ITEM 1. OUR BUSINESS
The Company
We own and operate ABC network-affiliated television stations serving six geographic markets: WJLA in Washington, D.C.; WCFT in Tuscaloosa, Alabama, WJSU in Anniston, Alabama and WBMA-LP, a low power television station licensed to Birmingham, Alabama (we operate WCFT and WJSU in tandem with WBMA-LP serving the viewers of the Birmingham, Tuscaloosa and Anniston market as a single programming source); WHTM in Harrisburg, Pennsylvania; KATV in Little Rock, Arkansas; KTUL in Tulsa, Oklahoma; and WSET in Lynchburg, Virginia. Our owned and operated stations broadcast to the 8th, 39th, 41st, 56th, 59th and 66th largest national media markets in the United States, respectively, as defined by The Nielsen Company (“Nielsen”), and reach approximately 5% of United States television households. We also own NewsChannel 8, which provides 24-hour per day basic cable television programming primarily focused on regional and local news for the Washington, D.C. metropolitan area. The operations of NewsChannel 8 are integrated with WJLA.
We also owned and operated WCIV, an ABC network-affiliated television station in Charleston, South Carolina, from March 1, 1996 until August 1, 2009, at which time the equity interests of WCIV were distributed to Perpetual. Additionally, we owned and operated Politico, a specialized newspaper and Internet site (politico.com), from its launch in January 2007 until November 13, 2009, at which time the equity interests of Politico were distributed to Perpetual. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Our stations are owned and operated by ACC (WJLA-TV/NewsChannel 8), Harrisburg Television, Inc. (WHTM), KATV, LLC (KATV), KTUL, LLC (KTUL), WSET, Incorporated (WSET), and TV Alabama, Inc. (WCFT, WJSU and WBMA). Each company other than ACC is either a directly or indirectly wholly-owned subsidiary of ACC. The Company was founded in 1974 and is a subsidiary of AG, which is controlled by Perpetual Corporation, which in turn is controlled by the Allbritton family. ACC and its subsidiaries are Delaware corporations or limited liability companies. Our corporate headquarters are located at 1000 Wilson Boulevard, Suite 2700, Arlington, VA 22209, and our telephone number at that address is (703) 647-8700.
Television Industry Background
General. Commercial television broadcasting began in the United States on a regular basis in the 1940s. Currently, there are a limited number of channels available for broadcasting in any one geographic area, and the license to operate a broadcast television station is granted by the FCC. Based upon interference criteria developed by the FCC, licenses are allocated in channels of 6 MHz each in either the VHF band (channels 2-13) or the UHF band (channels 14-69) of the spectrum. All television stations in the country are grouped by Nielsen into 210 generally recognized television markets that are ranked in size based upon actual or potential audience. Each of these markets, called “Designated Market Areas” or “DMAs,” is designated as an exclusive geographic area consisting of all counties whose largest viewing share is given to stations of that same market area. Nielsen regularly publishes data on estimated audiences for the television stations in each DMA, which data is a significant factor in determining our advertising rates. For over 70 years, broadcasters distributed their programming using an analog technological standard. In June 2009, stations changed the method of transmitting programming on these channels from analog to digital. Digital technologies provide cleaner video and audio signals as well as the ability to transmit “high definition television” with theater screen aspect ratios, higher resolution video and “noise-free” sound. Digital transmission also permits dividing the transmission frequency into multiple discrete channels of standard definition television, permitting the telecast of more than one “channel” of programming and/or other data services including mobile telecasting.
Revenue. Television station revenues are primarily derived from local, regional and national advertisers who pay for commercial advertising and, to a much lesser extent, from retransmission consent fees from multi-channel, video program distributors (“MVPDs”) such as cable television operators, direct broadcast satellite (“DBS”) providers and telephone company (“telco”) operators, from networks and program syndicators for the broadcast of programming and from other broadcast-related activities.
Advertising rates for television commercials are set based upon a variety of factors, including:
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the size and demographic makeup of the market served by the station;
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a program’s popularity among viewers whom an advertiser wishes to attract;
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the number of advertisers competing for the available time;
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the availability of alternative advertising media in the market area;
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a station’s overall ability to attract viewers in its market area; and
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the station’s ability to attract viewers among particular demographic groups that an advertiser may be targeting.
Advertising rates are also affected by an aggressive and knowledgeable sales force and the development of projects, features and programs that tie advertiser messages to programming. Because broadcast television stations rely on advertising revenues, they are sensitive to cyclical changes in the economy. The size of advertisers’ budgets, which are affected by broad economic trends, affect both the broadcast industry in general and the revenues of individual broadcast television stations.
Broadcast television stations compete for local and national advertising revenues with other television stations in their respective markets as well as with other advertising media, such as newspapers, radio, magazines, outdoor advertising, transit advertising, Internet/website, yellow page directories, direct mail and local cable systems. In addition, our stations compete for national advertising revenues with broadcast and cable television networks, program syndicators, satellite distributors and Internet websites.
Advertising revenue for television stations is generally seasonal due to, among other things, increases in retail advertising in the period leading up to and including the holiday season and active advertising in the spring. Additionally, advertising revenue is cyclical, benefiting in even-numbered calendar years from advertising placed by candidates for political offices and issue-oriented advertising, and demand for advertising time in Olympic broadcasts. The seasonality and cyclicality inherent in our business can make it difficult to estimate future operating results based on the previous results of any specific quarter.
Additional revenues are generated from advertising produced by television stations’ Internet websites. Sponsorships of web pages or sections as well as general advertising banners account for a relatively small but growing portion of revenues.
Audience Measurement. Nielsen, which provides audience-measuring services, periodically publishes data on estimated audiences for television stations in the various DMAs throughout the country. These estimates are expressed in terms of both the percentage of the total potential audience in the DMA viewing a station (the station’s “rating”) and the percentage of the audience actually watching television (the station’s “share”). Nielsen provides such data on the basis of total television households and selected demographic groupings in the DMA. Nielsen uses three methods of determining a station’s ratings and share. In most larger DMAs, ratings are determined by a combination of meters connected directly to selected household television sets and weekly viewer-completed paper diaries of television viewing (so called “set meter” measurement), while in smaller markets ratings are determined by paper diaries only. A select
number of the largest markets are measured by people meter technology (so called “local people meter” measurement). The local people meter records individual viewing behavior in real time, producing viewer demographic data on a daily basis. Combined with the ability to measure delayed viewing on digital video recording devices (“DVRs”), Nielsen’s local people meters can provide viewership for programs viewed live, on the same day and combined over seven days. Of the market areas in which we conduct business, Birmingham, Alabama and Tulsa, Oklahoma are set metered markets while Washington, D.C. is a local people metered market. The remaining markets are paper diary markets. Nielsen has announced its intention to convert all set metered markets to local people meter measurement and to convert all of the top 125 markets still using paper diaries to a new “mailable meter” form of electronic measurement; however, we do not anticipate any changes in audience measurement methodologies in our markets during Fiscal 2012.
Programming
Network. Historically, three major commercial broadcast networks-ABC, NBC and CBS-dominated broadcast television. In the past two decades, FOX has evolved into the fourth major network, although the hours of network programming produced by FOX for its affiliates are fewer than those produced by the other three major networks. In addition, CW, ION and myNetworkTV have been launched as new broadcast television networks, along with specialized networks Telemundo, Univision and TV Azteca.
The affiliation by a station with one of the four major networks has a significant impact on the composition of the station’s programming, revenues, expenses and operations. A typical affiliate station receives approximately 9 to 13 hours of each day’s programming from the network. This programming is provided to the affiliate by the network in exchange for a substantial majority of the advertising time sold during the airing of network programs. The network then sells this advertising time for its own account. The affiliate retains the revenues from time sold during breaks in and between network programs and during programs produced by the affiliate or purchased from non-network sources. There is also a cash element to some network affiliation agreements, with either cash payments from the network to the affiliate (“network compensation”) or from the affiliate to the network, depending on the particular arrangement.
An affiliate of CW, myNetworkTV or ION network receives a smaller portion of each day’s programming from its network compared to an affiliate of ABC, CBS, NBC or FOX. As a result, affiliates of CW, myNetworkTV or ION network must purchase or produce a greater amount of their programming, resulting in generally higher programming costs. These stations, however, retain a larger portion of the inventory of advertising time and the revenues obtained therefrom compared to stations affiliated with the major networks, which may offset their higher programming costs.
In contrast to a network affiliated station, an independent station purchases or produces all of the programming that it broadcasts, generally resulting in higher programming costs, although the independent station is, in theory, able to retain its entire inventory of advertising time and all
of the revenue obtained from the sale of such time. Barter and cash-plus-barter arrangements, however, are also popular among all stations.
Traditional network programming generally achieves higher audience levels than syndicated programs aired by independent stations. However, as greater amounts of advertising time are retained and available for sale by FOX affiliates, smaller network affiliates and independent stations, those stations typically achieve a share of the television market advertising revenues greater than their share of the market area’s audience. Consolidation of cable system ownership in discrete markets (so-called “clustering”) has enabled some cable operators to more efficiently sell time to local advertisers as well as to bid on local sports programming in competition with traditional broadcasters.
Public broadcasting outlets in many instances have relationships with the national Public Broadcasting Network and with state-funded regional networks. These networks are non-profit and “non-commercial,” but are permitted to seek some commercial funding through “enhanced underwriting” rules promulgated by the FCC. In most communities, these stations compete with commercial broadcasters for viewers but not directly for advertising dollars.
Non-Network. To supplement programming offered by a network or to program the station as an independent, a television broadcaster may acquire programming through cash and/or barter arrangements. A cash license fee is paid to a program distributor for “first run” syndicated programming (such as “Dr. Oz” or “Jeopardy”) sold independent of network affiliation or syndicated “off-network” programs, commonly referred to as “reruns.” Under such license agreements, stations retain a majority of the commercial availabilities in the programs. Under barter arrangements, a program distributor can receive advertising time in exchange for the programming it supplies, with the station paying no fee or a reduced fee for such programming.
Program Distribution. In addition to over-the-air broadcast distribution, viewers have several alternatives to receive television programming.
Cable. Through the 1970s, network television broadcasting enjoyed virtual dominance in viewership and television advertising revenues because network-affiliated stations only competed with each other in local markets. Beginning in the 1980s, this level of dominance began to change as the FCC authorized more local stations and marketplace choices expanded with the growth of independent stations and cable television services.
Cable television systems were first constructed in significant numbers in the 1970s and were initially used to retransmit broadcast television programming to paying subscribers in areas with poor broadcast signal reception. In the aggregate, cable-originated programming has emerged as a significant competitor for viewers of broadcast television programming, although no single cable programming network regularly attains audience levels close to any of the major broadcast networks. The advertising share of cable networks has steadily increased since the 1970s as a result of the growth in cable penetration (the percentage of television households that are connected to a cable system) and the increase in the number of new cable networks. The ability to store programming for later viewing has also led to an increase in “video-on-demand” viewing by cable subscribers. Notwithstanding such increases in cable network viewership and
advertising, over-the-air broadcast network stations remain the predominantly viewed networks used for mass market television advertising.
Telcos. Cable system operators have traditionally enjoyed near monopoly status as terrestrial distributors of multi-channel programming. “Overbuilders” (competing local distributors in the same local franchise area) were rare based upon the high costs associated with the cable system infrastructure. Recently, however, some telcos have begun using their fiber optic facilities to begin offering multi-channel programming in competition with the local franchised cable systems. These telcos seek program carriage arrangements with local broadcasters and other national program distributors.
Satellite. In the 1990s, DBS service was introduced as a new competitive distribution method. Home users purchase or lease satellite dish receiving equipment and subscribe to a monthly service of programming options. Local stations, under specified conditions, are carried on satellites which then retransmit those signals back to the originating market. As DBS providers, such as DirecTV and DISH Network, continue to expand their facilities, an increasing number of local stations are now carried as “local-to-local” signals, aided by a legal requirement that mandates the carriage of all local broadcast signals if one is retransmitted. All of our broadcast stations are currently carried on the two primary DBS systems.
Internet. Program distribution via the Internet recently has become an alternative to traditional television set viewing. Some broadcast networks and their affiliates provide “video players” on their websites allowing viewing of recently aired programs. This video-on-demand-type service (sometimes referred to as “over-the-top” television) permits viewers to choose the program or channel from a library of shows. Hulu.com is an example of a website offering commercial supported streaming video from the NBC, Fox and ABC broadcast networks. Additionally, services like Google TV and Apple TV have emerged as “Smart TV” platforms, which support streaming video from a variety of sources. It is uncertain at this time to what extent those new services will be a measurable competitor to us.
Video Recording. In addition to cable, telco, satellite and Internet program distribution, there has been substantial growth in video recording technology and playback systems, television game devices and new wireless/Internet connected devices permitting “podcasting,” wireless video distribution systems, satellite master antenna television systems and some low-power services. DVR or similar services have become standard home technology and permit viewers to “time-shift” their program viewing and no longer rely solely on broadcast “appointment” television viewing habits.
Digital Subchannels. Local broadcast stations themselves may now use excess capacity within their digital television channel to “multicast” discrete program offerings. Television broadcasters are beginning to program these subchannels with various forms of commercial informational and entertainment programs. Five of our stations provide a subchannel with the Retro Television Network programming, one station provides a subchannel with the LiveWell Network programming and four provide weather programming on subchannels.
Competition
Competition in the television industry, including each of the market areas in which our stations compete, takes place on several levels: competition for audience, programming (including news) and advertisers. Additional factors material to a television station’s competitive position include signal coverage and assigned frequency. The television broadcasting industry is continually faced with technological change and innovation, the possible rise or fall in popularity of competing entertainment and communications media and actions of federal regulatory bodies, including the FCC, any of which could possibly have a material adverse effect on our operations.
Audience. Stations compete for audience on the basis of program popularity, which has a direct effect on advertising rates. A substantial portion of the daily programming at our stations is supplied by the ABC network. In those periods, the stations are totally dependent upon the performance of the ABC network programs in attracting viewers. Non-network time periods are programmed by the station with a combination of self-produced news, public affairs and entertainment programming, including news and syndicated programs purchased for cash, cash and barter or barter-only. Minor network stations, the number of which has increased significantly over the past decade, have also emerged as viable competitors for television viewership share, particularly as the result of the availability of first-run major network-quality programming.
The development of methods of television transmission other than over-the-air broadcasting and, in particular, the growth of MVPDs and video recording has significantly altered competition for audience share in the television industry. These alternative transmission methods can increase competition for a broadcasting station both by bringing into its market area distant broadcasting signals not otherwise available to the station’s audience and by serving as a distribution system for programming originated on the cable or DBS systems. Although historically cable operators have not sought to compete with broadcast stations for a share of the local news audience, cable operators have made recent inroads to this market as well, particularly in the area of local sports channels. Increased competition for local audiences could have an adverse effect on our advertising revenues.
Other sources of competition for audience include home entertainment systems (including video recording and playback systems, television game devices and new wireless/Internet connected devices permitting “podcasting”), wireless video distribution systems, satellite master antenna television systems and some low-power services. In addition, local broadcast stations themselves using excess capacity within their digital television channel to “multicast” discrete program offerings have added to the number of outlets vying for audience. Programming alternatives, especially news, available on the Internet also provide non-broadcast alternatives available to the potential broadcast television audience. Video programming via the Internet is now also emerging as an option for viewers who wish to see full-length episodes of broadcast shows or brief clips of alternative fare on computers or other video devices. Each of the major broadcast networks offer “video player” buttons on their websites or those of broadcast affiliates. In addition, multiple Internet sites such as YouTube.com offer alternative video programming.
Further advances in technology may increase competition for household audiences and advertisers. Video compression techniques now under development for use with current cable channels, over-the-top Internet-relayed video and direct broadcast satellites are expected to reduce the bandwidth required for television signal transmission. These compression techniques, as well as other technological developments, are applicable to all video delivery systems, including over-the-air broadcasting, and have the potential to provide vastly expanded programming to highly targeted audiences. Reduction in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized niche programming. This ability to reach very defined audiences is expected to alter the competitive dynamics for advertising expenditures. We are unable to predict the effect that technological changes will have on the broadcast television industry or the future results of our operations.
Programming. Competition for local programming involves negotiating with national program distributors or syndicators which sell first-run and rerun packages of programming. Our stations compete against in-market broadcast station competitors for off-network reruns (such as “Two and a Half Men”) and first-run products (such as “Dr. Oz”) for exclusive access to those programs. Cable systems generally do not compete with local stations for programming; however, local cable operators are increasingly consolidating ownership of systems within various markets, enabling them to bid on local sports programming in competition with traditional broadcasters. In addition, various national cable networks from time to time have acquired programs that would have otherwise been offered to local television stations. Competition for exclusive news stories and features is also endemic to the television industry. In addition, national or network programming, once exclusive to broadcast television, may now appear first or only on national MVPD channels. These multichannel video program distributors are now better able to bid competitively for exclusive access to programming in part because they can recover their programming costs both with advertising revenue and direct or indirect subscriber fees and in part because they are not subject to regulatory content restrictions.
Advertising. Advertising rates are set based upon a variety of factors, including the size and demographic makeup of the market served by the station, a program’s popularity among viewers whom an advertiser wishes to attract, the number of advertisers competing for the available time, the availability of alternative advertising media in the market area, a station’s overall ability to attract viewers in its market area and the station’s ability to attract viewers among particular demographic groups that an advertiser may be targeting. Advertising rates are also affected by an aggressive and knowledgeable sales force and the development of projects, features and programs that tie advertiser messages to programming. Our television stations compete for local and national advertising revenues with other television stations in their respective markets as well as with other advertising media, such as newspapers, radio, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail and local MVPD operators. In addition, our stations compete for national advertising revenues with broadcast and cable television networks, program syndicators and Internet websites. Competition for advertising dollars in the broadcasting industry occurs primarily in individual market areas. Generally, a broadcast television station in one market does not compete with stations in other market areas. Our television stations are located in highly competitive market areas.
Station Information
The following table sets forth general information for each of our owned stations as of May 2011, unless otherwise indicated:
(1) Represents market rank based on the U.S. Television Household Estimates published by Nielsen in September 2011.
(2) Represents the total number of commercial broadcast television stations in the DMA with an audience share of at least 1% in the 6:00 a.m. to 2:00 a.m., Sunday through Saturday, time period, based on the Nielsen Station Index for May 2011 for all markets except Birmingham, which is based on February 2011. Nielsen did not release May 2011 data for the Birmingham market due to the impact of severe weather in the Birmingham DMA.
(3) Represents the station’s share of total viewing of commercial broadcast television stations in the DMA for the time period of 6:00 a.m. to 2:00 a.m., Sunday through Saturday, based on the Nielsen Station Index for May 2011 for all markets except Birmingham, which is based on February 2011.
(4) Represents the station’s rank in the DMA based on its share of total viewing of commercial broadcast television stations in the DMA for the time period of 6:00 a.m. to 2:00 a.m., Sunday through Saturday, based on the Nielsen Station Index for May 2011 for all markets except Birmingham, which is based on February 2011.
