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GRAY TELEVISION INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Executive Overview Introduction The following analysis of the financial condition and results of operations of Gray Television, Inc. ("we", "us", "our", "Gray" or the "Company") should be read in conjunction with our unaudited condensed consolidated financial statements and related notes contained in this report and our audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the "2010 Form 10-K"). Overview Gray Television, Inc. is a television broadcast company headquartered in Atlanta, GA. Gray currently operates 36 television stations serving 30 markets. We broadcast a primary channel from each of our stations and also operate at least one digital second channel from the majority of our stations. Each of our primary channels are affiliated with either CBS Inc. or "CBS" (17 channels), the National Broadcasting Corporation, Inc. or "NBC" (ten channels), the American Broadcasting Corporation or "ABC" (eight channels) or FOX Entertainment Group, Inc. or "FOX" (one channel). In addition, we currently operate 40 digital second channels that are affiliated with either ABC (one channel), FOX (four channels), The CW Network, LLC or "CW" (eight channels), Twentieth Television, Inc. or "MyNetworkTV" (18 channels), Universal Sports Network (two channels) and The Country Network (one channel) or are operated as local news/weather channels (six channels). Our 17 CBS-affiliated stations make us the largest independent owner of CBS affiliates in the United States. Our combined TV station group reaches approximately 6.3% of total United States households. Our operating revenue is derived primarily from broadcast and internet advertising and from other sources such as production of commercials, tower rentals, retransmission consent fees and management fees. Broadcast advertising is sold for placement either preceding or following a television station's network programming and within local and syndicated programming. Broadcast advertising is sold in time increments and is priced primarily on the basis of a program's popularity among the specific audience an advertiser desires to reach, as measured by Nielsen. In addition, broadcast advertising rates are affected by the number of advertisers competing for the available time, the size and demographic makeup of the market served by the station and the availability of alternative advertising media in the market area. Broadcast advertising rates are the highest during the most desirable viewing hours, with corresponding reductions during other hours. The ratings of a local station affiliated with a major network can also be affected by ratings of network programming. We sell internet advertising on our stations' websites. These advertisements are sold as banner advertisements on the websites, pre-roll advertisements or video and other types of advertisements. Most advertising contracts are short-term and generally run only for a few weeks. Approximately 65.2% of the net revenues of our television stations for the six-month period ended June 30, 2011 were generated from local advertising (including political advertising revenue), which is sold primarily by a station's sales staff directly to local accounts, and the remainder was represented primarily by national advertising, which is sold by a station's national advertising sales representatives. The stations generally pay commissions to advertising agencies on local, regional and national advertising and the stations also pay commissions to the national sales representatives on national advertising, including certain political advertising. Broadcast advertising revenues are generally highest in the second and fourth quarters each year, due in part to increases in advertising in the spring and in the period leading up to and including the holiday season. In addition, broadcast advertising revenues are generally higher during even numbered years due to increased spending by political candidates and special interest groups in advance of upcoming elections, which spending typically is heaviest during the fourth quarter of such years. 