates could take actions or make decisions that are not in the best interests of our other stockholders.
For example, HMC may from time-to-time acquire and hold controlling or non-controlling interests in television broadcast assets that may directly or indirectly compete with our company for advertising revenues. In addition, HMC and its affiliates may from time-to-time identify, pursue and consummate acquisitions of television stations or other broadcast related businesses that may be complementary to our business and therefore such acquisition opportunities may not be available to us.
Moreover, Royal W. Carson, III, a director, and HMC, combined beneficially own all of our class C common stock and therefore possess 70% of the combined voting power. Accordingly, Mr. Carson and HMC together have the power to elect our entire board of directors and, through this control, to approve or disapprove any corporate transaction or other matter submitted to our stockholders for approval, including the approval of mergers or other significant corporate transactions. Mr. Carson has prior business relations with HMC. Mr. Carson is the President of Carson Private Capital Incorporated, an investment firm that sponsors funds-of-funds and dedicated funds that have invested substantially all of the net capital of these funds in private equity investment funds sponsored by firms like HMC or its affiliates. Mr. Carson also serves on an advisory board representing the interests of limited partners of Hicks, Muse, Tate & Furst Equity Fund V, L.P.; Sector Performance Fund, L.P.; and Hicks, Muse, Tate & Furst Europe Fund L.P., which are sponsored by HMC. The three listed funds do not have an investment in us. In addition, Peter S. Brodsky, one of our directors, is a partner of HMC.
If we are unable to compete effectively, our revenue could decline.
The entertainment industry, and particularly the television industry, is highly competitive and is undergoing a period of consolidation and significant change. Many of our current and potential competitors have greater financial, marketing, programming and broadcasting resources than we do. Technological innovation and the resulting proliferation of television entertainment alternatives, such as cable, satellite television and telecommunications video services, Internet, wireless, pay-per-view and video-on-demand, digital video recorders, DVDs and mobile video devices have fragmented television viewing audiences and have subjected free over-the-air television broadcast stations to new types of competition. As a result, we are experiencing increased competition for viewing audience and advertisers. Significant declines in viewership and advertising revenues could materially and adversely affect our business, financial condition and results of operations.
New technologies may affect our broadcasting operations.
The television broadcasting business is subject to rapid technological change, evolving industry standards, and the emergence of new technologies. We cannot predict the effect such technologies will have on our broadcast operations. In addition, the capital expenditures necessary to implement these new technologies could be substantial and other companies employing such technologies before we are able to could aggressively compete with our business.
It would be difficult to take us over, which could adversely affect the trading price of our class A common stock.
Affiliates of HMC effectively have the ability to determine whether a change of control will occur through their ownership of one of the two outstanding shares of our class C common stock and all of the shares of our class B common stock. Provisions of Delaware corporate law and our bylaws and certificate of incorporation, including the 70% voting power of our class C common stock held by Mr. Carson and HMC and the voting power that affiliates of HMC would hold upon conversion of their shares of class B stock into class A stock or class C stock, make it difficult for a third party to acquire control of us, even if a change of control would benefit the holders of our class A common stock. These provisions and controlling ownership by affiliates of HMC could also adversely affect the public trading price of our class A common stock.
The loss of network affiliation agreements or changes in network affiliations could have a material and adverse effect on our results of operations if we are unable to quickly replace the network affiliation.
The non-renewal or termination of a network affiliation agreement or a change in network affiliations could have a material adverse effect on us. Each of the networks generally provides our affiliated stations with up to 22 hours of prime time programming per week. In return, our stations broadcast network-inserted commercials during that programming and, in some cases, receive cash payments from networks. In other cases, we make cash payments to certain networks.
Some of our network affiliation agreements are subject to earlier termination by the networks under specified circumstances, including as a result of a change of control of our Company, which would generally result upon the acquisition of shares having 50% or more of our voting power. In the event that affiliates of HMC elect to convert our class B common stock shares held by them into shares of either class A common stock or class C common stock, such conversion may result in a change of control of our Company causing an early termination of some or all of our network affiliation agreements. Some of the networks with which our stations are affiliated have required us, upon renewal of affiliation agreements, to reduce or eliminate network compensation and, in specific cases, to make cash payments to the network, and to accept other material modifications of existing affiliation agreements. Consequently, our affiliation agreements may not all remain in place and each network may not continue to provide programming or compensation to us on the same basis as it currently provides programming or compensation to our stations. If any of our stations cease to maintain affiliation agreements with networks for any reason, we would need to find alternative sources of programming, which may be less attractive and more expensive.
A change in network affiliation in a given television market may have many short-term and long-term consequences, depending upon the circumstances surrounding the change. Potential short-term consequences include: a) increased marketing costs and increased internal operating costs, which can vary widely depending on the amount of marketing required to educate the audience regarding the change and to maintain the station’s viewing audience; b) short term loss of market share or slower market growth due to advertiser uncertainty about the switch; c) costs of building a new or larger news operation; d) other increases in station programming costs, if necessary; and e) the cost of equipment needed to conform the station’s programming, equipment and logos to the new network affiliation. Long-term consequences are more difficult to assess, due to the cyclical nature of each of the major network’s share of the audience that changes from year-to-year with programs coming to the end of their production cycle, and the audience acceptance of new programs in the future and the fact that national network audience ratings are not necessarily indicative of how a network’s programming is accepted in an individual market. How well a particular network fares in an affiliation switch depends largely on the value of the broadcast license, which is influenced by the length of time the television station has been broadcasting, the quality and location of the license, the audience acceptance of the local news programming and community involvement of the local television station and the quality of the station non-network programming. In addition, the majority of the revenue earned by television stations is attributable to locally produced news and syndicated programming, rather than to network affiliation payments and advertising sales related to network programming. The circumstances that may surround a network affiliation switch cause uncertainty as to the actual costs that will be incurred by us and, if these costs are significant, the switch could have a material adverse impact on the income we derive from the affected station.
Changes by the national broadcast television networks in their respective business models and practices could adversely affect our business, financial condition and results of operations.
In recent years, the networks have streamed their programming on the Internet and other distribution platforms in close proximity to network programming broadcast on local television stations, including those we own. These and other practices by the networks dilute the exclusivity and value of network programming originally broadcast by the local stations and could adversely affect the business, financial conditions and results of operations of our stations.
We depend on key personnel, and we may not be able to operate and grow our businesses effectively if we lose the services of our management or are unable to attract and retain qualified personnel in the future.
We depend on the efforts of our management and other key employees. The success of our business depends heavily on our ability to develop and retain management and to attract and retain qualified personnel in the future. Competition for senior management personnel is intense and we may not be able to retain our key personnel. If we are unable to do so, our business, financial condition or results of operations may be adversely affected.
Risks Related to Our Industry
The FCC’s National Broadband Plan could result in the reallocation of broadcast spectrum for wireless broadband use, which could materially impair our ability to provide competitive services.
The American Recovery and Reinvestment Act of 2009 directed the FCC to deliver to Congress, within one year of enactment, a “National Broadband Plan.” The FCC has indicated that it will deliver the National Broadband Plan to Congress by March 17, 2010. Certain members of the FCC’s National Broadband Plan staff have expressed the view that some or all of the spectrum presently allocated for television broadcasting should be reclaimed and reallocated to be used for other purposes, including mobile wireless broadband, and in informal discussions with broadcasters and other stakeholders they have described possible mechanisms by which this could be accomplished. If the National Broadband Plan includes one or more proposals to reallocate broadcast spectrum, further action by the FCC or Congress, or both, would be necessary in order to develop and implement them. A reallocation, if it occurs, could result in voluntary or involuntary modification of television broadcast licenses. We cannot predict the likelihood, timing, or extent of a spectrum reallocation. If some or all of our television stations are required to change frequencies or reduce the amount of spectrum they use, our stations could suffer material adverse effects, including but not limited to substantial conversion costs, reduction or loss of over-the-air signal coverage, and an inability to provide high definition programming and additional program streams, including mobile video services.
Our ability to successfully negotiate future retransmission consent agreements may be hindered by the interests of networks with whom we are affiliated.
Our affiliation agreements with some broadcast networks include certain terms that may affect our ability to permit cable, satellite and telecommunications providers (“MVPDs”) to retransmit network programming, and in some cases, we may lose the right to grant retransmission consent to such providers. We may not be able to successfully negotiate retransmission consent agreements with the MVPDs in our local markets if the broadcast networks withhold their consent to the retransmission of those portions of our stations’ signals containing network programming, or the networks may require us to pay compensation in exchange for permitting redistribution of network programming by MVPDs. If we are required to make payments to networks in connection with signal retransmission, those payments may adversely affect our operating results. If we lose the right to grant retransmission consent, we may be unable to satisfy certain obligations under our existing retransmission consent agreements with MVPDs and there could be a material adverse effect on our results of operations.
Our industry is subject to significant syndicated and other programming costs, and increased programming costs could adversely affect our operating results.
Our industry is subject to significant syndicated and other programming costs. We often acquire program rights two or three years in advance, making it difficult for us to accurately predict how a program will perform. In some instances, we may have to replace programs before their costs have been fully amortized, resulting in impairments and write-offs that increase station operating costs. We may be exposed to future programming cost increases, which may adversely affect our operating results.
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 in a timely manner, if at all. 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 “Federal Regulation of Television Broadcasting” in Item 1. Business)
Changes in FCC ownership rules through FCC action, judicial review or federal legislation may limit our ability to continue providing services to stations under local marketing agreements, may prevent us from obtaining ownership of the stations we currently provide services to under local marketing agreements and/or may preclude us from obtaining the full economic value of one or more of our duopoly, or two-station operations upon a sale, merger or other similar transaction transferring ownership of such station or stations.
FCC ownership rules currently impose significant limitations on the ability of broadcast licensees to have attributable interests in multiple media properties. In addition, federal law prohibits one company from owning broadcast television stations that collectively have service areas encompassing more than an aggregate 39% share of national television households. Ownership restrictions under FCC rules also include a variety of local limits on media ownership. The restrictions include an ownership limit of one television station in most medium and smaller television markets and two stations in most larger markets, known as the television duopoly rule. The regulations also include a prohibition on the common ownership of a newspaper and television station in the same market (newspaper-television cross-ownership), limits on common ownership of radio and television stations in the same market (radio-television station ownership) and limits on radio ownership of four to eight radio stations in a local market.
Should the FCC liberalize media ownership rules, attractive opportunities may arise for additional television station and other media acquisitions. But these changes also create additional competition for us from other entities, such as national broadcast networks, large station groups, newspaper chains and cable operators who may be better positioned to take advantage of such changes and benefit from the resulting operating synergies both nationally and in specific markets.
Should the television duopoly rule become relaxed, we may be able to acquire the ownership of one or both of the stations in Austin and Providence for which we currently provide programming, sales and other related services under local marketing agreements and for which we have purchase option agreements to purchase these stations. Should we be unable to do so, there is no assurance that the grandfathering of our local marketing agreements will be permitted beyond conclusion of the current further rule-making. We had net revenues of $15.7 million, or 5% of our total net revenues, attributable to local marketing agreements for the year ended December 31, 2009.
Any potential hostilities, natural disasters or terrorist attacks may affect our revenues and results of operations.
If the U.S. becomes engaged in new, large scale foreign hostilities, is impacted by any significant natural disasters or if there is a terrorist attack against the U.S., we may lose advertising revenue and incur increased broadcasting expenses due to pre-emption, delay or cancellation of advertising campaigns and increased costs of providing news coverage of such events. We cannot predict the extent and duration of any future disruption to our programming schedule, the amount of advertising revenue that would be lost or delayed or the amount by which our expenses would increase as a result. Consequently, any related future loss of revenue and increased expenses could negatively affect our results of operations.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
We maintain our corporate headquarters in Providence under an operating lease that expires on March 31, 2015.
Each of our stations has facilities consisting of offices, studios, sales offices and tower and transmitter sites. Tower and transmitter sites are located in areas that provide optimal coverage to each of our markets. We own substantially all of the offices and studios where our stations are located and generally own the property where our towers and primary transmitters are located. We lease the remaining properties, consisting primarily of sales office locations and microwave transmitter sites. While none of the station properties owned or leased by us are individually material to our operations, if we were required to relocate any of our towers, the cost could be significant. This is because the number of sites in any geographic area that permit a tower of reasonable height to provide good coverage of the market is limited, and zoning and other land use restrictions, as well as Federal Aviation Administration and FCC regulations, limit the number of alternative locations or increase the cost of acquiring them for tower sites.
Item 3.
Item 3. Legal Proceedings
We are involved in various claims and lawsuits that are generally incidental to our business. We are vigorously contesting all of these matters and believe that their ultimate resolution will not have a material adverse effect on us.
Item 4.
Item 4. Reserved
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our class A common stock is listed on the NYSE under the symbol “TVL”. There is no established trading market for our class B common stock or our class C common stock.
On November 12, 2009, we were notified by the NYSE that we had regained compliance with the NYSE’s continued listing standards. We had received a non-compliance notification from the NYSE on January 8, 2009 because the average market capitalization of our class A common stock over a consecutive 30 trading-day period was less than $75 million. The November 12, 2009 notice from the NYSE was delivered following our compliance with the NYSE minimum market capitalization requirements over the prior two consecutive quarters.
The following table sets forth the high and low sales prices for our class A common stock for the periods indicated, as reported by the NYSE:
We have never declared or paid any cash dividends on our class A common stock and the terms of our indebtedness limit the payment of such dividends. We do not anticipate paying dividends in the foreseeable future.
As of December 31, 2009, there were approximately 36 stockholders of record of our class A common stock, 20 stockholders of record of our class B common stock and two stockholders of record of our class C common stock.
The common stock of our wholly-owned subsidiary, LIN Television Corporation, all of which is held directly by us, has not been registered under the Exchange Act and is not listed on any national securities exchange.
Equity compensation plans
The following table provides information about the securities authorized for issuance under our stock-based compensation plans, including our 1998 Stock Option Plan, Amended and Restated 2002 Stock Plan, and Third Amended and Restated 2002 Non-Employee Director Stock Plan, as of December 31, 2009:
(1)
Includes 729,221 shares available for future issuance under the Amended and Restated 2002 Stock Plan, and excludes 1,552,983 shares available for future issuance under the 1998 Stock Option Plan, which we do not intend to re-grant and consider unavailable for future grant, and 652,638 shares available for future issuance under the Third Amended and Restated 2002 Non-Employee Director Stock Plan. Both the Amended and Restated 2002 Stock Plan and the Third Amended and Restated 2002 Non-Employee Director Stock Plan, in addition to the future grant of stock options, permit the grant of “stock awards” that may take the form of restricted or unrestricted stock, with or without payment for such stock awards.
Comparative stock performance graph
The following graph compares the cumulative total return performance of our class A common stock for five years ending December 31, 2009 versus the performance of: a) the NYSE Composite Index; and b) a peer index consisting of the following broadcast television companies: Gray Communications Systems, Inc.; Sinclair Broadcasting Group, Inc.; Belo Corporation; Nextstar Broadcasting Group, Inc.; and CBS Corporation (the “Television Index”). The graph assumes the investment of $100 in our class A common stock and in each of the indices on December 31, 2004. The performance shown is not necessarily indicative of future performance.
Item 6.
Item 6. Selected Financial Data
Set forth below is our selected consolidated financial data for each of the five years in the period ended December 31, 2009. The selected financial data as of December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007 is derived from audited consolidated financial statements that appear elsewhere in this report. The selected financial data should be read in conjunction with Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The remaining assets and liabilities of the Banks Broadcasting joint venture and our Puerto Rico stations were sold in 2009 and 2007, respectively. Accordingly, our consolidated financial statements reflect the operations of the Puerto Rico stations and the operations, assets and liabilities of the Banks Broadcasting joint venture stations as discontinued for all periods presented.
Executive Summary
We own and operate and/or program 28 television stations in 17 mid-sized markets. Our operating revenues are derived primarily from the sale of advertising time to local, national and political advertisers and, to a much lesser extent, from digital revenues, network compensation, barter and other revenues. During 2009, economic conditions continued to adversely impact local and national advertising across all of our markets. We recorded net income of $9.1 million for the year ended December 31, 2009, compared to net loss of $830.4 million and net income of $53.7 million for the years ended December 31, 2008 and 2007, respectively. Our net income of $9.1 million for the year ended December 31, 2009 included: (a) a pre-tax gain on early extinguishment of debt of $50.1 million related to our purchase of a portion of our senior subordinated notes; and (b) a pre-tax non-cash impairment charge of $39.9 million related to our broadcast licenses and goodwill recorded during the second quarter of 2009, as further described in Note 6 - “Intangible Assets.”
Our operating highlights for 2009 include the following:
·
Total revenues decreased $60.3 million compared to 2008, primarily due to a decline in political revenues of $33.8 million in 2009 as a result of the Presidential, Congressional, state and local elections that took place during 2008. The decrease in revenue in 2009 also reflected the television advertising marketplace decline in our local markets resulting from the economic downturn. Advertising categories for which local and national advertising sales decreased for 2009 compared to 2008 were automotive, retail, restaurants, media/telecommunications, services, financial services and entertainment. Advertising categories for which revenues increased for 2009 included grocery and food items, home improvement and health and beauty.
·
As a result of declines in the demand for automobiles during 2009 and the related restructurings in the automobile industry, automotive advertising declines exceeded declines we experienced in other advertising categories. The automotive category, which represented 19% of our local and national advertising sales for 2009, decreased by 31% compared to 2008, during which the automotive category represented 24% of our local and national advertising sales. However, in the fourth quarter of 2009, automotive advertising increased by 9% as compared to the same period in 2008. During both the fourth quarter of 2009 and 2008 automotive advertising represented 22% of our local and national advertising sales.
·
During the latter half of the fourth quarter of 2009, we began to experience increases in our national and local advertising revenues as a result of modest recovery in advertising spending when compared to 2008. We anticipate continued modest recovery during 2010 and increases in advertising spending as a result of the 2010 Olympics and Congressional, state and local elections.
·
Operating expenses decreased approximately $1.0 billion compared to 2008 primarily as a result of the $1.0 billion impairment charge recorded during 2008. Additionally, direct operating, selling, general and administrative and corporate expenses decreased $11.9 million, $12.4 million and $2.3 million, respectively, compared to 2008 primarily as a result of cost savings realized from the restructuring initiatives implemented during 2008 and 2009.
·
During the year ended December 31, 2009, we purchased a total principal amount of $79.7 million and $42.0 million of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B, respectively, at market prices using available balances under our revolving credit facility and available cash balances. The total purchase price for the transactions was $68.4 million, resulting in a pre-tax gain on extinguishment of debt of $50.1 million, net of a write-off of deferred financing fees and discount related to the notes of $3.2 million.
·
During the six months ended June 30, 2009, we experienced declines in revenues compared to the same periods in 2008, which were in excess of our original 2009 plan. As a result, and to address continued compliance with the financial covenants in our credit agreement, on July 31, 2009 we entered into the Amended Credit Agreement. Under the Amended Credit Agreement, our aggregate revolving credit commitments remained at $225.0 million and our outstanding term loans remained at the July 31, 2009 balance of $69.9 million. The Amended Credit Agreement revised the Company’s financial covenants, tightened exceptions to certain of the negative covenants, increased the interest rates and fees payable on borrowings, and provided the lenders with additional collateral. For further information on the Amended Credit Agreement see “Description of Indebtedness”.
·
On October 2, 2009, we completed the acquisition of RMM, an online advertising and media services company based in Austin, Texas. This acquisition significantly expands our local multi-platform offerings by providing national advertising and enhanced services, including targeted display, rich media, video advertising, custom-built vertical channels, search engine marketing, search engine optimization, and mobile marketing. We believe this acquisition will further diversify and augment our digital marketing and sales business, as well as provide new opportunities for growth.
·
Our joint venture with NBC Universal continues to be adversely impacted by the recent economic downturn. As described in Item 1, “Business - Our Joint Venture with NBC Universal,” on March 9, 2010 we and NBC Universal entered into the 2010 Shortfall Funding Agreement through April 1, 2011, on terms substantially the same as the Original Shortfall Funding Agreement. During the year ended December 31, 2009, we accrued a total of $6.0 million for our probable and estimable obligations under both the Original and 2010 Shortfall Funding Agreements relating to our joint venture with NBC Universal. In part because of changes in the timing of working capital needs at the joint venture stations, as of March 15, 2010, we have not yet provided any funding under these agreements. However, as of March 15, 2010, this $6.0 million liability continues to reflect our best estimate of probable obligations under the Original Shortfall Funding Agreement and 2010 Shortfall Funding Agreement.
Critical Accounting Policies, Estimates and Recently Issued Accounting Pronouncements
Certain of our accounting policies, as well as estimates we make, are critical to the presentation of our financial condition and results of operations since they are particularly sensitive to our judgment. Some of these policies and estimates relate to matters that are inherently uncertain. The estimates and judgments we make affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent liabilities. On an on-going basis, we evaluate our estimates, including those related to intangible assets and goodwill, receivables and investments, program rights, income taxes, stock-based compensation, employee medical insurance claims, pensions, useful lives of property and equipment, contingencies, barter transactions, acquired asset valuations and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and it is possible that such differences could have a material impact on our consolidated financial statements.
For additional information about these and other accounting policies, see Note 1 - “Basis of Presentation and Summary of Significant Accounting Policies” to our consolidated financial statements included elsewhere in this report. We have discussed each of these critical accounting policies and related estimates with the Audit Committee of our Board of Directors.
Valuation of long-lived assets and intangible assets
Approximately $516.1 million or 65% of our total assets as of December 31, 2009 consisted of indefinite-lived intangible assets. Intangible assets principally include broadcast licenses and goodwill. If the fair value of these assets is less than the carrying value, we may be required to record an impairment charge.
We test the impairment of our broadcast licenses annually or whenever events or changes in circumstances indicate that such assets might be impaired. The impairment test consists of a comparison of the fair value of broadcast licenses with their carrying amount on a station-by-station basis using a discounted cash flow valuation method, assuming a hypothetical startup scenario. The future value of our broadcast licenses could be significantly impaired by the loss of the corresponding network affiliation agreements. Accordingly, such an event could trigger an assessment of the carrying value of a broadcast license.
We test the impairment of our goodwill annually or whenever events or changes in circumstances indicate that goodwill might be impaired. The first step of the goodwill impairment test compares the fair value of a station with its carrying amount, including goodwill. The fair value of a station is determined through the use of a discounted cash flow analysis. The valuation assumptions used in the discounted cash flow model reflect historical performance of the station and prevailing values in the markets for broadcasting properties. If the fair value of the station exceeds its carrying amount, goodwill is not considered impaired. If the carrying amount of the station exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by performing a hypothetical purchase price allocation, using the station’s fair value (as determined in the first step described above) as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment charge is recognized in an amount equal to that excess, but not more than the carrying value of the goodwill. An impairment assessment could be triggered by a significant reduction, or a forecast of such reductions, in operating results or cash flows at one or more of our television stations, a significant adverse change in the national or local advertising marketplaces in which our television stations operate, or by adverse changes to FCC ownership rules, among other factors.
The assumptions used in the valuation testing have certain subjective components including anticipated future operating results and cash flows based on our own internal business plans as well as future expectations about general economic and local market conditions. The changes in the discount rate used for our broadcast licenses and goodwill reflected in the table below are primarily driven by changes in the average beta for the public equity of companies in the television and media sector and the average cost of capital in each of the periods. The changes in the market growth rates and operating profit margins for both our broadcast licenses and goodwill reflect changes in the outlook for advertising revenues in certain markets where our stations operate in each of the periods.
We based the valuation of broadcast licenses on the following average industry-based assumptions:
As of December 31, 2009, we would not incur an impairment of our broadcast licenses if we were to decrease the market revenue growth by 2%; decrease the operating profit margins by 10% from the projected operating profit margins; or increase the discount rate used in the valuation calculation by 2%.
The valuation of goodwill is based on the following assumptions, which take into account our internal projections and industry assumptions related to market revenue growth, operating cash flows and prevailing discount rates:
As of December 31, 2009, if we were to decrease the market revenue growth by 1% and by 2% of the projected growth rate, the enterprise value of our stations with goodwill would decrease by $42 million and $78 million, respectively. If we were to decrease the operating profit margins by 5% and 10% from the projected operating profit margins, the enterprise value of our stations with goodwill would decrease by $82 million and $165 million, respectively. If we were to increase the discount rate used in the valuation calculation by 1% and 2%, the enterprise value of our stations with goodwill would decrease by $47 million and $87 million, respectively.
Network affiliations
Other broadcast companies may use different assumptions in valuing acquired broadcast licenses and their related network affiliations than those that we use. These different assumptions may result in the use of valuation methods that can result in significant variances in the amount of purchase price allocated to these assets by these broadcast companies.
We believe that the value of a television station is derived primarily from the attributes of its broadcast license. These attributes have a significant impact on the audience for network programming in a local television market compared to the national viewing patterns of the same network programming. These attributes and their impact on audiences can include:
·
the scarcity of broadcast licenses assigned by the FCC to a particular market determines how many television networks and other program sources are viewed in a particular market;
·
the length of time the broadcast license has been broadcasting. Television stations that have been broadcasting since the late 1940s are viewed more often than newer television stations;
·
the quality of the broadcast signal and location of the broadcast station within a market (i.e. the value of being licensed in the smallest city within a tri-city market has less value than being licensed in the largest city);
·
the audience acceptance of the local news programming and community involvement of the local television station. The local television station’s news programming that attracts the largest audience in a market generally will provide a larger audience for its network programming; and
·
the quality of the other non-network programming carried by the television station. A local television station’s syndicated programming that attracts the largest audience in a market generally will provide larger audience lead-ins to its network programming.
A local television station can be the top-rated station in a market, regardless of the national ranking of its affiliated network, depending on the factors or attributes listed above. ABC, CBS, FOX and NBC, each have affiliations with local television stations that have the largest primetime audience in the local market in which the station operates regardless of the network’s primetime rating.
Some broadcasting companies believe that network affiliations are the most important component of the value of a station. These companies generally believe that television stations with network affiliations have the most successful local news programming and the network affiliation relationship enhances the audience for local syndicated programming. As a result, these broadcasting companies allocate a significant portion of the purchase price for any station that they may acquire to the network affiliation relationship.
