UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission File No. 333-02302
ALLBRITTON COMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
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)
Securities registered pursuant to Section 12(b) of the Act: None
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 |_| NO |X|
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 |X| NO |_|
Indicate by check mark whether this 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 if the 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 registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
|X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |X| Smaller reporting company |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES |_| NO |X|
The aggregate market value of the registrant's Common Stock held by
non-affiliates is zero.
As of December 19, 2008, there were 20,000 shares of Common Stock, par value
$.05 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
_______________
(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, 2008, but the Company has agreed
under the terms of certain long-term debt to continue these filings in the
future.
As used herein, the terms "Allbritton," "our," "us," "we" or the "Company" refer
to Allbritton Communications Company and its subsidiaries, and "ACC" refers
solely to Allbritton Communications Company. Depending on the context in which
they are used, the following "call letters" refer either to the corporate owner
of the station indicated or to the station itself: "WJLA" and "NewsChannel 8"
together refer to WJLA-TV/NewsChannel 8, a division of ACC (operator of WJLA-TV
and NewsChannel 8, Washington, D.C.); "WHTM" refers to Harrisburg Television,
Inc. (licensee of WHTM-TV, Harrisburg, Pennsylvania); "KATV" refers to KATV, LLC
(licensee of KATV, Little Rock, Arkansas); "KTUL" refers to KTUL, LLC (licensee
of KTUL, Tulsa, Oklahoma); "WCIV" refers to WCIV, LLC (licensee of WCIV,
Charleston, South Carolina); "WSET" refers to WSET, Incorporated (licensee of
WSET-TV, Lynchburg, Virginia); "WCFT," "WBMA" and "WJSU" refer to TV Alabama,
Inc. (licensee of WCFT-TV, Tuscaloosa, Alabama, WBMA-LP, Birmingham, Alabama and
WJSU-TV, Anniston, Alabama). The term "Politico" refers to Capitol News Company,
LLC. The term "ACCLI" refers to ACC Licensee, Inc. (licensee of WJLA). The term
"ATP" refers to Allbritton Television Productions, Inc. and the term "Perpetual"
refers to Perpetual Corporation, which is controlled by Joe L. Allbritton and
his immediate family or trusts for their benefit ("the Allbritton family").
"AGI" refers to Allbritton Group, Inc., which is controlled by Perpetual and is
ACC's parent. "Allfinco" refers to Allfinco, Inc., a wholly-owned subsidiary of
ACC and parent company of Harrisburg Television, Inc. and TV Alabama, Inc.
TABLE OF CONTENTS
Page
--------
Part I
Item 1. Business............................................... 1
Item 1A. Risk Factors........................................... 20
Item 1B. Unresolved Staff Comments.............................. 25
Item 2. Properties............................................. 25
Item 3. Legal Proceedings...................................... 27
Item 4. Submission of Matters to a Vote of Security Holders.... 27
Part II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities.................................... 27
Item 6. Selected Consolidated Financial Data................... 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 30
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk................................................. 48
Item 8. Consolidated Financial Statements and Supplementary
Data................................................. 48
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 49
Item 9A. Controls and Procedures................................ 49
Item 9B. Other Information...................................... 49
Part III
Item 10. Directors, Executive Officers and Corporate Governance. 50
Item 11. Executive Compensation................................. 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters........... 56
Item 13. Certain Relationships and Related Transactions, and
Director Independence................................ 57
Item 14. Principal Accounting Fees and Services................. 59
Part IV
Item 15. Exhibits, Financial Statement Schedules................ 60
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING ITEM 7 "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.
PART I
ITEM 1. OUR BUSINESS
The Company
We own and operate ABC network-affiliated television stations serving
seven geographic markets: WJLA in Washington, D.C.; WCFT in Tuscaloosa, Alabama,
WJSU in Anniston, Alabama and WBMA-LP, a low power television station licensed
to Birmingham, Alabama (we operate WCFT and WJSU in tandem with WBMA-LP serving
the viewers of the Birmingham, Tuscaloosa and Anniston market as a single
programming source); WHTM in Harrisburg, Pennsylvania; KATV in Little Rock,
Arkansas; KTUL in Tulsa, Oklahoma; WSET in Lynchburg, Virginia; and WCIV in
Charleston, South Carolina. Our owned and operated stations broadcast to the
9th, 40th, 41st, 56th, 61st, 67th and 99th largest national media markets in the
United States, respectively, as defined by The Nielsen Company ("Nielsen"), and
reach approximately 5% of United States television households. We also own
NewsChannel 8, which provides 24-hour per day basic cable television programming
primarily focused on regional and local news for the Washington, D.C.
metropolitan area. Additionally, in January 2007 we launched Politico, a
specialized newspaper and Internet site (politico.com) that serves Congress,
1
congressional staffers and those interested in the actions of our national
legislature and the political electoral process. The operations of NewsChannel 8
and Politico are integrated with WJLA.
Our stations are owned and operated by ACC (WJLA-TV/NewsChannel 8),
Harrisburg Television, Inc. (WHTM), KATV, LLC (KATV), KTUL, LLC (KTUL), WSET,
Incorporated (WSET), WCIV, LLC (WCIV) and TV Alabama, Inc. (WCFT, WJSU and
WBMA). Each company other than ACC is either a directly or indirectly
wholly-owned subsidiary of ACC. The Company was founded in 1974 and is a
subsidiary of AGI, which is controlled by Perpetual Corporation, which in turn
is controlled by the Allbritton family. ACC and its subsidiaries are Delaware
corporations or limited liability companies. Our corporate headquarters are
located at 1000 Wilson Boulevard, Suite 2700, Arlington, VA 22209, and our
telephone number at that address is (703) 647-8700.
Television Industry Background
General. Commercial television broadcasting began in the United States on
a regular basis in the 1940s. Currently, there are a limited number of channels
available for broadcasting in any one geographic area, and the license to
operate a broadcast television station is granted by the FCC. Based upon
interference criteria developed by the FCC, licenses are allocated in channels
of 6 MHz each in either the VHF band (channels 2-13) or the UHF band (channels
14-69) of the spectrum. All television stations in the country are grouped by
Nielsen into 210 generally recognized television markets that are ranked in size
based upon actual or potential audience. Each of these markets, called
"Designated Market Areas" or "DMAs," is designated as an exclusive geographic
area consisting of all counties whose largest viewing share is given to stations
of that same market area. Nielsen regularly publishes data on estimated
audiences for the television stations in each DMA, which data is a significant
factor in determining our advertising rates.
Revenue. Television station revenues are primarily derived from local,
regional and national advertisers who pay for commercial advertising time and,
to a much lesser extent, from networks and program syndicators for the broadcast
of programming and from other broadcast-related activities, including
retransmission consent fees from multi-channel, video program distributors
("MVPDs") such as cable television operators, direct broadcast satellite ("DBS")
providers and telephone company ("telco") operators.
Advertising rates for television commercials are set based upon a variety
of factors, including:
o the size and demographic makeup of the market served by the station;
o a program's popularity among viewers whom an advertiser wishes to
attract;
o the number of advertisers competing for the available time;
o the availability of alternative advertising media in the market area;
o a station's overall ability to attract viewers in its market area; and
o the station's ability to attract viewers among particular demographic
groups that an advertiser may be targeting.
2
Advertising rates are also affected by an aggressive and knowledgeable
sales force and the development of projects, features and programs that tie
advertiser messages to programming. Because broadcast television stations rely
on advertising revenues, they are sensitive to cyclical changes in the economy.
The size of advertisers' budgets, which are affected by broad economic trends,
affect both the broadcast industry in general and the revenues of individual
broadcast television stations.
Broadcast television stations compete for local and national advertising
revenues with other television stations in their respective markets as well as
with other advertising media, such as newspapers, radio, magazines, outdoor
advertising, transit advertising, Internet/website, yellow page directories,
direct mail and local cable systems. In addition, our stations compete for
national advertising revenues with broadcast and cable television networks,
program syndicators and Internet websites.
Advertising revenue for television stations is generally seasonal due to,
among other things, increases in retail advertising in the period leading up to
and including the holiday season and active advertising in the spring.
Additionally, advertising revenue is cyclical, benefiting in even-numbered
calendar years from advertising placed by candidates for political offices and
issue-oriented advertising, and demand for advertising time in Olympic
broadcasts. The seasonality and cyclicality inherent in our business can make it
difficult to estimate future operating results based on the previous results of
any specific quarter.
Additional revenues are generated from advertising produced by television
stations' Internet websites. Sponsorships of web pages or sections as well as
general advertising banners account for a relatively small but growing portion
of revenues.
Audience Measurement. Nielsen, which provides audience-measuring services,
periodically publishes data on estimated audiences for television stations in
the various DMAs throughout the country. These estimates are expressed in terms
of both the percentage of the total potential audience in the DMA viewing a
station (the station's "rating") and the percentage of the audience actually
watching television (the station's "share"). Nielsen provides such data on the
basis of total television households and selected demographic groupings in the
DMA. Nielsen uses three methods of determining a station's ratings and share. In
most larger DMAs, ratings are determined by a combination of meters connected
directly to selected household television sets and weekly viewer-completed paper
diaries of television viewing (so called "set meter" measurement), while in
smaller markets ratings are determined by paper diaries only. A select number of
the largest markets are measured by people meter technology (so called "local
people meter" measurement). The local people meter records individual viewing
behavior in real time, producing viewer demographic data on a daily basis. Of
the market areas in which we conduct business, Birmingham, Alabama and Tulsa,
Oklahoma are set metered markets while Washington, D.C. is a local people
metered market. The remaining markets are paper diary markets. Nielsen has
announced its intention to convert all set metered markets to local people meter
measurement and to convert all of the top 125 markets still using paper diaries
to a new "mailable meter" form of electronic measurement; however, we do not
anticipate any changes in audience measurement methodologies in our markets
during Fiscal 2009.
3
Programming
Network. Historically, three major broadcast networks--ABC, NBC and
CBS--dominated broadcast television. In the past two decades, FOX has evolved
into the fourth major network, although the hours of network programming
produced by FOX for its affiliates are fewer than those produced by the other
three major networks. In addition, CW, ION and myNetworkTV have been launched as
new broadcast television networks, along with specialized networks, Telemundo,
Univision and TV Azteca.
The affiliation by a station with one of the four major networks has a
significant impact on the composition of the station's programming, revenues,
expenses and operations. A typical affiliate station receives approximately 9 to
13 hours of each day's programming from the network. This programming, along
with cash payments ("network compensation") in some instances, is provided to
the affiliate by the network in exchange for a substantial majority of the
advertising time sold during the airing of network programs. The network then
sells this advertising time for its own account. The affiliate retains the
revenues from time sold during breaks in and between network programs and during
programs produced by the affiliate or purchased from non-network sources.
An affiliate of CW, myNetworkTV or ION network receives a smaller portion
of each day's programming from its network compared to an affiliate of ABC, CBS,
NBC or FOX. As a result, affiliates of CW, myNetworkTV or ION network must
purchase or produce a greater amount of their programming, resulting in
generally higher programming costs. These stations, however, retain a larger
portion of the inventory of advertising time and the revenues obtained therefrom
compared to stations affiliated with the major networks, which may partially
offset their higher programming costs.
In contrast to a network affiliated station, an independent station
purchases or produces all of the programming that it broadcasts, generally
resulting in higher programming costs, although the independent station is, in
theory, able to retain its entire inventory of advertising time and all of the
revenue obtained from the sale of such time. Barter and cash-plus-barter
arrangements, however, have become increasingly popular among all stations.
Traditional network programming generally achieves higher audience levels
than syndicated programs aired by independent stations. However, as greater
amounts of advertising time are retained and available for sale by FOX
affiliates, smaller network affiliates and independent stations, those stations
typically achieve a share of the television market advertising revenues greater
than their share of the market area's audience. Consolidation of cable system
ownership in discrete markets (so-called "clustering") has enabled some cable
operators to more efficiently sell time to local advertisers as well as to bid
on local sports programming in competition with traditional broadcasters.
Public broadcasting outlets in many instances have relationships with the
national Public Broadcasting Network and with state-funded regional networks.
These networks are non-profit and "non-commercial," but are permitted to seek
some commercial funding through "enhanced
4
underwriting" rules promulgated by the FCC. In most communities, these stations
compete with commercial broadcasters for viewers but not directly for
advertising dollars.
Non-Network. To supplement programming offered by a network or to program
the station as an independent, a television broadcaster may acquire programming
through cash or barter arrangements. A cash license fee is paid to a program
distributor for "first run" syndicated programming (such as "The Oprah Winfrey
Show" or "Jeopardy") sold independent of network affiliation or syndicated
"off-network" programs, commonly referred to as "reruns." Under such license
agreements, stations retain a majority of the commercial availabilities in the
programs. Under barter arrangements, a national program distributor can receive
advertising time in exchange for the programming it supplies, with the station
paying no fee or a reduced fee for such programming.
Program Distribution. Through the 1970s, network television broadcasting
enjoyed virtual dominance in viewership and television advertising revenues
because network-affiliated stations only competed with each other in local
markets. Beginning in the 1980s, this level of dominance began to change as the
FCC authorized more local stations and marketplace choices expanded with the
growth of independent stations and cable television services.
Cable television systems were first constructed in significant numbers in
the 1970s and were initially used to retransmit broadcast television programming
to paying subscribers in areas with poor broadcast signal reception. In the
aggregate, cable-originated programming has emerged as a significant competitor
for viewers of broadcast television programming, although no single cable
programming network regularly attains audience levels amounting to more than a
small fraction of any of the major broadcast networks. The advertising share of
cable networks has steadily increased since the 1970s as a result of the growth
in cable penetration (the percentage of television households that are connected
to a cable system) and the increase in the number of new cable networks.
Notwithstanding such increases in cable viewership and advertising, over-the-air
broadcasting remains the predominant distribution system for mass market
television advertising.
Cable system operators have traditionally enjoyed near monopoly status as
terrestrial distributors of multi-channel programming. "Overbuilders" (competing
local distributors in the same local franchise area) were rare based upon the
high costs associated with the cable system infrastructure. Recently, however,
some telcos have begun using their fiber optic facilities to begin offering
multi-channel programming in competition with the local franchised cable
systems. These telcos seek program carriage arrangements with local broadcasters
and other national program distributors.
In the 1990s, DBS service was introduced as a new competitive distribution
method. Home users purchase or lease satellite dish receiving equipment and
subscribe to a monthly service of programming options. Local stations, under
specified conditions, are carried on satellites which then retransmit those
signals back to the originating market. As DBS providers, such as DirecTV and
DISH Network, continue to expand their facilities, an increasing number of local
stations will be carried as "local-to-local" signals, aided by a legal
requirement that mandates the carriage
5
of all local broadcast signals if one is retransmitted. All of our stations are
currently carried on the two primary DBS systems.
We believe that the market shares of television stations affiliated with
ABC, NBC and CBS declined since the 1980s because of the emergence of FOX and
certain strong independent stations and because of increased MVPD penetration.
Affiliates of the minor networks have emerged as viable competitors for
television viewership share, particularly as a result of the availability of
first-run, major network-quality and regional sports programming.
In addition to cable and satellite programming, there has been substantial
growth in video recording technology and playback systems, television game
devices and new wireless/Internet connected devices permitting "podcasting,"
wireless video distribution systems, satellite master antenna television systems
and some low-power services. In addition, local broadcast stations themselves
may now use excess capacity within their digital television channel to
"multicast" discrete program offerings. This has further expanded the number of
programming alternatives available to household audiences, along with
non-broadcast alternatives, especially with respect to news, available over the
rapidly expanding Internet. Video programming via the Internet is now emerging
as an option for viewers who wish to see full-length episodes of broadcast shows
or brief clips of alternative fare on computers or other video devices. Each of
the major broadcast networks offer "video player" buttons on their websites or
those of broadcast affiliates. In addition, multiple Internet sites such as
YouTube.com offer alternative video programming. It is uncertain at this time
whether and to what extent those new services will be a measurable competitor to
us.
Terrestrially-distributed television broadcast stations traditionally used
analog transmission technology. Recent advances in digital transmission
technology formats have enabled broadcasters to begin migration from analog to
digital broadcasting. Digital technologies provide cleaner video and audio
signals as well as the ability to transmit "high definition television" with
theater screen aspect ratios, higher resolution video and "noise-free" sound.
Digital transmission also permits dividing the transmission frequency into
multiple discrete channels of standard definition television. The FCC has
authorized a transition plan to convert existing analog stations to digital by
temporarily offering a second channel to transmit programming digitally with the
return of the analog channel after the transition period. See "Legislation and
Regulation--Digital Television." All of our full power stations broadcast with
both an analog and digital signal.
Competition
Competition in the television industry, including each of the market areas
in which our stations compete, takes place on several levels: competition for
audience, competition for programming (including news) and competition for
advertisers. Additional factors material to a television station's competitive
position include signal coverage and assigned frequency. The television
broadcasting industry is continually faced with technological change and
innovation, the possible rise or fall in popularity of competing entertainment
and communications media and actions of federal regulatory bodies, including the
FCC, any of which could possibly have a material adverse effect on our
operations.
6
Audience. Stations compete for audience on the basis of program
popularity, which has a direct effect on advertising rates. A substantial
portion of the daily programming at our stations is supplied by the ABC network.
In those periods, the stations are totally dependent upon the performance of the
ABC network programs in attracting viewers. Non-network time periods are
programmed by the station with a combination of self-produced news, public
affairs and entertainment programming, including news and syndicated programs
purchased for cash, cash and barter or barter-only. Minor network stations, the
number of which has increased significantly over the past decade, have also
emerged as viable competitors for television viewership share, particularly as
the result of the availability of first-run major network-quality programming.
The development of methods of television transmission other than
over-the-air broadcasting and, in particular, the growth of MVPDs has
significantly altered competition for audience share in the television industry.
These alternative transmission methods can increase competition for a
broadcasting station both by bringing into its market area distant broadcasting
signals not otherwise available to the station's audience and by serving as a
distribution system for programming originated on the cable or DBS systems.
Although historically cable operators have not sought to compete with broadcast
stations for a share of the local news audience, cable operators have made
recent inroads to this market as well, particularly in the area of local sports
channels. Increased competition for local audiences could have an adverse effect
on our advertising revenues.
Other sources of competition include home entertainment systems (including
video recording and playback systems, television game devices and new
wireless/Internet connected devices permitting "podcasting"), wireless video
distribution systems, satellite master antenna television systems and some
low-power services. In addition, local broadcast stations themselves may now use
excess capacity within their digital television channel to "multicast" discrete
program offerings. Programming alternatives, especially news, available on the
Internet also provide non-broadcast alternatives available to the potential
broadcast television audience. Video programming via the Internet is now also
emerging as an option for viewers who wish to see full-length episodes of
broadcast shows or brief clips of alternative fare on computers or other video
devices. Each of the major broadcast networks offer "video player" buttons on
their websites or those of broadcast affiliates. In addition, multiple Internet
sites such as YouTube.com offer alternative video programming.
Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques now under development
for use with current cable channels, Internet-relayed video and direct broadcast
satellites are expected to reduce the bandwidth required for television signal
transmission. These compression techniques, as well as other technological
developments, are applicable to all video delivery systems, including
over-the-air broadcasting, and have the potential to provide vastly expanded
programming to highly targeted audiences. Reduction in the cost of creating
additional channel capacity could lower entry barriers for new channels and
encourage the development of increasingly specialized niche programming. This
ability to reach very defined audiences is expected to alter the competitive
dynamics for advertising expenditures. We are unable to predict the effect that
technological changes will have on the broadcast television industry or the
future results of our operations.
7
Programming. Competition for programming involves negotiating with
national program distributors or syndicators which sell first-run and rerun
packages of programming. Our stations compete against in-market broadcast
station competitors for off-network reruns (such as "Seinfeld") and first-run
products (such as "The Oprah Winfrey Show") for exclusive access to those
programs. Cable systems generally do not compete with local stations for
programming; however, local cable operators are increasingly consolidating
ownership of systems within various markets, enabling them to bid on local
sports programming in competition with traditional broadcasters. In addition,
various national cable networks from time to time have acquired programs that
would have otherwise been offered to local television stations. Competition for
exclusive news stories and features is also endemic to the television industry.
Advertising. Advertising rates are set based upon a variety of factors,
including the size and demographic makeup of the market served by the station, a
program's popularity among viewers whom an advertiser wishes to attract, the
number of advertisers competing for the available time, the availability of
alternative advertising media in the market area, a station's overall ability to
attract viewers in its market area and the station's ability to attract viewers
among particular demographic groups that an advertiser may be targeting.