(5) TV Alabama serves the Birmingham market by simultaneously broadcasting identical programming over WBMA, WCFT and WJSU. The stations are listed on a combined basis by Nielsen as WBMA+, the call sign of the low power television station.
(6) We began programming WJSU pursuant to a local marketing agreement in December 1995 and acquired the station in March 2000.
(7) WSET has been indirectly owned and operated by the Allbritton family since 1976. On March 1, 1996, WSET became a wholly-owned subsidiary of ACC.
Business and Operating Strategy
Our business strategy is to focus on building net operating revenues and net cash provided by operating activities. We review selective acquisition or other expansion opportunities as they arise. Although we continue to review strategic investment and acquisition opportunities, no agreements or understandings are currently in place regarding any material investments or acquisitions.
In addition, we continually seek to enhance net operating revenues at a marginal incremental cost through our use of existing personnel and programming capabilities. The broadcast and cable news services of WJLA and NewsChannel 8 are fully integrated, representing the first newsgathering duopoly in the Nation’s Capital.
We have also sought to make use of the excess capacity of our digital broadcast channels. Four of our stations operate local weather channels using this digital spectrum, five of our stations are affiliated with the Retro Television Network (“RTV”) which supplies classic, off-network programming which is packaged together in an “oldies” television format, and one station provides original lifestyle programming as an affiliate of the LiveWell Network.
Our operating strategy focuses on four key elements:
Local News and Community Leadership. Our stations strive to be local news leaders to exploit the revenue potential associated with local news leadership. Since the acquisition of each station, we have focused on building that station’s local news programming franchise as the foundation for building significant audience share. In each of our market areas, we develop additional information-oriented programming designed to expand the stations’ hours of commercially valuable local news and other programming with relatively small incremental increases in operating expenses. Local news programming is commercially valuable because of its high viewership level, the attractiveness to advertisers of the demographic characteristics of the typical news audience (allowing stations to charge higher rates for advertising time) and the enhanced ratings of other programming in time periods adjacent to the news. In addition, we believe strong local news product has helped differentiate local broadcast stations from the increasing number of cable programming competitors that generally do not provide this material. We strive in each of our markets to generate additional audience and revenue through Internet and mobile distribution of our news programming.
High Quality Non-Network Programming. Our stations are committed to attracting viewers through an array of syndicated and locally-produced programming to fill those periods of the broadcast day not programmed by the network. This programming is selected by us based on its ability to attract audiences highly valued in terms of demographic makeup on a cost-effective basis and reflects a focused strategy to migrate and hold audiences from program to program throughout dayparts. Audiences highly valued in terms of demographic makeup include women aged 18-49 and all adults aged 25-54. These demographic groups are perceived by advertisers as the groups with the majority of buying authority and decision-making in product selection.
Local Sales Development Efforts. We believe that television stations with a strong local presence and active community relations can realize additional revenue from advertisers through the development and promotion of special programming and community events as well as through expanded production of regularly scheduled local news and information programming. Each of our stations has developed such additional products, including high quality programming of local interest and sponsored community events. Such sponsored events have included health fairs, contests, job fairs, parades and athletic events and have provided advertisers, who are offered participation in such events, an opportunity to direct a marketing program to targeted audiences. These additional local interest programs and sponsored community events have proven successful in attracting incremental local advertising revenues. The stations also seek to maximize their local sales efforts through the use of extensive research and targeted demographic studies.
Cost Control. We believe that controlling costs is an essential factor in achieving and maintaining the profitability of our stations. We believe that by delivering highly targeted audience levels and controlling programming and operating costs, our stations can achieve increased levels of revenue and operating cash flow. Each station rigorously manages its expenses through a budgetary control process and project accounting, which include an analysis of revenue and programming costs by daypart. Moreover, each station closely monitors its staffing levels.
Network Affiliation Agreements and Relationship
Each of our stations is an ABC affiliate with affiliation agreements that expire on December 31, 2012. ABC has routinely renewed the affiliation agreements with our stations; however, we cannot be assured that these affiliation agreements will be renewed in the future or under the same general terms. As one of the largest group owners of ABC network affiliates in the nation, we believe that we enjoy excellent relations with the ABC network.
Generally, each affiliation agreement provides our stations with the right to broadcast programs transmitted by the network that includes designated advertising time, the revenue from which the network retains. For every hour or fraction thereof that the station broadcasts network programming, the network pays the station compensation, as specified in each affiliation agreement, or as agreed upon by the network and the stations. Typically, prime-time programming generates the highest hourly rates. It has been reported that recent network affiliation agreements have not included network compensation, but rather have included programming payments from the affiliate to the network. In order to renew our affiliation agreements, we may be required to make similar payments to the network; however, we cannot provide any assurance as to the level of such payments.
Legislation and Regulation
The ownership, operation and sale of television stations are subject to the jurisdiction of the FCC under the Communications Act of 1934 (the “Communications Act”). Cable programming services like NewsChannel 8 are not directly regulated by the FCC, but are subject to some indirect regulation. Matters subject to FCC oversight include the assignment of frequency bands
for broadcast television; the approval of a television station’s frequency, location and operating power; the issuance, renewal, revocation or modification of a television station’s FCC license; the approval of changes in the ownership or control of a television station’s licensee; the regulation of equipment used by television stations; and the adoption and implementation of regulations and policies concerning the ownership, operation, programming and employment practices of television stations. The FCC has the power to impose penalties, including fines or license revocations, upon a licensee of a television station for violations of the FCC’s rules and regulations.
The following is a brief summary of certain provisions of the Communications Act and of specific FCC regulations and policies affecting broadcast television. Reference should be made to the Communications Act, FCC rules and the public notices and rulings of the FCC for further information concerning the nature and extent of FCC regulation of broadcast television stations.
License Renewal. Broadcast television licenses are generally granted for maximum terms of eight years. The main licenses are supported by various “auxiliary” licenses for point-to-point microwave, remote location electronic newsgathering and program distribution between the studio and transmitter locations. License terms are subject to renewal upon application to the FCC, but they may be renewed for a shorter period upon a finding by the FCC that the “public interest, convenience and necessity” would be served thereby. Under the Telecommunications Act of 1996 (the “Telecommunications Act”), the FCC must grant a renewal application if it finds that the station has served the public interest, there have been no serious violations of the Communications Act or FCC rules, and there have been no other violations of the Communications Act or FCC rules by the licensee that, taken together, would constitute a pattern of abuse. If the licensee fails to meet these requirements, the FCC may either deny the license or grant it on terms and conditions as are appropriate after notice and opportunity for hearing. In making its determination, the FCC may consider petitions to deny but cannot consider whether the public interest would be better served by issuing the license to a person other than the renewal applicant. In addition, competing applications for the same frequency may be accepted only after the FCC has denied a license renewal and the action is no longer subject to judicial review.
In the vast majority of cases, television broadcast licenses are renewed by the FCC even when petitions to deny or competing applications are filed against broadcast license renewal applications. However, we cannot assure that each of our broadcast licenses will be renewed in the future. License renewal applications are currently pending for KATV and WHTM. These stations continue to operate under their expired licenses until the FCC takes action on the renewal applications. The licenses for our remaining stations are currently effective with expiration dates ranging from October 1, 2012 to June 1, 2014.
Programming and Operation. The Communications Act requires broadcasters to serve the “public interest.” Since the late 1970s, the FCC gradually has relaxed or eliminated many of the more formalized procedures it had developed to promote the broadcast of certain types of programming responsive to the needs of a station’s community of license. However, broadcast station licensees must continue to present programming that is responsive to local community problems, needs and interests and to maintain certain records demonstrating such responsiveness.
Complaints from viewers concerning a station’s programming often will be considered by the FCC when it evaluates license renewal applications, although such complaints may be filed at any time and generally may be considered by the FCC at any time. Stations also must follow various FCC rules that regulate, among other things, political advertising, sponsorship identifications, the advertisements of contests and lotteries, obscene and indecent broadcasts and technical operations, including limits on radio frequency radiation. The FCC also has adopted rules that place additional obligations on television station operators for closed-captioning of programming for the hearing impaired, equal employment opportunity obligations, maximum amounts of advertising and minimum amounts of programming specifically targeted for children and special obligations relating to political candidate advertising, as well as additional public information and reporting requirements. New requirements for video captioning in some markets have also been adopted.
Digital Television. Prior to June 12, 2009, all U.S. television stations broadcast signals using an analog transmission system first developed in the 1940s. In 1997, the FCC approved a new digital television, or DTV, technical standard to be used by television broadcasters, television set manufacturers, the computer industry and the motion picture industry. This DTV standard allows the simultaneous transmission of higher quality and/or multiple streams of video programming and data on the bandwidth formerly used by a single analog channel. On the multiple channels allowed by DTV, it is possible to broadcast one high definition channel, with visual and sound quality substantially superior to present-day television; to transmit several standard definition channels, with digital sound and pictures of a quality varying from equivalent to somewhat better than present television; to provide interactive data services, including visual or audio transmission; or to provide some combination of these possibilities. Pursuant to a transition plan, television broadcasters were assigned new digital channels that were predicted to replicate their analog facilities. Analog transmission was terminated on June 12, 2009. The new digital channels have the ability to distribute high definition signals along with secondary programming channels and non-broadcast data. Broadcasters must also pay certain fees for non-broadcast uses of their digital channels. In addition, the FCC has determined that broadcasters who transmit multiple programs on their digital channels are required to carry additional children’s educational programming and is evaluating whether to impose further public interest programming requirements on digital broadcasters. The FCC also has held that the must-carry requirements applicable to cable and satellite carriage of analog broadcast signals will encompass only the primary digital program channel, and then only upon the cessation of analog signals.
Ownership Matters. The Communications Act, in conjunction with various antitrust statutes, contains restrictions on the ownership and control of broadcast licenses. Together with the FCC’s rules, those laws place limitations on alien ownership, common ownership of television, radio and newspaper properties, and ownership by those persons not having the requisite “character” qualifications and those persons holding “attributable” interests in the license. The FCC’s currently effective ownership rules that are material to our operations are summarized below:
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Local Television Ownership. Under the FCC’s current local television ownership (or “duopoly”) rule, a party may own multiple television stations without regard to signal contour
overlap provided they are located in separate Nielsen DMAs. In addition, the rules permit parties to own up to two TV stations in the same DMA so long as (1) at least one of the two stations is not among the top four-ranked stations in the market based on audience share at the time an application for approval of the acquisition is filed with the FCC, and (2) at least eight independently owned and operating full-power commercial and non-commercial television stations would remain in the market after the acquisition. In addition, without regard to the number of remaining or independently owned television stations, the FCC will permit television duopolies within the same DMA so long as the Grade B signal contours of the stations involved do not overlap. Stations designated by the FCC as “satellite” stations, which are full-power stations that typically rebroadcast the programming of a “parent” station, are exempt from the local television ownership rule. Also, the FCC may grant a waiver of the local television ownership rule if one of the two television stations is a “failed” or “failing” station or if the proposed transaction would result in the construction of a new television station. We are currently in compliance with the local television ownership rule.
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National Television Ownership Cap. The Communications Act, as amended in 2004, limits the number of television stations one entity may own nationally. Under the rule, no entity may have an attributable interest in television stations that reach, in the aggregate, more than 39% of all U.S. television households. Currently, our stations reach, in aggregate, approximately 5% of all U.S. television households. The FCC currently discounts the audience reach of a UHF station by 50% when computing the national television ownership cap. Further, for entities that have attributable interests in two stations in the same market, the FCC counts the audience reach of the stations in that market only once in computing the national ownership cap. The FCC is currently considering whether to retain the UHF discount. The propriety of the UHF discount will be the subject of further administrative proceedings, but the discount currently remains in effect.
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Dual Network Rule. The dual network rule prohibits a merger between or among any of the four major broadcast television networks-ABC, CBS, FOX and NBC.
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Media Cross-Ownership. The FCC historically has prohibited the licensee of a radio or TV station from directly or indirectly owning, operating, or controlling a daily newspaper if the station’s specified service contour encompasses the entire community where the newspaper is published. The FCC attempted to revise this rule in 2003 but the attempt was vacated by the courts. A similar attempt in 2008 was also struck down. A petition for review by the U.S. Supreme Court is pending. The Commission is currently reviewing the rule. There is no timetable established for any potential change. The cross-ownership rules also permit cross ownership of radio and television stations under a graduated test based on the number of independently owned media voices in the local market. In large markets (markets with at least 20 independently owned media voices), a single entity can own up to one television station and seven radio stations or, if permissible under the local television ownership rule (if eight full-power television stations would remain in the market post transaction), two television stations and six radio stations.
Carriage of Local Television Signals
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Cable. Pursuant to the Cable Television Consumer Protection and Competition Act of 1992 (“1992 Cable Act”) and the FCC’s “must carry” regulations, cable operators are generally required to devote up to one-third of their activated channel capacity to the carriage of the analog signals of local commercial television stations. The 1992 Cable Act also prohibits cable operators and other MVPDs from retransmitting a broadcast signal without obtaining the station’s consent. On a cable system-by-cable system basis, a local television broadcast station must make a choice once every three years whether to proceed under the “must carry” rules or to waive the right to mandatory, but uncompensated, carriage and, instead, to negotiate a grant of retransmission consent to permit the cable system to carry the station’s signal, in most cases in exchange for some form of consideration from the cable operator. These contracts may, however, extend longer than the three-year must carry notification period. Our cable retransmission agreements generally extend through at least December 31, 2011. We are in the process of negotiating for renewals of those agreements that expire as of December 31, 2011.
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Satellite. The Satellite Home Viewer Improvement Act of 1999 (“SHVIA”) established a compulsory copyright licensing system for the distribution of local television station signals by direct broadcast satellite systems to viewers in each DMA. Under SHVIA’s “carry-one, carry-all” provision, a direct broadcast satellite system generally is required to retransmit the analog signal of all local television stations in a DMA if the system chooses to retransmit the analog signal of any local television station in that DMA. Television stations located in markets in which satellite carriage of local stations is offered may elect mandatory carriage or retransmission consent. We have elected to negotiate retransmission consent agreements with the two DBS operators that carry our stations. Those agreements remain effective until 2013. SHIVIA, by its terms, expired in 2010 and was replaced by the Satellite Television Extension and Localism Act (“STELA”) extending the retransmission regime for broadcast station carriage on satellite systems.
Indecency Regulation. Federal law and the FCC’s rules prohibit the broadcast of obscene material at any time, and the broadcast of indecent or profane material during the period from 6 a.m. through 10 p.m. In recent years, the FCC and its indecency prohibition have received much attention. In 2006, legislation was enacted that raised the maximum monetary penalty for the broadcast of obscene, indecent, or profane language to $325,000 for each “violation,” with a cap of $3 million for any “single act.” In 2008, the FCC fined certain ABC stations, including two of our ABC-affiliated stations, each in the amount of $27,500 for the broadcast of allegedly indecent material during a 2003 episode of NYPD Blue. Pursuant to the affiliation agreement with ABC, the Network has assumed obligations for payment of the fine, but together the Network and its affiliates, including our affected stations, have appealed the FCC’s decision. It is pending in the U.S. Supreme Court.
Additional Competition in the Video Services Industry. The Telecommunications Act also eliminates the overall ban on telephone companies offering video services and permits the ownership of cable television companies by telephone companies in their service areas (or vice versa) in certain circumstances. Telephone companies providing such video services will be regulated according to the transmission technology they use. The Telecommunications Act also permits telephone companies to hold an ownership interest in the programming carried over such systems. Video programming via the Internet is now emerging as an option for viewers who wish
to see full-length episodes of broadcast shows or brief clips of alternative fare on computers or other video devices. Each of the major broadcast networks offer “video player” buttons on their websites or those of broadcast affiliates. In addition, multiple Internet sites such as YouTube.com offer alternative video programming. Although we cannot predict the effect of the removal of these barriers to telephone company participation in the video services industry, it may have the effect of increasing competition in the television broadcast industry in which we operate.
Other Legislation. The foregoing does not purport to be a complete summary of all the provisions of the Telecommunications Act, the Communications Act or of the regulations and policies of the FCC thereunder. Congress and the FCC have under consideration, and in the future may consider and adopt, (i) other changes to existing laws, regulations and policies or (ii) new laws, regulations and policies regarding a wide variety of matters that could affect, directly or indirectly, the operation, ownership and profitability of our broadcast stations. Also, certain of the foregoing matters are now, or may become, the subject of litigation, and we cannot predict the outcome of any such litigation or the impact on our business.
Employees
As of September 30, 2011, we employed in full and part-time positions 805 persons, including 788 at our television stations and 17 in our corporate office. Of our employees at WJLA/NewsChannel 8, 120 are represented by one of three unions: the American Federation of Television and Radio Artists (“AFTRA”), the Directors Guild of America (“DGA”) or the National Association of Broadcast Employees and Technicians/Communications Workers of America (“NABET/CWA”). The NABET/CWA collective bargaining agreement expired on December 31, 2010. The parties did not extend the contract but are in negotiations regarding a successor agreement. The AFTRA collective bargaining agreement has been extended while the parties are in negotiations for a successor agreement and currently is set to expire on December 31, 2011. The DGA collective bargaining agreement expired on February 28, 2011. The parties did not extend the contract but are in negotiations regarding a successor agreement. No employees of our other owned stations are represented by unions. We consider our relations with our employees to be satisfactory.
ITEM 1A.
ITEM 1A. RISK FACTORS
(dollars in thousands)
The risks described below, together with the other information included in this Form 10-K, should be carefully considered. We cannot identify nor can we control all circumstances that could occur in the future that may adversely affect our business and results of operations. If any of the following risks actually occurs, our business, financial condition, operating results and prospects could be materially affected.
A Downturn in the Economy May Adversely Affect Us
An economic slowdown in future periods could adversely affect our business. During times of economic slowdown, our customers may significantly reduce their advertising budgets. In addition, an economic downturn may adversely affect the demand for consumer products, which could in turn adversely affect our advertising revenues. To the extent these factors adversely affect other television companies, there could be an oversupply of unfilled airtime and downward pressure on pricing for advertising services, which could adversely affect us. Additionally, bankruptcies or financial difficulties of our customers could reduce our cash flows and adversely impact our liquidity and profitability. Collectively, these events could adversely affect our cash flow and adversely affect our ability to comply with the financial covenants of our senior credit facility.
Our substantial debt could adversely affect our financial condition and operational flexibility.
We have a substantial amount of debt. As of September 30, 2011, our total debt consisted of $455,000 of 8% senior subordinated notes due May 15, 2018 and $5,000 outstanding under our $60,000 senior credit facility which expires April 29, 2013. Subject to the limitations of our debt instruments, we could also incur additional debt in certain circumstances.
The degree to which we are leveraged could adversely affect us. For example, it could:
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make it more difficult for us to satisfy our obligations with respect to our existing debt;
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require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which will reduce amounts available for working capital, capital expenditures and other general corporate purposes;
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result in the sale of one or more of our stations to reduce our debt service obligations;
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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increase our vulnerability to general adverse economic and industry conditions;
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place us at a competitive disadvantage compared to our competitors with less debt; and
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limit our ability to borrow additional funds.
