SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
<TABLE>
<S> <C>
Date of Report (Date of earliest event reported): October 14, 1998 (July 31, 1998)
Gray Communications Systems, Inc.
- -------------------------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
- -------------------------------------------------------------------------------------------------------------------
Georgia 1-13796 58-0285030
- -------------------------------- ----------------------------- ----------------------------------
(State or other jurisdiction (IRS Employer Identification
of incorporation) (Commission File Number) Number)
126 N. Washington Street,
Albany, GA 31701
----------------------------------------------------- ----------------------
(Address of principal executive offices) (Zip code)
(912) 888-9390
----------------------------------------------------------------
(Registrant's telephone number, including area code)
</TABLE>
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On July 31, 1998, Gray Communications Systems, Inc. (the "Company")
completed the purchase of all of the outstanding capital stock of Busse
Broadcasting Corporation ("Busse"). The purchase price was $112 million plus
Busse's cash balance at July 31, 1998. The purchase price includes the
assumption of Busse's indebtedness, including its 11 5/8% Senior Secured Notes
due 2000. Immediately prior to the Company's acquisition of Busse, Cosmos
Broadcasting Corporation ("Cosmos") acquired the assets of WEAU-TV ("WEAU") from
Busse and exchanged them for the assets of WALB-TV, Inc. ("WALB"), the Company's
NBC affiliate in Albany, Georgia. In exchange for the assets of WALB, the
Company received the assets of WEAU, which were valued at $66 million, and
approximately $12 million in cash for a total value of $78 million. Immediately
following the acquisition of Busse, the Company exercised its right to satisfy
and discharge the Busse 11 5/8% Senior Secured Notes ("Busse Senior Notes"),
effectively prefunding the Busse Senior Notes at the October 15, 1998 call price
of 106 plus accrued interest. The amount necessary to satisfy and discharge the
Busse Senior Notes was approximately $69.9 million. The transactions described
above are referred to herein as the "Busse-WALB Transactions."
As a result of the Busse-WALB Transactions, the Company adds the
following television stations to its existing broadcast group: KOLN-TV ("KOLN"),
the CBS affiliate serving the Lincoln-Hastings-Kearney, Nebraska market; its
satellite station KGIN-TV ("KGIN"), the CBS affiliate serving Grand Island,
Nebraska; and WEAU, an NBC affiliate serving the Eau Claire-La Crosse, Wisconsin
market. The Busse-WALB Transactions also satisfy the Federal Communication
Commission's requirement for the Company to divest itself of WALB.
The Company funded the costs of this transaction through a senior credit
facility ("Senior Credit Facility") with NationsBank, N.A., KeyBank National
Association, CIBC, Inc., CoreStates Bank, N.A. and the Bank of New York. The
Company will pay Bull Run Corporation, an affiliate of the Company, a fee equal
to 1% of the purchase price for services performed.
The terms of the Busse-WALB Transactions, including the consideration
paid by the Company therefor, were determined in arms-length negotiations
between the Company, Busse and Cosmos.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The following unaudited interim financial statements of Busse Broadcasting
Corporation are included in Appendix A hereto and incorporated herein by
reference:
Condensed Consolidated Balance Sheets as of June 28, 1998 and December
28, 1997 (Unaudited)
Condensed Consolidated Statements of Operations for the three months
ended June 28, 1998 and June 29, 1997 (Unaudited)
2
<PAGE>
Item 7. Financial Statements and Exhibits (Continued).
Condensed Consolidated Statements of Operations for the six months
ended June 28, 1998 and June 29, 1997 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the six months
ended June 28, 1998 and June 29,1997 (Unaudited)
Notes to Condensed Consolidated Financial Statements for the six
months ended June 28, 1998 (Unaudited)
The following audited financial statements of Busse Broadcasting Corporation are
included in Appendix B hereto and incorporated herein by reference:
Independent Auditors' Report
Consolidated Balance Sheets as of December 28, 1997 and December 29,
1996
Consolidated Statements of Operations for the fiscal years ended
December 28, 1997 and December 29, 1996; the fiscal period
from May 3, 1995 through December 31, 1995; and the fiscal
period from January 2, 1995 through May 2, 1995
Consolidated Statements of Stockholders' Equity (Deficit) for the three
years ended December 28, 1997
Consolidated Statements of Cash Flows for the fiscal years ended
December 28, 1997 and December 29, 1996; the fiscal period
from May 3, 1995 through December 31, 1995; and the fiscal
period from January 2, 1995 through May 2, 1995
Notes to Consolidated Financial Statements for the three years ended
December 28, 1998
(b) Pro Forma Financial Information.
The pro forma financial information is included in Appendix C hereto and
incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Gray Communications Systems, Inc.
By: /s/ James C. Ryan
-------------------------------
James C. Ryan
Vice President--Finance and
Chief Financial Officer
Date: October 14, 1998
----------------
3
<PAGE>
APPENDIX A
<PAGE>
BUSSE BROADCASTING CORPORATION
Condensed Financial Statements (Unaudited)
June 28, 1998
A-1
<PAGE>
Busse Broadcasting Corporation
Condensed Consolidated Balance Sheets
Unaudited
<TABLE>
<CAPTION>
June 28, December 28,
1998 1997
----------------------------------------
Assets (Note 1)
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents (Note 2) $ 9,045,736 $ 8,974,699
Receivables, net 3,650,675 3,804,410
Other current assets 776,646 1,343,483
----------------------------------------
Total current assets 13,473,057 14,122,592
Property, plant and equipment, net 12,555,079 13,226,067
Deferred charges and other assets 1,503,221 1,811,809
Intangible assets and excess reorganization value 46,826,755 48,775,820
========================================
Total assets $ 74,358,112 $ 77,936,288
========================================
Liabilities and stockholders' equity (Note 1)
Current liabilities:
Accounts payable and accrued expenses $ 2,360,295 $ 4,161,712
Long-term debt (Note 2) 61,168,080 60,918,857
Stockholders' equity:
Series A cumulative convertible preferred stock (non-voting) - $.01 par
value, $1,000 per share liquidation preference; 65,524.41 shares
authorized, issued and outstanding including dividends in arrears of
$11,897,150 and $9,485,924 at June 28, 1998
and December 28, 1997, respectively 29,227,810 26,816,584
Common stock (voting) - $.01 par value; 2,154,000 shares authorized, and
107,700 shares issued and outstanding 1,077 1,077
Additional paid-in capital - common stock 9,185,772 9,185,772
Accumulated deficit (27,584,922) (23,147,714)
----------------------------------------
Total stockholders' equity 10,829,737 12,855,719
========================================
Total liabilities and stockholders' equity $ 74,358,112 $ 77,936,288
========================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
A-2
<PAGE>
Busse Broadcasting Corporation
Condensed Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three Months ended
---------------------------------------------
June 28, 1998 June 29, 1997
---------------------------------------------
<S> <C> <C>
Net revenue $ 5,488,694 $ 5,284,833
Operating costs and expenses, excluding depreciation and
amortization 2,177,559 2,180,756
Depreciation 427,494 530,269
Amortization of intangibles and excess reorganization value 960,440 977,126
---------------------------------------------
Total operating costs and expenses 3,565,493 3,688,151
Corporate expenses 407,255 387,601
---------------------------------------------
Income from operations 1,515,946 1,209,081
Other income (expense):
Interest expense (2,099,150) (2,084,508)
Interest income 126,254 90,062
Gain on disposition of assets 1,150 370
Other income (expense) 5,872 (3,916)
---------------------------------------------
Other expense (1,965,874) (1,997,992)
---------------------------------------------
Loss from operations before income taxes (449,928) (788,911)
Provision for current income taxes (Note 3) -- --
---------------------------------------------
Net loss (449,928) (788,911)
Charges to stockholders' equity for Series A preferred stock
dividends in arrears (1,205,613) (1,205,613)
=============================================
Net loss attributable to common stockholders $(1,655,541) $(1,994,524)
=============================================
Per common share - basic and diluted (Note 1):
Loss from operations $ (4.18) $ (7.33)
Series A preferred stock dividends in arrears (11.19) (11.19)
=============================================
Net loss attributable to common stockholders $ (15.37) $ (18.52)
=============================================
Weighted average common shares outstanding - basic and diluted 107,700 107,700
=============================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
A-3
<PAGE>
Busse Broadcasting Corporation
Condensed Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Six Months ended
---------------------------------------------
June 28, 1998 June 29, 1997
---------------------------------------------
<S> <C> <C>
Net revenue $10,215,822 $ 9,549,775
Operating costs and expenses, excluding depreciation and
amortization 4,448,310 4,345,637
Depreciation 919,906 1,060,538
Amortization of intangibles and excess reorganization value 1,949,065 1,989,904
---------------------------------------------
Total operating costs and expenses 7,317,281 7,396,079
Corporate expenses 960,135 740,554
---------------------------------------------
Income from operations 1,938,406 1,413,142
Other income (expense):
Interest expense (4,192,307) (4,163,284)
Interest income 227,078 186,576
Gain on disposition of assets 1,161 390
Other income (expense) (320) 65,199
---------------------------------------------
Other expense (3,964,388) (3,911,119)
---------------------------------------------
Loss from operations before income taxes (2,025,982) (2,497,977)
Provision for current income taxes (Note 3) -- --
---------------------------------------------
Net loss (2,025,982) (2,497,977)
Charges to stockholders' equity for Series A preferred stock
dividends in arrears (2,411,226) (2,411,226)
=============================================
Net loss attributable to common stockholders $(4,437,208) $(4,909,203)
=============================================
Per common share - basic and diluted (Note 1):
Loss from operations $ (18.81) $ (23.19)
Series A preferred stock dividends in arrears (22.39) (22.39)
=============================================
Net loss attributable to common stockholders $ (41.20) $ (45.58)
=============================================
Weighted average common shares outstanding - basic and diluted 107,700 107,700
=============================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
A-4
<PAGE>
Busse Broadcasting Corporation
Condensed Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Six Months ended
------------------------------------
June 28, 1998 June 29, 1997
------------------------------------
<S> <C> <C>
Operating activities:
Net loss $(2,025,982) $(2,497,977)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 2,868,971 3,050,442
Non cash interest expense 249,222 220,199
Amortization of deferred financing costs 308,703 308,703
Program payments over program amortization (4,247) (2,085)
Gain on disposition of property, plant and equipment (1,161) (390)
Deferred compensation expense 122,548 174,520
Pension expense -- 60,000
Change in current assets and liabilities:
Receivables 153,735 21,350
Other current assets 65,262 15,782
Deferred compensation payment (1,065,000) --
Accounts payable and accrued expenses (353,142) (369,718)
-----------------------------------
Net cash provided by operating activities 318,909 980,826
Investing activities:
Capital expenditures (248,919) (479,099)
Proceeds from disposition of assets 1,162 390
Increase in other assets (115) (3,367)
------------------------------------
Net cash used in investing activities (247,872) (482,076)
------------------------------------
Net cash used in financing activities -- --
------------------------------------
Net increase in cash and cash equivalents 71,037 498,750
Cash and cash equivalents at beginning of period 8,974,699 7,989,805
====================================
Cash and cash equivalents at end of period $ 9,045,736 $ 8,488,555
====================================
Supplemental disclosure of cash flow information:
Interest paid during the period $ 3,634,382 $ 3,634,382
====================================
Income taxes paid during the period $ -- $ --
====================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
A-5
<PAGE>
Busse Broadcasting Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited
June 28, 1998
1. Basis of Presentation
The condensed consolidated financial statements include Busse Broadcasting
Corporation and its wholly owned subsidiaries (collectively Busse or the
Company) engaged in the following businesses:
<TABLE>
<S> <C>
Television:
KOLN/KGIN-TV CBS Affiliate Lincoln/Grand Island, Nebraska
WEAU-TV NBC Affiliate Eau Claire/La Crosse, Wisconsin
(Sold July 31, 1998 as discussed in Note 5 "Sale of the Company's Capital
Stock and Like-kind Exchange of Assets", herein.)
</TABLE>
All intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements in
conjunction with the related notes to the financial statements reflect, in the
opinion of the Company, all adjustments, consisting of only normal recurring
adjustments necessary to present fairly the Company's financial position and
results of operations for the unaudited interim periods. Results for such
interim periods are not necessarily indicative of the results for the respective
entire years.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. It is suggested that these condensed
consolidated financial statements be read in conjunction with the audited
financial statements and notes thereto of Busse Broadcasting Corporation
included in the Company's 1997 Annual Report on Form 10-K.
