| • 10-Q • EX-31.1 • EX-31.2 • EX-31.3 • EX-31.4 • EX-32.1 • EX-32.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNITED STATES Washington, D.C. 20549
Form 10-Q
Quarterly Report pursuant to Section 13 OR 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2012
One West Exchange Street, Suite 5A, Providence, Rhode Island 02903 (Address of principal executive offices)
(401) 454-2880 (Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files). Yes o No 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. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
This combined Form 10-Q is separately filed by (i) LIN TV Corp. and (ii) LIN Television Corporation. LIN Television Corporation meets the conditions set forth in general instruction H (1) (a) and (b) of Form 10-Q and is, therefore, filing this form with the reduced disclosure format permitted by such instruction.
LIN TV Corp. Class A common stock, $0.01 par value, outstanding as of July 26, 2012: 30,413,216 shares. LIN TV Corp. Class B common stock, $0.01 par value, outstanding as of July 26, 2012: 23,401,726 shares. LIN TV Corp. Class C common stock, $0.01 par value, outstanding as of July 26, 2012: 2 shares. LIN Television Corporation common stock, $0.01 par value, outstanding as of July 26, 2012: 1,000 shares.
Item 1. Unaudited Consolidated Financial Statements
LIN TV Corp. (unaudited)
The accompanying notes are an integral part of the unaudited consolidated financial statements.
(a) Our consolidated assets as of June 30, 2012 and December 31, 2011 include total assets of $10,130 and $10,688, respectively, of a variable interest entity (“VIE”) that can only be used to settle the obligations of the VIE. These assets include broadcast licenses and other intangible assets of $7,811 and $7,815, respectively, and program rights of $1,224 and $1,574, respectively. Our consolidated liabilities as of June 30, 2012 and December 31, 2011 include total liabilities of $2,255 and $2,721, respectively, of a VIE for which the VIE’s creditors have no recourse to the Company, including $1,309 and $1,884 of program obligations. See further description in Note 1 — “Basis of Presentation and Summary of Significant Accounting Policies”.
LIN TV Corp. Consolidated Statements of Operations (unaudited)
The accompanying notes are an integral part of the unaudited consolidated financial statements.
LIN TV Corp. Consolidated Statements of Comprehensive Income (unaudited)
The accompanying notes are an integral part of the unaudited consolidated financial statements.
LIN TV Corp. Consolidated Statement of Stockholders’ Deficit (unaudited) (in thousands)
The accompanying notes are an integral part of the unaudited consolidated financial statements.
LIN TV Corp. Consolidated Statement of Stockholders’ Deficit (unaudited) (in thousands)
The accompanying notes are an integral part of the unaudited consolidated financial statements.
LIN TV Corp. Consolidated Statements of Cash Flows (unaudited)
The accompanying notes are an integral part of the unaudited consolidated financial statements.
LIN TV Corp. Notes to Unaudited Consolidated Financial Statements
Note 1 — Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
LIN TV Corp. (“LIN TV”), together with its subsidiaries, including LIN Television Corporation (“LIN Television”), is a local multimedia company operating in the United States. LIN TV and its subsidiaries are affiliates of HM Capital Partners I LP (“HMC”). In these notes, the terms “Company,” “we,” “us” or “our” mean LIN TV and all subsidiaries included in our consolidated financial statements.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”).
In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments necessary to state fairly our financial position, results of operations and cash flows for the periods presented. Certain changes in classifications have been made to prior period financial statements to conform to the current financial statement presentation. The interim results of operations are not necessarily indicative of the results to be expected for the full year.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of our Company, our wholly-owned and majority-owned and controlled subsidiaries, and variable interest entities (“VIEs”) for which we are the primary beneficiary. We review all local marketing agreements (“LMAs”), shared services agreements (“SSAs”) or joint sales agreements (“JSAs”), to evaluate whether consolidation of such arrangements is required. All intercompany accounts and transactions have been eliminated. We conduct our business through our subsidiaries and have no operations or assets other than our investment in our subsidiaries and equity-method investments. We operate in one reportable segment.
