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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 September 26, 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 October 31, 2010.

 

Class A Common shares:

     22,524,770   

Class B Common shares:

     548,564   

 

 

 


Table of Contents

 

MEDIA GENERAL, INC.

TABLE OF CONTENTS

FORM 10-Q REPORT

September 26, 2010

 

               Page  

Part I.

  

Financial Information

  
  

Item 1.

  

Financial Statements

  
     

Consolidated Condensed Balance Sheets – September 26, 2010 and December 27, 2009

     1   
     

Consolidated Condensed Statements of Operations – Three and nine months ended September 26, 2010 and September 27, 2009

     3   
     

Consolidated Condensed Statements of Cash Flows – Nine months ended September 26, 2010 and September 27, 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

     29   
  

Item 4.

  

Controls and Procedures

     29   

Part II.

  

Other Information

  
  

Item 6.

  

Exhibits

     30   
     

(a)     Exhibits

  

Signatures

     31   


Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

MEDIA GENERAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(000’s except shares)

 

     September 26,
2010
     December 27,
2009
 

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 21,857       $ 33,232   

Accounts receivable - net

     89,546         104,405   

Inventories

     7,770         6,632   

Other

     39,679         60,786   
                 

Total current assets

     158,852         205,055   
                 

Other assets

     42,457         34,177   

Property, plant and equipment - net

     399,849         421,208   

FCC licenses and other intangibles - net

     215,931         220,591   

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

     355,017         355,017   
                 
   $ 1,172,106       $ 1,236,048   
                 

See accompanying notes.

 

1


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MEDIA GENERAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(000’s except shares and per share data)

 

     September 26,
2010
    December 27,
2009
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 25,158      $ 26,398   

Accrued expenses and other liabilities

     94,424        72,174   
                

Total current liabilities

     119,582        98,572   
                

Long-term debt

     673,100        711,909   

Retirement, post-retirement and post-employment plans

     148,790        173,017   

Deferred income taxes

     27,603        7,233   

Other liabilities and deferred credits

     33,761        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 22,524,672 and 22,241,959 shares

     112,623        111,210   

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

     2,743        2,759   

Additional paid-in-capital

     25,536        24,253   

Accumulated other comprehensive loss

     (111,678     (117,703

Retained earnings

     140,046        171,732   
                

Total stockholders’ equity

     169,270        192,251   
                
   $ 1,172,106      $ 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     Nine Months Ended  
     September 26,
2010
    September 27,
2009
    September 26,
2010
    September 27,
2009
 

Revenues

        

Publishing

   $ 77,687      $ 84,097      $ 241,890      $ 263,136   

Broadcasting

     75,009        63,375        214,603        187,352   

Digital media and other

     10,517        10,536        31,746        30,043   
                                

Total revenues

     163,213        158,008        488,239        480,531   
                                

Operating costs:

        

Employee compensation

     74,494        69,966        222,531        230,117   

Production

     37,765        37,185        110,129        120,313   

Selling, general and administrative

     26,288        21,354        78,521        68,128   

Depreciation and amortization

     13,204        14,881        40,602        45,256   

Goodwill and other asset impairment

     —          84,220        —          84,220   

Gain on insurance recovery

     —          (1,915     —          (1,915
                                

Total operating costs

     151,751        225,691        451,783        546,119   
                                

Operating income (loss)

     11,462        (67,683     36,456        (65,588
                                

Other income (expense):

        

Interest expense

     (17,015     (10,489     (53,927     (31,718

Gain on sale of investments

     —          910        —          701   

Other, net

     184        212        725        621   
                                

Total other expense

     (16,831     (9,367     (53,202     (30,396
                                

Loss from continuing operations before income taxes

     (5,369     (77,050     (16,746     (95,984

Income tax expense (benefit)

     5,288        (16,670     14,940        (27,625
                                

Loss from continuing operations

     (10,657     (60,380     (31,686     (68,359

Discontinued operations:

        

Income (loss) from discontinued operations (net of taxes)

     —          (98     —          96   

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

     —          (1,984     —          5,136   
                                

Net loss

   $ (10,657   $ (62,462   $ (31,686   $ (63,127
                                

Net income (loss) per common share (basic and diluted):

        

Loss from continuing operations

   $ (0.48   $ (2.71   $ (1.42   $ (3.07

Discontinued operations

     —          (0.09     —          0.23   
                                

Net loss per common share

   $ (0.48   $ (2.80   $ (1.42   $ (2.84
                                

See accompanying notes.

 

3


Table of Contents

 

MEDIA GENERAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(000’s)

 

     Nine Months Ended  
     September 26,
2010
    September 27,
2009
 

Operating activities:

    

Net loss

   $ (31,686   $ (63,127

Adjustments to reconcile net loss:

    

Depreciation and amortization

     40,602        45,269   

Deferred income taxes

     22,519        371   

Gain on sale of investments

     —          (701

Goodwill and other asset impairment

     —          84,220   

Net gain related to divestiture of operations

     —          (5,136

Gain on insurance recovery

     —          (1,915

Gain on sale of fixed assets

     (394     (3,832

Write-off of previously deferred debt issuance costs

     1,772        —     

Intraperiod tax allocation

     (3,852     (25,997

Change in assets and liabilities:

    

Accounts receivable and inventories

     13,572        21,767   

Accounts payable, accrued expenses, and other liabilities

     9,266        (28,839

Retirement plan contributions

     (20,000     (15,000

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

     (519     (1,196

Income taxes refundable

     24,636        —     

Other, net

     (1,037     3,526   
                

Net cash provided by operating activities

     54,879        9,410   
                

Investing activities:

    

Capital expenditures

     (15,604     (11,625

Proceeds from sale of discontinued operations and investment

     —          17,442   

Collection of note receivable

     —          5,000   

Other, net

     599        3,552   
                

Net cash (used) provided by investing activities

     (15,005     14,369   
                

Financing activities:

    

Proceeds from notes

     293,070        —     

Increase in bank debt

     134,156        171,400   

Payment of bank debt

     (466,646     (195,776

Debt issuance costs

     (12,078     —     

Other, net

     249        180   
                

Net cash used by financing activities

     (51,249     (24,196
                

Net decrease in cash and cash equivalents

     (11,375     (417

Cash and cash equivalents at beginning of period

     33,232        7,142   
                

Cash and cash equivalents at end of period

   $ 21,857      $ 6,725   
                

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 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 $5.3 million in the third quarter and $14.9 million in the first nine months of 2010. The tax expense recorded in the third quarter of 2010 reflects the accrual of an additional $7.5 million ($22.5 million for the first nine months 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 an additional $1.5 million ($2.9 million in the year to date) tax refund related to the Company’s 2009 net operating loss (NOL) carryback claim, as well as a $0.6 million ($3.9 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 a favorable adjustment to the reserve for uncertain tax positions of $0.8 million. The Company expects the remaining non-cash naked credit of approximately $7.5 million to affect income tax expense in the fourth quarter of 2010; other tax adjustments and intraperiod tax allocations may also affect the fourth quarter 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 third 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 loss.

