GRAY TELEVISION, INC.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
fiscal year ended December 31, 2005 or |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
the transition period from __________ to __________. |
Commission File Number 1-13796
GRAY TELEVISION, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Georgia
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58-0285030 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
4370 Peachtree Road, NE |
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Atlanta, GA
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30319 |
(Address of Principal Executive Offices)
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(Zip Code) |
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 |
Class A Common Stock (no par value)
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New York Stock Exchange |
Common Stock (no par value)
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New York Stock Exchange |
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 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,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one).
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
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, 2005: Class A and
Common Stock; no par value $586,316,233.
The number of shares outstanding of the registrants classes of common stock as of February
23,2006: Class A Common Stock; no par value 5,752,845 shares; Common Stock, no par value
43,051,781 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for the annual meeting of shareholders
to be filed with the Commission pursuant to Regulation 14A is incorporated by reference into Part
III hereof.
Gray Television Inc.
INDEX
2
PART 1
Item 1. Business.
In this Annual Report, unless otherwise indicated, the words Gray, Company, our, us
and we refer to Gray Television, Inc. and its subsidiaries. Our discussion of the television
stations that we own and operate does not include our interest in the stations owned by Sarkes
Tarzian, Inc., which we refer to as Tarzian.
The Companys common stock, no par value, (the Common Stock) and its class A common stock,
no par value, (the Class A Common Stock) 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 its Common Stock and GTN.A for its 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
As of the filing date of the Annual Report the Company owns 36 television stations serving 30
television markets. Seventeen of the stations are affiliated with CBS Inc., or CBS, ten are
affiliated with the National Broadcasting Company, Inc., or NBC, eight are affiliated with the
American Broadcasting Company, or ABC And one is affiliated with FOX Entertainment Group, Inc. or
FOX. The combined station group has 24 stations ranked #1 in local news audience and 24 stations
ranked #1 in overall audience within their respective markets based on the results of the average
of the Nielsen November, July, May and February 2005 ratings reports. The combined TV station
group reaches approximately 6.5% of total U.S. TV households. With seventeen CBS affiliated
stations, the Company is the largest independent owner of CBS affiliates in the country. In
addition, as of the date of this Annual Report, the Company also broadcasts eleven additional
channels of programming in certain of its markets by multiplexing its digital broadcast spectrum.
In 1993, the Company implemented a strategy to foster growth through strategic acquisitions
and certain select divestitures. Since January 1, 1994, the Companys significant acquisitions
have included 32 television stations and the divestiture of two television stations.
On December 30, 2005 the Company completed the spinoff of its Gray Publishing and GrayLink
Wireless businesses. Following the spinoff, the Companys business consists of one reportable
segment, television broadcasting.
Acquisitions, Investments and Divestitures
2006 Acquisition
On March 3, 2006, the Company 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 $85 million in cash plus certain transaction fees. The Company financed this acquisition
with borrowings under the Companys senior credit facility.
2005 Spinoff
On December 30, 2005, the Company completed the spinoff of all of the outstanding stock of
Triple Crown Media., Inc. (TCM). Immediately prior to the spinoff, the Company contributed all of
the
3
membership interests in Gray Publishing, LLC which owned and operated the Companys 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, the Company
received an approximate $44 million cash distribution from TCM, which Gray used to reduce its
outstanding indebtedness on December 30, 2005. TCM is now quoted on the Nasdaq National Market
under the symbol TCMI. The financial position and results of operations of the publishing and
wireless businesses are reported in the Companys consolidated balance sheet and statement of
operations as Discontinued Operations for all periods presented.
2005 Acquisitions
On November 30, 2005, the Company completed the acquisition of the assets of WSAZ-TV, the NBC
affiliate in Charleston-Huntington, West Virginia from Emmis Communications Corp. for approximately
$185.8 million in cash plus certain transaction fees. The Company financed this acquisition by
borrowings under the companys senior credit facility.
On November 10, 2005, the Company completed the acquisition of the assets of WSWG-TV, the UPN
affiliate serving the Albany, Georgia television market from P.D. Communications, LLC. for $3.75
million in cash. The Company used a portion of its cash on hand to fund this acquisition.
Subsequent to the acquisition Gray obtained a CBS affiliation for this station.
On January 31, 2005, the Company completed the acquisition of KKCO-TV from Eagle III
Broadcasting, LLC for approximately $13.5 million plus certain transaction fees. KKCO-TV, Channel
11 serves the Grand Junction, Colorado television market and is an NBC affiliate. The Company used
a portion of its cash on hand to fully fund this acquisition.
During 2005 the Company acquired an FCC license to operate a low power television station,
WAHU-TV, in the Charlottesville, Virginia television market. The Fox broadcast network has agreed
to an affiliation agreement to allow the Company to operate WAHU-TV as a FOX affiliate.
2004 Acquisition
On August 17, 2004, the Company completed the acquisition of a FCC television license for
WCAV-TV, Channel 19, in Charlottesville, Virginia from Charlottesville Broadcasting Corporation.
Grays cost to acquire that FCC license was approximately $1 million. CBS, Inc. has agreed to a
ten-year affiliation agreement to allow Gray to operate WCAV-TV as a CBS-affiliated station.
Gray also has an FCC license to operate a low power television station, WVAW-TV, in the
Charlottesville, Virginia television market. The American Broadcasting Company has agreed to an
affiliation agreement expiring December 31, 2013 to allow Gray to operate WVAW-TV as an ABC
affiliate.
2002 Acquisitions
On October 25, 2002 the Company completed its acquisition of Stations Holding Company, Inc.
(Stations Holding) by acquiring all of Stations Holdings outstanding capital stock in a merger
transaction. Effective with the completion of the transaction, Stations Holding changed its name
to Gray MidAmerica Television, Inc. (Gray MidAmerica Television). With this transaction the
Company acquired 15 network affiliated television stations serving 13 television markets. On
December 18, 2002
4
the Company completed its acquisition of the assets of KOLO-TV, the ABC affiliate serving
Reno, Nevada.
The Company paid $516.5 million in aggregate cash consideration for Gray MidAmerica
Television. This amount included a base purchase price of $502.5 million plus certain net working
capital adjustments of approximately $5.7 million and fees of $8.3 million associated with the
transaction. The Company funded the acquisition and related fees and expenses by issuing 30.0
million shares of Gray Common Stock to the public for net proceeds of $232.7 million, issuing
additional debt totaling $275.0 million and cash on hand.
For advisory services rendered by Bull Run Corp. (Bull Run) a related party, in connection
with the acquisition of Gray MidAmerica Television, the Company paid to Bull Run an advisory fee of
$5.0 million. This amount is included in the fees described above. The Company does not intend to
engage Bull Run for any such advisory or similar services in the future.
The Company paid $41.9 million in cash consideration for KOLO-TV. This purchase price
included a base purchase price of $41.5 million and related fees of approximately $400,000. The
Company financed this transaction by utilizing cash on hand and net proceeds of $34.9 million from
the issuance of an additional 4.5 million shares of Gray Common Stock.
Acquisition of Investment in Sarkes Tarzian, Inc.
On December 3, 2001, the Company exercised its option to acquire 301,119 shares of the
outstanding common stock, $4.00 par value, of Sarkes Tarzian, Inc. (Tarzian) from Bull Run. Bull
Run had purchased these same shares from U.S. Trust Company of Florida Savings Bank as Personal
Representative of the Estate of Mary Tarzian (the Estate) in January 1999.
The acquired shares of Tarzian represent 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.
Gray paid $10 million to Bull Run to complete the acquisition of the 301,119 shares of
Tarzian. The Company has previously capitalized and paid to Bull Run $3.2 million of costs
associated with the Companys option to acquire these shares. This investment has been accounted
for under the cost method of accounting and reflected as a non-current other asset. The Company
believes the cost method is appropriate to account for this investment given the existence of a
single voting majority shareholder. The Companys ownership of these shares is subject to certain
litigation which is discussed in Item 3. Legal Proceedings.
5
The Companys Stations and Their Markets
The following is a list of all our owned and operated television stations as of March 3, 2006.
In markets where we have satellite stations and stations that serve distant communities, certain
figures relating to in market share of household viewing and television households have been
combined:
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FCC |
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Station |
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In Market |
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FCC Assigned |
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License |
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Station |
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News |
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Share of |
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Television |
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DMA |
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Analog |
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Digital |
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Affiliation |
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Expiration |
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Rank in |
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Rank in |
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Household |
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Households (a) |
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Rank (a) |
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Market |
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Station |
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Channel |
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Channel |
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Network |
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Expiration |
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Date |
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DMA (b) |
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DMA (c) |
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Viewing (d) |
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(in thousands) |
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58 |
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Knoxville, TN |
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WVLT |
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8 |
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30 |
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CBS |
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12/31/14 |
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08/01/05 |
(h) |
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2 |
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2 |
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23 |
% |
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516 |
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63 |
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Lexington, KY |
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WKYT |
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27 |
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13 |
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CBS |
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12/31/14 |
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08/01/05 |
(h) |
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1 |
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1 |
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35 |
% |
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479 |
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64 |
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Charleston-Huntington, WV |
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WSAZ |
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3 |
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23 |
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NBC |
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01/01/09 |
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10/01/12 |
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1 |
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1 |
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51 |
% |
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478 |
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66 |
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WichitaHutchinson, KS |
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KAKE |
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10 |
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21 |
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ABC |
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12/31/13 |
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06/01/06 |
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2 |
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2 |
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28 |
% |
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446 |
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(Colby, KS) |
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KLBY (e) |
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4 |
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17 |
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ABC |
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12/31/13 |
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06/01/06 |
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2 |
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2 |
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(Garden City, KS) |
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KUPK (e) |
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13 |
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18 |
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ABC |
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12/31/13 |
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06/01/06 |
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2 |
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2 |
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75 |
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Omaha, NE |
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WOWT |
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6 |
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22 |
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NBC |
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01/01/12 |
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06/01/06 |
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1 |
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1 |
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31 |
% |
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400 |
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85 |
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Madison, WI |
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WMTV |
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15 |
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19 |
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NBC |
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01/01/12 |
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12/01/05 |
(h) |
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2 |
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2 |
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25 |
% |
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366 |
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87 |
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South Bend, IN |
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WNDU |
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16 |
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42 |
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NBC |
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12/31/10 |
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08/01/13 |
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1 |
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1 |
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35 |
% |
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333 |
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93 |
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Colorado Springs, CO |
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KKTV |
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11 |
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10 |
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CBS |
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12/31/14 |
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04/01/06 |
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1 |
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2 |
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37 |
% |
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315 |
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94 |
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Waco-Temple-Bryan, TX |
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KWTX |
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10 |
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53 |
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CBS |
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12/31/14 |
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08/01/06 |
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1 |
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1 |
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43 |
% |
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311 |
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(Bryan, TX) |
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KBTX (f) |
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3 |
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50 |
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CBS |
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12/31/14 |
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08/01/06 |
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1 |
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1 |
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103 |
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LincolnHastings |
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KOLN |
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10 |
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25 |
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CBS |
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12/31/14 |
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06/01/06 |
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1 |
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1 |
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53 |
% |
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274 |
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Kearney, NE |
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KGIN (g) |
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11 |
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32 |
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CBS |
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12/31/14 |
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06/01/06 |
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1 |
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1 |
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(Grand Island, NE) |
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105 |
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GreenvilleNew Bern |
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WITN |
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7 |
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32 |
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NBC |
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01/01/12 |
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12/01/04 |
(h) |
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2 |
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2 |
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33 |
% |
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271 |
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Washington, NC |
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109 |
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Tallahassee, FL |
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WCTV |
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6 |
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46 |
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CBS |
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12/31/14 |
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04/01/05 |
(h) |
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1 |
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1 |
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57 |
% |
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261 |
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Thomasville, GA |
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110 |
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Lansing, MI |
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WILX |
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10 |
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57 |
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NBC |
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01/01/12 |
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10/01/05 |
(h) |
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2 |
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1 |
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34 |
% |
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257 |
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112 |
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Reno, NV |
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KOLO |
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8 |
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9 |
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ABC |
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12/31/13 |
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10/01/06 |
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1 |
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1 |
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31 |
% |
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264 |
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115 |
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Augusta, GA |
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WRDW |
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12 |
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31 |
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CBS |
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12/31/14 |
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04/01/05 |
(h) |
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1 |
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1 |
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35 |
% |
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247 |
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123 |
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La Crosse Eau |
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WEAU |
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13 |
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39 |
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NBC |
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1/1/12 |
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12/01/05 |
(h) |
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1 |
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1 |
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34 |
% |
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224 |
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Claire, WI |
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133 |
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Rockford, IL |
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WIFR |
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23 |
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41 |
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CBS |
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12/31/14 |
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12/01/05 |
(h) |
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2 |
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2 |
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32 |
% |
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183 |
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134 |
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WausauRhinelander, WI |
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WSAW |
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7 |
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40 |
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CBS |
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12/31/14 |
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12/01/05 |
(h) |
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1 |
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1 |
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40 |
% |
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182 |
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136 |
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Topeka, KS |
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WIBW |
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13 |
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44 |
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CBS |
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12/31/14 |
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06/01/06 |
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1 |
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1 |
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49 |
% |
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171 |
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147 |
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Albany, GA |
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WSWG |
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44 |
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43 |
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CBS\UPN |
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8/31/07 |
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04/01/13 |
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N/A |
(i) |
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N/A |
(i) |
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N/A |
(i) |
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152 |
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157 |
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Panama City, FL |
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WJHG |
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7 |
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8 |
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NBC |
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1/1/12 |
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02/01/05 |
(h) |
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1 |
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1 |
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45 |
% |
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135 |
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161 |
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Sherman,TXAda, OK |
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KXII |
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12 |
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20 |
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CBS |
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12/31/14 |
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08/01/06 |
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1 |
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1 |
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66 |
% |
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124 |
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172 |
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Dothan, AL |
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WTVY |
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4 |
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36 |
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CBS |
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12/31/14 |
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04/01/05 |
(h) |
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1 |
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1 |
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67 |
% |
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98 |
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181 |
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Harrisonburg, VA |
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WHSV |
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3 |
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49 |
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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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95 |
% |
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86 |
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183 |
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Bowling Green, KY |
|
WBKO |
|
|
13 |
|
|
|
33 |
|
|
ABC |
|
12/31/13 |
|
|
08/01/05 |
(h) |
|
|
1 |
|
|
|
1 |
|
|
|
83 |
% |
|
|
75 |
|
184 |
|
Meridian, MS |
|
WTOK |
|
|
11 |
|
|
|
49 |
|
|
ABC |
|
12/31/13 |
|
|
06/01/05 |
(h) |
|
|
1 |
|
|
|
1 |
|
|
|
67 |
% |
|
|
72 |
|
186 |
|
Charlottesville, VA |
|
WCAV |
|
|
19 |
|
|
|
19 |
|
|
CBS |
|
08/15/14 |
|
|
10/01/12 |
(j) |
|
|
2 |
|
|
|
2 |
|
|
|
10 |
%(j) |
|
|
75 |
|
|
|
|
|
WVAW |
|
|
16 |
|
|
|
|
|
|
ABC |
|
12/31/13 |
|
|
10/01/12 |
(j) |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
WAHU |
|
|
27 |
|
|
|
|
|
|
FOX |
|
06/30/08 |
|
|
10/01/12 |
(j) |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
187 |
|
Grand Junction, CO |
|
KKCO |
|
|
11 |
|
|
|
12 |
|
|
NBC |
|
7/30/06 |
|
|
04/30/08 |
|
|
|
1 |
|
|
|
1 |
|
|
|
38 |
% |
|
|
65 |
|
190 |
|
Parkersburg, WV |
|
WTAP |
|
|
15 |
|
|
|
49 |
|
|
NBC |
|
01/01/12 |
|
|
10/01/04 |
(h) |
|
|
1 |
|
|
|
1 |
|
|
|
93 |
% |
|
|
64 |
|
Note(k) |
|
Hazard, KY |
|
WYMT |
|
|
57 |
|
|
|
12 |
|
|
CBS |
|
12/31/14 |
|
|
08/01/05 |
(h) |
|
|
1 |
|
|
|
1 |
|
|
|
31 |
% |
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,113 |
(l) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
(a) |
|
Based on data published by Nielsen or other public sources for the 2005-2006 television
season for each DMA. |
|
(b) |
|
Based on the average of Nielsen data for November, July, May and February 2005 rating
periods, Sunday to Saturday, 6 a.m. to 2 a.m. |
|
(c) |
|
Based on managements review of Nielsen data for November, July, May and February 2005
rating periods for various news programs. |
|
(d) |
|
In-market share of households viewing television represents the average percentage of
the stations audience as a percentage of all viewing by households of local commercial
stations in the market. Except for WYMT-TV, in market share data is based on our
review of the Nielsen data for the November, July, May and February, 2005 rating periods,
Sunday to Saturday, 6 a.m. to 2 a.m. For WYMT-TV, in market share data is based on our
review of the Nielsen data for the November, May and February 2005 rating periods, Sunday
to Saturday, 6 a.m. to 2 a.m. WYMT-TV does not receive data for the July period. |
|
(e) |
|
KLBY-TV and KUPK-TV are satellite stations of KAKE-TV under FCC rules and retransmit
the signal of the primary station and may offer some locally originated programming such as
local news. |
|
(f) |
|
KBTX-TV is a satellite station of KWTX-TV under FCC rules and retransmits the signal of
the primary station and may offer some locally originated programming such as local news. |
|
(g) |
|
KGIN-TV is a satellite station of KOLN-TV under FCC rules and retransmits the signal of
the primary station and may offer some locally originated programming such as local news. |
|
(h) |
|
License renewal application has been filed with the Federal Communication Commission
(the FCC) and renewal is pending. As of the date of filing this Annual Report, the
Company anticipates that all pending applications will be renewed in due course. |
|
(i) |
|
Data not available; this station does not currently subscribe to Nielsen. |
|
(j) |
|
Original license application pending with the Federal Communications Commission. If
license is granted as expected, the expiration date of the license is expected to be
October 1, 2012. |
|
(k) |
|
The Company considers WYMT-TVs service area as a separate television market. This
area is a special 17 county trading area as defined by Nielsen and is part of the
Lexington, KY DMA. |
|
(l) |
|
Approximately 6.5% of all US television households. |
Television Industry Background
There are currently a limited number of channels available for broadcasting in any one
geographic area, and the license to operate a television station is granted by the FCC. Television
stations which broadcast over the very high frequency (VHF) band (channels 2-13) of the spectrum
generally have some competitive advantage over television stations which broadcast over the
ultra-high frequency (UHF) band (channels above 13) of the spectrum, because the former usually
have better signal coverage and operate at a lower transmission cost.
Television station revenues are primarily derived from local, regional and national
advertising and, to a much lesser extent, from network compensation and revenues from studio and
tower space rental and commercial production activities. Advertising rates are based upon a
variety of factors, including a programs popularity among the viewers an advertiser wishes to
attract, 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. Rates are also determined by a stations overall ratings and in-market share, as
well as the stations ratings and share among particular demographic groups, which an advertiser
may be targeting. Because broadcast stations rely on
7
advertising revenues, they are sensitive to cyclical changes in the economy. The sizes of
advertisers budgets, which are affected by broad economic trends, affect the broadcast industry in
general and the revenues of individual broadcast television stations.
All television stations in the country are grouped by Nielsen, a national audience measuring
service, into approximately 210 generally recognized television markets that are ranked in size
according to various formulae based upon actual or potential audience. Each Designated Market Area
(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.
Four major broadcast networks, ABC, NBC, CBS and FOX dominate broadcast television.
Additionally, the United Paramount Network (UPN) and the Warner Brothers Network (WB) have
announced a joint venture to replace their respective networks with a single network known as the
CW network (or CW) which is currently expected to be operational in the fall of 2006. Affiliates
of FOX have also announced the formation of a new network known as MyNetworkTV that is expected to
be operational in the fall of 2006. An affiliate of FOX, CW or MyNetworkTV receives a smaller
portion of each days programming from its network compared to an affiliate of ABC, NBC or CBS.
The affiliation of a station with ABC, NBC or CBS has a significant impact on the composition
of the stations programming, revenues, expenses and operations. A typical affiliate of these
networks receives the majority of each days programming from the network. This programming, along
with cash payments (network compensation) in certain instances, is provided to the affiliate by
the network 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 the revenues from time sold during breaks in and between
network programs and programs the affiliate produces or purchases from non-network sources. In
acquiring programming to supplement programming supplied by the affiliated network, 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. In addition, a television station may acquire programming through barter
arrangements. Under barter arrangements, a national program distributor may receive advertising
time in exchange for the programming it supplies, with the station paying a reduced or no fee for
such programming. Most successful commercial television stations obtain their brand identity from
locally produced news programs.
In contrast to a station affiliated with a network, a fully independent station purchases or
produces all of the programming that it broadcasts, resulting in generally higher programming
costs. An independent station, however, retains its entire inventory of advertising time and all
the revenues obtained therefrom. As a result of the smaller amount of programming provided by its
network, an affiliate of FOX, CW or MyNetworkTV must purchase or produce a greater amount of
programming, resulting in generally higher programming costs. These affiliate stations, however,
retain a larger portion of the inventory of advertising time and the revenues obtained therefrom
compared to stations affiliated with the major networks.
Cable-originated programming is a significant competitor for viewers of broadcast television
programming, although no single cable programming network regularly attains audience levels
amounting to more than a small fraction of any single major broadcast network. The advertising
share of cable networks has increased as a result of the growth in cable penetration (the
percentage of television households which are connected to a cable system). Notwithstanding such
increases in cable viewership and advertising, over-the-air broadcasting remains the dominant
distribution system for mass-market television advertising.
8
The Company accounts for trade barter transactions involving the exchange of tangible goods or
services with its 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.
In accordance with the Financial Accounting Standards Boards Statement No. 63, Financial
Reporting by Broadcasters, the Company does not account for barter revenue and related barter
expense generated from network programming. The Company does not account for barter
revenue and related barter expense generated from syndicated programming. Management of the
Company believes that barter revenue and related expense generated from syndicated programming is
immaterial. Furthermore, any such barter revenue recognized would then require the recognition of
an equal amount of barter expense. The recognition of these amounts would have no effect upon net
income.
Seasonality
Broadcast advertising revenues are generally highest in the second and fourth quarters each
year, due in part to increases in consumer advertising in the spring and retail advertising in the
period leading up to and including the holiday season. In addition, broadcast advertising revenues
are generally higher during even numbered years due to spending by political candidates, which
spending typically is heaviest during the fourth quarter.
Network Affiliation of the Stations
Each of the Companys 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 network with which the station is affiliated. In return, the
network has the right to sell a substantial majority of the advertising time during such
broadcasts. In exchange for every hour that a station elects to broadcast network programming, the
network may, in certain instances, pay the station a specific network compensation fee, which
varies with the time of day. Typically, prime-time programming generates the highest hourly
network compensation payments. Such payments are subject to increase or decrease by the network
during the term of an affiliation agreement with provisions for advance notices and right of
termination by the station in the event of a reduction in such payments. Although network
affiliation agreements have historically been renewed by the Company and the respective networks,
the Company can not guarantee that any agreements will be renewed in the future under their current
terms. Network compensation has declined in recent years at certain of the Companys television
stations reflecting an ongoing phase out of network compensation. See the Broadcasting Summary
table above for each of the Companys television stations primary network affiliations and the
expiration date of the current affiliation agreements.
In addition, as of the date of this Annual Report, the Company also broadcasts eleven
additional channels of programming in certain of its markets by multiplexing its digital broadcast
spectrum. These multiplexed channels are in addition to the primary digital broadcast channel of
each station which is affiliated with one of the three major networks. One of these channels is
affiliated with FOX and the other ten are currently affiliated with UPN. For the ten channels
currently affiliated with UPN, the Company is currently assessing the alternatives of affiliating
with either of the newly announced CW or MyNetworkTV networks or programming the channel(s)
independently. The Company can make no assurance whether any of its multiplexed digital channels
will be affiliated with any network.
9
Competition
Competition in the television industry exists on several levels: competition for audience,
competition for programming (including news) and competition for advertisers. Additional factors
that are material to a television stations competitive position include signal coverage and
assigned frequency.
Audience. Stations compete for audience based on program popularity, which has a direct
effect on advertising rates. A substantial portion of the daily programming on each of the
Companys stations is supplied by the affiliated network. During those periods, the stations are
dependent upon the performance of the network programs to attract viewers. There can be no
assurance that such programming will achieve or maintain satisfactory viewership levels in the
future. Non-network time periods are programmed by the station with a combination of locally
produced news, public affairs and other entertainment programming, including news and syndicated
programs purchased for cash, cash and barter, or barter only.
In addition, the development of methods of television transmission of video programming other
than over-the-air broadcasting, and in particular cable television, has significantly altered
competition for audience in the television industry. These other transmission methods can increase
competition for a broadcasting station by bringing into its market distant broadcasting signals not
otherwise available to the stations audience and also 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, direct broadcast satellite (DBS) video distribution services and the internet.
Programming. Competition for programming involves negotiating with national program
distributors or syndicators that sell first-run and rerun packages of programming. Each station
competes against the broadcast station competitors in its market for exclusive access to
off-network reruns (such as Seinfeld) and first-run product (such as Oprah). Competition exists
for exclusive news stories and features as well. 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.
Advertising. Advertising rates are based upon the size of the market in which the station
operates, a stations overall ratings, a programs popularity among the viewers that an advertiser
wishes to attract, the number of advertisers competing for the available time, the demographic
makeup of the market served by the station, the availability of alternative advertising media in
the market area, aggressive and knowledgeable sales forces and the development of projects,
features and programs that tie advertiser messages to programming. Advertising revenues comprise
the primary source of revenues for the Companys stations. The Companys stations compete for such
advertising revenues with other television stations and other media in their respective markets.
The 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. Competition for advertising dollars in the broadcasting
industry occurs primarily within individual markets.
Federal Regulation of the Companys Business
FCC Regulation. Television broadcasting is subject to the jurisdiction of the FCC under the
Communications Act of 1934 (the Communications Act), as amended by, among other statutes, the
Telecommunications Act of 1996 (the 1996 Telecommunications Act). The Communications Act
prohibits the operation of television broadcasting stations except under a license issued by the
FCC and empowers the FCC, among other things, to issue, revoke and modify broadcasting licenses,
determine the
10
locations of stations, regulate the equipment used by stations, adopt regulations to carry out the
provisions of the Communications Act and impose penalties for violation of such regulations. The
Communications Act prohibits the assignment of a license or the transfer of control of a licensee
without prior approval of the FCC.
License Grant and Renewal. Television broadcasting licenses generally are granted or renewed
for a period of eight years, but may be renewed for a shorter period upon a finding by the FCC that
the public interest, convenience, and necessity would be served thereby. Broadcast licenses are
of paramount importance to the Companys Television Broadcasting segment. The Communications Act
requires a broadcast license to be renewed 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 by the licensee; and (iii) there have
been no other violations which, taken together, would constitute a pattern of abuse. At the time
an application is made for renewal of a television license, parties in interest may file petitions
to deny, and such parties, including members of the public, may comment upon the service the
station has provided during the preceding license term and urge denial of the application. If the
FCC finds that the licensee has failed to meet the above-mentioned requirements, it could deny the
renewal application or grant a conditional approval, including renewal for a lesser term. The FCC
will not consider competing applications contemporaneously with a renewal application. Only after
denying a renewal application can the FCC accept and consider competing applications for the
license. Although in substantially all cases broadcast licenses are renewed by the FCC even when
petitions to deny are filed against license renewal applications, there can be no assurance that
the Companys stations licenses will be renewed. The Company is not aware of any facts or
circumstances that could prevent the renewal of the licenses for its stations at the end of their
respective license terms. See the dates through which the current licenses are effective in the
Broadcasting Summary table included on page 5 of this Annual Report.
Ownership Restrictions. Currently, the FCCs broadcast ownership rules limit the ownership,
operation or control of, as well as the attributable interests or voting power in: (1) television
stations serving the same area; (2) television stations and daily newspapers serving the same area;
and (3) 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 office or have more than a
specified interest or percentage of voting power. Pursuant to the 1996 Telecommunications Act and
recent appropriations legislation, the FCC must review all of its broadcast ownership rules every
four years to determine if they 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, the new rules have yet to take effect due to
legal challenges. The outcome of FCC proceedings and legislative efforts and the ultimate
landscape of FCC ownership regulation are in flux and may not be resolved for some time.
Specifically, on June 24, 2004, a three-judge panel of the United States Court of Appeals for
the Third Circuit released a split decision rejecting much of the Commissions 2003 decision on
media ownership regulations. While affirming the FCC in certain respects, the Third Circuit found
fault with the Commissions proposed new limits on media combinations, remanded them to the agency
for further proceedings and extended a stay on the implementation of the new rules that it had
imposed in September 2003. In January 2005, several parties filed petitions for Supreme Court
review of the Third Circuits decision, but the Supreme Court declined to review the decision. As
a result, the restrictions in place prior to the FCCs 2003 decision generally continue to govern
media transactions, pending completion of the agency proceedings on remand and/or further judicial
review.
11
The discussion below reviews the changes contemplated in the FCCs 2003 decision and the Third
Circuits response to the revised ownership regulations that the Commission adopted.
Local TV Ownership Rule: In its 2003 decision, the FCC relaxed the local television ownership
regulation by eliminating its eight voices test, which barred co-ownership of two TV stations in
a local market unless at least eight independently owned, full-power television stations, or
voices, remained. The modified rule would have permitted a company to own two commercial
television facilities (a duopoly) in any market with at least five such stations. In the largest
marketsthose with at least 18 television stationsa company would, for the first time, be
permitted to own three TV stations. So-called triopolies would be available only in a handful of
the nations largest markets. Under the new rules, both duopolies and triopolies would be subject
to the agencys top four limitation, meaning that no more than one of the co-owned stations could
be ranked among the top four in audience ratings. The new rules would have allowed parties to seek
waivers of the top four restriction in markets with 11 or fewer stations.
The Third Circuit upheld the FCCs decision to retain a prohibition of common ownership of
more than one top-four ranked station in a given market. However, the Court remanded for further
consideration the other numerical limits applicable to same-market TV station combinations, and the
eight voices requirement of the pre-2003 rules therefore remains in effect.
Cross-Media Limits: The newspaper/broadcast cross-ownership rule, originally adopted in 1975,
generally prohibited one entity from owning both a commercial broadcast station and a daily
newspaper in the same community. The old radio/television cross-ownership rule allowed a party to
own one TV station (or two, if permitted under the television duopoly rule) and a varying number of
radio stations within a single market, depending on the number of independently owned media voices
that would remain post combination. The cross-media limits (CMLs) adopted in the Commissions
2003 decision would have supplanted both rules with three different categories of restrictions
based on the number of commercial and noncommercial television stations in the relevant locale.
First, in markets with three or fewer TV stations, the FCC would have prohibited any
cross-ownership among TV stations, radio stations, and daily newspapers. Second, in markets with
between four and eight TV stations, the agency would have permitted one of the following three
combinations:
|
|
|
one or more daily newspaper(s), one TV station, and up to 50 percent of the
radio stations that would be permissible under the FCCs separate local radio ownership
limits for that community; or |
|
|
|
|
one or more daily newspaper(s), and as many radio stations as could be owned
pursuant to the local radio ownership limits; or |
|
|
|
|
two TV stations (so long as ownership would be permissible under the duopoly
rule) and as many radio stations as the local radio ownership limits would permit, but no
daily newspapers. |
Third, in local markets with nine or more TV stations, the Commission would have allowed any
newspaper and broadcast cross-media combinations, so long as they complied with the local TV
ownership rule and local radio ownership rule.
Although the Third Circuit determined that the Commissions decision to eliminate its outright
ban on newspaper/broadcast cross-ownership was justified, the court also found that the new CMLs
adopted by the agency were inconsistent and based on irrational assumptions. The CMLs consequently
were remanded to the Commission for further consideration, and the former radio/TV cross-ownership
limits as well as the newspaper/broadcast cross-ownership ban were left in place in the meantime.
12
National Television Station Ownership Rule: In its 2003 decision, the FCC raised the national
TV ownership capthe percentage of national U.S. households that a single owner can reach through
commonly owned television stationsfrom 35 percent to 45 percent. In that same decision, the
Commission decided to retain the 50 percent discount that it currently grants to ultra-high
frequency (UHF) stations, finding that the discount continues to be necessary to promote entry
and competition among broadcast networks.
This rule change sparked considerable controversy in Congress, eventually leading lawmakers to
include a new limitation in an appropriations bill. On January 22, 2004, President Bush signed
into law the Consolidated Appropriations Act of 2004. Section 629 of that legislation set the
national TV ownership cap at 39 percent. The Third Circuit subsequently ruled that challenges
before it to the national television ownership cap and UHF discount were moot.
