<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 1996
REGISTRATION NO. 333-4340
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
GEORGIA 4833 58-0285030
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
</TABLE>
126 NORTH WASHINGTON STREET
ALBANY, GEORGIA 31701
(912) 888-9390
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
WILLIAM A. FIELDER, III
126 NORTH WASHINGTON STREET
ALBANY, GEORGIA 31701
(912) 434-8732
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
Henry O. Smith III, Esq. John J. Kelley III, Esq.
Proskauer Rose Goetz & Mendelsohn LLP King & Spalding
1585 Broadway 191 Peachtree Street
New York, New York 10036 Atlanta, Georgia 30303
(212) 969-3000 (404) 572-4600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- --------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
- --------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION DATED SEPTEMBER 13, 1996
3,500,000 SHARES
GRAY
COMMUNICATIONS SYSTEMS, INC.
CLASS B COMMON STOCK
------------------------
All the 3,500,000 shares of Class B Common Stock, no par value (the "Class B
Common Stock"), offered hereby (this "Offering") are being sold by Gray
Communications Systems, Inc. (the "Company"). Prior to this Offering, there has
been no public market for the Class B Common Stock. The Company's Class A Common
Stock, no par value (the "Class A Common Stock" and, together with the Class B
Common Stock, the "Common Stock"), is listed on The New York Stock Exchange (the
"NYSE") under the symbol "GCS." The initial public offering price of the Class B
Common Stock will be based on the closing price of the Class A Common Stock on
the date of the offering and will be determined through negotiations between the
Company and the underwriters (the "Underwriters"). See "Underwriting." On
September 12, 1996, the last reported sale price of the Class A Common Stock on
the NYSE was $ per share. The Class B Common Stock has been approved for
listing on the NYSE under the symbol "GCS.B," subject to official notice of
issuance. Concurrently herewith, the Company is offering (the "Concurrent
Offering") $150,000,000 principal amount of its % Senior Subordinated Notes
due 2006 (the "Notes"). The Concurrent Offering is being made by separate
prospectus. The closing of this Offering is not conditioned upon the closing of
the Concurrent Offering.
The Company has two classes of common stock: Class A Common Stock and Class
B Common Stock. The Class A Common Stock is identical to the Company's Class B
Common Stock except with respect to voting power, with the Class A Common Stock
having 10 votes per share, and the Class B Common Stock having one vote per
share. Immediately after the consummation of this Offering and the Concurrent
Offering, the Class B Common Stock will have approximately 7.3% of the
outstanding voting power of the Company. See "Risk Factors -- Limited Voting
Rights of Class B Common Shareholders; Control by Principal Shareholder" and
"Description of Capital Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS B COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)(3)
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses of the Offering payable by the Company, estimated
to be approximately $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
525,000 additional shares of Class B Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ , and $ , respectively. See "Underwriting."
------------------------------
The Class B Common Stock is offered severally by the Underwriters named
herein, subject to prior sale, when, as, and if received and accepted by them,
subject to their right to reject orders, in whole or in part, and to certain
other conditions. It is expected that delivery of the certificates representing
the Class B Common Stock will be made on or about , 1996.
------------------------
THE ROBINSON-HUMPHREY COMPANY, INC.
ALLEN & COMPANY
INCORPORATED
J.C. BRADFORD & CO.
J.P. MORGAN & CO.
, 1996
<PAGE>
[The graphic material to be included is a map of the southeastern part of
the United States with logos of the television stations owned by the Company or
that are part of the Phipps Business marking where the stations are located.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS B COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE
READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT
OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND
ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS
DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE
CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND
UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS
INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE
KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY
THE COMPANY TO THE UNDERWRITERS IN THIS OFFERING IS NOT EXERCISED. ALL
INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2
SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND
DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK,
IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED
FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS
PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN").
THE COMPANY
The Company owns and operates seven network-affiliated television stations
in medium-size markets in the southeastern United States, six of which are
ranked number one in their respective markets (which includes two television
stations that are part of the Phipps Business). Five of the stations are
affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and
two are affiliated with the NBC Television Network, a division of the National
Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps
Acquisition (described below), the Company will be required under current
regulations of the Federal Communications Commission (the "FCC") to divest its
NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of
the Company's plans regarding such divestiture, see "Risk Factors -- FCC
Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the
Financing." The Company also owns and operates three daily newspapers, two
weekly, advertising only publications ("shoppers"), and a paging business (which
is part of the Phipps Business), all located in the Southeast. The Company
derives significant operating advantages and cost saving synergies through the
size of its television station group and the regional focus of its television
and publishing operations. These advantages and synergies include (i) sharing
television production facilities, equipment and regionally oriented programming,
(ii) the ability to purchase television programming for the group as a whole,
(iii) negotiating network affiliation agreements on a group basis and (iv)
purchasing newsprint and other supplies in bulk. In addition, the Company
believes that its regional focus can provide advertisers with an efficient
network through which to advertise in the fast-growing Southeast.
In 1993, after the acquisition of a large block of Class A Common Stock by a
new investor, the Company implemented a strategy to foster growth through
strategic acquisitions. Since 1994, the Company's significant acquisitions have
included three television stations and two newspapers, all located in the
Southeast. As a result of the Company's acquisitions and in support of its
growth strategy, the Company has added certain key members of management and has
greatly expanded its operations in the television broadcasting and newspaper
publishing businesses. On September 10, 1996, J. Mack Robinson, a director of
the Company, was appointed President and Chief Executive Officer of the Company
on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The
Company expects to commence a search to locate a new president as soon as
practicable following this Offering. On September 11, 1996, Robert S. Prather,
Jr., a director of the Company, was appointed Executive Vice
President-Acquisitions on an interim basis.
In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV
("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In
December 1995, the Company entered into an asset purchase agreement to acquire
(the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving
Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville,
Tennessee, a satellite broadcasting business and a paging business
(collectively, the "Phipps Business"). The Company believes that the Phipps
Acquisition will further enhance the Company's position as a major regional
television broadcaster and is highly attractive for a number of reasons,
including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading
station market position and WKXT's significant growth potential, (iii) strong
station broadcast cash flows, (iv) opportunities for revenue growth utilizing
the
3
<PAGE>
Company's extensive management expertise with medium-size stations and (v)
opportunities for synergies between WCTV and WKXT and the Company's existing
stations with regard to revenue enhancement and cost controls. The consummation
of the Phipps Acquisition is currently expected to occur by September 30, 1996,
although there can be no assurance with respect thereto.
In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc.
("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for
approximately $9.5 million in cash plus the amount of the accounts receivable on
the date of the closing.
For the year ended December 31, 1995, on a pro forma basis, the Company had
net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash
flow and paging cash flow), operating cash flow and net (loss) of $90.6 million,
$30.3 million, $28.1 million and $(3.4) million, respectively. For the six
months ended June 30, 1996, on a pro forma basis, the Company had net revenues,
Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9
million, $16.3 million and $322,000, respectively. Net revenues, Media Cash Flow
and operating cash flow on a pro forma basis for the year ended December 31,
1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income
decreased 224.7% from the historical amounts for the year ended December 31,
1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis
for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%,
respectively, while net income decreased 72.8% from the historical amounts for
the six months ended June 30, 1995. The Company's pro forma net income for its
television stations for the year ended December 31, 1995 and for the six months
ended June 30, 1996 was $1.7 million and $1.4 million, respectively.
The following table sets forth certain information for each of the Company's
television stations.
<TABLE>
<CAPTION>
PRO FORMA
---------------------------------------
IN-MARKET
SHARE YEAR ENDED DECEMBER SIX MONTHS ENDED
STATION OF 31, 1995 JUNE 30, 1996
RANK HOUSEHOLDS ------------------- ------------------
NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING
STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6)
- -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701
WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530
WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149
WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658
Panama City,
WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476
PHIPPS
ACQUISITION
WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903
Tallahassee,
WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254
Thomasville,
GA
</TABLE>
- ------------------------------
(1) Ranking of designated market area as defined by Nielsen ("DMA") served by a
station among all DMAs is measured by the number of television households
within the DMA based on the November 1995 Nielsen estimates.
(2) Represents station rank in DMA as determined by November 1995 Nielsen
estimates of the number of television sets tuned to the Company's station
as a percentage of the number of television sets in use in the market for
the Sunday through Saturday 6 a.m. to 2 a.m. time period.
(3) All stations in the market are UHF stations.
(4) The market area served by WYMT is an 18-county trading area, as defined by
Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station
rank is based upon its position in the 18-county trading area.
(5) The Company will be required under current FCC regulations to divest WALB
and WJHG in connection with the Phipps Acquisition. For a discussion of the
Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The
Phipps Acquisition, the KTVE Sale and the Financing."
(6) Represents pro forma income before miscellaneous income (expense),
allocation of corporate overhead, interest expense and income taxes.
The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and
the GWINNETT DAILY POST and two shoppers had net revenues and operating income
(income before miscellaneous income (expense), allocation of corporate overhead,
interest expense and income taxes) on a pro forma basis of $21.9 million and
$660,000, respectively, for the year ended December 31, 1995, and $11.3 million
and $1.3 million for the six months ended June 30, 1996, respectively. The
satellite broadcasting business and paging business, which are a part of the
Phipps Business, had net revenues and operating income (income before
miscellaneous
4
<PAGE>
income (expense), allocation of corporate overhead, interest expense and income
taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended
December 31, 1995 and $3.5 million and $467,000 for the six months ended June
30, 1996, respectively.
BUSINESS STRATEGY
The Company's business strategy includes the following key elements:
- STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to
achieve a distinct identity through its emphasis on local programming. A
key objective is to build audience loyalty through the development of a
strong local news franchise. Strong local news generates high viewership
and results in higher ratings for programs both preceding and following
the news, which
increases revenues and Media Cash Flow.
- REGIONAL FOCUS. The Company believes its regional focus has competitive
advantages, including the ability to purchase and produce programming that
can be used by multiple Company-owned stations as well as the opportunity
to sell advertising on multiple stations as a single buy. In addition, the
proximity of the Company's operations allows the sharing of equipment,
management and marketing expertise.
- TARGETED MARKETING. The Company seeks to increase its advertising
revenues and Media Cash Flow by expanding existing relationships with
local and national advertisers and by attracting new advertisers through
targeted marketing techniques and carefully tailored programming. The
Company works closely with advertisers to develop advertising campaigns
that match specifically targeted audience segments including sponsoring
and staging various special events such as fishing tournaments, boat shows
and bridal expositions.
- COST CONTROLS. Through its strategic planning and annual budgeting
processes, the Company continually seeks to identify and implement cost
savings opportunities at each of its stations and publications in order to
increase Media Cash Flow. The Company's ownership of multiple stations and
publications also benefits each operation in negotiating favorable terms
with programming syndicators, newsprint suppliers, national sales
representatives and other vendors.
- SELECTIVE ACQUISITIONS. The Company has focused on acquiring television
stations where the Company believes there is the potential for
improvements in revenue share, audience share and cost control. The
Company focuses on southeastern markets of medium size because the Company
believes these markets offer superior opportunities in terms of projected
population and economic growth, leading to higher advertising and
circulation revenues. In assessing acquisitions, the Company targets
stations and publications where it sees specific opportunities for revenue
enhancement while controlling expenditures, utilizing management's
significant experience with local and national advertising sales and in
operating similar businesses. In appropriate circumstances, the Company
will dispose of assets that it deems non-essential to its operating or
growth strategy.
THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING
The Company has entered into an agreement to acquire WCTV and WKXT, a
satellite broadcasting business and a paging business in the Southeast. The
purchase price for the Phipps Acquisition 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 30,
1996, although there can be no assurance with respect thereto. See "Risk
Factors--Possible Non-Consummation of the Phipps Acquisition."
Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"),
with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the
assets of KTVE for approximately $9.5 million in cash plus the amount of the
accounts receivable on the date of the closing (approximately $870,000), to the
extent collected by the buyer, to be paid to the Company 150 days following the
date of closing. For the year ended December 31, 1995, KTVE had net revenues,
Media Cash Flow and operating income (income before miscellaneous income
(expense), allocation of corporate overhead, interest expense and income taxes)
of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000
and $360,000, respectively, for the six months ended June 30, 1996. The Company
estimates that the gain, net of estimated taxes, on the KTVE Sale was
approximately $2.8 million.
In addition to the KTVE Sale and the consummation of this Offering, the
Concurrent Offering and the Phipps Acquisition, the Company intends to implement
a financing plan (the "Financing") to increase liquidity
5
<PAGE>
and improve operating and financial flexibility. Pursuant to the Financing, the
Company will (i) retire approximately $49.5 million aggregate principal amount
of outstanding indebtedness under its senior secured bank credit facility (the
"Old Credit Facility"), together with accrued interest thereon, (ii) retire
approximately $25.0 million aggregate principal amount of outstanding
indebtedness under its senior note due 2003 (the "Senior Note"), together with
accrued interest thereon and a prepayment fee, (iii) issue $10.0 million
liquidation preference of its Series A preferred stock (the "Series A Preferred
Stock") in exchange for its outstanding $10.0 million aggregate principal amount
8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull
Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack
Robinson, the President, Chief Executive Officer and director of the Company,
and certain of his affiliates $10.0 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 of Class A Common Stock (representing 10.1% of the currently issued and
outstanding Class A Common Stock after giving effect to the exercise of such
warrants) for cash proceeds of $10.0 million and (v) enter into a new senior
secured bank credit facility (the "Senior Credit Facility") to provide for a
term loan and revolving credit facility aggregating $125.0 million. 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 this Offering, the Concurrent Offering, the sale of the Series B Preferred
Stock and the warrants, borrowings under the Senior Credit Facility and the
Company's working capital. For a description of the Senior Credit Facility and
the Preferred Stock, see "Description of Certain Indebtedness" and
"Management--Compensation Committee Interlocks and Insider
Participation--Issuances of Preferred Stock." The consummation of this Offering
is not conditioned upon the concurrent consummation of the Financing, the Phipps
Acquisition or the Concurrent Offering. If the Phipps Acquisition is not
consummated prior to December 23, 1996, the Company is required to redeem the
Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a
redemption price (the "Special Redemption Price") equal to 101% of the principal
amount of the Notes plus accrued and unpaid interest to the date fixed for such
redemption (the "Trust Funds"). See "Description of the Notes."
The Concurrent Offering and the Financing are intended to provide financing
for the Phipps Acquisition and operating and financial flexibility thereafter.
Although the Concurrent Offering may be consummated prior to the Phipps
Acquisition, the Notes are subject to the special redemption described above.
The Financing described above will be implemented in connection with the closing
of the Concurrent Offering, but the Senior Credit Facility will provide that no
borrowings may be made thereunder until the closing of the Phipps Acquisition.
Accordingly, if the Phipps Acquisition is not consummated, the Notes will be
redeemed by the Company, the Old Credit Facility will remain in place and the
Company will not borrow under the Senior Credit Facility.
The following table sets forth the estimated sources and uses of funds
relating to this Offering, the Concurrent Offering, the Phipps Acquisition and
the Financing:
<TABLE>
<CAPTION>
(IN MILLIONS) AMOUNT
----------
SOURCES OF FUNDS:
<S> <C>
The Class B Common Stock offered hereby $73.5
The Concurrent Offering 150.0
Sale of Series B Preferred Stock and Warrants 10.0
Borrowings under the Senior Credit Facility 32.6
Working capital (1) 9.5
----------
TOTAL $275.6
----------
----------
USES OF FUNDS:
Consummation of Phipps Acquisition $185.0
Retire indebtedness under the Old Credit Facility (2) 49.5
Retire indebtedness under the Senior Note(3) 25.0
Fees and expenses (4) 16.1
----------
TOTAL $275.6
----------
----------
</TABLE>
6
<PAGE>
- ------------------------------
(1) The source of these funds was the KTVE Sale.
(2) Borrowings under the Old Credit Facility bear interest at formula rates
based upon the applicable London inter-bank offered rate ("LIBOR") or prime
rate at the time of borrowing plus a fixed spread and have a final maturity
of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%.
(3) The indebtedness under the Senior Note bears interest at 10.7%.
(4) Fees and expenses include underwriting costs for this Offering and the
Concurrent Offering, fees payable in connection with the negotiation and
execution of the Senior Credit Facility, fees payable in connection with
the retirement of the Senior Note and legal, accounting and other
transaction fees.
If the Phipps Acquisition is not consummated, the Company will redeem the
Notes. The following table sets forth the estimated sources and uses of funds to
consummate the Financing and to redeem the Notes if the Phipps Acquisition is
not consummated:
<TABLE>
<CAPTION>
(IN MILLIONS) AMOUNT
------------
<S> <C>
SOURCES OF FUNDS:
The Class B Common Stock offered hereby $ 73.5
The Concurrent Offering 150.0
Sale of Series B Preferred Stock and Warrants 10.0
Working capital (1) 8.6
------------
TOTAL $ 242.1
------------
------------
</TABLE>
<TABLE>
<S> <C>
USES OF FUNDS:
Redemption of the Notes $ 151.5(2)
Retire indebtedness under the Old Credit Facility (3) 49.5
Retire indebtedness under the Senior Note(4) 25.0
Fees and expenses (5) 16.1
----------
TOTAL $ 242.1
----------
----------
</TABLE>
- ------------------------------
(1) The source of these funds was the KTVE Sale.
(2) Amount shown excludes interest accrued on the Notes from the date of
issuance to the date of redemption.
(3) Borrowings under the Old Credit Facility bear interest at formula rates
based upon the applicable LIBOR or prime rate at the time of borrowing plus
a fixed spread and have a final maturity of 2003. As of June 30, 1996, the
weighted average interest rate was 8.94%.
(4) The indebtedness under the Senior Note bears interest at 10.7%.
(5) Fees and expenses include underwriting costs for this Offering and the
Concurrent Offering, fees payable in connection with the negotiation and
execution of the Senior Credit Facility, fees payable in connection with
the retirement of the Senior Note and legal, accounting and other
transaction fees. If the Phipps Acquisition is not consummated due to a
default by the Company, the Company will be required to pay $10.0 million
as liquidated damages, however such amount is not included above.
Prior to the consummation of the Phipps Acquisition, the net proceeds of the
Concurrent Offering, together with an amount sufficient to permit the Company to
redeem the Notes on the Special Redemption Date at the Special Redemption Price,
will be held by and pledged to the Trustee (as defined in the Indenture) under
the Indenture for the benefit of the holders of the Notes. The Trust Funds will
be invested in cash equivalents. Prior to the consummation of the Phipps
Acquisition, the proceeds of this Offering will be used to fund part of the
Trust Funds, to repay indebtedness under the Old Credit Facility and to retire
the Senior Note.
7
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class B Common Stock offered hereby......... 3,500,000 Shares
Common Stock to be outstanding after this
Offering (1)
Class A Common Stock.................... 4,467,205 Shares
Class B Common Stock.................... 3,500,000 Shares
Total................................. 7,967,205 Shares
Use of Proceeds by the Company.............. The Company intends to use the proceeds of
this Offering, together with the proceeds of
the Concurrent Offering, the Financing and the
Company's working capital for (i) the
consummation of the Phipps Acquisition, (ii)
the retirement of indebtedness under the Old
Credit Facility, (iii) the retirement of
indebtedness under the Senior Note and (iv)
the payment of related fees and expenses. See
"The Phipps Acquisition, the KTVE Sale and the
Financing."
New York Stock Exchange Symbols:
Class A Common Stock.................... GCS
Class B Common Stock.................... GCS.B
Concurrent Offering......................... Concurrently with this Offering, the Company
is offering $150,000,000 aggregate principal
amount of its Notes by separate prospectus.
The consummation of this Offering is not
conditioned upon the consummation of the
Financing, the Phipps Acquisition or the
Concurrent Offering.
</TABLE>
- ------------------------
(1) Excludes (i) approximately 53,500 shares of Class A Common Stock issuable
upon exercise of stock options outstanding under the Company's stock option
plans as of June 30, 1996, (ii) 487,500 shares of Class A Common Stock
issuable upon exercise of an outstanding warrant of the Company and (iii)
500,000 shares of Class A Common Stock issuable upon exercise of the
warrant to be issued as part of the Financing. See "Management."
RISK FACTORS
See "Risk Factors" beginning on page 14 for certain information that should
be considered by prospective purchasers of the Class B Common Stock offered
hereby.
------------------------
The Company was incorporated in Georgia in 1897. The principal executive
offices of the Company are located at 126 North Washington Street, Albany,
Georgia 31701, telephone number (912) 888-9390.
------------------------
THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTIONS "PRO FORMA FINANCIAL DATA,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS." THESE FORWARD LOOKING STATEMENTS INVOLVE CERTAIN
RISKS AND UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH MATTERS WILL
BE REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE
FOLLOWING POSSIBILITIES: (1) COMPETITIVE PRESSURE IN THE COMPANY'S INDUSTRY
INCREASES; (2) COSTS RELATED TO THE PHIPPS ACQUISITION ARE GREATER THAN
EXPECTED; AND (3) GENERAL ECONOMIC CONDITIONS ARE LESS FAVORABLE THAN EXPECTED.
FOR FURTHER INFORMATION ON OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL
RESULTS OF THE COMPANY AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS."
8
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
The following table sets forth (i) unaudited condensed consolidated
historical financial information of the Company and certain data derived
therefrom, (ii) unaudited condensed consolidated pro forma financial information
of the Company and certain data derived therefrom after giving effect to the
Augusta Acquisition, this Offering, the Financing and the KTVE Sale and (iii)
unaudited condensed consolidated pro forma combined financial information of the
Company and certain data derived therefrom after giving effect to the foregoing,
the Phipps Acquisition and the Concurrent Offering. The pro forma financial
statements of the Company give effect to the Augusta Acquisition, the KTVE Sale,
this Offering, the Financing, the Phipps Acquisition and the Concurrent Offering
as if such transactions had occurred as of January 1, 1995 with respect to the
statement of operations and data derived therefrom for the year ended December
31, 1995 and as of January 1, 1996 with respect to the statement of operations
and data derived therefrom for the six months ended June 30, 1996 and as of
December 31, 1995 and June 30, 1996 with respect to the balance sheet data
derived therefrom as of such dates.
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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, 1995 JUNE 30, 1996
--------------------------------- ---------------------------------
HISTORICAL PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA
COMPANY COMPANY COMBINED COMPANY COMPANY COMBINED
--------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Broadcasting (less agency
commissions)........................ $ 36,750 $ 41,450 $ 63,874 $ 24,252 $ 21,949 $ 33,295
Publishing........................... 21,866 21,866 21,866 11,262 11,262 11,262
Paging............................... -- -- 4,897 -- -- 2,744
--------- ---------- ---------- --------- ---------- ----------
Total revenues......................... 58,616 63,316 90,637 35,514 33,211 47,301
Total expenses......................... 51,756 55,051 75,224 28,203 26,211 36,603
--------- ---------- ---------- --------- ---------- ----------
Operating income....................... 6,860 8,265 15,413 7,311 7,000 10,698
Miscellaneous income (expense), net.... 143 24 36 81 80 75
--------- ---------- ---------- --------- ---------- ----------
Income before interest expense and
income taxes.......................... 7,003 8,289 15,449 7,392 7,080 10,773
Interest expense....................... 5,438 910 20,664 4,445 359 10,236
--------- ---------- ---------- --------- ---------- ----------
Income (loss) before income taxes...... 1,565 7,379 (5,215) 2,947 6,721 537
Income tax expense (benefit)........... 634 2,958 (1,766) 1,146 2,694 215
--------- ---------- ---------- --------- ---------- ----------
Net income (loss)...................... 931 4,421 (3,449) 1,801 4,027 322
Preferred stock dividends.............. -- 1,400 1,400 -- 700 700
--------- ---------- ---------- --------- ---------- ----------
Net income (loss) available to common
stockholders.......................... $ 931 $ 3,021 $ (4,849) $ 1,801 $ 3,327 $ (378)
--------- ---------- ---------- --------- ---------- ----------
--------- ---------- ---------- --------- ---------- ----------
Average shares outstanding............. 4,481 7,999 7,854 4,657 8,157 7,954
--------- ---------- ---------- --------- ---------- ----------
--------- ---------- ---------- --------- ---------- ----------
Earnings (loss) per common
share--primary........................ $ 0.21 $ 0.38 $ (0.62) $ 0.39 $ 0.41 $ (0.05)
--------- ---------- ---------- --------- ---------- ----------
--------- ---------- ---------- --------- ---------- ----------
Earnings (loss) per common share--fully
diluted............................... $ 0.21 $ 0.38 $ 0.62 $ 0.38 $ 0.41 $ (0.05)
--------- ---------- ---------- --------- ---------- ----------
--------- ---------- ---------- --------- ---------- ----------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficiency)........... $ (222) $ 11,942 $ 7,161 $ 3,538 $ 11,571 $ 7,116
Total assets........................... 78,240 116,250 299,786 112,516 116,448 299,267
Total debt............................. 54,324 3,853 186,103 82,846 1,101 183,351
Total stockholders' equity............. 8,986 96,390 95,609 13,813 98,929 98,217
OTHER DATA:
Media Cash Flow (1).................... $ 15,559 $ 17,448 $ 30,345 $ 12,004 $ 11,406 $ 17,888
Operating cash flow (2)................ 13,309 15,197 28,094 10,442 9,844 16,326
EBITDA (3)............................. 13,140 15,151 28,134 10,332 9,752 16,363
Cash flow provided by (used in):
Operating activities................. 7,600 11,593 9,136 6,801 8,178 7,562
Investing activities................. (8,929) (5,964) (8,011) (37,490) (3,190) (4,029)
Financing activities................. 1,331 (2,945) (2,945) 31,416 (3,012) (3,012)
Capital expenditures................... $ 3,280 $ 3,202 $ 6,390 $ 1,317 $ 1,313 $ 2,960
Ratio of Media Cash Flow to interest
expense............................... 2.9 19.2 1.5 2.7 31.8 1.7
Ratio of operating cash flow to
interest expense...................... 2.4 16.7 1.4 2.3 27.4 1.6
Ratio of total debt to Media Cash
Flow.................................. 3.5 0.2 6.1 4.3(5) 0.1 5.6(5)
Ratio of total debt to operating cash
flow.................................. 4.1 0.3 6.6 5.0(5) 0.1 6.2(5)
Ratio of earnings to fixed charges
(4)................................... 1.3 7.3 -- 1.6 14.8 1.1
</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 such 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 income (loss) before income taxes,
discontinued operations, extraordinary items, cumulative effect of change in
accounting principles and fixed charges. Pro forma combined earnings would
be insufficient to cover fixed charges for the year ended December 31, 1995
by $5.2 million.
(5) Represents applicable ratios for the 12 month period ended June 30, 1996.
9
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
GRAY COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
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. The selected consolidated financial data for, and as of the six
months ended June 30, 1995 and 1996 are derived from the unaudited accounting
records of the Company and have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of the management of the
Company, include all normal and recurring adjustments and accruals necessary for
a fair presentation of such information.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
-------------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
-------------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <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 $ 18,261 $ 24,252
Publishing........................... 8,968 9,512 10,109 13,692 21,866 10,046 11,262
-------------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues......................... 22,521 24,643 25,113 36,518 58,616 28,307 35,514
Expenses:
Broadcasting......................... 9,672 9,753 10,029 14,864 23,202 11,410 14,418
Publishing........................... 6,444 6,752 7,662 11,198 20,016 8,590 9,193
Corporate and administrative......... 1,889 2,627 2,326 1,959 2,258 1,012 1,571
Depreciation......................... 1,487 1,197 1,388 1,745 2,633 1,234 1,648
Amortization of intangible assets.... 14 44 177 396 1,326 588 1,253
Non-cash compensation paid in common
stock............................... -- -- -- 80 2,321 816 120
-------------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses......................... 19,506 20,373 21,582 30,242 51,756 23,650 28,203
-------------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income....................... 3,015 4,270 3,531 6,276 6,860 4,657 7,311
Miscellaneous income (expense), net.... 778 (1,519) 202 189 143 69 81
-------------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations
before interest expense and income
taxes................................. 3,793 2,751 3,733 6,465 7,003 4,726 7,392
Interest expense....................... 787 1,486 985 1,923 5,438 2,768 4,445
-------------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes................... 3,006 1,265 2,748 4,542 1,565 1,958 2,947
Income tax expense..................... 1,156 869 1,068 1,776 634 776 1,146
-------------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations...... 1,850 396 1,680 2,766 931 1,182 1,801
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
-------------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
-------------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
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 $ 1,182 $ 1,801
-------------- ---------- ---------- ---------- ---------- ---------- ----------
-------------- ---------- ---------- ---------- ---------- ---------- ----------
Average outstanding common shares...... 6,469 4,668 4,611 4,689 4,481 4,383 4,657
-------------- ---------- ---------- ---------- ---------- ---------- ----------
-------------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations per
common share.......................... $ 0.29 $ 0.09 $ 0.36 $ 0.59 $ 0.21 $ 0.27 $ 0.39
-------------- ---------- ---------- ---------- ---------- ---------- ----------
-------------- ---------- ---------- ---------- ---------- ---------- ----------
Cash dividends per common share........ $ 0.05 $ 0.07 $ 0.07 $ 0.07 $ 0.08 $ 0.04 $ 0.04
-------------- ---------- ---------- ---------- ---------- ---------- ----------
-------------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficiency)........... $ 6,740 $ 2,976 $ 2,579 $ 1,075 $ (222) $ 237 $ 3,538
Total assets........................... 31,548 24,173 21,372 68,789 78,240 73,932 112,516
Total debt............................. 20,378 12,412 7,759 52,940 54,324 54,319 82,846
Total stockholders' equity............. $ 5,853 $ 4,850 $ 7,118 $ 5,001 $ 8,986 $ 7,375 $ 13,813
OTHER DATA:
Media Cash Flow (1).................... $ 6,405 $ 8,079 $ 7,371 $ 10,522 $ 15,559 $ 8,333 $ 12,004
Operating cash flow (2)................ 4,516 5,452 5,044 8,567 13,309 7,329 10,442
EBITDA (3)............................. 4,516 5,512 5,095 8,498 13,140 7,296 10,332
Cash flows provided by (used in):
Operating activities............... 3,499 4,832 1,324 5,798 7,600 3,828 6,801
Investing activities............... (2,073) (1,041) 3,062 (42,770) (8,929) (5,377) (37,490)
Financing activities............... (10,424) (9,300) (4,932) 37,200 1,331 1,208 31,416
Capital expenditures................... $ 2,235 $ 2,216 $ 2,582 $ 1,768 $ 3,280 $ 1,852 $ 1,317
Ratio of Media Cash Flow to interest
expense............................... 8.1 5.4 7.5 5.5 2.9 3.0 2.7
Ratio of operating cash flow to
interest expense...................... 5.7 3.7 5.1 4.5 2.4 2.6 2.3
Ratio of total debt to Media Cash
Flow.................................. 3.2 1.5 1.1 5.0 3.5 3.5(5) 4.3(5)
Ratio of total debt to operating cash
flow.................................. 4.5 2.3 1.5 6.2 4.1 4.1(5) 5.0(5)
Ratio of earnings to fixed charges
(4)................................... 4.7 1.8 3.4 3.2 1.3 1.7 1.6
</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 such 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 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 income (loss) before income taxes,
discontinued operations, extraordinary items, cumulative effect of change
in accounting principles and fixed charges.
(5) Represents applicable ratios for the 12 month periods ended June 30, 1995
and 1996.
11
<PAGE>
THE PHIPPS BUSINESS
(DOLLARS IN THOUSANDS)
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 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. The selected financial
data for, and as of the six months ended June 30, 1995 and 1996 are derived from
the unaudited financial statements of the Phipps Business and have been prepared
on the same basis as the audited financial statements and, in the opinion of
management of the Company, include all normal and recurring adjustments and
accruals necessary for a fair presentation of such information.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------------------------------- ----------------------
1991 1992(1) 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues:
Broadcasting (less agency commission)....... $ 10,492 $ 14,523 $ 19,460 $ 21,524 $ 22,424 $ 10,774 $ 11,346
Paging...................................... 3,369 3,646 3,788 4,277 4,897 2,423 2,744
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues................................ 13,861 18,169 23,248 25,801 27,321 13,197 14,090
Expenses:
Broadcasting................................ 5,298 7,518 10,734 10,211 10,487 5,065 5,412
Paging...................................... 2,356 2,298 2,529 2,764 3,052 1,411 1,780
Management fee.............................. 579 973 2,462 2,486 3,280 1,539 735
Depreciation and amortization............... 1,513 1,734 2,836 2,672 3,120 1,436 1,530
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses................................ 9,746 12,523 18,561 18,133 19,939 9,451 9,457
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income.............................. 4,115 5,646 4,687 7,668 7,382 3,746 4,633
Miscellaneous income (expense), net........... 5 8 16 666 12 (4) (5)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before interest expense and minority
interests.................................... 4,120 5,654 4,703 8,334 7,394 3,742 4,628
Interest expense.............................. 162 442 632 480 499 223 159
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority interests.............. 3,958 5,212 4,071 7,854 6,895 3,519 4,469
Minority interests............................ -- 331 140 635 547 256 296
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.................................... $ 3,958 $ 4,881 $ 3,931 $ 7,219 $ 6,348 $ 3,263 $ 4,173
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Supplemental unaudited pro forma
information: (2)
Net income, as above........................ $ 3,958 $ 4,881 $ 3,931 $ 7,219 $ 6,348 $ 3,263 $ 4,173
Pro forma provision for income tax
expense.................................... 1,504 1,855 1,500 2,743 2,413 1,240 1,586
---------- ---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income.......................... $ 2,454 $ 3,026 $ 2,431 $ 4,476 $ 3,935 $ 2,023 $ 2,587
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital............................... $ 595 $ 615 $ 1,257 $ 1,421 $ 2,622 $ 2,228 $ 2,902
Total assets.................................. 8,931 25,068 24,819 25,298 27,562 27,633 26,306
Total debt.................................... 1,388 7,697 6,542 6,065 4,810 5,198 4,034
Minority interests............................ -- 1,154 824 728 586 648 655
Owner's equity................................ $ 6,351 $ 13,276 $ 14,306 $ 15,465 $ 18,794 $ 18,764 $ 18,666
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Media Cash Flow (3)........................ $ 10,466 $ 12,983 $ 13,696 $ 6,678 $ 6,769
Operating cash flow (4).................... 8,003 10,498 10,416 5,140 6,035
EBITDA (5)................................. 7,523 10,340 10,502 5,182 6,163
Cash flows provided by (used in):
Operating activities................... 7,397 9,808 9,259 4,136 6,191
Investing activities................... (2,953) (2,506) (3,828) (3,152) (840)
Financing activities................... (4,418) (7,233) (4,906) (917) (5,309)
Capital expenditures....................... $ 3,538 $ 3,353 $ 3,188 $ 1,902 $ 1,647
</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 Phipps Business' 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.
13
<PAGE>
RISK FACTORS
IN ADDITION TO CONSIDERING THE OTHER INFORMATION SET FORTH IN THIS
PROSPECTUS, PROSPECTIVE PURCHASERS OF THE CLASS B COMMON STOCK OFFERED HEREBY
SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS BEFORE DECIDING TO INVEST IN THE
CLASS B COMMON STOCK.
SUBSTANTIAL LEVERAGE. The Company will have substantial indebtedness upon
the consummation of this Offering and the Concurrent Offering. As of June 30,
1996, on a pro forma basis after giving effect to the KTVE Sale, this Offering,
the Financing, the Phipps Acquisition and the Concurrent Offering, the Company
and its subsidiaries, on a consolidated basis, would have had outstanding $183.3
million of indebtedness and stockholders' equity of $98.2 million, with the
ability, subject to certain limitations described herein, to incur approximately
$92.5 million of additional indebtedness pursuant to the Senior Credit Facility,
$10.1 million of which could have been borrowed thereunder. As part of the
Financing and as a condition of the Concurrent Offering, the Company will enter
into the Senior Credit Facility, and the Company has entered into a commitment
letter with respect thereto. See "Description of Certain Indebtedness." On a pro
forma basis after giving effect to the Augusta Acquisition, the KTVE Sale, this
Offering, the Financing, the Phipps Acquisition and the Concurrent Offering for
the year ended December 31, 1995 and the six months ended June 30, 1996, the
Company's pro forma combined earnings would have been insufficient to cover
fixed charges by $5.2 million and sufficient to cover fixed charges by $537,000,
respectively. In addition, upon the consummation of this Offering, the Company
will issue Series A and Series B Preferred Stock having annual dividend
requirements of $800,000 and $600,000, respectively, which in the case of the
Series B Preferred Stock, may, at the option of the Company, be paid in shares
of Series B Preferred Stock. See "Certain Relationships and Related
Transactions--Issuances of Preferred Stock."
The Company intends to pursue additional acquisitions of television
stations, publications or related businesses and, in connection therewith, may
incur substantial additional indebtedness or issue substantial additional
preferred stock.
The degree to which the Company will be leveraged could have important
consequences to holders of the Class B Common Stock, including the following:
(i) the Company's ability to obtain financing in the future for working capital,
capital expenditures and general corporate purposes may be impaired; (ii) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of principal and interest on its indebtedness and the payment of
cash dividends on the Series A Preferred Stock; and (iii) a high degree of
leverage may limit the Company's ability to react to changes in the industry,
make the Company more vulnerable to economic downturns and limit its ability to
withstand competitive pressures.
The Company's ability to service its debt and dividend obligations will
depend upon its future operating performance which will be affected by
prevailing economic conditions and financial and business factors, many of which
are beyond the Company's control. If the Company cannot generate sufficient cash
flow from operations to meet its obligations, then the Company may be required
to restructure or refinance its debt, raise additional capital or take other
actions such as selling assets or reducing or delaying capital expenditures.
There can be no assurance, however, that any of such actions could be effected
on satisfactory terms, if at all, or would be permitted by the terms of the Old
Credit Facility, the Senior Credit Facility, the Indenture or the Company's
other credit arrangements.
The Company's Old Credit Facility contains, and the Senior Credit Facility
and the Notes will contain, restrictive covenants that, among other things,
limit the Company's ability to incur additional indebtedness, create liens and
make investments and capital expenditures. The Old Credit Facility also
requires, and the Senior Credit Facility will require, the Company to comply
with certain financial ratios and tests, under which the Company is required to
achieve certain financial and operating results. The Company's ability to meet
these financial ratios and tests may be affected by events beyond its control,
and there can be no assurance that they will be met. A failure to comply with
the covenants and other provisions of its debt instruments could result in
events of default under such instruments, which could permit acceleration of the
debt under such instruments and in some cases acceleration of debt under other
instruments that contain cross default or cross-acceleration provisions.
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LIMITATIONS ON ADDITIONAL INDEBTEDNESS -- EFFECT ON ACQUISITION
STRATEGY. The Company's strategy includes acquiring television stations and
publications in the Southeast. However, the Company's ability to incur
additional indebtedness will be limited by the terms of the Old Credit Facility,
the Senior Credit Facility and the Notes. If the Company requires significant
additional financing to fund acquisitions or operations or for other purposes,
the consent of its lenders, or a refinancing of existing indebtedness, would be
required. The Old Credit Facility contains and the Senior Credit Facility will
contain financial covenants and other operating restrictions which must be met,
or consent to their modifications obtained, to permit acquisitions. There can be
no assurance that the Company would be successful in obtaining such consents or
refinancing. If the Company is unable to satisfy such financial covenants or
obtain such consents or refinancing, it would not be able to pursue its
acquisition strategy.
CONSUMMATION OF THE PHIPPS ACQUISITION PRIOR TO FINAL FCC APPROVAL. If the
requisite FCC approval is obtained, the Company intends to consummate the Phipps
Acquisition prior to the time such approval becomes "final" (that is, during the
time a third party may file a petition for reconsideration of, or the FCC itself
may reconsider, such approval) and the Company may cause the Trustee to release
the proceeds of the Trust Funds for such purpose. If any such appeals are filed,
the FCC may, under certain circumstances, reconsider its approval of the Phipps
Acquisition. If any such appeal is successful, the FCC may impose a variety of
remedies, including, among other things, requiring the Company to divest one or
both of the acquired stations.
FCC DIVESTITURE REQUIREMENT. In connection with the Phipps Acquisition, the
Company is seeking FCC approval granting the assignment of the television
broadcast licenses for WCTV, which serves Tallahassee, Florida/Thomasville,
Georgia, and WKXT, which serves Knoxville, Tennessee. The television broadcast
signal of WCTV overlaps with the Company's existing stations, WALB-TV ("WALB")
and WJHG-TV ("WJHG"). Due to such overlap, common ownership of such stations is
prohibited by current FCC regulations. Such regulations will require the Company
to divest its ownership interest in WALB and WJHG in connection with the Phipps
Acquisition. However, these rules may be revised by the FCC upon conclusion of
pending rulemaking proceedings. The Company has applied for six month waivers of
such regulations. There can be no assurance that these waivers will be granted.
Opposition to such waiver requests has been filed by a competing television
station in Panama City, Florida. If granted, the waivers will afford the Company
six months to divest WALB and WJHG following the consummation of the Phipps
Acquisition (if such divestiture is necessary in order to comply with FCC rules
in effect at the expiration of the waiver period). If these waivers are not
granted, it is unlikely that the Company will be able to consummate the Phipps
Acquisition.
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 1031 of the Internal Revenue Code of 1986, as
amended (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. WALB and WJHG accounted for 10.4% and
4.3%, respectively, of the Company's pro forma total revenues and 16.8% and
1.8%, respectively, of the Company's pro forma Media Cash Flow for the year
ended December 31, 1995. On a pro forma basis for the year ended December 31,
1995, the stations had net income of $3.2 million and $218,000, respectively,
while the Company had a net (loss) of $(3.4) million. WALB and WJHG accounted
for 10.8% and 5.1%, respectively of the Company's pro forma total revenues and
15.7% and 3.5%, respectively of the Company's pro forma Media Cash Flow for the
six months ended June 30, 1996. On a pro forma basis for the six months ended
June 30, 1996, the stations had net income of $1.6 million and $295,000,
respectively, while the Company had net income of
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$322,000. No assurance can be given that the Company will be able to identify or
enter into arrangements regarding suitable assets for a swap or sale satisfying
the FCC divestiture requirements. In addition, there can be no assurance that
the Company could effect a sale or swap on a timely basis or establish a trust
on satisfactory terms. See "Pro Forma Financial Data" and "Business-Federal
Regulation of the Company's Business."
POSSIBLE NON-CONSUMMATION OF THE PHIPPS ACQUISITION. The consummation of
the Phipps Acquisition, which is anticipated to occur by September 30, 1996, is
subject to certain closing conditions, including receipt of FCC approval. The
Asset Purchase Agreement (as defined) for the Phipps Acquisition provides that
either party may terminate the Phipps Acquisition if it has not been consummated
by September 30, 1996. If the Phipps Acquisition has not been consummated by
such date, the Company does not currently intend to terminate the Phipps
Acquisition, but the Company has not discussed with the seller an extension of
such date. The Company filed an application seeking FCC approval of the Phipps
Acquisition on January 16, 1996. Opposition to such application has been filed
by certain competitors of the Company and the Company has filed amendments to
its application in response thereto. The Company has not yet received FCC
approval of its application. There can be no assurance that FCC approval will be
obtained prior to September 30, 1996 or at all, that the other closing
conditions will be satisfied or waived or that the closing will occur. Upon the
consummation of the Concurrent Offering and pending the consummation of the
Phipps Acquisition, the Company will deposit the estimated net proceeds of
$144.7 million (before deducting expenses) from the Concurrent Offering plus an
amount estimated to be sufficient to fund in full the redemption of the Notes in
an interest-bearing trust account. If the Phipps Acquisition is not consummated
on or prior to December 23, 1996, the Company will be required to redeem the
Notes for $151.5 million plus accrued and unpaid interest to the date fixed for
redemption. The Company expects that the interest rate earned on the funds
deposited in the trust account will be less than the interest rate on the Notes.
See "Description of the Notes."
In addition, if the Phipps Acquisition is not consummated as a result of a
default by the Company, the Company will be required to pay $10 million as
liquidated damages.
For the year ended December 31, 1995, on a pro forma basis after giving
effect to the KTVE Sale, the Financing, this Offering and the Concurrent
Offering, the Phipps Business comprised approximately 30.1%, 42.5% and 35.7% of
the Company's total revenues, Media Cash Flow and operating income (income
before miscellaneous income (expense), allocation of corporate overhead,
interest expense and income tax expense), respectively. For the six months ended
June 30, 1996, on a pro forma basis after giving effect to the KTVE Sale, the
Financing, this Offering and the Concurrent Offering, the Phipps Business
comprised approximately 29.8%, 36.2% and 29.2% of the Company's total revenues,
Media Cash Flow and operating income (income before miscellaneous income
(expense), allocation of corporate overhead, interest expense and income tax
expense), respectively. If the Company does not consummate the Phipps
Acquisition, the Company would have lower revenues, lower Media Cash Flow,
higher cash balances and lower long-term debt. See "Pro Forma Financial Data."
DEPENDENCE ON ADVERTISING REVENUES; EFFECT OF ECONOMIC CONDITIONS. The
television and newspaper industries are cyclical in nature and are affected by
prevailing economic conditions. Since the Company relies on sales of advertising
time at its television stations and in its publications for substantially all of
its revenues, the Company's operating results are sensitive to general economic
conditions and regional conditions in each of the local markets served by its
television stations and publications. In addition, all of the Company's stations
and publications are located in the Southeast. As a result, the Company's
results of operations may be adversely affected by recessionary economic
conditions either in the Southeast, nationally or, due to the substantial
portion of revenues derived from local advertisers, the local economies in areas
served by its television stations and publications. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
DEPENDENCE ON NETWORK AFFILIATIONS. Five of the Company's television
stations are affiliated with CBS and two are affiliated with NBC. The television
viewership levels for each of the stations are materially dependent upon
programming provided by the network with which each station is affiliated. There
can be no
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assurance that such programming will achieve or maintain satisfactory viewership
levels in the future. Although the Company expects to continue to be able to
renew these affiliation agreements, no assurance can be given that such renewals
will be obtained. The non-renewal or termination of one or more of the Company's
stations' network affiliation agreements may have a material adverse effect on
the Company's results of operations. See "Business-Network Affiliation of the
Stations."
COMPETITIVE NATURE OF AND RISK OF CHANGES IN THE TELEVISION INDUSTRY. The
television industry is highly competitive and the Company's stations compete
with other television stations as well as other media for viewers and
advertising revenues, such as newspapers, radio stations, magazines, outdoor
advertising, transit advertising, yellow page directories, direct mail and local
cable systems. During the past decade, the entry of strong independent broadcast
stations and programming alternatives such as cable television, home satellite
delivery, home video and, more recently, direct broadcast satellite ("DBS")
television and video signals delivered over telephone lines have subjected
traditional network-affiliated television stations to new types of competition.
Competition for programming involves negotiating with national program
distributors or syndicators for exclusive rights to broadcast first-run or rerun
packages of programming in a particular DMA.
The ability of each of the Company's stations to generate advertising
revenues is dependent, to a significant degree, upon its audience ratings which,
in turn, are dependent upon successful programming. There can be no assurance
that any of the Company's stations will be able to maintain or increase its
current quality of programming, audience share or advertising revenues. To the
extent that certain of the Company's competitors have, or may in the future
obtain, greater resources than the Company, the Company's ability to compete
successfully in its broadcasting markets may be impeded. See
"Business-Competition."
Further advances in technology and changes in the regulatory climate may
increase competition for household audiences, programs and advertisers. In
addition, the Warner Brothers Network ("WB") and the United Paramount Network
("UPN") recently have begun operations. Video compression technology currently
under development, as well as other technological developments, have the
potential to provide vastly expanded programming to highly targeted audiences.
In addition, competition in the television industry in the future may come from
interactive video and data services that may provide two-way interaction. The
Company is unable to predict the effect that these or other technological
changes will have on the television industry or the future results of the
Company's operations.
The FCC has proposed the adoption of rules for implementing advanced
(including high-definition television or HDTV) television service ("ATV") in the
United States. Implementation of ATV will improve the technical quality of
television. Under certain circumstances, however, conversion to ATV operations
may reduce a station's geographical coverage area. While implementation of ATV
will impose additional costs on the Company's television stations providing the
new service primarily due to increased equipment costs, there is a potential for
increased revenues. On July 26, 1995, the FCC announced the issuance of a Notice
of Proposed Rule Making ("NPRM") to invite comment on a broad range of issues
related to the implementation of ATV, particularly the transition to digital
broadcasting. The FCC also stated that the NPRM would be followed by two
additional proceedings and that a Final Report and Order which will launch the
ATV system is anticipated sometime in 1997.
The Company cannot predict how the combination of business, regulatory and
technological change will affect the broadcast industry or the Company's results
of operations. See "Business-Federal Regulation of the Company's Business."
COMPETITIVE NATURE OF THE NEWSPAPER INDUSTRY. Revenue in the newspaper
industry is derived primarily from advertising revenue and paid circulation.
Competition for advertising and circulation revenue comes from local and
regional newspapers, radio, broadcast and cable television, direct mail and
other communications and advertising media. The extent and nature of such
competition is in large part determined by the demographics and location of the
markets and the media alternatives in those markets. To the extent that certain
of the Company's competitors have, or may in the future obtain, greater
resources than the Company, the Company's ability to compete successfully in its
publishing markets may be impeded. See "Business-Competition."
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The newspaper industry requires the availability of significant quantities
of newsprint. The variability of newsprint costs in recent years has been a
material factor in the profitability of the newspaper industry generally and has
affected the results of the Company's newspaper operations.
REGULATORY MATTERS. The broadcasting and paging industries are subject to
regulation by the FCC under the Communications Act of 1934, as amended (the
"Communications Act") and the Telecommunications Act of 1996 (the
"Telecommunications Act"). Approval by the FCC is required for the issuance,
renewal, transfer or assignment of television station operating licenses. In
particular, the Company's television business is dependent upon its continuing
ability to hold television broadcast licenses from the FCC, which generally are
issued for five-year terms. However, the Telecommunications Act now directs the
FCC to extend the term of television broadcast licenses to eight years for
license applications filed after May 1, 1995. The Company's existing television
station licenses expire between 1997 and 1999. Although in substantially all
cases such licenses are renewed by the FCC, there can be no assurance that any
of the Company's television broadcast licenses will be renewed at their
expiration dates for the full terms or at all. The non-renewal or limitation of
one or more of the Company's television broadcast licenses could have a material
adverse effect on the Company. The Telecommunications Act also addresses a wide
variety of matters (including technological changes) that affect the operation
and ownership of the Company's television stations. The Telecommunications Act
eliminates the restrictions on the number of television stations an entity may
own, operate or control and increases the national audience reach limitations to
35%. The FCC has been directed to adopt rules relating to the retention,
modification or elimination of local ownership limitations and spectrum
flexibility, including how to establish and collect fees from broadcasters for
the implementation of ancillary and supplementary services.
The FCC has been directed to revise its rules to permit cross-ownership
interests between a broadcast network and a cable system, and if necessary, to
revise its rules to ensure carriage, channel positioning and non-discriminatory
treatment of non-affiliated broadcast stations by cable systems affiliated with
a broadcast network. The FCC has been directed to review all of its ownership
rules every two years and currently has several broadcast related rulemaking
proceedings underway. There can be no assurance that any such rulemakings or
resulting changes would not materially adversely affect the Company.
The Company's paging operations (which are part of the Phipps Business) are
also subject to regulation by the FCC. The FCC licenses granted to the Company
are for varying terms of up to 10 years, at the end of which renewal
applications must be approved by the FCC. Although the Company is unaware of any
circumstances which could prevent the grant of renewal applications, no
assurance can be given that any of the Company's licenses will be free of
competing applications or will be renewed by the FCC. Futhermore, the FCC has
the authority to restrict the operation of licensed facilities or to revoke or
modify licenses. See "Business-Federal Regulation of the Company's Business."
RECENT ACQUISITION OF TELEVISION STATIONS AND PUBLICATIONS. The Company
acquired one newspaper and three shoppers in 1995 and consummated the Augusta
Acquisition in 1996. The Company consummated the KTVE Sale in August 1996. The
Phipps Acquisition is pending and the Company will be required under current FCC
regulations to divest WALB and WJHG in connection with the Phipps Acquisition.
As a result, the majority of the Company's assets have, or will have been,
recently acquired. Accordingly, there is no meaningful opportunity for
prospective purchasers of the Class B Common Stock to evaluate the performance
of these assets under the Company's management and there can be no assurance
that the Company's operating strategy can be successfully implemented with
respect to its newly acquired assets. See "Business."
RISK OF INABILITY TO FINANCE CHANGE OF CONTROL OFFER. A Change of Control
under the Indenture would require the Company to refinance substantial amounts
of indebtedness. In the event of a Change of Control, the Company has the
obligation to offer to purchase all the outstanding Notes at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest to the
date of purchase. As of June 30, 1996, on a pro forma basis after giving effect
to the KTVE Sale, this Offering, the Financing, the Phipps Acquisition and the
Concurrent Offering, the Company would not have sufficient funds available to
purchase all of the outstanding Notes if they were tendered as a result of a
Change of Control. In addition, covenants in the Senior Credit Facility would
restrict the Company's ability to make any such purchase. In the event of a
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Change of Control, there can be no assurance that the Company would have
available, or be able to obtain, sufficient funds through a refinancing of the
Notes to be purchased or otherwise, or that the lenders under the Senior Credit
Facility would permit any such purchase. A Change of Control of the Company also
may cause an acceleration under other Senior Debt (including the Senior Credit
Facility), in which case the subordination provisions of the Notes would require
payment in full of all such accelerated Senior Debt before repurchase of the
Notes. The inability to repay Senior Debt, if accelerated, and to effect an
offer to repurchase the Notes upon a Change of Control would constitute events
of default under the Indenture. Also, the requirement that the Company offer to
repurchase the Notes and the obligation to prepay the amounts owing under the
Company's existing indebtedness and the reduction of the commitments thereunder
to zero in the event of a Change of Control may have the effect of deterring a
third party from acquiring the Company in a transaction that would constitute a
Change of Control.
LIMITED VOTING RIGHTS OF CLASS B COMMON SHAREHOLDERS; CONTROL BY PRINCIPAL
SHAREHOLDER. Holders of Class B Common Stock are entitled to one vote per share
on all matters submitted to a vote of shareholders and holders of Class A Common
Stock are entitled to 10 votes per share. Immediately after the consummation of
this Offering and the Concurrent Offering, the Class B Common Stock will have
approximately 7.3% of the outstanding voting power of the Company. Bull Run and
its affiliates collectively beneficially own 47.1% of the outstanding shares of
Class A Common Stock representing approximately 43.7% of the total voting power
of the Company's capital stock after giving effect to this Offering. See
"Security Ownership of Certain Beneficial Owners and Management." In connection
with certain FCC applications, Bull Run and its affiliates have (i) agreed not
to cause more than three of its designees to be elected to the Board of
Directors of the Company, (ii) stated that Bull Run and its affiliates have
acquired the common stock of the Company for investment purposes only and not
with the intent to control the Company and (iii) agreed not to solicit proxies
for votes on matters before the Company's shareholders. However, if such
agreement is terminated for any reason, subject to applicable FCC regulations
that require the FCC's prior consent, Bull Run and its affiliates could
effectively control the election of a majority of the Company's directors and,
thus, the operations and business of the Company as a whole. In addition, such
shareholders may have the ability to prevent certain types of material
transactions, including a change of control of the Company.
The disproportionate voting rights of the Class A Common Stock relative to
the Class B Common Stock may make the Company a less attractive target for a
takeover than it otherwise might be, or render more difficult or discourage a
merger proposal or a tender offer.
