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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________.
COMMISSION FILE NUMBER 1-13796
GRAY COMMUNICATIONS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 52-0285030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4370 PEACHTREE ROAD, NE
ATLANTA, GA 30319
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 504-9828
Securities registered pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK (NO PAR VALUE) NEW YORK STOCK EXCHANGE
CLASS B COMMON STOCK (NO PAR VALUE) NEW YORK STOCK EXCHANGE
Title of each class Name of each exchange on which registered
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 15, 2002: CLASS A AND CLASS B COMMON STOCK; NO PAR
VALUE - $151,411,369
The number of shares outstanding of the registrant's classes of common
stock as of March 15, 2002: CLASS A COMMON STOCK; NO PAR VALUE - 6,848,467
SHARES; CLASS B COMMON STOCK, NO PAR VALUE - 8,803,810 SHARES
DOCUMENTS INCORPORATED BY REFERENCE: None
PART 1
ITEM 1. BUSINESS
As used herein, unless the context otherwise requires, the "Company" or
"Gray" mean Gray Communications Systems, Inc. and its subsidiaries. Unless
otherwise indicated, the information herein has been adjusted to give effect to
a three-for-two stock split of the Company's Class A Common Stock, no par value
(the "Class A Common Stock"), and the Company's Class B Common Stock, no par
value (the "Class B Common Stock"), effected in the form of a stock dividend
declared on the respective class of common stock on August 20, 1998. Unless
otherwise indicated, all station rank, in-market share and television household
data herein are derived from the Nielsen Station Index, Viewers in Profile,
dated November 2001, as prepared by A.C. Nielsen Company ("Nielsen").
GENERAL
The Company currently owns and operates 13 network-affiliated television
stations in 11 medium-size markets in the southeastern ("Southeast"),
southwestern ("Southwest") and midwestern (`Midwest") United States. Twelve of
the Company's 13 stations are ranked first in total viewing audience and news
audience, with the remaining station ranked second in total viewing audience and
third in news audience. Ten of the stations are affiliated with CBS Inc., or
"CBS," and three are affiliated with National Broadcasting Company, Inc., or
"NBC." The Company also owns and operates four daily newspapers, three located
in Georgia and one in Goshen, Indiana, with a total circulation of over 126,000.
The Company also owns and operates a paging business located in the Southeast
that had approximately 75,000 units in service at December 31, 2001. The Company
also owns and operates a satellite uplink business based in Tallahassee, Florida
and Baton Rouge, Louisiana.
In 1993, after the acquisition of a large block of the Class A Common
Stock by Bull Run Corporation ("Bull Run"), the Company implemented a strategy
to foster growth through strategic acquisitions and certain select divestitures.
Bull Run continues to be a principal shareholder of the Company since its
investment in 1993. Since January 1, 1994, the Company's significant
acquisitions have included 12 television stations, three newspapers, a
transportable satellite uplink business and a paging business located in the
Southeast, Southwest and Midwest and the divestiture of two stations in the
Southeast. As a result of the Company's acquisitions and in support of its
growth strategy, the Company has added certain key members of management and has
greatly expanded its operations in the television broadcasting and newspaper
publishing businesses.
ACQUISITIONS, INVESTMENTS AND DIVESTITURES
2001 Acquisition of Equity Investment in Sarkes Tarzian, Inc.
On December 3, 2001, the Company exercised its option to acquire 301,119
shares of the outstanding common stock of Sarkes Tarzian, Inc. ("Tarzian") from
Bull Run. Bull Run had purchased these same shares from U.S. Trust Company of
Florida Savings Bank as Personal Representative of the Estate of Mary Tarzian
(the "Estate") in January 1999.
The acquired shares of Tarzian represent 33.5% of the total outstanding
common stock of Tarzian (both in terms of the number of shares of common stock
outstanding and in terms of voting rights), but such investment represents 73%
of the equity of Tarzian for purposes of dividends if paid as well as
distributions in the event of any liquidation, dissolution or other sale of
Tarzian.
Tarzian is a closely held private company that owns and operates two
television stations and four radio stations: WRCB-TV Channel 3 in Chattanooga,
Tennessee, an NBC affiliate; KTVN-TV Channel 2
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in Reno, Nevada, a CBS affiliate; WGCL-AM and WTTS-FM in Bloomington, Indiana;
and WAJI-FM and WLDE-FM in Fort Wayne, Indiana. The Chattanooga and Reno markets
are the 86th and the 110th largest television markets ("DMA's") in the United
States, respectively, as ranked by the A.C. Nielsen Company.
Gray paid $10 million to Bull Run to complete the acquisition of the
301,119 shares of Tarzian. The Company has previously capitalized and paid to
Bull Run $3.2 million of costs associated with the Company's option to acquire
these shares. This acquisition has been accounted for under the cost method of
accounting and reflected as a non-current other asset.
On February 12, 1999, Tarzian filed a complaint against Bull Run and the
Estate in the United States District Court for the Southern District of Indiana.
Tarzian claims that it had a binding and enforceable contract to purchase the
Tarzian shares from the Estate prior to Bull Run's purchase of the shares, and
requests judgment providing that the contract be enforced. On May 3, 1999, the
action was dismissed without prejudice against Bull Run, leaving the Estate as
the sole defendant. The litigation between the Estate and Tarzian is ongoing and
the Company cannot predict when the final resolution of the litigation will
occur. The purchase agreement with the Estate provides that if a court of
competent jurisdiction awards title to the Tarzian shares to a person or entity
other than the purchaser (or its successors or assigns), the purchase agreement
will be rescinded and the Estate will be required to pay for the benefit of
Gray, as successor in interest, the full $10 million purchase price, plus
interest.
Acquisition of the Texas Stations
On October 1, 1999, the Company completed its acquisition of all the
outstanding capital stock of KWTX Broadcasting Company and Brazos Broadcasting
Company, as well as the assets of KXII Broadcasters Ltd. The Company acquired
the capital stock of KWTX Broadcasting Company and Brazos Broadcasting Company
in merger transactions with the shareholders of KWTX Broadcasting Company and
Brazos Broadcasting Company receiving a combination of cash and the Company's
Class B Common Stock for their shares. The Company acquired the assets of KXII
Broadcasters Ltd. in an all cash transaction. These transactions are referred to
herein as the "Texas Acquisitions."
Aggregate consideration (net of cash acquired) paid in the Company's Class
B Common Stock and cash was approximately $146.4 million which included a base
purchase price of $139.0 million, transaction expenses of $2.8 million and
certain net working capital adjustments (excluding cash) of $4.6 million. In
addition to the amount paid, the Company assumed approximately $600,000 in
liabilities in connection with the asset purchase of KXII Broadcasters Ltd. The
Company funded the acquisitions by issuing 3,435,774 shares of the Company's
Class B Common Stock (valued at $49.5 million) to the sellers, borrowing an
additional $94.4 million under its Senior Credit Facility and using cash on hand
of approximately $2.5 million.
With the Texas Acquisitions the Company added the following television
stations to its broadcast segment: KWTX-TV, the CBS affiliate located in Waco,
Texas; KBTX-TV, the CBS affiliate located in Bryan, Texas, each serving the
Waco-Temple-Bryan, Texas television market and KXII-TV, the CBS affiliate
serving Sherman, Texas and Ada, Oklahoma. Under Federal Communications Commision
(the "FCC") regulations, KBTX-TV is operated as a satellite station of KWTX-TV.
The stations are collectively referred to herein as the "Texas Stations."
Acquisition of The Goshen News
On March 1, 1999, the Company acquired substantially all of the assets of
The Goshen News from News Printing Company, Inc. and affiliates thereof, for
aggregate cash consideration of approximately $16.7 million including a
non-compete agreement (the "Goshen Acquisition"). The Goshen News is
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currently a 16,000-circulation newspaper published Monday through Sunday and
serves Goshen, Indiana and surrounding areas. The Company financed the
acquisition through borrowings under its Senior Credit Facility.
Busse - WALB Transactions
On July 31, 1998, the Company completed the purchase of all of the
outstanding capital stock of Busse Broadcasting Corporation ("Busse"). The
purchase price was approximately $126.6 million, less the accreted value of
Busse's 11 5/8 % Senior Secured Notes due 2000 (the "Busse Senior Notes"). The
purchase price of the capital stock consisted of the contractual purchase price
of $112.0 million, associated transaction costs of $3.9 million, acquisition
costs associated with the Busse Senior Notes of $5.1 million and Busse's cash
and cash equivalents of $5.6 million. Immediately following the acquisition of
Busse, the Company exercised its right to satisfy and discharge the Busse Senior
Notes, effectively prefunding the Busse Senior Notes at the October 15, 1998
call price of 106, plus accrued interest. The amount necessary to satisfy and
discharge the Busse Senior Notes was approximately $69.9 million.
Immediately prior to the Company's acquisition of Busse, Cosmos
Broadcasting Corporation acquired the assets of WEAU-TV ("WEAU") from Busse and
exchanged them for the assets of WALB-TV, Inc. ("WALB"), the Company's NBC
affiliate in Albany, Georgia. In exchange for the assets of WALB, the Company
received the assets of WEAU, which were valued at $66.0 million, and
approximately $12.0 million in cash for a total value of $78.0 million. The
Company recognized a pre-tax gain of approximately $72.6 million and estimated
deferred income taxes of approximately $28.3 million in connection with the
exchange of WALB. The Company funded the remaining costs of the acquisition of
Busse's capital stock through borrowings under the Company's Senior Credit
Facility.
As a result of these transactions, the Company acquired the following
television stations: KOLN-TV ("KOLN"), the CBS affiliate serving the
Lincoln-Hastings-Kearney, Nebraska market; its satellite station KGIN-TV
("KGIN"), the CBS affiliate serving Grand Island, Nebraska; and WEAU, an NBC
affiliate serving the La Crosse-Eau Claire, Wisconsin market. These transactions
also satisfied the FCC's requirement for the Company to divest itself of WALB.
These transactions are referred to as the "Busse-WALB Transactions."
WITN Acquisition
In August 1997, the Company acquired substantially all of the assets of
WITN-TV ("WITN"), a NBC affiliate serving the Greenville-New Bern-Washington,
North Carolina market (the "WITN Acquisition"). The purchase price for the WITN
Acquisition was approximately $41.7 million, including fees, expenses, working
capital and other adjustments.
GulfLink Acquisition
In April 1997, the Company acquired all of the issued and outstanding
common stock of GulfLink Communications, Inc. ("GulfLink") of Baton Rouge,
Louisiana (the "GulfLink Acquisition"). The GulfLink operations included nine
transportable satellite uplink trucks. The purchase price for the GulfLink
Acquisition approximated $5.2 million, including fees, expenses, and certain
assumed liabilities. Subsequent to the GulfLink Acquisition, certain other
satellite uplink truck operations of the Company were combined with GulfLink and
the operating name was changed to Lynqx Communications.
