<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
GRAY COMMUNICATIONS SYSTEMS, INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
P.O. BOX 48
ALBANY, GEORGIA 31702-0048
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
------------------------
The 1996 Annual Meeting of Shareholders of Gray Communications Systems, Inc.
(the "Company") will be held at 4370 Peachtree Road, N.E., Atlanta, Georgia
30319, on the 27th day of June, 1996 at 9:00 a.m. local time for the following
purposes:
(1) To elect eight directors to hold office until their respective
successors have been duly elected and qualified;
(2) To consider and take action upon a proposal to adopt and approve
Articles of Amendment to the Company's Articles of Incorporation (the
"Amendment") to (a) increase the voting rights of the Class A Common
Stock of no par value such that the Class A Common Stock shall have 10
votes per share on each matter that is submitted to shareholders for
approval, (b) redesignate the presently authorized Class B Common Stock
of no par value with no voting rights, such that the Class B Common Stock
of no par value shall have one vote per share on each matter that is
submitted to shareholders for approval and shall have certain rights as
described herein and (c) increase the authorized number of shares of the
Company's capital stock to 50,000,000 shares designating 15,000,000
shares as Class A Common Stock of no par value; 15,000,000 shares as
Class B Common Stock of no par value and 20,000,000 shares as Preferred
Stock;
(3) To consider and take action upon a proposal to amend the Company's
Bylaws to permit an increase of the voting rights of the Class A Common
Stock to 10 votes per share;
(4) To consider and take action upon a proposal to amend the Company's 1992
Long Term Incentive Plan for certain employees of the Company and its
subsidiaries to provide for the issuance of Class B Common Stock instead
of Class A Common Stock and to reserve for issuance thereunder 400,000
shares of Class B Common Stock;
(5) To approve the issuance to Bull Run Corporation of warrants to purchase
487,500 shares of Class A Common Stock;
(6) To approve the issuance to Bull Run Corporation of warrants to purchase
500,000 shares of Class A Common Stock;
(7) To ratify the Board of Directors' approval of an amendment to the
Company's non-qualified stock option plan for non-employee directors of
the Company;
(8) To approve the appointment of Ernst & Young LLP as independent auditors
of the Company and its subsidiaries for the year ending December 31,
1996; and
(9) To transact such other business as may properly come before the meeting
or any adjournment or adjournments thereof.
Only holders of record of Class A Common Stock at the close of business on
June 4, 1996 will be entitled to notice of and to vote at this meeting or any
adjournment or adjournments thereof. The transfer books of the Company will not
be closed.
IT IS IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THIS MEETING IN ORDER THAT
THE PRESENCE OF A QUORUM BE ASSURED. ENCLOSED IS A FORM OF PROXY WHICH, IF YOU
DO NOT EXPECT TO ATTEND IN PERSON, YOU ARE URGED TO SIGN AND FORWARD TO THE
SECRETARY IN THE ACCOMPANYING ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN
THE UNITED STATES.
By Order of the Board of Directors
Robert A. Beizer, SECRETARY
June 6, 1996
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
P.O. BOX 48
ALBANY, GEORGIA 31702-0048
------------------------
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 27, 1996
------------------------
SOLICITATION AND REVOCABILITY OF PROXY
The enclosed proxy is solicited by the Board of Directors of Gray
Communications Systems, Inc. (the "Company") in connection with the Annual
Meeting of Shareholders to be held at 4370 Peachtree Road, Atlanta, Georgia
30319, on the 27th day of June, 1996 at 9:00 a.m., local time, and at any
adjournments thereof.
The approximate date on which this Proxy Statement and form of proxy are
first being sent or given to shareholders is June 6, 1996.
You are requested to sign and complete the enclosed proxy and return it in
the enclosed envelope. Any person giving this proxy has the power to revoke it
at any time before it is exercised by delivering to the Company a written
instrument revoking it or a duly executed proxy bearing a later date. The proxy
will also be revoked if the person or persons executing it shall be present at
the meeting and elect to vote in person. If the proxy is not revoked or
suspended, the shares represented by the proxy will be voted as specified at the
meeting. All proxies received pursuant to this solicitation will be voted except
as to matters where authority to vote is specifically withheld and, where a
choice is specified as to the proposal, they will be voted in accordance with
such specification. If no instructions are given, the persons named in the proxy
solicited by the Board of Directors of the Company intend to vote for the
nominees for election as directors of the Company listed herein and for approval
of the proposals stated in the accompanying notice and described herein.
Abstentions and broker non-votes are not counted as votes cast on any matter to
which they relate.
The Board of Directors is not aware of any matter that may come before the
meeting other than the proposals stated in the accompanying Notice and as
described herein. No director has informed management that he intends to oppose
any action to be taken at the meeting. If any other matter is properly presented
at the meeting for action, the individuals named in the proxy will have
discretionary authority to vote on such matter.
The cost of soliciting proxies will be borne by the Company, which may
reimburse brokers and others for their expenses incurred in obtaining voting
instructions from beneficial owners of Class A Common Stock held of record by
such brokers and others.
OUTSTANDING CAPITAL STOCK
The record date for shareholders entitled to vote at the meeting is the
close of business June 4, 1996. At the close of business on that date, the
Company had issued and outstanding 4,419,576 shares of Class A Common Stock,
which constitute the only voting securities of the Company.
QUORUM AND VOTING
Only owners of record of shares of the Class A Common Stock at the close of
business on the record date will be entitled to vote at this meeting. Each owner
of record on the record date is entitled to one vote for each share of Class A
Common Stock so held. The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of Class A Common Stock shall constitute a
quorum at the meeting of shareholders. Except as stated specifically and except
with respect to the election of directors, which is by plurality of votes cast,
each of the matters being submitted to shareholder vote will be approved if a
quorum is present in person or by proxy and a majority of the votes cast on a
particular matter are cast in favor of that matter.
<PAGE>
ELECTION OF DIRECTORS
(ITEM ONE)
One of the purposes of the meeting is the annual election of directors. It
is intended that the shares represented by the enclosed proxy will be voted for
the election of the eight nominees for director named in this section unless
otherwise specified. Directors will be elected by a plurality of the votes cast.
The eight director nominees listed below, all of whom currently serve as
directors, have been nominated to serve as directors until the next annual
election of directors and until their respective successors are duly elected and
qualified. If any nominee for director should become unavailable, which is not
anticipated, it is intended that such shares subject to proxy will be voted for
such substitute nominees as may be nominated by the Board of Directors. THE
BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" ALL THE NOMINEES.
NOMINEES
Set forth below is certain information with respect to the nominees.
RICHARD L. BOGER DIRECTOR SINCE 1991 AGE: 49
Richard L. Boger has been President and Chief Executive Officer of Export
Insurance Services, Inc., an insurance company, and a director of CornerCap
Group of Funds, a "Series" investment company since prior to 1991. Mr. Boger is
a member of the Executive Committee and Management Personnel Committee of the
Board of Directors.
RALPH W. GABBARD DIRECTOR SINCE 1995 AGE: 50
Ralph W. Gabbard has been President of the Company since December 1, 1995.
Mr. Gabbard served as a Vice President of the Company and as President and Chief
Operating Officer of the Company's broadcast operations from September 2, 1994
until his election as President of the Company. He was President and General
Manager of Kentucky Central Television, Inc. from 1982 to 1994. Mr. Gabbard is
Chairman of the National Association of Broadcasters Television Board of
Directors and Chairman of the CBS Affiliates Advisory Board. Mr. Gabbard is a
member of the Executive Committee.
HILTON H. HOWELL, JR. DIRECTOR SINCE 1993 AGE: 34
Hilton H. Howell, Jr. has been President and Chief Executive Officer of
Atlantic American Corporation, an insurance holding company, since May 1995. He
has been Executive Vice President of Delta Life Insurance Company and Delta Fire
and Casualty Insurance Company since 1994, and Executive Vice President of
Atlantic American Life Insurance Company, Bankers Fidelity Life Insurance
Company and Georgia Casualty & Surety Company since 1992. In addition, since
1994, he has served as Vice President and Secretary of Bull Run Corporation, a
designer and manufacturer of dot matrix printers. He is also a director of the
following corporations: Bull Run Corporation, Atlantic American Corporation,
Atlantic American Life Insurance Company, Bankers Fidelity Life Insurance
Company, Delta Life Insurance Company, Delta Fire and Casualty Insurance
Company, Georgia Casualty & Surety Company, American Southern Insurance Company
and American Safety Insurance Company. From 1989 to 1991, Mr. Howell practiced
law in Houston, Texas with the law firm of Liddell, Sapp, Zivley, Hill & LaBoon.
Mr. Howell is a member of the Audit Committee. He is the son-in-law of J. Mack
Robinson.
WILLIAM E. MAYHER, III DIRECTOR SINCE 1990 AGE: 56
William E. Mayher, III has been a neurosurgeon in Albany, Georgia since
prior to 1991. Dr. Mayher is a member of the Executive Committee and has served
as Chairman of the Board of Directors since August 1993.
HOWELL W. NEWTON DIRECTOR SINCE 1991 AGE: 49
Howell W. Newton has been President and Treasurer of Trio Manufacturing Co.,
a textile manufacturing company, since prior to 1991. Mr. Newton is a member of
the Audit Committee.
HUGH NORTON DIRECTOR SINCE 1987 AGE: 63
Hugh Norton has been President of Norco, Inc., an insurance agency, since
prior to 1991.
2
<PAGE>
ROBERT S. PRATHER, JR. DIRECTOR SINCE 1993 AGE: 51
Robert S. Prather, Jr. has been President and Chief Executive Officer of
Bull Run Corporation since July 1992 and a Director of Bull Run Corporation
since 1992. Prior to that time, he was President and Chief Executive Officer of
Phoenix Corporation, a steel service center. He is a member of the Executive
Committee and Management Personnel Committee.
J. MACK ROBINSON DIRECTOR SINCE 1993 AGE: 72
J. Mack 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 1974 until
1995 and Chairman of the Board of Atlantic American Corporation since 1974. He
is also a director of the following corporations: Bull Run Corporation, Atlantic
American Corporation, Atlantic American Life Insurance Company, Bankers Fidelity
Life Insurance Company, Delta Life Insurance Company, Delta Fire and Casualty
Insurance Company, Georgia Casualty & Surety Company, American Southern
Insurance Company, and American Safety Insurance Company and director emeritus
of Wachovia Corporation. Mr. Robinson is a member of the Executive Committee and
Management Personnel Committee. Mr. Robinson is the father-in-law of Hilton H.
Howell, Jr.
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND OTHER PRINCIPAL HOLDERS
OF THE COMPANY'S VOTING SECURITIES
The following table sets forth certain information regarding the ownership
of Class A Common Stock as of April 15, 1996 by (i) any person who is known to
the Company to be the beneficial owner of more than five percent of the Class A
Common Stock of the Company, (ii) all directors, (iii) all named executive
officers and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED CLASS
- - ------------------------------------- ----------- -------------
<S> <C> <C>
Bull Run Corporation (1) 1,211,590 27.1%
George H. Nader (2) 240,899 5.4%
Ralph W. Gabbard 917 *
William A. Fielder III (3) 8,515 *
Sabra H. Cowart 181 *
Robert A. Beizer -- *
Thomas J. Stultz 1,500 *
Joseph A. Carriere 562 *
William E. Mayher III (3) 16,500 *
Richard L. Boger (3) 24,150 *
Hilton H. Howell, Jr. (3)(4)(5)(6) 69,150 1.5%
Howell W. Newton 9,250 *
Hugh Norton 16,500 *
Robert S. Prather, Jr. (3)(4)(7) 30,750 *
J. Mack Robinson (3)(4)(6)(8) 791,940 17.7%
John T. Williams (9) 78,752 1.8%
All directors and executive officers
as a group (14 persons) 1,048,667 23.5%
</TABLE>
- - ------------------------
* Less than 1%
(1) Owned by Bull Run Corporation through its wholly-owned subsidiary, Datasouth
Computer Corporation. The address of Bull Run Corporation is 4370 Peachtree
Road, N.E., Atlanta, Georgia 30319.
(2) Mr. Nader's address is P.O. Box 271, 1011 Fifth Avenue, West Point, Georgia
31833.
(3) Includes 7,500 currently exercisable options.
3
<PAGE>
(4) Excludes shares owned by Bull Run Corporation. Messrs. Howell, Prather and
Robinson are directors and officers of Bull Run Corporation. Messrs. Prather
and Robinson are principal shareholders of Bull Run Corporation.
(5) Includes 39,050 shares owned by Mr. Howell's wife, as to which shares Mr.
Howell disclaims beneficial ownership. Excludes 63,000 shares held in trust
for Mr. Howell's wife.
(6) Excludes as to Mr. Howell, and includes as to Mr. Robinson, an aggregate of
297,540 shares owned by certain companies of which Mr. Howell is an officer
and director and Mr. Robinson is an officer, director and a principal or
sole shareholder.
(7) Includes 150 shares owned by Mr. Prather's wife, as to which shares Mr.
Prather disclaims beneficial ownership.
(8) Includes an aggregate of 256,650 shares owned by Mr. Robinson's wife
directly and as trustee for their daughters, as to which shares Mr. Robinson
disclaims beneficial ownership. Mr. Robinson's address is 4370 Peachtree
Road, N.E., Atlanta, Georgia 30319.
(9) Mr. Williams resigned his position as President and Chief Executive Officer
of the Company effective December 1, 1995.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the executive
officers of the Company:
Robert A. Beizer, age 56, was appointed Vice President for Law and
Development and Secretary in 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 62, was appointed Vice President -- Corporate Sales
in February 1996. From November 1994, until his appointment as Vice President 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 Advisory Board and the National
Association of Broadcasters.
Sabra H. Cowart, age 29, joined the Company in March 1994 as corporate
accounting manager. In April 1995, she was appointed Controller and Chief
Accounting Officer of the Company and in February 1996, she was appointed
Assistant Secretary of the Company. Prior to joining the Company, Ms. Cowart was
employed from 1989 to 1994 by Deloitte & Touche LLP, an accounting firm.
William A. Fielder, III, age 37, was appointed Controller of the Company in
April 1991 and appointed Vice President and Chief Financial Officer of the
Company in August 1993. Prior to being appointed as Controller in April 1991, he
was employed by Ernst & Young LLP, the independent auditors for the Company.
Ralph W. Gabbard, age 50, has served as President and Director of the
Company since December 1, 1995. For additional information regarding Mr.
Gabbard, see "Election of Directors."
Thomas J. Stultz, age 44, was appointed Vice President of the Company and
was appointed President of the Company's publishing division in February 1996.
Prior to joining the Company, he was employed by Multimedia Newspaper Company, a
division of Multimedia, Inc. where he served as Vice President from 1990 to
1995.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the directors, executive officers and persons who own more than ten
percent of a registered class of a company's equity securities to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership
4
<PAGE>
(Form 3) and reports of changes in ownership (Forms 4 and 5) of such class of
equity securities. Officers, directors and greater than ten percent shareholders
of the Company are required by SEC regulation to furnish the Company with copies
of all such Section 16(a) reports that they file.
To the Company's knowledge, based solely on its review of the copies of such
reports furnished to the Company during the year ended December 31, 1995, all
Section 16(a) filing requirements applicable to its officers, directors and ten
percent beneficial owners were met, except for John T. Williams' inadvertent
failure to file Forms 4 for three stock awards made by the Company under his
1992 Restricted Stock Agreement. These awards of 37,500, 37,500 and 75,000
shares of Class A Common Stock were made on January 24, March 2 and March 14,
1995, respectively. Mr. Williams also inadvertently failed to file a Form 4
disclosing the sale of 75,000 shares of Class A Common Stock which occurred in
December 1995. These transactions were reported on his Form 5 filed timely in
February 1996. Additionally, Ralph W. Gabbard inadvertently failed to file
timely a Form 4 regarding the purchase of 150 shares of Class A Common Stock in
1995. This transaction was reported on his Form 5 filed in February 1996. Mr.
Gabbard also inadvertently failed to file timely a Form 3 in 1994 upon
appointment as an officer of the Company to report 300 shares of Class A Common
Stock owned by him prior to that election.
DIRECTORS COMMITTEES AND MEETINGS
Six meetings of the Board of Directors were held during the Company's last
fiscal year. Each director of the Company attended at least 75% of the aggregate
of (i) all meetings of the Board of Directors and (ii) all meetings of
committees of the Board of Directors of which he was a member, during the period
he served during the year ended December 31, 1995. In addition to the Executive
Committee, the Board of Directors has a Management Personnel Committee and an
Audit Committee. The Audit Committee is comprised of Messrs. Newton and Howell.
The functions performed by the Audit Committee include review of the affairs of
the Company with its independent auditors in determining whether in the
professional opinion of such auditors, the accounts are currently and accurately
kept and the condition of the Company corresponds therewith, as well as whether
officers and employees of the Company have provided adequate cooperation and
assistance to the Company's independent auditors for the purpose of making its
determination. It held one meeting during 1995.
The Management Personnel Committee is comprised of Messrs. Boger, Prather
and Robinson. Among its functions is to make recommendations with respect to
executive salaries, bonuses and compensation and to serve as the nominating
committee with respect to the principal officers and other committees of the
Board of Directors, as well as making nominations respecting membership of the
Board of Directors of the Company. The Committee will consider recommendations
for nominees for directorship submitted by shareholders. The Management
Personnel Committee met four times during the year ended December 31, 1995.
DIRECTOR'S COMPENSATION
Directors who are not employed by the Company receive an annual fee of
$6,000. Nonemployee directors are paid $500 for attendance at meetings of the
Board of Directors and $500 for attendance at meetings of Committees of the
Board. Committee chairmen, not employed by the Company, receive an additional
fee of $800 for each meeting they attend. Any outside director who serves as
Chairman of the Board receives an annual retainer of $12,000. Outside directors
are paid 40% of the usual fee arrangement for attending any special meeting of
the Board of Directors or any Committee thereof conducted by telephone.
5
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation of the
Company's President, its former Chief Executive Officer and the other executive
officers whose annual compensation exceeded $100,000 during the year ended
December 31, 1995 ("named executives"). John T. Williams resigned as President,
Chief Executive Officer and director and was replaced by Ralph W. Gabbard
effective December 1, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------
AWARDS
---------------------------------
ANNUAL COMPENSATION SECURITIES
---------------------------------- RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS OPTIONS SARS (#) COMPENSATION (1)
- - ----------------------------- ------------ --------- --------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John T. Williams, 1995 $ 285,000 $ -- $ 2,081,250(2) -- $ 606,266(2)
President, Chief Executive 1994 286,867 71,910 -- -- 2,112
Officer and director (2) 1993 258,400 112,500 -- -- 1,950
Ralph W. Gabbard, 1995(3) 261,000 150,000 -- 15,000 12,628
President and director 1994 77,000 118,941 -- 30,509 1,200,000(4)
1993(5) -- -- -- -- --
William A. Fielder, III, 1995 105,000 22,050 -- 3,000 9,188(6)
Vice President and Chief 1994 95,000 -- -- -- 6,055(6)
Financial Officer 1993 88,161 -- -- 7,500 6,040(6)
Joseph A. Carriere, 1995 115,000 65,922 -- 3,750 878
Vice President 1994(7) 6,635 -- -- -- --
Corporate Sales 1993(5) -- -- -- -- --
</TABLE>
- - --------------------------
(1) All other compensation includes the Company's matching contributions to its
401(k) plan and insurance premiums paid on behalf of the executive officer.
(2) Mr. Williams resigned his position as President, Chief Executive Officer and
director of the Company effective December 1, 1995. Upon his resignation,
his employment agreement with the Company was amended to pay consulting fees
of approximately $596,000 over the two-year period ending November 1997.
Additionally, the Company issued 150,000 shares of Class A Common Stock to
him in accordance with his employment agreement, which was amended to remove
certain restrictions on such shares.
(3) Mr. Gabbard was elected President and Director of the Company in December
1995. Prior to this election he served as Vice President of the Company and
President and Chief Operating Officer of the Company's broadcast operations
from September 2, 1994 to December 1995.
(4) Mr. Gabbard has an employment agreement with the Company which provides him
122,034 shares of Class A Common Stock if his employment with the Company
continues until September 1999. The Company will recognize approximately
$1.2 million of compensation expense for this award over the five-year
period. Approximately $80,000 and $240,000 of expense was recorded in 1994
and 1995, respectively.
(5) Not employed by the Company during this year.
(6) All other compensation includes amounts accrued for supplemental retirement
benefits.
(7) Mr. Carriere joined the Company in November 1994 as President and General
Manager of KTVE Inc.
6
<PAGE>
STOCK OPTIONS GRANTED
The following table contains information on stock options granted to the
Company's President and the named executives during the year ended December 31,
1995. Under the Company's 1992 Long Term Incentive Plan (the "Incentive Plan")
all officers and key employees are eligible for grants of stock options and
other stock-based awards. Options granted are exercisable over a three-year
period beginning on the second anniversary of the grant date and expire one
month after termination of employment. The total number of shares of Class A
Common Stock issuable under the Incentive Plan is not to exceed 600,000 shares,
subject to adjustment in the event of any change in the outstanding shares of
such stock by reason of a stock dividend, stock split, recapitalization, merger,
consolidation or other similar changes generally affecting shareholders of the
Company.
The Incentive Plan is administered by the members of the Management
Personnel Committee of the Board of Directors (the "Committee") who are not
eligible for selection as participants under the Incentive Plan. The Incentive
Plan is intended to provide additional incentives and motivation for the
Company's employees. The Committee, by majority action thereof, is authorized in
its sole discretion to determine the individuals to whom the benefits will be
granted, the type and amount of such benefits and the terms thereof; and to
prescribe, amend and rescind rules and regulations relating to the Incentive
Plan, among other things.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION FOR
SECURITIES OPTIONS GRANTED TO EXERCISE OF OPTION TERM (1)
UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION -------------------------
NAME OPTIONS GRANTED FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- - ------------------------- --------------- ------------------ ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ralph W. Gabbard 15,000 25.8% $ 13.33 3/30/00 $ 55,242 $ 122,071
William A. Fielder III 3,000 5.2% $ 13.33 3/30/00 $ 11,048 $ 24,414
Joesph A. Carriere 3,750 6.5% $ 13.33 3/30/00 $ 13,811 $ 30,518
</TABLE>
- - ------------------------
(1) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
Class A Common Stock over the term of the options. These numbers are
calculated based on rules promulgated by the SEC and do not reflect the
Company's estimate of future stock price growth. Actual gains, if any, on
stock option exercises and Class A Common Stock holdings are dependent on
the timing of such exercise and the future performance of the Class A Common
Stock. There can be no assurance that the rates of appreciation assumed in
this table can be achieved or that the amounts reflected will be received by
the option holder.
STOCK OPTIONS EXERCISED
The following table sets forth information about unexercised stock options
held by the named executives. No stock options were exercised by such officers
during 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FY END OPTIONS AT FY END
NAME (#) EXERCISABLE/UNEXERCISABLE ($) EXERCISABLE/UNEXERCISABLE (1)
- - ------------------------- ----------------------------- ---------------------------------
<S> <C> <C>
Ralph W. Gabbard 0/45,509 $0/$318,553
William A. Fielder III 7,500/3,000 $61,562/$13,625
Joseph A. Carriere 0/3,750 $0/$17,031
</TABLE>
- - ------------------------
(1) Closing price of the Class A Common Stock at December 31, 1995 was $17 7/8
per share.
7
<PAGE>
SUPPLEMENTAL PENSION PLAN
The Company has entered into agreements with certain key employees to
provide these employees with supplemental retirement benefits. The benefits are
disbursed after retirement in contractually predetermined payments of equal
monthly amounts over the employee's life, or the life of a surviving eligible
spouse, for a maximum of 15 years. The Company maintains life insurance coverage
on these individuals in adequate amounts to fund the agreements.
RETIREMENT PLAN
The Company sponsors a defined benefit pension plan, intended to be tax
qualified, for certain of its employees and the employees of any of its
subsidiaries which have been designated as participating companies under the
plan. A participating employee who retires on or after attaining age 65 and who
has completed five years of service upon retirement may be eligible to receive
during his lifetime, in the form of monthly payments, an annual pension equal to
(i) 22% of the employee's average earnings for the highest five consecutive
years during the employee's final 10 years of employment multiplied by a factor,
the numerator of which is the employee's years of service credited under the
plan before 1994 and the denominator of which is the greater of 25 or the years
of service credited under the plan, plus (ii) .9% of the employees monthly
average earnings for the highest five consecutive years in the employee's final
ten years of employment added to .6% of monthly average earnings in excess of
Social Security covered compensation, and multiplied by the employee's years of
service credited under the plan after 1993, with a maximum of 25 years minus
years of service credited under (i) above. For participants as of December 31,
1993, there is a minimum benefit equal to the projected benefit under (i) at
that time. For purposes of illustration, pensions estimated to be payable upon
retirement of participating employees in specified salary classifications are
shown in the following table:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------
REMUNERATION (1) 10 15 20 25 30 35
- - ------------------------------------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 15,000........................................ $ 1,326 $ 1,986 $ 2,646 $ 3,306 $ 3,300 $ 3,300
25,000........................................ 2,210 3,310 4,410 5,510 5,500 5,500
50,000........................................ 4,709 6,909 9,109 11,309 11,000 11,000
75,000........................................ 7,219 10,519 13,819 17,119 16,500 16,500
100,000........................................ 9,729 14,129 18,529 22,929 22,000 22,000
150,000........................................ 14,749 21,349 27,949 34,549 33,000 33,000
200,000........................................ 18,269 27,069 35,869 44,669 41,067 41,486
250,000 and above.............................. 19,622 29,268 38,914 48,560 45,014 45,473
</TABLE>
- - ------------------------
(1) Five-year average annual compensation.
Employees may become participants in the plan, provided that they have
attained age 21 and have completed one year of service. Average earnings are
based upon the salary paid to a participating employee by a participating
company. Pension compensation for a particular year as used for the calculation
of retirement benefits includes salaries, overtime pay, commissions and
incentive payments received during the year and the employee's contribution to
the Capital Accumulation Plan (as defined). Pension compensation for 1995
differs from compensation reported in the Summary Compensation Table in that
pension compensation includes any annual incentive awards received in 1995 for
services in 1994 rather than the incentive awards paid in 1996 for services in
1995. The maximum annual compensation considered for pension benefits under the
plan in 1995 was $150,000.
As of December 31, 1995, full years of actual credited service in this plan
are Mr. Williams -- 3 years; Mr. Fielder -- 4 years; and Mr. Carriere -- 1 year.
Mr. Gabbard had no full years of credited service under the plan at December 31,
1995.
8
<PAGE>
CAPITAL ACCUMULATION PLAN
Effective October 1, 1994, the Company adopted the Gray Communications
Systems, Inc. Capital Accumulation Plan (the "Capital Accumulation Plan") for
the purpose of providing additional retirement benefits for substantially all
employees. The Plan is intended to meet the requirements of Section 401(k) of
the Internal Revenue Code of 1986 (the "Code").
Contributions to the Capital Accumulation Plan are made by the employees of
the Company. The Company matches a percentage of each employee's contribution
which does not exceed 6% of the employee's gross pay. The percentage match is
made with a contribution of the Class A Common Stock, and is declared by the
Board of Directors before the beginning of each Capital Accumulation Plan year.
The percentage match declared for the year ended December 31, 1995 was 50%. The
Company's matching contributions vest based upon an employee's number of years
of service, over a period not to exceed five years. The Company has registered
150,000 shares of Class A Common Stock for issuance to the Capital Accumulation
Plan.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
In May 1992, John T. Williams, former President and Chief Executive Officer,
entered into an employment agreement with the Company. This agreement provided
for additional compensation based upon the performance of the Company's stock
price over a five-year period ending in 1997. Under this agreement, the Company
issued 150,000 shares of the Class A Common Stock (the "Common Stock Award"),
with certain restrictions, in three separate awards, to Mr. Williams during
1995. The Company recorded approximately $2.1 million in compensation expense in
1995 relating to these awards. In December 1995, Mr. Williams resigned his
position as President, Chief Executive Officer and Director of the Company. Upon
his resignation, the Company amended his existing employment agreement, to pay
him consulting fees of approximately $596,000 through November 1997, and to
remove certain restrictions on the Common Stock Award, including among others, a
time requirement for continued employment.
Ralph W. Gabbard and the Company entered into an employment agreement dated
September 3, 1994, for a five year term. The agreement provides for annual
compensation of $250,000 during the term of the agreement (subject to yearly
inflation adjustment) and entitles Mr. Gabbard to certain fringe benefits. In
addition to his annual compensation, Mr. Gabbard is entitled to participate in
an annual incentive compensation plan and the Incentive Plan. Under the annual
incentive compensation plan, Mr. Gabbard is eligible to receive additional
compensation if the operating profits of the broadcasting group of the Company
reach or exceed certain goals. Under the Incentive Plan, Mr. Gabbard has
received non-qualified stock options to purchase 30,509 shares of Class A Common
Stock. These options are exercisable over a three-year period beginning
September 1996. The exercise price for such options is $9.66. Upon the fifth
anniversary of Mr. Gabbard's employment with the Company, Mr. Gabbard shall
receive 122,034 shares of Class A Common Stock. In February 1996, the Board of
Directors approved an amendment, effective January 1, 1996, to increase his base
salary from $250,000 to $300,000 and to provide for additional annual
compensation of a minimum of $200,000 if certain operating profit levels are
achieved. Mr. Gabbard has agreed that during the term of his agreement and for
two years thereafter, he will be subject to certain non-competition provisions.
William A. Fielder, III, Vice President and Chief Financial Officer of the
Company, has an employment agreement with the Company dated April 1991, which
was amended March 1993, to provide for the continuation of his annual salary
(currently $135,000) for a period of one year in the event of termination
without cause.
Robert A. Beizer and the Company entered into an employment agreement dated
February 12, 1996, for a two-year term which automatically extends for three
successive one-year periods, subject to certain termination provisions. The
agreement provides that Mr. Beizer shall be employed as Vice President for Law
and Development of the Company with an initial annual base salary of $200,000
and a grant of options to purchase 15,000 shares of Class A Common Stock with an
exercise price of $19.375 per share under the Incentive Plan at the inception of
his employment. Mr. Beizer's base salary shall be increased yearly based upon a
cost of living index and he will receive options to purchase 7,000 shares of
Class A Common Stock
9
<PAGE>
annually during the term of the agreement. All options granted are exercisable
over a three-year period upon the second anniversary of the grant date. If there
is a change of control of the Company, Mr. Beizer will be paid a lump sum amount
equal to his then current base salary for the remaining term of the agreement
and will be granted any remaining stock options to which he would have been
entitled. Mr. Beizer has agreed that during the term of his agreement and for
two years thereafter, he will be subject to certain non-competition provisions.
MANAGEMENT PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The goals of the Company's executive compensation program for 1995 were to
attract, retain, motivate and reward qualified persons serving as executive
officers. To achieve such goals, the Company relies primarily on salaries,
annual bonuses and stock options. The Management Personnel Committee makes
recommendations with respect to executive salaries, bonuses and compensation for
each of the Company's executive officers. The Company's executive compensation
program is linked to corporate performance and return to shareholders. The
Company has developed an overall compensation strategy and specific compensation
plans that tie a significant portion of executive compensation to the Company's
success in meeting specified performance goals and to appreciation in the
Company's stock price. While the profitability of the Company is generally
considered with respect to executive compensation, no specific thresholds or
formulas are used. The factors considered by the Committee are typically
subjective. The compensation of the Company's President is determined in the
same manner as compensation of other executive officers and by the terms of his
employment agreement.
The former chief executive officer was awarded 150,000 shares of the
Company's Common Stock in three separate awards under his employment agreement
based upon the Company's stock price attaining certain designated values. Upon
his resignation the Company also amended his employment agreement to pay him
consulting fees of approximately $596,000 through November 1997 and remove
certain restrictions on the common stock awarded, including among others, a time
requirement for continued employment.
Mr. Gabbard's base salary was increased from $250,000 to $300,000 and to
provide for additional annual compensation of a minimum of $200,000 if certain
operating profit levels are achieved effective upon his becoming President of
the Company. The Management Personnel Committee believes that the increase in
Mr. Gabbard's base salary and the incentive for an increased bonus is consistent
with the responsibilities of his new position with the Company and his
performance as measured by the criteria discussed above.
Submitted by Management Personnel Committee of the Board of Directors
Richard L. Boger, Chairman
Robert S. Prather, Jr.
J. Mack Robinson
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Robert S. Prather, Jr. and J. Mack Robinson are two members of the three
member Management Personnel Committee. See "Certain Relationships and Related
Transactions" for a description of certain business relationships between the
Company and certain other affiliated companies of Messrs. Prather and Robinson.
10
<PAGE>
PERFORMANCE GRAPH
The following graph compares, for the period from March 27, 1992 (when the
Company's stock first became publicly traded) to December 31, 1995, the
Company's total return on its Class A Common Stock as compared to stock market
total return indexes for (i) the New York Stock Exchange, (ii) a New York Stock
Exchange Industry Index based upon the Television Broadcasting Stations Standard
Industrial Classification Code, and (iii) Nasdaq telecommunications stocks. In
July 1995, the Company's Class A Common Stock was listed on the New York Stock
Exchange. Therefore, as of such date, the Company has changed its peer group
from the Nasdaq telecommunications group to the Television Broadcasting Stations
Standard Industry Classification Group. The graph assumes that $100 was invested
in the Class A Common Stock in each such index on March 27, 1992 and all
dividends were reinvested.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MAR-92 DEC-92 DEC-93 DEC-94 DEC-95
<S> <C> <C> <C> <C> <C>
Gray Communications Systems, Inc. 100 145.22 176.16 194.91 322.55
New York Stock Exchange 100 108.91 123.66 121.26 157.23
Television Broadcasting Stations (SIC Code
4833) 100 109.67 143.69 111.67 132.89
Nasdaq Telecommunications Stocks 100 120.02 185.07 153.01 184.17
</TABLE>
RECENT DEVELOPMENTS
The Company has entered into discussions with certain investment bankers
(the "Underwriters") and has filed registration statements under the Securities
Act of 1933 with a view to the issuance and public offering of approximately
3,500,000 shares of its Class B Common Stock (the "Stock Offering") and
$150,000,000 aggregate principal amount (the "Note Offering") of the Company's
senior subordinated notes due 2006 (the "Notes"). The Company currently
anticipates that the proceeds of the Stock Offering and the Note Offering, if
any, will be used to consummate the previously announced acquisition (the
"Phipps Acquisition") of two CBS-affiliated television stations, WCTV and WKXT,
as well as a satellite broadcasting business and a paging business in the
Southeast (the "Phipps Business"). The closing of the Phipps Acquisition is
subject to the satisfaction or waiver of a number of conditions, including the
approval of the Federal Communications Commission (the "FCC"). The purchase
price for the Phipps Business is approximately $185 million, including fees,
expenses and working capital and other adjustments. The consummation of the
Phipps Acquisition is expected to occur by September 1996, although there can be
no assurance with respect thereto. Additionally, there can be no assurance that
the Company will issue the Class B Common Stock or the Notes in the near future
or at all or that, if so issued, the amount of the consideration that the
Company will receive therefor.
