<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________________
.
COMMISSION FILE NUMBER 1-13796
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GRAY COMMUNICATIONS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-0285030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
126 N. WASHINGTON ST. 31701
ALBANY, GA (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (912) 888-9390
------------------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
CLASS A COMMON STOCK (NO PAR VALUE) NEW YORK STOCK EXCHANGE
CLASS B COMMON STOCK (NO PAR VALUE) NEW YORK STOCK EXCHANGE
- ------------------------------------------- -------------------------------------------------
Title of each class Name of each exchange on which registered
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 21, 1997: CLASS A AND CLASS B COMMON STOCK; NO PAR
VALUE--$99,732,480
The number of shares outstanding of the registrant's classes of common stock
as of March 21, 1997: CLASS A COMMON STOCK,; NO PAR VALUE--4,496,402 SHARES;
CLASS B COMMON STOCK, NO PAR VALUE--3,332,382 SHARES
DOCUMENTS INCORPORATED BY REFERENCE: The registrant's definitive proxy
statement for the annual meeting of shareholders to be filed with the Commission
pursuant to Regulation 14A is incorporated by reference into part III herein.
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PART I
ITEM 1. BUSINESS
AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS
GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY CONSUMMATED
THE KTVE SALE AND THE FIRST AMERICAN ACQUISITION (EACH AS DEFINED) ON AUGUST 20,
1996 AND SEPTEMBER 30, 1996, RESPECTIVELY. EXCEPT WITH RESPECT TO HISTORICAL
FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE FIRST
AMERICAN BUSINESS (AS DEFINED) IS INCLUDED IN, AND KTVE (AS DEFINED) IS EXCLUDED
FROM, THE DESCRIPTION OF THE COMPANY. UNLESS OTHERWISE INDICATED, THE
INFORMATION HEREIN HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE
COMPANY'S CLASS A COMMON STOCK, NO PAR VALUE (THE "CLASS A COMMON STOCK"),
EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS
OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD
DATA IN THIS REPORT ON FORM 10-K ARE DERIVED FROM THE NIELSEN STATION INDEX,
VIEWERS IN PROFILE, DATED NOVEMBER 1996, AS PREPARED BY A.C. NIELSEN COMPANY
("NIELSEN").
GENERAL
The Company owns and operates seven network-affiliated television stations
in medium-size markets in the southeastern United States ("Southeast"), six of
which are ranked number one in their respective markets. Five of the stations
are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS"),
and two are affiliated with the NBC Television Network, a division of the
National Broadcasting Company, Incorporated ("NBC"). In connection with the
First American Acquisition (as defined and 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
"Divestiture Requirements" and "The First American 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,
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 the 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 five 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 (the "Augusta Acquisition") WRDW-TV
("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In
September 1996, The Company purchased from First American Media, Inc. (the
"First American Acquisition") substantially all of the assets of two
CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee,
Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a
satellite broadcasting business and a paging business (collectively, the "First
American Business"). Subsequent to the First American Acquisition, the Company
rebranded WKXT with the call letters WVLT ("WVLT") as a component of its
strategy to promote the station's upgraded news product. The Company believes
that the First American 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 WVLT's significant growth potential,
(iii) strong station broadcast cash flows,
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(iv) opportunities for revenue growth utilizing the Company's extensive
management expertise with medium-size stations and (v) opportunities for
synergies between WCTV and WVLT and the Company's existing stations with regard
to revenue enhancement and cost controls.
In August 1996, the Company sold the assets of KTVE Inc. ("KTVE") serving
Monroe, Louisiana/ El Dorado, Arkansas (the "KTVE Sale") for approximately $9.5
million in cash plus the amount of the accounts receivable on the date of the
closing to the extent collected by the buyer ($829,000).
For the year ended December 31, 1996, 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 income of $97.5 million,
$36.8 million, $33.6 million and $12,000, respectively. Net revenues, Media Cash
Flow and operating cash flow on a pro forma basis for the year ended December
31, 1996 increased 66.4%, 136.5% and 152.4%, respectively, while net income
decreased 98.7% from the historical amounts for the year ended December 31,
1995. The Company's pro forma net income for its television stations for the
year ended December 31, 1996 was $2.6 million.
The Company currently has signed a letter of intent to purchase
substantially all of the assets of WITN-TV, the NBC affiliate in the
Greenville-Washington-New Bern, North Carolina market. The Company has also
signed an agreement to purchase Gulflink Communications, Inc., which is in the
transportable satellite uplink business, a business in which the Company is
already engaged.
The following table sets forth certain information for each of the Company's
television stations.
<TABLE>
<CAPTION>
PRO FORMA
-----------
YEAR ENDED
DECEMBER
31,
1996
-----------
NET
STATION REVENUES
RANK IN-MARKET SHARE -----------
NETWORK YEAR DMA CHANNEL/ IN OF HOUSEHOLDS
STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) VIEWING TV (IN
- ------------ ----------- ----------------- ----------- ----------- ----------- ---------- --------------- THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WVLT........ CBS Knoxville, TN 1996 60 8/VHF 3 24 % $ 9,274
WKYT........ CBS Lexington, KY 1994 71 27/UHF(3) 1 37 15,755
WYMT........ CBS Hazard, KY 1994 71 57/UHF(3) 1(4) 27 4,287
WRDW........ CBS Augusta, GA 1996 111 12/VHF 1 38 9,368
WCTV........ CBS Tallahassee, FL/ 1996 114 6/VHF 1 63 13,199
Thomasville, GA
WALB(5)..... NBC Albany, GA 1954 150 10/VHF 1 80 10,611
WJHG(5)..... NBC Panama City, FL 1960 159 7/VHF 1 55 5,216
<CAPTION>
OPERATING
INCOME(6)
-----------
STATION
- ------------
<S> <C>
WVLT........ $ 1,969
WKYT........ 4,899
WYMT........ 1,028
WRDW........ 2,365
WCTV........ 3,745
WALB(5)..... 5,534
WJHG(5)..... 1,080
</TABLE>
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(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 1996 Nielsen estimates.
(2) Represents station rank in DMA as determined by November 1996 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 First American Acquisition. For a discussion
of the Company's plans, see "Divestiture Requirements" and "The First
American 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.
3
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The following table sets forth certain information for each of the Company's
publications:
<TABLE>
<CAPTION>
PRO FORMA
------------------------
YEAR ENDED DECEMBER 31,
1996
------------------------
OPERATING
PUBLISHED PER NET INCOME
PUBLICATION COVERAGE AREA CIRCULATION WEEK REVENUES (LOSS)(1)
- ----------------------- -------------------------------------- --------------- --------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
THE ALBANY HERALD...... 25 counties in Southwest Georgia 33,000 daily 7 $ 14,910 $ 4,186
39,000 Sunday
THE ROCKDALE CITIZEN... 2 counties in Georgia 10,000 6 3,675 202
(metro Atlanta)
GWINNETT DAILY POST.... 1 county in Georgia (metro Atlanta) 13,000 5 2,832 (512)
SOUTHWEST GEORGIA
SHOPPERS............. 10 counties in Southwest Georgia and 52,000 1 1,428 (710)
10 counties in North Florida
</TABLE>
- --------------------------
(1) Represents pro forma income before miscellaneous income (expense),
allocation of corporate overhead, interest expense and income taxes.
The satellite broadcasting business and paging business had pro forma 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 $7.0 million and $367,000, respectively, for the year ended
December 31, 1996.
THE FIRST AMERICAN ACQUISITION, THE KTVE SALE AND THE FINANCING
On September 30, 1996, the Company completed the First American Acquisition
and acquired WCTV and WVLT, a satellite broadcasting business and a paging
business in the Southeast. The purchase price for the First American Acquisition
was approximately $183.9 million, including fees, expenses and working capital
and other adjustments.
The Company completed the KTVE Sale, on August 20, 1996. The sales price
included $9.5 million in cash plus the amount of the accounts receivable on the
date of closing to the extent collected by the buyer (approximately $829,000).
The Company recognized a pre-tax gain of approximately $5.7 million and
estimated income taxes of approximately $2.8 million. For the year ended
December 31, 1996, 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 $3.0 million, $748,000 and $463,000,
respectively.
In addition to the consummation of the First American Acquisition, the
Company implemented a financing plan (the "Financing") to increase liquidity and
improve operating and financial flexibility. Pursuant to this financing plan,
the Company (i) retired approximately $45.3 million principal amount of
outstanding indebtedness under its former credit facility, together with accrued
interest thereon, (ii) retired approximately $25.0 million aggregate principal
amount of outstanding indebtedness under its senior note, together with accrued
interest thereon and a prepayment fee, (iii) issued $10.0 million liquidation
preference of its Series A Preferred Stock in exchange for the Company's 8% note
owned by Bull Run Corporation, the Company's principal shareholder, with
warrants to purchase up to 487,500 shares of Class A Common Stock (representing
9.8% of the Class A Common Stock issued and outstanding at December 31, 1996,
after giving effect to the exercise of such warrants), (iv) issued to Bull Run
Corporation, J. Mack Robinson (Chairman of the Board of Bull Run Corporation and
interim President and Chief Executive Officer 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 10.0% of the Class A Common Stock issued and outstanding at
December 31, 1996, after giving effect to the exercise of such warrants) for
cash proceeds of $10.0 million
4
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and (v) entered into a new bank credit facility (the "Senior Credit Facility")
which is comprised of a term loan of $71.5 million and a revolving credit
facility of $53.5 million aggregating $125.0 million. The cash required for the
consummation of the First American Acquisition, the repayment of indebtedness
and related transaction costs, was provided by the net proceeds of an offering
(the "Note Offering") of $160.0 million principal amount of the Company's Senior
Subordinated Notes due 2006 (the "Notes"), and an offering (the "Stock
Offering") of 3,500,000 shares of the Company's Class B Common Stock, no par
value (the "Class B Common Stock"), the sale of the Series B Preferred Stock
with warrants, the KTVE Sale and borrowings under the Senior Credit Facility.
DIVESTITURE REQUIREMENTS
In connection with the First American Acquisition, the Federal
Communications Commission (the "FCC") ordered the Company to divest WJHG-TV and
WALB-TV by March 31, 1997 to comply with regulations governing common ownership
of television stations with overlapping service areas. The FCC is currently
reexamining these regulations, and if it revises them in accordance with the
interim policy it has adopted, divestiture of WJHG-TV would not be required. The
FCC is not expected to complete its rulemaking on this subject until later in
1997. Accordingly, the Company will request, and expects to receive, an
extension of the divestiture deadline pending the outcome of the rulemaking
proceedings. In order to satisfy applicable FCC requirements with respect to
WALB-TV, 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. If the Company is unable to enter into an
agreement to effect such a swap by March 31, 1997, the Company will seek FCC
approval to transfer the station to a trust with a view towards the trustee
effecting a swap or sale of such assets. Under such trust arrangement, which
would be subject to the approval of the FCC, the Company would be required to
relinquish operating control of the station 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-TV, 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.
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
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. Six of the Company's stations offering
5
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comprehensive local news coverage are the dominant local broadcast news source.
The remaining station, WVLT in Knoxville, Tennessee, began offering significant
local news coverage during February 1997.
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.
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 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.
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 benefited 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 and recreational vehicle shows and golf shows. 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
6
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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 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. 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. The Company currently
has signed a letter of intent to purchase substantially all of the assets of
WITN-TV, the NBC affiliate in the Greenville-Washington-New Bern, North Carolina
market. The Company has also signed an agreement to purchase Gulflink
Communications, Inc. which is in the transportable satellite uplink business, a
business in which the Company is already engaged. Other than the proposed
acquisitions, the Company does not presently have any agreements to acquire any
television stations or publications. In appropriate circumstances, the Company
will dispose of assets that it deems non-essential to its operating or growth
strategy.
7
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TELEVISION BROADCASTING
THE COMPANY'S STATIONS AND THEIR MARKETS
AS USED IN THE TABLES FOR EACH OF THE COMPANY'S STATIONS AND IN THIS SECTION
(I) "GROSS REVENUES" REPRESENT ALL OPERATING REVENUES EXCLUDING BARTER REVENUES;
(II) "MARKET REVENUES" REPRESENT GROSS ADVERTISING REVENUES, EXCLUDING BARTER
REVENUES, FOR ALL COMMERCIAL TELEVISION STATIONS IN THE MARKET, AS REPORTED IN
INVESTING IN TELEVISION 1996 MARKET REPORT, 4TH EDITION JULY 1996 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>
COMMERCIAL IN-MARKET
STATIONS STATION MARKET SHARE OF
DMA IN RANK IN TELEVISION REVENUES IN HOUSEHOLDS
STATION MARKET RANK(1) DMA(2) DMA HOUSEHOLDS(3) DMA FOR 1996 VIEWING TV
- ------------------------------ --------------- -------- ---------- -------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
WVLT.......................... Knoxville, TN 60 4 3 456,000 $60,500 24%
WKYT.......................... Lexington, KY 71 5 1 375,000 50,600 37
WYMT(4)....................... Hazard, KY 71 N/A 1 166,000 4,800 27
WRDW.......................... Augusta, GA 111 4 1 223,000 27,500 38
WCTV.......................... Tallahassee, 114 4 1 215,000 21,300 63
FL/
Thomasville, GA
WALB(5)....................... Albany, GA 150 4 1 133,000 13,200 80
WJHG(5)....................... Panama City, FL 159 4 1 113,000 10,500 55
</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 1996 Nielsen
estimates.
(2) Includes independent broadcasting stations.
(3) Based upon the approximate number of television households in the DMA as
reported by the November 1996 Nielsen index.
(4) The market area served by WYMT is an 18-county trading area, as defined by
Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank
is based upon its ratings position in the 18-county trading area.
(5) The Company was required to divest WALB and WJHG under current FCC
regulations. For a discussion of the Company's plans, see "Divestiture
Requirements" and "The First American Acquisition, the KTVE Sale and the
Financing."
The following is a description of each of the Company's stations:
WVLT, THE CBS AFFILIATE IN KNOXVILLE, TENNESSEE
WVLT, acquired by the Company in September 1996, began operations in 1988.
Knoxville, Tennessee is the 60th largest designated market area ("DMA") in the
United States, with approximately 456,000 television households and a total
population of approximately 1.2 million. Total Market Revenues in the Knoxville
DMA in 1996 were approximately $60.5 million, an 8% increase over 1995. WVLT's
pro forma gross revenues for each of the years ended December 31, 1996 and 1995
were approximately $10.6 million. WVLT's pro forma net loss (before the
allocation of corporate and administrative expenses and after estimated income
taxes computed at statutory rates) for the year ended December 31, 1996 was
approximately $2.0 million, an increase of $120,000 from the pro forma net loss
of $1.9 million for the prior
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period. 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 WVLT:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Market Revenues in DMA........................................... $ 60,500 $ 56,000 $ 55,000
Market Revenues growth over prior year........................... 8% 2% 17%
In-market share of households viewing television................. 24% 22% 23%
Rank in market................................................... 3 3 3
</TABLE>
MARKET DESCRIPTION. The Knoxville DMA, consisting of 24 counties in eastern
Tennessee and southeastern Kentucky, includes the cities of Knoxville, Oak Ridge
and Gatlinburg, Tennessee. The Knoxville area is a center for education,
manufacturing, healthcare and tourism. The University of Tennessee's main campus
is located within the city of Knoxville. Leading manufacturing employers in the
area include: Lockheed Martin Energy Systems, Inc., Levi Strauss & Company,
DeRoyal Industries, Aluminum Company of North America, Phillips Consumer
Electronics North America Corp., Clayton Homes and Sea Ray Boats, Inc. Area
tourist attractions are the Great Smokey Mountains National Park and Dollywood,
a country-western theme park sponsored by Dolly Parton.
STATION PERFORMANCE. WVLT is a CBS affiliate and operates on channel 8.
WVLT is one of three commercial VHF stations in the Knoxville DMA. Based on
November 1996 Nielsen estimates, WVLT is ranked third in its market, with a 24%
in-market share of households viewing television. WVLT can be viewed on 50 cable
systems in its DMA. WVLT received 18% of the Knoxville DMA's Market Revenues in
1996.
WVLT produced only five hours of news per week prior to its acquisition by
the Company in September 1996. The Company has implemented its operating
strategy at WVLT by developing a comprehensive news department which currently
produces 22 hours of news programming per week.
In addition to carrying network programming supplied by CBS, WVLT carries
syndicated programming, including BAYWATCH, REGIS & KATHIE LEE, AMERICAN
JOURNAL, ENTERTAINMENT TONIGHT, HARD COPY, THE ANDY GRIFFITH SHOW and ROLANDA.
WKYT, THE CBS AFFILIATE IN LEXINGTON, KENTUCKY
WKYT, acquired by the Company in September 1994, began operations in 1957.
Lexington, Kentucky is the 71st largest DMA in the United States, with
approximately 375,000 television households and a total population of
approximately 1.0 million. Total Market Revenues in the Lexington DMA in 1996
were approximately $50.6 million, a 7% increase over 1995. WKYT's gross revenues
for the year ended December 31, 1996 were approximately $17.8 million, an
increase of 1.3% from the corresponding prior year. WKYT's net income before
extraordinary charge (before the allocation of corporate and administrative
expenses and after estimated income taxes computed at statutory rates) for the
year ended December 31, 1996 was approximately $1.1 million, a decrease of 7.8%
from the prior year. 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.
9
<PAGE>
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
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Market Revenues in DMA........................................... $ 50,600 $ 47,500 $ 43,500
Market Revenues growth over prior year........................... 7% 9% 14%
In-market share of households viewing television................. 37% 33% 37%
Rank in market................................................... 1 1 1
</TABLE>
MARKET DESCRIPTION. The Lexington DMA consists of 37 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. Eight hospitals and numerous medical clinics are located in
Lexington, reinforcing Lexington's position as a regional medical center. The
University of Kentucky's main campus is also located in Lexington. In 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 85 cable systems in its DMA and 51 cable
systems outside its DMA. In 1996, WKYT celebrated its 21st 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 1996
Nielsen index, WKYT is ranked number one in its market, with a 37% in-market
share of households viewing television, which is nine percentage points ahead of
the competition. WKYT received 35% of the Lexington DMA's Market Revenues in
1996. 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 TV 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 coverage of most area
sporting events.
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 WJHG, WVLT, WYMT and WRDW, and
DIRECTIONS and 27 NEWSMAKERS, two weekly public affairs 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!, AMERICAN JOURNAL, DEEP SPACE NINE, UNTOUCHABLES, CROOK AND
CHASE, DR QUINN MEDICINE WOMAN, WHEEL OF FORTUNE and THE ANDY GRIFFITH SHOW.
10
<PAGE>
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 166,000 television households and a
total population of approximately 463,000. WYMT is the only commercial
television station in this 18-county trading area. Total Market Revenues in the
18-county trading area and WYMT's gross revenues in the 18-county trading area
for the year ended December 31, 1996 were approximately $4.8 million, an
increase of 17.1% from the prior year. WYMT's net income before extraordinary
charge (before the allocation of corporate and administrative expenses and after
estimated income taxes computed at statutory rates) for the year ended December
31, 1996 was approximately $166,000, an increase of 419% from the corresponding
prior year. 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
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Market Revenues in the 18-county trading area(1)............. $ 4,800 $ 4,100 $ 3,800
Market Revenues growth over prior year....................... 17% 9% 8%
In-market share of households viewing television............. 27% 24% 20%
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 11,000 manufacturing jobs exist in the Hazard trading
area, most of which are concentrated in the Cumberland Valley area, a Kentucky
Area Development District located in the southern portion of the 18-county
trading area.
STATION PERFORMANCE. WYMT, which operates on channel 57, is a CBS
affiliate. WYMT is ranked number one, based on November 1996 Nielsen estimates,
in its trading area with a 27% in-market share of households viewing television,
which is fifteen 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. 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.
11
<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 223,000 television households and a total population of
approximately 630,000. Total Market Revenues in the Augusta DMA in 1996 were
approximately $27.5 million, a 7% increase over 1995. WRDW's pro forma gross
revenues for the year ended December 31, 1996 were approximately $10.5 million,
an increase of 9.3% from the corresponding prior year on a pro forma basis.
WRDW's pro forma net income before extraordinary charge (before the allocation
of corporate and administrative expenses and after estimated income taxes
computed at statutory rates) for the year ended December 31, 1996 was
approximately $74,000, as compared to a net loss of $386,000 for the prior year
on a pro forma basis. 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
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Market Revenues in DMA....................................... $ 27,500 $ 25,700 $ 24,700
Market Revenues growth over prior year....................... 7% 4% 8%
In-market share of households viewing television............. 38% 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
military and civilian personnel at the Department of Energy's Savannah River
Site, a nuclear processing plant, and Fort Gordon, a U.S. Army military
installation. Augusta has eight large hospitals which collectively employ
approximately 20,000 and reinforce Augusta's status as a regional healthcare
center. Augusta is also home to the Masters Golf Tournament, which has been
broadcast by CBS for 41 years.
STATION PERFORMANCE. WRDW, which operates on channel 12, is a CBS
affiliate. Based on November 1996 Nielsen estimates, WRDW is ranked number one
in its market, with a 38% in-market share of
12
<PAGE>
households viewing television, which is six share points ahead of the
competition. WRDW also received 38% of the Augusta DMA's Market Revenues in
1996. 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 noon, 5
p.m., 6 p.m. and, 11 p.m., and five 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 1996 Nielsen estimates. WRDW has
positioned itself as "The News Station" 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.
In addition to 38.5 hours of local news the station also produces its own
local programming, including TIME TO CARE, PRIMETIME SPECIALS and PAINE COLLEGE
PRESENTS, a semi-monthly local public affairs show. In addition to carrying the
programming provided by CBS, WRDW carries syndicated programming including:
OPRAH!, INSIDE EDITION, LIVE WITH REGIS AND KATHY LEE, WHEEL OF FORTUNE and
JEOPARDY!
WCTV, THE CBS AFFILIATE IN TALLAHASSEE, FLORIDA/THOMASVILLE, GEORGIA
WCTV, acquired by the Company in September 1996, began operations in 1955.
Tallahassee, Florida/ Thomasville, Georgia is the 114th largest DMA in the
United States, with approximately 215,000 television households and total
population of approximately 602,000. Total Market Revenues in the Tallahassee/
Thomasville DMA in 1996 were approximately $21.3 million, a 7% increase over
1995. WCTV's pro forma gross revenues for the year ended December 31, 1996 were
approximately $15.0 million, an increase of 12.6% from the corresponding prior
period on a pro forma basis. WCTV's pro forma net loss (before the allocation of
corporate and administrative expenses and after estimated income taxes computed
at statutory rates) for the year ended December 31, 1996 was approximately $1.9
million, a decrease of $878,000 from the net loss of $2.8 million for the prior
year on a pro forma basis. 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.
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
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Market Revenues in DMA....................................... $ 21,300 $ 19,900 $ 18,900
Market Revenues growth over prior year....................... 7% 5% 10%
In-market share of households viewing television............. 63% 60% 65%
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 University, Tallahassee Community College and Valdosta
State College. Florida State University is the largest university located in the
DMA and its main campus is located within the city of Tallahassee.
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 1996 Nielsen estimates, WCTV is ranked number one in its market, with a
63% in-market share of households viewing television. WCTV can
13
<PAGE>
be viewed on 47 cable systems in its DMA and 32 cable systems outside of its
DMA. WCTV received 70% of the Tallahassee/Thomasville DMA's Market Revenues in
1996.
WCTV considers its news department to be a key component of its operations.
The station attributes its successful news programming in part to its bureaus in
Tallahassee, Valdosta and Thomasville and its news gathering vehicles. WCTV
produces five news programs and two news cut-ins each day which total four 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, INSIDE EDITION, CROOK
AND CHASE, JEOPARDY! and OPRAH!
WALB, THE NBC AFFILIATE IN ALBANY, GEORGIA
WALB was founded by the Company and began operations in 1954. Albany,
Georgia is the 150th largest DMA in the United States with approximately 133,000
television households and a total population of approximately 383,000. Total
Market Revenues in the Albany DMA in 1996 were approximately $13.2 million, a 8%
increase over 1995. WALB's gross revenues for the year ended December 31, 1996
were approximately $11.8 million, an increase of 12.5% from the corresponding
prior year. 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, 1996 was approximately $3.4 million, an
increase of 15.2% from the prior year. The Albany DMA has four licensed
commercial television stations, three of which are affiliated with networks. The
Albany DMA also has one public television station.
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
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Market Revenues in DMA....................................... $ 13,200 $ 12,200 $ 11,600
Market Revenues growth over prior year....................... 8% 5% 17%
In-market share of households viewing television............. 80% 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 and Darton College are
also 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 1996
Nielsen estimates, WALB is ranked number one in its market, with an 80%
in-market share of households viewing television, which is 62 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 89% of the Albany DMA's Market Revenues in 1996.
WALB is the number one ranked NBC affiliate in the United States and is
ranked third in United States sign-on to sign-off among all networks (Source:
Nov. '96 Nielsen/KATZ SNAP). WALB's TODAY IN
14
<PAGE>
GEORGIA is the number one ranked early morning news program for an NBC affiliate
in the United States and is ranked second in United States among all networks
(Source: Nov. '96 Nielsen/KATZ SNAP). 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 each weekday and two hours of news each weekend day.
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 and MARTIN.
The Company will be required to divest this station pursuant to existing FCC
regulations. See "Divestiture Requirements" and "The First American Acquisition,
the KTVE Sale and the Financing."
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
113,000 television households and a total population of approximately 308,000.
Total Market Revenues in the Panama City DMA in 1996 were approximately $10.5
million, a 6% increase over 1995. WJHG's gross revenues for the year ended
December 31, 1996 were approximately $5.9 million, an increase of 37.3% from the
prior year. 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, 1996 was approximately $674,000, an
increase of 229% from the prior year. The Panama City DMA has three licensed
commercial television stations, all 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
-----------------------------------
1996 1995 1994
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Market Revenues in DMA................................... $ 10,500 $ 9,900 $ 9,500
Market Revenues growth over prior year................... 6% 4% 22%
In-market share of households viewing television......... 55% 53% 46%
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.
STATION PERFORMANCE. WJHG, which operates on channel 7, is an NBC
affiliate. Based on November 1996 Nielsen estimates, WJHG is ranked number one
in its market, with a 55% in-market share of households viewing television,
which is 21 share points ahead of the competition. WJHG received 56% of the
Panama City DMA's Market Revenues in 1996. 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
15
<PAGE>
ranking in its market at noon, 5:00 p.m., 6:00 p.m. and 10:00 p.m. on weekdays
and 10:00 p.m. 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
37.3% in 1996. WJHG is also focusing on other non-traditional revenue sources,
such as developing health expositions, children's fairs and wedding shows.
In addition to carrying programming provided by NBC, WJHG carries syndicated
programming, including WHEEL OF FORTUNE, JEOPARDY!, REAL TV, HARD COPY, MAURY
POVICH, JENNY JONES and RICKI LAKE.
The Company will be required to divest this station pursuant to existing FCC
regulations. See "Divestiture Requirements" and "The First American Acquisition,
the KTVE Sale and the Financing."
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.
16
<PAGE>
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, United Paramount Network ("UPN") and Warner Brothers Network ("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 the four major networks. 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 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.
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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 $14.9
million in 1996, a 48% 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 FARM AND
PLANTATION, an agricultural paper; a monthly coupon clipper and a quarterly,
direct mail coupon book called CASH CUTTERS. The Company introduced these
weeklies and other niche product publications in order to better utilize THE
ALBANY HERALD'S printing presses and infrastructure (such as sales and
advertising). The printing press is approximately 20 years old and is in good
working order. THE ALBANY HERALD cross-merchandises its publications, thereby
increasing total revenues with only a small increase in related expenditures.
The Company also seeks to increase THE ALBANY HERALD'S circulation and revenues
through its sponsorship of special events of local interest.
THE ROCKDALE CITIZEN and the GWINNETT DAILY POST
THE ROCKDALE CITIZEN is a six-day-a-week newspaper and the GWINNETT DAILY
POST is a five-day-a-week newspaper that serve communities in the metro Atlanta
area with complete local news, sports and lifestyles coverage together with
national stories that directly impact their local communities.
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.
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. 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 GWINNETT DAILY POST announced on January 14,
1997 that subscribers to Northeast CableVision, a local cable provider, will
receive subscriptions to the GWINNETT DAILY POST, including a new Sunday
edition, and a new local Gwinnett TV news channel beginning, May 4, 1997. This
alliance enables the GWINNETT DAILY POST to more than triple its paid
circulation within growing Gwinnett County.
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 hired a new president of
publishing in February 1996 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. The Company believes that print
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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, acquired by the Company in September 1996, is based in
Tallahassee, Florida and operates in Columbus, Macon, Albany and Valdosta,
Georgia, in Dothan, Alabama, in Tallahassee and Panama City, Florida and in
certain contiguous areas. In 1996 the population of this geographic coverage
area was approximately 3.0 million. The Company's paging business had
approximately 49,500 units in service, representing a penetration rate of
approximately 1.6%.
The Company's paging system operates by connecting a telephone call placed
to a local telephone number with a local paging switch. The paging switch
processes a caller's information and sends the information to a link transmitter
which relays the processed information to paging transmitters, which in turn
alert an individual pager by means of a coded radio signal. This process
provides service to a "local coverage area." To enhance coverage further to its
customer base, all of the Company's local coverage areas are interconnected or
networked, providing for "wide area coverage" or "network coverage." A pager's
coverage area is programmable and can be customized to include or exclude any
particular paging switch and its respective geographic coverage area, thereby
allowing the Company's paging customers a choice of coverage areas. In addition,
the Company is able to network with other paging companies which share the
Company's paging frequencies in other markets, by means of an industry standard
network paging protocol, in order to increase the geographic coverage area in
which the Company's customers can receive paging service.
A subscriber to the Company's paging services either owns a pager, thereby
paying solely for the use of the Company's paging services, or leases a pager,
thereby paying a periodic charge for both the pager and the paging services. Of
the Company's pagers currently in service, approximately 73% 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:
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(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 TRANSMISSION AND PRODUCTION SERVICES
The Company's satellite transmission and production services business
operates broadcast and production services through mobile C-band and Ku-band
transportable uplink units. Clients include The Walt Disney Company, The Golf
Channel, USA Network, Turner Broadcasting System, NBC, CBS, ABC, PGA Tour
Productions and The Children's Miracle Network. In January 1997, the Company
agreed to acquire Gulflink Communications, Inc. ("Gulflink") of Baton Rouge,
Louisiana. Gulflink's operations include nine transportable satellite uplink
units, which, when combined with the Company's existing units, will comprise the
largest fleet of transportable satellite uplink units in the United States. The
transaction, which is expected to close in the second quarter of 1997, is
subject to approval by certain regulatory agencies. Reference is made to Note C
of Notes to Consolidated Financial Statements of the Company for additional
information regarding business acquisitions.
ADDITIONAL INFORMATION ON BUSINESS SEGMENTS
Reference is made to Note K of Notes to Consolidated Financial Statements of
the Company for additional information regarding business segments.
COMPETITION
TELEVISION INDUSTRY
Competition in the television industry exists on several levels: competition
for audience, competition for programming (including news) and competition for
advertisers. Additional factors that are material to a television station's
competitive position include signal coverage and assigned frequency. The
broadcasting industry is faced continually with technological change and
innovation, the possible rise in popularity of
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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.