To service our debt, we will require a significant amount of cash, which depends on many factors beyond our control.
Our ability to make payments on and to refinance our debt will depend on our ability to generate cash in the future. This, to an extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot be assured that our business will generate sufficient cash flow or that future borrowings will be
available to us in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. If our future cash flow from operations and existing sources of funds are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional equity capital or restructure or refinance all or a portion of our debt on or before maturity. We cannot be assured that we will be able to refinance any of our debt on a timely basis or on satisfactory terms, if at all. In addition, the terms of our existing debt and other future debt may limit our ability to pursue any of these alternatives. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
The terms of our debt impose restrictions on us that may affect our ability to successfully operate our business.
The indenture governing our senior notes contains covenants that, among other things, limit our ability to:
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incur additional debt and issue preferred stock;
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pay dividends or make other restricted payments;
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make certain investments;
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create liens;
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allow restrictions on the ability of certain of our subsidiaries to pay dividends or make other payments to us;
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sell assets;
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merge or consolidate with other entities; and
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enter into transactions with affiliates;
The credit agreement governing our senior credit facility requires us to comply with specified restrictive financial and operating covenants. These covenants, among other things, restrict our ability to incur additional debt and issue preferred stock, pay dividends and make distributions, issue stock of subsidiaries, make certain investments, repurchase stock or debt, create liens, enter into transactions with affiliates, transfer and sell assets, and merge or consolidate.
All of these covenants may restrict our ability to expand or pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, such as prevailing economic conditions and changes in regulations, and if such events occur, we cannot be sure that we will be able to comply. A breach of these covenants could result in a default under the indenture governing our senior notes, or the credit agreement that governs our senior credit facility. If there were an event of default, holders of such defaulted debt could cause all amounts borrowed under these instruments to be due and payable immediately. If our indebtedness were to be accelerated, we cannot be assured that we would be able to repay it. Additionally, if we fail to repay any outstanding debt incurred under any secured credit facility when it becomes due, the lenders under the facility could proceed against certain of our assets and capital stock of our subsidiaries that we have pledged as security. Any of the events described in this paragraph could have a material adverse effect on our financial condition or results of operations.
In addition, debt incurred under our senior credit facility bears interest at variable rates. An increase in the interest rates on our debt will reduce the funds available to repay our debt and for operations and future business opportunities and will make us more vulnerable to the consequences of our leveraged capital structure.
We operate in a very competitive business environment that could adversely affect our operations.
The television industry is highly competitive. Stations compete for audience on the basis of program popularity, which has a direct effect on advertising rates. Broadcast television stations compete for local and national advertising revenues with other television stations in their respective markets as well as with other advertising media, such as newspapers, radio, magazines, outdoor advertising, transit advertising, Internet websites, yellow page directories, direct mail and local MVPD operators. In addition, our stations compete for national advertising revenues with broadcast and cable television networks, program syndicators and Internet websites. Some of our competitors are subsidiaries of large national or regional companies that have greater resources, including financial resources, than we do. Our television stations are located in highly competitive markets. Accordingly, our results of operations will be dependent upon the ability of each station to compete successfully in its market, and there can be no assurance that any one of our stations will be able to maintain or increase its current audience share or revenue share. To the extent that certain of our competitors have or may, in the future, obtain greater resources, our ability to compete successfully in our broadcasting markets may be impeded.
We depend on advertising revenue, which can vary substantially from period to period based on many factors beyond our control, including general economic conditions.
The broadcast television industry is cyclical in nature, being affected by prevailing economic conditions. Because we rely on sales of advertising time for substantially all of our revenues, our operating results are sensitive to general economic conditions and regional conditions in each of the local markets in which our stations operate. An economic slowdown in any of the local markets in which our stations operate could have an adverse effect on our results of operations and our business.
We depend on the Washington, D.C. advertising market for a substantial portion of our revenue.
For Fiscal 2009, 2010 and 2011, the Washington, D.C. advertising market accounted for approximately one-half of our total revenues. As a result, our results of operations are highly dependent on WJLA/NewsChannel 8 and, in turn, the Washington, D.C. economy. Decreased demand for advertising in the Washington, D.C. advertising market may adversely affect our business and results of operations.
We particularly depend on automotive-related advertising, which may be affected by the current turmoil in that industry.
Approximately 14%, 17% and 20% of our total operating revenues for the fiscal years ended September 30, 2009, 2010 and 2011, respectively, consisted of automotive-related advertising. Automotive-related advertising declined by 41% during the year ended September 30, 2009 as a result of decreased demand for advertising by the automotive industry.
Automotive-related advertising increased by 41% and 11% during the years ended September 30, 2010 and 2011, respectively. Significant decreases in such advertising would adversely affect our operating results.
Federal regulation of the broadcasting industry limits our operating flexibility.
The ownership, operation and sale of television stations are subject to the jurisdiction of the FCC under the Communications Act. Matters subject to FCC oversight include the assignment of frequency bands for broadcast television; the approval of a television station’s frequency, location and operating power; the issuance, renewal, revocation or modification of a television station’s FCC license; the approval of changes in the ownership or control of a television station’s licensee; the regulation of equipment used by television stations; and the adoption and implementation of regulations and policies concerning the ownership, operation, programming and employment practices of television stations. The FCC has the power to impose penalties, including fines or license revocations, upon a licensee of a television station for violations of the FCC’s rules and regulations. The FCC’s regulation of other media and spectrum users also has an indirect effect on the operations of our stations.
License Renewal. Our business is dependent upon our continuing to hold broadcasting licenses from the FCC that are issued for terms of eight years. While in the vast majority of cases such licenses are renewed by the FCC even when petitions to deny or competing applications are filed against broadcast license renewal applications, we cannot be assured that our licenses will be renewed upon their expiration dates. License renewal applications are currently pending for KATV and WHTM, which are currently operating under expired licenses. These stations will continue to operate under their expired licenses until the FCC takes action on the renewal applications. The licenses for all other of our stations are currently in effect with expiration dates ranging from October 1, 2012 to June 1, 2014. If we fail to renew any of our licenses, or renew them with substantial conditions or modifications, it could prevent us from operating the affected stations and generating revenues. See “Our Business-Legislation and Regulation-License Renewal.”
Ownership Matters. The Communications Act, in conjunction with various antitrust statutes, contains restrictions on the ownership and control of broadcast licenses. Together with the FCC’s rules, those laws place limitations on alien ownership, common ownership of television, radio and newspaper properties, and ownership by those persons not having the requisite “character” qualifications and those persons holding “attributable” interests in the license. We must comply with current FCC regulations and policies in the ownership of our stations. Any future actions by Congress or the FCC with respect to the ownership rules may adversely impact our business.
Frequency Allocation. The FCC reviews and reallocates non-governmental frequency spectrum on an ad hoc basis pursuant to its rulemaking authority. The FCC has announced a potential reassessment process in connection with expanded needs for high speed, broadband, wireless, data networks. The FCC has proposed and Congress is considering “voluntary” contributions of broadcast channels by television station owners who would receive compensation from the auction proceeds. Reallocation of portions of the broadcast frequency band for broadband uses could diminish the frequency allocation to our stations and could have
an adverse impact on our operations, including a requirement to relocate to alternate channels with attendant costs.
Programming and Operation. Broadcast station licensees must present programming that is responsive to local community problems, needs and interests and to maintain certain records demonstrating such responsiveness. Stations also must follow various FCC rules that regulate, among other things, political advertising, sponsorship identifications, the advertisements of contests and lotteries, obscene and indecent broadcasts and technical operations, including limits on radio frequency radiation. The FCC also has adopted rules that place additional obligations on television station operators for closed-captioning of programming for the hearing impaired, equal employment opportunity obligations, maximum amounts of advertising and minimum amounts of programming specifically targeted for children and special obligations relating to political candidate advertising, as well as additional public information and reporting requirements. In recent years, the FCC has also vigorously enforced a number of rules, typically in connection with license renewals. Violations of these rules could lead to fines and penalties which may adversely affect our business and results of operations.
Congress and the FCC may in the future adopt new laws, regulations or policies regarding a wide variety of matters that could, directly or indirectly, adversely affect the operation and ownership of our television stations. It is impossible to predict the outcome of federal legislation or the potential effect thereof on our business. See “Our Business-Legislation and Regulation.”
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 delivered the National Broadband Plan to Congress on March 16, 2010. The National Broadband Plan recommended reallocating some of the spectrum presently allocated for television broadcasting so that the spectrum could be used for other purposes, including mobile wireless broadband. Further action by the FCC, Congress, or both, would be necessary in order to develop and implement the National Broadband Plan’s recommendation to reallocate broadcast spectrum. We cannot predict the likelihood, timing, or extent of a voluntary or involuntary spectrum reallocation. If some or all of our television stations are involuntarily 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 or mobile television expansion.
We are dependent on our affiliation with the ABC television network.
All of our television stations are affiliated with the ABC network. These affiliations are valuable to us because programs provided by broadcast networks are typically the most popular with audiences, which increases our ability to attract viewers to our programs, including our local newscasts. Because networks increasingly distribute their programming on other platforms, such as the Internet or portable devices, they may become less reliant upon their affiliates to distribute their programming, which could put us at a disadvantage in future contract negotiations. Our television viewership levels, and ultimately advertising revenues, are in large
part dependent upon programming provided by ABC, and there can be no assurance that such programming will achieve and maintain satisfactory viewership levels in the future. Each of our television stations has entered into a long-term affiliation agreement with the ABC network, which expires on December 31, 2012. Although ABC has continually renewed its affiliation with our television stations for as long as we have owned them and we expect to continue to be able to renew such affiliation agreements, we cannot be assured that such renewals will be obtained or that they will reflect the same general terms. It has been reported that recent network affiliation agreements have not included network compensation, but rather have included programming payments from the affiliate to the network. In order to renew our affiliation agreements, we may be required to make similar payments to the network; however, we cannot provide any assurance as to the level of such payments. The non-renewal or termination of one or more of our network affiliation agreements or alteration of terms could have an adverse effect on our results of operations.
We Depend Upon Quality Syndicated Programming
We purchase syndicated programming to supplement the shows supplied to us by ABC. Generally, however, before we purchase syndicated programming for our stations, this programming must first be cleared in the largest television markets-New York, Los Angeles and Chicago. Network owned and operated stations in those markets typically determine which syndicated shows will be brought to market, and therefore dictate our options for syndicated programs. If those stations do not launch new shows for the national marketplace, or if the shows that they launch, and which in turn we acquire, fail to generate satisfactory ratings, our viewership levels may decrease and our revenues may be adversely affected.
Increased Programming Costs Could Adversely Affect Our Business and Operating Results
Television programming is a significant component of television operating expenses. We may be exposed in the future to increased programming costs. Should such an increase in our programming expenses occur, it could have a material adverse effect on our operating results. In addition, television networks have been seeking arrangements with their affiliates to share the networks’ programming costs and to change the structure of network compensation, including eliminating compensation to affiliates and seeking reverse compensation, or payment from affiliates in consideration for the network’s programming. If we become party to an arrangement whereby we share our networks’ programming costs, our programming expenses would increase further. In addition, we usually acquire syndicated programming rights two or three years in advance and acquiring those rights may require multi-year commitments, making it difficult to predict accurately how a program will perform. In some instances, we must replace programs before their costs have been fully amortized, resulting in write-offs that increase station operating costs. An increase in the cost of news programming and content or in the costs for on-air and creative talent may also increase our expenses, particularly during events requiring extended news coverage, and therefore adversely affect our business and operating results. Finally, cable distributors are increasingly competing with us or the networks with which we are affiliated for the rights to carry popular sports programming, which could increase our costs, or if we were to lose the rights to broadcast such sports programming, could adversely affect our audience share and operating results.
Increased Competition Due to Technological Innovation May Adversely Impact Our Business
Technological innovation, and the resulting proliferation of programming alternatives such as cable, satellite television, video provided by telephone company fiber lines, satellite radio, video-on-demand, pay-per-view, the Internet, home video and entertainment systems, portable entertainment systems, and the availability of television programs on the Internet and portable digital devices have fragmented television viewing audiences and subjected television broadcast stations to new types of competition. Over the past decade, the aggregate viewership of non-network programming distributed via MVPDs such as cable television and satellite systems has increased, while the aggregate viewership of the major television networks has declined. Technologies that enable users to view content of their own choosing, in their own time, and to fast-forward or skip advertisements, such as DVRs, portable digital devices, and the Internet, may cause changes in consumer behavior or could hinder Nielsen’s ability to accurately measure our audience, both of which could affect the attractiveness of our offerings to advertisers, which, in turn, could adversely affect our operating results.
Other advances in technology, such as increasing use of local-cable advertising “interconnects,” which allow for easier insertion of advertising on local cable systems, have also increased competition for advertisers. In addition, video compression technologies permit greater numbers of channels to be carried within existing bandwidth on cable, satellite and other television distribution systems. These compression technologies, as well as other technological developments, are applicable to all video delivery systems, including digital over-the-air broadcasting, and have the potential to provide vastly expanded programming to highly targeted audiences. Reduction in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized niche programming on cable, satellite and other television distribution systems. We expect this ability to reach very narrowly defined audiences to increase competition both for audience and for advertising revenue. In addition, the expansion of competition due to technological innovation has increased, and may continue to increase competitive demand for programming. Such increased demand, together with rising production costs, may in the future increase our programming costs or impair our ability to acquire programming, which will in turn impair our ability to generate revenue from the advertisers with which we seek to do business.
Our Inability to Secure Carriage of Our Stations By Multi-Channel Video Programming Distributors May Adversely Affect Our Business
Cable operators (including telcos) and direct broadcast satellite systems are generally required to carry the primary signal of local commercial television stations pursuant to the FCC’s “must carry” or “carry-one, carry-all” rules. However, these MVPDs are prohibited from carrying a broadcast signal without obtaining the station’s consent. For each distributor, a local television broadcaster must make a choice once every three years whether to proceed under the “must carry” or “carry-one, carry-all” rules or to waive the right to mandatory but uncompensated carriage and negotiate a grant of retransmission consent to permit the system to carry the station’s signal, in most cases in exchange for some form of consideration from the system operator. In 2008, we elected retransmission consent for most of our stations for the three-year period commencing on January 1, 2009 and successfully negotiated carriage agreements for the period January 1, 2009, to at least December 31, 2011. We elected retransmission consent for the three-
year period commencing January 1, 2012, and we are in negotiations currently for renewal of those agreements expiring on December 31, 2011. Similarly, our agreements for carriage of our broadcast stations by the two DBS satellite carriers expire in 2013. If our retransmission consent agreements are terminated or not renewed, or if our broadcast signals are distributed on less favorable terms, our ability to distribute our programming and our operating results could be adversely affected.
In addition, MVPDs are actively seeking to change FCC regulations under which retransmission consent is negotiated in order to increase their bargaining leverage with television stations. The FCC has initiated a Notice of Proposed Rulemaking to reexamine those rules. The FCC has also asked for comment on eliminating the network non-duplication and syndicated exclusivity protection rules, which may permit MVPDs to import out-of-market television stations during a retransmission consent dispute. If the FCC modifies any of these rules, such changes could materially reduce this revenue source and could have an adverse effect on our business, financial condition and results of operations.
NewsChannel 8 is dependent on cable operators for carriage of its programming.
NewsChannel 8 is party to affiliation agreements with cable operators and other terrestrial MVPDs for the carriage of its programming to subscribers. The three primary affiliation agreements have expiration dates of December 31, 2011, December 31, 2012 and December 31, 2021. We are currently in negotiations for the renewal of the smallest of the three contracts which is set to expire on December 31, 2011. The news service operated by NewsChannel 8 is entirely dependent upon carriage by the MVPDs. Although these agreements have been renewed by the MVPDs in the past, there can be no assurance that these agreements will be renewed upon expiration or whether the same general terms and conditions can be retained. The non-renewal or termination of one or more of these affiliation agreements or alteration of terms could adversely affect our results of operations.
The Loss of Key Personnel Could Disrupt Our Management or Operations and Adversely Affect Our Business
Our business depends upon the continued efforts, abilities and expertise of our chief executive officer and other key employees. We believe that the rare combination of skills and years of media experience possessed by our executive officers would be difficult to replace, and that the loss of our executive officers could have a material adverse effect on our business. Additionally, our stations employ several on-air personnel, including anchors and reporters, with significant loyal audiences. Our failure to retain these personnel could adversely affect our operating results.
Protection of electronically stored data can be costly and if our data is compromised in spite of this protection, we may incur additional costs, lost opportunities and damage to our reputation.
We maintain information necessary to conduct our business, including confidential and proprietary information as well as personal information regarding our advertisers, website users and employees, in digital form. Data maintained in digital form is subject to the risk of intrusion, tampering and theft. We maintain systems to prevent this from occurring, but the maintenance of these systems can be costly and requires ongoing monitoring and updating as technologies
change and efforts to overcome security measures become more sophisticated. Moreover, despite our efforts, the possibility of intrusion, tampering and theft cannot be eliminated entirely, and risks associated with each of these remain. In addition, we provide confidential, proprietary and personal information to third parties when it is necessary to pursue business objectives. While we attempt to obtain assurances that these third parties will protect this information and, where appropriate, monitor the protections employed by these third parties, there is a risk the confidentiality of data held by third parties may be compromised. If our data systems are compromised, our ability to conduct our business may be impaired, we may lose profitable opportunities or the value of those opportunities may be diminished. If personal information of our advertisers, website users or employees is misappropriated or if our stations’ websites are compromised by insertion of false or inappropriate information, our reputation with our advertisers, website users and employees may be injured resulting in loss of business or morale, and we may incur costs to remediate possible injury to our advertisers, website users and employees or to pay fines or take other action with respect to judicial or regulatory actions arising out of the incident.
Possible strategic initiatives may impact our business.
We are evaluating, and will continue to evaluate, the nature and scope of our operations and various short-term and long-term strategic considerations. There are uncertainties and risks relating to strategic initiatives. For example, acquisition opportunities may become more limited as a consequence of the consolidation of ownership occurring in the television broadcast industry. Also, prospective competitors may have greater financial resources than we do. Future acquisitions may not be available on attractive terms, or at all. Also, if we do make acquisitions, we may not be able to successfully integrate the acquired stations or businesses. With respect to divestitures, we may experience varying success in making such divestitures on favorable terms, if at all, or in reducing fixed costs or transferring liabilities previously associated with the divested television stations or businesses. Finally, any such acquisitions or divestitures will be subject to FCC approval and FCC rules and regulations. Any of these efforts would require varying levels of management resources, which may divert our attention from other business operations. If we do not realize the expected benefits or synergies of such transactions, there may be an adverse effect on our financial condition and operating results.
Our stockholder may have interests that conflict with holders of our debt.
We are controlled by the Allbritton family. Accordingly, the family is able to control our operations and policies, and the vote on all matters submitted to a vote of our stockholder, including, but not limited to, electing directors, adopting amendments to ACC’s certificate of incorporation and approving mergers or sales of substantially all of ACC’s assets. Circumstances may occur in which the interests of the family could be in conflict with the interests of the holders of our debt. In addition, the family could pursue acquisitions, divestitures or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to the holders of the notes. See “Ownership of Capital Stock- ACC Common Stock” and “Certain Relationships and Related Transactions.”
