<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 15, 1999 (October 1,
1999)
GRAY COMMUNICATIONS SYSTEMS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
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Georgia 0-13796 58-0285030
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(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification Number)
incorporation)
4370 Peachtree Road, NE
Atlanta, GA 30319
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(Address of principal executive offices) (Zip code)
(404) 504-9828
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(Registrant's telephone number, including area code)
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<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On October 1, 1999, Gray Communications Systems, Inc. ("Gray")
completed its acquisition of all the outstanding capital stock of KWTX
Broadcasting Company ("KWTX") and Brazos Broadcasting Company ("Brazos"), as
well as the assets of KXII Broadcasters Ltd. ("KXII"). Gray acquired the capital
stock of KWTX and Brazos in merger transactions with the shareholders of KWTX
and Brazos receiving a combination of cash and Gray class B common stock for
their shares. Gray acquired the assets of KXII in an all cash transaction.
KWTX operates CBS affiliate KWTX-TV located in Waco, Texas and Brazos
operates KBTX-TV, a satellite station of KWTX-TV located in Bryan, Texas, each
serving the Waco-Temple-Bryan, Texas television market. KXII operates KXII-TV,
which is the CBS affiliate serving Sherman, Texas and Ada, Oklahoma.
For additional information with respect to these acquisitions,
reference is made to Gray's definitive proxy statement which is filed as an
exhibit hereto and is incorporated by reference herein.
Aggregate consideration (net of cash acquired) paid was approximately
$145.8 million which included a base purchase price of $139.0 million,
transaction expenses of $2.8 million, certain net working capital adjustments
(excluding cash) of $3.4 million and assumed liabilities of $600,000. Gray
funded the acquisitions by issuing 3,435,774 shares of Gray class B common stock
to the sellers, additional borrowings of $94.4 million under its amended bank
loan agreement and cash on hand.
The terms of the acquisition, including the consideration paid by Gray,
were determined in arms-length negotiations between Gray and the sellers.
In connection with the acquisitions, Gray entered into an amended loan
agreement with a group of lenders whose primary agents were Bank of America,
N.A., Banc of America Securities LLC, Key Corporate Capital Inc. and First Union
National Bank. The primary modifications to the loan agreement effected by the
amendment were an increase in committed available credit and an increase in
interest rates. Under the amended loan agreement, committed available credit
increased from $200.0 million to $300.0 million. Prior to the amendment, the
loan agreement consisted of a $100.0 million revolving commitment (the
"Revolving Commitment") and a $100.0 million term loan commitment ("Term Loan A
Commitment"). The increase in committed available credit was effected by the
addition of a second $100.0 million term loan commitment ("Term Loan B
Commitment").
Under the amended loan agreement, Gray, at its option, can borrow funds
at an interest rate equal to the London Interbank Offered Rate ("LIBOR") plus a
premium or at an interest rate equal to the lender's prime rate ("Prime") plus a
premium. As a result of the amended loan agreement, the interest rates payable
by Gray for funds borrowed under the Revolving Commitment and Term Loan A
Commitment increased as follows: the
<PAGE> 3
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. (CONTINUED)
premium over Prime increased from a range of 0.0% to 0.5% to a range of 0.0% to
1.75% and the premium over LIBOR increased from a range of 0.75% to 2.25% to a
range of 1.25% to 3.0%. Under the new Term Loan B Commitment, funds can be
borrowed at Prime plus 1.75% to 2.0% and/or LIBOR plus 3.0% to 3.25%. The
premium above Prime and/or LIBOR payable by Gray will be determined by Gray's
operating leverage ratio that is calculated quarterly.
Immediately after the acquisitions, Gray had $231.0 million outstanding
under the amended bank loan agreement with $69.0 million remaining available. As
of October 1, 1999, Gray is incurring interest at a rate of Prime plus 1.5%
and/or LIBOR plus 2.75% for funds borrowed under the Revolving Commitment and
Term Loan A Commitment. For funds borrowed under Term Loan B Commitment, Gray is
incurring interest at Prime plus 2.0% and/or LIBOR plus 3.25%.
The maturity schedule for the Revolving Commitment and the Term Loan A
Commitment did not change as a result of the amendment to the loan agreement.
The amount outstanding under the newly established Term Loan B Commitment will
become fixed on March 30, 2001 and must be paid as follows: 1.0% in 2001, 1.0%
in 2002, 1.0% in 2003, 1.0% in 2004 and 96.0% in 2005. Reference is made to the
amended loan agreement, which is filed as an exhibit hereto and incorporated by
reference herein.
In connection with the amendment to the loan agreement, Gray incurred
approximately $2.6 million in additional financing costs of which $2.3 million
had been paid as of the date of the amendment. These financing costs were funded
through borrowings under the amended bank loan agreement.
Gray paid Bull Run Corporation, an affiliate of Gray, a fee of $1.39
million for advisory services performed for Gray in connection with the
acquisitions. This fee was paid in full as of the acquisition date and included
in the fee portion of the aggregate consideration for the acquisition described
above. Gray will pay an additional $300,000 to Bull Run Corporation for services
performed in connection with arranging the $100.0 million Term Loan B
Commitment. This financing fee is also included in the financing costs described
above.
ITEM 5. OTHER EVENTS.
The following matters were voted upon at the 1999 Annual Meeting of
Shareholders of Gray, on September 23, 1999, and votes were cast as indicated.
<PAGE> 4
ITEM 5. OTHER EVENTS. (CONTINUED)
1.) Election of Directors:
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Nominee For Withheld Authority
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Richard L. Boger 63,757,400 1,493,769
Hilton H. Howell, Jr. 63,748,400 1,502,769
William E. Mayher, III 63,757,400 1,493,769
Zell Miller 63,743,150 1,508,019
Howell W. Newton 63,737,400 1,513,769
Hugh Norton 63,754,300 1,496,869
Robert S. Prather, Jr. 63,757,400 1,493,769
Harriett J. Robinson 63,725,229 1,525,940
J. Mack Robinson 63,745,229 1,505,940
</TABLE>
2.) To approve the issuance of shares of Gray class B common stock in
connection with the proposed acquisitions of KWTX and Brazos.
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Broker
For Against Abstain Non-Votes
---------------------- --------------------- -------------------- ---------------------
55,758,921 400,392 108,640 8,983,216
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3.) To approve the amendment of the 1992 Long Term Incentive Plan to
increase the number of shares of Gray class B common stock issuable
thereunder.
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Broker
For Against Abstain Non-Votes
---------------------- --------------------- -------------------- ---------------------
46,797,643 2,519,785 38,984 15,894,757
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4.) To confirm the appointment of Ernst & Young LLP as independent auditors
of Gray for the year ending December 31, 1999.
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For Against Abstain
---------------------- --------------------- --------------------
64,998,389 245,030 7,750
</TABLE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
The financial statements of the businesses acquired, as required by
this Item 7(c), are incorporated by reference to pages F-1 to F-49 of Gray's
definitive proxy statement, dated August 16, 1999.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (CONTINUED)
(b) Pro Forma Financial Information.
The pro forma financial information, as required by this item 7(b), is
incorporated by reference to the caption Pro Forma Condensed Combined Financial
Data which begins on page 50 of Gray's definitive proxy statement, dated August
16, 1999.
(c) Exhibits.
(99.1) Second Amended and Restated Loan Agreement dated as of October 1, 1999
by and among Gray Communications Systems, Inc., as Borrower; The
Financial Institutions Signatory Hereto, as Lenders; and Bank of
America, N.A., as Administrative Agent for the Lenders with Banc of
America Securities LLC as Lead Arranger and Book Manager; Key Corporate
Capital, Inc., as documentation agent and First Union National Bank, as
Syndication Agent
(99.2) Gray's definitive proxy statement, dated August 16, 1999
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 15, 1999
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<PAGE> 1
EXHIBIT 99.1
EXECUTION COPY
SECOND AMENDED AND RESTATED LOAN AGREEMENT
DATED AS OF OCTOBER 1, 1999
BY AND AMONG
GRAY COMMUNICATIONS SYSTEMS, INC.,
AS BORROWER;
THE FINANCIAL INSTITUTIONS SIGNATORY HERETO,
AS LENDERS;
AND
BANK OF AMERICA, N.A.,
AS ADMINISTRATIVE AGENT FOR THE LENDERS
WITH
BANC OF AMERICA SECURITIES LLC
AS LEAD ARRANGER AND
BOOK MANAGER;
KEY CORPORATE CAPITAL, INC.,
AS DOCUMENTATION AGENT;
AND
FIRST UNION NATIONAL BANK,
AS SYNDICATION AGENT
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
ATLANTA, GEORGIA
<PAGE> 2
SECOND AMENDED AND RESTATED
LOAN AGREEMENT
among
GRAY COMMUNICATIONS SYSTEMS, INC.,
as Borrower;
THE FINANCIAL INSTITUTIONS SIGNATORY HERETO,
as Lenders;
and
BANK OF AMERICA, N.A.,
as Administrative Agent for the Lenders
INDEX
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Page
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ARTICLE 1 - Definitions 2
Section 1.1 Defined Terms................................................................................2
Section 1.2 Interpretation..............................................................................25
Section 1.3 Cross References............................................................................25
Section 1.4 Accounting Provisions.......................................................................25
ARTICLE 2 - Loans and Letters of Credit. 25
Section 2.1 The Loans...................................................................................25
Section 2.2 Manner of Borrowing and Disbursement........................................................26
Section 2.3 Interest....................................................................................29
Section 2.4 Fees........................................................................................31
Section 2.5 Mandatory Commitment Reductions.............................................................32
Section 2.6 Voluntary Commitment Reductions.............................................................33
Section 2.7 Prepayments and Repayments..................................................................33
Section 2.8 Notes; Loan Accounts........................................................................36
Section 2.9 Manner of Payment...........................................................................37
Section 2.10 Reimbursement...............................................................................38
Section 2.11 Pro Rata Treatment..........................................................................39
Section 2.12 Capital Adequacy............................................................................39
Section 2.13 Lender Tax Forms............................................................................40
Section 2.14 Letters of Credit...........................................................................40
ARTICLE 3 - Conditions Precedent 45
Section 3.1 Conditions Precedent to Effectiveness of Agreement..........................................45
Section 3.2 Conditions Precedent to Each Advance........................................................48
Section 3.3 Conditions Precedent to Issuance of Letters of Credit.......................................49
ARTICLE 4 - Representations and Warranties 50
Section 4.1 Representations and Warranties..............................................................50
Section 4.2 Survival of Representations and Warranties, etc.............................................59
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ARTICLE 5 - General Covenants 60
Section 5.1 Preservation of Existence and Similar Matters...............................................60
Section 5.2 Business; Compliance with Applicable Law....................................................60
Section 5.3 Maintenance of Properties...................................................................60
Section 5.4 Accounting Methods and Financial Records....................................................60
Section 5.5 Insurance...................................................................................61
Section 5.6 Payment of Taxes and Claims.................................................................61
Section 5.7 Compliance with ERISA.......................................................................62
Section 5.8 Visits and Inspections......................................................................63
Section 5.9 Payment of Indebtedness; Loans..............................................................63
Section 5.10 Use of Proceeds.............................................................................63
Section 5.11 Indemnity...................................................................................64
Section 5.12 Interest Rate Hedging.......................................................................64
Section 5.13 Covenants Regarding Formation of Subsidiaries and Acquisitions; Partnership, Subsidiaries...65
Section 5.14 Payment of Wages............................................................................66
Section 5.15 Further Assurances..........................................................................66
Section 5.16 License Subs................................................................................66
Section 5.17 Year 2000 Compliance........................................................................66
Section 5.18 Maintenance of Network Affiliations; Operating Agreements...................................67
Section 5.19 Ownership Reports...........................................................................67
Section 5.20 Environmental Compliance and Indemnity......................................................67
ARTICLE 6 - Information Covenants 68
Section 6.1 Quarterly Financial Statements and Information..............................................68
Section 6.2 Annual Financial Statements and Information.................................................69
Section 6.3 Monthly Financial Information...............................................................69
Section 6.4 Performance Certificates....................................................................69
Section 6.5 Copies of Other Reports.....................................................................70
Section 6.6 Notice of Litigation and Other Matters......................................................71
ARTICLE 7 - Negative Covenants 72
Section 7.1 Indebtedness of the Borrower and its Subsidiaries...........................................72
Section 7.2 Limitation on Liens.........................................................................73
Section 7.3 Amendment and Waiver........................................................................73
Section 7.4 Liquidation, Merger or Disposition of Assets................................................74
Section 7.5 Limitation on Guaranties....................................................................74
Section 7.6 Investments and Acquisitions................................................................74
Section 7.7 Restricted Payments; Restricted Purchases...................................................76
Section 7.8 Senior Leverage Ratio.......................................................................77
Section 7.9 Interest Coverage Ratio.....................................................................77
Section 7.10 Fixed Charge Coverage Ratio.................................................................78
Section 7.11 Pro Forma Debt Service Coverage Ratio.......................................................78
Section 7.12 Leverage Ratio..............................................................................78
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Section 7.13 Adjusted Leverage Ratio.....................................................................78
Section 7.14 Limitation on Capital Expenditures..........................................................79
Section 7.15 Affiliate Transactions......................................................................79
Section 7.16 Real Estate.................................................................................79
Section 7.17 ERISA Liabilities...........................................................................79
Section 7.18 No Limitation on Upstream Dividends by Subsidiaries.........................................79
ARTICLE 8 - Default 80
Section 8.1 Events of Default...........................................................................80
Section 8.2 Remedies....................................................................................83
Section 8.3 Payments Subsequent to Declaration of Event of Default......................................85
ARTICLE 9 - The Administrative Agent 86
Section 9.1 Appointment and Authorization...............................................................86
Section 9.2 Interest Holders............................................................................86
Section 9.3 Consultation with Counsel...................................................................86
Section 9.4 Documents...................................................................................86
Section 9.5 Administrative Agent and Affiliates.........................................................87
Section 9.6 Responsibility of the Administrative Agent and the Issuing Bank.............................87
Section 9.7 Action by the Administrative Agent and the Issuing Bank.....................................87
Section 9.8 Notice of Default or Event of Default.......................................................88
Section 9.9 Responsibility Disclaimed...................................................................88
Section 9.10 Indemnification.............................................................................89
Section 9.11 Credit Decision.............................................................................89
Section 9.12 Successor Administrative Agent..............................................................89
Section 9.13 Delegation of Duties........................................................................90
Section 9.14 Lead Arranger and Book Manager; Syndication Agent; Documentation Agent......................90
ARTICLE 10 - Change in Circumstances Affecting LIBOR Advances 90
Section 10.1 LIBOR Basis Determination Inadequate or Unfair..............................................90
Section 10.2 Illegality..................................................................................91
Section 10.3 Increased Costs.............................................................................91
Section 10.4 Effect On Other Advances....................................................................92
ARTICLE 11 - Miscellaneous 93
Section 11.1 Notices.....................................................................................93
Section 11.2 Expenses....................................................................................94
Section 11.3 Waivers.....................................................................................95
Section 11.4 Set-Off.....................................................................................95
Section 11.5 Assignment..................................................................................95
Section 11.6 Accounting Principles.......................................................................98
Section 11.7 Counterparts................................................................................99
Section 11.8 Governing Law...............................................................................99
Section 11.9 Severability................................................................................99
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Section 11.10 Interest....................................................................................99
Section 11.11 Table of Contents and Headings.............................................................100
Section 11.12 Amendment and Waiver.......................................................................100
Section 11.13 Entire Agreement...........................................................................100
Section 11.14 Other Relationships........................................................................101
Section 11.15 Directly or Indirectly.....................................................................101
Section 11.16 Reliance on and Survival of Various Provisions.............................................101
Section 11.17 Senior Debt................................................................................101
Section 11.18 Obligations Several........................................................................101
ARTICLE 12 - Waiver of Jury Trial 101
Section 12.1 Waiver of Jury Trial.......................................................................101
</TABLE>
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EXHIBITS
Exhibit A - Form of Assignment and Assumption Agreement
Exhibit B - Form of Borrower Pledge Agreement
Exhibit C - Form of Borrower Security Agreement
Exhibit D - Form of Certificate of Financial Condition
Exhibit E - Form of Request for Advance
Exhibit F - Form of Request for Issuance of Letter of Credit
Exhibit G-1 - Form of Revolving Loan Note
Exhibit G-2 - Form of Term Loan A Note
Exhibit G-3 - Form of Term Loan B Note
Exhibit H - Form of Subsidiary Guaranty
Exhibit I - Form of Subsidiary Pledge Agreement
Exhibit J - Form of Subsidiary Security Agreement
Exhibit K-1 - Form of Borrower Loan Certificate
Exhibit K-2 - Form of Subsidiary Loan Certificate
Exhibit L - Form of Performance Certificate
Exhibit M-1 - Form of Assignment of General Partner Interests
Exhibit M-2 - Form of Assignment of Limited Partner Interests
SCHEDULES
Schedule 1 Lender's Commitment Ratios and Notice Addresses
Schedule 2 Liens
Schedule 3 Stations, Newspapers, Porta-Phone Paging Business, Satellite
Broadcasting Business, Operating Agreements and Licenses
Schedule 4 Subsidiaries
Schedule 5 Litigation
Schedule 6 Affiliate Transactions
Schedule 7 Indebtedness
Schedule 8 Trademarks, Patents, Copyrights
Schedule 9 Labor Matters
Schedule 10 Environmental Matters
Schedule 11 Real Property
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SECOND AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDED AND RESTATED LOAN AGREEMENT (this "Agreement") is
entered into as of this 1st day of October, 1999 by and among GRAY
COMMUNICATIONS SYSTEMS, INC., a Georgia corporation (the "Borrower"), THE
FINANCIAL INSTITUTIONS SIGNATORY HERETO (the "Lenders") and BANK OF AMERICA,
N.A., as administrative agent (the "Administrative Agent"),
W I T N E S S E T H:
WHEREAS, the Borrower, the Syndication Agent and the Administrative
Agent (each as defined in the Prior Loan Agreement as hereinafter defined), and
certain of the Lenders are all parties to the Prior Loan Agreement; and
WHEREAS, the Borrower has requested that the Administrative Agent and
the Lenders consent to certain amendments to the Prior Loan Agreement, as more
fully set forth in this Agreement; and
WHEREAS, the Administrative Agent and the Lenders have agreed to amend
and restate the Prior Loan Agreement, as more fully set forth in this Agreement;
and
WHEREAS, the Borrower acknowledges and agrees that the security
interest granted to the Administrative Agent (as defined in the Prior Loan
Agreement), for itself and on behalf of the Documentation Agent, the Syndication
Agent and the Lenders (each as defined in the Prior Loan Agreement) pursuant to
the Prior Loan Agreement and the Collateral Documents (as defined in the Prior
Loan Agreement) executed in connection therewith shall remain outstanding and in
full force and effect in accordance with the Prior Loan Agreement and shall
continue to secure the Obligations (as hereinafter defined); and
WHEREAS, the Borrower acknowledges and agrees that: (i) the Obligations
(as hereinafter defined) represent, among other things, the amendment,
restatement, renewal, extension, consolidation and modification of the
Obligations (as defined in the Prior Loan Agreement) arising in connection with
the Prior Loan Agreement and the other Collateral Documents executed in
connection therewith; (ii) the parties hereto intend that the Prior Loan
Agreement and the other Collateral Documents executed in connection therewith
and the collateral pledged thereunder shall secure, without interruption or
impairment of any kind, all existing Indebtedness under the Prior Loan Agreement
and the other Collateral Documents executed in connection therewith, as so
amended, restated, restructured, renewed, extended, consolidated and modified
hereunder, together with Obligations (as hereinafter defined), (iii) all Liens
evidenced by the Prior Loan Agreement and the other Collateral Documents
executed in connection therewith are hereby ratified, confirmed and continued;
and (iv) the Loan Documents (as hereinafter defined) are intended to
restructure, restate, renew, extend, consolidate, amend and modify the Prior
Loan Agreement and the other Collateral Documents executed in connection
therewith; and
<PAGE> 8
WHEREAS, the parties hereto intend that (i) the provisions of the Prior
Loan Agreement and the other Collateral Documents executed in connection
therewith, to the extent restructured, restated, renewed, extended,
consolidated, amended and modified hereby, are hereby superseded and replaced by
the provisions hereof and of the Loan Documents; and (ii) the Notes (as
hereinafter defined) amend, renew, extend, modify, replace, are substituted for
and supersede in their entirety, but do not extinguish the indebtedness arising
under, the promissory notes issued pursuant to the Prior Loan Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by each of the parties hereto, the
parties hereby amend and restate the Prior Loan Agreement as follows:
ARTICLE 1
Definitions
Section 1.1 Defined Terms. The following terms when used in this
Agreement shall have the following meanings:
"Acquisition" shall mean (whether by purchase, lease, exchange,
issuance of stock or other equity or debt securities, merger, reorganization or
any other method) (a) any acquisition by the Borrower or any Subsidiary of the
Borrower of any other Person, which Person shall then become consolidated with
the Borrower or any such Subsidiary in accordance with GAAP; (b) any acquisition
by the Borrower or any Subsidiary of the Borrower of all or substantially all of
the assets of any other Person; or (c) any other acquisition by the Borrower or
any Subsidiary of the Borrower of the assets of another Person which acquisition
is not in the ordinary course of business for the Borrower or such Subsidiary.
"Adjusted Leverage Ratio" shall mean, as of any date, the ratio of (a)
the difference between (i) Total Debt as of such date minus (ii) the aggregate
amount of the Borrower's cash and marketable securities then on hand, not to
exceed $5,000,000.00 to (b) Operating Cash Flow for the four (4) quarter period
then ended or most recently ended.
"Administrative Agent" shall mean Bank of America, N.A., in its
capacity as Administrative Agent for the Lenders or any successor Administrative
Agent appointed pursuant to Section 9.12 hereof.
"Administrative Agent's Office" shall mean the office of the
Administrative Agent located at Agency Services, NC1-001-15-04, Independence
Center, 101 North Tryon Street, Charlotte, NC 28255, or such other office as may
be designated pursuant to the provisions of Section 11.1 hereof.
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<PAGE> 9
"Advance" shall mean amounts advanced by the Lenders to the Borrower
pursuant to Article 2 hereof on the occasion of any borrowing and having the
same Interest Rate Basis and Interest Period; and "Advances" shall mean more
than one Advance.
"Affiliate" shall mean, with respect to a Person, any other Person
directly or indirectly controlling, controlled by, or under common control with,
such first Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. "Affiliate" shall also
mean any beneficial owner of Ownership Interests representing ten percent (10%)
or more of the total voting power of such Ownership Interests (on a fully
diluted basis) of the Borrower or of rights or warrants to purchase such
Ownership Interests (whether or not currently exercisable) and any Person who
would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof. Unless otherwise specified, "Affiliate" shall mean an Affiliate
of the Borrower.
"Agreement" shall mean this Second Amended and Restated Loan Agreement,
as amended, supplemented, restated or otherwise modified from time to time.
"Agreement Date" shall mean the date as of which this Agreement is
dated.
"Applicable Law" shall mean, in respect of any Person, all provisions
of constitutions, statutes, rules, regulations and orders of governmental bodies
or regulatory agencies applicable to such Person, including, without limitation,
the Communications Act, zoning ordinances and all Environmental Laws, and all
orders, decisions, judgments and decrees of all courts and arbitrators in
proceedings or actions to which the Person in question is a party or by which it
is bound.
"Applicable Margin" shall mean the interest rate margin applicable to
Base Rate Advances and LIBOR Advances, as the case may be, in each case
determined in accordance with Section 2.3(f) hereof.
"Approved Fund" shall mean, with respect to any Lender that is a fund
that invests in commercial loans, any other fund that invests in commercial
loans and is managed or advised by the same investment advisor as such Lender or
by an Affiliate of such investment advisor.
"Asset Sale" shall mean the sale, lease, transfer or other disposition
by the Borrower or any of its Subsidiaries to any Person of any of the stock,
partnership interests or other equity interests of any Subsidiary or any other
assets of the Borrower or any Subsidiary.
"Assignment and Assumption Agreement" shall mean any Assignment and
Assumption Agreement substantially in the form of Exhibit A attached hereto
pursuant to which any Lender, as further provided in Section 11.5 hereof, sells
a portion of its Commitments and/or Loans.
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<PAGE> 10
"Assignment of General Partner Interests" shall mean any Assignment of
General Partner Interests between the Borrower or any of its Subsidiaries, on
the one hand, and the Administrative Agent, on the other hand, or any supplement
thereto or confirmation thereof, in form and substance satisfactory to the
Administrative Agent, or any similar agreement substantially in form of Exhibit
M-1 attached hereto.
"Assignment of Limited Partner Interests" shall mean any Assignment of
Limited Partner Interests between the Borrower or any of its Subsidiaries, on
the one hand, and the Administrative Agent, on the other hand, or any supplement
thereto or confirmation thereof, in form and substance satisfactory to the
Administrative Agent, or any similar agreement substantially in the form of
Exhibit M-2 attached hereto.
"Authorized Signatory" shall mean such senior personnel of a Person as
may be duly authorized and designated in writing from time to time by such
Person to execute documents, agreements and instruments on behalf of such
Person.
"Available Letter of Credit Commitment" shall mean, at any time, the
lesser of (a) (i) $15,000,000.00, minus (ii) all Letter of Credit Obligations
then outstanding, and (b) (i) the Available Revolving Loan Commitment.
"Available Revolving Loan Commitment" shall mean, as of any date, (a)
the Revolving Loan Commitment in effect on such date minus (b) the sum of (i)
the aggregate amount of all Letter of Credit Obligations then outstanding and
(ii) the Revolving Loans then outstanding.
"Base Rate" shall mean, at any time, a fluctuating interest rate per
annum equal to the higher of (a) the rate of interest quoted from time to time
by the Administrative Agent as its "prime rate" or "base rate" or (b) the
Federal Funds Rate plus one-half of one percent (1/2%). The Base Rate is not
necessarily the lowest rate of interest charged by the Administrative Agent in
connection with extensions of credit.
"Base Rate Advance" shall mean an Advance which the Borrower requests
to be made as or converted to a Base Rate Advance, in accordance with the
provisions of Section 2.2 hereof, and which shall be in a principal amount of at
least $500,000.00, and in an integral multiple of $200,000.00.
"Base Rate Basis" shall mean a simple interest rate equal to the sum of
(i) the Base Rate and (ii) the Applicable Margin applicable to Base Rate
Advances. The Base Rate Basis shall be adjusted automatically as of the opening
of business on the effective date of each change in the Base Rate to account for
such change, and shall also be adjusted to reflect changes of the Applicable
Margin applicable to Base Rate Advances.
"Borrower" shall mean Gray Communications Systems, Inc., a Georgia
corporation.
"Borrower Pledge Agreement" shall mean, collectively, that certain
Second Amended and Restated Borrower Pledge Agreement dated as of the Agreement
Date by and between the
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<PAGE> 11
Borrower and the Administrative Agent, or any supplement thereto or confirmation
thereof, in form and substance satisfactory to the Administrative Agent, or any
other similar agreement substantially in the form of Exhibit B attached hereto,
pursuant to which the Borrower has pledged to the Administrative Agent, for
itself and on behalf of the Lenders, all of the Borrower's Ownership Interests
in any of its Subsidiaries existing on the Agreement Date or formed or acquired
by the Borrower after the Agreement Date.
"Borrower Security Agreement" shall mean, collectively, that certain
Second Amended and Restated Borrower Security Agreement dated as of the
Agreement Date by and between the Borrower and the Administrative Agent, or any
supplement thereto or confirmation thereof, in form and substance satisfactory
to the Administrative Agent, or any other similar agreement substantially in the
form of Exhibit C attached hereto.
"Broker/Dealer" shall mean, with respect to any Investment or
Acquisition permitted under Section 7.6 hereof, (a) any broker/dealer (acting as
principal) registered as a broker or a dealer under Section 15 of the Exchange
Act, the unsecured short-term debt obligations of which are rated "P-1" by
Moody's Investors Service, Inc. and at least "A-1" by Standard and Poor's
Ratings Group, a division of The McGraw-Hill Companies, Inc., at the time of
entering into such Investment or Acquisition or (b) an unrated, broker/dealer,
acting as principal, that is a wholly-owned Subsidiary of a non-bank or bank
holding company, the unsecured short-term debt obligations of which are rated
"P-1" by Moody's Investors Service, Inc. and at least "A-1" by Standard and
Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc., at the time
of entering into such Investment or Acquisition.
"Business Day" shall mean a day on which banks and foreign exchange
markets are open for the transaction of business required for this Agreement in
Atlanta, Georgia and London, England, as relevant to the determination to be
made or the action to be taken.
"Capital Expenditures" shall mean any payments by the Borrower or any
of its Subsidiaries for or in connection with the rental, lease, purchase,
construction or use of any real or personal property, the value or cost of
which, under GAAP, should be capitalized and appear on the Borrower's or such
Subsidiary's balance sheet in the category of property, plant or equipment,
without regard to the manner in which such payments or the instrument pursuant
to which they are made are characterized by the Borrower or such Subsidiary or
any other Person; provided, however, that neither (a) the capitalized portion of
the purchase price payable in connection with the Texas Acquisition or any other
Acquisition permitted hereunder, nor (b) expenditures of proceeds of insurance
policies reasonably and promptly applied to replace insured assets, shall
constitute a Capital Expenditure for purposes of this Agreement.
"Capitalized Lease Obligation" shall mean that portion of any
obligation of a Person as lessee under a lease which at the time would be
required to be capitalized on the balance sheet of such lessee in accordance
with GAAP.
"Cash Equivalents" shall mean, as of any date of determination, (a)
marketable securities (i) issued or directly and unconditionally guaranteed as
to interest and principal by the United
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<PAGE> 12
States government or (ii) issued by any agency of the United States government
the obligations of which are backed by the full faith and credit of the United
States of America, in each case maturing within one (1) year after such date;
(b) marketable direct obligations issued by any state of the United States or
any political subdivision of any such state or any public instrumentality
thereof, in each case maturing within one (1) year after such date and having,
at the time of the acquisition thereof, the highest rating obtainable from
either Standard & Poor's Ratings Group or Moody's Investors Service, Inc.; (c)
commercial paper, money-market funds and business savings accounts issued by
corporations, each of which shall have a combined net worth of at least
$100,000,000.00 and each of which conducts a substantial part of its business in
the United States, maturing within two hundred seventy (270) days from the date
of the original issue thereof, and rated "P-2" or better by Moody's Investors
Service, Inc. or "A-2" or better by Standard & Poor's Ratings Group, a division
of The McGraw-Hill Companies, Inc.; (d) certificates of deposit or bankers'
acceptances maturing within one (1) year after such date and issued or accepted
by any Lender or by any commercial bank organized under the laws of the United
States or any state thereof or the District of Columbia that (i) is at least
"adequately capitalized" (as defined in the regulations of its primary Federal
banking regulator) and (ii) has Tier 1 capital (as defined in the regulations)
of not less than $100,000,000.00; and (e) shares of any money market mutual fund
that (i) has at least ninety-five percent (95%) of its assets invested
continuously in the types of investments referred to in clauses (a), (b) and (c)
above, (ii) has net assets of not less than $500,000,000.00, and (iii) has the
highest rating obtainable from either Standard & Poor's Ratings Group, a
division of The McGraw-Hill Companies, Inc., or Moody's Investors Service, Inc.
"Certificate of Financial Condition" shall mean a certificate dated the
Agreement Date, substantially in the form of Exhibit D attached hereto, signed
by the chief financial officer of the Borrower, together with any schedules,
exhibits or annexes appended thereto.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Collateral" shall mean any property of any kind constituting
collateral for the Obligations under any of the Security Documents.
"Commercial Letter of Credit shall mean a documentary letter of credit
issued in respect of the purchase of goods or services by the Borrower or its
Subsidiaries by the Issuing Bank in accordance with the terms hereof.
"Commitments" shall mean, collectively, the Revolving Loan Commitment,
the Term Loan A Commitment and the Term Loan B Commitment.
"Commitment Ratio" shall mean, with respect to any Lender for any
Commitment, the percentage equivalent of the ratio which such Lender's portion
of such Commitment (or, in the case of Term Loan A or Term Loan B after the
Agreement Date, such Lender's portion of such Loan) bears to the aggregate
amount of such Commitment or Loan, as the case may be (as each may be adjusted
from time to time as provided herein); and "Commitment Ratios" shall mean, with
respect to any Commitment, the Commitment Ratios of all of the Lenders with
respect to
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<PAGE> 13
such Commitment. As of the Agreement Date, the Commitment Ratios of the Lenders
party to this Agreement are as set forth on Schedule 1 attached hereto.
"Communications Act" shall mean the Communications Act of 1934, and any
similar or successor federal statute, and the rules and regulations of the FCC
thereunder, all as the same may be in effect from time to time.
"Continue", "Continuation" and "Continued" shall mean the continuation
pursuant to Article 2 hereof of a LIBOR Advance as a LIBOR Advance from one
Interest Period to the next Interest Period.
"Convert", "Conversion" and "Converted" shall mean a conversion
pursuant to Article 2 hereof of a LIBOR Advance into a Base Rate Advance or of a
Base Rate Advance into a LIBOR Advance, as applicable.
"Default" shall mean any Event of Default, and any of the events
specified in Section 8.1 hereof, regardless of whether there shall have occurred
any passage of time or giving of notice, or both, that would be necessary in
order to constitute such event an Event of Default.
"Default Rate" shall mean a simple per annum interest rate equal to the
sum of (a) the applicable Base Rate Basis and (b) two percent (2%).
"Documentation Agent" shall mean Key Corporate Capital, Inc.
"Employee Pension Plan" shall mean any Plan which is maintained by the
Borrower, any of its Subsidiaries or any ERISA Affiliate.
"Environmental Claim" means any investigation, notice, notice of
violation, claim, action, suit, proceeding, demand, abatement order or other
order or directive (conditional or otherwise), by any governmental authority or
any other Person, arising (i) pursuant to or in connection with any actual or
alleged violation of any Environmental Law, (ii) in connection with any
Hazardous Materials or any actual or alleged Hazardous Materials Activity, or
(iii) in connection with any actual or alleged damage, injury, threat or harm to
health, safety, natural resources or the environment.
"Environmental Laws" shall mean all applicable federal, state or local
laws, statutes, rules, regulations or ordinances, codes, common law, consent
agreements, orders, decrees, judgments or injunctions issued, promulgated,
approved or entered thereunder relating to public health, safety or the
pollution or protection of the environment, including, without limitation, those
relating to releases, discharges, emissions, spills, leaching, or disposals to
air, water, land or ground water, to the withdrawal or use of ground water, to
the use, handling or disposal of polychlorinated biphenyls, asbestos or urea
formaldehyde, to the treatment, storage, disposal or management of hazardous
substances (including, without limitation, petroleum, crude oil or any fraction
thereof, or other hydrocarbons), pollutants or contaminants, to exposure to
toxic, hazardous or other controlled, prohibited, or regulated substances,
including, without limitation,
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<PAGE> 14
any such provisions under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (42 U.S.C. ss. 9601 et seq.), the
Hazardous Materials Transportation Act (49 U.S.C. ss.1801 et seq.), the Resource
Conservation and Recovery Act of 1976, as amended (42 U.S.C. ss. 6901 et seq.),
the Federal Water Pollution Control Act (33 U.S.C. ss. 1251 et seq.), the Clean
Air Act (42 U.S.C. ss. 7401 et seq.), the Toxic Substances Control Act (15
U.S.C. ss. 2601 et seq.), the Federal Insecticide, Fungicide and Rodenticide Act
(7 U.S.C. ss. 136 et seq.), the Occupational Safety and Health Act (29 U.S.C.
ss. 651 et seq.), the Oil Pollution Act (33 U.S.C. ss. 2701 et seq.) and the
Emergency Planning and Community Right-to-Know Act (42 U.S.C. ss. 11001 et
seq.), each as amended or supplemented, any analogous present or future state or
local statutes or laws, and any regulations promulgated pursuant to any of the
foregoing.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as in effect from time to time.
"ERISA Affiliate" shall mean any Person, including a Subsidiary or an
Affiliate of the Borrower, that is a member of any group of organizations of
which the Borrower is a member and which is covered by a Plan.
"Event of Default" shall mean any of the events specified in Section
8.1 hereof, provided that any requirement for notice or lapse of time, or both,
has been satisfied.
"FCC" shall mean the Federal Communications Commission and any
successor or substitute governmental commission, agency, department, board or
authority performing functions similar to those performed by the Federal
Communications Commission on the date hereof.
"FCC License" shall mean any license required under the Communications
Act or from the FCC.
"FCC Regulations" shall mean all rules, regulations, written policies,
orders and decisions of the FCC under the Communications Act.
"Federal Funds Rate" shall mean, as of any date, the weighted average
of the rates on overnight federal funds transactions with the members of the
Federal Reserve System arranged by federal funds brokers, as published for such
day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or, if such rate is not so published
for any day which is a Business Day, the average of the quotations for such day
on such transactions received by the Administrative Agent from three (3) federal
funds brokers of recognized standing selected by the Administrative Agent.
"Fed Regulations" shall have the meaning ascribed thereto in Section
4.1(n) hereof.
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<PAGE> 15
"Fixed Charge Coverage Ratio" shall mean, as of any date, the ratio of
(a) Operating Cash Flow for the four (4) quarter period then ended or most
recently ended to (b) Fixed Charges.
"Fixed Charges" shall mean, as of any date, the sum of (i) all Interest
Expense, (ii) all required principal payments of Revolving Loans made pursuant
to scheduled Revolving Commitment reductions, (iii) all required principal
payments due on Term Loan A, (iv) all required principal payments due on Term
Loan B, (v) all principal payments required to be made by the Borrower and its
Subsidiaries on Total Debt (other than the Loans), (vi) Capital Expenditures
made by the Borrower and its Subsidiaries, (vii) any federal, state or local
income taxes paid by the Borrower or any of its Subsidiaries, plus (viii) any
purchases of common stock of the Borrower by the Borrower or any of its
Subsidiaries, in each case, for or during the four (4) quarter period then ended
or most recently ended. For purposes of calculating the Fixed Charge Coverage
Ratio as of any date from January 1, 2000 through December 31, 2002, Fixed
Charges for or during the four (4) quarter period then ended or most recently
ended, as the case may be, shall exclude actual HDTV Capital Expenditures for
such four (4) quarter period (A) in an amount not to exceed $8,000,000.00 and
(B) to the extent made on or after January 1, 2000 and on or prior to December
31, 2002.
"GAAP" shall mean, as in effect from time to time, generally accepted
accounting principles in the United States, consistently applied.
"Guaranty" or "Guaranteed," as applied to an obligation, shall mean and
include (a) a guaranty, direct or indirect, in any manner, of all or any part of
such obligation, and (b) any agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limitation, any reimbursement
obligations as to amounts drawn down by beneficiaries of outstanding letters of
credit or capital call requirements.
"Hazardous Materials" shall mean (i) any chemical, material or
substance at any time defined as or included in the definition of "hazardous
substances," "hazardous wastes," "hazardous materials," "extremely hazardous
waste," "acutely hazardous waste," "radioactive waste," "biohazardous waste,"
"pollutant," "toxic pollutant," "contaminant," "restricted hazardous waste,"
"infectious waste," "toxic substances," or any other term or expression intended
to define, list or classify substances by reason of properties harmful to
health, safety or the indoor or outdoor environment (including, without
limitation, harmful properties such as ignitability, corrosivity, reactivity,
carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or "EP
toxicity" or words of similar import under any applicable Environmental Laws);
(ii) any oil, petroleum, petroleum fraction or petroleum derived substance;
(iii) any drilling fluids, produced waters and other wastes associated with the
exploration, development or production of crude oil, natural gas or geothermal
resources; (iv) any flammable substances or explosives; (v) any radioactive
materials; (vi) any asbestos-containing materials; (vii) urea formaldehyde foam
insulation; (viii) electrical equipment which contains any oil or dielectric
fluid containing polychlorinated biphenyls; (ix) pesticides; and (x) any other
chemical, material
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<PAGE> 16
or substance, exposure to which is prohibited, limited or regulated by any
governmental authority or which may or could pose a hazard to the health and
safety of the owners, occupants or any Persons in the vicinity of any Real
Property or to the indoor or outdoor environment.
"Hazardous Materials Activity" shall mean any past, current, proposed
or threatened activity, event or occurrence involving any Hazardous Materials,
including the use, manufacture, possession, storage, holding, presence,
existence, location, Release, threatened Release, discharge, placement,
generation, transportation, processing, construction, treatment, abatement,
removal, remediation, disposal, disposition or handling of any Hazardous
Materials, and any corrective action or response action with respect to any of
the foregoing.
"HDTV Capital Expenditures" shall mean Capital Expenditures made in
connection with mandated conversion to digital television broadcasting,
including, without limitation, the purchase of transmission, distribution,
studio and antenna equipment and transmission site modifications, including
construction and modification of towers.
"Indebtedness" shall mean, with respect to any Person as of any date,
all liabilities, obligations and reserves, contingent or otherwise, which, in
accordance with GAAP, would be reflected as a liability on a balance sheet
(excluding trade accounts payable and accrued expenses arising in the ordinary
course of business), including, without duplication, (a) all obligations of such
Person for borrowed money or with respect to deposits or advances of any kind,
(b) all obligations of such Person evidenced by bonds, debentures, notes or
similar instruments, (c) all obligations of such Person upon which interest
charges are customarily paid, (d) all obligations of such Person under
conditional sale or other title retention agreements relating to assets purchase
by such Person, (e) all obligations of such Person issued or assumed as the
deferred purchase price of property or services, (f) all obligations of others
secured by (or for which the holder of such obligations has an existing right,
contingent or otherwise, to be secured by) any Lien on property owned or
acquired by such Person, whether or not the obligations secured thereby have
been assumed by such Person, (g) all obligations or liabilities Guaranteed by
such Person, (h) all Capitalized Lease Obligations of such Person, (i) all
Interest Rate Hedge Agreements, and (j) all obligations of such Person as an
account party to reimburse any Person in respect of letters of credit
(including, without limitation, the Letters of Credit) or bankers' acceptances.
The Indebtedness of any Person shall include any recourse Indebtedness of any
partnership in which such Person is a general partner.
"Indemnitee" shall have the meaning ascribed thereto in Section 5.11
hereof.
"Interest Coverage Ratio" shall mean as of any date, the ratio of (a)
Operating Cash Flow for the four (4) fiscal quarter period then ended or most
recently ended to (b) the sum of (i) Interest Expense and (ii) dividends made by
the Borrower and its Subsidiaries in respect of the Ownership Interests of the
Borrower or such Subsidiary, in each case, for the same four (4) quarter period
(excluding dividends made in such Ownership Interests).
"Interest Expense" shall mean, for any period, the gross interest
expense accrued by the Borrower and its Subsidiaries in respect of their
Indebtedness for such period, determined on a
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<PAGE> 17
consolidated basis, all fees payable under Section 2.4 or any fee letter of the
Borrower executed in connection with this Agreement, and any other fees,
charges, commissions and discounts in respect of Indebtedness, including,
without limitation, any fees payable in connection with the Letters of Credit,
but excluding deferred finance charges all calculated in accordance with GAAP.
For purposes of the foregoing, gross interest expense shall be determined after
giving effect to any net payments made or received by the Borrower with respect
to Interest Rate Hedge Agreements.
"Interest Period" shall mean (a) in connection with any Base Rate
Advance, the period beginning on the date such Advance is made as or Converted
to a Base Rate Advance and ending on the last day of the fiscal quarter in which
such Advance is made or as Converted to a Base Rate Advance, provided, however,
that if a Base Rate Advance is made or Converted on the last day of any fiscal
quarter, it shall have an Interest Period ending on, and its Payment Date shall
be, the last day of the following fiscal quarter, and (b) in connection with any
LIBOR Advance, the term of such Advance selected by the Borrower or otherwise
determined in accordance with this Agreement. Notwithstanding the foregoing,
however, (i) any applicable Interest Period which would otherwise end on a day
which is not a Business Day shall be extended to the next succeeding Business
Day unless, with respect to LIBOR Advances only, such Business Day falls in
another calendar month, in which case such Interest Period shall end on the next
preceding Business Day, (ii) any applicable Interest Period, with respect to
LIBOR Advances only, which begins on a day for which there is no numerically
corresponding day in the calendar month during which such Interest Period is to
end shall (subject to clause (i) above) end on the last day of such calendar
month, and (iii) the Borrower shall not select an Interest Period which extends
beyond the Maturity Date, or such earlier date as would interfere with the
Borrower's repayment obligations under Section 2.7 hereof. Interest shall be due
and payable with respect to any Advance as provided in Section 2.3 hereof.
"Interest Rate Basis" shall mean the Base Rate Basis or the LIBOR
Basis, as appropriate.
"Interest Rate Hedge Agreements" shall mean the obligations of any
Person pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
"Investment" shall mean, with respect to the Borrower or any of its
Subsidiaries, (a) any loan, advance or extension of credit (other than to
customers in the ordinary course of business) by such Person to, or any Guaranty
or other contingent liability with respect to the capital stock, indebtedness or
other obligations of, or any contributions to the capital of, any other Person,
or any ownership, purchase or other acquisition by such Person of any interest
in any capital stock, limited partnership interests, general partnership
interest, or other securities of such other Person, other than an Acquisition,
and (b) all expenditures by the Borrower or any of its Subsidiaries relating to
the foregoing.
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<PAGE> 18
"Issuing Bank" shall mean Bank of America, N.A., in its capacity as the
issuer of the Letters of Credit, or any successor issuer of the Letters of
Credit.
"known to the Borrower" or "to the knowledge of the Borrower" shall
mean known by or reasonably should have been known by the executive officers of
the Borrower (including, without limitation, the chief executive officer,
president, the chief operating officer, if any, the chief financial officer, the
controller, the chief accounting officer or the general counsel of the
Borrower).
"Lead Arranger and Book Manager" shall mean Banc of America Securities,
LLC.
"Lenders" shall mean the Persons whose names appear as "Lenders" on the
signature pages hereof and any other Person which becomes a "Lender" hereunder
after the Agreement Date; and "Lender" shall mean any one of the foregoing
Lenders.
"Letter of Credit Obligations" shall mean, as of any date, the sum of
(a) an amount equal to the aggregate undrawn and unexpired amount (including the
amount to which any such Letter of Credit can be reinstated pursuant to the
terms hereof) of the then outstanding Letters of Credit and (b) an amount equal
to the aggregate drawn, but unreimbursed drawings on any Letters of Credit.
"Letter of Credit Reserve Account" shall mean any account maintained by
the Administrative Agent for the benefit of the Issuing Bank pursuant to the
terms hereof.
"Letters of Credit" shall mean either Standby Letters of Credit or
Commercial Letters of Credit issued by the Issuing Bank on behalf of the
Borrower or its Subsidiaries from time to time in accordance with the terms
hereof.
"Leverage Ratio" shall mean, as of any date, the ratio of (a) Total
Debt as of such date to (b) Operating Cash Flow for the four (4) quarter period
then ended or most recently ended.
"LIBOR" shall mean, for any Interest Period, the average of the
interest rates per annum at which deposits in United States Dollars for such
Interest Period are offered to the Administrative Agent in the Eurodollar market
at approximately 11:00 a.m. (London, England time) two (2) Business Days before
the first day of such Interest Period, in an amount approximately equal to the
principal amount of, and for a length of time approximately equal to the
Interest Period for, the LIBOR Advance sought by the Borrower.
"LIBOR Advance" shall mean an Advance which the Borrower requests to be
made as, Continued as or Converted to a LIBOR Advance in accordance with the
provisions of Section 2.2 hereof, and which shall be in a principal amount of at
least $1,000,000.00 and in an integral multiple of $500,000.00.
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<PAGE> 19
"LIBOR Basis" shall mean a simple per annum interest rate (rounded
upward, if necessary, to the nearest one-hundredth (1/100th) of one percent
(1.0%)) equal to the sum of (a) the quotient of (i) the LIBOR divided by (ii)
one (1) minus the Eurodollar Reserve Percentage, if any, stated as a decimal,
plus (b) the Applicable Margin. The LIBOR Basis shall apply to Interest Periods
of one (1), two (2), three (3), or six (6), nine (9) and twelve (12) months,
and, once determined, shall remain unchanged during the applicable Interest
Period, except for changes to reflect adjustments in the Eurodollar Reserve
Percentage and the Applicable Margin as adjusted pursuant to Section 2.3(f)
hereof. The LIBOR Basis for any LIBOR Advance shall be adjusted as of the
effective date of any change in the Eurodollar Reserve Percentage and the
Applicable Margin. The Borrower may not elect an Interest Period in excess of
six (6) months unless the Administrative Agent has notified the Borrower that
each of the Lenders has funds available to it for such Lender's portion of the
proposed Advance which are not required for other purposes, and that such funds
are available to each Lender at a rate (exclusive of reserves and other
adjustments) at or below the LIBOR Basis for such proposed Advance and Interest
Period.
"LIBOR Reserve Percentage" means for any day that percentage (expressed
as a decimal) which is in effect on such day, as prescribed by the Board of
Governors of the Federal Reserve System (or any successor) for determining the
maximum reserve requirement (including, without limitation, all basic,
supplemental, marginal and other reserves and taking into account any
transitional adjustments or other scheduled changes in reserve requirements) for
a member bank of the Federal Reserve System in respect of Eurocurrency
Liabilities (as that term is defined in Regulation D of the Board of Governors
of the Federal Reserve System, as in effect from time to time). The LIBOR Rate
shall be adjusted automatically on and as of the effective date of any change in
the LIBOR Reserve Percentage.
"License" shall mean any license, authorization, permit, consent,
franchise, ordinance, registration, certificate, agreement or other right filed
with, granted by, or entered into by a federal, state or local governmental
authority which permits or authorizes the acquisition, construction or operation
of a television station or satellite broadcasting or portable phone paging
operation, or any part of a television station or satellite broadcasting or
portable phone paging operation, or which is required for the acquisition,
ownership or operation of any Station, any Newspaper, the Porta-Phone Paging
Business or the Satellite Broadcasting Business, including, without limitation,
the FCC Licenses.
"License Sub" shall mean each Subsidiary of the Borrower which has no
assets other than FCC Licenses.
"Lien" shall mean, with respect to any property, any mortgage, lien,
pledge, negative pledge or other agreement not to pledge, assignment, charge,
security interest, title retention agreement, levy, execution, seizure,
attachment, garnishment or other encumbrance of any kind in respect of such
property, whether created by statute, contract, the common law or otherwise, and
whether or not choate, vested or perfected.
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<PAGE> 20
"Loan Documents" shall mean this Agreement, the Notes, the Security
Documents, all fee letters, all Requests for Advance, all Interest Rate Hedge
Agreements between the Borrower, on the one hand, and the Administrative Agent,
the Lenders or their Affiliates, or any of them, on the other hand, all
compliance certificates issued by the Borrower or any of its Subsidiaries and
all other documents, agreements, supplements, confirmations, instruments or
certificates executed or delivered in connection with or contemplated by this
Agreement or any of the foregoing.
"Loans" shall mean, collectively, the Revolving Loans, the Term Loan A
and the Term Loan B.
"margin stock" shall have the meaning ascribed thereto in Section
4.1(n) hereof.
"Materially Adverse Effect" shall mean a material adverse effect upon
or change in (a) the properties, assets, business, operations, financial
condition or prospects of the Borrower or any of its Subsidiaries or on the
ability of the Borrower or any such Subsidiary to conduct its business, (b) the
ability of the Borrower, any of its Subsidiaries or any other party to a Loan
Document (other than the Administrative Agent or any Lender) to perform its
obligations hereunder or under any other Loan Document to which it is a party,
(c) the validity or enforceability of this Agreement, the Notes or any other
Loan Document, or (d) the rights or remedies of the Administrative Agent or the
Lenders under this Agreement, the Notes or any other Loan Document or at law or
in equity.
"Maturity Date" shall mean the Revolving Loan Maturity Date, the Term
Loan A Maturity Date or the Term Loan B Maturity Date, as applicable.
"Mortgage" shall mean (i) a security instrument (whether designated as
a deed of trust or a mortgage or by any similar title) executed and delivered by
the Borrower or any of its Subsidiaries, in each case in form and substance
satisfactory to the Administrative Agent and its counsel based on local laws or
customary local mortgage or deed of trust practices, or (ii) at the
Administrative Agent's option, an amendment to an existing Mortgage, in form and
substance reasonably satisfactory to the Administrative Agent, adding additional
property to the Real Property encumbered by such existing Mortgage.
"Multiemployer Plan" shall mean a multiemployer pension plan as defined
in Section 3(37) of ERISA to which Parent, the Borrower, any of its Subsidiaries
or any ERISA Affiliate is or has been required to contribute.
"Necessary Authorizations" shall mean all approvals and licenses from,
and all filings and registrations with, any governmental or other regulatory
authority, including, without limitation, all approvals, Licenses, filings and
registrations under the Communications Act.
"Net Earnings" shall mean, as of any date with respect to the Borrower,
the consolidated net income (or deficit) of the Borrower and its Subsidiaries
for the period involved, after taxes
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<PAGE> 21
accrued and after all proper charges and reserves (excluding, however,
non-recurring special charges and credits), all as determined in accordance with
GAAP.
"Net Proceeds" shall mean, with respect to any Asset Sale by, or any
insurance or condemnation proceeding in respect of any assets of, the Borrower
or any of its Subsidiaries, as applicable, the aggregate amount of cash received
for such assets (including, without limitation, any payments received for
non-competition covenants, any time brokerage, consulting or management fees for
services rendered on or prior to the consummation of such sale (other than such
fees received in the ordinary course of business for brokerage, management or
consulting services rendered after the consummation of such sale in amounts
usual and customary for the services rendered), and any portion of the amount
received evidenced by a promissory note or other evidence of Indebtedness issued
by the purchaser), net of (a) amounts reserved, if any, for taxes payable with
respect to any such sale (after application (assuming application first to such
reserves) of any available losses, credits or other offsets), (b) reasonable and
customary transaction costs properly attributable to such transaction and
payable by the Borrower or any of its Subsidiaries (other than to an Affiliate)
in connection with such Asset Sale, including, without limitation, commissions,
and (c) until actually received by the Borrower or any of its Subsidiaries, any
portion of the amount received held in escrow, evidenced by a promissory note or
other evidence of Indebtedness, or in respect of a purchase or non-compete,
consulting or management agreement or covenant or otherwise for which
compensation is paid over time. Upon receipt by the Borrower or any of its
Subsidiaries of (i) amounts referred to in item (c) of the preceding sentence,
or (ii) if there shall occur any reduction in the tax reserves referred to in
item (a) of the preceding sentence resulting in a payment to the Borrower or its
Subsidiaries, such amounts shall then be deemed to be "Net Proceeds."
"Newspapers" shall mean, as of any date, the newspapers owned or
operated by the Borrower or any of its Subsidiaries as of such date. As of the
Agreement Date, the Newspapers are set forth on Schedule 3 attached hereto.
"Non-US Lender" shall have the meaning ascribed thereto in Section
2.8(a) hereof.
"Notes" shall mean, collectively, the Revolving Loan Notes, the Term
Loan A Notes and the Term Loan B Notes.
"Obligations" shall mean all payment and performance obligations of
every kind, nature and description of the Borrower, its Subsidiaries, and any
other obligors to the Lenders, or the Administrative Agent, or any of them,
under this Agreement and the other Loan Documents (including any interest, fees
and other charges on the Loans or otherwise under the Loan Documents that would
accrue but for the filing of a bankruptcy action and including Obligations to
the Administrative Agent, any of the Lenders or any of their Affiliates under
the Interest Rate Hedge Agreements) as they may be amended from time to time, or
as a result of making the Loans, whether such obligations are direct or
indirect, absolute or contingent, due or not due, contractual or tortious,
liquidated or unliquidated, arising by operation of law or otherwise, now
existing or hereafter arising.
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"Operating Agreement" shall mean any programming agreement, time
brokerage, local marketing or similar agreement, network affiliation agreement,
franchise agreement, lease or other agreement of the Borrower or any of its
Subsidiaries relating to the operation of a Station, a Newspaper, the
Porta-Phone Paging Business or the Satellite Broadcasting Business, the
termination or adverse modification of which could reasonably be expected to
have a Material Adverse Effect.
"Operating Cash Flow" shall mean, as of any date for any period, (a)
the Net Earnings for such period (excluding, to the extent included in Net
Earnings, (i) the effect of any exchange of advertising time for non-cash
consideration, such as merchandise or services, (ii) any other non-cash income
or expense (including the cumulative effect of a change in accounting principles
and extraordinary items) and (iii) any gains or losses from sales, exchanges and
other dispositions of property not in the ordinary course of business), minus
(b) any interest income, minus (c) any cash payments made in respect of
Programming Obligations, plus (d) the sum of (i) depreciation on or obsolescence
of fixed or capital assets and amortization of intangibles and leasehold
improvements (including, without limitation, amortization in respect of
Programming Obligations) for such period, plus (ii) Interest Expense in such
period, plus (iii) federal, state and local income taxes in such period to the
extent deducted in calculating Net Earnings in such period (other than any such
taxes resulting from any gains from sales and exchanges and other distributions
not in the ordinary course of business), all on a consolidated basis and
computed on the accrual method. For purposes of calculating Operating Cash Flow
in any period , any Acquisition or Asset Sale which occurs during such period
shall be deemed to have occurred on the first day of such period.
"Ownership Interests" shall mean, as applied to any Person, any
ownership interests or capital stock of such Person, regardless of class or
designation, and all warrants, options, purchase rights, conversion or exchange
rights, voting rights, calls or claims of any character with respect thereto, or
any partnership interests, membership interest or other instruments or
securities evidencing ownership of such Person, as applicable.
"Ownership Reports" shall mean, with respect to any Station, the
reports and certifications filed with the FCC pursuant to 47 C.F.R. ss. 73.3615,
or any comparable reports filed pursuant to any successor regulation thereto.
"Payment Date" shall mean the last day of any Interest Period.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any
successor thereto.