The Company has entered into a non-binding letter of intent to sell KTVE
(the "KTVE Sale") for approximately $9.5 million in cash plus the amount of the
accounts receivable on the date of the closing (estimated to be approximately
$750,000), to the extent collected by the buyer, to be paid to the Company
within 150 days following the date of closing. The closing of the KTVE Sale is
expected to occur by September 1996, although there can be no assurance with
respect thereto.
11
<PAGE>
In addition to the consummation of the Phipps Acquisition and the KTVE Sale,
the Company intends to implement a financing plan (the "Financing") to increase
liquidity and improve operating and financial flexibility. Pursuant to the
Financing, the Company will (i) repay approximately $38.8 million aggregate
principal amount of outstanding indebtedness under its senior secured credit
bank facility (the "Senior Credit Facility"), together with accrued interest
thereon and revise the terms thereof, (ii) issue $10 million liquidation
preference of its Series A Preferred Stock (the "Series A Preferred Stock") in
exchange for its outstanding $10 million aggregate principal amount 8%
subordinated note (the "8% Note") issued to Bull Run Corporation, (iii) issue to
certain affiliates $10 million liquidation preference of its Series B Preferred
Stock (the "Series B Preferred Stock" and together with the Series A Preferred
Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares,
representing 11.3% of the Class A Common Stock for cash proceeds of $10 million
and (iv) revise the terms of its $25.0 million principal amount senior note due
2003 (the "Senior Note"). For additional information concerning the issuance of
the Preferred Stock and the warrants, see "Certain Relationships and Related
Transactions -- Issuances of Preferred Stock." The cash required for the
consummation of the Phipps Acquisition, the repayment of indebtedness and
related transaction costs will be provided by the net proceeds of the Stock
Offering and the Note Offering, the sale of the Series B Preferred Stock and the
warrants and the KTVE Sale. The consummation of the Note Offering is conditioned
upon the consummation of the Financing and the Stock Offering, but is not
conditioned upon the consummation of the Phipps Acquisition or the KTVE Sale.
However, the Notes are subject to a mandatory redemption at a redemption price
equal to 101% of the principal amount of the Notes plus accrued and unpaid
interest to the date fixed for redemption if the Phipps Acquisition is not
consummated prior to a specified date. The consummation of the Stock Offering is
not conditioned upon the concurrent consummation of the Financing, the KTVE
Sale, the Phipps Acquisition or the Note Offering.
THIS PROXY STATEMENT IS NOT A PROSPECTUS OR OFFERING DOCUMENT AND SHALL NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURITIES.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gray Kentucky Television, Inc., a subsidiary of the Company ("Gray
Kentucky"), is a party to a University of Kentucky Television Agreement with
Host Communications, Inc. ("Host"), pursuant to which Gray Kentucky is licensed
by Host to broadcast University of Kentucky football and basketball games. In
addition, Gray Kentucky provides Host with production services in connection
with televising broadcasts of University of Kentucky football and basketball
games pursuant to a rights sharing agreement. During the year ended December 31,
1995, the Company received approximately $332,000 resulting from these
arrangements.
Bull Run Corporation currently owns 51.5% of the outstanding common stock of
Capital Sports Properties, Inc. ("CSP"). CSP's assets consist of all of the
outstanding preferred stock of Host and warrants to purchase Host common stock.
Bull Run Corporation also owns approximately 9.4% of Host's currently
outstanding common shares directly, thereby giving Bull Run Corporation total
direct and indirect ownership of Host of approximately 29.7%, assuming
conversion of all currently outstanding exercisable stock options and warrants
for Host common stock. Ralph W. Gabbard and Robert S. Prather, Jr., members of
the Company's Board of Directors, are members of the Board of Directors of both
CSP and Host.
The Company's Board of Directors approved payments to Bull Run Corporation
of finders fees for the acquisition of the GWINNETT DAILY POST (the "Gwinnett
Acquisition"), WRDW-TV, a CBS affiliate serving the Augusta, Georgia area (the
"Augusta Acquisition") and the Phipps Acquisition. The Company agreed to pay
finders fees of $75,000 and $360,000 in connection with the Gwinnett Acquisition
and Augusta Acquisition, respectively. The Board of Directors has agreed to pay
a finders fee of 1% of the proposed purchase price of the Phipps Acquisition for
services performed, of which $550,000 was due and included in accounts payable
at December 31, 1995.
On January 3, 1996, Bull Run Corporation purchased for $10 million from the
Company (i) the 8% Note and (ii) warrants to purchase 487,500 shares of Class A
Common Stock at $17.88 per share, 300,000 of which are currently fully vested,
with the remaining warrants vesting in five equal annual installments
12
<PAGE>
commencing January 3, 1997, provided that the 8% Note is outstanding. The
warrants must be approved by the Company's Shareholders. See "Issuance of
Warrants to Bull Run Corporation." The warrants may not be exercised prior to
January 1998 and expire in January 2006. The exercise price and number of shares
issuable upon exercise of these warrants will be subject to adjustment from time
to time upon the occurrence of certain changes with respect to the Class A
Common Stock, such as stock dividends, stock splits, mergers and similar events.
The holder of these warrants does not have the right to receive dividends or
other rights of shareholders of the Company. The Company obtained a "fairness
opinion" from The Robinson-Humphrey Company, Inc., one of the proposed
Underwriters of the Stock Offering and the Note Offering, relative to the terms
and conditions of the 8% Note.
In connection with the issuance by the Company of a $10 million letter of
credit in connection with the Phipps Acquisition, J. Mack Robinson, a director
of the Company, executed a put agreement in favor of the letter of credit issuer
which such issuer can exercise if the Company defaults on the repayment of
amounts in accordance with the terms of the letter of credit.
ISSUANCES OF PREFERRED STOCK AND WARRANTS
As part of the Financing, the 8% Note will be retired and the Company will
issue to Bull Run Corporation, in exchange therefor, 1,000 shares of Series A
Preferred Stock. Subject to certain limitations, holders of the Series A
Preferred Stock are entitled to receive, when, as and if declared by the Board
of Directors, out of funds of the Company legally available for payment, cash
dividends at an annual rate of $800 per share. The Series A Preferred Stock has
priority as to dividends over the Class A Common Stock and Class B Common Stock
(the "Common Stock") and any other series or class of the Company's stock which
ranks junior as to dividends as to Series A Preferred Stock. In case of the
voluntary or involuntary liquidation, dissolution or winding up of the Company,
holders of the Series A Preferred Stock will be entitled to receive a
liquidation price of $10,000 per share, plus an amount equal to any accrued and
unpaid dividends to the payment date, before any payment or distribution is made
to the holders of Common Stock or any other series or class of the Company's
stock which ranks junior as to liquidation rights as to the Series A Preferred
Stock. The Series A Preferred Stock may be redeemed at the option of the
Company, in whole or in part, at $10,000 per share, plus an amount equal to any
accrued and unpaid dividends to the redemption date, and such redemption price
may be paid, at the Company's option, in cash or in shares of Class A Common
Stock. The holders of shares of Series A Preferred Stock will not be entitled to
vote on any matter except (i) with respect to the authorization or issuance of
capital stock ranking senior to the Series A Preferred Stock and with respect to
certain amendments to the Company's Articles of Incorporation, (ii) if the
Company shall have failed to declare and pay dividends on the Series A Preferred
Stock for any six quarterly payment periods, in which event the holders of the
Series A Preferred Stock shall be entitled to elect two additional directors to
the Company's Board of Directors until the full dividends accumulated have been
declared and paid and (iii) as required by law. In addition, without the
affirmative vote of the holders of a majority of the outstanding shares of
Series A Preferred Stock, the Company may not authorize or issue a class or
series of security convertible into capital stock ranking senior to the Series A
Preferred Stock as to the payment of dividends or the distribution of assets
upon liquidation or adversely change the preferences or powers of the Series A
Preferred Stock. The warrants issued with the 8% Note will vest in accordance
with the schedule described above provided the Series A Preferred Stock remains
outstanding.
In addition, as part of the Financing, the Company will issue to Bull Run
Corporation of the Company, for $10 million, 1,000 shares of Series B Preferred
Stock. Subject to certain limitations, holders of the Series B Preferred Stock
are entitled to receive, when, as and if declared by the Board of Directors, out
of funds of the Company legally available for payment, dividends at an annual
rate of $600 per share, except that the Company at its option may pay such
dividends in cash or may add the amount of such dividends to the then effective
liquidation price of the Series B Preferred Stock. The Series B Preferred Stock
has priority as to dividends over the Common Stock and any other series or class
of the Company's stock which ranks junior as to dividends as to the Series B
Preferred Stock. In case of the voluntary or involuntary liquidation,
dissolution or winding up of the Company, holders of the Series B Preferred
Stock will be entitled to receive a liquidation price of $10,000 per share, plus
an amount equal to any accrued and unpaid dividends to the payment date, before
any payment or distribution is made to the holders of Common Stock or any other
13
<PAGE>
series or class of the Company's stock which ranks junior as to liquidation
rights to the Series B Preferred Stock. The Series B Preferred Stock may be
redeemed at the option of the Company, in whole or in part, at any time or from
time to time, at $10,000 per share, plus an amount equal to any accrued and
unpaid dividends to the redemption date, and such redemption price may be paid,
at the Company's option, in cash or in shares of Class A Common Stock. The
holders of shares of Series B Preferred Stock will not be entitled to vote on
any matter except (i) with respect to the authorization or issuance of capital
stock ranking senior to the Series B Preferred Stock and with respect to certain
amendments to the Company's Articles of Incorporation, (ii) if the Company shall
have failed to declare and pay dividends on the Series B Preferred Stock for any
six quarterly payment periods, in which event the holders of the Series B
Preferred Stock shall be entitled to elect two additional directors to the
Company's Board of Directors until the full dividends accumulated have been
declared and paid and (iii) as required by law. In addition, without the
affirmative vote of the holders of a majority of the outstanding shares of
Series B Preferred Stock, the Company may not authorize or issue a class or
series of security convertible into, capital stock ranking senior to the Series
B Preferred Stock as to the payment of dividends or the distribution of assets
upon liquidation or voting rights or adversely change the preferences or powers
of the Series B Preferred Stock.
In connection with the issuance of the Series B Preferred Stock as part of
the Financing, (i) the Company will issue to Bull Run Corporation, warrants
entitling the holder thereof to purchase 500,000 shares of Class A Common Stock
at an exercise price equal to $24.00 per share. Of these warrants, 300,000 will
vest upon issuance, with the remaining warrants vesting in five equal
installments commencing on the first anniversary of the date of issuance. The
warrants must be approved by the Company's shareholders. See "Issuance of
Additional Warrants to Bull Run Corporation." They may not be exercised prior to
the second anniversary of the date of issuance and will expire on the tenth
anniversary of the date of issuance. The exercise price and number of shares
issuable upon exercise of these warrants will be subject to adjustment from time
to time upon the occurrence of certain changes with respect to the Class A
Common Stock, such as stock dividends, stock splits, mergers and similar events.
The holder of these warrants does not have the right to receive dividends or
other rights of shareholders of the Company. The Company will obtain a "fairness
opinion" from The Robinson-Humphrey Company, Inc., one of the proposed
underwriters of the Stock Offering and Note Offering relative to the terms and
conditions of the Series B Preferred Stock and the warrants.
AMENDMENT TO THE ARTICLES OF INCORPORATION
(ITEM TWO)
The Board of Directors has adopted a resolution unanimously approving and
recommending to the Company's shareholders for their approval, an amendment to
the Company's Articles of Incorporation to provide therein for an increase to
50,000,000 the number of shares of all classes which the Company has authority
to issue. The Company's Articles of Incorporation currently authorizes the
issuance of 40,000,000 shares, of which 10,000,000 shares are designated Class A
Common Stock with no par value and possess all voting powers (one vote per
share); 10,000,000 shares are designated Class B Common Stock with no par value
which have no voting power; and 20,000,000 shares are designated "blank check"
preferred stock for which the designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms and conditions of redemption (collectively the "Limitations and
Restrictions") are determined by the Board of Directors of the Company. As such,
the Board of Directors of the Company is entitled to authorize the creation and
issuance of up to 20,000,000 shares of preferred stock in one or more series
with such Limitations and Restrictions as may be determined in the Board's sole
discretion with no further authorization by security holders required for the
creation or issuance thereof.
The Amendment would provide that 15,000,000 shares would be designated Class
A Common Stock with no par value and shall possess 10 votes per share, and
15,000,000 shares shall be designated Class B Common Stock, no par value and
shall possess one vote per share. The Amendment provides that each presently
issued and outstanding share of Class A Common Stock having one vote per share
will be converted automatically to one share of Class A Common Stock having 10
votes per share. The Amendment
14
<PAGE>
would also establish certain shareholder rights ("Class B Rights"), which are
intended to insure that a buyer to acquire 100% of the Class A Common Stock
tender for the issued and outstanding Class B Common Stock.
Although the Class B Rights might make the Company a less attractive target
for a takeover bid, the Class B Rights gives holders of the Class B Common Stock
the opportunity to participate in any premium that might be paid for the
purchase of 100% of the Class A Common Stock.
If, after June 27, 1996, any person or group acquires beneficial ownership
of 100% of the Class A Common Stock (a "Significant Shareholder"), and such
person or group does not immediately after such acquisition beneficially own
100% of Class B Common Stock, the Class B Rights require that such Significant
Shareholder, within a 90-day period beginning the day after becoming a
Significant Shareholder, commence a public tender offer to acquire 100% of the
shares of Class B Common Stock (a "Class B Protection Transaction"). The
requirement to engage in a Class B Protection Transaction is satisfied by making
the requisite offer and purchasing validly tendered shares, even if the number
of shares tendered is less than 100%. The Rights cannot be amended without the
approval of the holders of a majority of the Class A Common Stock and a majority
of the Class B Common Stock, voting separately as classes.
The offer price for 100% of the shares of Class B Common Stock required to
be purchased by the Significant Shareholder pursuant to a Class B Protection
Transaction must be the greater of (i) the highest price per share paid by the
Significant Shareholder for either class of Common Stock in the six-month period
ending on the date such person or group became a Significant Shareholder and
(ii) the highest price per share of either class of Common Stock on The New York
Stock Exchange (or such other quotation system or securities exchange
constituting the principal trading market for either class of Common Stock)
during the 30 calendar days preceding the acquisition of 100% of the shares of
Class A Common Stock.
If a Significant Shareholder fails to undertake a Class B Protection
Transaction, the voting rights of the shares of Class A Common Stock
beneficially owned by such Significant Shareholder that exceeded such holder's
comparable percentage of Class B Common Stock would be suspended until
completion of a Class B Protection Transaction or until divestiture of the
shares of Class A Common Stock that triggered such requirement. To the extent
that the voting power of any shares of Class A Common Stock is so suspended,
such shares will not be included in the determination of aggregate voting shares
for any purpose. Neither the Class B Protection Transaction requirement nor the
related penalty applies to any increase in percentage ownership of Class A
Common Stock resulting solely from a change in the total amount of Class A
Common Stock outstanding.
For purposes of the Class B Rights, the terms "beneficial ownership" and
"group" generally have the same meanings as used in Regulation 13D promulgated
under the Exchange Act, subject to certain exceptions set forth in the Company's
Articles of Incorporation. In addition, only shares of Class B Common Stock
acquired by a Significant Shareholder for an "equitable price" shall be treated
as being beneficially owned by such Significant Shareholder. An "equitable
price" will be deemed to have been paid only when shares of Class B Common Stock
have been acquired at a price at least equal to the greater of (i) the highest
price per share paid by the Significant Shareholder for either class of the
Common Stock in the six-month period ending on the date such person or group
became a Significant Shareholder and (ii) the highest price per share of either
class of Common Stock on the New York Stock Exchange (or such other quotation
system or securities exchange constituting the principal trading market for
either class of Common stock) during the 30 calendar days preceding the date
such person or group became a Significant Shareholder.
The Class B Rights do not prevent any person or group from acquiring 100% of
the Class A Common Stock, provided that such person or group acquires 100% of
the Class B Common Stock at the same or greater price, undertakes a Class B
Protection Transaction or suffers suspension of the voting rights of the shares
of Class A Common Stock as provided by the Class B Rights. If a Class B
Protection Transaction is required, the purchase price to be paid in such offer
may be higher than the price at which a Significant Shareholder might otherwise
be able to acquire of the Class B Common Stock. Such requirement, therefore,
could make an acquisition of the Company more expensive and, if a Class B
Protection Transaction is required, time consuming, than if such requirement did
not exist. Consequently, a person or group might be
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deterred from acquiring the Company as a result of such requirement. Moreover,
by restricting the ability of an acquiror to acquire the Class A Common Stock
paying a premium for such stock without acquiring, or paying a similar premium
for, Class B Common Stock, the Class B Rights should help to reduce or eliminate
any discount on either class of Common Stock.
In order to effect the foregoing, the Board of Directors has unanimously
approved and recommends that the shareholders approve the proposed amendment to
Article 4 of the Articles of Incorporation of the Company substantially in the
form attached hereto as Appendix A.
The purpose of this proposal is to provide additional authorized Common
Stock for corporate purposes such as equity offerings, employee benefit and
stock option plans, future stock splits and future acquisitions and to create a
Class B Common Stock with one vote per share to be used in the Stock Offering.
See "Recent Developments."
The affirmative vote of the holders of a majority of the outstanding shares
of the Class A Common Stock is required to approve the Amendment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE
COMPANY'S ARTICLES OF INCORPORATION.
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AMENDMENT TO THE BYLAWS
(ITEM THREE)
The Board of Directors of the Company has unanimously adopted a resolution
approving and recommending to the Company's shareholders for their approval, an
amendment to the Company's Bylaws authorizing an amendment to the Articles of
Incorporation to provide for two classes of voting stock of the Company. The
amendment to the Bylaws, if adopted, would delete the present provision of the
Bylaws that each outstanding share of Company stock entitled to vote shall be
entitled to one vote upon each matter submitted to a vote of a meeting of
shareholders. The text of the proposed amendment to the Bylaws is attached
hereto as Appendix B.
The affirmative vote of the holders of a majority of the outstanding shares
of the Class A Common Stock is required to approve the amendment of the Bylaws.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE
COMPANY'S BYLAWS.
AMENDMENT TO THE
COMPANY'S 1992 LONG-TERM INCENTIVE PLAN
(ITEM FOUR)
In 1992, the Board of Directors adopted and the shareholders of the Company
approved, the Incentive Plan which provides for the granting of stock options
and other stock-based awards to key employees of the Company. The total number
of shares of Class A Common Stock issuable under the Incentive Plan was not to
exceed 400,000 shares, subject to adjustment in the event of any change in the
outstanding shares of such stock by reason of a stock dividend, stock split,
recapitalization, merger, consolidation or other similar changes generally
affecting shareholders of the Company. The Company effected a 3-for-2 split of
the Class A Common Stock in the form of a stock dividend on October 2, 1995
resulting in 600,000 shares being available for issuance under the Incentive
Plan.
The Board of Directors believes that the Incentive Plan will advance the
interests of the Company and its shareholders by providing additional incentives
and motivation toward superior performance and by enabling the Company and its
subsidiaries to attract and retain the services of key employees, upon whose
judgment, talents and special efforts the successful conduct of its operations
is largely dependent.
The Incentive Plan is administered by the members of the Management
Personnel Committee of the Board of Directors (the "Committee"), who are not
eligible for selection as a participant under the Incentive Plan. The Committee,
by majority action thereof, is authorized in its sole discretion to determine
the individuals to whom the benefits will be granted, the type and amount of
such benefits and the terms of benefit grants; to interpret the Incentive Plan;
to prescribe, amend and rescind rules and regulations relating to the Incentive
Plan; and to make all other determinations necessary or advisable for the
administration of the Incentive Plan to the extent not contrary to the express
provisions of the Incentive Plan. The complete text of the Incentive Plan with
the proposed amendments is set forth in Appendix C to this Proxy Statement. The
following summary of certain provisions of the Incentive Plan and the proposed
amendments is qualified in its entirety by reference to the full text of the
Incentive Plan. The amendments will not become effective unless shareholder
approval is obtained.
INCENTIVE PLAN DESCRIPTION
Under the terms of the Incentive Plan, key employees of the Company and its
subsidiaries (as determined by the Committee in its sole discretion) will be
eligible to receive (a) stock options ("Stock Options") which may or may not
qualify as incentive stock options within the meaning of Section 422 of the
Code, (b) stock appreciation rights ("SARs"), (c) restricted stock of the
Company ("Restricted Stock") and/or (d) performance awards ("Performance
Awards"). Of the 600,000 shares of Class A Common Stock issuable under the
Incentive Plan, no more than 150,000 shares may be issued as Restricted Stock.
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AWARDS UNDER THE INCENTIVE PLAN
STOCK OPTIONS. Stock Options granted under the Incentive Plan shall entitle
the holder thereof to purchase shares of Class A Common Stock at the base price
established therefor by the Committee, which price, in the case of incentive
stock options, shall not be less than the "Fair Market Value" (as defined in the
Incentive Plan) of the Class A Common Stock at the time of grant. Such Stock
Options are exercisable in the discretion of the Committee at any time from and
after the six-month anniversary date of the grant during the option exercise
period. In no event will Stock Options be exercisable later than ten years after
the date of the grant. Stock Options outstanding and unexercised at the time of
the death, disability or retirement of the holder generally shall terminate on
the first to occur of either the expiration date thereof or the expiration of
twelve months after the date of such event (except in the case of an incentive
stock option, which shall expire not later than three months after termination
of employment upon retirement of the holder). Upon termination of the employment
of the holder for any other reason Stock Options shall not remain exercisable
later than three months after the date of such event or, if earlier, the
expiration date of such option.
There is no maximum or minimum number of shares for which a Stock Option may
be granted; however, for any employee, the aggregate Fair Market Value of Class
A Common Stock subject to incentive stock options pursuant to the Incentive Plan
or any other stock option plan of the Company that are exercisable for the first
time in any calendar year may not exceed $100,000.
SARS. An SAR gives to the holder thereof a right to receive, at the time of
surrender, cash or Class A Common Stock or a combination thereof equal in value
to the difference between the Fair Market Value of the Class A Common Stock at
the date of surrender of the SAR and the base price established by the Committee
therefor at the time of grant. The base price established on any SAR shall not
be less than the Fair Market Value of the Class A Common Stock on the date of
the grant of the SAR. The Committee may impose any limitation that it may
determine in its discretion on the maximum amount of appreciation to be paid
pursuant thereto. An SAR may be granted either independent of, or in conjunction
with, any Stock Option. If granted in conjunction with a Stock Option, at the
discretion of the Committee, an SAR may either be surrendered (a) in lieu of the
exercise of such Stock Option, (b) in conjunction with the exercise of such
Stock Option, or (c) upon lapse of such Stock Option.
The term of an SAR shall be established by the Committee. Rights in respect
of an SAR surrenderable in conjunction with a Stock Option shall expire upon the
death, disability, retirement or termination of employment of the holder thereof
at times similar to those established in respect of such related Stock Options.
Rights with respect to an SAR surrenderable independent of a Stock Option will
be on the terms and conditions established by the Committee.
RESTRICTED STOCK. The Committee may issue shares of the Class A Common
Stock to a designated employee at a purchase price, if any, determined by the
Committee. Such Restricted Stock may be subject to forfeiture or repurchase in
the event of the termination of employment within a specified period or in the
event any other conditions specified by the Committee at the time of grant are
not subsequently met. During the period of restriction, holders of Restricted
Stock shall be entitled to receive and retain all dividends and other
distributions made in respect of such stock and to vote such stock without
limitations.
PERFORMANCE AWARDS. The Committee may grant Performance Awards which may
consist of shares of Class A Common Stock, monetary units or a combination
thereof. In the event that certain performance goals are achieved over a
designated period of time, the Performance Awards will be made in a
predesignated form in a single payment or in installments as the Committee
determines in its sole discretion. The goals established by the Committee may
include return on average total capital employed, earnings per share, return on
shareholders' equity and such other goals as may be established by the
Committee. The participant shall have no right to vote any shares of Class A
Common Stock subject to a Performance Award, nor shall such participant have any
right to receive dividends on such shares until the performance goals are
achieved and the shares are issued.
CHANGE OF CONTROL OF THE COMPANY. In the event of a "Change of Control" (as
defined in the Incentive Plan), if provided by the terms of the participant's
award agreement, the following shall occur: (a) Stock
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Options, if not otherwise exercisable, become immediately exercisable; (b)
unexercised Stock Options automatically include an SAR feature for a period of
six months and seven days after the date of a Change of Control, which is in
addition to any SAR separately granted in connection with such Stock Option; (c)
SARs become, if not otherwise then surrenderable, immediately surrenderable; (d)
restrictions lapse on Restricted Stock already earned, and such Restricted Stock
becomes immediately vested; and (e) any outstanding Performance Award shall be
deemed to be fully earned and all payments on such awards shall be made in a
lump sum.
AMENDMENT AND TERMINATION. The Incentive Plan is to remain in effect until
(a) all Class A Common Stock reserved under the Incentive Plan shall have been
purchased or acquired; (b) the Board terminates the Incentive Plan; or (c) July
1, 2002, whichever shall first occur. The Board at any time may terminate and,
from time to time, may amend or modify terms of the Incentive Plan; provided,
however, that no such action of the Board may, without the approval of the
shareholders of the Company: (a) increase the total amount of stock or increase
the amount and type of awards that may be issued under the Incentive Plan; (b)
change the provisions of the Incentive Plan regarding the minimum price, if any,
of awards, or (c) change the class of employees entitled to participate in the
Incentive Plan. No amendment, modification or termination of the Incentive Plan
may in any manner adversely affect any awards theretofore granted under the
Incentive Plan without the consent of the participant affected thereby. In
addition, awards may be substituted or exchanged for other awards under the
Incentive Plan by mutual agreement of the Company and the participant.
THE PROPOSED AMENDMENTS
Because of the limited number of remaining Class A Common Stock and because
of the proposed offering of the newly created Class B Common Stock, with voting
power, (upon Shareholder approval) the Board of Directors believes it is
appropriate at this time to change the shares to be awarded under the Incentive
Plan to Class B Common Stock and to authorize additional shares for issuance
under the Incentive Plan. Therefore, on February 22, 1996, the Board of
Directors adopted the following resolution:
"RESOLVED, that subject to the approval of the shareholders of the
Company of the Amendment to the Articles of Incorporation to provide for
Class B Common Stock, the 1992 Long-Term Incentive Plan is hereby amended to
delete Subsection "u" of Section II in its entirety and substitute in lieu
thereof the following:
"(u) Stock means the authorized and unissued shares of the Class B
Common Stock of the Company or reacquired shares of the Company's Class B
Common Stock in its treasury."
"RESOLVED FURTHER, that all reserved and unissued shares of Class A
Common Stock are hereby no longer reserved for use in the 1992 Long-Term
Incentive Plan and Section IV of the Plan is hereby amended to reserve for
issuance of the Plan an aggregate of 400,000 shares of Class B Common
Stock."
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal Federal income tax consequences
of transactions under the Incentive Plan. It does not describe all Federal tax
consequences, nor does it address possible state, local or foreign tax
consequences.
No income will be realized by a participating officer or employee on the
grant of an incentive stock option or an option which is not an incentive stock
option ("nonqualified option") or upon the award of Restricted Stock, or the
grant of an SAR, and the Company will not be entitled to a deduction at such
time. If a holder exercises an incentive stock option and does not dispose of
the shares acquired within two years from the date of the grant, or within one
year from the date of exercise of the option, no income will be realized by the
holder at the time of exercise. The exercise of an incentive stock option may
subject the holder to the alternative minimum tax. The Company will not be
entitled to a deduction by reason of the exercise.
If a holder disposes of the shares acquired pursuant to an incentive stock
option within two years from the date of grant of the option or within one year
from the date of exercise of the option, the holder will
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realize ordinary income at the time of disposition which will equal the excess,
if any, of the lesser of (a) the amount realized on the disposition, or (b) the
Fair Market Value of the shares on the date of exercise, over the holder's basis
in the shares. The Company will be entitled to a deduction in an amount equal to
such income in the year of such disposition, provided the Company complies with
applicable rules and regulations of the Code, including Section 162(m) of the
Code.
Upon the exercise of a nonqualified option, the excess, if any, of the Fair
Market Value of the stock on the date of exercise over the purchase price is
ordinary income to the holder as of the date of exercise. The Company will be
entitled to a deduction equal to such excess amount in the year of exercise,
provided the Company complies with applicable rules and regulations of the Code,
including Section 162(m) of the Code.
Subject to voluntary election by the holder under Section 83(b) of the Code,
a holder will realize income as a result of the award of Restricted Stock at the
time the restrictions expire on such shares. An election pursuant to Section
83(b) of the Code would have the effect of causing the holder to realize income
in the year in which such award was granted. The amount of income realized will
be the difference between the Fair Market Value of the shares on the date that
such restrictions expire (or on the date of issuance of the shares, in the event
of a Section 83(b) election) over the purchase price, if any, of such shares.
The Company will be entitled to a deduction equal to the income realized in the
year in which the holder is required to report such income, provided the Company
complies with applicable rules and regulations of the Code, including Section
162(m) of the Code.
A holder will realize income as a result of the surrender of an SAR at the
time the stock is issued or the cash is paid. The amount of income realized will
be equal to the Fair Market Value of shares issued on the date of surrender of
the SAR, plus the amount of cash, if any received. The Company will be entitled
to a deduction equal to the income realized in the year in which the SAR is
surrendered for payment. A participant will recognize income with respect to a
Performance Award at the time the shares are issued or the cash is paid after
the award is earned. The amount of income realized will be equal to the Fair
Market Value of the award on the date it was paid. The Company will be entitled
to a deduction equal to the income realized in the year that the award was paid,
provided the Company complies with applicable rules and regulations of the Code,
including Section 162(m) of the Code.
The affirmative vote of the holders of a majority of the outstanding shares
of the Class A Common Stock is required to approve the proposed amendment to the
Incentive Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE
AMENDMENTS TO THE COMPANY'S 1992 LONG TERM INCENTIVE PLAN.
ISSUANCE OF WARRANTS TO BULL RUN CORPORATION
(ITEM FIVE)
On January 3, 1996, the Company issued (i) the 8% Note to Bull Run
Corporation and (ii) warrants to purchase 487,500 shares of Class A Common Stock
at $17.88 per share subject to approval of a majority of the Company's
shareholders. See "Certain Relationships and Related Transactions -- Issuance of
Preferred Stock and Warrants." In accordance with the regulations of The New
York Stock Exchange, the Company is seeking the approval of the shareholders of
the Company of the issuance of such warrants to Bull Run Corporation.
The affirmative vote of the holders of a majority of the outstanding shares
of the Class A Common Stock is required to approve the issuance of the warrants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE ISSUANCE OF
THE WARRANTS TO BULL RUN CORPORATION.
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ISSUANCE OF ADDITIONAL WARRANTS TO BULL RUN CORPORATION
(ITEM SIX)
As part of the Financing, the Company proposes to issue to Bull Run
Corporation 1,000 shares of Series B Preferred Stock and warrants to purchase an
aggregate of 500,000 shares of Class A Common Stock at an exercise price of
$24.00 per share subject to approval of a majority of the Company's
shareholders. See "Certain Relationships and Related Transactions -- Issuance of
Preferred Stock and Warrants." In accordance with the regulations of The New
York Stock Exchange, the Company is seeking the approval of the shareholders of
the Company of the issuance of the warrants to Bull Run Corporation.
The affirmative vote of the holder of a majority of the outstanding shares
of the Class A Common Stock is required to approve the issuance of the warrants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE ISSUANCE OF
THE WARRANTS TO BULL RUN CORPORATION.
AMENDMENT TO THE NON-QUALIFIED STOCK OPTION PLAN
FOR THE NON-EMPLOYEE DIRECTORS OF THE COMPANY
(ITEM SEVEN)
On February 22, 1996, the Board of Directors of the Company approved a
Special Committee's recommendation of an amendment to the Non-Qualified Stock
Option Plan for the non-employee directors of the Company. The following
resolution was adopted by the Board of Directors to become effective upon the
approval by the shareholders of the Company of the Amendment to the Articles of
Incorporation to provide for Class B Common Stock having one vote per share:
"RESOLVED, that subject to the approval of the shareholders at the
Annual Meeting of Shareholders in 1996, beginning in 1996 and each year
thereafter, each non-employee director of the Company shall be granted the
opportunity to purchase up to 7,500 shares of the Company's Class B Common
Stock directly from the Company by the end of the first month following the
close of the Company's fiscal year at a price per share approximating the
recent market price at the time of grant. Such maximum amount shall be
automatically adjusted for any stock dividends, splits, or other similar
distributions as they occur. The exact number of shares or price per share
shall be determined by the Management Personnel Committee of the Board of
Directors each year, and the Company's non-qualified Stock option plan for
non-employee directors shall be amended to provide for the foregoing"
The Company compensates non-employee directors because of the judgment and
experience they provide, the responsibility they assume, and the time and effort
they expend in informing themselves about the Company's business and
participating in meetings of the Board and its committees. In the opinion of the
Company's management, compensation of non-employee directors should be fair,
reasonable and competitive with what other companies of its size provide so that
the Company would not be disadvantaged in seeking to attract and retain highly
qualified directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
AMENDMENT TO THE NON-QUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS.
