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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] 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
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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.)
126 N. WASHINGTON ST. 31701
ALBANY, GA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (912) 888-9390
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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
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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
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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 February 23, 1998: CLASS A AND CLASS B COMMON STOCK; NO PAR
VALUE - $139,915,154
The number of shares outstanding of the registrant's classes of common
stock as of February 23, 1998: CLASS A COMMON STOCK; NO PAR VALUE - 4,534,195
SHARES; CLASS B COMMON STOCK, NO PAR VALUE - 3,402,755 SHARES
DOCUMENTS INCORPORATED BY REFERENCE: The registrant's definitive proxy
statement for the annual meeting of shareholders to be filed with the Commission
pursuant to Regulation 14A is incorporated by reference into part III herein.
PART 1
ITEM 1. BUSINESS
AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS
GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY CONSUMMATED
THE GULFLINK ACQUISITION AND THE WITN ACQUISITION (EACH AS HEREINAFTER DEFINED)
ON APRIL 24, 1997 AND AUGUST 1, 1997, RESPECTIVELY. EXCEPT WITH RESPECT TO
HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE
GULFLINK ACQUISITION AND THE WITN ACQUISITION (AS HEREINAFTER DEFINED) ARE
INCLUDED IN THE DESCRIPTION OF THE COMPANY. UNLESS OTHERWISE INDICATED, THE
INFORMATION HEREIN HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR2 SPLIT OF THE
COMPANY'S CLASS A COMMON STOCK, NO PAR VALUE (THE "CLASS A COMMON STOCK"),
EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. 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 1997, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN").
GENERAL
The Company owns eight network-affiliated television stations in
medium-size markets in the southeastern United States (the "Southeast"), six of
which are ranked number one in their respective markets. Five of the stations
are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS"),
and three are affiliated with the NBC Television Network, a division of the
National Broadcasting Company, Incorporated ("NBC"). In connection with the
First American Acquisition (as hereinafter defined) the Company will be required
under current regulations of the Federal Communications Commission (the "FCC")
to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a
discussion of the Company's plans regarding such divestiture, see "Divestiture
Requirements." The Company also owns and operates three daily newspapers, two
weekly, advertising only publications ("shoppers"), and a paging business, all
located in the Southeast.
In 1993 after the acquisition of a large block of the Class A Common Stock
by a new investor, the Company implemented a strategy to foster growth through
strategic acquisitions. Since January 1, 1994, the Company's significant
acquisitions have included six television stations and two newspapers, all
located 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.
In August 1997 the Company acquired WITN-TV ("WITN"), a NBC-affiliate
serving the Greenville-Washington-New Bern, North Carolina market which is
ranked as the 106th largest designated market area ("DMA") in the United States
(the "WITN Acquisition").
In April 1997 the Company acquired (the "GulfLink Acquisition") the stock
of GulfLink Communications, Inc. ("GulfLink") of Baton Rouge, Louisiana. The
GulfLink operations include nine transportable satellite uplink trucks.
In January 1996 the Company acquired (the "Augusta Acquisition") WRDW-TV
("WRDW"), a CBS-affiliate serving Augusta, Georgia ( the "Augusta Business"). In
September 1996, the Company purchased from First American Media, Inc. (the
"First American Acquisition") substantially all of the assets of two
CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee,
Florida-Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a
satellite uplink business and a paging business (collectively, the "First
American Business"). Subsequent to the First American Acquisition, the Company
rebranded WKXT with the call letters WVLT ("WVLT').
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In August 1996 the Company sold the assets of KTVE Inc. ("KTVE") serving
Monroe, Louisiana-El Dorado, Arkansas (the "KTVE Sale") for approximately $9.5
million in cash plus the amount of accounts receivable on the date of the
closing (approximately $829,000).
For the year ended December 31, 1997, on a pro forma basis giving effect
to the WITN Acquisition and the GulfLink Acquisition as if they had occurred on
January 1, 1997, the Company had net revenues, Media Cash Flow (the sum of
broadcast cash flow, publishing cash flow and paging cash flow), operating cash
flow and a net loss of $109.1 million, $40.2 million, $37.7 million and $(2.4)
million, respectively. On a pro forma basis giving effect to the WITN
Acquisitions, the GulfLink Acquisition, the First American Acquisition and
the KTVE Sale, as if they had occurred on January 1, 1996, net revenues and net
loss for the year ended December 31, 1997, increased 0.2% and 136.6%,
respectively, while Media Cash Flow and operating cash flow decreased 2.9% and
1.3%, from the pro forma amounts for the year ended December 31, 1996.
PENDING ACQUISITION
In February 1998 the Company announced that it had signed a definitive
purchase agreement to acquire all of the outstanding capital stock of Busse
Broadcasting Corporation ("Busse"). The purchase price is approximately $112.0
million plus Busse's cash and cash equivalents less Busse's indebtedness
including its 11 5/8% Senior Secured Notes due 2000. Busse owns and operates
three VHF television stations: KOLN-TV, the CBS-affiliate operating on Channel
10 in the Lincoln-Hastings-Kearney, Nebraska television market, and its
satellite station KGIN-TV, the CBS-affiliate operating on Channel 11 serving
Grand Island, Nebraska; and WEAU-TV, the NBC-affiliate operating on Channel 13
serving the Eau Claire-La Crosse, Wisconsin market. The purchase of Busse is
subject to FCC approval, and the acquisition is expected to close on or before
September 1, 1998.
WITN ACQUISITION
On August 1, 1997, the Company completed the WITN Acquisition. The
purchase price for the WITN Acquisition was approximately $41.7 million,
including fees, expenses, and working capital and other adjustments. The Company
funded the costs of this acquisition through borrowings under its senior credit
facility (the "Senior Credit Facility").
THE FIRST AMERICAN ACQUISITION, THE KTVE SALE AND THE FINANCING
On September 30, 1996, the Company completed the First American
Acquisition and acquired WCTV and WVLT, a satellite broadcasting business and a
paging business in the Southeast. The purchase price for the First American
Acquisition was approximately $183.9 million, including fees, expenses, and
working capital and other adjustments.
The Company completed the KTVE Sale, on August 20, 1996. The sales price
included $9.5 million in cash plus the amount of accounts receivable on the date
of closing to the extent collected by the buyer (approximately $829,000). The
Company recognized a pre-tax gain of approximately $5.7 million and estimated
income taxes of approximately $2.8 million.
DIVESTITURE REQUIREMENTS
In connection with the First American Acquisition, the FCC ordered the
Company to divest itself of WALB-TV ("WALB") in Albany, Georgia and WJHG-TV
("WJHG") in Panama City, Florida by March
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31, 1997 to comply with regulations governing common ownership of television
stations with overlapping service areas. The FCC is currently reexamining these
regulations, and if it revises them in accordance with the interim policy it has
adopted, divestiture of WJHG would not be required. Accordingly, the Company
requested and in July 1997 received an extension of the divestiture deadline
with regard to WJHG, conditioned upon the outcome of the rulemaking proceedings.
It can not be determined when the FCC will complete its rulemaking on this
subject. Also in July 1997, the Company obtained FCC approval to transfer
control of WALB to a trust with a view towards the trustee effecting (i) a swap
of WALB's assets for assets of one or more television stations of comparable
value and with comparable broadcast cash flow in a transaction qualifying for
deferred capital gains treatment under the "like-kind exchange" provision of
Section 1031 of the Internal Revenue Code of 1986, or (ii) a sale of such
assets. Under the trust arrangement, the Company relinquished operating control
of the station to a trustee while retaining the economic risks and benefits of
ownership. If the trustee is required to effect a sale of WALB, the Company
would incur a significant gain and related tax liability. The FCC allowed up to
six months for the trustee to file an application seeking the agency's approval
of a swap or sale. This six month period expired in January 1998 without a swap
or sale being executed. The trustee has filed an application requesting a six
month extension to effect a swap or sale. The FCC has not yet ruled on this
extension application.
