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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2006
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number: 333-02302
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ALLBRITTON COMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
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Delaware 74-1803105
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
1000 Wilson Boulevard
Suite 2700
Arlington, VA 22209
(Address of principal executive offices)
(703) 647-8700
(Registrant's telephone number, including area code)
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 |_| No |X| (1)
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):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
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Number of shares of Common Stock outstanding as of August 11, 2006: 20,000
shares.
(1) Although the Company has not been subject to such filing requirements for
the past 90 days, it has filed all reports required to be filed by Section
15(d) of the Securities Exchange Act of 1934 during the preceding 12
months. Pursuant to Section 15(d) of the Securities Exchange Act of 1934,
the Company's duty to file reports is automatically suspended as a result
of having fewer than 300 holders of record of each class of its debt
securities outstanding as of October 1, 2005, but the Company has agreed
under the terms of certain long-term debt to continue these filings in the
future.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING ITEM 2 "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THAT ARE NOT HISTORICAL FACTS AND INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES. THERE ARE A NUMBER OF FACTORS THAT COULD
CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN SUCH
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, OUR
OUTSTANDING INDEBTEDNESS AND OUR HIGH DEGREE OF LEVERAGE; THE RESTRICTIONS
IMPOSED ON US BY THE TERMS OF OUR INDEBTEDNESS; THE HIGH DEGREE OF COMPETITION
FROM BOTH OVER-THE-AIR BROADCAST STATIONS AND PROGRAMMING ALTERNATIVES SUCH AS
CABLE TELEVISION, WIRELESS CABLE, IN-HOME SATELLITE DISTRIBUTION SERVICE,
PAY-PER-VIEW SERVICES AND HOME VIDEO AND ENTERTAINMENT SERVICES; THE IMPACT OF
NEW TECHNOLOGIES; CHANGES IN FEDERAL COMMUNICATIONS COMMISSION ("FCC")
REGULATIONS; FCC LICENSE RENEWAL REQUIREMENTS; DECREASES IN THE DEMAND FOR
ADVERTISING DUE TO WEAKNESS IN THE ECONOMY; AND THE VARIABILITY OF OUR QUARTERLY
RESULTS AND OUR SEASONALITY.
ALL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY ARE
EXPRESSLY QUALIFIED BY THE FOREGOING CAUTIONARY STATEMENTS. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH
REFLECT MANAGEMENT'S VIEW ONLY AS OF THE DATE HEREOF.
ALLBRITTON COMMUNICATIONS COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations and Retained Earnings
for the Three and Nine Months Ended June 30, 2005 and 2006.... 1
Consolidated Balance Sheets as of September 30, 2005 and
June 30, 2006................................................. 2
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 2005 and 2006.................................. 3
Notes to Interim Consolidated Financial Statements............ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 14
Item 4. Controls and Procedures....................................... 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................. 15
Item 6. Exhibits...................................................... 15
Signatures.............................................................. 16
Exhibit Index........................................................... 17
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ALLBRITTON COMMUNICATIONS COMPANY
(an indirectly wholly-owned subsidiary of Perpetual Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Dollars in thousands)
(unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
2005 2006 2005 2006
---- ---- ---- ----
Operating revenues, net ..................... $ 53,610 $ 59,460 $ 152,668 $ 171,646
--------- --------- --------- ---------
Television operating expenses, excluding
depreciation and amortization .......... 30,599 31,029 93,483 94,229
Depreciation and amortization ............... 2,222 2,029 6,662 6,226
Corporate expenses .......................... 1,486 1,286 4,393 3,416
--------- --------- --------- ---------
34,307 34,344 104,538 103,871
--------- --------- --------- ---------
Operating income ............................ 19,303 25,116 48,130 67,775
--------- --------- --------- ---------
Nonoperating income (expense)
Interest income
Related party ...................... 41 -- 222 226
Other .............................. 19 39 48 107
Interest expense ....................... (9,171) (9,025) (27,507) (27,191)
Other, net ............................. (303) (274) (993) 1,157
--------- --------- --------- ---------
(9,414) (9,260) (28,230) (25,701)
--------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting
principle............................... 9,889 15,856 19,900 42,074
Provision for income taxes .................. 4,264 6,128 8,394 16,227
--------- --------- --------- ---------
Income before cumulative effect of change
in accounting principle ................ 5,625 9,728 11,506 25,847
Cumulative effect of change in accounting
principle, net of income tax benefit
of $31,272 (Note 2) .................... -- -- -- 48,728
--------- --------- --------- ---------
Net income (loss) ........................... 5,625 9,728 11,506 (22,881)
Retained earnings, beginning of period ...... 14,498 (10,350) 8,617 22,259
--------- --------- --------- ---------
Retained earnings, end of period ............ $ 20,123 $ (622) $ 20,123 $ (622)
========= ========= ========= =========
See accompanying notes to interim consolidated financial statements.