Variable Interest Entities
In determining whether we are the primary beneficiary of a VIE for financial reporting purposes, we consider whether we have the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and whether we have the obligation to absorb losses or the right to receive returns that would be significant to the VIE. We consolidate VIEs when we are the primary beneficiary.
We have a JSA and a SSA with WBDT Television, LLC (“WBDT”), a third party, for WBDT-TV in the Dayton, OH market. Under these agreements, we provide sales and administrative services to WBDT, have an obligation to reimburse certain of WBDT’s expenses, and we are compensated through a performance-based fee structure that provides us the benefit of certain returns from the operation of WBDT-TV.
We determined that WBDT is a VIE, and as a result of the JSA and SSA we have a variable interest in WBDT. We are the primary beneficiary of WBDT, and therefore, we consolidate WBDT within our unaudited interim consolidated financial statements.
The carrying amounts and classifications of the assets and liabilities of WBDT, which have been included in our consolidated balance sheets were as follows (in thousands):
The assets of our consolidated VIE can only be used to settle the obligations of the VIE, and may not be sold, or otherwise disposed of, except for assets sold or replaced with others of like kind or value. As of June 30, 2012 and December 31, 2011, other liabilities of WBDT of $7.2 million reduce the carrying value of the entity, to reflect the fact that as of June 30, 2012 and December 31, 2011, LIN Television has an option to acquire the assets or membership interests of WBDT for an exercise price which may be less than the carrying value of the tangible and intangible net assets of WBDT. The option is exercisable by us if the Federal Communications Commission (“FCC”) attribution rules change.
Redeemable noncontrolling interest
The following table presents the activity of the redeemable noncontrolling interest included in our consolidated balance sheets related to Nami Media, Inc. (“Nami Media”), which represents a third party’s proportionate share of the interest (in thousands):
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and the notes thereto. Our actual results could differ from these estimates. Estimates are used for the allowance for doubtful accounts in receivables, valuation of goodwill and intangible assets, amortization and impairment of program rights and intangible assets, stock-based compensation and other long-term incentive compensation arrangements, pension costs, barter transactions, income taxes, employee medical insurance claims, useful lives of property and equipment, contingencies, including shortfall funding liabilities to our joint venture with NBCUniversal Media, LLC (“NBCUniversal”), litigation and net assets of businesses acquired.
Net Earnings per Common Share
Basic earnings per share (“EPS”) is computed by dividing income attributable to common stockholders by the number of weighted-average outstanding shares of common stock. Diluted EPS reflects the effect of the assumed exercise of stock options and vesting of restricted shares only in the periods in which such effect would have been dilutive.
The following table sets forth the computation of the common shares outstanding used in determining basic and diluted EPS (in thousands):
We apply the treasury stock method to measure the dilutive effect of our outstanding stock option and restricted stock awards and include the respective common share equivalents in the denominator of our diluted EPS calculation. Securities representing 1.8 million shares of common stock for the three and six months ended June 30, 2012, and 0.4 million shares of common stock for the three and six months ended June 30, 2011, were excluded from the computation of diluted EPS for these periods because their effect would have been anti-dilutive. The net income per share amounts are the same for our class A, class B and class C common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.
Recently Issued Accounting Pronouncements
In July 2012, there were revisions to the accounting standard for impairment tests of indefinite-lived intangible assets other than goodwill. Under the revised standard a company can first perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary. A company can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets, and can also bypass the qualitative assessment and perform the quantitative impairment test for any indefinite-lived intangible in any period. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted during 2012 if a company has not yet
performed its 2012 annual impairment test or issued its financial statements. We will adopt this guidance no later than January 1, 2013, and we do not expect it to have a material impact on our financial position or results of operations.
In September 2011, there were revisions to the accounting standard for goodwill impairment tests. A company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The revisions are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this guidance effective January 1, 2012, and the adoption did not have an impact on our financial position or results of operations.