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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 1997 MARKET REPORT, FOURTH EDITION
NOVEMBER 1997 RATINGS PUBLISHED BY BIA PUBLICATIONS, INC., EXCEPT FOR REVENUES
IN WYMT-TV'S ("WYMT") 18-COUNTY TRADING AREA WHICH IS NOT SEPARATELY REPORTED IN
SUCH BIA PUBLICATIONS, INC.'S REPORT; (II) "IN-MARKET SHARE OF HOUSEHOLDS
VIEWING TELEVISION" REPRESENTS THE PERCENTAGE OF THE STATION'S AUDIENCE AS A
PERCENTAGE OF ALL VIEWING BY HOUSEHOLDS IN THE MARKET FROM 6 A.M. TO 2 A.M.
SUNDAY THROUGH SATURDAY, INCLUDING VIEWING OF NON-COMMERCIAL STATIONS, NATIONAL
CABLE CHANNELS AND OUT-OF-MARKET STATIONS BROADCAST OR CARRIED BY CABLE IN THE
MARKET;(III) "STATION RANK IN DMA" IS BASED ON NIELSEN ESTIMATES FOR NOVEMBER
1997 FOR THE PERIOD FROM 6 A.M. TO 2 A.M. SUNDAY THROUGH SATURDAY; AND (IV)
AVERAGE HOUSEHOLD INCOME, EFFECTIVE BUYING INCOME AND RETAIL BUSINESS SALES
GROWTH PROJECTIONS ARE AS REPORTED IN INVESTING IN TELEVISION 1997 MARKET
REPORT, FOURTH EDITION NOVEMBER 1997 RATINGS AS PUBLISHED BY BIA PUBLICATIONS,
INC. (THE "BIA GUIDE").
Total In-Market
Commercial Station Market Share of
DMA Stations in Rank in Television Revenues in Households
Station Market Rank (1) DMA(2) DMA Households(3) DMA for 1997 Viewing TV
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(IN THOUSANDS)
WVLT Knoxville, TN 64 5 2 441,000 $62,100 24%
WKYT Lexington, KY 67 6 1 403,000 53,300 36
WYMT(4) Hazard, KY 67 N/A 1 175,000 4,800 28
WITN Greenville-Washington-106 4 2 234,000 27,700 29
New Bern, NC
WRDW Augusta, GA 109 4 1 226,000 30,500 38
WCTV Tallahassee,FL- 112 4 1 221,000 22,000 56
Thomasville, GA
WALB (5) Albany, GA 148 4 1 138,000 13,800 77
WJHG(5) Panama City, FL 157 4 1 117,000 10,900 53
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(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 1997
Nielsen estimates.
(2) Includes independent broadcasting stations.
(3) Based upon the approximate number of television households in the DMA as
reported by the November 1997 Nielsen index.
(4) The market area served by WYMT is an 18-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 18-county trading area.
(5) The Company is required to divest WALB and WJHG under current FCC
regulations. For a discussion of the Company's plan, see "Divestiture
Requirements."
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The percentage of the Company's total revenues contributed by the
Company's television broadcasting segment was approximately 69.8%, 69.3% and
62.7% for each of the years ended December 31, 1997, 1996 and 1995,
respectively.
In the following description of each of the Company's stations, all
information set forth below concerning Total Market Revenues, average household
income, projected effective buying income and projected retail business sales
growth has been derived from the BIA Guide.
WVLT, THE CBS-AFFILIATE IN KNOXVILLE, TENNESSEE
WVLT, acquired by the Company in September 1996, began operations in 1988.
Knoxville, Tennessee is the 64th DMA in the United States, with approximately
441,000 television households and a total population of approximately 1.1
million. Total Market Revenues in the Knoxville DMA in 1997 were approximately
$62.1 million, a 2% increase over 1996. According to the BIA Guide, the average
household income in the Knoxville DMA in 1995 was $33,774, with effective buying
income projected to grow at an annual rate of 5.6% through 2000. Retail business
sales growth in the Knoxville DMA is projected by the BIA Guide to average 5.9%
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 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. Area tourist
attractions are the Great Smokey Mountains National Park and Dollywood, a
country-western theme park sponsored by Dolly Parton.
WKYT, THE CBS-AFFILIATE IN LEXINGTON, KENTUCKY
WKYT, acquired by the Company in September 1994, began operations in 1957.
Lexington, Kentucky is the 67th largest DMA in the United States, with
approximately 403,000 television households and a total population of
approximately 1.1 million. Total Market Revenues in the Lexington DMA in 1997
were approximately $53.3 million, a 3% increase over 1996. According to the BIA
Guide, the average household income in the Lexington DMA in 1995 was $32,836,
with effective buying income projected to grow at an annual rate of 5.8% through
2000. Retail business sales growth in the Lexington DMA is projected by the BIA
Guide to average 5.8% 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 40 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., GTE
Corporation, 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 is also
located in Lexington. In
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addition, Lexington is an international center of the equine industry with the
Kentucky Horse Park, a 1,000 acre park that attracts approximately 730,000
visitors annually.
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 18 counties in eastern and
southeastern Kentucky. This trading area is a separate marketing area of the
Lexington, Kentucky DMA with approximately 175,000 television households and a
total population of approximately 460,000. WYMT is the only commercial
television station in this 18-county trading area. Total Market Revenues in the
18-county trading area for the year ended December 31, 1997, were approximately
$4.8 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 broadcast station which can be received
over the air in a large portion of its 18-county trading area and may now be
viewed on 93 cable systems.
The trading area's economy is centered around coal and related industries
and some light manufacturing. In recent years, the coal industry has undergone a
major restructuring due to consolidation in the industry and advances in
technology. Approximately 12,000 manufacturing jobs exist in the Hazard trading
area, most of which are concentrated in the Cumberland Valley area, a Kentucky
Area Development District located in the southern portion of the 18-county
trading area.
WITN, THE NBC-AFFILIATE IN GREENVILLE-WASHINGTON-NEW BERN, NORTH CAROLINA
WITN, acquired by the Company in August 1997, began operations in 1955.
Greenville-Washington-New Bern, North Carolina is the 106th largest DMA in the
United States, with approximately 234,000 television households and a total
population of approximately 673,000. Total Market Revenues in the
Greenville-Washington-New Bern DMA in 1997 were approximately $27.7 million, a
4% increase over 1996. According to the BIA Guide, the average household income
in the Greenville-Washington-New Bern DMA in 1995 was $35,260, with effective
buying income projected to grow at an annual rate of 5.9% through 2000. Retail
business sales growth in the Greenville-Washington-New Bern DMA is projected by
the BIA Guide to average 5.9% annually during the same period. The
Greenville-Washington-New Bern DMA has four licensed commercial television
stations, all of which are affiliated with major networks. The
Greenville-Washington-New Bern DMA also has two public television stations.
MARKET DESCRIPTION. The Greenville-Washington-New Bern 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. The Greenville-Washington-New Bern economy centers
around education, manufacturing, and agriculture. Leading employers in the area
include: East Carolina University, Catalytica Pharmaceuticals, Inc., PCS
Phosphate, Rubber Maid Cleaning Products, Inc., and Weyerhauser Co.
