e10vk
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2009
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File Number 1-13796
GRAY TELEVISION, INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Georgia
(State or Other Jurisdiction
of
Incorporation or Organization)
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58-0285030
(I.R.S. Employer
Identification No.)
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4370 Peachtree Road, NE
Atlanta, GA
(Address of Principal
Executive Offices)
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30319
(Zip Code)
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Registrants telephone number, including area code:
(404) 504-9828
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Class A Common Stock (no par value)
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New York Stock Exchange
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Common Stock (no par value)
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding
12 months. Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definition of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one).:
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting stock (based upon the
closing sales price quoted on the New York Stock Exchange) held
by non-affiliates as of June 30, 2009: Class A and
Common Stock; no par value $20,854,311.
The number of shares outstanding of the registrants
classes of common stock as of April 6, 2010:
Class A Common Stock; no par value
5,753,020 shares; Common Stock, no par
value 42,880,493 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for
the annual meeting of shareholders, to be filed within
120 days of the registrants fiscal year end, pursuant
to Regulation 14A is incorporated by reference into
Part III hereof.
Gray
Television Inc.
INDEX
PART 1
We were incorporated under the laws of the state of Georgia
in 1897. In this Annual Report, unless otherwise indicated, the
words Gray, we, us, and
our refer to Gray Television, Inc. and its
subsidiaries. Our discussion of the television (or
TV) stations that we own and operate does not
include our interest in the television and radio stations owned
by Sarkes Tarzian, Inc., (Tarzian). Our fiscal years
2007, 2008 and 2009 all ended on December 31, respectively.
When we refer to a year, we are referring to the fiscal year
ended on those respective dates.
Our common stock, no par value, and our Class A common
stock, no par value, have been listed and traded on The New York
Stock Exchange (the NYSE) since September 24,
1996 and June 30, 1995, respectively. The ticker symbols
are GTN for our common stock and GTN.A
for our Class A common stock.
Unless otherwise indicated, all station rank, in-market share
and television household data herein are derived from reports
prepared by A.C. Nielsen Company (Nielsen).
General
We own 36 television stations serving 30 television markets.
Seventeen of the stations are affiliated with CBS Inc.
(CBS), ten are affiliated with the National
Broadcasting Company, Inc. (NBC), eight are
affiliated with the American Broadcasting Company
(ABC), and one is affiliated with FOX Entertainment
Group, Inc. (FOX). Our 17 CBS-affiliated stations
make us the largest independent owner of CBS affiliates in the
United States. Based on the results of the average of the
Nielsen March, May, July, and November 2009 ratings reports, our
combined station group has 23 markets with stations
ranked #1 in local news audience and 21 markets with
stations ranked #1 in overall audience within their
respective markets. Of the 30 markets that we serve, we operate
the #1 or #2 ranked station in 29 of those markets. In
addition to our primary channels that we broadcast from our
television stations, we currently broadcast 39 digital second
channels including one affiliated with ABC, four affiliated with
FOX, seven affiliated with The CW Network, LLC (CW),
18 affiliated with Twentieth Television, Inc.
(MyNetworkTV or MyNet.), two affiliated
with Universal Sports Network or (Univ.) and seven
local news/weather channels in certain of our existing markets.
We created our digital second channels to better utilize our
excess broadcast spectrum. The digital second channels are
similar to our primary broadcast channels; however, our digital
second channels are affiliated with networks different from
those affiliated with our primary broadcast channels. Our
combined TV station group reaches approximately 6.3% of total
United States households.
Acquisitions,
Investments and Divestitures
In 1993, we implemented a strategy to foster a significant
portion of our growth through strategic acquisitions and select
divestitures. Since January 1, 1994, our significant
acquisitions have included 33 television stations. We completed
our most recent acquisition on March 3, 2006. Our
acquisition, investment and divestiture activities during the
most recent five years are described below.
2006
Acquisition
On March 3, 2006, we completed the acquisition of the stock
of Michiana Telecasting Corp., owner of
WNDU-TV, the
NBC affiliate in South Bend, Indiana, from the University of
Notre Dame for $88.9 million, which included certain
working capital adjustments and transaction fees. We financed
this acquisition with borrowings under our senior credit
facility.
2005
Spinoff
On December 30, 2005, we completed the spinoff of all of
the outstanding stock of Triple Crown Media, Inc.
(TCM). Immediately prior to the spinoff, we
contributed all of the membership interests in Gray
1
Publishing, LLC which owned and operated our Gray Publishing and
GrayLink Wireless businesses and certain other assets, to TCM.
In the spinoff, each of the holders of our common stock received
one share of TCM common stock for every ten shares of our common
stock and each holder of our Class A common stock received
one share of TCM common stock for every ten shares of our
Class A common stock. As part of the spinoff, we received a
cash dividend of approximately $44.0 million from TCM. We
used the dividend proceeds to reduce our outstanding
indebtedness.
2005
Acquisitions
On November 30, 2005, we completed the acquisition of the
assets of
WSAZ-TV, the
NBC affiliate in Charleston-Huntington, West Virginia. We
purchased these assets from Emmis Communications Corp. for
approximately $185.8 million in cash plus certain
transaction fees. We financed this acquisition with borrowings
under the senior credit facility we then had in place.
On November 10, 2005, we completed the acquisition of the
assets of
WSWG-TV, the
UPN affiliate serving the Albany, Georgia television market. We
purchased these assets from P.D. Communications, LLC for
$3.75 million in cash. We used a portion of our cash on
hand to fund this acquisition. After the acquisition, we
obtained a CBS affiliation for this station.
On January 31, 2005, we completed the acquisition of
KKCO-TV from
Eagle III Broadcasting, LLC. We acquired this station for
approximately $13.5 million plus certain transaction fees.
KKCO-TV
serves the Grand Junction, Colorado television market and is an
NBC affiliate. We used a portion of our cash on hand to fully
fund this acquisition.
During 2005, we acquired a Federal Communications Commission
(FCC) license to operate a low power television
station,
WAHU-TV, in
the Charlottesville, Virginia television market. We currently
operate
WAHU-TV as a
FOX affiliate.
Revenues
Our revenues are derived primarily from local, regional and
national advertising. Our revenues are derived to a much lesser
extent from retransmission consent fees; network compensation;
studio and tower space rental; and commercial production
activities. Advertising refers primarily to
advertisements broadcast by television stations, but it also
includes advertisements placed on a television stations
website. Advertising rates are based upon a variety of factors,
including: (i) a programs popularity among the
viewers an advertiser wishes to attract, (ii) the number of
advertisers competing for the available time, (iii) the
size and demographic makeup of the market served by the station
and (iv) the availability of alternative advertising media
in the market area. Rates are also determined by a
stations overall ratings and in-market share, as well as
the stations ratings and market share among particular
demographic groups that an advertiser may be targeting. Because
broadcast stations rely on advertising revenues, they are
consequently sensitive to cyclical changes in the economy. The
sizes of advertisers budgets, which can be affected by
broad economic trends, can affect the broadcast industry in
general and the revenues of individual broadcast television
stations.
Our revenues fluctuate significantly between years, consistent
with, among other things, increased political advertising
expenditures in even-numbered years.
We derive a material portion of our advertising revenue from the
automotive and restaurant industries. In 2009, we earned
approximately 17% and 12% of our total revenue from the
automotive and restaurant categories, respectively. In 2008, we
earned approximately 19% and 10% of our total revenue from the
automotive and restaurant categories, respectively. Our business
and operating results could be materially adversely affected if
automotive- or restaurant-related advertising revenues decrease.
Our business and operating results could also be materially
adversely affected if revenue decreased from one or more other
significant advertising categories, such as the communications,
entertainment, financial services, professional services or
retail industries.
2
Our
Stations and Their Markets
Each of our stations is affiliated with a major network pursuant
to an affiliation agreement. Each affiliation agreement provides
the affiliated station with the right to broadcast all programs
transmitted by the affiliated network. Our affiliation
agreements expire at various dates through January 1, 2016.
The following table is a list of all our owned and operated
television stations.
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Primary Network
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DMA
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Primary
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Secondary
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Broadcast
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Station
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News
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Rank
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Network
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Network
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License
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Rank in
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Rank in
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(a)
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Market
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Station
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Affil.(b)
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Exp.(c)
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Affil.(b)
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Exp.(c)
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Expiration
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DMA(d)
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DMA(e)
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59
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Knoxville, TN
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WVLT
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CBS
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12/31/14
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MyNet.
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10/04/11
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08/01/05(i)
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2
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2
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62
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Lexington, KY
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WKYT
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CBS
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12/31/14
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CW
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09/17/14
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08/01/05(i)
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1
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1
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63
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Charleston/Huntington, WV
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WSAZ
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NBC
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01/01/12
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MyNet.
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10/04/11
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10/01/12
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1
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1
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69
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Wichita/Hutchinson, KS
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KAKE
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ABC
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12/31/13
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NA
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NA
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06/01/06(i)
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2
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2
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(Colby, KS)
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KLBY(f)
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ABC
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12/31/13
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NA
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NA
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06/01/06(i)
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2
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2
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(Garden City, KS)
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KUPK(f)
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ABC
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12/31/13
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NA
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NA
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06/01/06(i)
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2
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2
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76
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Omaha, NE
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WOWT
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NBC
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01/01/12
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Univ.
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12/31/11
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06/01/06(i)
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2
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1
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85
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Madison, WI
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WMTV
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NBC
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01/01/12
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News
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NA
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12/01/05(i)
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2
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2
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89
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Waco-Temple-Bryan, TX
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KWTX
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CBS
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12/31/14
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CW
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12/31/14
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08/01/06(i)
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1
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1
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(Bryan, TX)
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KBTX(g)
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CBS
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12/31/14
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CW
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12/31/14
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08/01/06(i)
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1
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1
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91
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South Bend, IN
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WNDU
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NBC
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01/01/12
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NA
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NA
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08/01/13
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2
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2
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92
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Colorado Springs, CO
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KKTV
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CBS
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12/31/14
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MyNet.
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10/04/11
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04/01/06(i)
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1
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2
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103
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Greenville/New Bern/
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WITN
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NBC
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01/01/12
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MyNet.
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10/04/11
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12/01/04(i)
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2
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1
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Washington, NC
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105
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Lincoln/Hastings/Kearney, NE
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KOLN
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CBS
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12/31/14
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MyNet.
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10/04/11
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06/01/06(i)
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1
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1
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Grand Island, NE
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KGIN(h)
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CBS
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12/31/14
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NA
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NA
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06/01/06(i)
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1
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1
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106
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Tallahassee, FL/
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WCTV
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CBS
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12/31/14
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MyNet.
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10/04/11
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04/01/13
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1
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1
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Thomasville, GA
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108
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Reno, NV
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KOLO
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ABC
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12/31/13
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Univ.
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01/09/11
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10/01/06(i)
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1
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1
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114
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Augusta, GA
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WRDW
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CBS
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12/31/14
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MyNet
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10/04/11
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04/01/13
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1
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1
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News
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NA
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115
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Lansing, MI
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WILX
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NBC
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01/01/12
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News
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NA
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10/01/05(i)
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2
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1
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127
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La Crosse/Eau Claire, WI
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WEAU
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NBC
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01/01/12
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News
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NA
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12/01/05(i)
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1
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1
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134
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Rockford, IL
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WIFR
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CBS
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12/31/14
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News
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NA
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12/01/05(i)
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1
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1
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135
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Wausau/Rhinelander, WI
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WSAW
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CBS
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12/31/14
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MyNet.
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10/04/11
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12/01/05(i)
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1
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1
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News
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NA
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136
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Topeka, KS
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WIBW
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CBS
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12/31/14
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MyNet.
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10/04/11
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06/01/06(i)
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1
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1
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145
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Albany, GA
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WSWG
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CBS
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12/31/14
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MyNet.
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10/04/11
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04/01/13
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3
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NA(j)
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151
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Panama City, FL
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WJHG
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NBC
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01/01/12
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CW
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09/17/12
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02/01/05(i)
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1
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1
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MyNet.
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10/04/11
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161
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Sherman,TX/Ada, OK
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KXII
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CBS
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12/31/14
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FOX
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06/30/11
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08/01/06(i)
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1
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1
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MyNet.
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10/04/11
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172
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Dothan, AL
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WTVY
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CBS
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12/31/14
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CW
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09/01/12
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04/01/13
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1
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1
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MyNet.
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10/04/11
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178
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Harrisonburg, VA
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WHSV
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ABC
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12/31/13
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ABC
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12/31/13
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10/01/12
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1
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1
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FOX
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06/30/11
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MyNet.
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10/04/11
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3
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Primary Network
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DMA
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Primary
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Secondary
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Broadcast
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Station
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News
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Rank
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Network
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Network
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License
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Rank in
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Rank in
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(a)
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Market
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Station
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Affil.(b)
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Exp.(c)
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Affil.(b)
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Exp.(c)
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Expiration
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DMA(d)
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DMA(e)
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182
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Bowling Green, KY
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WBKO
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ABC
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12/31/13
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FOX
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06/30/11
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08/01/05(i)
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1
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1
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CW
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09/01/13
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183
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Charlottesville, VA
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WCAV
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CBS
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12/31/14
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NA
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NA
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10/01/12
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2
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2
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WVAW
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ABC
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12/31/13
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NA
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NA
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10/01/12
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|
4
|
|
4
|
|
|
|
|
|
|
WAHU
|
|
FOX
|
|
06/30/11
|
|
MyNet.
|
|
10/04/11
|
|
10/01/12
|
|
3
|
|
3
|
|
184
|
|
|
Grand Junction, CO
|
|
KKCO
|
|
NBC
|
|
01/01/16
|
|
NA
|
|
NA
|
|
04/01/06(i)
|
|
1
|
|
1
|
|
185
|
|
|
Meridian, MS
|
|
WTOK
|
|
ABC
|
|
12/31/13
|
|
CW
|
|
09/15/12
|
|
06/01/05(i)
|
|
1
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
MyNet.
|
|
10/04/11
|
|
|
|
|
|
|
|
194
|
|
|
Parkersburg, WV
|
|
WTAP
|
|
NBC
|
|
01/01/12
|
|
FOX
|
|
06/30/11
|
|
10/01/04(i)
|
|
1
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
MyNet.
|
|
10/04/11
|
|
|
|
|
|
|
|
(k)
|
|
|
Hazard, KY
|
|
WYMT
|
|
CBS
|
|
12/31/14
|
|
NA
|
|
NA
|
|
08/01/05(i)
|
|
1
|
|
1
|
|
|
|
(a) |
|
Designated market area (DMA) rank based on data
published by Nielsen or other public sources for the
2009-2010
television season. |
|
(b) |
|
Indicates network affiliations. The majority of our stations are
affiliated with a network. We also have independent stations and
stations broadcasting local news and weather. Such stations are
identified as News. |
|
(c) |
|
Indicates date of expiration of network license. |
|
(d) |
|
Based on the average of Nielsen data for the March, July, May
and November 2009 rating periods, Sunday to Saturday,
6 a.m. to 2 a.m. |
|
(e) |
|
Based on our review of Nielsen data for the March, July, May and
November 2009 rating periods for various news programs. |
|
(f) |
|
KLBY-TV and
KUPK-TV are
satellite stations of
KAKE-TV
under FCC rules.
KLBY-TV and
KUPK-TV
retransmit the signal of the primary station and may offer some
locally originated programming, such as local news. |
|
(g) |
|
KBTX-TV is a
satellite station of
KWTX-TV
under FCC rules.
KBTX-TV
retransmits the signal of the primary station and may offer some
locally originated programming, such as local news. |
|
(h) |
|
KGIN-TV is a
satellite station of
KOLN-TV
under FCC rules.
KGIN-TV
retransmits the signal of the primary station and may offer some
locally originated programming, such as local news. |
|
(i) |
|
We have filed a license renewal application with the FCC, and
renewal is pending. We anticipate that all pending applications
will be renewed in due course. |
|
(j) |
|
This station does not currently broadcast local news that is
specific to the Albany, Georgia market. |
|
(k) |
|
We consider
WYMT-TVs
service area to be a separate television market. This area is a
special 17-county trading area as defined by Nielsen and is part
of the Lexington, Kentucky DMA. |
Television
Industry Background
The FCC grants broadcast licenses to television stations.
Historically, there have been a limited number of channels
available for broadcasting in any one geographic area.
Television station revenues are derived primarily from local,
regional and national advertising. Television station revenues
are derived to a much lesser extent from retransmission consent
fees; network compensation; studio and tower space rental; and
commercial production activities. Advertising refers
primarily to advertisements broadcast by television stations,
but it also includes advertisements placed on a television
stations website. Advertising rates are based upon a
variety of factors, including: (i) a programs
popularity among the viewers an advertiser wishes to attract,
(ii) the number of advertisers competing for the available
4
time, (iii) the size and demographic makeup of the market
served by the station and (iv) the availability of
alternative advertising media in the market area. Rates are also
determined by a stations overall ratings and in-market
share, as well as the stations ratings and market share
among particular demographic groups that an advertiser may be
targeting. Because broadcast stations rely on advertising
revenues, they are sensitive to cyclical changes in the economy.
The sizes of advertisers budgets, which can be affected by
broad economic trends, can affect the broadcast industry in
general and the revenues of individual broadcast television
stations.
Television stations in the country are grouped by Nielsen, a
national audience measuring service, into approximately 210
generally recognized television markets or DMAs. These markets
are ranked in size according to various formulae based upon
actual or potential audience. Each DMA is an exclusive
geographic area consisting of all counties in which the
home-market commercial stations receive the greatest percentage
of total viewing hours. Nielsen periodically publishes data on
estimated audiences for the television stations in the various
television markets throughout the country.
Station
Network Affiliations
Four major broadcast networks, ABC, NBC, CBS and FOX, dominate
broadcast television in terms of the amount of original
programming provided to network affiliates. CW and MyNetworkTV
provide their affiliates with a smaller portion of each
days programming compared to ABC, NBC, CBS and FOX.
Most successful commercial television stations obtain their
brand identity from locally produced news programs.
Notwithstanding this, however, the affiliation of a station with
one of the four major networks can have a significant impact on
the stations programming, revenues, expenses and
operations. A typical affiliate of these networks receives the
majority of each days programming from the network. The
network provides an affiliate this programming, along with cash
payments (network compensation) in certain
instances, in exchange for a substantial majority of the
advertising time available for sale during the airing of network
programs. The network then sells this advertising time and
retains the revenues. The affiliate retains revenues from
advertising time sold for time periods between network programs
and for programs the affiliate produces or purchases from
non-network
sources. In seeking to acquire programming to supplement
network-supplied programming, the affiliates compete primarily
with other affiliates and independent stations in their markets.
Cable systems generally do not compete with local stations for
programming, although various national cable networks from time
to time have acquired programs that would have otherwise been
offered to local television stations.
A television station may also acquire programming through barter
arrangements. Under a barter arrangement, a national program
distributor retains a fixed amount of advertising time within
the program in exchange for the programming it supplies. The
television station may pay a fixed fee for such programming.
We account for trade or barter transactions involving the
exchange of tangible goods or services with our customers. The
revenue is recorded at the time the advertisement is broadcast
and the expense is recorded at the time the goods or services
are used. The revenue and expense associated with these
transactions are based on the fair value of the assets or
services received.
We do not account for barter revenue and related barter expense
generated from network or syndicated programming.
In contrast to a network-affiliated station, independent
stations purchase or produce all of the programming they
broadcast, generally resulting in higher programming costs.
Independent stations, however, retain their entire inventory of
advertising time and all related revenues. When compared to
major networks such as ABC, CBS, NBC and FOX, certain networks
such as CW and MyNetworkTV produce a smaller amount of
network-provided programming. Affiliates of CW or MyNetworkTV
must purchase or produce a greater amount of their
non-network
programming, generally resulting in higher programming costs.
Affiliates of CW or MyNetworkTV retain a larger portion of their
advertising time inventory and the related revenues compared to
stations affiliated with the major networks.
Cable-originated programming is a significant competitor of
broadcast television programming. However, no single cable
programming network regularly attains audience levels exceeding
a small fraction of those of
5
any major broadcast network. Cable networks advertising
share has increased due to the growth in cable penetration (the
percentage of television households that are connected to a
cable system). Despite increases in cable viewership, and
increases in advertising, growth in direct broadcast satellite
(DBS) and other multi-channel video program
distribution services,
over-the-air
broadcasting remains the dominant distribution system for
mass-market television advertising.
Seasonality
Broadcast advertising revenues are generally highest in the
second and fourth quarters each year. This seasonality results
partly from increases in consumer advertising in the spring and
retail advertising in the period leading up to and including the
holiday season. Broadcast advertising revenues are also
generally higher in even-numbered years, due to spending by
political candidates, political parties and special interest
groups. This political spending typically is heaviest during the
fourth quarter.
Competition
Television stations compete for audiences, certain programming
(including news) and advertisers. Signal coverage and assigned
frequency also materially affect a television stations
competitive position.
Audience
Stations compete for audience based on broadcast program
popularity, which has a direct effect on advertising rates.
Affiliated networks supply a substantial portion of our
stations daily programming. Stations depend on the
performance of the network programs to attract viewers. There
can be no assurance that any such current or future programming
created by our affiliated networks will achieve or maintain
satisfactory viewership levels in the future. Stations program
non-network
time periods with a combination of locally produced news, public
affairs and other entertainment programming, including national
news or syndicated programs purchased for cash, cash and barter,
or barter only.
Cable and satellite television have significantly altered
competition for audience in the television industry. Cable and
satellite television can increase a broadcasting stations
competition for viewers by bringing into the market distant
broadcasting signals not otherwise available to the
stations audience and by serving as a distribution system
for non-broadcast programming.
Other sources of competition include home entertainment systems,
wireless cable services, satellite master antenna
television systems, low-power television stations, television
translator stations, DBS video distribution services and the
internet.
Recent developments by many companies, including internet
service providers, are expanding the variety and quality of
broadcast content on the internet. Internet companies have
developed business relationships with companies that have
traditionally provided syndicated programming, network
television and other content. As a result, additional
programming is becoming available through non-traditional
methods, which can directly impact the number of TV viewers, and
thus indirectly impact station rankings, popularity and revenue
possibilities from our stations.
Programming
Competition for
non-network
programming involves negotiating with national program
distributors, or syndicators, that sell first-run and rerun
programming packages. Each station competes against the other
broadcast stations in its market for exclusive access to
off-network
reruns (such as Friends) and first-run programming (such
as Oprah). Broadcast stations compete also for exclusive
news stories and features. Cable systems generally do not
compete with local stations for programming, although various
national cable networks from time to time have acquired programs
that would have otherwise been offered to local television
stations.
6
Advertising
Advertising rates are based upon: (i) the size of a
stations market, (ii) a stations overall
ratings, (iii) a programs popularity among targeted
viewers, (iv) the number of advertisers competing for
available time, (v) the demographic makeup of the
stations market, (vi) the availability of alternative
advertising media in the market, (vii) the presence of
effective sales forces and (viii) the development of
projects, features and programs that tie advertiser messages to
programming. Advertising revenues comprise the primary source of
revenues for our stations. Our stations compete with other
television stations for advertising revenues in their respective
markets. Our stations also compete for advertising revenue with
other media, such as newspapers, radio stations, magazines,
outdoor advertising, transit advertising, yellow page
directories, direct mail, internet and local cable systems. In
the broadcasting industry, advertising revenue competition
occurs primarily within individual markets.
Federal
Regulation of Our Business
General
Under the Communications Act of 1934, as amended (the
Communications Act), television broadcast operations
such as ours are subject to the jurisdiction of the FCC. Among
other things, the Communications Act empowers the FCC to:
(i) issue, revoke and modify broadcasting licenses; (ii)
regulate stations operations and equipment; and
(iii) impose penalties for violations of the Communications
Act or FCC regulations. The Communications Act prohibits the
assignment of a license or the transfer of control of a licensee
without prior FCC approval.
License
Grant and Renewal
The FCC grants broadcast licenses to television stations for
terms of up to eight years. Broadcast licenses are of paramount
importance to the operations of our television stations. The
Communications Act requires the FCC to renew a licensees
broadcast license if the FCC finds that: (i) the station
has served the public interest, convenience and necessity;
(ii) there have been no serious violations of either the
Communications Act or the FCCs rules and regulations; and
(iii) there have been no other violations which, taken
together, would constitute a pattern of abuse. Historically the
FCC has renewed broadcast licenses in substantially all cases.
While we are not currently aware of any facts or circumstances
that might prevent the renewal of our stations licenses at
the end of their respective license terms, we cannot provide any
assurances that any license could be renewed. Our failure to
renew any licenses upon the expiration of any license term could
have a material adverse effect on our business. Under FCC rules,
a license expiration date is automatically extended pending the
review and approval of the renewal application. For further
information regarding the expiration dates of our stations
current licenses and renewal application status, see the table
under the heading Our Stations and Their Markets.
Ownership
Rules
The FCCs broadcast ownership rules affect the number, type
and location of broadcast and newspaper properties that we may
hold or acquire. The rules now in effect limit the common
ownership, operation or control of, and attributable
interests or voting power in: (i) television stations
serving the same area; (ii) television stations and daily
newspapers serving the same area; and (iii) television
stations and radio stations serving the same area. The rules
also limit the aggregate national audience reach of television
stations that may be under common ownership, operation and
control, or in which a single person or entity may hold an
official position or have more than a specified interest or
percentage of voting power. The FCCs rules also define the
types of positions and interests that are considered
attributable for purposes of the ownership limits, and thus also
apply to our principals and certain investors.