POTENTIAL CONFLICTS OF INTEREST. Bull Run is in the business of making
significant investments in existing companies and may from time to time acquire
and hold controlling or noncontrolling interests in broadcasting or
broadcasting-related businesses other than through the Company, some of which
may compete with the Company. Bull Run and its affiliates may from time to time
identify, pursue and consummate acquisitions of television stations or other
broadcasting related businesses that would be complementary to the business of
the Company and therefore such acquisition opportunities will not be available
to the Company. In addition, Bull Run may from time to time identify and
structure acquisitions for the Company and may receive customary finders fees in
connection with such transactions. Certain affiliates of Bull Run have entered,
and in the future may enter, into business relationships with the Company or its
subsidiaries. See "Management--Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related Transactions."
ANTI-TAKEOVER MEASURES. The Company's Articles of Incorporation authorize
the issuance of up to 20,000,000 shares of preferred stock. Other than the 1,000
shares of Series A Preferred Stock and the 1,000 shares of Series B Preferred
Stock to be issued in the Financing, the Company has no current plans to issue
any additional shares of preferred stock. However, because the rights and
preferences for any series of preferred stock may be set by the Board in its
sole discretion, the Company may issue preferred stock which has rights and
preferences superior to the rights of holders of the Common Stock and thus may
adversely effect the rights of holders of Common Stock. See "Description of
Capital Stock -- Preferred Stock."
NO PRIOR PUBLIC MARKET. Prior to this Offering, there has been no public
market for the Class B Common Stock. The Class B Common Stock has been approved
for listing on the NYSE, subject to official
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notice of issuance. Nevertheless, there can no assurance that an active public
trading market for the Class B Common Stock will develop or be sustained. The
initial public offering price of the Class B Common Stock will be based on the
closing price of the Class A Common Stock on the date of offering and will be
determined through negotiations between the Company and the Underwriters. There
can be no assurance that the market price of the Class B Common Stock subsequent
to this Offering will correlate to the market price of the Class A Common Stock.
Factors such as market conditions in the television broadcast industry may have
a significant impact on the market price of the Class B Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. At June 30, 1996, after giving effect to
this Offering, there would be 4,467,205 shares of Class A Common Stock and
3,500,000 shares of Class B Common Stock outstanding. Bull Run and its
affiliates and each of the Company's executive officers and directors who in the
aggregate own approximately 2,120,000 shares of Class A Common Stock and hold
options or warrants (currently outstanding or to be issued upon consummation of
the Financing) to acquire an additional estimated 1,047,500 shares of Class A
Common Stock have agreed that they will not offer, sell or otherwise dispose of
any of their shares of Class A Common Stock or Class B Common Stock or
securities convertible into, or exercisable or exchangeable for, Class A Common
Stock or Class B Common Stock, subject to certain exceptions, without the
consent of The Robinson-Humphrey Company, Inc. for a period of 180 days from the
date of this Prospectus (the "180-Day Lockup Period"). After the 180-Day Lockup
Period, Bull Run and its affiliates and the Company's executive officers and
directors may sell shares of Class A Common Stock, subject to the provisions of
Rule 144 under the Securities Act. Sales of a substantial number of shares of
the Class A Common Stock or Class B Common Stock in the public market following
this Offering could adversely affect the market price for the Class B Common
Stock. See "Shares Eligible for Future Sale."
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THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING
THE PHIPPS ACQUISITION
GENERAL
The Company has entered into an agreement (the "Asset Purchase Agreement")
to acquire two CBS-affiliated television stations, WCTV and WKXT, a satellite
broadcasting business and a paging business in the Southeast. The consummation
of the Phipps Acquisition is subject to certain closing conditions, including
FCC approval. Either party may terminate the Asset Purchase Agreement if the
Phipps Acquisition has not been consummated by September 30, 1996. The Phipps
Acquisition is currently expected to occur by September 30, 1996; however, there
can be no assurance that FCC approval will be obtained, that the other closing
conditions will be satisfied or waived or that the Phipps Acquisition will be
consummated. See "Risk Factors--Possible Non-Consummation of the Phipps
Acquisition."
THE ASSET PURCHASE AGREEMENT
On December 15, 1995 the Company entered into the Asset Purchase Agreement,
which was amended on March 15, 1996 and provides for the purchase of the Phipps
Business from Media Acquisition Partners, L.P. ("MAP"). The purchase price for
the Phipps Acquisition is approximately $185 million, including fees, expenses
and working capital and certain other adjustments. Upon execution of the Asset
Purchase Agreement, the Company deposited $200,000 with MAP, which will be
credited toward the purchase price or, if the Phipps Acquisition is not
consummated, refunded to the Company net of MAP's out-of-pocket expenses
incurred in connection with the transaction. The parties have agreed that $15
million of the purchase price will be deposited into an escrow account to fund
indemnification payments under the Asset Purchase Agreement. To the extent not
utilized to fund such payments, the escrow funds shall be released to MAP over a
seven-year period.
Pursuant to the Asset Purchase Agreement, the Company will acquire the
assets constituting the Phipps Business and assume certain liabilities relating
to the Phipps Business. MAP has agreed to indemnify the Company for certain
liabilities incurred by the Company relating to the Phipps Business, including
taxes, liabilities relating to certain employee benefit plans, certain
environmental matters and undisclosed liabilities. However, the Asset Purchase
Agreement provides that no party thereto shall be liable for indemnification
(which is the exclusive legal remedy thereunder) in an amount in excess of the
balance of escrowed funds. There can be no assurance that the escrowed funds
will be sufficient to satisfy liabilities of the Phipps Business assumed by the
Company.
Simultaneously with the execution of the Asset Purchase Agreement, MAP
entered into agreements (the "Stock Purchase Agreements") to acquire all of the
capital stock of John H. Phipps, Inc. ("Phipps"), which currently owns and
operates the Phipps Business, together with certain limited partnership
interests in the partnership that owns and operates WKXT (the general partner of
which is Phipps), for an aggregate purchase price of approximately $166 million,
subject to working capital and certain other adjustments (of approximately $10
million). The Company established a $10 million standby letter of credit which
may be drawn upon in full as liquidated damages if the Phipps Acquisition is not
consummated as a result of a default by the Company.
The Asset Purchase Agreement and the Stock Purchase Agreements include
representations and warranties with respect to the condition and operation of
the Phipps Business, covenants as to the conduct of the Phipps Business prior to
the closing and various closing conditions (including approval by the FCC).
DIVESTITURE REQUIREMENTS
In connection with the Phipps Acquisition, the Company will be required to
divest WALB and WJHG under current FCC regulations due to common ownership
restrictions on stations with overlapping signals. 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 1031 of the Code. If the Company is unable to effect such a
swap on satisfactory terms within
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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. No assurance can be given that the Company will be able to
identify or enter into arrangements regarding suitable assets for a swap or sale
satisfying the FCC divestiture requirements. In addition, there can be no
assurance that the Company could effect a sale or swap on a timely basis or
establish a trust on satisfactory terms.
THE KTVE SALE
In August 1996, the Company sold the assets of KTVE, a television station
serving Monroe, Louisiana/ El Dorado, Arkansas, for approximately $9.5 million
in cash plus the amount of the accounts receivable on the date of closing
(approximately $870,000), to the extent collected by the buyer, to be paid to
the Company 150 days following the date of closing. The Company estimates that
the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8
million.
THE FINANCING
In addition to the KTVE Sale and the consummation of this Offering, the
Concurrent Offering and 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) retire
approximately $49.5 million aggregate principal amount of outstanding
indebtedness under the Old Credit Facility, together with accrued interest
thereon, (ii) retire approximately $25.0 million aggregate principal amount of
outstanding indebtedness under the Senior Note, together with accrued interest
thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference
of its Series A Preferred Stock in exchange for the 8% Note issued to Bull Run,
(iv) issue to Bull Run J. Mack Robinson, the President, Chief Executive Officer
and a director of the Company, and certain of his affiliates $10.0 million
liquidation preference of its Series B Preferred Stock with warrants to purchase
up to 500,000 shares of Class A Common Stock (representing 10.1% of the
currently issued and outstanding Class A Common Stock after giving effect to the
exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into
the Senior Credit Facility to provide for a term loan and revolving credit
facility aggregating $125.0 million. 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 this Offering, the Concurrent
Offering, the sale of Series B Preferred Stock, borrowings under the Senior
Credit Facility and the Company's working capital. For a description of the
Senior Credit Facility and the Preferred Stock, see "Description of Certain
Indebtedness" and "Management--Compensation Committee Interlocks and Insider
Participation-Issuances of Preferred Stock." The consummation of this Offering
is not conditioned upon the consummation of the Financing, the KTVE Sale, the
Phipps Acquisition or the Concurrent Offering. If the Phipps Acquisition is not
consummated prior to December 23, 1996, the Company is required to redeem the
Notes at the Special Redemption Price. See "Description of the Notes."
The Concurrent Offering and the Financing are intended to provide financing
for the Phipps Acquisition and operating and financial flexibility thereafter.
Although the Concurrent Offering may be consummated prior to the Phipps
Acquisition, the Notes are subject to the special redemption described above.
The Financing described above will be implemented in connection with the closing
of the Concurrent Offering, but the Senior Credit Facility will provide that no
borrowings may be made thereunder until the closing of the Phipps Acquisition.
Accordingly, if the Phipps Acquisition is not consummated, the Notes will be
redeemed by the Company, the Old Credit Facility will remain in place and the
Company will not borrow under the Senior Credit Facility.
22
<PAGE>
SOURCES AND USES OF FUNDS FOR THE PHIPPS ACQUISITION, THE KTVE SALE AND THE
FINANCING
The following table sets forth the estimated sources and uses of funds
relating to this Offering, the Concurrent Offering, the Phipps Acquisition and
the Financing. The actual amounts of sources and uses of funds may differ at the
closing due to, among other things, the actual amount payable under the Asset
Purchase Agreement and the amount of indebtedness outstanding under the Old
Credit Facility.
<TABLE>
<CAPTION>
(IN MILLIONS)
SOURCES OF FUNDS AMOUNT
---------
<S> <C>
The Class B Common Stock offered hereby $ 73.5
The Concurrent Offering 150.0
Sale of Series B Preferred Stock and Warrants 10.0
Borrowings under the Senior Credit Facility 32.6
Working capital (1) 9.5
---------
TOTAL $ 275.6
---------
---------
</TABLE>
USES OF FUNDS
<TABLE>
<S> <C>
Consummation of Phipps Acquisition $ 185.0
Retire indebtedness under the Old Credit Facility (2) 49.5
Retire indebtedness under the Senior Note (3) 25.0
Fees and expenses (4) 16.1
---------
TOTAL $ 275.6
---------
---------
</TABLE>
- ------------------------------
(1) The source of these funds was the KTVE Sale.
(2) Borrowings under the Old Credit Facility bear interest at formula rates
based upon the applicable LIBOR or prime rate at the time of borrowing plus
a fixed spread and have a final maturity of 2003. As of June 30, 1996, the
weighted average interest rate was 8.94%.
(3) The indebtedness under the Senior Note bears interest at 10.7%
(4) Fees and expenses include underwriting costs for this Offering and the
Concurrent Offering, fees payable in connection with the negotiation and
execution of the Senior Credit Facility, fees payable in connection with the
retirement of the Senior Note and legal, accounting and other transaction
fees.
If the Phipps Acquisition is not consummated, the Company will redeem the
Notes. The following table sets forth the estimated sources and uses of funds to
consummate the Financing and to redeem the Notes if the Phipps Acquisition is
not consummated:
<TABLE>
<CAPTION>
(in millions)
SOURCES OF FUNDS AMOUNT
---------
<S> <C>
The Class B Common Stock offered hereby $ 73.5
The Concurrent Offering 150.0
Sale of Series B Preferred Stock and Warrants 10.0
Working capital(1) 8.6
---------
TOTAL $ 242.1
---------
---------
</TABLE>
USES OF FUNDS
<TABLE>
<S> <C>
Redemption of the Notes $ 151.5(2)
Retire indebtedness under the Old Credit Facility (3) 49.5
Retire indebtedness under the Senior Note (4) 25.0
Fees and expenses (5) 16.1
---------
TOTAL $ 242.1
---------
---------
</TABLE>
- ------------------------------
(1) The source of these funds was the KTVE Sale.
(2) Amount shown excludes interest accrued on the Notes from the date of
issuance to the date of redemption.
(3) Borrowings under the Old Credit Facility bear interest at formula rates
based upon the applicable LIBOR or prime rate at the time of borrowing plus
a fixed spread and have a final maturity of 2003. As of June 30, 1996, the
weighted average interest rate was 8.94%.
(4) The indebtedness under the Senior Note bears interest at 10.7%.
(5) Fees and expenses include underwriting costs for this Offering and the
Concurrent Offering, fees payable in connection with the negotiation and
execution of the Senior Credit Facility, fees payable in connection with the
retirement of the Senior Note and legal, accounting and other transaction
fees. If the Phipps Acquisition is not consummated due to a default by the
Company, the Company will be required to pay $10.0 million as liquidated
damages, however such amount is not included.
23
<PAGE>
PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY
Prior to this Offering, there has been no established public trading market
for the Class B Common Stock. The Class B Common Stock has been approved for
listing on the NYSE, subject to official notice of issuance. Since June 30,
1995, the Company's Class A Common Stock has been listed and traded on the NYSE
under the symbol "GCS." The following table sets forth the high and low sale
prices (restated to give effect to the three-for-two stock split) of the Class A
Common Stock as reported by the NYSE for the period after June 30, 1995 and,
prior to such time, the high and low bid quotations as reported on the NASDAQ
Small Cap Market.
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK CASH
-------------------- DIVIDENDS
HIGH LOW DECLARED PER SHARE
--------- --------- -------------------
<S> <C> <C> <C>
FISCAL 1994
First Quarter.......................................................... $ 9.67 $ 8.67 $ .0133
Second Quarter......................................................... 9.33 8.50 .0133
Third Quarter.......................................................... 9.83 9.33 .0133
Fourth Quarter......................................................... 11.00 9.83 .0267
FISCAL 1995
First Quarter.......................................................... $ 14.50 $ 10.67 $ .02
Second Quarter......................................................... 19.33 14.50 .02
Third Quarter.......................................................... 24.33 16.75 .02
Fourth Quarter......................................................... 22.38 16.38 .02
FISCAL 1996
First Quarter.......................................................... $ 20.38 $ 15.75 $ .02
Second Quarter......................................................... 23.25 18.73 .02
Third Quarter (through September , 1996).............................. 23.12 21.12 --
</TABLE>
On September , 1996, the last reported sale price for the Class A Common
Stock on the NYSE was $ per share. See "Risk Factors -- No Prior Public Market"
and "Underwriting" for a description of the method of determing the offering
price of the Class B Common Stock. As of June 30, 1996, the Company had
4,467,205 outstanding shares of Class A Common Stock held by approximately 228
shareholders of record.
The Company has paid a dividend on its Class A Common Stock since 1967.
There can be no assurance of the Company's ability to continue to pay any
dividends on either class of Common Stock. The Company's Articles of
Incorporation require that the Class A Common Stock and the Class B Common Stock
receive dividends on a PARI PASSU basis.
The Old Credit Facility contains, and the Senior Credit Facility and the
Indenture will, contain covenants that restrict the ability of the Company to
pay dividends on its capital stock. However, the Company does not believe that
such covenants currently materially limit its ability to pay dividends at the
recent quarterly rate of $.02. In addition to the foregoing, the declaration and
payment of dividends on the Class A Common Stock and the Class B Common Stock
are subject to the discretion of the Board of Directors. Any future payments of
dividends will depend on the earnings and financial position of the Company and
such other factors as the Board of Directors deems relevant.
24
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the historical consolidated
capitalization of the Company as of June 30, 1996; (ii) the historical
consolidated capitalization of the Company as adjusted to give effect, as of
June 30, 1996 to the KTVE Sale, the Financing and this Offering and (iii) the
historical consolidated capitalization of the Company as adjusted to give
effect, as of June 30, 1996 to the KTVE Sale, this Offering, the Financing, the
Phipps Acquisition and the Concurrent Offering. This table should be read in
conjunction with the consolidated financial statements of the Company, including
the notes thereto, and the Pro Forma Financial Statements and other information
contained in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------------------------------------
PRO FORMA
COMPANY
(INCLUDING
THIS OFFERING,
THE PRO FORMA,
HISTORICAL KTVE SALE AND COMBINED
COMPANY THE FINANCING) AS ADJUSTED
--------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt:
Old Credit Facility.................. $49,500 $300 $ --
Senior Credit Facility............... -- -- 32,550
Senior Note.......................... 25,000 -- --
The Notes............................ -- -- 150,000
The 8% Note.......................... 7,545 -- --
Other................................ 801 801 801
--------------- --------------- ---------------
Total long-term debt (including
current portion).................. 82,846 1,101 183,351
--------------- --------------- ---------------
STOCKHOLDERS' EQUITY:
Series A Preferred Stock............. -- 9,896 9,896
Series B Preferred Stock............. -- 10,000 10,000
Class A Common Stock, no par value;
historical Company, pro forma
Company and pro forma as adjusted
5,130,385 shares (1)................ 10,000 7,545 7,545
Class B Common Stock, no par value;
historical Company no shares; pro
forma Company and pro forma as
adjusted 3,500,000 shares........... -- 67,600 67,600
Retained earnings.................... 10,451 10,526 9,814
Treasury stock, 663,180 shares of
Class A Common Stock................ (6,638) (6,638) (6,638)
--------------- --------------- ---------------
Total stockholders' equity......... 13,813 98,929 98,217
--------------- --------------- ---------------
Total capitalization............... $96,659 $100,030 $281,568
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
- ------------------------
(1) Excludes (i) 53,500 shares of Class A Common Stock issuable upon exercise of
options outstanding under the Company's stock option plans as of June 30,
1996, (ii) 487,500 shares of Class A Common Stock issuable upon exercise of
an outstanding warrant of the Company and (iii) 500,000 shares of Class A
Common Stock issuable upon exercise of the warrant to be issued as part of
the Financing. See "Management" and "Certain Relationships and Related
Transactions."
25
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited condensed combined pro forma financial statements of
the Company give effect to the Augusta Acquisition, the KTVE Sale, this
Offering, the Phipps Acquisition, the Financing and the Concurrent Offering as
if such transactions had occurred (i) with respect to the statement of
operations, as of January 1, 1995 for the year ended December 31, 1995, as of
July 1, 1995 for the 12 months ended June 30, 1996, and as of January 1, 1996
for the six months ended June 30, 1996 and (ii) with respect to the balance
sheet, as of June 30, 1996. 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.
26
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA
----------------------- ADJUSTMENTS PRO
AUGUSTA FOR AUGUSTA FORMA 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 (97)(7) 2,150
Non-cash compensation paid in common
stock 2,321 -- -- 2,321 -- 2,321
Management fee -- -- -- -- -- --
-------- ----------- ----------- -------- ----------- ------------
Total expenses 51,756 6,198 945 58,899 (97) 58,802
-------- ----------- ----------- -------- ----------- ------------
Operating income 6,860 2,462 (717) 8,605 97 8,702
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 97 8,753
Interest expense 5,438 -- 3,644(5) 9,082 (8,172) (7) 910
-------- ----------- ----------- -------- ----------- ------------
Income (loss) before minority interests
and income taxes 1,565 2,242 (4,233) (426) 8,269 7,843
Minority interests -- -- -- -- -- --
-------- ----------- ----------- -------- ----------- ------------
Income (loss) before income taxes 1,565 2,242 (4,233) (426) 8,269 7,843
Income tax expense (benefit) 634 -- (773) (6) (139) 3,283(6) 3,144
-------- ----------- ----------- -------- ----------- ------------
Net income (loss) 931 2,242 (3,460) (287) 4,986 4,699
Preferred stock dividends -- -- -- -- 1,400(8) 1,400
-------- ----------- ----------- -------- ----------- ------------
Net income (loss) available to common
stockholders $ 931 $2,242 $(3,460) $ (287) $ 3,586 $ 3,299
-------- ----------- ----------- -------- ----------- ------------
-------- ----------- ----------- -------- ----------- ------------
Average shares outstanding (19) 4,481 4,354 7,981
-------- -------- ------------
-------- -------- ------------
Earnings (loss) per share $ 0.21 $ (0.07) $ 0.41
-------- -------- ------------
-------- -------- ------------
<CAPTION>
PRO FORMA PHIPPS PRO FORMA PRO FORMA
KTVE 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) 37,034
436(11)
Publishing -- 20,016 -- -- 20,016
Paging -- -- 3,052 143(11) 3,195
Corporate and administrative -- 2,258 -- 2,258
Depreciation (438) 2,415 2,385 (625)(12) 4,175
Amortization of intangible assets -- 2,150 735 3,514(13) 6,225
(174)(14)
Non-cash compensation paid in common
stock -- 2,321 -- -- 2,321
Management fee -- -- 3,280 (3,280)(15) --
------------ ------------ ----------- ------------- ------------
Total expenses (3,751) 55,051 19,939 234 75,224
------------ ------------ ----------- ------------- ------------
Operating income (437) 8,265 7,382 (234) 15,413
Miscellaneous income (expense), net (27) 24 12 -- 36
------------ ------------ ----------- ------------- ------------
Income before interest expense, minority
interests and income taxes (464) 8,289 7,394 (234) 15,449
Interest expense -- 910 499 (499)(16) 20,664
19,754(17)
------------ ------------ ----------- ------------- ------------
Income (loss) before minority interests
and income taxes (464) 7,379 6,895 (19,489) (5,215)
Minority interests -- -- 547 (547)(18) --
------------ ------------ ----------- ------------- ------------
Income (loss) before income taxes (464) 7,379 6,348 (18,942) (5,215)
Income tax expense (benefit) (186) 2,958 -- (4,724)(6) (1,766)
------------ ------------ ----------- ------------- ------------
Net income (loss) (278) 4,421 6,348 (14,218) (3,449)
Preferred stock dividends -- 1,400 -- -- 1,400
------------ ------------ ----------- ------------- ------------
Net income (loss) available to common
stockholders $ (278) $ 3,021 $6,348 $(14,218) $(4,849)
------------ ------------ ----------- ------------- ------------
------------ ------------ ----------- ------------- ------------
Average shares outstanding (19) 7,981 7,854
------------ ------------
------------ ------------
Earnings (loss) per share $ 0.38 $ (0.62)
------------ ------------
------------ ------------
</TABLE>
27
<PAGE>
The pro forma adjustments to reflect the Augusta Acquisition, this Offering,
the KTVE Sale, the Phipps Acquisition, the Financing and the Concurrent Offering
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' 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 for an interest rate
adjustment on the Senior Note; increased annual interest expense of $2.4
million on the Old 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 $1.1 million 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 amortization of deferred financing costs in
connection with retirement of the Senior Note. Also reflects decreased
annual interest expense of $4.4 million on the Old Credit Facility resulting
from the repayment of $49.2 million in principal on the Old Credit Facility,
bearing interest at an estimated weighted average rate of 8.96% per annum
with the proceeds of this Offering. Also reflects a reduction of annual
interest expense of $2.7 million resulting from the retirement of the Senior
Note and a reduction of annual interest expense of $1.1 million on the 8%
Note which will be converted into Series A Preferred Stock. The pro forma
statement of operations for the year ended December 31, 1995 does not
include an extraordinary loss relating to a prepayment fee associated with
the retirement of the Senior Note. See Pro Forma Statement of Operations for
the Six Months Ended June 30, 1996. Also see "The Phipps Acquisition, the
KTVE Sale and the Financing -- The Financing" with respect to the retirement
of the Senior Note.
8. Reflects annual dividends on the 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 before income taxes of $5.6 million
and 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 decreased annual amortization of debt acquisition costs resulting
from the retirement of the Old Credit Facility. The pro forma statement of
operations for the year ended December 31, 1995 does not include an
extraordinary loss relating to deferred financing costs associated with the
assumed retirement of the Old Credit Facility. See Pro Forma Statement of
Operations for the Six Months Ended June 30, 1996. Also see "The Phipps
Acquisition, the KTVE Sale and the Financing--The Financing" with respect to
the retirement of the Old Credit Facility.
15. 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.
16. Reflects the elimination of interest expense associated with borrowings of
the Phipps Business which will not be assumed by the Company.
17. Reflects increased annual interest expense of $16.7 million on the Notes,
which includes annual amortization expense of $525,000 resulting from the
transaction costs relating to the issuance of the Notes, annual interest
expense of $2.9 million relating to additional borrowings under the Senior
Credit Facility of $32.3 million at an estimated weighted average interest
rate of 8.96% plus amortization of additional deferred financing costs of
$214,000. See "The Phipps Acquisition, the KTVE Sale and the Financing --
The Financing" with respect to the retirement of the Old Credit Facility.
18. Reflects the elimination of minority interests associated with the Phipps
Business, because such minority interests will be acquired as a part of the
Phipps Acquisition.
19. 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 this Offering.
28
<PAGE>
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
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
1031 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. See "Risk Factors--FCC Divestiture
Requirement" and "Business--Federal Regulation of the Company's Business."
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>
29
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA PRO FORMA PHIPPS
COMPANY OFFERING COMPANY KTVE SALE(4) COMPANY BUSINESS
-------- ----------- ------------ ------------ ------------ -----------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Broadcasting (less agency
commissions)........................ $24,252 $ -- $24,252 $(2,303) $21,949 $11,346
Publishing............................ 11,262 -- 11,262 -- 11,262 --
Paging................................ -- -- -- -- -- 2,744
-------- ----------- ------------ ------------ ------------ -----------
Total revenues.......................... 35,514 -- 35,514 (2,303) 33,211 14,090
Expenses:
Broadcasting.......................... 14,418 -- 14,418 (1,723) 12,695 5,412
Publishing............................ 9,193 -- 9,193 -- 9,193 --
Paging................................ -- -- -- -- -- 1,780
Corporate and administrative.......... 1,571 -- 1,571 -- 1,571 --
Depreciation.......................... 1,648 -- 1,648 (220) 1,428 1,168
Amortization of intangible assets..... 1,253 (49)(1) 1,204 -- 1,204 362
Non-cash compensation paid in common
stock............................... 120 -- 120 -- 120 --
Management fee........................ -- -- -- -- -- 735
-------- ----------- ------------ ------------ ------------ -----------
Total expenses.......................... 28,203 (49) 28,154 (1,943) 26,211 9,457
-------- ----------- ------------ ------------ ------------ -----------
Operating income........................ 7,311 49 7,360 (360) 7,000 4,633
Miscellaneous income (expense), net..... 81 -- 81 (1) 80 (5)
-------- ----------- ------------ ------------ ------------ -----------
Income before interest expense, minority
interests and income taxes............. 7,392 49 7,441 (361) 7,080 4,628
Interest expense........................ 4,445 (4,086) (1) 359 -- 359 159
-------- ----------- ------------ ------------ ------------ -----------
Income (loss) before minority interests
and income taxes....................... 2,947 4,135 7,082 (361) 6,721 4,469
Minority interests...................... -- -- -- -- -- 296
-------- ----------- ------------ ------------ ------------ -----------
Income (loss) before income taxes....... 2,947 4,135 7,082 (361) 6,721 4,173
Income tax expense (benefit)............ 1,146 1,693(2) 2,839 (145) 2,694 --
-------- ----------- ------------ ------------ ------------ -----------
Net income (loss)..................... 1,801 2,442 4,243 (216) 4,027 4,173
Preferred stock dividends............... -- 700(3) 700 -- 700 --
-------- ----------- ------------ ------------ ------------ -----------
Net income (loss) available to common
stockholders........................ $ 1,801 $ 1,742 $ 3,543 $ (216) $ 3,327 $4,173
-------- ----------- ------------ ------------ ------------ -----------
-------- ----------- ------------ ------------ ------------ -----------
Average shares outstanding (14)......... 4,657 8,157 8,157
-------- ------------ ------------
-------- ------------ ------------
Earnings (loss) per share--primary...... $ 0.39 $ 0.43 $ 0.41
-------- ------------ ------------
-------- ------------ ------------
Earnings (loss) per share--fully
diluted................................. $ 0.38 $ 0.43 $ 0.41
-------- ------------ ------------
-------- ------------ ------------
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED(15)
------------- ------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Operating revenues:
Broadcasting (less agency
commissions)........................ $ -- $33,295
Publishing............................ -- 11,262
Paging................................ -- 2,744
------------- ------------
Total revenues.......................... -- 47,301
Expenses:
Broadcasting.......................... 110(5) 18,350
133(6)
Publishing............................ -- 9,193
Paging................................ 44(6) 1,824
Corporate and administrative.......... -- 1,571
Depreciation.......................... (312)(7) 2,284
Amortization of intangible assets..... 1,768(8) 3,261
(73)(9)
Non-cash compensation paid in common
stock............................... 120
Management fee........................ (735)(10) --
------------- ------------
Total expenses.......................... 935 36,603
------------- ------------
Operating income........................ (935) 10,698
Miscellaneous income (expense), net..... -- 75
------------- ------------
Income before interest expense, minority
interests and income taxes............. (935) 10,773
Interest expense........................ (159)(11) 10,236
9,877(12)
------------- ------------
Income (loss) before minority interests
and income taxes....................... (10,653) 537
Minority interests...................... (296)(13) --
------------- ------------
Income (loss) before income taxes....... (10,357) 537
Income tax expense (benefit)............ (2,479)(2) 215
------------- ------------
Net income (loss)..................... (7,878) 322
Preferred stock dividends............... -- 700
------------- ------------
Net income (loss) available to common
stockholders........................ $ (7,878) $ (378)
------------- ------------
------------- ------------
Average shares outstanding (14)......... 7,954
------------
------------
Earnings (loss) per share--primary...... $ (0.05)
------------
------------
Earnings (loss) per share--fully
diluted................................. $ (0.05)
------------
------------
</TABLE>
30
<PAGE>
The pro forma adjustments to reflect this Offering, the KTVE Sale, the
Phipps Acquisition, the Financing and the Concurrent Offering are as follows:
STATEMENT OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1996
1. Reflects decreased semiannual amortization of deferred financing costs in
connection with retirement of the Senior Note. Also reflects decreased
semiannual interest expense of $2.2 million on the Old Credit Facility
resulting from repayment from the proceeds of this Offering of $49.2 million
in principal at an estimated weighted average interest rate of 8.96% per
annum; decreased semiannual interest expense of $1.3 million resulting from
the retirement of the Senior Note; and a reduction of semiannual interest
expense of $544,000 on the 8% Note which will be converted into Series A
Preferred Stock. The Pro Forma Statement of Operations for the Six Months
Ended June 30, 1996 does not include an extraordinary loss of approximately
$2.7 million (net of estimated income tax benefit of $1.4 million) relating
to deferred financing costs and a prepayment fee associated with the assumed
retirement of the Senior Note. See "The Phipps Acquisition, the KTVE Sale
and the Financing -- The Financing" with respect to the retirement of the
Senior Note.
2. Reflects the adjustment of the income tax provision to the estimated
effective tax rate.
3. Reflects semiannual dividends on the Series A and Series B Preferred Stock.
4. Reflects the elimination of the results of operations of KTVE. The pro forma
adjustments exclude an estimated gain before income taxes of $5.6 million
and estimated income taxes of $2.8 million from the KTVE Sale.
5. Reflects accounting and administrative expenses associated with the Phipps
Business.
6. Reflects increased pension expense for the Phipps Business subsequent to the
Phipps Acquisition. Historical semiannual pension expense for the Phipps
Business was a credit of $113,000 while pension expense for the Phipps
Business subsequent to the Phipps Acquisition is expected to be a semiannual
expense of approximately $64,000.
7. Reflects decreased semiannual 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.
8. Reflects semiannual amortization of intangible assets associated with the
Phipps Acquisition over a 40-year period.
9. Reflects decreased semiannual amortization of debt acquisition costs
resulting from the retirement of the Old Credit Facility. The Pro Forma
Statement of Operations for the Six Months Ended June 30, 1996 does not
include an extraordinary loss of approximately $712,000 (net of estimated
tax benefit of $366,000) relating to deferred financing costs associated
with the assumed retirement of the Old Credit Facility. See "The Phipps
Acquisition, the KTVE Sale and the Financing -- The Financing" with respect
to the retirement of the Old Credit Facility.
10. 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.
11. Reflects the elimination of interest expense associated with the Phipps
Business which will not be incurred by the Company.
12. Reflects increased semiannual interest expense of $8.3 million on the Notes,
which includes semiannual amortization expense of $263,000 resulting from
the transaction costs relating to the issuance of the Notes, and increased
semiannual interest expense of $1.4 million relating to additional
borrowings under the Senior Credit Facility at an estimated weighted average
interest rate of 8.96% plus amortization of additional deferred financing
costs of $107,000. See "The Phipps Acquisition, the KTVE Sale and the
Financing -- The Financing" with respect to the retirement of the Old Credit
Facility.
13. Reflects the elimination of minority interests associated with the Phipps
Business, because such minority interests will be acquired as part of the
Phipps Acquisition.
14. 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 this Offering.
15. 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
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
1031 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. See "Risk Factors -- FCC Divestiture
Requirement" and "Business -- Federal Regulation of the Company's Business."
Condensed income statement data of WALB and WJHG are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996
------------------------
(IN THOUSANDS) WALB WJHG
----------- -----------
<S> <C> <C>
Broadcasting revenues $ 5,098 $ 2,409
Expenses 2,440 1,933
----------- -----------
Operating income 2,658 476
Other income 9 16
----------- -----------
Income before income taxes $ 2,667 $ 492
----------- -----------
----------- -----------
Net income $ 1,654 $ 305
----------- -----------
----------- -----------
Media Cash Flow $ 2,809 $ 624
----------- -----------
----------- -----------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA
----------------------- ADJUSTMENTS PRO
AUGUSTA FOR AUGUSTA FORMA PRO FORMA
COMPANY BUSINESS ACQUISITION COMPANY OFFERING COMPANY
-------- ----------- ----------- -------- ----------- ------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Broadcasting (less agency
commissions)........................ $42,741 $4,419 $ 110(1) $47,270 $ -- $47,270
Publishing............................ 23,082 -- -- 23,082 -- 23,082
Paging................................ -- -- -- -- -- --
-------- ----------- ----------- -------- ----------- ------------
Total revenues.......................... 65,823 4,419 110 70,352 -- 70,353
Expenses:
Broadcasting.......................... 26,211 2,997 110(1) 29,318 -- 29,318
Publishing............................ 20,619 -- -- 20,619 -- 20,619
Paging................................ -- -- -- -- -- --
Corporate and administrative.......... 2,817 -- -- 2,817 -- 2,817
Depreciation.......................... 3,048 135 (26)(2) 3,157 -- 3,157
Amortization of intangible assets..... 1,990 76 384(3) 2,450 (97)(7) 2,353
Non-cash compensation paid in common
stock............................... 1,625 -- -- 1,625 -- 1,625
Management fee........................ -- -- -- -- -- --
-------- ----------- ----------- -------- ----------- ------------
Total expenses.......................... 56,310 3,208 461 59,986 (97) 59,889
-------- ----------- ----------- -------- ----------- ------------
Operating income........................ 9,513 1,211 (358) 10,366 97 10,463
Miscellaneous income (expense), net..... 157 (126) 69(4) 100 -- 100
-------- ----------- ----------- -------- ----------- ------------
Income before interest expense, minority
interests and income taxes............. 9,670 1,085 (289) 10,466 97 10,563
Interest expense........................ 7,115 -- 1,859(5) 8,974 (8,172) (7) 802
-------- ----------- ----------- -------- ----------- ------------
Income (loss) before minority interests
and income taxes....................... 2,555 1,085 (2,148) 1,492 8,269 9,761
Minority interests...................... -- -- -- -- -- --
-------- ----------- ----------- -------- ----------- ------------
Income (loss) before income taxes....... 2,555 1,085 (2,148) 1,492 8,269 9,761
Income tax expense (benefit)............ 1,004 -- (412)(6) 592 3,316(6) 3,908
-------- ----------- ----------- -------- ----------- ------------
Net income (loss)..................... 1,551 1,085 (1,736) 900 4,953 5,853
Preferred stock dividends............... -- -- -- -- 1,400(8) 1,400
-------- ----------- ----------- -------- ----------- ------------
Net income (loss) available to common
stockholders........................ $ 1,551 $1,085 $(1,736) $ 900 $ 3,553 $ 4,453
-------- ----------- ----------- -------- ----------- ------------
-------- ----------- ----------- -------- ----------- ------------
Average shares outstanding (19)......... 4,624 8,124 8,124
-------- -------- ------------
-------- -------- ------------
Earnings (loss) per share............... $ 0.34 $ 0.11 $ 0.55
-------- -------- ------------
-------- -------- ------------
<CAPTION>
PRO FORMA PHIPPS PRO FORMA PRO FORMA
KTVE SALE(9) COMPANY BUSINESS ADJUSTMENTS COMBINED(20)
------------ ------------ ----------- ------------- ------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Operating revenues:
Broadcasting (less agency
commissions)........................ $(4,533) $42,737 $22,995 $ -- $65,733
Publishing............................ -- 23,082 -- -- 23,082
Paging................................ -- -- 5,219 -- 5,219
------------ ------------ ----------- ------------- ------------
Total revenues.......................... (4,533) 65,819 28,214 -- 94,033
Expenses:
Broadcasting.......................... (3,399) 25,919 10,835 220(10) 37,326
352(11)
Publishing............................ -- 20,619 -- -- 20,619
Paging................................ -- -- 3,420 115(11) 3,535
Corporate and administrative.......... -- 2,817 -- -- 2,817
Depreciation.......................... (442) 2,715 2,462 (625)(12) 4,552
Amortization of intangible assets..... -- 2,353 753 3,525(13) 6,521
(110)(14)
Non-cash compensation paid in common
stock............................... -- 1,625 -- -- 1,625
Management fee........................ -- -- 2,476 (2,476)(15) --
------------ ------------ ----------- ------------- ------------
Total expenses.......................... (3,841) 56,048 19,946 1,001 76,995
------------ ------------ ----------- ------------- ------------
Operating income........................ (692) 9,771 8,268 (1,001) 17,038
Miscellaneous income (expense), net..... (20) 80 13 -- 93
------------ ------------ ----------- ------------- ------------
Income before interest expense, minority
interests and income taxes............. (712) 9,851 8,281 (1,001) 17,131
Interest expense........................ -- 802 435 (435)(16) 20,556
19,754(17)
------------ ------------ ----------- ------------- ------------
Income (loss) before minority interests
and income taxes....................... (712) 9,049 7,846 (20,320) (3,425)
Minority interests...................... -- -- 587 (587)(18) --
------------ ------------ ----------- ------------- ------------
Income (loss) before income taxes....... (712) 9,049 7,259 (19,733) (3,425)
Income tax expense (benefit)............ (285) 3,623 -- (4,788)(6) (1,165)
------------ ------------ ----------- ------------- ------------
Net income (loss)..................... (427) 5,426 7,259 (14,945) (2,260)
Preferred stock dividends............... -- 1,400 -- -- 1,400
------------ ------------ ----------- ------------- ------------
Net income (loss) available to common
stockholders........................ $ (427) $ 4,026 $7,259 $(14,945) $(3,660)
------------ ------------ ----------- ------------- ------------
------------ ------------ ----------- ------------- ------------
Average shares outstanding (19)......... 8,124 7,926
------------ ------------
------------ ------------
Earnings (loss) per share............... $ 0.50 $ (0.46)
------------ ------------
------------ ------------
</TABLE>
32
<PAGE>
The pro forma adjustments to reflect this Offering, the KTVE Sale, the
Phipps Acquisition, the Financing and the Concurrent Offering are as follows:
STATEMENT OF OPERATIONS -- TWELVE MONTHS ENDED JUNE 30, 1996
1. Reflects the classification of national sales representative commissions as
an expense consistent with the presentation by the Company.
2. Reflects decreased depreciation prior to acquisition 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, for the six months ended December 31, 1995.
3. Reflects amortization prior to acquisition of $54,000 on the Augusta
Business' financing costs over a seven-year period. Also reflects the
amortization prior to acquisition of $406,000 on the intangible assets
associated with the Augusta Acquisition over a 40-year period.
4. Reflects the elimination of overhead allocated to the Augusta Business prior
to acquisition by its previous owner which will not be incurred by the
Company.
5. Reflects increased interest expense prior to the acquisition of the Augusta
Business of $77,000 for an interest rate adjustment on the Senior Note;
increased interest expense prior to the acquisition of the Augusta Business
of $1.2 million on the Old Credit Facility at LIBOR plus 3.5%, based on an
increase in the debt level subsequent to the Augusta Acquisition; and
interest expense prior to the acquisition of the Augusta Business of
$544,000 on the 8% Note.
6. Reflects the adjustment of the income tax provision to the estimated
effective tax rate.
7. Reflects decreased annual amortization of deferred financing costs in
connection with retirement of the Senior Note. Also reflects decreased
annual interest expense of $4.4 million on the Old Credit Facility resulting
from repayment of $49.2 million in principal at an estimated weighted
average interest rate of 8.96% per annum from the proceeds of this Offering;
decreased annual interest expense of $2.7 million resulting from the
retirement of the Senior Note; and a reduction of annual interest expense of
$1.1 million on the 8% Note which will be converted to Series A Preferred
Stock. The Pro Forma Statement of Operations for the Twelve Months Ended
June 30, 1996 does not include an extraordinary loss of approximately $2.7
million (net of estimated income tax benefit of $1.4 milion) relating to
deferred financing costs and a prepayment fee associated with the assumed
retirement of the Senior Note. See "The Phipps Acquisition, the KTVE Sale
and the Financing -- The Financing" with respect to the retirement of the
Senior Note.
8. Reflects annual dividends on the 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 before income taxes of $5.6 million
and estimated income taxes of $2.8 million from the KTVE Sale.
10. Reflects 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 $337,000 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 decreased annual amortization of debt acquisition costs resulting
from the retirement of the Old Credit Facility at June 30, 1996. The Pro
Forma Statement of Operations for the Twelve Months Ended June 30, 1996 does
not include an extraordinary loss of approximately $712,000 (net of
estimated tax benefit of $366,000) relating to deferred financing costs
associated with the assumed retirement of the Old Credit Facility. See "The
Phipps Acquisition, the KTVE Sale and the Financing -- The Financing" with
respect to the retirement of the Old Credit Facility.
15. 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.
16. Reflects the elimination of interest expense associated with the Phipps
Business which will not be assumed by the Company.
17. Reflects increased annual interest expense of $16.7 million on the Notes,
which includes annual amortization expense of $525,000 resulting from the
transaction costs relating to the issuance of the Notes, annual interest
expense of $2.9 million relating to the additional borrowings under the
Senior Credit Facility at an estimated weighted average interest rate of
8.96% plus amortization of additional deferred financing costs of $214,000.
See "The Phipps Acquisition, the KTVE Sale and the Financing -- The
Financing" with respect to the retirement of the Old Credit Facility.
18. Reflects the elimination of minority interests associated with the Phipps
Business, because such minority interests will be acquired as a part of the
Phipps Acquisition.
19. 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 this Offering.
33
<PAGE>
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
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
1031 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. See "Risk Factors -- FCC Divestiture
Requirement" and "Business -- Federal Regulation of the Company's Business."
Condensed income statement data of WALB and WJHG are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30, 1996
------------------------
(IN THOUSANDS) WALB WJHG
----------- -----------
<S> <C> <C>
Broadcasting revenues $ 9,829 $ 4,426
Expenses 4,735 3,816
----------- -----------
Operating income 5,094 610
Other income 17 45
----------- -----------
Income before income taxes $ 5,111 $ 655
----------- -----------
----------- -----------
Net income $ 3,170 $ 407
----------- -----------
----------- -----------
Media Cash Flow $ 5,409 $ 912
----------- -----------
----------- -----------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA KTVE PRO FORMA PHIPPS
COMPANY OFFERING COMPANY SALE(4) COMPANY BUSINESS
--------- ---------- --------- ----------- --------- --------
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Cash.................................... $1,287 $ -- $1,287 $9,500 $10,787 $663
Trade accounts receivable............... 10,818 -- 10,818 -- 10,818 5,188
Recoverable income taxes................ 797 1,394(1) 2,191 (2,191) -- --
Inventories............................. 109 -- 109 -- 109 --
Current portion of program broadcast
rights................................. 711 -- 711 (56) 655 924
Prepaid expenses and other current
assets................................. 759 -- 759 (50) 709 338
--------- ---------- --------- ----------- --------- --------
Total current assets.................... 14,481 1,394 15,875 7,203 23,078 7,113
Property and equipment-net.............. 18,798 -- 18,798 (1,531) 17,267 9,985
Other assets
Deferred acquisition costs.............. 2,819 -- 2,819 -- 2,819 --
Deferred loan costs..................... 1,882 (804)(1) 1,078 -- 1,078 --
Goodwill and other intangibles.......... 73,299 -- 73,299 (2,322) 70,977 9,097
Other................................... 1,237 -- 1,237 (8) 1,229 111
--------- ---------- --------- ----------- --------- --------
Total other assets...................... 79,237 (804) 78,433 (2,330) 76,103 9,208
--------- ---------- --------- ----------- --------- --------
Total assets.......................... $112,516 $590 $113,106 $3,342 $116,448 $26,306
--------- ---------- --------- ----------- --------- --------
--------- ---------- --------- ----------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Trade accounts payable.................. $3,169 $-- $3,169 $-- $3,169 $308
Employee compensation and benefits...... 4,114 -- 4,114 -- 4,114 --
Accrued expenses........................ 924 -- 924 -- 924 996
Accrued interest........................ 2,026 -- 2,026 -- 2,026 --
Income taxes payable.................... -- -- -- 617 617 --
Current portion of broadcast program
obligations............................ 710 -- 710 (53) 657 458
Deferred paging service income.......... -- -- -- -- -- 975
Current portion of long-term debt....... -- -- -- -- -- 1,474
--------- ---------- --------- ----------- --------- --------
Total current liabilities............... 10,943 -- 10,943 564 11,507 4,211
Long-term debt.......................... 82,846 (7,545)(2) 1,101 -- 1,101 2,560
(74,200)(3)
Deferred credits........................ 4,914 -- 4,914 (3) 4,911 214
Minority interests...................... -- -- -- -- -- 655
Stockholders' equity
Series A Preferred Stock................ -- 9,896(2) 9,896 -- 9,896 --
Series B Preferred Stock................ -- 10,000(2) 10,000 -- 10,000 --
Class A Common Stock, no par value...... 10,000 (2,455)(2) 7,545 -- 7,545 --
Class B Common Stock, no par value...... -- 67,600(2) 67,600 -- 67,600 --
Retained earnings....................... 10,451 (2,706)(1) 7,745 2,781 10,526 --
Net equity of acquired operations....... -- -- -- -- -- 18,666
--------- ---------- --------- ----------- --------- --------
20,451 82,335 102,786 2,781 105,567 18,666
Treasury stock.......................... (6,638) -- (6,638 ) -- (6,638) --
--------- ---------- --------- ----------- --------- --------
13,813 82,335 96,148 2,781 98,929 18,666
--------- ---------- --------- ----------- --------- --------
Total liabilities and stockholders'
equity............................... $112,516 $590 $113,106 $3,342 $116,448 $26,306
--------- ---------- --------- ----------- --------- --------
--------- ---------- --------- ----------- --------- --------
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED(10)
-------------- --------------
ASSETS:
<S> <C> <C>
Cash.................................... $(185,000)(5) $1,287
144,750(7)
30,750(8)
(663)(6)
Trade accounts receivable............... -- 16,006
Recoverable income taxes................ -- --
Inventories............................. -- 109
Current portion of program broadcast
rights................................. -- 1,579
Prepaid expenses and other current
assets................................. (338)(6) 709
-------------- --------------
Total current assets.................... (10,501) 19,690
Property and equipment-net.............. -- 27,252
Other assets
Deferred acquisition costs.............. -- 2,819
Deferred loan costs..................... 5,250(7) 6,750
1,500(8)
(1,078)(9)
Goodwill and other intangibles.......... (9,097)(6) 241,416
170,439(5)
Other................................... -- 1,340
-------------- --------------
Total other assets...................... 167,014 252,325
-------------- --------------
Total assets.......................... $156,513 $299,267
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Trade accounts payable.................. $(308)(6) $3,169
Employee compensation and benefits...... -- 4,114
Accrued expenses........................ (996)(6) 924
Accrued interest........................ -- 2,026
Income taxes payable.................... (366)(9) 251
Current portion of broadcast program
obligations............................ -- 1,115
Deferred paging service income.......... -- 975
Current portion of long-term debt....... (1,474)(6) --
-------------- --------------
Total current liabilities............... (3,144) 12,574
Long-term debt.......................... (2,560)(6) 183,351
32,250(8)
150,000(7)
Deferred credits........................ -- 5,125
Minority interests...................... (655)(6) --
Stockholders' equity
Series A Preferred Stock................ -- 9,896
Series B Preferred Stock................ -- 10,000
Class A Common Stock, no par value...... -- 7,545
Class B Common Stock, no par value...... -- 67,600
Retained earnings....................... (712)(9) 9,814
Net equity of acquired operations....... (18,666)(5) --
-------------- --------------
(19,378) 104,855
Treasury stock.......................... -- (6,638)
-------------- --------------
(19,378) 98,217
-------------- --------------
Total liabilities and stockholders'
equity............................... $156,513 $299,267
-------------- --------------
-------------- --------------
</TABLE>
35
<PAGE>
The pro forma adjustments to reflect this Offering, the KTVE Sale, the
Phipps Acquisition, the Financing and the Concurrent Offering are as follows:
BALANCE SHEET - JUNE 30, 1996
1. Reflects the prepayment fee associated with the retirement of the Senior
Note, the write-off of deferred loan costs in connection with the retirement
of the Senior Note and the exchange of the Series A Preferred Stock for the
8% Note, and the income tax benefit associated with the prepayment fee and
write-off of deferred loan costs.
2. Reflects the issuances, net of fees and expenses, of (i) approximately
3,500,000 shares of Class B Common Stock at an estimated $21 per share
pursuant to this Offering, (ii) Series A Preferred Stock in exchange for the
8% Note and (iii) $10.0 million of Series B Preferred Stock to certain
affiliates of the Company.
3. Reflects retirement of $25.0 million in aggregate principal amount and a
prepayment fee of $3.4 million on the Senior Note and a retirement of $49.2
million on the Old Credit Facility with the net proceeds from this Offering
and the sale of Series B Preferred Stock of $77.6 million.
4. Reflects the KTVE Sale for $9.5 million plus the amount of the accounts
receivable on the date of the closing. The transaction was consummated in
August 1996.
5. 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 June 30, 1996 as follows:
<TABLE>
<S> <C>
(IN THOUSANDS)
Trade accounts receivable........................................................... $ 5,188
Current portion of program broadcast rights......................................... 924
Property and equipment.............................................................. 9,985
Goodwill and other intangibles...................................................... 170,439
Other............................................................................... 111
Current portion of program broadcast obligations.................................... (458)
Deferred paging service income...................................................... (975)
Deferred credits.................................................................... (214)
----------
Purchase price of Phipps Business including expenses................................ $ 185,000
----------
----------
Historical book value of Phipps Business............................................ $ (18,666)
Assets not acquired and liabilities not assumed--net................................ 4,105
----------
Net assets acquired................................................................. (14,561)
Purchase price of Phipps Business................................................... 185,000
----------
Goodwill and other intangibles...................................................... $ 170,439
----------
----------
</TABLE>
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.
6. Reflects the elimination of certain of the assets and liabilities of the
Phipps Business, which were not included in the Phipps Acquisition.
7. Reflects the issuance of the Notes pursuant to the Concurrent Offering and
fees and expenses associated with the Concurrent Offering.
8. Reflects borrowings of $32.3 million under the Senior Credit Facility in
order to complete the Phipps Acquisition and estimated expenses of $1.5
million in connection with the negotiation and execution of the Senior
Credit Facility. See "Description of Certain Indebtedness -- Senior Credit
Facility."
9. Reflects the write-off of debt acquisition costs and related tax benefit
resulting from the retirement of the Old Credit Facility at June 30, 1996.
10. 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
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
1031 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. See "Risk Factors--FCC Divestiture
Requirement" and "Business--Federal Regulation of the Company's Business."
36
<PAGE>
Condensed balance sheets of WALB and WJHG are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
(IN THOUSANDS) WALB WJHG
----------- -----------
<S> <C> <C>
Current assets $ 1,801 $ 913
Property and equipment 1,714 1,014
Other assets 66 3
----------- -----------
Total assets $ 3,581 $ 1,930
----------- -----------
----------- -----------
Current liabilities $ 1,756 $ 474
Other liabilities 214 --
Stockholder's equity 1,611 1,456
----------- -----------
Total liabilities and stockholder's equity $ 3,581 $ 1,930
----------- -----------
----------- -----------
</TABLE>
37
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIOS 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. The selected consolidated financial data for, and as of the six
months ended June 30, 1995 and 1996 are derived from the unaudited accounting
records of the Company and have been prepared on the same basis as the audited
consolidated financial statements and in the opinion of the management of the
Company include all normal and recurring adjustments and accruals necessary for
a fair presentation of such information.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------------------------------- ----------
1991 1992 1993 1994 1995 1995
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
STATEMENT OF INCOME DATA:
Operating revenues:
Broadcasting (less agency commissions)............... $ 13,553 $ 15,131 $ 15,004 $ 22,826 $ 36,750 $ 18,261
Publishing........................................... 8,968 9,512 10,109 13,692 21,866 10,046
---------- ---------- ---------- ---------- ---------- ----------
Total revenues......................................... 22,521 24,643 25,113 36,518 58,616 28,307
Expenses:
Broadcasting......................................... 9,672 9,753 10,029 14,864 23,202 11,410
Publishing........................................... 6,444 6,752 7,662 11,198 20,016 8,590
Corporate and administrative......................... 1,889 2,627 2,326 1,959 2,258 1,012
Depreciation......................................... 1,487 1,197 1,388 1,745 2,633 1,234
Amortization of intangible assets.................... 14 44 177 396 1,326 588
Non-cash compensation paid in common stock........... -- -- -- 80 2,321 816
---------- ---------- ---------- ---------- ---------- ----------
Total expenses......................................... 19,506 20,373 21,582 30,242 51,756 23,650
---------- ---------- ---------- ---------- ---------- ----------
Operating income....................................... 3,015 4,270 3,531 6,276 6,860 4,657
Miscellaneous income (expense), net.................... 778 (1,519) 202 189 143 69
---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations before interest
expense and income taxes.............................. 3,793 2,751 3,733 6,465 7,003 4,726
Interest expense....................................... 787 1,486 985 1,923 5,438 2,768
---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations before income
taxes................................................. 3,006 1,265 2,748 4,542 1,565 1,958
Federal and state income taxes......................... 1,156 869 1,068 1,776 634 776
---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations...................... 1,850 396 1,680 2,766 931 1,182
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 $ 1,182
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Average outstanding common shares...................... 6,469 4,668 4,611 4,689 4,481 4,383
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations per common share-
primary............................................... $ 0.29 $ 0.09 $ 0.36 $ 0.59 $ 0.21 $ 0.27
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations per common
share-fully diluted................................... $ 0.29 $ 0.09 $ 0.36 $ 0.59 $ 0.21 $ 0.27
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Cash dividends per common share........................ $ 0.05 $ 0.07 $ 0.07 $ 0.07 $ 0.08 $ 0.04
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
1996
----------
<S> <C>
STATEMENT OF INCOME DATA:
Operating revenues:
Broadcasting (less agency commissions)............... $ 24,252
Publishing........................................... 11,262
----------
Total revenues......................................... 35,514
Expenses:
Broadcasting......................................... 14,418
Publishing........................................... 9,193
Corporate and administrative......................... 1,571
Depreciation......................................... 1,648
Amortization of intangible assets.................... 1,253
Non-cash compensation paid in common stock........... 120
----------
Total expenses......................................... 28,203
----------
Operating income....................................... 7,311
Miscellaneous income (expense), net.................... 81
----------
Income from continuing operations before interest
expense and income taxes.............................. 7,392
Interest expense....................................... 4,445
----------
Income from continuing operations before income
taxes................................................. 2,947
Federal and state income taxes......................... 1,146
----------
Income from continuing operations...................... 1,801
Discontinued business:
Income (loss) from operations of discontinued
business, net of applicable income tax expense
(benefit) of ($55), ($79) and $30, respectively..... --
Gain on disposal of discontinued business, net of
applicable income tax expense of $501............... --
----------
Net income............................................. $ 1,801
----------
----------
Average outstanding common shares...................... 4,657
----------
----------
Income from continuing operations per common share-
primary............................................... $ 0.39
----------
----------
Income from continuing operations per common
share-fully diluted................................... $ 0.38
----------
----------
Cash dividends per common share........................ $ 0.04
----------
----------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------------------------------- ----------
1991 1992 1993 1994 1995 1995
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficiency)........................... $ 6,740 $ 2,976 $ 2,579 $ 1,075 $ (222) $ 237
Total assets........................................... 31,548 24,173 21,372 68,789 78,240 73,932
Total debt............................................. 20,378 12,412 7,759 52,940 54,324 54,319
Total stockholders' equity............................. $ 5,853 $ 4,850 $ 7,118 $ 5,001 $ 8,986 $ 7,375
OTHER DATA:
Media Cash Flow (1).................................... $ 6,405 $ 8,079 $ 7,371 $ 10,522 $ 15,559 $ 8,333
Operating cash flow (2)................................ 4,516 5,452 5,044 8,567 13,309 7,329
EBITDA (3)............................................. 4,516 5,512 5,095 8,498 13,140 7,296
Cash flows provided by (used in):
Operating activities................................. 3,499 4,832 1,324 5,798 7,600 3,828
Investing activities................................. (2,073) (1,041) 3,062 (42,770) (8,929) (5,377)
Financing activities................................. (10,424) (9,300) (4,932) 37,200 1,331 1,208
Capital expenditures................................... $ 2,235 $ 2,216 $ 2,582 $ 1,768 $ 3,280 $ 1,852
Ratio of Media Cash Flow to interest expense........... 8.1 5.4 7.5 5.5 2.9 3.0
Ratio of operating cash flow to interest expense....... 5.7 3.7 5.1 4.5 2.4 2.6
Ratio of total debt to Media Cash Flow................. 3.2 1.5 1.1 5.0 3.5 3.5(5)
Ratio of total debt to operating cash flow............. 4.5 2.3 1.5 6.2 4.1 4.1(5)
Ratio of earnings to fixed charges (4)................. 4.7 1.8 3.4 3.2 1.3 1.7
<CAPTION>
1996
----------
<S> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficiency)........................... $ 3,538
Total assets........................................... 112,516
Total debt............................................. 82,846
Total stockholders' equity............................. $ 13,813
OTHER DATA:
Media Cash Flow (1).................................... $ 12,004
Operating cash flow (2)................................ 10,442
EBITDA (3)............................................. 10,332
Cash flows provided by (used in):
Operating activities................................. 6,801
Investing activities................................. (37,490)
Financing activities................................. 31,416
Capital expenditures................................... $ 1,317
Ratio of Media Cash Flow to interest expense........... 2.7
Ratio of operating cash flow to interest expense....... 2.3
Ratio of total debt to Media Cash Flow................. 4.3(5)
Ratio of total debt to operating cash flow............. 5.0(5)
Ratio of earnings to fixed charges (4)................. 1.6
</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 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.