"Permitted Liens" shall mean, as applied to any Person:
(a) any Lien in favor of the Administrative Agent or any
Lender given to secure the Obligations;
(b) (i) Liens on real estate or other property for taxes,
assessments, governmental charges or levies not yet delinquent and (ii) Liens
for taxes, assessments,
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judgments, governmental charges or levies or claims the non-payment of which is
being diligently contested in good faith by appropriate proceedings and for
which adequate reserves have been set aside on such Person's books in accordance
with GAAP, but only so long as no forfeiture, foreclosure, distraint, sale or
similar proceedings have been commenced with respect thereto;
(c) statutory liens of carriers, warehousemen, mechanics,
vendors, laborers and materialmen incurred in good faith in the ordinary course
of business for sums not yet due or being diligently contested in good faith, if
adequate reserves have been set aside on such Person's books in accordance with
GAAP, or appropriate provisions shall have been made therefor, and no
forfeiture, foreclosure, distraint, sale or similar proceedings have been
commenced with respect thereto;
(d) Liens incurred in the ordinary course of business in
connection with worker's compensation and unemployment insurance, social
security obligations, assessments or government charges which are not overdue
for more than sixty (60) days;
(e) restrictions on the transfer of assets of the Borrower or
its Subsidiaries imposed by the Communications Act and any regulations
thereunder;
(f) easements, rights-of-way, zoning restrictions, leases,
licenses, reservations or restrictions on use and other similar encumbrances on
the use of real property which do not materially interfere with the ordinary
conduct of the business of such Person or the use or value of such property;
(g) (i) Liens reflected by Uniform Commercial Code financing
statements filed in respect of Capitalized Lease Obligations permitted pursuant
to Section 7.1(i) hereof and true leases of the Borrower or any of its
Subsidiaries and (ii) Liens evidencing Indebtedness permitted by Section 7.1(c)
hereof;
(h) Liens to secure performance of statutory obligations,
surety or appeal bonds, performance bonds, bids, tenders or escrow deposits in
connection with Acquisitions and, in each case, in the ordinary course of
business;
(i) judgment Liens which do not result in an Event of Default
under Section 8.1(h) hereof;
(j) Liens existing on the Agreement Date as set forth in
Schedule 2 hereof; and
(k) Liens approved by the Administrative Agent and set forth
in any title policy insuring the interest of the Administrative Agent in any
Collateral, or set forth in title report, title examination or similar document
with respect to any of the Collateral.
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"Person" shall mean an individual, corporation, limited liability
company, association, partnership, joint venture, trust or estate, an
unincorporated organization, a government or any agency or political subdivision
thereof, or any other entity.
"Plan" shall mean an employee benefit plan within the meaning of
Section 3(3) of ERISA or any other employee benefit plan maintained for
employees of any Person or any affiliate of such Person.
"Porta-Phone Paging Business" shall mean, as of any date, the portable
telephone paging business owned or operated by the Borrower or any of its
Subsidiaries as of such date.
"Prior Loan Agreement" shall mean that certain Amended and Restated
Credit Agreement dated as of July 31, 1998 by and among Gray Communications
Systems, Inc., as Borrower, NationsBank, N.A., as Syndication Agent and
Administrative Agent, Key Corporate Capital Inc., as Documentation Agent, and
the Lenders party thereto as amended by that certain First Amendment thereto
dated as of November 13, 1998 and that certain Second Amendment thereto dated as
of March 3, 1999.
"Pro Forma Debt Service" shall mean, as of any date, the sum of, (a)
all required principal payments of Revolving Loans to be made pursuant to
scheduled Revolving Commitment reductions pursuant to Section 2.5 hereof during
the four (4) quarter period following such date, plus (b) all principal payments
required to be made on Term Loan A or Term Loan B pursuant to Section 2.7 during
such subsequent four (4) quarter period, plus (c) all principal payments
required to be made by the Borrower and its Subsidiaries on Total Debt (other
than the Loans) during such subsequent four (4) quarter period, plus (d) all
Interest Expense during such subsequent four (4) quarter period. In calculating
Pro Forma Debt Service, (i) the interest rate in effect in such subsequent
period on any Indebtedness which does not bear interest at a rate which is fixed
for the entire subsequent period shall be deemed to be the interest rate in
effect on such Indebtedness as of the date of determination, and (ii) for the
purpose of determining the amount of principal payments required on the Term
Loan A or Term Loan B pursuant to Section 2.7 hereof in future periods, it shall
be assumed that the principal amount of such Loans outstanding as of the date of
determination will be outstanding for the subsequent four (4) quarter period,
subject to any required principal payments.
"Pro Forma Debt Service Coverage Ratio" shall mean, as of any date, the
ratio of (a) Operating Cash Flow for the four (4) fiscal quarter period then
ended or most recently ended to (b) Pro Forma Debt Service as of the end of the
same four (4) quarter period.
"Programming Obligations" means all direct or indirect monetary
liabilities, contingent or otherwise, with respect to contracts for television
broadcast rights relating to television series or other programs produced or
distributed for television release.
"Program Payments" shall mean, as of any date for any period, the sum
of all cash payments actually made by or on behalf of the Borrower and its
Subsidiaries during the period involved with respect to or on account of
Programming Obligations.
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"Real Property" shall mean any and all real property (including all
buildings, fixtures or other improvements located thereon) now, hereafter or
heretofore owned, leased, operated or used by the Borrower or any of its
Subsidiaries or any of their respective predecessors or Affiliates. The Real
Property as of the Agreement Date is set forth on Schedule 11 attached hereto.
"Register" shall have the meaning ascribed thereto in Section 11.5(g)
hereof.
"Registered Noteholder" shall mean each Non-U.S. Lender that holds a
Registered Note pursuant to Section 2.8(a) hereof or registers its Loans
pursuant to Section 11.5(g) hereof.
"Registered Notes" shall mean those certain Notes that have been issued
in registered form in accordance with Sections 2.8(a) and 11.5(g) hereof and
each of which bears the following legend: "This is a Registered Note, and this
Registered Note and the Loans evidenced hereby may be assigned or otherwise
transferred in whole or in part only by registration of such assignment or
transfer on the Register and in compliance with all other requirements provided
for in the Loan Agreement."
"Release" shall mean any release, spill, emission, leaking, pumping,
pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping,
leaching or migration of Hazardous Materials into the indoor or outdoor
environment (including, without limitation, the abandonment or disposal of any
barrels, containers or other closed receptacles containing any Hazardous
Materials), including the movement of any Hazardous Materials through the air,
soil, surface water or groundwater.
"Reportable Event" shall mean, with respect to any Employee Pension
Plan, an event described in Section 4043(b) of ERISA.
"Request for Advance" shall mean a certificate designated as a "Request
for Advance," signed by an Authorized Signatory of the Borrower requesting an
Advance, Continuation or Conversion hereunder, which shall be in substantially
the form of Exhibit E attached hereto, and shall, among other things, (i)
specify the date of such Advance, Continuation or Conversion, which shall be a
Business Day, the amount and type of Advance (LIBOR or Base Rate), and, with
respect to LIBOR Advances, the Interest Period selected by the Borrower, (ii)
state that there shall not exist, on the date of the requested Advance and after
giving effect thereto, a Default or Event of Default, and (iii) the Applicable
Margin then in effect.
"Request for Issuance of Letter of Credit" shall mean any certificate
signed by an Authorized Signatory of the Borrower requesting that the Issuing
Bank issue a Letter of Credit hereunder, which certificate shall be in
substantially the form of Exhibit F attached hereto and shall, among other
things, specify (a) that the requested Letter of Credit is either a Commercial
Letter of Credit or a Standby Letter of Credit, (b) the stated amount of the
Letter of Credit, (c) the effective date for the issuance of the Letter of
Credit (which shall be a Business Day), (d) the date on which the Letter of
Credit is to expire (which shall be a Business Day), (e) the Person for
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whose benefit such Letter of Credit is to be issued, and (f) other relevant
terms of such Letter of Credit.
"Required Lenders" shall mean, at any time, the Lenders holding at
least sixty-six and two-thirds percent (66-2/3%) of the then aggregate unpaid
principal amount of the Loans, or, if no Loan is then outstanding, the Lenders
having at least sixty-six and two-thirds percent (66-2/3%) of the Commitments.
"Restricted Payment" shall mean (a) any direct or indirect
distribution, dividend or other payment to any Person (other than to the
Borrower or any of its Subsidiaries) on account of any Ownership Interests of
the Borrower or any of its Subsidiaries (other than dividends payable solely in
Ownership Interests of such Person and splits thereof), (b) any payment of
principal of, or interest on, or payment into a sinking fund for the retirement
of, or any defeasance of Subordinated Debt, or (c) any management, consulting or
similar fees, or any interest thereon, payable by the Borrower or any of its
Subsidiaries to any of their respective Affiliates (other than such fees and
interest payable to (1) the Borrower or any of its Subsidiaries or (2) Bull Run
Corporation).
"Restricted Purchase" shall mean any payment (including, without
limitation, any sinking fund payment, prepayment or installment payment) on
account of the purchase, redemption, defeasance or other acquisition or
retirement of any Ownership Interests of or Subordinated Debt of the Borrower or
any of its Subsidiaries, including, without limitation, any warrants or other
rights or options to acquire shares of Ownership Interests of the Borrower or of
any of its Subsidiaries or any loan, advance, release or forgiveness of
Indebtedness by the Borrower or any of its Subsidiaries to any partner,
shareholder or Affiliate (other than to the Borrower or any of its Subsidiaries)
of any such Person.
"Revolving Loan Commitment" shall mean the several obligations of the
Lenders to fund their respective portion of the Revolving Loans to the Borrower
in accordance with their respective Commitment Ratios in the aggregate sum as of
the Agreement Date of up to $100,000,000.00, pursuant to the terms hereof, as
such obligations may be reduced from time to time pursuant to the terms hereof.
"Revolving Loans" shall mean, collectively, those amounts advanced by
the Lenders to the Borrower under the Revolving Loan Commitment not to exceed
the Revolving Loan Commitment at any one time and evidenced by the Revolving
Loan Notes.
"Revolving Loan Maturity Date" shall mean June 30, 2005, or such
earlier date as payment of the Revolving Loans shall be due (whether by
acceleration, reduction of the Revolving Loan Commitment to zero or otherwise).
"Revolving Loan Notes" shall mean, collectively, those certain amended
and restated promissory notes in the aggregate original principal amount of
$100,000,000.00, and issued to each of the Lenders by the Borrower with respect
to the Revolving Loan Commitment, each one substantially in the form of Exhibit
G-1 attached hereto, any other promissory note issued by the
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Borrower to evidence the Revolving Loans pursuant to this Agreement, and any
extensions, renewals or amendments to, or replacements of, the foregoing.
"Revolving Loan Repayment Proceeds" shall mean the product of (a) the
Revolving Loan Repayment Ratio times (b) the applicable Net Proceeds amount.
"Revolving Loan Repayment Ratio" shall mean, as of any date, the ratio
of (a) (i) the sum of the Revolving Loans and Letter of Credit Obligations
outstanding on such date to (ii) the sum of the Loans and Letter of Credit
Obligations outstanding hereunder on such date or, (b) if no Loan or Letter of
Credit Obligation is then outstanding, (i) the Revolving Loan Commitment on such
date to (ii) the sum of the Commitments hereunder on such date.
"Satellite Broadcasting Business" shall mean, as of any date, the
satellite broadcasting business owned or operated by the Borrower or any of its
Subsidiaries on such date.
"Security Documents" shall mean, collectively, the Borrower Pledge
Agreement, the Borrower Security Agreement, any Subsidiary Guaranty, any
Subsidiary Pledge Agreement, any Subsidiary Security Agreement, any Mortgage,
any Assignment of General Partner Interests, any Assignment of Limited Partner
Interests, any other agreement or instrument providing Collateral for the
Obligations whether now or hereafter in existence, and any filings, instruments,
agreements and documents related thereto or to this Agreement, and providing the
Administrative Agent, for the benefit of the Lenders, with Collateral for the
Obligations.
"Security Interest" shall mean, collectively, all Liens in favor of the
Administrative Agent, for the benefit of the Lenders, created hereunder or under
any of the Security Documents to secure the Obligations.
"Senior Debt" shall mean, as of any date, (a) Total Debt on such date
minus (b) Subordinated Debt on such date.
"Senior Leverage Ratio" shall mean, as of any date, the ratio of (a)
Senior Debt as of such date to (b) Operating Cash Flow for the four (4) quarter
period then ended or most recently ended.
"Standby Letter of Credit shall mean a letter of credit issued to
support obligations of the Borrower or its Subsidiaries incurred in the ordinary
course of business, and which is not a Commercial Letter of Credit.
"Station" shall mean, collectively (i) each of the television stations
owned and operated by the Borrower and its Subsidiaries on the Agreement Date as
set forth in Schedule 3 attached hereto and (ii) any television station acquired
after the Agreement Date by the Borrower or any of its Subsidiaries in
accordance herewith.
"Subordinated Debt" shall mean, as of any date, the sum of (a) all
Indebtedness of the Borrower and its Subsidiaries under the Subordinated Note
Indenture or any agreements, notes,
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instruments or documents executed or delivered in connection therewith and (b)
all other Indebtedness of the Borrower the repayment of which is subordinated in
right of payment to the Obligations pursuant to a subordination agreement in
form and substance satisfactory to the Lenders, in each case, as of such date.
"Subordinated Note Indenture" shall mean that certain Indenture dated
as of September 25, 1996 by and among the Borrower, all of its Subsidiaries and
Bankers Trust Company in respect of the Borrower's 10-5/8% Senior Subordinated
Notes due 2006, as the same may be amended from time to time to the extent
permitted hereunder.
"Subsidiary" shall mean, as applied to any Person, (a) any corporation
of which more than fifty percent (50%) of the outstanding stock (other than
directors' qualifying shares) having ordinary voting power to elect a majority
of its board of directors, regardless of the existence at the time of a right of
the holders of any class or classes of securities of such corporation to
exercise such voting power by reason of the happening of any contingency, or any
partnership or limited liability company of which more than fifty percent (50%)
of the outstanding partnership or ownership interests, is at the time owned
directly or indirectly by such Person, or by one or more Subsidiaries of such
Person, or by such Person and one or more Subsidiaries of such Person, or (b)
any other entity which is directly or indirectly controlled or capable of being
controlled by such Person, or by one or more Subsidiaries of such Person, or by
such Person and one or more Subsidiaries of such Person. "Subsidiaries" as used
herein shall mean the Subsidiaries of the Borrower unless otherwise specified.
The Subsidiaries of the Borrower as of the Agreement Date are set forth on
Schedule 4 hereto, except as otherwise noted thereon.
"Subsidiary Guaranty" shall mean any Subsidiary Guaranty, in favor of
the Administrative Agent and the Lenders, given by each Subsidiary of the
Borrower, or any supplement thereto or confirmation thereof, in form and
substance satisfactory to the Administrative Agent, or any similar agreement
substantially in the form of Exhibit H attached hereto.
"Subsidiary Pledge Agreement" shall mean any Subsidiary Pledge
Agreement made by each Subsidiary of the Borrower having one or more of its own
Subsidiaries, on the one hand, in favor of the Administrative Agent, on the
other hand, or any supplement thereto or confirmation thereof, in form and
substance satisfactory to the Administrative Agent, or any similar agreement
substantially in the form of Exhibit I attached hereto.
"Subsidiary Security Agreement" shall mean any Subsidiary Security
Agreement between any of the Borrower's Subsidiaries, on the one hand, and the
Administrative Agent, on the other hand, or any supplement thereto or
confirmation thereof, in form and substance satisfactory to the Administrative
Agent, or any similar agreement substantially in the form of Exhibit J attached
hereto.
"Syndication Agent" shall mean First Union National Bank.
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"Term Loan A" shall mean, collectively, the amounts advanced by the
Lenders to the Borrower under the Term Loan A Commitment and evidenced by the
Term Loan A Notes.
"Term Loan A Commitment" shall mean the several obligations of the
Lenders to advance to the Borrower, in accordance with their respective
Commitment Ratios, an aggregate sum of up to $100,000,000.00, pursuant to the
terms hereof.
"Term Loan A Maturity Date" shall mean June 30, 2005, or such earlier
date as payment of the Term Loan A shall be due (whether by acceleration or
otherwise).
"Term Loan A Notes" shall mean, collectively, those certain amended and
restated promissory notes in the aggregate original principal amount of
$100,000,000.00, and issued to each of the Lenders by the Borrower with respect
to the Term Loan A Commitment, each one substantially in the form of Exhibit G-2
attached hereto, any other promissory note issued by the Borrower to evidence
the Term Loan A pursuant to this Agreement, and any extensions, renewal, or
amendments to, or replacements of, the foregoing.
"Term Loan A Repayment Proceeds" shall mean the product of (a) the Term
Loan A Repayment Ratio times (b) the applicable Net Proceeds amount.
"Term Loan A Repayment Ratio" shall mean, as of any date, the ratio of
(a) the Term Loan A outstanding on such date to (b) the sum of the Loans and
Letter of Credit Obligations outstanding hereunder on such date.
"Term Loan B" shall mean, collectively, the amounts advanced by the
Lenders to the Borrower under the Term Loan B Commitment and evidenced by the
Term Loan B Notes.
"Term Loan B Commitment" shall mean the several obligations of the
Lenders to advance to the Borrower on the Agreement Date, in accordance with
their respective Commitment Ratios, an aggregate sum of up to $100,000,000.00,
pursuant to the terms hereof.
"Term Loan B Maturity Date" shall mean December 31, 2005, or such
earlier date as payment of the Term Loan B shall be due (whether by acceleration
or otherwise).
"Term Loan B Notes" shall mean, collectively, those certain promissory
notes in the aggregate original principal amount of $100,000,000.00, and issued
to each of the Lenders by the Borrower with respect to the Term Loan B
Commitment, each one substantially in the form of Exhibit G-3 attached hereto,
any other promissory note issued by the Borrower to evidence the Term Loan B
pursuant to this Agreement, and any extensions, renewals or amendments to, or
replacements of, the foregoing.
"Term Loan B Repayment Proceeds" shall mean the product of (a) the Term
Loan B Repayment Ratio times (b) the applicable Net Proceeds amount.
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"Term Loan B Repayment Ratio" shall mean, as of any date, the ratio of
(a) the Term Loan B outstanding on such date to (b) the sum of the Loans and
Letter of Credit Obligations outstanding hereunder on such date.
"Texas Acquisition" shall mean the Acquisition by the Borrower of the
Ownership Interests and assets and properties of the Texas Stations pursuant to
the Texas Acquisition Agreement.
"Texas Acquisition Agreement" shall mean, collectively, (a) that
certain Agreement and Plan of Merger dated as of April 13, 1999 by and among the
Borrower, Gray Communications of Texas, Inc. and KWTX Broadcasting Company, (b)
that certain Agreement and Plan of Merger dated as of April 13, 1999 by and
among the Borrower, Gray Communications of Texas, Inc. and Brazos Broadcasting
Company, and (c) that certain Asset Purchase Agreement dated as of April 26,
1999 by and among the Borrower, Gray Communications of Texas-Sherman, Inc., KXII
License Corp., KXII Broadcasters, Ltd., KXII Television, Ltd., KBI 1, Inc., KBI
2, Inc., KXII Properties, Inc. and the Shareholders of KXII Properties, Inc.
"Texas Stations" shall mean KWTX-TV, Waco Texas, KBTX-TV, Bryan, Texas
and KXII-TV, Sherman, Texas.
"Total Debt" shall mean, as of any date, the sum of, without
duplication, (a) all Indebtedness of the Borrower and its Subsidiaries for
borrowed money, including, without limitation, the Loans, (b) all Capitalized
Lease Obligations of the Borrower and its Subsidiaries, (c) all other
Indebtedness of the Borrower or any of its Subsidiaries represented by notes or
drafts representing extensions of credit on which interest is typically charged,
(d) all obligations of the Borrower or any of its Subsidiaries evidenced by
bonds, debentures, notes or other similar instruments (including, without
limitation, all such obligations to which any property or asset owned by the
Borrower or any of its Subsidiaries is subject, whether or not the obligation
secured thereby shall have been assumed), (e) all obligations of the Borrower or
any of its Subsidiaries under conditional sale or other title retention
agreements relating to purchased assets, (f) all obligations of the Borrower or
any of its Subsidiaries which are incurred, issued or assumed as the deferred
purchase price of property or services and which are payable over a period in
excess of one (1) year (excluding Programming Obligations), (g) all obligations
or liabilities Guaranteed by the Borrower or any of its Subsidiaries, (h) at any
time after the occurrence and during the continuance of an event of default
under any Interest Rate Hedge Agreement, the aggregate amount payable by the
Borrower or such Subsidiary under such agreement, and (i) all obligations of the
Borrower or any of its Subsidiaries as an account party to reimburse any Person
in respect of letters of credit (including, without limitation, all Letters of
Credit) or bankers' acceptances, in each case, as of such date.
"Upstream Dividends" shall have the meaning ascribed thereto in Section
7.18 hereof.
"Year 2000 Compliant" shall have the meaning ascribed thereto in
Section 4.1(z) hereof.
"Year 2000 Problem" shall have the meaning ascribed thereto in Section
4.1(z) hereof.
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Section 1.2 Interpretation. Except where otherwise specifically
restricted, reference to a party to this Agreement or any other Loan Document
includes that party and its successors and assigns. All capitalized terms used
herein which are defined in Article 9 of the Uniform Commercial Code in effect
in the State of Georgia on the date hereof and which are not otherwise defined
herein shall have the same meanings herein as set forth therein. Whenever any
agreement, promissory note or other instrument or document is defined in this
Agreement, such definition shall be deemed to mean and include, from and after
the date of any amendment, restatement, supplement, confirmation or modification
thereof, such agreement, promissory note or other instrument or document as so
amended, restated, supplemented, confirmed or modified. All terms defined in
this Agreement in the singular shall have comparable meanings when used in the
plural and vice versa. The words "hereof," "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement.
Section 1.3 Cross References. Unless otherwise specified, references
in this Agreement and in each other Loan Document to any Article or Section are
references to such Article or Section of this Agreement or such other Loan
Document, as the case may be, and, unless otherwise specified, references in any
Article, Section or definition to any clause are references to such clause in
such Article, Section or definition.
Section 1.4 Accounting Provisions. All accounting terms used in this
Agreement which are not expressly defined herein shall have the respective
meanings given to them in accordance with GAAP, all computations shall be made
in accordance with GAAP, and all balance sheets and other financial statements
shall be prepared in accordance with GAAP. All financial or accounting
calculations or determinations required pursuant to this Agreement, unless
otherwise expressly provided, shall be made on a consolidated basis for the
Borrower and its Subsidiaries.
ARTICLE 2
Loans and Letters of Credit
Section 2.1 The Loans.
(a) Revolving Loans. The Lenders who issued a Revolving Loan
Commitment agree, severally, in accordance with their respective Commitment
Ratios and not jointly, upon the terms and subject to the conditions of this
Agreement to lend to the Borrower, prior to the Revolving Loan Maturity Date,
amounts not at any one time outstanding to exceed, in the aggregate, the
Available Revolving Loan Commitment as then in effect. The Borrower hereby
acknowledges that all "Obligations" in respect of "Revolving Loans" outstanding
on the Agreement Date under the "Revolving Commitment" (as such terms are
defined in the Prior Loan Agreement) shall be deemed to have been made to the
Borrower as Advances under the Revolving Loan Commitment hereunder and shall
constitute a portion of the Obligations.
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<PAGE> 32
Subject to the terms and conditions hereof, the Borrower may from time to time
(i) Convert a Base Rate Advance into a LIBOR Advance or a LIBOR Advance into a
Base Rate Advance or (ii) Continue a LIBOR Advance as a LIBOR Advance.
(b) Term Loan A. The Lenders who issued a "Term Commitment"
under, and as defined in, the Prior Loan Agreement have previously lent to the
Borrower the amount in the aggregate of $100,000,000 of which $100,000,000.00 is
outstanding on the Agreement Date. The Borrower hereby acknowledges that all
"Obligations" in respect of the "Term Loan" outstanding under the "Term
Commitment" (as such terms are defined in the Prior Agreement) shall be deemed
to have been made to the Borrower as Advances under the Term Loan A Commitment
hereunder and shall constitute a portion of the Obligations. Subject to the
terms and conditions hereof, the Borrower may from time to time (i) Convert a
Base Rate Advance into a LIBOR Advance or a LIBOR Advance into a Base Rate
Advance or (ii) Continue a LIBOR Advance as a LIBOR Advance; provided, however,
that there shall be no increase in the principal amount of the Term Loan A
outstanding after the Agreement Date.
(c) Term Loan B. The Lenders who issued a Term Loan B
Commitment, agree severally, in accordance with their respective Commitment
Ratios, and not jointly, upon the terms and subject to the conditions of this
Agreement, to lend to the Borrower on the Agreement Date an amount which does
not exceed in the aggregate the Term Loan B Commitment. Subject to the terms and
conditions hereof, the Borrower may from time to time (i) Convert a Base Rate
Advance into a LIBOR Advance or a LIBOR Advance into a Base Rate Advance or (ii)
Continue a LIBOR Advance as a LIBOR Advance; provided, however, that there shall
be no increase in the principal amount of the Term Loan B outstanding after the
Agreement Date.
(d) The Letters of Credit. Subject to the terms and conditions
of this Agreement, the Issuing Bank agrees to issue Letters of Credit for the
account of the Borrower (for itself and on behalf of its Subsidiaries) pursuant
to Section 2.14 hereof in an aggregate amount not to exceed the Available Letter
of Credit Commitment determined immediately prior to giving effect to the
issuance thereof.
Section 2.2 Manner of Borrowing and Disbursement.
(a) Choice of Interest Rate, Etc. Any Advance shall, at the
option of the Borrower, be made as a Base Rate Advance or a LIBOR Advance;
provided, however, that at such time as there shall have occurred and be
continuing a Default hereunder, the Borrower shall not have the right to
receive, Convert an Advance to or Continue an Advance as a LIBOR Advance. Any
notice given to the Administrative Agent in connection with a Request for
Advance hereunder shall be given to the Administrative Agent prior to 11:00 a.m.
(Atlanta, Georgia time) on any Business Day in order for such Business Day to
count toward the minimum number of Business Days required.
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(b) Base Rate Advances.
(i) Advances; Conversion. The Borrower shall give the
Administrative Agent, (A) in the case of a request for a Base Rate
Advance irrevocable telephonic notice on the date of such Advance and
(B) in the case of a request to Convert a LIBOR Advance to a Base Rate
Advance, at least three (3) Business Day's irrevocable prior telephonic
notice, in each case, followed immediately by a Request for Advance;
provided, however, that the Borrower's failure to confirm any
telephonic notice with a Request for Advance shall not invalidate any
notice so given if acted upon by the Administrative Agent. Upon receipt
of such notice from the Borrower, the Administrative Agent shall
promptly notify each Lender by telephone or telecopy of the contents
thereof.
(ii) Repayments and Reborrowings. Subject to Section 2.1
hereof, the Borrower may repay or prepay a Base Rate Advance without
regard to its Payment Date and, (A) upon irrevocable telephonic notice
on the date of such repayment or prepayment, as applicable, followed
immediately by a Request for Advance, reborrow all or a portion of the
principal amount thereof as a Base Rate Advance, (B) upon at least
three (3) Business Days' irrevocable prior telephonic notice followed
immediately by a Request for Advance, reborrow all or a portion of the
principal thereof as one or more LIBOR Advances, or (C) not reborrow
all or any portion of such Base Rate Advance. On the date indicated by
the Borrower, such Base Rate Advance shall be so repaid and, as
applicable reborrowed. The failure to give timely notice hereunder with
respect to the Payment Date of any Base Rate Advance shall be
considered a request for a Base Rate Advance.
(c) LIBOR Advances.
(i) Advances. Upon request, the Administrative Agent,
whose determination in absence of manifest error shall be conclusive,
shall determine the available LIBOR Bases and shall notify the Borrower
of such LIBOR Bases. The Borrower shall give the Administrative Agent
in the case of LIBOR Advances at least three (3) Business Days'
irrevocable prior telephonic notice followed immediately by a Request
for Advance; provided, however, that the Borrower's failure to confirm
any telephonic notice with a Request for Advance shall not invalidate
any notice so given if acted upon by the Administrative Agent. Upon
receipt of such notice from the Borrower, the Administrative Agent
shall promptly notify each Lender by telephone or telecopy of the
contents thereof.
(ii) Repayments; Conversion; Continuation. Subject to
Section 2.1 hereof, at least three (3) Business Days prior to the
Payment Date for each LIBOR Advance, the Borrower shall give the
Administrative Agent telephonic notice followed immediately by a
Request for Advance specifying whether all or a portion of such LIBOR
Advance (A) is to be Continued in whole or in part as one or more LIBOR
Advances, (B) is to be Converted in whole or in part to a Base Rate
Advance, or (C) is to
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be repaid and not Continued or Converted. The failure to give such
notice shall preclude the Borrower from Continuing such Advance as a
LIBOR Advance on its Payment Date and shall be considered a request for
a Conversion to a Base Rate Advance. Upon such Payment Date such LIBOR
Advance will, subject to the provisions hereof, be so repaid, Continued
or Converted, as applicable.
(d) Notification of Lenders. Upon receipt of a Request for
Advance, or a notice from the Borrower with respect to any outstanding Advance
prior to the Payment Date for such Advance, the Administrative Agent shall
promptly, but no later than, (i) with respect to LIBOR Advances, the close of
business on the day of such notice, and (ii) with respect to Base Rate Advances,
12:30 p.m. (Atlanta, Georgia time) notify each Lender by telephone or telecopy
of the contents thereof and the amount of such Lender's portion of the Advance.
With respect to each Request for Advance, each Lender shall, not later than 2:00
p.m. (Atlanta, Georgia time) on the date of borrowing specified in such Request
for Advance, make available to the Administrative Agent at the Administrative
Agent's Office, or at such account as the Administrative Agent shall designate,
the amount of its portion of any Advance which represents an additional
borrowing hereunder in immediately available funds.
(e) Disbursement.
(i) Prior to 3:00 p.m. (Atlanta, Georgia time) on the
date of an Advance hereunder, the Administrative Agent shall, subject
to the satisfaction of the conditions set forth in Article 3 hereof,
disburse the amounts made available to the Administrative Agent by the
Lenders in like funds by (A) transferring the amounts so made available
by wire transfer pursuant to the Borrower's instructions, or (B) in the
absence of such instructions, crediting the amounts so made available
to the account of the Borrower maintained with the Administrative
Agent.
(ii) Unless the Administrative Agent shall have received
notice from a Lender prior to 2:00 p.m. (Atlanta, Georgia time) on the
date of any Advance that such Lender will not make available to the
Administrative Agent such Lender's ratable portion of such Advance, the
Administrative Agent may assume that such Lender has made or will make
such portion available to the Administrative Agent on the date of such
Advance and the Administrative Agent may in its sole discretion and in
reliance upon such assumption, make available to the Borrower on such
date a corresponding amount. If and to the extent the Lender does not
make such ratable portion available to the Administrative Agent, such
Lender agrees to repay to the Administrative Agent on demand such
corresponding amount together with interest thereon, for each day from
the date such amount is made available to the Borrower until the date
such amount is repaid to the Administrative Agent, at the Federal Funds
Rate.
(iii) If such Lender shall repay to the Administrative
Agent such corresponding amount, such amount so repaid shall constitute
such Lender's portion of the applicable Advance for purposes of this
Agreement. If such Lender does not repay such corresponding amount
immediately upon the Administrative Agent's demand
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therefor, the Administrative Agent shall notify the Borrower and the
Borrower shall immediately pay such corresponding amount to the
Administrative Agent, with interest at the Federal Funds Rate. The
failure of any Lender to fund its portion of any Advance shall not
relieve any other Lender of its obligation, if any, hereunder to fund
its respective portion of the Advance on the date of such borrowing,
but no Lender shall be responsible for any such failure of any other
Lender.
(iv) In the event that, at any time when the Borrower is
not in Default and has otherwise satisfied each of the conditions in
Section 3.2 hereof, a Lender for any reason fails or refuses to fund
its portion of an Advance and such failure shall continue for a period
in excess of thirty (30) days, then, until such time as such Lender has
funded its portion of such Advance (which late funding shall not
absolve such Lender from any liability it may have to the Borrower), or
all other Lenders have received payment in full from the Borrower
(whether by repayment or prepayment) or otherwise of the principal and
interest due in respect of such Advance, such non-funding Lender shall
not have the right (A) to vote regarding any issue on which voting is
required or advisable under this Agreement or any other Loan Document,
and such Lender's portion of the Loans shall not be counted as
outstanding for purposes of determining "Required Lenders" hereunder,
and (B) to receive payments of principal, interest or fees from the
Borrower, the Administrative Agent or the other Lenders in respect of
its portion of the Loans.
Section 2.3 Interest.
(a) On Base Rate Advances. Interest on each Base Rate Advance
shall be computed on the basis of a 360-day year for the actual number of days
elapsed and shall be payable at the Base Rate Basis for such Advance, in arrears
on the applicable Payment Date. Interest on Base Rate Advances then outstanding
shall also be due and payable on the Maturity Date.
(b) On LIBOR Advances. Interest on each LIBOR Advance shall be
computed on the basis of a 360-day year for the actual number of days elapsed
and shall be payable at the LIBOR Basis for such Advance, in arrears on the
applicable Payment Date, and, in addition, if the Interest Period for a LIBOR
Advance exceeds three (3) months, interest on such LIBOR Advance shall also be
due and payable in arrears on every three-month anniversary of the beginning of
such Interest Period. Interest on LIBOR Advances then outstanding shall also be
due and payable on the Maturity Date.
(c) Interest if No Notice of Selection of Interest Rate Basis.
If the Borrower fails to give the Administrative Agent timely notice of its
selection of a LIBOR Basis, or if for any reason a determination of a LIBOR
Basis for any Advance is not timely concluded, the Base Rate Basis shall apply
to such Advance.
(d) Interest Upon Default. Immediately upon the occurrence of
an Event of Default hereunder, the outstanding principal balance of the Loans
shall bear interest at the Default Rate. Such interest shall be payable on
demand by the Required Lenders and shall
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accrue until the earlier of (i) waiver or cure of the applicable Event of
Default, (ii) agreement by the Required Lenders (or, if applicable to the
underlying Event of Default, the Lenders) to rescind the charging of interest at
the Default Rate, or (iii) payment in full of the Obligations.
(e) LIBOR Contracts. At no time may the number of
outstanding LIBOR Advances hereunder exceed eight (8) in the aggregate.
(f) Applicable Margin.
(i) Revolving Loans and Term Loan A. The Applicable
Margin shall be determined by the Administrative Agent with respect to
any Advance under the Revolving Loan Commitment or Term Loan A
Commitment based upon the Leverage Ratio as of the end of the fiscal
quarter most recently ended, effective as of the third (3rd) Business
Day after the financial statements referred to in Section 6.1 or 6.2
hereof, as the case may be, are furnished to the Administrative Agent
for such fiscal quarter, as follows:
<TABLE>
<CAPTION>
Applicable Margin for Applicable Margin for
Leverage Ratio Base Rate Advances LIBOR Advances
-------------- ----------------- --------------
<S> <C> <C>
Greater than 7.0:1.0. 1.750% 3.000%
Greater than 6.50:1.0, but less than or equal 1.500% 2.750%
to 7.0:1.0.
Greater than 6.00:1.0, but less than or equal 1.125% 2.375%
to 6.50:1.0.
Greater than 5.50:1.0, but less than or equal 0.750% 2.000%
to 6.00:1.0.
Greater than 5.00:1.0, but less than or equal 0.500% 1.750%
to 5.50:1.0.
Greater than 4.50:1.0, but less than or equal 0.250% 1.500%
to 5.00:1.0.
Less than or equal to 4.50:1.0. 0.000% 1.250%
</TABLE>
(ii) Term Loan B. The Applicable Margin shall be
determined by the Administrative Agent with respect to any Advance
under the Term Loan B Commitment based upon the Leverage Ratio as of
the end of the fiscal quarter most recently ended, effective as of the
third (3rd) Business Day after the financial statements referred to in
Section 6.1 or 6.2 hereof, as the case may be, are furnished to the
Administrative Agent for such fiscal quarter, as follows:
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<TABLE>
<CAPTION>
Applicable Margin Applicable Margin
Leverage Ratio for Base Rate Advances for LIBOR Advances
-------------- ---------------------- ------------------
<S> <C> <C>
Greater than or equal to 6.0:1.0. 2.000% 3.250%
Less than 6.0:1.0. 1.750% 3.000%
</TABLE>
Notwithstanding the foregoing Sections 2.3(f)(i) and (ii), if the
Borrower shall fail to timely deliver to the Administrative Agent the financial
statements required for the calculation of the Leverage Ratio for any fiscal
quarter, then commencing with the Business Day after the date such financial
statements were due and continuing through the third (3rd) Business Day
following the date of delivery thereof, the Leverage Ratio for such period shall
be conclusively presumed to be, and the Applicable Margin shall be calculated
based upon, the highest Leverage Ratio level listed in the tables set forth
above in Section 2.3(f)(i) or (ii), as applicable.
Section 2.4 Fees.
(a) Revolving Loan Commitment Fee. The Borrower agrees to pay
to the Administrative Agent for the account of each of the Lenders, in
accordance with such Lender's respective Commitment Ratio for the Revolving Loan
Commitment a commitment fee on the Available Revolving Loan Commitment for each
day from the Agreement Date through the Revolving Loan Maturity Date as follows:
(a) if the Leverage Ratio is greater than 5.75:1.00 on such date, then the
commitment fee shall be equal to the product of (i) the Available Revolving Loan
Commitment times (ii) one-half of one percent (0.50%); and (b) if the Leverage
Ratio is less than or equal to 5.75:1.00 on such date, then the commitment fee
shall be equal to the product of (i) the Available Revolving Loan Commitment
times (ii) one-quarter of one percent (0.25%). Such commitment fees shall be
computed on the basis of a year of 360-days for the actual number of days
elapsed, shall be payable quarterly in arrears on the last Business Day of each
fiscal quarter commencing December 31, 1999, and shall be fully earned when due
and non-refundable when paid. A final payment of all commitment fees then
payable shall also be due and payable on the Revolving Loan Maturity Date.
(b) Letter of Credit Fees. The Letters of Credit shall be
issued for a fee of one and one-eighth percent (1.125%) per annum of the stated
amount thereof, payable upon issuance. The fee shall be payable to the
Administrative Agent for the benefit of the Lenders who issued a Revolving Loan
Commitment in accordance with their Commitment Ratios. If any Letter of Credit
is drawn upon prior to its expiration date, the Lenders shall reimburse to the
Borrower that portion of the fee allocable to the period from the date of the
draw to the expiration date, calculated in accordance with the Issuing Bank's
standard letter of credit procedures. In addition, the Borrower shall pay to the
Issuing Bank for its own account its standard charges for the issuance of
letters of credit and for draws upon letters of credit, which charges, as of the
Agreement Date, are as follows: (i) $200 per Letter of Credit, payable upon
issuance; and (ii) $100 per Letter of Credit, payable upon a draw under such
Letter of Credit.
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(c) Other Fees. The Borrower shall pay such other fees as are
set forth in any fee letter executed by the Borrower in connection with this
Agreement.
Section 2.5 Mandatory Commitment Reductions.
(a) Scheduled Reductions under the Revolving Loan Commitment.
Commencing on September 30, 2000 and at the end of each fiscal quarter
thereafter, the Revolving Loan Commitment as of September 29, 2000 shall be
automatically and permanently reduced by the percentage amount set forth below
for and on the dates indicated (which reductions are in addition to those set
forth elsewhere in this Agreement):
<TABLE>
<CAPTION>
Percentage Reduction
to Revolving Loan
Commitment as of
Reduction Dates September 29, 2000
--------------- ------------------
<S> <C>
September 30, 2000 and December 31, 2000 5.000%
March 31, 2001, June 30, 2001, September 30, 2001
and December 31, 2001 3.750%
March 31, 2002, June 30, 2002, September 30, 2002
and December 31, 2002 3.750%
March 31, 2003, June 30, 2003, September 30, 2003
and December 31, 2003 5.000%
March 31, 2004, June 30, 2004, September 30, 2004
and December 31, 2004 6.250%
March 31, 2005 and June 30, 2005 7.500%
</TABLE>
(b) Reduction From Net Proceeds of Asset Sales or Insurance or
Condemnation Proceedings. The Revolving Loan Commitment shall be automatically
and permanently reduced by an amount equal to the repayment of Revolving Loans
required under Section 2.7(b)(iii) hereof; provided, however, that if there are
no Loans then outstanding, the Revolving Loan Commitment shall be reduced by an
amount equal to the Revolving Loan Repayment Proceeds. Reductions to the
Revolving Loan Commitment under this Section 2.5(b) shall be applied to the
reductions set forth in Section 2.5(a) hereof in inverse order of maturity.
Section 2.6 Voluntary Commitment Reductions. The Borrower shall have
the right, at any time and from time to time after the Agreement Date, upon at
least five (5) Business Days' prior written notice to the Administrative Agent,
without premium or penalty, to cancel or reduce permanently all or a portion of
the Revolving Loan Commitment, on a pro rata basis among the
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Lenders, provided, however, that any such partial reduction shall be made in an
amount not less than $5,000,000.00 and in integral multiples of not less than
$1,000,000.00. As of the date of cancellation or reduction set forth in such
notice, the Revolving Loan Commitment shall be permanently reduced to the amount
stated in the Borrower's notice for all purposes herein, and the Borrower shall
pay to the Administrative Agent for the Lenders the amount necessary to reduce
the principal amount of the Revolving Loans then outstanding to not more than
the amount of the Revolving Loan Commitment as so reduced, together with accrued
interest on the amount so prepaid and commitment fees accrued through the date
of the reduction with respect to the amount reduced. Reductions to the Revolving
Loan Commitment under this Section 2.6 shall be applied to the reductions set
forth in Section 2.5(a) hereof pro rata across maturities.
Section 2.7 Prepayments and Repayments.
(a) Prepayments. The principal amount of any Base Rate
Advance may be prepaid in full or ratably in part at any time without penalty
and without regard to the Payment Date for such Advance upon written notice, or
telephonic notice followed immediately by written notice, to the Administrative
Agent on the date of such prepayment; provided, however, that the Borrower's
failure to confirm any telephonic notice with a written notice shall not
invalidate any notice so given if acted upon by the Administrative Agent. LIBOR
Advances may be prepaid prior to the applicable Payment Date, upon three (3)
Business Days' prior written notice, or telephonic notice followed immediately
by written notice, to the Administrative Agent; provided, however, that the
Borrower shall reimburse the Lenders and the Administrative Agent, on the
earlier of demand by the applicable Lender or the Maturity Date, for any loss or
reasonable out-of-pocket expense incurred by any Lender or the Administrative
Agent in connection with such prepayment, as set forth in Section 2.10 hereof;
provided further, however, that the Borrower's failure to confirm any telephonic
notice with a written notice shall not invalidate any notice so given if acted
upon by the Administrative Agent. Any prepayment hereunder shall be in amounts
of not less than $500,000.00 and in integral multiples of $500,000.00. Revolving
Loans prepaid pursuant to this Section 2.7(a) may be reborrowed, subject to the
terms and conditions hereof. Any Term Loan A or Term Loan B prepaid pursuant to
this Section 2.7(a) may not be reborrowed. Amounts prepaid shall be paid
together with accrued interest on the amount so prepaid accrued through the date
of such prepayment.
(b) Repayments. The Borrower shall repay the Loans as
follows:
(i) Scheduled Repayments.
(A) Term Loan A. Commencing on December 31,
1999, the principal balance of Term Loan A outstanding on December 30, 1999
shall be repaid in consecutive quarterly installments on the last day of each
fiscal quarter ending during the periods set forth below until paid in full in
such amounts as follows:
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<TABLE>
<CAPTION>
Percentage of Principal of
Term Loan A outstanding on
Repayment Dates December 30, 1999 Due on each Repayment Date
--------------- --------------------------------------------
<S> <C>
December 31, 1999 2.500%
March 31, 2000, June 30, 2000,
September 30, 2000 and December 31, 2000 2.500%
March 31, 2001, June 30, 2001,
September 30, 2001 and December 31, 2001 2.500%
March 31, 2002, June 30, 2002,
September 30, 2002 and December 31, 2002 4.375%
March 31, 2003, June 30, 2003,
September 30, 2003 and December 31, 2003 4.375%
March 31, 2004, June 30, 2004
September 30, 2004 and December 31, 2004 5.31225%
March 31, 2005 and June 30, 2005 10.625%
</TABLE>
(B) Term Loan B. Commencing on March 31,
2001, the principal balance of Term Loan B outstanding on March 30, 2001 shall
be repaid in consecutive quarterly installments on the last day of each fiscal
quarter ending during the periods set forth below until paid in full in such
amounts as follows:
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<PAGE> 41
<TABLE>
<CAPTION>
Percentage of Principal of
Term Loan B outstanding on
Repayment Dates March 30, 2001 Due on each Repayment Date
--------------- -----------------------------------------
<S> <C>
March 31, 2001, June 30, 2001,
September 30, 2001 and December 31, 2001 0.250%
March 31, 2002, June 30, 2002,
September 30, 2002 and December 31, 2002 0.250%
March 31, 2003, June 30, 2003,
September 30, 2003 and December 31, 2003 0.250%
March 31, 2004, June 30, 2004,
September 30, 2004 and December 31, 2004 0.250%
March 31, 2005, June 30, 2005, and
September 30, 2005 0.250%
December 31, 2005 95.250%
</TABLE>
(ii) Revolving Loans in Excess of Revolving Loan
Commitment. If, at any time, the sum of the aggregate amount of the
Revolving Loans and Letter of Credit Obligations outstanding shall
exceed the Revolving Loan Commitment, the Borrower shall make a
repayment of the principal amount of the Revolving Loans on such date
in an aggregate amount equal to such excess, together with any accrued
interest with respect thereto.
(iii) Repayments From Net Proceeds of Asset Sales or
Insurance or Condemnation Proceedings. On the Business Day following
the date of receipt by the Borrower or any of its Subsidiaries of any
Net Proceeds (other than in connection with an Asset Sale permitted
under Section 7.4(a) (i) or (ii) hereof), the Loans shall be
automatically and permanently prepaid as set forth in Section
2.7(b)(iv) hereof in an amount equal to, in the aggregate, one-hundred
percent (100%) of any Net Proceeds; provided, however, that no
prepayment under this Section 2.7(b)(iii) shall occur if such Net
Proceeds (A) are from an Asset Sale and are reinvested in Stations,
Newspapers, the Porta-Phone Paging Business, the Satellite Broadcasting
Business and other assets related to the Borrower's business within the
succeeding three hundred sixty-five (365) day period or (B) are from an
insurance or condemnation proceeding and are reinvested in Stations,
Newspapers, the Porta-Phone Paging Business, the Satellite Broadcasting
Business and other assets related to the Borrower's business within the
succeeding ninety (90) day period.
(iv) Allocation of Repayment Amounts. On the Business
Day of the receipt by the Borrower or any Subsidiary of any Net
Proceeds, (A) the Term Loan A
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then outstanding shall be prepaid by an amount equal to the Term Loan A
Repayment Proceeds, (B) the Term Loan B then outstanding shall be
prepaid by an amount equal to the Term Loan B Repayment Proceeds, and
(C) the Revolving Loans then outstanding shall be prepaid by an amount
equal to the Revolving Loan Repayment Proceeds. Amounts so repaid shall
be applied to the principal of Term Loan A or Term Loan B, as
applicable, in inverse order of maturity set forth in Section 2.7(b)(i)
hereof.
(v) Revolving Loan Maturity Date. In addition to the
foregoing, a final payment of all Revolving Loans, together with
accrued interest and fees with respect thereto, shall be due and
payable on the Revolving Loan Maturity Date.
(vi) Term Loan A Maturity Date. In addition to the
foregoing, a final payment of Term Loan A, together with accrued
interest and fees with respect thereto, shall be due and payable on the
Term Loan A Maturity Date.
(vii) Term Loan B Maturity Date. In addition to the
foregoing, a final payment of Term Loan B, together with accrued
interest and fees with respect thereto and all other Obligations then
outstanding, shall be due and payable on the Term Loan B Maturity Date.
Section 2.8 Notes; Loan Accounts.
(a) The Loans shall be repayable in accordance with the
terms and provisions set forth herein and shall be evidenced by the Notes. One
(1) Revolving Loan Note, one (1) Term Loan A Note and one (1) Term Loan B Note
shall be payable to the order of each Lender, in accordance with such Lender's
respective applicable Commitment Ratio. The Revolving Loan Notes, Term Loan A
Notes and the Term Loan B Notes shall be issued by the Borrower to the Lenders
and shall be duly executed and delivered by one (1) or more Authorized
Signatories. Any Lender (i) which is not a United States Person (a "Non-U.S.
Lender") and (ii) which would become completely exempt from withholding of
United States federal income taxes in respect of payment of any obligations due
to such Lender hereunder or under the Notes or any other Loan Document relating
to any of its Loans if such Loans were in registered form for United States
federal income tax purposes may request the Borrower (through the Administrative
Agent), and the Borrower agrees thereupon, at the cost and expense of such
Lender, to register such Loans as provided in Section 11.5(g) hereof and to
issue to such Lender Notes evidencing such Loans as Registered Notes or to
exchange Notes evidencing such Loans for new Registered Notes, as applicable.
Registered Notes may not be exchanged for Notes that are not in registered form.
(b) Each Lender may open and maintain on its books in the
name of the Borrower a loan account with respect to its portion of the Loans and
interest thereon. Each Lender which opens such a loan account shall debit such
loan account for the principal amount of its portion of each Advance made by it
and accrued interest thereon, and shall credit such loan account for each
payment on account of principal of or interest on its Loans. The records of a
Lender with respect to the loan account maintained by it shall be prima facie
evidence of its portion of the Loans and accrued interest thereon absent
manifest error, but the failure of any
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Lender to make any such notations or any error or mistake in such notations
shall not affect the Borrower's repayment obligations with respect to such
Loans.
Section 2.9 Manner of Payment.
(a) Each payment (including any prepayment) by the Borrower on
account of the principal of or interest on the Loans, commitment fees and any
other amount owed to the Lenders or the Administrative Agent or any of them
under this Agreement or the Notes shall be made not later than 1:00 p.m.
(Atlanta, Georgia time) on the date specified for payment under this Agreement
to the Administrative Agent at the Administrative Agent's Office, for the
account of the Lenders or the Administrative Agent, as the case may be, in
lawful money of the United States of America in immediately available funds. Any
payment received by the Administrative Agent after 1:00 p.m. (Atlanta, Georgia
time) shall be deemed received on the next Business Day. Receipt by the
Administrative Agent of any payment intended for any Lender or Lenders hereunder
prior to 1:00 p.m. (Atlanta, Georgia time) on any Business Day shall be deemed
to constitute receipt by such Lender or Lenders on such Business Day. In the
case of a payment for the account of a Lender, the Administrative Agent will
promptly, but no later than the close of business on the date such payment is
deemed received, thereafter distribute the amount so received in like funds to
such Lender. If the Administrative Agent shall not have received any payment
from the Borrower as and when due, the Administrative Agent will promptly notify
the Lenders accordingly. In the event that the Administrative Agent shall fail
to make distribution to any Lender as required under this Section 2.9, the
Administrative Agent agrees to pay such Lender interest from the date such
payment was due until paid at the Federal Funds Rate.
(b) The Borrower agrees to pay principal, interest, fees and
all other amounts due hereunder or under the Notes without set-off or
counterclaim or any deduction whatsoever. So long as the applicable Lender has
complied with Section 2.13 hereof, the Borrower agrees to pay principal,
interest, fees and all other amounts due hereunder, under the Notes or under any
other Loan Document free and clear of all taxes, levies and withholding. So long
as the applicable Lender has complied with Section 2.13 hereof, if the Borrower
is required by Applicable Law to deduct any taxes from or in respect of any sum
payable to the such Lender hereunder, under any Note or under any other Loan
Document: (i) the sum payable hereunder or thereunder, as applicable, shall be
increased to the extent necessary to provide that, after making all required
deductions (including deductions applicable to additional sums payable under
this Section 2.9(b)), the Administrative Agent or such Lender, as applicable,
receives an amount equal to the sum it would have received had no such
deductions been made; (ii) the Borrower shall make such deductions from such
sums payable hereunder or thereunder, as applicable, and pay the amount so
deducted to the relevant taxing authority as required by Applicable Law; and
(iii) the Borrower shall provide the Administrative Agent or such Lender, as
applicable, with evidence satisfactory to the Administrative Agent or such
Lender, as applicable, that such deducted amounts have been paid to the relevant
taxing authority. Before making any such deductions, such Lender shall designate
a different lending office and may take such alternative courses of action if
such designation or alternative courses of action will avoid the need for such
deductions and will not in the good faith judgment of such Lender be otherwise
disadvantageous to such Lender.
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(c) Subject to any contrary provisions in the definition of
Interest Period, if any payment under this Agreement or any of the other Loan
Documents is specified to be made on a day which is not a Business Day, it shall
be made on the next Business Day, and such extension of time shall in such case
be included in computing interest and fees, if any, in connection with such
payment.
(d) Prior to the declaration of an Event of Default under
Section 8.2 hereof, if some but less than all amounts due from the Borrower are
received by the Administrative Agent with respect to the Obligations, the
Administrative Agent shall distribute such amounts in the following order of
priority, all in accordance where applicable with the respective Commitment
Ratios of the Lenders for the applicable Commitment: first, to the payment of
any fees or expenses then due and payable to the Administrative Agent, the
Issuing Bank and the Lenders, or any of them; second, to the payment of interest
then due and payable on the Loans; third, to the payment of all other amounts
not otherwise referred to in this Section 2.9(d) then due and payable to the
Administrative Agent, the Issuing Bank and the Lenders, or any of them,
hereunder or under the Notes, the Letters of Credit or any other Loan Document;
fourth, to the payment of principal then due and payable on the Loans; fifth, to
any other Obligations not otherwise referred to in this Section 2.9(d) until all
such Obligations are paid in full; sixth, to damages incurred by the
Administrative Agent, the Issuing Bank or the Lenders, or any of them, by reason
of any breach hereof or of any other Loan Document; and seventh, as otherwise
required by Applicable Law.
Section 2.10 Reimbursement.
(a) Whenever any Lender shall sustain or incur any losses or
reasonable out-of-pocket expenses in connection with (i) failure by the Borrower
to borrow, Continue or Convert any LIBOR Advance after having given notice of
its intention to borrow, Continue or Convert such Advance in accordance with
Section 2.2 hereof (whether by reason of the Borrower's election not to proceed
or the non-fulfillment of any of the conditions set forth in Article 3), or (ii)
prepayment (or failure to prepay after giving notice thereof) of any LIBOR
Advance in whole or in part for any reason, the Borrower agrees to pay to such
Lender, upon the earlier of such Lender's demand or the Maturity Date, an amount
sufficient to compensate such Lender for all such losses and out-of-pocket
expenses. Such Lender's good faith determination of the amount of such losses or
out-of-pocket expenses, as set forth in writing and accompanied by calculations
in reasonable detail demonstrating the basis for its demand, shall be
presumptively correct absent manifest error.
(b) Losses subject to reimbursement hereunder shall include,
without limitation, expenses incurred by any Lender or any participant of such
Lender permitted hereunder in connection with the re-employment of funds
prepaid, paid, repaid, not borrowed, or not paid, as the case may be, and will
be payable whether the Maturity Date is changed by virtue of an amendment hereto
(unless such amendment expressly waives such payment) or as a result of
acceleration of the Obligations.
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Section 2.11 Pro Rata Treatment.
(a) Advances. Each Advance under the Revolving Loan Commitment
from the Lenders hereunder made on or after the Agreement Date, shall be made
pro rata on the basis of the respective Commitment Ratios of the Lenders. On the
Agreement Date, each Advance from the Lenders under each of the Term Loan A
Commitment and the Term Loan B Commitment shall be made pro rata on the basis of
the respective Commitment Ratios of the Lenders.
(b) Payments. Each payment and prepayment of principal of the
Loans, and, except as provided in each of Section 2.2(e) and Article 10 hereof,
each payment of interest on the Loans, shall be made to the Lenders pro rata on
the basis of their respective unpaid principal amounts outstanding under the
applicable Notes immediately prior to such payment or prepayment. If any Lender
shall obtain any payment (whether involuntary, through the exercise of any right
of set-off, or otherwise) on account of the Loans in excess of its ratable share
of the applicable Loans under its applicable Commitment Ratio, such Lender shall
forthwith purchase from the other Lenders such participations in the portion of
the applicable Loans made by them as shall be necessary to cause such purchasing
Lender to share the excess payment ratably with each of them; provided, however,
that if all or any portion of such excess payment is thereafter recovered from
such purchasing Lender, such purchase from each Lender shall be rescinded and
such Lender shall repay to the purchasing Lender the purchase price to the
extent of such recovery. The Borrower agrees that any Lender so purchasing a
participation from another Lender pursuant to this Section 2.11(b) may, to the
fullest extent permitted by law, exercise all its rights of payment (including
the right of set-off) with respect to such participation as fully as if such
Lender were the direct creditor of the Borrower in the amount of such
participation.
Section 2.12 Capital Adequacy. If after the date hereof, the adoption
of any Applicable Law regarding the capital adequacy of banks or bank holding
companies, or any change in Applicable Law (whether adopted before or after the
Agreement Date) or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by such Lender with any
directive regarding capital adequacy (whether or not having the force of law) of
any such governmental authority, central bank or comparable agency, has or would
have the effect of reducing the rate of return on any Lender's capital as a
consequence of its obligations hereunder with respect to the Loans and the
Revolving Loan Commitment to a level below that which it could have achieved but
for such adoption, change or compliance (taking into consideration such Lender's
policies with respect to capital adequacy immediately before such adoption,
change or compliance and assuming that such Lender's capital was fully utilized
prior to such adoption, change or compliance) by an amount reasonably deemed by
such Lender to be material, then, upon the earlier of demand by such Lender or
the Maturity Date, the Borrower shall promptly pay to such Lender such
additional amounts as shall be sufficient to compensate such Lender for such
reduced return, together with interest on such amount from the fourth (4th)
Business Day after the date of demand or the Maturity Date, as applicable, until
payment in full thereof at the Default Rate. A certificate of such Lender
setting forth the amount to be paid to such Lender by the Borrower as a result
of any event referred to in this paragraph
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and supporting calculations in reasonable detail shall be presumptively correct
absent manifest error.