In June 2011, there were revisions to the accounting standard for reporting comprehensive income, which require presentation of the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We elected to present this information in a separate statement included within the primary financial statements following our consolidated statement of operations. The revisions are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. We adopted this guidance effective January 1, 2012, and the adoption did not have an impact on our financial position or results of operations.
In May 2011, the fair value accounting standard was amended to change fair value measurement principles and disclosure requirements. The key changes in measurement principles include limiting the concepts of the highest and best use and valuation premise to nonfinancial assets, providing a framework for considering whether a premium or discount can be applied in a fair value measurement, and aligning the fair value measurement of instruments classified within an entity’s stockholders’ equity with the guidance for liabilities. Disclosures are required for all transfers between Levels 1 and 2 within the valuation hierarchy, the use of a nonfinancial asset measured at fair value if its use differs from its highest and best use, the level in the valuation hierarchy of assets and liabilities not recorded at fair value but for which fair value is required to be disclosed, and for Level 3 measurements, quantitative information about unobservable inputs used, a description of the valuation processes used, and qualitative discussion about the sensitivity of the measurements. We adopted this guidance effective January 1, 2012, and the adoption did not have an impact on our financial position or results of operations.
Note 2 — Acquisitions
On May 4, 2012, LIN Television entered into an asset purchase agreement with affiliates and subsidiaries of New Vision Television, LLC (“New Vision”) to acquire (the “Acquisition”) certain broadcast and other related assets of 13 network-affiliates in eight markets for $330.4 million, subject to post-closing adjustments, and the assumption of $12.2 million of finance lease obligations. Concurrent with the Acquisition, Vaughan Acquisition LLC (“Vaughan”), a third-party licensee, will acquire certain assets of five separately owned network-affiliates in three markets for $4.6 million (the “Vaughan Acquired Stations”) currently owned by PBC Broadcasting, LLC (“PBC”) and operated by PBC with certain services from New Vision.
Upon the closing of these transactions, which are conditioned on the consummation of each other, LIN Television agreed to provide certain services to the Vaughan Acquired Stations pursuant to services arrangements with Vaughan. Under the services arrangements with Vaughan, we will provide sales, administrative and technical services, supporting the business and operation of the Vaughan Acquired Stations in exchange for commissions and fees that will provide us the benefit of certain returns from the business of the Vaughan Acquired Stations. In addition, we may, at our option (subject to regulatory approval) purchase assets of Vaughan relating to the Vaughan Acquired Stations in accordance with the terms of the option agreements among us, Vaughan and the licensees of the applicable Vaughan Acquired Stations. We expect that Vaughan will be considered a VIE, of which we are the primary beneficiary, and that we will consolidate the assets, liabilities, and results of operations of Vaughan and its consolidated subsidiaries.
The aggregate purchase price for these transactions is $335 million. Pursuant to the terms of the purchase agreement, we deposited $33.5 million into an escrow account, which will be applied to the payment of the purchase price at closing and is recorded in other long-term assets on our consolidated balance sheets. The remaining purchase price due at closing will be funded with a combination of a draw against LIN Television’s revolving credit facility, newly incurred debt and cash on hand. In connection with the Acquisition, we entered into a commitment letter pursuant to which JPMorgan Chase Bank, N.A. and J.P. Morgan Securities LLC committed to provide up to $265 million under a senior unsecured bridge loan facility. Upon the closing of the Acquisition, we will incur a fee of $4 million related to this commitment. If we utilize the bridge loan facility, the $4 million fee will be capitalized as deferred financing costs on our consolidated balance sheet. If we do not make use of the bridge loan facility, the $4 million will be recorded as a charge to our consolidated statement of operations in the period in which we consummate the Acquisition. The closing of these transactions, which is expected to occur in 2012, is subject to regulatory approvals and other closing conditions, including the approval of the FCC.