WRDW, THE CBS-AFFILIATE IN AUGUSTA, GEORGIA
WRDW, acquired by the Company in January 1996, began operations in 1954.
Augusta, Georgia is the 109th largest DMA in the United States, with
approximately 226,000 television households and a total
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population of approximately 637,000. Total Market Revenues in the Augusta DMA in
1997 were approximately $30.5 million, a 2% increase over 1996. According to the
BIA Guide, the average household income in the Augusta DMA in 1995 was $32,830,
with effective buying income projected to grow at an annual rate of 3.5% through
2000. Retail business sales growth in the Augusta DMA is projected by the BIA
Guide to average 3.5% annually during the same period. The Augusta DMA has four
licensed commercial television stations, all of which are affiliated with a
major network. The Augusta DMA also has two public television stations.
MARKET DESCRIPTION. The Augusta DMA consists of 19 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 42 years.
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 112th largest DMA in the United
States, with approximately 221,000 television households and a total population
of approximately 619,000. Total Market Revenues in the Tallahassee-Thomasville
DMA in 1997 were approximately $22.0 million, a 3% increase over 1996. According
to the BIA Guide, the average household income in the Tallahassee,
Florida-Thomasville, Georgia DMA in 1995 was $33,687, with effective buying
income projected to grow at an annual rate of 5.2% through 2000. Retail business
sales growth in the Tallahassee, Florida-Thomasville, Georgia DMA is projected
by the BIA Guide to average 5.4% annually during the same period. The
Tallahassee-Thomasville DMA has four licensed commercial television stations,
all 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, Florida A&M University, Tallahassee Community College, Thomas
College and Valdosta State University. Florida State University is the largest
university located in the DMA and its main campus is located within the city of
Tallahassee.
WALB, THE NBC-AFFILIATE IN ALBANY, GEORGIA
WALB was founded by the Company and began operations in 1954. Albany,
Georgia is the 148th largest DMA in the United States with approximately 138,000
television households and a total population of approximately 395,000. Total
Market Revenues in the Albany DMA in 1997 were approximately $13.8 million, a 2%
increase over 1996. According to the BIA Guide, the average household income in
the Albany DMA in 1995 was $28,830, with effective buying income projected to
grow at an annual rate of 4.5% through 2000. Retail business sales growth in the
Albany DMA is projected by the BIA Guide to average 4.5% annually during the
same period. The Albany DMA has four licensed commercial television stations,
three of which are affiliated with networks. The Albany DMA also has one public
television station.
MARKET DESCRIPTION. The Albany DMA, consists of 18 counties in southwest
Georgia. Albany, 170 miles south of Atlanta, is a regional center for
manufacturing, agriculture, education, health care and
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military service. Leading employers in the area include: The Marine Corps
Logistics Base, Phoebe Putney Memorial Hospital, the Proctor & Gamble Company,
Miller Brewing Company, Cooper Tire & Rubber Company, Bob's Candies, Coats and
Clark Inc., Merck & Co., Inc., MacGregor (USA) Inc. and M&M/Mars. Albany State
College and Darton College are also located within this area.
WJHG, THE NBC-AFFILIATE IN PANAMA CITY, FLORIDA
WJHG, acquired by the Company in 1960, began operations in 1953. Panama
City, Florida is the 157th largest DMA in the United States, with approximately
117,000 television households and a total population of approximately 318,000.
Total Market Revenues in the Panama City DMA in 1997 were approximately $10.9
million, a 3% increase over 1996. According to the BIA Guide, the average
household income in the Panama City DMA in 1995 was $33,357, with effective
buying income projected to grow at an annual rate of 5.9% through 2000. Retail
business sales growth in the Panama City DMA is projected by the BIA Guide to
average 5.7% annually during the same period. The Panama City DMA has four
licensed commercial television stations, three of which are affiliated with
major networks. In addition, a CBS signal is provided by a station in Dothan,
Alabama, an adjacent DMA.
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 Navy Coastal Systems Station,
Sallie Mae Servicing Corp., Stone Container Corporation, Arizona Chemical
Corporation and Gulf Coast Community College.
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 The Golf
Channel, USA Network, Turner Cable Network Services, NBC, CBS, ABC, Home Box
Office, MTV, The Children's Miracle Network and many other broadcast and cable
services. In April 1997 the Company acquired GulfLink of Baton Rouge, Louisiana.
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. However, the improvement of UHF transmitters and receivers,
the complete elimination from the marketplace of VHF-only receivers and the
expansion of cable television systems have reduced the VHF signal advantage.
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 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
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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, Inc. ("ABC"), NBC, CBS, and Fox
dominate broadcast television. Additionally, United Paramount Network ("UPN")
and Warner Brothers Network ("WB") have been launched as new television
networks. An affiliate of UPN or WB receives a smaller portion of each day's
programming from its network compared to an affiliate of the four major
networks.
The affiliation of a station with one of the four major networks has a
significant impact on the composition of the station's programming, revenues,
expenses and operations. A typical affiliate of a major network receives the
majority of each day's programming from the network. This programming, along
with cash payments (`network compensation"), is provided to the affiliate by the
network in exchange for a substantial majority of the advertising time sold
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, network 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, which are becoming increasingly
popular with both network affiliates and independents, a national program
distributor may receive advertising time in exchange for the programming it
supplies, with the station paying a reduced 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 UPN or WB must purchase or produce a greater amount
of its 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 has emerged as 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.
10
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 payment 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 NBC affiliation agreements for WALB
and WJHG are renewed automatically every five years unless the station notifies
NBC otherwise. The NBC affiliation agreement with WITN expires on June 30, 2006.
The CBS affiliation agreements for WKYT, WYMT, WRDW, WCTV and WVLT expire on
December 31, 2004, December 31, 2004, March 31, 2005, December 31, 1999, and
December 31, 2004, respectively.
NEWSPAPER PUBLISHING
The Company owns and operates five publications comprising three
newspapers and two shoppers, all located in the Southeast. The percentage of
total company revenues contributed by the newspaper publishing segment was
approximately 23.7%, 28.8% and 37.3% for each of the years ended December 31,
1997, 1996 and 1995, respectively.
THE ALBANY HERALD
The Albany Herald Publishing Company, Inc. ("The Albany Herald"), located
in Albany, Georgia, publishes THE ALBANY HERALD, which is the only
seven-day-a-week newspaper that serves southwest Georgia. The Company converted
THE ALBANY HERALD from an afternoon newspaper to a morning newspaper in 1993 and
over the last five years has improved THE ALBANY HERALD'S graphics and layout,
expanded local news coverage and expanded delivery zones on peak advertising
days. These changes have allowed the Company to increase THE ALBANY HERALD'S
newsstand and subscription prices as well as its advertising rates. The Company
intends to increase selectively the price and advertising rates of THE ALBANY
HERALD in the future.
The Albany Herald also publishes three other weekly editions in Georgia,
THE LEE COUNTY HERALD, THE WORTH COUNTY HERALD, and THE CALHOUN-CLAY HERALD, all
of which provide regional news coverage. Other niche publications include FARM
AND PLANTATION, an agricultural paper; a monthly coupon clipper and an annual
bridal book. The Company introduced these weeklies and other niche product
publications in order to better utilize The Albany Herald's printing presses and
infrastructure (such as sales and advertising). The printing press is
approximately 20 years old and is in good working order. The Albany Herald
cross-merchandises its publications, thereby increasing total revenues with only
a small increase in related expenditures. The Company also seeks to increase THE
ALBANY HERALD'S circulation and revenues through its sponsorship of special
events of local interest.