The Company and its wholly-owned subsidiary filed voluntary petitions for a
joint plan of reorganization under Chapter 11 of the United States Bankruptcy
Code (the "Plan") on March 10, 1995. On April 20, 1995 the United States
Bankruptcy Court for the district of Delaware (the "Court") confirmed the Plan,
such Plan became effective May 3, 1995 (the "Effective Date") and the respective
Chapter 11 cases were closed by the Court on September 21, 1995.
A-6
<PAGE>
Busse Broadcasting Corporation
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
2. Debt
Debt is summarized as follows:
<TABLE>
June 28, December 28,
1998 1997
========================================
<S> <C> <C>
Senior Secured Notes, net of unamortized original issue discount of $1,358,920
and $1,608,143 at June 28, 1998 and December 28, 1997,
respectively $ 61,168,080 $ 60,918,857
========================================
</TABLE>
On October 26, 1995 the Company issued $62,527,000 principal amount of 11 5/8%
Senior Secured Notes due October 15, 2000 ("Senior Notes") at a price of 95.96%
of the aggregate principal amount thereof. As discussed more fully in Note 5,
herein, on July 31, 1998 the Company effected a satisfaction and discharge (the
"Discharge") of the Senior Notes in accordance with the indenture pursuant to
which the Senior Notes were issued (the "Indenture"). The Senior Notes were
discharged by the Company depositing $69,913,002, in cash, with the Indenture's
trustee and collateral agent (the "Trustee") and providing the Trustee an
irrevocable direction to redeem all of the outstanding Senior Notes on October
15, 1998 at a redemption price of 106% of the aggregate principal amount of the
Senior Notes plus accrued and unpaid interest as of the date of the redemption.
The cash deposited with the Trustee is equal to 100% of the aggregate cash
required to effect the Senior Note redemption on October 15, 1998. Such cash
deposit and irrevocable direction effected a satisfaction and discharge of the
Senior Notes pursuant to the Indenture.
A-7
<PAGE>
Busse Broadcasting Corporation
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
3. Income Taxes
As of December 28, 1997 the Company had approximately $61.4 million of federal
net operating loss carryforwards ("NOL's") which begin to expire in 2005. As a
result of the Plan (see Note 1) the Company elected treatment under Section 382
(1) (5) of the Internal Revenue Code, as amended (the "Code"). This treatment
will allow the Company to utilize, under certain restrictions, its NOL's to
offset taxable income incurred after the Effective Date. Utilization of a
portion of these NOL's are assumed in the Company's calculation of
Post-Effective Date deferred taxes.
As discussed more fully in Note 5 herein, on July 31, 1998 the Company sold the
WEAU Assets, as defined in Note 5 herein, and recognized a gain, on a tax basis,
of approximately $60 million. Such gain will be offset by and reduce the
Company's NOL's.
Also, as discussed more fully in Note 5, herein, on July 31, 1998 after
completion of the sale of the WEAU Assets, as defined in Note 5, 100% of the
Company's capital stock was acquired by Gray Communications Systems, Inc.
("Gray"), as described in Note 5; such acquisition will subject the Company's
remaining NOL's to certain limitations under section 382 of the Code.
A-8
<PAGE>
Busse Broadcasting Corporation
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
4. Corporate Reorganization/Subsidiary Guarantors
Prior to their Discharge, as discussed in Notes 2 and 5, the Senior Notes were
fully and unconditionally guaranteed, on a joint and several and senior secured
basis, by all of the Company's direct and indirect subsidiaries, each of which
is wholly-owned.
The following tables present summarized combined balance sheet and operating
statement information for (i) KOLN/KGIN, Inc. (ii) KOLN/KGIN License, Inc. and
(iii) WEAU License, Inc. Separate financial statements of KOLN/KGIN, Inc.
immediately follow these notes to condensed consolidated financial statements of
Busse Broadcasting Corporation. Separate financial statements and other
disclosures concerning KOLN/KGIN License, Inc. and WEAU License, Inc. have not
been presented because management has determined that such financial statements
would not be material to investors. On June 29, 1998 WEAU License, Inc. was
merged into WEAU License, LLC, a Delaware limited liability company solely
controlled by Busse (WEAU, LLC") with WEAU LLC being the surviving entity.
<TABLE>
<CAPTION>
June 28, December 28,
1998 1997
------------------------------------
<S> <C> <C> <C> <C>
Assets
Current assets $ 2,851,333 $ 3,377,708
Non-current assets 43,954,877 45,525,932
====================================
$46,806,210 $48,903,640
====================================
Liabilities and stockholder's equity
Current liabilities $ 619,465 $ 1,112,618
Non-current liabilities 6,198,320 6,373,635
Stockholder's equity 39,988,425 41,417,387
------------------------------------
Total liabilities and stockholder's equity $46,806,210 $48,903,640
====================================
Three months ended Six months ended
------------------------------------ ------------------------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
------------------------------------ ------------------------------------
Net revenue $ 3,606,773 $ 3,342,150 $ 6,835,017 $ 6,161,283
Total operating costs and expenses 2,598,299 2,600,245 5,420,756 5,215,201
Income from operations 1,008,474 741,905 1,414,261 946,082
Net loss $ (518,646) $ (605,977) $ (1,428,962) $ (1,552,868)
</TABLE>
A-9
<PAGE>
Busse Broadcasting Corporation
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
5. Sale of the WEAU Assets, Like-kind Exchange of Assets and Sale of 100% of the
Capital Stock of the Company
On July 31, 1998 Busse and WEAU LLC sold all of the assets of WEAU-TV, Eau
Claire Wisconsin, including the FCC licenses controlled by WEAU LLC,
(collectively the "WEAU Assets") to Cosmos Broadcasting Corp. ("Cosmos") for an
aggregate cash purchase price of $66 million. In accordance with the Indenture,
the Company directed the $66 million of proceeds be deposited with the Indenture
Trustee.
Also on July 31, 1998, Busse; Gray; two subsidiaries of Gray (WALB-TV, Inc. and
WALB Licensee Corp. collectively referred to herein as the "Gray Subsidiaries");
and Cosmos effected a like-kind exchange transaction (the "Like-kind Exchange")
as follows: (i) the Gray Subsidiaries sold to Cosmos substantially all of the
assets from the Gray Subsidiaries in exchange for the WEAU Assets plus an
aggregate cash payment of $12 million and (ii) Cosmos directed Busse to deliver
the respective WEAU Assets directly to the Gray Subsidiaries to complete the
Like-kind Exchange.
After consummation of the sale of the WEAU Assets and the Like-kind Exchange,
Gray acquired all of the capital stock of Busse for an aggregate net purchase
price of $57.4 million, which was paid in cash to the Company's stockholders.
The aggregate net purchase price was derived by the sum of (i) $112 million,
plus (ii) the Company's cash and cash equivalents, less (iii) the aggregate
amount of the Company's indebtedness and accrued and unpaid interest thereon,
including the accreted amount of the Company's Senior Notes, less (iv) certain
other purchase price adjustments. The value of the Company's cash, cash
equivalents, aggregate indebtedness and other purchase price adjustments were
determined as of the close of business on July 30, 1998.
Effective with the closing of the sale of the Company's capital stock, as
discussed above, Messrs. Busse and Ryan resigned as executive officers of, and
terminated their respective employment with, the Company and its affiliates.
Messrs. Busse, Beck and Cornwell resigned as directors of the Company and Mr.
Busse resigned as a director of each of the Company's affiliates.
Gray, upon acquisition of Busse's stock elected the following directors for
Busse: Messrs. Richard L. Boger, Hilton H. Howell, William E. Mayher, III,
Howell Newton, Hugh Norton, Robert S. Prather, Mrs. Harriett J. Robinson and Mr.
J. Mack Robinson. Such new directors appointed the following executive officers
of the Company: Mr. J. Mack Robinson as President and Chairman, Mr. Frederick J.
Erickson as Chief Financial Officer, Mr. Robert Beizer as Secretary, Mr. Vance
Luke as Assistant Secretary and Mr. Jackson S. Cowart, IV as Assistant
Secretary.
A-10
<PAGE>
5. Sale of the WEAU Assets, Like-kind Exchange of Assets and Sale of 100% of the
Capital Stock of the Company (Continued)
After the change in control of the Busse capital stock and appointment of new
directors and officers for the Company, Busse irrecoverably directed the Trustee
to utilize certain collateral proceeds funds held by the Trustee along with
certain other cash deposited by the Company with the Trustee as an irrevocable
cash deposit aggregating $69,913,002, to redeem all of the outstanding Senior
Notes on October 15, 1998 at 106% of the aggregate principal amount thereof and
accrued and unpaid interest to the date of redemption. Such cash deposit and
irrevocable direction effected a satisfaction and discharge of the Senior Notes
pursuant to the Indenture.
A-11
<PAGE>
APPENDIX B
<PAGE>
BUSSE BROADCASTING CORPORATION
Financial Statements
December 28, 1998 and December 29, 1997
With Independent Auditors' Report Thereon
B-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Busse Broadcasting Corporation
We have audited the accompanying consolidated balance sheets of Busse
Broadcasting Corporation (the Company) (Post-Effective Date) as of December 28,
1997 and December 29, 1996 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years ended
December 28, 1997 and December 29, 1996 and the period from May 3, 1995 through
December 31, 1995. We have also audited the accompanying consolidated statements
of operations, stockholders' equity (deficit), and cash flows of Busse
Broadcasting Corporation (Pre-Effective Date) for the period from January 2,
1995 through May 2, 1995. Our audits also included the financial statement
schedule listed in the index at Item 14. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Busse Broadcasting
Corporation (Post-Effective Date) at December 28, 1997 and December 29, 1996 and
the consolidated results of its operations and its cash flows for the years
ended December 28, 1997 and December 29, 1996 and the period from May 3, 1995
through December 31, 1995 in conformity with generally accepted accounting
principles; and the consolidated results of its operations and its cash flows
(Pre-Effective Date) for the period from January 2, 1995 through May 2, 1995 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Ernst & Young LLP
Milwaukee Wisconsin
February 19, 1998
B-2
<PAGE>
Busse Broadcasting Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------------------------
ASSETS (NOTES 1 AND 3)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents (NOTE 6) .................................................... $ 8,974,699 $ 7,989,805
Receivables, net ...................................................................... 3,804,410 3,848,990
Other current assets .................................................................. 1,343,483 856,200
---------------------------------
Total current assets ....................................................................... 14,122,592 12,694,995
Property, plant and equipment, net ......................................................... 13,226,067 14,327,392
Deferred charges and other assets .......................................................... 1,811,809 2,424,312
Intangible assets and excess reorganization value .......................................... 48,775,820 52,707,124
---------------------------------
Total assets ............................................................................... $ 77,936,288 $ 82,153,823
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY (NOTES 1 AND 3)
Current liabilities
Accounts payable and accrued expenses ................................................. $ 4,161,712 $ 3,174,795
Long-term debt (NOTE 6) .................................................................... 60,918,857 60,464,182
Other long-term liabilities ................................................................ -- 941,501
Commitments (NOTE 11)
Stockholders' equity (NOTES 6 AND 10):
Series A cumulative convertible preferred stock
(non-voting) - $.01 par value, $1,000 per share liquidation preference;
65,524.41 shares authorized, issued and outstanding including dividends
in arrears of $9,485,924 and $4,663,471 at December 28, 1997 and December
29, 1996, respectively .............................................................. 26,816,584 21,994,131
Common stock (voting) - $.01 par value;
2,154,000 shares authorized, and 107,700 shares
issued and outstanding .............................................................. 1,077 1,077
Additional paid-in capital - common stock ............................................. 9,185,772 9,185,772
Accumulated deficit (NOTE 1) .......................................................... (23,147,714) (13,607,635)
---------------------------------
Total stockholders' equity ................................................................. 12,855,719 17,573,345
---------------------------------
Total liabilities and stockholders' equity ................................................. $ 77,936,288 $ 82,153,823
=================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
B-3
<PAGE>
Busse Broadcasting Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
POST-EFFECTIVE DATE
------------------------------------------------
FISCAL PERIOD
FISCAL YEAR FISCAL YEAR FROM MAY 3,
ENDED ENDED 1995 THROUGH
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Net revenue from continuing operations ............................................ $ 18,971,040 $ 19,274,171 $ 11,358,095
Operating costs and expenses, excluding depreciation and amortization ............. 8,427,942 8,407,679 5,151,550
Depreciation ...................................................................... 1,871,079 1,853,863 1,359,448
Amortization of intangibles and excess reorganization value ....................... 3,931,304 3,859,999 2,607,858
--------- --------- ---------
Total operating costs and expenses of continuing operations ...................... 14,230,325 14,121,541 9,118,856
Corporate expenses ................................................................ 1,523,674 1,571,772 870,072
--------- --------- ---------
Income from continuing operations ................................................. 3,217,041 3,580,858 1,369,167
Other income (expense) from continuing operations:
Interest expense ............................................................. (8,340,845) (8,400,340) (5,794,343)
Interest income .............................................................. 445,072 287,793 836,119
Loss on disposition of assets ................................................ (113,148) (77,982) (3,626)
Other income ................................................................. 74,254 23,922 4,522
--------- --------- ---------
Other expense from continuing operations .......................................... (7,934,667) (8,166,607) (4,957,328)
--------- --------- ---------
Loss from continuing operations before income taxes ............................... (4,717,626) (4,585,749) (3,588,161)
(Provision) benefit for income taxes (NOTE 8)
Current - Federal ............................................................ -- -- (1,673,929)
Current - State .............................................................. -- -- (41,000)
Deferred - Federal ........................................................... -- -- 2,069,000
Deferred - State ............................................................. -- -- 517,000
--------- --------- ---------
Income taxes benefit .............................................................. -- -- 871,071
--------- --------- ---------
Loss from continuing operations ................................................... (4,717,626) (4,585,749) (2,717,090)
Discontinued operations:
Income from operations net of applicable income tax provision of $53,000
for the fiscal period from May 3, 1995 through December 31, 1995 (NOTE 4) -- 220,468 67,843
Loss on disposal of operations (NOTE 4) ........................................... -- (1,929,636) --