Note 3 — Discontinued Operations
WWHO-TV
On February 16, 2012, we completed the sale of substantially all of the assets of WWHO-TV, our CW affiliate serving Columbus, OH, to Manhan Media, Inc. As of June 30, 2012, no amounts related to WWHO-TV were classified as assets or liabilities held for sale on our consolidated balance sheets. During the six months ended June 30, 2012, we recorded a loss on the sale of WWHO-TV of $0.4 million ($0.3 million, net of tax).
WUPW-TV
On April 21, 2012, we completed the sale of substantially all of the assets of WUPW-TV to WUPW, LLC. As of June 30, 2012, no amounts related to WUPW-TV were classified as assets or liabilities held for sale on our consolidated balance sheets. During the three and six months ended June 30, 2012, we recorded a gain on the sale of WUPW-TV of $18 million ($11.7 million, net of tax).
The following presents summarized information for the discontinued operations as follows (in thousands):
Note 4 — Equity Investments
Joint Venture with NBCUniversal
We own an approximate 20% interest in Station Venture Holdings, LLC (“SVH”), a joint venture with NBCUniversal, and account for our interest using the equity method as we do not have a controlling interest. SVH holds a 99.75% noncontrolling interest in Station Venture Operations, LP (“SVO”), which is the operating company that manages KXAS-TV and KNSD-TV, the television stations that comprise the joint venture.
The following presents summarized financial information of SVH and SVO (in thousands):
In 2008, we recorded an impairment charge that reduced the carrying value of our investment in SVH to $0. At the SVO level, there continues to exist net equity of which we have a proportional share. Subsequent to the reduction of the SVH carrying value to $0, and as a result of our guarantee of the debt financing provided by General Electric Capital Corporation (“GECC”) of SVH as further described in Note 11 — “Commitments and Contingencies”, we continue to track our share of the income or loss of SVH. We currently are not recording such loss in our financial statements until, or unless, our commitments to fund losses exceeds previously recognized impairment charges. When SVH generates income, we will begin recording our proportionate share of such income once it exceeds the operating losses not previously recognized in our financial statements.
We recognize shortfall funding liabilities when it is probable and estimable that there will be a shortfall at the SVH level requiring funding from us, and only when we have reached or intend to reach a shortfall funding agreement covering the period for which we estimate debt service shortfalls to occur, as further described in Note 11 — “Commitments and Contingencies”. As of December 31, 2011, we had a shortfall liability of $4.1 million recognized for any potential shortfall loans to the joint venture during 2012 and into 2013. During the three and six months ended June 30, 2012, pursuant to the shortfall funding agreements with GE, we made shortfall loans in the principal amounts of $1.1 million and $1.7 million, respectively, representing our approximate 20% share of debt service shortfalls during these periods, and GE made shortfall loans in the principal amounts of $4.2 million and $6.6 million, respectively, in respect of its approximate 80% share of debt service shortfalls during these periods. As of June 30, 2012, we have a remaining accrued shortfall liability of $2.5 million for any potential shortfall loans during the remainder of 2012 and into 2013. We believe that
cash shortfalls beyond the amounts currently accrued are not probable. However, our prospective shortfall obligations could vary from our estimate based upon changes in the performance of the joint venture stations and any changes to the proportionate share of each party’s debt service shortfall obligation.
Because of uncertainty surrounding the joint venture’s ability to repay shortfall loans, we have historically concluded that it is more likely than not that the amounts recognized for accrued shortfall loans will not be recovered within a reasonable period of time. During the three and six months ended June 30, 2011, we recognized charges of $0.5 million and $1.1 million, respectively, to reflect the impairment of the amounts recognized for accrued shortfall loans during these periods, which were classified as share of loss in equity investments in our consolidated statement of operations.
All amounts receivable under the shortfall loans, and all accrued interest due from the joint venture, are carried at zero on our consolidated balance sheets. Should there be sufficient evidence in the future to suggest that collectability of the shortfall loans and accrued interest is reasonably certain, we would reestablish notes receivable for all previously funded and accrued shortfall loans to the joint venture, and establish accrued interest receivable for all previously funded shortfall loans to the joint venture.