Advertising rates are also affected by an aggressive and knowledgeable sales
force and the development of projects, features and programs that tie advertiser
messages to programming. Our television stations compete for local and national
advertising revenues with other television stations in their respective markets
as well as with other advertising media, such as newspapers, radio, magazines,
outdoor advertising, transit advertising, yellow page directories, direct mail
and local cable systems. In addition, our stations compete for national
advertising revenues with broadcast and cable television networks, program
syndicators and Internet websites. Competition for advertising dollars in the
broadcasting industry occurs primarily in individual market areas. Generally, a
broadcast television station in one market does not compete with stations in
other market areas. Our television stations are located in highly competitive
market areas.
8
Station Information
The following table sets forth general information for each of our owned
stations as of May 2008, unless otherwise indicated:
Post- Total
Transition Market Commercial
Analog Digital Rank Competitors Station Rank in
Designated Network Channel Channel or DMA in Market Audience Market Acquisition
Market Area Station Affiliation Frequency Allocation <F1> <F2> Share<F3> <F4> Date
----------- ------- ----------- --------- ---------- ------ ----------- --------- ------- -----------
Washington, D.C. WJLA ABC 7/VHF 7 9 6 25% 1 01/29/76
Birmingham
(Anniston and
Tuscaloosa),
AL <F5> WBMA/WCFT/WJSU ABC -- -- 40 6 24% 2 --
Birmingham WBMA ABC 58/UHF -- -- -- -- -- 08/01/97
Anniston WJSU ABC 40/UHF 9 -- -- -- -- 03/22/00<F6>
Tuscaloosa WCFT ABC 33/UHF 33 -- -- -- -- 03/15/96
Harrisburg-
Lancaster-York-
Lebanon, PA WHTM ABC 27/UHF 10 41 5 24% 2 03/01/96
Little Rock, AR KATV ABC 7/VHF 22 56 5 31% 1 04/06/83
Tulsa, OK KTUL ABC 8/VHF 10 61 6 24% 2 04/06/83
Roanoke-
Lynchburg, VA WSET ABC 13/VHF 13 67 4 23% 2 01/29/76<F7>
Charleston, SC WCIV ABC 4/VHF 34 99 4 18% 3 01/29/76<F7>
<FN>
_______________
<F1> Represents market rank based on the U.S. Television Household Estimates
published by Nielsen in September 2008.
<F2> Represents the total number of commercial broadcast television stations in
the DMA with an audience share of at least 1% in the 6:00 a.m. to 2:00
a.m., Sunday through Saturday, time period, based on the Nielsen Station
Index for May 2008.
<F3> Represents the station's share of total viewing of commercial broadcast
television stations in the DMA for the time period of 6:00 a.m. to 2:00
a.m., Sunday through Saturday, based on the Nielsen Station Index for May
2008.
<F4> Represents the station's rank in the DMA based on its share of total
viewing of commercial broadcast television stations in the DMA for the time
period of 6:00 a.m. to 2:00 a.m., Sunday through Saturday, based on the
Nielsen Station Index for May 2008.
<F5> TV Alabama serves the Birmingham market by simultaneously broadcasting
identical programming over WBMA, WCFT and WJSU. The stations are listed on
a combined basis by Nielsen as WBMA+, the call sign of the low power
television station.
<F6> We began programming WJSU pursuant to a local marketing agreement in
December 1995. In connection with the local marketing agreement, we entered
into an option to purchase the assets of WJSU. We exercised our option to
acquire WJSU and completed our acquisition of WJSU on March 22, 2000. See
"Owned Stations--WBMA/WCFT/WJSU:
Birmingham (Anniston and Tuscaloosa), Alabama."
<F7> WSET and WCIV have been indirectly owned and operated by the Allbritton
family since 1976. On March 1, 1996, WSET and WCIV became wholly-owned
subsidiaries of ACC.
</FN>
9
Business and Operating Strategy
Our business strategy is to focus on building net operating revenues and
net cash provided by operating activities. We intend to pursue selective
acquisition or other expansion opportunities as they arise. Our acquisition
strategy is to target network-affiliated television stations where we believe we
can successfully apply our operating strategy and where such stations can be
acquired on attractive terms. Targets include stations in midsized growth
markets with what we believe to be advantageous business climates. Although we
continue to review strategic investment and acquisition opportunities, no
agreements or understandings are currently in place regarding any material
investments or acquisitions.
In addition, we continually seek to enhance net operating revenues at a
marginal incremental cost through our use of existing personnel and programming
capabilities. The broadcast and cable news services of WJLA and NewsChannel 8
are fully integrated along with Politico. This combination represents the first
and only broadcast/cable/print triopoly in the Nation's Capital.
We have also sought to make use of the excess capacity of our digital
broadcast channels. All but two of our stations operate local weather channels
using this digital spectrum, and four of our stations are affiliated with the
Retro Television Network ("RTN") which supplies classic, off network programming
which is packaged together in an "oldies" television format.
Our operating strategy focuses on four key elements:
Local News and Community Leadership. Our stations strive to be local news
leaders to exploit the revenue potential associated with local news leadership.
Since the acquisition of each station, we have focused on building that
station's local news programming franchise as the foundation for building
significant audience share. In each of our market areas, we develop additional
information-oriented programming designed to expand the stations' hours of
commercially valuable local news and other programming with relatively small
incremental increases in operating expenses. Local news programming is
commercially valuable because of its high viewership level, the attractiveness
to advertisers of the demographic characteristics of the typical news audience
(allowing stations to charge higher rates for advertising time) and the enhanced
ratings of other programming in time periods adjacent to the news. In addition,
we believe strong local news product has helped differentiate local broadcast
stations from the increasing number of cable programming competitors that
generally do not provide this material.
High Quality Non-Network Programming. Our stations are committed to
attracting viewers through an array of syndicated and locally-produced
programming to fill those periods of the broadcast day not programmed by the
network. This programming is selected by us based on its ability to attract
audiences highly valued in terms of demographic makeup on a cost-effective basis
and reflects a focused strategy to migrate and hold audiences from program to
program throughout dayparts. Audiences highly valued in terms of demographic
makeup include women aged 18-49 and all adults aged 25-54. These demographic
groups are perceived by advertisers as the groups with the majority of buying
authority and decision-making in product selection.
10
Local Sales Development Efforts. We believe that television stations with
a strong local presence and active community relations can realize additional
revenue from advertisers through the development and promotion of special
programming and community events as well as through expanded production of
regularly scheduled local news and information programming. Each of our stations
has developed such additional products, including high quality programming of
local interest and sponsored community events. Such sponsored events have
included health fairs, contests, job fairs, parades and athletic events and have
provided advertisers, who are offered participation in such events, an
opportunity to direct a marketing program to targeted audiences. These
additional local interest programs and sponsored community events have proven
successful in attracting incremental local advertising revenues. The stations
also seek to maximize their local sales efforts through the use of extensive
research and targeted demographic studies.
Cost Control. We believe that controlling costs is an essential factor in
achieving and maintaining the profitability of our stations. We believe that by
delivering highly targeted audience levels and controlling programming and
operating costs, our stations can achieve increased levels of revenue and
operating cash flow. Each station rigorously manages its expenses through a
budgetary control process and project accounting, which include an analysis of
revenue and programming costs by daypart. Moreover, each station closely
monitors its staffing levels.
Owned Stations
WJLA/NewsChannel 8/Politico: Washington, D.C.
Acquired by ACC in 1976, WJLA is an ABC network affiliate pursuant to an
affiliation agreement that expires on December 31, 2012. The station's FCC
license (held by ACCLI) expires on October 1, 2012. Washington, D.C. is the
ninth largest DMA, with approximately 2,322,000 television households. We
believe that stations in this market generally earn higher advertising rates
than stations in smaller markets because many national advertising campaigns
concentrate their spending in the top ten media markets and on issue-oriented
advertising in Washington, D.C. The Washington, D.C. market is served by six
commercial television stations.
On September 16, 2002, ACC acquired the operations of NewsChannel 8, which
provides 24-hour per day basic cable television programming primarily focused on
regional and local news for the Washington, D.C. metropolitan area. NewsChannel
8 is party to affiliation agreements with cable operators and other terrestrial
MVPDs for the carriage of its programming to subscribers. Each of the cable
operator affiliation agreements has an expiration date of December 31, 2011.
In January 2007, we launched Politico, a specialized newspaper and
Internet site (politico.com) that serves Congress, congressional staffers and
those interested in the actions of our national legislature and political
electoral process. Politico is advertising supported, with free, targeted
distribution of over 25,000 print copies per issue. Publication has been
generally three times per week when Congress is in session and once per week
when Congress is in recess.
11
In-session publication is planned to increase to four times per week beginning
in January 2009. Print and other original content is continuously available
without charge on politico.com.
The operations of NewsChannel 8 and Politico are integrated with those of
WJLA in its studio and office facility, creating the first broadcast/cable/print
triopoly in the Nation's Capital. The combination of these three operations
allows for certain operational efficiencies, primarily in the areas of
newsgathering, administration, finance, operations, promotions and human
resources.
WBMA/WCFT/WJSU: Birmingham (Anniston and Tuscaloosa), Alabama
We acquired WCFT in March 1996 and WJSU in March 2000 after previously
programming the station pursuant to a time brokerage agreement. We also own a
low power television station licensed to Birmingham, Alabama (WBMA).
We serve the Birmingham market by simultaneously transmitting identical
programming from our studio in Birmingham over WCFT, WJSU and WBMA. The stations
are listed on a combined basis by Nielsen as WBMA+. TV Alabama maintains studio
facilities in Birmingham for the operation of the stations. We have retained a
news and sales presence in both Tuscaloosa and Anniston, while at the same time
maintaining our primary news and sales presence in Birmingham. The ABC network
affiliation is based upon carriage on both WCFT and WJSU and expires on December
31, 2012. The FCC licenses for the three stations expire on April 1, 2013. In
October 1998, Nielsen collapsed the Tuscaloosa DMA and the Anniston DMA into the
Birmingham DMA creating what is now the 40th largest DMA with approximately
740,000 television households. The Birmingham DMA is served by six commercial
television stations.
WHTM: Harrisburg-Lancaster-York-Lebanon, Pennsylvania
Acquired by us in 1996, WHTM is an ABC network affiliate pursuant to an
affiliation agreement that expires on December 31, 2012. The station's FCC
license expired August 1, 2007. An application for license renewal has been
filed and is pending. The Harrisburg-Lancaster-York-Lebanon market, which
consists of ten contiguous counties located in central Pennsylvania, is the 41st
largest DMA, reaching approximately 739,000 television households. Harrisburg is
the capital of Pennsylvania, and the government represents the area's largest
employer. The Harrisburg market is served by five commercial television
stations, one of which is a VHF station.
KATV: Little Rock, Arkansas
Acquired by us in 1983, KATV is an ABC network affiliate pursuant to an
affiliation agreement that expires on December 31, 2012. The station's FCC
license expired on June 1, 2005. An application for license renewal has been
filed and is pending. The Little Rock market is the 56th largest DMA, with
approximately 567,000 television households. The Little Rock market has a
diversified economy, serving as the seat of both state and local government and
as home to numerous commercial businesses. The Little Rock market is served by
five commercial television stations.
12
KTUL: Tulsa, Oklahoma
Acquired by us in 1983, KTUL is an ABC network affiliate pursuant to an
affiliation agreement that expires on December 31, 2012. The station's FCC
license expires on June 1, 2014. Tulsa, Oklahoma is the 61st largest DMA, with
approximately 530,000 television households. The Tulsa market is served by six
commercial television stations.
WSET: Roanoke-Lynchburg, Virginia
Acquired by us in 1996, WSET has been indirectly owned and operated by the
Allbritton family since 1976. The station is an ABC network affiliate pursuant
to an affiliation agreement that expires on December 31, 2012. WSET's FCC
license expires on October 1, 2012. The hyphenated central Virginia market
comprised of Lynchburg, Roanoke and Danville is the 67th largest DMA, with
approximately 461,000 television households. The Lynchburg DMA is served by four
commercial television stations.
WCIV: Charleston, South Carolina
Acquired by us in 1996, WCIV has been indirectly owned and operated by the
Allbritton family since 1976. The station is an ABC affiliate pursuant to an
affiliation agreement that expires on December 31, 2012. WCIV's FCC license
expires on December 1, 2012. Charleston, South Carolina is the 99th largest DMA,
with approximately 308,000 television households. The Charleston DMA is served
by four commercial television stations.
Network Affiliation Agreements and Relationship
Each of our stations is an ABC affiliate with affiliation agreements that
expire on December 31, 2012. ABC has routinely renewed the affiliation
agreements with our stations; however, we cannot assure you that these
affiliation agreements will be renewed in the future or under the same general
terms. As one of the largest group owners of ABC network affiliates in the
nation, we believe that we enjoy excellent relations with the ABC network.
Generally, each affiliation agreement provides our stations with the right
to broadcast programs transmitted by the network that includes designated
advertising time, the revenue from which the network retains. For every hour or
fraction thereof that the station broadcasts network programming, the network
pays the station compensation, as specified in each affiliation agreement, or as
agreed upon by the network and the stations. Typically, prime-time programming
generates the highest hourly rates.
Legislation and Regulation
The ownership, operation and sale of television stations are subject to
the jurisdiction of the FCC under the Communications Act of 1934 (the
"Communications Act"). Matters subject to FCC oversight include the assignment
of frequency bands for broadcast television; the approval of a television
station's frequency, location and operating power; the issuance, renewal,
13
revocation or modification of a television station's FCC license; the approval
of changes in the ownership or control of a television station's licensee; the
regulation of equipment used by television stations; and the adoption and
implementation of regulations and policies concerning the ownership, operation,
programming and employment practices of television stations. The FCC has the
power to impose penalties, including fines or license revocations, upon a
licensee of a television station for violations of the FCC's rules and
regulations.
The following is a brief summary of certain provisions of the
Communications Act and of specific FCC regulations and policies affecting
broadcast television. Reference should be made to the Communications Act, FCC
rules and the public notices and rulings of the FCC for further information
concerning the nature and extent of FCC regulation of broadcast television
stations.
License Renewal. Broadcast television licenses are generally granted for
maximum terms of eight years. The main licenses are supported by various
"auxiliary" licenses for point-to-point microwave, remote location electronic
newsgathering and program distribution between the studio and transmitter
locations. License terms are subject to renewal upon application to the FCC, but
they may be renewed for a shorter period upon a finding by the FCC that the
"public interest, convenience and necessity" would be served thereby. Under the
Telecommunications Act of 1996 (the "Telecommunications Act"), the FCC must
grant a renewal application if it finds that the station has served the public
interest, there have been no serious violations of the Communications Act or FCC
rules, and there have been no other violations of the Communications Act or FCC
rules by the licensee that, taken together, would constitute a pattern of abuse.
If the licensee fails to meet these requirements, the FCC may either deny the
license or grant it on terms and conditions as are appropriate after notice and
opportunity for hearing.
In the vast majority of cases, television broadcast licenses are renewed
by the FCC even when petitions to deny or competing applications are filed
against broadcast license renewal applications. However, we cannot assure that
each of our broadcast licenses will be renewed in the future. License renewal
applications are currently pending for KATV and WHTM. These stations continue to
operate under their expired licenses until the FCC takes action on the renewal
applications. The licenses for our remaining stations are currently effective
with expiration dates ranging from October 1, 2012 to June 1, 2014.
Programming and Operation. The Communications Act requires broadcasters to
serve the "public interest." Since the late 1970s, the FCC gradually has relaxed
or eliminated many of the more formalized procedures it had developed to promote
the broadcast of certain types of programming responsive to the needs of a
station's community of license. However, broadcast station licensees must
continue to present programming that is responsive to local community problems,
needs and interests and to maintain certain records demonstrating such
responsiveness. Complaints from viewers concerning a station's programming often
will be considered by the FCC when it evaluates license renewal applications,
although such complaints may be filed at any time and generally may be
considered by the FCC at any time. Stations also must follow various FCC rules
that regulate, among other things, political advertising, sponsorship
identifications, the advertisements of contests and lotteries, obscene and
indecent broadcasts and technical operations, including limits on radio
frequency radiation. The FCC also has adopted rules that place additional
obligations on television station operators for closed-captioning of
14
programming for the hearing impaired, equal employment opportunity obligations,
maximum amounts of advertising and minimum amounts of programming specifically
targeted for children and special obligations relating to political candidate
advertising, as well as additional public information and reporting
requirements.
Digital Television. All U.S. television stations broadcast signals using
an analog transmission system first developed in the 1940s. The FCC has approved
a new digital television, or DTV, technical standard to be used by television
broadcasters, television set manufacturers, the computer industry and the motion
picture industry. This DTV standard allows the simultaneous transmission of
higher quality and/or multiple streams of video programming and data on the
bandwidth presently used by a single analog channel. On the multiple channels
allowed by DTV, it is possible to broadcast one high definition channel, with
visual and sound quality substantially superior to present-day television; to
transmit several standard definition channels, with digital sound and pictures
of a quality varying from equivalent to somewhat better than present television;
to provide interactive data services, including visual or audio transmission; or
to provide some combination of these possibilities. The FCC has allocated to
nearly every existing television broadcast station one additional channel to be
used for DTV during the transition between present-day analog television and
DTV, and has established a timetable by which every current station must
initiate DTV operations. Broadcasters were not required to pay for this new DTV
channel, but will be required to relinquish their analog channel on February 17,
2009. The FCC has declared its intention to place all DTV stations in a "core"
broadcast band consisting of channels 2-51 by February 17, 2009 and to
reallocate channels 52-69 to a variety of other uses, including advanced
cellular telephone and public safety. Broadcasters must also pay certain fees
for non-broadcast uses of their digital channels. In addition, the FCC recently
determined that broadcasters who transmit multiple programs on their digital
channels are required to carry additional children's educational programming and
is evaluating whether to impose further public interest programming requirements
on digital broadcasters. The FCC also recently held that the must-carry
requirements applicable to cable and satellite carriage of analog broadcast
signals will encompass only the primary digital program channel, and then only
upon the cessation of analog signals.
Our stations have been assigned the following digital channel allocations
by the FCC: WJLA-39, WCFT-5, WJSU-9, WHTM-10, KATV-22, KTUL-10, WSET-34 and
WCIV-34. All of these stations are currently operating on their assigned DTV
channels. Subsequent to the final transition to digital operations, our stations
will operate on the following channels: WJLA-7, WCFT-33, WJSU-9, WHTM-10,
KATV-22, KTUL-10, WSET-13 and WCIV-34.
On January 11, 2008, our broadcast tower in Little Rock, Arkansas
collapsed and fell, causing an interruption in the distribution of the
over-the-air broadcast signals for KATV. The tower, the broadcast equipment
installed on the tower and certain equipment located near the tower were
destroyed. Due to the collapse of the KATV tower, limited digital service is
being provided to the Little Rock market by utilizing a digital subchannel of
another broadcast station in the market. We anticipate final construction of the
KATV replacement tower and transmission system in time for the DTV national
cutover on February 17, 2009. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
15
Implementation of DTV service has imposed substantial additional costs on
television stations providing the new duplicative service because of the need to
purchase additional equipment and because some stations need to operate at
higher utility costs. Further, we are currently unable to predict how the
conversion to solely digital transmission will affect our business after the
elimination of analog service. While the industry-wide transition from analog to
digital delivery has currently yielded only limited opportunities to generate
incremental revenue from the DTV service, we have sought to make use of the
excess capacity of our digital broadcast channels. See "Our Business - Business
and Operating Strategy."
Ownership Matters. The Communications Act, in conjunction with various
antitrust statutes, contains restrictions on the ownership and control of
broadcast licenses. Together with the FCC's rules, those laws place limitations
on alien ownership, common ownership of television, radio and newspaper
properties, and ownership by those persons not having the requisite "character"
qualifications and those persons holding "attributable" interests in the
license.
In June 2006, the FCC launched a rulemaking proceeding to promulgate new
media ownership rules. This rulemaking was, in part, a response to a 2004
decision of the Third Circuit Court of Appeals that stayed and remanded several
of the ownership rule changes that the FCC had adopted in 2003. The rules
adopted in 2003 would have liberalized most of the ownership rules which would
have permitted us to acquire television stations in certain markets where we are
currently prohibited from acquiring new stations. In December 2007, the FCC
concluded its rulemaking proceeding by amending the 32-year-old ban on
newspaper/broadcast cross-ownership. The FCC made no other changes to its
broadcast ownership rules, thereby leaving in place the majority of the pre-June
2003 broadcast ownership rules. The FCC's currently effective ownership rules
that are material to our operations are summarized below:
o Local Television Ownership. Under the FCC's current local television
ownership (or "duopoly") rule, a party may own multiple television stations
without regard to signal contour overlap provided they are located in separate
Nielsen DMAs. In addition, the rules permit parties to own up to two TV stations
in the same DMA so long as (1) at least one of the two stations is not among the
top four-ranked stations in the market based on audience share at the time an
application for approval of the acquisition is filed with the FCC, and (2) at
least eight independently owned and operating full-power commercial and
non-commercial television stations would remain in the market after the
acquisition. In addition, without regard to the number of remaining or
independently owned television stations, the FCC will permit television
duopolies within the same DMA so long as the Grade B signal contours of the
stations involved do not overlap. Stations designated by the FCC as "satellite"
stations, which are full-power stations that typically rebroadcast the
programming of a "parent" station, are exempt from the local television
ownership rule. Also, the FCC may grant a waiver of the local television
ownership rule if one of the two television stations is a "failed" or "failing"
station or if the proposed transaction would result in the construction of a new
television station. We are currently in compliance with the local television
ownership rule.