APPOINTMENT OF INDEPENDENT AUDITORS OF COMPANY
(ITEM EIGHT)
The Board of Directors has appointed Ernst & Young LLP, certified public
accountants, as independent auditors of the Company and its subsidiaries for the
year ending December 31, 1996. The appointment of this firm was recommended to
the Board by the Audit Committee.
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Ernst & Young LLP has served the Company and its subsidiaries in this
capacity since 1967. The firm has advised the Company that neither the firm nor
any of its partners holds any direct financial interest or any material indirect
financial interest in the Company or any of its subsidiaries in the capacity of
promoter, underwriter, voting trustee, director, officer or employee.
One or more representatives of Ernst & Young LLP will be present at this
year's Annual Meeting of Shareholders, will have an opportunity to make a
statement if he or she desires to do so, and will be available to respond to
appropriate questions.
The Board of Directors recommends the appointment of Ernst & Young LLP as
independent auditors for the Company. If the appointment is not approved by a
majority of the votes cast at the meeting on this proposal, the appointment of
independent auditors will be reconsidered by the Board.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
APPOINTMENT OF AUDITORS.
OTHER INFORMATION
All information contained in this Proxy Statement relating to the
occupations and security holdings of directors and officers of the Company is
based upon information received from the individual directors and officers.
SHAREHOLDER PROPOSALS FOR PRESENTATION AT NEXT ANNUAL MEETING
Any proposal of a shareholder of the Company to be presented at the next
Annual Meeting of the Shareholders of the Company must be received by the
Secretary of the Company at the address set forth below on or before February
26, 1997 for inclusion in the Company's proxy statement and form of proxy
relating to that meeting.
The above notice and proxy statement are sent by order of the board of
directors.
Robert A. Beizer
SECRETARY
Dated: June 6, 1996
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APPENDIX A
ARTICLES OF AMENDMENT
OF
GRAY COMMUNICATIONS SYSTEMS, INC.
1.
The name of the corporation is Gray Communications Systems, Inc.
2.
The Articles of Incorporation of the Corporation are amended by striking
paragraphs one and two of Article 4 and the section entitled "Common Stock" of
Article 4 thereof in their entirety and inserting in lieu thereof amended
paragraphs one and two of Article 4 and an amended section entitled "Common
Stock" of Article 4 as set forth in Exhibit A attached hereto.
3.
Upon the filing of these Articles of Amendment with the Secretary of State
of the State of Georgia (the "Effective Date"), and without any further action
on the part of the Corporation or its shareholders, each share of the
Corporation's Class A Common Stock, no par value, one vote per share (the
"Existing Class A Common Stock"), then issued (including shares held in the
treasury of the Corporation) shall automatically be reclassified, changed and
converted into one share of Class A Common Stock, no par value, having ten votes
per share. Certificates previously representing shares of Existing Class A
Common Stock shall be deemed to represent shares of Class A Common Stock.
4.
Upon the Effective Date and without any further action on the part of the
Corporation or its shareholders, each share of the Corporation's Class B Common
Stock, no par value, non voting (the "Existing Class B Common Stock") then
issued (including shares held in the treasury of the Corporation) shall
automatically be reclassified, changed and converted into one share of Class B
Common Stock, no par value, having one vote per share. Certificate previously
representing shares of Existing Class B Common Stock shall be deemed to
represent shares of Class B Common Stock.
5.
This amendment was duly adopted by the shareholders of the Corporation on
June 27, 1996, in accordance with the provisions of O.C.G.A. 14-2-1003.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to be executed by its duly authorized officer on this the day of ,
1996.
GRAY COMMUNICATIONS SYSTEMS, INC.
By:
----------------------------------------
Its:
----------------------------------------
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EXHIBIT A
4.
The total number of shares of all classes which the Corporation shall have
authority to issue is 50,000,000 shares, consisting of 15,000,000 shares of
Class A Common Stock, no par value ("Class A Common Stock"); 15,000,000 shares
of Class B Common Stock, no par value ("Class B Common Stock"); and 20,000,000
shares of Preferred Stock ("Preferred Stock").
The designations and the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualification, and terms and
conditions of redemptions of the shares of each class of stock are as follows:
COMMON STOCK
The powers, preferences and rights of the Class A Common Stock and the Class
B Common Stock, and the qualifications, limitations or restrictions thereof,
shall be as follows:
(a) VOTING. Holders of Class A Common Stock are entitled to ten (10)
votes per share. Holders of Class B Common Stock are entitled to one (1)
vote per share. All actions submitted to a vote of shareholders are voted on
by holders of Class A and Class B Common Stock voting together as a single
class, except as otherwise provided herein or by law.
(b) DIVIDENDS AND OTHER DISTRIBUTIONS. Holders of Class A Common Stock
and holders of Class B Common Stock are entitled to receive dividends and
other distributions in cash, stock or property of the Corporation as may be
declared thereon by the Board of Directors out of funds legally available
therefor. Each share of Class A Common Stock and each share of Class B
Common Stock shall have identical rights with respect to dividends and
distributions (including distributions in connection with any
recapitalization, and upon liquidation, dissolution or winding up, either
partial or complete, of the Corporation.)
(c) CLASS B PROTECTION FEATURE.
(1) If, after the date on which the Articles of Amendment adding this
provision to these Articles are filed with the Secretary of State of
Georgia (the "Effective Date"), any person or group acquires beneficial
ownership of 100% or more of the then issued and outstanding shares of
Class A Common Stock (such acquisition making such person or group a
"Significant Shareholder"), and such person or group does not immediately
after such acquisition beneficially own an equal percentage of the then
issued and outstanding shares of Class B Common Stock, such Significant
Shareholder must, within a 90-day period beginning the day after becoming
a Significant Shareholder, commence a public tender offer in compliance
with all applicable laws and regulations to acquire additional shares of
Class B Common Stock (a "Class B Protection Transaction") as provided in
this subsection (c) of the section entitled "Common Stock" of this
Article 4.
(2) In a Class B Protection Transaction, the Significant Shareholder
must offer to acquire from all the other holders of the Class B Common
Stock all of the issued and outstanding shares of Class B Common Stock
beneficially owned by them. The Significant Shareholder must acquire all
shares validly tendered.
(3) The offer price for any shares of Class B Common Stock required
to be purchased by a Significant Shareholder pursuant to a Class B
Protection Transaction shall be the greater of (i) the highest price per
share paid by the Significant Shareholder for any share of Class A Common
Stock or Class B Common Stock (whichever is higher) in the six-month
period ending on the date such person or group became a Significant
Shareholder and (ii) the highest closing price of a share of Class A
Common Stock or Class B Common Stock (whichever is higher) on The New
York Stock Exchange (or such other quotation system or securities
exchange constituting the principal trading market for either class of
Common Stock) during the 30 calendar days preceding the date such
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person or group became a Significant Shareholder. If the Significant
Shareholder has acquired Class A Common Stock or Class B Common Stock in
the six-month period ending on the date such person or group becomes a
Significant Shareholder for consideration other than cash, the value of
such consideration per share of Class A Common Stock or Class B Common
Stock shall be as determined in good faith by the Board of Directors.
(4) The requirement to engage in a Class B Protection Transaction is
satisfied by making the requisite offer and purchasing validly tendered
shares, even if the number of shares tendered is less than the number of
shares for which tender was sought in the required offer.
(5) If a Significant Shareholder fails to make an offer required by
this subsection (c) of the section entitled "Common Stock" of this
Article 4, or to purchase shares validly tendered and not withdrawn
(after proration, if any), such Significant Shareholder shall not be
entitled to vote any shares of Class A Common Stock beneficially owned by
such Significant Shareholder and acquired by such Significant Shareholder
after the Effective Date unless and until such requirements are complied
with or unless and until all shares of Class A Common Stock causing such
offer required to be effective are no longer owned by such Significant
Shareholder. To the extent that the voting power of any shares of Class A
Common Stock is so suspended, such shares will not be included in the
determination of aggregate voting shares for any purpose under these
Articles of Incorporation or the Georgia Business Corporation Code.
(6) All calculations with respect to percentage ownership of issued
and outstanding shares of either class of Common Stock will be based upon
the numbers of issued and outstanding shares reported by the Corporation
on the last filed of (i) the Corporation's most recent Annual Report on
Form 10-K, (ii) its most recent definitive proxy statement, (iii) its
most recent Quarterly Report on Form 10-Q or (iv) if any, its most recent
Current Report on Form 8-K.
(7) For purposes of this subsection (c) of the section entitled
"Common Stock" of this Article 4, the term "person" means a natural
person, company, government, or political subdivision, agency or
instrumentality of a government, or other entity. The terms "beneficial
ownership" and "group" have the same meanings as used in Regulation 13D
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), subject to the following qualifications: (i)
relationships by blood or marriage between or among any persons will not
constitute any of such persons a member of a group with any other such
persons, absent affirmative attributes of concerted action; (ii) any
person acting in his official capacity as a director or officer of the
Corporation shall not be deemed to beneficially own shares of Common
Stock where such beneficial ownership exist solely by virtue of such
person's status as a trustee (or similar position) with respect to shares
of Common Stock held by plans or trusts for the general benefit of
employees or retirees of the Corporation, and actions taken or agreed to
be taken by him in such official capacity or in any other official
capacity will not be deemed to constitute such a person a member of a
group with any other person; and (iii) formation of a group will not be
deemed to be an acquisition by the group (or any member thereof) of
beneficial ownership of any shares of Class A Common Stock then owned by
a group member and acquired by such member from the Corporation, by
operation of law, by will or the laws of descent or distribution, by
charitable contribution or gift, or by foreclosure of a bona fide loan.
Furthermore, for the purposes of calculating the number of shares of
Class B Common Stock beneficially owned by such shareholder or group; (a)
shares of Class B Common Stock acquired by gift shall be deemed to be
beneficially owned by such shareholder or member of such group only if
such gift is made in good faith and not for the purposes of circumventing
the Class B Protection Feature; (b) only shares of Class B Common Stock
owned of record by such shareholder or member of such group, or held by
others as nominees of such shareholder or member and identified as such
to the Corporation, shall be deemed to be beneficially owned by such
shareholder or group (provided that shares with respect to which such
shareholder or member has sole investment and voting power shall be
deemed to be beneficially owned thereby); and (c) only shares of Class B
Common Stock acquired by such shareholder or member of such group for an
"equitable price" shall be treated as being beneficially owned by such
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shareholder or group. An "equitable price" will be deemed to have been
paid only when shares of Class B Common Stock have been acquired at a
price at least equal to the greater of (i) the highest price per share
paid by the Significant Shareholder in cash or in non-cash consideration,
for any shares of Class A Common Stock or Class B Common Stock (whichever
is higher) in the six-month period ending on the date such person or
group became a Significant Shareholder and (ii) the highest closing price
of a share of Class A Common Stock or Class B Common Stock (whichever is
higher) on The New York Stock Exchange (or such other quotation system or
securities exchange constituting the principal trading market for either
class of Common Stock) during the 30 calendar days preceding the date
such person or group became a Significant Shareholder, with the value of
any non-cash consideration in either case being determined by the Board
of Directors acting in good faith.
(d) PREEMPTIVE RIGHTS. The holders of the Class A Common Stock and
Class B Common Stock do not have preemptive rights enabling them to
subscribe for or receive shares of any class of stock of the Corporation or
any other securities convertible into shares of any class of stock of the
Corporation.
(e) MERGER AND CONSOLIDATION. In the event of a merger or
consolidation of the Corporation with or into another entity (whether or not
the Corporation is the surviving entity), or a statutory share exchange
involving the Common Stock, the holders of Class B Common Stock shall be
entitled to receive the same amount and form of consideration per share as
the per share consideration, if any, received by the holders of the Class A
Common Stock in such merger or consolidation.
(f) SUBDIVISION OF SHARES. If the Corporation shall in any manner
split, subdivide or combine the outstanding shares of Class A Common Stock
or Class B Common Stock, the outstanding shares of the other such class of
Common Stock shall be proportionally split, subdivided or combined in the
same manner and on the same basis as the outstanding shares of the other
class of Common Stock have been split, subdivided or combined.
(g) POWER TO SELL AND PURCHASE SHARES. The Board of Directors shall
have the power to cause the Corporation to issue and sell all or any part of
any class herein or hereafter authorized to such persons, firms,
associations, or corporations, and for such consideration, as the Board or
Directors shall from time to time, in its discretion, determine, whether or
not greater consideration could be received upon the issue or sale of the
same number of shares of another class, and as otherwise permitted by law.
The Board of Directors shall have the power to cause the Corporation to
purchase any class of stock herein or hereafter authorized from such
persons, firms, associations, or corporations, and for such consideration,
as the Board of Directors shall from time to time, in its discretion,
determine, whether or not less consideration could be paid upon to purchase
of the same number of shares of another class, and as otherwise permitted by
law.
(h) AMENDMENTS. In addition to any other vote provided for by law, by
these Articles or the By-Laws of the Corporation or by the Board to
Directors, the affirmative vote of at least a majority of the vote cast by
the holders of shares of Class B Common Stock, voting as a separate group,
at any meeting of shareholders shall be required to amend, alter or repeal
any provision of the section entitled "Common Stock" of this Article 4 that
adversely affects the rights of the holders of the Class B Common Stock.
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APPENDIX B
RESOLVED, that the Bylaws of the Company be, and the same hereby are,
amended by deleting the current Section 9 of Article II thereof in its entirety,
and substituting in lieu thereof the following:
Section 9. VOTING OF SHARES. All elections by stockholders shall be by
ballot unless waived by the unanimous consent of those stockholders present in
person or by proxy in the meeting. The vote on any questions, upon demand of a
stockholder present in person or by proxy, shall be by a stock vote and by
ballot. The stockholders shall have power by a majority vote at any meeting to
remove any director or officer from office."
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APPENDIX C
1992 LONG TERM INCENTIVE PLAN
[SENTENCES OR PARAGRAPHS CONTAINING PROPOSED AMENDMENTS
ARE ITALICIZED AND IN BOLD-FACE TYPE.]
SECTION 1. ESTABLISHMENT AND PURPOSE.
Gray Communications Systems, Inc. hereby establishes a long term incentive
plan to be named the Gray Communications Systems, Inc. 1992 Long Term Incentive
Plan, for certain employees of the Company and its subsidiaries. The purpose of
this Plan is to encourage certain employees of the Company, and of such
subsidiaries of the Company as the Committee administering the Plan designates,
to acquire Common Stock of the Company or to receive monetary payments based on
the value of such stock or based upon achieving certain goals on a basis
mutually advantageous to such employees and the Company and thus provide an
incentive for continuation of the efforts of employees for the success of the
Company and for continuity of employment.
SECTION 2. DEFINITIONS.
Whenever used herein, the following terms shall have the respective meanings
set forth below:
(a) ACT means the Securities Exchange Act of 1934, as amended from time to
time.
(b) AWARD means any Stock Option, Stock Appreciation Right, Restricted
Stock, or Performance Award granted under the Plan.
(c) BASE PRICE means, in the case of an Option or a Stock Appreciation
Right, a price fixed by the Committee at which the Option or the Stock
Appreciation Right may be exercised, which in the case of an Incentive
Stock Option or a Stock Appreciation Right shall not be less than 100% of
the Fair Market Value of a share of Stock on the date of grant of such
option or right.
(d) BOARD means the Board of Directors of the Company.
(e) CHANGE OF CONTROL IS DEFINED IN SECTION 14.
(f) CODE means the Internal Revenue Code of 1986, as amended and in effect
from time to time.
(g) COMMITTEE means those members of the Compensation Committee of the Board
who are not eligible for participation in the Plan or any other plan of
the Company, except plans meeting the requirements of Rule
16b-3(c)(2)(i)(A)-(D) promulgated under the Act, and who during the one
year period prior to becoming a member of the Compensation Committee were
not eligible for selection as a Participant in the Plan or any other plan
of the Company, except plans meeting the requirements of Rule
16b-3(c)(2)(i)(A)-(D).
(h) COMPANY means Gray Communications Systems, Inc., a Georgia Corporation.
(i) DISABILITY means permanent and total disability as defined in Section
22(e)(3) of the Code, as determined by the Committee in good faith, upon
receipt of and in reliance on sufficient competent medical advice.
(j) EMPLOYEE means a salaried employee (including officers and directors who
are also employees) of any member of the Group.
(k) FAIR MARKET VALUE means, for any particular date, (i) for any period
during which the Stock shall not be listed for trading on a national
securities exchange, but when prices for the Stock shall be reported by
the National Market System of the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), the last transaction price
per share as quoted by National Market System of NASDAQ, (ii) for any
period during which the Stock shall not be listed for trading on a
national securities exchange or its price reported by the National Market
System of
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NASDAQ, but when prices for the Stock shall be reported by NASDAQ, the
closing bid price as reported by the NASDAQ, (iii) for any period during
which the Stock shall be listed for trading on a national securities
exchange, the closing price per share of stock on such exchange as of the
close of such trading day or (iv) the market price per share of Stock as
determined by a nationally recognized investment banking firm selected by
the Board of Directors in the event neither (i), (ii) or (iii) above
shall be applicable. If Market Price is to be determined as of a day when
the securities markets are not open, the Market Price on that day shall
be the Market Price on the preceding day when the markets were open.
(l) GROUP means the Company and every Subsidiary of the Company.
(m) OPTION means the right to purchase Stock at the Base Price for a
specified period of time. For purposes of the Plan, an Option may be an
INCENTIVE STOCK OPTION within the meaning of Section 422 of the code, a
NONQUALIFIED STOCK OPTION, or any other type of option encompassed by the
Code.
(n) PARTICIPANT means any Employee designated by the Committee to
participate in the Plan.
(o) PERFORMANCE AWARD means a right to receive a payment equal to the value
of a unit or other measure as determined by the Committee based on
performance during a Performance Period.
(p) PERFORMANCE PERIOD means a period of not more than ten years established
by the Committee during which certain performance goals set by the
Committee are to be met.
(q) PERIOD OF RESTRICTION means the period during which a grant of shares of
Restricted Stock is restricted pursuant to Section 11 of the Plan.
(r) REPORTING PERSON means a person subject to Section 16 of the act.
(s) RESTRICTED STOCK means Stock granted pursuant to Section 11 of the Plan,
but a share of such Stock shall cease to be Restricted Stock when the
conditions to and limitations on transferability under Section 11 have
been satisfied or have expired, respectively.
(t) RETIREMENT (INCLUDING NORMAL, EARLY, and DISABILITY Retirement) means
termination of employment with eligibility for normal, early or
disability retirement benefits under the terms of the Gray Communications
Systems, Inc. Pension Plan, as amended and in effect at the time of such
termination of employment.
(u) STOCK MEANS THE AUTHORIZED AND UNISSUED SHARES OF THE CLASS B COMMON
VOTING STOCK OF THE COMPANY OR REACQUIRED SHARES OF THE COMPANY'S CLASS B
COMMON VOTING STOCK IN ITS TREASURY.
(v) STOCK APPRECIATION RIGHT or SAR means the right to receive a payment
from the Company equal to the excess of the Fair Market Value of a share
of Stock at the date of exercise over the Base Price. In the case of a
Stock Appreciation Right which is granted in conjunction with an Option,
the Base Price shall be the Option exercise price.
(w) SUBSIDIARY means a subsidiary corporation as defined in Section 425 of
the Code.
(x) WINDOW PERIOD means the third to the twelfth business day following the
release for publication of the Company's quarterly or annual earnings
report.
SECTION 3. ADMINISTRATION.
The Plan will be administered by the Committee. The determinations of the
Committee shall be made in accordance with their judgment as to the best
interests of the Company and its stockholders and in accordance with the purpose
of the Plan. A majority of members of the Committee shall constitute a quorum,
and all determinations of the Committee shall be made by a majority of its
members. Any determination of the Committee under the Plan may be made without
notice or meeting of the Committee,
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by a writing signed by a majority of the Committee members. Determinations,
interpretations, or other actions made or taken by the Committee pursuant to the
provisions of the Plan shall be final and binding and conclusive for all
purposes and upon all persons whomsoever.
SECTION 4. SHARES RESERVED UNDER THE PLAN.
THERE IS HEREBY RESERVED FOR ISSUANCE UNDER THE PLAN AN AGGREGATE OF 400,000
SHARES OF CLASS B COMMON STOCK, WHICH MAY BE AUTHORIZED BUT UNISSUED OR TREASURY
SHARES. No more than 100,000 of these shares may be issued as Restricted Stock.
Stock underlying outstanding Options or Performance Awards will be counted
against the Plan maximum while such options or awards are outstanding. Shares
underlying expired, canceled or forfeited options or awards (except Restricted
Stock) may be added back to the Plan maximum. When the exercise price of stock
options is paid by delivery of shares of Stock, the number of shares available
for issuance under the Plan shall continue to be reduced by the gross (rather
than the net) number of shares issued pursuant to such exercise, regardless of
the number of shares surrendered in payment. Restricted Stock issued pursuant to
the Plan will be counted against the Plan maximum while outstanding even while
subject to restrictions.
SECTION 5. PARTICIPANTS.
Participants will consist of such officers and key employees of the Company
or any designated subsidiary as the Committee in its sole discretion determines
have a major impact on the success and future growth and profitability of the
Company. Designation of a Participant in any year shall not require the
Committee to designate such person to receive an Award in any other year or to
receive the same type or amount of Award as granted to the Participant in any
other year or as granted to any other Participant in any year. The Committee
shall consider such factors as it deems pertinent in selecting Participants and
in determining the type and amount of their respective Awards.
SECTION 6. TYPES OF AWARDS.
The following Awards may be granted under the Plan: (a) Incentive Stock
Options; (b) Nonqualified Stock Options; (c) Stock Appreciation Rights; (d)
Restricted Stock; and (e) Performance Awards; all as described below. Except as
specifically limited herein, the Committee shall have complete discretion in
determining the type and number of Awards to be granted to any Participant, and
the terms and conditions which attach to each Award, which terms and conditions
need not be uniform as between different participants. All Awards shall be in
writing.
SECTION 7. DATE OF GRANTING AWARDS.
All Awards granted under the Plan shall be granted as of an Award Date.
Promptly after each Award Date, the Company shall notify the Participant of the
grant of the Award, and shall hand deliver or mail to the Participant an Award
Agreement, duly executed by and on behalf of the Company, with the request that
the Participant execute and return the Agreement within thirty days after the
date of mailing or delivery by the Company of the Agreement to the Participant.
If the Participant shall fail to execute and return the written Award Agreement
within said thirty day period, his or her Award shall be automatically
terminated, except that if the Participant dies within said thirty day period
such Option Agreement shall be effective notwithstanding the fact that it has
not been signed prior to death.
SECTION 8. INCENTIVE STOCK OPTIONS.
Incentive Stock Options shall consist of options to purchase shares of Stock
at purchase prices not less than 100% of the Fair Market Value of the shares on
the date the option is granted. Said purchase price may be paid by check or, in
the discretion of the Committee, by the delivery of shares of Stock then owned
by the Participant. Incentive Stock Options will be exercisable not earlier than
six months and not later than ten years after the date they are granted and,
except as provided below, will terminate not later than three months after
termination of employment for any reason other than death or disability. In the
event
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termination of employment occurs as a result of death or Disability, such an
option will be exercisable for 12 months after such termination. If the optionee
dies within 12 months after termination of employment by reason of Disability,
then the period of exercise following death shall be the remainder of the
12-month period, or three months, whichever is longer. If the optionee dies
within three months after termination of employment for any other reason, then
the period of exercise following death shall be three months. However, in no
event shall any Incentive Stock Option be exercised more than ten years after
its grant. Leaves of absence granted by the Company for military service,
illness, and transfers of employment between the Company and any subsidiary
thereof shall not constitute termination of employment. The aggregate Fair
Market Value (determined as of the time an option is granted) of the stock with
respect to which an Incentive Stock Option is exercisable for the first time
during any calendar year (under all option plans of the Company and its
subsidiary corporations) shall not exceed $100,000 per participant.
SECTION 9. NONQUALIFIED STOCK OPTIONS.
Nonqualified Stock Options shall consist of nonqualified options to purchase
shares of Stock at purchase prices determined by the Committee. The purchase
price may be paid by check or, in the discretion of the Committee, by the
delivery of shares of Stock then owned by the Participant. Nonqualified Stock
Options will be exercisable not earlier than six months and not later than ten
years after the date they are granted, and will terminate not later than three
months after termination of employment for any reason other than death,
Retirement or Disability. In the event termination of employment occurs as a
result of death, Retirement or Disability, such an option will be exercisable
for 12 months after such termination. If the optionee dies within 12 months
after termination of employment by Retirement or Disability, then the period of
exercise following death shall be three months. However, in no event shall any
option be exercised more than ten years after its grant. Leaves of absence
granted by the Company for military service, illness, and transfers of
employment between the Company and any subsidiary thereof shall not constitute
termination of employment. The Committee shall have the right to determine at
the time the option is granted whether shares issued upon exercise of a
Nonqualified Stock Option shall be subject to restrictions, and if so, the
nature of the restrictions.
SECTION 10. STOCK APPRECIATION RIGHTS.
Stock Appreciation Rights may be granted which, at the discretion of the
Committee, may be exercised (1) in lieu of exercise of an Option, (2) in
conjunction with the exercise of an Option, (3) upon lapse of an Option, (4)
independent of an Option, or (5) each of the above in connection with a
previously awarded Option under the Plan. SARs issued to Reporting Persons shall
be held for at least six months prior to exercise. If the Option referred to in
(1), (2) or (3) above qualified as an Incentive Stock Option pursuant to Section
422 of the Code, the related SAR shall comply with the applicable provisions of
the Code and the regulations issued thereunder. At the time of grant, the
Committee may establish, in its sole discretion, a maximum amount per share
which will be payable upon exercise of a SAR, and may impose such conditions on
exercise of an SAR (including, without limitation, the right of the Committee to
limit the time of exercise to specified periods) as may be required to satisfy
the requirements of Rule 16b-3 (or any successor rule), under the Act. At the
discretion of the Committee, payment for SARs may be made in cash or Stock, or
in a combination thereof, provided, however, that payment may be made in cash
for SARs exercised by Reporting Persons only upon the condition that such
exercise is made during the Window Period. The following will apply upon
exercise of an SAR:
(a) EXERCISE OF SARS IN LIEU OF EXERCISE OF OPTIONS. SARs exercisable in
lieu of Options may be exercised for all or part of the shares of Stock
subject to the related Option upon the exercise of the right to exercise an
equivalent number of Options. A SAR may be exercised only with respect to
the shares of stock for which its related Option is then exercisable. Upon
exercise of a SAR in lieu of exercise of an Option, shares of Stock equal to
the number of SARs exercised shall no longer be available for Awards under
the Plan, provided that if SARs are exercised for cash, shares of stock
equal to the number of SARs exercised shall be restored to the number of
shares available for issuance under the Plan.
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(b) EXERCISE OF SARS IN CONJUNCTION WITH EXERCISE OF OPTIONS. SARs
exercisable in conjunction with the exercise of Options shall be deemed to
be exercised upon the exercise of the related Options, and shares of Stock
equal to the sum of the number of shares acquired by exercise of the Option
plus the number of SARs exercised shall no longer be available for Awards
under the Plan, provided that if SARs are exercised for cash, shares of
stock equal to the number of SARs exercised shall be restored to the number
of shares available for issuance under the Plan.
(c) EXERCISE OF SARS UPON LAPSE OF OPTIONS. SARs exercisable upon lapse of
Options shall be deemed to have been exercised upon the lapse of the related
Options as to the number of shares of Stock subject to the Options. Shares
of Stock equal to the number of SARs deemed to have been exercised shall not
be available again for Awards under the Plan, provided that if SARs are
exercised for cash, shares of stock equal to the number of SARs exercised
shall be restored to the number of shares available for issuance under the
Plan.
(d) EXERCISE OF SARS INDEPENDENT OF OPTIONS. SARs exercisable independent
of Options may be exercised upon whatever terms and conditions the
Committee, in its sole discretion, imposes upon the SARs, and shares of
Stock equal to the number of SARs exercised shall no longer be available for
Awards under the Plan, provided that if SARs are exercised for cash, shares
of stock equal to the number of SARs exercised shall be restored to the
number of shares available for issuance under the Plan.
SECTION 11. RESTRICTED STOCK.
Restricted Stock shall consist of Stock issued or transferred under the Plan
(other than upon exercise of Stock Options or as Performance Awards) at any
purchase price less than the Fair Market Value thereof on the date of issuance
or transfer, or as a bonus. In the case of any Restricted Stock:
(a) The purchase price, if any, will be determined by the Committee.
(b) Restricted Stock may be subject to (i) restrictions on the sale or
other disposition thereof, provided, however, that Restricted Stock granted
to a Reporting Person shall, in addition to any other restrictions thereon,
not be sold or disposed of for not less than six (6) months following the
date of grant; (ii) rights of the Company to reacquire such Restricted Stock
at the purchase price, if any, originally paid therefor upon termination of
the employee's employment within specified periods, (iii) representation by
the employee that he or she intends to acquire Restricted Stock for
investment and not for resale, and (iv) such other restrictions, conditions
and terms as the Committee deems appropriate.
(c) The Participant shall be entitled to all dividends paid with respect to
Restricted Stock during the Period of Restriction and shall not be required
to return any such dividends to the company in the event of the forfeiture
of the Restricted Stock.
(d) The Participant shall be entitled to vote the Restricted Stock during
the Period of Restriction.
(e) The Committee shall determine whether Restricted Stock is to be
delivered to the Participant with an appropriate legend imprinted on the
certificate or if the shares are to be deposited in escrow pending removal
of the restrictions.
SECTION 12. PERFORMANCE AWARDS.
Performance Awards shall consist of Stock, stock units or a combination
thereof, to be issued without any payment therefor, in the event that certain
performance goals established by the Committee are achieved during the
Performance Period. The goals established by the Committee may include return on
average total capital employed, earnings per share, return on stockholders'
equity and such other goals as may be established by the Committee. In the event
the minimum Corporate goal is not achieved at the conclusion of the Performance
Period, no payment shall be made to the Participant. Actual payment of the award
earned shall be in cash or in Stock or in a combination of both, in a single sum
or in periodic
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installments, all as the Committee in its sole discretion determines. If Stock
is used, the Participant shall not have the right to vote and receive dividends
until the goals are achieved and the actual shares are issued. In the event a
Reporting Person received a Performance Award which includes Stock, such stock
shall not be sold or disposed of for six (6) months following the date of
issuance pursuant to such award. In the event an Award is paid in cash instead
of Stock, the number of shares reserved for issuance hereunder and the number of
shares which may be granted in the form of Restricted Stock or Performance
Awards shall be reduced as if shares had been issued.
SECTION 13. ADJUSTMENT PROVISIONS.
(a) If the Company shall at any time change the number of issued shares of
Stock without new consideration to the Company (such as by stock dividends
or stock splits), the total number of shares reserved for issuance under
this Plan, the number of shares which may be granted in the form of
Restricted Stock or Performance Awards, the maximum number of shares
available to a particular Participant, and the number of shares covered by
each outstanding Award, shall be adjusted so that the aggregate
consideration payable to the Company, if any, and the value of each such
Award shall not be changed. Awards may also contain provisions for their
continuation or for other equitable adjustments after changes in the Stock
resulting from reorganization, sale, merger, consolidation, issuance of
stock rights or warrants, or similar occurrence.
(b) Notwithstanding any other provision of this Plan, and without affecting
the number of shares reserved or available hereunder, the Board of Directors
may authorize the equitable adjustment of benefits in connection with any
merger, consolidation, acquisition of property or stock, or reorganization
upon such terms and conditions as it may deem appropriate.
SECTION 14. CHANGE OF CONTROL.
Notwithstanding any other provision of this Plan, if the terms of an
agreement under which the Committee has granted an Award under this Plan shall
so provide, upon a Change of Control outstanding Awards shall become immediately
and fully exercisable or payable according to the following terms:
(a) Any outstanding and unexercised Option shall become immediately and
fully exercisable, and shall remain exercisable until it would otherwise
expire by reason of lapse of time.
(b) During the six month and seven day period from and after a Change of
Control (the "Exercise Period"), unless the Committee shall determine
otherwise at the time of grant, a Participant shall have the right, in lieu
of the payment of the Base Price of the shares of Stock being purchased
under an Option and by giving notice to the Committee, to elect (within the
Exercise Period and, in the case of Reporting Persons, only within a Window
Period within such Exercise Period) in lieu of exercise thereof, provided
that if such Option is held by a Reporting Person more than six (6) months
have elapsed from the grant thereof to surrender all or part of the Option
to the Company and to receive in cash within 30 days of such notice, an
amount equal to the amount by which the Change in Control Price per share of
Stock on the date of such elections shall exceed the Base Price per share of
Stock under the Option multiplied by the number of shares of Stock granted
under the Option as to which the right granted under this subsection 14(b)
shall have been exercised. Change in Control Price shall mean the higher of
(i) (A) for any period during which the Stock shall not be listed for
trading on a national securities exchange, but when prices for the Stock
shall be reported by the National Market System of the Nasdaq Market, the
highest price per share as quoted by National Market System of Nasdaq
Market, (B) for any period during which the Stock shall not be listed for
trading on a national securities exchange or its price reported by the
National Market System of NASDAQ, but when prices for the Stock shall be
reported by NASDAQ, the highest average of the high bid and low asked prices
as reported by the NASDAQ, (C) for any period during which the Stock shall
be listed for trading on a national securities exchange, the highest closing
price per share of Stock on such exchange as of the close of such trading
day or (D) the highest market price per share of Stock as determined by a
nationally recognized investment banking firm selected by the Board of
Directors in the event neither (A), (B) or (C) above shall be
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applicable in each case during the 60 day period prior to and ending on the
date of the Change of Control and (ii) if the Change of Control is the
result of a transaction or series of transactions described in subsections
14(f)(i) or (iii) hereof, the highest price per share of the Stock paid in
such transaction or series of transaction (which in the case of paragraph
(i) shall be the highest price per share of the Stock as reflected in a
Schedule 13D by the person having made the acquisition); provided, however,
that with respect to any Incentive Stock Option, the Change of Control Price
shall not exceed the market price of a share of Stock (to the extent
required pursuant to Section 422 of the Internal Revenue Code of 1986, as
amended) on the date of surrender thereof.
(c) Any outstanding and unexercised Stock Appreciation Rights (other than
such rights which arise pursuant to subsection 14(b) hereof) shall become
exercisable as follows:
(i) Any SAR described in subsections 10(a) or (b) shall continue to be
treated as provided in those subsections, except that SARs exercised
by Reporting Persons for cash shall be exercised only during a
Window Period, and shall have been held for six months prior to
exercise.
