<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A-2
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
GEORGIA 58-0285030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
126 N. WASHINGTON ST., 31701
ALBANY, GEORGIA (Zip code)
(Address of principal executive
offices)
</TABLE>
(912) 888-9390
(Registrant's telephone number, including area code)
DATE OF REPORT: JANUARY 4, 1996
(Date of earliest event reported)
COMMISSION FILE NUMBER: 1-13796
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1.
Omitted
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
(a) On January 4, 1996, Gray Communications Systems, Inc. (the "Company")
purchased substantially all of the assets of Television Station Partners,
L.P., a Delaware limited partnership, and WRDW Associates, a New York
partnership ("WRDW"), and assumed certain liabilities. Such purchase is
hereinafter referred to as the "Transaction." The assets consist of
approximately 1.03 acres of real estate located at 1301 Georgia Avenue, in
the city of North Augusta, Aiken County, South Carolina on which is located
a single story brick building containing the main office/studio containing
approximately 17,023 sq. ft. which houses the VHF television station
operation of WRDW-TV, Channel 12; several smaller storage sheds; a 501 foot
tower and antennae and three microwave antennae dishes. The assets also
include a transmitter site consisting of 143.27 acres at Beach Island, Aiken
County, South Carolina on which is located a 1,590 ft. transmitter tower.
The purchased assets include all office equipment, all motor vehicles,
licenses and contracts relating to the operation of the television
broadcasting station.
(b) The consideration paid at closing consisted of a $35.9 million cash payment
and the assumption of approximately $1.3 million of liabilities. The
Transaction was effective for accounting purposes on January 4, 1996.
(c) The principles followed in determining the amount of the offer were
historical earnings, market share and future growth potential of the
television station. There are no material relationships between the Company
and the seller or any of either's affiliates. Funds for the Transaction were
obtained from the sale of $10.0 million of 8% subordinated notes due January
3, 2005 (the "Subordinated Notes") and from modification of the Company's
existing credit agreement. The Subordinated Notes which were sold to Bull
Run Corporation ("Bull Run"), a stockholder, include detachable warrants
which are exercisable in 1998 to purchase 487,500 shares of Class A Common
Stock of the Company at $17.88 each and expire if not exercised in ten
years. The Company obtained a "fairness opinion" from an investment banker
relative to the terms and conditions of the Subordinated Notes. The Company
modified its existing bank debt to a variable rate reducing revolving credit
facility, providing a credit line of $55.0 million. The outstanding credit
facility balance subsequent to the Transaction 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 Transaction, and
$425,000 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%. In connection with the Transaction, the Company's Board of
Directors approved the payment of a $360,000 finders fee to Bull Run. Three
of the directors of the Company are also directors of Bull Run which owns
approximately 27% of the outstanding common stock of the Company.
(d) The property acquired was used for VHF broadcasting station in the Augusta,
Georgia area. The Company proposes to continue such use of the purchased
assets.
ITEMS 3-6
Omitted
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
The following audited financial statements of WRDW are included in Appendix A
hereto and incorporated herein by reference:
Report of Independent Auditors
Balance Sheet dated December 31, 1995
Statement of Income for the year ended December 31, 1995
Statement of Partnership's Equity for the year ended December 31, 1995
Statement of Cash Flows for the year ended December 31, 1995
Notes to Financial Statements
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (CONTINUED)
The following audited financial statements of WRDW are included in Appendix B
hereto and incorporated herein by references:
Independent Auditors' Report
Balance Sheet dated December 31, 1994
Statements of Income for the years ended December 31, 1993 and 1994
Statement of Partnership's Equity for the years ended December 31, 1993 and
1994
Statements of Cash Flows for the years ended December 31, 1993 and 1994
Notes to Financial Statements
(b) Pro Forma Financial Information
The pro forma financial information is included in Appendix C hereto and
incorporated herein by reference.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GRAY COMMUNICATIONS SYSTEMS, INC.