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, direct broadcast satellite ("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 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
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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.
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
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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 WVLT 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 of 1934, as amended (the "Communications
Act") and the Telecommunications Act of 1996 (the "Telecommunications Act"). The
Communications Act prohibits the operation of television broadcasting stations
except under a license issued by the FCC and empowers the FCC, among other
things, to issue, revoke and modify broadcasting licenses, determine the
locations of stations, regulate the equipment used by stations, adopt
regulations to carry out the provisions of the Communications Act and the
Telecommunications Act and impose penalties for violation of such regulations.
The Communications Act prohibits the assignment of a license or the transfer of
control of a licensee without prior approval of the FCC.
LICENSE GRANT AND RENEWAL. Television broadcasting licenses generally are
granted or renewed for a period of 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 WVLT are effective until April 1, 2005, April 1, 2005, August 1, 1997,
August 1, 1997, April 1, 2005, April 1, 2005 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
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in interest may file petitions to deny, and such parties, including members of
the public, may comment upon the service the station has provided during the
preceding license term and urge denial of the application. If the FCC finds that
the licensee has failed to meet the above-mentioned requirements, it could deny
the renewal application or grant a conditional approval, including renewal for a
lesser term. The FCC will not consider competing applications contemporaneously
with a renewal application. Only after denying a renewal application can the FCC
accept and consider competing applications for the license. Although in
substantially all cases broadcast licenses are renewed by the FCC even when
petitions to deny or competing applications are filed against broadcast license
renewal applications, there can be no assurance that the Company's stations'
licenses will be renewed. The Company is not aware of any facts or circumstances
that could prevent the renewal of the licenses for its stations at the end of
their respective license terms.
MULTIPLE OWNERSHIP RESTRICTIONS. Currently, the FCC has rules that limit
the ability of individuals and entities to own or have an ownership interest
above a certain level (an "attributable" interest, as defined more fully below)
in broadcast stations, as well as other mass media entities. The current rules
limit the number of radio and television stations that may be owned both on a
national and a local basis. On a national basis, the rules preclude any
individual or entity from having an attributable interest in co-owned television
stations whose aggregate audience reach exceeds 35% of all United States
households.
On a local basis, FCC rules currently allow an individual or entity to have
an attributable interest in only one television station in a market. In
addition, FCC rules and the Telecommunications Act generally prohibit an
individual or entity from having an attributable interest in a television
station and a radio station, daily newspaper or cable television system that is
located in the same local market area served by the television station.
Proposals currently before the FCC could substantially alter these standards.
For example, in a pending rulemaking proceeding, the FCC suggested narrowing the
geographic scope of the local television cross-ownership rule (the so-called
"duopoly rule") from Grade B to Grade A contours for stations in adjacent
markets and possibly permitting some two-station combinations within certain
markets. The FCC has also proposed eliminating the TV/radio cross-ownership
restriction (the so-called "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 1997 or later, and there can be no assurance that any of these rules
will be changed or what will be the effect of any such change.
The Telecommunications Act also directs the FCC to extend its
one-to-a-market (TV-Radio) waiver policy from the top 25 to any of the top 50
markets. In addition, the Telecommunications Act directs the FCC to permit a
television station to affiliate with two or more networks unless such dual or
multiple networks are composed of (i) two or more of the four existing networks
(ABC, CBS, NBC or Fox) or, (ii) any of the four existing networks and one of the
two emerging networks (UPN or WBN). The Company believes that Congress does not
intend for these limitations to apply if such networks are not operated
simultaneously, or if there is no substantial overlap in the territory served by
the group of stations comprising each of such networks. The Telecommunications
Act also directs the FCC to revise its rules to permit cross-ownership interests
between a broadcast network and 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.
Under the FCC's ownership rules, a direct or indirect purchaser of certain
types of securities of the Company could violate FCC regulations if that
purchaser owned or acquired an "attributable" or
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"meaningful" interest in other media properties in the same areas as stations
owned by the Company or in a manner otherwise prohibited by the FCC. All
officers and directors of a licensee, as well as general partners, uninsulated
limited partners and stockholders who own five percent or more of the voting
power of the outstanding common stock of a licensee (either directly or
indirectly), generally will be deemed to have an "attributable" interest in the
licensee. Certain institutional investors which exert no control or influence
over a licensee may own up to 10% of the voting power of the outstanding common
stock before attribution occurs. Under current FCC regulations, debt
instruments, non-voting stock, certain limited partnership interests (provided
the licensee certifies that the limited partners are not "materially involved"
in the management and operation of the subject media property) and voting stock
held by minority stockholders in cases in which there is a single majority
stockholder generally are not subject to attribution. The FCC's cross-interest
policy, which precludes an individual or entity from having a "meaningful" (even
though not "attributable") interest in one media property and an "attributable"
interest in a broadcast, cable or newspaper property in the same area, may be
invoked in certain circumstances to reach interests not expressly covered by the
multiple ownership rules.
In January 1995, the FCC released a Notice of Proposed Rule Making ("NPRM")
designed to permit a "thorough review of [its] broadcast media attribution
rules." Among the issues on which comment was sought are (i) whether to change
the voting stock attribution benchmarks from five percent to 10% and, for
passive investors, from 10% to 20%; (ii) whether there are any circumstances in
which non-voting stock interests, which are currently considered
non-attributable, should be considered attributable; (iii) whether the FCC
should eliminate its single majority shareholder exception (pursuant to which
voting interests in excess of five percent are not considered cognizable if a
single majority shareholder owns more than 50% of the voting power); (iv)
whether to relax insulation standards for business development companies and
other widely-held limited partnerships; (v) how to treat limited liability
companies and other new business forms for attribution purposes; (vi) whether to
eliminate or codify the cross-interest policy; and, (vii) whether to adopt a new
policy which would consider whether multiple "cross interests" or other
significant business relationships (such as time brokerage agreements, debt
relationships or 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 1997 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. In addition, a broadcast license may
not be granted to or held by any corporation that is controlled, directly or
indirectly, by any other corporation more than one-fourth of whose capital stock
is owned or voted by non-citizens or their representatives or by foreign
governments or their representatives, or by non-U.S. corporations, if the FCC
finds that the public interest will be served by the refusal or revocation of
such license. The Company has been advised that the FCC staff has interpreted
this provision of the Communications Act to require an affirmative public
interest finding before a broadcast license may be granted to or held by any
such corporation and the FCC has made such an affirmative finding only in
limited circumstances. The Company, which serves as a holding company for
wholly-owned subsidiaries that are licensees for its stations, therefore may be
restricted from having more than one-fourth of its stock owned or voted directly
or indirectly by non-citizens, foreign governments, representatives of
non-citizens or foreign governments, or foreign corporations.
25
<PAGE>
RECENT DEVELOPMENTS. Congress has recently enacted legislation and the FCC
currently has under consideration or is implementing new regulations and
policies regarding a wide variety of matters that could affect, directly or
indirectly, the operation and ownership of the Company's broadcast properties.
In addition to the proposed changes noted above, such matters include, for
example, the license renewal process (particularly the weight to be given to the
expectancy of renewal for an incumbent broadcast licensee and the criteria to be
applied in deciding contested renewal applications), spectrum use fees,
political advertising rates, potential advertising restrictions on the
advertising of certain products (beer and wine, for example), the rules and
policies to be applied in enforcing the FCC's equal employment opportunity
regulations, reinstitution of the Fairness Doctrine (which requires broadcasters
airing programming concerning controversial issues of public importance to
afford a reasonable opportunity for the expression of contrasting viewpoints),
and the standards to govern evaluation of television programming directed toward
children and violent and indecent programming (including the possible
requirement of what is commonly referred to as the "v-chip," which would permit
parents to program television sets so that certain programming would not be
accessible by children). Other matters that could affect the Company's broadcast
properties include technological innovations and developments generally
affecting competition in the mass communications industry, such as the recent
initiation of direct broadcast satellite service, and the continued
establishment of wireless cable systems and low power television stations.
The FCC presently is seeking comment on its policies designed to increase
minority ownership of mass media facilities. Congress also recently enacted
legislation that eliminated the minority tax certificate program of the FCC,
which gave favorable tax treatment to entities selling broadcast stations to
entities controlled by an ethnic minority. In addition, a recent Supreme Court
decision has cast doubt upon the continued validity of many of the congressional
programs designed to increase minority ownership of mass media facilities.
DISTRIBUTION OF VIDEO SERVICES BY TELEPHONE COMPANIES. Recent actions by
the FCC, Congress and the courts all presage significant future involvement in
the provision of video services by telephone companies. The Company cannot
predict either the timing or the extent of such involvement.
THE 1992 CABLE ACT. On October 5, 1992, Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"). The FCC began implementing the requirements of the 1992 Cable Act in 1993
and final implementation proceedings remain pending regarding certain of the
rules and regulations previously adopted. Certain statutory provisions, such as
signal carriage, retransmission consent and equal employment opportunity
requirements, have a direct effect on television broadcasting. Other provisions
are focused exclusively on the regulation of cable television but can still be
expected to have an indirect effect on the Company because of the competition
between over-the-air television stations and cable systems.
The signal carriage, or "must carry," provisions of the 1992 Cable Act
require cable operators to carry the signals of local commercial and
non-commercial television stations and certain low power television stations.
Systems with 12 or fewer usable activated channels and more than 300 subscribers
must carry the signals of at least three local commercial television stations. A
cable system with more than 12 usable activated channels, regardless of the
number of subscribers, must carry the signals of all local commercial television
stations, up to one-third of the aggregate number of usable activated channels
of such system. The 1992 Cable Act also includes a retransmission consent
provision that prohibits cable operators and other multi-channel video
programming distributors from carrying broadcast stations without obtaining
their consent in certain circumstances. The "must carry" and retransmission
consent provisions are related in that a local television broadcaster, on a
cable system-by-cable system basis, must make a choice once every three years
whether to proceed under the "must carry" rules or to waive that right to
mandatory but uncompensated carriage and negotiate a grant of retransmission
consent to permit the cable system to carry the station's signal, in most cases
in exchange for some form of consideration from the cable operator. Cable
systems must obtain retransmission consent to carry all distant commercial
stations other than "super stations" delivered via satellite.
26
<PAGE>
Under rules adopted to implement these "must carry" and retransmission
consent provisions, local television stations are required to make an election
of "must carry" or retransmission consent at three year intervals. Stations that
fail to elect are deemed to have elected carriage under the "must carry"
provisions. Other issues addressed in the FCC rules are market designations, the
scope of retransmission consent and procedural requirements for implementing the
signal carriage provisions. Each of the Company's stations has elected "must
carry" status on certain cable systems in its DMA; on others the Company's
stations have entered into retransmission consent agreements. This election
entitled the Company's stations to carriage on those systems until at least
December 31, 1999.
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 appealed this decision to the Supreme Court, which is expected to rule
on the constitutionality of the 1992 Cable Acts's must carry provisions by June
1997. In the meantime, however, the FCC's "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.
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 later in 1997.
27
<PAGE>
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, acquired by the
Company in September 1996, are subject to regulation by the FCC under the
Communications Act. The FCC has granted the Company licenses to use the radio
frequencies necessary to conduct its paging 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 28 FCC licenses for its paging
business. Four of such licenses will expire in 1997, 12 will expire in 1999,
four will expire in 2000, two will expire in 2001, two will expire in 2006 and
four will expire in 2007. 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 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
28
<PAGE>
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.
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, although private carrier paging companies will be subject
to a transition period through August 1996 before these new rules are
applicable.
The 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 March 5, 1997, the Company had 890 full-time employees, of which 580
were employees of the Company's stations, 258 were employees of the Company's
publications, 41 were employees of the Company's paging operations and 11 were
corporate and administrative personnel. None of the Company's employees are
represented by unions. The Company believes that its relations with its
employees are satisfactory.
29
<PAGE>
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 126 North
Washington Street, Albany, Georgia.
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. The types of properties
required to support newspaper publishing include offices, facilities for the
printing press and production and storage. A station's studios are generally
housed with its offices in business districts. The transmitter sites and antenna
are generally located in elevated areas to provide optimal signal strength and
coverage.
The following table sets forth certain information regarding the Company's
properties.
TELEVISION BROADCASTING
<TABLE>
<CAPTION>
STATION/APPROXIMATE PROPERTY OWNED EXPIRATION
LOCATION USE OR LEASED APPROXIMATE SIZE OF LEASE
- ------------------------------------ -------------------------- ----------- ---------------------------- -----------
<S> <C> <C> <C> <C>
WKYT
Lexington, KY..................... Office, studio and Owned 34,500 sq. ft. building on --
transmission tower site 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
improvements Owned 1,248 sq. ft. --
WRDW
North Augusta, SC................. Office and studio Owned 17,000 sq. ft. --
Transmission tower site Owned 143 acres --
WALB
Albany, GA........................ Office and studio Owned 13,700 sq. ft. --
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 --
WVLT
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 Leased 182 acres Nov. 1999
</TABLE>
30
<PAGE>
PUBLISHING
<TABLE>
<CAPTION>
OWNED EXPIRATION
COMPANY/PROPERTY LOCATION USE OR LEASED APPROXIMATE SIZE OF LEASE
- ------------------------------------ -------------------------- ----------- ---------------------------- -----------
<S> <C> <C> <C> <C>
The Albany Herald Publishing
Company, Inc...................... Offices, printing press
and production facility
for The Albany Herald
Publishing Company, Inc. Owned 83,000 sq. ft. --
The Rockdale Citizen Publishing
Company
Conyers, GA....................... Offices, printing press
and production facility
for THE ROCKDALE CITIZEN Owned 20,000 sq. ft. --
Conyers, GA....................... Offices, printing press
and production facility
for THE ROCKDALE CITIZEN
and the GWINNETT DAILY
POST Leased 20,000 sq. ft. May 2002
Lawrenceville, GA................. Offices and production
facilities of the GWINNETT
DAILY POST Leased 11,000 sq. ft. Nov. 1997
The Southwest Georgia Shoppers,
Inc.
Tallahassee, FL................. Offices Owned 5,500 sq. ft. --
</TABLE>
PAGING
<TABLE>
<CAPTION>
OWNED
PROPERTY LOCATION USE OR LEASED APPROXIMATE SIZE EXPIRATION OF LEASE
- ------------------------------------ -------------------------- ----------- --------------------- -------------------
<S> <C> <C> <C> <C>
Albany GA........................... Office Leased 800 sq. ft. March 1997
Columbus, GA........................ Office Leased 1,000 sq. ft. July 1997
Dothan, AL.......................... Office Leased 800 sq. ft. Feb. 1998
Macon, GA........................... Office Leased 1,260 sq. ft. July 1998
Tallahassee, FL..................... 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>
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings in which an adverse
outcome would have a material adverse effect, either individually or in the
aggregate, upon the Company.
31
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the executive
officers of the Company:
J. Mack Robinson, age 73, was appointed interim President and Chief
Executive Officer of the Company in September 1996. Mr. Robinson has been
Chairman of the Board of Bull Run Corporation since March 1994, Chairman of the
Board and President of Delta Life Insurance Company and Delta Fire and Casualty
Insurance Company since 1958, President of Atlantic American Corporation, an
insurance holding company, from 1974 until 1995 and Chairman of the Board of
Atlantic American Corporation since 1974.
Robert S. Prather, age 52, was appointed interim Executive Vice
President-Acquisitions of the Company in September 1996. He has been President
and Chief Executive Officer of Bull Run Corporation since July 1992. Prior to
that time he was President and Chief Financial Officer of Phoenix Corporation, a
steel service center.
Robert A. Beizer, age 57, was appointed Vice President for Law and
Development and Secretary of the Company in February 1996. From June 1994 to
February 1996, he was of counsel to Venable, Baetjer, Howard & Civiletti, a law
firm, in its regulatory and legislative practice group. From 1990 to 1994, Mr.
Beizer was a partner at the law firm of Sidley & Austin and was head of its
communications practice group in Washington, D.C. He is a past president of the
Federal Communications Bar Association and a member of the ABA House of
Delegates.
Joseph A. Carriere, age 63, was appointed Vice President-Television of the
Company in September 1996. Prior to that appointment, he served as Vice
President-Corporate Sales from February 1996. He was appointed President and
General Manager of WVLT-TV, Inc., a subsidiary of the Company, in September
1996. From November 1994 until his appointment as Vice President-Corporate
Sales, he served as President and General Manager of KTVE Inc., a subsidiary of
the Company. Prior to joining the Company in 1994, Mr. Carriere was employed by
Withers Broadcasting Company of Colorado as General Manager from 1991 to 1994.
He has served as a past chairman of the CBS Affiliates Advisory Board and as a
member of the Television Board of Directors of the National Association of
Broadcasters.
William A. Fielder, III, age 38, was appointed Controller of the Company in
April 1991 and appointed Vice President and Chief Financial Officer of the
Company in August 1993. Prior to being appointed as Controller in 1991, he was
employed by Ernst & Young LLP, the independent auditors for the Company.
Thomas J. Stultz, age 45, was appointed Vice President of the Company and
President of the Company's publishing division in February 1996. Prior to
joining the Company, he was employed by Multimedia Newspaper Company, where he
served as Vice President from 1990 to 1995.
32
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since June 30, 1995, the Company's Class A Common Stock has been listed and
traded on The New York Stock Exchange (the "NYSE") under the symbol "GCS". Since
September 24, 1996, the date of its initial issuance, the Company's Class B
Common Stock has also been listed and traded on the NYSE under the symbol
"GCS.B". The following table sets forth the high and low sale prices of the
Company's Class A and Class B Common Stock as well as the cash dividends
declared. The high and low sale prices of the Class A Common Stock (restated to
give effect to the three-for-two stock split) are as reported by the NYSE for
the period after June 30, 1995 and, prior to such time, the high and low bid
quotations are as reported on the NASDAQ Small Cap Market. The high and low
sales prices of the Class B Common Stock is as reported by the NYSE since the
date of its initial issuance.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
----------------------------------- -----------------------------------
CASH CASH
DIVIDENDS DIVIDENDS
DECLARED PER DECLARED PER
HIGH LOW SHARE HIGH LOW SHARE
--------- --------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1996
First Quarter..................................... $ 20.38 $ 15.75 $ .02 -- -- --
Second Quarter.................................... 23.25 18.75 .02 -- -- --
Third Quarter..................................... 23.13 20.25 .02 $ 20.50 $ 18.00 --
Fourth Quarter.................................... 21.25 17.50 .02 19.50 14.88 $ .02
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 -- -- --
</TABLE>
As of March 21, 1997, the Company had 4,496,402 outstanding shares of Class
A Common Stock held by 1,412 shareholders and 3,332,382 outstanding shares of
Class B Common Stock held by 1,190 shareholders. The number of shareholders
includes shareholders of record and individual participants in security position
listings as furnished to the Company pursuant to Rule 17Ad-8 under the Exchange
Act.
The Company has paid a dividend on its Class A Common Stock since 1967. In
1996 the Company amended its Articles of Incorporation to provide that each
share of Class A Common Stock is entitled to 10 votes and each share of Class B
Common Stock is entitled to one vote. The Articles of Incorporation, as amended,
require that the Class A Common Stock and the Class B Common Stock receive
dividends on a PARI PASSU basis. There can be no assurance of the Company's
ability to continue to pay any dividends on either class of Common Stock.
The Senior Credit Facility and the Notes each contain covenants that
restrict the ability of the Company to pay dividends on its capital stock.
However, the Company does not believe that such covenants currently materially
limit its ability to pay dividends at the recent quarterly rate of $.02 per
share. In addition to the foregoing, the declaration and payment of dividends on
the Class A Common Stock and the Class B Common Stock are subject to the
discretion of the Board of Directors. Any future payments of dividends will
depend on the earnings and financial position of the Company and such other
factors as the Board of Directors deems relevant.
On January 3, 1996, Bull Run Corporation purchased for $10.0 million from
the Company an 8% subordinated note in the principal amount of $10.0 million due
in January 2005 and warrants to purchase 487,500 shares of Class A Common Stock
at $17.88 per share. On September 24, 1996, the 8% subordinated note was retired
and the Company issued to Bull Run Corporation, in exchange therefore, 1,000
shares of Series A Preferred Stock. Subject to certain limitations, holders of
the Series A Preferred
33
<PAGE>
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, cumulatve
cash dividends at an annual rate of $800 per share. On September 24, 1996, the
Company issued to Bull Run Corporation and to J. Mack Robinson, Chairman of the
Board of Bull Run Corporation and interim President and Chief Executive Officer
of the Company, and certain of his affiliates, for $10.0 million, 1,000 shares
of Series B Preferred Stock with warrants to purchase 500,000 shares of Class A
Common Stock at $24.00 per share. 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. On September 2, 1994, the Company sold to one institutional
investor its note in the principal amount of $25.0 million due 2003 and received
$25.0 million in cash. 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.
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY HISTORICAL FINANCIAL DATA
GRAY COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
Set forth below are certain selected historical consolidated financial data
of the Company. This information should be read in conjunction with the Audited
Consolidated Financial Statements of the Company and related notes thereto
appearing elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations of the
Company." The selected consolidated financial data for, and as of the end of,
each of the years in the five-year period ended December 31, 1996 are derived
from the Audited Consolidated Financial Statements of the Company and its
subsidiaries. Also see pro forma data for the First American Acquisition and the
Augusta Acquisition in Note C and the KTVE Sale in Note B to the Company's
Audited Consolidated Financial Statements included elsewhere herein. See Item 8.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996(1) 1995(2) 1994(2) 1993 1992
---------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues.................................................. $ 79,305 $ 58,616 $ 36,518 $ 25,113 $ 24,643
Operating income.......................................... 16,079 6,860 6,276 3,531 4,270
Income from continuing operations......................... 5,678 931 2,766 1,680 396
Income from continuing operations available to common
stockholders............................................ 5,302 931 2,766 1,680 396
Income from continuing operations per common share (3).... .94 .21 .59 .36 .09
Cash dividends per common share (3)....................... $ .08 $ .08 $ .07 $ .07 $ 07
BALANCE SHEET DATA (AT END OF PERIOD):
Total Assets.............................................. $ 298,664 $ 78,240 $ 68,789 $ 21,372 $ 24,173
Long-term Debt............................................ $ 173,368 $ 54,324 $ 52,940 $ 7,759 $ 12,412
</TABLE>
- ------------------------
(1) The financial data reflects the operating results of the Augusta Acquisition
and the First American Acquisition, as well as the KTVE Sale, all of which
were completed in 1996, as of their respective acquisition dates. See Notes
B and C to the Company's Audited Consolidated Financial Statements included
elsewhere herein.
34
<PAGE>
(2) The financial data reflects the operating results of various acquisitions
completed in 1994 and 1995 as of their respective acquisition dates. See
Note C to the Company's Audited Consolidated Financial Statements included
elsewhere herein.
(3) On August 17, 1995, the Company's Board of Directors authorized a 50% stock
dividend on the Company's Class A Common Stock payable October 2, 1995 to
stockholders of record on September 8, 1995 to effect a three for two stock
split. Income from continuing operations per common share is based on the
weighted average common and common equivalent shares outstanding during each
period determined using the treasury stock method. All applicable share and
per share data have been adjusted to give effect to the stock split.
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
Set forth below are certain selected historical financial data of the
Broadcasting and Paging Operations of John H. Phipps, Inc. (referred to herein
as the "First American Business"), which was acquired by the Company in
September 1996. This information should be read in conjunction with the Audited
Financial Statements of the Broadcasting and Paging Operations of John H.
Phipps, Inc. 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 First American Business." The selected
financial data for, and as of the end of, the nine months ended September 30,
1996 and each of the years in the three-year period ended December 31, 1995 are
derived from the audited financial statements of the First American Business.
The selected financial data for, and as of the end of, the year ended December
31, 1992 is derived from the unaudited accounting records of the First American
Business. See Item 8.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------------------------
1996(3) 1995 1994 1993 1992(1)
------------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................................... $ 21,203 $ 27,321 $ 25,801 $ 23,248 $ 18,169
Operating income (loss)................................ (1,703) 7,382 7,668 4,687 5,646
Income (loss) from continuing operations before
minority interests................................... (1,925) 6,896 7,854 4,071 5,212
Income (loss) from continuing operations after minority
interests............................................ (1,773) 6,349 7,219 3,931 4,881
Income (loss) from continuing operations per common
share(4).............................................
Cash dividends per common share(4).....................
Supplemental unaudited pro forma information:(2)
Net income (loss).................................... (1,773) 6,349 7,219 3,931 4,881
Pro forma provision for income tax expense
(benefit).......................................... (674) 2,413 2,743 1,500 1,855
------------- --------- --------- --------- ---------
Pro forma net income (loss).......................... $ (1,099) $ 3,936 $ 4,476 $ 2,431 $ 3,026
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
BALANCE SHEET DATA (AT END OF PERIOD):
Total Assets........................................... $ 27,562 $ 25,298 $ 24,819 $ 25,068
Long-term Debt......................................... $ 4,810 $ 6,065 $ 6,542 $ 7,697
</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 filed a consolidated federal
income tax return and separate state tax returns. Income tax expense for the
First American Business is not presented in the financial statements as such
amounts are computed and paid by John H. Phipps, Inc. Pro forma federal and
35
<PAGE>
state income taxes for the First American Business are calculated on a pro
forma, separate return basis. See Note E to the September 30, 1996 Audited
Financial Statements of the Broadcasting and Paging Operations of John H.
Phipps, Inc. included elsewhere herein. See Item 8.
(3) On September 30, 1996, Gray purchased from First American Media, Inc.
substantially all of the broadcasting and paging assets of John H. Phipps,
Inc.
(4) Per share data is not applicable for the Broadcasting and Paging Operations
of John H. Phipps, Inc.
THESE SUMMARIES SHOULD BE READ IN CONJUNCTION WITH THE RELATED CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED UNDER ITEM 8.
36
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS OF THE COMPANY
INTRODUCTION
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Audited
Consolidated Financial Statements and notes thereto included elsewhere herein.
The Company derives its revenues from its television broadcasting,
publishing and paging operations. In September 1996, the Company acquired
substantially all of the assets of WKXT-TV, WCTV-TV, a satellite production and
services business and a communications and paging business (the "First American
Acquisition"). Subsequent to the First American Acquisition, the Company
rebranded WKXT with the call letters WVLT ("WVLT") as a component of its
strategy to promote the station's upgraded news product. On January 4, 1996, the
Company purchased substantially all of the assets of WRDW-TV (the "Augusta
Acquisition"). The First American Acquisition and the Augusta Acquisition are
collectively referred to as the "1996 Broadcasting Acquisitions." In September
1994, the Company purchased substantially all of the assets of WKYT-TV and
WYMT-TV (the "Kentucky Acquisition"). As a result of the 1996 Broadcasting
Acquisitions and the Kentucky Acquisition, the proportion of the Company's
revenues derived from television broadcasting has increased significantly. The
Company currently has signed a letter of intent to purchase substantially all of
the assets of WITN-TV, the NBC affiliate in the Greenville-Washington-New Bern,
North Carolina market. The Company has also signed an agreement to purchase
Gulflink Communications, Inc., which is in the transportable satellite uplink
business, a business in which the Company is already engaged. The Company
anticipates that the proportion of the Company's revenues derived from
television broadcasting will increase further if such acquisitions are
completed. As a result of the higher operating margins associated with the
Company's television broadcasting operations, the profit contribution of these
operations as a percentage of revenues, has exceeded, and is expected to
continue to exceed, the profit contributions of the Company's publishing and
paging operations. Set forth below, for the periods indicated, is certain
information concerning the relative contributions of the Company's television
broadcasting, publishing and paging operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BROADCASTING
Revenues...................................... $ 54,981.3 69.3% $ 36,750.0 62.7% $ 22,826.4 62.5%
Operating income(1)........................... 16,988.7 84.0% 10,585.2 94.1% 6,556.0 78.4%
PUBLISHING
Revenues...................................... $ 22,845.3 28.8% $ 21,866.2 37.3% $ 13,692.0 37.5%
Operating income(1)........................... 3,166.7 15.7% 660.2 5.9% 1,804.0 21.6%
PAGING
Revenues...................................... $ 1,478.6 1.9% $ -0- -0-% $ -0- -0-%
Operating income(1)........................... 71.4 0.3% -0- -0-% -0- -0-%
</TABLE>
- ------------------------
(1) Represents income before miscellaneous income (expense), allocation of
corporate overhead, interest expense, income taxes and extraordinary charge.
The operating revenues of the Company's television stations are derived
primarily from broadcast advertising revenues and, to a much lesser extent, from
compensation paid by the networks to the stations for broadcasting network
programming. The operating revenues of the Company's publishing operations
37
<PAGE>
are derived from advertising, circulation and classified revenue. Paging revenue
is derived primarily from the leasing and sale of pagers.
In the Company's broadcasting operations, broadcast advertising is sold for
placement either preceding or following a television station's network
programming and within local and syndicated programming. Broadcast advertising
is sold in time increments and is priced primarily on the basis of a program's
popularity among the specific audience an advertiser desires to reach, as
measured by Nielsen Media Research ("Nielsen"). In addition, broadcast
advertising rates are affected by the number of advertisers competing for the
available time, the size and demographic makeup of the market served by the
station and the availability of alternative advertising media in the market
area. Broadcast advertising rates are the highest during the most desirable
viewing hours, with corresponding reductions during other hours. The ratings of
a local station affiliated with a major network can be affected by ratings of
network programming.
Most broadcast advertising contracts are short-term, and generally run only
for a few weeks. Approximately 54.4% of the gross revenues of the Company's
television stations for the year ended December 31, 1996 were generated from
local advertising, which is sold primarily by a station's sales staff directly
to local accounts, and the remainder represented primarily national advertising,
which is sold by a station's national advertising sales representative. The
stations generally pay commissions to advertising agencies on local, regional
and national advertising and the stations also pay commissions to the national
sales representative on national advertising.
Broadcast advertising revenues are generally highest in the second and
fourth quarters each year, due in part to increases in consumer advertising in
the spring and retail advertising in the period leading up to and including the
holiday season. In addition, broadcast advertising revenues are generally higher
during even numbered election years due to spending by political candidates,
which spending typically is heaviest during the fourth quarter.
The Company's publishing operations' advertising contracts are generally
entered into annually and provide for a commitment as to the volume of
advertising to be purchased by an advertiser during the year. The publishing
operations' advertising revenues are primarily generated from local advertising.
As with the broadcasting operations, the publishing operations' revenues are
generally highest in the second and fourth quarters of each year.
The Company's paging subscribers either own pagers, thereby paying solely
for the use of the Company's paging services, or lease pagers, thereby paying a
periodic charge for both the pagers and the paging services. Of the Company's
pagers currently in service, approximately 73% are owned and maintained by
subscribers with the remainder being leased. The terms of the lease contracts
are month-to-month, three months, six months or twelve months in duration.
Paging revenues are generally equally distributed throughout the year.
The broadcasting operations' primary operating expenses are employee
compensation, related benefits and programming costs. The publishing operations'
primary operating expenses are employee compensation, related benefits and
newsprint costs. The paging operations' primary operating expenses are employee
compensation and telephone and other communications costs. In addition, the
broadcasting, publishing and paging operations incur overhead expenses, such as
maintenance, supplies, insurance, rent and utilities. A large portion of the
operating expenses of the broadcasting, publishing and paging operations is
fixed, although the Company has experienced significant variability in its
newsprint costs in recent years.