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TELEVISION BROADCASTING
The Company's Stations and their Markets
As used in the tables for each of the Company's stations and in this
section (i) "Total Market Revenues" represent gross advertising revenues,
excluding barter revenues, for all commercial television stations in the market,
as reported in Investing in Television 2001 Market Report, Fourth Edition
November 2001 Ratings published by BIA Publications, Inc. (the "BIA Guide"),
except for revenues in WYMT-TV's ("WYMT") 16-county trading area which is not
separately reported in the BIA Guide; (ii) "in-market share of households
viewing television" represents the percentage of the station's audience as a
percentage of all viewing by households of local commercial stations in the
market from 7 a.m. to 1 a.m. Sunday through Saturday, as reported by Nielsen for
November 2001; (iii) "station rank in DMA" is based on Nielsen estimates for
November 2001 for the period from 7 a.m. to 1 a.m. Sunday through Saturday;
(iv)"station news rank in DMA" is based on management's review of the Nielsen
estimates for November 2001, (v) estimates of population, average household
income, effective buying income and retail business sales growth projections are
as reported in the BIA Guide; and (vi) television households are as reported by
Nielsen for November 2001. Designated Market Area is defined herein as "DMA."
Station Total In-Market
Commercial Station News Market Share of
DMA Stations in Rank in Rank in Television Revenues in Households
Station Market Rank(1) DMA(2) DMA DMA Households(3) DMA for 2001 Viewing TV
- ------- ------ ------- ------ --- --- ------------- ------------ ----------
(in thousands)
WVLT(4) Knoxville, TN 62 5 2 3 478,000 74,900 27%
WKYT Lexington, KY 66 6 1 1 436,000 55,000 35
WYMT(5) Hazard, KY 66 N/A 1 1 169,000 5,000 33
KWTX/ Waco - Temple -
KBTX(6) Bryan, TX 94 5 1 1 299,000 31,400 38
KOLN/ Lincoln-Hastings
KGIN(7) -Kearney, NE 102 5 1 1 269,000 27,200 47
WITN(4) Greenville-
New Bern-Washington, NC 106 6 1 1 251,000 33,700 31
WCTV Tallahassee, FL-
Thomasville, GA 113 5 1 1 237,000 26,200 56
WRDW Augusta, GA 114 6 1 1 234,000 31,400 33
WEAU La Crosse-
Eau Claire, WI 127 5 1 1 198,000 25,500 33
WJHG Panama City, FL 159 5 1 1 121,000 14,600 50
KXII Sherman,TX-Ada,OK 160 2 1 1 119,000 8,600 67
(1) Ranking of DMA served by a station among all DMAs is measured by the
number of television households based within the DMA in the November 2001
Nielsen estimates.
(2) Includes independent broadcasting stations and excludes satellite stations
such as KBTX and KGIN.
(3) Based upon the approximate number of television households in the DMA as
reported by Nielsen for November 2001.
(4) Tied in "Station Rank in DMA."
(5) The market area served by WYMT is a 16-county trading area, as defined by
Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station
rank is based upon its ratings position in the 16-county trading area.
(6) KBTX is a VHF station located in Bryan, Texas and is operated primarily as
a satellite station of KWTX, which is located in Waco, Texas.
(7) KGIN is a VHF station located in Grand Island, Nebraska and is operated
primarily as a satellite station of KOLN, which is located in Lincoln,
Nebraska.
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The percentage of the Company's total revenues contributed by the
Company's television broadcasting segment was approximately 68.1%, 70.5% and
67.4% for the years ended December 31, 2001, 2000 and 1999, respectively.
In the following description of each of the Company's stations,
information set forth below concerning estimates of population, Total Market
Revenues, average household income, projected effective buying income and
projected retail business sales growth has been derived from the BIA Guide.
Estimates of television households are as reported by Nielsen for November 2001.
WVLT, the CBS affiliate in Knoxville, Tennessee
WVLT, acquired by the Company in September 1996, began operations in 1988.
Knoxville, Tennessee is the 62nd DMA in the United States, with approximately
478,000 television households and a total population of approximately 1.2
million. Total Market Revenues in the Knoxville DMA in 2001 were approximately
$74.9 million. According to the BIA Guide, the average household income in the
Knoxville DMA in 1999 was $39,299, with effective buying income projected to
grow at an annual rate of 5.3% through 2004. Retail business sales growth in the
Knoxville DMA is projected by the BIA Guide to average 6.3% annually during the
same period. The Knoxville DMA has five licensed commercial television stations,
four of which are affiliated with major networks. The Knoxville DMA also has two
public broadcasting stations.
Market Description. The Knoxville DMA, consisting of 22 counties in
eastern Tennessee and southeastern Kentucky, includes the cities of Knoxville,
Oak Ridge and Gatlinburg, Tennessee. The Knoxville area is a center for
education, manufacturing, healthcare and tourism. The University of Tennessee's
main campus with approximately 26,000 students is located within the city of
Knoxville. Leading manufacturing employers in the area include: Lockheed Martin
Energy Systems, Inc., DeRoyal Industries, Aluminum Company of North America,
Phillips Consumer Electronics North America Corp., Clayton Homes and Sea Ray
Boats, Inc.
WKYT, the CBS affiliate in Lexington, Kentucky
WKYT, acquired by the Company in September 1994, began operations in 1957.
Lexington, Kentucky is the 66th largest DMA in the United States, with
approximately 436,000 television households and a total population of
approximately 1.2 million. Total Market Revenues in the Lexington DMA in 2001
were approximately $55.0 million. According to the BIA Guide, the average
household income in the Lexington DMA in 1999 was $37,411, with effective buying
income projected to grow at an annual rate of 5.3% through 2004. Retail business
sales growth in the Lexington DMA is projected by the BIA Guide to average 5.3%
annually during the same period. The Lexington DMA has six licensed commercial
television stations, including WYMT, WKYT's sister station, five of which are
affiliated with major networks. The Lexington DMA also has one public television
station.
Market Description. The Lexington DMA consists of 39 counties in central
and eastern Kentucky. The Lexington area is a regional hub for shopping,
business, healthcare, education, and cultural activities and has a comprehensive
transportation network and low commercial utility rates. Major employers in the
Lexington area include Toyota Motor Corp., Lexmark International, Inc., Verizon
Communications Inc., Square D Company, Ashland, Inc., the University of Kentucky
and International Business Machines Corporation. Eight hospitals and numerous
medical clinics are located in Lexington, reinforcing Lexington's position as a
regional medical center. The University of Kentucky's main campus with
approximately 25,000 students is also located in Lexington. Frankfort, the
capital of Kentucky is also located within WKYT's service area.
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WYMT, the CBS affiliate in Hazard, Kentucky
WYMT, acquired by the Company in September 1994, began operations in 1985.
WYMT has carved out a niche trading area comprising 16 counties in eastern and
southeastern Kentucky. This trading area is a separate marketing area of the
Lexington, Kentucky DMA with approximately 169,000 television households and a
total population of approximately 456,000. WYMT is the only commercial
television station in this 16-county trading area. Total Market Revenues in the
16-county trading area for the year ended December 31, 2001, were approximately
$5.0 million. WYMT is the sister station of WKYT and shares many resources and
simulcasts some local programming with WKYT.
Market Description. The mountain region of eastern and southeastern
Kentucky where Hazard is located is on the outer edges of four separate markets:
Bristol-Kingsport-Johnson City, Charleston-Huntington, Knoxville and Lexington.
Prior to 1985, mountain residents relied primarily on satellite dishes and cable
television carrying distant signals for their television entertainment and news.
Established in 1985, WYMT is the only local broadcast station received in its
16-county trading area. The trading area's economy is primarily centered around
coal and related industries, such as natural gas and oil.
KWTX and KBTX, the CBS affiliates in Waco-Temple-Bryan, Texas
KWTX and KBTX, acquired by the Company in October 1999, began operations
in 1955 and 1957, respectively. KWTX is a full power VHF television station
located in Waco, Texas. KBTX is a full power VHF television station located in
Bryan, Texas and, under FCC rules, is operated primarily as a satellite station
to KWTX in order to serve the entire broadcast market. Waco-Temple-Bryan, Texas
is the 94th largest DMA in the United States, with approximately 299,000
television households and a total population of approximately 848,000. Total
Market Revenues in the Waco-Temple-Bryan DMA in 2001 were approximately $31.4
million. According to the BIA Guide, the average household income in the
Waco-Temple-Bryan DMA in 1999 was $38,822, with effective buying income
projected to grow at an annual rate of 4.3% through 2004. Retail business sales
growth in the Waco-Temple-Bryan DMA is projected by the BIA Guide to average
4.7% annually during the same period. The Waco-Temple-Bryan DMA has five
licensed commercial television stations (excluding KBTX), four of which are
affiliated with major networks. The Waco-Temple-Bryan DMA also has three public
television stations.
Market Description. The Waco-Temple-Bryan DMA consists of 14 counties
covering a large portion of central Texas and the Brazos Valley. The cities of
Waco, Temple, Killeen, Bryan and College Station are the primary economic
centers of the region. College Station, Texas is the home of Texas A&M
University with approximately 45,000 students and Baylor University is located
in Waco, Texas with approximately 13,000 students. The Waco-Temple-Bryan economy
centers on education, medical services and U.S. military installations. Leading
employers in the area include: Texas A&M University, Raytheon, Baylor
University, St. Joseph's Regional Medical Center, Killeen ISD, Scott and White
Hospital and the U.S. Army base at Fort Hood, Texas.
KOLN\KGIN, the CBS affiliates in Lincoln-Hastings-Kearney, Nebraska
KOLN and KGIN, acquired by the Company in July 1998, began operations in
1953 and 1961, respectively. KOLN is a full power VHF television station located
in Lincoln, Nebraska. KGIN is a full power VHF television station located in
Grand Island, Nebraska and, under FCC rules, is operated primarily as a
satellite station to KOLN in order to serve the western portion of the
Lincoln-Hastings-Kearney DMA. Lincoln-Hastings-Kearney, Nebraska is the 102nd
largest DMA in the United States, with approximately 269,000 television
households and a total population of approximately 687,000. Total Market
Revenues in the Lincoln-Hastings-Kearney DMA in 2001 were approximately $27.2
million. According to the BIA Guide, the average household income in the
Lincoln-Hastings-Kearney DMA in
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1999 was $43,726, with effective buying income projected to grow at an annual
rate of 4.8% through 2004. Retail business sales growth in the
Lincoln-Hastings-Kearney DMA is projected by the BIA Guide to average 5.0%
annually during the same period. The Lincoln-Hastings-Kearney DMA has five
licensed commercial television stations, all of which are affiliated with major
networks. The Lincoln-Hastings-Kearney DMA also has one public television
station.
Market Description. The Lincoln-Hastings-Kearney DMA consists of 51
counties covering a large portion of the western two thirds of Nebraska and the
northern tier of Kansas. The city of Lincoln is the primary economic center of
the region, the capital of Nebraska and home to the University of Nebraska with
approximately 23,000 students. The Lincoln-Hastings-Kearney economy centers
around state government, education, medical services and agriculture. Leading
employers in the area include: the State of Nebraska, the University of
Nebraska, Gallup Inc., the Lincoln Public School System and several area
hospitals.