(Registrant)
By: /s/ WILLIAM A. FIELDER, III
-----------------------------------
William A. Fielder, III
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
Date: July , 1996
<PAGE>
APPENDIX A
<PAGE>
FINANCIAL STATEMENTS
WRDW-TV
YEAR ENDED DECEMBER 31, 1995
WITH REPORT OF INDEPENDENT AUDITORS
A-1
<PAGE>
WRDW-TV
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................ A-3
Audited Financial Statements
Balance Sheet......................................................... A-4
Statement of Income................................................... A-5
Statement of Partnership's Equity..................................... A-6
Statement of Cash Flows............................................... A-7
Notes to Financial Statements......................................... A-8
</TABLE>
A-2
<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
A-3
<PAGE>
WRDW-TV
BALANCE SHEET
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.
A-4
<PAGE>
WRDW-TV
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.
A-5
<PAGE>
WRDW-TV
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.
A-6
<PAGE>
WRDW-TV
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.
A-7
<PAGE>
WRDW-TV
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. STATION ORGANIZATION AND BASIS OF PRESENTATION
WRDW-TV (the "Station") is a commercial television station located in North
Augusta, South Carolina. The Station was owned and operated by Television
Station Partners, L.P. (the "Partnership") from July 7, 1989 to January 4,
1996-See Note 8. The Partnership is a Delaware limited partnership which was
organized on May 24, 1989 for the sole purpose of acquiring, owning, operating
and, at such time as GP Station Partners (the "general partner" of the
Partnership) determines is appropriate, reselling or otherwise disposing of its
television stations.
The Station was acquired by the Partnership on July 7, 1989 pursuant to an
Exchange Agreement dated May 24, 1989 between the Partnership and Television
Station Partners, a New York partnership ("TSP"). The Exchange Agreement
provided for the transfer to the partnership of all of TSP's assets in exchange
for all of the units of partnership interest in the Partnership, followed by the
liquidation and distribution of those units to the partners of TSP. For tax and
accounting purposes, the Partnership has been treated as a continuation of TSP.
The Station had been operated by TSP since March 23, 1983.
The financial statements of the Station are prepared on the accrual basis of
accounting, and include only those assets, liabilities, and results of
operations that relate to the business of the Station.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TELEVISION FILM EXHIBITION RIGHTS
Television film exhibition rights are recorded at the amount of the license fees
payable when purchased and amortized using the straight-line method based on the
license period or usage, whichever yields the greater accumulated amortization.
Television film exhibition rights are classified based upon the portion of the
unamortized balance expected to be broadcast within the current year.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment is stated at cost less accumulated
depreciation. Depreciation is provided principally by the straight-line method
over the estimated useful lives of the assets. Any gains or losses realized on
disposition are reflected in operations. Maintenance and repairs, as well as
minor renewals and betterments, are charged to operating expenses directly as
incurred.
INTANGIBLE ASSETS
Intangible assets are comprised principally of Federal Communications Commission
licenses and network affiliation agreements and are amortized on the
straight-line basis, primarily over 40 years. Intangible assets are periodically
evaluated for impairments using a measurement of fair value, calculated at the
current market multiple times operating income. If this review indicates that
the intangible assets will not be recoverable, the Company's carrying value of
the intangible assets would be reduced to its estimated fair value.
TRADE/BARTER TRANSACTIONS
Trade/barter transactions involve the exchange of advertising time for products
and/or services and are recorded based on the fair market value of the products
and/or services received. Revenue is recorded when advertising schedules air,
and expense is recognized when products and/or services are used.
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.