1
ALLBRITTON COMMUNICATIONS COMPANY
(an indirectly wholly-owned subsidiary of Perpetual Corporation)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30,
September 30, 2006
2005 (unaudited)
------------- -----------
Assets
Current assets
Cash and cash equivalents ............................. $ 4,205 $ 3,842
Accounts receivable, net .............................. 36,964 46,550
Program rights ........................................ 9,377 1,930
Deferred income taxes ................................. 1,330 1,330
Other ................................................. 1,967 2,251
--------- ---------
Total current assets ............................. 53,843 55,903
Property, plant and equipment, net .......................... 45,015 45,178
Intangible assets, net ...................................... 122,650 42,527
Cash surrender value of life insurance ...................... 11,833 12,126
Program rights .............................................. 371 414
Deferred income taxes ....................................... -- 5,435
Deferred financing costs and other .......................... 8,032 7,224
--------- ---------
$ 241,744 $ 168,807
========= =========
Liabilities and Stockholder's Investment
Current liabilities
Current portion of long-term debt ..................... $ 172 $ 74
Accounts payable ...................................... 2,352 3,731
Accrued interest payable .............................. 10,436 1,574
Program rights payable ................................ 12,458 3,880
Accrued employee benefit expenses ..................... 5,021 4,206
Other accrued expenses ................................ 5,641 6,677
--------- ---------
Total current liabilities ........................ 36,080 20,142
Long-term debt .............................................. 460,583 466,748
Deferred income taxes ....................................... 24,065 --
Program rights payable ...................................... 337 282
Accrued employee benefit expenses ........................... 2,077 2,002
Deferred rent and other ..................................... 6,016 9,353
--------- ---------
Total liabilities ................................ 529,158 498,527
--------- ---------
Stockholder's investment
Preferred stock, $1 par value, 1,000 shares authorized,
none issued ........................................ -- --
Common stock, $.05 par value, 20,000 shares authorized,
issued and outstanding ............................. 1 1
Capital in excess of par value ........................ 49,631 49,631
Retained earnings ..................................... 22,259 (622)
Distributions to owners, net .......................... (359,305) (378,730)
--------- ---------
Total stockholder's investment ..................... (287,414) (329,720)
--------- ---------
$ 241,744 $ 168,807
========= =========
See accompanying notes to interim consolidated financial statements.
2
ALLBRITTON COMMUNICATIONS COMPANY
(an indirectly wholly-owned subsidiary of Perpetual Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Nine Months Ended
June 30,
------------------
2005 2006
---- ----
Cash flows from operating activities:
Net income (loss) .................................... $ 11,506 $(22,881)
-------- --------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ..................... 6,662 6,226
Cumulative effect of change in accounting principle -- 48,728
Other noncash charges ............................. 1,157 976
Provision for doubtful accounts ................... 422 431
Gain on disposal of assets ........................ (38) (1,991)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ......................... (5,340) (10,017)
Program rights .............................. 11,472 7,404
Other current assets ........................ (515) (284)
Deferred income taxes ....................... -- 1,772
Other noncurrent assets ..................... (193) (266)
Increase (decrease) in liabilities:
Accounts payable ............................ 1,299 1,379
Accrued interest payable .................... (8,613) (8,862)
Program rights payable ...................... (11,942) (8,633)
Accrued employee benefit expenses ........... 811 (890)
Other accrued expenses ...................... (1,415) 1,036
Deferred income taxes ....................... 2,547 --
Deferred rent and other liabilities ......... 2,388 3,337
-------- --------
(1,298) 40,346
-------- --------
Net cash provided by operating activities ... 10,208 17,465
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (3,426) (6,437)
Proceeds from disposal of assets ..................... 66 2,162
-------- --------
Net cash used in investing activities ....... (3,360) (4,275)
-------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations ...... (120) (128)
Draws under line of credit, net ...................... 6,000 6,000
Distributions to owners, net of certain charges ...... (32,672) (25,946)
Repayments of distributions to owners ................ 15,625 6,521
-------- --------
Net cash used in financing activities ....... (11,167) (13,553)
-------- --------
Net decrease in cash and cash equivalents .................. (4,319) (363)
Cash and cash equivalents, beginning of period ............. 7,257 4,205
-------- --------
Cash and cash equivalents, end of period ................... $ 2,938 $ 3,842
======== ========
See accompanying notes to interim consolidated financial statements.
3
ALLBRITTON COMMUNICATIONS COMPANY
(an indirectly wholly-owned subsidiary of Perpetual Corporation)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(unaudited)
NOTE 1 - The accompanying unaudited interim consolidated financial statements of
Allbritton Communications Company (an indirectly wholly-owned subsidiary of
Perpetual Corporation) and its subsidiaries (collectively, the "Company") have
been prepared pursuant to instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been omitted or condensed where permitted by
regulation. In management's opinion, the accompanying financial statements
reflect all adjustments, which were of a normal recurring nature, and
disclosures necessary for a fair presentation of the consolidated financial
statements for the interim periods presented. The results of operations for the
three and nine months ended June 30, 2006 are not necessarily indicative of the
results that can be expected for the entire fiscal year ending September 30,
2006. The interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended September 30, 2005, which are contained in the Company's Form
10-K.
NOTE 2 - In September 2004, the Securities and Exchange Commission ("SEC")
announced, in conjunction with the issuance of Emerging Issues Task Force
("EITF") Topic No. D-108, "Use of the Residual Method to Value Acquired Assets
Other than Goodwill," that the "residual method" should no longer be used to
value intangible assets other than goodwill. Rather, a "direct value method" is
required to be used to determine the fair value of all intangible assets for
purposes of impairment testing, including those assets previously valued using
the residual method. Any impairment resulting from application of a direct value
method should be reported as a cumulative effect of a change in accounting
principle. Application of EITF Topic No. D-108 was effective as of the beginning
of the Company's fiscal year ending September 30, 2006.