We generally have acquired broadcast licenses in markets with a number of commercial television stations equal to or less than the number of television networks seeking affiliates. The methodology we used in connection with the valuation of the stations acquired is based on our evaluation of the broadcast licenses and the characteristics of the markets in which they operated. We believed that in substantially all our markets we would be able to replace a network affiliation agreement with little or no economic loss to our television station. As a result of this assumption, we ascribed no incremental value to the incumbent network affiliation in substantially all our markets in which we operate beyond the cost of negotiating a new agreement with another network and the value of any terms that were more favorable or unfavorable than those generally prevailing in the market. Other broadcasting companies have valued network affiliations on the basis that it is the affiliation and not the other attributes of the station, including its broadcast license, which contributes to the operating performance of that station. As a result, we believe that these broadcasting companies include in their network affiliation valuation amounts related to attributes that we believe are more appropriately reflected in the value of the broadcast license or goodwill.
In future acquisitions, the valuation of the broadcast licenses and network affiliations may differ from those attributable to our existing stations due to different facts and circumstances for each station and market being evaluated.
Valuation allowance for deferred tax assets
We record a valuation allowance to reduce our deferred tax assets to an amount that is more likely than not to be realized. While we have considered future taxable income and feasible tax planning strategies in assessing the need for a valuation allowance, in the event that we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax asset would be charged to income in the period in which such a determination was made.
Revenue recognition
We recognize advertising and other program-related revenue during the period in which advertising or programs are aired on our television stations or carried by our Internet web sites or the web sites of our advertiser network. We recognize retransmission consent fees in the period in which our service is delivered.
Stock-based compensation
We estimate the fair value of stock-based awards using a Black-Scholes valuation model. The Black-Scholes model requires us to make assumptions and judgments about the variables to be assumed in the calculation, including the option’s expected life, the price volatility of the underlying stock and the number of stock-based awards that are expected to be forfeited. The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. Price volatility is based on historical trends for our class A common stock and the common stock of peer group companies engaged in the broadcasting business. Expected forfeitures are estimated using our historical experience. If future changes in estimates differ significantly from our current estimates, our future stock-based compensation expense and results of operations could be materially impacted.
Retirement plan
We have historically provided a defined benefit retirement plan to our employees who did not receive matching contributions from our Company to their 401(k) Plan accounts. Our pension benefit obligations and related costs are calculated using actuarial concepts. Our defined benefit plan is a non-contributory plan under which we may make contributions either to: a) traditional plan participants based on periodic actuarial valuations, which are expensed over the expected average remaining service lives of current employees; or b) cash balance plan participants based on 5% of each participant’s eligible compensation.
Effective April 1, 2009, this plan was frozen and we do not expect to make additional benefit accruals to this plan. As a result of this action, during the year ended December 31, 2009, we recorded a net curtailment gain that included a $0.4 million charge related to prior service cost and a gain to our projected benefit obligation of $4.0 million as a result of the reduction of future compensation increases.
We contributed $0.6 million to our pension plan during the year ended December 31, 2009 and $3.0 million in each of years ended December 31, 2008 and 2007. We anticipate contributing approximately $3.1 million to our pension plan in 2010 although we currently have no minimum funding requirements as defined by ERISA and federal tax laws.
Pension plan assumptions:
Weighted-average assumptions used to estimate our pension benefit obligations and to determine our net periodic pension benefit cost, and the actual long-term rate-of-return on plan assets are as follows:
We used the Citigroup Pension Discount Curve to aid in the selection of our discount rate, which we believe reflects the weighted rate of a theoretical high quality bond portfolio consistent with the duration of the cash flows related to our pension liability.
We considered the current levels of expected returns on a risk-free investment, the historical levels of risk premium associated with each of our pension asset classes, the expected future returns for each of our pension asset classes and then weighted each asset class based on our pension plan asset allocation to derive an expected long-term return on pension plan assets. During the year ended December 31, 2009, our actual long-term rate of return on plan assets was 20.4%.
As a result of the plan freeze during 2009, we have no further service cost or amortization of prior service cost related to the plan. In addition, because the plan is now frozen and participants became inactive during 2009, the net losses related to the plan included in accumulated other comprehensive income will now be amortized over the average remaining life expectancy of the inactive participants instead of the average remaining service period. For these reasons, our 2010 expense is expected to be approximately $22 thousand, which is significantly less than in prior periods. For every 2.5% change in the actual return compared to the expected long-term return on pension plan assets and for every 0.25% change in the actual discount rate compared to the discount rate assumption for 2010, our 2010 pension expense would change by less than $0.1 million.
Our investment objective is to achieve a consistent total rate-of-return that will equal or exceed our actuarial assumptions and to equal or exceed the benchmarks that we use for each of our pension plan asset classes including the S&P 500 Index, S&P Mid-cap Index, Russell 2000 Index, MSCI EAFE Index and the Lehman Brothers Aggregate Bond Index. The following asset allocation is designed to create a diversified portfolio of pension plan assets that is consistent with our target asset allocation and risk policy:
Our actual allocation of plan assets for 2009 is not in range of our target allocation in an effort to realize potential gains associated with the equity market rebound. During late 2009, our Retirement Committee decided to set the target allocation at 60% equity securities and 40% debt securities. Beginning in 2010, the funds in our plan will be rebalanced on a quarterly basis in line with this new allocation. We continue to monitor the performance of these funds and anticipate the allocation moving in line with the target as the economic outlook stabilizes.
Recently issued accounting pronouncements
In December 2009, the FASB issued ASU 2009-17 “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”). ASU 2009-17 is effective for interim and annual reporting periods beginning after November 15, 2009. ASU 2009-17 amends the Codification to include the amendments prescribed by Financial Accounting Standard (“FAS”) 167, “Amendments to FASB Interpretation No. 46(R)”, which amends certain guidance in FIN 46(R) to eliminate the exemption for special purpose entities, require a new qualitative approach for determining who should consolidate a variable interest entity and change the requirement for when to reassess who should consolidate a variable interest entity. We adopted ASU 2009-17 effective January 1, 2010, and it did not have a material impact on our financial position or results of operations.
In December 2009, the FASB issued ASU 2009-15 “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets” (“ASU 2009-15”). ASU 2009-15 is effective for interim and annual reporting periods beginning after November 15, 2009 and must be applied to transfers occurring on or after the effective date. ASU 2009-15 amends the Codification to include the amendments prescribed by FAS 166 “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140”, which clarifies that the objective of paragraph 9 of Statement 140 is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. We adopted FAS 166 effective January 1, 2010, and it did not have a material impact on our financial position or results of operations.
In October 2009, the FASB issued ASU 2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force” (“ASC 605-25”). ASC 605-25 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. ASC 605-25 addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. We plan to adopt ASC 605-25 effective January 1, 2011, and we do not expect it to have a material impact on our financial position or results of operations.
In August 2009, the FASB issued ASU 2009-05 “Measuring Liabilities at Fair Value” (“ASC 820-10”). ASC 820-10 is effective for the first reporting period, including interim periods, beginning after issuance. ASC 820-10 clarifies the application of certain valuation techniques in circumstances in which a quoted price in an active market for the identical liability is not available and clarifies that when estimating the fair value of a liability, the fair value is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. ASC 820-10 became effective for us on October 1, 2009. We adopted ASC 820-10 effective September 30, 2009, and it did not have a material impact on our financial position or results of operations.
In April 2009, the FASB issued ASC 825-10, “Interim Disclosures about Fair Value of Financial Instruments” (“ASC 825-10”), which requires public entities to disclose in their interim financial statements the fair value of all financial instruments within the scope of FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments”, as well as the method(s) and significant assumptions used to estimate the fair value of those financial instruments. The adoption of ASC 825-10 had no impact on our financial position or results of operations.
Also in April 2009, the FASB issued ASC 320-10, “Recognition and Presentation of Other-Than-Temporary Impairments” (“ASC 320-10”), to change the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of an impairment charge to be recorded in earnings. ASC 320-10 also requires enhanced disclosures, including the Company’s methodology and key inputs used for determining the amount of credit losses recorded in earnings. We adopted ASC 320-10 during the second quarter of 2009 and the adoption had no impact on our financial position or results of operations.
Effective January 1, 2009, the Company adopted ASC 805-10, “Business Combinations” (“ASC 805-10”). ASC 805-10 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; how the acquirer recognizes and measures the goodwill acquired in a business combination; and how the acquirer determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. We have applied the provisions of ASC 805-10 to our acquisition of RMM and the appropriate disclosures are included in Note 2 - “Acquisitions”.
In December 2008, the FASB issued ASC 715-10, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“ASC 715-20”). ASC 715-20 is effective for fiscal years ending after December 15, 2009. ASC 715-20 increases disclosure requirements related to an employer’s defined benefit pension or other postretirement plans. We adopted the provisions of ASC 715-10 by including the required additional financial statement disclosures as of December 31, 2009 in Note 11 - “Retirement Plans”. The adoption of ASC 715-10 had no impact on our financial position or results of operations.
In November 2008, the FASB issued ASC 605-25, “Revenue Arrangements with Multiple Deliverables” (“ASC 605-25”). ASC 605-25 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after December 31, 2009 and shall be applied on a prospective basis. Earlier application is permitted as of the beginning of a fiscal year. ASC 605-25 addresses some aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. We plan to adopt these aspects of ASC-605-25 effective January 1, 2010, and we do not expect it to have a material impact on our financial position or results of operations
Results of Operations
Set forth below are the key operating areas that contributed to our results for the years ended December 31, 2009, 2008 and 2007. Our consolidated financial statements reflect the operations, assets and liabilities of the Puerto Rico stations and the operations of the Banks Broadcasting joint venture stations as discontinued for all periods presented. As a result, reported financial results may not be comparable to certain historical financial information and prior year performance may not be indicative of future financial performance.
Our results of operations are as follows (in thousands):
Three-Year Comparison
Net revenues consist primarily of national, local and political advertising revenues, net of sales adjustments and agency commissions. Additional but less significant amounts are generated from Internet revenues, retransmission consent fees, barter revenues, network compensation, production revenues, tower rental income and station copyright royalties.
Net revenues during the year ended December 31, 2009 decreased by $60.3 million when compared with the prior year. The decrease was primarily due to: a) a decrease in political advertising sales of $33.8 million; b) a decrease in local advertising sales of $31.7 million; and c) a decrease in national advertising sales of $20.8 million. These decreases were partially offset by: a) an increase in digital revenue of $13.9 million; and b) a decrease in agency commissions of $12.1 million.
The decrease in local and national advertising sales during 2009 is primarily due to the economic downturn that has broadly impacted demand for advertising. The decrease in political advertising sales during the year ended December 31, 2009, compared to the same period last year, is a result of the Presidential, Congressional, state and local elections in 2008 that did not recur in 2009.
The increase in digital revenues for the year ended December 31, 2009, compared to the same period last year, is primarily due to new retransmission consent agreements reached with cable operators during the second half of 2008, and an increase in Internet revenues. The increase in Internet revenues is a result of new sales initiatives, increased traffic to our web sites and incremental revenue from the acquisition of RMM in October 2009.
Net revenues during the year ended December 31, 2008 increased by $3.9 million when compared with the prior year. The increase was primarily due to: a) an increase in political advertising sales of $40.9 million; and b) an increase in digital revenue of $14.2 million. These increases were offset by: a) a decrease in local advertising sales of $24.8 million; b) a decrease in national advertising sales of $22.5 million; and c) the collective decrease in barter and all other revenue categories of $3.9 million.
The increase in political advertising revenues during the year ended December 31, 2008, compared to the prior year, was the result of the Presidential, Congressional, state and local elections that took place during 2008. The decrease in both local and national advertising sales is principally due to the economic downturn that began in 2008 and impacted a number of local economies and national advertising categories.
Direct operating expenses (excluding depreciation and amortization of intangible assets), which consist primarily of news, engineering and programming expenses, decreased $11.9 million, or 10%, for the year ended December 31, 2009, compared to the prior year. The decrease is primarily attributable to lower employee costs as a result of headcount reductions completed during the fourth quarter of 2008 and the second quarter of 2009.
Direct operating expenses increased $1.9 million, or 2%, for the year ended December 31, 2008, compared to the prior year as a result of increases in employee salaries.
Selling, general and administrative expenses consist primarily of employee salaries, sales commissions, employee benefit costs, advertising, promotional expenses and research, and these costs decreased $12.4 million, or 11%, for the year ended December 31, 2009, compared to the prior year. This decrease is also primarily attributable to lower employee costs as a result of headcount reductions completed during the fourth quarter of 2008 and the second quarter of 2009.
Selling, general and administrative expenses were flat for the year ended December 31, 2008, compared to the prior year.
Selling expenses as a percentage of net revenues were 7.8% in each of the years ended December 31, 2009 and 2008 and 7.9% for the year ended December 31, 2007.
Amortization of program rights represents the recognition of expense associated with syndicated programming, features and specials, and these costs increased $0.7 million, or 3%, for the year ended December 31, 2009 and decreased $0.7 million, or 3%, for the year ended December 31, 2008, compared to their respective prior years.
Corporate expenses represent corporate executive management, accounting, legal and other costs associated with the centralized management of our stations, and these costs decreased $2.3 million or 11% for the year ended December 31, 2009, compared to the prior year. The decrease is primarily due to lower professional and legal fees.
Corporate expenses decreased $1.4 million or 6% for the year ended December 31, 2008, compared to the prior year. The decrease is primarily due to a $3.6 million decrease in compensation costs, including fair value changes to the executive deferred compensation plan, lower bonus and stock based compensation, and benefit costs, offset by higher legal and professional fees of $1.7 million.
Depreciation expense increased $0.7 million or 2% for the year ended December 31, 2009 and decreased $1.1 million or 4% for the year ended December 31, 2008, compared to their respective prior years. The increase during 2009 is primarily the result of accelerated depreciation of the remaining analog equipment due to the digital transition. The decrease during 2008 is due to assets that became fully depreciated.
Amortization of intangible assets increased $0.4 million or 146% for the year ended December 31, 2009 and decreased $1.8 million or 87% for the year ended December 31, 2008, compared to their respective prior years. The increase during 2009 is a result of the amortization of the intangible assets acquired in the RMM acquisition. The decrease during 2008 was due to lower amortization expense related to finite-lived intangible assets that became fully amortized in 2008 and 2007.
Impairment of goodwill, broadcast licenses and broadcast equipment reflects non-cash impairment charges recorded during the years ended December 31, 2009 and 2008 of approximately $39.9 million and $1.0 billion, respectively. The 2009 charge includes an impairment to the carrying values of our broadcast licenses of $37.2 million and an impairment to the carrying values of our goodwill of $2.7 million. The 2008 charge includes $8.7 million for obsolete broadcast equipment identified during the year as a result of the transition to digital television, as well as $599.6 million related to broadcast licenses and $420.9 million related to goodwill. No impairments were required for the year ended December 31, 2007. (For further information regarding these charges, see Note 6 - “Intangible Assets”.)
Restructuring charge of $0.5 million was recorded during 2009 as a result of the consolidation of certain activities at our stations, which resulted in the termination of 28 employees. During 2008, we effected a restructuring that included a workforce reduction of 144 employees and the cancellation of certain syndicated television program and operating contracts. The total charge for this plan was $12.9 million, including $4.3 million for a workforce reduction and $8.6 million for the cancellation of the contracts.
(Gain) loss from asset dispositions for the year ended December 31, 2009 was $6.3 million and was primarily attributable to: a) a gain on the exchange of certain equipment with Sprint Nextel of $6.4 million, partially offset by b) a loss of $0.1 million for the disposal of fixed assets. (Gain) loss from asset dispositions for the year ended December 31, 2008 included: a) $2.0 million net loss for the disposal of fixed assets; and b) $1.2 million write-off of other assets; partially offset by c) $1.1 million gain from the exchange of certain equipment.
Other (Income) Expense
Interest expense, net decreased $10.3 million or 19% for the year ended December 31, 2009, compared to the prior year due to lower average borrowings outstanding as a result of the purchase of our 2.50% Exchangeable Senior Subordinated Debentures in 2008 and the purchase of a portion of our outstanding 6½% senior subordinated notes in 2008 and 2009. Interest expense, net decreased $9.6 million or 15% for the year ended December 31, 2008, compared to the prior year due to a reduction in average borrowings outstanding under our credit facility and the repayment of other debt.
The following table summarizes our total net interest expense:
Share of loss (income) in equity investments reflects primarily an impairment charge of $6.0 million for the year ended December 31, 2009, relating to accrued loan obligations to our joint venture with NBC Universal, pursuant to the Original Shortfall Funding Agreement and the 2010 Shortfall Funding Agreement, as discussed further in Item 1. “Business - Joint Venture with NBC Universal” and within the Liquidity and Capital Resources section of Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations". Because of uncertainty surrounding the joint venture’s ability to repay future shortfall loans, we concluded the $6.0 million loan was fully impaired during 2009. As of March 15, 2010, this $6.0 million liability continues to reflect our best estimate of probable obligations under the Original Shortfall Funding Agreement and 2010 Shortfall Funding Agreement.
Share of (income) loss in equity investments was a loss of $52.7 million for the year ended December 31, 2008, primarily related to the $53.6 million write-off of our investment in our joint venture with NBC Universal. During the fourth quarter of 2008, due to the continued decline in operating profits at the joint venture stations, we determined that there was an other than temporary impairment in our investment. As a result, and in the absence of the ability to recover our carrying amount of the investment, we recorded a loss of $53.6 million to write-off our equity investment in the NBC Universal joint venture.
(Gain) loss on derivative instruments increased $0.1 million and $0.3 million for the year ended December 31, 2009 and 2008, respectively, compared to their respective prior year periods due to fluctuations in market interest rates.
During 2009, our derivative instrument consisted of an interest rate hedge agreement entered into during the second quarter of 2006 to hedge the variability in cash flows associated with notional amount of the declining balances of our term loans, which effectively converted the floating rate LIBOR-based payments under this portion of the facility to fixed payments. We designated this interest rate hedge agreement as a cash flow hedge. Accordingly, changes in the value of this agreement are recorded in other comprehensive income (loss) and released into earnings over the life of the agreement through periodic interest payments, and the ineffective portion of the hedge is recorded in earnings.
During 2008 and 2007, our derivative instruments consisted of the interest rate hedge described above and the embedded derivatives within our 2.50% Exchangeable Senior Subordinated Debentures. As a result of the purchase of the 2.50% Exchangeable Senior Subordinated Debentures during the second quarter of 2008, we recorded a gain of approximately $0.4 million for the remaining fair value of the embedded derivatives associated with those debentures.
(Gain) loss on extinguishment of debt increased $41.3 million and $9.7 million for the year ended December 31, 2009 and 2008, respectively, compared to their respective prior year periods. The increase in both the years ended December 31, 2009 and 2008 was primarily due a gain of $50.1 million and $13.8 million, respectively, related to the purchase of our 6½% senior subordinated notes as further described in “Description of Indebtedness”.
Income taxes reflected a provision for (benefit from) income tax of $13.8 million, $(222.2) million and $18.2 million for the years ended in December 31, 2009 2008, and 2007, respectively. In 2008, we recorded an impairment charge of $1.0 billion related to our broadcast licenses and goodwill. Our 2008 impairment charge also includes an $8.7 million charge for the write-off of certain broadcast assets that became obsolete as a result of the DTV transition. We recorded no intangible asset impairment charges in 2007.
Additionally, in 2008, our effective tax rate was impacted by the change in our valuation allowance of $39.0 million. This amount was primarily attributable to our 2000 to 2002 net operating losses that more likely than not will not be utilized because of the expiration of the carryforward statute of limitations period. Our recorded provision for income tax of $13.8 million for the year ended December 31, 2009 represents an effective tax rate of 59.2% compared to a benefit from income tax of $222.2 million for the year ended December 31, 2008, which represents an effective tax rate of 21.1%. The increase in the 2009 effective tax rate is primarily due to the impact of various state law changes on our effective tax rate. The decrease in our 2008 benefit from income taxes compared to our statutory rate is a result of the significant impairment charge during 2008.
Results of Discontinued Operations
Our consolidated financial statements reflect the operations of the Puerto Rico stations and the operations, assets and liabilities of the Banks Broadcasting joint venture stations as discontinued for all periods presented. As a result, (loss) income from discontinued operations was $(446) thousand, $23 thousand and $3.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. Gain from the sale of discontinued operations was $11 thousand and $22.2 million for the year ended December 31, 2009 and 2007, respectively.
On April 23, 2009, Banks Broadcasting completed the sale of KNIN-TV, a CW affiliate in Boise, for $6.6 million to Journal Broadcast Corporation. As a result of the sale we received, on the basis of our economic interest in Banks Broadcasting, a distribution of $2.6 million during the second quarter of 2009. The operating loss for the year ended December 31, 2009 includes an impairment charge of $1.9 million to reduce the carrying value of broadcast licenses to fair value based on the final sale price of KNIN-TV of $6.6 million. Net loss included within discontinued operations for the year ended December 31, 2009 reflects our 50% share of net losses of Banks Broadcasting, net of taxes, through the April 23, 2009 disposal date.
We completed the sale of our Puerto Rico operations to InterMedia Partners VII, L.P. for $131.9 million in cash and recognized a related gain of $22.7 million after benefit of income taxes in the first quarter of 2007. The stations sold included WAPA-TV, a full-power independent station, and WJPX-TV, an independent station branded as MTV Puerto Rico, as well as WAPA America, a U.S. Spanish-language cable channel. The proceeds from the sale of the Puerto Rico operations, net of transaction fees, were used to pay-down $70.0 million of our term loans under our credit facility and to repay borrowings incurred to fund the purchase of KASA-TV.
The following table presents summarized information for the operations of our Puerto Rico stations and the operations of the Banks Broadcasting joint venture stations that were previously included in our historical operating results (in thousands):
Liquidity and Capital Resources
Our principal sources of funds for working capital have historically been cash from operations and borrowings under our credit facility. As of December 31, 2009, we had unrestricted cash and cash equivalents of $11.1 million, $2.0 million of restricted cash and a $225.0 million revolving credit facility, of which $21.0 million was available for borrowing, subject to certain covenant restrictions.
Our total outstanding debt as of December 31, 2009 was $683.0 million. This excludes the contingent obligation associated with our guarantee of an $815.5 million promissory note associated with our joint venture with NBC Universal (see Note 14 - “Commitments and Contingencies” for further details). The outstanding debt under our credit facility is due November 14, 2011 and all of our 6½% senior subordinated notes are due May 15, 2013. As of December 31, 2009, the total fair value of our outstanding debt was $616.2 million.
Our operating plan for the next 12 months requires that we generate cash from operations, utilize available borrowings, and make certain debt repayments, including mandatory repayments of term loans under our credit facility. Our ability to borrow under our revolving credit facility is contingent on our compliance with certain financial covenants, which are measured, in part, by the level of earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) we generate from our operations. During the six months ended June 30, 2009, we experienced declines in revenues compared to the same periods in 2008 which were in excess of our original 2009 plan. As a result, and to address continued compliance with the financial covenants in our credit agreement, on July 31, 2009 we entered into the Amended Credit Agreement. For further information regarding the terms of the Amended Credit Agreement see “Description of Indebtedness”. As of December 31, 2009, we were in compliance with all financial and non-financial covenants in the Amended Credit Agreement.
Our ability to generate cash from operations and from borrowings under our credit facility could be affected by, but is not limited to, the following factors:
·
The economic downturn, which has adversely affected local and national advertising revenues across all of our stations, with local advertising revenues decreasing 13% for the year ended December 31, 2009 as compared to 2008, and national advertising revenues decreasing 17% for the year ended December 31, 2009 as compared to 2008. Approximately 81%, 79% and 91% of our net revenues for the years ended December 31, 2009, 2008 and 2007, respectively, were derived from local and national advertising. We anticipate a modest recovery during 2010 as the U.S. economy emerges from recession, but there can be no assurance that this will occur.
·
The seasonality of the broadcast business, due primarily to political advertising revenues occurring in even years, which will result in increased political advertising revenues in 2010. Political advertising revenues were $13.2 million, $47.0 million and $6.1 million for the years ended December 31, 2009, 2008 and 2007, respectively.
·
Economic and credit market conditions can impact our advertisers’ ability to pay for advertising and the timing of those payments. During 2009, despite the economic downturn, we did not experience significant deterioration in the collectability of our outstanding receivables. We have evaluated our receivables due from customers who are experiencing financial difficulty, and the net realizable value of those receivables is not material to our financial position as of December 31, 2009. Our days sales outstanding as of the years ended December 31, 2009 and 2008 was 74 and 78, respectively. We experienced an improvement in days sales outstanding during 2009 and 2008 as a result of our centralization of credit and collection functions in 2007 and the resulting on-going improvement in our collections function.
·
Volatility in the equity markets impacts the fair value of our pension plan assets and ultimately the cash funding requirements of our pension plan. As of December 31, 2009, the fair value of our pension plan assets was $68.8 million compared to $61.5 million as of December 31, 2008. In order to manage our liquidity, we contributed $0.6 million to our pension plan during 2009. We anticipate contributing $3.1 million to our pension plan during 2010. Additionally, effective January 1, 2010, we resumed Company contributions to the 401(k) Plan, whereby the Company will provide a 3% non-elective contribution to all eligible employees. We expect to contribute approximately $4.2 million to our 401(k) Plan during 2010.
·
We are exposed to potential losses related to fluctuations in interest rates. Borrowings under our credit facility bear an interest rate based on, at our option, either a) the LIBOR interest rate, or b) the ABR rate, which is an interest rate that is equal to the greatest of (i) the Prime Rate, (ii) the Federal Funds Effective Rate plus ½ of 1 percent, and (iii) the one-month LIBOR rate plus 1%. In addition, the rate we select also bears an applicable margin rate of 3.750% or 2.750% for LIBOR based loans and ABR rate loans, respectively. To mitigate changes in our cash flows resulting from fluctuations in interest rates, we entered into the 2006 interest rate hedge that effectively converted the floating rate LIBOR rate-based payments on our term loan to fixed payments at 5.33% plus the applicable margin rate calculated under our credit facility, which expires in 2011. Our senior subordinated notes bear a fixed interest rate of 6½%.
Cash Requirements Related to the NBC Universal Joint Venture
Our joint venture with NBC Universal has been adversely impacted by the current economic downturn. The joint venture distributed no cash to NBC Universal and us during the year ended December 31, 2009. Although the joint venture distributed cash to NBC Universal and us in the amount of $13.0 million and $12.0 million for the years ended December 31, 2008 and 2007, the cash distributions for 2008 included nonrecurring cash proceeds of $12.6 million from the sale of broadcast towers.