16
o National Television Ownership Cap. The Communications Act, as amended in
2004, limits the number of television stations one entity may own nationally.
Under the rule, no entity may have an attributable interest in television
stations that reach, in the aggregate, more than 39% of all U.S. television
households. Currently, our stations reach, in aggregate, approximately 5% of all
U.S. television households. The FCC currently discounts the audience reach of a
UHF station by 50% when computing the national television ownership cap.
Further, for entities that have attributable interests in two stations in the
same market, the FCC counts the audience reach of the stations in that market
only once in computing the national ownership cap. The FCC is currently
considering whether to retain the UHF discount. The propriety of the UHF
discount will be the subject of further administrative proceedings, but the
discount currently remains in effect.
o Dual Network Rule. The dual network rule prohibits a merger between or
among any of the four major broadcast television networks--ABC, CBS, FOX and
NBC.
o Media Cross-Ownership. The FCC revised its newspaper/broadcast
cross-ownership rule in December 2007; however, the revised rule is not yet
effective. The FCC historically has prohibited the licensee of a radio or TV
station from directly or indirectly owning, operating, or controlling a daily
newspaper if the station's specified service contour encompasses the entire
community where the newspaper is published. Under the revised rule,
newspaper/broadcast cross-ownership would nonetheless be permissible if (i) the
market at issue is one of the 20 largest DMAs; (ii) the transaction involves the
combination of only one major daily newspaper and only one television or radio
station; (iii) where the transaction involves a television station, at least
eight independently owned and operating major media voices (major newspapers and
full-power television stations) would remain in the DMA following the
transaction and (iv) where the transaction involves a television station, that
station is not among the top four-ranked stations in the DMA. For all other
proposed newspaper/broadcast transactions, the FCC's historic prohibition
generally would remain in place. However, various parties have sought court
review, and a stay of the effectiveness of the FCC's revised cross-ownership
rule has been granted. The cross-ownership rules also permit cross ownership of
radio and television stations under a graduated test based on the number of
independently owned media voices in the local market. In large markets (markets
with at least 20 independently owned media voices), a single entity can own up
to one television station and seven radio stations or, if permissible under the
local television ownership rule (if eight full-power television stations would
remain in the market post transaction), two television stations and six radio
stations. The rule proscribing common ownership of television stations and
newspapers is not applicable to WJLA and Politico since, as a specialty
newspaper, Politico does not meet the definition of a "daily" newspaper of
"general circulation" under FCC Rules.
Carriage of Local Television Signals
Cable. Pursuant to the Cable Television Consumer Protection and
Competition Act of 1992 ("1992 Cable Act") and the FCC's "must carry"
regulations, cable operators are generally required to devote up to one-third of
their activated channel capacity to the carriage of the analog signals of local
commercial television stations. The 1992 Cable Act also prohibits cable
operators and other MVPDs from retransmitting a broadcast signal without
obtaining the
17
station's consent. On a cable system-by-cable system basis, a local television
broadcast station must make a choice once every three years whether to proceed
under the "must carry" rules or to waive the right to mandatory, but
uncompensated, carriage and, instead, to negotiate a grant of retransmission
consent to permit the cable system to carry the station's signal, in most cases
in exchange for some form of consideration from the cable operator. These
contracts may, however, extend longer than the three-year must carry
notification period. In 2005, we made cable carriage elections for the
three-year period January 1, 2006 to December 31, 2008. In these elections, we
opted to negotiate for retransmission consent with most of the cable systems
that carry our stations, some of which extend beyond 2008. We have made new
retransmission consent elections to cover the period from January 1, 2009 to
December 31, 2011 and are currently negotiating carriage agreements with those
systems whose agreements have or will expire on December 31, 2008.
In 2007, the FCC ruled that cable systems must ensure that all cable
subscribers--including those with analog television sets--continue to be able to
view all must-carry broadcast stations after the digital transition on February
17, 2009. After the transition, cable systems may either (i) carry digital
television signals in analog format (in addition to carrying the signals in
digital format) or (ii) carry the signals only in digital format provided that
subscribers are provided the necessary equipment to view the digital signals.
During the digital transition period, cable operators are required to carry
either a station's analog signal or a single programming stream of the digital
signal, but not both. Both during and after the digital transition, cable
operators are not required to carry multicast programming streams that we may
create using our digital spectrum. Nonetheless, we have retransmission consent
agreements with a number of cable operators and satellite carriers that require
carriage of the analog and certain digital programming streams of our stations.
Satellite. The Satellite Home Viewer Improvement Act of 1999 ("SHVIA")
established a compulsory copyright licensing system for the distribution of
local television station signals by direct broadcast satellite systems to
viewers in each DMA. Under SHVIA's "carry-one, carry all" provision, a direct
broadcast satellite system generally is required to retransmit the analog signal
of all local television stations in a DMA if the system chooses to retransmit
the analog signal of any local television station in that DMA. Television
stations located in markets in which satellite carriage of local stations is
offered may elect mandatory carriage or retransmission consent once every three
years. In 2005, we made satellite carriage elections and opted to negotiate
retransmission consent for all satellite systems that carry our stations. Those
agreements remain effective until 2010 and 2011.
Indecency Regulation. Federal law and the FCC's rules prohibit the
broadcast of obscene material at any time, and the broadcast of indecent or
profane material during the period from 6 a.m. through 10 p.m. In recent years,
the FCC and its indecency prohibition have received much attention. In 2006,
legislation was enacted that raised the maximum monetary penalty for the
broadcast of obscene, indecent, or profane language to $325,000 for each
"violation," with a cap of $3 million for any "single act." On February 19,
2008, the FCC fined certain ABC stations, including two of our ABC-affiliated
stations, each in the amount of $27,500 for the broadcast of allegedly indecent
material during a 2003 episode of NYPD Blue. Pursuant to the affiliation
18
agreement with ABC, the Network has assumed obligations for payment of the fine,
but together the Network and its affiliates, including our affected stations,
have appealed the FCC's decision.
Additional Competition in the Video Services Industry. The
Telecommunications Act also eliminates the overall ban on telephone companies
offering video services and permits the ownership of cable television companies
by telephone companies in their service areas (or vice versa) in certain
circumstances. Telephone companies providing such video services will be
regulated according to the transmission technology they use. The
Telecommunications Act also permits telephone companies to hold an ownership
interest in the programming carried over such systems. Video programming via the
Internet is now emerging as an option for viewers who wish to see full-length
episodes of broadcast shows or brief clips of alternative fare on computers or
other video devices. Each of the major broadcast networks offer "video player"
buttons on their websites or those of broadcast affiliates. In addition,
multiple Internet sites such as YouTube.com offer alternative video programming.
Although we cannot predict the effect of the removal of these barriers to
telephone company participation in the video services industry, it may have the
effect of increasing competition in the television broadcast industry in which
we operate.
Other Legislation. The foregoing does not purport to be a complete summary
of all the provisions of the Telecommunications Act, the Communications Act or
of the regulations and policies of the FCC thereunder. Congress and the FCC have
under consideration, and in the future may consider and adopt, (i) other changes
to existing laws, regulations and policies or (ii) new laws, regulations and
policies regarding a wide variety of matters that could affect, directly or
indirectly, the operation, ownership and profitability of our broadcast
stations. Also, certain of the foregoing matters are now, or may become, the
subject of litigation, and we cannot predict the outcome of any such litigation
or the impact on our business.
Employees
As of September 30, 2008, we employed in full and part-time positions
1,094 persons, including 377 at WJLA/NewsChannel 8/Politico, 130 at KATV, 125 at
KTUL, 125 at WHTM, 126 at WBMA/WCFT/WJSU, 109 at WSET, 87 at WCIV and 15 in our
corporate office. Of the employees at WJLA/NewsChannel 8, 133 are represented by
one of three unions: the American Federation of Television and Radio Artists
("AFTRA"), the Directors Guild of America ("DGA") or the National Association of
Broadcast Employees and Technicians/Communications Workers of America
("NABET/CWA"). The NABET/CWA collective bargaining agreement expires on December
31, 2010. The AFTRA collective bargaining agreement expires on September 30,
2009. The DGA collective bargaining agreement expires on January 27, 2009. We
have begun discussions with DGA regarding a successor agreement. No employees of
our other owned stations are represented by unions. We believe our relations
with our employees are satisfactory.
19
ITEM 1A. RISK FACTORS
(dollars in thousands)
The risks described below, together with the other information included in
this Form 10-K, should be carefully considered. We cannot identify nor can we
control all circumstances that could occur in the future that may adversely
affect our business and results of operations. If any of the following risks
actually occurs, our business, financial condition, operating results and
prospects could be materially affected.
Our substantial debt could adversely affect our financial condition and
operational flexibility.
We have a substantial amount of debt. As of September 30, 2008, our total
debt, net of applicable discounts, consisted of $453,408 of 7 3/4% senior
subordinated notes due December 15, 2012 and $30,000 outstanding under our
$70,000 senior credit facility which expires August 23, 2011. Subject to the
limitations of our debt instruments, we could also incur additional debt in
certain circumstances.
The degree to which we are leveraged could adversely affect us. For
example, it could:
o make it more difficult for us to satisfy our obligations with respect to
our existing debt;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which will reduce amounts available
for working capital, capital expenditures and other general corporate
purposes;
o result in the sale of one or more of our stations to reduce our debt
service obligations;
o limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
o increase our vulnerability to general adverse economic and industry
conditions;
o place us at a competitive disadvantage compared to our competitors with
less debt; and
o limit our ability to borrow additional funds.
In addition, debt incurred under our senior credit facility bears interest
at variable rates. An increase in the interest rates on our debt will reduce the
funds available to repay our debt and for operations and future business
opportunities and will make us more vulnerable to the consequences of our
leveraged capital structure. The agreements governing our debt contain certain
restrictive financial and operating covenants. These covenants, among other
things, restrict our ability to incur additional debt and issue preferred stock,
pay dividends and make distributions, issue stock of subsidiaries, make certain
investments, repurchase stock or debt, create liens, enter into transactions
with affiliates, transfer and sell assets, and merge or consolidate. Any failure
to comply with these covenants could result in an event of default under the
applicable instrument, which could permit acceleration of the debt under such
instrument and in some cases acceleration of debt under other instruments that
contain cross-default or cross-acceleration provisions. If our indebtedness were
to be accelerated, we cannot assure you that we would be able to repay it.
Further, current credit market conditions could adversely affect our ability to
renegotiate or restructure the terms of our senior credit facility.
20
To service our debt, we will require a significant amount of cash, which depends
on many factors beyond our control.
Our ability to make payments on and to refinance our debt will depend on
our ability to generate cash in the future. This, to an extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. We cannot assure you that our business will
generate sufficient cash flow or that future borrowings will be available to us
in an amount sufficient to enable us to pay our debt or to fund our other
liquidity needs. If our future cash flow from operations and existing sources of
funds are insufficient to pay our obligations as they mature or to fund our
liquidity needs, we may be forced to reduce or delay our business activities and
capital expenditures, sell assets, obtain additional equity capital or
restructure or refinance all or a portion of our debt on or before maturity. We
cannot assure you that we will be able to refinance any of our debt on a timely
basis or on satisfactory terms, if at all. In addition, the terms of our
existing debt and other future debt may limit our ability to pursue any of these
alternatives. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
We operate in a very competitive business environment that could adversely
affect our operations.
The television industry is highly competitive. Stations compete for
audience on the basis of program popularity, which has a direct effect on
advertising rates. Broadcast television stations compete for local and national
advertising revenues with other television stations in their respective markets
as well as with other advertising media, such as newspapers, radio, magazines,
outdoor advertising, transit advertising, Internet/website, yellow page
directories, direct mail and local cable systems. In addition, our stations
compete for national advertising revenues with broadcast and cable television
networks, program syndicators and Internet websites. Some of our competitors are
subsidiaries of large national or regional companies that have greater
resources, including financial resources, than we do. Our television stations
are located in highly competitive markets. Accordingly, our results of
operations will be dependent upon the ability of each station to compete
successfully in its market, and there can be no assurance that any one of our
stations will be able to maintain or increase its current audience share or
revenue share. To the extent that certain of our competitors have or may, in the
future, obtain greater resources, our ability to compete successfully in our
broadcasting markets may be impeded.
We depend on advertising revenue, which can vary substantially from period to
period based on many factors beyond our control, including general economic
conditions.
The broadcast television industry is cyclical in nature, being affected by
prevailing economic conditions. Because we rely on sales of advertising time for
substantially all of our revenues, our operating results are sensitive to
general economic conditions and regional conditions in each of the local markets
in which our stations operate. For Fiscal 2006, 2007 and 2008, the Washington,
D.C. advertising market accounted for approximately one-half of our total
revenues. As a result, our results of operations are highly dependent on
WJLA/NewsChannel 8 and, in turn, the Washington, D.C. economy and, to a lesser
extent, on each of the other local economies in which our stations operate.
21
We particularly depend on automotive-related advertising, which may be impacted
by the current turmoil in that industry.
Approximately 26%, 23% and 20% of our total broadcast revenues for the
fiscal years ended September 30, 2006, 2007 and 2008, respectively, consisted of
automotive-related advertising. Automotive-related advertising declined by 12%
and 14% for the years ended September 30, 2007 and 2008, respectively, as a
result of decreased demand for advertising by the automotive industry. Continued
or further significant decreases in such advertising would adversely affect our
operating results.
Federal regulation of the broadcasting industry limits our operating
flexibility.
The ownership, operation and sale of television stations are subject to
the jurisdiction of the FCC under the Communications Act. Matters subject to FCC
oversight include the assignment of frequency bands for broadcast television;
the approval of a television station's frequency, location and operating power;
the issuance, renewal, revocation or modification of a television station's FCC
license; the approval of changes in the ownership or control of a television
station's licensee; the regulation of equipment used by television stations; and
the adoption and implementation of regulations and policies concerning the
ownership, operation, programming and employment practices of television
stations. The FCC has the power to impose penalties, including fines or license
revocations, upon a licensee of a television station for violations of the FCC's
rules and regulations. The FCC's regulation of other media and spectrum users
also has an indirect effect on the operations of our stations.
License Renewal. Our business is dependent upon our continuing to hold
broadcasting licenses from the FCC that are issued for terms of eight years.
While in the vast majority of cases such licenses are renewed by the FCC even
when petitions to deny or competing applications are filed against broadcast
license renewal applications, we cannot assure you that our licenses will be
renewed upon their expiration dates. License renewal applications are currently
pending for KATV and WHTM, which are currently operating under expired licenses.
These stations will continue to operate under their expired licenses until the
FCC takes action on the renewal applications. The licenses for all other of our
stations are currently in effect with expiration dates ranging from October 1,
2012 to June 1, 2014. If we fail to renew any of our licenses, or renew them
with substantial conditions or modifications, it could prevent us from operating
the affected stations and generating revenues. See "Our Business--Legislation
and Regulation--License Renewal."
Ownership Matters. The Communications Act, in conjunction with various
antitrust statutes, contains restrictions on the ownership and control of
broadcast licenses. Together with the FCC's rules, those laws place limitations
on alien ownership, common ownership of television, radio and newspaper
properties, and ownership by those persons not having the requisite "character"
qualifications and those persons holding "attributable" interests in the
license. We must comply with current FCC regulations and policies in the
ownership of our stations, and any future actions by Congress or the FCC with
respect to the ownership rules may adversely impact our business.
22
Programming and Operation. Broadcast station licensees must present
programming that is responsive to local community problems, needs and interests
and to maintain certain records demonstrating such responsiveness. Stations also
must follow various FCC rules that regulate, among other things, political
advertising, sponsorship identifications, the advertisements of contests and
lotteries, obscene and indecent broadcasts and technical operations, including
limits on radio frequency radiation. The FCC also has adopted rules that place
additional obligations on television station operators for closed-captioning of
programming for the hearing impaired, equal employment opportunity obligations,
maximum amounts of advertising and minimum amounts of programming specifically
targeted for children and special obligations relating to political candidate
advertising, as well as additional public information and reporting
requirements. In recent years, the FCC has also vigorously enforced a number of
rules, typically in connection with license renewals. Violations of these rules
could lead to fines and penalties which may adversely affect our business and
results of operations.
Congress and the FCC may in the future adopt new laws, regulations or
policies regarding a wide variety of matters that could, directly or indirectly,
adversely affect the operation and ownership of our television stations. It is
impossible to predict the outcome of federal legislation or the potential effect
thereof on our business. See "Our Business--Legislation and Regulation."
We are dependent on our affiliation with the ABC television network.
All of our television stations are affiliated with the ABC network. Our
television viewership levels, and ultimately advertising revenues, are in large
part dependent upon programming provided by ABC, and there can be no assurance
that such programming will achieve and maintain satisfactory viewership levels
in the future. Each of our television stations has entered into a long-term
affiliation agreement with the ABC network, which expires on December 31, 2012.
Although ABC has continually renewed its affiliation with our television
stations for as long as we have owned them and we expect to continue to be able
to renew such affiliation agreements, we cannot assure you that such renewals
will be obtained or that they will reflect the same general terms. The
non-renewal or termination of one or more of our network affiliation agreements
or alteration of terms could have an adverse effect on our results of
operations.
NewsChannel 8 is dependent on cable operators for carriage of its programming.
NewsChannel 8 is party to affiliation agreements with cable operators and
other terrestrial MVPDs for the carriage of its programming to subscribers. Each
of the cable operator affiliation agreements has an expiration date of December
31, 2011. The news service operated by NewsChannel 8 is entirely dependent upon
carriage by the MVPDs. Although these agreements have been renewed by the MVPDs
in the past, there can be no assurance that these agreements will be renewed
upon expiration or whether the same general terms and conditions can be
retained. The non-renewal or termination of one or more of these affiliation
agreements or alteration of terms could adversely affect our results of
operations.
Possible strategic initiatives may impact our business.
We are evaluating, and will continue to evaluate, the nature and scope of
our operations and various short-term and long-term strategic considerations.
There are uncertainties and risks relating to strategic initiatives. For
example, acquisition opportunities may become more limited as a consequence of
the consolidation of ownership occurring in the television broadcast
23
industry. Also, prospective competitors may have greater financial resources
than we do. Future acquisitions may not be available on attractive terms, or at
all. Also, if we do make acquisitions, we may not be able to successfully
integrate the acquired stations or businesses. With respect to divestitures, we
may experience varying success in making such divestitures on favorable terms,
if at all, or in reducing fixed costs or transferring liabilities previously
associated with the divested television stations or businesses. Finally, any
such acquisitions or divestitures will be subject to FCC approval and FCC rules
and regulations. Any of these efforts would require varying levels of management
resources, which may divert our attention from other business operations. If we
do not realize the expected benefits or synergies of such transactions, there
may be an adverse effect on our financial condition and operating results.
Our stockholder may have interests that conflict with holders of our debt.
The Allbritton family controls our Company. Accordingly, the family is
able to control our operations and policies, and the vote on all matters
submitted to a vote of our stockholder, including, but not limited to, electing
directors, adopting amendments to ACC's certificate of incorporation and
approving mergers or sales of substantially all of ACC's assets. Circumstances
may occur in which the interests of the family could be in conflict with the
interests of the holders of our debt. In addition, the family could pursue
acquisitions, divestitures or other transactions that, in their judgment, could
enhance their equity investment, even though such transactions might involve
risks to the holders of the notes. See "Ownership of Capital Stock-- ACC Common
Stock" and "Certain Relationships and Related Transactions."
We have paid dividends and made advances to related parties, and we expect to
continue to do so in the future.
ACC has made advances to certain related parties. Because, at present,
such related parties' primary sources of repayment of the advances is through
our ability to pay dividends or to make other distributions, these advances have
been treated as reductions to stockholder's investment in our consolidated
balance sheets. The stockholder's deficit at September 30, 2007 and 2008 was
$366,527 and $383,524, respectively. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions." Under our debt
instruments, future advances, loans, dividends and distributions by us are
subject to certain restrictions. We anticipate that, subject to such
restrictions, applicable law and payment obligations with respect to our debt,
ACC will make advances, distributions or dividends to related parties in the
future.
