Filed with the SEC from Apr 10 to Apr 16:
Media General (MEG) Funds managed by Mario Gabelli's Gamco Investors (ticker: GBL) will support a slate of directors nominated in March by dissident shareholder Harbinger Capital Partners at next week's annual meeting. The nominees include former broadcasting executive J. Daniel Sullivan, investment manager F. Jack Liebau Jr. and turnaround consultant Eugene I. Davis. MEG hosts its annual meeting April 24, It has proposed its own slate for the nine-member board and called Harbinger's nominees "not well-qualified." The Gabelli group holds 4,994,347 shares (22.39%).
Media General, Inc., is an independent, publicly owned communications company situated primarily in the Southeast with interests in newspapers, television stations, and interactive media. The Company employs approximately 6,900 people on a full or part-time basis. The Companyâ€™s businesses are somewhat seasonal; the second and fourth quarters are typically stronger than the first and third quarters.
The Company owns 25 daily newspapers and more than 150 other publications, as well as 23 television stations. The Company also operates more than 75 online enterprises. The Company has placed significant emphasis on convergence. Convergence combines the unique strengths of newspapers, television, and the Internet to enable the Company to better gather and present news and information to its readers, viewers, and users and on behalf of its advertisers. These efforts were initiated in the Tampa market, where The Tampa Tribune , WFLA-TV and TBO.com share the Companyâ€™s News Center facility and work side by side to provide the most comprehensive news, information and entertainment in that market. The success of this initial venture led the Company to expand convergence to five additional markets in the Southeast where it operates market-leading newspapers, television stations, and Web sites in contiguous regions.
On December 18, 2007, the Federal Communications Commission (FCC) adopted a revised media ownership rule regulating the common ownership of a newspaper and a television station in the same market. The FCC amended the existing 32-year old absolute ban on newspaper/broadcast cross-ownership by crafting a rule that would presumptively allow a newspaper to own one television station or one radio station in the 20 largest markets, subject to certain limitations. The rule would also consider such combinations in other markets subject to certain public interest showings including the provision of local news by the television station, again subject to certain limitations. These new cross-ownership regulations modify the existing ban that has remained in place as a result of a stay imposed by the United States Court of Appeals for Third Circuit in 2003. In addition, the FCC announced that it would grant permanent waiver to the existing newspaper/broadcast combinations that were grandfathered in conjunction with the 1975 rule and that in certain instances involve one newspaper and one broadcast property in the same market. As a result of these actions, the FCC granted permanent waivers to the Companyâ€™s convergence partnership in Tampa and its newspaper-television combinations in the following television markets: Columbus, Georgia; Florence â€“ Myrtle Beach, South Carolina; Panama City, Florida; and Tri-Cities (Tennessee and Virginia). The Companyâ€™s newspaper-television partnership in Roanoke/Lynchburg/Danvill e, Virginia does not require an FCC waiver.
While the Company is gratified that the FCC has provided permanent waivers to the stations operating in five of its convergence markets, the Company will continue to press for cross-ownership relief in all markets, regardless of size.
The Company operates in three significant industry segments. For financial information related to these segments see pages 39 and 40 of the 2007 Annual Report to Stockholders, which are incorporated herein by reference. These segments are Publishing, Broadcast, and Interactive Media. Additional information related to each of the Companyâ€™s significant industry segments is included below.
The newspaper publishing industry in the United States comprises hundreds of public and private companies ranging from large national and regional companies, publishing multiple newspapers across many states, to small privately held companies publishing one newspaper in one locality. The Company is one of the largest publicly held newspaper publishing companies in the United States based on circulation and publishes more daily newspapers in the Southeast than any other company. Moreover, the Company is third in total circulation in its chosen southeastern area of focus.
All of the Companyâ€™s newspapers compete for circulation and advertising with other newspapers published nationally and in nearby cities and towns and for advertising with magazines, radio, broadcast and cable television, the Internet and other promotional media. All of the newspapers compete for circulation principally on the basis of content, quality of service and price.
