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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC. 20549

 

 

Form 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2010

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 number: 1-6383

 

 

MEDIA GENERAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Commonwealth of Virginia   54-0850433

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

333 E. Franklin St., Richmond, VA   23219
(Address of principal executive offices)   (Zip Code)

(804) 649-6000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report.)

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on 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 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Larger 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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of August 1, 2010.

 

Class A Common shares:

   22,523,263

Class B Common shares:

   548,564

 

 

 


Table of Contents

MEDIA GENERAL, INC.

TABLE OF CONTENTS

FORM 10-Q REPORT

June 27, 2010

 

          Page
Part I. Financial Information   
Item 1.    Financial Statements   
  

Consolidated Condensed Balance Sheets – June 27, 2010 and December 27, 2009

   1
  

Consolidated Condensed Statements of Operations – Three and six months ended June 27, 2010 and June 28, 2009

   3
  

Consolidated Condensed Statements of Cash Flows – Six months ended June 27, 2010 and June  28, 2009

   4
  

Notes to Consolidated Condensed Financial Statements

   5
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    21
Item 3.    Quantitative and Qualitative Disclosure About Market Risk    27
Item 4.    Controls and Procedures    27
Part II. Other Information   
Item 6.    Exhibits    28
  

(a) Exhibits

  
Signatures    29


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

MEDIA GENERAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(000’s except shares)

 

     June 27,
2010
   December 27,
2009

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 27,069    $ 33,232

Accounts receivable - net

     89,175      104,405

Inventories

     6,898      6,632

Other

     24,720      60,786
             

Total current assets

     147,862      205,055
             

Other assets

     60,792      34,177

Property, plant and equipment - net

     405,154      421,208

FCC licenses and other intangibles - net

     217,449      220,591

Excess of cost over fair value of net identifiable assets of acquired businesses

     355,017      355,017
             
   $ 1,186,274    $ 1,236,048
             

See accompanying notes.

 

1


Table of Contents

MEDIA GENERAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(000’s except shares and per share data)

 

     June 27,
2010
    December 27,
2009
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 24,848      $ 26,398   

Accrued expenses and other liabilities

     86,153        72,174   
                

Total current liabilities

     111,001        98,572   
                

Long-term debt

     672,859        711,909   

Retirement, post-retirement and post-employment plans

     166,643        173,017   

Deferred income taxes

     20,489        7,233   

Other liabilities and deferred credits

     37,176        53,066   

Stockholders’ equity:

    

Preferred stock ($5 cumulative convertible), par value $5 per share, authorized 5,000,000 shares; none outstanding

    

Common stock, par value $5 per share:

    

Class A, authorized 75,000,000 shares; issued 22,520,336 and 22,241,959 shares

     112,602        111,210   

Class B, authorized 600,000 shares; issued 548,564 and 551,881 shares

     2,743        2,759   

Additional paid-in capital

     24,671        24,253   

Accumulated other comprehensive loss

     (112,613     (117,703

Retained earnings

     150,703        171,732   
                

Total stockholders’ equity

     178,106        192,251   
                
   $ 1,186,274      $ 1,236,048   
                

See accompanying notes.

 

2


Table of Contents

MEDIA GENERAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(000’s except for per share data)

 

     Three Months Ended     Six Months Ended  
     June 27,
2010
    June 28,
2009
    June 27,
2010
    June 28,
2009
 

Revenues

        

Publishing

   $ 82,905      $ 89,305      $ 164,203      $ 179,037   

Broadcasting

     72,509        64,124        139,594        123,977   

Digital media and other

     10,748        9,958        21,229        19,506   
                                

Total revenues

     166,162        163,387        325,026        322,520   
                                

Operating costs:

        

Employee compensation

     72,445        73,587        148,037        160,151   

Production

     36,831        39,527        72,364        83,129   

Selling, general and administrative

     26,904        21,559        52,233        46,770   

Depreciation and amortization

     13,697        15,057        27,398        30,375   
                                

Total operating costs

     149,877        149,730        300,032        320,425   
                                

Operating income

     16,285        13,657        24,994        2,095   
                                

Other income (expense):

        

Interest expense

     (17,089     (11,257     (36,912     (21,229

Loss on sale of investments

     —          (209     —          (209

Other, net

     166        166        541        409   
                                

Total other expense

     (16,923     (11,300     (36,371     (21,029
                                

Income (loss) from continuing operations before income taxes

     (638     2,357        (11,377     (18,934

Income tax expense (benefit)

     3,645        (10,955     9,652        (10,955
                                

Income (loss) from continuing operations

     (4,283     13,312        (21,029     (7,979

Income from discontinued operations (net of taxes)

     —          156        —          194   

Gain related to divestiture of discontinued operations (net of taxes)

     —          7,120        —          7,120   
                                

Net income (loss)

   $ (4,283   $ 20,588      $ (21,029   $ (665
                                

Net income (loss) per common share:

        

Income (loss) from continuing operations

   $ (0.19   $ 0.57      $ (0.94   $ (0.36

Discontinued operations

     —          0.33        —          0.33   
                                

Net income (loss) per common share

   $ (0.19   $ 0.90      $ (0.94   $ (0.03
                                

Net income (loss) per common share – assuming dilution:

        

Income (loss) from continuing operations

   $ (0.19   $ 0.57      $ (0.94   $ (0.36

Discontinued operations

     —          0.33        —          0.33   
                                

Net income (loss) per common share – assuming dilution

   $ (0.19   $ 0.90      $ (0.94   $ (0.03
                                

See accompanying notes.

 

3


Table of Contents

MEDIA GENERAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(000’s)

 

     Six Months Ended  
     June 27,
2010
    June 28,
2009
 

Operating activities:

    

Net loss

   $ (21,029   $ (665

Adjustments to reconcile net loss:

    

Depreciation and amortization

     27,398        30,383   

Deferred income taxes

     15,013        —     

Impairment of and loss on investments

     —          209   

Net gain related to divestiture of operations

     —          (7,120

Write-off of previously deferred debt issuance costs

     1,772        —     

Intraperiod tax allocation

     (3,254     (6,619

Change in assets and liabilities:

    

Accounts receivable and inventories

     14,965        21,354   

Accounts payable, accrued expenses, and other liabilities

     14,011        (23,621

Retirement plan contribution

     (1,611     (5,000

Income taxes refundable

     26,171        (144

Company owned life insurance (cash surrender value less policy loans including repayments)

     (17,995     (602

Other, net

     (2,019     (4,912
                

Net cash provided by operating activities

     53,422        3,263   
                

Investing activities:

    

Capital expenditures

     (8,796     (7,978

Proceeds from sale of discontinued operations and investment

     —          16,942   

Collection of note receivable

     —          5,000   

Other, net

     520        (219
                

Net cash (used) provided by investing activities

     (8,276     13,745   
                

Financing activities:

    

Proceeds from notes

     293,070        —     

Increase in bank debt

     134,156        137,800   

Payment of bank debt

     (466,640     (156,392

Debt issuance costs

     (12,078     —     

Other, net

     183        192   
                

Net cash used by financing activities

     (51,309     (18,400
                

Net decrease in cash and cash equivalents

     (6,163     (1,392

Cash and cash equivalents at beginning of period

     33,232        7,142   
                

Cash and cash equivalents at end of period

   $ 27,069      $ 5,750   
                

See accompanying notes.

 

4


Table of Contents

MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States, and with applicable quarterly reporting regulations of the Securities and Exchange Commission. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and, accordingly, should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 27, 2009.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of interim financial information have been included.