Note 5 — Debt
We guarantee all of LIN Television’s debt. All of the consolidated 100% owned subsidiaries of LIN Television fully and unconditionally guarantee LIN Television’s senior secured credit facility and 83/8% Senior Notes (the “Senior Notes”), on a joint-and-several basis.
Debt consisted of the following (in thousands):
During the three and six months ended June 30, 2012, we paid $0.7 million and $1.3 million, respectively, of principal on the incremental term loans related to mandatory quarterly payments under our senior secured credit facility. On January 20, 2012, we completed the redemption of $251 million, net of a discount of $1.2 million, of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes — Class B using the proceeds of an incremental term loan funded in December 2011 and cash on hand. As a result of this redemption, we recorded a loss on extinguishment of debt of $2.1 million to our consolidated statement of operations during the six months ended June 30, 2012, associated with a write-down of deferred financing fees and unamortized discount.
During the six months ended June 30, 2011, we paid the remaining balance of $9.6 million on our term loans under our 2009 senior secured credit facility, which we terminated on October 26, 2011 concurrent with the entry into our new senior secured credit facility. Additionally, under our 2009 senior secured credit facility, our available revolving credit commitments decreased from $76.1 million to $48.7 million, based on a computation of excess cash flow for the fiscal year ended December 31, 2010. As a result, we recorded a loss on extinguishment of debt of $0.2 million to our consolidated statements of operations during the six months ended June 30, 2011, consisting of a write-down of deferred financing fees related to the revolving credit facility and term loans.
The fair values of our long-term debt are estimated based on Level 2 inputs of the three-level fair value hierarchy, including quoted market prices for the same issues, or based on the current rates offered to us for our debt. The carrying amounts and fair values of our long-term debt were as follows (in thousands):
Note 6 — Derivative Financial Instruments
We have historically used derivative financial instruments in the management of our interest rate exposure for our long-term debt. In accordance with our interest rate risk management policy, we do not enter into derivative instruments unless there is an underlying exposure, and we do not enter into derivative financial instruments for speculative trading purposes.
During the three and six months ended June 30, 2011, we recorded a gain on derivative instruments of $0.6 million and $1.2 million, respectively, related to an interest rate hedge we entered into a contract to hedge a notional amount of the declining balances of our term loans under our 2009 senior secured credit facility. The interest rate hedge expired on November 4, 2011, and therefore no amounts related to this hedge are included in our consolidated financial statements as of, and during the three and six months ended, June 30, 2012.
As of June 30, 2012, we have a derivative outstanding with a fair value of zero as further described in Note 2 — “Acquisitions” included in Item 15 of our Annual Report on Form 10-K for the year ended December 31, 2011 (“10-K”).
Note 7 — Fair Value Measurements
We record the fair value of certain financial assets and liabilities on a recurring basis. The following table summarizes the financial assets and liabilities measured at fair value in the accompanying financial statements using the three-level fair value hierarchy as of June 30, 2012 and December 31, 2011 (in thousands):
As of the dates presented, we had no financial assets or liabilities recorded at fair value for which the fair value was determined using Level 3 of the fair value hierarchy. The fair value of our deferred compensation related investments is based on the cash surrender values of life insurance policies underlying our supplemental income deferral plan, as well as the fair value of the investments selected by employees. The fair value of our deferred compensation related liabilities is determined based on the fair value of the investments selected by employees.
Note 8 — Retirement Plans
The following table shows the components of the net periodic pension cost (benefit) and the contributions to our 401(k) Plan and the retirement plans (in thousands):
See Note 11 — “Retirement Plans” included in Item 15 of our 10-K for a full description of our retirement plans.