20-------------------------------------------------------------------------------- Table of Contents Our primary broadcast operating expenses are employee compensation, related benefits and programming costs. In addition, broadcasting operations incur overhead expenses, such as maintenance, supplies, insurance, rent and utilities. A large portion of our operating expenses for broadcasting operations is fixed. During the recent economic recession, many of our advertising customers reduced their advertising spending. In 2010, the economy began to improve and our advertising customers began to increase their advertising spending. In the six-month period ended June 30, 2011, our non-political advertising revenue, in total, increased over 2010 levels, which we believe is a result of continued improvements in the economy. Our non-political advertising revenue includes our local, national and internet advertising revenue. Traditionally, automotive dealers have accounted for a significant portion of our advertising revenue and they increased their advertising spending in the six-month period ended June 30, 2011 as compared to the six-month period ended June 30, 2010. In even numbered years, there are a relatively greater number of elections than in odd numbered years. Consistent therewith, in first six months of 2011, our political advertising revenue has decreased as compared to the six-month period ended June 30, 2010 due to decreased advertising by political candidates and special interest groups. Our non-advertising revenue, such as retransmission consent revenue and consulting revenue, remained at a consistent level or increased in the six-month period ended June 30, 2011 as compared to the six-month period ended June 30, 2010. Notwithstanding these increases, our advertising revenue remains under pressure, to an extent, from the internet as a competitor for advertising spending. We continue to enhance and market our internet websites in order to generate additional revenue. Please see our "Results of Operations" and "Liquidity and Capital Resources" sections below for further discussion of our operating results. Revenue Set forth below are the principal types of revenue, less agency commissions, earned by us for the periods indicated and the percentage contribution of each to our total revenue (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, 2011 2010 2011 2010 Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Revenue: Local $ 47,785 62.7 % $ 45,886 60.7 % $ 91,550 62.7 % $ 89,397 61.2 % National 13,428 17.6 % 13,791 18.2 % 26,403 18.1 % 27,742 19.0 % Internet 4,865 6.4 % 3,124 4.1 % 9,112 6.2 % 6,196 4.2 % Political 2,316 3.0 % 5,588 7.4 % 3,697 2.5 % 8,371 5.7 % Retransmission consent 5,055 6.6 % 4,670 6.2 % 10,102 6.9 % 9,309 6.4 % Production and other 2,029 2.8 % 1,854 2.5 % 3,628 2.6 % 3,786 2.6 % Network compensation 173 0.2 % 173 0.2 % 351 0.2 % 217 0.1 % Consulting revenue 550 0.7 % 550 0.7 % 1,100 0.8 % 1,100 0.8 % Total $ 76,201 100.0 % $ 75,636 100.0 % $ 145,943 100.0 % $ 146,118 100.0 % Results of Operations Three Months Ended June 30, 2011 ("2011 three-month period") Compared to Three Months Ended June 30, 2010 ("2010 three-month period") Revenue. Total revenue increased $0.6 million, or 1%, to $76.2 million in the 2011 three-month period due primarily to increased local and internet advertising and retransmission consent revenue, partially offset by decreased national and political advertising revenue. Local advertising revenue increased approximately $1.9 million, or 4%, to $47.8 million. National advertising revenue decreased approximately $0.4 million, or 3%, to $13.4 million. Internet advertising revenue increased $1.7 million, or 56%, to $4.9 million. Local and internet advertising revenue increased due to increased spending by advertisers in an improving economic environment 21-------------------------------------------------------------------------------- Table of Contents while national advertising revenue suffered somewhat from decreased advertising spending by automotive and financial/insurance customers. Our five largest local and national advertising categories on a combined basis by customer type for the 2011 three-month period, demonstrated the following changes during the 2011 three-month period compared to the 2010 three-month period: automotive decreased 1%; restaurant increased 7%; medical increased 16%; communications increased 10%; and furniture and appliances increased 5%. Political advertising revenue decreased $3.3 million, or 59%, to $2.3 million, reflecting decreased advertising from political candidates during the "off year" of the two-year political advertising cycle. Retransmission consent revenue increased $0.4 million, or 8%, to $5.1 million primarily due to an increase in our number of subscribers in the 2011 three-month period compared to the 2010 three-month period. We earned base consulting revenue of $0.6 million in the 2011 and 2010 three-month periods due to our agreement with Young Broadcasting, Inc. ("Young"). Production and other revenue increased $0.2 million, or 9%, to $2.0 million. Broadcast expenses. Broadcast expenses (before depreciation, amortization and gain on disposal of assets) increased $1.8 million, or 4%, to $47.9 million in the 2011 three-month period, due primarily to increases in compensation expense of $1.5 million and non-compensation expense of $0.3 million. Compensation expense increased primarily due to increases in incentive compensation of $0.6 million, commissions of $0.2 million, salaries of $0.1 million and health care expense of $0.3 million. Increase in incentive compensation was due