In light of the adverse effect of the economic downturn on the joint venture’s operating results, in 2009 we entered into the Original Shortfall Funding Agreement with NBC Universal, which provided that: a) we and NBC waived the requirement that the joint venture maintain debt service reserve cash balances of at least $15 million; b) the joint venture would use a portion of its existing debt service reserve cash balances to fund interest payments in 2009; c) NBC agreed to defer its receipt of 2008 and 2009 management fees; and d) we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2010, we and NBC Universal would each provide the joint venture with a shortfall loan on the basis of our percentage of economic interest in the joint venture. During the year ended December 31, 2009, the joint venture used approximately $14.9 million of the existing debt service cash reserves, leaving approximately $0.2 million available. As of March 15, 2010, we have not yet provided any funding under the Original Shortfall Funding Agreement.
Because of anticipated future shortfalls at the joint venture, on March 9, 2010, NBC Universal and we entered into the 2010 Shortfall Funding Agreement covering the period through April 1, 2011. Under the terms of the 2010 Shortfall Funding Agreement: a) the joint venture may continue to access any portion of its existing debt service reserve cash balances to fund interest payments; b) NBC will continue to defer the payment of 2008 and 2009 management fees and will defer payment of 2010 management fees through March 31, 2011 (payable subject to repayment first of any joint venture shortfall loans); and c) we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2011, we and NBC Universal would each provide the joint venture with a shortfall loan on the basis of our percentage of economic interest in the joint venture.
The timing of anticipated debt service shortfalls at the joint venture is affected by the levels of working capital at the stations owned by the joint venture and their anticipated uses of working capital to fund operations and to distribute cash to the joint venture for the purpose of servicing the interest expense on the GECC Note. We recognize liabilities under the Original Shortfall Funding Agreement and the 2010 Shortfall Funding Agreement when those liabilities become both probable and estimable, which result when joint venture management provides us with budget or forecast information of operating cash flows and working capital needs indicating that a debt service shortfall is probable to occur.
During 2009, joint venture management provided us a revised outlook for 2009 after each quarter end, which, as of September 30, 2009, resulted in an accrual of $2.0 million for our probable and estimable obligations under the Original Shortfall Funding Agreement through the April 1, 2010 expiry of that agreement. Due to uncertainty surrounding the joint venture’s ability to repay the shortfall loan, we concurrently impaired the loan as of September 30, 2009. Based on our latest estimate of cash flow requirements of the joint venture through April 1, 2010, our share of the estimated shortfall through April 1, 2010 is $3.0 million, of which $2.0 million was accrued as of September 30, 2009. Subsequent to September 30, 2009, we: (a) received the joint venture’s 2010 budget and (b) as noted above, entered into the 2010 Shortfall Funding Agreement to cover debt service shortfalls through April 1, 2011. Based on the 2010 budget provided by the joint venture, and our discussions with the joint venture's management, we believe there will be an additional debt service shortfall at the joint venture from April 2, 2010 through April 1, 2011 of $13.0 million to $15.0 million, of which, our share of the shortfall could be approximately $3.0 million.
As a result, we have accrued our portion of the estimated shortfalls through April 1, 2011, bringing the total accrual for our joint venture shortfall obligations to $6.0 million as of December 31, 2009. Due to uncertainty surrounding the joint venture’s ability to repay the shortfall loans, we concurrently impaired all accrued loans to the joint venture as of December 31, 2009. This amount reflects our probable and estimable obligations through the expiration of the 2010 Shortfall Funding Agreement on April 1, 2011. We do not believe our funding obligations related to the joint venture, if any, beyond April 1, 2011 are currently probable and estimable, therefore, we have not accrued for any potential obligations beyond the $6.0 million discussed above. However, our actual cash shortfall funding could exceed our estimate. As of March 15, 2010, we have not yet provided any funding under either of these agreements. We expect to fund our $3.0 million share of shortfall liabilities under the Original Shortfall Funding Agreement during the first quarter of 2010, and the remaining $3.0 million amount through the period ending April 1, 2011. We do not believe our funding obligations related to the joint venture, if any, beyond April 1, 2011 are currently estimable and probable, therefore, we have not accrued for any potential obligations beyond the $6.0 million discussed above. However, our actual cash shortfall funding could exceed our estimate.
Our ability to honor our shortfall loan obligations under the Original Shortfall Funding Agreement and the 2010 Shortfall Funding Agreement is subject to compliance with restrictions under our senior credit facility and the indentures governing our senior notes. Based on the 2010 budget provided by joint venture management, and our forecast of total leverage and consolidated EBITDA during 2010 and 2011, we expect to have the capacity within these restrictions to provide shortfall funding under the 2010 Shortfall Funding Agreement in proportion to our approximately 20 percent economic interest in the joint venture through the April 1, 2011 expiration of the 2010 Shortfall Funding Agreement. However, there can be no assurance that we will have the capacity to provide such funding. If we are required to fund a portion of a shortfall loan, we plan to use our available cash balances or available borrowings under our credit facility. In addition, if the joint venture experiences further cash shortfalls beyond April 1, 2011, we may decide to fund such cash shortfalls, or to fund such shortfalls through further loans or equity contributions to the joint venture. If we are unable to make payments under the Original Shortfall Funding Agreement or the 2010 Shortfall Funding Agreement, the joint venture may be unable to fund interest obligations under the GECC Note, resulting in an event of default.
An event of default under the GECC Note will occur if the joint venture fails to make any scheduled interest payment within 90 days of the date due and payable, or to pay the principal amount on the maturity date. If the joint venture fails to pay interest on the GECC Note, and neither NBC Universal nor we make a shortfall loan to fund the interest payment within 90 days of the date due and payable, an event of default would occur and GECC could accelerate the maturity of the entire amount due under the GECC Note. Other than the acceleration of the principal amount upon an event of default, prepayment of the principal of the note is prohibited unless agreed upon by both NBC Universal and us. Upon an event of default under the GECC Note, GECC’s only recourse is to the joint venture, our equity interest in the joint venture and, after exhausting all remedies against the assets of the joint venture and the other equity interests in the joint venture, to LIN TV pursuant to its guarantee of the GECC Note.
Under the terms of its guarantee of the GECC Note, LIN TV would be required to make a payment for an amount to be determined upon occurrence of the following events: a) there is an event of default; b) neither NBC Universal or us remedy the default; and c) after GECC exhausts all remedies against the assets of the joint venture, the total amount realized upon exercise of those remedies is less than the $815.5 million principal amount of the GECC Note. Upon the occurrence of such events, the amount owed by LIN TV to GECC pursuant to the guarantee would be calculated as the difference between i) the total amount at which the joint venture’s assets were sold and ii) the principal amount and any unpaid interest due under the GECC Note. As of December 31, 2009, we estimate the fair value of the television stations in the joint venture to be approximately $366 million less than the outstanding balance of the GECC note of $815.5 million.
Although we believe the probability is remote that there would be an event of default and therefore an acceleration of the principal amount of the GECC Note during 2010, there can be no assurances that such an event of default will not occur. There are no financial or similar covenants in the GECC Note and, since both NBC Universal and we have agreed to fund interest payments through April 1, 2011 if the joint venture is unable to do so, NBC Universal and we are able to control the occurrence of a default under the GECC Note.
Factors Affecting Liquidity in 2009 and 2010 Outlook
·
During the year ended December 31, 2009, we completed a purchase of a portion of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B at market prices using available balances under our revolving credit facility and available cash balances. During the year ended December 31, 2009, we purchased a total principal amount of $79.7 million and $42.0 million of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B, respectively. For further information see “Description of Indebtedness”.
·
We completed a restructuring during the second quarter of 2009 that included the consolidation of certain activities at our stations that resulted in the termination of 28 employees. We anticipate savings of approximately $0.9 million per year from this restructuring; however, if our operational needs change during the year we may not be able to realize all of these savings.
·
We are using our strong local television station brands and considerable news, sports, weather, traffic and other local video content to develop new revenue streams. These new revenues are generated by our television station web sites, the launch of our mobile telephone and smart phone applications, the acquisition of RMM and scheduled increases in retransmission consent fees. Our digital revenues increased 48% or $13.9 million for the year ended December 31, 2009, compared to prior year.
·
We anticipate spending of approximately $16.5 million on capital expenditures during 2010 primarily for broadcast and related equipment, compared to capital expenditures of approximately $10.2 million during 2009. Additional spending may be required for any unplanned major repairs for equipment failures.
·
On April 23, 2009, our Banks Broadcasting joint venture completed the sale of KNIN-TV, a CW affiliate in Boise, for $6.6 million to Journal Broadcast Corporation. As a result of the sale we received, on the basis of our economic interest in Banks Broadcasting, a distribution of $2.6 million during the quarter ended June 30, 2009. We expect to receive net proceeds of approximately $0.2 million during the second quarter of 2010 from amounts held in escrow at the expiration of a one year indemnity period.
We have also assessed the impact the current market conditions could have on third parties with whom we do business, specifically as it relates to our interest rate hedge and insurance contracts. Management performs a quarterly assessment of the critical terms of the interest rate hedge including, among other matters, an assessment of the counterparties’ creditworthiness. Based on our assessment at December 31, 2009, we do not believe there is a significant risk associated with the creditworthiness of our interest rate hedge counterparty. Given current economic conditions, management also reviewed the insurance contracts associated with our facilities and business continuity insurance providers and noted no material credit risks.
We believe that our cash flows from our current operations, together with available borrowings under our credit facility, will be sufficient to meet our anticipated cash requirements for the next 12 months. These cash requirements include working capital, capital expenditures, interest payments and scheduled principal payments. Our anticipated cash payments for our debt and related interest are described below.
Contractual Obligations
The following table summarizes our estimated future contractual cash obligations at December 31, 2009 (in thousands):
(1)
We are obligated to make mandatory quarterly principal payments and to use proceeds of asset sales not reinvested to pay-down the term loan under our credit facility. Additionally, we are required to make mandatory prepayments of principal on our term loan subject to a computation of excess cash following the delivery of our year-end financial statements as described in “Description of Indebtedness”. We are also obligated to repay in full our credit facility on November 4, 2011, and each of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B on May 15, 2013. The amount does not include any potential amounts that may be paid related to the GECC Note as described in Item 1A. Risk Factors “The General Electric Capital Corporation (“GECC”) Note could result in significant liabilities, including (i) requiring us to make short term cash payments to the NBC Universal joint venture to fund interest payments, and (ii) potentially giving rise to a change of control under our existing indebtedness, which would cause such existing indebtedness to become immediately due and payable”.
(2)
We have contractual obligations to pay cash interest on our credit facility, as well as commitment fees of 0.750% on our revolving credit facility through November 2011, and on each of our 6½% Senior Subordinated Notes through 2013, our 6½% Senior Subordinated Notes - Class B and our RMM Notes, as described in “Description of Indebtedness”.
(3)
We have entered into commitments for future syndicated news, entertainment, and sports programming. We have recorded $66.1 million of program obligations as of December 31, 2009 and have unrecorded commitments of $12.4 million for programming that is not available to air as of December 31, 2009.
(4)
We lease land, buildings, vehicles and equipment under non-cancelable operating lease agreements.
(5)
We have entered into a variety of agreements for services used in the operation of our stations including rating services, consulting and research services, news video services, news weather services, marketing services and other operating contracts under non-cancelable operating agreements.
(6)
Includes scheduled payments to certain employees covered under our deferred compensation plan.
The above table excludes future payments for our defined benefit retirement plans, deferred taxes and executive compensation, with the exception of scheduled deferred compensation payments detailed above, because their future cash outflows are uncertain. Also excluded from the above table are potential interest shortfall payments to our joint venture with NBC Universal. Additional information regarding our financial commitments at December 31, 2009 is provided in the notes to our consolidated financial statements. See Note 7 - “Debt”, Note 11 - “Retirement Plans” and Note 14 - “Commitments and Contingencies” of our consolidated financial statements.
Summary of Cash Flows
The following table presents summarized cash flow information (in thousands):
Net cash provided by operating activities decreased $56.6 million to $27.2 million for the year ended December 31, 2009, compared to cash provided by operating activities of $83.8 million for the prior year. The decrease was primarily due to a decrease in revenue of $60.3 million, in addition to amounts paid during the year ended December 31, 2009 of $9.5 million for restructuring expenses.
Net cash provided by operating activities increased $41.1 million for the year ended December 31, 2008 primarily due to changes in working capital including a decrease in accounts receivable of $21.3 million and an increase in accrued expenses of $19.6 million, offset by a decrease in accounts payable of $3.4 million.
Net cash (used in) provided by investing activities decreased $10.1 million to $14.4 million for year ended December 31, 2009, compared to cash used in investing activities of $24.5 million for the prior year. The decrease is primarily attributable to a reduction in capital expenditures of $18.3 million, plus net proceeds of $2.6 million received from the sale of KNIN-TV included within discontinued operations, both of which were offset by $6.0 million paid under our settlement with 54 Broadcasting, along with $1.2 million of cash paid for our acquisition of RMM, a transfer from cash and cash equivalents to restricted cash of $2.0 million, and $2.6 million of dividends received during 2008 related to our joint venture with NBC Universal, which were not received during the same period in 2009.
Net cash (used in) provided by investing activities decreased $127.5 million to $24.5 million for year ended December 31, 2008, compared to cash provided by investing activities of $103.0 million for the prior year. The decrease is primarily due to the sale of certain assets and discontinued operations during 2007 that did not recur in 2008.
Net cash used in financing activities decreased $57.4 million to $21.9 million for the year ended December 31, 2009, compared to cash used in financing activities of $79.3 million for the prior year. The decrease was primarily due to a decrease in principal payments on long-term debt of $138.0 million, offset by a decrease in proceeds from our revolving credit facility of $74.0 million compared to the same period last year.
Net cash used in financing activities decreased $38.8 million to $79.3 million for the year ended December 31, 2008, compared to cash used in financing activities of $118.1 million for the prior year. This decrease was due to our purchase of $125 million of our 2.50% Exchangeable Senior Subordinated Debentures, all of which were tendered to us and our purchase of a notional amount of $19.4 million and $6.7 million of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B, respectively. Additionally, the decrease was due to our repayment of $77.0 million of our outstanding term loans. These decreases were partially offset by $135.0 million of borrowings under our credit facility.
Description of Indebtedness
Debt consisted of the following (in thousands):
During the period January 1, 2009 to July 31, 2009, prior to the execution of the Amended Credit Agreement, borrowings under our credit facility bore an interest rate based on, at our option, either a) the LIBOR interest rate, or b) an interest rate equal to the greater of the Prime Rate or the Federal Funds Effective Rate plus ½ of 1 percent. In addition, the rate we selected also bore an applicable margin rate of 0.625% to 1.500%, depending on us achieving certain financial ratios. The unused portion of the revolving credit facility was subject to a commitment fee of 0.25% to 0.50% depending on us achieving certain financial ratios.
Amended Credit Agreement
On July 31, 2009, we entered into the Amended Credit Agreement, which provided that our aggregate revolving credit commitments remained at $225.0 million and our outstanding term loans remained at $69.9 million (as of July 31, 2009). The terms of the Amended Credit Agreement include, but are not limited to, modifications to certain financial covenants, including our consolidated leverage ratio, consolidated interest coverage ratio and consolidated senior leverage ratio, a general tightening of the exceptions to our negative covenants (principally by means of reducing the types and amounts of permitted transactions), an increase in the interest rates and fees payable with respect to borrowings under the Amended Credit Agreement, and the inclusion of certain collateral-related provisions, principally relating to the provision of account control agreements and mortgages with respect to certain real property that we own. Certain revised financial condition covenants, and other key terms, are as follows:
The Amended Credit Agreement revises the calculation of Consolidated Total Debt used in our consolidated leverage ratios to exclude the netting of cash and cash equivalents against total debt.
The credit facility permits us to prepay loans and to permanently reduce the revolving credit commitments, in whole or in part, at any time. We repaid $15.9 million of the term loans during 2009, all of which related to mandatory quarterly amortization payments.
On an annual basis following the delivery of our year-end financial statements, the Amended Credit Agreement requires mandatory prepayments of principal of the term loans, as well as a permanent reduction in revolving credit commitments, based on a computation of excess cash flow for the preceding fiscal year, as more fully set forth in the Amended Credit Agreement. In addition, the Amended Credit Agreement restricts the use of proceeds from asset sales or from the issuance of debt (with the result that such proceeds, subject to certain exceptions, must be used for mandatory prepayments of principal and permanent reductions in revolving credit commitments), and includes a cash ceiling, which requires that LIN Television utilize unrestricted cash and cash equivalent balances in excess of $12.5 million to prepay principal amounts outstanding, but not permanently reduce capacity, under our revolving credit facility.
Borrowings under our credit facility bear an interest rate based on, at our option, either a) the LIBOR interest rate, or b) the ABR rate, which is an interest rate that is equal to the greatest of (i) the Prime Rate, (ii) the Federal Funds Effective Rate plus ½ of 1 percent, or (iii) the one-month LIBOR rate plus 1%. In addition, the rate we select also bears an applicable margin rate of 3.750% or 2.750% for LIBOR based loans and ABR rate loans, respectively. Lastly, the unused portion of the revolving credit facility is subject to a commitment fee of 0.750% depending on our consolidated leverage ratio.
Our revolving credit facility may be used for working capital and general corporate purposes. For example, during the year ended December 31, 2009, we used $66 million under this facility to purchase a portion of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B and we used approximately $12 million under this facility to partially fund interest payments related to these remaining outstanding notes.
The following table summarizes certain key terms of our credit facility (in thousands):
(1)
As of March 15, 2010, the unused balance of the revolving credit facility was $34.0 million.
(2)
Weighted average rate for loans outstanding as of December 31, 2009.
(3)
The outstanding loans as of December 31, 2009 include LIBOR based loans, which have an applicable margin of 3.75%.
The credit facility also contains provisions that prohibit any modification of the indentures governing our senior subordinated notes in any manner adverse to the lenders and that limits our ability to refinance or otherwise prepay our senior subordinated notes without the consent of such lenders.
6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B
The 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B are unsecured and are subordinated in right of payment to all senior indebtedness, including our credit facility.
The indentures governing the 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B contain covenants limiting, among other things, the incurrence of additional indebtedness and issuance of capital stock; layering of indebtedness; the payment of dividends on, and redemption of, our capital stock; liens; mergers, consolidations and sales of all or substantially all of our assets; asset sales; asset swaps; dividend and other payment restrictions affecting restricted subsidiaries; and transactions with affiliates. The indentures also have change of control provisions which may require our Company to purchase all or a portion of each of the 6½% Senior Subordinated Notes and the 6½% Senior Subordinated Notes - Class B at a price equal to 101% of the principal amount of the notes, together with accrued and unpaid interest. The 6½% Senior Subordinated Notes and the 6½% Senior Subordinated Notes - Class B have certain limitations and financial penalties for early redemption of the notes.
During 2008, we commenced a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to purchase a portion of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B at market prices using available balances under our revolving credit facility and available cash balances. During the year ended December 31, 2009, we purchased a total principal amount of $79.7 million and $42.0 million of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B, respectively, under this plan. The total purchase price for the transactions was $68.4 million, resulting in a gain on extinguishment of debt of $50.1 million, net of a write-off of deferred financing fees and discount related to the notes of $1.3 million and $1.9 million, respectively. Including the amounts purchased during 2008, we have purchased a total notional amount of $147.8 million of such notes for an aggregate purchase price of approximately $80.7 million.
RMM Notes
In connection with the acquisition of RMM as further described in Note 2 - “Acquisitions”, LIN Television issued a $2.0 million unsecured promissory note to McCombs Family Partners, Ltd. (the “LIN-RMM Note”) and a subsidiary of LIN Television also assumed $1.7 million of RMM's existing secured indebtedness to McCombs Family Partners, Ltd. (the “RMM Note”) and a $1.0 million unsecured promissory note to a financial institution (the “RMM Bank Note”).
The following table summarizes the material terms of each of these notes:
Repayment of Principal
The following table summarizes future principal repayments on our debt agreements (in thousands):
(1)
The above table excludes any pay-down of our term loans with proceeds from previous asset sales that have not been reinvested within one-year after such sales.
(2)
Debt incurred and assumed upon the acquisition of RMM on October 2, 2009.
The fair values of our long-term debt are estimated based on quoted market prices for the same or similar issues, or based on the current rates offered to us for debt of the same remaining maturities. The carrying amounts and fair values of our long-term debt were as follows (in thousands):
Off Balance Sheet Arrangements
GECC Note
We have guaranteed the GECC Note, which is an $815.5 million 25-year non-amortizing senior secured note bearing an initial interest rate of 8.0% per annum until March 2, 2013 and 9% per annum thereafter. The GECC Note was assumed by our joint venture with NBC Universal in 1998 and in the event of a default and acceleration of the note, our guarantee would require LIN TV to pay any shortfall should the assets of the joint venture be liquidated and not be sufficient to satisfy the principal amount due under the GECC Note. The GECC Note is not LIN TV or LIN Television’s obligation nor the obligation of any of our subsidiaries, GECC has recourse only to the joint venture, our equity interest in the joint venture and, after exhausting all remedies against the assets of the joint venture and the other equity interest in the joint venture, to LIN TV pursuant to its guarantee. Acceleration of the GECC Note upon an event of default, and GECC’s pursuit of remedies against LIN TV pursuant to the guarantee, could, if they result in material adverse consequences to LIN Television, cause an acceleration of LIN Television’s credit facility and other outstanding indebtedness. For more information about the GECC Note, see the description of the NBC Universal Joint Venture in Item 1. “Business - Joint Venture with NBC Universal” and Item 1A. Risk Factors “The GECC Note could result in significant liabilities, including (i) requiring us to make short term cash payments to the NBC Universal joint venture to fund interest payments, and (ii) potentially giving rise to a change of control under our existing indebtedness, which could cause such indebtedness to become immediately due and payable”, as well as the description of the GECC Note in Note 14 - "Commitments and Contingencies" to our consolidated financial statements.
Future Program Rights Agreements
We record program rights agreements on our balance sheet on the first broadcast date the programs are available for air. As a result, we have commitments for future program rights agreements not recorded on our balance sheet at December 31, 2009 of $53.7 million, as detailed in Note 14 - “Commitments and Contingencies.”
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to interest rates on our credit facility debt. We use derivative financial instruments to mitigate our exposure to market risks from fluctuations in interest rates. In accordance with our policy, we do not use derivative instruments unless there is an underlying exposure and we do not hold or enter into derivative financial instruments for speculative trading purposes.
Interest Rate Risk
Our total debt at December 31, 2009 was $683.0 million, including current portion of $16.4 million, of which the senior subordinated notes bear a fixed interest rate and the credit facility bears an interest rate based on, at our option, either a) the LIBOR interest rate, or b) the ABR rate, which is an interest rate that is equal to the greatest of (i) the Prime Rate, (ii) the Federal Funds Effective Rate plus ½ of 1 percent, and (iii) the one-month LIBOR rate plus 1%. In addition, the rate we select also bears an applicable margin rate of 3.750% or 2.750% for LIBOR based loans and ABR rate loans, respectively. Our credit facility outstanding balance was $266.0 million as of December 31, 2009.
Accordingly, we are exposed to potential losses related to increases in interest rates. A hypothetical 1% increase in the floating rate used as the basis for the interest charged on the credit facility as of December 31, 2009 would result in an estimated $2.0 million increase in annualized interest expense assuming a constant balance outstanding of $266.0 million less the notional amount of the declining balances of our term loans covered with an interest rate hedge agreement described below.
During the second quarter of 2006, we entered into a contract to hedge a notional amount of the declining balances of our term loans (“2006 interest rate hedge”). To mitigate changes in our cash flows resulting from fluctuations in interest rates, we entered into the 2006 interest rate hedge that effectively converted the floating LIBOR rate-based-payments to fixed payments at 5.33% plus the applicable margin rate calculated under our credit facility, which expires in November 2011. We designated the 2006 interest rate hedge as a cash flow hedge. The fair value of the 2006 interest rate hedge liability was $4.2 million at December 31, 2009. This amount will be released into earnings over the life of the 2006 interest rate hedge through periodic interest payments.
Item 8.
Item 8. Financial Statements and Supplementary Data
See index on page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
a) Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2009, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
b) Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policy or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission. As permitted by the SEC, we have excluded RMM from our evaluation as of December 31, 2009 because it was acquired by us in a purchase business combination on October 2, 2009. RMM is an operating division of Primeland, Inc., a wholly-owned subsidiary of LIN Television, whose total assets and total revenues represent 1% and 1%, respectively, of our consolidated financial statement amounts as of and for the year ended December 31, 2009. Based on this evaluation, which excludes RMM because it was acquired in a purchase business combination on October 2, 2009, our Chief Executive Officer and Chief Financial Officer have concluded that our internal control over financial reporting was effective as of December 31, 2009.
The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
c) Changes in internal controls. There were no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the quarter ended December 31, 2009 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors and Executive Officers and Corporate Governance
Information regarding members of our Board of Directors is contained in our Proxy Statement for the 2010 Annual Meeting of the Stockholders under the caption “Election of Directors” and is incorporated herein by reference. Information regarding our executive officers is contained in our Proxy Statement for the 2010 Annual Meeting of the Stockholders under the caption “Directors and Executive Officers” and is incorporated herein by reference. Information regarding Section 16(a) compliance is contained in our Proxy Statement for the 2010 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference. Information regarding our Audit Committee and our Audit Committee Financial Expert is contained in our Proxy Statement for the 2010 Annual Meeting of the Stockholders under the caption “Report of the Audit Committee of our Board of Directors” and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information required by this item is contained in our Proxy Statement for the 2010 Annual Meeting of Stockholders under the captions “Compensation Discussion and Analysis,” “Director Compensation,” “Report of the Compensation Committee of our Board of Directors,” and “Compensation Committee Interlocks and Insider Participation,” which is incorporated by reference in this document.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item about our securities authorized for issuance under equity compensation plans as of December 31, 2009 is included in Part I, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Annual Report on Form 10-K. All other information required by this item is contained in our Proxy Statement for the 2010 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management”, which is incorporated by reference in this document.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
The response to this item is contained in our Proxy Statement for the 2010 Annual Meeting of Stockholders under the caption “Certain Relationships and Related Transactions”, which is incorporated by reference in this document.
Item 14.
Item 14. Principal Accounting Fees and Services
The response to this item is contained in our Proxy Statement for the 2010 Annual Meeting of Stockholders under the caption “Independent Registered Public Accounting Firm Fees and Other Matters”, which is incorporated by reference in this document.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) See Index to Financial Statements on page.
(b) Exhibits.
__________
*
Management contracts and compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 15(b) of Form 10-K.
(c)
Financial Statement Schedule
The following financial statement schedule is filed herewith:
Schedule I - Condensed Financial Information of the Registrant
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each of LIN TV Corp. and LIN Television Corporation, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIN TV CORP.