(ii) Any SAR described in subsection 10(c) shall be deemed to have been
exercised if and when the Participant advises the Committee in
writing that he or she elects to have options with respect to which
the SAR was granted treated as having lapsed, except that SARs
exercised by Reporting Persons for cash shall be exercised only
during a Window Period, and shall have been held for six months
prior to exercise.
(iii) Any SAR described in Subsection 10(d) shall be exercisable
immediately, without regard to limitations imposed; upon such
exercise which are related to the passage of time, except that SARs
exercised by Reporting Persons for cash shall be exercised only
during a Window Period, and shall have been held for six months
prior to exercise.
(d) Any Restricted Stock granted pursuant to Section 11 shall become
immediately and fully transferable, and the Committee shall be deemed to
have exercised its discretion to waive any automatic forfeitures provided
with respect to such Restricted Stock. Any shares held in escrow shall be
delivered to the Participant, and the share certificates shall not contain
the legend specified by subsection 11(e). Reporting Persons shall not
dispose of any Restricted Stock until six (6) months following the date of
grant of such Restricted Stock.
(e) Any Performance Award granted pursuant to Section 12 which has not
expired or been forfeited shall be deemed to have been earned on the
assumption that all performance goals have been achieved to the fullest
extent scheduled in the Award. All payment shall be made promptly in a lump
sum, notwithstanding any other provision for installment or deferred payment
prescribed in the Award.
(f) For purposes of this Plan, Change of Control shall mean a change in
control of the Company of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under
the Act; provided that, for purposes of this Agreement, a Change in Control
shall be deemed to have occurred if (i) any Person (other than the Company)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Act), directly or indirectly, of securities of the Company which represent
20% or more of the combined voting power of the Company's then outstanding
securities; (ii) during any period of two (2) consecutive years individuals
who at the beginning of such period constitute the Board cease for any
reason to constitute at least a majority thereof, unless the election, or
the nomination for election, by the Company's stockholders, of each new
director is approved by a vote of at least two-thirds (2/3) of the directors
then still in office who were directors at the beginning of the period but
excluding any individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such term is
used in Rule 14a-11 of Regulation 14A promulgated under the Act) or other
actual or threatened solicitation of proxies or consents by or on behalf of
a person other than the Board; (iii) there is consummated any consolidation
or merger of the Company in which the Company is not the continuing or
surviving corporation or pursuant to which shares of the Company's Common
Stock are converted into cash, securities, or other property, other than a
merger of the Company in which the holders of the Company's Common Stock
C-7
<PAGE>
immediately prior to the merger have the same proportionate ownership of
common stock of the surviving corporation immediately after the merger; (iv)
there is consummated any consolidation or merger of the Company in which the
Company is the continuing or surviving corporation in which the holders of
the Company's Common Stock immediately prior to the merger do not own
seventy percent (70%) or more of the stock of the surviving corporation
immediately after the merger; (v) there is consummated any sale, lease,
exchange, or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company, or
(vi) the stockholders of the Company approve any plan or proposal for the
liquidation or dissolution of the Company.
SECTION 15. NONTRANSFERABILITY.
Each Award granted under the Plan to a Participant shall not be transferable
other wise than by will or the laws of descent and distribution or pursuant to a
Qualified Domestic Relations Order (as defined in Section 206(d)(3) of the
Employee Retirement Income Security Act of 1974, as amended, and the rules
promulgated thereunder), and shall be exercisable, during the Participant's
lifetime, only by the Participant. In the event of the death of a Participant,
exercise of payment shall be made only:
(a) By or to the executor or administrator of the estate of the deceased
Participant or the person or persons to whom the deceased Participant's
rights under the Award shall pass by will or the laws of descent and
distribution; and
(b) To the extent that the deceased Participant was entitled thereto at the
date of his death, provided, however, that any otherwise applicable
six-month holding period shall not be required for exercise by or payment to
an executor or administrator of the estate of a deceased Reporting Person.
SECTION 16. TAXES.
The Company shall be entitled to withhold the amount of any tax attributable
to any amounts payable or shares deliverable under the Plan after giving the
person entitled to receive such payment or delivery notice as far in advance as
practicable, and the Company may defer making payment or delivery as to any
Award if any such tax is payable until indemnified to its satisfaction. The
person entitled to any such delivery may, by notice to the Company at the time
the requirement for such delivery is first established, elect to have such
withholding satisfied by a reduction of the number of shares otherwise so
deliverable (a "Stock Withholding Election"), such reduction to be calculated
based on a closing market price on the date of such notice. Reporting Persons
may make a Stock Withholding Election either (i) during a Window Period, as to
an Option or SAR exercise during such Window Period, or (ii) six months in
advance of an Option or SAR exercise, which exercise need not occur during a
Window Period, and which election may not be suspended or revoked except by
another such election which shall not become effective until six months after it
is made.
SECTION 17. NO RIGHT TO EMPLOYMENT.
A Participant's right, if any, to continue to serve the Company and its
subsidiaries as an officer, employee, or otherwise, shall not be enlarged or
otherwise affected by his or her designation as a Participant under the Plan.
SECTION 18. DURATION, AMENDMENT AND TERMINATION.
No Award shall be granted more than ten years after the effective date of
this Plan; provided, however, that the terms and conditions applicable to any
Award granted within such period may thereafter be amended or modified by mutual
agreement between the Company and the Participant or such other person as may
then have an interest therein. Also, by mutual agreement between the Company and
a Participant hereunder, Stock Options or other Awards may be granted to such
Participant in substitution and exchange for, and in cancellation of, any Awards
previously granted such Participant under this Plan. To the extent that any
Stock Options or other Awards which may be granted within the terms of the Plan
would qualify under present or future laws for tax treatment that is beneficial
to a recipient, then any such beneficial treatment shall be considered within
the intent, purpose and operational purview of the Plan and the discretion of
the
C-8
<PAGE>
Committee and to the extent that any such Stock Options or other Awards would so
qualify within the terms of the Plan, the Committee shall have full and complete
authority to grant Stock Options or other Awards that so qualify (including the
authority to grant, simultaneously or otherwise, Stock Options or other Awards
which do not so qualify) and to prescribe the terms and conditions (which need
not be identical as among recipients) in respect to the grant or exercise of any
such Stock Option or other Awards under the Plan. The Board of Directors may
amend the Plan from time to time or terminate the Plan at any time. However, no
action authorized by this paragraph shall reduce the amount of any existing
Award or change the terms and conditions thereof without the Participant's
consent. No amendment of the Plan, shall, without approval of the stockholders
of the Company (a) increase the total number of shares which may be issued under
the Plan or increase the amount of type of Awards that may be granted under the
Plan; (b) change the minimum purchase price, if any, of shares of Common Stock
which may be made subject to Awards under the Plan; or (c) modify the
requirements as to eligibility for Awards under the Plan.
SECTION 19. STOCKHOLDER APPROVAL.
The Plan shall be effective on July 1, 1992, and shall be submitted for
approval by the stockholders of the Company at the Annual Meeting of
Stockholders in 1992. If the stockholders do not approve the Plan, it, and any
action taken hereunder, shall be void and of no effect.
C-9
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRO FORMA FINANCIAL DATA.................................................. F-2
SELECTED HISTORICAL FINANCIAL DATA........................................ F-8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS............................................................... F-10
GRAY COMMUNICATIONS SYSTEMS, INC. (THE "COMPANY")
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors.......................................... F-20
Consolidated Balance Sheets at December 31, 1994 and 1995............... F-21
Consolidated Statements of Income for the years ended December 31, 1993,
1994 and 1995.......................................................... F-22
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995....................................... F-23
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995.................................................... F-24
Notes to Consolidated Financial Statements.............................. F-25
WRDW-TV (THE "AUGUSTA BUSINESS")
AUDITED FINANCIAL STATEMENTS:
Reports of Independent Auditor.......................................... F-43
Balance Sheet at December 31, 1995...................................... F-44
Statement of Income for the year ended December 31, 1995................ F-45
Statement of Partnership's Equity for the year ended December 31,
1995................................................................... F-46
Statement of Cash Flows for the year ended December 31, 1995............ F-47
Notes to Financial Statements........................................... F-48
Independent Auditors' Report............................................ F-51
Balance Sheet at December 31, 1994...................................... F-52
Statements of Income for the years ended December 31, 1993 and 1994..... F-53
Statements of Partnership's Equity for the years ended December 31, 1993
and 1994............................................................... F-54
Statements of Cash Flows for the years ended December 31, 1993 and
1994................................................................... F-55
Notes to Financial Statements........................................... F-56
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE "PHIPPS
BUSINESS")
AUDITED FINANCIAL STATEMENTS:
Report of Independent Auditors.......................................... F-60
Balance Sheets at December 31, 1994 and 1995............................ F-61
Statements of Income for the years ended December 31, 1993, 1994 and
1995................................................................... F-62
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995................................................................... F-63
Notes to Financial Statements........................................... F-64
</TABLE>
F-1
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited condensed combined pro forma financial statements of
the Company give effect to the Augusta Acquisition, the Stock Offering, the Note
Offering, the KTVE Sale, the Phipps Acquisition and the Financing as if such
transactions had occurred as of January 1, 1995 with respect to the statement of
income for the year ended December 31, 1995 and as of December 31, 1995 with
respect to the balance sheet. The Augusta Acquisition and the Phipps Acquisition
are reflected using the purchase method of accounting for business combinations.
The pro forma financial information is provided for comparative purposes only
and does not purport to be indicative of the results that actually would have
been obtained if the events set forth above had been effected on the dates
indicated or of those results that may be obtained in the future. The pro forma
financial statements are based on preliminary estimates of values and
transaction costs. The actual recording of the transactions will be based on
final appraisals, values and transaction costs. Accordingly, the actual
recording of the transactions can be expected to differ from these pro forma
financial statements.
F-2
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------- ADJUSTMENTS
AUGUSTA FOR AUGUSTA PRO FORMA STOCK PRO FORMA
COMPANY BUSINESS ACQUISITION COMPANY OFFERING COMPANY
--------- ---------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Broadcasting (less agency commissions) $ 36,750 $ 8,660 $ 228(1) $ 45,638 $ -- $ 45,638
Publishing 21,866 -- -- 21,866 -- 21,866
Paging -- -- -- -- -- --
--------- ---------- ------------ ----------- ------------ ----------
Total revenues 58,616 8,660 228 67,504 -- 67,504
Expenses:
Broadcasting 23,202 5,774 228(1) 29,204 -- 29,204
Publishing 20,016 -- -- 20,016 -- 20,016
Paging -- -- -- -- -- --
Corporate and administrative 2,258 -- -- 2,258 -- 2,258
Depreciation 2,633 272 (52)(2) 2,853 -- 2,853
Amortization of intangible assets 1,326 152 769(3) 2,247 -- 2,247
Non-cash compensation paid in common
stock 2,321 -- -- 2,321 -- 2,321
Management fee -- -- -- -- -- --
--------- ---------- ------------ ----------- ------------ ----------
Total expenses 51,756 6,198 945 58,899 -- 58,899
--------- ---------- ------------ ----------- ------------ ----------
Operating income 6,860 2,462 (717) 8,605 -- 8,605
Miscellaneous income (expense), net 143 (220) 128(4) 51 -- 51
--------- ---------- ------------ ----------- ------------ ----------
Income before interest expense, minority
interests and income taxes 7,003 2,242 (589) 8,656 -- 8,656
Interest expense 5,438 -- 3,355(5) 8,793 (5,468)(7) 3,325
--------- ---------- ------------ ----------- ------------ ----------
Income (loss) before minority interests and
income taxes 1,565 2,242 (3,944) (137) 5,468 5,331
Minority interests -- -- -- -- -- --
--------- ---------- ------------ ----------- ------------ ----------
Income (loss) before income taxes 1,565 2,242 (3,944) (137) 5,468 5,331
Income tax expense (benefit) 634 -- (675) (6) (41) 2,180(6) 2,139
--------- ---------- ------------ ----------- ------------ ----------
Net income (loss) 931 2,242 (3,269) (96) 3,288 3,192
Preferred stock dividends -- -- -- -- 1,400(8) 1,400
--------- ---------- ------------ ----------- ------------ ----------
Net income (loss) available to common
stockholders $ 931 $ 2,242 $ (3,269) $ (96) $ 1,888 $ 1,792
--------- ---------- ------------ ----------- ------------ ----------
--------- ---------- ------------ ----------- ------------ ----------
Average shares outstanding (000s) (18) 4,481 4,354 7,981
--------- ----------- ----------
--------- ----------- ----------
Earnings (loss) per share (19) $ 0.21 $ (0.02) $ 0.22
--------- ----------- ----------
--------- ----------- ----------
<CAPTION>
KTVE PRO FORMA PHIPPS PRO FORMA PRO FORMA
SALE (9) COMPANY BUSINESS ADJUSTMENTS COMBINED (20)
---------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Broadcasting (less agency commissions) $ (4,188) $ 41,450 $ 22,424 $ -- $ 63,874
Publishing -- 21,866 -- -- 21,866
Paging -- -- 4,897 -- 4,897
---------- ---------- ---------- ------------ -------
Total revenues (4,188) 63,316 27,321 -- 90,637
Expenses:
Broadcasting (3,313) 25,891 10,487 220(10) 37,177
579(11)
Publishing -- 20,016 -- -- 20,016
Paging -- -- 3,052 -- 3,052
Corporate and administrative -- 2,258 -- -- 2,258
Depreciation (438) 2,415 2,385 (625)(12) 4,175
Amortization of intangible assets -- 2,247 735 3,515(13) 6,497
Non-cash compensation paid in common
stock -- 2,321 -- -- 2,321
Management fee -- -- 3,280 (3,280)(14) --
---------- ---------- ---------- ------------ -------
Total expenses (3,751) 55,148 19,939 409 75,496
---------- ---------- ---------- ------------ -------
Operating income (437) 8,168 7,382 (409) 15,141
Miscellaneous income (expense), net (27) 24 12 -- 36
---------- ---------- ---------- ------------ -------
Income before interest expense, minority
interests and income taxes (464) 8,192 7,394 (409) 15,177
Interest expense -- 3,325 499 (499)(15) 21,131
17,806(16)
---------- ---------- ---------- ------------ -------
Income (loss) before minority interests and
income taxes (464) 4,867 6,895 (17,716) (5,954)
Minority interests -- -- 547 (547)(17) --
---------- ---------- ---------- ------------ -------
Income (loss) before income taxes (464) 4,867 6,348 (17,169) (5,954)
Income tax expense (benefit) (185) 1,954 -- (3,972)(6) (2,018)
---------- ---------- ---------- ------------ -------
Net income (loss) (279) 2,913 6,348 (13,197) (3,936)
Preferred stock dividends -- 1,400 -- -- 1,400
---------- ---------- ---------- ------------ -------
Net income (loss) available to common
stockholders $ (279) $ 1,513 $ 6,348 $ (13,197) $ (5,336)
---------- ---------- ---------- ------------ -------
---------- ---------- ---------- ------------ -------
Average shares outstanding (000s) (18) 7,981 7,854
---------- -------
---------- -------
Earnings (loss) per share (19) $ 0.19 $ (0.68)
---------- -------
---------- -------
</TABLE>
F-3
<PAGE>
The pro forma adjustments to reflect the Augusta Acquisition, the Stock
Offering, the Note Offering, the KTVE Sale, the Phipps Acquisition and the
Financing are as follows:
STATEMENT OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1995
1. Reflects the classification of national sales representative commissions as
an expense consistent with the presentation by the Company.
2. Reflects decreased annual depreciation resulting from the change in asset
lives in connection with the preliminary allocation of the Augusta
Acquisition purchase price to the newly acquired property and equipment, at
fair market value.
3. Reflects annual amortization of $107,000 on the Augusta Business's financing
costs over a seven-year period. Also reflects the annual amortization of
$813,000 on the intangible assets associated with the Augusta Acquisition
over a 40-year period.
4. Reflects the elimination of the corporate allocation to the Augusta Business
by its previous owner which will not be incurred by the Company.
5. Reflects increased annual interest expense of $155,000 due to an interest
rate adjustment on the Senior Note; increased annual interest expense of
$2.4 million on the Senior Credit Facility at LIBOR plus 3.5%, based on an
increase in the debt level subsequent to the Augusta Acquisition; and annual
interest expense of $800,000 on the 8% Note. Three month LIBOR on January 4,
1996 was approximately 5.625%.
6. Reflects the adjustment of the income tax provision to the estimated
effective tax rate.
7. Reflects decreased annual interest expense of $4.7 million on the Senior
Credit Facility resulting from payment from the proceeds of the Stock
Offering of $52.1 million in principal, bearing interest at an estimated
interest rate of 8.96% per annum. Also reflects a reduction of annual
interest expense of $800,000 on the 8% Note which will be converted to
Series A Preferred Stock.
8. Reflects annual dividends on the Company's Series A and Series B Preferred
Stock.
9. Reflects the elimination of the results of operations of KTVE. The pro forma
adjustments exclude an estimated gain of $5.4 million (net of estimated
income taxes of $2.8 million) from the KTVE Sale.
10. Reflects additional accounting and administrative expenses associated with
the Phipps Business.
11. Reflects increased pension expense for the Phipps Business subsequent to the
Phipps Acquisition. Historical pension expense for the Phipps Business was a
credit of $449,000 while pension expense for these operations subsequent to
the Phipps Acquisition is expected to be an expense of approximately
$130,000.
12. Reflects decreased annual depreciation resulting from the change in asset
lives in connection with the newly acquired property and equipment (at fair
market value) of the Phipps Acquisition.
13. Reflects annual amortization of intangible assets associated with the Phipps
Acquisition over a 40-year period.
14. Reflects elimination of the corporate allocation to the Phipps Business.
Such amounts will not be incurred by the Company in connection with its
operations of the Phipps Business.
15. Reflects the elimination of interest expense associated with borrowings of
the Phipps Business which will not be assumed by the Company.
16. Reflects increased annual interest expense of $16.3 million on the Notes,
which includes annual amortization expense of $525,000 resulting from the
transaction costs relating to the issuance of the Notes, increased annual
interest expense of $1.2 million relating to additional borrowings under the
Senior Credit Facility at an estimated interest rate of 8.96% plus
amortization of additional deferred financing costs of $214,000, and
increased annual interest expense of $125,000 due to an interest rate
adjustment from 10.7% to 11.2% on the Senior Note.
17. Reflects the elimination of minority interests associated with the Phipps
Business, because such minority interests will be acquired as part of of the
Phipps Acquisition.
18. Average outstanding shares used to calculate pro forma earnings (loss) per
share are based on weighted average common shares outstanding during the
period, adjusted for the Stock Offering.
19. If the issuance of Class B Common Stock and retirement of $52.1 million in
debt under the Senior Credit Facility had taken place at the beginning of
1995, pro forma net income (1995 historical earnings adjusted for interest
expense in connection with the payment under the Senior Credit Facility, net
of income tax) would have been $3.0 million, or $0.38 per share.
20. In connection with the Phipps Acquisition, the Company is seeking FCC
approval of the assignment of the television broadcast licenses for WCTV and
WKXT. Current FCC regulations will require the Company to divest its current
ownership interest in WALB and WJHG. In order to satisfy applicable FCC
requirements, the Company, subject to FCC approval, intends to swap such
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
1033 of the Code. If the Company is unable to effect such a swap on
satisfactory terms within the time period granted by the FCC, the Company
may transfer such assets to a trust with a view towards the trustee
effecting a swap or sale of such assets. Any such trust arrangement would be
subject to the approval of the FCC.
Condensed income statement data of WALB and WJHG are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------
WALB WJHG
----------------- -----------------
<S> <C> <C>
Broadcasting revenues............................. $ 9,445 $ 3,843
Expenses.......................................... 4,650 3,573
------ ------
Operating income.................................. 4,795 270
Other income...................................... 17 60
------ ------
Income before income taxes........................ 4,812 330
------ ------
Net income........................................ $ 2,984 $ 205
------ ------
------ ------
Media Cash Flow................................... $ 5,103 $ 549
------ ------
------ ------
</TABLE>
F-4
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ADJUSTMENTS
AUGUSTA FOR AUGUSTA PRO FORMA STOCK PRO FORMA KTVE PRO FORMA
COMPANY BUSINESS ACQUISITION COMPANY OFFERING COMPANY SALE (7) COMPANY
-------- -------- ----------- ---------- -------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash $ 560 $ 334 $ (334)(1) $ 560 $ 18,950(5) $ 19,510 $ 9,500 $ 29,010
Trade accounts receivable 9,560 1,748 -- 11,308 -- 11,308 -- 11,308
Recoverable income taxes 1,347 -- -- 1,347 -- 1,347 (1,347) --
Inventories 553 -- -- 553 -- 553 -- 553
Current portion of
program broadcast rights 1,153 924 (260)(2) 1,817 -- 1,817 (204) 1,613
Prepaid expenses and
other current assets 264 55 -- 319 -- 319 (33) 286
-------- -------- ----------- ---------- -------- ------------ ------------- ---------
Total current assets 13,437 3,061 (594) 15,904 18,950 34,854 7,916 42,770
Property and equipment --
net 17,017 1,778 402(1) 19,197 -- 19,197 (1,748) 17,449
Other assets
Deferred acquisition
costs 3,330 -- (1,500)(1) 454 -- 454 -- 454
(1,376)(3)
Deferred loan costs 1,232 -- 751(3) 1,983 -- 1,983 -- 1,983
Goodwill and other
intangibles 42,004 4,129 27,652(1) 74,410 -- 74,410 (2,322) 72,088
625(3)
Other 1,220 2,571 (2,518)(2) 1,273 -- 1,273 (17) 1,256
-------- -------- ----------- ---------- -------- ------------ ------------- ---------
Total other assets 47,786 6,700 23,634 78,120 -- 78,120 (2,339) 75,781
-------- -------- ----------- ---------- -------- ------------ ------------- ---------
Total assets $78,240 $11,539 $ 23,442 $113,221 $ 18,950 $132,171 $ 3,829 $136,000
-------- -------- ----------- ---------- -------- ------------ ------------- ---------
-------- -------- ----------- ---------- -------- ------------ ------------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Trade accounts payable $ 3,753 $ 233 $ (233)(1) $ 3,753 $ -- $ 3,753 $ -- $ 3,753
Employee compensation and
benefits 4,213 -- -- 4,213 -- 4,213 -- 4,213
Accrued expenses 561 -- 452(1) 1,013 -- 1,013 -- 1,013
Accrued interest 1,064 -- -- 1,064 -- 1,064 -- 1,064
Income taxes payable -- -- -- -- -- -- 1,461 1,461
Current portion of
broadcast program
obligations 1,205 898 (260)(2) 1,843 -- 1,843 (205) 1,638
Deferred paging service
income -- -- -- -- -- -- -- --
Current portion of
long-term debt 2,862 -- -- 2,862 -- 2,862 -- 2,862
-------- -------- ----------- ---------- -------- ------------ ------------- ---------
Total current liabilities 13,658 1,131 (41) 14,748 -- 14,748 1,256 16,004
Long-term debt 51,463 -- 33,728(4) 85,191 (10,000)(5) 23,091 -- 23,091
(52,100)(6)
Deferred credits 4,133 2,681 (2,518)(2) 4,296 -- 4,296 (3) 4,293
Minority interests -- -- -- -- -- -- -- --
Stockholders' equity
Series A Preferred Stock -- -- -- -- 10,000(5) 10,000 -- 10,000
Series B Preferred Stock -- -- -- -- 10,000(5) 10,000 -- 10,000
Class A Common Stock, no
par value 6,796 -- -- 6,796 -- 6,796 -- 6,796
Class B Common Stock, no
par value -- -- -- -- 61,050(5) 61,050 -- 61,050
Retained earnings 8,828 -- -- 8,828 -- 8,828 2,576 11,404
Net equity of acquired
operations -- 7,727 (7,727)(1) -- -- -- -- --
-------- -------- ----------- ---------- -------- ------------ ------------- ---------
15,624 7,727 (7,727) 15,624 81,050 96,674 2,576 99,250
Treasury stock (6,638 ) -- -- (6,638) -- (6,638) -- (6,638)
-------- -------- ----------- ---------- -------- ------------ ------------- ---------
8,986 7,727 (7,727) 8,986 81,050 90,036 2,576 92,612
-------- -------- ----------- ---------- -------- ------------ ------------- ---------
Total liabilities and
stockholders' equity $78,240 $11,539 $ 23,442 $113,221 $ 18,950 $132,171 $ 3,829 $136,000
-------- -------- ----------- ---------- -------- ------------ ------------- ---------
-------- -------- ----------- ---------- -------- ------------ ------------- ---------
<CAPTION>
PHIPPS PRO FORMA PRO FORMA
BUSINESS ADJUSTMENTS COMBINED (12)
-------- ----------- --------------
<S> <C> <C> <C>
ASSETS:
Cash $ 620 $(185,000)(8) $ 560
144,750(10)
11,800(11)
(620)(9)
Trade accounts receivable 5,153 -- 16,461
Recoverable income taxes -- -- --
Inventories -- -- 553
Current portion of
program broadcast rights 919 -- 2,532
Prepaid expenses and
other current assets 348 (348)(9) 286
-------- ----------- --------------
Total current assets 7,040 (29,418) 20,392
Property and equipment --
net 10,493 -- 27,942
Other assets
Deferred acquisition
costs -- -- 454
Deferred loan costs -- 5,250(10) 8,733
1,500(11)
Goodwill and other
intangibles 9,455 9,455(9) 242,048
169,960(8)
Other 575 -- 1,831
-------- ----------- --------------
Total other assets 10,030 167,255 253,066
-------- ----------- --------------
Total assets $27,563 $137,837 $301,400
-------- ----------- --------------
-------- ----------- --------------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Trade accounts payable $ 366 $ (366)(9) $ 3,753
Employee compensation and
benefits -- -- 4,213
Accrued expenses 907 (907)(9) 1,013
Accrued interest -- -- 1,064
Income taxes payable -- -- 1,461
Current portion of
broadcast program
obligations 922 -- 2,560
Deferred paging service
income 833 -- 833
Current portion of
long-term debt 1,390 (1,390)(9) 2,862
-------- ----------- --------------
Total current liabilities 4,418 (2,663) 17,759
Long-term debt 3,420 (3,420)(9) 186,391
13,300(11)
150,000(10)
Deferred credits 345 -- 4,638
Minority interests 586 (586)(9) --
Stockholders' equity
Series A Preferred Stock -- -- 10,000
Series B Preferred Stock -- -- 10,000
Class A Common Stock, no
par value -- -- 6,796
Class B Common Stock, no
par value -- -- 61,050
Retained earnings -- -- 11,404
Net equity of acquired
operations 18,794 (18,794)(8) --
-------- ----------- --------------
18,794 (18,794) 99,250
Treasury stock -- -- (6,638)
-------- ----------- --------------
18,794 (18,794) 92,612
-------- ----------- --------------
Total liabilities and
stockholders' equity $27,563 $137,837 $301,400
-------- ----------- --------------
-------- ----------- --------------
</TABLE>
F-5
<PAGE>
The pro forma adjustments to reflect the Augusta Acquisition, the Stock
Offering, the Note Offering, the KTVE Sale, the Phipps Acquisition and the
Financing are as follows:
BALANCE SHEET -- DECEMBER 31, 1995
1. Reflects the Augusta Acquisition, including a $1.5 million deposit which was
recorded as a deferred acquisition cost by the Company at December 31, 1995.
Pursuant to the acquisition agreement, cash balances were retained by the
seller and certain accounts payable were paid prior to closing. The Company
has recorded a preliminary allocation of the purchase price of $35.9 million
to the tangible assets and liabilities based upon estimates of fair market
value at January 4, 1996 as follows:
<TABLE>
<S> <C>
Trade accounts receivable................................... $ 1,748
Current portion of program broadcast rights................. 924
Prepaid expenses and other current assets................... 55
Property and equipment...................................... 2,180
Goodwill and other intangibles.............................. 32,406
Other....................................................... 2,571
Accrued expenses............................................ (452)
Current portion of program broadcast obligations............ (898)
Deferred credits............................................ (2,681)
---------
Purchase price of the Augusta Business including expenses... $ 35,853
---------
---------
Historical book value of the Augusta Business............... $ (7,727)
Assets not acquired and liabilities not assumed -- net...... 4,280
---------
Net assets acquired......................................... (3,447)
Purchase price of Augusta Business.......................... 35,853
---------
Goodwill and other intangibles.............................. $ 32,406
---------
---------
</TABLE>
The excess of purchase price over amounts allocated to the net tangible
assets will be amortized on a straight-line basis over a 40-year period.
Also reflects the elimination of assets of the Augusta Business which were
not purchased by the Company.
2. Reflects an adjustment in accounting method for recording film exhibition
rights and liabilities to conform to the Company's accounting method.
3. Reflects purchase costs and financing fees and expenses associated with the
Augusta Acquisition which were previously treated as deferred acquisition
costs.
4. Reflects the sale of the 8% Note and additional borrowings of $23.7 million
under the Senior Credit Facility.
5. Reflects the issuance net of fees and expenses of (i) approximately
3,500,000 shares of Class B Common Stock at an estimated $19 per share
pursuant to the Stock Offering, (ii) Series A Preferred Stock in exchange
for the 8% Note and (iii) $10 million of Series B Preferred Stock to certain
affiliates of the Company.
6. Reflects a repayment of $52.1 million on the Senior Credit Facility from
funds available subsequent to the Stock Offering.
7. Reflects the proposed KTVE Sale for $9.5 million plus the amount of the
accounts receivable on the date of the closing. The transaction is subject
to regulatory approval and is expected to close by September 1996, although
there can be no assurance with respect thereto.
8. Reflects the purchase of the Phipps Business and a preliminary allocation of
the purchase price of $185.0 million to the tangible assets and liabilities
based upon estimates of fair market value at December 31, 1995 as follows:
<TABLE>
<S> <C>
Trade accounts receivable................................... $ 5,153
Current portion of program broadcast rights................. 919
Property and equipment...................................... 10,493
Goodwill and other intangibles.............................. 169,960
Other....................................................... 575
Current portion of broadcast program obligations............ (922)
Deferred paging service income.............................. (833)
Deferred credits............................................ (345)
---------
Purchase price of Phipps Business including expenses........ $ 185,000
---------
---------
Historical book value of Phipps Business.................... $ (18,794)
Assets not acquired and liabilities not assumed -- net...... 3,754
---------
Net assets acquired......................................... (15,040)
Purchase price of Phipps Business........................... 185,000
---------
Goodwill and other intangibles.............................. $ 169,960
---------
---------
</TABLE>
F-6
<PAGE>
The excess of purchase price over amounts allocated to net tangible assets
will be amortized on a straight-line basis over a 40-year period. The
allocation of the purchase price is subject to adjustment based upon the
results of pending appraisals.
9. Reflects the elimination of certain of the assets and liabilities of the
Phipps Business, which were not included in the Phipps Acquisition.
10. Reflects the issuance of the Notes pursuant to the Note Offering and fees
and expenses associated with the Note Offering.
11. Reflects borrowings of $13.3 million under the Senior Credit Facility in
order to complete the Phipps Acquisition and estimated expenses of $1.5
million in connection with the contemplated amendment to the Senior Credit
Facility.
12. In connection with the Phipps Acquisition, the Company is seeking FCC
approval of the assignment of the television broadcast licenses for WCTV and
WKXT. Current FCC regulations will require the Company to divest its current
ownership interest in WALB and WJHG. In order to satisfy applicable FCC
requirements, the Company, subject to FCC approval, intends to swap such
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
1033 of the Code. If the Company is unable to effect such a swap on
satisfactory terms within the time period granted by the FCC, the Company
may transfer such assets to a trust with a view towards the trustee
effecting a swap or sale of such assets. Any such trust arrangement would be
subject to the approval of the FCC.