 

5


Table of Contents

 

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 recognized an after-tax gain of $0.3 million. During the second quarter of 2009, the Company completed the sale of WCWJ in Jacksonville, Florida, and recorded an after-tax gain of $4.8 million related to this divesture. Results of these discontinued operations are presented below for the third quarter and first nine months of September 27, 2009:

 

     Quarter Ended     Nine Months Ended  

(In thousands)

   September 27,
2009
    September 27,
2009
 

Revenues

   $ 584      $ 4,084   

Costs and expense

     565        3,927   
                

Income before income taxes

     19        157   

Income taxes

     117        61   
                

Income (loss) from discontinued operations

   $ (98   $ 96   
                

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 September 26, 2010 and December 27, 2009:

 

     September 26, 2010      December 27, 2009  

(In thousands)

   Carrying
Amounts
     Fair Value      Carrying
Amounts
     Fair Value  

Assets

           

Investments

           

Trading

   $ 251       $ 251       $ 303       $ 303   

Liabilities

           

Interest rate swaps

     9,365         9,365         14,353         14,353   

Long-term debt:

           

Bank term loan

     379,412         372,159         285,844         277,614   

11.75% senior notes

     293,682         327,383         —           —     

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 September 26, 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 September 26, 2010, the fair value of the 11.75% Senior Notes was valued at the most recent trade prior to the end of the quarter which approximates fair value. 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


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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 notional 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 9.9% at September 26, 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 nine months of 2010 and 2009, $8.0 million and $9.5 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 nine months of 2010 and 2009 was $5.0 million and $6.0 million, respectively. Based on the estimated current and future fair values of the swaps as of September 26, 2010, the Company estimates that $9.4 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 September 26, 2010:

 

Derivatives designated as hedging instruments

  

Balance sheet location

   Fair Value as of
September 26, 2010
 

Interest rate swaps

  

Accrued expenses and other liabilities

     9,365   

6. The Company is a diversified communications company located primarily in the southeastern United States. The Company is comprised of five geographic market 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 promotions 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.

 

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

 

(In thousands)

   Revenues     Depreciation and
Amortization
    Operating Profit
(Loss)
 

Three Months Ended September 26, 2010

      

Virginia/Tennessee

   $ 46,105      $ (3,285   $ 7,399   

Florida

     38,958        (1,718     2,052   

Mid-South

     39,065        (2,875     7,030   

North Carolina

     18,174        (1,478     (51

Ohio/Rhode Island

     14,688        (809     4,426   

Advertising Services & Other

     6,757        (185     483   

Eliminations

     (534     —          (6
            
         21,333   

Unallocated amounts:

      

Acquisition intangibles amortization

     —          (1,518     (1,518

Corporate expense

     —          (1,336     (7,888
                  
   $ 163,213      $ (13,204  
                  

Corporate interest expense

         (17,007

Other

         (289
            

Consolidated loss from continuing operations before income taxes

       $ (5,369
            

Three Months Ended September 27, 2009

      

Virginia/Tennessee

   $ 47,980      $ (3,380   $ 10,674   

Florida

     36,519        (2,076     524   

Mid-South

     35,513        (3,364     5,479   

North Carolina

     18,946        (1,703     1,430   

Ohio/Rhode Island

     12,314        (849     2,509   

Advertising Services & Other

     7,160        (209     1,529   

Eliminations

     (424     —          —     
            
         22,145   

Unallocated amounts:

      

Acquisition intangibles amortization

     —          (1,775     (1,775

Corporate expense

     —          (1,525     (4,752
                  
   $ 158,008      $ (14,881  
                  

Interest expense

         (10,489

Gain on sale of investments

         910   

Gain on insurance recovery

         1,915   

Goodwill and other asset impairment

         (84,220

Other

         (784
            

Consolidated loss from continuing operations before income taxes

       $ (77,050
            

 

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Table of Contents

 

(In thousands)

   Revenues     Depreciation and
Amortization
    Operating Profit
(Loss)
 

Nine Months Ended September 26, 2010

      

Virginia/Tennessee

   $ 140,903      $ (9,862   $ 25,491   

Florida

     114,424        (5,242     4,823   

Mid-South

     117,127        (8,895     21,269   

North Carolina

     56,195        (4,592     2,597   

Ohio/Rhode Island

     42,129        (2,479     11,388   

Advertising Services & Other

     19,035        (650     2,808   

Eliminations

     (1,574     —          (8
            
         68,368   

Unallocated amounts:

      

Acquisition intangibles amortization

     —          (4,660     (4,660

Corporate expense

     —          (4,222     (23,600
                  
   $ 488,239      $ (40,602  
                  

Corporate interest expense

         (53,904

Other

         (2,950
            

Consolidated loss from continuing operations before income taxes

       $ (16,746
            

Nine Months Ended September 27, 2009

      

Virginia/Tennessee

   $ 145,408      $ (10,525   $ 24,033   

Florida

     116,386        (6,266     (2,313

Mid-South

     106,252        (10,152     12,516   

North Carolina

     57,601        (5,095     1,355   

Ohio/Rhode Island

     36,014        (2,541     5,245   

Advertising Services & Other

     19,963        (657     2,894   

Eliminations

     (1,093     2        (46
            
         43,684   

Unallocated amounts:

      

Acquisition intangibles amortization

     —          (5,361     (5,361

Corporate expense

     —          (4,661     (20,014
                  
   $ 480,531      $ (45,256  
                  

Interest expense

         (31,718

Gain on sale of investments

         701   

Gain on insurance recovery

         1,915   

Goodwill and other asset impairment

         (84,220

Other

         (971
            

Consolidated loss from continuing operations before income taxes

       $ (95,984
            

 

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7. The Company recorded a non-cash impairment charge of $84 million in the third quarter of 2009 due to the continuation of challenging business conditions and the more granular testing required by accounting standards as a result of the Company’s new reporting structure, implemented at the beginning of the third quarter of 2009. Of the total charge, approximately $66 million related to goodwill and approximately $18 million related to FCC licenses, network affiliation and other intangibles. The pretax charge was recorded on the “Goodwill and other asset impairment” line.