38
<PAGE>
The following table sets forth certain operating data for the broadcast,
publishing and paging operations for the years ended December 31, 1996, 1995 and
1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating income........................................................... $ 16,078.9 $ 6,859.7 $ 6,276.4
Add:
Amortization of program license rights................................... 2,742.7 1,647.0 1,218.0
Depreciation and amortization............................................ 7,662.5 3,958.9 2,141.6
Corporate overhead....................................................... 3,218.6 2,258.3 1,958.4
Non-cash compensation and contribution to 401(k) plan, paid in Common
Stock.................................................................. 1,126.6 2,612.2 109.5
Less:
Payments for program license liabilities................................. (2,877.1) (1,776.8) (1,181.6)
---------- ---------- ----------
Media cash flow(1)......................................................... $ 27,952.2 $ 15,559.3 $ 10,522.3
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) Of media cash flow, $22.6 million, $13.6 million and $8.0 million was
attributable to the Company's broadcasting operations in 1996, 1995 and
1994, respectively; $5.0 million, $2.0 million and $2.5 million was
attributable to the Company's publishing operations in 1996, 1995 and 1994,
respectively; and $400,900, $-0-and $-0- was attributable to the Company's
paging operations in 1996, 1995 and 1994, respectively.
"Media cash flow" is defined as operating income from broadcast, publishing
and paging operations 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, publishing and
paging 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
Company's Audited Consolidated Financial Statements, and is not a measure of
financial performance under generally accepted accounting principles and should
not be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
Since 1994, the Company has completed several broadcasting and publishing
acquisitions and a broadcasting disposition. The financial results of the
Company reflect significant increases between the years ended December 31, 1996,
December 31, 1995 and December 31, 1994 in substantially all line items. The
principal reason for these increases was the completion by the Company of the
First American Acquisition (September 1996), the Augusta Acquisition (January
1996) and the Kentucky Acquisition (September 1994). The purchase price for the
First American Acquisition was approximately $183.9 million, of which, $175.5
million was cash, $1.8 million was in the form of acquisition-related costs, and
approximately $6.6 million resulted from assumed liabilities. The purchase price
for the Augusta Acquisition was $35.9 million in cash and the assumption of $1.3
million in liabilities. The purchase price for the Kentucky Acquisition
consisted of $38.1 million in cash and the assumption of $2.3 million of
liabilities. The Company sold the assets of KTVE Inc. (the "KTVE Sale"), its
NBC-affiliated television station, in Monroe, Louisiana/El Dorado, Arkansas on
August 20, 1996. The sales price included $9.5 million in cash plus the amount
of the accounts receivable (approximately $829,000).
In addition, during 1995 the Company acquired the GWINNETT DAILY POST for
approximately $3.7 million (January 1995) and three area weekly advertising only
direct mail publications ("Shoppers") for an aggregate purchase price of
approximately $1.4 million (September 1995) (the "1995 Publishing
Acquisitions"), and during 1994 the Company acquired THE ROCKDALE CITIZEN for
approximately $4.8 million (May
39
<PAGE>
1994) and four Shoppers located in southwest Georgia for approximately $1.5
million (October 1994) (the "1994 Publishing Acquisitions"). The 1995 Publishing
Acquisitions and the 1994 Publishing Acquisitions are collectively referred to
as the "Publishing Acquisitions."
CASH FLOW PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCING ACTIVITIES
The following table sets forth certain cash flow data for the Company for
the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows provided by (used in)
Operating activities............................... $ 12,055.0 $ 7,599.7 $ 5,797.8
Investing activities............................... (214,440.9) (8,929.3) (42,770.2)
Financing activities............................... 202,876.9 1,331.0 37,199.7
</TABLE>
BROADCASTING, PUBLISHING AND PAGING REVENUES
Set forth below are the principal types of broadcasting, publishing and
paging revenues earned by the Company's television stations, publishing and
paging operations for the periods indicated and the percentage contribution of
each to the Company's total broadcasting, publishing and paging revenues,
respectively:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
AMOUNT % AMOUNT % AMOUNT %
---------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BROADCASTING
Net Revenues:
Local.................................... $ 30,045.6 37.9% $ 20,888.1 35.6% $ 12,191.4 33.4%
National................................. 15,611.1 19.7% 10,881.1 18.6% 7,804.4 21.4%
Network compensation..................... 3,660.7 4.6% 2,486.8 4.2% 1,297.5 3.5%
Political................................ 3,612.5 4.6% 1,174.2 2.0% 1,029.0 2.8%
Production and other..................... 2,051.4 2.5% 1,319.8 2.3% 504.1 1.4%
---------- ----- ---------- ----- ---------- -----
$ 54,981.3 69.3% $ 36,750.0 62.7% $ 22,826.4 62.5%
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
PUBLISHING
Revenues:
Circulation.............................. $ 4,271.6 5.4% $ 3,783.8 6.5% $ 2,628.9 7.2%
Local advertising........................ 11,089.7 14.0% 11,044.2 18.8% 7,460.3 20.4%
Classifieds.............................. 6,150.0 7.8% 5,323.8 9.1% 3,174.2 8.7%
Other.................................... 1,334.0 1.6% 1,714.4 2.9% 428.6 1.2%
---------- ----- ---------- ----- ---------- -----
$ 22,845.3 28.8% $ 21,866.2 37.3% $ 13,692.0 37.5%
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
PAGING
Revenues:
Paging lease and service................. $ 1,557.0 2.0% $ 0.0 0.0% $ 0.0 0.0%
Other.................................... (78.4) (0.1)% 0.0 0.0% 0.0 0.0%
---------- ----- ---------- ----- ---------- -----
1,478.6 1.9% $ 0.0 0.0% $ 0.0 0.0%
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
TOTAL...................................... $ 79,305.2 100.0% $ 58,616.2 100.0% $ 36,518.4 100.0%
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
</TABLE>
40
<PAGE>
YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Total revenues for the year ended December 31, 1996 increased
$20.7 million, or 35.3%, over the year ended December 31, 1995, from $58.6
million to $79.3 million. This increase was attributable to the net effect of
(i) increased revenues as a result of the 1996 Broadcasting Acquisitions, (ii)
increases in total revenues of the Company (excluding the 1996 Broadcasting
Acquisitions) and (iii) decreased revenues as a result of the KTVE Sale. The
1996 Broadcasting Acquisitions, net of the effects of the KTVE Sale, accounted
for $16.4 million, or 79.3%, of the revenue increase.
Broadcast net revenues increased $18.3 million, or 49.6%, over the prior
year, from $36.7 million to $55.0 million. The 1996 Broadcasting Acquisitions,
net of the effects of the KTVE Sale, accounted for $14.9 million, or 81.9%, of
the broadcast net revenue increase. On a pro forma basis, assuming the 1996
Broadcasting Acquisitions had been effective on January 1, 1995, broadcast net
revenues for the 1996 Broadcasting Acquisitions for the year ended December 31,
1996 increased $2.0 million, or 6.4%, over the year ended December 31, 1995 from
$31.3 million to $33.3 million. The KTVE Sale resulted in a decrease in
broadcast net revenues of $1.2 million. Broadcast net revenues, excluding the
1996 Broadcasting Acquisitions and the operating results of KTVE, increased $3.3
million, or 9.0%, over the prior year. Approximately $1.4 million, $1.4 million,
$267,000 and 224,000 of the $3.3 million increase in broadcast net revenues,
excluding the 1996 Broadcasting Acquisitions and the operating results of KTVE,
was due to increased political advertising spending, local advertising spending,
network compensation and other revenue, respectively.
Publishing revenues increased $979,000, or 4.5%, over the prior year, from
$21.9 million to $22.8 million. Circulation and classified advertising revenue
comprised approximately $486,000 and $826,000, respectively, of the revenue
increase. This increase in circulation revenue was attributable primarily to
price increases in 1996 at two of the Company's publishing operations and the
conversion of the GWINNETT DAILY POST to a five-day-a-week paper. The increase
in classified advertising was primarily the result of linage increases. These
increases were offset by a decrease of $267,000 in commercial printing revenue.
Paging revenue increased $1.5 million due to the 1996 Broadcasting
Acquisitions. On a pro forma basis, assuming the 1996 Broadcasting Acquisitions
had been effective on January 1, 1995, paging revenue for the year ended
December 31, 1996 increased $621,000, or 12.7%, over the year ended December 31,
1995 from $4.9 million to $5.5 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, 1996
increased $11.5 million, or 22.2%, over the year ended December 31, 1995 from
$51.7 million to $63.2 million. This increase was attributable to the net effect
of (i) increased expenses resulting from the 1996 Broadcasting Acquisitions,
(ii) increases in total expenses of the Company (excluding the 1996 Broadcasting
Acquisitions), (iii) decreased expenses resulting from the KTVE Sale, (iv)
decreased publishing expenses and (v) decreased non-cash compensation. The 1996
Broadcasting Acquisitions net of the effects of the KTVE Sale accounted for $9.3
million, or 80.7%, of the increase in operating expenses.
Broadcast expenses increased $9.2 million, or 39.8%, over the prior year,
from $23.2 million to $32.4 million. The increase was attributable primarily to
the 1996 Broadcasting Acquisitions partially offset by the KTVE Sale. On a pro
forma basis, assuming the 1996 Broadcasting Acquisitions had been effective on
January 1, 1995, broadcast expenses for the 1996 Broadcasting Acquisitions for
the year ended December 31, 1996 increased $432,000, or 2.4%, over the year
ended December 31, 1996 from $17.5 million to $18.0 million. The KTVE Sale
resulted in a decrease in broadcast expenses of $1.1 million. Broadcast
expenses, excluding the results of the 1996 Broadcasting Acquisitions and the
KTVE Sale, increased $1.1 million, or 5.3%, as a result of higher payroll costs
partially offset by lower syndicated film expense.
41
<PAGE>
Publishing expenses decreased $2.1 million, or 10.3%, over the prior year,
from $20.0 million to $17.9 million. This decrease resulted primarily from a
decrease in work force related costs, improved newsprint pricing, fewer
promotions and restructuring of the advertising publications, partially offset
by higher product delivery and outside service costs associated with the
conversion of the GWINNETT DAILY POST to a five-day-a-week newspaper. Average
newsprint costs decreased approximately 9.6%, while newsprint consumption
remained relatively constant with that of the prior year.
Paging expenses increased $1.1 million due to the 1996 Broadcasting
Acquisitions. On a pro forma basis, assuming the 1996 Broadcasting Acquisitions
had been effective on January 1, 1995, paging expenses for the year ended
December 31, 1996 increased $637,000, or 19.9%, over the year ended December 31,
1996 from $3.2 million to $3.8 million. This increase was attributable primarily
to increased trade expense, administrative expense and other communication
expenses.
Corporate and administrative expenses increased $960,000, or 42.5%, over the
prior year, from $2.3 million to $3.2 million. This increase was attributable
primarily to the addition of several officers at the corporate level.
DEPRECIATION AND AMORTIZATION. Depreciation of property and equipment and
amortization of intangible assets was $7.7 million for the year ended December
31, 1996, compared to $3.9 million for the prior year, an increase of $3.8
million, or 93.6%. This increase was primarily the result of higher depreciation
and amortization costs related to the 1996 Broadcasting Acquisitions.
NON-CASH COMPENSATION. Non-cash compensation paid in Class A Common Stock
resulted from the Company's employment agreements with its former President,
Ralph W. Gabbard, who died unexpectedly in September 1996 and its former chief
executive officer, John T. Williams, who resigned in December 1995. Non-cash
compensation was $880,000 for the year ended December 31, 1996, compared to $2.3
million for the prior year, a decrease of $1.4 million, or 62.1%. The decrease
was primarily attributable to a restricted stock award to the estate of Ralph W.
Gabbard, for which the Company incurred expense of $880,000 for the year ended
December 31, 1996 and the 1995 restricted stock award of 150,000 shares of Class
A Common Stock to John T. Williams, for which the Company incurred expense of
$2.1 million for the year ended December 31, 1995.
MISCELLANEOUS INCOME AND EXPENSE, NET: Miscellaneous income and expense
increased $5.6 million from $143,600 for the year ended December 31, 1995 to
$5.7 million for the year ended December 31, 1996. The increase was primarily
attributable to the KTVE Sale which resulted in a gain before income tax of $5.7
million.
INTEREST EXPENSE. Interest expense increased $6.3 million, or 114.9%, from
$5.4 million for the year ended December 31, 1995 to $11.7 million for the year
ended December 31, 1996. This increase was attributable primarily to increased
levels of debt resulting from the financing of the 1996 Broadcasting
Acquisitions. The Company entered into a $25.0 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. Effective May 14, 1996, the
Company received $254,000 as settlement of this interest rate swap agreement,
which will be reflected as a reduction of interest expense over the remaining
life of the original five-year interest rate swap agreement term. The effective
interest rate of the Company's senior subordinated notes and Senior Credit
Facility at December 31, 1996 was approximately 10.63% and 8.39%, respectively.
EXTRAORDINARY CHARGE: An extraordinary charge of $5.3 million ($3.2 million
after taxes) was recorded for the year ended December 31, 1996 in connection
with the early retirement of the Company's former credit facility and Senior
Note.
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS. Net income available to common
stockholders for the Company was $2.1 million for the year ended December 31,
1996 compared with $931,000 for the year ended December 31, 1995, an increase of
$1.2 million, or 130.2%.
42
<PAGE>
YEAR ENDED DECEMBER 31, 1995 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 (excluding the Kentucky Acquisition
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 $1.0 million, or 6.1%, over the prior year.
Approximately $889,000 and $304,000 of the $1.0 million increase in 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 broadcast net revenues, excluding the Kentucky Acquisition,
was 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 was attributable
primarily to price increases over the prior year. The 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).
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, broadcasting 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
attributable 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.
43
<PAGE>
DEPRECIATION AND AMORTIZATION. 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. 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 amended employment agreement with its
former chief executive officer, which resulted in an expense of $2.1 million,
all of which was recognized in 1995.
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 $25.0 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 Company recorded approximately $34,000 of
interest expense relative to the interest rate swap in 1995. The effective
interest rate of the Company's bank term loan agreement and interest rate swap
at December 31, 1995 was approximately 8.64% and 9.10%, respectively.
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS. Net income available to common
stockholders 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, or 66.3%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficiency was $342,000 and $222,000 at
December 31, 1996 and 1995, respectively. The Company's cash provided from
operations was $12.1 million, $7.6 million and $5.8 million in 1996, 1995 and
1994, respectively. Management believes that current cash balances, cash flows
from operations and the available funds under its Senior Credit Facility will be
adequate to provide for the Company's capital expenditures, debt service, cash
dividends and working capital requirements. The agreement pursuant to which the
Senior Credit Facility was issued contains certain restrictive provisions,
which, among other things, limit capital expenditures and additional
indebtedness and require minimum levels of cash flows. Additionally, the
effective interest rate of the Senior Credit Facility can be changed based upon
the Company's maintenance of certain operating ratios as defined by the Senior
Credit Facility, not to exceed the lender's prime rate plus 1.0% or LIBOR plus
3.25%. The Senior Credit Facility contains restrictive provisions similar to the
provisions of the Company's 10 5/8% Senior Subordinated Notes due 2006. The
amount borrowed by the Company and the amount available to the Company under the
Senior Credit Facility at December 31, 1996 was $12.7 million and $112.3
million, respectively.
44
<PAGE>
The Company's cash used in investing activities was $214.4 million, $8.9
million and $42.8 million in 1996, 1995 and 1994, respectively. The increase of
$205.5 million from 1995 to 1996 was primarily due to the 1996 Broadcasting
Acquisitions. The decrease of $33.9 million from 1994 to 1995 was primarily due
to the Kentucky Acquisition and the 1994 Publishing Acquisitions (in 1994),
partially offset by the 1995 Publishing Acquisitions and the deferred costs
related to the Augusta Acquisition (in 1995).
The Company was provided $202.9 million, $1.3 million and $37.2 million in
cash by financing activities in 1996, 1995 and 1994, respectively. The cash
provided in 1996 resulted primarily from the (i) the issuance of $160.0 million
principal amount of 10 5/8% Senior Subordinated Notes due 2006, (ii) borrowings
under the Company's revolving credit agreements, (iii) public sale of Class B
Common Stock and (iv) the private placement of preferred stock, partially offset
by the repayment of certain long-term debt and the purchase of Class B Common
Stock by the Company. 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 September 30, 1996 the Company completed the First American Acquisition.
The purchase price for the First American Acquisition was approximately $183.9
million and consisted of $175.5 million cash, $1.8 million in
acquisition-related costs, and the assumption of approximately $6.6 million of
liabilities.
In addition to the consummation of the First American Acquisition, the
Company implemented a financing plan to increase liquidity and improve operating
and financial flexibility. Pursuant to the financing plan, the Company (i)
retired approximately $45.3 million principal amount of outstanding indebtedness
under its former credit facility, together with accrued interest thereon, (ii)
retired approximately $25.0 million aggregate principal amount of outstanding
indebtedness under its senior note, together with accrued interest thereon and a
prepayment fee, (iii) issued $10.0 million liquidation preference of its Series
A Preferred Stock in exchange for the Company's 8% note owned by the Company's
principal stockholder, with warrants to purchase up to 487,500 shares of Class A
Common Stock (representing 9.8% of the Class A Common Stock issued and
outstanding at December 31, 1996, after giving effect to the exercise of such
warrants), (iv) issued to Bull Run Corporation, J. Mack Robinson (Chairman of
the Board of Bull Run Corporation and the interim President and Chief Executive
Officer 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 10.0% of the Class A Common
Stock issued and outstanding at December 31, 1996, after giving effect to the
exercise of such warrants) for cash proceeds of $10.0 million and (v) entered
into the Senior Credit Facility which is comprised of a term loan of $71.5
million and a revolving credit facility of $53.5 million aggregating $125.0
million.
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 avaiable for payment, cumulative cash dividends at
an annual rate of $800 per share. 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 Company completed the KTVE Sale, on August 20, 1996. The sales price
included $9.5 million in cash plus the amount of the accounts receivable on the
date of closing to the extent collected by the buyer, (approximately $829,000).
The Company recognized a pre-tax gain of approximately $5.7 million and
estimated income taxes of approximately $2.8 million.
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
45
<PAGE>
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, 1996, payments on program license liabilities due in 1997,
which will be paid with cash from operations, were approximately $4.2 million.
In 1996, the Company made $3.4 million in capital expenditures, relating
primarily to the broadcasting operations, and paid $2.9 million for program
broadcast rights. The Company anticipates making $7.5 million in capital
expenditures in 1997.
In connection with the First American Acquisition, the FCC ordered the
Company to divest itself of WJHG-TV and WALB-TV by March 31, 1997 to comply with
regulations governing common ownership of television stations with overlapping
service areas. The FCC is currently reexamining these regulations, and if it
revises them in accordance with the interim policy it has adopted, divestiture
of WJHG-TV would not be required. The FCC is not expected to complete its
rulemaking on this subject until later in 1997. Accordingly the Company will
request, and expects to receive, an extension of the divestiture deadline
pending the outcome of the rulemaking proceedings. In order to satisfy
applicable FCC requirements with respect to WALB-TV, 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. If the
Company is unable to enter into an agreement to effect such a swap by March 31,
1997, the Company will seek FCC approval to transfer the station to a trust with
a view towards the trustee effecting a swap or sale of such assets. Under such
trust arrangement, which would be subject to the approval of the FCC, the
Company would be required to relinquish operating control of the station 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-TV, 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 December 31,
1996, the Company anticipates that it will generate taxable operating losses for
the foreseeable future.
Management 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.
Additional acquisitions are under consideration by the Company. If
completed, the Company currently believes that funding for such acquisitions
would be provided primarily through cash flow from operations and borrowings
under the Senior Credit Facility, although there can be no assurances that any
such acquisitions would not require the sale by the Company of its debt or
equity securities.
RESULTS OF OPERATIONS OF THE FIRST AMERICAN BUSINESS
INTRODUCTION
The following analysis of the financial condition and results of operations
of the Broadcasting and Paging Operations of John H. Phipps, Inc., (referred to
as the "First American Business") should be read in conjunction with the
September 30, 1996 Audited Financial Statements of the Broadcasting and Paging
Operations of John H. Phipps, Inc. and notes thereto.
The First American Business derived its revenues from its television
broadcasting operations which consisted of two CBS-affiliated television
stations, WCTV-TV serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV
in Knoxville, Tennessee, as well as a satellite broadcasting business based in
Tallahassee, Florida and a paging business also based in Tallahassee, Florida.
46
<PAGE>
On September 30, 1996, the Company purchased substantially all of the assets
used in the operation of the First American Business.
Set forth below, for the periods indicated, is certain information
concerning the relative contributions of the First American Business's
broadcasting (including satellite broadcasting) and paging operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31
------------------------------------------------ ------------------------------------------------
1996 1995 1995 1994
----------------------- ----------------------- ----------------------- -----------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ------------ --------- ------------ --------- ------------ --------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BROADCASTING
Revenues........................ $17,163.2 80.9% $16,338.0 81.4% $22,424.1 82.1% $21,524.3 83.4%
Operating income(1)............. 6,065.0 97.0 6,951.3 88.0 9,635.3 90.4 9,297.9 91.6
PAGING
Revenues........................ $ 4,040.1 19.1% $ 3,723.0 18.6% $ 4,897.5 17.9% $ 4,276.6 16.6%
Operating income(1)............. 186.1 3.0 950.3 12.0 1,026.9 9.6 855.1 8.4
</TABLE>
- ------------------------------
(1) Excludes any allocation of corporate and administrative expenses.
MEDIA CASH FLOW
The following table sets forth certain operating data for the First American
Business for the nine months ended September 30, 1996 and 1995 and for the years
ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30 DECEMBER 31
---------------------- --------------------
1996 1995 1995 1994
--------- ----------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating income (loss)........................... $(1,703.1) $ 5,593.6 $ 7,381.8 $ 7,667.6
Add:
Amortization of program license rights.......... 695.8 633.6 844.8 1,021.4
Depreciation and amortization................... 2,300.8 2,280.5 3,120.4 2,672.2
Corporate overhead.............................. 7,954.2 2,308.1 3,280.4 2,485.4
Less:
Payments for program license liabilities........ (840.8) (705.4) (931.0) (863.3)
--------- ----------- --------- ---------
Media Cash Flow(1)................................ $ 8,406.9 $10,110.4 $13,696.4 $12,983.3
--------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
- ------------------------
(1) Of Media Cash Flow, $7.7 million and $8.6 million was attributable to the
First American Business's broadcasting operations for the nine months ended
September 30, 1996 and 1995, respectively. Of Media Cash Flow, $11.9 million
and $11.5 million was attributable to the First American Business's
broadcasting operations in 1995 and 1994, respectively.
"Media cash flow" is defined as operating income (loss) from broadcast and
paging operations 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 for the First
American Business, because such data are commonly used as a measure of
performance for broadcast and paging 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 (loss), net
income (loss) or cash flow as reflected in the September 30, 1996 Audited
Consolidated Financial Statements of the Broadcasting and Paging Operations of
John H. Phipps, Inc., and is not a measure of financial performance under
generally
47
<PAGE>
accepted accounting principles and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
CASH FLOW PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCING ACTIVITIES
The following table sets forth certain operating data for the First American
Business for the nine months ended September 30, 1996 and 1995 and for the years
ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30 DECEMBER 31
---------------------- --------------------
1996 1995 1995 1994
--------- ----------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows provided by (used in)
Operating activities.............................. $ 368.0 $ 7,258.1 $ 9,259.0 $ 9,808.3
Investing activities.............................. (969.3) (3,882.2) (3,827.9) (2,505.6)
Financing activities.............................. 229.1 (3,697.9) (4,906.4) (7,233.4)
</TABLE>
BROADCASTING AND PAGING REVENUES
Set forth below are the principal types of broadcast net revenues earned by
the First American Business's television stations (including the satellite
broadcasting operation) and paging operations for the periods indicated and the
percentage contribution of each to the First American Business's total revenues.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31
------------------------------------------------ ------------------------------------------------
1996 1995 1995 1994
----------------------- ----------------------- ----------------------- -----------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ------------ --------- ------------ --------- ------------ --------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BROADCASTING
Net revenues
Local......................... $ 8,641.5 40.8% $ 8,166.2 40.7% $11,149.2 40.8% $10,412.2 40.4%
National...................... 5,320.0 25.1 5,688.9 28.4 7,844.9 28.7 7,217.0 27.9
Network compensation.......... 1,224.1 5.8 1,242.4 6.2 1,740.1 6.4 1,433.2 5.6
Political..................... 552.5 2.6 14.6 0.1 33.9 0.1 1,147.1 4.4
Production and other(1)....... 1,425.1 6.6 1,225.9 6.0 1,656.0 6.1 1,314.8 5.1
--------- ----- --------- ----- --------- ----- --------- -----
$17,163.2 80.9% $16,338.0 81.4% $22,424.1 82.1% $21,524.3 83.4%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
PAGING
Net revenues
Paging lease and service...... $ 4,276.1 20.2% $ 3,756.9 18.7% $ 5,004.9 18.3% $ 4,201.4 16.3%
Other......................... (236.0) (1.1) (33.9) (0.1) (107.4) (0.4) 75.2 0.3
--------- ----- --------- ----- --------- ----- --------- -----
$ 4,040.1 19.1% $ 3,723.0 18.6% $ 4,897.5 17.9% $ 4,276.6 16.6%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
TOTAL........................... $21,203.3 100.0% $20,061.0 100.0% $27,321.6 100.0% $25,800.9 100.0%
</TABLE>
- ------------------------------
(1) Includes satellite broadcasting business.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
REVENUES. Total revenues for the nine months ended September 30, 1996
increased $1.1 million, or 5.7%, over the nine months ended September 30, 1995,
from $20.1 million to $21.2 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 for the First American Business increased $825,000,
or 5.1%, over the same period of the prior year, from $16.3 million to $17.2
million. Approximately $475,000, $538,000 and
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<PAGE>
$199,000 of the increase in total broadcast net revenues resulted from an
increase in local advertising revenue, political advertising revenue and
production and other advertising revenue, respectively. This increase was
partially offset by a $369,000 decrease in national advertising revenue.
Net paging revenues for the First American Business increased $317,000, or
8.5%, over the same period of the prior year, from $3.7 million to $4.0 million.
The increase was attributable primarily to higher sales volume generated by a
reseller program implemented during 1995.
OPERATING EXPENSES. Operating expenses for the nine months ended September
30, 1996 increased $8.4 million, or 58.3%, over the nine months ended September
30, 1995, from $14.5 million to $22.9 million. The increase was attributable
primarily to an increase in broadcasting expenses, paging expenses and
management fees of $1.6 million, $1.2 million and $5.6 million, respectively.
Broadcasting expenses increased $1.6 million, or 21.1%, over the same period
of the prior year, from $7.7 million to $9.3 million. The increase was
attributable primarily to higher payroll and related costs resulting from the
payment of bonuses and severance to employees.
Paging expenses increased $1.2 million, or 52.4%, over the same period of
the prior year, from $2.2 million to $3.4 million. The increase was attributable
primarily to higher payroll and related costs resulting from the payment of
bonuses and severance to employees.
Management fees for the nine months ended September 30, 1996 increased $5.6
million, or 244.6%, from the same period of the prior year, from $2.3 million to
$7.9 million. The increase was attributable to higher personnel costs and
bonuses to certain executives.
Phipps paid substantially all of its employees a separation bonus prior to
the sale of the Broadcasting and Paging operations. Broadcasting and paging
expenses recognized from these separation bonuses were approximately $1.6
million in the nine months ended September 30, 1996.
Depreciation of property and equipment and amortization of intangible assets
for the nine months ended September 30, 1996 and 1995 was $2.3 million.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
1996 decreased $109,000, or 28.2%, from the same period of the prior year from
$387,000 to $278,000. This decrease was primarily attributable to a reduction in
average debt outstanding during the period.
NET LOSS. The net loss for the First American Business was $1.8 million for
the nine months ended September 30, 1996 compared with net income of $4.8
million for the nine months ended September 30, 1995, a decrease of $6.6
million, or 136.7%.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Total revenues for the First American Business 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.
49
<PAGE>
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.
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 First American Business 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, or 12.1%.
LIQUIDITY AND CAPITAL RESOURCES
The First American Business's cash provided from operations was $368,000 and
$7.3 million for the nine months ended September 30, 1996 and 1995,
respectively, and $9.3 million and $9.8 million for the years ended December 31,
1995 and 1994, respectively. The decrease of $6.9 million for the nine months
ended September 30, 1996, was primarily attributable to a decrease in net income
of $6.6 million.
The First American Business's cash used in investing activities was $1.0
million and $3.9 million for the nine months ended September 30, 1996 and 1995,
respectively, a decrease of $2.9 million. Cash used in investing activities was
$3.8 million and $2.5 million for the years ended December 31, 1995 and 1994,
respectively. The decrease for the nine months ended September 30, 1996 was
primarily attributable to a decrease in property and equipment purchases and a
decrease in purchases of minority interests of $789,000 and $1.8 million,
respectively.
The First American Business provided $229,000 and used $3.7 million for
financing activities for the nine months ended September 30, 1996 and 1995,
respectively, an increase in cash provided of $3.9 million. The First American
Business used $4.9 million and $7.2 million in cash for financing activities in
1995 and 1994, respectively. The increase for the nine months ended September
30, 1996 was primarily attributable to a decrease in payments to John H. Phipps,
Inc. of $4.2 million which was partially offset by repayments of indebtedness
net of borrowings and an increase in distributions to minority interests of
$95,000 and $204,000, respectively.
50
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Consolidated Financial Statements of Gray Communications Systems,
Inc.
Report of Independent Auditors.......................................... 52
Consolidated Balance Sheets at December 31, 1996 and 1995............... 53
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994......................................................... 55
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994...................................... 56
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994................................................... 57
Notes to Consolidated Financial Statements.............................. 58
Audited Financial Statements of the Broadcasting and Paging Operations of
John H. Phipps, Inc.