We have paid dividends and made advances to related parties, and we expect to continue to do so in the future.
ACC has made advances to certain related parties. Because, at present, such related parties’ primary sources of repayment of the advances is through our ability to pay dividends or to make
other distributions, these advances have been treated as reductions to stockholder’s investment in our consolidated balance sheets. The stockholder’s deficit at September 30, 2010 and 2011 was $388,716 and $379,567, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” and “Certain Relationships and Related Transactions.” Under our current debt instruments, future advances, loans, dividends and distributions by us are subject to certain restrictions. We anticipate that, subject to such restrictions, applicable law and payment obligations with respect to our debt, ACC will make advances, distributions or dividends to related parties in the future.
Our business may be negatively affected by work stoppages, slowdowns or strikes by our employees.
Currently, there are three bargaining agreements with unions representing 120 of our full and part-time employees at WJLA/NewsChannel 8, two of which expired during Fiscal 2011, and one of which is set to expire on December 31, 2011. We cannot provide assurance about the results of negotiation of future collective bargaining agreements, whether future collective bargaining agreements will be negotiated without interruptions in our business, or the possible effect of future collective bargaining agreements on our financial condition or results of operations. We also cannot be assured that strikes will not occur in the future in connection with labor negotiations or otherwise. Any prolonged strike or work stoppage could have an adverse effect on our financial condition and results of operations. See “Our Business - Employees.”
Changes in accounting standards can significantly impact reported operating results.
Generally accepted accounting principles and accompanying pronouncements and implementation guidelines for many aspects of our business, including those related to intangible assets and income taxes, are complex and involve significant judgments. Changes in these rules or their interpretation could significantly change our reported operating results. See “Management’s Discussions and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates.”
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2.
ITEM 2. PROPERTIES
We maintain our corporate headquarters in Arlington, Virginia, occupying leased office space of approximately 14,200 square feet.
The types of properties required to support each of the stations include offices, studios, transmitter sites and antenna sites. The stations’ studios are co-located with their office space while transmitter sites and antenna sites are generally located away from the studios in locations determined to provide maximum market signal coverage.
The following table describes the general characteristics of our principal real property:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We currently and from time to time are involved in litigation incidental to the conduct of our business, including suits based on defamation and employment activity. We are not currently a party to any lawsuit or proceeding which, in our opinion, could reasonably be expected to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Not Applicable.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands)
The selected consolidated financial data for the fiscal years ended September 30, 2007, 2008, 2009, 2010 and 2011 are derived from our consolidated financial statements. The information in this table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere herein. Please note that the statement of operations data below have been adjusted to reflect WCIV and Politico as discontinued operations for all periods presented. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(Footnotes on following page)
Footnotes
(dollars in thousands)
(1) Effective August 1, 2009, the equity interests of WCIV, our wholly-owned subsidiary, were distributed to Perpetual. On November 13, 2009, the equity interests of Politico, our wholly-owned subsidiary, were distributed to Perpetual. As the operations of WCIV and Politico each constituted a component of the Company, their operating results have been presented as discontinued operations for all periods presented. See “Consolidated Financial Statements-Notes to Consolidated Financial Statements-Note 7.”
(2) Total debt is defined as long-term debt (including the current portion thereof, and net of discount).
(3) Cash flows from operating, investing and financing activities were determined in accordance with Generally Accepted Accounting Principles (“GAAP”). See “Consolidated Financial Statements-Consolidated Statements of Cash Flows.”
(4) Capital expenditures for the years ended September 30, 2008 and 2009 are exclusive of $2,924 and $4,376, respectively, associated with the replacement of our broadcast tower and related equipment in Little Rock, Arkansas. See “Consolidated Financial Statements-Notes to Consolidated Financial Statements-Note 10.”
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands)
General Factors Affecting Our Business
The Company
We own ABC network-affiliated television stations serving six geographic markets: WJLA in Washington, D.C.; WCFT in Tuscaloosa, Alabama, WJSU in Anniston, Alabama and WBMA-LP, a low power television station licensed to Birmingham, Alabama (we operate WCFT and WJSU in tandem with WBMA-LP serving the viewers of the Birmingham, Tuscaloosa and Anniston market as a single programming source); WHTM in Harrisburg, Pennsylvania; KATV in Little Rock, Arkansas; KTUL in Tulsa, Oklahoma; and WSET in Lynchburg, Virginia. We also provide 24-hour per day basic cable television programming to the Washington, D.C. market, through NewsChannel 8, primarily focused on regional and local news for the Washington, D.C. metropolitan area. The operations of NewsChannel 8 are integrated with WJLA.
We owned and operated WCIV, an ABC network-affiliated television station in Charleston, South Carolina, from March 1, 1996 until August 1, 2009, at which time the equity interests of WCIV were distributed to Perpetual. We also owned and operated Politico, a specialized newspaper and Internet site (politico.com), from its launch in January 2007 until November 13, 2009, at which time the equity interests of Politico were distributed to Perpetual. The operating results of WCIV and Politico are classified as discontinued operations for all periods presented.
Based upon regular assessments of our operations and internal financial reporting, we have determined that we have one reportable segment.
Business
Our operating revenues are derived from local and national advertisers and, to a much lesser extent, from retransmission consent fees from cable and telephone company operators as well as DBS providers, from the ABC network and program syndicators for the broadcast of programming and from other broadcast-related activities. The primary operating expenses involved in owning and operating television stations are employee compensation, programming, newsgathering, production, promotion and the solicitation of advertising.
Television stations receive revenues for advertising sold for placement within and adjoining locally originated and network programming. Advertising rates are set based upon a variety of factors, including the size and demographic makeup of the market served by the station, a program’s popularity among viewers whom an advertiser wishes to attract, the number of advertisers competing for the available time, the availability of alternative advertising media in the market area, a station’s overall ability to attract viewers in its market area and the station’s ability to attract viewers among particular demographic groups that an advertiser may be
targeting. Advertising rates are also affected by an aggressive and knowledgeable sales force and the development of projects, features and programs that tie advertiser messages to programming.
Our advertising revenues are generally highest in the first and third quarters of each fiscal year, due in part to increases in retail advertising in the period leading up to and including the holiday season and active advertising in the spring. The fluctuation in our operating results is generally related to fluctuations in the revenue cycle. In addition, advertising revenues are generally higher during election years due to spending by political candidates, which is typically heaviest during our first and fourth fiscal quarters. During years in which Olympic Games are held, there is additional demand for advertising time and, as a result, increased advertising revenue associated with Olympic broadcasts. The 2010 Winter Olympic Games were broadcast by NBC in February 2010 in connection with NBC’s United States television rights to the Olympic Games, which extend through 2020.
Our cash flow from operations is also affected on a quarterly basis by the timing of cash collections and interest payments on our debt. Cash receipts are usually greater during the second and fourth fiscal quarters, as the collection of advertising revenue typically lags the period in which such revenue is recorded. Scheduled semi-annual interest payments on our long-term fixed interest rate debt occur during the first and third fiscal quarters. As a result, our cash flows from operating activities as reflected in our consolidated financial statements are generally significantly higher during our second and fourth fiscal quarters, and such quarters comprise a substantial majority of our cash flow from operating activities for the full fiscal year.
The broadcast television industry is cyclical in nature, being affected by prevailing economic conditions. Because we rely on sales of advertising for substantially all of our revenues, our operating results are sensitive to general economic conditions and regional conditions in each of the local market areas in which our stations operate. For Fiscal 2009, 2010 and 2011, the Washington, D.C. advertising market accounted for approximately one-half of our total revenues. As a result, our results of operations are highly dependent on WJLA/NewsChannel 8 and, in turn, the Washington, D.C. economy and, to a lesser extent, on each of the other local economies in which our stations operate.
We are also dependent on automotive-related advertising. Approximately 14%, 17% and 20% of our total operating revenues for the years ended September 30, 2009, 2010 and 2011, respectively, consisted of automotive-related advertising. Automotive-related advertising declined by 41% for the year ended September 30, 2009 as a result of decreased demand for advertising by the automotive industry. Automotive-related advertising increased by 41% and 11% for the years ended September 30, 2010 and 2011, respectively. Significant decreases in such advertising in the future would adversely affect our operating results.
2010 Financing Activities
On April 29, 2010, we executed an amendment to our senior credit facility. The amendment served to: (i) permit us to complete our offering of senior notes as discussed below; (ii) provide additional collateral; (iii) extend the maturity date to April 29, 2013; and (iv) reduce the total commitment from $65,000 to $60,000.
On April 30, 2010, we issued $455,000 aggregate principal amount of 8% Senior Notes due May 15, 2018 (the “2018 Notes”) at par. The net proceeds, together with borrowings under our senior credit facility and cash on hand, were used to purchase and redeem $455,000 aggregate principal amount of our 7 3/4% Senior Subordinated Notes due 2012 (the “2012 Notes”). As of June 1, 2010, all of the 2012 Notes had been purchased or redeemed.
As a result of the purchase and redemption of our 2012 Notes, we recorded a pre-tax charge of $10,408 during the quarter ended June 30, 2010 related to the early repayment of the 2012 Notes.
On June 28, 2010, we commenced a registered exchange offer of a new series of the 2018 Notes in exchange for the initial series of the 2018 Notes issued April 30, 2010 and consummated the exchange offer following its expiration on August 4, 2010 by issuing the new series of notes in exchange for notes of the initial series properly tendered. The terms of the exchange notes are substantially identical to those of the initial notes, except that the exchange notes have been registered under the Securities Act of 1933, as amended, and transfer restrictions and registration rights relating to the initial notes do not apply to the exchange notes.
Operating Revenues
The following table depicts the principal types of operating revenues from continuing operations, net of agency commissions, earned by us during each of the last three fiscal years and the percentage contribution of each to our total operating revenues, before fees.
(1) Represents sale of advertising to local and national advertisers, either directly or through agencies representing such advertisers, net of agency commission.
(2) Represents sale of advertising to political advertisers.
(3) Represents subscriber fees earned from cable and telco operators as well as DBS providers.
(4) Represents sale of advertising on our Internet websites.
(5) Represents payment by network for broadcasting or promoting network programming.
(6) Represents value of commercial time exchanged for goods and services (trade) or syndicated programs (barter).
(7) Represents fees paid to national sales representatives and fees paid for music licenses.
Local and national advertising constitutes our largest category of operating revenues, representing 75% to 80% of our total operating revenues in each of the last three fiscal years. Local and national advertising revenues decreased 18.0% in Fiscal 2009, increased 14.0% in Fiscal 2010, and decreased 3.5% in Fiscal 2011.
Results of Operations-Fiscal 2011 Compared to Fiscal 2010
Set forth below are selected consolidated financial data for Fiscal 2010 and 2011, respectively, and the percentage change between the years.
Net Operating Revenues
Net operating revenues for Fiscal 2011 totaled $196,923, a decrease of $4,277, or 2.1%, as compared to Fiscal 2010. This decrease primarily reflects decreased demand for local, national and political advertising, partially offset by increased subscriber fees as discussed below.
Local and national advertising revenues decreased $5,700, or 3.5%, from Fiscal 2010. Local and national advertising revenue decreased as a result of significantly less demand for issue-oriented advertising surrounding the legislative process during the current year as well as a decrease in demand from larger, more nationally-focused advertisers. Notwithstanding a 5% decrease in automotive-related advertising due to the effect of the events in Japan on automotive inventory levels during the three months ended June 30, 2011, the automotive category increased 11% during Fiscal 2011, which partially offset the decreases discussed above.
Political advertising revenues amounted to $7,782 during Fiscal 2011 as compared to $10,355 during Fiscal 2010. Substantially all of the political advertising revenue in Fiscal 2011 occurred during the first quarter of the year and consisted of spending related to the November 2010 interim elections. In Fiscal 2010, political advertising revenue consisted of spending related to the November 2009 Virginia Governor’s election and spending by candidates in heavily contested primary and runoff elections in several of our markets as well as spending leading up to the November 2010 interim elections.
Subscriber fees increased $3,168, or 16.9%, during Fiscal 2011 as compared to the prior fiscal year. This increase was due to the renewal of certain retransmission consent agreements during the year as well as increases in per subscriber rates in accordance with the underlying agreements and increases in the overall number of subscribers.
No individual advertiser accounted for more than 5% of our operating revenues during Fiscal 2011 or 2010.
Total Operating Expenses
Total operating expenses in Fiscal 2011 were $131,681, an increase of $7,502, or 6.0%, compared to total operating expenses of $124,179 in Fiscal 2010. This net increase consisted of an increase in television operating expenses, excluding depreciation and amortization of $6,310, an increase in depreciation and amortization of $637 and an increase in corporate expenses of $555.
Television operating expenses, excluding depreciation and amortization, totaled $115,450 in Fiscal 2011, an increase of $6,310, or 5.8%, when compared to television operating expenses of $109,140 in Fiscal 2010. This increase was due primarily to increased personnel and operating costs related to the new Washington, D.C. local news website, TBD.com, and its integration with the NewsChannel 8 cable platform in the beginning of the year as well as the effect of expense reduction initiatives on the Fiscal 2010 period. While the majority of the expense reductions that we initiated during Fiscal 2009 are continuing, certain of these reductions were temporary in nature and the related expenses have begun to increase. This effect had largely taken place by the end of Fiscal 2011. Television operating expenses, excluding depreciation and amortization, increased by 2.0% during the fourth fiscal quarter as compared to the 5.8% increase for the full fiscal year. Such expenses are expected to decline in Fiscal 2012 as a result of a reduction in programming costs, largely due to the end of The Oprah Winfrey Show.
Operating Income
Operating income of $65,242 in Fiscal 2011 decreased $11,779, or 15.3%, compared to operating income of $77,021 in Fiscal 2010. The operating income margin in Fiscal 2011 decreased to 33.1% from 38.3% for the prior fiscal year. The decreases in operating income and margin during Fiscal 2011 were primarily the result of decreased net operating revenues and increased total operating expenses as discussed above.
Nonoperating Expenses, Net
Interest Expense. Interest expense decreased by $268, or 0.7%, from $37,469 in Fiscal 2010 to $37,201 in Fiscal 2011. The average balance of debt outstanding for Fiscal 2010 and 2011 was $481,806 and $469,125, respectively, and the weighted average interest rate on debt was 7.7% and 7.9% during the years ended September 30, 2010 and 2011, respectively. This decrease in average debt outstanding was primarily due to a reduction in the average amount outstanding under our senior credit facility during the year ended September 30, 2011 as
compared to the prior year. Net repayments of $10,000 were made during Fiscal 2011, resulting in a decrease in the average amount outstanding of $8,414.
Loss on Early Repayment of Debt. As a result of the purchase and redemption of our 2012 Notes during Fiscal 2010 as discussed above, we recorded a pre-tax charge of $10,408 during the quarter ended June 30, 2010 related to the early repayment of the 2012 Notes.
Other, Net. Other net nonoperating expense was $1,823 during Fiscal 2011 as compared to other net nonoperating income of $1,057 during Fiscal 2010. The difference of $2,880 resulted primarily from the recording of a non-cash gain on the exchange of equipment with Sprint Nextel Corporation (“Nextel”) of $2,591 during the year ended September 30, 2010 with no comparable activity during the year ended September 30, 2011.
The FCC granted to Nextel the right to reclaim a portion of the spectrum in the 2 GHz band from broadcasters across the country. In order to claim this spectrum, Nextel was required to replace all of the broadcasters’ electronic newsgathering equipment using this spectrum with digital equipment capable of operating in the reformatted portion of the 2 GHz band retained by the broadcasters. This exchange of equipment was completed on a market by market basis. As the equipment was exchanged and placed into service in each of our markets, a gain was recorded to the extent that the fair market value of the equipment received exceeded the book value of the analog equipment exchanged.
Income Taxes
The provision for income taxes in Fiscal 2011 totaled $8,759, an increase of $1,871, or 27.2%, when compared to the provision for income taxes of $6,888 in Fiscal 2010. This increase in income tax expense was primarily due to the prior year reduction in valuation allowances resulting from management’s evaluation of the recoverability of certain state and local net operating loss carryforwards as well as the effect of releasing reserves due to the expiration of a statute of limitations of $1,372 and $839 during the years ended September 30, 2010 and 2011, respectively.
Income from Continuing Operations
Income from continuing operations during Fiscal 2011 was $17,459, a decrease of $6,072, or 25.8%, when compared to income from continuing operations during Fiscal 2010 of $23,531. This decrease was primarily due to decreased operating income, partially offset by decreased nonoperating expenses, including the effect of the loss on early repayment of debt in the prior fiscal year, as discussed above.
Income from Discontinued Operations, Net of Income Taxes
The operations of Politico through November 13, 2009 are classified as discontinued operations. Income from discontinued operations was $1,641, net of the related tax provision of $1,028, during Fiscal 2010.
Net Income
For Fiscal 2011, we recorded net income of $17,459 as compared to $25,172 for Fiscal 2010. The decrease in net income during Fiscal 2011 of $7,713, or 30.6%, was primarily due to decreased income from continuing operations in the current year as well as income from discontinued operations in the prior year, as discussed above.
Balance Sheet
Program rights and program rights payable decreased from September 30, 2010 to September 30, 2011 primarily due to the end of The Oprah Winfrey Show in September 2011 and the significantly lower cost of replacement programming. See “Liquidity and Capital Resources” for discussion of other balance sheet fluctuations.
Results of Operations-Fiscal 2010 Compared to Fiscal 2009
Set forth below are selected consolidated financial data for Fiscal 2009 and 2010, respectively, and the percentage change between the years.
Net Operating Revenues
Net operating revenues for Fiscal 2010 totaled $201,200, an increase of $19,402, or 10.7%, as compared to Fiscal 2009. This increase primarily reflects increased demand for local and national advertising as discussed below.
Local and national advertising revenues increased $20,028, or 14.0%, from Fiscal 2009. Local and national advertising revenue increased as a result of strengthening advertising demand due to the improving economic environment. Active issue-oriented advertising surrounding the
legislative process also contributed to this increase during the first half of the fiscal year. The automotive category, which decreased significantly during the previous fiscal year, increased 41% during Fiscal 2010.
Political advertising revenues amounted to $10,355 during Fiscal 2010 as compared to $10,104 during Fiscal 2009. Political advertising revenue was strong during both fiscal years. Spending by the Presidential candidates associated with the November 2008 general election generated political revenues during the first quarter of Fiscal 2009. Advertising leading up to the Virginia Governor’s election in November 2009 generated political revenues during the fourth quarter of Fiscal 2009 and the first quarter of Fiscal 2010. Spending by candidates related to heavily contested primaries in several of our markets as well as spending leading up to the November 2010 interim elections generated political revenues during the second half of Fiscal 2010.
Subscriber fees increased $3,099, or 19.8%, during Fiscal 2010 as compared to the prior fiscal year. This increase was due to new retransmission consent agreements entered into with certain cable companies during the quarters ended March 31, 2009 and June 30, 2009 as well as contractual increases in per subscriber rates and increases in the overall number of subscribers related to existing agreements.