The Company had used the residual method to value its FCC licenses in
conjunction with acquisitions made in 1996 and 2000. Upon its implementation of
EITF Topic No. D-108 during the first quarter of the fiscal year ending
September 30, 2006, the Company performed an impairment test using a direct
value method on its FCC licenses previously valued using the residual method.
The direct value method, which differs markedly from the residual value method,
requires the Company to value its FCC licenses using an average market
participant concept. This concept assumes that cash flows associated with FCC
licenses are limited to those cash flows that could be expected by an average
market participant. In contrast, the residual value method formerly used by the
Company included other elements of cash flows which contributed to station
value.
As a result of the implementation of EITF Topic No. D-108, the Company recorded
a non-cash, pre-tax impairment charge related to the carrying value of certain
of its FCC licenses of $80,000. This charge was recorded, net of the related tax
benefit of $31,272, as a cumulative effect of a change in accounting principle
during the quarter ended December 31, 2005.
4
The carrying value of the Company's indefinite lived intangible assets,
consisting of its broadcast licenses, at September 30, 2005 and June 30, 2006
was $122,290 and $42,290, respectively.
The carrying value of the Company's other intangible assets, consisting of
favorable terms on contracts and leases, was as follows:
September 30, June 30,
2005 2006
------------- --------
Gross carrying amount........... $ 6,174 $ 6,174
Less accumulated amortization... (5,814) (5,937)
------- -------
Net carrying amount............. $ 360 $ 237
======= =======
Amortization expense was $124 and $123 for the nine-month periods ended June 30,
2005 and 2006, respectively.
NOTE 3 - For the nine months ended June 30, 2005 and 2006, distributions to
owners and related activity consisted of the following:
Federal and
Virginia state
Distributions Income Tax Net
to Owners Receivable Distributions
and Dividends (Payable) to Owners
------------- -------------- -------------
Balance as of September 30, 2004................ $ 339,425 $ -- $ 339,425
Cash advances to Perpetual...................... 30,905 30,905
Repayment of cash advances to Perpetual......... (15,625) (15,625)
Charge for federal and state income taxes....... (5,430) (5,430)
Payment of income taxes......................... 7,197 7,197
--------- --------- ---------
Balance as of June 30, 2005..................... $ 354,705 $ 1,767 $ 356,472
========= ========= =========
Balance as of September 30, 2005................ $ 359,305 $ -- $ 359,305
Cash advances to Perpetual...................... 31,002 31,002
Repayment of cash advances to Perpetual......... (6,521) (6,521)
Charge for federal and state income taxes....... (13,126) (13,126)
Payment of income taxes......................... 8,070 8,070
--------- --------- ---------
Balance as of June 30, 2006..................... $ 383,786 $ (5,056) $ 378,730
========= ========= =========
The average amount of non-interest bearing advances outstanding was $339,417 and
$362,230 during the nine months ended June 30, 2005 and 2006, respectively.
In conjunction with its move to a new headquarters office location, the Company
sold to Perpetual certain furnishings, which were not being moved to the new
office location. Such furnishings were sold at their independently appraised
value of $123, which approximated book value.
5
NOTE 4 - In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income
Taxes." FIN 48 clarifies the accounting for uncertainty in income taxes by
prescribing a recognition threshold and measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. FIN 48 is effective for the Company's fiscal year ending
September 30, 2008. The Company is currently evaluating the impact, if any, that
FIN 48 may have on its financial position or results of operations.
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(dollars in thousands)
Overview
As used herein, the terms the "Company," "our," "us," or "we" refer to
Allbritton Communications Company and its subsidiaries and "ACC" refers solely
to Allbritton Communications Company.
We own ABC network-affiliated television stations serving seven geographic
markets: WJLA-TV in Washington, D.C.; WCFT-TV in Tuscaloosa, Alabama, WJSU-TV in
Anniston, Alabama and WBMA-LP, a low power television station licensed to
Birmingham, Alabama (we operate WCFT-TV and WJSU-TV in tandem with WBMA-LP
serving the viewers of the Birmingham, Tuscaloosa and Anniston market as a
single programming source); WHTM-TV in Harrisburg, Pennsylvania; KATV in Little
Rock, Arkansas; KTUL in Tulsa, Oklahoma; WSET-TV in Lynchburg, Virginia; and
WCIV in Charleston, South Carolina. We also provide 24-hour per day basic cable
television programming to the Washington, D.C. market, through NewsChannel 8,
primarily focused on regional and local news for the Washington, D.C.
metropolitan area. The operations of NewsChannel 8 are integrated with WJLA.
Our advertising revenues are generally highest in the first and third quarters
of each fiscal year, due in part to increases in retail advertising in the
period leading up to and including the holiday season and active advertising in
the spring. The fluctuation in our operating results is generally related to
fluctuations in the revenue cycle. In addition, advertising revenues are
generally higher during election years due to spending by political candidates,
which is typically heaviest during our first and fourth fiscal quarters. During
years in which Olympic Games are held, there is additional demand for
advertising time and, as a result, increased advertising revenue associated with
Olympic broadcasts. The 2006 Winter Olympic Games were broadcast by NBC in
February 2006 in connection with NBC's United States television rights to the
Olympic Games, which extend through 2012.