(5) Represents applicable ratios for the 12 month periods ended June 30, 1995
and 1996.
39
<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. The
selected financial data for, and as of the six months ended June 30, 1995 and
1996 are derived from the unaudited financial statements of the Phipps Business
and have been prepared on the same basis as the audited financial statements and
in the opinion of management of the Company include all normal and recurring
adjustments and accruals necessary for a fair presentation of such information.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------------------------------- ----------------------
1991 1992(1) 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
STATEMENT OF INCOME DATA:
Operating revenues:
Broadcasting (less agency
commissions)...................... $ 10,492 $ 14,523 $ 19,460 $ 21,524 $ 22,424 $ 10,774 $ 11,346
Paging............................. 3,369 3,646 3,788 4,277 4,897 2,423 2,744
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues....................... 13,861 18,169 23,248 25,801 27,321 13,197 14,090
Expenses:
Broadcasting....................... 5,298 7,518 10,734 10,211 10,487 5,065 5,412
Paging............................. 2,356 2,298 2,529 2,764 3,052 1,411 1,780
Management fees.................... 579 973 2,462 2,486 3,280 1,539 735
Depreciation and amortization...... 1,513 1,734 2,836 2,672 3,120 1,436 1,530
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses....................... 9,746 12,523 18,561 18,133 19,939 9,451 9,457
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income..................... 4,115 5,646 4,687 7,668 7,382 3,746 4,633
Miscellaneous income (expense),
net................................. 5 8 16 666 12 (4) (5)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before interest expense and
minority interests.................. 4,120 5,654 4,703 8,334 7,394 3,742 4,628
Interest expense..................... 162 442 632 480 499 223 159
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority interests..... 3,958 5,212 4,071 7,854 6,895 3,519 4,469
Minority interests................... -- 331 140 635 547 256 296
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................... $ 3,958 $ 4,881 $ 3,931 $ 7,219 $ 6,348 $ 3,263 $ 4,173
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Supplemental unaudited pro forma
information: (2)
Net income, as above............... $ 3,958 $ 4,881 $ 3,931 $ 7,219 $ 6,348 $ 3,263 $ 4,173
Pro forma provision for income tax
expense........................... 1,504 1,855 1,500 2,743 2,413 1,240 1,586
---------- ---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income................. $ 2,454 $ 3,026 $ 2,431 $ 4,476 $ 3,935 $ 2,023 $ 2,587
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital...................... $ 595 $ 615 $ 1,257 $ 1,421 $ 2,622 $ 2,228 $ 2,902
Total assets......................... 8,931 25,068 24,819 25,298 27,562 27,633 26,306
Total debt........................... 1,388 7,697 6,542 6,065 4,810 5,198 4,034
Minority interests................... -- 1,154 824 728 586 648 655
Owner's equity....................... 6,351 13,276 14,306 15,465 18,794 18,764 18,666
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
OTHER DATA:
Media Cash Flow (3)...................................... $ 10,466 $ 12,983 $ 13,696 $ 6,678 $ 6,769
Operating cash flow (4).................................. 8,003 10,498 10,416 5,140 6,035
EBITDA (5)............................................... 7,523 10,340 10,502 5,182 6,163
Net cash flows provided by (used in):
Operating activities................................... 7,397 9,808 9,259 4,136 6,191
Investing activities................................... (2,953) (2,506) (3,828) (3,152) (840)
Financing activities................................... (4,418) (7,233) (4,906) (917) (5,309)
Capital expenditures..................................... $ 3,538 $ 3,353 $ 3,188 $ 1,902 $ 1,647
</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 Phipps Business' 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.
41
<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 and the Augusta Acquisition, which was completed in January 1996, 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
Phipps Acquisition, which is expected to occur by September 30, 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------- ------------------------------------------
1993 1994 1995 1995 1996
-------------------- -------------------- -------------------- -------------------- --------------------
(DOLLARS IN PERCENT PERCENT PERCENT PERCENT PERCENT
THOUSANDS) AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
TELEVISION
BROADCASTING
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....... $15,003.7 59.8% $22,826.4 62.5% $36,750.0 62.7% $18,260.9 64.5% $24,251.9 68.3%
Operating
income (1).... 4,070.6 66.9 6,556.0 78.4 10,585.2 94.1 5,416.1 84.8 7,757.3 85.9
PUBLISHING
Revenues....... $10,109.4 40.2% $13,692.0 37.5% $21,866.2 37.3% $10,046.1 35.5% $11,261.8 31.7%
Operating
income (1).... 2,009.1 33.1 1,804.0 21.6 660.2 5.9 972.2 15.2 1,272.7 14.1
</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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------- ------------------------------------------
1993 1994 1995 1995 1996
-------------------- -------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
(DOLLARS IN COMPANY COMPANY COMPANY COMPANY COMPANY
THOUSANDS) AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Local........ $ 7,312.3 29.2% $12,191.4 33.4% $20,888.1 35.6% $10,294.6 36.4% $13,745.3 38.7%
National..... 6,102.8 24.3 7,804.4 21.4 10,881.1 18.6 5,497.4 19.4 6,967.9 19.6
Network
compensation... 1,286.1 5.1 1,297.5 3.5 2,486.8 4.2 1,247.2 4.4 1,761.0 5.0
Political.... 17.7 0.1 1,029.0 2.8 1,174.2 2.0 437.9 1.5 786.3 2.2
Production
and other... 284.8 1.1 504.1 1.4 1,319.8 2.3 783.8 2.8 991.4 2.8
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
$15,003.7 59.8% $22,826.4 62.5% $36,750.0 62.7% $18,260.9 64.5% $24,251.9 68.3%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
In the Company's broadcasting operations, broadcast advertising is sold for
placement either preceding or following a television station's network
programming and within local and syndicated programming.
42
<PAGE>
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 advertising
rates are affected by the number of advertisers competing for the available
time, the size and demographic makeup of the market served by the station and
the availability of alternative advertising media in the market area. Broadcast
advertising rates are the highest during the most desirable viewing hours, with
corresponding reductions during other hours. The ratings of a local station
affiliated with a major network can be affected by ratings of network
programming.
Most broadcast advertising contracts are short-term, and generally run only
for a few weeks. Approximately 56.5% of the gross revenues of the Company's
television stations for the year ended December 31, 1995 and the six months
ended June 30, 1996, were generated from local advertising, which is sold by a
station's sales staff directly to local accounts, and the remainder primarily
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------- ------------------------------------------
1993 1994 1995 1995 1996
-------------------- -------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
COMPANY COMPANY COMPANY COMPANY COMPANY
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Retail
advertising... $ 5,734.3 22.8% $ 7,460.3 20.4% $11,044.2 18.8% $ 5,089.5 18.0% $ 5,299.8 14.9%
Classified... 2,336.5 9.3 3,174.2 8.7 5,323.8 9.1 2,493.7 8.8 3,036.5 8.5
Circulation... 2,011.8 8.0 2,628.9 7.2 3,783.8 6.5 1,821.6 6.4 2,188.6 6.2
Other........ 26.8 0.1 428.6 1.2 1,714.4 2.9 641.3 2.3 736.9 2.1
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
$10,109.4 40.2% $13,692.0 37.5% $21,866.2 37.3% $10,046.1 35.5% $11,261.8 31.7%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
</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.
43
<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,
and the six months ended June 30, 1995 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
(DOLLARS IN --------------------------------- ---------------------
THOUSANDS) 1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
Operating
income.......... $3,530.7 $ 6,276.4 $ 6,859.7 $4,657.5 $7,311.2
<S> <C> <C> <C> <C> <C>
Add:
Amortization of
program
license
rights........ 924.9 1,218.0 1,647.0 768.0 1,279.4
Depreciation
and
amortization... 1,564.8 2,141.6 3,958.9 1,821.7 2,900.7
Corporate
overhead...... 2,326.7 1,958.4 2,258.3 1,012.0 1,570.8
Non-cash
compensation
and
contributions
to the
Company's
401(k) plan,
paid in common
stock......... - 109.5 2,612.2 976.4 250.8
Less:
Payments for
program
license
liabilities... (976.2) (1,181.6) (1,776.8) (902.8) (1,309.3)
--------- --------- --------- --------- ---------
Media Cash Flow
(1)............. $7,370.9 $10,522.3 $15,559.3 $8,332.8 $12,003.6
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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; and $6.8 million and $9.9 million was attributable to
the Company's broadcasting operations during the six months ended June 30,
1995 and 1996, 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 six months ended June 30, 1995 and
1996, and the years ended December 31, 1994 and 1995. The principal reason for
these increases is the acquisition by the Company in January 1996 of the Augusta
Business for $35.9 million and the assumption of $1.3 million of liabilities,
and 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."
44
<PAGE>
CASH FLOW PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCING ACTIVITIES.
The following table sets forth certain operating data for the Company for
the years ended December 31, 1993, 1994 and 1995 and for the six months ended
June 30, 1995 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
(DOLLARS IN --------------------------------- ---------------------
THOUSANDS) 1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
Cash flows provided
by (used in):
<S> <C> <C> <C> <C> <C>
Operating
activities..... $1,324 $5,798 $7,600 $3,828 $6,801
Investing
activities..... 3,062 (42,770) (8,929) (5,377) (37,490)
Financing
activities..... (4,932) 37,200 1,331 1,208 31,416
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
REVENUES. Total revenues for the six months ended June 30, 1996 increased
$7.2 million, or 25.5%, over the six months ended June 30, 1995, from $28.3
million to $35.5 million. This increase was attributable to (i) the Augusta
Acquisition, which occurred on January 4, 1996 and (ii) increases in publishing
and broadcasting (excluding the Augusta Acquisition) revenues. The Augusta
Acquisition accounted for $4.5 million, or 62.3%, of the revenue increase.
Broadcast net revenues increased $6.0 million, or 32.8%, over the same
period of the prior year, from $18.3 million to $24.3 million. Revenues
generated by WRDW accounted for $4.5 million, or 74.9%, of the increase. On a
pro forma basis, broadcast net revenues for WRDW for the six months ended June
30, 1996 increased $130,000, or 3.0%, over the same period of the prior year.
Broadcast net revenues, excluding the Augusta Acquisition, increased $1.5
million, or 8.2%, over the six months ended June 30, 1995. Approximately $1.1
million, $94,000 and $171,000 of the $1.5 million increase in total broadcast
net revenues, excluding the Augusta Acquisition, were due to higher local,
national and political advertising spending, respectively. The remaining
increase was due to greater tower rental and special projects revenue.
Publishing revenues increased $1.2 million, or 12.1%, over the six months
ended June 30, 1995, from $10.1 million to $11.3 million. Advertising and
circulation revenues comprised $766,000 and $367,000, respectively, of the
revenue increase. The increase in advertising revenue was primarily the result
of linage increases in classified advertising and retail rate increases. The
increase in circulation revenue can be attributed primarily to price increases
over the same period of the prior year at two of the Company's publishing
operations and the conversion of the GWINNETT DAILY POST to a five-day-a-week
paper. Approximately $81,000 of the publishing revenue increase was the result
of higher special events revenue.
OPERATING EXPENSES. Operating expenses for the six months ended June 30,
1996 increased $4.6 million, or 19.3%, over the six months ended June 30, 1995,
from $23.6 million to $28.2 million, due to the Augusta Acquisition and
increased expenses at the broadcasting and publishing operations, as well as
increased corporate and administrative expenses, depreciation and amortization,
offset by a reduction in non-cash compensation paid in Class A Common Stock.
Broadcasting expenses for the six months ended June 30, 1996 increased $3.0
million, or 26.4%, over the same period of the prior year from $11.4 million to
$14.4 million. This increase was primarily attributable to the Augusta
Acquisition. On a pro forma basis, broadcast expenses for WRDW for the six
months ended June 30, 1996 decreased $129,000, or 4.5%, over the same period of
1995, from $2.9 million to $2.8 million. Broadcasting expenses, excluding WRDW,
increased $243,000, or 2.1%, primarily as the result of higher payroll related
costs.
Publishing expenses for the six months ended June 30, 1996 increased
$603,000, or 7.0%, over the same period of the prior year, from $8.6 million to
$9.2 million. This increase resulted primarily from the conversion of the
GWINNETT DAILY POST to a five-day-a-week paper and the acquisition of
advertising only publications in September 1995. Newsprint costs increased
approximately 12% while consumption of newsprint increased approximately 7%.
Payroll related costs, promotional costs, product delivery costs and outside
service costs increased over the same period of the prior year.
45
<PAGE>
Corporate and administrative expenses for the six months ended June 30, 1996
increased $559,000, or 55.2%, over the same period of the prior year, from $1.0
million to $1.6 million. This increase was
attributable primarily to the addition of several new officers.
Depreciation of property and equipment and amortization of intangible assets
was $2.9 million for the six months ended June 30, 1996, compared to $1.8
million for the same period of the prior year, an increase of $1.1 million or
59.2%. This increase was primarily the result of higher depreciation and
amortization costs related to the Augusta Acquisition and $3.3 million of
capital expenditures made in 1995.
Non-cash compensation paid in Class A Common Stock resulting from the
Company's employment agreement with its former President and the Separation
Agreement (as defined) with its former chief executive officer decreased
$696,000, or 85.3%, for the six months ended June 30, 1996, from $816,000 to
$120,000. This decrease resulted from the Company's award in 1995 of 150,000
shares of Class A Common Stock to its former chief executive officer. The
expense for such award was recognized in 1995 (including $696,000 recognized in
the six months ended June 30, 1995).
INTEREST EXPENSE. Interest expense increased $1.7 million, or 60.6%, from
$2.8 million for the six months ended June 30, 1995 to $4.4 million for the six
months ended June 30, 1996. This increase was attributable primarily to
increased levels of debt resulting from the financing of the Augusta
Acquisition.
NET INCOME. Net income for the Company was $1.8 million for the six months
ended June 30, 1996, compared with $1.2 million for the same period in 1995, an
increase of $620,000 or 52.5%.
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
($12.9 million), (ii) the Publishing Acquisitions ($6.4 million) and (iii)
increases in total revenues of the Company of $2.8 million (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 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. 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 ($9.8
million) and the Publishing Acquisitions ($7.6 million).
46
<PAGE>
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 Separation 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 former President and its former chief
executive officer. The former President's employment agreement provided him with
122,034 shares of Class A Common Stock if his employment continued until
September 1999. 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 employment agreement with its former chief
executive officer, which resulted in an expense of $2.1 million, all of which
was recognized in 1995.
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. The interest rate swap
fixed the LIBOR base rate of the Old Credit Facility at 6.105% for the notional
amount. Under the terms of the interest rate swap, amounts were paid to or
received from Society National Bank ("Society"), the other party to the swap, on
a quarterly basis. The calculation of these amounts was based upon a comparison
of the results of multiplying the notional amount by (i) 6.105% and (ii)
Society's current three-month LIBOR rate. If Society's current three-month LIBOR
rate was lower than 6.105%, the Company paid Society the difference. If
Society's current three-month LIBOR rate was higher than 6.105%, Society paid
the Company the difference. Since the inception of the interest rate swap
agreement, the three-month LIBOR rates charged by Society have been consistent
with the three-month LIBOR rates published in THE WALL STREET JOURNAL. The
Company recorded approximately $34,000 of interest expense relative to the
interest rate swap in 1995. The effective interest rate of the Old Credit
Facility and interest rate swap at December 31, 1995 was approximately 8.64% and
9.10%, respectively.
NET INCOME. Net income for the Company was $931,000 for the year ended
December 31, 1995, compared with $2.8 million for the year ended December 31,
1994, a decrease of $1.8 million.
47
<PAGE>
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 ($4.4 million) and the 1994 Publishing Acquisitions ($2.1 million).
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.
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.
48
<PAGE>
NET INCOME. Net income for the Company was $2.8 million for the year ended
December 31, 1994, compared with $2.6 million for the year ended December 31,
1993, an increase of $200,000.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------- ------------------------------------
1993 1994 1995 1995 1996
------------------ ------------------ ------------------ ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
(DOLLARS IN THOUSANDS) AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
TELEVISION BROADCASTING
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $19,460.1 83.7% $21,524.3 83.4% $22,424.1 82.1% $10,774.3 81.6% $11,345.7 80.5%
Operating
income (1).............. 6,636.4 92.8 9,297.9 91.6 9,635.3 90.4 4,656.5 88.1 4,740.0 88.3
PAGING
Revenues................. $ 3,787.9 16.3% $ 4,276.6 16.6% $ 4,897.5 17.9% $2,422.9 18.4% $2,743.5 19.5%
Operating
income (1).............. 512.7 7.2 855.1 8.4 1,026.9 9.6 628.8 11.9 627.1 11.7
</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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------- ------------------------------------
1993 1994 1995 1995 1996
------------------ ------------------ ------------------ ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
REVENUES REVENUES REVENUES REVENUES REVENUES
OF OF OF OF OF
PHIPPS PHIPPS PHIPPS PHIPPS PHIPPS
(DOLLARS IN THOUSANDS) AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
TELEVISION BROADCASTING
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Local.................. $ 9,732.8 41.9% $10,412.2 40.4% $11,149.2 40.8% $5,359.3 40.6% $5,788.6 41.1%
National............... 7,057.2 30.4 7,217.0 27.9 7,844.9 28.7 3,808.7 28.9 3,597.7 25.5
Network compensation... 1,164.6 5.0 1,433.2 5.6 1,740.1 6.4 802.2 6.1 819.5 5.8
Political.............. 9.1 0.0 1,147.1 4.4 33.9 0.1 7.7 -- 239.2 1.7
Production and other
(1)................... 1,496.4 6.4 1,314.8 5.1 1,656.0 6.1 796.4 6.0 900.7 6.4
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
$19,460.1 83.7% $21,524.3 83.4% $22,424.1 82.1% $10,774.3 81.6% $11,345.7 80.5%
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
</TABLE>
- ------------------------
(1) Includes satellite broadcasting business.
49
<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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------- ------------------------------------
1993 1994 1995 1995 1996
------------------ ------------------ ------------------ ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
REVENUES REVENUES REVENUES REVENUES REVENUES
OF OF OF OF OF
PHIPPS PHIPPS PHIPPS PHIPPS PHIPPS
(DOLLARS IN THOUSANDS) AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
PAGING
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Paging lease and
service............... $ 3,741.6 16.1% $ 4,201.4 16.3% $ 5,004.9 18.3% $2,485.3 18.9% $2,922.8 20.8%
Other.................. 46.3 0.2 75.2 0.3 (107.4) (0.4) (62.4) (0.5) (179.3) (1.3)
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
$ 3,787.9 16.3% $ 4,276.6 16.6% $ 4,897.5 17.9% $2,422.9 18.4% $2,743.5 19.5%
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
--------- -------- --------- -------- --------- -------- -------- -------- -------- --------
</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 and for
the six months ended June 30, 1995 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995 1995 1996
----------- ----------- ----------- ------------- -------------
Operating income......... $4,686.9 $7,667.6 $7,381.8 $3,746.4 $4,632.6
<S> <C> <C> <C> <C> <C>
Add:
Amortization of program
license rights........ 1,552.4 1,021.4 844.8 422.4 463.9
Depreciation and
amortization.......... 2,836.0 2,672.2 3,120.4 1,435.5 1,530.0
Corporate overhead..... 2,462.2 2,485.4 3,280.4 1,538.7 734.5
Less:
Payments for program
license liabilities... (1,072.0) (863.3) (931.0) (464.5) (592.0)
----------- ----------- ----------- ------------- -------------
Media Cash Flow (1)...... $10,465.5 $12,983.3 $13,696.4 $6,678.5 $6,769.0
----------- ----------- ----------- ------------- -------------
----------- ----------- ----------- ------------- -------------
</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. Of Media Cash Flow, $5.7 million and $5.8 million
was attributable to the Phipps Business's broadcasting operations for the
six months ended June 30, 1995 and 1996, respectively.
CASH FLOW PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCING ACTIVITIES
The following table sets forth certain operating data for the Phipps
Business for the years ended December 31, 1993, 1994 and 1995 and for the six
months ended June 30, 1995 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995 1995 1996
----------- ----------- ----------- ------------- -------------
Cash flows provided by
(used in):
<S> <C> <C> <C> <C> <C>
Operating activities... $7,397 $9,808 $9,259 $4,136 $6,191
Investing activities... (2,953) (2,506) (3,828) (3,152) (840)
Financing activities... (4,418) (7,233) (4,906) (917) (5,309)
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
REVENUES. Total revenues for the six months ended June 30, 1996 increased
$893,000, or 6.8%, over the six months ended June 30, 1995, from $13.2 million
to $14.1 million. This increase was attributable to an improvement in local and
political advertising revenue in the broadcasting operations and the
implementation of a reseller program in the paging operations.
Broadcast net revenues increased $572,000, or 5.3%, over the same period of
the prior year, from $10.8 million to $11.4 million. Approximately $429,000,
$17,000, $232,000 and $104,000 of the increase in total
50
<PAGE>
broadcast net revenues was due to higher local advertising revenue, network
compensation, political advertising revenue and production revenues,
respectively, offset by a $211,000 decrease in national advertising revenue. In
addition, revenues generated from satellite broadcasting operations increased
due to additional equipment coming on line.
Net paging revenues increased $321,000, or 13.2%, over the same period of
the prior year, from $2.4 million to $2.7 million. The increase was attributable
primarily to higher sales volume generated by a reseller program implemented
during 1995.
OPERATING EXPENSES. Operating expenses for the six months ended June 30,
1996 remained relatively unchanged from the six months ended June 30, 1995. An
increase of $716,000 in broadcast and paging expenses was offset by a reduction
in management fees of $804,000.
Broadcasting expenses increased $347,000, or 6.9%, over the same period of
the prior year, from $5.1 million to $5.4 million. The increase was attributable
primarily to higher payroll and related costs, higher levels of other
expenditures in the sales and news departments and additional costs associated
with new equipment. Paging expenses increased $369,000, or 26.1%, over the same
period of the prior year, from $1.4 million to $1.8 million. The increase was
attributable primarily to higher payroll, sales and operating costs associated
with revenue growth.
Management fees for the six months ended June 30, 1996 decreased $804,000,
or 52.3%, from the same period of the prior year, from $1.5 million to $734,000.
The decrease was attributable to lower personnel costs and the termination of
certain executive benefit plans.
Depreciation of property and equipment and amortization of intangible assets
for the six months ended June 30, 1996 increased $94,000, or 6.6%, over the same
period of the prior year, from $1.4 million to $1.5 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 decreased $64,000, or 29.1% from the
same period of the prior year from $223,000 to $158,000.
NET INCOME. The net income for the Phipps Business was $4.2 million for the
six months ended June 30, 1996 compared with $3.3 million for the six months
ended June 30, 1995, an increase of $910,000 or 27.9%.
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 $620,000, 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.
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.
51
<PAGE>
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.
Management fees 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.
NET INCOME. Net income for the Phipps broadcasting and paging operations
was $6.3 million for the year ended December 31, 1995 compared with $7.2 million
for the year ended December 31, 1994, a decrease of $871,000.
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 $19.4 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.
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 $2.7 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 $2.6 million. This decrease was
primarily the result of the completion of depreciation for certain items of
equipment purchased in 1988.
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.
NET INCOME. Net income for the Phipps Business was $7.2 million for the
year ended December 31, 1994, compared with $3.9 million for the year ended
December 31, 1993, an increase of $3.3 million.
52
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Following the consummation of the Phipps Acquisition, the Financing, the
Offering and the Concurrent 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 Old Credit Facility or the Senior Credit Facility, will be sufficient
for such purposes for the remainder of 1996 and for 1997.
The Company's working capital (deficiency) was $1.1 million, $(222,000) and
$3.5 million at December 31, 1994 and 1995, and June 30, 1996, respectively. The
working capital of the Phipps Business was $1.4 million, $2.6 million and $2.9
million at December 31, 1994 and 1995, and June 30, 1996, 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, and $3.8 million and
$6.8 million for the six months ended June 30, 1995 and 1996, 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, and $4.1
million and $6.2 million for the six months ended June 30, 1995 and 1996,
respectively.
The Company was provided $3.0 million in cash in 1993 from investing
activities and used $42.8 million and $8.9 million of cash in investing
activities in 1994 and 1995, respectively. The change of $45.8 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's cash
used in investing activities was $5.4 million and $37.5 million for the six
months ended June 30, 1995 and 1996, respectively. The increased usage of $32.1
million was due primarily to the Augusta Acquisition. The Phipps Business's cash
used in investing activities was $3.2 million and $840,000 for the six months
ended June 30, 1995 and 1996, 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. 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 Old Credit Facility and through
the sale of the 8% Note to Bull Run. Long-term debt was $54.3 million and $82.8
million at December 31, 1995 and June 30, 1996, respectively. The balance of the
Old Credit Facility was $28.4 million and $49.5 million, at December 31, 1995
and June 30, 1996, respectively. The weighted average interest rate of the Old
Credit Facility was 8.94% at June 30, 1996. Principal maturities on long-term
debt at December 31, 1995 included $2.9 million and $5.0 million for the years
ended 1996 and 1997, respectively. The Company anticipates that its operating
cash flows, together with borrowings available under the Senior Credit Facility
will be sufficient to provide for such payments. 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. The Company was provided with $1.2 million and $31.4 million in
cash by financing activities for the six months ended June 30, 1995 and 1996,
respectively, due primarily to the funding of the Gwinnett Acquisition in 1995
and the Augusta Acquisition in 1996. The Phipps Business used $917,000 and $5.3
million in cash for financing activities for the six months ended June 30, 1995
and 1996, respectively.
Under the terms of the Old Credit Facility, the Company had additional
borrowing capacity at June 30, 1996 of approximately $4.8 million. Borrowings
under the Senior Credit Facility will be available upon the consummation of the
Phipps Acquisition. The availability of funds under the Senior Credit Facility
also will be subject to certain conditions, including the maintenance by the
Company of certain financial ratios consisting, among others, of a total debt to
operating cash flow ratio, a senior debt to operating cash flow
53
<PAGE>
ratio, an operating cash flow to total interest expense ratio and an operating
cash flow to pro forma debt service ratio. See "Description of Certain
Indebtedness -- The Senior Credit Facility." Under the Senior Credit Facility,
after giving effect to the consummation of the this Offering, the Concurrent
Offering, the KTVE Sale and the Phipps Acquisition (of which there can be no
assurance), the Company would have additional borrowing capacity of $10.1
million as of June 30, 1996. Under the terms of the Old Credit Facility, the
Company was allowed to make $3.0 million of capital expenditures in 1996. The
terms of the Senior Credit Facility allow for $5.0 million of capital
expenditures annually. The Company believes that cash flow from operations will
be sufficient to fund such expenditures, which will be adequate for the
Company's normal replacement requirements.
The Company regularly enters into program contracts for the right to
broadcast television programs produced by others and program commitments for the
right to broadcast programs in the future. Such programming commitments are
generally made to replace expiring or canceled program rights. Payments under
such contracts are made in cash or the concession of advertising spots for the
program provider to resell, or a combination of both. At December 31, 1995,
payments on program license liabilities due in 1996 and 1997, which will be paid
with cash from operations, were $1.2 million and $110,000, 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. During the six months ended June 30, 1996, the Company made
$1.3 million in capital expenditures, relating primarily to broadcasting
operations, and paid $1.3 million for program broadcast rights. During 1995, the
Phipps Business made $3.2 million in capital expenditures and paid $931,000 for
program broadcast rights. During the six months ended June 30, 1996, the Phipps
Business made $1.6 million in capital expenditures and paid $592,000 for program
broadcast rights. The Company anticipates making an aggregate of $3.0 million in
capital expenditures and $2.7 million in payments for program broadcast rights
during 1996. Subsequent to the consummation of the Phipps Acquisition, the
Company anticipates that its annual capital expenditures will approximate $5.0
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)
retire approximately $49.5 million principal amount of outstanding indebtedness
under the Old Credit Facility, together with accrued interest thereon, (ii)
retire approximately $25.0 million aggregate principal amount of outstanding
indebtedness under the Senior Note, together with accrued interest thereon and a
prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A
Preferred Stock in exchange for the 8% Note issued to Bull Run, (iv) issue to
Bull Run $10.0 million liquidation preference of its Series B Preferred Stock
with warrants to purchase up to 500,000 shares of Class A Common Stock
(representing 10.1% of the currently issued and outstanding Class A Common
Stock, after giving effect to the exercise of such warrants) for cash proceeds
of $10.0 million and (v) enter into the Senior Credit Facility which will
provide for a term loan and revolving credit facility aggregating $125.0
million. See "The Phipps Acquisition, the KTVE Sale and the Financing-The
Financing."
The Old Credit Facility is a $54.3 million line of credit available for
working capital requirements and general corporate purposes. The Old Credit
Facility matures in March 2003, provides for increasing quarterly amortization,
includes certain customary financial covenants and bears interest at a rate of
3.25% over LIBOR at July 31, 1996, subject to adjustment based on the Company's
leverage ratio. The Old 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. The Old Credit Facility is and the Senior Credit Facility will be
guaranteed by each of the Company's subsidiaries and is and will be secured by
liens on substantially all of the assets of the Company and its subsidiaries. As
part of the Financing, the Company will enter into the Senior Credit Facility
and the Company has entered into a commitment letter with respect thereto. See
"Description of Certain Indebtedness -- The Senior Credit Facility."
In August 1996, the Company sold the assets of KTVE for approximately $9.5
million in cash plus the amount of the accounts receivable on the date of the
closing. The Company estimates that the gain, net of estimated taxes and the
estimated taxes for the KTVE Sale will aggregate approximately $2.8 million and
$2.8 million, respectively.
54
<PAGE>
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 1031 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. As of June 30, 1996,
on a pro forma basis after giving effect to the KTVE Sale, the Concurrent
Offering, the Financing, the Phipps Acquisition and this Offering (of which
there can be no assurance), 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.
55
<PAGE>
BUSINESS
The Company owns and operates seven network-affiliated television stations
in medium-size markets in the southeastern United States, six of which are
ranked number one in their respective markets (which includes two television
stations that are part of the Phipps Business). Five of the stations are
affiliated with CBS and two are affiliated with NBC. In connection with the
Phipps Acquisition, the Company will be required under current regulations of
the FCC to divest its NBC affiliates in Albany, Georgia and Panama City,
Florida. For a discussion of the Company's plans regarding such divestiture, see
"Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the
KTVE Sale and the Financing." The Company also owns and operates three daily
newspapers, two shoppers and a paging business (which is part of the Phipps
Business), all located in the Southeast. The Company derives significant
operating advantages and cost saving synergies through the size of its
television station group and the regional focus of its television and publishing
operations. These advantages and synergies include (i) sharing television
production facilities, equipment and regionally oriented programming, (ii) the
ability to purchase television programming for the group as a whole, (iii)
negotiating network affiliation agreements on a group basis and (iv) purchasing
newsprint and other supplies in bulk. In addition, the Company believes that its
regional focus can provide advertisers with an efficient network through which
to advertise in the fast-growing Southeast.
In 1993, after the acquisition of a large block of Class A Common Stock by a
new investor, the Company implemented a strategy to foster growth through
strategic acquisitions. Since 1994, the Company's significant acquisitions have
included three television stations and two newspapers, all located in the
Southeast. As a result of the Company's acquisitions and in support of its
growth strategy, the Company has added certain key members of management and has
greatly expanded its operations in the television broadcasting and newspaper
publishing businesses.
In January 1996, the Company acquired WRDW serving Augusta, Georgia for
approximately $35.9 million in cash, including acquisition costs of
approximately $600,000, but excluding assumed liabilities of approximately $1.3
million. In December 1995, the Company entered into an asset purchase agreement
to acquire two CBS-affiliated stations, WCTV serving Tallahassee,
Florida/Thomasville, Georgia and WKXT in Knoxville, Tennessee, a satellite
broadcasting business and a paging business. The Company believes that the
Phipps Acquisition will further enhance the Company's position as a major
regional television broadcaster and is highly attractive for a number of
reasons, including (i) the stations' strategic fit within the Southeast, (ii)
WCTV's leading station market position and WKXT's significant growth potential,
(iii) strong station broadcast cash flows, (iv) opportunities for revenue growth
utilizing the Company's extensive management expertise with medium-size stations
and (v) opportunities for synergies between WCTV and WKXT and the Company's
existing stations with regard to revenue enhancement and cost controls. The
consummation of the Phipps Acquisition is currently expected to occur by
September 30, 1996, although there can be no assurance with respect thereto.
In August 1996, the Company sold the assets of KTVE, a television station
serving Monroe, Louisiana/ El Dorado, Arkansas, for approximately $9.5 million
in cash plus the amount of the accounts receivable on the date of the closing.
For the year ended December 31, 1995, on a pro forma basis, the Company had
net revenues, Media Cash Flow, operating cash flow and net (loss) of $90.6
million, $30.3 million, $28.1 million and $(3.4) million, respectively. For the
six months ended June 30, 1996, on a pro forma basis, the Company had net
revenues, Media Cash Flow, operating cash flow and net income of $47.3 million,
$17.9 million, $16.3 million and $322,000, respectively. Net revenues, Media
Cash Flow and operating cash flow on a pro forma basis for the year ended
December 31, 1995 increased 148.2%, 188.4%, and 227.9% respectively, while net
income decreased 224.7% from the historical amounts for the year ended December
31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma
basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%,
respectively, while net income decreased 72.8% from the historical amounts for
the six months ended June 30, 1995. The Company's pro forma net income for its
television stations for the year ended December 31, 1995 and for the six months
ended June 30, 1996 was $1.7 million and $1.4 million, respectively.
56
<PAGE>
The following table sets forth certain information for each of the Company's
television stations.
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------
IN-MARKET
SHARE YEAR ENDED
OF DECEMBER 31, 1995
STATION HOUSEHOLDS -------------------------------
NETWORK YEAR DMA CHANNEL/ RANK IN VIEWING OPERATING
STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV NET REVENUES INCOME (6)
- -------- ----------- ---------------- -------- -------- ---------- ------- --------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WKYT CBS Lexington, KY 1994 68 27/UHF (3) 1 33% $15,553 $ 5,247
WYMT CBS Hazard, KY 1994 68 57/UHF (3) 1(4) 24 3,721 831
WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853
WALB(5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795
WJHG(5) NBC Panama City, FL 1960 159 7/VHF 1 53 3,843 270
PHIPPS ACQUISITION
WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204
CBS Tallahassee, FL 116 6/VHF 1 60 11,862 4,229
Thomasville, GA
WCTV
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-------------------------------
OPERATING
STATION NET REVENUES INCOME (6)
- -------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C>
WKYT $ 7,845 $ 2,701
WYMT 2,107 530
WRDW 4,489 1,149
WALB(5) 5,099 2,658
WJHG(5) 2,409 476
PHIPPS A
WKXT 4,387 903
6,212 2,254
WCTV
</TABLE>
- ------------------------
(1) Ranking of DMA served by a station among all DMAs is measured by the number
of television households within the DMA based on the November 1995 Nielsen
estimates.
(2) Represents station rank in DMA as determined by November 1995 Nielsen
estimates of the number of television sets tuned to the Company's station
as a percentage of the number of television sets in use in the market for
the Sunday through Saturday 6 a.m. to 2 a.m. time period.
(3) All stations in the market are UHF stations.
(4) The market area served by WYMT is an 18-county trading area, as defined by
Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station
rank is based upon its position in the 18-county trading area.
(5) The Company will be required under current FCC regulations to divest WALB
and WJHG in connection with the Phipps Acquisition. For a discussion of the
Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The
Phipps Acquisition, the KTVE Sale and the Financing."
(6) Represents pro forma income before miscellaneous income (expense),
allocation of corporate overhead, interest expense and income taxes.
The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and
the GWINNETT DAILY POST and two shoppers had net revenues and operating income
(income before miscellaneous income (expense), allocation of corporate overhead,
interest expense and income taxes) on a pro forma basis of $21.9 million and
$660,000, respectively, for the year ended December 31, 1995, $11.3 million and
$1.3 million for the six months ended June 30, 1996, respectively. The satellite
broadcasting business and paging business, which are part of the Phipps
Business, had net revenues and operating income (income before miscellaneous
income (expense), allocation of corporate overhead, interest expense and income
taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended
December 31, 1995 and $3.5 million and $467,000 for the six months ended June
30, 1996, respectively.
57
<PAGE>
The following table sets forth certain information for each of the Company's
publications:
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------------
SIX MONTHS
ENDED JUNE
YEAR ENDED DECEMBER 31, 1995
30, 1996
---------------------------- -----------
OPERATING
PUBLISHED PER INCOME
PUBLICATION COVERAGE AREA CIRCULATION WEEK NET REVENUE (LOSS) (1) NET REVENUE
- ------------------------ ---------------- ---------------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
THE ALBANY HERALD 25 counties in 34,000 daily 7 $ 13,535 $ 2,010 $ 7,250
Southwest 40,000 Sunday
Georgia
THE ROCKDALE CITIZEN 2 counties in 10,000 6 3,854 (212) 1,739
Georgia (metro
Atlanta)
GWINNETT DAILY POST 1 county in 13,000 5 2,432 (913) 1,400
Georgia (metro
Atlanta)
SOUTHWEST GEORGIA 10 counties in 52,000 1 2,045 (224) 873
SHOPPERS Southwest
Georgia and 10
counties in
North Florida
<CAPTION>
OPERATING
INCOME
PUBLICATION (LOSS) (1)
- ------------------------ -----------
<S> <C>
THE ALBANY HERALD $ 1,929
THE ROCKDALE CITIZEN 34
GWINNETT DAILY POST (298)
SOUTHWEST GEORGIA (392)
SHOPPERS
</TABLE>
- ------------------------------
(1) Represents pro forma income before miscellaneous income (expense),
allocation of corporate overhead, interest expense and income taxes.
REGIONAL FOCUS
The Company's television stations and publications are all located in the
fast-growing southeastern United States. The Company believes that this regional
focus provides it with significant competitive advantages and has enabled it to
develop an expertise in serving medium-size southeastern markets. As a result of
its ownership of seven network-affiliated television stations in the Southeast,
the Company believes that there are opportunities to sell advertising to certain
sponsors on all or several of its stations as a single buy. Further, the
Company's ownership of multiple publications in several adjacent southeastern
communities provides an attractive and efficient channel through which to sell
local print advertising. The Company capitalizes on its regional presence by
transferring management personnel, equipment, programming and news content among
its stations and publications.
OPERATING STRATEGY
The Company has begun to introduce various operating strategies that have
been successfully implemented at WKYT in Lexington, Kentucky throughout its
station group. The Company's current President served as the general manager of
WKYT from 1982 to 1994 and developed and successfully implemented many of the
strategies being adopted at the Company's other stations. Set forth below are
the Company's operating strategies.
STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to
achieve a distinct local identity principally through the depth and focus of its
local news programming and by targeting specific audience groups with special
programs and marketing events. Each station's local news franchise is the core
component of the Company's strategy to strengthen audience loyalty and increase
revenues and Media Cash Flow for each station. Strong local news generates high
viewership and results in higher ratings both for programs preceding and
following the news. All of the Company's stations that offer comprehensive local
news coverage are the dominant local broadcast news source. WKXT in Knoxville,
Tennessee currently does not offer significant local news coverage; the Company
intends to significantly expand the news broadcast at this station after the
consummation of the Phipps Acquisition.
Strong local news product also differentiates local broadcast stations from
cable system competitors, which generally do not provide this service. The cost
of producing local news programming generally is lower than other sources of
programming and the amount of such local news programming can be increased or
decreased on very short notice, providing the Company with greater programming
flexibility.
58
<PAGE>
The Company believes that its strong commitment to local broadcasting is
integral to its ability to serve each of the communities in which it operates.
In each of its markets, the Company develops information-oriented programming
which expands the Company's hours of commercially valuable local programming
with relatively small increases in operating expenses. In addition, each station
utilizes special programming and marketing events, such as prime-time
programming of local interest or sponsored community events, to strengthen
community relations and increase advertising revenues. For example, certain of
the Company's stations offer state governor call-in shows, local medical shows
and cover local sporting events. The Company requires its senior staff to become
actively involved in community affairs in an effort to better understand the
issues in each community in which it operates.
A key component of the Company's publishing strategy is an emphasis on
strong local content in its publications. Consequently, the Company focuses on
local news, sports and lifestyle issues in order to foster reader loyalty with
the objective of raising circulation and advertising rates. The Company's
publications also sponsor community events such as bridal expositions with the
objective of strengthening community relationships and building advertising
revenues.
TARGETED MARKETING. The Company seeks to increase its advertising revenues
and Media Cash Flow by expanding existing relationships with local and national
advertisers and by attracting new advertisers through targeted marketing
techniques and carefully tailored programming. The Company sells advertising
locally through its sales employees and nationally through representative firms
with which the Company enters into representation agreements. The Company works
closely with advertisers to develop advertising campaigns that match
specifically targeted audience segments with the advertisers' overall marketing
strategies. With this information, the Company regularly refines its programming
mix among network, syndicated and locally-produced shows in a focused effort to
attract audiences with demographic characteristics desirable to advertisers. As
a result of implementing this strategy, WKYT's share of advertising dollars
exceeded its in-market share of households viewing television by 15% in 1995.
The Company's success in increasing advertising revenues at both its
stations and publications is also attributable, in part, to the implementation
of training programs for its marketing consultants that focus on innovative
sales techniques, such as events marketing and demographic-specific projects,
that target specific advertisers. The Company trains its marketing consultants
to sell not only advertising spots, but also non-traditional advertising such as
billboards for sponsored sports events and weather forecasts within newscasts.
In addition, performance based compensation arrangements and performance
accountability systems have contributed to the Company's success in increasing
local advertising revenues. The Company has also benefitted from sharing ideas
and information for increasing advertising revenues among its station group and
publications. The Company's targeted marketing focus also includes the following
key elements:
- NON-TRADITIONAL REVENUE SOURCES. The Company uses its stations' and
publications' local promotional power in order to increase revenues from
non-traditional sources by sponsoring and staging various special events,
such as boat shows, fitness shows, bridal expositions and fishing
tournaments. The Company derives revenues through the promotion,
production and advertising sales generated by these events.
- VENDOR MARKETING. The Company engages in targeted vendor marketing whereby
it contacts major vendors that supply a particular store or retail chain,
and the management at a particular store or retail chain in order to
arrange for the vendors to purchase local television advertising. The
store or retail chain in turn agrees to purchase additional products from
the vendor and also benefits from the increased local television
advertising presence. As a result of this vendor marketing, the Company's
stations are able to sell advertising to promote a local retailer, which
the local retailer would not normally have purchased for itself.
COST CONTROLS. Through its strategic planning and annual budgeting
processes, the Company continually seeks to identify and implement cost savings
opportunities at each of its stations and publications in order to increase
Media Cash Flow. The Company closely monitors expenses incurred by each of its
stations
59
<PAGE>
and publications and continually reviews their performance and productivity.
Additionally, the Company seeks to minimize its use of outside firms and
consultants by relying on its in-house production and design capability.
In order to further reduce costs, the Company capitalizes on its regional
focus through its ability to produce programming at one station which can be
used by many of the Company's other stations. Further, the size of the Company's
station group and its ownership of multiple publications gives it the ability to
negotiate favorable terms with programming syndicators, newsprint suppliers,
national sales representatives and other vendors. For example, the Company
recently entered into a new agreement with its national sales representative,
which significantly reduced the commissions payable by the Company for national
advertising. Due to the proximity of the Company's operations, the Company's
stations and publications share equipment, programming and management expertise.
In addition, each station and publication reduces its corporate overhead costs
by utilizing group benefits such as insurance and employee benefit plans
provided by the Company.
ACQUISITION STRATEGY
The Company focuses on medium-size markets in the Southeast because the
Company believes these markets offer superior opportunities in terms of
projected population and economic growth, leading to higher advertising and
circulation revenues. The Company intends to continue to consider additional
acquisitions of television stations and publications that serve these markets.
The Company has focused on acquiring television stations where it believes there
is potential for improvements in revenue share, audience share and cost control.
In assessing acquisitions, the Company targets stations where it sees specific
opportunities for revenue enhancement utilizing management's significant
experience in local and national advertising sales and in operating similar
stations in the Southeast. In addition, projections of growth in the particular
market are taken into account. The Company also targets stations and
publications for which it can control expenditures as it expands the operation's
revenue base. Typical cost savings arise from (i) reducing staffing levels and
sharing management with other stations and publications, (ii) utilizing in-house
production and design expertise, (iii) substituting more cost effective employee
benefit programs, (iv) reducing travel and other non-essential expenses and (v)
optimizing the purchase of newsprint and other supplies. Other than the Phipps
Acquisition, the Company does not presently have any agreements to acquire any
television stations or publications. See "The Phipps Acquisition, the KTVE Sale
and the Financing." In appropriate circumstances, the Company will dispose of
assets that it deems non-essential to its operating or growth strategy.
[Map of certain states in the southeast United States that sets forth state
capitals and locations of the Company's stations]
TELEVISION BROADCASTING
THE COMPANY'S STATIONS AND THEIR MARKETS
AS USED IN THE TABLES FOR EACH OF THE COMPANY'S STATIONS IN THE FOLLOWING
SECTION (I) "GROSS REVENUES" REPRESENT ALL OPERATING REVENUES EXCLUDING BARTER
REVENUES; (II) "MARKET REVENUES" REPRESENT GROSS ADVERTISING REVENUES, EXCLUDING
60
<PAGE>
BARTER REVENUES, FOR ALL COMMERCIAL TELEVISION STATIONS IN THE MARKET, AS
REPORTED IN INVESTING IN TELEVISION 1995 MARKET REPORT, 4TH EDITION JULY 1995
RATINGS PUBLISHED BY BIA PUBLICATIONS, INC., EXCEPT FOR REVENUES IN WYMT-TV'S
("WYMT") 18-COUNTY TRADING AREA WHICH IS NOT SEPARATELY REPORTED IN SUCH BIA
PUBLICATIONS, INC.'S REPORT; (III) "IN-MARKET SHARE OF HOUSEHOLDS VIEWING
TELEVISION" REPRESENTS THE PERCENTAGE OF THE STATION'S AUDIENCE AS A PERCENTAGE
OF ALL VIEWING BY HOUSEHOLDS IN THE MARKET FROM 6 A.M. TO 2 A.M. SUNDAY THROUGH
SATURDAY, INCLUDING VIEWING OF NON-COMMERCIAL STATIONS, NATIONAL CABLE CHANNELS
AND OUT-OF-MARKET STATIONS BROADCAST OR CARRIED BY CABLE IN THE MARKET; AND (IV)
"STATION RANK IN DMA" IS BASED ON NIELSEN ESTIMATES FOR NOVEMBER OF EACH YEAR
FOR THE PERIOD FROM 6 A.M. TO 2 A.M. SUNDAY THROUGH SATURDAY.
<TABLE>
<CAPTION>
IN-MARKET
COMMERCIAL STATION SHARE OF
DMA STATIONS RANK IN TELEVISION MARKET REVENUES HOUSEHOLDS
STATION MARKET RANK(1) IN DMA(2) DMA HOUSEHOLDS(3) IN DMA FOR 1995 VIEWING TV
- -------- ---------------- ------- ---------- ------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
WKYT Lexington, KY 68 5 1 387,000 $46,100 33%
WYMT (4) Hazard, KY 68 N/A 1 169,000 4,100 24
WRDW Augusta, GA 111 4 1 221,000 26,300 36
WALB (5) Albany, GA 152 3 1 132,000 12,200 80
WJHG (5) Panama City, FL 159 4 1 110,000 8,500 53
PHIPPS ACQUISITION(6)
WKXT Knoxville, TN 62 4 3 429,000 57,900 22
WCTV Tallahassee, FL/ 116 4 1 210,000 19,900 60
Thomasville, GA
</TABLE>
- ------------------------------
(1) Ranking of DMA served by a station among all DMAs is measured by the number
of television households based within the DMA on the November 1995 Nielsen
estimates.
(2) Includes independent broadcasting stations.
(3) Based upon the approximate number of television households in the DMA as
reported by the November 1995 Nielsen index.
(4) The market area served by WYMT is an 18-county trading area, as defined by
Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station
rank is based upon its position in the 18-county trading area.
(5) The Company will be required to divest WALB and WJHG in connection with the
Phipps Acquisition. For a discussion of the Company's plans, see "Risk
Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE
Sale and the Financing."
(6) The closing of the Phipps Acquisition is expected to occur by September 30,
1996, although there can be no assurance with respect thereto.
The following is a description of each of the Company's stations:
WKYT, THE CBS AFFILIATE IN LEXINGTON, KENTUCKY
WKYT, acquired by the Company in September 1994, began operations in 1957.
Lexington, Kentucky is the 68th largest DMA in the United States, with
approximately 387,000 television households and a total population of
approximately 1.1 million. Total Market Revenues in the Lexington DMA in 1995
were approximately $46.1 million, a 6% increase over 1994. WKYT's gross revenues
for the year ended December 31, 1995 and the six months ended June 30, 1996 were
approximately $17.6 million and $8.8 million, respectively, an increase of 14.6%
and a decrease of 1.2% from the corresponding prior periods. WKYT's net income
(before the allocation of corporate and administrative expenses and after
estimated income taxes computed at statutory rates) for the year ended December
31, 1995 and the six months ended June 30, 1996 was approximately $1.2 million
and $630,000, respectively, a decrease of 36.7% and 19.4%, respectively, from
the corresponding prior periods. The Lexington DMA has five licensed commercial
television stations, including WYMT, WKYT's sister station, all of which are
affiliated with major networks. The Lexington DMA also has one public television
station.
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The following table sets forth Market Revenues for the Lexington DMA and
in-market share and ranking information for WKYT:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
---------- ---------- ----------
Market Revenues in DMA $39,500 $43,500 $46,100
<S> <C> <C> <C>
Market Revenues growth over prior year 13% 10% 6%
In-market share of households viewing television 38% 37% 33%
Rank in market 1 1 1
</TABLE>
MARKET DESCRIPTION. The Lexington DMA consists of 38 counties in central
and eastern Kentucky. The Lexington area is a regional hub for shopping,
business, healthcare, education, and cultural activities and has a comprehensive
transportation network and low commercial utility rates. Major employers in the
Lexington area include Toyota Motor Corp., Lexmark International, Inc., GTE
Corporation, Square D Company, Ashland, Inc. and International Business Machines
Corporation. Toyota Motor Corp. operates a large production facility near
Lexington, employing 6,000 people and in May 1995 announced plans to build its
next generation mini-van at this facility. Eight hospitals and numerous medical
clinics are located in Lexington, reinforcing Lexington's position as a regional
medical center. The University of Kentucky which is located in Lexington, is
also a major employer with approximately 10,000 employees, and has a full time
enrollment of approximately 24,000 students. In addition, Lexington is an
international center of the equine industry with the Kentucky Horse Park, a
1,000 acre park that attracts approximately 700,000 visitors annually.
STATION PERFORMANCE. WKYT, which operates on channel 27, is a CBS
affiliate. WKYT can be viewed on 86 cable systems in its DMA and 51 cable
systems outside its DMA. In 1995, WKYT celebrated its 20th consecutive year as
the Lexington DMA's most watched local news program. Every broadcast of "27
Newsfirst"-at 6 a.m., noon, 5 p.m., 5:30 p.m., 6 p.m. and 11 p.m.-continues to
be the number one rated program in its time period. WKYT's news programs also
provide support and coverage of local events through public service
announcements, on-air bulletin boards and special reports, such as
CRIMESTOPPERS, 27 ON THE TOWN and HOMETOWN HEROES. Based on the November 1995
Nielsen index, WKYT is ranked number one in its market, with a 33% in-market
share of households viewing television, which is five percentage points ahead of
the competition. WKYT received 38% of the Lexington DMA's Market Revenues in
1995. The station attributes its success to the experience of its senior
management and local sales staff, which focus on developing strong relationships
with local advertisers and devoting significant attention to the quality and
content of WKYT's local news programming.
Since the 1970's WKYT has been the flagship station for the University of
Kentucky Sports Network, producing sports events and coaches' shows, such as the
RICK PITINO COACH'S SHOW a half-hour show featuring the University of Kentucky
Basketball coach, that air on a 10-station network across Kentucky. Although
WKYT focuses on the most popular University of Kentucky Wildcat sports,
basketball and football, the station also features other intercollegiate sports,
such as baseball, tennis and swimming/diving.
WKYT has a full mobile production unit that produces a variety of events,
including sports events, beauty pageants and horse racing. In addition, WKYT has
a Doppler Weather Radar System, the latest technology available in weather
forecasting. In 1995, WKYT spent over $1.3 million on capital improvements,
including a complete studio and master control room renovation and the addition
of Maxigrid, an inventory management system.
Cross-promotion and partnerships with radio, newspapers and businesses are a
source of non-traditional revenue as well as a means of community involvement.
WKYT is also party to the first joint venture in the Lexington market through
its production of a 10 p.m. newscast for WDKY-TV, an affiliate of the Fox
Broadcasting Company ("Fox") in Lexington, which provides additional exposure
for the station's news talent as well as a new source of revenue for WKYT.