The primary raw material used by the Company in its publishing operations is newsprint, which is purchased at market prices from various Canadian and United States sources, including SP Newsprint Company (SPNC), in which the Company presently owns a one-third equity interest. SPNC has mills in Dublin, Georgia, and Newberg, Oregon, with a combined annual capacity in excess of one million short tons. The publishing operations of the Company consumed approximately 106,000 short tons of newsprint in 2007. Management of the Company believes that sources of supply under existing arrangements, including a commitment to purchase 35,000 short tons from SPNC, will be adequate in 2008.
In January 2008, SPNC announced that it had entered into an agreement with certain affiliates of White Birch Paper Company to be acquired. The acquisition, which is subject to regulatory approval, is expected to close during March or April of 2008. For additional information regarding the sale, see page 37 of the Annual Report to Stockholders.
In June 2005, the Company sold its 20% ownership in The Denver Post Company (Denver), parent company of the Denver Post, to MediaNews Group, Inc. For additional information regarding the sale, see page 37 of the Annual Report to Stockholders.
The Broadcast Television Division operates 23 network-affiliated television stations in the United States. The Company has initiated a plan to divest WMBB in Panama City, Florida, KALB/NALB in Alexandria, Louisiana, and WNEG in Toccoa, Georgia. The divestitures are expected to occur in the first half of 2008. For additional information, see pages 35 and 36 of the Annual Report to Stockholders. The following table sets forth certain information on each of the Companyâ€™s stations:
The primary source of revenues for the Companyâ€™s television stations is the sale of commercial time to national and local advertisers and political candidates. Additionally, the Companyâ€™s Professional Communications Systems operating unit derives revenue from the sale and integration of broadcast equipment to third parties including other broadcasters, corporate and governmental enterprises, and colleges and universities.
The Companyâ€™s television stations compete for audience and advertising revenues with other television and radio stations, cable programming channels, and cable television systems as well as magazines, newspapers, the Internet and other promotional media. A number of cable television systems and direct-to-home satellite companies (which operate generally on a subscriber payment basis) are in business in the Companyâ€™s broadcasting markets and compete for audience by presenting broadcast television, cable network, and other program services. The television stations compete for audience on the basis of program content and quality of reception, and for advertising revenues on the basis of price, share of market and performance.
In the third quarter of 2006, the Company acquired four NBC stations; WNCN in Raleigh, North Carolina, WCMH in Columbus, Ohio, WJAR in Providence, Rhode Island and WVTM in Birmingham, Alabama. In the third and fourth quarters of 2006, the Company sold four CBS stations; KWCH in Wichita, Kansas, and its three satellites, WIAT in Birmingham, Alabama, KIMT in Mason City, Iowa, and WDEF in Chattanooga, Tennessee. For additional information regarding the acquisition and dispositions, see page 36 of the Annual Report to Stockholders.
The television broadcast industry has largely implemented the transition from analog to digital technology in accordance with a mandated conversion timetable established by the Communications Act and the FCC. In February 2006, President Bush signed into law the Digital Television Transition and Public Safety Act setting February 17, 2009, as the deadline for completion of the transition from analog to digital television broadcasting. The law requires the FCC to terminate the licenses for all full-power analog television stations on February 18, 2009. The Companyâ€™s television stations, with the exception of its satellite stations, have substantially transitioned to digital technology. The Company is in the process of completing the final stages of digital channel assignment in several markets and expects to achieve full compliance by the FCC mandated deadline.
Interactive Media Business
The Interactive Media Division (IMD), which was launched in January 2001, operates in conjunction with the Publishing and Broadcast Divisions to provide online news, information and entertainment to its customers without geographic restrictions. The Division comprises more than 75 interactive enterprises, as well as a minority investment. In July 2005, the Division acquired Blockdot, Inc., a Dallas-based advergaming and game development firm. The Division focuses on the following areas of the interactive business: improving content, driving viewership, and increasing advertising and game production revenue. As the Internet is both a medium and a marketplace, direct online sales are increasing because of expanded viewership and enhanced content. While some of the Divisionâ€™s online enterprises were profitable in 2007, the Divisionâ€™s results were adversely affected by the decline in classified volume experienced by the Publishing Division. In contrast, Blockdotâ€™s advergaming business experienced tremendous growth in 2007. The Division expects that it will be moderately profitable in 2008 due in large measure to continued success at Blockdot.