Results of Operations
Set forth below are selected consolidated financial data for the three and nine
months ended June 30, 2005 and 2006 and the percentage change between the
periods:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ Percent ----------------- Percent
2005 2006 Change 2005 2006 Change
---- ---- ------- ---- ---- -------
Operating revenues, net ............ $ 53,610 $ 59,460 10.9% $ 152,668 $ 171,646 12.4%
Total operating expenses............ 34,307 34,344 0.1% 104,538 103,871 -0.6%
-------- -------- --------- ---------
Operating income.................... 19,303 25,116 30.1% 48,130 67,775 40.8%
Nonoperating expenses, net.......... 9,414 9,260 -1.6% 28,230 25,701 -9.0%
Income tax provision................ 4,264 6,128 43.7% 8,394 16,227 93.3%
-------- -------- --------- ---------
Income before cumulative effect of
change in accounting principle... 5,625 9,728 72.9% 11,506 25,847 124.6%
-------- --------
Cumulative effect of change in
accounting principle, net of
income tax benefit............... -- -- -- -- 48,728 --
-------- -------- --------- ---------
Net income (loss)................... $ 5,625 $ 9,728 72.9% $ 11,506 $ (22,881) --
======== ======== ========= =========
7
Net Operating Revenues
The following table depicts the principal types of operating revenues, net of
agency commissions, earned by us for each of the three and nine months ended
June 30, 2005 and 2006, and the percentage contribution of each to our total
broadcast revenues, before fees:
Three Months Ended June 30, Nine Months Ended June 30,
-------------------------------------- ---------------------------------------
2005 2006 2005 2006
----------------- ----------------- ----------------- -----------------
Dollars Percent Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- ------- ------- -------
Local and national<F1>........ $49,637 90.7 $53,887 88.7 $135,929 87.2 $154,285 88.0
Political<F2>................. 425 0.8 2,114 3.5 3,907 2.5 4,311 2.5
Network compensation<F3>...... 665 1.2 580 1.0 2,185 1.4 1,841 1.1
Trade and barter<F4>.......... 1,483 2.7 1,429 2.3 4,479 2.9 4,250 2.4
Other revenue<F5>............. 2,518 4.6 2,765 4.5 9,391 6.0 10,599 6.0
------- ----- ------- ----- -------- ----- -------- -----
Broadcast revenues............ 54,728 100.0 60,775 100.0 155,891 100.0 175,286 100.0
===== ===== ===== =====
Fees<F6>...................... (1,118) (1,315) (3,223) (3,640)
------- ------- -------- --------
Operating revenues, net ...... $53,610 $59,460 $152,668 $171,646
======= ======= ======== ========
<FN>
- ----------
<F1> Represents sale of advertising time to local and national advertisers,
either directly or through agencies representing such advertisers, net of
agency commission.
<F2> Represents sale of advertising time to political advertisers.
<F3> Represents payment by networks for broadcasting or promoting network
programming.
<F4> Represents value of commercial time exchanged for goods and services
(trade) or syndicated programs (barter).
<F5> Represents other revenue, principally from cable and direct broadcast
satellite subscriber fees, the sales of University of Arkansas sports
programming to advertisers and radio stations as well as receipts from
tower rental and production of commercials.
<F6> Represents fees paid to national sales representatives and fees paid for
music licenses.
</FN>
Net operating revenues for the three months ended June 30, 2006 totaled $59,460,
an increase of $5,850, or 10.9%, when compared to net operating revenues of
$53,610 for the three months ended June 30, 2005. Net operating revenues
increased $18,978, or 12.4%, to $171,646 for the nine months ended June 30, 2006
as compared to $152,668 for the same period in the prior year. Net operating
revenues for both the three and nine months ended June 30, 2006 were record
highs for the periods.
Local and national advertising revenues increased $4,250, or 8.6%, and $18,356,
or 13.5%, during the three and nine months ended June 30, 2006, respectively,
versus the comparable periods in Fiscal 2005. The increase for the three months
ended June 30, 2006 reflected increased local and national advertising revenues
in a majority of our markets, with particular growth in demand by local and
national advertisers in our Washington, D.C., Birmingham and Charleston markets.
This increase in demand was partially attributable to established increases in
ratings for certain ABC primetime programming over the past year, the strength
of our local news franchises and our continued focus on new local business
development.
The increase in local and national advertising revenues for the nine months
ended June 30, 2006 reflected increased local and national advertising revenues
in all of our markets, with particular growth in demand by local and national
advertisers in our Washington, D.C., Birmingham and Charleston markets. In
addition to the factors discussed above, the nine-month results reflect
increased advertising revenue related to the broadcast of the Super Bowl by the
ABC network in
8
February 2006 (broadcast by the Fox network in 2005 and the CBS network in
2004). The increased local and national revenue during the nine months ended
June 30, 2006 was also impacted by prior year displacement of local and national
advertisers during the peak political advertising month of October 2004.
Political advertising revenues increased by $1,689 to $2,114 for the three
months ended June 30, 2006 as compared to the three months ended June 30, 2005
due to local primary elections in several of our markets with much less
comparable activity during the same period of the prior year. Political
advertising revenues increased $404, or 10.3%, during the nine months ended June
30, 2006 as compared to the same period in Fiscal 2005. Political advertising
revenue increased in a majority of our markets due to several high-profile local
primary elections as discussed above as well as the November 2005 Virginia
Governor's election, substantially offset by the national presidential election
in November 2004, which generated substantial revenue in the first quarter of
Fiscal 2005.
No individual advertiser accounted for more than 5% of our broadcast revenues
during the three or nine months ended June 30, 2005 or 2006.