2. Inventories are principally raw materials (primarily newsprint).

3. The Company’s tax provision for both the current and prior-year periods had an unusual relationship to the pretax income (loss) from continuing operations primarily due to the existence of a full deferred tax asset valuation allowance at the beginning of both periods. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. Tax expense was $3.7 million in the second quarter and $9.7 in the first six months of 2010. The tax expense recorded in the second quarter of 2010 reflects the accrual of an additional $7.5 million ($15 million for the first half of 2010) valuation allowance in connection with the tax amortization of the Company’s indefinite-lived intangible assets that is not available to offset existing deferred tax assets (termed a “naked credit”); these accruals were partially offset by a $1 million ($.7 million in the year to date) favorable adjustment to the Company’s reserve for uncertain tax positions as well as a $2.8 million ($3.2 million in the year to date) tax benefit related to the intraperiod allocation to items in Other Comprehensive Income (OCI). The year-to-date tax expense was further benefited by an increase in the Company’s 2009 net operating loss (NOL) carryback. The Company expects the remaining non-cash naked credit of approximately $15 million to ratably affect income tax expense in the second half of 2010; other tax adjustments and intraperiod tax allocations may also affect the second half of the year. A full discussion of the naked credit issue is discussed in Note 3 of Item 8 of the Company’s Form 10-K for the year ended December 27, 2009.

The Company reported income tax expense for the second quarter using the “discrete-period” approach (discrete) as opposed to the “projected annual effective tax rate” approach (ETR) which is the generally prescribed method for interim reporting periods. The Company employed the discrete method in lieu of the ETR method because relatively small movements in projected income for the year could result in extreme variability in the ETR. Therefore, the Company does not believe it can reliably estimate its ETR for the full year.

Health Care Reform legislation passed and signed into law during the first quarter of 2010 repealed employer tax deductions for the cost of providing post-retirement prescription drug coverage to the extent that it is reimbursed by the Medicare Part D (“Part D”) drug subsidy. As a result of this law change, the Company wrote-off approximately $1.7 million in deferred tax assets related to the future deductibility of the Part D subsidy in the first quarter of 2010. However, due to the Company’s full valuation allowance recorded against its deferred tax asset balance, there was a corresponding reduction in the valuation allowance, and, therefore, the net result of these two adjustments had no impact on net income.

 

5


Table of Contents

MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. In the third quarter of 2009, the Company sold a small magazine and its related web site located in the Virginia/Tennessee Market and reported it as a discontinued operation for all prior periods. During the second quarter of 2009, the Company completed the sale of WCWJ in Jacksonville, Florida, and recorded an after-tax gain of $7.1 million related to this divestiture. Results of discontinued operations are presented below for the quarter and six months ended June 28, 2009:

 

     Quarter Ended     Six Months Ended  
(In thousands)    June 28,
2009
    June 28,
2009
 

Revenues

   $ 1,224      $ 3,500   

Costs and expense

     1,124        3,362   
                

Income before income taxes

     100        138   

Income taxes

     (56     (56
                

Income from discontinued operations

   $ 156      $ 194   
                

5. In the first quarter of 2010, the Company established a new financing structure; the Company simultaneously amended and extended its bank debt and issued Senior Notes in a private placement. The Senior Notes mature in 2017 and have a face value of $300 million, an interest rate of 11.75%, and were issued at a price equal to 97.69% of face value. The proceeds from the Senior Notes were used to pay down existing bank credit facilities. The amended bank debt matures in March 2013 and bears an interest rate of LIBOR plus a margin based on the Company’s leverage ratio, as defined in the agreement. The new agreements have two main financial covenants: a leverage ratio and a fixed charge coverage ratio which involve debt levels, interest expense as well as other fixed charges, and a rolling four-quarter calculation of EBITDA – all as defined in the agreements. These agreements provide the Company with enhanced financial flexibility. The Company pledged its cash and assets as well as the stock of its subsidiaries as collateral; the Company’s subsidiaries also guaranteed the debt securities of the parent company. Additionally, there are restrictions on the Company’s ability to pay dividends (none are allowed in 2010 and 2011), make capital expenditures above certain levels, repurchase its stock, and engage in certain other transactions such as making investments or entering into capital leases above certain levels.

The following table includes information about the carrying values and estimated fair values of the Company’s financial instruments at June 27, 2010 and December 27, 2009:

 

     June 27, 2010    December 27, 2009
(In thousands)    Carrying Amounts    Fair Value    Carrying Amounts    Fair Value

Assets

           

Investments

           

Trading

   $ 170    $ 170    $ 303    $ 303

Liabilities

           

Interest rate swaps

     10,898      10,898      14,353      14,353

Long-term debt:

           

Bank term loan

     379,412      362,240      285,844      277,614

11.75% senior notes

     293,434      306,417      —        —  

Revolving credit facility

     —        —        426,037      413,771

Trading securities held by the Supplemental 401(k) plan are carried at fair value and are determined by reference to quoted market prices. The fair value of the bank-term loan debt as of June 27, 2010 and December 27, 2009, was estimated using discounted cash flow analyses and an estimate of the Company’s bank borrowing rate for similar types of borrowings. As of June 27, 2010, the fair value of the 11.75% Senior Notes was valued at the most recent trade prior to the end of the quarter. Under the fair value hierarchy, the Company’s trading securities fall under Level 1 (quoted prices in active markets), and its long-term debt falls under Level 2 (other observable inputs).

 

6


Table of Contents

MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In the third quarter of 2006, the Company entered into several interest rate swaps as part of an overall strategy to manage interest cost and risk associated with variable interest rates, primarily short-term changes in LIBOR. These interest rate swaps are cash flow hedges with original notional amounts totaling $300 million; swaps with notional amounts of $100 million matured in August of 2009 and swaps with nominal amounts of $200 million will mature in 2011. Changes in cash flows of the interest rate swaps offset changes in the interest payments on the Company’s Facilities. These swaps effectively convert a portion of the Company’s variable rate bank debt to fixed rate debt with a weighted average interest rate approximating 9.6% at June 27, 2010.

The interest rate swaps are carried at fair value based on the present value of the estimated cash flows the Company would have received or paid to terminate the swaps; the Company applied a discount rate that is predicated on quoted LIBOR prices and current market spreads for unsecured borrowings. In the first six months of 2010 and 2009, $5.4 million and $6.2 million, respectively, was reclassified from OCI into interest expense on the Statement of Operations as the effective portion of the interest rate swap. The pretax change deferred in other comprehensive income (“OCI”) for the first six months of 2010 and 2009 was $3.5 million and $4.4 million, respectively. Based on the estimated current and future fair values of the swaps as of June 27, 2010, the Company estimates that $8.7 million will be reclassified from OCI to interest expense in the next twelve months. Under the fair value hierarchy, the Company’s interest rate swaps fall under Level 2 (other observable inputs).The following table includes information about the Company’s derivative instruments as of June 27, 2010:

 

(In thousands)

 

         
          Fair Value as of

Derivatives designated as hedging instruments

  

Balance sheet location

   June 27, 2010

Interest rate swaps

   Accrued expenses and other liabilities    $ 8,724

Interest rate swaps

   Other liabilities and deferred credits      2,174

6. The Company is a diversified communications company located primarily in the southeastern United States. The Company is comprised of five geographic segments (Virginia/Tennessee, Florida, Mid-South, North Carolina and Ohio/Rhode Island) along with a sixth segment that includes interactive advertising services and certain other operations.

Revenues for the geographic markets include revenues from 18 network-affiliated television stations, three metropolitan newspapers, and 20 community newspapers, all of which have associated Web sites. Additionally, more than 200 specialty publications that include weekly newspapers and niche publications (and the associated Web sites) are included in revenues for the geographic markets. Revenues for the sixth segment, Advertising Services & Other, are generated by three interactive advertising services companies and certain other operations including a broadcast equipment and studio design company.

Management measures segment performance based on profit or loss from operations before interest, income taxes, and acquisition-related amortization. Amortization of acquired intangibles is not allocated to individual segments although the intangible assets themselves are included in identifiable assets for each segment. Intercompany sales are primarily accounted for as if the sales were at current market prices and are eliminated in the consolidated financial statements. Certain promotion in the Company’s newspapers and television stations on behalf of its online shopping portal are recognized based on incremental cost. The Company’s reportable segments are managed separately, largely based on geographic market considerations and a desire to provide services to customers regardless of the media platform or any difference in the method of delivery. In certain instances, operations have been aggregated based on similar economic characteristics.