A-8
<PAGE>
WRDW-TV
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
3. PROPERTY, BUILDINGS, AND EQUIPMENT
The major classes of property, buildings and equipment at December 31, 1995
are as follows:
<TABLE>
<S> <C>
Land $190,000
Buildings and tower 2,062,613
Automobiles 136,245
Furniture and fixtures 5,999,846
Machinery and equipment 1,769,175
-----------
10,157,879
Less accumulated depreciation 8,379,450
-----------
$1,778,429
-----------
-----------
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1995 consist of the
following:
<TABLE>
<S> <C>
Accounts payable $10,275
Accrued state taxes 9,096
Accrued payroll, commissions, and bonuses 152,201
Other accrued expenses 61,625
----------
$233,197
----------
----------
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
FILM EXHIBITION RIGHTS
The obligations for television film exhibition rights are payable in the
following years:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- --------------------------------------------------------------- -----------
<S> <C>
1996 $898,251
1997 875,838
1998 838,254
1999 672,724
2000 293,451
-----------
$3,578,518
-----------
-----------
</TABLE>
LITIGATION
The Station is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial statements of the Station.
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).
A-9
<PAGE>
WRDW-TV
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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.
A-10
<PAGE>
APPENDIX B
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1994 AND 1993, AND
INDEPENDENT AUDITORS' REPORT
B-1
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT.......................................... B-3
FINANCIAL STATEMENTS
Balance Sheet as of December 31, 1994................................. B-4
Statements of Income for the years ended December 31, 1993 and 1994... B-5
Statements of Partnership's Equity for the years ended December 31,
1993 and 1994........................................................ B-6
Statements of Cash Flows for the years ended December 31, 1993 and
1994................................................................. B-7
Notes to Financial Statements......................................... B-8
</TABLE>
B-2
<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
B-3
<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.
B-4
<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.
B-5
<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.
B-6
<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.
B-7
<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.
B-8
<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
B-9
<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)
of the asset transfer, the return by the general partner of all cash
distributions made from the $72 million borrowing, damages and other relief.
The suit was subsequently dismissed on the grounds that the California
courts were an inconvenient forum.
On April 8, 1992, the plaintiffs in the California suit and another
plaintiff commenced an action in the United States District Court for the
Southern District of New York against GP Station Partners and each of its
general partners. The action, which the plaintiffs purported to bring
individually and as representatives of the limited partners, sought damages
and other relief. The Partnership Agreement contains exculpation and
indemnification provisions relating to claims against GP Station Partners
and its affiliates. In November 1992 the action was settled and discontinued
following the court's denial of the plaintiff's motion for class
certification. The settlement agreement provided for an exchange of general
releases and for payment to the original plaintiffs of an amount equal to
their share of the July 1989 distribution to partners (which the original
Television Station Partners had been escrowing pending the outcome of the
litigation), plus accrued interest, and those plaintiffs also agreed to
waive all rights to any further distribution and to relinquish their
interest in the Partnership without further consideration. No amount will be
payable to the other plaintiff in the action. The agreement also provides
for payment of $75,000 to the plaintiffs' counsel as partial reimbursement
of legal fees and expenses incurred in prosecuting the action. As part of
the settlement, the limited partners' original investment of $203,000, plus
interest of approximately $63,000 was paid. As a result of the litigation,
the Partnership incurred legal fees of approximately $579,000.
The Station is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect
the financial statements of the Station.
DEBT -- At December 31, 1994 the Partnership had $71,900,000 of principal
indebtedness outstanding under an Amended and Restated Credit Agreement (the
"Agreement"). The Agreement is secured by a first lien on substantially all
the assets of the Partnership. The Agreement requires the Partnership to
enter into one or more binding sales contracts for the assets of each
station, satisfactory to the Banks, on or before June 30, 1995. During the
latter part of 1994, the Partnership contracted the services of Media
Venture Partners for the purpose of marketing the stations. In February
1995, the Partnership signed letters of intent for the sale of the assets of
each station. (Note 9)
7. TRANSACTIONS WITH RELATED PARTIES
The Partnership pays various operating and non-operating expenses on behalf
of the Station. These expenses totaled approximately $165,000 and $177,000
for the years ended December 31, 1993 and 1994, respectively. Additionally,
the Station transfers excess cash to the Partnership's headquarters. Excess
cash transferred was $1,909,588 and $2,240,380 for the years ended December
31, 1993 and 1994, respectively. This money is primarily used for principal
and interest payments on the Partnership's debt obligations.