Total Operating Expenses
Total operating expenses for the three months ended June 30, 2006 totaled
$34,344, an increase of $37, or 0.1%, compared to total operating expenses of
$34,307 for the three-month period ended June 30, 2005. This net increase
consisted of an increase in television operating expenses, excluding
depreciation and amortization, of $430, a decrease in depreciation and
amortization of $193 and a decrease in corporate expenses of $200.
Total operating expenses for the nine months ended June 30, 2006 totaled
$103,871, a decrease of $667, or 0.6%, compared to total operating expenses of
$104,538 for the nine-month period ended June 30, 2005. This net decrease
consisted of an increase in television operating expenses, excluding
depreciation and amortization, of $746, a decrease in depreciation and
amortization of $436 and a decrease in corporate expenses of $977.
Television operating expenses, excluding depreciation and amortization,
increased $430 and $746, or 1.4% and 0.8%, for the three and nine months ended
June 30, 2006, respectively, as compared to the comparable periods in Fiscal
2005. These increases were primarily due to increased employee compensation and
benefits, mitigated by reduced syndicated programming costs. Employee
compensation and benefits increased 6.3% and 7.7% for the three and nine months
ended June 30, 2006, respectively, as compared to the same periods in the prior
year principally due to increased local sales commissions associated with
increased local advertising revenues, an increased number of sales personnel
related to our continued focus on new business development and increased news
personnel costs in several markets, due in large part to increases in locally
produced news and related programming. The decrease in syndicated programming
costs resulted from renewals of several of our existing programs under more
favorable terms, the conversion of certain time periods from syndicated
programming to local news or other locally produced programming as well as
non-recurring rights fees incurred during the prior year associated with the
airing of certain sporting events.
9
Corporate expenses decreased $200 and $977, or 13.5% and 22.2%, respectively,
for the three and nine months ended June 30, 2006 versus the comparable periods
in Fiscal 2005 due to a variety of decreased expenses including the cessation of
management fees to Joe L. Allbritton effective October 1, 2005, decreased
corporate aircraft costs as a result of the sale of our aircraft during the
quarter ended December 31, 2005 (see "Nonoperating expenses, net"), and elevated
costs related to Sarbanes-Oxley internal control compliance incurred during the
prior year.
Operating Income
For the three months ended June 30, 2006, operating income of $25,116 increased
$5,813, or 30.1%, when compared to operating income of $19,303 for the three
months ended June 30, 2005. For the three months ended June 30, 2006, the
operating margin increased to 42.2% from 36.0% for the comparable period in
Fiscal 2005. The increases in operating income and margin during the three
months ended June 30, 2006 were primarily the result of increased net operating
revenues as discussed above.
Operating income of $67,775 for the nine months ended June 30, 2006 increased
$19,645, or 40.8%, when compared to operating income of $48,130 for the same
period in the prior fiscal year. For the nine months ended June 30, 2006, the
operating margin increased to 39.5% from 31.5% for the comparable period in the
prior fiscal year. The increases in operating income and margin were primarily
the result of increased net operating revenues as discussed above.
Operating income for both the three and nine months ended June 30, 2006 were
record highs for the periods.
Nonoperating Expenses, Net
Interest Expense. Interest expense of $9,025 for the three months ended June 30,
2006 decreased $146, or 1.6%, as compared to $9,171 for the three-month period
ended June 30, 2005. The average balance of debt outstanding, including capital
lease obligations, for the three months ended June 30, 2005 and 2006 was
$463,796 and $458,425, respectively, and the weighted average interest rate on
debt was 7.7% for each of the three month periods ended June 30, 2005 and 2006.
Interest expense of $27,191 for the nine months ended June 30, 2006 decreased
$316, or 1.1%, as compared to $27,507 for the comparable period of Fiscal 2005.
The average balance of debt outstanding, including capital lease obligations,
for the nine months ended June 30, 2005 and 2006 was $464,924 and $461,165,
respectively, and the weighted average interest rate on debt was 7.7% for each
of the nine month periods ended June 30, 2005 and 2006.
Other, Net. Other, net nonoperating income was $1,157 for the nine months ended
June 30, 2006, as compared to other, net nonoperating expense of $993 for the
same period in the prior year. The difference of $2,150 primarily resulted from
a gain on the sale of our corporate aircraft during the quarter ended December
31, 2005.
Income Taxes
The provision for income taxes for the three months ended June 30, 2006 totaled
$6,128 as compared to the provision for income taxes of $4,264 for the three
months ended June 30, 2005. The increase in the provision for income taxes of
$1,864, or 43.7%, during the three months ended June 30, 2006 was primarily due
to the $5,967, or 60.3%, increase in pre-tax income.
10
The provision for income taxes for the nine months ended June 30, 2006 totaled
$16,227, an increase of $7,833, or 93.3%, when compared to the provision for
income taxes of $8,394 for the nine months ended June 30, 2005. The increase in
the provision for income taxes during the nine months ended June 30, 2006 was
primarily due to the $22,174, or 111.4%, increase in pre-tax income.
Cumulative Effect of Change in Accounting Principle
In September 2004, the Securities and Exchange Commission ("SEC") announced, in
conjunction with the issuance of Emerging Issues Task Force ("EITF") Topic No.
D-108, "Use of the Residual Method to Value Acquired Assets Other than
Goodwill," that the "residual method" should no longer be used to value
intangible assets other than goodwill. Rather, a "direct value method" is
required to be used to determine the fair value of all intangible assets for
purposes of impairment testing, including those assets previously valued using
the residual method. Any impairment resulting from application of a direct value
method should be reported as a cumulative effect of a change in accounting
principle. Application of EITF Topic No. D-108 was effective as of the beginning
of our fiscal year ending September 30, 2006.