Condensed balance sheets of WALB and WJHG are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------
WALB WJHG
----------------- -----------------
<S> <C> <C>
Current assets.................................... $ 1,996 $ 822
Property and equipment............................ 1,806 973
Other assets...................................... 67 3
------ ------
Total assets...................................... $ 3,869 $ 1,798
------ ------
------ ------
Current liabilities............................... $ 985 $ 447
Other liabilities................................. 227 --
Stockholders' equity.............................. 2,657 1,351
------ ------
Total liabilities and stockholders equity......... $ 3,869 $ 1,798
------ ------
------ ------
</TABLE>
F-7
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT RATIO AND PER SHARE DATA)
SELECTED FINANCIAL DATA OF THE COMPANY
Set forth below are certain selected historical consolidated financial data
of the Company. This information should be read in conjunction with the
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 four-year period ended December 31, 1995 are derived
from the audited consolidated financial statements of the Company. The selected
consolidated financial data for, and as of the year ended December 31, 1991 are
derived from unaudited financial statements, since the Company had a June 30
fiscal year end.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1992 1993 1994 1995
1991 ------------ ------------ ------------ ------------
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues:
Broadcasting (less agency commissions).......... $ 13,553 $ 15,131 $ 15,004 $ 22,826 $ 36,750
Publishing...................................... 8,968 9,512 10,109 13,692 21,866
------------ ------------ ------------ ------------ ------------
Total revenues.................................... 22,521 24,643 25,113 36,518 58,616
Expenses:
Broadcasting.................................... 9,672 9,753 10,029 14,864 23,202
Publishing...................................... 6,444 6,752 7,662 11,198 20,016
Corporate and administrative.................... 1,889 2,627 2,326 1,959 2,258
Depreciation.................................... 1,487 1,197 1,388 1,745 2,633
Amortization of intangible assets............... 14 44 177 396 1,326
Non-cash compensation paid in common stock...... -- -- -- 80 2,321
------------ ------------ ------------ ------------ ------------
Total expenses.................................... 19,506 20,373 21,582 30,242 51,756
------------ ------------ ------------ ------------ ------------
Operating income.................................. 3,015 4,270 3,531 6,276 6,860
------------ ------------ ------------ ------------ ------------
Miscellaneous income (expense), net............... 778 (1,519) 202 189 143
------------ ------------ ------------ ------------ ------------
Income from continuing operations before interest
expense and income taxes......................... 3,793 2,751 3,733 6,465 7,003
Interest expense.................................. 787 1,486 985 1,923 5,438
------------ ------------ ------------ ------------ ------------
Income from continuing operations before income
taxes............................................ 3,006 1,265 2,748 4,542 1,565
Federal and state income taxes.................... 1,156 869 1,068 1,776 634
------------ ------------ ------------ ------------ ------------
Income from continuing operations................. 1,850 396 1,680 2,766 931
Discontinued business:
Income (loss) from operations of discontinued
business, net of applicable income tax expense
(benefit) of ($55), ($79) and $30,
respectively................................... (90) (129) 48 -- --
Gain on disposal of discontinued business, net
of applicable income tax expense of $501....... -- -- 818 -- --
------------ ------------ ------------ ------------ ------------
Net income........................................ $ 1,760 $ 267 $ 2,546 $ 2,766 $ 931
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Average outstanding common shares (000s).......... 6,469 4,668 4,611 4,689 4,481
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Income from continuing operations per common
share............................................ $ 0.29 $ 0.09 $ 0.36 $ 0.39 $ 0.21
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Cash dividends per common share................... $ 0.05 $ 0.07 $ 0.07 $ 0.07 $ 0.08
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital................................. $ 6,740 $ 2,976 $ 2,579 $ 1,075 $ (221)
Total assets.................................... 31,548 24,173 21,372 68,789 78,240
Total debt...................................... 20,378 12,412 7,759 52,940 54,325
Total stockholders' equity...................... 5,853 4,850 7,118 5,001 8,986
OTHER DATA:
Media Cash Flow (1)............................... $ 6,405 $ 8,079 $ 7,371 $ 10,522 $ 15,559
Operating cash flow (2)........................... 4,516 5,452 5,044 8,567 13,309
EBITDA (3)........................................ 4,516 5,512 5,095 8,498 13,140
Capital expenditures.............................. 2,235 2,216 2,582 1,768 3,280
Ratio of Media Cash Flow to interest expense...... 8.1 5.4 7.5 5.5 2.9
Ratio of operating cash flow to interest
expense.......................................... 5.7 3.7 5.1 4.5 2.4
Ratio of total debt to Media Cash Flow............ 3.2 1.5 1.1 5.0 3.5
Ratio of total debt to operating cash flow........ 4.5 2.3 1.5 6.2 4.1
Ratio of earnings to fixed charges (4)............ 4.7 1.8 3.4 3.1 1.3
</TABLE>
- - ----------------------------------
(1) Media Cash Flow represents operating income plus depreciation and
amortization (including amortization of program license rights), non-cash
compensation and corporate overhead, less payments of program license
liabilities.
(2) Operating cash flow represents operating income plus depreciation,
amortization (including amortization of program license rights) and
non-cash compensation, less payments for program license liabilities.
(3) EBITDA represents operating income plus (i) depreciation and amortization
(excluding amortization of program license rights) and (ii) non-cash
compensation paid in common stock (excluding stock payments made to the
401(k) plan). EBITDA is presented not as a measure of operating results,
but rather to provide additional information related to the Company's
ability to service debt. EBITDA should not be considered as an alternative
to either (x) operating income determined in accordance with generally
accepted accounting principles ("GAAP") as an indicator of operating
performance or (y) cash flows from operating activities (determined in
accordance with GAAP) as a measure of liquidity.
(4) For purposes of this item, "fixed charges" represent interest, the interest
element of rental expense, capitalized interest and amortization of debt
issuance costs and "earnings" represent net income (loss) before income
taxes, discontinued operations, extraordinary items, cumulative effect of
change in accounting principles and fixed charges.
F-8
<PAGE>
SELECTED FINANCIAL DATA OF THE PHIPPS BUSINESS
Set forth below are certain selected historical financial data of the Phipps
Business. This information should be read in conjunction with the financial
statements of the Phipps Business 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 Phipps Business." The
selected historical financial data for, and as of the end of, each of the years
in the three-year period ended December 31, 1995 are derived from the audited
financial statements of the Phipps Business. The selected financial data for,
and as of the end of, each of the years ended December 31, 1991 and 1992 are
derived from the unaudited accounting records of the Phipps Business.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1993 1994 1995
1991 1992(1) --------- --------- ---------
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues:
Broadcasting (less agency commissions)................................ $ 10,492 $ 14,523 $ 19,460 $ 21,524 $ 22,424
Paging................................................................ 3,369 3,646 3,788 4,277 4,897
----------- ----------- --------- --------- ---------
Total revenues.......................................................... 13,861 18,169 23,248 25,801 27,321
Expenses:
Broadcasting.......................................................... 5,298 7,518 10,734 10,211 10,487
Paging................................................................ 2,356 2,298 2,529 2,764 3,052
Management fees....................................................... 579 973 2,462 2,486 3,280
Depreciation and amortization......................................... 1,513 1,734 2,836 2,672 3,120
----------- ----------- --------- --------- ---------
Total expenses.......................................................... 9,746 12,523 18,561 18,133 19,939
----------- ----------- --------- --------- ---------
Operating income........................................................ 4,115 5,646 4,687 7,668 7,382
Miscellaneous income (expense), net..................................... 5 8 16 666 12
----------- ----------- --------- --------- ---------
Income before interest expense and minority interests................... 4,120 5,654 4,703 8,334 7,394
Interest expense........................................................ 162 442 632 480 499
----------- ----------- --------- --------- ---------
Income before minority interests........................................ 3,958 5,212 4,071 7,854 6,895
Minority interests...................................................... -- 331 140 635 547
----------- ----------- --------- --------- ---------
Net income............................................................ $ 3,958 $ 4,881 $ 3,931 $ 7,219 $ 6,348
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
Supplemental unaudited pro forma information: (2)
Net income, as above.................................................. 3,958 4,881 3,931 7,219 6,348
Pro forma provision for income tax expense............................ 1,504 1,855 1,500 2,743 2,413
----------- ----------- --------- --------- ---------
Pro forma net income.................................................... $ 2,454 $ 3,026 $ 2,431 $ 4,476 $ 3,935
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital......................................................... $ 595 $ 615 $ 1,127 $ 1,421 $ 2,622
Total assets............................................................ 8,931 25,068 24,819 25,298 27,562
Total debt.............................................................. 1,388 7,697 6,542 6,065 4,810
Minority interests...................................................... -- 1,154 824 728 586
Owner's equity.......................................................... 6,351 13,276 14,306 15,465 18,794
OTHER DATA:
Media Cash Flow (3)..................................................... $ 6,207 $ 7,968 $ 10,466 $ 12,983 $ 13,696
Operating cash flow (4)................................................. 5,628 6,994 8,003 10,498 10,416
EBITDA (5).............................................................. 5,627 7,380 7,523 10,340 10,502
Capital expenditures.................................................... 1,005 2,258 3,538 3,353 3,188
</TABLE>
- - --------------------------
(1) Includes the acquisition of a majority interest in WKXT in July 1992, which
was accounted for using the purchase method of accounting.
(2) John H. Phipps, Inc. and its subsidiaries file a consolidated federal income
tax return and separate state tax returns. Income tax expense for the Phipps
Business is not presented in the financial statements as such amounts are
computed and paid by John H. Phipps, Inc. Pro forma federal and state income
taxes for the Phipps Business are calculated on a pro forma, separate return
basis.
(3) Media Cash Flow represents operating income plus depreciation, amortization
(including amortization of program license rights) and corporate overhead
less payments of program license liabilities.
(4) Operating cash flow represents operating income plus depreciation and
amortization (including amortization of program license rights) less
payments for program license liabilities.
(5) EBITDA represents operating income plus depreciation and amortization
(excluding amortization of program license rights). EBITDA is presented not
as a measure of operating results, but rather to provide additional
information related to the Company's ability to service debt. EBITDA should
not be considered as an alternative to either (x) operating income
determined in accordance with GAAP as an indicator of operating performance
or (y) cash flows from operating activities (determined in accordance with
GAAP) as a measure of liquidity.
F-9
<PAGE>
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 the Company should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
The Company derives its revenues from its television broadcasting and
publishing operations. As a result of the Kentucky Acquisition (as defined) in
1994, the proportion of the Company's revenues derived from television
broadcasting has increased and this proportion will continue to increase as a
result of the Augusta Acquisition, which was completed in January 1996, and the
Phipps Acquisition, which is expected to occur by September 1996. 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 contribution of the Company's publishing operations. Set forth below, for
the periods indicated, is certain information concerning the relative
contributions of the Company's television broadcasting and publishing operations
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995
------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
TELEVISION BROADCASTING
Revenues $ 15,003.7 59.8% $ 22,826.4 62.5% $ 36,750.0 62.7%
Operating income (1) 4,070.6 66.9 6,556.0 78.4 10,585.2 94.1
PUBLISHING
Revenues $ 10,109.4 40.2% $ 13,692.0 37.5% $ 21,866.2 37.3%
Operating income (1) 2,009.1 33.1 1,804.0 21.6 660.2 5.9
</TABLE>
- - ------------------------
(1) Excludes any allocation of corporate and administrative expenses.
TELEVISION BROADCASTING
Set forth below are the principal types of broadcasting revenues earned by
the Company's television stations for the periods indicated and the percentage
contribution of each to total Company revenues (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995
------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL COMPANY TOTAL COMPANY TOTAL COMPANY
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Local $ 7,312.3 29.2% $ 12,191.4 33.4% $ 20,888.1 35.6%
National 6,102.8 24.3 7,804.4 21.4 10,881.1 18.6
Network compensation 1,286.1 5.1 1,297.5 3.5 2,486.8 4.2
Political 17.7 0.1 1,029.0 2.8 1,174.2 2.0
Production and other 284.8 1.1 504.1 1.4 1,319.8 2.3
---------- --- ---------- --- ---------- ---
$ 15,003.7 59.8% $ 22,826.4 62.5% $ 36,750.0 62.7%
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
In the Company's broadcasting operations, broadcast advertising is sold for
placement either preceding or following a television stations' 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. In addition, broadcast
F-10
<PAGE>
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. The Company estimates that approximately 56.5% of the annual
gross revenues of the Company's television stations for the year ended December
31, 1995 were generated from local advertising, which is sold by a station's
sales staff directly to local accounts, and the remainder represents 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 of each year, due in part to increases in retail advertising in
the spring and in the period leading up to and including the holiday season. In
addition, broadcast advertising revenues are generally higher during even
numbered election years due to spending by political candidates, which spending
typically is heaviest during the fourth quarter.
The broadcasting operations' primary operating expenses are employee
compensation, related benefits and programming costs. In addition, the
broadcasting operations incur overhead expenses such as maintenance, supplies,
insurance, rent and utilities. A large portion of the operating expenses of the
broadcasting operations is fixed.
PUBLISHING
Set forth below are the principal types of publishing revenues earned by the
Company's publishing operations for the periods indicated and the percentage
contribution of each to total Company revenues (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995
------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL COMPANY TOTAL COMPANY TOTAL COMPANY
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Retail advertising $ 5,734.3 22.8% $ 7,460.3 20.4% $ 11,044.2 18.8%
Classified 2,336.5 9.3 3,174.2 8.7 5,323.8 9.1
Circulation 2,011.8 8.0 2,628.9 7.2 3,783.8 6.5
Other 26.8 0.1 428.6 1.2 1,714.4 2.9
---------- --- ---------- --- ---------- ---
$ 10,109.4 40.2% $ 13,692.0 37.5% $ 21,866.2 37.3%
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
In the Company's publishing operations, advertising contracts are generally
annual and primarily provide for a commitment as to the volume of advertising
purchased by a customer. The publishing operations' advertising revenues are
primarily generated from retail advertising. As with the broadcasting
operations, the publishing operations' revenues are generally highest in the
second and fourth quarters of each year.
The publishing operations' primary operating expenses are employee
compensation, related benefits and newsprint costs. In addition, publishing
operations incur overhead expenses such as maintenance, supplies, insurance,
rent and utilities. A large portion of the operating expenses of the publishing
operations is fixed, although the Company has experienced significant
variability in its newsprint costs in recent years.
F-11
<PAGE>
MEDIA CASH FLOW
The following table sets forth certain operating data for both the broadcast
and publishing operations for the years ended December 31, 1993, 1994 and 1995
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
--------- ---------- ----------
<S> <C> <C> <C>
Operating income $ 3,530.7 $ 6,276.4 $ 6,859.7
Add:
Amortization of program license rights 924.9 1,218.0 1,647.0
Depreciation and amortization 1,564.8 2,141.6 3,958.9
Corporate overhead 2,326.7 1,958.4 2,258.3
Non-cash compensation and contributions to the Company's 401(k) plan, paid
in common stock -- 109.5 2,612.2
Less:
Payments for program license liabilities (976.2) (1,181.6) (1,776.8)
--------- ---------- ----------
Media Cash Flow (1) $ 7,370.9 $ 10,522.3 $ 15,559.3
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
- - ------------------------
(1) Of Media Cash Flow, $4.9 million, $8.0 million and $13.6 million was
attributable to the Company's broadcasting operations in 1993, 1994 and
1995, respectively.
"Media Cash Flow" is defined as operating income from broadcast and
publishing operations (and includes paging with regard to the Phipps Business)
before income taxes and interest expense, 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 broadcast 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 indicator or alternative to operating income, net income or
cash flow as reflected in the consolidated financial statements of the Company
and is not a measure of financial performance under GAAP and should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP.
ACQUISITIONS
Since 1994, the Company has completed several broadcasting and publishing
acquisitions. The operating results of the Company reflect significant increases
in substantially all line items between the years ended December 31, 1994 and
December 31, 1995. The principal reason for these increases is the acquisition
by the Company in September 1994 of WKYT and WYMT (together, the "Kentucky
Business") for $38.1 million and the assumption of $2.3 million of liabilities
(the "Kentucky Acquisition"). In addition, during 1994 the Company acquired THE
ROCKDALE CITIZEN for approximately $4.8 million (May 1994) and four shoppers for
approximately $1.5 million (October 1994) (collectively the "1994 Publishing
Acquisitions"), and during 1995 the Company acquired the GWINNETT DAILY POST for
approximately $3.7 million (January 1995) and three shoppers for an aggregate
purchase price of approximately $1.4 million (September 1995) (collectively the
"1995 Publishing Acquisitions"). The 1994 Publishing Acquisitions and the 1995
Publishing Acquisitions are collectively referred to as the "Publishing
Acquisitions."
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Total revenues for the year ended December 31, 1995 increased
$22.1 million or 60.5% over the year ended December 31, 1994, from $36.5 million
to $58.6 million. This increase was attributable to (i) the effect of owning the
Kentucky Business for all of 1995 versus the last four months of 1994, (ii) the
Publishing Acquisitions and (iii) increases in total revenues of the Company
(excluding the Kentucky Business and the Publishing Acquisitions). The Kentucky
Acquisition and the Publishing Acquisitions accounted for $19.3 million or 87.3%
of the revenue increase.
Broadcast net revenues increased $13.9 million or 61.0% over the prior year,
from $22.8 million to $36.7 million. Revenues generated by the Kentucky
Acquisition accounted for $12.9 million or 92.8% of the
F-12
<PAGE>
increase. On a pro forma basis, broadcast net revenues for the Kentucky Business
for the year ended December 31, 1995 increased $2.7 million or 16.1% over the
year ended December 31, 1994, from $16.6 million to $19.3 million. Broadcast net
revenues, excluding the Kentucky Acquisition, increased 6.1% or $1.0 million
over the prior year. Approximately $889,000 and $304,000 of the $1.0 million
increase in total broadcast net revenues, excluding the Kentucky Acquisition,
were due to higher local and national advertising spending, respectively.
Approximately $417,000 of the $1.0 million increase in total broadcast net
revenues, excluding the Kentucky Acquisition, is a result of higher network
compensation negotiated by the Company with CBS and NBC, respectively. These
increases were offset by a $617,000 decrease in political advertising revenues
associated with cyclical political activity.
Publishing revenues increased $8.2 million or 59.7% over the prior year,
from $13.7 million to $21.9 million. Approximately $6.4 million or 77.8% of the
increase was due to the Publishing Acquisitions. Publishing revenues, excluding
the Publishing Acquisitions, increased $1.8 million or 15.5% over the prior
year. Advertising and circulation revenue, excluding the Publishing
Acquisitions, comprised approximately $885,000 and $511,000, respectively, of
the revenue increase. This increase in circulation revenue can be attributed
primarily to price increases over the prior year. This increase in classified
advertising, excluding the Publishing Acquisitions, was primarily the result of
rate and linage increases. Approximately $417,000 of the revenue increase,
excluding the Publishing Acquisitions, was the result of higher special events
and commercial printing revenues.
OPERATING EXPENSES. Operating expenses for the year ended December 31, 1995
increased $21.5 million or 71.1% over the year ended December 31, 1994, from
$30.2 million to $51.7 million, primarily due to the Kentucky Acquisition and
the Publishing Acquisitions.
Broadcasting expenses increased $8.3 million or 56.1% over the prior year,
from $14.9 million to $23.2 million. The increase was attributable primarily to
the Kentucky Acquisition. On a pro forma basis, broadcast expenses for the
Kentucky Business for the year ended December 31, 1995 increased $1.5 million or
14.3% over the year ended December 31, 1994, from $10.7 million to $12.2
million. The increase in broadcast expenses for the Kentucky Business can be
attributed primarily to increased payroll related costs and sales commissions.
Broadcasting expenses, excluding the Kentucky Acquisition, remained relatively
constant primarily as a result of lower syndicated film programming costs offset
by higher payroll related costs.
Publishing expenses increased $8.8 million or 78.7% over the prior year,
from $11.2 million to $20.0 million. Approximately $7.1 million or 80.6% of the
increase was due to the Publishing Acquisitions. Publishing expenses, excluding
the Publishing Acquisitions, increased $1.7 million or 18.5%, primarily due to a
40% increase in newsprint cost, increased payroll related costs and product
delivery and promotion costs.
Corporate and administrative expenses increased $300,000 or 15.3% over the
prior year, from $2.0 million to $2.3 million. This increase was attributable
primarily to the amendment of an employment agreement with the Company's former
chief executive officer, which resulted in a $440,000 charge to expense.
Depreciation of property and equipment and amortization of intangible assets
was $3.9 million for the year ended December 31, 1995, compared to $2.1 million
for the prior year, an increase of $1.8 million or 84.9%. This increase was
primarily the result of higher depreciation and amortization costs related to
the Kentucky Acquisition and the Publishing Acquisitions.
Non-cash compensation paid in Class A Common Stock resulted from the
Company's employment agreements with its current President and its former chief
executive officer. The current President's employment agreement provides him
with 122,034 shares of Class A Common Stock if his employment continues until
September 1999. The Company will recognize $1.2 million of compensation expense
for this award ratably over such five-year period. This agreement resulted in a
charge to expense of $240,000 for the year ended December 31, 1995 as compared
to $80,000 for the year ended December 31, 1994. In addition, the Company
awarded 150,000 shares of Class A Common Stock, pursuant to the amended
employment agreement with its former chief executive officer, which resulted in
an expense of $2.1 million, all of which was recognized in 1995.
F-13
<PAGE>
INTEREST EXPENSE. Interest expense increased $3.5 million or 182.8%, from
$1.9 million for the year ended December 31, 1994 to $5.4 million for the year
ended December 31, 1995. This increase was attributable primarily to increased
levels of debt resulting from the financing of the Kentucky Acquisition and the
Publishing Acquisitions. The Company entered into a $25 million notional amount
five year interest rate swap agreement on June 2, 1995, to effectively convert a
portion of its floating rate debt to a fixed rate basis. Most of the Company's
outstanding debt under the Senior Credit Facility is subject to this interest
rate swap. The Company recorded approximately $34,000 of interest expense
relative to the interest rate swap in 1995. The effective interest rate of the
Senior Credit Facility and interest rate swap at December 31, 1995 was
approximately 8.64% and 9.10%, respectively.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUES. Total revenues for the year ended December 31, 1994 increased
$11.4 million or 45.4% over the year ended December 31, 1993, from $25.1 million
to $36.5 million. Excluding the Kentucky Acquisition and the 1994 Publishing
Acquisitions, the increase was $3.1 million or 12.3%.
Broadcast net revenues increased $7.8 million or 52.1% over the prior year,
from $15.0 million to $22.8 million. Broadcast net revenues, excluding the
Kentucky Acquisition, increased 9.8% or $1.5 million over the prior year. The
Kentucky Acquisition contributed $6.3 million to this increase. Excluding the
Kentucky Acquisition, approximately $921,000 of the $1.5 million increase was a
result of higher levels of political advertising spending due to cyclical
election activity in the Company's broadcast markets. Excluding the Kentucky
Acquisition, local and national advertising contributed an additional $668,000
to the revenue increase. These increases were offset by decreased network
compensation related to the preemption of network programming in favor of local
advertising.
Publishing revenues increased $3.6 million or 35.4% over the prior year,
from $10.1 million to $13.7 million. The 1994 Publishing Acquisitions
contributed $2.0 million to this increase. Publishing revenues, excluding the
1994 Publishing Acquisitions, increased $1.6 million over the prior year.
Advertising and circulation revenues comprised $833,000 and $436,000,
respectively, of the revenue increase. Special events and commercial printing
services accounted for $344,000 of the revenue increase.
OPERATING EXPENSES. Operating expenses for the year ended December 31, 1994
increased $8.7 million or 40.1% over the year ended December 31, 1993, from
$21.6 million to $30.3 million, attributable primarily to the Kentucky
Acquisition and the 1994 Publishing Acquisitions.
Broadcasting expenses increased $4.8 million or 48.2% over the prior year,
from $10.0 million to $14.8 million primarily due to the Kentucky Acquisition.
Broadcasting expenses, excluding the Kentucky Acquisition, increased
approximately $1.0 million, or 10.0%, over the prior year from $10.0 million to
$11.0 million. This increase was attributable to increased payroll related costs
associated with improvement of news programming, costs associated with coverage
of the 1994 flood in Albany, Georgia and other costs related to on-air product
upgrades at the stations.
Publishing expenses increased $3.5 million or 46.1% over the prior year,
from $7.7 million to $11.2 million primarily as a result of the 1994 Publishing
Acquisitions. Publishing expenses, excluding the 1994 Publishing Acquisitions,
increased approximately $1.6 million or 20.9% during the year ended December 31,
1994, as compared to the prior year. This increase was primarily attributable to
an 11.9% increase in newsprint usage, payroll related costs and other product
improvement costs associated with format changes and expanded market coverage of
THE ALBANY HERALD.
Corporate and administrative expenses decreased $368,000 or 15.8% during the
year ended December 31, 1994, from $2.3 million to $1.9 million. This decrease
can be attributed to lower professional fees and related expenses.
Depreciation of property and equipment and amortization of intangible assets
was $2.2 million for the year ended December 31, 1994 compared to $1.6 million
for the prior year, an increase of $577,000 or 36.9%. This increase was due
principally from the depreciation and amortization expense related to the assets
acquired in the Kentucky Acquisition and 1994 Publishing Acquisitions.
F-14
<PAGE>
INTEREST EXPENSE. Interest expense was $1.9 million for the year ended
December 31, 1994 compared to $985,000 for the prior year, an increase of
$938,000 or 95.3%. This increase was due primarily to increased levels of debt
resulting from the financing of the Kentucky Acquisition and the 1994 Publishing
Acquisitions. At December 31, 1993 and 1994 the Company's outstanding debt was
$7.3 million and $52.9 million, respectively.
RESULTS OF OPERATIONS OF THE PHIPPS BUSINESS
INTRODUCTION
The following analysis of the financial condition and results of operations
of the Phipps Business should be read in conjunction with the Phipps Business's
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
The Phipps Business derives its revenues from its television broadcasting
operations which consist of two CBS-affiliated television stations serving
Tallahassee, Florida/Thomasville, Georgia and Knoxville, Tennessee, a satellite
broadcasting business based in Tallahassee, Florida and a paging business also
based in Tallahassee, Florida.
Set forth below, for the periods indicated, is certain information
concerning the relative contributions of the Phipps Business's broadcasting
(including satellite broadcasting) and paging operations (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995
------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
TELEVISION BROADCASTING
Revenues $19,460.1 83.7% $21,524.3 83.4% $22,424.1 82.1%
Operating income (1) 6,636.4 92.8 9,298.1 91.6 9,635.3 90.4
PAGING
Revenues $3,787.9 16.3% $4,276.6 16.6% $4,897.5 17.9%
Operating income (1) 512.7 7.2 854.9 8.4 1,026.9 9.6
</TABLE>
- - ------------------------
(1) Excludes any allocation of corporate and administrative expenses.
TELEVISION BROADCASTING AND PAGING REVENUES
Set forth below are the principal types of broadcast net revenues earned by
the Phipps Business's television stations (including the satellite broadcasting
operation) for the periods indicated and the percentage contribution of each to
the Phipps Business's total revenues (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995
------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL TOTAL TOTAL
REVENUES REVENUES REVENUES
OF PHIPPS OF PHIPPS OF PHIPPS
AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
TELEVISION BROADCASTING
Net revenues:
Local $9,732.8 41.9% $10,412.2 40.4% $11,149.2 40.8%
National 7,057.2 30.4 7,217.0 27.9 7,844.9 28.7
Network compensation 1,164.6 5.0 1,433.2 5.6 1,740.1 6.4
Political 9.1 0.0 1,147.1 4.4 33.9 0.1
Production and other (1) 1,496.4 6.4 1,314.8 5.1 1,656.0 6.1
---------- --- ---------- --- ---------- ---
$19,460.1 83.7% $21,524.3 83.4% $22,424.1 82.1%
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
- - ------------------------
(1) Includes satellite broadcasting business.
F-15
<PAGE>
Set forth below are the principal types of revenues earned by the Phipps
Business's paging operations for the periods indicated and the percentage
contribution of each to the Phipps Business's total revenues (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995
------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL TOTAL TOTAL
REVENUES REVENUES REVENUES
OF PHIPPS OF PHIPPS OF PHIPPS
AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
PAGING
Net revenues:
Paging lease and service $3,741.6 16.1% $4,201.4 16.3% $5,004.9 18.3%
Other income (expense), net 46.3 0.2 75.2 0.3 (107.4) (.4)
---------- --- ---------- --- ---------- ---
$3,787.9 16.3% $4,276.6 16.6% $4,897.5 17.9%
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
MEDIA CASH FLOW
The following table sets forth certain operating data for the broadcast and
paging operations for the years ended December 31, 1993, 1994 and 1995 (dollars
in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Operating income $4,686.9 $7,667.6 $7,381.8
Add:
Amortization of program license rights 1,552.4 1,021.4 844.8
Depreciation and amortization 2,836.0 2,672.2 3,120.4
Corporate overhead 2,462.2 2,485.4 3,280.4
Less:
Payments for program license liabilities (1,072.0) (863.3) (931.0)
---------- ---------- ----------
Media Cash Flow (1) $10,465.5 $12,983.3 $13,696.4
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- - ------------------------
(1) Of Media Cash Flow, $9.2 million, $11.5 million and $11.9 million was
attributable to the Phipps Business's broadcasting operations in 1993, 1994
and 1995, respectively.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Total revenues for the year ended December 31, 1995 increased
$1.5 million or 5.9% over the year ended December 31, 1994, from $25.8 million
to $27.3 million. This increase was attributable to an improvement in local and
national advertising revenue in the broadcasting operations and the
implementation of a reseller program in the paging operations.
Broadcast net revenues increased $900,000 or 4.2% over the prior year, from
$21.5 million to $22.4 million. Approximately $737,000, $628,000, $307,000 and
$341,000 of the increase in total broadcast net revenues was due to higher local
advertising revenue, national advertising revenue, network compensation and
production revenues, respectively, offset by a $1.1 million decrease in
political advertising spending associated with cyclical political activity. In
addition, revenues generated from satellite broadcasting operations increased
due to additional equipment coming on line.
Net paging revenues increased $621,000 or 14.5% over the prior year, from
$4.3 million to $4.9 million. The increase was attributable primarily to higher
sales volume generated by a reseller program implemented during 1995.
F-16
<PAGE>
OPERATING EXPENSES. Operating expenses for the year ended December 31, 1995
increased $1.8 million or 10.0% over the year ended December 31, 1994, from
$18.1 million to $19.9 million. The increase was attributable primarily to
higher payroll and related costs and sales expenses and commissions associated
with higher sales volumes, increased corporate overhead and depreciation and
amortization costs.
Broadcasting expenses increased $276,000 or 2.7% over the prior year, from
$10.2 million to $10.5 million. The increase was attributable primarily to
higher payroll and related costs offset by lower syndicated film programming
costs.
Paging expenses increased $288,000 or 10.4% over the prior year, from $2.8
million to $3.1 million. The increase was attributable primarily to higher
payroll, sales and operating costs associated with revenue growth.
Corporate and administrative expenses for the year ended December 31, 1995
increased $794,000 or 32.0% over the year ended December 31, 1994, from $2.5
million to $3.3 million. The increase was attributable to higher personnel costs
and overhead allocation.
Depreciation of property and equipment and amortization of intangible assets
for the year ended December 31, 1995 increased $448,000 or 16.8% over the year
ended December 31, 1994, from $2.7 million to $3.1 million. This increase was
primarily the result of higher depreciation costs relating to property and
equipment purchases and higher amortization of intangible assets in connection
with the purchase of certain minority interests of WKXT in Knoxville, Tennessee.
INTEREST EXPENSE. Interest expense remained relatively unchanged from year
to year.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUES. Total revenues for the year ended December 31, 1994 increased
$2.6 million or 11.0% over the year ended December 31, 1993, from $23.2 million
to $25.8 million. This increase was attributable to higher local, national and
political advertising as well as an increase in network compensation. In
addition, paging revenues increased as geographic coverage expanded.
Broadcast net revenues increased $2.1 million or 10.6% over the prior year,
from $19.5 million to $21.5 million. Approximately $679,000 and $160,000 of the
$2.1 million increase in total broadcast net revenues is due to higher local and
national advertising spending, respectively. Approximately $269,000 and $1.1
million of the $2.1 million increase is due to higher network compensation and
political advertising revenues associated with cyclical political activity,
respectively, offset by a $182,000 decrease in satellite broadcasting revenues.
Net paging revenues increased $489,000 or 12.9% over the prior year, from
$3.8 million to $4.3 million. The increase was attributable primarily to higher
sales volume due to increased geographical coverage.
OPERATING EXPENSES. Operating expenses for the year ended December 31, 1994
decreased $428,000 or 2.3% from the year ended December 31, 1993, from $18.6
million to $18.2 million. The decrease was attributable primarily to lower
syndicated programming costs, offset by slightly higher paging expenses due to
higher sales volume and lower depreciation and amortization.
Broadcasting expenses decreased $523,000 or 4.9% from the prior year, from
$10.7 million to $10.2 million. The decrease was attributable primarily to the
write-off of certain syndicated programming in 1993 that was not being utilized.
Paging expenses increased $235,000 or 9.3% over the prior year, from $2.5
million to $2.8 million. The increase was attributable primarily to costs
associated with higher sales volume.
Corporate and administrative expenses remained relatively unchanged from
year to year.
Depreciation of property and equipment and amortization of intangible assets
for the year ended December 31, 1994 decreased $164,000 or 5.8% from the year
ended December 31, 1993, from $2.8 million to $2.7 million. This decrease was
primarily the result of the completion of depreciation for certain items of
equipment purchased in 1988.
F-17
<PAGE>
INTEREST EXPENSE. Interest expense for the year ended December 31, 1994
decreased $152,000 or 24.0% from the year ended December 31, 1993, from $632,000
to $480,000. This decrease was attributable primarily to lower levels of debt
associated with WKXT.
LIQUIDITY AND CAPITAL RESOURCES
Following the consummation of the KTVE Sale, the Phipps Acquisition, the
Financing, the Stock Offering, and the Note Offering, the Company will be highly
leveraged. The Company anticipates that its principal uses of cash for the next
several years will be working capital and debt service requirements, cash
dividends, capital expenditures and expenditures related to additional
acquisitions. The Company anticipates that its operating cash flow, together
with borrowings available under the Senior Credit Facility, will be sufficient
for such purposes.
The Company's working capital (deficiency) was $1.1 million and $(221,000)
at December 31, 1994 and 1995, respectively. The working capital of the Phipps
Business was $1.4 million and $2.6 million at December 31, 1994 and 1995
respectively. The Company's cash provided from operations was $5.8 million and
$7.6 million for the years ended December 31, 1994 and 1995, respectively. The
Phipps Business's cash provided from operations was $9.8 million and $9.3
million for the years ended December 31, 1994 and 1995, respectively.
The Company's cash used in investing activities was $42.8 million and $8.9
million in 1994 and 1995, respectively. The change of $(45.9) million from 1993
to 1994 was due primarily to the Kentucky Acquisition and the 1994 Publishing
Acquisitions. The change of $33.9 million from 1994 to 1995 was due primarily to
the Kentucky Acquisition and the 1994 Publishing Acquisitions, partially offset
by the 1995 Publishing Acquisitions and the deferred costs related to the
Augusta Acquisition. The Phipps Business's cash used in investing activities was
$2.5 million and $3.8 million in 1994 and 1995, respectively.
The Company used $4.9 million in cash in 1993, and was provided $37.2
million and $1.3 million in cash by financing activities in 1994 and 1995,
respectively. The use of cash in 1993 resulted primarily from the repayment of
debt while cash provided by financing activities in 1994 and 1995 was
principally due to increased borrowings in 1994 to finance the Kentucky
Acquisition and the 1994 Publishing Acquisitions, as well as increased
borrowings in 1995 to finance the 1995 Publishing Acquisitions and the funding
of the deposit for the Augusta Acquisition. Long-term debt was $54.3 million at
December 31, 1995. On January 4, 1996, the Company acquired the Augusta
Business. The cash consideration of approximately $35.9 million, including
acquisition costs of approximately $600,000, was financed primarily through
long-term borrowings under the Senior Credit Facility and through the sale of
the 8% Note to Bull Run Corporation. For the year ended December 31, 1995, the
Augusta Business reported net revenues and broadcast cash flow of $8.7 million
and $2.8 million, respectively. The Phipps Business used $7.2 million and $4.9
million in cash for financing activities in 1994 and 1995, respectively.