8. PENSION PLAN
Effective January 1, 1993, the defined contribution pension plan was
converted to a 401(k) salaried deferral plan with a Partnership profit
sharing contribution of 3 1/2 percent of the participants' salary per annum.
Annual contributions aggregating approximately $40,585 and $57,314 were made
to the Plan during 1993 and 1994, respectively.
B-10
<PAGE>
WRDW-TV
(AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
9. SUBSEQUENT EVENT
On February 10, 1995, the Partnership signed a letter of intent for the sale
of the assets of WRDW-TV for approximately $34 million, plus an amount equal
to the excess of the current assets over the current liabilities assumed by
the buyer, as defined in the Asset Purchase Agreement, if applicable, to be
paid in cash at the closing of the sale.
B-11
<PAGE>
APPENDIX C
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
On January 4, 1996, Gray Communications Systems, Inc. (the "Company") purchased
substantially all of the assets of Television Station Partners, L.P., a Delaware
limited partnership and WRDW Associates, a New York partnership (collectively
referred to as the "Partnerships") and assumed certain liabilities (the
"Transaction"). The Partnerships operated WRDW, an affiliate of the CBS
television network. The acquisition, which is being accounted for by the
purchase method, was effective the close of business on January 3, 1996. The
cash consideration of approximately $35.9 million, including acquisition costs
of approximately $625,000, was financed primarily through long-term borrowings.
The excess of purchase price over the net assets acquired (approximately $32.4
million based on preliminary allocations) has been recorded as an intangible
asset and will be amortized over a forty-year period using the straight-line
method.
Funds for the Transaction were obtained from the sale of $10.0 million of 8%
subordinated notes due January 3, 2005, (the "Subordinated Notes") and
modification of the Company's existing credit agreement. The Subordinated Notes
which were sold to Bull Run Corporation include detachable warrants which are
exercisable in 1998 to purchase 487,500 shares of Class A Common Stock of the
Company at $17.88 each and expire if not exercised in ten years. The Company
obtained a "fairness opinion" from an investment banker relative to the terms
and conditions of the Subordinated Notes. The Company modified its existing bank
debt to a variable rate reducing revolving credit facility providing a credit
line of $55.0 million. The outstanding credit facility balance subsequent to
this 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 Transaction, and $425,000 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%.
The following unaudited pro forma consolidated balance sheet of the Company as
of December 31, 1995 is based on the historical consolidated balance sheet of
the Company and the balance sheet of WRDW. The unaudited pro forma consolidated
balance sheet gives effect to the acquisition under the purchase method of
accounting and is based on a preliminary allocation of the purchase price
reflecting the assumptions and the adjustments described in the accompanying
notes.
This unaudited pro forma consolidated balance sheet does not purport to
represent the Company's actual financial position that would have been reported
had the Transaction occurred on December 31, 1995.
The pro forma adjustments are based upon currently available information and
upon certain assumptions that management believes are reasonable under the
circumstances. This unaudited pro forma consolidated balance sheet should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto for the period ended December 31, 1994 (as filed on the annual
report, Form 10-K) and for the quarter ended September 30, 1995 (as filed on
Form 10-Q).