We used the residual method to value our FCC licenses in conjunction with
acquisitions made in 1996 and 2000. Upon our implementation of EITF Topic No.
D-108 during the first quarter of the fiscal year ending September 30, 2006, we
performed an impairment test using a direct value method on our FCC licenses
previously valued using the residual method. The direct value method, which
differs markedly from the residual value method, requires us to value our FCC
licenses using an average market participant concept. This concept assumes that
cash flows associated with FCC licenses are limited to those cash flows that
could be expected by an average market participant. In contrast, the residual
value method formerly used by us included other elements of cash flows which
contributed to station value.
As a result of the implementation of EITF Topic No. D-108, we recorded a
non-cash, pre-tax impairment charge related to the carrying value of certain of
our FCC licenses of $80,000. This charge was recorded, net of the related tax
benefit of $31,272, as a cumulative effect of a change in accounting principle
during the quarter ended December 31, 2005.
Net Income
For the three months ended June 30, 2006, the Company recorded net income of
$9,728 as compared to net income of $5,625 for the three months ended June 30,
2005. The increase of $4,103 during the three months ended June 30, 2006 was
primarily due to increased net operating revenues as discussed above.
For the nine months ended June 30, 2006, the Company recorded a net loss of
$22,881 as compared to net income of $11,506 for the nine months ended June 30,
2005. This decrease in net income during the nine months ended June 30, 2006 was
primarily due to the cumulative effect of change in accounting principle,
partially offset by increased net operating revenues, as discussed above.
11
Balance Sheet
Significant balance sheet fluctuations from September 30, 2005 to June 30, 2006
consisted primarily of an increase in accounts receivable and decreases in
program rights, program rights payable and accrued interest payable. The
increase in accounts receivable was the result of an overall increase in net
operating revenues. The decrease in program rights and program rights payable
reflects the annual cycle of the underlying program contracts which generally
begins in September of each year. The decrease in accrued interest payable
reflects the timing of scheduled interest payments on our long-term fixed
interest rate debt. Additionally, the decrease in intangible assets and the
increase in noncurrent deferred income tax assets are due to the impairment
charge and related income tax benefit resulting from our implementation of EITF
Topic No. D-108.
Liquidity and Capital Resources
As of June 30, 2006, our cash and cash equivalents aggregated $3,842, and we had
an excess of current assets over current liabilities of $35,761.
Cash Provided by Operations. Our principal sources of working capital are cash
flow from operations and borrowings under our senior credit facility. As
discussed above, our operating results are cyclical in nature primarily as a
result of seasonal fluctuations in advertising revenues, which are generally
highest in the first and third quarters of each fiscal year. Our cash flow from
operations is also impacted on a quarterly basis by the timing of cash
collections and interest payments on debt. Cash receipts are usually greater
during the second and fourth fiscal quarters as the collection of advertising
revenue typically lags the period in which such revenue is recorded. Scheduled
semi-annual interest payments on our long-term fixed interest rate debt occur
during the first and third fiscal quarters. As a result, our cash flows from
operating activities as reflected in our consolidated financial statements are
generally significantly higher during our second and fourth fiscal quarters, and
such quarters comprise a substantial majority of our cash flows from operating
activities for the full fiscal year.
As reported in the consolidated statements of cash flows, our net cash provided
by operating activities was $10,208 and $17,465 for the nine months ended June
30, 2005 and 2006, respectively. The $7,257 increase in cash flows from
operating activities was the result of increased income before cumulative effect
of change in accounting principle (exclusive of the gain on sale of our
corporate aircraft) during the nine months ended June 30, 2006, partially offset
by increased accounts receivable. The additional increase in accounts receivable
during the nine months ended June 30, 2006 as compared to the nine months ended
June 30, 2005 was primarily due to the 13.5% increase in local and national
advertising revenues during the nine months ended June 30, 2006.
Transactions with Owners. We have periodically made advances in the form of
distributions to Perpetual Corporation ("Perpetual"). During the nine months
ended June 30, 2005 and 2006, we made cash advances, net of repayments, to
Perpetual of $15,280 and $24,481, respectively. The advances to Perpetual are
non-interest bearing and, as such, do not reflect market rates of
interest-bearing loans to unaffiliated third parties.
At present, the primary source of repayment of the net advances is through our
ability to pay dividends or make other distributions, and there is no immediate
intent for the amounts to be repaid. Accordingly, these advances have been
treated as a reduction of stockholder's investment and are described as
"distributions" in our consolidated financial statements.
12
Under the terms of the agreements relating to our indebtedness, future advances,
distributions and dividends to related parties are subject to certain
restrictions. We anticipate that, subject to such restrictions, applicable law
and payment obligations with respect to our indebtedness, we will make advances,
distributions or dividends to related parties in the future.
During the nine months ended June 30, 2005 and 2006, we made tax payments to
Perpetual of $7,197 and $8,070, respectively, of which $7,197 and $6,222,
respectively, represented interest-bearing advances of tax payments made in
accordance with the terms of the tax sharing agreement between Perpetual and us.
We were charged by Perpetual for federal and state income taxes totaling $5,430
and $13,126 during the nine months ended June 30, 2005 and 2006, respectively.