Among the online enterprises included in the Interactive Media Division, each of the Companyâ€™s daily newspapers and television stations is affiliated with a Web site featuring content complementary to but increasingly more expansive than its published products or its television offerings. Online revenues are derived primarily from advertising, which includes various classified products as well as banner and sponsorship advertisements. The most successful revenue initiatives have involved classified products placed on the Companyâ€™s Web sites; these products represented approximately forty percent of the Divisionâ€™s revenues in 2007. The majority of these revenues are derived from upsell arrangements under which customers pay an additional fee to have their classified advertisement placed online simultaneously with its publication in the newspaper. Revenue generated from Blockdotâ€™s advergaming business grew substantially in 2007, accounting for more than twenty percent of the Divisionâ€™s revenues in 2007.
In December 2006, the Company entered into a strategic alliance with Yahoo! Inc., joining a national consortium of over 20 media companies representing more than 500 newspapers to deliver classified advertising to consumers. In 2007, the Company worked with Yahoo! to transition the online career sections of its 25 daily newspapers to a Yahoo!HotJobs-driven platform. Now that the implementation is complete, a large portion of the career-related advertising sold through its daily newspaper Web sites is also posted on Yahoo!HotJobs, which gives the ads increased visibility to career seekers across the country. The Division is also proceeding with the launch of an ad serving platform which will provide Yahoo! users the ability to access local content provided by the Divisionâ€™s daily newspaper Web sites. The Division expects that Yahoo!â€™s search capabilities and advertising reach coupled with the Divisionâ€™s local content will result in increased traffic and advertising revenue for both parties.
The Companyâ€™s online enterprises compete for advertising, as well as for usersâ€™ discretionary time, against newspapers, magazines, radio, broadcast and cable television, other Web sites and other promotional media. These Web sites compete for users principally on the basis of content relevance and accessibility, and for advertisers primarily on viewer demographics and the innovative means in which advertising is delivered. Blockdot, through its advergaming production, also competes for advertising by providing major consumer product brands a unique method to deliver their message.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Media General is an independent, publicly owned communications company situated primarily in the Southeast with interests in newspapers, television stations and interactive media.
The Companyâ€™s fiscal year ends on the last Sunday in December.
RESULTS OF OPERATIONS
Two significant events occurred in the latter half of 2006 which merit separate mention at the forefront of this discussion. First, the Company acquired four NBC television stations on the first day of the third quarter. Second, the Company sold four of its CBS-affiliated television stations which caused their results to be reported as discontinued operations for all periods presented in 2006. Results of the discontinued operations of the CBS stations are excluded throughout the remainder of this report. In order to facilitate the discussion of meaningful year-over-year comparisons, results of the acquired NBC stations are included in the quarterly comparative results, but excluded in the year-to-date discussions as they were not acquired until the third quarter of 2006.
The Company recorded net income of $2.5 million in the third quarter of 2007, as compared to income from continuing operations of $7.7 million (net income was $20.6 million) in the same quarter of 2006. The first nine months of 2007 produced net income of $1.1 million, as compared to income from continuing operations of $33.3 million (net income was $47.4 million) in the equivalent prior-year period of 2006.
While the magnitude of the above changes varied between the quarter and the year to date, the reasons driving the fluctuations remained similar between the periods in most cases. The Companyâ€™s share of SP Newsprintâ€™s results suffered due to the combination of lower newsprint prices and higher raw material costs. SP Newsprint is undergoing a strategic review as announced earlier in the year, which might include selling the company in an effort to maximize value to its partners. At the Broadcast Division, strong National revenues were unable to replace record 2006-levels of Political revenues in this off-election year. The Publishing Division continued to be challenged by a difficult advertising environment, particularly in Florida. However, the Divisionâ€™s implementation of its performance improvement plan helped to aggressively manage costs and resulted in a 7.5% and 4.1% decrease in expenses for the quarter and year to date, excluding severance expense relating to the improvement plan. Corporate expense and other expenses were down significantly due to lower costs for healthcare, retirement-related plans and performance-based incentives, as well as certain insurance proceeds. Additionally, interest expense decreased in the quarter as the result of lower average debt levels, but markedly increased in the year to date due to additional borrowings associated with the acquisition of the four NBC stations (which were purchased in the third quarter of 2006).