In 1995, the Company made $3.3 million in capital expenditures, relating
primarily to the broadcasting operations and paid $1.8 million for program
broadcast rights. In 1995, the Phipps Business made $3.2 million in capital
expenditures, and paid $931,000 for program broadcast rights. The Company
anticipates making $3.0 million in capital expenditures and $2.7 million in
payments for program broadcast rights in 1996. Subsequent to the consummation of
the Phipps Acquisition, the Company anticipates that its annual capital
expenditures will approximate $5 million.
In addition to the consummation of the Phipps Acquisition, the Company
intends to implement the Financing to increase liquidity and improve operating
and financial flexibility. Pursuant to the Financing, the Company will (i) repay
approximately $38.8 million principal amount of outstanding indebtedness under
the Senior Credit Facility, together with accrued interest thereon and to amend
the terms therof, (ii) issue $10 million liquidation preference of its Series A
Preferred Stock in exchange for the 8% Note issued to Bull Run Corporation,
(iii) issue an affiliate $10 million liquidation preference of its Series B
Preferred Stock with warrants to purchase up to 500,000 shares representing
approximately 11.3% of the outstanding Class A Common Stock for cash proceeds of
$10 million and (iv) revise the terms of the Senior Note.
F-18
<PAGE>
The Senior Credit Facility is a $55.0 million line of credit available for
working capital requirements and general corporate purposes. The Senior Credit
Facility matures in March 2003 with increasing quarterly amortization, includes
certain customary financial covenants and bears interest at a rate of 3.5% over
LIBOR, subject to adjustment based on the Company's leverage ratio. The Senior
Credit Facility also requires the Company to use its annual Excess Cash Flow (as
defined) to repay indebtedness thereunder at the end of each year. As of
December 31, 1995, on a pro forma basis after giving effect to the Augusta
Acquisition, the KTVE Sale, the Stock Offering, the Note Offering, the Phipps
Acquisition and the Financing, the Company would have been able to incur
approximately $41.7 million of additional indebtedness pursuant to the Senior
Credit Facility, none of which could have been borrowed thereunder due to the
covenant restrictions contained in the Senior Credit Facility. The Senior Credit
Facility is guaranteed by each of the Company's subsidiaries and is secured by
liens on substantially all of the assets of the Company and its subsidiaries.
As part of the Financing and as a condition of the Note Offering, the
Company will amend or replace the Senior Credit Facility and the Company is
currently engaged in negotiations with certain institutional lenders with
respect thereto.
The Senior Note provides for semi-annual principal payments of $2.5 million
beginning March 1999. Interest is payable semi-annually in arrears and the
Senior Note, as amended on January 4, 1996, bears interest at 10.7% per annum.
The agreement pursuant to which the Senior Note was issued contains certain
restrictive provisions, which, among other things, limit capital expenditures
and additional indebtedness, and require minimum levels of net worth and cash
flows. As part of the Financing, the Company intends to amend the Senior Note to
increase the interest rate to 11.2% per annum and to amend certain covenants.
The Company has entered into a non-binding letter of intent to sell KTVE for
approximately $9.5 million in cash plus the amount of the accounts receivable on
the date of the closing, which is expected to occur by September 1996. The
Company anticipates the taxes for the KTVE Sale will aggregate approximately
$2.8 million.
In connection with the Phipps Acquisition, the Company will be required to
divest WALB and WJHG under current FCC regulations. However, these rules may be
revised by the FCC upon conclusion of pending rulemaking proceedings. In order
to satisfy applicable FCC requirements, the Company, subject to FCC approval,
intends to swap such 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 1033 of the Code. If the Company is unable to effect such a
swap on satisfactory terms within the time period granted by the FCC under the
waivers, the Company may transfer such assets to a trust with a view towards the
trustee effecting a swap or sale of such assets. Any such trust arrangement
would be subject to the approval of the FCC. It is anticipated that the Company
would be required to relinquish operating control of such assets to a trustee
while retaining the economic risks and benefits of ownership. If the Company or
such trust is required to effect a sale of WALB, the Company would incur a
significant gain and related tax liability, the payment of which could have a
material adverse effect on the Company's ability to acquire comparable assets
without incurring additional indebtedness.
The Company and its subsidiaries file a consolidated federal income tax
return and such state or local tax returns as are required. On a pro forma basis
after giving effect to the Augusta Acquisition, the KTVE Sale, the Stock
Offering, the Note Offering, the Financing and the Phipps Acquisition, the
Company anticipates that it will generate taxable operating losses for the
foreseeable future.
The Company does not believe that inflation in past years has had a
significant impact on the Company's results of operations nor is inflation
expected to have a significant effect upon the Company's business in the near
future.
F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Gray Communications Systems, Inc.
We have audited the accompanying consolidated balance sheets of Gray
Communications Systems, Inc. as of December 31, 1994 and 1995 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gray
Communications Systems, Inc. at December 31, 1994 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP
Columbus, Georgia
February 14, 1996
F-20
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------
DECEMBER 31,
1994 1995
------------ ------------
ASSETS
<S> <C> <C>
Current assets (NOTE C):
Cash and cash equivalents $558,520 $559,991
Trade accounts receivable, less allowance for doubtful accounts of
$694,000 and $450,000, respectively 8,448,366 9,560,274
Recoverable income taxes -0- 1,347,007
Inventories 368,202 553,032
Current portion of program broadcast rights 1,195,633 1,153,058
Other current assets 247,687 263,600
------------ ------------
Total current assets 10,818,408 13,436,962
Property and equipment (NOTES B AND C):
Land 646,562 758,944
Buildings and improvements 8,594,343 8,630,694
Equipment 24,781,964 28,229,255
------------ ------------
34,022,869 37,618,893
Allowance for depreciation (17,999,752) (20,601,819)
------------ ------------
16,023,117 17,017,074
Other assets (NOTE C):
Deferred acquisition costs (NOTE B) -0- 3,330,481
Deferred loan costs 1,381,908 1,232,261
Goodwill and other intangibles (NOTE B) 38,538,413 42,004,050
Other 2,026,938 1,219,650
------------ ------------
41,947,259 47,786,442
------------ ------------
$68,788,784 $78,240,478
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $2,114,008 $3,752,742
Employee compensation and benefits 3,150,154 4,213,639
Accrued expenses 512,483 560,877
Accrued interest 985,955 1,064,491
Current portion of program broadcast obligations 1,687,481 1,205,784
Current portion of long term debt 1,293,481 2,861,672
------------ ------------
Total current liabilities 9,743,562 13,659,205
Long-term debt (NOTE C) 51,646,265 51,462,645
Other long-term liabilities:
Program broadcast obligations, less current portion 54,489 109,971
Supplemental employee benefits (NOTE D) 2,343,379 2,212,685
Deferred income taxes (NOTE F) -0- 201,348
Other acquisition related liabilities (NOTES B AND C) -0- 1,609,026
------------ ------------
2,397,868 4,133,030
Commitments and contingencies (NOTES B, C AND H)
Stockholders' equity (NOTES B, C AND E)
Class A Common Stock, no par value; authorized 10,000,000 shares;
issued 4,841,785 and 5,082,756 shares, respectively 3,393,747 6,795,976
Retained earnings 8,245,626 8,827,906
------------ ------------
11,639,373 15,623,882
Treasury Stock, 663,180 shares, at cost (6,638,284) (6,638,284)
------------ ------------
5,001,089 8,985,598
------------ ------------
$68,788,784 $78,240,478
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-21
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
------------------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
Operating revenues:
<S> <C> <C> <C>
Broadcasting (less agency commissions) $15,003,752 $22,826,392 $36,750,035
Publishing 10,109,368 13,692,073 21,866,220
------------ ------------ ------------
25,113,120 36,518,465 58,616,255
Expenses:
Broadcasting 10,028,837 14,864,011 23,201,990
Publishing 7,662,127 11,198,011 20,016,137
Corporate and administrative 2,326,691 1,958,449 2,258,261
Depreciation 1,387,698 1,745,293 2,633,360
Amortization of intangible assets 177,063 396,342 1,325,526
Non-cash compensation paid in common
stock (NOTE D) -0- 80,000 2,321,250
------------ ------------ ------------
21,582,416 30,242,106 51,756,524
------------ ------------ ------------
3,530,704 6,276,359 6,859,731
Miscellaneous income and expense, net 202,465 188,307 143,612
------------ ------------ ------------
3,733,169 6,464,666 7,003,343
Interest expense 984,706 1,922,965 5,438,374
------------ ------------ ------------
Income from continuing operations before
income taxes 2,748,463 4,541,701 1,564,969
Federal and state income taxes (NOTE F) 1,068,000 1,776,000 634,000
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 1,680,463 2,765,701 930,969
Discontinued business (NOTE I):
Income from operations of discontinued
business, net of applicable income tax
expense
of $30,000 48,174 -0- -0-
Gain on disposal of discontinued business,
net of applicable income tax expense of
$501,000 817,717 -0- -0-
------------ ------------ ------------
NET EARNINGS $2,546,354 $2,765,701 $930,969
------------ ------------ ------------
------------ ------------ ------------
Average outstanding common shares 4,610,625 4,689,453 4,481,317
------------ ------------ ------------
------------ ------------ ------------
Earnings per common share
Continuing operations $.36 $.59 $.21
Discontinued operations .01 -0- -0-
Gain on disposal of discontinued
operations .18 -0- -0-
------------ ------------ ------------
NET EARNINGS
PER COMMON SHARE $.55 $.59 $.21
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-22
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK RESTRICTED TREASURY STOCK
------------------------- STOCK -------------------------- RETAINED
SHARES AMOUNT DEFERRALS SHARES AMOUNT EARNINGS TOTAL
----------- ----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 4,610,625 $1,307,071 $-0- -0- $-0- $3,542,901 $4,849,972
Net income -0- -0- -0- -0- -0- 2,546,354 2,546,354
Cash dividends ($.07 per
share) -0- -0- -0- -0- -0- (307,376) (307,376)
Issuance of Common Stock-
Directors Stock Plan (NOTE
E) 3,000 29,000 -0- -0- -0- -0- 29,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Balance at December 31, 1993 4,613,625 1,336,071 -0- -0- -0- 5,781,879 7,117,950
Net income -0- -0- -0- -0- -0- 2,765,701 2,765,701
Cash dividends ($.07 share) -0- -0- -0- -0- -0- (301,954) (301,954)
Purchase of Common Stock
(NOTE E) -0- -0- -0- (663,180) (6,638,284) -0- (6,638,284)
Issuance of Common Stock
(NOTES B AND G):
401(k) Plan 3,160 32,676 -0- -0- -0- -0- 32,676
Rockdale Acquisition 225,000 2,025,000 -0- -0- -0- -0- 2,025,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Balance at December 31, 1994 4,841,785 3,393,747 -0- (663,180) (6,638,284) 8,245,626 5,001,089
Net income -0- -0- -0- -0- -0- 930,969 930,969
Cash dividends ($.08 share) -0- -0- -0- -0- -0- (348,689) (348,689)
Issuance of Common Stock
(NOTES B, D, E, AND G):
401(k) Plan 18,354 298,725 -0- -0- -0- -0- 298,725
Directors' Stock Plan 23,500 238,919 -0- -0- -0- -0- 238,919
Non-qualified Stock Plan 5,000 48,335 -0- -0- -0- -0- 48,335
Gwinnett Acquisition 44,117 500,000 -0- -0- -0- -0- 500,000
Restricted Stock Plan 150,000 2,081,250 (2,081,250) -0- -0- -0- -0-
Amortization of Restricted
Stock Plan deferrals -0- -0- 2,081,250 -0- -0- -0- 2,081,250
Income tax benefits relating
to stock plans -0- 235,000 -0- -0- -0- -0- 235,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Balance at December 31, 1995 5,082,756 $6,795,976 $-0- (663,180) $(6,638,284) $8,827,906 $8,985,598
----------- ----------- ----------- ----------- ------------ ------------ ------------
----------- ----------- ----------- ----------- ------------ ------------ ------------
</TABLE>
See accompanying notes.
F-23
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $2,546,354 $2,765,701 $930,969
Items which did not use (provide) cash:
Depreciation 1,612,040 1,745,293 2,633,360
Amortization of intangible assets 177,063 396,342 1,325,526
Amortization of program broadcast
rights 924,878 1,217,976 1,647,035
Payments for program broadcast rights (976,150) (1,181,598) (1,776,796)
Compensation paid in Common Stock -0- 80,000 2,321,250
Supplemental employee benefits (608,729) (454,703) (370,694)
Common Stock contributed to 401(k) Plan -0- 32,676 298,725
Deferred income taxes 196,000 523,000 863,000
(Gain) loss on asset sales (52,819) (21,419) 1,652
Changes in operating assets and
liabilities:
Trade accounts receivable (116,526) (1,444,159) (852,965)
Recoverable income taxes (1,066,422) 589,942 (1,347,007)
Inventories (92,526) (179,930) (181,034)
Other current assets (352,174) (24,361) (11,208)
Trade accounts payable 701,556 (306,493) 1,441,745
Employee compensation and benefits 10,755 1,246,726 1,011,667
Accrued expenses (163,458) (45,335) (414,087)
Accrued interest (97,419) 858,164 78,536
Reduction in value of net assets of
discontinued business 1,135,394 -0- -0-
Gain on disposal of warehouse
operations (2,454,111) -0- -0-
------------ ------------ ------------
Net cash provided by operating activities 1,323,706 5,797,822 7,599,674
INVESTING ACTIVITIES
Acquisitions of newspaper businesses -0- (3,442,836) (2,084,621)
Acquisition of television business (1,505,655) (37,492,643) -0-
Purchases of property and equipment (2,582,225) (1,767,800) (3,279,721)
Proceeds from asset sales 3,076,764 103,434 2,475
Deferred acquisition costs -0- -0- (3,330,481)
Deferred loan costs -0- (1,251,287) -0-
Proceeds from disposals of operating
units 2,922,893 1,222,697 -0-
Other 1,150,104 (141,767) (236,904)
------------ ------------ ------------
Net cash provided by (used in) investing
activities 3,061,881 (42,770,202) (8,929,252)
FINANCING ACTIVITIES
Proceeds from borrowings:
Short-term debt 650,000 -0- 1,200,000
Long-term debt -0- 55,826,260 2,950,000
Repayments of borrowings:
Short-term debt (170,000) (480,000) (1,200,000)
Long-term debt (5,133,349) (11,206,281) (1,792,516)
Dividends paid (307,376) (301,954) (348,689)
Common Stock transactions 29,000 (6,638,284) 522,254
------------ ------------ ------------
Net cash provided by (used in) financing
activities (4,931,725) 37,199,741 1,331,049
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents (546,138) 227,361 1,471
Cash and cash equivalents at beginning of
year 877,297 331,159 558,520
------------ ------------ ------------
Cash and cash equivalents at end of year $331,159 $558,520 $559,991
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-24
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company's operations, which are located in six southeastern states,
include six television stations, three daily newspapers, and six area weekly
advertising only direct mail publications.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenues as services are performed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit with a bank. Deposits with
the bank are generally insured in limited amounts.
INVENTORIES
Inventories, principally newsprint and supplies, are stated at the lower of
cost or market. The Company uses the last-in, first-out ("LIFO") method of
determining costs for substantially all of its inventories. Current cost
exceeded the LIFO value of inventories by approximately $36,000 and $170,000 at
December 31, 1994 and 1995, respectively.
PROGRAM BROADCAST RIGHTS
Rights to programs available for broadcast are initially recorded at the
amounts of total license fees payable under the license agreements and are
charged to operating expense on the basis of total programs available for use on
the straight-line method. The portion of the unamortized balance expected to be
charged to operating expense in the succeeding year is classified as a current
asset, with the remainder classified as a non-current asset. The liability for
program broadcast rights is classified as current or long-term, in accordance
with the payment terms of the various licenses. The liability is not discounted
for imputation of interest.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed
principally by the straight-line method for financial reporting purposes and by
accelerated methods for income tax purposes.
INTANGIBLE ASSETS
Intangible assets are stated at cost, and with the exception of goodwill
acquired prior to November 1, 1970 (approximately $2.47 million at December 31,
1994 and 1995), are amortized using the straight-line method. Goodwill is
amortized over 40 years. Loan acquisition fees are amortized over the life of
the applicable indebtedness. Non-compete agreements are amortized over the life
of the specific agreement. Accumulated amortization of intangible assets
resulting from business acquisitions was $0.4 million and $1.7 million as of
December 31, 1994 and 1995, respectively.
F-25
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If facts and circumstances indicate that the goodwill may be impaired, an
evaluation of continuing value would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with this asset would be
compared to its carrying amount to determine if a write down to fair market
value or discounted cash flow value is required.
INCOME TAXES
Deferred income taxes are provided on the differences between the financial
statement and income tax basis of assets and liabilities. The Company and its
subsidiaries file a consolidated federal income tax return and separate state
and local tax returns.
CAPITAL STOCK
The Company has authorized 10 million shares of Class B Common Stock and 20
million shares of Preferred Stock, none of which have been issued at December
31, 1995. All references made to Common Stock in the December 31, 1995 Audited
Consolidated Financial Statements of the Company and the Notes thereto refer to
the Company's Class A Common Stock.
On August 17, 1995, the Board of Directors declared a 50% stock dividend on
the Company's 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.
EARNINGS PER COMMON SHARE
Earnings per common share are based on the weighted average common and
common equivalent shares outstanding during the period determined using the
treasury stock method. Common equivalent shares are attributable to a Common
Stock award to be paid in 1999 and outstanding stock options (SEE NOTES D AND
E).
STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options. Under APB 25, if the
exercise price of the stock options granted by the Company equals the market
price of the underlying stock on the date of the grant, no compensation expense
is recognized.
CONCENTRATION OF CREDIT RISK
The Company provides advertising air time to national, regional and local
advertisers within the geographic areas in which the Company operates. Credit is
extended based on an evaluation of the customer's financial condition, and
generally advance payment is not required. Credit losses are provided for in the
financial statements and consistently have been within management's
expectations.
INTEREST SWAP
The Company has entered into an interest rate swap agreement to modify the
interest characteristics of a portion of its outstanding debt (see Note C). The
agreement involves the exchange of amounts based on a fixed interest rate for
amounts based on variable interest rates over the life of the agreement without
an exchange of the notional amount upon which the payments are based. The
differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the debt (the accrual
accounting method). The related amount payable to or receivable from
counter-parties is included in other liabilities or assets. The fair value of
the swap agreement is not recognized in the financial statements. In the event
of the early extinguishment of a designated debt obligation, any realized or
unrealized gain or loss from the swap would be recognized in income coincident
with the extinguishment.
F-26
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has adopted FASB Statement No. 107, DISCLOSURE ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS, which requires disclosure of fair value, to the extent
practical, of certain of the Company's financial instruments. The fair value
amounts do not necessarily represent the amount that could be realized in a sale
or settlement. The Company's financial instruments are comprised principally of
an interest rate swap and long-term debt.
The estimated fair value of long-term bank debt at December 31, 1995
approximated book value since, in management's opinion, such obligations are
subject to fluctuating market rates of interest and can be settled at their face
amounts. The fair value of the Senior Note at December 31, 1995 was estimated by
management to be its carrying value at that date. The Company amended its Senior
Note at January 4, 1996 and among other things, changed its effective interest
rate. The Company does not anticipate settlement of long-term debt at other than
book value.
The fair value of other financial instruments classified as current assets
or liabilities approximates their carrying values due to the short-term
maturities of these instruments.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
("Statement 121"), which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the asset's carrying amount. Statement 121 also addresses the accounting for
long-lived assets which are expected to be disposed. The Company does not
believe that the adoption of Statement 121 will have a material impact on the
Company's financial position.
RECLASSIFICATIONS
Certain amounts in the accompanying consolidated financial statements have
been reclassified to conform to the 1995 format.
B. BUSINESS ACQUISITIONS
The Company's acquisitions have been accounted for under the purchase method
of accounting. Under the purchase method of accounting, the results of
operations of the acquired businesses are included in the accompanying
consolidated financial statements as of their respective acquisition dates. The
assets and liabilities of acquired businesses are included based on an
allocation of the purchase price.
PENDING ACQUISITIONS
In December 1995, the Company agreed to acquire certain assets owned by John
H. Phipps, Inc. ("Phipps"). The assets include WCTV-TV, the CBS network
affiliate serving the Tallahassee, Florida and Thomasville, Georgia television
market, WKXT-TV, the CBS network affiliate in Knoxville, Tennessee, and a
communications and paging business located in three southeastern states. The
purchase price is estimated at approximately $185.0 million. The transaction,
which is expected to close in 1996, is subject to approval by the appropriate
regulatory agencies. If approved, the Company will be required to divest of
certain of its broadcasting operations due to a signal overlap with WCTV, unless
the rules of the Federal Communications Commission are modified to permit common
ownership of television stations with overlapping signals.
The Company plans to fund the costs of this acquisition through the issuance
of debt and equity securities. Additionally, the Company will amend or replace
its existing bank credit facilities.
In connection with this acquisition, a bank has provided a $10.0 million
letter of credit to Phipps on behalf of the Company. The letter of credit will
be payable under certain conditions if this acquisition is not
F-27
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
completed. In connection with the issuance of the letter of credit, a
stockholder of the Company has executed a put agreement which the bank can
exercise if the Company defaults on repayment of any amounts that might be paid
in accordance with the terms of the letter of credit.
In connection with the proposed acquisition of assets owned by Phipps, the
Company's Board of Directors has agreed to pay Bull Run Corporation ("Bull
Run"), a stockholder, a finder's fee equal to 1% of the proposed purchase price
for services performed, of which $550,000 was due and included in accounts
payable at December 31, 1995.
On January 4, 1996, the Company purchased substantially all of the assets of
WRDW-TV, a CBS television affiliate serving the Augusta, Georgia television
market (the "Augusta Acquisition"). The purchase price of approximately $35.9
million, excluding assumed liabilities of approximately $4.0 million, was
financed primarily through long-term borrowings. The assets acquired consisted
of office equipment and broadcasting operations located in North Augusta, South
Carolina. Based on a preliminary allocation of the purchase price, the excess of
the purchase price over the fair value of net tangible assets acquired was
approximately $32.4 million. In connection with the Augusta Acquisition, the
Company's Board of Directors approved the payment of a $360,000 finders fee to
Bull Run.
Funds for the Augusta Acquisition were obtained from the sale to Bull Run of
an 8% subordinated note due January 3, 2005 in principal amount of $10.0 million
(the "Subordinated Note"). In connection with the sale of the Subordinated Note,
the Company also issued warrants to Bull Run to purchase 487,500 shares of
Common Stock at $17.88 per share, 300,000 of which are currently vested, with
the remaining warrants vesting in five equal installments commencing in 1997
provided that the Subordinated Note is outstanding. The warrants may not be
exercised prior to January 3, 1998 and expire in January 2006. The Company
modified its existing bank debt to a variable rate reducing revolving credit
facility providing a credit line of $55.0 million (see Note C). The outstanding
credit facility balance subsequent to the Augusta Acquisition was approximately
$54.0 million; including $28.4 million, which was outstanding under the credit
facility at December 31, 1995, $25.2 million used for the Augusta Acquisition,
and $425,000 used for the Company's working capital. The transaction also
required a modification of the interest rate of the Company's $25.0 million
senior secured note with an institutional investor (the "Senior Note") from
10.08% to 10.7%.
An unaudited pro forma balance sheet as of December 31, 1995 and income
statements for the years ended December 31, 1994 and 1995 are presented below
giving effect to the Augusta Acquisition as though it had occurred on January 1,
1994.
F-28
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
Pro forma December 31, 1995 balance sheet (in 000's):
<TABLE>
<CAPTION>
----------------------------------------------
AUGUSTA PRO FORMA ADJUSTED
GRAY ACQUISITION ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ----------
UNAUDITED
<S> <C> <C> <C> <C>
Current assets $13,437 $3,061 $(594) $15,904
Property and equipment 17,017 1,778 402 19,197
Goodwill and other intangibles 46,566 4,129 26,152 76,847
Other long-term assets 1,220 2,571 (2,518) 1,273
---------- ---------- ---------- ----------
$78,240 $11,539 $23,442 $113,221
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Current liabilities $13,659 $1,131 $(41) $14,749
Long-term debt 51,462 -0- 33,729 85,191
Other long-term liabilities 4,133 2,680 (2,518) 4,295
Stockholders' equity 8,986 7,728 (7,728) 8,986
---------- ---------- ---------- ----------
$78,240 $11,539 $23,442 $113,221
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
These pro forma unaudited results of operations do not purport to represent
what the Company's actual results of operations would have been if the Augusta
Acquisition had occurred on January 1, 1994, and should not serve as a forecast
of the Company's operating results for any future periods. The pro forma
adjustments are based solely upon certain assumptions that management believes
are reasonable under the circumstances at this time. Subsequent adjustments are
expected upon final determination of the allocation of the purchase price. Pro
forma statement of operations for the year ended December 31, 1994 are as
follows (in 000's, except per share data):
<TABLE>
<CAPTION>
----------------------------------------------
AUGUSTA PRO FORMA ADJUSTED
GRAY ACQUISITION ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ----------
UNAUDITED
<S> <C> <C> <C> <C>
Revenues, net $36,518 $8,046 $255 $44,819
Expenses 30,242 5,854 935 37,031
---------- ---------- ---------- ----------
6,276 2,192 (680) 7,788
Miscellaneous income (expense), net 189 (55) 90 224
Interest expense 1,923 -0- 3,156 5,079
---------- ---------- ---------- ----------
4,542 2,137 (3,746) 2,933
Income tax expense (benefit) 1,776 -0- (603) 1,173
---------- ---------- ---------- ----------
NET EARNINGS $2,766 $2,137 $(3,143) $1,760
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average shares outstanding 4,689 4,689
---------- ----------
---------- ----------
Earnings per share $.59 $.38
---------- ----------
---------- ----------
</TABLE>
F-29
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
Pro forma statement of operations for the year ended December 31, 1995 are
as follows (in 000's, except per share data):
<TABLE>
<CAPTION>
----------------------------------------------
AUGUSTA PRO FORMA ADJUSTED
GRAY ACQUISITION ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ----------
UNAUDITED
<S> <C> <C> <C> <C>
Revenues, net $58,616 $8,660 $227 $67,503
Expenses 51,756 6,198 944 58,898
---------- ---------- ---------- ----------
6,860 2,462 (717) 8,605
Miscellaneous income (expense), net 143 (220) 128 51
Interest expense 5,438 -0- 3,355 8,793
---------- ---------- ---------- ----------
1,565 2,242 (3,944) (137)
Income tax expense (benefit) 634 -0- (675) (41)
---------- ---------- ---------- ----------
NET EARNINGS (LOSS) $931 $2,242 $(3,269) $(96)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average shares outstanding 4,481 4,354
---------- ----------
---------- ----------
Earnings (loss) per share $.21 $(.02)
---------- ----------
---------- ----------
</TABLE>
The pro forma results presented above include adjustments to reflect (i) the
reclassification of national representative commissions as an expense consistent
with the presentation of the Company, (ii) the incurrence of interest expense to
fund the Augusta Acquisition, (iii) depreciation and amortization of assets
acquired, and (iv) the income tax effect of such pro forma adjustments and
income taxes on the earnings of the Augusta Acquisition. With respect to the
Augusta Acquisition, the pro forma adjustments are based upon a preliminary
allocation of the purchase price.
1995 ACQUISITIONS
On January 6, 1995, the Company purchased substantially all of the assets of
The Gwinnett Post-Tribune and assumed certain liabilities (the "Gwinnett
Acquisition"). The assets consisted of office equipment and publishing
operations located in Lawrenceville, Georgia. The purchase price of
approximately $3.7 million, including assumed liabilities of approximately
$370,000, was paid by approximately $1.2 million in cash (financed through
long-term borrowings and cash from operations), issuance of 44,117 shares of the
Company's Common Stock (having fair value of $500,000), and $1.5 million payable
to the sellers pursuant to non-compete agreements. The excess of the purchase
price over the fair value of net tangible assets acquired was approximately $3.4
million. In connection with the Gwinnett Acquisition, the Company's Board of
Directors approved the payment of a $75,000 finders fee to Bull Run. Pro forma
results of the Gwinnett Acquisition have not been presented as the effect on
prior periods is not significant.
On September 1, 1995, the Company purchased substantially all of the assets
of three area weekly advertising only direct mail publications, and assumed
certain liabilities (the "Tallahassee Acquisition"). The tangible assets
acquired consist of land and office buildings, office equipment, mechanical
equipment and automobiles used in operations located in southwest Georgia and
north Florida. The purchase price of approximately $1.4 million consisted of
$833,000 in cash and approximately $583,000 in assumed liabilities. The excess
of the purchase price over the fair value of net tangible assets acquired was
approximately $934,000. Pro forma results giving effect to the Tallahassee
Acquisition have not been presented as the effect on prior periods is not
significant.
1994 ACQUISITIONS
On September 2, 1994, the Company purchased substantially all of the assets
of Kentucky Central Television, Inc. ("Kentucky Central") and assumed certain of
its liabilities (the "Kentucky Acquisition").
F-30
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
Kentucky Central operated two television stations, WKYT located in Lexington,
Kentucky and WYMT located in Hazard, Kentucky, both of which are affiliates of
the CBS television network. The purchase price of approximately $38.1 million,
excluding acquisition costs of approximately $2.1 million and assumed
liabilities of approximately $2.3 million, was financed primarily through
long-term borrowings. The excess of the purchase price over the fair value of
net tangible assets acquired was approximately $31.4 million.
On May 31, 1994, the Company purchased substantially all of the assets of
Citizens Publishing Company, Inc. and assumed certain of its liabilities (the
"Rockdale Acquisition"). The acquired assets consist of land and an office
building located in Conyers, Georgia, containing The Rockdale Citizen newspaper
and other assets relating to the newspaper publishing business. The purchase
price of approximately $4.8 million consisted of a $2.8 million cash payment
financed through long-term bank borrowings, and 225,000 shares of the Company's
Common Stock (with a fair value of $2.0 million at the closing date). The excess
of the purchase price over the fair value of net tangible assets acquired was
approximately $4.0 million.
On October 18, 1994, the Company purchased substantially all of the assets
of four area weekly advertising only direct mail publications and assumed
certain of their liabilities. The assets consist of land and an office building,
office equipment, automobiles, and publishing operations located in southwest
Georgia. The purchase price of approximately $1.5 million consisted of a
$545,000 cash payment and approximately $1.0 million financed by the sellers.
The excess of the purchase price over the fair value of net tangible assets
acquired was approximately $1.2 million. Pro forma results giving effect to this
acquisition have not been presented below as the effect on prior periods is not
significant.
Unaudited pro forma statements of income from continuing operations for the
years ended December 31, 1993 and 1994, are presented below, giving effect to
the Rockdale Acquisition and the Kentucky Acquisition (collectively the "1994
Acquisitions") as though they had occurred on January 1, 1993.
These pro forma unaudited results of operations do not purport to represent
what the Company's actual results of operations would have been if the 1994
Acquisitions had occurred on January 1, 1993, and should
F-31
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
not serve as a forecast of the Company's operating results for any future
periods. The pro forma adjustments are based upon certain assumptions that
management believes are reasonable under the circumstances. The unaudited pro
forma results of continuing operations are as follows (in 000's, except per
share data):
<TABLE>
<CAPTION>
----------------------------------------------------------
YEAR ENDED DECEMBER 31, 1993
KENTUCKY ROCKDALE PRO FORMA ADJUSTED
GRAY ACQUISITION ACQUISITION ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues $25,113 $14,526 $2,660 $-0- $42,299
Operating expenses 21,582 10,827 2,646 877 35,932
---------- ---------- ---------- ---------- ----------
Operating income 3,531 3,699 14 (877) 6,367
Miscellaneous income, net 202 219 -0- -0- 421
---------- ---------- ---------- ---------- ----------
3,733 3,918 14 (877) 6,788
Interest expense 985 4 9 3,187 4,185
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before income
taxes 2,748 3,914 5 (4,064) 2,603
Income tax expense (benefit) 1,068 1,326 -0- (1,405) 989
---------- ---------- ---------- ---------- ----------
Income from continuing
operations $1,680 $2,588 $5 $2,659 $1,614
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Average shares outstanding 4,611 4,836
---------- ----------
---------- ----------
Earnings per common share from
continuing operations $.36 $.33
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994
KENTUCKY ROCKDALE PRO FORMA ADJUSTED
GRAY ACQUISITION ACQUISITION ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues $36,518 $10,237 $980 $-0- $47,735
Operating expenses 30,242 7,382 930 559 39,113
---------- ---------- ---------- ---------- ----------
Operating income 6,276 2,855 50 (559) 8,622
Miscellaneous income, net 189 19 -0- -0- 208
---------- ---------- ---------- ---------- ----------
6,465 2,874 50 (559) 8,830
Interest expense 1,923 -0- 4 2,412 4,339
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before income
taxes 4,542 2,874 46 (2,971) 4,491
Income tax expense (benefit) 1,776 237 -0- (208) 1,805
---------- ---------- ---------- ---------- ----------
Net income from continuing
operations $2,766 $2,637 $46 $(2,763) $2,686
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Average shares outstanding 4,689 4,780
---------- ----------
---------- ----------
Earnings per common share from
continuing operations $.59 $.56
---------- ----------
---------- ----------
</TABLE>
The pro forma results presented above include adjustments to reflect (i) the
incurrence of interest expense to fund the 1994 Acquisitions, (ii) depreciation
and amortization of assets acquired, and (iii) the
F-32
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
income tax effect of such pro forma adjustments. Average outstanding shares used
to calculate earnings per share from continuing operations for 1994 and 1993
include the 225,000 shares issued in connection with the Rockdale Acquisition.
C. LONG-TERM DEBT
Long-term debt consists of the following (in 000's):
<TABLE>
<CAPTION>
----------------------
DECEMBER 31,
1994 1995
---------- ----------
<S> <C> <C>
Senior Note $25,000 $25,000
Bank Loan 26,926 28,375
Other 1,013 950
---------- ----------
52,939 54,325
Less current portion (1,293) (2,862)
---------- ----------
$51,646 $51,463
---------- ----------
---------- ----------
</TABLE>
On September 2, 1994, the Company issued through a private placement with an
institutional investor, a $25.0 million 9.33% note (the "Senior Note"). The
Senior Note provides for semi-annual principal payments of $2.5 million
beginning March 1999. Interest is payable semi-annually in arrears and the
Senior Note, as amended on January 4, 1996, bears interest at 10.7% (see Note
B). The agreement pursuant to which the Senior Note was issued contains certain
restrictive provisions, which, among other things, limit capital expenditures
and additional indebtedness, and require minimum levels of net worth and cash
flows.