Stockholder's deficit amounted to $329,720 at June 30, 2006, an increase of
$42,306, or 14.7%, from the September 30, 2005 deficit of $287,414. The increase
was due to the cumulative effect of change in accounting principle of $48,728
and a net increase in distributions to owners of $19,425, partially offset by
income before cumulative effect of change in accounting principle for the nine-
month period of $25,847.
In conjunction with our move to a new headquarters office location, we sold to
Perpetual certain furnishings, which were not being moved to our new office
location. Such furnishings were sold at their independently appraised value of
$123, which approximated book value.
Indebtedness. Our total debt, including the current portion of long-term debt,
increased from $460,755 at September 30, 2005 to $466,822 at June 30, 2006. This
debt, net of applicable discounts, consisted of $452,748 of 7 3/4% senior
subordinated notes due December 15, 2012, $14,000 of draws under our senior
credit facility and $74 of capital lease obligations at June 30, 2006. The
increase of $6,067 in total debt from September 30, 2005 to June 30, 2006 was
primarily due to $6,000 in net draws under the senior credit facility.
Our $70,000 senior credit facility is secured by the pledge of stock of ACC and
its subsidiaries and matures August 23, 2011. Interest is payable quarterly at
various rates from prime or from LIBOR plus 0.75% depending on certain financial
operating tests.
Under the existing borrowing agreements, we are subject to restrictive covenants
that place limitations upon payments of cash dividends, issuance of capital
stock, investment transactions, incurrence of additional obligations and
transactions with affiliates. In addition, under the senior credit facility, we
must maintain compliance with certain financial covenants. Compliance with the
financial covenants is measured at the end of each quarter, and as of June 30,
2006, we were in compliance with those financial covenants. We are also required
to pay a commitment fee ranging from 0.25% to 0.375% per annum based on the
amount of any unused portion of the senior credit facility.
The indenture for our long-term debt provides that, whether or not required by
the rules and regulations of the SEC, so long as any senior notes are
outstanding, we, at our expense, will furnish to each holder (i) all quarterly
and annual financial information that would be required to be contained in a
filing with the SEC on Forms 10-Q and 10-K, if we were required to file such
forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of
13
Operations" and, with respect to the annual financial information only, a report
thereon by our certified independent accountants and (ii) all current reports
that would be required to be filed with the SEC on Form 8-K if we were required
to file such reports. In addition, the indenture also provides that, whether or
not required by the rules and regulations of the SEC, we will file a copy of all
such information and reports with the SEC for public availability (unless the
SEC will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. Although our duty to
file such reports with the SEC has been automatically suspended pursuant to
Section 15(d) of the Securities Exchange Act of 1934 since October 1, 2003, we
will continue to file such reports in accordance with the indenture.
Other Uses of Cash. We anticipate that capital expenditures for Fiscal 2006 will
approximate $8,000 and will be primarily for the acquisition of technical
equipment and vehicles to support ongoing operations across our stations as well
as for the implementation of full power DTV service in our two remaining
markets. We expect that the source of funds for these anticipated capital
expenditures will be cash provided by operations and borrowings under the senior
credit facility. Capital expenditures during the nine months ended June 30, 2006
totaled $6,437.
Based upon our current level of operations, we believe that available cash,
together with cash flows generated by operating activities and amounts available
under the senior credit facility, will be adequate to meet our anticipated
future requirements for working capital, capital expenditures and scheduled
payments of interest on our debt.
New Accounting Standards
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes." FIN
48 clarifies the accounting for uncertainty in income taxes by prescribing a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. FIN 48 is effective for our fiscal year ending September 30, 2008.
We are currently evaluating the impact, if any, that FIN 48 may have on our
financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At June 30, 2006, we had other financial instruments consisting primarily of
long-term fixed interest rate debt. Such debt, with future principal payments of
$455,000, matures December 15, 2012. At June 30, 2006, the carrying value of
such debt was $452,748, the fair value was approximately $450,000 and the
interest rate was 7 3/4%. The fair market value of long-term fixed interest rate
debt is subject to interest rate risk. Generally, the fair market value of fixed
interest rate debt will increase as interest rates fall and decrease as interest
rates rise. We estimate the fair value of our long-term debt by using quoted
market prices, as available, or by discounting the required future cash flows
under our debt using borrowing rates currently available to us. We actively
monitor the capital markets in analyzing our capital raising decisions.
14
Item 4. Controls and Procedures
The Company has performed an evaluation of its disclosure controls and
procedures (as defined by Exchange Act rule 15d-15(e)) as of June 30, 2006.
Based on this evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the disclosure controls and procedures are
effective in providing reasonable assurances that material information required
to be in this Form 10-Q is made known to them by others on a timely basis.
There were no changes in the Company's internal control over financial reporting
during the quarter ended June 30, 2006 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We currently and from time to time are involved in litigation incidental to the
conduct of our business, including suits based on defamation and employment
activity. We are not currently a party to any lawsuit or proceeding which, in
our opinion, is reasonably expected to have a material adverse effect on our
consolidated financial condition, results of operations or cash flows.