 

7


Table of Contents

MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table sets forth the Company’s current and prior-year financial performance by segment:

 

           Depreciation and     Operating Profit  

(In thousands)

   Revenues     Amortization     (Loss)  

Three Months ended June 27, 2010

      

Virginia/Tennessee

   $ 48,947      $ (3,288   $ 10,483   

Florida

     37,393        (1,762     1,526   

Mid-South

     41,477        (3,010     9,563   

North Carolina

     19,212        (1,557     1,537   

Ohio/Rhode Island

     13,826        (835     3,681   

Advertising Services & Other

     5,942        (234     884   

Eliminations

     (635     —          —     
            
         27,674   

Unallocated amounts:

      

Acquisition intangibles amortization

     —          (1,571     (1,571

Corporate expense

     —          (1,440     (7,756
                  
   $ 166,162      $ (13,697  
                  

Corporate interest expense

         (17,083

Other

         (1,902
            

Consolidated loss from continuing operations before income taxes

       $ (638
            

Three Months ended June 28, 2009

      

Virginia/Tennessee

   $ 50,587      $ (3,486   $ 11,324   

Florida

     37,627        (2,094     193   

Mid-South

     36,941        (3,397     5,971   

North Carolina

     19,675        (1,696     1,483   

Ohio/Rhode Island

     12,614        (847     2,577   

Advertising Services & Other

     6,242        (224     776   

Eliminations

     (299     —          (5
            
         22,319   

Unallocated amounts:

      

Acquisition intangibles amortization

     —          (1,787     (1,787

Corporate expense

     —          (1,526     (6,629
                  
   $ 163,387      $ (15,057  
                  

Interest expense

         (11,257

Loss on sale of investments

         (209

Other

         (80
            

Consolidated income from continuing operations before income taxes

       $ 2,357   
            

 

8


Table of Contents

MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

(In thousands)

   Revenues     Depreciation and
Amortization
    Operating Profit
(Loss)
 

Six Months ended June 27, 2010

      

Virginia/Tennessee

   $ 94,798      $ (6,577   $ 18,092   

Florida

     75,466        (3,525     2,771   

Mid-South

     78,062        (6,020     14,239   

North Carolina

     38,021        (3,114     2,648   

Ohio/Rhode Island

     27,441        (1,669     6,962   

Advertising Services & Other

     12,278        (465     2,323   

Eliminations

     (1,040     —          —     
            
         47,035   

Unallocated amounts:

      

Acquisition intangibles amortization

     —          (3,142     (3,142

Corporate expense

     —          (2,886     (15,712
                  
   $ 325,026      $ (27,398  
                  

Corporate interest expense

         (36,897

Other

         (2,661
            

Consolidated loss from continuing operations before income taxes

       $ (11,377
            

Six Months ended June 28, 2009

      

Virginia/Tennessee

   $ 97,427      $ (7,144   $ 13,360   

Florida

     79,867        (4,190     (2,837

Mid-South

     70,739        (6,788     7,037   

North Carolina

     38,656        (3,392     (76

Ohio/Rhode Island

     23,700        (1,692     2,737   

Advertising Services & Other

     12,804        (449     1,367   

Eliminations

     (673     1        (49
            
         21,539   

Unallocated amounts:

      

Acquisition intangibles amortization

     —          (3,586     (3,586

Corporate expense

     —          (3,135     (15,263
                  
   $ 322,520      $ (30,375  
                  

Interest expense

         (21,229

Loss on sale of investments

         (209

Other

         (186
            

Consolidated loss from continuing operations before income taxes

       $ (18,934
            

 

9


Table of Contents

MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7. The Consolidated Condensed Statements of Operations include amortization expense from amortizing intangible assets of $1.6 million and $1.8 million for the second quarters of 2010 and 2009, and $3.1 million and $3.6 million for the first six months of 2010 and 2009. Currently, intangibles amortization expense is projected to be approximately $6 million in total for both 2010 and 2011, decreasing to $3 million in 2012, and to $2 million in 2013 and 2014.

In the past ten years, the Company has recorded pretax cumulative impairment losses related to goodwill approximating $685 million. The following table shows the gross carrying amount and accumulated amortization for intangible assets as of June 27, 2010 and December 27, 2009:

 

     December 27, 2009    Change    June 27, 2010

(In thousands)

   Gross  Carrying
Amount
   Accumulated
Amortization
   Amortization
Expense
   Gross  Carrying
Amount
   Accumulated
Amortization

Amortizing intangible assets (including network affiliation, advertiser, programming and subscriber relationships):

              

Virginia/Tennessee

   $ 55,326    $ 42,377    $ 355    $ 55,326    $ 42,732

Florida

     1,055      1,055      —        1,055      1,055

Mid-South

     84,048      61,770      2,144      84,048      63,914

North Carolina

     11,931      10,095      147      11,931      10,242

Ohio/Rhode Island

     9,157      4,864      179      9,157      5,043

Advert. Serv. & Other

     6,614      3,249      317      6,614      3,566
                                  

Total

   $ 168,131    $ 123,410    $ 3,142    $ 168,131    $ 126,552
                                  

Indefinite-lived intangible assets:

              

Goodwill:

              

Virginia/Tennessee

   $ 96,725          $ 96,725   

Florida

     43,123            43,123   

Mid-South

     118,153            118,153   

North Carolina

     20,896            20,896   

Ohio/Rhode Island

     61,408            61,408   

Advert. Serv. & Other

     14,712            14,712   
                      

Total goodwill

     355,017            355,017   

FCC licenses

              

Virginia/Tennessee

     20,000            20,000   

Mid-South

     93,694            93,694   

North Carolina

     24,000            24,000   

Ohio/Rhode Island

     36,004            36,004   
                      

Total FCC licenses

     173,698            173,698   

Other

     2,172            2,172   
                      

Total

   $ 530,887          $ 530,887   
                      

8. The following table sets forth the computation of basic and diluted earnings per share from continuing operations. There were approximately 181,000 shares and 119,000 shares that were not included in the computation of diluted EPS for the second quarter and first six months of 2010, respectively, because to do so would have been anti-dilutive for the periods presented.

 

10


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MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

     Quarter Ended June 27, 2010     Quarter Ended June 28, 2009

(In thousands, except per share amounts)

   Loss
(Numerator)
    Shares
(Denominator)
   Per Share
Amount
    Income
(Numerator)
    Shares
(Denominator)
   Per Share
Amount

Basic and Diluted EPS:

              

Income (loss) from continuing operations

   $ (4,283        $ 13,312        

Undistributed earnings attributable to participating securites

     —               (646     
                          

Income (loss) from continuing operations attributable to common stockholders

   $ (4,283   22,343    $ (0.19   $ 12,666      22,253    $ 0.57
                                        

 

     Six Months Ended June 27, 2010     Six Months Ended June 28, 2009  

(In thousands, except per share amounts)

   Loss
(Numerator)
    Shares
(Denominator)
   Per Share
Amount
    Loss
(Numerator)
    Shares
(Denominator)
   Per Share
Amount
 

Basic and Diluted EPS:

              

Loss from continuing operations attributable to common stockholders

   $ (21,029   22,316    $ (0.94   $ (7,979   22,217    $ (0.36
                                          

9. The following table provides the components of net periodic employee benefits expense for the Company’s benefit plans for the second quarter and first six months of 2010 and 2009:

 

     Quarter Ended  
     Pension Benefits     Other Benefits  

(In thousands)

   June 27,
2010
    June 28,
2009
    June 27,
2010
    June 28,
2009
 

Service cost

   $ 19      $ 142      $ 51      $ 50   

Interest cost

     5,630        5,906        560        617   

Expected return on plan assets

     (5,960     (5,814     —          —     

Amortization of prior-service (credit)/cost

     —          (79     410        424   

Amortization of net loss/(gain)

     635        270        (243     (280

Curtailment charge

     —          50        —          —     
                                

Net periodic benefit cost

   $ 324      $ 475      $ 778      $ 811   
                                

 

     Six Months Ended  
     Pension Benefits     Other Benefits  

(In thousands)

   June 27,
2010
    June 28,
2009
    June 27,
2010
    June 28,
2009
 

Service cost

   $ 19      $ 332      $ 101      $ 125   

Interest cost

     11,455        12,408        1,160        1,267   

Expected return on plan assets

     (11,910     (12,054     —          —     

Amortization of prior-service (credit)/cost

     —          (92     860        874   

Amortization of net loss/(gain)