Section 2.13 Lender Tax Forms. On or prior to the Agreement Date, and
prior to the date on which any Person becomes a Lender hereunder, and from time
to time thereafter if required by Applicable Law due to a change in
circumstances or if reasonably requested by the Borrower or the Administrative
Agent (unless such Lender is unable to do so by reasons of change in Applicable
Law), each Lender organized under the laws of a jurisdiction outside the United
States shall provide the Administrative Agent and the Borrower with (i) an
accurate and duly completed United States Internal Revenue Service Form 4224 or
Form 1001, as the case may be, and Form W-8 or Form W-9, as the case may be, or
other applicable or successor form, certificate or document prescribed by the
United States Internal Revenue Service certifying as to such Lender's
entitlement to full exemption from United States withholding tax with respect to
all payments to be made to such Lender hereunder or under any Note or other Loan
Document, or, (ii) in the case of a Lender that is not a "bank" within the
meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal
Revenue Service Form 1001 or 4224 pursuant to clause (i) above, (A) an accurate
and duly completed United States Internal Revenue Service Form W-8, or other
applicable or successor form, certificate or document prescribed by the United
States Internal Revenue Service certifying to such Lender's foreign status and
(B) a certificate certifying to such Lender's entitlement to a complete
exemption from United States withholding tax with respect to all payments
hereunder or under any Note or other Loan Document. In the event that the
Borrower withholds a portion of any payment hereunder or under any Note or other
Loan Document in accordance with this Section 2.13, the Borrower shall provide
evidence that such taxes of any nature whatsoever in respect of this Agreement,
any Loan or any Note or other Loan Document shall have been paid to the
appropriate taxing authorities by delivery to the Lender on whose account such
payment was made of the official tax receipts or notarized copies of such
receipts within thirty (30) days after payment of such tax. If the Borrower
fails to make any such payment when due, the Borrower shall indemnify the
Lenders for any incremental taxes, interest or penalties that may become payable
by any Lender as a result of any such failure. For any period with respect to
which a Lender has failed to provide the Borrower with the appropriate form
described above (other than if such failure is due to a change in Applicable Law
occurring subsequent to the date on which a form originally was required to be
provided), such Lender shall not be entitled to indemnification with respect to
withholding taxes imposed by the United States and the Borrower shall be allowed
to deduct from payments to such Lender hereunder and under any Note or other
Loan Document, the amount of any such withholding taxes paid by the Borrower.
Section 2.14 Letters of Credit.
(a) Subject to the terms and conditions hereof, the Issuing
Bank, on behalf of the Lenders, and in reliance on the agreements of the Lenders
set forth in Section 2.14(d) hereof, hereby agrees to issue one or more Letters
of Credit up to an aggregate face amount equal to the Available Letter of Credit
Commitment determined immediately prior to giving effect to the issuance
thereof; provided, however, that the Issuing Bank shall not issue any Letter of
Credit unless the conditions precedent to the issuance thereof set forth in
Section 3.3 hereof have been
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satisfied, and shall have no obligation to issue any Letter of Credit if any
Default then exists or would be caused thereby or if, after giving effect to
such issuance, the Available Revolving Loan Commitment would be less than zero;
and provided further, however, that at no time shall the total Letter of Credit
Obligations outstanding hereunder exceed $15,000,000.00. Each Letter of Credit
shall (1) be denominated in United States dollars, and (2) expire no later than
the earlier to occur of (A) the Revolving Loan Maturity Date or (B) 364-days
after its date of issuance (but may contain provisions for automatic renewal;
provided that no Default or Event of Default exists on the renewal date or would
be caused by such renewal). Each Letter of Credit shall be subject to the
Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No. 500 and, to the extent not
inconsistent therewith, the laws of the State of Georgia. The Issuing Bank shall
not at any time be obligated to issue, or cause to be issued, any Letter of
Credit if such issuance would conflict with, or cause the Issuing Bank to exceed
any limits imposed by, any Applicable Law. If a Letter of Credit provides that
it is automatically renewable unless notice is given by the Issuing Bank that it
will not be renewed, the Issuing Bank shall not be bound to give a notice of
non-renewal unless directed to do so by the Required Lenders at least sixty-five
(65) days prior to the then scheduled expiration date of such Letter of Credit.
(b) The Borrower may from time to time request the issuance
of, and be provided with by the Issuing Bank, Letters of Credit. The Borrower
shall execute and deliver to the Administrative Agent and the Issuing Bank a
Request for Issuance of Letter of Credit for each Letter of Credit to be issued
by the Issuing Bank, not later than 12:00 noon (Atlanta, Georgia time) on the
fifth (5th) Business Day preceding the date on which the requested Letter of
Credit is to be issued, or such shorter notice as may be acceptable to the
Issuing Bank and the Administrative Agent. Upon receipt of any such Request for
Issuance of Letter of Credit, subject to satisfaction of all conditions
precedent thereto as set forth in Section 3.3 hereof, the Issuing Bank shall
process such Request for Issuance of Letter of Credit and the certificates,
documents and other papers and information delivered to it in connection
therewith in accordance with its customary procedures and shall promptly issue
the Letter of Credit requested thereby. The Issuing Bank shall furnish a copy of
such Letter of Credit to the Borrower and the Administrative Agent following the
issuance thereof. The Borrower shall pay or reimburse the Issuing Bank for
normal and customary costs and expenses incurred by the Issuing Bank in issuing,
effecting payment under, amending or otherwise administering the Letters of
Credit.
(c) At such time as the Administrative Agent shall be notified
by the Issuing Bank that the beneficiary under any Letter of Credit has drawn on
the same, the Administrative Agent shall promptly notify the Borrower and each
Lender, by telephone or telecopy, of the amount of the draw and, in the case of
each Lender, such Lender's portion of such draw amount as calculated in
accordance with its Revolving Loan Commitment Ratio.
(d) The Borrower hereby agrees to immediately reimburse the
Issuing Bank for amounts paid by the Issuing Bank in respect of draws under a
Letter of Credit issued at the Borrower's request. In order to facilitate such
repayment, the Borrower hereby irrevocably requests the Lenders having a
Revolving Loan Commitment, and such Lenders hereby severally agree, on the terms
and conditions of this Agreement (other than as provided in Article 2 hereof
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with respect to the amounts of, the timing of requests for, and the repayment of
Advances hereunder and in Section 3.3 hereof with respect to conditions
precedent to Advances hereunder), with respect to any drawing under a Letter of
Credit prior to the occurrence of an event described in Sections 8.1(f) or (g)
hereof, to make an Advance (which Advance may be a LIBOR Advance if the Borrower
so requests in a timely manner or may be converted to a LIBOR Advance as
provided in the Loan Agreement) to the Borrower on each day on which a draw is
made under any Letter of Credit and in the amount of such draw, and to pay the
proceeds of such Advance directly to the Issuing Bank to reimburse the Issuing
Bank for the amount paid by it upon such draw. Each Lender having a Revolving
Loan Commitment shall pay its share of such Advance by paying its portion of
such Advance to the Administrative Agent in accordance with Article 2 hereof and
its Revolving Loan Commitment Ratio, without reduction for any set-off or
counterclaim of any nature whatsoever and regardless of whether any Default or
Event of Default (other than with respect to an event described in Sections 8.1
(f) or (g) hereof) then exists or would be caused thereby. If at any time that
any Letters of Credit are outstanding, any of the events described in Sections
8.1 (f) or (g) hereof shall have occurred and be continuing, then each Lender
having a Revolving Loan Commitment shall, automatically upon the occurrence of
any such event and without any action on the part of the Issuing Bank, the
Borrower, the Administrative Agent or such Lender, be deemed to have purchased
an undivided participation in the face amount of all Letters of Credit then
outstanding in an amount equal to such Lender's Revolving Loan Commitment Ratio,
and each Lender having a Revolving Loan Commitment shall, notwithstanding such
Default or Event of Default, upon a drawing under any Letter of Credit,
immediately pay to the Administrative Agent for the account of the Issuing Bank,
in immediately available funds, the amount of such Lender's participation (and
the Issuing Bank shall deliver to such Lender a loan participation certificate
dated the date of the occurrence of such event and in the amount of such
Lender's Revolving Loan Commitment Ratio). The disbursement of funds in
connection with a draw under a Letter of Credit pursuant to this Section 2.14(d)
shall be subject to the terms and conditions of Article 2 hereof. The obligation
of each Lender having a Revolving Loan Commitment to make payments to the
Administrative Agent, for the account of the Issuing Bank, in accordance with
this Section 2.14 shall be absolute and unconditional and no such Lender shall
be relieved of its obligations to make such payments by reason of noncompliance
by any other Person with the terms of the Letter of Credit or for any other
reason. The Administrative Agent shall promptly remit to the Issuing Bank the
amounts so received from the other Lenders. Any overdue amounts payable by the
Lenders having a Revolving Loan Commitment to the Issuing Bank in respect of a
draw under any Letter of Credit shall bear interest, payable on demand, at the
Federal Funds Rate.
(e) The Borrower agrees that any action taken or omitted to be
taken by the Issuing Bank in connection with any Letter of Credit, except for
such actions or omissions as shall constitute gross negligence or willful
misconduct on the part of the Issuing Bank, shall be binding on the Borrower as
between the Borrower and the Issuing Bank, and shall not result in any liability
of the Issuing Bank to the Borrower. The obligation of the Borrower to reimburse
the Lenders for Advances made to reimburse the Issuing Bank for draws under the
Letter of Credit shall be absolute, unconditional and irrevocable, and shall be
paid strictly in accordance with the terms of this Agreement under all
circumstances whatsoever, including, without limitation, the following
circumstances:
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(i) any lack of validity or enforceability of any
Loan Document;
(ii) any amendment or waiver of or consent to any
departure from any or all of the Loan Documents;
(iii) any improper use which may be made of any
Letter of Credit or any improper acts or omissions of any beneficiary or
transferee of any Letter of Credit in connection therewith;
(iv) the existence of any claim, set-off, defense
or any right which the Borrower may have at any time against any beneficiary or
any transferee of any Letter of Credit (or Persons for whom any such beneficiary
or any such transferee may be acting) or any Lender (other than the defense of
payment to such Lender in accordance with the terms of this Agreement) or any
other Person, whether in connection with any Letter of Credit, any transaction
contemplated by any Letter of Credit, this Agreement or any other Loan Document,
or any unrelated transaction;
(v) any statement or any other documents presented
under any Letter of Credit proving to be insufficient, forged, fraudulent or
invalid in any respect or any statement therein being untrue or inaccurate in
any respect whatsoever;
(vi) the insolvency of any Person issuing any
documents in connection with any Letter of Credit;
(vii) any breach of any agreement between the
Borrower and any beneficiary or transferee of any Letter of Credit, provided
that the same shall not have resulted from the gross negligence or willful
misconduct of the Issuing Bank;
(viii) any irregularity in the transaction with
respect to which any Letter of Credit is issued, including, without limitation,
any fraud by the beneficiary or any transferee of such Letter of Credit,
provided that the same shall not be the result of the gross negligence or
willful misconduct of the Issuing Bank;
(ix) any errors, omissions, interruptions or delays
in transmission or delivery of any messages, by mail, cable, telegraph, wireless
or otherwise, whether or not they are in code, provided that the same shall not
be the result of the gross negligence or willful misconduct of the Issuing Bank;
(x) any act, error, neglect, default, omission,
insolvency or failure of business of any of the correspondents of the Issuing
Bank, provided that the same shall not have constituted the gross negligence or
willful misconduct of the Issuing Bank;
(xi) any other circumstances arising from causes
beyond the control of the Issuing Bank;
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(xii) payment by the Issuing Bank under any Letter
of Credit against presentation of a sight draft or a certificate
which does not comply with the terms of such Letter of Credit,
provided that such payment shall not have constituted gross
negligence or willful misconduct of the Issuing Bank; and
(xiii) any other circumstance or happening
whatsoever, whether or not similar to any of the foregoing, provided
that such other circumstances or happenings shall not have been the
result of gross negligence or willful misconduct of the Issuing Bank.
(f) If any change in Applicable Law, any change in the
interpretation or administration thereof, or any change in compliance with
Applicable Law by the Issuing Bank or any Lender as a result of any official
request or directive of any governmental authority, central bank or comparable
agency (whether or not having the force of law) shall (i) impose, modify or deem
applicable any reserve (including, without limitation, any imposed by the Board
of Governors of the Federal Reserve System), special deposit, capital adequacy,
assessment or other requirements or conditions against Letters of Credit issued
by the Issuing Bank or against participations by any other Lender in the Letters
of Credit or (ii) impose on the Issuing Bank or any other Lender any other
condition regarding any Letter of Credit or any participation therein, and the
result of any of the foregoing in the reasonable determination of the Issuing
Bank or such Lender, as the case may be, is to increase the cost to the Issuing
Bank or such Lender of issuing or maintaining any Letter of Credit or purchasing
or maintaining any participation therein, as the case may be, by an amount
(which amount shall be reasonably determined) deemed by the Issuing Bank or such
Lender to be material, and the designation of a different lending office will
not avoid the need for additional compensation, then, on request by the Issuing
Bank or such Lender, the Borrower shall pay, within ten (10) days after demand,
the Issuing Bank or such Lender, as the case may be, such additional amount or
amounts as the Issuing Bank or such Lender, as the case may be, so determines
will compensate it for such increased costs. A certificate of the Issuing Bank
or such Lender setting forth the amount, and in reasonable detail the basis for
the Issuing Bank or such Lender's determination of such amount, to be paid to
the Issuing Bank or such Lender by the Borrower as a result of any event
referred to in this Section 2.14(f) shall, absent manifest error, be conclusive.
(g) Each Lender having a Revolving Loan Commitment shall
be responsible for its pro rata share (based on such Lender's Revolving Loan
Commitment Ratio) of any and all reasonable out-of-pocket costs, expenses
(including, without limitation, reasonable legal fees) and disbursements which
may be incurred or made by the Issuing Bank in connection with the collection
of any amounts due under, the administration of, or the presentation or
enforcement of any rights conferred by any Letter of Credit, the Borrower's or
any guarantor's obligations to reimburse or otherwise. In the event the
Borrower shall fail to pay such expenses of the Issuing Bank within ten (10)
days after demand for payment by the Issuing Bank, each Lender having a
Revolving Loan Commitment shall thereupon pay to the Issuing Bank its pro rata
share (based on such Lender's Revolving Loan Commitment Ratio) of such expenses
within five (5) days from the date of the Issuing Bank's notice to the Lenders
having a Revolving Loan Commitment
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of the Borrower's failure to pay; provided, however, that if the Borrower or
any guarantor shall thereafter pay such expense, the Issuing Bank will repay to
each Lender having a Revolving Loan Commitment Ratio the amounts received from
such Lender hereunder.
(h) The Borrower agrees that each Advance by the Lenders
having a Revolving Loan Commitment to reimburse the Issuing Bank for draws under
any Letter of Credit, shall, for all purposes hereunder, be deemed to be an
Advance under the Revolving Loan Commitment to the Borrower and shall be payable
and bear interest in accordance with all other Loans to the Borrower.
(i) The Borrower will indemnify and hold harmless the
Administrative Agent, the Issuing Bank and each other Lender and each of their
respective employees, representatives, officers and directors from and against
any and all claims, liabilities, obligations, losses (other than loss of
profits), damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever (including reasonable attorneys'
fees, but excluding taxes) which may be imposed on, incurred by or asserted
against the Administrative Agent, the Issuing Bank or any such other Lender in
any way relating to or arising out of the issuance of a Letter of Credit, except
that the Borrower shall not be liable to the Administrative Agent, the Issuing
Bank or any such Lender for any portion of such claims, liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from the gross negligence or willful
misconduct of the Administrative Agent, the Issuing Bank or such Lender, as the
case may be, as determined by a non-appealable judicial order. This Section
2.14(i) shall survive termination of this Agreement.
ARTICLE 3
Conditions Precedent
Section 3.1 Conditions Precedent to Effectiveness of Agreement. The
obligation of the Lenders to undertake the Commitments and the effectiveness of
this Agreement are subject to the prior or contemporaneous fulfillment of each
of the following conditions:
(a) The Administrative Agent and the Lenders shall have
received each of the following:
(i) this Agreement duly executed;
(ii) duly executed Notes;
(iii) duly executed Borrower Pledge Agreement;
(iv) duly executed Borrower Security Agreement,
together with duly executed appropriate Uniform Commercial Code
financing statement forms to the extent requested by the Administrative
Agent;
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(v) duly executed Subsidiary Guaranties;
(vi) duly executed Subsidiary Pledge Agreements;
(vii) duly executed (A) Assignments of General
Partner Interests and (B) Assignments of Limited Partner Interests,
each together with duly executed appropriate Uniform Commercial Code
financing statement forms to the extent requested by the Administrative
Agent;
(viii) duly executed Subsidiary Security Agreements,
together with duly executed appropriate Uniform Commercial Code
financing statement forms to the extent requested by the Administrative
Agent;
(ix) duly executed Mortgages, or confirmations
thereof, with respect to the Real Property of the Borrower and its
Subsidiaries, including, without limitation, the Real Property acquired
in the Texas Acquisition, together with duly executed appropriate
Uniform Commercial Code financing statement forms, appropriate surveys
and title insurance to the extent requested by the Administrative
Agent;
(x) the loan certificate of the Borrower dated as
of the Agreement Date, in substantially the form attached hereto as
Exhibit K-1, including a certificate of incumbency with respect to each
Authorized Signatory of such Person, together with the following items:
(A) a true, complete and correct copy of the Articles of Incorporation
of the Borrower as in effect on the Agreement Date, (B) a true,
complete and correct copy of the By-laws of the Borrower as in effect
on the Agreement Date, (C) certificates of good standing for the
Borrower issued by the Secretary of State or similar state official for
the state of incorporation of the Borrower and for each state in which
the Borrower is required to qualify to do business, (D) a true,
complete and correct copy of the corporate resolutions of the Borrower
authorizing the Borrower to execute, deliver and perform this Agreement
and the other Loan Documents and (E) a true, complete and correct copy
of any shareholders' agreements or voting agreements in effect with
respect to the Ownership Interests of the Borrower;
(xi) a loan certificate of each Subsidiary of the
Borrower (including all License Subs existing as of the Agreement Date)
dated as of the Agreement Date, in substantially the form attached
hereto as Exhibit K-2, including a certificate of incumbency with
respect to each Authorized Signatory of such Person, together with the
following items: (A) a true, complete and correct copy of the Articles
or Certificate of Incorporation or Formation of such Person as in
effect on the Agreement Date, (B) a true, complete and correct copy of
the By-laws or Operating Agreement of such Person as in effect on the
Agreement Date, (C) certificates of good standing for such Person
issued by the Secretary of State or similar state official for the
state of incorporation or formation of such Person and for each state
in which such Person is required to qualify to do business, (D) a true,
complete and correct copy of the resolutions of such Person (or another
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appropriate Person) authorizing such Person to execute, deliver and
perform the Loan Documents to which it is a party and (E) a true,
complete and correct copy of any shareholders' agreements or voting
agreements in effect with respect to the Ownership Interests of such
Person;
(xii) copies of insurance binders or certificates
covering the assets of the Borrower and its Subsidiaries, and otherwise
meeting the requirements of Section 5.5 hereof;
(xiii) legal opinions of (A) Heyman & Sizemore,
corporate counsel to the Borrower and its Subsidiaries, and (B)
Venable, Baetjer, Howard and Civiletti LLP, FCC counsel, to the
Borrower and its Subsidiaries, addressed to each Lender and the
Administrative Agent and dated as of the Agreement Date which shall be
in form and substance acceptable to the Administrative Agent;
(xiv) duly executed Certificate of Financial
Condition for the Borrower and its Subsidiaries on a consolidated
basis;
(xv) copies of the financial statements of the
Borrower and its Subsidiaries and with respect to the Texas Acquisition
for the period ended June 30, 1999, certified by the chief financial
officer of the Borrower;
(xvi) financial projections and calculations after
giving effect to the Texas Acquisition, in form and substance
satisfactory to the Administrative Agent and the Lenders, specifically
demonstrating (x) the Borrower's pro forma compliance with Sections
7.8, 7.9, 7.10, 7.11., 7.12, 7.13 and 7.14 hereof, (y) the sources and
uses of funds for the Texas Acquisitions and (z) the Borrower's ability
to meet its repayment obligations hereunder through the Maturity Date;
(xvii) Uniform Commercial Code lien, tax and
judgment search results with respect to the Borrower and its
Subsidiaries and the properties and Persons involved in the Texas
Acquisition;
(xviii) evidence satisfactory to the Administrative
Agent and the Lenders that there is no outstanding Indebtedness secured
by, or Liens on, any of the assets and properties to be acquired in the
Texas Acquisition other than Permitted Liens;
(xix) delivery to the Administrative Agent of all
possessory collateral, including, without limitation, any pledged notes
or pledged stock, together with the undated stock powers endorsed in
blank, as applicable; and
(xx) all such other documents as the
Administrative Agent may reasonably request, certified by an
appropriate governmental official or an Authorized Signatory if so
requested.
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(b) The Administrative Agent and the Lenders shall have
received evidence satisfactory to them that all Necessary Authorizations,
including, without limitation, all necessary consents to the closing of this
Agreement and the Texas Acquisition, to the execution, delivery and performance
of this Agreement and the other Loan Documents and to the granting of Liens in
all Operating Agreements and other material contracts and leases of the Borrower
and its Subsidiaries, each of which shall be in form and substance satisfactory
to the Administrative Agent, have been obtained or made, are in full force and
effect and are not subject to any pending or, to the knowledge of the Borrower,
threatened reversal or cancellation, and the Administrative Agent and the
Lenders shall have received a certificate of an Authorized Signatory so stating.
(c) The Borrower shall certify to the Administrative Agent and
the Lenders that each of the representations and warranties in Article 4 hereof
and each other Loan Document are true and correct as of the Agreement Date and
that no Default or Event of Default then exists or is continuing or will be
caused by the Texas Acquisition.
(d) (i) There shall not exist as of the Agreement Date any
action, suit, proceeding or investigation pending against, or, to the knowledge
of the Borrower, threatened against or in any manner relating adversely to, the
Borrower, any of its Subsidiaries, any of their respective properties or the
transactions contemplated hereby, and (ii) no event shall have occurred and no
condition exist, in each case, which, in the reasonable judgment of the Required
Lenders, has had or could be expected to have a Materially Adverse Effect.
(e) The Administrative Agent shall have received evidence
reasonably satisfactory to it that the Texas Acquisition has been consummated on
substantially the terms set forth in the Texas Acquisition Agreement.
(f) The Borrower shall have paid to the Administrative Agent
for the account of each Lender the fees, expenses and other amounts due as set
forth in those letter agreements dated the Agreement Date in favor of each
Lender.
Section 3.2 Conditions Precedent to Each Advance. The obligation of
the Lenders to make, Convert or Continue each Advance on or after the Agreement
Date is subject to the fulfillment of each of the following conditions
immediately prior to or contemporaneously with such Advance:
(a) All of the representations and warranties of the Borrower
under this Agreement and the other Loan Documents (including, without
limitation, all representations and warranties with respect to the Borrower's
Subsidiaries), which, pursuant to Section 4.2 hereof, are made at and as of the
time of such Advance (except to the extent previously fulfilled in accordance
with the terms hereof and to the extent relating specifically to a specific
prior date), shall be true and correct at such time in all material respects,
both before and after giving effect to the application of the proceeds of such
Advance, and after giving effect to any updates to information provided to the
Lenders in accordance with the terms of such representations and warranties, and
no Default hereunder shall then exist or be caused thereby.
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(b) With respect to Advances which, if funded, would increase
the aggregate principal amount of the Loans outstanding hereunder, the
Administrative Agent shall have received a duly executed Request for Advance.
(c) The Administrative Agent and the Lenders shall have
received all such other certificates, reports, statements, opinions of counsel
(if such Advance is in connection with an Acquisition) or other documents as the
Administrative Agent or any Lender may reasonably request.
(d) With respect to any Advance relating to any Acquisition or
the formation of any Subsidiary which is permitted hereunder, the Administrative
Agent and the Lenders shall have received certified documents and instruments
relating to such Acquisition or such formation of a new Subsidiary as are
described in Section 5.13 hereof or otherwise required herein.
(e) (i) There shall not exist any action, suit, proceeding or
investigation pending against, or, to the knowledge of the Borrower, threatened
against or in any manner relating adversely to, the Borrower, any of its
Subsidiaries, any of their respective properties or the transactions
contemplated hereby, and (ii) no event shall have occurred and no condition
exist, in each case, which, in the reasonable judgment of the Required Lenders,
has had or could be expected to have a Materially Adverse Effect.
(f) On the date of such Advance, after giving effect to the
Advance requested, the Borrower shall be in compliance on a pro forma basis with
the covenants set forth in Sections 7.8, 7.9, 7.10, 7.11, 7.12, 7.13 and 7.14
hereof and that no Default or Event of Default shall be caused hereunder by such
Advance.
The acceptance of proceeds of any Advance which would increase the
aggregate principal amount of Loans outstanding shall be deemed to be a
representation and warranty by the Borrower as to compliance with this Section
3.2 on the date any such Loan is made.
Section 3.3 Conditions Precedent to Issuance of Letters of
Credit. The obligation of the Issuing Bank to issue each Letter of Credit
hereunder is subject to the fulfillment of each of the following conditions
immediately prior to or contemporaneously with such issuance:
(a) All of the representations and warranties of the Borrower
under this Agreement and the other Loan Documents (including, without
limitation, all representations and warranties with respect to the Borrower's
Subsidiaries), which, pursuant to Section 4.2 hereof, are made at and as of the
time of such Advance (except to the extent previously fulfilled in accordance
with the terms hereof and to the extent relating specifically to a specific
prior date), shall be true and correct at such time in all material respects,
both before and after giving effect to the issuance of the Letter of Credit, and
after giving effect to any updates to information provided to the Lenders in
accordance with the terms of such representations and warranties, and no Default
hereunder shall then exist or be caused thereby;
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(b) The Administrative Agent shall have received a duly
executed Request for Issuance of Letter of Credit;
(c) The Administrative Agent and the Lenders shall have
received all such other certificates, reports, statements, opinions of counsel
(if such Letter of Credit is in connection with an Acquisition) or other
documents as the Administrative Agent or any Lender may reasonably request;
(d) (i) There shall not exist any action, suit, proceeding or
investigation pending against, or, to the knowledge of the Borrower, threatened
against or in any manner relating adversely to, the Borrower, any of its
Subsidiaries, any of their respective properties or the transactions
contemplated hereby, and (ii) no event shall have occurred and no condition
exist, in each case, which, in the reasonable judgment of the Required Lenders,
has had or could be expected to have a Materially Adverse Effect.
(e) On the date of issuance of such Letter of Credit, after
giving effect to the Letter of Credit requested, the Borrower shall be in
compliance on a pro forma basis with the covenants set forth in Sections 7.8,
7.9, 7.10, 7.11, 7.12, 7.13 and 7.14 of this Agreement and that no Default or
Event of Default shall be caused hereunder by such Letter of Credit.
ARTICLE 4
Representations and Warranties
Section 4.1 Representations and Warranties. The Borrower hereby
agrees, represents and warrants, upon the Agreement Date, in favor of the
Administrative Agent and each Lender, that:
(a) Organization; Ownership; Power; Qualification. The
Borrower is a corporation duly organized, validly existing and in good standing
under the laws of the State of Georgia. The Borrower has the corporate power and
authority to own its properties and to carry on its business as now being and as
proposed hereafter to be conducted. Each Subsidiary of the Borrower is a Person
duly organized, validly existing and in good standing under the laws of the
state of its incorporation or formation and has the power and authority to own
its properties and to carry on its business as now being and as proposed
hereafter to be conducted. The Borrower and its Subsidiaries are duly qualified,
in good standing and authorized to do business in each jurisdiction in which the
character of their respective properties or the nature of their respective
businesses requires such qualification or authorization, except where failure to
be so qualified, in the aggregate, could not reasonably be expected to have a
Materially Adverse Effect.
(b) Authorization; Enforceability. The Borrower has the
corporate power and has taken all necessary corporate action to authorize it to
borrow hereunder, and the Borrower has the corporate power and has taken all
necessary corporate action to execute, deliver and
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perform this Agreement and each of the other Loan Documents to which it is a
party in accordance with their respective terms, and to consummate the
transactions contemplated hereby and thereby. This Agreement has been duly
executed and delivered by the Borrower and is, and each of the other Loan
Documents to which the Borrower is party is, a legal, valid and binding
obligation of the Borrower, enforceable against the Borrower, in accordance with
its terms, subject, as to enforcement of remedies, to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity.
(c) Subsidiaries: Authorization; Enforceability. The
Borrower's Subsidiaries, and the Borrower's direct and indirect ownership
thereof as of the Agreement Date, are as set forth on Schedule 4 attached
hereto, and the Borrower has the unrestricted right to vote the issued and
outstanding Ownership Interests of the Subsidiaries shown thereon; such
Ownership Interests of such Subsidiaries have been duly authorized and issued
and are fully paid and nonassessable. Each Subsidiary of the Borrower has the
power and has taken all necessary action to authorize it to execute, deliver and
perform each of the Loan Documents to which it is a party in accordance with
their respective terms and to consummate the transactions contemplated by this
Agreement and by such Loan Documents. Each of the Loan Documents to which any
Subsidiary of the Borrower is party is a legal, valid and binding obligation of
such Subsidiary enforceable against such Subsidiary in accordance with its
terms, subject, as enforcement of remedies, to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity. The Borrower's ownership
interest in each of its Subsidiaries represents a direct or indirect controlling
interest of such Subsidiary for purposes of directing or causing the direction
of the management and policies of each Subsidiary.
(d) Compliance with Other Loan Documents and Contemplated
Transactions. The execution, delivery and performance, in accordance with their
respective terms, by the Borrower of this Agreement and the Notes, and by the
Borrower and its Subsidiaries of each of the other Loan Documents to which they
are respectively party, and the consummation of the transactions contemplated
hereby and thereby, do not and will not (i) require any consent or approval,
governmental or otherwise, not already obtained, (ii) violate any Applicable Law
respecting the Borrower or any of its Subsidiaries, (iii) conflict with, result
in a breach of, or constitute a default under the certificate or articles of
incorporation or by-laws or partnership agreements or operating agreements or
trust agreements, as the case may be, as amended, of the Borrower or of any of
its Subsidiaries, or under any material Operating Agreement, or any other
material indenture, agreement, or other instrument, to which the Borrower or any
of its Subsidiaries is a party or by which any of them or their respective
properties may be bound, including, without limitation, the Subordinated Note
Indenture, or (iv) result in or require the creation or imposition of any Lien
upon or with respect to any property now owned or hereafter acquired by the
Borrower or any of its Subsidiaries, except for Permitted Liens.
(e) Business. The Borrower, together with its Subsidiaries, is
engaged in the business of owning and operating the Stations, Newspapers, the
Porta-Phone Page Business, the Satellite Broadcasting Business and other
media-related businesses.
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(f) Licenses; Operating Agreements.
(i) Each of the Borrower and its Subsidiaries has all
requisite power and authority, material Operating Agreements and
Licenses to own and operate its properties and to carry on its
businesses as now conducted and as proposed to be conducted. Schedule 3
annexed hereto, as it may be supplemented, correctly describes each of
the Stations, the Newspapers, the Porta-Phone Page Business and the
Satellite Broadcasting Business and sets forth all of the material
Operating Agreements and Licenses of the Borrower and its Subsidiaries
and correctly sets forth the termination date, if any, of each such
Operating Agreements and License. A true, correct and complete copy of
each material Operating Agreement and License has been made available
to the Administrative Agent. Each material Operating Agreement and
License was duly and validly issued pursuant to procedures which comply
in all material respects with all requirements of Applicable Law. As of
the Agreement Date and at all times thereafter, the Borrower and its
Subsidiaries have the right to use all material Licenses required in
the ordinary course of business for all Stations, the Newspapers, the
Porta-Phone Paging Business and the Satellite Broadcasting Business,
and each such License is in full force and effect. Each of the Borrower
and it Subsidiaries has taken all material actions and performed all of
its material obligations that are necessary to maintain all material
Licenses without adverse modification or impairment. Except as shown on
Schedule 3, no event has occurred which (i) results in, or after notice
or lapse of time or both would result in, revocation, suspension,
adverse modification, non-renewal, impairment, restriction or
termination of or any order of forfeiture with respect to, any material
License or (ii) materially and adversely affects or could reasonably be
expected in the future to materially adversely affect any of the rights
of the Borrower or any of its Subsidiaries thereunder. Except as set
forth on Schedule 3, each FCC License is held by a License Sub. Except
as set forth in Schedule 3, none of the FCC Licenses requires that any
present stockholder, director, officer or employee of the Borrower or
any of its Subsidiaries remain a stockholder or employee of such
Person, or that any transfer of control of such Person must be approved
by any public or governmental body other than the FCC.
(ii) Except as shown on Schedule 3, neither the
Borrower nor any of its Subsidiaries is a party to or has knowledge of
any investigation, notice of apparent liability, violation, forfeiture
or other order or complaint issued by or before any court or regulatory
body, including the FCC, or of any other proceedings (other than
proceedings relating to the radio or television industries generally)
which could in any manner materially threaten or adversely affect the
validity or continued effectiveness of the Licenses of any such Person.
Neither the Borrower nor any of its Subsidiaries has any reason to
believe that any material Licenses listed and described in Schedule 3
will not be renewed in the ordinary course. Each of the Borrower and
its Subsidiaries, as applicable, (a) has duly filed in a timely manner
all material filings, reports, applications, documents, instruments and
information required to be filed by it under the Communication Act or
pursuant to FCC Regulations or requests of any regulatory body having
jurisdiction over
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any of its Licenses, (b) has submitted to the FCC on a timely basis all
required equal employment opportunity reports, and (c) is in compliance
in all material respects with the Communications Act, including all FCC
Regulations relating to the broadcast of television signals, all FCC
Regulations concerning the limits on the duration of advertising in
children's programming and the record keeping obligations relating to
such advertising, the Children's Television Act and all FCC Regulations
promulgated thereunder and all equal employment opportunity-related FCC
Regulations. The Borrower and its Subsidiaries maintain appropriate
public files at the Stations, the Porta-Phone Paging Business and the
Satellite Broadcasting Business in a manner that complies in all
material respects with all FCC Regulations.
(iii) The Ownership Reports filed by the Borrower and
its Subsidiaries with the FCC are true, correct and complete in all
material respects and there have been no changes in the ownership of
the Borrower or any Subsidiary of the Borrower since the filing of such
Ownership Reports other than as described in information filed with the
FCC and made available for examination by the Administrative Agent.
(g) Compliance with Law. The Borrower and its Subsidiaries are
in compliance with all Applicable Law, except where the failure to be in
compliance would not individually or in the aggregate have a Materially Adverse
Effect.
(h) Title to Assets. The Borrower and its Subsidiaries have
good, legal and marketable title to, or a valid leasehold interest in, all of
their respective material assets. None of the properties or assets of the
Borrower or any of its Subsidiaries is subject to any Liens, except for
Permitted Liens. Except for financing statements evidencing Permitted Liens, no
financing statement under the Uniform Commercial Code as in effect in any
jurisdiction and no other filing which names the Borrower or any of its
Subsidiaries as debtor or which covers or purports to cover any of the assets of
the Borrower or any of its Subsidiaries is currently effective and on file in
any state or other jurisdiction, and neither the Borrower nor any of its
Subsidiaries has signed any such financing statement or filing or any security
agreement authorizing any secured party thereunder to file any such financing
statement or filing.
(i) Litigation. Except as set forth on Schedule 5 hereto,
there is no action, suit, proceeding or investigation pending against, or, to
the knowledge of the Borrower, threatened against or in any other manner
relating adversely to, the Borrower or any of its Subsidiaries or any of their
respective properties, including, without limitation, the Licenses, in any court
or before any arbitrator of any kind or before or by any governmental body which
could reasonably be expected to have a Materially Adverse Effect. No action,
suit, proceeding or investigation (i) calls into question the validity of this
Agreement or any other Loan Document, or (ii) individually or collectively
involves the possibility of any judgment or liability not fully covered by
insurance which, if determined adversely to the Borrower or any of its
Subsidiaries, would have a Materially Adverse Effect.
(j) Taxes. All federal, state and other tax returns of the
Borrower, each of its Subsidiaries required by law to be filed have been duly
filed and all federal, state and other taxes,
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including, without limitation, withholding taxes, assessments and other
governmental charges or levies required to be paid by the Borrower or by any of
its Subsidiaries or imposed upon the Borrower or any of its Subsidiaries or any
of their respective properties, income, profits or assets, which are due and
payable, have been paid, except any such taxes (i) (A) the payment of which the
Borrower or any of its Subsidiaries is diligently contesting in good faith by
appropriate proceedings, (B) for which adequate reserves have been provided on
the books of the Borrower or the Subsidiary of the Borrower involved, and (C) as
to which no Lien other than a Permitted Lien has attached and no foreclosure,
distraint, sale or similar proceedings have been commenced, or (ii) which may
result from audits not yet conducted. The charges, accruals and reserves on the
books of the Borrower and each of its Subsidiaries in respect of taxes are, in
the reasonable judgment of the Borrower, adequate.
(k) Financial Statements; Projections.
(i) The Borrower has furnished or caused to be
furnished to the Administrative Agent and the Lenders a Form 10-K for
the Borrower and its Subsidiaries on a consolidated basis for the
fiscal year ended December 31, 1998, audited financial statements for
the fiscal year ended December 31, 1998 and unaudited for the quarter
ended June 30, 1999 and the month ended July 31, 1999, which, together
with other financial statements furnished to the Lenders subsequent to
the Agreement Date have been prepared in accordance with GAAP and
present fairly in all material respects the financial position of the
Borrower and its Subsidiaries on a consolidated and consolidating
basis, as the case may be, on and as at such dates and the results of
operations for the periods then ended (subject, in the case of
unaudited financial statements, to normal year-end and audit
adjustments). None of the Borrower or any of its Subsidiaries has any
material liabilities, contingent or otherwise, other than as disclosed
in the financial statements most recently delivered on the Agreement
Date or pursuant to Section 6.1, 6.2 or 6.3 hereof, and there are no
material unrealized losses of the Borrower and its Subsidiaries taken
as a whole and no material anticipated losses of the Borrower and its
Subsidiaries taken as a whole other than those which have been
previously disclosed in writing to the Administrative Agent and the
Lenders and identified as such.
(ii) The Borrower has delivered to the Administrative
Agent and the Lenders projections for fiscal years 1999 through 2005.
Such projections assume the consummation of the transactions
contemplated in the Texas Acquisition Agreement, were prepared by the
Borrower in good faith on the basis of assumptions the Borrower
believes were reasonable in light of the conditions existing at the
time of preparation thereof and remain reasonable as of the date
hereof, and as of the date hereof no facts which are known to the
Borrower which the Borrower believes would cause a material adverse
change in such projections.
(l) No Material Adverse Change. There has occurred no event
since December 31, 1998 which has or which could reasonably be expected to have
a Materially Adverse Effect.
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(m) ERISA. The Borrower and each of its Subsidiaries and each
of their respective Plans are in material compliance with ERISA and the Code,
and neither the Borrower nor any of its ERISA Affiliates, including its
Subsidiaries, has incurred any material accumulated funding deficiency with
respect to any such Plan within the meaning of ERISA or the Code. Neither the
Borrower nor any of its Subsidiaries has made any promises of retirement or
other benefits to employees, except as set forth in the Plans, in written
agreements with such employees, or in the Borrower's employee handbook and
memoranda to employees. Neither the Borrower nor any of its ERISA Affiliates,
including its Subsidiaries, has incurred any material liability to PBGC in
connection with any such Plan. The assets of each such Plan which is subject to
Title IV of ERISA are sufficient to provide the benefits under such Plan, the
payment of which PBGC would guarantee if such Plan were terminated, and such
assets are also sufficient to provide all other "benefit liabilities" (within
the meaning of Section 4041 of ERISA) due under the Plan upon termination. No
Reportable Event has occurred and is continuing with respect to any such Plan.
No such Plan or trust created thereunder, or party in interest (as defined in
Section 3(14) of ERISA), or any fiduciary (as defined in Section 3(21) of
ERISA), has engaged in a "prohibited transaction" (as such term is defined in
Section 406 of ERISA or Section 4975 of the Code) which would subject such Plan
or any other Plan of the Borrower or any of its Subsidiaries, any trust created
thereunder, or any such party in interest or fiduciary, or any party dealing
with any such Plan or any such trust, to the tax or penalty on "prohibited
transactions" imposed by Section 502 of ERISA or Section 4975 of the Code.
Neither the Borrower nor any of its ERISA Affiliates, including its
Subsidiaries, is or has been obligated to make any payment to a Multiemployer
Plan.
(n) Compliance with Regulations T, U and X. Neither the
Borrower nor any of its Subsidiaries is engaged principally or as one of its
important activities in the business of extending credit for the purpose of
purchasing or carrying, and neither the Borrower nor any of its Subsidiaries
owns or presently intends to acquire, any "margin security" or "margin stock"
(the "margin stock") as defined in Regulations T, U, and X (12 C.F.R. Parts 220,
221 and 224) of the Board of Governors of the Federal Reserve System (the "Fed
Regulations"). None of the proceeds of the Loans will be used, directly or
indirectly, for the purpose of purchasing or carrying any margin stock or for
the purpose of reducing or retiring any Indebtedness which was originally
incurred to purchase or carry margin stock or for any other purpose which might
constitute this transaction a "purpose credit" within the meaning of said
Regulations. The Borrower has not taken, caused or authorized to be taken, and
will not take any action which might cause this Agreement or the Notes to
violate any Fed Regulation or any other regulation of the Board of Governors of
the Federal Reserve System or to violate the Securities Exchange Act of 1934, in
each case as now in effect or as the same may hereafter be in effect. If so
requested by the Administrative Agent, the Borrower will furnish the
Administrative Agent with (i) a statement or statements in conformity with the
requirements of Federal Reserve Forms G-3 and/or U-1 referred to in Regulation U
of said Board of Governors and (ii) other documents evidencing its compliance
with the margin regulations, reasonably requested by the Administrative Agent.
Neither the making of the Loans nor the use of proceeds thereof will violate, or
be inconsistent with, the provisions of any Fed Regulation.
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(o) Investment Company Act. Neither the Borrower nor any of
its Subsidiaries is required to register under the provisions of the Investment
Company Act of 1940, as amended, and neither the entering into or performance by
the Borrower and its Subsidiaries of this Agreement and the Loan Documents nor
the issuance of the Notes violates any provision of such Act or requires any
consent, approval or authorization of, or registration with, the Securities and
Exchange Commission or any other governmental or public body or authority
pursuant to any provisions of such Act.
(p) Governmental Regulation. Neither the Borrower nor any of
its Subsidiaries is required to obtain any consent, approval, authorization,
permit or license which has not already been obtained from, or effect any filing
or registration which has not already been effected with, any federal, state or
local regulatory authority in connection with the execution and delivery of this
Agreement or any other Loan Document. Neither the Borrower nor any of its
Subsidiaries is required to obtain any consent, approval, authorization, permit
or license which has not already been obtained from, or effect any filing or
registration which has not already been effected with, any federal, state or
local regulatory authority in connection with the performance, in accordance
with their respective terms, of this Agreement or any other Loan Document, other
than filing of appropriate Uniform Commercial Code financing statements and
mortgages.
(q) Absence of Default, Etc. The Borrower and its Subsidiaries
are in material compliance in all respects with all of the provisions of their
respective partnership agreements, operating agreements, certificates or
articles of incorporation and by-laws, as the case may be, and no event has
occurred or failed to occur (including, without limitation, any matter which
could create a Default hereunder by cross-default) which has not been remedied
or waived, the occurrence or non-occurrence of which constitutes, (i) a Default
or (ii) a material default by the Borrower or any of its Subsidiaries under any
indenture, agreement or other instrument relating to Indebtedness of the
Borrower or any of its Subsidiaries in the amount of $1,000,000.00 or more in
the aggregate, any material license, or any judgment, decree or order to which
the Borrower or any of its Subsidiaries is a party or by which the Borrower or
any of its Subsidiaries or any of their respective properties may be bound or
affected.
(r) Accuracy and Completeness of Information. All information,
reports, prospectuses and other papers and data relating to the Borrower or any
of its Subsidiaries and furnished by or on behalf of the Borrower or any of its
Subsidiaries to the Administrative Agent or the Lenders, taken as a whole, were,
at the time furnished, true, complete and correct in all material respects to
the extent necessary to give the Administrative Agent and the Lenders true and
accurate knowledge of the subject matter. Any projections and pro forma
financial information contained in such materials are based upon good faith
estimates and assumptions believed by the Borrower to be reasonable and
attainable at the time made, it being recognized by the Lenders that such
projections as to future events are not to be viewed as facts and that actual
results during the period or periods covered by any such projections may differ
from the projected results.
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(s) Agreements with Affiliates. Except for agreements or
arrangements with Affiliates wherein the Borrower or one or more of its
Subsidiaries provides services to such Affiliates for fair consideration or
which are set forth on Schedule 6 attached hereto, neither the Borrower nor any
of its Subsidiaries has (i) any written agreements or binding arrangements of
any kind with any Affiliate or (ii) any management or consulting agreements of
any kind with any Affiliate.
(t) Payment of Wages. The Borrower and each of its
Subsidiaries are in compliance with the Fair Labor Standards Act, as amended, in
all material respects, and to the knowledge of the Borrower and each of its
Subsidiaries, such Persons have paid all minimum and overtime wages required by
law to be paid to their respective employees.
(u) Priority. The Security Interest is a valid and perfected
first priority security interest in the Collateral in favor of the
Administrative Agent, for the benefit of itself and the Lenders, securing, in
accordance with the terms of the Security Documents, the Obligations, and the
Collateral is subject to no Liens other than Permitted Liens. The Liens created
by the Security Documents are enforceable as security for the Obligations in
accordance with their terms with respect to the Collateral subject, as to
enforcement of remedies, to the following qualifications: (i) an order of
specific performance and an injunction are discretionary remedies and, in
particular, may not be available where damages are considered an adequate remedy
at law, and (ii) enforcement may be limited by bankruptcy, insolvency,
liquidation, reorganization, reconstruction and other similar laws affecting
enforcement of creditors' rights generally (insofar as any such law relates to
the bankruptcy, insolvency or similar event of the Borrower or any of its
Subsidiaries, as the case may be).
(v) Indebtedness. Except as described on Schedule 7 attached
hereto none of the Borrower nor any of its Subsidiaries has outstanding, as of
the Agreement Date, and after giving effect to the initial Advances hereunder on
the Agreement Date, any Indebtedness.
(w) Solvency. As of the Agreement Date and after giving effect
to the transactions contemplated by the Loan Documents (i) the property of the
Borrower, at a fair valuation, will exceed its debt; (ii) the capital of the
Parent and the Borrower will not be unreasonably small to conduct its business;
(iii) the Borrower will not have incurred debts, or have intended to incur
debts, beyond its ability to pay such debts as they mature; and (iv) the present
fair salable value of the assets of the Borrower will be greater than the amount
that will be required to pay its probable liabilities (including debts) as they
become absolute and matured. For purposes of this Section 4.1(w), "debt" means
any liability on a claim, and "claim" means (i) the right to payment, whether or
not such right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, undisputed, legal, equitable, secured or
unsecured, or (ii) the right to an equitable remedy for breach of performance if
such breach gives rise to a right to payment, whether or not such right to an
equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured,
undisputed, secured or unsecured.
(x) Patents, Trademarks, Franchises, etc. The Borrower and
each of its Subsidiaries owns, possesses, or has the right to use all necessary
patents, trademarks, trademark
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rights, trade names, trade name rights, service marks, copyrights and
franchises, and rights with respect thereof, necessary to conduct its respective
business as now conducted, without known conflict with any patent, trademark,
trade name, service mark, franchise, or copyright of any other Person, and in
each case, subject to no mortgage, pledge, lien, lease, encumbrance, charge,
security interest, title retention agreement, or option. All such patents,
trademarks, trademark rights, trade names, trade name rights, service marks,
copyrights, and franchises are listed as of the Agreement Date on Schedule 8
attached hereto and are in full force and effect, the holder thereof is in full
compliance in all material respects with all of the provisions thereof, and no
such asset or agreement is subject to any pending or, to the best of the
Borrower's knowledge, threatened attack or revocation.
(y) Collective Bargaining. None of the employees of the
Borrower or any of its Subsidiaries is a party to any collective bargaining
agreement with the Parent, the Borrower or any of its Subsidiaries except as set
forth on Schedule 9 attached hereto, and, to the best knowledge of the Borrower
and its officers, there are no material grievances, disputes, or controversies
with any union or any other organization of the employees of the Borrower or any
of its Subsidiaries or threats of strikes, work stoppages, or any asserted
pending demands for collective bargaining by any union or other organization
except as set forth on Schedule 9 attached hereto.
(z) Year 2000 Compliance. The Borrower has (i) initiated a
review and assessment of all areas within the Borrower's and each of its
Subsidiaries' respective business and operations (including those affected by
suppliers, vendors and customers) that could be adversely affected by the "Year
2000 Problem" (that is, the risk that computer applications used by the Borrower
or any of its Subsidiaries (or suppliers, vendors and customers) may be unable
to recognize and perform properly date-sensitive functions involving certain
dates prior to and any date on or after December 31, 1999), (ii) developed a
plan and timeline for addressing the Year 2000 Problem on a timely basis, and
(iii) to date, implemented that plan in accordance with that timetable. Based on
the foregoing, the Borrower believes that all computer applications (including
those of its suppliers, vendors and customers) that are material to the
Borrower's or any of its Subsidiaries' business and operations are reasonably
expected on a timely basis to be able to perform properly date-sensitive
functions for all dates before, on and after January 1, 2000 (that is, be "Year
2000 Compliant"), except to the extent that a failure to do so could not
reasonably be expected to have a Materially Adverse Effect.
(aa) Environmental Protection.
(i) Except as set forth in Schedule 10 attached
hereto, neither the Borrower nor any of its Subsidiaries nor any of
their respective Real Property or operations are subject to any
outstanding written order, consent decree or settlement agreement with
any Person relating to (A) any Environmental Law, (B) any Environmental
Claim or (C) any Hazardous Materials Activity;
(ii) Neither the Borrower nor any of its Subsidiaries
has received any letter or request for information under Section 104 of
the Comprehensive Environmental
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Response, Compensation and Liability Act (42 U.S.C. ss. 9604) or any
comparable state law.
(iii) There are no and, to the Borrower's knowledge,
have been no conditions, occurrences, or Hazardous Materials Activities
which could reasonably be expected to form the basis of an
Environmental Claim against the Borrower or any of its Subsidiaries
that, individually or in the aggregate, could reasonably be expected to
have a Materially Adverse Effect;
(iv) Neither the Borrower nor any of its
Subsidiaries, nor, to the Borrower's knowledge, any predecessor of the
Borrower or any of its Subsidiaries has filed any notice under any
Environmental Law indicating past or present treatment of Hazardous
Materials on any Real Property, and neither the Borrower nor any of its
Subsidiaries' operations involves the generation, transportation,
treatment, storage or disposal of hazardous waste (other than Hazardous
Materials used in the ordinary course of business, the use of which is
immaterial and not reasonably likely to materially adversely affect the
Real Property or have a Materially Adverse Effect), as defined under 40
C.F.R. Parts 260-270 or any state equivalent; and
(v) Compliance with all current requirements
pursuant to or under Environmental Laws will not, individually or in
the aggregate, have a reasonable possibility of giving rise to a
Materially Adverse Effect.
Notwithstanding anything in this Section 4.1(aa) to the contrary, no
event or condition has occurred or is occurring with respect to the Borrower or
any of its Subsidiaries relating to any Environmental Law, any release of
Hazardous Materials, or any Hazardous Materials Activity which individually or
in the aggregate has had or could reasonably be expected to have a Materially
Adverse Effect.
Section 4.2 Survival of Representations and Warranties, etc. All
representations and warranties made under this Agreement and any other Loan
Document shall be deemed to be made, and shall be true and correct in all
material respects, at and as of the Agreement Date and on the date of the
making, Continuation or Conversion of each Advance or issuance of Letter of
Credit, except to the extent relating specifically to the Agreement Date. All
representations and warranties made under this Agreement and the other Loan
Documents shall survive, and not be waived by, the execution hereof by the
Lenders and the Administrative Agent, any investigation or inquiry by any Lender
or the Administrative Agent, or the making, Continuation or Conversion of any
Advance under this Agreement.
ARTICLE 5
General Covenants
So long as any of the Obligations is outstanding and unpaid or the
Lenders have an obligation to fund Advances hereunder (whether or not the
conditions to borrowing have been or
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can be fulfilled), and unless the Required Lenders, or such greater number of
Lenders as may be expressly provided herein, shall otherwise consent in writing:
Section 5.1 Preservation of Existence and Similar Matters. Except as
permitted under Section 7.4 hereof, the Borrower will, and will cause each of
its Subsidiaries to:
(a) preserve and maintain its existence, and its material
rights, franchises, Licenses and privileges; and
(b) qualify and remain qualified and authorized to do business
in each jurisdiction in which the character of its properties or the nature of
its business requires such qualification or authorization, except for such
failure to so qualify and be so authorized as could not reasonably be expected
to have a Materially Adverse Effect.
Section 5.2 Business; Compliance with Applicable Law. The Borrower
will, and will cause each of its Subsidiaries to, (a) engage in the business of
owning and operating Stations, Newspapers, the Porta-Phone Paging Business, the
Satellite Broadcasting Business and other media-related businesses, and (b)
comply in all material respects with the requirements of all Applicable Law.
Section 5.3 Maintenance of Properties. The Borrower will, and will
cause each of its Subsidiaries to, maintain or cause to be maintained in the
ordinary course of business in good repair, working order and condition
(reasonable wear and tear excepted) all properties used in their respective
businesses (whether owned or held under lease), other than obsolete equipment or
unused assets and from time to time make or cause to be made all needed and
appropriate repairs, renewals, replacements, additions, betterments and
improvements thereto.
Section 5.4 Accounting Methods and Financial Records. The Borrower
will, and will cause each of its Subsidiaries on a consolidated and
consolidating basis to, maintain a system of accounting established and
administered in accordance with GAAP, keep adequate records and books of account
in which complete entries will be made in accordance with GAAP and reflecting
all transactions required to be reflected by GAAP and keep accurate and complete
records of their respective properties and assets. The Borrower and its
Subsidiaries will maintain a fiscal year ending on December 31st.
Section 5.5 Insurance. The Borrower will, and will cause each of its
Subsidiaries to:
(a) maintain insurance, including, without limitation,
business interruption coverage and public liability coverage insurance from
responsible companies in such amounts and against such risks to the Borrower and
each of its Subsidiaries as is prudent for similarly situated companies engaged
in the television or satellite broadcast, portable telephone paging, newspaper
or other media related industry, as applicable, and as is reasonably acceptable
to the Administrative Agent;
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(b) keep their respective assets insured by insurers on terms
and in a manner reasonably acceptable to the Administrative Agent against loss
or damage by fire, theft, burglary, loss in transit, explosions and hazards
insured against by extended coverage, in amounts which are prudent for companies
in similarly situated industries and reasonably satisfactory to the
Administrative Agent, all premiums thereon to be paid by the Borrower and its
Subsidiaries; and
(c) require that each insurance policy provide for at least
thirty (30) days' prior written notice to the Administrative Agent of any
termination of or proposed cancellation or nonrenewal of such policy, and name
the Administrative Agent as additional named lender loss payee and, as
appropriate, additional insured, to the extent of the Obligations.
In addition to the foregoing, in the event that any insurer distributes
insurance proceeds, a condemnation award, or any other disbursement in
connection with any of the foregoing insurance policies, the Administrative
Agent is authorized to collect such distribution and, if received by the
Borrower or any of its Subsidiaries, such distribution shall be paid over to the
Administrative Agent; provided that all such proceeds shall be paid over to the
Borrower unless an Event of Default has occurred and is continuing. Any such
distribution shall be applied to prepay the Loans as set forth in Section
2.7(b)(iii) hereof.
Section 5.6 Payment of Taxes and Claims. The Borrower will, and will
cause each of its Subsidiaries to, pay and discharge all taxes, including,
without limitation, withholding taxes, assessments and governmental charges or
levies required to be paid by them or imposed upon them or their income or
profits or upon any properties belonging to them, prior to the date on which
penalties attach thereto, and all lawful claims for labor, materials and
supplies which, if unpaid, might become a Lien or charge upon any of their
properties; provided, however, except that no such tax, assessment, charge, levy
or claim need be paid which is being diligently contested in good faith by
appropriate proceedings and for which adequate reserves shall have been set
aside on the appropriate books, but only so long as such tax, assessment,
charge, levy or claim does not become a Lien or charge other than a Permitted
Lien and no foreclosure, distraint, sale or similar proceedings shall have been
commenced. The Borrower will, and will cause each of its Subsidiaries to, timely
file all information returns required by federal, state or local tax
authorities.
Section 5.7 Compliance with ERISA.
(a) The Borrower will, and will cause its Subsidiaries to,
make all contributions to any Employee Pension Plan when such contributions are
due and not incur any "accumulated funding deficiency" within the meaning of
Section 412(a) of the Code, whether or not waived, and will otherwise comply
with the requirements of the Code and ERISA with respect to the operation of all
Plans, except to the extent that the failure to so comply could not have a
Materially Adverse Effect.