The FCC is expected to initiate proceedings to address the issues raised by the Third Circuit
in 2006. Any new rules the FCC adopts would be subject to further judicial review.
Attribution Rules. Under the FCCs ownership rules, a direct or indirect purchaser of certain
types of securities of the Company could violate FCC regulations if that purchaser owned or
acquired an attributable interest in other media properties in the same areas as stations owned
by the Company or in a manner otherwise prohibited by the FCC. Pursuant to FCC rules adopted in
August 1999, as modified slightly on January 2001, the following relationships and interests
generally are considered attributable for purposes of the agencys broadcast ownership
restrictions:
|
|
|
All officers and directors of a licensee and its direct or indirect parent(s); |
|
|
|
|
Voting stock interests of at least five percent; |
|
|
|
|
Stock interests of at least 20 percent, if the holder is a passive
institutional investor (investment companies, banks, insurance companies); |
|
|
|
|
Any equity interest in a limited partnership or limited liability company,
unless properly insulated from management activities; and |
|
|
|
|
Equity and/or debt interests which in the aggregate exceed 33 percent of a
licensees total assets, if the interest holder supplies more than 15 percent of the
stations total weekly programming, or is a same-market broadcast company or daily
newspaper publisher. |
|
|
|
|
Time brokerage of a broadcast station by a same-market broadcast company. |
|
|
|
|
Same market radio joint sales agreements (in addition, the Commission is
considering making same-market television joint sales agreements attributable.) |
To the best of the Companys knowledge, no officer, director or 5% stockholder of the Company
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 ownership by the
Company of its stations.
Alien Ownership Restrictions. The Communications Act restricts the ability of foreign
entities or individuals to own or hold interests in 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 are barred from holding
broadcast licenses. Non-citizens, collectively, may directly or indirectly own or vote up to 20%
of the capital stock of a licensee. In addition, a broadcast license may not be granted to or held
by any corporation that is controlled, directly
13
or indirectly, by any other corporation more than 25% of whose capital stock is owned or voted by
non-U.S. citizens if the FCC finds that the public interest will be served by the refusal or
revocation of such license. The FCC has interpreted this provision of the Communications Act to
require an affirmative public interest finding before a broadcast license may be granted to or held
by any such corporation, and the FCC has made such an affirmative finding only in limited
circumstances. The Company, which serves as a holding company for wholly-owned subsidiaries that
are licensees for its stations, therefore may be restricted from having more than one-fourth of its
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. The FCC significantly reduced its regulation of the programming
and other operations of broadcast stations a number of years ago, including elimination of formal
ascertainment requirements and guidelines concerning the amounts of some types of programming and
commercial matter that may be broadcast. There are, however, FCC rules and policies, and rules and
policies of other federal agencies, that regulate matters such as network/affiliate relations,
political advertising practices, obscene and indecent programming, accessibility of television
programming to audience members who are visually or hearing disabled, childrens programming,
employment practices, and other areas affecting the business or operations of broadcast stations.
The Childrens Television Act of 1990 limits the permissible amount of commercial matter in
childrens television programs and requires each television station to present educational and
informational childrens programming. The FCC subsequently adopted stricter childrens programming
requirements, including a requirement that television broadcasters provide a minimum of three hours
of childrens educational programming per week. In addition, in September 2004, the FCC issued the
first in what may be a series of public interest mandates relating to the implementation of
digital television service (DTV) (which is discussed in detail below). Among other things, the
Commission determined that the amount of childrens educational programming it would require a DTV
broadcaster to air will increase proportionally with the number of free video programming streams
broadcast simultaneously (or multicast) by the broadcaster. In addition, the FCC extended its
existing limits on the duration and content of commercials aired during childrens programming to
digital programming. The agency also established new restraints designed to address excessive
commercialization of childrens fare on both analog and digital programming, including a ban on
the airing of Internet addresses to web pages containing commercial content. In late 2005, certain
advocacy groups and entertainment companies challenged these new rules in federal court. The
groups thereafter reached an agreement on a recommendation to the FCC that, if adopted, would
resolve their concerns with the FCCs rules. The FCC has stated that it will seek public comment
on the parties recommendation.
In August 2003, then-FCC Chairman Michael Powell announced the opening of a proceeding to seek
comment on a wide range of measures aimed at promoting localism in broadcasting. This initiative
has resulted in the creation of a Localism Task Force to conduct studies to measure localism,
organize a series of public hearings on localism around the country and offer recommendations to
both the agency and Congress on how to promote localism in television and radio. In July 2004, the
Commission released a wide-ranging Notice of Inquiry into broadcasters localism practices. The
NOI asks whether additional regulation is necessary to ensure that licensees satisfy the
programming needs and interests of their local audiences. Among other things, the Commission
suggests imposing minimum requirements for the amount of time dedicated to local and national
political programming. This proceeding remains pending, and the Company cannot predict its
outcome.
The FCC has stepped up its enforcement with respect to broadcast indecency issues over the
past few years. In doing so, the Commission has explicitly stated its willingness to find
licensees liable for repeated violations during a single program (which can lead to significantly
increased fines) and issued warnings about possible license revocation proceedings for serious
violations. The agency brought several significant indecency enforcement actions in 2004 and
proposed a new rule requiring broadcasters
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to retain copies of their programming for a limited time, purportedly to facilitate
investigation into and prosecution of indecency violations. That proposal remains pending. In
addition, Congress is considering legislation that would increase the penalties for broadcasting
indecent material.
EEO Rules. In October 2002, the FCC adopted new Equal Employment Opportunity (EEO) Rules
that went into effect March 10, 2003. The new rules impose job information dissemination,
recruitment and reporting requirements. Specifically, broadcasters must (1) widely disseminate
information concerning each full-time job vacancy; (2) provide notice of each full-time job vacancy
to recruitment organizations requesting notice; and (3) complete additional recruitment
initiatives, such as participation in job fairs, scholarship programs and EEO training. The new
rules also require licensees to file periodic reports relating to the EEO requirements.
Broadcasters may be subject to random audits to ensure compliance with the new EEO rules and could
be sanctioned for noncompliance.
Cable and Satellite Transmission of Local Television Signals. The FCC has adopted various
regulations to implement provisions of the Cable Television Consumer Protection and Competition Act
of 1992, as amended by the 1996 Act, governing the relationship between broadcasters and cable
operators. Among other matters, these regulations require cable systems to devote a specified
portion of their channel capacity to the carriage of the signals of local television stations and
permit TV stations to 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). The Communications Act and FCC regulations also contain measures to facilitate
competition among cable systems, telephone companies and other systems in the distribution of TV
signals, video programming and other services. Each of the Companys stations has elected must
carry status on certain cable systems in its DMA. On other cable systems, the Companys stations
are in the process of negotiating or have entered into retransmission consent agreements. These
elections and agreements will entitle the Companys stations to carriage on those systems until at
least December 31, 2008.
In November 1999, Congress enacted the Satellite Home Viewer Improvement Act of 1999
(SHVIA), which established a copyright licensing system for limited distribution of television
programming to DBS viewers and directed the FCC to initiate rulemaking proceedings to implement the
new system. SHVIA also extended the current system of satellite distribution of distant network
signals to unserved households (i.e., those that do not receive a Grade B signal from a local
network affiliate).
As part of the rulemakings required under SHVIA, the FCC established a market-specific
requirement for mandatory carriage of local television stations. Similar to the obligations
applicable to cable systems, the rules require satellite operators to carry all local broadcast
signals in those markets in which they choose to provide any local signal, beginning January 1,
2002. Stations in affected markets were required to select either must carry or retransmission
consent rights by October 1, 2005. This election is effective from January 1, 2006 to December 31,
2008. Further, under SHVIA, those broadcasters selecting retransmission consent (as opposed to
must carry rights) originally were required to meet certain good faith requirements in
negotiating for carriage rights until 2006.
Shortly before SHVIA expired on December 31, 2004, Congress passed the Satellite Home Viewer
Extension and Reauthorization Act of 2004 (SHVERA), which extends the compulsory copyright
license for carriage of distant signals through December 31, 2009 and addresses a variety of other
issues related to the carriage of broadcast television signals on DBS systems. Specifically,
SHVERA requires satellite carriers to phase out the carriage of distant signals in markets where
they carry local broadcast signals. The statute also permits satellite carriers to deliver the
distant signal of a network station to consumers in unserved digital households (also referred to
as digital white areas), but only if the local station affiliated with that network misses the
FCCs deadlines for increasing its digital signal power (also discussed below). In addition, the
law extends to DBS operators the obligation to negotiate in good faith with respect to
retransmission consent arrangements. Previously, only broadcasters were subject to the good faith
requirement, which was scheduled to sunset on December 31, 2005 but will now sunset on
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December 31, 2009. In February 2005, the FCC adopted rules relating to station eligibility
for satellite carriage and subscriber eligibility for receiving signals, and which stations are
entitled to significantly viewed status. In March 2005, the FCC adopted rules for carriage
elections, unified retransmission consent negotiation, and a requirement that satellite carriers
notify local broadcasters concerning carriage of significantly viewed signals. The Company cannot
predict the impact of DBS service upon the Companys business. It has, however, entered into
retransmission consent agreements with EchoStar and DirectTV for the retransmission of its
television stations signals into the local markets that they serve. These agreements run through
2008.
Digital Television Service. In April 1997, the FCC adopted rules for implementing DTV service
in the United States, which will improve the technical quality of television signals received by
viewers and give television broadcasters the ability to provide new services, including
high-definition television.
On April 3, 1997, all broadcasters holding a license or construction permit for a full-power
television station were assigned a second channel in order to provide either separate DTV
programming or a simulcast of their analog programming. These second channels were assigned for an
eight-year transition period scheduled to end in 2006. Stations were required to construct their
DTV facilities and be on the air with a digital signal according to a schedule set by the FCC based
on the type of station and the size of the market in which it is located. Generally, under current
FCC rules each of the Companys stations was required to construct DTV facilities and commence
operations by May 2002. Except as noted below, all other commercial broadcasters were required to
follow suit by May 1, 2002.
At the end of the DTV transition period, analog television transmissions will cease and DTV
channels will be reassigned to a smaller segment of the broadcasting spectrum comprising channels
2-51. Congress has set February 17, 2009 as the hard date by which television broadcasters must
cease analog broadcasts and surrender their analog spectrum to the government.
When the FCC adopted service rules for the digital television transition, it stated that it
would periodically review the transitions progress. In its first review, completed in 2001, the
Commission decided to permit broadcasters to construct initial minimal DTV facilities (i.e.,
facilities that cover only their cities of license) while retaining interference protection for
their allotted and maximized facilities.
In September 2004, the FCC issued a decision in its second periodic review of the DTV
transition, in which it revisited several of the issues addressed in 2001 and considered a number
of new matters. Among other things, the decision:
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Set deadlines by which broadcasters operating with minimal (e.g., reduced
power) DTV facilities must either provide DTV service to their full authorized coverage
areas or else lose interference protection to the unserved areas. For top 4 network
affiliated stations in the top 100 markets, the deadline was July 1, 2005; for all
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Established a multi-step process by which broadcasters may select their
post-transition DTV channel within the core DTV spectrum (Channels 2-51); this process
began in November 2004, with a goal of having all channel assignments finalized by the end
of 2006. |
The FCC will continue to review the progress of DTV periodically and make adjustments to the
transition schedule, as necessary.
In January 2001, the FCC issued a preliminary decision regarding the carriage (must carry)
rights of digital television broadcasters on local cable and certain DBS systems. The FCC
determined the following:
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Digital-only television stations may immediately assert carriage rights on
local cable systems; |
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Television stations that return their analog spectrum and convert to digital
operations are entitled to must carry rights; and |
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A digital-only station asserting must carry rights is entitled only to carriage
of a single programming stream and other program-related content, regardless of the
number of programs it multicasts on its digital spectrum. 1 |
In February 2005, the Commission (1) affirmed its prior tentative conclusion not to
accord broadcasters the right to simultaneous carriage of broadcasters analog and digital signals;
and (2) affirmed its prior determination that cable operators need not carry more than a single
digital programming stream from any particular broadcaster.
Several parties filed petitions for reconsideration of various parts of the FCCs DTV must
carry decisions. Some of those petitions remain pending before the Commission and the Company
cannot predict what changes, if any, the FCC will make to its DTV must carry rules on
reconsideration.
In addition, because it determined that the lack of DTV receiver capability in television sets
was delaying the transition, the FCC has adopted a plan to phase in the inclusion of digital tuning
and decoding devices in television sets. Specifically, the decision requires all new television
sets and TV interface devices (VCRs, etc.) to include the capability of tuning and decoding
over-the-air digital signals by 2007.
Another major concern for the DTV transition involves the technical standards needed to ensure
that digital television sets can connect to cable systems. On September 10, 2003, the FCC adopted
plug-and-play rules for cable adaptability. Under these rules, consumers will be able to plug
their cable directly into their digital televisions, without the need for a set-top box. These
rules cover one-way programming only; the cable and electronics industries are working toward an
agreement on two-way plug-and-play standards that would eliminate the need for set-top boxes for
advanced services such as video on demand, impulse pay-per-view and cable operator-enhanced
electronic programming guides. The Company cannot predict the outcome of those negotiations.
On November 4, 2003, the Commission adopted protection against unauthorized copying and
distribution of digital television programming in the form of a broadcast flag. A broadcast flag
is a digital code that can be embedded into a digital broadcasting stream. This would have allowed
a broadcaster, at its discretion, to prevent mass distribution of its digital signal over the
Internet, without affecting consumers ability to make digital copies. On May 6, 2005, however,
the United States Court of Appeals for the D.C. Circuit struck down the FCCs broadcast flag
requirements as beyond the agencys statutory authority.
Additionally, the FCC recently adopted rules and procedures to facilitate 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.
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In its September 2004 decision, the
Commission also eliminated a requirement that broadcasters simulcast a certain
percentage of the video programming of their analog channel on their DTV
channel. The FCC noted, however, that it will continue to monitor the
transitions progress and, if necessary, re-impose the requirement at a
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In November 2005, moreover, the FCC modified its rules to require all digital television
broadcasters to participate in the Emergency Alert System.
Broadcasters are permitted either to use their digital spectrum to provide a single HDTV
signal or to multicast several program streams in lower resolution formats, known as standard
definition television (SDTV). Broadcasters also may use some of their digital spectrum to
provide non-broadcast ancillary servicessuch as subscription video, data transfer or audio
signalsprovided such services do not interfere with the mandatory free digital broadcasts.
Stations using their DTV spectrum for subscription services must pay the government a fee of 5
percent of gross revenues received from such use of the digital spectrum. Because of the
flexibility of the U.S. digital system, moreover, licensees are able to shift between different
quality services (including data) in different time periods.
Moreover, broadcasters currently are not required to provide a minimum amount of HDTV
programming. Thus, licensees may use their digital channels according to their best business
judgment, provided they continue to offer at least one free programming service with a resolution
comparable to or better than todays service. Network-affiliated DTV broadcasters in the top 30
television markets must broadcast a DTV signal at any time they broadcast an analog signal. All
other stations currently must air a DTV signal for an amount of time equivalent to 75 percent of
the time they provide an analog signal, increasing to 100 percent on April 1, 2005. The DTV signal
must always be in operation during prime time hours.
In addition, as discussed above, in September 2004, the FCC issued an order specifically
addressing the childrens programming obligations of DTV broadcast licensees. Still under
consideration in a proceeding initially launched during the Clinton Administration are such issues
as whether a licensees public interest obligations attach to the DTV channel as a whole or to each
program stream offered by the licensee; whether broadcasters should be required to report their
public interest programming and activities on a quarterly basis; whether the Commission should
establish more specific minimum public interest requirements for broadcasters; and how broadcasters
could improve candidate access to television. The Company cannot predict the outcomes of these
proceedings.
As of the date of filing this Annual Report, the Company was in compliance with the FCCs
digital broadcasting requirements at all of its stations.
Employees
As of March 3, 2006, the Company had 2,113 full-time employees, of which 2,089 were employees
of the Companys broadcast operations and 24 were corporate and administrative personnel. The
Company has 185 full time employees and 37 part time employees that are represented by unions. The
Company believes that its relations with its employees are satisfactory.
Available Information
The Companys Internet 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 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. |
These filings are also available at the SECs website located at http://www.sec.gov. 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 Company from the
SECs public reference room by calling the SEC at 1-800-SEC-0330.
The foregoing reports are made available on the Companys website as soon as practicable after
they are filed with, or furnished to, the SEC. The information found on our web site is not part
of this or any other report we file with or furnish to the SEC.
The Company has adopted a Code of Ethics that applies to all of its directors, executive
officers and employees. The Code is available on the Companys 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 a SEC filing on Form 8-K. The Company has also filed the Code as an exhibit to the
Annual Report filed on Form 10-K for the year ended December 31, 2004 and is incorporated by
reference to this report.
The Companys website also includes the Companys Corporate Governance Principles, as well as
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 (229)
888-9378.
Certification with the New York Stock Exchange
On May 27, 2005, the Companys Chief Executive Officer filed with the New York Stock Exchange
the annual written affirmation certifying the Companys compliance with the New York Stock
Exchanges corporate governance listing standards as required by Listed Company Manual Rule
303A.12.
The certifications of the Companys Chairman and Chief Executive Officer and the Companys
Senior Vice President and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act
of 2002 are filed as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K.
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Item 1A. Risk Factors.
Risks Related to Our Business
We depend on advertising revenues, which fluctuate as a result of a number of factors and also
experience seasonal fluctuations.
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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the health of the economy 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 makeup of the population in the areas where our stations are located; |
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pricing fluctuations in local and national advertising; |
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the activities of our competitors, including increased competition from other forms of
advertising based mediums, particularly network, cable television, direct satellite
television and the Internet; |
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the outbreak and duration of hostilities or the occurrence of terrorist attacks and the
duration and extent of network preemption of regularly scheduled programming and decisions
by advertisers to withdraw or delay planned advertising expenditures 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, or a recession in
a particular market, would make it more difficult to sell advertising time and space and could
reduce our revenue.
In addition, our results are subject to seasonal fluctuations, which typically result in
second and fourth quarter broadcast operating income being greater than first and third quarter
broadcast operating income. This seasonality is primarily attributable to increased expenditures by
advertisers in the spring and in anticipation of holiday season spending and an increase in
viewership during this period. Furthermore, revenues from political advertising are significantly
higher in even-numbered years.
Our flexibility is limited by the terms of our senior secured credit facilities.
Our senior secured credit facility prevents us from taking certain actions and require us to
meet certain tests. These limitations and tests include, without limitation, the following:
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limitations on liens; |
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limitations on additional debt; |
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limitations on dividends and distributions; |
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limitations on management and consulting fees; |
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limitations on stock repurchases; |
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limitations on transactions with affiliates; |
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limitations on guarantees; |
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limitations on asset sales; |
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limitations on sale-leaseback transactions; |
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limitations on acquisitions; |
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limitations on changes in our business; |
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limitations on mergers and other corporate reorganizations; |
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limitations on loans, investments and advances, including investments in joint ventures
and foreign subsidiaries; |
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financial ratio and condition tests; and |
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increases in our cost of borrowings or inability or unavailability of additional debt or
equity capital. |
These restrictions and tests may prevent us from taking action that could increase the value
of our securities, or may require actions that decrease the value of our securities. In addition,
we may fail to meet the tests and thereby default under such senior secured credit facility
(particularly if the industry continues to soften and thereby reduce our advertising revenues). If
we default on our obligations, creditors could require immediate payment of the obligations or
foreclose on collateral. If this happened, we could be forced to sell assets or take other action
that would reduce the value of our securities.
Servicing our debt will require a significant amount of cash, and our ability to generate
sufficient cash depends on many factors, some of which are beyond our control.
Our ability to service our debt depends on our ability to generate significant cash flow in
the future. This, to some extent, is subject to general economic, financial, competitive,
legislative and regulatory factors as well as other factors that are beyond our control. We cannot
assure you that our business will generate cash flow from operations, or that future borrowings
will be available to us under our senior secured credit facility, or otherwise, in an amount
sufficient to enable us to pay our debt 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 additional
capital. Additional debt or equity financing may not be available in sufficient amounts 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 obligations.
We may be required to take an impairment charge on our goodwill and FCC licenses, which may have a
material effect on the value of our total assets.
As of December 31, 2005 the book value of our FCC licenses was $1.023 billion and the book
value of our goodwill was $222.4 million in comparison to total assets of $1.525 billion. Not less
than annually, we are required to evaluate our goodwill and FCC 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 if 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
popular 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 also have little
control over the costs of programming. We usually must purchase programming several years in
advance, and may have to commit to purchase more than one years worth of programming. In addition,
we may replace programs that are
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doing 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 or otherwise cause our costs to escalate relative to revenues.
We may lose a large amount of television programming if a network terminates its affiliation with
us.
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 network with which the station is affiliated. The NBC affiliation agreement for KKCO expires on
July 30, 2006. Our other affiliation agreements expire between January 1, 2012 and December 31,
2014.
If we do not enter into affiliation agreements to replace our expiring agreements, we may no
longer be able to carry programming of the relevant network. This loss of programming would require
us to obtain replacement programming, which may involve higher costs and which may not be as
attractive to our target audiences. Furthermore, our concentration of CBS affiliates makes us
sensitive to adverse changes in our business relationship with, and the general success of, CBS.
Network compensation is expected to decrease in future periods.
Television station revenues are primarily derived from local, regional and national
advertising and, to a much lesser extent, from network compensation. Cash payments are provided to
us by networks in partial exchange for a substantial majority of the advertising time available for
sale during the airing of network programs. Our network compensation has declined in recent years
and will continue to decline in future years, reflecting an on-going phase-out by the networks of
network compensation under our affiliation agreements.
Increases in cable viewership and advertising could result in a decrease in our advertising
revenues.
Cable-originated programming is a significant competitor for viewers of broadcast television
programming. The advertising share of cable networks has increased as a result of the growth in
cable penetration (the percentage of television households which are connected to a cable system).
Increases in the advertising share of cable networks could result in a decrease in the advertising
revenue at our television stations.
Competition from other broadcasters and other sources may cause our advertising sales to go down or
our costs to go up.
Competition in the television industry exists on several levels: competition for audience;
competition for programming, including news; and competition for advertisers. Additional factors
that are material to a television stations competitive position include signal coverage and
assigned frequency.
Audience. Stations compete for audience based on program popularity, which has a direct effect
on advertising rates. A substantial portion of the daily programming on each of our stations is
supplied by the network affiliate. During those periods, the stations are totally dependent upon
the performance of the network programs to attract viewers. There can be no assurance that this
programming will achieve or maintain satisfactory viewership levels in the future. Non-network time
periods are programmed by the station with a combination of self-produced news, public affairs and
other entertainment programming, including news and syndicated programs purchased for cash, cash
and barter, or barter only, and involve significant costs.
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In addition, the development of methods of television transmission of video programming other
than over-the-air broadcasting and, in particular, cable television have significantly altered
competition for audiences in the television industry. These other transmission methods can increase
competition for a broadcasting station by bringing into its market distant broadcasting signals not
otherwise available to the stations audience and also by serving as a distribution system for
non-broadcasting programming.
Technological innovation and the resulting proliferation of programming alternatives, such as
home entertainment systems, wireless cable services, satellite master antenna television
systems, low power television stations, television translator stations, direct broadcast satellite,
video distribution services, pay-per-view and the Internet, have fractionalized television viewing
audiences and have subjected free over-the-air television broadcast stations to new types of
competition.
Programming. Competition for programming involves negotiating with national program
distributors or syndicators that sell first-run and rerun packages of programming. Each station
competes against the broadcast station competitors in its market for exclusive access to
off-network reruns, such as Seinfeld, and first-run product, such as Oprah. 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. Competition exists for exclusive news stories and features as well.
Advertising. Advertising rates are based upon the size of the market in which the station
operates, a stations overall ratings, a programs popularity among the viewers that an advertiser
wishes to attract, the number of advertisers competing for the available time, the demographic
makeup of the market served by the station, the availability of alternative advertising media in
the market area, aggressive and knowledgeable sales forces and 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 for advertising revenues with
other television stations in their respective markets. The stations also compete for advertising
revenues with other media, such as newspapers, radio stations, magazines, outdoor advertising,
transit advertising, yellow page directories, direct mail, Internet and local cable systems.
Competition for advertising dollars in the broadcasting industry occurs primarily within individual
markets.
Deregulation. Recent changes in law have also increased competition. The Telecommunications
Act of 1996 created greater flexibility and removed some limits on station ownership. The prices
for stations have risen as a result. Telephone, cable and some other content providers are also
free to provide video services in competition with us. Other proposed legislation would relax
existing prohibitions on the simultaneous ownership of telephone and cable businesses. As a result
of these changes, new companies are able to enter our markets and compete with us.
Future technology under development. Cable providers and direct broadcast satellite companies
are developing new techniques that allow them to transmit more channels on their existing
equipment. These so-called video compression techniques will reduce the cost of creating
channels, and may lead to the division of the television industry into ever more specialized niche
markets. Video compression is available to us as well, but competitors who target programming to
such sharply defined markets may gain an advantage over us for television advertising revenues.
Lowering the cost of creating channels may also encourage new competitors to enter our markets and
compete with us for advertising revenue.
Materiality of a Single Advertising Category Could Adversely Affect Our Business
We derive a material portion of our ad revenue from the automotive industry. For
example, approximately 26% of total revenue came from the automotive category in 2005. If
automotive-related advertising revenue decreases, or if revenue from another ad category that
constitutes a material portion
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of our stations revenue in a particular period were to decrease, our business and operating
results could be adversely affected.
The phased-in introduction of digital television will continue to require us to incur capital and
operating costs and may expose us to increased competition.
The conversion from analog to digital television services in the United States may have the
following effects on us:
Capital and operating costs. We will incur costs to replace equipment in our stations in order
to provide digital television. Even with the flexible operating requirements, some of our stations
will also incur increased utilities costs as a result of converting to digital operations. We
cannot be certain we will be able to increase revenues to offset these additional costs.
Conversion and programming costs. In addition to incurring costs to convert our stations from
the current analog format to digital format, 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 make up for the conversion costs and additional programming
expenses. Also, multiple channels programmed by other stations could increase competition in our
markets.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act
of 2002. Identification of material weaknesses in internal controls, if identified, could indicate
a lack of proper controls to generate accurate financial statements.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rules, we are
required to furnish a report of managements assessment of the effectiveness of our internal
controls as part of our Annual Report on Form 10-K. Our auditors are required to attest to and
report on managements assessment, as well as provide a separate opinion. To issue our report, we
document our internal control design and the testing processes that supports our evaluation and
conclusion, and then we test and evaluate the results. There can be no assurance, however, that we
will be able to remediate material weaknesses, if any, that may be identified in future periods, or
maintain all of the controls necessary for continued compliance. There likewise can be no assurance
that we will be able to retain sufficient skilled finance and accounting personnel, especially in
light of the increased demand for such personnel among publicly traded companies.
Pending litigation could adversely affect our ownership interest in Tarzian.
Our equity investment in Tarzian represents shares which were originally held by the estate of
Mary Tarzian, which we refer to as the Estate. Tarzian filed a complaint against the Estate
claiming that Tarzian had a binding and enforceable contract to purchase these shares from the
Estate. In addition, we were subject to a complaint filed by Tarzian claiming tortious
interference with contract and seeking damages equal to the liquidation value of the shares.
Although this case has been administratively closed, it is ongoing pending the final resolution of
the litigation against the Estate. The Company believes it has meritorious defenses and intends to
vigorously defend the lawsuit. Although the action has been adjudged on appeal in favor of the
Estate, we cannot predict when the final resolution of this case, or the companion action against
us for tortious interference, will occur.
Our inability to integrate acquisitions successfully would adversely affect us.
We have acquired 33 television stations since January 1, 1994 and in the future we may make
additional acquisitions. In order to integrate successfully the businesses we acquire we will need
to
24
coordinate the management and administrative functions and sales, marketing and development
efforts of each company. Combining companies presents a number of challenges, including integrating
the management of companies that may have different approaches to sales and service, and the
integration of a number of geographically separated facilities. In addition, integrating
acquisitions requires substantial management time and attention and may distract management from
our day-to-day business. If we cannot successfully integrate the businesses we have acquired and
any future acquisitions, our business and results of operations could be adversely affected.
Risks Related to Regulatory Matters
Federal regulation of the broadcasting industry limits our operating flexibility.
The FCC regulates our business, just as it does all other companies in the broadcasting
industry. We must request and obtain FCC approval whenever we need a new license, seek to renew or
assign a license, purchase a new station or transfer the control of one of our subsidiaries that
holds a license. Our FCC licenses are critical to our operations; we cannot operate without them.
We cannot be certain that the FCC will renew these licenses in the future or approve new
acquisitions.
Federal legislation and FCC rules have changed significantly in recent years and can be
expected to continue to change. These changes may limit our ability to conduct our business in ways
that we believe would be advantageous and may therefore 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, our ability to expand through acquisitions of additional stations in markets where we
presently are operating is constrained by those rules. Under current FCC cross-ownership rules, we
also are not allowed to own and operate a television station and a newspaper in the same market.
Item 1B. Unresolved Staff Comments.
None.
25
Item 2. Properties.
The Companys principal executive offices are located at 4370 Peachtree Road, NE, Atlanta,
Georgia, 30319. The Companys administrative office is located at 126 North Washington St., Third
Floor, Albany, Georgia, 31701.
The types of properties required to support television stations include offices, studios,
transmitter sites and antenna sites. A stations studios are generally housed with its offices in
business districts. The transmitter sites and antenna are generally located in elevated areas to
provide optimal signal strength and coverage.