Operating income for the Publishing Division decreased $1.8 million and $19.4 million in the third quarter and first nine months of 2007 from the comparable 2006 periods despite successful cost containment measures which appreciably helped to mitigate a $9.4 million and $32.3 million decline in revenues in those respective periods. As shown in the following chart, Classified advertising suffered the largest portion of the revenue decline as employment, automotive and real estate advertising fell at virtually all locations. The Tampa Tribune comprised more than 85% of the Classified reduction as the Companyâ€™s largest market (the Tampa Bay area) continued to struggle with a sharp downturn in Floridaâ€™s economy. This yearâ€™s unfavorable market conditions in the Tampa Bay region are amplified because they followed several years of booming growth in that area. Retail revenues were down in the year to date due to weakness in the home improvement, financial and furniture categories; in the quarter, Retail advertising declined nominally as new products helped to offset lower advertising in categories similar to those that struggled in the year to date.
As previously mentioned, the Division has faced a particularly challenging advertising environment (most pronounced at The Tampa Tribune ); the Company has reacted by implementing a performance improvement plan to align expenses with the current revenue climate. Cost reductions are being achieved by the consolidation and centralization of certain functions and the outsourcing of others, resulting in the elimination of over 200 authorized positions. The Divisionâ€™s 2007 year-to-date results included pretax charges of approximately $2 million for severance costs related to this realignment. In addition, the Division has implemented several sales initiatives to stimulate Classified advertising sales and continues to aggressively manage its discretionary spending.
Publishing Division operating expenses decreased $8.7 million in the third quarter and $14.9 million in the first nine months of this year (excluding quarterly and year-to-date severance costs of $1.1 million and $2 million, respectively) from the equivalent prior-year periods led by lower newsprint expense but also aided by other cost reduction measures. Reduced newsprint consumption as a result of switching to lighter weight newsprint, concerted conservation efforts and decreased advertising and circulation volumes contributed $2.1 million and $6.5 million in savings in the quarter and first nine months of the year, while lower average newsprint prices, down $81 and $46 per short ton, supplied another $2 million and $3.7 million in savings for the equivalent periods. Employee benefits and compensation costs were also below the prior-year level, particularly in the third quarter, due in large part to lower healthcare costs, a decrease in advertising commissions, and to a lesser degree, the performance improvement program which eliminated certain positions and resulted in reduced salary costs.
The Company acquired four NBC stations at the beginning of the third quarter of 2006. Results of these stations have been excluded in the discussion of year-over-year divisional changes in order to facilitate meaningful comparisons; however, these stations are included in the third quarter discussion as both quarters include a full period of the four NBC stationâ€™s results in 2006 and 2007.
Broadcast operating income decreased $5.7 million in the third quarter and $8.7 million in the first nine months of this year as compared to the equivalent periods of 2006 due primarily to lower Political revenues combined with a $2.4 million and $6.3 million rise in expenses in the quarter and year to date. As illustrated by the following chart, National time sales demonstrated growth in the quarter and year to date (driven by the telecommunications and financial categories), while Political advertising tumbled, as expected, from the prior year. Local revenues were slightly below 2006 in the year to date (caused by restrained automotive spending as dealers remained cautious), but regained its footing in the third quarter on strength in the home improvement and hardware categories. There was no surprise surrounding the near 80% quarterly and year-to-date decline in Political time sales in this off-election year; political revenues generated from 2007 gubernatorial races and issue advertising curbed what could have been an even larger descent from the prior year.
The Broadcast Divisionâ€™s advertising sales outperformed that of the industry for the first nine months of the year. According to the Television Bureau of Advertising (a not-for-profit trade association of Americaâ€™s broadcast television industry), time sales across the broadcast industry (including Political revenues in either the National or Local ad category, as appropriate) have declined 5% through September 2007 as compared to the Divisionâ€™s smaller 2.4% decrease. Industry national time sales were down 8%, while the Division posted a 3.5% drop; industry local time sales fell 3.2% as compared to the Divisionâ€™s lesser 1.7% decline.