C-1
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
GRAY
COMMUNICATIONS
SYSTEMS, PRO FORMA ADJUSTED
INC. WRDW ADJUSTMENTS PRO-FORMA
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 559,991 $ 333,658 $33,728,410(1) $ 559,991
(33,728,410)(2)
(333,658)(3)
Trade accounts receivable 9,560,274 1,748,208 -0- 11,308,482
Recoverable income taxes 1,347,007 -0- -0- 1,347,007
Inventories 553,032 -0- -0- 553,032
Current portion of program
broadcast rights 1,153,058 924,107 (260,987)(4) 1,816,178
Prepaid expenses and other
current assets 263,600 55,342 -0- 318,942
----------- ----------- -------------- -----------
TOTAL CURRENT ASSETS 13,436,962 3,061,315 (594,645) 15,903,632
PROPERTY AND EQUIPMENT -- NET 17,017,074 1,778,429 402,113(2) 19,197,616
OTHER ASSETS
Deferred acquisition costs 3,330,481 -0- (1,500,000)(2) 454,170
(1,376,311)(5)
Deferred loan costs 1,232,261 -0- 751,118(5) 1,983,379
Goodwill and other intangibles 42,004,050 4,128,730 27,651,479(2) 74,409,452
625,193(5)
Other 1,219,650 2,570,850 (2,518,019)(4) 1,272,481
----------- ----------- -------------- -----------
47,786,442 6,699,580 23,633,460 78,119,482
----------- ----------- -------------- -----------
TOTAL ASSETS $78,240,478 $11,539,324 $23,440,928 $113,220,730
----------- ----------- -------------- -----------
----------- ----------- -------------- -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Trade acounts payable $3,752,742 $ 233,197 $ (233,197)(2) $ 3,752,742
Employee compensation and
benefits 4,213,639 -0- -0- 4,213,639
Accrued expenses 560,877 -0- 452,330(2) 1,013,207
Accrued interest 1,064,491 -0- -0- 1,064,491
Current portion of broadcast
program obligations 1,205,784 898,251 (260,983)(4) 1,843,052
Current portion of long-term debt 2,861,672 -0- -0- 2,861,672
----------- ----------- -------------- -----------
TOTAL CURRENT LIABILITIES 13,659,205 1,131,448 (41,850) 14,748,803
LONG-TERM DEBT 51,462,645 -0- 33,728,410(1) 85,191,055
DEFERRED CREDITS 4,133,030 2,680,267 (2,518,023)(4) 4,295,274
STOCKHOLDERS' EQUITY
Common Stock, no par value 6,795,976 -0- -0- 6,795,976
Retained earnings 8,827,906 -0- -0- 8,827,906
WRDW net equity -0- 7,727,609 (7,727,609)(2) -0-
----------- ----------- -------------- -----------
15,623,882 7,727,609 (7,727,609) 15,623,882
Treasury Stock (6,638,284) -0- -0- (6,638,284)
----------- ----------- -------------- -----------
8,985,598 7,727,609 (7,727,609) 8,985,598
----------- ----------- -------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $78,240,478 $11,539,324 $23,440,928 $113,220,730
----------- ----------- -------------- -----------
----------- ----------- -------------- -----------
</TABLE>
SEE ACCOMPANYING NOTE.
C-2
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
The following unaudited pro forma consolidated statement of operations of the
Company for the year ended December 31, 1995 is based in the historical
consolidated financial statements of the Company and the financial statements of
WRDW and are presented as if the acquisition had occurred on January 1, 1995.
The unaudited pro forma consolidated statement of operations gives effect to the
Transaction under the purchase method of accounting and is based on a
preliminary allocation of the purchase price and the assumptions and the
adjustments described in the accompanying notes.
This unaudited pro forma consolidated statement of operations does not purport
to represent the Company's actual results of operations that would have been
reported had the Transaction occurred on January 1, 1995.
The pro forma adjustments are based upon currently available information and
upon certain assumptions that management believes are reasonable under the
circumstances. This unaudited pro forma statement of operations should be read
in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto for the period ended December 31, 1994 (as filed on the annual
report, Form 10-K) and for the quarter ended September 30, 1995 (as filed on
Form 10-Q).