LIN TELEVISION CORPORATION
Date: March 15, 2010 /s/ Vincent L. Sadusky
Vincent L. Sadusky
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of each of LIN TV Corp. and LIN Television Corporation in the capacities and on the dates indicated.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of LIN TV Corp.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of LIN TV Corp. and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control over Financial Reporting, management has excluded RMM from its assessment of internal control over financial reporting as of December 31, 2009 because it was acquired by the Company in a purchase business combination on October 2, 2009. We have also excluded RMM from our audit of internal control over financial reporting. RMM is an operating division of Primeland, Inc., a wholly owned subsidiary of LIN Television Corporation, whose total assets and total revenues represent 1% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2009.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
March 15, 2010
LIN TV Corp.
Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
LIN TV Corp. (“LIN TV”), together with its subsidiaries, including LIN Television Corporation (“LIN Television”), is a television station group operator in the United States. LIN TV and its subsidiaries are affiliates of HM Capital Partners LLC (“HMC”). In these notes, the terms “Company,” “LIN TV,” “we,” “us” or “our” mean LIN TV Corp. and all subsidiaries included in our consolidated financial statements.
We guarantee substantially all of LIN Television’s debt. All of the consolidated wholly-owned subsidiaries of LIN Television fully and unconditionally guarantee the Company’s Senior Credit Facility, 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B on a joint-and-several basis.
Our consolidated financial statements reflect the operations of the Puerto Rico stations and the operations, assets and liabilities of Banks Broadcasting, Inc. (“Banks Broadcasting”) as discontinued for all periods presented. The assets and liabilities of Banks Broadcasting are shown as discontinued effective September 30, 2007 and our Puerto Rico stations were sold in 2007 (See Note 3 - “Discontinued Operations” for further discussion of our discontinued operations.)
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. Certain changes in classifications have been made to the prior period financial statements to conform to the current financial statement presentation. Our significant accounting policies are described below.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
Financial Condition
We have experienced significant operating losses since our inception and we have a stockholders’ deficit as of December 31, 2009. The economic downturn and credit crisis had a significant impact on the demand for advertising within the markets in which our stations operate. Based on our projections for 2010, which we believe use reasonable assumptions regarding the current economic environment, we estimate that cash flows from our operations, together with cash available under our revolving credit facility, will be sufficient to fund our cash requirements over the next 12 months, including scheduled interest and required principal payments on our outstanding indebtedness and planned capital expenditures and projected working capital needs. In addition, based on our projections, we believe that we will remain in compliance with the financial covenants in our credit agreement over the next four quarters. We cannot assure, however, that our projections will be realized and actual results may differ materially.
Our operating plan for the next 12 months requires that we generate cash from operations, utilize available borrowings, and make certain repayments of indebtedness, including mandatory repayments of term loans under our credit facility. Our ability to borrow under our revolving credit facility is contingent on our compliance with certain financial covenants, which are measured, in part, by the level of earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) we generate from our operations. During the six months ended June 30, 2009, we experienced declines in revenues compared to the same periods in 2008, which were in excess of our original 2009 plan. As a result, and to address continued compliance with the financial covenants in our credit agreement, on July 31, 2009 we entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent, and banks and financial institutions party thereto. Our ability to sustain compliance with the Amended Credit Agreement requires, during 2010, a reduction in our consolidated leverage ratio and our consolidated senior leverage ratio, and an increase in our consolidated interest coverage ratio, as more fully described in Note 7 - “Debt”.
Our joint venture with NBC Universal has been adversely impacted by the current economic downturn. The joint venture distributed no cash to NBC Universal and us during the year ended December 31, 2009 and used approximately $14.9 million of the existing debt service cash reserves, leaving approximately $0.2 million available.
In light of the adverse effect of the economic downturn on the joint venture’s operating results, in 2009 we entered into the Original Shortfall Funding Agreement with NBC Universal, which provided that: a) we and NBC waived the requirement that the joint venture maintain debt service reserve cash balances of at least $15 million; b) the joint venture would use a portion of its existing debt service reserve cash balances to fund interest payments in 2009; c) NBC agreed to defer its receipt of 2008 and 2009 management fees; and d) we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2010, we and NBC Universal would each provide the joint venture with a shortfall loan on the basis of our percentage of economic interest in the joint venture. As of March 15, 2010, we have not yet provided any funding under the Original Shortfall Funding Agreement.
Because of anticipated future shortfalls at the joint venture, on March 9, 2010, NBC Universal and we entered into the 2010 Shortfall Funding Agreement covering the period through April 1, 2011. Under the terms of the 2010 Shortfall Funding Agreement: a) the joint venture may continue to access any portion of its existing debt service reserve cash balances to fund interest payments; b) NBC will continue to defer the payment of 2008 and 2009 management fees and defer payment of 2010 management fees through March 31, 2011; and c) we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2011, we and NBC Universal would each provide the joint venture with a shortfall loan on the basis of our percentage of economic interest in the joint venture.
As of December 31, 2009, we have accrued $6.0 million for our probable and estimable obligations under these agreements, and due to uncertainity surrounding the joint venture's ability to repay the shortfall loans, concurrent with the recognition of these liabilities we have impaired the loans, resulting in a $6.0 million charge recognized in share of loss (income) in equity investments in our consolidated statement of operations for the year ended December 31, 2009. For further details on the timing of debt service shortfalls and our recognition of liabilities under both the Original Shortfall Funding Agreement and the 2010 Shortfall Funding Agreement see Note 14 - “Commitments and Contingencies”.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of our Company and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated. We conduct our business through our subsidiaries and have no operations or assets other than our investment in our subsidiaries and equity-method investments. We operate in one reportable segment.
Our 50 percent interest in the Banks Broadcasting joint venture was consolidated in our financial statements effective March 31, 2004 because we were the primary beneficiary of this variable interest entity (see Note 3 - “Discontinued Operations” for further discussion of Banks Broadcasting).
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the notes thereto. Our actual results could differ from these estimates. Estimates are used when accounting for the collectability of receivables, valuation of intangible assets, equity investments, deferred tax valuation allowances, amortization and valuation of program rights, stock-based compensation, pension costs, barter transactions and net assets of businesses acquired.
Cash and cash equivalents
Cash equivalents consist of highly liquid, short-term investments that have an original maturity of three months or less when purchased. Our excess cash is invested primarily in short-term U.S. Government securities and money market funds. We had no material losses on our cash or cash equivalents during fiscal 2009. All available cash is on deposit with banking institutions that we believe to be financially sound. We maintain a $2.0 million compensating balance related to a line of credit with one of our creditors, which has been classified as restricted cash in our consolidated balance sheet.
Property and equipment
Property and equipment is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the assets, an average of 30 to 40 years for buildings and fixtures, and 3 to 15 years for broadcast and other equipment. Upon retirement or other disposition, the cost and related accumulated depreciation of the assets are removed from the accounts and the resulting gain or loss is included in consolidated net income or loss. Expenditures for maintenance and repairs, including expenditures for planned major maintenance activities, are expensed as incurred. We review our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Nonmonetary exchanges
We exchange productive assets, such as broadcast equipment, with third parties through nonmonetary exchanges. We recognize gains or losses on nonmonetary exchanges in an amount equal to the difference between the fair value of the assets received and the fair value of the assets surrendered.
Equity investments
Equity investments that we do not have a controlling interest in are accounted for using the equity method. Our share of the net loss or income for these investments, including any equity investment impairments, is included in share of loss (income) from equity investments on our consolidated statement of operations. We review our interest in our equity investments for impairment if there is a series of operating losses or other factors that may indicate that there is a decrease in the value of our investment that is other than temporary.
Revenue recognition
We recognize advertising and other program-related revenue during the period in which advertising or programs are aired on our television stations or carried by our Internet web sites or the web sites of our advertiser network. We recognize retransmission consent fees in the period in which these services are performed.
Barter transactions
We account for barter transactions at the fair value of the goods or services we receive from our customers, or the advertising time provided, whichever is more clearly indicative of fair value based on the judgment of our management. We record barter advertising revenue at the time the advertisement is aired and barter expense at the time the goods or services are used. We account for barter programs at fair value based on a calculation using the actual cash advertisements we sell within barter programs multiplied by one minus the program profit margin for similar syndicated programs where we pay cash to acquire the program rights. We record barter program revenue and expense when we air the barter program. We do not record barter revenue or expenses related to network programs. Barter revenue and expense included in the consolidated statements of operations are as follows (in thousands):
Advertising expense
Advertising costs are expensed as incurred. We incurred advertising costs in the amounts of $3.2 million, $5.5 million and $6.1 million in the years ended December 31, 2009, 2008 and 2007, respectively.
Intangible assets
Intangible assets primarily include broadcast licenses, network affiliations, customer relationships, acquired internal use software, non-compete agreements and goodwill.
We test the impairment of our broadcast licenses annually or whenever events or changes in circumstances indicate that such assets might be impaired. The impairment test consists of a comparison of the fair value of broadcast licenses with their carrying amount on a station-by-station basis using a discounted cash-flow valuation method, assuming a hypothetical start-up scenario. The future value of our broadcast licenses could be significantly impaired by the loss of the corresponding network affiliation agreements. Accordingly, such an event could trigger an assessment of the carrying value of a broadcast license.
We test the impairment of goodwill annually or whenever events or changes in circumstances indicate that goodwill might be impaired. The first step of the goodwill impairment test compares the fair value of a station with its carrying amount, including goodwill. The fair value of a station is determined through the use of a discounted cash flow analysis. The valuation assumptions used in the discounted cash flow model reflect historical performance of the station and prevailing values in the markets for broadcasting properties. If the fair value of the station exceeds its carrying amount, goodwill is not considered impaired. If the carrying amount of the station exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by performing a hypothetical purchase price allocation, using the station’s fair value (as determined in step one) as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment charge is recognized in an amount equal to that excess, but not more than the carrying value of the goodwill. An impairment assessment could be triggered by a significant reduction, or a forecast of such reductions, in operating results or cash flows at one or more of our television stations, a significant adverse change in the national or local advertising marketplaces in which our television stations operate, or by adverse changes to Federal Communications Commission (“FCC”) ownership rules, among other factors. We recorded impairment charges during 2009 and 2008, which are more fully described in Note 6 - "Intangible Assets".
Long lived-assets
We periodically evaluate the net realizable value of long-lived assets, including tangible and intangible assets, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. Impairment in the carrying value of an asset is recognized when the expected future operating cash flow derived from the asset is less than its carrying value.
Program rights
Program rights are recorded as assets when the license period begins and the programs are delivered to our stations for broadcasting, at the gross amount of the related obligations. Costs incurred in connection with the purchase of programs to be broadcast within one year are classified as current assets, while costs of those programs to be broadcast subsequently are considered non-current. The program costs are charged to operations over their estimated broadcast periods using the straight-line method.
If the projected future net revenues associated with a program are less than the current carrying value of the program rights (i.e. due to poor ratings), we would be required to write-down the program rights assets to equal the amount of projected future net revenues. If the actual usage of the program rights is on a more accelerated basis than straight-line over the life of the contract, we would be required to write-down the program rights to equal the lesser of the amount of projected future net revenues or the average revenue per run multiplied by the number of remaining runs. We recorded no impairments to our program rights during 2009, 2008 or 2007.
Program obligations are classified as current or non-current in accordance with the payment terms of the license agreement.
Stock-based compensation
At December 31, 2009, we have three stock-based employee compensation plans, which are described more fully in Note 8 - “Stock-Based Compensation”. We estimate the fair value of stock-based awards using a Black-Scholes valuation model. The Black-Scholes model requires us to make assumptions and judgments about the variables used in the calculation, including the option’s expected life, the price volatility of the underlying stock and the number of stock-based awards that are expected to be forfeited. The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. Price volatility is based on historical trends for our class A common stock and the common stock of peer group companies engaged in the broadcasting business. Expected forfeitures are estimated using our historical experience. If future changes in estimates differ significantly from our current estimates, our future stock-based compensation expense and results of operations could be materially impacted.
The following table presents the stock-based compensation expense included in the consolidated statements of operations (in thousands):
Income taxes
Deferred income taxes are recognized based on temporary differences between the financial statement and the tax basis of assets and liabilities using statutory tax rates in effect in the years in which the temporary differences are expected to reverse. A valuation allowance is applied against net deferred tax assets if it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized. When accounting for uncertainty in income taxes we follow the prescribed recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more-likely than not to be sustained upon examination by taxing authorities.
We recognize interest and penalties related to uncertain tax positions as a component of income tax expense.
Concentration of credit risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, investments and trade receivables. Concentration of credit risk with respect to cash and cash equivalents and investments are limited as we maintain primary banking relationships with only large nationally recognized institutions. We evaluated the viability of these institutions as of December 31, 2009 and we believe our risk is minimal. Credit risk with respect to trade receivables is limited, as the trade receivables are primarily related to advertising revenues generated from a large diversified group of local and nationally recognized advertisers and advertising agencies. We do not require collateral or other security against trade receivable balances, however, we do maintain reserves for potential bad debt losses, which are based on historical bad debt write-offs, and such reserves and bad debts have been within management’s expectations for all years presented.
Additionally, management performs a quarterly assessment of the critical terms of the interest rate hedge including, among other matters, an assessment of the counterparties’ creditworthiness. Based on our assessment at December 31, 2009, we do not believe there is a significant risk associated with the creditworthiness of our interest rate hedge counterparty.
If we incur additional indebtedness or amend or replace our current indebtedness, current volatility within the credit markets may impact our ability to refinance our debt or to refinance our debt on terms similar to our existing debt agreements.
Income (loss) per share
Basic income (loss) per common share is computed by dividing income (loss) attributable to common stockholders by the number of weighted-average outstanding shares of common stock. For the year ended December 31, 2008, because we incurred a net loss, there was no difference between basic and diluted income per share. As a result of the net loss, all potential common shares from the exercise of stock options, the vesting of restricted stock and the potential common shares from the assumed conversion of the contingently convertible debt were anti-dilutive.
The following is a reconciliation of income available to common shareholders from continuing operations and weighted-average common shares outstanding for purposes of calculating basic and diluted income per common share (in thousands):
Fair value of financial instruments
Certain financial instruments, including cash and cash equivalents, investments, accounts receivable and accounts payable are carried in the consolidated financial statements at amounts that approximate fair value. For certain financial assets and liabilities recorded at fair value on a recurring basis we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. For more information on our assets and liabilities measured at fair value using the prescribed three level fair value hierarchy see Note 9 - "Fair Value Measurement".
Derivative financial instruments
Derivatives are required to be recorded as assets or liabilities and measured at fair value. Gains or losses resulting from changes in the fair values of derivatives are recognized immediately or deferred, depending on the use of the derivative and whether or not it qualifies as a hedge. We presently use derivative financial instruments in the management of our interest rate exposure for our long-term debt, principally our credit facility. We do not use derivative financial instruments for trading purposes.
Retirement plans
We have a defined benefit retirement plan covering certain of our employees. Our pension benefit obligations and related costs are calculated using prescribed actuarial concepts. Additionally, we record the unfunded status of our plan on our consolidated balance sheet.
Recently issued accounting pronouncements
In December 2009, the FASB issued ASU 2009-17 “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”). ASU 2009-17 is effective for interim and annual reporting periods beginning after November 15, 2009. ASU 2009-17 amends the Codification to include the amendments prescribed by Financial Accounting Standard (“FAS”) 167, “Amendments to FASB Interpretation No. 46(R)”, which amends certain guidance in FIN 46(R) to eliminate the exemption for special purpose entities, require a new qualitative approach for determining who should consolidate a variable interest entity and change the requirement for when to reassess who should consolidate a variable interest entity. We adopted ASU 2009-17 effective January 1, 2010, and it did not have a material impact on our financial position or results of operations.
In December 2009, the FASB issued ASU 2009-15 “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets” (“ASU 2009-15”). ASU 2009-15 is effective for interim and annual reporting periods beginning after November 15, 2009 and must be applied to transfers occurring on or after the effective date. ASU 2009-15 amends the Codification to include the amendments prescribed by FAS 166 “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140”, which clarifies that the objective of paragraph 9 of Statement 140 is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. We adopted FAS 166 effective January 1, 2010, and it did not have a material impact on our financial position or results of operations.
In October 2009, the FASB issued ASU 2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force” (“ASC 605-25”). ASC 605-25 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. ASC 605-25 addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. We plan to adopt ASC 605-25 effective January 1, 2011, and we do not expect it to have a material impact on our financial position or results of operations.
In August 2009, the FASB issued ASU 2009-05 “Measuring Liabilities at Fair Value” (“ASC 820-10”). ASC 820-10 is effective for the first reporting period, including interim periods, beginning after issuance. ASC 820-10 clarifies the application of certain valuation techniques in circumstances in which a quoted price in an active market for the identical liability is not available and clarifies that when estimating the fair value of a liability, the fair value is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. ASC 820-10 became effective for us on October 1, 2009. We adopted ASC 820-10 effective September 30, 2009, and it did not have a material impact on our financial position or results of operations.
In April 2009, the FASB issued ASC 825-10, “Interim Disclosures about Fair Value of Financial Instruments” (“ASC 825-10”), which requires public entities to disclose in their interim financial statements the fair value of all financial instruments within the scope of FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments”, as well as the method(s) and significant assumptions used to estimate the fair value of those financial instruments. The adoption of ASC 825-10 had no impact on our financial position or results of operations.
Also in April 2009, the FASB issued ASC 320-10, “Recognition and Presentation of Other-Than-Temporary Impairments” (“ASC 320-10”), to change the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of an impairment charge to be recorded in earnings. ASC 320-10 also requires enhanced disclosures, including the Company’s methodology and key inputs used for determining the amount of credit losses recorded in earnings. We adopted ASC 320-10 during the second quarter of 2009 and the adoption had no impact on our financial position or results of operations.
Effective January 1, 2009, the Company adopted ASC 805-10, “Business Combinations” (“ASC 805-10”). ASC 805-10 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; how the acquirer recognizes and measures the goodwill acquired in a business combination; and how the acquirer determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. We have applied the provisions of ASC 805-10 to our acquisition of RMM and the appropriate disclosures are included in Note 2 - “Acquisitions”.
In December 2008, the FASB issued ASC 715-10, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“ASC 715-20”). ASC 715-20 is effective for fiscal years ending after December 15, 2009. ASC 715-20 increases disclosure requirements related to an employer’s defined benefit pension or other postretirement plans. We adopted the provisions of ASC 715-10 by including the required additional financial statement disclosures as of December 31, 2009 in Note 11 - “Retirement Plans”. The adoption of ASC 715-10 had no impact on our financial position or results of operations.
In November 2008, the FASB issued ASC 605-25, “Revenue Arrangements with Multiple Deliverables” (“ASC 605-25”). ASC 605-25 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after December 31, 2009 and shall be applied on a prospective basis. Earlier application is permitted as of the beginning of a fiscal year. ASC 605-25 addresses some aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. We plan to adopt these aspects of ASC-605-25 effective January 1, 2010, and we do not expect it to have a material impact on our financial position or results of operations
Note 2 - Acquisitions
RMM
On October 2, 2009, we acquired Red McCombs Media, LP ("RMM"), an online advertising and media services company based in Austin, Texas. The acquisition provides us with a national interactive footprint and significantly expands our multi-platform offerings by providing national online advertising and enhanced services, including targeted display, rich media, video advertising, custom-built vertical channels, search engine marketing, search engine optimization, and mobile marketing. The acquisition was effected through the merger of RMM with and into Primeland Television, Inc., a wholly owned subsidiary of LIN Television, which subsequently changed its name to Primeland, Inc. ("Primeland").
The following table summarizes the final allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed in the acquisition:
As part of the merger consideration, we issued 933,610 shares of class A common stock, from shares held within treasury, to the former owners of RMM. The class A common stock was issued in a private placement transaction that was exempt from registration under the Securities Act of 1933, as amended. The number of shares of class A common stock issued by us to the sellers is subject to adjustment in the event that the value of the equity consideration is less than $4.5 million as of the six month anniversary of the acquisition. If the value of our class A common stock as of the six-month anniversary of the acquisition is less than $4.5 million (such difference, the “Equity Value Shortfall Amount”), we are obligated, at our option to: a) issue to the sellers a number of additional shares of our class A common stock having a value as of the six-month anniversary of the acquisition, equal to the Equity Value Shortfall Amount; b) make a cash payment to the sellers in an amount equal to the Equity Value Shortfall Amount; or c) satisfy the Equity Value Shortfall Amount through any combination of the foregoing we determine appropriate. In the event that we choose to issue additional shares of our class A common stock to the sellers to satisfy all or a portion of the Equity Value Shortfall Amount, a final adjustment will be made at the twelve month anniversary of the acquisition. In the event that the value of such shares as of the 12-month anniversary of the acquisition is less than or exceeds the Equity Value Shortfall Amount by at least $0.25 per share, we are required to make a cash payment to the sellers or the sellers are required to return shares to us. The merger consideration is also subject to customary adjustments for working capital and indemnification for claims against RMM related to the period prior to the merger.
As of the acquisition date, we classified the Equity Value Shortfall Amount as a current liability, and estimated the fair value to be $1.6 million, which is based on an option pricing model reflecting our assumptions about the value that market participants would place on this liability. Since October 2, 2009, the value of our class A common stock has increased, and as a result the fair value of the Equity Value Shortfall Amount has decreased to $0.6 million as of December 31, 2009. Therefore, we recorded a gain in other, net of $1.0 million in our consolidated statement of operations for the year ended December 31, 2009. Under the terms of the merger agreement, our actual liability could range from zero to $4.5 million, depending on the fair value of our class A common stock as of the six month and twelve month anniversary dates of the acquisition of April 2, 2010 and October 2, 2010, respectively.
In connection with the acquisition, we recognized $2.8 million of goodwill, all of which is amortizable for tax purposes. The goodwill primarily represents synergies between us and RMM that we expect to benefit from as a result of expanded distribution channels provided by RMM’s broad advertising network. Additionally, we recognized $6.6 million of other finite-lived intangible assets, all of which are amortizable for tax purposes, and are primarily comprised of advertiser relationships, completed technology and management non-compete agreements.
Additionally, in connection with the acquisition we entered into an incentive compensation arrangement with certain key members of management. The arrangement provides payments to those employees based on the EBITDA generated by RMM during 2012. Our liability under this arrangement could range from zero to $24.0 million, and is payable in 2013.
The following summarizes the activity in acquisition related restructuring liabilities for the year ended December 31, 2009 and 2008 (in thousands):
(1)
Adjustment for retirement benefits owed in connection with the Sunrise Television Corp. acquisition.
(2)
Adjustment to final payout of contract related to master control automation system related to KASA-TV.
Note 3 - Discontinued Operations
Our consolidated financial statements reflect the operations of the Puerto Rico stations and the operations, assets and liabilities of the Banks Broadcasting joint venture as discontinued for all periods presented.
Out-of-Period Adjustment
We discovered during the preparation of our 2007 financial statements a $3.1 million deferred tax liability, relating to an asset that had been fully-impaired for the six months ended June 30, 2006, had not been removed from our deferred tax liabilities as of June 30, 2006 nor was the benefit realized in our earnings for the six months ended June 30, 2006. The original asset to which the deferred tax liability related was a fair value adjustment of $7.7 million initially recorded at March 31, 2004, when we consolidated the broadcast licenses of Banks Broadcasting because we were the primary beneficiary of this variable interest entity.
We concluded that the effect of this $3.1 million adjustment was not material to the prior year. Accordingly, the 2006 financial statements were not revised. Instead, this adjustment of $3.1 million was recorded to the income (loss) from discontinued operations for the year ended December 31, 2007, since we reflected the operations of Banks Broadcasting as discontinued operations effective with the filing of our Form 10-Q for the period ended September 30, 2007.
Banks Broadcasting
On April 23, 2009, the Banks Broadcasting joint venture completed the sale of KNIN-TV, a CW affiliate in Boise, for $6.6 million to Journal Broadcast Corporation. As a result of the sale we received, on the basis of our economic interest in Banks Broadcasting, a distribution of $2.6 million during the year ended December 31, 2009. The operating loss for the year ended December 31, 2009 includes an impairment charge of $1.9 million to reduce the carrying value of broadcast licenses to fair value based on the final sale price of KNIN-TV of $6.6 million. Net loss included within discontinued operations for the year ended December 31, 2009 reflects our 50% share of net losses of the Banks Broadcasting joint venture, net of taxes, through the April 23, 2009 disposal date.
Following the sale of KNIN-TV on April 23, 2009, substantially all of the assets of the Banks Broadcasting joint venture had been liquidated.
During the years ended December 31, 2008 and 2007, Banks Broadcasting distributed $2.5 million and $2.0 million, respectively, in cash to us and we provided no capital contributions to Banks Broadcasting during the years ended December 31, 2009, 2008 and 2007. In March 2008, Banks Broadcasting sold certain of its 700 MHz spectrum licenses for $2.0 million in cash with a related gain of $1.4 million. Additionally, in July 2007, Banks Broadcasting sold the operating assets, including the broadcast license, of KSCW-TV, a CW affiliate in Wichita, to Sunflower Broadcasting, Inc. for $6.8 million of which $5.4 million was paid in cash at the closing and the remaining $1.4 million was held in escrow and released in July 2008. Our consolidated operating results for the third quarter of 2007 included a $0.5 million loss from the sale of KSCW-TV, net of an income tax benefit of $0.4 million.
Puerto Rico Operations (WAPA-TV, WJPX-TV and WAPA America)
On March 30, 2007, we sold our Puerto Rico operations to InterMedia Partners VII, L.P. for $131.9 million in cash and we recorded a gain on the sale of $22.7 million, net of income tax benefit, in our 2007 operating results.
The following presents summarized information for the discontinued operations as follows (in thousands):
Note 4 - Investments
Joint Venture with NBC Universal
We own a 20.38 percent interest in Station Venture Holdings, LLC (“SVH”), a joint venture with NBC Universal, and account for our interest using the equity method as we do not have a controlling interest. SVH wholly owns Station Venture Operations, LP (“SVO”), which is the operating company that manages KXAS-TV and KNSD-TV, the television stations that comprise the joint venture. The following presents the summarized financial information of SVH (in thousands):
(1)
Cash distributions from equity investments include proceeds of $12.6 million from the sale of broadcast towers for the year ended December 31, 2008.
(2)
See Note 14 - "Commitments and Contingencies" for further description of the General Electric Capital Corporation ("GECC") Note and LIN TV's guarantee of the GECC Note.
During the year ended December 31, 2009, we did not recognize our 20.38 percent share of SVH’s net loss, because the investment was written down to zero during the year ended December 31, 2008 as described below, and accordingly we suspended recognition of equity method gains and losses.