The following table sets forth certain information regarding the Companys television stations
and related properties as of March 9, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
Approximate |
|
|
Height(ft.)/ |
|
|
Lease |
|
|
|
or |
|
Size |
|
|
Analog |
|
|
Expiration |
|
Market Area, Station and Use |
|
Leased |
|
(sq. ft.)(a) |
|
|
Power |
|
|
Date |
|
|
Knoxville, Tennessee, WVLT
Office and studio |
|
Owned |
|
|
18,000 |
|
|
|
|
|
|
|
|
|
Transmission tower site |
|
Leased |
|
Tower space |
|
|
1,078/316 kw |
|
|
|
6/2028 |
|
Lexington, Kentucky, WKYT
Office and studio |
|
Owned |
|
|
34,500 |
|
|
|
|
|
|
|
|
|
Transmission tower site |
|
Owned |
|
|
|
|
|
1,510/60 kw |
|
|
|
|
|
Hazard, Kentucky, WYMT
Office and studio |
|
Owned |
|
|
21,200 |
|
|
|
|
|
|
|
|
|
Transmission tower site |
|
Leased |
|
|
|
|
|
1,029/263 kw |
|
|
|
6/2010 |
|
Transmitter buildings and improvements |
|
Owned |
|
816 and 864 |
|
|
|
|
|
|
|
|
|
Waco, Texas, KWTX
Office and studio |
|
Owned |
|
|
34,000 |
|
|
|
|
|
|
|
|
|
Moody, Texas, KWTX
Transmission tower site |
|
Owned |
|
|
856 |
|
|
1,679/209 kw |
|
|
|
|
|
Killeen, Texas, KWTX
Office Space |
|
Leased |
|
|
3,000 |
|
|
|
|
|
|
|
07/2006 |
|
Tower Relay |
|
Owned |
|
|
|
|
|
|
109 |
|
|
|
|
|
Bryan, Texas, KBTX
Office and studio |
|
Owned |
|
|
13,000 |
|
|
|
|
|
|
|
|
|
Transmission tower |
|
Owned |
|
|
|
|
|
|
374 |
|
|
|
|
|
Grimes County, Texas, KBTX
Transmission tower site |
|
Leased |
|
|
1,300 |
|
|
1,705/70 kw |
|
|
|
03/2023 |
|
Calvert, Texas, KBTX
Transmission Tower |
|
Owned |
|
80 and 96 |
|
|
|
252 |
|
|
|
|
|
Falls County, Texas, KBTX
Transmission Tower |
|
Owned |
|
|
128 |
|
|
|
200 |
|
|
|
|
|
Beaver Crossing, Nebraska, KOLN
Transmission tower site |
|
Owned |
|
120 acres |
|
|
1,500/302 kw |
|
|
|
|
|
Lincoln, Nebraska, KOLN
Office and studio |
|
Owned |
|
|
28,044 |
|
|
|
400 |
|
|
|
|
|
Heartwell, Nebraska, KOLN
Transmission Tower site |
|
Owned |
|
|
71 |
|
|
1,069/316 kw |
|
|
|
|
|
Grand Island, Nebraska, KGIN
Office and studio |
|
Leased |
|
|
3,616 |
|
|
|
|
|
|
|
12/2008 |
|
Transmission tower site |
|
Owned |
|
|
71 |
|
|
1,069/316kw |
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
Approximate |
|
|
Height(ft.)/ |
|
|
Lease |
|
|
|
or |
|
Size |
|
|
Analog |
|
|
Expiration |
|
Market Area, Station and Use |
|
Leased |
|
(sq. ft.)(a) |
|
|
Power |
|
|
Date |
|
|
Washington, North Carolina, WITN
Office and studio |
|
Owned |
|
|
19,600 |
|
|
|
198 |
|
|
|
|
|
Greenville, North Carolina, WITN
Office and studio |
|
Leased |
|
|
2,822 |
|
|
|
|
|
|
|
11/2006 |
|
Grifton, North Carolina, WITN
Transmitter building |
|
Owned |
|
|
4,190 |
|
|
|
2,000 |
|
|
|
|
|
Transmission tower site |
|
Leased |
|
9 acres |
|
|
316 kw |
|
|
|
01/2029 |
|
Tallahassee, Florida, WCTV
Office and studio |
|
Owned |
|
|
20,000 |
|
|
|
|
|
|
|
|
|
Transmission tower site |
|
Leased |
|
37 acres |
|
|
400 |
|
|
|
12/2014 |
|
Tallahassee, Florida, WCTV
Office and studio (Halstead Blvd) |
|
Owned |
|
|
29,000 |
|
|
|
|
|
|
|
|
|
Transmission tower site (27 site) |
|
Owned |
|
10 acres |
|
|
900 |
|
|
|
|
|
Metcalf, Georgia, WCTV
Transmission tower site |
|
Owned |
|
182 acres |
|
|
2,000/96 kw |
|
|
|
|
|
North Augusta, South Carolina, WRDW
Office and studio |
|
Owned |
|
|
17,000 |
|
|
501/20 kw |
|
|
|
|
|
Beech Island, South Carolina, WRDW
Transmission tower site |
|
Owned |
|
143 acres |
|
|
1,454/750 kw |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,591/316 kw |
|
|
|
|
|
Eau Claire, Wisconsin, WEAU
Office and studio |
|
Owned |
|
|
16,116 |
|
|
|
961 |
|
|
|
|
|
Township of Fairchild, Wisconsin, WEAU |
|
Owned |
|
|
|
|
|
|
|
|
|
|
|
|
Transmitter building and transmission site |
|
With easement |
|
|
2,304 |
|
|
2,000/316 kw |
|
|
|
|
|
Panama City, Florida, WJHG
Office and studio |
|
Owned |
|
|
14,000 |
|
|
|
413 |
|
|
|
|
|
Youngstown, Florida, WJHG
Transmission tower site |
|
Owned |
|
17 acres |
|
|
867/316kw 52 kw |
|
|
|
|
|
|
|
|
|
|
|
|
|
digital |
|
|
|
|
|
Sherman, Texas, KXII
Office and studio |
|
Owned |
|
|
12,813 |
|
|
|
202 |
|
|
|
|
|
Madill, Oklahoma, KXII
Transmission tower site |
|
Owned |
|
|
1,200 |
|
|
1,694/316 kw |
|
|
|
|
|
Ardmore, Oklahoma, KXII
Studio and offices |
|
Owned |
|
|
3,000 |
|
|
|
60 |
|
|
|
|
|
Paris, Texas, KXII
Translator Tower |
|
Owned |
|
|
60 |
|
|
300/10 kw |
|
|
|
|
|
Wichita-Hutchinson, Kansas, KAKE-TV
Office and Studio |
|
Owned |
|
|
46,762 |
|
|
|
|
|
|
|
|
|
Tower/Transmitter site |
|
Owned |
|
|
2,176 |
|
|
1,079/316 kw |
|
|
|
|
|
Colby, Kansas, KLBY-TV
Tower/Transmitter site |
|
Leased |
|
|
1,000 |
|
|
768/100 kw |
|
|
|
04/2007 |
|
Garden City, Kansas, KUPK-TV
Office and Studio |
|
Owned |
|
|
1,831 |
|
|
|
|
|
|
|
|
|
Tower/Transmitter site |
|
Owned |
|
|
4,655 |
|
|
880/224 kw |
|
|
|
|
|
Omaha, Nebraska, WOWT-TV
Office and Studio |
|
Owned |
|
|
58,829 |
|
|
528/100 kw |
|
|
|
|
|
Tower/Transmitter site |
|
Owned |
|
|
2,500 |
|
|
1,342/100 kw |
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
Approximate |
|
|
Height(ft.)/ |
|
|
Lease |
|
|
|
or |
|
Size |
|
|
Analog |
|
|
Expiration |
|
Market Area, Station and Use |
|
Leased |
|
(sq. ft.)(a) |
|
|
Power |
|
|
Date |
|
|
Madison, Wisconsin, WMTV-TV
Office and Studio |
|
Owned |
|
|
16,485 |
(b) |
|
|
|
|
|
|
|
|
Tower |
|
Leased |
|
|
|
|
|
1299/891 kw |
|
|
|
5/2103 |
|
Transmitter site |
|
Owned |
|
|
|
|
|
|
|
|
|
|
|
|
South Bend, Indiana, WNDU-TV
Office and studio building |
|
Owned |
|
|
39,800 |
|
|
|
|
|
|
|
|
|
Office and studio property |
|
Leased |
|
12.4 Acres |
|
|
|
|
|
|
|
|
|
Transmission tower site |
|
Owned |
|
56 Acres |
|
|
1,072/5000kw |
|
|
|
2021 |
|
Colorado Springs-Pueblo, Colorado, KKTV
Office and Studio |
|
Owned |
|
|
30,465 |
|
|
|
|
|
|
|
|
|
Tower/Transmitter site |
|
Leased |
|
|
800 |
|
|
350/234 kw |
|
|
|
02/2059 |
|
Lansing, Michigan, WILX-TV
Office and Studio |
|
Owned |
|
|
13,700 |
|
|
|
|
|
|
|
|
|
Tower/Transmitter site |
|
Leased |
|
|
5,000 |
|
|
994/309 kw |
|
|
|
10/2008 |
|
Rockford, Illinois, WIFR-TV
Office and Studio |
|
Owned |
|
|
15,858 |
(b) |
|
|
|
|
|
|
|
|
Tower/Transmitter site |
|
Owned |
|
|
|
|
|
729/562 kw |
|
|
|
|
|
Wausau-Rhinelander, WI WSAW-TV
Office and Studio |
|
Owned |
|
|
24,400 |
|
|
|
|
|
|
|
|
|
Tower/Transmitter site |
|
Leased |
|
|
1,440 |
|
|
650/316 kw |
|
|
|
08/2017 |
|
Translator Tower site Sayner, WI |
|
Owned |
|
|
144 |
|
|
495/1kw |
|
|
|
|
|
Topeka, Kansas, WIBW-TV
Office and Studio |
|
Owned |
|
|
19,800 |
|
|
|
|
|
|
|
|
|
Tower/Transmitter site |
|
Leased |
|
|
2,338 |
|
|
1,249/316 kw |
|
|
|
02/2062 |
|
Dothan, Alabama WTVY-TV
Office and Studio |
|
Leased |
|
|
20,440 |
|
|
|
|
|
|
|
12/2010 |
|
Bonifay, FL WTVY-TV
Tower/Transmitter site |
|
Owned |
|
|
2,500 |
|
|
1,880/100 kw |
|
|
|
|
|
Harrisonburg, Virginia, WHSV-TV
Office and Studio |
|
Leased |
|
|
18,000 |
|
|
|
|
|
|
|
04/2018 |
(c) |
Tower/Transmitter site |
|
Leased |
|
|
2,016 |
|
|
337/8.32 kw |
|
|
|
12/2001 |
(d) |
Bowling Green, Kentucky, WBKO-TV
Office and Studio |
|
Owned |
|
|
17,598 |
|
|
|
|
|
|
|
|
|
Tower/Transmitter site |
|
Owned |
|
|
1,175 |
|
|
603/316 kw |
|
|
|
|
|
Meridian, Mississippi, WTOK-TV
Office and Studio |
|
Owned |
|
|
34,061 |
|
|
|
|
|
|
|
|
|
Tower/Transmitter site |
|
Owned |
|
|
1,504 |
|
|
319/316 kw |
|
|
|
|
|
Parkersburg, West Virginia, WTAP-TV
Office and Studio |
|
Owned |
|
|
17,500 |
|
|
|
|
|
|
|
|
|
Tower/Transmitter site |
|
Owned |
|
|
3,600 |
|
|
460/216 kw |
|
|
|
|
|
Reno, Nevada, KOLO-TV
Office and studio |
|
Owned |
|
|
20,600 |
|
|
|
|
|
|
|
|
|
Transmission tower site |
|
Leased |
|
|
|
|
|
80/20kw |
|
|
|
12/2030 |
|
Transmitter building and improvements |
|
Owned |
|
1018 and 864 |
|
|
|
|
|
|
|
|
|
Charlottesville, VA, WCAV-TV
Office and Studio |
|
Leased |
|
|
8,900 |
|
|
|
|
|
|
|
04/2009 |
|
Transmission Tower / 2 Antennas |
|
Leased |
|
|
1,000 |
|
|
198/34.91 kw |
|
|
|
|
|
|
|
|
|
|
|
|
|
190/15.74 kw |
|
|
|
04/2009 |
|
Antennae for WAHU FOX |
|
Leased |
|
|
2,500 |
|
|
210/50 kw |
|
|
|
04/2009 |
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
Approximate |
|
|
Height(ft.)/ |
|
|
Lease |
|
|
|
or |
|
Size |
|
|
Analog |
|
|
Expiration |
|
Market Area, Station and Use |
|
Leased |
|
(sq. ft.)(a) |
|
|
Power |
|
|
Date |
|
|
Grand Junction, CO, KKCO-TV
Office and Studio |
|
Leased |
|
|
4,000 |
|
|
|
|
|
|
|
4/30/2006 |
|
Tower/Transmitter site |
|
Leased |
|
|
|
|
|
300/155kw |
|
|
|
12/31/2006 |
|
Transmitter building and improvements |
|
Owned |
|
|
800 |
|
|
|
|
|
|
|
|
|
Charleston, WV, WSAZ
Office and Studio Charleston |
|
Owned |
|
|
6,468 |
|
|
|
|
|
|
|
|
|
Tower |
|
Owned |
|
|
|
|
|
180/1 kw |
|
|
|
|
|
Huntington, WV, WSAZ
Office and Studio |
|
Owned |
|
|
24,476 |
|
|
|
|
|
|
|
|
|
Tower |
|
Owned |
|
|
|
|
|
1061/42.7 kw |
|
|
|
|
|
Tower |
|
Owned |
|
|
|
|
|
1061/724 kw |
|
|
|
|
|
Moultrie, GA, WSWG
Office |
|
Owned |
|
|
6,000 |
|
|
|
|
|
|
|
|
|
Office |
|
Leased |
|
|
170 |
|
|
|
|
|
|
|
10/2009 |
|
Transmission Tower |
|
Leased |
|
|
|
|
|
960/1.7 mw |
|
|
|
10/2009 |
|
|
|
|
(a) |
|
Approximate size is for building space only and does not include the land on which the
facilities are located. |
|
(b) |
|
The tower/transmitter is located at and included within the size of the office and studio
premises. |
|
(c) |
|
The Company has an option to purchase this property during the term of the lease. The
purchase price is subject to adjustment depending upon the date the option is exercised. |
|
(d) |
|
The United States Department of Agriculture Forest Service granted us a Special Use Permit to
occupy this land. |
29
Item 3. Legal Proceedings.
Settlement of Income Tax Matter
In October 2001, the Company received a notice of deficiency from the Internal Revenue Service
(the IRS) with respect to its 1996 and 1998 federal income tax returns. The notice of deficiency
alleged that the Company recognized a significant amount of taxable gain from the sale of certain
assets in 1996 in connection with a business acquisition from First American Media, Inc. The notice
of deficiency also alleged that the Companys 1996 acquisition of certain assets from First
American Media, Inc. should be characterized for tax purposes as an acquisition of stock. On
January 18, 2002, the Company filed a petition to contest the matter in the United States Tax
Court.
In January 2004, the Company settled its litigation with the IRS regarding all deficiencies
related to the IRS audit of the Companys 1996 and 1998 federal income tax returns. The
settlement required no cash payments from the Company. The Company agreed in the settlement to
forego certain claimed depreciation and amortization deductions relating to the 1996 through 1999
tax years, which in turn resulted in a reduction of the federal income tax net operating loss
carryforwards by approximately $16.3 million. During the three months ended December 31, 2003, the
Company recorded a non-cash charge to decrease its deferred tax assets by approximately $5.8
million to reflect this settlement. During 2004 and as a result of the settlement, the Company
collected a previously claimed federal tax cash refund of approximately $1.1 million, plus
statutory interest, that related to 1996.
Other Legal Proceedings
The Company is not a party to any legal proceedings in which an adverse outcome would have a
material adverse effect, either individually or in the aggregate, upon the Company except as
described below.
Investment in Broadcasting Company
The Company has an equity investment in Sarkes Tarzian, Inc. (Tarzian) representing shares
in Tarzian which were originally held by the estate of Mary Tarzian (the Estate). As described
more fully below, the Companys ownership of the Tarzian shares is subject to certain litigation.
On February 12, 1999, Tarzian filed suit in the United States District Court for the Southern
District of Indiana against U.S. Trust Company of Florida Savings Bank as Personal Representative
of the Estate, claiming that Tarzian had a binding and enforceable contract to purchase the Tarzian
shares from the Estate. On February 3, 2003, the Court entered judgment on a jury verdict in favor
of Tarzian for breach of contract and awarding Tarzian $4.0 million in damages. The Estate
appealed the judgment and the Courts rulings on certain post-trial motions, and Tarzian
cross-appealed. On February 14, 2005, the U.S. Court of Appeals for the Seventh Circuit issued a
decision concluding that no contract was ever created between Tarzian and the Estate, reversing the
judgment of the District Court, and remanding the case to the District Court with instructions to
enter judgment for the Estate. Tarzians petition for rehearing was denied by the Seventh Circuit
Court of Appeals, and the U.S. Supreme Court denied Tarzians petition for certiorari. Tarzian
also filed a motion for a new trial in the District Court based on the Estates alleged failure to
produce certain documents in discovery. The District Court denied Tarzians motion, and on
February 24, 2006, the Seventh Circuit Court of Appeals affirmed the District Courts ruling.
Tarzian has not petitioned for rehearing and has 90 days from the date of the Seventh Circuits
opinion in which to petition the U.S. Supreme Court for certiorari. The Company cannot predict
when the final resolution of this litigation will occur.
30
On March 7, 2003, Tarzian filed suit in the United States District Court for the Northern
District of Georgia against Bull Run Corporation and the Company for tortious interference with
contract and conversion. The lawsuit alleges that Bull Run Corporation and the Company purchased
the Tarzian shares with actual knowledge that Tarzian had a binding agreement to purchase the stock
from the Estate. The lawsuit seeks damages in an amount equal to the liquidation value of the
interest in Tarzian that the stock represents, which Tarzian claims to be as much as $75 million,
as well as attorneys fees, expenses, and punitive damages. The lawsuit also seeks an order
requiring the Company and Bull Run Corporation to turn over the stock certificates to Tarzian and
relinquish all claims to the stock. The stock purchase agreement with the Estate would permit the
Company to make a claim against the Estate in the event that title to the Tarzian Shares is
ultimately awarded to Tarzian. There is no assurance that the Estate would have sufficient assets
to honor any or all of such potential claims. The Company filed its answer to the lawsuit on May
14, 2003 denying any liability for Tarzians claims. On May 27, 2005, the Court issued an Order
administratively closing the case pending resolution of Tarzians lawsuit against the Estate in
Indiana federal court. The Company believes it has meritorious defenses and intends to vigorously
defend the lawsuit. The Company cannot predict when the final resolution of this litigation will
occur.
31
Item 4. Submission of Matters to a vote of Security Holders.
No matters were submitted to a vote of security holders of the Company during the fourth
quarter of the fiscal year covered.
Item 4A. Executive Officers of the Registrant.
Set forth below is certain information with respect to the executive officers of the Company
as of March 8, 2006:
J. Mack Robinson, age 82, has been our Chairman and Chief Executive Officer since September
2002. Prior to that, he was our President and Chief Executive Officer since 1996. He has served as
one of our directors since 1993. He is the Chairman of the Executive Committee of our board of
directors. Mr. Robinson is Chairman Emeritus of Triple Crown Media, Inc. since December 30, 2005
and previously served as Chairman of the Board of Bull Run Corporation from 1994 through 2005,
Chairman of the Board and President of Delta Life Insurance Company and Delta Fire and Casualty
Insurance Company since 1958, President of Atlantic American Corporation, an insurance holding
company, from 1988 until 1995 and Chairman of the Board of Atlantic American Corporation since
1974. Mr. Robinson also serves as a director of the following companies: Bankers Fidelity Life
Insurance Company, American Independent Life Insurance Company, Georgia Casualty & Surety Company,
American Southern Insurance Company and American Safety Insurance Company. He is a director
emeritus of Wachovia Corporation. Mr. Robinson is the husband of Mrs. Harriett J. Robinson and the
father-in-law of Mr. Hilton H. Howell, Jr., both members of our board of directors.
Hilton H. Howell, Jr., age 43, has been our Vice Chairman since September 2002. Prior to that,
he was 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 Executive Vice President from 1992 to 1995. He has been Executive Vice
President and General Counsel of Delta Life Insurance Company and Delta Fire and Casualty Insurance
Company since 1991, and Vice Chairman of Bankers Fidelity Life Insurance Company and Georgia
Casualty & Surety Company since 1992. He is a director of Triple Crown Media, Inc. since December
30, 2005 and was previously a director, Vice President and Secretary of Bull Run Corporation, from
1994 through 2005. Mr. Howell also serves as a director of the following companies: Atlantic
American Corporation, Bankers Fidelity Life Insurance Company, Delta Life Insurance Company, Delta
Fire and Casualty Insurance Company, Georgia Casualty & Surety Company, American Southern Insurance
Company, American Safety Insurance Company, Association Casualty Insurance Company and Association
Risk Management General Agency. 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 61, has served as our President and Chief Operating Officer since
September 2002. Prior to that, he served as our Executive Vice President Acquisitions since 1996.
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 Chairman of Triple Crown Media, Inc. since December 30, 2005
and was previously a director, Vice President and Secretary of Bull Run Corporation, from 1994
through 2005. 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 and also serves as a member of the Board
of Directors for Gabelli Asset Management and Victory Ventures, Inc.
James C. Ryan, age 45, has served as our Senior Vice President and Chief Financial Officer
since September 2002. Prior to that, he was our Vice President and Chief Financial Officer since
October 1998.
32
He was the Chief Financial Officer of Busse Broadcasting Corporation from 1987 until it was
acquired by the Company in 1998.
Robert A. Beizer, age 66, 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, Baetjer, Howard
& Civiletti, 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.
33
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
The Companys common stock, no par value (the Common Stock), and its class A common stock,
no par value (the Class A Common Stock), have been listed and traded on The New York Stock
Exchange (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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Class A Common Stock |
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends |
|
|
|
|
|
|
|
|
|
|
Cash Dividends |
|
|
|
|
|
|
|
|
|
|
|
Declared Per |
|
|
|
|
|
|
|
|
|
|
Declared Per |
|
|
|
High |
|
|
Low |
|
|
Share |
|
|
High |
|
|
Low |
|
|
Share |
|
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
15.74 |
|
|
$ |
13.61 |
|
|
$ |
0.03 |
|
|
$ |
14.00 |
|
|
$ |
11.99 |
|
|
$ |
0.03 |
|
Second Quarter |
|
|
14.66 |
|
|
|
10.58 |
|
|
|
0.03 |
|
|
|
13.44 |
|
|
|
10.30 |
|
|
|
0.03 |
|
Third Quarter |
|
|
13.59 |
|
|
|
10.10 |
|
|
|
0.03 |
|
|
|
12.22 |
|
|
|
9.80 |
|
|
|
0.03 |
|
Fourth Quarter |
|
|
9.41 |
|
|
|
7.65 |
|
|
|
0.03 |
|
|
|
8.66 |
|
|
|
7.43 |
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
16.22 |
|
|
$ |
13.52 |
|
|
$ |
0.03 |
|
|
$ |
15.99 |
|
|
$ |
13.42 |
|
|
$ |
0.03 |
|
Second Quarter |
|
|
16.19 |
|
|
|
13.62 |
|
|
|
0.03 |
|
|
|
14.98 |
|
|
|
12.10 |
|
|
|
0.03 |
|
Third Quarter |
|
|
13.95 |
|
|
|
11.20 |
|
|
|
0.03 |
|
|
|
13.12 |
|
|
|
10.66 |
|
|
|
0.03 |
|
Fourth Quarter |
|
|
15.74 |
|
|
|
12.00 |
|
|
|
0.15 |
|
|
|
14.41 |
|
|
|
10.90 |
|
|
|
0.15 |
|
As of February 23, 2006, the Company had 43,051,781 outstanding shares of Common Stock held by
approximately 2,026 stockholders and 5,753,020 outstanding shares of Class A Common Stock held by
approximately 222 stockholders. The number of stockholders includes stockholders of record and
individual participants in security position listings as furnished to the Company pursuant to Rule
17Ad-8 under the Exchange Act.
The
Company has paid a cash dividend on its Common Stock since its initial offering in 1996 and on
its Class A Common Stock since 1967. The Company declared a special dividend of 12 cents per share
in the fourth quarter of 2004. The Companys 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. There can be no assurance of the Companys ability to
continue to pay any dividends on either class of common stock.
The Companys senior credit facility and its 91/4% Notes due 2011 each contain covenants that
restrict the amount available to the Company to pay cash dividends on its capital stock. However, the
Company does not believe that such covenants currently limit its ability to pay dividends at the
recent quarterly rate of $0.03 per share. In addition to the foregoing, the declaration and
payment of dividends on the Common Stock and the Class A Common Stock are subject to the discretion
of the Board of Directors. Any future payments of dividends will depend on the earnings and
financial position of the Company and such other factors as the Board of Directors deems relevant.
See Note E. Long-term Debt
34
to the Companys audited consolidated financial statements included elsewhere herein for further
discussion of restrictions on the Companys ability to pay dividends.
Issuer Purchases of Equity Securities
The following tables provide information about Grays repurchase of its common stock (ticker:
GTN) and its class A common stock (ticker: GTN.A) during the quarter ended December 31, 2005.
Issuer Purchases of Common Stock and Class A Common Stock
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
of Shares that |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
May Yet Be |
|
|
|
NYSE |
|
Total Number |
|
|
Average |
|
|
as Part of |
|
|
Purchased Under |
|
|
|
Ticker |
|
of Shares |
|
|
Price Paid |
|
|
Publicly |
|
|
the Plans or |
|
Period |
|
Symbol |
|
Purchased |
|
|
per Share(1) |
|
|
Announced Plans |
|
|
Programs (2) |
|
October 1, 2005
through |
|
GTN |
|
|
130,000 |
|
|
$ |
10.01 |
|
|
|
130,000 |
|
|
|
|
|
October 31, 2005: |
|
GTN.A |
|
|
-0- |
|
|
$ |
00.00 |
|
|
|
-0- |
|
|
|
1,712,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2005
through |
|
GTN |
|
|
-0- |
|
|
$ |
00.00 |
|
|
|
-0- |
|
|
|
|
|
November 30, 2005: |
|
GTN.A |
|
|
-0- |
|
|
$ |
00.00 |
|
|
|
-0- |
|
|
|
1,712,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1, 2005
through |
|
GTN |
|
|
-0- |
|
|
$ |
00.00 |
|
|
|
-0- |
|
|
|
|
|
December 31, 2005: |
|
GTN.A |
|
|
-0- |
|
|
$ |
00.00 |
|
|
|
-0- |
|
|
|
1,712,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
130,000 |
|
|
$ |
10.01 |
|
|
|
130,000 |
|
|
|
1,712,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount excludes standard brokerage commissions. |
|
(2) |
|
On November 3, 2004, the Companys Board of Directors increased, from 2 million to 4
million, the aggregate number of shares of its Common Stock or Class A Common Stock
authorized for repurchase. On March 3, 2004, Grays Board of Directors had previously
authorized the repurchase, from time to time, of up to an aggregate of 2 million shares of
the Companys Common Stock or Class A Common Stock. As of December 31, 2005, 1,712,400
shares of the Companys Common Stock and Class A Common Stock are available for repurchase
under the increased limit of 4 million shares. There is no expiration date for this
repurchase plan. |
Equity Compensation Plan Information
See Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters Equity Compensation Plan Information for disclosure regarding the Companys
equity compensation plans.
35
Item 6. Selected Financial Data.
Set forth below is certain selected historical consolidated financial data of the Company.
This information should be read in conjunction with the Companys audited consolidated financial
statements and related notes thereto appearing elsewhere herein and Managements Discussion and
Analysis of Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005(2) |
|
|
2004 |
|
|
2003 |
|
|
2002(1) |
|
|
2001 |
|
|
|
(in thousands except per share data) |
|
Statements of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (3) |
|
$ |
261,553 |
|
|
$ |
293,273 |
|
|
$ |
243,061 |
|
|
$ |
146,714 |
|
|
$ |
106,430 |
|
Operating income |
|
|
60,861 |
|
|
|
100,415 |
|
|
|
62,543 |
|
|
|
43,354 |
|
|
|
9,089 |
|
Loss on early extinguishment of debt (4) |
|
|
(6,543 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
(16,838 |
) |
|
|
-0- |
|
Income (loss) from continuing operations |
|
|
4,604 |
|
|
|
36,517 |
|
|
|
7,538 |
|
|
|
(4,581 |
) |
|
|
(17,968 |
) |
Income (loss) from discontinued
publishing and wireless operations, net
of income tax of $3,253, $5,059,
$5,672, $4,664, and $3,014,
respectively (5) |
|
|
(1,242 |
) |
|
|
7,768 |
|
|
|
6,486 |
|
|
|
(137 |
) |
|
|
(4,650 |
) |
Cumulative effect of accounting change,
net of income tax benefit of $8,674 (6) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(19,223 |
) |
|
|
-0- |
|
Net income (loss) |
|
|
3,362 |
|
|
|
44,285 |
|
|
|
14,024 |
|
|
|
(23,941 |
) |
|
|
(13,318 |
) |
Net income (loss) available to common
stockholders |
|
|
(2,286 |
) |
|
|
41,013 |
|
|
|
10,737 |
|
|
|
(30,371 |
) |
|
|
(13,934 |
) |
Net income (loss) from continuing
operations available to common
stockholders per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(0.02 |
) |
|
|
0.67 |
|
|
|
0.08 |
|
|
|
(0.50 |
) |
|
|
(1.19 |
) |
Diluted |
|
|
(0.02 |
) |
|
|
0.66 |
|
|
|
0.08 |
|
|
|
(0.50 |
) |
|
|
(1.19 |
) |
Net income (loss) available to common
stockholders per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(0.05 |
) |
|
|
0.83 |
|
|
|
0.21 |
|
|
|
(1.37 |
) |
|
|
(0.89 |
) |
Diluted |
|
|
(0.05 |
) |
|
|
0.82 |
|
|
|
0.21 |
|
|
|
(1.37 |
) |
|
|
(0.89 |
) |
Cash dividends per common share (7) |
|
|
0.12 |
|
|
|
0.24 |
|
|
|
0.08 |
|
|
|
0.08 |
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,525,054 |
|
|
$ |
1,374,466 |
|
|
$ |
1,325,329 |
|
|
$ |
1,332,048 |
|
|
$ |
830,056 |
|
Long-term debt (including current
portion) |
|
|
792,509 |
|
|
|
655,905 |
|
|
|
655,846 |
|
|
|
658,096 |
|
|
|
551,258 |
|
Redeemable serial preferred stock |
|
|
39,090 |
|
|
|
39,003 |
|
|
|
39,276 |
|
|
|
39,190 |
|
|
|
-0- |
|
Total stockholders equity |
|
|
380,996 |
|
|
|
378,237 |
|
|
|
362,775 |
|
|
|
373,366 |
|
|
|
142,196 |
|
|
|
|
(1) |
|
Reflects the acquisitions of Gray MidAmerica Television, completed October 25, 2002 and
KOLO-TV, completed December 18, 2002, as of their respective acquisition dates. For further
information concerning these acquisitions, see Part 1, Item 1. Business included elsewhere
herein. |
|
(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. For further
information concerning these acquisitions, see Part 1, Item 1. Business included elsewhere
herein. |
36
|
|
|
(3) |
|
The Companys revenues fluctuate significantly between years consistent with increased
advertising expenditures associated with political election years. |
|
(4) |
|
The Company recorded in 2005 losses on early extinguishment of debt related to two
amendments to its senior credit facility and the repurchase of a portion of its 9 1/4 %
Senior Subordinated Notes, and recorded in 2002 a loss on early extinguishment of debt
related to the amendment of its senior credit facility and the redemption of its 10
5/8% Senior Subordinated Notes due in 2006. |
|
(5) |
|
The Company completed (i) the contribution of all of its membership interests in Gray
Publishing, LLC, which included its Gray Publishing and Graylink Wireless businesses and
(ii) the spinoff of all the common stock to Grays shareholders on December 30, 2005. The
selected financial information for all years presented reflect the reclassification of the
results of operations of those businesses as discontinued operations, net of income tax.
See Note B. Discontinued Operations to the Companys audited consolidated financial
statements included elsewhere herein. |
|
(6) |
|
Upon adoption of Statement of Financial Accounting Standard No.142 Goodwill and Other
Intangible Assets, the Company recorded a non-cash charge of approximately $39.9 million
($26.6 million after income taxes) as a cumulative effect of accounting change. Of this
amount, $12.0 million ($7.4 million, net of income tax) was related to discontinued
operations and is included in the income (loss) from discontinued operations. |
|
(7) |
|
Cash dividends for 2004 include a Special Cash Dividend of 12 cents per share approved
in the fourth quarter of 2004 and paid in the first quarter of 2005. |
37
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. (the Company) should be read in conjunction with the Companys audited
consolidated financial statements and notes thereto included elsewhere herein.
Overview
The operating revenues of the Companys television stations are derived primarily from
broadcast advertising revenues and, to a much lesser extent, from ancillary services such as
production of commercials and tower rentals as well as compensation paid by the networks to the
stations for broadcasting network programming.
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.
Most broadcast advertising contracts are short-term, and generally run only for a few weeks.
Approximately 68% of the net revenues of the Companys television stations for the year ended
December 31, 2005, 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, due in part to increases in consumer advertising in the spring and retail advertising in the
period leading up to and including the holiday season. In addition, broadcast advertising revenues
are generally higher during even numbered years due to spending by political candidates, which
spending typically is heaviest during the fourth quarter. Consistent with this trend the Company
has not received significant political advertising revenue during the current year.
The broadcasting operations primary 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.
2005 Spinoff
On December 30, 2005, the Company completed the spinoff of all of the outstanding stock of
Triple Crown Media., Inc. (TCM). Immediately prior to the spinoff, the Company contributed all of
the membership interests in Gray Publishing, LLC which owned and operated the Companys Gray
38
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, the Company
received an approximate $44 million cash distribution from TCM, which Gray used to reduce its
outstanding indebtedness on December 30, 2005. TCM is now quoted on the Nasdaq National Market
under the symbol TCMI. The financial position and results of operations of the publishing and
wireless businesses are reported in the Companys consolidated balance sheet and statement of
operations as discontinued operations for all periods presented. Please refer to Note B.
Discontinued Operations to the Companys audited consolidated financial statements included
elsewhere herein.
Recent Acquisition Activity
On March 3, 2006, the Company 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 $85 million in cash plus certain transaction fees. The Company financed this acquisition
with borrowings under the Companys senior credit facility.
On November 30, 2005, the Company completed the acquisition of the assets of WSAZ-TV, Channel
3, the NBC affiliate serving the in Charleston-Huntington, West Virginia market,
from Emmis Communications Corp for approximately $185.8 million. The Company used funds borrowed
under its senior credit facility and a portion of its cash on hand to fund this acquisition.
On November 10, 2005, the Company completed the acquisition of the assets of WVAG-TV, the UPN
affiliate serving Albany, Georgia from P.D. Communications, LLC for approximately $3.75 million.
The Company used a portion of its cash on hand to fund this acquisition. Subsequent to the
acquisition the Company re-named the station WSWG-TV.