Our business may be negatively affected by work stoppages, slowdowns or strikes
by our employees.
Currently, there are three bargaining agreements with unions representing
133 of our full and part-time employees at WJLA/NewsChannel 8, two of which
expire during Fiscal 2009. We cannot assure you about the results of negotiation
of future collective bargaining agreements, whether future collective bargaining
agreements will be negotiated without interruptions in our business, or the
possible effect of future collective bargaining agreements on our financial
condition or results of operations. We also cannot assure you that strikes will
not occur in the future in connection with labor negotiations or otherwise. Any
prolonged strike or work stoppage could have an adverse effect on our financial
condition and results of operations. See "Our Business - Employees."
24
Changes in accounting standards can significantly impact reported operating
results.
Generally accepted accounting principles and accompanying pronouncements
and implementation guidelines for many aspects of our business, including those
related to intangible assets and income taxes, are complex and involve
significant judgments. Changes in these rules or their interpretation could
significantly change our reported operating results. See "Management's
Discussions and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies and Estimates."
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
We maintain our corporate headquarters in Arlington, Virginia, occupying
leased office space of approximately 14,200 square feet.
The types of properties required to support each of the stations include
offices, studios, transmitter sites and antenna sites. The stations' studios are
co-located with their office space while transmitter sites and antenna sites are
generally located away from the studios in locations determined to provide
maximum market signal coverage.
The following table describes the general characteristics of our principal
real property:
25
Lease
Expiration
Facility Market/Use Ownership Approximate Size Date
- ----------------------- ----------------------- ------------- -------------------- -----------
WJLA/NewsChannel 8 Rosslyn, VA
Office/Studio Leased 84,381 sq. ft. 6/30/17
Prince George's, MD
Tower - Weather Leased 1 acre 3/31/11
Bethesda, MD
Downlink Receive Leased 5,300 sq. ft. Monthly
Washington, D.C.
Tower/Transmitter Joint Venture 108,000 sq. ft. N/A
Office/Studio Leased 1,500 sq. ft. 2/28/12
WHTM Harrisburg, PA
Office/Studio Owned 14,000 sq. ft. N/A
Adjacent Land Owned 59,337 sq. ft. N/A
Tower/Transmitter Owned 2,801 sq. ft. N/A
Office Leased 3,168 sq. ft. 10/31/11
KATV Little Rock, AR
Office/Studio Owned 20,500 sq. ft. N/A
Office/Studio Leased 1,500 sq. ft. 1/31/09
Tower/Transmitter Owned 188 acres N/A
Tower/Transmitter Leased 3.49 acres 5/31/23
Annex/Garage Owned 67,400 sq. ft. N/A
KTUL Tulsa, OK
Office/Studio Owned 13,520 sq. ft. N/A
Tower/Transmitter Owned 160 acres N/A
WSET Lynchburg, VA
Office/Studio Owned 15,500 sq. ft. N/A
Tower/Transmitter Owned 2,700 sq. ft. N/A
Danville, VA
Office/Studio Leased 2,150 sq. ft. 2/28/09
Roanoke, VA
Office/Studio Leased 2,688 sq. ft. 11/30/11
WCIV Mt. Pleasant, SC
Office/Studio Owned 21,700 sq. ft. N/A
Tower/Transmitter Leased 2,000 sq. ft. 6/25/11
WBMA/WCFT/WJSU Birmingham, AL
Office/Studio/Dish Farm Leased 26,357 sq. ft./0.5 acre 9/30/21
Tower/Relay-Pelham Leased .08 acres 10/31/11
Tower/Relay-Red Mtn. Owned .21 acres N/A
Tuscaloosa, AL
Office/Studio Owned 9,475 sq. ft. N/A
Tower-Tuscaloosa Owned 10.5 acres N/A
Tower-AmSouth Leased 134.3 acres 4/30/11
Anniston, AL
Office/Studio Leased 700 sq. ft. 10/31/10
Tower-Blue Mtn. Owned 1.7 acres N/A
Tower-Bald Rock Leased 1 acre 8/29/16
26
ITEM 3. LEGAL PROCEEDINGS
We currently and from time to time are involved in litigation incidental
to the conduct of our business, including suits based on defamation and
employment activity. We are not currently a party to any lawsuit or proceeding
which, in our opinion, could reasonably be expected to have a material adverse
effect on our consolidated financial condition, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Not Applicable.
27
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands)
The selected consolidated financial data for the fiscal years ended
September 30, 2004, 2005, 2006, 2007 and 2008 are derived from our consolidated
financial statements. The information in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes thereto included elsewhere herein.
Fiscal Year Ended September 30,
-----------------------------------------------------------------
2004 2005 2006 2007 2008
--------- --------- --------- --------- ---------
Statement of Operations Data:
Operating revenues, net.................................. $ 203,270 $ 200,427 $ 223,399 $ 226,146 $ 224,108
Television operating expenses, excluding depreciation
and amortization...................................... 127,586 124,082 124,871 138,588 149,987
Depreciation and amortization............................ 9,908 9,170 8,666 8,712 9,511
Corporate expenses....................................... 4,908 6,012 5,000 6,106 6,459
Operating income......................................... 60,868 61,163 84,862 72,740 58,151
Interest expense......................................... 36,759 36,729 36,234 37,213 37,631
Interest income.......................................... 24 71 147 208 96
Interest income-related party............................ 162 262 226 430 200
Income before cumulative effect of change in accounting
principle............................................. 13,581 13,642 31,509 22,614 12,873
Cumulative effect of change in accounting principle<F1>.. -- -- 48,728 -- --
Net income (loss)........................................ 13,581 13,642 (17,219) 22,614 12,873
As of September 30,
-----------------------------------------------------------------
2004 2005 2006 2007 2008
--------- --------- --------- --------- ---------
Balance Sheet Data:
Total assets............................................. $ 253,978 $ 241,744 $ 176,021 $ 169,049 $ 159,455
Total debt<F2>........................................... 465,675 460,755 452,846 484,100 483,408
Stockholder's investment................................. (281,176) (287,414) (327,770) (366,527) (383,524)
Fiscal Year Ended September 30,
-----------------------------------------------------------------
2004 2005 2006 2007 2008
--------- --------- --------- --------- ---------
Cash Flow Data<F3>:
Cash flow from operating activities...................... $ 30,959 $ 27,266 $ 41,374 $ 31,092 $ 34,027
Cash flow from investing activities...................... (5,712) (4,593) (6,670) (5,889) (5,977)
Cash flow from financing activities...................... (21,268) (25,725) (31,309) (30,401) (28,880)
Financial Ratios and Other Data:
Operating income margin.................................. 29.9% 30.5% 38.0% 32.2% 25.9%
Capital expenditures<F4>................................. 5,816 4,660 8,836 6,052 5,986
(Footnotes on following page)
28
<FN>
Footnotes
(dollars in thousands)
<F1> In September 2004, the Securities 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 became
effective at the beginning of our year ended September 30, 2006. 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. See
"Consolidated Financial Statements--Notes to Consolidated Financial
Statements--Note 4."
<F2> Total debt is defined as long-term debt (including the current portion
thereof, and net of discount) and capital lease obligations.
<F3> Cash flows from operating, investing and financing activities were
determined in accordance with GAAP. See "Consolidated Financial
Statements--Consolidated Statements of Cash Flows."
<F4> Capital expenditures for the year ended September 30, 2008 are exclusive of
$2,924 of expenditures associated with the replacement of our broadcast
tower and related equipment in Little Rock, Arkansas. See "Consolidated
Financial Statements--Notes to Consolidated Financial Statements--Note 9."
</FN>
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands)
General Factors Affecting Our Business
The Company
We own ABC network-affiliated television stations serving seven geographic
markets: WJLA in Washington, D.C.; WCFT in Tuscaloosa, Alabama, WJSU in
Anniston, Alabama and WBMA-LP, a low power television station licensed to
Birmingham, Alabama (we operate WCFT and WJSU in tandem with WBMA-LP serving the
viewers of the Birmingham, Tuscaloosa and Anniston market as a single
programming source); WHTM in Harrisburg, Pennsylvania; KATV in Little Rock,
Arkansas; KTUL in Tulsa, Oklahoma; WSET 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. Additionally, in January 2007 we launched Politico, a
specialized newspaper and Internet site (politico.com) that serves Congress,
congressional staffers and those interested in the actions of our national
legislature and political electoral process. The operations of NewsChannel 8 and
Politico are integrated with WJLA.
Business
Our operating revenues are derived from local and national advertisers
and, to a much lesser extent, the ABC network and program syndicators for the
broadcast of programming, cable and telephone company operators as well as DBS
providers in the form of subscriber fees, and other broadcast-related
activities. The primary operating expenses involved in owning and operating
television stations are employee compensation, programming, newsgathering,
production, promotion and the solicitation of advertising.
Television stations receive revenues for advertising sold for placement
within and adjoining locally originated and network programming. Advertising
rates are set based upon a variety of factors, including the size and
demographic makeup of the market served by the station, a program's popularity
among viewers whom an advertiser wishes to attract, the number of advertisers
competing for the available time, the availability of alternative advertising
media in the market area, a station's overall ability to attract viewers in its
market area and the station's ability to attract viewers among particular
demographic groups that an advertiser may be targeting. Advertising rates are
also affected by an aggressive and knowledgeable sales force and the development
of projects, features and programs that tie advertiser messages to programming.
Our advertising revenues are generally highest in the first and third
quarters of each fiscal year, due in part to increases in retail advertising in
the period leading up to and including the holiday season and active advertising
in the spring. The fluctuation in our operating results is generally related to
fluctuations in the revenue cycle. In addition, advertising revenues are
generally higher during election years due to spending by political candidates,
which is typically
30
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
2008 Summer Olympic Games were broadcast by NBC in August 2008 in connection
with NBC's United States television rights to the Olympic Games, which extend
through 2012.
Our cash flow from operations is also affected on a quarterly basis by the
timing of cash collections and interest payments on our debt. Cash receipts are
usually greater during the second and fourth fiscal quarters, as the collection
of advertising revenue typically lags the period in which such revenue is
recorded. Scheduled semi-annual interest payments on our long-term fixed
interest rate debt occur during the first and third fiscal quarters. As a
result, our cash flows from operating activities as reflected in our
consolidated financial statements are generally significantly higher during our
second and fourth fiscal quarters, and such quarters comprise a substantial
majority of our cash flow from operating activities for the full fiscal year.
The broadcast television industry is cyclical in nature, being affected by
prevailing economic conditions. Because we rely on sales of advertising time for
substantially all of our revenues, our operating results are sensitive to
general economic conditions and regional conditions in each of the local market
areas in which our stations operate. For Fiscal 2006, 2007 and 2008, the
Washington, D.C. advertising market accounted for approximately one-half of our
total revenues. As a result, our results of operations are highly dependent on
WJLA/NewsChannel 8 and, in turn, the Washington, D.C. economy and, to a lesser
extent, on each of the other local economies in which our stations operate.
We are also dependent on automotive-related advertising. Approximately
26%, 23% and 20% of our total broadcast revenues for the years ended September
30, 2006, 2007 and 2008, respectively, consisted of automotive-related
advertising. Automotive-related advertising declined by 12% and 14% for the
years ended September 30, 2007 and 2008, respectively, as a result of decreased
demand for advertising by the automotive industry. Continued or further
significant decreases in such advertising in the future would adversely affect
our operating results.
31
Operating Revenues
The following table depicts the principal types of operating revenues, net
of agency commissions, earned by us during each of the last three fiscal years
and the percentage contribution of each to our total operating revenues, before
fees.
Fiscal Year Ended September 30,
-----------------------------------------------------------------------
2006 2007 2008
-------------------- --------------------- --------------------
Dollars Percent Dollars Percent Dollars Percent
--------- ------- --------- ------- --------- -------
Local and national<F1>................ $ 197,334 86.5% $ 194,662 84.3% $ 188,418 82.6%
Political<F2>......................... 8,180 3.6% 9,826 4.3% 6,995 3.1%
Subscriber fees<F3>................... 9,260 4.1% 10,410 4.5% 11,946 5.2%
Network compensation<F4>.............. 2,796 1.2% 3,771 1.6% 3,477 1.5%
Trade and barter<F5>.................. 5,628 2.5% 6,104 2.6% 6,343 2.8%
Other revenues........................ 4,907 2.1% 6,120 2.7% 10,878 4.8%
--------- ------ --------- ------ --------- ------
Operating revenues.................... 228,105 100.0% 230,893 100.0% 228,057 100.0%
====== ====== ======
Fees<F6>.............................. (4,706) (4,747) (3,949)
--------- --------- ---------
Operating revenues, net............... $ 223,399 $ 226,146 $ 224,108
========= ========= =========
<FN>
______________
<F1> Represents sale of advertising to local and national advertisers, either
directly or through agencies representing such advertisers, net of agency
commission.
<F2> Represents sale of advertising to political advertisers.
<F3> Represents subscriber fees earned from cable and telco operators as well
as DBS providers.
<F4> Represents payment by network for broadcasting or promoting network
programming.
<F5> Represents value of commercial time exchanged for goods and services
(trade) or syndicated programs (barter).
<F6> Represents fees paid to national sales representatives and fees paid for
music licenses.
</FN>
Local and national advertising constitutes our largest category of
operating revenues, representing 83% to 87% of our total operating revenues in
each of the last three fiscal years. Local and national advertising revenues
increased 10.2% in Fiscal 2006, and decreased 1.4% and 3.2% in Fiscal 2007 and
2008, respectively.
32
Results of Operations--Fiscal 2008 Compared to Fiscal 2007
Set forth below are selected consolidated financial data for Fiscal 2007
and 2008, respectively, and the percentage change between the years.
Fiscal Year Ended Percentage
September 30, Change
------------------------ ----------
2007 2008
--------- ---------
Operating revenues, net.............. $ 226,146 $ 224,108 (0.9)%
Total operating expenses............. 153,406 165,957 8.2%
--------- ---------
Operating income..................... 72,740 58,151 (20.1)%
Nonoperating expenses, net........... 36,309 37,212 2.5%
Income tax provision................. 13,817 8,066 (41.6)%
--------- ---------
Net income........................... $ 22,614 $ 12,873 (43.1)%
========= =========
Net Operating Revenues
Net operating revenues for Fiscal 2008 totaled $224,108, a decrease of
$2,038, or 0.9%, as compared to Fiscal 2007.
Local and national advertising revenues decreased $6,244, or 3.2%, from
Fiscal 2007. The decrease in local and national advertising revenues was due to
a general decrease in demand for local and national advertising in all of our
markets during the final three quarters of Fiscal 2008, with a particular
decrease in demand by local and national advertisers in our Washington, D.C.
market. This overall decrease was partially offset by increased local and
national advertising revenue in the first quarter of Fiscal 2008, primarily
reflecting the prior year displacement of local and national advertisers during
the peak political advertising period leading up to the November 2006 elections.
Additionally, increased local and national advertising revenue generated by
Politico, which launched in January 2007, also served to partially offset the
overall local and national advertising revenue decrease during Fiscal 2008.
Political advertising revenues decreased by $2,831, or 28.8%, in Fiscal
2008 from Fiscal 2007. Political advertising revenues decreased due to various
high-profile state-wide political elections in November 2006, which generated
substantial revenue in the first quarter of Fiscal 2007 with no comparable
activity in Fiscal 2008, partially offset by spending by the Presidential
candidates during Fiscal 2008 for the primaries and principally for the period
leading up to the November 2008 general election in our Virginia and
Pennsylvania markets.
Subscriber fee revenue increased $1,536, or 14.8%, during Fiscal 2008 as
compared to the prior fiscal year. This increase was due to an increase in the
overall number of subscribers as well as various contractual increases in the
monthly per subscriber rates.
33
Other revenue increased $4,758, or 77.7%, during Fiscal 2008 as compared
to Fiscal 2007. This increase was primarily due to increased Internet-based
advertising revenue across our station group as well as Internet-based
advertising revenue generated by politico.com, which launched in January 2007.
No individual advertiser accounted for more than 5% of our operating
revenues during Fiscal 2008 or 2007.
Total Operating Expenses
Total operating expenses in Fiscal 2008 were $165,957, an increase of
$12,551, or 8.2%, compared to total operating expenses of $153,406 in Fiscal
2007. This net increase consisted of an increase in television operating
expenses, excluding depreciation and amortization, of $11,399, an increase in
depreciation and amortization of $799 and an increase in corporate expenses of
$353.
Television operating expenses, excluding depreciation and amortization,
totaled $149,987 in Fiscal 2008, an increase of $11,399, or 8.2%, when compared
to television operating expenses of $138,588 in Fiscal 2007. This increase was
primarily due to an overall increase in our employee compensation and benefits
as well as operating expenses associated with producing and distributing
Politico, which launched in January 2007. Employee compensation and benefits
increased 8.9% for the year ended September 30, 2008 as compared to the prior
fiscal year principally due to the hiring of additional personnel leading up to
and associated with the January 2007 launch of Politico.
Operating Income
Operating income of $58,151 in Fiscal 2008 decreased $14,589, or 20.1%,
compared to operating income of $72,740 in Fiscal 2007. The operating income
margin in Fiscal 2008 decreased to 25.9% from 32.2% for the prior fiscal year.
The decreases in operating income and margin during Fiscal 2008 were primarily
the result of increased total operating expenses as discussed above.
Nonoperating Expenses, Net
Interest Expense. Interest expense increased by $418, or 1.1%, from
$37,213 in Fiscal 2007 to $37,631 in Fiscal 2008. The increase in interest
expense was primarily due to the increase in the average balance of debt
outstanding during Fiscal 2008 as compared to the prior fiscal year, partially
offset by a decrease in the weighted average interest rate on debt. The average
balance of debt outstanding for Fiscal 2007 and 2008 was $475,871 and $491,788,
respectively, and the weighted average interest rate on debt was 7.7% and 7.6%
during the years ended September 30, 2007 and 2008, respectively.
34
Other, Net. The FCC has granted to Sprint Nextel Corporation ("Nextel")
the right to reclaim a portion of the spectrum in the 2 GHz band from
broadcasters across the country. In order to claim this spectrum, Nextel must
replace all of the broadcasters' electronic newsgathering equipment currently
using this spectrum with digital equipment capable of operating in the
reformatted portion of the 2 GHz band retained by the broadcasters. This
exchange of equipment will be completed on a market by market basis. As the
equipment is exchanged and placed into service in each of our markets, a gain
will be recorded to the extent that the fair market value of the equipment
received exceeds the book value of the analog equipment exchanged. During the
years ended September 30, 2007 and 2008, equipment was exchanged and placed into
service with an excess of fair market value as compared to book value of $1,256
and $1,367, respectively, and was recorded as a non-cash gain in other, net
nonoperating income.
Income Taxes
The provision for income taxes in Fiscal 2008 totaled $8,066, a decrease
of $5,751, or 41.6%, when compared to the provision for income taxes of $13,817
in Fiscal 2007. The decrease in the provision for income taxes was primarily due
to the $15,492, or 42.5%, decrease in pre-tax income.
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income
Taxes." FIN No. 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 provisions taken or expected to be
taken in a tax return. The provisions of FIN No. 48 were adopted on October 1,
2007. The cumulative effect of implementing FIN No. 48 resulted in a net
decrease of $1,295 to the opening balance of retained earnings.
Our operations are included in a consolidated federal income tax return
and a combined Virginia state income tax return filed by Perpetual. We calculate
and record income tax expense in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109 as if we were a separate taxpayer from
Perpetual. We make payments to Perpetual in accordance with the terms of a tax
sharing agreement between Perpetual and us. During the year ended September 30,
2008, income tax payments due to Perpetual in accordance with the tax sharing
agreement exceeded the income tax payments that would be due as calculated in
accordance with SFAS No. 109 by $695. This difference was recorded as a charge
against retained earnings.
Net Income
For Fiscal 2008, the Company recorded net income of $12,873 as compared to
$22,614 for Fiscal 2007. The decrease in net income during Fiscal 2008 of
$9,741, or 43.1%, was primarily due to decreased operating income, as discussed
above.
35
Results of Operations--Fiscal 2007 Compared to Fiscal 2006
Set forth below are selected consolidated financial data for Fiscal 2006
and 2007, respectively, and the percentage change between the years.
Fiscal Year Ended Percentage
September 30, Change
------------------------ ----------
2006 2007
--------- ---------
Operating revenues, net.............. $ 223,399 $ 226,146 1.2%
Total operating expenses............. 138,537 153,406 10.7%
--------- ---------
Operating income..................... 84,862 72,740 (14.3)%
Nonoperating expenses, net........... 35,011 36,309 3.7%
Income tax provision................. 18,342 13,817 (24.7)%
--------- ---------
Income before cumulative effect of
change in accounting principle.... 31,509 22,614 (28.2)%
Cumulative effect of change in
accounting principle, net of income
tax benefit....................... 48,728 -- --
--------- ---------
Net (loss) income.................... $ (17,219) $ 22,614 --
========= =========
Net Operating Revenues
Net operating revenues for Fiscal 2007 totaled $226,146, an increase of
$2,747, or 1.2%, as compared to Fiscal 2006.