to an accrual of a portion of the currently estimated annual incentive compensation. Commissions increased due to increased local and internet advertising sales revenue. Healthcare expenses increased due to increased claims activity. As of June 30, 2011 and 2010, we employed 2,087 and 2,176 total employees, respectively, in our broadcast operations. Corporate and administrative expenses. Corporate and administrative expenses (before depreciation, amortization and gain on disposal of assets) decreased $0.4 million, or 11%, to $3.4 million in the 2011 three-month period. The decrease was due primarily to a decrease in compensation expense of $0.8 million partially offset by an increase in non-compensation expense of $0.3 million. Compensation expense decreased primarily due to a decrease in bonus compensation expense. The decrease in bonus compensation expense was due primarily to the payment of an aggregate of $1.05 million in bonuses to certain executive officers in the 2010 three-month period. No bonus compensation payments were made to these executive officers in the 2011 three-month period. We recorded non-cash stock-based compensation expense during the three-month periods ended June 30, 2011 and 2010 of $34,000 and $62,000, respectively. Non-cash stock based compensation expense decreased primarily due to the majority of our outstanding stock options becoming fully vested in 2010. Depreciation. Depreciation of property and equipment decreased $1.3 million, or 16%, to $6.6 million during the 2011 three-month period compared to the 2010 three-month period. Depreciation decreased due to a greater amount of property and equipment becoming fully depreciated compared to the amount of property and equipment being placed in service during the 2011 three-month period. Gain on disposal of assets. Gain on disposal of assets increased $0.4 million to $0.8 million during the 2011 three-month period as compared to the comparable period in the prior year. On March 22, 2011, our primary broadcast tower for WEAU-TV, our station which serves the La Crosse - Eau Claire, Wisconsin market, collapsed during inclement weather. Our loss of property and any loss resulting from business interruption due to the tower collapse will be covered by insurance and we anticipate that any costs from this incident in excess of our insurance coverage will not be material. As of June 30, 2011, we had received insurance proceeds of approximately $1.0 million and recorded a gain on disposal on the old tower of $0.8 million in the 2011 three-month period. As a result of an earlier Federal Communications Commission (the "FCC") mandate, we disposed of a portion of our broadcast microwave spectrum and recorded a gain of $0.3 million on the disposal during the 2010 three-month period. No similar disposals of our broadcast microwave spectrum were completed in the 2011 three-month period. Interest expense. Interest expense decreased $2.1 million, or 12%, to $15.3 million for the 2011 three-month period. This decrease was attributable to a decrease in our average interest rates and a decrease in our average debt balance. On April 29, 2010, we issued $365.0 million aggregate principal amount of Notes. The Notes were issued at a discount to yield 11.0% per annum. We used $300.0 million of the proceeds from the issuance of the Notes to 22-------------------------------------------------------------------------------- Table of Contents reduce the balance outstanding under our senior credit facility. As a result of this transaction, our average debt balance increased, but the overall interest rate on our total debt outstanding decreased. Later in 2010, we repaid a portion of the outstanding principal of our debt, which reduced the outstanding debt balance. Further, our interest rate swap agreements expired in April 2010, which reduced our average interest rate. Our average debt balance was $831.1 million and $871.6 million during the 2011 and 2010 three-month periods, respectively. The average interest rates, including the effects of our interest rate swap agreements, on our total debt balances were approximately 6.9% and 7.2% during the 2011 and 2010 three-month periods, respectively. Income tax expense or benefit. We recognized income tax expense of $1.1 million and $0.2 million for the 2011 and 2010 three-month periods, respectively. For the 2011 and 2010 three-month periods, our effective income tax rate was 30.6% and 26.2%, respectively. We estimate our income and differences between taxable income and recorded income on an annual basis. Our tax provision for each quarter is based upon these full year projections which are revised each reporting period. As a result of our refinancing activities that we completed in April 2010, we revised our full-year 2010 tax estimates during the 2010 three-month period. The revisions to these estimates resulted in a decrease in tax expense during the 2010 