The FCC is required by statute to review all of its broadcast
ownership rules every four years to determine if such rules
remain necessary in the public interest. The FCC completed a
comprehensive review of its ownership rules in 2003,
significantly relaxing restrictions on the common ownership of
television stations, radio stations and daily newspapers within
the same local market. However, in 2004, the United
7
States Court of Appeals for the Third Circuit vacated many of
the FCCs 2003 rule changes. The court remanded the rules
to the FCC for further proceedings and extended a stay on the
implementation of the new rules. In 2007, the FCC adopted a
Report and Order addressing the issues remanded by the Third
Circuit and fulfilling the FCCs obligation to review its
media ownership rules every four years. That Order left most of
the FCCs pre-2003 ownership restrictions in place, but
made modifications to the newspaper/broadcast cross-ownership
restriction. A number of parties appealed the FCCs order;
those appeals were consolidated in the Third Circuit in 2008 and
remain pending. The Third Circuit initially stayed
implementation of the 2007 changes to the newspaper/broadcast
cross-ownership restriction but recently lifted the stay and set
a briefing schedule for the pending appeals. We cannot provide
any assurances regarding the outcome of these appeals, or the
potential impact thereof on our business. In 2010, the FCC again
will be required to undertake a comprehensive review of its
broadcast ownership rules to determine whether the rules remain
necessary in the public interest.
Local
TV Ownership Rule
The FCCs 2007 actions generally reinstated the FCCs
pre-2003 local television ownership rules. Under those rules,
one entity may own two commercial television stations in a DMA
as long as no more than one of those stations is ranked among
the top four stations in the DMA and eight independently owned,
full-power stations will remain in the DMA. Waivers of this rule
may be available if at least one of the stations in a proposed
combination qualifies, pursuant to specific criteria set forth
in the FCCs rules, as failed, failing, or unbuilt.
Cross-Media
Limits
The newspaper/broadcast cross-ownership rule generally prohibits
one entity from owning both a commercial broadcast station and a
daily newspaper in the same community. The radio/television
cross-ownership rule allows a party to own one or two TV
stations and a varying number of radio stations within a single
market. The FCCs 2007 decision left the pre-2003
newspaper/broadcast and radio/television cross-ownership
restrictions in place, but provided that the FCC would evaluate
newly-proposed newspaper/broadcast combinations under a
non-exhaustive list of four public interest factors and apply
positive or negative presumptions in specific circumstances. As
noted above, a stay implemented by the Third Circuit that
precluded these rule changes from taking effect recently was
lifted.
National
Television Station Ownership Rule
The maximum percentage of U.S. households that a single
owner can reach through commonly owned television stations is
39 percent. This limit was specified by Congress in 2004
and is not affected by the December 2007 FCC decision. The FCC
applies a 50 percent discount for ultra-high
frequency (UHF) stations, but the FCC indicated in
the 2007 decision that it will conduct a separate proceeding to
determine how or whether the UHF discount will operate in the
future.
As indicated above, the FCCs latest actions concerning
media ownership are subject to further judicial and FCC review.
We cannot predict the outcome of potential appellate litigation
or FCC action.
Attribution
Rules
Under the FCCs ownership rules, a direct or indirect
purchaser of certain types of our securities could violate FCC
regulations if that purchaser owned or acquired an
attributable interest in other media properties in
the same areas as our stations. Pursuant to FCC rules, the
following relationships and interests are generally considered
attributable for purposes of broadcast ownership restrictions:
(i) all officers and directors of a corporate licensee and
its direct or indirect parent(s); (ii) voting stock
interests of at least five percent; (iii) voting stock
interests of at least 20 percent, if the holder is a
passive institutional investor (such as an investment company,
bank, or insurance company); (iv) any equity interest in a
limited partnership or limited liability company, unless
properly insulated from management activities;
(v) equity
and/or debt
interests that in the aggregate exceed 33 percent of a
licensees total assets, if the interest holder supplies
more than
8
15 percent of the stations total weekly programming
or is a same-market broadcast company or daily newspaper
publisher; (vi) time brokerage of a broadcast station by a
same-market broadcast company; and (vii) same-market radio
joint sales agreements. The FCC is also considering deeming
same-market television joint sales agreements attributable.
Management services agreements and other types of shared
services arrangements between same-market stations that do not
include attributable time brokerage or joint sales components
generally are not deemed attributable under the FCCs rules.
To our knowledge, no officer, director or five percent
stockholder currently holds an attributable interest in another
television station, radio station or daily newspaper that is
inconsistent with the FCCs ownership rules and policies or
with our ownership of our stations.
Alien
Ownership Restrictions
The Communications Act restricts the ability of foreign entities
or individuals to own or hold interests in broadcast licenses.
The Communications Act bars the following from holding broadcast
licenses: foreign governments, representatives of foreign
governments, non-citizens, representatives of non-citizens, and
corporations or partnerships organized under the laws of a
foreign nation. Foreign individuals or entities, collectively,
may directly or indirectly own or vote no more than
20 percent of the capital stock of a licensee or
25 percent of the capital stock of a corporation that
directly or indirectly controls a licensee. The 20 percent
limit on foreign ownership of a licensee may not be waived.
While the FCC has the discretion to permit foreign ownership in
excess of 25 percent in a corporation controlling a
licensee, it has rarely done so in the broadcast context.
We serve as a holding company of wholly owned subsidiaries, one
of which is a licensee for our stations. Therefore we may be
restricted from having more than one-fourth of our stock owned
or voted directly or indirectly by non-citizens, foreign
governments, representatives of non-citizens or foreign
governments, or foreign corporations.
Programming
and Operations
Rules and policies of the FCC and other federal agencies
regulate certain programming practices and other areas affecting
the business or operations of broadcast stations.
The Childrens Television Act of 1990 limits commercial
matter in childrens television programs and requires
stations to present educational and informational
childrens programming. Broadcasters are required to
provide at least three hours of childrens educational
programming per week on their primary digital channels. This
requirement increases proportionately with each free video
programming stream a station broadcasts simultaneously
(multicasts). In October 2009, the FCC issued a
Notice of Inquiry (NOI) seeking comment on a broad
range of issues related to childrens usage of electronic
media and the current regulatory landscape that governs the
availability of electronic media to children. The NOI remains
pending, and we cannot predict what recommendations or further
action, if any, will result from it.
In 2007 the FCC adopted an order imposing on broadcasters new
public filing and public interest reporting requirements. These
new requirements must be approved by the Office of Management
and Budget before they become effective, and the OMB has not yet
approved them. It is unclear when, if ever, these rules will be
implemented. Pursuant to these new requirements, stations that
have websites will be required to make certain portions of their
public inspection files accessible online. Stations also will be
required to file electronically every quarter a new,
standardized form that will track various types and quantities
of local programming. The form will require information about
programming related to: (i) local news and community
issues, (ii) local civic affairs, (iii) local
electoral affairs, (iv) underserved communities,
(v) public service announcements (vi) independently
produced programming, and (vii) religious programming.
Stations will also have to describe: (i) any efforts made
to assess the programming needs of their stations
community, (ii) whether the station is providing required
close captioning, (iii) efforts to make emergency
information accessible to persons with disabilities and (iv), if
applicable, any local marketing or joint sales agreements
involving the station. If implemented as proposed by the FCC,
the new standardized form will significantly increase
recordkeeping requirements for television broadcasters. Several
station owners and other interested
9
parties have asked the FCC to reconsider the new reporting
requirements and have sought to postpone their implementation.
In addition, the order imposing the new rules is currently on
appeal in the U.S. Court of Appeals for the District of
Columbia Circuit.
In 2007, the FCC issued a Report on Broadcast Localism and
Notice of Proposed Rulemaking (the Report). The
Report tentatively concluded that broadcast licensees should be
required to have regular meetings with permanent local advisory
boards to ascertain the needs and interests of their
communities. The Report also tentatively adopted specific
renewal application processing guidelines that would require
broadcasters to air a minimum amount of local programming. The
Report sought public comment on two additional rule changes that
would impact television broadcasters. These rule changes would
restrict a broadcasters ability to locate a stations
main studio outside the community of license and the right to
operate a station remotely. To date, the FCC has not issued a
final order on the matter. We cannot predict whether or when the
FCC will codify some or all of the specific localism initiatives
discussed in the Report.
Over the past few years, the FCC has increased its enforcement
efforts regarding broadcast indecency and profanity. In 2006,
the statutory maximum fine for broadcast indecency material
increased from $32,500 to $325,000 per incident. Several
judicial appeals of FCC indecency enforcement actions are
currently pending, and their outcomes could affect future FCC
policies in this area.
EEO
Rules
The FCCs Equal Employment Opportunity (EEO)
rules impose job information dissemination, recruitment,
documentation and reporting requirements on broadcast station
licensees. Broadcasters are subject to random audits to ensure
compliance with the EEO rules and could be sanctioned for
noncompliance.
Cable
and Satellite Transmission of Local Television
Signals
Under FCC regulations, cable systems must devote a specified
portion of their channel capacity to the carriage of local
television station signals. Television stations may elect
between must carry rights or a right to restrict or
prevent cable systems from carrying the stations signal
without the stations permission (retransmission
consent). Stations must make this election at the same
time once every three years, and did so most recently on
October 1, 2008. All broadcast stations that made carriage
decisions on October 1, 2008 will be bound by their
decisions until the end of the current three year cycle on
December 31, 2011. Our stations have generally elected
retransmission consent and have entered into carriage agreements
with cable systems serving their markets.
For those markets in which a DBS carrier provides any local
signal, the FCC also has established a market-specific
requirement for mandatory carriage of local television stations
by DBS operators similar to that for cable systems. The FCC has
also adopted rules relating to station eligibility for DBS
carriage and subscriber eligibility for receiving signals. There
are specific statutory requirements relating to satellite
distribution of distant network signals to unserved
households, households that do not receive a Grade B
signal from a local network affiliate. A law governing DBS
distribution, the Satellite Home Viewer Extension and
Reauthorization Act of 2004 (SHVERA), was scheduled
to expire at the end of 2009. Congress has extended SHVERA three
times. The most recent extension maintains the current law until
April 30, 2010. A long-term extension and revision of
SHVERA is still expected to be finalized in the near future. We
cannot predict the impact of DBS service on our business. We
have, however, entered into retransmission consent agreements
with DISH Network and DirectTV for the retransmission of our
television stations signals into the local markets that
each of these DBS providers respectively serves.
Digital
Television Service
In 1997, the FCC adopted rules for implementing digital
television (DTV) service. On June 12, 2009, the
U.S. finalized its transition from analog to digital
service, and full-power television stations were required to
cease analog operations and commence digital-only operations.
The DTV transition has improved the technical quality of
viewers television signals and given broadcasters the
ability to provide new services, such as high definition
television.
10
Broadcasters may use their digital spectrum to provide either a
single DTV signal or multicast several program streams.
Broadcasters also may use some of their digital spectrum to
offer non-broadcast ancillary services such as
subscription video, data transfer or audio signals. However,
broadcasters must pay the government a fee of five percent of
gross revenues received from such ancillary services. Under the
FCCs rules relating to digital broadcasters
must carry rights (which apply to cable and certain
DBS systems) digital stations asserting must carry
rights are entitled to carriage of only a single programming
stream and other program-related content on that
stream, even if they multicast. Now that the DTV transition is
complete, cable operators have two options to ensure that all
analog cable subscribers continue to be able to receive the
signals of stations electing must-carry status. They may choose
either to (i) broadcast the signal in digital format for
digital customers and down-convert the signal to
analog format for analog customers or (ii) deliver the
signal in digital format to all subscribers and ensure that all
subscribers with analog service have set-top boxes that convert
the digital signal to analog format.
Currently, all of our full-power stations are broadcasting
digitally. In 2009, we also began testing mobile DTV broadcasts
in one of our markets. Consumers are able to view these
broadcasts on handheld devices equipped with a DTV receiver. To
date, the FCC has not adopted any regulations that are specific
to mobile DTV services, and we cannot predict whether it will do
so in the future.
The FCC has adopted rules and procedures regarding the digital
conversion of Low Power Television (LPTV) stations,
TV translator stations and TV booster stations. Under these
rules, existing LPTV and TV translator stations may convert to
digital operations on their current channels. Alternatively,
LPTV and translator licenses may seek a digital
companion channel for their analog station
operations. At a later date, the FCC will determine the date by
which those stations obtaining a digital companion channel must
surrender one of their channels.
Beginning December 31, 2006, DTV broadcasters were required
to comply with Emergency Alert System (EAS) rules
and ensure that viewers of all programming streams can receive
EAS messages.
Broadcast
Spectrum
On March 16, 2010, the FCC delivered to Congress a
National Broadband Plan. The National Broadband
Plan, inter alia, makes recommendations regarding the use of
spectrum currently allocated to television broadcasters,
including seeking the voluntary surrender of certain portions of
the television broadcast spectrum and repacking the currently
allocated spectrum to make portions of that spectrum available
for other wireless communications services. If some or all of
our television stations are required to change frequencies or
reduce the amount of spectrum they use, our stations could incur
substantial conversion costs, reduction or loss of
over-the-air
signal coverage or an inability to provide high definition
programming and additional program streams, including mobile
video services. Prior to implementation of the proposals
contained in the National Broadband Plan, further action by the
FCC or Congress or both is necessary. We cannot predict the
likelihood, timing or outcome of any Congressional or FCC
regulatory action in this regard nor the impact of any such
changes upon our business.
The foregoing does not purport to be a complete summary of the
Communications Act, other applicable statutes, or the FCCs
rules, regulations or policies. Proposals for additional or
revised regulations and requirements are pending before, are
being considered by, and may in the future be considered by,
Congress and federal regulatory agencies from time to time. We
cannot predict the effect of any existing or proposed federal
legislation, regulations or policies on our business. Also,
several 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 effect on our business.
Employees
As of December 31, 2009, we had 1,954 full-time
employees and 254 part-time employees. As of
December 31, 2009, we had 100 full-time employees and
19 part-time employees that were represented by unions. We
consider relations with our employees to be good.
11
Available
Information
Our web address is
http://www.gray.tv.
We make the following reports filed with the Securities and
Exchange Commission (the SEC) available, free of
charge, on our website under the heading SEC Filings:
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our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on Form
8-K and
amendments to the foregoing reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, or the Exchange Act;
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our proxy statements; and
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initial statements of beneficial ownership of securities on
Form 3, statements of changes in beneficial ownership on
Form 4 and annual statements of beneficial ownership on
Form 5, in each case as filed by certain of our officers,
directors and large stockholders pursuant to Section 16 of
the Exchange Act.
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These filings are also available at the SECs website
located at
http://www.sec.gov.
The SECs website contains reports, proxy and information
statements, and other information regarding issuers, like us,
that file electronically. The public may read and copy any
materials filed with the SEC at the SECs public reference
room at 100 F Street, N.E., Washington, DC 20549. The
public may obtain information on the operation of the SECs
public reference room by calling the SEC at
1-800-SEC-0330.
The foregoing reports are made available on our website as soon
as practicable after they are filed with, or furnished to, the
SEC. The information found on our website is not incorporated by
reference or part of this or any other report we file with or
furnish to the SEC.
We have adopted a Code of Ethics (the Code) that
applies to all of our directors, executive officers and
employees. The Code is available on our website at
http://www.gray.tv
under the heading of Corporate Governance. If any
waivers of the Code are granted, the waivers will be disclosed
in an SEC filing on
Form 8-K.
We have also filed the Code as an exhibit to the annual report
filed on
Form 10-K
for the year ended December 31, 2004, and it is
incorporated by reference to this report.
Our website also includes our Corporate Governance Principles,
the Charter of the Audit Committee, the Nominating and Corporate
Governance Committee and the Compensation Committee.
All such information is also available to any shareholder upon
request by telephone at
(404) 504-9828.
Risks
Related to Our Business
We
depend on advertising revenues, which are seasonal, and also may
fluctuate as a result of a number of factors.
Our main source of revenue is sales of advertising time and
space. Our ability to sell advertising time and space depends on:
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economic conditions in the areas where our stations are located
and in the nation as a whole;
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the popularity of our programming;
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changes in the population demographics in the areas where our
stations are located;
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local and national advertising price fluctuations, which can be
affected by the availability of programming, the popularity of
programming, and the relative supply of and demand for
commercial advertising;
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our competitors activities , including increased
competition from other forms of advertising-based mediums,
particularly network, cable television, direct satellite
television and internet;
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the duration and extent of any network preemption of regularly
scheduled programming for any reason, including as a result of
the outbreak or continuance of military hostilities or terrorist
attacks, and
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decisions by advertisers to withdraw or delay planned
advertising expenditures for any reason, including as a result
of military action or terrorist attacks; and
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other factors that may be beyond our control. For example, a
labor dispute or other disruption at a major national
advertiser, programming provider or network, or a recession
nationally
and/or in a
particular market, might make it more difficult to sell
advertising time and space and could reduce our revenue.
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Our results are also subject to seasonal fluctuations. Seasonal
fluctuations typically result in higher broadcast operating
income in the second and fourth quarters than first and third
quarters of each year. This seasonality is primarily
attributable to (i) advertisers increased
expenditures in the spring and in anticipation of holiday season
spending and (ii) an increase in viewership during this
period. Furthermore, revenues from political advertising are
significantly higher in even-numbered years, particularly during
presidential election years.
Our
operating and financial flexibility is limited by the terms of
our senior credit facility.
Our senior credit facility prevents us from taking certain
actions and requires us to comply with certain financial and
operating requirements. Among other things, these include
limitations on:
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certain additional indebtedness;
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liens;
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amendments to our by-laws and articles of incorporation;
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mergers and the sale of assets;
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guarantees;
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investments and acquisitions;
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payment of dividends and redemption of our capital stock;
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a specified leverage ratio;
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related party transactions;
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purchases of real estate; and
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entering into multiemployer retirement plans.
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These restrictions and requirements may prevent us from taking
actions that could increase the value of our business, or may
require actions that decrease the value of our business. In
addition, if we fail to maintain compliance with any of these
requirements, we would thereby be in default under such senior
credit facility. If we were in default under this agreement, the
lenders thereunder could require immediate payment of all
obligations under the senior credit facility
and/or
foreclose on the collateral that is pledged to secure those
obligations. If this occurred, we could be forced to sell assets
or take other action that would reduce the value of our business.
Servicing
our debt and other obligations requires a significant amount of
cash, and our ability to generate sufficient cash depends on
many factors, some of which are beyond our
control.
We have significant financial obligations outstanding. Our
ability to service our debt and these other obligations depends
on our ability to generate significant cash flow. This is
partially subject to general economic, financial, competitive,
legislative and regulatory, and other factors that are beyond
our control. We cannot assure you that our business will
generate cash flow from operations, that future borrowings will
be available to us under our senior credit facility, or that we
will be able to complete any necessary financings, in amounts
sufficient to enable us to fund our operations or pay our debts
and other obligations, or to fund other liquidity needs. If we
are not able to generate sufficient cash flow to service our
debt obligations, we may need to refinance or restructure our
debt, sell assets, reduce or delay capital investments, or seek
to raise
13
additional capital. Additional debt or equity financing may not
be available in sufficient amounts, at times or on terms
acceptable to us, or at all. If we are unable to implement one
or more of these alternatives, we may not be able to service our
debt or other obligations, which could result in us being in
default thereon, in which circumstances our lenders could cease
making loans to us and accelerate and declare due all
outstanding obligations under our senior credit facility, which
could have a material adverse effect on the value of our common
stock. In addition, the current volatility in the capital
markets may also impact our ability to obtain additional
financing, or to refinance our existing debt, on terms or at
times favorable to us.
Our
operating and financial flexibility is limited by the terms of
our Series D Perpetual Preferred Stock.
Our Series D Perpetual Preferred Stock prevents us from
taking certain actions and requires us to comply with certain
requirements. Among other things, this includes limitations on:
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additional indebtedness;
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liens;
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amendments to our by-laws and articles of incorporation;
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our ability to issue equity securities having liquidation
preferences senior or equivalent to the liquidation preferences
of the Series D Perpetual Preferred Stock;
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mergers and the sale of assets;
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guarantees;
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investments and acquisitions;
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payment of dividends and the redemption of our capital
stock; and
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related-party transactions.
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These restrictions may prevent us from taking action that could
increase the value of our business, or may require actions that
decrease the value of our business.
We
have suspended cash dividends on both classes of our common
stock and have not paid certain accumulated dividends under our
Series D Perpetual Preferred Stock. To the extent a
potential investor ascribes value to a dividend paying stock,
the value of our stock may be correspondingly
reduced.
Our board of directors has not declared a cash or stock dividend
for our common stock or Class A common stock since the
third quarter of 2008. We can provide no assurance when or if
any future dividends will be declared on either class of common
stock.
We made our most recent Series D Perpetual Preferred Stock
cash dividend payment on October 15, 2008, for dividends
earned through September 30, 2008. We have deferred the
cash payment of our preferred stock dividends earned thereon
since October 1, 2008. As a result of our election to defer
three consecutive cash dividend payments with respect to the
Series D Perpetual Preferred Stock, the dividend rate
thereon has increased from 15.0% per annum to 17.0% per annum.
While any Series D Perpetual Preferred Stock dividend
payments are in arrears, we are prohibited from repurchasing,
declaring
and/or
paying any cash dividend with respect to any equity securities
having liquidation preferences equivalent to or junior in
ranking to the liquidation preferences of the Series D
Perpetual Preferred Stock, including our common stock and
Class A common stock. We can provide no assurances as to
when any future cash payments will be made on any accumulated
and unpaid Series D Perpetual Preferred Stock cash
dividends presently in arrears or that become in arrears in the
future. The Series D Perpetual Preferred Stock has no
mandatory redemption date but may be redeemed at the
stockholders option on or after June 30, 2015.
If and to the extent an investor ascribes value to a
dividend-paying stock, the value of our common and Class A
common stock may be correspondingly reduced due to our current
cessation of dividend payments.
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We may
not be able to maintain the NYSE listings for our common stock
and/or Class A common stock.
The NYSE requires all NYSE-listed companies to maintain
compliance with certain criteria. These criteria include minimum
stock price and minimum market capitalization standards. From
November 3, 2008 until September 30, 2009, our common
stock did not satisfy the NYSEs minimum stock price
criteria for continued listing because the average closing price
per share over a consecutive 30
trading-day
period was less than $1.00 per share.
In addition, the NYSE has other listing standards that may apply
to us, including a requirement to have a minimum market
capitalization of at least $15 million over a
30-trading-day period. Failure to comply with this particular
listing standard allows the NYSE to delist promptly a company
from the exchange. As of April 5, 2010, our average market
capitalization calculated over the prior consecutive
30-trading-day period was $104.9 million.
Although we are currently in compliance with all of the
NYSEs continued listing criteria, we can give no
assurances that we will be able to remain in compliance in
future periods. If either class of our common stock cannot meet
the applicable NYSE listing standards, then the NYSE may delist
both classes of our common stock.
If our common stock or Class A common stock were delisted
from the NYSE, the liquidity of such stock may be significantly
reduced which could, in turn, materially adversely effect the
price of such stock. In such event, we may seek to have such
Stock listed for trading on another national exchange or
alternative
over-the-counter
trading forum to provide liquidity to investors, although we can
provide no assurances as to the liquidity, market pricing or
investor interest in either class of our common stock under such
circumstances.
We
have, in the past, incurred impairment charges on our goodwill
and/or broadcast licenses, and any such future charges may have
a material effect on the value of our total
assets.
For the year ended December 31, 2008, we recorded a
non-cash impairment charge to our broadcast licenses of
$240.1 million and a non-cash impairment charge to our
goodwill of $98.6 million. As of December 31, 2009,
the book value of our broadcast licenses was $819.0 million
and the book value of our goodwill was $170.5 million, in
comparison to total assets of $1.2 billion. Not less than
annually, and more frequently if necessary, we are required to
evaluate our goodwill and broadcast licenses to determine if the
estimated fair value of these intangible assets is less than
book value. If the estimated fair value of these intangible
assets is less than book value, we will be required to record a
non-cash expense to write-down the book value of the intangible
asset to the estimated fair value. We cannot make any assurances
that any required impairment charges will not have a material
effect on our total assets.
We
must purchase television programming in advance but cannot
predict whether a particular show will be popular enough to
cover its cost.
One of our most significant costs is television programming. If
a particular program is not sufficiently popular among audiences
in relation to its costs, we may not be able to sell enough
advertising time to cover the costs of the program. Since we
purchase programming content from others, we have little control
over programming costs. We usually must purchase programming
several years in advance, and may have to commit to purchase
more than one years worth of programming. We may also
replace programs that are performing poorly before we have
recaptured any significant portion of the costs we incurred or
fully expensed the costs for financial reporting purposes. Any
of these factors could reduce our revenues, result in the
incurrence of impairment charges or otherwise cause our costs to
escalate relative to revenues. For instance, during the year
ended December 31, 2009, we recorded a television program
impairment expense of $0.2 million.
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We are
highly dependent upon our network affiliations, and may lose a
large amount of television programming if a network
(i) terminates its affiliation with us,
(ii) significantly changes the economic terms and
conditions of any future affiliation agreements with us or
(iii) significantly changes the type, quality or quantity
of programming provided to us under an affiliation
agreement.
Our business depends in large part on the success of our network
affiliations. Each of our stations is affiliated with a major
network pursuant to an affiliation agreement. Each affiliation
agreement provides the affiliated station with the right to
broadcast all programs transmitted by the affiliated network.
Our affiliation agreements expire at various dates through
January 1, 2016.
If we can not enter into affiliation agreements to replace our
expiring agreements, we may no longer be able to carry the
affiliated networks programming. This loss of programming
would require us to obtain replacement programming. Such
replacement programming may involve higher costs and may not be
as attractive to our target audiences, thereby reducing our
ability to generate advertising revenue. Furthermore, our
concentration of CBS
and/or NBC
affiliates makes us particularly sensitive to adverse changes in
our business relationship with, and the general success of, CBS
and/or NBC.
In addition, if we are unable renew or replace our existing
affiliation agreements, we may be unable to satisfy certain
obligations under our existing or any future retransmission
consent agreements with cable, satellite and telecommunications
providers (MVPDs). Furthermore, if in the future a
network limited or removed our ability to retransmit network
programming to MVPDs, we may be unable to satisfy certain
obligations under our existing or any future retransmission
consent agreements. In either case such an event could have a
material adverse effect on our business and results of
operations.
We
operate in a highly competitive environment. Competition occurs
on multiple levels (for audiences, programming and advertisers)
and is based on a variety of factors. If we are not able to
successfully compete in all relevant aspects, our revenues will
be materially adversely affected.