On January 31, 2005, the Company completed the acquisition of KKCO-TV for approximately $13.5
million. KKCO-TV, Channel 11 serves the Grand Junction, Colorado television market and is an NBC
affiliate. The Company used a portion of its cash on hand to fully fund this acquisition. Due to
the acquisitions of WSAZ-TV, WSWG-TV and KKCO-TV occurring in 2005, the operating results of these
stations are not reflected in the Companys Consolidated Financial Statements as of and for the
years ended December 31, 2004, and 2003 included elsewhere herein. The results for these stations
are included in the results of operations for the year ended December 31, 2005 beginning on their
acquisition dates.
On August 17, 2004, the Company completed the acquisition of a FCC television license for
WCAV-TV, Channel 19, in Charlottesville, Virginia from Charlottesville Broadcasting Corporation.
Grays cost to acquire that FCC license was approximately $1 million. CBS, Inc. has agreed to a
ten-year affiliation agreement to allow Gray to operate WCAV-TV as a CBS-affiliated station. Gray
also has an FCC license to operate a low power television station, WVAW-TV, also in the
Charlottesville, Virginia television market. The American Broadcasting Company has agreed to an
affiliation agreement expiring December 31, 2013 to allow Gray to operate WVAW-TV as an ABC
affiliate. Additionally during 2005 the Company also acquired an FCC license to operate another low
power television license, WAHU-TV, also in the Charlottesville, Virginia television market. The
Fox broadcast network has agreed to an affiliation agreement to allow the Company to operate
WAHU-TV as a FOX affiliate. WCAV-TV and WVAW-TV began broadcasting in August 2004 and WAHU-TVs
license was acquired on July 1, 2005. Grays total cost to acquire and/or construct the combined
broadcast facilities for these three stations was approximately $8.5 million.
39
Net Revenues
Set forth below are the principal types of revenues earned by the Companys broadcasting
operations for the periods indicated and the percentage contribution of each to total revenues
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
$ |
174,568 |
|
|
|
66.7 |
% |
|
$ |
160,648 |
|
|
|
54.8 |
% |
|
$ |
150,105 |
|
|
|
61.8 |
% |
National |
|
|
70,825 |
|
|
|
27.1 |
% |
|
|
70,817 |
|
|
|
24.1 |
% |
|
|
70,798 |
|
|
|
29.1 |
% |
Network compensation |
|
|
5,095 |
|
|
|
2.0 |
% |
|
|
9,951 |
|
|
|
3.4 |
% |
|
|
8,378 |
|
|
|
3.5 |
% |
Political |
|
|
2,862 |
|
|
|
1.1 |
% |
|
|
41,706 |
|
|
|
14.2 |
% |
|
|
5,668 |
|
|
|
2.3 |
% |
Production and other |
|
|
8,203 |
|
|
|
3.1 |
% |
|
|
10,151 |
|
|
|
3.5 |
% |
|
|
8,112 |
|
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
261,553 |
|
|
|
100.0 |
% |
|
$ |
293,273 |
|
|
|
100.0 |
% |
|
$ |
243,061 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations of the Company
Year Ended December 31, 2005 to Year Ended December 31, 2004
Revenues. Total broadcasting revenues decreased 11% over the same period of the prior year to
$261.6 million. Local broadcasting advertising revenues, increased 9% to $174.6 million from
$160.6 million. Since January 1, 2004 the Company has launched UPN second channels in six of its
existing television markets, built television station WCAV-TV in Charlottesville, VA which
commenced broadcast operations in August, 2004, acquired television stations KKCO-TV, Grand
Junction, CO on January 31, 2005, WSWG-TV, Albany GA on November 10, 2005 and WSAZ-TV, Charleston -
Huntington, WV on November 30, 2005 and sold the Companys satellite uplink operations on December
31, 2004. These transactions account for approximately one-third, or $5.0 million of the Companys
overall increase in local broadcasting advertising revenues. For the stations continuously
operated since January 1, 2004 local broadcasting advertising revenues, excluding political
advertising revenues increased 6% or $9.0 million due to increased demand for commercial time by
local advertisers. National broadcasting advertising revenues of $70.8 million were consistent
between the years ended December 31, 2005 and 2004. The transactions discussed above account for
approximately $1.6 million of the total national broadcasting advertising. National advertising for
the stations and second channels continuously operated since January 1, 2004 decreased
approximately 2% or $1.6 million due to decreased demand for commercial time by national
advertisers. Political advertising revenues decreased to $2.9 million from $41.7 million reflecting
the cyclical influence of the 2004 Presidential election. In addition, in the 2004 period Gray
recorded approximately $3.0 million of broadcast revenue associated with the broadcast of the 2004
Summer Olympics. There was no such similar Olympic broadcast in the current year. Network
compensation revenue decreased 49% to $5.1 million from $10.0 million due to lower revenue from
renewed network affiliation agreements. However, under the terms of the affiliation agreements,
Grays cash payments received or receivable in excess of revenue recognized in accordance with
generally accepted accounting principles approximated $2.8 million for the year ended December 31,
2005. In the same period of the prior year, the network compensation revenue and the related cash
payments received or receivable were approximately equal in their respective amounts.
Operating expenses. Broadcasting expenses, before depreciation, amortization and loss on
disposal of assets increased 2% to $161.9 million from $158.3 million. For the stations
continuously operated since January 1, 2004 broadcast expenses decreased approximately 1%, or $1.8
million. This decrease in existing broadcast expenses was due primarily to reduced payroll
expenses, including station incentive bonus expense, reduced commissions to national sales
representatives reflecting the lower political revenue discussed above and reduced legal and
consulting services. The six new UPN second channels,
40
WCAV-TV and the newly acquired stations (KKCO-TV, WSWG-TV and WSAZ-TV) incurred approximately
$8.5 million in operating expenses for the year ended December 31, 2005.
Corporate and administrative expenses. Corporate and administrative expenses before
depreciation, amortization and loss on disposal of assets decreased 1% to $11.5 million from $11.7
million in the year ended December 31, 2005 as compared to the same period in 2004.
Depreciation. Depreciation of property and equipment totaled $24.5 million and $22.0 million
for the years ended December 31, 2005 and 2004, respectively. The increase in depreciation was due
to newly acquired equipment.
Amortization of intangible assets. Amortization of intangible assets was $1.0 million for the
year ended December 31, 2005, as compared to $920,000 for the year ended December 31, 2004. The
increase in amortization expense was due to definite lived intangible assets that were acquired in
2005.
Amortization of restricted stock awards. Amortization of restricted stock awards decreased 24%
to $391,000 for the year ended December 31, 2005 compared to $512,000 for the year ended December
31, 2004. Amortization of restricted stock awards decreased due to the grant and complete
amortization of a 10,000 share restricted stock award in 2004. The Company awarded 5,000 and
15,000 shares of restricted stock in 2005 and 2004 respectively. These shares were awarded to its
board of directors and president.
Loss on disposal of assets. A loss on disposal of assets of $1.4 million was recorded for the
year ended December 31, 2005, as opposed to a gain on disposal of assets of $496,000 for the year
ended December 31, 2004. These amounts reflect disposals of equipment during the respective
periods.
Miscellaneous income, net. Miscellaneous income, net decreased $421,000 to $558,000 in the
year ended December 31, 2005 compared to $1.0 million in the year ended December 31, 2004.
Included in miscellaneous income was interest income of $468,000 in the year ended December 31,
2005 and $818,000 in the year ended December 31, 2004. The majority of this interest income was
received from interest on the Companys cash and cash equivalents balances.
Interest expense. Interest expense increased $4.5 million to $46.5 million in the year ended
December 31 2005 compared to $42.0 million in the year ended December 31, 2004. This increase is
primarily attributable to higher average interest rates in 2005 compared to 2004 and increases in
amounts borrowed under the Companys Senior Credit Facility to fund recent acquisitions. The total
average debt balance was $670.0 million and $656.9 million for the years ended December 31, 2005
and 2004, respectively. The total average interest rates were 6.79% and 6.08% for the years ended
December 31, 2005 and 2004, respectively.
Loss on Early Extinguishment of Debt. Gray reported a loss on early extinguishment of debt in
the amount of $6.5 million which related to four events: the repurchase by Gray of a portion of its
91/4% Notes, two amendments of Grays senior credit facility, first on June 28, 2005 and again on
November 22, 2005, and other costs related to abandoned refinancing activities:
|
|
|
Gray repurchased $21.5 million, face amount, of its 91/4% Notes in the open market.
Associated with this repurchase, Gray recorded a loss upon early extinguishment of debt of
$2.6 million which included a premium of $2.0 million, the write off of unamortized
deferred finance costs of $485,000 and an unaccreted discount of $74,000. Upon repurchase
of Grays 91/4% Notes, Gray paid $749,000 in accrued interest. |
|
|
|
|
On June 28, 2005, Gray amended its senior credit facility. Gray paid out approximately
$1.6 million in cash for the amendment of the senior credit facility and of this amount
$1.2 million was |
41
|
|
|
capitalized as deferred financing costs which will be amortized to interest expense over the
remaining life of the agreement. The remaining $370,000 was reported as a loss on early
extinguishment of debt. Furthermore, Gray wrote off deferred financing costs and recognized
a loss on early extinguishment of debt in the amount of $1.8 million. The total loss on
early extinguishment of debt related to the June 2005 amendment of the senior credit
facility was $2.2 million. |
|
|
|
|
On November 22, 2005, Gray amended its senior credit facility. Gray paid out
approximately $5.6 million in cash for the amendment of the senior credit facility and of
this amount $5.5 million was capitalized as deferred financing costs which will be
amortized to interest expense over the remaining life of the agreement. The remaining
$81,000 was reported as a loss on early extinguishment of debt. $873,000 of previously
capitalized cost was also reported as a loss on early extinguishment of debt. The total
loss on early extinguishment of debt related to the November 2005 amendment was $954,000. |
|
|
|
|
During 2005 the Company incurred and subsequently wrote off approximately $817,000 in
professional and other costs incurred to explore other means of refinancing portions of its
indebtedness. |
Income tax expense. The effective tax rate increased to 44.7% for the year ended December 31,
2005 from 38.5% for the year ended December 31, 2004. Income tax expense for 2005 increased as a
percentage of pre-tax income primarily as a result of higher income tax valuation allowances
against state net operating loss carryforwards. See H. Income Taxes to the Companys audited
consolidated financial statements included herein for further discussions of this matter.
Year Ended December 31, 2004 to Year Ended December 31, 2003
Revenues. Broadcasting revenues increased 21% over the same period of the prior year to $293.3
million. The increase in broadcasting revenues reflects increased political advertising revenues as
well as increased non-political broadcasting advertising revenues. Political advertising revenues
increased to $41.7 million from $5.7 million. Political advertising revenues for 2004 primarily
reflect the cyclical influence of the 2004 Presidential election. Excluding political advertising
revenues, local broadcasting advertising revenues increased 7% to $160.7 million from $150.1
million and national broadcasting advertising revenues remained at $70.8 million. We attribute the
increases in non-political local broadcasting advertising revenues to improved economic conditions
and broad based demand for commercial time by local advertisers in the markets in which we operate.
We believe that commercial time used for political advertising limited, in part, the amount of
commercial time available for sale by the Company to national advertisers during the year ended
December 31, 2004.
Operating expenses. Broadcast operating expenses for all stations, before depreciation and
amortization, increased 9% to $158.3 million. Payroll expense, excluding incentive based
compensation, increased $4.8 million due to an increase in the number of employees, annual salary
increases for existing employees and employee benefit costs. The increase in the number of
employees is primarily attributable to the commencement of broadcast operations at WCAV-TV, the
Companys new station located in Charlottesville, Virginia which began operations in August of
2004. Employee incentive based compensation increased $1.4 million as a result of increased
revenues produced by the Companys broadcast stations. Professional services increased $2.8
million including a $1.7 million increase in sales commissions paid to national sales
representative firms which is attributable to the increase in political advertising in 2004.
42
Corporate and administrative expenses. Corporate and administrative expenses, before
depreciation and amortization, increased 38% to $11.7 million due primarily to increased employee
payroll expense and other professional service expenses. Payroll expense, excluding incentive based
compensation, increased approximately $249,000 due to the addition of certain staff, payroll
increases and increased employee benefits for existing personnel. Employee incentive based
compensation increased by approximately $1 million as a result of the improved operating results of
the Company. The increase in professional fees is due primarily to increased accounting costs of
approximately $1.0 million incurred in our efforts to comply with Section 404 of the Sarbanes-Oxley
Act of 2002.
Depreciation. Depreciation of property and equipment totaled $22.0 million and $19.7 million
for the years ended December 31, 2004 and 2003, respectively. The increase in depreciation was due
to newly acquired equipment.
Amortization of intangible assets. Amortization of intangible assets was $920,000 for the year
ended December 31, 2004, as compared to $5.2 million for the same period of the prior year, a
decrease of $4.3 million, or 82%. The decrease in amortization expense was due to certain definite
lived intangible assets that were acquired in 2002, becoming fully amortized.
Amortization of restricted stock awards. Amortization of restricted stock awards increased 13%
to $512,000. Amortization of restricted stock awards increased due to the granting of additional
restricted stock in the current year. The Company awarded 15,000 and 145,000 shares of restricted
stock in 2004 and 2003, respectively. These shares were awarded to its board of directors and
president.
Gain on disposal of assets. A gain on disposal of assets of $496,000 was recorded for the year
ended December 31, 2004, as opposed to a loss on disposal of assets of $1.0 million for the year
ended December 31, 2003. These amounts reflect disposals of equipment during the respective
periods.
Miscellaneous income, net. Miscellaneous income, net increased to $1.0 million in the year
ended December 31, 2004. Included in miscellaneous income for 2004 was interest income of
$818,000. The majority of this interest income was received from interest on the Companys cash
and cash equivalents balances. The company recorded less interest income in the year ended December
31, 2003 due to lower cash balances
Interest expense. Interest expense decreased $1.3 million to $42.0 million. This decrease is
primarily attributable to lower average interest rates in 2004 compared to 2003. The total average
debt balance was $656.9 million and $657.0 million for the years ended December 31, 2004 and 2003,
respectively. The total average interest rates were 6.08% and 6.16% for the years ended December
31, 2004 and 2003, respectively.
Income tax expense. The effective tax rate decreased to 38.5% from 60.7%. Income tax expense
for 2003 included an additional $5.0 million in expense resulting from settlement of litigation
with the IRS relating to the acquisition of certain television assets in 1996. See Note I. Income
Taxes to the Companys audited consolidated financial statements included herein for further
discussions of this matter.
43
Liquidity and Capital Resources
General
The following tables present certain data that the Company believes is helpful in evaluating
the Companys liquidity and capital resources (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Net cash provided by operating activities |
|
$ |
50,482 |
|
|
$ |
102,736 |
|
Net cash used in investing activities |
|
|
(245,925 |
) |
|
|
(37,552 |
) |
Net cash provided by (used in) financing activities |
|
|
154,192 |
|
|
|
(26,565 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
(41,251 |
) |
|
$ |
38,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Cash and cash equivalents |
|
$ |
9,315 |
|
|
$ |
50,566 |
|
Long-term debt including current portion |
|
|
792,509 |
|
|
|
655,905 |
|
Redeemable serial preferred stock |
|
|
39,090 |
|
|
|
39,003 |
|
Available credit under senior credit agreement |
|
|
58,500 |
|
|
|
71,250 |
|
The Company and its subsidiaries file a consolidated federal income tax return and such state
or local tax returns as are required. Although the Company may earn taxable operating income, as
of December 31, 2005 the Company anticipates that through the use of its available loss
carryforwards it will not pay significant amounts of federal or state income taxes in the next
several years.
Management believes that current cash balances, cash flows from operations and available funds
under its senior revolving credit facility will be adequate to provide for the Companys capital
expenditures, debt service, cash dividends and working capital requirements for the foreseeable
future.
The senior credit facility provides the Company with a $150 million term loan A facility; a
$350 million term loan B facility; and a $100 million revolving credit facility. The credit
facility also provides for up to $400 million in incremental credit facilities upon the consent of
the lenders. In order to fund the pending acquisition of WNDU-TV the Company, in January 2006,
requested and the lenders consented to provide $100.0 million under the incremental credit
facility. The Company used these funds to complete the acquisition of WNDU-TV on March 3, 2006.
The senior credit facility is collateralized by substantially all of the assets, excluding
real estate, of the Company and its subsidiaries. In addition, the Companys subsidiaries are
joint and several guarantors of the obligations and the Companys ownership interests in its
subsidiaries are pledged to collateralize the obligations. The agreement contains certain
restrictive provisions which include but are not limited to, requiring the Company to maintain
certain financial ratios and limits upon the Companys ability to incur additional indebtedness,
make certain acquisitions or investments, sell assets or make other restricted payments, including
dividends, (all as are defined in the loan agreement). The senior subordinated notes also contain
similar restrictive provisions limiting the Companys ability to, among other things, incur
additional indebtedness, make certain acquisitions or investments, sell assets or make certain
restricted payments that include but are not limited to purchases or redemptions of the Companys
capital stock.
Management does not believe that inflation in past years has had a significant impact on the
Companys results of operations nor is inflation expected to have a significant effect upon the
Companys business in the near future.
44
Net cash provided by operating activities decreased $52.3 million. The decrease was primarily
the result of a decrease in net income of $40.9 million from reduced political advertising in a non
presidential election year. Significant adjustments to reconcile net income to net cash provided
by operating activities included a decrease of $19.8 million in non cash deferred taxes resulting
from changes in timing differences between the Companys reported income and the Companys taxable
income; an increase of $3.6 million for the non-cash write off of loan acquisition costs associated
with two amendments to the Companys senior credit facility and repurchase of a portion of the
Companys senior subordinated notes; an increase of a $3.2 million for the non-cash FCC license
impairment expense to write down the value of the FCC license associated with the Companys
discontinued wireless communication business; and $2.4 million increase in deferred network
compensation revenue
Net cash used in investing activities increased $208.4 million to $245.9 million during the
year ended December 31, 2005. The amount used increased primarily due to the Companys use of
$208.3 million to purchase KKCO-TV, WSWG-TV and WSAZ-TV and the FCC license for WAHU-TV. Cash used
to purchase property plant and equipment totaled $37.2 million, $36.3 million and $22.3 million
during the years ended December 31, 2005, 2004 and 2003 respectively. During the year ended
December 31, 2003 the Company used $8.4 million to pay purchase obligations related to acquisitions
in prior years.
Net cash provided by financing activities was 154.2 million. Proceeds from borrowings on long
term debt primarily to finance the Companys acquisitions of television stations as well as for
general operating purposes were $229.4 million in the year ended December 31, 2005. Partial
repayments of Long term debt in 2005 totaled $93.0 million. The two amendments of the Companys
senior credit facility caused the company to incur in the year ended December 31, 2005 $7.2 million
of bank, legal, accounting and other costs. Dividends paid in the year ended December 31, 2005
included $9.0 million in regular quarterly dividends on the Companys common and preferred stocks
as well as an additional $5.9 million common stock dividend which was declared in 2004 but not paid
until 2005. The Company received a distribution from the spinoff of its publishing and wireless
businesses received on December 30, 2005 in the amount of $44.0 million.
During the year ended December 31, 2005, the Company purchased 12,800 shares of the Companys
Class A Common Stock and 528,400 shares of the Companys Common Stock for a total of $7.0 million.
During the year ended December 31, 2004, the Company purchased 65,000 shares of the Companys Class
A Common Stock and 1,681,400 shares of the Companys Common Stock for a total of $22.4 million.
Also during the year ended December 31, 2003, the Company purchased warrants for the purchase of
1,106,250 shares of the Companys Class A Common Stock and 100,000 shares of the Companys Common
Stock. The total cost of the Common Stock and warrants was $22.5 million. The purchases of the
stock and the warrants during 2004 and 2003 were funded from cash on hand.
Digital Television Conversion
The FCC required that all commercial stations begin broadcasting a digital signal. The
Company paid approximately $9.6 million and $11.8 million for digital transmission equipment
capital expenditures for the years ending December 31, 2005 and 2004, respectively. The Company is
in compliance with the FCCs digital broadcasting requirements at all of its stations.
In the future, the Company may increase the power output of its digital broadcast signals of
certain stations. These enhancements will be phased in by July 2006 to meet certain FCC
regulations. As of the date of filing this Annual Report, the Company estimates that it will pay
$7.9 million for these capital expenditures to comply with this new FCC requirement during 2006.
45
Settlement of Internal Revenue Service Audit
In January 2004, the Company settled its litigation with the IRS regarding the IRS audit of
the Companys 1996 and 1998 federal income tax returns. The settlement required no cash payments
from the Company. The Company agreed in the settlement to forego certain claimed depreciation and
amortization deductions relating to the 1996 through 1999 tax years, which in turn resulted in a
reduction of the Companys then federal income tax net operating loss carryforwards by
approximately $16.3 million. During 2004 and as a result of the settlement, the Company collected
a previously claimed federal tax cash refund for 1996 of approximately $1.1 million, plus statutory
interest.
Retirement Plan
The Company has an active defined benefit pension plan that it considers its primary pension
plan and this plan covers substantially all full-time employees. Retirement benefits are based on
years of service and the employees highest average compensation for five consecutive years during
the last ten years of employment. The Companys 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 GAAP. The discount rate selected as of December 31, 2005, was 5.75% which
reflects the results of this yield curve analysis and are unchanged from December 31, 2004. 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
7.0% for our invested pension assets. Actual asset returns for these trusts were approximately 4.9%
in 2004 and 5.2% in 2005. 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.
Because the spinoff of the Companys former publishing and wireless businesses resulted in a
curtailment of benefits to those plan participants the Company anticipates that its pension expense
will decrease from the $3.7 million recognized for the year ended December 31, 2005 to $3.3 million
for the year ended December 31, 2006.
During the years ended December 31, 2005 and 2004, the Company contributed $5.0 million and
$1.8 million, respectively, to all three of its pension plans and anticipates making a contribution
of $3.1 million in the year ended December 31, 2006.
See Note J. Retirement Plans to the Companys audited consolidated financial statements
included elsewhere herein for further information concerning the Companys retirement plans.
Off-Balance Sheet Arrangements
The Company has various operating lease commitments for equipment, land and office space. The
Company also has commitments for various syndicated television programs and for digital television
(DTV) equipment.
46
The Company has 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 Seinfeld. 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. The amounts for syndicated television
programming in the table below are for contracts that are not recorded on the Companys balance
sheet as of December 31, 2005.
Future minimum payments under operating leases with initial or remaining noncancelable lease
terms in excess of one year, obligations for syndicated television programs as described above and
commitments for DTV equipment that had been ordered but not yet been received are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated |
|
|
|
|
|
|
DTV |
|
|
Operating |
|
|
Television |
|
|
|
|
Year |
|
Equipment |
|
|
Lease |
|
|
Programming |
|
|
Total |
|
2006 |
|
$ |
3,110 |
|
|
$ |
1,348 |
|
|
$ |
3,635 |
|
|
$ |
8,093 |
|
2007 |
|
|
-0- |
|
|
|
1,064 |
|
|
|
9,889 |
|
|
|
10,953 |
|
2008 |
|
|
-0- |
|
|
|
865 |
|
|
|
9,011 |
|
|
|
9,876 |
|
2009 |
|
|
-0- |
|
|
|
612 |
|
|
|
8,010 |
|
|
|
8,622 |
|
2010 |
|
|
-0- |
|
|
|
416 |
|
|
|
6,329 |
|
|
|
6,745 |
|
Thereafter |
|
|
-0- |
|
|
|
765 |
|
|
|
3,198 |
|
|
|
3,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,110 |
|
|
$ |
5,070 |
|
|
$ |
40,072 |
|
|
$ |
48,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The DTV equipment, operating lease and syndicated television programming amounts in the table
above are estimates of commitments that are in addition to liabilities accrued for on the Companys
balance sheet as of December 31, 2005.
Through a rights-sharing agreement with Host Communications, Inc. (Host), a wholly owned
subsidiary of TCM and a related party, the Company participated jointly with Host in the marketing,
selling and broadcasting of certain collegiate sporting events and in related programming,
production and other associated activities related to the University of Kentucky. This initial
agreement commenced April 1, 2000 and terminated April 15, 2005. The Company shared with Host the
profit or loss from these activities. Individual revenues and expenses under this agreement were
not separately recorded in the Companys statement of operations; rather the net amount received
was included in broadcasting revenues. The Companys operating results for 2005, 2004 and 2003
include net income from these activities of $123,356, $101,475 and $104,396. As a result of the
rights-sharing agreement, in certain circumstances, the Company could be called upon for payment of
a share of certain upfront rights fees. During 2003, the Company paid $1.5 million to Host as an
advance under this provision. No similar payments were made in 2004 or 2005. As of December 31,
2005, Host owed to the Company $1.0 million from the advance in 2003, $332,000 of undistributed
earnings from this rights-sharing agreement as well as $310,000 unrelated to the first
rights-sharing agreement for a total of $1.6 million. As of December 31, 2005 and 2004, the
Company had $1.6 million and $1.4 million respectively, recorded as a related party receivable.
Between January 1, 2006 and February 17, 2006, the Company received payments totaling $1.6 for full
payment of this related party receivable. Certain executive officers and significant stockholders
of Gray are also executive officers and significant stockholders of TCM.
On October 12, 2004, the University of Kentucky jointly awarded a second sports marketing
agreement to the Company and Host. The new agreement commenced on April 16, 2005 and has an
initial term of seven years with the option to extend the license for three additional years.
Aggregate license fees to be paid to the University of Kentucky over a full ten year term for the
agreement will approximate $80.5 million. The Company and Host will share equally the cost of the
license fees. Under
47
the new sports marketing agreement, the Company paid $1.8 million to the University of
Kentucky and recognized a loss of $137,000 during 2005.
Tabular Disclosure of Contractual Obligations as of December 31, 2005 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
|
|
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Contractual Obligations |
|
Total |
|
|
(2006) |
|
|
(2007-2008) |
|
|
(2009-2010) |
|
|
(after 2010) |
|
Long-term debt obligations
(1) |
|
$ |
793,320 |
|
|
$ |
3,577 |
|
|
$ |
14,756 |
|
|
$ |
37,157 |
|
|
$ |
737,830 |
|
Cash interest on long-term debt
obligations (2) |
|
|
333,718 |
|
|
|
54,419 |
|
|
|
108,015 |
|
|
|
105,298 |
|
|
|
65,986 |
|
Mandatorily redeemable serial
preferred stock(3) |
|
|
39,640 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
39,640 |
|
Cash dividends on mandatorily
redeemable serial preferred
stock(4) |
|
|
20,783 |
|
|
|
3,171 |
|
|
|
6,477 |
|
|
|
6,738 |
|
|
|
4,397 |
|
Capital lease obligations (5) |
|
|
15 |
|
|
|
11 |
|
|
|
4 |
|
|
|
-0- |
|
|
|
-0- |
|
Operating lease obligations
(6) |
|
|
5,070 |
|
|
|
1,348 |
|
|
|
1,929 |
|
|
|
1,028 |
|
|
|
765 |
|
Purchase obligations currently accrued
(7) |
|
|
5,356 |
|
|
|
4,423 |
|
|
|
933 |
|
|
|
-0- |
|
|
|
-0- |
|
Purchase obligations not currently
accrued (8) |
|
|
3,110 |
|
|
|
3,110 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
Programming obligations currently
accrued (9) |
|
|
11,351 |
|
|
|
10,391 |
|
|
|
856 |
|
|
|
78 |
|
|
|
26 |
|
Programming obligations not currently
accrued (10) |
|
|
40,072 |
|
|
|
3,635 |
|
|
|
18,900 |
|
|
|
14,339 |
|
|
|
3,198 |
|
Acquisition related
liabilities(11) |
|
|
5,960 |
|
|
|
4,033 |
|
|
|
745 |
|
|
|
731 |
|
|
|
451 |
|
Obligation to University of Kentucky
(12) |
|
|
76,092 |
|
|
|
7,326 |
|
|
|
15,702 |
|
|
|
15,401 |
|
|
|
37,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,334,487 |
|
|
$ |
95,444 |
|
|
$ |
168,317 |
|
|
$ |
180,770 |
|
|
$ |
889,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt obligations represent the current and all future payment obligations
under long-term borrowings referenced in FASB Statement of Financial Accounting Standards
No. 47 Disclosure of Long-Term Obligations, as may be modified or supplemented. This
obligation consists primarily of obligations under the Companys senior credit facility and
the Companys senior subordinated notes. These amounts are recorded as liabilities as of
the current balance sheet date. As of December 31, 2005, the Companys senior subordinated
notes had a coupon of 91/4% and were priced at a discount to yield 9 3/8%. The weighted
average interest rate on the balance outstanding under the senior credit facility at
December 31, 2005 was 5.67%. |
|
(2) |
|
Cash interest on long-term debt obligations represents estimated interest expense on
long-term debt obligations based upon the average debt balances expected in the future and
computed using the average interest rates for the year ended December 31, 2005. As of
December 31, 2005, the Companys senior subordinated notes had a coupon of 91/4% and were
priced at a discount to yield 93/8%. The weighted average interest rate on the balance
outstanding under the senior credit facility at December 31, 2005 was 5.67%. |
|
(3) |
|
Mandatorily redeemable serial preferred stock represents the cash due to be paid upon
the redemption of the Companys redeemable serial preferred stock on April 22, 2012. This
mandatorily redeemable serial preferred stock is convertible into the Companys common
stock. |
48
|
|
|
|
|
Therefore it is not known if this preferred stock will be redeemed for cash or converted
into the Companys common stock. |
|
(4) |
|
Cash dividends on mandatorily redeemable serial preferred stock represents dividends
on the Companys mandatorily redeemable serial preferred stock payable at 8% through April
22, 2009 and at 8.5% from that date through April 22, 2012. |
|
(5) |
|
Capital lease obligations represent payment obligations under non-cancelable lease
agreements classified as capital leases and disclosed pursuant to FASB Statement of
Financial Accounting Standards No. 13 Accounting for Leases, as may be modified or
supplemented. These amounts are recorded as liabilities as of the current balance sheet
date. |
|
(6) |
|
Operating lease obligations represent payment obligations under non-cancelable lease
agreements classified as operating leases and disclosed pursuant to FASB Statement of
Financial Accounting Standards No. 13 Accounting for Leases, as may be modified or
supplemented. These amounts are not recorded as liabilities as of the current balance
sheet date. |
|
(7) |
|
Purchase obligations currently accrued generally represent payment obligations for
DTV equipment. It is the Companys 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 recorded as liabilities as of the current balance sheet date. |
|
(8) |
|
Purchase obligations not currently accrued generally represent payment obligations
for DTV equipment. It is the Companys 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. |
|
(9) |
|
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. |
|
(10) |
|
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. |
|
(11) |
|
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. |
|
(12) |
|
Obligation to University of Kentucky represents total obligations and excluding any
potential revenues under a sports marketing agreement awarded jointly to the Company and
Host Communications, Inc., a related party. Under this agreement, the Company and Host
Communications, Inc. will share equally in all revenues and obligations under the
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 the Companys 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. The Company
49
expects to contribute approximately $3.1 million in total to the Companys plan and the
acquired pension plans during the year ended December 31, 2006.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make judgments and estimations that
affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. The Company considers the following accounting policies 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.
Valuation of FCC Licenses
As of December 31, 2005 the book value of the Companys Federal Communications Commission (the
FCC) licenses and goodwill approximated $1.023 billion and $222.4 million respectively.
Broadcast licenses of television stations acquired by the Company prior to January 1, 2002
were valued using a residual basis methodology (analogous to goodwill) where the excess of the
purchase price over the fair value of all identified tangible and intangible assets was attributed
to the broadcast license. This residual basis approach will generally produce higher valuations of
FCC licenses when compared to applying an income method as discussed below. The Companys book
value for these FCC licenses approximated $471 million as of December 31, 2005.
The Company values the broadcast licenses of any television station acquired after 2001 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 FCC licenses when compared to applying a residual method
as discussed above. The Companys book value for these FCC licenses approximated $552 million as
of December 31, 2005.
At the September 2004 meeting of the Emerging Issues Task Force (EITF), the SEC Observer
clarified the SEC Staffs position on the use of the residual method for valuation of acquired
assets other than goodwill which is referred to as topic D-108. The SEC Staff believed that the
residual method did not comply with the requirements of SFAS No. 141 when used to value certain
intangible assets that arise from legal or contractual rights. Accordingly, the SEC Staff believed
that the residual method should no longer be used to value intangible assets other than goodwill.
Registrants were required to apply the income approach to such assets acquired in business
combinations completed after September 29, 2004, and perform impairment tests using an income
approach on all intangible assets that were previously valued using the residual method no later
than the beginning of their first fiscal year beginning after December 15, 2004.