THE ROCKDALE CITIZEN and the GWINNETT DAILY POST
THE ROCKDALE CITIZEN and the GWINNETT DAILY POST are six-day-a-week
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.
11
The Rockdale Citizen Publishing Company is located in Conyers, Georgia,
the county seat of Rockdale County, which is 19 miles east of downtown Atlanta.
Rockdale County's population is estimated to be approximately 65,000.
The Gwinnett Daily Post, which was purchased by the Company in January
1995, is located north of Atlanta in Gwinnett County, one of the fastest growing
areas in the nation. Since the purchase of the Gwinnett Daily Post, the
frequency of publication has increased from three to six days per week in an
effort to establish a daily newspaper and increase market share.
In 1997, the Gwinnett Daily Post entered into an agreement with
CableVision Communications, Inc. ("Cable Vision"), a local cable provider, that
resulted in a subscription to the GWINNETT DAILY POST being included in the
basic cable package purchased by cable subscribers. As a result, the GWINNETT
DAILY POST'S paid circulation tripled to 49,000 in 1997, and the Company started
a local Gwinnett TV news channel, Gwinnett News and Entertainment Television
("GNET"), which is produced by the Company and broadcast on the local cable
system.
On October 30, 1997, the Gwinnett Daily Post entered into a similar
agreement with Genesis Cable Communications LLC ("Genesis"). Upon the completion
of this alliance on March 1, 1998, paid circulation for the GWINNETT DAILY POST
will be approximately 64,000.
The Company's operating strategy with respect to The Rockdale Citizen
and the Gwinnett Daily Post is to increase circulation by improving the print
quality, increasing the local news content and increasing their promotional
efforts. Additionally, the Gwinnett Daily Post is increasing its circulation
through the cable alliances with Cable Vision and Genesis. The Gwinnett Daily
Post intends to build upon this additional circulation in order to increase
advertising revenues. In 1997, the Company made a capital investment of
approximately $3.9 million to upgrade and expand the newspaper and GNET
production facilities including the installation of a new press at The Rockdale
Citizen.
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 has recently
resulted 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.
PAGERS AND PAGING 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, and Valdosta,
Georgia, in Dothan, Alabama, in Tallahassee, Gainesville, Orlando and Panama
City, Florida and in certain contiguous areas. The population of the paging
business geographic coverage area is approximately 5.9 million. In 1997, the
Company's paging and specialized mobile radio ("SMR") business had approximately
67,000 units in service, representing a penetration rate of approximately 2.5%.
The percentage of total Company revenues contributed by the
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paging segment was approximately 6.5% and 1.9% for each of the years ended
December 31, 1997, and 1996, 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.
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 75% are customer owned
and maintained ("COAM") with the remainder being leased. In recent years, prices
for pagers have fallen considerably, and thus there has been a trend toward
subscriber ownership of pagers, allowing the Company to maintain lower inventory
and fixed asset levels. 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. The Company
purchases the majority of its pagers from two suppliers, INTEK and Motorola,
with Motorola supplying a majority of such pagers. Due to the high demand from
the Company's customers for Motorola pagers, the Company believes that its
ability to offer Motorola pagers is important to its business.
The Company's goal is to increase the number of pagers in service,
revenues and cash flow from operations by implementing a plan that focuses on
improved operating methods and controls and innovative marketing programs. The
Company's paging business has grown in recent years by: (i) increasing the
number of business customers; (ii) expanding its resale program; (iii)
increasing its retail operations, and (iv) increasing the Company's geographical
coverage.
INDUSTRY BACKGROUND
Paging is a method of wireless communication which uses an assigned radio
frequency to contact a paging subscriber within a designated service area. A
subscriber carries a pager which receives messages by the broadcast of a radio
signal. To contact a subscriber, a message is usually sent by placing a
telephone call to the subscriber's designated telephone number. The telephone
call is received by an electronic paging switch which generates a signal that is
sent to radio transmitters in the subscriber's service area. The transmitters
broadcast a coded signal that is unique to the pager carried by the subscriber
and alerts the subscriber through a tone or vibration that there is a voice,
numeric, alphanumeric or other message. Depending upon the topography of the
service area, the operating radius of a radio transmitter typically ranges from
three to 20 miles.
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 Company believes that the
paging industry is undergoing consolidation.
13
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 K 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 on the basis of 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 with which each station is affiliated. 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 self-produced news, public
affairs and other entertainment programming, including news and syndicated
programs purchased for cash, cash and barter, or barter only.
Independent stations, whose number has increased significantly over the
past decade, have also emerged as viable competitors for television viewership
shares. In addition, UPN and WB have been launched recently as new television
networks. The Company is unable to predict the effect, if any, that such
networks will have on the future results of the Company's operations.
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. Historically, cable operators
have not sought to compete with broadcast stations for a share of the local news
audience. Recently, however, certain cable operators do compete for such
audiences and the increased competition could have an adverse effect on the
Company's advertising revenues.
Other sources of competition include home entertainment systems, "wireless
cable" services, satellite master antenna television systems, low power
television stations, television translator stations and direct broadcast
satellite ("DBS") video distribution services.
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). Cable systems
generally do not compete
14
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. Competition exists for exclusive news stories and
features as well.
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 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 and television, 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 also seeks
to establish its publications as the local newspaper by sponsoring special
events of particular community interest.
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 high-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. Some of the Company's competitors have
greater financial and other resources than the Company.
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. However, future technological
developments in the wireless communications industry and enhancements of current
technology could create new products and services, such as personal
communications services and mobile satellite services, which are competitive
with the paging services currently offered by the Company. Recent and proposed
regulatory changes by the FCC are aimed at encouraging such technological
developments and 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.
15
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 WALB, WJHG, WITN,
WKYT, WYMT, WRDW, WCTV and WVLT are effective until April 1, 2005, February 1,
2005, December 1, 2004, August 1, 2005, August 1, 2005, April 1, 2005, April 1,
2005 and August 1, 2005, respectively. 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
or competing applications 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 radio and television 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.
On a local basis, FCC rules currently allow an individual or entity to
have an attributable interest in only one television station in a market. In
addition, FCC rules and the Telecommunications Act generally prohibit an
individual or entity from having an attributable interest in a television
station and a radio station, daily newspaper or cable television system that is
located in the same local market area served by the television station.
Proposals currently before the FCC could substantially alter these standards.
For example, in a pending rulemaking proceeding, the FCC suggested narrowing the
geographic scope of the local television cross-ownership rule (the so-called
"duopoly rule") from Grade B to Grade A contours for stations in adjacent
markets and possibly permitting some two-station combinations within certain
markets. The FCC has also proposed eliminating the TV-radio cross-ownership
restriction (the so-called
16
"one-to-a-market" rule) entirely or at least exempting larger markets. In
addition, the FCC is seeking comment on issues of control and attribution with
respect to local marketing agreements entered into by television stations. It is
unlikely that this rulemaking will be concluded until late 1998 or later, and
there can be no assurance that any of these rules will be changed or what will
be the effect of any such change.