Local programming produced by WKYT includes SCOTT'S PLACE, a weekly
half-hour children's show which is carried on WALB, WJHG and WRDW, and
DIRECTIONS and 27 NEWSMAKERS, two weekly public affairs
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<PAGE>
programs dealing with minority and government and political issues,
respectively. In addition, WKYT also carries programming provided by CBS and
syndicated programming, including OPRAH!, JEOPARDY!, WHEEL OF FORTUNE and THE
ANDY GRIFFITH SHOW.
The Company's former President and the current station manager at WALB are
both former members of senior management at WKYT.
WYMT, THE CBS AFFILIATE IN HAZARD, KENTUCKY
WYMT, acquired by the Company in September 1994, began operations in 1985.
WYMT has carved out a niche trading area comprising 18 counties in eastern and
southeastern Kentucky. This trading area is a separate market area of the
Lexington, Kentucky DMA with approximately 169,000 television households and a
total population of approximately 463,000. WYMT is the only commercial
television station in this 18-county trading area. WYMT's gross revenues for the
year ended December 31, 1995 and the six months ended June 30, 1996 were
approximately $4.1 million and $2.3 million, respectively, an increase of 8.8%
and 15.8%, respectively, from the corresponding prior periods. WYMT's net income
(before the allocation of corporate and administrative expenses and after
estimated income taxes computed at statutory rates) for the year ended December
31, 1995 and the six months ended June 30, 1996 was approximately $32,000 and
$75,000, respectively, a decrease of 88.9% and an increase of 32.6%,
respectively, from the corresponding prior periods. WYMT is the sister station
of WKYT and shares many resources and simulcasts some local programming with
WKYT.
The following table sets forth Market Revenues for the 18-county trading
area and ranking information for WYMT (based upon its position in its 18-county
trading area):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
---------- ---------- ----------
Market Revenues in the 18-county trading area (1) $3,500 $3,800 $4,100
<S> <C> <C> <C>
Market Revenues growth over prior year 12% 8% 9%
In-market share of households viewing television 25% 20% 24%
Rank in market 1 1 1
</TABLE>
(1) Represents the gross revenues of WYMT, which is the only commercial
television station in the 18-county trading area. The Company is unable to
determine the amount of Market Revenue for the 18-county trading area which
may be attributable to other television stations serving the Lexington DMA.
MARKET DESCRIPTION. The mountain region of eastern and southeastern
Kentucky where Hazard is located is on the outer edges of four separate markets:
Bristol-Kingsport-Johnson City, Charleston-Huntington, Knoxville and Lexington.
Prior to 1985, mountain residents relied primarily on satellite dishes and cable
television carrying distant signals for their television entertainment and news.
Established in 1985, WYMT is the only broadcast station which can be received
over the air in a large portion of its 18-county trading area and may now be
viewed on 100 cable systems.
The trading area's economy is centered around coal and related industries
and some light manufacturing. In recent years, the coal industry has undergone a
major restructuring due to consolidation in the industry and advances in
technology. Approximately 10,700 manufacturing jobs exist in the Hazard trading
area, most of which are concentrated in the Cumberland Valley area, a Kentucky
Area Development District located in the southern portion of the 18-county
trading area.
STATION PERFORMANCE. WYMT, which operates on channel 57, is a CBS
affiliate. WYMT is ranked number one, based on November 1995 Nielsen estimates,
in its trading area with a 24% in-market share of households viewing television,
which is nine points ahead of the competition. WYMT's Mountain News at 6:30
a.m., 6 p.m. and 11 p.m. is ranked number one in the 18-county trading area.
WYMT's Mountain News at 6 p.m. is ranked number two in the entire Lexington DMA
by Nielsen, behind only its sister station WKYT. In addition to the Mountain
News, WYMT simulcasts WKYT's 6 a.m., noon, 5 p.m. and 5:30 p.m. newscasts Monday
through Friday, all of which rank number one in the 18-county trading area. WYMT
includes local inserts into these simulcasted news programs in order to add an
enhanced degree of local content. The station attributes its success to its
position as the only commercial broadcaster in the 18-county trading area and to
customer and community loyalty.
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<PAGE>
WYMT considers its news department to be a key component of its operations.
The station is strategically positioned with a central newsroom in Hazard and
two satellite news bureaus, one in Middlesboro, Kentucky (the Cumberland Valley)
and one in Harold, Kentucky (the Big Sandy region). Microwave links to these
regional news bureaus and to WYMT's sister station WKYT in Lexington, Kentucky,
provide the news operation with the ability to report on, coordinate and share
the latest news information and coverage throughout the mountain region and from
Lexington.
In 1994 WYMT installed a state-of-the-art digital playback system in its
master control room. This new system has allowed WYMT to adopt a computer-based
playback format that has resulted in significant cost savings and an improved
on-air appearance.
Strong local business and general community relations are an important
component of WYMT's success. WYMT continues to develop partnerships with current
and potential new clients through the production of various special annual
events that also serve to strengthen community ties and enhance advertising
revenue. Examples of such events include the Mountain Basketball Classic, the
Charity Golf Classic and the Boat and RV Show.
WRDW, THE CBS AFFILIATE IN AUGUSTA, GEORGIA
WRDW, acquired by the Company in January 1996, began operations in 1954.
Augusta, Georgia is the 111th largest DMA in the United States, with
approximately 221,000 television households and a total population of
approximately 627,000. Total Market Revenues in the Augusta DMA in 1995 were
approximately $26.3 million, a 6% increase over 1994. WRDW's gross revenues for
the year ended December 31, 1995 and the six months ended June 30, 1996 were
approximately $9.6 million and $5.0 million, respectively, an increase of 5.7%
and 6.3%, respectively, from the corresponding prior periods. WRDW's net income
(before the allocation of corporate and administrative expenses and after
estimated income taxes computed at statutory rates) for the year ended December
31, 1995 was approximately $1.4 million, an increase of 4.9%, from the
corresponding prior period. WRDW's net loss (before the allocation of corporate
and administrative expenses and after estimated income taxes computed at
statutory rates) for the six months ended June 30, 1996 was approximately
$372,000 as compared to net income of approximately $717,000, from the
corresponding prior period. The Augusta DMA has four licensed commercial
television stations, all of which are affiliated with a major network. The
Augusta DMA also has two public television stations.
The following table sets forth Market Revenues for the Augusta DMA and
in-market share and ranking information for WRDW:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
---------- ---------- ----------
Market Revenues in DMA $22,800 $24,800 $26,300
<S> <C> <C> <C>
Market Revenues growth over prior year 8% 9% 6%
In-market share of households viewing television 36% 36% 36%
Rank in market 1 1 1
</TABLE>
MARKET DESCRIPTION. The Augusta DMA consists of 19 counties in eastern
Georgia and western South Carolina, including the cities of Augusta, Georgia and
North Augusta and Aiken, South Carolina. The Augusta, Georgia area is one of
Georgia's major metropolitan/regional centers, with a particular emphasis on
health services, manufacturing and the military. The Federal government employs
over 12,500 military and 4,600 civilian personnel at the Department of Energy's
Savannah River Site, a nuclear processing plant, and Fort Gordon, a U.S. Army
military installation. Augusta has eight large hospitals which collectively
employ 20,000 and reinforce Augusta's status as a regional healthcare center.
Augusta is also home to the Masters Golf Tournament, which has been broadcast by
CBS for 41 years.
STATION PERFORMANCE. WRDW, which operates on channel 12, is a CBS
affiliate. Based on November 1995 Nielsen estimates, WRDW is ranked number one
in its market, with a 36% in-market share of households viewing television,
which is one share point ahead of the competition. WRDW also received 36%
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<PAGE>
of the Augusta DMA's Market Revenues in 1995. WRDW can be viewed on all 29 cable
systems in its DMA and nine cable systems outside of its DMA. Since 1992, WRDW
has risen from a weak second-place ranking to the number one position. WRDW's
weekday news programs at 6 a.m., noon, 5 p.m., 11 p.m., and four weekend slots
are ranked number one in household rating and share. WRDW attributes its number
one position in the market to its strong syndicated programming which leads into
and out of its weekly news programs as well as its expanded local news coverage.
WRDW was also the leader in prime time in the November 1995 Nielsen estimates.
WRDW has positioned itself as "Your 24 Hour News Source" in the DMA. In January
1996, WRDW began providing local cut-ins to the CNN news slots on cable, with
all revenues from commercial inserts going to the station. In addition, as the
local CBS affiliate in the DMA, WRDW produces local Masters programming, such as
THE GREEN JACKET PROGRAM, a show hosted by Paul Davis that includes interviews
with many golf celebrities.
The station also produces its own local programming, including INSIDE
AGRICULTURE, a weekly program and PAINE COLLEGE PRESENTS, a bi-monthly local
public affairs show. In addition to carrying the programming provided by CBS,
WRDW carries syndicated programming including: OPRAH!, INSIDE EDITION, WHEEL OF
FORTUNE and JEOPARDY!
WALB, THE NBC AFFILIATE IN ALBANY, GEORGIA
WALB was founded by the Company and began operations in 1954. Albany,
Georgia is the 152nd largest DMA in the United States with approximately 132,000
television households and a total population of approximately 380,000. Total
Market Revenues in the Albany DMA in 1995 were approximately $12.2 million, a 5%
increase over 1994. WALB's gross revenues for the year ended December 31, 1995
and for six months ended June 30, 1996 were approximately $10.5 million and $5.6
million, respectively, an increase of 3.5% and 7.9%, respectively, from the
corresponding prior periods. WALB's net income (before the allocation of
corporate and administrative expenses and after estimated income taxes computed
at statutory rates) for the year ended December 31, 1995 and the six months
ended June 30, 1996 was approximately $3.0 million and $1.7 million,
respectively, an increase of 3.8% and 11.3%, respectively, from the
corresponding prior periods. The Albany DMA has three licensed commercial
television stations, two of which are affiliated with major networks. The Albany
DMA also has two public television stations.
The following table sets forth Market Revenues for the Albany DMA and
in-market share and ranking information for WALB:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
---------- ---------- ----------
Market Revenues in DMA $10,900 $11,600 $12,200
<S> <C> <C> <C>
Market Revenues growth over prior year 8% 6% 5%
In-market share of households viewing television 81% 80% 80%
Rank in market 1 1 1
</TABLE>
MARKET DESCRIPTION. The Albany DMA, consists of 17 counties in southwest
Georgia. Albany, 170 miles south of Atlanta, is a regional center for
manufacturing, agriculture, education, health care and military service. Leading
employers in the area include: The Marine Corps Logistics Base, Phoebe Putney
Memorial Hospital, The Proctor & Gamble Company, Miller Brewing Company, Cooper
Tire & Rubber Company, Bob's Candies, Coats and Clark Inc., Merck & Co., Inc.,
MacGregor (USA) Inc. and M&M/Mars. Albany State College, Darton College and
Albany Technical Institute are located within this area.
STATION PERFORMANCE. WALB, which operates on channel 10, is the only VHF
station in the Albany DMA and is an NBC affiliate. Based on the November 1995
Nielsen estimates, WALB is ranked number one in its market, with an 80%
in-market share of households viewing television, which is 63 share points ahead
of the competition. WALB has the strongest signal in its DMA and can be viewed
on all of the 26 cable systems in its DMA and 51 cable systems outside of its
DMA. WALB received 86% of the Albany DMA's Market Revenues in 1995.
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<PAGE>
WALB is known as "South Georgia's Number One News Source." The station's
news is its primary focus. WALB is the number one local news source in all of
its time slots. WALB is the only station in its market with both electronic and
satellite news gathering trucks, allowing the Company to provide live coverage.
WALB broadcasts three hours and 20 minutes of news weekdays and one hour of news
each weekend day.
WALB considers its dedication to the community to be a key component of its
operations. For example, WALB devoted substantial resources in 1994 to expand
its local news coverage and programming. Such investment allowed WALB to provide
the most extensive flood coverage available to viewers during the flood in July
1994, which was one of the largest natural disasters to occur in Georgia in
recent history. This coverage made WALB one of the top-rated stations in the
United States in terms of in-market share of households viewing television in
July 1994, as measured by Nielsen. In addition, the Georgia Broadcasters
Association presented WALB with two of its top awards in 1994: the "1994 TV
Community Service Award" for its dedication to providing local community service
and the "1994 TV Station Promotion of the Year" award for the station's nearly
year long broadcast of its "Learn to Read" program.
The station produces its own local programming including TOWN AND COUNTRY, a
live morning show that travels to various locations in Georgia and DIALOG, a
weekly public affairs show focusing on minority issues. In addition to carrying
programming supplied by NBC, WALB carries syndicated programming, including
OPRAH!, ENTERTAINMENT TONIGHT, THE ANDY GRIFFITH SHOW, MONTEL WILLIAMS, RICKI
LAKE, AMERICAN JOURNAL, and HARD COPY.
The Company will be required to divest this station pursuant to existing FCC
regulations. See "Risk Factors-FCC Divestiture Requirement" and "The Phipps
Acquisition, the KTVE Sale and the Financing."
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WJHG, THE NBC AFFILIATE IN PANAMA CITY, FLORIDA
WJHG, acquired by the Company in 1960, began operations in 1953. Panama
City, Florida is the 159th largest DMA in the United States, with approximately
110,000 television households and a total population of approximately 298,000.
Total Market Revenues in the Panama City DMA in 1995 were approximately $8.5
million, a 6% increase over 1994. WJHG's gross revenues for the year ended
December 31, 1995 and for the six months ended June 30, 1996 were approximately
$4.3 million and $2.7 million, respectively, an increase of 7.7% and 32.2%,
respectively, from the corresponding prior periods. WJHG's net income (before
the allocation of corporate and administrative expenses and after estimated
income taxes computed at statutory rates) for the year ended December 31, 1995
and for the six months ended June 30, 1996 was approximately $205,000 and
$305,000, respectively, an increase of 84.8% and 184.1%, respectively, from the
corresponding prior periods. The Panama City DMA has four licensed commercial
television stations, three of which are affiliated with major networks. In
addition, a CBS signal is provided by a station in Dothan, Alabama, an adjacent
DMA. The Panama City DMA also has one public television station.
The following table sets forth Market Revenues for the Panama City DMA and
in-market share and ranking information for WJHG:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
---------- ---------- ----------
Market Revenues in DMA $7,400 $8,000 $8,500
<S> <C> <C> <C>
Market Revenues growth over prior year 11% 8% 6%
In-market share of households viewing television 51% 46% 53%
Rank in market 1 1 1
</TABLE>
MARKET DESCRIPTION. The Panama City DMA consists of nine counties in
northwest Florida. The Panama City market stretches north from Florida's Gulf
Coast to Alabama's southern border. The Panama City economy centers around
tourism, military bases, manufacturing, education and financial services. Panama
City is the county seat and principal city of Bay County. Leading employers in
the area include: Tyndall Air Force Base, the Navy Coastal Systems Station,
Sallie Mae Servicing Corp., Stone Container Corporation, Arizona Chemical
Corporation, Russell Corporation and Gulf Coast Community College. Panama City
is also a spring break destination for college students and drew approximately
550,000 students during 1995.
STATION PERFORMANCE. WJHG, which operates on channel 7, is an NBC
affiliate. Based on November 1995 Nielsen estimates, WJHG is ranked number one
in its market, with a 53% in-market share of households viewing television,
which is 17 share points ahead of the competition. WJHG received 50% of the
Panama City DMA's Market Revenues in 1995. WJHG can be viewed on all of the 36
cable systems in its DMA and on 29 cable systems outside its DMA.
WJHG dominates the Panama City market in all popular news time periods and
has twice the audience viewership at 5 p.m. and 10 p.m. as does the competition.
WJHG also has the number one news ranking in its market at 6:30 a.m., 6 p.m. and
on weekends. WJHG's ratings success in its newscasts have allowed it to increase
its overall unit rates and to negotiate for larger shares of advertisers'
national budgets. WJHG considers its news department to be a key component of
its operations and in 1994, devoted substantial resources to redesign the set,
purchase new cameras, add new graphics, develop a new logo and reformat
newscasts. As part of the continuing growth of its news product, WJHG recently
introduced the first noon newscast in Panama City.
WJHG has also launched a direct mail campaign to attract new advertisers to
the station. As a result of these factors, WJHG increased its gross revenues by
7.7% in 1995. WJHG is also focusing on other non-traditional revenue sources,
such as developing a health exposition, a children's fair and a wedding show,
all of which are scheduled to occur in 1996.
In addition to carrying programming provided by NBC, WJHG carries syndicated
programming, including WHEEL OF FORTUNE, JEOPARDY!, HARD COPY, MAURY POVICH,
JENNY JONES and RICKI LAKE.
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The Company will be required to divest this station pursuant to existing FCC
regulations. See "Risk Factors-FCC Divestiture Requirement" and "The Phipps
Acquisition, the KTVE Sale and the Financing."
WKXT, THE CBS AFFILIATE IN KNOXVILLE, TENNESSEE
WKXT, which is part of the Phipps Business, began operations in 1988. The
Phipps Acquisition is expected to occur in September 1996, although there can be
no assurance with respect thereto. Knoxville, Tennessee is the 62nd largest DMA
in the United States, with approximately 429,000 television households and a
total population of approximately 1.1 million. Total Market Revenues in the
Knoxville DMA in 1995 were approximately $57.9 million, a 6% increase over 1994.
WKXT's gross revenues for the year ended December 31, 1995 and the six months
ended June 30, 1996 were approximately $10.6 million and $5.0 million,
respectively, an increase of 2.3% and a decrease of 2.2%, respectively, from the
corresponding prior periods. WKXT's net income (before the allocation of
corporate and administrative expenses and after estimated income taxes computed
at statutory rates) for the year ended December 31, 1995 and the six months
ended June 30, 1996 was approximately $1.8 million and $836,000, respectively,
an increase of 8.3% and a decrease of 4.4%, respectively, from the corresponding
prior periods. The Knoxville DMA has four licensed commercial television
stations, all of which are affiliated with major networks. The Knoxville DMA
also has two public broadcasting stations.
The following table sets forth Market Revenues for the Knoxville DMA and
in-market share and ranking information for WKXT:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
---------- ---------- ----------
Market Revenues in DMA $47,900 $54,600 $57,900
<S> <C> <C> <C>
Market Revenues growth over prior year 14% 14% 6%
In-market share of households viewing television 24% 23% 22%
Rank in market 3 3 3
</TABLE>
MARKET DESCRIPTION. The Knoxville DMA, consisting of 22 counties in eastern
Tennessee and southeastern Kentucky, includes the cities of Knoxville, Oak Ridge
and Gatlinburg, Tennessee. The Knoxville area is a center for education,
manufacturing, healthcare and tourism. The University of Tennessee's main campus
is located within the city of Knoxville. It employs approximately 6,400 people
and has an enrollment of approximately 26,000 students. Leading manufacturing
employers in the area include: Lockheed Martin Energy Systems, Inc., Levi
Strauss & Company, DeRoyal Industries, Aluminum Company of North America,
Phillips Consumer Electronics North America Corp., Clayton Homes and Sea Ray
Boats, Inc. which employ approximately 26,800 people, collectively. The
Knoxville area also has eight hospitals which employ approximately 16,900
employees. Area tourist attractions are the Great Smokey Mountains National Park
and Dollywood, a country-western theme park sponsored by Dolly Parton. The Great
Smokey Mountains National Park and Dollywood had approximately 9.1 million and
2.2 million visitors, respectively during 1995. Dollywood employs approximately
1,800 people.
STATION PERFORMANCE. WKXT is a CBS affiliate and operates on channel 8.
WKXT is one of three commercial VHF stations in the Knoxville DMA. Based on
November 1995 Nielsen estimates, WKXT is ranked third in its market, with a 22%
in-market share of households viewing television. WKXT can be viewed on 52 cable
systems in its DMA and on 15 cable systems outside its DMA. WKXT received 18% of
the Knoxville DMA's Market Revenues in 1995.
WKXT produces only one hour of news each day. The Company plans to implement
its operating strategy at WKXT by developing comprehensive news programming upon
consummation of the Phipps Acquisition.
In addition to carrying network programming supplied by CBS, WKXT carries
syndicated programming including BAYWATCH, NORTHERN EXPOSURE, REGIS & KATHIE
LEE, MAURY POVICH, AMERICAN JOURNAL, ENTERTAINMENT TONIGHT, HARD COPY, and THE
ANDY GRIFFITH SHOW.
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WCTV, THE CBS AFFILIATE IN TALLAHASSEE, FLORIDA/THOMASVILLE, GEORGIA
WCTV, which is part of the Phipps Business, began operations in 1955. The
Phipps Acquisition is expected to occur in September 1996, although there can be
no assurance with respect thereto. Tallahassee, Florida/Thomasville, Georgia is
the 116th largest DMA in the United States, with approximately 210,000
television households and total population of approximately 586,000. Total
Market Revenues in the Tallahassee/Thomasville DMA in 1995 were approximately
$19.9 million, a 5% increase over 1994. WCTV's gross revenues for the year ended
December 31, 1995 and the six months ended June 30, 1996 were approximately
$13.3 million and $7.0 million, respectively, an increase of 3.2% and 9.8%,
respectively, from the corresponding prior periods. WCTV's net income (before
the allocation of corporate and administrative expenses and after estimated
income taxes computed at statutory rates) for the year ended December 31, 1995
and the six months ended June 30, 1996 was approximately $3.8 million and $1.9
million, respectively, an increase of 1.4% and 6.3%, respectively, from the
corresponding prior periods. The Tallahassee/Thomasville DMA has four licensed
commercial television stations, all of which are affiliated with major networks.
The Tallahassee/ Thomasville DMA also has one public station that is owned by
the Florida State University Board of Regents.
The following table sets forth Market Revenues in the
Tallahassee/Thomasville DMA and in-market share and ranking information for
WCTV:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
---------- ---------- ----------
Market Revenues in DMA $17,200 $18,900 $19,900
<S> <C> <C> <C>
Market Revenues growth over prior year 4% 10% 5%
In-market share of households viewing television 64% 65% 60%
Rank in market 1 1 1
</TABLE>
MARKET DESCRIPTION. The Tallahassee/Thomasville DMA, consisting of 18
counties in the panhandle of Florida and southwest Georgia, includes
Tallahassee, the capital of Florida, and Thomasville, Valdosta and Bainbridge,
Georgia. The Tallahassee/Thomasville economy centers around state and local
government as well as state and local universities which include Florida State
University, Florida A&M, Tallahassee Community College and Valdosta State
College. Florida State University is the largest university located in the DMA
with total enrollment of approximately 29,000 students. Florida State
University's main campus is located within the city of Tallahassee. State and
local government agencies employ approximately 36,700 and 8,500 people,
respectively, in the Tallahassee area.
STATION PERFORMANCE. WCTV is a CBS affiliate and operates on channel 6.
WCTV is the only VHF station in the Tallahassee/Thomasville DMA. Based on
November 1995 Nielsen estimates, WCTV is ranked number one in its market, with a
60% in-market share of households viewing television. WCTV can be viewed on 47
cable systems in its DMA and 32 cable systems outside of its DMA. WCTV received
67% of the Tallahassee/Thomasville DMA's Market Revenues in 1995.
WCTV considers its news department to be a key component of its operations;
approximately 43% of its employees are devoted to its news department and a
significant portion of WCTV's revenues is generated by news programming. The
station attributes its successful news programming in part to its bureaus in
Tallahassee, Valdosta and Thomasville and its news gathering vehicle. WCTV
produces five news programs and six news cut-ins each day which total three and
one-half hours of news per weekday. All news programs are closed-captioned. The
station has the number one in-market share in news at 6 a.m., noon, 5:30 p.m., 6
p.m. and 11 p.m. on weekdays and 6 p.m. and 11 p.m. on weekends.
The station produces the BOBBY BOWDEN SHOW, a coach's show for Florida State
University. In addition to carrying network programming supplied by CBS, WCTV
carries syndicated programming including WHEEL OF FORTUNE, JEOPARDY!, OPRAH! and
SEINFELD.
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INDUSTRY BACKGROUND
There are currently a limited number of channels available for broadcasting
in any one geographic area, and the license to operate a television station is
granted by the FCC. Television stations which broadcast over the very high
frequency ("VHF") band (channels 2-13) of the spectrum generally have some
competitive advantage over television stations which broadcast over the
ultra-high frequency ("UHF") band (channels above 13) of the spectrum, because
the former usually have better signal coverage and operate at a lower
transmission cost. However, the improvement of UHF transmitters and receivers,
the complete elimination from the marketplace of VHF-only receivers and the
expansion of cable television systems have reduced the VHF signal advantage.
Television station revenues are primarily derived from local, regional and
national advertising and, to a much lesser extent, from network compensation and
revenues from studio and tower space rental and commercial production
activities. Advertising rates are based upon a variety of factors, including a
program's popularity among the viewers an advertiser wishes to attract, the
number of advertisers competing for the available time, the size and demographic
makeup of the market served by the station and the availability of alternative
advertising media in the market area. Rates are also determined by a station's
overall ratings and in-market share, as well as the station's ratings and share
among particular demographic groups which an advertiser may be targeting.
Because broadcast stations rely on advertising revenues, they are sensitive to
cyclical changes in the economy. The size of advertisers' budgets, which are
affected by broad economic trends, affect the broadcast industry in general and
the revenues of individual broadcast television stations.
All television stations in the country are grouped by Nielsen, a national
audience measuring service, into approximately 210 generally recognized
television markets that are ranked in size according to various formulae based
upon actual or potential audience. Each DMA is an exclusive geographic area
consisting of all counties in which the home-market commercial stations receive
the greatest percentage of total viewing hours. Nielsen periodically publishes
data on estimated audiences for the television stations in the various
television markets throughout the country. The estimates are expressed in terms
of the percentage of the total potential audience in the market viewing a
station (the station's "rating") and of the percentage of households using
television actually viewing the station (the station's "share"). Nielsen
provides such data on the basis of total television households and selected
demographic groupings in the market. Nielsen uses two methods of determining a
station's ability to attract viewers. In larger geographic markets, ratings are
determined by a combination of meters connected directly to selected television
sets and weekly diaries of television viewing, while in smaller markets only
weekly diaries are utilized. All of the Company's stations operate in markets
where only weekly diaries are used.
Historically, three major broadcast networks, Capital Cities/ABC, Inc.
("ABC"), NBC and CBS, dominated broadcast television. In recent years, Fox has
evolved into the fourth major network by establishing a network of independent
stations whose operating characteristics are similar to the major network
affiliate stations, although the number of hours of network programming produced
by Fox for its affiliates is less than that of the three major networks. In
addition, UPN and WB recently have been launched as new television networks. An
affiliate of UPN or WB receives a smaller portion of each day's programming from
its network compared to an affiliate of a major network. Currently, UPN and WB
provide 10 and 11.5 hours of programming per week to their affiliates,
respectively.
The affiliation of a station with one of the four major networks has a
significant impact on the composition of the station's programming, revenues,
expenses and operations. A typical affiliate of a major network receives the
majority of each day's programming from the network. This programming, along
with cash payments ("network compensation"), is provided to the affiliate by the
network in exchange for a substantial majority of the advertising time sold
during the airing of network programs. The network then sells this advertising
time and retains the revenues. The affiliate retains the revenues from time sold
during breaks in and between network programs and programs the affiliate
produces or purchases from non-network sources. In acquiring programming to
supplement programming supplied by the affiliated network, network affiliates
compete primarily with other affiliates and independent stations in their
markets. Cable systems generally do not compete with local stations for
programming, although various national cable networks from time to time have
acquired programs that would have otherwise been offered to local
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television stations. In addition, a television station may acquire programming
through barter arrangements. Under barter arrangements, which are becoming
increasingly popular with both network affiliates and independents, a national
program distributor may receive advertising time in exchange for the programming
it supplies, with the station paying a reduced fee for such programming.
In contrast to a station affiliated with a network, a fully independent
station purchases or produces all of the programming that it broadcasts,
resulting in generally higher programming costs. An independent station,
however, retains its entire inventory of advertising time and all of the
revenues obtained therefrom. As a result of the smaller amount of programming
provided by its network, an affiliate of UPN or WB must purchase or produce a
greater amount of its programming, resulting in generally higher programming
costs. These affiliate stations, however, retain a larger portion of the
inventory of advertising time and the revenues obtained therefrom compared to
stations affiliated with the major networks.
Through the 1970s, network television broadcasting enjoyed virtual dominance
in viewership and television advertising revenues, because network-affiliated
stations competed only with each other in most local markets. Beginning in the
1980s, this level of dominance began to change as the FCC authorized more local
stations and marketplace choices expanded with the growth of independent
stations and cable television services. See "-Federal Regulation of the
Company's Business."
Cable television systems were first installed in significant numbers in the
1970s and were initially used to retransmit broadcast television programming to
paying subscribers in areas with poor broadcast signal reception. In the
aggregate, cable-originated programming has emerged as a significant competitor
for viewers of broadcast television programming, although no single cable
programming network regularly attains audience levels amounting to more than a
small fraction of any single major broadcast network. The advertising share of
cable networks increased during the 1970s and 1980s as a result of the growth in
cable penetration (the percentage of television households which are connected
to a cable system). Notwithstanding such increases in cable viewership and
advertising, over-the-air broadcasting remains the dominant distribution system
for mass market television advertising.
NEWSPAPER PUBLISHING
The Company owns and operates five publications comprising three newspapers
and two shoppers, all located in the Southeast.
THE ALBANY HERALD
THE ALBANY HERALD, located in Albany, Georgia, is the only seven-day-a-week
newspaper that serves southwestern Georgia. The Company changed THE ALBANY
HERALD from an afternoon newspaper to a morning newspaper in 1993 and improved
its graphics and layout. These changes enabled the Company to increase THE
ALBANY HERALD's newsstand and subscription prices as well as its advertising
rates, resulting in an increase of revenues from $10.1 million in 1993 to $13.5
million in 1995, a 33.8% increase. The Company intends to increase selectively
the price and advertising rates of THE ALBANY HERALD in the future. The Albany
market has four other daily newspapers with a limited circulation and market
area.
THE ALBANY HERALD also publishes three other weekly editions in Georgia, THE
LEE COUNTY HERALD, THE WORTH COUNTY HERALD and THE CALHOUN-CLAY HERALD, all of
which provide regional news coverage. Other niche publications include (i) FARM
AND PLANTATION, an agricultural paper, (ii) a monthly COUPON CLIPPER, (iii) a
quarterly, direct mail coupon book called CASH CUTTERS, (iv) an annual dining
guide and (v) an annual bridal book. The Company introduced these weeklies and
other niche product publications in order to better utilize THE ALBANY HERALD's
printing presses and infrastructure (such as sales and advertising). The
printing press is approximately 19 years old and is in good working order. THE
ALBANY HERALD cross-merchandises its publications, thereby increasing total
revenues with only a small increase in related expenditures. The Company also
seeks to increase THE ALBANY HERALD's circulation and revenues through its
sponsorship of special events of local interest, such as bass fishing
tournaments.
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THE ROCKDALE CITIZEN AND THE GWINNETT DAILY POST
THE ROCKDALE CITIZEN and the GWINNETT DAILY POST, a six-day-a-week newspaper
and a five-day-a-week newspaper, respectively, serve communities in the metro
Atlanta area with complete local news, sports and lifestyles coverage together
with national stories that directly impact their local communities.
THE ROCKDALE CITIZEN is located in Conyers, Georgia, the county seat of
Rockdale County, which is 19 miles east of downtown Atlanta. Rockdale County's
population is estimated to be 64,000 in 1996. Conyers was the site of the 1996
Olympic equestrian competition.
The GWINNETT DAILY POST, which was purchased by the Company in January 1995,
is located north of Atlanta in Gwinnett County, one of the fastest growing areas
in the nation. Gwinnett's population, which has more than doubled during each of
the past two census periods, was estimated at 457,000 in 1995. In September
1995, the Company increased the frequency of publication of the GWINNETT DAILY
POST from three to five days per week in an effort to increase circulation.
The Company's operating strategy with respect to THE ROCKDALE CITIZEN and
the GWINNETT DAILY POST is to increase circulation by improving the print
quality, increasing the local news content and increasing its telemarketing and
promotional efforts. The Rockdale Citizen's printing press is approximately 24
years old and is in good working order. The Company has hired a new president of
publishing for THE ROCKDALE CITIZEN and the GWINNETT DAILY POST in order to
implement its operating strategy at these newspapers.
SOUTHWEST GEORGIA SHOPPER
The Southwest Georgia Shopper, Inc., prints and distributes two shoppers,
which are direct mailed and rack distributed throughout north Florida and
southwest Georgia. These two shoppers represent a consolidation of the seven
shoppers that the Company purchased in 1994 and 1995. The Company believes that
print quality is an important criterion to advertisers and consumers and, since
their acquisition, the Company has accordingly improved the graphics of the
shoppers.
INDUSTRY BACKGROUND
Newspaper publishing is the oldest segment of the media industry and, as a
result of the focus on local news, newspapers in general, remain one of the
leading media for local advertising. Newspaper advertising revenues are cyclical
and have generally been affected by changes in national and regional economic
conditions. Financial instability in the retail industry, including bankruptcies
of large retailers and consolidations among large retail chains has recently
resulted in reduced retail advertising expenditures. Classified advertising,
which makes up approximately one-third of newspaper advertising expenditures,
can be affected by an economic slowdown and its effect on employment, real
estate transactions and automotive sales. However, growth in housing starts and
automotive sales, although cyclical in nature, generally provide continued
growth in newspaper advertising expenditures.
PAGERS AND PAGING SERVICES
THE PAGING BUSINESS
The paging business, which is a part of the Phipps Business, is based in
Tallahassee, Florida and operates in Columbus, Macon, Albany and Valdosta,
Georgia, in Dothan, Alabama, in Tallahassee and Panama City, Florida and in
certain contiguous areas. In 1995 the population of this geographic coverage
area was approximately 2.3 million. In June 1996, the Company's paging business
had approximately 44,000 units in service, representing a penetration rate of
approximately 1.9%.
The Company's paging system operates by connecting a telephone call placed
to a local telephone number with a local paging switch. The paging switch
processes a caller's information and sends the information to a link transmitter
which relays the processed information to paging transmitters, which in turn
alert an individual pager by means of a coded radio signal. This process
provides service to a "local coverage area." To enhance coverage further to its
customer base, all of the Company's local coverage areas are interconnected or
networked, providing for "wide area coverage" or "network coverage." A pager's
coverage area is programmable and can be customized to include or exclude any
particular paging switch and its respective geographic coverage area, thereby
allowing the Company's paging customers a choice of
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coverage areas. In addition, the Company is able to network with other paging
companies which share the Company's paging frequencies in other markets, by
means of an industry standard network paging protocol, in order to increase the
geographic coverage area in which the Company's customers can receive paging
service.
A subscriber to the Company's paging services either owns a pager, thereby
paying solely for the use of the Company's paging services, or leases a pager,
thereby paying a periodic charge for both the pager and the paging services. Of
the Company's pagers currently in service, approximately 72% are owned and
maintained by subscribers ("COAM") with the remainder being leased. In recent
years, prices for pagers have fallen considerably, and thus there has been a
trend toward subscriber ownership of pagers, allowing the Company to maintain
lower inventory and fixed asset levels. COAM customers historically stay on
service longer, thus enhancing the stability of the subscriber base and
earnings. The Company is focusing its marketing efforts on increasing its base
of COAM users. The Company purchases all of its pagers from two suppliers,
Panasonic and Motorola, with Motorola supplying a majority of such pagers. Due
to the high demand from the Company's customers for Motorola pagers, the Company
believes that its ability to offer Motorola pagers is important to its business.
The Company's goal is to increase the number of pagers in service, revenues
and cash flow from operations by implementing a plan that focuses on improved
operating methods and controls and innovative marketing programs. The Company's
paging business has grown in recent years by: (i) increasing the number of
business customers; (ii) expanding its resale program; (iii) increasing its
retail operations; and (iv) increasing geographical coverage.
INDUSTRY BACKGROUND.
Paging is a method of wireless communication which uses an assigned radio
frequency to contact a paging subscriber within a designated service area. A
subscriber carries a pager which receives messages by the broadcast of a radio
signal. To contact a subscriber, a message is usually sent by placing a
telephone call to the subscriber's designated telephone number. The telephone
call is received by an electronic paging switch which generates a signal that is
sent to radio transmitters in the subscriber's service area. The transmitters
broadcast a coded signal that is unique to the pager carried by the subscriber
and alerts the subscriber through a tone or vibration that there is a voice,
numeric, alphanumeric or other message. Depending upon the topography of the
service area, the operating radius of a radio transmitter typically ranges from
three to 20 miles.
Three tiers of carriers have emerged in the paging industry: (i) large
nationwide providers serving multiple markets throughout the United States; (ii)
regional carriers, like the Company's paging business, which operate in regional
markets such as several contiguous states in one geographic region of the United
States; and (iii) small, single market operators. The Company believes that the
paging industry is undergoing consolidation.
The paging industry has traditionally marketed its services through direct
distribution by sales representatives. In recent years, additional channels of
distribution have evolved, including: (i) carrier-operated retail stores; (ii)
resellers, who purchase paging services on a wholesale basis from carriers and
resell those services on a retail basis to their own customers; (iii)
independent sales agents who solicit customers for carriers and are compensated
on a commission basis; and (iv) retail outlets that often sell a variety of
merchandise, including pagers and other telecommunications equipment.
SATELLITE BROADCASTING
The Company's satellite broadcasting business provides broadcast and
production services through mobile and fixed production units as well as C-band
and Ku-band satellite transmission facilities. Clients include The Walt Disney
Company, The Golf Channel, USA Network, Turner Broadcasting System, CBS, ABC,
PGA Tour Productions and The Children's Miracle Network.
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ADDITIONAL INFORMATION ON BUSINESS SEGMENTS
Reference is made to Note J of Notes to Consolidated Financial Statements of
the Company for additional information regarding business segments. Reference is
made to Note 11 of Notes to Financial Statements of the Phipps Business for
additional information regarding business segments.
COMPETITION
TELEVISION INDUSTRY
Competition in the television industry exists on several levels: competition
for audience, competition for programming (including news) and competition for
advertisers. Additional factors that are material to a television station's
competitive position include signal coverage and assigned frequency. The
broadcasting industry is faced continually with technological change and
innovation, the possible rise in popularity of competing entertainment and
communications media and governmental restrictions or actions of federal
regulatory bodies, including the FCC and the Federal Trade Commission, any of
which could have a material effect on the Company's operations. In addition,
since early 1994, there have been a number of network affiliation changes in
many of the top 100 television markets. As a result, the major networks have
sought longer terms in their affiliation agreements with local stations and
generally have increased the compensation payable to the local stations in
return for such longer term agreements. During the same time period, the rate of
change of ownership of local television stations has increased over past
periods.
AUDIENCE. Stations compete for audience on the basis of program popularity,
which has a direct effect on advertising rates. A substantial portion of the
daily programming on each of the Company's stations is supplied by the network
with which each station is affiliated. During those periods, the stations are
totally dependent upon the performance of the network programs to attract
viewers. There can be no assurance that such programming will achieve or
maintain satisfactory viewership levels in the future. Non-network time periods
are programmed by the station with a combination of self-produced news, public
affairs and other entertainment programming, including news and syndicated
programs purchased for cash, cash and barter, or barter only.
Independent stations, whose number has increased significantly over the past
decade, have also emerged as viable competitors for television viewership
shares. In addition, UPN and WB have been launched recently as new television
networks. The Company is unable to predict the effect, if any, that such
networks will have on the future results of the Company's operations.
In addition, the development of methods of television transmission of video
programming other than over-the-air broadcasting, and in particular cable
television, has significantly altered competition for audience in the television
industry. These other transmission methods can increase competition for a
broadcasting station by bringing into its market distant broadcasting signals
not otherwise available to the station's audience and also by serving as a
distribution system for non-broadcast programming. Through the 1970s, television
broadcasting enjoyed virtual dominance in viewership and television advertising
revenues because network-affiliated stations competed only with each other in
most local markets. Although cable television systems initially retransmitted
broadcast television programming to paying subscribers in areas with poor
broadcast signal reception, significant increases in cable television
penetration in areas that did not have signal reception problems occurred
throughout the 1970s and 1980s. As the technology of satellite program delivery
to cable systems advanced in the late 1970s, development of programming for
cable television accelerated dramatically, resulting in the emergence of
multiple, national-scale program alternatives and the rapid expansion of cable
television and higher subscriber growth rates. Historically, cable operators
have not sought to compete with broadcast stations for a share of the local news
audience. Recently, however, certain cable operators have elected to compete for
such audiences and the increased competition could have an adverse effect on the
Company's advertising revenues.
Other sources of competition include home entertainment systems (including
video cassette recorder and playback systems, video discs and television game
devices), "wireless cable" services, satellite master antenna television
systems, low power television stations, television translator stations and, more
recently, DBS video distribution services, which transmit programming directly
to homes equipped with special receiving antennas, and video signals delivered
over telephone lines. Public broadcasting outlets in most
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communities compete with commercial television stations for audience but not for
advertising dollars, although this may change as the United States Congress
considers alternative means for the support of public television.
Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques are expected to reduce
the bandwidth required for television signal transmission. These compression
techniques, as well as other technological developments, are applicable to all
video delivery systems, including over-the-air broadcasting, and have the
potential to provide vastly expanded programming to highly targeted audiences.
Reduction in the cost of creating additional channel capacity could lower entry
barriers for new channels and encourage the development of increasingly
specialized "niche" programming. This ability to reach very narrowly defined
audiences is expected to alter the competitive dynamics for advertising
expenditures. In addition, competition in the television industry in the future
may come from interactive video and information and data services that may be
delivered by commercial television stations, cable television, DBS, multipoint
distribution systems, multichannel multipoint distribution systems or other
video delivery systems. The Company is unable to predict the effect that these
or other technological changes will have on the broadcast television industry or
the future results of the Company's operations.
PROGRAMMING. Competition for programming involves negotiating with national
program distributors or syndicators that sell first-run and rerun packages of
programming. Each station competes against the broadcast station competitors in
its market for exclusive access to off-network reruns (such as ROSEANNE) and
first-run product (such as ENTERTAINMENT TONIGHT). Cable systems generally do
not compete with local stations for programming, although various national cable
networks from time to time have acquired programs that would have otherwise been
offered to local television stations. Competition exists for exclusive news
stories and features as well.
ADVERTISING. Advertising rates are based upon the size of the market in
which the station operates, a program's popularity among the viewers that an
advertiser wishes to attract, the number of advertisers competing for the
available time, the demographic makeup of the market served by the station, the
availability of alternative advertising media in the market area, aggressive and
knowledgeable sales forces and the development of projects, features and
programs that tie advertiser messages to programming. Advertising revenues
comprise the primary source of revenues for the Company's stations. The
Company's stations compete for such advertising revenues with other television
stations and other media in their respective markets. Typically, independent
stations achieve a greater proportion of the television market advertising
revenues than network affiliated stations relative to their share of the
market's audience, because independent stations have greater amounts of
available advertising time. The stations also compete for advertising revenues
with other media, such as newspapers, radio stations, magazines, outdoor
advertising, transit advertising, yellow page directories, direct mail and local
cable systems. Competition for advertising dollars in the broadcasting industry
occurs primarily within individual markets.
NEWSPAPER INDUSTRY
The Company's newspapers compete for advertisers with a number of other
media outlets, including magazines, radio and television, as well as other
newspapers, which also compete for readers with the Company's publications. Many
of the Company's newspaper competitors are significantly larger than the
Company. The Company attempts to differentiate its publications from other
newspapers by focusing on local news and local sports coverage in order to
compete with its larger competitors. The Company also seeks to establish its
publications as the local newspaper by sponsoring special events of particular
community interest.
PAGING INDUSTRY
The paging industry is highly competitive. Companies in the industry compete
on the basis of price, coverage area offered to subscribers, available services
offered in addition to basic numeric or tone paging, transmission quality,
system reliability and customer service. The Company competes by maintaining
competitive pricing of its product and service offerings, by providing
high-quality, reliable transmission networks and by furnishing subscribers a
superior level of customer service.
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The Company's primary competitors include those paging companies that
provide wireless service in the same geographic areas in which the Company
operates. The Company experiences competition from one or more competitors in
all locations in which it operates. Some of the Company's competitors have
greater financial and other resources than the Company.
The Company's paging services also compete with other wireless
communications services such as cellular service. The typical customer uses
paging as a low cost wireless communications alternative either on a stand-alone
basis or in conjunction with cellular services. Future technological
developments in the wireless communications industry and enhancements of current
technology, however, could create new products and services, such as personal
communications services and mobile satellite services, which are competitive
with the paging services currently offered by the Company. Recent and proposed
regulatory changes by the FCC are aimed at encouraging such technological
developments and new services and promoting competition. There can be no
assurance that the Company's paging business would not be adversely affected by
such technological developments or regulatory changes.
NETWORK AFFILIATION OF THE STATIONS
Each of the Company's stations is affiliated with a major network pursuant
to an affiliation agreement. Each affiliation agreement provides the affiliated
station with the right to broadcast all programs transmitted by the network with
which the station is affiliated. In return, the network has the right to sell a
substantial majority of the advertising time during such broadcasts. In exchange
for every hour that a station elects to broadcast network programming, the
network pays the station a specific network compensation payment which varies
with the time of day. Typically, prime-time programming generates the highest
hourly network compensation payments. Such payments are subject to increase or
decrease by the network during the term of an affiliation agreement with
provisions for advance notices and right of termination by the station in the
event of a reduction in such payments. The NBC affiliation agreements for WALB
and WJHG are renewed automatically every five years on September 1 unless the
station notifies NBC otherwise. The CBS affiliation agreements for WKYT, WYMT,
WRDW, WCTV and WKXT expire on December 31, 2004, December 31, 2004, March 31,
2005, December 31, 1999, and December 31, 1999, respectively.
FEDERAL REGULATION OF THE COMPANY'S BUSINESS
TELEVISION BROADCASTING
EXISTING REGULATION. Television broadcasting is subject to the jurisdiction
of the FCC under the Communications Act and the Telecommunications Act. The
Communications Act prohibits the operation of television broadcasting stations
except under a license issued by the FCC and empowers the FCC, among other
things, to issue, revoke and modify broadcasting licenses, determine the
locations of stations, regulate the equipment used by stations, adopt
regulations to carry out the provisions of the Communications Act and the
Telecommunications Act and impose penalties for violation of such regulations.
The Communications Act prohibits the assignment of a license or the transfer of
control of a licensee without prior approval of the FCC.
LICENSE GRANT AND RENEWAL. Television broadcasting licenses generally are
granted or renewed for a period of five years (recently extended to eight years
by the Telecommunications Act) but may be renewed for a shorter period upon a
finding by the FCC that the "public interest, convenience, and necessity" would
be served thereby. The broadcast licenses for WALB, WJHG, WKYT, WYMT, WRDW, WCTV
and WKXT are effective until April 1, 1997, February 1, 1997, August 1, 1997,
August 1, 1997, April 1, 1997, February 1, 1997 and August 1, 1997,
respectively. The Telecommunications Act requires a broadcast license to be
renewed if the FCC finds that: (i) the station has served the public interest,
convenience and necessity; (ii) there have been no serious violations of either
the Telecommunications Act or the FCC's rules and regulations by the licensee;
and (iii) there have been no other violations, which taken together would
constitute a pattern of abuse. At the time an application is made for renewal of
a television license, parties in interest may file petitions to deny, and such
parties, including members of the public, may comment upon the service the
station has provided during the preceding license term and urge denial of the
application. If the FCC finds that the licensee has failed to meet the
above-mentioned requirements, it could deny the renewal application or grant a
conditional approval, including renewal for a lesser term. The FCC will not
consider
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competing applications contemporaneously with a renewal application. Only after
denying a renewal application can the FCC accept and consider competing
applications for the license. Although in substantially all cases broadcast
licenses are renewed by the FCC even when petitions to deny or competing
applications are filed against broadcast license renewal applications, there can
be no assurance that the Company's stations' licenses will be renewed. The
Company is not aware of any facts or circumstances that could prevent the
renewal of the licenses for its stations at the end of their respective license
terms.
MULTIPLE OWNERSHIP RESTRICTIONS. Currently, the FCC has rules that limit
the ability of individuals and entities to own or have an ownership interest
above a certain level (an "attributable" interest, as defined more fully below)
in broadcast stations, as well as other mass media entities. The current rules
limit the number of radio and television stations that may be owned both on a
national and a local basis. On a national basis, the rules preclude any
individual or entity from having an attributable interest in more than 12
television stations. Moreover, the aggregate audience reach of co-owned
television stations may not exceed 25% of all United States households. An
individual or entity may hold an attributable interest in up to 14 television
stations (or stations with an aggregate audience reach of 30% of all United
States households) if at least two of the stations are controlled by a member of
an ethnic minority. The Telecommunications Act directs the FCC to eliminate the
restriction on the number of television stations which may be owned or
controlled nationally and to increase the national audience reach limitation for
television stations to 35%.
On a local basis, FCC rules currently allow an individual or entity to have
an attributable interest in only one television station in a market. In
addition, FCC rules and the Telecommunications Act generally prohibit an
individual or entity from having an attributable interest in a television
station and a radio station, daily newspaper or cable television system that is
located in the same local market area served by the television station.
Proposals currently before the FCC could substantially alter these standards.
For example, in a recently initiated rulemaking proceeding, the FCC suggested
narrowing the geographic scope of the local television cross-ownership rule (the
so-called "duopoly rule") from Grade B to Grade A contours and possibly
permitting some two-station combinations in certain markets. The FCC has also
proposed eliminating the TV/radio cross-ownership restriction (the so-called
"one-to-a-market" rule) entirely or at least exempting larger markets. In
addition, the FCC is seeking comment on issues of control and attribution with
respect to local marketing agreements entered into by television stations. It is
unlikely that this rulemaking will be concluded until late 1996 or later, and
there can be no assurance that any of these rules will be changed or what will
be the effect of any such change. The Telecommunications Act expressly does not
prohibit any local marketing agreements in compliance with FCC regulations.
Furthermore, the Telecommunications Act directs the FCC to conduct a rulemaking
proceeding to determine whether restricting ownership of more than one
television station in the same area should be retained, modified or eliminated.
It is the intent of Congress that if the FCC revises the multiple ownership
rules, it should permit co-located VHF-VHF combinations only in compelling
circumstances, where competition and diversity will not be harmed.
The Telecommunications Act also directs the FCC to extend its
one-to-a-market waiver policy from the top 25 to any of the top 50 markets. In
addition, the Telecommunications Act directs the FCC to permit a television
station to affiliate with two or more networks unless such dual or multiple
networks are composed of (i) two or more of the four existing networks (ABC,
CBS, NBC or Fox), or (ii) any of the four existing networks and one of the two
emerging networks (UPN or WBN). The Company believes that Congress does not
intend for these limitations to apply if such networks are not operated
simultaneously, or if there is no substantial overlap in the territory served by
the group of stations comprising each of such networks. The Telecommunications
Act also directs the FCC to revise its rules to permit cross-ownership interests
between a broadcast network and a cable system. The Telecommunications Act
further authorizes the FCC to consider revising its rules to permit common
ownership of co-located broadcast stations and cable systems.
Expansion of the Company's broadcast operations in particular areas and
nationwide will continue to be subject to the FCC's ownership rules and any
changes the FCC or Congress may adopt. Any relaxation of the FCC's ownership
rules may increase the level of competition in one or more of the markets in
which the Company's stations are located, particularly to the extent that the
Company's competitors may have greater resources and thereby be in a better
position to capitalize on such changes.
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Under the FCC's ownership rules, a direct or indirect purchaser of certain
types of securities of the Company (including the Class B Common Stock offered
hereby) could violate FCC regulations if that purchaser owned or acquired an
"attributable" or "meaningful" interest in other media properties in the same
areas as stations owned by the Company or in a manner otherwise prohibited by
the FCC. All officers and directors of a licensee, as well as general partners,
uninsulated limited partners and stockholders who own five percent or more of
the voting power of the outstanding common stock of a licensee (either directly
or indirectly), generally will be deemed to have an "attributable" interest in
the licensee. Certain institutional investors which exert no control or
influence over a licensee may own up to 10% of the voting power of the
outstanding common stock before attribution occurs. Under current FCC
regulations, debt instruments, non-voting stock, certain limited partnership
interests (provided the licensee certifies that the limited partners are not
"materially involved" in the management and operation of the subject media
property) and voting stock held by minority stockholders in cases in which there
is a single majority stockholder generally are not subject to attribution. The
FCC's cross-interest policy, which precludes an individual or entity from having
a "meaningful" (even though not "attributable") interest in one media property
and an "attributable" interest in a broadcast, cable or newspaper property in
the same area, may be invoked in certain circumstances to reach interests not
expressly covered by the multiple ownership rules.
In January 1995, the FCC released a NPRM designed to permit a "thorough
review of [its] broadcast media attribution rules." Among the issues on which
comment was sought are (i) whether to change the voting stock attribution
benchmarks from five percent to 10% and, for passive investors, from 10% to 20%;
(ii) whether there are any circumstances in which non-voting stock interests,
which are currently considered non-attributable, should be considered
attributable; (iii) whether the FCC should eliminate its single majority
shareholder exception (pursuant to which voting interests in excess of five
percent are not considered cognizable if a single majority shareholder owns more
than 50% of the voting power); (iv) whether to relax insulation standards for
business development companies and other widely-held limited partnerships; (v)
how to treat limited liability companies and other new business forms for
attribution purposes; (vi) whether to eliminate or codify the cross-interest
policy; and (vii) whether to adopt a new policy which would consider whether
multiple "cross interests" or other significant business relationships (such as
time brokerage agreements, debt relationships or holdings of nonattributable
interests), which individually do not raise concerns, raise issues with respect
to diversity and competition. It is unlikely that this inquiry will be concluded
until late 1996 at the earliest and there can be no assurance that any of these
standards will be changed. Should the attribution rules be changed, the Company
is unable to predict what, if any, effect it would have on the Company or its
activities. To the best of the Company's knowledge, no officer, director or five
percent stockholder of the Company currently holds an interest in another
television station, radio station, cable television system or daily newspaper
that is inconsistent with the FCC's ownership rules and policies or with
ownership by the Company of its stations.
ALIEN OWNERSHIP RESTRICTIONS. The Communications Act restricts the ability
of foreign entities or individuals to own or hold interests in broadcast
licenses. Foreign governments, representatives of foreign governments,
non-citizens, representatives of non-citizens, and corporations or partnerships
organized under the laws of a foreign nation are barred from holding broadcast
licenses. Non-citizens, collectively, may directly or indirectly own or vote up
to 20% of the capital stock of a licensee but are prohibited from serving as
officers or directors of such licensee. In addition, a broadcast license may not
be granted to or held by any corporation that is controlled, directly or
indirectly, by any other corporation (i) that has a non-citizen as an officer,
(ii) more than one-fourth of whose directors are non-citizens or (iii) more than
one-fourth of whose capital stock is owned or voted by non-citizens or their
representatives or by foreign governments or their representatives, or by
non-U.S. corporations, if the FCC finds that the public interest will be served
by the refusal or revocation of such license. The Company has been advised that
the FCC staff has interpreted this provision of the Communications Act to
require an affirmative public interest finding before a broadcast license may be
granted to or held by any such corporation and the FCC has made such an
affirmative finding only in limited circumstances. The Company, which serves as
a holding company for wholly-owned subsidiaries that are licensees for its
stations, therefore may be restricted from having (i) more than one-fourth of
its
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stock owned or voted directly or indirectly by non-citizens, foreign
governments, representatives of non-citizens or foreign governments, or foreign
corporations; (ii) an officer who is a non-citizen; or (iii) more than
one-fourth of its board of directors consisting of non-citizens.