     1,335        2,047        (443     (505

Curtailment charge

     —          50        —          —     
                                

Net periodic benefit cost

   $ 899      $ 2,691      $ 1,678      $ 1,761   
                                

 

11


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MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

10. The Company’s comprehensive income (loss) consisted of the following:

 

     Quarter Ended    Six Months Ended  

(In thousands)

   June 27,
2010
    June 28,
2009
   June 27,
2010
    June 28,
2009
 

Net income (loss)

   $ (4,283   $ 20,588    $ (21,029   $ (665

Unrealized gain on derivative contracts

         

(net of deferred taxes)

     1,329        2,348      1,976        3,972   

Change in pension and postretirement

         

(net of deferred taxes)

     3,114        52,892      3,114        52,892   
                               

Comprehensive income (loss)

   $ 160      $ 75,828    $ (15,939   $ 56,199   
                               

11. The Company accrues severance expense when payment of benefits is both probable and the amount is reasonably estimable. The Company records severance expense in the “Employee compensation” line item on the Consolidated Condensed Statements of Operations related to involuntary employee terminations. Workforce reductions have been utilized, mainly in prior periods, in response to the deep economic recession and the Company’s continuing efforts to align its costs with available revenues. The Company recorded severance expense of $.1 million and $.4 million in the second quarter and first six months of 2010, as compared to $1.5 million and $6 million in the second quarter and first six months of 2009. As of June 27, 2010, accrued severance was less than $100 thousand; as of June 28, 2009, accrued severance was $1 million and included in “Accrued expenses and other liabilities” on the Consolidated Condensed Balance Sheet.

12. The following table shows the Company’s Statement of Stockholders’ Equity as of June 27, 2010:

 

     Common Stock     Additional
Paid-in
    Accumulated
Other
Comprehensive
    Retained        
     Class A    Class B     Capital     Income (Loss)     Earnings     Total  

Balance at December 27, 2009

   $ 111,210    $ 2,759      $ 24,253      $ (117,703   $ 171,732      $ 192,251   

Net loss

     —        —          —          —          (21,029     (21,029

Unrealized gain on derivative contracts

             

(net of deferred taxes of $1,480)

     —        —          —          1,976        —          1,976   

Pension and postretirement

             

(net of deferred taxes of $1,774)

     —        —          —          3,114        —          3,114   
                   

Comprehensive loss

                (15,939

Exercise of stock options

     439      —          (249     —          —          190   

Performance accelerated restricted stock

     935      —          (935     —          —          —     

Stock-based compensation

     —        —          1,614        —          —          1,614   

Other

     18      (16     (12     —          —          (10
                                               

Balance at June 27, 2010

   $ 112,602    $ 2,743      $ 24,671      $ (112,613   $ 150,703      $ 178,106   
                                               

13. From time to time, the Company’s subsidiaries may guarantee the debt securities of the parent company. The following financial information presents condensed consolidating balance sheets, statements of operations, and statements of cash flows for the parent company, the Guarantor Subsidiaries, and the non-Guarantor Subsidiaries, which are comprised of the Company’s Supplemental 401(k) Plan, together with certain eliminations.

 

12


Table of Contents

MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Media General, Inc.

Condensed Consolidating Balance Sheet

As of June 27, 2010

(In thousands, unaudited)

 

     Media General
Corporate
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Media General
Consolidated
 

ASSETS

          

Current assets:

          

Cash & cash equivalents

   $ 25,055      $ 2,014      $ —        $ —        $ 27,069   

Accounts receivable, net

     —          89,158        —          17        89,175   

Inventories

     3        6,895        —          —          6,898   

Other current assets

     3,825        45,966        —          (25,071     24,720   
                                        

Total current assets

     28,883        144,033        —          (25,054     147,862   
                                        

Investment in and advances to subsidiaries

     321,499        1,966,733        —          (2,288,232     —     

Intercompany note receivable

     682,770        —          —          (682,770     —     

Other assets

     43,694        16,928        170        —          60,792   

Property, plant & equipment, net

     27,959        377,195        —          —          405,154   

FCC licenses and other intangibles

     —          217,449        —          —          217,449   

Excess cost over fair value

     —          355,017        —          —          355,017   
                                        

TOTAL ASSETS

   $ 1,104,805      $ 3,077,355      $ 170      $ (2,996,056   $ 1,186,274   
                                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

          

Current liabilities:

          

Accounts payable

   $ 8,289      $ 16,548      $ —        $ 11      $ 24,848   

Accrued expenses and other liabilities

     45,214        66,011        —          (25,072     86,153   
                                        

Total current liabilities

     53,503        82,559        —          (25,061     111,001   
                                        

Long-term debt

     672,846        13        —          —          672,859   

Intercompany loan

     —          682,770        —          (682,770     —     

Retirement, post-retirement and post-employment plans

     166,643        —          —          —          166,643   

Deferred income taxes

     —          20,489        —          —          20,489   

Other deferred credits

     31,774        4,075        1,327        —          37,176   

Stockholders’ equity

          

Common stock

     115,345        4,872        —          (4,872     115,345   

Additional paid-in capital

     26,604        2,434,816        (1,928     (2,434,821     24,671   

Accumulated other comprehensive loss

     (112,613     —          —          —          (112,613

Retained earnings

     150,703        (152,239     771        151,468        150,703   
                                        

Total stockholders’ equity

     180,039        2,287,449        (1,157     (2,288,225     178,106   
                                        

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY

   $ 1,104,805      $ 3,077,355      $ 170      $ (2,996,056   $ 1,186,274   
                                        

 

13


Table of Contents

MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Media General, Inc.

Condensed Consolidating Balance Sheet

As of December 27, 2009

(In thousands, unaudited)

 

     Media General
Corporate
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Media General
Consolidated
 

ASSETS

          

Current assets:

          

Cash & cash equivalents

   $ 31,691      $ 1,541      $ —        $ —        $ 33,232   

Accounts receivable, net

     —          104,405        —          —          104,405   

Inventories

     2        6,630        —          —          6,632   

Other current assets

     3,141        83,375        —          (25,730     60,786   
                                        

Total current assets

     34,834        195,951        —          (25,730     205,055   
                                        

Investment in and advances to subsidiaries

     336,575        1,965,508        —          (2,302,083     —     

Intercompany note receivable

     742,219        —          —          (742,219     —     

Other assets

     16,928        16,946        303        —          34,177   

Property, plant & equipment, net

     28,702        392,506        —          —          421,208   

FCC licenses and other intangibles

     —          220,591        —          —          220,591   

Excess cost over fair value

     —          355,017        —          —          355,017   
                                        

TOTAL ASSETS

   $ 1,159,258      $ 3,146,519      $ 303      $ (3,070,032   $ 1,236,048   
                                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

          

Current liabilities:

          

Accounts payable

   $ 9,074      $ 17,330      $ —        $ (6   $ 26,398   

Accrued expenses and other liabilities

     24,537        73,367        —          (25,730     72,174   
                                        

Total current liabilities

     33,611        90,697        —          (25,736     98,572   
                                        

Long-term debt

     711,881        28        —          —          711,909   

Intercompany loan

     —          742,219        —          (742,219     —     

Retirement, post-retirement and post-employment plans

     173,017        —          —          —          173,017   

Deferred income taxes

     —          7,233        —          —          7,233   

Other deferred credits

     46,740        5,162        1,164        —          53,066   

Stockholders’ equity

          

Common stock

     113,969        4,872        —          (4,872     113,969   

Additional paid-in capital

     26,011        2,435,790        (1,919     (2,435,629     24,253   

Accumulated other comprehensive loss

     (117,703     —          —          —          (117,703

Retained earnings

     171,732        (139,482     1,058        138,424        171,732   
                                        

Total stockholders’ equity

     194,009        2,301,180        (861     (2,302,077     192,251   
                                        

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY

   $ 1,159,258      $ 3,146,519      $ 303      $ (3,070,032   $ 1,236,048   
                                        

 

14


Table of Contents

MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Media General, Inc.