(b) The Borrower will furnish to Administrative Agent (i)
within thirty (30) days after any officer of the Borrower obtains knowledge that
a "prohibited transaction" (within the meaning of Section 406 of ERISA or
Section 4975 of the Code) has occurred with respect to
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any material Plan of the Borrower or its ERISA Affiliates, including its
Subsidiaries, that any Reportable Event has occurred with respect to any
Employee Pension Plan or that PBGC has instituted or will institute proceedings
under Title IV of ERISA to terminate any Employee Pension Plan or to appoint a
trustee to administer any Employee Pension Plan, a statement setting forth the
details as to such prohibited transaction, Reportable Event or termination or
appointment proceedings and the action which it (or any other Employee Pension
Plan sponsor if other than the Borrower) proposes to take with respect thereto,
together with a copy of the notice of such Reportable Event given to PBGC if a
copy of such notice is available to the Borrower, any of its Subsidiaries or any
of its ERISA Affiliates, (ii) promptly after receipt thereof, a copy of any
notice the Parent, the Borrower, any of its Subsidiaries or any of its ERISA
Affiliates or the sponsor of any Plan receives from PBGC, or the Internal
Revenue Service or the Department of Labor which sets forth or proposes any
action or determination with respect to such Plan, (iii) promptly after the
filing thereof, any annual report required to be filed pursuant to ERISA in
connection with each Plan maintained by the Borrower or any of its ERISA
Affiliates, including the Subsidiaries, and (iv) promptly upon the
Administrative Agent's request therefor, such additional information concerning
any such Plan as may be reasonably requested by the Administrative Agent.
(c) The Borrower will promptly notify the Administrative Agent
of any excise taxes which have been assessed or which the Borrower, any of its
Subsidiaries or any of its ERISA Affiliates has reason to believe may be
assessed against the Borrower, any of its Subsidiaries or any of its ERISA
Affiliates by the Internal Revenue Service or the Department of Labor with
respect to any Plan of the Borrower or its ERISA Affiliates, including its
Subsidiaries.
(d) Within the time required for notice to the PBGC under
Section 302(f)(4)(A) of ERISA, the Borrower will notify the Administrative Agent
of any lien arising under Section 302(f) of ERISA in favor of any Plan of the
Borrower or its ERISA Affiliates, including its Subsidiaries.
(e) The Borrower will not, and will not permit any of its
Subsidiaries or any of its ERISA Affiliates to take any of the following actions
or permit any of the following events to occur if such action or event together
with all other such actions or events would subject the Parent, the Borrower,
any of its Subsidiaries, or any of its ERISA Affiliates to any tax, penalty, or
other liabilities which could have a Materially Adverse Effect:
(i) engage in any transaction in connection with
which the Borrower, any of its Subsidiaries or any ERISA Affiliate
could be subject to either a civil penalty assessed pursuant to Section
502(i) of ERISA or a tax imposed by Section 4975 of the Code;
(ii) terminate any Employee Pension Plan in a manner,
or take any other action, which could result in any liability of the
Borrower, any of its Subsidiaries or any ERISA Affiliate to the PBGC;
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(iii) fail to make full payment when due of all
amounts which, under the provisions of any Plan, the Borrower, any of
its Subsidiaries or any ERISA Affiliate is required to pay as
contributions thereto, or permit to exist any accumulated funding
deficiency within the meaning of Section 412(a) of the Code, whether or
not waived, with respect to any Employee Pension Plan; or
(iv) permit the present value of all benefit
liabilities under all Employee Pension Plans which are subject to Title
IV of ERISA to exceed the present value of the assets of such Plans
allocable to such benefit liabilities (within the meaning of Section
4041 of ERISA), except as may be permitted under actuarial funding
standards adopted in accordance with Section 412 of the Code.
Section 5.8 Visits and Inspections. The Borrower will, and will cause
each of its Subsidiaries to, permit representatives of the Administrative Agent
and any of the Lenders, prior to the occurrence of an Event of Default upon
reasonable notice and at any time upon the occurrence and during the continuance
of an Event of Default, to (i) visit and inspect the properties of the Borrower
or any of its Subsidiaries during business hours, (ii) inspect and make extracts
from and copies of their respective books and records, and (iii) discuss with
their respective principal officers their respective businesses, assets,
liabilities, financial positions, results of operations and business prospects.
The Borrower and each of its Subsidiaries will also permit representatives of
the Administrative Agent and any of the Lenders to discuss with their respective
accountants the Borrower's and its Subsidiaries' businesses, assets,
liabilities, financial positions, results of operations and business prospects.
Section 5.9 Payment of Indebtedness; Loans. Subject to any provisions
herein or in any other Loan Document, the Borrower will, and will cause each of
its Subsidiaries to, pay any and all of their respective Indebtedness when and
as it becomes due, other than amounts diligently disputed in good faith and for
which adequate reserves have been set aside in accordance with GAAP.
Section 5.10 Use of Proceeds. The Borrower will use the aggregate
proceeds of all Advances under the Loans directly or indirectly: (a) to
refinance Indebtedness under the Prior Loan Agreement; (b) to finance the Texas
Acquisition; and (c) to the extent permitted hereunder, for working capital
needs, Capital Expenditures, Acquisitions, Investments, Restricted Payments,
Restricted Purchases and other general corporate purposes of the Borrower and
its Subsidiaries which do not otherwise conflict with this Section 5.10
(including, without limitation, the payment of the fees and expenses incurred in
connection with the execution and delivery of this Agreement). No proceeds of
Advances hereunder shall be used for the purchase or carrying or the extension
of credit for the purpose of purchasing or carrying, any margin stock within the
meaning of the Fed Regulations.
Section 5.11 Indemnity. The Borrower, for itself and on behalf of each
of its Subsidiaries, agrees to indemnify and hold harmless each Lender, the
Administrative Agent, and each of their respective affiliates, employees,
representatives, shareholders, officers and directors (any of the foregoing
shall be an "Indemnitee") from and against any and all claims, obligations,
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judgments, suits, liabilities, losses, damages, penalties, actions, reasonable
attorneys' fees and expenses and demands by any party, including, without
limitation, the costs of investigating and defending such claims, whether or not
the Borrower, any Subsidiary of the Borrower or the Person seeking
indemnification is the prevailing party: (a) resulting from any breach or
alleged breach by the Borrower or any Subsidiary of the Borrower of any
representation or warranty made under any Loan Document; or (b) otherwise
arising out of (i) the Commitments, the Loans or otherwise under this Agreement,
any Loan Document or any transaction contemplated hereby or thereby, including,
without limitation, the use of the proceeds of Loans hereunder in any fashion by
the Borrower or the performance of their respective obligations under the Loan
Documents by the Borrower or any of its Subsidiaries, (ii) allegations of any
participation by the Lenders and the Administrative Agent, or any of them, in
the affairs of the Borrower or any of its Subsidiaries, or allegations that any
of them has any joint liability with the Borrower or any of its Subsidiaries for
any reason, (iii) any claims against the Lenders and the Administrative Agent,
or any of them, by any shareholder or other investor in or lender to the
Borrower or any of its Subsidiaries, by any brokers or finders or investment
advisers or investment bankers retained by the Borrower or by any other third
party, arising out of the Commitments or otherwise under this Agreement; or (c)
in connection with taxes (not including federal or state income or franchise
taxes or other taxes based solely upon the revenues or income of such Persons),
fees and other charges payable in connection with the Loans, or the execution,
delivery and enforcement of this Agreement, the Security Documents, the other
Loan Documents and any amendments thereto or waivers of any of the provisions
thereof; unless the Person seeking indemnification hereunder is determined in
such case to have acted with gross negligence or willful misconduct, in any
case, by a final, non-appealable judicial order. The obligations of the Borrower
under this Section 5.11 are in addition to, and shall not otherwise limit, any
liabilities which the Borrower might otherwise have in connection with any
warranties or similar obligations of the Borrower in any other Loan Document.
Section 5.12 Interest Rate Hedging. Within sixty (60) days immediately
following the Agreement Date, and at all times thereafter, the Borrower shall at
all times maintain one (1) or more Interest Rate Hedge Agreements, or otherwise
fix the interest rate, with respect to the Borrower's interest obligations on an
aggregate principal amount of not less than fifty percent (50%) of Total Debt
outstanding from time to time as determined in a manner satisfactory to the
Administrative Agent. Such Interest Rate Hedge Agreements shall provide interest
rate protection in conformity with International Swap Dealers Association
standards and for a period averaging at least eighteen (18) months from the date
of such Interest Rate Hedge Agreements across all such Interest Rate Hedge
Agreements or, if earlier, until the Maturity Date on terms acceptable to the
Administrative Agent, such terms to include consideration of the
creditworthiness of the other party to the proposed Interest Rate Hedge
Agreement. All Obligations of the Borrower to the Administrative Agent or any of
the Lenders or any of their Affiliates pursuant to any Interest Rate Hedge
Agreement permitted hereunder and all Liens granted to secure such Obligations
shall rank pari passu with all other Obligations and Liens securing such other
Obligations; and any Interest Rate Hedge Agreement between the Borrower and any
other Person shall be unsecured.
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Section 5.13 Covenants Regarding Formation of Subsidiaries and
Acquisitions; Partnership, Subsidiaries. At the time of (i) any Acquisition
permitted hereunder, (ii) the purchase by the Borrower or any of its
Subsidiaries of any interests in any Subsidiary of the Borrower, or (iii) the
formation of any new Subsidiary of the Borrower or any of its Subsidiaries which
is permitted under this Agreement, the Borrower will, and will cause its
Subsidiaries, as appropriate, to: (a) provide to the Administrative Agent an
executed Subsidiary Security Agreement for any new Subsidiary, together with
appropriate Uniform Commercial Code financing statements, as well as an executed
Subsidiary Guaranty for such new Subsidiary, which shall constitute both
Security Documents and Loan Documents for purposes of this Agreement, as well as
a loan certificate for such new Subsidiary, substantially in the form of Exhibit
K-2 attached hereto, together with appropriate attachments; (b) pledge to the
Administrative Agent all of the Ownership Interests of such Subsidiary or Person
which is acquired or formed, beneficially owned by the Borrower or any of its
Subsidiaries, as the case may be, as additional Collateral for the Obligations
to be held by the Administrative Agent in accordance with the terms of the
Borrower Pledge Agreement, or a new Subsidiary Pledge Agreement and execute and
deliver to the Administrative Agent all such documentation for such pledge as,
in the reasonable opinion of the Administrative Agent, is appropriate; (c) with
respect to any Real Property acquired or owned by any new Subsidiary, provide to
the Administrative Agent a Mortgage, title insurance policy, Phase I
environmental audit or such other documentation reasonably satisfactory to the
Administrative Agent, which in its reasonable opinion is appropriate with
respect thereto; and (d) provide revised financial projections for the remainder
of the fiscal year and for each subsequent year until the Maturity Date which
reflect such Acquisition or formation, certified by the chief financial officer
of the Borrower, together with a statement by such Person that no Default or
Event of Default exists or would be caused by such Acquisition or formation, and
all other documentation, including one or more opinions of counsel, which are
satisfactory to the Administrative Agent and which in its opinion is appropriate
with respect to such Acquisition or formation. Any document, agreement or
instrument executed or issued pursuant to this Section 5.13 shall be a "Loan
Document" for purposes of this Agreement.
Section 5.14 Payment of Wages. The Borrower will, and will cause each
of its Subsidiaries to, at all times comply in all material respects, with the
material requirements of the Fair Labor Standards Act, as amended, including,
without limitation, the provisions of such Act relating to the payment of
minimum and overtime wages as the same may become due from time to time.
Section 5.15 Further Assurances. The Borrower will promptly cure, or
cause to be cured, defects in the creation and issuance of any of the Notes and
the execution and delivery of the Loan Documents (including this Agreement),
resulting from any acts or failure to act by the Borrower or any of the its
Subsidiaries or any employee or officer thereof. The Borrower, at its expense,
will promptly execute and deliver to the Administrative Agent and the Lenders,
or cause to be executed and delivered to the Administrative Agent and the
Lenders, all such other and further documents, agreements and instruments in
compliance with or accomplishment of the covenants and agreements of the
Borrower and its Subsidiaries in the Loan Documents, including, without
limitation, this Agreement, or to correct any omissions in the Loan Documents,
or more fully to state the obligations set out herein or in any of the Loan
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Documents, or to obtain any consents, all as may be necessary or appropriate in
connection therewith and as may be reasonably requested.
Section 5.16 License Subs. At the time of any Acquisition permitted
hereunder, the Borrower shall cause each of the FCC Licenses being acquired by
the Borrower or any of its Subsidiaries to be transferred to one or more License
Subs, each of which License Subs shall have as its sole asset or assets the FCC
Licenses of the Borrower or any of its Subsidiaries and a management agreement
with the Borrower and such of its Subsidiaries subject to such FCC License or
FCC Licenses, such that from and after such applicable date neither the Borrower
nor its Subsidiaries (other than License Subs) shall hold any FCC Licenses other
than through one or more duly created and existing License Subs. The Borrower
shall not permit the License Subs to have any business activities, operations,
assets, Indebtedness, Guaranties or Liens (other than holding FCC Licenses and
owning the Ownership Interests of other License Subs, and other than pursuant to
a Subsidiary Guaranty and Subsidiary Security Agreement issued in connection
herewith or any agreement referred to in the preceding sentence). Promptly after
the transfer of the FCC Licenses to the License Subs, the Borrower shall provide
to the Administrative Agent copies of any required consents to such transfer
from the FCC and any other governmental authority, together with a certificate
of an Authorized Signatory stating that all Necessary Authorizations relating to
such transfer have been obtained or made, are in full force and effect and are
not subject to any pending or threatened reversal or cancellation.
Section 5.17 Year 2000 Compliance. The Borrower will, and will cause
each of its Subsidiaries to, promptly notify the Administrative Agent in the
event that the Borrower or any of its Subsidiaries discovers or determines that
any computer application (including those of its suppliers, vendors, and
customers) that is material to the Borrower's or any of its Subsidiaries'
businesses and operations will not be Year 2000 Compliant, except to the extent
that such failure could not reasonably be expected to have a Materially Adverse
Effect.
Section 5.18 Maintenance of Network Affiliations; Operating
Agreements. The Borrower will, and will cause each of its Subsidiaries to,
maintain a network affiliation with ABC, CBS, NBC, FOX or other network
reasonably satisfactory to the Required Lenders at all times for each Station.
The Borrower will, and will cause each of its Subsidiaries to maintain, and not
breach or violate, any and all Operating Agreements and other material
contracts and rights necessary to operate the Stations, the Newspapers, the
Porta-Phone Paging Business, the Satellite Broadcasting Business and its other
media-related businesses in all material respects.
Section 5.19 Ownership Reports. The Borrower will file Ownership
Reports for any Station acquired after the Agreement Date (reflecting such
Acquisition by the Borrower) with the FCC within thirty (30) days after the date
of the consummation of such Acquisition.
Section 5.20 Environmental Compliance and Indemnity.
(a) The Borrower will, and will cause each of its Subsidiaries
to, comply in all material respects with all Environmental Laws, including,
without limitation, all Environmental
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Laws in jurisdictions in which the Borrower or any of its Subsidiaries owns or
operates a facility or site, arranges for disposal or treatment of Hazardous
Materials, solid waste or other wastes, accepts for transport any Hazardous
Materials, solid wastes or other wastes or holds any interest in Real Property
or otherwise. Neither the Borrower nor any of its Subsidiaries shall cause or
allow the release of Hazardous Materials, solid waste or other wastes on, under
or to any Real Property in which the Borrower or such Subsidiary holds any
interest or performs any of its operations, in material violation of any
Environmental Law. The Borrower shall notify the Lenders promptly after its
receipt of notice thereof, of any Environmental Claim which the Borrower
receives involving any potential or actual material liability of the Borrower
or any of its Subsidiaries arising in connection with any noncompliance with or
violation of the requirements of any Environmental Law or a material Release or
threatened Release of any Hazardous Materials, solid waste or other waste into
the environment. The Borrower shall promptly notify the Lenders (i) of any
material release of Hazardous Material on, under or from the Real Property in
which the Borrower or any of its Subsidiaries holds or has held an interest,
upon the Borrower's learning thereof by receipt of notice that the Borrower or
any of its Subsidiaries is or may be liable to any Person as a result of such
Release or that the Borrower or such Subsidiary has been identified as
potentially responsible for, or is subject to investigation by any governmental
authority relating to, such Release, and (ii) of the commencement or threat or
any judicial or administrative proceeding alleging a violation of any
Environmental Laws.
(b) If the Administrative Agent at any time has a reasonable
basis to believe that there may be a violation of any Environmental Law by, or
any liability arising thereunder of, the Borrower or any of its Subsidiaries or
related to any real property owned, leased or operated by the Borrower or any of
its Subsidiaries or real property adjacent to such Real Property, which
violation or liability could reasonably be expected to have a Materially Adverse
Effect, then the Borrower shall, upon request from the Administrative Agent,
provide the Administrative Agent with such reports, certificates, engineering
studies or other written material or data as the Administrative Agent may
require so as to satisfy the Administrative Agent that the Borrower or such
Subsidiary is in material compliance with all applicable Environmental Laws.
(c) The Borrower shall defend, indemnify and hold the
Administrative Agent and the Lenders and their respective officers, directors,
shareholders, employees, agents, affiliates, successors and assigns harmless
from and against all costs, expenses, claims, demands, damages, penalties and
liabilities of every kind or nature whatsoever incurred by them (including,
without limitation, reasonable attorney fees and expenses) arising out of,
resulting from or relating to (i) the noncompliance of the Borrower, any of its
Subsidiaries or any property owned or leased by the Borrower or any of its
Subsidiaries with any Environmental Law, or (ii) any investigatory or remedial
action involving the Borrower, any of its Subsidiaries or any property owned or
leased by the Borrower or any of its Subsidiaries and required by Environmental
Laws or by order of any governmental authority having jurisdiction under any
Environmental Laws, or (iii) any injury to any person whatsoever or damage to
any property arising out of, in connection with or in any way relating to the
breach of any of the environmental warranties or covenants in this Agreement or
any facts or circumstances that cause any of the environmental representations
or warranties contained in this Agreement to cease to be true, or (iv) the
existence, treatment, storage, Release, generation, transportation,
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removal, manufacture or other handling of any Hazardous Material on or affecting
any property owned or leased by the Borrower or any of its Subsidiaries, or (v)
the presence of any asbestos-containing material or underground storage tanks,
whether in use or closed, under or on any property owned or leased by the
Borrower or any of its Subsidiaries; provided, however, that the foregoing
indemnity shall not apply to any such costs, expenses, claims, demands, damages,
penalties or liabilities that are determined in a final non-appealable order of
a court of competent jurisdiction to have arisen solely out of the gross
negligence or willful misconduct of the indemnified person.
ARTICLE 6
Information Covenants
So long as any of the Obligations is outstanding and unpaid or the
Lenders have an obligation to fund Advances hereunder (whether or not the
conditions to borrowing have been or can be fulfilled), and unless the Required
Lenders shall otherwise consent in writing, the Borrower will furnish or cause
to be furnished to the Administrative Agent (with, for the reports required
under Sections 6.1, 6.2, 6.3 and 6.4 hereof, sufficient copies for each Lender):
Section 6.1 Quarterly Financial Statements and Information. Within
forty-five (45) days after the last day of each of the first three (3) quarters
of each fiscal year of the Borrower, the balance sheets and the related
statements of operations of the Borrower on a consolidated and consolidating
basis with its Subsidiaries as at the end of such quarter and as of the end of
the preceding fiscal year and the related statements of cash flows of the
Borrower on a consolidated basis with its Subsidiaries for such quarter and for
the elapsed portion of the year ended with the last day of such quarter, each of
which shall set forth in comparative form such figures as at the end of and for
such quarter and appropriate prior period and shall be certified by the chief
financial officer, chief accounting officer or controller of the Borrower to
have been prepared in accordance with GAAP and to present fairly in all material
respects the financial position of the Borrower on a consolidated and
consolidating basis with its Subsidiaries as at the end of such period and the
results of operations for such period, and for the elapsed portion of the year
ended with the last day of such period, subject only to normal year-end and
audit adjustments.
Section 6.2 Annual Financial Statements and Information. Within ninety
(90) days after the end of each fiscal year of the Borrower, the audited
consolidated balance sheet of the Borrower and its Subsidiaries as of the end of
such fiscal year and the related audited consolidated statements of operations
for such fiscal year and for the previous fiscal year, the related audited
consolidated statements of cash flow and members' equity for such fiscal year
and for the previous fiscal year, each of which shall be accompanied by an
opinion of independent certified public accountants of recognized national
standing acceptable to the Administrative Agent (without a "going concern" or
like qualification or exception and without any qualification or exception as to
the scope of the audit), together with a statement of such accountants that in
connection with their audit, nothing came to their attention that caused them to
believe that the Borrower was not in compliance with or was otherwise in Default
under the
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terms, covenants, provisions or conditions of Articles 7 and 8 hereof insofar as
they relate to accounting or financial matters.
Section 6.3 Monthly Financial Information. Within forty-five (45)
days after the end of each month for the first eleven (11) months of fiscal
year, and within sixty (60) days after the end of the last month of each fiscal
year, the Borrower shall furnish unaudited statements of income and expense for
each Station, each Newspaper, the Porta-Phone Paging Business and the Satellite
Broadcasting Business, which shall contain a comparison with budget or
projections for such period and a comparison to the comparable period for the
prior year, and which shall be certified by the chief financial officer, chief
accounting officer or controller of the Borrower.
Section 6.4 Performance Certificates. At the time the financial
statements are furnished pursuant to Sections 6.1 and 6.2, a certificate of the
president, chief financial officer, chief accounting officer or controller of
the Borrower as to its financial performance, in substantially the form attached
hereto as Exhibit L:
(a) setting forth as and at the end of such quarterly period
or fiscal year, as the case may be, the arithmetical calculations required to
establish (i) any adjustment to the Applicable Margins, as provided for in
Section 2.3(f) and (ii) whether or not the Borrower was in compliance with the
requirements of Sections 7.8, 7.9, 7.10, 7.11, 7.12, 7.13 and 7.14 hereof;
(b) stating that, to the best of his or her knowledge, no
Default has occurred as at the end of such quarterly period or year, as the case
may be, or, if a Default has occurred, disclosing each such Default and its
nature, when it occurred, whether it is continuing and the steps being taken by
the Borrower with respect to such Default; and
(c) containing a list of all Acquisitions, Investments (other
than Cash Equivalents), Restricted Payments, Restricted Purchases and Asset
Sales, in each case, which exceed $1,000,000.00 per transaction or series of
related transactions, for the four (4) quarter period then ended or most
recently ended, together with the total amount for each of the foregoing
categories.
Section 6.5 Copies of Other Reports.
(a) Promptly upon receipt thereof, copies of all reports, if
any, submitted to the Borrower by the Borrower's independent public accountants
regarding the Borrower, including, without limitation, any management report
submitted to the board of directors of the Borrower prepared in connection with
the annual audit referred to in Section 6.2 hereof.
(b) From time to time and promptly upon each request, such
data, certificates, reports, statements, documents or further information
regarding the business, assets, liabilities, financial position, projections,
results of operations or business prospects of the Borrower or any of its
Subsidiaries, as the Administrative Agent or any Lender may reasonably request.
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(c) Annually, certificates of insurance indicating that the
requirements of Section 5.5 hereof remain satisfied for such fiscal year,
together with, upon request, copies of any new or replacement insurance policies
obtained during such year.
(d) Within sixty (60) days of the beginning of each fiscal
year, the annual budget for the Borrower and its Subsidiaries on a quarter by
quarter basis.
(e) Promptly upon their becoming available, copies of (i) all
financial statements, reports, notices and proxy statements sent or made
available generally by the Borrower to its security holders or by any Subsidiary
of the Borrower to its security holders other than the Borrower or another
Subsidiary of the Borrower, (ii) all regular and periodic reports and all
registration statements (other than on Form S-8 or a similar form) and
prospectuses, if any, filed by the Borrower or any of its Subsidiaries with any
securities exchange or with the Securities and Exchange Commission or any
governmental or private regulatory authority, (iii) all press releases and other
statements made available generally by the Borrower or any of its Subsidiaries
to the public concerning material developments in the business of the Borrower
or any of its Subsidiaries, (iv) any material non-routine correspondence or
official notices received by the Borrower, or any of its Subsidiaries from the
FCC or other communications regulatory authority, and (v) all material
information filed by the Borrower or any of its Subsidiaries with the FCC
(including all Ownership Reports and amendments or supplements to any Ownership
Report).
(f) Promptly upon (i) receipt of notice of (A) any forfeiture,
non-renewal, cancellation, termination, revocation, suspension, impairment or
material modification of any material License held by the Borrower or any of its
Subsidiaries, or any notice of default or forfeiture with respect to any such
License, or (B) any refusal by any governmental agency or authority (including
the FCC) to renew or extend any such License, a certificate specifying the
nature of such event, the period of existence thereof, and what action the
Borrower and its Subsidiaries are taking and propose to take with respect
thereto, and (ii) any Acquisition of any Station, a written notice setting forth
with respect to such Station all of the data required to be set forth in
Schedule 3 with respect to such Stations and the Licenses required in connection
with the ownership and operation of such Station (it being understood that such
written notice shall be deemed to supplement Schedule 3 attached hereto for all
purposes of this Agreement).
Section 6.6 Notice of Litigation and Other Matters. Notice specifying
the nature and status of any of the following events, promptly, but in any event
not later than fifteen (15) days after the occurrence of any of the following
events becomes known to the Borrower:
(a) the commencement of all proceedings and investigations by
or before any governmental body and all actions and proceedings in any court or
before any arbitrator against the Borrower or any Subsidiary, or, to the extent
known to the Borrower, which could have a Materially Adverse Effect;
(b) any material adverse change with respect to the business,
assets, liabilities, financial position, annual budget, results of operations
business prospects or projections of the
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Borrower and its Subsidiaries, taken as a whole, other than changes in the
ordinary course of business which have not had and would not reasonably be
expected to have a Materially Adverse Effect and other than changes in the
industry in which the Borrower or any of its Subsidiaries operate which would
not reasonably be expected to have a Materially Adverse Effect;
(c) any Default or the occurrence or non-occurrence of any
event (i) which constitutes, or which with the passage of time or giving of
notice or both would constitute a default by the Borrower or any of its
Subsidiaries under any material agreement other than this Agreement and the
other Loan Documents to which the Borrower or any Subsidiary of the Borrower is
party or by which any of their respective properties may be bound, including,
without limitation, the Subordinated Note Indenture or any License, Operating
Agreement or other material contract, or (ii) which could have a Materially
Adverse Effect, giving in each case a description thereof and specifying the
action proposed to be taken with respect thereto;
(d) the occurrence of any Reportable Event or a "prohibited
transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of
the Code) with respect to any Plan of the Borrower or any of its Subsidiaries or
the institution or threatened institution by PBGC of proceedings under ERISA to
terminate or to partially terminate any such Plan or the commencement or
threatened commencement of any litigation regarding any such Plan or naming it
or the trustee of any such Plan with respect to such Plan or any action taken by
the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate of the
Borrower to withdraw or partially withdraw from any Plan or to terminate any
Plan; and
(e) the occurrence of any event subsequent to the Agreement
Date which, if such event had occurred prior to the Agreement Date, would have
constituted an exception to the representation and warranty in Section 4.1(m) of
this Agreement.
ARTICLE 7
Negative Covenants
So long as any of the Obligations is outstanding and unpaid or the
Lenders have an obligation to fund Advances hereunder (whether or not the
conditions to borrowing have been or can be fulfilled), and unless the Required
Lenders, or such greater number of Lenders as may be expressly provided herein,
shall otherwise give their prior consent in writing:
Section 7.1 Indebtedness of the Borrower and its Subsidiaries. The
Borrower shall not, and shall not permit any of its Subsidiaries to, create,
assume, incur or otherwise become or remain obligated in respect of, or permit
to be outstanding, any Indebtedness except:
(a) the Obligations;
(b) accounts payable, accrued expenses (including taxes) and
customer advance payments incurred in the ordinary course of business;
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(c) Indebtedness secured by Permitted Liens which, together
with Indebtedness permitted under Sections 7.1(f), (g), (h) and (i) (other than
obligations incurred pursuant to an Acquisition as may be permitted in such
Sections), shall not exceed $5,000,000.00 in the aggregate at any time
outstanding;
(d) obligations under Interest Rate Hedge Agreements;
(e) unsecured Indebtedness of the Borrower or any of its
Subsidiaries to the Borrower or any other Subsidiary of the Borrower so long as
the corresponding debt instruments are pledged to the Administrative Agent as
security for the Obligations;
(f) Guaranties constituting Indebtedness permitted under
Section 7.5 hereof which, together with Indebtedness permitted under Sections
7.1(c), (g), (h) and (i), (other than obligations incurred pursuant to an
Acquisition as may be permitted in such Sections) shall not exceed $5,000,000.00
in the aggregate at any time outstanding;
(g) with respect to any personal property, any conditional
sale obligation, any purchase money obligation, any rental obligation, any
purchase money security interest or any other arrangement for the use of
personal property of any other Person, which in any such case has an unexpired
term of not less than one (1) year, other than an arrangement constituting a
Capitalized Lease Obligation, provided that the aggregate amount payable by the
Borrower and its Subsidiaries pursuant to all such arrangements in any fiscal
year, together with Indebtedness permitted under Section 7.1(c), (f), (h) and
(i), (other than obligations incurred pursuant to a Permitted Acquisition as may
be permitted in such Sections) shall not exceed $5,000,000.00 in the aggregate
at any time outstanding, plus the amount of any such obligations incurred
pursuant to an Acquisition permitted under Section 7.6 hereof;
(h) any lease or rental obligation for real property which has
an unexpired term of not less than one (1) year, provided that the aggregate
amount payable in respect of all such arrangements by the Borrower and its
Subsidiaries in any fiscal year, together with Indebtedness permitted under
Sections 7.1(c), (f), (g) and (i) (other than obligations incurred pursuant to a
Permitted Acquisition as may be permitted in such Sections) shall not exceed
$5,000,000.00 in the aggregate at any time outstanding, plus the amount of any
such obligations incurred pursuant to an Acquisition permitted under Section 7.6
hereof;
(i) Capitalized Lease Obligations, provided that the aggregate
amount payable by the Borrower and its Subsidiaries in respect of all such
Capitalized Lease Obligations in any fiscal year, together with Indebtedness
permitted under Sections 7.1(c), (f), (g) and (h), (other than obligations
incurred pursuant to a Permitted Acquisition as may be permitted in such
Sections) shall not exceed $5,000,000.00 in the aggregate at any time
outstanding, plus the amount of any such obligations incurred pursuant to an
Acquisition permitted under Section 7.6 hereof;
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(j) Subordinated Debt incurred pursuant to the terms of the
Subordinated Note Indenture as in effect on the date hereof in a principal
amount not to exceed $160,000,000, or Indebtedness incurred in refinancing such
Subordinated Debt, provided such refinancing Indebtedness is on terms and
conditions satisfactory to the Required Lenders; and
(k) Indebtedness of the Borrower and its Subsidiaries existing
as of the Agreement Date as set forth on Schedule 7 attached hereto.
Section 7.2 Limitation on Liens. The Borrower shall not, and shall not
permit any of its Subsidiaries to, create, assume, incur or permit to exist or
to be created, assumed, incurred or permitted to exist, directly or indirectly,
any Lien on any of its properties or assets, whether now owned or hereafter
acquired, except for Permitted Liens. The Borrower shall not, and shall not
permit any of its Subsidiaries to undertake, covenant or agree with any third
party that it will not create, assume, incur or permit to exist any lien in the
favor the Administrative Agent or the Lenders securing the Obligations on any of
its assets or properties, whether now owned or hereafter acquired, except for
Permitted Liens.
Section 7.3 Amendment and Waiver. The Borrower shall not, and shall
not permit any of its Subsidiaries to, enter into any amendment of, or agree to
or accept or consent to any waiver of any of the provisions of its articles or
certificate of incorporation, or its partnership agreement or its by-laws, as
appropriate, any License or Operating Agreement or any of the documents
evidencing Subordinated Debt, in each case, in any respect materially adverse to
the Administrative Agent or any Lender or any of their rights or claims under
any of the Loan Documents.
Section 7.4 Liquidation, Merger or Disposition of Assets.
(a) Disposition of Assets. The Borrower shall not, and shall
not permit any of its Subsidiaries to, make any Asset Sale; provided, however,
that the Borrower and its Subsidiaries, or any of them, may make Asset Sales if
such Asset Sales (i) are in the ordinary course of business of assets held for
resale in the ordinary course of business or the trade in or replacement of
assets in the ordinary course of business, (ii) do not exceed, for any
transaction or series of related transactions, $1,000,000.00 per fiscal year or
(iii) (A) involve the disposition of substantially all of the assets of the
Porta-Phone Paging Business or the Satellite Broadcasting Business and (B) the
proceeds of such Asset Sales are applied pursuant to Section 2.7(b)(iii) hereof.
(b) Liquidation or Merger. The Borrower shall not, and shall
not permit any of its Subsidiaries to, at any time liquidate or dissolve itself
(or suffer any liquidation or dissolution) or otherwise wind up, or enter into
any merger, other than (so long as no Default exists or would be caused
thereby): (i) a merger or consolidation among the Borrower and one or more of
its Subsidiaries, provided the Borrower is the surviving corporation, or (ii) a
merger between or among two or more Subsidiaries of the Borrower, or (iii) in
connection with an Acquisition permitted hereunder effected by a merger in
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which the Borrower or, in a merger in which the Borrower is not a party, a
Subsidiary of the Borrower is the surviving corporation or the surviving
corporation becomes a Subsidiary of the Borrower.
Section 7.5 Limitation on Guaranties. The Borrower shall not, and
shall not permit any of its Subsidiaries to, at any time Guaranty, assume, be
obligated with respect to, or permit to be outstanding any Guaranty of, any
obligation of any other Person other than: (a) a guaranty by endorsement of
negotiable instruments for collection in the ordinary course of business; (b) as
may be contained in any Loan Document; or (c) Guaranties of Indebtedness
incurred as permitted pursuant to Section 7.1(f) hereof and the Borrower
provides to the Administrative Agent and the Lenders calculations in form and
substance reasonably satisfactory to the Administrative Agent, specifically
demonstrating compliance with Sections 7.8, 7.9, 7.10, 7.11, 7.12, 7.13 and 7.14
hereof after giving effect to such Guaranty.
Section 7.6 Investments and Acquisitions. The Borrower shall not, and
shall not permit any of its Subsidiaries to, directly or indirectly make any
Acquisition or Investment; provided, however, that so long as no Default or
Event of Default exists or would be caused thereby the Borrower and its
Subsidiaries may:
(a) make Investments in Cash Equivalents;
(b) make Investments in Subsidiaries;
(c) provided that the Borrower complies with Sections 5.13 and
5.16 hereof in connection therewith, and provides to the Administrative Agent
and the Lenders within ten (10) days prior to the consummation of the proposed
Acquisition an acquisition report signed by an executive officer of the
Borrower, in form and substance reasonably satisfactory to the Administrative
Agent, which shall include, without limitation, (X) financial calculations
specifically demonstrating the Borrower's pro forma compliance with Sections
7.8, 7.9, 7.10, 7.11, 7.12, 7.13 and 7.14 hereof after giving effect to such
Acquisition and (Y) financial projections for the Borrower for a five (5) year
period after the closing of such Acquisition after giving effect to such
Acquisition, including, without limitation, a statement of sources and uses of
funds for such Acquisition showing, among other things, the sources of financing
for such Acquisition, and demonstrating Borrower's ability to meet its repayment
obligations hereunder through the Maturity Date, the Borrower and its
Subsidiaries may make Acquisitions of Stations or Newspapers subject to
satisfaction of the following conditions:
(i) any Station to be acquired (A) shall be located
in any of the top one hundred twenty-five (125) United States markets,
as ranked by Designated Market Area as determined by Nielsen Media
Research, (B) shall be a CBS, NBC, ABC or FOX network affiliate and
located in a market ranked one hundred twenty-six (126) through and
including one hundred seventy-five (175), as ranked by Designated
Market Area as determined by Nielsen Media Research, or (C) shall be
located in, or adjacent to, a market in which the Borrower or any of
its Subsidiaries owns a Station;
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(ii) any Newspaper to be acquired shall be a daily
newspaper with a minimum paid circulation of 15,000;
(iii) the Borrower shall have given to the
Administrative Agent written notice of such Acquisition at least
fifteen (15) days prior to executing any binding commitment with
respect thereto, which notice shall state the additional amounts, if
any, by which the Borrower proposes to increase the dollar limitations
set forth in Sections 7.1(g), (h) and (i) hereof; and the structure of
the transaction shall be in form and substance acceptable to the
Administrative Agent;
(iv) if such Acquisition is of a Station that does
not have an affiliation agreement with ABC, CBS, NBC or FOX, the
Borrower shall negotiate in good faith with the Administrative Agent,
on behalf of the Lenders, regarding a limitation, to be added upon
consent of the Required Lenders as a negative covenant to this
Agreement, on the annual amount of its Programming Obligations; and
(v) the agreement governing such Acquisition and all
related documents and instruments shall be in form and substance
satisfactory to the Administrative Agent;
(d) acquire from Bull Run Corporation a seventy-three percent
(73%) economic interest and a thirty-three and one-half percent (33.5%) voting
interest in Sarkes Tarzian for a purchase price of $10,000,000.00 plus
transaction and related costs and options for the purchase of certain of the
Borrower's stock; provided, that on or prior to the consummation of such
Investment, the Borrower shall provide to the Administrative Agent, in form and
substance satisfactory the Administrative Agent, (i) evidence that the Borrower
has pledged such economic and voting interests as additional collateral securing
the Obligations under the Loan Agreement, (ii) certification of the Borrower's
compliance with Section 7.8, 7.9, 7.10, 7.11, 7.12, 7.13 and 7.14 hereof and
under through the Maturity Date after giving effect to such Investment, (iii)
certification that no Default or Event of Default exists or will be caused by
such Investment, and (iv) evidence of consummation of such Investment on
substantially the terms and conditions set forth in that certain Stock Option
Agreement dated as of February 28, 1999 between the Borrower and Bull Run
Corporation; and
(e) provided that the Borrower complies with Sections 5.13 and
5.16 hereof in connection therewith, and provides to the Administrative Agent
and the Lenders within ten (10) days prior to the consummation of the proposed
Acquisition an acquisition report signed by an executive officer of the
Borrower, in form and substance reasonably satisfactory to the Administrative
Agent, which shall include, without limitation, (X) financial calculations
specifically demonstrating the Borrower's pro forma compliance with Sections
7.8, 7.9, 7.10, 7.11, 7.12, 7.13 and 7.14 hereof after giving effect to such
Acquisition and (Y) financial projections for the Borrower for a five (5) year
period after the closing of such Acquisition after giving effect to such
Acquisition, including, without limitation, a statement of sources and uses of
funds for such Acquisition showing, among other things, the sources of financing
for such Acquisition, and demonstrating Borrower's ability to meet its repayment
obligations hereunder
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through the Maturity Date, the Borrower and its Subsidiaries may make
Acquisitions of or Investments in Stations, Newspapers, the Porta-Phone Paging
Business, the Satellite Broadcasting Business or other media related businesses
in an aggregate amount not to exceed $1,000,000.00 per transaction or series of
related transactions per fiscal year; and
(f) The Borrower may make such other Acquisitions as may be
approved from time to time by the Required Lenders in their sole discretion.
Section 7.7 Restricted Payments; Restricted Purchases. The Borrower
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly declare or make any Restricted Payment or Restricted Purchase;
provided, however, that:
(a) any Subsidiary of the Borrower may make Restricted
Payments to the Borrower or to a wholly-owned Subsidiary of the Borrower;
(b) the Borrower may redeem its existing preferred or common
stock and purchase subordinated notes in the open market issued under the
Subordinated Note Indenture so long as no Default or Event of Default exists at
the time of making such payment or purchase or would exist after giving effect
thereto;
(c) the Borrower may make payments of current interest on the
senior subordinated notes issued pursuant to and in accordance with the
Subordinated Note Indenture; and
(d) the Borrower may make Restricted Payments and Restricted
Purchases (other than as set forth above in clause (a), (b) or (c) of this
Section 7.7), provided that: (A) prior to making any such payment or purchase,
the Borrower shall have demonstrated to the satisfaction of the Administrative
Agent that the Borrower will be in compliance with all of the covenants
contained herein after giving effect to such payment or purchase; (B) no Default
or Event of Default exists at the time of making such payment or purchase or
would exist after giving effect thereto; and (C) prior to making any such
payment or purchase, the Borrower shall have delivered to the Administrative
Agent a certificate of its chief financial officer, chief accounting officer or
controller in form and substance satisfactory to the Administrative Agent which
shall contain calculations demonstrating on a pro forma basis the Borrower's
compliance with Sections 7.8, 7.9, 7.10, 7.11, 7.12, 7.13 and 7.14 hereof after
giving effect to such payment or purchase.
Section 7.8 Senior Leverage Ratio. (a) As of the end of any fiscal
quarter, (b) at the time of the issuance of any Letter of Credit (after giving
effect to such Letter of Credit), and (c) the time of any Advance hereunder
(after giving effect to such Advance), the Borrower shall not permit its Senior
Leverage Ratio to exceed the ratios set forth below during the periods
indicated:
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<TABLE>
<CAPTION>
Period Senior Leverage Ratio
------ ---------------------
<S> <C>
Agreement Date through December 31, 2000 4.25:1.00
January 1, 2001 and thereafter 4.00:1.00
</TABLE>
Section 7.9 Interest Coverage Ratio. (a) As of the end of any fiscal
quarter, (b) at the time of the issuance of any Letter of Credit (after giving
effect to such Letter of Credit), and (c) the time of any Advance hereunder
(after giving effect to such Advance), the Borrower shall not permit its
Interest Coverage Ratio to be less than the ratio set forth below for the
periods indicated:
<TABLE>
<CAPTION>
Period Interest Coverage Ratio
------ -----------------------
<S> <C>
Agreement Date through June 30, 2000 1.40:1.00
July 1, 2000 and thereafter 1.50:1.00
</TABLE>
Section 7.10 Fixed Charge Coverage Ratio. (a) As of the end of any
fiscal quarter, (b) at the time of the issuance of any Letter of Credit (after
giving effect to such Letter of Credit) and (c) at the time of any Advance
hereunder (after giving effect to such Advance) the Borrower shall not permit
the Fixed Charge Coverage Ratio to be less than 1.0:1.0.
Section 7.11 Pro Forma Debt Service Coverage Ratio. (a) As of the end
of any fiscal quarter, (b) at the time of the issuance of any Letter of Credit
(after giving effect to such Letter of Credit) and (c) at the time of any
Advance hereunder (after giving effect to such Advance) the Borrower shall not
permit its Pro Forma Debt Service Coverage Ratio to be less than 1.10:1.0.
Section 7.12 Leverage Ratio. (a) As of the end of any fiscal quarter,
(b) at the time of the issuance of any Letter of Credit (after giving effect to
such Letter of Credit) and (c) at the time of any Advance hereunder (after
giving effect to such Advance) the Borrower shall not permit its Leverage Ratio
to exceed the ratios set forth below during the periods indicated:
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<TABLE>
<CAPTION>
Period Leverage Ratio
------ --------------
<S> <C>
Agreement Date through March 31, 2000 7.15:1.00
April 1, 2000 through June 30, 2000 6.95:1.00
July 1, 2000 through December 31, 2000 6.50:1.00
January 1, 2001 and thereafter 6.40:1.00
</TABLE>
Section 7.13 Adjusted Leverage Ratio. (a) As of the end of any fiscal
quarter, (b) at the time of the issuance of any Letter of Credit (after giving
effect to such Letter of Credit) and (c) at the time of any Advance hereunder
(after giving effect to such Advance) the Borrower shall not permit its Adjusted
Leverage Ratio to exceed the ratios set forth below during the periods
indicated:
<TABLE>
<CAPTION>
Period Leverage Ratio
------ --------------
<S> <C>
Agreement Date through March 31, 2000 7.15:1.00
April 1, 2000 through June 30, 2000 6.95:1.00
July 1, 2000 through December 31, 2000 6.50:1.00
January 1, 2001 through December 31, 2001 6.25:1.00
January 1, 2002 through December 31, 2003 6.00:1.00
January 1, 2004 and thereafter 5.00:1.00
</TABLE>
Section 7.14 Limitation on Capital Expenditures. The Borrower shall
not, and shall not permit its Subsidiaries to, make Capital Expenditures during
the period from January 1, 2000 through December 21, 2002 other than Capital
Expenditures in an amount not to exceed $15,500,000.00 in the aggregate per
fiscal year.
Section 7.15 Affiliate Transactions. Except as specifically provided
herein and as may be described on Schedule 6 attached hereto, the Borrower shall
not, and shall not permit any of its Subsidiaries to, at any time engage in any
transaction with an Affiliate, or make an assignment or other transfer of any of
its properties or assets to any Affiliate on terms no less advantageous to the
Borrower or such Subsidiary than would be the case if such transaction had been
effected with a non-Affiliate.
Section 7.16 Real Estate. Neither the Borrower nor any of its
Subsidiaries shall purchase any real estate or enter into any sale-leaseback
transaction except (a) as contemplated in
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an Acquisition permitted under Section 7.6 hereof and (b) real estate purchases
useful in connection with the Borrower's business made in the ordinary course of
business.
Section 7.17 ERISA Liabilities. The Borrower shall not, and shall
cause each of its ERISA Affiliates not to, (i) permit the assets of any of their
respective Plans to be materially less than the amount necessary to provide all
accrued benefits under such Plans, or (ii) enter into any Multiemployer Plan.
Section 7.18 No Limitation on Upstream Dividends by Subsidiaries. The
Borrower shall not permit any Subsidiary to enter into or agree, or otherwise
become subject (other than pursuant to Applicable Law), to any agreement,
contract or other arrangement with any Person pursuant to the terms of which (a)
such Subsidiary is or would be prohibited from or limited in declaring or paying
any cash dividends or distributions on any class of its Ownership Interests
owned directly or indirectly by the Borrower or from making any other
distribution on account of any class of any such Ownership Interests (herein
referred to as "Upstream Dividends") or (b) the declaration or payment of
Upstream Dividends by a Subsidiary to the Borrower or to another Subsidiary, on
an annual or cumulative or other basis, is or would be otherwise limited or
restricted.
ARTICLE 8
Default
Section 8.1 Events of Default. Each of the following shall constitute
an Event of Default, whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment or order of any court or any order, rule or regulation of any
governmental or non-governmental body:
(a) Any representation or warranty made under this Agreement
shall prove incorrect or misleading in any material respect when made or deemed
to be made pursuant to Section 4.2 hereof;
(b) The Borrower shall default in the payment of: (i) any
interest under any of the Notes or fees or other amounts payable to the Lenders
and the Administrative Agent under any of the Loan Documents, or any of them,
when due, and such Default shall not be cured by payment in full within three
(3) Business Days from the due date; or (ii) any principal under any of the
Notes when due;
(c) The Parent or the Borrower shall default in the
performance or observance of any agreement or covenant contained in Sections
5.2(a), 5.10, 5.13, 5.16 or 5.20 hereof or in Articles 6 or 7 hereof;
(d) The Borrower shall default in the performance or
observance of any other agreement or covenant contained in this Agreement not
specifically referred to elsewhere in this
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Section 8.1, and such default shall not be cured within a period of
thirty (30) days from the occurrence of such Default;
(e) There shall occur any default in the performance or
observance of any agreement or covenant or breach of any representation or
warranty contained in any of the Loan Documents (other than this Agreement or as
otherwise provided in Section 8.1 hereof) by the Borrower, any of its
Subsidiaries, or any other obligor thereunder, which shall not be cured within a
period of thirty (30) days from the occurrence of such Default;
(f) There shall be entered and remain unstayed a decree or
order for relief in respect of the Borrower or any of its Subsidiaries under
Title 11 of the United States Code, as now constituted or hereafter amended, or
any other applicable federal or state bankruptcy law or other similar law, or
appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or
similar official of the Borrower or any of its Subsidiaries, or of any
substantial part of their respective properties, or ordering the winding-up or
liquidation of the affairs of the Borrower, or any of its Subsidiaries; or an
involuntary petition shall be filed against the Borrower or any of its
Subsidiaries and a temporary stay entered, and (i) such petition and stay shall
not be diligently contested, or (ii) any such petition and stay shall continue
undismissed for a period of sixty (60) consecutive days;
(g) The Borrower or any of its Subsidiaries shall file a
petition, answer or consent seeking relief under Title 11 of the United States
Code, as now constituted or hereafter amended, or any other applicable federal
or state bankruptcy law or other similar law, or the Borrower or any of its
Subsidiaries shall consent to the institution of proceedings thereunder or to
the filing of any such petition or to the appointment or taking of possession of
a receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of the Borrower or any of its Subsidiaries or of any
substantial part of their respective properties, or the Borrower or any of its
Subsidiaries shall fail generally to pay their respective debts as they become
due or shall be adjudicated insolvent; the Borrower shall suspend or discontinue
its business; the Borrower or any of its Subsidiaries shall have concealed,
removed any of its property with the intent to hinder or defraud its creditors
or shall have made a fraudulent or preferential transfer under any applicable
fraudulent conveyance or bankruptcy law, or the Borrower or any of its
Subsidiaries shall take any action in furtherance of any such action;
(h) A judgment not covered by insurance or indemnification,
where the indemnifying party has agreed to indemnify and is financially able to
do so, shall be entered by any court against the Borrower or any of its
Subsidiaries for the payment of money which exceeds singly or in the aggregate
with other such judgments, $250,000.00, or a warrant of attachment or execution
or similar process shall be issued or levied against property of the Borrower or
any of its Subsidiaries which, together with all other such property of the
Borrower or any of its Subsidiaries subject to other such process, exceeds in
value $250,000.00 in the aggregate, and if, within thirty (30) days after the
entry, issue or levy thereof, such judgment, warrant or process shall not have
been paid or discharged or stayed pending appeal or removed to bond, or if,
after the expiration of any such stay, such judgment, warrant or process shall
not have been paid or discharged or removed to bond;
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(i) There shall be at any time any material "accumulated
funding deficiency," as defined in ERISA or in Section 412 of the Code, with
respect to any Plan maintained by the Borrower or any of its Subsidiaries or any
ERISA Affiliate, or to which the Borrower or any of its Subsidiaries or any
ERISA Affiliate has any liabilities, or any trust created thereunder; or a
trustee shall be appointed by a United States District Court to administer any
such Plan; or PBGC shall institute proceedings to terminate any such Plan; or
the Borrower or any of its Subsidiaries or any ERISA Affiliate shall incur any
liability to PBGC in connection with the termination of any such Plan; or any
Plan or trust created under any Plan of the Borrower or any of its Subsidiaries
or any ERISA Affiliate shall engage in a "prohibited transaction" (as such term
is defined in Section 406 of ERISA or Section 4975 of the Code) which would
subject any such Plan, any trust created thereunder, any trustee or
administrator thereof, or any party dealing with any such Plan or trust to the
tax or penalty on "prohibited transactions" imposed by Section 502 of ERISA or
Section 4975 of the Code;
(j) There shall occur (i) any default under any instrument,
document or agreement relating to any Indebtedness of the Borrower or any of its
Subsidiaries in an aggregate principal amount exceeding $250,000.00; (ii) any
event or condition the occurrence of which would permit such acceleration of
such Indebtedness, or which, as a result of a failure to comply with the terms
thereof, would make such Indebtedness otherwise due and payable, and which event
or condition has not been cured within any applicable cure period or waived in
writing prior to any declaration of an Event of Default or acceleration of the
Loans hereunder; or (iii) any material default under any Interest Rate Hedge
Agreement which would permit the obligation of the Borrower to make payments to
the counterparty thereunder to be then due and payable;
(k) Any Loan Document or any material provision thereof, shall
at any time and for any reason be declared by a court of competent jurisdiction
to be null and void, or a proceeding shall be commenced by the Borrower or any
of its Subsidiaries or by any governmental authority having jurisdiction over
the Borrower or any of its Subsidiaries seeking to establish the invalidity or
unenforceability thereof (exclusive of questions of interpretation of any
provision thereof), or the Borrower or any of its Subsidiaries shall deny that
it has any liability or obligation for the payment of principal or interest
purported to be created under any Loan Document;
(l) Any Security Document shall for any reason, fail or cease
(except by reason of lapse of time) to create a valid and perfected and
first-priority Lien on or Security Interest in any portion of the Collateral
purported to be covered thereby, subject only to Permitted Liens;
(m) (i) Any Person (or group of Persons) is or becomes the
"beneficial owner" (within the meaning of Rules 13d-3 and 13d-5 under the
federal Securities Exchange Act of 1934, as amended), directly or indirectly, of
a percentage of the voting Ownership Interests of the Borrower greater than
thirty-five percent (35%), other than J. Mack Robinson or Robert S. Prather,
Jr., the spouse and lineal descendants or either such individual, the estate,
executor,
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administrator, or other personal representative of either such individual, or
any trust created for either such individual or for the spouse or lineal
descendants of either such individual; or (ii) during any period of twenty-four
(24) consecutive months, individuals who at the beginning of such period
constituted the Board of Directors of the Borrower (together with any new
directors whose election by such Board or whose nomination for election by the
stockholders of the Borrower was approved by a majority of the directors then
still in office who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors then in office; or
(iii) except as permitted pursuant to this Agreement, the Borrower shall cease
or fail to own, directly or indirectly, beneficial and legal title to all of the
issued and outstanding Ownership Interests of each of its Subsidiaries or any
Subsidiary of the Borrower shall cease to be a wholly-owned Subsidiary of the
Borrower;
(n) Any material License shall be cancelled, terminated,
rescinded, revoked, suspended, impaired, otherwise finally denied renewal, or
otherwise modified in any material adverse respect, or shall be renewed on terms
that materially and adversely affect the economic or commercial value or
usefulness thereof; or any material License shall cease to be in full force and
effect; or the grant of any material License shall have been stayed, vacated or
reversed, or modified in any material adverse respect by judicial or
administrative proceedings; or any administrative law judge or other
representative of the shall have issued an initial decision in any
non-comparative material License renewal, material License revocation or any
comparative (multiple applicant) proceeding to the effect that any material
License should be revoked or not be renewed; or any other proceeding shall have
been instituted by or shall have been commenced before any court, the or any
other regulatory body that could reasonably be expected to result in (i)
cancellation, termination, rescission, revocation, material impairment,
suspension or denial of renewal of a material License, or (ii) a modification of
a material License in a material adverse respect or a renewal thereof on terms
that materially and adversely affect the economic or commercial value or
usefulness thereof;
(o) Any Operating Agreement or any other agreement which is
necessary to the operation of a Station, a Newspaper, the Porta-Phone Paging
Business or the Satellite Broadcasting Business shall be revoked or terminated
or materially, adversely modified and not replaced by a substitute acceptable to
the Required Lenders within thirty (30) days of such revocation, termination or
modification;
(p) The Borrower's on-the-air broadcast operations at any
Station shall be interrupted at any time for more than forty-eight (48) hours,
whether or not consecutive, during any period of five (5) consecutive days,
unless (a) the broadcasting operations of all or substantially all of the
Stations in the relevant market also are interrupted for a like period of time,
or (b) the Borrower shall be receiving during such period of interruption
insurance sufficient to assure that its per diem Operating Cash Flow during such
period is at least equal to that which could reasonably have been expected
during such period but for the interruption;
(q) The Borrower or any holder of Subordinated Debt shall fail
to comply with the agreement or instrument governing or evidencing such
Subordinated Debt or any
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separate subordination agreement, and the Administrative Agent shall have
determined that such failure to comply could reasonably be expected to have a
material adverse effect on the Borrower or any of its Subsidiaries or on its
ability to perform its obligations hereunder or under any of the Loan Documents
or on the rights and remedies of the Administrative Agent and the Lenders
hereunder or under the Loan Documents; or
(r) There shall occur any Materially Adverse Effect.
Section 8.2 Remedies.
(a) If an Event of Default specified in Section 8.1 hereof
(other than an Event of Default under Section 8.1(f) or (g) hereof) shall have
occurred and shall be continuing, the Administrative Agent, at the request of
the Required Lenders subject to Section 9.8(a) hereof, shall (i) (A) terminate
the Commitments, and/or (B) declare the principal of and interest on the Loans
and the Notes and all other amounts owed to the Lenders and the Administrative
Agent under this Agreement, the Notes and any other Loan Documents to be
forthwith due and payable without presentment, demand, protest or other notice
of any kind, all of which are hereby expressly waived, anything in this
Agreement, the Notes or any other Loan Document to the contrary notwithstanding,
and the Commitments shall thereupon forthwith terminate and (ii) require the
Borrower to, and the Borrower shall thereupon, deposit in an interest bearing
account with the Administrative Agent, as cash collateral for the Obligations,
an amount equal to the maximum amount currently or at any time thereafter to be
drawn on all outstanding Letters of Credit, and the Borrower hereby pledges to
the Administrative Agent, the Lenders and the Issuing Bank and grants to them a
security interest in, all such cash as security for the Obligations.
(b) Upon the occurrence and continuance of an Event of Default
specified in Section 8.1(f) or (g) hereof, all principal, interest and other
amounts due hereunder and under the Notes, and all other Obligations, shall
thereupon and concurrently therewith become due and payable and the Commitments
shall forthwith terminate and the principal amount of the Loans outstanding
hereunder shall bear interest at the Default Rate, and the Borrower shall
thereupon, deposit in an interest bearing account with the Administrative Agent,
as cash collateral for the Obligations, an amount equal to the maximum amount
currently or at any time thereafter to be drawn on all outstanding Letters of
Credit, all without any action by the Administrative Agent, the Lenders, the
Required Lenders and the Issuing Bank, or any of them, and without presentment,
demand, protest or other notice of any kind, all of which are expressly waived,
anything in this Agreement or in the other Loan Documents to the contrary
notwithstanding, and the Borrower hereby pledges to the Administrative Agent,
the Lenders and the Issuing Bank and grants to them a security interest in, all
such cash as security for the Obligations.
(c) Upon acceleration of the Notes, as provided in subsection
(a) or (b) of this Section 8.2, the Administrative Agent and the Lenders shall
have all of the post-default rights granted to them, or any of them, as
applicable under the Loan Documents and under Applicable Law.