RECENT DEVELOPMENTS. The FCC recently decided to eliminate the prime time
access rule ("PTAR"), effective August 30, 1996. PTAR limited a station's
ability to broadcast network programming (including syndicated programming
previously broadcast over a network) during prime time hours. The elimination of
PTAR could increase the amount of network programming broadcast over a station
affiliated with ABC, NBC, CBS or Fox. Such elimination also could result in (i)
an increase in the compensation paid by the network (due to the additional prime
time during which network programming could be aired by a network-affiliated
station) and (ii) increased competition for syndicated network programming that
previously was unavailable for broadcast by network affiliates during prime
time. The FCC also recently announced that it was rescinding its remaining
financial interest and syndication ("fin\syn") rules. The original rules, first
adopted in 1970, severely restricted the ability of a network to obtain
financial interests in, or participate in syndication of, prime-time
entertainment programming created by independent producers for airing during the
networks' evening schedules. The FCC previously lifted the financial interest
rules and restraints on foreign syndication.
Congress has recently enacted legislation and the FCC currently has under
consideration or is implementing new regulations and policies regarding a wide
variety of matters that could affect, directly or indirectly, the operation and
ownership of the Company's broadcast properties. In addition to the proposed
changes noted above, such matters include, for example, the license renewal
process (particularly the weight to be given to the expectancy of renewal for an
incumbent broadcast licensee and the criteria to be applied in deciding
contested renewal applications), spectrum use fees, political advertising rates,
potential advertising restrictions on the advertising of certain products (beer
and wine, for example), the rules and policies to be applied in enforcing the
FCC's equal employment opportunity regulations, reinstitution of the Fairness
Doctrine (which requires broadcasters airing programming concerning
controversial issues of public importance to afford a reasonable opportunity for
the expression of contrasting viewpoints), and the standards to govern
evaluation of television programming directed toward children and violent and
indecent programming (including the possible requirement of what is commonly
referred to as the "v-chip," which would permit parents to program television
sets so that certain programming would not be accessible by children). Other
matters that could affect the Company's broadcast properties include
technological innovations and developments generally affecting competition in
the mass communications industry, such as the recent initiation of direct
broadcast satellite service, and the continued establishment of wireless cable
systems and low power television stations.
The FCC presently is seeking comment on its policies designed to increase
minority ownership of mass media facilities. Congress also recently enacted
legislation that eliminated the minority tax certificate program of the FCC,
which gave favorable tax treatment to entities selling broadcast stations to
entities controlled by an ethnic minority. In addition, a recent Supreme Court
decision has cast doubt upon the continued validity of many of the congressional
programs designed to increase minority ownership of mass media facilities.
DISTRIBUTION OF VIDEO SERVICES BY TELEPHONE COMPANIES. Recent actions by
the FCC, Congress and the courts all presage significant future involvement in
the provision of video services by telephone companies. The Company cannot
predict either the timing or the extent of such involvement.
THE 1992 CABLE ACT. On October 5, 1992, Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"). The FCC began implementing the requirements of the 1992 Cable Act in 1993
and final implementation proceedings remain pending regarding certain of the
rules and regulations previously adopted. Certain statutory provisions, such as
signal carriage, retransmission consent and equal employment opportunity
requirements, have a direct effect on television broadcasting. Other provisions
are focused exclusively on the regulation of cable television but can still be
expected to have an indirect effect on the Company because of the competition
between over-the-air television stations and cable systems.
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The signal carriage, or "must carry," provisions of the 1992 Cable Act
require cable operators to carry the signals of local commercial and
non-commercial television stations and certain low power television stations.
Systems with 12 or fewer usable activated channels and more than 300 subscribers
must carry the signals of at least three local commercial television stations. A
cable system with more than 12 usable activated channels, regardless of the
number of subscribers, must carry the signals of all local commercial television
stations, up to one-third of the aggregate number of usable activated channels
of such system. The 1992 Cable Act also includes a retransmission consent
provision that prohibits cable operators and other multi-channel video
programming distributors from carrying broadcast stations without obtaining
their consent in certain circumstances. The "must carry" and retransmission
consent provisions are related in that a local television broadcaster, on a
cable system-by-cable system basis, must make a choice once every three years
whether to proceed under the "must carry" rules or to waive that right to
mandatory but uncompensated carriage and negotiate a grant of retransmission
consent to permit the cable system to carry the station's signal, in most cases
in exchange for some form of consideration from the cable operator. Cable
systems must obtain retransmission consent to carry all distant commercial
stations other than "super stations" delivered via satellite.
Under rules adopted to implement these "must carry" and retransmission
consent provisions, local television stations were required to make an initial
election of "must carry" or retransmission consent by June 17, 1993. Stations
that failed to elect were deemed to have elected carriage under the "must carry"
provisions. Other issues addressed in the FCC rules were market designations,
the scope of retransmission consent and procedural requirements for implementing
the signal carriage provisions. Each of the Company's stations elected "must
carry" status on certain cable systems in its DMA. This election entitles the
Company's stations to carriage on those systems until at least December 31,
1996. In certain other situations, the Company's stations entered into
"retransmission consent" agreements with cable systems. The Company is unable to
predict whether or not these retransmission consent agreements will be extended
and, if so, on what terms.
On April 8, 1993, a special three-judge panel of the U.S. District Court for
the District of Columbia upheld the constitutionality of the "must carry"
provisions of the 1992 Cable Act. However, on June 27, 1994, the United States
Supreme Court in a 5-4 decision vacated the lower court's judgment and remanded
the case to the District Court for further proceedings. Although the Supreme
Court found the "must carry" rules to be content-neutral and supported by
legitimate governmental interests under appropriate constitutional tests, it
also found that genuine issues of material fact still remained that must be
resolved in a more detailed evidentiary record. On December 12, 1995, the United
States District Court for the District of Columbia upheld the "must carry"
requirements compelling cable systems to carry broadcast signals. The cable
industry plans to appeal this decision. In the meantime, however, the FCC's new
"must carry" regulations implementing the 1992 Cable Act remain in effect.
The 1992 Cable Act also codified the FCC's basic equal employment
opportunity ("EEO") rules and the use of certain EEO reporting forms currently
filed by television broadcast stations. In addition, pursuant to the 1992 Cable
Act's requirements, the FCC has adopted new rules providing for a review of the
EEO performance of each television station at the mid-point of its license term
(in addition to renewal time). Such a review will give the FCC an opportunity to
evaluate whether the licensee is in compliance with the FCC's processing
criteria and notify the licensee of any deficiency in its employment profile.
Among the other rulemaking proceedings conducted by the FCC to implement
provisions of the 1992 Cable Act have been those concerning cable rate
regulation, cable technical standards, cable multiple ownership limits and
competitive access to programming.
Among other provisions, the Telecommunications Act redefines the term "cable
system" as "a facility that serves subscribers without using any public right of
way." It eliminates a single subscriber's ability to initiate a rate complaint
proceeding at the FCC and allows a cable operator to move any service off the
basic tier in its discretion, other than local broadcast signals and access
channels required to be carried on the basic tier.
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ADVANCED TELEVISION SERVICE. The FCC has proposed the adoption of rules for
implementing advanced television ("ATV") service in the United States.
Implementation of digital ATV will improve the technical quality of television
signals receivable by viewers and will provide broadcasters the flexibility to
offer new services, including high-definition television ("HDTV"), simultaneous
broadcasting of multiple programs of standard definition television ("SDTV") and
data broadcasting.
The FCC must adopt ATV service rules and a table of ATV allotments before
broadcasters can provide these services enabled by the new technology. On July
28, 1995, the FCC announced the issuance of a NPRM to invite comment on a broad
range of issues related to the implementation of ATV, particularly the
transition to digital broadcasting. The FCC announced that the anticipated role
of digital broadcasting will cause it to revisit certain decisions made in an
earlier order. The FCC also announced that broadcasters will be allowed greater
flexibility in responding to market demand by transmitting a mix of HDTV, SDTV
and perhaps other services. The FCC also stated that the NPRM would be followed
by two additional proceedings and that a Final Report and Order which will
launch the ATV system is anticipated in 1996.
The Telecommunications Act directs the FCC, if it issues licenses for ATV,
to limit the initial eligibility for such licenses to incumbent broadcast
licensees. It also authorizes the FCC to adopt regulations that would permit
broadcasters to use such spectrum for ancillary or supplementary services. It is
expected that the FCC will assign all existing television licensees a second
channel on which to provide ATV simultaneously with their current NTSC service.
It is possible after a period of years that broadcasters would be required to
cease NTSC operations, return the NTSC channel to the FCC, and broadcast only
with the newer digital technology. Some members of Congress have advocated
authorizing the FCC to auction either NTSC or ATV channels; however, the
Telecommunications Act allows the FCC to determine when such licenses will be
returned and how to allocate returned spectrum.
Under certain circumstances, conversion to ATV operations would reduce a
station's geographical coverage area but the majority of stations will obtain
service areas that match or exceed the limits of existing operations. Due to
additional equipment costs, implementation of ATV will impose some near-term
financial burdens on television stations providing the service. At the same
time, there is a potential for increased revenues to be derived from ATV.
Although the Company believes the FCC will authorize ATV in the United States,
the Company cannot predict precisely when or under what conditions such
authorization might be given, when NTSC operations must cease, or the overall
effect the transition to ATV might have on the Company's business.
DIRECT BROADCASTING SATELLITE SYSTEMS. The FCC has authorized DBS, a
service which provides video programming via satellite directly to home
subscribers. Local broadcast stations and broadcast network programming are not
carried on DBS systems. Proposals recently advanced in the Telecommunications
Act include a prohibition on restrictions that inhibit a viewer's ability to
receive video programming through DBS services. The FCC has exclusive
jurisdiction over the regulation of DBS service. The Company cannot predict the
impact of this new service upon the Company's business.
PAGING
FEDERAL REGULATION. The Company's paging operations (which are part of the
Phipps Business) are subject to regulation by the FCC under the Communications
Act. The FCC has granted the Company licenses to use the radio frequencies
necessary to conduct its paging operations. Licenses issued by the FCC to the
Company set forth the technical parameters, such as signal strength and tower
height, under which the Company is authorized to use those frequencies.
LICENSE GRANT AND RENEWAL. The FCC licenses granted to the Company are for
varying terms of up to 10 years, at the end of which renewal applications must
be approved by the FCC. The Company currently has 23 FCC licenses for its paging
business. Five of such licenses will expire in 1997, 12 will expire in 1999,
four will expire in 2000, one will expire in 2001 and one is currently awaiting
renewal. In the past, paging license renewal applications generally have been
granted by the FCC in most cases upon a demonstration of compliance with FCC
regulations and adequate service to the public. Although the Company is unaware
of any circumstances which could prevent the grant of renewal applications, no
assurance can be given that any
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of the Company's licenses will be free of competing applications or will be
renewed by the FCC. Furthermore, the FCC has the authority to restrict the
operation of licensed facilities or to revoke or modify licenses. None of the
Company's licenses has ever been revoked or modified involuntarily.
The FCC has enacted regulations regarding auctions for the award of radio
spectrum licenses. Pursuant to such rules, the FCC at any time may require
auctions for new or existing services prior to the award of any license.
Accordingly, there can be no assurance that the Company will be able to procure
additional frequencies, or to expand existing paging networks operating on
frequencies for which the Company is currently licensed into new geographical
areas. In March 1994, the FCC adopted rules pursuant to which the FCC will
utilize competitive bidding to select Commercial Mobile Radio Service ("CMRS")
licensees when more than one entity has filed a timely application for the same
license. These competitive bidding rules could require that FCC licensees make
significant investments in order to obtain spectrum. While the FCC has not yet
applied these rules to paging licenses, it could do so at any time. The Company
also believes that this rule change may increase the number of competitors which
have significant financial resources and may provide an added incentive to build
out their systems quickly.
RECENT DEVELOPMENTS. On February 8, 1996, the FCC announced a temporary
cessation in the acceptance of applications for new paging stations, and placed
certain restrictions on the extent to which current licensees can expand into
new territories on an existing channel. The FCC has initiated an expedited
comment period in which it will consider whether these interim processing
procedures should be relaxed. The FCC is also considering whether CMRS operators
should be obligated to interconnect their systems with others and be prohibited
from placing restrictions on the resale of their services.
The FCC recently adopted rules generally revising the classification of the
services offered by paging companies. Traditionally, paging companies have been
classified either as Private Common Carriers or Private Carrier Paging Operators
or as resellers. Pursuant to the FCC's recently adopted rules, which aim to
reduce the disparities in the regulatory treatment of similar mobile services,
the Company's paging services are or will be classified as CMRS. The Company
believes that such parity will remove certain regulatory advantages which
private carrier paging competitors have enjoyed under the previous
classification scheme.
The recently enacted Telecommunications Act may affect the Company's paging
business. Some aspects of the new statute could have beneficial effect on the
Company's paging business. For example, proposed federal guidelines regarding
antenna siting issues may remove local and state barriers to the construction of
communications facilities, and efforts to increase competition in the local
exchange and interexchange industries may reduce the cost to the Company of
acquiring necessary communications services and facilities. On the other hand,
some provisions relating to common carrier interconnection, telephone number
portability, equal access, the assignment of new area codes, resale requirements
and auction authority may place additional burdens upon the Company or subject
the Company to increased competition.
In addition to regulation by the FCC, paging systems are subject to certain
Federal Aviation Administration regulations with respect to the height,
location, construction, marking and lighting of towers and antennas.
STATE REGULATION. As a result of the enactment by Congress of the Omnibus
Budget Reconciliation Act of 1993, the authority of the states to regulate the
Company's paging operations was severely curtailed as of August 1994. At this
time the Company is not aware of any proposed state legislation or regulations
which would have a material adverse impact on the Company's paging business.
There can be no assurance, however, that such legislation or regulations will
not be passed in the future.
EMPLOYEES
As of June 30, 1996, the Company (excluding KTVE) had 648 full-time
employees, of which 376 were employees of the Company's stations, 260 were
employees of the Company's publications and 12 were corporate and administrative
personnel. As of June 30, 1996, the Phipps Business had 201 employees. None of
the Company's employees are represented by unions. The Company believes that its
relations with its employees are satisfactory.
82
<PAGE>
PROPERTIES
The Company's principal executive offices are located at 126 North
Washington Street, Albany, Georgia 31701, which is owned by The Albany Herald
Publishing Company, Inc. (the "Albany Herald"). The Albany Herald also owns the
adjacent building on the corner of Pine Avenue in Albany. The building located
at 126 North Washington Street contains administration, news and advertising
offices and the adjacent buildings located on Pine Avenue contain the printing
press and production facilities, as well as paper storage and maintenance. These
buildings contain approximately 83,000 square feet. In addition, the parking lot
for the employees and customers of THE ALBANY HERALD is located immediately
across Pine Avenue from the administration offices.
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. The types of properties
required to support newspaper publishing include offices, facilities for the
printing press and production and storage. A station's studios are generally
housed with its offices in business districts. The transmitter sites and antenna
are generally located in elevated areas to provide optimal signal strength and
coverage.
The following table sets forth certain information regarding the Company's
properties.
TELEVISION BROADCASTING
<TABLE>
<CAPTION>
STATION/APPROXIMATE
PROPERTY OWNED APPROXIMATE EXPIRATION
LOCATION USE OR LEASED SIZE OF LEASE
- ------------------------- ------------------------- --------------- --------------- ---------------
WKYT
<S> <C> <C> <C> <C>
Lexington, KY Office, studio and Owned 34,500 sq. ft. -
transmission tower site building on 20
acres
WYMT
Hazard, KY Office and studio Owned 21,200 sq. ft. -
building
Hazard, KY Transmission tower site Leased - June 2015
Hazard, KY Transmitter building and Owned 1,248 sq. ft. -
improvements
WRDW
North Augusta, SC Office and studio Owned 17,000 sq. ft. -
Transmission tower site Owned 143 acres -
WALB
Albany, GA Office and studio Owned 13,700 sq. ft. -
Albany, GA Transmission tower site Owned 21 acres -
WJHG
Panama City, FL Office and studio Owned 14,000 sq. ft. -
Youngstown, FL Transmission tower site Owned 17 acres -
WKXT
Knoxville, TN Office and studio Owned 18,300 sq. ft. --
Knoxville, TN Transmission tower site Leased Tower space Dec. 1998
WCTV
Tallahassee, FL Office and studio Leased 22,000 sq. ft. Dec. 2014
Metcalf, GA Transmission tower site Owned 182 acres --
</TABLE>
83
<PAGE>
PUBLISHING
<TABLE>
<CAPTION>
OWNED APPROXIMATE EXPIRATION
COMPANY/PROPERTY LOCATION USE OR LEASED SIZE OF LEASE
- ----------------------------------- ------------------------- --------------- --------------- ---------------
The Albany Herald Publishing See above See above See above See above
Company, Inc.
<S> <C> <C> <C> <C>
The Rockdale Citizen Publishing
Company
Conyers, GA Offices, printing press Owned 20,000 sq. ft. --
and production facility
for THE ROCKDALE CITIZEN
Lawrenceville, GA Offices and production Leased 11,000 sq. ft. Nov. 1997
facilities of the
GWINNETT DAILY POST
The Southwest Georgia Shoppers Inc.
Tallahassee, FL Offices Owned 5,500 sq. ft. --
</TABLE>
PAGING
<TABLE>
<CAPTION>
OWNED APPROXIMATE EXPIRATION
PROPERTY LOCATION USE OR LEASED SIZE OF LEASE
----------------------------------- ------------------------- --------------- --------------- ---------------
Albany GA Office Leased 800 sq. ft. March 1997
<S> <C> <C> <C> <C>
Columbus, GA Office Leased 1,000 sq. ft. July 1997
Dothan, AL Office Leased 800 sq. ft. Feb. 1997
Macon, GA Office Leased 1,260 sq. ft. July 1998
Tallahassee, GA Office Leased 2,400 sq. ft. Month to month
Thomasville, GA Office Leased 300 sq. ft. Month to month
Valdosta, GA Office Leased 400 sq. ft. May 1997
Panama City, FL Office Leased 1,050 sq. ft. Jan. 1998
</TABLE>
LEGAL PROCEEDINGS
The Company is not party to any legal proceedings in which an adverse
outcome would have a material adverse effect, either individually or in the
aggregate, upon the Company.
84
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning each of the directors and
executive officers of the Company and its subsidiaries.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ----------------------------------- ----- -----------------------------------
<S> <C> <C>
J. Mack Robinson*+ 73 President, Chief Executive Officer
and Director
Robert S. Prather, Jr.*+ 51 Executive Vice
President--Acquisitions and
Director
William A. Fielder III 37 Vice President and Chief Financial
Officer
Sabra H. Cowart 29 Controller, Chief Accounting
Officer and Assistant Secretary
Robert A. Beizer 56 Vice President for Law and
Development and Secretary
Thomas J. Stultz 45 Vice President
Joseph A. Carriere 62 Vice President-Corporate Sales
William E. Mayher III* 57 Chairman of the Board of Directors
Richard L. Boger*+ 49 Director
Hilton H. Howell, Jr.** 34 Director
Howell W. Newton** 49 Director
Hugh Norton 64 Director
</TABLE>
- ------------------------
* Member of the Executive Committee
** Member of the Audit Committee
+ Member of the Management Personnel Committee
MR. ROBINSON was appointed President and Chief Executive Officer on
September 10, 1996 to succeed the late Ralph W. Gabbard. Mr. Robinson has been
chairman of the board of Bull Run 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, 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. He has been a director of the Company since 1993.
MR. PRATHER was appointed Executive Vice President-Acquisitions on September
11, 1996. Mr. Prather has been the President and chief executive officer of Bull
Run since July 1992 and a director of Bull Run since 1992. Prior to that time,
he was President and chief executive officer of Phoenix Corporation, a steel
service center. Mr. Prather has been a director of the Company since 1993.
MR. FIELDER has been a Vice President and the Chief Financial Officer of the
Company since August 1993. From April 1991 until his appointment as Chief
Financial Officer, he was Controller of the Company. Prior to being appointed
controller of the Company in April 1991, he was employed by Ernst & Young LLP,
an accounting firm, which are the independent auditors of the Company.
MS. COWART has been Controller and Chief Accounting Officer of the Company
since April 1995. In February 1996 Ms. Cowart was appointed Assistant Secretary
of the Company. From March 1994 until her appointment as Controller and Chief
Accounting Officer, Ms. Cowart was the corporate accounting manager for the
Company. Prior to joining the Company, she was employed by Deloitte & Touche
LLP, an accounting firm, from 1989 to 1994.
MR. BEIZER has been Vice President for Law and Development and Secretary of
the Company since February 1996. From June 1994 to February 1996, he was of
counsel to Venable, Baetjer, Howard & Civiletti, a law firm, in its regulatory
and legislative practice group. From 1990 to 1994, Mr. Beizer was a partner at
the law firm of Sidley & Austin and was head of its communications practice
group in Washington, D.C. He has
85
<PAGE>
represented newspaper and broadcasting companies, including the Company, before
the Federal Communications Commission for over 25 years. He is a past president
of the Federal Communications Bar Association and a member of the ABA House of
Delegates.
MR. STULTZ has been a Vice President of the Company and the President of the
Company's publishing division since February 1996. From 1990 to 1995, he was
employed by Multimedia, Inc. as a vice president and from 1988 to 1990, as vice
president of marketing.
MR. CARRIERE has been Vice President of Corporate Sales since 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.
DR. MAYHER has been a surgeon since prior to 1991 and has been a director of
the Company since 1990. He has served as Chairman of the Board of Directors
since August 1993.
MR. BOGER has been the 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. He has been a
director of the Company since 1991.
MR. HOWELL 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 a Vice President and Secretary of Bull Run, a designer and
manufacturer of dot matrix printers. He is also a director of the following
corporations: Bull Run, 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. He has been a director of the
Company since 1993. He is the son-in-law of J. Mack Robinson.
MR. NEWTON has been the President and Treasurer of Trio Manufacturing Co., a
textile manufacturing company, since prior to 1991 and a director of the Company
since 1991.
MR. NORTON has been the President of Norco, Inc., an insurance agency, since
prior to 1991 and a director of the Company since 1987.
Each director holds office until the Company's next annual meeting of the
shareholders and until his successor is elected and qualified. Officers are
elected annually by the Board of Directors and hold office at the discretion of
the Board.
EXECUTIVE COMPENSATION
GENERAL. The following table sets forth a summary of the compensation of
the Company's former President, its former chief executive officer and the other
executive officers whose total annual compensation exceeded $100,000 during the
year ended December 31, 1995 ("named executives"). Mr. John T. Williams resigned
as President, Chief Executive Officer and director and was replaced by Mr. Ralph
W. Gabbard effective December 1, 1995. Mr. Gabbard died in September 1996.
86
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------
AWARDS
------------------------------
ANNUAL COMPENSATION SECURITIES
UNDERLYING
NAME AND --------------------- RESTRICTED OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS SARS(#) COMPENSATION
- ---------------------------------------- ------- --------- --------- ------------ --------------- -------------
John T. Williams, 1995 $ 285,000 $ - $2,700,000(2) - $ 606,601(3)
Former President, Chief Executive 1994 286,867 71,910 - - 2,112(4)
Officer and Director (1) 1993 258,400 112,500 - - 1,252(4)
<S> <C> <C> <C> <C> <C> <C>
Ralph W. Gabbard, 1995(5) 261,000 150,000 1,200,000(7) 15,000 12,628(6)
Former President and Director 1994 76,611 168,117 - 30,509 -
1993(8) - - - -
William A. Fielder, III, 1995 106,050 21,000 - 3,000 9,407(9)
Vice President and Chief Financial 1994 75,127 - - - 6,055(10)
Officer 1993 84,600 - - 7,500 5,991(11)
Joseph A. Carriere, 1995 115,075 65,922 - 3,750 878(4)
Vice President Corporate Sales 1994(12) 6,635 - - - -
1993(8) - - - - -
</TABLE>
- ------------------------------
(1) Mr. Williams resigned his position as President, Chief Executive Officer and
director of the Company effective December 1, 1995.
(2) Pursuant to Mr. Williams' employment agreement, Mr. Williams received three
restricted stock awards (the "Common Stock Award") from the Company
aggregating 150,000 shares of Class A Common Stock in 1995. In connection
with Mr. Williams' resignation from the Company, the Company removed the
restrictions on the Common Stock Award in December 1995 and the shares
subject to such Common Stock Award became fully vested. The Company paid
dividends on such shares.
(3) Upon Mr. Williams' resignation, the Company entered into a separation
agreement dated December 1, 1995 (the "Separation Agreement"), which
provided, among other things, for the payment of $596,000 over a two-year
period ending November 1997 as consideration for consulting services, his
resignation and certain non-compete and confidentiality agreements. $3,750,
$2,117 and $4,734 represent payments by the Company for matching
contributions to the 401(k) plan, term life insurance premiums and long term
disability premiums, respectively. The Company expensed the entire $596,000
in 1995.
(4) Represents payments by the Company for term life insurance premiums.
(5) Mr. Gabbard was elected President and director of the Company in December
1995 and served as such until his death in September 1996. 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.
(6) $3,750, $2,736 and $6,142 represent payments by the Company for matching
contributions to the 401(k) plan, term life insurance premiums and long term
disability premiums, respectively.
(7) Mr. Gabbard had an employment agreement with the Company which provided him
with 122,034 shares of Class A Common Stock if his employment with the
Company continued until September 1999. The market value of such shares at
December 31, 1995 was $2,181,358. Approximately $80,000 and $240,000 of
compensation expense was recorded in 1994 and 1995, respectively. The
Company paid dividends on such shares.
(8) Not employed by the Company during this year.
(9) $5,765, $2,625, $378 and $639 represent payments or accruals by the Company
for supplemental retirement benefits, matching contributions to the 401(k)
plan, term life insurance premiums and long term disability premiums,
respectively.
(10) $5,717 and $338 represent payments or accruals by the Company for
supplemental retirement benefits and term life insurance premiums,
respectively.
(11) $5,700 and $291 represent payments or accruals by the Company for
supplemental retirement benefits and term life insurance premiums,
respectively.
(12) Mr. Carriere joined the Company in November 1994 as President and General
Manager of KTVE
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 stockholders of the Company.
87
<PAGE>
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
% OF TOTAL ASSUMED ANNUAL RATES
OPTIONS OF
NUMBER OF GRANTED TO STOCK PRICE
SECURITIES EMPLOYEES EXERCISE APPRECIATION FOR
UNDERLYING IN OR OPTION TERM(1)
OPTIONS FISCAL BASE PRICE EXPIRATION ----------------------
NAME GRANTED YEAR ($/SHARE) DATE 5%($) 10%($)
- --------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Ralph W. Gabbard 15,000 25.8% $13.33 3/30/00 $55,242 $122,071
<S> <C> <C> <C> <C> <C> <C>
William A. Fielder, III 3,000 5.2% $13.33 3/30/00 $11,048 $24,414
Joseph A. Carriere 3,750 6.5% $13.33 3/30/00 $13,811 $30,518
</TABLE>
- ------------------------
(1) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
Class A Common Stock over the term of the options. These numbers are
calculated based on rules promulgated by the Commission and do not reflect
the Company's estimate of future stock price growth. Actual gains, if any,
on stock option exercises and Class A Common Stock holdings are dependent on
the timing of such exercise and the future performance of the Class A Common
Stock. There can be no assurance that the rates of appreciation assumed in
this table can be achieved or that the amounts reflected will be received by
the option holder.
STOCK OPTIONS EXERCISED. The following table sets forth information about
unexercised stock options held by the named executives. No stock options were
exercised by such officers during 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-
NUMBER OF UNEXERCISED THE-MONEY OPTIONS AT FY
OPTIONS AT FY END(#) END($) EXERCISABLE/
NAME EXERCISABLE/UNEXERCISABLE UNEXERCISABLE(1)
- ------------------------------ ------------------------- -------------------------
Ralph W. Gabbard 0/45,509 $0/$318,553
<S> <C> <C>
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 Class A Common Stock at December 31, 1995 was $17 7/8 per
share.
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, the denominator of which is the greater of 25 or the
years of service credited under the plan, plus (ii) .9% of the
88
<PAGE>
employee's 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
- -------------------- ---------- ---------- ---------- ---------- ---------- ----------
$ 15,000 $1,326 $1,986 $2,646 $3,306 $3,300 $3,300
<S> <C> <C> <C> <C> <C> <C>
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.
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 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 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 the employees' 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.
89
<PAGE>
DIRECTORS' COMPENSATION
Directors who are not employed by the Company receive an annual fee of
$6,000. Non-employee 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. In
addition, the Company has a Non-Qualified Stock Option Plan for non-employee
directors that currently provides for the annual grant of options to purchase up
to 7,500 shares of Class A Common Stock at a price per share approximating the
recent market price at the time of grant. Such options are exercisable until the
end of the first month following the close of the Company's fiscal year. The
Company, subject to approval by the Company's shareholders, intends to amend
such Non-Qualified Stock Option Plan to provide for the issuance of Class B
Common Stock in lieu of Class A Common Stock.
EMPLOYMENT AGREEMENTS
In 1995, pursuant to Mr. Williams' employment agreement, Mr. Williams
received the Common Stock Award. In December 1995, Mr. Williams resigned his
position as President, Chief Executive Officer and director of the Company. Upon
his resignation, the Company entered into the Separation Agreement with Mr.
Williams which provides for the payment of $596,000 over a two-year period
ending November 1, 1997 as consideration for Mr. Williams' agreement to (i)
resign from the Company and terminate his employment agreement, (ii) be
available as a consultant to the Company from December 1, 1995 until November
30, 1997 and (iii) not compete with the Company's business and to keep all
information regarding the Company confidential while he is a consultant. In
addition, under the Separation Agreement, Mr. Williams is to receive health and
life insurance coverage with premiums paid by the Company while he is available
as a consultant. Finally, the Separation Agreement provides that the
restrictions on the Common Stock Award were removed and such Common Stock Award
became fully vested.
Ralph W. Gabbard and the Company entered into an employment agreement, dated
September 3, 1994, for a five year term. The agreement provided for annual
compensation of $250,000 during the term of the agreement (subject to yearly
inflation adjustment) and entitled Mr. Gabbard to certain fringe benefits. In
addition to his annual compensation, Mr. Gabbard was entitled to participate in
an annual incentive compensation plan and the Incentive Plan. Under the annual
incentive compensation plan, Mr. Gabbard was eligible to receive additional
compensation if the operating profits of the broadcasting group of the Company
reached or exceeded certain goals. Under the Incentive Plan, Mr. Gabbard
received non-qualified stock options to purchase 30,509 shares of Class A Common
Stock. The exercise price for such options is $9.66.
In February 1996, the Board of Directors approved an amendment to Mr.
Gabbard's employment agreement to increase Mr. Gabbard's base salary from
$250,000 to $300,000, effective January 1, 1996 and to establish a new annual
compensation plan (the "Annual Compensation Plan") to be based upon the
achievement by the Company of a certain operating profit, the amount of which
was to be established by the Board of Directors. Under the Annual Compensation
Plan, if the Company achieved the targeted amount of operating profit in any
given year, Mr. Gabbard would receive $200,000 as additional compensation. The
Annual Compensation Plan further provided that if the Company exceeded the
targeted amount of operating profit in any given year, Mr. Gabbard would be
entitled to receive additional compensation in excess of $200,000, as determined
by the Board of Directors.
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
as of February 12, 1996, for a two-year term which automatically renews 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 non-qualified
options to purchase 7,000 shares of
90
<PAGE>
Class A Common Stock annually during the term of the agreement at an exercise
price per share equal to the fair market value of the Class A Common Stock on
the date of the grant. All options granted are exercisable over a three year
period beginning 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. For purposes of the agreement, "change of control" is defined as any
change in the control of the Company that would be required to be reported in
response to Item 6(e) of Schedule 14A promulgated under the Exchange Act. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Richard L. Boger, Robert S. Prather, Jr. and J. Mack Robinson are the
members of the Management Personnel Committee of the Board of Directors.
Gray Kentucky Television, Inc., a subsidiary of the Company ("Gray
Kentucky") is a party to a rights sharing agreement with Host Communications,
Inc. ("Host") and certain other parties not affiliated with the Company,
pursuant to which the parties agreed to exploit Host's rights to broadcast and
market certain University of Kentucky football and basketball games and related
activities. Pursuant to such agreement, Gray Kentucky is licensed to broadcast
certain University of Kentucky football and basketball games and related
activities. Under this agreement, Gray Kentucky also provides Host with
production and certain marketing services and Host provides accounting and
various marketing services. During the year ended December 31, 1995, the Company
received approximately $332,000 from this joint venture.
Bull Run 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
also owns approximately 9.4% of Host's currently outstanding common shares
directly, thereby giving Bull Run total direct and indirect ownership of Host of
approximately 29.7%. Robert S. Prather, Jr., Executive Vice
President-Acquisitions and a director of the Company, is also a member of the
boards of directors of both CSP and Host.
The Company's Board of Directors approved payments to Bull Run of finders
fees for the acquisition of the GWINNETT DAILY POST, the Augusta Acquisition and
the Phipps Acquisition. The Company agreed to pay finders fees of $75,000 and
$360,000 for the acquisition of GWINNETT DAILY POST and Augusta Acquisitions,
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 and $950,000 was due and included in accounts payable at December
31, 1995 and June 30, 1996, respectively.
On January 3, 1996, Bull Run purchased for $10 million from the Company (i)
the 8% Note in the principal amount of $10 million due in January 2005, with
interest payable quarterly beginning March 31, 1996 and (ii) warrants to
purchase 487,500 shares of Class A Common Stock at $17.88 per share, (subject to
customary antidilution provisions) 300,000 of which are currently fully vested,
with the remaining warrants vesting in five equal annual installments commencing
January 3, 1997, provided that the 8% Note is outstanding. On January 3, 1996,
the closing price of the Class A Common Stock on the NYSE was $17.75. The
warrants (which represent 9.8% of the currently issued and outstanding shares of
Class A Common Stock, after giving effect to the exercise of such warrants)
expire in January 2006 and may not be exercised unless shareholder approval of
the issuance of the warrants is obtained, which is expected to occur at the
Company's 1996 annual meeting of shareholders. The Company obtained an opinion
from The Robinson-Humphrey Company, Inc., one of the underwriters of this
Offering and the Concurrent Offering, stating that the terms and conditions of
the 8% Note were fair from a financial point of view, to the shareholders of the
Company. The proceeds from the sale of the 8% Note and the warrants were used to
fund, in part, the Augusta Acquisition.
In connection with the issuance by the Company of the $10 million letter of
credit in the Phipps Acquisition, J. Mack Robinson, a director of the Company
(and subsequently appointed the President and Chief Executive Officer of the
Company), executed a put agreement in favor of the letter of credit issuer, for
which he received no consideration from the Company. Pursuant to such agreement,
in the event that such
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letter of credit is drawn upon by the sellers of the Phipps Business and the
Company defaults on the repayment of such amounts so drawn under the letter of
credit, Mr. Robinson has agreed to pay such amounts to the issuer of the letter
of credit.
ISSUANCES OF PREFERRED STOCK.
As part of the Financing, the 8% Note will be retired and the Company will
issue to Bull Run, 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, cumulative cash dividends
at an annual rate of $800 per share. The Series A 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 to the 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 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 any 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 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, or on a parity with, 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 directors to the
Company's Board of Directors until the full dividends accumulated have been
declared and paid and (iii) as required by law. The warrants issued with the 8%
Note will vest in accordance with the schedule described above, provided that
the Series A Preferred Stock remains outstanding.
In addition, as part of the Financing, the Company will issue to Bull Run,
J. Mack Robinson and certain of his affiliates 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,
cumulative dividends at an annual rate of $600 per share, except that the
Company at its option may pay such dividends in cash or in additional shares of
Series B Preferred Stock valued, for the purpose of determining the number of
shares (or fraction thereof) of such Series B Preferred Stock to be issued, at
$10,000 per share. 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 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 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, 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, or on a parity with, 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 directors to the Company's Board of Directors until the
full dividends accumulated have been declared and paid and (iii) as required by
law. The shares of the Series A Preferred Stock and Series B Preferred Stock
will rank PARI PASSU as to the payment of dividends and as to distributions of
assets upon liquidation, dissolution or winding up of the Company.
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In connection with the issuance of the Series B Preferred Stock as part of
the Financing, (i) the Company will issue to the purchasers of the Series B
Preferred Stock warrants entitling the holders thereof to purchase an aggregate
of 500,000 shares of Class A Common Stock at an exercise price of $24.00 per
share (subject to customary antidilution provisions), representing 10.1% of the
currently issued and outstanding shares of Class A Common Stock, after giving
effect to the exercise of such warrants. Of these warrants, an aggregate of
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 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
Company has obtained a written opinion from The Robinson-Humphrey Company, Inc.,
one of the underwriters of this Offering and the Concurrent Offering, stating
that the terms and conditions of the Series B Preferred Stock and the warrants
are fair to the shareholders of the Company from a financial point of view.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
stockholders who are known by the Company to be the beneficial owners of more
than 5% of the outstanding Class A Common Stock and the number of shares of
Class A Common Stock beneficially owned by directors and named executive
officers of the Company, individually, and all directors and executive officers
of the Company as a group as of July 31, 1996. Except as indicated below, none
of such shareholders own, or have the right to acquire any shares of Class B
Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SHARES BENEFICIALLY
BENEFICIAL OWNER OWNED PERCENT OF CLASS
- ---------------------------------- ------------------------ ------------------------
<S> <C> <C>
Bull Run Corporation (1) 1,211,590 27.1%
George H. Nader (2) 240,899 5.4%
Ralph W. Gabbard 31,427 *
William A. Fielder III (3) 8,629 *
Sabra H. Cowart 216 *
Robert A. Beizer -- *
Thomas J. Stultz 1,500 *
Joseph A. Carriere 642 *
William E. Mayher III (3) 16,500 *
Richard L. Boger (3) 24,150 *
Hilton H. Howell, Jr. (3)(4)(5)(6) 1,280,740 28.6%
Howell W. Newton (3) 9,250 *
Hugh Norton (3) 16,500 *
Robert S. Prather, Jr. (3)(4)(7) 1,242,340 27.8%
J. Mack Robinson (3)(4)(6)(8) 2,003,530 44.8%
John T. Williams (9) 78,752 1.8%
All directors and executive (4)-(2,290,9968),
officers as a group (14 persons) (10) 50.6
</TABLE>
- ------------------------------
* Less than 1%.
(1) Owned by Bull Run through its wholly-owned subsidiary, Datasouth Computer
Corporation. The address of Bull Run is 4370 Peachtree Road, Atlanta,
Georgia 30319. Does not include warrants to be issued as part of the
Financing. See "Management-- Compensation Committee Interlocks and Insider
Participation."
(2) Mr. Nader's address is P.O. Box 271, 1011 Fifth Avenue, West Point, Georgia
31833.
(3) Includes 7,500 shares subject to currently exercisable options.
(4) Includes 1,211,590 shares owned by Bull Run as described in footnote (1)
above, because Messrs. Howell, Prather and Robinson are directors and
officers of Bull Run and Messrs. and Prather and Robinson are principal
shareholders of Bull Run and, as such, may be deemed to have the right to
vote or dispose of such shares. However, each of Messrs. Howell, Prather and
Robinson disclaims beneficial ownership of the shares owned by Bull Run.
(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 stockholder.
(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, Atlanta, Georgia 30319.
(9) Mr. Williams resigned his position as President and Chief Executive Officer
of the Company effective December 1, 1995.
(10) Includes 60,000 shares subject to currently exercisable options.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
J. Mack Robinson, President, Chief Executive Officer and a director of the
Company, is Chairman of the Board of Bull Run and the beneficial owner of
approximately 28% of the outstanding shares of common stock, par value $.01 per
share ("Bull Run Common Stock"), of Bull Run (including certain shares as to
which such beneficial ownership is disclaimed by Mr. Robinson). Robert S.
Prather, Jr., Executive Vice President--Acquisitions and a director of the
Company, is President, Chief Executive Officer and a director of Bull Run and
the beneficial owner of approximately 12% of the outstanding shares of Bull Run
Common Stock (including certain shares as to which such beneficial ownership is
disclaimed by Mr. Prather). Mr. Prather is also a member of the Board of
Directors of CSP and Host. Hilton H. Howell, Jr. a director of the Company, is
Vice President, Secretary and a director of Bull Run. See
"Management--Compensation Committee Interlocks and Insider Participation" for a
description of certain business relationships between the Company and Messrs.
Prather and Robinson, Host, CSP and Bull Run.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
THE SENIOR CREDIT FACILITY
The Company has executed a commitment letter with respect to the Senior
Credit Facility. However, there can be no assurance that the Company will enter
into the Senior Credit Facility on the terms described herein or at all.
As of June 30, 1996, approximately $49.5 million of indebtedness (excluding
accrued interest) was outstanding under the Old Credit Facility. As part of the
Financing, the Company will retire all of the outstanding indebtedness under the
Old Credit Facility and will enter into the Senior Credit Facility.
The Senior Credit Facility will provide for borrowings of up to an aggregate
of $125.0 million in the form of a seven-year reducing revolving credit facility
in the amount of $53.5 million ("Facility A") and a seven-year reducing
revolving credit/term facility in the amount of $71.5 million ("Facility B").
The Senior Credit Facility will also provide for the issuance of standby letters
of credit in an aggregate amount of up to $15.0 million to the extent that there
is borrowing availability under the Senior Credit Facility.
Funds available under the Senior Credit Facility will be available upon
consummation of the Phipps Acquisition to retire indebtedness under the Old
Credit Facility and under the Senior Note, to finance certain acquisitions, to
fund the optional redemption of the Notes and for capital expenditures and
working capital needs. In addition, the Senior Credit Facility may be used to
fund, in part, the Phipps Acquisition.
Commitments under Facility A will be reduced in quarterly amounts commencing
on March 31, 1997 with a final maturity of June 30, 2003. Facility B will
convert to a term loan at December 31, 1998, the outstanding balance of which
must thereafter be repaid on a quarterly basis with a final maturity of June 30,
2003.
Interest under the Senior Credit Facility will be payable, at the Company's
option, at LIBOR or the prime rate, in each case, plus a floating percentage
tied to the Company's ratio of total debt to operating cash flow, ranging from
LIBOR plus 3.25% or the prime rate plus 1.0%, based upon a 6.50 to 1 ratio, to
LIBOR plus 1.50% or the prime rate, based upon a 4 to 1 ratio. Pursuant to the
Senior Credit Facility, the Company will be required to enter into interest rate
swap agreements for the purpose of interest rate protection covering an amount
of borrowings thereunder of no less than 50% of the outstanding principal amount
of all indebtedness.
The Senior Credit Facility will be secured by the pledge of all of the stock
of the subsidiaries of the Company and a first lien on all of the assets of the
Company and its subsidiaries. Each of the subsidiaries of the Company will
guarantee the Company's obligations under the Senior Credit Facility.
The Senior Credit Facility will contain restrictions on the Company's
ability to pay dividends and make certain acquisitions. The Senior Credit
Facility will also contain provisions requiring the Company to maintain certain
financial ratios, including a total debt to operating cash flow ratio, a senior
debt to operating cash flow ratio, an operating cash flow to total interest
expense ratio, an operating cash flow to pro forma debt service ratio and a
fixed charge coverage ratio.
The Senior Credit Facility will require the Company to apply at the end of
each fiscal year, commencing on December 31, 1997, 50% (if the Company's total
debt to operating cash flow ratio at the end of such year is 4.5 to 1 or
greater) of its "Excess Cash Flow" to reduce outstanding debt, on a pro rata
basis, under Facilities A and B. In addition, the Company will be required to
apply from the proceeds of any permitted equity issuance an amount sufficient to
reduce the Company's leverage to specified levels. The Senior Credit Facility
will require the Company to use the proceeds from certain asset sales to repay
indebtedness under the Senior Credit Facility. The Senior Credit Facility will
also contain a number of customary covenants including, among others,
limitations on investments and advances, mergers and sales of assets, liens on
assets, affiliate transactions and changes in business.
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DESCRIPTION OF THE NOTES
Pursuant to the Concurrent Offering, the Company is offering $150,000,000
aggregate principal amount of its % Senior Subordinated Notes due 2006.
Interest on the Notes is payable semi-annually on and
, commencing , 1997, at the rate of % per
annum. The Notes are redeemable, in whole or in part, at the option of the
Company on or after , 2001, at the redemption prices set forth in the
Indenture pursuant to which the Notes are to be issued (the "Indenture") plus
accrued interest to the date of redemption. In addition, at any time before
, 1999, the Company, at its option, may redeem up to 35% of the
aggregate principal amount of the Notes originally issued with the net proceeds
of one or more Public Equity Offerings (as defined in the Indenture), other than
this Offering, at the redemption prices set forth in the Indenture plus accrued
and unpaid interest to the date of redemption; provided, however, that at least
$97.5 million in aggregate principal amount of the Notes remain outstanding
immediately after any such redemption.
The Notes will be general unsecured obligations of the Company and
subordinated in right of payment to all Senior Debt (as defined in the
Indenture), including all indebtedness of the Company under the Senior Credit
Facility. Pursuant to the terms of the Indenture, the Notes will be guaranteed,
fully and unconditionally, jointly and severally, on a senior subordinated
unsecured basis by all of the Company's subsidiaries (the "Subsidiary
Guarantors").
Upon a Change of Control (as defined in the Indenture), each holder will
have the right to require the Company to repurchase such holder's Notes at a
price equal to 101% of their principal amount plus accrued interest to the date
of repurchase. If the Phipps Acquisition is not consummated prior to December
23, 1996, the Company will be required to redeem the Notes on or prior to
December 31, 1996 at a redemption price equal to 101% of the principal amount of
the Notes plus accrued and unpaid interest to the date of purchase. At any time
prior to December 23, 1996, if the Phipps Acquisition has not been consummated,
the Company may, at its option, redeem the Notes, in whole but not in part, at a
redemption price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date fixed for redemption. In addition, the Company will
be obligated to offer to repurchase Notes at 100% of their principal amount plus
accrued interest to the date of repurchase in the event of certain asset sales.
The Indenture will impose certain limitations on the ability of the Company
and its subsidiaries to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur indebtedness that
is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt
(as defined in the Indenture) and senior in right of payment to the Notes or any
Subsidiary Guarantor, incur liens, impose restrictions on the ability of a
subsidiary to pay dividends or make certain payments to the Company, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The following descriptions of certain terms of the Class A Common Stock,
Class B Common Stock, preferred stock (the "Preferred Stock") and the Company's
warrants are intended as summaries only and are qualified in their entirety by
reference to the complete text of the Articles of Incorporation of the Company
and such warrants.
CLASS A AND CLASS B COMMON STOCK
VOTING. Holders of Class A Common Stock are entitled to 10 votes per share.
Holders of Class B Common Stock are entitled to one 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
by law. Immediately after the consummation of this Offering and the Concurrent
Offering, the Class B Common Stock will have approximately 7.3% of the
outstanding voting power of the Company.
DIVIDENDS. Holders of Class B Common Stock are entitled to receive cash
dividends on an equal per share basis as Class A Common Stock if and when such
dividends are declared by the Board of Directors of the Company from funds
legally available therefor.
LIQUIDATION. Holders of Class A and Class B Common Stock share with each
other on a ratable basis as a single class in the net assets of the Company
available for distribution in respect to Class A and Class B Common Stock in the
event of liquidation.
CLASS B RIGHTS. Voting rights disproportionate to equity ownership may be
acquired through acquisitions of Class A Common Stock without corresponding
purchases of Class B Common Stock. The Class B rights (the "Class B Rights") are
intended to make it more difficult for a buyer who has not acquired 100% of the
Class B Common Stock to acquire 100% of the Class A Common Stock. Although the
Class B Rights might make the Company a less attractive target for a takeover
bid, the Class B Rights are intended to help reduce or eliminate any disparity
in the prices at which the two classes of Common Stock might trade and to give
holders of the Class B Common Stock the opportunity to participate in any
premium that might be paid for 100% of the Class A Common Stock.
If, after the consummation of this Offering, 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 the 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 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 Class B Rights
cannot be amended without the approval of the holders of a majority of the Class
B Common Stock, voting separately as a class.
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 NYSE (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 the shares of Class A Common Stock giving rise to
the Class B Rights.
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 were in excess of the percentage ownership
of Class B Common Stock. 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
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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 Rule 13d-1 promulgated under
the Securities Exchange Act of 1934, as amended (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 NYSE (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 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 certain
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 100% 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 deterred
from acquiring the Company as a result of such requirement.
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 Company or any other securities
convertible into shares of any class of stock of the Company.
PREFERRED STOCK AND WARRANTS
The Company is authorized to issue 20,000,000 shares of Preferred Stock. The
Board of Directors of the Company, without further shareholder approval, has the
authority to issue, at any time and from time to time, the Preferred Stock of
any series and, in connection with the creation of each such series, to fix the
number of shares of such series and the relative rights, powers, preferences,
qualifications, limitations and restrictions of such series to the full extent
now or hereafter permitted by the laws of Georgia. For a description of the
Series A Preferred Stock, Series B Preferred Stock and the Company's warrants,
see "Management--Compensation Committee Interlocks and Insider Participation."
CERTAIN PROVISIONS OF ARTICLES OF INCORPORATION AND BYLAWS
The Articles of Incorporation provide that the directors of the Company will
not be personally liable for monetary damages to the Company for certain
breaches of their fiduciary duty as directors, except for liability (i) for any
appropriation, in violation of such director's duties, of any business
opportunity of the Company, (ii) for acts or omissions which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful corporate
distributions or (iv) for any transaction from which the director derived an
improper personal benefit. This provision would have no effect on the
availability of equitable remedies or non-monetary relief, such as an injunction
or rescission for breach of duty of care. In addition, the provision applies
only to claims against a director arising out of his role as a director and not
in any other capacity (such as an officer or employee of the Company). Directors
will, however, no longer be liable as such for monetary damages arising from
decisions involving violations of the duty of care which could be deemed grossly
negligent.
TRANSFER AGENT AND REGISTRAR
Mellon Securities Trust Company will be the Transfer Agent and Registrar for
the Class B Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
4,467,205 shares of Class A Common Stock based upon shares outstanding as of
June 30, 1996 and 3,500,000 shares of Class B Common Stock outstanding. All of
such shares of Class B Common Stock will be freely tradeable without restriction
or limitation under the Securities Act, except for any shares held or purchased
by "affiliates" or persons acting as "underwriters," as these terms are defined
under the Securities Act.
Approximately 2,260,000 shares of Class A Common Stock held by Bull Run and
its affiliates and the executive officers and directors of the Company may not
be sold unless they are registered under the Securities Act or sold pursuant to
an exemption from registration, such as the exemption provided by Rule 144
promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least a two-year period (as computed under Rule 144) is entitled
to sell within any three-month period up to the number of restricted shares (as
defined in Rule 144) that does not exceed the greater of (i) one percent of the
then outstanding shares of Common Stock of such class or (ii) the average weekly
trading volume in the related class of Common Stock of such class during the
four calendar weeks immediately preceding the date on which the notice of sale
is filed with the Securities and Exchange Commission, subject to certain manner
of sale provisions, notice requirements and the availability of current public
information about the Company. In addition, restricted shares (within the
meaning of Rule 144 under the Securities Act) that have been held by a person
who is not an "affiliate" of the Company for at least three years may be sold
under Rule 144(k) without regard to the volume limitations or current public
information or manner of sale requirements of Rule 144.
The holders of approximately 2,120,000 shares of Class A Common Stock and
options or warrants (currently outstanding or to be issued upon consummation of
the Financing) to acquire an additional estimated 1,047,500 shares of Class A
Common Stock, including each of the Company's directors and executive officers
and Bull Run and its affiliates, have agreed that they will not offer, sell or
otherwise dispose of any shares of Class A Common Stock or Class B Common Stock
or securities convertible into, or exercisable or exchangeable for, Class A
Common Stock or Class B Common Stock, subject to certain exceptions, without the
prior consent of The Robinson-Humphrey Company, Inc. for a period of 180 days
from the date of this Prospectus. See "Underwriting."
Prior to this Offering, there has not been any public market for the Class B
Common Stock. No prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of Class A Common Stock or Class B Common Stock in the public market could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future. See "Risk Factors--No Prior Public Market."
100
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom The Robinson-Humphrey Company, Inc.
("Robinson-Humphrey"), Allen & Company Incorporated ("Allen & Company"), J.C.
Bradford & Co. and J.P. Morgan Securities Inc. ("J.P. Morgan") are acting as
representatives (collectively, the "Representatives"), have severally agreed to
purchase from the Company and the Company has agreed to sell to the
Underwriters, the number of shares of Class B Common Stock set forth opposite
their respective names below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------
<S> <C>
The Robinson-Humphrey Company, Inc.............................................................
Allen & Company Incorporated...................................................................
J.C. Bradford & Co.............................................................................
J.P. Morgan Securities Inc.....................................................................
-------
Total........................................................................................
-------
-------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriers thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all shares of Class B
Common Stock offered hereby if any are purchased.
The Underwriters propose to offer the shares of Class B Common Stock
directly to the public at the Price to Public set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share in sales to certain other
dealers. After the Offering, the Price to Public and other selling terms may be
changed.
The Company, Bull Run and its affiliates and each of the Company's directors
and executive officers have agreed that they will not offer, sell or otherwise
dispose of any shares of Class A Common Stock or securities convertible into, or
exercisable or exchangeable for, Class A Common Stock or Class B Common Stock,
subject to certain exceptions, for a period of 180 days from the date of this
Prospectus without the prior written consent of Robinson-Humphrey.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to 525,000 additional shares of
Class B Common Stock to cover-allotments, if any, at the public offering price
less the underwriting discount, as set forth on the cover page of this
Prospectus. If the Underwriters exercise their over-allotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
3,500,000 shares of Class B Common Stock offered hereby. The Underwriters may
exercise such option only to cover over-allotments in connection with the sale
of the shares of Class B Common Stock offered hereby.
Prior to this Offering there has been no public market for the Class B
Common Stock. The initial offering price of the Class B Common Stock will be
based on the closing price of the Class A Common Stock on the date of offering
and will be determined through negotiations between the Company and the
Underwriters. There can be no assurance that the market price of the Class B
Common Stock subsequent to this Offering will correlate to the market price of
the Class A Common Stock. The Class B Common Stock has been approved for listing
on the NYSE, subject to official notice of issuance. The Underwriters have
advised the NYSE that they will undertake to ensure that the NYSE share
distribution standards required to be satisfied for initial listing of the Class
B Common Stock will be met.
Robinson-Humphrey, Allen & Company and J.P. Morgan are acting as
underwriters in connection with the Concurrent Offering and will receive
customary fees in connection therewith. Robinson-Humphrey will be rendering
investment banking advice in connection with the exchange of the 8% Note for
Series A
101
<PAGE>
Preferred Stock and the sale of the Series B Preferred Stock and warrants and
will receive customary fees in connection therewith. Robinson-Humphrey from time
to time has performed investment banking services for the Company and certain of
its affiliates, for which it has received customary fees.
The Underwriters do not intend to confirm sales of shares of Class B Common
Stock to any accounts over which they exercise discretionary authority.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares of Class B Common Stock offered hereby will be
passed upon for the Company by Heyman & Sizemore, Atlanta, Georgia. Certain
other legal matters in connection with this Offering will be passed upon for the
Company by Proskauer Rose Goetz & Mendelsohn LLP, New York, New York. Certain
legal matters in connection with this Offering will be passed upon for the
Underwriters by King & Spalding, Atlanta, Georgia.
EXPERTS
The consolidated financial statements and schedule of Gray Communications
Systems, Inc. at December 31, 1995 and 1994, and for each of the three years in
the period ended December 31, 1995, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The financial statements of WRDW-TV at December 31, 1995 and for the year
then ended appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of WRDW-TV (an operating station of Television
Station Partners, L.P.) at December 31, 1994 and for the years ended December
31, 1993 and 1994 included in this Prospectus and Registration Statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report thereon appearing elsewhere herein and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements and schedule of the Broadcasting and Paging
Operations of John H. Phipps, Inc. at December 31, 1995 and 1994, and for each
of the three years in the period ended December 31, 1995, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act. This Prospectus does not contain all of
the information set forth in the Registration Statement and the schedules and
exhibits thereto. For further information with respect to the Company and the
Class B Common Stock, reference is hereby made to the Registration Statement and
to the schedules and exhibits thereto. Statements contained in this Prospectus
as to the contents of any contract or other document referred to herein are not
necessarily complete and where such contract or other document is an exhibit to
the Registration Statement, each such statement is qualified in all respects by
the provisions of such exhibit, to which reference is hereby made for a full
statement of the provisions thereof.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such Registration
102
<PAGE>
Statement, reports, proxy statements and other information filed by the Company
with the Commission may be inspected and copied at the public reference
facilities of the Commission at its principal office at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at Seven World Trade Center, 13th Floor, New York, New York
10048 and at Room 3190, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60061. Copies of each such document may be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549.