Effective January 1, 2005, the Company adopted the provisions of this announcement and
performed a valuation assessment of its FCC licenses using the income approach. The implementation
of this pronouncement did not require the Company to record an impairment charge in the first
quarter of 2005. However, applying the income approach to value FCC licenses originally valued
using a residual method may place a greater possibility of future impairment charges on those FCC
licenses due to the inherent miss-match of the fundamental assumptions between the current
valuation method (a hypothetical start-up value) in comparison to the method utilized to first
establish the initial value of the FCC license (a mature stations residual enterprise value).
50
Annual Impairment Testing of FCC Licenses and Goodwill
The annual impairment testing of FCC licenses and goodwill for each individual television
station requires an estimation of the fair value of each FCC license and the fair value of the
entire television station for evaluating goodwill. Such estimations generally rely on analysis of
public and private comparative sales data as well as discounted cash flow analysis that inherently
requires multiple assumptions relating to the future prospects of each individual television
station including, but not limited to, the long term market growth characteristics, a stations
viewing audience, station revenue shares within a market, future operating expenses, costs of
capital and appropriate discount rates. The company believes that the assumptions it utilizes in
analyzing potential impairment of FCC licenses and/or goodwill for each of its 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.
Valuation of Network Affiliation Agreements
Some broadcast companies may use methods to value acquired network affiliations different than
those that are used by the Company. These different methods may result in significant variances in
the amount of purchase price allocated to these assets among broadcast companies.
Some broadcasting companies account for network affiliations as a significant component of the
value of a station. These companies believe that stations are popular because they have generally
been affiliating with networks from the inception of network broadcasts, stations with network
affiliations have the most successful local news programming and the network affiliation
relationship enhances the audience for local syndicated programming. As a result, these broadcast
companies allocate a significant portion of the purchase price for any station that they may
acquire to the network affiliation relationship.
The Company ascribes no incremental value to the incumbent network affiliation relationship in
a market beyond the cost of negotiating a new 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. Instead, the Company believes 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.
The Company has acquired a total of 18 television stations since 2002. The methodology the
Company used to value these stations was based on the Companys evaluation of the broadcast
licenses acquired and the characteristics of the markets in which they operated. Given the
Companys assumptions and the specific attributes of the stations the Company acquired during 2002
through 2005, the Company ascribed no incremental value to the incumbent network affiliation
relationship in each market beyond the cost of negotiating a new 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.
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, which
contributes to the operational performance of that station. As a result, the Company believes that
these broadcasting companies include in their network affiliation valuation amounts related to
attributes that the Company believes are more appropriately reflected in the value of the broadcast
license or goodwill.
51
If the Company were to assign higher values to all of its network affiliations and less value
to its 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 the Companys operating results. It should be noted that there is a
diversity of practice and some broadcast companies have considered such network affiliation
intangible asset 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 hypothetical reassignment of value
from broadcast licenses to network affiliations for all prior acquisitions of the Company (the
first acquisition being in 1994) and the resulting increase in amortization expense assuming a
hypothetical 15-year amortization period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total |
|
|
|
|
|
|
|
Value reassigned to |
|
|
|
|
|
|
|
Network |
|
|
|
As |
|
|
Affiliation Agreements |
|
|
|
Reported |
|
|
50% |
|
|
25% |
|
|
|
(In thousands, except per share data) |
|
Balance Sheet (As of December 31, 2005): |
|
|
|
|
|
|
|
|
|
|
|
|
Broadcast licenses |
|
$ |
1,023,428 |
|
|
$ |
673,348 |
|
|
$ |
848,388 |
|
Other intangible assets, net (including network
affiliation agreements) |
|
|
3,658 |
|
|
|
353,738 |
|
|
|
178,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
(For the year ended December 31, 2005): |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
1,034 |
|
|
|
36,938 |
|
|
|
18,986 |
|
Operating income |
|
|
60,861 |
|
|
|
24,957 |
|
|
|
42,909 |
|
Income (loss) from continuing operations |
|
|
4,604 |
|
|
|
(17,298 |
) |
|
|
(6,347 |
) |
Net loss available to common stockholders |
|
|
(2,286 |
) |
|
|
(24,188 |
) |
|
|
(13,237 |
) |
Net loss
available to common stockholders per share, basic |
|
$ |
(0.05 |
) |
|
$ |
(0.50 |
) |
|
$ |
(0.27 |
) |
Net loss available to common stockholders per share, diluted |
|
$ |
(0.05 |
) |
|
$ |
(0.50 |
) |
|
$ |
(0.27 |
) |
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.
Income Taxes
The Company has approximately $156.7 million in federal operating loss carryforwards, which
expire during the years 2020 through 2023. Additionally, the Company has an aggregate of
approximately $193 million of various state operating loss carryforwards. The utilization of a
significant portion of the net operating losses is limited on an annual basis due to a change in
ownership of both the Company and Gray MidAmerica Television. Management does not believe that
these limitations will significantly impact the Companys ability to utilize the federal net
operating losses before they expire.
A valuation allowance has been provided for a portion of the state net operating loss
carryforwards. The Company believes there may be limitations on the utilization of certain state
net operating losses due to the uncertainty of generating sufficient income in certain states. The
valuation allowance at December 31, 2005 and 2004 was $4.6 million and $3.7 million, respectively.
52
Recent Accounting Pronouncements
Accounting Changes and Corrections of Errors - In May 2005, the FASB issued Statement of
Financial Accounting Standard No. 154, (SFAS No. 154), Accounting Changes and Error Corrections,
a replacement of APB Opinion No. 20 and FASB Statement No. 20. SFAS No. 154 replaces APB Opinion
No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the accounting for and reporting of a change
in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle.
It also applies to changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for
the Company in the first quarter of 2006.
Share-Based Payment In December 2004, the FASB issued Statement of Financial Accounting
Standard No. 123, (revised 2005), Share-Based Payment (SFAS 123(R)), that addresses the
accounting for share-based payment transactions in which an enterprise receives employee services
in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the
fair value of the enterprises equity instruments or that may be settled by the issuance of such
equity instruments. SFAS 123(R) eliminates the ability to account for share-based compensation
transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and generally would require instead that such
transactions be accounted for using a fair-value-based method. Under SFAS 123(R) the Company must
determine which fair-value-based model and transitional provision it will follow upon adoption. The
options for transition methods as prescribed in SFAS 123(R) include either the modified prospective
or the modified retrospective methods. The Company has selected the modified prospective method
which requires that compensation expense be recorded for all unvested stock options and restricted
stock as the requisite service is rendered beginning with the first quarter of adoption. SFAS
123(R) will be effective for the Company beginning in its first quarter of fiscal 2006. Although
the Company will continue to evaluate the application of SFAS 123(R), based on unvested options and
restricted stock outstanding at present, the Company expects that the expense for options and
restricted stock will be between $750,000 and $800,000 for the year ended December 31, 2006.
However, the actual expense recognized in the future will vary based upon the number of options and
shares of restricted stock issued and their respective terms
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. When used in this Annual Report, the words
believes, expects, anticipates, estimates and similar words and expressions are generally
intended to identify forward-looking statements. Statements that describe the Companys future
strategic plans, goals, or objectives are also forward-looking statements. Readers of this Annual
Report are cautioned that any forward-looking statements, including those regarding the intent,
belief or current expectations of the Company or 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 in the forward-looking statements as a result of various
factors including, but not limited to those listed in Item 1A. of this report and the other factors
described from time to time in the Companys filings with the Securities and Exchange Commission.
The forward-looking statements included in this Annual Report are made only as of the date hereof.
The Company undertakes no obligation to update such forward-looking statements to reflect
subsequent events or circumstances.
53
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Based on the Companys floating rate debt outstanding at December 31, 2005, a 100 basis point
increase in market interest rates would increase the Companys interest expense and decrease the
Companys income before income taxes for the year by approximately $4.0 million.
The fair market value of long-term fixed interest rate debt is also subject to interest rate
risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates
fall and decrease as interest rates rise. The estimated fair value of the Companys total
long-term debt at December 31, 2005 was approximately $815.7 million, which was approximately $23.2
million more than its carrying value. A hypothetical 100 basis point decrease in the prevailing
interest rates at December 31, 2005 would result in an increase in fair value of total long-term
debt by approximately $2.6 million. Fair market values are determined from quoted market prices
where available or based on estimates made by investment bankers.
54
Item 8. Financial Statements and Supplementary Data.
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|
|
|
Page |
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|
|
56 |
|
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|
57 |
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|
59 |
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|
|
|
61 |
|
|
|
|
62 |
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|
|
|
65 |
|
|
|
|
66 |
|
55
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the
supervision and with the participation of our management, including our CEO and CFO, we conducted
an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal
Control Integrated Framework, our management concluded that our internal control over financial reporting was effective
as of December 31, 2005. Management has excluded WSWG-TV and
WSAZ-TV from its
assessment of internal control over financial reporting as of
December 31, 2005 because they were acquired by the Company in
purchase business combinations during the later portion of 2005.
WSWG-TV and WSAZ-TV are wholly-owned television stations
whose total assets and total revenues represent 13% and 1%,
respectively, of the related consolidated financial statement amounts
as of and for the year ended December 31, 2005.
Our managements assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which is included herein.
56
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Gray Television, Inc.:
We have completed integrated audits of Gray Television, Inc.s 2005 and 2004 consolidated financial
statements and of its internal control over financial reporting as of December 31, 2005 and an
audit of its 2003 consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of Gray Television, Inc.
and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in Managements Report on Internal
Control Over Financial Reporting appearing herein, that the Company maintained effective internal
control over financial reporting as of December 31, 2005 based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements assessment and on the effectiveness of the
Companys internal control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control over financial
reporting includes obtaining an understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating the design and operating effectiveness
of internal controls, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinions.
57
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 (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the 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.
As described in Managements Report on Internal Control Over Financial Reporting, management has
excluded WSWG-TV and WSAZ-TV from its assessment of internal control over financial reporting as of
December 31, 2005 because they were acquired by the Company in purchase business combinations
during 2005. We have also excluded WSWG-TV and WSAZ-TV from our audit of internal control over
financial reporting. WSWG-TV and WSAZ-TV are wholly-owned television stations whose total assets and total
revenues represent 13% and 1%, respectively, of the related consolidated financial statement
amounts as of and for the year ended December 31, 2005.
/s/PricewaterhouseCoopers LLP
Atlanta, Georgia
March 16, 2006
58
GRAY TELEVISION, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
9,315 |
|
|
$ |
50,566 |
|
Trade accounts receivable, less allowance for
doubtful accounts of $564 and $733,
respectively |
|
|
58,436 |
|
|
|
50,961 |
|
Current portion of program broadcast rights, net |
|
|
8,548 |
|
|
|
7,679 |
|
Related party receivable |
|
|
1,645 |
|
|
|
1,411 |
|
Current assets of discontinued operations |
|
|
-0- |
|
|
|
7,285 |
|
Deferred tax asset |
|
|
1,091 |
|
|
|
997 |
|
Other current assets |
|
|
2,149 |
|
|
|
2,007 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
81,184 |
|
|
|
120,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
Land |
|
|
20,011 |
|
|
|
17,834 |
|
Buildings and improvements |
|
|
35,903 |
|
|
|
30,807 |
|
Equipment |
|
|
220,787 |
|
|
|
179,517 |
|
|
|
|
|
|
|
|
|
|
|
276,701 |
|
|
|
228,158 |
|
Accumulated depreciation |
|
|
(113,940 |
) |
|
|
(95,519 |
) |
|
|
|
|
|
|
|
|
|
|
162,761 |
|
|
|
132,639 |
|
|
|
|
|
|
|
|
|
|
Deferred loan costs, net |
|
|
13,954 |
|
|
|
12,101 |
|
Broadcast licenses |
|
|
1,023,428 |
|
|
|
921,910 |
|
Goodwill |
|
|
222,394 |
|
|
|
137,079 |
|
Other intangible assets, net |
|
|
3,658 |
|
|
|
2,832 |
|
Investment in broadcasting company |
|
|
13,599 |
|
|
|
13,599 |
|
Related party investment |
|
|
1,682 |
|
|
|
-0- |
|
Long term assets of discontinued operations |
|
|
-0- |
|
|
|
31,416 |
|
Other |
|
|
2,394 |
|
|
|
1,984 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,525,054 |
|
|
$ |
1,374,466 |
|
|
|
|
|
|
|
|
See accompanying notes.
59
GRAY TELEVISION, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Liabilities and stockholders equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Trade accounts payable |
|
$ |
4,803 |
|
|
$ |
2,767 |
|
Employee compensation and benefits |
|
|
9,567 |
|
|
|
11,279 |
|
Current portion of accrued pension costs |
|
|
3,051 |
|
|
|
2,685 |
|
Accrued interest |
|
|
4,463 |
|
|
|
4,233 |
|
Other accrued expenses |
|
|
12,366 |
|
|
|
7,454 |
|
Dividends payable |
|
|
-0- |
|
|
|
5,871 |
|
Federal and state income taxes |
|
|
1,833 |
|
|
|
1,063 |
|
Current portion of program broadcast obligations |
|
|
10,391 |
|
|
|
9,225 |
|
Acquisition related liabilities |
|
|
4,033 |
|
|
|
1,231 |
|
Deferred revenue |
|
|
697 |
|
|
|
325 |
|
Current liabilities of discontinued operations |
|
|
-0- |
|
|
|
3,936 |
|
Current portion of long-term debt |
|
|
3,577 |
|
|
|
3,823 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
54,781 |
|
|
|
53,892 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
|
788,932 |
|
|
|
652,082 |
|
Program broadcast obligations, less current portion |
|
|
960 |
|
|
|
852 |
|
Deferred income taxes |
|
|
253,341 |
|
|
|
242,390 |
|
Long-term liabilities of discontinued operations |
|
|
-0- |
|
|
|
1,748 |
|
Long-term deferred revenue |
|
|
2,190 |
|
|
|
-0- |
|
Other |
|
|
4,764 |
|
|
|
6,262 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,104,968 |
|
|
|
957,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note K.) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Serial Preferred Stock, no par value; cumulative;
convertible; designated 5 shares, issued and outstanding 4 shares
($39,640 aggregate liquidation value, respectively) |
|
|
39,090 |
|
|
|
39,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common Stock, no par value; authorized 100,000, respectively; issued
45,259 and 44,787 shares, respectively |
|
|
441,533 |
|
|
|
402,162 |
|
Class A Common Stock, no par value; authorized 15,000 shares; issued
7,332 shares, respectively |
|
|
15,282 |
|
|
|
11,037 |
|
Retained earnings (deficit) |
|
|
(22,662 |
) |
|
|
11,669 |
|
Accumulated other comprehensive loss, net of income tax |
|
|
(1,257 |
) |
|
|
(1,414 |
) |
Unearned compensation |
|
|
(736 |
) |
|
|
(1,056 |
) |
|
|
|
|
|
|
|
|
|
|
432,160 |
|
|
|
422,398 |
|
|
|
|
|
|
|
|
|
|
Treasury Stock at cost, Common, 2,222 and 1,693 shares, respectively |
|
|
(28,766 |
) |
|
|
(21,934 |
) |
Treasury Stock at cost, Class A Common,1,579 and 1,566 shares,
respectively |
|
|
(22,398 |
) |
|
|
(22,227 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
380,996 |
|
|
|
378,237 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,525,054 |
|
|
$ |
1,374,466 |
|
|
|
|
|
|
|
|
See accompanying notes.
60
GRAY TELEVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Revenues (less agency commissions) |
|
$ |
261,553 |
|
|
$ |
293,273 |
|
|
$ |
243,061 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses before depreciation, amortization
and (gain) loss on disposal of assets, net: |
|
|
161,905 |
|
|
|
158,305 |
|
|
|
145,721 |
|
Corporate and administrative |
|
|
11,505 |
|
|
|
11,662 |
|
|
|
8,460 |
|
Depreciation |
|
|
24,456 |
|
|
|
21,955 |
|
|
|
19,697 |
|
Amortization of intangible assets |
|
|
1,034 |
|
|
|
920 |
|
|
|
5,195 |
|
Amortization of restricted stock award |
|
|
391 |
|
|
|
512 |
|
|
|
454 |
|
(Gain) loss on disposals of assets, net |
|
|
1,401 |
|
|
|
(496 |
) |
|
|
991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,692 |
|
|
|
192,858 |
|
|
|
180,518 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
60,861 |
|
|
|
100,415 |
|
|
|
62,543 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous income (expense), net |
|
|
558 |
|
|
|
979 |
|
|
|
(33 |
) |
Interest expense |
|
|
(46,549 |
) |
|
|
(41,972 |
) |
|
|
(43,307 |
) |
Loss on early extinguishment of debt |
|
|
(6,543 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
8,327 |
|
|
|
59,422 |
|
|
|
19,203 |
|
Income tax expense |
|
|
3,723 |
|
|
|
22,905 |
|
|
|
11,665 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4,604 |
|
|
|
36,517 |
|
|
|
7,538 |
|
Income (loss) from operations of discontinued publishing
and wireless operations net of income tax expense of
$3,253, $5,059, and $5,672, respectively |
|
|
(1,242 |
) |
|
|
7,768 |
|
|
|
6,486 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3,362 |
|
|
|
44,285 |
|
|
|
14,024 |
|
Preferred dividends (includes accretion of issuance cost
of $87, respectively) |
|
|
3,258 |
|
|
|
3,272 |
|
|
|
3,287 |
|
Deemed
non-cash preferred stock dividend |
|
|
2,390 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) available to common stockholders |
|
$ |
(2,286 |
) |
|
$ |
41,013 |
|
|
$ |
10,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations available to common stockholders |
|
$ |
(0.02 |
) |
|
$ |
0.67 |
|
|
$ |
0.08 |
|
Income (loss) from discontinued operations, net of tax |
|
|
(0.03 |
) |
|
|
0.16 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
|
$ |
(0.05 |
) |
|
$ |
0.83 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
48,649 |
|
|
|
49,643 |
|
|
|
50,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations available to common stockholders |
|
$ |
(0.02 |
) |
|
$ |
0.66 |
|
|
$ |
0.08 |
|
Income (loss) from discontinued operations, net of tax |
|
|
(0.03 |
) |
|
|
0.16 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) available to common stockholders |
|
$ |
(0.05 |
) |
|
$ |
0.82 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
48,649 |
|
|
|
50,170 |
|
|
|
50,535 |
|
See accompanying notes.
61
GRAY TELEVISION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(in thousands except for number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Class A |
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Class A |
|
|
Common |
|
|
Other |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Common Stock |
|
|
Earnings |
|
|
Treasury Stock |
|
|
Treasury Stock |
|
|
Comprehensive |
|
|
Unearned |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
(Deficit) |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Income (Loss) |
|
|
Compensation |
|
|
Total |
|
|
|
|
Balance at December 31, 2002 |
|
|
7,331,574 |
|
|
$ |
15,969 |
|
|
|
43,435,704 |
|
|
$ |
385,762 |
|
|
$ |
(24,230 |
) |
|
|
(483,107 |
) |
|
$ |
(4,135 |
) |
|
|
-0- |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
373,366 |
|
Net income |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
14,024 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
14,024 |
|
Unrealized loss on
derivatives, net of income
taxes |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(126 |
) |
|
|
-0- |
|
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,898 |
|
Common Stock cash dividends
($0.08) per share |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(4,007 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(4,007 |
) |
Preferred Stock dividends |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(3,287 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(3,287 |
) |
Issuance of Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
172,096 |
|
|
|
1,899 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
1,899 |
|
Non-qualified stock plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
279,170 |
|
|
|
2,741 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
2,741 |
|
Directors stock plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
168 |
|
|
|
2 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
2 |
|
Directors restricted
stock
plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
45,000 |
|
|
|
439 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(439 |
) |
|
|
-0- |
|
Officers restricted
stock plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
100,000 |
|
|
|
1,372 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(1,372 |
) |
|
|
-0- |
|
Amortization of unearned
compensation |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
454 |
|
|
|
454 |
|
Cost of stock issuance |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(195 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(195 |
) |
Purchase of Common Stock
from related party |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(1,017,647 |
) |
|
|
(17,380 |
) |
|
|
(11,750 |
) |
|
|
(200 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
(17,580 |
) |
Purchase of warrants from
related party |
|
|
-0- |
|
|
|
(4,932 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(4,932 |
) |
Income tax benefits
relating to stock plans |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
416 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
7,331,574 |
|
|
$ |
11,037 |
|
|
|
44,032,138 |
|
|
$ |
392,436 |
|
|
$ |
(17,500 |
) |
|
|
(1,500,754 |
) |
|
$ |
(21,515 |
) |
|
|
(11,750 |
) |
|
$ |
(200 |
) |
|
$ |
(126 |
) |
|
$ |
(1,357 |
) |
|
$ |
362,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
62
GRAY TELEVISION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (Continued)
(in thousands except for number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Class A |
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Class A |
|
|
Common |
|
|
Other |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Common Stock |
|
|
Earnings |
|
|
Treasury Stock |
|
|
Treasury Stock |
|
|
Comprehensive |
|
|
Unearned |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
(Deficit) |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Income (Loss) |
|
|
Compensation |
|
|
Total |
|
|
|
|
Balance at December 31, 2003
(continued) |
|
|
7,331,574 |
|
|
$ |
11,037 |
|
|
|
44,032,138 |
|
|
$ |
392,436 |
|
|
$ |
(17,500 |
) |
|
|
(1,500,754 |
) |
|
$ |
(21,515 |
) |
|
|
(11,750 |
) |
|
$ |
(200 |
) |
|
$ |
(126 |
) |
|
$ |
(1,357 |
) |
|
$ |
362,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
44,285 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
44,285 |
|
Gain on derivatives, net of
income taxes |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
126 |
|
|
|
-0- |
|
|
|
126 |
|
Recognition of minimum
pension liability, net of
income taxes |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(1,414 |
) |
|
|
-0- |
|
|
|
(1,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock cash dividends
($0.12) per share |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(5,973 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(5,973 |
) |
Common Stock special cash
dividends ($0.12) per share |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(5,871 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(5,871 |
) |
Preferred Stock dividends |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(3,272 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(3,272 |
) |
Issuance of Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
214,843 |
|
|
|
3,155 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
3,155 |
|
Non-qualified stock plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
524,585 |
|
|
|
5,540 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
5,540 |
|
Directors restricted
stock
plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
15,000 |
|
|
|
211 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(211 |
) |
|
|
-0- |
|
Amortization of unearned
compensation |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
512 |
|
|
|
512 |
|
Purchase of Common Stock |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(65,000 |
) |
|
|
(712 |
) |
|
|
(1,606,400 |
) |
|
|
(20,594 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
(21,306 |
) |
Purchase of Common Stock
from a director |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(75,000 |
) |
|
|
(1,140 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
(1,140 |
) |
Income tax benefits
relating to stock plans |
|
|
-0- |
|
|
|
-0- |
|
|
|
0- |
|
|
|
820 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
7,331,574 |
|
|
$ |
11,037 |
|
|
|
44,786,566 |
|
|
$ |
402,162 |
|
|
$ |
11,669 |
|
|
|
(1,565,754 |
) |
|
$ |
(22,227 |
) |
|
|
(1,693,150 |
) |
|
$ |
(21,934 |
) |
|
$ |
(1,414 |
) |
|
$ |
(1,056 |
) |
|
$ |
378,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
63
GRAY TELEVISION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (Continued)
(in thousands except for number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Class A |
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Class A |
|
|
Common |
|
|
Other |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Common Stock |
|
|
Earnings |
|
|
Treasury Stock |
|
|
Treasury Stock |
|
|
Comprehensive |
|
|
Unearned |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
(Deficit) |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Income (Loss) |
|
|
Compensation |
|
|
Total |
|
|
|
|
Balance at December 31, 2004
(continued) |
|
|
7,331,574 |
|
|
$ |
11,037 |
|
|
|
44,786,566 |
|
|
$ |
402,162 |
|
|
$ |
11,669 |
|
|
|
(1,565,754 |
) |
|
$ |
(22,227 |
) |
|
|
(1,693,150 |
) |
|
$ |
(21,934 |
) |
|
$ |
(1,414 |
) |
|
$ |
(1,056 |
) |
|
$ |
378,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
3,362 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
3,362 |
|
Recognition of minimum
pension liability, net of
income taxes |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
157 |
|
|
|
-0- |
|
|
|
157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,519 |
|
Spinoff of publishing and
wireless businesses |
|
|
-0- |
|
|
|
4,245 |
|
|
|
-0- |
|
|
|
31,758 |
|
|
|
(26,196 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
9,807 |
|
Common Stock cash dividends
($0.12) per share |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(5,849 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(5,849 |
) |
Preferred Stock dividends |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(3,258 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(3,258 |
) |
Deemed
non-cash preferred stock dividend |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
2,390 |
|
|
|
(2,390 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
Issuance of Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
216,748 |
|
|
|
2,284 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
2,284 |
|
Non-qualified stock plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
250,230 |
|
|
|
2,448 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
2,448 |
|
Directors restricted
stock
plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
5,000 |
|
|
|
72 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(72 |
) |
|
|
-0- |
|
Amortization of unearned
compensation |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
392 |
|
|
|
392 |
|
Purchase of Common Stock |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(12,800 |
) |
|
|
(171 |
) |
|
|
(528,400 |
) |
|
|
(6,832 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
(7,003 |
) |
Income tax benefits
relating to stock plans |
|
|
-0- |
|
|
|
-0- |
|
|
|
0- |
|
|
|
419 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
7,331,574 |
|
|
$ |
15,282 |
|
|
|
45,258,544 |
|
|
$ |
441,533 |
|
|
$ |
(22,662 |
) |
|
|
(1,578,554 |
) |
|
$ |
(22,398 |
) |
|
|
(2,221,550 |
) |
|
$ |
(28,766 |
) |
|
$ |
(1,257 |
) |
|
$ |
(736 |
) |
|
$ |
380,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
64
GRAY TELEVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,362 |
|
|
$ |
44,285 |
|
|
$ |
14,024 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
26,090 |
|
|
|
23,656 |
|
|
|
21,715 |
|
Amortization of intangible assets |
|
|
1,034 |
|
|
|
975 |
|
|
|
5,622 |
|
Amortization of deferred loan costs |
|
|
1,709 |
|
|
|
1,831 |
|
|
|
1,796 |
|
Amortization of restricted stock award |
|
|
391 |
|
|
|
512 |
|
|
|
454 |
|
Amortization of program broadcast rights |
|
|
11,577 |
|
|
|
11,137 |
|
|
|
11,136 |
|
Payments on program broadcast obligations |
|
|
(11,452 |
) |
|
|
(11,055 |
) |
|
|
(10,967 |
) |
Write off loan acquisition costs from early extinguishment of debt |
|
|
3,638 |
|
|
|
-0- |
|
|
|
-0- |
|
FCC license impairment expense |
|
|
3,206 |
|
|
|
-0- |
|
|
|
-0- |
|
Common Stock contributed to 401(K) Plan |
|
|
2,284 |
|
|
|
2,559 |
|
|
|
2,495 |
|
Deferred income taxes |
|
|
5,717 |
|
|
|
25,472 |
|
|
|
16,205 |
|
(Gain) loss on disposal of assets, net |
|
|
1,265 |
|
|
|
(451 |
) |
|
|
1,155 |
|
Deferred revenue, network compensation |
|
|
2,414 |
|
|
|
-0- |
|
|
|
-0- |
|
Other |
|
|
339 |
|
|
|
99 |
|
|
|
109 |
|
Changes in operating assets and liabilities, net of business
acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(2,181 |
) |
|
|
(1,749 |
) |
|
|
(628 |
) |
Recoverable income taxes |
|
|
-0- |
|
|
|
18 |
|
|
|
216 |
|
Inventories |
|
|
169 |
|
|
|
420 |
|
|
|
(343 |
) |
Other current assets |
|
|
(242 |
) |
|
|
(167 |
) |
|
|
(184 |
) |
Trade accounts payable |
|
|
1,363 |
|
|
|
893 |
|
|
|
(3,660 |
) |
Employee compensation, benefits and pension costs |
|
|
(3,100 |
) |
|
|
3,079 |
|
|
|
561 |
|
Accrued expenses |
|
|
2,295 |
|
|
|
70 |
|
|
|
(371 |
) |
Accrued interest |
|
|
230 |
|
|
|
193 |
|
|
|
2,920 |
|
Income taxes payable |
|
|
770 |
|
|
|
1,733 |
|
|
|
-0- |
|
Deferred revenue other, including current portion |
|
|
(396 |
) |
|
|
(774 |
) |
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
50,482 |
|
|
|
102,736 |
|
|
|
62,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of television businesses and licenses, net of cash acquired |
|
|
(208,250 |
) |
|
|
(1,023 |
) |
|
|
(819 |
) |
Purchases of property and equipment |
|
|
(37,161 |
) |
|
|
(36,295 |
) |
|
|
(22,306 |
) |
Proceeds from asset sales |
|
|
2,223 |
|
|
|
1,392 |
|
|
|
435 |
|
Payments on purchase liabilities |
|
|
(980 |
) |
|
|
(1,818 |
) |
|
|
(8,386 |
) |
Other |
|
|
(1,757 |
) |
|
|
192 |
|
|
|
(1,920 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(245,925 |
) |
|
|
(37,552 |
) |
|
|
(32,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on long-term debt |
|
|
229,438 |
|
|
|
937 |
|
|
|
16,000 |
|
Repayments of borrowings on long-term debt |
|
|
(92,970 |
) |
|
|
(1,079 |
) |
|
|
(18,491 |
) |
Deferred loan costs |
|
|
(7,199 |
) |
|
|
(819 |
) |
|
|
(1,152 |
) |
Dividends paid, net of accreted preferred dividend |
|
|
(14,892 |
) |
|
|
(9,158 |
) |
|
|
(7,207 |
) |
Income tax benefit relating to stock plans |
|
|
419 |
|
|
|
820 |
|
|
|
416 |
|
Proceeds from issuance of Common Stock |
|
|
2,448 |
|
|
|
5,540 |
|
|
|
2,658 |
|
Purchase of Common Stock |
|
|
(7,004 |
) |
|
|
(21,306 |
) |
|
|
-0- |
|
Purchase of Common Stock from related party |
|
|
-0- |
|
|
|
(1,140 |
) |
|
|
(17,581 |
) |
Purchase of Preferred Stock from related party |
|
|
-0- |
|
|
|
(360 |
) |
|
|
-0- |
|
Purchase of warrants from related party |
|
|
-0- |
|
|
|
-0- |
|
|
|
(4,932 |
) |
Distribution
from spinoff of publishing and wireless businesses |
|
|
43,952 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
154,192 |
|
|
|
(26,565 |
) |
|
|
(30,289 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(41,251 |
) |
|
|
38,619 |
|
|
|
(968 |
) |
Cash and cash equivalents at beginning of year |
|
|
50,566 |
|
|
|
11,947 |
|
|
|
12,915 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
9,315 |
|
|
$ |
50,566 |
|
|
$ |
11,947 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
65
GRAY TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Description of Business and Summary of Significant Accounting Policies
Description of Business
Gray Television, Inc. is a television broadcast company headquartered in Atlanta, Georgia. As
of December 31, 2005 the Company operated 35 television stations serving 29 markets. Sixteen of
the stations are affiliated with CBS Inc., or CBS, nine of the stations are affiliated with the
National Broadcasting Company, Inc., or NBC, eight of the stations are affiliated with the
American Broadcasting Company, or ABC, one station is affiliated with FOX Entertainment Group,
Inc., or FOX, and one station has a dual affiliation with the United Paramount Network, Inc., or
UPN. In addition, Gray currently operates eleven digital multi-cast television channels in nine
of its existing markets, which are affiliated with either UPN, FOX or NBC. With sixteen CBS
affiliated stations, the Company is the largest independent owner of CBS affiliates in the country.
In addition to the stations described above, on March 3, 2006 the Company acquired WNDU-TV, an NBC
affiliate in South Bend, Indiana. The Companys operations consist of one reportable segment.
On December 30, 2005, the Company completed the spinoff of all of the outstanding stock of
Triple Crown Media., Inc. (TCM). Immediately prior to the spinoff, the Company contributed all of
the membership interests in Gray Publishing, LLC which owned and operated the Companys 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, the Company
received an approximate $44 million cash distribution from TCM, which Gray used to reduce its
outstanding indebtedness on December 30, 2005. TCM is now quoted on the Nasdaq National Market
under the symbol TCMI. The financial position and results of operations of the publishing and
wireless businesses are presented on a discontinued operations basis in the Companys consolidated
balance sheet and statement of operations for all periods presented. See Note B. Discontinued
Operations for further discussion of the spinoff.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its
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. Broadcast network compensation is generated by payments from the broadcast
networks to the Company. Advertising revenue is billed to the customer and recognized when the
advertisement is aired. Broadcast network compensation is recognized on a straight-line basis over
the life of the contract. Cash received which has not yet been recognized as revenue is presented
as deferred revenue.