During the year ended December 31, 2009, we recognized a contingent liability of $6.0 million based on our estimate of amounts that we expect to loan to the SVH joint venture pursuant to the Original and 2010 Shortfall Funding Agreements with NBC Universal, as discussed further in Note 14 - “Commitments and Contingencies”. Because of uncertainty surrounding the joint venture’s ability to repay the shortfall loan, we concluded the loan was fully impaired during 2009. Accordingly, we recognized a charge of $6.0 million, which has been classified as share of loss (income) in equity investments during the year ended December 31, 2009 to reflect the impairment of the loan. As of March 15, 2010, we have not yet provided any funding under these agreements. However, as of March 15, 2010, this $6.0 million liability continues to reflect our best estimate of probable obligations under the Original Shortfall Funding Agreement and 2010 Shortfall Funding Agreement.
During the fourth quarter of 2008, due to the continued decline in operating profits of this joint venture, we determined that there was an other-than-temporary impairment in our investment in the joint venture with NBC Universal. As a result, and in the absence of the ability to recover our carrying amount of the investment, we recorded a loss of $53.6 million to write-off our equity investment in the joint venture, which is included in the share of loss (income) in equity investment in our consolidated statement of operations.
WAND(TV) Partnership
On November 1, 2007, we sold our 33.33% interest in WAND(TV) Partnership to a wholly-owned subsidiary of Block Communications, Inc. for $6.8 million in cash and recorded a gain of approximately $0.7 million.
Prior to the sale of WAND(TV) Partnership, we accounted for our 33.33% interest using the equity method, as we did not have a controlling interest. Our management services agreement with WAND(TV) Partnership, under which we provided specified management, engineering and related services for a fixed fee, was also terminated on November 1, 2007. Included in this agreement was a cash management arrangement under which we incurred expenditures on behalf of WAND(TV) Partnership and were periodically reimbursed.
The following presents the summarized financial information of the WAND(TV) Partnership (in thousands):
Note 5 - Property and Equipment
Property and equipment consisted of the following (in thousands):
We recorded depreciation expense of $30.4 million, $29.7 million and $30.8 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Under a Federal Communications Commission (“FCC”) order, we have been exchanging spectrum with Sprint Nextel, which has been used primarily to send news feeds via microwave back to the television studios and to send broadcast feeds to television transmission and tower sites, for new microwave digital equipment. During the years ended December 31, 2009, 2008 and 2007, we received $5.5 million, $4.6 million and $1.6 million, respectively, of equipment pursuant to this exchange. Additionally, during 2009, 2008 and 2007 we recognized a gain of $6.4 million, $0.9 million and zero related to this equipment, which is recorded in (gain) loss from asset dispositions in our consolidated statement of operations.
During 2008, we recorded a charge of $8.7 million for the write-off of certain broadcast assets that have become obsolete as a result of the DTV transition. The charge has been recorded in impairment of goodwill, broadcast licenses and broadcast equipment in our consolidated statement of operations.
Note 6 - Intangible Assets
The following table summarizes the carrying amount of each major class of intangible assets (in thousands):
(1)
These assets are fully amortized and therefore have no remaining useful life.
We recorded amortization expense of $0.6 million, $0.3 million and $2.0 million for the years ended December 31, 2009, 2008 and 2007. We recorded an impairment of our indefinite-lived intangible assets of $39.9 million and $1.0 billion for the years ended December 31, 2009 and 2008.
The following table summarizes the projected aggregate amortization expense for the next five years and thereafter (in thousands):
We recorded an impairment charge of $39.9 million during the second quarter of 2009 that included an impairment to the carrying values of our broadcast licenses of $37.2 million, relating to 26 of our television stations; and an impairment to the carrying values of our goodwill of $2.7 million, relating to two of our television stations. We tested our indefinite-lived intangible assets for impairment at June 30, 2009, between the required annual tests, because we believed events had occurred and circumstances changed that would more likely than not reduce the fair value of our broadcast licenses and goodwill below their carrying amounts. The need for an impairment analysis at June 30, 2009 was triggered by the continued decline in advertising revenue at certain of our stations in excess of our original plan, due to the ongoing effects of the economic downturn, that resulted in downward adjustments to their respective forecasts. There were no additional impairment charges recorded as of September 30, 2009 or December 31, 2009.
We recorded an impairment charge of $297.0 million during the second quarter of 2008 that included an impairment to the carrying values of our broadcast licenses of $185.7 million, relating to 19 of our television stations; and an impairment to the carrying values of our goodwill of $111.3 million, relating to 8 of our television stations. We tested our indefinite-lived intangible assets for impairment at June 30, 2008, between the required annual tests, because we believed events had occurred and circumstances changed that would more likely than not reduce the fair value of our broadcast licenses and goodwill below their carrying amounts. These events included: a) the continued decline of the price of our class A common stock; b) the decline in the current selling prices of television stations; c) the lower growth in advertising revenues; and d) the decline in the operating profit margins of some of our stations.
We recorded an additional impairment charge in the fourth quarter of 2008 of $723.5 million, including a goodwill impairment charge of $309.6 million, relating to 8 of our television stations and to the goodwill related to the NBC Universal joint venture, and an impairment charge to the carrying value of our broadcast licenses of $413.9 million, relating to 26 of our television stations. This was due to the continued economic recession that started in December 2007 and the resulting decline in advertising revenues.
There were no events during 2007 to warrant the performance of an interim impairment test of our indefinite-lived intangible assets. Additionally, there was no impairment charge recorded as of December 31, 2007.
The changes in the carrying amount of goodwill for the year ended December 31, 2009 and 2008, respectively, are as follows (in thousands):
The values of our goodwill and broadcast licenses measured at fair value on a nonrecurring basis during the year ended December 31, 2009 are as follows using the three-level fair value hierarchy established by FAS 157:
Note 7 - Long-term Debt
Debt consisted of the following (in thousands):
During the period January 1, 2009 to July 31, 2009, prior to the execution of the Amended Credit Agreement, borrowings under our credit facility bore an interest rate based on, at our option, either a) the LIBOR interest rate, or b) an interest rate that is equal to the greater of the Prime Rate or the Federal Funds Effective Rate plus ½ of 1 percent. In addition, the rate we selected also bore an applicable margin rate of 0.625% to 1.500%, depending on us achieving certain financial ratios. The unused portion of the revolving credit facility was subject to a commitment fee of 0.25% to 0.50% depending on us achieving certain financial ratios.
Amended Credit Agreement
On July 31, 2009, we entered into the Amended Credit Agreement, which provided that our aggregate revolving credit commitments remained at $225.0 million and our outstanding term loans remained at $69.9 million (as of July 31, 2009). The terms of the Amended Credit Agreement include, but are not limited to, modifications to certain financial covenants, including our consolidated leverage ratio, consolidated interest coverage ratio and consolidated senior leverage ratio, a general tightening of the exceptions to our negative covenants (principally by means of reducing the types and amounts of permitted transactions), an increase in the interest rates and fees payable with respect to borrowings under the Amended Credit Agreement, and the inclusion of certain collateral-related provisions, principally relating to the provision of account control agreements and mortgages with respect to certain real property that we own. Certain revised financial condition covenants, and other key terms, are as follows:
The Amended Credit Agreement revises the calculation of Consolidated Total Debt used in our consolidated leverage ratios to exclude the netting of cash and cash equivalents against total debt.
The credit facility permits us to prepay loans and to permanently reduce the revolving credit commitments, in whole or in part, at any time. We repaid $15.9 million of the term loans during 2009, all of which related to mandatory quarterly amortization payments.
On an annual basis following the delivery of our year-end financial statements, the Amended Credit Agreement requires mandatory prepayments of principal of the term loans, as well as a permanent reduction in revolving credit commitments, based on a computation of excess cash flow for the preceding fiscal year, as more fully set forth in the Amended Credit Agreement. In addition, the Amended Credit Agreement restricts the use of proceeds from asset sales or from the issuance of debt (with the result that such proceeds, subject to certain exceptions, must be used for mandatory prepayments of principal and permanent reductions in revolving credit commitments), and includes a cash ceiling, which requires that LIN Television utilize unrestricted cash and cash equivalent balances in excess of $12.5 million to prepay principal amounts outstanding, but not permanently reduce capacity, under our revolving credit facility.
Borrowings under our credit facility bear an interest rate based on, at our option, either a) the LIBOR interest rate, or b) the ABR rate, which is an interest rate that is equal to the greatest of (i) the Prime Rate, (ii) the Federal Funds Effective Rate plus ½ of 1 percent, and (iii) the one-month LIBOR rate plus 1%. In addition, the rate we select also bears an applicable margin rate of 3.750% or 2.750% for LIBOR based loans and ABR rate loans, respectively. Lastly, the unused portion of the revolving credit facility is subject to a commitment fee of 0.750% depending on our consolidated leverage ratio.
Our revolving credit facility may be used for working capital and general corporate purposes. For example, during the year ended December 31, 2009, we used $66 million under this facility to purchase a portion of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B and we used approximately $12 million under this facility to partially fund interest payments related to these remaining outstanding notes.
The following table summarizes certain key terms of our credit facility (in thousands):
(1)
As of March 15, 2010, the unused balance of the revolving credit facility was $34.0 million.
(2)
Weighted average rate for loans outstanding as of December 31, 2009.
(3)
The outstanding loans as of December 31, 2009 include LIBOR based loans, which have an applicable margin of 3.75%.
We are required, under the terms of the credit facility, to comply with specified financial ratio covenants, including maximum leverage ratios and a minimum interest coverage ratio. As of December 31, 2009, we were in compliance with all of the covenants under our credit facility.
The credit facility also contains provisions that prohibit any modification of the indentures governing our senior subordinated notes in any manner adverse to the lenders and that limits our ability to refinance or otherwise prepay our senior subordinated notes without the consent of such lenders.
6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B
The 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B are unsecured and are subordinated in right of payment to all senior indebtedness, including our credit facility.
The indentures governing the 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B contain covenants limiting, among other things, the incurrence of additional indebtedness and issuance of capital stock; layering of indebtedness; the payment of dividends on, and redemption of, our capital stock; liens; mergers, consolidations and sales of all or substantially all of our assets; asset sales; asset swaps; dividend and other payment restrictions affecting restricted subsidiaries; and transactions with affiliates. The indentures also have change of control provisions which may require our Company to purchase all or a portion of each of the 6½% Senior Subordinated Notes and the 6½% Senior Subordinated Notes - Class B at a price equal to 101% of the principal amount of the notes, together with accrued and unpaid interest. The 6½% Senior Subordinated Notes and the 6½% Senior Subordinated Notes - Class B have certain limitations and financial penalties for early redemption of the notes.
During 2008, we commenced a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to purchase a portion of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B at market prices using available balances under our revolving credit facility and available cash balances. During the year ended December 31, 2009, we purchased a total principal amount of $79.7 million and $42.0 million of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B, respectively, under this plan. The total purchase price for the transactions was $68.4 million, resulting in a gain on extinguishment of debt of $50.1 million, net of a write-off of deferred financing fees and discount related to the notes of $1.3 million and $1.9 million, respectively. Including the amounts purchased during 2008, we have purchased a total notional amount of $147.8 million of such notes for an aggregate purchase price of approximately $80.7 million.
RMM Notes
In connection with the acquisition of RMM as further described in Note 2 - “Acquisitions”, LIN Television issued a $2.0 million unsecured promissory note to McCombs Family Partners, Ltd. (the “LIN-RMM Note”), and a subsidiary of LIN Television also assumed $1.7 million of RMM's existing secured indebtedness to McCombs Family Partners, Ltd. (the “RMM Note”) and a $1.0 million unsecured promissory note to a financial institution (the “RMM Bank Note”).
The following table summarizes the material terms of each of these notes:
Repayment of Principal
The following table summarizes future principal repayments on our debt agreements (in thousands):
(1)
The above table excludes any pay-down of our term loans with proceeds from previous asset sales that have not been reinvested within one-year after such sales.
(2)
Debt incurred and assumed upon the acquisition of RMM on October 2, 2009.
The fair values of our long-term debt are estimated based on quoted market prices for the same or similar issues, or based on the current rates offered to us for debt of the same remaining maturities. The carrying amounts and fair values of our long-term debt were as follows (in thousands):
Note 8 - Stock-Based Compensation
We have several stock-based employee compensation plans, including our 1998 Option Plan, the Amended and Restated 2002 Stock Plan and the Third Amended and Restated 2002 Non-Employee Director Stock Plan (collectively, the “Option Plans”), which permit us to grant non-qualified options in our class A common stock or restricted stock units, which convert into our class A common stock upon vesting, to certain directors, officers and key employees of our Company.
The following table presents the stock-based compensation expense included in our consolidated statements of operations as follows (in thousands):
We recognized stock-based compensation expense (income) related to modifications to our stock option agreements of $0.6 million, $9 thousand and $(0.3) million for the years ended December 31, 2009, 2008 and 2007, respectively. The modifications impacted 257 employees in 2009 and 11 employees in each of 2008 and 2007. We expect to record an additional $1.5 million of expense related to the modification completed during 2009 over the remaining vesting period of the new grants. We expect no further charges for the modifications prior to 2009. These modifications related to the following:
·
On June 2, 2009, we completed an exchange offer which enabled employees and non-employee directors to exchange some or all of their outstanding options to purchase shares of our class A common stock, for new options to purchase shares of our class A common stock, on a one for one basis. A total of 257 employees participated in the exchange, in which options to purchase an aggregate of 2,931,285 shares of our class A common stock were exchanged. The new options have an exercise price of $1.99 per share, equal to the closing price per share of our class A common stock on June 2, 2009. The new stock options vest ratably over three years.
·
Under our 1998 plan certain employee option agreements were eligible for make-whole payments when these employees exercised their options and the market price of our class A common stock was below $1.00. We recorded stock-based compensation expense (income) of $9 thousand and $(0.3) million related to this modification for the years ended December 31, 2008 and 2007, respectively. We made payments to employees that related to this provision of $0.4 million and $0.2 million for the years ended December 31, 2008 and 2007.
We did not capitalize any stock-based compensation for the years ended December 31, 2009, 2008 and 2007.
We have not yet recognized compensation expense relating to our unvested employee stock options and stock awards of $7.8 million in the aggregate, which will be recognized over a weighted-average future period of approximately 1.62 to 3.45 years.
During the year ended December 31, 2009, we received no proceeds from the exercise of stock options.
Stock Option Plans
Options granted under the stock option plans generally vest over a three or four-year service period, using the graded vesting attribution method. Options expire ten years from the date of grant. We issue new shares of our class A common stock when options are exercised. There were 6,655,000 shares authorized for grant under the various Option Plans and 1,382,000 shares available for future grant as of December 31, 2009. Both the shares authorized and shares available exclude 1,553,000 shares under the 1998 Stock Plan, which we do not intend to re-grant and consider unavailable for future grants.
The following table provides additional information regarding our Option Plans for the year ended December 31, 2009 as follows (in thousands, except per share data):
The following table summarizes information about our Option Plans at December 31, 2009 (in thousands, except per share data):
The intrinsic value in the table above represents the total pre-tax intrinsic value, based on our closing price as of December 31, 2009, which would have been received by the option holders had all option holders exercised their options and immediately sold their shares on that date. We estimate the fair value of stock options, when new options are granted or when existing option grants are modified, using a Black-Scholes valuation model. The fair value of each option grant is estimated on the date of grant or modification, based on a single employee group and the graded vesting approach, using the following assumptions:
(1)
The expected term was estimated using the historical and expected terms of similar broadcast companies whose information was publicly available, as our exercise history does not provide a reasonable basis to estimate expected term.
(2)
The stock volatility for each grant is measured using the weighted-average of historical daily price changes of our common stock since our initial public offering in May 2002, as well as comparison to peer companies.
(3)
The risk-free interest rate for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life.
Restricted Stock Awards
We granted 591,500 and 437,000 shares of restricted stock to employees and directors for the years ended December 31, 2009 and 2008, respectively. We granted no restricted stock awards during 2007. Stock granted to directors in lieu of director fees are immediately vested. As of December 31, 2009, 1,053,000 shares of restricted stock were unvested.
The following table provides additional information regarding the restricted stock awards for the year ended December 31, 2009 (in thousands, except per share data):
The following table provides further information for both our restricted stock and stock option awards (in thousands):
Note 9 - Fair Value Measurement
We record the fair value of certain financial assets and liabilities on a recurring basis. The following table summarizes the financial assets and liabilities measured at fair value in the accompanying financial statements using the prescribed three-level fair value hierarchy as of December 31, 2009 and 2008 (in thousands):
The following table details the change in fair value of our Level 3 liability for the year ended December 31, 2009:
The fair value of interest rate hedge is determined based on the present value of future cash flows using observable inputs, including interest rates associated with a similar financial instrument using a series of three-month LIBOR-based loans through November 4, 2011. With respect to the deferred compensation plan, the fair value of deferred compensation is determined based on the fair value of the investments selected by employees.
The fair value of the Equity Value Shortfall Amount, described further in Note 2 -“Acquisitions” is determined based on an option pricing model reflecting our assumptions about the value that market participants would place on this liability. As of the October 2, 2009 acquisition date of RMM, the estimated fair value was $1.6 million. Since October 2, 2009, the value of our class A common stock has increased and as a result the fair value of the Equity Value Shortfall Amount has decreased to $0.6 million as of December 31, 2009. Therefore, we recorded a gain in other, net of $1.0 million in our consolidated statement of operations for the year ended December 31, 2009.
During the second quarter of 2006, we entered into a contract to hedge a notional amount of the declining balances of our term loans (“2006 interest rate hedge”). The interest payments under our credit facility term loans are based on LIBOR plus an applicable margin rate. To mitigate changes in our cash flows resulting from fluctuations in interest rates, we entered into the 2006 interest rate hedge that effectively converted the floating LIBOR rate-based-payments to fixed payments at 5.33% plus the applicable margin rate calculated under our credit facility. We designated the 2006 interest rate hedge as a cash flow hedge. The fair value of the 2006 interest rate hedge liability was $4.2 million and $6.5 million at December 31, 2009 and 2008, respectively. This amount will be released into earnings over the life of the 2006 interest rate hedge through periodic interest payments. We have recognized a gain of $0.2 million and a loss of $(0.3) million for ineffectiveness during the years ended December 31, 2009 and December 31, 2008 respectively, related to this hedge in (gain) loss on derivative instruments in our consolidated statement of operations.
During the second quarter of 2008, we purchased $125.0 million of our 2.50% Exchangeable Senior Subordinated Debentures, all of which were tendered to us. These debentures had certain embedded derivative features that were required to be separately identified and recorded at fair value each period. The fair value of these derivatives on issue of the debentures was $21.1 million and this amount was recorded as an original issue discount and accreted through interest expense from the date of issuance through May 15, 2008. As a result of the purchase of the debentures, during the second quarter of 2008, we recorded a gain of $0.4 million to earnings for the remaining fair value of these derivatives.
The following table summarizes our derivative activity (in thousands):
The following table summarizes the balances for our derivative liability included in other liabilities in our consolidated balance sheet (in thousands):
Note 10 - Accumulated Other Comprehensive Loss
The balance of related after-tax components comprising accumulated other comprehensive loss are summarized below (in thousands):
Note 11 - Retirement Plans
401(k) Plan
We have historically provided a defined contribution plan (“401(k) Plan”) for almost all of our employees. We have historically made contributions to the 401(k) Plan on behalf of employee groups that were not covered by our defined benefit retirement plan matching 50% of the employee’s contribution up to 6% of the employee’s total annual compensation. Contributions made by us vest in 20% annual increments until the employee is 100% vested after five years. We contributed $0.5 million, $2.8 million and $2.7 million to the 401(k) Plan in the years ended December 31, 2009, 2008 and 2007, respectively. We suspended our contributions to our 401(k) Plan during 2009. Effective January 1, 2010, we resumed company contributions to the 401(k) Plan, which will provide a 3% non-elective contribution to all eligible employees.
Retirement Plan
We have historically provided a defined benefit retirement plan to our employees who did not receive matching contributions from our Company to their 401(k) Plan accounts. Our defined benefit plan is a non-contributory plan under which we may make contributions either to: a) traditional plan participants based on periodic actuarial valuations, which are expensed over the expected average remaining service lives of current employees; or b) cash balance plan participants based on 5% of each participant’s eligible compensation.
Effective April 1, 2009, this plan was frozen and we do not expect to make additional benefit accruals to this plan. As a result of this action, during the year ended December 31, 2009, we recorded a net curtailment gain that included a $0.4 million charge related to prior service cost and a gain to our projected benefit obligation of $4.0 million as a result of the reduction of future compensation increases.
We contributed $0.6 million to our pension plan during December 31, 2009 and $3.0 million in each of years ended December 31, 2008 and 2007. We anticipate contributing approximately $3.1 million to our pension plan in 2010 although we currently have no minimum funding requirements as defined by ERISA and federal tax laws.
We record the under-funded status of our defined benefit plan as a liability. The plan assets and benefit obligations of our defined benefit plan are recorded at fair value as of December 31, 2009.
Information regarding the change in the projected benefit obligation, the accumulated benefit obligation and the change in the fair value of plan assets, are as follows (in thousands):
The following table includes the pension-related accounts recognized on the balance sheets and the components of accumulated other comprehensive loss related to the net periodic pension benefit costs as follows (in thousands):
The total net loss of $19.6 million, which is net of tax, relates to deferred actuarial losses from changes in discount rates, differences between actual and assumed asset returns and differences between actual and assumed demographic experience (rates of compensation increases, rates of turnover, retirement rates and mortality rates). During the year ended December 31, 2009, as a result of the curtailment of our plan, we recognized the remaining prior service cost balance of $0.4 million, before taxes, in accumulated other comprehensive income as a component of our net periodic pension cost. During 2010, we expect to amortize net losses of $0.4 million, which are included in the accumulated other comprehensive loss, net of tax, at December 31, 2009.
Components of net periodic pension benefit cost were (in thousands):
Our expected future pension benefit payments for the next 10 years are as follows (in thousands):
Weighted-average assumptions used to estimate our pension benefit obligations and to determine our net periodic pension benefit cost, and the actual long-term rate-of-return on plan assets are as follows:
We used the Citigroup Pension Discount Curve to aid in the selection of our discount rate, which we believe reflects the weighted rate of a theoretical high quality bond portfolio consistent with the duration of the cash flows related to our pension liability.
We considered the current levels of expected returns on a risk-free investment, the historical levels of risk premium associated with each of our pension asset classes, the expected future returns for each of our pension asset classes and then weighted each asset class based on our pension plan asset allocation to derive an expected long-term return on pension plan assets. During the year ended December 31, 2009, our actual long-term rate of return on plan assets was 20.4%.
As a result of the plan freeze during 2009, we have no further service cost or amortization of prior service cost related to the plan. In addition, because the plan is now frozen and participants became inactive during 2009, the net losses related to the plan included in accumulated other comprehensive income will now be amortized over the average remaining life expectancy of the inactive participants instead of average remaining service period.
Our investment objective is to achieve a consistent total rate-of-return that will equal or exceed our actuarial assumptions and to equal or exceed the benchmarks that we use for each of our pension plan asset classes including the S&P 500 Index, S&P Mid-cap Index, Russell 2000 Index, MSCI EAFE Index and the Lehman Brothers Aggregate Bond Index. The following asset allocation is designed to create a diversified portfolio of pension plan assets that is consistent with our target asset allocation and risk policy:
Our actual allocation of plan assets for 2009 is not in range of our target allocation in an effort to realize potential gains associated with the equity market rebound. During late 2009, our Retirement Committee decided to set the target allocation at 60% equity securities and 40% debt securities. Beginning in 2010, on a quarterly basis, the funds in our plan will be rebalanced in line with this new allocation. We continue to monitor the performance of these funds and anticipate the allocation moving in line with the target as the economic outlook stabilizes.
The following table summarizes our pension plan assets measured at fair value using the three-level fair value hierarchy established by ASC 157 as of December 31, 2009 and 2008 (in thousands):
The guaranteed deposit is invested primarily in publicly traded and privately placed debt securities and mortgage loans. Fair value is calculated by discounting the expected future investment cash flow from both investment income and repayment of principal for each investment purchased directly for the guaranteed deposit fund. The U.S. and International stock funds and U.S. bond funds consist of various funds that are valued at the net asset value of units held by the plan at year-end as determined by the custodian, based on fair value of the underlying securities. These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. Furthermore, while we believe these valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in different fair value measurement at the reporting date.
The following table details the change in fair value of the Level 3 investments for the years ended December 31, 2009 and 2008:
Note 12 - Restructuring
During the second quarter of 2009, we recorded a restructuring charge of $0.5 million as a result of the consolidation of certain activities at our stations which resulted in the termination of 28 employees. We made cash payments of $0.5 million during the year ended December 31, 2009 related to this restructuring.
During 2008, we effected a restructuring that included a workforce reduction and the cancellation of certain syndicated television program contracts. The total charge for the plan was $12.9 million, including $4.3 million for a workforce reduction of 144 employees and $8.6 million for the cancellation of the contracts. We made cash payments of $9.0 million during the year ended December 31, 2009 related to these restructuring activities. Cumulatively under the plan, we have made payments of $12.6 million through December 31, 2009. As of December 31, 2009, we had $0.3 million in accrued expenses and accounts payable in the consolidated balance sheet for this restructuring and expect to make cash payments of $0.3 million during 2010 and thereafter.
During the year ended December 31, 2007, we recorded $0.3 million for temporary labor costs and made cash payments of approximately $4.3 million for severance and contractual costs related to a restructuring plan initiated in 2006.
The activity for these restructuring charges are as follows (in thousands):
Note 13 - Related Party Transactions
Centennial Cable of Puerto Rico. Centennial Cable of Puerto Rico, in which HMC had a substantial economic interest, provided our Puerto Rico operations with a barter agreement for advertising and promotional services which are reflected in our consolidated financial statements as discontinued operations for the year ended December 31, 2007.
Note 14 - Commitments and Contingencies
Commitments
We lease land, buildings, vehicles and equipment pursuant to non-cancelable operating lease agreements and we contract for general services pursuant to non-cancelable operating agreements that expire at various dates through 2017. In addition, we have entered into commitments for future syndicated entertainment and sports programming. Future payments for these non-cancelable operating leases and agreements, and future payments associated with syndicated television programs at December 31, 2009 are as follows (in thousands):
Rent expense, resulting from operating leases, was $2.1 million for the year ended December 31, 2009, and $2.2 million in each of the years ended December 31, 2008 and 2007.