--------- --------- ---------
-- (1,709,168) 67,843
--------- --------- ---------
Net loss .......................................................................... (4,717,626) (6,294,917) (2,649,247)
Charges to stockholders' equity for Series A preferred
stock dividends in arrears .................................................. (4,822,453) (4,663,471) --
--------- --------- ---------
Net loss attributable to common stockholders ...................................... $ (9,540,079) $(10,958,388) $ (2,649,247)
============ ============ ============
Per common share (basic and diluted):
Loss from continuing operations .............................................. $ (43.80) $ (42.58) $ (25.13)
Income (loss) from discontinued operations ................................... -- (15.87) .63
Series A preferred stock dividends in arrears ................................ (44.78) (43.30) --
--------- --------- ---------
Net loss ..................................................................... $ (88.58) $ (101.75) $ (24.50)
============ ============ ============
Weighted average common shares outstanding ........................................ 107,700 107,700 108,126
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
B-4
<PAGE>
Busse Broadcasting Corporation
Consolidated Statements of Operations (continued)
<TABLE>
<CAPTION>
PRE-EFFECTIVE DATE
------------------
FISCAL PERIOD FROM
JANUARY 2, 1995
THROUGH
MAY 2, 1995
------------------
<S> <C>
Net revenue ............................................................................................ $ 14,510,895
Operating costs and expenses, excluding depreciation and amortization .................................. 8,509,977
Depreciation ........................................................................................... 1,307,271
Amortization of intangibles and excess reorganization value ............................................ 468,801
--------------
Total operating costs and expenses ..................................................................... 10,286,049
Corporate expenses ..................................................................................... 290,960
--------------
Income from operations ................................................................................. 3,933,886
Other income (expense):
Interest expense ................................................................................. (7,472,473)
Interest income .................................................................................. 85,525
Gain on disposition of assets .................................................................... 2,133
Other income ..................................................................................... 144,198
--------------
Other expense .......................................................................................... (7,240,617)
--------------
(3,306,731)
Reorganization items:
Gain on restructuring transaction (NOTE 1) ....................................................... 103,810,917
Legal and professional fees ...................................................................... (2,660,510)
--------------
Income before income taxes and extraordinary item ...................................................... 97,843,676
(Provision) benefit for income taxes (NOTE 8)
Current - State .................................................................................. (100,000)
Deferred-Benefit ................................................................................. 2,318,000
--------------
2,218,000
-------------
Income before extraordinary item ....................................................................... 100,061,676
Extraordinary item
Debt forgiveness related to restructuring transactions (NOTE 1) ................................... 46,479,605
-------------
Net income ............................................................................................. $ 146,541,281
=============
Per common share (basic and diluted):
Income before extraordinary item .................................................................. $ 990.71
Extraordinary item ................................................................................ 460.19
-------------
Net income ........................................................................................ $ 1,450.90
=============
Weighted average common shares outstanding ............................................................. 101,000
=============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
B-5
<PAGE>
Busse Broadcasting Corporation
Consolidated Statements of Stockholders' Equity (Deficit) (NOTE 1)
<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------------------------------------- PRE-EFFECTIVE
PRE- POST- DATE
EFFECTIVE EFFECTIVE SHARES
DATE SHARES AMOUNT DATE SHARES AMOUNT CLASS A
----------- ------ ----------- ------ -------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1995 ................................ 30 $ 6,309,000 -- $ -- 1,000
Net income for the period from January 2,
1995 through May 2, 1995 ............................. -- -- -- -- --
Transactions pursuant to Plan of Reorganizations:
Cancellation of pre-effective date
preferred stock ................................. (30) (6,309,000) -- -- --
Cancellation of pre-effective date
common stock .................................... -- -- -- -- (1,000)
Issuance of post-effective date
common stock and adoption of
fresh start reporting ........................... -- -- -- -- --
-------- ------------ --------- ----------- -----------
Balance May 3, 1995 .................................... -- -- -- -- --
Net loss for the period from May 3, 1995
through December 31, 1995 ............................ -- -- -- -- --
Purchase and cancellation of Company's
stock ................................................ -- -- -- -- --
-------- ------------ --------- ----------- -----------
Balance December 31, 1995 .............................. -- -- -- -- --
Issuance of Series A Preferred stock in
exchange for junior subordinated pay-in-
kind notes on January 12, 1996 ....................... -- -- 65,524.41 17,330,660 --
Net loss ............................................... -- -- -- -- --
Provisions for dividends in arrears .................... -- -- -- 4,663,471 --
-------- ------------ --------- ----------- -----------
Balance December 29, 1996 .............................. -- -- 65,524.41 21,994,131 --
Net loss ............................................... -- -- -- -- --
Provisions for dividends in arrears .................... -- -- -- 4,822,453 --
-------- ------------ --------- ----------- -----------
Balance December 28, 1997 .............................. -- $ -- 65,524.41 $26,816,584 --
======== ============ ========= =========== ===========
<CAPTION>
COMMON STOCK
--------------------------------------------------------------------
PRE- EFFECTIVE DATE
SHARES
------------------- POST-
ADDITIONAL EFFECTIVE
PAID-IN DATE
CLASS B AMOUNT CAPITAL SHARES AMOUNT
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1995 ................................ 100,000 $ 1,010 $ 1,008,990 -- $ --
Net income for the period from January 2,
1995 through May 2, 1995 ............................. -- -- -- -- --
Transactions pursuant to Plan of Reorganizations:
Cancellation of pre-effective date
preferred stock ................................. -- -- -- -- --
Cancellation of pre-effective date
common stock .................................... (100,000) (1,010) (1,008,990) -- --
Issuance of post-effective date
common stock and adoption of
fresh start reporting ........................... -- -- -- 110,000 1,100
-------- ------------ --------- ----------- -----------
Balance May 3, 1995 .................................... -- -- -- 110,000 1,100
Net loss for the period from May 3, 1995
through December 31, 1995 ............................ -- -- -- -- --
Purchase and cancellation of Company's
stock ................................................ -- -- -- (2,300) (23)
-------- ------------ --------- ----------- -----------
Balance December 31, 1995 .............................. -- -- -- 107,700 1,077
Issuance of Series A Preferred stock in
exchange for junior subordinated pay-in-
kind notes on January 12, 1996 ....................... -- -- -- -- --
Net loss ............................................... -- -- -- -- --
Provisions for dividends in arrears .................... -- -- -- -- --
-------- ------------ --------- ----------- -----------
Balance December 29, 1996 .............................. -- -- -- 107,700 1,077
Net loss ............................................... -- -- -- -- --
Provisions for dividends in arrears .................... -- -- -- -- --
-------- ------------ --------- ----------- -----------
Balance December 28, 1997 .............................. -- $ -- $ -- 107,700 $ 1,077
======== ============ ========= =========== ============
<CAPTION>
COMMON STOCK
-----------------------------------------------
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIT)
------- ------- ---------
<S> <C> <C> <C>
Balance January 1, 1995 ......................................................... $ -- $(144,657,381) $(143,647,381)
Net income for the period from January 2,
1995 through May 2, 1995 ...................................................... -- 146,541,281 146,541,281
Transactions pursuant to Plan of Reorganizations:
Cancellation of pre-effective date
preferred stock .......................................................... -- 6,309,000 6,309,000
Cancellation of pre-effective date
common stock ............................................................. -- 1,010,000 --
Issuance of post-effective date
common stock and adoption of
fresh start reporting .................................................... 9,201,800 (9,202,900) --
--------- ------------- -------------
Balance May 3, 1995 ............................................................. 9,201,800 -- 9,202,900
Net loss for the period from May 3, 1995
through December 31, 1995 ..................................................... -- (2,649,247) (2,649,247)
Purchase and cancellation of Company's
stock ......................................................................... (16,028) -- (16,051)
--------- ------------- -------------
Balance December 31, 1995 ....................................................... 9,185,772 (2,649,247) 6,537,602
Issuance of Series A Preferred stock in exchange for junior subordinated pay-in-
kind notes on January 12, 1996 ................................................ -- -- 17,330,660
Net loss ........................................................................ -- (6,294,917) (6,294,917)
Provisions for dividends in arrears ............................................. -- (4,663,471) --
--------- ------------- -------------
Balance December 29, 1996 ....................................................... 9,185,772 (13,607,635) 17,573,345
Net loss ........................................................................ -- (4,717,626) (4,717,626)
Provisions for dividends in arrears ............................................. -- (4,822,453) --
--------- ------------- -------------
Balance December 28, 1997 ....................................................... $ 9,185,772 $ (23,147,714) $ 12,855,719
========= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
B-6
<PAGE>
Busse Broadcasting Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
PRE-EFFECTIVE
POST-EFFECTIVE DATE DATE
-----------------------------------------------------------------
FISCAL PERIOD
FISCAL YEAR FISCAL YEAR FROM MAY 3, FISCAL PERIOD
ENDED ENDED 1995 THROUGH FROM JANUARY 2,
DECEMBER 28, DECEMBER 29, DECEMBER 31, 1995 THROUGH
1997 1996 1995 MAY 2, 1995
------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income (loss) .............................................. $ (4,717,626) $ (6,294,917) $ (2,649,247) $ 146,541,281
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ............................. 5,802,383 5,996,936 4,123,242 1,776,072
Loss on sale of discontinued operations ................... -- 1,929,636 -- --
Noncash interest expense .................................. 454,675 445,712 3,104,661 6,743,397
Amortization of deferred financing costs .................. 617,406 611,433 88,043 --
Program payments (over) under program amortization ........ (2,568) (16,891) (15,582) 20,063
Loss (gain) on disposition of property, plant and equipment 113,148 92,498 49,067 (2,133)
Deferred compensation expense ............................. 351,999 346,260 244,193 --
Pension expense (income) .................................. 63,060 129,507 (229,964) 79,926
Gain on pension plan curtailment (NOTE 7) ................. (344,782) -- -- --
Deferred income tax benefit (NOTE 8) ...................... -- -- (2,600,000) (2,318,000)
Reorganization items:
Gain on restructuring transactions (NOTE 1) ............. -- -- -- (103,810,917)
Debt forgiveness relating to restructuring
transactions (NOTE 1) ................................ -- -- -- (46,479,605)
Change in current assets and liabilities:
Receivables ............................................. 44,580 (299,044) (515,122) 596,984
Inventories and other current assets .................... (32,923) 522,037 62,914 185,403
Accounts payable and accrued expenses ................... 31,490 384,374 1,476,721 (378,690)
Income taxes payable .................................... (8,143) (30,817) 58,817 --
Contribution to pension plan trust (NOTE 7) ............. (500,000) -- -- --
--------- --------- --------- ---------
Net cash provided by operating activities ...................... 1,872,699 3,816,724 3,197,743 2,953,781
INVESTING ACTIVITIES:
Proceeds from sale of television station, net ................ -- -- 98,979,532 --
Capital expenditures ......................................... (883,599) (1,983,417) (656,772) (497,728)
Proceeds from disposition of assets .......................... 697 64,432 35,459 4,089
(Increase) decrease in other assets .......................... (4,903) (24,298) (34,364) 295
Increase in intangibles ...................................... -- -- (297,636) --
Cash proceeds from sale of Winnebago Color Press net of
expenses and cash sold ($285,101) (NOTE 4) ................ -- 2,854,277 -- --
--------- --------- --------- ---------
Net cash provided by (used in) investing activities ............ (887,805) 910,994 98,026,219 (493,344)
FINANCING ACTIVITIES:
Purchase and cancellation of Company's stock ................. -- -- (16,051) --
Payments on indebtedness ..................................... -- (35,391,571) (121,658,147) (4,641,023)
Proceeds from issuance of Senior Secured Notes ............... -- -- 60,000,909 --
Payment of deferred financing costs .......................... -- (240,301) (2,811,539) --
--------- --------- --------- ---------
Net cash used in financing activities .......................... -- (35,631,872) (64,484,828) (4,641,023)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........... 984,894 (30,904,154) 36,739,134 (2,180,586)
Cash and cash equivalents at beginning of period ............... 7,989,805 38,893,959 2,154,825 4,335,411
--------- --------- --------- ---------
Cash and cash equivalents at end of period ..................... $ 8,974,699 $ 7,989,805 $ 38,893,959 $ 2,154,825
============= ============= ============= =============
Supplemental disclosure of cash flow information:
Interest paid during the period ............................. $ 7,268,764 $ 7,303,035 $ 1,313,943 $ 742,020
============= ============= ============= =============
Income taxes paid during the period .......................... $ -- $ -- $ 1,723,112 $ 100,000
============= ============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
B-7
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements
December 28, 1997
1. BASIS OF PRESENTATION
The consolidated financial statements include Busse Broadcasting Corporation and
its wholly owned subsidiaries (collectively BBC or the Company) engaged in the
following businesses:
<TABLE>
<CAPTION>
TELEVISION:
<S> <C> <C>
KOLN/KGIN-TV CBS Affiliate Lincoln/Grand Island, Nebraska
WEAU-TV NBC Affiliate Eau Claire/La Crosse, Wisconsin
WWMT-TV CBS Affiliate Kalamazoo/Grand Rapids, Michigan
(Sold June 1, 1995)
PRINTING:
Winnebago Color Press Menasha, Wisconsin
(Sold December 27, 1996)
</TABLE>
All intercompany accounts and transactions have been eliminated in
consolidation.