Item 6. Exhibits
See Exhibit Index on pages 17-19.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLBRITTON COMMUNICATIONS COMPANY
(Registrant)
August 11, 2006 /s/ Robert L. Allbritton
- ------------------------- -------------------------------------
Date Name: Robert L. Allbritton
Title: Chairman and Chief
Executive Officer
August 11, 2006 /s/ Stephen P. Gibson
- ------------------------- -------------------------------------
Date Name: Stephen P. Gibson
Title: Senior Vice President
and Chief Financial Officer
16
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
1.1 Purchase Agreement dated December 6, 2002 by and among *
ACC, Deutsche Bank Securities Inc. and Fleet Securities,
Inc. (Incorporated by reference to Exhibit 1 of the
Company's Form 10-K, No. 333-02302, dated December 17,
2002)
1.2 Purchase Agreement dated January 28, 2003 by and among *
ACC, Deutsche Bank Securities Inc. and Fleet Securities,
Inc. (Incorporated by reference to Exhibit 1.2 of the
Company's Quarterly Report on Form 10-Q, No. 333-02302,
dated February 3, 2003)
3.1 Certificate of Incorporation of ACC. (Incorporated by *
reference to Exhibit 3.1 of Company's Registration
Statement on Form S-4, No. 333-02302, dated March 12,
1996)
3.2 Bylaws of ACC. (Incorporated by reference to Exhibit 3.2 *
of Registrant's Registration Statement on Form S-4, No.
333-02302, dated March 12, 1996)
4.1 Indenture dated as of December 20, 2002 between ACC and *
State Street Bank and Trust Company, as Trustee, relating
to the 7 3/4% Senior Subordinated Notes due 2012.
(Incorporated by reference to Exhibit 4.1 of the
Company's Report on Form 8-K, No. 333-02302, dated
December 23, 2002)
4.2 Supplemental Indenture dated as of February 6, 2003 *
between ACC and U.S. Bank National Association
(successor-in-interest to State Street Bank and Trust
Company), as Trustee, to the Indenture dated as of
December 20, 2002 between ACC and State Street Bank and
Trust Company, as Trustee, relating to the 7 3/4% Senior
Subordinated Notes due 2012. (Incorporated by reference
to Exhibit 4.1 of the Company's Report on Form 8-K, No.
333-02302, dated February 6, 2003)
4.3 Form of 7 3/4% Series B Senior Subordinated Notes due *
2012. (Incorporated by reference to Exhibit 4.7 of the
Company's Quarterly Report on Form 10-Q, No. 333-02302,
dated February 3, 2003)
4.4 Credit Agreement dated as of August 23, 2005 by and among *
ACC, certain financial institutions, and Bank of America,
N.A., as the Administrative Agent, and Deutsche Bank
Securities Inc., as the Syndication Agent. (Incorporated
by reference to Exhibit 4.1 of the Company's Report on
Form 8-K, No. 333-02302, dated August 23, 2005)
17
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
10.1 Registration Rights Agreement by and among ACC, Deutsche *
Bank Securities Inc. and Fleet Securities Inc. dated
December 20, 2002. (Incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q, No.
333-02302, dated February 3, 2003)
10.2 Registration Rights Agreement by and among ACC, Deutsche *
Bank Securities Inc. and Fleet Securities Inc. dated
February 6, 2003. (Incorporated by reference to Exhibit
10.2 of the Company's Registration Statement on Form S-4,
No. 333-02302, dated April 11, 2003)
10.3 Primary Television Affiliation Agreement (WSET, *
Incorporated) (with a schedule attached for other
stations' substantially identical affiliation
agreements). (Incorporated by reference to Exhibit 10.3
of the Company's Quarterly Report on Form 10-Q, No.
333-02302, dated May 13, 2004)**
10.4 Tax Sharing Agreement effective as of September 30, 1991 *
by and among Perpetual Corporation, ACC and ALLNEWSCO,
Inc., amended as of October 29, 1993. (Incorporated by
reference to Exhibit 10.11 of Company's Registration
Statement on Form S-4, No. 333-02302, dated March 12,
1996)
10.5 Second Amendment to Tax Sharing Agreement effective as of *
October 1, 1995 by and among Perpetual Corporation, ACC
and ALLNEWSCO, Inc. (Incorporated by reference to Exhibit
10.9 of the Company's Form 10-K, No. 333-02302, dated
December 22, 1998)
10.6 Master Equipment Lease Agreement dated as of November 22, *
2000 between Fleet Capital Corporation and ACC.
(Incorporated by reference to Exhibit 10.19 of the
Company's Form 10-K, No. 333-02302, dated December 28,
2000)
10.7 Pledge Agreement dated as of August 23, 2005 by and among *
ACC, Allbritton Group, Inc., Allfinco, Inc., and Bank of
America, N.A., as Agent. (Incorporated by reference to
Exhibit 10.1 of the Company's Report on Form 8-K, No.
333-02302, dated August 23, 2005)
10.8 Unlimited Guaranty dated as of August 23, 2005 by each of *
the subsidiaries of ACC in favor of Bank of America,
N.A., as Administrative Agent. (Incorporated by reference
to Exhibit 10.2 of the Company's Report on Form 8-K, No.
333-02302, dated August 23, 2005)
10.9 Collateral Assignment of Proceeds and Security Agreement *
dated as of August 23, 2005 by and among certain
subsidiaries of ACC and Bank of America, N.A., as Agent.
(Incorporated by reference to Exhibit 10.3 of the
Company's Report on Form 8-K, No. 333-02302, dated August
23, 2005)
18
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
14. Code of Ethics for Senior Financial Officers. *
(Incorporated by reference to Exhibit 14 of the Company's
Form 10-K, No. 333-02302, dated December 12, 2003)
31.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended.
31.2 Certification of Senior Vice President and Chief
Financial Officer pursuant to Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended.
- -----------------
*Previously filed
**Portions have been omitted pursuant to a request for confidential treatment
19