three-month period of approximately $0.1 million, which reduced our effective tax rate for the 2010 three-month period. We did not complete a similar transaction in the 2011 three-month period. Six Months Ended June 30, 2011 ("2011 six-month period") Compared to Six Months Ended June 30, 2010 ("2010 six-month period") Revenue. Total revenue decreased $0.2 million, or 0.1%, to $145.9 million in the 2011 six-month period due primarily to decreased political and national advertising revenue, partially offset by increased local and internet advertising revenue and retransmission consent revenue. Political advertising revenue decreased $4.7 million, or 56%, to $3.7 million, reflecting decreased advertising from political candidates during the "off year" of the two-year political advertising cycle. Local advertising revenue increased approximately $2.2 million, or 2%, to $91.6 million. Internet advertising revenue increased $2.9 million, or 47%, to $9.1 million. Local and internet advertising revenue increased due to increased spending by advertisers in an improving economic environment. National advertising revenue decreased approximately $1.3 million, or 5%, to $26.4 million. National advertising revenue decreased primarily due to the change in the broadcast network carrying the Super Bowl in 2011 to FOX from CBS and the lack of Olympic Games coverage in 2011. These events did not have as large a negative effect upon our local and internet advertising revenue as they did on our national advertising revenue and, as a result, we were able to grow our revenue in these two advertising customer types. Net advertising revenue associated with the broadcast of the 2011 Super Bowl on our one primary FOX-affiliated channel and four secondary digital FOX-affiliated channels approximated $0.2 million, which was a decrease from our approximated $0.9 million earned in 2010 on our seventeen CBS-affiliated channels. In addition, the 2010 six-month period benefited from approximately $2.8 million of net revenues earned from the broadcast of the 2010 Winter Olympic Games on our NBC-affiliated channels. There was no corresponding broadcast of Olympic Games during the 2011 six-month period. Our five largest local and national advertising categories on a combined basis by customer type for the 2011 six-month period, demonstrated the following changes during the 2011 six-month period compared to the 2010 six-month period: automotive increased 1%; medical increased 11%; restaurant increased 1%; communications increased 4%; and furniture and appliances increased 6%. Retransmission consent revenue increased $0.8 million, or 9%, to $10.1 million in the 2011 six-month period compared to the 2010 six-month period primarily due to an increase in the number of subscribers and improved terms of our retransmission contracts in the 2011 six-month period compared to the 2010 six-month period. Production and other revenue decreased $0.2 million, or 4%, to $3.6 million in the 2011 six-month period compared to the 2010 six-month period. We earned base consulting revenue of $1.1 million in the 2011 and 2010 six-month periods from our agreement with Young. Broadcast expenses. Broadcast expenses (before depreciation, amortization and gain on disposal of assets) increased $2.5 million, or 3%, to $96.1 million in the 2011 six-month period, due primarily to an increase in compensation expense of $2.6 million, partially offset by a decrease in non-compensation expense of $0.1 million. Compensation expense increased primarily due to increases in incentive compensation of $1.1 million, commissions of $0.3 million, salaries of $0.2 million and health care expense of $0.5 million. Increase in incentive compensation was due to an accrual of a portion of the currently estimated annual incentive compensation. Commissions increased 23-------------------------------------------------------------------------------- Table of Contents due to increased local and internet advertising revenue sales. Healthcare expenses increased due to increased claims activity. Corporate and administrative expenses. Corporate and administrative expenses (before depreciation, amortization and gain on disposal of assets) decreased $0.3 million, or 5%, to $6.4 million for the 2011 six-month period. The decrease was due primarily to a decrease in compensation expense of $0.6 million, partially offset by an increase in non-compensation expense of $0.3 million. Compensation expense decreased primarily due to a decrease in bonus compensation expense. The decrease in bonus compensation expense was due primarily to the payment of an aggregate of $1.05 million in bonuses to certain executive officers in the 2010 six-month period. No bonus payments were made to these executive officers in the 2011 six-month period. We recorded non-cash stock-based compensation expense during the six-month periods ended June 30, 2011 and 2010 of $68,000 and $217,000, respectively. Non-cash stock based compensation expense decreased primarily due to the majority of our outstanding stock options becoming fully vested in 2010. Depreciation. Depreciation of property and equipment decreased $2.3 million, or 14%, to $13.6 million for the 2011 six-month period. Depreciation decreased due to a greater amount of property and equipment becoming fully depreciated compared to the amount of property and equipment being placed in service during the 2011 six-month period. Gain on disposal of assets. Gain on disposal of assets increased $0.3 million to $0.8 million during the 2011 six-month period as compared to the 2010 six-month period. As discussed above, our primary broadcast tower for WEAU-TV collapsed during inclement weather on March 22, 2011. We recorded a gain on disposal on our old WEAU-TV broadcast tower of $0.8 million in the 2011 six-month period. As a result of an earlier FCC mandate, we disposed of a portion of our broadcast microwave spectrum and recorded a gain of $0.4 million on the disposal during the 2010 six-month period. No similar disposals of our broadcast microwave spectrum were completed in the 2011 six-month period. Interest expense. Interest expense decreased $5.7 million, or 15%, to $31.3 million for the 2011 six-month period. This decrease was attributable to a decrease in our average interest rates. Our average debt balance was $831.8 million and $831.0 million during the 2011 six-month period and the 2010 six-month period, respectively. The average interest rates on our total debt balances were 7.1% and 8.9% during the 2011 and 2010 six-month periods, respectively. These interest rates include the effects of our interest rate swap agreements which expired in April 2010. Loss on early extinguishment of debt. On March 31, 2010, we amended our senior credit facility. In order to obtain this amendment, we incurred loan issuance costs of approximately $4.5 million, including legal and professional fees. These fees were funded from our cash balances. In connection with this transaction, we reported a loss from early extinguishment of debt of $0.3 million in the 2010 six-month period. We did not complete a similar transaction in the 2011 six-month period. Income tax expense or benefit. We recognized an income tax benefit of $0.3 million and $3.0 million in the 2011 and 2010 six-month periods, respectively. The effective income tax rate was 35.0% for the 2011 six-month period and 42.0% in the 2010 six-month period. The effective income tax rate for the 2011 six-month period was lower than the effective income tax rate for the 2010 six-month period due primarily to a larger decrease in our reserve for uncertain tax positions in the 2011 six-month period compared to the 2010 six-month period. Preferred stock dividends. Preferred stock dividends decreased $7.4 million, or 67%, to $3.6 million for the 2011 six-month period. On April 29, 2010, we redeemed approximately $60.7 million in face amount of our Series D Perpetual Preferred Stock. As a result of this transaction, we recognized the unaccreted portion of the original issuance costs and discount allocated to the redemption of $60.7 million of Series D Perpetual Preferred Stock as a dividend. Preferred stock dividends have also decreased due to fewer shares of our Series D Perpetual Preferred Stock being outstanding in the 2011 six-month period compared to the 2010 six-month period. 24-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources General The following table presents data that we believe is helpful in evaluating our liquidity and capital resources (dollars in thousands). Six Months Ended June 30, 2011 2010 Net cash provided by operating activities $ 17,262 $ 13,961 Net cash used in investing activities (16,199 ) (6,298 ) Net cash used in financing activities (3,037 ) (7,949 ) Decrease in cash $ (1,974 ) $ (286 ) As of June 30, 2011 December 31, 2010 Cash $ 3,457 $ 5,431 Long-term debt including current portion $ 824,969 $ 826,704 Preferred stock, excluding unamortized original issue discount $ 37,418 $ 37,181 Borrowing availability under our senior credit facility $ 40,000 $ 40,000 Long-term Debt Our senior credit facility consists of a revolving loan facility and term loans. Excluding accrued interest, the amount outstanding under our senior credit facility as of June 30, 2011 and December 31, 2010 was comprised solely of term loan balances of $465.4 million and $467.8 million, respectively. The revolving loan facility did not have an outstanding balance as of June 30, 2011 or December 31, 2010. The maximum borrowing capacity available under the revolving loan facility was $40.0 million as of June 30, 2011 and December 31, 2010. Of the maximum borrowing capacity available under our revolving loan facility, the amount that we can draw is limited by certain restrictive covenants, including our first lien net leverage ratio covenant. Based