The Company currently has outstanding Class A Common Stock, which is listed
on the NYSE. Reports, proxy statements and other information concerning the
Company can be inspected at the offices of the NYSE, 20 Broad Street, New York,
New York 10005.
103
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
GRAY COMMUNICATIONS SYSTEMS, INC. (THE "COMPANY")
Interim Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets at December 31, 1995 and June 30, 1996....... F-2
Condensed Consolidated Statements of Income for the six months ended June 30, 1995
and 1996.......................................................................... F-3
Condensed Consolidated Statement of Stockholders' Equity for the six months ended
June 30, 1996..................................................................... F-4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
1995 and 1996..................................................................... F-5
Notes to Condensed Consolidated Financial Statements............................... F-6
Audited Consolidated Financial Statements:
Report of Independent Auditors..................................................... F-12
Consolidated Balance Sheets at December 31, 1994 and 1995.......................... F-13
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and
1995.............................................................................. F-14
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995............................................................... F-15
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995.......................................................................... F-16
Notes to Consolidated Financial Statements......................................... F-17
WRDW-TV (THE "AUGUSTA BUSINESS")
AUDITED FINANCIAL STATEMENTS:
Report of Independent Auditors..................................................... F-35
Balance Sheet at December 31, 1995................................................. F-36
Statement of Income for the year ended December 31, 1995........................... F-37
Statement of Partnership's Equity for the year ended December 31, 1995............. F-38
Statement of Cash Flows for the year ended December 31, 1995....................... F-39
Notes to Financial Statements...................................................... F-40
Independent Auditors' Report....................................................... F-43
Balance Sheet at December 31, 1994................................................. F-44
Statements of Income for the years ended December 31, 1993 and 1994................ F-45
Statements of Partnership's Equity for the years ended December 31, 1993 and
1994.............................................................................. F-46
Statements of Cash Flows for the years ended December 31, 1993 and 1994............ F-47
Notes to Financial Statements...................................................... F-48
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE "PHIPPS BUSINESS")
Interim Condensed Financial Statements (unaudited):
Condensed Balance Sheets at December 31, 1995 and June 30, 1996.................... F-52
Condensed Statements of Income for the six months ended June 30, 1995 and 1996..... F-53
Condensed Statements of Cash Flows for the six months ended June 30, 1995 and
1996.............................................................................. F-54
Notes to Condensed Financial Statements............................................ F-55
Audited Financial Statements:
Report of Independent Auditors..................................................... F-56
Balance Sheets at December 31, 1994 and 1995....................................... F-57
Statements of Income for the years ended December 31, 1993, 1994 and 1995.......... F-58
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995...... F-59
Notes to Financial Statements...................................................... F-60
</TABLE>
F-1
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------
DECEMBER 31, JUNE 30,
1995 1996
--------------- ---------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $559,991 $1,287,096
Trade accounts receivable, less allowance for
doubtful accounts of $450,000 and $537,000,
respectively 9,560,274 10,817,791
Recoverable income taxes 1,347,007 797,455
Inventories 553,032 109,028
Current portion of program broadcast rights 1,153,058 710,424
Other current assets 263,600 758,808
--------------- ---------------
13,436,962 14,480,602
Property and equipment 37,618,893 40,178,694
Less allowance for depreciation (20,601,819) (21,380,407)
--------------- ---------------
17,017,074 18,798,287
Other assets
Deferred acquisition costs (includes $910,000
and $1,050,000 to Bull Run Corporation at
December 31, 1995 and June 30, 1996,
respectively) (NOTE C) 3,330,481 2,818,851
Deferred loan costs (NOTE C) 1,232,261 1,881,648
Goodwill and other intangibles (NOTE C) 42,004,050 73,299,223
Other 1,219,650 1,237,021
--------------- ---------------
47,786,442 79,236,743
--------------- ---------------
$78,240,478 $112,515,632
--------------- ---------------
--------------- ---------------
Current liabilities:
Trade accounts payable (includes $670,000 and
$950,000 payable to Bull Run Corporation at
December 31, 1995 and June 30, 1996,
respectively) $3,752,742 $3,169,283
Accrued expenses 5,839,007 7,063,971
Current portion of program broadcast obligations 1,205,784 709,782
Current portion of long-term debt 2,861,672 0
--------------- ---------------
13,659,205 10,943,036
Long-term debt (including a $10,000,000 principal
amount 8% Note to Bull Run Corporation at June
30, 1996) (Notes C and D) 51,462,645 82,845,688
Non-current liabilities 4,133,030 4,913,624
Commitments and Contingencies (NOTE E)
Stockholders' Equity (NOTE B AND D)
Class A Common Stock, no par value; authorized
10,000,000 shares; issued 5,082,756 and
5,130,385 shares, respectively 6,795,976 10,000,365
Retained earnings 8,827,906 10,451,203
--------------- ---------------
15,623,882 20,451,568
Treasury stock, 663,180 shares at cost (6,638,284) (6,638,284)
--------------- ---------------
8,985,598 13,813,284
--------------- ---------------
$78,240,478 $112,515,632
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------
1995 1996
---------- ----------
Operating revenues:
<S> <C> <C>
Broadcasting (net of agency commissions) $18,260,940 $24,251,901
Publishing 10,046,114 11,261,792
---------- ----------
28,307,054 35,513,693
Expenses:
Broadcasting 11,409,511 14,418,200
Publishing 8,589,861 9,192,751
Corporate and administrative 1,012,024 1,570,806
Depreciation and amortization 1,821,700 2,900,724
Non-cash compensation paid in common stock (NOTE
B) 816,474 120,000
---------- ----------
23,649,570 28,202,481
---------- ----------
4,657,484 7,311,212
Miscellaneous income 68,514 81,361
---------- ----------
4,725,998 7,392,573
Interest expense 2,768,187 4,444,878
---------- ----------
Income before income taxes 1,957,811 2,947,695
Income tax expense 776,000 1,146,000
---------- ----------
Net earnings $1,181,811 $1,801,695
---------- ----------
---------- ----------
Average outstanding common shares 4,383,263 4,656,691
---------- ----------
---------- ----------
Net earnings per common share - primary $0.27 $0.39
---------- ----------
---------- ----------
Net earnings per common share - fully diluted $0.27 $0.38
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
CLASS A COMMON STOCK TREASURY STOCK
-------------------------- -------------------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 5,082,756 $6,795,976 (663,180) $(6,638,284) $8,827,906 $8,985,598
Net income for the six months
ended
June 30, 1996 -0- -0- -0- -0- 1,801,695 1,801,695
Cash dividends ($.04 per
share) -0- -0- -0- -0- (178,398) (178,398)
Issuance of common stock
warrants (Note C) -0- 2,600,000 -0- -0- -0- 2,600,000
Income tax benefits relating
to stock plans -0- 62,000 -0- -0- -0- 62,000
Issuance of Class A Common
Stock:
401(k) Plan 7,129 139,640 -0- -0- -0- 139,640
Directors stock plan 22,500 228,749 -0- -0- -0- 228,749
Non-qualified stock plan 18,000 174,000 -0- -0- -0- 174,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1996 5,130,385 $10,000,365 (663,180) $(6,638,284) $10,451,203 $13,813,284
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1995 1996
--------------- ---------------
Operating activities
<S> <C> <C>
Net income $1,181,811 $1,801,695
Items which did not use (provide)
cash:
Depreciation 1,233,847 1,648,014
Amortization of intangible assets 587,853 1,252,710
Amortization of program broadcast
rights 767,964 1,279,357
Amortization of original issue
discount on subordinated note 0 144,444
Payments for program broadcast
rights (902,858) (1,309,364)
Income tax benefit relating to stock
plan 0 62,000
Compensation paid in Class A common
stock 816,474 120,000
Supplemental employee benefits (154,216) (203,708)
Class A common stock contributed to
401(k) Plan 168,023 139,640
Deferred income taxes 109,000 676,059
(Gain) loss on disposal of assets 1,952 (17,968)
Changes in operating assets and
liabilities:
Receivables, inventories, and
other current assets (599,165) 1,081,052
Accounts payable and other current
liabilities 616,978 126,622
--------------- ---------------
Net cash provided by operating
activities 3,827,663 6,800,553
Investing Activities
Acquisition of newspaper business (1,232,509) 0
Acquisition of television business 0 (34,330,365)
Purchases of property and equipment (1,852,431) (1,317,345)
Deferred acquisition costs (2,033,892) (1,797,772)
Proceeds from asset sales 2,742 113,297
Other (261,233) (157,538)
--------------- ---------------
Net cash used in investing activities (5,377,323) (37,489,723)
Financing Activities
Dividends paid (172,110) (178,398)
Class A common stock transactions 0 402,749
Proceeds from settlement of interest
rate swap 0 215,000
Proceeds from borrowings of long-term
debt 2,200,000 36,725,000
Payments on long-term debt (820,281) (5,748,076)
--------------- ---------------
Net cash provided by financing
activities 1,207,609 31,416,275
--------------- ---------------
Increase (decrease) in cash and cash
equivalents (342,051) 727,105
Cash and cash equivalents at beginning
of period 558,520 559,991
--------------- ---------------
Cash and cash equivalents at end of
period $216,469 $1,287,096
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to condensed consolidated financial statements.
F-5
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Gray
Communications Systems, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for
the six month period ended June 30, 1996, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included herein.
Certain amounts in the accompanying unaudited consolidated financial
statements have been reclassified to conform to the 1996 format.
NOTE B -- EMPLOYMENT AGREEMENTS
During the quarter ended March 31, 1995, the Company awarded 150,000 shares
of its Class A Common Stock to its former president and chief executive officer
under his employment agreement. Compensation expense of approximately $696,000
was recognized for these awards in the six months ended June 30, 1995.
The Company has an employment agreement with its current President which
provides for an award of 122,034 shares of Class A Common Stock if his
employment with the Company continues until September 1999. Approximately
$60,000 of expense was recognized in each quarter of 1995 and 1996 relating to
this award and approximately $1.2 million of expense will be recognized over the
five-year period ending in 1999.
NOTE C -- BUSINESS ACQUISITIONS
The Company's acquisitions in 1995 and 1996 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 unaudited condensed 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 and as amended in March 1996, the Company entered into an
asset purchase agreement to acquire (the "Phipps Acquisition") two
CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee,
Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a
satellite broadcasting business and a paging business (collectively, the "Phipps
Business"). The purchase price is estimated at approximately $185.0 million. The
Company's Board of Directors has agreed to pay Bull Run Corporation ("Bull
Run"), a principal stockholder of the Company, a finder's fee equal to 1% of the
proposed purchase price for services performed, of which $1.05 million is
included in deferred acquisition costs and $950,000 is due and included in
accounts payable at June 30, 1996.
The consummation of the Phipps Acquisition, which is expected to occur by
September 1996, is subject to approval by the appropriate regulatory agencies.
In connection with the Phipps Acquisition, the Company is seeking approval from
the Federal Communications Commission ("FCC") of the assignment of the
television broadcast licenses for WCTV and WKXT. Current FCC regulations will
require the Company to divest itself of WALB-TV ("WALB") in Albany, Georgia and
WJHG-TV ("WJHG") in Panama City, Florida due to common ownership restrictions on
stations with overlapping signals. 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
F-6
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE C -- BUSINESS ACQUISITIONS (CONTINUED)
transaction qualifying for deferred capital gains treatment under the "like-kind
exchange" provision of Section 1031 of the Internal Revenue Code of 1986, as
amended (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 (in thousands):
<TABLE>
<CAPTION>
--------------------------------
<S> <C> <C>
JUNE 30, 1996
--------------------------------
WALB WJHG
--------------- ---------------
Current assets $1,801 $913
Property and equipment 1,714 1,014
Other assets 66 3
--------------- ---------------
Total assets $3,581 $1,930
--------------- ---------------
--------------- ---------------
Current liabilities $1,756 $474
Other liabilities 214 0
Stockholder's equity 1,611 1,456
--------------- ---------------
Total liabilities and stockholder's equity $3,581 $1,930
--------------- ---------------
--------------- ---------------
</TABLE>
Condensed income statement data of WALB is as follows (in thousands):
<TABLE>
<CAPTION>
--------------------------------
SIX MONTHS
ENDED JUNE 30,
--------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
Broadcasting revenues $4,715 $5,098
Expenses 2,356 2,440
--------------- ---------------
Operating income 2,359 2,658
Other income 9 9
--------------- ---------------
Income before income taxes 2,368 2,667
--------------- ---------------
--------------- ---------------
Net income $1,468 $1,654
--------------- ---------------
--------------- ---------------
</TABLE>
Condensed income statement data of WJHG is as follows (in thousands):
<TABLE>
<CAPTION>
--------------------------------
SIX MONTHS
ENDED JUNE 30,
--------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
Broadcasting revenues $1,826 $2,409
Expenses 1,690 1,933
--------------- ---------------
Operating income 136 476
Other income 31 16
--------------- ---------------
Income before income taxes 167 492
--------------- ---------------
--------------- ---------------
Net income $103 $305
--------------- ---------------
--------------- ---------------
</TABLE>
F-7
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE C -- BUSINESS ACQUISITIONS (CONTINUED)
The Phipps Acquisition will be funded with a portion of the anticipated net
proceeds of proposed public offerings by the Company of $150.0 million principal
amount of the Company's senior subordinated notes and 3.5 million shares of the
Company's Class B Common Stock, the sale of 1,000 shares of the Company's Series
B Preferred Stock ($10.0 million) and warrants to Bull Run and the sale of KTVE
Inc., the Company's broadcast station in Monroe, Louisiana/El Dorado, Arkansas.
Additionally, the Company plans to retire its existing bank credit facility and
other senior indebtedness (See Notes E and F) and enter into a new bank credit
facility.
In connection with the Phipps Acquisition, a bank has provided a $10.0
million stand-by letter of credit to the seller of the Phipps Business on behalf
of the Company. The letter of credit will be payable under certain conditions if
the Phipps Acquisition is not 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.
1996 ACQUISITIONS
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 $1.3 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 $32.5 million. In connection with the Augusta Acquisition, the
Company's Board of Directors approved the payment of a $360,000 finder's fee to
Bull Run.
Funds for the Augusta Acquisition were obtained from the modification of the
Company's existing bank debt to a variable rate reducing revolving credit
facility (the "Senior Credit Facility") and the sale to Bull Run of an 8%
subordinated note due January 3, 2005 in the principal amount of $10.0 million
(the "8% Note"). In connection with the sale of the 8% Note, the Company also
issued warrants to Bull Run to purchase 487,500 shares of Class A Common Stock
at $17.88 per share, 300,000 shares of which are currently vested, with the
remainder vesting in five equal annual installments commencing in 1997 provided
that the 8% Note is outstanding. The Senior Credit Facility provides for a
credit line up to $54.2 million, of which $49.5 million was outstanding at June
30, 1996. This transaction also required a modification of the interest rate of
the Company's $25.0 million senior secured note (the "Senior Note") with an
institutional investor from 10.08% to 10.7%.
As part of the financing arrangements for the Phipps Acquisition, the 8%
Note will be retired and the Company will issue to Bull Run, in exchange for the
8% Note, 1,000 shares of 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.
An unaudited pro forma statement of income for the six months ended June 30,
1995, is presented below and assumes that the Augusta Acquisition occurred on
January 1, 1995.
This pro forma unaudited statement of income does not purport to represent
the Company's actual results of operations had the Augusta Acquisition occurred
on January 1, 1995, 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
F-8
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE C -- BUSINESS ACQUISITIONS (CONTINUED)
time. Subsequent adjustments are expected upon final determination of the
allocation of the purchase price. An unaudited pro form statement of income for
the six months ended June 30, 1995 is as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30, 1995
----------
Operating revenues $32,666
<S> <C>
Expenses 23,906
Depreciation and amortization 2,396
Non-cash compensation paid in Class A Common Stock 816
----------
5,548
Miscellaneous income, net 33
Interest expense 4,572
----------
Pro forma income before income taxes 1,009
Income tax expense 407
----------
Pro forma net income $602
----------
----------
Pro forma average shares outstanding 4,436
----------
----------
Pro forma earnings per share $0.14
----------
----------
</TABLE>
1995 ACQUISITION
On January 6, 1995, the Company purchased substantially all of the assets of
the GWINNET POST-TRIBUNE and assumed certain liabilities (the "Gwinnett
Acquisition"). The assets consist of office equipment and publishing operations
located in Lawrenceville, Georgia. The purchase price of $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), the issuance of 44,117 shares of Class A 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 finder's fee to Bull Run.
NOTE D -- STOCKHOLDERS' EQUITY
A portion of the funds for the Augusta Acquisition were obtained from the 8%
Note, which included the issuance of detachable warrants to Bull Run to purchase
487,500 shares of Class A Common Stock at $17.88 per share, 300,000 shares of
which are currently vested, with the remainder vesting in five equal annual
installments commencing in 1997 provided that the 8% Note is outstanding.
Approximately $2.6 million of the $10.0 million of proceeds from the 8% Note was
allocated to the warrants and increased Class A Common Stock. This allocation of
the proceeds was based on an estimate of the relative fair values of the 8% Note
and the warrants on the date of issuance. The Company is amortizing the original
issue discount over the period of time that the 8% Note is to be outstanding.
During the six months ended June 30, 1996, the Company recognized approximately
$144,000 in amortization costs for the $2.6 million original issue discount.
F-9
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE E -- COMMITMENTS AND CONTINGENCIES
The Company entered into an interest rate swap agreement (the "Interest
Swap") on June 2, 1995, to effectively convert a portion of its floating rate
debt to a fixed rate basis. The Interest Swap is effective for five years.
Approximately $25.0 million of the Company's outstanding long-term debt was
subject to this Interest Swap. Effective May 14, 1996, the Company received
$215,000 as settlement of this Interest Swap, which will be reflected as a
reduction of interest expense over the remaining term of the original Interest
Swap.
Upon termination of the Interest Swap, the Company entered into an interest
rate cap agreement (the "Interest Cap") on May 16, 1996, which expires on
September 6, 1996. Approximately $25.0 million of the Company's outstanding
long-term debt is subject to this Interest Cap. This Interest Cap serves to cap
the base rate of the Company's Senior Credit Facility at 7%. The base rate used
to compare against the Interest Cap at June 30, 1996 was approximately 5.5%.
Accordingly, the Interest Cap had no value at June 30, 1996. The effective rate
of the Senior Credit Facility at June 30, 1996 was approximately 8.94%.
Effective July 19, 1996, the Company's interest rates, based on a spread over
LIBOR, were reduced 0.25% as the result of the attainment of certain debt
provisions.
On May 15, 1996 the Company entered into an agreement with GOCOM Television
of Ouachita, L.P. to sell the assets of KTVE Inc., the Company's NBC-affiliated
station serving Monroe, Louisiana/El Dorado, Arkansas, for approximately $9.5
million in cash plus the amount of the accounts receivable on the date of
closing (estimated to be approximately $750,000) to the extent collected by the
buyer, to be paid to the Company 150 days following the date of closing. The
sale agreement regarding KTVE included a number of closing conditions. The
Company completed the sale of the assets of KTVE Inc. on August 20, 1996. The
Company anticipates recognizing in the quarter ended September 30, 1996, the
gain, net of estimated income taxes, and the estimated income taxes on the KTVE
Sale of approximately $2.8 million and $2.8 million, respectively.
A condensed balance sheet of KTVE is as follows (in thousands):
<TABLE>
<CAPTION>
----------
JUNE 30,
1996
----------
<S> <C>
Current assets $864
Property and equipment 1,540
Other assets 550
----------
Total assets $2,954
----------
----------
Current liabilities $333
Other liabilities 476
Stockholders' equity 2,145
----------
Total liabilities and stockholders' equity $2,954
----------
----------
</TABLE>
F-10
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE E -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Condensed statement of operations data of KTVE is as follows (in thousands):
<TABLE>
<CAPTION>
----------------------
<S> <C> <C>
SIX MONTHS ENDED
JUNE 30,
----------------------
1995 1996
---------- ----------
Broadcasting revenues $1,958 $2,303
Expenses 1,891 1,943
---------- ----------
Operating income 67 360
Other income 9 1
---------- ----------
Income before income taxes 76 361
---------- ----------
---------- ----------
Net income $47 $224
---------- ----------
---------- ----------
</TABLE>
NOTE F -- SUBSEQUENT EVENTS
On May 2, 1996, the Company filed a Registration Statement (subsequently
amended) with the Securities and Exchange Commission (the "SEC") on Form S-1 to
register the sale of 4,025,000 shares of Class B Common Stock, including an
over-allotment option granted by the Company to the underwriters of such
offering, subject to shareholder approval. Also on May 2, 1996, the Company
filed a Registration Statement (subsequently amended) with the SEC on Form S-1
to register the sale of $150,000,000 Senior Subordinated Notes due in 2006 (the
"Notes").
F-11
<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. These financial
statements are the responsibility of the Company'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 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.
ERNST & YOUNG LLP
Columbus, Georgia
February 14, 1996, except for Note K, as
to which the date is August 9, 1996
F-12
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------------
DECEMBER 31,
1994 1995
--------------- ---------------
<S> <C> <C>
ASSETS
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 (including $860,000
to Bull Run Corporation) (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 (including $670,000
payable to Bull Run Corporation at December 31,
1995) $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-13
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
-------------------------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating revenues:
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, 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-14
<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-15
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
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-16
<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-17
<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-18
<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-19
<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-20
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
Pro forma December 31, 1995 balance sheet (in thousands):
<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 thousands, 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-21
<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 thousands, 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-22
<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 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-23
<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 thousands, 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-24
<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 thousands):
<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-25
<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 thousands):
<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).
Pursuant to the terms of his employment agreement, Mr. Williams was awarded
an aggregate of 150,000 shares of Class A Common Stock in three separate grants
(the "Common Stock Award") based upon the Class A Common Stock attaining certain
designated values. Upon Mr. Williams' resignation from the Company in December
1995, the Company entered into a separation agreement with him, which provided,
among other things, for the payment of $596,000 over a two-year period ending
November 1997 as consideration for consulting services, Mr. Williams'
resignation and certain non-compete and confidentiality agreements. 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
separation agreement. In addition, the separation agreement provided for the
removal of the restrictions on the Common Stock Award and such Common Stock
Award became fully vested. Compensation expense of approximately $2.1 million
(including $865,000 during the quarter ended December 31, 1995), was recognized
in 1995 for the Common Stock Award.
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. The Company maintains life insurance
coverage on these individuals (with a cash surrender value of approximately
$280,000 at December 31, 1995) in adequate amounts to fund the agreements.
F-26
<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 thousands):
<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-27
<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-28
<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 thousands):
<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 thousands):
<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-29
<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 thousands):
<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 thousands):
<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-30
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. RETIREMENT PLANS (CONTINUED)
The net pension expense includes the following (in thousands):
<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 thousands):
<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-31
<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-32
<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 thousands):
<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
thousands).
<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>
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
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
F-33
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
-------------------------------------------------
YEAR ENDED DECEMBER 31,
1993 1994 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
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>
K. SUBSEQUENT EVENTS
On May 2, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission (the "SEC") on Form S-1 to register the sale
of 4,025,000 shares of Class B Common Stock, including an over-allotment option
granted by the Company to the underwriters of such offering. Also on May 2,
1996, the Company filed a Registration Statement with the SEC on Form S-1 to
register the sale of $150,000,000 Senior Subordinated Notes due in 2006 (the
"Notes"). On May 13, July 9, and August 9, 1996 the Company filed amendments to
such Registration Statements. The Notes will be jointly and severally guaranteed
(the "Subsidiary Guarantees") by all of the Company's subsidiaries (the
"Subsidiary Guarantors"). The obligations of the Subsidiary Guarantors under the
Subsidiary Guarantees will be subordinated, to the same extent as the
obligations of the Company in respect of the Notes, to the prior payment in full
of all existing and future senior debt of the Subsidiary Guarantors (which will
include any guarantee issued by such Subsidiary Guarantors of any senior debt).
The Company is a holding company with no material independent asset or
operations, other than its investment in its subsidiaries. The Subsidiary
Guarantors are, directly or indirectly, wholly-owned subsidiaries of the Company
and the Subsidiary Guarantees will be full, unconditional and joint and several.
All of the current and future direct and indirect subsidiaries of the Company
will be guarantors of the Notes. Accordingly, separate financial statements of
each of the Subsidiary Guarantors are not presented because management has
determined that they are not material to investors.
F-34
<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-35
<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-36
<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
Depreciation 272,298
Amortization of intangible assets 151,620
------------
Total operating expenses 6,198,150
------------
INCOME BEFORE OTHER EXPENSES 2,462,442
Other-expenses, net 220,211
------------
Net income $2,242,231
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-37
<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-38
<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-39
<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.
F-40
<PAGE>
WRDW-TV
(THE AUGUSTA BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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>
F-41
<PAGE>
WRDW-TV
(THE AUGUSTA BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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.
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-42
<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-43
<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-44
<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
Depreciation 290,730 309,949
Amortization of intangible assets 151,620 151,620
------------ ------------
Total operating expenses 5,124,915 5,854,410
------------ ------------
INCOME BEFORE OTHER EXPENSES 1,671,220 2,191,566
Other-expenses, net 77,408 54,570
------------ ------------
NET INCOME $1,593,812 $2,136,996
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-45
<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-46
<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-47
<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-48
<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 the suit sought rescission of the
asset transfer, the return by the
F-49
<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)
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.
F-50
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
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.
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-51
<PAGE>
BROADCASTING AND PAGING OPERATIONS
OF
JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
CONDENSED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------
DECEMBER 31,
1995 JUNE 30, 1996
--------------- ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $620,015 $662,576
Accounts receivable, less allowance for doubtful
accounts of $49,000 and $53,500, respectively 5,152,778 5,188,446
Program broadcast rights, current portion 919,281 924,281
Other current assets 347,785 337,452
--------------- ---------------
7,039,859 7,112,755
Property and equipment, net 10,492,583 9,985,084
Goodwill and other intangibles 9,454,775 9,096,855
Program broadcast rights, less current portion 575,111 111,230
--------------- ---------------
10,029,886 9,208,085
--------------- ---------------
$27,562,328 $26,305,924
--------------- ---------------
--------------- ---------------
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $365,468 $308,308
Program broadcast obligations, current portion 921,579 458,353
Deferred paging service income 833,264 975,000
Current portion of long-term debt 1,389,931 1,473,681
Other current liabilities 907,345 995,901
--------------- ---------------
4,417,587 4,211,243
Long-term debt 3,419,918 2,560,175
Program broadcast obligations, less current
portion 345,140 213,906
Minority interest 585,768 654,918
Commitments and contingencies
Owner's equity 18,793,915 18,665,682
--------------- ---------------
$27,562,328 $26,305,924
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to condensed financial statements.
F-52
<PAGE>
BROADCASTING AND PAGING OPERATIONS
OF
JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1995 1996
--------------- ---------------
Revenues:
<S> <C> <C>
Broadcast revenues, net $9,977,857 $10,444,960
Paging operations 2,422,911 2,743,524
Production and other revenues 796,437 900,731
--------------- ---------------
13,197,205 14,089,215
--------------- ---------------
Expenses:
Operating, technical and programming 2,641,775 2,805,292
Selling, general and administrative 3,636,715 4,035,891
Amortization of program broadcast rights 422,408 463,890
Depreciation and amortization 1,435,474 1,530,027
Pension credit (NOTE 2) (224,500) (113,000)
Management fees 1,538,720 734,502
--------------- ---------------
9,450,592 9,456,602
--------------- ---------------
3,746,613 4,632,613
Interest 222,592 158,491
Other expense, net 4,862 4,744
--------------- ---------------
Income before minority interests 3,519,159 4,469,378
Minority interests (256,219) (296,387)
--------------- ---------------
Net income $3,262,940 $4,172,991
--------------- ---------------
--------------- ---------------
Supplemental pro-forma net income
Net income, as above $3,262,940 $4,172,991
Pro-forma provision for income tax expense (1,239,900) (1,585,700)
--------------- ---------------
Pro-forma net income $2,023,040 $2,587,291
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to condensed financial statements.
F-53
<PAGE>
BROADCASTING AND PAGING OPERATIONS
OF
JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1995 1996
--------------- ---------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $3,262,940 $4,172,991
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,435,474 1,530,027
Gain (loss) on disposition of fixed assets 44,011 179,264
Amortization of program broadcast rights 422,408 463,890
Payments of program broadcast rights obligations (464,553) (591,960)
Minority interests 256,219 296,387
Changes in operating assets and liabilities:
Accounts receivable (437,692) (35,668)
Other current assets (283,242) 2,833
Accounts payable and accrued expenses (183,408) (57,160)
Other current liabilities (43,074) 88,556
Deferred paging income 127,078 141,736
--------------- ---------------
Net cash provided by operating activities 4,136,161 6,190,896
Investing activities:
Purchases of property and equipment (1,901,966) (1,647,485)
Proceeds from disposition of property and
equipment 530,938 807,978
Purchase of minority interest (1,780,794) --
--------------- ---------------
Net cash used in investing activities (3,151,822) (839,507)
Financing activities:
Indebtedness:
Borrowings 1,671,015 386,152
Repayments (2,538,371) (1,162,145)
Distributions to minority interests (186,384) (342,130)
Other (1,235) (4,375)
Payments to J.H. Phipps, Inc., net 137,992 (4,186,330)
--------------- ---------------
Net cash used in financing activities (916,983) (5,308,828)
--------------- ---------------
Increase (decrease) in cash and cash equivalents 67,356 42,561
Cash and cash equivalents at beginning of period 95,210 620,015
--------------- ---------------
Cash and cash equivalents at end of period $162,566 $662,576
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to condensed financial statements.
F-54
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the Broadcasting and Paging Operations of John H. Phipps, Inc. (the "Phipps
Business") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six month period
ended June 30, 1996, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further information, refer
to the annual financial statements and footnotes thereto of the Phipps Business
included herein.
NOTE 2 -- EMPLOYEE BENEFIT PLANS
Management of J.H. Phipps, Inc. has elected to terminate the defined benefit
pension plan effective March 31, 1996 subject to obtaining approval from the
appropriate regulatory agencies.
NOTE 3 -- SALE OF PHIPPS BUSINESS
Pursuant to an agreement dated December 15, 1995 as amended March 15, 1996,
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 June 30, 1996, 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 also owns and operates other businesses which are not being purchased
by Gray. The condensed 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 condensed 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.
F-55
<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-56
<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
--------------- ---------------
--------------- ---------------
LIABILITIES AND OWNER'S EQUITY
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-57
<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-58
<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-59
<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 VHF 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
F-60
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
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.
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
F-61
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
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.
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-62
<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 thousands):
<TABLE>
<CAPTION>
-------------------------------------------------
ESTIMATED
USEFUL LIVES DECEMBER 31,
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 thousands):
<TABLE>
<CAPTION>
--------------------------------
DECEMBER 31,
1994 1995
--------------- ---------------
<S> <C> <C>
Goodwill $3,050 $4,663
Broadcast licenses and network affiliation
agreements 6,162 6,162
Other 812 812
Accumulated amortization (1,447) (2,182)
--------------- ---------------
$8,577 $9,455
--------------- ---------------
--------------- ---------------
</TABLE>
The composition of other current liabilities is as follows (in thousands):
<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 thousands):
<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-63
<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 thousands):
<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 thousands):
<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 Agreement, 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 amount is guaranteed by the Knoxville Partnership. The first payment of
$100,000
F-64
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INDEBTEDNESS (CONTINUED)
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 is recorded at a discounted
present value in the accompanying financial statements.
Future scheduled reductions of principal for indebtedness are as follows (in
thousands):
<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-65
<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 expense credit (in thousands).
<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
--------- --------- ---------
--------- --------- ---------
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 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 thousands):
<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,
F-66
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
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 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 $303,000 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
thousands):
<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
Operations 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.
F-67
<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
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 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 thousands):
<TABLE>
<CAPTION>
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance of the beginning of year $13,276 $14,306 $15,465
Payments to Phipps (5,067) (8,181) (7,696)
Phipps' purchase of minority interests -0- -0- 1,781
Phipps allocations 2,166 2,121 2,895
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 thousands):
<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 thousands):
<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 renewal options.
Certain of the towers used in the Paging Operations are leased
F-68
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 thousands):
<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 thousands):
<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-69
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
(THE PHIPPS BUSINESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. INFORMATION ON BUSINESS SEGMENTS (IN THOUSANDS):
<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 $27,562
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Operating profit is total operating revenue less expenses and before
miscellaneous income and expense (net), interest expense and minority interests.
F-70
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, ANY OF THE UNDERWRITERS OR ANY OTHER PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALES MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SHARES OF CLASS B COMMON STOCK OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SHARES OF CLASS B COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 14
The Phipps Acquisition, the KTVE Sale
and the Financing..................... 21
Price Range of Class A Common Stock and
Dividend Policy....................... 24
Capitalization......................... 25
Pro Forma Financial Data............... 26
Selected Historical Financial Data..... 38
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 42
Business............................... 56
Management............................. 85
Security Ownership of Certain
Beneficial Owners and Management...... 94
Certain Relationships and Related
Transactions.......................... 95
Description of Certain Indebtedness.... 96
Description of the Notes............... 97
Description of Capital Stock........... 98
Shares Eligible for Future Sale........ 100
Underwriting........................... 101
Legal Matters.......................... 102
Experts................................ 102
Available Information.................. 102
Index to Financial Statements.......... F-1
</TABLE>
3,500,000 Shares
GRAY
COMMUNICATIONS SYSTEMS, INC.
CLASS B COMMON STOCK
---------------------
PROSPECTUS
---------------------
ALLEN & COMPANY
INCORPORATED
J.C. BRADFORD & CO.
J.P. MORGAN & CO.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred by the Company
in connection with the issuance and distribution of the Class B Common Stock.
Except for the SEC and NASD filing fees, all expenses have been estimated and
are subject to future contingencies.
<TABLE>
<S> <C>
SEC registration fee $26,371
NASD fee 8,148
NYSE listing fee 44,388
Legal fees and expenses 265,000
Printing and engraving expenses 261,000
Accounting fees and expenses 125,000
Blue sky fees and expenses 15,000
Transfer agent and registrar fees and expenses 2,000
Miscellaneous 3,093
----------
Total $750,000
----------
----------
</TABLE>
- ------------------------
ITEM 14 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Business Corporation Code of the State of Georgia grants corporations
incorporated thereunder (such as the Company) the power to indemnify its
officers and directors against liability for certain of their acts.
The Company's Articles of Incorporation eliminate the liability of directors
to stockholders or the Company for monetary damages arising out of the
directors' breach of their fiduciary duty of care. The By-laws of the Company
authorize indemnification of its directors, officers, incorporators, employees
and agents with respect to certain costs, expenses and amounts incurred in
connection with an action, suit or proceeding by reason of the fact that such
person was serving as a director, officer, incorporator, employee or agent of
the Company.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and its controlling persons, on the one hand, and the Underwriters
and their controlling persons, on the other hand, against certain liabilities in
connection with this offering, including liabilities under the Securities Act.
ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES
On January 3, 1996, Bull Run purchased for $10 million from the Company (i)
an 8% subordinated note in the principal amount of $10 million due in January
2005 and (ii) warrants to purchase 487,500 shares of Class A Common Stock at
$17.88 per share. On September 2, 1994, the Company sold to one institutional
investor for $25 million its note in the principal amount of $25 million due
2003. The Company believes that the foregoing transactions were exempt from the
registration provisions of the Securities Act of 1933 pursuant to Section 4(2)
of such Act.
II-1
<PAGE>
ITEM 16 EXHIBITS
<TABLE>
<S> <C>
1** Form of Underwriting Agreement.
3.1 Articles of Incorporation of Gray Communications Systems, Inc., as amended
(incorporated by reference to Exhibit 3 to the Company's Form 10 dated October 7,
1991, as amended on January 29, 1992 and March 2, 1992, and Exhibit 3(i) to the
Company's Form 10-K for the fiscal year ended June 30, 1993).
3.2** Articles of Amendment to the Articles of Incorporation of Gray Communications
Systems, Inc. relating to the Class A Common Stock and the Class B Common Stock
and the Series A Preferred Stock and Series B Preferred Stock.
3.4 By-Laws of Gray Communications Systems, Inc., as amended (incorporated by
reference to Exhibit 3(i) to the Company's Form 10 dated October 7, 1991, as
amended on January 29, 1992 and March 2, 1992, Exhibit 3(i) to the Company's 10-K
for the period ended June 30, 1993 and Exhibit 3(d) of the Company's 10-K for the
transition period from July 1, 1993 to December 31, 1993).
3.5 Amendment to the By-Laws of Gray Communications Systems, Inc., dated September 3,
1996 (incorporated by reference to Exhibit 3.2.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-4338)).
5** Opinion of Heyman & Sizemore re: validity of securities
10.1 Supplemental pension plan (incorporated by reference to Exhibit 10(a) to the
Company's Form 10 filed October 7, 1991, as amended January 29, 1992 and March 2,
1992).
10.2 Employment Agreement, between the Company and John T. Williams (incorporated by
reference to Exhibit 19 to the Company's Form 10-Q for the quarter ended March
31, 1992).
10.3 Amendment to employment agreement, between the Company and John T. Williams
(incorporated by reference to Exhibit 19(b) to the Company's Form 10-Q for the
quarter ended March 31, 1992).
10.4 Restricted stock agreement between the Company and John T. Williams (incorporated
by reference to Exhibit 19(c) to the Company's Form 10-Q for the quarter ended
March 31, 1992).
10.5 Long Term Incentive Plan (incorporated by reference to Exhibit 10(e) to the
Company's Form 10-K for the fiscal year ended June 30, 1993).
10.6 Asset Purchase Agreement between the Company and The Citizen Publishing Company,
Inc. (incorporated by reference to Exhibit 10 to the Company's Form 8-K, dated
May 31, 1994).
10.7 Asset Purchase Agreement between the Company and Kentucky Central Television, Inc.
(incorporated by reference to Exhibit 10 to the Company's Form 8-K, dated
September 2, 1994).
10.8 Asset Purchase Agreement, dated January 6, 1995, between the Company and Still
Publishing, Inc. (incorporated by reference to Exhibit 10(h) to the Company's
Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K")).
10.9 Asset Purchase Agreement, dated March 23, 1995, between the Company, Television
Station Partners, L.P. and WRDW Associates (incorporated by reference to Exhibit
10(i) to the 1994 Form 10-K).
10.10 Capital Accumulation Plan, effective October 1, 1994 (incorporated by reference to
Exhibit 10(i) to the 1994 Form 10-K).
10.11 Employment Agreement, dated September 3, 1994, between the Company and Ralph W.
Gabbard (incorporated by reference to Exhibit 10(j) to the 1994 Form 10-K).
10.12 Asset Purchase Agreement, dated March 15, 1996, by and between the Company and
Media Acquisition Partners, L.P. (incorporated by reference to Exhibit 10(l) to
the 1995 Form 10-K).
10.13*** Warrant, dated January 4, 1996, to purchase 487,500 shares of Class A Common
Stock.
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.14 Form of amendment to employment agreement between the Company and Ralph W.
Gabbard, dated January 1, 1996 (incorporated by reference to the Exhibit 10(m)
1995 Form 10-K).
10.15 Indenture for the Notes (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-4338)).
10.16 Credit Agreement and first modification of Credit Agreement, dated as of April 22,
1994, between the Company and Bank South, N.A., and Deposit Guaranty National
Bank (incorporated by reference to Exhibit 4(i) to the Company's Form 8-K, dated
September 2, 1994).
10.17 Note Purchase Agreement and first modification of Note Purchase Agreement between
the Company and Teachers Insurance and Annuity Association of America
(incorporated by reference to Exhibit 4(ii) to the Company's Form 8-K, dated
September 2, 1994).
10.18 Second modification of Credit Agreement, dated November 30, 1994, between the
Company and Bank South, N.A. and Deposit Guaranty National Bank (incorporated by
reference to Exhibit 4(c) to the 1994 Form 10-K).
10.19 Second modification of Note Purchase Agreement, dated November 30, 1994, between
the Company and Teachers Insurance and Annuity Association (incorporated by
reference to Exhibit 4(d) to the 1994 Form 10-K).
10.20 Third modification of Credit Agreement, dated January 6, 1995, between the Company
and Bank South, N.A. and Deposit Guaranty National Bank (incorporated by
reference to Exhibit 4(e) to the 1994 Form 10-K).
10.21 Fourth modification of Credit Agreement, dated January 27, 1995, between the
Company and Bank South, N.A. and Deposit Guaranty National Bank (incorporated by
reference to Exhibit 4(f) to the 1994 Form 10-K).
10.22 Third Modification of Note Purchase Agreement, dated June 15, 1995, between the
Company and Teachers Insurance and Annuity Association (incorporated by reference
to Exhibit 4(a) to the Company's Form 10-Q for the quarter ended June 30, 1995).
10.23 Form of Master Agreement, dated as of June 13, 1995, between the Company and
Society National Bank.
10.24 Amendment to Intercreditor Agreement, dated June 15, 1995, by and among the
Company, Bank South, N.A., Deposit Guaranty National Bank and Teachers Insurance
and Annuity Association (incorporated by reference to Exhibit 4(b) to the
Company's Form 10-Q for the quarter ended June 30, 1995).
10.25 Fourth Modification of Note Purchase Agreement, dated as of January 3, 1996,
between the Company and Teachers Insurance Annuity Association (incorporated by
reference to Exhibit 4(h) to the Company's Form 10-K for the year ended December
31, 1995 (the "1995 10-K")).
10.26 First Consolidated Modification of Credit Agreement, dated as of January 3, 1996,
among the Company, Bank South, Deposit Guaranty National Bank and Society
National Bank (incorporated by reference to Exhibit 4(i) to the Company's Form
8-K, dated January 18, 1996).
10.27 Note Purchase between the Company and Bull Run, dated as of January 3, 1996
(incorporated by reference to Exhibit 4(ii) to the Company's Form 8-K, dated
January 18, 1996).
10.28*** Employment Agreement, Dated February 12, 1996 between the Company and Robert A.
Beizer
10.29*** Separation Agreement between the Company and John T. Williams (incorporated by
reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1
(Registration No. 333-4338)).
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.30 Form of Preferred Stock Exchange and Purchase Agreement (incorporated by reference
to Exhibit 10.17 to the Company's Registration Statement on Form S-1
(Registration No. 333-4338)).
10.31 Form of Warrant to purchase 500,000 shares of Class A Common Stock (incorporated
by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1
(Registration No. 333-4338)).
12** Statement re computation of ratios
21** List of Subsidiaries
23.1** Consent of Ernst & Young LLP for the financial statements for Gray Communications
Systems, Inc.
23.2** Consent of Heyman & Sizemore (contained in opinion filed as Exhibit 5)
23.3** Consent of Ernst & Young LLP for certain financial statements of WRDW-TV.
23.4** Consent of Ernst & Young LLP for the financial statements of the Broadcasting and
Paging Operations of John H. Phipps, Inc.
23.5** Consent of Deloitte & Touche LLP for certain financial statements of WRDW-TV.
24.1*** Power of Attorney
</TABLE>
- ------------------------
** Filed herewith
*** Previously filed
(b) The financial statement schedules filed as a part of this Registration
Statement are as follows:
Gray Communications Systems, Inc.:
Report of Independent Auditors
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable or is presented in the financial statements or related
notes.
Broadcasting and Paging Operations of John H. Phipps, Inc.:
Report of Independent Auditors
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable or its presented in the financial statements or
related notes.
ITEM 17 UNDERTAKINGS
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
II-4
<PAGE>
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 13th day of September, 1996.
GRAY COMMUNICATIONS SYSTEMS, INC.
By: /s/ J. MACK ROBINSON
-----------------------------------
J. Mack Robinson
PRESIDENT
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ J. MACK ROBINSON
------------------------------------------- President and Director (principal September 13, 1996
J. Mack Robinson executive officer)
/s/ WILLIAM A. FIELDER III Vice President and Chief
------------------------------------------- Financial Officer (principal September 13, 1996
William A. Fielder III financial officer)
/s/ Sabra H. Cowart Controller and Chief Accounting
------------------------------------------- Officer (principal accounting September 13, 1996
Sabra H. Cowart officer)
*
------------------------------------------- Director September 13, 1996
Richard L. Boger
*
------------------------------------------- Director September 13, 1996
Hilton H. Howell, Jr.
*
------------------------------------------- Director September 13, 1996
William E. Mayher III
*
------------------------------------------- Director September 13, 1996
Howell W. Newton
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
*
------------------------------------------- Director September 13, 1996
Robert S. Prather, Jr.
/s/ WILLIAM A. FIELDER
-------------------------------------------
William A. Fielder
*Attorney-in-fact September 13, 1996
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- -------------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
1** Form of Underwriting Agreement. ..............................................................
3.1 Articles of Incorporation of Gray Communications Systems, Inc., as amended (incorporated by
reference to Exhibit 3 to the Company's Form 10 dated October 7, 1991, as amended on January
29, 1992 and March 2, 1992, and Exhibit 3(i) to the Company's Form 10-K for the fiscal year
ended June 30, 1993). .......................................................................
3.2** Articles of Amendment to the Articles of Incorporation of Gray Communications Systems, Inc.
relating to the Class A Common Stock and the Class B Common Stock and the Series A Preferred
Stock and Series B Preferred Stock...........................................................
3.4 By-Laws of Gray Communications Systems, Inc., as amended (incorporated by reference to Exhibit
3(i) to the Company's Form 10 dated October 7, 1991, as amended on January 29, 1992 and March
2, 1992, Exhibit 3(i) to the Company's 10-K for the period ended June 30, 1993 and Exhibit
3(d) of the Company's 10-K for the transition period from July 1, 1993 to December 31, 1993).
.............................................................................................
3.5 Amendment to the By-Laws of Gray Communications Systems Inc. dated September 3, 1996
(incorporated by reference to Exhibit 3.2.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-4338))
5** Opinion of Heyman & Sizemore re: validity of securities. .....................................
10.1 Supplemental pension plan (incorporated by reference to Exhibit 10(a) to the Company's Form 10
filed October 7, 1991, as amended January 29, 1992 and March 2, 1992). ......................
10.2 Employment Agreement, between the Company and John T. Williams (incorporated by reference to
Exhibit 19 to the Company's Form 10-Q for the quarter ended March 31, 1992). ................
10.3 Amendment to employment agreement, between the Company and John T. Williams (incorporated by
reference to Exhibit 19(b) to the Company's Form 10-Q for the quarter ended March 31, 1992).
.............................................................................................
10.4 Restricted stock agreement between the Company and John T. Williams (incorporated by reference
to Exhibit 19(c) to the Company's Form 10-Q for the quarter ended March 31, 1992). ..........
10.5 Long Term Incentive Plan (incorporated by reference to Exhibit 10(e) to the Company's Form
10-K for the fiscal year ended June 30, 1993). ..............................................
10.6 Asset Purchase Agreement between the Company and The Citizen Publishing Company, Inc.
(incorporated by reference to Exhibit 10 to the Company's Form 8-K, dated May 31, 1994). ....
10.7 Asset Purchase Agreement between the Company and Kentucky Central Television, Inc.
(incorporated by reference to Exhibit 10 to the Company's Form 8-K, dated September 2, 1994).
.............................................................................................
10.8 Asset Purchase Agreement, dated January 6, 1995, between the Company and Still Publishing,
Inc. (incorporated by reference to Exhibit 10(h) to the Company's Form 10-K for the year
ended December 31, 1994 (the "1994 Form 10-K")). ............................................
10.9 Asset Purchase Agreement, dated March 23, 1995, between the Company, Television Station
Partners, L.P. and WRDW Associates (incorporated by reference to Exhibit 10(i) to the 1994
Form 10-K). .................................................................................
10.10 Capital Accumulation Plan, effective October 1, 1994 (incorporated by reference to Exhibit
10(i) to the 1994 Form 10-K). ...............................................................
10.11 Employment Agreement, dated September 3, 1994, between the Company and Ralph W. Gabbard
(incorporated by reference to Exhibit 10(j) to the 1994 Form 10-K). .........................
10.12 Asset Purchase Agreement, dated March 15, 1996, by and between the Company and Media
Acquisition Partners, L.P. (incorporated by reference to Exhibit 10(l) to the 1995 Form
10-K). ......................................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- -------------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
10.13*** Warrant, dated January 4, 1996, to purchase 487,500 shares of Class A Common Stock. ..........
10.14 Form of amendment to employment agreement between the Company and Ralph W. Gabbard, dated
January 1, 1996 (incorporated by reference to the Exhibit 10(m) 1995 Form 10-K). ............
10.15 Form of Indenture for the Notes (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-4338)). ............................
10.16 Credit Agreement and first modification of Credit Agreement, dated as of April 22, 1994,
between the Company and Bank South, N.A., and Deposit Guaranty National Bank (incorporated by
reference to Exhibit 4(i) to the Company's Form 8-K, dated September 2, 1994). ..............
10.17 Note Purchase Agreement and first modification of Note Purchase Agreement between the Company
and Teachers Insurance and Annuity Association of America (incorporated by reference to
Exhibit 4(ii) to the Company's Form 8-K, dated September 2, 1994). ..........................
10.18 Second modification of Credit Agreement, dated November 30, 1994, between the Company and Bank
South, N.A. and Deposit Guaranty National Bank (incorporated by reference to Exhibit 4(c) to
the 1994 Form 10-K). ........................................................................
10.19 Second modification of Note Purchase Agreement, dated November 30, 1994, between the Company
and Teachers Insurance and Annuity Association (incorporated by reference to Exhibit 4(d) to
the 1994 Form 10-K). ........................................................................
10.20 Third modification of Credit Agreement, dated January 6, 1995, between the Company and Bank
South, N.A. and Deposit Guaranty National Bank (incorporated by reference to Exhibit 4(e) to
the 1994 Form 10-K). ........................................................................
10.21 Fourth modification of Credit Agreement, dated January 27, 1995, between the Company and Bank
South, N.A. and Deposit Guaranty National Bank (incorporated by reference to Exhibit 4(f) to
the 1994 Form 10-K). ........................................................................
10.22 Third Modification of Note Purchase Agreement, dated June 15, 1995, between the Company and
Teachers Insurance and Annuity Association (incorporated by reference to Exhibit 4(a) to the
Company's Form 10-Q for the quarter ended June 30, 1995). ...................................
10.23 Form of Master Agreement, dated as of June 13, 1995, between the Company and Society National
Bank. .......................................................................................
10.24 Amendment to Intercreditor Agreement, dated June 15, 1995, by and among the Company, Bank
South, N.A., Deposit Guaranty National Bank and Teachers Insurance and Annuity Association
(incorporated by reference to Exhibit 4(b) to the Company's Form 10-Q for the quarter ended
June 30, 1995). .............................................................................
10.25 Fourth Modification of Note Purchase Agreement, dated as of January 3, 1996, between the
Company and Teachers Insurance Annuity Association (incorporated by reference to Exhibit 4(h)
to the Company's Form 10-K for the year ended December 31, 1995 (the "1995 10-K")). .........
10.26 First Consolidated Modification of Credit Agreement, dated as of January 3, 1996, among the
Company, Bank South, Deposit Guaranty National Bank and Society National Bank (incorporated
by reference to Exhibit 4(i) to the Company's Form 8-K, dated January 18, 1996). ............
10.27 Note Purchase between the Company and Bull Run, dated as of January 3, 1996 (incorporated by
reference to Exhibit 4(ii) to the Company's Form 8-K, dated January 18, 1996). ..............
10.28*** Employment Agreement, Dated February 12, 1996 between the Company and Robert A. Beizer. ......
10.29*** Separation Agreement between the Company and John T. Williams (incorporated by reference to
Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration No.
333-4338)). .................................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- -------------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
10.30 Form of Preferred Stock Exchange and Purchase Agreement. (incorporated by reference to Exhibit
10.17 to the Company's Registration Statement on Form S-1 (Registration No. 333-4338)).......
10.31 Form of Warrant to purchase 500,000 shares of Class A Common Stock (incorporated by reference
to Exhibit 10.18 to the Company's Registration Statement on Form S-1 (Registration No.
333-4338)) ..................................................................................
12** Statement re computation of ratios. ..........................................................
21** List of Subsidiaries. ........................................................................
23.1** Consent of Ernst & Young LLP for the financial statements for Gray Communications Systems,
Inc. ........................................................................................
23.2** Consent of Heyman & Sizemore (contained in opinion filed as Exhibit 5). ......................
23.3** Consent of Ernst & Young LLP for certain financial statements of WRDW-TV. ....................
23.4** Consent of Ernst & Young LLP for the financial statements of the Broadcasting and Paging
Operations of John H. Phipps, Inc. ..........................................................
23.5** Consent of Deloitte & Touche LLP for certain financial statements of WRDW-TV. ................
24.1*** Power of Attorney ............................................................................
</TABLE>
- ------------------------
** Filed herewith
*** Previously filed
<PAGE>
3,500,000 SHARES
GRAY COMMUNICATIONS SYSTEMS, INC.
COMMON STOCK
_________________
UNDERWRITING AGREEMENT
September __, 1996
THE ROBINSON-HUMPHREY COMPANY, INC.
ALLEN & COMPANY INCORPORATED
J.C. BRADFORD & CO.
J.P. MORGAN SECURITIES INC.
As representatives of the several
Underwriters named in Schedule I hereto,
c/o The Robinson-Humphrey Company, Inc.
3333 Peachtree Road, N.E.
Atlanta, Georgia 30326
Dear Sirs:
Gray Communications Systems, Inc., a Georgia corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of 3,500,000 shares of Class B common stock, no par value per share (the "Common
Stock"), of the Company (the "Firm Shares"), and, at the election of the
Underwriters, subject to the terms and conditions stated herein, to sell to the
Underwriters up to 525,000 additional shares of Common Stock (the "Optional
Shares") (the Firm Shares and the Optional Shares that the Underwriters elect to
purchase pursuant to Section 2 hereof are collectively called the "Shares").
Concurrently with the offering of the Firm Shares, the Company is offering
(the "Concurrent Offering") $150,000,000 principal amount of its % Senior
Subordinated Notes due 2006 (the "Notes"). The offering of the Shares is not
conditioned upon the consummation of the Concurrent Offering. In addition, the
Company intends to implement a financing plan (the "Financing") pursuant to
which it will (i) retire approximately $49,500,000 aggregate principal amount of
outstanding indebtedness under its senior secured bank credit facility, together
with accrued interest thereon, (ii) retire approximately $25,000,000 aggregate
principal amount of outstanding indebtedness under its senior note due 2003,
together with accrued interest thereon and a prepayment fee, (iii) issue
$10,000,000 liquidation preference of its series A preferred stock, no par value
per share (the "Series A Preferred Stock") in exchange for its outstanding
<PAGE>
$10,000,000 principal amount 8% subordinated note (the "Preferred Stock
Exchange"), (iv) issue $10,000,000 liquidation preference of its series B
preferred stock, no par value per share (the "Series B Preferred Stock"),
together with warrants (the "Warrants") to purchase up to 500,000 shares of the
Company's class A common stock, no par value per share ("the Class A Common
Stock"), for gross cash proceeds of $10,000,000 (the "Preferred Stock Purchase")
and (v) enter into a new senior secured bank credit facility (the "Senior Credit
Facility") to provide for a term loan and revolving credit facility aggregating
$125,000,000.