Other revenue decreased $2,624, or 46.6%, during Fiscal 2010 as compared to the same period in the prior year. During the fourth quarter of Fiscal 2009, the insurance claim related to the January 2008 collapse of our broadcast tower in Little Rock, Arkansas was finalized. As a result, we recorded a gain on the business interruption portion of the claim of $2,811 in other revenue. See “Liquidity and Capital Resources-Other Uses of Cash.”
No individual advertiser accounted for more than 5% of our operating revenues during Fiscal 2010 or 2009.
Total Operating Expenses
Total operating expenses in Fiscal 2010 were $124,179, a decrease of $32,287, or 20.6%, compared to total operating expenses of $156,466 in Fiscal 2009. This net decrease consisted of a decrease in television operating expenses, excluding depreciation, amortization and impairment, of $2,608, a decrease in depreciation and amortization of $76, a prior year intangible asset impairment charge of $30,700 and an increase in corporate expenses of $1,097.
Television operating expenses, excluding depreciation, amortization and impairment, totaled $109,140 in Fiscal 2010, a decrease of $2,608, or 2.3%, when compared to television operating expenses of $111,748 in Fiscal 2009. This decrease was due primarily to expense reduction initiatives implemented during the quarter ended March 31, 2009 in response to the overall weak advertising environment. These expense reductions included the elimination of management and staff positions, reductions in incentive and base compensation across the Company, the suspension of the Company match to our 401(k) plan and other cost-saving measures, including significant decreases in discretionary spending, such as travel, meals and entertainment. The full-year effect of these initiatives largely occurred by February 1, 2010. This decrease was somewhat offset by increased personnel costs during the second half of the
fiscal year leading up to the launch of our new Washington, D.C. website, TBD.com, and its integration with the NewsChannel 8 cable platform as well as increased sales expenses associated with the increase in revenues.
Corporate expenses increased $1,097, or 21.6%, for the fiscal year ended September 30, 2010 as compared to the prior fiscal year primarily due to increased compensation expense as compared to the prior year’s reduced levels.
During the second quarter of Fiscal 2009, events occurred which indicated that an impairment of certain broadcast licenses may have existed. The events included the decline in the overall economy, forecasts for negative industry-wide advertising growth in 2009, and reduced revenue projections and related cost reduction measures within the Company. Thus, such broadcast licenses were tested for impairment as of March 31, 2009. The tests indicated that four broadcast licenses were impaired. As a result, we recorded a non-cash impairment charge of $27,700 during the quarter ended March 31, 2009. Our annual impairment tests were performed as of September 30, 2009. These tests indicated that a further impairment had occurred with respect to these four broadcast licenses, resulting in a non-cash impairment charge of $3,000 during the quarter ended September 30, 2009. There were no related charges recorded during Fiscal 2010.
Operating Income
Operating income of $77,021 in Fiscal 2010 increased $51,689, or 204.0%, compared to operating income of $25,332 in Fiscal 2009. The operating income margin in Fiscal 2010 increased to 38.3% from 13.9% for the prior fiscal year. The increases in operating income and margin during Fiscal 2010 were primarily the result of increased net operating revenues and decreased total operating expenses as discussed above.
Nonoperating Expenses, Net
Interest Expense. Interest expense increased by $289, or 0.8%, from $37,180 in Fiscal 2009 to $37,469 in Fiscal 2010. The increase in interest expense was primarily due to the increase in the weighted average interest rate on debt, partially offset by the decrease in the average balance of debt outstanding during Fiscal 2010 as compared to the prior fiscal year. The average balance of debt outstanding for Fiscal 2009 and 2010 was $488,199 and $481,806, respectively, and the weighted average interest rate on debt was 7.5% and 7.7% during the years ended September 30, 2009 and 2010, respectively.
Loss on Early Repayment of Debt. As a result of the purchase and redemption of our 2012 Notes as discussed above, we recorded a pre-tax charge of $10,408 during the quarter ended June 30, 2010 related to the early repayment of the 2012 Notes.
Other, Net. Other net nonoperating income was $1,057 and $5,222 during Fiscal 2010 and 2009, respectively. The $4,165 decrease in other net nonoperating income was primarily due to a prior year insurance gain. During the fourth quarter of Fiscal 2009, the insurance claim related to the January 2008 collapse of our broadcast tower in Little Rock, Arkansas was finalized. As a result, we recorded a gain on the replacement cost property portion of the claim of $6,015,
reflecting the excess of replacement cost insurance proceeds over the carrying value of the destroyed assets. See “Liquidity and Capital Resources-Other Uses of Cash.” This decrease in other net nonoperating income was partially offset by an increase in the non-cash gain recorded related to the exchange of equipment by Nextel of $1,976 as discussed below.
The FCC granted to Sprint Nextel Corporation (“Nextel”) the right to reclaim a portion of the spectrum in the 2 GHz band from broadcasters across the country. In order to claim this spectrum, Nextel was required to replace all of the broadcasters’ electronic newsgathering equipment using this spectrum with digital equipment capable of operating in the reformatted portion of the 2 GHz band retained by the broadcasters. This exchange of equipment was completed on a market by market basis. As the equipment was exchanged and placed into service in each of our markets, a gain was recorded to the extent that the fair market value of the equipment received exceeded the book value of the analog equipment exchanged. During the years ended September 30, 2009 and 2010, equipment was exchanged and placed into service with an excess of fair market value as compared to book value of $615 and $2,591, respectively, and was recorded as a non-cash gain in other, net nonoperating income.
Income Taxes
The provision for income taxes in Fiscal 2010 totaled $6,888, an increase of $7,601 when compared to the benefit from income taxes of $713 in Fiscal 2009. This increase in income tax expense was primarily due to the $36,903 increase in pre-tax income from continuing operations, partially offset by a reduction in income tax expense related to the release of reserves due to the expiration of a statute of limitations and a reduction in valuation allowances resulting from management’s evaluation of the recoverability of certain state and local net operating loss carryforwards.
Income (Loss) from Continuing Operations
Income from continuing operations during Fiscal 2010 was $23,531, an increase of $29,302 when compared to the loss from continuing operations during Fiscal 2009 of $5,771. This increase was primarily due to increased operating income, partially offset by the loss on early repayment of debt, the decrease in net nonoperating income and the increased provision for income taxes related to the increased operating income, as discussed above.
Income (Loss) from Discontinued Operations, Net of Income Taxes
The operations of WCIV and Politico through July 31, 2009 and November 13, 2009, respectively, are classified as discontinued operations for all periods presented. Income from discontinued operations of Politico through November 13, 2009 was $1,641, net of the related tax provision of $1,028, during Fiscal 2010. The distribution of Politico resulted in a current tax effect of $1,766 which was reflected as a reduction to stockholder’s investment during Fiscal 2010. Income from discontinued operations of WCIV and Politico during Fiscal 2009 was $199, net of the related tax provision of $156.
Net Income (Loss)
For Fiscal 2010, the Company recorded net income of $25,172 as compared to a net loss of $5,572 for Fiscal 2009. The increase in net income during Fiscal 2010 of $30,744 was primarily due to increased income from continuing operations, as discussed above.
Liquidity and Capital Resources
As of September 30, 2011, our cash and cash equivalents aggregated $2,402, and we had an excess of current assets over current liabilities of $16,194.
Cash Provided by Operations
Our principal sources of working capital are cash flow from operations and borrowings under our senior credit facility. As discussed above, our operating results are cyclical in nature primarily as a result of seasonal fluctuations in advertising revenues, which are generally highest in the first and third quarters of each fiscal year. Our cash flow from operations is also affected on a quarterly basis by the timing of cash collections and interest payments on our debt. Cash receipts are usually greater during the second and fourth fiscal quarters as the collection of advertising revenue typically lags the period in which such revenue is recorded. Scheduled semi-annual interest payments on our long-term fixed interest rate debt occur during the first and third fiscal quarters. As a result, our cash flows from operating activities as reflected in our consolidated financial statements are generally significantly higher during our second and fourth fiscal quarters, and such quarters comprise a substantial majority of our cash flows from operating activities for the full fiscal year.
As reported in our consolidated statements of cash flows, our net cash provided by operating activities was $21,407, $36,142 and $27,304 for Fiscal 2009, 2010 and 2011, respectively. The increase in cash provided by operating activities from Fiscal 2009 to Fiscal 2010 was primarily the result of the increase in net income (exclusive of the after-tax effect of the intangible asset impairment charge in Fiscal 2009 and the loss on early repayment of debt in Fiscal 2010). Additionally, cash flows from operating activities were affected by various differences in the timing of cash receipts and payments in the ordinary course of operations, including an increase in accounts receivable (exclusive of the effect of discontinued operations), which was associated with the increase in net operating revenues. The decrease in cash provided by operating activities from Fiscal 2010 to Fiscal 2011 was primarily the result of the decrease in net income (exclusive of the after-tax effect of the loss on early repayment of debt in Fiscal 2010) as well as an increase in cash paid for interest during the current year due to changes in timing related to the prior year financing activities. These decreases were partially offset by changes in accounts receivable, excluding the effect of discontinued operations, as well as various differences in timing of cash receipts and payments in ordinary course of operations.
Distributions to Related Parties
We have periodically made advances in the form of distributions to Perpetual. For Fiscal 2009, 2010 and 2011, we made cash advances net of repayments to Perpetual of $7,125, $5,905 and $8,310, respectively. The advances to Perpetual are non-interest bearing and, as such, do not reflect market rates of interest-bearing loans to unaffiliated third parties. Effective August 1, 2009, the equity interests of WCIV were distributed to Perpetual, and on November 13, 2009, the equity interests of Politico were distributed to Perpetual. See “General Factors Affecting Our Business.”
At present, the primary source of repayment of net advances is through our ability to pay dividends or make other distributions, and there is no immediate intent for the amounts to be repaid. Accordingly, these advances have been treated as a reduction of stockholder’s investment and are described as “distributions” in our consolidated financial statements.
Under the terms of the agreements relating to our indebtedness, future advances, distributions and dividends to related parties are subject to certain restrictions. We anticipate that, subject to such restrictions, applicable law and payment obligations with respect to our indebtedness, we will make advances, distributions or dividends to related parties in the future. Subsequent to September 30, 2011 and through December 15, 2011, we made net distributions to owners of $2,000.
During Fiscal 2009, 2010 and 2011, we were charged by Perpetual under a tax sharing agreement with Perpetual for federal and state income taxes totaling $4,887, $9,272 and $6,411, respectively, and we made payments to Perpetual for these taxes of $2,842, $11,317 and $6,411, respectively.
Stockholder’s deficit amounted to $379,567 at September 30, 2011, a decrease of $9,149, or 2.4%, from the September 30, 2010 deficit of $388,716. The decrease was due to net income for Fiscal 2011 of $17,459, partially offset by a net increase in distributions to owners of $8,310.
Indebtedness
Our total debt decreased from $470,000 at September 30, 2010 to $460,000 at September 30, 2011. This debt consisted of $455,000 of 8% senior notes due May 15, 2018 and $5,000 outstanding under our senior credit facility. The decrease of $10,000 in total debt from September 30, 2010 to September 30, 2011 was due to net repayments under the senior credit facility.
On April 30, 2010, we issued $455,000 aggregate principal amount of the 2018 Notes at par. The net proceeds, together with borrowings under our senior credit facility and cash on hand, were used to purchase and redeem $455,000 aggregate principal amount of our 2012 Notes. As of June 1, 2010, all of the 2012 Notes had been purchased or redeemed.
As a result of the purchase and redemption of our 2012 Notes, we recorded a pre-tax charge of $10,408 during the quarter ended June 30, 2010 related to the early repayment of the 2012 Notes.
On June 28, 2010, we commenced a registered exchange offer of a new series of the 2018 Notes in exchange for the initial series of the 2018 Notes issued April 30, 2010 and consummated the exchange offer following its expiration on August 4, 2010 by issuing the new series of notes in exchange for notes of the initial series properly tendered. The terms of the exchange notes are substantially identical to those of the initial notes, except that the exchange notes have been registered under the Securities Act of 1933, as amended, and transfer restrictions and registration rights relating to the initial notes do not apply to the exchange notes.
Our $60,000 senior credit facility is secured by the assets and stock of ACC and its subsidiaries and matures April 19, 2013. Interest is payable quarterly at various rates from prime plus 1.50% or from LIBOR plus 2.75% depending on certain financial operating tests.
Under the existing borrowing agreements, we are subject to restrictive covenants that place limitations upon payments of cash distributions, dividends, issuance of capital stock, investment transactions, incurrence of additional obligations and transactions with affiliates. Our senior credit facility currently contains the most restrictive covenants and limitations of this nature. In addition, under the senior credit facility, we must maintain compliance with certain financial covenants. Compliance with the financial covenants is measured at the end of each quarter, and as of September 30, 2011, we were in compliance with those financial covenants. We are also required to pay a commitment fee ranging from 0.375% to 0.500% per annum based on the amount of any unused portion of the senior credit facility.
Our senior credit facility, under which $5,000 was outstanding at September 30, 2011, has four financial maintenance covenants which are calculated based on the most recent twelve months of activity as of the end of each quarter. These financial maintenance covenants include a minimum interest coverage ratio, maximum total and senior secured leverage ratios and a minimum fixed charge coverage ratio. The maximum total leverage ratio covenant is currently the most restrictive of the four financial maintenance covenants, and it also serves to limit cash advances to Perpetual. The calculation and the requirements for this ratio as of September 30, 2010 and 2011 are provided below.
Consolidated EBITDA is a defined term in our senior credit facility and is calculated as required by the terms of our senior credit facility as follows:
The calculation for the twelve months ended September 30, 2010 excludes amounts related to Politico as required by the senior credit facility. Consolidated EBITDA is a non-GAAP measure which is only presented for purposes of assisting the reader in understanding our compliance with our financial covenants. We have calculated Consolidated EBITDA in accordance with the specific requirements of our senior credit facility, and this calculation may not be consistent with similarly titled measures used by other companies. This measure should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
We believe that based on anticipated results for Fiscal 2012, we will be able to continue to comply with the financial covenants of our senior credit facility.
The indenture for our long-term debt provides that, whether or not required by the rules and regulations of the SEC, so long as any senior notes are outstanding, we, at our expense, will furnish to each holder (i) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K, if we were required to file such forms, including a “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and, with respect to the annual financial information only, a report thereon by our certified independent accountants and (ii) all current reports that would be required to be filed with the SEC on Form 8-K if we were required to file such reports. In addition, the indenture also provides that, whether or not required by the rules and regulations of the SEC, we will file a copy of all such information and reports with the SEC for public availability (unless the SEC will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. Although our duty to file such reports with the SEC was automatically suspended pursuant to Section 15(d) of the Securities Exchange Act of 1934, effective October 1, 2010, we will continue to file such reports in accordance with the indenture.
Other Uses of Cash
During Fiscal 2009, 2010 and 2011, we made $4,853, $5,666 and $9,710, respectively, of capital expenditures. Capital expenditures of $4,853 during the year ended September 30, 2009, are exclusive of $4,376 of expenditures related to the replacement of our broadcast tower and related equipment in Little Rock, Arkansas, as discussed below. The increase in capital expenditures during Fiscal 2011 as compared to the prior fiscal year was due primarily to the completion of the conversion to high definition local production in all markets. At this time, we estimate that capital expenditures for Fiscal 2012 will be in the approximate range of $4,000 to $5,000, and will primarily be for the acquisition of technical equipment and vehicles to support ongoing operations across our stations. We expect that the source of funds for these anticipated capital expenditures will be cash provided by operations and borrowings under the senior credit facility.
On January 11, 2008, our broadcast tower in Little Rock, Arkansas collapsed and fell, causing an interruption in the distribution of the over-the-air broadcast signals for our station in the Little Rock market. The tower, the broadcast equipment installed on the tower and certain equipment located near the tower were destroyed. We completed construction of the permanent replacement tower and installation of related equipment and began broadcasting a full power digital signal from the replacement tower on February 20, 2009. During July 2009, the related insurance claim negotiation was finalized. As a result, the Company recorded a gain on the replacement cost property portion of the claim of $6,015, reflecting the excess of replacement cost insurance proceeds over the carrying value of the destroyed assets. This gain is reflected in other nonoperating income in the accompanying consolidated statement of operations and retained earnings. In addition, a gain on the business interruption portion of the claim of $2,811, reflecting the lost revenue associated with the tower collapse, was also recorded during the quarter ended September 30, 2009. This gain is reflected in net operating revenues in the accompanying consolidated statement of operations and retained earnings. Proceeds received from the insurance company during the years ended September 30, 2008 and 2009 were reflected within investing activities in the consolidated statements of cash flows to the extent of claim-related capital expenditures during that period. Proceeds in excess of claim-related capital expenditures were reflected within operating activities.
We regularly enter into program contracts for the right to broadcast television programs produced by others and program commitments for the right to broadcast programs in the future. Such programming commitments are generally made to replace expiring or cancelled program rights. During Fiscal 2009, 2010 and 2011, we made cash payments of approximately $11,300, $11,000 and $11,600, respectively, for rights to television programs. We anticipate cash payments for program rights will approximate $8,000 for Fiscal 2012 and be in the approximate range of $8,000 to $9,000 per year for Fiscal 2013 through 2016. The decrease in anticipated future program payments is due primarily to the end of The Oprah Winfrey Show in September 2011 and the significantly lower cost of replacement programming. We currently intend to fund these commitments with cash provided by operations.
The following table presents the long-term debt maturities, required payments under contractual agreements for broadcast rights, future minimum lease payments under noncancellable leases and guaranteed payments under employment contracts and deferred compensation agreements as of September 30, 2011:
Interest payments under our senior credit facility have not been included in the above table as such payments fluctuate depending on the market rates of interest and the amount outstanding under the senior credit facility.
Based upon our current level of operations, we believe that available cash, together with cash flows generated by operating activities as well as amounts available both under our senior credit facility and from repayments of distributions to owners, will be adequate to meet our anticipated future requirements for working capital, capital expenditures and scheduled payments of interest on our debt for the next twelve months.
ACC’s cash flow from operations and consequent ability to service its debt is, in part, dependent upon the earnings of its subsidiaries and the distribution (through dividends or otherwise) of those earnings to ACC, or upon loans, advances or other payments of funds by those subsidiaries to ACC. As of September 30, 2011, approximately 50% of the assets of ACC were held by operating subsidiaries, and for Fiscal 2011, approximately 50% of ACC’s net operating revenues were derived from the operations of ACC’s subsidiaries.
Income Taxes
Our operations are included in a consolidated federal income tax return filed by Perpetual. In accordance with the terms of a tax sharing agreement between ACC and Perpetual, we are required to pay to Perpetual our federal income tax liability, computed based upon statutory federal income tax rates applied to our consolidated taxable income. We file separate state income tax returns with the exception of Virginia, which is included in a combined state income tax return filed by Perpetual. In accordance with the terms of the tax sharing agreement, we are
required to pay to Perpetual our combined Virginia income tax liability, computed based upon statutory Virginia income tax rates applied to our combined Virginia net taxable income. Taxes payable to Perpetual are not reduced by losses generated in prior years by us. In addition, the amounts payable by us to Perpetual under the tax sharing agreement are not reduced if losses of other members of the Perpetual group are utilized to offset our taxable income for purposes of the Perpetual consolidated federal or Virginia state income tax returns.