Report of Independent Auditors.......................................... 80
Statements of Operations for the nine months ended September 30, 1996
and the years ended December 31, 1995 and 1994........................ 81
Statements of Cash Flows for the nine months ended September 30, 1996
and the years ended December 31, 1995 and 1994........................ 82
Notes to Financial Statements........................................... 83
</TABLE>
51
<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, 1996 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, 1996. 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, 1996 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, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Atlanta, Georgia
January 27, 1997 except for Pending Acquisitions of
Note C, as to which the date is February 13, 1997
52
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Current assets (NOTE D):
Cash and cash equivalents...................................................... $ 1,051,044 $ 559,991
Trade accounts receivable, less allowance for doubtful accounts of $1,450,000
and $450,000, respectively................................................... 17,373,839 9,560,274
Recoverable income taxes....................................................... 1,747,687 1,347,007
Inventories.................................................................... 624,118 553,032
Current portion of program broadcast rights.................................... 2,362,742 1,153,058
Other current assets........................................................... 379,793 263,600
-------------- --------------
Total current assets............................................................. 23,539,223 13,436,962
Property and equipment (NOTES B, C AND D):
Land........................................................................... 785,682 758,944
Buildings and improvements..................................................... 11,253,559 8,630,694
Equipment...................................................................... 41,954,501 28,229,255
-------------- --------------
53,993,742 37,618,893
Allowance for depreciation..................................................... (18,209,891) (20,601,819)
-------------- --------------
35,783,851 17,017,074
Other assets (NOTE D):
Deferred acquisition costs..................................................... -0- 3,330,481
Deferred loan costs............................................................ 9,141,262 1,232,261
Goodwill and other intangibles (NOTE C)........................................ 228,692,018 42,004,050
Other.......................................................................... 1,507,488 1,219,650
-------------- --------------
239,340,768 47,786,442
-------------- --------------
$ 298,663,842 $ 78,240,478
-------------- --------------
-------------- --------------
</TABLE>
53
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable (includes $1,000,000 and $670,000 payable to Bull Run
Corporation, respectively)................................................... $ 6,043,062 $ 3,752,742
Employee compensation and benefits............................................. 7,152,786 4,213,639
Accrued expenses............................................................... 1,059,769 560,877
Accrued interest............................................................... 4,858,775 1,064,491
Current portion of program broadcast obligations............................... 2,862,434 1,205,784
Deferred revenue............................................................... 1,764,509 -0-
Current portion of long-term debt.............................................. 140,000 2,861,672
-------------- --------------
Total current liabilities........................................................ 23,881,335 13,659,205
Long-term debt (NOTE D).......................................................... 173,228,049 51,462,645
Other long-term liabilities:
Program broadcast obligations, less current portion............................ 545,889 109,971
Supplemental employee benefits (NOTE E)........................................ 1,357,275 2,212,685
Deferred income taxes (NOTE H)................................................. -0- 201,348
Deferred interest swap (NOTE D)................................................ 191,055 -0-
Other acquisition related liabilities (NOTES C AND D).......................... 4,234,723 1,609,026
-------------- --------------
6,328,942 4,133,030
Commitments and contingencies (NOTES C, D AND J)
Stockholders' equity (NOTES C, D AND F)
Serial Preferred Stock, no par value; authorized 20,000,000 shares; issued
2,000 and -0- shares, respectively ($20,000,000 aggregate liquidation
value)....................................................................... 20,000,000 -0-
Class A Common Stock, no par value; authorized 15,000,000 shares; issued
5,155,331 and 5,082,756 shares, respectively................................. 7,994,235 6,795,976
Class B Common Stock, no par value; authorized 15,000,000 shares; issued
3,500,000 and -0- shares, respectively....................................... 66,065,762 -0-
Retained earnings.............................................................. 10,543,940 8,827,906
-------------- --------------
104,603,937 15,623,882
Treasury Stock at cost, Class A Common, 663,180 shares......................... (6,638,284) (6,638,284)
Treasury Stock at cost, Class B Common, 172,300 shares......................... (2,740,137) -0-
-------------- --------------
95,225,516 8,985,598
-------------- --------------
$ 298,663,842 $ 78,240,478
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
54
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Operating revenues:
Broadcasting (less agency commissions)............................ $ 54,981,317 $ 36,750,035 $ 22,826,392
Publishing........................................................ 22,845,274 21,866,220 13,692,073
Paging............................................................ 1,478,608 -0- -0-
------------- ------------- -------------
79,305,199 58,616,255 36,518,465
Expenses:
Broadcasting...................................................... 32,438,405 23,201,990 14,864,011
Publishing........................................................ 17,949,064 20,016,137 11,198,011
Paging............................................................ 1,077,667 -0- -0-
Corporate and administrative...................................... 3,218,610 2,258,261 1,958,449
Depreciation...................................................... 4,077,696 2,633,360 1,745,293
Amortization of intangible assets................................. 3,584,845 1,325,526 396,342
Non-cash compensation paid in common stock (NOTE E)............... 880,000 2,321,250 80,000
------------- ------------- -------------
63,226,287 51,756,524 30,242,106
------------- ------------- -------------
16,078,912 6,859,731 6,276,359
Miscellaneous income and expense, net (NOTE B)...................... 5,704,582 143,612 188,307
------------- ------------- -------------
21,783,494 7,003,343 6,464,666
Interest expense.................................................... 11,689,053 5,438,374 1,922,965
------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE................. 10,094,441 1,564,969 4,541,701
Federal and state income taxes (NOTE H)............................. 4,416,000 634,000 1,776,000
------------- ------------- -------------
INCOME BEFORE EXTRAORDINARY CHARGE.................................. 5,678,441 930,969 2,765,701
Extraordinary charge on extinguishment of debt, net of applicable
income tax benefit of $2,157,000.................................. 3,158,960 -0- -0-
------------- ------------- -------------
NET INCOME.......................................................... 2,519,481 930,969 2,765,701
Preferred dividends................................................. 376,849 -0- -0-
------------- ------------- -------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS......................... $ 2,142,632 $ 930,969 $ 2,765,701
------------- ------------- -------------
------------- ------------- -------------
Average outstanding common shares--primary.......................... 5,625,548 4,481,317 4,689,453
Average outstanding common shares--fully diluted.................... 5,643,725 4,498,865 4,689,453
Primary and fully diluted earnings per common share
Income before extraordinary charge available to common
stockholders.................................................... $ .94 $ .21 $ .59
Extraordinary charge.............................................. (.56) -0- -0-
------------- ------------- -------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS......................... $ .38 $ .21 $ .59
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
55
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK
---------------------- ------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1993.......... -0- $ -0- 4,613,625 $ 1,336,071 -0- $ -0-
Net income.......... -0- -0- -0- -0- -0- -0-
Class A Common Stock
Cash dividends
($.07 per
share)............ -0- -0- -0- -0- -0- -0-
Purchase of Class A
Common Stock (NOTE
F)................ -0- -0- -0- -0- -0- -0-
Issuance of Class A
Common Stock:
401(k) Plan (NOTE
I).............. -0- -0- 3,160 32,676 -0- -0-
Rockdale
Acquisition..... -0- -0- 225,000 2,025,000 -0- -0-
-------- ------------ ---------- ------------ ----------- ------------
Balance at December
31, 1994.......... -0- -0- 4,841,785 3,393,747 -0- -0-
Net income.......... -0- -0- -0- -0- -0- -0-
Class A Common Stock
Cash dividends
($.08 per
share)............ -0- -0- -0- -0- -0- -0-
Issuance of Class A
Common Stock
(NOTES C, E, F, G
AND I):
401(k) Plan....... -0- -0- 18,354 298,725 -0- -0-
Directors' Stock
Plan............ -0- -0- 23,500 238,919 -0- -0-
Non-qualified
Stock Plan...... -0- -0- 5,000 48,335 -0- -0-
Gwinnett
Acquisition..... -0- -0- 44,117 500,000 -0- -0-
Restricted Stock
Plan............ -0- -0- 150,000 2,081,250 -0- -0-
Amortization of
Restricted Stock
Plan deferrals.... -0- -0- -0- -0- -0- -0-
Income tax benefits
relating to stock
plans............. -0- -0- -0- 235,000 -0- -0-
-------- ------------ ---------- ------------ ----------- ------------
Balance at December
31, 1995.......... -0- -0- 5,082,756 6,795,976 -0- -0-
Net income.......... -0- -0- -0- -0- -0- -0-
Common Stock Cash
dividends:
Class A ($.08 per
share).......... -0- -0- -0- -0- -0- -0-
Class B ($.02 per
share).......... -0- -0- -0- -0- -0- -0-
Purchase of Class B
Common Stock (NOTE
F)................ -0- -0- -0- -0- -0- -0-
Issuance of Class A
Common Stock
(NOTES F, G AND
I):...............
401(k) Plan....... -0- -0- 13,225 262,426 -0- -0-
Directors Stock
Plan............ -0- -0- 22,500 228,749 -0- -0-
Non-qualified
Stock Plan...... -0- -0- 36,850 358,417 -0- -0-
Preferred Stock
Dividends......... -0- -0- -0- -0- -0- -0-
Issuance of Class A
Common Stock
Warrants (NOTES C
AND F)............ -0- -0- -0- 2,600,000 -0- -0-
Issuance of Series A
Preferred Stock in
exchange for
Subordinated Note
(NOTES C AND F)... 1,000 10,000,000 -0- (2,383,333) -0- -0-
Issuance of Series B
Preferred Stock
(NOTES C AND F)... 1,000 10,000,000 -0- -0- -0- -0-
Issuance of Class B
Common Stock, net
of expenses (NOTES
C AND F )......... -0- -0- -0- -0- 3,500,000 66,065,762
Income tax benefits
relating to stock
plans............. -0- -0- -0- 132,000 -0- -0-
-------- ------------ ---------- ------------ ----------- ------------
Balance at December
31, 1996.......... 2,000 $ 20,000,000 5,155,331 $ 7,994,235 3,500,000 $ 66,065,762
-------- ------------ ---------- ------------ ----------- ------------
-------- ------------ ---------- ------------ ----------- ------------
<CAPTION>
CLASS A CLASS B
RESTRICTED TREASURY STOCK TREASURY STOCK
STOCK ----------------------- ----------------------- RETAINED
DEFERRALS SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
----------- ---------- ----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1993.......... $ -0- -0- $ -0- -0- $ -0- $ 5,781,879 $ 7,117,950
Net income.......... -0- -0- -0- -0- -0- 2,765,701 2,765,701
Class A Common Stock
Cash dividends
($.07 per
share)............ -0- -0- -0- -0- -0- (301,954) (301,954)
Purchase of Class A
Common Stock (NOTE
F)................ -0- (663,180) (6,638,284) -0- -0- -0- (6,638,284)
Issuance of Class A
Common Stock:
401(k) Plan (NOTE
I).............. -0- -0- -0- -0- -0- -0- 32,676
Rockdale
Acquisition..... -0- -0- -0- -0- -0- -0- 2,025,000
----------- ---------- ----------- ---------- ----------- ------------ ------------
Balance at December
31, 1994.......... -0- (663,180) (6,638,284) -0- -0- 8,245,626 5,001,089
Net income.......... -0- -0- -0- -0- -0- 930,969 930,969
Class A Common Stock
Cash dividends
($.08 per
share)............ -0- -0- -0- -0- -0- (348,689) (348,689)
Issuance of Class A
Common Stock
(NOTES C, E, F, G
AND I):
401(k) Plan....... -0- -0- -0- -0- -0- -0- 298,725
Directors' Stock
Plan............ -0- -0- -0- -0- -0- -0- 238,919
Non-qualified
Stock Plan...... -0- -0- -0- -0- -0- -0- 48,335
Gwinnett
Acquisition..... -0- -0- -0- -0- -0- -0- 500,000
Restricted Stock
Plan............ (2,081,250) -0- -0- -0- -0- -0- -0-
Amortization of
Restricted Stock
Plan deferrals.... 2,081,250 -0- -0- -0- -0- -0- 2,081,250
Income tax benefits
relating to stock
plans............. -0- -0- -0- -0- -0- -0- 235,000
----------- ---------- ----------- ---------- ----------- ------------ ------------
Balance at December
31, 1995.......... -0- (663,180) (6,638,284) -0- -0- 8,827,906 8,985,598
Net income.......... -0- -0- -0- -0- -0- 2,519,481 2,519,481
Common Stock Cash
dividends:
Class A ($.08 per
share).......... -0- -0- -0- -0- -0- (357,598) (357,598)
Class B ($.02 per
share).......... -0- -0- -0- -0- -0- (69,000) (69,000)
Purchase of Class B
Common Stock (NOTE
F)................ -0- -0- -0- (172,300) (2,740,137) -0- (2,740,137)
Issuance of Class A
Common Stock
(NOTES F, G AND
I):...............
401(k) Plan....... -0- -0- -0- -0- -0- -0- 262,426
Directors Stock
Plan............ -0- -0- -0- -0- -0- -0- 228,749
Non-qualified
Stock Plan...... -0- -0- -0- -0- -0- -0- 358,417
Preferred Stock
Dividends......... -0- -0- -0- -0- -0- (376,849) (376,849)
Issuance of Class A
Common Stock
Warrants (NOTES C
AND F)............ -0- -0- -0- -0- -0- -0- 2,600,000
Issuance of Series A
Preferred Stock in
exchange for
Subordinated Note
(NOTES C AND F)... -0- -0- -0- -0- -0- -0- 7,616,667
Issuance of Series B
Preferred Stock
(NOTES C AND F)... -0- -0- -0- -0- -0- -0- 10,000,000
Issuance of Class B
Common Stock, net
of expenses (NOTES
C AND F )......... -0- -0- -0- -0- -0- -0- 66,065,762
Income tax benefits
relating to stock
plans............. -0- -0- -0- -0- -0- -0- 132,000
----------- ---------- ----------- ---------- ----------- ------------ ------------
Balance at December
31, 1996.......... $ -0- (663,180) $(6,638,284) (172,300) $(2,740,137) $ 10,543,940 $ 95,225,516
----------- ---------- ----------- ---------- ----------- ------------ ------------
----------- ---------- ----------- ---------- ----------- ------------ ------------
</TABLE>
See accompanying notes.
56
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 2,519,481 $ 930,969 $ 2,765,701
Items which did not use (provide) cash:
Depreciation........................................................ 4,077,696 2,633,360 1,745,293
Amortization of intangible assets................................... 3,584,845 1,325,526 396,342
Amortization of deferred loan costs................................. 270,813 -0- -0-
Amortization of program broadcast rights............................ 2,742,712 1,647,035 1,217,976
Amortization of original issue discount on 8% subordinated note..... 216,667 -0- -0-
Amortization of deferred interest rate swap settlement liability.... (37,292) -0- -0-
Write-off of loan acquisition costs from early extinguishment of
debt.............................................................. 1,818,840 -0- -0-
Gain on disposition of television station........................... (5,671,323) -0- -0-
Payments for program broadcast rights............................... (2,877,128) (1,776,796) (1,181,598)
Compensation paid in Common Stock................................... 880,000 2,321,250 80,000
Supplemental employee benefits...................................... (855,410) (370,694) (454,703)
Common Stock contributed to 401(k) Plan............................. 262,426 298,725 32,676
Deferred income taxes............................................... (44,000) 863,000 523,000
(Gain) loss on asset sales.......................................... 201,792 1,652 (21,419)
Changes in operating assets and liabilities:
Trade accounts receivable......................................... (1,575,723) (852,965) (1,444,159)
Recoverable income taxes.......................................... (400,680) (1,347,007) 589,942
Inventories....................................................... 254,952 (181,034) (179,930)
Other current assets.............................................. (21,248) (11,208) (24,361)
Trade accounts payable............................................ 2,256,795 1,441,745 (306,493)
Employee compensation and benefits................................ 2,882,379 1,011,667 1,246,726
Accrued expenses.................................................. (2,936,155) (414,087) (45,335)
Accrued interest.................................................. 3,794,284 78,536 858,164
Deferred revenue.................................................. 710,286 -0- -0-
------------ ----------- ------------
Net cash provided by operating activities............................... 12,055,009 7,599,674 5,797,822
INVESTING ACTIVITIES
Acquisitions of newspaper businesses.................................. -0- (2,084,621) (3,442,836)
Acquisition of television businesses.................................. (210,944,547) -0- (37,492,643)
Disposition of television business.................................... 9,480,699 -0- -0-
Purchases of property and equipment................................... (3,395,635) (3,279,721) (1,767,800)
Proceeds from asset sales............................................. 174,401 2,475 103,434
Deferred acquisition costs............................................ -0- (3,330,481) -0-
Deferred loan costs................................................... (9,410,078) -0- (1,251,287)
Proceeds from disposals of operating units............................ -0- -0- 1,222,697
Other................................................................. (345,722) (236,904) (141,767)
------------ ----------- ------------
Net cash used in investing activities................................... (214,440,882) (8,929,252) (42,770,202)
FINANCING ACTIVITIES
Proceeds from borrowings:
Short-term debt..................................................... -0- 1,200,000 -0-
Long-term debt...................................................... 238,478,310 2,950,000 55,826,260
Repayments of borrowings:
Short-term debt..................................................... -0- (1,200,000) (480,000)
Long-term debt...................................................... (109,434,577) (1,792,516) (11,206,281)
Dividends paid........................................................ (426,598) (348,689) (301,954)
Class A Common Stock transactions..................................... 719,166 522,254 (6,638,284)
Proceeds from equity offering--Class B Common Stock, net of expenses.. 66,065,762 -0- -0-
Proceeds from offering of Series B Preferred Stock.................... 10,000,000 -0- -0-
Proceeds from settlement of interest rate swap agreement.............. 215,000 -0- -0-
Purchase of Class B Common Stock...................................... (2,740,137) -0- -0-
------------ ----------- ------------
Net cash provided by financing activities............................... 202,876,926 1,331,049 37,199,741
------------ ----------- ------------
Increase in cash and cash equivalents................................... 491,053 1,471 227,361
Cash and cash equivalents at beginning of year.......................... 559,991 558,520 331,159
------------ ----------- ------------
Cash and cash equivalents at end of year................................ $ 1,051,044 $ 559,991 $ 558,520
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See accompanying notes.
57
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company's operations, which are located in six southeastern states,
include seven television stations, three daily newspapers, two area weekly
advertising only direct mail publications, and paging operations.
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 $13,000 and $170,000 at
December 31, 1996 and 1995, respectively.
PROGRAM BROADCAST RIGHTS
Rights to programs available for broadcast under program license agreements
are initially recorded at the beginning of the license period for 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
the license fees payable under the program license agreements is classified as
current or long-term, in accordance with the payment terms of the various
license agreements.
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. Buildings, improvements and
equipment are depreciated over estimated useful lives of approximately 35 years,
10 years and 5 years, respectively.
58
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets are stated at cost and 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 $4.9
million and $1.7 million as of December 31, 1996 and 1995, respectively.
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. Consolidated state
tax returns are filed when appropriate and separate state tax returns are filed
when consolidation is not available. Local tax returns are filed separately.
CAPITAL STOCK
On August 17, 1995, the Board of Directors declared a 50% stock dividend on
the Company's Class A Common Stock payable October 2, 1995 to stockholders of
record on September 8, 1995, to effect a three for two stock split. All
applicable share and per share data have been adjusted to give effect to the
stock split.
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
share award and outstanding stock options and warrants. (SEE NOTES E AND F).
STOCK BASED COMPENSATION
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 print advertising and 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.
59
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST SWAP
The Company entered into an interest-rate swap agreement to modify the
interest characteristics of a portion of its outstanding debt (SEE NOTE D). The
agreement involved the exchange of amounts based on a fixed interest rate for
amounts based on variable interest rates over the life of the agreement without
an exchange of the notional amount upon which the payments were 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). Effective May 14, 1996, the Company received a settlement of
this interest-rate swap, the effect of which is recognized as an adjustment to
interest expense over the remaining life of the original swap agreement term.
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
long-term debt and preferred stock.
The estimated fair value of long-term debt at December 31, 1996 and 1995
exceeded book value by $9.6 million and $0, respectively. The fair value of the
Preferred Stock at December 31, 1996 approximates its carrying value at that
date. The Company does not anticipate settlement of long-term debt or preferred
stock 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
Effective January 1, 1996, the Company adopted 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 adoption
of Statement 121 did not 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 1996 format.
B. BUSINESS DISPOSITIONS
The Company sold the assets of KTVE Inc. (the "KTVE Sale"), its
NBC-affiliated television station, in Monroe, Louisiana/El Dorado, Arkansas on
August 20, 1996. The sales price included $9.5 million in cash plus the amount
of the accounts receivable on the date of closing to the extent collected by the
buyer, to be paid to the Company within 150 days following the closing date
(approximately $829,000). The
60
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS DISPOSITIONS (CONTINUED)
Company recognized a pre-tax gain of approximately $5.7 million and estimated
income taxes of approximately $2.8 million in connection with the sale.
C. 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.
1996 ACQUISITIONS
On September 30, 1996, the Company purchased from First American Media, Inc.
substantially all of the assets used in the operation of two CBS-affiliated
television stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville,
Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, as well as those assets
used in the operations of a satellite production services business and a
communications and paging business (the "First American Acquisition").
Subsequent to the First American Acquisition, the Company rebranded WKXT with
the call letters WVLT ("WVLT") as a component of its strategy to promote the
station's upgraded news product. The purchase price of approximately $183.9
million consisted of $175.5 million cash, $1.8 million in acquisition-related
costs, and the assumption of approximately $6.6 million of liabilities. 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 $159.8
million. The Company's Board of Directors has agreed to pay Bull Run Corporation
("Bull Run"), a principal stockholder of the Company, a fee equal to $1.4
million for services performed in connection with this acquisition. At December
31, 1996, $1.0 million of this fee remains payable and is included in accounts
payable.
The First American Acquisition and the early retirement of the Company's
existing bank credit facility and other senior indebtedness (SEE NOTES D AND F),
were funded as follows: net proceeds of $66.1 million from the sale of 3,500,000
shares of the Company's Class B Common Stock; net proceeds of $155.2 million
from the sale of $160.0 million principal amount of the Company's 10 5/8% Senior
Subordinated Notes due 2006; $16.9 million of borrowings under a senior credit
facility (the "Senior Credit Facility"); and $10.0 million net proceeds from the
sale of 1,000 shares of the Company's Series B Preferred Stock with warrants to
purchase 500,000 shares of the Company's Class A Common Stock at $24 per share.
The shares of Series B Preferred Stock were issued to Bull Run and to J. Mack
Robinson, Chairman of the Board of Bull Run and interim President and Chief
Executive Officer of the Company, and certain of his affiliates. The Company
obtained an opinion as to the fairness of the terms of the sale of such Series B
Preferred Stock with warrants from an investment banker. The Federal
Communications Commission's (the "FCC") approval of the First American
Acquisition requires the Company to divest itself of WALB-TV ("WALB") in Albany,
Georgia and WJHG-TV ("WJHG") in Panama City, Florida by March 31, 1997 to comply
with regulations governing common ownership of television stations with
overlapping service areas. The FCC is currently reexamining these regulations,
and if it revises them in accordance with the interim policy it has adopted,
divestiture of WJHG-TV would not be required. The FCC is not expected to
complete its rulemaking on this subject until later in 1997. Accordingly, the
Company will request, and expects to receive, an extension of the divestiture
deadline pending the outcome of the rulemaking proceedings. In order to satisfy
applicable FCC requirements with respect to WALB-TV, the Company, subject to FCC
61
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. BUSINESS ACQUISITIONS (CONTINUED)
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. If the
Company is unable to enter into an agreement to effect such a swap by March 31,
1997, the Company will seek FCC approval to transfer the station to a trust with
a view towards the trustee effecting a swap or sale of such assets. Under such
trust arrangement, which would be subject to the approval of the FCC, the
Company would be required to relinquish operating control of the station 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-TV, 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.
Condensed unaudited balance sheets of WALB and WJHG are as follows (in
thousands):
<TABLE>
<CAPTION>
WALB WJHG
-------------------- --------------------
DECEMBER 31,
1996 1995 1996 1995
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets......................................... $ 2,058 $ 1,996 $ 1,079 $ 821
Property and equipment................................. 1,579 1,806 981 974
Other assets........................................... 100 67 55 3
--------- --------- --------- ---------
Total assets........................................... $ 3,737 $ 3,869 $ 2,115 $ 1,798
--------- --------- --------- ---------
--------- --------- --------- ---------
Current liabilities.................................... $ 1,189 $ 762 $ 497 $ 358
Other liabilities...................................... 242 228 -0- -0-
Stockholder's equity................................... 2,306 2,879 1,618 1,440
--------- --------- --------- ---------
Total liabilities and stockholder's equity............. $ 3,737 $ 3,869 $ 2,115 $ 1,798
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Condensed unaudited income statement data for the years ended December 31,
1996, 1995 and 1994 for WALB and WJHG are as follows (in thousands):
<TABLE>
<CAPTION>
WALB WJHG
------------------------------- -------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 1995 1994 1996 1995 1994
--------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Broadcasting revenues............. $ 10,611 $ 9,445 $ 9,074 $ 5,217 $ 3,843 $ 3,619
Expenses.......................... 5,070 4,650 4,458 4,131 3,573 3,502
--------- --------- --------- --------- --------- ---------
Operating income.................. 5,541 4,795 4,616 1,086 270 117
Other income...................... 7 17 22 6 60 62
--------- --------- --------- --------- --------- ---------
Income before income taxes........ 5,548 4,812 4,638 1,092 330 179
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net income........................ $ 3,465 $ 2,984 $ 3,126 $ 685 $ 205 $ 208
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
62
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. BUSINESS ACQUISITIONS (CONTINUED)
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 the 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 fee to Bull Run.
Funds for the Augusta Acquisition were obtained from the modification of the
Company's existing bank debt on January 4, 1996 (the "Bank Loan") to a variable
rate reducing revolving credit facility (the "Old 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 were vested at
December 31, 1996. The remainder vests in five equal annual installments of
37,500 shares commencing in 1997. 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. The Old Credit Facility provided for a credit line up to
$54.2 million. This 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%.
As part of the financing arrangements for the First American Acquisition,
the Old Credit Facility and the Senior Note were retired and the Company issued
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. The Company recorded an extraordinary charge of $5.3 million ($3.2
million after taxes or $0.56 per common share) in connection with the early
retirement of the $25.0 million Senior Note and the write-off of loan
acquisition costs from the early extinguishment of debt.
Unaudited pro forma operating data for the year ended December 31, 1996 and
1995, is presented below and assumes that the Augusta Acquisition, the First
American Acquisition, and the KTVE Sale occurred on January 1, 1995.
This unaudited pro forma operating data does not purport to represent the
Company's actual results of operations had the Augusta Acquisition, the First
American Acquisition, and the KTVE Sale 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
63
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. BUSINESS ACQUISITIONS (CONTINUED)
are reasonable under the circumstances at this time. Unaudited pro forma
operating data for the year ended December 31, 1996 are as follows (in
thousands, except per common share data):
<TABLE>
<CAPTION>
FIRST
KTVE AMERICAN PRO FORMA ADJUSTED
GRAY SALE ACQUISITION ADJUSTMENTS PRO FORMA
--------- --------- ----------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues, net.............................. $ 79,305 $ (2,968) $ 21,203 $ -0- $ 97,540
--------- --------- ----------- ----- -----------
--------- --------- ----------- ----- -----------
Net earnings (loss) before extraordinary
charge.................................... $ 5,678 $ (3,173) $ (1,773) $ (720) $ 12
--------- --------- ----------- ----- -----------
--------- --------- ----------- ----- -----------
Earnings (loss) per share available to
common stockholders before extraordinary
charge.................................... $ 0.94 $ (0.17)
--------- -----------
--------- -----------
</TABLE>
Unaudited pro forma operating data for the year ended December 31, 1995 are
as follows (in thousands, except per common share data):
<TABLE>
<CAPTION>
FIRST
AUGUSTA KTVE AMERICAN PRO FORMA ADJUSTED
GRAY ACQUISITION SALE ACQUISITION ADJUSTMENTS PRO FORMA
--------- ----------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues, net.................. $ 58,616 $ 8,660 $ (4,188) $ 27,321 $ 228 $ 90,637
--------- ----------- --------- ----------- ----------- -----------
--------- ----------- --------- ----------- ----------- -----------
Net earnings (loss) available
to common stockholders........ $ 931 $ 2,242 $ (278) $ 6,348 $ (15,316) $ (6,073)
--------- ----------- --------- ----------- ----------- -----------
--------- ----------- --------- ----------- ----------- -----------
Earnings (loss) per share
available to common
stockholders.................. $ 0.21 $ (0.77)
--------- -----------
--------- -----------
</TABLE>
The pro forma results presented above include adjustments to reflect (i) the
incurrence of interest expense to fund the 1996 Acquisitions, (ii) depreciation
and amortization of assets acquired, (iii) the reduction of employee
compensation related to severance and vacation compensation for 1996, (iv) the
elimination of the corporate expense allocation net of additional accounting and
administrative expenses for the First American Acquisition, (v) increased
pension expense for the First American Acquisition, and (vi) the income tax
effect of such pro forma adjustments. Average outstanding shares used to
calculate pro forma earnings per share data for 1996 and 1995 include the
3,500,000 Class B Common shares issued in connection with the First American
Acquisition.
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 $3.7
million, including assumed liabilities of approximately $370,000, was paid by
approximately $1.2 million in
64
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. BUSINESS ACQUISITIONS (CONTINUED)
cash (financed through long-term borrowings and cash from operations), the
issuance of 44,117 shares of the Company's 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 fee to Bull Run.
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"). 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.
Unaudited pro forma operating data for the year ended December 31, 1994, is
presented below, giving effect to the Rockdale Acquisition and the Kentucky
Acquisition (collectively the "1994 Acquisitions") as though they had occurred
on January 1, 1994.
This unaudited pro forma operating data does not purport to represent what
the Company's actual results of operations would have been if the 1994
Acquisitions 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 upon certain assumptions that management believes are
reasonable under the circumstances.
Unaudited pro forma operating data for the year ended December 31, 1994 are
as follows (in thousands, except per common share data):
<TABLE>
<CAPTION>
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
--------- ----------- ----- ----------- -----------
--------- ----------- ----- ----------- -----------
Net income.......................................... $ 2,766 $ 2,637 $ 46 $ (2,763) $ 2,686
--------- ----------- ----- ----------- -----------
--------- ----------- ----- ----------- -----------
Earnings per common share........................... $ 0.59 $ 0.56
--------- -----------
--------- -----------
</TABLE>
65
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. BUSINESS ACQUISITIONS (CONTINUED)
1994 ACQUISITIONS (CONTINUED)
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 income tax effect of such pro
forma adjustments. Average outstanding shares used to calculate earnings per
share from continuing operations for 1994 include the 225,000 shares issued in
connection with the Rockdale Acquisition.
PENDING ACQUISITIONS
In January 1997, the Company agreed to acquire Gulflink Communications, Inc.
of Baton Rouge, Louisiana. The operations include nine transportable satellite
uplink trucks. The purchase price is estimated at approximately $5.8 million,
including a cash payment of $3.7 million and assumed liabilities of
approximately $2.1 million. The transaction, which is expected to close by April
1997, is subject to approval by the appropriate regulatory agencies. The Company
plans to fund the costs of this acquisition through its Senior Credit Facility.
In February 1997, the Company announced that it had signed a letter of
intent with Raycom-US, Inc. to purchase the assets of WITN-TV ("WITN"). The
purchase price is estimated at approximately $39.5 million plus the assumption
of certain liabilities. WITN is currently owned by AFLAC Broadcast Group, Inc.,
which has entered into a contract to sell the stock of WITN, Inc. to Raycom.
Gray's letter of intent with Raycom is conditional upon the completion of the
stock purchase by Raycom. WITN operates on Channel 7 and is the NBC affiliate in
the Greenville-Washington-New Bern, North Carolina market. The purchase of WITN
is subject to a number of conditions, including the negotiation and execution of
a definitive purchase agreement. In connection with the proposed purchase of the
assets of WITN, the Company will pay Bull Run a finder's fee equal to 1% of the
purchase price for services performed, none of which was due and included in
accounts payable at December 31, 1996.
D. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
10 5/8% Senior Subordinated Notes due 2006............................. $ 160,000 $ -0-
Senior Credit Facility................................................. 12,680 -0-
Senior Note............................................................ -0- 25,000
Bank Loan.............................................................. -0- 28,375
Other.................................................................. 688 950
---------- ---------
173,368 54,325
Less current portion................................................... (140) (2,862)
---------- ---------
$ 173,228 $ 51,463
---------- ---------
---------- ---------
</TABLE>
On September 20, 1996, the Company sold $160.0 million principal amount of
the Company's 10 5/8% Senior Subordinated Notes (the "Senior Subordinated
Notes") due 2006. The net proceeds of $155.2 million from this offering, along
with the net proceeds from (i) the KTVE Sale, (ii) the issuance of Class B
66
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. LONG-TERM DEBT (CONTINUED)
Common Stock, (iii) the issuance of Series B Preferred Stock and (iv) borrowings
under the Senior Credit Facility, were used in financing the First American
Acquisition as well as the early retirement of the Senior Note and The Old
Credit Facility. Interest on the Senior Subordinated Notes is payable
semi-annually on April 1 and October 1, commencing April 1, 1997.
The Senior Subordinated Notes are 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 is subordinated, to the same extent as the obligations of the Company
in respect of the Senior Subordinated 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 assets or
operations, other than its investment in its subsidiaries. The aggregate assets,
liabilities, earnings and equity of the Subsidiary Guarantors are substantially
equivalent to the assets, liabilities, earnings and equity of the Company on a
consolidated basis. 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 and other disclosures of each of the
Subsidiary Guarantors are not presented because management has determined that
they are not material to investors.
In September 1996, the Company entered into its $125.0 million Senior Credit
Facility which is comprised of a term loan (the "Term Commitment") of $71.5
million and a revolving credit facility (the "Revolving Commitment") of $53.5
million. The agreement pursuant to which the Senior Credit Facility was issued
contains certain restrictive provisions, which, among other things, limit
capital expenditures and additional indebtedness and require minimum levels of
cash flows. The Senior Subordinated Note also contains similar restrictive
provisions. Additionally, the effective interest rate of the Senior Credit
Facility can be changed based upon the Company's maintenance of certain
operating ratios as defined by the Senior Credit Facility, not to exceed the
lender's prime rate plus 1.0% or LIBOR plus 3.25%.
The amounts available under the Revolving Commitment will be reduced as
follows (in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 7,356
1998............................................................... 8,025
1999............................................................... 8,025
2000............................................................... 8,025
2001............................................................... 8,025
2002............................................................... 9,363
2003............................................................... 4,681
---------
$ 53,500
---------
---------
</TABLE>
The amount borrowed by the Company on December 31, 1998 under the Term
Commitment will be converted to a four and one-half year term loan. The
principal of the term loan shall be repaid in nineteen consecutive quarterly
installments commencing on December 31, 1998. Each of the first five quarterly
installments are equal to 2.50% of the principal balance outstanding at December
31, 1998. Each of the
67
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. LONG-TERM DEBT (CONTINUED)
next thirteen quarterly installments are equal to 3.75% of the principal balance
outstanding at December 31, 1998. The nineteenth and final installment due June
30, 2003 will be equal to the remaining balance outstanding and any outstanding
interest due on June 30, 2003.
The Company is charged a commitment fee on the excess of the aggregate
average daily undisbursed amount of the Revolving Commitment and the Term
Commitment over the amount outstanding. At December 31, 1996, the commitment fee
was 0.50% per annum.
At December 31, 1996, the Company had approximately $12.7 million
outstanding on the Senior Credit Facility. At December 31, 1996, the Company's
interest rate for the Senior Credit Facility, was based on a spread over LIBOR
and/or Prime, of 2.50% and 0.25%, respectively.
The Senior Subordinated Notes and the Senior Credit Facility are secured by
substantially all of the Company's existing and hereafter acquired assets.
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 under the Old Credit Facility to a fixed rate basis. The Interest Swap was
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
is reflected as a reduction of interest expense over the remaining life of the
original five-year interest rate swap agreement term. The Company does not
currently have any other interest rate swap agreements.
At December 31, 1996, retained earnings of approximately $1.4 million and
$1.0 million were available for dividends to holders of preferred and common
stock, respectively.
Aggregate minimum principal maturities on long-term debt as of December 31,
1996, were as follows (in thousands):
<TABLE>
<S> <C>
1997.............................................................. $ 140
1998.............................................................. 134
1999.............................................................. 115
2000.............................................................. 53
2001.............................................................. 57
Thereafter........................................................ 172,869
---------
$ 173,368
---------
---------
</TABLE>
The Company made interest payments of approximately $7.6 million, $5.4
million, and $1.2 million during 1996, 1995 and 1994, respectively.
In the quarter ended September 30, 1996, the Company recorded an
extraordinary charge of $5.3 million ($3.2 million after taxes or $0.56 per
share) in connection with the early retirement of the Senior Note and the
write-off of unamortized loan acquisition costs of the Senior Note and the Old
Credit Facility resulting from the early extinguishment of debt.
68
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. SUPPLEMENTAL EMPLOYEE BENEFITS AND OTHER AGREEMENTS
The Company had an employment agreement with its former President, Ralph W.
Gabbard, which provided for an award of 122,034 shares of the Company's Class A
Common Stock if his employment with the Company continued until September 1999.
Mr. Gabbard died unexpectedly in September 1996. The Company awarded these
shares to the estate of Mr. Gabbard. Approximately $880,000, $240,000, and
$80,000 of expense was recorded in 1996, 1995, and 1994, respectively.
In December 1995, the Company amended an existing employment agreement to
pay consulting fees to its former chief executive officer. The Company recorded
approximately $596,000 of corporate and administrative expenses during the year
ended December 31, 1995 in accordance with the terms of the amended employment
agreement. Additionally, in December 1995 the Company issued 150,000 shares of
the Company's Class A Common Stock to this former chief executive officer in
accordance with his employment agreement which was amended to remove certain
restrictions, including, among others, a time requirement for continued
employment. Compensation expense of approximately $2.1 million was recognized in
1995 for the 150,000 shares of Class A Common Stock issued pursuant to this
agreement.
The Company has entered into supplemental retirement benefit agreements with
certain key employees. These benefits are to be paid in equal monthly amounts
over the employees' life for a period not to exceed 15 years after retirement.
The Company charges against operations amounts sufficient to fund the present
value of the estimated lifetime supplemental benefit over each employee's
anticipated remaining period of employment.
The following summarizes activity relative to certain officers' agreements
and the supplemental employee benefits (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Beginning liability............................................. $ 2,938 $ 2,518 $ 2,960
--------- --------- ---------
Provision....................................................... 918 976 184
Forfeitures..................................................... -0- (169) (266)
--------- --------- ---------
Net (income) expense............................................ 918 807 (82)
Payments........................................................ (698) (387) (360)
--------- --------- ---------
Net change...................................................... 220 420 (442)
--------- --------- ---------
Ending liability................................................ 3,158 2,938 2,518
Less current portion............................................ (1,801) (725) (175)
--------- --------- ---------
$ 1,357 $ 2,213 $ 2,343
--------- --------- ---------
--------- --------- ---------
</TABLE>
F. STOCKHOLDERS' EQUITY
The Company amended its Articles of Incorporation to increase to 50,000,000
the number of shares of all classes of stock which the Company has the authority
to issue, of which, 15,000,000 shares are designated Class A Common Stock,
15,000,000 shares are designated Class B Common Stock, and 20,000,000 shares are
designated "blank check" preferred stock for which the Board of Directors has
the authority to determine the rights, powers, limitations and restrictions. The
rights of the Company's Class A and Class B Common Stock are identical, except
that the Class A Common Stock has 10 votes per share and the Class B Common
Stock has one vote per share. The Class A and Class B Common Stock receive
69
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. STOCKHOLDERS' EQUITY (CONTINUED)
cash dividends on an equal per share basis. In September 1996, the Company
issued 1,000 shares each of Series A and Series B Preferred Stock relating to
the financing arrangements for the First American Acquisition.
As part of the financing for the Augusta Acquisition, funding was 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. 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 amortized the original issue discount on a ratable basis
in accordance with the original terms of the 8% Note through September 30, 1996.
The Company recognized approximately $217,000 in amortization costs for the $2.6
million original issue discount. In September 1996, the Company exchanged the 8%
Note with Bull Run for 1,000 shares of liquidation preference Series A Preferred
Stock yielding 8%. The warrants issued with the 8% Note will vest in accordance
with their original schedule provided the Series A Preferred Stock remains
outstanding. The holder of the Series A Preferred Stock will receive cash
dividends at an annual rate of $800 per share. The liquidation or redemption
price of the Series A Preferred Stock is $10,000 per share.
As part of the financing for the First American Acquisition, the Company
also issued 1,000 shares of Series B Preferred Stock, with warrants to purchase
an aggregate of 500,000 shares of Class A Common Stock at an exercise price of
$24.00 per share. Of these warrants 300,000 vested upon issuance, with the
remaining warrants vesting in five equal annual installments commencing on the
first anniversary of the date of issuance. The shares of Series B Preferred
Stock were issued to Bull Run and to J. Mack Robinson, Chairman of the Board of
Bull Run and interim President and Chief Executive Officer of the Company, and
certain of his affiliates. The Company has obtained a written opinion as to the
fairness of the terms of the sale of such Series B Preferred Stock and warrants
from an investment banker. The holders of the Series B Preferred Stock will
receive dividends at an annual rate of $600 per share, except the Company at its
option may pay these dividends in cash or in additional shares. The liquidation
or redemption price of the Series B Preferred Stock is $10,000 per share.
On September 24, 1996, the Company completed a public offering of 3.5
million shares of its Class B Common Stock at an offering price of $20.50 per
share. The proceeds, net of expenses, from this public offering of approximately
$66.1 million were used in the financing of the First American Acquisition.
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 1996, 1995 and 1994, certain directors purchased an aggregate
of 22,500, 23,500, and -0- shares of Class A Common Stock, respectively, under
this plan.
In November 1996, the Company's Board of Directors authorized the purchase
of up to one million shares of the Company's Class B Common Stock to either be
retired or reissued in connection with the Company's benefit plans, including
the Capital Accumulation Plan and the Incentive Plan. In the fourth quarter of
1996, the Company purchased 172,300 shares of its Class B Common Stock under
this authorization. These treasury shares were purchased at prevailing market
prices with an average effective price of $15.90 per share and were funded from
the Company's operating cash flow.
70
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. STOCKHOLDERS' EQUITY (CONTINUED)
On December 1, 1994, the Company repurchased 663,180 shares of its Class A
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 Class A Common Stock on the
NASDAQ Small Cap Issues Market was $10.83 on December 1, 1994. The Class A
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.
G. LONG-TERM INCENTIVE PLAN AND STOCK PURCHASE PLAN
The Company has a long-term incentive plan (the "Incentive Plan") under
which 200,000 shares of the Company's Class A Common Stock and 400,000 shares of
the Company's Class B 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. Shares of Common 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 typically vest after a two year period and expire three
years after full vesting. Options granted through December 31, 1996, have been
granted at a price which approximates fair market value on the date of the
grant.
The Company also has a Stock Purchase Plan which grants outside directors up
to 7,500 shares of the Company's Common Stock. Under this Stock Purchase Plan,
the options granted vest at the beginning of the upcoming calendar year and
expire at the end of January following that calendar year.
Prior to 1996, grants under the Incentive Plan and the Stock Purchase Plan
were made with the Company's Class A Common Stock. In 1996, the Company amended
its Incentive Plan and Stock Purchase Plan for grants to be made with Class B
Common Stock. Therefore, the options granted in 1996, were made with Class B
Common Stock.
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 employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123 requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.43%
and 6.06%; a dividend yield of 0.50% and 0.53%; volatility factors of the
expected market price of the Company's Class A Common Stock of 0.33 and 0.26;
and a weighted average expected life of the options of 2.0 and 2.7 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and which
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value
71
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. LONG-TERM INCENTIVE PLAN AND STOCK PURCHASE PLAN (CONTINUED)
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except per common share data):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Pro forma income before extraordinary charge available to common stockholders................... $ 5,190 $ 792
Primary and fully diluted pro forma earnings per common share:.................................. $ 0.92 $ 0.18
</TABLE>
A summary of the Company's stock option activity for Class A common shares,
and related information for the years ended December 31 follows (in thousands,
except weighted average exercise price data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding-- beginning
of year............................. 263 $ 12.37 199 $ 9.80 89 $ 9.67
Options granted..................... -0- 111 16.14 126 9.87
Options exercised................... (52) 9.93 (29) 10.08 -0- -0-
Options forfeited................... (6) 12.44 (18) 10.45 (16) 9.67
Options expired..................... (7) 10.17 -0- -0- -0- -0-
--- --- ---
Stock options outstanding--end of
year................................ 198 $ 11.54 263 $ 12.37 199 $ 9.80
--- --- ---
--- --- ---
Exercisable at end of year............ 164 $ 13.06 86 $ 9.84 -0- $ -0-
Weighted-average fair value of options
granted during the year............. $ 3.37
</TABLE>
Exercise prices for Class A Common Stock options outstanding as of December
31, 1996 ranged from $9.67 to $13.33 for the Incentive Plan and $19.25 for the
Stock Purchase Plan. The weighted-average remaining contractual life of the
Class A Common Stock options outstanding for the Incentive Plan and Stock
Purchase Plan is 2.3 and 0.1 years, respectively.
During the year ended December 31, 1996, the Company granted options for the
purchase of 68,000 shares of Class B Common Stock at a price of $15.88 per
share, none of which are exercisable at year end. The weighted average fair
value of these options was $3.22 per option. The weighted-average remaining
contractual life of the Class B Common Stock options outstanding for the
Incentive Plan and Stock Purchase Plan is 5.0 and 1.1 years, respectively.
72
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. 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.
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,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal......................................................... $ 1,462 $ (253) $ 1,093
State........................................................... 841 24 160
Deferred.......................................................... (44) 863 523
--------- --------- ---------
$ 2,259 $ 634 $ 1,776
--------- --------- ---------
--------- --------- ---------
</TABLE>
The total provision for income taxes for 1996 included a tax benefit of
$2,157,000 which related to an extraordinary charge on extinguishment of debt.
Significant components of the Company's deferred tax liabilities and assets
are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Net book value of property and equipment................................. $ 1,165 $ 1,069
Goodwill................................................................. 2,370 890
Other.................................................................... 120 120
--------- ---------
Total deferred tax liabilities....................................... 3,655 2,079
Deferred tax assets:
Liability under supplemental retirement plan............................. 1,241 1,127
Allowance for doubtful accounts.......................................... 619 195
Difference in basis of assets held for sale.............................. 941 941
State and local operating loss carryforwards............................. 1,164 123
Other.................................................................... 511 245
--------- ---------
Total deferred tax assets............................................ 4,476 2,631
Valuation allowance for deferred tax assets.............................. (753) (753)
--------- ---------
Net deferred tax assets.............................................. 3,723 1,878
--------- ---------
Deferred tax assets (liabilities) net.................................... $ 68 $ (201)
--------- ---------
--------- ---------
</TABLE>
73
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. INCOME TAXES (CONTINUED)
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,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate applied to income................................. $ 1,625 $ 532 $ 1,544
State and local taxes, net of federal tax benefits............... (7) 91 195
Permanent difference relating to sale of KTVE.................... 602 -0- -0-
Other items, net................................................. 39 11 37
--------- --------- ---------
$ 2,259 $ 634 $ 1,776
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company made income tax payments of approximately $3.6 million, $742,000
and $1.5 million during 1996, 1995 and 1994, respectively. At December 31, 1996,
the Company had current recoverable income taxes of approximately $1.7 million.
I. 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.
The net pension expense includes the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service costs--benefits earned during the year...................... $ 360 $ 221 $ 204
Interest cost on projected benefit obligation....................... 409 384 359
Actual return on plan assets........................................ (574) (655) (91)
Net amortization and deferral....................................... 126 187 (338)
--------- --------- ---------
Net pension expense................................................. $ 321 $ 137 $ 134
--------- --------- ---------
--------- --------- ---------
Assumptions:
Discount rate..................................................... 7.0% 8.0% 7.0%
Expected long-term rate of return on assets....................... 7.0% 8.0% 7.0%
Estimated rate of increase in compensation levels................. 5.0% 6.0% 5.0%
</TABLE>
74
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. RETIREMENT PLANS (CONTINUED)
The following summarizes the plan's funded status and related assumptions
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation is as follows:
Vested................................................................. $ 5,675 $ 5,308
Other.................................................................. 291 135
--------- ---------
$ 5,966 $ 5,443
--------- ---------
--------- ---------
Plan assets at fair value, primarily mutual funds and an unallocated
insurance contract..................................................... $ 6,282 $ 5,680
Projected benefit obligation............................................. (6,483) (5,904)
--------- ---------
Plan assets (less than) projected benefit obligation..................... (201) (224)
Unrecognized net loss.................................................... 72 190
Unrecognized net asset................................................... (300) (355)
--------- ---------
Pension liability included in consolidated balance sheet................. $ (429) $ (389)
--------- ---------
--------- ---------
Assumptions:
Discount rate.......................................................... 7.0% 7.0%
Estimated rate of increase in compensation levels...................... 5.0% 5.0%
</TABLE>
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.
Employee contributions to the Capital Accumulation Plan, not to exceed 6% of
the employees' gross pay, are matched by Company contributions. Since the
Capital Accumulation Plan's inception, the Company's percentage match has been
made by a contribution of the Company's Class A 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 the years ended December 31,
1996 and 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.
On November 14, 1996, the Company amended its Capital Accumulation Plan to
allow an investment option in the Company's Class B Common Stock. The amendment
also allows for the Company's percentage match to be made by a contribution of
the Company's Class B Common Stock, effective in 1997. On December 13, 1996, the
Company reserved 200,000 shares of the Company's Class B Common Stock for
issuance under the Capital Accumulation Plan.
Company matching contributions aggregating $262,426, $298,725 and $32,676
were charged to expense for 1996, 1995 and 1994, respectively, for the issuance
of 13,225, 18,354 and 3,160 shares, respectively of the Company's Class A Common
Stock.
75
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease commitments for equipment, land and
office space. The Company has also entered into commitments for various
television film exhibition rights for which the license periods have not yet
commenced. Rent expense resulting from operating leases for the years ended
December 31, 1996, 1995 and 1994 were $501,000, $267,000 and $139,000,
respectively. Future minimum payments under operating leases with initial or
remaining noncancelable lease terms in excess of one year and obligations under
film exhibition rights for which the license period have not yet commenced are
as follows (in thousands):
<TABLE>
<CAPTION>
LEASE FILM TOTAL
--------- --------- ---------
<S> <C> <C> <C>
1997............................................................. $ 884 $ 1,374 $ 2,258
1998............................................................. 731 1,692 2,423
1999............................................................. 535 1,299 1,834
2000............................................................. 141 548 689
2001............................................................. 92 0 92
Thereafter....................................................... 540 0 540
--------- --------- ---------
$ 2,923 $ 4,913 $ 7,836
--------- --------- ---------
--------- --------- ---------
</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.
K. INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: broadcasting, publishing
and paging. The broadcasting segment operates seven television stations at
December 31, 1996. The publishing segment operates three daily newspapers in
three different markets, and two area weekly advertising only direct mail
publications in southwest Georgia and north Florida. The paging operations are
located in Florida,
76
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
Georgia and Alabama. The following tables present certain financial information
concerning the Company's three operating segments (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES:
Broadcasting............................................... $ 54,981 $ 36,750 $ 22,826
Publishing................................................. 22,845 21,866 13,692
Paging..................................................... 1,479 0 0
--------- --------- ---------
$ 79,305 $ 58,616 $ 36,518
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING PROFIT:
Broadcasting............................................... $ 14,106 $ 7,822 $ 5,241
Publishing................................................. 1,980 (962) 1,036
Paging..................................................... (7) 0 0
---------- --------- ---------
Total operating profit....................................... 16,079 6,860 6,277
Miscellaneous income and expense, net........................ 5,704 144 188
Interest expense............................................. (11,689) (5,439) (1,923)
---------- --------- ---------
Income before income taxes................................... $ 10,094 $ 1,565 $ 4,542
---------- --------- ---------
---------- --------- ---------
</TABLE>
77
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
Operating profit is total operating revenue less operating expenses,
excluding miscellaneous income and expense (net) and interest. Corporate and
administrative expenses are allocated to operating profit based on net segment
revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION EXPENSE:
Broadcasting................................................... $ 5,554 $ 2,723 $ 1,326
Publishing..................................................... 1,730 1,190 690
Paging......................................................... 329 0 0
--------- --------- ---------
7,613 3,913 2,016
Corporate...................................................... 50 46 126
--------- --------- ---------
Total depreciation and amortization expense...................... $ 7,663 $ 3,959 $ 2,142
--------- --------- ---------
--------- --------- ---------
CAPITAL EXPENDITURES:
Broadcasting................................................... $ 2,674 $ 2,285 $ 1,330
Publishing..................................................... 692 973 366
Paging......................................................... 0 0 0
--------- --------- ---------
3,366 3,258 1,696
Corporate...................................................... 30 22 72
--------- --------- ---------
Total capital expenditures....................................... $ 3,396 $ 3,280 $ 1,768
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
IDENTIFIABLE ASSETS:
Broadcasting.............................................. $ 245,614 $ 54,022 $ 53,173
Publishing................................................ 16,301 18,170 11,878
Paging.................................................... 23,764 0 0
---------- --------- ---------
285,679 72,192 65,051
Corporate................................................. 12,985 6,048 3,738
---------- --------- ---------
Total identifiable assets................................... $ 298,664 $ 78,240 $ 68,789
---------- --------- ---------
---------- --------- ---------
</TABLE>
78
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL QUARTERS
------------------------------------------
YEAR ENDED DECEMBER 31, 1996 FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues.................................................... $ 17,027 $ 18,487 $ 16,699 $ 27,092
Operating income...................................................... 2,678 4,633 2,381 6,387
Income before extraordinary charge.................................... 311 1,490 2,947 930
Extraordinary charge.................................................. 0 0 3,159 0
Net income (loss)..................................................... 311 1,490 (212) 930
Net income (loss) available to common stockholders.................... 311 1,490 (239) 580
Primary earnings (loss) per share
Income before extraordinary charge available to common
stockholders...................................................... 0.07 0.32 0.62 0.07
Extraordinary charge................................................ 0.00 0.00 (0.67) 0.00
Net income (loss) available to common stockholders.................. 0.07 0.32 (0.05) 0.07
Fully diluted earnings (loss) per share
Income before extraordinary charge available to common
stockholders...................................................... 0.07 0.31 0.62 0.07
Extraordinary charge................................................ 0.00 0.00 (0.67) 0.00
Net income (loss) available to common stockholders.................. 0.07 0.31 (0.05) 0.07
</TABLE>
<TABLE>
<CAPTION>
FISCAL QUARTERS
------------------------------------------
YEAR ENDED DECEMBER 31, 1995 FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues.................................................... $ 13,150 $ 15,157 $ 13,826 $ 16,483
Operating income...................................................... 1,991 2,666 1,307 895
Net income (loss)..................................................... 404 778 15 (266)
Primary net income (loss) per share................................... 0.09 0.18 0.00 (0.06)
Fully diluted net income (loss) per share............................. 0.09 0.17 0.00 (0.06)
</TABLE>
Because of the method used in calculating per share data, the quarterly per
share data will not necessarily add to the per share data as computed for the
year.
The third quarter of 1996 includes the KTVE Sale and an extraordinary
charge. As a result of the KTVE Sale, the Company recognized a pre-tax gain of
approximately $5.7 million and estimated income taxes of approximately $2.8
million (SEE NOTE B). The Company recorded an extraordinary charge on
extinguishment of debt of $5.3 million and an income tax benefit of $2.2 million
(SEE NOTE D).
On August 17, 1995, the Board of Directors declared a 50% stock dividend on
the Company's Class A Common Stock payable October 2, 1995 to stockholders of
record on September 8, 1995 to effect a three for two stock split. All
applicable per common share data have been adjusted to give effect to the stock
split.
79
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
John H. Phipps, Inc.
We have audited the accompanying statements of operations and cash flows of
the Broadcasting and Paging Operations of John H. Phipps, Inc. (see Note A) for
the nine month period ended September 30, 1996 and the years ended December 31,
1995 and 1994. 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 statements of operations and cash flows for the nine
month period ended September 30, 1996 and the years ended December 31, 1995 and
1994 present fairly, in all material respects, the results of operations and
cash flows of the Broadcasting and Paging Operations of John H. Phipps, Inc. for
the nine month period ended September 30, 1996 and the years ended December 31,
1995 and 1994 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
February 12, 1997
80
<PAGE>
BROADCASTING AND PAGING OPERATIONS
OF
JOHN H. PHIPPS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Broadcast revenues, net........................................... $ 15,738,160 $ 20,768,121 $ 20,209,523
Paging operations................................................. 4,040,113 4,897,522 4,276,640
Production and other revenues..................................... 1,425,066 1,655,940 1,314,779
------------- ------------- -------------
21,203,339 27,321,583 25,800,942
------------- ------------- -------------
Expenses:
Operating, technical and programming.............................. 4,490,553 5,449,435 5,306,801
Selling, general and administrative............................... 7,577,979 7,693,715 7,056,510
Amortization of program broadcast rights.......................... 695,835 844,815 1,021,395
Depreciation and amortization..................................... 2,300,836 3,120,442 2,672,209
Pension credit (NOTE D)........................................... (113,000) (449,000) (409,000)
Management fees (NOTE F).......................................... 7,954,224 3,280,354 2,485,423
------------- ------------- -------------
22,906,427 19,939,761 18,133,338
------------- ------------- -------------
(1,703,088) 7,381,822 7,667,604
Interest............................................................ 278,511 498,714 479,852
Other expense (income), net......................................... (56,632) (12,526) (666,657)
------------- ------------- -------------
Income (loss) before minority interests............................. (1,924,967) 6,895,634 7,854,409
Minority interests.................................................. 151,795 (547,045) (635,302)
------------- ------------- -------------
Net income (loss)................................................... $ (1,773,172) $ 6,348,589 $ 7,219,107
------------- ------------- -------------
------------- ------------- -------------
Supplemental unaudited pro-forma information (NOTE E):
Net income (loss), as above....................................... $ (1,773,172) $ 6,348,589 $ 7,219,107
Pro-forma provision for income tax expense (benefit).............. (673,800) 2,412,500 2,743,300
------------- ------------- -------------
Pro-forma net income (loss)......................................... $ (1,099,372) $ 3,936,089 $ 4,475,807
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
81
<PAGE>
BROADCASTING AND PAGING OPERATIONS
OF
JOHN H. PHIPPS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................................... $(1,773,172) $ 6,348,589 $ 7,219,107
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization...................................... 2,300,836 3,120,442 2,672,209
Loss (gain) on disposition of fixed assets......................... 197,443 (9,023) (665,047)
Amortization of program broadcast rights........................... 695,835 844,815 1,021,395
Payments of program broadcast rights obligations................... (840,859) (931,004) (863,344)
Minority interests................................................. (151,795) 547,045 635,302
Changes in operating assets and liabilities:
Accounts receivable................................................ 185,973 (678,024) (396,373)
Other current assets............................................... (57,236) (18,442) (90,846)
Accounts payable and accrued expenses.............................. (320,314) (101,832) (206,137)
Other current liabilities.......................................... (231,373) (117,697) 277,681
Deferred paging income............................................. 362,696 254,155 204,356
------------- ------------- -------------
Net cash provided by operating activities............................ 368,034 9,259,024 9,808,303
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchases of minority interests...................................... -0- (1,780,794) (818,000)
Purchases of property and equipment.................................. (2,171,271) (3,187,596) (3,353,068)
Proceeds from disposition of property and equipment.................. 1,201,962 1,140,520 1,665,504
------------- ------------- -------------
Net cash used in investing activities................................ (969,309) (3,827,870) (2,505,564)
------------- ------------- -------------
FINANCING ACTIVITIES:
Indebtedness:
Borrowings......................................................... 3,409,147 3,422,586 5,761,977
Repayments......................................................... (4,723,928) (4,677,653) (6,239,305)
Distributions to minority interests.................................. (632,429) (505,532) (539,596)
Other................................................................ (12,109) (126,128) (156,475)
Payments by (to) J.H. Phipps, Inc., net.............................. 2,188,422 (3,019,622) (6,060,036)
------------- ------------- -------------
Net cash provided by (used) in financing activities.................. 229,103 (4,906,349) (7,233,435)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents..................... (372,172) 524,805 69,304
Cash and cash equivalents at beginning of period..................... 620,015 95,210 25,906
------------- ------------- -------------
Cash and cash equivalents at end of period........................... $ 247,843 $ 620,015 $ 95,210
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
82
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
A. BASIS OF PRESENTATION
On September 30, 1996, Gray Communications Systems, Inc. ("Gray") purchased
substantially all of the assets and assumed certain liabilities and commitments
of certain operations owned, or controlled by J.H. Phipps, Inc. ("Phipps"). The
operations include (i) two CBS affiliates WCTV-TV, a VHF television station
located in Tallahassee, Florida, and WKXT-TV, a VHF television station 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").
At September 30, 1996, prior to the purchase by Gray, 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 was owned by
four limited partners. Phipps' ownership of the Knoxville Partnership increased,
from 70.0% during 1994 to the 74.5% ownership interest at September 30, 1996,
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 $1.78 million and $200,000
in 1995 and 1994, 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 were acquired by Gray 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 of the Broadcasting and Paging Operations
were not assumed by Gray.
B. 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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Broadcasting revenues are recognized as the related advertising broadcast
services are rendered. Agency commissions are deducted from gross revenue,
reflecting the net amount due for broadcast services. Revenues from paging and
communications services are recognized over the applicable service period.
Revenues from mobile broadcasting contracts are recognized as services are
provided.
CONCENTRATION OF CREDIT RISK
The Broadcast Operations provide advertising air time to national, regional
and local advertisers within the geographic areas in which the Broadcast
Operations operate. Credit is extended based on an evaluation of the customer's
financial condition, and generally advance payment is not required. The Paging
Operations provide services to individuals and corporate customers in three
southeastern states.
83
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
B. ACCOUNTING POLICIES (CONTINUED)
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.
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.
PROPERTY AND EQUIPMENT
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. The agreement,
which expired during 1995, involved the exchange of amounts based on a fixed
interest rate for amounts based on variable interest rates over the life of the
agreement without an exchange of the notional amount upon which the payments are
based. The differential to be paid or received as interest rates changed was
accrued and recognized as an adjustment of interest expense related to the debt
(the accrual accounting method). Interest expense (income) adjustments resulting
from the interest rate swap were $(2,805) in 1995 and $(986) in 1994.
84
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
B. ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
Phipps accounted for its stock Appreciation Rights Plan (see Note F. 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 E. PRO-FORMA INCOME TAXES).
IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
The Broadcasting and Paging Operations adopted 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. The
adoption of Statement 121 had no impact on Phipps' financial position.
C. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Cash payments of interest were approximately $256,000, $564,000, and
$449,000 in the nine months ended September 30, 1996 and the years ended
December 31, 1995 and 1994, respectively.
D. 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
$(113,000), $(449,000) and $(409,000) for the nine months ended September 30,
1996 and the years ended December 31, 1995 and 1994, respectively.