Note 9 — Restructuring
During the six months ended June 30, 2012, we recorded a restructuring charge of $1.4 million, for severance and related costs at WWHO-TV and WUPW-TV, as a result of the divestitures of these stations as further described in Note 3 — “Discontinued Operations”. During the three and six months ended June 30, 2012, we made cash payments of $1.3 million and $1.4 million, respectively, related to these restructuring actions.
During the year ended December 31, 2011, we recorded a restructuring charge of $0.7 million as a result of the consolidation of certain activities at our stations and our corporate headquarters. As of December 31, 2011, we had a remaining accrual of $0.5 million related to these restructuring actions. During the three and six months ended June 30, 2012, we made cash payments of $0.1 million and $0.3 million, respectively, related to these restructuring actions and expect to make cash payments of $0.2 million during the remainder of 2012.
The activities for these restructuring actions are as follows (in thousands):
Note 10 — Income Taxes
We recorded a provision for income taxes of $10.1 million and $12.9 million for the three and six months ended June 30, 2012, respectively, compared to a provision for income taxes of $9.6 million and $10.6 million for the three and six months ended June 30, 2011, respectively. The increase in the tax provision was primarily a result of the increase in income from operations before taxes as compared to the same period last year. Our effective income tax rate was 38.6% and 80.8% for the six months ended June 30, 2012 and June 30, 2011, respectively. The decrease in the effective income tax rate was primarily a result of state tax legislation enacted in Michigan in May 2011, which repealed the Michigan business tax (“MBT”), and implemented a corporate income tax instead, effective January 2012. As a result of the elimination of the MBT, certain future tax deductions, which were available to be utilized beginning in 2015, and had been recognized as deferred tax assets in our consolidated financial statements, will be not be deductible. Therefore, during the second quarter of 2011, we recognized incremental deferred income tax expense of $5.1 million, net of federal benefit, for the reversal of these previously established deferred tax assets.
Note 11 — Commitments and Contingencies
Commitments
Contingencies
GECC Note
GECC provided debt financing for the joint venture between NBCUniversal and us, in the form of an $815.5 million non-amortizing senior secured note due 2023 bearing interest at an initial rate of 8% per annum until March 2, 2013 and 9% per annum thereafter (the “GECC Note”). The GECC Note is an obligation of the joint venture. We have an approximate 20% equity interest in the joint venture and NBCUniversal has the remaining approximate 80% equity interest, in which we and NBCUniversal each have a 50% voting interest. NBCUniversal operates two television stations, KXAS-TV, an NBC affiliate in Dallas, and KNSD-TV, an NBC affiliate in San Diego, pursuant to a management agreement. LIN TV has guaranteed the payment of principal and interest on the GECC Note.
Comcast Corporation owns and controls 51% of NBCUniversal and GE owns the remaining 49%. GECC is a wholly-owned subsidiary of GE.
In light of the adverse effect of the economic downturn on the joint venture’s operating results, we entered into agreements with NBCUniversal and GE, under which we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note, we and NBCUniversal (2009 and 2010 shortfall funding agreements), and we and GE (2011 and 2012 shortfall funding agreements) would each provide the joint venture with a shortfall loan on the basis of our and NBCUniversal’s percentage of economic interest in the joint venture. For further information on these agreements see Note 15 — “Commitments and Contingencies” included in Item 15 of our 10-K. During the six months ended June 30, 2012, we received the consent of Comcast Corporation to the terms and conditions on which GE provides its proportionate share of any joint venture debt service shortfall under the shortfall funding agreement we and GE entered into on March 5, 2012 (the “2012 Shortfall Funding Agreement”), covering the period from April 2, 2012 through April 1, 2013.
We recognize shortfall funding liabilities to the joint venture on our consolidated balance sheets when those liabilities become both probable and estimable. These liabilities become probable and estimable when joint venture management provides us with budget or forecast information of operating cash flows and working capital needs indicating that a debt service shortfall is probable to occur, and for periods beyond joint venture management’s forecast, we develop our own internal estimates of debt service shortfalls. Additionally, we accrue shortfall funding liabilities only when we have reached or intend to reach a shortfall funding agreement covering the period for which we estimate debt service shortfalls to occur.