The provision for income taxes is determined in accordance with the accounting rules for income taxes, which require that the consolidated amount of current and deferred income tax expense for a group that files a consolidated income tax return be allocated among members of the group when those members issue separate financial statements. Perpetual allocates a portion of its consolidated current and deferred income tax expense to us as if we and our subsidiaries were separate taxpayers. We record deferred tax assets, to the extent it is considered more likely than not that such assets will be realized in future periods, and deferred tax liabilities for the tax effects of the differences between the bases of our assets and liabilities for tax and financial reporting purposes.
We record income tax expense in accordance with the accounting rules for income taxes and make payments to Perpetual in accordance with the terms of the tax sharing agreement between us and Perpetual. To the extent that there is a difference between tax payments that would be due as calculated in accordance with the accounting rules and tax payments due under the tax sharing agreement, such difference is recorded to retained earnings.
Inflation
The impact of inflation on our consolidated financial condition and consolidated results of operations for each of the periods presented was not material.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make judgments and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and assumptions we consider reasonable at the time of making those estimates. We evaluate our estimates on an on-going basis. Actual results may differ from these estimates under different circumstances or using different assumptions. We consider the following accounting policies to be critical to our business operations and the understanding of our financial condition and results of operations.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. As is customary in the broadcasting industry, we do not require collateral for our credit sales, which are typically due within thirty days. If the economy and/or the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make their payments, additional allowances may be required.
Intangible Assets
Intangible assets consist of values assigned to broadcast licenses as well as favorable terms on contracts and leases. The amounts originally assigned to intangible assets were based on the results of independent valuations. The carrying value of our indefinite lived intangible assets, consisting of broadcast licenses, was $11,590 at September 30, 2010 and 2011, respectively. Other intangible assets, consisting of favorable terms on contracts and leases, were amortized over the terms of the respective contracts and leases, and these assets became fully amortized during Fiscal 2008.
Our indefinite lived intangible assets, consisting of broadcast licenses, are not amortized but are subject to impairment tests annually on September 30 as well as on an interim basis whenever events indicate that an impairment may exist. During the quarter ended March 31, 2009, events occurred which indicated that an impairment of certain broadcast licenses may exist. The events included the decline in the overall economy, forecasts for negative industry-wide advertising growth in 2009, and reduced revenue projections and related cost reduction measures within the Company. Thus, such broadcast licenses were tested for impairment as of March 31, 2009. The tests indicated that four broadcast licenses were impaired. As a result, we recorded a non-cash impairment charge of $27,700 during the quarter ended March 31, 2009. The annual impairment test as of September 30, 2009 indicated that a further impairment had occurred with respect to these four broadcast licenses, resulting in a non-cash impairment charge of $3,000 during the quarter ended September 30, 2009. The annual impairment tests as of September 30, 2010 and 2011 indicated that none of our broadcast licenses were impaired. Accordingly, no impairment charge was recorded during Fiscal 2010 or 2011.
We use an income approach to determine the fair value of our broadcast licenses on a station-by-station basis. Any excess of carrying value over fair value represents the amount of impairment. The income approach assumes an initial hypothetical start-up operation, maturing into an average performing independent or non-affiliated station in a specific television market and giving consideration to other relevant factors such as the number of competing stations within that market. The net cash flows of this hypothetical average market participant are projected from the first year start-up to perpetuity and then discounted back to net present value. The calculated valuation is compared to market transactions in order to confirm the results of the income approach.
The following key valuation assumptions were made for an average market participant in our specific markets as of September 30, 2010: (a) a pre-tax discount rate of 14.2%; (b) compound annual market revenue growth rates ranging from 1.5% - 2.6%; and (c) operating profit margins, excluding depreciation and amortization, after the hypothetical start-up period ranging from 23.6% - 25.1%. These assumptions as of September 30, 2011 were: (a) a pre-tax discount rate of 14.0%; (b) compound annual market revenue growth rates ranging from 1.5% - 2.3%; and (c) operating profit margins, excluding depreciation and amortization, after the hypothetical start-up period ranging from 23.1% - 24.8%. The discount rate represents the
current weighted average cost of capital that would be expected in our industry for an average market participant, taking into account the typical split between debt and equity financing within our industry, the rate of return required by investors for an investment with similar risk as well as market risk premiums. The compound annual market revenue growth rates are based on our historical experience within the respective market as well as market-specific and industry-wide future projections. The operating profit margins, excluding depreciation and amortization, are determined based on margins achieved by average market participants in similar markets with similar competitive environments.
The performance of impairment tests requires significant management judgment. Future events affecting cash flows, general economic or market conditions or accounting standards could result in further impairment losses.
Income Taxes
We account for income taxes in accordance with the accounting rules for income taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that the deferred tax assets will not be realized. This assessment is based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. If we are unable to generate sufficient taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and an adverse impact on our operating results.
Our operations are included in a consolidated federal income tax return filed by Perpetual. In accordance with the terms of a tax sharing agreement between us and Perpetual, we are required to pay to Perpetual our federal income tax liability, computed based upon statutory federal income tax rates applied to our consolidated taxable income. We file separate state income tax returns with the exception of Virginia, which is included in a combined state income tax return filed by Perpetual. In accordance with the terms of the tax sharing agreement, we are required to pay to Perpetual our combined Virginia income tax liability, computed based upon statutory Virginia income tax rates applied to our combined Virginia net taxable income. Taxes payable to Perpetual are not reduced by losses generated in prior years by us. In addition, the amounts payable to Perpetual under the tax sharing agreement are not reduced if losses of other members of the Perpetual group are utilized to offset our taxable income for purposes of the Perpetual consolidated federal or Virginia income tax returns.
The accounting rules for income taxes require that the consolidated amount of current and deferred income tax expense for a group that files a consolidated income tax return be allocated among members of the group when those members issue separate financial statements. Perpetual allocates a portion of its consolidated current and deferred income tax expense to us as if we and our subsidiaries were separate taxpayers. We record deferred tax assets, to the extent it is more likely than not that such assets will be realized in future periods, and deferred tax liabilities for
the tax effects of the differences between the bases of our assets and liabilities for tax and financial reporting purposes.
We record income tax expense in accordance with the accounting rules for income taxes and make payments to Perpetual in accordance with the terms of the tax sharing agreement between us and Perpetual. To the extent that there is a difference between tax payments that would be due as calculated in accordance with the accounting rules for income taxes and tax payments due under the tax sharing agreement, such difference is recorded to retained earnings.
We classify interest and penalties related to its uncertain tax positions as a component of income tax expense.
Our provision for income taxes and related deferred tax assets and liabilities reflect our estimates of actual future taxes to be paid. Such estimates are based on items reflected in the consolidated financial statements, considering timing as well as the sustainability of our tax filing positions. Actual income taxes paid could vary from our estimates as a result of future changes in income tax law or reviews by federal or various state and local tax authorities.
New Accounting Standards
In October 2009, the FASB issued new guidance on revenue arrangements with multiple deliverables. The guidance revises the criteria for separating, measuring and allocating arrangement consideration to each deliverable in a multiple element arrangement. This guidance was effective for our year ended September 30, 2011. We adopted the guidance as of October 1, 2010. The adoption had no effect on our financial position or results of operations.
In May 2011, the FASB issued new guidance which changes certain fair value measurement principles and enhances the related disclosures requirements. This guidance will be effective beginning with our fiscal quarter ending March 31, 2012. The adoption is not expected to have a significant effect on our financial position or results of operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303 of Regulation S-K.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
(dollars in thousands)
At September 30, 2011, we had other financial instruments consisting primarily of long-term fixed interest rate debt. Such debt, with future principal payments of $455,000, matures May 15, 2018. At September 30, 2011, the carrying value of such debt was $455,000, the fair value was approximately $428,000 and the interest rate was 8%. The fair market value of long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. We estimate the fair value of our long-term fixed interest rate debt by using quoted market prices. We actively monitor the capital markets in analyzing our capital raising decisions.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
See Index on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company has performed an evaluation of its disclosure controls and procedures (as defined by Exchange Act rule 15d-15(e)) as of September 30, 2011. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are effective.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). To evaluate the effectiveness of the Company’s internal control over financial reporting, the Company uses the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Using the framework in Internal Control - Integrated Framework, management, including the CEO and CFO, evaluated the Company’s internal control over financial reporting and concluded that the Company’s internal control over
financial reporting was effective as of September 30, 2011. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers and Directors
Executive officers and directors of ACC are as follows:
Name
Age
Title
Barbara B. Allbritton
Executive Vice President and Director
Robert L. Allbritton
Chairman, Chief Executive Officer and Director
Frederick J. Ryan, Jr.
Vice Chairman, President, Chief Operating Officer and Director
Jerald N. Fritz
Senior Vice President, Legal and Strategic Affairs, General Counsel
Stephen P. Gibson
Senior Vice President and Chief Financial Officer
James C. Killen, Jr.
Vice President, Sales
BARBARA B. ALLBRITTON has been a Director of ACC since its inception in 1974, Vice President of ACC from 1980 to 2001 and Executive Vice President since 2001. She currently serves as an officer and/or director of each of ACC’s television subsidiaries, as well as Perpetual, The Allbritton Foundation and the Allbritton Art Institute. She currently serves as a trustee of Baylor College of Medicine and a director of Blair House Restoration Fund. She was formerly a director of The Foundation for the National Archives. Mrs. Allbritton is the wife of Joe L. Allbritton and the mother of Robert L. Allbritton. See “Certain Relationships and Related Transactions.”
As a director, Mrs. Allbritton brings institutional knowledge and continuity to the board, having served for 36 years. In addition, her experience in media, banking, insurance and real estate enable her to provide knowledgeable guidance to the Company in these areas. Her experience in serving on multiple boards, including the board of a medical college as well as boards of civic, educational and charitable institutions has provided her insight on a variety of different corporate governance methods and has enabled her to provide guidance to the ACC board that incorporates these experiences.
ROBERT L. ALLBRITTON has been Chairman of the Board of Directors and Chief Executive Officer of ACC since February 2001 and a Director of ACC since 1993. Mr. Allbritton was Executive Vice President and Chief Operating Officer of ACC from 1994 to 1998
and President of ACC from 1998 to 2001. He is also an officer and/or director of Perpetual, each of ACC’s subsidiaries, The Allbritton Foundation and the Allbritton Art Institute. He is also founder and Publisher of Politico, which launched in January 2007. Mr. Allbritton has served on the Board of Directors of the Lyndon B. Johnson Foundation since 2002 and on the Board of Trustees of Wesleyan University since 2003. He served on the Board of Directors of Juniper Content Corporation from January to November 2007. He is the son of Joe L. and Barbara B. Allbritton. See “Certain Relationships and Related Transactions.”
Mr. Allbritton brings significant operational experience to all aspects of the Company’s operations. He has been involved in management of the television properties at both the corporate and daily operational levels, including financial, technical, strategic, programming, sales, news and promotion. His extensive background in media, communications, banking, business and technology provide him with the background to set and implement the strategic direction of the Company. Mr. Allbritton is recognized as an innovative, influential leader within the industry.
FREDERICK J. RYAN, JR. has been President of ACC since February 2001, Chief Operating Officer since 1998 and a Director and its Vice Chairman since 1995. He has served as Senior Vice President and Executive Vice President of ACC and is an officer of each of its television subsidiaries. He is also President, Chief Executive Officer and a Manager of Politico. He previously served as Chief of Staff to former President Ronald Reagan (1989-1995) and Assistant to the President in the White House (1982-1989). Prior to his government service, Mr. Ryan was an attorney with the Los Angeles firm of Hill, Farrer and Burrill. Mr. Ryan presently serves as Chairman of the Ronald Reagan Presidential Library Foundation, Chairman of the Ronald Reagan Centennial Commission, Chairman of the White House Historical Association, a trustee of Ford’s Theatre, a trustee of the National Museum of American History, and a member of the Board of Councilors of the Annenberg School of Communications at the University of Southern California.
Mr. Ryan combines broad contacts from his prior service at the highest levels of the federal government with his extensive understanding of business, finance, and the media industry structure to provide reasoned insight on all matters that come before the Company. Mr. Ryan’s current service on other boards gives him a deep understanding of company governance, which he uses to help establish an innovative corporate culture. He provides the critical link to management’s perspective in board discussions and provides energetic, focused, and analytical guidance to all operational levels of the Company.
JERALD N. FRITZ has been part of ACC’s management since 1987, currently serving as a Senior Vice President. He serves as its General Counsel and also oversees strategic planning and governmental affairs. From 1981 to 1987, Mr. Fritz held several positions with the FCC, including Chief of Staff and Legal Counsel to the Chairman. Mr. Fritz was in private practice from 1978 to 1981, specializing in communications law, and from 1980 to 1983 was on the adjunct faculty of George Mason University Law School teaching communications law and policy. Mr. Fritz began his career in broadcasting in 1973 with WGN-TV, Chicago. He is a former director of the National Association of Broadcasters (“NAB”). Mr. Fritz currently serves on the NAB’s Copyright Committee and the Board of Governors of the ABC Affiliates
Association. He is a former division chair of the Communications Forum of the American Bar Association as well as the past Co-Chair of the Pre-Publication Committee of the Media Law Resource Center.
STEPHEN P. GIBSON has been a Senior Vice President of ACC since February 2001 and a Vice President since 1997. He has served as Chief Financial Officer since 1998 and Controller from 1997, when he joined the Company, to 1998. He is also Assistant Treasurer of The Allbritton Foundation and Vice President of Perpetual and each of ACC’s subsidiaries. Prior to joining ACC, Mr. Gibson served as Controller for COMSAT RSI Plexsys Wireless Systems, a provider of wireless telecommunications equipment and services, from 1994 to 1997. From 1987 to 1994, Mr. Gibson held various positions with the accounting firm of Price Waterhouse LLP, the latest as Audit Manager. He served as an elected director of the Broadcast Cable Financial Management Association from 2002 until 2005.
JAMES C. KILLEN, JR. joined ACC as Vice President, Sales in November 2004 to oversee, coordinate and support all aspects of advertising sales for the Company. Prior to joining ACC, Mr. Killen held various sales positions with NBC from 1992 until 2004, most recently Local Sales Manager and New York National Sales Manager of NBC4 in Washington, D.C. His network experience included several years as an NBC Account Manager selling the NBC owned and operated stations.
Code of Ethics for Senior Financial Officers
Our Board of Directors has adopted a Code of Ethics for Senior Financial Officers. A copy of the Code of Ethics is incorporated by reference as an exhibit to this Annual Report on Form 10-K.
Audit Committee Financial Expert
The members of our Audit Committee are Robert L. Allbritton and Frederick J. Ryan, Jr. The Board of Directors has determined that it does not currently have an “audit committee financial expert” as defined by Item 407(d)(5)(ii) of Regulation S-K. As the Company is privately held, the Board of Directors is not currently considering expanding its members in order to include an “audit committee financial expert” as defined.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview and Objectives
Our executive compensation program is designed to attract, retain and reward qualified executives and encourage decisions and actions that have a positive impact on Company performance. It is our objective to set total executive compensation at a level that attracts and
retains strong, competent leadership for the Company. A further objective of the compensation program is to provide incentives and rewards to each executive for their contribution to the Company.
The Company’s compensation program, primarily consisting of salary and bonus payments to the Company’s executive officers, who are named in the Summary Compensation Table appearing elsewhere in this Item and are referred to as the “named executive officers,” is a cash program. At this time, there are no stock options, stock awards or any other equity-based programs as part of the Company’s compensation program.
The Company’s executives do not have employment agreements that might include provisions for change in control, severance arrangements, equity or security ownership, or other such matters.
Compensation Process
We do not have a compensation committee of our Board of Directors, and our Board generally does not seek input from outside compensation consultants with respect to annual compensation decisions.
Our Chairman and Chief Executive Officer, with input from our President and Chief Operating Officer, annually reviews the performance of each of the named executive officers and determines their compensation levels. Compensation levels for our Chairman and Chief Executive Officer and President and Chief Operating Officer are established in the same manner as our other executive officers in consultation with the third member of our Board of Directors.
Elements of Compensation
The principal elements of the Company’s executive compensation consist of the following:
•
Base Salary;
•
Annual Cash Bonuses;
•
Perquisites and Other Compensation; and
•
Health Benefits.
Base Salary. The base salary component of the Company’s executive compensation program provides each named executive officer with a fixed minimum amount of cash compensation throughout the year. Salaries are determined by position, which takes into consideration the responsibilities and job performance of each named executive officer and competitive compensation paid in the market for similar positions. Base salary amounts are determined in the first quarter of the fiscal year.
Annual Cash Bonuses. The Company does not utilize defined formulas for bonuses paid to its executive officers, including its named executive officers. The payment of cash bonuses is made on a discretionary basis and is determined based on an evaluation of each executive’s individual performance. The annual cash bonuses are intended to reward individuals based on
their contributions to the overall success of the Company. Bonuses are generally paid in the first quarter following the end of the fiscal year for which performance is being rewarded.
Perquisites and Other Compensation. We also provide our named executive officers with other benefits that we believe are reasonable and consistent with the stated objectives of the Company’s executive compensation program. Such benefits include the following:
•
Company contributions to our defined contribution 401(k) savings plan;
•
Use of a Company-provided automobile or payment of an automobile allowance;
•
Company-paid parking; and
•
Reimbursement for membership in certain clubs.
The Company provides all eligible employees a 50% matching contribution on up to 6% of compensation deferred through an IRS qualified 401(k) savings plan. Under the 401(k) plan, employees may contribute a portion of their compensation subject to IRS limitations. Effective February 1, 2009, the Company suspended its matching contributions. Effective July 1, 2010, the Company reinstated matching contributions in an amount equal to 25% of the contribution of the employee not to exceed 6% of the compensation of the employee, and effective June 1, 2011, the Company reinstated its full matching contribution of 50% of the contribution of the employee not to exceed 6% of the compensation of the employee. The Company does not have a defined benefit pension plan.
Health Benefits. All full-time employees, including our named executive officers, may participate in our group health benefit program, including medical, dental and vision care coverage, disability insurance and life insurance. In addition, our named executive officers are also covered under a supplemental executive long-term disability insurance program.
Determination of Fiscal 2011 Compensation
Our goals for Fiscal 2011 were to provide an executive compensation program that was equitable in a competitive marketplace and recognized and rewarded individual achievements. To achieve such goals, we relied primarily on base salaries, cash bonuses and other compensation for each of our named executive officers. Compensation levels for each named executive officer were determined based on the position and responsibility of such executive, his impact on the operation and financial performance of the Company and the knowledge and experience of such executive. These factors were considered as a group, without particular weight given to any single factor, and were necessarily subjective in nature.