85
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
D. EMPLOYEE BENEFIT PLANS (CONTINUED)
The net pension credit included in the accompanying financial statements is
calculated as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
NINE MONTHS 31,
ENDED SEPTEMBER 30, --------------------
1996 1995 1994
--------------------- --------- ---------
<S> <C> <C> <C>
Service costs-benefits earned during the period........ $ 35 $ 144 $ 207
Interest cost on projected benefit obligation.......... 76 303 306
Actual return on plan assets........................... (172) (687) (713)
Net amortization and deferral.......................... (52) (209) (209)
----- --------- ---------
Net pension credit..................................... $ (113) $ (449) $ (409)
----- --------- ---------
----- --------- ---------
</TABLE>
The assumptions used to develop the plan's funded status and expenses were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS
ENDED SEPTEMBER 30, ------------------------
1996 1995 1994
----------------------- ----------- -----------
<S> <C> <C> <C>
Assumptions:
Discount rate....................................... 7.5% 7.5% 8.5%
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>
Management of J. H. Phipps, Inc. elected to terminate the defined benefit
plan effective March 31, 1996.
401(K) PLAN
Phipps also sponsors two 401(k) plans which provide for discretionary
employer contributions equal to 25% of the first 4% of an employee's
contribution. Contributions by Phipps to the plans are not material.
MANAGEMENT INCENTIVE BONUS PLAN
Phipps maintains an incentive bonus plan in which managers participate in
the performance of the division of Phipps which they manage. Eligible employees
are selected by the Board of Directors, and the bonus formula is established and
reviewed annually by the Board of Directors and key members of management.
Bonuses are calculated in the period following the period 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 $0,
$233,000 and $170,000 in the nine months ended September 30, 1996 and the years
ended December 31, 1995 and 1994, respectively.
86
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
D. EMPLOYEE BENEFIT PLANS (CONTINUED)
SEPARATION BONUS
Phipps paid substantially all of its employees a separation bonus prior to
the sale of the Broadcasting and Paging Operations. Expenses recognized from
these separation bonuses were approximately $1,622,000 in the nine months ended
September 30, 1996.
E. PRO-FORMA INCOME TAXES
Pro-forma income tax (benefit) 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
NINE MONTHS 31,
ENDED SEPTEMBER 30, --------------------
1996 1995 1994
--------------------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax rate.......................... $ (603) $ 2,159 $ 2,454
Increase (decrease) resulting from:
State income taxes.................................. (71) 253 289
----- --------- ---------
$ (674) $ 2,412 $ 2,743
----- --------- ---------
----- --------- ---------
</TABLE>
F. 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 $110,000, $64,500 and $44,000 in the nine months ended
September 30, 1996 and the year ended December 31, 1995 and 1994, respectively.
Pension expense (credit) is allocated based on an actuarial calculation (see
Note D. 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 $7,954,224, $3,280,354, and
$2,485,423 for these services during the nine months ended September 30, 1996
and the years ended December 31, 1995 and 1994, respectively. Bonus expense for
two executives of John H. Phipps Inc. was included in the corporate allocation
for the period ended September 30, 1996. 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 the
nine months ended September 30, 1996 and the years ended December 31, 1995 and
1994, was approximately $0, $2,861,000 and $2,458,000, respectively.
87
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
G. 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 or 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 is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
NINE MONTHS 31,
ENDED SEPTEMBER 30, --------------------
1996 1995 1994
------------------- --------- ---------
<S> <C> <C> <C>
Balance of the beginning of period................. $ 18,794 $ 15,465 $ 14,306
Payments to Phipps............................... (5,745) (7,696) (8,181)
Phipps' purchase of minority interests........... 0 1,781 0
Phipps allocations............................... 7,933 2,895 2,121
Net earnings (loss).............................. (1,773) 6,349 7,219
------- --------- ---------
Balance at the end of period....................... $ 19,209 $ 18,794 $ 15,465
------- --------- ---------
------- --------- ---------
</TABLE>
H. LITIGATION
At September 30, 1996, 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 on the accompanying financial statements.
I. COMMITMENTS
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 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>
PHIPPS OTHER LESSORS TOTAL
----------- --------------- ---------
<S> <C> <C> <C>
Nine months ended September 30, 1996.......................... $ 90 $ 418 $ 508
Year Ended December 31,
1995........................................................ 83 385 468
1994........................................................ 64 316 380
</TABLE>
88
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
J. INFORMATION ON BUSINESS SEGMENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
NINE MONTHS 31,
ENDED SEPTEMBER 30, --------------------
1996 1995 1994
------------------- --------- ---------
<S> <C> <C> <C>
REVENUES
Broadcasting Operations............................ $ 17,163 $ 22,424 $ 21,524
Paging Operations.................................. 4,040 4,898 4,277
------- --------- ---------
Total revenues..................................... $ 21,203 $ 27,322 $ 25,801
------- --------- ---------
------- --------- ---------
OPERATING (LOSS) PROFIT:
Broadcasting Operations............................ $ (229) $ 7,040 $ 7,287
Paging Operations.................................. (1,474) 342 381
------- --------- ---------
Total operating (loss) profit...................... $ (1,703) $ 7,382 $ 7,668
------- --------- ---------
------- --------- ---------
DEPRECIATION AND AMORTIZATION EXPENSE:
Broadcasting Operations............................ $ 1,791 $ 2,302 $ 2,015
Paging Operations.................................. 510 818 657
------- --------- ---------
Total depreciation and amortization expense........ $ 2,301 $ 3,120 $ 2,672
------- --------- ---------
------- --------- ---------
CAPITAL EXPENDITURES:
Broadcasting Operations............................ $ 118 $ 1,216 $ 1,515
Paging Operations.................................. 2,053 1,972 1,838
------- --------- ---------
Total capital expenditures......................... $ 2,171 $ 3,188 $ 3,353
------- --------- ---------
------- --------- ---------
</TABLE>
Operating profit is total operating revenue less expenses and before
miscellaneous income and expense (net), interest expense and minority interests.
89
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning executive officers, in response to this item, is
incorporated from PART I herein. Information concerning directors of the
registrant, in response to this item, is hereby incorporated by reference to the
information, relating thereto in the Company's proxy statement for its 1997
Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation, in response to this item, is
hereby incorporated by reference to the information, relating thereto in the
Company's proxy statement for its 1997 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management, in response to this item, is hereby incorporated by reference to the
the information, relating thereto in the Company's proxy statement for its 1997
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning Certain Relationships and Related Transactions, in
response to this item, is hereby incorporated by reference to the information,
relating thereto in the Company's proxy statement for its 1997 Annual Meeting of
Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) AND (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
(1) FINANCIAL STATEMENTS
The following consolidated financial statements of Gray Communications
Systems, Inc. and the financial statements of the Broadcasting and Paging
Operations of John H. Phipps, Inc. (a "predecessor company") are included in
item 8:
Audited Consolidated Financial Statements of Gray Communications Systems,
Inc. Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
90
<PAGE>
Audited Consolidated Financial Statements of the Broadcasting and Paging
Operations of John H. Phipps, Inc.
Report of Independent Auditors
Consolidated Statements of Operations for the nine months ended September
30, 1996 and the years ended December 31, 1995 and 1994
Consolidated Statements of Cash Flows for the nine months ended September
30, 1996 and the years ended December 31, 1995 and 1994
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of Gray Communications Systems,
Inc. and subsidiaries is included in Item 14(d):
Schedule II--Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
The following financial statement schedule of the Broadcasting and Paging
Operations of John H. Phipps, Inc. is included in Item 14(d):
Schedule II--Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(b) REPORTS ON FORM 8-K.
A report on Form 8-K was filed on October 15, 1996, reporting the purchase
of certain assets from First American Media, Inc. used in the operations of
WCTV-TV in Tallahassee, Florida/Thomasville, Georgia, WKXT-TV in Knoxville,
Tennessee and a satellite production services business and a communications and
paging business.
(c) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ---------- -------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
3.1 Restated Articles of Incorporation of Gray Communications Systems, Inc............................
3.2 By-Laws of Gray Communications Systems, Inc., as amended..........................................
4.1 Indenture for the Company's 10 5/8% Senior Subordinated Notes due 2006 (incorporated by reference
to Exhibit 4.1 to the Company's registration statement on Form S-1 (Registration No. 333-4338)
(Exhibit 4.1 to the "Note S-1").................................................................
4.2 Loan Agreement dated September 23, 1996 by and among Gray Communications Systems, Inc., as the
borrower, KeyBank National Association as agent, NationsBank, N.A. (South) as Co-Agent and CIBC,
Inc., CoreStates Bank, N.A., and the Bank of New York (incorporated by reference to Exhibit 4(i)
to the Company's Form 8-K, filed October 15, 1996)..............................................
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ---------- -------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
4.3 Borrower Security Agreement dated September 30, 1996 by and between Gray Communications Systems,
Inc. and KeyBank National Association (incorporated by reference to Exhibit 4(ii) to the
Company's Form 8-K, filed October 15, 1996......................................................
4.4 Subsidiary Security Agreement dated September 30, 1996 between Gray Communications Systems, Inc.,
its subsidiaries and KeyBank National Association (incorporated by reference to Exhibit 4(iii)
to the Company's Form 8-K, filed October 15, 1996)..............................................
4.5 Borrower Pledge Agreement dated September 30, 1996 between Gray Communications Systems, Inc. and
KeyBank National Association (incorporated by reference to Exhibit 4(iv) to the Company's Form
8-K, filed October 15, 1996)....................................................................
4.6 Subsidiary Pledge Agreement dated September 30, 1996 by and among WRDW-TV, Inc., WJHG-TV, Inc.,
WALB-TV, Inc., Gray Kentucky Television, Inc. and KeyBank National Association (incorporated by
reference to Exhibit 4(v) to the Company's Form 8-K, filed October 15, 1996)....................
4.7 Subsidiary Guarantee dated September 30, 1996 between Gray Communications Systems, Inc., its
subsidiaries and KeyBank National Association (incorporated by reference to Exhibit 4(vi) to the
Company's Form 8-K, filed October 15, 1996).....................................................
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 1994 Form 10-K)..............................
10.9 Asset Purchase Agreement, dated April 11, 1995, between the Company, Television Station Partners,
L.P. and WRDW Associates (incorporated by reference to Exhibit 10(a) to the Company's 10-Q for
the quarter ended June 30, 1995)................................................................
10.10 Capital Accumulation Plan, effective October 1, 1994 (incorporated by reference to Exhibit 10(i)
to the 1994 Form 10-K)..........................................................................
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ---------- -------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
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 (incorporated
by reference to the Note S-1)...................................................................
10.14 Form of amendment to employment agreement between the Company and Ralph W. Gabbard, dated January
1, 1996 (incorporated by reference to Exhibit 10(m) to the 1995 Form 10-K)......................
10.15 Employment Agreement, dated February 12, 1996 between the Company and Robert A. Beizer
(incorporated by reference to the Note S-1).....................................................
10.16 Separation Agreement between the Company and John T. Williams (incorporated by reference to the
Note S-1).......................................................................................
10.17 Form of Preferred Stock Exchange and Purchase Agreement between the Company and Bull Run
Corporation (incorporated by reference to the Note S-1).........................................
10.18 Form of Warrant to purchase 500,000 shares of Class A Common Stock (incorporated by reference to
the Note S-1)...................................................................................
10.19 Form of amendment to employment agreement between the Company and Robert A. Beizer, dated December
12, 1996........................................................................................
10.20 Amendment to the Company's Long Term Incentive Plan...............................................
10.21 First Amendment to the Company's Capital Accumulation Plan........................................
11 Statement re: Computation of Earnings Per Share...................................................
21 List of Subsidiaries..............................................................................
23.1 Consent of Ernst & Young LLP for the financial statements for Gray Communications Systems, Inc....
23.2 Consent of Ernst & Young LLP for the financial statements for the Broadcasting and Paging
Operations of John H. Phipps, Inc...............................................................
27 Financial data schedule for Gray Communications Systems, Inc......................................
</TABLE>
(d) FINANCIAL STATEMENT SCHEDULES--The response to this section is submitted
as a part of (a)(1) and (2).
93
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
GRAY COMMUNICATIONS SYSTEMS, INC.
Date: By: /S/ J. MACK ROBINSON
------------------------------------------
J. MACK ROBINSON, INTERIM PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: By: /S/ WILLIAM A. FIELDER, III
------------------------------------------
WILLIAM A. FIELDER, III,
VICE PRESIDENT & CFO
(CHIEF FINANCIAL OFFICER)
Date: By: /S/ SABRA H. COWART
------------------------------------------
SABRA H. COWART,
(CHIEF ACCOUNTING OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Date: By: /S/ WILLIAM E. MAYHER, III
------------------------------------------
WILLIAM E. MAYHER, III,
CHAIRMAN OF THE BOARD
Date: By: /S/ J. MACK ROBINSON
------------------------------------------
J. MACK ROBINSON,
INTERIM PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Date: By: /S/ RICHARD L. BOGER
------------------------------------------
RICHARD L. BOGER, DIRECTOR
Date: By: /S/ HILTON H. HOWELL, JR.
------------------------------------------
HILTON H. HOWELL, JR., DIRECTOR
Date: By: /S/ HOWELL W. NEWTON
------------------------------------------
HOWELL W. NEWTON, DIRECTOR
</TABLE>
94
<PAGE>
<TABLE>
<S> <C> <C>
Date: By: /S/ HUGH NORTON
------------------------------------------
HUGH NORTON, DIRECTOR
Date: By: /S/ ROBERT S. PRATHER, JR.
------------------------------------------
ROBERT S. PRATHER, JR., DIRECTOR
Date: March 28, 1997
</TABLE>
95
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Gray Communications
Systems, Inc. as of December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, and have issued our report thereon dated
January 27, 1997 (except for Pending Acquisitions of Note C, as to which the
date is February 13, 1997). Our audits also included the financial statement
schedule listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express and opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Atlanta, Georgia
January 27, 1997
95
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- -------------------------------------- ------------- ----------------------------- ------------- -------------
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD
- -------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts....... $ 450,000 $ 894,000 $ 583,000(2) $ 477,000 $ 1,450,000
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts....... $ 694,000 $ 384,000 $ 33,000(2) $ 661,000 $ 450,000
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts....... $ 352,000 $ 211,000 $ 360,000(2) $ 229,000 $ 694,000
</TABLE>
- ------------------------
(1) Deductions are write-offs of amounts not considered collectible.
(2) Represents amounts recorded in certain allocations of purchase prices for
the Company's acquisitions.
96
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of the Broadcasting
and Paging Operations of John H. Phipps, Inc. for the nine month period ended
September 30, 1996, and the years ended December 31, 1995 and 1994, and have
issued our report thereon dated February 12, 1997. Our audits also included the
financial statement schedule listed in Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to express and
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Atlanta, Georgia
February 12, 1997
97
<PAGE>
BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------- ------------- ----------------------------- ------------- -------------
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD
- --------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NINE MONTH PERIOD ENDED SEPTEMBER 30,
1996
Allowance for doubtful accounts........ $ 49,000 $ 2,500 -0- $ 2,500 $ 49,000
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts........ $ 49,000 $ 38,000 -0- $ 38,000 $ 49,000
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts........ $ 49,000 $ 53,000 -0- $ 53,000 $ 49,000
</TABLE>
- ------------------------
(1) Deductions are write-offs of amounts not considered collectible.
98
<PAGE>
SECRETARY OF STATE
BUSINESS INFORMATION AND SERVICES
SUITE 315, WEST TOWER DOCKET NUMBER : 970210232
2 MARTIN LUTHER KING JR. DR. CONTROL NUMBER: 0702307
ATLANTA, GEORGIA 30334-1530 EFFECTIVE DATE: 01/08/1997
REFERENCE : 0086
PRINT DATE : 01/21/1997
FORM NUMBER : 115
HEYMAN & SIZEMORE
NEAL H. RAY
229 PEACHTREE ST/2300 INTERNATIONAL TWR
ATLANTA GA 30303-1608
CERTIFICATE OF RESTATED ARTICLES OF INCORPORATION
I, the Secretary of the State and the Corporation Commissioner of the State of
Georgia, do hereby certify under the seal of my office that the articles of
incorporation of
GRAY COMMUNICATIONS SYSTEMS, INC.
A DOMESTIC PROFIT CORPORATION
have been duly restated and amended by the filing of articles of restatement
in the office of the Secretary of State and by the paying of fees as provided
by Title 14 of the Official Code of Georgia Annotated. Attached hereto is a
true and correct copy of said articles of restatement.
WITNESS my hand and official seal in the City of Atlanta and the State of
Georgia on the date set forth above.
/s/ Lewis A. Massey
------------------------
LEWIS A. MASSEY
SECRETARY OF STATE
[SEAL]
<PAGE>
ARTICLES OF RESTATEMENT
OF
GRAY COMMUNICATIONS SYSTEMS, INC.
The provisions hereof constitute the Articles of Restatement of Gray
Communications Systems, Inc. (the "Corporation"). The Corporation was
incorporated on January 25, 1897 and its charter number is 0702307. The
Restated Articles of Incorporation of the Corporation shall be as follows:
1.
The name of the Corporation is Gray Communications Systems, Inc.
2.
The object of said Corporation shall be pecuniary gain and profit.
3.
(a) The general nature of the business to be engaged in by the
Corporation shall be to publish a daily and weekly newspaper, to do a general
publishing and printing business, to buy and sell paper and all types of
stationery, and to acquire, own, lease, rent and operate television and radio
broadcasting stations and community antenna cable television systems and
other forms of communication services, utilizing any and all types of
transmission facilities. The Corporation shall further have the right to
apply for, receive and hold all licenses that may be necessary or required
from any licensing agency, federal, state, local or foreign; to do any and
all things incident to the operation of such facilities, including, but not
limited to, contracting for transmission of programs and entering into such
other contracts as the Board of Directors of the Corporation may from time to
time deem proper and expedient. Further, the Corporation shall have the right
of buying, taking, exchanging, leasing and otherwise acquiring real and
personal
<PAGE>
property, and any interest or right therein, including the right to hold,
own, operate, control, maintain, manage, develop, construct, alter and
promote both real property, personal property, securities and evidences of
indebtedness, including the right to sell, exchange, or hypothecate all forms
of real and personal property, chattels, rights, choses in action, mortgages,
bonds, and securities of all kinds and wherever located.
(b) Without in any way limiting the foregoing, petitioner desires that
said Corporation be vested with all the rights, powers, and privileges now or
hereafter given to do any and all things which may be needful or proper in
the operation of the above described business, and that said Corporation have
all the powers enumerated in Sections 9 and 10 of the Act of the General
Assembly of Georgia approved January 28, 1938 (Georgia Laws 1937-38,
Ex. Sess., page 214), and codified as Sections 22-1827 and 22-1828 of the Code
of Georgia Annotated, and such powers as are now, or may be hereafter, given by
law.
(c) Without in any way limiting the above enumerating powers, the
Corporation shall have the power to guarantee, become surety upon, or endorse
the contracts or obligations of other corporations, firms, or individuals;
including the right to become a purely accommodation guaranty, endorser or
surety upon the contracts or obligations of any other corporation, firm or
individual, and the further power to buy, sell, trade or purchase the
contracts, negotiable instruments or obligations of any other corporation,
firm or individual, or any part thereof; all of the foregoing powers to be
granted this Corporation regardless of the fact that this Corporation may or
may not have the direct interest in the subject matter of such contracts,
negotiable instruments or obligations.
2
<PAGE>
4.
The total number of shares of all classes which the Corporation
shall have authority to issue is 50,000,000 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:
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more series. The description of shares of each
series of Preferred Stock, including any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption shall be as set forth
in resolutions adopted by the Board of Directors, and articles of amendment
shall be filed with the Georgia Secretary of State as required by law to be
filed with respect to issuance of such Preferred Stock, prior to the issuance
of any shares of such series.
The Board of Directors is expressly authorized, at any time, by
adopting resolutions providing for the issuance of, or providing for a change
in the number of shares of any particular series of Preferred Stock and, if
and to the extent from time to time as required by law, by filing articles
of amendment which are effective without Shareholder action to increase or
decrease the number of shares included in each series of Preferred Stock, but
not below the number of shares then issued, and to set or change in any one
or more respects the designations, preferences,
3
<PAGE>
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms and conditions of redemption relating to
the shares of each such series. Notwithstanding the foregoing, the Board of
Directors shall not be authorized to change the right of holders of the Class
A Common Stock of the Corporation to vote one vote per share on all matters
submitted for shareholder action. The authority of the Board of Directors
with respect to each series of Preferred Stock shall include, but not be
limited to, setting or changing the following:
(a) the annual dividend rate, if any, on shares of such series, the
times of payment and the date from which dividends shall be accumulated, if
dividends are to be cumulative;
(b) whether the shares of such series shall be redeemable and, if
so, the redemption price and the terms and conditions of such redemption;
(c) the obligation, if any, of the Corporation to redeem shares of
such series pursuant to a sinking fund;
(d) whether the shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes and, if so,
the terms and conditions of such conversion or exchange, including the price
or prices of the rate or rates of conversion or exchange and the terms of
adjustment, if any;
(e) whether the shares of such series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the extent of such
voting rights;
(f) the rights of the shares of such series in the event of
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation; and
(g) any other relative rights, powers, preferences, qualifications,
limitations or restrictions thereof relating to such series.
4
<PAGE>
The shares of Preferred Stock of any one series shall be identical
with each other in all respects except as to the dates from and after which
dividends thereon shall cumulate, if cumulative.
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 form 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
5
<PAGE>
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 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
6
<PAGE>
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 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
7
<PAGE>
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 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
8
<PAGE>
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 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.
9
<PAGE>
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 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
10
<PAGE>
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 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
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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 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
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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 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 available,
shall
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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
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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
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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
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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 any
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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 good faith by the Board of
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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 or 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 shall
thereupon be entitled to receive payment of the Redemption Price. If fewer than
all the
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<PAGE>
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 Dividend Stock shall be in arrears in an
amount equal to at least six quarterly dividends, (whether
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<PAGE>
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 entitled to vote in
such election shall be present or represented by proxy, then the authorized
number of directors of the Corporation shall be
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<PAGE>
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
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
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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.
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).
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(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 such
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<PAGE>
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
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aggregate voting shares for any purpose under these Articles of Incorporation
or the Georgia Business Corporation Code.
(6) All calculations with respect to percentage ownership of issued and
outstanding shares of either class of Common Stock will be based upon the
numbers of issued and outstanding shares reported by the Corporation on the
last filed of (i) the Corporation's most recent Annual Report on Form 10-K,
(ii) its most recent definitive proxy statement, (iii) its most recent
Quarterly Report on Form 10-Q , or (iv) if any, its most recent Current
Report on Form 8-K.
(7) For purposes of this subsection (c) of the section entitled "Common
Stock" of this Article 4, the term "person" means a natural person, company,
government, or political subdivision, agency or instrumentality of a
government, or other entity. The terms "beneficial ownership" and "group"
have the same meanings as used in Regulation 13D promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), subject to
the following qualifications: (i) relationships by blood or marriage between
or among any persons will not constitute any of such persons a member of a
group with any other such persons, absent affirmative attributes of concerted
action; (ii) any person acting in his official capacity as a director or
officer of the Corporation shall not be deemed to beneficially own shares of
Common Stock where such beneficial ownership 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
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<PAGE>
will not be deemed to be an acquisition by the group (or any member thereof)
of beneficial ownership of any shares of Class A Common Stock then owned by a
group member and acquired by such member from the Corporation, by operation of
law, by will or the laws of descent or distribution, by charitable
contribution or gift, or by foreclosure of a bona fide loan. Furthermore,
for the purposes of calculating the number of shares of Class B Common Stock
beneficially owned by such shareholder or group: (a) shares of Class B Common
Stock acquired by gift shall be deemed to be beneficially owned by such
shareholder or member of such group only if such gift is made in good faith
and not for the purposes of circumventing the Class B 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
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<PAGE>
or securities exchange constituting the principal trading market for either
class of Common Stock) during the 30 calendar days preceding the date such
person or group became a Significant Shareholder with the value of any
non-cash consideration in either case being determined by the Board of
Directors acting in good faith.
(d) PREEMPTIVE RIGHTS. The holders of the Class A Common Stock and Class
B Common Stock do not have preemptive rights enabling them to subscribe for
or receive shares of any class of stock of the Corporation or any other
securities convertible into shares of any class of stock of the Corporation.
(e) MERGER AND CONSOLIDATION. In the event of a merger or consolidation
of the Corporation with or into another entity (whether or not the
Corporation is the surviving entity), or a statutory share exchange
involving the Common Stock, the holders of Class B Common Stock shall be
entitled to receive the same amount and form of consideration per share as
the per share consideration, if any, received by 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 of any part of any
class of stock 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,
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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).
5.
The location of the principal office of the Corporation shall be in
Dougherty County, Georgia, but the Corporation shall have the privilege of
establishing branch offices and places of business both within and without
the State of Georgia.
6.
The bylaws of the Corporation shall be adopted by the stockholders and
such bylaws shall provide for the officers of the Corporation, the manner of
their selection and such other rules appropriate to bylaws which have as
their purpose the control and management of the Corporation, including
provisions whereby the bylaws may be amended.
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7.
No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for breach of duty of
care or other duty as a director; provided, however, that to the extent
required by applicable law, this Paragraph 7 shall not eliminate or limit the
liability of a director (i) for any appropriation, in violation of his
duties, of any business opportunity of the Corporation; (ii) for acts or
omissions which involve intentional misconduct or a knowing violation of law;
(iii) for the types of liability set forth in Section 14-2-832 of the Georgia
Business Corporation Code; or (iv) for any transaction from which the
director derived an improper personal benefit. If applicable law is amended
to authorize corporate action further eliminating or limiting the liability
of directors, then the liability of each director of the Corporation shall be
eliminated or limited to the fullest extent permitted by applicable law, as
amended. Neither the amendment nor repeal of this Paragraph 7 nor the
adoption of any provision of these Articles of Incorporation inconsistent
with the Paragraph 7 shall eliminate or reduce the effect of this Paragraph 9
in respect of any acts or omissions occurring prior to such amendment, repeal
or adoption of an inconsistent provision.
8.
The Corporation may acquire its own shares and any such shares that are
reacquired shall become treasury shares.
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IN WITNESS WHEREOF, Gray Communications Systems, Inc. has caused these
Articles of Restatement to be executed by its duly authorized officer this
2nd day of January, 1997.
GRAY COMMUNICATIONS SYSTEMS, INC.
By: /s/ J. Mack Robinson
--------------------------------
J. Mack Robinson, President
ATTEST:
By: /s/ Robert A. Beizer
---------------------------
Robert A. Beizer, Secretary
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GRAY COMMUNICATIONS SYSTEMS, INC.
BYLAWS
ARTICLE I
OFFICES
The principal office of the corporation in the State of Georgia shall be located
in the City of Albany, County of Dougherty. The corporation may have such other
offices, either within or without the State of Georgia, as the Board of
Directors may designate or as the business of the corporation may require from
time to time.
ARTICLE II
STOCKHOLDERS
Section 1. ANNUAL MEETING. Commencing in 1973, the annual meeting of
stockholders shall be held on the third Tuesday in November of each year at such
hour as the Board of Directors may determine, for the purpose of electing
directors and for the transaction of such other business as may come before the
meeting, provided that the Board of Directors may designate some other date in
any particular year for the annual meeting. If the day fixed for the annual
meeting shall be a legal holiday in the State of Georgia, such meeting shall be
held on the next succeeding business day. If the election of directors shall
not be held on the day designated for any annual meeting of stockholders, or at
any adjournment thereof, the Board of Directors shall cause the election to be
held at a special meeting of the stockholders as soon thereafter as conveniently
may be.
Section 2. SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute, may be called by
the Chairman of the Board, or by the President, or by the Board of Directors,
and shall be called by the President at the request of the holders of not less
than one-third of all outstanding shares of the corporation entitled to vote at
a meeting, such request shall state the purpose of purposes of the proposed
meeting.
Section 3. PLACE OF MEETING. The Board of Directors may designate any place
within the State of Georgia as the place of meeting for any annual meeting or
for any special meeting called by the Board of Directors. If no designation is
made, or if a special meeting be otherwise called, the place of meeting shall be
the principal office of the corporation in the State of Georgia.
Section 4. NOTICE OF MEETING. Written or printed notice stating the place, day
and hour of meeting, and in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be delivered not less than ten nor more
than sixty days before the
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date of the meeting, either personally or by mail, by or at the direction of the
President, or the Secretary, or the officer or persons calling the meeting, to
each stockholder of record entitled to vote at such meeting. If mailed, the
notice shall be deemed to be delivered when deposited in the United States mail,
addressed to the stockholder at his address as it appears on the stock transfer
books of the corporation, with postage thereon prepaid. Any stockholder may
waive notice of any meeting, whether before or after said meeting.
Section 5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. For the purpose
of determining stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or stockholders entitled to receive
payment of any dividend, or in order to make a determination of stockholders for
any other proper purpose, the Board of Directors of the corporation may provide
that the stock transfer books shall be closed for a stated period not to exceed
in any case, fifty days; provided notice of the closing of the stock transfer
books is published prior to the commencement of the stated period in the manner,
form and within such time limitations as now or hereafter may be required by
law. If the stock transfer books shall be closed for the purpose of determining
stockholders entitled to notice of or to vote at a meeting of stockholders, such
books shall be closed for at least ten days immediately preceding such meeting.
In lieu of closing the stock transfer books, the Board of Directors may fix in
advance a date as the record date for any such determination of stockholders,
such date in any case to be not more than fifty days, and, in case of a meeting
of stockholders, not less than ten days prior to the date on which the
particular action, requiring such determination of stockholders, is to be taken;
provided notice is published prior to such date in the manner, form and within
such time limitations as now or hereafter may be required by law. If the stock
transfer books are not closed no record date is fixed for the determination of
stockholders entitled to notice of or to vote at a meeting of stockholders, or
stockholders entitled to receive payment of a dividend, the date on which notice
of the meeting is mailed or the date on which the resolution of the Board of
Directors declaring such dividend is adopted, as the case may be, shall be the
record date for such determination of stockholders. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof, unless the Board of Directors, as provided in this section, fixes a new
stated period for closing of the stock transfer books or fixes a new record date
for the adjourned meeting.
Section 6. VOTING LISTS. The officer or agent having charge of the stock
transfer books for shares of the corporation shall make, at least ten days
before each meeting of stockholders, a complete list of the stockholders
entitled to vote at such meeting, or any adjournment thereof, arranged in
alphabetical order, with the address of, and the number of shares held by each,
which list, for a period of ten days prior to such meeting, shall be kept on
file at the principal office of the corporation and shall be subject to
inspection of any stockholder at any time during usual business hours. Such
list shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any stockholder during the whole time
of the meeting. The original stock transfer
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books shall be prima facie evidence as to who are stockholders entitled to
examine such list or transfer books or to vote at any meeting of stockholders.
Section 7. QUORUM. A majority of the shares outstanding of the corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. If less than a majority of the outstanding shares
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The stockholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
Section 8. PROXIES. At all meetings of stockholders, a stockholder may vote by
proxy executed in writing by the stockholder or by his duly authorized attorney
in fact. Such proxy shall be filed with the Secretary of the corporation before
or at the time of the meeting. No proxy shall be valid after eleven months from
the date of its execution, unless otherwise provided in the proxy.
Section 9. VOTING OF SHARES. All elections by stockholders shall be by ballot
unless waived by the unanimous consent of those stockholders present in person
or by proxy in the meeting. The vote on any questions, upon demand of a
stockholder present in person or by proxy, shall be by a stock vote and by
ballot. The stockholders shall have power by a majority vote at any meeting to
remove any director or officer from office.
Section 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the name
of another corporation may be voted by such officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the Board of Directors of such corporation may determine.