Condensed Consolidating Statements of Operations

Three Months Ended June 27, 2010

(In thousands, unaudited)

 

     Media General
Corporate
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Media  General
Consolidated
 

Revenues

   $ 10,475      $ 191,886      $ —        $ (36,199   $ 166,162   

Operating costs:

          

Employee compensation

     8,653        63,533        260        (1     72,445   

Production

     —          37,364        —          (533     36,831   

Selling, general and administrative

     342        62,229        —          (35,667     26,904   

Depreciation and amortization

     607        13,090        —          —          13,697   
                                        

Total operating costs

     9,602        176,216        260        (36,201     149,877   
                                        

Operating income (loss)

     873        15,670        (260     2        16,285   

Other income (expense):

          

Interest expense

     (17,083     (6     —          —          (17,089

Intercompany interest income (expense)

     13,028        (13,028     —          —          —     

Investment income (loss) - consolidated affiliates

     (5,167     —          —          5,167        —     

Other, net

     204        (38     —          —          166   
                                        

Total other income (expense)

     (9,018     (13,072     —          5,167        (16,923
                                        

Income (loss) from continuing operations before income taxes

     (8,145     2,598        (260     5,169        (638

Income tax expense (benefit)

     (3,862     7,507        —          —          3,645   
                                        

Net income (loss)

     (4,283     (4,909     (260     5,169        (4,283

Other comprehensive income (net of tax)

     4,443        —          —          —          4,443   
                                        

Comprehensive income (loss)

   $ 160      $ (4,909   $ (260   $ 5,169      $ 160   
                                        

 

15


Table of Contents

MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Media General, Inc.

Condensed Consolidating Statements of Operations

Three Months Ended June 28, 2009

(In thousands, unaudited)

 

     Media General
Corporate
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Media  General
Consolidated
 

Revenues

   $ 8,986      $ 187,830      $ —        $ (33,429   $ 163,387   

Operating costs:

          

Employee compensation

     6,459        67,165        (37     —          73,587   

Production

     —          40,363        —          (836     39,527   

Selling, general and administrative

     (122     54,268        —          (32,587     21,559   

Depreciation and amortization

     661        14,397        —          (1     15,057   
                                        

Total operating costs

     6,998        176,193        (37     (33,424     149,730   
                                        

Operating loss

     1,988        11,637        37        (5     13,657   

Other income (expense):

          

Interest expense

     (11,256     (1     —          —          (11,257

Intercompany interest income (expense)

     10,570        (10,570     —          —          —     

Impairment of and loss on investments

     —          (209     —          —          (209

Investment income (loss) - consolidated affiliates

     18,146        —          —          (18,146     —     

Other, net

     252        (86     —          —          166   
                                        

Total other income (expense)

     17,712        (10,866     —          (18,146     (11,300
                                        

Income (loss) from continuing operations before income taxes

     19,700        771        37        (18,151     2,357   

Income tax expense (benefit)

     (888     (10,067     —          —          (10,955
                                        

Income (loss) from continuing operations

     20,588        10,838        37        (18,151     13,312   

Income from discontinued operations (net of taxes)

     —          156        —          —          156   

Gain related to divestiture of operations (net of taxes)

     —          7,120          —          7,120   
                                        

Net Income (loss)

     20,588        18,114        37        (18,151     20,588   

Other comprehensive income (net of tax)

     55,240        —          —          —          55,240   
                                        

Comprehensive income (loss)

   $ 75,828      $ 18,114      $ 37      $ (18,151   $ 75,828   
                                        

 

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MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Media General, Inc.

Condensed Consolidating Statements of Operations

Six Months Ended June 27, 2010

(In thousands, unaudited)

 

     Media General
Corporate
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Media General
Consolidated
 

Revenues

   $ 18,889      $ 375,014      $ —        $ (68,877   $ 325,026   

Operating costs:

          

Employee compensation

     17,237        130,514        287        (1     148,037   

Production

     —          73,205        —          (841     72,364   

Selling, general and administrative

     207        120,061        —          (68,035     52,233   

Depreciation and amortization

     1,220        26,179        —          (1     27,398   
                                        

Total operating costs

     18,664        349,959        287        (68,878     300,032   
                                        

Operating income (loss)

     225        25,055        (287     1        24,994   

Other income (expense):

          

Interest expense

     (36,897     (15     —          —          (36,912

Intercompany interest income (expense)

     24,132        (24,132     —          —          —     

Investment income (loss) - consolidated affiliates

     (13,043     —          —          13,043        —     

Other, net

     579        (38     —          —          541   
                                        

Total other income (expense)

     (25,229     (24,185     —          13,043        (36,371
                                        

Income (loss) from continuing operations before income taxes

     (25,004     870        (287     13,044        (11,377

Income tax expense (benefit)

     (3,975     13,627        —          —          9,652   
                                        

Net income (loss)

     (21,029     (12,757     (287     13,044        (21,029

Other comprehensive income (net of tax)

     5,090        —          —          —          5,090   
                                        

Comprehensive income (loss)

   $ (15,939   $ (12,757   $ (287   $ 13,044      $ (15,939
                                        

 

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MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Media General, Inc.

Condensed Consolidating Statements of Operations

Six Months Ended June 28, 2009

(In thousands, unaudited)

 

     Media General
Corporate
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Media General
Consolidated
 

Revenues

   $ 15,152      $ 370,307      $ —        $ (62,939   $ 322,520   

Operating costs:

          

Employee compensation

     13,800        146,333        18        —          160,151   

Production

     —          84,797        —          (1,668     83,129   

Selling, general and administrative

     856        107,176        —          (61,262     46,770   

Depreciation and amortization

     1,322        29,055        —          (2     30,375   
                                        

Total operating costs

     15,978        367,361        18        (62,932     320,425   
                                        

Operating income (loss)

     (826     2,946        (18     (7     2,095   

Other income (expense):

          

Interest expense

     (21,226     (3     —          —          (21,229

Intercompany interest income (expense)

     21,421        (21,421     —          —          —     

Impairment of and loss on investments

     —          (209     —          —          (209

Investment income (loss) - consolidated affiliates

     (2,103     —          —          2,103        —     

Other, net

     544        (135     —          —          409   
                                        

Total other income (expense)

     (1,364     (21,768     —          2,103        (21,029
                                        

Income (loss) from continuing operations before income taxes

     (2,190     (18,822     (18     2,096        (18,934

Income tax benefit

     (1,525     (9,430     —          —          (10,955
                                        

Income (loss) from continuing operations

     (665     (9,392     (18     2,096        (7,979

Income from discontinued operations (net of taxes)

     —          194        —          —          194   

Gain related to divestiture of operations (net of taxes)

     —          7,120          —          7,120   
                                        

Net income (loss)

     (665     (2,078     (18     2,096        (665

Other comprehensive income (net of tax)

     56,864        —          —          —          56,864   
                                        

Comprehensive income (loss)

   $ 56,199      $ (2,078   $ (18   $ 2,096      $ 56,199   
                                        

 

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MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Media General, Inc.

Condensed Consolidating Statements of Cash Flows

Six Months Ended June 27, 2010

(In thousands, unaudited)

 

     Media General
Corporate
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Media General
Consolidated
 

Cash flows from operating activities:

          

Net cash (used) provided by operating activities

   $ (13,833   $ 67,246      $ 9      $ —        $ 53,422   

Cash flows from investing activities:

          

Capital expenditures

     (1,027     (7,769     —          —          (8,796

Net change in intercompany note receivable

     59,449        —          —          (59,449     —     

Other, net

     60        460        —          —          520   
                                        

Net cash provided (used) by investing activities

     58,482        (7,309     —          (59,449     (8,276

Cash flows from financing activities:

          

Proceeds from notes

     293,070        —          —          —          293,070   

Increase in debt

     134,156        —          —          —          134,156   

Payment of debt

     (466,625     (15     —          —          (466,640

Debt issuance costs

     (12,078     —          —          —          (12,078

Net change in intercompany loan

     —          (59,449     —          59,449        —     

Other, net

     192        —          (9     —          183   
                                        

Net cash (used) provided by financing activities

     (51,285     (59,464     (9     59,449        (51,309
                                        

Net (decrease) increase in cash and cash equivalents

     (6,636     473        —          —          (6,163

Cash and cash equivalents at beginning of year

     31,691        1,541        —          —          33,232   
                                        

Cash and cash equivalents at end of period

   $ 25,055      $ 2,014      $ —        $ —        $ 27,069   
                                        

 

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MEDIA GENERAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Media General, Inc.