WITN, the NBC affiliate in Greenville-New Bern-Washington, North Carolina
WITN, acquired by the Company in August 1997, began operations in 1955.
Greenville-New Bern-Washington, North Carolina is the 106th largest DMA in the
United States, with approximately 251,000 television households and a total
population of approximately 710,000. Total Market Revenues in the Greenville-New
Bern-Washington DMA in 2001 were approximately $33.7 million. According to the
BIA Guide, the average household income in the Greenville-New Bern-Washington
DMA in 1999 was $39,721, with effective buying income projected to grow at an
annual rate of 4.8% through 2004. Retail business sales growth in the
Greenville-New Bern-Washington DMA is projected by the BIA Guide to average 3.8%
annually during the same period. The Greenville-New Bern-Washington DMA has six
licensed commercial television stations, four of which are affiliated with major
networks. The Greenville-New Bern-Washington DMA also has three public
television stations.
Market Description. The Greenville-New Bern-Washington DMA consists of 15
counties in eastern North Carolina. Greenville, North Carolina (located 100
miles east of Raleigh) is the primary economic center of the region and home to
East Carolina University with approximately 19,000 students. The Greenville-New
Bern-Washington economy centers around education, manufacturing and agriculture.
Leading employers in the area include: Pitt County Memorial Hospital, NADEP
(Naval Rework Facility), East Carolina University, Catalytica Pharmaceuticals,
Inc., PCS Phosphate, Rubber Maid Cleaning Products, Inc. and Weyerhaeuser Co.
WCTV, the CBS affiliate in Tallahassee, Florida-Thomasville, Georgia
WCTV, acquired by the Company in September 1996, began operations in 1955.
Tallahassee, Florida-Thomasville, Georgia is the 113th largest DMA in the United
States, with approximately 237,000 television households and a total population
of approximately 655,000. Total Market Revenues in the Tallahassee-Thomasville
DMA in 2001 were approximately $26.2 million. According to the BIA Guide, the
average household income in the Tallahassee, Florida-Thomasville, Georgia DMA in
1999 was $38,678, with effective buying income projected to grow at an annual
rate of 4.5% through 2004. Retail business sales growth in the Tallahassee,
Florida-Thomasville, Georgia DMA is projected by the BIA Guide to average 6.4%
annually during the same period. The Tallahassee-Thomasville DMA has five
licensed commercial television stations, four of which are affiliated with major
networks. The Tallahassee-Thomasville DMA also has one public television
station.
Market Description. The Tallahassee-Thomasville DMA, consisting of 18
counties in the panhandle of Florida and southwest Georgia, includes
Tallahassee, the capital of Florida, and Thomasville, Valdosta and Bainbridge,
Georgia. The Tallahassee-Thomasville economy centers around state and local
government as well as state and local universities which include Florida State
University with approximately 33,000 students, Florida A&M University with
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approximately 12,000 students, Tallahassee Community College, Thomas College and
Valdosta State University. Florida State University and Florida A&M University
each have their main campus located within the city of Tallahassee.
WRDW, the CBS affiliate in Augusta, Georgia
WRDW, acquired by the Company in January 1997, began operations in 1954.
Augusta, Georgia is the 114th largest DMA in the United States, with
approximately 234,000 television households and a total population of
approximately 647,000. Total Market Revenues in the Augusta DMA in 2001 were
approximately $31.4 million. According to the BIA Guide, the average household
income in the Augusta DMA in 1999 was $36,606, with effective buying income
projected to grow at an annual rate of 3.5% through 2004. Retail business sales
growth in the Augusta DMA is projected by the BIA Guide to average 4.8% annually
during the same period. The Augusta DMA has six licensed commercial television
stations, four of which are affiliated with a major network. The Augusta DMA
also has two public television stations.
Market Description. The Augusta DMA consists of 18 counties in eastern
Georgia and western South Carolina, including the cities of Augusta, Georgia and
North Augusta and Aiken, South Carolina. The Augusta, Georgia area is one of
Georgia's major metropolitan/regional centers, with a particular emphasis on
health services, manufacturing and the military. The federal government employs
military and civilian personnel at the Department of Energy's Savannah River
Site, a nuclear processing plant, and Fort Gordon, a U.S. Army military
installation. Augusta has eight large hospitals, which collectively employ
approximately 20,000 and reinforce Augusta's status as a regional healthcare
center. Augusta is also home to the Masters Golf Tournament, which has been
broadcast by CBS for 46 years.
WEAU, the NBC affiliate in La Crosse-Eau Claire, Wisconsin
WEAU, acquired by the Company in July 1998, began operations in 1953. La
Crosse-Eau Claire, Wisconsin is the 127th largest DMA in the United States, with
approximately 198,000 television households and a total population of
approximately 532,000. Total Market Revenues in the La Crosse-Eau Claire,
Wisconsin DMA in 2001 were approximately $25.5 million. According to the BIA
Guide, the average household income in the La Crosse-Eau Claire, Wisconsin DMA
in 1999 was $37,490, with effective buying income projected to grow at an annual
rate of 3.8% through 2004. Retail business sales growth in the La Crosse-Eau
Claire, Wisconsin DMA is projected by the BIA Guide to average 5.3% annually
during the same period. The La Crosse-Eau Claire, Wisconsin DMA has five
licensed commercial television stations, four of which are affiliated with major
networks. The La Crosse-Eau Claire, Wisconsin DMA also has one public television
station.
Market Description. The La Crosse-Eau Claire, Wisconsin DMA, consists of
12 counties in west central Wisconsin and two counties in eastern Minnesota. The
La Crosse and Eau Claire, Wisconsin economy centers around medical services,
agriculture, education and retail businesses. The University of Wisconsin
maintains a 11,000-student campus in Eau Claire. Leading employers include
Hutchinson Technologies, the University of Wisconsin at Eau Claire and several
area hospitals.
WJHG, the NBC affiliate in Panama City, Florida
WJHG, acquired by the Company in 1960, began operations in 1953. Panama
City, Florida is the 159th largest DMA in the United States, with approximately
121,000 television households and a total population of approximately 328,000.
Total Market Revenues in the Panama City DMA in 2001 were approximately $14.6
million. According to the BIA Guide, the average household income in the Panama
City DMA in 1999 was $36,902, with effective buying income projected to grow at
an annual rate of
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4.8% through 2004. Retail business sales growth in the Panama City DMA is
projected by the BIA Guide to average 5.4% annually during the same period. The
Panama City DMA has five licensed commercial television stations, three of which
are affiliated with major networks. In addition, a station in Dothan, Alabama,
an adjacent DMA, provides a CBS signal. The Panama City DMA also has one public
television station.
Market Description. The Panama City DMA consists of nine counties in
northwest Florida. The Panama City market stretches north from Florida's Gulf
Coast to Alabama's southern border. The Panama City economy centers around
tourism, military bases, manufacturing, education and financial services. Panama
City is the county seat and principal city of Bay County. Leading employers in
the area include: Tyndall Air Force Base, the U.S. Navy Coastal Systems Station,
Sallie Mae Servicing Corp., Stone Container Corporation, Arizona Chemical
Corporation and Gulf Coast Community College.
KXII, the CBS affiliate in Sherman, Texas - Ada, Oklahoma
KXII, acquired by the Company in October 1999, began operations in 1956.
Sherman, Texas-Ada, Oklahoma is the 160th largest DMA in the United States, with
approximately 119,000 television households and a total population of
approximately 312,000. Total Market Revenues in the Sherman, Texas-Ada, Oklahoma
DMA in 2001 were approximately $8.6 million. According to the BIA Guide, the
average household income in the Sherman, Texas-Ada, Oklahoma DMA in 1999 was
$34,745, with effective buying income projected to grow at an annual rate of
5.1% through 2004. Retail business sales growth in the Sherman, Texas-Ada,
Oklahoma DMA is projected by the BIA Guide to average 4.8% annually during the
same period. The Sherman, Texas-Ada, Oklahoma DMA has two licensed commercial
television stations, both of which are affiliated with major networks.
Market Description. The Sherman, Texas-Ada, Oklahoma DMA, consists of one
county in north central Texas and 10 counties in south central Oklahoma. The
Sherman, Texas-Ada, Oklahoma economy centers around medical services,
manufacturing and distribution services. Leading employers include Michelin,
MEMC Southwest, Globitech, Raytheon, CIGNA, Johnson & Johnson and Texas
Instruments.
Satellite Transmission and Production Services
The Company's satellite transmission and production services business,
Lynqx Communications, operates C-band and Ku-band transportable satellite uplink
units and provides production management services. Clients include NBC, CBS, ABC
and other broadcast and cable services. Currently Lynqx operates 13 mobile
satellite uplink units.
Industry Background
There are currently a limited number of channels available for
broadcasting in any one geographic area, and the license to operate a television
station is granted by the FCC. Television stations which broadcast over the very
high frequency ("VHF") band (channels 2-13) of the spectrum generally have some
competitive advantage over television stations which broadcast over the
ultra-high frequency ("UHF") band (channels above 13) of the spectrum, because
the former usually have better signal coverage and operate at a lower
transmission cost.
Television station revenues are primarily derived from local, regional and
national advertising and, to a much lesser extent, from network compensation and
revenues from studio and tower space rental and commercial production
activities. Advertising rates are based upon a variety of factors, including a
program's popularity among the viewers an advertiser wishes to attract, the
number of advertisers competing for the available time, the size and demographic
makeup of the market served by the station and the availability of alternative
advertising media in the market area. Rates are also determined by a
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station's overall ratings and in-market share, as well as the station's ratings
and share among particular demographic groups, which an advertiser may be
targeting. Because broadcast stations rely on advertising revenues, they are
sensitive to cyclical changes in the economy. The size of advertisers' budgets,
which are affected by broad economic trends, affect the broadcast industry in
general and the revenues of individual broadcast television stations.
All television stations in the country are grouped by Nielsen, a national
audience measuring service, into approximately 210 generally recognized
television markets that are ranked in size according to various formulae based
upon actual or potential audience. Each DMA is an exclusive geographic area
consisting of all counties in which the home-market commercial stations receive
the greatest percentage of total viewing hours. Nielsen periodically publishes
data on estimated audiences for the television stations in the various
television markets throughout the country.
Four major broadcast networks, ABC, NBC, CBS and FOX dominate broadcast
television. Additionally, United Paramount Network ("UPN"), Warner Brothers
Network ("WB") and the Pax TV Network have been launched as additional
television networks. An affiliate of FOX, UPN, WB or Pax TV receives a smaller
portion of each day's programming from its network compared to an affiliate of
ABC, NBC or CBS.