The Consolidated Condensed Statements of Operations include amortization expense from amortizing intangible assets of $1.5 million and $1.8 million for the third quarters of 2010 and 2009, and $4.7 million and $5.4 million for the first nine 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 September 26, 2010 and December 27, 2009:

 

     December 27, 2009      Change      September 26, 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       $ 534       $ 55,326       $ 42,911   

Florida

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

Mid-South

     84,048         61,770         3,215         84,048         64,985   

North Carolina

     11,931         10,095         184         11,931         10,279   

Ohio/Rhode Island

     9,157         4,864         268         9,157         5,132   

Advert. Serv. & Other

     6,614         3,249         459         6,614         3,708   
                                            

Total

   $ 168,131       $ 123,410       $ 4,660       $ 168,131       $ 128,070   
                                            

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      
                          

 

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8. The following table sets forth the computation of basic and diluted earnings per share from continuing operations. There were approximately 125,000 shares that were not included in the computation of diluted EPS for the third quarter and first nine months of 2010, because to do so would have been anti-dilutive for the periods presented.

 

     Quarter Ended September 26, 2010     Quarter Ended September 27, 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

   $ (10,657     22,366       $ (0.48   $ (60,380     22,273       $ (2.71
                                                  

 

     Nine Months Ended September 26, 2010     Nine Months Ended September 27, 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

   $ (31,686     22,333       $ (1.42   $ (68,359     22,236       $ (3.07
                                                  

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

 

     Quarter Ended  
     Pension Benefits     Other Benefits  

(In thousands)

   Sept. 26,
2010
    Sept. 27,
2009
    Sept. 26,
2010
    Sept. 27,
2009
 

Service cost

   $ 10      $ 118      $ 50      $ 50   

Interest cost

     5,727        5,890        580        617   

Expected return on plan assets

     (5,955     (5,814     —          —     

Amortization of prior-service (credit)/cost

     —          (101     430        424   

Amortization of net loss/(gain)

     668        238        (221     (280

Curtailment gain

     —          (2,050     —          —     
                                

Net periodic benefit cost (income)

   $ 450      $ (1,719   $ 839      $ 811   
                                

 

     Nine Months Ended  
     Pension Benefits     Other Benefits  

(In thousands)

   Sept. 26,
2010
    Sept. 27,
2009
    Sept. 26,
2010
    Sept. 27,
2009
 

Service cost

   $ 29      $ 450      $ 151      $ 175   

Interest cost

     17,182        18,298        1,740        1,884   

Expected return on plan assets

     (17,865     (17,868     —          —     

Amortization of prior-service (credit)/cost

     —          (193     1,290        1,298   

Amortization of net loss/(gain)

     2,003        2,285        (664     (785

Net curtailment gain

     —          (2,000     —          —     
                                

Net periodic benefit cost

   $ 1,349      $ 972      $ 2,517      $ 2,572   
                                

In the third quarter of 2009, the Company amended the Executive Supplemental Retirement Plan so that service provided after January 31, 2010 would not increase a participant’s benefit. The third-quarter amendment resulted in a curtailment of the Executive Supplemental Retirement Plan, for which the Company recorded a gain of $2 million. As a result of this action, the plan was effectively frozen. This change did not affect the benefits of current retirees.

 

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

 

     Quarter Ended     Nine Months Ended  

(In thousands)

   September 26,
2010
    September 27,
2009
    September 26,
2010
    September 27,
2009
 

Net loss

   $ (10,657   $ (62,462   $ (31,686   $ (63,127

Unrealized gain (loss) on derivative contracts (net of deferred taxes)

     935        (165     2,911        3,807   

Change in pension and postretirement (net of deferred taxes)

     —          (21,172     3,114        31,720   
                                

Comprehensive loss

   $ (9,722   $ (83,799   $ (25,661   $ (27,600
                                

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 $.7 million and $1.1 million in the third quarter and first nine months of 2010, as compared to $.2 million and $6.2 million in the third quarter and first nine months of 2009. As of September 26, 2010 and September 27, 2009 accrued severance was immaterial.

12. The following table shows the Company’s Statement of Stockholders’ Equity as of September 26, 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

     —           —          —          —          (31,686     (31,686

Unrealized gain on derivative contracts (net of deferred taxes of $2,077)

     —           —          —          2,911        —          2,911   

Pension and postretirement (net of deferred taxes of $1,774)

     —           —          —          3,114        —          3,114   
                   

Comprehensive loss

                (25,661

Exercise of stock options

     460         —          (262     —          —          198   

Performance accelerated restricted stock

     935         —          (935     —          —          —     

Stock-based compensation

     —           —          2,432        —          —          2,432   

Other

     18         (16     48        —          —          50   
                                                 

Balance at September 26, 2010

   $ 112,623       $ 2,743      $ 25,536      $ (111,678   $ 140,046      $ 169,270   
                                                 

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 is the Company’s Supplemental 401(k) Plan), together with certain eliminations.

 

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Media General, Inc.