Local and national advertising revenues decreased $2,672, or 1.4%, from
Fiscal 2006. The decrease in local and national advertising revenues primarily
reflected decreased demand for local and national advertising in our Washington,
D.C. market partially offset by increased local and national advertising
revenues from Politico which launched on January 23, 2007. The decreased local
and national advertising revenues during Fiscal 2007 were also impacted by
displacement of local and national advertisers during the peak political
advertising period leading up to the November 7, 2006 elections as well as
incremental revenue generated in the prior year associated with the February
2006 broadcast of the Super Bowl by the ABC network (broadcast by the CBS
network in 2007).
Political advertising revenues increased by $1,646, or 20.1%, in Fiscal
2007 from Fiscal 2006. Political advertising revenues increased due to various
high-profile local political elections in November 2006, which generated
substantial revenue in the first quarter of Fiscal 2007. This increase was
partially offset by advertising generated during the first quarter of Fiscal
2006 related to the November 2005 Virginia Governor's election, advertising
during the second and third quarters of Fiscal 2006 related to local primary
elections, and advertising during the fourth quarter of Fiscal 2006 leading up
to the November 2006 elections.
36
Subscriber fee revenue increased $1,150, or 12.4%, during Fiscal 2007 as
compared to the prior fiscal year. This increase was due to an increase in the
overall number of subscribers as well as various contractual increases in the
monthly per subscriber rates.
Network compensation revenue increased $975, or 34.9%, during the year
ended September 30, 2007 versus Fiscal 2006. This increase was due primarily to
the July 31, 2006 expiration of certain provisions of ABC's National Football
League ("NFL") programming rights arrangement with its affiliates, which
principally involved the exchange of additional primetime inventory for reduced
network compensation, in conjunction with ABC's non-renewal of NFL programming
rights beyond the 2005 NFL season. This increase was partially offset by a
decreased rate of compensation in Fiscal 2007 as compared to Fiscal 2006
pursuant to our long-term affiliation agreement with ABC.
No individual advertiser accounted for more than 5% of our operating
revenues during Fiscal 2007 or 2006.
Total Operating Expenses
Total operating expenses in Fiscal 2007 were $153,406, an increase of
$14,869, or 10.7%, compared to total operating expenses of $138,537 in Fiscal
2006. This net increase consisted of an increase in television operating
expenses, excluding depreciation and amortization, of $13,717, an increase in
depreciation and amortization of $46 and an increase in corporate expenses of
$1,106.
Television operating expenses, excluding depreciation and amortization,
totaled $138,588 in Fiscal 2007, an increase of $13,717, or 11.0%, when compared
to television operating expenses of $124,871 in Fiscal 2006. This increase was
due primarily to an overall increase in employee compensation and benefits,
increased programming expense and new operating expenses for Politico. Employee
compensation and benefits increased 11.0% during Fiscal 2007 as compared to the
prior fiscal year principally due to the hiring of additional personnel leading
up to and associated with the January 2007 launch of Politico. The increase in
programming expense of 8.0% resulted primarily from renewals of several existing
programs as well as the replacement of certain programming with new programming
at higher rates. In addition to new personnel as discussed above, operating
expenses associated with producing and distributing Politico since its January
2007 launch also contributed to the increase in overall operating expenses
during Fiscal 2007.
Corporate expenses in Fiscal 2007 increased $1,106, or 22.1%, from Fiscal
2006 due to a variety of increased expenses primarily including executive
compensation and related costs.
Operating Income
Operating income of $72,740 in Fiscal 2007 decreased $12,122, or 14.3%,
compared to operating income of $84,862 in Fiscal 2006. The operating income
margin in Fiscal 2007 decreased to 32.2% from 38.0% for the prior fiscal year.
The decreases in operating income and
37
margin during Fiscal 2007 were primarily the result of total operating expenses
increasing by a greater amount than net operating revenues, as discussed above.
Nonoperating Expenses, Net
Interest Expense. Interest expense increased by $979, or 2.7%, from
$36,234 in Fiscal 2006 to $37,213 in Fiscal 2007. The increase in interest
expense was primarily due to the increase in the average balance of debt
outstanding during Fiscal 2007 as compared to the prior fiscal year. The average
balance of debt outstanding, including capital lease obligations, for Fiscal
2006 and 2007 was $460,837 and $475,871, respectively, and the weighted average
interest rate on debt during each year was 7.7%.
Other, Net. Other, net nonoperating income was $266 for Fiscal 2007 as
compared to $850 for the prior fiscal year. The difference of $584 primarily
resulted from a gain on the sale of our corporate aircraft during Fiscal 2006,
partially offset by a gain on the exchange of equipment with Sprint Nextel
Corporation ("Nextel") during Fiscal 2007 as discussed below.
The FCC has granted to Nextel the right to reclaim a portion of the
spectrum in the 2 GHz band from broadcasters across the country. In order to
claim this spectrum, Nextel must replace all of the broadcasters' electronic
newsgathering equipment currently using this spectrum with digital equipment
capable of operating in the reformatted portion of the 2 GHz band retained by
the broadcasters. This exchange of equipment will be completed on a market by
market basis. As the equipment is exchanged and placed into service in each of
our markets, a gain will be recorded to the extent that the fair market value of
the equipment received exceeds the book value of the analog equipment exchanged.
During the year ended September 30, 2007, the excess of fair market value as
compared to book value of equipment exchanged and placed into service of $1,256
was recorded as a non-cash gain in other, net nonoperating income.
Income Taxes
The provision for income taxes in Fiscal 2007 totaled $13,817, a decrease
of $4,525, or 24.7%, when compared to the provision for income taxes of $18,342
in Fiscal 2006. The decrease in the provision for income taxes was primarily due
to the $13,420, or 26.9%, decrease in pre-tax income.
Cumulative Effect of Change in Accounting Priniciple
In September 2004, the SEC announced, in conjunction with the issuance of
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 ended September 30, 2006.
38
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 year ended 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 first quarter of the year ended September 30, 2006.
Net Income
For Fiscal 2007, the Company recorded net income of $22,614 as compared to
a net loss of $17,219 for Fiscal 2006. The increase in net income during Fiscal
2007 was primarily due to the cumulative effect of change in accounting
principle during the prior year, partially offset by decreased operating income,
as discussed above.
Contribution of Ownership Interests
During the second quarter of the year ended September 30, 2007, Perpetual
acquired from the Robert Lewis Allbritton Revocable Trust its 20% ownership
interests in TV Alabama, Inc. and Harrisburg Television, Inc., our subsidiaries
which operate our television stations in the Birmingham and Harrisburg markets,
respectively. The 20% ownership interests were then contributed to us. As a
result, we now own 100% of these and all other of our subsidiaries. As the
entities involved in these transactions are considered to be under common
control, we were required to account for this contribution at its book value.
Since the book value of the 20% ownership interests acquired by Perpetual and
then contributed to us was zero, no amount has been recorded in the accompanying
consolidated financial statements related to the contribution.
Liquidity and Capital Resources
Cash Provided by Operations
Our principal sources of working capital are cash flow from operations and
borrowings under our senior credit facility. As discussed above, our operating
results are cyclical in nature primarily as a result of seasonal fluctuations in
advertising revenues, which are generally highest in the first and third
quarters of each fiscal year. Our cash flow from operations is also affected on
a quarterly basis by the timing of cash collections and interest payments on our
debt. Cash receipts are usually greater during the second and fourth fiscal
quarters as the collection of advertising revenue typically lags the period in
which such revenue is recorded. Scheduled semi-
39
annual interest payments on our long-term fixed interest rate debt occur during
the first and third fiscal quarters. As a result, our cash flows from operating
activities as reflected in our consolidated financial statements are generally
significantly higher during our second and fourth fiscal quarters, and such
quarters comprise a substantial majority of our cash flows from operating
activities for the full fiscal year.
As reported in our consolidated statements of cash flows, our net cash
provided by operating activities was $41,374, $31,092 and $34,027 for Fiscal
2006, 2007 and 2008, respectively. The decrease in cash provided by operating
activities from Fiscal 2006 to Fiscal 2007 was the result of decreased income
before cumulative effect of change in accounting principle during Fiscal 2007.
The increase in cash provided by operating activities from Fiscal 2007 to Fiscal
2008 was primarily the result of greater cash collection activity as well as
various other differences in the timing of cash receipts and payments in the
ordinary course of operations, largely offset by decreased net income during
Fiscal 2008.
Distributions to Related Parties
We have periodically made advances in the form of distributions to
Perpetual. For Fiscal 2006, 2007 and 2008, we made cash advances net of
repayments to Perpetual of $23,137, $61,371 and $27,880, 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 sources of repayment of net advances is through
our ability to pay dividends or make other distributions, and there is no
immediate intent for the amounts to be repaid. Accordingly, these advances have
been treated as a reduction of stockholder's investment and are described as
"distributions" in our consolidated financial statements.
Under the terms of the agreements relating to our indebtedness, future
advances, distributions and dividends to related parties are subject to certain
restrictions. We anticipate that, subject to such restrictions, applicable law
and payment obligations with respect to our indebtedness, we will make advances,
distributions or dividends to related parties in the future. Subsequent to
September 30, 2008 and through December 19, 2008, we made additional net
distributions to owners of $4,800.
During Fiscal 2006, 2007 and 2008, we were charged by Perpetual and made
payments under a tax sharing agreement with Perpetual for federal and state
income taxes totaling $15,480, $9,734 and $5,350, respectively.
Stockholder's deficit amounted to $383,524 at September 30, 2008, an
increase of $16,997, or 4.6%, from the September 30, 2007 deficit of $366,527.
The increase was due to a net increase in distributions to owners of $27,880,
the cumulative effect of adopting FIN No. 48 of $1,295 and a charge against
retained earnings under our tax sharing agreement with Perpetual of $695, all
partially offset by net income of $12,873.
40
Indebtedness
Our total debt decreased from $484,100 at September 30, 2007 to $483,408
at September 30, 2008. This debt, net of applicable discounts, consists of
$453,408 of 7 3/4% senior subordinated notes due December 15, 2012 and $30,000
outstanding under our senior credit facility. The decrease of $692 in total debt
from September 30, 2007 to September 30, 2008 was primarily due to net
repayments under the senior credit facility of $1,000.
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 either from prime to prime plus 0.25% or from LIBOR
plus 0.75% to LIBOR plus 1.50% depending on certain financial operating tests.
Under our 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 September
30, 2008, 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 Operations" and, with respect to the annual
financial information only, a report thereon by our certified independent
accountants and (ii) all current reports that would be required to be filed with
the SEC on Form 8-K if we were required to file such reports. In addition, the
indenture also provides that, whether or not required by the rules and
regulations of the SEC, we will file a copy of all such information and reports
with the SEC for public availability (unless the SEC will not accept such a
filing) and make such information available to securities analysts and
prospective investors upon request. Although our duty to file such reports with
the SEC was automatically suspended pursuant to Section 15(d) of the Securities
Exchange Act of 1934, effective October 1, 2003, we will continue to file such
reports in accordance with the indenture.
Other Uses of Cash
During Fiscal 2006, 2007 and 2008, we made $8,836, $6,052 and $5,986,
respectively, of capital expenditures. Capital expenditures of $5,986 during the
year ended September 30, 2008 are exclusive of $2,924 of expenditures related to
the replacement of our broadcast tower and related equipment in Little Rock,
Arkansas, as discussed below. At this time, we estimate that capital
expenditures for Fiscal 2009 will be in the approximate range of $6,000 to
$8,000 (exclusive of capital expenditures associated with the replacement of our
broadcast tower and related equipment in Little Rock, Arkansas, as discussed
below), and will primarily be for the
41
acquisition of technical equipment and vehicles to support ongoing operations
across our stations, including the conversion of WJLA/NewsChannel 8 to
high-definition local production and the transition to our final digital
channels. We expect that the source of funds for these anticipated capital
expenditures will be cash provided by operations and borrowings under the senior
credit facility.
On January 11, 2008, our broadcast tower in Little Rock, Arkansas
collapsed and fell, causing an interruption in the distribution of the
over-the-air broadcast signals for our station in the Little Rock market. The
tower, the broadcast equipment installed on the tower and certain equipment
located near the tower were destroyed. The distribution of the station's primary
signal via cable and satellite services was restored beginning within hours of
the collapse. A limited over-the-air signal was restored ten days later, on
January 21, 2008. Transmitter power was increased as of March 16, 2008, which
served to enhance the reach and quality of the interim over-the-air signal. We
maintain replacement cost property insurance as well as business interruption
insurance on the tower and equipment affected by the collapse, and expect to be
reimbursed for substantially all property and income losses. We are currently
constructing the permanent replacement tower and preparing to install related
equipment. When the insurance claim is ultimately finalized, it is anticipated
that the proceeds received to replace the tower and related equipment will
substantially exceed the carrying value of the destroyed assets. As progress
payments are received from the insurance company, they will be reflected within
investing activities in the accompanying consolidated statement of cash flows to
the extent of claim-related capital expenditures during that period. Progress
payments in excess of claim-related capital expenditures will be reflected
within operating activities.
We regularly enter into program contracts for the right to broadcast
television programs produced by others and program commitments for the right to
broadcast programs in the future. Such programming commitments are generally
made to replace expiring or cancelled program rights. During Fiscal 2006, 2007
and 2008, we made cash payments of approximately $11,600, $10,800 and $10,800,
respectively, for rights to television programs. We anticipate cash payments for
program rights will be in the approximate range of $11,000 to $13,000 per year
for Fiscal 2009 through 2013. We currently intend to fund these commitments with
cash provided by operations.
42
The following table presents the long-term debt maturities, required
payments under contractual agreements for broadcast rights, future minimum lease
payments under noncancellable leases and guaranteed payments under employment
contracts and deferred compensation agreements as of September 30, 2008:
Fiscal Year Ending September 30,
----------------------------------------------------------
2009 2010 2011 2012 2013 Thereafter Total
-------- -------- -------- ------- --------- ---------- ---------
Long-term debt.................... $ -- $ -- $ 30,000 $ -- $ 455,000 $ -- $ 485,000
Programming contracts -- currently
available...................... 13,041 691 477 324 -- -- 14,533
Programming contracts -- future
commitments.................... 969 10,360 9,296 4,150 324 -- 25,099
Operating leases.................. 4,873 4,813 4,731 4,504 4,597 21,427 44,945
Employment contracts.............. 11,371 3,497 1,995 313 44 -- 17,220
Deferred compensation............. 587 369 369 169 96 -- 1,590
-------- -------- -------- ------- --------- -------- ---------
Total....................... $ 30,841 $ 19,730 $ 46,868 $ 9,460 $ 460,061 $ 21,427 $ 588,387
======== ======== ======== ======= ========= ======== =========
We also have certain obligations and commitments under various executory
agreements to make future payments for goods and services. These agreements
secure the future rights to certain goods and services to be used in the normal
course of operations.
Based upon our current level of operations, we believe that available
cash, together with cash flows generated by operating activities as well as
amounts available both under the senior credit facility and from repayments of
distributions to owners, will be adequate to meet our anticipated future
requirements for working capital, capital expenditures and scheduled payments of
interest on our debt for the next twelve months.
ACC's cash flow from operations and consequent ability to service its debt
is, in part, dependent upon the earnings of its subsidiaries and the
distribution (through dividends or otherwise) of those earnings to ACC, or upon
loans, advances or other payments of funds by those subsidiaries to ACC. As of
September 30, 2008, 59% of the assets of ACC were held by operating subsidiaries
and for Fiscal 2008, approximately 50% of ACC's net operating revenues were
derived from the operations of ACC's subsidiaries.
Income Taxes
Our operations are included in a consolidated federal income tax return
filed by Perpetual. In accordance with the terms of a tax sharing agreement
between ACC and Perpetual, we are required to pay to Perpetual our federal
income tax liability, computed based upon statutory federal income tax rates
applied to our consolidated taxable income. We file separate state income tax
returns with the exception of Virginia, which is included in a combined state
income tax return filed by Perpetual. In accordance with the terms of the tax
sharing agreement, we are required to pay to Perpetual our combined Virginia
income tax liability, computed based upon statutory Virginia income tax rates
applied to our combined Virginia net taxable income. Taxes
43
payable to Perpetual are not reduced by losses generated in prior years by us.
In addition, the amounts payable by us to Perpetual under the tax sharing
agreement are not reduced if losses of other members of the Perpetual group are
utilized to offset our taxable income for purposes of the Perpetual consolidated
federal or Virginia state income tax returns.
The provision for income taxes is determined in accordance with SFAS No.
109, which requires that the consolidated amount of current and deferred income
tax expense for a group that files a consolidated income tax return be allocated
among members of the group when those members issue separate financial
statements. Perpetual allocates a portion of its consolidated current and
deferred income tax expense to us as if we and our subsidiaries were separate
taxpayers. We record deferred tax assets, to the extent it is considered more
likely than not that such assets will be realized in future periods, and
deferred tax liabilities for the tax effects of the differences between the
bases of our assets and liabilities for tax and financial reporting purposes.
We record income tax expense in accordance with SFAS No. 109 and make
payments to Perpetual in accordance with the terms of the tax sharing agreement
between us and Perpetual. To the extent that there is a difference between tax
payments that would be due as calculated in accordance with SFAS No. 109 and tax
payments due under the tax sharing agreement, such difference is recorded to
retained earnings.
Inflation
The impact of inflation on our consolidated financial condition and
consolidated results of operations for each of the periods presented was not
material.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make judgments
and estimates that affect the amounts reported in our consolidated financial
statements and accompanying notes. We base our estimates on historical
experience and assumptions we consider reasonable at the time of making those
estimates. We evaluate our estimates on an on-going basis. Actual results may
differ from these estimates under different circumstances or using different
assumptions. We consider the following accounting policies to be critical to our
business operations and the understanding of our financial condition and results
of operations.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. As is
customary in the broadcasting industry, we do not require collateral for our
credit sales, which are typically due within thirty days. If the economy and/or
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make their payments, additional allowances may be
required.
44
Intangible Assets
Intangible assets consist of values assigned to broadcast licenses as well
as favorable terms on contracts and leases. The amounts originally assigned to
intangible assets were based on the results of independent valuations.
Intangible assets, net of accumulated amortization, were $42,327 and $42,290 as
of September 30, 2007 and 2008, respectively.
SFAS No. 142, "Goodwill and Other Intangible Assets," was issued in June
2001 and became effective for our fiscal year ended September 30, 2003. SFAS No.
142 addressed the financial accounting and reporting for acquired goodwill and
other intangible assets. Under these rules, goodwill and intangible assets
deemed to have indefinite lives are not amortized but are subject to annual
impairment tests. Other intangible assets continue to be amortized over their
useful lives.
In September 2004, the SEC announced, in conjunction with the issuance of
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 became effective at the beginning
of our Fiscal 2006.
Our indefinite lived intangible assets, consisting of broadcast licenses,
are subject to periodic impairment tests. Prior to the implementation of EITF
Topic No. D-108, we had used the residual method to determine the value of our
broadcast licenses for purposes of testing for impairment. Upon implementation
of EITF Topic No. D-108 during the first quarter of Fiscal 2006, we use the
direct value method. The direct value method, which differs markedly from the
residual value method, requires us to value our broadcast licenses using an
average market participant concept. This concept assumes that cash flows
associated with broadcast 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 broadcast 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 first quarter of Fiscal 2006.
Other intangible assets have been amortized over the terms of the related
contracts and leases, and the recoverability of these assets is assessed on an
ongoing basis by evaluating whether amounts can be recovered through
undiscounted cash flows over the remaining amortization period.
The performance of impairment tests under SFAS No. 142, including the new
requirements of EITF Topic No. D-108, requires significant management judgment.
Future events affecting
45
cash flows, market conditions or accounting standards could result in further
impairment losses. Any resulting impairment loss could have a material adverse
impact on our consolidated financial statements.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." We recognize deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. We regularly review our deferred tax assets for
recoverability and establish a valuation allowance if it is more likely than not
that the deferred tax assets will not be realized. This assessment is based on
historical taxable income, projected future taxable income and the expected
timing of the reversals of existing temporary differences. If we are unable to
generate sufficient taxable income, or if there is a material change in the
actual effective tax rates or time period within which the underlying temporary
differences become taxable or deductible, we could be required to establish a
valuation allowance against all or a significant portion of our deferred tax
assets resulting in a substantial increase in our effective tax rate and an
adverse impact on our operating results.