The affiliation of a station with ABC, NBC or CBS has a significant impact
on the composition of the station's programming, revenues, expenses and
operations. A typical affiliate of these networks receives the majority of each
day's programming from the network. This programming, along with cash payments
("network compensation") in certain instances, is provided to the affiliate by
the network in exchange for a substantial majority of the advertising time
available for sale during the airing of network programs. The network then sells
this advertising time and retains the revenues. The affiliate retains the
revenues from time sold during breaks in and between network programs and
programs the affiliate produces or purchases from non-network sources. In
acquiring programming to supplement programming supplied by the affiliated
network, the affiliates compete primarily with other affiliates and independent
stations in their markets. Cable systems generally do not compete with local
stations for programming, although various national cable networks from time to
time have acquired programs that would have otherwise been offered to local
television stations. In addition, a television station may acquire programming
through barter arrangements. Under barter arrangements, a national program
distributor may receive advertising time in exchange for the programming it
supplies, with the station paying a reduced or no fee for such programming. Most
successful commercial television stations obtain their brand identity from
locally produced news programs.
In contrast to a station affiliated with a network, a fully independent
station purchases or produces all of the programming that it broadcasts,
resulting in generally higher programming costs. An independent station,
however, retains its entire inventory of advertising time and all the revenues
obtained therefrom. As a result of the smaller amount of programming provided by
its network, an affiliate of FOX, UPN, WB or Pax TV must purchase or produce a
greater amount of programming, resulting in generally higher programming costs.
These affiliate stations, however, retain a larger portion of the inventory of
advertising time and the revenues obtained therefrom compared to stations
affiliated with the major networks.
Cable-originated programming is a significant competitor for viewers of
broadcast television programming, although no single cable programming network
regularly attains audience levels amounting to more than a small fraction of any
single major broadcast network. The advertising share of cable networks has
increased as a result of the growth in cable penetration (the percentage of
television households which are connected to a cable system). Notwithstanding
such increases in cable viewership and advertising, over-the-air broadcasting
remains the dominant distribution system for mass-market television advertising.
11
Network Affiliation of the Stations
Each of the Company's stations is affiliated with a major network pursuant
to an affiliation agreement. Each affiliation agreement provides the affiliated
station with the right to broadcast all programs transmitted by the network with
which the station is affiliated. In return, the network has the right to sell a
substantial majority of the advertising time during such broadcasts. In exchange
for every hour that a station elects to broadcast network programming, the
network pays the station a specific network compensation fee, which varies with
the time of day. Typically, prime-time programming generates the highest hourly
network compensation payments. Such payments are subject to increase or decrease
by the network during the term of an affiliation agreement with provisions for
advance notices and right of termination by the station in the event of a
reduction in such payments. The CBS affiliation agreements expire as follows:
(i) WVLT, WKYT, WYMT and WCTV, on December 31, 2004, (ii) WRDW on March 31, 2005
and (iii) KWTX, KBTX, KOLN, KGIN and KXII on December 31, 2005. The Company has
tentatively agreed with NBC to extend the affiliation agreements of WEAU, WITN
and WJHG through December 31, 2011 and is currently working with NBC to finalize
the definitive affiliation agreements. The CBS affiliation agreements for KWTX,
KBTX and KXII were renegotiated during the fourth quarter of 2000 and were
extended through December 31, 2005. For the year ended December 31, 2001,
combined network compensation for our three NBC affiliates and the three
CBS-affiliated Texas stations was $1.8 million and $1.3 million, respectively.
As a result of these negotiations with NBC and CBS, network compensation for our
three NBC affiliates and our CBS affiliates, KWTX, KBTX and KXII will be phased
out over the next few years. Although network affiliation agreements have
historically been renewed by the Company and the respective networks, the
Company can not guarantee that any agreements will be renewed in the future
under their current terms.
NEWSPAPER PUBLISHING
At December 31, 2001, the Company owned and operated five publications
comprising four daily newspapers and an advertising shopper, located in the
Southeast and Midwest. The percentage of total Company revenues contributed by
the newspaper publishing segment was approximately 26.3%, 24.2% and 26.3% for
each of the years ended December 31, 2001, 2000 and 1999, respectively.
The Albany Herald
The Albany Herald Publishing Company, Inc. ("The Albany Herald"), located
in Albany, Georgia, publishes The Albany Herald, which is published seven days a
week and serves southwest Georgia. The Albany Herald's circulation approximates
31,000 Sunday subscribers and 28,000 daily. The Albany Herald also produces a
weekly advertising shopper and other niche publications.
Gwinnett Daily Post and Rockdale Citizen/Newton Citizen
The Gwinnett Daily Post and Rockdale Citizen/Newton Citizen are newspapers
that serve communities in the metro Atlanta area with complete local news,
sports and lifestyles coverage together with national stories that directly
impact their local communities.
The Gwinnett Daily Post is published Tuesday through Sunday and has a
circulation of approximately 65,000 subscribers. The Gwinnett Daily Post is
located northeast of Atlanta in Gwinnett County, one of the fastest growing
areas in the nation with an estimated population of approximately 650,000.
According to Woods and Poole 2000 MSA Profile, Gwinnett County's population is
projected to grow by 25% between 1999 and 2004. Since the purchase of the
Gwinnett Daily Post in 1995, the frequency of publication has increased from
three to six days per week and circulation has grown from 13,000 to 65,000
subscribers.
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Rockdale Citizen/Newton Citizen is published seven days per week with a
circulation of approximately 17,000. In 2000, the Company began publication of
the Newton Citizen for distribution into neighboring Newton County. The Rockdale
Citizen is located in Conyers, Georgia, the county seat of Rockdale County,
which is 19 miles east of downtown Atlanta. Rockdale County and Newton County's
combined population is estimated to be approximately 132,000.
The Goshen News
The Goshen News is published seven days a week with a circulation of
16,000 and serves Goshen, Indiana and surrounding areas. The Goshen News also
produces a weekly advertising shopper. Since the Company acquired The Goshen
News in 1999, it has added a Sunday edition and converted the Saturday edition
to morning delivery.
Industry Background
Newspaper publishing is the oldest segment of the media industry and, as a
result of the focus on local news, newspapers in general, remain an important
media for local advertising. Newspaper advertising revenues are cyclical and
have generally been affected by changes in national and regional economic
conditions. Financial instability in the retail industry, including bankruptcies
of larger retailers and consolidations among large retail chains can result in
reduced retail advertising expenditures. Classified advertising, which makes up
approximately one-third of newspaper advertising expenditures, can be affected
by an economic slowdown and its effect on employment, real estate transactions
and automotive sales. However, growth in housing starts and automotive sales,
although cyclical in nature, generally provide continued growth in newspaper
advertising expenditures. While the newspaper publishing industry is impacted by
the economic cycles, it is not generally affected by the cyclical nature of
political advertising revenue.
PAGERS AND WIRELESS SERVICES
The Paging Business
The paging business, acquired by the Company in September 1996, is based
in Tallahassee, Florida and operates in Columbus, Macon, Albany, Thomasville,
Valdosta and Savannah, Georgia, in Dothan, Alabama, in Tallahassee, Gainesville,
Orlando and Panama City, Florida and in certain contiguous areas. In 2001, the
Company's paging operations had approximately 75,000 units in service compared
to approximately 90,000 units in service in 2000. The percentage of total
Company revenues contributed by the paging segment was approximately 5.6%, 5.3%
and 6.3% for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company's paging system operates by connecting a telephone call placed
to a local telephone number with a local paging switch. The paging switch
processes a caller's information and sends the information to a link transmitter
which relays the processed information to paging transmitters, which in turn
alert an individual pager by means of a coded radio signal. This process
provides service to a "local coverage area." To enhance coverage further to its
customer base, all of the Company's local coverage areas are interconnected or
networked, providing for "wide area coverage" or "network coverage." A pager's
coverage area is programmable and can be customized to include or exclude any
particular paging switch and its respective geographic coverage area, thereby
allowing the Company's paging customers a choice of coverage areas. In addition,
the Company is able to network with other paging companies which share the
Company's paging frequencies in other markets, by means of an industry standard
network paging protocol, in order to increase the geographic coverage area in
which the Company's customers can receive paging service. During 1999, the
Company introduced services which allow its paging customers to receive
electronic mail on their pagers. In addition, the Company expanded its
13
capability so that individuals may send text messages via the Internet to the
Company's paging customers by accessing the paging businesses web page. In 2001,
the Company introduced WebTouch, allowing its customers to access their account
information through the web to make changes and payments.
A subscriber to the Company's paging services either owns a pager, thereby
paying solely for the use of the Company's paging services, or leases a pager,
thereby paying a periodic charge for both the pager and the paging services. Of
the Company's pagers currently in service, approximately 70% are customer owned
and maintained ("COAM") with the remainder being leased. COAM customers
historically stay on service longer, thus enhancing the stability of the
subscriber base and earnings. The Company is focusing its marketing efforts on
increasing its base of COAM users.
Industry Background
Three tiers of carriers have emerged in the paging industry: (i) large
nationwide providers serving multiple markets throughout the United States; (ii)
regional carriers, like the Company's paging business, which operate in regional
markets such as several contiguous states in one geographic region of the United
States; and (iii) small, single market operators.
The paging industry has traditionally marketed its services through direct
distribution by sales representatives. In recent years, additional channels of
distribution have evolved, including: (i) carrier-operated retail stores; (ii)
resellers, who purchase paging services on a wholesale basis from carriers and
resell those services on a retail basis to their own customers; and (iii) sales
agents who solicit customers and are compensated on a salary and commission
basis.
ADDITIONAL INFORMATION ON BUSINESS SEGMENTS
Reference is made to Note I of notes to consolidated financial statements
of the Company for additional information regarding business segments.
COMPETITION
Television Industry
Competition in the television industry exists on several levels:
competition for audience, competition for programming (including news) and
competition for advertisers. Additional factors that are material to a
television station's competitive position include signal coverage and assigned
frequency.
Audience. Stations compete for audience based on program popularity, which
has a direct effect on advertising rates. A substantial portion of the daily
programming on each of the Company's stations is supplied by the network
affiliate. During those periods, the stations are totally dependent upon the
performance of the network programs to attract viewers. There can be no
assurance that such programming will achieve or maintain satisfactory viewership
levels in the future. Non-network time periods are programmed by the station
with a combination of locally produced news, public affairs and other
entertainment programming, including news and syndicated programs purchased for
cash, cash and barter, or barter only.
In addition, the development of methods of television transmission of
video programming other than over-the-air broadcasting, and in particular, cable
television, has significantly altered competition for audience in the television
industry. These other transmission methods can increase competition for a
broadcasting station by bringing into its market distant broadcasting signals
not otherwise available to the station's audience and also by serving as a
distribution system for non-broadcast programming.
14
Other sources of competition include home entertainment systems, "wireless
cable" services, satellite master antenna television systems, low power
television stations, television translator stations, direct broadcast satellite
("DBS") video distribution services and the internet.
Programming. Competition for programming involves negotiating with
national program distributors or syndicators that sell first-run and rerun
packages of programming. Each station competes against the broadcast station
competitors in its market for exclusive access to off-network reruns (such as
Seinfeld) and first-run product (such as Entertainment Tonight). Competition
exists for exclusive news stories and features as well. Cable systems generally
do not compete with local stations for programming, although various national
cable networks from time to time have acquired programs that would have
otherwise been offered to local television stations.