Condensed Consolidating Statements of Cash Flows

Six Months Ended June 28, 2009

(In thousands, unaudited)

 

     Media General
Corporate
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Media General
Consolidated
 

Cash flows from operating activities:

          

Net cash provided (used) by operating activities

   $ 5,849      $ (2,557   $ (29   $ —        $ 3,263   

Cash flows from investing activities:

          

Capital expenditures

     (1,007     (6,971     —          —          (7,978

Net change in intercompany note receivable

     (3,912     —          —          3,912        —     

Proceeds from sale of discontinued operations and investment

     17,150        (208     —          —          16,942   

Collection of receivable note

     —          5,000        —          —          5,000   

Other, net

     (995     776        —          —          (219
                                        

Net cash provided (used) by investing activities

     11,236        (1,403     —          3,912        13,745   

Cash flows from financing activities:

          

Increase in debt

     137,800        —          —          —          137,800   

Payment of debt

     (156,380     (12     —          —          (156,392

Net change in intercompany loan

     —          3,912        —          (3,912     —     

Other, net

     163        —          29        —          192   
                                        

Net cash (used) provided by financing activities

     (18,417     3,900        29        (3,912     (18,400
                                        

Net decrease in cash and cash equivalents

     (1,332     (60     —          —          (1,392

Cash and cash equivalents at beginning of year

     5,593        1,549        —          —          7,142   
                                        

Cash and cash equivalents at end of period

   $ 4,261      $ 1,489      $ —        $ —        $ 5,750   
                                        

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

The Company is a diversified communications company located primarily in the southeastern United States and is committed to providing excellent local content in growth markets over multiple platforms, to continually developing new products and services that will stimulate audience and revenue growth, and to nurturing traditional audience viewership while embracing the expanding opportunities arising in the digital media arena. The Company is comprised of five geographic segments (Virginia/Tennessee, Florida, Mid-South (which includes South Carolina, Georgia, Alabama, and Mississippi), North Carolina, and Ohio/Rhode Island) along with a sixth segment that includes interactive advertising services and certain other operations. The Company’s mission of being the leading provider of high-quality news, information and entertainment in the Southeast by continually building its position of strength in strategically located markets is enhanced by its evolution to geographic-based markets. By combining its resources in a designated geographic market under one leader, a leaner more cohesive structure thrives and more closely connects the Company to its customers and non-customers, accelerates the Company’s digital strategy, and facilitates streamlined decision-making.

The Company’s fiscal year ends on the last Sunday in December.

RESULTS OF OPERATIONS

The Company recorded a net loss of $4.3 million ($0.19 per share) and $21 million ($0.94 per share) in the second quarter and first six months of 2010, respectively, compared to net income of $21 million and a net loss of $.7 million in the equivalent 2009 periods. In the second quarter of 2009, the Company completed the divestiture of a held-for-sale station, WCWJ in Jacksonville, Florida, and recognized an after-tax gain of $7.1 million related to this divestiture. In 2009 the Company also sold a small business magazine located in the Virginia/Tennessee Market. These results were reported as discontinued operations and, excluding the above-mentioned gain, had limited impact on the Company’s results in the second quarter of 2009. See Note 4 of this Form 10-Q for additional details regarding prior-year discontinued operations.

In the second quarter of 2010, the Company had a loss from continuing operations of $4.3 million ($0.19 per share) as compared to income from continuing operations of $13.3 million ($0.57 per share) in the comparable quarter of 2009. This quarter-over-quarter decline was more than accounted for by an increase in non-cash income tax expense and higher interest expense. Income taxes of $3.6 million in the second quarter of 2010, as compared to an income tax benefit of $11 million in the equivalent quarter of 2009, were the result of several issues, most notably a non-cash “naked credit” issue all of which is described in the Income Taxes section of this Form 10-Q. Interest costs rose 52%, reflecting the new financing structure put into place in February 2010; see the Liquidity section of this Form 10-Q for a further discussion. Focusing on operations, the Company’s operating income increased 19% in the second quarter as five-out-of-six segments produced improved operating profits due to a 2% increase in revenues combined with a 2% reduction in segment costs. Corporate and Other expense was up a combined $2.9 million due to increased stock-based compensation expense and the absence in 2010 of employee furlough days and certain other cost containment measures.

The Company recorded a loss from continuing operations of $21 million ($0.94 per share) in the first six months of 2010, as compared to a loss from continuing operations of $8 million ($0.36) in the equivalent prior-year period. The overriding factors contributing to the year-over-year increased loss included a substantial increase in non-cash income tax expense and a 74% rise in interest costs for reasons similar to those detailed above in the second quarter discussion. Additionally, Corporate and Other expense was up a combined $2.9 million due to increased stock-based compensation expense, the absence of prior-year employee furlough days, and to lower fixed asset sales. In opposition to these higher costs were considerable expense savings in the areas of compensation and newsprint costs which facilitated a $23 million increase in operating income. Aggressive cost management yielded an 8% reduction in segment operating expense and was the driving force in the year-over-year operating improvement.

 

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SEGMENT RESULTS

Revenues

Revenues are grouped primarily into five major categories: Local, National, Political, Classified, and Subscription/Content/Circulation (which includes newspaper circulation, broadcast retransmission revenues, and interactive subscription and content revenues). The following chart summarizes the total consolidated period-over-period changes in these select revenue categories:

Change in Market Revenue by Major Category

2010 versus 2009

 

     Second Quarter Change     Year-to-date Change  

(In thousands)

   Amount     Percent     Amount     Percent  

Local

   $ (906   (1.1   $ (416   (0.3

National

     689      2.4        1,908      3.4   

Political

     6,268      NM        7,080      NM   

Classified

     (1,867   (7.8     (4,754   (9.9

Subs/Content/Circulation

     (73   (0.3     1,213      2.9   

 

“NM” is not meaningful.

Strong second quarter Political advertising and solid first quarter Winter Olympics advertising contributed to higher revenues in the second quarter (up 2%) and first six months (up 1%) of 2010, as compared with the prior year’s equivalent periods. This marks the first time in over three years that revenue has shown a quarter-over-quarter improvement. Solid Political and National advertising more than offset lower Local and Classified advertising. Subscription/Content/Circulation revenues stalled in the second quarter due to decreased newspaper circulation (lower home delivery and single copy sales), but remained up in the first six months of 2010 as a 24% rise in cable and satellite retransmission revenues more than offset a 1% decrease in newspaper circulation revenues. While not yet a major revenue category, the Company’s Printing/Distribution operations have continued to expand and are becoming an increasingly important contributor to overall revenues.

Revenues in the Virginia/Tennessee Market fell 3% in both the second quarter and first half of 2010 as compared to the prior year. Advertising dollars were down across all categories, with National (down approximately 19% in both periods) and Classified (down 4% and 5% in the quarter and year to date, respectively) falling farthest from the mark. Counter to trend, Political advertising was down slightly due to off-year elections in 2009 for the prior-year Virginia governor’s race.

Revenues in the Florida Market decreased 1% and 6% in the second quarter and year to date of 2010 from equivalent prior-year periods. Florida’s economy is still under significant pressure from unemployment and a very soft housing market, which in turn, continues to impact advertising demand. However, National advertising showed improvement in the quarter (up 11%) due primarily to image ads run by BP regarding the oil spill in the Gulf of Mexico. Political advertising also showed strength as a result of gubernatorial and congressional races, combined with issue spending. Despite these period-over-period revenue improvements, Classified and Local advertising downturns were still more than offsetting. Classified advertising (down 22% and 24% in the quarter and year to date, respectively) suffered across all categories, while Local advertising felt the most significant drop in the telecommunications category.