Condensed Consolidating Balance Sheet

As of September 26, 2010

(In thousands, unaudited)

 

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

ASSETS

          

Current assets:

          

Cash & cash equivalents

   $ 20,373      $ 1,484      $ —        $ —        $ 21,857   

Accounts receivable, net

     —          89,571        —          (25     89,546   

Inventories

     4        7,766        —          —          7,770   

Other current assets

     4,180        61,090        —          (25,591     39,679   
                                        

Total current assets

     24,557        159,911        —          (25,616     158,852   
                                        

Investment in and advances to subsidiaries

     317,943        1,963,229        —          (2,281,172     —     

Intercompany note receivable

     673,017        —          —          (673,017     —     

Other assets

     25,462        16,744        251        —          42,457   

Property, plant & equipment, net

     27,704        372,145        —          —          399,849   

FCC licenses and other intangibles

     —          215,931        —          —          215,931   

Excess cost over fair value

     —          355,017        —          —          355,017   
                                        

TOTAL ASSETS

   $ 1,068,683      $ 3,082,977      $ 251      $ (2,979,805   $ 1,172,106   
                                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

          

Current liabilities:

          

Accounts payable

   $ 8,612      $ 16,578      $ —        $ (32   $ 25,158   

Accrued expenses and other liabilities

     38,675        81,339        —          (25,590     94,424   
                                        

Total current liabilities

     47,287        97,917        —          (25,622     119,582   
                                        

Long-term debt

     673,094        6        —          —          673,100   

Intercompany loan

     —          673,017        —          (673,017     —     

Retirement, post-retirement and post-employment plans

     148,790        —          —          —          148,790   

Deferred income taxes

     —          27,603        —          —          27,603   

Other deferred credits

     28,559        3,982        1,220        —          33,761   

Stockholders’ equity

          

Common stock

     115,366        4,872        —          (4,872     115,366   

Additional paid-in capital

     27,219        2,434,814        (1,871     (2,434,626     25,536   

Accumulated other comprehensive loss

     (111,678     —          —          —          (111,678

Retained earnings

     140,046        (159,234     902        158,332        140,046   
                                        

Total stockholders’ equity

     170,953        2,280,452        (969     (2,281,166     169,270   
                                        

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY

   $ 1,068,683      $ 3,082,977      $ 251      $ (2,979,805   $ 1,172,106   
                                        

 

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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   
                                        

 

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Media General, Inc.

Condensed Consolidating Statements of Operations

Three Months Ended September 26, 2010

(In thousands, unaudited)

 

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

Revenues

   $ 6,719      $ 189,375      $ —        $ (32,881   $ 163,213   

Operating costs:

          

Employee compensation

     7,769        66,856        (131     —          74,494   

Production

     —          38,212        —          (447     37,765   

Selling, general and administrative

     228        58,488        —          (32,428     26,288   

Depreciation and amortization

     523        12,681        —          —          13,204   
                                        

Total operating costs

     8,520        176,237        (131     (32,875     151,751   
                                        

Operating income (loss)

     (1,801     13,138        131        (6     11,462   

Other income (expense):

          

Interest expense

     (17,007     (8     —          —          (17,015

Intercompany interest income (expense)

     14,137        (14,137     —          —          —     

Investment income (loss) - consolidated affiliates

     (6,870     —          —          6,870        —     

Other, net

     211        (27     —          —          184   
                                        

Total other income (expense)

     (9,529     (14,172     —          6,870        (16,831
                                        

Income (loss) before income taxes

     (11,330     (1,034     131        6,864        (5,369

Income tax expense (benefit)

     (673     5,961        —          —          5,288   
                                        

Net income (loss)

     (10,657     (6,995     131        6,864        (10,657

Other comprehensive income (net of tax)

     935        —          —          —          935   
                                        

Comprehensive income (loss)

   $ (9,722   $ (6,995   $ 131      $ 6,864      $ (9,722
                                        

 

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Media General, Inc.

Condensed Consolidating Statements of Operations

Three Months Ended September 27, 2009

(In thousands, unaudited)

 

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

Revenues

   $ 8,093      $ 180,931      $ —        $ (31,016   $ 158,008   

Operating costs:

          

Employee compensation

     7,125        62,263        578        —          69,966   

Production

     —          37,491        —          (306     37,185   

Selling, general and administrative

     (4,585     56,653        —          (30,714     21,354   

Depreciation and amortization

     600        14,281        —          —          14,881   

Goodwill and other asset impairment

     —          84,220        —          —          84,220   

Gain on insurance recovery

     —          (1,915       —          (1,915
                                        

Total operating costs

     3,140        252,993        578        (31,020     225,691   
                                        

Operating income (loss)

     4,953        (72,062     (578     4        (67,683

Other income (expense):

          

Interest expense

     (10,487     (2     —          —          (10,489

Intercompany interest income (expense)

     11,946        (11,946     —          —          —     

Gain on sale of investments

     —          910        —          —          910   

Investment income (loss) - consolidated affiliates

     (68,447     —          —          68,447        —     

Other, net

     262        (50     —          —          212   
                                        

Total other income (expense)

     (66,726     (11,088     —          68,447        (9,367
                                        

Income (loss) from continuing operations before income taxes

     (61,773     (83,150     (578     68,451        (77,050

Income tax expense (benefit)

     689        (17,359     —          —          (16,670
                                        

Income (loss) from continuing operations

     (62,462     (65,791     (578     68,451        (60,380

Loss from discontinued operations (net of taxes)

     —          (98     —          —          (98

Loss related to divestiture of operations (net of taxes)

     —          (1,984       —          (1,984
                                        

Net Income (loss)

     (62,462     (67,873     (578     68,451        (62,462

Other comprehensive loss (net of tax)

     (21,337     —          —          —          (21,337
                                        

Comprehensive income (loss)

   $ (83,799   $ (67,873   $ (578   $ 68,451      $ (83,799
                                        

 

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Media General, Inc.