As described elsewhere herein, television stations compete for
audiences, certain programming (including news) and advertisers.
Signal coverage and assigned frequency also materially affect a
television stations competitive position. With respect to
audiences, stations compete primarily based on broadcast program
popularity. Because we purchase or otherwise acquire, rather
than produce, programs, we cannot provide any assurances as to
the acceptability by audiences of any of the programs we
broadcast. Further, because we compete with other broadcast
stations for certain programming, we cannot provide any
assurances that we will be able to obtain any desired
programming at costs that we believe are reasonable.
Cable-originated programming and increased access to cable and
satellite TV has become a significant competitor for broadcast
television programming viewers. Cable networks advertising
share has increased due to the growth in cable/satellite
penetration (the percentage of television households that are
connected to a cable or satellite system), which reduces
viewers. Further increases in the advertising share of cable or
satellite networks could materially adversely affect the
advertising revenue of our television stations.
In addition, technological innovation and the resulting
proliferation of programming alternatives, such as home
entertainment systems, wireless cable services,
satellite master antenna television systems, LPTV stations,
television translator stations, DBS, video distribution
services,
pay-per-view
and the internet, have further fractionalized television viewing
audiences and resulted in additional challenges to revenue
generation.
Our inability or failure to broadcast popular programs, or
otherwise maintain viewership for any reason, including as a
result of significant increases in programming alternatives,
could result in a lack of advertisers, or a reduction in the
amount advertisers are willing to pay us to advertise, which
could have a material adverse effect on our business, financial
condition and results of operations.
Our
dependence upon a single advertising category could adversely
affect our business.
We derive a material portion of our advertising revenue from the
automotive and restaurant industries. In 2009, we earned
approximately 17% and 12% of our total revenue from the
automotive and restaurant categories, respectively. In 2008, we
earned approximately 19% and 10% of our total revenue from the
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automotive and restaurant categories, respectively. Our business
and operating results could be materially adversely affected if
automotive or restaurant-related advertising revenues decrease.
Our business and operating results could also be materially
adversely affected if revenue decreased from one or more other
significant advertising categories, such as the communications,
entertainment, financial services, professional services or
retail industries.
The
required phased-in introduction of digital television will
continue to require us to incur significant capital and
operating costs and may expose us to increased
competition.
The 2009 requirement to convert from analog to digital
television services in the United States may require us to incur
significant capital expenditures in replacing our stations
equipment to produce local programming, including news, in
digital format. We cannot be certain that increased revenues
will offset these additional capital expenditures.
In addition, we also may incur additional costs to obtain
programming for the additional channels made available by
digital technology. Increased revenues from the additional
channels may not offset the conversion costs and additional
programming expenses. Multiple channels programmed by other
stations may further increase competition in our markets.
Any
potential hostilities or terrorist attacks, or similar events
leading to broadcast interruptions, may affect our revenues and
results of operations.
If the United States engages in additional foreign hostilities,
experiences a terrorist attack or experiences any similar event
resulting in interruptions to regularly scheduled broadcasting,
we may lose advertising revenue and incur increased broadcasting
expenses. Lost revenue and increased expenses may be due to
pre-emption, delay or cancellation of advertising campaigns, and
increased costs of covering such events. We cannot predict the
(i) extent or duration of any future disruption to our
programming schedule, (ii) amount of advertising revenue
that would be lost or delayed or (iii) amount by which our
broadcasting expenses would increase as a result. Any such loss
of revenue and increased expenses could negatively affect our
future results of operations.
Risks
Related to Regulatory Matters
Federal
broadcasting industry regulation limits our operating
flexibility.
The FCC regulates all television broadcasters, including us. We
must obtain FCC approval whenever we (i) apply for a new
license, (ii) seek to renew or assign a license,
(iii) purchase a new station or (iv) transfer the
control of one of our subsidiaries that holds a license. Our FCC
licenses are critical to our operations, and we cannot operate
without them. We cannot be certain that the FCC will renew these
licenses in the future or approve new acquisitions. Our failure
to renew any licenses upon the expiration of any license term
could have a material adverse effect on our business.
Federal legislation and FCC rules have changed significantly in
recent years and may continue to change. These changes may limit
our ability to conduct our business in ways that we believe
would be advantageous and may affect our operating results.
The
FCCs duopoly restrictions limit our ability to own and
operate multiple television stations in the same market and our
ability to own and operate a television station and newspaper in
the same market.
The FCCs ownership rules generally prohibit us from owning
or having attributable interests in television
stations located in the same markets in which our stations are
licensed. Accordingly, those rules constrain our ability to
expand in our present markets through additional station
acquisitions. Current FCC cross-ownership rules prevent us from
owning and operating a television station and newspaper in the
same market.
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The
FCCs National Television Station Ownership Rule limits the
maximum number of households we can reach.
A single television station owner can reach no more than
39 percent of U.S. households through commonly owned
television stations. Accordingly, these rules constrain our
ability to expand through additional station acquisitions.
Federal legislation and FCC rules have changed significantly in
recent years and may continue to change. These changes may limit
our ability to conduct our business in ways that we believe
would be advantageous and may affect our operating results.
The
FCCs 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.
On March 16, 2010, the FCC delivered to Congress a
National Broadband Plan. The National Broadband
Plan, inter alia, makes recommendations regarding the use of
spectrum currently allocated to television broadcasters,
including seeking the voluntary surrender of certain portions of
the television broadcast spectrum and repacking the currently
allocated spectrum to make portions of that spectrum available
for other wireless communications services. If some or all of
our television stations are required to change frequencies or
reduce the amount of spectrum they use, our stations could incur
substantial conversion costs, reduction or loss of
over-the-air
signal coverage or an inability to provide high definition
programming and additional program streams, including mobile
video services. Prior to implementation of the proposals
contained in the National Broadband Plan, further action by the
FCC or Congress or both is necessary. We cannot predict the
likelihood, timing or outcome of any Congressional or FCC
regulatory action in this regard nor the impact of any such
changes upon our business.
Our
ability to successfully negotiate future retransmission consent
agreements may be hindered by the interests of networks with
whom we are affiliated.
Our affiliation agreements with some broadcast networks include
certain terms that may affect our future ability to permit MVPDs
to retransmit network programming, and in some cases, we may be
unable to satisfy certain obligations under our existing or any
future retransmission consent agreements with MVPDs. In
addition, we may not be able to successfully negotiate future
retransmission consent agreements with the MVPDs in our local
markets if the broadcast networks withhold their consent to the
retransmission of those portions of our stations signals
containing network programming, or the networks may require us
to pay compensation in exchange for permitting redistribution of
network programming by MVPDs. If we are required to make
payments to networks in connection with signal retransmission,
those payments may adversely affect our operating results. If we
are unable to satisfy certain obligations under our existing or
future retransmission consent agreements with MVPDs then there
could be a material adverse effect on our results of operations.
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Item 1B.
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Unresolved
Staff Comments.
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None.
Our principal executive offices are located at 4370 Peachtree
Road, NE, Atlanta, Georgia, 30319. Our administrative offices
are located at 126 North Washington St., Third Floor, Albany,
Georgia, 31701. Our shared services offices are located at 1801
Halstead Blvd., Tallahassee, Florida, 32309. A complete listing
of our television stations and their locations is included on
pages three and four of this Annual Report.
The types of properties required to support television stations
include offices, studios, transmitter sites and antenna sites. A
stations studios are generally housed within its offices
in each respective market. The transmitter sites and antenna
sites are generally located in elevated areas, to provide
optimal signal strength and coverage. We own or lease land,
office, studio, transmitters and antennas in each of our markets
necessary to support our operations in that market area. In some
market areas, we also own or lease multiple properties,
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such as multiple towers and or translators, to optimize our
broadcast capabilities. To the extent that our properties are
leased and those leases contain expiration dates, we believe
that those leases can be renewed, or that alternative facilities
can be leased or acquired, on terms that are comparable, in all
material respects, to our existing properties.
We generally believe all of our owned and leased properties are
in good condition, and suitable for the conduct of our present
business.
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Item 3.
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Legal
Proceedings.
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We are, from time to time, subject to legal proceedings and
claims in the normal course of our business. Based on our
current knowledge, we do not believe that any known legal
proceedings or claims are likely to have a material adverse
effect on our financial position, results of operations or cash
flows.
Executive
Officers of the Registrant.
Set forth below is certain information with respect to our
executive officers as of March 30, 2010:
Hilton H. Howell, Jr., age 48, has been our
Chief Executive Officer since August 20, 2008 and has also
served as Vice-Chairman since September 2002. Before that, he
had been our Executive Vice President since September 2000. He
has served as one of our directors since 1993. He is a member of
the Executive Committee of our board of directors. He has served
as President and Chief Executive Officer of Atlantic American
Corporation, an insurance holding company, since 1995, and as
Chairman of that Company since February 24, 2009. He has
been Executive Vice President and General Counsel of Delta Life
Insurance Company and Delta Fire and Casualty Insurance Company
since 1991. He has served as Vice Chairman of Bankers Fidelity
Life Insurance Company since 1992 and Vice Chairman of Georgia
Casualty & Surety Company from 1992 through 2008. He
served as Chairman of the Board of Triple Crown Media, Inc.
(TCM) from December 2005 until December 2009.
Mr. Howell also serves as a director of Atlantic American
Corporation and its subsidiaries American Southern Insurance
Company, American Safety Insurance Company and Bankers Fidelity
Life Insurance Company, as well as Delta Life Insurance Company
and Delta Fire and Casualty Insurance Company. He is the
son-in-law
of Mr. J. Mack Robinson and Mrs. Harriett J. Robinson,
both members of our board of directors.
Robert S. Prather, Jr., age 65, has served as
our President and Chief Operating Officer since September 2002.
He has served as one of our directors since 1993. He is a member
of the Executive Committee of our board of directors. He has
been a director of TCM since 1994, and served as Chairman of TCM
from December 2005 until November 2007. He served as President
and Chief Executive Officer of TCM from May 2005 to
December 30, 2005, and has served in that position since
November 2007. TCM filed for protection under Chapter 11 of
the U.S. bankruptcy code on September 14, 2009. The
order confirming the Plan of Reorganization under
Chapter 11 of the bankruptcy code became effective
December 8, 2009. He serves as an advisory director of
Swiss Army Brands, Inc., and serves on the Board of Trustees of
the Georgia World Congress Center Authority. He also serves as a
member of the Board of Directors for GAMCO Investors, Inc.,
Gaylord Entertainment Company and Victory Ventures, Inc.
James C. Ryan, age 49, has served as our Chief
Financial Officer since October 1998 and Senior Vice President
since September 2002. Before that, he had been our Vice
President since October 1998.
Robert A. Beizer, age 70, has served as our Vice
President for Law and Development and Secretary since 1996. From
June 1994 to February 1996, he was of counsel to Venable, LLC, a
law firm, in its regulatory and legislative practice group. From
1990 to 1994, Mr. Beizer was a partner in the law firm of
Sidley & Austin and was head of their communications
practice group in Washington, D.C. He is a past president
of the Federal Communications Bar Association and has served as
a member of the American Bar Association House of Delegates. He
is a member of the ABA Forum Committee on Communications Law.
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PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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Our common stock, no par value, and our Class A common
stock, no par value, have been listed and traded on the NYSE
since September 24, 1996 and June 30, 1995,
respectively. Prior to September 16, 2002, the common stock
was named Class B common stock.
The following table sets forth the high and low sale prices of
the common stock and the Class A common stock as well as
the cash dividend declared for the periods indicated. The high
and low sales prices of the common stock and the Class A
common stock are as reported by the NYSE.
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Common Stock
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Class A Common Stock
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Cash Dividends
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Cash Dividends
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Declared per
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Declared per
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High
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Low
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Share
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High
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Low
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Share
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2009:
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First Quarter
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$
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0.54
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|
$
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0.28
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$
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|
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$
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1.28
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$
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0.55
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$
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Second Quarter
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0.92
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0.32
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|
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1.36
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0.53
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Third Quarter
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3.57
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0.38
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|
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3.55
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0.50
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Fourth Quarter
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2.89
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1.06
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2.73
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1.12
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2008:
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First Quarter
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$
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8.25
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|
|
$
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4.69
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|
$
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0.03
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|
|
$
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8.79
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|
|
$
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5.82
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$
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0.03
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Second Quarter
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6.02
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2.67
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|
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0.03
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7.00
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4.00
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|
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0.03
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Third Quarter
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3.10
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1.61
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0.03
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4.75
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2.72
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0.03
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Fourth Quarter
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1.75
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0.18
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3.50
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0.50
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As of March 24, 2010, we had 42,879,557 outstanding shares
of common stock held by approximately 4,844 stockholders and
5,753,020 outstanding shares of Class A common stock held
by approximately 468 stockholders. The number of stockholders
includes stockholders of record and individual participants in
security position listings as furnished to us pursuant to
Rule 17Ad-8
under the Exchange Act.
Our Articles of Incorporation provide that each share of common
stock is entitled to one vote, and each share of Class A
common stock is entitled to 10 votes. The Articles of
Incorporation require that the common stock and the Class A
common stock receive dividends on a pari passu basis.
We have not paid dividends on either class of our common stock
since October 15, 2008. Our senior credit facility contains
covenants that restrict the amount of funds available to pay
cash dividends on our capital stock. Further, the terms of our
Series D Perpetual Preferred Stock contain requirements
that, in certain circumstances, will restrict our ability to pay
dividends on our Class A common stock and our common stock.
We have deferred the cash payment of dividends on our
Series D Perpetual Preferred Stock earned thereon since
October 1, 2008.
While any Series D Perpetual Preferred Stock dividend
payments are in arrears, we are prohibited from repurchasing,
declaring
and/or
paying any cash dividend with respect to any equity securities
having liquidation preferences equivalent to or junior in
ranking to the liquidation preferences of the Series D
Perpetual Preferred Stock, including our common stock and
Class A common stock. We can provide no assurances as to
when any future cash payments will be made on any accumulated
and unpaid Series D Perpetual Preferred Stock cash
dividends presently in arrears or that become in arrears in the
future. The Series D Perpetual Preferred Stock has no
mandatory redemption date but may be redeemed at the
stockholders option on or after June 30, 2015.
In addition, the declaration and payment of common stock and
Class A common stock dividends are subject to the
discretion of our Board of Directors. Any future payments of
dividends will depend on our earnings and financial position and
such other factors as our Board of Directors deems relevant. See
Note 3. Long-term Debt and Accrued Facility Fee
of our audited consolidated financial statements included
elsewhere herein for a further discussion of restrictions on our
ability to pay dividends.
20
Stock
Performance Graph
The following stock performance graphs do not constitute
soliciting material and should not be deemed filed or
incorporated by reference into any other filing by us under the
Securities Act of 1933, or the Securities Exchange Act of 1934,
except to the extent we specifically incorporate these graphs by
reference therein.
The following graphs compare the cumulative total return of the
common stock and the Class A common stock from
January 1, 2005 to December 31, 2009, as compared to
the stock market total return indexes for (i) The New York
Stock Exchange Market Index and (ii) The New York Stock
Exchange Industry Index based upon the Television Broadcasting
Stations Index.
The graphs assume the investment of $100 in the common stock and
the Class A common stock, the New York Stock Exchange
Market Index and the NYSE Television Broadcasting Stations Index
on January 1, 2005. Dividends are assumed to have been
reinvested as paid.
Common
Stock
Comparison of Cumulative Total Return
of One or More Companies, Peer Groups, Industry Indexes
and/or
Broad Markets
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Fiscal Year Ended
|
Gray Television Com.
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$
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64.13
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|
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$
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55.61
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|
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|
$
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61.75
|
|
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$
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3.77
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|
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|
$
|
14.15
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|
TV Broadcasting Stations
|
|
|
$
|
96.70
|
|
|
|
$
|
119.48
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|
|
|
$
|
117.15
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|
|
|
$
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61.11
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|
|
|
$
|
94.07
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|
NYSE Market Index
|
|
|
$
|
109.36
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|
|
|
$
|
131.75
|
|
|
|
$
|
143.43
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|
|
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$
|
87.12
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|
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$
|
111.76
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21
Class A
Common Stock
Comparison of Cumulative Total Return
of One or More Companies, Peer Groups, Industry Indexes
and/or
Broad Markets
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Fiscal Year Ended
|
Gray Television Cl A
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$
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64.69
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|
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|
$
|
59.62
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|
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$
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62.52
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|
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$
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4.93
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|
|
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$
|
12.74
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TV Broadcasting Stations
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|
|
$
|
96.70
|
|
|
|
$
|
119.48
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|
|
|
$
|
117.15
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|
|
|
$
|
61.11
|
|
|
|
$
|
94.07
|
|
NYSE Market Index
|
|
|
$
|
109.36
|
|
|
|
$
|
131.75
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|
|
|
$
|
143.43
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|
|
|
$
|
87.12
|
|
|
|
$
|
111.76
|
|
|
|
|
|
|
|
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22
|
|
Item 6.
|
Selected
Financial Data.
|
Certain selected historical consolidated financial data is set
forth below. This information with respect to the years ended
December 31, 2009, 2008 and 2007 should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and our
audited consolidated financial statements and related notes
thereto included elsewhere herein.
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Year Ended December 31,
|
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2009
|
|
|
2008
|
|
|
2007
|
|
|
2006(1)
|
|
|
2005(2)
|
|
|
|
(In thousands, except per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(3)
|
|
$
|
270,374
|
|
|
$
|
327,176
|
|
|
$
|
307,288
|
|
|
$
|
332,137
|
|
|
$
|
261,553
|
|
Impairment of goodwill and broadcast licenses(4)
|
|
|
|
|
|
|
338,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
43,079
|
|
|
|
(258,895
|
)
|
|
|
53,376
|
|
|
|
87,991
|
|
|
|
60,861
|
|
Loss on early extinguishment of debt(5)
|
|
|
(8,352
|
)
|
|
|
|
|
|
|
(22,853
|
)
|
|
|
(347
|
)
|
|
|
(6,543
|
)
|
(Loss) income from continuing operations
|
|
|
(23,047
|
)
|
|
|
(202,016
|
)
|
|
|
(23,151
|
)
|
|
|
11,711
|
|
|
|
4,604
|
|
Loss from discontinued publishing and wireless operations, net
of income tax of $0, $0, $0, $0 and $3,253 respectively(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,242
|
)
|
Net (loss) income
|
|
|
(23,047
|
)
|
|
|
(202,016
|
)
|
|
|
(23,151
|
)
|
|
|
11,711
|
|
|
|
3,362
|
|
Net (loss) income available to common stockholders
|
|
|
(40,166
|
)
|
|
|
(208,609
|
)
|
|
|
(24,777
|
)
|
|
|
8,464
|
|
|
|
(2,286
|
)
|
Net (loss) income from continuing operations available to common
stockholders per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.83
|
)
|
|
|
(4.32
|
)
|
|
|
(0.52
|
)
|
|
|
0.17
|
|
|
|
(0.02
|
)
|
Diluted
|
|
|
(0.83
|
)
|
|
|
(4.32
|
)
|
|
|
(0.52
|
)
|
|
|
0.17
|
|
|
|
(0.02
|
)
|
Net (loss) income available to common stockholders per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.83
|
)
|
|
|
(4.32
|
)
|
|
|
(0.52
|
)
|
|
|
0.17
|
|
|
|
(0.05
|
)
|
Diluted
|
|
|
(0.83
|
)
|
|
|
(4.32
|
)
|
|
|
(0.52
|
)
|
|
|
0.17
|
|
|
|
(0.05
|
)
|
Cash dividends declared per common share(7)
|
|
|
|
|
|
|
0.09
|
|
|
|
0.12
|
|
|
|
0.12
|
|
|
|
0.12
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,245,739
|
|
|
$
|
1,278,265
|
|
|
$
|
1,625,969
|
|
|
$
|
1,628,287
|
|
|
$
|
1,525,054
|
|
Long-term debt (including current portion)
|
|
|
791,809
|
|
|
|
800,380
|
|
|
|
925,000
|
|
|
|
851,654
|
|
|
|
792,509
|
|
Long-term accrued facility fee(8)
|
|
|
18,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable serial preferred stock(9)
|
|
|
93,386
|
|
|
|
92,183
|
|
|
|
|
|
|
|
37,451
|
|
|
|
39,090
|
|
Total stockholders equity
|
|
|
93,620
|
|
|
|
117,107
|
|
|
|
337,845
|
|
|
|
379,754
|
|
|
|
380,996
|
|
|
|
|
(1) |
|
Reflects the acquisition of
WNDU-TV on
March 3, 2006 as of the acquisition date. For further
information concerning this acquisition, see Part I,
Item 1. Business. |
|
(2) |
|
Reflects the acquisitions of
KKCO-TV on
January 31, 2005,
WSWG-TV on
November 10, 2005 and
WSAZ-TV on
November 30, 2005, as of their respective acquisition dates. |
|
(3) |
|
Our revenues fluctuate significantly between years, consistent
with, among other things, increased political advertising
expenditures in even-numbered years. |
|
(4) |
|
As of December 31, 2008, we recorded a non-cash impairment
expense of $338.7 million resulting from a write down of
$98.6 million in the carrying value of our goodwill and a
write down of $240.1 million in the carrying value of our
broadcast licenses. The write-down of our goodwill and broadcast
licenses related to seven stations and 23 stations,
respectively. As of this testing date, we believe events had
occurred and |
23
|
|
|
|
|
circumstances changed that more likely than not reduce the fair
value of our broadcast licenses and goodwill below their
carrying amounts. These events which accelerated in the fourth
quarter of 2008 included: (i) the continued decline of the
price of our common stock and Class A common stock;
(ii) the decline in the current selling prices of
television stations; (iii) the decline in local and
national advertising revenues excluding political advertising
revenue; and (iv) the decline in the operating profit
margins of some of our stations. |
|
(5) |
|
In 2009, we recorded a loss on early extinguishment of debt
related to an amendment of our senior credit facility. In 2007,
we recorded a loss on early extinguishment of debt related to
the refinancing of our senior credit facility and the redemption
of our 9.25% Senior Subordinated Notes
(9.25% Notes). In 2006, we recorded a loss on
early extinguishment of debt related to the repurchase of a
portion of our 9.25% Notes. In 2005, we recorded a loss on
early extinguishment of debt related to two amendments to our
then existing senior credit facility and the repurchase of a
portion of our 9.25% Notes. |
|
(6) |
|
On December 30, 2005, we completed (i) the
contribution of all of our membership interests in Gray
Publishing, LLC, which included our Gray Publishing and Graylink
Wireless businesses and certain other assets, to TCM and
(ii) the spinoff of all the common stock of TCM to our
shareholders. The selected financial information for 2005
reflects the reclassification of the results of operations of
those businesses as discontinued operations, net of income tax. |
|
(7) |
|
Cash dividends for 2007 and 2006 include a cash dividend of
$0.03 per share approved in the fourth quarters of 2007 and
2006, respectively, and paid in the first quarters of 2008 and
2007, respectively. |
|
(8) |
|
On March 31, 2009, we amended our senior credit facility.
Effective on that date, we began to incur an annual facility fee
equal to 3% multiplied by the outstanding balance under our
senior credit facility. See Note 3. Long-term Debt
and Accrued Facility Fee of our notes to our audited
consolidated financial statements included elsewhere herein for
further information regarding our accrued facility fee. |
|
(9) |
|
On June 26, 2008, we issued 750 shares of
Series D Perpetual Preferred Stock. The no par value
Series D Perpetual Preferred Stock has a liquidation value
of $100,000 per share, for a total liquidation value of
$75.0 million. The issuance of the Series D Perpetual
Preferred Stock generated net cash proceeds of approximately
$68.6 million, after a 5.0% original issue discount,
transaction fees and expenses. We used $65.0 million of the
net cash proceeds to voluntarily prepay a portion of the
outstanding balance under our term loan portion of our senior
credit facility and used the remaining $3.6 million for
general corporate purposes, which included the payment of
$635,000 of accrued interest. The $6.4 million of original
issue discount, transaction fees and expenses will be accreted
over a seven-year period ending June 30, 2015. |
On July 15, 2008, we issued an additional 250 shares
of our Series D Perpetual Preferred Stock and generated net
cash proceeds of approximately $23.0 million, after a 5.0%
original issue discount, transaction fees and expenses. We used
the net cash proceeds to make an additional $23.0 million
voluntary prepayment on the outstanding balance of our term loan
portion of our senior credit facility. The $2.0 million of
original issue discount, transaction fees and expenses will be
accreted over a seven-year period ending June 30, 2015. On
May 22, 2007, we redeemed all outstanding shares of our
Series C Preferred Stock.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Executive
Overview
Introduction
The following analysis of the financial condition and results of
operations of Gray Television, Inc. (we,
us, or our) should be read in
conjunction with our audited consolidated financial statements
and notes thereto included elsewhere herein.
Overview
We own 36 television stations serving 30 television markets.
Seventeen of the stations are affiliated with CBS Inc.
(CBS), ten are affiliated with the National
Broadcasting Company, Inc. (NBC), eight are
affiliated with the American Broadcasting Company
(ABC), and one is affiliated with FOX Entertainment
Group, Inc. (FOX). Our 17 CBS-affiliated stations
make us the largest independent owner of CBS affiliates
24
in the United States. Based on the results of the average of the
Nielsen March, May, July, and November 2009 ratings reports, our
combined station group has 23 markets with stations
ranked #1 in local news audience and 21 markets with
stations ranked #1 in overall audience within their
respective markets. Of the 30 markets that we serve, we operate
the #1 or #2 ranked station in 29 of those markets. In
addition to our primary channels that we broadcast from our
television stations, we currently broadcast 39 digital second
channels including one affiliated with ABC, four affiliated with
FOX, seven affiliated with The CW Network, LLC (CW),
18 affiliated with Twentieth Television, Inc.
(MyNetworkTV or MyNet.), two affiliated
with Universal Sports Network or (Univ.) and seven
local news/weather channels in certain of our existing markets.