The Company and its wholly-owned subsidiary filed voluntary petitions for a
joint plan of reorganization under Chapter 11 of the United States Bankruptcy
Code (the "Plan") on March 10, 1995. On April 20, 1995 the United States
Bankruptcy Court for the district of Delaware (the "Court") confirmed the Plan,
such Plan became effective May 3, 1995 (the "Effective Date") and the respective
Chapter 11 cases were closed by the Court on September 21, 1995.
The Plan provided for, among other things, the following as of the Effective
Date:
Creditors under the Bank Credit Agreement received, on a pro-rata basis,
immediately prior to the Effective Date $4,600,000 of cash, (plus
interest of $23,000) and on the Effective Date received on a pro-rata
basis, in exchange, on a dollar for dollar basis, for 100% of the
aggregate claims held against the Company, Senior Secured Credit
Agreement Notes (the "Credit Agreement") in the aggregate principal
amount of $10,400,000;
In exchange, on a dollar for dollar basis, for 100% of the aggregate
claims held against the Company, holders of the Zero Coupon Senior Notes
(for their aggregate claim as of May 2, 1995), Working Capital Advances,
Subordinated Note and Senior Subordinated Debentures (for their aggregate
claims as of March 9, 1995) received, on a pro-rata basis, $109,993,000
principal amount of 7.38% Secured Senior Subordinated Pay-in-Kind Notes
due December 31, 2014 (the "Senior PIK Notes") and new 7.38% Junior
Subordinated Pay-in-Kind Notes (the "Junior PIK Notes") due December 31,
2014 in the aggregate principal amount of $97,021,000 and cash in the
aggregate amount of $14,806 in lieu of fractional securities;
B-8
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
1. BASIS OF PRESENTATION (CONTINUED)
Holders of the Zero Coupon Senior Notes also received, on a pro-rata
basis, 100% of the new common stock of the restructured Company. As a
result of the Plan, on May 3, 1995, 98% of the new common stock was held
by a group of affiliated investment funds (the "South Street Investment
Funds"). On June 16, 1995, the Company purchased and retired the 2,300
shares of common stock not controlled by the South Street Investment
Funds;
Substantially all other obligations of the Company, including trade
payables and other general unsecured obligations were unaffected by the
plan;
All rights and claims of the holders of the Company's then outstanding
capital stock (or interests to acquire such stock) were extinguished; and
The appointment of new Board of Directors two of which are executive
officers of Granite Broadcasting Corporation (see Note 5).
The American Institute of Certified Public Accountants issued Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"), which provides guidance for financial reporting
when companies operate under and emerge from the protection of Chapter 11. SOP
90-7 requires that if (a) the reorganization value of the company, as defined,
was less than the total of all post-petition liabilities and pre-petition
claims, and (b) the holders of voting shares immediately before confirmation of
the Plan received less than fifty percent of the voting shares of the emerging
entity, then Fresh Start Accounting must be adopted. Since the Company met both
of these conditions, it adopted Fresh Start Accounting on the Effective Date.
Fresh Start Accounting provides that liabilities be recorded at their fair
values, based upon market interest rates at the Effective Date. In addition,
assets are to be recorded based on an allocation of the reorganization value of
the Company, which approximates fair market value, and any retained earnings or
deficit balance is to be eliminated as of the Effective Date.
The reorganization value of the Company as of the Effective Date was based, in
part, on the valuation information supplied to the bankruptcy court and, as
discussed below and in Note 5, the net cash proceeds the Company expected to
receive in conjunction with the sale of WWMT-TV. The reorganization value was
allocated based on appraisals which were performed by independent, third-party
appraisers and were based on traditional valuation methods used in the appraisal
industry.
B-9
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
1. BASIS OF PRESENTATION (CONTINUED)
The Company determined the Fresh Start Accounting balances for its
liabilities as follows:
Liabilities and indebtedness not impaired by the Plan were recorded at
their historical balances;
Indebtedness retired or expected to be retired with the proceeds of the
WWMT-TV sale was valued for financial reporting purposes at 100% of
aggregate principal amount at the date of issuance and included
$10,400,000 of Credit Agreement notes, $84,437,000 of Senior PIK Notes
and $1,180,000 of Junior PIK Notes;
Indebtedness which the Company reasonably expected to refinance in the
near future was valued for financial reporting purposes at 100% of
aggregate principal amount at the date of issuance and included
$25,556,000 of Senior PIK Notes and $40,000,000 of Junior PIK Notes;
Indebtedness which the Company did not anticipate refinancing on a
current basis was recorded for financial accounting purposes at its
discounted present value using a 17% discount rate which was indicative
of market interest rates for similar securities at the Effective Date.
Accordingly, $55,841,000 aggregate principal amount of Junior PIK Notes
(the "Discounted Junior PIK Notes") were recorded at an initial balance
of $9,390,000 as of May 3, 1995 and accrued interest for financial
reporting purposes at 17%.
The adjustments to adopt Fresh Start Accounting resulted in a total gain on
restructuring transactions of $150,290,522 in the accompanying consolidated
statement of operations for the period from January 2, 1995 through May 2, 1995.
The components of this gain are as follows:
Adjustments to assets and liabilities to reflect adoption
of Fresh Start Accounting $103,810,917
Debt forgiveness related to restructuring transactions
(classified as an extraordinary item in the
accompanying consolidated statement of operations) 46,479,605
------------
Total gain on restructuring transactions $150,290,522
============
B-10
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
1. BASIS OF PRESENTATION (CONTINUED)
Pursuant to the Plan, the Company did not accrue approximately $1.8 million of
interest on certain of its Pre-Effective Date indebtedness for the period March
9, 1995 through the Effective Date.
In applying Fresh Start Accounting, the Company accounted for its interest in
WWMT-TV (sold June 1, 1995) as an investment held for sale pursuant to the
guidance of EITF Issue No. 87-11, "Allocation of Purchase Price to Assets to be
Sold". As discussed more fully in Note 5, the Company valued the investment in
WWMT-TV based on the expected sales proceeds, net of selling costs, the
incremental cash generated during the holding period and interest charges
relating to the debt to be retired with the net sale proceeds. The results of
operations for WWMT-TV and the incremental interest on the debt to be retired
with the net sale proceeds are not reflected in the accompanying Post-Effective
Date consolidated statement of operations but rather were estimated in the
original investment in WWMT-TV on the Effective Date.
As a result of the effectiveness of the Plan and the adoption of Fresh Start
Accounting, the results for the fiscal years ended December 28, 1997 and
December 29, 1996 and for the fiscal period from May 3, 1995 through December
31, 1995 are not comparable to any of the Company's fiscal periods ended on or
prior to May 2, 1995 and accordingly, Pre-Effective Date and Post-Effective Date
financial statements and disclosures are presented on separate pages or are
separated by a vertical line.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
TELEVISION PROGRAM CONTRACT RIGHTS
The rights to broadcast non-network programs are stated at cost less accumulated
amortization. These costs are amortized based upon the usage of the programs
under methods which generally result in straight-line amortization. The cost of
program rights expected to be used within one year is classified as a current
asset.
B-11
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost net of accumulated
depreciation. Depreciation is generally calculated on the straight-line method
based on the following useful lives:
POST-EFFECTIVE|PRE-EFFECTIVE
DATE DATE
-------------- -------------
YEARS YEARS
-------------- -------------
Leasehold and land improvements 5-20 5-10
Buildings 20 30
Machinery and equipment 1-20 10-20
Vehicles 1-3 3-7
DEFERRED FINANCING COSTS
Deferred financing costs relate to costs incurred with the issuance of debt
securities and are being amortized over the respective lives of the debt issues
utilizing the weighted average debt outstanding method. Accumulated amortization
at December 28, 1997 and December 29, 1996 was $1,316,882 and $699,476,
respectively.
INTANGIBLE ASSETS AND EXCESS REORGANIZATION VALUE
On the Effective Date the amounts allocated to intangible assets and excess
reorganization value represent the excess of the reorganization value over the
amounts allocated to the net tangible and all other intangible assets as of the
Effective Date. These amounts are being amortized on a straight-line basis over
15 years. Accumulated amortization at December 28, 1997 and December 29, 1996
was $10,399,161 and $6,467,857, respectively.
Prior to the Effective Date, goodwill and amounts allocated to FCC licenses and
network contracts were amortized on a straight-line basis over forty years. The
cost of other intangible assets with determinable economic lives was charged to
operations based on their respective economic lives, under methods that
generally resulted in accelerated amortization.
B-12
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company records impairment losses on long-lived assets used in operations,
including excess reorganization value, when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets.
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.
ADVERTISING
Advertising costs are expensed as incurred and totaled $239,689, $222,780 and
$489,243 for fiscal 1997, 1996 and 1995, respectively.
REPORTING PERIOD
The Company's fiscal year is the 52/53 week period ending on the Sunday nearest
December 31.