Condensed Consolidating Statements of Operations

Nine Months Ended September 26, 2010

(In thousands, unaudited)

 

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

Revenues

   $ 25,608      $ 564,389      $ —        $ (101,758   $ 488,239   

Operating costs:

          

Employee compensation

     25,006        197,370        156        (1     222,531   

Production

     —          111,417        —          (1,288     110,129   

Selling, general and administrative

     435        178,549        —          (100,463     78,521   

Depreciation and amortization

     1,743        38,860        —          (1     40,602   
                                        

Total operating costs

     27,184        526,196        156        (101,753     451,783   
                                        

Operating income (loss)

     (1,576     38,193        (156     (5     36,456   

Other income (expense):

          

Interest expense

     (53,904     (23     —          —          (53,927

Intercompany interest income (expense)

     38,269        (38,269     —          —          —     

Investment income (loss) - consolidated affiliates

     (19,913     —          —          19,913        —     

Other, net

     790        (65     —          —          725   
                                        

Total other income (expense)

     (34,758     (38,357     —          19,913        (53,202
                                        

Income (loss) before income taxes

     (36,334     (164     (156     19,908        (16,746

Income tax expense (benefit)

     (4,648     19,588        —          —          14,940   
                                        

Net income (loss)

     (31,686     (19,752     (156     19,908        (31,686

Other comprehensive income (net of tax)

     6,025        —          —          —          6,025   
                                        

Comprehensive income (loss)

   $ (25,661   $ (19,752   $ (156   $ 19,908      $ (25,661
                                        

 

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Media General, Inc.

Condensed Consolidating Statements of Operations

Nine Months Ended September 27, 2009

(In thousands, unaudited)

 

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

Revenues

   $ 23,245      $ 551,241      $ —        $ (93,955   $ 480,531   

Operating costs:

          

Employee compensation

     20,925        208,596        596        —          230,117   

Production

     —          122,287        —          (1,974     120,313   

Selling, general and administrative

     (3,729     163,833        —          (91,976     68,128   

Depreciation and amortization

     1,922        43,336        —          (2     45,256   

Goodwill and other asset impairment

     —          84,220        —          —          84,220   

Gain on insurance recovery

     —          (1,915       —          (1,915
                                        

Total operating costs

     19,118        620,357        596        (93,952     546,119   
                                        

Operating income (loss)

     4,127        (69,116     (596     (3     (65,588

Other income (expense):

          

Interest expense

     (31,713     (5     —          —          (31,718

Intercompany interest income (expense)

     33,367        (33,367     —          —          —     

Gain on sale of investments

     —          701        —          —          701   

Investment income (loss) - consolidated affiliates

     (70,550     —          —          70,550        —     

Other, net

     806        (185     —          —          621   
                                        

Total other income (expense)

     (68,090     (32,856     —          70,550        (30,396
                                        

Income (loss) from continuing operations before income taxes

     (63,963     (101,972     (596     70,547        (95,984

Income tax expense (benefit)

     (836     (26,789     —          —          (27,625
                                        

Income (loss) from continuing operations

     (63,127     (75,183     (596     70,547        (68,359

Income from discontinued operations (net of taxes)

     —          96        —          —          96   

Gain related to divestiture of operations (net of taxes)

     —          5,136          —          5,136   
                                        

Net Income (loss)

     (63,127     (69,951     (596     70,547        (63,127

Other comprehensive income (net of tax)

     35,527        —          —          —          35,527   
                                        

Comprehensive income (loss)

   $ (27,600   $ (69,951   $ (596   $ 70,547      $ (27,600
                                        

 

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Media General, Inc.

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 26, 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

   $ (26,146     81,073      $ (48   $ —        $ 54,879   

Cash flows from investing activities:

          

Capital expenditures

     (3,151     (12,453     —          —          (15,604

Net change in intercompany note receivable

     69,202        —          —          (69,202     —     

Other, net

     51        548        —          —          599   
                                        

Net cash provided (used) by investing activities

     66,102        (11,905     —          (69,202     (15,005

Cash flows from financing activities:

          

Proceeds from notes

     293,070        —          —          —          293,070   

Increase in debt

     134,156        —          —          —          134,156   

Payment of debt

     (466,625     (21     —          —          (466,646

Debt issuance costs

     (12,078     —          —          —          (12,078

Net change in intercompany loan

     —          (69,202     —          69,202        —     

Other, net

     203        (2     48        —          249   
                                        

Net cash (used) provided by financing activities

     (51,274     (69,225     48        69,202        (51,249
                                        

Net decrease in cash and cash equivalents

     (11,318     (57     —          —          (11,375

Cash and cash equivalents at beginning of year

     31,691        1,541        —          —          33,232   
                                        

Cash and cash equivalents at end of period

   $ 20,373      $ 1,484      $ —        $ —        $ 21,857   
                                        

 

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Media General, Inc.

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 27, 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

   $ (6,085   $ 15,509      $ (14   $ —        $ 9,410   

Cash flows from investing activities:

          

Capital expenditures

     (2,407     (9,218     —          —          (11,625

Net change in intercompany note receivable

     16,097        —          —          (16,097     —     

Proceeds from sale of discontinued operations and investment

     17,442        —          —          —          17,442   

Collection of receivable note

     —          5,000        —          —          5,000   

Other, net

     (1,019     4,571        —          —          3,552   
                                        

Net cash provided (used) by investing activities

     30,113        353        —          (16,097     14,369   

Cash flows from financing activities:

          

Increase in debt

     171,400        —          —          —          171,400   

Payment of debt

     (195,758     (18     —          —          (195,776

Net change in intercompany loan

     —          (16,097     —          16,097        —     

Other, net

     166        —          14        —          180   
                                        

Net cash (used) provided by financing activities

     (24,192     (16,115     14        16,097        (24,196
                                        

Net decrease in cash and cash equivalents

     (164     (253     —          —          (417

Cash and cash equivalents at beginning of year

     5,593        1,549        —          —          7,142   
                                        

Cash and cash equivalents at end of period

   $ 5,429      $ 1,296      $ —        $ —        $ 6,725   
                                        

 

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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 market 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 was enhanced by its evolution in July 2009, 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 $10.7 million ($0.48 per share) and $31.7 million ($1.42 per share) in the third quarter and first nine months of 2010, respectively, compared to a net loss of $62.5 million and $63.1 million in the equivalent 2009 periods. The 2009 third quarter and nine-month period included an impairment charge and discontinued operations embedded within its results. The Company recorded an after-tax non-cash impairment charge of $64.8 million in the third quarter of 2009. See Note 7 of this Form 10-Q for a complete discussion regarding this impairment charge. In the second quarter of 2009, the Company completed the divestiture of a held-for-sale station, WCWJ in Jacksonville, Florida; in the third quarter of 2009, the Company also sold a small business magazine located in the Virginia/Tennessee Market. The Company recognized after-tax gains of $5.1 million in the first nine months of 2009 related to these divestitures. Their results were reported as discontinued operations and, excluding the above-mentioned gain, had limited impact on the Company’s results in 2009. See Note 4 of this Form 10-Q for additional details regarding prior-year discontinued operations.