We created our digital second channels to better utilize our
excess broadcast spectrum. The digital second channels are
similar to our primary broadcast channels; however, our digital
second channels are affiliated with networks different from
those affiliated with our primary broadcast channels. Our
combined TV station group reaches approximately 6.3% of total
United States households.
Our operating revenues are derived primarily from broadcast and
internet advertising, and from other sources such as production
of commercials and tower rentals, retransmission consent fees
and consulting fees.
Broadcast advertising is sold for placement either preceding or
following a television stations network programming and
within local and syndicated programming. Broadcast advertising
is sold in time increments and is priced primarily on the basis
of a programs popularity among the specific audience an
advertiser desires to reach, as measured by Nielsen. In
addition, broadcast advertising rates are affected by the number
of advertisers competing for the available time, the size and
demographic makeup of the market served by the station and the
availability of alternative advertising media in the market
area. Broadcast advertising rates are the highest during the
most desirable viewing hours, with corresponding reductions
during other hours. The ratings of a local station affiliated
with a major network can be affected by ratings of network
programming.
We sell internet advertising on our stations websites.
These advertisements are sold as banner advertisements on the
websites, pre-roll advertisements or video and other types of
advertisements.
Most advertising contracts are short-term, and generally run
only for a few weeks. Approximately 67% of the net revenues of
our television stations for the year ended December 31,
2009 were generated from local advertising (including political
advertising revenues), which is sold primarily by a
stations sales staff directly to local accounts, and the
remainder represented primarily by national advertising, which
is sold by a stations national advertising sales
representative. The stations generally pay commissions to
advertising agencies on local, regional and national advertising
and the stations also pay commissions to the national sales
representative on national advertising.
Broadcast advertising revenues are generally highest in the
second and fourth quarters each year. This seasonality results
partly from increases in advertising in the spring and in the
period leading up to and including the holiday season. Broadcast
advertising revenues are also generally higher in even-numbered
years, due to spending by political candidates, political
parties and special interest groups. This political spending
typically is heaviest during the fourth quarter of such years.
Our primary broadcasting operating expenses are employee
compensation, related benefits and programming costs. In
addition, the broadcasting operations incur overhead expenses,
such as maintenance, supplies, insurance, rent and utilities. A
large portion of the operating expenses of the broadcasting
operations is fixed.
During the economic recession that began in 2008 and continued
through 2009, many of our advertising customers reduced their
advertising spending which has reduced our revenue. Also,
automotive dealers and manufacturers have traditionally
accounted for a significant portion of our revenue. We believe
our automotive advertising customers have suffered
disproportionately during the recession and have therefore
significantly reduced their advertising expenditures, which in
turn has negatively impacted our revenues. Our revenues have
also come under pressure from the internet as a competitor for
advertising spending. We continue to enhance and market our
internet websites to generate additional revenue.
We have reduced our operating expenses as our revenues have
decreased. However, partly due to our significant fixed
expenses, the decrease in our revenues has exceeded the decrease
in our expenses. Please see
25
our Results of Operations and Liquidity and
Capital Resources sections below for further discussion of
our operating results.
Revenues
Set forth below are the principal types of revenues earned by
our broadcasting operations for the periods indicated and the
percentage contribution of each to total revenues (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year End December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local
|
|
$
|
170,813
|
|
|
|
63.2
|
%
|
|
$
|
186,492
|
|
|
|
57.0
|
%
|
|
$
|
200,686
|
|
|
|
65.3
|
%
|
National
|
|
|
53,892
|
|
|
|
19.9
|
%
|
|
|
68,417
|
|
|
|
20.9
|
%
|
|
|
77,365
|
|
|
|
25.2
|
%
|
Internet
|
|
|
11,413
|
|
|
|
4.2
|
%
|
|
|
11,859
|
|
|
|
3.6
|
%
|
|
|
9,506
|
|
|
|
3.1
|
%
|
Political
|
|
|
9,976
|
|
|
|
3.7
|
%
|
|
|
48,455
|
|
|
|
14.8
|
%
|
|
|
7,808
|
|
|
|
2.5
|
%
|
Retransmission consent
|
|
|
15,645
|
|
|
|
5.8
|
%
|
|
|
3,046
|
|
|
|
0.9
|
%
|
|
|
2,436
|
|
|
|
0.8
|
%
|
Production and other
|
|
|
7,119
|
|
|
|
2.6
|
%
|
|
|
8,155
|
|
|
|
2.5
|
%
|
|
|
8,719
|
|
|
|
2.8
|
%
|
Network compensation
|
|
|
653
|
|
|
|
0.2
|
%
|
|
|
752
|
|
|
|
0.3
|
%
|
|
|
768
|
|
|
|
0.3
|
%
|
Consulting revenue
|
|
|
863
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
270,374
|
|
|
|
100.0
|
%
|
|
$
|
327,176
|
|
|
|
100.0
|
%
|
|
$
|
307,288
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
Factors
The broadcast television industry is reliant primarily on
advertising revenues and faces increased competition. For a
discussion of certain other presently known, significant factors
that may affect our business, see Item 1A. Risk
Factors beginning on page 12 of this Annual Report.
Results
of Operations
Year
Ended December 31, 2009 (2009) Compared to Year
Ended December 31, 2008 (2008)
Revenue
Total revenues decreased $56.8 million, or 17%, to
$270.4 million due primarily to decreased local, national,
political and internet advertising revenue, decreased network
compensation revenue and decreased production and other revenue.
These decreases were partially offset by increased
retransmission consent revenue and consulting revenue in the
year ended December 31, 2009. Retransmission consent
revenue increased $12.6 million, or 414%, to
$15.6 million reflecting the more profitable terms of our
current contracts that we finalized earlier in 2009. Consulting
revenue increased to $0.9 million for the year ended
December 31, 2009 due to revenue from an agreement with
Young Broadcasting, Inc. that was effective August 10,
2009. Local advertising revenues, excluding political
advertising revenues, decreased $15.7 million, or 8%, to
$170.8 million. National advertising revenues, excluding
political advertising revenues, decreased $14.5 million, or
21%, to $53.9 million. The decrease in local and national
advertising revenue was due to reduced spending by advertisers
in the continued recessionary economic environment. Our
automotive advertising revenue decreased approximately 31%
compared to the prior year. In addition, during the year ended
December 31, 2008 we earned a total of $3.4 million of
net revenue from local and national advertisers during the
broadcast of the 2008 Summer Olympics on our ten NBC stations.
There were no Olympic Game broadcasts during 2009. The negative
effects of the recession were partially offset by increased
advertising during the 2009 Super Bowl. Net advertising revenue
associated with the broadcast of the 2009 Super Bowl on our ten
NBC affiliated stations approximated $750,000, which was an
increase from the approximate $130,000 of Super Bowl revenue
earned in 2008 on our then six Fox affiliated channels.
Political advertising revenues decreased $38.5 million, or
79%, to $10.0 million reflecting reduced advertising from
political candidates during the off year of the
two-year political advertising cycle. However, we did recognize
political advertising revenue in the three months ended
December 31, 2009 related to increased spending on the
national healthcare debate.
26
Broadcast
expenses
Broadcast expenses (before depreciation, amortization,
impairment expense and gain on disposal of assets) decreased
$12.0 million, or 6%, to $187.6 million due primarily
to a reduction in compensation expense of $3.4 million,
professional service expense of $2.2 million, facility fees
of $1.1 million, bad debt expense of $0.9 million and
syndicated programming expense of $1.1 million.
Compensation expenses included payroll and benefit expenses.
Payroll expense decreased primarily due to a reduction in the
number of employees and reduced commissions. As of
December 31, 2009 and 2008, we employed 2,184 and 2,253
total employees in our broadcast operations which included
full-time and part-time employees. This reduction in total
employees is a decrease of 3.1% or 69 total employees. Since
December 31, 2007, we have reduced our total number of
employees by 241, or 9.9%. Our reduction in payroll expense
resulting from the reduced number of employees was partially
offset by an increase in pension expense of $1.9 million.
Pension expense increased due to the use of a lower discount
rate in 2009 compared to the discount rate used to calculate the
2008 pension expense and due to the performance of our pension
plans assets in 2009 and 2008. Professional service
expense decreased primarily due to lower national representation
fees, which are paid based upon a percentage of our national and
political revenue, both of which decreased as discussed above.
Facility fees decreased primarily due to lower electricity
expense resulting from the discontinuance of our analog
broadcasts. Bad debt expense improved due to an improvement in
the average age of our accounts receivable balances. Syndicated
programming expense decreased primarily due to a lower
impairment expense in the current year compared to the prior
year. We recorded impairment expenses related to our syndicated
television programming during the years ended December 31,
2009 and 2008 of $0.2 million and $0.6 million,
respectively.
Corporate
and administrative expenses
Corporate and administrative expenses (before depreciation,
amortization, impairment and (gain) loss on disposal of assets)
increased $0.1 million, or 1%, to $14.2 million during
the year ended December 31, 2009. The increase was due
primarily to an increase in pension expense of
$0.2 million, an increase in relocation expense of
$0.2 million and an increase in legal expense of
$0.5 million. These increases were partially offset by a
decrease in market research expense of $0.6 million and
severance expense of $0.1 million. We currently believe the
relocation cost incurred in 2009 will not recur in future years
to the same extent as 2009. Also, approximately
$0.4 million of the increased legal costs were attributable
to the negotiation and documentation of our new retransmission
consent agreements, and such costs are currently not anticipated
to recur in future periods to the same extent. Corporate and
administrative expenses included non-cash stock-based
compensation expense during the years ended 2009 and 2008 of
$1.4 million and $1.5 million, respectively.
Depreciation
Depreciation of property and equipment totaled
$32.6 million and $34.6 million for 2009 and 2008,
respectively. The decrease in depreciation was the result of
reduced capital expenditures in recent years compared to that of
prior years. As a result, more assets acquired in prior years
have become fully depreciated than were purchased in recent
years.
Amortization
of intangible assets
Amortization of intangible assets was $0.6 million for 2009
as compared to $0.8 million for 2008. Amortization expense
decreased in the current year compared to that of the prior year
as a result of certain assets becoming fully amortized in the
current year.
Impairment
of goodwill and broadcast licenses
As of December 31, 2009, we evaluated the recorded value of
our goodwill and broadcast licenses for potential impairment and
concluded that they were reasonably stated. As a result, we did
not record an impairment expense for 2009. As of
December 31, 2008, we recorded a non-cash impairment
expense of $338.7 million resulting from a write-down of
$98.6 million in the carrying value of our goodwill and a
write
27
down of $240.1 million in the carrying value of our
broadcast licenses. The write-down of our goodwill and broadcast
licenses related to seven stations and 23 stations,
respectively. As of this testing date, we believed events had
occurred and circumstances changed that more likely than not
reduce the fair value of our broadcast licenses and goodwill
below their carrying amounts. These events, which accelerated in
the fourth quarter of 2008, included: (i) the continued
decline of the price of our common stock and Class A common
stock; (ii) the decline in the current selling prices of
television stations; (iii) the decline in local and
national advertising revenues excluding political advertising
revenue; and (iv) the decline in the operating profit
margins of some of our stations.
Gain or
loss on disposal of assets
Gain on disposal of assets increased $6.0 million, or 367%,
to $7.6 million during 2009 as compared to 2008. The FCC
has mandated that all broadcasters operating microwave
facilities on certain frequencies in the 2 GHz band
relocate to other frequencies and upgrade their equipment. The
spectrum being vacated by these broadcasters has been
reallocated to third parties who, as part of the overall
FCC-mandated spectrum reallocation project, must provide
affected broadcasters with new digital microwave replacement
equipment at no cost to the broadcaster and also reimburse those
broadcasters for certain associated
out-of-pocket
expenses. During 2009 and 2008, we recognized gains of
$9.2 million and $2.2 million, respectively, on the
disposal of equipment associated with the spectrum reallocation
project. The gains from the spectrum reallocation project were
partially offset by losses on disposals of equipment in the
ordinary course of business.
Interest
expense
Interest expense increased $15.0 million, or 28%, to
$69.1 million for 2009 compared to 2008. This increase is
due to the net effect of higher average interest rates and lower
principal balances in 2009 compared to 2008. The average
interest rates were 8.4% and 5.9% for 2009 and 2008,
respectively. The total average principal balance was
$796.4 million and $868.3 million for 2009 and 2008,
respectively. These average interest rates and average principal
balances are for the respective period and not the respective
ending balance sheet dates. The average interest rates include
the effects of our interest rate swap agreements.
Loss from
early extinguishment of debt
On March 31, 2009, we amended our senior credit facility.
To obtain this amendment, we incurred loan issuance costs of
approximately $7.4 million, including legal and
professional fees. These fees were funded from our existing cash
balances. In connection with this transaction, we reported a
loss on early extinguishment of debt of $8.4 million for
2009. There was no comparable loss in 2008.
Income
tax expense or benefit
The effective tax rate decreased to 32.8% for 2009 from 35.5%
for 2008. The effective tax rates differ from the statutory rate
due to the following items:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes
|
|
|
2.6
|
%
|
|
|
3.7
|
%
|
Change in valuation allowance
|
|
|
(4.5
|
)%
|
|
|
0.1
|
%
|
Reserve for uncertain tax positions
|
|
|
1.1
|
%
|
|
|
(0.2
|
)%
|
Goodwill impairment
|
|
|
0.0
|
%
|
|
|
(3.0
|
)%
|
Other
|
|
|
(1.4
|
)%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
32.8
|
%
|
|
|
35.5
|
%
|
|
|
|
|
|
|
|
|
|
28
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007 (2007)
Revenue
Total revenues increased $19.9 million, or 6%, to
$327.2 million reflecting increased cyclical political
advertising revenues. Political advertising revenues increased
$40.7 million, or 521%, to $48.5 million reflecting
the cyclical influence of the 2008 elections. Local advertising
revenues, excluding political advertising revenues, decreased
$14.2 million, or 7%, to $186.5 million. National
advertising revenues, excluding political advertising revenues,
decreased $9.0 million, or 12%, to $68.4 million.
Internet advertising revenues, excluding political advertising
revenues, increased $2.4 million, or 25%, to
$11.9 million reflecting increased website traffic and
internet sales initiatives in each of our markets. The increase
in political advertising revenue reflects increased advertising
from political candidates in the 2008 primary and general
elections. Spending on political advertising was the strongest
at our stations in Colorado, West Virginia, Wisconsin, Michigan
and North Carolina, accounting for a significant portion of the
total political net revenue for 2008. The decrease in local and
national revenue was largely due to the general weakness in the
economy and due to the change in networks broadcasting the Super
Bowl. During 2008, we earned approximately $130,000 of net
revenue relating to the 2008 Super Bowl broadcast on our six FOX
channels compared to approximately $750,000 of net revenue
relating to the 2007 Super Bowl broadcast on our 17 CBS channels
during 2007. The decrease in local and national revenue was
offset in part by $3.4 million of net revenue earned during
2008 attributable to the broadcast of the 2008 Summer Olympics
on our ten NBC stations.
Broadcast
expenses
Broadcast expenses (before depreciation, amortization,
impairment expense and (gain) loss on disposal of assets)
decreased $0.1 million, or approximately 0%, to
$199.6 million. This modest decrease primarily reflected
the impact of increased national sales representative
commissions on the incremental political advertising revenues
and increased syndicated programming expenses offset partially
by decreases in payroll and other operating expenses. We
recorded an impairment expense related to our syndicated
television programming of $0.6 million in 2008. Employee
payroll and related expenses decreased due to a reduction in our
number of employees in 2008 compared to 2007. As of
December 31, 2008 and 2007, we employed 2,253 and 2,425
total employees in our broadcast operations, which included
full-time and part-time employees. This reduction in total
employees was a decrease of 7.1% or 172 total employees.
Corporate
and administrative expenses
Corporate and administrative expenses (before depreciation,
amortization, impairment and (gain) loss on disposal of assets)
decreased $1.0 million, or 7%, to $14.1 million.
During 2008, corporate payroll expenses decreased by $950,000
compared to 2007, due primarily to a decrease in incentive-based
compensation. Corporate and administrative expenses included
non-cash stock-based compensation expense during the years ended
2008 and 2007 of $1.5 million and $1.2 million,
respectively.
Depreciation
Depreciation of property and equipment totaled
$34.6 million and $38.6 million for 2008 and 2007,
respectively. The decrease in depreciation was the result of a
large proportion of our stations equipment, which was
acquired in 2002, becoming fully depreciated.
Amortization
of intangible assets
Amortization of intangible assets was $0.8 million for each
of 2008 and 2007. Amortization expense remained consistent to
that of the prior year as a result of no acquisitions or
disposals of definite-lived intangible assets in 2008.
29
Impairment
of goodwill and broadcast licenses
During 2008, we recorded a non-cash impairment expense of
$338.7 million resulting from a write-down of
$98.6 million in the carrying value of our goodwill and a
write down of $240.1 million in the carrying value of our
broadcast licenses. The write-down of our goodwill and broadcast
licenses related to seven stations and 23 stations,
respectively. We tested our unamortized intangible assets for
impairment at December 31, 2008. As of the testing date, we
believe events had occurred and circumstances changed that more
likely than not reduce the fair value of our broadcast licenses
and goodwill below their carrying amounts. These events, which
accelerated in the fourth quarter of 2008, included:
(i) the continued decline of the price of our common stock
and Class A common stock; (ii) the decline in the
current selling prices of television stations; (iii) the
decline in local and national advertising revenues excluding
political advertising revenue; and (iv) the decline in the
operating profit margins of some of our stations.
Interest
expense
Interest expense decreased $13.1 million, or 20%, to
$54.1 million for 2008 compared to 2007. This decrease was
primarily attributable to lower average principal balances in
2008 compared to 2007 and lower average interest rates. The
total average principal balance was $868.3 million and
$913.0 million for 2008 and 2007, respectively. The average
interest rates were 5.9% and 7.1% for 2008 and 2007,
respectively. These average principal balances and interest
rates were for the respective period and not the respective
ending balance sheet dates. The average interest rates include
the effects of our interest rate swap agreements.
Loss on
Early Extinguishment of Debt
In 2007, we replaced our former senior credit facility with a
new senior credit facility and redeemed our 9.25% Notes. As
a result of these transactions, we recorded a loss on early
extinguishment of debt of $6.5 million related to the
senior credit facility and $16.4 million related to the
redemption of the 9.25% Notes. The loss related to the
redemption of the 9.25% Notes included $11.8 million
in premiums, the write-off of $4.0 million in deferred
financing costs and $614,000 in unamortized bond discount.
Income
tax expense or benefit
The effective tax rate increased to 35.5% for 2008 from 35.1%
for 2007. The effective tax rates differ from the statutory rate
due to the following items:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes
|
|
|
3.7
|
%
|
|
|
4.1
|
%
|
Change in valuation allowance
|
|
|
0.1
|
%
|
|
|
(1.2
|
)%
|
Reserve for uncertain tax positions
|
|
|
(0.2
|
)%
|
|
|
(2.8
|
)%
|
Goodwill impairment
|
|
|
(3.0
|
)%
|
|
|
0.0
|
%
|
Other
|
|
|
(0.1
|
)%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
35.5
|
%
|
|
|
35.1
|
%
|
|
|
|
|
|
|
|
|
|
30
Liquidity
and Capital Resources
General
The following tables present data that we believe is helpful in
evaluating our liquidity and capital resources (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net cash provided by operating activities
|
|
$
|
18,903
|
|
|
$
|
73,675
|
|
Net cash used in investing activities
|
|
|
(17,531
|
)
|
|
|
(16,340
|
)
|
Net cash used in financing activities
|
|
|
(16,021
|
)
|
|
|
(42,024
|
)
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
$
|
(14,649
|
)
|
|
$
|
15,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
Cash and cash equivalents
|
|
$
|
16,000
|
|
|
$
|
30,649
|
|
Long-term debt including current portion
|
|
$
|
791,809
|
|
|
$
|
800,380
|
|
Long-term accrued facility fee
|
|
$
|
18,307
|
|
|
$
|
|
|
Preferred stock
|
|
$
|
93,386
|
|
|
$
|
92,183
|
|
Borrowing availability under our senior credit facility
|
|
$
|
31,681
|
|
|
$
|
12,262
|
|
Leverage ratio as defined under our senior credit facility:
|
|
|
|
|
|
|
|
|
Actual
|
|
|
8.42
|
|
|
|
7.14
|
|
Maximum allowed
|
|
|
8.75
|
|
|
|
7.25
|
|
Senior
Credit Facility
Our senior credit facility consists of a revolving loan and a
term loan. The amount outstanding under our senior credit
facility as of December 31, 2009 and December 31, 2008
was $791.8 million and $800.4 million, respectively,
comprised solely of the term loan. Under the revolving loan
portion of our senior credit facility, the maximum available
borrowing capacity was $50.0 million as of
December 31, 2009. Of the maximum borrowing capacity
available under our revolving loan, the amount that we can draw
is limited by certain restrictive covenants, including our total
net leverage ratio covenant. Based on such covenant, as of
December 31, 2009 and December 31, 2008, we could have
drawn $31.7 million and $12.3 million, respectively,
of the $50.0 million maximum borrowing capacity under the
revolving loan. Effective as of March 31, 2010, the maximum
borrowing capacity available under the revolving loan was
reduced to $40.0 million.
Under our revolving and term loans, we can choose to pay
interest at an annual rate equal to the London Interbank Offered
Rate (LIBOR) plus 3.5% or at the lenders base
rate, generally equal to the lenders prime rate, plus
2.5%. This interest is payable in cash throughout the year.
In addition, effective as of March 31, 2009, we incur a
facility fee at an annual rate of 3.0% on all principal balances
outstanding under the revolving and term loans. For the period
from March 31, 2009 until April 30, 2010, the annual
facility fee for the revolving and term loans accrues and is
payable on the respective revolving and term loan maturity
dates. The revolving loan and term loan maturity dates are
March 19, 2014 and December 31, 2014, respectively.
For the period from April 30, 2010 until maturity of the
senior credit facility, the annual facility fee will be payable
in cash on a quarterly basis and the amount accrued through
April 30, 2010 will bear interest at an annual rate of
6.5%, payable quarterly. As of December 31, 2009, our
accrued facility fee of $18.3 million was classified as a
long-term liability on our balance sheet. The accrued facility
fee is included in determining the amount of total debt in
calculating our total net leverage ratio covenant as defined in
our senior credit facility.
31
The average interest rates on our total debt balance outstanding
under the senior credit facility as of December 31, 2009
and 2008 were 6.8% and 4.8%, respectively. These rates are as of
the period end and do not include the effects of our interest
rate swap agreements. Including the effects of our interest rate
swap agreements, the average interest rates on our total debt
balances outstanding under the senior credit facility at
December 31, 2009 and 2008 were 9.8% and 5.6%, respectively.
Also under our revolving loan, we pay a commitment fee on the
average daily unused portion of the $50.0 million revolving
loan. As of December 31, 2009 and 2008, the annual
commitment fees were 0.5% and 0.4%, respectively.
Collateral
and Restrictions
The collateral for our senior credit facility consists of
substantially all of our and our subsidiaries assets. In
addition, our subsidiaries are joint and several guarantors of
the obligations and our ownership interests in our subsidiaries
are pledged to collateralize the obligations. The senior credit
facility contains affirmative and restrictive covenants. These
covenants include but are not limited to (i) limitations on
additional indebtedness, (ii) limitations on liens,
(iii) limitations on amendments to our by-laws and articles
of incorporation, (iv) limitations on mergers and the sale
of assets, (v) limitations on guarantees,
(vi) limitations on investments and acquisitions,
(vii) limitations on the payment of dividends and the
redemption of our capital stock, (vii) maintenance of a
specified total net leverage ratio not to exceed certain maximum
limits, (viii) limitations on related party transactions,
(ix) limitations on the purchase of real estate, and
(x) limitations on entering into multiemployer retirement
plans, as well as other customary covenants for credit
facilities of this type. As of December 31, 2009 and 2008,
we were in compliance with all restrictive covenants as required
by our senior credit facility.
We are a holding company with no material independent assets or
operations, other than our investments in our subsidiaries. The
aggregate assets, liabilities, earnings and equity of the
subsidiary guarantors as defined in our senior credit facility
are substantially equivalent to our assets, liabilities,
earnings and equity on a consolidated basis. The subsidiary
guarantors are, directly or indirectly, our wholly owned
subsidiaries and the guarantees of the subsidiary guarantors are
full, unconditional and joint and several. All of our current
and future direct and indirect subsidiaries are and will be
guarantors under the senior credit facility. Accordingly,
separate financial statements and other disclosures of each of
the subsidiary guarantors are not presented because we have no
independent assets or operations, the guarantees are full and
unconditional and joint and several and any of our subsidiaries
other than the subsidiary guarantors are immaterial.
Amendments
to Our Senior Credit Facility
Effective as of March 31, 2009, we amended our senior
credit facility (the 2009 amendment). The 2009
amendment included (i) an increase in the maximum total net
leverage ratio covenant for the year ended December 31,
2009, (ii) a general increase in the restrictiveness of our
remaining covenants and (iii) increased interest rates, as
described below. In connection therewith, we incurred loan
issuance costs of approximately $7.4 million, including
legal and professional fees. These fees were funded from our
existing cash balances. The 2009 amendment of our senior credit
facility was determined to be significant and, as a result, we
recorded a loss from early extinguishment of debt of
$8.4 million.
Without the 2009 amendment, we would not have been in compliance
with the total net leverage ratio covenant under the senior
credit facility and such noncompliance would have caused a
default under the agreement as of March 31, 2009. Such a
default would have given the lenders thereunder certain rights,
including the right to declare all amounts outstanding under our
senior credit facility immediately due and payable or to
foreclose on the assets securing such indebtedness. The 2009
amendment increased our annual cash interest rate by 2.0% and,
beginning April 1, 2009, required the payment of a 3.0%
annual facility fee.