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(d) Upon acceleration of the Notes, as provided in subsection
(a) or (b) of this Section 8.2, the Administrative Agent shall have the right
(but not the obligation) upon the request of the Lenders to operate the business
of the Borrower and its Subsidiaries in accordance with the terms of the
Licenses and pursuant to the terms and subject to any limitations contained in
the Security Documents and, within guidelines established by the Required
Lenders, to make any and all payments and expenditures necessary or desirable in
connection therewith, including, without limitation, payment of wages as
required under the Fair Labor Standards Act, as amended, and of any necessary
withholding taxes to state or federal authorities. In the event the Required
Lenders fail to agree upon the guidelines referred to in the preceding sentence
within six (6) Business Days after the Administrative Agent has begun to operate
the business of the Borrower, the Administrative Agent may, after giving three
(3) days' prior written notice to the Lenders of its intention to do so, make
such payments and expenditures as it deems reasonable and advisable in its sole
discretion to maintain the normal day-to-day operation of such business. Such
payments and expenditures in excess of receipts shall constitute Advances under
this Agreement, not in excess of the amount of the Commitments. Advances made
pursuant to this Section 8.2(d) shall bear interest as provided in Section
2.3(d) hereof and shall be payable on demand. The making of one or more Advances
under this Section 8.2(d) shall not create any obligation on the part of the
Lenders to make any additional Advances hereunder. No exercise by the
Administrative Agent of the rights granted to it under this Section 8.2(d) shall
constitute a waiver of any other rights and remedies granted to the
Administrative Agent and the Lenders, or any of them, under this Agreement or at
law. The Borrower hereby irrevocably appoints the Administrative Agent as agent
for the Lenders, the true and lawful attorney of the Borrower, in its name and
stead and on its behalf, to execute, receipt for or otherwise act in connection
with any and all contracts, instruments or other documents in connection with
the operation of the Borrower's business in the exercise of the Administrative
Agent's and the Lenders' rights under this Section 8.2(d). Such power of
attorney is coupled with an interest and is irrevocable. The rights of the
Administrative Agent under this Section 8.2(d) shall be subject to its prior
compliance with Applicable Law to the extent applicable to the exercise of such
rights.
(e) Upon acceleration of the Notes, as provided in subsection
(a) or (b) of this Section 8.2, the Administrative Agent, upon request of the
Required Lenders, shall have the right to the appointment of a receiver for the
properties and assets of the Borrower and its Subsidiaries, and the Borrower,
for itself and on behalf of its Subsidiaries, hereby consents to such rights and
such appointment and hereby waives any objection the Borrower or any Subsidiary
may have thereto or the right to have a bond or other security posted by the
Administrative Agent on behalf of the Lenders, in connection therewith. The
rights of the Administrative Agent under this Section 8.2(e) shall be subject to
its prior compliance with Applicable Law to the extent applicable to the
exercise of such rights.
(f) The rights and remedies of the Administrative Agent and
the Lenders hereunder shall be cumulative, and not exclusive.
Section 8.3 Payments Subsequent to Declaration of Event of Default.
Subsequent to the acceleration of the Loans under Section 8.2 hereof, payments
and prepayments under this Agreement made to the Administrative Agent and the
Lenders or otherwise received by any of
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such Persons (from realization on Collateral for the Obligations or otherwise)
shall be paid over to the Administrative Agent (if necessary) and distributed by
the Administrative Agent as follows: first, to the Administrative Agent's
reasonable costs and expenses, if any, incurred in connection with the
collection of such payment or prepayment, including, without limitation, any
reasonable costs incurred by it in connection with the sale or disposition of
any Collateral for the Obligations and all amounts under Section 11.2(b) and (c)
hereof; second, to the Lenders, the Issuing Bank or the Administrative Agent for
any fees hereunder or under any of the other Loan Documents then due and
payable; third, to be deposited as set forth in Section 8.2(a) or (b) hereof;
fourth, to the Lenders pro rata (except as provided in Section 2.2(e)hereof), to
the payment of any unpaid interest which may have accrued on the Obligations;
fifth, to the Lenders pro rata based on the Loans then outstanding until all
Loans have been paid in full (and, for purposes of this clause, obligations
under Interest Rate Hedge Agreements with the Lenders or any of them shall be
paid on a pro rata basis with the Loans); sixth, to the Lenders pro rata based
on the Loans outstanding to the payment of any other unpaid Obligations;
seventh, to damages incurred by the Administrative Agent, the Issuing Bank and
the Lenders, or any of them, by reason of any breach hereof or of any other Loan
Document; and eighth, to the Borrower or as otherwise required by law.
ARTICLE 9
The Administrative Agent
Section 9.1 Appointment and Authorization. Each Lender hereby
irrevocably appoints and authorizes, and hereby agrees that it will require any
transferee of any of its interest in its portion of the Loans and in its Note
irrevocably to appoint and authorize, the Administrative Agent to take such
actions as its agent on its behalf and to exercise such powers hereunder and
under the other Loan Documents as are delegated by the terms hereof and thereof,
together with such powers as are reasonably incidental thereto. Neither the
Administrative Agent, nor any of its respective directors, officers, employees
or agents, shall be liable for any action taken or omitted to be taken by it or
them hereunder or in connection herewith, except for its or their own gross
negligence or willful misconduct as determined by a final, non-appealable
judicial order of a court of competent jurisdiction.
Section 9.2 Interest Holders. The Administrative Agent may treat each
Lender, or the Person designated in the last notice filed with the
Administrative Agent, as the holder of all of the interests of such Lender in
its portion of the Loans and in its Note until written notice of transfer,
signed by such Lender (or the Person designated in the last notice filed with
the Administrative Agent) and by the Person designated in such written notice of
transfer, in form and substance reasonably satisfactory to the Administrative
Agent, shall have been filed with the Administrative Agent.
Section 9.3 Consultation with Counsel. The Administrative Agent may
consult with Powell, Goldstein, Frazer & Murphy LLP, Atlanta, Georgia, special
counsel to the Administrative Agent, or with other legal counsel selected by it
and shall not be liable for any
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action taken or suffered by it in good faith in consultation with the Required
Lenders and in reasonable reliance on such consultations.
Section 9.4 Documents. The Administrative Agent shall be under no duty
to examine, inquire into, or pass upon the validity, effectiveness or
genuineness of this Agreement, any Note, any other Loan Document, or any
instrument, document or communication furnished pursuant hereto or in connection
herewith, and the Administrative Agent shall be entitled to assume that they are
valid, effective and genuine, have been signed or sent by the proper parties and
are what they purport to be.
Section 9.5 Administrative Agent and Affiliates. With respect to the
Commitments and the Loans, the Administrative Agent shall have the same rights
and powers hereunder as any other Lender and the Administrative Agent and
Affiliates of the Administrative Agent may accept deposits from, lend money to
and generally engage in any kind of business with the Borrower, any of its
Subsidiaries or any Affiliates of, or Persons doing business with the Borrower,
as if they were not affiliated with the Administrative Agent and without any
obligation to account therefor.
Section 9.6 Responsibility of the Administrative Agent and the Issuing
Bank. The duties and obligations of the Administrative Agent and the Issuing
Bank under this Agreement are only those expressly set forth in this Agreement.
Each of the Administrative Agent and the Issuing Bank shall be entitled to
assume that no Default or Event of Default has occurred and is continuing unless
it has actual knowledge, or has been notified in writing by the Borrower, of
such fact, or has been notified by a Lender in writing that such Lender
considers that a Default or an Event of Default has occurred and is continuing,
and such Lender shall specify in detail the nature thereof in writing. Each of
the Administrative Agent and the Issuing Bank shall not be liable hereunder for
any action taken or omitted to be taken except for its own respective gross
negligence or willful misconduct as determined by a final, non-appealable
judicial order of a court of competent jurisdiction. The Administrative Agent
and the Issuing Bank shall provide each Lender with copies of such documents
received from the Borrower as such Lender may reasonably request.
Section 9.7 Action by the Administrative Agent and the Issuing Bank.
(a) Each of the Administrative Agent and the Issuing Bank
shall be entitled to use its discretion with respect to exercising or refraining
from exercising any rights which may be vested in it by, and with respect to
taking or refraining from taking any action or actions which it may be able to
take under or in respect of, this Agreement, unless the Administrative Agent or
the Issuing Bank shall have been instructed by the Required Lenders to exercise
or refrain from exercising such rights or to take or refrain from taking such
action; provided that neither the Administrative Agent nor the Issuing Bank
shall exercise any rights under Section 8.2(a) hereof without the request of the
Required Lenders (or, where expressly required, all of the Lenders) unless time
is of the essence. Each of the Administrative Agent and the Issuing Bank shall
incur no liability under or in respect of this Agreement with respect to
anything which it may do or refrain from doing in the reasonable exercise of its
judgment or which may seem to
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it to be necessary or desirable in the circumstances, except for its own
respective gross negligence or willful misconduct as determined by a final,
non-appealable judicial order of a court having jurisdiction over the subject
matter.
(b) Neither the Administrative Agent nor the Issuing Bank
shall be liable to the Lenders, or to any Lender, or the Borrower or any its
Subsidiaries in acting or refraining from acting under this Agreement or any
other Loan Document in accordance with the instructions of the Required Lenders
(or, where expressly required, all of the Lenders), and any action taken or
failure to act pursuant to such instructions shall be binding on all Lenders,
except for its own respective gross negligence or willful misconduct as
determined by a final, non-appealable judicial order of a court having
jurisdiction over the subject matter. Neither the Administrative Agent nor the
Issuing Bank shall be obligated to take any action which is contrary to law or
which would in such Person's reasonable opinion subject such Person to
liability.
Section 9.8 Notice of Default or Event of Default. In the event that
the Administrative Agent, the Issuing Bank or any Lender shall acquire actual
knowledge, or shall have been notified, of any Default or Event of Default, the
Administrative Agent, the Issuing Bank or such Lender shall promptly notify the
Lenders (provided failure to give such notice shall not result in any liability
on the part of such Lender, the Issuing Bank or Administrative Agent), and the
Administrative Agent and the Issuing Bank shall take such action and assert such
rights under this Agreement and the other Loan Documents as the Required Lenders
shall request in writing, and neither the Administrative Agent nor the Issuing
Bank shall be subject to any liability by reason of its acting pursuant to any
such request. If the Required Lenders shall fail to request the Administrative
Agent and the Issuing Bank to take action or to assert rights under this
Agreement or any other Loan Documents in respect of any Default or Event of
Default within ten (10) days after their receipt of the notice of any Default or
Event of Default from the Administrative Agent, the Issuing Bank or any Lender,
or shall request inconsistent action with respect to such Default or Event of
Default, the Administrative Agent and the Issuing Bank, or either of them, may,
but shall not be required to, take such action and assert such rights (other
than rights under Article 8 hereof) as it deems in their or its respective
discretion to be advisable for the protection of the Lenders, except that, if
the Required Lenders have instructed the Administrative Agent and the Issuing
Bank not to take such action or assert such right, in no event shall the
Administrative Agent and the Issuing Bank act contrary to such instructions
unless time is of the essence.
Section 9.9 Responsibility Disclaimed. The Administrative Agent shall
not be under any liability or responsibility whatsoever as Administrative Agent:
(a) To the Borrower or any other Person as a consequence of
any failure or delay in performance by or any breach by, any Lender or Lenders
of any of its or their obligations under this Agreement;
(b) To any Lender or Lenders, as a consequence of any failure
or delay in performance by, or any breach by, (i) the Borrower of any of its
obligations under this
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Agreement or the Notes or any other Loan Document, or (ii) any Subsidiary of the
Borrower or any other obligor under any other Loan Document;
(c) To any Lender or Lenders, for any statements,
representations or warranties in this Agreement, or any other document
contemplated by this Agreement or any information provided pursuant to this
Agreement, any other Loan Document, or any other document contemplated by this
Agreement, or for the validity, effectiveness, enforceability or sufficiency of
this Agreement, the Notes, any other Loan Document, or any other document
contemplated by this Agreement; or
(d) To any Person for any act or omission other than that
arising from gross negligence or willful misconduct of the Administrative Agent
as determined by a final, non-appealable judicial order of a court of competent
jurisdiction.
Section 9.10 Indemnification. The Lenders agree to indemnify the
Administrative Agent (to the extent not reimbursed by the Borrower) pro rata
according to their respective Commitment Ratios, from and against any and all
liabilities, obligations, losses (other than the loss of principal and interest
hereunder in the event of a bankruptcy or out-of-court `work-out' of the Loans),
damages, penalties, actions, judgments, suits, costs, expenses (including fees
and expenses of experts, agents, consultants and counsel), or disbursements of
any kind or nature whatsoever which may be imposed on, incurred by or asserted
against the Administrative Agent in any way relating to or arising out of this
Agreement, any other Loan Document, or any other document contemplated by this
Agreement or any other Loan Document or any action taken or omitted by the
Administrative Agent under this Agreement, any other Loan Document, or any other
document contemplated by this Agreement, except that no Lender shall be liable
to the Administrative Agent for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses, or
disbursements resulting from the gross negligence or willful misconduct of the
Administrative Agent as determined by a final, non-appealable judicial order of
a court having jurisdiction over the subject matter.
Section 9.11 Credit Decision. Each Lender represents and warrants to
each other and to the Administrative Agent that:
(a) In making its decision to enter into this Agreement and to
make its portion of the Loans, it has independently taken whatever steps it
considers necessary to evaluate the financial condition and affairs of the
Borrower, that it has made an independent credit judgment, and that it has not
relied upon the Administrative Agent or information provided by the
Administrative Agent (other than information provided to the Administrative
Agent by the Borrower and forwarded by the Administrative Agent to the Lenders);
and
(b) So long as any portion of the Loans remains outstanding or
such Lender has an obligation to make its portion of Advances hereunder, it will
continue to make its own independent evaluation of the financial condition and
affairs of the Borrower.
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Section 9.12 Successor Administrative Agent. Subject to the
appointment and acceptance of a successor Administrative Agent as provided
below, the Administrative Agent may resign at any time by giving written notice
thereof to the Lenders and the Borrower and may be removed at any time for cause
by the Required Lenders. Upon any such resignation or removal, the Required
Lenders shall have the right to appoint a successor Administrative Agent which
appointment shall, prior to a Default, be subject to the consent of the
Borrower, acting reasonably. If (a) no successor Administrative Agent shall have
been so appointed by the Required Lenders or (b) if appointed, no successor
Administrative Agent shall have accepted such appointment within thirty (30)
days after the retiring Administrative Agent gave notice of resignation or the
Required Lenders removed the retiring Administrative Agent, then the retiring
Administrative Agent may, on behalf of the Lenders, appoint a successor
Administrative Agent which shall be any Lender or a commercial bank organized
under the laws of the United States or any political subdivision thereof which
has combined capital and reserves in excess of $250,000,000.00 and which shall
be reasonably acceptable to the Borrower. Upon the acceptance of any appointment
as Administrative Agent hereunder by a successor Administrative Agent such
successor Administrative Agent shall thereupon succeed to and become vested with
all the rights, powers, privileges, duties and obligations of the retiring
Administrative Agent and the retiring Administrative Agent shall be discharged
from its duties and obligations hereunder and under the other Loan Documents.
After any retiring Administrative Agent's resignation or removal hereunder as
Administrative Agent the provisions of this Article 9 shall continue in effect
for its benefit in respect of any actions taken or omitted to be taken by it
while it was acting as the Administrative Agent. In the event that the
Administrative Agent or any of its respective affiliates ceases to be a Lender
hereunder, such Person shall resign its agency hereunder.
Section 9.13 Delegation of Duties. The Administrative Agent may
execute any of its duties under the Loan Documents by or through agents or
attorneys selected by it using reasonable care, and shall be entitled to advice
of counsel concerning all matters pertaining to such duties.
Section 9.14 Lead Arranger and Book Manager, Syndication Agent;
Documentation Agent. Each of the Lead Arranger and Book Manager, the Syndication
Agent and the Documentation Agent in its capacity as Lead Arranger and Book
Manager, Syndication Agent and Documentation Agent, respectively, shall have no
duties or responsibilities under this Agreement or any other Loan Document.
ARTICLE 10
Change in Circumstances Affecting LIBOR Advances
Section 10.1 LIBOR Basis Determination Inadequate or Unfair. If with
respect to any proposed LIBOR Advance for any Interest Period, the
Administrative Agent determines after consultation with the Lenders that
deposits in dollars (in the applicable amount) are not being offered to each of
the Lenders in the relevant market for such Interest Period, the Administrative
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Agent shall forthwith give notice thereof to the Borrower and the Lenders,
whereupon until the Administrative Agent notifies the Borrower that the
circumstances giving rise to such situation no longer exist, the obligations of
any affected Lender to make its portion of such LIBOR Advances shall be
suspended.
Section 10.2 Illegality. If after the date hereof, the adoption of any
Applicable Law, or any change in any Applicable Law (whether adopted before or
after the Agreement Date), or any change in interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by any Lender
with any directive (whether or not having the force of law) of any such
authority, central bank or comparable agency, shall make it unlawful or
impossible for any Lender to make, maintain or fund its portion of LIBOR
Advances, such Lender shall so notify the Administrative Agent, and the
Administrative Agent shall forthwith give notice thereof to the other Lenders
and the Borrower. Before giving any notice to the Administrative Agent pursuant
to this Section 10.2, such Lender shall designate a different lending office if
such designation will avoid the need for giving such notice and will not, in the
sole reasonable judgment of such Lender, be otherwise materially disadvantageous
to such Lender. Upon receipt of such notice, notwithstanding anything contained
in Article 2 hereof, the Borrower shall repay in full the then outstanding
principal amount of such Lender's portion of each affected LIBOR Advance,
together with accrued interest thereon, on either (a) the last day of the then
current Interest Period applicable to such affected LIBOR Advances if such
Lender may lawfully continue to maintain and fund its portion of such LIBOR
Advance to such day or (b) immediately if such Lender may not lawfully continue
to fund and maintain its portion of such affected LIBOR Advances to such day.
Concurrently with repaying such portion of each affected LIBOR Advance, the
Borrower may borrow a Base Rate Advance from such Lender, whether or not it
would have been entitled to effect such borrowing and such Lender shall make
such Advance, if so requested, in an amount such that the outstanding principal
amount of the affected Note held by such Lender shall equal the outstanding
principal amount of such Note or Notes immediately prior to such repayment.
Section 10.3 Increased Costs.
(a) If after the date hereof, the adoption of any Applicable
Law, or any change in any Applicable Law (whether adopted before or after the
Agreement Date), or any interpretation or change in interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof or compliance
by any Lender with any directive (whether or not having the force of law) of any
such authority, central bank or comparable agency:
(1) shall subject any Lender to any tax, duty or
other charge with respect to its obligation to make its portion of
LIBOR Advances, or its portion of existing Advances, or shall change
the basis of taxation of payments to any Lender of the principal of or
interest on its portion of LIBOR Advances or in respect of any other
amounts due under this Agreement, in respect of its portion of LIBOR
Advances or its
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obligation to make its portion of LIBOR Advances (except for changes in
the rate or method of calculation of tax on the revenues or net income
of such Lender); or
(2) shall impose, modify or deem applicable any
reserve (including, without limitation, any imposed by the Board of
Governors of the Federal Reserve System, but excluding any included in
an applicable Eurodollar Reserve Percentage), special deposit, capital
adequacy, assessment or other requirement or condition against assets
of, deposits with or for the account of, or commitments or credit
extended by, any Lender or shall impose on any Lender or the London
interbank borrowing market any other condition affecting its obligation
to make its portion of such LIBOR Advances or its portion of existing
Advances;
and the result of any of the foregoing is to increase the cost to such Lender of
making or maintaining any of its portion of LIBOR Advances, or to reduce the
amount of any sum received or receivable by such Lender under this Agreement or
under its Note with respect thereto, then, within ten (10) days after demand by
such Lender, the Borrower agrees to pay to such Lender such additional amount or
amounts as will compensate such Lender for such increased costs. Each Lender
will promptly notify the Borrower and the Administrative Agent of any event of
which it has knowledge, occurring after the date hereof, which will entitle such
Lender to compensation pursuant to this Section 10.3 and will designate a
different lending office if such designation will avoid the need for, or reduce
the amount of, such compensation and will not, in the sole reasonable judgment
of such Lender made in good faith, be otherwise disadvantageous to such Lender.
(b) Any Lender claiming compensation under this Section 10.3
shall provide the Borrower with a written certificate setting forth the
additional amount or amounts to be paid to it hereunder and calculations
therefor in reasonable detail. Such certificate shall be presumptively correct
absent manifest error. In determining such amount, such Lender may use any
reasonable averaging and attribution methods. If any Lender demands compensation
under this Section 10.3, the Borrower may at any time, upon at least five (5)
Business Days' prior notice to such Lender, prepay in full such Lender's portion
of the then outstanding LIBOR Advances, together with accrued interest thereon
to the date of prepayment, along with any reimbursement required under Section
2.10 hereof. Concurrently with prepaying such portion of LIBOR Advances the
Borrower may, whether or not then entitled to make such borrowing, borrow a Base
Rate Advance, or a LIBOR Advance not so affected, from such Lender, and such
Lender shall, if so requested, make such Advance in an amount such that the
outstanding principal amount of the affected Note or Notes held by such Lender
shall equal the outstanding principal amount of such Note or Notes immediately
prior to such prepayment.
Section 10.4 Effect On Other Advances. If notice has been given
pursuant to Section 10.1, 10.2 or 10.3 hereof suspending the obligation of any
Lender to make its portion of any type of LIBOR Advance, or requiring such
Lender's portion of LIBOR Advances to be repaid or prepaid, then, unless and
until such Lender notifies the Borrower that the circumstances giving rise to
such repayment no longer apply, all amounts which would otherwise be made by
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such Lender as its portion of LIBOR Advances shall, unless otherwise notified by
the Borrower, be made instead as Base Rate Advances.
ARTICLE 11
Miscellaneous
Section 11.1 Notices.
(a) Except as otherwise expressly provided herein, all notices
and other communications under this Agreement and the other Loan Documents
(unless otherwise specifically stated therein) shall be in writing and shall be
deemed to have been given three (3) Business Days after deposit in the mail,
designated as certified mail, return receipt requested, postage-prepaid, or one
(1) Business Day after being entrusted to a reputable commercial overnight
delivery service for next day delivery, or when sent on a Business Day prior to
5:00 p.m. (Atlanta, Georgia time) by telecopy addressed to the party to which
such notice is directed at its address determined as provided in this Section
11.1. All notices and other communications under this Agreement shall be given
to the parties hereto at the following addresses:
(i) If to the Borrower, to it at:
Gray Communications Systems, Inc.
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319
Attention: James C. Ryan
Telecopy: (404) 261-9607
with a copy to:
Heyman & Sizemore
2300 International Tower
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Neal H. Ray, Esq.
Telecopy: (404) 521-2838
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(ii) If to the Administrative Agent, to it at:
Bank of America, N.A.
Agency Services
NC1-001-15-04
Independence Center
101 North Tryon Street
Charlotte, North Carolina 28255
Attention: Angela Berry
Telecopy: (704) 386-9923
with a copy to:
Bank of America, N.A.
Financial Strategies Group
600 Peachtree Street, N.E., 19th Floor
Atlanta, Georgia 30308
Attention: Scott Reed and David Jackson
Telecopy: (404) 607-6343 (Reed)
(404) 607-6323 (Jackson)
and with a copy to:
Powell, Goldstein, Frazer & Murphy LLP
Sixteenth Floor
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attn: Cindy A. Brazell, Esq.
Telecopy: (404) 572-6999
(iii) If to the Lenders, to them at the addresses set
forth on Schedule 1 hereto.
The failure to provide copies shall not affect the validity of the notice given
to the primary recipient.
(b) Any party hereto may change the address to which notices
shall be directed under this Section 11.1 by giving ten (10) days' written
notice of such change to the other parties.
Section 11.2 Expenses. The Borrower will promptly pay, or reimburse:
(a) all reasonable out-of-pocket expenses of the
Administrative Agent in connection with the preparation, negotiation, execution
and delivery of this Agreement and the other Loan Documents, and the
transactions contemplated hereunder and thereunder and the
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making of the initial Advance hereunder (whether or not such Advance is made),
including, but not limited to, the reasonable fees and disbursements of Powell,
Goldstein, Frazer & Murphy LLP, special counsel for the Administrative Agent;
and
(b) all reasonable out-of-pocket costs and expenses of the
Administrative Agent and the Lenders of enforcement under this Agreement or the
other Loan Documents and all reasonable out-of-pocket costs and expenses of
collection if an Event of Default occurs in the payment of the Notes, which in
each case shall include reasonable fees and out-of-pocket expenses of counsel
for the Administrative Agent and the Lenders.
Section 11.3 Waivers. The rights and remedies of the Administrative
Agent and the Lenders under this Agreement and the other Loan Documents shall be
cumulative and not exclusive of any rights or remedies which they would
otherwise have. No failure or delay by the Administrative Agent, the Required
Lenders, or the Lenders, or any of them, in exercising any right, shall operate
as a waiver of such right. The Administrative Agent and the Lenders expressly
reserve the right to require strict compliance with the terms of this Agreement
in connection with any future funding of a Request for Advance. In the event the
Lenders decide to fund a Request for Advance at a time when the Borrower is not
in strict compliance with the terms of this Agreement, such decision by the
Lenders shall not be deemed to constitute an undertaking by the Lenders to fund
any further Request for Advance or preclude the Lenders or the Administrative
Agent from exercising any rights available under the Loan Documents or at law or
equity. Any waiver or indulgence granted by the Administrative Agent, the
Lenders, or the Required Lenders, shall not constitute a modification of this
Agreement or any other Loan Document, except to the extent expressly provided in
such waiver or indulgence, or constitute a course of dealing at variance with
the terms of this Agreement or any other Loan Document such as to require
further notice of their intent to require strict adherence to the terms of this
Agreement or any other Loan Document in the future.
Section 11.4 Set-Off. In addition to any rights now or hereafter
granted under Applicable Law and not by way of limitation of any such rights,
upon the occurrence of an Event of Default and during the continuation thereof,
the Administrative Agent and each of the Lenders are hereby authorized by the
Borrower at any time or from time to time, without notice to the Borrower or to
any other Person, any such notice being hereby expressly waived, to set off and
to appropriate and to apply any and all deposits (general or special, time or
demand, including, but not limited to, Indebtedness evidenced by certificates of
deposit, in each case whether matured or unmatured) and any other Indebtedness
at any time held or owing by any Lender or Administrative Agent, to or for the
credit or the account of the Borrower or any of its Subsidiaries, against and on
account of the obligations and liabilities of the Borrower to the Lenders and
the Administrative Agent, including, without limitation, all Obligations and any
other claims of any nature or description arising out of or connected with this
Agreement, the Notes or any other Loan Document, irrespective of whether (a) any
Lender or Administrative Agent shall have made any demand hereunder or (b) any
Lender or Administrative Agent shall have declared the principal of and interest
on the Loans and other amounts due hereunder to be due and payable as permitted
by Section 8.2 hereof and although such obligations and liabilities or any of
them shall be contingent or unmatured. Upon direction by the Administrative
Agent
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with the consent of all of the Lenders each Lender holding deposits of the
Borrower or any of its Subsidiaries shall exercise its set-off rights as so
directed.
Section 11.5 Assignment.
(a) The Borrower may not assign or transfer any of its rights
or obligations hereunder, under the Notes or under any other Loan Document
without the prior written consent of each Lender.
(b) Each Lender may sell (i) assignments of any amount of its
interest hereunder to any other Lender, or (ii) assignments or participations of
up to one hundred percent (100%) of its interest hereunder to (A) one or more
wholly-owned Affiliates of such Lender (provided that, if such Affiliate is not
a financial institution, such Lender shall be obligated to repurchase such
assignment if such Affiliate is unable to honor its obligations hereunder) or to
an Approved Fund, or (B) any Federal Reserve Bank as collateral security
pursuant to Regulation A of the Board of Governors of the Federal Reserve System
and any Operating Circular issued by such Federal Reserve Bank, provided that no
such assignment shall relieve such Lender of its rights and obligations
hereunder, or (C) in the case of any Lender that is a fund that invests in bank
loans, such Lender may assign or pledge all or any portion of its Loans and
Notes to any trustee for, or any other representative of, holders of obligations
owed or securities issued, by such fund, as security for such obligations or
securities; provided that any foreclosure or similar action by such trustee or
representatives shall be subject to the provisions of this Section 11.5(b)
concerning assignments; and provided, that a copy of any such assignment or
participation is provided to the Administrative Agent prior to, or simultaneous
with, the effectiveness thereof.
(c) Each of the Lenders may at any time enter into assignment
agreements or participations with one or more other banks or other Persons
pursuant to which each Lender may assign or participate its interest under this
Agreement and the other Loan Documents, including, its interest in any
particular Advance or portion thereof, provided, that (1) all assignments (other
than assignments described in clause (b) hereof) shall be in minimum principal
amounts of the lesser of (x) the entire remaining amount of such Lender's Loans
and Commitments, (y) $1,000,000.00 and (z) such other amount as may be agreed to
in writing by the Administrative Agent and Borrower, and (2) all assignments
(other than assignments described in clause (b) hereof) and participations
hereunder shall be subject to the following additional terms and conditions:
(i) No assignment (except assignments permitted in
Section 11.5(b) hereof) shall be sold without the prior consent of the
Administrative Agent and prior to the occurrence and continuation of an
Event of Default, the consent of the Borrower, which consents shall not
be unreasonably withheld or delayed;
(ii) Any Person purchasing a participation or an
assignment of any portion of the Loans from any Lender shall be
required to represent and warrant that its purchase shall not
constitute a "prohibited transaction" (as defined in Section 4.1(m)
hereof);
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(iii) The Borrower, the Lenders, and the Administrative
Agent agree that assignments permitted hereunder (including the
assignment of any Advance or portion thereof) may be made with all
voting rights, and shall be made pursuant to an Assignment and
Assumption Agreement. An administrative fee of $3,500.00 shall be
payable to the Administrative Agent by the assigning Lender at the time
of any assignment under this Section 11.5(c);
(iv) No participation agreement shall confer any rights
under this Agreement or any other Loan Document to any purchaser
thereof, or relieve any issuing Lender from any of its obligations
under this Agreement, and all actions hereunder shall be conducted as
if no such participation had been granted; provided, however, that any
participation agreement may confer on the participant the right to
approve or disapprove decreases in the interest rate, increases in the
principal amount of the Loans participated in by such participant,
decreases in fees, extensions of the Revolving Loan Maturity Date, the
Term Loan A Maturity Date or the Term Loan B Maturity Date, as
applicable, or other principal payment date for the Loans or of the
scheduled reduction of the Revolving Loan Commitment and releases of
Collateral;
(v) Each Lender agrees to provide the Administrative
Agent and the Borrower with prompt written notice of any issuance of
participations in or assignments of its interests hereunder;
(vi) No assignment, participation or other transfer of
any rights hereunder or under the Notes shall be effected that would
result in any interest requiring registration under the Securities Act
of 1933, as amended, or qualification under any state securities law;
(vii) No such assignment may be made to (A) any bank or
other financial institution (excluding funds) unless (1) such bank or
other financial institution either (x) has a minimum capital and
surplus of $500,000,000.00, or (y) is "adequately capitalized" (as such
term is defined in 12 USCA Section 1831(b)(1)(B) as in effect on the
Agreement Date) and (2) a receiver or conservator (including, without
limitation, the Federal Deposit Insurance Corporation, the Resolution
Trust Company or the Office of Thrift Supervision) has not been
appointed with respect to such bank or other financial institution, (B)
any fund unless such fund either (1) invests in commercial loans or (2)
has total assets in excess of $125,000,000.00, or (C) any other Person
unless such Person either (1) is an "accredited investor" (as defined
in Regulation D of the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder) or (2) has total assets
in excess of $100,000,000.00;
(viii) If applicable, each Lender shall, and shall cause
each of its assignees to, provide to the Administrative Agent on or
prior to the effective date of any assignment an appropriate Internal
Revenue Service form as required by Applicable Law supporting such
Lender's or assignee's position that no withholding by the Borrower or
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the Administrative Agent for United States income tax payable by such
Bank or assignee in respect of amounts received by it hereunder is
required. For purposes of this Agreement, an appropriate Internal
Revenue Service form shall mean Form 1001 (Ownership Exemption or
Reduced Rate Certificate of the United States Department of Treasury),
or Form 4224 (Exemption from Withholding of Tax on Income Effectively
Connected with the Conduct of a Trade or Business in the United
States), or any successor or related forms adopted by the relevant
United States taxing authorities; and
(ix) Any Lender making an assignment of its rights and
obligations under the Revolving Loan Commitment shall also make an
assignment of an equal percentage of its outstanding Revolving Loans.
(d) Except as specifically set forth in Section 11.5(b) or (c)
hereof, nothing in this Agreement or the Notes, expressed or implied, is
intended to or shall confer on any Person other than the respective parties
hereto and thereto and their successors and assignees permitted hereunder and
thereunder any benefit or any legal or equitable right, remedy or other claim
under this Agreement or the Notes.
(e) In the case of any participation, all amounts payable by
the Borrower under the Loan Documents shall be calculated and made in the manner
and to the parties hereto as if no such participation had been sold.
(f) The provisions of this Section 11.5 shall not apply to any
purchase of participations among the Lenders pursuant to Section 2.11 hereof.
(g) The Administrative Agent, acting, for this purpose only,
as agent of the Borrower shall maintain, at no extra charge or cost to the
Borrower, a register (the "Register") at the address to which notices to the
Administrative Agent are to be sent under Section 11.1 hereof on which Register
the Administrative Agent shall enter the name, address and taxpayer
identification number (if provided) of the registered owner of the Loans
evidenced by a Registered Note or, upon the request of the registered owner, for
which a Registered Note has been requested. A Registered Note and the Loans
evidenced thereby may be assigned or otherwise transferred in whole or in part
only by registration of such assignment or transfer of such Registered Note and
the Loans evidenced thereby on the Register. Any assignment or transfer of all
or part of such Loans and the Registered Note evidencing the same shall be
registered on the Register only upon compliance with the other provisions of
this Section 11.5 and surrender for registration of assignment or transfer of
the Registered Note evidencing such Loans, duly endorsed by (or accompanied by a
written instrument of assignment or transfer duly executed by) the Registered
Noteholder thereof, and thereupon one or more new Registered Notes in the same
aggregate principal amount shall be issued to the designated assignee(s) or
transferee(s) and, if less than the aggregate principal amount of such
Registered Notes is thereby transferred, the assignor or transferor. Prior to
the due presentment for registration of transfer of any Registered Note, the
Borrower and the Administrative Agent shall treat the Person in whose name such
Loans and the Registered Note evidencing the same is registered as the owner
thereof
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for the purpose of receiving all payments thereon and for all other purposes,
notwithstanding any notice to the contrary.
Section 11.6 Accounting Principles. All references in this Agreement
to GAAP shall be to such principles as in effect from time to time. All
accounting terms used herein without definition shall be used as defined under
GAAP. All references to the financial statements of the Borrower and to its
Total Debt, Senior Debt and Fixed Charges, and other such terms shall be deemed
to refer to such items of the Borrower and its Subsidiaries, on a fully
consolidated basis.
Section 11.7 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but all
such separate counterparts shall together constitute but one and the same
instrument.
Section 11.8 Governing Law. This Agreement and the Notes shall be
construed in accordance with and governed by the internal laws of the State of
Georgia applicable to agreements made and to be performed in Georgia. If any
action or proceeding shall be brought by the Administrative Agent or any Lender
hereunder or under any other Loan Document in order to enforce any right or
remedy under this Agreement or under any Note or any other Loan Document, the
Borrower hereby consents and will, and the Borrower will cause each Subsidiary
to, submit to the jurisdiction of any state or federal court of competent
jurisdiction sitting within the area comprising the Northern District of Georgia
on the date of this Agreement. The Borrower, for itself and on behalf of its
Subsidiaries, hereby agrees that, to the extent permitted by Applicable Law,
service of the summons and complaint and all other process which may be served
in any such suit, action or proceeding may be effected by mailing by registered
mail a copy of such process to the offices of the Borrower at the address given
in Section 11.1 hereof and that personal service of process shall not be
required. Nothing herein shall be construed to prohibit service of process by
any other method permitted by law, or the bringing of any suit, action or
proceeding in any other jurisdiction. The Borrower agrees that final judgment in
such suit, action or proceeding shall be conclusive and may be enforced in any
other jurisdiction by suit on the judgment or in any other manner provided by
Applicable Law.
Section 11.9 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof in that jurisdiction or affecting the validity or
enforceability of such provision in any other jurisdiction.
Section 11.10 Interest.
(a) In no event shall the amount of interest due or payable
hereunder or under the Notes exceed the maximum rate of interest allowed by
Applicable Law, and in the event any such payment is inadvertently made by the
Borrower or inadvertently received by the Administrative Agent or any Lender,
then such excess sum shall be credited as a payment of principal, unless the
Borrower shall notify the Administrative Agent or such Lender, in writing, that
it elects to have such excess sum returned forthwith. It is the express intent
hereof that the Borrower not pay and the Administrative Agent and the Lenders
not receive, directly or
-98-
<PAGE> 105
indirectly in any manner whatsoever, interest in excess of that which may
legally be paid by the Borrower under Applicable Law.
(b) Notwithstanding the use by the Lenders of the Base Rate
and the LIBOR as reference rates for the determination of interest on the Loans,
the Lenders shall be under no obligation to obtain funds from any particular
source in order to charge interest to the Borrower at interest rates related to
such reference rates.
Section 11.11 Table of Contents and Headings. The Table of Contents
and the headings of the various subdivisions used in this Agreement are for
convenience only and shall not in any way modify or amend any of the terms or
provisions hereof, nor be used in connection with the interpretation of any
provision hereof.
Section 11.12 Amendment and Waiver. Any term of this Agreement or of
the Notes may be amended and the observance of any term of this Agreement or of
the Notes may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the written consent of the Borrower
and the Required Lenders or, if there are only two (2) Lenders each of which has
a Commitment Ratio of eighty percent (80%) or less of the Loans, with the
written consent of the Borrower and both Lenders; provided, however, that no
such amendment or waiver or other action shall, without the prior written
consent of all of the Lenders or the holders of all of the Notes at the time
outstanding, (a) extend the maturity or reduce the principal amount of, or
reduce the rate or extend the time of payment of interest on, or reduce the
amount or extend the time of payment of any principal installment of, any Note,
(b) reduce the amount or extend the time of payment of the commitment fees, (c)
change the Commitments or the Commitment Ratio of any Lender (other than any
change in Commitments or Commitment Ratio resulting from the sale of a
participation in or assignment of any Lender's interest in the Commitments and
Loans in accordance with subsection 11.5 or resulting from an increase in
Commitments pursuant to Section 2.16 of the Prior Loan Agreement, which appears
in this Agreement as the Term B Loan Commitment), (d) change the percentage
referred to in the definition of "Required Lenders" or reduce the number of
Lenders required to approve any waiver, amendment or modification, (e) amend
this Section 11.12, (f) amend or waive compliance with Section 2.7(b), (g)
release any collateral or any guaranty for the Loans except in connection with a
sale permitted pursuant to Section 7.4, (h) amend or waive any of the conditions
precedent set forth in Section 3 for the making of the initial Loans on the
Closing Date, or (i) extend the expiration date of any outstanding Letter of
Credit or postpone the reimbursement obligations of the Borrower in respect of
any Letter of Credit or reduce the fees payable by the Borrower in respect of
any Letter of Credit; and provided, further, however, that notwithstanding the
foregoing provisions of this Section 11.12, this Agreement and the Notes may be
amended or modified in the manner contemplated by Section 11.5 for the purpose
of permitting any Lender to assign its interest, rights and obligations
hereunder to another Person if the appropriate assignment agreement or
counterparts thereof are executed by the Borrower (to the extent required), the
Administrative Agent and the appropriate Lender assignor and assignee. Any
amendment or waiver effected in accordance with this Section 11.12 shall be
binding upon each holder of any Note at the time outstanding, each future holder
of any Note and the Borrower.
-99-
<PAGE> 106
Section 11.13 Entire Agreement. Except as otherwise expressly provided
herein, this Agreement and the other documents described or contemplated herein
will embody the entire agreement and understanding among the parties hereto and
thereto and supersede all prior agreements and understandings relating to the
subject matter hereof and thereof.
Section 11.14 Other Relationships. No relationship created hereunder
or under any other Loan Document shall in any way affect the ability of the
Administrative Agent and each Lender to enter into or maintain business
relationships with the Borrower or any of its Affiliates beyond the
relationships specifically contemplated by this Agreement and the other Loan
Documents.
Section 11.15 Directly or Indirectly. If any provision in this
Agreement refers to any action taken or to be taken by any Person, or which such
Person is prohibited from taking, such provision shall be applicable whether
such action is taken directly or indirectly by such Person, whether or not
expressly specified in such provision.
Section 11.16 Reliance on and Survival of Various Provisions. All
covenants, agreements, statements, representations and warranties made herein or
in any certificate delivered pursuant hereto (i) shall be deemed to have been
relied upon by the Administrative Agent and each of the Lenders notwithstanding
any investigation heretofore or hereafter made by them, and (ii) shall survive
the execution and delivery of the Notes and shall continue in full force and
effect so long as any Note is outstanding and unpaid. Any right to
indemnification hereunder, including, without limitation, rights pursuant to
Sections 2.10, 2.12, 2.14, 5.11, 10.3 and 11.2 hereof, shall survive the
termination of this Agreement and the payment and performance of all
Obligations.
Section 11.17 Senior Debt. The Obligations are secured by the Security
Documents and are intended by the parties hereto to be in parity with the
Interest Rate Hedge Agreements and senior in right of payment to all other
Indebtedness of the Borrower.
Section 11.18 Obligations Several. The obligations of the
Administrative Agent and each of the Lenders hereunder are several, not joint.
ARTICLE 12
Waiver of Jury Trial
Section 12.1 Waiver of Jury Trial. THE BORROWER, FOR ITSELF AND ON
BEHALF OF EACH OF ITS SUBSIDIARIES AND THE ADMINISTRATIVE AGENT AND THE LENDERS
HEREBY AGREE, TO THE EXTENT PERMITTED BY LAW, TO WAIVE AND HEREBY WAIVE THE
RIGHT TO A TRIAL BY JURY IN ANY COURT AND IN ANY ACTION OR PROCEEDING OF ANY
TYPE IN WHICH THE BORROWER, ANY OF THE BORROWER'S SUBSIDIARIES, ANY OF THE
LENDERS, THE ADMINISTRATIVE AGENT OR ANY OF THEIR RESPECTIVE SUCCESSORS OR
ASSIGNS IS A PARTY, AS
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<PAGE> 107
TO ALL MATTERS AND THINGS ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT,
ANY OF THE NOTES OR THE OTHER LOAN DOCUMENTS AND THE RELATIONS AMONG THE PARTIES
LISTED IN THIS SECTION 12.1. EXCEPT AS PROHIBITED BY LAW, EACH PARTY TO THIS
AGREEMENT WAIVES ANY RIGHTS IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION
REFERRED TO IN THIS SECTION, ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH PARTY
TO THIS AGREEMENT (i) CERTIFIES THAT NEITHER ANY REPRESENTATIVE, AGENT OR
ATTORNEY OF THE ADMINISTRATIVE AGENT OR ANY LENDER HAS REPRESENTED, EXPRESSLY OR
OTHERWISE, THAT THE ADMINISTRATIVE AGENT OR ANY LENDER WOULD NOT, IN THE EVENT
OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (ii) ACKNOWLEDGES THAT
IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND EACH OTHER LOAN DOCUMENT
BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
THE PROVISIONS OF THIS SECTION HAVE BEEN FULLY DISCLOSED BY AND TO THE PARTIES
AND THE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN ANY WAY
AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS
SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
[Remainder of Page Intentionally Left Blank]
-101-
<PAGE> 108
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused it to be executed by their duly authorized officers, all as of the day
and year first above written.
BORROWER: GRAY COMMUNICATIONS SYSTEMS, INC.
By: /s/ JAMES C. RYAN
--------------------------------
Name: JAMES C. RYAN
---------------------
Title: V.P. - C.F.O.
--------------------
ADMINISTRATIVE AGENT, BANK OF AMERICA, N.A., as Administrative
DOCUMENTATION AGENT, Agent and as a Lender
SYNDICATION AGENT
AND LENDERS:
By: /s/ DAVID B. JACKSON
--------------------------------
Name: DAVID B. JACKSON
---------------------
Title: SENIOR VICE PRES.
--------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 1
<PAGE> 109
KEY CORPORATE CAPITAL INC., as Documentation
Agent and as a Lender
By: /s/ KENNETH J. KEELER
--------------------------------
Name: KENNETH J. KEELER
---------------------
Title: SENIOR VICE PRES.
--------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 2
<PAGE> 110
FIRST UNION NATIONAL BANK, as Syndication
Agent and as a Lender
By: /s/ JEFFREY M. GRACI
--------------------------------
Name: JEFFREY M. GRACI
---------------------
Title: VICE PRESIDENT
--------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 3
<PAGE> 111
BANK AUSTRIA CREDITANSTALT CORPORATE
FINANCE, INC., as a Lender
By: /s/ CARL G. DRAKE
------------------------------------
Name: CARL G. DRAKE
-------------------------
Title: VICE PRESIDENT
------------------------
By: /s/ WILLIAM E. McCOLLUM, JR.
------------------------------------
Name: WILLIAM E. McCOLLUM, JR.
-------------------------
Title: SR. ASSOCIATE
------------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 4
<PAGE> 112
THE BANK OF NEW YORK COMPANY, INC., as a
Lender
By: /s/ EDWARD F. RYAN, JR.
----------------------------------
Name: EDWARD F. RYAN, JR.
-----------------------
Title: SENIOR VICE PRES.
----------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 5
<PAGE> 113
THE BANK OF NOVA SCOTIA, as a Lender
By: /s/ VINCENT J. FITZGERALD, JR.
--------------------------------------
Name: VINCENT J. FITZGERALD, JR.
---------------------------
Title: AUTHORIZED SIGNATORY
--------------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 6
<PAGE> 114
THE BANK OF TOKYO-MITSUBISHI TRUST COMPANY,
as a Lender
By: /s/ GLENN B. ECKERT
--------------------------------
Name: GLENN B. ECKERT
---------------------
Title: VICE PRESIDENT
--------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 7
<PAGE> 115
CANADIAN IMPERIAL BANK OF COMMERCE, as a
Lender
By: /s/ MICHELE E. ROLLER
--------------------------------------
Name: MICHELE E. ROLLER
---------------------------
Title: EXECUTIVE DIRECTOR
CIBC WORLD MARKETS CORP.
AS AGENT
--------------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 8
<PAGE> 116
THE CIT GROUP/EQUIPMENT FINANCING, INC., as
a Lender
By: /s/ J.E. PALMER
---------------------------------
Name: J.E. PALMER
----------------------
Title: ASSISTANT VICE PRES.
---------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 9
<PAGE> 117
COOPERATIEVE CENTRALE
RAIFFEINSEN-BOERENLEENBANK B.A., "RABOBANK
NEDERLAND", NEW YORK BRANCH, as a Lender
By: /s/ MICHIEL V.M. VAN DER VOORT
--------------------------------------
Name: MICHIEL V.M. VAN DER VOORT
---------------------------
Title: VICE PRESIDENT
--------------------------
By: /s/ PIETER KODDE
--------------------------------------
Name: PIETER KODDE
---------------------------
Title: SENIOR VICE PRES.
--------------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 10
<PAGE> 118
FREMONT INVESTMENT & LOAN, as a Lender
By: /s/ KANNIKA VIRAVAN
--------------------------------
Name: KANNIKA VIRAVAN
---------------------
Title: VICE PRESIDENT
--------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 11
<PAGE> 119
HELLER FINANCIAL, INC., as a Lender
By: /s/ ROBERT M. REEG
-------------------------------
Name: ROBERT M. REEG
--------------------
Title: ASST. VICE PRES.
-------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 12
<PAGE> 120
[THIS PAGE INTENTIONALLY LEFT BLANK]
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 13
<PAGE> 121
MERRILL LYNCH SENIOR FLOATING RATE FUND II,
INC., as a Lender
By: /S/ JOSEPH MATTEO
-------------------------------
Name: JOSEPH MATTEO
--------------------
Title: AUTHORIZE SIGNATORY
--------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 14
<PAGE> 122
MORGAN STANLEY DEAN WITTER PRIME INCOME
TRUST, as a Lender
By: /S/ PETER GEWIRTZ
--------------------------------
Name: PETER GEWERTZ
---------------------
Title: AUTHORIZED SIGNATORY
--------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 15
<PAGE> 123
[THIS PAGE INTENTIONALLY LEFT BLANK]
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 16
<PAGE> 124
PPM SPYGLASS FUNDING TRUST, as a Lender
By: /s/ KELLY C. WALKER
--------------------------------
Name: KELLY C. WALKER
---------------------
Title: AUTHORIZED AGENT
--------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 17
<PAGE> 125
SUNTRUST BANK, CENTRAL FLORIDA, N.A., as a
Lender
By: /s/ W. DAVID WISDOM
--------------------------------
Name: W. DAVID WISDOM
---------------------
Title: VICE PRESIDENT
--------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 18
<PAGE> 126
TORONTO DOMINION (TEXAS), INC., as a Lender
By: /s/ ALVA J. JONES
--------------------------------
Name: ALVA J. JONES
---------------------
Title: VICE PRESIDENT
--------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 19
<PAGE> 127
WACHOVIA BANK, N.A., as a Lender
By: /s/ TERA C. COX
---------------------------------
Name: TERA C. COX
----------------------
Title: ASSISTANT VICE PRES.
---------------------
GRAY COMMUNICATIONS SYSTEMS, INC.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Signature Page 20
<PAGE> 1
EXHIBIT 99.2
GRAY COMMUNICATIONS SYSTEMS, INC.
4370 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30319
YOUR VOTE IS VERY IMPORTANT
At the annual meeting, shareholders will consider and vote upon a proposal
relating to the approval of the issuance of shares of Gray's class B common
stock in connection with the proposed acquisition by Gray of three television
stations. Gray class B common stock is listed on The New York Stock Exchange
under the symbol "GCS.B."
At the annual meeting, shareholders will also elect directors and consider
and vote upon proposals to amend the 1992 Long Term Incentive Plan to increase
the number of shares issuable thereunder and confirm the appointment of the
independent auditors and consider and act upon such other business as may
properly come before the meeting.
This proxy statement/prospectus provides shareholders with detailed
information about the matters to be considered at the annual meeting.
Shareholders are encouraged to read this entire document carefully.
The board of directors believes that the matters to be presented at the
annual meeting are in the best interests of Gray and its shareholders.
Therefore, the board of directors urges shareholders to vote in favor of each of
the proposals to be presented at the annual meeting.
J. Mack Robinson
President and Chief Executive
Officer
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 8 OF THIS
PROXY STATEMENT/ PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. A REGISTRATION STATEMENT RELATING TO THE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES MAY NOT BE SOLD
UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE. THIS PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES AND IT IS NOT SOLICITING
AN OFFER TO BUY SECURITIES IN ANY STATE WHERE OFFERS OR SALES ARE NOT PERMITTED.
PROXY STATEMENT/PROSPECTUS DATED AUGUST 16, 1999
AND FIRST MAILED TO SHAREHOLDERS ON OR ABOUT AUGUST 23, 1999
<PAGE> 2
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
<TABLE>
<S> <C>
Time: 9:30 a.m., local time
Date: September 23, 1999
Place: The Peachtree Insurance Center
The Executive Board Room, 5th Floor
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319
Purpose:
</TABLE>
- to consider and vote upon a proposal to approve the issuance of
shares of Gray class B common stock in connection with certain proposed
acquisitions;
- to elect nine directors;
- to consider and vote upon a proposal to approve the amendment of the
1992 Long Term Incentive Plan to increase the number of shares of Gray
class B common stock issuable thereunder;
- to consider and vote upon a proposal to confirm the appointment of
Ernst & Young LLP as the independent auditors; and
- to consider and act upon such other business and matters or
proposals as may properly come before the meeting.
The board of directors has fixed the close of business on August 13, 1999
as the record date for determining the holders of Gray class A common stock and
class B common stock having the right to receive notice of, and to vote at, the
meeting. Only holders of record of Gray class A common stock and class B common
stock at the close of business on such date are entitled to notice of, and to
vote at, the meeting.
Your vote is very important. We encourage you to vote as soon as possible
by one of three convenient methods: by calling the toll-free number listed on
the form of proxy, by accessing the Internet site listed on the form of proxy or
by signing, dating and returning the form of proxy in the enclosed postage-paid
envelope.
By Order of the Board of Directors,
J. Mack Robinson
President and Chief Executive
Officer
Atlanta, Georgia
August 23, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
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<S> <C>
SUMMARY.................................. 1
Shareholders Meeting................... 1
Votes Required and Recommendation of
the Board of Directors............... 1
The Proposed Acquisitions.............. 2
Summary of the Acquisitions.......... 2
The Parties to the Acquisition
Agreements........................ 2
Consideration to be paid by Gray in
the KWTX and Brazos
Acquisitions...................... 3
Consideration to be paid by Gray in
the KXII Acquisition.............. 4
Conditions to the Obligation of the
Parties to Complete the
Acquisitions...................... 4
Conditions to the Obligation of Gray
to Complete the Acquisitions...... 5
Circumstances where the Parties can
Terminate the Acquisition
Agreements........................ 5
Regulatory Matters................... 5
Material Federal Income Tax
Consequences of the
Acquisitions...................... 6
Gray's Accounting Treatment of the
Acquisitions...................... 6
Market Price Information............. 6
Unaudited Comparative Per Share
Data.............................. 6
RISK FACTORS............................. 8
Risks Relating to Gray's Current
Businesses........................... 8
Risks Relating to KWTX, Brazos, KXII
and the Acquisitions................. 9
THE SHAREHOLDERS MEETING................. 10
Purpose of the Meeting................. 10
Required Votes......................... 11
Record Date and Voting Rights.......... 11
Voting and Revocation of Proxies....... 12
PROPOSAL 1: APPROVAL OF THE ISSUANCE OF
SHARES OF CLASS B COMMON STOCK IN THE
ACQUISITIONS........................... 12
Recommendation of the Gray Board of
Directors and Reasons for the
Recommendation....................... 12
Reasons of KWTX, Brazos and KXII for
Recommending the Acquisitions........ 13
Background of the Acquisitions......... 14
Interests of Certain Persons in the
Acquisitions......................... 15
The Acquisition Agreements............. 15
</TABLE>
<TABLE>
<CAPTION>
PAGE
NO.
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<S> <C>
Material Federal Income Tax
Consequences......................... 21
Accounting Treatment................... 26
Regulatory Matters..................... 26
Financing of the Acquisitions.......... 26
Resale of Gray Class B Common Stock
Following the Acquisitions........... 28
Shareholders' Agreements............... 28
No Appraisal Rights Available to Gray
Shareholders......................... 28
SELECTED FINANCIAL INFORMATION OF GRAY... 29
SELECTED FINANCIAL INFORMATION OF KWTX... 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF KWTX..................... 33
Introduction........................... 33
Broadcasting Revenues.................. 34
Six Months Ended June 30, 1999 Compared
to Six Months Ended June 30, 1998.... 34
Year Ended December 31, 1998 Compared
to Year Ended December 31, 1997...... 35
Year Ended December 31, 1997 Compared
to Year Ended December 31, 1996...... 35
Liquidity and Capital Resources........ 36
Year 2000 Issue........................ 37
SELECTED FINANCIAL INFORMATION OF
BRAZOS................................. 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BRAZOS................... 40
Introduction........................... 40
Broadcasting Revenues.................. 41
Six Months Ended June 30, 1999 Compared
to Six Months Ended June 30, 1998.... 41
Year Ended December 31, 1998 Compared
to Year Ended December 31, 1997...... 42
Year Ended December 31, 1997 Compared
to Year Ended December 31, 1996...... 42
Liquidity and Capital Resources........ 43
Year 2000 Issue........................ 43
SELECTED COMBINED FINANCIAL INFORMATION
OF KXII................................ 45
</TABLE>
i
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
NO.
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<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF KXII..................... 46
Introduction........................... 46
Broadcasting Revenues.................. 47
Six Months Ended June 30, 1999 Compared
to Six Months Ended June 30, 1998.... 47
Year Ended December 31, 1998 Compared
to Year Ended December 31, 1997...... 47
Year Ended December 31, 1997 Compared
to Year Ended December 31, 1996...... 48
Liquidity and Capital Resources........ 48
Year 2000 Issue........................ 48
PRO FORMA CONDENSED COMBINED FINANCIAL
DATA................................... 50
GENERAL BACKGROUND INFORMATION RELATING
TO THE TELEVISION BROADCAST INDUSTRY... 63
Revenues............................... 63
Market Designations and Audience Rating
Information.......................... 63
Network Affiliations and Other
Programming Information.............. 63
Competition............................ 64
Federal Regulation of Television
Broadcasting......................... 65
INFORMATION CONCERNING KWTX.............. 69
General................................ 69
Market Information..................... 69
Employees.............................. 70
Network Affiliation Agreement.......... 70
FCC License............................ 70
Digital Television (High Definition
Television).......................... 70
Primary Properties..................... 71
Share Ownership........................ 71
INFORMATION CONCERNING BRAZOS............ 72
General................................ 72
Market Information..................... 72
Employees.............................. 73
Network Affiliation Agreement.......... 73
FCC License............................ 73
Digital Television (High Definition
Television).......................... 73
Primary Properties..................... 74
Share Ownership........................ 74
</TABLE>
<TABLE>
<CAPTION>
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NO.
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<S> <C>
INFORMATION CONCERNING KXII.............. 75
General................................ 75
Market Information..................... 75
Employees.............................. 76
Network Affiliation Agreement.......... 76
FCC License............................ 76
Digital Television (High Definition
Television).......................... 76
Primary Properties..................... 76
Equity Ownership....................... 77
COMPARISON OF THE SHAREHOLDERS' RIGHTS,
ARTICLES OF INCORPORATION AND BYLAWS OF
GRAY, KWTX AND BRAZOS.................. 78
General................................ 78
Authorized Capital Stock............... 78
Directors.............................. 79
Removal of Directors................... 79
Special Meetings of Shareholders....... 79
Amendment of Bylaws.................... 80
Amendments to the Articles of
Incorporation........................ 80
Dividends, Redemptions and
Repurchases.......................... 80
Transactions with Interested
Directors............................ 81
Indemnification........................ 81
Appraisal Rights....................... 82
PROPOSAL 2: ELECTION OF DIRECTORS........ 84
Nominees............................... 84
Compliance with Section 16(a) of the
Securities Exchange Act of 1934...... 86
Board Committees and Membership........ 86
Share Ownership........................ 87
Executive Compensation................. 90
Stock Options Granted.................. 92
Stock Options Exercised................ 94
Supplemental Pension Plan.............. 94
Retirement Plan........................ 94
Capital Accumulation Plan.............. 95
Compensation of Directors.............. 96
Employment Agreements.................. 96
Compensation Committee Interlocks and
Insider Participation................ 97
Report of the Management Personnel
Committee............................ 98
Certain Relationships and Related
Transactions......................... 99
Performance Graph...................... 100
</TABLE>
ii
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
NO.