3. SUPPLEMENTARY BALANCE SHEET INFORMATION
The composition of certain balance sheet information follows:
DECEMBER 28, DECEMBER 29,
1997 1996
------------------------
Receivables:
Trade $3,715,713 $3,786,502
Other 149,597 123,388
----------------------
3,865,310 3,909,890
Less allowance for doubtful accounts (60,900) (60,900)
----------------------
$3,804,410 $3,848,990
======================
B-13
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
3. SUPPLEMENTARY BALANCE SHEET INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------------------------
Other current assets:
<S> <C> <C>
Program contract rights (NOTE 11) ........................................... $ 699,405 $ 675,719
Prepaid expenses and other .................................................. 213,404 180,481
Prepaid pension costs (NOTE 7) .............................................. 430,674 --
------------ ------------
$ 1,343,483 $ 856,200
============ ============
Property, plant and equipment:
Land, land improvements, buildings and improvements ......................... $ 2,676,990 $ 2,666,744
Machinery and equipment ..................................................... 13,908,889 13,285,024
Office equipment ............................................................ 953,501 854,225
Vehicles .................................................................... 465,895 443,995
Construction in progress .................................................... 67,767 175,931
------------ ------------
18,073,042 17,425,919
Accumulated depreciation .................................................... (4,846,975) (3,098,527)
------------ ------------
$ 13,226,067 $ 14,327,392
============ ============
Deferred charges and other assets:
Deferred financing costs .................................................... $ 1,734,958 $ 2,352,364
Other ....................................................................... 76,851 71,948
------------ ------------
$ 1,811,809 $ 2,424,312
============ ============
Accounts payable and accrued expenses:
Accounts payable ............................................................ $ 245,761 $ 318,639
Program contracts payable (NOTE 11) ......................................... 590,865 569,747
Accrued interest ............................................................ 1,514,326 1,514,326
Accrued long term incentive plan obligations (NOTE 7) ....................... 942,452 --
Other accrued expenses ...................................................... 868,308 772,083
------------ ------------
$ 4,161,712 $ 3,174,795
============ ============
Other long-term
liabilities:
Accrued pension plan obligations (NOTE 7) ................................... $ -- $ 351,048
Accrued long term incentive plan obligations (NOTE 7) ....................... -- 590,453
------------ ------------
$ -- $ 941,501
============ ============
</TABLE>
B-14
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
4. DISCONTINUED OPERATIONS--SALE OF WINNEBAGO COLOR PRESS
On December 27, 1996, the Company sold substantially all of the assets of its
Winnebago Color Press ("Winnebago") division to Winnebago Color Press, Inc., an
entity owned in part by Mr. Lawrence A. Busse, the Chairman and Chief Executive
Officer of BBC for $3,327,856 in cash plus the assumption of certain liabilities
totaling $369,638 and, after payment of certain selling costs, retained net
proceeds of $3,242,235 (approximately $3,207,000 after payment of $35,000 of
certain obligations under the Company's Long Term Incentive Plan, see Note 7).
The Company received $102,857 of the sale proceeds in February 1997; such amount
was recorded as a receivable as of December 29, 1996. The Company's utilization
of such net proceeds is restricted under the terms of a certain indenture
relating to the Company's 11 5/8% Senior Secured Notes due October 15, 2000 (see
Note 6). As part of the transaction the Company received an opinion from an
investment banking firm that the transaction was fair to the Company and its
stockholders. Winnebago was the Company's only operation within the printing
segment and accordingly, because of the sale, this segment has been presented as
a discontinued operation. The loss on the transaction of $1,929,636 is
classified as a loss on disposal of discontinued operations in the accompanying
consolidated statements of operations for the year ended December 29, 1996 and
the operations of Winnebago for the year ended December 29, 1996 and the period
from May 3, 1995 through December 31, 1995 are classified as income from
discontinued operations. The net revenues of Winnebago included in the
consolidated statements of operations were $6,896,484 and $4,312,605 for the
year ended December 29, 1996 and the period from May 3, 1995 through December
31, 1995, respectively.
Corporate expenses and interest expense, net of interest income, have been
allocated to income from discontinued operations only if such expenses are
directly attributable to Winnebago. For the year ended December 29, 1996 and for
the period from May 3, 1995 through December 31, 1995 the corporate expenses
allocated to income from discontinued operations were $27,233 and $7,767,
respectively, and $12,711 and $3,611, respectively, for interest expense net of
interest income.
B-15
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
5. SALE OF WWMT-TV
On February 1, 1995, the Company formed a wholly-owned subsidiary, WWMT, Inc.
[renamed Busse Management Inc. ("BMI") on May 3, 1995 and further renamed
KOLN/KGIN, Inc. on October 20, 1995 (see Note 9)], and subsequently contributed
substantially all of the assets and current liabilities of television station
WWMT-TV, Kalamazoo, Michigan, to the subsidiary. On February 20, 1995, the
Company and WWMT, Inc. entered into an agreement with Granite Broadcasting
Corporation ("Granite") to sell substantially all of the assets of WWMT for
$95,000,000 plus the net working capital as defined therein and Granite's
assumption of certain liabilities. The sale was completed as of the opening of
business on June 1, 1995. Gross proceeds, approximating $99,400,000 from the
sale were used, in part, to repay the outstanding Credit Agreement ($10,400,000)
and purchase or redeem (at 100% of aggregate principal value plus accrued
interest) certain Senior PIK Notes ($84,437,000 aggregate principal value),
Junior PIK Notes ($1,180,000 aggregate principal value) and 2,300 shares of
common stock ($16,051 purchase price).
In applying Fresh Start Accounting the Company accounted for its interest in
WWMT-TV as an investment held for sale pursuant to the guidance of EITF Issue
No. 87-11, "Allocation of Purchase Price to Assets to be Sold". The Company
valued the investment in WWMT-TV based on the expected sales proceeds, net of
selling costs, the incremental cash to be generated during the holding period
and interest charges relating to the debt to be retired with the net sale
proceeds as follows:
Expected gross cash proceeds from the sale of
WWMT-TV $99,420,357
Plus cash generated from operations from May 3,
1995 through May 31, 1995 498,637
Less expenses incurred to sell WWMT-TV (316,969)
Less interest on the debt to be retired (622,493)
-----------
Net investment in WWMT-TV as of May 3, 1995 $98,979,532
===========
Two of the three members of the board of directors of the Company are executive
officers of Granite. An individual affiliated with the South Street Investment
Funds is one of the nine members of the board of directors of Granite and holds
equity interests in Granite (see Note 1).
B-16
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
6. DEBT
Long-term debt is summarized as follows:
DECEMBER 28, DECEMBER 29,
1997 1996
-------------------------
Senior Secured Notes, net of unamortized original
issue discount of $1,608,143 and $2,062,818
at December 28, 1997 and December 29, 1996,
respectively $60,918,857 $60,464,182
========================
On October 26, 1995 the Company issued $62,527,000 principal amount of 11 5/8%
Senior Secured Notes due October 15, 2000 ("Senior Notes") at a price of 95.96%
of the aggregate principal amount thereof and received net proceeds of
$58,125,099 after payment of underwriting discounts and commissions of
$1,875,810.
A portion of the net proceeds from the issuance of the Senior Notes were used by
the Company on October 26, 1995 to redeem all of the outstanding 7.38% Secured
Senior Subordinated Pay-in-Kind Notes, at 100% of the principal amount thereof
plus accrued and unpaid interest thereon, for an aggregate cost of $26,469,445.
The remaining net proceeds of $31,655,654 were deposited in an Escrow Account
maintained by the trustee of the Senior Notes and used by the Company on January
12, 1996 to effect, together with cash of approximately $3,193,409 and the
interest earned on the funds deposited in the Escrow Account, the Junior
Subordinated Note Redemption, without penalty or premium, at 100% of the
principal amount of the Junior Subordinated Notes to be redeemed for cash, plus
accrued interest thereon to the date of redemption, at a cost of $35,241,061.
The outstanding principal amount of the Junior Subordinated Notes immediately
prior to the Junior Subordinated Note Redemption was $100,765,475. The balance
of the Junior Subordinated Notes not redeemed for cash in the Junior
Subordinated Note Redemption was redeemed for 65,524.4135 shares of the
Company's Series A Preferred Stock, at a rate of one share for each $1,000
aggregate principal amount of, and accrued and unpaid interest on, such Junior
Subordinated Notes.
Interest on the Senior Notes is payable semiannually in arrears on April 15 and
October 15 of each year. Interest is computed on the basis of a 360-day year
comprised of twelve 30-day months.
B-17
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
6. DEBT (CONTINUED)
The Senior Notes are senior in right of payment to all existing and future
subordinated indebtedness of the Company and rank pari passu with all existing
and future senior indebtedness of the Company. The Senior Notes are secured by
all of the Company's equity interests in, and certain intercompany indebtedness
of, its subsidiaries, including the subsidiaries which hold the FCC licenses of
the Company's two television stations, certain agreements and contract rights
related to such television stations (including network affiliation agreements),
certain machinery, equipment and fixtures, certain general intangibles,
mortgages on substantially all of the owned and certain of the leased real
property of the Company and its subsidiaries, and proceeds thereof. In addition,
the Company's subsidiaries (collectively the "Guarantors") have fully and
unconditionally guaranteed the Senior Notes on a joint and several and senior
secured basis and each such guarantee ranks senior in right of payment to all
existing and future subordinated indebtedness of such Guarantor and ranks pari
passu with all existing and future senior indebtedness of such Guarantor.
The Senior Notes may not, except in certain circumstances, be redeemed by the
Company before October 15, 1998. Thereafter, the Senior Notes will be subject to
redemption at the option of the Company, in whole or in part, at the redemption
prices of 106% and 103% (expressed as percentages of the face amount of the
Senior Notes), plus accrued and unpaid interest to the date of redemption, if
redeemed during the twelve-month period beginning on October 15, 1998 and 1999,
respectively.
The indenture relating to the Senior Notes (the "Indenture") required that the
net proceeds, as defined by the Indenture and which are net of the payment made
under the long-term incentive plan, from the sale of Winnebago ($3,207,000) be
utilized to (i) offer to redeem Senior Notes at 100% of their accreted value on
the date of redemption, plus accrued interest, or (ii) to make investments in or
acquire properties and assets directly related to television and/or radio
broadcasting as specified in the Indenture. In accordance with the Indenture, on
February 12, 1997 the Company commenced an offer to purchase up to $3,207,000 of
aggregate principal amount of Senior Notes with the net proceeds of the sale of
Winnebago. The Company's offer to purchase expired, by its terms, on March 14,
1997 with no Senior Notes having been tendered by their respective holders and,
consequently, no Senior Notes were purchased by the Company. Under the terms of
the Indenture, the Company may only utilize the $3,207,000 and the interest
thereon to make investments in or acquire properties and assets directly related
to television and/or radio broadcasting. Such net proceeds and the interest
earnings thereon are held by the Indenture Trustee as collateral proceeds and
are classified as cash equivalents on the accompanying consolidated balance
sheet.
B-18
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
6. DEBT (CONTINUED)
The Indenture contains various convenants and restrictions on the Company and
its subsidiaries including, but not limited to, incurring additional
indebtedness, issuing certain disqualified capital stock, making dividend
payments or certain other restricted payments, consummating certain asset sales,
incurring liens, entering into certain transactions with affiliates, creating or
acquiring additional subsidiaries, merging or consolidating with any other
person, or selling, assigning, transferring, leasing, conveying or otherwise
disposing of all or substantially all of the assets of the Company or its
subsidiaries. Upon a change of control, as defined in the Indenture, the Company
is required to offer to repurchase all or any portion (equal to $1,000 or an
integral multiple thereof) of the Senior Notes at a purchase price in cash equal
to 101% of the accreted value thereof, plus accrued and unpaid interest to the
date of repurchase in accordance with the terms of the Indenture. Consumation of
the Stock Purchase Agreement (see Note 13) will constitute a change of control,
as defined in the Indenture.
The Indenture does not restrict the ability of a subsidiary to pay dividends or
make loans or advances to the Company.
It was not practicable to estimate the fair value of the Company's long-term
debt securities because of a lack of quoted market prices and the inability to
estimate fair value without incurring excessive costs.
7. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLAN
The Company has a noncontributory defined benefit pension plan (the "Pension
Plan") covering approximately 129 full-time employees, 15 retirees receiving
benefits and 90 separated vested participants. The benefits are based on length
of service, age and the employee's compensation.
On July 1, 1997 the Company amended its defined benefit plan to freeze all
benefit and service accruals thereunder and to terminate, subject to
governmental approval, the Pension Plan effective as of September 28, 1997. The
Company has recorded a gain of $344,782 for the year ended December 28, 1997 for
the curtailment of the Pension Plan. Such gain is included as an offset to
operating costs and expenses in the consolidated statement of operations.
Additional charges or gains, if any, for the settlement of the Pension Plan will
be recorded upon final settlement of the Pension Plan obligations. Termination
and settlement for the Pension Plan are subject to various government agency
approvals and the Company does not currently anticipate such settlements to
occur prior to the second half of fiscal 1998.
B-19
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Applications for determination and notification with the Pension Benefit
Guaranty Corporation (the "PBGC") and Internal Revenue Service (the "IRS") were
filed pursuant to governmental regulations on January 22, 1998. The Company
anticipates that the IRS will rule that the Pension Plan qualifies under Section
401(a) of the Internal Revenue Code and, therefore, will not be subject to tax
under present income tax laws. Upon termination, all participants will become
fully vested and will be able to accept their settlement benefit as an annuity,
lump sum payment or roll-over of benefits into the Company's 401(k) Savings
Plan.
In anticipation of the settlement of the Pension Plan, in September 1997 the
Company contributed $500,000 to the Pension Plan's trust fund.