Contingencies
GECC Note
GECC provided debt financing for a joint venture between NBC Universal and us, in the form of an $815.5 million non-amortizing senior secured note due 2023 bearing interest at an initial rate of 8% per annum until March 2, 2013 and 9% per annum thereafter (the “GECC Note”). The GECC Note is an obligation of the joint venture. We have a 20% equity interest in the joint venture and NBC Universal has the remaining 80% equity interest, in which we and NBC Universal each have a 50% voting interest. NBC Universal operates two television stations, KXAS-TV, an NBC affiliate in Dallas, and KNSD-TV, an NBC affiliate in San Diego, pursuant to a management agreement. NBC Universal and GECC are both majority-owned subsidiaries of General Electric Company. LIN TV has guaranteed the payment of principal and interest on the GECC Note.
Our joint venture with NBC Universal has been adversely impacted by the current economic downturn. The joint venture distributed no cash to NBC Universal and us during the year ended December 31, 2009. Although the joint venture distributed cash to NBC Universal and us in the amount of $13.0 million and $12.0 million for the years ended December 31, 2008 and 2007, respectively, the cash distributions for 2008 included nonrecurring cash proceeds of $12.6 million from the sale of broadcast towers.
In light of the adverse effect of the economic downturn on the joint venture’s operating results, in 2009 we entered into the Original Shortfall Funding Agreement with NBC Universal, which provided that: a) we and NBC waived the requirement that the joint venture maintain debt service reserve cash balances of at least $15 million; b) the joint venture would use a portion of its existing debt service reserve cash balances to fund interest payments in 2009; c) NBC agreed to defer its receipt of 2008 and 2009 management fees; and d) we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2010, we and NBC Universal would each provide the joint venture with a shortfall loan on the basis of our percentage of economic interest in the joint venture. During the year ended December 31, 2009, the joint venture used approximately $14.9 million of the existing debt service cash reserves, leaving approximately $0.2 million available. As of March 15, 2010, we have not yet provided any funding under the Original Shortfall Funding Agreement.
Because of anticipated future shortfalls at the joint venture, on March 9, 2010, NBC Universal and we entered into the 2010 Shortfall Funding Agreement covering the period through April 1, 2011. Under the terms of the 2010 Shortfall Funding Agreement: a) the joint venture may continue to access any portion of its existing debt service reserve cash balances to fund interest payments; b) NBC will continue to defer the payment of 2008 and 2009 management fees and defer payment of 2010 management fees through March 31, 2011 (payable subject to repayment first of any joint venture shortfall loans); and c) we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2011, we and NBC Universal would each provide the joint venture with a shortfall loan on the basis of our percentage of economic interest in the joint venture.
The timing of anticipated debt service shortfalls at the joint venture is affected by the levels of working capital at the stations owned by the joint venture and their anticipated uses of working capital to fund operations and to distribute cash to the joint venture for the purpose of servicing the interest expense on the GECC Note. We recognize liabilities under the Original Shortfall Funding Agreement and the 2010 Shortfall Funding Agreement when those liabilities become both probable and estimable, which result when joint venture management provides us with budget or forecast information of operating cash flows and working capital needs indicating that a debt service shortfall is probable to occur.
During 2009, joint venture management provided us a revised outlook for 2009 after each quarter end, which, as of September 30, 2009, resulted in an accrual of $2.0 million for our probable and estimable obligations under the Original Shortfall Funding Agreement through the April 1, 2010 expiry of that agreement. Due to uncertainty surrounding the joint venture’s ability to repay the shortfall loan, we concurrently impaired the loan as of September 30, 2009. Based on our latest estimate of cash flow requirements of the joint venture through April 1, 2010, our share of the estimated shortfall through April 1, 2010 is $3.0 million, of which $2.0 million was accrued as of September 30, 2009. Subsequent to September 30, 2009, we: (a) received the joint venture’s 2010 budget and (b) as noted above, entered into the 2010 Shortfall Funding Agreement to cover debt service shortfalls through April 1, 2011. Based on the 2010 budget provided by the joint venture, and our discussions with the joint venture's management, we believe there will be an additional debt service shortfall at the joint venture from April 2, 2010 through April 1, 2011 of $13.0 million to $15.0 million, of which, our share of the shortfall could be approximately $3.0 million.
As a result, we have accrued our portion of the estimated shortfalls through April 1, 2011, bringing the total accrual for our joint venture shortfall obligations to $6.0 million as of December 31, 2009. Due to uncertainty surrounding the joint venture’s ability to repay the shortfall loans, we concurrently impaired all accrued loans to the joint venture as of December 31, 2009. As of March 15, 2010, we have not yet provided any funding under either of these agreements. We expect to fund our $3.0 million share of shortfall liabilities under the Original Shortfall Funding Agreement during the first quarter of 2010, and the remaining $3.0 million amount through the period ending April 1, 2011. We do not believe our funding obligations related to the joint venture, if any, beyond April 1, 2011 are currently estimable and probable, therefore, we have not accrued for any potential obligations beyond the $6.0 million discussed above. However, our actual cash shortfall funding could exceed our estimate.
Our ability to honor our shortfall loan obligations under the Original Shortfall Funding Agreement and the 2010 Shortfall Funding Agreement is subject to compliance with restrictions under our senior credit facility and the indentures governing our senior notes. Based on the 2010 budget provided by joint venture management, and our forecast of total leverage and consolidated EBITDA during 2010 and 2011, we expect to have the capacity within these restrictions to provide shortfall funding under the 2010 Shortfall Funding Agreement in proportion to our approximately 20 percent economic interest in the joint venture through the April 1, 2011 expiration of the 2010 Shortfall Funding Agreement. However, there can be no assurance that we will have the capacity to provide such funding. If we are required to fund a portion of a shortfall loan, we plan to use our available cash balances or available borrowings under our credit facility. In addition, if the joint venture experiences further cash shortfalls beyond April 1, 2011, we may decide to fund such cash shortfalls, or to fund such shortfalls through further loans or equity contributions to the joint venture. If we are unable to make payments under the Original Shortfall Funding Agreement or the 2010 Shortfall Funding Agreement, the joint venture may be unable to fund interest obligations under the GECC Note, resulting in an event of default.
An event of default under the GECC Note will occur if the joint venture fails to make any scheduled interest payment within 90 days of the date due and payable, or to pay the principal amount on the maturity date. If the joint venture fails to pay interest on the GECC Note, and neither NBC Universal nor we make a shortfall loan to fund the interest payment within 90 days of the date due and payable, an event of default would occur and GECC could accelerate the maturity of the entire amount due under the GECC Note. Other than the acceleration of the principal amount upon an event of default, prepayment of the principal of the note is prohibited unless agreed upon by both NBC Universal and us. Upon an event of default under the GECC Note, GECC’s only recourse is to the joint venture, our equity interest in the joint venture and, after exhausting all remedies against the assets of the joint venture and the other equity interests in the joint venture, to LIN TV pursuant to its guarantee of the GECC Note.
Under the terms of its guarantee of the GECC Note, LIN TV would be required to make a payment for an amount to be determined upon occurrence of the following events: a) there is an event of default; b) neither NBC Universal or us remedy the default; and c) after GECC exhausts all remedies against the assets of the joint venture, the total amount realized upon exercise of those remedies is less than the $815.5 million principal amount of the GECC Note. Upon the occurrence of such events, the amount owed by LIN TV to GECC pursuant to the guarantee would be calculated as the difference between i) the total amount at which the joint venture’s assets were sold and ii) the principal amount and any unpaid interest due under the GECC Note. As of December 31, 2009, we estimate the fair value of the television stations in the joint venture to be approximately $366 million less than the outstanding balance of the GECC note of $815.5 million.
Although we believe the probability is remote that there would be an event of default and therefore an acceleration of the principal amount of the GECC Note during 2010, there can be no assurances that such an event of default will not occur. There are no financial or similar covenants in the GECC Note and, since both NBC Universal and we have agreed to fund interest payments through April 1, 2011 if the joint venture is unable to do so, NBC Universal and we are able to control the occurrence of a default under the GECC Note.
If an event of default occurs under the GECC Note, LIN TV, which conducts all of its operations through its subsidiaries, could experience material adverse consequences, including:
·
GECC, after exhausting all remedies against the joint venture, could enforce its rights under the guarantee, which could cause LIN TV to determine that LIN Television should seek to sell material assets owned by it in order to satisfy LIN TV’s obligations under the guarantee;
·
GECC’s initiation of proceedings against LIN TV under the guarantee could result in a change of control or other material adverse consequences to LIN Television, which could cause an acceleration of LIN Television’s credit facility and other outstanding indebtedness; and
·
if the GECC Note is prepaid because of an acceleration on default or otherwise, we would incur a substantial tax liability of approximately $273.6 million related to our deferred gain associated with the formation of the joint venture, exclusive of any potential NOL utilization.
On December 3, 2009, General Electric Corporation (“GE”), which wholly owns GECC, and Comcast Corporation (“Comcast”) announced a definitive agreement to form a joint venture that will be 51 percent owned by Comcast, 49 percent owned by GE and managed by Comcast. The proposed joint venture will include NBC Universal. As of March 15, 2010, the proposed transaction is undergoing regulatory review and it is not certain whether or when the transaction will receive the approvals required to close. Furthermore, assuming the transaction is completed, we cannot predict the effect the joint venture between Comcast and GE may have on our joint venture with NBC Universal.
Litigation
We are currently and from time-to-time involved in litigation incidental to the conduct of our business. In the opinion of our management, such litigation as of December 31, 2009 is not likely to have a material adverse effect on our financial position, results of operations or cash flows.
Note 15 - Income Taxes
The income (loss) before income taxes was solely from domestic operations. The provision for (benefit from) income taxes consist of the following (in thousands):
The following table reconciles the amount that would be calculated by applying the 35% federal statutory rate to income (loss) before income taxes to the actual provision for (benefit from) income taxes (in thousands):
The components of the net deferred tax liability are as follows (in thousands):
We maintain a valuation allowance related to our deferred tax asset position when management believes it is more likely than not that the net deferred tax assets will not be realized in the future. Our valuation allowance was $51.0 million as of December 31, 2009, which represents a decrease of $1.3 million for the year ended December 31, 2009. This decrease is primarily attributable to additional taxable income generated and corresponding utilization of prior year net operating losses that were subject to a valuation allowance. Components of our valuation allowance were:
·
federal net operating loss carryforwards of $31.4 million;
·
state net operating loss carryforwards of $10.1 million;
·
state deferred tax assets of $0.8 million recorded in connection with the acquisitions of stations in 2005 and 2006; and
·
state deferred tax assets of $8.7 million related to the impairment of the broadcast licenses and goodwill.
At December 31, 2009, we had federal net operating loss carryforwards of approximately $328.6 million that begin to expire in 2021. Additionally, we had state net operating loss carryforwards that vary by jurisdiction (tax effected, net of federal benefit) of approximately $10.1 million, expiring through 2029.
We recorded no amounts related to uncertain tax positions for the years ended December 31, 2009, 2008 and 2007. We file a consolidated federal income tax return and we file numerous other consolidated and separate income tax returns in U.S. state jurisdictions. Tax years 2005-2008 remain open to examination by major taxing jurisdictions.
Note 16 - Accrued Expenses
Accrued expenses consisted of the following (in thousands):
Note 17 - Subsequent Events
Joint Venture with NBC Universal:
On March 9, 2010, because of anticipated future debt service shortfalls at the NBC joint venture, NBC Universal and we entered into the 2010 Shortfall Funding Agreement. For further information on the 2010 Shortfall Funding Agreement see Note 14 - “Commitments and Contingencies”.
Note 18 -Unaudited Quarterly Data
(1)
Includes an impairment charge of $39.9 million, including $37.2 million impairment to the carrying value of our broadcast licenses and $2.7 million impairment to the carrying values of our goodwill.
(2)
Includes the results of operations of Banks Broadcasting.
(3)
Includes an out of period adjustment for a gain on the exchange of equipment of $0.9 million and $0.5 million in operating income and income from continuing operations, respectively, that should have been recorded in third quarter of 2009. We concluded this amount was immaterial to our financial statements as of September 30, 2009 and have corrected the item as an out of period adjustment.
(1)
Includes an impairment charge of $297.0 million, including $185.7 million impairment to the carrying value of our broadcast licenses and $111.3 million impairment to the carrying values of our goodwill.
(2)
Includes an impairment charge of $732.2 million, including $413.9 million impairment to the carrying value of our broadcast licenses, $309.6 million impairment to the carrying values of our goodwill and $8.7 million for the write-off of certain broadcast assets that have become obsolete as a result of the DTV transition.
(3)
Includes the result of operations of Banks Broadcasting.
Note 19 - Supplemental Disclosure of Cash Flow Information
On May 27, 2009, the FCC approved the transfer of the shares of 54 Broadcasting to Vaughan Media, LLC (“Vaughan Media”). 54 Broadcasting holds the FCC broadcast license to KNVA-TV in Austin, TX, for which we provide programming under a local marketing agreement. On July 27, 2009, we assigned our option to purchase the shares of 54 Broadcasting to Vaughan Media, which acquired the stock of 54 Broadcasting on July 27, 2009. Pursuant to the settlement agreement we reached on March 2, 2009 with the former shareholders of 54 Broadcasting, as a result of a complaint filed against us and Vaughan Media by 54 Broadcasting alleging that our assignment and subsequent exercise were not valid, on the date of the closing of this transfer, we made a payment of $6.0 million to 54 Broadcasting prior to Vaughan Media’s exercise of the option to purchase the shares of 54 Broadcasting. We incurred approximately $1.7 million of legal and other expenses associated with the consummation of this transaction.
Note 20 - Valuation and Qualifying Accounts
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of LIN Television Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of LIN Television Corporation and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control over Financial Reporting, management has excluded RMM from its assessment of internal control over financial reporting as of December 31, 2009 because it was acquired by the Company in a purchase business combination on October 2, 2009. We have also excluded RMM from our audit of internal control over financial reporting. RMM is an operating division of Primeland, Inc., a wholly owned subsidiary of LIN Television Corporation, whose total assets and total revenues represent 1% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2009.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
March 15, 2010
LIN Television Corporation
Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
LIN Television Corporation (“LIN Television”), together with its subsidiaries, is a television station group operator in the United States. LIN Television and its subsidiaries are affiliates of HM Capital Partners LLC (“HMC”). In these notes, the terms “Company,” “LIN Television,” “we,” “us” or “our” mean LIN Television Corporation and all subsidiaries included in our consolidated financial statements. LIN Television is a wholly-owned subsidiary of LIN TV Corp. ("LIN TV").
All of the consolidated wholly-owned subsidiaries of LIN Television fully and unconditionally guarantee the Company’s Senior Credit Facility, 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B on a joint-and-several basis.
Our consolidated financial statements reflect the operations of the Puerto Rico stations and the operations, assets and liabilities of Banks Broadcasting, Inc. (“Banks Broadcasting”) as discontinued for all periods presented. The assets and liabilities of Banks Broadcasting are shown as discontinued effective September 30, 2007 and our Puerto Rico stations were sold in 2007 (See Note 3 - “Discontinued Operations” for further discussion of our discontinued operations.)
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. Certain changes in classifications have been made to the prior period financial statements to conform to the current financial statement presentation. Our significant accounting policies are described below.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
Financial Condition
We have experienced significant operating losses since our inception and we have a stockholders’ deficit as of December 31, 2009. The economic downturn and credit crisis had a significant impact on the demand for advertising within the markets in which our stations operate. Based on our projections for 2010, which we believe use reasonable assumptions regarding the current economic environment, we estimate that cash flows from our operations, together with cash available under our revolving credit facility, will be sufficient to fund our cash requirements over the next 12 months, including scheduled interest and required principal payments on our outstanding indebtedness and planned capital expenditures and projected working capital needs. In addition, based on our projections, we believe that we will remain in compliance with the financial covenants in our credit agreement over the next four quarters. We cannot assure, however, that our projections will be realized and actual results may differ materially.
Our operating plan for the next 12 months requires that we generate cash from operations, utilize available borrowings, and make certain repayments of indebtedness, including mandatory repayments of term loans under our credit facility. Our ability to borrow under our revolving credit facility is contingent on our compliance with certain financial covenants, which are measured, in part, by the level of earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) we generate from our operations. During the six months ended June 30, 2009, we experienced declines in revenues compared to the same periods in 2008, which were in excess of our original 2009 plan. As a result, and to address continued compliance with the financial covenants in our credit agreement, on July 31, 2009 we entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent, and banks and financial institutions party thereto. Our ability to sustain compliance with the Amended Credit Agreement requires, during 2010, a reduction in our consolidated leverage ratio and our consolidated senior leverage ratio, and an increase in our consolidated interest coverage ratio, as more fully described in Note 7 - “Debt”.
Our joint venture with NBC Universal has been adversely impacted by the current economic downturn. The joint venture distributed no cash to NBC Universal and us during the year ended December 31, 2009 and used approximately $14.9 million of the existing debt service cash reserves, leaving approximately $0.2 million available.
In light of the adverse effect of the economic downturn on the joint venture’s operating results, in 2009 we entered into the Original Shortfall Funding Agreement with NBC Universal, which provided that: a) we and NBC waived the requirement that the joint venture maintain debt service reserve cash balances of at least $15 million; b) the joint venture would use a portion of its existing debt service reserve cash balances to fund interest payments in 2009; c) NBC agreed to defer its receipt of 2008 and 2009 management fees; and d) we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2010, we and NBC Universal would each provide the joint venture with a shortfall loan on the basis of our percentage of economic interest in the joint venture. As of March 15, 2010, we have not yet provided any funding under the Original Shortfall Funding Agreement.
Because of anticipated future shortfalls at the joint venture, on March 9, 2010, NBC Universal and we entered into the 2010 Shortfall Funding Agreement covering the period through April 1, 2011. Under the terms of the 2010 Shortfall Funding Agreement: a) the joint venture may continue to access any portion of its existing debt service reserve cash balances to fund interest payments; b) NBC will continue to defer the payment of 2008 and 2009 management fees and defer payment of 2010 management fees through March 31, 2011; and c) we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2011, we and NBC Universal would each provide the joint venture with a shortfall loan on the basis of our percentage of economic interest in the joint venture.
As of December 31, 2009, we have accrued $6.0 million for our probable and estimable obligations under these agreements, and due to uncertainity surrounding the joint venture's ability to repay the shortfall loans, concurrent with the recognition of these liabilities we have impaired the loans, resulting in a $6.0 million charge recognized in share of loss (income) in equity investments in our consolidated statement of operations for the year ended December 31, 2009. For further details on the timing of debt service shortfalls and our recognition of liabilities under both the Original Shortfall Funding Agreement and the 2010 Shortfall Funding Agreement see Note 14 - “Commitments and Contingencies”.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of our Company and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated. We conduct our business through our subsidiaries and have no operations or assets other than our investment in our subsidiaries and equity-method investments. We operate in one reportable segment.
Our 50 percent interest in the Banks Broadcasting joint venture was consolidated in our financial statements effective March 31, 2004 because we were the primary beneficiary of this variable interest entity (see Note 3 - “Discontinued Operations” for further discussion of Banks Broadcasting).
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the notes thereto. Our actual results could differ from these estimates. Estimates are used when accounting for the collectability of receivables, valuation of intangible assets, equity investments, deferred tax valuation allowances, amortization and valuation of program rights, stock-based compensation, pension costs, barter transactions and net assets of businesses acquired.
Cash and cash equivalents
Cash equivalents consist of highly liquid, short-term investments that have an original maturity of three months or less when purchased. Our excess cash is invested primarily in short-term U.S. Government securities and money market funds. We had no material losses on our cash or cash equivalents during fiscal 2009. All available cash is on deposit with banking institutions that we believe to be financially sound. We maintain a $2.0 million compensating balance related to a line of credit with one of our creditors, which has been classified as restricted cash in our consolidated balance sheet.
Property and equipment
Property and equipment is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the assets, an average of 30 to 40 years for buildings and fixtures, and 3 to 15 years for broadcast and other equipment. Upon retirement or other disposition, the cost and related accumulated depreciation of the assets are removed from the accounts and the resulting gain or loss is included in consolidated net income or loss. Expenditures for maintenance and repairs, including expenditures for planned major maintenance activities, are expensed as incurred. We review our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Nonmonetary exchanges
We exchange productive assets, such as broadcast equipment, with third parties through nonmonetary exchanges. We recognize gains or losses on nonmonetary exchanges in an amount equal to the difference between the fair value of the assets received and the fair value of the assets surrendered.
Equity investments
Equity investments that we do not have a controlling interest in are accounted for using the equity method. Our share of the net loss or income for these investments, including any equity investment impairments, is included in share of loss (income) from equity investments on our consolidated statement of operations. We review our interest in our equity investments for impairment if there is a series of operating losses or other factors that may indicate that there is a decrease in the value of our investment that is other than temporary.
Revenue recognition
We recognize advertising and other program-related revenue during the period in which advertising or programs are aired on our television stations or carried by our Internet web sites or the web sites of our advertiser network. We recognize retransmission consent fees in the period in which these services are performed.
Barter transactions
We account for barter transactions at the fair value of the goods or services we receive from our customers, or the advertising time provided, whichever is more clearly indicative of fair value based on the judgment of our management. We record barter advertising revenue at the time the advertisement is aired and barter expense at the time the goods or services are used. We account for barter programs at fair value based on a calculation using the actual cash advertisements we sell within barter programs multiplied by one minus the program profit margin for similar syndicated programs where we pay cash to acquire the program rights. We record barter program revenue and expense when we air the barter program. We do not record barter revenue or expenses related to network programs. Barter revenue and expense included in the consolidated statements of operations are as follows (in thousands):
Advertising expense
Advertising costs are expensed as incurred. We incurred advertising costs in the amounts of $3.2 million, $5.5 million and $6.1 million in the years ended December 31, 2009, 2008 and 2007, respectively.
Intangible assets
Intangible assets primarily include broadcast licenses, network affiliations, customer relationships, acquired internal use software, non-compete agreements and goodwill.
We test the impairment of our broadcast licenses annually or whenever events or changes in circumstances indicate that such assets might be impaired. The impairment test consists of a comparison of the fair value of broadcast licenses with their carrying amount on a station-by-station basis using a discounted cash-flow valuation method, assuming a hypothetical start-up scenario. The future value of our broadcast licenses could be significantly impaired by the loss of the corresponding network affiliation agreements. Accordingly, such an event could trigger an assessment of the carrying value of a broadcast license.
We test the impairment of goodwill annually or whenever events or changes in circumstances indicate that goodwill might be impaired. The first step of the goodwill impairment test compares the fair value of a station with its carrying amount, including goodwill. The fair value of a station is determined through the use of a discounted cash flow analysis. The valuation assumptions used in the discounted cash flow model reflect historical performance of the station and prevailing values in the markets for broadcasting properties. If the fair value of the station exceeds its carrying amount, goodwill is not considered impaired. If the carrying amount of the station exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by performing a hypothetical purchase price allocation, using the station’s fair value (as determined in step one) as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment charge is recognized in an amount equal to that excess, but not more than the carrying value of the goodwill. An impairment assessment could be triggered by a significant reduction, or a forecast of such reductions, in operating results or cash flows at one or more of our television stations, a significant adverse change in the national or local advertising marketplaces in which our television stations operate, or by adverse changes to Federal Communications Commission (“FCC”) ownership rules, among other factors. We recorded impairment charges during 2009 and 2008, which are more fully described in Note 6 - "Intangible Assets".
Long lived-assets
We periodically evaluate the net realizable value of long-lived assets, including tangible and intangible assets, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. Impairment in the carrying value of an asset is recognized when the expected future operating cash flow derived from the asset is less than its carrying value.
Program rights
Program rights are recorded as assets when the license period begins and the programs are delivered to our stations for broadcasting, at the gross amount of the related obligations. Costs incurred in connection with the purchase of programs to be broadcast within one year are classified as current assets, while costs of those programs to be broadcast subsequently are considered non-current. The program costs are charged to operations over their estimated broadcast periods using the straight-line method.
If the projected future net revenues associated with a program are less than the current carrying value of the program rights (i.e. due to poor ratings), we would be required to write-down the program rights assets to equal the amount of projected future net revenues. If the actual usage of the program rights is on a more accelerated basis than straight-line over the life of the contract, we would be required to write-down the program rights to equal the lesser of the amount of projected future net revenues or the average revenue per run multiplied by the number of remaining runs. We recorded no impairments to our program rights during 2009, 2008 or 2007.
Program obligations are classified as current or non-current in accordance with the payment terms of the license agreement.
Stock-based compensation
At December 31, 2009, LIN TV had three stock-based employee compensation plans, which are described more fully in Note 8 - “Stock-Based Compensation”. We estimate the fair value of stock-based awards using a Black-Scholes valuation model. The Black-Scholes model requires us to make assumptions and judgments about the variables used in the calculation, including the option’s expected life, the price volatility of the underlying stock and the number of stock-based awards that are expected to be forfeited. The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. Price volatility is based on historical trends for our class A common stock and the common stock of peer group companies engaged in the broadcasting business. Expected forfeitures are estimated using our historical experience. If future changes in estimates differ significantly from our current estimates, our future stock-based compensation expense and results of operations could be materially impacted.
The following table presents the stock-based compensation expense included in the consolidated statements of operations (in thousands):
Income taxes
Deferred income taxes are recognized based on temporary differences between the financial statement and the tax basis of assets and liabilities using statutory tax rates in effect in the years in which the temporary differences are expected to reverse. A valuation allowance is applied against net deferred tax assets if it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized. When accounting for uncertainty in income taxes we follow the prescribed recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more-likely than not to be sustained upon examination by taxing authorities.
We recognize interest and penalties related to uncertain tax positions as a component of income tax expense.
Concentration of credit risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, investments and trade receivables. Concentration of credit risk with respect to cash and cash equivalents and investments are limited as we maintain primary banking relationships with only large nationally recognized institutions. We evaluated the viability of these institutions as of December 31, 2009 and we believe our risk is minimal. Credit risk with respect to trade receivables is limited, as the trade receivables are primarily related to advertising revenues generated from a large diversified group of local and nationally recognized advertisers and advertising agencies. We do not require collateral or other security against trade receivable balances, however, we do maintain reserves for potential bad debt losses, which are based on historical bad debt write-offs, and such reserves and bad debts have been within management’s expectations for all years presented.
Additionally, management performs a quarterly assessment of the critical terms of the interest rate hedge including, among other matters, an assessment of the counterparties’ creditworthiness. Based on our assessment at December 31, 2009, we do not believe there is a significant risk associated with the creditworthiness of our interest rate hedge counterparty.