Our operations are included in a consolidated federal income tax return
filed by Perpetual. In accordance with the terms of a tax sharing agreement
between us and Perpetual, we are required to pay to Perpetual our federal income
tax liability, computed based upon statutory federal income tax rates applied to
our consolidated taxable income. We file separate state income tax returns with
the exception of Virginia, which is included in a combined state income tax
return filed by Perpetual. In accordance with the terms of the tax sharing
agreement, we are required to pay to Perpetual our combined Virginia income tax
liability, computed based upon statutory Virginia income tax rates applied to
our combined Virginia net taxable income. Taxes payable to Perpetual are not
reduced by losses generated in prior years by us. In addition, the amounts
payable to Perpetual under the tax sharing agreement are not reduced if losses
of other members of the Perpetual group are utilized to offset our taxable
income for purposes of the Perpetual consolidated federal or Virginia income tax
returns.
SFAS No. 109 requires that the consolidated amount of current and deferred
income tax expense for a group that files a consolidated income tax return be
allocated among members of the group when those members issue separate financial
statements. Perpetual allocates a portion of its consolidated current and
deferred income tax expense to us as if we and our subsidiaries were separate
taxpayers. We record deferred tax assets, to the extent it is more likely than
not that such assets will be realized in future periods, and deferred tax
liabilities for the tax effects of the differences between the bases of our
assets and liabilities for tax and financial reporting purposes.
We record income tax expense in accordance with SFAS No. 109 and make
payments to Perpetual in accordance with the terms of the tax sharing agreement
between us and Perpetual. To the extent that there is a difference between tax
payments that would be due as calculated in accordance with SFAS No. 109 and tax
payments due under the tax sharing agreement, such difference is recorded to
retained earnings.
46
In June 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in
Income Taxes." FIN No. 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. The provisions of FIN No. 48 were adopted
on October 1, 2007. The Company classifies interest and penalties related to its
uncertain tax positions as a component of income tax expense.
Our provision for income taxes and related deferred tax assets and
liabilities reflect our estimates of actual future taxes to be paid. Such
estimates are based on items reflected in the consolidated financial statements,
considering timing as well as the sustainability of our tax filing positions.
Actual income taxes paid could vary from our estimates as a result of future
changes in income tax law or reviews by federal or various state and local tax
authorities.
New Accounting Standards
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements." SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS No. 157 does not expand or require any new fair value measures but is
applicable whenever another accounting pronouncement requires or permits assets
and liabilities to be measured at fair value. SFAS No. 157 is effective for our
fiscal year ending September 30, 2009. We are currently evaluating the impact,
if any, that SFAS No. 157 may have on our financial position or results of
operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities." SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. SFAS
No. 159 is effective for our fiscal year ending September 30, 2009. We are
currently evaluating the impact, if any, that SFAS No. 159 may have on our
financial position or results of operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303 of
Regulation S-K.
47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
(dollars in thousands)
At September 30, 2008, 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 September 30,
2008, the carrying value of such debt was $453,408, the fair value was
approximately $389,000 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 using either quoted market prices or by discounting
the required future cash flows under our debt using borrowing rates currently
available to us, as applicable. We actively monitor the capital markets in
analyzing our capital raising decisions.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
See Index on page F-1.
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company has performed an evaluation of its disclosure controls and
procedures (as defined by Exchange Act rule 15d-15(e)) as of September 30, 2008.
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-K is made known to them by others on a timely basis.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). To evaluate the effectiveness of the Company's internal
control over financial reporting, the Company uses the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Using the framework in Internal
Control - Integrated Framework, management, including the CEO and CFO, evaluated
the Company's internal control over financial reporting and concluded that the
Company's internal control over financial reporting was effective as of
September 30, 2008. This annual report does not include an attestation report of
the Company's independent registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by the Company's independent registered public accounting firm
pursuant to temporary rules of the SEC that permit the Company to provide only
management's report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial
reporting during the quarter ended September 30, 2008 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
49
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers and Directors
Executive officers and directors of ACC are as follows:
Name Age Title
- -------------------------- --- -----------------------------------
Barbara B. Allbritton 71 Executive Vice President and Director
Robert L. Allbritton 39 Chairman, Chief Executive Officer and Director
Frederick J. Ryan, Jr. 53 Vice Chairman, President, Chief Operating
Officer and Director
Jerald N. Fritz 57 Senior Vice President, Legal and Strategic
Affairs, General Counsel
Stephen P. Gibson 43 Senior Vice President and Chief Financial
Officer
James C. Killen, Jr. 46 Vice President, Sales
_______________
BARBARA B. ALLBRITTON has been a Director of ACC since its inception, Vice
President of ACC from 1980 to 2001 and Executive Vice President since 2001. She
currently serves as an officer and/or director of each of ACC's television
subsidiaries, as well as Perpetual, The Allbritton Foundation and the Allbritton
Art Institute. She currently serves as a trustee of Baylor College of Medicine
and a director of Blair House Restoration Fund. She was formerly a director of
Riggs Bank N.A. and The Foundation for the National Archives. Mrs. Allbritton is
the wife of Joe L. Allbritton and the mother of Robert L. Allbritton. See
"Certain Relationships and Related Transactions."
ROBERT L. ALLBRITTON has been Chairman of the Board of Directors and Chief
Executive Officer of ACC since February 2001 and a Director of ACC since 1993.
He also serves as a member of the Executive Committee of the Board of Directors
of ACC. Mr. Allbritton was Executive Vice President and Chief Operating Officer
of ACC from 1994 to 1998 and President of ACC from 1998 to 2001. He is also an
officer and/or director of Perpetual, each of ACC's subsidiaries, The Allbritton
Foundation and the Allbritton Art Institute. He has been involved in management
of the television properties at both the corporate and daily operational levels,
including financial, technical, strategic, programming, sales, news and
promotion. He is also Publisher of Politico, which launched in January 2007. In
addition to his positions with ACC, Mr. Allbritton was the Chairman of the Board
of Directors and Chief Executive Officer of Riggs National Corporation ("Riggs")
from 2001 until 2005 and a Director of Riggs from 1994 until 2005. Mr.
Allbritton has served on the Board of Directors of the Washington Hospital
Center and the Lyndon B. Johnson Foundation since 2002. He has also served on
the Board of
50
Trustees of The George Washington University since 2002 and Wesleyan University
since 2003. He served on the Board of Directors of Juniper Content Corporation
from January to November 2007. He is the son of Joe L. and Barbara B.
Allbritton. See "Certain Relationships and Related Transactions."
FREDERICK J. RYAN, JR. has been President of ACC since February 2001,
Chief Operating Officer since 1998 and a Director and its Vice Chairman since
1995. He has served as Senior Vice President and Executive Vice President of ACC
and is an officer of each of its television subsidiaries. He is also President
and Chief Executive Officer of Politico, which launched in January 2007. He
previously served as Chief of Staff to former President Ronald Reagan
(1989-1995) and Assistant to the President in the White House (1982-1989). Prior
to his government service, Mr. Ryan was an attorney with the Los Angeles firm of
Hill, Farrer and Burrill. Mr. Ryan presently serves as Chairman of the Ronald
Reagan Presidential Library Foundation, Vice Chairman of the White House
Historical Association, a trustee of Ford's Theatre, and a member of the Board
of Councilors of the Annenberg School of Communications at the University of
Southern California.
JERALD N. FRITZ has been part of ACC's management since 1987, currently
serving as a Senior Vice President. He serves as its General Counsel and also
oversees strategic planning and governmental affairs. From 1981 to 1987, Mr.
Fritz held several positions with the FCC, including Chief of Staff and Legal
Counsel to the Chairman. Mr. Fritz was in private practice from 1978 to 1981,
specializing in communications law, and from 1980 to 1983 was on the adjunct
faculty of George Mason University Law School teaching communications law and
policy. Mr. Fritz began his career in broadcasting in 1973 with WGN-TV, Chicago.
He is a former director of the National Association of Broadcasters ("NAB"). Mr.
Fritz is a former division chair of the Communications Forum of the American Bar
Association and currently serves on the NAB's Copyright Committee and Digital TV
Task Force as well as the immediate past Co-Chair of the Pre-Publication
Committee of the Media Law Resource Center.
STEPHEN P. GIBSON has been a Senior Vice President of ACC since February
2001 and a Vice President since 1997. He has served as Chief Financial Officer
since 1998 and Controller from 1997, when he joined the Company, to 1998. He is
also Assistant Treasurer of The Allbritton Foundation and Vice President of
Perpetual and each of ACC's subsidiaries. Prior to joining ACC, Mr. Gibson
served as Controller for COMSAT RSI Plexsys Wireless Systems, a provider of
wireless telecommunications equipment and services, from 1994 to 1997. From 1987
to 1994, Mr. Gibson held various positions with the accounting firm of Price
Waterhouse LLP, the latest as Audit Manager. He served as an elected director of
the Broadcast Cable Financial Management Association from 2002 until 2005.
JAMES C. KILLEN, JR. joined ACC as Vice President, Sales in November 2004
to oversee, coordinate and support all aspects of advertising sales for the
Company. Prior to joining ACC, Mr. Killen held various sales positions with NBC
from 1992 until 2004, most recently Local Sales Manager and New York National
Sales Manager of NBC4 in Washington, D.C. His network experience included
several years as an NBC Account Manager selling the NBC owned and operated
stations.
51
Code of Ethics for Senior Financial Officers
Our Board of Directors has adopted a Code of Ethics for Senior Financial
Officers. A copy of the Code of Ethics is incorporated by reference as an
exhibit to this Annual Report on Form 10-K.
Audit Committee Financial Expert
The members of our Audit Committee are Robert L. Allbritton and Frederick
J. Ryan, Jr. The Board of Directors has determined that it does not currently
have an "audit committee financial expert" as defined by Item 401(h) of
Regulation S-K. As the Company is privately held, the Board of Directors is not
currently considering expanding its members in order to include an "audit
committee financial expert" as defined.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview and Objectives
Our executive compensation program is designed to attract, retain and
reward qualified executives and encourage decisions and actions that have a
positive impact on Company performance. It is our objective to set total
executive compensation at a level that attracts and retains strong, competent
leadership for the Company. A further objective of the compensation program is
to provide incentives and rewards to each executive for their contribution to
the Company.
The Company's compensation program, primarily consisting of salary and
bonus payments to the Company's executive officers, who are named in the Summary
Compensation Table appearing elsewhere in this Item and are referred to as the
"named executive officers," is a cash program. At this time, there are no stock
options, stock awards or any other equity-based programs as part of the
Company's compensation program.
The Company's executives do not have employment agreements that might
include provisions for change in control, severance arrangements, equity or
security ownership, or other such matters.
Compensation Process
We do not have a compensation committee of our Board of Directors, and our
Board generally does not seek input from outside compensation consultants with
respect to annual compensation decisions.
Our Chairman and Chief Executive Officer, with input from our President
and Chief Operating Officer, annually reviews the performance of each of the
named executive officers and
52
determines their compensation levels. Compensation levels for our Chairman and
Chief Executive Officer and President and Chief Operating Officer are
established in the same manner as our other executive officers in consultation
with the third member of our Board of Directors.
Elements of Compensation
The principal elements of the Company's executive compensation consist of
the following:
o Base Salary;
o Annual Cash Bonuses;
o Perquisites and Other Compensation; and
o Health Benefits.
Base Salary. The base salary component of the Company's executive
compensation program provides each named executive officer with a fixed minimum
amount of cash compensation throughout the year. Salaries are determined by
position, which takes into consideration the responsibilities and job
performance of each named executive officer and competitive market compensation
paid by other companies for similar positions. Base salary amounts are
determined in the first quarter of the fiscal year.
Annual Cash Bonuses. The Company does not utilize defined formulas for
bonuses paid to its executive officers, including its named executive officers.
The payment of cash bonuses is made on a discretionary basis and is determined
based on an evaluation of each executive's individual performance. The annual
cash bonuses are intended to reward individuals based on their contributions to
the overall success of the Company. Bonuses are generally paid in the first
quarter following the end of the fiscal year for which performance is being
rewarded.
Perquisites and Other Compensation. We also provide our named executive
officers with other benefits that we believe are reasonable and consistent with
the stated objectives of the Company's executive compensation program. Such
benefits include the following:
o Company contributions to our defined contribution 401(k) savings
plan;
o Use of a Company-provided automobile or payment of an automobile
allowance;
o Company-paid parking; and
o Reimbursement for membership in certain clubs.
The Company provides all eligible employees a 50% matching contribution on
up to 6% of compensation deferred through an IRS qualified 401(k) savings plan.
Under the 401(k) plan, employees may contribute a portion of their compensation
subject to IRS limitations. The Company does not have a defined benefit pension
plan.
Health Benefits. All full-time employees, including our named executive
officers, may participate in our group health benefit program, including
medical, dental and vision care coverage, disability insurance and life
insurance. In addition, our named executive officers are also covered under a
supplemental executive long-term disability insurance program.
53
Determination of Fiscal 2008 Compensation
Our goals for Fiscal 2008 were to provide an executive compensation
program that was equitable in a competitive marketplace and recognized and
rewarded individual achievements. To achieve such goals, we relied primarily on
base salaries, cash bonuses and other compensation for each of our named
executive officers. Compensation levels for each named executive officer were
determined based on the position and responsibility of such executive, his
impact on the operation and financial performance of the Company and the
knowledge and experience of such executive. These factors were considered as a
group, without particular weight given to any single factor, and were
necessarily subjective in nature.
54
Summary Compensation Table
The following table sets forth certain compensation information for our
Chief Executive Officer, Chief Financial Officer and each of our three other
most highly compensated executive officers for the fiscal years ended September
30, 2007 and 2008:
Fiscal All Other
Name and Principal Position Year Salary Bonus Compensation<F5> Total
- ------------------------------ ------ --------- --------- ---------------- ---------
Robert L. Allbritton<F1> 2008 $ 600,000 $ 212,500 $ -- $ 812,500
Chairman and 2007 550,000 250,000 -- 800,000
Chief Executive Officer
Frederick J. Ryan, Jr.<F2> 2008 550,000 212,500 44,169 806,669
President and Chief 2007 500,000 250,000 40,554 790,554
Operating Officer
Stephen P. Gibson<F3> 2008 325,000 106,250 35,684 466,934
Senior Vice President and 2007 300,000 125,000 36,073 461,073
Chief Financial Officer
James C. Killen, Jr. 2008 325,000 93,500 40,365 458,865
Vice President, Sales 2007 300,000 110,000 38,956 448,956
Jerald N. Fritz<F4> 2008 290,000 85,000 35,492 410,492
Senior Vice President, Legal 2007 275,000 100,000 35,847 410,847
and Strategic Affairs
<FN>
_______________
<F1> Robert L. Allbritton is paid cash compensation by Perpetual for services to
Perpetual and other interests of Joe L. Allbritton, including ACC. The
portion of such compensation related to ACC is allocated to ACC and also
included as compensation above.
<F2> Frederick J. Ryan, Jr. is paid cash compensation by ACC for services to
ACC, which is included as compensation above. In addition, Mr. Ryan is also
separately paid cash compensation by Perpetual for services to Perpetual
and other interests of Joe L. Allbritton.
<F3> Stephen P. Gibson is paid cash compensation by ACC for services to ACC,
which is included as compensation above. In addition, Mr. Gibson is also
separately paid cash compensation by Perpetual for services to Perpetual
and other interests of Joe L. Allbritton.
<F4> Jerald N. Fritz is paid cash compensation by ACC for services to ACC and
Perpetual. Of the compensation shown in the table for Mr. Fritz, $11,000
and $14,500 represent the portion of such compensation related to
Perpetual, and has been allocated to Perpetual in Fiscal 2007 and 2008,
respectively.
<F5> Amounts in this column consist of dollar values of perquisites and other
benefits including amounts contributed by the Company on behalf of our
named executive officers to our defined contribution 401(k) savings plan,
use of a Company-provided automobile or an automobile allowance, premiums
for group health and term life insurance and executive disability plans,
parking and club membership reimbursements.
</FN>
Compensation of Directors
Our directors are not separately compensated for membership on the Board
of Directors.
55
Compensation Committee
We do not have a compensation committee of our Board of Directors. Our
Chairman and Chief Executive Officer, with input from our President and Chief
Operating Officer, annually reviews the performance of each of the named
executive officers and determines their compensation levels. Compensation levels
for our Chairman and Chief Executive Officer and President and Chief Operating
Officer are established in the same manner as our other executive officers in
consultation with the third member of our Board of Directors, who is also an
Executive Officer of the Company.
Compensation Committee Report
Our Board of Directors has reviewed and discussed with management the
Compensation Discussion and Analysis contained in this Form 10-K. Based on this
review and discussion, our Board of Directors recommends that the Compensation
Discussion and Analysis be included in this Form 10-K for the fiscal year ended
September 30, 2008.
Barbara B. Allbritton
Robert L. Allbritton
Frederick J. Ryan, Jr.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The authorized capital stock of ACC consists of 20,000 shares of common
stock, par value $0.05 per share (the "ACC Common Stock"), all of which is
outstanding, and 1,000 shares of preferred stock, 200 shares of which have been
designated for issue as Series A Redeemable Preferred Stock, par value $1.00 per
share (the "Series A Preferred Stock"), no shares of which are issued and
outstanding.
ACC Common Stock
The Allbritton family controls Perpetual. Perpetual owns 100% of the
outstanding common stock of AGI, and AGI owns 100% of the outstanding ACC Common
Stock. Perpetual's address is 1000 Wilson Boulevard, Suite 2700, Arlington,
Virginia 22209. There is no established public trading market for ACC Common
Stock.
Each share of ACC Common Stock has an equal and ratable right to receive
dividends when and as declared by the Board of Directors of ACC out of assets
legally available therefor.
In the event of a liquidation, dissolution or winding up of ACC, holders
of ACC Common Stock are entitled to share ratably in assets available for
distribution after payments to creditors and to holders of any preferred stock
of ACC that may at the time be outstanding. The holders of ACC Common Stock have
no preemptive rights to subscribe to additional shares of capital stock
56
of ACC. Each share of ACC Common Stock is entitled to one vote in elections of
directors and all other matters submitted to a vote of ACC's stockholder.
Equity Compensation Plans
ACC does not have any compensation plans or individual compensation
arrangements under which ACC Common Stock or Series A Preferred Stock are
authorized for issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
(dollars in thousands)
Distributions to Related Parties
ACC has periodically made advances in the form of distributions to
Perpetual. For Fiscal 2008, ACC made cash advances to Perpetual of $37,845 and
Perpetual made repayments on these cash advances of $9,965. The advances to
Perpetual are non-interest bearing and, as such, do not reflect market rates of
interest-bearing loans to unaffiliated third parties. In addition, ACC was
charged by Perpetual and made payments to Perpetual for federal and state income
taxes in the amount of $5,350. As a result of making advances of tax payments in
accordance with the terms of the tax sharing agreement between ACC and
Perpetual, we earned interest income from Perpetual in the amount of $200. See
"Income Taxes" below.
At present, the primary source of repayment of net advances is through our
ability to pay dividends or make other distributions, and there is no immediate
intent for the amounts to be repaid. Accordingly, these advances have been
treated as a reduction of stockholder's investment and are described as
"distributions" in our consolidated financial statements.
Under the terms of the agreements governing our indebtedness, future
advances, distributions and dividends to related parties are subject to certain
restrictions. We anticipate that, subject to such restrictions, applicable law
and payment obligations with respect to the notes and our other debt, ACC will
make advances, distributions or dividends to related parties in the future.
Subsequent to September 30, 2008 and through December 19, 2008, we made
additional net distributions to owners of $4,800.
Management Fees
We paid management fees of $750 to Perpetual for Fiscal 2008, and we
expect that management fees to be paid to Perpetual during Fiscal 2009 will
approximate the amount paid for Fiscal 2008. These management fees reflect the
compensation allocations referenced in the Executive Compensation Table as well
as the net allocation of other shared costs. We believe that payments to
Perpetual will continue in the future and that the amount of the management fees
is at least as favorable to us as those prevailing for comparable transactions
with or involving unaffiliated parties.
57
Income Taxes
Our operations are included in a consolidated federal income tax return
filed by Perpetual. In accordance with the terms of a tax sharing agreement
between ACC and Perpetual, ACC is required to pay to Perpetual its federal
income tax liability, computed based upon statutory federal income tax rates
applied to our consolidated taxable income. We file separate state income tax
returns with the exception of Virginia which is included in a combined state
income tax return filed by Perpetual. In accordance with the terms of the tax
sharing agreement, we are required to pay to Perpetual our combined Virginia
income tax liability, computed based upon statutory Virginia income tax rates
applied to our combined Virginia net taxable income. Taxes payable to Perpetual
are not reduced by losses generated in prior years by us. In addition, the
amounts payable by us to Perpetual under the tax sharing agreement are not
reduced if losses of other members of the Perpetual group are utilized to offset
our taxable income for purposes of the Perpetual consolidated federal or
Virginia state income tax returns.