The Broadcast Divisionâ€™s $2.4 million and $6.3 million increase in operating expenses in the third quarter and first nine months of this year over the equivalent periods in 2006 was due in part to higher spending on sales development initiatives and an approximate 14% rise in depreciation costs during both periods on new digital equipment as the Division has virtually completed its government-mandated conversion to broadcast high definition television. Also contributing to the increased expense level in the year to date was a 3.5% rise in employee compensation and benefit costs as a result of merit increases and higher sales commissions. In the quarter, lower benefit costs helped to constrain the increase in overall employee compensation and benefits costs to less than 1%.
The 2006 purchase of the four NBC television stations included their associated websites. Results of these websites have been excluded in the discussion of year-over-year divisional changes in order to facilitate meaningful comparisons; however, they are included in the third quarter discussion as both quarters include a full period of the four NBC websiteâ€™s results in 2006 and 2007. Also excluded in the divisional discussion of results is a $2.1 million net write-off of investments which is comprised of a $2.3 million third-quarter write-off of an investment in a company to reflect its approximate fair value and a $.2 million second-quarter recovery on an investment which was previously written off.
In the third quarter of 2007, the Interactive Media Division (IMD) delivered record revenues and continued to make excellent progress with its Yahoo!HotJobs partnership. However, the Division posted a $1.0 million operating loss in the quarter ($.7 million greater than 2006â€™s third quarter loss) as expenses increased $3.3 million over the prior year. In the year to date, the Division reduced its operating loss by nearly 30% as revenue growth outpaced higher expenses. Blockdot, the Companyâ€™s advergaming business, remained an instrumental factor in the Divisionâ€™s performance as it improved from operating losses in the third quarter and first nine months of 2006 to producing operating income in the equivalent 2007 periods (a $.7 million and $3.0 million quarterly and year-over-year improvement). IMD Revenues grew by more than 30% in the quarter and year-to-date period with nearly two-thirds of the growth coming from Blockdot as revenues from its advergaming business more than doubled. The remaining divisional revenue growth resulted from a 43% increase in the third quarter and first nine months of 2007 in Local online advertising as banners and sponsorships continued to grow and from National/Regional online revenues that grew 49% and 102% in those periods as emergent relationships with an expanding network of national agencies translated into more advertisers. Classified advertising, which has historically produced double-digit quarterly revenue growth, declined 3%-5% in the third quarter and first nine months of 2007. Online Classified advertising, where customers pay an additional fee to have their classified advertisement placed online simultaneously with its publication in the newspaper, is directly impacted by Classified performance in the Publishing Division. Although initial revenues from the Companyâ€™s strategic alliance with Yahoo!HotJobs was good, weak employment and real estate advertising volumes in the Companyâ€™s newspapers translated into lower online Classified advertising. The following chart illustrates that although Classified advertising remains the Divisionâ€™s largest source of revenues, Local and National/Regional advertising growth in 2007 continues to make noteworthy strides.
IMDâ€™s operating expenses were higher by $3.4 million and $4.8 million in the quarter and year to date, reflective of increased employee compensation and benefits expense due to annual salary increases and additional staffing and recruitment in key sales areas. The Division also incurred expenses related to its Yahoo!HotJobs initiative that were not present a year ago.
The Interactive Media Division remains focused on expanding product offerings, securing and retaining talented personnel, driving revenue growth with innovative products and services, and creating a dynamic online presence across all the Companyâ€™s online enterprises. The Division continues to seek opportunities to broaden its online product portfolio in an effort to meet the growing needs of its advertisers as demonstrated by the Companyâ€™s alliance with Yahoo! and a consortium of over 250 newspapers. The Company anticipates the transition from its online Classified career sections at all of its daily newspapers to a Yahoo!HotJobs-driven platform will be implemented at all newspapers before the end of 2007. Employers and job seekers from across the country will then be able to access state-of-the-art search and targeting tools in a user-friendly platform.
Interest expense decreased $1.9 million in the third quarter from the prior-year equivalent period due to a decrease in average debt outstanding of approximately $115 million. Interest expense increased $12.6 million in the year to date as average debt outstanding rose approximately $270 million as a result of additional borrowings associated with the acquisition of the four NBC stations which were purchased in the third quarter of 2006.