Advertising. Advertising rates are based upon the size of the market in
which the station operates, a station's overall ratings, a program's popularity
among the viewers that an advertiser wishes to attract, the number of
advertisers competing for the available time, the demographic makeup of the
market served by the station, the availability of alternative advertising media
in the market area, aggressive and knowledgeable sales forces and the
development of projects, features and programs that tie advertiser messages to
programming. Advertising revenues comprise the primary source of revenues for
the Company's stations. The Company's stations compete for such advertising
revenues with other television stations and other media in their respective
markets. The stations also compete for advertising revenue with other media,
such as newspapers, radio stations, magazines, outdoor advertising, transit
advertising, yellow page directories, direct mail, internet and local cable
systems. Competition for advertising dollars in the broadcasting industry occurs
primarily within individual markets.
Newspaper Industry
The Company's newspapers compete for advertisers with a number of other
media outlets, including magazines, radio, television and the internet, as well
as other newspapers, which also compete for readers with the Company's
publications. One of the Company's newspaper competitors is significantly larger
than the Company and operates in two of its newspaper markets. The Company
differentiates its publications from the other newspaper by focusing on local
news and local sports coverage in order to compete with its larger competitor.
The Company clearly identifies the markets it wishes to target and seeks to
become the primary source for local news and advertising information within
those markets.
Paging Industry
The paging industry is highly competitive. Companies in the industry
compete on the basis of price, coverage area offered to subscribers, available
services offered in addition to basic numeric or tone paging, transmission
quality, system reliability and customer service. The Company competes by
maintaining competitive pricing of its product and service offerings, by
providing quality, reliable transmission networks and by furnishing subscribers
a superior level of customer service.
The Company's primary competitors include those paging companies that
provide wireless service in the same geographic areas in which the Company
operates. The Company experiences competition from one or more competitors in
all locations in which it operates; however, many of the Company's competitors
have experienced financial difficulty in the past two years.
The Company's paging services also compete with other wireless
communications services such as cellular service. The typical customer uses
paging as a low cost wireless communications alternative either on a stand-alone
basis or in conjunction with cellular services. In addition, technological
developments in the wireless communications industry and enhancements of current
technology have created new products and services, such as personal
communications services and mobile satellite
15
services, which are also competitive with the paging services currently offered
by the Company. FCC policies are aimed at encouraging such technological
developments, new services and promoting competition. There can be no assurance
that the Company's paging business would not be adversely affected by such
technological developments or regulatory changes.
FEDERAL REGULATION OF THE COMPANY'S BUSINESS
Television Broadcasting
Existing Regulation. Television broadcasting is subject to the
jurisdiction of the FCC under the Communications Act of 1934, as amended (the
"Communications Act") and the Telecommunications Act of 1996 (the
"Telecommunications Act"). The Communications Act prohibits the operation of
television broadcasting stations except under a license issued by the FCC and
empowers the FCC, among other things, to issue, revoke and modify broadcasting
licenses, determine the locations of stations, regulate the equipment used by
stations, adopt regulations to carry out the provisions of the Communications
Act and the Telecommunications Act and impose penalties for violation of such
regulations. The Communications Act prohibits the assignment of a license or the
transfer of control of a licensee without prior approval of the FCC.
License Grant and Renewal. Television broadcasting licenses generally are
granted or renewed for a period of eight years but may be renewed for a shorter
period upon a finding by the FCC that the "public interest, convenience, and
necessity" would be served thereby. The broadcast licenses for each station are
effective through the following dates: WVLT - August 1, 2005; WKYT - August 1,
2005; WYMT- August 1, 2005; KOLN and KGIN - June 1, 2006; WITN - December 1,
2004; WRDW - April 1, 2005; WCTV - April 1, 2005; WEAU - December 1, 2005, WJHG
- - February 1, 2005, KBTX and KWTX - August 1, 2006, and KXII - August 1, 2006.
The Telecommunications Act requires a broadcast license to be renewed if the FCC
finds that: (i) the station has served the public interest, convenience and
necessity; (ii) there have been no serious violations of either the
Telecommunications Act or the FCC's rules and regulations by the licensee; and
(iii) there have been no other violations, which taken together would constitute
a pattern of abuse. At the time an application is made for renewal of a
television license, parties in interest may file petitions to deny, and such
parties, including members of the public, may comment upon the service the
station has provided during the preceding license term and urge denial of the
application. If the FCC finds that the licensee has failed to meet the
above-mentioned requirements, it could deny the renewal application or grant a
conditional approval, including renewal for a lesser term. The FCC will not
consider competing applications contemporaneously with a renewal application.
Only after denying a renewal application can the FCC accept and consider
competing applications for the license. Although in substantially all cases
broadcast licenses are renewed by the FCC even when petitions to deny are filed
against broadcast license renewal applications, there can be no assurance that
the Company's stations' licenses will be renewed. The Company is not aware of
any facts or circumstances that could prevent the renewal of the licenses for
its stations at the end of their respective license terms.
Multiple Ownership Restrictions. Currently, the FCC has rules that limit
the ability of individuals and entities to own or have an ownership interest
above a certain level (an "attributable" interest, as defined more fully below)
in broadcast stations, as well as other mass media entities. The current rules
limit the number of broadcast stations that may be owned both on a national and
a local basis. On a national basis, the rules preclude any individual or entity
from having an attributable interest in co-owned television stations whose
aggregate audience reach exceeds 35% of all United States households. Owners of
television stations that have an attributable interest in another TV station in
the same Nielsen DMA, or that operate a satellite station in the same market, do
not have to include those additional same-market outlets in calculating its 35%
aggregate television audience reach cap. A station owner with an attributable
interest in a station in a separate market (including time-brokered local
marketing agreements
16
("LMAs") and satellite stations) must count that additional audience as part of
its national aggregate audience. The U.S. Court of Appeals for the D.C. Circuit
has recently ordered the FCC to review the rule to determine whether it is
necessary to protect the public interest.
On a local basis, the FCC has revised its local market television
ownership rules, permitting station owners to realize the efficiencies of
certain types of common ownership. The FCC currently allows the common ownership
of two television stations without regard to broadcast signal contour overlap if
the stations are in separate DMAs. The FCC continues to allow common ownership
of two stations in the same DMA if their Grade B contours do not overlap.
Entities are permitted to own two television stations within the same DMA if
eight full-power independently owned television stations (commercial and
noncommercial) will remain post-merger, and one of the co-owned stations is not
among the top four-ranked stations in the market based on audience share. In
order for a television station to count toward the minimum number of independent
stations necessary for FCC approval of a proposed duopoly, its Grade B signal
contour must overlap the Grade B signal contour of a at least one of the TV
stations involved in the proposed combination. The common ownership of two
television stations in the same market with an overlapping contour is permitted
where the same-market licensee is the only reasonably available buyer and the
station purchased is a "failed station" (either off the air for at least four
months prior to the waiver application or involved in involuntary bankruptcy or
insolvency proceedings) or a "failing" station (having a low audience share and
financially struggling during the previous several years). A waiver of the FCC's
ownership restrictions is possible if the applicants for waiver can show that
the combination will result in the construction of a previously unbuilt station.
A challenge to the rule limiting duopolies to markets whose eight separate
voices would remain after a merger or combination is pending in the U. S. Court
of Appeals for the D.C. Circuit.
The FCC also substantially modified its rules implementing TV-radio
cross-ownership restrictions (the so-called "one-to-a-market" rule). Depending
upon the particular circumstances an entity may own up to two television
stations and six radio stations or one television station and seven radio
stations in a market.
In addition, the FCC decided to retain the cable/television
cross-ownership rule, which effectively prohibits joint ownership of a broadcast
television station and cable system in the same market. An appeal challenging
the FCC's decision to retain this rule was filed in the U. S. Court of Appeals
for the D. C. Circuit, which recently vacated the rule and ordered the
Commission to provide a stronger justification for the rule before it attempts
to reinstate it.
The FCC has also initiated a proceeding to determine whether any changes
should be made to its newspaper/broadcast cross-ownership rule. The rule,
adopted by the FCC in the 1970s, generally prohibits one entity from owning both
a commercial broadcast station and a daily newspaper in situations in which the
predicted or measured contours of the station encompass entirely the community
in which the newspaper is published.
Expansion of the Company's broadcast operations in particular areas and
nationwide will continue to be subject to the FCC's ownership rules and any
changes the FCC or Congress may adopt. Any relaxation of the FCC's ownership
rules may increase the level of competition in one or more of the markets in
which the Company's stations are located, particularly to the extent that the
Company's competitors may have greater resources and thereby be in a better
position to capitalize on such changes.
Under the FCC's ownership rules, a direct or indirect purchaser of certain
types of securities of the Company could violate FCC regulations if that
purchaser owned or acquired an "attributable" or "meaningful" interest in other
media properties in the same areas as stations owned by the Company or in a
manner otherwise prohibited by the FCC. All officers and directors of a
licensee, as well as general partners, uninsulated limited partners or members
of a limited liability company and stockholders who
17
own 5% or more of the voting power of the outstanding common stock of a licensee
(either directly or indirectly), generally will be deemed to have an
"attributable" interest in the licensee. Certain institutional investors, which
exert no control or influence over a licensee, may own up to 20% of the voting
power of the outstanding common stock before attribution occurs.
The FCC has recently revised its broadcast ownership attribution rules.
The attribution rules define what constitutes a "cognizable interest" for
purposes of applying the ownership rules. The FCC's attribution rules now
include a new "equity/debt plus" attribution rule that functions in addition to
the current attribution rules. Under the new rule, a holder of a financial
interest, whether equity or debt or both, of 33% of licensee's total assets will
have an attributable interest in that licensee if it is either a major program
supplier to that licensee (supplying more than 15% of a station's total weekly
broadcast programming hours) or if it is a same media market entity (including
broadcasters, cable operators and newspapers). All stock, including common and
preferred, voting and nonvoting stock, will be counted toward the 33% threshold.
Time brokerage of another television station in the same market (including LMAs)
for more than 15% of the brokered station's broadcast hours per week will result
in the attribution of the time brokerage arrangement. Except for certain LMAs,
any interest acquired on or after November 7, 1996, is subject to the FCC's
revised ownership and attribution rules. To the best of the Company's knowledge,
no officer, director or 5% stockholder of the Company currently holds an
attributable interest in another television station, radio station, cable
television system or daily newspaper that is inconsistent with the FCC's
ownership rules and policies or with ownership by the Company of its stations.