Summary Compensation Table
The following table sets forth certain compensation information for our Chief Executive Officer, Chief Financial Officer and each of our three other most highly compensated executive officers for the fiscal years ended September 30, 2009, 2010 and 2011:
(1) Robert L. Allbritton is paid cash compensation by Perpetual for services to Perpetual and other interests of the Allbritton family, including ACC. The portion of such compensation related to ACC is allocated to ACC and also included as compensation above.
(2) Frederick J. Ryan, Jr. is paid cash compensation by ACC for services to ACC, which is included as compensation above. In addition, Mr. Ryan is also separately paid cash compensation by Perpetual for services to Perpetual and other interests of the Allbritton family.
(3) Stephen P. Gibson is paid cash compensation by ACC for services to ACC, which is included as compensation above. In addition, Mr. Gibson is also separately paid cash compensation by Perpetual for services to Perpetual and other interests of the Allbritton family.
(4) Jerald N. Fritz is paid cash compensation by ACC for services to ACC and Perpetual. Of the compensation shown in the table for Mr. Fritz, $21,000, $36,900 and $86,400 represent the portion of such compensation related to Perpetual, and has been allocated to Perpetual in Fiscal 2009, 2010 and 2011, respectively.
(5) Amounts in this column consist of dollar values of perquisites and other benefits including amounts contributed by the Company on behalf of our named executive officers to our defined contribution 401(k) savings plan, use of a Company-provided automobile or an automobile allowance, premiums for group health and term life insurance and executive disability plans, parking and club membership reimbursements.
Compensation of Directors
Our directors are not separately compensated for membership on the Board of Directors.
Compensation Committee, Interlocks and Insider Participation
We do not have a compensation committee of our Board of Directors. Our Chairman and Chief Executive Officer, with input from our President and Chief Operating Officer, annually reviews the performance of each of the named executive officers and determines their compensation levels. Compensation levels for our Chairman and Chief Executive Officer and President and Chief Operating Officer are established in the same manner as our other executive officers in consultation with the third member of our Board of Directors, who is also an Executive Officer of the Company.
Compensation Committee Report
Our Board of Directors has reviewed and discussed with management the Compensation Discussion and Analysis contained in this Form 10-K. Based on this review and discussion, our Board of Directors recommends that the Compensation Discussion and Analysis be included in this Form 10-K for the fiscal year ended September 30, 2011.
Barbara B. Allbritton
Robert L. Allbritton
Frederick J. Ryan, Jr.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The authorized capital stock of ACC consists of 20,000 shares of common stock, par value $0.05 per share (the “ACC Common Stock”), all of which is outstanding, and 1,000 shares of preferred stock, 200 shares of which have been designated for issue as Series A Redeemable Preferred Stock, par value $1.00 per share (the “Series A Preferred Stock”), no shares of which are issued and outstanding.
ACC Common Stock
The Allbritton family controls Perpetual. Perpetual owns 100% of the outstanding common stock of AG, and AG owns 100% of the outstanding ACC Common Stock. Perpetual and AG’s address is 1000 Wilson Boulevard, Suite 2700, Arlington, Virginia 22209. There is no established public trading market for ACC Common Stock.
Each share of ACC Common Stock has an equal and ratable right to receive dividends when and as declared by the Board of Directors of ACC out of assets legally available therefor.
In the event of a liquidation, dissolution or winding up of ACC, holders of ACC Common Stock are entitled to share ratably in assets available for distribution after payments to creditors and to holders of any preferred stock of ACC that may at the time be outstanding. The holders of ACC Common Stock have no preemptive rights to subscribe to additional shares of capital stock
of ACC. Each share of ACC Common Stock is entitled to one vote in elections of directors and all other matters submitted to a vote of ACC’s stockholder.
Equity Compensation Plans
ACC does not have any compensation plans or individual compensation arrangements under which ACC Common Stock or Series A Preferred Stock are authorized for issuance.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
(dollars in thousands)
Distributions to Related Parties
ACC has periodically made advances in the form of distributions to Perpetual. For Fiscal 2011, ACC made cash advances to Perpetual of $8,310. The advances to Perpetual are non-interest bearing and, as such, do not reflect market rates of interest-bearing loans to unaffiliated third parties. In addition, ACC was charged by Perpetual for federal and state income taxes of $6,411 and made payments to Perpetual for federal and state income taxes in the amount of $6,411. There were no taxes due to Perpetual at September 30, 2011. See “Income Taxes” below.
At present, the primary source of repayment of net advances is through our ability to pay dividends or make other distributions, and there is no immediate intent for the amounts to be repaid. Accordingly, these advances have been treated as a reduction of stockholder’s investment and are described as “distributions” in our consolidated financial statements.
Under the terms of the agreements governing our indebtedness, future advances, distributions and dividends to related parties are subject to certain restrictions. We anticipate that, subject to such restrictions, applicable law and payment obligations with respect to our indebtedness, ACC will make advances, distributions or dividends to related parties in the future. Subsequent to September 30, 2011 and through December 15, 2011, we made net distributions to owners of $2,000.
Management Fees
We paid management fees of $600 to Perpetual for Fiscal 2011, and we expect that management fees to be paid to Perpetual during Fiscal 2012 will approximate the amount paid for Fiscal 2011. These management fees reflect the compensation allocations referenced in the Executive Compensation Table as well as the net allocation of other shared costs. We believe that payments to Perpetual will continue in the future and that the amount of the management fees is at least as favorable to us as those prevailing for comparable transactions with or involving unaffiliated parties.
Income Taxes
Our operations are included in a consolidated federal income tax return filed by Perpetual. In accordance with the terms of a tax sharing agreement between ACC and Perpetual, ACC is required to pay to Perpetual its federal income tax liability, computed based upon statutory federal income tax rates applied to our consolidated taxable income. We file separate state income tax returns with the exception of Virginia which is included in a combined state income tax return filed by Perpetual. In accordance with the terms of the tax sharing agreement, we are required to pay to Perpetual our combined Virginia income tax liability, computed based upon statutory Virginia income tax rates applied to our combined Virginia net taxable income. Taxes payable to Perpetual are not reduced by losses generated in prior years by us. In addition, the amounts payable by us to Perpetual under the tax sharing agreement are not reduced if losses of other members of the Perpetual group are utilized to offset our taxable income for purposes of the Perpetual consolidated federal or Virginia state income tax returns.
The provision for income taxes is determined in accordance with the accounting rules for income taxes, which require that the consolidated amount of current and deferred income tax expense for a group that files a consolidated income tax return be allocated among members of the group when those members issue separate financial statements. Perpetual allocates a portion of its consolidated current and deferred income tax expense to us as if we and our subsidiaries were separate taxpayers. We record deferred tax assets, to the extent it is considered more likely than not that such assets will be realized in future periods, and deferred tax liabilities for the tax effects of the differences between the bases of its assets and liabilities for tax and financial reporting purposes.
We record income tax expense in accordance with the accounting rules for income taxes and make payments to Perpetual in accordance with the terms of the tax sharing agreement between us and Perpetual. To the extent that there is a difference between tax payments that would be due as calculated in accordance with the accounting rules for income taxes and tax payments due under the tax sharing agreement, such difference is recorded to retained earnings.
Office Space
We provide certain office space to Irides, LLC (“Irides”). Irides is a wholly-owned subsidiary of Allbritton New Media, Inc. (“ANMI”) which in turn is an 80%-owned subsidiary of Perpetual. Charges for this space totaled $159 for Fiscal 2011, and we expect to receive approximately the same amount during Fiscal 2012. We believe that the terms of the lease are substantially the same or at least as favorable to ACC as those prevailing for comparable arrangements involving nonaffiliated companies.
We provide certain office space and facilities-related services to Politico. Politico was a wholly-owned subsidiary of ACC until November 13, 2009, at which time the equity interests of Politico were distributed to Perpetual. Charges for this office space and related services totaled $1,054 for Fiscal 2011, and we expect to receive approximately the same amount during Fiscal 2012. We believe that these terms are substantially the same or at least as favorable to ACC as those prevailing for comparable arrangements involving nonaffiliated companies.
Internet Services
We have entered into various agreements with Irides to provide our stations with website design, hosting and maintenance services. We incurred fees of $360 to Irides during Fiscal 2011, and we expect to pay approximately the same amount in Fiscal 2012. We believe that the terms and conditions of the agreements are substantially the same or at least as favorable to us as those prevailing for comparable transactions with or involving nonaffiliated companies.
Politico provides us with certain website development services. We were charged $520 for such services during Fiscal 2011 based on Politico’s actual cost to provide these services. We anticipate that such charges could be in the approximate range of $250 to $750 during Fiscal 2012. We believe these charges are substantially the same or at least as favorable to ACC as those prevailing for comparable services from nonaffiliated companies.
Director Independence
There are no independent members of our Board of Directors as each member of our Board is also an executive officer of the Company. As the Company is privately held, the Board of Directors is not currently considering expanding its members in order to include independent directors.
Review and Approval of Transactions with Related Parties
The Company is subject to various restrictive covenants covering transactions with related parties under its existing debt agreements. Our directors and executive officers are made aware of the Company’s obligations to identify, process and disclose such transactions in order to comply with these covenants. Our directors and executive officers are also expected to promptly disclose to the Chairman and Chief Executive Officer or the President and Chief Operating Officer, for review and approval, the material facts of any transaction that could be considered a related party transaction that is otherwise permissible under the terms of the Company’s debt covenants.
On an annual basis, each director and executive officer of the Company must complete and certify to a Director and Officer Questionnaire that requires disclosure of any transaction, arrangement or relationship with the Company during the last fiscal year in which the director or executive officer, or any member of his or her immediate family, had a direct or indirect material interest. Any transaction, arrangement, or relationship disclosed in the Director and Officer Questionnaire is reviewed and considered by our General Counsel with respect to any conflicts of interest.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
(dollars in thousands)
PricewaterhouseCoopers LLP audited our consolidated financial statements for the year ended September 30, 2011 and our Board of Directors has appointed PricewaterhouseCoopers LLP as our independent registered public accounting firm to audit our consolidated financial statements for the year ending September 30, 2012.
The fees billed by PricewaterhouseCoopers LLP for 2010 and 2011 were as follows:
Fees for audit services included fees associated with the annual audit and the reviews of our quarterly reports on Form 10-Q as well as any other documents filed with the SEC.
Fees for audit-related services represented fees associated with our offering of senior notes during Fiscal 2010. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financing Activities.”
All other fees consisted of fees associated with the advertising revenue surveys for the Washington, D.C. market as well as the license of accounting research software.
Our Board of Directors pre-approves all audit and permitted non-audit services, including the fees and terms thereof.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements
See Index on p. hereof.
(2) Financial Statement Schedule II-Valuation and Qualifying Accounts and Reserves
See Index on p. hereof.
(3) Exhibits
See Index on p. A-1 hereof.
ALLBRITTON COMMUNICATIONS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder
of Allbritton Communications Company
In our opinion, the consolidated financial statements listed in the index on page present fairly, in all material respects, the financial position of Allbritton Communications Company (an indirectly wholly-owned subsidiary of Perpetual Corporation) and its subsidiaries at September 30, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2011 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 index on page presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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. We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
McLean, VA
December 15, 2011
ALLBRITTON COMMUNICATIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
ALLBRITTON COMMUNICATIONS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
ALLBRITTON COMMUNICATIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1-THE COMPANY
Allbritton Communications Company (ACC or the Company) is an indirectly wholly-owned subsidiary of Perpetual Corporation (Perpetual), a Delaware corporation, which is controlled by the Allbritton family. The Company owns ABC network-affiliated television stations serving six geographic markets:
Station
Market
WJLA
Washington, D.C.
WBMA/WCFT/WJSU
Birmingham (Anniston and Tuscaloosa), Alabama
WHTM
Harrisburg-Lancaster-York-Lebanon, Pennsylvania
KATV
Little Rock, Arkansas
KTUL
Tulsa, Oklahoma
WSET
Roanoke-Lynchburg, Virginia
The Company also provides 24-hour per day basic cable television programming to the Washington, D.C. market, through NewsChannel 8, primarily focused on regional and local news for the Washington, D.C. metropolitan area. The operations of NewsChannel 8 are integrated with WJLA (WJLA/NewsChannel 8).
The Company owned and operated an ABC network-affiliated television station serving Charleston, South Carolina (WCIV) until August 1, 2009, at which time the equity interests of WCIV were distributed to Perpetual. The Company also owned and operated Politico, a specialized newspaper and Internet site (politico.com), from its launch in 2007 until November 13, 2009, at which time the equity interests of Politico were distributed to Perpetual (see Note 7).
Based upon regular assessments of its operations and internal financial reporting, the Company has determined that it has one reportable segment.
NOTE 2-SIGNIFICANT ACCOUNTING POLICIES
Consolidation-The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany accounts and transactions.
Use of estimates and assumptions-The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
Revenue recognition-Revenues are generated principally from sales of commercial advertising and are recorded as the advertisements are broadcast net of agency and national representative commissions and music license fees. For certain program contracts which provide for the exchange of advertising time in lieu of cash payments for the rights to such programming, revenue is recorded as advertisements are broadcast at the estimated fair value of the advertising time given in exchange for the program rights. Such barter revenue was $5,300, $4,943 and $4,708 for the years ended September 30, 2009, 2010 and 2011, respectively. Subscriber fee revenues are recognized in the period during which programming is provided, pursuant to affiliation agreements with cable television systems, direct broadcast satellite service providers and telephone company operators.
Cash and cash equivalents-The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts-The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. As is customary in the broadcasting industry, the Company does not require collateral for its credit sales, which are typically due within thirty days.
Program rights-The Company has entered into contracts for the rights to television programming. Payments related to such contracts are generally made in installments over the contract period. Program rights which are currently available and the liability for future payments under such contracts are reflected in the consolidated balance sheets. The vast majority of the Company’s program rights represent one-year contracts for first-run syndicated programming. As each broadcast over the term of the contract generally provides the same advertising value, such program rights are amortized on a straight-line basis over the term. A limited number of multi-year program contracts representing off-network syndicated programming are amortized on an accelerated basis due to the generally higher advertising value of the early broadcasts. Program rights expected to be amortized in the succeeding year and amounts payable within one year are classified as current assets and liabilities, respectively. The program rights are reflected in the consolidated balance sheets at the lower of unamortized cost or estimated net realizable value based on management’s expectation of the net future cash flows to be generated by the programming.
Property, plant and equipment-Property, plant and equipment are recorded at cost and depreciated over the estimated useful lives of the assets. Maintenance and repair expenditures are charged to expense as incurred and expenditures for modifications and improvements which increase the expected useful lives of the assets are capitalized. Depreciation expense is computed using the straight-line method for buildings and straight-line and accelerated methods for furniture, machinery and equipment. Leasehold improvements are amortized using the straight-line method over the lesser of the term of the related lease or the estimated useful lives of the assets. The Company reviews the carrying amount of property, plant and equipment for impairment whenever events and circumstances indicate that the carrying amount of such assets
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
may not be recoverable. Recoverability is measured by comparison of the carrying amount of the assets to the estimated undiscounted future cash flows associated with them.
The useful lives of property, plant and equipment for purposes of computing depreciation and amortization expense are:
Intangible assets-Intangible assets consist of values assigned to broadcast licenses as well as favorable terms on contracts and leases. The amounts originally assigned to intangible assets were based on the results of independent valuations. Intangible assets deemed to have indefinite lives, consisting of broadcast licenses, are not amortized but are subject to tests for impairment at least annually each September 30, or whenever events indicate that impairment may exist. While broadcast licenses are granted by the Federal Communications Commission (“FCC”) for a fixed period of time, renewals of these licenses have occurred routinely and at nominal cost. Costs associated with the renewal of broadcast licenses are expensed as incurred. Other intangible assets, consisting of favorable terms on contracts and leases, are amortized over their useful lives.
Deferred financing costs-Costs incurred in connection with the issuance of long-term debt are deferred and amortized to other nonoperating expense on a straight-line basis over the term of the underlying financing agreement.
Deferred rent-Rent concessions and scheduled rent increases in connection with operating leases are recognized as adjustments to rental expense on a straight-line basis over the associated lease term.
Concentration of credit risk-Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of certain cash and cash equivalents and receivables from advertisers. The Company invests its excess cash with high-credit quality financial institutions and at September 30, 2011 had an overnight repurchase agreement for $2,089. Concentrations of credit risk with respect to receivables from advertisers are limited as the Company’s advertising base consists of large national advertising agencies and high-credit quality local advertisers.
Income taxes-The operations of the Company are included in a consolidated federal income tax return filed by Perpetual. In accordance with the terms of a tax sharing agreement between the Company and Perpetual, the Company is required to pay to Perpetual its federal income tax liability, computed based upon statutory federal income tax rates applied to the Company’s consolidated taxable income. The Company files separate state income tax returns with the exception of Virginia, which is included in a combined state income tax return filed by Perpetual. In accordance with the terms of the tax sharing agreement, the Company is required to pay to Perpetual its combined Virginia income tax liability, computed based upon statutory
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
Virginia income tax rates applied to the Company’s combined Virginia net taxable income. Taxes payable to Perpetual are not reduced by losses generated in prior years by the Company. In addition, the amounts payable by the Company to Perpetual under the tax sharing agreement are not reduced if losses of other members of the Perpetual group are utilized to offset taxable income of the Company for purposes of the Perpetual consolidated federal or Virginia income tax returns.
The accounting rules for income taxes require that the consolidated amount of current and deferred income tax expense for a group that files a consolidated income tax return be allocated among members of the group when those members issue separate financial statements. Perpetual allocates a portion of its consolidated current and deferred income tax expense to the Company as if the Company and its subsidiaries were separate taxpayers. The Company records deferred tax assets, to the extent it is more likely than not that such assets will be realized in future periods, and deferred tax liabilities for the tax effects of the differences between the bases of its assets and liabilities for tax and financial reporting purposes.
The Company records income tax expense in accordance with the accounting rules for income taxes, and makes payments to Perpetual in accordance with the terms of the tax sharing agreement between the Company and Perpetual. To the extent that there is a difference between tax payments that would be due as calculated in accordance with the accounting rules and tax payments due under the tax sharing agreement, such difference is recorded to retained earnings.
The Company classifies interest and penalties related to its uncertain tax positions as a component of income tax expense.
Discontinued operations-The consolidated statements of operations and retained earnings separately present discontinued operations and the results of continuing operations (see Note 7). Prior year amounts have been reclassified to conform to the current year presentation. Discontinued operations have not been segregated in the consolidated statements of cash flows and, therefore, amounts for certain captions will not agree directly with the accompanying consolidated statements of operations and retained earnings. Footnote disclosures include both continuing and discontinued operations unless noted otherwise.
Fair value of financial instruments-The carrying amount of the Company’s cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and program rights payable approximate fair value due to the short maturity of those instruments.
Accounting guidance provides a fair value hierarchy to categorize three levels of inputs that may be used to measure fair value. The three levels are as follows:
Level 1 - Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2 - Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities; quoted prices for identical assets or liabilities in markets that are not active; or
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
Level 3 - Unobservable inputs that are supported by little or no market activity which result in the use of management estimates.