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<S> <C>
PROPOSAL 3: AMENDMENT OF THE GRAY 1992
LONG TERM INCENTIVE PLAN............... 102
Vote Required and Board
Recommendation....................... 107
PROPOSAL 4: CONFIRMATION OF APPOINTMENT
OF AUDITORS............................ 108
EXPERTS.................................. 108
LEGAL MATTERS............................ 108
</TABLE>
<TABLE>
<CAPTION>
PAGE
NO.
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<S> <C>
SHAREHOLDER PROPOSALS.................... 108
WHERE TO FIND ADDITIONAL INFORMATION..... 109
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE.............................. 109
FORWARD-LOOKING STATEMENTS............... 110
INDEX TO FINANCIAL STATEMENTS............ F-1
</TABLE>
-------------------------
<TABLE>
<S> <C>
Appendix A Agreement and Plan of Merger, dated as of April 13, 1999, by
and among Gray Communications Systems, Inc., Gray
Communications of Texas, Inc. and KWTX Broadcasting Company
Appendix B Agreement and Plan of Merger, dated as of April 13, 1999, by
and among Gray Communications Systems, Inc., Gray
Communications of Texas, Inc. and Brazos Broadcasting Co.
Appendix C Asset Purchase Agreement, dated as of April 26, 1999, by and
among Gray Communications Systems, Inc., Gray Communications
of Texas-Sherman, Inc., KXII Licensee Corp., KXII
Broadcasters, Ltd., KXII Television, Ltd., K-Twelve, Ltd.,
KBI 1, Inc., KBI 2, Inc., KXII Properties, Inc., and the
Shareholders of KXII Properties, Inc.
</TABLE>
iii
<PAGE> 6
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand better the matters to be considered at the
shareholders meeting and for a more complete description of the legal terms of
the proposed acquisitions and related transactions, you should read carefully
this entire document and the documents to which you are referred. See "Where To
Find Additional Information" on page 109.
SHAREHOLDERS MEETING (SEE PAGE 10)
The annual meeting of shareholders of Gray will be held at 9:30 a.m., local
time, on September 23, 1999, at The Peachtree Insurance Center, The Executive
Board Room, 5th Floor, 4370 Peachtree Rd., N.E., Atlanta, Georgia 30319. At the
meeting, holders of Gray class A common stock and class B common stock will
consider and vote upon:
- a proposal to approve the issuance of shares of Gray class B common stock
in connection with certain proposed acquisitions (see page 12);
- the election of directors (see page 84);
- a proposal to amend the 1992 Long Term Incentive Plan to increase by
1,000,000 shares the number of shares of Gray class B common stock
issuable thereunder (see page 102);
- a proposal to confirm the appointment of Ernst & Young LLP as the
independent auditors (see page 108); and
- any other matters that may properly come before the meeting.
VOTES REQUIRED AND RECOMMENDATION OF THE BOARD OF DIRECTORS
Approval of the issuance of shares of Gray class B common stock in
connection with the proposed acquisitions, the amendment of the 1992 Long Term
Incentive Plan and the confirmation of Ernst & Young LLP as the independent
auditors requires the affirmative vote of the holders of a majority of the votes
represented by the shares of Gray class A common stock and class B common stock,
voting together as a single class, present in person or represented by proxy at
the meeting and entitled to vote on the proposal. Election of directors requires
a plurality of votes cast by holders of shares of Gray class A common stock and
class B common stock, voting together as a single class. Gray's board of
directors believes that the foregoing proposals are in the best interests of its
shareholders and recommends that shareholders vote "FOR" each of these proposals
and "FOR" the election of those directors specified in this proxy
statement/prospectus.
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THE PROPOSED ACQUISITIONS
The agreements relating to Gray's proposed acquisitions are attached as
Appendices A, B and C to this proxy statement/prospectus. Shareholders should
read these agreements, because they are the legal documents which govern these
acquisitions.
SUMMARY OF THE ACQUISITIONS
Gray is a party to two merger agreements and an asset purchase agreement
that provide for the acquisition by Gray of three network-affiliated television
stations in Texas for a combination of cash and Gray class B common stock.
THE PARTIES TO THE ACQUISITION AGREEMENTS
Gray Communications Systems, Inc.
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319
(404) 504-9828
Gray Communications Systems, Inc. operates 10 television stations located
in the Southeast and Midwest; three of which are NBC affiliates and seven of
which are CBS affiliates; four daily newspapers (one in Albany, Georgia, two in
suburban Atlanta, Georgia, and one in Goshen, Indiana); a weekly advertising
shopper in southwest Georgia; a communications and paging business in the
Southeast and one of the largest fleets of satellite uplink trucks in the
Southeast.
KWTX Broadcasting Company
200 West Highway 6
Suite 210
Waco, Texas 76712
KWTX operates television station KWTX, a CBS affiliate located in Waco,
Texas, which is part of the Waco-Temple-Bryan television market, the 95th
largest television market in the United States.
Brazos Broadcasting Co.
200 West Highway 6
Suite 210
Waco, Texas 76712
Brazos operates television station KBTX, a CBS affiliated satellite station
of KWTX located in Bryan, Texas, which is part of the Waco-Temple-Bryan
television market, the 95th largest television market in the United States. As a
satellite station, KBTX rebroadcasts substantial amounts of network and
syndicated programming from its parent station, KWTX.
KXII Broadcasters, Ltd. and affiliates
4201 Texoma Parkway
Sherman, Texas 75090
KXII operates television station KXII, a CBS affiliate located in Sherman,
Texas, which is part of the Sherman, Texas-Ada, Oklahoma television market, the
161st largest television market in the United States.
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<PAGE> 8
CONSIDERATION TO BE PAID BY GRAY IN THE KWTX AND BRAZOS ACQUISITIONS (SEE PAGE
16)
The KWTX acquisition agreement provides that the KWTX shareholders will
receive in exchange for each share of KWTX stock each shareholder holds: cash
and Gray class B common stock equal to the sum of (1) $74,680,000, (2) the
amount by which the current assets and certain other assets of KWTX exceed its
current liabilities and (3) 50% of the amount by which the current assets and
certain other assets of Brazos exceed its current liabilities divided by (4)
1,550 (the number of outstanding shares of KWTX common stock). In general and
subject to the election of Gray to pay all of the acquisition consideration in
cash and the limitations discussed below, each holder will have the right to
elect the percentage of the consideration to be received in cash and the
percentage to be received in Gray class B common stock, provided that each KWTX
shareholder must take at least 40% of the total consideration in stock.
The Brazos acquisition agreement provides that the Brazos shareholders
(other than KWTX) will receive in exchange for each share of Brazos stock each
shareholder holds: cash and Gray class B common stock equal to the sum of (1)
$22,820,000 and (2) 50% of the amount by which the current assets and certain
other assets of Brazos exceed its current liabilities divided by (3) 250 (the
number of outstanding shares of Brazos common stock not held by KWTX). In
general and subject to the election of Gray to pay all of the acquisition
consideration in cash and the limitations discussed below, each holder will have
the right to elect the percentage of the consideration to be received in cash
and the percentage to be received in Gray class B common stock, provided that
each Brazos shareholder must take at least 40% of the total consideration in
stock.
The KWTX and Brazos acquisition agreements provide that the number of
shares of Gray class B common stock to be issued as merger consideration will be
determined by dividing the amount of the merger consideration to be paid in Gray
class B common stock by its average closing price on The New York Stock Exchange
for the 20 consecutive trading days immediately preceding the closing date,
except that:
- if the average price, as so determined, is less than $14 per share, Gray
class B common stock will be valued at $14 per share, and if the average
price is greater than $15 per share, Gray class B common stock will be
valued at $15 per share;
- notwithstanding the average per share price of Gray class B common stock
during the 20 trading day period immediately preceding the closing date,
if the price of Gray class B common stock on the day immediately
preceding the closing date is less than $14 per share, the number of
shares of Gray class B common stock to be issued will be increased, so
that each shareholder of KWTX and Brazos will receive at least 40% of the
consideration in Gray class B common stock, valued as of the trading day
immediately preceding the closing date, and the remainder in cash; and
- if (1) the average per share price of Gray class B common stock during
the 20 trading day period immediately preceding the closing date is less
than $10 or (2) the price per share on the day immediately preceding the
closing date is less than $10, the acquisition agreements provide that
Gray may extend the closing date to obtain its shareholders' approval of
the issuance of such number of shares of Gray class B common stock as may
be required under the agreements so that each of the KWTX and Brazos
shareholders will receive at least 40% of the merger consideration in
Gray class B common stock.
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<PAGE> 9
If the average per share price of Gray class B common stock during the 20
trading day period immediately preceding the closing date of the KWTX and Brazos
acquisitions or the price of Gray class B common stock on the closing date is
less than $12 per share, Gray may pay all of the acquisition consideration for
KWTX and Brazos in cash, in which event the total acquisition price will be
reduced by $1,530,000 in the case of KWTX and $470,000 in the case of Brazos.
CONSIDERATION TO BE PAID BY GRAY IN THE KXII ACQUISITION (SEE PAGE 16)
The KXII acquisition agreement provides that Gray will pay the sellers cash
equal to the sum of (1) $41,500,000 and (2) the value of all accounts
receivable, notes receivable and other monies due to KXII for sales and
deliveries of goods, performance of services and other business transactions on
the date of the acquisition, reduced by: (a) an amount equal to two percent of
such value and (b) all reserves for doubtful accounts or similar reserves. Gray
will also assume specified liabilities of KXII. At June 30, 1999, such
liabilities were $259,000.
CONDITIONS TO THE OBLIGATION OF THE PARTIES TO COMPLETE THE ACQUISITIONS (SEE
PAGE 17)
The obligation of each party to complete the acquisitions depends upon the
satisfaction or waiver of a number of conditions relating to the correctness of
the representations and warranties of the parties, the absence of a material
adverse change with respect to the parties, the receipt of customary opinions
and closing documents, and the following material conditions:
- the shares of Gray class B common stock issuable pursuant to the
acquisition of KWTX and Brazos shall have been approved for listing on
The New York Stock Exchange;
- the shareholders of KWTX and Brazos shall have adopted the acquisition
agreements;
- consent of the Federal Communications Commission shall have been granted
and become final, without the imposition of any condition adverse to any
of the parties;
- all applicable Hart-Scott-Rodino Antitrust Improvements Act waiting
periods shall have expired or otherwise terminated;
- there shall not be in effect any order of any court or administrative
agency which restrains or prohibits the acquisitions;
- there shall not be pending any action or proceeding by or before any
court or administrative agency challenging any of the acquisitions; and
- Gray's registration statement, of which this proxy statement/prospectus
is a part, relating to the shares of Gray class B common stock to be
issued to shareholders of KWTX and Brazos shall have become effective.
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<PAGE> 10
CONDITIONS TO THE OBLIGATION OF GRAY TO COMPLETE THE ACQUISITIONS (SEE PAGE 17)
The obligation of Gray to complete the acquisitions also depends upon the
satisfaction or waiver of the following material conditions:
- receipt of environmental audits, satisfactory to Gray, of KWTX's, Brazos'
and KXII's real property; and
- receipt of policies of owner's or lessee's title insurance for the real
properties to be acquired or leased by Gray.
CIRCUMSTANCES WHERE THE PARTIES CAN TERMINATE THE ACQUISITION AGREEMENTS (SEE
PAGE 20)
The acquisition agreements provide that they may be terminated and the
acquisitions may be abandoned at any time before the acquisitions have been
completed, even if all requisite shareholder approvals have been obtained, under
the following circumstances:
- by mutual written consent of the parties;
- by any party if any material representation, warranty, covenant or
agreement of another party to the acquisition agreement has been
materially breached or is incorrect and such breach is not cured within
10 days of receiving written notice of such breach; or
- if the closing date has not occurred by December 31, 1999, unless the
assignment applications jointly filed by the parties are still pending
before the FCC on that date, in which case the transactions may not be
terminated until May 31, 2000, but after which date they may be
terminated by any of the parties.
If the acquisition agreements are terminated, the acquisition agreements
provide that they will become void and there will be no liability on the part of
any party, except that if termination occurs as a result of a breach or default
by Gray, then each of KWTX, Brazos and KXII may retain as liquidated damages
$1,000,000 of Gray's $3,000,000 deposit being held in escrow.
REGULATORY MATTERS (SEE PAGE 26)
Under the Communications Act of 1934, the acquisitions may not be
consummated until the FCC has approved the assignment of the FCC licenses of
KWTX, Brazos and KXII to Gray. The FCC's approval has been obtained and has
become final without the imposition of an adverse material condition.
Under the Hart-Scott-Rodino Act, the acquisitions may not be consummated
until notifications have been given and information has been furnished to the
Federal Trade Commission and the Anti-Trust Division of the United States
Department of Justice and specified waiting period requirements have expired. On
July 23, 1999, Gray, KWTX and Brazos filed the required notification and report
forms under the Hart-Scott-Rodino Act with the FTC and the Anti-Trust Division,
and the applicable waiting period is scheduled to expire at midnight on August
22, 1999, unless earlier termination is granted. The FTC and the Anti-Trust
Division have the authority to challenge the acquisitions on antitrust grounds
before or after the acquisitions are completed.
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<PAGE> 11
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITIONS (SEE PAGE 21)
For federal income tax purposes, the KWTX and Brazos acquisitions have been
structured as "reorganizations" under Section 368(a) of the Internal Revenue
Code so that the KWTX and Brazos shareholders will not recognize any taxable
income with respect to the Gray class B common stock that such shareholders will
receive in the acquisitions. Such shareholders, however, will be subject to
federal income tax on any gain realized to the extent the acquisition
consideration is received in cash. If Gray elects to pay all of the acquisition
consideration in cash in accordance with the terms of the acquisition
agreements, the KWTX or Brazos shareholders, as the case may be, will be treated
as having sold their KWTX stock or Brazos stock to Gray in a taxable sale in
which gain or loss will be recognized.
GRAY'S ACCOUNTING TREATMENT OF THE ACQUISITIONS (SEE PAGE 26)
Gray expects to account for the acquisitions of KWTX, Brazos, and KXII
using the purchase method of accounting. Generally, under the purchase method of
accounting, assets acquired and liabilities assumed are recorded at their fair
value.
MARKET PRICE INFORMATION
Gray class B common stock is listed on The New York Stock Exchange. On
April 13, 1999, the last trading day before the public announcement of the
proposed acquisitions of KWTX, Brazos and KXII, the last reported sales price
per share of Gray class B common stock was $13 9/16. On August 13, 1999, the
last trading day before the date of this proxy statement/prospectus, the last
reported sales price per share of Gray class B common stock was $14 3/16. Since
the securities of KWTX, Brazos and KXII are not publicly traded, they have no
readily ascertainable market value.
UNAUDITED COMPARATIVE PER SHARE DATA
The following summary presents per share information for Gray, KWTX and
Brazos on an historical, pro forma combined and pro forma diluted equivalent
basis for the periods and as of the dates indicated below. The pro forma
information gives effect to the acquisitions using the purchase method of
accounting. This information should be read in conjunction with the companies'
historical financial statements and related notes and pro forma condensed
combined financial data included elsewhere or incorporated by reference in this
proxy statement/prospectus. The pro forma information should not be relied upon
as being indicative of the historical results that the companies would have had
if the acquisitions had occurred before such periods or the future results that
the companies will experience after the acquisitions.
The pro forma combined income (loss) per diluted share has been computed
based on the diluted number of outstanding shares of Gray, adjusted for the Gray
class B common stock to be issued in the acquisitions of KWTX and Brazos. The
merger equivalent income (loss) per share of KWTX and Brazos is based on the
number of shares of Gray class B common stock into which each share of KWTX and
Brazos common stock will be converted in the mergers as follows, KWTX: 1,558
shares; and Brazos: 3,024 shares.
The pro forma merger equivalent dividends per common share of KWTX and
Brazos are based on the historical dividends per common share of Gray multiplied
by the number
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<PAGE> 12
of shares of Gray class B common stock into which each share of KWTX and Brazos
common stock will be converted in the acquisitions, as follows, KWTX: 1,558
shares; and Brazos: 3,024 shares.
The pro forma combined book value per share is based upon the pro forma
combined equity of Gray, less the liquidation preference of Gray preferred
stock, divided by the pro forma number of outstanding shares of Gray class A
common stock and class B common stock as of June 30, 1999. The merger equivalent
book value per share of KWTX and Brazos is based on the number of shares of Gray
class B common stock into which each share of KWTX and Brazos common stock will
be converted in the acquisitions, as follows, KWTX: 1,558 shares; and Brazos:
3,024 shares.
The summary assumes that the shares of Gray class B common stock to be
issued will have a value of $14.125 per share, the closing price of the Gray
class B common stock on June 30, 1999, and that the shareholders of KWTX and
Brazos, as a group, will elect to receive 40% of their consideration in Gray
class B common stock and the remainder in cash.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Income (loss) per weighted average diluted share:
Gray........................................... $ 3.25 $ (0.26)
KWTX........................................... 2,142.41 940.34
Brazos......................................... 4,032.99 1,689.35
Gray pro forma combined........................ 2.13 (0.34)
KWTX merger equivalent......................... 3,322.57 (523.61)
Brazos merger equivalent....................... 6,450.96 (1,016.62)
Dividends per common share:
Gray........................................... $ 0.06 $ 0.04
KWTX........................................... 1,000.00 1,400.00
Brazos......................................... 2,000.00 3,000.00
Gray pro forma combined........................ 0.06 0.04
KWTX merger equivalent......................... 93.46 62.32
Brazos merger equivalent....................... 181.45 120.96
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
-------------
<S> <C>
BALANCE SHEET DATA:
Net book value per share:
Gray...................................................... $ 9.16
KWTX...................................................... 10,700.38
Brazos.................................................... 17,881.62
Gray pro forma combined................................... 10.20
KWTX merger equivalent.................................... 15,883.99
Brazos merger equivalent.................................. 30,839.64
</TABLE>
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<PAGE> 13
RISK FACTORS
In addition to the other information contained in this proxy
statement/prospectus, shareholders should consider the following risk factors
before they decide whether or not to vote in favor of the proposals described in
this proxy statement/prospectus.
RISKS RELATING TO GRAY'S CURRENT BUSINESSES
Gray's Leverage May Adversely Affect its Cash Flow, its Ability to Obtain
Financing and React to Changes in its Industries. Gray has substantial
indebtedness and, upon the completion of the acquisitions, Gray's indebtedness
will increase materially. If the average per share price of Gray class B common
stock during the 20 day trading period immediately preceding the closing date is
below $12 per share, the acquisition agreements provide that Gray may elect to
pay all of the acquisition consideration for KWTX and Brazos in cash, in which
case, Gray's indebtedness would significantly increase further. Gray may incur
substantial indebtedness in the future, including acquisition-related
indebtedness. The degree to which Gray will be leveraged may have important
consequences to holders of Gray stock, including the following:
- Gray's ability to obtain financing in the future for working capital,
capital expenditures and general corporate purposes may be impaired;
- a substantial portion of Gray's cash flow must be dedicated to the
payment of principal and interest on its indebtedness and to the payment
of dividends on its preferred stock; and
- a high degree of leverage may limit Gray's ability to react to changes in
the broadcast television, publishing and paging industries, making it
more vulnerable to economic downturns and limiting its ability to
withstand competitive pressures.
Implementation of Digital Television Service May Adversely Affect Gray's
Television Operations. The FCC has adopted rules and regulations, which require
television stations to implement digital television service (including high
definition) in the United States. Conversion to digital television service may
reduce the geographic reach of Gray's television stations or result in increased
interference with, in either case, a corresponding loss of population coverage.
In addition, implementation of digital television service will impose
significant additional costs on Gray's television stations, primarily due to the
capital costs associated with the construction of digital television facilities
and increased operating costs both during and after the transition to digital
television service. Gray's television stations are required to begin
broadcasting on their digital channels in addition to their analog channels in
2002.
Gray's Business May Be Affected by Adverse Regional and Local Business
Conditions and Cyclical and Seasonal Fluctuations. Gray's television and
newspaper businesses are affected by prevailing economic conditions. Since Gray
relies on sales of advertising at its television stations and in its
publications for substantially all of its revenues, Gray's operating results are
sensitive to general economic conditions and regional conditions in each of the
local markets served by its television stations and publications. In addition,
most of Gray's stations and publications are located in the Southeast. As a
result, Gray's results of operations may be adversely affected by recessionary
economic conditions in the Southeast, nationally and, due to the substantial
portion of revenues derived from local advertisers, the local economies in areas
served by its television stations and publications.
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<PAGE> 14
Gray's results usually are subject to seasonal fluctuations, which result
in fourth quarter broadcast operating income being greater usually than first,
second and third quarter broadcast operating income. This seasonality is
primarily attributable to increased expenditures by advertisers in anticipation
of holiday season spending and an increase in viewership during this period. In
addition, revenues from political advertising tend to be higher in even numbered
years.
Gray's Business Depends in Large Part on the Success of Its Network
Affiliations. All of Gray's television stations are affiliated with national
networks. The television viewership levels for each of Gray's stations are
dependent upon programming provided by the network with which each station is
affiliated. Gray currently operates seven CBS affiliated stations and three NBC
affiliated stations, and KWTX, Brazos and KXII operate CBS affiliated stations.
The concentration of CBS affiliates makes Gray sensitive to adverse changes in
its business relationship with, and the general success of, CBS.
Expiration of Network Affiliation Agreements. The network affiliation
agreements for all of Gray's stations expire over the next several years. Gray
may not be able to enter into new affiliation agreements that provide Gray with
as much compensation from the networks as the present agreements.
Governmental Regulation Could Restrict, Suspend or Terminate Gray's Ability
to Operate a Television Station. The operation of television stations is
subject to regulation by the FCC, which has the power to suspend, or refuse to
renew, television stations' licenses. The failure of the FCC to renew Gray's
licenses would have a material adverse effect upon Gray and therefore would
materially adversely affect an investment in Gray.
Gray's Businesses Are Very Competitive. The businesses engaged in by Gray
are highly competitive. Competitors include companies with considerably greater
financial, technical and marketing resources.
Technological innovation and the resulting proliferation of programming
alternatives, such as the Internet, cable television, wireless cable, in home
satellite-to-home distribution services, pay-per-view and home video and
entertainment systems have fractionalized television viewing audiences and have
subjected free over-the-air television broadcast stations to new types of
competition.
RISKS RELATING TO KWTX, BRAZOS, KXII AND THE ACQUISITIONS
Adverse Regional and Local Business Conditions May Affect the Operations of
KWTX, Brazos and KXII. The operations of KWTX, Brazos, and KXII are subject to
regional and local business conditions. All three of these stations operate in
Texas and KWTX and KBTX operate in the same market. Since the three stations
rely on sales of advertising time for substantially all of their revenue, their
operating results may be adversely effected by recessionary economic conditions
primarily in Texas, nationally and, due to the substantial portion of revenues
from local advertisers, the local economies in the areas served by KWTX, Brazos
or KXII.
Acquisition Agreements Provide for the Issuance of a Currently
Unquantifiable Number of Shares of Class B Common Stock. The acquisition
agreements for KWTX and Brazos provide that the number of shares of Gray class B
common stock to be issued will be based upon the market price of the Gray class
B common stock: (1) during the 20 trading days immediately preceding the closing
date of the acquisitions and (2) on the trading day immediately preceding the
closing date. The acquisition agreements also
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<PAGE> 15
provide that shareholders of KWTX and Brazos may elect to receive all of the
consideration in Gray class B common stock and that the amount of consideration
to be paid by Gray will be increased by a portion of working capital amounts at
KWTX and Brazos immediately prior to the closings. Accordingly, when voting to
approve the issuance of shares of Gray class B common stock in these
acquisitions, Gray shareholders will not know the exact number of shares of Gray
class B common stock that ultimately may be issued. The pro forma financial
statements contained in this proxy statement/prospectus are based upon
assumptions concerning the number of shares of Gray class B common stock to be
issued in the acquisitions, which assumptions may not prove to be accurate.
If Gray Cannot Successfully Integrate KWTX, Brazos and KXII, Gray's
Business and the Combined Business Could Be Adversely Affected. To combine
Gray, KWTX, Brazos, and KXII, Gray will need to integrate and coordinate the
management and administrative functions, and sales, marketing and development
efforts of each company. Combining these companies will present a number of
challenges, including integrating the management of these companies who may have
different approaches to sales and service, and the integration of a number of
geographically separated facilities. In addition, Gray's management will be
occupied with integrating these companies' operations following the acquisitions
and this may temporarily distract management from day-to-day business. If Gray
cannot successfully integrate these companies, Gray's business and the results
of operations of the combined businesses could be adversely affected.
The Combined Company Will Depend on Senior Management Who May Not Continue
to Work for the Combined Company. The success of the combined company depends
to a significant extent on the efforts of the senior management of the combined
company. As a result, if any of these individuals were to leave, the combined
company could face substantial difficulty in hiring qualified successors and
could experience a loss in productivity while any such successors gain the
necessary experience.
THE SHAREHOLDERS MEETING
This proxy statement/prospectus is being furnished to the holders of Gray
class A common stock and class B common stock in connection with the
solicitation of proxies by the Gray board of directors for use at the annual
meeting of shareholders to be held at 9:30 a.m., local time, on September 23,
1999, at The Peachtree Insurance Center, The Executive Board Room, 5th Floor,
4370 Peachtree Road, N.E., Atlanta, Georgia 30319, or any adjournment or
postponement thereof.
This proxy statement/prospectus is first being mailed to Gray shareholders
on or about August 23, 1999.
PURPOSE OF THE MEETING
The meeting has been called to consider and vote upon:
- a proposal to approve the issuance of shares of Gray class B common stock
in connection with certain proposed acquisitions;
- the election of directors;
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<PAGE> 16
- a proposal to amend the 1992 Long Term Incentive Plan to increase by
1,000,000 shares the number of shares of Gray class B common stock
issuable thereunder;
- a proposal to confirm the appointment of Ernst & Young LLP as the
independent auditors; and
- the transaction of such other business as may properly come before the
meeting.
REQUIRED VOTES
Approval of the issuance of shares of Gray class B common stock in
connection with the proposed acquisitions, the amendment of the 1992 Long Term
Incentive Plan and the confirmation of Ernst & Young LLP as the independent
auditors requires the affirmative vote of the holders of a majority of the votes
represented by the shares of Gray class A common stock and class B common stock,
voting together as a single class, present in person or represented by proxy at
the meeting and entitled to vote on the proposal. Election of directors requires
a plurality of votes cast by holders of shares of Gray class A common stock and
class B common stock, voting together as a single class.
RECORD DATE AND VOTING RIGHTS
The Gray board of directors has fixed the close of business on August 13,
1999 as the record date for determining holders of Gray class A common stock and
class B common stock entitled to notice of, and to vote at, the meeting. Only
holders of record of Gray class A common stock and class B common stock on that
date will be entitled to notice of, and to vote at, the meeting. On the record
date, 6,832,042 shares of Gray class A common stock and 5,147,522 shares of
class B common stock were outstanding and entitled to vote. Each record holder
of Gray class A common stock on the record date is entitled to cast 10 votes per
share and each record holder of Gray class B common stock on the record date is
entitled to cast one vote per share, in each case, exercisable in person,
telephonically, by Internet or by properly executed proxy, on each matter
properly submitted for the vote of the shareholders at the meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the votes represented by the outstanding Gray class A common stock
and class B common stock entitled to vote at the meeting is necessary to
constitute a quorum and transact business at the meeting. Abstentions will be
counted for purposes of determining a quorum, but will have the effect of a vote
against the matters being voted upon. If a broker holding shares in street name
returns an executed proxy that indicates that the broker does not have
discretionary authority to vote certain shares on one or more matters, those
shares will count towards determining a quorum, but will have the effect of a
vote against the matters being voted upon.
On August 9, 1999, Gray's directors, executive officers and affiliates of
these directors and executive officers, beneficially owned in the aggregate
4,937,864 shares of Gray class A common stock and 439,750 shares of class B
common stock, or approximately 57.8% of the votes represented by all outstanding
shares of Gray class A common stock and class B common stock. Except for
shareholders identified under "Proposal 2: Election of Directors -- Share
Ownership," to the knowledge of Gray, no other person beneficially owned more
than five percent of the outstanding shares of Gray class A common stock or
class B common stock as on August 9, 1999.
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<PAGE> 17
VOTING AND REVOCATION OF PROXIES
All shares of Gray class A common stock and class B common stock that are
entitled to vote and are represented at the meeting by valid proxies, and not
duly and timely revoked, will be voted at the meeting in accordance with the
instructions indicated on the proxies. If no instructions are indicated, the
proxies will be voted "FOR" approval of the issuance of shares of Gray class B
common stock in the acquisitions, the election of the directors specified in
this proxy statement/prospectus, the amendment of the 1992 Long Term Incentive
Plan and the confirmation of Ernst & Young LLP as the independent auditors of
Gray. If any other matters are properly presented for consideration at the
meeting, including consideration of a motion to adjourn or postpone the meeting
to another time or place, the persons named in the enclosed form of proxy will
have discretion to vote on those matters in accordance with their best judgment.
A Gray shareholder may revoke his or her proxy at any time before its use
by delivering to the Secretary of Gray, a signed notice of revocation or a
later, dated, signed proxy or by attending the meeting and voting in person.
Attendance at the meeting will not, in itself, constitute the revocation of a
proxy. All written notices of revocation and other communications with respect
to revocation of proxies should be sent to: Gray Communications Systems, Inc.,
4370 Peachtree Road, N.E., Atlanta, Georgia 30319, Attention: Corporate
Secretary.
The cost of solicitation of proxies will be paid by Gray. In addition to
solicitation by mail, proxies may be solicited in person by directors, officers
and employees of Gray, without additional compensation, and by telephone,
telegram, facsimile or similar method. Arrangements will be made with brokerage
houses and other custodians, nominees and fiduciaries to send proxy material to
beneficial owners. Gray will, upon request, reimburse them for their reasonable
expenses in doing so.
PROPOSAL 1: APPROVAL OF THE ISSUANCE OF SHARES OF
CLASS B COMMON STOCK IN THE ACQUISITIONS
RECOMMENDATION OF THE GRAY BOARD OF DIRECTORS AND REASONS FOR THE RECOMMENDATION
At its meeting held on April 29, 1999, the Gray board of directors,
approved the acquisitions, declared advisable the issuance of shares of Gray
class B common stock in the acquisitions and determined that the terms of the
issuance of such shares were fair to and in the best interests of the
shareholders. Therefore, the Gray board recommends that its shareholders vote in
favor of the proposal to approve the issuance of such shares.
In reaching its decision to approve the acquisitions and the issuance of
shares of Gray class B common stock, the Gray board considered the following
material factors:
- the acquisitions will create a stronger company and will diversify the
geographic range of Gray's television stations;
- the acquisitions provide Gray access to additional operating cash flow
for the purposes of funding debt service, as well as future acquisitions
and investments;
- the terms of the acquisition agreements;
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- the demographic characteristics and competitive dynamics of the markets
served by KWTX, Brazos and KXII; and
- the strong management teams and local news operations of KWTX, Brazos and
KXII.
The foregoing discussion of the factors considered by the Gray board is not
intended to be exhaustive. In view of the variety of factors considered in
connection with its evaluation of the acquisitions, the Gray board did not find
it practicable to, and did not, quantify or otherwise assign relative weights to
the specific factors considered in reaching its determination. In addition,
individual members of the Gray board may have given different weight to
different factors.
REASONS OF KWTX, BRAZOS AND KXII FOR RECOMMENDING THE ACQUISITIONS
At their meeting held on April 13, 1999, the KWTX, Brazos and KXII (which
was then organized as a Texas corporation) boards of directors approved and
declared advisable the acquisition agreements with Gray and determined that the
terms of the acquisitions were fair to and in the best interests of their
respective shareholders.
In evaluating the acquisitions, the boards of KWTX, Brazos and KXII
considered the following material factors:
- the significant experience of Gray's management in operating television
stations;
- current industry, economic and market conditions, including, in
particular, the recent consolidation trend in the broadcast industry;
- the terms of the acquisition agreements;
- the tax-free nature of the shares of Gray class B common stock to be
received in the KWTX and Brazos acquisitions;
- a significant portion of the consideration to be received by shareholders
of KWTX and Brazos and all of the consideration to be received by
shareholders of KXII will be in cash;
- the non-cash consideration to be received by shareholders of KWTX and
Brazos will consist of Gray class B common stock, which trades on The New
York Stock Exchange, thereby resulting in greater liquidity for such
shareholders;
- the current and historical trading prices and values of the Gray class B
common stock; and
- the expressed desire of the shareholders of KWTX, Brazos and KXII to sell
the companies.
The foregoing discussion of the factors considered by the KWTX, Brazos and
KXII boards is not intended to be exhaustive. In view of the variety of factors
considered in connection with their respective evaluation of the acquisitions,
the KWTX, Brazos and KXII boards did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors considered
in reaching their respective determinations. In addition, individual members of
the KWTX, Brazos and KXII boards may have given different weight to different
factors.
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BACKGROUND OF THE ACQUISITIONS
In 1998, the shareholders of KWTX, Brazos and KXII indicated that in light
of the potential costs involved in converting the television stations to digital
format, they would be interested in exploring strategic alternatives for the
companies. Milford N. Bostick, Chairman of each of KWTX, Brazos and KXII and Ray
M. Deaver, President of each of KWTX, Brazos and KXII, engaged in preliminary
discussions with several potential acquisition candidates. Ultimately, the
boards of directors of KWTX, Brazos and KXII did not reach an agreement with any
of these candidates.
Hilton H. Howell, Jr., a director of Gray and a shareholder of KWTX, was
generally aware that the owners of each of KWTX, Brazos and KXII were interested
in pursuing possible business combination transactions with respect to these
businesses, including mergers or the sale of substantially all of the assets of
these businesses. In his capacity as a shareholder of KWTX, Mr. Howell was also
aware that previous attempts by KWTX, Brazos and KXII to effect such
transactions had been unsuccessful. In January 1999, Mr. Howell informed J. Mack
Robinson, Gray's President, and Robert S. Prather, Jr., Gray's Executive Vice
President -- Acquisitions, that he believed that senior management of each of
KWTX, Brazos and KXII would be receptive to an acquisition proposal by Gray.
During February 1999, in telephone calls between Messrs. Robinson and
Prather, on behalf of Gray, and Mr. Bostick, the potential acquisitions of KWTX,
Brazos and KXII were explored. These telephone discussions led to exchanges of
information over the next several weeks. On February 24, 1999, Messrs. Robinson,
Prather and Howell met with Messrs. Bostick and Deaver. At this meeting, general
terms of the potential acquisitions were discussed. Subsequent to this meeting,
the parties continued to exchange information and to negotiate the terms of the
acquisitions. On March 19, 1999 representatives of Gray also met with
representatives of a principal shareholder of KWTX to discuss general terms of
the acquisitions and related matters.
At its regularly scheduled meeting on February 25, 1999, the Gray board of
directors approved in principle the acquisitions of KWTX, Brazos and KXII.
Because Gray will pay a fee to Bull Run for advisory services in connection with
the acquisitions, Mr. Robinson (Chairman of the Board of Bull Run), Harriett J.
Robinson (Mr. Robinson's wife), Mr. Prather (President of Bull Run) and Mr.
Howell (Vice President and Secretary of Bull Run and a shareholder of KWTX),
abstained from voting on the proposal relating to the acquisitions. On April 13,
1999, the boards of directors of KWTX, Brazos and KXII (which was then organized
as a Texas corporation) met and approved the acquisitions. At these meetings,
the respective shareholders of KWTX and Brazos were invited to observe, for
information purposes only, the board of directors meetings. The shareholders who
attended the meetings were not solicited for any vote, nor did they vote, upon
the proposed transactions. Mr. Prather attended a portion of the meetings to
answer any questions regarding the business of Gray.
The definitive agreements for KWTX and Brazos were completed and signed on
April 13, 1999. The parties to the KXII acquisition agreement entered into an
enabling agreement, whereby each agreed to execute the definitive asset purchase
agreement as soon as practicable. The definitive agreement for KXII was signed
on April 26, 1999. The definitive agreements, as executed, were ratified by the
Gray board of directors on April 29, 1999. Mr. and Mrs. Robinson and Messrs.
Prather and Howell also abstained from this vote.
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INTERESTS OF CERTAIN PERSONS IN THE ACQUISITIONS
In considering the recommendation of the Gray board of directors with
respect to the acquisitions, shareholders of Gray should be aware that certain
persons may have direct and indirect interests in the acquisitions separate from
the shareholders of Gray, including those interests discussed below.
It is anticipated that Ray M. Deaver, the President of each of KWTX, Brazos
and KXII will enter into an employment agreement with Gray, which will become
effective upon the consummation of the acquisitions. It is anticipated that this
employment agreement will provide for Mr. Deaver's employment as Regional Vice
President -- Texas of Gray at an annual salary of not less than $230,000 with a
bonus of $125,000 for each year during his employment by Gray that KWTX, Brazos
and KXII reach the annual budget set by Gray for the three stations. In
addition, it is expected that the employment agreement will provide that Mr.
Deaver will receive a bonus equal to 10% of the amount by which the net
operating profit of those three stations, on an aggregate basis, exceeds the
annual budget set by Gray. It is also anticipated that Gray will grant Mr.
Deaver a stock option to purchase 15,000 shares of Gray class B common stock
under Gray's 1992 Long Term Incentive Plan at an exercise price equal to the
fair market value of the Gray class B common stock on the date of grant and that
one-third of this option will vest on each anniversary of the date of grant.
For advisory services rendered by Bull Run to Gray in connection with the
proposed acquisitions of KWTX, Brazos and KXII, Gray paid Bull Run $400,000 on
May 19, 1999, $800,000 on August 11, 1999 and will pay Bull Run an additional
$190,000 upon the consummation of these acquisitions. For additional information
regarding related transactions with Bull Run, see pages 97 and 99.
Hilton H. Howell, Jr., a director of Gray, owns approximately 1.04% of the
issued and outstanding capital stock of KWTX. In addition, members of Mr.
Howell's family own approximately 13.21% of the issued and outstanding capital
stock of KWTX.
THE ACQUISITION AGREEMENTS
Set forth below is a summary of the material terms and provisions of the
acquisition agreements. A copy of the acquisition agreements are attached as
Appendices A, B and C to this proxy statement/prospectus and are incorporated in
this proxy statement/prospectus by reference. Gray shareholders are urged to
read the acquisition agreements in their entirety for a more complete
description of the acquisitions.
The Acquisitions. Immediately after the approval by Gray shareholders of
the issuance of shares of Gray class B common stock in accordance with the
acquisition agreements, on the terms and subject to the conditions of the
acquisition agreements and subject to the right of Gray to pay all cash under
certain circumstances, (1) KWTX and Brazos will merge into a wholly owned
subsidiary of Gray and (2) a wholly owned subsidiary of Gray will purchase all
of the assets of KXII. As a result of the acquisitions, KWTX and Brazos will
become a wholly owned subsidiary of Gray and a wholly owned subsidiary of Gray
will own all of the assets of KXII. In the acquisitions, KWTX and Brazos
shareholders will receive a combination of cash and shares of Gray class B
common stock in exchange for their shares, while the sellers of KXII will
receive solely cash. If Gray elects to pay all of the acquisition consideration
in cash, in accordance with the terms of the acquisition agreements, then wholly
owned subsidiaries of Gray will merge
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into KWTX and Brazos and KWTX and Brazos will become wholly owned subsidiaries
of Gray.
Effective Time. The KWTX and Brazos acquisitions will become effective
upon the filing of articles of merger with the Secretaries of State of the
States of Georgia and Texas. These filings are anticipated to take place as soon
as practicable after (1) the receipt of Gray, KWTX and Brazos shareholder
approvals and all required regulatory approvals and (2) the satisfaction or
waiver of the other conditions to the acquisitions. The KXII acquisition will
occur when all of the assets of KXII are transferred to Gray's subsidiary. It is
currently anticipated that the effective time of the acquisitions will occur as
soon as practicable after the annual meeting of Gray shareholders.
Consideration to be paid by Gray. If the acquisitions of KWTX, Brazos and
KXII are completed:
- KWTX shareholders will receive in exchange for each share of KWTX stock
each shareholder holds: cash and Gray class B common stock (or under
certain circumstances described below, all cash) equal to the sum of (1)
$74,680,000, (2) the amount by which the current assets and certain other
assets of KWTX exceed its current liabilities and (3) 50% of the amount
by which the current assets and certain other assets of Brazos exceed its
current liabilities divided by (4) 1,550 (the number of outstanding
shares of KWTX common stock). In general and subject to the election of
Gray to pay all of the acquisition consideration in cash and certain
limitations discussed below, each holder will have the right to elect the
percentage of the consideration to be received in cash and the percentage
to be received in Gray class B common stock, provided that each KWTX
shareholder must take at least 40% of the total consideration in stock.
- Brazos shareholders (other than KWTX) will receive in exchange for each
share of Brazos stock each shareholder holds: cash and Gray class B
common stock (or under certain circumstances described below, all cash)
equal to the sum of (1) $22,820,000 and (2) 50% of the amount by which
the current assets and certain other assets of Brazos exceed its current
liabilities divided by (3) 250 (the number of outstanding shares of
Brazos common stock not held by KWTX). In general and subject to the
election of Gray to pay all of the acquisition consideration in cash and
certain limitations discussed below, each holder will have the right to
elect the percentage of the consideration to be received in cash and the
percentage to be received in Gray class B common stock, provided that
each Brazos shareholder must take at least 40% of the total consideration
in stock.
- Gray will pay the sellers of KXII cash equal to the sum of (1)
$41,500,000 and (2) the value of all accounts receivable, notes
receivable and other monies due to KXII for sales and deliveries of
goods, performance of services and other business transactions on the
date of the acquisition, reduced by: (a) an amount equal to two percent
of such value and (b) all reserves for doubtful accounts or similar
reserves. Gray will also assume specified liabilities of KXII. At June
30, 1999, such liabilities were approximately $259,000.
Valuation of Gray Class B Common Stock and Limitations on Elections. The
KWTX and Brazos acquisition agreements provide that the number of shares of Gray
class B common stock to be issued as merger consideration will be determined by
dividing the merger consideration to be paid in Gray class B common stock by its
average closing
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price on The New York Stock Exchange for the 20 consecutive trading days
immediately preceding the closing date, except that:
- if the average price, as so determined, is less than $14 per share, Gray
class B common stock will be valued at $14 per share, and if the average
price is greater than $15 per share, Gray class B common stock will be
valued at $15 per share;
- notwithstanding the average per share price of Gray class B common stock
during the 20 trading day period immediately preceding the closing, if
the price of Gray class B common stock on the day immediately preceding
the closing date is less than $14 per share, the number of shares of Gray
class B common stock to be issued will be increased, so that each
shareholder of KWTX and Brazos will receive at least 40% of the
consideration in Gray class B common stock, valued as of the trading day
immediately preceding the closing date, and the remainder in cash; and
- if (1) the average per share price of Gray class B common stock during
the 20 trading day period immediately preceding the closing is less than
$10 or (2) the closing price per share on the day immediately preceding
the closing date is less than $10, the acquisition agreements provide
that Gray may extend the closing date to obtain its shareholders'
approval of the issuance of such number of shares of class B common stock
as may be required under the agreements so that each of the KWTX and
Brazos shareholders receive at least 40% of the merger consideration in
Gray class B common stock.
Gray Election to Pay Cash Only. If the average per share price of Gray
class B common stock during the 20 trading day period immediately preceding the
closing date of the KWTX or Brazos acquisitions or the price of Gray class B
common stock on the closing date is less than $12 per share, Gray may pay all of
the acquisition consideration for KWTX and Brazos in cash, in which event the
total acquisition price will be reduced by $1,530,000 in the case of KWTX and
$470,000 in the case of Brazos.
No Fractional Shares. No fractional shares of Gray class B common stock
will be issued to holders of KWTX or Brazos stock. Instead, the shareholders
otherwise entitled to a fractional share of Gray class B common stock will
receive the cash value of the fractional share.
Officers and Directors. The acquisition agreements provide that the
officers and directors of the wholly owned subsidiaries of Gray immediately
prior to the acquisitions, together with such additional persons as may be
elected, will serve as the officers and directors of the surviving corporation
(in the case of the mergers of KWTX and Brazos) or Gray's subsidiary which is
purchasing assets (in the case of KXII).
Conditions to the Acquisitions. The closing of the acquisitions of KWTX
and Brazos are mutually dependent, so that if both acquisitions are not
consummated, neither may be consummated. The closing of the acquisition of KXII
is dependent on the consummation of the acquisitions of KWTX and Brazos. Under
the acquisition agreements, the respective obligations of each party to effect
the acquisitions are subject to the satisfaction or waiver of the following
material conditions:
- the representations and warranties of the parties in the acquisition
agreements shall be true and correct as of the closing date in all
material respects and the parties shall have performed in all material
respects their obligations required to be performed by them under the
acquisition agreements;
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- the receipt of FCC approval;
- no stop order suspending the effectiveness of the registration statement,
of which this proxy statement/prospectus is a part, shall have been
issued by the Securities and Exchange Commission and no proceedings for
that purpose, and no similar proceeding in respect of this proxy
statement/prospectus, shall have been initiated or threatened by the
Securities and Exchange Commission;
- the shareholders of Gray, KWTX and Brazos shall have approved the
acquisitions;
- no temporary restraining order, injunction or other order, binding legal
restraint or prohibition preventing the consummation of the acquisitions
shall be in effect;
- legal opinions with respect to certain aspects of the acquisitions shall
have been received;
- the shares of Gray class B common stock issuable pursuant to the
acquisition agreements shall have been approved for listing on The New
York Stock Exchange; and
- all applicable waiting periods relating to the Hart-Scott-Rodino Act
shall have expired or otherwise terminated.
The obligations of each of KWTX and Brazos to complete the acquisitions are
also subject to the following material conditions:
- a legal opinion with respect to certain tax consequences of the
acquisitions shall have been delivered to KWTX and Brazos; and
- certain principal shareholders of Gray shall have agreed to vote their
shares in favor of the acquisition.
The obligations of Gray to complete the acquisitions are also subject to
the following material conditions:
- each director, officer or 5% shareholder of KWTX and Brazos shall have
agreed to vote his shares in favor of the acquisition;
- written results of an environmental audit of KWTX's and Brazos's real
property acceptable to Gray shall have been received by Gray; and
- standard form policies of owner's or lessee's title insurance, insuring
the applicable party's title as owner or as lessee, shall have been
received by Gray.
Representations and Warranties. The acquisition agreements contain various
customary representations and warranties of the parties, including
representations and warranties made by each of the parties with respect to its:
- organization, standing and power;
- capital structure;
- financial statements;
- authority relative to the acquisition agreement;
- certificate of incorporation and bylaws;
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- absence of litigation;
- compliance with law and permits;
- employee benefit plans;
- consents and approvals; and
- absence of brokers.
In addition, each of KWTX, Brazos and KXII made representations and
warranties with respect to its:
- subsidiaries;
- contracts and commitments;
- real property;
- environmental, health and safety matters;
- personnel information;
- certain business practices and potential conflicts of interest;
- labor relations;
- FCC licenses;
- title to and condition of assets;
- intellectual property;
- insurance; and
- taxes.
In addition, Gray made a representation and warranty with respect to the
accuracy and completeness of its filings with the Securities and Exchange
Commission.
Covenants. The acquisition agreements contain several covenants concerning
the conduct of the parties including the following material covenants relating
to:
- agreement by KWTX, Brazos and KXII not to solicit, or take any other
action to facilitate, any proposal or offer from any person for the
acquisition of KWTX and Brazos or KXII or any proposal to acquire in any
manner a substantial equity interest in, or a substantial portion of the
assets of, KWTX, Brazos or KXII;
- meetings of the shareholders of Gray, KWTX and Brazos to approve the
acquisitions;
- recommendation of the respective boards of directors of Gray, KWTX and
Brazos to their shareholders to vote in favor of the acquisitions;
- confidentiality of information obtained in connection with the proposed
acquisitions;
- access to information;
- coordination and cooperation with respect to meetings of shareholders;
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- preparing and filing disclosure documents and a registration statement of
which this proxy statement/prospectus is a part;
- actions and filings with governmental bodies, agencies, officials or
other authorities and third parties;
- public announcements; and
- government authorizations.
Further Action. The acquisition agreements provide that each of the
parties to the acquisition agreements will in good faith use all commercially
reasonable efforts to take all actions and to do all other things necessary,
proper or advisable to:
- consummate and make effective as promptly as practicable the transactions
contemplated by the acquisition agreements;
- obtain in a timely manner all necessary waivers, consents and approvals;
- effect all necessary registrations and filings; and
- otherwise satisfy or cause to be satisfied all conditions precedent to
its obligations under the acquisition agreements.
Termination. The acquisition agreements provide that they may be
terminated and the acquisitions may be abandoned at any time before the
effective time of the acquisitions, even if all requisite shareholder approvals
have been obtained, under the following circumstances:
- by mutual consent of the parties;
- by any party, if any material representation, warranty, covenant or
agreement of another party shall have been incorrect or breached and
shall not have been cured or otherwise resolved to the reasonable
satisfaction of the other party on or before the closing date; provided,
however, that prior to such termination the party in default shall be
given written notice by the other party, and shall have 10 days in which
to cure such default;
- by any party, if the acquisitions have not occurred by December 31, 1999,
unless the assignment applications jointly filed by the parties are still
pending before the FCC on that date, in which case the acquisition
agreements shall not be terminated until May 31, 2000, but after which,
any party may terminate the acquisition agreements; and
- by KWTX or Brazos, if Gray fails to obtain shareholder approval of the
issuance of the Gray class B common stock in the acquisitions within 40
days after the registration statement, of which this proxy
statement/prospectus is a part, has been declared effective by the SEC.
If the acquisition agreements are terminated, the acquisition agreements
provide that they will become void and there will be no liability on the part of
any party except:
- if the termination occurs as a result of a breach or default by any of
KWTX, Brazos or KXII then Gray shall be entitled to seek specific
performance of any of KWTX's, Brazos' or KXII's obligation to effect the
acquisition in accordance with the provisions of the acquisition
agreements; and
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- if the termination occurs as a result of a breach or default by Gray,
then each of KWTX, Brazos and KXII may retain as liquidated damages
$1,000,000 of Gray's $3,000,000 deposit being held in escrow.
Fees and Expenses. Whether or not the acquisitions are consummated, each
party will pay its own costs and expenses in connection with preparing, entering
into and carrying out the acquisition agreements and related transactions,
except that Gray, KWTX, Brazos and KXII shall share equally in the payment of
FCC and Hart-Scott-Rodino Act filing fees, and the fees of any certified public
accountants used in connection with the determination of the net working capital
of KWTX and Brazos.
Indemnification. Under the acquisition agreements, the shareholders of
KWTX and Brazos and the sellers of the assets of KXII agreed to indemnify Gray
against any damages arising from breaches of the representations, warranties,
agreements and covenants of KWTX, Brazos and the sellers of the assets of KXII,
as the case may be, provided that these parties' indemnification liabilities may
not exceed $750,000 (in the case of KWTX), $250,000 (in the case of Brazos), and
$300,000 (in the case of KXII). A total of $1,300,000 will be escrowed at the
closings of the acquisitions to support these indemnification provisions.
One-half of this amount will be released one year after the closings, subject to
any claims pending at that time. Four years after the closing dates of the
acquisitions, any escrowed funds not distributed or reserved for distribution to
satisfy these indemnification obligations will be distributed among the former
shareholders of KWTX and Brazos and the sellers of the assets of KXII. The
acquisition agreements also provide for indemnification by Gray for four years
for breaches by Gray of its representations, warranties, covenants and
agreements, subject to the same monetary limitations, although Gray will not
escrow any funds to support these indemnification obligations.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of the KWTX and Brazos acquisitions. The discussion is not
exhaustive as to all possible tax considerations and does not include a
discussion of any state, local or foreign tax considerations. In addition, the
discussion is intended to address only those federal income tax considerations
that are generally applicable to U.S. shareholders of Gray, KWTX and Brazos and
does not discuss all of the aspects of federal income taxation that may be
relevant to shareholders, including insurance companies, tax-exempt entities,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States who are subject to special
treatment under the federal income tax laws.
The following discussion assumes that the KWTX and Brazos shareholders hold
their respective shares of KWTX or Brazos stock as capital assets within the
meaning of Section 1221 of the Internal Revenue Code. It is based upon current
provisions of the Internal Revenue Code and its legislative history, existing,
temporary and currently proposed Treasury Regulations, existing administrative
rulings and practices of the Internal Revenue Service and judicial decisions. No
assurance can be given that legislative, judicial or administrative changes will
not affect the accuracy of this discussion, possibly on a retroactive basis. In
addition, no rulings from the IRS with respect to the tax consequences of the
acquisitions will be sought. Accordingly, no assurance can be given that the
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statements set forth in this discussion will not be challenged by the IRS and
sustained by the courts if so challenged.
This discussion is not intended as a substitute for careful tax planning.
Each KWTX and Brazos shareholder is urged to consult his own tax advisor
regarding the specific tax consequences of the acquisitions, including the
federal, state, local and foreign tax consequences that may be applicable to
such shareholder.
Unless Gray elects to pay all of the acquisition consideration for KWTX or
Brazos in cash, each of these acquisitions should qualify as a reorganization
under Section 368(a) of the Internal Revenue Code, and consummation of each of
these acquisitions is conditioned upon the receipt by the parties of an opinion
from King & Spalding, tax counsel to Gray, substantially to the effect that each
of the acquisitions should constitute a reorganization under Section 368(a) of
the Internal Revenue Code.
If the KWTX and Brazos acquisitions constitute "reorganizations" under
Section 368(a) of the Internal Revenue Code, the acquisitions generally will
have the following federal income tax consequences:
- No gain or loss will be recognized by a holder of KWTX stock or of Brazos
stock whose shares of such stock are exchanged solely for shares of Gray
class B common stock.
- A KWTX or Brazos shareholder who exchanges his KWTX or Brazos stock for a
combination of Gray class B common stock and cash (other than cash in
lieu of a fractional share of Gray class B common stock) will recognize
gain, if any, realized on the exchange, but in an amount which does not
exceed the amount of cash received. Any such gain recognized should
generally be taxable to KWTX or Brazos shareholders as capital gain and
should be long-term capital gain if the shareholder has held his KWTX or
Brazos stock for more than one year at the time of the acquisitions. It
is possible, however, that such gain will be taxable as dividend income
to a particular shareholder if the cash received by him does not result
in a "meaningful reduction" in the percentage ownership of Gray class B
common stock that he otherwise would have received had he not elected to
receive the cash. Any such determination would take into account both his
actual and constructive ownership of Gray class B common stock under the
constructive ownership rules of Section 318 of the Internal Revenue Code.
A KWTX or Brazos shareholder who receives both Gray class B common stock
and cash will not be permitted to recognize any loss on the exchange with
respect to which the cash was received.
- The tax basis of the Gray class B common stock received by a KWTX or
Brazos shareholder in the acquisitions will be the same as the
shareholder's tax basis in the KWTX or Brazos stock surrendered in
exchange therefor (reduced by an amount allocable to a fractional share
of Gray class B common stock for which cash is received), less the amount
of any cash consideration received by the shareholder (other than cash
received in lieu of a fractional share of Gray class B common stock),
plus any amount that is treated as gain or as a dividend to the
shareholder.
- The holding period of the Gray class B common stock received by the KWTX
and Brazos shareholders in the acquisitions (including a fractional share
of Gray class B common stock deemed to have been received and then
redeemed) will include the holding period of the KWTX or Brazos stock
surrendered in exchange therefor.
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- Cash received by a KWTX or Brazos shareholder in lieu of a fractional
share of Gray class B common stock will be treated as having been
received in exchange for such fractional share, and capital gain or loss
will be recognized by such shareholder in an amount equal to the
difference between the amount of cash received and the portion of the tax
basis of the share of KWTX or Brazos stock allocable to such fractional
interest. Any such gain or loss will be long term capital gain or loss if
the share of KWTX or Brazos stock exchanged for the fractional share of
Gray class B stock was held for more than one year at the time of the
acquisitions.
- No gain or loss will be recognized by Gray, the Gray merger subsidiaries,
Gray's shareholders, KWTX or Brazos in connection with the acquisitions.
In rendering its tax opinions, King & Spalding will make customary factual
assumptions and will rely upon customary representations of appropriate officers
of Gray, KWTX and Brazos, including a representation that the aggregate fair
market value of the Gray class B common stock that will be issued to KWTX
shareholders in the KWTX acquisition and to Brazos shareholders in the Brazos
acquisition will represent not less than 40% of the aggregate value of the total
consideration that will be received by the respective shareholders of KWTX and
Brazos (taking into account any cash paid in lieu of fractional shares of Gray
class B common stock). In addition, King & Spalding will assume and rely on
representations that the fair market value of the Gray class B common stock and
other consideration that will be received by each shareholder in the KWTX and
Brazos acquisitions will be approximately equal to the fair market value of the
KWTX or Brazos stock surrendered in exchange therefor. King & Spalding's
opinions cannot be relied upon if any of the assumptions or representations upon
which the opinions are based is, or later becomes, inaccurate.
Gray's Election to Pay Cash Only. If Gray elects to pay all of the
acquisition consideration for KWTX and Brazos in cash, a wholly owned subsidiary
of Gray will merge with and into KWTX and another wholly owned subsidiary of
Gray will merge with and into Brazos, and KWTX and Brazos will be the surviving
corporations in such mergers. For federal income tax purposes, the KWTX
shareholders and Brazos shareholders will be treated as having sold their shares
to Gray for cash and will recognize capital gain or loss in an amount equal to
the difference between the amount of cash received and the shareholder's
adjusted tax basis in his KWTX or Brazos stock, but no gain or loss will be
recognized by Gray, the Gray merger subsidiaries, Gray's shareholders, KWTX or
Brazos.