Alien Ownership Restrictions. The Communications Act restricts the ability
of foreign entities or individuals to own or hold interests in broadcast
licenses. Foreign governments, representatives of foreign governments,
non-citizens, representatives of non-citizens, and corporations or partnerships
organized under the laws of a foreign nation are barred from holding broadcast
licenses. Non-citizens, collectively, may directly or indirectly own or vote up
to 20% of the capital stock of a licensee. In addition, a broadcast license may
not be granted to or held by any corporation that is controlled, directly or
indirectly, by any other corporation more than one-fourth of whose capital stock
is owned or voted by non-citizens or their representatives or by foreign
governments or their representatives, or by non-U.S. corporations if the FCC
finds that the public interest will be served by the refusal or revocation of
such license. The Company has been advised that the FCC staff has interpreted
this provision of the Communications Act to require an affirmative public
interest finding before a broadcast license may be granted to or held by any
such corporation and the FCC has made such an affirmative finding only in
limited circumstances. The Company, which serves as a holding company for
wholly-owned subsidiaries that are licensees for its stations, therefore may be
restricted from having more than one-fourth of its stock owned or voted directly
or indirectly by non-citizens, foreign governments, representatives of
non-citizens or foreign governments, or foreign corporations.
Recent Developments. Congress has recently enacted legislation and the FCC
currently has under consideration or is implementing new regulations and
policies regarding a wide variety of matters that could affect, directly or
indirectly, the operation and ownership of the Company's broadcast properties.
In addition to the proposed changes noted above, such matters include, for
example, spectrum use fees, political advertising rates, potential advertising
restrictions on the advertising of certain products (such as hard liquor), the
rules and policies to be applied in enforcing the FCC's equal employment
opportunity regulations, cable carriage of digital television signals and
viewing of distant network signals by direct broadcast satellite services. Other
matters that could affect the Company's broadcast properties include
technological innovations and developments generally affecting competition in
the mass communications industry, such as the recent initiation of direct
broadcast satellite service, and the continued establishment of wireless cable
systems and low power television stations.
In response to a decision of the U.S. Court of Appeals for the D.C.
Circuit, the FCC suspended its requirement that licensees widely disseminate
information about job openings to all segments of the
18
community to ensure that all qualified applicants, including minorities and
women, have sufficient opportunities to compete for jobs in the broadcast
industry. Recently the FCC voted to open a new proceeding to re-establish equal
employment opportunity rules for broadcasters, which would reinstate the
requirement that licensees widely disseminate information about job openings to
all segments of the community and periodically disclose details concerning
recruiting and outreach activities.
The 1992 Cable Act. On October 5, 1992, Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"). The FCC implemented the requirements of the 1992 Cable Act. Certain
statutory provisions, such as signal carriage, retransmission consent and equal
employment opportunity requirements, have a direct effect on television
broadcasting. Other provisions are focused exclusively on the regulation of
cable television but can still be expected to have an indirect effect on the
Company because of the competition between over-the-air television stations and
cable systems.
The signal carriage, or "must carry," provisions of the 1992 Cable Act
require cable operators to carry the signals of local commercial and
non-commercial television stations and certain low power television stations.
Systems with 12 or fewer usable activated channels and more than 300 subscribers
must carry the signals of at least three local commercial television stations. A
cable system with more than 12 usable activated channels, regardless of the
number of subscribers, must carry the signals of all local commercial television
stations, up to one-third of the aggregate number of usable activated channels
of such system. The 1992 Cable Act also includes a retransmission consent
provision that prohibits cable operators and other multi-channel video
programming distributors from carrying broadcast stations without obtaining
their consent in certain circumstances. The "must carry" and retransmission
consent provisions are related in that a local television broadcaster, on a
cable system-by-cable-system basis, must make a choice once every three years
whether to proceed under the "must carry" rules or to waive that right to
mandatory but uncompensated carriage and negotiate a grant of retransmission
consent to permit the cable system to carry the station's signal, in most cases
in exchange for some form of consideration from the cable operator. Cable
systems must obtain retransmission consent to carry all distant commercial
stations other than certain "super stations" delivered via satellite. Under
rules adopted to implement these "must carry" and retransmission consent
provisions, local television stations are required to make an election of "must
carry" or retransmission consent at three year intervals. Stations that fail to
elect are deemed to have elected carriage under the "must carry" provisions.
Other issues addressed in the FCC rules are market designations, the scope of
retransmission consent and procedural requirements for implementing the signal
carriage provisions. Each of the Company's stations has elected "must carry"
status on certain cable systems in its DMA. On other cable systems the Company's
stations have entered into retransmission consent agreements. This election
entitles the Company's stations to carriage on those systems until at least
December 31, 2002.
The 1992 Cable Act was amended in several important respects by the
Telecommunications Act. Most notable, the Telecommunications Act repeals the
cross-ownership ban between cable and telephone entities as well as the FCC's
former video dial-tone rules (permitting telephone companies to enter the video
distribution services market under several new regulatory options). The
Telecommunications Act also (a) eliminated the broadcast network/cable
cross-ownership limitation and (b) lifted the statutory ban on TV/cable
cross-ownership within the same market area (without, however, eliminating the
separate FCC regulatory restrictions on TV/cable cross-ownership, discussed
above).
Digital Television Service. In December 1996, the FCC formally approved
technical standards for digital advanced television ("DTV"). DTV is a flexible
system that will permit broadcasters to utilize a single digital channel in
various ways, including providing one channel of high-definition television
programming with greatly enhanced image and sound quality or several channels of
lower-definition television programming ("multicasting"), and is capable of
accommodating subscription video and data services. Broadcasters may offer a
combination of services, so long as they transmit at least one stream of
19
free video programming on the DTV channel. The FCC has assigned to each existing
full power television station (including each station owned by the Company) a
second channel to implement DTV while present television operations are
continued on that station's existing analog channel. Although in some cases a
station's DTV channel may only permit operation over a smaller geographic
service area than that available using its existing channel, the FCC's stated
goal in assigning channels was to provide stations with DTV service areas that
will replicate their existing service areas. The FCC's DTV rules also permit
stations to request new channel assignments and other modifications to their
assigned DTV facilities, allowing them to expand their DTV service areas if
certain interference criteria are met. Under FCC rules and the Balanced Budget
Act of 1997, station owners may be required to surrender one channel in 2006 and
thereafter provide service solely in the DTV format. Generally, under current
FCC rules each of the Company's stations must construct DTV facilities and
commence operations by May 2002. The Company completed its DTV implementation at
WRDW, its Augusta, Georgia station, in early 2000. In 2001, the Company
completed its DTV implementation at KWTX, its Waco, Texas station and WEAU, its
Eau Claire, Wisconsin station. The Company currently intends to begin digital
broadcast on KXII in Sherman, Texas by May 2002. It plans to complete the
necessary DTV construction at all of its remaining stations within the next year
and has sought six-month extensions of the May 2002 deadline.
In November 1998, the FCC issued a decision to implement the requirement
of the Telecommunications Act that it charge broadcasters a fee for offering
subscription services on the DTV channel. The FCC decision was to impose a fee
of 5% of the gross revenues generated by such services. The FCC also is
considering whether and how to extend cable systems' obligations for mandatory
carriage of broadcast stations' DTV channels. Finally, the FCC is considering
additional public interest obligations on broadcasters' digital operations. The
FCC has asked for comment on four general categories of issues: (1) the
application of television stations' public interest obligations to the new
flexibility and capabilities of digital television, such as multiple channel
transmission; (2) how television stations could best serve their communities in
terms of providing their viewers information on their public interest
activities, and using digital technology to provide emergency information in new
ways; (3) how DTV broadcasters could increase access to television programming
by people with disabilities, and further the longstanding legislative and
regulatory goals of diversity; and (4) whether broadcasters could enhance the
quality of political discourse through uses of the airwaves for political issues
and debate.
In January 2001, the FCC issued an order addressing the must-carry rights
of digital television broadcasters in which it determined the following:
(i) Digital-only television stations may immediately assert carriage
rights on local cable systems;
(ii) Television stations that return their analog spectrum and convert to
digital operations are entitled to must-carry rights; and
(iii) A digital-only station asserting must-carry rights is entitled only
to carriage of a single programming stream and other
"program-related" content, regardless of the number of programs it
broadcasts simultaneously on its digital spectrum.
The FCC deferred making a decision as to whether broadcasters are entitled
to simultaneous carriage of both their digital and analog signals during the
transition to DTV. Nevertheless, the agency did announce its tentative
conclusion that, although neither forbidden nor mandated by the Communications
Act, dual carriage obligations would appear to impose an unconstitutional burden
on a cable operator's First Amendment rights. The FCC is also considering
whether rules for carriage of digital television signals by cable system
operators should also apply to direct broadcast satellite operators.
Several parties have filed petitions for reconsideration of the FCC's DTV
must-carry decision. Those petitions remain pending before the FCC, and we
cannot predict what changes, if any, the FCC will make to its DTV must-carry
rules on reconsideration.
20
Direct Broadcasting Satellite Systems. The FCC has authorized DBS, a
service which provides video programming via satellite directly to home
subscribers. Congress has enacted the Satellite Home Viewer Improvement Act
("SHVIA") that gives satellite companies the option of providing local broadcast
stations to subscribers living in the station's local market area. This is
referred to as "local-into-local."
Beginning January 1, 2002 DBS operators became subject to a requirement
for mandatory carriage of local television stations, similar to that applicable
to cable systems, for those markets in which a satellite carrier chooses to
provide any local signal. Stations in affected markets were required to make
must-carry elections by June 2001. SHVIA also extended the current system of
satellite distribution of distant network signals to unserved households (i.e.
those that do not receive a Grade B signal from a local network affiliate). In
response to a challenge to certain provisions of SHVIA, a panel of the U.S.
Court of Appeals for the Fourth Circuit upheld the requirement that DBS
operators carry the signal of all local television stations in markets where
they elect to carry any local signals. The court also upheld an FCC rule that
permits DBS operators to offer all local television stations on a single tier or
an a la carte basis. The rule allows consumers to choose between the two
options.
In response to broadcasters' June 2001 elections, DBS operators issued a
large number of carriage denial letters, prompting the FCC to issue an order in
September 2001 clarifying the DBS mandatory carriage rules. In particular, the
FCC emphasized that a satellite carrier must have a "reasonable basis" for
rejecting a broadcast station's request for carriage. The Company cannot predict
the impact of DBS service upon the Company's business.
Paging
Federal Regulation. The Company's paging operations, acquired by the
Company in September 1996, are subject to regulation by the FCC under the
Communications Act. The FCC has granted the Company licenses to use the radio
frequencies necessary to conduct its paging operations.
License Grant and Renewal. The FCC paging licenses granted to the Company
are for varying terms of up to 10 years, at the end of which renewal
applications must be approved by the FCC. The Company holds various FCC radio
licenses which are used in connection with its paging operations. Paging
licenses will expire during calendar year 2009. Licensees in the paging services
normally enjoy a license renewal expectancy and the vast majority of license
renewal applications are granted in the normal course. Although the Company is
unaware of any circumstances which could prevent the grant of renewal
applications, no assurance can be given that any of the Company's licenses will
be free of competing applications or will be renewed by the FCC. Furthermore,
the FCC has the authority to restrict the operations of licensed facilities or
to revoke or modify licenses. None of the Company's licenses has ever been
revoked or modified involuntarily, and such proceedings by the FCC are rarely
undertaken.