The Company estimates the fair value of its long-term debt on a recurring basis. See Note 5.
Earnings per share-Earnings per share data are not presented since the Company has only one shareholder.
Reclassifications-Certain amounts in previously issued financial statements have been reclassified to conform to the current year presentation.
New Accounting Standards-In October 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance on revenue arrangements with multiple deliverables. The guidance revises the criteria for separating, measuring and allocating arrangement consideration to each deliverable in a multiple element arrangement. This guidance was effective for the Company’s year ended September 30, 2011. The Company adopted the guidance as of October 1, 2010. The adoption had no effect on the Company’s financial position or results of operations.
In May 2011, the FASB issued new guidance which changes certain fair value measurement principles and enhances the related disclosures requirements. This guidance will be effective beginning with the Company’s fiscal quarter ending March 31, 2012. The adoption is not expected to have a significant effect on the Company’s financial position or results of operations.
NOTE 3-PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
Depreciation and amortization expense was $9,629, $8,876 and $9,500 for the years ended September 30, 2009, 2010 and 2011, respectively.
The FCC granted to Sprint Nextel Corporation (“Nextel”) the right to reclaim a portion of the spectrum in the 2 GHz band from broadcasters across the country. In order to claim this spectrum, Nextel was required to replace all of the broadcasters’ electronic newsgathering equipment using this spectrum with digital equipment capable of operating in the reformatted portion of the 2 GHz band retained by the broadcasters. This exchange of equipment was completed on a market by market basis. As the equipment was exchanged and placed into service in each of the Company’s markets, a gain was recorded to the extent that the fair market value of the equipment received exceeded the book value of the analog equipment exchanged.
During the years ended September 30, 2009 and 2010, the fair market value of the equipment received and placed into service was $779 and $2,591, respectively. These amounts have been recorded as additions to property, plant and equipment, but they are not included in capital expenditures in the accompanying consolidated statement of cash flows as no cash was involved in the exchange. The excess of fair market value as compared to the book value of equipment exchanged and placed into service of $767 and $2,591 for the years ended September 30, 2009 and 2010, respectively, was recorded as a non-cash gain in other, net nonoperating income in the accompanying consolidated financial statements. There were no exchanges during the year ended September 30, 2011.
NOTE 4-INTANGIBLE ASSETS
The carrying value of the Company’s indefinite lived intangible assets, consisting of its broadcast licenses, at September 30, 2010 and 2011 was $11,590.
The Company tests its indefinite lived intangible assets for impairment annually on September 30 as well as on an interim basis whenever events indicate that an impairment may exist. During the quarter ended March 31, 2009, events occurred which indicated that an impairment of certain broadcast licenses may exist. The events included the decline in the overall economy, forecasts for negative industry-wide advertising growth in 2009, and reduced revenue projections and related cost reduction measures within the Company. Thus, such broadcast licenses were tested for impairment as of March 31, 2009. The tests indicated that four broadcast licenses were impaired. As a result, the Company recorded a non-cash impairment charge of $27,700 during the quarter ended March 31, 2009. The annual impairment test as of September 30, 2009 indicated that a further impairment had occurred with respect to these four broadcast licenses, resulting in a non-cash impairment charge of $3,000 during the quarter ended September 30, 2009. The annual impairment tests as of September 30, 2010 and 2011 indicated that none of the broadcast licenses were impaired. No impairment charge was recorded during the years ended September 30, 2010 or 2011.
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
The Company uses an income approach to determine the fair value of its broadcast licenses on a station-by-station basis. Any excess of carrying value over fair value represents the amount of impairment. The income approach assumes an initial hypothetical start-up operation, maturing into an average performing independent or non-affiliated station in a specific television market and giving consideration to other relevant factors such as the number of competing stations within that market. The net cash flows of this hypothetical average market participant are projected from the first year start-up to perpetuity and then discounted back to net present value. The calculated valuation is compared to market transactions in order to confirm the results of the income approach. The key valuation assumptions include the pre-tax discount rate, the compound annual market revenue growth rates, and operating profit margins, excluding depreciation and amortization, after the hypothetical start-up period. This valuation is considered to be Level 3.
The Company’s other intangible assets, consisting of favorable terms on contracts and leases, had a gross carrying amount of $6,174 and no net carrying value at September 30, 2010 or 2011 as these intangible assets are fully amortized.
NOTE 5-LONG-TERM DEBT
Outstanding debt consists of the following:
On November 13, 2009, the Credit Agreement was amended to permit the distribution of the equity interests of Politico to Perpetual (see Note 7). On April 29, 2010, the Credit Agreement was further amended to: (i) permit the Company to complete its offering of senior
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
notes as discussed below; (ii) provide additional collateral; (iii) extend the maturity date to April 29, 2013; and (iv) reduce the total commitment from $65,000 to $60,000.
On April 30, 2010, the Company issued $455,000 aggregate principal amount of 8% Senior Notes due May 15, 2018 (the “2018 Notes”) at par. The net proceeds, together with borrowings under the Company’s Credit Agreement and cash on hand, were used to purchase and redeem $455,000 aggregate principal amount of the Company’s 7 3/4% Senior Subordinated Notes due 2012 (the “2012 Notes”). As of June 1, 2010, all of the 2012 Notes had been purchased or redeemed.
As a result of the purchase and redemption of the 2012 Notes, the Company recorded a pre-tax charge of $10,408 during the quarter ended June 30, 2010 related to the early repayment of the 2012 Notes.
On June 28, 2010, the Company commenced a registered exchange offer of a new series of the 2018 Notes in exchange for the initial series of the 2018 Notes issued April 30, 2010 and consummated the exchange offer following its expiration on August 4, 2010 by issuing the new series of notes in exchange for notes of the initial series properly tendered. The terms of the exchange notes are substantially identical to those of the initial notes, except that the exchange notes have been registered under the Securities Act of 1933, as amended, and transfer restrictions and registration rights relating to the initial notes do not apply to the exchange notes.
Unamortized deferred financing costs of $10,244 and $8,758 at September 30, 2010 and 2011, respectively, are included in deferred financing costs and other noncurrent assets in the accompanying consolidated balance sheets. Amortization of the deferred financing costs for the years ended September 30, 2009, 2010 and 2011 was $1,148, $1,305 and $1,486 respectively, which is included in other nonoperating expenses.
Under the existing financing agreements, the Company is subject to restrictive covenants, which place limitations upon payments of cash distributions, dividends, issuance of capital stock, investment transactions, incurrence of additional obligations and transactions with affiliates. In addition, under the Credit Agreement, the Company must maintain compliance with certain financial covenants as measured at the end of each quarter. As of September 30, 2011, the Company was in compliance with such covenants. The Company is also required to pay a commitment fee ranging from 0.375% to 0.500% per annum based on the amount of any unused portion of the Credit Agreement.
The Company estimates the fair value of its long-term debt on a recurring basis. The Company estimates the fair value of its Senior Notes to be approximately $456,000 and $428,000 at September 30, 2010 and 2011, respectively. This fair value estimate was determined based on quoted market prices provided by investment banking firms who regularly make a market in the Company’s Senior Notes, which is considered to be a Level 2 input. The carrying value of the Company’s Credit Agreement approximated fair value at September 30, 2010 and
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
2011. This estimate was determined using a discounted cash flow analysis which is considered to be a Level 3 input.
NOTE 6-INCOME TAXES
The (benefit from) provision for income taxes consists of the following:
The provision for income taxes for the year ended September 30, 2010 does not include the current tax effect of the distribution of the equity interests of Politico to Perpetual on November 13, 2009 (see Note 7). Such tax effect of $1,766 was reflected as a reduction to stockholder’s investment during the year ended September 30, 2010 in accordance with the accounting rules for such transactions.
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
The components of deferred income tax assets (liabilities) are as follows:
The deferred tax asset related to state and local net operating loss carryforwards of $2,839 at September 30, 2011 represents approximately $55,000 in state and local net operating loss carryforwards in certain jurisdictions which are available for future use for state and local income tax purposes and expire in various years from 2012 through 2031.
The change in the valuation allowance for deferred tax assets of ($2,730) and ($11) during the years ended September 30, 2010 and 2011, respectively, principally resulted from management’s evaluation of the recoverability of the loss carryforwards.
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
The following table reconciles the statutory federal income tax rate to the Company’s effective income tax rate for income before cumulative effect of change in accounting principle:
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
As of September 30, 2010 and 2011, the Company had unrecognized tax benefits of $2,685 and $1,404, respectively. If all such benefits were recognized, $1,745 and $913, respectively, would have a favorable impact on the effective tax rate. Of the total gross unrecognized tax benefits
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
of $2,685 at September 30, 2010, $1,808 are recorded in deferred rent and other noncurrent liabilities on the accompanying consolidated balance sheets, and the remaining $877 represents net operating losses which have not been recorded in accordance with the rules surrounding uncertain tax positions. Of the total gross unrecognized tax benefits of $1,404 at September 30, 2011, $642 are recorded in deferred rent and other noncurrent liabilities on the accompanying consolidated balance sheets, and the remaining $762 represents net operating losses which have not been recorded in accordance with the rules surrounding uncertain tax positions.
The Company expects that it is reasonably possible that the amount of unrecognized tax benefits will decrease during the next twelve months in the approximate range of $100 to $300, primarily due to the expected expiration of certain statutes of limitations.
The Company classifies interest and penalties related to its uncertain tax positions as a component of income tax expense. Accrued interest and penalties were $438 and $95 at September 30, 2010 and 2011, respectively, and reductions in accrued interest and penalties of $766 and $343 were recognized during the years ended September 30, 2010 and 2011, respectively.
The Company is no longer subject to Federal or state income tax examinations for years prior to the Company’s fiscal year ended September 30, 2008, although certain of the Company’s net operating loss carryforwards generated prior to September 30, 2008 remain subject to examination.
The Company’s operations are included in a consolidated federal income tax return and a combined Virginia state income tax return filed by Perpetual. Income tax expense is calculated and recorded in accordance with the accounting rules for income taxes as if the Company was a separate taxpayer from Perpetual. The Company makes payments to Perpetual in accordance with the terms of a tax sharing agreement between Perpetual and the Company.
NOTE 7-DISCONTINUED OPERATIONS
Effective August 1, 2009, the equity interests of WCIV, a wholly-owned subsidiary of the Company, were distributed to Perpetual. As the operations of WCIV constitute a component of the Company, the operating results of WCIV through July 31, 2009 have been presented as discontinued operations for all periods presented. The August 1, 2009 distribution of the equity interests of WCIV is reflected as a distribution to owners at historical cost, or $4,633, in the accompanying statement of operations and retained earnings. The $4,633 of equity interests of WCIV distributed effective August 1, 2009 consisted of current assets of $1,380, net property, plant and equipment of $3,802, current liabilities of $262 and non-current liabilities of $287.
On November 13, 2009, the equity interests of Politico, a wholly-owned subsidiary of the Company, were distributed to Perpetual. As the operations of Politico constitute a component of the Company, the operating results of Politico through November 13, 2009 are presented as discontinued operations for all periods presented. The November 13, 2009 distribution of the equity interests of Politico was reflected as a distribution to owners at historical cost, or $5,363,
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
in the accompanying statement of operations and retained earnings. The $5,363 of equity interests of Politico distributed on November 13, 2009 consisted of current assets of $7,548, net property, plant and equipment of $258, current liabilities of $2,429 and non-current liabilities of $14. The distribution of Politico resulted in a current tax effect of $1,766 which was reflected as a reduction to stockholder’s investment.
Following is a summary of operating results of WCIV and Politico for all periods presented:
NOTE 8-TRANSACTIONS WITH OWNERS AND RELATED PARTIES
Distributions to Owners, Net
In the ordinary course of business, the Company makes cash advances in the form of distributions to Perpetual. At present, the primary source of repayment of the net advances from the Company is through the ability of the Company to pay dividends or make other distributions. There is no immediate intent for these amounts to be repaid. Accordingly, such amounts have been treated as a reduction of stockholder’s investment and described as “distributions” in the accompanying consolidated balance sheets. The weighted average amount of non-interest bearing advances outstanding was $472,408, $474,338, and $483,381 during Fiscal 2009, 2010 and 2011, respectively.
Effective August 1, 2009, the equity interests of WCIV were distributed to Perpetual, and on November 13, 2009, the equity interests of Politico were distributed to Perpetual (see Note 7).
The operations of the Company are included in a consolidated federal income tax return and a combined Virginia state income tax return filed by Perpetual. The Company is charged by Perpetual and makes payments to Perpetual for federal and Virginia state income taxes, which are computed in accordance with the terms of a tax sharing agreement between the Company and Perpetual.
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
The components of distributions to owners and the related activity during Fiscal 2009, 2010 and 2011 consist of the following:
Subsequent to September 30, 2011 and through December 15, 2011 the Company made net distributions to owners of $2,000.
Other Transactions with Related Parties
During the years ended September 30, 2009 and 2010, the Company earned interest income from Perpetual of $112 and $215, respectively, as a result of making advances of tax payments in accordance with the terms of the tax sharing agreement between the Company and Perpetual. No advances of tax payments were made during the year ended September 30, 2011.
Management fees of $750, $600 and $600 were paid to Perpetual by the Company for the years ended September 30, 2009, 2010 and 2011, respectively.
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
The Company has entered into various agreements with Irides, LLC (Irides) to provide the Company’s stations with certain website design, hosting and maintenance services. Irides is an indirect subsidiary of Perpetual. The Company paid fees of $475, $330 and $360 to Irides during the years ended September 30, 2009, 2010 and 2011, respectively. These fees are included in television operating expenses in the consolidated statements of operations. The Company also provides certain office space to Irides. Charges for this space totaled $149, $154 and $159 for the years ended September 30, 2009, 2010 and 2011, respectively, and such amounts are included as an offset to television operating expenses in the consolidated statements of operations.
Subsequent to the distribution of the equity interests of Politico to Perpetual on November 13, 2009 (see Note 7), Politico has provided the Company with certain website development services. The Company was charged $739 for such services during the period from November 14, 2009 through September 30, 2010. Of this amount, $495 has been capitalized and $244 is included in television operating expenses in the consolidated statements of operations. The Company was charged $520 for such services during the year ended September 30, 2011. Of this amount, $41 has been capitalized and $479 is included in television operating expenses in the consolidated statements of operations. The Company also provides certain office space and facilities-related services to Politico. Such charges totaled $667 and $1,054 for the period from November 14, 2009 through September 30, 2010 and during the year ended September 30, 2011, respectively, and are included as an offset to television operating expenses in the consolidated statements of operations.
NOTE 9-RETIREMENT PLANS
A defined contribution savings plan is maintained for eligible employees of the Company and certain of its affiliates. Under the plan, employees may contribute a portion of their compensation subject to Internal Revenue Service limitations and the Company contributes an amount equal to 50% of the contribution of the employee not to exceed 6% of the compensation of the employee. Effective February 1, 2009, the Company suspended its matching contributions. Effective July 1, 2010, the Company reinstated matching contributions in an amount equal to 25% of the contribution of the employee not to exceed 6% of the compensation of the employee. Effective June 1, 2011, the Company reinstated its full matching contributions of 50% of the contribution of the employee not to exceed 6% of the compensation of the employee. The amounts contributed to the plan by the Company on behalf of its employees totaled approximately $356, $35 and $628 for the years ended September 30, 2009, 2010 and 2011, respectively.
The Company also contributes to certain other multi-employer union pension plans on behalf of certain of its union employees. The amounts contributed to such plans totaled approximately $614, $603 and $603 for the years ended September 30, 2009, 2010 and 2011, respectively.
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
NOTE 10-COLLAPSE OF BROADCAST TOWER
On January 11, 2008, the Company’s broadcast tower in Little Rock, Arkansas collapsed and fell, causing an interruption in the distribution of the over-the-air broadcast signals for the Company’s station in the Little Rock market. The tower, the broadcast equipment installed on the tower and certain equipment located near the tower were destroyed. The Company completed construction of the permanent replacement of its tower and installation of related equipment and began broadcasting a full power digital signal from the replacement tower on February 20, 2009. During July 2009, the related insurance claim negotiation was finalized. As a result, the Company recorded a gain on the replacement cost property portion of the claim of $6,015, reflecting the excess of replacement cost insurance proceeds over the carrying value of the destroyed assets. This gain is reflected in other nonoperating income in the accompanying consolidated statement of operations and retained earnings. In addition, a gain on the business interruption portion of the claim of $2,811, reflecting the lost revenue associated with the tower collapse, was also recorded during the quarter ended September 30, 2009. This gain is reflected in net operating revenues in the accompanying consolidated statement of operations and retained earnings. Proceeds received from the insurance company during the years ended September 30, 2008 and 2009 were reflected within investing activities in the consolidated statement of cash flows to the extent of claim-related capital expenditures during that period. Proceeds in excess of claim-related capital expenditures were reflected within operating activities.
NOTE 11-COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases office and studio facilities and machinery and equipment under operating leases expiring in various years through 2023. Certain leases contain provisions for renewal and extension.
Future minimum lease payments under operating leases, which have remaining noncancellable lease terms in excess of one year as of September 30, 2011, are as follows:
Rental expense under operating leases aggregated approximately $4,600, $4,200 and $4,200 for the years ended September 30, 2009, 2010 and 2011, respectively.
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
The Company has entered into contractual commitments in the ordinary course of business for the rights to television programming which is not yet available for broadcast as of September 30, 2011. Under these agreements, the Company must make specific minimum payments approximating the following:
The Company has entered into various employment contracts. Future guaranteed payments under such contracts as of September 30, 2011 approximate the following:
The Company has entered into various deferred compensation agreements with certain employees. Under these agreements, the Company is required to make payments aggregating $484 during the years 2012 through 2013. At September 30, 2010 and 2011, the Company has recorded a deferred compensation liability of approximately $592 and $470, respectively, which is included as a component of accrued employee benefit expenses in the accompanying consolidated balance sheets.
The Company also has certain obligations and commitments under various executory agreements to make future payments for goods and services. These agreements secure the future rights to certain goods and services to be used in the normal course of operations.
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars in thousands)
The Company currently and from time to time is involved in litigation incidental to the conduct of its business, including suits based on defamation and employment activity. The Company is not currently a party to any lawsuit or proceeding which, in the opinion of management, could reasonably be expected to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.
SCHEDULE II
ALLBRITTON COMMUNICATIONS COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
<1> Represents the distribution of the equity interests of WCIV effective August 1, 2009.
<2> Write-off of uncollectible accounts, net of recoveries and collection fees.
<3> Represents valuation allowance established related to certain net operating loss carryforwards and other deferred tax assets for state income tax purposes.
<4> Represents reduction of valuation allowance relating to certain net operating loss carryforwards.
<5> Represents the distribution of the equity interests of Politico on November 13, 2009.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALLBRITTON COMMUNICATIONS COMPANY
By:
/S/ ROBERT L. ALLBRITTON
Robert L. Allbritton
Chairman and Chief Executive Officer
Date: December 15, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
A-1
A-2
* Previously filed
** Portions have been omitted pursuant to confidential treatment
A-3