Escrow to Secure Representations and Warranties. A portion of the cash
consideration otherwise payable to the KWTX and Brazos shareholders will be
deposited into an escrow account at closing to secure such shareholders'
indemnification obligations to Gray. A KWTX or Brazos shareholder's right to
receive distributions from the escrow account in the future should be treated as
an installment obligation for federal income tax purposes. Accordingly, any gain
recognized by a KWTX or Brazos shareholder in the KWTX or Brazos acquisition
will be required to be taken into account by such shareholder under the
installment method of tax accounting unless (1) the shareholder affirmatively
elects out of the installment method or (2) the cash consideration paid to the
shareholder is taxable as a dividend, in which case the installment method will
not be available.
If the installment method applies, any taxable gain recognized by a KWTX or
Brazos shareholder generally will be taken into account at the time that
payments, including
23
<PAGE> 29
distributions from the escrow account, if any are received. In the case of a
"reorganization" qualifying under Section 368(a) of the Internal Revenue Code in
which (1) a KWTX or Brazos shareholder receives a combination of Gray class B
common stock and cash and (2) the amount of cash to be received by the
shareholder does not exceed the shareholder's realized gain, the entire amount
of each cash payment to the shareholder (other than amounts treated as interest
for federal income tax purposes) will be taken into account as taxable gain at
the time of receipt. Conversely, if the shareholder has a basis in his KWTX or
Brazos stock that exceeds the fair market value of the Gray class B common stock
received, a portion of the cash consideration received by the shareholder equal
to such excess will be treated as a tax-free recovery of basis. The
determination of the portion of each payment treated as basis recovery would be
determined under the Treasury Regulations discussed below. In addition, if Gray
elects to pay all cash in the KWTX or Brazos acquisition, a portion of each cash
payment to shareholders reporting their taxable gain under the installment
method will be treated as a tax-free recovery of basis under the rules discussed
below.
Under the Treasury Regulations governing the installment method of
reporting, the KWTX and Brazos acquisitions, because of the payments from the
escrow account, likely will be treated as "contingent payment" transactions in
which there is neither a stated maximum selling price nor a fixed maximum period
during which payments will be received. In such circumstances, a shareholder who
realizes gain and does not elect out of the installment method might be able to
recover only 1/15 of the basis of his KWTX or Brazos stock in each taxable year.
This would include the taxable year in which the KWTX and Brazos acquisitions
close, even though the shareholder will have received in such year substantially
all of the consideration payable to him by Gray. Shareholders should consult
their tax advisors regarding the basis recovery rules under the installment
method and may wish to consider electing out of the installment method to avoid
the potentially adverse consequences of such rules.
The right to receive distributions from the escrow account likely will be
treated as a "contingent payment debt instrument" subject to Section 1274 of the
Internal Revenue Code and the regulations thereunder, and shareholders will be
required to include in gross income the imputed interest attributable to the
debt instrument. Imputed interest is taxable at ordinary income rates. The
amount of imputed interest with respect to the debt instrument will equal the
difference between (1) the amount of distributions from the escrow account,
including earnings on amounts in the escrow account, and (2) the present value
of such distributions, discounted back to the closing date of the acquisitions
at the "applicable federal rate" (the "AFR").
Gray intends to take the position that the possibility of a claim being
made against the escrow account is a "remote" contingency and that distributions
from the escrow account (other than distributions attributable to earnings on
the escrow account) are thus "noncontingent" payments. Under applicable Treasury
Regulations, imputed interest with respect to noncontingent payments is treated
as original issue discount ("OID") and must be accrued by the former KWTX and
Brazos shareholders on a constant yield basis, regardless of the shareholder's
regular method of tax accounting. Gray's determination that distributions from
the escrow account are noncontingent payments is binding on shareholders who do
not explicitly disclose to the IRS in their tax returns that they are taking a
contrary position.
Gray intends also to take the position that distributions of the earnings
on the escrow account should be treated as contingent payments. Imputed interest
with respect to a
24
<PAGE> 30
contingent payment is not determined until the payment becomes fixed and is not
includible in the gross income of a KWTX or Brazos shareholder until the taxable
year in which the contingent payment is made.
If a shareholder elects out of the installment method, the contingent
payment debt instrument deemed to have been received will have to be included in
the shareholder's "amount realized" for purposes of computing gain or loss. In
general, the "amount realized" with respect to a contingent payment debt
instrument is equal to the "issue price" of any noncontingent payments required
by the debt instrument (which is the difference between any such noncontingent
payments and their present value, using the AFR as the discount rate), increased
by the "fair market value" of the contingent payments required by the
instrument. If the contingent payments treated as principal exceed the
shareholder's basis in the right to receive such payments, the excess will be
treated as gain from the sale or exchange of the debt instrument. Conversely,
any unrecovered basis in the right to receive contingent payments remaining at
the time the final contingent payment is made generally will be treated as a
loss from the sale or exchange of the debt instrument. In general, a
shareholder's basis in the right to receive the contingent payments should equal
the fair market value of such contingent payments determined as of the date that
the debt instrument was deemed to have been issued.
The rules governing the installment method of reporting, as well as the
imputed interest rules, are extremely complex. KWTX and Brazos shareholders are
encouraged to discuss the treatment of the escrow account with their personal
tax advisors in order to acquire a complete understanding of the effects of
installment reporting and the imputed interest rules.
Backup Withholding and Information Reporting. Any cash received in the
KWTX or Brazos acquisitions by a KWTX or Brazos shareholder may be subject to
backup withholding at a 31% rate. Backup withholding will not apply, however, to
a taxpayer who (1) furnishes a correct taxpayer identification number on IRS
Form W-9 or an appropriate substitute form and certifies on such Form that he or
she is not subject to backup withholding, (2) provides a certificate of foreign
status on IRS Form W-8 or an appropriate substitute form, or (3) is otherwise
exempt from backup withholding. Any amount paid as backup withholding will be
credited against the holder's federal income tax liability.
KWTX and Brazos shareholders who receive Gray class B common stock also
must comply with the information reporting requirements of the Treasury
Regulations under Section 368 of the Internal Revenue Code. In general, these
regulations require any taxpayer who receives stock, securities or other
property, including cash, in a "reorganization" described in Section 368(a) of
the Internal Revenue Code to include with his income tax return a complete
statement of the facts pertaining to the nonrecognition of gain or loss
including (1) the cost or other basis of the stock or securities transferred in
the exchange and (2) the amount of stock, securities, or other property received
in the exchange. In addition, the statement must include the fair market value,
as of the date of the exchange, of each type of stock, securities or other
property received by the taxpayer, and the taxpayer is required to maintain
permanent records. All KWTX and Brazos shareholders are encouraged to consult
their own tax advisors to determine the specific information that may be needed
to file pursuant to the Treasury Regulations under Section 368 of the Internal
Revenue Code.
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<PAGE> 31
THIS DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE KWTX AND BRAZOS ACQUISITIONS AND DOES NOT PROVIDE A COMPLETE
ANALYSIS OF SUCH CONSEQUENCES. IN ADDITION, THIS DISCUSSION DOES NOT ADDRESS TAX
CONSEQUENCES WHICH MAY VARY WITH, OR ARE CONTINGENT UPON, INDIVIDUAL
CIRCUMSTANCES. MOREOVER, THE DISCUSSION DOES NOT ADDRESS ANY NON-INCOME TAX OR
FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE ACQUISITIONS. ACCORDINGLY, KWTX
AND BRAZOS SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
PARTICULAR FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES
RESULTING FROM THE ACQUISITIONS.
ACCOUNTING TREATMENT
The acquisitions of KWTX, Brazos and KXII will be accounted for under the
purchase method of accounting. Generally, under the purchase method of
accounting, assets acquired and liabilities assumed are recorded at their fair
value.
REGULATORY MATTERS
Under the Communications Act, the acquisitions may not be consummated until
the FCC has approved the assignment of the FCC licenses of KWTX, Brazos and KXII
to Gray. This approval has been obtained.
Under the Hart-Scott-Rodino Act, the acquisitions may not be consummated
until notifications have been given and information has been furnished to the
Federal Trade Commission and the Anti-Trust Division of the United States
Department of Justice and specified waiting period requirements have expired. On
July 23, 1999, Gray, KWTX and Brazos filed the required notification and report
forms under the Hart-Scott-Rodino Act with the FTC and Anti-Trust Division, and
the applicable waiting period scheduled to expire at midnight on August 22,
1999, unless earlier termination is granted. At any time before or after the
effective time of the acquisitions, the FTC or the Antitrust Division could take
any action under the United States antitrust laws that it deems necessary or
desirable in the public interest. This could include seeking to enjoin the
acquisitions or seeking the divestiture of KWTX, Brazos or KXII by Gray, in
whole or in part, or the divestiture or compulsory licensing of substantial
assets of Gray, KWTX, Brazos or KXII or their respective subsidiaries. State
attorneys general and private parties may also bring legal actions under the
federal or state antitrust laws in some cases.
FINANCING OF THE ACQUISITIONS
The total amount of funds required by Gray to consummate the acquisitions
and pay related fees and expenses is estimated to be approximately $100 million.
Gray intends to finance the cash consideration required by the acquisition
agreements by issuing long-term debt. Gray is analyzing various financing
alternatives and is in discussions with its lenders to provide the financing.
While exact financing terms have not been finalized, Gray currently believes the
financing will be completed incorporating the general terms outlined below.
Additional funds, if any, necessary to complete the financing are expected to be
borrowed under Gray's existing revolving credit facility.
<TABLE>
<S> <C>
Principal Amount: $100,000,000
</TABLE>
26
<PAGE> 32
<TABLE>
<S> <C>
Interest Rate: Variable -- based on LIBOR plus an additional
percentage based upon Gray's overall ratio of
indebtedness to its operating cash flow
Interest Payable: Quarterly in arrears
Repayment and
Final Maturity: .25% of principal quarterly each March 31, June
30, September 30 and December 31 beginning March
31, 2001 through September 30, 2005, with the
remaining outstanding principal due and payable on
December 31, 2005
Ranking and
Security: The indebtedness will be senior secured
indebtedness of Gray and Gray and its subsidiaries
will jointly and severally pledge their assets to
guarantee the indebtedness
Covenants: The credit agreement is expected to contain normal
and customary debt covenants, such as debt service
coverage ratios and the requirement of Gray to
maintain certain financial ratios, and will limit
Gray's ability to incur additional indebtedness
</TABLE>
The actual amount of cash that will be needed to complete the acquisitions
is unknown at this time and is dependent on the following factors:
- the election of each of the KWTX and Brazos shareholders regarding the
proportion of cash and Gray class B common stock to be received in the
acquisitions;
- the final amount of the specified working capital accounts as to which
the acquisition agreements require Gray to increase the consideration
payable;
- the election by Gray to pay all of the merger consideration in cash if
the per share price of the Gray class B common stock for the 20 trading
days preceding the closing date is less than $12; and
- the actual amount of the transaction and closing costs.
If additional financing is required, Gray currently intends to fund such
amounts by drawing on its existing bank revolving credit facility. As of June
30, 1999, Gray had availability of approximately $69.3 million under the terms
of that facility. Gray would be required to explore alternative financing
arrangements if its borrowing ability under the revolving credit facility was
insufficient to meet any additional financing necessary to complete the
acquisitions.
If KWTX and Brazos shareholders elect to receive more than 40% of their
respective consideration in Gray class B common stock, the cash consideration
will be correspondingly reduced. In such circumstances, Gray would either:
- reduce the planned $100 million new debt issuance to an appropriate
lesser amount;
- fund the cash consideration required by exclusively drawing on its
existing bank revolving credit facility; or
27
<PAGE> 33
- issue a smaller principal amount of new debt and draw on its existing
revolving credit facility.
Gray will require modifications to its existing bank senior credit facility
to allow for the expected increase in Gray's total indebtedness and the issuance
of the planned additional senior debt. These actions will require the approval
of over two-thirds of the senior credit facility's participants. Gray currently
believes that such approval will be obtained. If the approval were not obtained,
Gray would explore alternate financing arrangements.
RESALE OF GRAY CLASS B COMMON STOCK FOLLOWING THE ACQUISITIONS
In general the shares of the Gray class B common stock issuable upon
conversion of the KWTX and Brazos stock in the acquisitions will be freely
transferable. However, securities received by any shareholder who is an
"affiliate" of KWTX or Brazos for purposes of Rule 145 under the Securities Act
of 1933 will not be transferable, except pursuant to an effective registration
statement or an exemption from the registration requirements of the Securities
Act of 1933. An affiliate, as defined under the Securities Act of 1933,
generally includes, without limitation, directors, certain executive officers
and beneficial owners of 10% or more of a class of capital stock. This proxy
statement/prospectus does not cover sales of Gray class B common stock issued to
any person who is an affiliate of KWTX or Brazos. However, the acquisition
agreements require Gray to register for resale the shares of Gray class B common
stock received by affiliates of KWTX and Brazos.
SHAREHOLDERS' AGREEMENTS
Each director, officer and five percent shareholder of each of KWTX and
Brazos and certain principal shareholders of Gray have agreed to vote their
shares in favor of the acquisitions. As of June 30, 1999, the shares subject to
such voting agreements represented 66.9% of the outstanding shares of KWTX,
69.2% of the outstanding shares of Brazos and 48.9% of the votes represented by
the outstanding shares of Gray class A common stock and class B common stock.
NO APPRAISAL RIGHTS AVAILABLE TO GRAY SHAREHOLDERS
Under Georgia law, Gray shareholders who object to the proposal to approve
the issuance of shares of Gray class B common stock pursuant to the acquisition
agreements will not be afforded statutory appraisal rights.
28
<PAGE> 34
SELECTED FINANCIAL INFORMATION OF GRAY
The following selected consolidated financial data for, and as of the end
of, each of the years in the five-year period ended December 31, 1998 are
derived from the audited consolidated financial statements of Gray. The
consolidated financial statements as of December 31, 1997 and 1998 and for each
of the years in the three-year period ended December 31, 1998 have been audited
by Ernst & Young LLP, independent auditors, which consolidated financial
statements and auditors' report thereon are incorporated by reference in this
proxy statement/prospectus. The selected consolidated financial data as of June
30, 1998 and 1999 and for the six-month periods then ended are derived from the
unaudited condensed consolidated financial statements of Gray incorporated by
reference in this proxy statement/prospectus which, in the opinion of management
of Gray, include all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the data for such periods. The results of operations
for the six months ended June 30, 1999 are not necessarily indicative of the
results to be expected for the year ending December 31, 1999.
The selected consolidated financial data of Gray should be read in
conjunction with Gray's annual report on Form 10-K for the year ended December
31, 1998 and quarterly report on Form 10-Q for the quarter ended June 30, 1999,
which are incorporated by reference in this proxy statement/prospectus.
29
<PAGE> 35
<TABLE>
<CAPTION>
IN THOUSANDS EXCEPT PER SHARE DATA
------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- -------------------
1994(1) 1995(2) 1996(3) 1997(4) 1998(5) 1998 1999
------- ------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues:
Broadcasting............... $22,826 $36,750 $ 54,981 $ 72,301 $ 91,007 $ 42,201 $ 44,306
Publishing................. 13,692 21,866 22,845 24,536 29,330 13,917 17,558
Paging..................... -- -- 1,479 6,711 8,553 3,925 4,557
------- ------- -------- -------- -------- -------- --------
Total net
revenues........ 36,518 58,616 79,305 103,548 128,890 60,043 66,421
Expenses:
Broadcasting............. 14,864 23,202 32,437 41,967 52,967 24,780 26,673
Publishing............... 11,198 20,016 17,949 19,754 24,197 11,441 13,710
Paging................... -- -- 1,078 4,051 5,618 2,583 3,238
Corporate and
administrative......... 1,959 2,258 3,219 2,528 3,063 1,317 1,687
Depreciation............. 1,745 2,633 4,078 7,800 9,691 4,176 5,773
Amortization of
intangible assets...... 396 1,326 3,585 6,718 8,426 3,667 5,346
Non-cash compensation
paid in common stock... 80 2,321 880 -- -- -- --
------- ------- -------- -------- -------- -------- --------
30,242 51,756 63,226 82,818 103,962 47,964 56,427
------- ------- -------- -------- -------- -------- --------
6,276 6,860 16,079 20,730 24,928 12,079 9,994
Gain on disposition of
television station....... -- -- 5,671 -- 70,572 -- --
Miscellaneous income and
(expense)................ 189 143 33 (31) (242) (314) 456
------- ------- -------- -------- -------- -------- --------
6,465 7,003 21,783 20,699 95,258 11,765 10,450
Interest expense........... 1,923 5,438 11,689 21,861 25,455 11,967 13,775
------- ------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary
charge................... 4,542 1,565 10,094 (1,162) 69,803 (202) (3,325)
Federal and state income
taxes.................... 1,776 634 4,416 240 28,144 443 (684)
Extraordinary charge on
extinguishment of debt,
net of tax benefit of
$2,157................... -- -- 3,159 -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net income (loss).......... 2,766 931 2,519 (1,402) 41,659 (645) (2,641)
Preferred dividends........ -- -- 377 1,410 1,318 718 505
------- ------- -------- -------- -------- -------- --------
Net income (loss) available
to common stockholders... $ 2,766 $ 931 $ 2,142 $ (2,812) $ 40,341 $ (1,363) $ (3,146)
======= ======= ======== ======== ======== ======== ========
Average outstanding common
shares:
Basic.................... 7,034 6,531 8,098 11,853 11,923 11,899 11,961
Diluted.................. 7,034 6,722 8,438 11,853 12,404 11,899 11,961
Net income (loss) per share
available to common
stockholders:
Basic.................... $ 0.39 $ 0.14 $ 0.26 $ (0.24) $ 3.38 $ (0.11) $ (0.26)
Diluted.................. $ 0.39 $ 0.14 $ 0.25 $ (0.24) $ 3.25 $ (0.11) $ (0.26)
BALANCE SHEET DATA AT END
OF PERIOD:
Working capital
(deficiency)............. $ 1,075 $ (222) $ (158) $ 10,089 $ 10,249 $ 9,949 $ 15,022
Total assets............... 68,789 78,240 298,664 345,051 468,974 343,683 480,828
Total debt................. 52,940 54,324 173,368 227,076 270,655 226,901 291,672
Total stockholders
equity................... $ 5,001 $ 8,986 $ 95,226 $ 92,295 $126,703 $ 91,669 $123,183
</TABLE>
30
<PAGE> 36
- -------------------------
(1) Reflects the operating results of WKYT-TV, WYMT-TV and The Rockdale Citizen
as of their respective acquisition dates.
(2) Reflects the operating results of The Gwinnett Post-Tribune as of its date
of acquisition.
(3) Reflects the operating results of WRDW-TV, WCTV-TV, WVLT-TV, a satellite
uplink and production business and a communications and paging business as
of their respective acquisition dates. Also reflects the sale of KTVE Inc.,
as of its date of disposition. Gray also incurred an extraordinary charge in
connection with the early extinguishment of debt.
(4) Reflects the operating results of WITN-TV and Gulflink Communications, Inc.,
as of their respective acquisition dates.
(5) Reflects the operating results of Busse Broadcasting Corporation as of its
date of acquisition. Also reflects the sale of WALB-TV as of its date of
disposition.
31
<PAGE> 37
SELECTED FINANCIAL INFORMATION OF KWTX
The following selected financial data for, and as of the end of, each of
the years in the five-year period ended December 31, 1998 are derived from the
financial statements of KWTX. The financial statements as of and for the year
ended December 31, 1998 have been audited by Pattillo, Brown & Hill, LLP,
independent auditors. The financial statements as of December 31, 1997 and for
the years ended December 31, 1996 and 1997 were compiled by Pattillo, Brown &
Hill, LLP, independent auditors. These financial statements and the auditors'
report thereon are included elsewhere in this proxy statement/ prospectus. The
selected financial data as of June 30, 1998 and 1999 and for the six month
periods ended June 30, 1998 and 1999 are derived from the unaudited condensed
financial statements of KWTX included elsewhere in this proxy
statement/prospectus which, in the opinion of management of KWTX, include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the data for such periods. The results of operations for the six months
ended June 30, 1999 are not necessarily indicative of the results to be expected
for the year ending December 31, 1999.
The selected financial data of KWTX should be read in conjunction with
KWTX's audited financial statements and related notes for the year ended
December 31, 1998 and the unaudited financial statements and related notes for
the years ended December 31, 1996 and 1997 and the six months ended June 30,
1998 and 1999, included elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
---------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues...................... $ 8,215 $ 8,797 $ 9,590 $ 8,796 $ 9,222 $ 4,290 $ 4,639
Expenses:
Broadcasting..................... 5,772 5,968 6,260 5,550 5,507 2,700 2,780
Depreciation..................... 418 463 553 495 607 288 336
--------- --------- --------- --------- --------- ------- -------
Total operating expenses... 6,190 6,431 6,813 6,045 6,114 2,988 3,116
--------- --------- --------- --------- --------- ------- -------
Operating income................. 2,025 2,366 2,777 2,751 3,108 1,302 1,523
Miscellaneous income............. 745 855 1,196 1,281 1,601 676 587
--------- --------- --------- --------- --------- ------- -------
Income before income taxes....... 2,770 3,221 3,973 4,032 4,709 1,978 2,110
Federal and state income taxes... 838 1,002 1,205 1,305 1,388 543 652
Gain on disposition of radio
station, net................... -- -- 2,392 -- -- -- --
--------- --------- --------- --------- --------- ------- -------
Net income................. $ 1,932 $ 2,219 $ 5,160 $ 2,727 $ 3,321 $ 1,435 $ 1,458
========= ========= ========= ========= ========= ======= =======
Average outstanding common shares:
Basic and diluted................ 1,550 1,550 1,550 1,550 1,550 1,550 1,550
Net income per share of common
stock:
Basic and diluted $1,246.45 $1,431.62 $3,329.35 $1,759.09 $2,142.41 $925.92 $940.34
BALANCE SHEET DATA AT END OF
PERIOD:
Working capital................... $ 4,857 $ 5,351 $ 9,655 $ 7,070 $ 7,888 $ 6,830 $ 7,322
Total assets...................... 13,303 14,394 19,968 17,621 19,319 17,270 17,956
Total stockholders equity......... $ 11,538 $ 12,517 $ 17,057 $ 15,527 $ 17,298 $15,722 $16,586
</TABLE>
32
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF KWTX
INTRODUCTION
The following analysis of the financial condition and results of operations
of KWTX should be read in conjunction with KWTX's audited financial statements
and related notes for the year ended December 31, 1998 and the unaudited
financial statements and related notes for the years ended December 31, 1996 and
1997 and the six months ended June 30, 1998 and 1999.
In November 1996, KWTX sold all of the assets and operations of radio
stations KWTX-AM and KWTX-FM to a third party resulting in a pre-tax gain of
$3.6 million. These were the only radio broadcasting stations operated by KWTX.
The operating revenues of KWTX for 1998 and 1997 were derived from
broadcast advertising revenues and, to a much lesser extent, from compensation
paid by the networks to KWTX for broadcasting network programming. In addition,
KWTX obtains revenue from other incidental services such as the production of
television commercials. The 1996 operating revenues also include advertising
revenues from the radio stations that were sold in November of that year.
In KWTX's operations, broadcast advertising is sold for placement either
preceding or following a television station's network programming and within
local and syndicated programming. Broadcast advertising is sold in time
increments and is priced primarily on the basis of a program's popularity among
the specific audience an advertiser desires to reach, as measured by Nielsen
Media Research. In addition, broadcast-advertising rates are affected by the
number of advertisers competing for the available time, the size and demographic
makeup of the market served by the station and the availability of alternative
advertising media in the market area. Broadcast advertising rates are the
highest during the most desirable viewing hours, with corresponding reductions
during other hours. The ratings of a local station affiliated with a major
network can be affected by ratings of network programming.
Most broadcast advertising contracts are short-term and generally run only
for a few weeks. Approximately 47% of the net revenues of KWTX for the year
ended December 31, 1998 were generated from local advertising, which is sold
primarily by a station's sales staff directly to local accounts. The remainder
represents primarily national advertising, which is sold by a station's national
advertising sales representative. The stations generally pay commissions to
advertising agencies on local, regional and national advertising and the
stations also pay commissions to the national sales representative on national
advertising.
Broadcast advertising revenues are generally highest in the second and
fourth quarters of each year, due in part to increases in consumer advertising
in the spring and retail advertising in the period leading up to and including
the winter holiday season. In addition, broadcast advertising revenues are
generally higher during even numbered election years due to spending by
political candidates, which spending typically is heaviest during the fourth
quarter.
33
<PAGE> 39
KWTX's primary operating expenses are programming costs, employee
compensation and related benefits and programming costs. In addition,
broadcasting operations incur overhead expenses, such as maintenance, supplies,
insurance, rent and utilities.
BROADCASTING REVENUES
Set forth below are the principal types of broadcasting revenues earned by
KWTX for the periods indicated and the percentage contribution of each of the
revenues (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------- ---------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Local............... $3,696 38.54% $4,097 46.58% $4,293 46.56% $1,927 44.92% $2,179 46.97%
National............ 2,851 29.73 3,104 35.29 2,955 32.04 1,545 36.01 1,659 35.76
Network
compensation...... 1,480 15.43 1,500 17.05 1,439 15.60 693 16.15 755 16.28
Political........... 311 3.24 22 .25 452 4.90 77 1.79 5 0.11
Radio............... 1,123 11.71 -- -- -- -- -- -- -- --
Other............... 129 1.35 73 .83 83 .90 48 1.14 41 0.88
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net
revenue..... $9,590 100.00% $8,796 100.00% $9,222 100.00% $4,290 100.00% $4,639 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net revenue increased $349,000, or 8.1%, from $4.3 million to $4.6 million
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998. This increase reflected an increase in net local advertising sales of
approximately $252,000, due to increased advertiser demand for commercial time.
Political net revenue decreased approximately $72,000 between the six months
ended June 30, 1999 and 1998 reflecting a decrease in political announcements
associated with local elections. In addition, network compensation increased
approximately $62,000 between the six months ended June 30, 1999 and 1998.
During the 1998 period, the network did not compensate its affiliates for
carrying the Olympic broadcasts. Net national revenues increased approximately
$114,000 between the six months ended June 30, 1999 and 1998, reflecting
increased demand for commercial time by national advertisers.
Operating costs and expenses increased $128,000, or 4.3%, from $3.0 million
to $3.1 million for the six months ended June 30, 1999 compared to the six
months ended June 30, 1998. The increase primarily reflected additional charges
of approximately $38,000 for programming and $50,000 for increased sales
salaries.
Income from operations increased $221,000, or 17.0%, from $1.3 million to
$1.5 million for the six months ended June 30, 1999 compared to the six months
ended June 30, 1998 reflecting the net effect of the increased revenue and
expenses both discussed above.
Miscellaneous income decreased $89,000, or 13.2%, from $676,000 to $587,000
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998 reflecting non-recurring miscellaneous income from the 1998 period.
34
<PAGE> 40
Federal income tax expense for the six months ended June 30, 1999 and 1998
generally reflected KWTX's application of a 34% federal tax rate to pre-tax
income. The pre-tax income is adjusted for the deduction of state franchise
taxes, an 80% exclusion on income from the Brazos equity investment and other
items calculating the federal income tax expense.
Net earnings increased $23,000, or 1.6%, from $1,435,000 to $1,458,000 for
the six months ended June 30, 1999 compared to the six months ended June 30,
1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net revenue increased $426,000, or 4.8%, from $8.8 million to $9.2 million
for the year ended December 31, 1998 compared to the year ended December 31,
1997. This increase reflected an increase of $430,000 in net political revenue
to $452,000 in 1998 from $22,000 in 1997. Political revenue is generally
cyclical and coincides with the general election cycle during even numbered
years. Net local revenue increased by $196,000 from $4.1 million in 1997 to $4.3
million in 1998, reflecting a general increase in local sales. Net national
revenue decreased by $149,000 from $3.1 million in 1998 to $3.0 million in 1997,
reflecting a decrease in national advertising spots to allow for increased
political advertising. Network compensation decreased $61,000 from 1997 to 1998
reflecting the station's share of CBS's network wide reduction in compensation
due to the network's acquisition of broadcast rights for NFL football.
Income from operations increased $357,000, or 13.0%, from $2.8 million in
1997 to $3.1 million in 1998, reflecting the increased revenue discussed above.
Miscellaneous income increased $321,000, or 25.1%, from $1.3 million in
1997 to $1.6 million in 1998. The increase was partially attributable to an
increase of $109,000 in the income from KWTX's 50% interest in Brazos reflecting
Brazos' 1998 financial performance relative to 1997. In addition, other income
increased $177,000 between 1997 and 1998, reflecting a gain on the sale of fixed
assets in 1998.
Federal income tax expense for 1998 and 1997 generally reflected KWTX's
application of a 34% federal tax rate to pre tax income. The pre-tax income is
adjusted for the deduction of state franchise tax, an 80% exclusion on income
from the Brazos equity investment and other items in calculating the federal
income tax expense.
Net earnings increased $594,000, or 21.8%, from $2.7 million in 1997 to
$3.3 million in 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenue decreased $794,000, or 8.3%, from $9.6 million in 1996 to $8.8
million in 1997. This decrease was attributable to the sale of KWTX's radio
stations in November 1996. The sale of the radio stations decreased net revenue
by $1.1 million for 1997. This decrease was partially offset by increases in
television broadcasting net revenues. Net political revenue decreased $289,000,
or 93%, from $311,000 in 1996 to $22,000 in 1997 reflecting the "off" year of
the biennial election cycle. Net local revenue increased $401,000 from $3.7
million in 1996 to $4.1 million in 1997 reflecting an overall sales increase.
Net national revenue increased $253,000 from $2.8 million in 1996 to $3.1
million in 1997 reflecting an increase in national spots sold due to decreased
local political advertising.
35
<PAGE> 41
Operating costs and expenses decreased $768,000, or 11.3%, from $6.8
million in 1996 to $6.0 million in 1997. The decrease reflected the sale of the
radio operations in November 1996. This sale reduced 1997 expenses by
approximately $1.1 million. Increases in television operating expenses offset,
in part, the reduction of expenses due to the sale of the radio stations.
Miscellaneous income increased $85,000, or 7.1%, from $1.2 million in 1996
to $1.3 million in 1997. The increase was attributable to an increase of
$116,000 in the income from KWTX's 50% interest in Brazos reflecting Brazos'
financial performance during 1997 compared to 1996.
Federal income tax expense for 1997 and 1996 generally reflected KWTX's
application of a 34% federal tax rate to pre-tax income. Pre-tax income was
adjusted for the deduction of state franchise taxes, an 80% exclusion on income
from the Brazos equity investment and other items in calculating the federal
income tax expense.
Net earnings decreased $2.4 million, or 47.2%, from $5.2 million in 1996 to
$2.7 million in 1997. The 1996 net earnings included a net of tax gain of $2.4
million relating to the discontinuance and disposition of KWTX's radio stations.
LIQUIDITY AND CAPITAL RESOURCES
KWTX's working capital approximated $9.7 million, $7.1 million, $7.8
million and $7.3 million at December 31, 1996, 1997, 1998 and June 30, 1999,
respectively. KWTX's cash provided from operations was approximately $6.2
million, $1.4 million, $3.2 million and $1.7 million in 1996, 1997, 1998 and the
six months ended June 30, 1999, respectively. Management of KWTX believes that
current cash balances and cash flows from operations will be adequate to provide
for KWTX's capital expenditures, cash dividends and working capital requirements
respectively.
KWTX used cash for capital expenditures in the amount of $369,000,
$911,000, $1.3 million, and $414,000 in 1996, 1997, 1998 and the six months
ended June 30, 1999, respectively.
KWTX paid dividends of $620,000, $4.3 million, $1.6 million and $2.2
million in 1996, 1997, 1998 and during the six months ended June 30, 1999,
respectively. The 1997 dividends reflect, in part, a special dividend in the
amount of the net proceeds from the sale of KWTX's radio stations which were
sold in November 1996.
KWTX regularly enters into program contracts for the right to broadcast
television programs produced by others and programming commitments for the right
to broadcast programs in the future. Such programming commitments are generally
made to replace expiring or canceled program rights. Payments under such
contracts are made in cash or the concession of advertising spots for the
program provider to resell, or a combination of both. At June 30, 1999, payments
on program license liabilities due in 1999, which will be paid with cash from
operations, were approximately $20,000.
Management does not believe that inflation in past years has had a
significant impact on KWTX's results of operations nor is inflation expected to
have a significant effect upon KWTX's business in the near future.
36
<PAGE> 42
YEAR 2000 ISSUE
The problems created by systems that are unable to interpret dates
accurately after December 31, 1999 is referred to as the "Year 2000 Issue." Many
software programs have historically categorized the "year" in a two-digit format
rather than a four-digit format. As a result, those computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. The Year 2000 Issue creates potential risks for KWTX,
including potential problems in KWTX's Information Technology and
non-Information Technology systems. The Year 2000 Issue could cause a system
failure, miscalculations or disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. KWTX may also be exposed to risks from
third parties who fail to adequately address their own Year 2000 Issue.
KWTX has implemented a multiphase program designed to address the Year 2000
Issue. Each phase of this program and its state of completion are described
below:
Assessment: This phase of the program includes the identification of
KWTX's IT and non-IT systems. After these systems have been identified,
they are evaluated to determine whether they will correctly recognize dates
after December 31, 1999 ("Year 2000 Compliant"). If it is determined that
they are not Year 2000 Compliant, they are replaced or modified in the
remediation phase of the program. KWTX's systems are non-proprietary. KWTX
is in the process of obtaining from each system vendor a written or oral
representation as to each significant system's status of compliance. KWTX
has commenced an ongoing process of contacting suppliers and other key
third parties to assess their Year 2000 Compliance status. It appears that
all of these third parties are currently Year 2000 Compliant or they plan
to be Year 2000 Compliant prior to December 31, 1999. This phase is
substantially complete and KWTX has identified the majority of the systems
that need to be replaced.
Remediation: For those systems which are not Year 2000 Compliant, a
plan is derived to make the systems Year 2000 Compliant. These solutions
have included modification or replacement of existing systems. The
remediation phase is approximately 85% complete.
Testing: Test remediated systems to assure normal function when
placed in their original operating environment and further test for Year
2000 Compliance. The Testing phase of the program is approximately 85%
complete and KWTX anticipates that it will be completed by October 1, 1999.
Contingency: As a result of KWTX's Year 2000 Compliance program, KWTX
does not believe that it has significant risk resulting from this issue.
However, KWTX is in the process of developing contingency plans for the
possibility that one of its systems or one of a third party's systems may
not be Year 2000 Compliant.
KWTX does not presently believe that the estimated total Year 2000 project
cost will exceed $15,000. Most of this cost will be realized over the estimated
useful lives of the new hardware and software; however, any third party
consulting fees would be expended in the period the services are rendered. To
date, KWTX has identified several minor systems that are not Year 2000 Compliant
and these systems are in the process of being replaced. However, KWTX has not
incurred significant expenses associated with the Year 2000 Issue. As of
December 31, 1998, no IT projects have been deferred due to KWTX's efforts
related to the Year 2000 Issue.
37
<PAGE> 43
The costs of the project and the date on which KWTX believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
38
<PAGE> 44
SELECTED FINANCIAL INFORMATION OF BRAZOS
The following table sets forth selected financial data for, and as of the
end of, each of the years in the five-year period ended December 31, 1998 are
derived from the financial statements of Brazos. The financial statements as of
and for the year ended December 31, 1998 have been audited by Pattillo, Brown &
Hill, LLP, independent auditors. The financial statements as of December 31,
1997 and for the years ended December 31, 1996 and 1997 were compiled by
Pattillo, Brown & Hill, LLP, independent auditors. These financial statements
and the auditor's report thereon are included elsewhere in this proxy
statement/prospectus. The selected financial data as of June 30, 1998 and 1999
and for the six-month periods ended June 30, 1998 and 1999 are derived from the
unaudited condensed financial statements of Brazos included elsewhere in this
proxy statement/ prospectus which, in the opinion of management of Brazos,
include all adjustments, consisting of normal recurring adjustments, necessary
to present fairly the data for such periods. The results of operations for the
six months ended June 30, 1999 are not necessarily indicative of the results to
be expected for the year ending December 31, 1999.
The selected financial data of Brazos should be read in conjunction with
Brazos' audited financial statements and related notes for the year ended
December 31, 1998 and the unaudited financial statements and related notes for
the years ended December 31, 1996 and 1997 and the six months ended June 30,
1998 and 1999, included elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
---------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues.................... $ 5,018 $ 5,201 $ 6,146 $ 6,624 $ 7,301 $ 3,509 $ 3,357
Expenses:
Broadcasting.................. 3,024 3,228 3,477 3,719 4,021 1,983 2,012
Depreciation.................. 428 469 424 381 392 196 192
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.... 3,452 3,697 3,901 4,100 4,413 2,179 2,204
--------- --------- --------- --------- --------- --------- ---------
Operating income................ 1,566 1,504 2,245 2,524 2,888 1,330 1,153
Miscellaneous income............ 135 238 198 287 263 149 141
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes...... 1,701 1,742 2,443 2,811 3,151 1,479 1,294
Federal and state income
taxes......................... 611 656 875 1,012 1,135 502 449
--------- --------- --------- --------- --------- --------- ---------
Net income.................. $ 1,090 $ 1,086 $ 1,568 $ 1,799 $ 2,016 $ 977 $ 845
========= ========= ========= ========= ========= ========= =========
Average outstanding common
shares:
Basic and Diluted............. 500 500 500 500 500 500 500
Net income per share of common
stock:
Basic and Diluted............. $2,179.52 $2,171.55 $3,135.42 $3,598.63 $4,032.99 $1,954.09 $1,689.35
BALANCE SHEET DATA AT END OF
PERIOD:
Working capital................. $ 4,087 $ 4,589 $ 5,385 $ 6,548 $ 7,845 $ 6,601 $ 7,197
Total assets.................... 7,006 7,489 8,517 9,842 10,914 9,543 9,735
Total stockholders equity....... $ 5,702 $ 6,288 $ 7,280 $ 8,580 $ 9,596 $ 8,557 $ 8,941
</TABLE>
39
<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BRAZOS
INTRODUCTION
The following analysis of the financial condition and results of operations
of Brazos should be read in conjunction with Brazos' audited financial
statements and related notes for the year ended December 31, 1998 and the
unaudited financial statements and related notes for the years ended December
31, 1996 and 1997 and the six months ended June 30, 1998 and 1999.
The operating revenues of Brazos are derived from broadcast advertising
revenues and, to a lesser extent, compensation paid by the networks to Brazos
for broadcasting network programming. In addition, Brazos obtains revenue from
other incidental services, such as the production of television commercials.
In Brazos' operations, broadcast advertising is sold for placement either
preceding or following a television station's network programming and within
local and syndicated programming. Broadcast advertising is sold in time
increments and is priced primarily on the basis of a program's popularity among
the specific audience an advertiser desires to reach, as measured by A.C.
Nielsen Media Research. In addition, broadcast advertising rates are affected by
the number of advertisers competing for the available time, the size and
demographic makeup of the market served by the station and the availability of
alternative advertising media in the market area. Broadcast advertising rates
are the highest during the most desirable viewing hours, with corresponding
reductions during other hours. The ratings of a local station affiliated with a
major network can be affected by ratings of network programming.
Most broadcast advertising contracts are short-term and generally run only
for a few weeks. Approximately 42% of the net revenues of Brazos for the year
ended December 31, 1998 were generated from local advertising, which is sold
primarily by a station's sales staff directly to local accounts. The remainder
represents primarily national advertising, which is sold by a station's national
advertising sales representative. The stations generally pay commissions to
advertising agencies on local, regional and national advertising and the
stations also pay commissions to the national sales representative on national
advertising.
Broadcast advertising revenues are generally highest in the second and
fourth quarters of each year, due in part to increases in consumer advertising
in the spring and retail advertising in the period leading up to and including
the winter holiday season. In addition, broadcast advertising revenues are
generally higher during even numbered election years due to spending by
political candidates, which spending typically is heaviest during the fourth
quarter.
Brazos' primary operating expenses are employee compensation and related
benefits and programming costs. In addition, broadcasting operations incur
overhead expenses, such as maintenance, supplies, insurance, rent and utilities.
40
<PAGE> 46
BROADCASTING REVENUES
Set forth below are the principal types of broadcasting revenues earned by
Brazos for the periods indicated and the percentage contribution of each of the
revenues (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------- ---------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Local.............. $3,038 49.43% $2,904 43.84% 3,053 41.82% 1,505 42.89% $1,661 49.48
National........... 2,246 36.54 3,006 45.38 3,255 44.58 1,647 46.94 1,403 41.79
Network
compensation..... 566 9.21 573 8.65 539 7.38 262 7.47 287 8.55
Political.......... 195 3.17 43 .65 360 4.93 95 2.70 6 0.18
Production and
other............ 101 1.65 98 1.48 94 1.29 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net
revenue.... $6,146 100.00% $6,624 100.00% $7,301 100.00% $3,509 100.00% $3,357 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net revenue decreased $153,000, or 4.3%, from $3.5 million to $3.4 million
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998. This decrease reflected an increase in net local advertising sales of
approximately $156,000 offset, in part, by a decrease in national advertising
sales of $244,000. Political net revenue decreased approximately $89,000 between
the six months ended June 30, 1999 and 1998 reflecting the "off year" of the
biannual election cycle. Network compensation increased approximately $25,000
between the six months ended June 30, 1998 and 1999. During the 1998 period the
network did not compensate its affiliates for carrying the Olympic broadcasts.
Operating costs and expenses increased $25,000, or 1.1%, from $2,179,000 to
$2,204,000 for the six months ended June 30, 1999 compared to the six months
ended June 30, 1998.
Income from operations decreased $177,000, or 13.3%, from $1.3 million to
$1.1 million for the six months ended June 30, 1999 compared to the six months
ended June 30, 1998, reflecting the net effect of the decreased revenue and
increased expenses both discussed above.
Miscellaneous income decreased $8,000, or 5.4%, from $149,000 to $141,000
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998 reflecting decreased interest income from cash investments.
Federal income tax expense for the six months ended June 30, 1999 and 1998
generally reflected Brazos' application of a 34% federal tax rate to pre-tax
income. The pre-tax income is adjusted for the deduction of state franchise
taxes.
Net earnings decreased $132,000, or 13.5%, from $977,000 to $845,000 for
the six months ended June 30, 1999 compared to the six months ended June 30,
1998.
41
<PAGE> 47
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net revenue increased $677,000, or 10.2%, from $6.6 million to $7.3 million
for the year ended December 31, 1998 compared to the year ended December 31,
1997. This increase reflected an increase of $317,000 in net political revenue
to $360,000 for 1998 from $43,000 for 1997. Net local revenue increased $149,000
from $2.9 million in 1997 to $3.1 million in 1998, reflecting a normal increase
in sales. Net national revenue increased $249,000 from $3.0 million in 1997 to
$3.3 million in 1998, reflecting a general sales increase due to rising
advertising prices. Network compensation decreased approximately $34,000 in
1998, reflecting the station's share of CBS's network wide reduction in
compensation due to the network's acquisition of broadcast rights for NFL
football.
Operating costs and expenses increased $313,000, or 7.6%, from $4.1 million
in 1997 to $4.4 million in 1998, reflecting, in part, increased general and
administrative expenses of $142,000, and increased sales compensation costs of
$44,000. In addition, management bonus expense increased $59,000 between the
fiscal years.
Income from operations increased $364,000, or 14.4%, from $2.5 million in
1997 to $2.9 million in 1998, reflecting the net effect of the changes in
revenue and expenses discussed above.
Miscellaneous income decreased $24,000, or 8.4%, from $287,000 in 1997 to
$263,000 in 1998. The decrease reflected a loss on the disposal of fixed assets
recognized in 1998 versus a gain recognized in 1997.
Federal income tax expense for 1998 and 1997 generally reflected the
application of a 34% federal tax rate to pre tax income. The pre-tax income is
adjusted for the deduction of state franchise taxes.
Net earnings increased $217,000, or 12.1%, from $1.8 million in 1997 to
$2.0 million in 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenue increased $478,000, or 7.8%, from $6.1 million in 1996 to $6.6
million in 1997. Net political revenue decreased $152,000, or 77.9%, from
$195,000 in 1996 to $43,000 in 1997 reflecting the "off" year of the biennial
election cycle. Net local revenue decreased by $134,000 from $3.0 million in
1996 to $2.9 million in 1997 reflecting a shift from local sales to national
sales. Net national revenue increased by $760,000 from $2.2 million in 1996 to
$3.0 million in 1997 reflecting increased national advertising space due to
decreased political and local revenue as well as a general increase in sales.
Operating costs and expenses increased $199,000, or 5.1%, from $3.9 million
in 1996 to $4.1 million in 1997. The increase reflects, in part, a $100,000
increase in news costs reflecting increased staff and news programming and a
$70,000 increase in general and administrative expenses. Management bonus
expense increased $23,000, or 5.7%, from $403,000 in 1996 to $426,000 in 1997,
reflecting increased performance compensation based on the improved operating
results for the year ended December 31, 1997.
Income from operations increased $279,000, or 12.4%, from $2.2 million in
1996 to $2.5 million in 1997, reflecting the net effect of the changes in
revenue and expenses discussed above.
42
<PAGE> 48
Miscellaneous income increased $89,000, or 44.9%, from $198,000 in 1996 to
$287,000 in 1997. The increase reflected a gain recognized in 1997 on the
disposal of fixed assets verses a loss recognized in 1996.
Federal income tax expense for the years ended December 31, 1997 and 1996
generally reflected the application of a 34% federal tax rate to pre tax income.
The pre tax income is adjusted for the deduction of state franchise taxes.
Net earnings increased $232,000, or 14.8%, from $1.6 million in 1997 to
$1.8 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Brazos' working capital was approximately $5.4 million, $6.5 million, $7.8
million and $7.2 million at December 31, 1996, 1997, 1998 and June 30, 1999,
respectively. Brazos' cash provided from operations approximated $1.7 million,
$1.8 million, $2.4 million and $778,000 in 1996, 1997, 1998 and the six months
ended June 30, 1999, respectively. Management of Brazos believes that current
cash balances and cash flows from operations will be adequate to provide for
Brazos' capital expenditures, cash dividends and working capital requirements
respectively.
Brazos used cash for capital expenditures in the amount of $392,000,
$482,000, $154,000 and $127,000 in 1996, 1997, 1998 and the six months ended
June 30, 1999, respectively.
Brazos paid dividends of $575,000, $500,000, $1 million and $1.5 million in
1996, 1997, 1998 and during the six months ended June 30, 1999, respectively.
Brazos regularly enters into program contracts for the right to broadcast
television programs produced by others and programming commitments for the right
to broadcast programs in the future. Such programming commitments are generally
made to replace expiring or canceled program rights. Payments under such
contracts are made in cash or the concession of advertising spots for the
program provider to resell, or a combination of both. At June 30, 1999, payments
on program license liabilities due in 1999, which will be paid with cash from
operations, were approximately $20,000.
Management does not believe that inflation in past years has had a
significant impact on Brazos' results of operations nor is inflation expected to
have a significant effect upon Brazos' business in the near future.
YEAR 2000 ISSUE
The problems created by systems that are unable to interpret dates
accurately after December 31, 1999 is referred to as the "Year 2000 Issue." Many
software programs have historically categorized the "year" in a two-digit format
rather than a four-digit format. As a result, those computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. The Year 2000 Issue creates potential risks for Brazos,
including potential problems in Brazos' IT and non-IT systems. The Year 2000
Issue could cause a system failure, miscalculations or disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Brazos may also be exposed to risks from third parties who fail to adequately
address their own Year 2000 Issue.
43
<PAGE> 49
Brazos has implemented a multiphase program designed to address the Year
2000 Issue. Each phase of this program and its state of completion is described
below:
Assessment: This phase of the program includes the identification of
Brazos' IT and non-IT systems. After these systems have been identified,
they are evaluated to determine whether they will correctly recognize dates
after December 31, 1999 ("Year 2000 Compliant"). If it is determined that
they are not Year 2000 Compliant, they are replaced or modified in the
remediation phase of the program. Brazos' systems are non-proprietary.
Brazos is in the process of obtaining from each system vendor a written or
oral representation as to each significant system's status of compliance.
Brazos has commenced an ongoing process of contacting suppliers and other
key third parties to assess their Year 2000 Compliance status. It appears
that all of these third parties are currently Year 2000 Compliant or they
plan to be Year 2000 Compliant prior to December 31, 1999. This phase is
substantially complete and Brazos has identified the majority of the
systems that need to be replaced.
Remediation: For those systems which are not Year 2000 Compliant, a
plan is derived to make the systems Year 2000 Compliant. These solutions
have included modification or replacement of existing systems. The
remediation phase is approximately 60% complete.
Testing: Test remediated systems to assure normal function when
placed in their original operating environment and further test for Year
2000 Compliance. The Testing phase of the program is approximately 60%
complete and Brazos anticipates that it will be completed by October 1,
1999.
Contingency: As a result of Brazos' Year 2000 Compliance program,
Brazos does not believe that it has significant risk resulting from this
issue. However, Brazos is in the process of developing contingency plans
for the possibility that one of its systems or one of a third party's
systems may not be Year 2000 Compliant.
Brazos does not presently believe that the estimated total Year 2000
project cost will exceed $18,000. Most of this cost will be realized over the
estimated useful lives of the new hardware and software; however, any third
party consulting fees would be expended in the period the services are rendered.
To date, Brazos has identified several minor systems that are not Year 2000
Compliant and these systems are in the process of being replaced. However,
Brazos has not incurred significant expenses associated with the Year 2000
Issue. As of December 31, 1998, no IT projects have been deferred due to Brazos'
efforts related to the Year 2000 Issue.
The costs of the project and the date on which Brazos believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
44
<PAGE> 50
SELECTED COMBINED FINANCIAL INFORMATION OF KXII
The following table sets forth selected combined financial data for, and as
of the end of, each of the years in the five-year period ended December 31, 1998
are derived from the combined financial statements of KXII. The combined
financial statements as of and for the year ended December 31, 1998, have been
audited by Jaynes, Reitmeier, Boyd & Therrell, P.C., independent auditors. The
combined financial statements as of December 31, 1997 and for the years December
31, 1996 and 1997 were compiled by Jaynes, Reitmeier, Boyd & Therrell, P.C.
These combined financial statements and the auditor's report thereon are
included elsewhere in this proxy statement/prospectus. The selected combined
financial data as of June 30, 1998 and 1999 and for the six-month periods ended
June 30, 1998 and 1999 are derived from the unaudited condensed combined
financial statements of KXII included elsewhere in the proxy statement/
prospectus which, in the opinion of management of KXII, include all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the data
for such periods. The combined results of operations for the six months ended
June 30, 1999 are not necessarily indicative of the results to be expected for
the year ending December 31, 1999.
The selected combined financial data of KXII should be read in conjunction
with KXII's audited combined financial statements and related notes for the year
ended December 31, 1998 and the unaudited combined financial statements and
related notes thereto for the years ended December 31, 1996 and 1997 and the six
months ended June 30, 1998 and 1999, included elsewhere in this proxy
statement/prospectus.
<TABLE>
<CAPTION>
IN THOUSANDS
---------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues............... $4,426 $4,936 $5,604 $5,604 $6,102 $2,835 $3,209
Expenses:
Broadcasting............. 2,864 3,102 3,502 3,514 3,638 1,776 1,846
Depreciation............. 379 377 426 409 442 174 198
Amortization of
intangible assets...... 106 106 106 106 106 53 53
------ ------ ------ ------ ------ ------ ------
Total operating
expenses............. 3,349 3,585 4,034 4,029 4,186 2,003 2,097
------ ------ ------ ------ ------ ------ ------
Operating income........... 1,077 1,351 1,570 1,575 1,916 832 1,112
Miscellaneous income....... -- 7 2 7 33 -- 90
Interest expense........... 496 492 497 478 472 234 232
------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................... 581 866 1,075 1,104 1,477 598 970
State income taxes......... 24 36 29 21 36 13 4
------ ------ ------ ------ ------ ------ ------
Net income............. $ 557 $ 830 $1,046 $1,083 $1,441 $ 585 $ 966
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA AT END
OF PERIOD:
Working capital............ $ 270 $ 363 $ 904 $ 978 $1,790 $ 935 $1,839
Total assets............... 6,864 7,096 7,203 7,054 8,343 7,781 8,469
Total stockholders
equity................... $ 910 $1,354 $1,844 $1,976 $2,946 $2,205 $3,289
</TABLE>
- -------------------------
Information with respect to basic and diluted average outstanding common shares
and related income per share data has been omitted, because the selected
combined financial information for KXII combines corporate and partnership
entities. Accordingly share and per share data would not be meaningful.
45
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF KXII
INTRODUCTION
The following analysis of the financial condition and results of operations
of KXII should be read in conjunction with KXII's audited financial statements
and related notes for the year ended December 31, 1998 and the unaudited
financial statements and related notes for the years ended December 31, 1996 and
1997 and the six months ended June 30, 1998 and 1999.
The operating revenues of KXII are derived from broadcast advertising
revenues and, to a lesser extent, compensation paid by the networks to KXII for
broadcasting network programming. In addition, KXII obtains revenue from other
incidental services, such as production of television commercials.
In KXII's operations, broadcast advertising is sold for placement either
preceding or following a television station's network programming and within
local and syndicated programming. Broadcast advertising is sold in time
increments and is priced primarily on the basis of a program's popularity among
the specific audience an advertiser desires to reach, as measured by Nielsen
Media Research. In addition, broadcast advertising rates are affected by the
number of advertisers competing for the available time, the size and demographic
makeup of the market served by the station and the availability of alternative
advertising media in the market area. Broadcast advertising rates are highest
during the most desirable viewing hours, with corresponding reductions during
other hours. The ratings of a local station affiliated with a major network can
be affected by ratings of network programming.
Most broadcast advertising contracts are short-term and generally run only
for a few weeks. Approximately 59% of the net revenues of KXII for the year
ended December 31, 1998, were generated from local and regional advertising,
which is sold primarily by a station's sales staff directly to local accounts.
The remainder represents primarily national advertising, which is sold by a
station's national advertising sales representative. The stations generally pay
commissions to advertising agencies on local, regional and national advertising
and the stations also pay commissions to the national sales representative on
national advertising.
Broadcast advertising revenues are generally highest in the second and
fourth quarters of each year, due in part to increases in consumer advertising
in the spring and retail advertising in the period leading up to and including
the winter holiday season. In addition, broadcast advertising revenues are
generally higher during even numbered election years due to spending by
political candidates, which spending typically is heaviest during the fourth
quarter.
KXII's primary operating expenses are programming costs, employee
compensation and related benefits and programming costs. In addition,
broadcasting operations incur overhead expenses, such as maintenance, supplies,
insurance, rent and utilities.
46
<PAGE> 52
BROADCASTING REVENUES
Set forth below are the principal types of broadcasting revenues earned by
KXII for the periods indicated and the percentage contribution of each of the
revenues (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -------------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Local......................... $3,194 57.01% $3,326 59.35% $3,631 59.50% $1,814 63.99% $2,022 63.01%
National...................... 1,219 21.75 1,280 22.84 1,197 19.62 535 18.87 688 21.44
Network compensation.......... 935 16.68 943 16.83 897 14.70 432 15.24 468 14.58
Political..................... 179 3.19 3 0.05 327 5.36 -- -- -- --
Production and other.......... 77 1.37 52 0.93 50 0.82 54 1.90 31 0.97
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total net revenue....... $5,604 100.0% $5,604 100.0% $6,102 100.0% $2,835 100.0% $3,209 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net revenue increased $374,000, or 13.2%, from $2.8 million to $3.2 million
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998. This increase reflected an increase in net local and national advertising
sales of approximately $208,000 and $153,000, respectively, due to increased
advertiser demand for commercial time. Network compensation increased
approximately $36,000 from the six months ended June 30, 1998 to the six months
ended June 30, 1999. During the 1998 period the network did not compensate its
affiliates for carrying the Olympic broadcasts.
Income from operations increased $280,000, or 33.7%, from $832,000 to $1.1
million for the six months ended June 30, 1999 compared to the six months ended
June 30, 1998, reflecting increased revenue as discussed above.
Net earnings increased $381,000, or 65.1%, from $585,000 to $966,000 for
the six months ended June 30, 1999 compared to the six months ended June 30,
1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net revenue increased $498,000, or 8.9%, from $5.6 million to $6.1 million
for the year ended December 31, 1998 compared to the year ended December 31,
1997. This increase reflected an increase of $324,000 in net political revenue
to $327,000 for 1998 from $3,000 for 1997. Net local revenue increased $305,000
from $3.3 million in 1997 to $3.6 million in 1998, reflecting a significant
increase in the advertising budget for several local and regional advertisers in
the KXII broadcasting area. Net national revenue decreased $83,000 from $1.2
million in 1997 to $1.1 million in 1998, reflecting a national account which
significantly reduced its advertising in KXII's broadcast area. Network
compensation decreased approximately $46,000 from $943,000 in 1997 to $897,000
in 1998 reflecting KXII's share of CBS's network-wide reduction in compensation
due to the network's acquisition of broadcast rights for NFL football.
Income from operations increased $341,000, or 21.6%, from $1.6 million in
1997 to $1.9 million in 1998, reflecting an increase in production salaries and
broadcast rights expenses. In addition, management bonus expense increased
$30,000, or 34.9%, from
47
<PAGE> 53
$86,000 to $116,000, reflecting increased performance compensation based on the
improved operating results of KXII for 1998.
Net earnings increased $358,000, or 33%, from $1.1 million in 1997 to $1.4
million in 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenue was unchanged from 1996 to 1997. Net political revenue
decreased $176,000, or 98.3%, from $179,000 in 1996 to $3,000 in 1997,
reflecting the "off" year of the biannual election cycle. Net local revenue
increased by $132,000 from $3.2 million in 1996 to $3.3 million in 1997,
reflecting the addition of local sales staff and the focus of existing sales
staff on new business development. Net national revenue increased by $61,000
from $1.2 million in 1996 to $1.3 million in 1997, reflecting moderate increases
in the KXII's advertising rates.