Shares held by an administrator, executor, guardian, or conservator may be voted
by him, either in person or by proxy, without a transfer of such shares into his
name. Shares standing in the name of a trustee may be voted by him, either in
person or by proxy, but no trustee shall be entitled to vote shares held by him
without a transfer of such shares into his name.
Shares standing in the name of receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without the transfer thereof into his name if authority so to do be contained in
an appropriate order of the court by which such receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such shares
until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
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Shares of its own stock belonging to the corporation or held by it in a
fiduciary capacity shall not be voted, directly or indirectly, at any meeting,
and shall not be counted in determining the total number of outstanding shares
at any given time.
Section 11. INSPECTORS OF ELECTION. At each meeting of the stockholders, the
polls shall be opened and closed, the proxies and ballots shall be received and
be taken in charge, and all questions touching the qualification of voters and
the validity of proxies and the acceptance or rejection of votes, shall be
decided by three inspectors. At the first meeting of the Board of Directors
held immediately after the annual meeting of stockholders, the Board of
Directors shall appoint three persons as Inspectors of Election, to serve until
the close of the next annual meeting and until their successors are chosen. In
case of a failure to elect inspectors, or in case an inspector shall fail to
attend or refuse or be unable to serve, the Board of Directors may choose an
inspector or inspectors to act at such meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the corporation shall
be managed by its Board of Directors.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. The number of directors of the
corporation shall be not less than three nor more than fifteen. Each director
shall hold office until the next annual meeting of stockholders and until his
successor shall have been elected and qualified. A majority of the directors
shall be bona fide residents of the State of Georgia.
Section 3. REGULAR MEETINGS. A regular meeting of the Board of Directors shall
be held without other notice than this bylaw immediately after, and at the same
place as, the annual meeting of stockholders. The Board of Directors may
provide, by resolution, the time and place either within or without the State of
Georgia, for the holding of additional regular meetings without other notice
than such resolution.
Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by or at the request of the Chairman of the Board, the President, or any
three directors. The person or persons authorized to call special meetings of
the Board of Directors may fix any place within the State of Georgia as the
place for holding any special meeting of the Board of Directors called by them.
Section 5. NOTICE. Notice of any special meeting shall be given at least five
days previously thereto by written notice delivered personally or mailed to each
director at his business address, or by telegram. If mailed, such notice shall
be deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice be given by telegram, such notice shall
be deemed to be delivered when the telegram is delivered to the telegraph
company. Any director may waive notice of any
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meeting. The attendance of a director at a meeting shall constitute a waiver of
notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
need be specified in the notice or waiver of notice of such meeting.
Section 6. QUORUM. A majority of the Board of Directors for the time being in
office shall constitute a quorum for the transaction of business at any meeting
of the Board of Directors, but if less than such majority is present at a
meeting, a majority of the directors present may adjourn the meeting from time
to time without further notice.
Section 7. MANNER OF ACTING. The act of the majority of the directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors.
Section 8. VACANCIES. Any vacancy occurring in the Board of Directors may be
filled by the affirmative vote of a majority of the remaining directors though
less than a quorum of the Board of Directors. A director elected to fill a
vacancy shall be elected for the unexpired term of his predecessor in office.
Any directorship to be filled by reason of an increase in the number of
directors shall be filled by election at an annual meeting or at a special
meeting of the stockholders called for that purpose.
Section 9. COMPENSATION OF DIRECTORS. By resolution of the Board of Directors,
the directors may be paid their expenses, if any, of attendance at each meeting
of the Board of Directors, and may be paid a fixed sum for attendance at each
meeting of the Board of Directors. No such payment shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
Section 10. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent shall be entered in the minutes of the meeting or unless he shall
file his written dissent to such action with the person acting as the secretary
of the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
ARTICLE IV
COMMITTEES
Section 1. EXECUTIVE COMMITTEE. At their first meeting after the annual
meeting of stockholders, the Board of Directors shall elect an Executive
Committee consisting of not less than three nor more than five members of the
Board, and shall designate its chairman. The Chairman of the Board of Directors
and the President shall be two of the members elected to the committee. During
the intervals between the meetings of the
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Board of Directors, the executive committee shall possess and may exercise all
the powers of the Board of Directors in the management and direction of the
affairs of the company in all cases in which specific directions shall not have
been given by the Board of Directors. All actions by the executive committee
shall be reported to the Board of Directors at its meeting next succeeding such
action, and shall be subject to revision and alteration by the Board; provided,
that no rights of third parties shall be affected by any such revision or
alteration. Regular minutes of the proceedings of the executive committee shall
be kept in a book provided for that purpose. Vacancies in the executive
committee shall be filled by the Board of Directors. A majority of the
committee shall be necessary to constitute a quorum, and in every case the
affirmative vote of a majority of the members present shall be necessary for the
passage of any resolution. The Executive Committee may act by the written
resolution of a quorum thereof although not formally convened; it shall fix its
own rules of procedure, and shall meet as provided by such rules or by
resolution of the Board, and it shall also meet at the call of the chairman or
of any two members of the committee.
Section 2. MANAGEMENT PERSONNEL COMMITTEE. At the first meeting after the
annual meeting of the stockholders, the Board of Directors shall elect a
management personnel committee consisting of not less than three nor more than
five members of the Board and shall designate its chairman. It shall be the
duty of the management personnel committee to make recommendations with respect
to executive salaries, bonuses, and compensation, and it shall be their further
duty to serve as the nominating committee with respect to the principal officers
and other committees of the Board of Directors, as well as making nominations
respecting membership to the Board of Directors. Regular minutes of the
proceedings of the management personnel committee shall be kept in the book
provided for that purpose. Vacancies in the management personnel committee
shall be filled by the Board of Directors. A majority of the members of the
committee shall constitute a quorum, and in every case the affirmative vote of a
majority of the members present shall be necessary for the passage of any
resolution. The management personnel committee may act by the written
resolution of a quorum though they are not formally convened; it shall fix its
own rules of procedure and shall meet as provided by such rules, and it shall
meet on the call of the Chairman or any two (2) members of the committee.
Section 3. INTERPRETATION. In these bylaws, unless there is something in the
context inconsistent therewith, the term "Board of Directors" shall include and
embrace the committees herein provided for to the extent of their delegated
authority.
ARTICLE V
OFFICERS
Section 1. NUMBER. The officers of the corporation shall be a Chairman of the
Board of Directors, a president, one or more vice presidents (the number thereof
to be determined by the Board of Directors), a secretary and a treasurer, each
of whom shall be elected by the Board of Directors. Such other officers and
assistant officers as may be deemed necessary may be elected or appointed by the
Board of Directors. Any person
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may hold two or more offices, except that the president may not also be the
secretary of the corporation.
Section 2. ELECTION AND TERM OF OFFICE. The officers of the corporation to be
elected by the Board of Directors shall be elected annually by the Board of
Directors at the first meeting of the Board held after each annual meeting of
the stockholders. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as conveniently may be.
Each officer shall hold office until his successor shall have been duly elected
and qualified, or until his death or until he shall resign or shall have been
removed in the manner hereinafter provided.
Section 3. REMOVAL. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever in its judgment the
best interests of the corporation would be served thereby.
Section 4. VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification or otherwise, may be filled by the Board of Directors
for the unexpired portion of the term.
Section 5. SALARIES. The salaries of the officers shall be fixed from time to
time by the Board of Directors and no officer shall be prevented from receiving
such salary by reason of the fact that he is also a director of the corporation.
Section 6. CHAIRMAN OF BOARD OF DIRECTORS. The Chairman of the Board shall be
a director and shall preside, when present, at all meetings of the stockholders
and of the Board of Directors, and shall perform such other duties as may be
prescribed by the Board of Directors from time to time. The Board of Directors
may appoint a Vice Chairman of the Board who shall perform such duties as may be
prescribed by the Board of Directors from time to time.
Section 7. PRESIDENT. The president shall be a director. He shall preside, in
the absence of the Chairman or Vice Chairman, at all meetings of the
stockholders or the Board of Directors. He may sign, with the secretary or any
other proper officer of the corporation thereunto authorized by the Board of
Directors, certificates for shares of the corporation, any deeds, mortgages,
bonds, policies of insurance, contracts investment certificates, or other
instruments which the Board of Directors has authorized to be executed, except
in cases where the signing and execution thereof shall be expressly delegated by
the Board of Directors or by these bylaws to some other officer or agent of the
corporation, or shall be required by law to be otherwise signed or executed; and
in general shall perform all duties incident to the office of president and such
other duties as may be prescribed by the Board of Directors from time to time.
Section 8. VICE PRESIDENTS. In the absence of the President or in the event of
his death or inability or refusal to act, the Vice President (or in the event
there be more than one vice president, the vice presidents in the order
designated at the time of their election)
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shall perform the duties of the president, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the president. Any
vice president may sign, with the Secretary or an assistant secretary
certificates for shares of the corporation, and shall perform such other duties
as shall from time to time be assigned to him by the President or by the Board
of Directors. All vice presidents shall have such other duties as may be
prescribed by the Board of Directors from time to time. The Board of Directors
may from time to time add to the title of "Vice President" such additional
descriptive prefix as may indicate his service, duty or duties.
Section 9. SECRETARY. The secretary shall:
(a) attend and keep the minutes of the stockholders' meetings and of the
Board of Directors' meetings in one or more books provided for that purpose;
(b) see that all notices are duly given in accordance with the provisions
of these bylaws as required by law;
(c) be custodian of the corporate records and of the seal of the
corporation and see that the seal of the corporation is affixed to all
documents, the execution of which on behalf of the corporation under its seal is
duly authorized;
(d) keep a register of the post office address of each stockholder which
shall be furnished to the secretary by such stockholder;
(e) sign with the president, or a vice president, certificates for shares
of the corporation, the issuance of which shall have been authorized by
resolution of the Board of Directors;
(f) have general charge of the stock transfer books of the corporation;
(g) in general perform all duties incident to the office of secretary and
such other duties as from time to time may be assigned to him by the president
or by the Board of Directors.
Section 10. TREASURER. The treasurer shall give a bond for the faithful
discharge of his duties in such sum and with such surety or sureties as the
Board of Directors shall determine. He shall:
(a) have charge and custody of and be responsible for all funds and
securities of the corporation; receive and give receipts for monies due and
payable to the corporation from any source whatsoever, and deposit all such
monies in the name of the corporation in such banks, trust companies, or other
depositories as shall be selected in accordance with the provisions of Article
VI of these bylaws; and
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(b) in general perform all the duties incident to the office of treasurer
and such other duties as from time to time may be assigned to him by the
president or by the Board of Directors.
Section 11. CONTROLLER. The controller shall be the accounting officer of the
corporation. He shall keep adequate and correct accounts of the corporation's
business transactions, including the accounts of its assets, liabilities,
reserves, gains, losses, capital, surplus, and shares. It shall be his duty, in
conjunction with other proper officers, to enforce budget rules and regulations
and other measures and procedures whereby the business of the company shall be
conducted with the maximum of safety, efficiency, economy, and profit; and he
shall see to it that adequate internal audits are currently and accurately made.
He shall, in general, perform all duties incident to the office of controller
and such other duties as from time to time may be assigned to him by the
President or by the Board of Directors.
Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant
secretaries and assistant treasurers, in general, shall perform such duties as
shall be assigned to them by the secretary or the treasurer, respectively, or by
the Board of Directors.
Section 13. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer, subject to
the control of the Board of Directors, shall be in general charge of the affairs
of the corporation and in general manage, supervise and control all of its
business activities and without limitation on the foregoing shall supervise all
the public relations of the Company. Any officer or agent of the corporation
may be suspended and removed by the Chief Executive Officer, subject to
ratification or reinstatement by the Board of Directors, whenever in his
judgment the best interest of the corporation; would be served thereby.
The Board of Directors may designate by resolution either the Chairman of the
Board, the Vice Chairman of the Board (if one), or the President as the Chief
Executive Officer, but in the absence of such a resolution the President shall
be the Chief Executive Officer.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver
any instrument, including contracts or policies of insurance, in the name of and
on behalf of the corporation, and such authority may be general or confined to
specific instances.
Section 2. LOANS. No loans shall be contracted on behalf of the corporation
and no evidences of indebtedness shall be issued in its name unless authorized
by a resolution of the Board of Directors. Such authority may be general or
confined to specific instances.
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Section 3. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation shall be signed by such officer or officers, agent or agents of
the corporation and in such manner as shall from time to time be determined by
resolution of the Board of Directors.
Section 4. DEPOSITS. All funds of the corporation not otherwise employed shall
be deposited from time to time to the credit of the corporation in such banks,
trust companies, or other depositories as the Board of Directors may select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. CERTIFICATES FOR SHARES. Certificates representing shares of the
corporation shall be in such form as shall be determined by the Board of
Directors. Such certificates shall be signed by the president or vice president
and by the secretary or an assistant secretary, but when such certificate is
signed by a transfer agent and a registrar the signatures of such president,
vice president, secretary or assistant secretary may be facsimiles. All
certificates for shares shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares represented thereby are
issued, with the number of shares and date of issue, shall be entered on the
transfer books of the corporation. All certificates surrendered to the
corporation for transfer shall be cancelled and no new certificates shall be
issued until the former certificate for a like number of shares shall have been
surrendered and cancelled, except that in case of a lost, destroyed or mutilated
certificate a new one may be issued therefor upon such terms and indemnity to
the corporation as the Board of Directors may prescribe.
Section 2. TRANSFER OF SHARES. Transfer of shares of the corporation shall be
made only on the stock transfer books of the corporation by the holder of record
thereof or by his legal representative, who shall furnish proper evidence of
authority to transfer, or by his attorney thereto authorized by power of
attorney duly executed and filed with the secretary of the corporation, and on
surrender for cancellation of the certificate for such shares. The person in
whose name shares stand on the books of the corporation shall be deemed by the
corporation to be the owner thereof for all purposes.
Section 3. REGULATIONS. The Board of Directors shall have power and authority
to make all such rules and regulations as respectively they may deem expedient,
concerning the issue, transfer and registration of certificates for shares of
the capital stock of the company.
The Board of Directors may appoint one or more transfer agents or assistant
transfer agents and one or more registrars of transfer, and may require all
stock certificates to bear the signature of a transfer agent or assistant
transfer agent and a registrar of transfer. The Board of Directors may at any
time terminate the appointment of any transfer agent or any assistant transfer
agent or any registrar of transfers.
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ARTICLE VIII
FISCAL YEAR
The fiscal year of the corporation shall begin on the first day of January of
each year, and end on the 31st day of December of the same year.
ARTICLE IX
DIVIDENDS
The Board of Directors may from time to time declare, and the corporation may
pay, dividends on its outstanding shares in the manner and upon the terms and
conditions provided by law, its charter, and these bylaws.
ARTICLE X
ANNUAL STATEMENT
The Board of Directors shall publish and submit to the stockholders, at or in
advance of the annual meeting of stockholders, a statement of the financial
condition of the corporation, such statement to show the income of the
corporation during the previous fiscal year and such statement to include a
balance sheet showing the assets and liabilities of the corporation at the end
of the preceding fiscal year.
ARTICLE XI
SEAL
The Board of Directors shall provide a corporate seal which shall be circular in
form and shall have inscribed thereon the name of the corporation and the state
of incorporation and the words "Corporate Seal".
ARTICLE XII
WAIVER OF NOTICE
Whenever any notice is required to be given to any stockholder or director of
the corporation under the provisions of these bylaws or under the provisions of
the articles of incorporation, a waiver thereof in writing, signed by the person
or persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
ARTICLE XIII
AMENDMENTS
These bylaws may be altered, amended, or repealed and new bylaws may be adopted
by a majority vote of the stockholders at any regular or special meeting of the
stockholders.
11
<PAGE>
ARTICLE XIV
INDEMNIFICATION
Section 1. AUTHORITY TO INDEMNIFY. The corporation shall indemnify or obligate
itself to indemnify an individual made a party to a proceeding because he or she
is or was a director, officer, employee or agent of the Corporation (or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise) for reasonable expenses, judgments, fines, penalties and amounts
paid in settlement (including attorneys' fees), incurred in connection with the
proceeding of the individual acted in the manner he or she believed in good
faith to be in or not opposed to the best interests of the Corporation and, in
the case of any criminal proceeding, he or she had no reasonable cause to
believe his or her conduct was unlawful. The termination of a proceeding by a
judgment, order, settlement or conviction, or upon a plea of nolo contendere or
its equivalent is not, of itself, determinative that the director, officer,
employee or agent did not meet the standard of conduct set forth above.
Indemnification permitted under this section in connection with a proceeding by
or in the right of the corporation is limited to reasonable expenses incurred in
connection with the proceeding.
Section 2. MANDATORY INDEMNIFICATION. To the extent that a director, officer,
employee or agent of the Corporation has been successful, on the merits or
otherwise, in the defense of any proceeding to which he or she was a party, or
in defense of any claim, issue or matter therein, because he or she is or was a
director, officer, employee or agent of the Corporation, the Corporation shall
indemnify the director, employee or agent against reasonable expenses incurred
by him or her in connection therewith.
Section 3. ADVANCE FOR EXPENSES. The Corporation shall pay for or reimburse
the reasonable expenses incurred by a director, officer, employee or agent of
the Corporation who is a party to a proceeding in advance of final disposition
of the proceeding if (a) he or she furnishes the Corporation written affirmation
of his or her good faith belief that he or she has met the standard of conduct
set forth in Section 1 of this Article, and (b) he or she furnishes the
Corporation a written undertaking, executed personally or on his or her behalf,
to repay any advances if it is ultimately determined that he or she is not
entitled to indemnification. The undertaking required by this section must be an
unlimited general obligation, but need not be secured and may be accepted
without reference to financial ability to make repayment.
Section 4. COURT-ORDERED INDEMNIFICATION AND ADVANCES FOR EXPENSES. A
director, officer, employee or agent of the Corporation who is a party to a
proceeding may apply for indemnification or advances for expenses to the court
conducting the proceeding or to another court of competent jurisdiction.
Section 5. DETERMINATION OF INDEMNIFICATION. Except as provided in Section 2
and except as may be ordered by the court, the Corporation may not indemnify a
director, officer, employee or agent under Section 1 unless authorized
thereunder and a
12
<PAGE>
determination has been made in the specific case that indemnification of the
director, officer, employee or agent is permissible in the circumstances because
he or she has met the standard of conduct set forth in Section 1. The
determination shall be made:
(a) by the Board of Directors by majority vote of a quorum consisting of
directors not at the time parties to the proceeding;
(b) if a quorum cannot be obtained, by majority vote of a committee duly
designated by the Board of Directors (in which designation directors who are
parties may participate), consisting solely of two or more directors not at the
time parties to the proceeding;
(c) by special legal counsel:
(i) selected by the Board of Directors or its committee in the manner
prescribed in paragraph (a) or (b) of this section; or
(ii) if a quorum of the Board of Directors cannot be obtained and
committee cannot be designated, selected by majority vote of the full Board of
Directors (in which selection directors who are parties may participate); or
(d) by the shareholders, but shares owned by or voted under the control of
directors, who are at the time parties to the proceeding, may not be voted on
the determination.
Section 6. AUTHORIZATION OF INDEMNIFICATION. Authorization of indemnification
or determination of an obligation to indemnify and evaluation as to the
reasonableness of expenses shall be made in the same manner as the determination
that indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subsection (c)
of Section 5 to select counsel.
Section 7. OTHER RIGHTS. The indemnification and advancement of expenses
provided by or granted pursuant to this Article XIV shall not be deemed
exclusive of any other rights, in respect of indemnification or otherwise, to
which those seeking indemnification or advancement of expenses may be entitled
under any bylaw, resolution, agreement or contract either specifically or in
general terms approved by the affirmative vote of the holders of a majority of
the shares entitled to vote thereon taken at a meeting the notice of which
specified that such bylaw, resolution or agreement would be placed before the
stockholders, both as to action by a director, trustee, officer, employee or
agent in his or her official capacity and as to action in another capacity while
holding such office or position, except that no such other rights, in respect to
indemnification or otherwise, may be provided or granted to a director, trustee,
officer, employee or agent pursuant to this Section 7 by the Corporation for
liability for (a) any appropriation , in violation of his or her duties, of any
business opportunity of the Corporation; (b) acts of
13
<PAGE>
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (c) the types of liability set forth in Section 14-2-832 of
the Georgia Business Corporation Code dealing with illegal or unauthorized
distributions of corporate assets, whether as dividends or in liquidation of the
Corporation or otherwise; or (d) any transaction from which the director derived
an improper material tangible personal benefit.
Section 8. INSURANCE. The Corporation may purchase and maintain insurance on
behalf of an individual who is or was a director, officer, employee or agent of
the Corporation or who, while a director, officer, employee or agent of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against liability asserted against or incurred by him or her in that
capacity or arising from his or her status as a director, officer, employee or
agent whether or not the Corporation would have power to indemnify him or her
against the same liability under this Article XIV.
Section 9. CONTINUATION OF EXPENSES. The indemnification and advancement of
expenses provided by or granted pursuant to this Article XIV shall continue as
to a person who has ceased to be a director, trustee, officer, employee or agent
and shall inure to the benefit of the heirs, executors and administrators of
such person.
Section 10. If applicable law is amended to authorize corporate action further
eliminating or limiting the liability of directors, then the liability of each
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by applicable law, as amended. Neither the amendment nor repeal of
this Article XIV, nor the adoption of any provision of these Bylaws inconsistent
with this Article XIV, shall eliminate or reduce the effect of this Article XIV
in respect of any acts of omission occurring prior to such amendment, repeal or
adoption of any inconsistent provision.
14
<PAGE>
Amendment of Employment Agreement
of Robert A. Beizer
This Agreement made as of the 12th day of December, 1996, between Gray
Communications Systems, Inc., a Georgia business corporation (the
"Corporation"), and Robert A. Beizer (the "Employee"):
RECITALS
WHEREAS, the Corporation and Employee desire to modify certain terms of
that Employment Agreement entered into between the Corporation and Employee
dated as of the 12th day of February, 1996 (the "Agreement"); and
WHEREAS, the terms, conditions and undertakings of this amendment to
the Agreement were submitted to and duly approved and duly authorized by the
Management Personnel Committee of the Corporations's Board of Directors at a
meeting held on December 12, 1996; and
WHEREAS, the stockholders of the Corporation approved an amendment to
the Corporations's Articles of Incorporation to provide for a Class B Common
Stock of no par value (the "Shares").
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth and other good and valuable services, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Paragraph 5 LONG TERM INCENTIVE COMPENSATION of the Agreement is
amended by striking it entirely and inserting in its place the following:
LONG TERM INCENTIVE COMPENSATION
The Corporation has adopted a stock option plan known as the 1992
Long Term Incentive Plan (the "Plan"). Employee will be immediately
awarded a non-qualified stock option to purchase from the Corporation all
or part of up to and including 15,000 Shares. If following the date of
this Agreement and prior to the exercise (s) of this option, there shall
have occurred a Share dividend, Share split, recapitalization or
issuance of additional Shares, then the number of Shares available for
exercise shall be adjusted to reflect such occurrence. The term of the
option shall commence on December 12, 1996, and shall be exercisable over
a three (3) year period beginning on the second anniversary date of the
date of grant. The exercise price of each Share so purchased shall be
$15.875 per share. On February 12 of each remaining year of the Agreement,
the Employee will be awarded a non-qualified stock option for 7,000
Shares at the Fair Market Value of the Shares as determined on the date
of the award each year pursuant to the Plan which shall be exercisable
<PAGE>
over a three (3) year period beginning on the second anniversary
date of the date of each grant.
Other than the above changes, all of the other provisions of the
Employment Agreement dated as of February 12, 1996, shall remain in full
force and effect.
The non-qualified stock option award agreement pursuant to the 1992
Long Term Incentive Plan, dated February 12, 1996, between the Corporation
and the Employee is hereby terminated and a non-qualified stock option award
agreement pursuant to the 1992 Long Term Incentive Plan dated as of December
12, 1996, will be executed in compliance with the terms of this Agreement.
IN WITNESS WHEREOF, the parties have hereunto executed this
Agreement the date and year first written.
ATTEST: GRAY COMMUNICATIONS SYSTEMS, INC.
("Corporation")
By:
- ------------------------- ----------------------------
Secretary J. Mack Robinson, President
----------------------------
Robert A. Beizer (Employee)
2
<PAGE>
AMENDMENT TO GRAY COMMUNICATIONS SYSTEMS, INC.'S
1992 LONG TERM INCENTIVE PLAN
(As adopted by the Board of Directors on February 22, 1996 and
approved by the Stockholders on September 3, 1996.)
RESOLVED, that subject to the approval of the shareholders of the
Company, the 1992 Long Term Incentive Plan is hereby amended to delete
subsection (u) of Section II in its entirety and substitute in lieu
thereof the following:
"(u) Stock means the authorized and unissued shares of the
Company's Class A Common Stock and Class B Common Stock or
shares of the Company's Class A Common Stock or Class B Common
Stock held in its treasury."
RESOLVED, that subject to the approval of the shareholders of the
Company, the 1992 Long Term Incentive plan is hereby amended by adding
a new first sentence to Section 4 thereof as follows:
"There is hereby reserved for issuance under the Plan an
aggregate of 600,000 shares of Stock, of which 200,000 shares
shall be the Company's Class A Common Stock and 400,000 shares
shall be the Company's Class B Common Stock."
RESOLVED, that subject to the approval of the shareholders of the
Company, 400,000 shares of Class A Common Stock previously reserved for
issuance pursuant to the 1992 Long Term Incentive Plan are hereby no
longer reserved for issuance pursuant thereto and 400,000 shares of
Class B Common Stock are hereby reserved for issuance pursuant to the
1992 Long Term Incentive Plan.
<PAGE>
FIRST AMENDMENT
TO THE
GRAY COMMUNICATIONS SYSTEMS, INC.
CAPITAL ACCUMULATION PLAN
THIS AMENDMENT to the Gray Communications Systems, Inc. Capital
Accumulation Plan, made this _______ day of ________, 1997, by Gray
Communications Systems, Inc., a corporation organized and existing under the
laws of the State of Georgia (hereinafter referred to as the "Employer"), to be
effective January 1, 1997, or as otherwise indicated.
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Employer has previously adopted the Gray Communications
Systems, Inc. Capital Accumulation Plan (hereinafter referred to as the "Plan");
and
WHEREAS, the Employer wishes to amend the Plan at this time in order
to reflect recent changes in Federal law, to provide for investment in Class B
common stock of the Employer, and for other purposes;
NOW THEREFORE, the Plan is hereby amended in the following
particulars:
<PAGE>
1.
The Preamble of the Plan is changed by deleting the references to
Sections 41 and 409 of the Code.
2.
Section 1.03 of the Plan is amended to read as follows:
1.03 AFFILIATED COMPANY: Any company or organization directly or
indirectly controlled by, controlling, or under common control with
the Company, within the meaning of Section 1563(a) of the Internal
Revenue Code, determined without regard to Sections 1563(a)(4) and
1563(e)(3)(C) thereof, or Section 414(c) of the Code or is a member
of an affiliated service group within the meaning of Section 414(m) of
the Code.
3.
Section 1.11 of the Plan is amended to read as follows:
(c) for all purposes under the Plan except Articles 15 and 16,
and for purposes of Article 15 beginning with the 1998 Plan Year,
Earnings shall include any amount contributed by the Employer on
behalf of an Employee pursuant to a salary reduction agreement which
is not includable in the gross income of the Employee under
Section 125, 402(a)(8), or 402(h) of the Code; and
4.
Section 1.29 of the Plan is amended to read as follows:
1.29 SHARE OF COMPANY STOCK: A share of common stock of the
Company. Effective beginning January 1997 for Employer Contributions
under Article 4 and beginning April 1997 for Participant Contributions
under Article 3, and investment elections and transfers of Accounts
under Article 5, Class B Common Stock shall be used.
<PAGE>
5.
Section 2.02 of the Plan is amended by replacing the third
paragraph with the following:
With respect to a Rollover, Plan to Plan Transfer, or Contribution
under Section 4.02(b), an Employee shall automatically become a
Participant at the time of rollover, transfer, or Contribution.
6.
The first paragraph of Section 3.09 of the Plan is amended to read
as follows:
ROLLOVER CONTRIBUTIONS: Any employee upon commencement of
Employment may make a rollover contribution to the Trust Fund of all
or any portion of the entire amount which is an eligible rollover
distribution, as defined in Section 402(c)(4) of the Code and Treasury
Regulation Section 1.402(c)-2, Q&A 3 and 4, provided such rollover
contribution is either (i) a direct transfer from another qualified
plan or (ii) received on or before the 60th day immediately following
the date the Employee received such distribution from a qualified plan
or conduit individual retirement account or annuity. Only cash or its
equivalent may be contributed to the Plan.
7.
Section 4.02(b) of the Plan is amended to read as follows:
(b) To satisfy either the Actual Deferral Percentage Test of
Section 16.02 or the Actual Contribution Percentage Test of Section
16.03, contribute or reclassify amounts which may be designated as
"qualified non-elective contributions" within the meaning of
Section 401(m)(4)(C) of the Code or as "qualified matching
contributions" within the meaning of Treasury Regulations issued
pursuant to Sections 401(k) and (m) of the Code, which amounts may be
allocated, at the direction of the Employer and in accordance with
applicable Treasury Regulations, only among the appropriate
Accounts of those who are not Highly Compensated Employees according
to Article 16. Qualified nonelective contributions will be
allocated to all such eligible Employees. Qualified
<PAGE>
matching contributions will be allocated to all such Employees who
have made contributions during the Plan Year. Any contributions
made under this Section 4.02(b) shall be fully vested and
nonforfeitable, shall be identified as allocable or reallocable to
the Company Additional Contribution Accounts of the affected
Participants, and may be withdrawn pursuant to Section 8.03.
8.
Section 7.04 of the Plan is amended by deleting "in" between
"Contribution" and "Account" in item (i) of the second paragraph.
9.
Section 7.06 of the Plan is amended by replacing the first
sentence of the first paragraph with the following:
Subject to the following paragraph, benefits shall be paid or
made available under the Plan upon the direction of the
Committee as soon as practicable after termination of
Employment occurs.
10.
Section 7.07(d) is amended to read as follows:
(d) For purposes of this Section, the term "required
beginning date" means April 1 of the calendar year following
the calendar year in which the Participant attains age
70 1/2, or such other date as may be prescribed by regulations.
Provided however, in the case of a Participant who is not a 5%
owner included under Section 14.02(b)(3) the term "required
beginning date" means April 1 of the calendar year following the
later of: (1) the calendar year in which the Participant attains
70 1/2, or (2) the calendar year in which the Participant retires
or otherwise terminates Employment.
<PAGE>
11.
The last paragraph of Section 7.07 of the Plan is amended to
read as follows:
Distributions will be made in accordance with the regulations
under Section 401(a)(9) of the Code, and (to the extent consistent
with Section 401(a)(9) of the Code), the minimum distribution
requirements in Section 1.401(a)(9)-1 of the Proposed Treasury
Regulations, and the minimum distribution incidental death benefit
requirements of Section 1.401(a)(9)-2 of the Proposed Treasury
Regulations.
12.
Section 8.03 of the Plan is amended by replacing the first
paragraph with the following:
Upon written application by a Participant for a Specified
Hardship Withdrawal and approval by the Plan Administrator, the
Participant may withdraw from his Accounts as follows, in the
order indicated.