In the third quarter of 2010, the Company had a loss from continuing operations before income taxes of $5.4 million as compared to a loss of $77.1 million in the comparable quarter of 2009; excluding the $84.2 million pretax impairment charge in 2009, income from continuing operations before income taxes was $7.2 million in the third quarter. This quarter-over-quarter decline was accounted for by higher interest expense and increased operating costs. Interest costs rose 62%, reflecting the new financing structure put into place in February 2010; see the Liquidity section of this Form 10-Q for a further discussion. Despite a 3% increase in revenues, segment operating income decreased 4% in the third quarter from the similar prior-year quarter. Segment operating costs were up 4% due primarily to higher employee compensation costs as the third quarter of 2009 reflected 4 days of furlough and the third quarter of 2010 included the expense associated with the reimbursement to employees of 2 days furlough time (which was paid to the employees early in the fourth quarter). Corporate expense was up $3.1 million primarily because 2009 included a $2 million gain resulting from the final freeze on a retirement plan and the impact of employee furlough days. Additionally, total operating costs in 2009 were favorably impacted by a $1.9 million gain associated with an insurance recovery and substantially higher gains on fixed assets sales. Income taxes of $5.3 million in the third quarter of 2010, as compared to an income tax benefit of $16.7 million in the equivalent quarter of 2009, were the result of several matters, most notably a non-cash “naked credit”, all of which are described in the Income Taxes section of this Form 10-Q.

 

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The Company recorded a loss from continuing operations before income taxes of $16.7 million in the first nine months of 2010, as compared to $96 million loss in the equivalent prior-year period; excluding the $84.2 million pretax impairment charge in 2009, loss from continuing operations before income taxes was $11.8 million in the first nine months of 2009. The largest factor contributing to the year-over-year increased loss was a 70% rise in interest costs for reasons similar to those detailed above in the third quarter discussion. Corporate expense was up $3.6 million due to the combined impact of the furlough program and the inclusion in 2009 of a $2 million gain from the final freeze on a retirement plan. Additionally, there were several singular 2009 gains similar to those discussed in the preceding paragraph. Offsetting these items were considerable expense savings in the areas of compensation and newsprint costs, combined with other successful cost management efforts that yielded a 4% reduction in segment operating expense. Income taxes of $14.9 million in the first nine months of 2010, as compared to an income tax benefit of $27.6 million in the equivalent period of 2009, were primarily the result of the non-cash “naked credit” issue and more fully described in the Income Taxes section of this Form 10-Q.

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

 

     Third Quarter Change     Year-to-date Change  

(In thousands)

   Amount     Percent     Amount     Percent  

Local

   $ (563     (0.7   $ (978     (0.4

National

     2,375        9.0        4,283        5.2   

Political

     8,129        NM        15,209        NM   

Classified

     (2,059     (9.1     (6,813     (9.7

Subs/Content/Circulation

     (833     (3.8     380        0.6   

 

“NM” is not meaningful.

Robust Political advertising and an underlying firming in television transactional advertising contributed to higher total revenues in the third quarter (up 3%) and first nine months (up 2%) of 2010, as compared with the prior year’s equivalent periods. Strong Political and solid National advertising more than offset lower Local and Classified advertising. Subscription/Content/Circulation revenues stalled in the third quarter due to decreased newspaper circulation (lower home delivery and single copy sales), but remained up in the first nine months of 2010 as a 20% rise in cable and satellite retransmission revenues more than offset a 4% 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 4% and 3% in the third quarter and first nine months of 2010 as compared to the prior year. With the exception of Political, advertising dollars were down across all categories. Classified advertising was down 6% in both the quarter and year–to-date. National advertising fell 9% and 16% in the quarterly and year-to-date periods, while Local advertising was off approximately 3% in both periods. Revenues from third-party printing and distribution produced double digit growth.

 

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Revenues in the Florida Market increased 7% in the third quarter and decreased 2% in the year to date of 2010 from equivalent prior-year periods. The Company’s Florida operations have benefited from political advertising, as indicated by its quarter-over-quarter revenue increase, and despite the continued soft housing market and high unemployment in the Tampa Bay area. Political advertising was robust as a result of Florida’s hotly contested gubernatorial, congressional, and attorney general races, combined with issue spending. National advertising improved 2% to 3% in the quarter and first nine months of 2010 due primarily to image ads run by BP regarding the oil spill in the Gulf of Mexico. Despite these period-over-period revenue improvements, Classified and Local advertising declines were still more than offsetting in the first nine months of 2010. Classified advertising (down 18% and 22% in the quarter and year to date, respectively) suffered across all categories, while Local advertising was down less than 4% in both periods.

Revenues in the Mid-South Market increased 10% in the both the third quarter and first nine months of 2010 due to strong Political advertising (resulting from both primary and general election spending) and solid Local advertising growth (up more than 5% in the quarter and year to date). Local advertising benefited from certain first-quarter events (the Super Bowl and Winter Olympics), along with year-over-year strength in the automotive and tourism advertising categories. Increases in National advertising of 11% in the quarter and 4% in the year to date more than offset lower Classified advertising which fell 8% and 6% in the equivalent periods.

Revenues in the North Carolina Market declined 4% and 2% in the third quarter and first nine months of 2010 from similar 2009 periods. Increases in National advertising were unable to overcome weak Local advertising (down 6% and 5% in the quarter and year to date, respectively) and Classified advertising (off 6% and 3% in equivalent periods). Counter to trend, Political advertising was down slightly in the third quarter due predominately to the absence of hotly contested races in the state; however, Political advertising increased moderately in the year-to-date period due primarily to higher issue spending earlier in the year.

Revenues in the Ohio/Rhode Island Market increased 19% and 17% in the third quarter and first nine months 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 elections, combined with intense issue spending. National advertising continued to thrive on the strength of the automotive, furniture, and grocery categories. Local advertising made a comeback from the second quarter, increasing 3% and 5% in the third quarter and first nine months of 2010, respectively.