32
As stated above, our senior credit facility requires us to
maintain our total net leverage ratio below certain maximum
amounts. Our actual total net leverage ratio and our maximum
total net leverage ratio allowed under our senior credit
facility for recent reporting periods was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
|
|
Maximum Allowed
|
|
|
|
|
Agreement
|
|
|
|
|
|
|
Giving Effect
|
|
Agreement
|
|
|
|
|
to 2009
|
|
Pre-2009
|
|
|
Actual
|
|
Amendment
|
|
Amendment
|
|
Leverage ratios under our senior credit facility as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
7.14
|
|
|
|
NA
|
|
|
|
7.25
|
|
March 31, 2009
|
|
|
7.48
|
|
|
|
8.00
|
|
|
|
7.25
|
|
June 30, 2009
|
|
|
7.98
|
|
|
|
8.25
|
|
|
|
7.25
|
|
September 30, 2009
|
|
|
8.22
|
|
|
|
8.50
|
|
|
|
7.25
|
|
December 31, 2009
|
|
|
8.42
|
|
|
|
8.75
|
|
|
|
7.00
|
|
Assuming we maintain compliance with the financial and other
covenants in our senior credit facility, including the total net
leverage ratio covenant, we believe that our current cash
balance, cash flows from operations and any available funds
under the revolving credit line of our senior credit facility
will be adequate to provide for our capital expenditures, debt
service and working capital requirements through
December 31, 2010.
Compliance with our total net leverage ratio covenant depends on
a number of factors, including the interrelationship of our
ability to reduce our outstanding debt
and/or the
results of our operations. The continuing general economic
recession, including the significant decline in advertising by
the automotive industry, adversely impacted our ability to
generate cash from operations during 2009. Based upon certain
internal financial projections, we did not believe that we would
be in compliance with our total net leverage ratio as of
March 31, 2010 unless we further amended the terms of our
senior credit facility. As a result, we requested and obtained
such an amendment of our senior credit facility on
March 31, 2010.
Effective March 31, 2010, we amended our senior credit
facility which, among other things, increased the maximum amount
of the total net leverage ratio covenant thereunder through
March 31, 2011, and reduced the maximum availability under
the revolving loan to $40.0 million.
Based upon our internal financial projections as of the date of
filing this Annual Report and the amended terms of our senior
credit facility, we believe that we will be in compliance with
all covenants required by our amended senior credit facility as
of March 31, 2010. The March 2010 amendment also imposed an
additional fee, equal to 2.0% per annum, payable quarterly, in
arrears, until such time as we complete an offering of capital
stock or certain debt securities that results in the repayment
of not less than $200.0 million of the term loan
outstanding under our senior credit facility. That fee would be
eliminated upon such a repayment of amounts under the term loan.
In addition, upon completion of a financing that results in the
repayment of at least $200.0 million of our term loan, we
would achieve additional flexibility under various covenants in
our senior credit facility. The use of proceeds from any
issuance of additional securities will generally be limited to
the repayment of amounts outstanding under our term loan and, in
certain circumstances, to the repurchase of outstanding shares
of our Series D Perpetual Preferred Stock. There can be no
assurance that we will be able to complete such a capital
raising transaction, or to repurchase any of our preferred
stock, at times and on terms acceptable to us, or at all. If we
are unable to complete such a financing and repayment of amounts
under our term loan, we would continue to incur increased fees
under our senior credit facility and to be subject to the
stricter limits contained in our existing financial covenants.
For additional details regarding the March 2010 amendment to our
senior credit facility, see Note 14. Subsequent
Event Long-term Debt Amendment to our audited
financial statements included elsewhere herein.
For further information concerning our senior credit facility,
see Note 3. Long-term Debt and Accrued Facility
Fee to our audited financial statements included elsewhere
herein. For estimates of future principal and interest payments
under our senior credit facility, see Tabular Disclosure
of Contractual Obligations as of
33
December 31, 2009 included elsewhere in this
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
Series D
Perpetual Preferred Stock
On June 26, 2008 and July 15, 2008, we issued
750 shares and 250 shares, respectively, of our
Series D Perpetual Preferred Stock, no par value. We used
the majority of the net proceeds of these issuances to reduce
our outstanding debt balance by $88.0 million during 2008.
As of December 31, 2009 and 2008, we had 1,000 shares
of Series D Perpetual Preferred Stock outstanding. The
Series D Perpetual Preferred Stock has a liquidation value
of $100,000 per share for a total liquidation value of
$100.0 million as of December 31, 2009 and 2008. Our
accrued Series D Perpetual Preferred Stock dividend
balances as of December 31, 2009 and 2008 were
$18.9 million and $3.0 million, respectively.
We made our most recent Series D Perpetual Preferred Stock
cash dividend payment on October 15, 2008, for dividends
earned through September 30, 2008. We have deferred the
cash payment of our preferred stock dividends earned thereon
since October 1, 2008. When three consecutive cash dividend
payments with respect to the Series D Perpetual Preferred
Stock remain unfunded, the dividend rate increases from 15.0%
per annum to 17.0% per annum. Thus, our Series D Perpetual
Preferred Stock dividend began accruing at 17.0% per annum on
July 16, 2009 and will accrue at that rate as long as at
least three consecutive cash dividend payments remain unfunded.
Our Series D Perpetual Preferred Stock dividend rate was
15.0% per annum from December 31, 2008 through
July 16, 2009. Prior to December 31, 2008, our
Series D Perpetual Preferred Stock dividend rate was 12%
per annum.
While any Series D Perpetual Preferred Stock dividend
payments are in arrears, we are prohibited from repurchasing,
declaring
and/or
paying any cash dividend with respect to any equity securities
having liquidation preferences equivalent to or junior in
ranking to the liquidation preferences of the Series D
Perpetual Preferred Stock, including our common stock and
Class A common stock. We can provide no assurances as to
when any future cash payments will be made on any accumulated
and unpaid Series D Perpetual Preferred Stock cash
dividends presently in arrears or that become in arrears in the
future. The Series D Perpetual Preferred Stock has no
mandatory redemption date but may be redeemed at the
stockholders option on or after June 30, 2015. We
deferred cash dividends on our Series D Perpetual Preferred
Stock and correspondingly suspended cash dividends on our common
and Class A common stock to reallocate cash resources and
support our ability to pay increased interest costs and fees
associated with our senior credit facility.
See Note 7. Preferred Stock of our audited
consolidated financial statements included elsewhere herein for
further information concerning the Series D Perpetual
Preferred Stock.
Income
Taxes
We file a consolidated federal income tax return and such state
or local tax returns as are required. Although we may earn
taxable operating income in future years, as of
December 31, 2009, we anticipate that through the use of
our available loss carryforwards we will not pay significant
amounts of federal income taxes in the next several years.
However, we estimate that we will pay state income taxes in
certain states over the next several years.
Net
Cash Provided By (Used In) Operating, Investing and Financing
Activities
Net cash provided by operating activities decreased
$54.8 million to $18.9 million for 2009 compared to
net cash provided of $73.7 million for 2008. The decrease
in cash provided by operations was due primarily to several
factors, including: (i) a decrease in revenues of
$56.8 million and (ii) a decrease from a net change in
current operating assets and liabilities of $10.9 million
partially offset by a decrease in broadcast expenses of
$12.0 million.
34
Net cash used in investing activities increased
$1.2 million to $17.5 million for 2009 compared to
$16.3 million for 2008. The increase in cash used in
investing activities was largely due to increases in capital
expenditures for 2009 of $2.8 million.
Net cash used in financing activities decreased
$26.0 million to $16.0 million for 2009 compared to
$42.0 million for 2008. In 2008, we issued our
Series D Perpetual Preferred Stock and used the proceeds of
that issuance along with cash generated from operations to repay
a portion of our long-term debt balance. Also, we paid
$8.8 million of dividends in 2008. During 2009, we repaid
$8.6 million of our long-term debt balance, paid
$7.5 million in fees associated with our long-term debt
refinancing and suspended the payment of all dividends.
Retirement
Plan
We have three defined benefit pension plans. Two of these plans
were assumed by us as a result of our acquisitions and are
frozen plans. Our active defined benefit pension plan, which we
consider to be our primary pension plan, covers substantially
all our full-time employees. Retirement benefits under such plan
are based on years of service and the employees highest
average compensation for five consecutive years during the last
ten years of employment. Our funding policy is consistent with
the funding requirements of existing federal laws and
regulations under the Employee Retirement Income Security Act of
1974.
A discount rate is selected annually to measure the present
value of the benefit obligations. In determining the selection
of a discount rate, we estimated the timing and amounts of
expected future benefit payments and applied a yield curve
developed to reflect yields available on high-quality bonds. The
yield curve is based on an externally published index
specifically designed to meet the criteria of generally accepted
accounting principles in the United States of America
(U.S. GAAP). The discount rate selected for
determining benefit obligations as of December 31, 2009 was
6.27% which reflects the results of this yield curve analysis.
The discount rate used for determining benefit obligations as of
December 31, 2008 was 5.79%. Our assumption regarding
expected return on plan assets reflects asset allocations,
investment strategy and the views of investment managers, as
well as historical experience. We use an assumed return of 7.00%
for our assets invested in our active pension plan. Actual asset
returns for this plan increased in value 14.85% in 2009 and
decreased in value of 25.28% in 2008. Other significant
assumptions include inflation, salary growth, retirement rates
and mortality rates. Our inflation assumption is based on an
evaluation of external market indicators. The salary growth
assumptions reflect our long-term actual experience, the
near-term outlook and assumed inflation. Compensation increases
over the latest five-year period have been in line with
assumptions. Retirement and mortality rates are based on actual
plan experience.
During 2009 and 2008, we contributed $3.5 million and
$2.9 million, respectively, to all three of our pension
plans and we anticipate making an aggregate contribution of
$4.5 million to such plans in 2010.
See Note 10. Retirement Plans of our audited
consolidated financial statements included elsewhere herein for
further information concerning the retirement plans.
Capital
Expenditures
Capital expenditures for the years ended December 31, 2009
and 2008 were $17.8 million and $15.0 million,
respectively. The year ended December 31, 2009 included, in
part, capital expenditures relating to the conversion of analog
broadcasts to digital broadcasts upon the final cessation of
analog transmissions, while the year ended December 31,
2008 did not contain comparable projects. We expect that our
capital expenditures will be approximately $15.0 million in
the year ending December 31, 2010. Our senior credit
facility limits our capital expenditures to not more than
$15.0 million for the year ending December 31 2010. We
expect to fund future capital expenditures with cash from
operations and borrowings under our senior credit facility.
35
Off-Balance
Sheet Arrangements
Operating
Commitments
We have various operating lease commitments for equipment, land
and office space. We also have commitments for various
syndicated television programs.
We have two types of syndicated television program contracts:
first run programs and off network reruns. The first run
programs are programs such as Oprah and the off network
programs are programs such as Friends. A difference
between the two types of syndicated television programming is
that the first run programs have not been produced at the time
the contract is signed and the off network programs have been
produced. For all syndicated television contracts we record an
asset and corresponding liability for payments to be made for
the entire off network contract period and for only
the current year of the first run contract period.
Only the payments in the current year of the first
run contracts are recorded on the current balance sheet,
because the programs for the later years of the contract period
have not been produced and delivered.
Obligation
to UK
On October 12, 2004, the University of Kentucky
(UK) jointly awarded a sports marketing agreement to
a subsidiary of IMG Worldwide, Inc. (IMG) and us
(the UK Agreement). The UK Agreement commenced on
April 16, 2005 and has an initial term of seven years, with
the option to extend for three additional years.
On July 1, 2006, the terms between IMG and us concerning
the UK Agreement were amended. The amended agreement provides
that we will share in profits in excess of certain amounts
specified by the agreement, if any, but not losses. The
agreement also provides that we will separately retain all local
broadcast advertising revenue and pay all local broadcast
expenses for activities under the agreement. Under the amended
agreement, IMG agreed to make all license fee payments to UK.
However, if IMG is unable to pay the license fee to UK, we will
then pay the unpaid portion of the license fee to UK. As of
December 31, 2009, the aggregate license fees to be paid by
IMG to UK over the remaining portion of the full ten-year term
(including optional three additional years) for the agreement is
approximately $45.4 million. If we make advances on behalf
of IMG, IMG will then reimburse us for the amount paid within
60 days after the close of each contract year which ends on
June 30th. IMG has also agreed to pay interest on any
advance at a rate equal to the prime rate. During the years
ended December 31, 2009 and 2008, we have not advanced any
amounts to UK on behalf of IMG under this agreement.
36
Tabular
Disclosure of Contractual Obligations as of December 31,
2009
The following table aggregates our material expected contractual
obligations and commitments as of December 31, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
Contractual Obligations
|
|
Total
|
|
|
2010
|
|
|
2011-2012
|
|
|
2013-2014
|
|
|
after 2014
|
|
|
Contractual obligations recorded in our balance sheet as of
December 31 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations(1)
|
|
$
|
791,809
|
|
|
$
|
8,080
|
|
|
$
|
16,160
|
|
|
$
|
767,569
|
|
|
$
|
|
|
Long-term accrued facility fee(2)
|
|
|
18,307
|
|
|
|
|
|
|
|
|
|
|
|
18,307
|
|
|
|
|
|
Dividends currently accrued(3)
|
|
|
18,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,917
|
|
Programming obligations currently accrued(4)
|
|
|
16,802
|
|
|
|
15,271
|
|
|
|
1,241
|
|
|
|
290
|
|
|
|
|
|
Interest rate swap agreements(5)
|
|
|
6,344
|
|
|
|
6,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related liabilities(6)
|
|
|
1,790
|
|
|
|
863
|
|
|
|
834
|
|
|
|
93
|
|
|
|
|
|
Off-balance sheet arrangements as of December 31 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash interest on long-term debt obligations(7)
|
|
|
261,169
|
|
|
|
53,568
|
|
|
|
104,939
|
|
|
|
102,662
|
|
|
|
|
|
Cash interest on long-term accrued facility fee(8)
|
|
|
8,189
|
|
|
|
1,136
|
|
|
|
3,487
|
|
|
|
3,566
|
|
|
|
|
|
Operating lease obligations(9)
|
|
|
8,119
|
|
|
|
1,321
|
|
|
|
1,780
|
|
|
|
1,231
|
|
|
|
3,787
|
|
Dividends not currently accrued(10)
|
|
|
85,000
|
|
|
|
17,000
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
unknown
|
|
Purchase obligations not currently accrued(11)
|
|
|
832
|
|
|
|
832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Programming obligations not currently accrued(12)
|
|
|
22,304
|
|
|
|
4,502
|
|
|
|
16,526
|
|
|
|
1,257
|
|
|
|
19
|
|
Obligation to UK(13)
|
|
|
45,426
|
|
|
|
7,763
|
|
|
|
15,963
|
|
|
|
17,200
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,285,008
|
|
|
$
|
116,680
|
|
|
$
|
194,930
|
|
|
$
|
946,175
|
|
|
$
|
27,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt obligations represent current
and all future payment principal obligations under our senior
credit facility. These amounts are recorded as liabilities as of
the current balance sheet date. As of December 31, 2009,
the interest rate on the balance outstanding under the senior
credit facility, excluding effects of interest rate swap
agreements, was 6.8%. |
|
(2) |
|
Long-term accrued facility fee represents a
facility fee accrued as of December 31, 2009 under our
senior credit facility at a rate of 3% per annum and payable in
subsequent periods. |
|
(3) |
|
Dividends currently accrued represent
Series D Perpetual Preferred Stock dividends accrued as of
December 31, 2009 and payable in subsequent periods. |
|
(4) |
|
Programming obligations currently accrued
represent obligations for syndicated television programming
whose license period has begun and the product is available.
These amounts are recorded as liabilities as of the current
balance sheet date. |
|
(5) |
|
Interest rate swap agreements represent
certain contracts that allow us to fix the interest rate on a
portion of our long-term debt balance. We have estimated
obligations associated with these contracts. Although the fair
value of these contracts can fluctuate significantly based on
market interest rates, the amounts in the table are estimated
settlement amounts. These amounts are recorded as liabilities as
of the current balance sheet date. |
37
|
|
|
(6) |
|
Acquisition related liabilities represent
certain obligations associated with acquisitions of television
stations that were completed in prior years. These amounts are
recorded as liabilities as of the current balance sheet date. |
|
(7) |
|
Cash interest on long-term debt obligations
includes estimated interest expense on long-term debt
obligations based upon the average debt balances expected in the
future and computed using an interest rate of 6.8%. This was the
interest rate on the balance outstanding under the senior credit
facility, excluding the effects of our interest rate swap
agreements, as of December 31, 2009. Our senior credit
facility will mature on December 31, 2014. |
|
(8) |
|
Cash interest on long-term accrued facility
fee represents estimated interest expense on the
accrued facility fee obligation under our senior credit
facility. Effective as of March 31, 2009, we incur a
facility fee equal to 3.0% per annum on the outstanding
revolving and term loans thereunder. From March 31, 2009
through April 30, 2010, this fee accrues and becomes
payable on the respective maturity dates of those loans
(March 19, 2014 and December 31, 2014, respectively).
From April 30, 2010 until the maturity dates under the
senior credit facility, such accrued amounts bear interest at
6.5% per year. These interest payments are included in this item
as cash interest on long-term accrued facility fee.
From April 30, 2010 until the maturity dates under our
senior credit facility, the fee will be payable in cash on a
quarterly basis. This portion of the fee is included in the
estimate of Cash interest on long-term debt
obligations above. |
|
(9) |
|
Operating lease obligations represent payment
obligations under non-cancelable lease agreements classified as
operating leases. These amounts are not recorded as liabilities
as of the current balance sheet date. |
|
(10) |
|
Dividends not currently accrued represent
Series D Perpetual Preferred Stock dividends for future
periods and assumes that the $100 million of Series D
Perpetual Preferred Stock remains outstanding in future periods
with a dividend rate of 17%. For the column headed More
than 5 years, after 2014, we cannot estimate a
dividend amount; due to the perpetual nature of our
Series D Perpetual Preferred Stock and its holders
having the right to request that we repurchase such Stock on or
after June 30, 2015. |
|
(11) |
|
Purchase obligations not currently accrued
generally represent payment obligations for equipment. It is our
policy to accrue for these obligations when the equipment is
received and the vendor has completed the work required by the
purchase agreement. These amounts are not recorded as
liabilities as of the current balance sheet date because we had
not yet received the equipment. |
|
(12) |
|
Programming obligations not currently accrued
represent obligations for syndicated television programming
whose license period has not yet begun or the product is not yet
available. These amounts are not recorded as liabilities as of
the current balance sheet date. |
|
(13) |
|
Obligation to UK represents total
obligations, excluding any potential revenues, under the UK
Agreement. These amounts are not recorded as liabilities as of
the current balance sheet date. See Off-Balance Sheet
Arrangements immediately preceding this table for
additional information concerning this obligation. |
Estimates of the amount, timing and future funding obligations
under our pension plans include assumptions concerning, among
other things, actual and projected market performance of plan
assets, investment yields, statutory requirements and
demographic data for pension plan participants. Pension plan
funding estimates are therefore not included in the table above
because the timing and amounts of funding obligations for all
future periods cannot be reasonably determined. We expect to
contribute approximately $4.5 million in total to our
active pension plan and the acquired pension plans during 2010.
Inflation
The impact of inflation on operations has not been significant
to date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on
operating results, particularly since a significant portion of
our senior bank debt is comprised of variable-rate debt.
38
Other
We are a holding company with no material independent assets or
operations, other than our investment in our subsidiaries. The
aggregate assets, liabilities, earnings and equity of the
Subsidiary Guarantors are substantially equivalent to our
assets, liabilities, earnings and equity on a consolidated
basis. The Subsidiary Guarantors (as defined in our senior
credit facility) are, directly or indirectly, our wholly owned
subsidiaries and the guarantees of the Subsidiary Guarantors are
full, unconditional and joint and several. All of our current
and future direct and indirect subsidiaries are Subsidiary
Guarantors. Accordingly, separate financial statements and other
disclosures of each of the Subsidiary Guarantors are not
presented because we have no independent assets or operations,
the guarantees are full and unconditional and joint and several.
Critical
Accounting Policies
The preparation of financial statements in conformity with
U.S. GAAP requires us to make judgments and estimations
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from
those reported amounts. We consider our accounting policies
relating to intangible assets and income taxes to be critical
policies that require judgments or estimations in their
application where variances in those judgments or estimations
could make a significant difference to future reported results.
Our policies concerning intangible assets are disclosed below.
Annual
Impairment Testing of Broadcast Licenses and
Goodwill
Our annual impairment testing of broadcast licenses and goodwill
for each individual television station requires an estimation of
the fair value of each broadcast license and the fair value of
the entire television station which we consider a reporting
unit. Such estimations generally rely on analyses of public and
private comparative sales data as well as discounted cash flow
analyses that inherently require multiple assumptions relating
to the future prospects of each individual television station
including, but not limited to: (i) expected long-term
market growth characteristics, (ii) estimations regarding a
stations future expected viewing audience,
(iii) station revenue shares within a market,
(iv) future expected operating expenses, (v) costs of
capital and (vi) appropriate discount rates. We believe
that the assumptions we utilize in analyzing potential
impairment of broadcast licenses
and/or
goodwill for each of our television stations are reasonable
individually and in the aggregate. However, these assumptions
are highly subjective and changes in any one assumption, or a
combination of assumptions, could produce significant
differences in the calculated outcomes.
To estimate the fair value of our reporting units, we utilize a
discounted cash flow model supported by a market multiple
approach. We believe that a discounted cash flow analysis is the
most appropriate methodology to test the recorded value of
long-term assets with a demonstrated long-lived/enduring
franchise value. We believe the results of the discounted cash
flow and market multiple approaches provide reasonable estimates
of the fair value of our reporting units because these
approaches are based on our actual results and reasonable
estimates of future performance, and also take into
consideration a number of other factors deemed relevant by us,
including but not limited to, expected future market revenue
growth, market revenue shares and operating profit margins. We
have consistently used these approaches in determining the fair
value of our goodwill. We also consider a market multiple
valuation method to corroborate our discounted cash flow
analysis. We believe that this methodology is consistent with
the approach that any strategic market participant would utilize
if they were to value one of our television stations.
As of December 31, 2009, the recorded value of our
broadcast licenses and goodwill was approximately
$819.0 million and $170.5 million, respectively. As of
December 31, 2008, the recorded value of our broadcast
licenses and goodwill was approximately $819.0 million and
$170.5 million, respectively.
As of December 31, 2008, we recorded a non-cash impairment
expense of $338.7 million resulting from a write-down of
$98.6 million in the recorded value of our goodwill at
seven of our stations and a write-down of $240.1 million in
the recorded value of our broadcast licenses at 23 of our
stations. We did not record an impairment expense related to our
broadcast licenses or goodwill during 2009 or 2007. Neither of
these asset types are amortized; however, they are both subject
to impairment testing.
39
Prior to January 1, 2002, acquired broadcast licenses were
valued at the date of acquisition using a residual method. The
recorded value of these broadcast licenses as of
December 31, 2009 and 2008 was approximately
$341.0 million. The impairment charge recorded as of
December 31, 2008 for these broadcast licenses approximated
$129.6 million. After December 31, 2001, acquired
broadcast licenses were valued at the date of acquisition using
an income method that assumes an initial hypothetical
start-up
operation. This change in methodology was due to a change in
accounting requirements. The book value of these broadcast
licenses as of December 31, 2009 and 2008 was approximately
$478.0 million. The impairment expense recorded as of
December 31, 2008 for these broadcast licenses approximated
$110.5 million. Regardless of whether we initially recorded
the value of our broadcast licenses using the residual or the
income method, for purposes of testing for potential impairment
we use the income method to estimate the fair value of our
broadcast licenses.
We test for impairment of broadcast licenses and goodwill on an
annual basis on the last day of each fiscal year. However, we
will test for impairment during any reporting period if certain
triggering events occur. The two most recent impairment testing
dates were as of December 31, 2009 and 2008. A summary of
the significant assumptions used in our impairment analyses of
broadcast licenses and goodwill as of December 31, 2009 and
2008 is presented below. Following the summary of assumptions is
a sensitivity analysis of those assumptions as of
December 31, 2009. Our reporting units, allocations of our
broadcast licenses and goodwill and our methodologies were
consistent as of both testing dates.
Summary
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Pre-tax impairment charge:
|
|
|
|
|
|
|
|
|
Broadcast licenses
|
|
$
|
|
|
|
$
|
240.1
|
|
Goodwill
|
|
$
|
|
|
|
$
|
98.6
|
|
Significant assumptions:
|
|
|
|
|
|
|
|
|
Forecast period
|
|
|
10 years
|
|
|
|
10 years
|
|
Increase or (decrease) in market advertising revenue for
projection year 1 compared to latest historical period(1)
|
|
|
(4.4)% to 8.9%
|
|
|
|
(15.8)% to (2.3)%
|
|
Positive or (negative) advertising revenue compound growth rate
for forecast period
|
|
|
(0.3)% to 3.7%
|
|
|
|
1.1% to 3.4%
|
|
Operating cash flow margin:
|
|
|
|
|
|
|
|
|
Broadcast licenses
|
|
|
8.3% to 50.0%
|
|
|
|
11.0% to 50.0%
|
|
Goodwill
|
|
|
11.1% to 50.0%
|
|
|
|
11.5% to 50.0%
|
|
Discount rate:
|
|
|
|
|
|
|
|
|
Broadcast licenses
|
|
|
9.50%
|
|
|
|
10.50%
|
|
Goodwill
|
|
|
10.50%
|
|
|
|
11.50%
|
|
|
|
|
(1) |
|
Depending on whether the first year of the respective projection
period is an even- or odd-numbered year, assumptions relating to
market advertising growth rates can vary significantly from year
to year reflecting the significant cyclical impact of political
advertising in even-numbered years. The fiscal 2009 analysis
generally anticipated an increase in revenues for fiscal 2010.