Revenues in the Mid-South Market increased 12% and 10% in the second quarter and first half of 2010 due to strong Political advertising (resulting from several primary elections) and solid Local advertising growth (up 5% in the quarter and 6% in the year to date). Local advertising benefited from certain first-quarter events

 

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(the Super Bowl and Winter Olympics), along with second quarter strength in the telecommunications and automotive advertising categories. This shift from National to Local advertising resulted in a 3% National advertising decline in the second quarter; year-to-date National revenues were up 1% over the first half of 2009.

Revenues in the North Carolina Market declined 2% in both the second quarter and first six months of 2010 from similar 2009 periods. Increases in National and Political advertising were unable to overcome weak Local advertising (down 6% and 5% in the quarter and year to date, respectively). Congressional primaries and issue spending fueled the increase in Political revenues. Local revenues suffered the effects of advertiser cutbacks and cancelled advertising driven by several first-quarter winter storms. Classified advertising made solid progress in the second quarter (up 3% on higher employment advertising), but was down 2% in the first half of the year as compared to the similar year-ago period due to lower real estate and automotive advertising.

Revenues in the Ohio/Rhode Island Market increased 10% and 16% in the second quarter and first half of 2010 compared to the equivalent prior-year periods. This is the Company’s only geographic market which does not include any newspapers and is therefore less influenced by Classified advertising; rather it is more affected by the ebb and flow of Political and Olympic revenues in corresponding odd and even-numbered years. Both of this Market’s television stations are NBC affiliates and, consequently, reaped the full benefit of 2010 Winter Olympics advertising. Political and National advertising were the largest contributors to the segment’s revenue improvement. Political advertising advances were the result of gubernatorial and congressional primary elections, combined with intense issue spending. Local advertising decreased 2% in the second quarter, but remained ahead by 7% in the first six months of 2010.

Operating Expenses

Over the past few years, the Company has reacted to the challenging advertising environment by reducing costs across all markets while achieving greater efficiencies and implementing aggressive actions to better align expenses with current economic opportunities. In the second quarter of 2010, operating expenses were held even with the prior-year quarter; in the first half of the year, cost-containment efforts resulted in a 6% reduction in operating expense as compared to the first six months of 2009. Workforce reductions (largely undertaken in 2009) across the entire Company were instrumental in aligning expenses with the prevailing economic environment. The Company’s results included pretax severance costs of $1.5 million and $6 million in the second quarter and first half of 2009, respectively. For the first half of 2010, pretax severance expense was under $500,000. However, 2009 also included lower salary costs as a result of mandatory furlough days for employees (three days in the second quarter and seven days in the first half of the year). Company-wide employee compensation expense decreased 2% and 8% in the second quarter and first half of 2010 from the prior year due primarily to lower employee counts, reduced healthcare costs and the absence of certain first-quarter employee benefits such as the Company’s 401(k) match. Newsprint expense fell 29% and 43% in the second quarter and first half of 2010 from the prior year due to a substantial reduction in consumption because of lower advertising linage, decreased circulation volumes, web-width reductions and concerted conservation efforts, as well as a considerable decrease (15% in the quarter and 25% in the year to date) in average cost per ton. Additional savings were derived from lower depreciation costs (due primarily to lower capital expenditures).

Operating expenses in the Virginia/Tennessee Market decreased 2% and 9% in the second quarter and first half of 2010 from the equivalent periods of 2009. In the quarter, a 30% reduction in newsprint cost combined with a 5% decrease in compensation expense to produce the savings. In the first six months of 2010, approximately two-thirds of the decrease was attributable to lower compensation expense (down 14%); a 41% reduction in newsprint costs was responsible for the majority of the remaining decrease.

Operating expenses in the Florida Market were down 4% and 12% in second quarter and the first half of 2010 from the same periods in 2009. Lower compensation expense (down 8% and 12% in the quarter and year to date, respectively) and reduced newsprint costs (down 31% in the quarter and 47% in the year to date) were responsible for the Market’s reduced operating expenses.

 

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Table of Contents

Running counter to trend, operating expenses in the Mid-South Market rose 3% in the second quarter of 2010 due primarily to a 4% increase in compensation cost as commissions grew proportionately with the Market’s strong revenue growth combined with the absence of prior-year furloughs. A 17% reduction in newsprint cost was unable to offset the increase. In the first half of 2010, expenses decreased less than 1%. As in most other Markets, savings were achieved in the areas of compensation, newsprint, and depreciation.

Operating expenses in the North Carolina Market declined 4% and 9% in the second quarter and first half of 2010 as compared to 2009’s comparable periods. In the quarter, the savings were achieved equally from lower compensation costs and newsprint expense. In the first half of the year, a 12% reduction in compensation costs contributed over 60% of the savings, with the remainder coming primarily from lower newsprint costs.

Operating expenses in the Ohio/Rhode Island Market were essentially level in the second quarter and down 2% in the first half of 2010 due primarily to a 12% reduction in compensation cost. The remaining savings were achieved primarily through concerted efforts to manage departmental spending.

ADVERTISING SERVICES & OTHER

Advertising Services & Other (ASO) primarily includes:

 

   

Blockdot - a leading advergaming business;

 

   

Dealtaker.com - an online social shopping portal;

 

   

NetInformer - a leading provider of mobile advertising and marketing services;

 

   

Production Services - comprised primarily of a provider of broadcast equipment and studio design services.

Revenue in ASO decreased 5% in the second quarter and was comprised of a 20% drop in revenues at Blockdot (attributable to fewer advergaming projects) combined with a 9% reduction in revenues in the Production Services operations due to the absence of certain products which are now either being managed in their respective geographic market or have been discontinued. In the first half of the year, revenues declined 4% for reasons similar to those discussed in the quarter and consisted of a 14% decrease at Blockdot and a 20% reduction in revenues in the Production Services operations, which additionally had lower year-over-year equipment sales. Dealtaker.com grew its revenues by 11% and 19% in the second quarter and year-to-date period of 2010, reflecting increased traffic and visitors buying from merchant sites.

Operating expenses were reduced 8% and 13% in the second quarter and first half of 2010 primarily due to lower compensation costs.

Operating Profit (Loss)

The following chart shows the change in operating profit by market. The period-over-period movement in market operating profit was driven by the underlying fluctuations in revenue and expense as detailed in the previous discussion.

 

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Change in Market Operating Profits

2010 versus 2009

 

     Second Quarter Change     Year-to-date Change

(In thousands)

   Amount     Percent     Amount    Percent

Virginia/Tennessee

   $ (841   (7.4   $ 4,732    35.4

Florida

     1,333      NM        5,608    NM

Mid-South

     3,592      60.2        7,202    102.3

North Carolina

     54      3.6        2,724    NM

Ohio/Rhode Island

     1,104      42.8        4,225    154.4

Adv. Services & Other

     108      13.9        956    69.9

Eliminations

     5      100.0        49    100.0
                   

Total

   $ 5,355      24.0      $ 25,496    118.4
                   

In the second quarter, strong Political advertising revenues across most markets combined with lower compensation and newsprint expense to produce a segment operating profit of $28 million (up 24%). In the first half of 2010, segment operating profit more than doubled compared to the prior year as a result of reduced expense across all segments, higher revenues from strong Olympic advertising in the Mid-South and Ohio/Rhode Island Markets and robust second quarter Political spending. In the first six months of 2010, all segments made meaningful contributions to the improved period-over-period operating results, with the Florida and North Carolina Markets converting 2009 first-half operating losses into operating profits in the first six months of 2010.

INTEREST EXPENSE

Interest expense increased $5.8 million and $15.7 million in the second quarter and first half of 2010 from the prior-year equivalent periods as a direct result of the Company’s new financing structure that was completed in February 2010. Approximately one-third of the year-over-year increase in interest expense was attributable to debt issuance costs totaling $5.5 million that were immediately expensed upon entering into the financing structure. A $67 million decline in average debt levels in the second quarter of 2010 as compared to 2009 only partially mitigated a 400 basis point increase in the average interest rate. A $61 million decline in average debt levels in the first half of 2010 as compared to 2009, scarcely offset a 500 basis point increase in the average interest rate (excluding the impact of debt issuance costs immediately expensed). See the Liquidity section of this Form 10-Q for a more detailed discussion of the new financing structure.