66
A. Description of Business and Summary of Significant Accounting Policies (Continued)
Barter Transactions
The Company accounts for trade barter transactions involving the exchange of tangible goods or
services with its 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.
Trade barter revenue and expense recognized by the Company for each of the years ended December 31,
2005, 2004 and 2003 is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Trade barter revenue |
|
$ |
2,344 |
|
|
$ |
2,562 |
|
|
$ |
2,561 |
|
Trade barter expense |
|
|
(2,191 |
) |
|
|
(2,437 |
) |
|
|
(2,375 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
153 |
|
|
$ |
125 |
|
|
$ |
186 |
|
|
|
|
|
|
|
|
|
|
|
In accordance with the Financial Accounting Standards Boards (the FASB) Statement No. 63,
Financial Reporting by Broadcasters, the Company does not account for barter revenue and related
barter expense generated from network programming. Neither does the Company account for barter
revenue and related barter expense generated from syndicated
programming as such amounts are not material. Furthermore, any such
barter revenue recognized would then require the recognition of an equal amount of barter expense.
The recognition of these amounts would have no effect upon net income.
Advertising Expense
The Company recorded advertising expense of $893,000, $921,000 and $766,000 for the years
ended December 31, 2005, 2004 and 2003, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments that are readily convertible to known
amounts of cash and have a maturity of three months or less when purchased.
Allowance for Doubtful Accounts Receivable
The Company records a provision for doubtful accounts based on a percentage of local revenue
receivables that are over sixty days old and a percentage of national revenue receivables that are
over ninety days old. The Company recorded expenses for this allowance of $387,000, $308,000 and
$375,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
67
A. Description of Business and Summary of Significant Accounting Policies (Continued)
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 the 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 time of disposition, and any
resulting profit or loss is reflected in income or expense for the period.
Deferred Loan Costs
Loan acquisition costs are amortized over the life of the applicable indebtedness using a
straight-line method which approximates the effective interest method.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes (SFAS 109). Under SFAS 109, deferred tax assets and liabilities
are recognized for future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Stock-Based Compensation
FASB Statement No. 148, Accounting for Stock-Based Compensation Transition and Disclosure,
an amendment of FASB Statement No. 123 (SFAS 148), amends the disclosure requirements of FASB
Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123), to require more prominent
disclosure in both annual and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported results.
The Company currently applies APB Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25) and related interpretations in accounting for its stock option plans. Under APB 25,
compensation expense is based on the difference, if any, on the date of grant, between the
fair value of the Companys stock and the exercise price. Had compensation expense related to the
Companys outstanding options been determined based on the fair value at the grant dates consistent
with SFAS 123,
68
A. Description of Business and Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation (Continued)
net income (loss) available to common stockholders and earnings per share would be as reflected
below (in thousands, except per common share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net income
(loss) available to common stockholders, as reported |
|
$ |
(2,286 |
) |
|
$ |
41,013 |
|
|
$ |
10,737 |
|
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects |
|
|
(961 |
) |
|
|
(908 |
) |
|
|
(1,477 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders, pro forma |
|
$ |
(3,247 |
) |
|
$ |
40,105 |
|
|
$ |
9,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported |
|
$ |
(0.05 |
) |
|
$ |
0.83 |
|
|
$ |
0.21 |
|
Basic, pro forma |
|
$ |
(0.07 |
) |
|
$ |
0.81 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted, as reported |
|
$ |
(0.05 |
) |
|
$ |
0.82 |
|
|
$ |
0.21 |
|
Diluted, pro forma |
|
$ |
(0.07 |
) |
|
$ |
0.80 |
|
|
$ |
0.18 |
|
The fair value for the options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 2005, 2004 and 2003 respectively:
risk-free interest rates of 3.81%, 3.53% and 3.14%; dividend yields of 0.86%, 0.90% and 0.71%;
volatility factors of the expected market price of the Companys common stock of 0.30, 0.30 and
0.30; and a weighted-average expected life of the options of 3.0, 3.4 and 4.1 years.
Accounting for Derivatives
The Company may use swap agreements to convert a portion of its variable rate debt to a fixed
rate basis, thus hedging against interest rate fluctuations. These hedging activities may be
transacted with one or more highly-rated institutions, reducing the exposure to credit risk in the
event of nonperformance by the counter-party.
As of December 31, 2005, the Company is not engaged in any interest rate swap agreements.
During 2003, the Company entered into four interest rate swap agreements which expired in November
2004. These agreements converted a combined notional amount of $50.0 million of floating rate debt
under the senior credit facility to fixed rate debt. These swap agreements fixed the LIBOR
component of the total interest rate charged on this portion of the Companys debt at a weighted
average fixed rate of 1.87%.
For periods where the Company has entered into a swap agreement, the Company recognizes
interest differentials from the interest rate swap agreements as adjustments to interest expense in
the period they
occur. The differential paid or received as interest rates change is accrued and recognized as
an adjustment to interest expense. The amount payable to, or receivable from, counter-parties is
included in liabilities or assets. The fair value of the swap agreements is recognized in the
financial statements as an asset or liability depending on the circumstances.
69
A. Description of Business and Summary of Significant Accounting Policies (Continued)
Concentration of Credit Risk
The Company provides advertising air-time to national and local advertisers within the
geographic areas in which the Company operates. Credit is extended based on an evaluation of the
customers financial condition, and generally advance payment is not required. Credit losses are
provided for in the financial statements and consistently have been within managements
expectations.
For the year ended December 31, 2005, approximately 26% and 12% of the Companys broadcast
revenue was obtained from advertising sales to automotive and restaurant customers, respectively.
The Company experienced similar concentrations of revenue in the years ended December 31, 2004 and
2003. Although, the Companys revenues could be affected by changes within these industries, this
risk is in part mitigated by the diversity of companies from which these revenues are obtained.
Furthermore, the Companys large geographic operating area partially mitigates the effect upon the
Company from regional economic changes.
The Companys cash and cash equivalents are held by a single major financial institution;
however, risk of loss is mitigated by the size and the financial health of the institution.
Fair Value of Financial Instruments
The estimated fair value of the Companys long-term debt at December 31, 2005 and 2004 was
$815.7 million and $694.5 million, respectively. Estimated fair market value of the 91/4% senior
subordinated notes is based upon recent trading activity. The estimated fair market value of the
senior credit facility approximates recorded value as a result of the facilitys market interest
rate. Currently, the Company does not anticipate settlement of long-term debt at other than book
value. However, if favorable market conditions exist, the Company may purchase a portion of its 9
1/4% senior subordinated notes in the open market. If so, these open market purchases could be at
an amount greater than carrying value. The fair value of other financial instruments classified as
current assets or liabilities approximates their carrying value.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted-average number of
common shares outstanding during the 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
will not 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,
including restricted stock and stock options. A reconciliation of the numerator and denominator
used in the calculation of historical basic and diluted earnings per share follows (in thousands):
70
A. Description of Business and Summary of Significant Accounting Policies (Continued)
Earnings Per Share (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Income from continuing operations |
|
$ |
4,604 |
|
|
$ |
36,517 |
|
|
$ |
7,538 |
|
Preferred dividends |
|
|
3,258 |
|
|
|
3,272 |
|
|
|
3,287 |
|
Deemed
non-cash preferred stock dividend |
|
|
2,390 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations available
to common stockholders |
|
|
(1,044 |
) |
|
|
33,245 |
|
|
|
4,251 |
|
Income (loss) from discontinued operations,
net of income tax |
|
|
(1,242 |
) |
|
|
7,768 |
|
|
|
6,486 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
|
$ |
(2,286 |
) |
|
$ |
41,013 |
|
|
$ |
10,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding basic |
|
|
48,649 |
|
|
|
49,643 |
|
|
|
50,111 |
|
Stock options, restricted stock and warrants |
|
|
-0- |
|
|
|
527 |
|
|
|
424 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
48,649 |
|
|
|
50,170 |
|
|
|
50,535 |
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2004 and 2003, the Company generated net income;
therefore, common stock equivalents related to employee stock-based compensation plans, warrants
and convertible preferred stock were included in the computation of diluted earnings per share to
the extent that their exercise costs and conversion prices exceeded market value.
For the year ended December 31, 2005 the Company reported a net loss
available to common stockholders, therefore, common stock equivalents
were not included because they were antidilutive.
The number of antidilutive common stock equivalents excluded from diluted earnings per share for the respective
periods are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Antidilutive common stock equivalents
excluded from diluted earnings per
share |
|
|
5,157 |
|
|
|
4,477 |
|
|
|
5,120 |
|
Investment in Broadcasting Company
The Company has 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. The Company has no commitment to fund operations
of Tarzian and has neither representation on Tarzians board of directors nor any other influence
over Tarzians management. The Company believes the cost method is appropriate to account for this
investment given the existence of a single voting majority shareholder, the lack of management
influence and litigation concerning the Tarzian shares. See Note K Commitments and Contingencies
for further discussion of the Tarzian investment.
Valuation and Impairment Testing of Intangible Assets
Approximately $1.2 billion, or 82%, of the Companys total assets as of December 31, 2005
consist of unamortized intangible assets, principally broadcast licenses and goodwill.
71
A. Description of Business and Summary of Significant Accounting Policies (Continued)
Valuation and Impairment Testing of Intangible Assets (Continued)
The Company values the broadcast licenses of television stations 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 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.
For purposes of testing goodwill impairment, each of the Companys individual television
stations is a separate reporting unit. The Company reviews each television station acquired after
January 1, 2002 for possible goodwill impairment by comparing the estimated market value of each
respective reporting unit to the carrying value of that reporting units net assets. If the
estimated market values exceed the net assets, no goodwill impairment is deemed to exist. If the
fair value of the reporting unit does not exceed the carrying value of that reporting units net
assets, the Company then performs, on a notional basis, a purchase price allocation applying the
guidance of Statements of Financial Accounting Standards No. 141, Business Combinations (SFAS
141) 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 carrying value of goodwill for the reporting unit is written
down to this implied value.
Related Party Transactions
For the years ended December 31, 2005, 2004 and 2003, the Company made payments to Georgia
Casualty and Surety Co. in the amounts of $288,000, $256,000 and $239,000, respectively, for
insurance services provided. Mr. J. Mack Robinson, the Companys Chairman and Chief Executive
Officer has an ownership interest in Atlantic American Corporation, a publicly traded company,
which is the parent company of Georgia Casualty and Surety Co.
Recent Accounting Pronouncements
Accounting Changes and Corrections of Errors - In May 2005, the FASB issued Statement of
Financial Accounting Standard No. 154, (SFAS No. 154), Accounting Changes and Error Corrections,
a replacement of APB Opinion No. 20 and FASB Statement No. 20. SFAS No. 154 replaces APB Opinion
No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the accounting for and reporting of a change
in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle.
It also applies to changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for
the Company in the first quarter of 2006.
Share-Based Payment In December 2004, the FASB issued Statement of Financial Accounting
Standard No. 123, (revised 2005), Share-Based Payment (SFAS 123(R)), that addresses the
accounting for share-based payment transactions in which an enterprise receives employee services
in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the
fair value of the enterprises equity instruments or that may be settled by the issuance of such
equity instruments. SFAS 123(R) eliminates the ability to account for share-based compensation
transactions using the intrinsic value
72
A. Description of Business and Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements (Continued)
method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and generally would require instead that such transactions be accounted for using a
fair-value-based method. Under SFAS 123(R) the Company must determine which fair-value-based model
and transitional provision it will follow upon adoption. The options for transition methods as
prescribed in SFAS 123(R) include either the modified prospective or the modified retrospective
methods. The Company has selected the modified prospective method which requires that compensation
expense be recorded for all unvested stock options and restricted stock as the requisite service is
rendered beginning with the first quarter of adoption. SFAS 123(R) will be effective for the
Company beginning in its first quarter of fiscal 2006. Although the Company will continue to
evaluate the application of SFAS 123(R), based on unvested options and restricted stock outstanding
at present, the Company expects that the expense for options and restricted stock will be between
$750,000 and $800,000 for the year ended December 31, 2006. However, the actual expense recognized
in the future will vary based upon the number of options and shares of restricted stock issued and
their respective terms
Changes
in Classifications
The
classification of certain prior year amounts in the accompanying consolidated financial statements have been
changed in order to conform to the current year presentation.
B. Discontinued Operations
On December 30, 2005 the Company completed the spinoff of all of the outstanding stock of
Triple Crown Media, Inc. (TCM). Immediately prior to the spinoff, the Company contributed all of
the membership interests of Gray Publishing LLC, which owned and operated the Companys Gray
Publishing and GrayLink Wireless businesses and certain other assets to TCM. In accordance with
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, (SFAS No. 144) the balance sheet of the Company at December 31, 2005 no longer
includes the assets and liabilities of those businesses. The Companys statement of stockholders
equity for the year ended December 31, 2005 records the related $26.2 million decrease in retained
earnings reflecting the distribution of the net carrying amounts of those businesses to TCM. The
statement of stockholders equity also records the $36.0 million distribution, net of tax, received
from TCM, as a proportionate increase to the balances of the Companys Common Stock and Class A
Common Stock. The assets and liabilities of the former publishing and wireless businesses have been
reclassified and are reported as current and non-current assets and liabilities of discontinued
operations in the consolidated balance sheet as of December 31, 2004.
The major classes of discontinued assets and liabilities included in the consolidated balance
sheets as of the day of the spinoff, December 30, 2005 and at December 31, 2004 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Current assets from discontinued operations: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
6,291 |
|
|
$ |
6,003 |
|
Inventories |
|
|
932 |
|
|
|
1,101 |
|
Other current assets |
|
|
300 |
|
|
|
181 |
|
|
|
|
|
|
|
|
Total |
|
$ |
7,523 |
|
|
$ |
7,285 |
|
|
|
|
|
|
|
|
73
B. Discontinued Operations (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Non-current assets from discontinued operations: |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
9,570 |
|
|
$ |
9,570 |
|
Intangibles, net |
|
|
17,579 |
|
|
|
21,609 |
|
Other non-current assets |
|
|
246 |
|
|
|
237 |
|
|
|
|
|
|
|
|
Total |
|
$ |
27,395 |
|
|
$ |
31,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities from discontinued operations: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
4,548 |
|
|
$ |
1,875 |
|
Deferred revenue |
|
|
1,922 |
|
|
|
2,061 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,470 |
|
|
$ |
3,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities from discontinued operations: |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
$ |
1,512 |
|
|
$ |
1,595 |
|
Other non-current liabilities |
|
|
740 |
|
|
|
153 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,252 |
|
|
$ |
1,748 |
|
|
|
|
|
|
|
|
The Company has reclassified the former publishing and wireless revenues and expenses for the
years ended December 31, 2005, 2004 and 2003 to discontinued operations, net of income tax in its
consolidated statement of operations. The Company did not allocate interest on corporate
indebtedness to discontinued operations. The Company has included its
third party legal, accounting,
professional, printing and other costs of the transactions related to the spinoff as a part of its
discontinued operations, net of income tax, in the consolidated statement of operations for the
year ended December 31, 2005. The following are the components of income from discontinued
operations, net of tax for the years ended December 31, 2005, 2004 and 2003 respectively (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Operating revenues |
|
$ |
52,658 |
|
|
$ |
51,928 |
|
|
$ |
50,363 |
|
Operating expenses |
|
|
39,708 |
|
|
|
37,335 |
|
|
|
35,619 |
|
Transaction costs |
|
|
6,238 |
|
|
|
-0- |
|
|
|
-0- |
|
Depreciation |
|
|
1,634 |
|
|
|
1,701 |
|
|
|
2,018 |
|
Amortization of intangible assets |
|
|
-0- |
|
|
|
55 |
|
|
|
427 |
|
Impairment of FCC license |
|
|
3,206 |
|
|
|
-0- |
|
|
|
-0- |
|
(Gain) loss on disposal of assets, net |
|
|
(136 |
) |
|
|
45 |
|
|
|
164 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,008 |
|
|
|
12,792 |
|
|
|
12,135 |
|
Miscellaneous income, net |
|
|
3 |
|
|
|
37 |
|
|
|
53 |
|
Interest expense |
|
|
-0- |
|
|
|
(2 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
2,011 |
|
|
|
12,827 |
|
|
|
12,158 |
|
Income tax expense |
|
|
3,253 |
|
|
|
5,059 |
|
|
|
5,672 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations of
discontinued publishing and other
operations net of income tax expense |
|
$ |
(1,242 |
) |
|
$ |
7,768 |
|
|
$ |
6,486 |
|
|
|
|
|
|
|
|
|
|
|
74
B. Discontinued Operations (Continued)
During the year ended December 31, 2005, the Company recorded a $3.2 million impairment charge
related to its wireless FCC licenses. The impairment of the FCC license is attributed to increased
competition from cellular telephones.
Related Party Transactions
For the years ended December 31, 2005, 2004 and 2003, the Company made payments to Georgia
Casualty and Surety Co. in the amounts of $153,000, $143,000 and $161,000, respectively, for
insurance services provided to the Companys discontinued operations. Mr. J. Mack Robinson, the
Companys Chairman and Chief Executive Officer has an ownership interest in Atlantic American
Corporation, a publicly traded company, which is the parent company of Georgia Casualty and Surety
Co.
C. Purchase of Federal Communications License
During 2005 the Company acquired a third FCC license to operate a second low power television
station, WAHU-TV, in the Charlottesville, Virginia television market. The Fox broadcast network
has agreed to an affiliation agreement to allow the Company to operate WAHU-TV as a FOX affiliate.
WCAV-TV and WVAW-TV began broadcasting in August 2004 and WAHU-TVs licence was acquired on
July 1, 2005. Grays total cost to acquire and/or construct the combined broadcast facilities for
these three stations was approximately $8.5 million.
On August 17, 2004, the Company completed the acquisition of a FCC television license for
WCAV-TV, Channel 19, in Charlottesville, Virginia from Charlottesville Broadcasting Corporation.
Grays cost to acquire that FCC license was approximately $1 million. CBS, Inc. has agreed to a
ten-year affiliation agreement to allow Gray to operate WCAV-TV as a CBS-affiliated station.
Gray also has an FCC license to operate a low power television station, WVAW-TV, in the
Charlottesville, Virginia television market. The American Broadcasting Company has agreed to an
affiliation agreement expiring December 31, 2013 to allow Gray to operate WVAW-TV as an ABC
affiliate.
D. Business Acquisitions
WSAZ-TV
On November 30, 2005, the Company completed the acquisition of WSAZ-TVs assets from Emmis
Communications Corp. for a purchase price of $185.8 million plus related transaction costs of
$239,000. WSAZ-TV, Channel 3, serves the Charleston Huntington, West Virginia television market
and is an
NBC affiliate. To fund the acquisition, the Company borrowed $185.0 million under its amended
senior credit facility and used $1.0 million of cash on hand.
WSWG-TV (formerly WVAG-TV)
On November 10, 2005, the Company completed the acquisition of WSWG-TVs assets from P. D.
Communications LLC for a purchase price of $3.75 million plus related transaction costs of $83,000.
Total cost was $3.8 million and of this amount $2.8 million was paid at closing. The remaining $1.0
million will be paid at a later date and was recorded as a liability as of December 31, 2005. When
purchased, the stations call letters were WVAG-TV. The Company changed the stations call letters
to
75
D. Business Acquisitions (Continued)
WSWG-TV (formerly WVAG-TV) (Continued)
WSWG-TV subsequent to the acquisition to emphasize its focus on southwest Georgia. WSWG-TV,
Channel 44, serves the Albany, Georgia television market. WSWG-TV is affiliated with the UPN
network. The Company used cash on hand to fund the acquisition.
KKCO-TV
On January 31, 2005, the Company completed the acquisition of KKCO-TVs assets from Eagle III
Broadcasting, LLC for a purchase price of $13.5 million plus related transaction costs of $700,000.
Total cost was $14.2 million. KKCO-TV, Channel 11, serves the Grand Junction, Colorado television
market and is an NBC affiliate. The Company used cash on hand to fully fund this acquisition.
The acquisitions of WSAZ-TV, WSWG-TV and KKCO-TV were accounted for under the purchase method
of accounting. Under the purchase method of accounting, the results of operations of the acquired
business are included in the accompanying consolidated financial statements as of its acquisition
date. The identifiable assets and liabilities of the acquired business are recorded at their
estimated fair values with the excess of the purchase price over such identifiable net assets
allocated to goodwill.
The following table summarizes the fair values of the assets acquired and the liabilities
assumed at the date of acquisition for WSAZ-TV, WSWG-TV and KKCO-TV (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WSAZ-TV |
|
|
WSWG-TV |
|
|
KKCO-TV |
|
Accounts receivable |
|
$ |
4,558 |
|
|
$ |
10 |
|
|
$ |
442 |
|
Current portion of program broadcast rights |
|
|
1,002 |
|
|
|
38 |
|
|
|
35 |
|
Other current assets |
|
|
35 |
|
|
|
-0- |
|
|
|
48 |
|
Program broadcast rights excluding current portion |
|
|
-0- |
|
|
|
69 |
|
|
|
-0- |
|
Property and equipment |
|
|
12,721 |
|
|
|
500 |
|
|
|
1,111 |
|
Broadcast licenses |
|
|
91,137 |
|
|
|
1,554 |
|
|
|
8,338 |
|
Goodwill |
|
|
78,675 |
|
|
|
1,752 |
|
|
|
4,448 |
|
Other intangible assets |
|
|
2,310 |
|
|
|
26 |
|
|
|
67 |
|
Trade payables and accrued expenses |
|
|
(3,375 |
) |
|
|
(8 |
) |
|
|
(251 |
) |
Current portion of program broadcast obligations |
|
|
(1,028 |
) |
|
|
(38 |
) |
|
|
(35 |
) |
Program broadcast obligations excluding current
portion |
|
|
-0- |
|
|
|
(75 |
) |
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
Total purchase price including expenses |
|
$ |
186,035 |
|
|
$ |
3,828 |
|
|
$ |
14,203 |
|
|
|
|
|
|
|
|
|
|
|
All of the goodwill recorded in association with the acquisitions is expected to be deductible
for income tax purposes. Broadcast licenses and goodwill are indefinite lived intangible assets.
Pro Forma Operating Results (Unaudited)
This unaudited pro forma operating data does not purport to represent what the Companys
actual results of operations would have been had the Company acquired KKCO-TV, WSWG-TV and WSAZ-TV
on January 1, 2004 and should not serve as a forecast of the Companys operating results for any
future periods. The pro forma adjustments are based solely upon certain assumptions that
management believes are reasonable under the circumstances at this time. Unaudited pro forma
operating data for the years ended December 31, 2005 and 2004, are as follows (in thousands, except
per common share data):
76
D. Business Acquisitions (Continued)
Pro Forma Operating Results (Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
Operating revenues |
|
$ |
282,131 |
|
|
$ |
326,986 |
|
Operating income |
|
|
69,873 |
|
|
|
116,154 |
|
Income from continuing operations, net of income tax |
|
|
4,705 |
|
|
|
41,523 |
|
Net income |
|
|
3,463 |
|
|
|
49,429 |
|
Preferred dividends |
|
|
3,258 |
|
|
|
3,272 |
|
Deemed
non-cash preferred stock dividend |
|
|
2,390 |
|
|
|
-0- |
|
Net income
(loss) available to common stockholders |
|
$ |
(2,185 |
) |
|
$ |
46,157 |
|
|
|
|
|
|
|
|
|
|
Basic per share information: |
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations available to common stockholders |
|
$ |
(0.02 |
) |
|
$ |
0.77 |
|
Income
(loss) from discontinued operations, net of income tax |
|
|
(0.03 |
) |
|
|
0.16 |
|
|
|
|
|
|
|
|
Net income
(loss) available to common stockholders |
|
$ |
(0.05 |
) |
|
$ |
0.93 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
48,649 |
|
|
|
49,643 |
|
|
|
|
|
|
|
|
|
|
Diluted per share information: |
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations available to common stockholders |
|
$ |
(0.02 |
) |
|
$ |
0.76 |
|
Income
(loss) from discontinued operations, net of income tax |
|
|
(0.03 |
) |
|
|
0.16 |
|
|
|
|
|
|
|
|
Net income
(loss) available to common stockholders |
|
$ |
(0.05 |
) |
|
$ |
0.92 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
48,649 |
|
|
|
50,170 |
|
The pro forma results presented above include adjustments to reflect (i) additional interest
expense associated with debt to finance the respective acquisitions, (ii) depreciation and
amortization of assets acquired and (iii) the income tax effect of such pro forma adjustments.
WNDU-TV
On March 3, 2006, the Company acquired Michiana Telecasting Corp., operator of WNDU-TV, from
The University of Notre Dame for a purchase price of $85.0 million in cash, plus related
transaction costs. WNDU-TV serves the South Bend Elkhart, Indiana television market and is an
NBC affiliate. In January 2006, the Company borrowed $100 million under its senior credit
facility. These funds were used
to fund the acquisition of WNDU-TV and to reduce other portions of the Companys then outstanding
revolving credit facility debt. The financial position and the results of operations of WNDU-TV
are not included in the accompanying consolidated financial statements. WNDU-TVs condensed
balance sheet as of the acquisition date was not available as of the filing date of this annual
report.
The acquisitions of KKCO-TV, WSWG-TV, WSAZ-TV and WNDU-TV were consistent with the Companys
acquisition strategy which is to acquire dominant stations in mid size markets.
77
E. Long-term Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Senior credit facility |
|
$ |
533,000 |
|
|
$ |
375,000 |
|
91/4 % Senior Subordinated Notes due 2011 |
|
|
258,479 |
|
|
|
280,000 |
|
Other |
|
|
1,841 |
|
|
|
1,914 |
|
|
|
|
|
|
|
|
|
|
|
793,320 |
|
|
|
656,914 |
|
Less unamortized discount |
|
|
(811 |
) |
|
|
(1,009 |
) |
|
|
|
|
|
|
|
|
|
|
792,509 |
|
|
|
655,905 |
|
Less current portion |
|
|
(3,577 |
) |
|
|
(3,823 |
) |
|
|
|
|
|
|
|
|
|
$ |
788,932 |
|
|
$ |
652,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available capacity under the revolving
portion of the senior credit facility |
|
$ |
58,500 |
|
|
$ |
71,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit outstanding |
|
$ |
8,500 |
|
|
$ |
-0- |
|
|
|
|
|
|
|
|
Senior Credit Facility
As of December 31, 2005, the amount outstanding under the senior credit facility was $533
million which included $33 million, $150 million and $350 million under the revolving facility, the
term loan A facility and the term loan B facility, respectively. Also as of December 31, 2005, the
available capacity to borrow under the revolving facility was $58.5 million.
On November 22, 2005, Gray amended its existing senior credit facility. The amended agreement
has a maximum term of six years (or seven years, with respect to the term loan B facility) and the
total amount available under the agreement is $600 million, consisting of a $100 million revolving
facility, a $150 million term loan A facility and a $350 million term loan B facility. In addition,
an incremental loan facility is also made available under the senior credit facility in the maximum
amount of $400 million. Initially, Gray used the proceeds from the credit facilities to finance
the acquisition of WSAZ-TV, to refinance the indebtedness under the previous senior credit
facility, and for certain permitted working capital needs, investments and acquisitions permitted
under the facility. On January 31, 2006, Gray borrowed $100 million under the incremental facility
to finance the pending acquisition of WNDU-TV.
As amended on November 22, 2005, the final maturity date for the revolving loan facility, and
the term loan A facility and term loan B facility is November 22, 2011, November 22, 2011 and
November 22, 2012, respectively. However, if the Company has not refinanced its 91/4% Senior
Subordinated Notes
by December 15, 2010, the final maturity date will be accelerated to June 15, 2011 for all three
portions of the senior credit facility.
Under the senior credit facility, irrevocable stand by letters of credit for $8.5 million and
$18.6 million were issued on behalf of Gray and in lieu of an earnest money deposits for the
pending acquisitions of WNDU-TV and WSAZ-TV. The WSAZ-TV letter of credit was cancelled on November
23, 2005 upon completion of the acquisition. The WNDU-TV letter of credit was outstanding at
December 31, 2005 and was cancelled on and March 3, 2006 upon completion of the acquisition.
Neither letter of credit was drawn upon.
78
E. Long-term Debt (Continued)
Senior Credit Facility (Continued)
Effective August 19, 2005, a lender of Gray issued an irrevocable $18.6 million stand by
letter of credit on behalf of Gray in lieu of an earnest money deposit for the pending acquisition
of WSAZ-TV. This letter of credit was never drawn upon and it was cancelled on November 30, 2005.
On June 28, 2005, Gray amended its existing senior credit facility. The amended agreement had
a maximum term of seven and one half years and the total amount available under the agreement is
$400 million, consisting of a $100 million revolving facility, a $100 million term loan A facility
and a $200 million term loan B facility. The amended agreement contained affirmative and negative
covenants similar to those contained in the agreement as amended on November 22, 2005 and described
above.
Under the revolving and term facilities as amended, the Company, at its option, can borrow
funds at an interest rate equal to the London Interbank Offered Rate (LIBOR) plus a margin or at
the lenders base rate, generally equal to the lendersprime rate, plus a margin. The applicable
margin on the revolving and term facilities varies based on the Companys total leverage ratio as
defined in the loan agreement. Presented below are the ranges of applicable margins available to
the Company based on the Companys performance in comparison with the terms as defined in the loan
agreement:
|
|
|
Applicable Margin for |
|
Applicable Margin for |
Base Rate Advances |
|
LIBOR Advances |
0.00% 0.25%
|
|
0.625% 1.50% |
The weighted average interest rate on the balance outstanding under the senior credit facility
at December 31, 2005 and 2004 was 5.67% and 3.83%, respectively. As of December 31, 2005, the
Company was charged a commitment fee equal to 0.375% per annum of the excess of the aggregate
average daily available credit limit less the amount outstanding. This commitment fee can range
between 0.2% and 0.5% per annum.
The senior credit facility is collateralized by substantially all of the assets, excluding
real estate, of the Company and its subsidiaries. In addition, the Companys subsidiaries are
joint and several guarantors of the obligations and the Companys ownership interests in its
subsidiaries are pledged to collateralize the obligations. The amended agreement contains
affirmative and negative covenants that Gray must comply with, including (a) limitations on
additional indebtedness, (b) limitations on liens, (c) limitations on the sale of assets, (d)
limitations on guarantees, (e) limitations on investments and acquisitions, (f) limitations on the
payment of dividends, (g) limitations on mergers, as well as other customary covenants. Also, Gray
must not let its leverage ratio and senior leverage ratio exceed certain maximum limits and Gray
can not let its interest coverage ratio or fixed charge ratio fall below certain
minimum limits. The senior subordinated notes also contain similar restrictive provisions
limiting the Companys ability to, among other things, incur additional indebtedness, make certain
acquisitions or investments, sell assets or make certain restricted payments that include but are
not limited to purchases or redemptions of the Companys capital stock.
91/4% Senior Subordinated Notes
On December 21, 2001, the Company completed its sale of $180 million aggregate principal
amount of its Senior Subordinated Notes due 2011 (the 91/4% Notes). The net proceeds from the sale
of these notes were approximately $173.6 million. These senior subordinated notes have a coupon of
91/4% and were priced at a discount to yield 9 3/8 %. On September 10, 2002, the Company completed
the sale of
79
E. Long-term Debt (Continued)
91/4% Senior Subordinated Notes (Continued)
an additional $100 million principal amount of senior subordinated notes. The coupon on these
additional notes was 91/4% and they were issued at par. These additional notes were issued under the
same indenture and have the same terms as the Companys previously existing senior subordinated
notes. The additional senior subordinated notes form a single series with the Companys then
existing senior subordinated notes and are collectively referred to as the 91/4% Notes.
Interest on the 91/4% Notes is payable semi-annually on December 15 and June 15, commencing June
15, 2002. The 91/4% Notes mature on December 15, 2011 and are redeemable, in whole or in part, at
the Companys option after December 15, 2006. If the 91/4% Notes are redeemed during the
twelve-month period beginning on December 15 of the years indicated below, they will be redeemed at
the redemption prices set forth below, plus accrued and unpaid interest to the date fixed for
redemption.
|
|
|
|
|
|
|
Percentage of the Principal |
|
Year |
|
Amount Outstanding |
|
2006 |
|
|
104.625 |
% |
2007 |
|
|
103.083 |
% |
2008 |
|
|
101.542 |
% |
2009 and thereafter |
|
|
100.000 |
% |
Under certain circumstances, the Company at its option can redeem all or a portion of the 91/4%
Notes prior to December 15, 2006. If the 91/4% Notes were to be redeemed prior to December 15, 2006,
the Company would have to pay the principal amount, accrued but unpaid interest and certain
premiums.