As of December 31, 2011, we had a shortfall liability of $4.1 million recognized for any potential shortfall loans to the joint venture during 2012 and into 2013. During the three and six months ended June 30, 2012, pursuant to the shortfall funding agreements with GE, we made shortfall loans in the principal amounts of $1.1 million and $1.7 million, respectively, representing our approximate 20% share of debt service shortfalls during these periods, and GE made shortfall loans in the principal amounts of $4.2 million and $6.6 million, respectively, in respect of its approximate 80% share of debt service shortfalls during these periods. As of June 30, 2012, we have a remaining accrued shortfall liability of $2.5 million for any potential shortfall loans during the remainder of 2012 and into 2013. We believe that cash shortfalls beyond the amounts currently accrued are not probable. However, our prospective shortfall obligations could vary from our estimate based upon changes in the performance of the joint venture stations and any changes to the proportionate share of each party’s debt service shortfall obligation.
Our ability to honor our shortfall loan obligations under the 2012 Shortfall Funding Agreement is limited by certain covenants contained in our senior secured credit facility and the indenture governing our Senior Notes. Based on our estimate of debt service shortfalls for 2012 and into 2013 at the joint venture, and our forecast of total leverage and consolidated EBITDA during the remainder of 2012 and into 2013, we expect to have the capacity within these restrictions to provide funding to the joint venture for the $2.5 million accrued shortfall liability. As of June 30, 2012, we had availability under applicable debt covenants to fund future shortfall loans as follows: (i) $47.2 million of availability under the credit agreement governing our senior secured credit facility, and (ii) $192 million of availability under the indenture governing our Senior Notes.
The possibility exists that debt service shortfalls at the joint venture could exceed current expectations; including the possibility that neither GE nor NBCUniversal will continue to fund a share of such debt service shortfall loans after April 1, 2013. Should circumstances arise in which we desire to make shortfall loans to the joint venture in excess of the limitations imposed by the covenants contained in the credit agreement governing our senior secured credit facility or the indenture governing our Senior Notes, we could seek an amendment or waiver of such limitations, but there is no assurance that we would be able to obtain such amendment or waiver on a timely basis, or at all, or on terms satisfactory to us. If we are unable to make shortfall payments, the joint venture may be unable to fund interest obligations under the GECC Note, resulting in an event of default.
An event of default under the GECC Note would occur if the joint venture fails to make any scheduled interest payment within 90 days of the date due, or fails to pay the principal amount on the maturity date in 2023. If an event of default occurs, GECC could accelerate the maturity of the entire amount due under the GECC Note. Other than upon the acceleration of the principal amount upon an event of default, prepayment of the principal of the note is prohibited unless agreed upon by both NBCUniversal and LIN TV. Upon an event of default under the GECC Note, GECC’s only recourse would be to the joint venture, our equity interest in the joint venture and, after exhausting all remedies against the assets of the joint venture and the other equity interests in the joint venture, to LIN TV pursuant to its guarantee of the full amount of the GECC Note.
Under the terms of its guarantee of the GECC Note, LIN TV would be required to make a payment for an amount to be determined upon occurrence of the following events: (i) there is an event of default; (ii) the default is not remedied; and (iii) after GECC exhausts all remedies against the assets of the joint venture, the total amount realized upon exercise of those remedies is less than the $815.5 million principal amount of, plus any accrued and unpaid interest due, under the GECC Note. Upon the occurrence of such events, the amount owed by LIN TV to GECC pursuant to the guarantee would be calculated as the difference between (i) the total amount at which the joint venture’s assets were sold and (ii) the principal amount of, plus any accrued and unpaid interest due, under the GECC Note. As of December 31, 2011, we estimated the fair value of the television stations in the joint venture to be approximately $118 million less than the outstanding principal balance of the GECC Note of $815.5 million.