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 first nine months of the year, cost-containment efforts resulted in a 4% reduction (excluding the $84.2 million impairment charge, gain on insurance recovery, curtailment gain from freezing a retirement plan and gain on sale of fixed assets) in operating expense as compared to the similar period of 2009. However, the third quarter of 2010 generated a 3% rise (excluding the impairment charge, gain on insurance recovery, curtailment gain from freezing a retirement plan and gain on sale of fixed assets) in operating costs due primarily to the impact of employee furlough days. Workforce reductions (largely undertaken in the first half of 2009) across the entire Company were instrumental in aligning expenses with the prevailing economic environment. The Company’s results included pretax severance costs of $.7 million and $1.1 million in the third quarter and first nine months of 2010, respectively, and $.2 million and $6.2 million for the equivalent periods of 2009. However, 2009 also included lower salary costs as a result of mandatory furlough days for employees (four days in the third quarter and eleven days in the first nine months of the year). Company-wide employee compensation expense rose 6% in the third quarter and decreased 3% in

 

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the first nine months of 2010 from the prior year. Newsprint expense fell 2% and 34% in the third quarter and first nine months 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. For the year-to-date period, average cost per ton for newsprint was 18% lower than the first nine months of 2009. In the third quarter of 2010, newsprint price per ton was 6% higher than the prior year, reflecting the increase in prices during 2010. Additionally, depreciation expense was down (due primarily to lower capital expenditures) approximately 11% in both the third quarter and first nine months of 2010.

Operating costs rose across all markets in the third quarter and, with the exception of the Mid-South Market, declined in all markets during the first nine months of 2010. Employee compensation was the seemingly contradictory force behind both of these fluctuations. In the third quarter, higher employee compensation drove the increase due in large part to the impact of furlough days on 2010. The year-to-date decrease in company-wide employee compensation was due to a $5.1 million year-over-year decline in severance costs, reduced headcount, reduced healthcare costs, and the absence of certain first-quarter employee benefits such as the Company’s suspended 401(k) match.

Operating expenses in the Virginia/Tennessee Market increased 4% in the third quarter and decreased 5% in the first nine months of 2010 from the equivalent periods of 2009. In the quarter, a 5% reduction in newsprint cost was unable to offset a 4% increase in compensation expense. In the first nine months of 2010, approximately three-quarters of the overall expense decrease was attributable to lower compensation expense (down 9%); a 33% reduction in newsprint costs was responsible for the majority of the remaining decrease.

Operating expenses in the Florida Market were up 3% in the third quarter and decreased 8% in the first nine months of 2010 from the same periods in 2009. Higher compensation expense (up 7%) and newsprint costs (up 2%) were responsible for the Market’s increased operating expenses in the quarter. Quite the reverse was true for the first nine months of 2010 as a 7% decrease in compensation costs combined with a 38% drop in newsprint expense to produce the year-over-year cost reduction in the market.

Operating expenses in the Mid-South Market rose 7% in the third quarter of 2010 and, running counter to trend, also rose 2% in the first nine months of the year. The Market’s increased period-over-period expenses were primarily the result of higher employee compensation (up 11% and 3% in the third quarter and first nine months of 2010, respectively) due to the impact of furlough days and to increased commissions which grew proportionately with the Market’s strong revenue growth. The Market also incurred several singular expenses in the third quarter totaling over $500,000 related to repairs and maintenance and write-offs. As in most markets, newsprint cost rose (up 11%) in the third quarter and remained down (19%) in the first nine months of the year, while lower depreciation costs helped to mitigate the overall increase of market operating expense.

Operating expenses in the North Carolina Market rose 4% in the third quarter and decreased 5% in the first nine months of 2010 as compared to 2009’s equivalent periods. In the quarter, a 7% reduction in newsprint cost was unable to offset a 5% increase in compensation expense. In the first nine months of 2010, a 7% drop in employee compensation combined with a 33% decline in newsprint expense to produce the Market’s overall cost savings.

Operating expenses in the Ohio/Rhode Island Market were up 5% in the third quarter and down 1% in the first nine months of 2010. The rise in quarter-over-quarter costs resulted from several small increases including higher programming, editorial and content costs and in employee compensation costs. In the year to date, an 8% drop in employee compensation costs was the largest component of the Market’s overall cost reduction, offset by small increases in a variety of other expense categories, including outside services, programming and travel and entertainment. The remaining savings were achieved primarily through concerted efforts to manage departmental spending.

 

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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 6% in the third quarter and was comprised of revenue declines of 35% at Blockdot (attributable to fewer advergaming projects) and 12% at Dealtaker (due to lower placement within search engine results), partially offset by a 29% increase in revenues in the Production Services operations due to higher sales and installation of broadcast equipment. In the first nine months of the year, revenues declined 5% due to a 22% revenue decrease at Blockdot (for a similar reason as in the quarter) and to the absence of certain products which are now either being managed in their respective geographic market or have been discontinued. Dealtaker.com grew its revenues by 9% in the year-to-date period of 2010, reflecting higher spending per visit.

Operating expenses increased 11% in the third quarter and decreased 5% in the first nine months of 2010 primarily due to higher compensation costs in the quarter and lower compensation costs in the year to date. This seemingly contradictive result was consistent with most of the geographic markets as well.

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 discussions.

Change in Market Operating Profits

2010 versus 2009

 

     Third Quarter Change     Year-to-date Change  

(In thousands)

   Amount     Percent     Amount     Percent  

Virginia/Tennessee

   $ (3,275     (30.7   $ 1,458        6.1   

Florida

     1,528        NM        7,136        NM   

Mid-South

     1,551        28.3        8,753        69.9   

North Carolina

     (1,481     NM        1,242        91.7   

Ohio/Rhode Island

     1,917        76.4        6,143        117.1   

Adv. Services & Other

     (1,046     (68.4     (86     (3.0

Eliminations

     (6     NM        38        (82.6
                    

Total

   $ (812     (3.7   $ 24,684        56.5   
                    

In the third quarter, robust Political advertising revenues and solid National advertising were unable to offset a 4% increase in segment operating expense, producing a segment operating profit that was down 4%. In the first nine months of 2010, segment operating profit increased 57% as compared to the prior year as a result of reduced expense and robust Political spending across most segments along with higher revenues from strong Local and National advertising in the Mid-South and Ohio/Rhode Island Markets. In the year to date, all segments except Advertising Services made meaningful contributions to the improved year-over-year operating results, with the Florida Market converting a 2009 nine-month operating loss into an operating profit in the first nine months of 2010.