The Company has entered into an Asset Purchase Agreement (the "KTVE
Agreement") with GOCOM Television of Ouachita, L.P. ("GOCOM"), dated May 15,
1996. Pursuant to the KTVE Agreement, the Company sold (the "KTVE Sale")
KTVE-TV to GOCOM for approximately $9.5 million in cash plus the amount of the
accounts receivable on the date of the closing, to the extent collected by the
GOCOM. The Company has also entered into an Asset Purchase Agreement (the
"Phipps Agreement") with Media Acquisition Partners, L.P., dated March 15, 1996
and amended July 5, 1996. Pursuant to the terms of the Phipps Agreement, the
Company will acquire (the "Phipps Acquisition") WCTV-TV, WKXT-TV, a satellite
broadcasting business and a paging business (each a "Phipps Business" and
collectively the "Phipps Businesses") for approximately $185,000,000. The cash
required for the consummation of the Phipps Acquisition, the repayment of
indebtedness pursuant to the Financing and the payment of related transaction
costs will be provided by the net proceeds of the offering of the Firm Shares
and the Optional Shares (if any), the Concurrent Offering, the Preferred Stock
Purchase, the KTVE Sale and borrowings under the Senior Credit Facility.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, each of the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-4340) with
respect to the Shares, including a prospectus subject to completion, has
been filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and
one or more amendments to such registration statement may have been so
filed. After the execution of this Agreement, the Company will file with
the Commission either (i) if such registration statement, as it may have
been amended, has become effective under the Act and information has been
omitted therefrom in accordance with Rule 430A under the Act, either (A) if
the Company relies on Rule 434 under the Act, a term sheet relating to the
Shares that shall identify the preliminary prospectus that it supplements
containing such information as is required or permitted by Rules 434, 430A
and 424(b) under the Act or (B) if the Company does not rely on Rule 434
under the Act, a prospectus in the form most recently included in an
amendment to such registration statement (or, if no such amendment shall
have been filed, in such registration statement) with such changes or
insertions as are required by Rule 430A or permitted by Rule 424(b) under
the Act and as have been provided to and approved by the Representatives,
or (ii) if such registration statement, as it may have been amended, has
not become effective under the Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has
been provided to and approved by the Representatives prior to the execution
of this Agreement. The
<PAGE>
Company may also file a related registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering
certain additional shares of Common Stock, which registration statement
will be effective upon filing with the Commission. As used in this
Agreement, the term "Original Registration Statement" means the
registration statement initially filed relating to the Shares, as amended
at the time when it was or is declared effective, including all financial
statement schedules and exhibits thereto and including any information
omitted therefrom pursuant to Rule 430A under the Act and included in the
Prospectus (as hereinafter defined); the term "Rule 462(b) Registration
Statement" means any registration statement filed with the Commission
pursuant to Rule 462(b) under the Act (including the Original Registration
Statement and any Preliminary Prospectus or Prospectus incorporated therein
at the time such Original Registration Statement becomes effective); the
term "Registration Statement" includes both the Original Registration
Statement and any Rule 462(b) Registration Statement; the term "Preliminary
Prospectus" means each prospectus subject to completion included in such
registration statement or any amendment or post-effective amendment thereto
(including the prospectus subject to completion, if any, included in the
Registration Statement at the time it was or is declared effective); the
term "Prospectus" means (A) if the Company relies on Rule 434 of the Act,
the Term Sheet (as hereinafter defined) relating to the Shares that is
first filed pursuant to Rule 424(b)(7) of the Act, together with the
Preliminary Prospectus identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 of the Act, the prospectus
first filed with the Commission pursuant to Rule 424(b) under the Act or
(C) if no prospectus is required to be so filed, such term means the
prospectus included in the Registration Statement at the effective time of
such Registration Statement; and the term "Term Sheet" means any term sheet
that satisfies the requirements of Rule 434 of the Act. Any reference to
the "date" of a Prospectus that includes a Term Sheet shall mean the date
of such Term Sheet. For purposes of the following representations and
warranties, to the extent reference is made to the Prospectus and at the
relevant time the Prospectus is not yet in existence, such reference shall
be deemed to be the most recent Preliminary Prospectus.
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued and no proceeding for that purpose has been
instituted or, to the best knowledge of the Company, threatened by the
Commission or the securities authority of any state or other jurisdiction.
If the Registration Statement has become effective under the Act, no stop
order suspending the effectiveness of the Registration Statement or any
part thereof has been issued and no proceeding for that purpose has been
instituted or, to the best knowledge of the Company, threatened or
contemplated by the Commission or the securities authority of any state or
other jurisdiction.
(c) When any Preliminary Prospectus was filed with the Commission it
(i) contained all statements required to be stated therein in accordance
with, and complied in all material respects with the requirements of, the
Act and the rules and regulations of the Commission thereunder and (ii) did
not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
<PAGE>
light of the circumstances under which they were made, not misleading.
When the Registration Statement or any amendment thereto was or is declared
effective, and at each Time of Delivery (as hereinafter defined), it (i)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with
the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not or will not include any untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements therein not misleading. When (A) the
Prospectus or any amendment or supplement thereto is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment
or supplement is not required to be so filed, when the Registration
Statement or the amendment thereto containing such amendment or supplement
to the Prospectus was or is declared effective) or (B) any Term Sheet which
is a part of the Prospectus is filed with the Commission pursuant to Rule
434, and at each Time of Delivery, the Prospectus, as amended or
supplemented at any such time, (i) contained or will contain all statements
required to be stated therein in accordance with, and complied or will
comply in all material respects with the requirements of, the Act and the
rules and regulations of the Commission thereunder and (ii) did not or will
not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (c) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or
any amendment thereto, the Prospectus or any amendment or supplement
thereto, or any Term Sheet in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through you
specifically for use therein.
(d) If the Company has elected to rely on Rule 462(b) and the Rule
462(b) Registration Statement has not been declared effective (i) the
Company has filed a Rule 462(b) Registration Statement in compliance with
and that is effective upon filing pursuant to Rule 462(b) and has received
confirmation of its receipt; and (ii) the Company has given irrevocable
instructions for transmission of the applicable filing fee in connection
with the filing of the Rule 462(b) Registration Statement, in compliance
with Rule 111 promulgated under the Act, or the Commission has received
payment of such filing fee.
(e) The descriptions in the Registration Statement and the Prospectus
of statutes, legal and governmental proceedings or contracts and other
documents fairly present the information required to be shown; and there
are no statutes or legal or governmental proceedings required to be
described in the Registration Statement or the Prospectus that are not
described as required and there are no contracts or documents of a
character that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required.
(f) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of its jurisdiction of
<PAGE>
incorporation and has full power and authority (corporate and other) to own
or lease its properties and conduct its business as described in the
Prospectus. The Company has full power and authority (corporate and other)
to enter into this Agreement and to perform its obligations hereunder.
Each of the Company and its subsidiaries is duly qualified to transact
business as a foreign corporation and is in good standing under the laws of
each other jurisdiction in which it owns or leases properties, or conducts
any business, so as to require such qualification, except where the failure
to so qualify would not have a material adverse effect on the financial
position, results of operations or business of the Company and its
subsidiaries taken as a whole (a "Material Adverse Effect").
(g) The Company's number of shares of authorized, issued and
outstanding capital stock is as disclosed in the Prospectus as of the date
set forth therein. All of the issued shares of capital stock of the
Company have been duly authorized and validly issued, are fully paid and
nonassessable and conform in all material respects to the description of
the capital stock contained in the Prospectus. None of the issued shares
of capital stock of the Company or any of its subsidiaries has been issued
or is owned or held in violation of any preemptive rights of shareholders,
and no person or entity (including any holder of outstanding shares of
capital stock of the Company or its subsidiaries) has any preemptive or
other rights to subscribe for any of the Shares.
(h) All of the issued shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable and are owned beneficially by the Company free
and clear of all liens, security interests, pledges, charges, encumbrances,
defects, shareholders' agreements, voting trusts, equities or claims of any
nature whatsoever except for any such liens, security interests, pledges,
charges or encumbrances which exist pursuant to the First Consolidated
Modification of Credit Agreement among the Company, as Borrower, Bank
South, Deposit Guaranty National Bank and Society National Bank, as Lenders
and Bank South as Administrative Agent, dated as of January 3, 1996 or
except pursuant to pledges to be granted in connection with the Financing.
Other than the subsidiaries listed on Exhibit 21 to the Registration
Statement and other than as disclosed in the Prospectus, the Company does
not own, directly or indirectly, any capital stock or other equity
securities of any other corporation or any ownership interest in any
partnership, joint venture or other association, except such as are not
material to the Company and its subsidiaries, taken as a whole.
(i) Except as disclosed in the Prospectus, there are no outstanding
(i) securities or obligations of the Company or any of its subsidiaries
convertible into or exchangeable for any capital stock of the Company or
any such subsidiary, (ii) warrants, rights or options to subscribe for or
purchase from the Company or any such subsidiary any such capital stock or
any such convertible or exchangeable securities or obligations, or (iii)
obligations of the Company or any such subsidiary to issue any shares of
capital stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options.
<PAGE>
(j) Since the date of the most recent audited financial statements
included in the Prospectus, none of the Company, any of its subsidiaries or
any of the Phipps Businesses has sustained any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as disclosed
in or contemplated by the Prospectus.
(k) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus and except as described or
contemplated therein, (i) none of the Company, any of its subsidiaries or
the Phipps Businesses has incurred any liabilities or obligations, direct
or contingent, or entered into any transactions, not in the ordinary course
of business, that are material to the Company and its subsidiaries or to
the Phipps Businesses, as the case may be, except that the Company has
transferred the licenses to each of its television stations to separate,
wholly-owned subsidiaries of the Company, (ii) the Company has not
purchased any of its outstanding capital stock or declared, paid or
otherwise made any dividend or distribution of any kind on its capital
stock except pursuant to the terms thereof and except for the declaration
and payment of a quarterly dividend on the Class A Common Stock consistent
with past practice, (iii) there has not been any change in the capital
stock, long-term debt or short-term debt of the Company or any of its
subsidiaries except pursuant to (A) the terms of the instruments governing
the same, (B) the exercise of outstanding options or warrants, (C) the
arrangements relating to the Concurrent Offering and the Financing and
(D) borrowings or incurrence of indebtedness in the ordinary course of
business, and (iv) there has not been any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the financial position, results of operations or business of the
Company and its subsidiaries taken as a whole.
(l) The Shares have been duly authorized and, when issued and
delivered against payment therefor as provided herein, will be validly
issued and fully paid and nonassessable and will conform to the description
of the Common Stock contained in the Prospectus; and the certificates
evidencing the Shares will comply with all applicable requirements of
Georgia law.
(m) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company owned
or to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to the Registration
Statement (or any such right has been effectively waived) or any securities
being registered pursuant to any other registration statement filed by the
Company under the Act.
(n) Neither the Company nor any of its subsidiaries is, or with the
giving of notice or passage of time or both would be, in violation of its
Articles of Incorporation or Bylaws or in default under any indenture,
mortgage, deed of trust, loan agreement, lease
<PAGE>
or other agreement or instrument to which the Company or any of its
subsidiaries is a party or to which any of their respective properties or
assets are subject which would have a Material Adverse Effect.
(o) The issue and sale of the Shares, the performance of this
Agreement and the consummation of the transactions herein contemplated, the
consummation of the Concurrent Offering, the performance of the Phipps
Agreement and the consummation of the transactions contemplated therein and
the consummation of the Financing will not conflict with, or (with or
without the giving of notice or the passage of time or both) result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement or instrument to which the Company, any of its
subsidiaries or any of the Phipps Businesses is a party or to which any of
their respective properties or assets is subject, nor will such action
conflict with or violate any provision of (i) the Certificate of
Incorporation or Bylaws of the Company or any of its subsidiaries; (ii) any
statute, rule or regulation, including, without limitation, the
Communications Act of 1934, as amended (the "Communications Act"), the
Telecommunications Act of 1996 (the "Telecommunications Act") and the rules
and regulations of the Federal Communications Commission (the "FCC")
thereunder; or (iii) any order, judgment or decree of any court or
governmental agency or body having jurisdiction over the Company, any of
its subsidiaries or any of the Phipps Businesses or any of their respective
properties or assets, including, without limitation, the FCC. Further, the
issue and sale of the Shares, the performance of this Agreement and the
consummation of the transactions herein contemplated, the consummation of
the Concurrent Offering, the performance of the Phipps Agreement and the
consummation of the transactions contemplated therein and the consummation
of the Financing shall not result in the termination or revocation of any
of the permits, licenses, approvals, orders, certificates, franchises or
authorizations of governmental or regulatory authorities, including those
relating to the Communications Act, the Telecommunications Act or the rules
and regulations of the FCC, owned or held by the Company, any of its
subsidiaries or any of the Phipps Businesses in order to conduct the
publishing, broadcasting or paging operations of the publications,
television stations, or paging business owned or operated by them
(collectively the "Licenses") or result in any other material impairment of
the rights of the holder of such License.
(p) The Company and its subsidiaries have good and marketable title
in fee simple to all real property, if any, and good title to all personal
property owned by them that is material to the business of the Company and
its subsidiaries taken as a whole, in each case free and clear of all
liens, security interests, pledges, charges, encumbrances, mortgages and
defects, except such as are disclosed or contemplated in the Prospectus or
such as do not materially and adversely affect the value of such property
and do not interfere with the use made of such property by the Company and
its subsidiaries; and any real property and buildings held under lease by
the Company or any of its subsidiaries that are material to the business of
the Company and its subsidiaries, taken as a whole and are held under
valid, subsisting and enforceable (as against the Company or its subsidiary
that is party thereto) leases, with such exceptions as are disclosed in the
<PAGE>
Prospectus or are not material and do not interfere with the use made of
such property and buildings by the Company or such subsidiary. Upon
consummation of the Phipps Acquisition, the Company and its subsidiaries
will have good and marketable title in fee simple to all real property, if
any, and good title to all personal property owned or acquired by them that
is material to the business of the Phipps Businesses, in each case free and
clear of all liens, security interests, pledges, charges, encumbrances,
mortgages and defects, except such as are disclosed or contemplated in the
Prospectus or such as do not materially and adversely affect the value of
such property and do not interfere with the use made of such property by
the Company and its subsidiaries; and any real property and buildings held
under lease by the Company or any of its subsidiaries that are material to
the business of the Phipps Businesses will be held under valid, subsisting
and enforceable (as against the Company or its subsidiary that is party
thereto) leases, with such exceptions as are disclosed in the Prospectus or
are not material and do not interfere with the use made of such property
and buildings by the Company or such subsidiary.
(q) No consent, approval, authorization, order or declaration of or
from, or registration, qualification or filing with, any court or
governmental agency or body, including, but not limited to, the FCC, is
required for the issue and sale of the Shares, the consummation of the
transactions contemplated by this Agreement, the consummation of the
Concurrent Offering, the performance of the Phipps Agreement and the
consummation of the transactions contemplated therein and the consummation
of the Financing, except the registration of the Shares under the Act
(which, if the Registration Statement is not effective as of the time of
execution hereof, shall be obtained as provided in this Agreement) and such
as may be required under state securities or blue sky laws in connection
with the offer, sale and distribution of the Shares by the Underwriters and
except as shall have been received as of the date hereof.
(r) Other than as disclosed in the Prospectus, there is no
litigation, arbitration, claim, proceeding (formal or informal) or
investigation pending or, to the best knowledge of the Company, threatened
in which the Company or any of its subsidiaries is a party or of which any
of their respective properties or assets are the subject which, if
determined adversely to the Company or any such subsidiary, would
individually or in the aggregate have a Material Adverse Effect.
(s) Other than as disclosed in the Prospectus, there is no
litigation, arbitration, claim, proceeding (formal or informal) or
investigation pending or, to the best knowledge of the Company, threatened
in which any of the Phipps Businesses is a party or of which any of their
respective properties or assets are the subject which, if determined
adversely to any Phipps Business, would individually or in the aggregate
have a material adverse effect on the financial position, results of
operations or business of the Company, its subsidiaries and the Phipps
Businesses taken as a whole (a "Consolidated Material Adverse Effect").
(t) Ernst & Young LLP, who have certified certain financial
statements of the Company and its consolidated subsidiaries, the Phipps
Business and WRDW-TV for the
<PAGE>
year ended December 31, 1995, and Deloitte & Touche LLP, who have certified
certain financial statements of WRDW-TV for the years ended December 31,
1994 and 1993, to the best knowledge of the Company, are each, and were
each during the periods covered by their reports included in the
Registration Statement and the Prospectus, independent public accountants
as required by the Act and the rules and regulations of the Commission
thereunder.
(u) The consolidated financial statements and schedules (including
the related notes) of the Company and its consolidated subsidiaries
included in the Registration Statement, the Prospectus or any Preliminary
Prospectus were prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved and fairly
present the financial position and results of operations of the Company and
its subsidiaries, on a consolidated basis, at the dates and for the periods
presented. The selected financial data set forth under the caption
"Selected Historical Financial Data" in the Prospectus fairly present, on
the basis stated in the Prospectus, the information included therein. The
unaudited condensed, combined pro forma financial statements included in
the Prospectus comply as to form in all material respects with the
applicable accounting requirements of the Act and the rules and regulations
of the Commission thereunder and management of the Company believes (A) the
assumptions underlying the pro forma adjustments are reasonable, (B) that
such adjustments have been properly applied to the historical amounts in
the compilation of such statements and (C) that such statements fairly
present, with respect to the Company and its consolidated subsidiaries, the
condensed combined pro forma financial position and results of operations
and the other information purported to be shown therein at the respective
dates or for the respective periods therein specified. The financial
statements and schedules (including the related notes) of each of WRDW-TV
and the Broadcasting and Paging Operations of John H. Phipps, Inc. included
in the Registration Statement, the Prospectus or any Preliminary Prospectus
were prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved and fairly present the
financial position and results of WRDW-TV or the Broadcasting and Paging
Operations of John H. Phipps, Inc., as the case may be, at the dates and
for the periods presented.
(v) This Agreement has been duly authorized, executed and delivered
by the Company and constitutes the valid and binding agreement of the
Company enforceable against the Company in accordance with its terms,
subject, as to enforcement, to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws relating to or affecting
the enforcement of creditors' rights generally and to general equitable
principles and except as the enforceability of rights to indemnity and
contribution under this Agreement may be limited under applicable
securities laws or the public policy underlying such laws.
(w) The Company has not (i) taken, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any security of the Company to facilitate
<PAGE>
the sale or resale of the Shares or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased or paid anyone any
compensation for soliciting purchases of, the Shares or (B) paid or agreed
to pay to any person any compensation for soliciting another to purchase
any other securities of the Company.
(x) The Company has obtained for the benefit of the Company and the
Underwriters from Bull Run Corporation ("Bull Run") and its affiliates and
each of the Company's directors and executive officers a written agreement
("the Lock-Up Agreement") that for a period of 180 days from the date of
the Prospectus Bull Run, such affiliate, director or executive officer, as
the case may be, will not, without your prior written consent, offer, sell,
contract to sell or otherwise dispose of, directly or indirectly, any
shares of Class A Common Stock, any shares of Common Stock or any security
or other instrument which by its terms is convertible into, exercisable or
exchangeable for, any shares of Class A Common Stock or Common Stock of
which Bull Run, such affiliate, director or executive officer, as the case
may be, is now, or in the future may become, the beneficial owner (within
the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as
amended), other than an exercise of stock options or sale of Class A Common
Stock or Class B Common Stock pursuant to a "cashless exercise" of stock
options or a gift of Class A Common Stock or Class B Common Stock, provided
that the donee agrees to be bound by the terms of the Lock-Up Agreement.
(y) The operations of the Company and its subsidiaries and the Phipps
Businesses with respect to any real property currently leased or owned or
by any means controlled by the Company or any subsidiary or any of the
Phipps Businesses (the "Real Property") are in compliance in all material
respects with all federal, state, and local laws, ordinances, rules, and
regulations relating to occupational health and safety and the environment
(collectively, "Laws"), and the Company and its subsidiaries and the Phipps
Businesses have all Licenses which are material for the operation of the
business of the Company and its subsidiaries and the Phipps Businesses, and
are in compliance in all material respects with all terms and conditions of
such Licenses, permits and authorizations; none of the Company, any
subsidiary or any of the Phipps Businesses has authorized, conducted or has
knowledge of the generation, transportation, storage, use, treatment,
disposal or release of any hazardous substance, hazardous waste, hazardous
material, hazardous constituent, toxic substance, pollutant, contaminant,
petroleum product, natural gas, liquified gas or synthetic gas defined or
regulated under any environmental law on, in or under any Real Property;
and, except as set forth on Exhibit B hereto, there is no pending or
threatened claim, litigation or any administrative agency proceeding, nor
has the Company or any subsidiary or any Phipps Business received any
written or oral notice from any governmental entity or third party, that:
(i) alleges a violation of any Laws by the Company or any subsidiary or any
Phipps Business; (ii) alleges the Company or any subsidiary or any Phipps
Business is a liable party under the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. Section 9601 ET SEQ. or any
state superfund law; (iii) alleges possible contamination of the
environment by the Company or any subsidiary or any Phipps Business; or
(iv) alleges possible contamination of the Real Property.
<PAGE>
(z) The Company and its subsidiaries and the Phipps Businesses own or
have the right to use all patents, patent applications, trademarks,
trademark applications, tradenames, service marks, copyrights, franchises,
trade secrets, proprietary or other confidential information and intangible
properties and assets (collectively, "Intangibles") necessary to their
respective businesses (i) as presently conducted or, (ii) to the best
knowledge of the Company, as the Company or such subsidiary or such Phipps
Business proposes to conduct them as indicated by the Prospectus; to the
best knowledge of the Company, none of the Company, any of its subsidiaries
or any of the Phipps Businesses has infringed or is infringing, and none of
the Company, any of its subsidiaries or any of the Phipps Businesses has
received notice of infringement with respect to, asserted Intangibles of
others; and, to the best knowledge of the Company, there is no infringement
by others of Intangibles of the Company, any of its subsidiaries or any of
the Phipps Businesses.
(aa) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it to become, an "investment company"
or a company "controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940.
(bb) Each of the Company and its subsidiaries has all necessary
Licenses and has made all declarations and filings with all federal, state,
local and other governmental authorities, all self-regulatory organizations
and all courts and other tribunals, to own, lease, license and use its
properties and assets and to conduct its business in the manner described
in the Prospectus, except to the extent that the failure to obtain or file
would not have a Material Adverse Effect. The Licenses issued by the FCC
are valid and in full force and effect with no restrictions or
qualifications which would have a Material Adverse Effect. The Company and
its subsidiaries are not in violation of any statutes, orders, rules and
regulations relating to or affecting the properties, businesses and
Licenses of the Company and its subsidiaries and are not in breach or in
violation of the Licenses, the Communications Act, the Telecommunications
Act or any orders, rules and regulations of the FCC, which in any such case
would have a Material Adverse Effect. No event has occurred which permits,
or with notice or lapse of time or both would permit, and no legal or
governmental proceeding has been instituted or threatened which could
cause, the revocation or termination of any of the Licenses or which might
result in any other impairment or modification of the rights of the Company
and its subsidiaries therein which in any such case would have a Material
Adverse Effect. Except as described in the Prospectus, the Company has no
reason to believe that any License issued by the FCC will not be renewed in
the ordinary course.
(cc) Each of the Phipps Businesses has all necessary Licenses and has
made all declarations and filings with all federal, state, local and other
governmental authorities, all self-regulatory organizations and all courts
and other tribunals, to own, lease, license and use its properties and
assets and to conduct its business in the manner described in the
Prospectus, except to the extent that the failure to obtain or file would
not have a
<PAGE>
Consolidated Material Adverse Effect. The Licenses issued by the FCC are
valid and in full force and effect with no restrictions or qualifications
which would have a Consolidated Material Adverse Effect. The Phipps
Businesses are not in violation of any statutes, orders, rules and
regulations relating to or affecting the properties, businesses and
Licenses of the Phipps Businesses and are not in breach or in violation of
the Licenses, the Communications Act, the Telecommunications Act or any
orders, rules and regulations of the FCC, which in any such case would have
a Consolidated Material Adverse Effect. No event has occurred which
permits, or with notice or lapse of time or both would permit, and no legal
or governmental proceeding has been instituted or threatened which could
cause, the revocation or termination of any of the Licenses or which might
result in any other impairment or modification of the rights of the Phipps
Businesses therein which in any such case would have a Consolidated
Material Adverse Effect. Except as described in the Prospectus, the
Company has no reason to believe that any License issued by the FCC will
not be renewed in the ordinary course.
(dd) The Phipps Agreement has been duly authorized, executed and
delivered by the Company and constitutes the valid and binding agreement of
the Company enforceable against the Company in accordance with its terms,
subject, as to enforcement, to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws relating to or affecting
the enforcement of creditors' rights generally and to general equitable
principles.
(ee) The Loan Agreement by and among the Company, as the Borrower,
Keybank National Association, as Agent, Nationsbank, N.A. (South), as Co-
Agent and the financial institutions listed therein, dated as of September
__, 1996 (the "Loan Agreement"), has been duly authorized, executed and
delivered by the Company and each of the Company's subsidiaries which is a
party thereto and constitutes the valid and binding agreement of the
Company and each such subsidiary enforceable against the Company and each
such subsidiary in accordance with its terms, subject, as to enforcement,
to applicable bankruptcy, insolvency, reorganization and moratorium laws
and other laws relating to or affecting the enforcement of creditors'
rights generally and to general equitable principles.
(ff) The Indenture (the "Indenture") to be entered into with respect
to the Concurrent Offering by and among the Company, as Issuer, certain
subsidiaries of the Company as Guarantors and Bankers Trust Company, as
Trustee, has been duly authorized by the Company and, when executed and
delivered by the Company and each of the Company's subsidiaries which is a
party thereto, will constitute the valid and binding agreement of the
Company and each such subsidiary enforceable against the Company and each
such subsidiary in accordance with its terms, subject, as to enforcement,
to applicable bankruptcy, insolvency, reorganization and moratorium laws
and other laws relating to or affecting the enforcement of creditors'
rights generally and to general equitable principles. The Notes to be
issued pursuant to the Indenture have been duly authorized, and when
executed and authenticated in accordance with the provisions of the
Indenture and delivered to and paid for by the purchasers thereof pursuant
to the
<PAGE>
Underwriting Agreement between the Company and J.P. Morgan Securities Inc.,
Allen & Company Incorporated and The Robinson-Humphrey Company, Inc., dated
September __, 1996 (the "Note Underwriting Agreement"), will constitute
legal, valid and binding obligations of the Company entitled to the
benefits of the Indenture, subject, as to enforcement, to applicable
bankruptcy, insolvency, reorganization and moratorium laws and other laws
relating to or affecting the enforcement of creditors' rights generally and
to general equitable principles.
(gg) The Preferred Stock Exchange and Purchase Agreement among the
Company and Bull Run, dated September __, 1996 (the "Preferred Stock
Agreement"), has been duly authorized, executed and delivered by the
Company and constitutes the valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, subject, as
to enforcement, to applicable bankruptcy, insolvency, reorganization and
moratorium laws and other laws relating to or affecting the enforcement of
creditors' rights generally and to general equitable principles. The
shares of Series A Preferred Stock to be issued pursuant to the Preferred
Stock Agreement have been duly authorized and, when issued and delivered in
connection with the Preferred Stock Exchange, will be validly issued and
fully paid and nonassessable, and the description of the Series A Preferred
Stock contained in the Prospectus fairly summarizes the terms and
provisions of the Series A Preferred Stock; and the certificates evidencing
the shares will comply with all applicable requirements of Georgia law.
The shares of Series B Preferred Stock to be issued pursuant to the
Preferred Stock Agreement have been duly authorized and, when issued and
delivered in connection with the Preferred Stock Purchase, will be validly
issued and fully paid and nonassessable, and the description of the Series
B Preferred Stock contained in the Prospectus fairly summarizes the terms
and provisions of the Series B Preferred Stock; and the certificates
evidencing the shares will comply with all applicable requirements of
Georgia law. The Warrants to be issued pursuant to the Preferred Stock
Agreement will, when issued, be binding obligations of the Company,
enforceable against the Company in accordance with their terms, and the
Company has reserved 500,000 shares of its Class A Common Stock for
issuance upon exercise of the Warrants.
(hh) The shareholders of the Company have approved each of the matters
voted on at the Company's Annual Meeting of Shareholders as set forth in
the Company's Proxy Statement dated August 14, 1996.
(ii) The affiliation agreements between certain of the Company's
subsidiaries and NBC and CBS, as applicable, have been duly authorized,
executed and delivered by the Company and the subsidiaries, as applicable,
and are the valid and legally binding obligations of the respective parties
thereto, and the description of such affiliation agreements in the
Prospectus under the caption "Business-Network Affiliation of the Stations"
fairly summarizes the terms thereof.
2. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions
herein set forth, (a) the Company agrees to issue and sell to each of the
Underwriters, and each of the
<PAGE>
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price of $_________ per share, the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto, and (b) in the event
and to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to issue and sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction, the numerator of which is the maximum number of
Optional Shares that such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of the Optional Shares that all of the
Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election in whole or in part from time to time within a period of 30
calendar days from the date of this Agreement up to 525,000 Optional Shares, at
the purchase price per share set forth in clause (a) in the paragraph above, for
the sole purpose of covering over-allotments in the sale of Firm Shares. Any
such election to purchase Optional Shares may be exercised by written notice
from you to the Company, given from time to time within a period of 30 calendar
days after the date of this Agreement and setting forth the aggregate number of
Optional Shares to be purchased and the date on which such Optional Shares are
to be delivered, as determined by you but in no event earlier than the First
Time of Delivery (as hereinafter defined) or, unless you and the Company
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice. In the event you elect to purchase all or a
portion of the Optional Shares, the Company agrees to furnish or cause to be
furnished to you the certificates, letters and opinions, and to satisfy all
conditions, set forth in Section 7 hereof at each Subsequent Time of Delivery
(as hereinafter defined).
3. OFFERING BY THE UNDERWRITERS. Upon the authorization by you of the
release of the Shares, the several Underwriters propose to offer the Shares for
sale upon the terms and conditions disclosed in the Prospectus.
4. DELIVERY OF SHARES; CLOSING. Certificates in definitive form for the
Shares to be purchased by each Underwriter hereunder, and in such denominations
and registered in such names as The Robinson-Humphrey Company, Inc. may request
upon at least 48 hours' prior written notice to the Company shall be delivered
by or on behalf of the Company to you for the account of such Underwriter,
against payment by such Underwriter on its behalf of the purchase price therefor
by official bank check or checks (payable in next day funds) drawn on an
Atlanta, Georgia bank or a New York City bank, payable to the order of the
Company in next day available funds. The closing of the sale and purchase of
the Shares shall be held at the offices of ___________________ except that
physical delivery of such certificates shall be made at the office of The
Depository Trust Company, 55 Water Street, New York, New York 10041. The time
and date of such delivery and payment shall be, with respect to the Firm Shares,
at 10:00 a.m., New York City time, on the third full business day after the
execution of this
<PAGE>
Agreement or at such other time and date as you and the Company may agree upon
in writing, and, with respect to the Optional Shares, at 10:00 a.m., New York
City time, on the date specified by you in the written notice given by you of
the Underwriters' election to purchase all or part of such Optional Shares, or
at such other time and date as you and the Company may agree upon in writing.
Such time and date for delivery of the Firm Shares is herein called the "First
Time of Delivery," such time and date for delivery of the Optional Shares, if
not the First Time of Delivery, is herein called a "Subsequent Time of
Delivery," and each such time and date for delivery is herein called a "Time of
Delivery." The Company will make such certificates available for checking and
packaging at least 24 hours prior to each Time of Delivery at the office of The
Depository Trust Company, 55 Water Street, New York, New York 10041 or at such
other location in New York, New York specified by you in writing at least 48
hours prior to such Time of Delivery.
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with each
of the Underwriters:
(a) If the Registration Statement has been declared effective prior
to the execution and delivery of this Agreement, the Company will file
either (A) the Prospectus with the Commission pursuant to and in accordance
with subparagraph (1) (or, if applicable and if consented to by you,
subparagraph (4)) of Rule 424(b) or (B) a Term Sheet with the Commission
pursuant to and in accordance with Rule 434 not later than the earlier of
(i) the second business day following the execution and delivery of this
Agreement or (ii) the fifth business day after the date on which the
Registration Statement is declared effective. The Company will advise you
promptly of any such filing pursuant to Rule 424(b) or Rule 434.
(b) The Company will not file with the Commission the Prospectus or
the amendment referred to in the second sentence of Section 1(a) hereof,
any amendment or supplement to the Prospectus, any Term Sheet, any
amendment to the Registration Statement or any Rule 462(b) Registration
Statement unless you have received a reasonable period of time to review
any such proposed amendment or supplement and consented to the filing
thereof and will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective as promptly as possible.
Upon the request of the Representatives or counsel for the Underwriters,
the Company will promptly prepare and file with the Commission, in
accordance with the rules and regulations of the Commission, any amendments
to the Registration Statement or any amendments or supplements to the
Prospectus or any Term Sheet that may be necessary or advisable in
connection with the distribution of the Shares by the several Underwriters
and will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective as promptly as possible.
If required, the Company will file any amendment or supplement to the
Prospectus or any Term Sheet with the Commission in the manner and within
the time period required by Rule 424(b) and Rule 434, as applicable, under
the Act. The Company will advise the Representatives, promptly after
receiving notice thereof, of the time when the Original Registration
Statement or any amendment thereto or any Rule 462(b) Registration
Statement has been filed or declared
<PAGE>
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide evidence to the Representatives of each such filing
or effectiveness.
(c) The Company will advise you promptly after receiving notice or
obtaining knowledge of (i) the issuance by the Commission of any stop order
suspending the effectiveness of the Original Registration Statement or any
Rule 462(b) Registration Statement or any part thereof or any order
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (ii) the suspension of
the qualification of the Shares for offer or sale in any jurisdiction or of
the initiation or threatening of any proceeding for any such purpose, or
(iii) any request made by the Commission or any securities authority of any
other jurisdiction for amending the Original Registration Statement or any
Rule 462(b) Registration Statement, for amending or supplementing the
Prospectus or for additional information. The Company will use its best
efforts to prevent the issuance of any such stop order and, if any such
stop order is issued, to obtain the withdrawal thereof as promptly as
possible.
(d) If the delivery of a prospectus relating to the Shares is
required under the Act at any time prior to the expiration of nine months
after the date of the Prospectus and if at such time any events have
occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or if for any reason it is necessary during such same period to
amend or supplement the Prospectus to comply with the Act or the rules and
regulations thereunder, the Company will promptly notify you and upon your
request (but at the Company's expense) prepare and file with the Commission
an amendment or supplement to the Prospectus that corrects such statement
or omission or effects such compliance and will furnish without charge to
each Underwriter and to any dealer in securities as many copies of such
amended or supplemented Prospectus as you may from time to time reasonably
request. If the delivery of a prospectus relating to the Shares is
required under the Act at any time nine months or more after the date of
the Prospectus, upon your request but at the expense of such Underwriter,
the Company will prepare and deliver to such Underwriter as many copies as
you may request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act. Neither your consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 7.
(e) The Company promptly from time to time will take such action as
you may reasonably request to qualify the Shares for offering and sale
under the securities or blue sky laws of such jurisdictions as you may
request and will continue such qualifications in effect for as long as may
be necessary to complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in
any jurisdiction.
<PAGE>
(f) The Company will promptly provide you, without charge, (i) five
conformed executed copies of the Original Registration Statement and any
Rule 462(b) Registration Statement as originally filed with the Commission
and of each amendment thereto, (ii) for each other Underwriter a conformed
copy of the Original Registration Statement and any Rule 462(b)
Registration Statement as originally filed and of each amendment thereto,
without exhibits, and (iii) so long as a prospectus relating to the Shares
is required to be delivered under the Act, as many copies of each
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto as you may reasonably request.
(g) As soon as practicable, but in any event not later than the last
day of the thirteenth month after the later of the effective date of the
Original Registration Statement and any Rule 462(b) Registration Statement,
the Company will make generally available to its security holders an
earnings statement of the Company and its subsidiaries, if any, covering a
period of at least 12 months beginning after the later of the effective
date of the Original Registration Statement and any Rule 462(b)
Registration Statement (which need not be audited) complying with
Section 11(a) of the Act and the rules and regulations thereunder.
(h) During the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, the
Company will not, without your prior written consent, offer, sell, contract
to sell or otherwise dispose of, directly or indirectly, any shares of
Class A Common Stock, or any shares of Common Stock or any security or
other instrument which by its terms is convertible into, exercisable or
exchangeable for, any shares of Class A Common Stock or Common Stock,
except as provided in Section 2 and except that such restrictions shall not
affect the Company's ability to take any such actions in connection with
any option plan or 401(k) plan in effect at the date of the Prospectus or
to issue shares of Class A Common Stock or Common Stock upon the exercise
of stock options or warrants outstanding on the date of this Agreement to
the extent that such stock options or warrants are disclosed in the
Prospectus.
(i) During a period of five years from the later of the effective
date of the Original Registration Statement or any Rule 462(b) Registration
Statement, the Company will furnish to you and, upon request, to each of
the other Underwriters, without charge, (i) copies of all reports or other
communications (financial or other) furnished to shareholders and (ii) as
soon as they are available, copies of any reports and financial statements
furnished to or filed with the Commission or any national securities
exchange.
(j) Neither the Company nor any of its officers or directors will
(i) take, directly or indirectly, prior to the termination of the
underwriting syndicate contemplated by this Agreement, any action designed
to cause or to result in, or that might reasonably be expected to
constitute, the stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of any of the Shares,
(ii) sell, bid for, purchase
<PAGE>
or pay anyone any compensation for soliciting purchases of, the Shares or
(iii) pay or agree to pay to any person any compensation for soliciting
another to purchase any other securities of the Company.
(k) The Company will apply the net proceeds from the offering in the
manner set forth under "The Phipps Acquisition, the KTVE Sale and the
Financing" in the Prospectus.
(l) The Company will cause the Shares to be listed on the New York
Stock Exchange, subject to notice of issuance, at each Time of Delivery and
for at least one year from the date hereof.
(m) If the Company elects to rely upon Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and pay the applicable fees in accordance with
Rule 111 promulgated under the Act by the earlier of (i) 10:00 P.M.
Eastern time on the date of this Agreement and (ii) the time confirmations
are sent or given, as specified by Rule 462(b)(2).
6. EXPENSES. The Company will pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to Section 10 hereof, including without limitation all costs and
expenses incident to (i) the fees, disbursements and expenses of the Company's
counsel and accountants in connection with the registration of the Shares under
the Act and all other expenses in connection with the preparation, printing and,
if applicable, filing of the Original Registration Statement (including all
amendments thereto), any Rule 462(b) Registration Statement, any Preliminary
Prospectus, the Prospectus and any amendments and supplements thereto, this
Agreement and any blue sky memoranda; (ii) the delivery of copies of the
foregoing documents to the Underwriters; (iii) the filing fees of the Commission
and the National Association of Securities Dealers, Inc. relating to the Shares;
(iv) the preparation, issuance and delivery to the Underwriters of any
certificates evidencing the Shares, including transfer agent's and registrar's
fees; (v) the qualification of the Shares for offering and sale under state
securities and blue sky laws, including filing fees and fees and disbursements
of counsel for the Underwriters relating thereto; (vi) any listing of the
securities on the New York Stock Exchange and (vii) any expenses for travel,
lodging and meals incurred by the Company and any of its officers, directors and
employees in connection with any meetings with prospective investors in the
Shares. It is understood, however, that, except as provided in this Section,
Section 8 and Section 10 hereof, the Underwriters will pay all of their own
costs and expenses, including the fees of their counsel, stock transfer taxes on
resale of any of the Shares by them, and any advertising expenses relating to
the offer and sale of the Shares.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder to purchase and pay for the Shares to be delivered at
each Time of Delivery shall be subject, in their discretion, to the accuracy of
the representations and warranties of the Company contained herein as of the
date hereof and as of such Time of Delivery, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the
<PAGE>
performance by the Company of its covenants and agreements hereunder, and to the
following additional conditions precedent:
(a) If the Original Registration Statement as amended to date has not
become effective prior to the execution of this Agreement, such Original
Registration Statement and, if the Company has elected to rely upon Rule
462(b), the Rule 462(b) Registration Statement shall have been declared
effective not later than the earlier of (i) 11:00 a.m., Atlanta time, on
the date of this Agreement and (ii) the time confirmations are sent or
given as specified by Rule 462(b)(2), or, with respect to the Original
Registration Statement such later date and/or time as shall have been
consented to by you in writing. The Prospectus and any amendment or
supplement thereto or a Term Sheet shall have been filed with the
Commission pursuant to Rule 424(b) or Rule 434, as applicable, within the
applicable time period prescribed for such filing and in accordance with
Section 5(a) of this Agreement; no stop order suspending the effectiveness
of the Registration Statement or any Rule 462(b) Registration Statement,
respectively, or any part thereof shall have been issued and no proceedings
for that purpose shall have been instituted, threatened or, to the
knowledge of the Company and the Representatives, contemplated by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction.
(b) King & Spalding, counsel for the Underwriters, shall have
furnished to you such opinion or opinions, dated such Time of Delivery,
with respect to the incorporation of the Company, the validity of the
Shares being delivered at such Time of Delivery, the Registration
Statement, the Prospectus, and other related matters as you may reasonably
request, and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon
such matters.
(c) You shall have received an opinion, dated such Time of Delivery,
of Proskauer Rose Goetz & Mendelsohn LLP, counsel for the Company, in form
and substance satisfactory to you and your counsel, to the effect that:
(i) Each of the subsidiaries of the Company incorporated in
Delaware and listed on an annex to such opinion (the "Delaware
Subsidiaries") is validly existing as a corporation in good standing
under the laws of the State of Delaware and has the corporate power
and authority to own or lease its properties and conduct its business
as described in the Registration Statement and the Prospectus. Each
of the Delaware Subsidiaries is duly qualified to transact business as
a foreign corporation and is in good standing under the laws of the
jurisdictions listed on such annex to the opinion.
(ii) All of the issued shares of capital stock of each of the
Company's subsidiaries are held of record and, to the best knowledge
of such counsel, owned beneficially by the Company free and clear of
any liens, security interests, pledges, charges, encumbrances,
shareholders' agreements, voting trusts, defects, equities or claims
of any nature whatsoever of which such counsel has knowledge
<PAGE>
except as otherwise described in the Prospectus. Other than the
subsidiaries listed on Exhibit 21 to the Registration Statement, to
the best of such counsel's knowledge, the Company does not own,
directly or indirectly, any capital stock or other equity securities
of any other corporation or any ownership interest in any partnership,
joint venture or other association.
(iii) Except as disclosed in the Prospectus, to the best of
such counsel's knowledge, there are no outstanding (A) securities or
obligations of the Company or any of its subsidiaries convertible into
or exchangeable for any capital stock of the Company or any such
subsidiary, (B) warrants, rights or options to subscribe for or
purchase from the Company or any such subsidiary any such capital
stock or any such convertible or exchangeable securities or
obligations, or (C) obligations of the Company or any such subsidiary
to issue any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants, rights
or options.
(iv) The Shares have been listed, subject to notice of issuance,
on the New York Stock Exchange.
(v) Except as disclosed in the Prospectus, to the best of such
counsel's knowledge, there are no contracts, agreements or
understandings between the Company and any person granting such person
the right to require the Company to file a registration statement
under the Act with respect to any securities of the Company owned or
to be owned by such person or to require the Company to include such
securities in the Registration Statement (or any such right has been
effectively waived).
(vi) The issue and sale of the Shares being issued at such Time
of Delivery, the performance of this Agreement and the consummation of
the transactions herein contemplated, the consummation of the
Concurrent Offering, the performance of the Phipps Agreement and the
consummation of the transactions contemplated therein and the
consummation of the Financing will not conflict with, or (with or
without the giving of notice or the passage of time or both) result in
a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement, lease or other agreement or instrument filed as an
exhibit to the Registration Statement, nor will such action conflict
with or violate any provision of the Certificates of Incorporation or
Bylaws of any of the Delaware Subsidiaries or any statute, rule or
regulation or any order, judgment or decree of which such counsel has
knowledge of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of
their respective properties or assets except for any such conflict,
breach, violation or default which would not individually or in the
aggregate have a material adverse effect on the financial position,
results of operations or business of the Company and its subsidiaries
taken as a whole.
<PAGE>
(vii) No consent, approval, authorization, order or
declaration of or from, or registration, qualification or filing with,
any court or governmental agency or body is required for the issue and
sale of the Shares, the consummation of the transactions contemplated
by this Agreement, the consummation of the Concurrent Offering, the
performance of the Phipps Agreement and the consummation of the
transactions contemplated therein and the consummation of the
Financing, except the registration of the Shares under the Act and
such as may be required under state securities or blue sky laws in
connection with the offer, sale and distribution of the Shares by the
Underwriters.
(viii) To such counsel's knowledge and other than as disclosed
in or contemplated by the Prospectus, there is no litigation,
arbitration, claim, proceeding (formal or informal) or investigation
pending or threatened (or any basis therefor) in which the Company or
any of its subsidiaries is a party or of which any of their respective
properties or assets is the subject which, if determined adversely to
the Company or any such subsidiary, would individually or in the
aggregate have a material adverse effect on the financial position,
results of operations or business of the Company and its subsidiaries
taken as a whole.
(ix) The Registration Statement, any Rule 462(b) Registration
Statement and the Prospectus and each amendment or supplement thereto
(other than the financial statements and related schedules and other
financial data therein or omitted therefrom, as to which such counsel
need express no opinion), as of their respective effective or issue
dates, complied as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder.
Such counsel does not know of any statutes or legal or governmental
proceedings required to be described in the Registration Statement,
any Rule 462(b) Registration Statement or Prospectus that are not
described as required or of any contracts or documents of a character
required to be described in the Registration Statement or Prospectus
or to be filed as exhibits to the Registration Statement which are not
described and filed as required.
(x) Each of the Registration Statement and any Rule 462(b)
Registration Statement is effective under the Act; any required filing
of the Prospectus or any Term Sheet pursuant to Rule 424(b) or Rule
434, as applicable, has been made in the manner and within the time
period required by Rule 424(b) or Rule 434, as applicable; and no stop
order suspending the effectiveness of the Registration Statement or
any Rule 462(b) Registration Statement, respectively, or any part
thereof has been issued and, to such counsel's knowledge, no
proceedings for that purpose have been instituted or threatened or are
contemplated by the Commission.
(xi) The Company is not, and will not be as a result of the
consummation of the transactions contemplated by this Agreement, an
<PAGE>
"investment company," or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940.
(xii) If the Company elects to rely upon Rule 434, the
Prospectus is not "materially different", as such term is used in Rule
434, from the prospectus included in the Registration Statement at the
time of its effectiveness or an effective post-effective amendment
thereto (including such information that is permitted to be omitted
pursuant to Rule 430A).
Such counsel shall also state that, based upon their participation in
the preparation of the Registration Statement and meetings with members of
management of the Company and its independent certified public accountants,
but without passing upon or assuming any responsibilities for the accuracy,
completeness or fullness of the information contained in the Registration
Statement, nothing has come to such counsel's attention which has caused
them to believe that the Registration Statement, on its effective date,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, or any amendment
or supplement thereto made prior to such Time of Delivery, as of its issue
date and as of such Time of Delivery, contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading (provided that
such counsel need express no belief regarding the financial statements and
related schedules and other financial data contained in or omitted from the
Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
In rendering such opinions set forth in subparagraphs (vi) and (vii)
above, such counsel may state that such opinions do not cover any matters
governed by the Communications Act, the Telecommunications Act or the rules
and regulations of the FCC promulgated thereunder.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of
responsible officers of the Company and public officials and, as to matters
involving the application of laws of any jurisdiction except for the
general corporate law of the State of Delaware, the laws of the state of
New York or the laws of the United States, to the extent satisfactory in
form and scope to counsel for the Underwriters, upon the opinion of local
counsel satisfactory to the Underwriters, provided that such counsel states
such counsel believes that the Underwriters are justified in relying upon
such opinion and copies of such opinion are delivered to the
Representatives and counsel for the Underwriters.
(d) You shall have received an opinion, dated such Time of Delivery,
of Heyman & Sizemore, Georgia counsel for the Company in form and substance
satisfactory to you and your counsel, to the effect that:
<PAGE>
(i) All of the issued shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable.
(ii) All of the issued shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued
and are fully paid and nonassessable.
(iii) The Shares have been duly authorized and, when issued
and delivered against payment therefor as provided herein, will be
validly issued and fully paid and nonassessable; the certificates
evidencing the Shares comply with all applicable requirements of
Georgia law. The issuance of the Shares will not be subject to any
statutory or, to such counsel's knowledge, contractual preemptive or
similar rights.
(iv) The Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of its jurisdiction
of incorporation and has the corporate power and authority to own or
lease its properties and conduct its business as described in the
Registration Statement and the Prospectus and to enter into this
Agreement and perform its obligations hereunder. Each of the
subsidiaries of the Company incorporated in Georgia and listed on an
annex to such opinion (the "Georgia Subsidiaries") has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the State of Georgia and has the corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus. Each of
the Georgia Subsidiaries and the Company is duly qualified to transact
business as a foreign corporation and is in good standing under the
laws of the jurisdictions listed on such annex to the opinion.
(v) All offers and sales of the Company's capital stock prior to
the date hereof were at all relevant times duly registered under the
Act or exempt from the registration requirements of the Act by reason
of Sections 3(b), 4(2) or 4(6) thereof and were duly registered or the
subject of an available exemption from the registration requirements
of the applicable state securities or blue sky laws.
(vi) The Company's authorized, issued and outstanding capital
stock is as disclosed in the Prospectus. All of the issued shares of
capital stock of the Company conform to the description of the capital
stock contained in the Prospectus.
(vii) This Agreement has been duly authorized, executed and
delivered by the Company.
(viii) To such counsel's knowledge and other than as disclosed
in or contemplated by the Prospectus, there is no litigation,
arbitration, claim, proceeding (formal or informal) or investigation
pending or threatened (or any
<PAGE>
basis therefor) in which the Company or any of its subsidiaries is a
party or of which any of their respective properties or assets is the
subject which, if determined adversely to the Company or any such
subsidiary, would individually or in the aggregate have a material
adverse effect on the financial position, results of operations or
business of the Company and its subsidiaries taken as a whole.
(ix) The Phipps Agreement has been duly authorized, executed and
delivered by the Company and constitutes the valid and binding
agreement of the Company enforceable against the Company in accordance
with its terms, subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws relating
to or affecting the enforcement of creditors' rights generally and to
general equitable principles.
(x) The Loan Agreement has been duly authorized, executed and
delivered by the Company and each of its subsidiaries which is a party
thereto and constitutes the valid and binding agreement of the Company
and each such subsidiary enforceable against the Company and each such
subsidiary in accordance with its terms, subject, as to enforcement,
to applicable bankruptcy, insolvency, reorganization and moratorium
laws and other laws relating to or affecting the enforcement of
creditors' rights generally and to general equitable principles.
(xi) The Indenture has been duly authorized by the Company and,
when executed and delivered by the Company and each of the Company's
subsidiaries which is a party thereto, will constitute the valid and
binding agreement of the Company and each such subsidiary enforceable
against the Company and each such subsidiary in accordance with its
terms, subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws relating
to or affecting the enforcement of creditors' rights generally and to
general equitable principles. The Notes to be issued pursuant to the
Indenture have been duly authorized and when executed and
authenticated in accordance with the provisions of the Indenture and
delivered to and paid for by the purchasers thereof pursuant to the
Note Underwriting Agreement, will constitute legal, valid and binding
obligations of the Company entitled to the benefits of the Indenture,
subject, as to enforcement, to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws relating to or
affecting the enforcement of creditors' rights generally and to
general equitable principles.
(xii) The Preferred Stock Agreement has been duly authorized,
executed and delivered by the Company and constitutes the valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms, subject, as to enforcement, to applicable
bankruptcy, insolvency, reorganization and moratorium laws and other
laws relating to or affecting the enforcement of creditors' rights
generally and to general equitable principles. The shares of Series
<PAGE>
A Preferred Stock to be issued pursuant to the Preferred Stock
Agreement have been duly authorized and, when issued and delivered in
connection with the Preferred Stock Exchange, will be validly issued
and fully paid and nonassessable and will conform to the description
of the Series A Preferred Stock contained in the Prospectus; and the
certificates evidencing the shares will comply with all applicable
requirements of Georgia law. The shares of Series B Preferred Stock
to be issued pursuant to the Preferred Stock Agreement have been duly
authorized and, when issued and delivered in connection with the
Preferred Stock Purchase, will be validly issued and fully paid and
nonassessable and will conform to the description of the Series B
Preferred Stock contained in the Prospectus; and the certificates
evidencing the shares will comply with all applicable requirements of
Georgia law. The Warrants to be issued pursuant to the Preferred
Stock Agreement will, when issued, be binding obligations of the
Company enforceable against the Company in accordance with their terms
and the Company has reserved 500,000 shares of its Class A Common
Stock for issuance upon exercise of the Warrants.
(xiii) The shareholders of the Company have approved each of
the matters voted on at the Company's Annual Meeting of Shareholders
as set forth in the Company's Proxy Statement dated August 14, 1996.
(xiv) The issue and sale of the Shares being issued at such
Time of Delivery, the performance of this Agreement and the
consummation of the transactions herein contemplated, the consummation
of the Concurrent Offering, the performance of the Phipps Agreement
and the consummation of the transactions contemplated therein and the
consummation of the Financing will not conflict with, or (with or
without the giving of notice or the passage of time or both) result in
a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement, lease or other agreement or instrument to which the
Company or any of its subsidiaries is a party or to which any of their
respective properties or assets is subject, nor will such action
conflict with or violate any provision of (i) the Certificate of
Incorporation or Bylaws of the Company or any of its subsidiaries;
(ii) any statute, rule or regulation or (iii) any order, judgment or
decree of any court or governmental agency or body having jurisdiction
over the Company or any of its subsidiaries or any of their respective
properties or assets except for any such conflict, breach, violation
or default which would not individually or in the aggregate have a
material adverse effect on the financial position, results of
operations or business of the Company and its subsidiaries taken as a
whole.
(e) You shall have received, an opinion, dated such Time of Delivery
of Venable, Baetjer, Howard & Civiletti, LLP, special FCC counsel to the
Company, in form and substance satisfactory to you and your counsel, to the
effect that:
(i) The execution and delivery by the Company and each of its
<PAGE>
subsidiaries (to the extent it is a party) of, and the performance by
each of the Company and each of its subsidiaries (to the extent it is
a party) of its obligations under this Agreement, the Phipps
Agreement, the Loan Agreement, the Preferred Stock Agreement, the
Indenture, the Notes and the Debt Underwriting Agreement did not or
will not result in a violation of the Communications Act, the
Telecommunications Act or any order, rule or regulation of the FCC,
and do not and will not cause any forfeiture or impairment by or
before the FCC of any FCC license, permit or authorization of any of
the subsidiaries.
(ii) No consent, approval, authorization, order, registration or
qualification of or with any governmental agency or body is required
under the Communications Act, the Telecommunications Act or the rules
and regulations of the FCC, for the execution and delivery by each of
the Company and its subsidiaries of this Agreement, the Phipps
Agreement, the Loan Agreement, the Preferred Stock Agreement, the
Indenture, the Notes and the Debt Underwriting Agreement.
(iii) WALB Licensee Corp., WJHG Licensee Corp., WRDW Licensee
Corp., WYMT Licensee Corp., WKYT Licensee Corp. and certain of the
Phipps Signatories (collectively the "Licensees") are the holders of
the Licenses issued by the FCC listed in an attachment to such opinion
(the "FCC Licenses"), all of which are validly issued by the FCC and
in full force and effect, with no material restrictions or
qualifications other than as described in the Prospectus and
Registration Statement, and such FCC Licenses constitute all of the
FCC Licenses necessary for the Company and the Licensees to own their
properties and to conduct their businesses as proposed to be owned and
conducted after giving effect to the Phipps Acquisition in the manner
and to the full extent now operated or proposed to be operated as
described in the Prospectus and Registration Statement.