The 91/4% Notes are jointly and severally guaranteed (the Subsidiary Guarantees) by all of the
Companys subsidiaries (the Subsidiary Guarantors). The obligations of the Subsidiary Guarantors
under the Subsidiary Guarantees is subordinated, to the same extent as the obligations of the
Company in respect of the 91/4% Notes, to the prior payment in full of all existing and future senior
debt of the Subsidiary Guarantors (which will include any guarantee issued by such Subsidiary
Guarantors of any senior debt).
The Company is a holding company with no material independent assets or operations, other than
its investment in its subsidiaries. The aggregate assets, liabilities, earnings and equity of the
Subsidiary Guarantors are substantially equivalent to the assets, liabilities, earnings and equity
of the Company on a consolidated basis. The Subsidiary Guarantors are, directly or indirectly,
wholly owned subsidiaries of
the Company and the Subsidiary Guarantees are full, unconditional and joint and several. All
of the current and future direct and indirect subsidiaries of the Company are guarantors of the
senior subordinated notes. Accordingly, separate financial statements and other disclosures of each
of the Subsidiary Guarantors are not presented because the Company has no independent assets or
operations, the guarantees are full and unconditional and joint and several and any subsidiaries of
the parent company other than the Subsidiary Guarantors are minor. The senior credit facility is
collateralized by substantially all of the Companys existing and hereafter acquired assets except
real estate.
Loss on Early Extinguishment of Debt
The Company has incurred approximately $7.2 million, $820,000 and $1.0 million in lender and
legal fees for the amendments of its senior credit facility during the years ending December 31,
2005,
80
E. Long-term Debt (Continued)
Loss on Early Extinguishment of Debt (Continued)
2004 and 2003, respectively. Portions of these fees have been capitalized, net of amounts written
off in accordance with EITF 98-14 Debtors Accounting for Changes in Line-of-Credit or
Revolving-Debt Arrangements and EITF 96-19 Debtors Accounting for a Modification or Exchange of
Debt Instruments. Based on these criteria, the Company has recognized a loss on early
extinguishment of debt to write off portions of the previously capitalized loan costs totaling $3.1
million in the year ended December 31, 2005. No similar amounts were recognized in the years ended
December 31, 2004 or 2003. Included in loss on early extinguishment of debt is $817,000 of costs
incurred while considering alternative financing transactions. Ultimately, the Company amended its
senior credit facility rather than completing one of the alternative transactions.
During the year ended December 31, 2005, Gray repurchased $21.5 million, face amount, of its
91/4% Notes in the open market. Associated with this repurchase, Gray recorded a loss upon early
extinguishment of debt of $2.6 million which consisted of a premium of $2.0 million, the write off
of unamortized deferred finance costs of $485,000 and an unaccreted discount of $74,000. Gray used
cash on hand of $23.5 million for the repurchase of its 91/4% Notes which included amounts for the
face amount of the 91/4% Notes, premium and accrued interest.
The Company considered financing alternatives to refinance its existing debt, finance the now
completed acquisition of WSAZ-TV and to finance the pending acquisition of WNDU-TV. Ultimately,
the Company amended its existing senior credit facility rather than completing these alternative
financing arrangements. The Company incurred $817,000 associated with these financing alternatives.
This amount was expensed during the year ended December 31, 2005 as a loss on early extinguishment
of debt.
Interest Rate Swap Agreements
As of December 31, 2005 and 2004, the Company was not engaged in any interest rate swap
agreements. During 2003, the Company entered into four interest rate swap agreements which expired
in November 2004. These agreements converted a combined notional amount of $50.0 million of
floating rate debt under the senior credit facility to fixed rate debt. These swap agreements
fixed the LIBOR component of the total interest rate charged on this portion of the Companys debt
at a weighted average fixed rate of 1.87%.
On February 9, 2006, the Company entered into an interest rate swap agreement having a
notional amount of $100.0 million. Under this agreement the Company will pay at an annual fixed
rate of 5.05% and receive interest at the 90 day LIBOR rate. The swap agreement will expire on
January 3, 2007.
81
E. Long-term Debt (Continued)
Maturities
Aggregate minimum principal maturities on long-term debt as of December 31, 2005, were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Principal Maturities |
|
|
|
Senior |
|
|
|
|
|
|
|
|
|
|
|
|
Credit |
|
|
|
|
|
|
|
|
|
|
Year |
|
Facility |
|
|
91/4% Notes |
|
|
Other |
|
|
Total |
|
2006 |
|
$ |
3,500 |
|
|
$ |
-0- |
|
|
$ |
77 |
|
|
$ |
3,577 |
|
2007 |
|
|
3,500 |
|
|
|
-0- |
|
|
|
75 |
|
|
|
3,575 |
|
2008 |
|
|
11,000 |
|
|
|
-0- |
|
|
|
181 |
|
|
|
11,181 |
|
2009 |
|
|
11,000 |
|
|
|
-0- |
|
|
|
77 |
|
|
|
11,077 |
|
2010 |
|
|
26,000 |
|
|
|
-0- |
|
|
|
80 |
|
|
|
26,080 |
|
Thereafter |
|
|
478,000 |
|
|
|
258,479 |
|
|
|
1,351 |
|
|
|
737,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
533,000 |
|
|
$ |
258,479 |
|
|
$ |
1,841 |
|
|
$ |
793,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company made interest payments of approximately $44.5 million, $39.8 million and $38.5
million during 2005, 2004 and 2003, respectively.
F. Stockholders Equity
On May 26, 2004, the shareholders of the Company voted to amend the Companys articles of
incorporation to allow for an increase in the authorized number of shares of common stock from 50
million to 100 million.
The Company is 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 the Board of Directors
has the authority to determine the rights, powers, limitations and restrictions. The rights of the
Companys Common Stock and Class A Common Stock are identical, except that the Class A Common Stock
has 10 votes per share and the Common Stock has one vote per share. The Common Stock and Class A
Common Stock receive cash dividends on an equal per share basis.
On March 3, 2004, the Board of Directors authorized the Company to repurchase up to an
aggregate of two million shares of the Companys Common Stock or Class A Common Stock. On November
3, 2004, the Board of Directors increased, from two million to four million, the aggregate number
of shares of its Common Stock or Class A Common Stock authorized for repurchase. This
authorization supersedes any previously authorized share repurchases. There is no expiration for
this authorization. Shares repurchased under this authorization will be held as treasury shares
and used for general corporate purposes including, but not limited to, satisfying obligations under
the Companys employee benefit plans and long term incentive plan.
During the year ended December 31, 2005, the Company purchased 528,400 shares of the Companys
Common Stock for an average price of $12.89 per share and purchased 12,800 shares of the Companys
Class A Common Stock for $13.37 per share for a combined cost of $7.0 million. During the year
ended December 31, 2004, the Company purchased 1,681,400 shares of the Companys Common Stock for
an average price of $12.93 per share and purchased 65,000 shares of the Companys Class A
82
F. Stockholders Equity (Continued)
Common Stock for $10.95 per share for a combined cost of $22.4 million. Included in the purchases
made during 2004 were 75,000 shares of the Companys Common Stock which were purchased from a
member of the Companys Board of Directors, for $15.20 per share. The price paid was the market
value of the shares on the New York Stock Exchange on the date of sale. At December 31, 2005, the
remaining shares authorized for purchase total 1,712,400. Treasury stock is recorded at cost.
In transactions completed in April 2003, the Company purchased, and cancelled, all of the
warrants held by Bull Run, a related party, for a total price including the Companys expenses, of
$5.3 million which was paid using cash on hand. The warrants were initially granted in
association with the Sarkes Tarzian transaction and the issuance of Series A and Series B Preferred
Stock. The purchase of the warrants has been recorded as an increase in the Sarkes Tarzian
investment of $395,000 and a decrease in Class A Common Stock of $4.9 million. The independent
directors of the Company approved this transaction with Bull Run after receiving an opinion as to
the fairness of the transaction from an independent and nationally recognized investment-banking
firm.
In August of 2003, the Company purchased 1,017,647 shares of the Companys Class A Common
Stock and 11,750 shares of the Companys Common Stock from Bull Run for $16.95 per share, or a
total of $17.6 million including expenses, which was funded using cash on hand. An independent
Special Committee of the Companys Board of Directors approved this transaction after receiving an
opinion as to the fairness of the transaction from an independent and nationally recognized
investment-banking firm.
At December 31, 2005, warrants to purchase 375,000 shares of Class A Common Stock at $16.00
per share were outstanding and fully vested. The warrants expire if not exercised by September 24,
2006.
As of December 31, 2004, the Company had declared but unpaid common stock dividends of $5.9
million which remained a liability of the Company as of December 31, 2004. These dividends were
paid during the first quarter of 2005. For the years ended December 31, 2005 and 2003, all common
stock dividends declared by the Company were paid during the year that the common stock dividends
were declared.
As of December 31, 2005, the Company had reserved 9,395,810 shares and 395,687 shares of the
Companys Common Stock and Class A Common Stock, respectively, for future issuance under various
employee benefit plans, potential exercise of outstanding warrants and the potential conversion of
the Companys preferred stock.
G. Redeemable Preferred Stock
In April of 2002, the Company issued $40 million of a redeemable and convertible preferred
stock to a group of private investors. The preferred stock was designated as Series C Preferred
Stock and has a liquidation value of $10,000 per share. The issuance of the Series C Preferred
Stock generated net cash proceeds of approximately $30.5 million, after transaction fees and
expenses and excluding the value of the Series A and Series B preferred stock exchanged into the
Series C Preferred Stock. As part of the transaction, holders of the Companys Series A and Series
B Preferred Stock have exchanged all of the outstanding shares of each respective series, an
aggregate liquidation value of approximately $8.2 million, for an equal number of shares of the
Series C Preferred Stock. Upon closing this transaction, the Series C Preferred Stock is the only
currently outstanding preferred stock of the Company.
83
G. Redeemable Preferred Stock (Continued)
The
Series C Preferred Stock is convertible into the Companys Common Stock. On December 30,
2005, the Company spun off a portion of its assets to TCM. Due to the decrease in the market price
of the Companys Common Stock resulting from the TCM spin off, the Company decreased the conversion
price to $13.07 from $14.39 per share of the Companys Common Stock. The new conversion price was
effective as of December 30, 2005.
The modification of the
conversion price resulted in a non-cash deemed dividend to the
Preferred Stockholders totaling approximately $2.4 million on
December 30, 2005. See Note B. Discontinued Operations for further discussion of
the TCM spinoff.
The Series C Preferred Stock is redeemable at the Companys option on or after April 22, 2007
and is subject to mandatory redemption on April 22, 2012 at a value of $10,000 per share.
Therefore, the Company does not have any Series C Preferred Stock redemption requirements for the
five years subsequent to December 31, 2005. Dividends on the Series C Preferred Stock will accrue
at 8% per annum until April 22, 2009 after which the dividend rate shall be 8.5% per annum.
Dividends, when declared by the Companys Board of Directors may be paid at the Companys option in
cash or additional shares of Series C Preferred Stock.
On August 4, 2004, the Company repurchased 36 shares of the Companys Redeemable Serial
Preferred Stock from the Companys Chairman and CEO, at the liquidation price of $10,000 per share.
The Company chose to repurchase these shares when they became available and after considering the
preferred stocks dividend rate in comparison to the interest earned on the Companys cash
investments. By repurchasing the preferred stock, the Company retired stock with a dividend
accruing at an annual rate of 8.0% while it used cash that was earning interest at a significantly
lower annual rate.
As of December 31, 2005, the carrying value and the liquidation value of the Series C
Preferred Stock was $39.1 million and $39.6 million, respectively. The difference between these
two values is the unaccredited portion of the original issuance cost. The original issuance cost,
prior to accretion, was $868,000 and it is being accreted over the estimated ten-year life of the
Series C Preferred Stock.
H. Long-term Incentive Plan
On September 16, 2002, the shareholders of the Company approved the 2002 Long Term Incentive
Plan (the 2002 Incentive Plan), which replaced the prior long-term incentive plan, the 1992 Long
Term Incentive Plan. Originally, the 2002 Incentive Plan had 2.8 million shares of the Companys
Common Stock reserved for grants to key personnel for (i) incentive stock options, (ii)
non-qualified stock options, (iii) stock appreciation rights, (iv) restricted stock awards and (v)
performance awards, as defined by the 2002 Incentive Plan. On May 26, 2004, the shareholders of
the Company approved an amendment to the
2002 Incentive Plan, which increased the number of shares reserved for issuance thereunder by two
million shares to a total of 4.8 million shares. At December 31, 2005, 2.9 million shares were
available for issuance under the 2002 Incentive Plan. Shares of Common Stock underlying
outstanding options or performance awards are counted against the 2002 Incentive Plans maximum
shares while such options or awards are outstanding. Under the 2002 Incentive Plan, the options
granted typically vest after a two-year period and expire three years after full vesting. However,
options will vest immediately upon a change in control of the Company as such term is defined in
the 2002 Incentive Plan. All options have been granted at prices that approximate fair market
value on the date of the grant. During 2003, the Company granted 100,000 shares of restricted
stock to the Companys president of which 60,000 shares were fully vested as of December 31, 2005.
During 2003 and in connection with this grant, the Company recorded a liability for unearned
compensation of $1.4 million that is being amortized as an expense over the four-year vesting
period of the stock. The total amount of unearned compensation is equal to the market value of the
shares as of the date of grant.
84
H. Long-term Incentive Plan (Continued)
On May 14, 2003, the Companys shareholders approved a restricted stock plan for its Board of
Directors (the Directors Restricted Stock Plan). The Company has reserved 1.0 million shares of
the Companys Common Stock for issuance under this plan and as of December 31, 2005 there were
935,000 shares available for award. The Directors Restricted Stock Plan replaces the Companys
non-employee director stock option plan. Under the Directors Restricted Stock Plan, each director
can be awarded up to 10,000 shares of restricted stock each calendar year. Under this plan, the
Company granted 5,000 and 15,000 shares of restricted Common Stock, in total, to its directors
during 2005 and 2004, respectively. Of the total shares granted to date, 40,000 shares were fully
vested as of December 31, 2005. In connection with this grant, the Company recorded liabilities
for unearned compensation of $72,300 and $211,000 for 2005 and 2004, respectively. The unearned
compensation is being amortized as an expense over the vesting period of the stock. The total
amount of unearned compensation is equal to the market value of the shares as of the date of grant.
A summary of the Companys stock option activity for Class A Common Stock, and related
information for the years ended December 31, 2005, 2004 and 2003 is as follows (in thousands,
except weighted average data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Stock options outstanding
beginning of year |
|
|
19 |
|
|
$ |
17.81 |
|
|
|
19 |
|
|
$ |
17.81 |
|
|
|
19 |
|
|
$ |
17.81 |
|
Options granted |
|
|
-0- |
|
|
|
|
|
|
|
-0- |
|
|
|
|
|
|
|
-0- |
|
|
|
|
|
Options exercised |
|
|
-0- |
|
|
|
|
|
|
|
-0- |
|
|
|
|
|
|
|
-0- |
|
|
|
|
|
Options forfeited |
|
|
-0- |
|
|
|
|
|
|
|
-0- |
|
|
|
|
|
|
|
-0- |
|
|
|
|
|
Options expired |
|
|
-0- |
|
|
|
|
|
|
|
-0- |
|
|
|
|
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding end of year |
|
|
19 |
|
|
$ |
17.81 |
|
|
|
19 |
|
|
$ |
17.81 |
|
|
|
19 |
|
|
$ |
17.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
19 |
|
|
$ |
17.81 |
|
|
|
19 |
|
|
$ |
17.81 |
|
|
|
19 |
|
|
$ |
17.81 |
|
The exercise price for Class A Common Stock options outstanding as of December 31, 2005 is
$17.81. The weighted-average remaining contractual life of the Class A Common Stock options
outstanding is 2.9 years.
85
H. Long-term Incentive Plan (Continued)
A summary of the Companys stock option activity for Common Stock, and related information for
the years ended December 31, 2005, 2004 and 2003 is as follows (in thousands, except weighted
average data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Stock
options outstanding
beginning of year |
|
|
1,753 |
|
|
$ |
10.75 |
|
|
|
2,245 |
|
|
$ |
10.49 |
|
|
|
2,632 |
|
|
$ |
10.47 |
|
Options granted |
|
|
544 |
|
|
|
11.36 |
|
|
|
151 |
|
|
|
14.07 |
|
|
|
177 |
|
|
|
11.44 |
|
Options exercised |
|
|
(250 |
) |
|
|
9.78 |
|
|
|
(525 |
) |
|
|
10.56 |
|
|
|
(279 |
) |
|
|
9.82 |
|
Options forfeited |
|
|
(101 |
) |
|
|
10.58 |
|
|
|
(61 |
) |
|
|
9.18 |
|
|
|
(159 |
) |
|
|
9.53 |
|
Options expired |
|
|
(282 |
) |
|
|
10.09 |
|
|
|
(57 |
) |
|
|
12.75 |
|
|
|
(126 |
) |
|
|
14.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding end of year |
|
|
1,664 |
|
|
$ |
11.20 |
|
|
|
1,753 |
|
|
$ |
10.75 |
|
|
|
2,245 |
|
|
$ |
10.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
1,458 |
|
|
$ |
11.12 |
|
|
|
1,435 |
|
|
$ |
10.31 |
|
|
|
770 |
|
|
$ |
10.80 |
|
|
Weighted-average fair value of
options granted during the year |
|
|
|
|
|
$ |
2.67 |
|
|
|
|
|
|
$ |
3.44 |
|
|
|
|
|
|
$ |
3.15 |
|
Information concerning Common Stock options outstanding has been segregated into five groups
with similar option prices and is disclosed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Exercise Price |
Exercise Price Per |
|
|
Number of |
|
|
Exercise |
|
|
Remaining |
|
|
Number of Options |
|
Per Share of |
Share |
|
|
options |
|
|
Price Per |
|
|
Contractual |
|
|
Outstanding that |
|
Options that are |
Low |
|
|
High |
|
|
outstanding |
|
|
Share |
|
|
Life |
|
|
are Exercisable |
|
Exercisable |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
(in years) |
|
|
(in thousands) |
|
|
|
|
$ |
|
|
7.13 |
|
|
$ |
8.91 |
|
|
209 |
|
|
|
$ |
8.89 |
|
|
1.8 |
|
|
|
|
209 |
|
|
$ |
8.89 |
|
$ |
|
|
8.91 |
|
|
$ |
10.69 |
|
|
112 |
|
|
|
$ |
9.41 |
|
|
3.0 |
|
|
|
|
67 |
|
|
$ |
9.65 |
|
$ |
|
|
10.69 |
|
|
$ |
12.47 |
|
|
1,009 |
|
|
|
$ |
11.08 |
|
|
2.7 |
|
|
|
|
919 |
|
|
$ |
11.08 |
|
$ |
|
|
12.47 |
|
|
$ |
14.25 |
|
|
268 |
|
|
|
$ |
13.38 |
|
|
2.4 |
|
|
|
|
256 |
|
|
$ |
13.35 |
|
$ |
|
|
14.25 |
|
|
$ |
16.03 |
|
|
66 |
|
|
|
$ |
14.59 |
|
|
4.2 |
|
|
|
|
7 |
|
|
$ |
14.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,664 |
|
|
|
|
|
|
|
|
|
|
|
|
1,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
I. Income Taxes
Federal and state income tax expense (benefit) attributable to income from continuing
operations is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
351 |
|
|
$ |
1,069 |
|
|
$ |
-0- |
|
State and local |
|
|
(757 |
) |
|
|
794 |
|
|
|
357 |
|
Deferred |
|
|
4,129 |
|
|
|
21,042 |
|
|
|
11,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,723 |
|
|
$ |
22,905 |
|
|
$ |
11,665 |
|
|
|
|
|
|
|
|
|
|
|
Significant components of the Companys deferred tax liabilities and assets are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Net book value of property and equipment |
|
$ |
17,832 |
|
|
$ |
19,195 |
|
Broadcast licenses, goodwill and other intangibles |
|
|
296,078 |
|
|
|
286,445 |
|
Other |
|
|
-0- |
|
|
|
379 |
|
Discontinued operations |
|
|
-0- |
|
|
|
1,735 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
313,910 |
|
|
|
307,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Liability under supplemental retirement plan |
|
|
53 |
|
|
|
68 |
|
Allowance for doubtful accounts |
|
|
220 |
|
|
|
288 |
|
Liability under severance and leases |
|
|
98 |
|
|
|
301 |
|
Liability under health and welfare plan |
|
|
296 |
|
|
|
335 |
|
Liability for pension plan |
|
|
1,894 |
|
|
|
2,570 |
|
Federal operating loss carryforwards |
|
|
54,832 |
|
|
|
56,258 |
|
State and local operating loss carryforwards |
|
|
7,934 |
|
|
|
7,899 |
|
Alternative minimum tax carryforward |
|
|
838 |
|
|
|
629 |
|
Other |
|
|
69 |
|
|
|
-0- |
|
Discontinued operations |
|
|
-0- |
|
|
|
140 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
66,234 |
|
|
|
68,488 |
|
Valuation allowance for deferred tax assets |
|
|
(4,574 |
) |
|
|
(3,722 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
61,660 |
|
|
|
64,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, net |
|
$ |
252,250 |
|
|
$ |
242,988 |
|
|
|
|
|
|
|
|
The Company has approximately $156.7 million in federal operating loss carryforwards, which
expire during the years 2020 through 2023. Additionally, the Company has an aggregate of
approximately $193 million of various state operating loss carryforwards. The utilization of a
significant portion of the net operating losses is limited on an annual basis due to a change in
ownership of both the Company and its former subsidiary Gray MidAmerica Television. Management
does not believe that these limitations will significantly impact the Companys ability to utilize
the federal net operating losses before they expire.
87
I. Income Taxes (Continued)
A valuation allowance has been provided for a portion of the state net operating loss
carryforwards. The Company believes there may be limitations on the utilization of certain state
net operating losses due to the uncertainty of generating sufficient income in certain states. The
valuation allowance at December 31, 2005 and 2004 was $4.6 million and $3.7 million, respectively.
In connection with the spinoff of Triple Crown Media, Triple Crown assumed a net deferred tax
liability of approximately $1.5 million. This net deferred tax liability is the result of
differences between the book and tax basis of assets transferred in the spinoff. The Company
retained all net operating loss carryforwards.
A reconciliation of income tax expense at the statutory federal income tax rate and income
taxes as reflected in the consolidated financial statements is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Statutory federal rate applied to income from
continuing operations before income taxes |
|
$ |
2,914 |
|
|
$ |
20,798 |
|
|
$ |
6,721 |
|
State and local taxes, net of federal tax benefit |
|
|
1,484 |
|
|
|
3,037 |
|
|
|
1,954 |
|
Settlement of IRS audit |
|
|
-0- |
|
|
|
-0- |
|
|
|
5,057 |
|
Change in valuation allowance |
|
|
(852 |
) |
|
|
(597 |
) |
|
|
(3,125 |
) |
Change in deferred tax rate |
|
|
-0- |
|
|
|
-0- |
|
|
|
980 |
|
Other items, net |
|
|
177 |
|
|
|
(333 |
) |
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,723 |
|
|
$ |
22,905 |
|
|
$ |
11,665 |
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate on continuing operations |
|
|
44.7 |
% |
|
|
38.5 |
% |
|
|
60.7 |
% |
During the year ended December 31, 2003, the Company changed its statutory federal income tax
rate applied to current and deferred taxes to 35% from 34% due to the tax rate expected to be
incurred on future income. As a result of this change on deferred taxes, a total tax charge of
$1.1 million was recorded of which $1.0 million related to continuing operations.
The Company recorded income tax benefits related to employee stock plans of $419,000, $820,000
and $416,000 for the years ended December 31, 2005, 2004 and 2003, respectively. These benefits
were recorded directly to equity.
During the year ended December 31, 2005, the Company recorded a reduction in its minimum
pension liability as other comprehensive income which was net of a $101,000 tax expense. During
the year ended December 31, 2004 the Company recorded an increase in its minimum pension liability
as other comprehensive expense net of a $904,000 income tax benefit. The Company also recorded a
gain on derivatives as other comprehensive income in the year ended December 31, 2004 which was net
of an $84,000 tax expense. For the year ended December 31, 2003, the Company recorded a loss on
derivatives as other comprehensive expense which was net of an $84,000 tax benefit.
The Company made income tax payments (net of refunds) of approximately $356,000, $42,000 and
$635,000 in 2005, 2004 and 2003, respectively. At December 31, 2005 and 2004, the Company had
current income taxes payable of approximately $1.8 million and $1.1 million, respectively.
88
I. Income Taxes (Continued)
In October 2001, the Company received a notice of deficiency from the Internal Revenue Service
(the IRS) with respect to its 1996 and 1998 federal income tax returns. The notice of deficiency
alleged that the Company recognized a significant amount of taxable gain from the sale of certain
assets in 1996 in connection with a business acquisition from First American Media, Inc. The notice
of deficiency also alleged that the Companys 1996 acquisition of certain assets from First
American Media, Inc. should be characterized for tax purposes as an acquisition of stock. On
January 18, 2002, the Company filed a petition to contest the matter in the United States Tax
Court.
In January 2004, the Company settled its litigation with the IRS regarding all deficiencies
related to the IRS audit of the Companys 1996 and 1998 federal income tax returns. The
settlement required no cash payments from the Company. The Company agreed in the settlement to
forego certain claimed depreciation and amortization deductions relating to the 1996 through 1999
tax years, which in turn resulted in a reduction of the federal income tax net operating loss
carryforwards by approximately $16.3 million. During the three months ended December 31, 2003, the
Company recorded a non-cash charge to decrease its deferred tax assets by approximately $5.8
million to reflect this settlement. During 2004 and as a result of the settlement, the Company
collected a previously claimed federal tax cash refund of approximately $1.1 million, plus
statutory interest, that related to 1996.
The pretax income from discontinued operations for the years ended December 31, 2005, 2004 and
2003 was $2.1 million, $12.8 million and $12.2 million, respectively. The income tax expense
related to discontinued operations for the years ended December 31, 2005, 2004 and 2003 was $3.3
million, $5.1 million and $5.7 million, respectively. The Company incurred $6.2 million in legal,
accounting and other costs associated with the spinoff. These costs are nondeductible for income
tax purposes.
J. Retirement Plans
Pension Plan
The Company has a defined benefit pension plan covering substantially all full-time employees.
Retirement benefits are based on years of service and the employees highest average compensation
for five consecutive years during the last ten years of employment. The Companys funding policy
is consistent with the funding requirements of existing federal laws and regulations under the
Employee Retirement Income Security Act of 1974.
As discussed in Note B. Discontinued Operations, the Company completed the spinoff of its
publishing and other businesses on December 30, 2005. In accordance with the terms of the related
separation and distribution agreement the Company retained the pension obligation for its former
employees but is not required to provide benefits for additional service after the date of the
spinoff. In accordance with Statement of Financial Accounting Standards No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits (SFAS No. 88) the projected benefit obligation for those former employee participants in
the Companys plan has been curtailed resulting in a reduction in the unrecognized losses and the
projected benefit obligation at December 31, 2005 of approximately $1.1 million. This reduction had
no effect on the Companys statement of operations for the year ended December 31, 2005.
The measurement dates used to determine the benefit information for the Companys active
defined benefit pension plan were December 31, 2005 and December 31, 2004, respectively. The
following summarizes the plans funded status and amounts recognized in the Companys consolidated
balance sheets at December 31, 2005 and 2004, respectively (dollars in thousands):
89
J. Retirement Plans (Continued)
Pension Plan (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
$ |
21,816 |
|
|
$ |
14,423 |
|
Service cost |
|
|
2,915 |
|
|
|
2,184 |
|
Interest cost |
|
|
1,301 |
|
|
|
1,035 |
|
Actuarial (gains) losses |
|
|
1,030 |
|
|
|
4,661 |
|
Curtailment resulting from spinoff of TCM |
|
|
(1,083 |
) |
|
|
-0- |
|
Benefits paid |
|
|
(481 |
) |
|
|
(487 |
) |
|
|
|
|
|
|
|
Projected benefit obligation at end of year |
|
$ |
25,498 |
|
|
$ |
21,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
12,995 |
|
|
$ |
11,331 |
|
Actual return on plan assets |
|
|
678 |
|
|
|
559 |
|
Company contributions |
|
|
4,687 |
|
|
|
1,592 |
|
Benefits paid |
|
|
(481 |
) |
|
|
(487 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
17,879 |
|
|
$ |
12,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status: |
|
|
|
|
|
|
|
|
Underfunded status of the plan |
|
$ |
(7,618 |
) |
|
$ |
(8,821 |
) |
Unrecognized net actuarial loss |
|
|
5,473 |
|
|
|
5,740 |
|
Unrecognized net transition amount |
|
|
-0- |
|
|
|
-0- |
|
Unrecognized prior service cost |
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
Net liability |
|
|
(2,145 |
) |
|
|
(3,081 |
) |
Unfunded accumulated benefit obligation at end of year |
|
|
(3,765 |
) |
|
|
(5,311 |
) |
|
|
|
|
|
|
|
Additional minimum liability |
|
$ |
(1,620 |
) |
|
$ |
(2,230 |
) |
|
|
|
|
|
|
|
The accumulated benefit obligation for the defined benefit pension was $21.6 million and $18.3
million at December 31, 2005 and 2004, respectively. The increases in the accumulated benefit
obligation is due primarily to the current year $2.9 million in service cost representing
approximately 3.7% of current year covered payroll and $1.3 million in interest cost. The
long-term rate of return on assets assumption was chosen from a best estimate range based upon the
anticipated long-term returns for asset categories in which the plan is invested. The long term
rate of return may be viewed as the sum of 3% inflation, 1% risk-free rate of return, and 3% risk
premium. The estimated rate of increase in compensation levels is based on historical compensation
increases for the Companys employees.
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Weighted-average assumptions used to determine net periodic benefit cost: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
6.75 |
% |
Expected long-term rate of return on plan assets |
|
|
7.00 |
% |
|
|
7.00 |
% |
Estimated rate of increase in compensation levels |
|
|
5.00 |
% |
|
|
5.00 |
% |
90
J. Retirement Plans (Continued)
Pension Plan (Continued)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
2004 |
|
Weighted-average assumptions used to determine benefit obligations: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
5.75 |
% |
Estimated rate of increase in compensation levels |
|
|
5.00 |
% |
|
|
5.00 |
% |
Pension expense is computed using the projected unit credit actuarial cost method. The net
periodic pension cost includes the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Components of net periodic pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
2,915 |
|
|
$ |
2,184 |
|
|
$ |
1,257 |
|
Interest cost |
|
|
1,300 |
|
|
|
1,035 |
|
|
|
845 |
|
Expected return on plan assets |
|
|
(943 |
) |
|
|
(806 |
) |
|
|
(672 |
) |
Amortization of prior service cost |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
Amortization of transition asset |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
Recognized net actuarial loss |
|
|
479 |
|
|
|
55 |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
3,751 |
|
|
$ |
2,468 |
|
|
$ |
1,430 |
|
|
|
|
|
|
|
|
|
|
|
Estimated future benefit payments are as follows (in thousands):
|
|
|
|
|
|
|
Amount |
|
Estimated future benefit payments for subsequent ten years: |
|
|
|
|
2006 |
|
$ |
580 |
|
2007 |
|
|
630 |
|
2008 |
|
|
726 |
|
2009 |
|
|
821 |
|
2010 |
|
|
965 |
|
2011-2015 |
|
$ |
7,651 |
|
The Companys pension plan weighted-average asset allocations by asset category are as
follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
2004 |
|
Asset Category: |
|
|
|
|
|
|
|
|
Insurance general account |
|
|
33 |
% |
|
|
43 |
% |
Equity accounts |
|
|
31 |
% |
|
|
21 |
% |
Fixed income account |
|
|
13 |
% |
|
|
21 |
% |
Cash equivalents |
|
|
23 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
The investment objective is to achieve a consistent total rate of return (income,
appreciation, and reinvested funds) that will equal or exceed the actuarial assumption with
aversion to significant volatility.