In the third quarter of 2006, the Company entered into three interest rate swaps (where it pays a fixed rate and receives a floating rate) to manage interest cost and cash flows associated with variable interest rates, primarily short-term changes in LIBOR, not to trade such instruments for profit or loss. These interest rate swaps are cash flow hedges with notional amounts totaling $300 million and maturities of either three or five years. Changes in cash flows of the interest rate swaps offset changes in the interest payments on the Companyâ€™s $300 million bank term loan. These swaps effectively convert the Companyâ€™s variable rate bank term loan to fixed rate debt with a weighted average interest rate approximating 6.4% at September 30, 2007.
The Companyâ€™s effective tax rate on income from continuing operations was 35.8% and 33.8% in the third quarter and first nine months of 2007 as compared to 38.1% and 37.5% in the equivalent prior-year periods due primarily to a relatively greater impact of favorable permanent items and credits on lower expected pretax profit in the current year. Additionally, during the third quarter, the Company recognized a tax benefit of $786 thousand to record the favorable resolution of an outstanding state income tax assessment.
On January 1, 2007, the Company adopted Interpretation No. 48, Accounting for Uncertainty in Income Taxes â€“ an interpretation of FASB Statement No. 109 (FIN 48). As a result of the implementation of FIN 48, the Company recognized a $4.9 million net increase in the liability for uncertain tax positions, which was accounted for as a reduction to retained earnings as of January 1, 2007. See Note 3 for further detail regarding the adoption of FIN 48.
Net cash generated from operating activities and from net borrowings in the first nine months of 2007 enabled the Company to repurchase stock for $48.7 million, to make capital expenditures of $55.1 million, to pay dividends to stockholders of $16 million and to purchase a small weekly newspaper.
The Company has in place a $1 billion revolving credit facility and a $300 million variable-rate bank term loan facility (together the â€śFacilitiesâ€ť). The term loan is with essentially the same syndicate of banks that provides the Companyâ€™s revolving credit facility. Prior to the end of the first quarter in 2007, the Company repaid, at maturity, $95 million in debt that existed as the result of consolidating certain variable interest entities (VIEs) in which the Company had controlling financial interest by virtue of certain real property leases; the Company purchased the facilities by using existing capacity under its revolving credit facility. The Facilities have both interest coverage and leverage ratio covenants. These covenants, which involve debt levels, interest expense, and EBITDA (a measure of cash earnings as defined in the revolving credit agreement), can affect the Companyâ€™s maximum borrowing capacity under the Facilities. Subsequent to the end of the third quarter, the Company amended the Facilities to allow the Company, at its own discretion on or before December 14, 2007, to increase the maximum leverage ratio covenant and reduce the minimum interest coverage ratio covenant for a period of three fiscal quarters. The Company was in compliance with all covenants at quarter-end and expects to remain in compliance with them going forward. The Company believes that internally generated funds provided by operations, together with the unused portion of the Facilities, provide it with flexibility to manage working capital needs, pay dividends, finance capital expenditures, and take advantage of attractive strategic opportunities. The Company is also exploring the possibility of selling five television stations which would allow it to reduce debt.
The Company expects the fourth quarter will reflect trends similar to those which have been present throughout the first nine months of 2007, including a challenging advertising environment, lower Political advertising revenues, lower newsprint prices and a tough economy in its largest market (Tampa, Florida). The Publishing Division anticipates continued weakness in Classified and Retail advertising. While lower newsprint prices will benefit the Publishing Division, they are expected to result in a further loss from the Companyâ€™s share of SP Newsprintâ€™s results. The Company will continue to monitor its process improvement initiatives and aggressively implement its cost-containment measures. Although the Company expects Political advertising in the latter part of 2007 to be higher than historic norms for an off-election year, the level of Political revenues will still be significantly below the record performance of 2006. The Interactive Media Division remains invigorated by its year-over-year improvement and anticipates solid contributions from Blockdot. The Company is excited about the possibilities emanating from expanding its relationship with Yahoo! and a consortium that now has more than 250 newspapers. This relationship combines the strength of the newspapersâ€™ unique local content with the advertising reach, leading technologies and leading global Internet brand of Yahoo!, resulting in a powerful, cutting-edge advertising network. The Company looks forward to 2008 and the opportunities that exist in an even-numbered year, including the prospect of garnering significant Political and Olympics revenues.