(iv) To the best of such counsel's knowledge, the business and
operations of the Company, its subsidiaries and the Licensees comply
in all material respects with the Communications Act, the
Telecommunications Act and all published orders, rules and regulations
of the FCC.
(v) Other than matters described in the Prospectus and except as
to any other matters relating to the television broadcast industry in
general which would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole, such counsel after due inquiry
does not know of (A) any proceedings threatened, pending or
contemplated before the FCC against or involving the properties,
businesses or Licenses of the Company, its subsidiaries and the
Licensees or (B) any communications laws or regulations of the United
States applicable to such properties, businesses or Licenses, which in
either case could have a material adverse effect on financial
position, results of operations or business the Company and its
subsidiaries, taken as a whole.
<PAGE>
(vi) To the best of such counsel's knowledge after due inquiry,
no event has occurred which permits, or with notice or lapse of time
or both would permit, the revocation or non-renewal of any of the FCC
Licences, assuming the filing of timely license renewal applications
and the timely payment of all applicable filing and regulatory fees to
the FCC, or which might result in any other material impairment of the
rights of the Company or its subsidiaries in the FCC Licenses.
(vii) The statements in the Registration Statement and
Prospectus under the caption "Risk Factors - Consummation of the
Phipps Acquisition Prior to Final FCC Approval," "Risk Factors - FCC
Divestiture Requirement," "Risk Factors - Competitive Nature of and
Risk of Changes in the Television Industry," "Risk Factors -
Regulatory Matters" and "Business - Federal Regulation of the
Company's Business" insofar as such statements constitute summaries of
the legal or regulatory matters, documents or proceedings referred to
therein, fairly present the information called for with respect to
such legal matters, documents and proceedings and fairly summarize the
matters referred to therein and such counsel does not believe that
such statements (A) at the time such amendment became effective,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or (B) as of the date of this
opinion, contained an untrue statement of a material fact or omitted
to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(f) (i) You shall have received from Ernst & Young LLP letters
dated, respectively, the date hereof (or, if the Registration
Statement has been declared effective prior to the execution and
delivery of this Agreement, dated such effective date and the date of
this Agreement) and each Time of Delivery, in form and substance
satisfactory to you, to the effect set forth in Annex I hereto. In
the event that the letters referred to in this Section 7(f) set forth
any changes, decreases or increases in the items specified in
paragraph (iv) of Annex I, it shall be a further condition to the
obligations of the Underwriters that (i) such letters shall be
accompanied by a written explanation by the Company as to the
significance thereof, unless the Representatives deem such explanation
unnecessary, and (ii) such changes, decreases or increases do not, in
your sole judgment, make it impracticable or inadvisable to proceed
with the purchase, sale and delivery of the Shares being delivered at
such Time of Delivery as contemplated by the Registration Statement,
as amended as of the date of such letter.
(ii) You shall have received from Deloitte & Touche LLP letters
dated, respectively, the date hereof (or, if the Registration
Statement has been declared effective prior to the execution and
delivery of this Agreement, dated such effective date and the date of
this Agreement) and each Time of Delivery, in form and substance
satisfactory to you, to the effect set forth in Annex II hereto.
<PAGE>
(g) Since the date of the latest audited financial statements
included in the Prospectus, neither the Company nor any of its subsidiaries
shall have sustained (i) any loss or interference with their respective
businesses from fire, explosion, flood, hurricane or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as disclosed in or
contemplated by the Prospectus, or (ii) any change, or any development
involving a prospective change (including without limitation a change in
management or control of the Company), in or affecting the position
(financial or otherwise), results of operations, net worth or business
prospects of the Company and its subsidiaries, otherwise than as disclosed
in or contemplated by the Prospectus, the effect of which, in either such
case, is in your judgment so material and adverse as to make it
impracticable or inadvisable to proceed with the purchase, sale and
delivery of the Shares being delivered at such Time of Delivery as
contemplated by the Registration Statement, as amended as of the date
hereof.
(h) Subsequent to the date hereof there shall not have occurred any
of the following: (i) any suspension or limitation in trading in securities
generally on the New York Stock Exchange, or any setting of minimum prices
for trading on such exchange, or in the Common Stock by the Commission;
(ii) a moratorium on commercial banking activities in New York declared by
either federal or state authorities; (iii) any downgrading in the rating of
any debt securities of the Company by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g)
under the Act), or any public announcement that any such organization has
under surveillance or review its rating of any debt securities of the
Company (other than an announcement with positive implications of a
possible upgrading, and no implication of a possible downgrading, of such
rating); or (iv) any outbreak or escalation of hostilities involving the
United States, declaration by the United States of a national emergency or
war or any other national or international calamity or emergency if the
effect of any such event specified in this clause (iv) in your judgment
makes it impracticable or inadvisable to proceed with the purchase, sale
and delivery of the Shares being delivered at such Time of Delivery as
contemplated by the Registration Statement, as amended as of the date
hereof.
(i) The Company shall have furnished to you at such Time of Delivery
certificates of officers of the Company, satisfactory to you as to the
accuracy of the representations and warranties of the Company herein at and
as of such Time of Delivery, as to the performance by the Company of all of
its obligations hereunder to be performed at or prior to such Time of
Delivery, and as to such other matters as you may reasonably request, and
the Company shall have furnished or caused to be furnished certificates as
to the matters set forth in the first paragraph of this Section 7 and in
subsection (f) of this Section 7, and as to such other matters as you may
reasonably request.
(j) The Shares shall be listed on the New York Stock Exchange,
subject to notice of issuance.
<PAGE>
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the Company in
Section 1 of this Agreement; (ii) any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or (B) any application or other document, or
any amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Shares under the securities or blue sky
laws thereof or filed with the Commission or any securities association or
securities exchange (each an "Application"); or (iii) the omission or alleged
omission to state in the Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or any Application a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating, defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or action;
PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage, liability or action arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement or any Rule 462(b)
Registration Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto or any Application in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through you expressly for use therein provided, further, that the
foregoing indemnity agreement with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting such
losses, claims, damages or liabilities purchased Shares, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) was not sent or given by or on behalf of
such Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended or supplemented) would have cured
the defect giving rise to such losses, claims, damages or liabilities. The
Company will not, without the prior written consent of each Underwriter, settle
or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding (or related cause of action or
portion thereof) in respect of which indemnification may be sought hereunder
(whether or not such Underwriter is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of such Underwriter from all liability arising out of such
claim, action, suit or proceeding (or related cause of action or portion
thereof).
(b) Each Underwriter, severally but not jointly, agrees to indemnify and
hold harmless the Company against any losses, claims, damages or liabilities to
which the Company may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any
<PAGE>
amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment
or supplement thereto or any Application or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter through you expressly for use therein; and will reimburse the
Company for any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party under subsection (a)
and (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party); PROVIDED, HOWEVER, that if the defendants in any such action include
both the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be one or more legal defenses
available to it or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnifying party
shall not have the right to assume the defense of such action on behalf of such
indemnified party and such indemnified party shall have the right to select
separate counsel to defend such action on behalf of such indemnified party.
After such notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and approval by such indemnified party
of counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any legal or other
expenses, other than reasonable costs of investigation, subsequently incurred by
such indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the prior sentence (it being understood, however, that in connection
with such action the indemnifying party shall not be liable for the expenses of
more than one separate counsel (in addition to local counsel) in any one action
or separate but substantially similar actions in the same jurisdiction arising
out of the same general allegations or circumstances, which separate counsel
shall be designated by the Representatives in the case of indemnity arising
under paragraph (a) of this Section 8) or (ii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. Nothing in this Section 8(c) shall preclude an
indemnified party from participating at its own expense in the defense of any
such action so assumed by the indemnifying party.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of
<PAGE>
any losses, claims, damages or liabilities (or actions in respect thereof)
referred to therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
<PAGE>
9. DEFAULT OF UNDERWRITERS. (a) If any Underwriter defaults in its
obligation to purchase Shares at a Time of Delivery, you may in your discretion
arrange for you or another party or other parties to purchase such Shares on the
terms contained herein. If within thirty-six (36) hours after such default by
any Underwriter you do not arrange for the purchase of such Shares, the Company
shall be entitled to a further period of thirty-six (36) hours within which to
procure another party or other parties satisfactory to you to purchase such
Shares on such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have so arranged for the purchase of
such Shares, or the Company notifies you that it has so arranged for the
purchase of such Shares, you or the Company shall have the right to postpone a
Time of Delivery for a period of not more than seven days in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees to file promptly any amendments to the Registration Statement or the
Prospectus that in its or your reasonable opinion may thereby be made necessary.
The cost of preparing, printing and filing any such amendments shall be paid for
by the Underwriters. The term "Underwriter" as used in this Agreement shall
include any person substituted under this Section with like effect as if such
person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of
Shares to be purchased at such Time of Delivery, then the Company shall have the
right to require each non-defaulting Underwriter to purchase the number of
Shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made, but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
10. TERMINATION. (a) This Agreement may be terminated with respect to
the Firm Shares or any Optional Shares in the sole discretion of the
Representatives by notice to the Company given prior to the First Time of
Delivery or any Subsequent Time of Delivery, respectively, in the event that
(i) any condition to the obligations of the Underwriters set forth in Section 7
hereof has not been satisfied, or (ii) the Company shall have failed, refused
or been unable to deliver the Shares or to perform all obligations and satisfy
all conditions on its part to be performed or satisfied hereunder at or prior to
such Time of Delivery, in either case other than by reason of a default by any
of the Underwriters. If this Agreement is terminated pursuant to this Section
10(a), the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including counsel fees and disbursements) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Shares. The Company shall not in any event be liable to any of the
Underwriters for the loss of anticipated profits from the transactions covered
by this Agreement.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in Section 9(a), the
<PAGE>
aggregate number of such Shares which remains unpurchased exceeds one-eleventh
of the aggregate number of Shares to be purchased at such Time of Delivery, or
if the Company shall not exercise the right described in Section 9(b) to require
non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to a Subsequent Time of
Delivery, the obligations of the Underwriters to purchase and of the Company to
sell the Optional Shares) shall thereupon terminate, without liability on the
part of any non-defaulting Underwriter or the Company, except for the expenses
to be borne by the Company and the Underwriters as provided in Section 6 hereof
and the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
11. SURVIVAL. The respective indemnities, agreements, representations,
warranties and other statements of the Company, its officers and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person referred to in
Section 8(e) or the Company, or any officer or director or controlling person of
the Company referred to in Section 8(e), and shall survive delivery of and
payment for the Shares. The respective agreements, covenants, indemnities and
other statements set forth in Sections 6 and 8 hereof shall remain in full force
and effect, regardless of any termination or cancellation of this Agreement.
12. NOTICES. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be mailed, delivered or telegraphed and
confirmed in writing to you in care of The Robinson-Humphrey Company, Inc., 3333
Peachtree Road, N.E., Atlanta, Georgia 30326, Attention: Corporate Finance
Department (with a copy to King & Spalding, 191 Peachtree Street, Atlanta,
Georgia 30303, Attention: John J. Kelley III; and if sent to the Company, shall
be mailed, delivered or telegraphed and confirmed in writing to the Company at
126 N. Washington Street, P.O. Box 48, Albany, Georgia 31702-0048, Attention:
William A. Fielder III (with a copy to Proskauer Rose Goetz & Mendelsohn LLP,
1585 Broadway, New York, New York 10036, Attention: Henry O. Smith III).
13. REPRESENTATIVES. You will act for the several Underwriters in
connection with the transactions contemplated by this Agreement, and any action
under this Agreement taken by you jointly or by The Robinson-Humphrey Company,
Inc. will be binding upon all the Underwriters.
14. BINDING EFFECT. This Agreement shall be binding upon, and inure
solely to the benefit of, the Underwriters and the Company and to the extent
provided in Sections 8 and 10 hereof, the officers and directors and controlling
persons referred to therein and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia without giving effect to any
provisions regarding conflicts of laws.
<PAGE>
16. COUNTERPARTS. This Agreement may be executed by any one or more of
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one and
the same instrument.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us one of the counterparts hereof, and upon the
acceptance hereof by The Robinson-Humphrey Company, Inc., on behalf of each of
the Underwriters, this letter will constitute a binding agreement among the
Underwriters and the Company. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in the Master Agreement among Underwriters, a copy of which shall be
submitted to the Company for examination, upon request, but without warranty on
your part as to the authority of the signers thereof.
Very truly yours,
GRAY COMMUNICATIONS SYSTEMS, INC.
By:_______________________________
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first written above at
Atlanta, Georgia.
THE ROBINSON-HUMPHREY COMPANY, INC.
ALLEN & COMPANY INCORPORATED
J.C. BRADFORD & CO.
J.P. MORGAN SECURITIES INC.
By: The Robinson-Humphrey Company,
Inc.
By:________________________________
(Authorized Representative)
On behalf of each of the Underwriters
<PAGE>
SCHEDULE I
Number of
Optional
Shares to be
Total Purchased if
Number of Firm Maximum
Shares to be Option
Underwriter Purchased Exercised
- ----------- --------------- -------------
The Robinson-Humphrey Company, Inc.
Allen & Company Incorporated
J.C. Bradford & Co.
J.P. Morgan Securities Inc.
__________ __________
Total.................. __________ __________
__________ __________
<PAGE>
ANNEX I
Pursuant to Section 7(f)(i) of the Underwriting Agreement, Ernst & Young
LLP shall furnish letters to the Underwriters to the effect that:
(i) they are independent public accountants with respect to the
Company, its consolidated subsidiaries, WRDW and the Phipps Businesses
within the meaning of the Act and the applicable published rules and
regulations thereunder;
(ii) in their opinion, the consolidated financial statements and
schedules audited by them and included in the Prospectus and the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations thereunder;
(iii) the interim financial statements of the Company and the
Phipps Businesses as of and for the six-month period ended June 30, 1996
were reviewed by them in accordance with the standards established by the
American Institute of Certified Public Accountants for a review of interim
financial statements and based upon their review they are not aware of any
material modifications that should be made to such financial statements for
them to be in conformity with generally accepted accounting principles, and
such financial statements comply as to form in all material respects with
the applicable accounting requirements of the Act and the applicable rules
and regulations thereunder;
(iv) On the basis of limited procedures, not constituting an audit in
accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company, its subsidiaries and the Phipps Businesses,
inspection of the minute books of the Company and its subsidiaries since
the date of the latest audited financial statements included in the
Prospectus, inquiries of officials of the Company and its subsidiaries
responsible for financial accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) the unaudited consolidated condensed financial statements of
the Company and its consolidated subsidiaries included in the
Registration Statement and the Prospectus do not comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder or are
not in conformity with generally accepted principles applied on a
basis substantially consistent with that of the audited consolidated
financial statements included in the Registration Statement and the
Prospectus;
(B) as of a specified date not more than 5 days prior to the
date of such letter, there were any changes in the capital stock
(other than the issuance of capital stock upon exercise of employee
stock options that were outstanding on the date of the latest balance
sheet included in the Prospectus) or any increase in
<PAGE>
inventories or the long-term debt or short-term debt of the Company
and its subsidiaries, or any decreases in net current assets or net
assets or other items specified by the Representatives, or any
increases in any other items specified by the Representatives, in each
case as compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes, increases
or decreases which the Prospectus discloses have occurred or may
occur, or which are described in such letter; and
(C) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (B) there were any decreases in revenues or operating
income or the total or per share amounts of net income or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with the
comparable period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in each
case for increases or decreases which the Prospectus discloses have
occurred or may occur, or which are described in such letter; and
(v) In addition to the audit referred to in their report(s) included
in the Prospectus and the limited procedures, inspection of minute books,
inquiries and other procedures referred to in paragraph (iv) above, they
have carried out certain specified procedures, not constituting an audit in
accordance with generally accepted auditing standards, with respect to
certain amounts, percentages and financial information specified by the
Representatives that are included in the Registration Statement and the
Prospectus, or which appear in Part II of, or in exhibits or schedules to,
the Registration Statement and have compared certain of such amounts,
percentages and financial information with the accounting records of the
Company and its subsidiaries and have found them to be in agreement;
(vi) on the basis of a reading of the unaudited pro forma consolidated
condensed financial statements included in the Registration Statement and
the Prospectus, carrying out certain specified procedures that would not
necessarily reveal matters of significance with respect to the comments set
forth in this paragraph (vi), inquiries of certain officials of the Company
and its consolidated subsidiaries who have responsibility for financial and
accounting matters and preparing the pro forma consolidated condensed
financial statements, nothing came to their attention that caused them to
believe that the unaudited pro forma consolidated condensed financial
statements do not comply as to form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X or that
the pro forma adjustments have not been properly applied to the historical
amounts in the compilation of such statements.
References to the Registration Statement and the Prospectus in this
Annex I shall include any amendment or supplement thereto at the date of
such letter.
<PAGE>
ANNEX II
Pursuant to Section 7(f)(ii) of the Underwriting Agreement, Deloitte &
Touche LLP shall furnish letters to the Underwriters to the effect that:
(i) they are independent public accountants with respect to WRDW-TV
within the meaning the Act and the applicable published rules and
regulations thereunder and
(ii) in their opinion, the consolidated financial statements and
schedules audited by them and included in the Prospectus and the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations thereunder.
References to the Registration Statement and the Prospectus in this
Annex II shall include any amendment or supplement thereto at the date of such
letter.
<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
GRAY COMMUNICATIONS SYSTEMS, INC.
I.
The name of the corporation is Gray Communications Systems, Inc.
II.
Effective the date hereof, the Section entitled "PREFERRED STOCK" of
Article 4 of the Articles of Incorporation of Gray Communications Systems, Inc.
is hereby amended by adding the subsections entitled "SERIES A PREFERRED STOCK"
and "SERIES B PREFERRED STOCK" as set forth in Exhibit A attached hereto.
III.
All other provisions of the Articles of Incorporation, including the
remaining sections of Article 4, shall remain in full force and effect.
IV.
This Amendment was duly adopted on September 3, 1996 by the Board of
Directors in accordance with the provisions of Section 14-2-602(d) and Section
14-2-1002(9) of the Georgia Business Corporation Code, and pursuant to said code
sections, shareholder action was not required.
V.
The Articles of Incorporation of the Corporation are further 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 B attached hereto.
1
<PAGE>
2
<PAGE>
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.
VII.
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. Certificates previously
representing shares of Existing Class B Common Stock shall be deemed to
represent shares of Class B Common Stock.
VIII.
This amendment was duly adopted by the shareholders of the Corporation on
September 3, 1996, in accordance with the provisions of O.C.G.A. Section 14-2-
1003.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to
3
<PAGE>
be executed by its duly authorized officer on this the 3rd day of September,
1996.
GRAY COMMUNICATIONS SYSTEMS, INC.
By: ____________________________________
PRESIDENT
4
<PAGE>
Exhibit A
SERIES A PREFERRED STOCK
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Preferred Stock" (the "Series A Preferred Stock"), and
the number of shares constituting the Series A Preferred Stock shall be 1,000.
Section 2. RANK. All Series A Preferred Stock shall rank, as to payment
of dividends and as to distribution of assets upon liquidation, dissolution, or
winding up of the Corporation, whether voluntary or involuntary, (i) on a parity
with the Series B Preferred Stock, no par value, of the Corporation, now or
hereafter issued and (ii) senior to the Class A Common Stock, no par value (the
"Class A Common Stock"), of the Corporation and the Class B Common Stock, no par
value (the "Class B Common Stock" and, together with the Class A Common Stock,
the "Common Stock"), of the Corporation now or hereafter issued.
Section 3. DIVIDENDS AND DISTRIBUTIONS. The holders of shares of Series
A Preferred Stock shall be entitled to receive, when, as, and if declared by the
Board of Directors of the Corporation (the "Board of Directors" or the "Board")
out of funds legally available for such purpose, dividends at the rate of
$800.00 per annum per share, and no more, which shall be fully cumulative, shall
accrue without interest from the date of original issuance and shall be payable
in cash quarterly on March 31, June 30, September 30 and December 31 of each
year commencing December 31, 1996 (except that if any such date is a Saturday,
Sunday, or legal holiday, then such dividend shall be payable on the next day
that is not a Saturday, Sunday, or legal holiday) to holders of record as they
appear on the stock books of the Corporation on such record dates, not more than
50 nor less than 10 days preceding the payment dates for such dividends, as
shall be fixed by the Board. The amount of dividends payable per share of
Series
5
<PAGE>
A Preferred Stock for each quarterly dividend period shall be computed by
dividing the annual dividend amount by four. The amount of dividends payable
for the initial dividend period and any period shorter than a full quarterly
dividend period shall be computed on the basis of a 360-day year of twelve 30-
day months. No dividends or other distributions, other than dividends payable
solely in shares of Common Stock or capital stock of the Corporation ranking
junior as to dividends to the Series A Preferred Stock (collectively, the
"Junior Dividend Stock"), shall be paid or set apart for payment on, and except
for the use of Common Stock to pay for the exercise of stock options pursuant to
the stock option plans of the Corporation and its subsidiaries, no purchase,
redemption, or other acquisition shall be made by the Corporation of, any shares
of Junior Dividend Stock unless and until all accrued and unpaid dividends on
the Series A Preferred Stock shall have been paid or declared and set apart for
payment.
If at any time any dividend on any capital stock of the Corporation ranking
senior as to dividends to the Series A Preferred Stock (the "Senior Dividend
Stock") shall be in default, in whole or in part, no dividend shall be paid or
declared and set apart for payment on the Series A Preferred Stock unless and
until all accrued and unpaid dividends with respect to the Senior Dividend
Stock, including the full dividends for the then current dividend period, shall
have been paid or declared and set apart for payment, without interest. No full
dividends shall be paid or declared and set apart for payment on any class or
series of the Corporation's capital stock ranking, as to dividends, on a parity
with the Series A Preferred Stock (the "Parity Dividend Stock") for any period
unless all accrued but unpaid dividends have been , or contemporaneously are,
paid or declared and set apart for such payment on the Series A Preferred Stock.
No full dividends shall be paid or declared and set apart for payment on the
Series A Preferred Stock for any period unless all accrued but unpaid dividends
have been, or contemporaneously are, paid or
6
<PAGE>
declared and set apart for payment on the Parity Dividend Stock for all dividend
periods terminating on or prior to the date of payment of such full dividends.
When dividends are not paid in full upon the Series A Preferred Stock and the
Parity Dividend Stock, all dividends paid or declared and set apart for payment
upon shares of Series A Preferred Stock and the Parity Dividend Stock shall be
paid or declared and set apart for payment pro rata, so that the amount of
dividends paid or declared and set apart for payment per share on the Series A
Preferred Stock and the Parity Dividend Stock shall in all cases bear to each
other the same ratio that accrued and unpaid dividends per share on the shares
of Series A Preferred Stock and the Parity Dividend Stock bear to each other.
Any reference to "distribution" contained in this Section 3 shall not be
deemed to include any stock dividend or distributions made in connection with
any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
Section 4. LIQUIDATION PREFERENCE. In the event of a liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series A Preferred Stock shall be entitled to receive out of the
assets of the Corporation, whether such assets constitute stated capital or
surplus of any nature, an amount equal to the dividends accrued and unpaid
thereon to the date of final distribution to such holders, without interest, and
a sum equal to $10,000.00 per share (the "Liquidation Preference"), and no more,
before any payment shall be made or any assets distributed to the holders of
Common Stock or any other class or series of the Corporation's capital stock
ranking junior as to liquidation rights to the Series A Preferred Stock
(collectively, the "Junior Liquidation Stock"); provided, however, that the
holders of Series A Preferred Stock shall be entitled to such payment only in
the event that the Corporation's payments with respect to the liquidation
preference of the holders of capital stock
7
<PAGE>
of the Corporation ranking senior as to liquidation rights to the Series A
Preferred Stock (the "Senior Liquidation Stock") are fully met. After the
liquidation preferences of the Senior Liquidation Stock are fully met, the
entire assets of the Corporation available for distribution shall be distributed
ratably among the holders of the Series A Preferred Stock and any other class or
series of the Corporation's capital stock having parity as to liquidation rights
with the Series A Preferred Stock in proportion to the respective preferential
amounts to which each is entitled (but only to the extent of such preferential
amounts). After payment in full of the Liquidation Preference of the shares of
the Series A Preferred Stock, the holders of such shares shall not be entitled
to any further participation in any distribution of assets by the Corporation.
Neither a consolidation or merger of the Corporation with another corporation
nor a sale or transfer of all or part of the Corporation's assets for cash,
securities, or other property will be considered a liquidation, dissolution, or
winding up of the Corporation.
Section 5. REDEMPTION AT OPTION OF THE CORPORATION. The Corporation at
its option, may redeem at any time all, or from time to time a portion, of the
Series A Preferred Stock on any date set by the Board of Directors, at the
redemption price of $10,000.00 per share, plus an amount per share equal to all
dividends on the Series A Preferred Stock accrued and unpaid on such share, pro
rata to the date fixed for redemption (the "Redemption Price"). The Redemption
Price shall be payable in cash or, at the option of the Corporation as long as
the Class A Common Stock is registered pursuant to the Securities Exchange Act
of 1934, in the number of shares (rounded up to the nearest whole share) of
Class A Common Stock equal to the amount determined by dividing the Redemption
Price by the Average Market Price. The "Average Market Price" shall mean the
average of the last reported sales prices regular way of the Class A Common
Stock on each day of the 10-day period preceding the date fixed for redemption
or, in
8
<PAGE>
case no sale takes place on any such day, the average of the closing bid and
asked prices regular way on such day, in either case as reported on the New York
Stock Exchange Composite Tape, or, if the Class A Common Stock is not listed or
admitted to trading on such Exchange, on the principal national securities
exchange on which the Class A Common Stock is listed or admitted to trading, or,
if not listed or admitted to trading on any national securities exchange, on the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
National Market System, or, if not admitted for quotation on the NASDAQ National
Market System, the average of the high bid and low asked prices on such day as
recorded by the National Association of Securities Dealers, Inc. through NASDAQ
or, if the National Association of Securities Dealers, Inc. through NASDAQ shall
not have reported any bid and asked prices for the Class A Common Stock on such
day, the average of the bid and asked prices for such day as furnished by any
New York Stock Exchange member firm selected from time to time by the
Corporation for such purpose, or, if no such bid and asked prices can be
obtained from any such firm, the fair market value of one share of Class A
Common Stock on such day as determined in good faith by the Board of Directors.
Such determination by the Board of Directors shall be conclusive.
In case of the redemption of less than all of the then outstanding Series A
Preferred Stock, the Corporation shall designate by lot, or in such other manner
as the Board of Directors may determine, the shares to be redeemed, or shall
effect such redemption pro rata. Notwithstanding the foregoing, the Corporation
shall not redeem less than all of the Series A Preferred Stock at any time
outstanding until all accrued but unpaid dividends upon all Series A Preferred
Stock then outstanding shall have been paid.
Not more than 60 nor less than 30 days prior to the redemption date, notice
by first class
9
<PAGE>
mail, postage prepaid, shall be given to the holders of record of the Series A
Preferred Stock to be redeemed, addressed to such shareholders at their last
addresses as shown on the books of the Corporation. Each such notice of
redemption shall specify the date fixed for redemption, the Redemption Price and
the form of payment, the place or places of payment, that payment will be made
upon presentation and surrender of the shares of Series A Preferred Stock, that
accrued but unpaid dividends to the date fixed for redemption will be paid on
the date fixed for redemption, and that on and after the redemption date,
dividends will cease to accrue on such shares.
Any notice which is mailed as herein provided shall be conclusively
presumed to have been duly given, whether or not the holder of the Series A
Preferred Stock receives such notice; and failure to give such notice by mail,
or any defect in such notice, to the holders of any shares designated for
redemption shall not affect the validity of the proceedings for the redemption
of any other shares of Series A Preferred Stock. On or after the date fixed for
redemption as stated in such notice, each holder of the shares called for
redemption shall surrender the certificate (or certificates) evidencing such
shares to the Corporation at the place designated in such notice and shall
thereupon be entitled to receive payment of the Redemption Price. If fewer than
all the shares represented by any such surrendered certificate (or certificates)
are redeemed, a new certificate shall be issued representing the unredeemed
shares. If, on the date fixed for redemption, funds or shares of Class A Common
Stock necessary for the redemption shall be available therefor and shall have
been irrevocably deposited or set aside, then, notwithstanding that the
certificates evidencing any shares so called for redemption shall not have been
surrendered, the dividends with respect to the shares so called shall cease to
accrue after the date fixed for redemption, the shares shall no longer be deemed
outstanding, the holders thereof shall cease to be shareholders, and all rights
whatsoever with respect to the shares so called for
10
<PAGE>
redemption (except the right of the holders to receive the Redemption Price
without interest upon surrender of their certificates therefor) shall terminate.
Any monies or shares of Class A Common Stock deposited by the Corporation
pursuant to the foregoing provision and unclaimed at the end of one year from
the date fixed for redemption shall, to the extent permitted by law, be returned
to the Corporation, after which the holders of shares of Series A Preferred
Stock so called for redemption shall look only to the Corporation for the
payment thereof. Shares of Series A Preferred Stock redeemed by the Corporation
shall be restored to the status of authorized but unissued shares of Preferred
Stock of the Corporation, without designation as to series, and may thereafter
be reissued, but not as shares of Series A Preferred Stock.
Section 6. NO SINKING FUND. The shares of Series A Preferred Stock
shall not be subject to the operation of a purchase, retirement, or sinking
fund.
Section 7. VOTING RIGHTS. The holders of Series A Preferred Stock will
not have any voting rights except as set forth below or as otherwise from time
to time required by law. Whenever dividends on the Series A Preferred Stock or
any other class or series of Parity Dividend Stock shall be in arrears in an
amount equal to at least six quarterly dividends, (whether or not consecutive),
the holders of the Series A Preferred Stock (voting separately as a class with
all other affected classes or series of the Parity Dividend Stock upon which
like voting rights have been conferred and are exercisable) will be entitled to
vote for and elect two additional directors. Such right of the holders of
Series A Preferred Stock to vote for the election of such two directors may be
exercised at an annual meeting or at any special meeting called for such
purposes as hereinafter provided or at any adjournment thereof, until dividends
in default on such outstanding shares of Series A Preferred Stock shall have
been paid in full (or such dividends shall have been declared and funds
sufficient therefor set apart for payment), at which
11
<PAGE>
time the term of office of the two directors so elected shall terminate
automatically (subject to revesting in the event of each and every subsequent
default of the character specified in the preceding sentence). So long as such
right to vote continues, the Secretary of the Corporation may call, and upon the
written request of the holders of record of 10% of the outstanding shares of
Series A Preferred Stock addressed to him at the principal office of the
Corporation shall call, a special meeting of the holders of such shares for the
election of such two directors, as provided herein. Such meeting shall be held
not less than 45 nor more than 90 days after the accrual of such right, at the
place and upon the notice provided by law and in the By-laws of the Corporation
for the holding of meetings of shareholders. No such special meeting or
adjournment thereof shall be held on a date less than 30 days before an annual
meeting of shareholders or any special meeting in lieu thereof, provided that at
such annual meeting appropriate provisions are made to allow the holders of the
Series A Preferred Stock to exercise such right at such meeting. If at any such
annual or special meeting or any adjournment thereof the holders of a majority
of the then outstanding shares of Series A Preferred Stock entitled to vote in
such election shall be present or represented by proxy, then the authorized
number of directors of the Corporation shall be increased by two, and the
holders of Series A Preferred Stock shall be entitled to elect such two
additional directors. Directors so elected shall serve until the next annual
meeting or until their successors shall be elected and shall qualify, unless the
term of office of the persons so elected as directors shall have terminated by
virtue of the payment in full of all dividends in arrears (or such dividends
shall have been declared and funds sufficient therefor set apart for payment.)
In case of any vacancy occurring among the directors so elected by the holders
of Series A Preferred Stock, the remaining director who shall have been so
elected may appoint a successor to hold office for the unexpired term of the
director whose
12
<PAGE>
place shall be vacant, and such successor shall be deemed to have been
elected by the holders of Series A Preferred Stock. If both directors so
elected by the holders of Series A Preferred Stock shall cease to serve as
directors before their terms shall expire, the holders of Series A Preferred
Stock then outstanding and entitled to vote for such directors may, at a
special meeting of such holders called as provided above, elect successors to
hold office for the unexpired terms of the directors whose places shall be
vacant.
Without the consent or affirmative vote of the holders of at least a
majority of the outstanding shares of Series A Preferred Stock, voting
separately as a class, the Corporation shall not authorize, create, or issue
any shares of any other class or series of capital stock ranking senior to or
on a parity with the Series A Preferred Stock as to dividends or upon
liquidation.
The affirmative vote or consent of the holders of at least a majority
of the outstanding shares of the Series A Preferred Stock, voting separately
as a class, will be required for any amendment, alteration, or repeal,
whether by merger or consolidation or otherwise, of the Corporation's
Articles of Incorporation if the amendment, alteration, or repeal materially
and adversely affects the powers, preferences, or special rights of the
Series A Preferred Stock; provided, however, that any increase in the
authorized Preferred Stock of the Corporation or the creation and issuance of
any other capital Stock of the Corporation ranking senior to, on a parity
with, or junior to the Series A Preferred Stock shall not be deemed to affect
materially and adversely such powers, preferences, or special rights.
Section 8. OUTSTANDING SHARES. For purposes hereof all shares of
Series A Preferred Stock shall be deemed outstanding except that, from the
date fixed for redemption pursuant to Section 5 hereof, all shares of Series
A Preferred Stock which have been so called for redemption under Section 5,
if funds or shares necessary for the redemption of such shares are
13
<PAGE>
available, shall not be deemed to be outstanding.
SERIES B PREFERRED STOCK
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall
be designated as "Series B Preferred Stock" (the "Series B Preferred Stock"),
and the number of shares constituting the Series B Preferred Stock shall be
2,500 and if and to the extent further shares are needed in order to pay
dividends in shares of Series B Preferred Stock as provided for in Section 3
hereof, the Board of Directors of the Corporation will authorize additional
shares of Series B Preferred Stock so that at all times, so long as Series B
Preferred Stock is outstanding, there will be a sufficient number of Series B
Preferred Stock authorized and reserved to pay dividends as provided for in
Section 3 hereof in shares of Series B Preferred Stock for the next
succeeding four quarters.
Section 2. RANK. All Series B Preferred Stock shall rank, as to
payment of dividends and as to distribution of assets upon liquidation,
dissolution, or winding up of the Corporation, whether voluntary or
involuntary, (i) on a parity with the Series A Preferred Stock, no par value,
of the Corporation, now or hereafter issued and (ii) senior to the Class A
Common Stock, no par value (the "Class A Common Stock"), of the Corporation
and the Class B Common Stock, no par value (the "Class B Common Stock" and,
together with the Class A Common Stock, the "Common Stock"), of the
Corporation now or hereafter issued.
Section 3. DIVIDENDS AND DISTRIBUTIONS. The holders of shares of
Series B Preferred Stock shall be entitled to receive, when, as, and if
declared by the Board of Directors of the Corporation (the "Board of
Directors" or the "Board") out of funds legally available for such purpose,
dividends at the rate of $600.00 per annum per share, which shall be fully
cumulative, shall accrue without interest from the date of original issuance
and shall be payable at the
14
<PAGE>
Corporation's option in cash, or in additional shares (whether whole or
fractional) of Series B Preferred Stock valued, for the purpose of
determining the number of shares (or fraction thereof) of such Series B
Preferred Stock to be issued at the value of $10,000 per whole share,
quarterly on March 31, June 30, September 30 and December 31 of each year
commencing December 31, 1996 (except that if any such date is a Saturday,
Sunday, or legal holiday, then such dividend shall be payable on the next day
that is not a Saturday, Sunday, or legal holiday) to holders of record as
they appear on the stock books of the Corporation on such record dates, not
more than 50 nor less than 10 days preceding the payment dates for such
dividends, as shall be fixed by the Board. The amount of dividends payable
per share of Series B Preferred Stock for each quarterly dividend period
shall be computed by dividing the annual dividend amount by four. The amount
of dividends payable for the initial dividend period and any period shorter
than a full quarterly dividend period shall be computed on the basis of a
360-day year of twelve 30-day months. No dividends or other distributions,
other than dividends payable solely in shares of Common Stock or capital
stock of the Corporation ranking junior as to dividends to the Series B
Preferred Stock (collectively, the "Junior Dividend Stock"), shall be paid or
set apart for payment on, and except for the use of Common Stock to pay for
the exercise of stock options pursuant to the stock option plans of the
Corporation and its subsidiaries, no purchase, redemption, or other
acquisition shall be made by the Corporation of, any shares of Junior
Dividend Stock unless and until all accrued and unpaid dividends on the
Series B Preferred Stock shall have been paid or declared and set apart for
payment.
If at any time any dividend on any capital stock of the Corporation
ranking senior as to dividends to the Series B Preferred Stock (the "Senior
Dividend Stock") shall be in default, in whole or in part, no dividend shall
be paid or declared and set apart for payment on the Series B
15
<PAGE>
Preferred Stock unless and until all accrued and unpaid dividends with
respect to the Senior Dividend Stock, including the full dividends for the
then current dividend period, shall have been paid or declared and set apart
for payment, without interest. No full dividends shall be paid or declared
and set apart for payment on any class or series of the Corporation's capital
stock ranking, as to dividends, on a parity with the Series B Preferred Stock
(the "Parity Dividend Stock") for any period unless all accrued but unpaid
dividends have been , or contemporaneously are, paid or declared and set
apart for such payment on the Series B Preferred Stock. No full dividends
shall be paid or declared and set apart for payment on the Series B Preferred
Stock for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the
Parity Dividend Stock for all dividend periods terminating on or prior to the
date of payment of such full dividends. When dividends are not paid in full
upon the Series B Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series B
Preferred Stock and the Parity Dividend Stock shall be paid or declared and
set apart for payment pro rata, so that the amount of dividends paid or
declared and set apart for payment per share on the Series B Preferred Stock
and the Parity Dividend Stock shall in all cases bear to each other the same
ratio that accrued and unpaid dividends per share on the shares of Series B
Preferred Stock and the Parity Dividend Stock bear to each other.
Any reference to "distribution" contained in this Section 3 shall not
be deemed to include any stock dividend or distributions made in connection
with any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
Section 4. LIQUIDATION PREFERENCE. In the event of a liquidation,
dissolution, or winding up of the Corporation, whether voluntary or
involuntary, the holders of Series B
16
<PAGE>
Preferred Stock shall be entitled to receive out of the assets of the
Corporation, whether such assets constitute stated capital or surplus of any
nature, an amount equal to the dividends accrued and unpaid thereon to the
date of final distribution to such holders, without interest, and a sum equal
to $10,000.00 per share (the "Liquidation Preference") and no more, before
any payment shall be made or any assets distributed to the holders of Common
Stock or any other class or series of the Corporation's capital stock ranking
junior as to liquidation rights to the Series B Preferred Stock
(collectively, the "Junior Liquidation Stock"); provided, however, that the
holders of Series B Preferred Stock shall be entitled to such payment only in
the event that the Corporation's payments with respect to the liquidation
preference of the holders of capital stock of the Corporation ranking senior
as to liquidation rights to the Series B Preferred Stock (the "Senior
Liquidation Stock") are fully met. After the liquidation preferences of the
Senior Liquidation Stock are fully met, the entire assets of the Corporation
available for distribution shall be distributed ratably among the holders of
the Series B Preferred Stock and any other class or series of the
Corporation's capital stock having parity as to liquidation rights with the
Series B Preferred Stock in proportion to the respective preferential amounts
to which each is entitled (but only to the extent of such preferential
amounts). After payment in full of the Liquidation Preference of the shares
of the Series B Preferred Stock, the holders of such shares shall not be
entitled to any further participation in any distribution of assets by the
Corporation. Neither a consolidation or merger of the Corporation with
another corporation nor a sale or transfer of all or part of the
Corporation's assets for cash, securities, or other property will be
considered a liquidation, dissolution, or winding up of the Corporation.
Section 5. REDEMPTION AT OPTION OF THE CORPORATION. The
Corporation at its option, may redeem at any time all, or from time to time a
portion, of the Series B Preferred Stock on
17
<PAGE>
any date set by the Board of Directors, at a redemption price of $10,000 per
share plus an amount per share equal to all dividends on the Series B
Preferred Stock accrued and unpaid on such share, pro rata to the date fixed
for redemption (the "Redemption Price"). The Redemption Price shall be
payable in cash or, at the option of the Corporation as long as the Class A
Common Stock is registered pursuant to the Securities Exchange Act of 1934,
in the number of shares (rounded up to the nearest whole share) of Class A
Common Stock equal to the amount determined by dividing the Redemption Price
by the Average Market Price. The "Average Market Price" shall mean the
average of the last reported sales prices regular way of the Class A Common
Stock on each day of the 10-day period preceding the date fixed for
redemption or, in case no sale takes place on any such day, the average of
the closing bid and asked prices regular way on such day, in either case as
reported on the New York Stock Exchange Composite Tape, or, if the Class A
Common Stock is not listed or admitted to trading on such Exchange, on the
principal national securities exchange on which the Class A Common Stock is
listed or admitted to trading, or, if not listed or admitted to trading on
any national securities exchange, on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") National Market System, or, if
not admitted for quotation on the NASDAQ National Market System, the average
of the high bid and low asked prices on such day as recorded by the National
Association of Securities Dealers, Inc. through NASDAQ or, if the National
Association of Securities Dealers, Inc. through NASDAQ shall not have
reported any bid and asked prices for the Class A Common Stock on such day,
the average of the bid and asked prices for such day as furnished by any New
York Stock Exchange member firm selected from time to time by the Corporation
for such purpose, or, if no such bid and asked prices can be obtained from
any such firm, the fair market value of one share of Class A Common Stock on
such day as determined in
18
<PAGE>
good faith by the Board of Directors. Such determination by the Board of
Directors shall be conclusive.
In case of the redemption of less than all of the then outstanding
Series B Preferred Stock, the Corporation shall designate by lot, or in such
other manner as the Board of Directors may determine, the shares to be
redeemed, or shall effect such redemption pro rata. Notwithstanding the
foregoing, the Corporation shall not redeem less than all of the Series B
Preferred Stock at any time outstanding until all accrued but unpaid
dividends upon all Series B Preferred Stock then outstanding shall have been
paid.
Not more than 60 nor less than 30 days prior to the redemption date,
notice by first class mail, postage prepaid, shall be given to the holders of
record of the Series B Preferred Stock to be redeemed, addressed to such
shareholders at their last addresses as shown on the books of the
Corporation. Each such notice of redemption shall specify the date fixed for
redemption, the Redemption Price and the form of payment, the place or places
of payment, that payment will be made upon presentation and surrender of the
shares of Series B Preferred Stock, that accrued but unpaid dividends to the
date fixed for redemption will be paid on the date fixed for redemption, and
that on and after the redemption date, dividends will cease to accrue on such
shares.
Any notice which is mailed as herein provided shall be conclusively
presumed to have been duly given, whether or not the holder of the Series B
Preferred Stock receives such notice; and failure to give such notice by
mail, or any defect in such notice, to the holders of any shares designated
for redemption shall not affect the validity of the proceedings for the
redemption of any other shares of Series B Preferred Stock. On or after the
date fixed for redemption as stated in such notice, each holder of the shares
called for redemption shall surrender the certificate (or certificates)
evidencing such shares to the Corporation at the place designated in such
notice and
19
<PAGE>
shall thereupon be entitled to receive payment of the Redemption Price. If
fewer than all the shares represented by any such surrendered certificate (or
certificates) are redeemed, a new certificate shall be issued representing
the unredeemed shares. If, on the date fixed for redemption, funds or shares
of Class A Common Stock necessary for the redemption shall be available
therefor and shall have been irrevocably deposited or set aside, then,
notwithstanding that the certificates evidencing any shares so called for
redemption shall not have been surrendered, the dividends with respect to the
shares so called shall cease to accrue after the date fixed for redemption,
the shares shall no longer be deemed outstanding, the holders thereof shall
cease to be shareholders, and all rights whatsoever with respect to the
shares so called for redemption (except the right of the holders to receive
the Redemption Price without interest upon surrender of their certificates
therefor) shall terminate. Any monies or shares of Class A Common Stock
deposited by the Corporation pursuant to the foregoing provision and
unclaimed at the end of one year from the date fixed for redemption shall, to
the extent permitted by law, be returned to the Corporation, after which the
holders of shares of Series B Preferred Stock so called for redemption shall
look only to the Corporation for the payment thereof. Shares of Series B
Preferred Stock redeemed by the Corporation shall be restored to the status
of authorized but unissued shares of Preferred Stock of the Corporation,
without designation as to series, and may thereafter be reissued, but not as
shares of Series B Preferred Stock.
Section 6. NO SINKING FUND. The shares of Series B Preferred Stock
shall not be subject to the operation of a purchase, retirement, or sinking
fund.
Section 7. VOTING RIGHTS. The holders of Series B Preferred Stock
will not have any voting rights except as set forth below or as otherwise
from time to time required by law. Whenever dividends on the Series B
Preferred Stock or any other class or series of Parity
20
<PAGE>
Dividend Stock shall be in arrears in an amount equal to at least six
quarterly dividends, (whether or not consecutive), the holders of the
Series B Preferred Stock (voting separately as a class with all other
affected classes or series of the Parity Dividend Stock upon which like
voting rights have been conferred and are exercisable) will be entitled to
vote for and elect two additional directors. Such right of the holders of
Series B Preferred Stock to vote for the election of such two directors may
be exercised at an annual meeting or at any special meeting called for such
purpose as hereinafter provided or at any adjournment thereof, until
dividends in default on such outstanding shares of Series B Preferred Stock
shall have been paid in full (or such dividends shall have been declared and
funds sufficient therefor set apart for payment), at which time the term of
office of the two directors so elected shall terminate automatically (subject
to revesting in the event of each and every subsequent default of the
character specified in the preceding sentence). So long as such right to
vote continues, the Secretary of the Corporation may call, and upon the
written request of the holders of record of 10% of the outstanding shares of
Series B Preferred Stock addressed to him at the principal office of the
Corporation shall call, a special meeting of the holders of such shares for
the election of such two directors, as provided herein. Such meeting shall
be held not less than 45 nor more than 90 days after the accrual of such
right, at the place and upon the notice provided by law and in the By-laws of
the Corporation for the holding of meetings of shareholders. No such special
meeting or adjournment thereof shall be held on a date less than 30 days
before an annual meeting of shareholders or any special meeting in lieu
thereof, provided that at such annual meeting appropriate provisions are made
to allow the holders of the Series B Preferred Stock to exercise such right
at such meeting. If at any such annual or special meeting or any adjournment
thereof the holders of a majority of the then outstanding shares of Series B
Preferred Stock
21
<PAGE>
entitled to vote in such election shall be present or represented by
proxy, then the authorized number of directors of the Corporation shall be
increased by two, and the holders of Series B Preferred Stock shall be
entitled to elect such two additional directors. Directors so elected shall
serve until the next annual meeting or until their successors shall be
elected and shall qualify, unless the term of office of the persons so
elected as directors shall have terminated by virtue of the payment in full
of all dividends in arrears (or such dividends shall have been declared and
funds sufficient therefor set apart for payment.) In case of any vacancy
occurring among the directors so elected by the holders of Series B Preferred
Stock, the remaining director who shall have been so elected may appoint a
successor to hold office for the unexpired term of the director whose place
shall be vacant, and such successor shall be deemed to have been elected by
the holders of Series B Preferred Stock. If both directors so elected by the
holders of Series B Preferred Stock shall cease to serve as directors before
their terms shall expire, the holders of Series B Preferred Stock then
outstanding and entitled to vote for such directors may, at a special meeting
of such holders called as provided above, elect successors to hold office for
the unexpired terms of the directors whose places shall be vacant.
Without the consent or affirmative vote of the holders of at least a
majority of the outstanding shares of Series B Preferred Stock, voting
separately as a class, the Corporation shall not authorize, create, or issue
any shares of any other class or series of capital stock ranking senior to or
on a parity with the Series B Preferred Stock as to dividends or upon
liquidation.
The affirmative vote or consent of the holders of at least a majority
of the outstanding shares of the Series B Preferred Stock, voting separately
as a class, will be required for any amendment, alteration, or repeal,
whether by merger or consolidation or otherwise, of the Corporation's
Articles of Incorporation if the amendment, alteration, or repeal materially
and
22
<PAGE>
adversely affects the powers, preferences, or special rights of the
Series B Preferred Stock; provided, however, that any increase in the
authorized Preferred Stock of the Corporation or the creation and issuance of
any other capital stock of the Corporation ranking senior to, on a parity
with, or junior to the Series B Preferred Stock shall not be deemed to affect
materially and adversely such powers, preferences, or special rights.
Section 8. OUTSTANDING SHARES. For purposes hereof all shares of
Series B Preferred Stock shall be deemed outstanding except that, from the
date fixed for redemption pursuant to Section 5 hereof, all shares of Series
B Preferred Stock which have been so called for redemption under Section 5,
if funds or shares necessary for the redemption of such shares are available,
shall not be deemed to be outstanding.
<PAGE>
Exhibit B
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).
24
<PAGE>
(c) CLASS B RIGHTS.
(1) If, after the date the Articles of Amendment adding this
provision to the Articles are filed with the Secretary of State of
Georgia (the "Effective Date"), any person or group acquires beneficial
ownership of 100% 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 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
25
<PAGE>
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. 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 such section (c) of the section entitled "Common Stock" of this
Article 4, or to purchase shares validly tendered and not withdrawn,
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
that exceeded such Significant Shareholder's comparable percentage of
Class B Common Stock unless and until such requirements are complied
with or unless and until all shares of Class A Common Stock which would
require an offer to be made 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
26
<PAGE>
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
exists 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
27
<PAGE>
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 Rights; (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 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
28
<PAGE>
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 any holder 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 of stock
29
<PAGE>
herein or hereafter authorized to 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 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 the 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
of Directors, the affirmative vote of at least a majority of the vote
cast by the holder 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 Article 4(c).
30
<PAGE>
Exhibit 5
[HEYMAN & SIZEMORE LETTERHEAD]
September 12, 1996
Gray Communications Systems, Inc.
126 North Washington Street
Albany, Georgia 31701
Gentlemen:
We are acting as your counsel in connection with the Registration Statement
on Form S-1 with exhibits thereto (the "Registration Statement") filed by Gray
Communications Systems, Inc. a Georgia corporation (the "Company"), under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
registration under the Securities Act of 4,025,000 shares (the "Shares") of
Class B Common Stock, no par value, of the Company. The Shares are to be
issued and sold by the Company pursuant to an underwriting agreement
("Underwriting Agreement") among the Company and the underwriters party
thereto (the"Underwriters"). A form of the Underwriting Agreement has been
filed as an exhibit to the Registration Statement.
As such counsel, we have reviewed the Registration Statement and certain
corporate proceedings. We have also examined and relied upon originals or
copies, certified or otherwise authenticated to our satisfaction, of certain
public officials and of representatives of the Company and have made such
investigation of law, and have discussed with representatives of the Company
and such other persons such questions of fact, as we have deemed proper and
necessary as a basis for rendering this opinion.
Based upon, and subject to, the foregoing, we are of the opinion that the
Shares are duly authorized and, upon issuance and sale of the Shares in
accordance with the terms of the Unerwriting Agreement, will be legally issued,
fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm in the prospectus
contained in the registration Statement in the section entitled "Legal Matters".
In giving such consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Very truly yours,
HEYMAN & SIZEMORE
Neal H. Ray
<PAGE>
EXHIBIT 12
GRAY COMMUNICATIONS SYSTEMS, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS EXCEPT RATIO DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated pretax income from
continuing operations $ 3,006 $ 1,265 $ 2,748 $ 4,542 $ 1,565 $ 1,958 $ 2,947
Interest expense 787 1,486 985 1,923 5,438 2,768 4,445
Interest portion of rental
expense 20 18 16 46 89 36 45
Amortization of debt discount 14 45 150 142 163 81 137
--------- --------- --------- --------- --------- --------- ---------
Earnings $ 3,827 $ 2,814 $ 3,899 $ 6,653 $ 7,255 $ 4,843 $ 7,574
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Interest expense $ 787 $ 1,486 $ 985 $ 1,923 $ 5,438 $ 2,768 $ 4,445
Interest portion of rental
expense 20 18 16 46 89 36 45
Amortization of debt discount 14 45 150 142 163 81 137
Capitalized interest 0 0 0 0 94 0 0
--------- --------- --------- --------- --------- --------- ---------
Fixed Charges $ 821 $ 1,549 $ 1,151 $ 2,111 $ 5,784 $ 2,885 $ 4,627
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Ratio of Earnings to Fixed
Charges 4.7 1.8 3.4 3.2 1.3 1.7 1.6
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
PRO FORMA COMBINED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS EXCEPT RATIO DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- --------------
<S> <C> <C>
Consolidated pretax income from continuing operations $ (5,215) $ 537
Interest expense 20,664 10,236
Interest portion of rental expense 255 145
Amortization of debt discount -- 15
-------- --------------
Earnings $ 15,704 $ 10,933
-------- --------------
-------- --------------
Interest expense $ 20,664 $ 10,236
Interest portion of rental expense 255 145
Amortization of debt discount 0 15
Capitalized interest 0 0
-------- --------------
Fixed Charges $ 20,919 $ 10,396
-------- --------------
-------- --------------
Ratio of Earnings to Fixed Charges (1) -- 1.1
-------- --------------
-------- --------------
(1) Fixed charges exceed earnings by $ 5,215 $ --
-------- --------------
-------- --------------
</TABLE>
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF
GRAY COMMUNICATIONS SYSTEMS, INC.
Jurisdiction
------------
Name of Incorporation
---- ----------------
The Albany Herald Georgia
Publishing Company, Inc.
The Rockdale Citizen Georgia
Publishing Company
WALB-TV, Inc. Georgia
WJHG-TV, Inc. Georgia
Gray Real Estate & Georgia
Development Company
WKXT Licensee Corp. Delaware
WCTV Operating Corp. Delaware
WKXT-TV, Inc. Delaware
Gray Television Delaware
Management, Inc.
Gray Kentucky Georgia
Television, Inc.
The Southwest Georgia Georgia
Shopper, Inc.
WRDW-TV, Inc. Georgia
KTVE, Inc. Arkansas
Gray Transportation Georgia
Company, Inc.
WALB Licensee Corp. Delaware
WJHG Licensee Corp. Delaware
WKYT Licensee Corp. Delaware
WRDW Licensee Corp. Delaware
WYMT Licensee Corp. Delaware
WCTV Licensee Corp. Delaware
Porta-Phone Paging Delaware
Licensee Corp.
Porta-Phone Paging, Inc. Georgia
<PAGE>
EXHIBIT 23.1
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 14, 1996, except for Note K, as to which
the date is August 9, 1996, in Amendment No. 4 to the Registration Statement
(Form S-1) and related Prospectus of Gray Communications Systems, Inc. dated
September 13, 1996.
ERNST & YOUNG LLP
Columbus, Georgia
September 13, 1996
<PAGE>
EXHIBIT 23.3
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 26, 1996 with respect to the financial
statements of WRDW-TV included in Amendment No. 4 to the Registration Statement
(Form S-1) and related Prospectus of Gray Communications Systems, Inc. dated
September 13, 1996.
ERNST & YOUNG LLP
Atlanta, Georgia
September 13, 1996
<PAGE>
EXHIBIT 23.4
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 19, 1996 with respect to the financial
statements of the Broadcasting and Paging Operations of John H. Phipps, Inc.
included in Amendment No. 4 to the Registration Statement (Form S-1) and related
Prospectus of Gray Communications Systems, Inc. dated September 13, 1996.
ERNST & YOUNG LLP
Atlanta, Georgia
September 13, 1996
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 to Registration Statement No.
333-4340 of Gray Communications Systems, Inc. of our report dated May 12, 1995
on the balance sheet of WRDW-TV (an operating station of Television Station
Partners, L.P.), 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, appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
September 13, 1996