on such covenants, as of June 30, 2011 and December 31, 2010, we had the ability to draw $40.0 million under the revolving loan facility. As of June 30, 2011 and December 31, 2010, we were in compliance with all covenants required under our debt obligations. As of June 30, 2011 and December 31, 2010, we had $365.0 million of Notes outstanding. As of June 30, 2011 and December 31, 2010, the interest rate on the balance outstanding under the senior credit facility was 3.7% and 4.5%, respectively. As of June 30, 2011 and December 31, 2010, the coupon interest rate and the yield on the Notes were 10.5% and 11.0%, respectively. The yield of the Notes exceeds the coupon interest rate because the Notes were issued with "original issue discount". Amendment to Senior Credit Facility Effective June 30, 2011, we entered into the third amendment to our senior credit facility which provides for, among other things, our ability to use a portion of the proceeds from a potential issuance by us of certain capital stock and/or debt securities to redeem the outstanding shares of our Series D Perpetual Preferred Stock (including accrued dividends and any premiums), provided that we repay the term loans outstanding under the senior credit facility on not less than a dollar for dollar basis by the amount used to redeem such preferred stock, except to the extent that the redemption of the Series D Perpetual Preferred Stock is effectuated with the proceeds of an issuance of common equity interests. Any such preferred stock redemption must be completed within 40 days of the issuance of such securities, or the proceeds therefrom will be required to be used to repay additional amounts of the loans outstanding under the senior credit facility. We completed the third amendment to our senior credit facility at a cost of approximately $0.5 million, which was funded from cash on hand. These costs were primarily capitalized as deferred financing costs and we are amortizing them over the term of our senior credit facility. 25-------------------------------------------------------------------------------- Table of Contents Preferred Stock As of June 30, 2011 and December 31, 2010, we had 393 shares of Series D Perpetual Preferred Stock outstanding. The Series D Perpetual Preferred Stock has a liquidation value of $100,000 per share, for a total liquidation value of $39.3 million as of June 30, 2011 and December 31, 2010. The Series D Perpetual Preferred Stock had a recorded value of $37.4 million and $37.2 million as of June 30, 2011 and December 31, 2010, respectively. Our accrued Series D Perpetual Preferred Stock dividend balances as of June 30, 2011 and December 31, 2010 were $17.5 million and $14.1 million, respectively. On April 29, 2010, we completed the redemption of approximately $60.7 million in face amount of our Series D Perpetual Preferred Stock, and paid $14.9 million in accrued dividends related thereto, in exchange for $50.0 million in cash, using proceeds from the offering of Notes and the issuance 8.5 million shares of our common stock. Except for the dividend payment on April 29, 2010 in connection with the redemption of a portion of the Series D Perpetual Preferred Stock, we have deferred the cash payment of dividends on our Series D Perpetual Preferred Stock since October 1, 2008. When three consecutive cash dividend payments with respect to the Series D Perpetual Preferred Stock remain unfunded, the dividend rate increases from 15.0% per annum to 17.0% per annum. Thus, our Series D Perpetual Preferred Stock dividend began accruing at 17.0% per annum on July 16, 2009 and will accrue at that rate as long as at least three consecutive cash dividend payments remain unfunded. While any Series D Perpetual Preferred Stock dividend payments are in arrears, we are prohibited from repurchasing, declaring and/or paying any cash dividend with respect to any equity securities having liquidation preferences equivalent to or junior in ranking to the liquidation preferences of the Series D Perpetual Preferred Stock, including our common stock and Class A common stock. We can provide no assurances as to when any future cash payments will be made on any accumulated and unpaid Series D Perpetual Preferred Stock dividends presently in arrears or that become in arrears in the future. Net Cash Provided By (Used In) Operating, Investing and Financing Activities Net cash provided by operating activities was $17.3 million in the 2011 six-month period compared to $14.0 million in the 2010 six-month period. The increase in cash provided by operations was due partially to a reduction in contributions to our pension plans. We contributed $1.1 million and $2.1 million to our pension plans in the 2011 and 2010 six-month periods, respectively. The remaining portion of the increase was due largely to changes in current assets, current liabilities and accrued long-term facility fee. Net cash