The Telecommunications Act also directs the FCC to extend its
one-to-a-market (TV-Radio) waiver policy from the top 25 to any of the top 50
markets. In addition, the Telecommunications Act directs the FCC to permit a
television station to affiliate with two or more networks unless such dual or
multiple networks are composed of (i) two or more of the four existing networks
(ABC, CBS, NBC, or FOX) or, (ii) any of the four existing networks and one of
the two emerging networks (UPN or WBN). The Company believes that Congress does
not intend for these limitations to apply if such networks are not operated
simultaneously, or if there is no substantial overlap in the territory served by
the group of stations comprising each of such networks. The Telecommunications
Act also directs the FCC to revise its rules to permit cross-ownership interests
between a broadcast network and cable system. The Telecommunications Act further
authorizes the FCC to consider revising its rules to permit common ownership of
co-located broadcast stations and cable systems.
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 and
stockholders who own five percent 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 10%
of the voting power of the outstanding common stock before attribution occurs.
Under current FCC regulations, debt instruments, non-voting stock, certain
limited partnership interests (provided the licensee certifies that the limited
partners are not "materially involved" in the management and operation of the
subject media property) and voting stock held by minority stockholders in cases
in which there is a single majority stockholder generally are not subject to
attribution. The FCC's cross-interest policy, which precludes an individual or
entity from having a "meaningful" (even though not "attributable") interest in
one media property and an "attributable" interest in a broadcast cable or
newspaper property in the same area, may be invoked in certain circumstances to
reach interests not expressly covered by the multiple ownership rules.
In January 1995, the FCC released a Notice of Proposed Rule Making
("NPRM") designed to permit a "thorough review of [its] broadcast media
attribution rules." Among the issues on which comment was sought are (i) whether
to change the voting stock attribution benchmarks from five percent to 10% and,
for passive investors, from 10% to 20%; (ii) whether there are any circumstances
in which non-voting stock interests, which are currently considered
non-attributable, should be considered attributable; (iii) whether the FCC
should eliminate its single majority shareholder exception (pursuant to which
voting interests in excess of five percent are not considered cognizable if a
single majority shareholder owns more than 50% of the voting power); (iv)
whether to relax insulation standards for business development companies and
other widely-held limited partnerships; (v) how to treat limited liability
companies and other new business forms for attribution purposes; (vi) whether to
eliminate or codify the cross-interest policy; and, (vii) whether to adopt a new
policy which would consider whether multiple "cross interests" or other
significant business relationships (such as time brokerage agreements, debt
relationships or
17
holdings of nonattributable interests), which individually do not raise
concerns, raise issues with respect to diversity and competition. At this time,
the Company is unable to predict when this inquiry will be completed and there
can be no assurance that any of these standards will be changed. Should the
attribution rules be changed, the Company is unable to predict what, if any,
effect it would have on the Company or its activities. To the best of the
Company's knowledge, no officer, director or five percent stockholder of the
Company currently holds an 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, the license renewal process (particularly the weight to be given to the
expectancy of renewal for an incumbent broadcast licensee and the criteria to be
applied in deciding contested renewal applications), spectrum use fees,
political advertising rates, potential advertising restrictions on the
advertising of certain products (beer and wine, for example), the rules and
policies to be applied in enforcing the FCC's equal employment opportunity
regulations, reinstitution of the Fairness Doctrine (which requires broadcasters
airing programming concerning controversial issues of public importance to
afford a reasonable opportunity for the expression of contrasting viewpoints),
and the standards to govern evaluation of television programming directed toward
children and violent and indecent programming (including the possible
requirement of what is commonly referred to as the "v-chip," which would permit
parents to program television sets so that certain programming would not be
accessible by children). 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.
The FCC presently is seeking comment on its policies designed to increase
minority ownership of mass media facilities. Congress also recently enacted
legislation that eliminated the minority tax certificate program of the FCC,
which gave favorable tax treatment to entities selling broadcast stations to
entities controlled by an ethnic minority. In addition, a recent Supreme Court
decision has cast doubt upon the continued validity of many of the congressional
programs designed to increase minority ownership of mass media facilities.
18
DISTRIBUTION OF VIDEO SERVICES BY TELEPHONE COMPANIES. Recent actions by
the FCC, Congress and the courts all presage significant future involvement in
the provision of video services by telephone companies. The Company cannot
predict either the timing or the extent of such involvement.
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 began implementing the requirements of the 1992 Cable Act in 1993
and final implementation proceedings remain pending regarding certain of the
rules and regulations previously adopted. 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 "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 others the Company's
stations have entered into retransmission consent agreements. This election
entitled the Company's stations to carriage on those systems until at least
December 31, 1999.
ADVANCE TELEVISION SERVICE. The FCC has proposed the adoption of rules
for implementing advanced television ("ATV") service in the United States.
Implementation of digital ATV will improve the technical quality of television
signals receivable by viewers and will provide broadcasters the flexibility to
offer new services, including high-definition television ("HDTV"), simultaneous
broadcasting of multiple programs of standard definition television ("SDTV") and
data broadcasting.
The FCC must adopt ATV service rules and a table of ATV allotments before
broadcasters can provide these services enabled by the new technology. On July
28, 1995, the FCC announced the issuance of a NPRM to invite comment on a broad
range of issues related to the implementation of ATV, particularly the
transition to digital broadcasting. The FCC announced that the anticipated role
of digital broadcasting will cause it to revisit certain decisions made in an
earlier order. The FCC also announced that broadcasters will be allowed greater
flexibility in responding to market demand by transmitting a mix of HDTV, SDTV
and perhaps other services. In February 1998, the FCC acted on numerous
petitions for
19
reconsideration and issued a new table of allotments that expands the channels
(2-51) available for permanent digital broadcasting operations.
The Telecommunications Act directs the FCC, if it issues licenses for ATV,
to limit the initial eligibility for such licenses to incumbent broadcast
licensees. It also authorizes the FCC to adopt regulations that would permit
broadcasters to use such spectrum for ancillary or supplementary services. It is
expected that the FCC will assign all existing television licensees a second
channel on which to provide ATV simultaneously with their current NTSC service.
It is possible after a period of years that broadcasters would be required to
cease NTSC operations, return the NTSC channel to the FCC, and broadcast only
with the newer digital technology. Some members of Congress have advocated
authorizing the FCC to auction either NTSC or ATV channels; however, the
Telecommunications Act allows the FCC to determine when such licenses will be
returned and how to allocate returned spectrum.
Under certain circumstances, conversion to ATV operations would reduce a
station's geographical coverage area but the majority of stations will obtain
service areas that match or exceed the limits of existing operations. Due to
additional equipment costs, implementation of ATV will impose some near-term
financial burdens on television stations providing the service. At the same
time, there is a potential for increased revenues to be derived from ATV.
Although the Company believes the FCC will authorize ATV in the United States,
the Company cannot predict precisely when or under what conditions such
authorization might be given, when NTSC operations must cease, or the overall
effect the transition to ATV might have on the Company's business.
DIRECT BROADCASTING SATELLITE SYSTEMS. The FCC has authorized DBS, a
service which provides video programming via satellite directly to home
subscribers. Local broadcast stations and broadcast network programming are not
carried on DBS systems. Proposals recently advanced in the Telecommunications
Act include a prohibition on restrictions that inhibit a viewer's ability to
receive video programming through DBS services. The FCC has exclusive
jurisdiction over the regulation of DBS service. The Company cannot predict the
impact of this new service upon the Company's business or the impact of possible
legislation on the growth of DBS service.
PAGING
FEDERAL REGULATION. The Company's paging operations, including its SMR
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 and SMR
operations. Licenses issued by the FCC to the Company set forth the technical
parameters, such as signal strength and tower height, under which the Company is
authorized to use those frequencies.