As a result, overall future projected revenue growth rates
thereafter were low given the high starting point of these
projections. Conversely, since the fiscal 2008 analysis assumed
cyclically low revenues for fiscal 2009, the subsequent
projected growth rates were higher. |
When estimating the fair value of our broadcast licenses and
goodwill, we make assumptions regarding revenue growth rates,
operating cash flow margins and discount rates. These
assumptions require substantial judgment. Although we did not
record an impairment charge for the year ended December 31,
2009, we may have recorded such an adjustment if we had changed
certain assumptions. The following table contains a
40
sensitivity analysis of these assumptions and a hypothetical
impairment charge that would have resulted if our advertising
revenue growth rate and our operating cash flow margin had been
revised lower or if our discount rate had been revised higher.
We also provide a hypothetical impairment charge assuming a 5%
and 10% decrease in the fair value of our broadcast licenses and
enterprise values.
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
Impairment Charge
|
|
|
|
As of December 31, 2009
|
|
|
|
Broadcast
|
|
|
|
|
|
|
License
|
|
|
Goodwill
|
|
|
|
(In millions)
|
|
|
Hypothetical change:
|
|
|
|
|
|
|
|
|
A 100 basis point decrease in advertising revenue growth
rate throughout the forecast period
|
|
$
|
29.4
|
|
|
$
|
3.9
|
|
A 100 basis point decrease in operating cash flow margin
throughout the forecast period
|
|
$
|
0.5
|
|
|
$
|
|
|
A 100 basis point increase in the applicable discount rate
|
|
$
|
29.9
|
|
|
$
|
4.2
|
|
A 5% reduction in the fair value of broadcast licenses and
enterprise values
|
|
$
|
1.1
|
|
|
$
|
|
|
A 10% reduction in the fair value of broadcast licenses and
enterprise values
|
|
$
|
6.8
|
|
|
$
|
2.8
|
|
These hypothetical non-cash impairment charges would not have
any direct impact on our liquidity, senior credit facility
covenant compliance or future results of operations. Our
historical operating results may not be indicative of our future
operating results. Our future ten-year discounted cash flow
analysis, which fundamentally supports our estimated fair values
as of December 31, 2009, reflected certain assumptions
relating to the expected impact of the current general economic
recession and dislocation of the credit markets.
In addition, the change in macroeconomic factors impacting the
credit markets caused us to decrease our assumed discount rate
to 9.5% for valuing broadcast licenses and to 10.5% for valuing
goodwill in 2009 as compared to the 10.5% discount rate used to
value broadcast licenses and the 11.5% rate used to value
goodwill in 2008. The discount rates used in our impairment
analysis were based upon the after-tax rate determined using a
weighted-average cost of capital calculation for media
companies. In calculating the discount rates, we considered
estimates of the long-term mean market return, industry beta,
corporate borrowing rate, average industry debt to capital
ratio, average industry equity capital ratio, risk free rate and
the tax rate. We believe using a discount rate based on a
weighted-average cost of capital calculation for media companies
is appropriate because it would be reflective of rates active
participants in the media industry would utilize in valuing
broadcast licenses
and/or
broadcast enterprises.
Valuation
of Network Affiliation Agreements
We believe that the value of a television station is derived
primarily from the attributes of its broadcast license. These
attributes have a significant impact on the audience for network
programming in a local television market compared to the
national viewing patterns of the same network programming.
Certain other broadcasting companies have valued network
affiliations on the basis that it is the affiliation and not the
other attributes of the station, including its broadcast
license, that contributes to the operational performance of that
station. As a result, we believe that these broadcasting
companies allocate a significant portion of the purchase price
for any station that they may acquire to the network affiliation
relationship and include in their network affiliation valuation
amounts related to attributes which we believe are more
appropriately reflected in the value of the broadcast license or
goodwill.
The methodology we used to value these stations was based on our
evaluation of the broadcast licenses acquired and the
characteristics of the markets in which they operated. Given our
assumptions and the specific attributes of the stations we
acquired from 2002 through December 31, 2009, we ascribed
no incremental value to the incumbent network affiliation
relationship in each market beyond the cost of negotiating a new
41
agreement with another network and the value of any terms of the
affiliation agreement that were more favorable or unfavorable
than those generally prevailing in the market.
Some broadcast companies may use methods to value acquired
network affiliations different than those that we use. These
different methods may result in significant variances in the
amount of purchase price allocated to these assets among
broadcast companies.
If we were to assign higher values to all of our network
affiliations and less value to our broadcast licenses or
goodwill and if it is further assumed that such higher values of
the network affiliations are definite-lived intangible assets,
this reallocation of value might have a significant impact on
our operating results. It should be noted that there is
diversity of practice within the industry, and some broadcast
companies have considered such network affiliation intangible
assets to have a life ranging from 15 to 40 years depending
on the specific assumptions utilized by those broadcast
companies.
The following table reflects the hypothetical impact of the
reassignment of value from broadcast licenses to network
affiliations for all our prior acquisitions (the first
acquisition being in 1994) and the resulting increase in
amortization expense assuming a hypothetical
15-year
amortization period as of our most recent impairment testing
date of December 31, 2009 (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total
|
|
|
|
|
Value Reassigned to
|
|
|
|
|
Network
|
|
|
As
|
|
Affiliation Agreements
|
|
|
Reported
|
|
50%
|
|
25%
|
|
Balance Sheet (As of December 31, 2009):
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcast licenses
|
|
$
|
818,981
|
|
|
$
|
262,598
|
|
|
$
|
540,789
|
|
Other intangible assets, net (including network affiliation
agreements)
|
|
|
1,316
|
|
|
|
185,347
|
|
|
|
93,332
|
|
Statement of Operations
(For the year ended December 31, 2009):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
577
|
|
|
|
36,626
|
|
|
|
18,602
|
|
Operating income
|
|
|
43,079
|
|
|
|
7,030
|
|
|
|
25,054
|
|
Net loss
|
|
|
(23,047
|
)
|
|
|
(45,037
|
)
|
|
|
(34,042
|
)
|
Net loss available to common stockholders
|
|
|
(40,166
|
)
|
|
|
(62,156
|
)
|
|
|
(51,161
|
)
|
Net loss available to common stockholders, per share
basic and diluted
|
|
$
|
(0.83
|
)
|
|
$
|
(1.28
|
)
|
|
$
|
(1.05
|
)
|
In future acquisitions, the valuation of the network
affiliations may differ from the values of previous acquisitions
due to the different characteristics of each station and the
market in which it operates.
Market
Capitalization
When we test our broadcast licenses and goodwill for impairment,
we also consider our market capitalization. During 2009, our
market capitalization has increased from its 2008 lows. As of
December 31, 2009, our market capitalization was less than
our book value and it remains less than book value as of the
date of this filing. We believe the decline in our stock price
has been influenced, in part, by the current state of the
national credit market and the national economic recession. We
believe that it is appropriate to view the current state of
credit markets and recession as relatively temporary in relation
to reporting units that have demonstrated long-lived/enduring
franchise value. Accordingly, we believe that a variance between
market capitalization and fair value can exist and that
difference could be significant at points in time due to
intervening macroeconomic influences.
Income
Taxes
We have approximately $285.3 million in federal operating
loss carryforwards, which expire during the years 2020 through
2029. Additionally, we have an aggregate of approximately
$328.6 million of various state operating loss
carryforwards. We project to have taxable income in the
carryforward periods. Therefore, we believe that it is more
likely than not that the federal net operating loss
carryforwards will be fully utilized.
42
A valuation allowance has been provided for a portion of the
state net operating loss carryforwards. We believe that it will
not meet the more likely than not threshold in certain states
due to the uncertainty of generating sufficient income.
Therefore, the state valuation allowance at December 31,
2009 and 2008 was $6.2 million and $4.6 million,
respectively. As of December 31, 2009 and 2008, a full
valuation allowance of $264,000 and $261,000, respectively, has
been provided for the capital loss carryforwards, as we believe
that we will not meet the more likely than not threshold due to
the uncertainty of generating sufficient capital gains in the
carryforward period.
Recent
Accounting Pronouncements
Various authoritative accounting organizations have issued
accounting pronouncements that we will be required to adopt at a
future date. Either (i) we have reviewed these
pronouncements and concluded that their adoption will not have a
material affect upon our liquidity or results of operations or
(ii) we are continuing to evaluate the pronouncements. See
Note 1. Description of Business and Summary of
Significant Accounting Policies of our audited
consolidated financial statements included elsewhere herein for
further discussion of recent accounting principles.
Cautionary
Statements for Purposes of the Safe Harbor
Provisions of the Private Securities Litigation Reform
Act
This Annual Report on
Form 10-K
contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933 and
Section 21 E of the Securities Exchange Act of 1934.
Forward-looking statements are all statements other than those
of historical fact. When used in this Annual Report, the words
believes, expects,
anticipates, estimates,
will, may, should and
similar words and expressions are generally intended to identify
forward-looking statements. Forward-looking statements also
include, among other things, statements that describe our
expectations regarding compliance with the covenants contained
in our senior credit facility. Readers of this Annual Report are
cautioned that any forward-looking statements, including those
regarding the intent, belief or current expectations of our
management, are not guarantees of future performance, results or
events and involve risks and uncertainties, and that actual
results and events may differ materially from those contained in
the forward-looking statements as a result of various factors
including, but not limited to, those listed in Item 1A. of
this Annual Report and the other factors described from time to
time in our SEC filings. The forward-looking statements included
in this Annual Report are made only as of the date hereof. We
undertake no obligation to update such forward-looking
statements to reflect subsequent events or circumstances.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Based on our floating rate debt outstanding at December 31,
2009, a 100 basis point increase in market interest rates
would have increased our interest expense and decreased our
income before income taxes for the year 2009 by approximately
$3.3 million. Similarly, based on our floating rate debt
outstanding at December 31, 2009, a 100 basis point
decrease in market interest rates would have decreased our
interest expense and increased our income before income taxes
for the year 2009 by approximately $3.3 million.
The carrying amount of our long-term debt, including the current
portion and long-term accrued facility fee, was
$810.1 million and $800.4 million, respectively, and
the fair value was $704.8 million and $312.1 million,
respectively as of December 31, 2009 and 2008. Fair value
of our long-term debt, including the current portion and
long-term accrued facility fee, is based on estimates provided
by third party financial professionals as of December 31,
2009 and 2008. Management believes that these estimated fair
values as of December 31, 2009 and 2008 were not an
accurate indicator of fair value, given that (i) our debt
has a relatively limited number of market participants,
relatively infrequent market trading and generally small dollar
volume of actual trades and (ii) management believes there
continues to exist a general disruption of the financial
markets. Based upon consideration of alternate valuation
methodologies, including our historic and projected future cash
flows, as well as historic private trading valuations of
television stations
and/or
television companies, we believe that the estimated fair value
of our long-term debt would more closely approximate the
recorded book value of the debt as of December 31, 2009 and
2008, respectively.
43
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
53
|
|
|
|
|
54
|
|
44
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting and for the
assessment of the effectiveness of internal control over
financial reporting. As defined by the SEC, internal control
over financial reporting is a process designed by, or under the
supervision of our principal executive and principal financial
officers and effected by our Board of Directors, management and
other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the
consolidated financial statements in accordance with
U.S. GAAP.
Our internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect our acquisitions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of the consolidated
financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our
management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect all misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In connection with the preparation of our annual consolidated
financial statements, management has undertaken an assessment of
the effectiveness of our internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or the COSO Framework. Managements
assessment included an evaluation of the design of our internal
control over financial reporting and testing of the operational
effectiveness of those controls.
Based on this evaluation, management has concluded that our
internal control over financial reporting was effective as of
December 31, 2009.
The effectiveness of our internal control over financial
reporting as of December 31, 2009 has been audited by
McGladrey & Pullen, LLP, an independent registered
public accounting firm, as stated in their report which is
included herein.
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Gray Television, Inc.
We have audited the accompanying consolidated balance sheets of
Gray Television, Inc. as of December 31, 2009 and 2008, and
the related consolidated statements of operations,
stockholders equity and comprehensive income, and cash
flows for each of the three years in the period ended
December 31, 2009. Our audits also included the financial
statement schedule listed in Item 15(a). We also have
audited Gray Television, Inc.s internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Gray Television, Inc.s management is
responsible for these financial statements, the financial
statement schedule, for maintaining effective internal control
over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting
included in the accompanying Managements Report on
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on these financial statements, the
financial statement schedule and an opinion on the
companys internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (a) pertain to the
maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
assets of the company; (b) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (c) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Gray Television, Inc. as of December 31, 2009
and 2008, and the results of its operations and its cash flows
for each of the years in the three-year period ended
December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule when
considered in relation to the basic consolidated financial
statements taken as a whole; presents fairly in all material
respects the information set forth therein. Further in
46
our opinion Gray Television, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission .
As discussed in Note 9 to the consolidated financial
statements, in 2007 the company changed its method of accounting
for uncertainty in income taxes.
/s/ McGladrey &
Pullen, LLP
Ft. Lauderdale, Florida
April 6, 2010
47
GRAY
TELEVISION, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
16,000
|
|
|
$
|
30,649
|
|
Accounts receivable, less allowance for doubtful accounts of
$1,092 and $1,543, respectively
|
|
|
57,179
|
|
|
|
54,685
|
|
Current portion of program broadcast rights, net
|
|
|
10,220
|
|
|
|
10,092
|
|
Deferred tax asset
|
|
|
1,597
|
|
|
|
1,830
|
|
Marketable securities
|
|
|
|
|
|
|
1,384
|
|
Prepaid and other current assets
|
|
|
1,788
|
|
|
|
3,167
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
86,784
|
|
|
|
101,807
|
|
Property and equipment, net
|
|
|
148,092
|
|
|
|
162,903
|
|
Deferred loan costs, net
|
|
|
1,619
|
|
|
|
2,850
|
|
Broadcast licenses
|
|
|
818,981
|
|
|
|
818,981
|
|
Goodwill
|
|
|
170,522
|
|
|
|
170,522
|
|
Other intangible assets, net
|
|
|
1,316
|
|
|
|
1,893
|
|
Investment in broadcasting company
|
|
|
13,599
|
|
|
|
13,599
|
|
Other
|
|
|
4,826
|
|
|
|
5,710
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,245,739
|
|
|
$
|
1,278,265
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,047
|
|
|
$
|
11,515
|
|
Employee compensation and benefits
|
|
|
9,675
|
|
|
|
9,603
|
|
Accrued interest
|
|
|
13,531
|
|
|
|
9,877
|
|
Other accrued expenses
|
|
|
4,814
|
|
|
|
9,128
|
|
Interest rate hedge derivatives
|
|
|
6,344
|
|
|
|
|
|
Dividends payable
|
|
|
|
|
|
|
3,000
|
|
Federal and state income taxes
|
|
|
4,206
|
|
|
|
4,374
|
|
Current portion of program broadcast obligations
|
|
|
15,271
|
|
|
|
15,236
|
|
Acquisition related liabilities
|
|
|
863
|
|
|
|
980
|
|
Deferred revenue
|
|
|
6,241
|
|
|
|
10,364
|
|
Current portion of long-term debt
|
|
|
8,080
|
|
|
|
8,085
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
75,072
|
|
|
|
82,162
|
|
Long-term debt, less current portion
|
|
|
783,729
|
|
|
|
792,295
|
|
Long-term accrued facility fee
|
|
|
18,307
|
|
|
|
|
|
Program broadcast obligations, less current portion
|
|
|
1,531
|
|
|
|
1,534
|
|
Deferred income taxes
|
|
|
142,204
|
|
|
|
143,975
|
|
Long-term deferred revenue
|
|
|
2,638
|
|
|
|
3,310
|
|
Long-term accrued dividends
|
|
|
18,917
|
|
|
|
|
|
Accrued pension costs
|
|
|
13,969
|
|
|
|
18,782
|
|
Interest rate hedge derivatives
|
|
|
|
|
|
|
24,611
|
|
Other
|
|
|
2,366
|
|
|
|
2,306
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,058,733
|
|
|
|
1,068,975
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Preferred stock, no par value; cumulative; redeemable;
designated 1.00 shares, issued and outstanding
1.00 shares, ($100,000 aggregate liquidation value)
|
|
|
93,386
|
|
|
|
92,183
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, no par value; authorized 100,000 shares,
issued 47,530 shares and 47,179 shares, respectively
|
|
|
453,824
|
|
|
|
452,289
|
|
Class A common stock, no par value; authorized
15,000 shares, issued 7,332 shares
|
|
|
15,321
|
|
|
|
15,321
|
|
Accumulated deficit
|
|
|
(303,698
|
)
|
|
|
(263,532
|
)
|
Accumulated other comprehensive loss, net of income tax benefit
|
|
|
(9,314
|
)
|
|
|
(24,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
156,133
|
|
|
|
179,620
|
|
Treasury stock at cost, common stock, 4,655 shares
|
|
|
(40,115
|
)
|
|
|
(40,115
|
)
|
Treasury stock at cost, Class A common stock,
1,579 shares
|
|
|
(22,398
|
)
|
|
|
(22,398
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
93,620
|
|
|
|
117,107
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,245,739
|
|
|
$
|
1,278,265
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
48
GRAY
TELEVISION, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except for per share data)
|
|
|
Revenues (less agency commissions)
|
|
$
|
270,374
|
|
|
$
|
327,176
|
|
|
$
|
307,288
|
|
Operating expenses before depreciation, amortization,
impairment, and gain on disposal of assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcast
|
|
|
187,583
|
|
|
|
199,572
|
|
|
|
199,687
|
|
Corporate and administrative
|
|
|
14,168
|
|
|
|
14,097
|
|
|
|
15,090
|
|
Depreciation
|
|
|
32,595
|
|
|
|
34,561
|
|
|
|
38,558
|
|
Amortization of intangible assets
|
|
|
577
|
|
|
|
792
|
|
|
|
825
|
|
Impairment of goodwill and broadcast licenses
|
|
|
|
|
|
|
338,681
|
|
|
|
|
|
Gain on disposals of assets, net
|
|
|
(7,628
|
)
|
|
|
(1,632
|
)
|
|
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
227,295
|
|
|
|
586,071
|
|
|
|
253,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
43,079
|
|
|
|
(258,895
|
)
|
|
|
53,376
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous income (expense), net
|
|
|
54
|
|
|
|
(53
|
)
|
|
|
972
|
|
Interest expense
|
|
|
(69,088
|
)
|
|
|
(54,079
|
)
|
|
|
(67,189
|
)
|
Loss from early extinguishment of debt
|
|
|
(8,352
|
)
|
|
|
|
|
|
|
(22,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(34,307
|
)
|
|
|
(313,027
|
)
|
|
|
(35,694
|
)
|
Income tax benefit
|
|
|
(11,260
|
)
|
|
|
(111,011
|
)
|
|
|
(12,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(23,047
|
)
|
|
|
(202,016
|
)
|
|
|
(23,151
|
)
|
Preferred dividends (includes accretion of issuance cost of
$1,202, $576 and $439, respectively)
|
|
|
17,119
|
|
|
|
6,593
|
|
|
|
1,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(40,166
|
)
|
|
$
|
(208,609
|
)
|
|
$
|
(24,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(0.83
|
)
|
|
$
|
(4.32
|
)
|
|
$
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
48,510
|
|
|
|
48,302
|
|
|
|
47,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
|
|
|
$
|
0.09
|
|
|
$
|
0.12
|
|
See accompanying notes.
49
GRAY
TELEVISION, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Common
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Treasury Stock
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In thousands, except for number of shares)
|
|
|
Balance at December 31, 2006
|
|
|
7,331,574
|
|
|
$
|
15,321
|
|
|
|
45,690,633
|
|
|
$
|
443,698
|
|
|
$
|
(20,026
|
)
|
|
|
(1,578,554
|
)
|
|
$
|
(22,398
|
)
|
|
|
(3,123,750
|
)
|
|
$
|
(34,412
|
)
|
|
$
|
(2,429
|
)
|
|
$
|
379,754
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivatives, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,754
|
)
|
|
|
|
|
Adjustment to pension liability, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,769
|
)
|
Common stock cash dividends ($0.12) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,757
|
)
|
Preferred stock dividends (including accretion of original
issuance costs)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,626
|
)
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) plan
|
|
|
|
|
|
|
|
|
|
|
264,419
|
|
|
|
2,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,242
|
|
Non-qualified stock plan
|
|
|
|
|
|
|
|
|
|
|
163,295
|
|
|
|
1,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,271
|
|
Directors restricted stock plan
|
|
|
|
|
|
|
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(647,800
|
)
|
|
|
(5,518
|
)
|
|
|
|
|
|
|
(5,518
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
7,331,574
|
|
|
$
|
15,321
|
|
|
|
46,173,347
|
|
|
$
|
448,459
|
|
|
$
|
(50,560
|
)
|
|
|
(1,578,554
|
)
|
|
$
|
(22,398
|
)
|
|
|
(3,771,550
|
)
|
|
$
|
(39,930
|
)
|
|
$
|
(13,047
|
)
|
|
$
|
337,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
50
GRAY
TELEVISION, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE
INCOME (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Common
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Treasury Stock
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In thousands, except for number of shares)
|
|
|
Balance at December 31, 2007
|
|
|
7,331,574
|
|
|
$
|
15,321
|
|
|
|
46,173,347
|
|
|
$
|
448,459
|
|
|
$
|
(50,560
|
)
|
|
|
(1,578,554
|
)
|
|
$
|
(22,398
|
)
|
|
|
(3,771,550
|
)
|
|
$
|
(39,930
|
)
|
|
$
|
(13,047
|
)
|
|
$
|
337,845
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(202,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivatives, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,262
|
)
|
|
|
|
|
Adjustment to pension liability, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,149
|
)
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213,427
|
)
|
Common stock cash dividends ($0.09) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,363
|
)
|
Preferred stock dividends (including accretion of original
issuance costs)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,593
|
)
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) plan
|
|
|
|
|
|
|
|
|
|
|
950,601
|
|
|
|
2,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,380
|
|
Directors restricted stock plan
|
|
|
|
|
|
|
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(883,200
|
)
|
|
|
(185
|
)
|
|
|
|
|
|
|
(185
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
7,331,574
|
|
|
$
|
15,321
|
|
|
|
47,178,948
|
|
|
$
|
452,289
|
|
|
$
|
(263,532
|
)
|
|
|
(1,578,554
|
)
|
|
$
|
(22,398
|
)
|
|
|
(4,654,750
|
)
|
|
$
|
(40,115
|
)
|
|
$
|
(24,458
|
)
|
|
$
|
117,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
51
GRAY
TELEVISION, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE
LOSS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Common
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Treasury Stock
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In thousands, except for number of shares)
|
|
|
Balance at December 31, 2008
|
|
|
7,331,574
|
|
|
$
|
15,321
|
|
|
|
47,178,948
|
|
|
$
|
452,289
|
|
|
$
|
(263,532
|
)
|
|
|
(1,578,554
|
)
|
|
$
|
(22,398
|
)
|
|
|
(4,654,750
|
)
|
|
$
|
(40,115
|
)
|
|
$
|
(24,458
|
)
|
|
$
|
117,107
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on derivatives, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,143
|
|
|
|
|
|
Adjustment to pension liability, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,001
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,903
|
)
|
Preferred stock dividends (including accretion of original
issuance costs)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,119
|
)
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) plan
|
|
|
|
|
|
|
|
|
|
|
350,554
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
7,331,574
|
|
|
$
|
15,321
|
|
|
|
47,529,502
|
|
|
$
|
453,824
|
|
|
$
|
(303,698
|
)
|
|
|
(1,578,554
|
)
|
|
$
|
(22,398
|
)
|
|
|
(4,654,750
|
)
|
|
$
|
(40,115
|
)
|
|
$
|
(9,314
|
)
|
|
$
|
93,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
52
GRAY
TELEVISION, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,047
|
)
|
|
$
|
(202,016
|
)
|
|
$
|
(23,151
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
32,595
|
|
|
|
34,561
|
|
|
|
38,558
|
|
Amortization of intangible assets
|
|
|
577
|
|
|
|
792
|
|
|
|
825
|
|
Amortization of deferred loan costs
|
|
|
329
|
|
|
|
475
|
|
|
|
967
|
|
Amortization of restricted stock awards
|
|
|
1,388
|
|
|
|
1,450
|
|
|
|
1,248
|
|
Loss from early extinguishment of debt
|
|
|
8,352
|
|
|
|
|
|
|
|
22,853
|
|
Accrual of long-term accrued facility fee
|
|
|
18,307
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill and broadcast licenses
|
|
|
|
|
|
|
338,681
|
|
|
|
|
|
Amortization of program broadcast rights
|
|
|
15,130
|
|
|
|
16,070
|
|
|
|
15,194
|
|
Payments on program broadcast obligations
|
|
|
(15,287
|
)
|
|
|
(13,968
|
)
|
|
|
(14,101
|
)
|
Common stock contributed to 401(K) Plan
|
|
|
147
|
|
|
|
2,380
|
|
|
|
2,242
|
|
Deferred revenue, network compensation
|
|
|
(617
|
)
|
|
|
(604
|
)
|
|
|
(300
|
)
|
Deferred income taxes
|
|
|
(11,219
|
)
|
|
|
(110,990
|
)
|
|
|
(13,823
|
)
|
Gain on disposals of assets, net
|
|
|
(7,628
|
)
|
|
|
(1,632
|
)
|
|
|
(248
|
)
|
Payment for sports marketing agreement
|
|
|
|
|
|
|
|
|
|
|
(4,950
|
)
|
Other
|
|
|
2,574
|
|
|
|
257
|
|
|
|
173
|
|
Changes in operating assets and liabilities, net of business
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,483
|
)
|
|
|
8,385
|
|
|
|
(2,089
|
)
|
Other current assets
|
|
|
3,208
|
|
|
|
3,387
|
|
|
|
(3,169
|
)
|
Accounts payable
|
|
|
(4,238
|
)
|
|
|
2,162
|
|
|
|
2,082
|
|
Employee compensation, benefits and pension costs
|
|
|
72
|
|
|
|
(2,017
|
)
|
|
|
288
|
|
Accrued expenses
|
|
|
(2,288
|
)
|
|
|
870
|
|
|
|
(374
|
)
|
Accrued interest
|
|
|
3,654
|
|
|
|
(6,001
|
)
|
|
|
5,047
|
|
Income taxes payable
|
|
|
(168
|
)
|
|
|
(282
|
)
|
|
|
1,141
|
|
Deferred revenue other, including current portion
|
|
|
(455
|
)
|
|
|
1,715
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
18,903
|
|
|
|
73,675
|
|
|
|
28,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of television businesses and licenses, net of cash
acquired
|
|
|
|
|
|
|
|
|
|
|
(92
|
)
|
Purchases of property and equipment
|
|
|
(17,756
|
)
|
|
|
(15,019
|
)
|
|
|
(24,605
|
)
|
Proceeds from asset sales
|
|
|
104
|
|
|
|
199
|
|
|
|
272
|
|
Equipment transactions related to spectrum reallocation, net
|
|
|
697
|
|
|
|
(766
|
)
|
|
|
(211
|
)
|
Payments on acquisition related liabilities
|
|
|
(805
|
)
|
|
|
(779
|
)
|
|
|
(1,012
|
)
|
Other
|
|
|
229
|
|
|
|
25
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(17,531
|
)
|
|
|
(16,340
|
)
|
|
|
(25,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on long-term debt
|
|
|
|
|
|
|
16,000
|
|
|
|
392,500
|
|
Repayments of borrowings on long-term debt
|
|
|
(8,571
|
)
|
|
|
(140,621
|
)
|
|
|
(318,500
|
)
|
Deferred and other loan costs
|
|
|
(7,450
|
)
|
|
|
|
|
|
|
(16,255
|
)
|
Dividends paid, net of accreted preferred stock dividend
|
|
|
|
|
|
|
(8,825
|
)
|
|
|
(7,709
|
)
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
1,271
|
|
Proceeds from issuance of preferred stock
|
|
|
|
|
|
|
91,607
|
|
|
|
|
|
Purchase of common stock
|
|
|
|
|
|
|
(185
|
)
|
|
|
(5,518
|
)
|
Redemption of preferred stock
|
|
|
|
|
|
|
|
|
|
|
(31,400
|
)
|
Redemption and purchase of preferred stock from related party
|
|
|
|
|
|
|
|
|
|
|
(6,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(16,021
|
)
|
|
|
(42,024
|
)
|
|
|
7,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(14,649
|
)
|
|
|
15,311
|
|
|
|
10,597
|
|
Cash and cash equivalents at beginning of period
|
|
|
30,649
|
|
|
|
15,338
|
|
|
|
4,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
16,000
|
|
|
$
|
30,649
|
|
|
$
|
15,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
53
GRAY
TELEVISION, INC.
|
|
1.
|
Description
of Business and Summary of Significant Accounting
Policies
|
Description
of Business
Gray Television, Inc. is a television broadcast company
headquartered in Atlanta, Georgia. We own 36 television
stations serving 30 television markets. Seventeen of the
stations are affiliated with CBS Inc. (CBS), ten are
affiliated with the National Broadcasting Company, Inc.