If we incur additional indebtedness or amend or replace our current indebtedness, current volatility within the credit markets may impact our ability to refinance our debt or to refinance our debt on terms similar to our existing debt agreements.
Fair value of financial instruments
Certain financial instruments, including cash and cash equivalents, investments, accounts receivable and accounts payable are carried in the consolidated financial statements at amounts that approximate fair value. For certain financial assets and liabilities recorded at fair value on a recurring basis we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. For more information on our assets and liabilities measured at fair value using the prescribed three level fair value hierarchy see Note 9 - "Fair Value Measurement".
Derivative financial instruments
Derivatives are required to be recorded as assets or liabilities and measured at fair value. Gains or losses resulting from changes in the fair values of derivatives are recognized immediately or deferred, depending on the use of the derivative and whether or not it qualifies as a hedge. We presently use derivative financial instruments in the management of our interest rate exposure for our long-term debt, principally our credit facility. We do not use derivative financial instruments for trading purposes.
Retirement plans
We have a defined benefit retirement plan covering certain of our employees. Our pension benefit obligations and related costs are calculated using prescribed actuarial concepts. Additionally, we record the unfunded status of our plan on our consolidated balance sheet.
Recently issued accounting pronouncements
In December 2009, the FASB issued ASU 2009-17 “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”). ASU 2009-17 is effective for interim and annual reporting periods beginning after November 15, 2009. ASU 2009-17 amends the Codification to include the amendments prescribed by Financial Accounting Standard (“FAS”) 167, “Amendments to FASB Interpretation No. 46(R)”, which amends certain guidance in FIN 46(R) to eliminate the exemption for special purpose entities, require a new qualitative approach for determining who should consolidate a variable interest entity and change the requirement for when to reassess who should consolidate a variable interest entity. We adopted ASU 2009-17 effective January 1, 2010, and it did not have a material impact on our financial position or results of operations.
In December 2009, the FASB issued ASU 2009-15 “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets” (“ASU 2009-15”). ASU 2009-15 is effective for interim and annual reporting periods beginning after November 15, 2009 and must be applied to transfers occurring on or after the effective date. ASU 2009-15 amends the Codification to include the amendments prescribed by FAS 166 “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140”, which clarifies that the objective of paragraph 9 of Statement 140 is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. We adopted FAS 166 effective January 1, 2010, and it did not have a material impact on our financial position or results of operations.
In October 2009, the FASB issued ASU 2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force” (“ASC 605-25”). ASC 605-25 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. ASC 605-25 addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. We plan to adopt ASC 605-25 effective January 1, 2011, and we do not expect it to have a material impact on our financial position or results of operations.
In August 2009, the FASB issued ASU 2009-05 “Measuring Liabilities at Fair Value” (“ASC 820-10”). ASC 820-10 is effective for the first reporting period, including interim periods, beginning after issuance. ASC 820-10 clarifies the application of certain valuation techniques in circumstances in which a quoted price in an active market for the identical liability is not available and clarifies that when estimating the fair value of a liability, the fair value is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. ASC 820-10 became effective for us on October 1, 2009. We adopted ASC 820-10 effective September 30, 2009, and it did not have a material impact on our financial position or results of operations.
In April 2009, the FASB issued ASC 825-10, “Interim Disclosures about Fair Value of Financial Instruments” (“ASC 825-10”), which requires public entities to disclose in their interim financial statements the fair value of all financial instruments within the scope of FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments”, as well as the method(s) and significant assumptions used to estimate the fair value of those financial instruments. The adoption of ASC 825-10 had no impact on our financial position or results of operations.
Also in April 2009, the FASB issued ASC 320-10, “Recognition and Presentation of Other-Than-Temporary Impairments” (“ASC 320-10”), to change the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of an impairment charge to be recorded in earnings. ASC 320-10 also requires enhanced disclosures, including the Company’s methodology and key inputs used for determining the amount of credit losses recorded in earnings. We adopted ASC 320-10 during the second quarter of 2009 and the adoption had no impact on our financial position or results of operations.
Effective January 1, 2009, the Company adopted ASC 805-10, “Business Combinations” (“ASC 805-10”). ASC 805-10 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; how the acquirer recognizes and measures the goodwill acquired in a business combination; and how the acquirer determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. We have applied the provisions of ASC 805-10 to our acquisition of RMM and the appropriate disclosures are included in Note 2 - “Acquisitions”.
In December 2008, the FASB issued ASC 715-10, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“ASC 715-20”). ASC 715-20 is effective for fiscal years ending after December 15, 2009. ASC 715-20 increases disclosure requirements related to an employer’s defined benefit pension or other postretirement plans. We adopted the provisions of ASC 715-10 by including the required additional financial statement disclosures as of December 31, 2009 in Note 11 - “Retirement Plans”. The adoption of ASC 715-10 had no impact on our financial position or results of operations.
In November 2008, the FASB issued ASC 605-25, “Revenue Arrangements with Multiple Deliverables” (“ASC 605-25”). ASC 605-25 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after December 31, 2009 and shall be applied on a prospective basis. Earlier application is permitted as of the beginning of a fiscal year. ASC 605-25 addresses some aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. We plan to adopt these aspects of ASC-605-25 effective January 1, 2010, and we do not expect it to have a material impact on our financial position or results of operations
Note 2 - Acquisitions
RMM
On October 2, 2009, we acquired Red McCombs Media, LP ("RMM"), an online advertising and media services company based in Austin, Texas. The acquisition provides us with a national interactive footprint and significantly expands our multi-platform offerings by providing national online advertising and enhanced services, including targeted display, rich media, video advertising, custom-built vertical channels, search engine marketing, search engine optimization, and mobile marketing. The acquisition was effected through the merger of RMM with and into Primeland Television, Inc., a wholly owned subsidiary of LIN Television, which subsequently changed its name to Primeland, Inc. ("Primeland").
The following table summarizes the final allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed in the acquisition:
As part of the merger consideration, LIN TV issued 933,610 shares of class A common stock, from shares held within treasury, to the former owners of RMM. The class A common stock was issued in a private placement transaction that was exempt from registration under the Securities Act of 1933, as amended. The number of shares of class A common stock issued by us to the sellers is subject to adjustment in the event that the value of the equity consideration is less than $4.5 million as of the six month anniversary of the acquisition. If the value of LIN TV's class A common stock as of the six-month anniversary of the acquisition is less than $4.5 million (such difference, the “Equity Value Shortfall Amount”), we are obligated, at our option to: a) issue to the sellers a number of additional shares of our class A common stock having a value as of the six-month anniversary of the acquisition, equal to the Equity Value Shortfall Amount; b) make a cash payment to the sellers in an amount equal to the Equity Value Shortfall Amount; or c) satisfy the Equity Value Shortfall Amount through any combination of the foregoing we determine appropriate. In the event that we choose to issue additional shares of LIN TV's class A common stock to the sellers to satisfy all or a portion of the Equity Value Shortfall Amount, a final adjustment will be made at the twelve month anniversary of the acquisition. In the event that the value of such shares as of the 12-month anniversary of the acquisition is less than or exceeds the Equity Value Shortfall Amount by at least $0.25 per share, we are required to make a cash payment to the sellers or the sellers are required to return shares to us. The merger consideration is also subject to customary adjustments for working capital and indemnification for claims against RMM related to the period prior to the merger.
As of the acquisition date, we classified the Equity Value Shortfall Amount as a current liability, and estimated the fair value to be $1.6 million, which is based on an option pricing model reflecting our assumptions about the value that market participants would place on this liability. Since October 2, 2009, the value of LIN TV's class A common stock has increased, and as a result the fair value of the Equity Value Shortfall Amount has decreased to $0.6 million as of December 31, 2009. Therefore, we recorded a gain in other, net of $1.0 million in our consolidated statement of operations for the year ended December 31, 2009. Under the terms of the merger agreement, our actual liability could range from zero to $4.5 million, depending on the fair value of LIN TV's class A common stock as of the six month and twelve month anniversary dates of the acquisition of April 2, 2010 and October 2, 2010, respectively.
In connection with the acquisition, we recognized $2.8 million of goodwill, all of which is amortizable for tax purposes. The goodwill primarily represents synergies between us and RMM that we expect to benefit from as a result of expanded distribution channels provided by RMM’s broad advertising network. Additionally, we recognized $6.6 million of other finite-lived intangible assets, all of which are amortizable for tax purposes, and are primarily comprised of advertiser relationships, completed technology and management non-compete agreements.
Additionally, in connection with the acquisition we entered into an incentive compensation arrangement with certain key members of management. The arrangement provides payments to those employees based on the EBITDA generated by RMM during 2012. Our liability under this arrangement could range from zero to $24.0 million, and is payable in 2013.
The following summarizes the activity in acquisition related restructuring liabilities for the year ended December 31, 2009 and 2008 (in thousands):
(1)
Adjustment for retirement benefits owed in connection with the Sunrise Television Corp. acquisition.
(2)
Adjustment to final payout of contract related to master control automation system related to KASA-TV.
Note 3 - Discontinued Operations
Our consolidated financial statements reflect the operations of the Puerto Rico stations and the operations, assets and liabilities of the Banks Broadcasting joint venture as discontinued for all periods presented.
Out-of-Period Adjustment
We discovered during the preparation of our 2007 financial statements a $3.1 million deferred tax liability, relating to an asset that had been fully-impaired for the six months ended June 30, 2006, had not been removed from our deferred tax liabilities as of June 30, 2006 nor was the benefit realized in our earnings for the six months ended June 30, 2006. The original asset to which the deferred tax liability related was a fair value adjustment of $7.7 million initially recorded at March 31, 2004, when we consolidated the broadcast licenses of Banks Broadcasting because we were the primary beneficiary of this variable interest entity.
We concluded that the effect of this $3.1 million adjustment was not material to the prior year. Accordingly, the 2006 financial statements were not revised. Instead, this adjustment of $3.1 million was recorded to the income (loss) from discontinued operations for the year ended December 31, 2007, since we reflected the operations of Banks Broadcasting as discontinued operations effective with the filing of our Form 10-Q for the period ended September 30, 2007.
Banks Broadcasting
On April 23, 2009, the Banks Broadcasting joint venture completed the sale of KNIN-TV, a CW affiliate in Boise, for $6.6 million to Journal Broadcast Corporation. As a result of the sale we received, on the basis of our economic interest in Banks Broadcasting, a distribution of $2.6 million during the year ended December 31, 2009. The operating loss for the year ended December 31, 2009 includes an impairment charge of $1.9 million to reduce the carrying value of broadcast licenses to fair value based on the final sale price of KNIN-TV of $6.6 million. Net loss included within discontinued operations for the year ended December 31, 2009 reflects our 50% share of net losses of the Banks Broadcasting joint venture, net of taxes, through the April 23, 2009 disposal date.
Following the sale of KNIN-TV on April 23, 2009, substantially all of the assets of the Banks Broadcasting joint venture had been liquidated.
During the years ended December 31, 2008 and 2007, Banks Broadcasting distributed $2.5 million and $2.0 million, respectively, in cash to us and we provided no capital contributions to Banks Broadcasting during the years ended December 31, 2009, 2008 and 2007. In March 2008, Banks Broadcasting sold certain of its 700 MHz spectrum licenses for $2.0 million in cash with a related gain of $1.4 million. Additionally, in July 2007, Banks Broadcasting sold the operating assets, including the broadcast license, of KSCW-TV, a CW affiliate in Wichita, to Sunflower Broadcasting, Inc. for $6.8 million of which $5.4 million was paid in cash at the closing and the remaining $1.4 million was held in escrow and released in July 2008. Our consolidated operating results for the third quarter of 2007 included a $0.5 million loss from the sale of KSCW-TV, net of an income tax benefit of $0.4 million.
Puerto Rico Operations (WAPA-TV, WJPX-TV and WAPA America)
On March 30, 2007, we sold our Puerto Rico operations to InterMedia Partners VII, L.P. for $131.9 million in cash and we recorded a gain on the sale of $22.7 million, net of income tax benefit, in our 2007 operating results.
The following presents summarized information for the discontinued operations as follows (in thousands):
Note 4 - Investments
Joint Venture with NBC Universal
We own a 20.38 percent interest in Station Venture Holdings, LLC (“SVH”), a joint venture with NBC Universal, and account for our interest using the equity method as we do not have a controlling interest. SVH wholly owns Station Venture Operations, LP (“SVO”), which is the operating company that manages KXAS-TV and KNSD-TV, the television stations that comprise the joint venture. The following presents the summarized financial information of SVH (in thousands):
(1)
Cash distributions from equity investments include proceeds of $12.6 million from the sale of broadcast towers for the year ended December 31, 2008.
(2)
See Note 14 - "Commitments and Contingencies" for further description of the General Electric Capital Corporation ("GECC") Note and LIN TV's guarantee of the GECC Note.
During the year ended December 31, 2009, we did not recognize our 20.38 percent share of SVH’s net loss, because the investment was written down to zero during the year ended December 31, 2008 as described below, and accordingly we suspended recognition of equity method gains and losses.
During the year ended December 31, 2009, we recognized a contingent liability of $6.0 million based on our estimate of amounts that we expect to loan to the SVH joint venture pursuant to the Original and 2010 Shortfall Funding Agreements with NBC Universal, as discussed further in Note 14 - “Commitments and Contingencies”. Because of uncertainty surrounding the joint venture’s ability to repay the shortfall loan, we concluded the loan was fully impaired during 2009. Accordingly, we recognized a charge of $6.0 million, which has been classified as share of loss (income) in equity investments during the year ended December 31, 2009 to reflect the impairment of the loan. As of March 15, 2010, we have not yet provided any funding under these agreements. However, as of March 15, 2010, this $6.0 million liability continues to reflect our best estimate of probable obligations under the Original Shortfall Funding Agreement and 2010 Shortfall Funding Agreement.
During the fourth quarter of 2008, due to the continued decline in operating profits of this joint venture, we determined that there was an other-than-temporary impairment in our investment in the joint venture with NBC Universal. As a result, and in the absence of the ability to recover our carrying amount of the investment, we recorded a loss of $53.6 million to write-off our equity investment in the joint venture, which is included in the share of loss (income) in equity investment in our consolidated statement of operations.
WAND(TV) Partnership
On November 1, 2007, we sold our 33.33% interest in WAND(TV) Partnership to a wholly-owned subsidiary of Block Communications, Inc. for $6.8 million in cash and recorded a gain of approximately $0.7 million.
Prior to the sale of WAND(TV) Partnership, we accounted for our 33.33% interest using the equity method, as we did not have a controlling interest. Our management services agreement with WAND(TV) Partnership, under which we provided specified management, engineering and related services for a fixed fee, was also terminated on November 1, 2007. Included in this agreement was a cash management arrangement under which we incurred expenditures on behalf of WAND(TV) Partnership and were periodically reimbursed.
The following presents the summarized financial information of the WAND(TV) Partnership (in thousands):
Note 5 - Property and Equipment
Property and equipment consisted of the following (in thousands):
We recorded depreciation expense of $30.4 million, $29.7 million and $30.8 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Under a Federal Communications Commission (“FCC”) order, we have been exchanging spectrum with Sprint Nextel, which has been used primarily to send news feeds via microwave back to the television studios and to send broadcast feeds to television transmission and tower sites, for new microwave digital equipment. During the years ended December 31, 2009, 2008 and 2007, we received $5.5 million, $4.6 million and $1.6 million, respectively, of equipment pursuant to this exchange. Additionally, during 2009, 2008 and 2007 we recognized a gain of $6.4 million, $0.9 million and zero related to this equipment, which is recorded in (gain) loss from asset dispositions in our consolidated statement of operations.
During 2008, we recorded a charge of $8.7 million for the write-off of certain broadcast assets that have become obsolete as a result of the DTV transition. The charge has been recorded in impairment of goodwill, broadcast licenses and broadcast equipment in our consolidated statement of operations.
Note 6 - Intangible Assets
The following table summarizes the carrying amount of each major class of intangible assets (in thousands):
(1)
These assets are fully amortized and therefore have no remaining useful life.
We recorded amortization expense of $0.6 million, $0.3 million and $2.0 million for the years ended December 31, 2009, 2008 and 2007. We recorded an impairment of our indefinite-lived intangible assets of $39.9 million and $1.0 billion for the years ended December 31, 2009 and 2008.
The following table summarizes the projected aggregate amortization expense for the next five years and thereafter (in thousands):
We recorded an impairment charge of $39.9 million during the second quarter of 2009 that included an impairment to the carrying values of our broadcast licenses of $37.2 million, relating to 26 of our television stations; and an impairment to the carrying values of our goodwill of $2.7 million, relating to two of our television stations. We tested our indefinite-lived intangible assets for impairment at June 30, 2009, between the required annual tests, because we believed events had occurred and circumstances changed that would more likely than not reduce the fair value of our broadcast licenses and goodwill below their carrying amounts. The need for an impairment analysis at June 30, 2009 was triggered by the continued decline in advertising revenue at certain of our stations in excess of our original plan, due to the ongoing effects of the economic downturn, that resulted in downward adjustments to their respective forecasts. There were no additional impairment charges recorded as of September 30, 2009 or December 31, 2009.
We recorded an impairment charge of $297.0 million during the second quarter of 2008 that included an impairment to the carrying values of our broadcast licenses of $185.7 million, relating to 19 of our television stations; and an impairment to the carrying values of our goodwill of $111.3 million, relating to 8 of our television stations. We tested our indefinite-lived intangible assets for impairment at June 30, 2008, between the required annual tests, because we believed events had occurred and circumstances changed that would more likely than not reduce the fair value of our broadcast licenses and goodwill below their carrying amounts. These events included: a) the continued decline of the price of our class A common stock; b) the decline in the current selling prices of television stations; c) the lower growth in advertising revenues; and d) the decline in the operating profit margins of some of our stations.
We recorded an additional impairment charge in the fourth quarter of 2008 of $723.5 million, including a goodwill impairment charge of $309.6 million, relating to 8 of our television stations and to the goodwill related to the NBC Universal joint venture, and an impairment charge to the carrying value of our broadcast licenses of $413.9 million, relating to 26 of our television stations. This was due to the continued economic recession that started in December 2007 and the resulting decline in advertising revenues.
There were no events during 2007 to warrant the performance of an interim impairment test of our indefinite-lived intangible assets. Additionally, there was no impairment charge recorded as of December 31, 2007.
The changes in the carrying amount of goodwill for the year ended December 31, 2009 and 2008, respectively, are as follows (in thousands):
The values of our goodwill and broadcast licenses measured at fair value on a nonrecurring basis during the year ended December 31, 2009 are as follows using the three-level fair value hierarchy established by FAS 157:
Note 7 - Long-term Debt
Debt consisted of the following (in thousands):
During the period January 1, 2009 to July 31, 2009, prior to the execution of the Amended Credit Agreement, borrowings under our credit facility bore an interest rate based on, at our option, either a) the LIBOR interest rate, or b) an interest rate that is equal to the greater of the Prime Rate or the Federal Funds Effective Rate plus ½ of 1 percent. In addition, the rate we selected also bore an applicable margin rate of 0.625% to 1.500%, depending on us achieving certain financial ratios. The unused portion of the revolving credit facility was subject to a commitment fee of 0.25% to 0.50% depending on us achieving certain financial ratios.
Amended Credit Agreement
On July 31, 2009, we entered into the Amended Credit Agreement, which provided that our aggregate revolving credit commitments remained at $225.0 million and our outstanding term loans remained at $69.9 million (as of July 31, 2009). The terms of the Amended Credit Agreement include, but are not limited to, modifications to certain financial covenants, including our consolidated leverage ratio, consolidated interest coverage ratio and consolidated senior leverage ratio, a general tightening of the exceptions to our negative covenants (principally by means of reducing the types and amounts of permitted transactions), an increase in the interest rates and fees payable with respect to borrowings under the Amended Credit Agreement, and the inclusion of certain collateral-related provisions, principally relating to the provision of account control agreements and mortgages with respect to certain real property that we own. Certain revised financial condition covenants, and other key terms, are as follows:
The Amended Credit Agreement revises the calculation of Consolidated Total Debt used in our consolidated leverage ratios to exclude the netting of cash and cash equivalents against total debt.
The credit facility permits us to prepay loans and to permanently reduce the revolving credit commitments, in whole or in part, at any time. We repaid $15.9 million of the term loans during 2009, all of which related to mandatory quarterly amortization payments.
On an annual basis following the delivery of our year-end financial statements, the Amended Credit Agreement requires mandatory prepayments of principal of the term loans, as well as a permanent reduction in revolving credit commitments, based on a computation of excess cash flow for the preceding fiscal year, as more fully set forth in the Amended Credit Agreement. In addition, the Amended Credit Agreement restricts the use of proceeds from asset sales or from the issuance of debt (with the result that such proceeds, subject to certain exceptions, must be used for mandatory prepayments of principal and permanent reductions in revolving credit commitments), and includes a cash ceiling, which requires that LIN Television utilize unrestricted cash and cash equivalent balances in excess of $12.5 million to prepay principal amounts outstanding, but not permanently reduce capacity, under our revolving credit facility.
Borrowings under our credit facility bear an interest rate based on, at our option, either a) the LIBOR interest rate, or b) the ABR rate, which is an interest rate that is equal to the greatest of (i) the Prime Rate, (ii) the Federal Funds Effective Rate plus ½ of 1 percent, and (iii) the one-month LIBOR rate plus 1%. In addition, the rate we select also bears an applicable margin rate of 3.750% or 2.750% for LIBOR based loans and ABR rate loans, respectively. Lastly, the unused portion of the revolving credit facility is subject to a commitment fee of 0.750% depending on our consolidated leverage ratio.
Our revolving credit facility may be used for working capital and general corporate purposes. For example, during the year ended December 31, 2009, we used $66 million under this facility to purchase a portion of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B and we used approximately $12 million under this facility to partially fund interest payments related to these remaining outstanding notes.
The following table summarizes certain key terms of our credit facility (in thousands):
(1)
As of March 15, 2010, the unused balance of the revolving credit facility was $34.0 million.
(2)
Weighted average rate for loans outstanding as of December 31, 2009.
(3)
The outstanding loans as of December 31, 2009 include LIBOR based loans, which have an applicable margin of 3.75%.
We are required, under the terms of the credit facility, to comply with specified financial ratio covenants, including maximum leverage ratios and a minimum interest coverage ratio. As of December 31, 2009, we were in compliance with all of the covenants under our credit facility.
The credit facility also contains provisions that prohibit any modification of the indentures governing our senior subordinated notes in any manner adverse to the lenders and that limits our ability to refinance or otherwise prepay our senior subordinated notes without the consent of such lenders.
6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B
The 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B are unsecured and are subordinated in right of payment to all senior indebtedness, including our credit facility.
The indentures governing the 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B contain covenants limiting, among other things, the incurrence of additional indebtedness and issuance of capital stock; layering of indebtedness; the payment of dividends on, and redemption of, our capital stock; liens; mergers, consolidations and sales of all or substantially all of our assets; asset sales; asset swaps; dividend and other payment restrictions affecting restricted subsidiaries; and transactions with affiliates. The indentures also have change of control provisions which may require our Company to purchase all or a portion of each of the 6½% Senior Subordinated Notes and the 6½% Senior Subordinated Notes - Class B at a price equal to 101% of the principal amount of the notes, together with accrued and unpaid interest. The 6½% Senior Subordinated Notes and the 6½% Senior Subordinated Notes - Class B have certain limitations and financial penalties for early redemption of the notes.
During 2008, we commenced a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to purchase a portion of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B at market prices using available balances under our revolving credit facility and available cash balances. During the year ended December 31, 2009, we purchased a total principal amount of $79.7 million and $42.0 million of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B, respectively, under this plan. The total purchase price for the transactions was $68.4 million, resulting in a gain on extinguishment of debt of $50.1 million, net of a write-off of deferred financing fees and discount related to the notes of $1.3 million and $1.9 million, respectively. Including the amounts purchased during 2008, we have purchased a total notional amount of $147.8 million of such notes for an aggregate purchase price of approximately $80.7 million.
RMM Notes
In connection with the acquisition of RMM as further described in Note 2 - “Acquisitions”, LIN Television issued a $2.0 million unsecured promissory note to McCombs Family Partners, Ltd. (the “LIN-RMM Note”), and a subsidiary of LIN Television also assumed $1.7 million of RMM's existing secured indebtedness to McCombs Family Partners, Ltd. (the “RMM Note”) and a $1.0 million unsecured promissory note to a financial institution (the “RMM Bank Note”).
The following table summarizes the material terms of each of these notes:
Repayment of Principal
The following table summarizes future principal repayments on our debt agreements (in thousands):
(1)
The above table excludes any pay-down of our term loans with proceeds from previous asset sales that have not been reinvested within one-year after such sales.
(2)
Debt incurred and assumed upon the acquisition of RMM on October 2, 2009.
The fair values of our long-term debt are estimated based on quoted market prices for the same or similar issues, or based on the current rates offered to us for debt of the same remaining maturities. The carrying amounts and fair values of our long-term debt were as follows (in thousands):
Note 8 - Stock-Based Compensation
We have several stock-based employee compensation plans, including LIN TV's 1998 Option Plan, the Amended and Restated 2002 Stock Plan and the Third Amended and Restated 2002 Non-Employee Director Stock Plan (collectively, the “Option Plans”), which permit us to grant non-qualified options in LIN TV's class A common stock or restricted stock units, which convert into LIN TV's class A common stock upon vesting, to certain directors, officers and key employees of our Company.
The following table presents the stock-based compensation expense included in our consolidated statements of operations as follows (in thousands):
We recognized stock-based compensation expense (income) related to modifications to our stock option agreements of $0.6 million, $9 thousand and $(0.3) million for the years ended December 31, 2009, 2008 and 2007, respectively. The modifications impacted 257 employees in 2009 and 11 employees in each of 2008 and 2007. We expect to record an additional $1.5 million of expense related to the modification completed during 2009 over the remaining vesting period of the new grants. We expect no further charges for the modifications prior to 2009. These modifications related to the following:
·
On June 2, 2009, we completed an exchange offer which enabled employees and non-employee directors to exchange some or all of their outstanding options to purchase shares of LIN TV's class A common stock, for new options to purchase shares of LIN TV's class A common stock, on a one for one basis. A total of 257 employees participated in the exchange, in which options to purchase an aggregate of 2,931,285 shares of LIN TV's class A common stock were exchanged. The new options have an exercise price of $1.99 per share, equal to the closing price per share of LIN TV's class A common stock on June 2, 2009. The new stock options vest ratably over three years.