EMPLOYEES
As of March 1, 2002, the Company had 1,203 full-time employees, of which
802 were employees of the Company's television stations and satellite business,
335 were employees of the Company's publications, 51 were employees of the
Company's paging operations and 15 were corporate and administrative personnel.
None of the Company's employees are represented by unions. The Company believes
that its relations with its employees are satisfactory.
21
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 4370 Peachtree
Road, NE, Atlanta, Georgia, 30319.
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. A station's studios are
generally housed with its offices in business districts. The transmitter sites
and antenna are generally located in elevated areas to provide optimal signal
strength and coverage. The types of properties required to support newspaper
publishing include offices, facilities for printing presses and production and
storage. Paging properties include leased retail, office and tower space.
The following table sets forth certain information regarding the Company's
significant properties.
TELEVISION BROADCASTING
Station/ Owned or Expiration of
Property Location Use Leased Approximate Size Lease
- --------------------- ------------------------ -------- -------------------------------- --------------
WVLT
Knoxville, TN Office and studio Owned 18,000 sq. ft. --
building
Transmission tower site Leased Tower space Month to Month
WKYT
Lexington, KY Office, studio and Owned 34,500 sq. ft. --
transmission tower site building on 20 acres
WYMT
Hazard, KY Office and studio Owned 21,200 sq. ft. --
building on 2 acres
Hazard, KY Transmission tower site Leased -- June 2005
Hazard, KY Transmitter buildings Owned 816 sq. ft. building --
and improvements and 864 sq.ft.
building
KWTX
Waco, TX Office and studio Owned 34,000 sq. ft. --
building on 4 acres
Moody, TX Transmission tower site Owned 27.9 acres --
22
Station/ Owned or Expiration of
Property Location Use Leased Approximate Size Lease
- --------------------- ------------------------ -------- -------------------------------- --------------
KBTX
Bryan, TX Office and studio Owned 7,000 sq. ft. building --
on 23.4 acres
Grimes County, TX Transmission tower site Owned 1,300 sq. ft. building
Leased on 560 acres March 2023
Calvert, TX Transmission tower site Owned 80 sq. ft. building --
and 96 sq. ft.
building on 3.1 acres
Falls County, TX Transmission tower site Owned 128 sq. ft. building on --
2 acres
KOLN
Beaver Crossing, NE Transmission tower site Owned 120 acres --
Lincoln, NE Office and studio Owned 28,044 sq. ft. --
building on 5 acres
Bradshaw, NE Transmission tower site Owned 8 acres --
KGIN
Heartwell, NE Transmission tower site Owned 71 acres --
Grand Island, NE Office and studio Leased 5,153 sq. ft. Dec. 2003
WITN
Washington, NC Office and studio Owned 19,600 sq. ft. building --
Greenville, NC Office and studio Leased 1,707 sq. ft. Sept. 2002
Grifton, NC Transmitter building Owned 4,190 sq. ft. building --
Grifton, NC Transmission tower site Leased 9 acres Jan. 2029
WCTV
Tallahassee, FL Office and studio Owned 20,000 sq. ft. --
building on
Leased 37 acres Dec. 2014
Metcalf, GA Transmission tower site Owned 182 acres --
WRDW
North Augusta, SC Office and studio Owned 17,000 sq. ft. --
building
Beech Island, SC Transmission tower site Owned 143 acres --
23
Station/ Owned or Expiration of
Property Location Use Leased Approximate Size Lease
- --------------------- ------------------------ -------- -------------------------------- --------------
WEAU
Eau Claire, WI Office and studio Owned 16,116 sq. ft. of --
buildings on 2 acres
Township of Fairchild, Transmitter building & Owned with 2,304 sq. ft. building --
WI Transmission tower site easement on 6 acres
WJHG
Panama City, FL Office and studio Owned 14,000 sq. ft. building on 4 acres --
Youngstown, FL Transmission tower site Owned 17 acres --
KXII
Sherman, TX Office and studio Owned 12,813 sq. ft. --
building on 3 acres
Madill, OK Transmission tower site Owned 1,200 sq. ft. --
building on 97 acres
Ardmore,OK Studio and offices Owned 3,000 sq. ft. --
building on 1.5 acres
Paris, TX Translator tower site Owned 65 sq. ft. building on --
4.1 acres
Lynqx Communications
Baton Rouge, LA Office and repair site Leased 3,400 sq. ft. Dec. 2003
Tallahassee, FL Office Owned 1,000 sq. ft. --
PUBLISHING
Newspaper/ Owned or Expiration of
Property Location Use Leased Approximate Size Lease
- --------------------- ------------------------ -------- -------------------------------- --------------
The Albany Herald
Publishing Company,
Inc.,
Albany, GA Offices and production Owned 83,000 sq. ft. building --
facility for The Albany
Herald
Post Citizen Media, Inc.
Conyers, GA Offices for Rockdale Owned 20,000 sq. ft. building --
Citizen/ Newton Citizen
24
Newspaper/ Owned or Expiration of
Property Location Use Leased Approximate Size Lease
- --------------------- ------------------------ -------- -------------------------------- --------------
Post Citizen Media, Inc.
Conyers, GA (Cont.)
Conyers, GA Offices and production Leased 20,000 sq. ft. building May 2002
facility for Rockdale
Citizen/ Newton Citizen and
the Gwinnett Daily Post
Lawrenceville, GA Offices for the Gwinnett Leased 11,000 sq. ft. building Month to Month
Daily Post
Goshen. IN Offices and production Owned 21,000 sq. ft. --
facility for The Goshen building on 0.6 acres
News
PAGING
Owned or Expiration of
Property Location Use Leased Approximate Size Lease
- --------------------- ------------------------ -------- -------------------------------- --------------
Albany, GA Sales Office Leased 3,200 sq. ft. May 2004
Columbus, GA Sales Office Leased 2,200 sq. ft. Dec. 2002
Lumpkin Road Sales Office Leased 2,800 sq. ft. May 2002
Dothan, AL Sales Office Leased 800 sq. ft. Feb. 2005
Macon, GA Sales Office Leased 1,260 sq. ft. Month to Month
Tallahassee, FL Sales Office Leased 1,800 sq. ft. Aug. 2002
Tallahassee, FL Corporate Office Leased 2,400 sq. ft. Mar. 2002
Thomasville, GA Sales Office Leased 1,200 sq. ft. June 2002
Valdosta, GA Sales Office Leased 1,250 sq. ft. Feb. 2005
Panama City, FL Sales Office Leased 1,050 sq. ft. Month to Month
Gainesville, FL Sales Office Leased 1,100 sq. ft. Month to Month
The paging operations also lease space on various towers in Florida,
Georgia and Alabama. These tower lease terms range from month-to-month to
expiration dates through 2006.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings in which an adverse
outcome would have a material adverse effect, either individually or in the
aggregate, upon the Company except for the income tax matter described below.
25
The Internal Revenue Service (the "IRS") is auditing the Company's federal
tax return for the year ended December 31, 1996. In conjunction with this
examination, the Company extended the time period that the IRS has to audit the
Company's federal tax returns for the 1996 and 1997 tax years until December 31,
2001.
In October 2001, the Company received a notice of deficiency from the IRS
associated with its audit of the Company's 1996 federal income tax return. The
IRS alleges in the notice that the Company owes approximately $12.1 million of
tax plus interest and penalties stemming from certain acquisition related
transactions, which occurred in 1996. Additionally, if the IRS were successful
in its claims, the Company would be required to account for these acquisition
transactions as stock purchases instead of asset purchases, which would
significantly lower the tax basis in the assets acquired. The Company believes
the IRS claims are without merit and on January 18, 2002 filed a petition to
contest the matter in United States Tax Court. The Company cannot predict when
the tax court will conclude its ruling on this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered.
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the executive
officers of the Company as of March 15, 2002:
J. MACK ROBINSON, age 78, has been the Company's President and Chief
Executive Officer since 1996. Mr. Robinson has served as Chairman of the Board
of Bull Run Corporation, a principal stockholder of the Company, since 1994,
Chairman of the Board and President of Delta Life Insurance Company and Delta
Fire and Casualty Insurance Company since 1958, President of Atlantic American
Corporation, an insurance holding company, from 1988 until 1995 and Chairman of
the Board of Atlantic American Corporation since 1974. Mr. Robinson serves as a
director of the following companies: Bankers Fidelity Life Insurance Company,
American Independent Life Insurance Company, Georgia Casualty & Surety Company,
American Southern Insurance Company and American Safety Insurance Company. He is
a director emeritus of Wachovia Corporation. He is the Chairman of the Executive
Committee and a member of the Management Personnel Committee of the Company's
Board of Directors. Mr. Robinson is the husband of Mrs. Harriett J. Robinson and
the father-in-law of Mr. Hilton H. Howell, Jr., both members of the Company's
Board of Directors.
ROBERT S. PRATHER, JR., age 57, has been Executive Vice
President-Acquisitions of the Company since 1996. He has served as President and
Chief Executive Officer and a director of Bull Run Corporation, a principal
stockholder of the Company, since 1992. He serves as a director of Swiss Army
Brands, Inc. and The Morgan Group, Inc. and serves on the Board of Trustees of
the Georgia World Congress Center Authority. He is a member of the Executive
Committee and Management Personnel Committee of the Company's Board of
Directors.
HILTON H. HOWELL, JR., age 40, has been the Company's Executive Vice
President since September 2000. He has served as President and Chief Executive
Officer of Atlantic American Corporation, an insurance holding company, since
1995 and Executive Vice President from 1992 to 1995. He has been Executive Vice
President and General Counsel of Delta Life Insurance Company and Delta Fire and
Casualty Insurance Company since 1991, and Vice Chairman of Bankers Fidelity
Life Insurance Company and Georgia Casualty & Surety Company since 1992. He has
been a director, Vice President and Secretary of Bull Run Corporation, a
principal stockholder of the Company, since 1994. Mr. Howell also serves as a
director of the following companies: Atlantic American Corporation, Bankers
Fidelity
26
Life Insurance Company, Delta Life Insurance Company, Delta Fire and Casualty
Insurance Company, Georgia Casualty & Surety Company, American Southern
Insurance Company, American Safety Insurance Company, Association Casualty
Insurance Company and Association Risk Management General Agency. He is the
son-in-law of J. Mack Robinson and Harriett J. Robinson, both members of the
Company's Board of Directors.
ROBERT A. BEIZER, age 62, has served as Vice President for Law and
Development and Secretary of the Company since 1996. From June 1994 to February
1996 he was of counsel to Venable, Baetjer, Howard & Civiletti, a law firm, in
its regulatory and legislative practice group. From 1990 to 1994, Mr. Beizer was
a partner in the law firm of Sidley & Austin and was head of their
communications practice group in Washington, D.C. He is a past president of the
Federal Communications Bar Association and has served as a member of the ABA
House of Delegates.