LICENSE GRANT AND RENEWAL. The FCC 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 and SMR operations. The license
expiration dates for these licenses are staggered, with only a portion of the
licenses expiring in any particular calendar year. The largest group of licenses
will expire during calendar year 1999. Licensees in the paging and SMR 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 have ever been
revoked or modified involuntarily, and such proceedings by the FCC are rarely
undertaken.
20
The FCC has enacted regulations regarding auctions for the award of
radio licenses. Pursuant to such rules, the FCC may, at any time, require
auctions for new or existing services prior to the award of any license, and has
done so in the 800 and 900 MHz SMR service band widths. Accordingly, there can
be no assurance that the Company will be able to procure additional frequencies,
or expand existing paging and SMR networks into new service areas.
In March 1994, the FCC adopted rules pursuant to which the FCC auctions
licenses for blocks of spectrum on a "market area basis." The winner of the
license is given the right to use a certain frequency or group of frequencies
throughout a defined geographic area and can construct and operate its
transmitters throughout this market area without FCC licensing of individual
stations. Existing users of the designated frequencies will be protected from
interference. The FCC has completed auctions to license various radio services
on a market area basis including the first phase of the 800 MHz trunked SMR
auction, which concluded in December 1997. In these auctions, successful bidders
have made significant auction payments in order to obtain spectrum. In the SMR
auction which just closed, the Company was the high bidder for the Tallahassee
and Panama City, Florida; Albany, Valdosta and Tifton, Georgia; and Columbus,
Georgia and Auburn, Alabama markets. The Company filed its long-form auction
application on December 23, 1997, and is not aware of any protests. The time
period for filing protests against the pending application has expired.
Once the Company's application for its licenses is granted, the Company
will be required to meet certain coverage bench marks in order to retain its
licenses. The Company believes that it will be able to build out the markets won
at the auction to meet these bench marks.
With respect to its paging operations, the Company may chose to
participate in the market area licensing auctions for the paging services. The
first such auction, for the 900 MHz paging band is tentatively scheduled for the
third quarter of calendar year 1998. The lower paging bands, e.g., the exclusive
150 Mhz frequencies on which the Company is licensed, are likely to be the
subject of market area licensing auctions in calendar year 1999. There is no
assurance that the Company will be able to successfully bid on its existing
frequencies; however, users of the designated frequencies will be protected from
interference.
EMPLOYEES
As of February 23, 1998, the Company had 1,020 full-time employees, of
which 671 were employees of the Company's stations, 290 were employees of the
Company's publications, 49 were employees of the Company's paging operations and
10 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.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT
This annual report on Form 10-K contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. When
used in this report, the words "believes," "expects," "anticipates," "estimates"
and similar words and expressions are generally intended to identify
forward-looking statements. Statements that describe the Company's future
strategic plans, goals, or objectives are also forward-looking statements.
Readers of this report are cautioned that any forward-looking statements,
including those regarding the intent, belief or current expectations of the
Company or management, are not guarantees of future performance, results or
events and involve risks and uncertainties, and that actual results and events
may differ materially from those in the forward-looking statements as a result
of various factors including, but not limited to, (i) general economic
conditions in
21
the markets in which the Company operates, (ii) competitive pressures in the
markets in which the Company operates, (iii) the effect of future legislation or
regulatory changes on the Company's operations and (iv) other factors described
from time to time in the Company's filings with the Securities and Exchange
Commission. The forward-looking statements included in this report are made only
as of the date hereof. The Company undertakes no obligation to update such
forward-looking statements to reflect subsequent events or circumstances.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 126 North
Washington Street, Albany, Georgia.
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. The types of properties
required to support newspaper publishing include offices, facilities for the
printing press and production and storage. 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 following table sets forth certain information regarding the Company's
properties.
TELEVISION BROADCASTING
Station/Approximate Owned or
Property Location Use Leased Approximate Size Expiration of Lease
- ---------------------------------------------------------------------------------------------------------------------
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 building and
improvements Owned 1,248 sq. ft. --
WRDW
North Augusta, SC Office and studio Owned 17,000 sq. ft. --
Transmission tower site Owned 143 acres --
WALB
Albany, GA Office and studio Owned 13,700 sq. ft. --
Transmission tower site Owned 23 acres --
WJHG
Panama City, FL Office and studio Owned 14,000 sq. ft. --
Youngstown, FL Transmission tower site Owned 17 acres --
- -----------------------------------------------------------------------------------------------------------------------
22
TELEVISION BROADCASTING (CONTINUED)
Station/Approximate Owned or
Property Location Use Leased Approximate Size Expiration of Lease
- ---------------------------------------------------------------------------------------------------------------------
WVLT
Knoxville, TN Office and studio Owned 18,000 sq. ft. --
Transmission tower site Leased Tower space Dec. 1998
WCTV
Tallahassee, FL Office and studio Leased 21,000 sq. ft. of Dec. 2014
buildings on 37 acres
Metcalf, GA Transmission tower site Leased 182 acres Nov. 1999
WITN
Washington, NC Office and studio Owned 19,600 sq. ft. --
Grifton, NC Transmitter building Owned 4,190 sq. ft. --
Grifton, NC Transmission tower site Leased 9 acres Jan. 1999
Lynqx Communications
Baton Rouge, LA Office and repair site Leased 6,800 sq. ft. Dec. 1999
Tallahassee, FL Office Owned 1,000 sq. ft. --
- -----------------------------------------------------------------------------------------------------------------------
PUBLISHING
Owned or
Company/Property Location Use Leased Approximate Size Expiration of Lease
- -----------------------------------------------------------------------------------------------------------------------
The Albany Herald
Publishing Company,
Inc.
Albany, GA Offices, printing press and Owned 83,000 sq. ft. --
production facility for The
Albany Herald Publishing
Company, Inc.
The Rockdale Citizen
Publishing Company
Conyers, GA Offices for THE ROCKDALE Owned 20,000 sq. ft. --
CITIZEN
Conyers, GA Offices, printing press and Leased 20,000 sq. ft. May 2002
production facility for THE
ROCKDALE CITIZEN and the
GWINNETT DAILY POST
Lawrenceville, GA Offices and production Leased 11,000 sq. ft. Nov 1999
facilities of the GWINNETT
DAILY POST
The Southwest Georgia Offices Owned 5,500 sq. ft. --
Shoppers, Inc.
Tallahassee, FL
23
PAGING
Owned or
Property Location Use Leased Approximate Size Expiration of Lease
- -----------------------------------------------------------------------------------------------------------------------
Albany, GA Sales Office Leased 800 sq. ft. May 2000
Columbus, GA Sales Office Leased 1,000 sq. ft. July 1998
Dothan, AL Sales Office Leased 800 sq. ft. Feb. 2000
Macon, GA Sales Office Leased 1,260 sq. ft. July 1998
Tallahassee, FL Sales Office Leased 1,800 sq. ft. Sept. 2000
Tallahassee, FL General and Administrative Leased 2,400 sq. ft. March 2002
Office
Thomasville, GA Sales Office Leased 300 sq. ft. May 2000
Valdosta, GA Sales Office Leased 400 sq. ft. Sept. 2000
Panama City, FL Sales Office Leased 1,050 sq. ft. Jan. 2000
Gainsville, FL Sales Office Leased 800 sq. ft. Oct. 2000
Central, FL (1) Various Sales Offices (1) Leased (1) (1)
(1) The paging operations have five sales office locations in the Central
Florida region. These offices are leased and average approximately 600 sq.
ft. Three of the leases are month to month with the remaining two leases
expiring in April and October 1999.