The Company currently anticipates that the present value of all vested benefit
obligations will exceed the fair value of the pension plan trust assets at the
future settlement date and, as such, the Company expects to be required to fund
such difference, the "Settlement Funding". The settlement date cannot be
determined until the IRS and PBGC approve the Company's termination
applications. Any Settlement Funding to the pension trust by the Company will
not be calculable as a sum certain until the settlement date is established
according to the applicable governmental regulations since such calculations are
dependent upon certain governmentally prescribed settlement interest rates in
effect 60 days prior to the settlement date.
The Company's funding policy is to contribute amounts to the plan sufficient to
meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974, plus such additional amounts as the Company may
determine to be appropriate from time to time, including any contributions
necessary to effect the plan settlement. The components of pension cost were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Service cost--benefit earned during period $ 74,150 $ 134,377 $ 204,706
Interest cost on projected benefit obligation 162,453 154,256 180,362
Actual return on plan assets (239,265) (183,951) (227,067)
Net amortization and deferral 65,722 24,825 19,824
----------------------------------------
Net periodic pension cost $ 63,060 $ 129,507 $ 177,825
========================================
</TABLE>
B-20
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumptions used in the accounting for the defined benefit plan were:
1997 1996 1995
----------------------------
Weighted average discount rates 7.5% 7.25% 7.25%
Rates of increase in compensation levels 5.0% 5.0% 5.0%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
The following table sets forth the funded status and amounts recognized in the
Company's consolidated balance sheet:
DECEMBER 28, DECEMBER 29,
1997 1996
-------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $2,426,263 $2,149,278
=======================
Accumulated benefit obligation $2,426,263 $2,175,809
=======================
Projected benefit obligation 2,426,263 2,356,168
Plan assets at fair value, primarily group annuity
contracts and U.S. corporate stocks and bonds 2,729,263 2,103,190
-----------------------
Projected benefit obligation in excess of (less
than) plan assets (303,000) 252,978
Unrecognized gain (127,674) (15,561)
Unrecognized prior service cost -- 113,631
-----------------------
Net pension (asset) liability recognized in the
consolidated balance sheets $ (430,674) $ 351,048
=======================
Effective June 1, 1995 the Company curtailed the portion of the defined benefit
pension plan related to the WWMT-TV employees and recognized an associated gain
of $327,866 at that time.
DEFINED CONTRIBUTION PLAN
The Company has 401(k) plans available to substantially all employees with at
least 1,000 hours of service annually. The Company matches 50% of the first 2%
of the employee contributions.
B-21
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
In addition, for the period from September 29, 1997 through December 28, 1997
the Company accrued a voluntary profit sharing contribution for each participant
of the greater of $75 or the product of the applicable percentage set forth
below times the participant's compensation during the period from September 29,
1997 through December 28, 1997:
YEARS OF VESTING SERVICE PERCENTAGE
--------------------------------------------------------------
Less than 5 1.0%
5 to 9 1.5%
10 to 14 3.0%
15 to 19 5.0%
20 to 24 6.0%
25 to 29 7.0%
30 or more 7.5%
Funding of the voluntary profit sharing contribution will occur in fiscal 1998.
Total plan expense was $64,476, $71,673, $31,247, and $57,718 for fiscal years
1997 and 1996 and the periods from May 3, 1995 through December 31, 1995, and
January 2, 1995 through May 2, 1995, respectively.
LONG TERM INCENTIVE PLAN
The Company maintains a Long Term Incentive Plan (the "LTIP") for certain key
executives (the "Participants"). As of December 28, 1997 the aggregate maximum
amount which the Company may become obligated to pay under the LTIP is
$1,065,000 and each Participants' allocated share of such amount is referred to
as the "Maximum Amount". Participants vest ratably over thirty-six months
beginning May 3, 1995 (the "Vested Amount"), and, subject only to continuous
employment, the Maximum Amount is due and payable May 3, 1998. In the event of a
Participant's death or disability the Participant will be entitled to payment of
the Vested Amount as of such date. In certain instances involving changes in
control of the Company or significant asset sales, a Participant may be entitled
to the Maximum Amount. In conjunction with the sale of Winnebago, a former
Participant was paid his Maximum Amount of $35,000. In the event of a
Participant's termination of employment without "cause" or by such Participant
for "good reason" (as defined therein) the Participant may be entitled to the
discounted present value of the Maximum Amount according to a formula defined in
the LTIP. If a Participant's employment with the Company terminates for "cause"
(as defined therein), the Company's obligations with respect to that Participant
terminate and no payments will be made to the Participant.
B-21
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company is not required to fund or otherwise segregate assets to be used to
pay benefits under the LTIP. Under the LTIP the Company is precluded, with
certain permitted exceptions, from paying cash dividends and entering into
transactions with Affiliates (as defined therein) other than on fair and
reasonable terms.
For fiscal years 1997 and 1996 and the fiscal period from May 3, 1995 through
December 31, 1995, the Company expensed $351,999, $381,260 and $244,193,
respectively, relating to the LTIP based on a 3 year straight line amortization.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and income tax purposes. Significant components of the Company's
deferred tax assets and liabilities are as follows:
DECEMBER 28, DECEMBER 29,
1997 1996
---------------------------
Deferred tax liabilities -
Property, plant and equipment basis differences $ 3,176,000 $ 3,569,000
Deferred tax assets:
Federal net operating loss carryforwards 20,876,000 20,706,000
State net operating loss carryforwards 3,177,000 2,747,000
Alternative minimum tax credit 1,615,000 1,615,000
Other 290,000 47,000
--------------------------
25,958,000 25,115,000
Valuation allowances (22,782,000) (21,546,000)
--------------------------
3,176,000 3,569,000
--------------------------
$ -- $ --
==========================
Due to past and current operating losses, a valuation allowance has been
recognized to offset the Company's net deferred tax assets.
B-23
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The benefit (provision) for income taxes from continuing operations is different
from the amount computed by applying the U.S. statutory rate due to the
following items:
<TABLE>
<CAPTION>
| PRE-EFFECTIVE
POST-EFFECTIVE DATE | DATE
--------------------------------------------------|-----------------
FISCAL PERIOD |
FISCAL YEAR ENDED FROM MAY 3, | FISCAL PERIOD
---------------------------- 1995 THROUGH | FROM JANUARY 2,
DECEMBER 28, DECEMBER 29, DECEMBER 31, | 1995 THROUGH
1997 1996 1995 | MAY 2, 1995
--------------------------------------------------|-----------------
Benefit (provision), from continuing operations |
and including extraordinary item, at federal |
<S> <C> <C> <C> <C>
statutory rate $1,604,000 $1,559,000 $1,220,000 | $(49,070,000)
State taxes -- -- 341,000 | (1,358,000)
Change in valuation allowance -- -- 136,000 | 40,854,000
Unused current net operating loss (267,000) (71,000) -- | --
Gain on restructuring transactions and |
related items -- -- -- | 11,762,000
Non-deductible amortization of intangible assets |
and excess reorganization values and other |
items (1,337,000) (1,488,000) (825,929) | 30,000
--------------------------------------------------|-----------------
$ -- $ -- $ 871,071 | $ 2,218,000
==================================================|=================
</TABLE>
The deferred (provision) benefit from continuing operations consists of the
following:
<TABLE>
<CAPTION>
| PRE-EFFECTIVE
POST-EFFECTIVE DATE | DATE
--------------------------------------------------|-----------------
|
FISCAL PERIOD |
FISCAL YEAR ENDED FROM MAY 3, | FISCAL PERIOD
---------------------------- 1995 THROUGH | FROM JANUARY 2,
DECEMBER 28, DECEMBER 29, DECEMBER 31, | 1995 THROUGH
1997 1996 1995 | MAY 2, 1995
--------------------------------------------------|-----------------
|
Deferred tax benefits of temporary differences |
<S> <C> <C> <C> <C>
other than operating loss carryforwards $ 636,000 $ 19,414,000 $30,220,000 | $(39,562,000)
Benefits (use) of operating loss carryforwards 600,000 1,728,000 (27,770,000) | 1,026,000
Change in valuation allowance (1,236,000) (21,142,000) 136,000 | 40,854,000
--------------------------------------------------|-----------------
$ -- $ -- $ 2,586,000 | $ 2,318,000
==================================================|=================
</TABLE>
B-24
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
As of December 28, 1997 the Company had approximately $61,400,000 of federal net
operating loss carryforwards ("NOL's") which begin to expire in 2005. As a
result of the Plan (see Note 1) the Company elected treatment under Section 382
(1) (5) of the Internal Revenue Code, as amended. This treatment will allow the
restructured Company to utilize, under certain restrictions, its NOL's to offset
taxable income incurred after the Effective Date. The pending ownership change
(see Note 13) will further restrict the Company's use of its NOL's under Section
382. Utilization of a portion of these NOL's are assumed in the Company's
calculation of Post-Effective Date deferred taxes.
9. CORPORATE REORGANIZATION/SUBSIDIARY GUARANTORS
The Senior Notes are fully and unconditionally guaranteed, on a joint and
several and senior secured basis, by all of the Company's direct and indirect
subsidiaries, each of which is wholly-owned. To facilitate the collateral
arrangements required by the Senior Notes the Company effected the following
transactions on October 20, 1995:
1. The Federal Communication Commission ("FCC") licenses
relating to the operation of WEAU-TV were conveyed to a
wholly-owned subsidiary, WEAU License, Inc., in exchange
for a $4,880,000 note payable to Busse Broadcasting
Corporation and 100% of the stock of the subsidiary;
2. The assets and liabilities relating to the operation of
KOLN/KGIN-TV were conveyed to a wholly-owned subsidiary,
KOLN/KGIN, Inc. (formerly known as Busse Management, Inc.
which was formerly known as WWMT, Inc.); and
3. KOLN/KGIN, Inc. conveyed the FCC licenses relating to the
operation of KOLN/KGIN-TV to its wholly-owned subsidiary
KOLN/KGIN License, Inc. in exchange for all of the
capital stock of the subsidiary.
B-25
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
9. CORPORATE REORGANIZATION/SUBSIDIARY GUARANTORS (CONTINUED)
The following tables present summarized combined balance sheet and operating
statement information for (i) KOLN/KGIN, Inc. (ii) KOLN/KGIN License, Inc. and
(iii) WEAU License, Inc., or the respective prior operations as a division of
the Company. Separate financial statements of KOLN/KGIN, Inc. immediately follow
these notes to consolidated financial statements of Busse Broadcasting
Corporation. Separate financial statements and other disclosures concerning
KOLN/KGIN License, Inc. and WEAU License, Inc. have not been presented because
management has determined that such financial statements would not be material
to investors.
<TABLE>
<CAPTION>
POST-EFFECTIVE DATE
--------------------------
DECEMBER 28, DECEMBER 29,
1997 1996
--------------------------
ASSETS
<S> <C> <C>
Current assets $ 3,377,708 $ 3,258,170
Non-current assets 45,525,932 49,097,117
--------------------------
$48,903,640 $52,355,287
==========================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities $ 1,112,618 $ 1,090,989
Non-current liabilities 6,373,635 6,703,675
Shareholder's equity 41,417,387 44,560,623
--------------------------
Total liabilities and shareholder's equity $48,903,640 $52,355,287
==========================
</TABLE>
<TABLE>
<CAPTION>
| PRE-EFFECTIVE
POST-EFFECTIVE DATE | DATE
--------------------------------------------|---------------
FISCAL PERIOD |
FISCAL YEAR FISCAL YEAR FROM MAY 3, | FISCAL PERIOD
ENDED ENDED 1995 THROUGH | FROM JANUARY 2,
DECEMBER 28, DECEMBER 29, DECEMBER 31, | 1995 THROUGH
1997 1996 1995 | MAY 2, 1995
--------------------------------------------|----------------
|
<S> <C> <C> <C> <C>
Net revenue $12,310,713 $11,926,061 $ 6,657,481 | $ 3,489,390
Total operating costs and expenses 10,325,586 9,937,965 6,345,213 | 2,393,360
Income from operations 1,985,127 1,988,096 312,268 | 1,096,030
Reorganization item--gain on |
restructuring transaction -- -- -- | 34,831,263
Net income (loss) (3,143,236) (2,903,328) (1,727,698) | 36,308,787
</TABLE>
B-26
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
10. CAPITAL STOCK
On January 12, 1996 the Company amended its articles of incorporation to revise
its authorized shares of capital stock as discussed below.