JAMES C. RYAN, age 41, has served as the Company's Vice President and
Chief Financial Officer since October 1998. He was the Chief Financial Officer
of Busse Broadcasting Corporation from 1987 until its acquisition by the Company
in 1998.
THOMAS J. STULTZ, age 50, has served as Vice President of the Company and
President of the Company's Publishing Division since 1996. Prior to joining the
Company, he served as Vice President of Multimedia Newspaper Company, a division
of Multimedia, Inc. from 1988 to 1995. Mr. Stultz has approximately 32 years of
experience in the newspaper industry.
RICH D. ADAMS, age 54, assumed the positions of the Company's Regional
Vice President-Texas and General Manager of KWTX-TV, Waco, Texas, in January
2002. He replaced Mr. Ray Deaver who retired from these positions on December
31, 2001. Prior to his appointment in January 2002 to these positions, Mr.
Adams, served as General Manager of KXII-TV, the Company's Sherman, Texas
station, since 1980. The Company acquired KXII and KWTX in October 1999. Mr.
Adams has approximately 31 years of experience in the broadcast industry.
FRANK J. JONAS, age 55, has served as the Company's Regional Vice
President-Midwest since June 2000. He has served as the President and General
Manager of KOLN/KGIN-TV, Lincoln and Grand Island, Nebraska, since 1985. The
Company acquired KOLN/KGIN-TV in 1998. Mr. Jonas has approximately 29 years of
experience in the broadcast industry.
WAYNE M. MARTIN, age 55, has served as the Company's Regional Vice
President-Television since 1998. In 1998, he was also appointed President of
WVLT-TV, the Company's subsidiary in Knoxville, Tennessee. Since 1993, Mr.
Martin has served as President of the Company's subsidiary, Gray Kentucky
Television, Inc., which operates WKYT-TV, in Lexington, Kentucky and WYMT-TV, in
Hazard, Kentucky. Mr. Martin has approximately 16 years of experience in the
broadcast industry.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since June 30, 1995, the Company's Class A Common Stock, no par value,
(the "Class A Common Stock') has been listed and traded on The New York Stock
Exchange (the "NYSE") under the symbol "GCS." Since September 24, 1996, the date
of its initial issuance, the Company's Class B Common Stock, no par value, (the
"Class B Common Stock") has also been listed and traded on the NYSE under the
symbol "GCS.B." The following table sets forth the high and low sale prices of
the Class A Common Stock and Class B Common Stock as well as the cash dividend
declared for the periods indicated. The high and low sales prices of the Class A
Common Stock and the Class B Common Stock are as reported by the NYSE.
CLASS A COMMON STOCK CLASS B COMMON STOCK
----------------------------------- --------------------------------
CASH CASH
DIVIDENDS DIVIDENDS
DECLARED DECLARED
HIGH LOW PER SHARE HIGH LOW PER SHARE
------ ------ --------- ------ ------ ---------
2001
First Quarter $19.04 $15.63 $0.02 $17.65 $14.50 $0.02
Second Quarter 19.05 15.27 0.02 16.40 14.20 0.02
Third Quarter 18.79 15.20 0.02 15.45 13.10 0.02
Fourth Quarter 15.20 12.20 0.02 13.23 9.60 0.02
2000
First Quarter $18.13 $11.75 $0.02 $13.69 $10.75 $0.02
Second Quarter 12.38 9.75 0.02 11.75 9.50 0.02
Third Quarter 11.50 9.94 0.02 11.13 9.50 0.02
Fourth Quarter 16.25 11.00 0.02 15.50 10.38 0.02
As of March 15, 2002, the Company had 6,848,467 outstanding shares of
Class A Common Stock held by approximately 674 stockholders and 8,803,810
outstanding shares of Class B Common Stock held by approximately 744
stockholders. The number of stockholders includes stockholders of record and
individual participants in security position listings as furnished to the
Company pursuant to Rule 17Ad-8 under the Exchange Act.
The Company has paid a dividend on its Class A Common Stock since 1967 and
its Class B Common Stock since its initial offering in 1996. The Company's
Articles of Incorporation provide that each share of Class A Common Stock is
entitled to 10 votes and each share of Class B Common Stock is entitled to one
vote. The Articles of Incorporation require that the Class A Common Stock and
the Class B Common Stock receive dividends on a pari passu basis. There can be
no assurance of the Company's ability to continue to pay any dividends on either
class of Common Stock.
The Senior Credit Facility and the Company's 9 1/4% Notes due 2011 each
contain covenants that restrict the ability of the Company to pay dividends on
its capital stock. However, the Company does not believe that such covenants
currently limit its ability to pay dividends at the recent quarterly rate of
$0.02 per share. In addition to the foregoing, the declaration and payment of
dividends on the Class A Common Stock and the Class B Common Stock are subject
to the discretion of the Board of Directors. Any future payments of dividends
will depend on the earnings and financial position of the Company and such other
factors as the Board of Directors deems relevant.
28
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is certain selected historical consolidated financial data
of the Company. This information should be read in conjunction with the
Company's audited consolidated financial statements and related notes thereto
appearing elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2001 2000 1999(1) 1998(2) 1997(3)
--------- --------- --------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenues $ 156,343 $ 171,213 $ 143,953 $128,890 $ 103,548
Operating income(4) 17,880 31,098 22,060 24,927 20,730
Net income (loss) (13,318) (6,212) (6,315) 41,659 (1,402)
Net income (loss) available to common stockholders (13,934) (9,384) (7,325) 36,981 (2,812)
Net income (loss) available to common stockholders per
common share(5):
Basic (0.89) (0.61) (0.57) 3.10 (0.24)
Diluted (0.89) (0.61) (0.57) 2.98 (0.24)
Cash dividends per common share(5) $ 0.08 $ 0.08 $ 0.08 $ 0.06 $ 0.05
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $ 794,337 $ 636,772 $ 658,157 $468,974 $ 345,051
Long-term debt(including current portion) 551,444 374,887 381,702 270,655 227,076
Total stockholders' equity 142,196 $ 155,961 $ 168,188 $126,703 $ 92,295
(1) Reflects the operating results of the Texas Acquisitions, completed
October 1, 1999 and the Goshen Acquisition, completed on March 1, 1999, as
of their respective acquisition dates. See Note B to the Company's audited
consolidated financial statements included elsewhere herein.
(2) Reflects the operating results of the Busse-WALB Transactions as of July
31, 1998, the closing date of the respective transactions.
(3) Reflects the operating results of the WITN Acquisition and the GulfLink
Acquisition, as of their respective acquisition dates, August 1, 1997 and
April 24, 1997, respectively.
(4) Operating income excludes gain on disposition of television stations of
$72.6 million recognized for the exchange of WALB in 1998. Operating
income also excludes charges relating to valuation adjustments of goodwill
and other assets of $2.1 million for the year ended December 31, 1998.
(5) On August 20, 1998, the Company's Board of Directors declared a 50% stock
dividend, payable on September 30, 1998, to stockholders of record of the
Class A Common Stock and Class B Common Stock on September 16, 1998. This
stock dividend effected a three for two stock split. All applicable share
and per share data have been adjusted to give effect to the stock split.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS OF THE COMPANY
Introduction
The following analysis of the financial condition and results of
operations of Gray Communications Systems, Inc. (the "Company") should be read
in conjunction with the Company's audited consolidated financial statements and
notes thereto included elsewhere herein.
As discussed below, the Company has acquired several television stations,
a newspaper and an equity investment in Sarkes Tarzian, Inc. ("Tarzian") since
January 1, 1999. The Company's acquisitions have been accounted for under the
purchase method of accounting. Under the purchase method of accounting, the
results of operations of the acquired businesses are included in the
accompanying consolidated financial statements as of their respective
acquisition dates. The assets and liabilities of acquired businesses are
included based on an allocation of the purchase price. The equity investment in
Tarzian is accounted for under the cost method of accounting.
On October 1, 1999, the Company completed its acquisition of all the
outstanding capital stock of KWTX Broadcasting Company and Brazos Broadcasting
Company, as well as the assets of KXII Broadcasters Ltd. The Company acquired
the capital stock of KWTX Broadcasting Company and Brazos Broadcasting Company
in merger transactions with the shareholders of KWTX Broadcasting Company and
Brazos Broadcasting Company receiving a combination of cash and the Company's
Class B Common Stock for their shares. The Company acquired the assets of KXII
Broadcasters Ltd. in an all cash transaction. These transactions are referred to
herein as the "Texas Acquisitions."
On March 1, 1999, the Company acquired substantially all of the assets of
The Goshen News from News Printing Company, Inc. and affiliates thereof, (the
"Goshen Acquisition").
See Note B of the Notes to the Company's audited consolidated financial
statements included elsewhere herein for more information concerning its Texas
Acquisitions, its Goshen Acquisition and its equity investment in Tarzian.
General
The Company derives its revenues from its television broadcasting,
publishing and paging operations. The operating revenues of the Company's
television stations are derived from broadcast advertising revenues and, to a
much lesser extent, from compensation paid by the networks to the stations for
broadcasting network programming. The operating revenues of the Company's
publishing operations are derived from advertising, circulation and classified
revenue. Paging revenue is derived primarily from the leasing and sale of
pagers. Certain information concerning the relative contributions of the
Company's television broadcasting, publishing and paging operations is provided
in Note I of the Notes to the Company's audited consolidated financial
statements included elsewhere herein.
In the Company's broadcasting operations, broadcast advertising is sold
for placement either preceding or following a television station's network
programming and within local and syndicated programming. Broadcast advertising
is sold in time increments and is priced primarily on the basis of a program's
popularity among the specific audience an advertiser desires to reach, as
measured by Nielsen Media Research ("Nielsen"). In addition, broadcast
advertising rates are affected by the number of advertisers competing for the
available time, the size and demographic makeup of the market served by the
station and the availability of alternative advertising media in the market
area. Broadcast advertising rates are the highest during the most desirable
viewing hours, with corresponding reductions during other
30
hours. The ratings of a local station affiliated with a major network can be
affected by ratings of network programming.
Most broadcast advertising contracts are short-term, and generally run
only for a few weeks. Approximately 59% of the gross revenues of the Company's
television stations for the year ended December 31, 2001, were generated from
local advertising, which is sold primarily by a station's sales staff directly
to local accounts, and the remainder represented primarily by national
advertising, which is sold by a station's national advertising sales
representative. The stations generally pay commissions to advertising agencies
on local, regional and national advertising and the stations also pay
commissions to the national sales representative on national advertising.
Broadcast advertising revenues are generally highest in the second and
fourth quarters each year, due in part to increases in consumer advertising in
the spring and retail advertising in the period leading up to and including the
holiday season. In addition, broadcast advertising revenues are generally higher
during even numbered election years due to spending by political candidates,
which spending typically is heaviest during the fourth quarter.
The Company's publishing operations' advertising contracts are generally
entered into annually and provide for a commitment as to the volume of
advertising to be purchased by an advertiser during the year. The publishing
operations' advertising revenues are primarily generated from local advertising.
As with the broadcasting operations, the publishing operations' revenues are
generally highest in the second and fourt