C-3
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
GRAY
COMMUNICATIONS
SYSTEMS, PRO FORMA ADJUSTED
INC. WRDW ADJUSTMENTS PRO FORMA
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Broadcasting
(less agency commissions) $36,750,035 $ 8,660,592 $ 227,368(1) $45,637,995
Publishing 21,866,220 -0- -0- 21,866,220
----------- ----------- -------------- -----------
58,616,255 8,660,592 227,368 67,504,215
EXPENSES
Broadcasting 23,201,990 5,774,232 227,368(1) 29,203,590
Publishing 20,016,137 -0- -0- 20,016,137
Corporate and administrative 2,258,261 -0- -0- 2,258,261
Depreciation 2,633,360 272,298 (51,889)(2) 2,853,769
Amortization of intangible assets 1,325,526 151,620 768,988(3) 2,246,134
Non-cash compensation paid in
common stock 2,321,250 -0- -0- 2,321,250
----------- ----------- -------------- -----------
51,756,524 6,198,150 944,467 58,899,141
----------- ----------- -------------- -----------
6,859,731 2,462,442 (717,099) 8,605,074
Miscellaneous income (expense), net 143,612 (220,211) 127,556(4) 50,957
----------- ----------- -------------- -----------
7,003,343 2,242,231 (589,543) 8,656,031
Interest expense 5,438,374 -0- 3,355,000(5) 8,793,374
----------- ----------- -------------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 1,564,969 2,242,231 (3,944,543) (137,343)
Income tax expense (benefit) 634,000 -0- (675,000)(6) (41,000)
----------- ----------- -------------- -----------
NET INCOME (LOSS) $ 930,969 $ 2,242,231 $(3,269,543) $ (96,343)
----------- ----------- -------------- -----------
----------- ----------- -------------- -----------
Average shares outstanding (7) 4,481,317 4,354,183
----------- -----------
----------- -----------
Earnings per share $ .21 $ (.02)
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTE.
C-4
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTE TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- PRO FORMA ADJUSTMENTS
The pro forma adjustments to reflect the Transaction are as follows:
BALANCE SHEET -- AS OF DECEMBER 31, 1995
1. To record the sale of $10,000,000 in aggregate principal amount of 8%
subordinated notes due January 3, 2005, and additional borrowings of
$25,200,000 from a variable rate reducing revolving credit facility which
provides for principal reduction on a quarterly basis maturing December 31,
2003 with Bank South, Deposit Guaranty Bank and Society National Bank.
2. To record the purchase of WRDW, including a $1.5 million deposit which was
recorded as a deferred acquisition cost by the Company at December 31, 1995.
Pursuant to the acquisition agreement, certain accounts payable of WRDW were
paid by WRDW prior to closing. The Company has recorded a preliminary
allocation of the purchase price to the tangible assets and liabilities
based upon estimates of fair market value at January 4, 1996. The excess of
purchase price over amounts allocated to the assets and liabilities will be
amortized on a straight-line basis over a 40 year period.
3. To eliminate assets of WRDW which were not included in the purchase of WRDW.
4. To reflect a difference in accounting method, recording film exhibition
rights and liabilities at the beginning of their license period, consistent
with the presentation by the Company.
5. To record purchase costs and financing fees and expenses associated with the
purchase of WRDW which were previously treated as deferred acquisition
costs.
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 acquisition
purchase price to the newly acquired property and equipment, at fair market
value.
3. Reflects annual amortization of $107,000 on WRDW's financing costs over a
seven-year period. Also reflects the annual amortization of $813,000 on the
intangible assets associated with the acquisition over a 40-year period.
4. Reflects the elimination of the corporate allocation to WDRW 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 credit facility at LIBOR plus 3.5%, based on an increase in
the debt level subsequent to the acquisition; and annual interest expense of
$800,000 on the 8% Note. Three month LIBOR on January 4, 1996 was
approximately 5.625%.
6. Reflects the adjustment of the income tax provision to the estimated
effective tax rate.
7. Average outstanding shares used to calculate pro forma loss per share are
based on weighted average common shares outstanding during the period.
C-5