 

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INTEREST EXPENSE

Interest expense increased $6.5 million and $22.2 million in the third quarter and first nine months 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-quarter 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 $55 million decline in average debt levels in the third quarter of 2010 as compared to 2009 only partially mitigated a 430 basis point increase in the average interest rate. A $59 million decline in average debt levels in the first nine months of 2010 as compared to 2009, minimally offset a 370 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 9.9% at September 26, 2010.

INCOME TAXES

The Company recorded income tax expense of $5.3 million and $14.9 million in the third quarter and first nine months of 2010 as compared to an income tax benefit of $16.7 million and $27.6 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 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. The tax expense recorded in the third quarter of 2010 reflects the accrual of an additional $7.5 million ($22.5 million for the first nine months 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 $1.5 million ($2.9 million in the year to date) tax refund related to the Company’s 2009 net operating loss (NOL) carryback claim, as well as a $.7 million ($3.9 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 a favorable adjustment to the reserve for uncertain tax positions. Last year’s $16.7 million and $27.6 million benefit related primarily to the non-cash impairment charge and also included $3.6 million in the year-to-date from a favorable determination concerning a state tax issue. The Company expects the remaining non-cash naked credit of approximately $7.5 million to affect income tax expense in the fourth quarter of 2010; other tax adjustments and intraperiod tax allocations that are difficult to forecast may also affect the fourth quarter 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 to $54.9 million in the current period from $9.4 million in the first nine months of 2009. The Company received a tax refund in April of approximately $26 million, the majority of which was used to reduce debt. Higher cash flow generation by the operating segments was another significant contributor. During 2010, the Company made retirement plan contributions of $20 million, paid debt issuance costs of $12 million, made capital expenditures of $15.6 million and reduced debt by $39 million.

 

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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 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 improved operating results.

As of September 26, 2010, the Company has in place with its lendors a fully-drawn $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 (4.6% at the close of the third quarter) based on the Company’s leverage ratio, as defined in the agreement. Total debt outstanding was $673 million on September 26, 2010. The 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 position the Company to emerge solidly from the 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 and retirement plan contributions 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.

OUTLOOK

Although the outlook for improvement in the economy in the final quarter of 2010 remains uncertain, advertising spending patterns continued to show signs of improvement in the first nine months of the year, particularly in the Mid-South and Ohio/Rhode Island Markets. The Company expects total revenue growth to continue in the fourth quarter, especially at its broadcast television stations due to additional advertising revenues from Political spending in this even-numbered year. However, higher interest expense and expected non-cash income tax expense will also have an impact on the bottom line. Furthermore, fourth-quarter expenses are expected to increase due to the absence of prior-year furlough savings, higher newsprint prices, and costs to support new revenue initiatives. Together, these higher expenses are expected to virtually 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 recently extended its partnerships for Yahoo! display and Zillow real estate advertising to several television markets and announced a new partnership for locally branded daily deals with Groupon. The Company’s enhanced financial flexibility should position it to capitalize on an improving economy and to build shareholder value over the long term.

Non-GAAP Financial Metrics

The Company has presented the following non-GAAP financial metrics in Management’s Discussion and Analysis: income (loss) from continuing operations excluding the after-tax effect of impairment charges, operating costs excluding impairment charges, gain on insurance recovery, freeze on retirement plan and gain on fixed asset sales and operating costs excluding impairment charges. The Company believes these metrics are useful to shareholders and investors in understanding the Company’s financial results due to the outsized impact that impairment charges have had on the Company’s consolidated statements of operations. Specifically, the Company believes these metrics help investors and shareholders evaluate the effect the Company’s

 

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cost-cutting initiatives have had on its financial performance. A reconciliation of these non-GAAP financial metrics to amounts on the consolidated statements of operations is included in the charts that follow:

 

(in thousands, except percentages)

   Three Months Ended
September 27, 2009
    Nine Months Ended
September 27, 2009
 

Loss from continuing operations before income taxes

   $ (77,050   $ (95,984

Goodwill and other asset impairment

     84,220        84,220   
                

Income (loss) from continuing operations excluding impairment charge

   $ 7,170      $ (11,764
                
      Three Months Ended
September 26, 2010
    Three Months Ended
September 27, 2009
 

Operating costs

   $ 151,751      $ 225,691   

Goodwill and other asset impairment

     —          (84,220

Gain on insurance recovery

     —          1,915   

Curtailment gain from freezing a retirement plan

     —          2,049   

Gain on fixed asset sales

     36        2,355   
                

Operating costs excluding impairment charge, gain on insurance recovery, freeze on retirement plan and gain on fixed asset sales

   $ 151,787      $ 147,790   
                

Percentage change from previous year

     3  
          
      Nine Months Ended
September 26, 2010
    Nine Months Ended
September 27, 2009
 

Operating costs

   $ 451,783      $ 546,119   

Goodwill and other asset impairment

     —          (84,220

Gain on insurance recovery

     —          1,915   

Curtailment gain from freezing a retirement plan

     —          2,049   

Gain on fixed asset sales

     394        3,832   
                

Operating costs excluding impairment charge, gain on insurance recovery, freeze on retirement plan and gain on fixed asset sales

   $ 452,177      $ 469,695   
                

Percentage change from previous year

     (4 %)   
          

* * * * * * * *

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 accounting standards, health care cost trends and regulations, a natural disaster, the level of political advertising, and regulatory rulings and laws.

 

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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 September 26, 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: November 4, 2010

     

/s/ Marshall N. Morton

       

Marshall N. Morton

President and Chief Executive Officer

DATE: November 4, 2010

     

/s/ John A. Schauss

       

John A. Schauss

Vice President - Finance and Chief Financial Officer

 

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