91
J. Retirement Plans (Continued)
Pension Plan (Continued)
The following is the target asset allocation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Range |
|
Asset class: |
|
|
|
|
|
|
|
|
|
|
|
|
Large cap equities |
|
|
23 |
% |
|
to |
|
|
91 |
% |
Mid cap equities |
|
|
0 |
% |
|
to |
|
|
15 |
% |
Small cap equities |
|
|
0 |
% |
|
to |
|
|
16 |
% |
International equities |
|
|
5 |
% |
|
to |
|
|
25 |
% |
Fixed income |
|
|
0 |
% |
|
to |
|
|
30 |
% |
Cash |
|
|
0 |
% |
|
to |
|
|
20 |
% |
The equity strategy is a diversified portfolio of attractively priced, financially sound
companies. The fixed income strategy is a portfolio of obligations generally rated A or better with
no maturity restrictions and an actively managed duration. The cash equivalents strategy uses
securities of the highest credit quality.
Acquired Pension Plans
In past years the Company has acquired several companies and the assumption of two underfunded
pension plans (the acquired pension plans). The acquired pension plans were frozen by their
prior plan sponsors and no new participants can be added to the acquired pension plans. Combined,
the acquired
pension plans have 119 participants as compared to the Companys active plan which has
approximately 2,300 participants and is described above. As of December 31, 2005 for the acquired
pension plans, the combined plan assets were $4.2 million and the combined projected benefit
obligation was $5.0 million. The net liability for the two acquired pension plans is recorded as a
liability in the Companys financial statements as of December 31, 2005 and 2004. For the year
ended December 31, 2005 an additional minimum pension liability and a charge to other comprehensive
income was recognized in the amount of $116,000.
Contributions
The Company expects to contribute approximately $3.1 million in total to the Companys active
plan and the acquired pension plans during the year ended December 31, 2006
Capital Accumulation Plan
The Gray Television, Inc. Capital Accumulation Plan (the Capital Accumulation Plan) provides
additional retirement benefits for substantially all employees. The Capital Accumulation Plan is
intended to meet the requirements of section 401(k) of the Internal Revenue Code of 1986.
The Capital Accumulation Plan allows an investment option in the Companys Common Stock and
Class A Common Stock. It also allows for the Companys percentage match to be made by a
contribution of the Companys Common Stock. The Company reserved 1,300,000 shares of the Companys
Common Stock for issuance under the Capital Accumulation Plan. As of December 31, 2005, 431,024
shares were available for the plan.
92
J. Retirement Plans (Continued)
Capital Accumulation Plan (Continued)
Employee contributions to the Capital Accumulation Plan, not to exceed 6% of the employees
gross pay, are matched by Company contributions. The Companys percentage match amount is declared
by the Companys Board of Directors before the beginning of each plan year and is made by a
contribution of the Companys Common Stock. The Companys percentage match was 50% for the three
years ended December 31, 2005. The Company contributions vest, based upon each employees number of
years of service, over a period not to exceed five years.
In addition to the Companys matching contributions, the Company authorized a voluntary
contribution for 2005, 2004 and 2003 for active participants in the Capital Accumulation Plan.
This voluntary contribution was equal to 1% of each active participants earnings for 2005 and
2003, and 2% of each active participants earnings for 2004. The Companys matching and voluntary
contributions are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
Contributions to the
Capital Accumulation Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matching contributions |
|
|
141 |
|
|
$ |
1,633 |
|
|
|
94 |
|
|
$ |
1,301 |
|
|
|
112 |
|
|
$ |
1,331 |
|
Voluntary contributions |
|
|
76 |
|
|
$ |
651 |
|
|
|
81 |
|
|
$ |
1,259 |
|
|
|
39 |
|
|
$ |
595 |
|
Included in the contributions listed above are amounts related to the Companys discontinued
operations totaling $287,000, $371,000 and $371,000 in the years ended December 31, 2005, 2004 and
2003, respectively.
Employee Stock Purchase Plan
On May 14, 2003, the Companys shareholders approved the adoption of the Gray Television, Inc.
Employee Stock Purchase Plan (the Stock Purchase Plan). The Stock Purchase Plan is intended to
qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code and to
provide eligible employees of the Company with an opportunity to purchase the Common Stock through
payroll deductions. An aggregate of 500,000 shares of the Common Stock are reserved for issuance
under the Stock Purchase Plan and are available for purchase, subject to adjustment in the event of
a stock split, stock dividend or other similar change in the Common Stock or the capital structure
of the Company. As of December 31, 2005, 408,561 shares were available under the plan. The price
per share at which shares of Common Stock may be purchased under the Stock Purchase Plan during any
purchase period is 85% of the fair market value of the Common Stock on the last day of the purchase
period. The Companys board of directors has the discretion to establish a different purchase
price for a purchase period provided that such purchase price will not be less than 85% of the fair
market value of the Common Stock on the transaction date.
93
K. Commitments and Contingencies
The Company has various operating lease commitments for equipment, land and office space. The
Company also has commitments for various syndicated television programs and for digital television
(DTV) equipment.
The Company has 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 Seinfeld. The two program types are different in that the first run programs
have not been produced at the time the contract is signed and the off network programs have been
produced.
Future minimum payments under operating leases with initial or remaining noncancelable lease
terms in excess of one year, obligations for syndicated television programs as described above and
commitments for DTV equipment that had been ordered but not yet been received are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated |
|
|
|
|
|
|
DTV |
|
|
Operating |
|
|
Television |
|
|
|
|
Year |
|
Equipment |
|
|
Lease |
|
|
Programming |
|
|
Total |
|
2006 |
|
$ |
3,110 |
|
|
$ |
1,348 |
|
|
$ |
3,635 |
|
|
$ |
8,093 |
|
2007 |
|
|
-0- |
|
|
|
1,064 |
|
|
|
9,889 |
|
|
|
10,953 |
|
2008 |
|
|
-0- |
|
|
|
865 |
|
|
|
9,011 |
|
|
|
9,876 |
|
2009 |
|
|
-0- |
|
|
|
612 |
|
|
|
8,010 |
|
|
|
8,622 |
|
2010 |
|
|
-0- |
|
|
|
416 |
|
|
|
6,329 |
|
|
|
6,745 |
|
Thereafter |
|
|
-0- |
|
|
|
765 |
|
|
|
3,198 |
|
|
|
3,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,110 |
|
|
$ |
5,070 |
|
|
$ |
40,072 |
|
|
$ |
48,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The DTV equipment, operating lease and syndicated television programming amounts in the table
above are estimates of commitments that are in addition to the liabilities accrued for on the
Companys balance sheet as of December 31, 2005.
Leases
The Company has no material capital leases. Where leases include rent holidays, rent
escalations, rent concessions and leasehold improvement incentives, the value of these incentives
are amortized over the lease term including anticipated renewal periods. Leasehold improvements
are depreciated over the associated lease term including anticipated renewal periods. Rent expense
resulting from operating leases for the years ended December 31, 2005, 2004 and 2003 were $1.3
million, $1.2 million and $1.2 million, respectively.
Related Party Contract
Through a rights-sharing agreement with Host Communications, Inc. (Host), a wholly owned
subsidiary of TCM and a related party, the Company participated jointly with Host in the marketing,
selling and broadcasting of certain collegiate sporting events and in related programming,
production and other associated activities related to the University of Kentucky. This initial
agreement commenced April 1, 2000 and terminated April 15, 2005. The Company shared with Host the
profit or loss from these activities. Individual revenues and expenses under this agreement were
not separately recorded in the Companys statement of operations; rather the net amount received
was included in broadcasting revenues. The Companys operating results for 2005, 2004 and 2003
include net income from these activities of $123,356, $101,475 and $104,396. As a result of the
rights-sharing agreement, in certain
94
K. Commitments and Contingencies (Continued)
Related Party Contract (Continued)
circumstances, the Company could be called upon for payment of a share of certain upfront rights
fees. During 2003, the Company paid $1.5 million to Host as an advance under this provision. No
similar payments were made in 2004 or 2005. As of December 31, 2005, Host owed to the Company $1.0
million from the advance in 2003, $332,000 of undistributed earnings from this rights-sharing
agreement as well as $310,000 unrelated to the first rights-sharing agreement for a total of $1.6
million. As of December 31, 2005 and 2004, the Company had $1.6 million and $1.4 million
respectively, recorded as a related party receivable. Between January 1, 2006 and February 17,
2006, the Company received payments totaling $1.6 for full payment of this related party
receivable. Certain executive officers and significant stockholders of Gray are also executive
officers and significant stockholders of TCM.
On October 12, 2004, the University of Kentucky jointly awarded a second sports marketing
agreement to the Company and Host. The new agreement commenced on April 16, 2005 and has an
initial term of seven years with the option to extend the license for three additional years.
Aggregate license fees to be paid to the University of Kentucky over a full ten year term for the
agreement will approximate $80.5 million. The Company and Host will share equally the cost of the
license fees. Under the new sports marketing agreement, the Company paid $1.8 million to the
University of Kentucky and recognized a loss of $137,000 during 2005.
Legal proceedings and claims
The Company is subject to legal proceedings and claims that arise in the normal course of its
business. In the opinion of management, the amount of ultimate liability, if any, with respect to
these actions, will not materially affect the Companys financial position.
Tarzian Litigation
The Company has an equity investment in Sarkes Tarzian, Inc. (Tarzian) representing shares
in Tarzian which were originally held by the estate of Mary Tarzian (the Estate). As described
more fully below, the Companys ownership of the Tarzian shares is subject to certain litigation.
On February 12, 1999, Tarzian filed suit in the United States District Court for the Southern
District of Indiana against U.S. Trust Company of Florida Savings Bank as Personal Representative
of the Estate, claiming that Tarzian had a binding and enforceable contract to purchase the Tarzian
shares from the Estate. On February 3, 2003, the Court entered judgment on a jury verdict in favor
of Tarzian for breach of contract and awarding Tarzian $4.0 million in damages. The Estate
appealed the judgment and the Courts rulings on certain post-trial motions, and Tarzian
cross-appealed. On February 14, 2005, the U.S. Court of Appeals for the Seventh Circuit issued a
decision concluding that no contract was ever created between Tarzian and the Estate, reversing the
judgment of the District Court, and remanding the case to the District Court with instructions to
enter judgment for the Estate. Tarzians petition for rehearing was denied by the Seventh Circuit
Court of Appeals, and the U.S. Supreme Court denied Tarzians petition for certiorari. Tarzian
also filed a motion for a new trial in the District Court based on the Estates alleged failure to
produce certain documents in discovery. The District Court denied Tarzians motion, and on
February 24, 2006, the Seventh Circuit Court of Appeals affirmed the District Courts ruling.
Tarzian has not petitioned for rehearing and has 90 days from the date of the Seventh Circuits
opinion in which to petition the U.S. Supreme Court for certiorari. The Company cannot predict
when the final resolution of this litigation will occur.
95
K. Commitments and Contingencies (Continued)
Tarzian Litigation (Continued)
On March 7, 2003, Tarzian filed suit in the United States District Court for the Northern
District of Georgia against Bull Run Corporation and the Company for tortious interference with
contract and conversion. The lawsuit alleges that Bull Run Corporation and the Company purchased
the Tarzian shares with actual knowledge that Tarzian had a binding agreement to purchase the stock
from the Estate. The lawsuit seeks damages in an amount equal to the liquidation value of the
interest in Tarzian that the stock represents, which Tarzian claims to be as much as $75 million,
as well as attorneys fees, expenses, and punitive damages. The lawsuit also seeks an order
requiring the Company and Bull Run Corporation to turn over the stock certificates to Tarzian and
relinquish all claims to the stock. The stock purchase agreement with the Estate would permit the
Company to make a claim against the Estate in the event that title to the Tarzian Shares is
ultimately awarded to Tarzian. There is no assurance that the Estate would have sufficient assets
to honor any or all of such potential claims. The Company filed its answer to the lawsuit on May
14, 2003 denying any liability for Tarzians claims. On May 27, 2005, the Court issued an Order
administratively closing the case pending resolution of Tarzians lawsuit against the Estate in
Indiana federal court. The Company believes it has meritorious defenses and intends to vigorously
defend the lawsuit. The Company cannot predict when the final resolution of this litigation will
occur.
L. Goodwill and Intangible Assets
A summary of changes in the Companys goodwill and other intangible assets for the years ended
December 31, 2005 and 2004 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Balance |
|
|
|
at |
|
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
at |
|
|
|
December 31, |
|
|
And |
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2004 |
|
|
Adjustments |
|
|
Impairments |
|
|
Amortization |
|
|
2005 |
|
Goodwill |
|
$ |
137,079 |
|
|
$ |
85,315 |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
222,394 |
|
Broadcast licenses |
|
|
921,910 |
|
|
|
101,518 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
1,023,428 |
|
Definite lived
intangible assets |
|
|
2,832 |
|
|
|
1,859 |
|
|
|
-0- |
|
|
|
(1,033 |
) |
|
|
3,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible
assets net of
accumulated
amortization |
|
$ |
1,061,821 |
|
|
$ |
188,692 |
|
|
$ |
-0- |
|
|
$ |
(1,033 |
) |
|
$ |
1,249,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Balance |
|
|
|
at |
|
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
at |
|
|
|
December 31, |
|
|
And |
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2003 |
|
|
Adjustments |
|
|
Impairments |
|
|
Amortization |
|
|
2004 |
|
Goodwill |
|
$ |
137,079 |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
137,079 |
|
Broadcast licenses |
|
|
920,882 |
|
|
|
1,028 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
921,910 |
|
Definite lived
intangible assets |
|
|
3,752 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(920 |
) |
|
|
2,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible
assets net of
accumulated
amortization |
|
$ |
1,061,713 |
|
|
$ |
1,028 |
|
|
$ |
-0- |
|
|
$ |
(920 |
) |
|
$ |
1,061,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
L. Goodwill and Intangible Assets (Continued)
As of December 31, 2005 and 2004, the Companys intangible assets and related accumulated
amortization consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 |
|
|
As of December 31, 2004 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
Intangible assets
not subject to
amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcast licenses |
|
$ |
1,077,127 |
|
|
$ |
(53,699 |
) |
|
$ |
1,023,428 |
|
|
$ |
975,609 |
|
|
$ |
(53,699 |
) |
|
$ |
921,910 |
|
Goodwill |
|
|
222,394 |
|
|
|
-0- |
|
|
|
222,394 |
|
|
|
137,079 |
|
|
|
-0- |
|
|
|
137,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,299,521 |
|
|
$ |
(53,699 |
) |
|
$ |
1,245,822 |
|
|
$ |
1,112,688 |
|
|
$ |
(53,699 |
) |
|
$ |
1,058,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
subject to
amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
affiliation
agreements |
|
$ |
523 |
|
|
$ |
(419 |
) |
|
$ |
104 |
|
|
$ |
523 |
|
|
$ |
(343 |
) |
|
$ |
180 |
|
Other definite
lived intangible
assets |
|
|
11,929 |
|
|
|
(8,375 |
) |
|
|
3,554 |
|
|
|
10,161 |
|
|
|
(7,509 |
) |
|
|
2,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,452 |
|
|
$ |
(8,794 |
) |
|
$ |
3,658 |
|
|
$ |
10,684 |
|
|
$ |
(7,852 |
) |
|
$ |
2,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles |
|
$ |
1,311,973 |
|
|
$ |
(62,493 |
) |
|
$ |
1,249,480 |
|
|
$ |
1,123,372 |
|
|
$ |
(61,551 |
) |
|
$ |
1,061,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, the Company recorded additional goodwill, broadcast licenses and definite
lived intangible assets related to the acquisitions of KKCO-TV, WSWG-TV and WSAZ-TV. During 2004,
the Company recorded an additional broadcast license asset related to the acquisition of WCAV-TV.
The Company recorded amortization expense for the years ended December 31, 2005, 2004 and 2003 of
$1.0 million, $920,000 and $5.2 million, respectively. Based on the current amount of intangible
assets subject to amortization, the amortization expense for the succeeding five years is as
follows: 2006: $1.9 million; 2007: $441,000; 2008: $432,000; 2009: $235,000 and 2010: $146,000. As
acquisitions and dispositions occur in the future, actual amounts may vary from these estimates.
97
M. Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarters |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
(In thousands, except for per share data) |
|
Year Ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
58,309 |
|
|
$ |
67,988 |
|
|
$ |
62,281 |
|
|
$ |
72,975 |
|
Operating income |
|
|
11,217 |
|
|
|
19,649 |
|
|
|
12,490 |
|
|
|
17,505 |
|
Income (loss) from continuing operations |
|
|
249 |
|
|
|
2,253 |
|
|
|
972 |
|
|
|
1,130 |
|
Income (loss) from discontinued operations, net of tax |
|
|
1,826 |
|
|
|
1,140 |
|
|
|
771 |
|
|
|
(4,979 |
) |
Net income (loss) available to common stockholders |
|
|
1,260 |
|
|
|
2,579 |
|
|
|
928 |
|
|
|
(7,053 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(0.01 |
) |
|
$ |
0.03 |
|
|
$ |
0.00 |
|
|
$ |
(0.05 |
) |
Income (loss) from discontinued operations |
|
|
0.04 |
|
|
|
0.02 |
|
|
|
0.02 |
|
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
|
$ |
0.03 |
|
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(0.01 |
) |
|
$ |
0.03 |
|
|
$ |
0.00 |
|
|
$ |
(0.05 |
) |
Income (loss) from discontinued operations |
|
|
0.04 |
|
|
|
0.02 |
|
|
|
0.02 |
|
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
|
$ |
0.03 |
|
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
61,910 |
|
|
$ |
71,235 |
|
|
$ |
73,658 |
|
|
$ |
86,470 |
|
Operating income |
|
|
16,463 |
|
|
|
26,875 |
|
|
|
26,370 |
|
|
|
30,707 |
|
Income from continuing operations |
|
|
3,719 |
|
|
|
10,119 |
|
|
|
9,807 |
|
|
|
12,872 |
|
Income from discontinued operations, net of tax |
|
|
1,783 |
|
|
|
2,078 |
|
|
|
1,975 |
|
|
|
1,932 |
|
Net income available to common stockholders |
|
|
4,680 |
|
|
|
11,376 |
|
|
|
10,967 |
|
|
|
13,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.06 |
|
|
$ |
0.19 |
|
|
$ |
0.18 |
|
|
$ |
0.25 |
|
Income from discontinued operations |
|
|
0.03 |
|
|
|
0.04 |
|
|
|
0.04 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.09 |
|
|
$ |
0.23 |
|
|
$ |
0.22 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.06 |
|
|
$ |
0.18 |
|
|
$ |
0.18 |
|
|
$ |
0.24 |
|
Income from discontinued operations |
|
|
0.03 |
|
|
|
0.04 |
|
|
|
0.04 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.09 |
|
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Because of the method used in calculating per share data, the quarterly per share data will
not necessarily add to the per share data as computed for the year.
During the fourth quarter of the year ended December 31, 2005, the Company recorded $3.6
million of transaction costs related to the completion of the spinoff of its publishing and
wireless businesses to TCM and recorded a $3.2 million impairment charge of the FCC license for its
wireless business. These amounts are included in the results of the discontinued operations. See
Note B. Discontinued Operations for further discussion of the TCM
spinoff and impairment charge. Also during the fourth quarter of the year ended December 31, 2005,
the Company modified the conversion price of the Companys
Series C Preferred Stock. The modification of the conversion price
resulted in a non-cash deemed dividend to the Preferred Stockholders
of approximately $2.4 million. See note G of Redeemable Preferred
Stock for
further discussion.
98
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
An evaluation as of December 31, 2005 was carried out under the supervision and with the
participation of management, including the Chief Executive Officer (CEO) and the Chief Financial
Officer (CFO), of the effectiveness of the Companys disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended). Based on that
evaluation, the CEO and the CFO have concluded that the Companys disclosure controls and
procedures are effective.
Changes in Internal Control Over Financial Reporting
No change in the Companys internal control over financial reporting occurred during the
quarter ended December 31, 2005 that materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
Managements Report on Internal Control Over Financial Reporting and Attestation Report of our
Independent Registered Public Accounting Firm
Our Managements Report on Internal Control over Financial Reporting and Attestation Report of
our Independent Registered Public Accounting Firm thereon are set forth in Item 8. of this Annual
Report on Form 10-K.
Item 9B. Other Information.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information relating to our directors and audit committee, compliance with Section 16(a)
of the Exchange Act, and our code of ethics applicable to our chief executive, financial and
accounting officers set forth in the Companys definitive Proxy Statement for the 2006 Annual
Meeting of Shareholders (to be filed within 120 days after December 31, 2005) is incorporated
herein by reference. In addition, the information set forth under Executive Officers of the
Registrant in Part I of this Report is incorporated herein by reference.
Item 11. Executive Compensation.
The information set forth in Proposal No. One: Election of Directors under the headings
Executive Compensation, Compensation of Directors, Employment Agreements and Compensation
Committee Interlocks and Insider Participation in the Companys definitive Proxy Statement for the
2006 Annual Meeting of Shareholders is incorporated herein by reference.
99
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The information set forth in Proposal No. One: Election of Directors under the heading
Share Ownership in the Companys definitive Proxy Statement for the 2006 Annual Meeting of
Shareholders is incorporated herein by reference.
Equity Compensation Plan Information
The following table gives information about the Common Stock and Class A Common Stock that may
be issued upon the exercise of options, warrants and rights under all existing equity compensation
plans as of December 31, 2005.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities remaining |
|
|
|
Number of securities to |
|
|
Weighted-average |
|
|
available for future issuance |
|
|
|
be issued upon exercise |
|
|
exercise price of |
|
|
under equity compensation |
|
|
|
of outstanding options, |
|
|
outstanding options, |
|
|
plans (excluding securities |
|
Plan Category |
|
warrants and rights |
|
|
warrants and rights |
|
|
reflected in 1st column) |
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans approved by
security holders
(1) |
|
|
1,664,378 |
|
|
$ |
11.20 |
|
|
|
4,598,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders
(2) |
|
|
-0- |
|
|
$ |
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,664,378 |
|
|
|
|
|
|
|
4,598,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common |
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans approved by
security holders
(3) |
|
|
19,337 |
|
|
$ |
17.81 |
|
|
|
1,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders |
|
|
-0- |
|
|
$ |
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
19,337 |
|
|
|
|
|
|
|
1,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes securities available for future issuance under the 2002 Long-Term Incentive
Plan. |
|
(2) |
|
Includes securities available for future issuance under the 2002 Long-Term Incentive
Plan. |
Item 13. Certain Relationships and Related Transactions.
The information set forth in Proposal No. One: Election of Directors under the headings
Certain Relationships and Related Transactions and Compensation Committee Interlocks and Insider
100
Participation in the Companys definitive Proxy Statement for the 2006 Annual Meeting of
Shareholders is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information set forth in the Companys definitive Proxy Statement for the 2006 Annual
Meeting of Shareholders concerning principal accountant fees and services is incorporated herein by
reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) (1) and (2) List of Financial Statements and Financial Statement Schedules.
(1) Financial Statements.
See Item Part II, Item 8. for the index of financial statements.
(2) Financial statement schedules.
The following financial statement schedule of Gray Television, Inc. and subsidiaries is
included in Item 15(c):
Schedule II
Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
(b) Exhibits.
|
3.1 |
|
Articles of Amendment of the restated Articles of Incorporation of Gray Television, Inc. dated June 1, 2004
|
|
|
3.2 |
|
Bylaws of Gray Television, Inc., as amended (incorporated by reference to Exhibit
3.2 of the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
1998, File No. 0-13796) |
|
|
3.3 |
|
Amendment to bylaws of Gray Television, Inc. dated January 6, 1999 |
|
|
3.4 |
|
Amendment to the Restated Articles of Gray Television, Inc.,
dated September 16, 2002 (incorporated by reference to Exhibit 3.4 of
the Companys Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-13796) |
|
|
4.1 |
|
See Exhibits 3.1 and 3.3 for provisions of the Articles of Incorporation and
Bylaws defining rights of holders of the Common Stock |
|
|
4.2 |
|
Indenture, for the Companys 9 1/4% Senior Subordinated Notes due 2011, dated as of
September 15, 2001 (incorporated by reference to Exhibit 4.13 of the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2001, File No. 0-13796) |
|
|
4.3 |
|
Supplemental Indenture, for the Companys 9 1/4% Senior Subordinated Notes due
2011, dated as of September 10, 2002 (incorporated by reference to Exhibit 4.2 of the
Companys Current Report on Form 8-K, filed on September 9, 2002, File No. 0-13796) |
101
|
4.4 |
|
Warrant, dated January 4, 1996, to purchase 487,500 shares of Class A Common
Stock (incorporated by reference to Exhibit 10.13 of the Companys Registration
Statement on Form S-1, Registration No. 333-04340) |
|
|
4.5 |
|
Form of Warrant, to purchase 500,000 shares of Class A Common Stock (incorporated
by reference to Exhibit 10.18 of the Companys Registration Statement on Form S-1,
Registration No. 333-04338) |
|
|
4.6 |
|
Registration Rights Agreement, dated as of December 21, 2001, by and among Gray
Television, Inc., First Union Securities, Inc., Banc of America Securities, LLC, and
Allen & Company, Incorporated (incorporated by reference to Exhibit 4.2 of the Companys
Registration Statement on Form S-4, Registration No. 333-86068) |
|
|
4.7 |
|
Registration Rights Agreement, dated as of April 22, 2002, by and among Gray
Television, Inc. and Certain Investors (incorporated by reference to Exhibit 4.1 of the
Companys Registration Statement on Form S-3, Registration No. 333-88694) |
|
|
10.1 |
|
Sixth Amended and Restated Loan Agreement, dated November 22, 2005, by and among
Gray Television, Inc., as Borrower, Wachovia Bank, National Association, as
Administrative Agent, Wachovia Capital Markets, LLC, as Sole Lead Arranger and Sole Bookrunner, Bank of America, N.A., as Syndication Agent, and Deutsche Bank Trust Company
Americas, Allied Irish Banks PLC, Key Bank National Association, and Goldman Sachs Credit
Partners L.P., each as a Documentation Agent (incorporated by reference to Exhibit 99.1 of
the Companys Current Report on Form 8-K, filed on November 29, 2005, File No. 1-13796) |
|
|
10.2 |
|
Preferred Stock Purchase Agreement, dated as of April 22, 2002, by and among Gray
Television, Inc. and Certain Investors (incorporated by reference to Exhibit 4.2 of the
Companys Registration Statement on Form S-3, Registration No. 333-88694) |
|
|
10.3 |
|
Exchange Agreement, dated as of April 22, 2002, by and among Gray Television, Inc.
and certain holders of the Companys preferred stock (incorporated by reference to
Exhibit 4.3 of the Companys Registration Statement on Form S-3, Registration No.
333-88694) |
|
|
10.4 |
|
Agreement and Plan of Merger, dated as of June 4, 2002, by and among the Company,
Gray MidAmerica Television, Inc. and Stations Holding Company, Inc. (incorporated by
reference to Exhibit 2.1 of the Companys Registration Statement on Form S-3,
Registration No. 333-88694) |
|
|
10.5 |
|
Asset Purchase Agreement, dated as of June 4, 2002, by and among Chelsey
Broadcasting Company, LLC, Benedek Broadcasting Corporation and Benedek License, Inc.
(incorporated by reference to Exhibit 10.5 of the Companys Registration Statement on
Form S-3, Registration No. 333-88694) |
|
|
10.6 |
|
Form of Preferred Stock Exchange and Purchase Agreement, between the Company and
Bull Run Corporation (incorporated by reference to Exhibit 10.17 to the Companys
Registration Statement on Form S-1, Registration No. 333-04338) |
102
|
10.7 |
|
Supplemental Pension Plan (incorporated by reference to Exhibit 10(a) of the
Companys Registration Statement on Form 10, File No. 0-13796)* |
|
|
10.8 |
|
Reserved |
|
|
10.9 |
|
2002 Long-Term Incentive Plan (incorporated by reference to the Companys
definitive Proxy Statement on Schedule 14A, filed on August 15, 2002)* |
|
|
10.10 |
|
Reserved |
|
|
10.11 |
|
Capital Accumulation Plan (incorporated by reference to Exhibit 10(i) to the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No.
0-13796)* |
|
|
10.12 |
|
Directors Restricted Stock Plan (incorporated by reference to Exhibit 10.12 of the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2002, File No.
1-13796)* |
|
|
10.13 |
|
Reserved |
|
|
10.14 |
|
Reserved |
|
|
10.15 |
|
Asset Purchase Agreement, dated as of September 3, 2002, by and among Smith
Television Group, Inc., Smith Television Holdings, Inc. and Gray Television, Inc.
(incorporated by reference to Exhibit 10-15 of the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, File No. 1-13796) |
|
|
10.16 |
|
Reserved |
|
|
10.17 |
|
Warrant Purchase Agreement, dated April 15, 2003, between Bull Run Corporation and
the Company (incorporated by reference to Exhibit 10.1 of the Companys Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 2003, filed on November 12, 2003,
File No. 1-13796) |
|
|
10.18 |
|
Stock Purchase Agreement, dated August 19, 2003, between Bull Run Corporation and
the Company (incorporated by reference to Exhibit 10.2 of the Companys Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 2003, filed on November 12, 2003,
File No. 1-13796) |
|
|
14.1 |
|
Code of Ethics as approved by the Companys board of directors on March 3, 2004.
(incorporated by reference to Exhibit 14.1 of the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2003, filed on March 12, 2004, File No. 1-13796) |
|
|
16.1 |
|
Letter re: Change in Certifying Accountant (incorporated by reference to the
Companys Current Report on Form 8-K, filed on January 8, 2002, File No. 0-13796) |
|
|
21.1 |
|
Subsidiaries of the Registrant |
|
|
23.1 |
|
Consent of PricewaterhouseCoopers LLP |
103
|
24.1 |
|
Power of Attorney (contained in the signature page of this Report) |
|
|
31.1 |
|
Rule 13 (a) 14 (a) Certificate of Chief Executive Officer |
|
|
31.2 |
|
Rule 13 (a) 14 (a) Certificate of Chief Financial Officer |
|
|
32.1 |
|
Section 1350 Certificate of Chief Executive Officer |
|
|
32.2 |
|
Section 1350 Certificate of Chief Financial Officer |
|
|
|
* |
|
Compensation Plan or Arrangement |
(c) Financial
Statement Schedules The response to this section is submitted as a part of (a)(1)
and (2).
104
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
|
|
|
Gray Television, Inc. |
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ J. Mack Robinson |
|
|
|
|
|
|
|
|
|
J. Mack Robinson, |
|
|
|
|
Chairman and Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints J. Mack Robinson, Robert S. Prather, Jr. and James C. Ryan, and each of them, as his true
and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution for
him, in his name place and stead, in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises as fully and to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ William E. Mayher, III |
|
|
|
|
|
|
|
|
|
William E. Mayher, III, |
|
|
|
|
Chairman of the Board |
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ J. Mack Robinson |
|
|
|
|
|
|
|
|
|
J. Mack Robinson, Director, Chairman and |
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ Richard L. Boger |
|
|
|
|
|
|
|
|
|
Richard L. Boger, Director |
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ RAY M. DEAVER. |
|
|
|
|
|
|
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|
|
Ray M. Deaver, Director |
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ T. L. ELDER |
|
|
|
|
|
|
|
|
|
T. L. Elder, Director |
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ Hilton H. Howell, Jr. |
|
|
|
|
|
|
|
|
|
Hilton H. Howell, Jr., Director |
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ Zell B. Miller |
|
|
|
|
|
|
|
|
|
Zell B. Miller, Director |
105
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ Howell W. Newton |
|
|
|
|
|
|
|
|
|
Howell W. Newton, Director |
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ Hugh Norton |
|
|
|
|
|
|
|
|
|
Hugh Norton, Director |
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ Robert S. Prather, Jr. |
|
|
|
|
|
|
|
|
|
Robert S. Prather, Jr., Director |
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ Harriett J. Robinson |
|
|
|
|
|
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|
|
Harriett J. Robinson, Director |
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ James C. Ryan |
|
|
|
|
|
|
|
|
|
James C. Ryan, |
|
|
|
|
Sr.Vice President & Chief Financial Officer |
|
|
|
|
|
Date: March 16, 2006
|
|
By:
|
|
/s/ Jackson S. Cowart, IV |
|
|
|
|
|
|
|
|
|
Jackson S. Cowart, IV, |
|
|
|
|
Chief Accounting Officer |
106
GRAY TELEVISION, INC.
SCHEDULE
II VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
|
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Col. C |
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Additions |
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|
Col. B |
|
Charged |
|
Charged to |
|
|
|
|
|
Col. E |
|
|
Balance at |
|
to |
|
Other |
|
Col. D |
|
Balance at |
Col. A |
|
Beginning |
|
Costs and |
|
Accounts |
|
Deductions |
|
End of |
Description |
|
Of Period |
|
Expenses |
|
(2) |
< |