The paging operations also lease space on various towers in Florida,
Georgia and Alabama. These tower leases have expiration dates ranging from 1998
to 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is not 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.
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.
24
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the executive
officers of the Company:
J. Mack Robinson, age 74, has been President and Chief Executive Officer,
of the Company since September 1996. Mr. Robinson has been Chairman of the Board
of Bull Run Corporation since March 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.
Robert S. Prather, age 53, has been Executive Vice President-Acquisitions
of the Company since September 1996. He has been President and Chief Executive
Officer of Bull Run Corporation since July 1992.
Robert A. Beizer, age 58, has been Vice President for Law and Development
and Secretary of the Company since February 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 at the law firm of Sidley & Austin and was head of its communications
practice group in Washington, D.C. He is a past president of the Federal
Communications Bar Association and a member of the ABA House of Delegates.
Joseph A. Carriere, age 65, has been Vice President-Television of the
Company since September 1996. Prior to that appointment, he served as Vice
President-Corporate Sales from February 1996. He has been President and General
Manager of WVLT-TV, Inc., a subsidiary of the Company, since September 1996.
From November 1994 until his appointment as Vice President-Corporate Sales, he
served as President and General Manager of KTVE Inc., a subsidiary of the
Company. Prior to joining the Company in 1994, Mr. Carriere was employed by
Withers Broadcasting Company of Colorado as General Manager from 1991 to 1994.
He has served as a past chairman of the CBS Affiliates Advisory Board and as a
member of the Television Board of Directors of the National Association of
Broadcasters.
William A. Fielder, III, age 39, had been Vice President and Chief
Financial Officer of the Company since August 1993. Prior to this position, he
served as Controller of the Company from April 1991 to August 1993. Effective
March 9, 1998, Mr. Fielder resigned to accept a position with a software
company.
Thomas J. Stultz, age 46, has been Vice President of the Company and
President of the Company's publishing division since February 1996. Prior to
joining the Company, he was employed by Multimedia Newspaper Company, where he
served as Vice President from 1988 to 1995.
25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since June 30, 1995, the Company's 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 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 B Common Stock are as reported by the NYSE since the date of
its initial issuance.
CLASS A COMMON STOCK CLASS B COMMON STOCK
------------------------------------------------------------------------------------
CASH CASH
DIVIDENDS DIVIDENDS
DECLARED PER DECLARED
HIGH LOW SHARE HIGH LOW PER SHARE
-------------------------------------------------------- ------------- -------------
FISCAL 1996
First Quarter $20.38 $15.75 $0.02 --- --- ---
Second Quarter 23.25 18.75 0.02 --- --- ---
Third Quarter 23.13 20.25 0.02 $20.50 $18.00 ---
Fourth Quarter 21.25 17.50 0.02 19.50 14.88 $0.02
FISCAL 1997
First Quarter $20.75 $17.63 $0.02 $19.50 $16.38 $0.02
Second Quarter 22.43 16.75 0.02 20.88 15.38 0.02
Third Quarter 25.63 20.31 0.02 25.50 18.88 0.02
Fourth Quarter 27.88 25.00 0.02 26.13 24.06 0.02
As of February 23, 1998, the Company had 4,534,195 outstanding shares of
Class A Common Stock held by 1,209 shareholders and 3,402,755 outstanding shares
of Class B Common Stock held by 825 shareholders. The number of shareholders
includes shareholders 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. In
1996 the Company amended its Articles of Incorporation to 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, as amended,
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 Senior Subordinated Notes due
2006 (the "Notes") 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 convenants 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.
26
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are certain selected historical consolidated financial
data of the Company. This information should be read in conjunction with the
Audited Consolidated Financial Statements of the Company and related notes
thereto appearing elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Results of Operations of the
Company." The selected consolidated financial data for, and as of the end of,
each of the years in the five-year period ended December 31, 1997, are derived
from the Audited Consolidated Financial Statements of the Company and its
subsidiaries. Also see pro forma data for the WITN Acquisition, the GulfLink
Acquisition, the First American Acquisition and the Augusta Acquisition in Note
C and the KTVE Sale in Note B to the Company's Audited Consolidated Financial
Statements included elsewhere herein.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997(1) 1996 (2) 1995 (3) 1994 (3) 1993
------------- ------------ -------------------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENTS OF INCOME DATA
Revenues $ 103,548 $ 79,305 $58,616 $36,518 $25,113
Operating Income 20,730 16,079 6,860 6,276 3,531
Income (loss) from continuing operations (1,402) 5,678 931 2,766 1,680
Income (loss) from continuing operations
available to common stockholders (2,812) 5,302 931 2,766 1,680
Income (loss) from continuing operations
available to common stockholders
per common share (4):
Basic (0.36) 0.98 0.21 0.59 0.36
Diluted (0.36) 0.94 0.21 0.59 0.36
Cash dividends per common share (4) $ 0.08 $ 0.08 $ 0.08 $ 0.07 $ 0.07
BALANCE SHEET DATA (AT END OF PERIOD):
Total Assets $ 345,051 $298,664 $78,240 $68,789 $21,372
Long-term Debt $ 227,076 $173,368 $54,324 $52,940 $ 7,759
- ---------------------------------------------------
(1) The financial data reflects the operating results of the WITN Acquisition
and the GulfLink Acquisition, which were completed in 1997, as of their
respective acquisition dates. See Note C to the Company's Audited
Consolidated Financial Statements included elsewhere herein.
(2) The financial data reflects the operating results of the Augusta
Acquisition and the First American Acquisition, as well as the KTVE Sale,
all of which were completed in 1996, as of their respective acquisition,
or disposition, dates. The Company also incurred an extraordinary charge
in connection with the early extinguishment of debt. See Notes B, C and D
to the Company's Audited Consolidated Financial Statements included
elsewhere herein.
(3) The financial data reflects the operating results of various acquisitions
completed in 1994 and 1995 as of their respective acquisition dates. See
Note C of the Company's Audited Consolidated Financial Statements included
elsewhere herein.
(4) On August 17, 1995, the Company's Board of Directors authorized a 50%
stock dividend on the Company's Class A Common Stock payable October 2,
1995 to stockholders of record on September 8, 1995 to effect a three for
two stock split. All applicable share and per share data have been
adjusted to give effect to the stock split.
27
THESE SUMMARIES SHOULD BE READ IN CONJUNCTION WITH THE RELATED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED UNDER ITEM 8.
28
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.
The Company derives its revenues from its television broadcasting,
publishing and paging operations. On February 13, 1998, the Company signed a
definitive purchase agreement to acquire all of the outstanding capital stock of
Busse Broadcasting Corporation ("Busse"). Busse owns and operates three VHF
television stations: KOLN-TV, the CBS affiliate operating on Channel 10 in the
Lincoln-Hastings-Kearney, Nebraska television market, and its satellite station
KGIN-TV, the CBS affiliate operating on Channel 11 serving Grand Island,
Nebraska; and WEAU-TV, the NBC affiliate operating on Channel 13 serving the Eau
Claire-La Crosse, Wisconsin market. The purchase of Busse is subject to FCC
approval; however, the parties expect to close the transaction on or before
September 1, 1998.
On August 1, 1997 the Company purchased substantially all of the assets
of WITN-TV ("WITN"), the NBC affiliate in the Greenville-Washington-New Bern,
North Carolina market (the "WITN Acquisition"). On April 24, 1997, the Company
purchased GulfLink Communications, Inc. (the "GulfLink Acquisition"), which is
in the transportable satellite uplink business, a business in which the Company
was already engaged.