On September 2, 1994, the Company entered into a bank term loan agreement
(the "Bank Loan") which provided for borrowings of approximately $21.4 million.
On November 30, 1994, the Bank Loan was amended to provide for additional
borrowings of $6.7 million which were used to purchase 663,180 shares of the
Company's Common Stock (SEE NOTE E). The Bank Loan, as amended on January 4,
1996, bears interest, at the Company's option, at a spread over LIBOR, or at a
spread over the bank's prime rate (8.96% at January 4, 1996) (see Note B). The
Bank Loan is due in varying, quarterly principal payments of $750,000 to $2.0
million through September 2002 with two quarterly installments of $7 million
payable starting December 2002. The Bank Loan provides for an annual loan
prepayment based on the Company's cash flow as defined by the Bank Loan.
Additionally, the effective interest rate of the Bank Loan can be changed based
upon the Company's maintenance of certain operating ratios as defined by the
Bank Loan, not to exceed the bank's prime rate plus 1.25% or LIBOR plus 3.5%.
The Bank Loan contains restrictive provisions similar to the provisions of the
Senior Note.
The Senior Note and the Bank Loan are secured by substantially all of the
Company's existing and hereafter acquired assets.
The Company entered into a five year interest rate swap agreement on June 2,
1995, to effectively convert a portion of its floating rate debt to a fixed rate
basis. Approximately $25.0 million of the Company's outstanding debt under the
Bank Loan was subject to this interest rate swap agreement at December 31, 1995.
The effective rate of the Bank Loan and interest rate swap at December 31, 1995,
was approximately 8.64% and 9.10%, respectively. The unrealized loss for the
interest rate swap was approximately $565,000 at December 31, 1995, based upon
comparison to treasury bond yields for bonds with similar maturity dates as the
interest rate swap.
At December 31, 1995, retained earnings of approximately $500,000 were
available for dividends.
F-33
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. LONG-TERM DEBT (CONTINUED)
Aggregate minimum principal maturities on long-term debt as of December 31,
1995, were as follows (in 000's):
<TABLE>
<S> <C>
1996 $2,862
1997 5,039
1998 6,634
1999 12,615
2000 11,303
Thereafter 15,872
----------
$54,325
----------
----------
</TABLE>
The Company made interest payments of approximately $902,000, $1.2 million,
and $5.4 million during 1993, 1994 and 1995, respectively.
D. SUPPLEMENTAL EMPLOYEE BENEFITS AND OTHER AGREEMENTS
The Company has an employment agreement with its President which provides
him 122,034 shares of the Company's Common Stock if his employment with the
Company continues until September 1999. The Company will recognize approximately
$1.2 million of compensation expense for this award over the five year period
ending in 1999 ($80,000 and $240,000 of expense was recorded in 1994 and 1995,
respectively).
In December 1995, the Company amended an existing employment agreement to
pay consulting fees to its former chief executive officer. The Company has
recorded approximately $596,000 of corporate and administrative expenses during
the year ended December 31, 1995 in accordance with the terms of the employment
agreement. Additionally, in December 1995 the Company issued 150,000 shares of
Common Stock to this former chief executive officer in accordance with his
employment agreement which was amended to remove certain restrictions,
including, among others, a time requirement for continued employment.
Compensation expense of approximately $2.1 million (including $865,000 during
the quarter ended December 31, 1995), was recognized in 1995 for the 150,000
shares of Common Stock issued pursuant to this agreement.
The Company has entered into supplemental retirement benefit agreements with
certain key employees. These benefits are to be paid in equal monthly amounts
over the employees' life for a period not to exceed 15 years after retirement.
The Company charges against operations amounts sufficient to fund the present
value of the estimated lifetime supplemental benefit over each employee's
anticipated remaining period of employment.
F-34
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. SUPPLEMENTAL EMPLOYEE BENEFITS AND OTHER AGREEMENTS (CONTINUED)
The following summarizes activity relative to certain officers' agreements
and the supplemental employee benefits (in 000's):
<TABLE>
<CAPTION>
----------------------------------
DECEMBER 31,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Beginning liability $3,495 $2,960 $2,518
---------- ---------- ----------
Provision 166 184 976
Forfeitures (399) (266) (169)
---------- ---------- ----------
Net (income) expense (233) (82) 807
Payments (302) (360) (387)
---------- ---------- ----------
Net change (535) (442) 420
---------- ---------- ----------
Ending liability 2,960 2,518 2,938
Less current portion (162) (175) (725)
---------- ---------- ----------
$2,798 $2,343 $2,213
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-35
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. STOCKHOLDERS' EQUITY
The Company has a Stock Purchase Plan which allows outside directors to
purchase up to 7,500 shares of the Company's Common Stock directly from the
Company before the end of January following each calendar year. The purchase
price per share approximates the market price of the Common Stock at the time of
the grant. During 1993, 1994 and 1995, certain directors purchased an aggregate
of 3,000, -0- and 23,500 shares of Common Stock, respectively, under this plan.
The Company has a long-term incentive plan (the "Incentive Plan") under
which 600,000 shares of the Company's Common Stock are reserved for grants to
key personnel for (i) incentive stock options, (ii) non-qualified stock options,
(iii) stock appreciation rights, (iv) restricted stock and (v) performance
awards, as defined by the Incentive Plan. Stock underlying outstanding options
or performance awards are counted against the Incentive Plan's maximum shares
while such options or awards are outstanding. Under the Incentive Plan, the
options granted vest after a two year period and expire three years after full
vesting. Options granted through December 31, 1995, have been granted at a price
which approximates fair market value on the date of the grant.
<TABLE>
<CAPTION>
----------------------
EXERCISE PRICE PER
SHARE
----------------------
<S> <C> <C>
$9.67 $13.33
Stock options granted on November 18, 1993 92,250 -0-
Forfeitures (3,000) -0-
---------- ----------
Stock options outstanding at
December 31, 1993 89,250 -0-
Options granted 73,559 -0-
Forfeitures (16,500) -0-
---------- ----------
Stock options outstanding at
December 31, 1994 146,309 -0-
Options granted -0- 58,050
Options exercised (5,000) -0-
Forfeitures (14,250) (3,900)
---------- ----------
Stock options outstanding at December 31, 1995 127,059 54,150
---------- ----------
---------- ----------
</TABLE>
At December 31, 1995, 56,500 of the $9.67 options issued in 1993 were
exercisable.
On December 1, 1994, the Company repurchased 663,180 shares of its Common
Stock at a price of $10.00 per share for a total purchase price before expenses,
of $6.63 million. The trading value of the Common Stock on the NASDAQ Small Cap
Issues Market was $10.83 on December 1, 1994. The Common Stock was purchased
from The Prudential Insurance Company of America and Sandler Associates (420,000
and 243,180 shares, respectively). The purchase was funded by a bank loan (SEE
NOTE C).
F. INCOME TAXES
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
F-36
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. INCOME TAXES (CONTINUED)
Federal and state income tax expense (benefit) included in the consolidated
financial statements are summarized as follows (in 000's):
<TABLE>
<CAPTION>
----------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal $982 $1,093 $(253)
State 181 160 24
Deferred 436 523 863
---------- ---------- ----------
$1,599 $1,776 $634
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The total provision for income taxes for 1993 included $531,000 for
discontinued operations.
The components of deferred income tax expense for federal and state and
local income taxes resulted from the following (in 000's):
<TABLE>
<CAPTION>
----------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Accelerated depreciation for tax
purposes $50 $19 $349
Accelerated amortization for tax
purposes -0- 164 726
Employee benefits and other agreements 181 96 (150)
Temporary difference related to loss on
sales of assets 174 248 -0-
Excess of book over tax deductions for
lease 7 91 -0-
Other 24 (95) (62)
---------- ---------- ----------
$436 $523 $863
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-37
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
are as follows (in 000's):
<TABLE>
<CAPTION>
----------------------------------
DECEMBER 31,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax liabilities:
Net book value of property and
equipment $704 $723 $1,069
Goodwill -0- 164 890
Other 120 120 120
---------- ---------- ----------
Total deferred tax liabilities 824 1,007 2,079
Deferred tax assets:
Liability under supplemental
retirement plan 1,125 1,029 1,127
Allowance for doubtful accounts 168 335 195
Difference in basis of assets held for
sale 1,189 941 941
Other 135 117 368
---------- ---------- ----------
Total deferred tax assets 2,617 2,422 2,631
Valuation allowance for deferred tax
assets (753) (753) (753)
---------- ---------- ----------
Net deferred tax assets 1,864 1,669 1,878
---------- ---------- ----------
Deferred tax assets (liabilities) $1,040 $662 $(201)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A reconciliation of income tax expense at the statutory federal income tax
rate and income taxes as reflected in the consolidated financial statements is
as follows (in 000's):
<TABLE>
<CAPTION>
----------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate applied to income $1,409 $1,544 $532
State and local taxes, net of federal
tax benefits 164 195 91
Other items, net 26 37 11
---------- ---------- ----------
$1,599 $1,776 $634
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company made income tax payments of approximately $2.1 million, $1.5
million and $742,000 during 1993, 1994 and 1995, respectively. At December 31,
1995, the Company had current recoverable income taxes of approximately $1.3
million.
G. RETIREMENT PLANS
PENSION PLAN
The Company has a retirement plan covering substantially all full-time
employees. Retirement benefits are based on years of service and the employees'
highest average compensation for five consecutive years during the last ten
years of employment. The Company's funding policy is to contribute annually the
minimum amounts deductible for federal income tax purposes.
F-38
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. RETIREMENT PLANS (CONTINUED)
The net pension expense includes the following (in 000's):
<TABLE>
<CAPTION>
----------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Service costs-benefits earned during the
year $224 $204 $221
Interest cost on projected benefit
obligation 374 359 384
Actual return on plan assets (377) (91) (655)
Net amortization and deferral (63) (338) 187
---------- ---------- ----------
Net pension expense $158 $134 $137
---------- ---------- ----------
---------- ---------- ----------
Assumptions:
Discount rate 8.0% 7.0% 8.0%
Expected long-term rate of return on
assets 8.0% 7.0% 8.0%
Estimated rate of increase in
compensation levels 6.0% 5.0% 6.0%
</TABLE>
The following summarizes the plan's funded status and related assumptions
(in 000's):
<TABLE>
<CAPTION>
----------------------
DECEMBER 31,
1994 1995
---------- ----------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation is as follows:
Vested $4,452 $5,308
Other 66 135
---------- ----------
$4,518 $5,443
---------- ----------
---------- ----------
Plan assets at fair value, primarily mutual funds
and an unallocated insurance contract $5,307 $5,680
Projected benefit obligation (5,015) (5,904)
---------- ----------
Plan assets in excess of (less than) projected
benefit obligation 292 (224)
Unrecognized net (gain) loss (135) 190
Unrecognized net asset (409) (355)
---------- ----------
Pension liability included in consolidated balance
sheet $(252) $(389)
---------- ----------
---------- ----------
Assumptions:
Discount rate 8.0% 7.0%
Estimated rate of increase in compensation levels 6.0% 5.0%
</TABLE>
Effective December 31, 1995, the Company changed certain assumptions
utilized in the actuarially computed costs and liabilities. The effect of such
changes was to increase the present value of the projected benefit obligations
by approximately $613,000.
CAPITAL ACCUMULATION PLAN
Effective October 1, 1994, the Company adopted the Gray Communications
Systems, Inc. Capital Accumulation Plan (the "Capital Accumulation Plan") for
the purpose of providing additional retirement benefits for substantially all
employees. The Capital Accumulation Plan is intended to meet the requirements of
section 401(k) of the Internal Revenue Code.
F-39
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. RETIREMENT PLANS (CONTINUED)
Employee contributions to the Capital Accumulation Plan, not to exceed 6% of
the employees' gross pay, are matched by Company contributions. The Company's
percentage match is made by a contribution of the Company's Common Stock, in an
amount declared by the Company's Board of Directors before the beginning of each
plan year. The Company's percentage match was 50% for both the year ended
December 31, 1995 and the three months ended December 31, 1994. The Company
contributions vest, based upon each employee's number of years of service, over
a period not to exceed five years. The Company has reserved 150,000 shares of
its Common Stock for issuance under the Capital Accumulation Plan.
Company matching contributions aggregating $32,676 and $298,725 were charged
to expense for 1994 and 1995, respectively, for the issuance of 3,160 and 18,354
shares, respectively of the Company's Common Stock.
H. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease commitments for equipment, land and
office space which expire through the year 2027. Future minimum payments under
operating leases with initial or remaining non-cancelable lease terms in excess
of one year are not material.
The Company has entered into commitments for various television film
exhibition rights for which the license periods have not yet commenced.
Obligations under these commitments are payable in the following years:
<TABLE>
<S> <C>
1996 $491,360
1997 1,431,983
1998 1,351,273
1999 1,133,860
2000 456,733
----------
$4,865,209
----------
----------
</TABLE>
The Company is subject to legal proceedings and claims which arise in the
normal course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the Company's financial position.
I. DISCONTINUED OPERATIONS
On April 13, 1994, the Company completed the sale of the assets of Gray Air
Service (an operation discontinued in 1993) for approximately $1.2 million, and
used the proceeds to reduce the Company's outstanding debt. During the year
ended December 31, 1993, the Company sold its investment in undeveloped
farmland, another asset held for sale, for approximately $2.0 million.
On March 31, 1993, the Company completed the sale of its warehouse
operations to Gray Distribution Services, Inc., a Georgia corporation, owned by
a former director and officer of the Company. The net sales price of
approximately $2.9 million was paid in cash at the date of closing. The Company
recognized a gain of approximately $1.5 million, net of income tax expense of
approximately $932,000, relative to the disposal of the warehouse operations. A
special independent committee of the Company's Board of Directors approved the
terms and conditions of the sale.
F-40
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. DISCONTINUED OPERATIONS (CONTINUED)
The following summarizes information relative to the discontinued business
segment for the year ended December 31, 1993 (in 000's):
<TABLE>
<S> <C>
Operating revenues $1,695
----------
----------
Operating earnings $100
----------
----------
Net earnings $48
----------
----------
</TABLE>
J. INFORMATION ON BUSINESS SEGMENTS
The Company operates in two business segments: broadcasting and publishing.
A transportation segment was discontinued in 1993 (see Note I). The broadcasting
segment operates five television stations at December 31, 1995. The Publishing
segment operates three daily newspapers in three different markets, and six area
weekly advertising only direct mail publications in southwest Georgia and north
Florida. The following tables present certain financial information concerning
the Company's two operating segments and its discontinued segment (in 000's).
<TABLE>
<CAPTION>
----------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING REVENUE
Broadcasting $15,004 $22,826 $36,750
Publishing 10,109 13,692 21,866
---------- ---------- ----------
$25,113 $36,518 $58,616
---------- ---------- ----------
---------- ---------- ----------
OPERATING PROFIT (LOSS) FROM CONTINUING
OPERATIONS
Broadcasting $2,491 $5,241 $7,822
Publishing 1,040 1,036 (962)
---------- ---------- ----------
Total operating profit from continuing
operations 3,531 6,277 6,860
Miscellaneous income and expense, net 202 188 144
Interest expense (985) (1,923) (5,439)
---------- ---------- ----------
Income from continuing operations before
income taxes $2,748 $4,542 $1,565
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-41
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
Operating profit is total operating revenue less operating expenses,
excluding miscellaneous income and expense (net) and interest. Corporate
administrative expenses are allocated to operating profit based on net segment
revenues.
<TABLE>
<CAPTION>
----------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION EXPENSE
Broadcasting $904 $1,326 $2,723
Publishing 438 690 1,190
---------- ---------- ----------
1,342 2,016 3,913
Corporate 223 126 46
---------- ---------- ----------
1,565 2,142 3,959
Discontinued operations 224 -0- -0-
---------- ---------- ----------
Total depreciation and amortization
expense $1,789 $2,142 $3,959
---------- ---------- ----------
---------- ---------- ----------
CAPITAL EXPENDITURES
Broadcasting $787 $1,330 $2,285
Publishing 755 366 973
---------- ---------- ----------
1,542 1,696 3,258
Corporate 124 72 22
---------- ---------- ----------
1,666 1,768 3,280
Discontinued operations 916 -0- -0-
---------- ---------- ----------
Total capital expenditures $2,582 $1,768 $3,280
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------
DECEMBER 31,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Broadcasting $9,984 $53,173 $54,022
Publishing 4,753 11,878 18,170
---------- ---------- ----------
14,737 65,051 72,192
Corporate 5,699 3,738 6,048
---------- ---------- ----------
20,436 68,789 78,240
Discontinued operations 936 -0- -0-
---------- ---------- ----------
Total identifiable assets $21,372 $68,789 $78,240
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Partners of Television Station Partners, L.P.
We have audited the accompanying balance sheet of WRDW-TV, an operating
station of Television Station Partners, L.P., as of December 31, 1995, and the
related statements of income, partnership's equity, and cash flows for the year
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WRDW-TV at December 31,
1995, and the results of its operations and its cash flows for the year then
ended in conformity with the generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
January 26, 1996
F-43
<PAGE>
WRDW-TV
(THE AUGUSTA BUSINESS)
BALANCE SHEETS
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $333,658
Accounts receivable, net of allowance for doubtful accounts of approximately $117,380 1,748,208
Television film exhibition rights 924,107
Prepaid and other current assets 55,342
------------
Total current assets 3,061,315
Property, buildings and equipment-net (NOTE 3): 1,778,429
Television film exhibition rights 2,570,850
Intangible assets-net 4,128,730
------------
Total $11,539,324
------------
------------
LIABILITIES AND PARTNERSHIP'S EQUITY
Current liabilities:
Accounts payable and accrued expenses (NOTE 4) $233,197
Obligations for television film exhibition rights 898,251
------------
Total current liabilities 1,131,448
Obligations for television film exhibition rights 2,680,267
Commitments and contingencies (NOTE 5)
Partnership's equity (NOTES 1 AND 7) 7,727,609
------------
Total $11,539,324
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-44
<PAGE>
WRDW-TV
(THE AUGUSTA BUSINESS)
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
REVENUES:
Broadcasting revenues $10,059,555
Less:
Advertising agency commissions 1,171,595
National sales representative commissions 227,368
------------
Total advertising agency and national sales representative commissions 1,398,963
------------
Net operating revenues 8,660,592
------------
OPERATING EXPENSES:
Operating, technical and programming costs 3,142,280
Selling, general and administrative 2,631,952
------------
Total operating expenses 5,774,232
------------
INCOME BEFORE OTHER EXPENSES 2,886,360
------------
OTHER EXPENSES:
Depreciation 272,298
Amortization of intangible assets 151,620
Other-expenses, net 220,211
------------
Total 644,129
------------
Net income $2,242,231
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-45
<PAGE>
WRDW-TV
(THE AUGUSTA BUSINESS)
STATEMENT OF PARTNERSHIP'S EQUITY
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Balance at December 31, 1994 $7,410,422
Net income 2,242,231
Distribution to Television Station Partners, L.P. (1,925,044)
------------
Balance at December 31, 1995 $7,727,609
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-46
<PAGE>
WRDW-TV
(THE AUGUSTA BUSINESS)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $2,242,231
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,359,415
Provision for bad debt (recoveries) (14,000)
Net trade barter revenue (59,356)
Gain on sale of property and equipment (12,868)
Changes in operating assets and liabilities:
Accounts receivable (60,155)
Prepaid and other assets 102,937
Accounts payable and accrued expenses (359,296)
Payments of obligations for television film exhibition rights (1,017,754)
Other 274,956
------------
Net cash provided by operating activities 2,456,110
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 12,868
Capital expenditures (121,987)
------------
Net cash used in investing activities (109,119)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash transferred to Partnership (2,200,000)
------------
Net cash used in financing activities (2,200,000)
NET INCREASE IN CASH 146,991
CASH AT BEGINNING OF YEAR 186,667
------------
CASH AT END OF YEAR $333,658
------------
------------
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING, INVESTING AND FINANCIAL ACTIVITIES
Television film exhibition obligations were incurred when the Station entered into contracts for
film exhibition rights totaling: $387,450
------------
------------
Property and equipment was acquired in exchange for advertising time totaling: $59,356
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-47
<PAGE>
WRDW-TV
(THE AUGUSTA BUSINESS)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. STATION ORGANIZATION AND BASIS OF PRESENTATION
WRDW-TV (the "Station") is a commercial television station located in North
Augusta, South Carolina. The Station was owned and operated by Television
Station Partners, L.P. (the "Partnership") from July 7, 1989 to January 4,
1996-See Note 8. The Partnership is a Delaware limited partnership which was
organized on May 24, 1989 for the sole purpose of acquiring, owning, operating
and, at such time as GP Station Partners (the "general partner" of the
Partnership) determines is appropriate, reselling or otherwise disposing of its
television stations.
The Station was acquired by the Partnership on July 7, 1989 pursuant to an
Exchange Agreement dated May 24, 1989 between the Partnership and Television
Station Partners, a New York partnership ("TSP"). The Exchange Agreement
provided for the transfer to the partnership of all of TSP's assets in exchange
for all of the units of partnership interest in the Partnership, followed by the
liquidation and distribution of those units to the partners of TSP. For tax and
accounting purposes, the Partnership has been treated as a continuation of TSP.
The Station had been operated by TSP since March 23, 1983.
The financial statements of the Station are prepared on the accrual basis of
accounting, and include only those assets, liabilities, and results of
operations that relate to the business of the Station.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TELEVISION FILM EXHIBITION RIGHTS
Television film exhibition rights are recorded at the amount of the license
fees payable when purchased and amortized using the straight-line method based
on the license period or usage, whichever yields the greater accumulated
amortization. Television film exhibition rights are classified based upon the
portion of the unamortized balance expected to be broadcast within the current
year.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment is stated at cost less accumulated
depreciation. Depreciation is provided principally by the straight-line method
over the estimated useful lives of the assets. Any gains or losses realized on
disposition are reflected in operations. Maintenance and repairs, as well as
minor renewals and betterments, are charged to operating expenses directly as
incurred.
INTANGIBLE ASSETS
Intangible assets are comprised principally of Federal Communications
Commission licenses and network affiliation agreements and are amortized on the
straight-line basis, primarily over 40 years. Intangible assets are periodically
evaluated for impairments using a measurement of fair value, calculated at the
current market multiple times operating income. If this review indicates that
the intangible assets will not be recoverable, the Company's carrying value of
the intangible assets would be reduced to its estimated fair value.
TRADE/BARTER TRANSACTIONS
Trade/barter transactions involve the exchange of advertising time for
products and/or services and are recorded based on the fair market value of the
products and/or services received. Revenue is recorded when advertising
schedules air, and expense is recognized when products and/or services are used.
F-48
<PAGE>
WRDW-TV
(THE AUGUSTA BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
No income tax provision has been included in the financial statements since
income or loss of the Station is required to be reported by the partners of the
Partnership on their respective income tax returns.
3. PROPERTY, BUILDINGS, AND EQUIPMENT
The major classes of property, buildings and equipment at December 31, 1995
are as follows:
<TABLE>
<S> <C>
Land $190,000
Buildings and tower 2,062,613
Automobiles 136,245
Furniture and fixtures 5,999,846
Machinery and equipment 1,769,175
----------
10,157,879
Less accumulated depreciation 8,379,450
----------
$1,778,429
----------
----------
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1995 consist of the
following:
<TABLE>
<S> <C>
Accounts payable $10,275
Accrued state taxes 9,096
Accrued payroll, commissions, and bonuses 152,201
Other accrued expenses 61,625
----------
$233,197
----------
----------
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
FILM EXHIBITION RIGHTS
The obligations for television film exhibition rights are payable in the
following years:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- - ---------------------------------------------------------------- ----------
<S> <C>
1996 $898,251
1997 875,838
1998 838,254
1999 672,724
2000 293,451
----------
$3,578,518
----------
----------
</TABLE>
LITIGATION
The Station is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial statements of the Station.
F-49
<PAGE>
WRDW-TV
(THE AUGUSTA BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
DEBT
The Partnership had indebtedness outstanding under an Amended and Restated
Credit Agreement (the "Agreement"). The Agreement is secured by a first lien on
substantially all the assets of the Partnership. The Agreement required the
Partnership to enter into one or more binding sales contracts for the assets of
each station, satisfactory to the Banks, on or before June 30, 1995. During the
latter part of 1994, the Partnership contracted the services of Media Venture
Partners for the purpose of marketing the stations. On January 4, 1996, the
Partnership sold the assets of the Station. (Note 8).
6. TRANSACTIONS WITH RELATED PARTIES
The Partnership pays various operating and non-operation expenses on behalf
of the Station. These expenses have been allocated for the year ended December
31, 1995. The Station is allocated a portion of management fees and expenses in
the amount of approximately $90,000 to RP Television for financial support
services such as accounting. Additionally, the Station transfers excess cash to
the Partnership's headquarters. Excess cash transferred was $2,200,000 for the
year ended December 31, 1995. This money is primarily used for principal and
interest payments on the Partnership's debt obligations.
7. PENSION PLAN
Effective January 1, 1993, the defined contribution pension plan was
converted to a 401(k) salaried deferral plan, covering substantially all
employees, with a Partnership profit sharing contribution of 3 1/2 percent of
the participants' salary per annum. Annual contributions aggregating
approximately $53,803 were made to the Plan during 1995.
8. SUBSEQUENT EVENT
On January 4, 1996, the Partnership sold the assets of WRDW-TV to Gray
Communication Systems, Inc., for approximately $34 million plus an amount equal
to the excess of the current assets over the current liabilities assumed by the
buyer, as defined in the Asset Purchase Agreement.
F-50
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners' of
Television Station Partners, L.P.:
We have audited the accompanying balance sheets of WRDW-TV (an operating
station of Television Station Partners, L.P.), (the "Station") as of December
31, 1994 and the related statements of income, partnership's equity, and cash
flows for the years ended December 31, 1993 and 1994. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Station as of December 31, 1994 and the
results of their operations and their cash flows for the years ended December
31, 1993 and 1994 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
May 12, 1995
F-51
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $186,667
Accounts receivable, net of allowance for doubtful accounts of approximately $131,000 1,674,053
Television film exhibition rights 874,495
Prepaid and other current assets 158,279
------------
Total current assets 2,893,494
PROPERTY, BUILDINGS AND EQUIPMENT-Net (NOTE 3): 1,869,384
TELEVISION FILM EXHIBITION RIGHTS 3,168,509
INTANGIBLE ASSETS-Net 4,280,350
------------
TOTAL $12,211,737
------------
------------
LIABILITIES AND PARTNERSHIP'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (NOTE 4) $592,493
Obligations for television film exhibition rights (NOTE 5) 908,652
------------
Total current liabilities 1,501,145
OBLIGATIONS FOR TELEVISION FILM EXHIBITION RIGHTS (NOTE 5) 3,300,170
COMMITMENTS AND CONTINGENCIES (NOTE 6)
PARTNERSHIP'S EQUITY (NOTES 1 AND 8) 7,410,422
------------
Total $12,211,737
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-52
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
------------ ------------
<S> <C> <C>
REVENUES:
Broadcasting revenues $7,933,825 $9,460,307
Less:
Advertising agency commissions 943,174 1,158,952
National sales representative commissions 194,516 255,379
------------ ------------
Total advertising agency and national sales representative commissions 1,137,690 1,414,331
------------ ------------
Net operating revenues 6,796,135 8,045,976
------------ ------------
OPERATING EXPENSES:
Operating, technical and programming costs 2,555,795 2,958,364
Selling, general and administrative 2,126,770 2,434,477
------------ ------------
Total operating expenses 4,682,565 5,392,841
------------ ------------
INCOME BEFORE OTHER EXPENSES 2,113,570 2,653,135
------------ ------------
OTHER EXPENSES:
Depreciation 290,730 309,949
Amortization of intangible assets 151,620 151,620
Other-expenses, net 77,408 54,570
------------ ------------
Total 519,758 516,139
------------ ------------
NET INCOME $1,593,812 $2,136,996
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-53
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
STATEMENTS OF PARTNERSHIP'S EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
PARTNERSHIP'S
EQUITY
------------
<S> <C>
BALANCE, JANUARY 1, 1993 $7,829,582
Net income 1,593,812
Transfer to Television Station Partners, L.P. (1,909,588)
------------
BALANCE, DECEMBER 31, 1993 7,513,806
Net income 2,136,996
Transfer to Television Station Partners, L.P. (2,240,380)
------------
BALANCE, DECEMBER 31, 1994 $7,410,422
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-54
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $1,593,812 $2,136,996
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,355,485 1,345,658
Provision for bad debt 24,800 62,000
Net trade barter revenue (15,850) (30,105)
Gain on sale of property and equipment (1,137) (400)
Changes in operating assets and liabilities:
Accounts receivable (413,414) (173,216)
Prepaid and other assets (51,535) (34,480)
Accounts payable and accrued expenses 155,264 2,443
Payments of obligations for television film exhibition rights (2,645,344) (3,048,878)
------------ ------------
Net cash provided by operating activities 2,081 260,018
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 9,470 400
Capital expenditures (230,718) (176,374)
------------ ------------
Net cash used in investing activities (221,248) (175,974)
------------ ------------
NET INCREASE (DECREASE) IN CASH (219,167) 84,044
CASH, BEGINNING OF YEAR 321,790 102,623
------------ ------------
CASH, END OF YEAR $102,623 $186,667
------------ ------------
------------ ------------
SUPPLEMENTAL INFORMATION:
Cash transferred to Television Station Partners, L.P. $2,075,000 $2,417,500
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING, INVESTING AND FINANCIAL ACTIVITIES:
Television film exhibition obligations of $1,969,210 and 3,112,615 in 1993 and
1994, respectively, were incurred when the Station entered into contracts for
film exhibition rights.
Property and equipment totaling $15,850 and $30,105 was acquired in 1993 and 1994,
respectively, in exchange for advertising time.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-55
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994
1. STATION ORGANIZATION AND BASIS OF PRESENTATION
WRDW-TV (the "Station") is a commercial television station located in North
Augusta, South Carolina. The Station is owned and operated by Television
Station Partners, L.P. (the "Partnership") since July 7, 1989, as one of
four commercial television stations owned by the Partnership. The
Partnership is a Delaware limited partnership which was organized on May 24,
1989 for the sole purpose of acquiring, owning, operating and, at such time
as GP Station Partners (the "general partner" of the Partnership) determines
is appropriate, reselling or otherwise disposing of its television stations.
The Station was acquired by the Partnership on July 7, 1989 pursuant to an
Exchange Agreement dated May 24, 1989 between the Partnership and Television
Station Partners, a New York partnership ("TSP"). The Exchange Agreement
provided for the transfer to the partnership of all of TSP's assets in
exchange for all of the units of partnership interest in the Partnership,
followed by the liquidation and distribution of those units to the partners
of TSP. For tax and accounting purposes, the Partnership has been treated as
a continuation of TSP. The Station has been operated by TSP since March 23,
1983.
The financial statements of the Station are prepared on the accrual basis of
accounting, and include only those assets, liabilities, and results of
operations that relate to the business of the Station.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TELEVISION FILM EXHIBITION RIGHTS -- Television film exhibition rights
relating to films which are currently available for telecasting are recorded
at the gross cost method when purchased and amortized using the
straight-line method over the greater of the license period or usage.
Television film exhibition rights are classified based upon the portion of
the unamortized balance expected to be broadcast within the current year.
PROPERTY, BUILDINGS AND EQUIPMENT -- Property, buildings and equipment are
stated at cost less accumulated depreciation. Depreciation is provided
principally by the straight-line method over the estimated useful lives of
the assets. Any gains or losses realized on disposition are reflected in
operations. Maintenance and repairs, as well as minor renewals and
betterments, are charged to operating expenses directly as incurred.
INTANGIBLE ASSETS -- Intangible assets are comprised principally of Federal
Communications Commission licenses and network affiliation agreements and
are amortized on the straight-line basis, primarily over 40 years.
Intangible assets are periodically evaluated for impairments using a
measurement of fair value, calculated at the current market multiple times
operating income. The current market value multiple used at December 31,
1994 was 8.5 times.
TRADE/BARTER TRANSACTIONS -- Trade/barter transactions involve the exchange
of advertising time for products and/or services and are recorded based on
the fair market value of the products and/or services received. Revenue is
recorded when advertising schedules air, and expense is recognized when
products and/or services are used.
INCOME TAXES -- No income tax provision has been included in the financial
statements since income or loss of the Station is required to be reported by
the partners of the Partnership on their respective income tax returns.
F-56
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
3. PROPERTY, BUILDINGS AND EQUIPMENT
The major classes of property, buildings and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
---------------
<S> <C>
Land $190,000
Buildings and Tower 2,043,123
Automobiles 153,378
Furniture and fixtures 5,994,475
Machinery and equipment 1,637,285
---------------
10,018,261
Less accumulated depreciation 8,148,877
---------------
$1,869,384
---------------
---------------
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
---------------
<S> <C>
Accounts payable $99,042
Accrued state taxes 25,126
Accrued payroll, commissions, and bonuses 133,473
Other accrued expenses 334,852
---------------
$592,493
---------------
---------------
</TABLE>
5. OBLIGATIONS FOR TELEVISION FILM EXHIBITION RIGHTS
Obligation for television film exhibition rights at December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- - ----------------------------------------------------------------------------------------- ------------
<S> <C>
1995 $908,652
1996 907,886
1997 822,655
1998 736,849
1999 539,332
Thereafter 293,448
------------
4,208,822
Current portion 908,652
------------
Long-term obligations $3,300,170
------------
------------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
LITIGATION -- In March 1990, a suit was commenced in the Superior Court of
California, County of Alameda, against the Partnership, GP Station Partners,
and certain individuals, in connection with the July 1989 transaction in
which the assets of TSP were transferred to the Partnership and the
Partnership distributed to the partners a major portion of the proceeds of a
$72 million borrowing. The plaintiffs in
F-57
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
the suit sought rescission of the asset transfer, the return by the general
partner of all cash distributions made from the $72 million borrowing,
damages and other relief. The suit was subsequently dismissed on the grounds
that the California courts were an inconvenient forum.