The provision for income taxes is determined in accordance with SFAS No.
109, "Accounting for Income Taxes," which requires that the consolidated amount
of current and deferred income tax expense for a group that files a consolidated
income tax return be allocated among members of the group when those members
issue separate financial statements. Perpetual allocates a portion of its
consolidated current and deferred income tax expense to us as if we and our
subsidiaries were separate taxpayers. We record deferred tax assets, to the
extent it is considered more likely than not that such assets will be realized
in future periods, and deferred tax liabilities for the tax effects of the
differences between the bases of its assets and liabilities for tax and
financial reporting purposes.
We record income tax expense in accordance with SFAS No. 109 and make
payments to Perpetual in accordance with the terms of the tax sharing agreement
between us and Perpetual. To the extent that there is a difference between tax
payments that would be due as calculated in accordance with SFAS No. 109 and tax
payments due under the tax sharing agreement, such difference is recorded to
retained earnings.
Office Space
We lease certain office space to Irides, LLC ("Irides"). Irides is a
wholly-owned subsidiary of Allbritton New Media, Inc. ("ANMI") which in turn is
an 80%-owned subsidiary of Perpetual. The remaining 20% of ANMI is owned by Mr.
Robert L. Allbritton who has options to acquire up to a total of 80% ownership
of ANMI. Charges for this space totaled $145 for Fiscal 2008, and we expect to
receive $149 during Fiscal 2009. We believe that the terms of the lease are
substantially the same or at least as favorable to ACC as those prevailing for
comparable leases involving nonaffiliated companies.
Internet Services
We have entered into various agreements with Irides to provide our
stations with web site design, hosting and maintenance services. We incurred
fees of $525 to Irides during Fiscal 2008, and we expect to pay fees to Irides
during Fiscal 2009 for services performed of approximately
58
$475. We believe that the terms and conditions of the agreements are
substantially the same or at least as favorable to us as those prevailing for
comparable transactions with or involving nonaffiliated companies.
Director Independence
There are no independent members of our Board of Directors as each member
of our Board is also an executive officer of the Company. As the Company is
privately held, the Board of Directors is not currently considering expanding
its members in order to include independent directors.
Review and Approval of Transactions with Related Parties
The Company is subject to various restrictive covenants covering
transactions with related parties under its existing debt agreements. Our
directors and executive officers are made aware of the Company's obligations to
identify, process and disclose such transactions in order to comply with these
covenants. Our directors and executive officers are also expected to promptly
disclose to the Chairman and Chief Executive Officer or the President and Chief
Operating Officer, for review and approval, the material facts of any
transaction that could be considered a related party transaction that is
otherwise permissible under the terms of the Company's debt covenants.
On an annual basis, each director and executive officer of the Company
must complete and certify to a Director and Officer Questionnaire that requires
disclosure of any transaction, arrangement or relationship with the Company
during the last fiscal year in which the director or executive officer, or any
member of his or her immediate family, had a direct or indirect material
interest. Any transaction, arrangement, or relationship disclosed in the
Director and Officer Questionnaire is reviewed and considered by our General
Counsel with respect to any conflicts of interest.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
(dollars in thousands)
PricewaterhouseCoopers LLP audited our consolidated financial statements
for the year ended September 30, 2008 and our Board of Directors has appointed
PricewaterhouseCoopers LLP as our independent registered public accounting firm
to audit our consolidated financial statements for the year ending September 30,
2009.
59
The fees billed by PricewaterhouseCoopers LLP for 2007 and 2008 were as
follows:
2007 2008
----- -----
Audit fees................................. $ 297 $ 320
Audit-related fees......................... 28 --
Tax fees................................... -- --
All other fees............................. 5 6
----- -----
Total...................................... $ 330 $ 326
===== =====
Fees for audit services included fees associated with the annual audit and
the reviews of our quarterly reports on Form 10-Q as well as any other documents
filed with the SEC. Audit-related fees during the year ended September 30, 2007
consisted of fees associated with the audit of our defined contribution savings
plan. All other fees consisted of fees associated with the compilation of
advertising revenue information for the Washington, D.C. market as well as the
license of accounting research software.
Our Board of Directors pre-approves all audit and permitted non-audit
services, including the fees and terms thereof.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements
See Index on p. F-1 hereof.
(2) Financial Statement Schedule II--Valuation and Qualifying
Accounts and Reserves
See Index on p. F-1 hereof.
(3) Exhibits
See Index on p. A-1 hereof.
60
ALLBRITTON COMMUNICATIONS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm............. F-2
Consolidated Balance Sheets as of September 30, 2007 and 2008....... F-3
Consolidated Statements of Operations and Retained Earnings for
Each of the Years Ended September 30, 2006, 2007 and 2008........ F-4
Consolidated Statements of Cash Flows for Each of the Years
Ended September 30, 2006, 2007 and 2008.......................... F-5
Notes to Consolidated Financial Statements.......................... F-6
Financial Statement Schedule for the Years Ended September 30,
2006, 2007 and 2008
II--Valuation and Qualifying Accounts and Reserves............... F-22
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or the notes
thereto.
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder
of Allbritton Communications Company
In our opinion, the consolidated financial statements listed in the index on
page F-1 present fairly, in all material respects, the financial position of
Allbritton Communications Company (an indirectly wholly-owned subsidiary of
Perpetual Corporation) and its subsidiaries at September 30, 2008 and 2007, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 2008 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index on page F-1 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
McLean, VA
December 19, 2008
F-2
ALLBRITTON COMMUNICATIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share information)
September 30,
------------------------
2007 2008
--------- ---------
ASSETS
Current assets
Cash and cash equivalents ......................................................... $ 2,402 $ 1,572
Accounts receivable, less allowance for doubtful accounts of $1,547 and $1,563 .... 44,048 37,824
Program rights .................................................................... 10,610 10,848
Deferred income taxes ............................................................. 1,441 1,447
Other ............................................................................. 2,140 2,677
--------- ---------
Total current assets ........................................................ 60,641 54,368
Property, plant and equipment, net ...................................................... 43,863 43,314
Intangible assets, net .................................................................. 42,327 42,290
Cash surrender value of life insurance .................................................. 12,611 13,092
Program rights .......................................................................... 1,262 978
Deferred income taxes ................................................................... 2,643 745
Deferred financing costs and other ...................................................... 5,702 4,668
--------- ---------
$ 169,049 $ 159,455
========= =========
LIABILITIES AND STOCKHOLDER'S INVESTMENT
Current liabilities
Accounts payable .................................................................. $ 3,328 $ 4,111
Accrued interest payable .......................................................... 10,595 10,541
Program rights payable ............................................................ 12,476 13,041
Accrued employee benefit expenses ................................................. 6,322 7,168
Other accrued expenses ............................................................ 4,822 7,907
--------- ---------
Total current liabilities ................................................... 37,543 42,768
Long-term debt .......................................................................... 484,100 483,408
Program rights payable .................................................................. 1,628 1,492
Accrued employee benefit expenses ....................................................... 1,565 1,207
Deferred rent and other ................................................................. 10,740 14,104
--------- ---------
Total liabilities ........................................................... 535,576 542,979
--------- ---------
Commitments and contingent liabilities (Note 10)
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 ................................................................. 27,654 38,537
Distributions to owners, net (Note 7) ............................................. (443,813) (471,693)
--------- ---------
Total stockholder's investment............................................... (366,527) (383,524)
--------- ---------
$ 169,049 $ 159,455
========= =========
See accompanying notes to consolidated financial statements.
F-3
ALLBRITTON COMMUNICATIONS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Dollars in thousands)
Year Ended September 30,
---------------------------------------
2006 2007 2008
--------- --------- ---------
Operating revenues, net ................................................ $ 223,399 $ 226,146 $ 224,108
--------- --------- ---------
Television operating expenses, excluding depreciation and amortization.. 124,871 138,588 149,987
Depreciation and amortization .......................................... 8,666 8,712 9,511
Corporate expenses ..................................................... 5,000 6,106 6,459
--------- --------- ---------
138,537 153,406 165,957
--------- --------- ---------
Operating income ....................................................... 84,862 72,740 58,151
Nonoperating income (expense)
Interest income
Related party .............................................. 226 430 200
Other ...................................................... 147 208 96
Interest expense ................................................. (36,234) (37,213) (37,631)
Other, net ....................................................... 850 266 123
--------- --------- ---------
Income before income taxes and cumulative effect of change
in accounting principle ........................................ 49,851 36,431 20,939
Provision for income taxes ............................................. 18,342 13,817 8,066
--------- --------- ---------
Income before cumulative effect of change in
accounting principle ........................................... 31,509 22,614 12,873
Cumulative effect of change in accounting principle, net of
income tax benefit of $31,272 (Note 4) ......................... 48,728 -- --
--------- --------- ---------
Net (loss) income ...................................................... (17,219) 22,614 12,873
Retained earnings, beginning of year ................................... 22,259 5,040 27,654
Cumulative effect of adopting FIN No. 48 effective
October 1, 2007 (Note 6) ....................................... -- -- (1,295)
Charge under tax sharing agreement (Note 6) ............................ -- -- (695)
--------- --------- ---------
Retained earnings, end of year ......................................... $ 5,040 $ 27,654 $ 38,537
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
ALLBRITTON COMMUNICATIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended September 30,
-----------------------------------
2006 2007 2008
-------- -------- --------
Cash flows from operating activities:
Net (loss) income ................................................ $(17,219) $ 22,614 $ 12,873
-------- -------- --------
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization ............................... 8,666 8,712 9,511
Cumulative effect of change in accounting principle ......... 48,728 -- --
Other noncash charges ....................................... 1,304 1,326 1,349
Provision for doubtful accounts ............................. 587 1,265 1,068
Gain on disposal of assets .................................. (1,962) (1,382) (1,243)
Charge under tax sharing agreement .......................... -- -- (695)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ............................... (4,916) (4,020) 5,156
Program rights .................................... (1,834) (290) 46
Other current assets .............................. 365 (538) (537)
Deferred income taxes ............................. 1,293 3,160 3,616
Other noncurrent assets ........................... (245) (286) (488)
Increase (decrease) in liabilities:
Accounts payable .................................. 688 288 783
Accrued interest payable .......................... (53) 212 (54)
Program rights payable ............................ 484 825 429
Accrued employee benefit expenses ................. 296 493 488
Other accrued expenses ............................ 1,929 (2,748) 1,380
Deferred rent and other liabilities ............... 3,263 1,461 345
-------- -------- --------
Total adjustments ........................... 58,593 8,478 21,154
-------- -------- --------
Net cash provided by operating activities ... 41,374 31,092 34,027
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ............................................. (8,836) (6,052) (8,910)
Progress payments received from property insurance claims ........ -- -- 2,924
Proceeds from disposal of assets ................................. 2,166 163 9
-------- -------- --------
Net cash used in investing activities ....... (6,670) (5,889) (5,977)
-------- -------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capital leases .......... (172) (30) --
(Repayments) draws under line of credit, net ..................... (8,000) 31,000 (1,000)
Distributions to owners and dividends, net of certain charges .... (36,472) (73,181) (37,845)
Repayments of distributions to owners ............................ 13,335 11,810 9,965
-------- -------- --------
Net cash used in financing activities ....... (31,309) (30,401) (28,880)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ................... 3,395 (5,198) (830)
Cash and cash equivalents, beginning of year ........................... 4,205 7,600 2,402
-------- -------- --------
Cash and cash equivalents, end of year ................................. $ 7,600 $ 2,402 $ 1,572
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ...................................... $ 35,920 $ 36,620 $ 37,327
======== ======== ========
Cash paid for state income taxes ............................ $ 207 $ 217 $ 97
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except share information)
NOTE 1--THE COMPANY
Allbritton Communications Company (ACC or the Company) is an indirectly
wholly-owned subsidiary of Perpetual Corporation (Perpetual), a Delaware
corporation, which is controlled by the Allbritton family. The Company owns ABC
network-affiliated television stations serving seven geographic markets:
Station Market
--------------------- -----------------------------------------------
WJLA Washington, D.C.
WBMA/WCFT/WJSU Birmingham (Anniston and Tuscaloosa), Alabama
WHTM Harrisburg-Lancaster-York-Lebanon, Pennsylvania
KATV Little Rock, Arkansas
KTUL Tulsa, Oklahoma
WSET Roanoke-Lynchburg, Virginia
WCIV Charleston, South Carolina
The Company also provides 24-hour per day basic cable television
programming to the Washington, D.C. market, through NewsChannel 8, primarily
focused on regional and local news for the Washington, D.C. metropolitan area.
Additionally, in January 2007 the Company launched Politico, a specialized
newspaper and Internet site (politico.com) that serves Congress, congressional
staffers and those interested in the actions of the national legislature and
political electoral process. The operations of NewsChannel 8 and Politico are
integrated with WJLA.
Based upon regular assessments of its operations, the Company has
determined that the economic characteristics, services, production processes,
customer type and distribution methods for the Company's operations are
substantially similar and have therefore been aggregated as one reportable
segment.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Consolidation--The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries after elimination of all
significant intercompany accounts and transactions.
Use of estimates and assumptions--The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates and assumptions.
F-6
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
Revenue recognition--Revenues are generated principally from sales of
commercial advertising and are recorded as the advertisements are broadcast net
of agency and national representative commissions and music license fees. For
certain program contracts which provide for the exchange of advertising time in
lieu of cash payments for the rights to such programming, revenue is recorded as
advertisements are broadcast at the estimated fair value of the advertising time
given in exchange for the program rights. Such barter revenue was $5,133, $5,579
and $5,940 for the years ended September 30, 2006, 2007 and 2008, respectively.
Subscriber fee revenues are recognized in the period during which programming is
provided, pursuant to affiliation agreements with cable television systems,
direct broadcast satellite service providers and telephone company operators.
Cash and cash equivalents--The Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
Program rights--The Company has entered into contracts for the rights to
television programming. Payments related to such contracts are generally made in
installments over the contract period. Program rights which are currently
available and the liability for future payments under such contracts are
reflected in the consolidated balance sheets. The vast majority of the Company's
program rights represent one-year contracts for first-run syndicated
programming. As each broadcast over the term of the contract generally provides
the same advertising value, such program rights are amortized on a straight-line
basis over the term. A limited number of multi-year program contracts
representing off-network syndicated programming are amortized on an accelerated
basis due to the generally higher advertising value of the early broadcasts.
Program rights expected to be amortized in the succeeding year and amounts
payable within one year are classified as current assets and liabilities,
respectively. The program rights are reflected in the consolidated balance
sheets at the lower of unamortized cost or estimated net realizable value based
on management's expectation of the net future cash flows to be generated by the
programming.
Property, plant and equipment--Property, plant and equipment are recorded
at cost and depreciated over the estimated useful lives of the assets.
Maintenance and repair expenditures are charged to expense as incurred and
expenditures for modifications and improvements which increase the expected
useful lives of the assets are capitalized. Depreciation expense is computed
using the straight-line method for buildings and straight-line and accelerated
methods for furniture, machinery and equipment. Leasehold improvements are
amortized using the straight-line method over the lesser of the term of the
related lease or the estimated useful lives of the assets.
The useful lives of property, plant and equipment for purposes of
computing depreciation and amortization expense are:
Buildings....................................... 15-40 years
Leasehold improvements.......................... 5-16 years
Furniture, machinery and equipment.............. 3-20 years
F-7
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
Intangible assets--Intangible assets consist of values assigned to
broadcast licenses as well as favorable terms on contracts and leases. The
amounts originally assigned to intangible assets were based on the results of
independent valuations. Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," was issued in June 2001. SFAS No.
142 addressed the financial accounting and reporting for acquired goodwill and
other intangible assets. Under these rules, goodwill and intangible assets
deemed to have indefinite lives are not amortized but are subject to annual
impairment tests. Other intangible assets continue to be amortized over their
useful lives. SFAS No. 142 became effective for the Company's fiscal year ended
September 30, 2003.
In September 2004, the Securities 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 became effective at the beginning
of the Company's year ended September 30, 2006 (See Note 4).
The Company's indefinite lived intangible assets, consisting of broadcast
licenses, are subject to periodic impairment tests. Prior to the implementation
of EITF Topic No. D-108, the Company had used the residual method to determine
the value of its broadcast licenses for purposes of testing for impairment. Upon
implementation of EITF Topic No. D-108 during the first quarter of the year
ended September 30, 2006, the Company uses the direct value method. The direct
value method, which differs markedly from the residual value method, requires
the broadcast licenses to be valued using an average market participant concept.
This concept assumes that cash flows associated with broadcast licenses are
limited to those cash flows that could be expected by an average market
participant. In contrast, the residual method formerly used included other
elements of cash flows which contributed to station value.
Other intangible assets have been amortized over the terms of the related
contracts and leases, and the recoverability of these assets is assessed on an
ongoing basis by evaluating whether amounts can be recovered through
undiscounted cash flows over the remaining amortization period.
Deferred financing costs--Costs incurred in connection with the issuance
of long-term debt are deferred and amortized to other nonoperating expense on a
straight-line basis over the term of the underlying financing agreement.
Deferred rent--Rent concessions and scheduled rent increases in connection
with operating leases are recognized as adjustments to rental expense on a
straight-line basis over the associated lease term.
F-8
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
Concentration of credit risk--Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
certain cash and cash equivalents and receivables from advertisers. The Company
invests its excess cash with high-credit quality financial institutions and at
September 30, 2008 had an overnight repurchase agreement for $737.
Concentrations of credit risk with respect to receivables from advertisers are
limited as the Company's advertising base consists of large national advertising
agencies and high-credit quality local advertisers. As is customary in the
broadcasting industry, the Company does not require collateral for its credit
sales, which are typically due within thirty days.
Income taxes--The operations of the Company are included in a consolidated
federal income tax return filed by Perpetual. In accordance with the terms of a
tax sharing agreement between the Company and Perpetual, the Company is required
to pay to Perpetual its federal income tax liability, computed based upon
statutory federal income tax rates applied to the Company's consolidated taxable
income. The Company files separate state income tax returns with the exception
of Virginia, which is included in a combined state income tax return filed by
Perpetual. In accordance with the terms of the tax sharing agreement, the
Company is required to pay to Perpetual its combined Virginia income tax
liability, computed based upon statutory Virginia income tax rates applied to
the Company's combined Virginia net taxable income. Taxes payable to Perpetual
are not reduced by losses generated in prior years by the Company. In addition,
the amounts payable by the Company to Perpetual under the tax sharing agreement
are not reduced if losses of other members of the Perpetual group are utilized
to offset taxable income of the Company for purposes of the Perpetual
consolidated federal or Virginia income tax returns.
The provision for income taxes is determined in accordance with SFAS No.
109, "Accounting for Income Taxes," which requires that the consolidated amount
of current and deferred income tax expense for a group that files a consolidated
income tax return be allocated among members of the group when those members
issue separate financial statements. Perpetual allocates a portion of its
consolidated current and deferred income tax expense to the Company as if the
Company and its subsidiaries were separate taxpayers. The Company records
deferred tax assets, to the extent it is more likely than not that such assets
will be realized in future periods, and deferred tax liabilities for the tax
effects of the differences between the bases of its assets and liabilities for
tax and financial reporting purposes.
The Company records income tax expense in accordance with SFAS No. 109 and
makes payments to Perpetual in accordance with the terms of the tax sharing
agreement between the Company and Perpetual. To the extent that there is a
difference between tax payments that would be due as calculated in accordance
with SFAS No. 109 and tax payments due under the tax sharing agreement, such
difference is recorded to retained earnings.
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income
Taxes." FIN No. 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
F-9
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
taken or expected to be taken in a tax return. The provisions of FIN No. 48 were
adopted on October 1, 2007 (See Note 6). The Company classifies interest and
penalties related to its uncertain tax positions as a component of income tax
expense.
Fair value of financial instruments--The carrying amount of the Company's
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and program rights payable approximate fair value due to the short
maturity of those instruments. The Company estimates the fair value of its
long-term debt using either quoted market prices or by discounting the required
future cash flows under its debt using borrowing rates currently available to
the Company, as applicable.
Earnings per share--Earnings per share data are not presented since the
Company has only one shareholder.
New Accounting Standards--In September 2006, the FASB issued SFAS No. 157,
"Fair Value Measurements." SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS No. 157 does not expand or require any new fair value
measures but is applicable whenever another accounting pronouncement requires or
permits assets and liabilities to be measured at fair value. SFAS No. 157 is
effective for the Company's fiscal year ending September 30, 2009. The Company
is currently evaluating the impact, if any, that SFAS No. 157 may have on its
financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities." SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. SFAS
No. 159 is effective for the Company's fiscal year ending September 30, 2009.