COMMON STOCK
The authorized common stock of the Company consists of 2,154,000 shares, of
which 107,700 shares are issued and outstanding. Each share of Common Stock has
an equal and ratable right to receive dividends when and as declared by the
Board of Directors of the Company out of assets legally available therefor. The
declaration and payment of cash dividends on Common Stock are restricted by the
provisions of the Indenture and the LTIP. In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock would be
entitled to share ratably in the assets available for distribution after
payments to creditors and liquidation preference payments to holders of the
Series A Preferred Stock.
SERIES A PREFERRED STOCK
The authorized preferred stock of the Company consists of 65,524.4135 shares,
all of which are issued and outstanding. Dividends on the Series A Preferred
Stock accrue at an annual rate of $73.80 per share until such shares are
redeemed or converted, whether or not any funds are legally available therefor.
Such dividends are payable only upon the conversion of the Series A Preferred
Stock into Common Stock or the redemption thereof, unless any Senior Notes are
then outstanding or if such payment is then prohibited by any other debt
instruments of the Company or applicable law. In the event that payment of any
accrued dividends is not so permitted, such dividends will remain an obligation
of the Company and be payable at the earliest date on which both (i) no Senior
Notes remain outstanding and (ii) such payment is not prohibited by the other
debt instruments of the Company or by applicable law.
In the event of any liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, any holder of the Series A Preferred Stock
will, for each share of Series A Preferred Stock, be entitled to receive a
distribution of $1,000, plus any accrued and unpaid dividends, out of the assets
of the Company prior to any distribution of assets with respect to any other
shares of capital stock of the Company as a result of such liquidation,
distribution or winding-up of the Company.
B-27
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
10. CAPITAL STOCK (CONTINUED)
Each share of Series A Preferred Stock may be converted at any time at the
option of the holder into fully paid, nonassessable shares of Common Stock at
the rate of 31.22958299 shares of Common Stock per share of Series A Preferred
Stock, except that, if the Series A Preferred Stock is called for redemption,
the conversion right will terminate at the close of business on the date fixed
for redemption. Provision will be made for adjustment of the conversation rate,
under certain conditions, in order to protect the conversion rights against
dilution.
The Series A Preferred Stock is redeemable at the option of the Company at any
time, in whole or in part, out of funds legally available therefor, at a per
share redemption price equal to the per share liquidation preference per share
($1,000), plus in each case an amount equal to accrued and unpaid dividends, if
any, to (and including) the redemption date, whether or not declared.
The holders of the Series A Preferred Stock have no voting rights except to the
extent required by the Delaware General Corporation Law and the Series A
Preferred Stock is entitled to no preemptive rights.
11. COMMITMENTS
The Company has entered into contracts to purchase rights to air certain
programs at future dates. The Company records these contracts as assets and
corresponding liabilities when the license period begins, which totaled
$1,017,375, $969,630 and $959,010 in fiscal 1997, 1996 and 1995, respectively.
The aggregate amount of these contracts entered into but not yet recorded at
December 28, 1997 is approximately $3,031,795.
12. BUSINESS SEGMENTS
On December 27, 1996 the Company sold substantially all of the assets of its
printing segment, Winnebago Color Press. Because of this sale, the Company now
operates only in the television segment. For the year ended December 29, 1996
and the period from May 3, 1995 through December 31, 1995, the loss on the sale
of the printing segment and its results of operations have been included as
discontinued operations in the accompanying respective statements of operations
(see Note 4).
B-28
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
12. BUSINESS SEGMENTS (CONTINUED)
PRE-EFFECTIVE
DATE
------------
FISCAL PERIOD
FROM
JANUARY 2,
1995 THROUGH
MAY 2, 1995
------------
Net revenue:
Television $12,141,986
Printing 2,368,909
-----------
$14,510,895
===========
Depreciation and amortization:
Television $ 1,631,472
Printing 144,600
-----------
$ 1,776,072
===========
Income from operations:
Television $ 3,810,498
Printing 123,388
-----------
$ 3,933,886
===========
Capital expenditures:
Television $ 450,106
Printing 47,622
-----------
$ 497,728
===========
B-29
<PAGE>
Busse Broadcasting Corporation
Notes to Consolidated Financial Statements (continued)
13. SUBSEQUENT EVENTS
On February 13, 1998 the Company, its stockholders and Gray Communications
Systems, Inc., a Georgia Corporation ("Gray"), entered into a definitive
purchase agreement (the "Stock Purchase Agreement") whereby Gray agreed to
acquire, and the stockholders agreed to sell, all of the capital stock of the
Company for the aggregate purchase price of (i) $112 million, plus (ii) the
Company's cash and cash equivalents, less (iii) the aggregate amount of the
Company's indebtedness and accrued and unpaid interest thereon, including the
accreted amount of the Company's 11 5/8% Secured Senior Notes due 2000. The
value of the Company's cash, cash equivalents and aggregate indebtedness will be
determined as of the close of business on the business day immediately preceding
the closing date of the Stock Purchase Agreement.
Consummation of the transactions contemplated by the Stock Purchase Agreement is
subject to the receipt of requisite governmental approvals, including the
approval of the Federal Communications Commission. The Company can make no
assurance as to whether the transactions contemplated by the Stock Purchase
Agreement will be completed, but currently anticipates that such transactions
will close on or before September 1, 1998.
B-30
<PAGE>
APPENDIX C
<PAGE>
Gray Communications Systems, Inc.
Pro Forma Condensed Combined Balance Sheet - June 30, 1998 (Unaudited)
The unaudited pro forma condensed combined balance sheet as of June 30,
1998 gives effect to the Busse-WALB Transactions under the purchase method of
accounting and is based on a preliminary allocation of the purchase price
reflecting the assumptions and the adjustments described in the accompanying
notes.
This unaudited pro forma condensed combined balance sheet does not
purport to represent the Company's actual financial position that would have
been reported had the Busse-WALB Transactions occurred on June 30, 1998.
The pro forma adjustments are based upon currently available
information and upon certain assumptions that management believes are reasonable
under the circumstances. This unaudited pro forma condensed combined balance
sheet should be read in conjunction with the Company's Consolidated Financial
Statements and the Notes thereto for the year ended December 31, 1997 (as filed
in the Company's annual report on Form 10-K for the year ended December 31,
1997) and for the quarter ended June 30, 1998 (as filed in the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1998).
C-1
<PAGE>
Gray Communications Systems, Inc.
Pro Forma Condensed Combined Balance Sheet (Unaudited)
June 30, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Busse-WALB Transactions
---------------------------------------------------------
Pro Forma Pro Forma
Company WALB Busse Adjustments Combined
----------------- ----------------- ---------------- -------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,739 $ -0- $ 9,046 $ 12,000 (1) $ 2,738
(63,791) (2)
42,744 (3)
Trade accounts receivable, net 20,025 -0- 3,651 -0- 23,676
Recoverable income taxes 1,897 -0- -0- -0- 1,897
Inventories 1,320 -0- -0- -0- 1,320
Current portion of program
broadcast rights 1,325 (117) 197 -0- 1,405
Other current assets 1,186 (34) 579 (431) (4) 1,300
---------- --------- --------- --------- ---------
Total current assets 28,492 (151) 13,473 (9,478) 32,336
PROPERTY AND EQUIPMENT, NET 43,175 (2,757) 12,555 830 (4) 53,803
OTHER ASSETS
Deferred loan costs 7,987 -0- 1,426 (1,426) (4) 7,987
Goodwill and other intangibles 261,159 -0- 46,827 105,534 (4) 380,244
13,551 (5)
(46,827) (6)
Other 2,870 (96) 77 (860) (7) 1,790
(201) (4)
---------- --------- --------- --------- ---------
272,016 (96) 48,330 69,771 390,021
---------- --------- --------- --------- ---------
$ 343,683 $ (3,004) $ 74,358 $ 61,123 $ 476,160
========== ========= ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 3,392 $ -0- $ 146 $ 1,200 (4) $ 4,738
Employee compensation and benefits 3,840 -0- 422 -0- 4,262
Accrued expenses 2,647 -0- 151 -0- 2,798
Accrued interest 4,713 -0- 1,514 2,120 (8) 4,713
(3,634) (9)
Current portion of program
broadcast obligations 1,189 (163) 85 -0- 1,111
Deferred revenue 2,184 -0- 42 -0- 2,226
Current portion of long-term debt 579 -0- -0- -0- 579
---------- ---------- --------- --------- ---------
Total current liabilities 18,544 (163) 2,360 (314) 20,427
LONG-TERM DEBT 226,322 -0- 61,168 5,111 (8) 269,066
42,744 (3)
(66,279) (9)
OTHER LONG-TERM LIABILITIES 7,148 -0- -0- 29,312 (10) 49,684
13,551 (5)
(327) (7)
STOCKHOLDERS' EQUITY 91,669 (2,841) 10,830 48,688 (10) 136,983
(533) (7)
(10,830) (4)
---------- --------- --------- --------- ---------
$ 343,683 $ (3,004) $ 74,358 $ 61,123 $ 476,160
========== ========= ========= ========= =========
</TABLE>
See notes to pro forma condensed combined balance sheet
C-2
<PAGE>
Gray Communications Systems, Inc.
Notes to Pro Forma Condensed Combined Balance Sheet (Unaudited)
June 30, 1998
1) Reflects the receipt of $12.0 million that was received by the Company with
the assets of WEAU in exchange for the assets of WALB.
2) Reflects the costs of the Busse-WALB Transactions as follows:
<TABLE>
<CAPTION>
Amount
Description (in thousands)
----------------------------------------------------------------- ---------------------
<S> <C>
Busse purchase price $ 112,000
Busse cash balance 9,046
Costs associated with satisfaction and discharge of Busse
Senior Notes 7,386
Other adjustments to purchase price 1,359
Less: Appraised value of WEAU received in exchange for WALB (66,000)
------------
$ 63,791
============
</TABLE>
3) Reflects net borrowing of $42.7 million under the Company's Senior Credit
Facility in order to complete the Busse-WALB Transactions.
4) Reflects the preliminary allocation of the Busse purchase price of $112.0
million (plus Busse's cash balance of approximately $9.0 million) to the
tangible assets and liabilities based upon estimates of fair market value
at June 30, 1998 as follows:
<TABLE>
<CAPTION>
Amount
Description (in thousands)
----------------------------------------------------------------- ---------------------
<S> <C>
Cash and cash equivalents $ 9,046
Trade accounts receivable, net 3,651
Current portion of program broadcast rights 197
Other current assets 148
Property and equipment, net 13,385
Adjustment to goodwill and other intangibles 105,534
Other assets 77
Trade accounts payable (146)
Employee compensation and benefits (422)
Accrued expenses (151)
Accrued interest (1,514)
Current portion of program broadcast obligations (85)
Deferred revenue (42)
Deferred acquisition costs (1,401)
Busse Senior Notes - adjustment to fair market value (7,231)
--------------
Busse purchase price (including Busse's cash balance) $ 121,046
==============
</TABLE>
C-3
<PAGE>
Gray Communications Systems, Inc.
Notes to Pro Forma Condensed Combined Balance Sheet (Unaudited) (Continued)
June 30, 1998
<TABLE>
<CAPTION>
Amount
Description (in thousands)
----------------------------------------------------------------- ---------------------
<S> <C>
Net equity of Busse $ (10,830)
Adjustment of Busse assets and liabilities to market value 47,854
Prepayment of Busse Senior Notes (61,168)
Deferred acquisition costs 1,401
Busse Senior Notes - adjustment to fair market value 7,231
-------------
(15,512)
Busse purchase price (including Busse's cash balance) 121,046
-------------
Adjustment to goodwill and other intangibles $ 105,534
=============
</TABLE>
5) Reflects goodwill and deferred income taxes associated with the value of
the KOLN Federal Communications Commission license.
6) Reflects the elimination of goodwill as recorded by Busse.
7) Reflects the recognition of deferred sales costs as a transaction expense
associated with the disposition of the assets of WALB. Also, reflects the
adjustments for the related decrease in the income tax liability and
retained earnings.
8) Reflects adjustment of Busse Senior Notes to approximate fair market value.
The Busse Senior Notes are subject to redemption at the option of Busse, in
whole or in part, at a redemption price of 106% (expressed as a percentage
of the face amount of the Busse Senior Notes), plus accrued interest and
unpaid interest on the date of redemption, if redeemed during the
twelve-month period beginning on October 15, 1998.
9) Reflects the early satisfaction and discharge of the Busse Senior Notes.
Immediately following the acquisition of Busse, the Company exercised its
right to satisfy and discharge the Busse Senior Notes, effectively
prefunding such notes at the October 15, 1998 call price of 106 plus
accrued interest. The aggregate amount necessary to satisfy and discharge
the Busse Senior Notes and accrued interest was approximately $69.9
million.