·
Under our 1998 plan certain employee option agreements were eligible for make-whole payments when these employees exercised their options and the market price of LIN TV's class A common stock was below $1.00. We recorded stock-based compensation expense (income) of $9 thousand and $(0.3) million related to this modification for the years ended December 31, 2008 and 2007, respectively. We made payments to employees that related to this provision of $0.4 million and $0.2 million for the years ended December 31, 2008 and 2007.
We did not capitalize any stock-based compensation for the years ended December 31, 2009, 2008 and 2007.
We have not yet recognized compensation expense relating to our unvested employee stock options and stock awards of $7.8 million in the aggregate, which will be recognized over a weighted-average future period of approximately 1.62 to 3.45 years.
During the year ended December 31, 2009, we received no proceeds from the exercise of stock options.
Stock Option Plans
Options granted under the stock option plans generally vest over a three or four-year service period, using the graded vesting attribution method. Options expire ten years from the date of grant. We issue new shares of LIN TV's class A common stock when options are exercised. There were 6,655,000 shares authorized for grant under the various Option Plans and 1,382,000 shares available for future grant as of December 31, 2009. Both the shares authorized and shares available exclude 1,553,000 shares under the 1998 Stock Plan, which we do not intend to re-grant and consider unavailable for future grants.
The following table provides additional information regarding our Option Plans for the year ended December 31, 2009 as follows (in thousands, except per share data):
The following table summarizes information about our Option Plans at December 31, 2009 (in thousands, except per share data):
The intrinsic value in the table above represents the total pre-tax intrinsic value, based on our closing price as of December 31, 2009, which would have been received by the option holders had all option holders exercised their options and immediately sold their shares on that date. We estimate the fair value of stock options, when new options are granted or when existing option grants are modified, using a Black-Scholes valuation model. The fair value of each option grant is estimated on the date of grant or modification, based on a single employee group and the graded vesting approach, using the following assumptions:
(1)
The expected term was estimated using the historical and expected terms of similar broadcast companies whose information was publicly available, as our exercise history does not provide a reasonable basis to estimate expected term.
(2)
The stock volatility for each grant is measured using the weighted-average of historical daily price changes of LIN TV's common stock since LIN TV's initial public offering in May 2002, as well as comparison to peer companies.
(3)
The risk-free interest rate for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life.
Restricted Stock Awards
We granted 591,500 and 437,000 shares of restricted stock to employees and directors for the years ended December 31, 2009 and 2008, respectively. We granted no restricted stock awards during 2007. Stock granted to directors in lieu of director fees are immediately vested. As of December 31, 2009, 1,053,000 shares of restricted stock were unvested.
The following table provides additional information regarding the restricted stock awards for the year ended December 31, 2009 (in thousands, except per share data):
The following table provides further information for both our restricted stock and stock option awards (in thousands):
Note 9 - Fair Value Measurement
We record the fair value of certain financial assets and liabilities on a recurring basis. The following table summarizes the financial assets and liabilities measured at fair value in the accompanying financial statements using the prescribed three-level fair value hierarchy as of December 31, 2009 and 2008 (in thousands):
The following table details the change in fair value of our Level 3 liability for the year ended December 31, 2009:
The fair value of interest rate hedge is determined based on the present value of future cash flows using observable inputs, including interest rates associated with a similar financial instrument using a series of three-month LIBOR-based loans through November 4, 2011. With respect to the deferred compensation plan, the fair value of deferred compensation is determined based on the fair value of the investments selected by employees.
The fair value of the Equity Value Shortfall Amount, described further in Note 2 -“Acquisitions” is determined based on an option pricing model reflecting our assumptions about the value that market participants would place on this liability. As of the October 2, 2009 acquisition date of RMM, the estimated fair value was $1.6 million. Since October 2, 2009, the value of LIN TV's class A common stock has increased and as a result the fair value of the Equity Value Shortfall Amount has decreased to $0.6 million as of December 31, 2009. Therefore, we recorded a gain in other, net of $1.0 million in our consolidated statement of operations for the year ended December 31, 2009.
During the second quarter of 2006, we entered into a contract to hedge a notional amount of the declining balances of our term loans (“2006 interest rate hedge”). The interest payments under our credit facility term loans are based on LIBOR plus an applicable margin rate. To mitigate changes in our cash flows resulting from fluctuations in interest rates, we entered into the 2006 interest rate hedge that effectively converted the floating LIBOR rate-based-payments to fixed payments at 5.33% plus the applicable margin rate calculated under our credit facility. We designated the 2006 interest rate hedge as a cash flow hedge. The fair value of the 2006 interest rate hedge liability was $4.2 million and $6.5 million at December 31, 2009 and 2008, respectively. This amount will be released into earnings over the life of the 2006 interest rate hedge through periodic interest payments. We have recognized a gain of $0.2 million and a loss of $(0.3) million for ineffectiveness during the years ended December 31, 2009 and December 31, 2008 respectively, related to this hedge in (gain) loss on derivative instruments in our consolidated statement of operations.
During the second quarter of 2008, we purchased $125.0 million of our 2.50% Exchangeable Senior Subordinated Debentures, all of which were tendered to us. These debentures had certain embedded derivative features that were required to be separately identified and recorded at fair value each period. The fair value of these derivatives on issue of the debentures was $21.1 million and this amount was recorded as an original issue discount and accreted through interest expense from the date of issuance through May 15, 2008. As a result of the purchase of the debentures, during the second quarter of 2008, we recorded a gain of $0.4 million to earnings for the remaining fair value of these derivatives.
The following table summarizes our derivative activity (in thousands):
The following table summarizes the balances for our derivative liability included in other liabilities in our consolidated balance sheet (in thousands):
Note 10 - Accumulated Other Comprehensive Loss
The balance of related after-tax components comprising accumulated other comprehensive loss are summarized below (in thousands):
Note 11 - Retirement Plans
401(k) Plan
We have historically provided a defined contribution plan (“401(k) Plan”) for almost all of our employees. We have historically made contributions to the 401(k) Plan on behalf of employee groups that were not covered by our defined benefit retirement plan matching 50% of the employee’s contribution up to 6% of the employee’s total annual compensation. Contributions made by us vest in 20% annual increments until the employee is 100% vested after five years. We contributed $0.5 million, $2.8 million and $2.7 million to the 401(k) Plan in the years ended December 31, 2009, 2008 and 2007, respectively. We suspended our contributions to our 401(k) Plan during 2009. Effective January 1, 2010, we resumed company contributions to the 401(k) Plan, which will provide a 3% non-elective contribution to all eligible employees.
Retirement Plan
We have historically provided a defined benefit retirement plan to our employees who did not receive matching contributions from our Company to their 401(k) Plan accounts. Our defined benefit plan is a non-contributory plan under which we may make contributions either to: a) traditional plan participants based on periodic actuarial valuations, which are expensed over the expected average remaining service lives of current employees; or b) cash balance plan participants based on 5% of each participant’s eligible compensation.
Effective April 1, 2009, this plan was frozen and we do not expect to make additional benefit accruals to this plan. As a result of this action, during the year ended December 31, 2009, we recorded a net curtailment gain that included a $0.4 million charge related to prior service cost and a gain to our projected benefit obligation of $4.0 million as a result of the reduction of future compensation increases.
We contributed $0.6 million to our pension plan during December 31, 2009 and $3.0 million in each of years ended December 31, 2008 and 2007. We anticipate contributing approximately $3.1 million to our pension plan in 2010 although we currently have no minimum funding requirements as defined by ERISA and federal tax laws.
We record the under-funded status of our defined benefit plan as a liability. The plan assets and benefit obligations of our defined benefit plan are recorded at fair value as of December 31, 2009.
Information regarding the change in the projected benefit obligation, the accumulated benefit obligation and the change in the fair value of plan assets, are as follows (in thousands):
The following table includes the pension-related accounts recognized on the balance sheets and the components of accumulated other comprehensive loss related to the net periodic pension benefit costs as follows (in thousands):
The total net loss of $19.6 million, which is net of tax, relates to deferred actuarial losses from changes in discount rates, differences between actual and assumed asset returns and differences between actual and assumed demographic experience (rates of compensation increases, rates of turnover, retirement rates and mortality rates). During the year ended December 31, 2009, as a result of the curtailment of our plan, we recognized the remaining prior service cost balance of $0.4 million, before taxes, in accumulated other comprehensive income as a component of our net periodic pension cost. During 2010, we expect to amortize net losses of $0.4 million, which are included in the accumulated other comprehensive loss, net of tax, at December 31, 2009.
Components of net periodic pension benefit cost were (in thousands):
Our expected future pension benefit payments for the next 10 years are as follows (in thousands):
Weighted-average assumptions used to estimate our pension benefit obligations and to determine our net periodic pension benefit cost, and the actual long-term rate-of-return on plan assets are as follows:
We used the Citigroup Pension Discount Curve to aid in the selection of our discount rate, which we believe reflects the weighted rate of a theoretical high quality bond portfolio consistent with the duration of the cash flows related to our pension liability.
We considered the current levels of expected returns on a risk-free investment, the historical levels of risk premium associated with each of our pension asset classes, the expected future returns for each of our pension asset classes and then weighted each asset class based on our pension plan asset allocation to derive an expected long-term return on pension plan assets. During the year ended December 31, 2009, our actual long-term rate of return on plan assets was 20.4%.
As a result of the plan freeze during 2009, we have no further service cost or amortization of prior service cost related to the plan. In addition, because the plan is now frozen and participants became inactive during 2009, the net losses related to the plan included in accumulated other comprehensive income will now be amortized over the average remaining life expectancy of the inactive participants instead of average remaining service period.
Our investment objective is to achieve a consistent total rate-of-return that will equal or exceed our actuarial assumptions and to equal or exceed the benchmarks that we use for each of our pension plan asset classes including the S&P 500 Index, S&P Mid-cap Index, Russell 2000 Index, MSCI EAFE Index and the Lehman Brothers Aggregate Bond Index. The following asset allocation is designed to create a diversified portfolio of pension plan assets that is consistent with our target asset allocation and risk policy:
Our actual allocation of plan assets for 2009 is not in range of our target allocation in an effort to realize potential gains associated with the equity market rebound. During late 2009, our Retirement Committee decided to set the target allocation at 60% equity securities and 40% debt securities. Beginning in 2010, on a quarterly basis, the funds in our plan will be rebalanced in line with this new allocation. We continue to monitor the performance of these funds and anticipate the allocation moving in line with the target as the economic outlook stabilizes.
The following table summarizes our pension plan assets measured at fair value using the three-level fair value hierarchy established by ASC 157 as of December 31, 2009 and 2008 (in thousands):
The guaranteed deposit is invested primarily in publicly traded and privately placed debt securities and mortgage loans. Fair value is calculated by discounting the expected future investment cash flow from both investment income and repayment of principal for each investment purchased directly for the guaranteed deposit fund. The U.S. and International stock funds and U.S. bond funds consist of various funds that are valued at the net asset value of units held by the plan at year-end as determined by the custodian, based on fair value of the underlying securities. These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. Furthermore, while we believe these valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in different fair value measurement at the reporting date.
The following table details the change in fair value of the Level 3 investments for the years ended December 31, 2009 and 2008:
Note 12 - Restructuring
During the second quarter of 2009, we recorded a restructuring charge of $0.5 million as a result of the consolidation of certain activities at our stations which resulted in the termination of 28 employees. We made cash payments of $0.5 million during the year ended December 31, 2009 related to this restructuring.
During 2008, we effected a restructuring that included a workforce reduction and the cancellation of certain syndicated television program contracts. The total charge for the plan was $12.9 million, including $4.3 million for a workforce reduction of 144 employees and $8.6 million for the cancellation of the contracts. We made cash payments of $9.0 million during the year ended December 31, 2009 related to these restructuring activities. Cumulatively under the plan, we have made payments of $12.6 million through December 31, 2009. As of December 31, 2009, we had $0.3 million in accrued expenses and accounts payable in the consolidated balance sheet for this restructuring and expect to make cash payments of $0.3 million during 2010 and thereafter.
During the year ended December 31, 2007, we recorded $0.3 million for temporary labor costs and made cash payments of approximately $4.3 million for severance and contractual costs related to a restructuring plan initiated in 2006.
The activity for these restructuring charges are as follows (in thousands):
Note 13 - Related Party Transactions
Centennial Cable of Puerto Rico. Centennial Cable of Puerto Rico, in which HMC had a substantial economic interest, provided our Puerto Rico operations with a barter agreement for advertising and promotional services which are reflected in our consolidated financial statements as discontinued operations for the year ended December 31, 2007.
Note 14 - Commitments and Contingencies
Commitments
We lease land, buildings, vehicles and equipment pursuant to non-cancelable operating lease agreements and we contract for general services pursuant to non-cancelable operating agreements that expire at various dates through 2017. In addition, we have entered into commitments for future syndicated entertainment and sports programming. Future payments for these non-cancelable operating leases and agreements, and future payments associated with syndicated television programs at December 31, 2009 are as follows (in thousands):
Rent expense, resulting from operating leases, was $2.1 million for the year ended December 31, 2009, and $2.2 million in each of the years ended December 31, 2008 and 2007.
Contingencies
GECC Note
GECC provided debt financing for a joint venture between NBC Universal and us, in the form of an $815.5 million non-amortizing senior secured note due 2023 bearing interest at an initial rate of 8% per annum until March 2, 2013 and 9% per annum thereafter (the “GECC Note”). The GECC Note is an obligation of the joint venture. We have a 20% equity interest in the joint venture and NBC Universal has the remaining 80% equity interest, in which we and NBC Universal each have a 50% voting interest. NBC Universal operates two television stations, KXAS-TV, an NBC affiliate in Dallas, and KNSD-TV, an NBC affiliate in San Diego, pursuant to a management agreement. NBC Universal and GECC are both majority-owned subsidiaries of General Electric Company. LIN TV has guaranteed the payment of principal and interest on the GECC Note.
Our joint venture with NBC Universal has been adversely impacted by the current economic downturn. The joint venture distributed no cash to NBC Universal and us during the year ended December 31, 2009. Although the joint venture distributed cash to NBC Universal and us in the amount of $13.0 million and $12.0 million for the years ended December 31, 2008 and 2007, respectively, the cash distributions for 2008 included nonrecurring cash proceeds of $12.6 million from the sale of broadcast towers.
In light of the adverse effect of the economic downturn on the joint venture’s operating results, in 2009 we entered into the Original Shortfall Funding Agreement with NBC Universal, which provided that: a) we and NBC waived the requirement that the joint venture maintain debt service reserve cash balances of at least $15 million; b) the joint venture would use a portion of its existing debt service reserve cash balances to fund interest payments in 2009; c) NBC agreed to defer its receipt of 2008 and 2009 management fees; and d) we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2010, we and NBC Universal would each provide the joint venture with a shortfall loan on the basis of our percentage of economic interest in the joint venture. During the year ended December 31, 2009, the joint venture used approximately $14.9 million of the existing debt service cash reserves, leaving approximately $0.2 million available. As of March 15, 2010, we have not yet provided any funding under the Original Shortfall Funding Agreement.
Because of anticipated future shortfalls at the joint venture, on March 9, 2010, NBC Universal and we entered into the 2010 Shortfall Funding Agreement covering the period through April 1, 2011. Under the terms of the 2010 Shortfall Funding Agreement: a) the joint venture may continue to access any portion of its existing debt service reserve cash balances to fund interest payments; b) NBC will continue to defer the payment of 2008 and 2009 management fees and defer payment of 2010 management fees through March 31, 2011 (payable subject to repayment first of any joint venture shortfall loans); and c) we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2011, we and NBC Universal would each provide the joint venture with a shortfall loan on the basis of our percentage of economic interest in the joint venture.
The timing of anticipated debt service shortfalls at the joint venture is affected by the levels of working capital at the stations owned by the joint venture and their anticipated uses of working capital to fund operations and to distribute cash to the joint venture for the purpose of servicing the interest expense on the GECC Note. We recognize liabilities under the Original Shortfall Funding Agreement and the 2010 Shortfall Funding Agreement when those liabilities become both probable and estimable, which result when joint venture management provides us with budget or forecast information of operating cash flows and working capital needs indicating that a debt service shortfall is probable to occur.
During 2009, joint venture management provided us a revised outlook for 2009 after each quarter end, which, as of September 30, 2009, resulted in an accrual of $2.0 million for our probable and estimable obligations under the Original Shortfall Funding Agreement through the April 1, 2010 expiry of that agreement. Due to uncertainty surrounding the joint venture’s ability to repay the shortfall loan, we concurrently impaired the loan as of September 30, 2009. Based on our latest estimate of cash flow requirements of the joint venture through April 1, 2010, our share of the estimated shortfall through April 1, 2010 is $3.0 million, of which $2.0 million was accrued as of September 30, 2009. Subsequent to September 30, 2009, we: (a) received the joint venture’s 2010 budget and (b) as noted above, entered into the 2010 Shortfall Funding Agreement to cover debt service shortfalls through April 1, 2011. Based on the 2010 budget provided by the joint venture, and our discussions with the joint venture's management, we believe there will be an additional debt service shortfall at the joint venture from April 2, 2010 through April 1, 2011 of $13.0 million to $15.0 million, of which, our share of the shortfall could be approximately $3.0 million.
As a result, we have accrued our portion of the estimated shortfalls through April 1, 2011, bringing the total accrual for our joint venture shortfall obligations to $6.0 million as of December 31, 2009. Due to uncertainty surrounding the joint venture’s ability to repay the shortfall loans, we concurrently impaired all accrued loans to the joint venture as of December 31, 2009. As of March 15, 2010, we have not yet provided any funding under either of these agreements. We expect to fund our $3.0 million share of shortfall liabilities under the Original Shortfall Funding Agreement during the first quarter of 2010, and the remaining $3.0 million amount through the period ending April 1, 2011. We do not believe our funding obligations related to the joint venture, if any, beyond April 1, 2011 are currently estimable and probable, therefore, we have not accrued for any potential obligations beyond the $6.0 million discussed above. However, our actual cash shortfall funding could exceed our estimate.
Our ability to honor our shortfall loan obligations under the Original Shortfall Funding Agreement and the 2010 Shortfall Funding Agreement is subject to compliance with restrictions under our senior credit facility and the indentures governing our senior notes. Based on the 2010 budget provided by joint venture management, and our forecast of total leverage and consolidated EBITDA during 2010 and 2011, we expect to have the capacity within these restrictions to provide shortfall funding under the 2010 Shortfall Funding Agreement in proportion to our approximately 20 percent economic interest in the joint venture through the April 1, 2011 expiration of the 2010 Shortfall Funding Agreement. However, there can be no assurance that we will have the capacity to provide such funding. If we are required to fund a portion of a shortfall loan, we plan to use our available cash balances or available borrowings under our credit facility. In addition, if the joint venture experiences further cash shortfalls beyond April 1, 2011, we may decide to fund such cash shortfalls, or to fund such shortfalls through further loans or equity contributions to the joint venture. If we are unable to make payments under the Original Shortfall Funding Agreement or the 2010 Shortfall Funding Agreement, the joint venture may be unable to fund interest obligations under the GECC Note, resulting in an event of default.
An event of default under the GECC Note will occur if the joint venture fails to make any scheduled interest payment within 90 days of the date due and payable, or to pay the principal amount on the maturity date. If the joint venture fails to pay interest on the GECC Note, and neither NBC Universal nor we make a shortfall loan to fund the interest payment within 90 days of the date due and payable, an event of default would occur and GECC could accelerate the maturity of the entire amount due under the GECC Note. Other than the acceleration of the principal amount upon an event of default, prepayment of the principal of the note is prohibited unless agreed upon by both NBC Universal and us. Upon an event of default under the GECC Note, GECC’s only recourse is to the joint venture, our equity interest in the joint venture and, after exhausting all remedies against the assets of the joint venture and the other equity interests in the joint venture, to LIN TV pursuant to its guarantee of the GECC Note.
Under the terms of its guarantee of the GECC Note, LIN TV would be required to make a payment for an amount to be determined upon occurrence of the following events: a) there is an event of default; b) neither NBC Universal or us remedy the default; and c) after GECC exhausts all remedies against the assets of the joint venture, the total amount realized upon exercise of those remedies is less than the $815.5 million principal amount of the GECC Note. Upon the occurrence of such events, the amount owed by LIN TV to GECC pursuant to the guarantee would be calculated as the difference between i) the total amount at which the joint venture’s assets were sold and ii) the principal amount and any unpaid interest due under the GECC Note. As of December 31, 2009, we estimate the fair value of the television stations in the joint venture to be approximately $366 million less than the outstanding balance of the GECC note of $815.5 million.
Although we believe the probability is remote that there would be an event of default and therefore an acceleration of the principal amount of the GECC Note during 2010, there can be no assurances that such an event of default will not occur. There are no financial or similar covenants in the GECC Note and, since both NBC Universal and we have agreed to fund interest payments through April 1, 2011 if the joint venture is unable to do so, NBC Universal and we are able to control the occurrence of a default under the GECC Note.
If an event of default occurs under the GECC Note, LIN TV, which conducts all of its operations through its subsidiaries, could experience material adverse consequences, including:
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GECC, after exhausting all remedies against the joint venture, could enforce its rights under the guarantee, which could cause LIN TV to determine that LIN Television should seek to sell material assets owned by it in order to satisfy LIN TV’s obligations under the guarantee;
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GECC’s initiation of proceedings against LIN TV under the guarantee could result in a change of control or other material adverse consequences to LIN Television, which could cause an acceleration of LIN Television’s credit facility and other outstanding indebtedness; and
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if the GECC Note is prepaid because of an acceleration on default or otherwise, we would incur a substantial tax liability of approximately $273.6 million related to our deferred gain associated with the formation of the joint venture, exclusive of any potential NOL utilization.
On December 3, 2009, General Electric Corporation (“GE”), which wholly owns GECC, and Comcast Corporation (“Comcast”) announced a definitive agreement to form a joint venture that will be 51 percent owned by Comcast, 49 percent owned by GE and managed by Comcast. The proposed joint venture will include NBC Universal. As of March 15, 2010, the proposed transaction is undergoing regulatory review and it is not certain whether or when the transaction will receive the approvals required to close. Furthermore, assuming the transaction is completed, we cannot predict the effect the joint venture between Comcast and GE may have on our joint venture with NBC Universal.
Litigation
We are currently and from time-to-time involved in litigation incidental to the conduct of our business. In the opinion of our management, such litigation as of December 31, 2009 is not likely to have a material adverse effect on our financial position, results of operations or cash flows.
Note 15 - Income Taxes
The income (loss) before income taxes was solely from domestic operations. The provision for (benefit from) income taxes consist of the following (in thousands):
The following table reconciles the amount that would be calculated by applying the 35% federal statutory rate to income (loss) before income taxes to the actual provision for (benefit from) income taxes (in thousands):
The components of the net deferred tax liability are as follows (in thousands):
We maintain a valuation allowance related to our deferred tax asset position when management believes it is more likely than not that the net deferred tax assets will not be realized in the future. Our valuation allowance was $51.0 million as of December 31, 2009, which represents a decrease of $1.3 million for the year ended December 31, 2009. This decrease is primarily attributable to additional taxable income generated and corresponding utilization of prior year net operating losses that were subject to a valuation allowance. Components of our valuation allowance were:
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federal net operating loss carryforwards of $31.4 million;
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state net operating loss carryforwards of $10.1 million;
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state deferred tax assets of $0.8 million recorded in connection with the acquisitions of stations in 2005 and 2006; and
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state deferred tax assets of $8.7 million related to the impairment of the broadcast licenses and goodwill.
At December 31, 2009, we had federal net operating loss carryforwards of approximately $328.6 million that begin to expire in 2021. Additionally, we had state net operating loss carryforwards that vary by jurisdiction (tax effected, net of federal benefit) of approximately $10.1 million, expiring through 2029.
We recorded no amounts related to uncertain tax positions for the years ended December 31, 2009, 2008 and 2007. We file a consolidated federal income tax return and we file numerous other consolidated and separate income tax returns in U.S. state jurisdictions. Tax years 2005-2008 remain open to examination by major taxing jurisdictions.
Note 16 - Accrued Expenses
Accrued expenses consisted of the following (in thousands):
Note 17 - Subsequent Events
Joint Venture with NBC Universal:
On March 9, 2010, because of anticipated future debt service shortfalls at the NBC joint venture, NBC Universal and we entered into the 2010 Shortfall Funding Agreement. For further information on the 2010 Shortfall Funding Agreement see Note 14 - “Commitments and Contingencies”.
Note 18 -Unaudited Quarterly Data
(1)
Includes an impairment charge of $39.9 million, including $37.2 million impairment to the carrying value of our broadcast licenses and $2.7 million impairment to the carrying values of our goodwill.
(2)
Includes the results of operations of Banks Broadcasting.
(3)
Includes an out of period adjustment for a gain on the exchange of equipment of $0.9 million and $0.5 million in operating income and income from continuing operations, respectively, that should have been recorded in third quarter of 2009. We concluded this amount was immaterial to our financial statements as of September 30, 2009 and have corrected the item as an out of period adjustment.
(1)
Includes an impairment charge of $297.0 million, including $185.7 million impairment to the carrying value of our broadcast licenses and $111.3 million impairment to the carrying values of our goodwill.
(2)
Includes an impairment charge of $732.2 million, including $413.9 million impairment to the carrying value of our broadcast licenses, $309.6 million impairment to the carrying values of our goodwill and $8.7 million for the write-off of certain broadcast assets that have become obsolete as a result of the DTV transition.
(3)
Includes the result of operations of Banks Broadcasting.
Note 19 - Supplemental Disclosure of Cash Flow Information
On May 27, 2009, the FCC approved the transfer of the shares of 54 Broadcasting to Vaughan Media, LLC (“Vaughan Media”). 54 Broadcasting holds the FCC broadcast license to KNVA-TV in Austin, TX, for which we provide programming under a local marketing agreement. On July 27, 2009, we assigned our option to purchase the shares of 54 Broadcasting to Vaughan Media, which acquired the stock of 54 Broadcasting on July 27, 2009. Pursuant to the settlement agreement we reached on March 2, 2009 with the former shareholders of 54 Broadcasting, as a result of a complaint filed against us and Vaughan Media by 54 Broadcasting alleging that our assignment and subsequent exercise were not valid, on the date of the closing of this transfer, we made a payment of $6.0 million to 54 Broadcasting prior to Vaughan Media’s exercise of the option to purchase the shares of 54 Broadcasting. We incurred approximately $1.7 million of legal and other expenses associated with the consummation of this transaction.
Note 20 - Valuation and Qualifying Accounts