(NBC), eight are affiliated with the American
Broadcasting Company (ABC), and one is affiliated
with FOX Entertainment Group, Inc. (FOX). In
addition to our primary channels that we broadcast from our
television stations, we currently broadcast 39 digital second
channels including one affiliated with ABC, four affiliated with
FOX, seven affiliated with The CW Network, LLC (CW),
18 affiliated with Twentieth Television, Inc.
(MyNetworkTV or MyNet.), two affiliated
with Universal Sports Network or (Univ.) and seven
local news/weather channels in certain of our existing markets.
We created our digital second channels to better utilize our
excess broadcast spectrum. The digital second channels are
similar to our primary broadcast channels; however, our digital
second channels are affiliated with networks different from
those affiliated with our primary broadcast channels. Our
operations consist of one reportable segment.
Principles
of Consolidation
The consolidated financial statements include our accounts and
the accounts of our subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Revenue
Recognition
Broadcasting advertising revenue is generated primarily from the
sale of television advertising time to local, national and
political customers. Internet advertising revenue is generated
from the sale of advertisements on our stations websites.
Broadcast network compensation is generated by contractual
payments to us from the broadcast networks. Retransmission
consent revenue is generated by payments to us from cable and
satellite distribution systems for their retransmission of our
broadcasts. Advertising revenue is billed to the customer and
recognized when the advertisement is broadcast or appears on our
stations websites. Broadcast network compensation is
recognized on a straight-line basis over the life of the
contract. Retransmission consent revenue is recognized as earned
over the life of the contract. Cash received which has not yet
been recognized as revenue is presented as deferred revenue.
Barter
Transactions
We account for trade barter transactions involving the exchange
of tangible goods or services with our customers as revenue. The
revenue is recorded at the time the advertisement is broadcast
and the expense is recorded at the time the goods or services
are used. The revenue and expense associated with these
transactions are based on the fair value of the assets or
services involved in the transaction. Trade barter revenue and
expense recognized by us for each of the years ended
December 31, 2009, 2008 and 2007 are as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Trade barter revenue
|
|
$
|
1,289
|
|
|
$
|
1,850
|
|
|
$
|
2,256
|
|
Trade barter expense
|
|
|
(1,324
|
)
|
|
|
(1,892
|
)
|
|
|
(2,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net trade barter (expense) income
|
|
$
|
(35
|
)
|
|
$
|
(42
|
)
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We do not account for barter revenue and related barter expense
generated from network or syndicated programming as such amounts
are not material. Furthermore, any such barter revenue
recognized would then
54
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
require the recognition of an equal amount of barter expense.
The recognition of these amounts would have no effect upon net
income (loss).
Advertising
Expense
We recorded advertising expense of $0.8 million,
$1.3 million and $1.8 million for the years ended
December 31, 2009, 2008 and 2007, respectively. In 2009 and
2008, advertising expense decreased as a result of general cost
reduction initiatives. In 2007, advertising expense increased as
a result of the acquisition of stations and the expansion of
operations at existing stations through digital second channels.
We expense all advertising expenditures.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates
and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Our actual results
could materially differ from these estimated amounts. Our most
significant estimates are used for our allowance for doubtful
accounts in receivables, valuation of goodwill and intangible
assets, amortization of program rights and intangible assets,
stock-based compensation, pension costs, income taxes, employee
medical insurance claims, useful lives of property and
equipment, contingencies and litigation.
Allowance
for Doubtful Accounts
We record a provision for doubtful accounts based on a
percentage of receivables. We recorded expenses for this
allowance of $0.9 million, $1.8 million and
$1.0 million for the years ended December 31, 2009,
2008 and 2007, respectively. We write-off accounts receivable
balances when we determine that they have become uncollectible.
Program
Broadcast Rights
Rights to programs available for broadcast under program license
agreements are initially recorded at the beginning of the
license period for the amounts of total license fees payable
under the license agreements and are charged to operating
expense over the period that the episodes are broadcast. The
portion of the unamortized balance expected to be charged to
operating expense in the succeeding year is classified as a
current asset, with the remainder classified as a non-current
asset. The liability for the license fees payable under program
license agreements is classified as current or long-term, in
accordance with the payment terms of the various license
agreements.
Property
and Equipment
Property and equipment are carried at cost. Depreciation is
computed principally by the straight-line method. Buildings,
towers, improvements and equipment are generally depreciated
over estimated useful lives of approximately 35 years,
20 years, 10 years and 5 years, respectively.
Maintenance, repairs and minor replacements are charged to
operations as incurred; major replacements and betterments are
capitalized. The cost of any assets sold or retired and related
accumulated depreciation are removed from the accounts at the
55
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
time of disposition, and any resulting profit or loss is
reflected in income or expense for the period. The following
table lists components of property and equipment by major
category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
23,046
|
|
|
$
|
22,452
|
|
Buildings and improvements
|
|
|
51,606
|
|
|
|
49,766
|
|
Equipment
|
|
|
291,682
|
|
|
|
296,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
366,334
|
|
|
|
368,231
|
|
Accumulated depreciation
|
|
|
(218,242
|
)
|
|
|
(205,328
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
148,092
|
|
|
$
|
162,903
|
|
|
|
|
|
|
|
|
|
|
Deferred
Loan Costs
Loan acquisition costs are amortized over the life of the
applicable indebtedness using a straight-line method that
approximates the effective interest method.
Asset
Retirement Obligations
We own office equipment, broadcasting equipment, leasehold
improvements and transmission towers, some of which are located
on, or are housed in, leased property or facilities. At the
conclusion of several of these leases we are legally obligated
to dismantle, remove and otherwise properly dispose of and
remediate the facility or property. We estimate our asset
retirement obligation based upon the cash flows of the costs to
be incurred and the net present value of those estimated
amounts. The asset retirement obligation is recognized as a
non-current liability and as a component of the cost of the
related asset. Changes to our asset retirement obligation
resulting from revisions to the timing or the amount of the
original undiscounted cash flow estimates are recognized as an
increase or decrease to the carrying amount of the asset
retirement obligation and the related asset retirement cost
capitalized as part of the related property, plant, or
equipment. Changes in the asset retirement obligation resulting
from accretion of the net present value of the estimated cash
flows are recognized as operating expenses. We recognize
depreciation expense of the capitalized cost over the estimated
life of the lease. Our estimated obligations become due at
varying times during the years 2010 through 2059. The liability
recognized for our asset retirement obligations was
approximately $465,000 and $507,000 as of December 31, 2009
and 2008, respectively. Related to our asset retirement
obligations, we recorded a gain of $3,000 for the year ended
December 31, 2009 and expenses of $28,000 and $0 for the
years ended December 31, 2008 and 2007, respectively.
Concentration
of Credit Risk
We provide advertising air-time to national and local
advertisers within the geographic areas in which we operate.
Credit is extended based on an evaluation of the customers
financial condition, and generally advance payment is not
required except for political advertising. Credit losses are
provided for in the financial statements and consistently have
been within our expectations that are based upon our prior
experience.
For the year ended December 31, 2009, approximately 17% and
12% of our broadcast revenue was obtained from advertising sales
to automotive and restaurant customers, respectively. We
experienced similar industry-based concentrations of revenue in
the years ended December 31, 2008 and 2007. Although our
revenues can be affected by changes within these industries, we
believe this risk is in part mitigated due to the fact that no
one customer accounted for in excess of 5% of our revenue in any
of these periods. Furthermore, our large geographic operating
area partially mitigates the potential effect of regional
economic changes.
56
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
However, during the years ended December 31, 2009 and 2008,
our overall revenues have been negatively impacted by the
economic recession, including the recessions effect upon
the automotive industry.
The majority of our cash is held by a major financial
institution and we believe risk of loss is mitigated by the size
and the financial health of the institution. Risk of loss has
been further mitigated by the U.S. Governments
intervention in the banking system during the years ended
December 31, 2009 and 2008.
Earnings
Per Share
We compute basic earnings per share by dividing net income by
the weighted-average number of common shares outstanding during
the relevant period. The weighted-average number of common
shares outstanding does not include unvested restricted shares.
These shares, although classified as issued and outstanding, are
considered contingently returnable until the restrictions lapse
and are not to be included in the basic earnings per share
calculation until the shares are vested. Diluted earnings per
share is computed by giving effect to all dilutive potential
common shares issuable, including restricted stock and stock
options. The following table reconciles basic weighted-average
shares outstanding to diluted weighted-average shares
outstanding for the years ended December 31, 2009, 2008 and
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Weighted-average shares outstanding basic
|
|
|
48,510
|
|
|
|
48,302
|
|
|
|
47,788
|
|
Stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding diluted
|
|
|
48,510
|
|
|
|
48,302
|
|
|
|
47,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For periods in which we reported losses, all common stock
equivalents are excluded from the computation of diluted
earnings per share, since their inclusion would be antidilutive.
Securities that could potentially dilute earnings per share in
the future, but which were not included in the calculation of
diluted earnings per share because their inclusion would have
been antidilutive for the periods presented are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Potentially dilutive securities outstanding at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
1,476
|
|
|
|
1,949
|
|
|
|
864
|
|
Unvested restricted stock
|
|
|
66
|
|
|
|
100
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,542
|
|
|
|
2,049
|
|
|
|
992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in Broadcasting Company
We have an investment in Sarkes Tarzian, Inc.
(Tarzian) whose principal business is the ownership
and operation of two television stations. The investment
represents 33.5% of the total outstanding common stock of
Tarzian (both in terms of the number of shares of common stock
outstanding and in terms of voting rights), but such investment
represents 73% of the equity of Tarzian for purposes of
dividends, if paid, as well as distributions in the event of any
liquidation, dissolution or other sale of Tarzian. This
investment is accounted for under the cost method of accounting
and reflected as a non-current asset. We have no commitment to
fund operations of Tarzian and we have neither representation on
Tarzians board of directors or any other influence over
Tarzians management. We believe the cost method is
appropriate to account for this investment given the existence
of a single voting majority shareholder and our lack of
management influence.
57
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Valuation
of Broadcast Licenses, Goodwill and Other Intangible
Assets
From January 1, 1994 through December 31, 2009, we
acquired 33 television stations. We completed our most recent
acquisition on March 3, 2006. Among the assets acquired in
these transactions were broadcast licenses issued by the Federal
Communications Commission, goodwill and other intangible assets.
For broadcast licenses acquired prior to January 1, 2002,
we recorded their respective values using a residual method
(analogous to goodwill) where the excess of the
purchase price over the fair value of all identified tangible
and intangible assets is attributed to the broadcast license.
This residual basis approach will generally produce higher
valuations of broadcast licenses when compared to applying an
income method as discussed below.
For broadcast licenses acquired after December 31, 2001, we
recorded their respective values using an income approach. Under
this approach, a broadcast license is valued based on analyzing
the estimated after-tax discounted future cash flows of the
station, assuming an initial hypothetical
start-up
operation maturing into an average performing station in a
specific television market and giving consideration to other
relevant factors such as the technical qualities of the
broadcast license and the number of competing broadcast licenses
within that market. This income approach will generally produce
lower valuations of broadcast licenses when compared to applying
a residual method as discussed above. For television stations
acquired after December 31, 2001, we allocated the residual
value of the station to goodwill.
When renewing broadcast licenses, we incur regulatory filing
fees and legal fees. We expense these fees as they are incurred.
Other intangible assets that we have acquired include network
affiliation agreements, advertising contracts, client lists,
talent contracts and leases. Each of our stations is affiliated
with a broadcast network. We believe that the value of a
television station is derived primarily from the attributes of
its broadcast license rather than its network affiliation
agreement. As a result, we have allocated minimal values to our
network affiliation agreements. We have classified our other
intangible assets as definite-lived intangible assets. The
amortization period of our other intangible assets is equal to
the shorter of their estimated useful life or contract period.
When renewing other intangible asset contracts, we incur legal
fees which expensed as incurred.
Annual
Impairment Testing of Intangible Assets
We test for impairment of our intangible assets on an annual
basis on the last day of each fiscal year. However, if certain
triggering events occur, we will test for impairment during the
relevant reporting period.
For purposes of testing goodwill for impairment, each of our
individual television stations is considered a separate
reporting unit. We review each television station for possible
goodwill impairment by comparing the estimated fair value of
each respective reporting unit to the recorded value of that
reporting units net assets. If the estimated fair value
exceeds the net asset value, no goodwill impairment is deemed to
exist. If the fair value of the reporting unit does not exceed
the recorded value of that reporting units net assets, we
then perform, on a notional basis, a purchase price allocation
by allocating the reporting units fair value to the fair
value of all tangible and identifiable intangible assets with
residual fair value representing the implied fair value of
goodwill of that reporting unit. The recorded value of goodwill
for the reporting unit is written down to this implied value.
To estimate the fair value of our reporting units, we utilize a
discounted cash flow model supported by a market multiple
approach. We believe that a discounted cash flow analysis is the
most appropriate methodology to test the recorded value of
long-term assets with a demonstrated
long-lived / enduring franchise value. We believe the
results of the discounted cash flow and market multiple
approaches provide reasonable estimates of the fair value of our
reporting units because these approaches are based on our actual
results and
58
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reasonable estimates of future performance, and also take into
consideration a number of other factors deemed relevant by us,
including but not limited to, expected future market revenue
growth, market revenue shares and operating profit margins. We
have historically used these approaches in determining the value
of our goodwill. We also consider a market multiple approach
utilizing market multiples to corroborate our discounted cash
flow analysis. We believe that this methodology is consistent
with the approach that a strategic market participant would
utilize if they were to value one of our television stations.
For testing of our broadcast licenses and other intangible
assets for potential impairment of their recorded asset values,
we compare their estimated fair value to the respective
assets recorded value. If the fair value is greater than
the assets recorded value, no impairment expense is
recorded. If the fair value does not exceed the assets
recorded value, we record an impairment expense equal to the
amount that the assets recorded value exceeded the
assets fair value. We use the income method to estimate
the fair value of all broadcast licenses irrespective of whether
they were initially recorded using the residual or income
methods.
For further discussion of our goodwill, broadcast licenses and
other intangible assets, see Note 12. Goodwill and
Intangible Assets.
Market
Capitalization
When we test our broadcast licenses and goodwill for impairment,
we also give consideration to our market capitalization. During
2008, we experienced a significant decline in our market
capitalization. As of December 31, 2008, our market
capitalization was less than our book value and it remains less
than book value as of the date of this filing. We believe the
decline in our stock price was influenced, in part, by the then
current state of the national credit market and the national
economic recession. We believe that it is appropriate to view
the current status of the credit markets and recession as
relatively temporary in relation to reporting units that have
demonstrated long-lived/enduring franchise value. Accordingly,
we believe that a variance between market capitalization and
fair value can exist and that difference could be significant at
points in time due to intervening macroeconomic influences.
Related
Party Transactions
On December 23, 2008, Gray entered into a one-year
consulting contract with Mr. J. Mack Robinson whereby he
agreed to consult and advise Gray with respect to its television
stations and all related matters in connection with various
proposed or existing television stations. In return for his
services, Mr. Robinson received compensation under this
agreement of $400,000 for the year ended December 31, 2009.
Prior to Mr. Robinsons retirement on
December 14, 2008, he had served as Grays Chief
Executive Officer. At all times during which the consulting
agreement has been in effect, he has continued to serve as a
member of Grays Board of Directors and as Chairman
emeritus.
For the years ended December 31, 2008 and 2007, we made
related party payments to Georgia Casualty & Surety
Co. (Georgia Casualty) in the amounts of $183,000
and $317,000, respectively, for certain insurance services
provided. Through March 2008, Georgia Casualty was a
wholly-owned subsidiary of Atlanta American Corporation, a
publicly-traded company (Atlantic American). For all
periods through 2008, Mr. Robinson served as chairman of
the board of Atlantic American. Mr. Robinson and certain
entities controlled by him own a majority of the outstanding
capital stock of Atlantic American. In addition, Mr. Hilton
H. Howell, our Chairman and Chief Executive Officer is Chairman,
President and Chief Executive Officer of, and maintains an
ownership interest in, Atlantic American and Harriett J.
Robinson, one of our directors and the wife of J. Mack Robinson,
is a director of, and maintains an ownership interest in,
Atlantic American. During 2008, Atlantic American sold Georgia
Casualty to an unrelated party. The payments for 2008 are the
total payments made for all of 2008. After 2008, we no longer
consider Georgia Casualty a related party due to their sale in
2008.
59
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accumulated
Other Comprehensive (Loss) Income
Our accumulated other comprehensive (loss) income balances as of
December 31, 2009 and 2008 consist of adjustments to our
derivative and pension liabilities as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accumulated balances of items included in accumulated other
comprehensive loss:
|
|
|
|
|
|
|
|
|
Loss on derivatives, net of income tax
|
|
$
|
(3,870
|
)
|
|
$
|
(15,013
|
)
|
Pension liability adjustments, net of income tax
|
|
|
(5,444
|
)
|
|
|
(9,445
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(9,314
|
)
|
|
$
|
(24,458
|
)
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In June 2009 the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 168 The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Standard
No. 162 (SFAS 168). SFAS 168
replaces GAAP with two levels of GAAP: authoritative and
non-authoritative. On July 1, 2009, the FASB Accounting
Standards Codification (FASB ASC) became the single
source of authoritative nongovernmental GAAP, except for rules
and interpretive releases of the Securities and Exchange
Commission. All other non-grandfathered accounting literature
became non-authoritative. The adoption of SFAS 168 did not
have a material impact on our consolidated financial statements.
As a result of the adoption of SFAS 168, all references to
GAAP now refer to the codified FASB ASC topic.
In September 2006, FASB ASC Topic 820 was issued. FASB ASC Topic
820 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. FASB ASC
Topic 820 does not require any new fair value measurements, but
provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the
information. We adopted the provisions of FASB ASC Topic 820 on
January 1, 2009. The adoption of FASB ASC Topic 820 did not
have a significant impact on our consolidated financial
statements.
In April 2009, FASB ASC Topic 855 was issued. FASB ASC Topic 855
establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before
financial statements are issued or available to be issued. We
adopted FASB ASC Topic 855 for the quarter ending June 30,
2009. The adoption did not have a material impact on our
consolidated financial statements.
Subsequent
Events
We evaluate subsequent events through the date we issue our
financial statements.
Reclassifications
Certain reclassifications have been made within the liability
section of our prior years balance sheet and the investing
section of our prior years statement of cash flows to be
consistent with the current years presentation. The
reclassifications did not change total assets, total liabilities
or net loss as previously recorded.
60
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We have historically invested excess cash balances in an
enhanced cash fund managed by Columbia Management Advisers, LLC,
a subsidiary of Bank of America, N.A. (Columbia
Management). We refer to this investment fund as the
Columbia Fund.
On December 6, 2007, Columbia Management initiated a series
of steps which included the temporary suspension of all
immediate cash distributions from the Columbia Fund and changed
its method of valuation from a fixed asset valuation to a
fluctuating asset valuation. Since that date, Columbia
Management has commenced the liquidation of the Columbia Fund.
During the quarter ended March 31, 2009, Columbia
Management completed the liquidation and distribution of our
investment.
For the years ended December 31, 2009, 2008 and 2007, we
recorded a
mark-to-market
expense of $2,100, $383,000 and $88,000, respectively,
reflecting a decrease in market value of our original investment
in the Columbia Fund. As of December 31, 2009, we no longer
had funds invested in the Columbia Fund. Our balance in the
Columbia Fund net of the
mark-to-market
adjustment as of December 31, 2008 was $1.4 million
and was recorded as a current marketable security.
For the years ended December 31, 2009, 2008 and 2007, we
received cash distributions of $1.4 million,
$4.5 million and $623,000, respectively, and we earned
interest income of $5,000, $116,000 and $78,000, respectively,
from the Columbia Fund.
Fair value is based on quoted prices of similar assets in active
markets. Valuation of these items entails a significant amount
of judgment and the inputs that are significant to the fair
value measurement are Level 2 in the fair value hierarchy.
See Note 5. Fair Value Measurement for further
discussion of fair value.
As of December 31, 2009, all excess cash is held in a bank
account and we do not have any cash equivalents.
|
|
3.
|
Long-term
Debt and Accrued Facility Fee
|
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Senior credit facility current portion
|
|
$
|
8,080
|
|
|
$
|
8,085
|
|
Senior credit facility long-term portion
|
|
|
783,729
|
|
|
|
792,295
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt including current portion
|
|
|
791,809
|
|
|
|
800,380
|
|
Long-term accrued facility fee
|
|
|
18,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt and accrued facility fee
|
|
$
|
810,116
|
|
|
$
|
800,380
|
|
|
|
|
|
|
|
|
|
|
Borrowing availability under our senior credit facility
|
|
$
|
31,681
|
|
|
$
|
12,262
|
|
Leverage ratio as defined in our senior credit facility:
|
|
|
|
|
|
|
|
|
Actual
|
|
|
8.42
|
|
|
|
7.14
|
|
Maximum allowed
|
|
|
8.75
|
|
|
|
7.25
|
|
Our senior credit facility consists of a revolving loan and a
term loan. The amount outstanding under our senior credit
facility as of December 31, 2009 and December 31, 2008
was $791.8 million and $800.4 million, respectively,
comprised solely of the term loan. Under the revolving loan
portion of our senior credit facility, the maximum available
borrowing capacity was $50.0 million as of
December 31, 2009. Of the maximum borrowing capacity
available under our revolving loan, the amount that we can draw
is limited by certain
61
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
restrictive covenants, including our total net leverage ratio
covenant. Based on such covenant, as of December 31, 2009
and December 31, 2008, we could have drawn
$31.7 million and $12.3 million, respectively, of the
$50.0 million maximum borrowing capacity under the
revolving loan. Effective as of March 31, 2010, the maximum
borrowing capacity available under the revolving loan was
reduced to $40.0 million.
Under our revolving and term loans, we can choose to pay
interest at an annual rate equal to the London Interbank Offered
Rate (LIBOR) plus 3.5% or at the lenders base
rate, generally equal to the lenders prime rate, plus
2.5%. This interest is payable in cash throughout the year.
In addition, effective as of April 1, 2009, we incur a
facility fee at an annual rate of 3.0% on all principal balances
outstanding under the revolving and term loans. For the period
from April 4, 2009 until April 30, 2010, the annual
facility fee for the revolving and term loans accrues and is
payable on the respective revolving and term loan maturity
dates. The revolving loan and term loan maturity dates are
March 19, 2014 and December 31, 2014, respectively.
For the period from April 30, 2010 until maturity of the
senior credit facility, the annual facility fee will be payable
in cash on a quarterly basis and the amount accrued through
April 30, 2010 will bear interest at an annual rate of
6.5%, payable quarterly. As of December 31, 2009, our
accrued facility fee of $18.3 million was classified as a
long-term liability on our balance sheet. The accrued facility
fee is included in determining the amount of total debt in
calculating our total net leverage ratio covenant as defined in
our senior credit facility.
The average interest rates on our total debt balance outstanding
under the senior credit facility as of December 31, 2009
and 2008 were 6.8% and 4.8%, respectively. These rates are as of
the period end and do not include the effects of our interest
rate swap agreements. See Note 4. Derivatives.