On April 8, 1992, the plaintiffs in the California suit and another
plaintiff commenced an action in the United States District Court for the
Southern District of New York against GP Station Partners and each of its
general partners. The action, which the plaintiffs purported to bring
individually and as representatives of the limited partners, sought damages
and other relief. The Partnership Agreement contains exculpation and
indemnification provisions relating to claims against GP Station Partners
and its affiliates. In November 1992 the action was settled and discontinued
following the court's denial of the plaintiff's motion for class
certification. The settlement agreement provided for an exchange of general
releases and for payment to the original plaintiffs of an amount equal to
their share of the July 1989 distribution to partners (which the original
Television Station Partners had been escrowing pending the outcome of the
litigation), plus accrued interest, and those plaintiffs also agreed to
waive all rights to any further distribution and to relinquish their
interest in the Partnership without further consideration. No amount will be
payable to the other plaintiff in the action. The agreement also provides
for payment of $75,000 to the plaintiffs' counsel as partial reimbursement
of legal fees and expenses incurred in prosecuting the action. As part of
the settlement, the limited partners' original investment of $203,000, plus
interest of approximately $63,000 was paid. As a result of the litigation,
the Partnership incurred legal fees of approximately $579,000.
The Station is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect
the financial statements of the Station.
DEBT -- At December 31, 1994 the Partnership had $71,900,000 of principal
indebtedness outstanding under an Amended and Restated Credit Agreement (the
"Agreement"). The Agreement is secured by a first lien on substantially all
the assets of the Partnership. The Agreement requires the Partnership to
enter into one or more binding sales contracts for the assets of each
station, satisfactory to the Banks, on or before June 30, 1995. During the
latter part of 1994, the Partnership contracted the services of Media
Venture Partners for the purpose of marketing the stations. In February
1995, the Partnership signed letters of intent for the sale of the assets of
each station. (Note 9)
7. TRANSACTIONS WITH RELATED PARTIES
The Partnership pays various operating and non-operating expenses on behalf
of the Station. These expenses totaled approximately $165,000 and $177,000
for the years ended December 31, 1993 and 1994, respectively. Additionally,
the Station transfers excess cash to the Partnership's headquarters. Excess
cash transferred was $1,909,588 and $2,240,380 for the years ended December
31, 1993 and 1994, respectively. This money is primarily used for principal
and interest payments on the Partnership's debt obligations.
8. PENSION PLAN
Effective January 1, 1993, the defined contribution pension plan was
converted to a 401(k) salaried deferral plan with a Partnership profit
sharing contribution of 3 1/2 percent of the participants' salary per annum.
Annual contributions aggregating approximately $40,585 and $57,314 were made
to the Plan during 1993 and 1994, respectively.
F-58
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
9. SUBSEQUENT EVENT
On February 10, 1995, the Partnership signed a letter of intent for the sale
of the assets of WRDW-TV for approximately $34 million, plus an amount equal
to the excess of the current assets over the current liabilities assumed by
the buyer, as defined in the Asset Purchase Agreement, if applicable, to be
paid in cash at the closing of the sale.
F-59
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
John H. Phipps, Inc.
We have audited the accompanying balance sheets of the Broadcasting and
Paging Operations of John H. Phipps, Inc. (see Note 1) as of December 31, 1994
and 1995 and the related statements of operations and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the management of John H. Phipps, Inc. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Broadcasting and Paging
Operations of John H. Phipps, Inc. at December 31, 1994 and 1995 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Atlanta,Georgia
February 19, 1996
F-60
<PAGE>
BROADCASTING AND PAGING OPERATIONS
OF
JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------
DECEMBER 31,
--------------------------
1994 1995
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $95,210 $620,015
Accounts receivable, less allowance of $49,000 for each year 4,474,754 5,152,778
Program broadcast rights, current portion 521,921 919,281
Other current assets 329,343 347,785
------------ ------------
Total current assets 5,421,228 7,039,859
Program broadcast rights, excluding current portion 579,561 575,111
Property and equipment, net (NOTE 3) 10,720,196 10,492,583
Goodwill and other intangibles (NOTE 3) 8,576,721 9,454,775
------------ ------------
Total assets $25,297,706 $27,562,328
------------ ------------
------------ ------------
<CAPTION>
LIABILITIES AND OWNER'S EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $467,300 $365,468
Program broadcast obligations, current portion 722,676 921,579
Deferred paging service income 579,109 833,264
Current portion of long-term debt (NOTE 4) 1,206,483 1,389,931
Other current liabilities 1,025,042 907,345
------------ ------------
Total current liabilities 4,000,610 4,417,587
Long-term debt, less current portion (NOTE 4) 4,858,433 3,419,918
Program broadcast obligations, less current portion 245,421 345,140
Commitment and contingencies (NOTES 9 AND 10)
Minority interests 728,293 585,768
Owner's equity 15,464,949 18,793,915
------------ ------------
Total liabilities and owner's equity $25,297,706 $27,562,328
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-61
<PAGE>
BROADCASTING AND PAGING OPERATIONS
OF
JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Broadcast revenues, net (NOTE 3) $17,963,667 $20,209,523 $20,768,121
Paging operations 3,787,946 4,276,640 4,897,522
Production and other revenues 1,496,417 1,314,779 1,655,940
------------- ------------- -------------
23,248,030 25,800,942 27,321,583
------------- ------------- -------------
Expenses:
Operating, technical and
programming 5,221,729 5,306,801 5,449,435
Selling, general and
administrative 6,919,769 7,056,510 7,693,715
Amortization of program broadcast
rights 1,552,438 1,021,395 844,815
Depreciation and amortization 2,835,966 2,672,209 3,120,442
Pension credit (NOTE 5) (431,000) (409,000) (449,000)
Management fees (NOTE 7) 2,462,195 2,485,423 3,280,354
------------- ------------- -------------
18,561,097 18,133,338 19,939,761
------------- ------------- -------------
4,686,933 7,667,604 7,381,822
Interest 631,333 479,852 498,714
Other (income) expense, net (15,765) (666,657) (12,526)
------------- ------------- -------------
Income before minority interests 4,071,365 7,854,409 6,895,634
Minority interests (140,586) (635,302) (547,045)
------------- ------------- -------------
Net income $3,930,779 $7,219,107 $6,348,589
------------- ------------- -------------
------------- ------------- -------------
Supplemental unaudited pro-forma
information (NOTE 6):
Net income, as above $3,930,779 $7,219,107 $6,348,589
Pro-forma provision for income
tax expense (1,500,300) (2,743,300) (2,412,500)
------------- ------------- -------------
Pro-forma net income $2,430,479 $4,475,807 $3,936,089
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-62
<PAGE>
BROADCASTING AND PAGING OPERATIONS
OF
JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $3,930,779 $7,219,107 $6,348,589
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,835,966 2,672,209 3,120,442
Gain on disposition of fixed assets (13,408) (665,047) (9,023)
Amortization of program broadcast rights 1,552,438 1,021,395 844,815
Payments of program broadcast rights
obligations (1,072,008) (863,344) (931,004)
Minority interests 140,586 635,302 547,045
Changes in operating assets and
liabilities:
Accounts receivable 40,092 (396,373) (678,024)
Other current assets (12,091) (90,846) (18,442)
Accounts payable and accrued expenses (292,863) (206,137) (101,832)
Other current liabilities 219,336 277,681 (117,697)
Deferred paging income 68,136 204,356 254,155
------------- ------------- -------------
Net cash provided by operating activities 7,396,963 9,808,303 9,259,024
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchases of minority interests -0- (818,000) (1,780,794)
Purchases of property and equipment (3,537,592) (3,353,068) (3,187,596)
Proceeds from disposition of property and
equipment 584,187 1,665,504 1,140,520
------------- ------------- -------------
Net cash used in investing activities (2,953,405) (2,505,564) (3,827,870)
------------- ------------- -------------
FINANCING ACTIVITIES:
Indebtedness:
Borrowings 6,266,780 5,761,977 3,422,586
Repayments (7,421,873) (6,239,305) (4,677,653)
Distributions to minority interests (495,150) (539,596) (505,532)
Other (134,536) (156,475) (126,128)
Payments to J.H. Phipps, Inc., net (2,901,945) (6,060,036) (3,019,622)
------------- ------------- -------------
Net cash used in financing activities (4,417,652) (7,233,435) (4,906,349)
------------- ------------- -------------
Increase in cash and cash equivalents 25,906 69,304 524,805
Cash and cash equivalents at beginning of
year -0- 25,906 95,210
------------- ------------- -------------
Cash and cash equivalents at end of year $25,906 $95,210 $620,015
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-63
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BASIS OF PRESENTATION
Pursuant to a letter of intent dated December 15, 1995, Gray Communications
Systems, Inc. ("Gray") agreed to purchase substantially all of the assets and
assume certain liabilities and commitments of certain operations owned by J.H.
Phipps, Inc. ("Phipps"). The operations include (i) two CBS affiliates-a VHF
television station (WCTV-TV located in Tallahassee, Florida), and 74.5% interest
in a UHF television station (WKXT-TV located in Knoxville, Tennessee), (the
"Broadcast Operations"); and (ii) a portable communications and paging service
business (the "Paging Operations"), with operations in three southeastern states
(collectively referred to as the "Broadcasting and Paging Operations"). The
purchase is subject to regulatory approval.
At December 31, 1995, a Phipps subsidiary held the 74.5% interest in the
partnership that owns WKXT-TV (the "Knoxville Partnership"). The Knoxville
Partnership's remaining 25.5% interest is owned by four limited partners and
their ownership is shown as "minority interests" in the accompanying financial
statements. Gray, in separate agreements, has also agreed to purchase the
limited partners' interests. Phipps' ownership of the Knoxville Partnership has
increased, from 65.8% during 1993 to the 74.5% ownership interest at December
31, 1995, through purchases of certain minority interests for approximately
$818,000 in 1994 and approximately $1.78 million in 1995. Goodwill recorded
related to these acquisitions of minority interests was approximately $200,000
and $1.78 million in 1994 and 1995, respectively.
Phipps also owns and operates other businesses which are not being purchased
by Gray. The accompanying financial statements are intended to present the
Broadcasting and Paging Operations which are to be acquired by Gray pursuant to
the letter of intent described above and do not include the other operations of
Phipps.
The accompanying financial statements are derived from the historical books
and records of Phipps and do not give effect to any purchase accounting
adjustments which Gray may record as a result of its acquisition. Certain
current liabilities and long-term debt on the accompanying balance sheets will
not be assumed by Gray. Such liabilities will be retained by Phipps or retired
at the closing date of the acquisition by Gray.
2. ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Broadcasting revenues are recognized as the related advertising broadcast
services are rendered. Agency commissions are deducted from gross revenue,
reflecting the net amount due for broadcast services. Revenues from paging and
communications services are recognized over the applicable service period.
Revenues from mobile broadcasting contracts are recognized as services are
provided.
CONCENTRATION OF CREDIT RISK
The Broadcast Operations provide advertising air time to national, regional
and local advertisers within the geographic areas in which the Broadcast
Operations operate. Credit is extended based on an evaluation of the customer's
financial condition, and generally advance payment is not required. The Paging
Operations provide services to individuals and corporate customers in three
southeastern states. Such services are generally billed in advance. Credit
losses for the Broadcasting and Paging Operations are provided for in the
financial statements and consistently have been within management's
expectations.
F-64
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
BARTER ARRANGEMENTS
The Broadcasting and Paging Operations, in the ordinary course of business,
provide services and advertising air time to certain customers in exchange for
products or services. In addition, the Broadcasting Operations provide air time
to certain program syndicators in exchange for program licenses or reductions in
program license fees. Barter transactions are recorded on the basis of the
estimated fair market value of the products or services received. Revenue is
recognized as the related advertising is broadcast and expenses are recognized
when the merchandise or services are received or utilized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit with banks. Deposits with
banks are generally insured in limited amounts. All liquid investments with an
original maturity of three months or less when purchased are considered to be
cash equivalents.
PROGRAM BROADCAST RIGHTS
Rights to programs available for broadcast are initially recorded at the
amounts of total license fees payable under the license agreements and are
charged to operating expense on the basis of total programs available for use on
the straight-line method. The portion of the unamortized balance expected to be
charged to operating expense in the succeeding year is classified as a current
asset, with the remainder classified as a noncurrent asset. The liability for
program broadcast rights is classified as current or long-term, in accordance
with the payment terms of the various licenses. The liability is not discounted
for imputation of interest.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful
life of the assets for financial reporting purposes and by accelerated methods
for income tax purposes.
INTANGIBLE ASSETS
Intangible assets are stated at cost and are amortized using the
straight-line method. Goodwill is amortized over 15 to 40 years. Intangible
assets other than goodwill, which include broadcasting licenses, network
affiliation agreements, and other intangibles carried at an allocated cost based
on appraisals are amortized over 15 years. Loan acquisition fees are amortized
over the life of the specific agreement.
In the event that facts and circumstances indicate that the goodwill or
other intangibles may be impaired, an evaluation of continuing value would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with this asset would be compared to its carrying amount to
determine if a write down to fair market value or discounted cash flow value is
required.
INTEREST SWAP
The Knoxville Partnership had an interest rate swap agreement to modify the
interest characteristics of a portion of its outstanding debt (see Note 4.
INDEBTEDNESS). The agreement, which expired during 1995, involved the exchange
of amounts based on a fixed interest rate for amounts based on variable interest
rates over the life of the agreement without an exchange of the notional amount
upon which the payments are based. The differential to be paid or received as
interest rates changed was accrued and recognized as an adjustment of interest
expense related to the debt (the accrual accounting method). Interest expense
(income) adjustments resulting from the interest rate swap were $44,385 in 1993,
$(986) in 1994 and $(2,805) in 1995.
F-65
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
Phipps accounted for its stock Appreciation Rights Plan (see Note 7. PHIPPS
CORPORATE ALLOCATIONS) in accordance with APB Opinion No 25, Accounting for
Stock Issued to Employees and related interpretations.
INCOME TAXES
Phipps and its subsidiaries file a consolidated federal income tax return
and separate state tax returns. The operating results of the Knoxville
Partnership are included in the income tax returns of Phipps based on their
percentage ownership. All states where the Broadcast and Paging Operations are
located have taxes based on income. Income tax expense for the Broadcasting and
Paging Operations are not presented in the accompanying financial statements as
such amounts are computed and paid by Phipps. Pro-forma federal and state income
taxes for the Broadcast and Paging Operations are calculated on a pro-forma,
separate return basis (see Note 6. PRO-FORMA INCOME TAXES).
FAIR VALUES OF FINANCIAL INSTRUMENTS
Phipps has adopted FASB Statement No. 107, "Disclosure about Fair Value of
Financial Instruments", which requires disclosure of fair value, to the extent
practical, of certain of Phipps' financial instruments. The fair value amounts
do not necessarily represent the amount that could be realized in a sale or
settlement. Phipps' financial instruments are comprised principally of an
interest rate swap and long-term debt.
The estimated fair value of long-term bank debt at December 31, 1995
approximates book value since, in management's opinion, such obligations are
subject to fluctuating market rates of interest and can be settled at their face
amounts. The Company does not anticipate settlement of long-term debt at other
than book value and currently intends to hold such financial instruments through
maturity.
The fair value of other financial instruments classified as current assets
or liabilities approximate their carrying values due to the short-term
maturities of these instruments.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("Statement 121"), which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairments are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the asset's carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. Phipps does not believe
that the adoption of Statement 121 will have a material impact on Phipps'
financial position.
F-66
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Major classifications of property and equipment and their estimated useful
lives are summarized as follows (in 000's):
<TABLE>
<CAPTION>
-------------------------------------
ESTIMATED
USEFUL DECEMBER 31,
LIVES ------------------------
CLASSIFICATION (YEARS) 1994 1995
- - ------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Land $593 $593
Buildings and improvements 40 2,630 3,104
Broadcasting equipment and furniture 5-20 15,440 14,567
Communications and paging equipment 5-7 4,561 4,739
----------- -----------
23,224 23,003
Less accumulated depreciation (12,504) (12,510)
----------- -----------
$10,720 $10,493
----------- -----------
----------- -----------
</TABLE>
The composition of intangible assets was as follows (in 000's):
<TABLE>
<CAPTION>
------------------------
DECEMBER 31,
1994 1995
----------- -----------
<S> <C> <C>
Goodwill $3,050 $4,578
Broadcast licenses and network affiliation
agreements 6,162 6,162
Other 812 812
Accumulated amortization (1,447) (2,182)
----------- -----------
$8,577 $9,370
----------- -----------
----------- -----------
</TABLE>
The composition of other current liabilities is as follows (in 000's):
<TABLE>
<CAPTION>
------------------------
DECEMBER 31,
1994 1995
----------- -----------
<S> <C> <C>
Customer deposits $63 $85
Accrued bonuses 163 265
Other compensation related accruals 404 439
Other 395 118
----------- -----------
$1,025 $907
----------- -----------
----------- -----------
</TABLE>
The Broadcast Operations' revenues are presented net of agency commissions
as follows (in 000's):
<TABLE>
<CAPTION>
-------------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Broadcast revenues, gross $20,523 $23,131 $23,767
Agency commissions (2,559) (2,921) (2,999)
----------- ----------- -----------
Broadcast revenues, net $17,964 $20,210 $20,768
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-67
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION (CONTINUED)
Components of "Other (income) expense, net" are as follows (in 000's):
<TABLE>
<CAPTION>
-------------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income $2 $2 $4
Gain on sale of assets 14 665 9
----------- ----------- -----------
$16 $667 $13
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
4. INDEBTEDNESS
A summary of indebtedness is as follows (in 000's):
<TABLE>
<CAPTION>
------------------------
DECEMBER 31,
1994 1995
----------- -----------
<S> <C> <C>
Bank Credit Agreement:
Revolving credit loan $302 $498
Term loan 4,500 3,202
Partnership Note Payable 744 725
PortaPhone Acquisition Debt 518 385
----------- -----------
6,064 4,810
Less current portion (1,206) (1,390)
----------- -----------
$4,858 $3,420
----------- -----------
----------- -----------
</TABLE>
BANK CREDIT AGREEMENT
The Knoxville Partnership has a bank credit agreement (the "Bank Credit
Agreement") which provides a term loan and a revolving credit facility. The loan
has provisions which, among other things, requires that the loan be redeemed in
the event of a change in control.
Under the terms of the Bank Credit Agreements, the Knoxville Partnership
may, at its option, have a Base Rate Advance or LIBOR (London Interbank Official
Rate) Advance, as specified by the bank in the notice of borrowing. Base Rate
Advances and LIBOR Advances may be outstanding at the same time with Base Rate
Advances bearing interest at the bank's index rate (8.5% at December 31, 1995),
plus .25% or .50% as applicable based on the Partnership's leverage ratio. LIBOR
Advances bear interest at the LIBOR (5.88% at December 31, 1995), plus 1.25% or
1.5% as applicable based on the Knoxville Partnership's leverage ratio. Base
Rate Advances and LIBOR Advances totaled $0 and $3.7 million, respectively, at
December 31, 1995.
The Bank Credit Agreement contains numerous financial covenants and other
affirmative covenants with regard to payment of distributions to partners,
operating and capitalized leases, and acquisition of property. The advances are
guaranteed by Phipps and collateralized by substantially all the Knoxville
Partnership's assets. In connection with the Phipps guarantee, Phipps charged
the Knoxville Partnership guaranty fees, classified as interest expense in the
accompanying financial statements, of approximately $55,000 in 1993, $54,000 in
1994 and $42,000 in 1995.
PARTNERSHIP NOTE PAYABLE
On September 30, 1994, Phipps acquired approximately 4.2% additional
ownership interest in the Knoxville Partnership from a limited partner. The
total amount to be paid to the former limited partner by the remaining partners
is $2 million and is payable over 20 years at $100,000 a year. The payment of
this
F-68
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INDEBTEDNESS (CONTINUED)
amount is guaranteed by the Knoxville Partnership. The first payment of $100,000
was made at the time the assignment was executed. Subsequent payments are due
annually at September 30. The present value of the total purchase price at
September 30, 1994 was $1,098,841 based on an interest factor of 7.46%
compounded annually. Phipps Tennessee has recorded a liability of approximately
$725,000 at December 31, 1995 for its portion of the outstanding balance.
PORTAPHONE ACQUISITION DEBT
In connection with a 1988 asset acquisition, PortaPhone is required to pay
the seller a consulting fee of $15,000 monthly for ten years. The liability for
the monthly payments required under the agreement are recorded at a discounted
present value in the accompanying financial statements.
Future scheduled reductions of principal for indebtedness are as follows (in
000's):
<TABLE>
<S> <C>
Year Ended December 31
1996 $ 1,390
1997 1,155
1998 1,557
1999 81
2000 and thereafter 627
---------
$ 4,810
---------
---------
</TABLE>
Cash payments of net interest expense were approximately $339,000 in 1993,
$449,000 in 1994 and $564,000 in 1995.
5. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN
Phipps has a defined benefit pension plan that covers substantially all its
full-time employees. Benefits are based on years of service and each employee's
compensation during the last ten years of employment (average final pay) up to a
maximum of 50% of average final pay.
Benefits become vested upon completion of five years of service. No vesting
occurs until the employee has completed five years of service. Phipps' funding
policy is to make the maximum contribution allowable by applicable regulations.
Total pension credit for the Broadcasting and Paging Operations was
($431,000), ($409,000) and ($449,000) for 1993, 1994 and 1995, respectively.
F-69
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following summarizes information for all Phipps operations including the
plan's funded status as of the plan's September 30 year end and assumptions used
to develop the net periodic pension expenses credit (in 000's).
<TABLE>
<CAPTION>
-------------------------------
DECEMBER 31,
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Actuarial present value of accumulated benefit
obligation is as follows:
Vested $3,691 $3,451 $4,348
Other 382 284 358
--------- --------- ---------
$4,073 $3,735 $4,706
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Plan assets at fair value, primarily common
stocks and bonds $9,582 $9,367 $10,206
Projected benefit obligation (4,993) (4,419) (5,568)
--------- --------- ---------
Plan assets in excess of projected benefit
obligation 4,589 4,948 4,638
Unrecognized net (gain) loss 804 688 1,288
Unrecognized net asset (3,394) (3,149) (2,904)
--------- --------- ---------
Pension asset $1,999 $2,487 $3,022
--------- --------- ---------
--------- --------- ---------
</TABLE>
The net pension credit included in the accompanying financial statements is
calculated as follows (in 000's):
<TABLE>
<CAPTION>
-------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Service costs-benefits earned during the year $168 $207 $144
Interest cost on projected benefit obligation 280 306 303
Actual return on plan assets (670) (713) (687)
Net amortization and deferral (209) (209) (209)
--------- --------- ---------
Net pension credit $(431) $(409) $(449)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The assumptions used to develop the plan's funded status and expenses were
as follows:
<TABLE>
<S> <C> <C> <C>
Assumptions:
Discount rate 7.5% 8.5% 7.5%
Expected long-term rate of return on assets 9.0% 9.0% 9.0%
Estimated rate of increase in compensation levels 4.5% 4.5% 4.5%
</TABLE>
401(K) PLAN
The Company also sponsors two 401(k) plans which provide for discretionary
employer contributions equal to 25% of the first 4% of an employee's
contribution. Contributions by Phipps to the plans are not material.
MANAGEMENT INCENTIVE BONUS PLAN
Phipps maintains an incentive bonus plan in which managers participate in
the performance of the division of Phipps which they manage. Eligible employees
are selected by the Board of Directors, and the bonus formula is established and
reviewed annually by the Board of Directors and key members of management.
Bonuses are calculated in the year following the year earned, at which time
one-half of the
F-70
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
calculated bonus is paid as compensation. The remaining portion is deferred and
earned by the employee over five years based on a vesting schedule adopted by
the Board. Employees become eligible to receive payment of deferred amounts upon
full vesting. Deferred amounts are recognized as an expense in the year earned.
Expenses under this plan were approximately $128,000 in 1993, $170,000 in 1994
and $233,000 in 1995.
Cumulative amounts vested for the Broadcasting and Paging Operations since
the inception of the plan in 1990, total approximately $300,000 at December 31,
1995 and are included as a current liability in the accompanying financial
statements.
6. PRO-FORMA INCOME TAXES
Pro-forma income tax expense differed from the amounts computed by applying
the statutory federal income tax rate of 34% as a result of the following (in
000's):
<TABLE>
<CAPTION>
-------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax rate $ 1,342 $ 2,454 $ 2,159
Increase resulting from:
State income taxes 158 289 253
--------- --------- ---------
$ 1,500 $ 2,743 $ 2,412
--------- --------- ---------
--------- --------- ---------
</TABLE>
7. PHIPPS' CORPORATE ALLOCATIONS
Interest expense incurred by Phipps is allocated to the Broadcasting and
Paging Operations based on specific borrowings. Such allocated interest expense
totaled approximately $134,700 in 1993, $44,000 in 1994 and $64,500 in 1995.
Pension expense (credit) is allocated based on an actuarial calculation (see
Note 5. EMPLOYEE BENEFITS PLANS)
The corporate operations and employees of Phipps provide certain services to
the Broadcasting and Paging Operations including executive management, cash
management, accounting, tax and other corporate services which are allocated to
the operating units of Phipps. Corporate expenses of Phipps, including corporate
officers salaries and related employee benefits (see Stock Appreciation Rights
and Performance Incentive Agreement below), travel costs, and related support
staff and operations, are allocated to the operating units of Phipps. The
Broadcasting and Paging Operations were charged $2,462,195, $2,485,423, and
$3,280,354 for these services during 1993, 1994 and 1995, respectively. In the
opinion of Phipps management, these charges have been made on a basis which is
reasonable, however, they are not necessarily indicative of the level of
expenses which might have been incurred by the Broadcasting and Paging Operation
on a stand-alone basis.
Phipps maintains a Stock Appreciation Rights Plan and Performance Incentive
Agreement for certain key corporate officers identified by the Board of
Directors. The expenses incurred for these plans are allocated to the
Broadcasting and Paging Operations as part of the management fee allocation for
Phipps' corporate expenses as discussed above. All amounts due under these plans
were paid in December 1995. Compensation expense recorded for these plans in
1993, 1994 and 1995 was approximately $2,828,000, $2,458,000 and $2,861,000,
respectively.
8. SUMMARY ACTIVITY IN OWNER'S EQUITY
Phipps provides centralized cash management for the Broadcasting and Paging
Operations. Substantially all cash receipts are remitted to Phipps and
substantially all disbursements are made by Phipps. There
F-71
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SUMMARY ACTIVITY IN OWNER'S EQUITY (CONTINUED)
are no terms of settlement for interest charges on these intercompany accounts.
The amounts due to/from Phipps are included as a part of owner's equity as the
Broadcasting and Paging operations are not required to settle these amounts on a
current basis.
An analysis of the net transactions in the owner's equity accounts for each
of the three years in the period ended December 31 is as follows (in 000's):
<TABLE>
<CAPTION>
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance of the beginning of year $13,276 $14,306 $15,131
Payments to Phipps (5,067) (8,181) (7,696)
Phipps purchase of minority interests -0- -0- 1,781
Phipps allocations 2,166 2,121 2,875
Net earnings 3,931 7,219 6,349
---------- ---------- ----------
Balance at the end of year $14,306 $15,465 $18,794
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
9. LITIGATION
At December 31, 1995, the Broadcast and Paging Operations are involved in
various lawsuits arising in the normal course of their business. However,
management believes that any potential losses that may occur from such lawsuits
would be covered by insurance and the final outcome of these lawsuits will not
have a material effect to the accompanying combined financial statements.
10. COMMITMENTS AND CONTINGENCIES
Program rights payable for films and syndicated series, which are
noninterest bearing, are due as follows at December 31, 1995 (in 000's):
<TABLE>
<S> <C>
1996 $922
1997 171
1998 and later 174
---------
$1,267
---------
---------
</TABLE>
Payments related to commitments for films and syndicated series, rights
which are not yet available for broadcast at December 31, 1995 are due as
follows (in 000's):
<TABLE>
<S> <C>
1996 $106
1997 631
1998 515
1999 440
2000 283
----------
$1,975
----------
----------
</TABLE>
The Paging Operations lease office space, office equipment and paging
network towers. The Broadcasting Operations lease land and broadcast towers. The
operating leases with unaffiliated entities have various
F-72
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
renewal options. Certain of the towers used in the Paging Operations are leased
from Phipps. Written contracts do not exist for such leases but management has
established that the leases are for five years and are renewable at the end of
five years. Rental expense for operating leases was as follows (in 000's):
<TABLE>
<CAPTION>
----------------------------------
OTHER
PHIPPS LESSORS TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Year Ended December 31
1993 $58 $384 $442
1994 64 316 380
1995 83 385 468
</TABLE>
The minimum aggregate rentals under noncancelable operating leases are
payable the lessors as follows (in 000's):
<TABLE>
<CAPTION>
----------------------------------
OTHER
PHIPPS LESSORS TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Year Ended December 31
1996 $118 $329 $447
1997 122 240 362
1998 125 190 315
1999 129 61 190
2000 and thereafter 133 59 192
---------- ---------- ----------
$627 $879 $1,506
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-73
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. INFORMATION ON BUSINESS SEGMENTS (IN 000'S):
<TABLE>
<CAPTION>
----------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Broadcasting Operations $19,460 $21,524 $22,424
Paging Operations 3,788 4,277 4,898
---------- ---------- ----------
Total revenues $23,248 $25,801 $27,322
---------- ---------- ----------
---------- ---------- ----------
OPERATING PROFIT:
Broadcasting Operations $4,631 $7,287 $7,040
Paging Operations 56 381 342
---------- ---------- ----------
Total operating profit $4,687 $7,668 $7,382
---------- ---------- ----------
---------- ---------- ----------
DEPRECIATION AND AMORTIZATION EXPENSE:
Broadcasting Operations $2,089 $2,015 $2,302
Paging Operations 747 657 818
---------- ---------- ----------
Total depreciation and amortization
expense $2,836 $2,672 $3,120
---------- ---------- ----------
---------- ---------- ----------
CAPITAL EXPENDITURES:
Broadcasting Operations $2,429 $1,515 $1,216
Paging Operations 1,109 1,838 1,972
---------- ---------- ----------
Total capital expenditures $3,538 $3,353 $3,188
---------- ---------- ----------
---------- ---------- ----------
IDENTIFIABLE ASSETS (AT END OF YEAR):
Broadcasting Operations $21,003 $21,059 $23,036
Paging Operations 3,816 4,239 4,526
---------- ---------- ----------
Total identifiable assets $24,819 $25,298 $27,563
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Operating profit is total operating revenue less expenses and before
miscellaneous income and expense (net), interest expense and minority interests.
F-74
<PAGE>
PROXY
GRAY COMMUNICATIONS SYSTEMS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned does hereby constitute and appoint WILLIAM E. MAYHER, III
and RALPH W. GABBARD and each of them with power of substitution to each, the
proxies of the undersigned to vote all shares of GRAY COMMUNICATIONS SYSTEMS,
INC. which the undersigned may be entitled to vote at the Annual Meeting of
its shareholders to be held on June 27, 1996, at 9:00 a.m. local time and at
any adjournment or adjournments thereof upon the matters described in the
accompanying Proxy Statement and upon any other business that may properly
come before the meeting or adjournment thereof. Said proxies are directed to
vote or to refrain from voting as checked below upon the following matters,
and otherwise in their discretion upon other matters in connection with the
following or otherwise as may properly come before the meeting or any
adjournment thereof.
(CONTINUED ON THE OTHER SIDE)
FOLD AND DETACH HERE
<PAGE>
BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL PROPOSALS
Please mark your votes as indicated in this example /X/
1. Election of eight (8) Directors
Nominees: Richard L. Boger, Ralph W. Gabbard, Hilton H. Howell, Jr.,
William E. Mayher, III, Howell Newton, Hugh Norton, Robert S. Prather, Jr.,
and J. Mark Robinson
FOR all except as listed below WITHHOLD AUTHORITY
/ / / /
(INSTRUCTION: To refrain from voting on any individual nominee, write that
nominee's name on the space provided below.)
___________________________________________________________________________
UNLESS OTHERWISE SPECIFIED THIS PROXY SHALL BE VOTED "FOR" EACH OF THE PROPOSALS
2. Proposal to amend to the Company's Articles of Incorporation to (a)
increase the voting rights of the Class A Common Stock of no par value by
a multiple of ten such that the Class A Common Stock shall have ten (10)
votes per share on each matter that is submitted to stockholders for
approval, (b) redesignate the presently authorized Class B Non-Voting
Common Stock of no par value, such that the Class B Common Stock of no par
value shall have one (1) vote per share on each matter that is submitted
to shareholders for approval and shall have certain shareholder rights (c)
to increase the authorized number of shares of the Company's Capital Stock
to 50,000,000 shares designating 15,000,000 as Class A Common Stock of no
par value; 15,000,000 shares as Class B Common Stock of no par value; and
20,000,000 shares as preferred stock.
FOR AGAINST ABSTAIN
/ / / / / /
3. Proposal to amend to the Company's Bylaws to permit an increase of the
voting rights of the Class A Common Stock to ten (10) votes per share.
FOR AGAINST ABSTAIN
/ / / / / /
4. Proposal to amend to the Company's 1992 Long Term Incentive Plan for
certain employees of the Company and its subsidiaries to provide for the
issuance of Class B Common Stock of the Company instead of Class A Common
Stock and to reserve for issuance an aggregate of 400,000 shares of
Class B Common Stock of the Company.
FOR AGAINST ABSTAIN
/ / / / / /
5. Proposal to approve the issuance of warrants to purchase 487,500 shares of
Class A Common Stock to Bull Run Corporation.
FOR AGAINST ABSTAIN
/ / / / / /
6. Proposal to approve the issuance of warrants to purchase 500,000 shares of
Class A Common Stock to Bull Run Corporation.
FOR AGAINST ABSTAIN
/ / / / / /
7. Proposal to ratify the Board's approval of amendment to the Company's
non-qualified stock option plan for the non-employee directors of the
Company.
FOR AGAINST ABSTAIN
/ / / / / /
8. Proposal to approve the appointment of Ernst & Young as independent
auditors of the Company and its subsidiaries for the year ending December
31, 1996.
FOR AGAINST ABSTAIN
/ / / / / /
SIGNATURE(S)_____________________________________
SIGNATURE(S)_____________________________________ DATE____________________, 1996
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
FOLD AND DETACH HERE