used in investing activities was $16.2 million in the 2011 six-month period compared to net cash used in investing activities of $6.3 million for the 2010 six-month period. The increase in cash used in investing activities was largely due to increased spending for equipment. Net cash used in financing activities in the 2011 six-month period was $3.0 million compared to $7.9 million in the 2010 six-month period. This decrease in cash used was due primarily to a decrease in fees related to refinancing activities in the 2011 six-month period compared to the 2010 six-month period. Capital Expenditures Capital expenditures in the 2011 and 2010 six-month periods were $16.7 million and $6.2 million, respectively. The 2011 six-month period included capital expenditures for high definition broadcast equipment for local programming including local news, while the 2010 six-month period did not contain as many comparable projects. On March 22, 2011, our primary broadcast tower for WEAU-TV, our station which serves the La Crosse - Eau Claire, Wisconsin market, collapsed during inclement weather. Our loss of property and any loss resulting from 26-------------------------------------------------------------------------------- Table of Contents business interruption due to the tower collapse will be covered by insurance and we anticipate that any costs from this incident in excess of our insurance coverage will not be material. As of June 30, 2011, we had received insurance proceeds of approximately $1.0 million. Excluding the cost of building our new tower at WEAU-TV, we anticipate that our capital expenditures for the remainder of 2011 will be approximately $4.7 million. Other We file a consolidated federal income tax return and such state or local tax returns as are required. Although we may earn taxable operating income in future years, as of June 30, 2011, we anticipate that through the use of our available loss carryforwards we will not pay significant amounts of federal or state income taxes in the next several years. We do not believe that inflation has had a significant impact on our results of operations nor is inflation expected to have a significant effect upon our business in the near future. During the 2011 six-month period, we contributed $1.1 million to our pension plans. During the remainder of fiscal 2011, we expect to contribute an additional $1.9 million to our pension plans. Critical Accounting Policies The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments and estimations that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. We consider our accounting policies relating to intangible assets and income taxes to be critical policies that require judgments or estimations in their application where variances in those judgments or estimations could make a significant difference to future reported results. These critical accounting policies and estimates are more fully disclosed in our 2010 Form 10-K. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q (this "Quarterly Report") contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of 1934. Forward-looking statements are all statements other than those of historical fact. When used in this Quarterly Report, the words "believes," "expects," "anticipates," "estimates," "will," "may," "should" and similar words and expressions are generally intended to identify forward-looking statements. Among other things, statements that describe our expectations regarding our results of operations, general and industry-specific economic conditions, future pension plan contributions, capital expenditures, refinancing transactions and the realization of potential future gains that could be recorded related to insurance proceeds at WEAU-TV are forward-looking statements. Readers of this Quarterly Report are cautioned that any forward-looking statements, including those regarding the intent, belief or current expectations of our management, are not guarantees of future performance, results or events and involve risks and uncertainties, and that actual results and events may differ materially from those contained in the forward-looking statements as a result of various factors including, but not limited to, those listed under the heading "Risk Factors" in our 2010 Form 10-K and subsequently filed quarterly reports on Form 10-Q, as well as the other factors described from time to time in our filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update such forward-looking statements to reflect subsequent events or circumstances. Item 3. Quantitative and Qualitative Disclosure About Market Risk We believe that the market risk of our financial instruments as of June 30, 2011 has not materially changed since December 31, 2010. The market risk profile on December 31, 2010 is disclosed in our 2010 Form 10-K. 27-------------------------------------------------------------------------------- Table of Contents |