Including the effects of our interest rate swap agreements, the
average interest rates on our total debt balance outstanding
under our senior credit facility at December 31, 2009 and
2008 were 9.8% and 5.6%, respectively.
Also under our revolving loan, we pay a commitment fee on the
average daily unused portion of the $50.0 million revolving
loan. As of December 31, 2009 and 2008, the annual
commitment fees were 0.5% and 0.4%, respectively.
Collateral
and Restrictions
The collateral for our senior credit facility consists of
substantially all of our and our subsidiaries assets. In
addition, our subsidiaries are joint and several guarantors of
the obligations and our ownership interests in our subsidiaries
are pledged to collateralize the obligations. The senior credit
facility contains affirmative and restrictive covenants. These
covenants include but are not limited to (i) limitations on
additional indebtedness, (ii) limitations on liens,
(iii) limitations on amendments to our by-laws and articles
of incorporation, (iv) limitations on mergers and the sale
of assets, (v) limitations on guarantees,
(vi) limitations on investments and acquisitions,
(vii) limitations on the payment of dividends and the
redemption of our capital stock, (vii) maintenance of a
specified total net leverage ratio not to exceed certain maximum
limits, (viii) limitations on related party transactions,
(ix) limitations on the purchase of real estate, and
(x) limitations on entering into multiemployer retirement
plans, as well as other customary covenants for credit
facilities of this type. As of December 31, 2009 and 2008,
we were in compliance with all restrictive covenants as required
by our senior credit facility.
We are a holding company with no material independent assets or
operations, other than our investments in our subsidiaries. The
aggregate assets, liabilities, earnings and equity of the
subsidiary guarantors as defined in our senior credit facility
are substantially equivalent to our assets, liabilities,
earnings and equity on a consolidated basis. The subsidiary
guarantors are, directly or indirectly, our wholly owned
subsidiaries and the guarantees of the subsidiary guarantors are
full, unconditional and joint and several. All of our current
and future direct and indirect subsidiaries are and will be
guarantors under the senior credit facility. Accordingly,
62
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
separate financial statements and other disclosures of each of
the subsidiary guarantors are not presented because we have no
independent assets or operations, the guarantees are full and
unconditional and joint and several and any of our subsidiaries
other than the subsidiary guarantors are immaterial.
Amendments
to Our Senior Credit Facility
Effective as of March 31, 2009, we amended our senior
credit facility (the 2009 amendment). The 2009
amendment included (i) an increase in the maximum total net
leverage ratio covenant for the year ended December 31,
2009, (ii) a general increase in the restrictiveness of our
remaining covenants and (iii) increased interest rates, as
described below. In connection therewith, we incurred loan
issuance costs of approximately $7.4 million, including
legal and professional fees. These fees were funded from our
existing cash balances. The 2009 amendment of our senior credit
facility was determined to be significant and, as a result, we
recorded a loss from early extinguishment of debt of
$8.4 million.
Without the 2009 amendment, we would not have been in compliance
with the total net leverage ratio covenant under the senior
credit facility and such noncompliance would have caused a
default under the agreement as of March 31, 2009. Such a
default would have given the lenders thereunder certain rights,
including the right to declare all amounts outstanding under our
senior credit facility immediately due and payable or to
foreclose on the assets securing such indebtedness. The 2009
amendment increased our annual cash interest rate by 2.0% and,
beginning March 31, 2009, required the payment of a 3.0%
annual facility fee.
As stated above, our senior credit facility requires us to
maintain our total net leverage ratio below certain maximum
amounts. Our actual total net leverage ratio and our maximum
total net leverage ratio allowed under our senior credit
facility for recent reporting periods was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
|
|
|
|
Maximum Allowed
|
|
|
|
|
|
|
Agreement
|
|
|
|
|
|
|
|
|
|
Giving Effect
|
|
|
Agreement
|
|
|
|
|
|
|
to 2009
|
|
|
Pre-2009
|
|
|
|
Actual
|
|
|
Amendment
|
|
|
Amendment
|
|
|
Leverage ratios under our senior credit facility as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
7.14
|
|
|
|
NA
|
|
|
|
7.25
|
|
March 31, 2009
|
|
|
7.48
|
|
|
|
8.00
|
|
|
|
7.25
|
|
June 30, 2009
|
|
|
7.98
|
|
|
|
8.25
|
|
|
|
7.25
|
|
September 30, 2009
|
|
|
8.22
|
|
|
|
8.50
|
|
|
|
7.25
|
|
December 31, 2009
|
|
|
8.42
|
|
|
|
8.75
|
|
|
|
7.00
|
|
Assuming we maintain compliance with the financial and other
covenants in our senior credit facility, including the total net
leverage ratio covenant, we believe that our current cash
balance, cash flows from operations and any available funds
under the revolving credit line of our senior credit facility
will be adequate to provide for our capital expenditures, debt
service and working capital requirements through
December 31, 2010.
Compliance with our total net leverage ratio covenant depends on
a number of factors, including the interrelationship of our
ability to reduce our outstanding debt
and/or the
results of our operations. The continuing general economic
recession, including the significant decline in advertising by
the automotive industry, adversely impacted our ability to
generate cash from operations during 2009. Based upon certain
internal financial projections, we did not believe that we would
be in compliance with our total net leverage ratio as of
March 31, 2010 unless we further amended the terms of our
senior credit facility. As a result, we requested and obtained
such an amendment of our senior credit facility on
March 31, 2010.
63
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective March 31, 2010, we amended our senior credit
facility which, among other things, increased the maximum amount
of the total net leverage ratio covenant through March 31,
2011, and reduced the maximum availability under the revolving
loan to $40.0 million.
Based upon our internal financial projections as of the date of
filing this Annual Report and the amended terms of our senior
credit facility, we believe that we will be in compliance with
all covenants required by our amended senior credit facility as
of March 31, 2010. The March 2010 amendment also imposed an
additional fee, equal to 2.0% per annum, payable quarterly, in
arrears, until such time as we complete an offering of capital
stock or certain debt securities that results in the repayment
of not less than $200.0 million of the term loan
outstanding under our senior credit facility. That fee would be
eliminated upon such a repayment of amounts under the term loan.
In addition, upon completion of a financing that results in the
repayment of at least $200.0 million of our term loan, we
would achieve additional flexibility under various covenants in
our senior credit facility. The use of proceeds from any
issuance of additional securities will generally be limited to
the repayment of amounts outstanding under our term loan and, in
certain circumstances, to the repurchase of outstanding shares
of our Series D Perpetual Preferred Stock. There can be no
assurance that we will be able to complete such a capital
raising transaction, or to repurchase any of our preferred
stock, at times and on terms acceptable to us, or at all. If we
are unable to complete such a financing and repayment of amounts
under our term loan, we would continue to incur increased fees
under our senior credit facility and to be subject to the
stricter limits contained in our existing financial covenants.
For additional details regarding the March 2010 amendment to our
senior credit facility, see Note 14. Subsequent
Event Long-term Debt Amendment to our audited
financial statements included elsewhere herein.
Loss
on Early Extinguishment of Debt in 2007
On March 19, 2007, we entered into the senior credit
facility and repaid all then-outstanding obligations under our
previous credit facility. As a result of these transactions, in
the first quarter of 2007 we incurred lender and legal fees of
approximately $3.2 million and recognized a loss on early
extinguishment of debt of $6.5 million, including the
write-off of a portion of our previously capitalized loan fees.
On April 18, 2007, we redeemed all of our then-outstanding
9.25% Notes and, accordingly, recorded a loss on early
extinguishment of debt of $16.4 million during the second
quarter of 2007.
Maturities
Aggregate minimum principal maturities on long-term debt and
long-term accrued facility fee as of December 31, 2009,
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Principal Maturities
|
|
|
|
Long-Term Accrued
|
|
|
Long-Term
|
|
|
|
|
Year
|
|
Facility Fee
|
|
|
Debt
|
|
|
Total
|
|
|
2010
|
|
$
|
|
|
|
$
|
8,080
|
|
|
$
|
8,080
|
|
2011
|
|
|
|
|
|
|
8,080
|
|
|
|
8,080
|
|
2012
|
|
|
|
|
|
|
8,080
|
|
|
|
8,080
|
|
2013
|
|
|
|
|
|
|
8,080
|
|
|
|
8,080
|
|
2014
|
|
|
18,307
|
|
|
|
759,489
|
|
|
|
777,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,307
|
|
|
$
|
791,809
|
|
|
$
|
810,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Interest
Payments
For all of our interest bearing obligations, including
derivative contracts, we made interest payments of approximately
$46.8 million, $59.6 million and $61.2 million
during 2009, 2008 and 2007, respectively. We did not capitalize
any interest payments during the years ended December 31,
2009, 2008 and 2007.
Risk
Management Objective of Using Derivatives
We are exposed to certain risks arising from business operations
and economic conditions. We attempt to manage our exposure to a
wide variety of business and operational risks principally
through management of our core business activities. We attempt
to manage economic risk, including interest rate, liquidity, and
credit risk, primarily by managing the amount, sources and
duration of our debt funding and the use of interest rate swap
agreements. Specifically, we enter into interest rate swap
agreements to manage interest rate exposure with the following
objectives:
|
|
|
|
|
managing current and forecasted interest rate risk while
maintaining financial flexibility and solvency;
|
|
|
|
proactively managing our cost of capital to ensure that we can
effectively manage operations and execute our business strategy,
thereby maintaining a competitive advantage and enhancing
shareholder value; and
|
|
|
|
complying with covenant requirements in our senior credit
facility.
|
Cash
Flow Hedges of Interest Rate Risk
In using interest rate derivatives, our objectives are to add
stability to interest expense and to manage our exposure to
interest rate movements. To accomplish these objectives, we
primarily use interest rate swap agreements as part of our
interest rate risk management strategy. Interest rate swaps
designated as cash flow hedges involve the receipt of variable
rate amounts from a counterparty in exchange for our making
fixed-rate payments over the life of the agreements, without
exchange of the underlying notional amount. Under the terms of
our senior credit facility, we are required to fix the interest
rate on at least 50.0% of the outstanding balance thereunder
through March 19, 2010.
During 2007, we entered into three swap agreements to convert
$465.0 million of our variable rate debt under our senior
credit facility to fixed rate debt. These interest rate swap
agreements expire on April 3, 2010, and they were our only
derivatives as of December 31, 2009 and 2008. Upon entering
into the swap agreements, we designated them as hedges of
variability of our variable rate interest payments attributable
to changes in three-month LIBOR, the designated interest rate.
Therefore, these interest rate swap agreements are considered
cash flow hedges.
Upon entering into a swap agreement, we document our hedging
relationships and our risk management objectives. Our swap
agreements do not include written options. Our swap agreements
are intended solely to modify the payments for a recognized
liability from a variable rate to a fixed rate. Our swap
agreements do not qualify for the short-cut method of accounting
because the variable rate debt being hedged is pre-payable.
Hedge effectiveness is evaluated at the end of each quarter. We
compare the notional amount, the variable interest rate and the
settlement dates of the interest rate swap agreements to the
hedged portion of the debt. Historically, our swap agreements
have been highly effective at hedging our interest rate
exposure, although no assurances can be provided that they will
continue to be effective for future periods.
During the period of each interest rate swap agreement, we
recognize the swap agreements at their fair value as an asset or
liability on our balance sheet. The effective portion of the
change in the fair value of our interest rate swap agreements is
recorded in accumulated other comprehensive income (loss). The
ineffective
65
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
portion of the change in fair value of the derivatives is
recognized directly in earnings. Amounts reported in accumulated
other comprehensive income (loss) related to derivatives will be
reclassified to interest expense as the related interest
payments are made on our variable rate debt. We estimate that an
additional $6.3 million will be reclassified as an increase
in interest expense and a decrease in other comprehensive income
(loss) between January 1, 2010 and April 3, 2010.
Under these swap agreements, we receive variable rate interest
at the LIBOR and pay fixed interest at an annual rate of 5.48%.
The variable LIBOR is reset in three-month periods for the swap
agreements. At our option, the variable LIBOR is reset in
one-month or three-month periods for the hedged portion of our
variable rate debt.
Beginning in April 2009 and ending in early October 2009, we
chose to hedge our long-term debt against a one-month LIBOR
contract that is renewed monthly rather than a three-month LIBOR
contract. By doing so, we took advantage of the lower one-month
LIBOR during this period. As a result, our hedge was not 100%
effective during this period and the ineffective portion was
recognized in earnings.
The table below presents the fair value of our interest rate
swap agreements as well as their classification on our balance
sheet as of December 31, 2009 and 2008. These interest rate
swap agreements are our only derivative financial instruments.
We did not have any derivatives classified as assets as of
December 31, 2009 or 2008. The fair values of the
derivative instruments are estimated by obtaining quotations
from the financial institutions that are counterparties to the
instruments. The fair values are estimates of the net amount
that we would have been required to pay on December 31,
2009 and 2008 if the agreements were transferred to other
parties or cancelled on such dates. Amounts in the following
table are in thousands.
Fair
Values of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Balance Sheet
|
|
|
Fair
|
|
|
Balance Sheet
|
|
|
Fair
|
|
|
|
Location
|
|
|
Value
|
|
|
Location
|
|
|
Value
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
|
Current liabilities
|
|
|
$
|
6,344
|
|
|
|
Noncurrent liabilities
|
|
|
$
|
24,611
|
|
The following table presents the effect of our derivative
financial instruments on our consolidated statement of
operations for the years ended December 31, 2009 and 2008
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedging Relationships
|
|
|
|
for the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Interest rate swap agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (liability) at beginning of period
|
|
$
|
(24,611
|
)
|
|
$
|
(17,625
|
)
|
|
$
|
4
|
|
Effective portion of gains (losses) recognized in other
comprehensive income (loss)
|
|
|
35,497
|
|
|
|
719
|
|
|
|
(17,693
|
)
|
Effective portion of gains (losses) recorded in accumulated
other comprehensive income (loss) and reclassified into interest
expense
|
|
|
(17,230
|
)
|
|
|
(7,705
|
)
|
|
|
64
|
|
Portion of gains (losses) representing the amount of hedge
ineffectiveness and the amount excluded from the assessment of
hedge effectiveness and recorded as an increase (decrease) in
interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (liability) at end of period
|
|
$
|
(6,344
|
)
|
|
$
|
(24,611
|
)
|
|
$
|
(17,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the year ended December 31, 2009, we recorded a loss on
derivatives as other comprehensive income of $11.2 million,
net of a $7.1 million income tax expense. For the year
ended December 31, 2008, we recorded a loss on derivatives
as other comprehensive expense of $4.3 million, net of a
$2.7 million income tax benefit. For the year ended
December 31, 2007, we recorded a loss on derivatives as
other comprehensive expense of $10.8 million, net of a
$6.9 million income tax benefit.
Credit-risk
Related Contingent Features
We manage our counterparty risk by entering into derivative
instruments with global financial institutions that we believe
present a low risk of credit loss resulting from nonperformance.
As of December 31, 2009 and 2008, we had not recorded a
credit value adjustment related to our interest rate swap
agreements.
Our interest rate swap agreements incorporate the covenant
provisions of our senior credit facility. Failure to comply with
the covenant provisions of the senior credit facility could
result in our being in default of our obligations under our
interest rate swap agreements.
|
|
5.
|
Fair
Value Measurement
|
Fair value is the price that market participants would pay or
receive to sell an asset or paid to transfer a liability in an
orderly transaction. Fair value is also considered the exit
price. We utilize market data or assumptions that market
participants would use in pricing an asset or liability,
including assumptions about risk and the risks inherent in the
inputs to the valuation technique. These inputs can be readily
observable, market corroborated or generally unobservable. We
utilize valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs. These inputs
are prioritized into a hierarchy that gives the highest priority
to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1) and the lowest
priority to unobservable inputs that require assumptions to
measure fair value (Level 3).
Recurring
Fair Value Measurements
Financial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant
to the fair value measurement. Our assessment of the
significance of a particular input to the fair value measurement
requires judgment and may affect the fair value of assets and
liabilities and their placement within the fair value hierarchy
levels. The following table sets forth our financial assets and
liabilities, which were accounted for at fair value, by level
within the fair value hierarchy as of December 31, 2009 and
2008 (in thousands):
Recurring
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securites
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
$
|
|
|
|
$
|
6,344
|
|
|
$
|
|
|
|
$
|
6,344
|
|
67
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securites
|
|
$
|
|
|
|
$
|
1,384
|
|
|
$
|
|
|
|
$
|
1,384
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
$
|
|
|
|
$
|
24,611
|
|
|
$
|
|
|
|
$
|
24,611
|
|
Fair value of our interest rate swap agreements is based on
estimates provided by the counterparties. Fair value of our
marketable securities was based on estimates provided by
Columbia Management. Valuation of these items does entail a
significant amount of judgment.
Non-Recurring
Fair Value Measurements
We have certain assets that are measured at fair value on a
non-recurring basis and are adjusted to fair value only when the
carrying values exceed their fair values. Included in the
following table are the significant categories of assets
measured at fair value on a non-recurring basis as of
December 31, 2009 (amounts in thousands).
Non-Recurring
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment Loss
|
|
|
|
As of December 31, 2009
|
|
|
For The Year Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
December 31, 2009
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
|
|
|
$
|
|
|
|
$
|
148,092
|
|
|
$
|
148,092
|
|
|
$
|
|
|
Program broadcast rights
|
|
|
|
|
|
|
|
|
|
|
11,265
|
|
|
|
11,265
|
|
|
|
177
|
|
Investment in broadcasting company
|
|
|
|
|
|
|
|
|
|
|
13,599
|
|
|
|
13,599
|
|
|
|
|
|
Broadcast licenses
|
|
|
|
|
|
|
|
|
|
|
818,981
|
|
|
|
818,981
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
170,522
|
|
|
|
170,522
|
|
|
|
|
|
Other intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
1,316
|
|
|
|
1,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,163,775
|
|
|
$
|
1,163,775
|
|
|
$
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment Loss
|
|
|
|
As of December 31, 2008
|
|
|
For The Year Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
December 31, 2008
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
|
|
|
$
|
|
|
|
$
|
162,903
|
|
|
$
|
162,903
|
|
|
$
|
|
|
Program broadcast rights
|
|
|
|
|
|
|
|
|
|
|
11,068
|
|
|
|
11,068
|
|
|
|
627
|
|
Investment in broadcasting company
|
|
|
|
|
|
|
|
|
|
|
13,599
|
|
|
|
13,599
|
|
|
|
|
|
Broadcast licenses
|
|
|
|
|
|
|
|
|
|
|
818,981
|
|
|
|
818,981
|
|
|
|
240,085
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
170,522
|
|
|
|
170,522
|
|
|
|
98,596
|
|
Other intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
1,893
|
|
|
|
1,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,178,966
|
|
|
$
|
1,178,966
|
|
|
$
|
339,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of our property and equipment is estimated by our
engineers. Fair value of our program broadcast rights is based
upon estimated future advertising revenue generated by the
programming. Fair value of our investment in broadcasting
company is based upon estimated future cash flows. Fair value of
broadcast
68
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
licenses, goodwill and other intangible assets is described in
Note 1. Description of Business and Summary of
Significant Accounting Policies. Our program broadcast
rights impairment charge was recorded as a broadcast operating
expense in the respective periods.
Fair
Value of Other Financial Instruments
The estimated fair value of other financial instruments is
determined using the best available market information and
appropriate valuation methodologies. Interpreting market data to
develop fair value estimates involves considerable judgment.
Accordingly, the estimates presented are not necessarily
indicative of the amounts that we could realize in a current
market exchange, or the value that ultimately will be realized
upon maturity or disposition. The use of different market
assumptions may have a material effect on the estimated fair
value amounts.
The carrying amounts of the following instruments approximate
fair value, due to their short term to maturity:
(i) accounts receivable, (ii) prepaid and other
current assets, (iii) accounts payable, (iv) accrued
employee compensation and benefits, (v) accrued interest,
(vi) other accrued expenses, (vii) dividends payable,
(viii) acquisition-related liabilities and
(ix) deferred revenue.
The carrying amount of our long-term debt, including the current
portion and long-term accrued facility fee, was
$810.1 million and $800.4 million, respectively, and
the fair value was $704.8 million and $312.1 million,
respectively as of December 31, 2009 and 2008. Fair value
of our long-term debt, including the current portion and
long-term accrued facility fee, is based on estimates provided
by third party financial professionals as of December 31,
2009 and 2008. Management believes that these estimated fair
values as of December 31, 2009 and 2008 were not an
accurate indicator of fair value, given that (i) our debt
has a relatively limited number of market participants,
relatively infrequent market trading and generally small dollar
volume of actual trades and (ii) management believes there
continues to exist a general disruption of the financial
markets. Based upon consideration of alternate valuation
methodologies, including our historic and projected future cash
flows, as well as historic private trading valuations of
television stations
and/or
television companies, we believe that the estimated fair value
of our long-term debt would more closely approximate the
recorded book value of the debt as of December 31, 2009 and
2008, respectively.
We are authorized to issue 135 million shares of all
classes of stock, of which 15 million shares are designated
Class A common stock, 100 million shares are
designated common stock, and 20 million shares are
designated blank check preferred stock for which our
Board of Directors has the authority to determine the rights,
powers, limitations and restrictions. The rights of our common
stock and Class A common stock are identical, except that
our Class A common stock has 10 votes per share and our
common stock has one vote per share. If declared, our common
stock and Class A common stock receive cash dividends on an
equal per-share basis.
As of December 31, 2009, we are authorized by our Board of
Directors to repurchase an aggregate total of up to
5,000,000 shares of our common stock and Class A
common stock in the open market. When we have determined that
market and liquidity conditions are favorable, we have
repurchased shares. As of December 31, 2009,
279,200 shares of our common stock and Class A common
stock are available for repurchase under these authorizations.
There is no expiration date for these authorizations. Shares
repurchased are held as treasury shares and used for general
corporate purposes including, but not limited to, satisfying
obligations under our employee benefit plans and long term
incentive plan. Treasury stock is recorded at cost.
During the year ended December 31, 2009, we did not make
any repurchases under these authorizations. During the year
ended December 31, 2008, we repurchased 883,200 shares
of our common stock at an average price of $0.20 per share for a
total cost of $177,000. During the year ended December 31,
2007, we
69
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
repurchased 647,800 shares of our common stock at an
average price of $8.49 per share for a total cost of
$5.5 million.
For the year ended December 31, 2009, we did not declare or
pay any common stock or Class A common stock dividends. For
the year ended December 31, 2008, we declared common stock
and Class A common stock dividends in the first, second and
third quarters and did not declare a common stock or
Class A common stock dividend in the fourth quarter.
We deferred cash dividends on our Series D Perpetual
Preferred Stock and correspondingly suspended cash dividends on
our common and Class A common stock to reallocate cash
resources to support our ability to pay increased interest costs
and fees associated with our senior credit facility.
As of December 31, 2009, we had not funded our
Series D Perpetual Preferred Stock dividend for at least
three consecutive quarters. See Note 7 Preferred
Stock for further discussion of our Series D
Perpetual Preferred Stock dividend payments. As long as these
Series D Perpetual Preferred Stock dividends remain in
arrears, we are prohibited from paying additional common stock
or Class A common stock dividends.
In connection with our various employee benefit plans, we may,
at our discretion, issue authorized and unissued shares of our
Class A common stock and common stock or previously issued
shares of our Class A common stock or common stock
reacquired by Gray, including stock purchased in the open
market, held in the treasury. As of December 31, 2009, we
had reserved 8,868,940 shares and 1,000,000 shares of
our common stock and Class A common stock, respectively,
for future issuance under various employee benefit plans. As of
December 31, 2008, we had reserved 9,523,365 shares
and 1,000,000 shares of our common stock and Class A
common stock, respectively, for future issuance under various
employee benefit plans.
During 2008, we issued 1,000 shares of perpetual preferred
stock to a group of private investors. This preferred stock was
designated Series D Perpetual Preferred Stock, no par
value. The issuance of the Series D Perpetual Preferred
Stock generated net cash proceeds of approximately
$91.6 million, after a 5.0% original issue discount,
transaction fees and expenses. The $8.4 million of original
issue discount, transaction fees and expenses are being accreted
over a seven-year period ending June 30, 2015.
As of December 31, 2009 and 2008, we had 1,000 shares
of Series D Perpetual Preferred Stock outstanding. The
Series D Perpetual Preferred Stock has a liquidation value
of $100,000 per share for a total liquidation value of
$100.0 million as of December 31, 2009 and 2008 and a
recorded value of $93.4 million and $92.2 million as
of December 31, 2009 and 2008, respectively. The difference
between the liquidation values and the recorded values was the
un-accreted portion of the original issuance discount and
issuance cost. Our accrued Series D Perpetual Preferred
Stock dividend balances as of December 31, 2009 and 2008
were $18.9 million and $3.0 million, respectively.
The Series D Perpetual Preferred Stock has no mandatory
redemption date, but is redeemable, at our option, at any time.
The Series D Perpetual Preferred Stock may also be
redeemed, at the stockholders option, on or after
June 30, 2015. If the Series D Perpetual Preferred
Stock is redeemed, we are required to pay the liquidation price
per share in cash plus the pro-rata accrued dividends to the
date fixed for redemption.
70
GRAY
TELEVISION, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
If the Series D Perpetual Preferred Stock is redeemed
before January 1, 2012, the redemption price per share will
include a premium as described in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption
|
|
|
|
|
|
|
|
|
|
Price
|
|
|
|
|
|
|
|
Date of Redemption
|
|
per Share
|
|
|
|
|
|
|
|
|
January 1, 2009 through June 30, 2009
|
|
$
|
105,000
|
|
|
|
|
|
|
|
|
|
July 1, 2009 through December 31, 2009
|
|
$
|
106,500
|
|
|
|
|
|
|
|
|
|
January 1, 2010 through June 30, 2010
|
|
$
|
108,000
|
|
|
|
|
|
|
|
|
|
July 1, 2010 through December 31, 2010
|
|
$
|
106,000
|
|
|
|
|
|
|
|
|
|
|