10) Reflects the income tax liability and the increase in retained earnings
resulting from the Company's exchange of WALB. The exchange of WALB
resulted in a pretax gain as calculated under Generally Accepted Accounting
Principles of approximately $70.5 million as of July 31, 1998.
C-4
<PAGE>
Gray Communications Systems, Inc.
Pro Forma Condensed Combined Statement of Operations (Unaudited)
For the Year Ended December 31, 1997
On August 1, 1997, the Company purchased the assets of WITN-TV ("WITN").
The purchase price of approximately $41.7 million consisted of $40.7 million
cash, $600,000 in acquisition related costs, and approximately $400,000 in
liabilities which were assumed by the Company. 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 $37.4 million. The
Company funded the costs of this acquisition through its Senior Credit Facility.
WITN operates on Channel 7 and is the NBC-affiliate in the
Greenville-Washington-New Bern, North Carolina market. In connection with the
purchase of the assets of WITN ("WITN Acquisition"), the Company paid Bull Run a
fee equal to 1% of the purchase price for services performed.
The following unaudited pro forma condensed combined statement of
operations for the year ended December 31, 1997, is presented below and assumes
that the WITN Acquisition and the Busse-WALB Transactions occurred on January 1,
1997. This unaudited pro forma condensed combined statement of operations does
not include the pretax gain resulting from the disposition of the assets of WALB
of approximately $70.5 million as of July 31, 1998.
This unaudited pro forma condensed combined statement of operations
does not purport to represent the Company's actual results of operations had
these events occurred on January 1, 1997, and should not serve as a forecast of
the Company's operating results for any future periods. The pro forma
adjustments are based solely upon certain assumptions that management believes
are reasonable under the circumstances at this time. This unaudited pro forma
condensed combined statement of operations should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto for the
year ended December 31, 1997 (as filed in the Company's annual report on Form
10-K for the year ended December 31, 1997).
C-5
<PAGE>
Pro Forma Condensed Combined Statement of Operations (Unaudited)
Year Ended December 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
WITN Acquisition Busse-WALB Transactions
---------------- -------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Company WITN Adjustments Company WALB Busse Adjustments Combined
------- ---- ----------- ------- ---- ----- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES
Broadcasting ................ $ 72,300 $ 4,551 $ -0- $ 76,851 $ (10,090) $ 18,971 $ -0- $ 85,732
Publishing .................. 24,536 -0- -0- 24,536 -0- -0- -0- 24,536
Paging ...................... 6,712 -0- -0- 6,712 -0- -0- -0- 6,712
--------- ------- ------- --------- --------- --------- --------- ---------
103,548 4,551 -0- 108,099 (10,090) 18,971 -0- 116,980
EXPENSES
Broadcasting ................ 41,966 2,706 -0- 44,672 (4,473) 8,428 345 (5) 48,972
Publishing .................. 19,753 -0- -0- 19,753 -0- -0- -0- 19,753
Paging ...................... 4,051 -0- -0- 4,051 -0- -0- -0- 4,051
Corporate and administrative 2,528 128 (128)(1) 2,528 -0- 1,524 (1,524)(6) 2,528
Depreciation and amortization 14,520 619 196 (2) 15,335 (296) 5,802 (958)(7) 19,883
--------- ------- ------- --------- --------- --------- --------- ---------
82,818 3,453 68 86,339 (4,769) 15,754 (2,137) 95,187
--------- ------- ------- --------- --------- --------- --------- ---------
20,730 1,098 (68) 21,760 (5,321) 3,217 2,137 21,793
Miscellaneous income (expense) .. (31) 12 -0- (19) 4 406 (445)(8) (54)
--------- ------- ------- --------- --------- --------- --------- ---------
20,699 1,110 (68) 21,741 (5,317) 3,623 1,692 21,739
Interest expense ................ 21,861 952 1,029 (3) 23,842 -0- 8,341 (2,180)(9) 30,003
--------- ------- ------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES ............ (1,162) 158 (1,097) (2,101) (5,317) (4,718) 3,872 (8,264)
Income tax expense (benefit) .... 240 12 (967)(4) (715) (1,340) -0- (755)(4) (2,810)
--------- ------- ------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) ........... (1,402) 146 (130) (1,386) (3,977) (4,718) 4,627 (5,454)
Preferred dividends ............. 1,410 -0- -0- 1,410 -0- 4,822 (4,822)(10) 1,410
--------- ------- ------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE
TO COMMON STOCKHOLDERS .. $ (2,812) $ 146 $ (130) $ (2,796) $ (3,977) $ (9,540) $ 9,449 $ (6,864)
========= ======= ======= ========= ========= ========= ========= =========
AVERAGE OUTSTANDING
COMMON SHARES:
Basic ................... 7,902 7,902 7,902
Stock compensation awards -0- -0- -0-
--------- -------- ---------
Diluted ................. 7,902 7,902 7,902
========= ======== =========
BASIC LOSS PER SHARE:
Net loss available to
common stockholders ..... $ (0.36) $ (0.35) $ (0.87)
========= ========= =========
DILUTED LOSS PER SHARE:
Net loss available to
common stockholders ..... $ (0.36) $ (0.35) $ (0.87)
========= ========= =========
</TABLE>
See notes to pro forma condensed combined statements of operations
C-6
<PAGE>
Gray Communications Systems, Inc.
Notes to Pro Forma Condensed Combined Statement of Operations (Unaudited)
For the Year Ended December 31, 1997
1) Reflects elimination of a corporate allocation from WITN's parent company
to WITN. The Company in connection with its operations of WITN will not
incur such amounts.
2) Reflects increased depreciation of approximately $52,000 resulting from the
change in asset lives in connection with the newly acquired property and
equipment (at fair market value) of WITN. Also reflects increased
amortization of approximately $144,000 resulting from the increase in
goodwill and other intangible assets. Amortization of goodwill and other
intangible assets associated with WITN will be calculated using an
estimated useful life of 40 years.
3) Reflects increased interest expense associated with the borrowing of
approximately $40.6 million to fund the WITN acquisition.
4) Reflects the adjustment of the income tax provision to the estimated
effective tax rate.
5) Reflects elimination of a gain recognized by Busse that resulted from the
curtailment of its pension plan. The Company in connection with its
operations of Busse will not record such amount.
6) Reflects elimination of corporate and administrative expenses of Busse. The
Company in connection with its operations of Busse will not incur such
amounts.
7) Reflects decreased depreciation of approximately $7,000 resulting from the
change in asset lives in connection with the newly acquired property and
equipment (at fair market value) of Busse. Also reflects decreased
amortization of approximately $951,000 resulting from the increase in the
estimated useful life of goodwill and other intangible assets partially
offset by increased goodwill and other intangible assets. Amortization of
goodwill and other intangible assets associated with Busse will be
calculated using an estimated useful life of 40 years.
8) Reflects the elimination of interest income received by Busse. The Company
will receive such interest income in connection with its placement in
escrow of the funds necessary for the satisfaction and discharge of the
Busse Senior Notes. However, for pro forma income statement presentation,
this interest income is reflected as a reduction of interest expense.
9) Reflects adjustment to interest expense associated with the borrowing of
approximately $42.7 million resulting from the Busse-WALB Transactions.
Also, reflects interest expense on the Busse Senior Notes net of interest
income resulting from the funds placed in escrow with the Busse Senior Note
trustee to effect the satisfaction and discharge of such notes.
10) Reflects elimination of Busse's preferred stock dividend. The Company in
connection with its operations of Busse will not incur such amounts on a
consolidated basis.
C-7
<PAGE>
Gray Communications Systems, Inc.
Pro Forma Condensed Combined Statement of Operations (Unaudited)
For the Six Months Ended June 30, 1998
The following unaudited pro forma condensed combined statement of
operations for the six months ended June 30, 1998, is presented below and
assumes that the Busse-WALB Transactions occurred on January 1, 1998. This
unaudited pro forma condensed combined statement of operations does not include
the pretax gain resulting from the disposition of the assets of WALB of
approximately $70.5 million as of July 31, 1998.
The pro forma adjustments are based upon currently available
information and upon certain assumptions that management believes are reasonable
under the circumstances. This unaudited pro forma condensed combined statement
of operations should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto for the year ended December 31, 1997
(as filed in the Company's annual report on Form 10-K for the year ended
December 31, 1997) and for the quarter ended June 30, 1998 (as filed in the
Company's quarterly report on Form 10-Q for the quarter ended June 30, 1998).
C-8
<PAGE>
Gray Communications Systems, Inc.
Pro Forma Condensed Combined Statement of Operations (Unaudited)
Six Months Ended June 30, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Busse-WALB Transactions
----------------------------------------------
Pro Forma Pro Forma
Company WALB Busse Adjustments Combined
------- ---- ----- ----------- --------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES
Broadcasting $ 42,201 $ (5,658) $ 10,216 $ -0- $ 46,759
Publishing 13,916 -0- -0- -0- 13,916
Paging 3,925 -0- -0- -0- 3,925
--------- --------- --------- -------- --------
60,042 (5,658) 10,216 -0- 64,600
EXPENSES
Broadcasting 24,779 (2,388) 4,448 -0- 26,839
Publishing 11,441 -0- -0- -0- 11,441
Paging 2,583 -0- -0- -0- 2,583
Corporate and administrative 1,317 -0- 960 (960) (1) 1,317
Depreciation and amortization 7,844 (173) 2,869 (471) (2) 10,069
--------- --------- --------- -------- ---------
47,964 (2,561) 8,277 (1,431) 52,249
--------- --------- --------- -------- ---------
12,078 (3,097) 1,939 1,431 12,351
Miscellaneous income (expense) (314) -0- 227 (227) (3) (314)
--------- --------- --------- -------- ---------
11,764 (3,097) 2,166 1,204 12,037
Interest expense 11,967 -0- 4,192 (1,157) (4) 15,002
--------- --------- --------- -------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (203) (3,097) (2,026) 2,361 (2,965)
Income tax expense 443 (1,178) -0- (273) (5) (1,008)
--------- --------- --------- -------- ---------
NET INCOME (LOSS) (646) (1,919) (2,026) 2,634 (1,957)
Preferred dividends 718 -0- 2,411 (2,411) (6) 718
--------- --------- --------- -------- ---------
NET INCOME (LOSS) AVAILABLE
TO COMMON STOCKHOLDERS $ (1,364) $ (1,919) $ (4,437) $ 5,045 $ (2,675)
========= ========= ========= ======== =========
AVERAGE OUTSTANDING
COMMON SHARES:
Basic 7,933 7,933
Stock compensation awards -0- -0-
--------- ---------
Diluted 7,933 7,933
========= =========
BASIC LOSS PER SHARE:
Net loss available to
common stockholders $ (0.17) $ (0.34)
========= =========
DILUTED LOSS PER SHARE:
Net loss available to
common stockholders $ (0.17) $ (0.34)
========= =========
</TABLE>
See notes to pro forma condensed combined statements of operations
C-9
<PAGE>
Gray Communications Systems, Inc.
Notes to Pro Forma Condensed Combined Statement of Operations (Unaudited)
For the Six Months Ended June 30, 1998
1) Reflects elimination of corporate and administrative expenses of Busse. The
Company in connection with its operations of Busse will not incur such
amounts.
2) Reflects decreased depreciation of approximately $12,000 resulting from the
change in asset lives in connection with the newly acquired property and
equipment (at fair market value) of Busse. Also reflects decreased
amortization of approximately $458,000 resulting from the increase in the
estimated useful life of goodwill and other intangible assets partially
offset by increased goodwill and other intangible assets. Amortization of
goodwill and other intangible assets associated with Busse will be
calculated using an estimated useful life of 40 years.
3) Reflects the elimination of interest income received by Busse. The Company
will receive such interest income in connection with its placement in
escrow of the funds necessary for the satisfaction and discharge of the
Busse Senior Notes. However, for pro forma income statement presentation,
this interest income is reflected as a reduction of interest expense.
4) Reflects adjustment to interest expense associated with the borrowing of
approximately $42.7 million resulting from the Busse-WALB Transactions.
Also, reflects interest expense on the Busse Senior Notes net of interest
income resulting from the funds placed in escrow with the Busse Senior Note
trustee to effect the satisfaction and discharge of such notes.
5) Reflects adjustment of income tax expense to the estimated effective tax
rate.
6) Reflects elimination of Busse's preferred stock dividend. The Company in
connection with its operations of Busse will not incur such amounts on a
consolidated basis.
C-10