In the third quarter of 2006, the Company entered into three interest rate swaps (where it pays a fixed rate and receives a floating rate) to manage interest cost and cash flows associated with variable interest rates, primarily short-term changes in LIBOR, not to trade such instruments for profit or loss. The interest rate swaps are carried at fair value based on a discounted cash flow analysis (predicated on quoted LIBOR prices) of the estimated amounts the Company would have received or paid to terminate the swaps. These interest rate swaps were cash flow hedges with notional amounts originally totaling $300 million; swaps with notional amounts of $100 million matured in 2009, and $200 million will mature in 2011. Changes in cash flows of the interest rate swaps offset changes in the interest payments on the Company’s bank debt. These swaps effectively convert the Company’s variable rate bank debt to fixed rate debt with a weighted average interest rate approximating 9.6% at June 27, 2010.

INCOME TAXES

The Company recorded income tax expense of $3.7 million and $9.7 million in the second quarter and first half of 2010 as compared to an income tax benefit of $11 million for the same periods in 2009. The Company’s tax provision for both the current and prior-year periods had an unusual relationship to the pretax income (loss) from continuing operations primarily due to the existence of a full deferred tax asset valuation allowance at the beginning of both periods. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance.

 

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The tax expense recorded in the second quarter of 2010 reflects the accrual of an additional $7.5 million ($15 million for the first half of 2010) valuation allowance in connection with the tax amortization of the Company’s indefinite-lived intangible assets that is not available to offset existing deferred tax assets (termed a “naked credit”); these accruals were partially offset by a $1 million ($.7 million in the year to date) favorable adjustment related to a court ruling received in connection with a state income tax issue as well as a $2.8 million ($3.2 million in the year to date) tax benefit resulting from the intraperiod allocation of tax to other comprehensive income items. The year-to-date tax expense was further benefited by an $1.4 million increase (from the amount estimated at the end of 2009) in the Company’s 2009 net operating loss (NOL) carryback, which was recorded in the first quarter. Last year’s $11 million tax benefit included $3.6 million from a favorable determination concerning a state tax issue and $7.5 million of tax benefit resulting from the intraperiod allocation of tax to Other Comprehensive Income Items. The Company expects the remaining non-cash naked credit of approximately $15 million to ratably affect income tax expense in the second half of 2010; other tax adjustments and intraperiod tax allocations may also affect the second half of the year. A full discussion of the naked credit issue is discussed in Note 3 of Item 8 of the Company’s Form 10-K for the year ended December 27, 2009.

LIQUIDITY

Net cash generated from operating activities grew from $3.3 million in the first half of 2009 to $53 million in the current period, including the effect of reinvesting $18 million in company owned life insurance by repaying policy loans. The Company received a tax refund in April of approximately $26 million, the majority of which was used to reduce debt. During 2010, the Company paid debt issuance costs of $12 million, made capital expenditures of $8.8 million and reduced debt by $39 million.

Over the past several years the overall economy has been faced with a recession and a credit crisis, both of which have had a direct impact on the Company. In February 2010, the Company established a new financing structure that is expected to serve its needs for the next several years. The Company simultaneously amended and extended its bank debt and issued Senior Notes in a private placement. The proceeds from the Senior Notes, which mature in 2017, were used to pay down existing bank credit facilities. At the same time, the maturity of the bank facility was extended to March 2013; the revised operating covenants under the agreements provide additional financial flexibility for the Company. The steps that the Company has taken to lower its debt levels in recent years and the implementation of the new financing structure should allow the Company the flexibility necessary to operate within the debt covenants at a cost the Company believes to be manageable. The Company fully expects to be in compliance with the debt covenants in both the near and long term due to the lower debt levels and decreased operating expenses.

As of June 27, 2010, the Company has in place with its syndicate of banks a $380 million term loan, and a $70 million revolving credit line with nothing outstanding. Additionally, the Company has 11.75% Senior Notes with a par value of $300 million that were sold at a discount. The amended bank credit facilities mature in March 2013 and bear an interest rate of LIBOR plus a margin (4.8% at the close of the second quarter) based on the Company’s leverage ratio, as defined in the agreement. Total debt outstanding was $673 million on June 27, 2010. The new agreements have two main financial covenants: a leverage ratio and a fixed charge coverage ratio which involve debt levels, interest expense as well as other fixed charges, and rolling four-quarter calculations of EBITDA – all as defined in the agreements. These ratios have been amended and they position the Company to emerge solidly from the current economic downturn. The Company has pledged its cash and assets as well as the stock of its subsidiaries as collateral; the Company’s subsidiaries also guaranteed the debt securities of the parent company. Additionally, there are restrictions on the Company’s ability to pay dividends (none are allowed in 2010 or 2011), make capital expenditures above certain levels, repurchase its stock, and engage in certain other transactions such as making investments or entering into capital leases above certain preset levels.

 

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OUTLOOK

Although the outlook for continued improvement in the economy in the second half of 2010 is uncertain, advertising spending patterns showed signs of improvement in the first half of the year. The Company expects total revenue growth to continue in the second half, especially at its Broadcast television stations due to advertising revenues from Political spending in this even-numbered year. However, higher interest expense and adverse changes to expected income tax expense will also be significant. Furthermore, third-quarter expenses are expected to increase due to the absence of prior-year furlough savings, higher prices for newsprint, and costs to support new revenue initiatives. Together, these higher expenses are expected to more than offset revenue increases. The Company plans to continue to seize new opportunities and develop new revenue streams in the increasingly important realm of digital media. The Company’s enhanced financial flexibility should position it to capitalize on an improving economy over the remainder of the year and to build shareholder value over the long term.

* * * * * * * *

Certain statements in this quarterly report that are not historical facts are “forward-looking” statements, as that term is defined by the federal securities laws. Forward-looking statements include statements related to accounting estimates and assumptions, expectations regarding interest expense, the economic recovery, the impact of cost-containment measures, staff reductions, income taxes, the Internet, debt compliance, general advertising levels and political advertising levels. Forward-looking statements, including those which use words such as the Company “believes,” “anticipates,” “expects,” “estimates,” “intends,” “projects,” “plans,” “may” and similar words, are made as of the date of this filing and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by such statements.

Some significant factors that could affect actual results include: the effect of the economy on advertising demand, interest rates, the availability of newsprint, changes to pending accounting standards, health care cost trends and regulations, a natural disaster, the level of political advertising, the performance of acquisitions, and regulatory rulings and laws.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

The Company’s Annual Report on Form 10-K for the year ended December 27, 2009, details our disclosures about market risk. As of June 27, 2010, there have been no material changes in the Company’s market risk from December 27, 2009.

 

Item 4. Controls and Procedures

The Company’s management, including the chief executive officer and chief financial officer, performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the chief executive officer and chief financial officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no significant changes in the Company’s internal controls or in other factors that are reasonably likely to adversely affect internal control subsequent to the date of this evaluation.

During the first six months of 2010, the Company completed the installation and integration of a traffic and billing system for its broadcast TV stations which manages commercial pricing and spot inventory utilization, and should improve business processes and expand customer service opportunities. This new system was installed at six broadcast stations (including the three largest stations) in 2009 and at the Company’s remaining twelve broadcast stations in the first half of 2010.

 

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PART II. OTHER INFORMATION

 

Item 6. Exhibits

 

(a) Exhibits

 

31.1    Section 302 Chief Executive Officer Certification
31.2    Section 302 Chief Financial Officer Certification
32      

Section 906 Chief Executive Officer and Chief Financial Officer Certification

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  MEDIA GENERAL, INC.
DATE: August 11, 2010  

/S/    MARSHALL N. MORTON        

  Marshall N. Morton
  President and Chief Executive Officer
DATE: August 11, 2010  

/S/    JOHN A. SCHAUSS        

  John A. Schauss
  Vice President - Finance and Chief Financial Officer

 

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