In September 1996, the Company acquired substantially all of the assets
of WKXT-TV ("WKXT"), WCTV-TV ("WCTV"), a satellite uplink and production
services business and a communications and paging business (the "First American
Acquisition"). Subsequent to the First American Acquisition, the Company
rebranded WKXT with the call letters WVLT ("WVLT") as a component of its
strategy to promote the station's upgraded news product. On January 4, 1996, the
Company purchased substantially all of the assets of WRDW-TV (the "Augusta
Acquisition"). The First American Acquisition and the Augusta Acquisition are
collectively referred to as the "1996 Broadcasting Acquisitions." As a result of
these acquisitions, the proportion of the Company's revenues derived from
television broadcasting has increased significantly. The Company anticipates
that the proportion of the Company's revenues derived from television
broadcasting will increase further as a result of the announced acquisition of
Busse, and the completed acquisitions of WITN and GulfLink Communications, Inc.
As a result of the higher operating margins associated with the Company's
television broadcasting operations, the profit contribution of these operations
as a percentage of revenues, has exceeded, and is expected to continue to
exceed, the profit contributions of the Company's publishing and paging
operations. Set forth below, for the periods indicated, is certain information
concerning the relative contributions of the Company's television broadcasting,
publishing and paging operations.
29
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------- -------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------------- ------------------------------------ ------------- -----------
(DOLLARS IN THOUSANDS)
BROADCASTING
Revenues $72,300 69.8% $54,981 69.3% $36,750 62.7%
Operating income(1) 19,309 82.9% 16,989 84.0% 10,585 94.1%
PUBLISHING
Revenues $24,536 23.7% $22,845 28.8% $21,866 37.3%
Operating income(1) 2,810 12.1% 3,167 15.7% 660 5.9%
PAGING
Revenues $ 6,711 6.5% $ 1,479 1.9% $ -0- -0-%
Operating income(1) 1,181 5.0% 71 0.3% -0- -0-%
- ------------------------
(1) Represents income before miscellaneous income (expense), allocation of
corporate overhead, interest expense, income taxes and extraordinary
charge.
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.
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 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 56% of the gross revenues of the Company's
television stations for the year ended December 31, 1997, 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
30
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 fourth quarters of each year.
The Company's paging subscribers either own pagers, thereby paying solely
for the use of the Company's paging services, or lease pagers, thereby paying a
periodic charge for both the pagers and the paging services. The terms of the
lease contracts are month-to-month, three months, six months or twelve months in
duration. Paging revenues are generally equally distributed throughout the year.
The broadcasting operations' primary operating expenses are employee
compensation, related benefits and programming costs. The publishing operations'
primary operating expenses are employee compensation, related benefits and
newsprint costs. The paging operations' primary operating expenses are employee
compensation and telephone and other communications costs. In addition, the
broadcasting, publishing and paging operations incur overhead expenses, such as
maintenance, supplies, insurance, rent and utilities. A large portion of the
operating expenses of the broadcasting, publishing and paging operations is
fixed, although the Company has experienced significant variability in its
newsprint costs in recent years.
The following table sets forth certain operating data for the broadcast,
publishing and paging operations for the years ended December 31, 1997, 1996 and
1995.
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
------------------------------ ---------------
(IN THOUSANDS)
Operating income $20,730 $16,079 $ 6,860
Add:
Amortization of program license rights 3,501 2,743 1,647
Depreciation and amortization 14,519 7,663 3,959
Corporate overhead 2,528 3,219 2,258
Non-cash compensation and contribution
to 401(k) plan, paid in Common Stock 412 1,125 2,612
Less:
Payments for program license liabilities (3,629) (2,877) (1,777)
------ ------ -------
Media cash flow (1) $38,061 $27,952 $15,559
======= ======= =======
- ----------------------
(1) Of media cash flow, $30.5 million, $22.6 million and $13.6 million was
attributable to the Company's broadcasting operations in 1997, 1996, and
1995, respectively; $4.9 million, $5.0 million and $2.0 million was
attributable to the Company's publishing operations in 1997, 1996 and
1995, respectively; and $2.7 million, $401,000 and $-0- was attributable
to the Company's paging operations in 1997, 1996 and 1995, respectively.
"MEDIA CASH FLOW" IS DEFINED AS OPERATING INCOME, PLUS DEPRECIATION AND
AMORTIZATION (INCLUDING AMORTIZATION OF PROGRAM LICENSE RIGHTS), NON-CASH
COMPENSATION AND CORPORATE OVERHEAD, LESS PAYMENTS FOR PROGRAM LICENSE
LIABILITIES. THE COMPANY HAS INCLUDED MEDIA CASH FLOW DATA BECAUSE SUCH DATA ARE
COMMONLY USED AS A MEASURE OF PERFORMANCE FOR MEDIA COMPANIES AND ARE ALSO USED
BY INVESTORS TO MEASURE A COMPANY'S ABILITY TO SERVICE DEBT. MEDIA CASH FLOW IS
NOT, AND SHOULD NOT BE USED AS, AN
31
INDICATOR OR ALTERNATIVE TO OPERATING INCOME, NET INCOME OR CASH FLOW AS
REFLECTED IN THE COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS, AND IS NOT
A MEASURE OF FINANCIAL PERFORMANCE UNDER GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND SHOULD NOT BE CONSIDERED IN ISOLATION OR AS A SUBSTITUTE FOR
MEASURES OF PERFORMANCE PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES.
Since 1995, the Company has completed several broadcasting and publishing
acquisitions and a broadcasting disposition. The financial results of the
Company reflect significant increases between the years ended December 31, 1997,
December 31, 1996 and December 31, 1995, in substantially all line items. The
principal reason for these increases was the completion by the Company of the
WITN Acquisition (August 1997), the First American Acquisition (September 1996)
and the Augusta Acquisition (January 1996). The purchase prices for the WITN
Acquisition, the First American Acquisition and the Augusta Acquisition were
approximately $41.7 million, $183.9 million and $37.2 million, respectively. The
Company sold the assets of KTVE Inc. (the "KTVE Sale"), its NBC-affiliated
television station, in Monroe, Louisiana-El Dorado, Arkansas on August 20, 1996.
The sales price included $9.5 million in cash plus the amount of the accounts
receivable (approximately $829,000).
In addition, during 1995 the Company acquired the GWINNETT DAILY POST for
approximately $3.7 million (January 1995) and three area weekly advertising only
direct mail publications ("Shoppers") for an aggregate purchase price of
approximately $1.4 million (September 1995) (the "1995 Publishing
Acquisitions").
CASH FLOW PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCING ACTIVITIES
The following table sets forth certain cash flow data for the Company
for the years ended December 31, 1997, 1996 and 1995.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
(IN THOUSANDS)
Cash flows provided by (used in)
Operating activities $ 9,744 $ 12,092 $ 7,600
Investing activities (57,498) (205,068) (8,929)
Financing activities 49,071 193,467 1,331
32
BROADCASTING, PUBLISHING AND PAGING REVENUES
Set forth below are the principal types of broadcasting, publishing and
paging revenues earned by the Company's television stations, publishing and
paging operations for the periods indicated and the percentage contribution of
each of the Company's total broadcasting, publishing and paging revenues,
respectively:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------- -------------------------
AMOUNT % AMOUNT % AMOUNT %
------------- ------------------------- ---------- ------------- -----------
(DOLLARS IN THOUSANDS)