The Company is currently evaluating the impact, if any, that SFAS No. 159 may
have on its financial position or results of operations.
F-10
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
NOTE 3--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
September 30,
------------------------
2007 2008
--------- ---------
Buildings and leasehold improvements.......... $ 32,673 $ 33,253
Furniture, machinery and equipment............ 135,327 131,881
--------- ---------
168,000 165,134
Less accumulated depreciation................. (128,506) (128,397)
--------- ---------
39,494 36,737
Land.......................................... 2,902 2,902
Construction-in-progress...................... 1,467 3,675
--------- ---------
$ 43,863 $ 43,314
========= =========
Depreciation and amortization expense was $8,502, $8,553 and $9,474 for
the years ended September 30, 2006, 2007 and 2008, respectively.
The FCC has granted to Sprint Nextel Corporation ("Nextel") the right to
reclaim a portion of the spectrum in the 2 GHz band from broadcasters across the
country. In order to claim this spectrum, Nextel must replace all of the
broadcasters' electronic newsgathering equipment currently using this spectrum
with digital equipment capable of operating in the reformatted portion of the 2
GHz band retained by the broadcasters. This exchange of equipment will be
completed on a market by market basis. As the equipment is exchanged and placed
into service in each of the Company's markets, a gain will be recorded to the
extent that the fair market value of the equipment received exceeds the book
value of the analog equipment exchanged.
During the years ended September 30, 2007 and 2008, the fair market value
of the equipment received and placed into service was $1,263 and $1,370,
respectively. These amounts have been recorded as additions to property, plant
and equipment, but they are not included in capital expenditures in the
accompanying consolidated statement of cash flows as no cash was involved in the
exchange. The excess of fair market value as compared to the book value of
equipment exchanged and placed into service of $1,256 and $1,367 for the years
ended September 30, 2007 and 2008, respectively, was recorded as a non-cash gain
in other, net nonoperating income in the accompanying consolidated financial
statements.
F-11
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
NOTE 4--INTANGIBLE ASSETS
In September 2004, the SEC announced, in conjunction with the issuance of
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 became effective at the beginning
of the Company's year ended 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 year ended 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 first quarter of the year ended September 30, 2006.
The carrying value of the Company's indefinite lived intangible assets,
consisting of its broadcast licenses, at September 30, 2007 and 2008 was
$42,290.
F-12
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
The carrying value of the Company's other intangible assets, consisting
of favorable terms on contracts and leases, was as follows:
September 30,
---------------------
2007 2008
------- -------
Gross carrying amount................... $ 6,174 $ 6,174
Less accumulated amortization........... (6,137) (6,174)
------- -------
Net carrying amount..................... $ 37 $ --
======= =======
Amortization expense was $164, $159 and $37 for the years ended September
30, 2006, 2007 and 2008, respectively.
NOTE 5--LONG-TERM DEBT
Outstanding debt consists of the following:
September 30,
-------------------------
2007 2008
--------- ---------
Senior Subordinated Notes, due December 15, 2012 with interest payable
semi-annually at 7 3/4%.......................................................... $ 455,000 $ 455,000
Credit Agreement, maximum amount of $70,000, expiring August 23, 2011, secured by
the outstanding stock of the Company and its subsidiaries, interest payable
quarterly at various rates either from prime to prime plus 0.25% or from LIBOR
plus 0.75% to LIBOR plus 1.50% depending on certain financial operating tests
(4.45% at September 30, 2008).................................................... 31,000 30,000
--------- ---------
486,000 485,000
Less unamortized discount........................................................... (1,900) (1,592)
--------- ---------
484,100 483,408
Less current maturities............................................................. -- --
--------- ---------
$ 484,100 $ 483,408
========= =========
F-13
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
Unamortized deferred financing costs of $5,313 and $4,272 at September 30,
2007 and 2008, respectively, are included in deferred financing costs and other
noncurrent assets in the accompanying consolidated balance sheets. Amortization
of the deferred financing costs for the years ended September 30, 2006, 2007 and
2008 was $1,041, $1,042 and $1,041 respectively, which is included in other
nonoperating expenses.
Under the existing financing agreements, the Company is subject to
restrictive covenants, which place limitations upon payments of cash dividends,
issuance of capital stock, investment transactions, incurrence of additional
obligations and transactions with affiliates. In addition, under the Credit
Agreement, the Company must maintain compliance with certain financial covenants
as measured at the end of each quarter. As of September 30, 2008, the Company
was in compliance with such covenants. The Company is 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 Credit Agreement.
The Company estimates the fair value of its Senior Subordinated Notes to
be approximately $460,000 and $389,000 at September 30, 2007 and 2008,
respectively. The carrying value of the Company's Credit Agreement approximates
fair value as borrowings bear interest at market rates.
NOTE 6--INCOME TAXES
In June 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in
Income Taxes." FIN No. 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. The provisions of FIN No. 48 were adopted
on October 1, 2007. The cumulative effect of implementing FIN No. 48 resulted in
a net decrease of $1,295 to the opening balance of retained earnings.
Additionally, as required by FIN No. 48, certain net operating loss
carryforwards and the corresponding valuation allowances related to uncertain
tax positions were offset, thus removing them from the accompanying consolidated
balance sheet effective October 1, 2007.
F-14
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
The provision for income taxes consists of the following:
Years Ended September 30,
-------------------------------
2006 2007 2008
-------- -------- -------
Current
Federal....................... $ 15,480 $ 9,734 $ 4,155
State......................... 1,569 923 295
-------- -------- -------
17,049 10,657 4,450
-------- -------- -------
Deferred
Federal....................... 1,856 2,966 3,229
State......................... (563) 194 387
-------- -------- -------
1,293 3,160 3,616
-------- -------- -------
$ 18,342 $ 13,817 $ 8,066
======== ======== =======
The components of deferred income tax assets (liabilities) are as
follows:
September 30,
------------------------
2007 2008
-------- --------
Deferred income tax assets:
State and local net operating loss carryforwards...... $ 4,912 $ 3,317
Intangible assets..................................... 1,561 --
Accrued employee benefits............................. 1,150 1,160
Deferred rent......................................... 2,046 2,098
Deferred revenue...................................... 836 1,053
Allowance for accounts receivable..................... 611 617
Other................................................. 713 2,234
-------- --------
11,829 10,479
Less valuation allowance.............................. (4,332) (2,770)
-------- --------
7,497 7,709
-------- --------
Deferred income tax liabilities:
Property, plant and equipment......................... (3,413) (3,375)
Intangible assets..................................... -- (2,142)
-------- --------
Net deferred income tax assets.............................. $ 4,084 $ 2,192
======== ========
F-15
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
The deferred tax asset related to state and local net operating loss
carryforwards of $3,317 at September 30, 2008 represents approximately $65,000
in state and local net operating loss carryforwards in certain jurisdictions
which are available for future use for state and local income tax purposes and
expire in various years from 2009 through 2028.
The change in the valuation allowance for deferred tax assets of ($10),
($97) and ($331) (excluding the effect of adopting FIN No. 48) during the years
ended September 30, 2006, 2007 and 2008, respectively, principally resulted from
management's evaluation of the recoverability of the loss carryforwards.
The following table reconciles the statutory federal income tax rate to
the Company's effective income tax rate for income before cumulative effect of
change in accounting principle:
Years ended September 30,
-----------------------------
2006 2007 2008
----- ----- -----
Statutory federal income tax rate............................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit........... 1.9 3.1 4.7
Permanent items, principally insurance premiums and meals
and entertainment............................................ (0.1) 0.2 0.9
Change in valuation allowance................................... 0.0 (0.3) (1.6)
Other, net...................................................... 0.0 (0.1) (0.5)
----- ----- -----
Effective income tax rate....................................... 36.8% 37.9% 38.5%
===== ===== =====
A reconciliation of the beginning and ending balances of the total
amounts of gross unrecognized tax benefits is as follows:
Gross unrecognized tax benefits at October 1, 2007........... $ 7,074
Reductions related to prior years tax positions.............. (1,431)
Increases related to current year tax positions.............. 391
Reductions related to expiration of statutes of limitations.. (673)
-------
Gross unrecognized tax benefits at September 30, 2008........ $ 5,361
=======
As of September 30, 2008, the Company had unrecognized tax benefits of
$5,361. If all such benefits were recognized, $3,485 would have a favorable
impact on the effective tax rate. Of the total gross unrecognized tax benefits
of $5,361 at September 30, 2008, $4,712 are recorded in deferred rent and other
noncurrent liabilities on the accompanying consolidated balance sheets, and the
remaining $649 represents net operating losses which have not been recorded as
required by FIN No. 48.
F-16
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
The Company expects that it is reasonably possible that the amount of
unrecognized tax benefits will decrease during the next twelve months in the
approximate range of $500 to $1,000, primarily due to the expected expiration of
certain statutes of limitations.
The Company classifies interest and penalties related to its uncertain
tax positions as a component of income tax expense. Accrued interest and
penalties were $1,503 at September 30, 2008, and expense for interest and
penalties of $226 was recognized during the year ended September 30, 2008.
The Company is no longer subject to Federal or state income tax
examinations for years prior to the Company's fiscal year ended September 30,
2005, although certain of the Company's net operating loss carryforwards
generated prior to September 30, 2005 remain subject to examination.
The Company's operations are included in a consolidated federal income
tax return and a combined Virginia state income tax return filed by Perpetual.
Income tax expense is calculated and recorded in accordance with SFAS No. 109 as
if the Company was a separate taxpayer from Perpetual. The Company makes
payments to Perpetual in accordance with the terms of a tax sharing agreement
between Perpetual and the Company. During the year ended September 30, 2008,
income tax payments due to Perpetual in accordance with the tax sharing
agreement exceeded the income tax payments that would be due as calculated in
accordance with SFAS No. 109 by $695. This difference was recorded as a charge
against retained earnings.
NOTE 7--TRANSACTIONS WITH OWNERS AND RELATED PARTIES
Distributions to Owners, Net
In the ordinary course of business, the Company makes cash advances in the
form of distributions to Perpetual. At present, the primary source of repayment
of the net advances from the Company is through the ability of the Company to
pay dividends or make other distributions. There is no immediate intent for
these amounts to be repaid. Accordingly, such amounts have been treated as a
reduction of stockholder's investment and described as "distributions" in the
accompanying consolidated balance sheets. The weighted average amount of
non-interest bearing advances outstanding was $366,622, $409,190, and $454,031
during Fiscal 2006, 2007 and 2008, respectively.
The operations of the Company are included in a consolidated federal
income tax return and a combined Virginia state income tax return filed by
Perpetual. The Company is charged by Perpetual and makes payments to Perpetual
for federal and Virginia state income taxes, which are computed in accordance
with the terms of a tax sharing agreement between the Company and Perpetual.
F-17
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
The components of distributions to owners and the related activity during
Fiscal 2006, 2007 and 2008 consist of the following:
Federal and
Distributions Virginia State Net
to Owners and Income Tax Distributions
Dividends Receivable to Owners
------------- -------------- -------------
Balance as of September 30, 2005............... $ 359,305 $ -- $ 359,305
Cash advances to Perpetual..................... 36,472 36,472
Repayment of cash advances from Perpetual...... (13,335) (13,335)
Charge for federal and state income taxes...... (15,480) (15,480)
Payment of income taxes........................ 15,480 15,480
--------- --------- ----------
Balance as of September 30, 2006............... 382,442 -- 382,442
Cash advances to Perpetual..................... 73,181 73,181
Repayment of cash advances from Perpetual...... (11,810) (11,810)
Charge for federal and state income taxes...... (9,734) (9,734)
Payment of income taxes........................ 9,734 9,734
--------- --------- ----------
Balance as of September 30, 2007............... 443,813 -- 443,813
Cash advances to Perpetual..................... 37,845 37,845
Repayment of cash advances from Perpetual...... (9,965) (9,965)
Charge for federal and state income taxes...... (5,350) (5,350)
Payment of income taxes........................ 5,350 5,350
--------- --------- ----------
Balance as of September 30, 2008............... $ 471,693 $ -- $ 471,693
========= ========= ==========
Subsequent to September 30, 2008 and through December 19, 2008 the Company
made additional net distributions to owners of $4,800.
Other Transactions with Related Parties
During the years ended September 30, 2006, 2007 and 2008, the Company
earned interest income from Perpetual of $226, $430 and $200 respectively, as a
result of making advances of tax payments in accordance with the terms of the
tax sharing agreement between the Company and Perpetual.
Management fees of $550, $750 and $750 were paid to Perpetual by the
Company for each of the years ended September 30, 2006, 2007 and 2008,
respectively.
F-18
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
During the second quarter of the year ended September 30, 2007, Perpetual
acquired from the Robert Lewis Allbritton Revocable Trust its 20% ownership
interests in TV Alabama, Inc. and Harrisburg Television, Inc., the Company's
subsidiaries which operate its television stations in the Birmingham and
Harrisburg markets, respectively. The 20% ownership interests were then
contributed into the Company. As a result, the Company now owns 100% of these
and all other of its subsidiaries. As the entities involved in these
transactions are considered to be under common control, the Company was required
to account for this contribution at its book value. Since the book value of the
20% ownership interests acquired by Perpetual and then contributed to the
Company was zero, no amount has been recorded in the accompanying consolidated
financial statements related to the contribution.
The Company has entered into various agreements with Irides, LLC (Irides)
to provide the Company's stations with certain web site design, hosting and
maintenance services. Irides is an indirect subsidiary of Perpetual. The Company
paid fees of $262, $416 and $525 to Irides during the years ended September 30,
2006, 2007 and 2008, respectively. These fees are included in television
operating expenses in the consolidated statements of operations. Irides also
leases certain office space from the Company. Charges for this space totaled
$137, $141 and $145 for the years ended September 30, 2006, 2007 and 2008,
respectively, and such amounts are included as an offset to television operating
expenses in the consolidated statements of operations.
NOTE 8--RETIREMENT PLANS
A defined contribution savings plan is maintained for eligible employees
of the Company and certain of its affiliates. Under the plan, employees may
contribute a portion of their compensation subject to Internal Revenue Service
limitations and the Company contributes an amount equal to 50% of the
contribution of the employee not to exceed 6% of the compensation of the
employee. The amounts contributed to the plan by the Company on behalf of its
employees totaled approximately $1,065, $970 and $1,245 for the years ended
September 30, 2006, 2007 and 2008, respectively.
The Company also contributes to certain other multi-employer union pension
plans on behalf of certain of its union employees. The amounts contributed to
such plans totaled approximately $611, $618 and $644 for the years ended
September 30, 2006, 2007 and 2008, respectively.
F-19
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
NOTE 9--COLLAPSE OF BROADCAST TOWER
On January 11, 2008, the Company's broadcast tower in Little Rock,
Arkansas collapsed and fell, causing an interruption in the distribution of the
over-the-air broadcast signals for the Company's station in the Little Rock
market. The tower, the broadcast equipment installed on the tower and certain
equipment located near the tower were destroyed. The distribution of the
station's primary signal via cable and satellite services was restored beginning
within hours of the collapse. A limited over-the-air signal was restored ten
days later, on January 21, 2008. Transmitter power was increased as of March 16,
2008, which served to enhance the reach and quality of the interim over-the-air
signal. The Company maintains replacement cost property insurance as well as
business interruption insurance on the tower and equipment affected by the
collapse, and expects to be reimbursed for substantially all property and income
losses. The Company is currently constructing the permanent replacement tower
and preparing to install related equipment. When the insurance claim is
ultimately finalized, it is anticipated that the proceeds received to replace
the tower and related equipment will substantially exceed the carrying value of
the destroyed assets. As progress payments are received from the insurance
company, they will be reflected within investing activities in the accompanying
consolidated statements of cash flows to the extent of claim-related capital
expenditures during that period. Progress payments in excess of claim-related
capital expenditures will be reflected within operating activities.
NOTE 10--COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases office and studio facilities and machinery and
equipment under operating leases expiring in various years through 2023. Certain
leases contain provisions for renewal and extension.
Future minimum lease payments under operating leases, which have remaining
noncancellable lease terms in excess of one year as of September 30, 2008, are
as follows:
Year ending September 30,
2009............................... $ 4,873
2010............................... 4,813
2011............................... 4,731
2012............................... 4,504
2013............................... 4,597
2014 and thereafter................ 21,427
--------
$ 44,945
========
Rental expense under operating leases aggregated approximately $4,200,
$4,500 and $4,500 for the years ended September 30, 2006, 2007 and 2008,
respectively.
F-20
ALLBRITTON COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share information)
The Company has entered into contractual commitments in the ordinary
course of business for the rights to television programming which is not yet
available for broadcast as of September 30, 2008. Under these agreements, the
Company must make specific minimum payments approximating the following:
Year ending September 30,
2009............................... $ 969
2010............................... 10,360
2011............................... 9,296
2012............................... 4,150
2013............................... 324
--------
$ 25,099
========
The Company has entered into various employment contracts. Future
guaranteed payments under such contracts as of September 30, 2008 approximate
the following:
Year ending September 30,
2009............................... $ 11,371
2010............................... 3,497
2011............................... 1,995
2012............................... 313
2013............................... 44
--------
$ 17,220
========
The Company has entered into various deferred compensation agreements with
certain employees. Under these agreements, the Company is required to make
payments aggregating $1,590 during the years 2009 through 2013. At September 30,
2007 and 2008, the Company has recorded a deferred compensation liability of
approximately $1,536 and $1,436, respectively, which is included as a component
of accrued employee benefit expenses in the accompanying consolidated balance
sheets.
The Company also has certain obligations and commitments under various
executory agreements to make future payments for goods and services. These
agreements secure the future rights to certain goods and services to be used in
the normal course of operations.
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business, including suits based on defamation
and employment activity. The Company is not currently a party to any lawsuit or
proceeding which, in the opinion of management, could reasonably be expected to
have a material adverse effect on the Company's consolidated financial
condition, results of operations or cash flows.
F-21
SCHEDULE II
ALLBRITTON COMMUNICATIONS COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
Balance at Charged Charged to
beginning of to costs other Balance at
Classification year and expenses accounts Deductions end of year
- ---------------------------------- ------------ ------------ ---------- ---------- -----------
Year ended September 30, 2006:
Allowance for doubtful
accounts $ 1,188 $ 587 -- $ (535) <F2> $ 1,240
======= ======= ======== ======== =======
Valuation allowance for
deferred income tax assets $ 4,439 $ 1,860 <F1> -- $ (1,870) <F3> $ 4,429
======= ======= ======== ======== =======
Year ended September 30, 2007:
Allowance for doubtful
accounts $ 1,240 $ 1,265 -- $ (958) <F2> $ 1,547
======= ======= ======== ======== =======
Valuation allowance for
deferred income tax assets $ 4,429 $ 372 <F1> -- $ (469) <F3> $ 4,332
======= ======= ======== ======== =======
Year ended September 30, 2008:
Allowance for doubtful
accounts $ 1,547 $ 1,068 -- $ (1,052) <F2> $ 1,563
======= ======= ======== ======== =======
Valuation allowance for
deferred income tax assets $ 4,332 $ 164 <F1> $ (1,231) <F4> $ (495) <F3> $ 2,770
======= ======= ======== ======== =======
<FN>
_______________
<F1> Represents valuation allowance established related to certain net operating
loss carryforwards and other deferred tax assets for state income tax
purposes.
<F2> Write-off of uncollectible accounts, net of recoveries and collection fees.
<F3> Represents reduction of valuation allowance relating to certain net
operating loss carryforwards.
<F4> Represents adjustment related to the adoption of FIN No. 48.
</FN>
F-22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALLBRITTON COMMUNICATIONS COMPANY
By: /s/ ROBERT L. ALLBRITTON
-----------------------------------
Robert L. Allbritton
Chairman and Chief Executive Officer
Date: December 22, 2008
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.
/s/ BARBARA B. ALLBRITTON Executive Vice President December 22, 2008
- ------------------------------- and Director
Barbara B. Allbritton
/s/ ROBERT L. ALLBRITTON Chairman, Chief Executive December 22, 2008
- ------------------------------- Officer and Director
Robert L. Allbritton (principal executive officer)
/s/ FREDERICK J. RYAN, JR. Vice Chairman, President, December 22, 2008
- ------------------------------- Chief Operating Officer
Frederick J. Ryan, Jr. and Director
/s/ STEPHEN P. GIBSON Senior Vice President and December 22, 2008
- ------------------------------- Chief Financial Officer
Stephen P. Gibson (principal financial officer)
/s/ ELIZABETH A. HALEY Vice President and December 22, 2008
- ------------------------------- Controller (principal
Elizabeth A. Haley accounting officer)
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)
A-1
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 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)
10.7 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)
10.8 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)
A-2
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)
21. Subsidiaries of Registrant.
24. Powers of Attorney.
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 confidential treatment
A-3