Although we believe the probability is remote that there would be an event of default and therefore an acceleration of the principal amount of the GECC Note, there can be no assurances that such an event of default will not occur. There are no financial or similar covenants in the GECC Note. In addition, since both GE and LIN Television have agreed to fund interest payments through April 1, 2013, if the joint venture is unable to generate sufficient cash to service interest payments on the GECC Note, GE and LIN Television are able to control the occurrence of a default under the GECC Note. Since 2009, LIN Television and its joint venture partners have prevented the occurrence of a default by entering into shortfall funding agreements and funding shortfall loans to the joint venture as further described above.
If an event of default occurs under the GECC Note, LIN TV, which conducts all of its operations through its subsidiaries, could experience material adverse consequences, including:
· GECC, after exhausting all remedies against the joint venture, could enforce its rights under the guarantee, which could cause LIN TV to determine that LIN Television should seek to sell material assets owned by it in order to satisfy LIN TV’s obligations under the guarantee;
· GECC’s initiation of proceedings against LIN TV under the guarantee could result in a change of control or other material adverse consequences to LIN Television, which could cause an acceleration of LIN Television’s senior secured credit facility and other outstanding indebtedness; and
· if the GECC Note is prepaid because of an acceleration on default or otherwise, or if LIN TV is released from its obligation, LIN TV would realize a substantial tax gain of approximately $815.5 million related to its deferred gain associated with the formation of the joint venture. This amount of gain, exclusive of any potential utilization of net operating loss carryforwards or other unrealized capital losses, would be subject to U.S. Federal and various State tax rates of 35% and approximately 1% (net of Federal benefit), respectively.
Litigation
We are involved in various legal claims and disputes in the ordinary course of our business. As such, we accrue for such liabilities when it is both (i) probable that a loss has occurred and (ii) the amount of the loss can be reasonably estimated. We evaluate, on a quarterly basis, developments affecting various legal claims and disputes that could cause an increase or decrease in the amount of the liability that has been previously accrued. It is possible that we could incur losses in excess of any amounts accrued. While management does not anticipate any such loss would have a material adverse impact on our consolidated financial position, it is possible that the final outcome could have a material impact on our results of operations or cash flows in any given period.
Note 12 — Related Party
We have a non-controlling investment in an interactive service provider that hosts our web sites. During the three and six months ended June 30, 2012, we incurred charges from the provider of $0.4 million and $1.3 million, respectively, and made cash payments to the provider of $0.2 million and $0.7 million, respectively, for web hosting services and web site development and customization. Additionally, during the three and six months ended June 30, 2011, we incurred charges from, and made cash payments to, the provider of $0.6 million and $1.3 million, respectively, for web hosting services and web site development and customization.
Note 13 — Condensed Consolidating Financial Statements
LIN Television, a 100% owned subsidiary of LIN TV, is the primary obligor of our senior secured credit facility and our Senior Notes, which are further described in Note 5 — “Debt”. LIN TV fully and unconditionally guarantees all of LIN Television’s debt on a joint-and-several basis. Additionally, all of the consolidated 100% owned subsidiaries of LIN Television fully and unconditionally guarantee LIN Television’s senior secured credit facility and Senior Notes on a joint-and-several basis, subject to customary release provisions. There are certain contractual restrictions on LIN Television’s ability to obtain funds in the form of dividends or loans from the non-guarantor subsidiaries.
The following condensed consolidating financial statements present the consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income and consolidated statements of cash flows of LIN TV, LIN Television, as the issuer, the guarantor subsidiaries, and the non-guarantor subsidiaries of LIN Television and the elimination entries necessary to consolidate or combine the issuer with the guarantor and non-guarantor subsidiaries. These statements are presented in accordance with the disclosure requirements under SEC Regulation S-X Rule 3-10.
Condensed Consolidating Balance Sheet As of June 30, 2012 (in thousands)
Condensed Consolidating Balance Sheet As of December 31, 2011 (in thousands)
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