(1) Non Tax-Deferred Employee Contribution Account;
(2) Rollover Account;
(3) Vested Value of Matching Company Contribution Account under
Section 4.01 and Vested Value of Company Additional
Contribution Account under Section 4.02(a);
(4) Company Additional Contribution Account under Section
4.02(b);
(5) Tax-Deferred Employee Contribution Account, excluding
investment return;
13.
Section 8.03(h) of the Plan is amended by adding the following
at the end of the first sentence:
(but not including any health or welfare benefit plan, including
one that is part of a cafeteria plan under Section 125 of the
Code).
<PAGE>
14.
Section 11.05 of the Plan is amended by deleting the reference
to Section 409 of the Code.
15.
Section 12.01 of the Plan is amended by replacing "411(d)(b)"
with "411(d)(6)."
16.
Section 12.03 of the Plan is amended by replacing "4976(3)"
with "4975(e)(7)."
17.
Section 15.02 is amended by inserting the following as the
first paragraph:
This Section shall not apply after the 1999 Plan Year.
18.
Article 16 of the Plan is amended to read as follows:
SPECIAL 401(k) AND 401(m) NONDISCRIMINATION RULES
16.01 DEFINITIONS: For purposes of this Article 16, the following
words and phrases shall have the following meanings:
(a) ACTUAL DEFERRAL PERCENTAGE: The ratio (to the nearest
one-hundredth of one percent (1/100%)), of Elective Deferrals and
Qualified Employer Deferral Contributions on behalf of the
Eligible Participant for the Plan Year to the Eligible
Participant's Earnings for the Plan Year.
<PAGE>
Such Elective Deferrals and/or Qualified Employer Deferral Contributions
shall be taken into account for a Plan Year only if allocated to the
Employee's Accounts as of a date within that Plan Year. For this
purpose, an elective contribution is considered allocated as of a date
within a Plan Year if the allocation is not contingent on participation
or performance of services after such date, and the elective
contribution is actually paid to the Trust Fund no later than twelve
(12) months after the Plan Year to which the contribution relates.
Such Elective Deferrals and/or Qualified Employer Deferral Contributions
shall be taken into account for a Plan Year only if they relate to
Earnings that either would have been received by the Employee in the
Plan Year (but for the deferral election) or are attributable to
services performed by the Employee in the Plan Year and would have been
received by the Employee within 2-1/2 months after the close of the Plan
Year (but for the deferral election).
For this purpose, the Employer may elect to take into account Qualified
Nonelective Contributions and/or qualified matching contributions
allocated to the Participant's Accounts for the Plan Year only if the
conditions described in Section 401(k)(3) and Section 1.401(k)-1(b)(5)
of the regulations are satisfied.
(b) ADJUSTMENT FACTOR: The cost of living adjustment factor prescribed by
the Secretary of the Treasury under Section 415(d) of the Code, as
applied to such items and in such manner as the Secretary shall provide.
(c) AVERAGE ACTUAL DEFERRAL PERCENTAGE (ADP): The average (to the nearest
one-hundredth of one percent (1/100%)) of the Actual Deferral
Percentages of the Eligible Participants in a group.
(d) AVERAGE CONTRIBUTION PERCENTAGE (ACP): The average (to the nearest
one-hundredth of one percent (1/100%)) of the Contribution Percentages
of the Eligible Participants in a group.
(e) CONTRIBUTION PERCENTAGE: The ratio (to the nearest one-hundredth of one
percent (1/100%)), of the sum of the Employee Contributions and
Matching Contributions under the plan on behalf of the Eligible
Participant for the Plan Year to the Eligible Participant's Earnings for
the Plan Year. For this purpose, the Employer may elect to take into
account Elective Deferrals and/or Qualified Nonelective Contributions
allocated to a Participant's Accounts, instead of under sub-section (a),
only if the conditions described in Section 401(m)(3) of the Code and
Section 1.401(m)-1(b)(5) of the regulations are satisfied. These
conditions include:
<PAGE>
(1) The nonelective contributions, including Qualified Nonelective
Contribution treated as matching contributions under this
sub-section (e), satisfy the requirements of Section 401(a)(4) of
the Code;
(2) The nonelective contributions, excluding Qualified Nonelective
Contributions treated as matching contributions under this
subsection (e) and Qualified Nonelective Contributions treated as
Qualified Employer Deferral Contributions for purposes of subsection
(a), satisfy the requirements of Section 401(a)(4) of the Code;
(3) The elective contributions, including those treated as matching
contributions under this subsection (e), satisfy the requirements of
Section 401(k)(3) of the Code.
(f) DEFERRAL AMOUNT: The amount of Elective Deferrals for a calendar year
that the Participant allocates to this Plan pursuant to the claim
procedure set forth in Section 16.02(b).
(g) ELECTIVE DEFERRALS: Contributions made to the Plan during the Plan Year
by the Employer, at the election of the Participant, in lieu of cash
compensation and including contributions made pursuant to a salary
reduction agreement.
(h) ELIGIBLE PARTICIPANT: For purposes of Section 16.02, any Employee of the
Employer who is directly or indirectly eligible to have Elective
Deferrals, or Qualified Employer Deferral Contributions allocated to his
Accounts for the Plan Year, including:
(1) an Employee who would be a Plan Participant but for the failure to
make required contributions;
(2) an Employee whose right to make contributions under Article 3 or
receive matching contributions under Article 4 has been suspended
because of an election (other than certain one-time elections) not
to participate; a distribution; or a loan;
(3) an Employee who cannot make an Elective Deferral under Article 3,
because Article 16 of this Plan and Section 415 of the Code prevents
the Employee from receiving additional "annual additions", as
defined in Section 16.01.
In the case of an Eligible Participant who makes no Elective Deferrals
under Sections 3.01 or 3.02 or who receives no Employer Contributions
under Section 4.02(b), the Actual Deferral Percentage to be included in
deferring the ADP is zero.
<PAGE>
For purposes of Section 16.03, any Employee of the Employer who is
directly or indirectly eligible to have Employee Contributions or
Matching Contributions allocated to his Account for the Plan Year,
including:
(1) an Employee who would be a Plan Participant but for the failure to
make required contributions;
(2) an Employee whose right to make contributions under Article 3 or
receive matching contributions under Article 4 has been suspended
because of an election (other than certain one-time elections) not
to participate;
(3) an Employee who cannot make a contribution under Article 3 or
receive matching contributions under Article 4, because Article 16
of this Plan and Section 415(c)(1) or Section 415(e) of the Code
prevents the Employee from receiving additional "annual additions",
as defined in Section 16.01.
In the case of an Eligible Participant who makes no contributions under
Section 3.03 or who receives no Employer Contributions under Section
4.01 or 4.02(a), the Contribution Percentage to be included in
determining the ACP is zero.
(i) EMPLOYEE CONTRIBUTIONS: Contributions to the Plan made by a Participant
during the Plan Year.
(j) EXCESS AGGREGATE CONTRIBUTIONS: The excess of:
(1) the aggregate amount of the Employee Contributions and Matching
Contributions, any recharacterized contributions under Section
16.02(e)(2) and, if taken into account under Section 16.03, the
Deferral Amounts actually made on behalf of Highly Compensated
Eligible Participants for the Plan Year, over
(2) the maximum amount of the Contributions permitted under the
limitations of Section 16.03, determined under the "leveling
method".
Under the leveling method, the Excess Aggregate Contributions of the
Highly Compensated Employee with the highest Contribution amount shall
be reduced to the greater of the next highest such amount or an amount
which will produce an Average Contribution Percentage that will satisfy
the test under Section 16.03(a). This reduction process will be repeated
as necessary to satisfy the test for such Plan Year.
<PAGE>
The amount of Excess Aggregate Contributions for a Highly Compensated
Employee is equal to the total of contributions under subsection (1), minus
the amount of the Contribution determined under the previous paragraphs.
(k) EXCESS CONTRIBUTIONS: The excess of:
(1) the aggregate amount of Deferral Amounts and Qualified Employer
Deferral Contributions actually contributed on behalf of Highly
Compensated Eligible Participants for the Plan Year, over
(2) the maximum amount of Deferral Amounts permitted under the
limitations of Section 16.02, determined under the "leveling method".
Under the leveling method, the Excess Contributions of the Highly
Compensated Employee with the highest Deferral Amount shall be reduced to
the greater of the next highest such Amount or an Amount which will produce
an Average Actual Deferral Percentage that will satisfy the test under
Section 16.02(b). This reduction process will be repeated as necessary to
satisfy the test for such Plan Year.
<PAGE>
(l) HIGHLY COMPENSATED EMPLOYEE: For each Plan Year, a Highly Compensated
Active Employee or Highly Compensated Former Employee is determined under
the following rules:
(1) A Highly Compensated Active Employee shall include:
(A) any Employee who performs service for the Employer during the
determination year and who, during the look-back year: received
Earnings from the Employer in excess of $80,000 (as modified by
the Adjustment Factor) and is in the top 20% of the Employees when
Employees are ranked on the basis of Earnings during the look-back
year.
(B) an Employee who is a Five-Percent Owner at any time during the
look-back year or determination year. A five--Percent Owner is a
person who owns (or is considered as owning within the meaning of
Code Section 318) more than five percent (5%) of the outstanding
stock of the Employer or Affiliated Company, or stock possessing
more than five percent (5%) of the total combined voting power of
all stock of the Employer or Affiliated Company.
(2) A Highly Compensated Former Employee shall include an Employee who
terminated employment with the Employer (or was deemed to have
terminated employment) before the determination year, performs no
service for the Employer during the determination year and was a
Highly Compensated Active Employee for the separation year or any
determination year ending on or after the Employee's 55th birthday.
(3) The determination of who is a Highly Compensated Employee, shall be
made in accordance with Code Section 414(g) and the regulations
thereunder.
(4) For purposes of this Section the determination year shall be the
Plan Year; and the look-back year shall be the twelve-month period
immediately preceding the determination year.
(m) NONHIGHLY COMPENSATED EMPLOYEE: An Employee of the Employer who is not a
Highly Compensated Employee.
(n) QUALIFIED EMPLOYER DEFERRAL CONTRIBUTIONS: Qualified Non-elective
Contributions taken into account under the terms of the Plan in determining
the Actual Deferral Percentage.
<PAGE>
(o) QUALIFIED NONELECTIVE CONTRIBUTIONS: Contributions (other than Matching
Contributions) made by the Employer and allocated to Participants' Accounts
that the Participant may not elect to receive in cash until distributed
from the Plan; that are 100 percent vested and nonforfeitable when made;
and that are not distributable under the terms of the Plan to Participants
or their Beneficiaries earlier than the earlier of:
(1) separation from service, death, or disability of the participant;
(2) attainment of the age of 59 1/2 by the Participant;
(3) termination of the Plan without establishment of a successor plan;
(4) qualification for a Specified Hardship under Section 8.03.
<PAGE>
16.02 ELECTIVE DEFERRALS:
(a) MAXIMUM DEFERRAL: No Employee shall be permitted to have Elective
Deferrals made under this Plan during any calendar year in excess
of $9,500, modified by the Adjustment Factor as provided by the
Secretary of the Treasury.
(b) DISTRIBUTION OF EXCESS DEFERRALS: Excess Deferrals and income
allocable thereto shall be distributed no later than each April 15
to Participants who claim such allocable Excess Deferrals for the
preceding calendar year.
The Participant's claim shall be in writing; shall be submitted to
the Plan Administrator no later than March 1; shall specify the
Participant's Excess Deferral Amount for the preceding calendar
year; and shall be accompanied by the Participant's written
statement that if such amounts are not distributed, such Excess
Deferral Amount, when added to amounts deferred under other plans or
arrangements described in Sections 401(k), 408(k) or 403(b) of the
Code, exceeds the limit imposed on the Participant by Section
402(g) of the Code for the year in which the deferral occurred.
The Excess Deferral Amount distributed to a Participant with respect
to a calendar year shall be adjusted for income and, if there is a
loss allocable to the Excess Deferral, shall in no event be less
than the lesser of the Participant's Account under the Plan or the
Participant's Elective Deferrals for the Plan Year.
(c) MAXIMUM ADP:
(1) The ADP for the determination year for Eligible Participants
who are Highly Compensated Employees shall not exceed the ADP
for the look back year for Eligible Participants who are
Nonhighly Compensated employees, multiplied by 1.25; or
(2) The ADP for the determination year for Eligible Participants
who are Highly Compensated Employees shall not exceed the 200%
of the ADP for the lookback year for Eligible Participants
who are Nonhighly Compensated Employees, and the excess of the
ADP for the determination year for Eligible Participants who
are Highly Compensated Employees over the ADP for the look
back year for Eligible Participants who are Nonhighly
Compensated Employees shall not be more than 2%.
<PAGE>
(d) SPECIAL RULES:
(1) For purposes of this Section 16.02, the Actual Deferral
Percentage for any Eligible Participant who is a Highly
Compensated Employee for the Plan Year and who is eligible to
have Elective Deferrals or Qualified Employer Deferral
Contributions allocated to his account under two or more plans
or arrangements described in Section 401(k) of the Code that
are maintained by the Employer or an Affiliated Company and
that are aggregated for purposes of Section 401(a)(4) or
Section 410(b) (other than Section 410(b)(2)(A)(ii)) of the
Code shall be determined as if all such Elective Deferrals and
Qualified Employer Deferral Contributions were made under a
single arrangement. If this Plan and one or more other plans
are permissibly aggregated for purposes of the test described
in Sections 16.02(c), then the aggregated plans must also
satisfy sections 401(a)(4) and 410(b) of the Code as though
they constituted a single plan.
(2) Beginning with the 1999 Plan Year, the requirements of
Sub-section (c) shall not apply for any Plan Year for which a
Qualified Nonelective Contribution of 3% or more is made under
the provisions of Section 4.02(b), provided each eligible
Employee is provided with a written notice of his rights and
obligations under this arrangement within a reasonable period
before such year.
(3) For purposes of this Article, for the 1997 Plan Year, "the ADP
for Nonhighly Compensated Employees for 1997" shall be
substituted for "the ADP for the look-back year for Eligible
Participants who are Nonhighly Compensated Employees," in
Section 16.02(c).
(e) CORRECTION OF EXCESS CONTRIBUTIONS: If the above limitations of
Sections 16.02(c) and 16.02(d) would be exceeded in any Plan Year,
the Committee shall take one or more of the following actions (in
any order it deems advisable):
(1) Limit Future Tax-Deferred Contributions: The Committee may
limit future Basic or Supplemental Tax-Deferred Employee
Contributions for some or all Highly Compensated Employees to
the extent it deems necessary to pass the ADP test or the
Multiple Use Test.
(2) Recharacterize Excess Contributions: The Committee may
recharacterize Excess Contributions as after-tax contributions
for some or all Highly Compensated Employees to the extent
<PAGE>
it deems necessary to pass the ADP test or the Multiple Use
Test. Any contributions so recharacterized shall be included
in the Participant's taxable income and shall remain subject
to the nonforfeitability requirements and distribution
limitations that apply to elective contributions.
The amount of Excess Contributions recharacterized as
after-tax contributions with respect to a Highly Compensated
Employee, when added to the amount of actual Supplemental Non
Tax-Deferred Employee Contributions made by the Participant,
may not exceed the maximum amount of Supplemental Non
Tax-Deferred Contributions that the Participant is permitted
to make under the Plan in the absence of recharacterization
(which maximum amount shall be determined without reference to
the limitations of Section 16.03(a) of this Plan).
(3) Return Excess Contributions: Excess Contributions and income
allocable thereto shall be distributed no later than the last
day of each Plan Year, to Participants on whose behalf such
Excess Contributions were made for the preceding Plan Year.
The Employer will be liable for a 10% excise tax on the amount
of Excess Contributions unless they are distributed within
2-1/2 months after the close of the Plan Year for which they
are made.
The income allocable to Excess Contributions shall be
determined by multiplying income allocable to the
Participant's Elective Deferrals and Qualified Employer
Deferral Contributions for the Plan Year by a fraction. The
numerator of the fraction is the Excess Contribution on behalf
of the Participant for the Plan Year. The denominator of
the fraction is the sum of the Participant's Account balances
attributable to Elective Deferrals and Qualified Employer
Deferral Contributions on the last day of the preceding Plan
Year plus the Participant's Elective Deferrals and Qualified
Employer Deferral Contributions for the Plan Year. No income
shall be included for the period between the end of the Plan
Year and the date of distribution (the "gap period").
The Excess Contributions to be distributed to the Participant
shall be adjusted for income; and shall, if there is a loss
allocable to the Excess Contributions, in no event be less
<PAGE>
than the lesser of the Participant's Account under the Plan or the
Participant's Elective Deferrals and Qualified Employer Deferral
Contributions for the Plan Year.
Amounts distributed under this Subsection (e) shall first be
treated as distributions from the Participant's Elective Deferral
account and shall be treated as distributed from the Participant's
Qualified Employer Deferral Contribution account only to the
extent such Excess Contributions exceed the balance in the
Participant's Elective Deferral account.
If the entire account balance of a Highly Compensated Employee is
distributed during the Plan Year in which the Excess Contribution
occurred, the distribution is deemed to have been a corrective
distribution to the extent that a corrective distribution would have
been required.
(4) The amount of Excess Contributions to be recharacterized or
distributed under this Section 16.02(e) with respect to a
Participant for a Plan Year shall be reduced by any Excess Deferrals
previously distributed to the Participant for the same Plan Year.
Similarly, the amount of Excess Deferrals that may be distributed
with respect to a Participant for a Plan Year under Section
16.02(b) shall be reduced by any Excess Contributions previously
distributed or recharacterized with respect to the Participant for
the same Plan Year.
(5) Any correction of Excess Contributions in accordance with this
Section 16.02(e) shall be accomplished no later than March 15 of
the Plan Year following the Plan Year with respect to which the
Excess Contributions were originally made to the Plan.
<PAGE>
16.03 EMPLOYEE AND MATCHING COMPANY CONTRIBUTIONS:
(a) MAXIMUM ACP:
(1) The ACP for the determination year for Eligible Participants
who are Highly Compensated Employees shall not exceed 125% of
the ACP for the look back year for Eligible Participants who
are Nonhighly Compensated Employees; or
(2) The ACP for the determination year for Eligible Participants who
are Highly Compensated Employees shall not exceed 200% of the
ACP for the look back year for Eligible Participants who are
Nonhighly Compensated Employees and the excess of the ACP for
the determination year for Eligible Participants who are Highly
Compensated Employees over the ACP for the look back year for
Eligible Participants who are Nonhighly Compensated Employees
shall not be more than 2%.
(b) SPECIAL RULES:
(1) For purposes of this Section 16.03, the Contribution Percentage
for any Eligible Participant who is a Highly Compensated Employee
for the Plan Year and who is eligible to make Employee
Contributions, or to receive Matching Contributions, Qualified
Nonelective Contributions or Elective Deferrals allocated to
his account under two or more plans described in Section 401(a)
of the Code or arrangements described in Section 401(k) of the
Code that are maintained by the Employer or an Affiliated
Company shall be determined as if all such contributions and
Elective Deferrals were made under a single plan.
(2) In the event that this Plan satisfies the requirements of Section
410(b) of the Code only if aggregated with one or more other
plans, or if one or more other plans satisfy the requirements of
Section 410(b) of the Code only if aggregated with this Plan, then
this Section shall be applied by determining the Contribution
Percentages of Eligible Participants as if all such plans were a
single plan.
(3) For purposes of determining the Contribution Percentages, the
Committee may elect to take into account Elective Deferrals and/or
Qualified Employer Deferral Contributions allocated to a
Participant's Accounts, subject to the requirements
<PAGE>
of Sections 401(a)(4) and 401(m) of the Code and the regulations
thereunder.
(4) The determination and treatment of the Contribution Percentage
of any Participant shall satisfy such other requirements as may
be prescribed by the Secretary of the Treasury.
(5) Beginning with the 1999 Plan Year, the requirements of this
subsection and subsection (c) shall not apply for Matching
Contributions under Section 4.01, if Section 16.02(d)(2) of this
Plan applies, provided each eligible Employee is provided with
a written notice of his rights and obligations under this
arrangement within a reasonable period before such year.
(6) For purposes of this Article for the 1997 Plan Year, "the ACP
for Nonhighly Compensated Employees for 1997" shall be
substituted for "the ACP for the look-back year for Eligible
Participants who are Nonhighly Compensated Participants" in
Section 16.03(a).
(c) MULTIPLE USE TEST: For each Plan Year, Sections 16.02(c)(2) and
16.03(a)(2) shall not be applied to satisfy the ADP test and
ACP test for the same Plan Year, unless:
(1) the ADP for all Highly Compensated Employees exceeds the
amount described in Section 16.02(c)(1);
(2) the ACP for all Highly Compensated Employees exceeds the
amount described in Section 16.03(a)(1);
(3) the sum of the ADP and the ACP for all Highly Compensated
Participants does not exceed the greater of the sum of (A)
and (B), or the sum of (C) and (D), where
(A) equals 125% of the greater of the ADP and the ACP for
all Nonhighly Compensated Participants.
(B) equals either 200% of the lesser of the ADP and the
ACP for all Nonhighly Compensated Participants or, if
less, the lesser of the ADP or the ACP for all Nonhighly
Compensated employees plus 2%.
<PAGE>
(C) equals 125% of the lesser of the ADP and the ACP for all
Nonhighly Compensated Participants.
(D) equals either 200% of the greater of the ADP and the ACP
for all Nonhighly Compensated Participants or, if less,
the greater of the ADP or the ACP for all Nonhighly
Compensated Employees plus 2%.
In the event of a required reduction for Highly Compensated
Employees due to the Multiple Use Test, such reduction will be
made first under subsection 16.03(d) and then under subsection
16.02(e).
<PAGE>
(d) CORRECTION OF EXCESS AGGREGATE CONTRIBUTIONS: If the Plan fails
or is projected to fail the ACP test, the Committee shall
take one or more of the following actions (in any order it
deems advisable) to pass the test(s):
(1) Limit Future Employee Contributions: The Committee may
limit future Supplemental Employee Contributions and/or
Company Matching Contributions for some or all Highly
Compensated Employees to the extent it deems necessary.
(2) Use Tax-Deferred Contributions: The Committee may
consider a portion of Tax-Deferred Contributions for some
or all Nonhighly Compensated Employees to be Employee
Contributions to the extent such Contributions are not
necessary to pass the ADP test or the Multiple Use Test.
(3) Return Excess Aggregate Contributions: Excess Aggregate
Contributions and income allocable thereto shall be
forfeited, if otherwise forfeitable under the terms of
this Plan, or if not forfeitable, distributed after the
Plan Year in which the Excess Aggregate Contributions
occurred, but no later than the last day of the
subsequent Plan Year, for each Plan Year beginning after
December 31, 1987.
The income allocable to Excess Aggregate Contributions
shall be determined by multiplying the income allocable
to the Participant's Employee Contributions and Matching
Employer Contributions for the Plan Year by a fraction.
The numerator of the fraction is the Excess Aggregate
Contributions on behalf of the Participant for the Plan
Year. The denominator of the fraction is the sum of the
Participant's Account balances attributable to Employee
Contributions and Matching Employer Contributions on the
last day of the preceding Plan Year, plus the amounts of
the Employee Contributions and Matching Employer
Contributions for the Plan Year. No income shall be
included for the period between the end of the Plan Year
and the date of distribution (the "gap period").
The Excess Aggregate Contributions to be distributed to a
Participant shall be adjusted for income, and, if there
is a loss allocable to the Excess Aggregate Contribution,
shall in no event be less than the lesser of the
Participant's Account under the Plan or the
Participants's Employee Contributions and Matching
Contributions for the Plan Year.
<PAGE>
Notwithstanding any other provision herein, if any
Supplemental Non Tax-Deferred Employee Contributions are
treated as Excess Aggregate Contributions, then any
Matching Contributions that the Employer has made with
respect to such contributions shall be forfeited, and
shall be treated in accordance with Section 4.04.
(4) Notwithstanding any other provision herein, the amount of
the Excess Aggregate Contributions for a year shall be
calculated only after the determination of the amount of
the Excess Contributions that are to be recharacterized
as after-tax contributions in accordance with Section
16.02(e)(2).
(5) Any correction of Excess Aggregate Contributions in
accordance with this Section 16.03(d) shall be
accomplished no later than March 15 of the Plan Year
following the Plan Year with respect to which the
Excess Aggregate Contributions were originally made to
the Plan.
Excess Aggregate Contributions shall be distributed
from the Participant's Employee Contribution Account,
and forfeited if otherwise forfeitable under the terms
of the Plan (or, if not forfeitable, distributed) from
the Participant's Matching Contribution account in
proportion to the Participant's Employee Contributions
and Matching Contributions for the Plan Year.
Any distribution or forfeiture of Excess Aggregate
Contributions will be made on the basis of the
respective portions of such amounts that are attributable
to each Highly Compensated Employee.
If the entire Account balance of a Highly Compensated
Employee is distributed during the Plan Year in which
the Excess Aggregate Contribution occurred, the
distribution is deemed to have been a corrective
distribution to the extent that a corrective
distribution would have been required.
Amounts forfeited by Highly Compensated Employees under
this Section 16.03 shall be treated as Annual Additions
under Article 15 and applied to reduce employer
contributions.
<PAGE>
19.
All other provisions of the Plan not inconsistent herewith are
hereby confirmed and ratified.
IN WITNESS WHEREOF, the Employer has caused this Amendment to be
executed on the day and year first above written.
GRAY COMMUNICATIONS SYSTEMS, INC.
By:
----------------------------------
Title:
-------------------------------
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PRIMARY:
Weighted average shares outstanding 5,398,436 4,354,183 4,689,453
Common stock equivalents - based
on the treasury stock
method using average
market price 227,112 127,134 -0-
----------- ----------- -----------
Totals 5,625,548 4,481,317 4,689,453
----------- ----------- -----------
----------- ----------- -----------
Income before extraordinary charge
available to common stockholders $ 5,301,592 $ 930,969 $ 2,765,701
Extraordinary charge 3,158,960 -0- -0-
----------- ----------- -----------
Net income available to common
stockholders $ 2,142,632 $ 930,969 $ 2,765,701
----------- ----------- -----------
----------- ----------- -----------
PRIMARY PER SHARE AMOUNTS:
Income before extraordinary charge
available to common stockholders $ 0.94 $ 0.21 $ 0.59
Extraordinary charge (0.56) -0- -0-
----------- ----------- -----------
Net income available to common
stockholders $ 0.38 $ 0.21 $ 0.59
----------- ----------- -----------
----------- ----------- -----------
FULLY DILUTED:
Weighted average shares outstanding 5,398,436 4,354,183 4,689,453
Common stock equivalents - based
on the treasury stock method
using the the higher of quarter-end
market price or average market price 245,289 144,682 -0-
----------- ----------- -----------
Totals 5,643,725 4,498,865 4,689,453
----------- ----------- -----------
----------- ----------- -----------
Income before extraordinary charge
available to common stockholders $ 5,301,592 $ 930,969 $ 2,765,701
Extraordinary charge 3,158,960 -0- -0-
----------- ----------- -----------
Net income available to common
stockholders $ 2,142,632 $ 930,969 $ 2,765,701
----------- ----------- -----------
----------- ----------- -----------
FULLY DILUTED PER SHARE AMOUNTS:
Income before extraordinary charge
available to common stockholders $ 0.94 $ 0.21 $ 0.59
Extraordinary charge (0.56) -0- -0-
----------- ----------- -----------
Net income available to common stockholders $ 0.38 $ 0.21 $ 0.59
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
1
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF
GRAY COMMUNICATIONS SYSTEMS, INC.
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
The Albany Herald Publishing Company, Inc. Georgia
The Rockdale Citizen Publishing Company Georgia
The Southwest Georgia Shopper, Inc. Georgia
Gray Kentucky Television, Inc. Georgia
KTVE Inc. Arkansas
WALB-TV, Inc. Georgia
WCTV Operating Corp. Georgia
WJHG-TV, Inc. Georgia
WRDW-TV, Inc. Georgia
WVLT-TV, Inc. Georgia
Gray Real Estate and Development Company Georgia
Gray Transportation Company, Inc. Georgia
Porta-Phone Paging, Inc. Georgia
Gray Television Management, Inc. Delaware
Porta-Phone Licensee Corp. Delaware
WALB Licensee Corp. Delaware
WCTV Licensee Corp. Delaware
WJHG Licensee Corp. Delaware
WKYT Licensee Corp. Delaware
WRDW Licensee Corp. Delaware
WYMT Licensee Corp. Delaware
WVLT Licensee Corp. Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-84656 and Form S-8 No. 333-17773) pertaining to the Gray
Communications Systems, Inc. Capital Accumulation Plan and in the Registration
Statement (Form S-8 No. 333-15711) pertaining to the Gray Communications
Systems, Inc. 1992 Long-Term Incentive Plan of our report dated January 27,
1997, except for Pending Acquisitions of Note C, as to which the date is
February 13, 1997, with respect to the consolidated financial statements and
schedule of Gray Communications Systems, Inc. included in the Annual Report
(Form 10-K) for the year ended December 31, 1996.
Ernst & Young LLP
Atlanta, Georgia
March 28, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-84656 and Form S-8 No. 333-17773) pertaining to the Gray
Communications Systems, Inc. Capital Accumulation Plan and in the Registration
Statement (Form S-8 No. 333-15711) pertaining to the Gray Communications
Systems, Inc. 1992 Long-Term Incentive Plan of our report dated February 12,
1997, with respect to the financial statements and schedule of the Broadcasting
and Paging Operations of John H. Phipps, Inc. included in the Annual Report
(Form 10-K) of Gray Communications Systems, Inc. for the year ended December 31,
1996.
Ernst & Young LLP
Atlanta, Georgia
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF GRAY COMMUNICATIONS
SYSTEMS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,051,044
<SECURITIES> 0
<RECEIVABLES> 18,823,839
<ALLOWANCES> 1,450,000
<INVENTORY> 624,118
<CURRENT-ASSETS> 23,539,223
<PP&E> 53,993,742
<DEPRECIATION> 18,209,891
<TOTAL-ASSETS> 298,663,842
<CURRENT-LIABILITIES> 23,881,335
<BONDS> 173,228,049
0
20,000,000
<COMMON> 64,681,576
<OTHER-SE> 10,543,940
<TOTAL-LIABILITY-AND-EQUITY> 298,663,842
<SALES> 0
<TOTAL-REVENUES> 79,305,199
<CGS> 0
<TOTAL-COSTS> 63,226,287
<OTHER-EXPENSES> (5,704,582)<F1>
<LOSS-PROVISION> 894,000
<INTEREST-EXPENSE> 11,689,053
<INCOME-PRETAX> 10,094,441
<INCOME-TAX> 4,416,000
<INCOME-CONTINUING> 5,678,441
<DISCONTINUED> 0
<EXTRAORDINARY> 3,158,960<F2>
<CHANGES> 0
<NET-INCOME> 2,519,481
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
<FN>
<F1>Includes gain recognized on the sale of KTVE, the Company's NBC-
affiliated television station of approximately $5.7 million.
<F2>Extraordinary charge net of taxes recorded in connection with
the early retirement of the Senior Note and the Old Credit Facility and
the write-off of related unamortized loan aquisition costs.
</FN>
</TABLE>