Net earnings increased $37,000, or 3.5%, from $1.0 million in 1996 to $1.1
million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
KXII's working capital was approximately $904,000, $978,000, $1.8 million
and $1.8 million at December 31, 1996, 1997, 1998 and June 30, 1999,
respectively. KXII's cash provided from operations approximated $1.4 million,
$1.5 million, $1.9 million, and $1.0 million in 1996, 1997, 1998 and the six
months ended June 30, 1999, respectively. Management of KXII believes that
current cash balances and cash flows from operations will be adequate to provide
for KXII's capital expenditures, cash dividends and working capital
requirements, respectively.
KXII had capital expenditures in the amount of $313,000, $405,000, $418,000
and $336,000 in 1996, 1997, 1998 and the six months ended June 30, 1999,
respectively.
KXII paid $556,000, $951,000, $471,000 and $622,590 in dividends in 1996,
1997, 1998 and the six months ended June 30, 1999, respectively.
KXII regularly enters into program contracts for the right to broadcast
television programs produced by others and programming commitments for the right
to broadcast programs in the future. Such programming commitments are generally
made to replace expiring or canceled program rights. Payments under such
contracts are made in cash or the concession of advertising spots for the
program provider to resell, or a combination of both. At June 30, 1999, payments
on program license liabilities due in 1999, which will be paid with cash from
operations, were approximately $156,000.
Management does not believe that inflation in past years has had a
significant impact on KXII's results of operations nor is inflation expected to
have a significant effect upon KXII's business in the near future.
YEAR 2000 ISSUE
The problems created by systems that are unable to interpret dates
accurately after December 31, 1999 is referred to as the "Year 2000 Issue." Many
software programs have historically categorized the "year" in a two-digit format
rather than a four-digit format. As a result, those computer programs that have
time-sensitive software may recognize a date
48
<PAGE> 54
using "00" as the year 1900 rather than the year 2000. The Year 2000 Issue
creates potential risks for KXII, including potential problems in KXII's IT and
non-IT systems. The Year 2000 Issue could cause a system failure,
miscalculations or disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities. KXII may also be exposed to risks from third parties
who fail to adequately address their own Year 2000 Issue.
KXII has implemented a multiphase program designed to address the Year 2000
Issue. Each phase of this program and its state of completion is described
below:
Assessment: This phase of the program includes the identification of
KXII's IT and non-IT systems. After these systems have been identified,
they are evaluated to determine whether they will correctly recognize dates
after December 31, 1999 ("Year 2000 Compliant"). If it is determined that
they are not Year 2000 Compliant, they are replaced or modified in the
remediation phase of the program. KXII's systems are non-proprietary. KXII
is in the process of obtaining from each system vendor a written or oral
representation as to each significant system's status of compliance. KXII
has commenced an ongoing process of contacting suppliers and other key
third parties to assess their Year 2000 Compliance status. It appears that
all of these third parties are currently Year 2000 Compliant or they plan
to be Year 2000 Compliant prior to December 31, 1999. This phase is
substantially complete and KXII has identified the majority of the systems
that need to be replaced.
Remediation: For those systems which are not Year 2000 Compliant, a
plan is derived to make the systems Year 2000 Compliant. These solutions
have included modification or replacement of existing systems. The
remediation phase is 100% complete.
Testing: Test remediated systems to assure normal function when
placed in their original operating environment and further test for Year
2000 Compliance. The Testing phase of the program is approximately 95%
complete and KXII anticipates that it will be completed by August 31, 1999.
Contingency: As a result of KXII's Year 2000 Compliance program, KXII
does not believe that it has significant risk resulting from this issue.
However, KXII is in the process of developing contingency plans for the
possibility that one of its systems or one of a third party's systems may
not be Year 2000 Compliant.
49
<PAGE> 55
PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma condensed combined financial statements
of Gray give effect to the acquisitions of KWTX, Brazos and KXII and the related
financing. In addition to reflecting these transactions, the statements of
operations also reflect certain other recently completed transactions. The
statement of operations for the six months ended June 30, 1999 reflects the
acquisition of KWTX, Brazos and KXII, the related financing and the acquisition
of The Goshen News as if these transactions had occurred on January 1, 1999. The
statement of operations for the year ended December 31, 1998 reflects the
acquisition of KWTX, Brazos and KXII, the related financing, the acquisition of
The Goshen News, the acquisition of Busse Broadcasting Corporation and the
divestiture of WALB-TV as if these transactions had occurred on January 1, 1998.
The balance sheet as of June 30, 1999 reflects the acquisition of KWTX, Brazos
and KXII and the related financing as if these transactions had occurred on June
30, 1999. The acquisitions of KWTX, Brazos, KXII, The Goshen News and Busse
Broadcasting Corporation are reflected using the purchase method of accounting
for business combinations.
Gray completed the acquisition of The Goshen News and Busse Broadcasting
Corporation on March 1, 1999 and July 31, 1998, respectively. The divestiture of
WALB-TV was completed on July 31, 1998.
The pro forma financial information is provided for comparative purposes
only and does not purport to be indicative of the results that actually would
have been obtained if the transactions set forth above had occurred as of the
dates indicated or results that may be obtained in the future. The acquisition
agreements with KWTX and Brazos provide that: (1) each shareholder of KWTX and
Brazos may elect to receive up to 100% of his merger consideration, but must
elect to receive at least 40% of his merger consideration, in shares of Gray
class B common stock and (2) the number of shares of Gray class B common stock
to be received by KWTX and Brazos shareholders will be dependent on the market
price of Gray class B common stock at a specified time and for a specified
period immediately preceding the closing date. The acquisition agreements for
KWTX, Brazos and KXII also require Gray to increase the amount of the merger
consideration to pay for certain specified net working capital accounts as of
the closing date.
Accordingly, the pro forma financial statements are based on preliminary
estimates of the number of shares of Gray class B common stock to be issued and
their related value, indebtedness to be incurred and related financing terms,
the amounts of the specified net working capital accounts of KWTX, Brazos and
KXII as of the closing date, and transaction costs, all determined as of the
closing date. Accordingly, the actual recording of these transactions are
expected to differ from the pro forma financial statements.
50
<PAGE> 56
GRAY COMMUNICATIONS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACQUISITION OF THE
GOSHEN NEWS COMPLETED KWTX BRAZOS
------------------------ TRANSACTION BROADCASTING BROADCASTING
PRO FORMA PRO FORMA COMPANY CO.
STATEMENT OF OPERATIONS DATA GRAY HISTORICAL ADJUSTMENTS COMBINED HISTORICAL HISTORICAL
- ---------------------------- ------- ---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Broadcasting.......................... $44,306 $ -- $ -- $44,306 $4,639 $3,356
Publishing............................ 17,558 652 30(1) 18,240 -- --
Paging................................ 4,557 -- -- 4,557 -- --
------- ---- ----- ------- ------ ------
66,421 652 30 67,103 4,639 3,356
EXPENSES:
Broadcasting.......................... 26,673 -- -- 26,673 2,780 2,011
Publishing............................ 13,710 621 (30)(1) 14,296 -- --
(5)(2)
Paging................................ 3,238 -- -- 3,238 -- --
Corporate and administrative.......... 1,687 -- -- 1,687 -- --
Depreciation and amortization......... 11,119 62 103(3) 11,284 336 192
------- ---- ----- ------- ------ ------
56,427 683 68 57,178 3,116 2,203
------- ---- ----- ------- ------ ------
9,994 (31) (38) 9,925 1,523 1,153
Miscellaneous income (expense), net... 456 7 7(4) 470 587 141
------- ---- ----- ------- ------ ------
10,450 (24) (31) 10,395 2,110 1,294
Interest expense...................... 13,775 -- 221(5) 13,996 -- --
------- ---- ----- ------- ------ ------
Income (loss) before income taxes..... (3,325) (24) (252) (3,601) 2,110 1,294
Federal and state income taxes........ (684) -- (94)(6) (778) 652 449
------- ---- ----- ------- ------ ------
Net income (loss)..................... (2,641) (24) (158) (2,823) 1,458 845
Preferred dividends................... 505 -- -- 505 -- --
------- ---- ----- ------- ------ ------
Net income (loss) available to common
stockholders........................ $(3,146) $(24) $(158) $(3,328) $1,458 $ 845
======= ==== ===== ======= ====== ======
Average outstanding common shares --
basic and diluted................... 11,961 11,961
======= =======
Basic and diluted loss per common
share............................... $ (0.26) $ (0.28)
======= =======
<CAPTION>
KXII
BROADCASTERS, INC.
KXII
BROADCASTERS, LTD.
COMBINED PRO FORMA PRO FORMA
STATEMENT OF OPERATIONS DATA HISTORICAL ADJUSTMENTS COMBINED
- ---------------------------- ------------------ ----------- ---------
<S> <C> <C> <C>
OPERATING REVENUES:
Broadcasting.......................... $3,209 $ 225(7) $55,735
Publishing............................ -- -- 18,240
Paging................................ -- -- 4,557
------ ------- -------
3,209 225 78,532
EXPENSES:
Broadcasting.......................... 1,846 225(7) 32,845
(690)(2)
Publishing............................ -- -- 14,296
Paging................................ -- -- 3,238
Corporate and administrative.......... -- -- 1,687
Depreciation and amortization......... 251 1,934(3) 13,997
------ ------- -------
2,097 1,469 66,063
------ ------- -------
1,112 (1,244) 12,469
Miscellaneous income (expense), net... 90 (790)(4) 498
------ ------- -------
1,202 (2,034) 12,967
Interest expense...................... 232 (232)(8) 19,233
5,237(9)
------ ------- -------
Income (loss) before income taxes..... 970 (7,039) (6,266)
Federal and state income taxes........ 4 (2,012)(6) (1,685)
------ ------- -------
Net income (loss)..................... 966 (5,027) (4,581)
Preferred dividends................... -- -- 505
------ ------- -------
Net income (loss) available to common
stockholders........................ $ 966 $(5,027) $(5,086)
====== ======= =======
Average outstanding common shares --
basic and diluted................... 15,131(10)
=======
Basic and diluted loss per common
share............................... $ (0.34)(10)
=======
</TABLE>
51
<PAGE> 57
GRAY COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(1) Reflects the reclassification of certain revenue to conform to Gray's
financial statement presentation.
(2) Reflects elimination of certain historical related party rental expenses
that Gray will not incur subsequent to the acquisition of The Goshen News
since such rental expense was eliminated as part of the transaction. With
respect to KWTX, Brazos and KXII, reflects elimination of historical
corporate overhead expenses, including director's fees, certain management
bonuses and other management fees paid to related parties whose involvement
with the businesses will terminate at closing. Gray does not anticipate
that it will incur such expenses subsequent to the respective acquisitions.
(3) Reflects the increased depreciation and amortization charges associated
with the allocation of the total consideration among the assets acquired
and the liabilities assumed. Depreciation of property, plant and equipment
is calculated using the straight-line method applied over the estimated
useful lives of the assets. Such lives range from five to 35 years.
Amortization of intangible assets, including FCC licenses, network
affiliation agreements and goodwill, is calculated using the straight-line
method over an estimated useful life of 40 years. Also, with respect to The
Goshen News, a non-compete agreement with a value of $1.5 million is being
amortized using the straight-line method over its stated life of five
years.
(4) Reflects (a) adjustment of certain other historical expenses and interest
income that Gray will not incur or does not anticipate it will earn
subsequent to the acquisitions and (b) elimination of KWTX's income of
$442,000 derived from its equity investment in Brazos under the equity
method.
(5) Reflects interest expense on $16.7 million of incremental indebtedness
incurred in connection with the purchase of The Goshen News, assuming an
effective interest rate of 8%.
(6) Income tax benefits have been estimated assuming an effective tax rate of
34%. Gray is assumed to be in a net operating loss position on a combined
pro forma basis.
(7) Reflects reclassification of certain sales commission expenses to
broadcasting expenses to conform to Gray's financial statement
presentation.
(8) Reflects the elimination of historical interest expense.
(9) Reflects: (a) interest charges on the estimated $100 million of newly
issued indebtedness with an assumed effective interest rate of 8.8%; (b)
amortization of an estimated $1.8 million of deferred financing charges
associated with the new indebtedness issued; (c) incremental interest due
to an assumed increase in the effective interest rate of 1% on Gray's
$130.7 million term loan and revolving credit facility due to the increased
overall leverage of Gray after completion of the acquisitions and (d)
interest on an incremental $1.6 million of borrowing under the revolving
credit facility used to complete the financing of the acquisitions at an
assumed effective interest rate of 8.3%. A 1/8% change in the effective
interest rates
52
<PAGE> 58
on variable rate debt paid by Gray would produce a corresponding change in
Gray's interest expense of approximately $145,000 for the six months ended
June 30, 1999.
(10) The pro forma weighted average shares outstanding and loss per share assume
that:
- the price of the Gray class B common stock as of the day immediately
preceding the closing date of the acquisitions will be $14.125 per share;
- KWTX and Brazos shareholders will receive 40% of the aggregate merger
consideration in shares of Gray class B common stock; and
- a total of 3,170,000 shares of Gray class B common stock will be issued
in the acquisitions of KWTX and Brazos.
The merger agreements provide that the shareholders of KWTX and Brazos may
elect to receive up to 100% of their respective merger consideration in Gray
class B common stock and that each shareholder of KWTX and Brazos must receive
at least 40% of the aggregate consideration in shares of Gray class B common
stock with the stock being valued as of the close of business on the day
immediately preceding the closing date. Accordingly, the number of shares of
Gray class B common stock to be issued can not be determined until the closing
date of the acquisitions.
The following table illustrates the effect that the issuance of varying
numbers of shares of Gray class B common stock in the acquisitions would have on
Gray's pro forma basic and diluted loss per share for the six months ended June
30, 1999, based upon:
- varying assumptions as to the percentage of aggregate merger
consideration such shareholders elect to receive in Gray class B common
stocks; and
- varying assumptions as to the market value per share of Gray class B
common stock as of the day immediately preceding the closing date of the
acquisitions.
Weighted average basic and diluted loss per common share (rounded to the
nearest cent):
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF KWTX AND
BRAZOS MERGER CONSIDERATION TO BE
RECEIVED IN SHARES OF GRAY CLASS B
COMMON STOCK:
-------------------------------------
40% 60% 80% 100%
------- ------- ------- -------
<S> <C> <C> <C> <C>
Price per Share: Loss Per Common Share
$15.......................................... $(0.34) $(0.31) $(0.28) $(0.26)
$14.125(a)................................... (0.34) (0.30) (0.28) (0.26)
$14.......................................... (0.34) (0.30) (0.28) (0.25)
$13.......................................... (0.33) (0.30) (0.27) (0.25)
$12.......................................... (0.32) (0.29) (0.26) (0.24)
$11.......................................... (0.32) (0.28) (0.25) (0.23)
$10.......................................... (0.31) (0.27) (0.24) (0.22)
</TABLE>
- -------------------------
(a) The closing price of Gray class B common stock on June 30, 1999
53
<PAGE> 59
If the average price per share of Gray class B common stock during the 20
trading day period immediately preceding the closing date of the KWTX and Brazos
acquisitions or the price of Gray class B common stock on the day immediately
preceding the closing date is less than $12 per share, then Gray at its option
may pay the aggregate merger consideration for KWTX and Brazos in cash. Such
amount would be $95.5 million before the payment for any specified net working
capital adjustments required under the acquisition agreements, transaction fees
and related expenses.
54
<PAGE> 60
GRAY COMMUNICATIONS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACQUISITION OF ACQUISITION OF
BUSSE BROADCASTING CORPORATION BUSSE/WALB THE GOSHEN NEWS
DISPOSITION --------------------------------- TRANSACTIONS --------------
OF WALB PRO FORMA PRO FORMA
GRAY HISTORICAL HISTORICAL ADJUSTMENTS COMBINED HISTORICAL
-------- ----------- ---------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
OPERATING REVENUES:
Broadcasting.......... $ 91,007 $(6,773) $11,544 $ -- $ 95,778 $ --
Publishing............ 29,330 -- -- -- 29,330 4,550
Paging................ 8,553 -- -- -- 8,553 --
-------- ------- ------- ------- -------- ------
128,890 (6,773) 11,544 -- 133,661 4,550
EXPENSES:
Broadcasting.......... 52,967 (2,923) 5,309 -- 55,353 --
Publishing............ 24,197 -- -- -- 24,197 3,425
Paging................ 5,618 -- -- -- 5,618 --
Corporate and
administrative...... 3,063 -- 2,177 (2,177)(1) 3,063 --
Depreciation and
amortization........ 18,117 (206) 3,347 (520)(2) 20,738 190
-------- ------- ------- ------- -------- ------
103,962 (3,129) 10,833 (2,697) 108,969 3,615
-------- ------- ------- ------- -------- ------
24,928 (3,644) 711 2,697 24,692 935
Gain on exchange of
television station.... 70,572 -- -- -- 70,572 --
Miscellaneous income
(expense), net........ (242) -- 249 (249)(3) (242) 59
-------- ------- ------- ------- -------- ------
95,258 (3,644) 960 2,448 95,022 994
Interest expense....... 25,455 -- 4,892 (4,892)(4) 29,365 --
3,910(5)
-------- ------- ------- ------- -------- ------
Income (loss) before
income taxes.......... 69,803 (3,644) (3,932) 3,430 65,657 994
Federal and state
income taxes.......... 28,144 (1,410)(6) 26,734 --
-------- ------- ------- ------- -------- ------
Net income (loss)...... 41,659 (3,644) (3,932) 4,840 38,923 994
Preferred dividends.... 1,318 -- 2,813 (2,813)(7) 1,318 --
-------- ------- ------- ------- -------- ------
Net income (loss)
available to common
stockholders.......... $ 40,341 $(3,644) $(6,745) $ 7,653 $ 37,605 $ 994
======== ======= ======= ======= ======== ======
Average outstanding
common shares-basic... 11,923 11,923
Stock compensation
awards................ 481 481
-------- --------
Average outstanding
common shares-
diluted............... 12,404 12,404
======== ========
Basic earnings per
common share.......... $ 3.38 $ 3.15
======== ========
Diluted earnings per
common share.......... $ 3.25 $ 3.03
======== ========
<CAPTION>
ACQUISITION OF KXII
THE GOSHEN NEWS COMPLETED KWTX BRAZOS BROADCASTERS,
--------------- TRANSACTIONS BROADCASTING BROADCASTING LTD.
PRO FORMA PRO FORMA COMPANY CO. COMBINED PRO FORMA
ADJUSTMENTS COMBINED HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS
--------------- ------------ ------------ ------------ ------------------ -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
OPERATING REVENUES:
Broadcasting.......... $ -- $ 95,778 $9,222 $7,301 $6,102 $ 479(10)
Publishing............ 230(8) 34,110 -- -- -- --
Paging................ -- 8,553 -- -- -- --
------- -------- ------ ------ ------ --------
230 138,441 9,222 7,301 6,102 479
EXPENSES:
Broadcasting.......... -- 55,353 5,507 4,021 3,638 479(10)
(1,402)(1)
Publishing............ 230(8) 27,852 -- -- -- --
Paging................ -- 5,618 -- -- -- --
Corporate and
administrative...... -- 3,063 -- -- -- --
Depreciation and
amortization........ 664(2) 21,592 607 392 548 3,868(2)
------- -------- ------ ------ ------ --------
894 113,478 6,114 4,413 4,186 2,945
------- -------- ------ ------ ------ --------
(664) 24,963 3,108 2,888 1,916 (2,466)
Gain on exchange of
television station.... -- 70,572 -- -- -- --
Miscellaneous income
(expense), net........ (59)(3) (242) 1,601 263 33 (1,850)(3)
------- -------- ------ ------ ------ --------
(723) 95,293 4,709 3,151 1,949 (4,316)
Interest expense....... 1,335(9) 30,700 -- -- 472 (472)(4)
11,069(11)
------- -------- ------ ------ ------ --------
Income (loss) before
income taxes.......... (2,058) 64,593 4,709 3,151 1,477 (14,913)
Federal and state
income taxes.......... (362)(6) 26,372 1,388 1,135 36 (4,455)(6)
------- -------- ------ ------ ------ --------
Net income (loss)...... (1,696) 38,221 3,321 2,016 1,441 $(10,458)
Preferred dividends.... -- 1,318 -- -- -- --
------- -------- ------ ------ ------ --------
Net income (loss)
available to common
stockholders.......... $(1,696) $ 36,903 $3,321 $2,016 $1,441 $(10,458)
======= ======== ====== ====== ====== ========
Average outstanding
common shares-basic... 11,923
Stock compensation
awards................ 481
--------
Average outstanding
common
shares-diluted........ 12,404
========
Basic earnings per
common share.......... $ 3.10
========
Diluted earnings per
common share.......... $ 2.98
========
<CAPTION>
PRO FORMA
COMBINED
---------
<S> <C>
STATEMENT OF OPERATIONS
DATA:
OPERATING REVENUES:
Broadcasting.......... $118,882
Publishing............ 34,110
Paging................ 8,553
--------
161,545
EXPENSES:
Broadcasting.......... 67,596
Publishing............ 27,852
Paging................ 5,618
Corporate and
administrative...... 3,063
Depreciation and
amortization........ 27,007
--------
131,136
--------
30,409
Gain on exchange of
television station.... 70,572
Miscellaneous income
(expense), net........ (195)
--------
100,786
Interest expense....... 41,769
--------
Income (loss) before
income taxes.......... 59,017
Federal and state
income taxes.......... 24,476
--------
Net income (loss)...... 34,541
Preferred dividends.... 1,318
--------
Net income (loss)
available to common
stockholders.......... $ 33,223
========
Average outstanding
common shares-basic... 15,093(12)
Stock compensation
awards................ 481
--------
Average outstanding
common
shares-diluted........ 15,574
========
Basic earnings per
common share.......... $ 2.20(12)
========
Diluted earnings per
common share.......... $ 2.13
========
</TABLE>
55
<PAGE> 61
GRAY COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(1) Reflects elimination of historical corporate overhead expense of Busse
Broadcasting Corporation, including executive officer compensation,
professional fees and office overhead costs. With respect to KWTX, Brazos
and KXII, reflects elimination of historical expenses, including director's
fees, certain management bonuses and other management fees paid to related
parties whose involvement with the businesses will terminate at closing.
Gray does not anticipate that it will incur such expenses subsequent to the
respective acquisitions.
(2) Reflects adjustment of depreciation and amortization charges associated
with the allocation of the total acquisition cost among the assets acquired
and the liabilities assumed. Depreciation of property plant and equipment
is calculated using the straight-line method applied over the estimated
useful lives of the assets. Such lives range from five to 35 years.
Amortization of intangible assets, including FCC licenses, network
affiliation agreements and goodwill, is calculated using the straight-line
method over an estimated useful life of 40 years. Also, with respect to The
Goshen News, a non-compete agreement with a value of $1.5 million is being
amortized using the straight-line method over its stated life of five
years.
(3) Reflects elimination of (a) certain other historical expenses and interest
income, that Gray will not incur or does not anticipate it will earn
subsequent to the acquisitions and (b) KWTX's income of $1 million derived
from its equity investment in Brazos under the equity method.
(4) Reflects elimination of historical interest expense.
(5) Reflects increased interest expense associated with the $42.7 million
incremental debt incurred for the acquisition of Busse, assuming an
effective interest rate of 8%. The pro forma increase of interest expense
includes $1.9 million of historical net interest expense eliminated in Note
(4) above from January 1, 1998 through July 31, 1998 associated with
certain Busse indebtedness that was retired in October 1998.
(6) Income tax benefits associated with the respective acquisition and
disposition transactions have been estimated assuming an effective tax rate
of 34%.
(7) Reflects elimination of Busse historical preferred stock dividends.
(8) Reflects the reclassification of certain revenue to conform to Gray's
financial statement presentation.
(9) Reflects interest expense on $16.7 million of incremental indebtedness
incurred in connection with the purchase of The Goshen News, assuming an
effective interest rate of 8%.
(10) Reflects reclassification of certain sales commission expense to
broadcasting expenses to conform to Gray's financial statement
presentation.
(11) Reflects: (a) interest charges on the estimated $100 million of newly
issued indebtedness, with an assumed effective interest rate of 8.8%; (b)
amortization of an estimated $1.8 million of deferred financing charges
associated with the new
56
<PAGE> 62
indebtedness issued; (c) incremental interest due to an assumed increase in
the effective interest rate of 1.4% on Gray's $130.7 million term loan and
revolving credit facility due to the increased overall leverage of Gray
after completion of the acquisitions and (d) interest on an incremental
$1.6 million of borrowing under the revolving credit facility used to
complete the financing of the acquisitions at an assumed effective interest
rate of 8.3%. A 1/8% change in the effective interest rates on variable
rate debt paid by Gray would produce a corresponding change in Gray's
interest expense of approximately $290,000 for the year ended December 31,
1998.
(12) The pro forma weighted average shares outstanding and earnings per common
share assume that:
- the price of the Gray class B common stock as of the day immediately
preceding the closing date of the acquisitions will be $14.125 per share;
- KWTX and Brazos shareholders will receive 40% of the aggregate merger
consideration in shares of Gray class B common stock; and
- a total of 3,170,000 shares of Gray class B common stock will be issued
in the acquisitions of KWTX and Brazos.
The merger agreements provide that the shareholders of KWTX and Brazos may elect
to receive up to 100% of their respective merger consideration in Gray class B
common stock and that each shareholder of KWTX and Brazos must receive at least
40% of the aggregate consideration in shares of Gray class B common stock with
the stock being valued as of the close of business on the day immediately
preceding the closing date. Accordingly, the number of shares of Gray class B
common stock to be issued can not be determined until the closing date of the
acquisitions.
The following table illustrates the effect that the issuance of varying numbers
of shares of Gray class B common stock in the acquisitions would have on Gray's
pro forma diluted earnings per share for the year ended December 31, 1998, based
upon:
- varying assumptions as to the percentage of aggregate merger
consideration such shareholders elect to receive in Gray class B common
stock; and
- varying assumptions as to the market value per share of Gray class B
common stock as of the day immediately preceding the closing date of the
acquisitions.
57
<PAGE> 63
Weighted average diluted earnings per common share (rounded to the nearest
cent):
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF KWTX AND
BRAZOS MERGER CONSIDERATION TO BE
RECEIVED IN SHARES OF GRAY CLASS B
COMMON STOCK:
------------------------------------
40% 60% 80% 100%
------ ------ ------ ------
<S> <C> <C> <C> <C>
PRICE PER SHARE: EARNINGS PER COMMON SHARE
------------------------------------
$15......................................... $2.16 $1.97 $1.81 $1.67
$14.125(a).................................. 2.13 1.94 1.77 1.63
$14......................................... 2.13 1.93 1.77 1.63
$13......................................... 2.10 1.89 1.72 1.58
$12......................................... 2.06 1.85 1.67 1.53
$11......................................... 2.02 1.79 1.62 1.47
$10......................................... 1.97 1.74 1.56 1.41
</TABLE>
- -------------------------
(a) The closing price of Gray class B common stock on June 30, 1999
If the average price per share of Gray class B common stock during the 20
trading day period immediately preceding the closing date of the KWTX and Brazos
acquisitions or the price of Gray class B common stock on the day immediately
preceding the closing date is less than $12 per share, then Gray at its option
may pay the aggregate merger consideration for KWTX and Brazos in cash. Such
amount would be $95.5 million before the payment for any specified net working
capital adjustments required under the acquisition agreements, transaction fees
and related expenses.
58
<PAGE> 64
GRAY COMMUNICATIONS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
KWTX BROADCASTING
COMPANY BRAZOS BROADCASTING CO.
------------------------ ------------------------
PRO FORMA PRO FORMA
GRAY HISTORICAL ADJUSTMENTS HISTORICAL ADJUSTMENTS
-------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash............................... $ 5,085 $ 6,020 $ (6,020)(1) $6,059 $(6,059)(1)
Trade accounts receivable.......... 22,795 1,660 (30)(2) 1,505 --
Recoverable income taxes........... 1,587 -- -- -- --
Inventories........................ 878 -- -- --
Current portion of program
broadcast rights.................. 1,206 81 -- 78 --
Other current assets............... 1,013 275 -- 52 --
-------- ------- -------- ------ -------
Total current assets........ 32,564 8,036 (6,050) 7,694 (6,059)
Property and equipment, net........ 52,885 5,187 (187)(3) 1,921 2,079(3)
Deferred loan costs................ 7,691 -- -- -- --
Intangibles........................ 384,975 -- 62,903(4) -- 58,191(4)
Other long term assets............. 2,713 263 -- 120 --
Equity investment.................. -- 4,470 (4,470)(5) -- --
-------- ------- -------- ------ -------
Total assets................ $480,828 $17,956 $ 52,196 $9,735 $54,211
======== ======= ======== ====== =======
LIABILITIES AND STOCKHOLDER'S EQUITY:
CURRENT LIABILITIES:
Trade payables..................... $ 805 $ 298 $ -- $ 115 $ --
Employee compensation and
benefits.......................... 4,718 386 -- 317 --
Accrued expenses................... 2,310 10 -- 45 (27)(2)
Accrued interest................... 5,049 -- -- -- --
Current portion of program
broadcasting obligations.......... 1,028 20 -- 20 --
Deferred revenue................... 3,247 -- -- -- --
Current portion of long-term
debt.............................. 385 -- -- -- --
-------- ------- -------- ------ -------
Total current liabilities... 17,542 714 -- 497 (27)
Long term debt..................... 291,287 -- (6,020)(1) -- (6,059)(1)
Other long-term liabilities:
Program broadcast obligations, less
current portion................... 417 17 -- 17 --
Supplemental employee benefits..... 1,052 -- -- -- --
Deferred income taxes.............. 43,120 639 15,562(6) 280 15,211(6)
Other acquisition related
liabilities....................... 4,227 -- -- -- --
Other long term liabilities........ -- -- 59,240(4) -- 54,027(4)
-------- ------- -------- ------ -------
48,816 656 74,802 297 69,238
Commitments and contingencies
STOCKHOLDERS EQUITY:
Net equity of acquired
operations........................ -- 16,586 (16,586)(4) 8,941 (8,941)(4)
Series A preferred stock........... 10,000 -- -- -- --
Series B preferred stock........... 3,500 -- -- -- --
Class A common stock............... 10,684 -- -- -- --
Class B common stock............... 66,867 -- -- -- --
Retained earnings.................. 42,112 -- -- -- --
Treasury stock -- class A.......... (8,579) -- -- -- --
Treasury stock -- class B.......... (1,401) -- -- -- --
-------- ------- -------- ------ -------
123,183 16,586 (16,586) 8,941 (8,941)
-------- ------- -------- ------ -------
Liabilities and
Stockholder's Equity....... $480,828 $17,956 $ 52,196 $9,735 $54,211
======== ======= ======== ====== =======
<CAPTION>
KXII BROADCASTERS, INC. AND
KXII BROADCASTERS, LTD.
----------------------------
COMBINED PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS FINANCING COMBINED
------------ ------------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash............................... $1,118 $(1,118)(7) $ -- $ 5,085
Trade accounts receivable.......... 1,380 -- -- 27,310
Recoverable income taxes........... -- -- -- 1,587
Inventories........................ -- -- -- 878
Current portion of program
broadcast rights.................. 121 -- -- 1,486
Other current assets............... 70 -- -- 1,410
------ ------- --------- --------
Total current assets........ 2,689 (1,118) -- 37,756
Property and equipment, net........ 2,135 624(3) -- 64,644
Deferred loan costs................ -- -- 1,750(8) 9,441
Intangibles........................ 3,559 (3,559)(7) -- 545,343
39,274(4)
Other long term assets............. 86 -- -- 3,182
Equity investment.................. -- -- -- --
------ ------- --------- --------
Total assets................ $8,469 $35,221 $ 1,750 $660,366
====== ======= ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY:
CURRENT LIABILITIES:
Trade payables..................... $ 165 $ (165)(7) $ -- $ 1,218
Employee compensation and
benefits.......................... -- -- -- 5,421
Accrued expenses................... 263 (263) (7) -- 2,338
Accrued interest................... -- -- 5,049
Current portion of program
broadcasting obligations.......... 156 -- -- 1,224
Deferred revenue................... -- -- -- 3,247
Current portion of long-term
debt.............................. 265 (265)(7) -- 385
------ ------- --------- --------
Total current liabilities... 849 (693) -- 18,882
Long term debt..................... 4,228 (4,228)(7) 113,667(9) 392,875
Other long-term liabilities:
Program broadcast obligations, less
current portion................... 103 -- -- 554
Supplemental employee benefits..... -- -- -- 1,052
Deferred income taxes.............. -- -- -- 74,812
Other acquisition related
liabilities....................... -- -- -- 4,227
Other long term liabilities........ -- 43,431(4) (156,698)(4) --
------ ------- --------- --------
103 43,431 (156,698) 80,645
Commitments and contingencies
STOCKHOLDERS EQUITY:
Net equity of acquired
operations........................ 3,289 (3,289)(4) -- --
Series A preferred stock........... -- -- -- 10,000
Series B preferred stock........... -- -- -- 3,500
Class A common stock............... -- -- -- 10,684
Class B common stock............... -- -- 44,781(10) 111,648
Retained earnings.................. -- -- -- 42,112
Treasury stock -- class A.......... -- -- -- (8,579)
Treasury stock -- class B.......... -- -- -- (1,401)
------ ------- --------- --------
3,289 (3,289) 44,781 167,964
------ ------- --------- --------
Liabilities and
Stockholder's Equity....... $8,469 $35,221 $ 1,750 $660,366
====== ======= ========= ========
</TABLE>
59
<PAGE> 65
GRAY COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEET
JUNE 30, 1999
The pro forma adjustments for the acquisitions of KWTX, Brazos and KXII and
the related financing are as follows:
(1) Reflects the use of cash to pay down long-term debt. This cash was
acquired with the acquisitions of KWTX and Brazos.
(2) Reflects elimination of certain intercompany accounts.
(3) Reflects adjustment of property, plant and equipment to estimated fair
market value.
(4) Reflects the purchase of KWTX, Brazos and KXII and the allocation of the
purchase price of $156.7 million to the tangible assets and liabilities
based upon estimates of fair value at June 30, 1999. The total cost
includes the base price, cash on hand at KWTX and Brazos, working capital
adjustments and acquisition related fees, which as of June 30, 1999 were
$139.0 million, $12.1 million, $3.7 million and $1.9 million,
respectively. The allocation of the total cost is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DESCRIPTION KWTX BRAZOS KXII TOTAL
- ----------- -------- -------- ------- --------
<S> <C> <C> <C> <C>
Cash..................................... $ 6,020 $ 6,059 $ -- $ 12,079
Accounts receivable...................... 1,630 1,505 1,380 4,515
Other current assets..................... 356 130 191 677
Property and equipment................... 5,000 4,000 2,759 11,759
Other long term assets................... 263 120 86 469
FCC licenses, network affiliation
agreements and other intangible
assets................................. 62,903 58,191 39,274 160,368
Trade payables........................... (298) (115) -- (413)
Employee compensation and benefits....... (386) (317) -- (703)
Current portion of program broadcast
obligations............................ (20) (20) (156) (196)
Other current liabilities................ (10) (18) (28)
Deferred tax liabilities................. (16,201) (15,491) -- (31,692)
Other long term liabilities.............. (17) (17) (103) (137)
-------- -------- ------- --------
Purchase price including expenses........ $ 59,240 $ 54,027 $43,431 $156,698
======== ======== ======= ========
Historical book value.................... $(16,586) $ (8,941) $(3,289) $(28,816)
Assets not acquired and liabilities not
assumed................................ -- -- (244) (244)
Adjustment to eliminate certain
intercompany accounts.................. 30 (27) -- 3
Adjustment to equity investment.......... 4,470 -- -- 4,470
Adjustment of property, plant and
equipment to fair market value......... 187 (2,079) (624) (2,516)
Adjustment to deferred taxes............. 15,562 15,211 -- 30,773
-------- -------- ------- --------
Net value of assets acquired or
liabilities assumed.................... 3,663 4,164 (4,157) 3,670
Purchase price including expenses........ 59,240 54,027 43,431 156,698
-------- -------- ------- --------
FCC licenses, network affiliation
agreements and other intangible
assets................................. $ 62,903 $ 58,191 $39,274 $160,368
======== ======== ======= ========
</TABLE>
60
<PAGE> 66
(5) Reflects elimination of KWTX's equity investment in Brazos.
(6) Reflects the deferred tax liability associated with recording assets and
liabilities at fair value and recording intangibles which are not
deductible for income tax purposes. The adjustment is calculated using an
assumed effective tax rate of 34%.
(7) Reflects the elimination of certain assets and liabilities of KXII, which
will not be included in the acquisition.
(8) Reflects estimated financing fees to be incurred in connection with the
acquisitions of KWTX, Brazos and KXII.
(9) Reflects assumed incremental borrowings of $101.6 million to complete the
acquisitions. Cash acquired at KWTX and Brazos will be used to reduce
aggregate borrowing requirements. Gray currently intends to borrow $100
million of new senior indebtedness to fund the acquisitions and to borrow
additional funds, as necessary, under the existing revolving credit
facility to complete any funding requirements. The amount borrowed to
complete the acquisitions assumes the shareholders of KWTX and Brazos
elect to receive 60% of their respective merger consideration in cash.
(10) Reflects assumed issuance of 3,170,000 shares of Gray class B common
stock at an assumed price of $14.125 per share, the closing price of such
stock on June 30, 1999. Such amount assumes the shareholders of KWTX and
Brazos elect to receive 40% of their respective merger consideration in
shares of Gray class B common stock.
The respective merger agreements establish the minimum value of the Gray
class B common stock at $14.00 per share and the maximum value at $15.00 per
share. However, Gray is obligated to provide at least 40% of the aggregate
merger consideration for KWTX and Brazos in shares of Gray class B common stock
with the stock being valued at a specified time and for a specified period
immediately preceding the closing date.
The following table illustrates the aggregate number of shares which would
be issued to the KWTX and Brazos shareholders as of June 30, 1999, based upon:
- varying assumptions as to the percentage of aggregate merger
consideration such shareholders elect to receive in Gray class B common
stock; and
- varying assumptions as to the market value per share of Gray class B
common stock as of the close of business on the day immediately preceding
the closing date.
61
<PAGE> 67
Shares in thousands, price per share in dollars:
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF KWTX AND
BRAZOS CONSIDERATION TO BE RECEIVED
IN SHARES OF GRAY CLASS B COMMON
STOCK
--------------------------------------
40% 60% 80% 100%
------- ------- ------- --------
<S> <C> <C> <C> <C>
NUMBER OF SHARES OF
PRICE PER SHARE: GRAY CLASS B COMMON STOCK
--------------------------------------
$15............................................ 2,985 4,478 5,971 7,463
$14.125(a)..................................... 3,170 4,755 6,341 7,926
$14............................................ 3,199 4,798 6,397 7,997
$13............................................ 3,445 5,167 6,889 8,612
$12............................................ 3,732 5,598 7,463 9,329
$11............................................ 4,071 6,106 8,142 10,177
$10............................................ 4,478 6,717 8,956 11,195
</TABLE>
- -------------------------
(a) The closing price of Gray class B common stock on June 30, 1999
If the average price per share of Gray class B common stock during the 20
trading day period immediately preceding the closing date of the KWTX and Brazos
acquisitions or the price of Gray class B common stock on the day immediately
preceding the closing date is less than $12 per share, then Gray at its option
may pay the aggregate merger consideration for KWTX and Brazos in cash. Such
amount would be $95.5 million before the payment for any specified net working
capital adjustments required under the acquisition agreements, transaction fees
and related expenses.
62
<PAGE> 68
GENERAL BACKGROUND INFORMATION RELATING TO THE
TELEVISION BROADCAST INDUSTRY
REVENUES
Television station revenues are primarily derived from local, regional and
national advertising. To a lesser extent, television stations derive revenues
from network compensation, studio and tower space rental and commercial
production activities.
Advertising rates are based upon a variety of factors, including:
- a program's popularity among the viewers an advertiser wishes to attract;
- the number of advertisers competing for the available time;
- the size and demographic makeup of the market served by the station;
- the availability in the market area of alternative advertising media,
such as radio, newspapers and billboards;
- overall image of a station in a market;
- the station's ratings and share among particular demographic groups which
an advertiser may be targeting; and
- aggressive and knowledgeable sales forces and the development of
projects, features and programs that tie advertiser messages to
programming.
Because broadcast stations rely on advertising revenues, they are sensitive
to cyclical changes in the economy. Advertisers' budgets are affected by broad
economic trends and in turn affect the broadcast industry in general and the
revenues of individual broadcast television stations.
MARKET DESIGNATIONS AND AUDIENCE RATING INFORMATION
The A.C. Nielsen Company groups all television stations in the country into
approximately 210 generally recognized television markets that are ranked in
size according to various formulae based upon actual or potential audience. Each
television market is an exclusive geographic area consisting of all counties in
which the home-market commercial stations receive the greatest percentage of
total viewing hours.
Nielsen periodically publishes data on estimated audiences for the
television stations in the various television markets throughout the country.
This information contains, among other items, data relating to the size of the
viewing audience and demographic characteristics such as sex and age.
At present, Nielsen is the only company collecting and reporting television
viewing data on a nationally recognized basis.
NETWORK AFFILIATIONS AND OTHER PROGRAMMING INFORMATION
Four major broadcast networks, ABC, CBS, NBC and Fox, dominate broadcast
television. Additionally, United Paramount Network and Warner Brothers Network
have emerged as additional television networks. An affiliate of UPN or WB
receives a smaller
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<PAGE> 69
portion of each day's programming from its network compared to an affiliate of
one of the four major networks.
In general, affiliation agreements provide the affiliated station with the
right to broadcast all programs transmitted by the network. In return, the
network has the right to sell a substantial majority of the advertising time
during such broadcasts. The affiliate retains the revenues from time sold during
breaks in and between network programs and programs the affiliate produces or
purchases from non-network sources.
In exchange for every hour of network programming a station elects to
broadcast, ABC, CBS, NBC and to a lesser extent, Fox pay their affiliated
station a specific network compensation payment. The payment varies with the
time of day. Typically, prime-time programming generates the highest hourly
network compensation payments. Such payments are subject to increase or decrease
by the network during the term of an affiliation agreement with provisions for
advance notices and right of termination by the station in the event of a
reduction in such payments.
To fill in the time periods not programmed by the network, the local
station will either produce local programs or purchase rights to air programs
from national program distributors. A station's local news and public affairs
programs are the most often locally produced programs. Successful commercial
television stations will often build a strong market brand identity from locally
produced news programs.
In contrast to a station affiliated with a network, a fully independent
station purchases or produces all of the programming that it broadcasts,
resulting in generally higher programming costs. An independent station,
however, retains its entire inventory of advertising time and all the revenues
obtained therefrom.
COMPETITION
Competition in the television industry exists on several levels:
competition for audience, competition for programming, including news and
competition for advertisers.
Audience. Stations compete for audience on the basis of program
popularity, which has a direct effect on advertising rates. An affiliated
station is supplied a large portion of its programming by the network. During
those periods, the affiliate is dependent upon the performance of the network
programs to attract viewers. A station programs non-network time periods with a
combination of self-produced news, public affairs and other entertainment
programming.
Cable-originated programming has emerged as a significant competitor for
viewers of broadcast television programming. However, no single cable network
regularly attains audience levels amounting to more than a small fraction of any
single major broadcast network. The advertising share of cable networks has
increased as a result of the growth in cable subscribers and viewers. Even with
the increases in cable viewership and advertising, over-the-air broadcasting
remains the dominant distribution system for mass market television advertising.
In addition to cable, the development of other methods of television
transmission of video programming has significantly altered competition for
audience in the television industry. These other transmission methods can
increase competition for a broadcasting station by bringing into its market
distant broadcasting signals not otherwise available to
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the station's audience and also by serving as a distribution system for
non-broadcast programming. These sources of competition include:
- home entertainment systems such as VCRs and digital video disk players;
- wireless cable services and satellite master antenna television systems;
- low power television stations and television translator stations;
- direct broadcast satellite video distribution services; and
- the Internet.
Also, television stations compete with all other forms of leisure activities for
the attention of viewers.
Programming. Competition for programming involves negotiating with
national program distributors or syndications that sell first-run and rerun
packages of programming. Each station competes against the broadcast station
competitors in its market for exclusive access to off-network reruns such as
Seinfeld and first-run product such as Entertainment Tonight. Cable systems
generally do not compete with local stations for programming, although various
national cable networks acquire programs that would otherwise be offered to
local television stations. Competition exists for exclusive news stories and
features as well. In purchasing rights to non-network programs affiliates
compete primarily with other affiliates and independent stations in their
markets.
A television station may acquire programming through barter arrangements.
Under barter arrangements a national program distributor may receive advertising
time in exchange for the programming it supplies, with the station paying a
reduced or zero cash fee for such programming.
Advertising. Stations compete for advertising revenues with other
television stations. Stations also compete for advertising revenue with other
media, such as newspapers, radio stations, magazines, outdoor advertising,
transit advertising, yellow page directories, direct mail, local cable systems
and the Internet. Competition for advertising dollars in the broadcasting
industry occurs primarily within individual markets.
FEDERAL REGULATION OF TELEVISION BROADCASTING
The FCC regulates television broadcast stations and related facilities
consistent with its interpretation of the public interest, convenience and
necessity, as required by the Communications Act of 1934, as amended. Its
regulatory jurisdiction includes:
- the technical operation of broadcast stations, including the initial
allotment and assignment of frequencies;
- the approval of transfers of licenses and assignment of licenses;
- the assignment of call letters to stations;
- the designation of operating power, sign-on and sign-off times; and
- the enforcement of statutes, rules and policies relating to program
content, including indecent programming limitations, games and lotteries,
and providing a core amount
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<PAGE> 71
of children's television programming with limited commercial matter while
identifying sponsors.
In addition, the FCC requires that licensees make available equal
opportunities for use of broadcast facilities by political candidates or
opposing political candidates, station identification and identification of
recorded programs or program segments. Licensees which have violated FCC
statutes, rules or policies are subject to sanctions, including loss of license
and fines.
Television broadcasting licenses generally are granted or renewed for a
period of eight years. When a television license is subject to renewal parties
in interest may file petitions to deny, and such parties, including members of
the public, may comment upon the service the station has provided during the
preceding license term and urge denial of the application. If the FCC finds that
the licensee has failed to meet the above-mentioned requirements, it could deny
the renewal application or grant a conditional approval, including renewal for a
term of less than eight years. Only after denying a renewal application can the
FCC accept and consider competing applications for the license. There can be no
assurance that a station's licenses will be renewed. However, in almost all
cases, the FCC will renew a license.
The FCC has many rules and regulations for the television broadcast
industry, which include, but are not limited to:
- Rules limiting the ability of individuals and entities to own or have an
ownership interest above a certain level in broadcast stations as well as
other mass media entities. For example, these rules preclude any
individual or entity from having an attributable interest in television
stations whose aggregate audience reach exceeds 35% of all United States
households.
- Rules prohibiting an individual or entity from having an attributable
interest in more than one television station in a market. An exception to
this general rule prohibiting the ownership of more than one television
station in a market is when one of the stations qualifies as a "satellite
station" under FCC rules, i.e, a station that rebroadcasts substantial
amounts of programming supplied by, and is often economically tied to, a
"parent station" in the same market. The ownership of more than one
television station in a market is also permitted when (1) one of the
stations with common ownership is a failing station or an authorized but
unbuilt station, (2) the television stations with common ownership have
overlapping signals; provided they are licensed to serve communities in
separate markets as defined by A.C. Nielsen or (3) there are eight
independently owned stations in the market and one of the stations with
common ownership is not among the top four most highly viewed stations in
the market.
- Rules and the Telecommunications Act generally prohibiting an individual
or entity from having an attributable interest in a television station
and a radio station, daily newspaper or cable television system that is
located in the same local market area served by the television station,
although waivers will be entertained. In addition, the FCC has revised
the TV-radio cross-ownership restriction (the so-called "one-
to-a-market" rule) to permit such ownership combinations in larger
markets provided at least 20 independent media voices would remain
following the merger and the combined entity owned no more than two
television stations and six radio stations (any combination of AM or FM
stations) in the market. Further, the FCC
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<PAGE> 72
has adopted new rules regarding issues of control and attribution with
respect to local marketing and similar agreements entered into by
television stations with other stations in the same market.
- The Communications Act restricts the ability of foreign entities,
corporations or individuals to own or hold interests in broadcast
licenses. Foreign governments, representatives of foreign governments,
non-citizens, representatives of non-citizens, and corporations or
partnerships organized under the laws of a foreign nation are barred from
holding broadcast licenses.
- Pursuant to the 1992 Cable Act, cable operators must carry the signals of
local commercial television stations, with certain exceptions. A cable
system with more than 12 usable activated channels, regardless of the
number of subscribers, must carry the signals of all local commercial
television stations, up to one-third of the aggregate number of usable
activated channels. The 1992 Cable Act also includes a retransmission
consent provision that prohibits cable operators and other multi-channel
video programming distributors from carrying broadcast stations without
obtaining their consent in certain circumstances. The "must carry" and
retransmission consent provisions are related in that a local television
broadcaster, on a cable system-by-cable-system basis, must make a choice
once every three years whether to proceed under the "must carry" rules or
to waive that right to mandatory but uncompensated carriage and negotiate
a grant of retransmission consent to permit the cable system to carry the
station's signal, in exchange for some form of consideration from the
cable operator. Cable systems must obtain retransmission consent to carry
all distant commercial stations other than certain "super stations"
delivered via satellite. Under rules adopted to implement these "must
carry" and retransmission consent provisions, local television stations
are required to make an election of "must carry" or retransmission
consent at three-year intervals. Stations that fail to elect are deemed
to have elected carriage under the "must carry" provisions.
Under the FCC's ownership rules, a direct or indirect purchaser of certain
types of securities of Gray could violate FCC regulations if that purchaser
owned or acquired an "attributable" or "meaningful" interest in other media
properties in the same areas as stations owned by Gray or in a manner otherwise
prohibited by the FCC. All officers and directors of a licensee, as well as
general partners, uninsulated limited partners and shareholders who own five
percent or more of the voting power of the outstanding common stock of a
licensee either directly or indirectly, generally will be deemed to have an
"attributable" interest in the licensee. Certain institutional investors who
exert no control or influence over a licensee may own up to 20% of the voting
power of the outstanding common stock before attribution occurs. Under current
FCC regulations the following are not subject to attribution, debt instruments,
non-voting stock, voting stock held by minority shareholders in cases in which
there is a single majority shareholder and limited partnership interests
provided the licensee certifies that the limited partners are not "materially
involved" in the management and operation of the subject media property. To
determine whether a program supplier or another station in the market has an
attributable interest in a station, the FCC will determine whether the entity in
question holds equity or debt equal to 33% of the station's assets.
In response to legislation and judicial determinations, the FCC currently
has under consideration new regulations and policies regarding a wide variety of
matters that could
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affect, directly or indirectly, the operation and ownership of television
broadcast properties, including:
- the license renewal processes, particularly the weight to be given to the
expectancy of renewal for an incumbent broadcast licensee and the
criteria to be applied in deciding contested renewal applications;
- spectrum use fees;
- political advertising practices;
- potential advertising restrictions on the advertising of products such as
liquor;
- the rules to be applied in enforcing the FCC's equal employment
opportunity policies;
- cable carriage of digital television signals;
- viewing of distant network signals by subscribers to direct broadcast
satellite services; and
- the standards to govern evaluation of television programming directed
toward children and violent and indecent programming, including the
possible requirement of what is commonly referred to as the "v-chip,"
which would permit parents to program television sets so that certain
programming would not be accessible by children.
There can be no assurance that any of these rules will not be changed by
Congress or by the FCC. The impact of any such changes affecting the broadcast
industry cannot be predicted.
Under FCC rules, the entire television broadcast industry has commenced the
introduction of digital television to the United States. Implementation of
digital television will improve the technical quality of television signals
receivable by viewers and will provide broadcasters the flexibility to offer new
services, including: high-definition television which is comparable to 35mm film
in quality; simultaneous broadcasting of multiple programs of standard
definition television; and digitally broadcasting other forms of data, such as
stock quotes.
Based upon current pronouncements of the FCC and Congress, it is expected,
after a period of years, that: (1) broadcasters will be required to cease
non-digital operations; (2) return the non-digital channel to the FCC and (3)
broadcast only with the newer digital technology.
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<PAGE> 74
INFORMATION CONCERNING KWTX
GENERAL
KWTX Broadcasting Company, a Texas corporation, owns and operates
television station KWTX located in Waco, Texas. KWTX broadcasts on channel 10
and is affiliated with the CBS television network. KWTX began operations in
1955. In addition to station KWTX, KWTX Broadcasting Company owns 50% of the
stock of Brazos Broadcasting Company, a Texas corporation. KWTX broadcasts 16.5
hours of locally produced newscasts each week. The remainder of the program
schedule is filled with programming provided by the CBS network and syndicated
programming purchased from various program suppliers.
Waco, Texas is part of the Waco-Temple-Bryan television market. The market
is considered to be the 95th largest television market in the country.
MARKET INFORMATION
The table below and the discussion that follows contain information
regarding KWTX and the television markets in which it operates. Unless noted
otherwise, all station rank, in-market share and television household data is
from the Nielsen Station Index, Viewers in Profile, dated November 1998, as
prepared by Nielsen. The station's rank in the television market area is based
on Nielsen estimates for November 1998 for the period from 6 a.m. to 2 a.m.
Sunday through Saturday. Estimates of population are as reported by the
September 1998, Nielsen Station Index-U.S. Television Household Estimates
published by Nielsen. "In-market share of households viewing television"
represents the percentage of the station's audience as a percentage of all
viewing by households in the market from 6 a.m. to 2 a.m. Sunday through
Saturday, including viewing of non-commercial stations, national cable channels
and out-of-market stations broadcast or carried by cable in the market as
reported by Nielsen for November 1998. Total Market Revenues represent gross
advertising revenues, excluding barter revenues, for all commercial television
stations in the market, as reported in Investing in Television 1998 Market
Report, Fourth Edition November 1998 Ratings published by BIA Publications, Inc.
Average household income, effective buying income and retail business sales
growth projections are as reported in the BIA Guide.
<TABLE>
<CAPTION>
TOTAL MARKET IN-MARKET
MARKET COMMERCIAL STATION REVENUES SHARE OF
RANK PER STATIONS IN RANK IN TELEVISION FOR 1998 HOUSEHOLDS
STATION MARKET NIELSEN MARKET(1) MARKET HOUSEHOLDS (IN THOUSANDS) VIEWING TV
- ------- ------ -------- ----------- ------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
KWTX................. Waco-Temple- 95 5 1 279,000 $28,800 32%
Bryan, Texas
</TABLE>
- -------------------------
(1) Includes independent broadcasting stations and excludes satellite stations.
The Waco-Temple-Bryan television market has a total population of
approximately 790,000. According to the BIA Guide, the average household income
in the Waco-Temple-Bryan television market in 1996 was $35,062. The television
market consists of 14 counties covering a large portion of central Texas. The
cities of Waco, Temple and Bryan are the primary economic centers of the region.
In addition, College Station, Texas is the home of Texas A&M University. The
area's economy centers on medical services, colleges
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<PAGE> 75
and universities and U.S. military installations. Leading employers in the
Waco-Temple area include Baylor University, Raytheon and the U.S. Army Base at
Fort Hood.
EMPLOYEES
As of July 31, 1999, KWTX had 90 full-time and 12 part-time employees. KWTX
believes its relations with its employees are good. No employees are represented
under any collective bargaining agreements.
NETWORK AFFILIATION AGREEMENT
KWTX's current CBS network affiliation agreement expires December 31, 2000.
The affiliation agreement allows for an automatic five-year renewal. The station
or the network can cancel the automatic renewal, by giving notice to the other
party at least 12 months before the then current expiration date. Also, when
there is a change in control of an affiliated station, like the proposed
acquisition by Gray, the network must give its consent to maintain an existing
affiliation agreement in force. Generally, such consent is routinely granted.
FCC LICENSE
The FCC license for KWTX will expire on August 1, 2006, subject to routine
renewal applications.
DIGITAL TELEVISION (HIGH DEFINITION TELEVISION)
In connection with the introduction of digital television to the United
States, the FCC has assigned all existing television licensees a second channel
on which to provide digital television simultaneously with their current
non-digital service. The implementation of digital television is based upon an
FCC timetable that generally requires the largest television markets to begin
digital operations and then phase in progressively smaller markets over a period
of several years. The table below provides the current FCC digital channel
assignment and implementation schedule for KWTX.
<TABLE>
<CAPTION>
REQUEST DIGITAL LICENSE
FCC PROPOSED FROM THE FCC COMMENCE DIGITAL BROADCAST
STATION DIGITAL CHANNEL NOT LATER THAN OPERATIONS NOT LATER THAN
- ------- --------------- ----------------------- --------------------------
<S> <C> <C> <C>
KWTX................. 53 November 1, 1999 May 1, 2002
</TABLE>
KWTX intends to comply with the FCC timetable outlined above. The
introduction of digital television at KWTX will involve material amounts of
capital expenditures. KWTX is currently evaluating the initial costs of digital
services. KWTX anticipates that the initial costs to commence digital
broadcasting may require a minimum investment of several million dollars.
The conversion to digital operations may reduce a station's geographical
coverage area but the majority of stations will obtain service areas that match
or exceed the limits of existing operations. KWTX currently anticipates that its
digital operations will produce coverage areas substantially similar to their
non-digital operations.
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PRIMARY PROPERTIES
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. A station's studios are
generally housed with its offices in business districts. The transmitter sites
and antenna are generally located in elevated areas to provide optimal signal
strength and coverage. The primary offices of KWTX are located at 6700 American
Plaza, Waco, Texas 76712. Its mailing address is KWTX Broadcasting Company, P.O.
Box 2636, Waco, Texas 76702-2636.
The following table provides information regarding the significant
properties involved in the operation of KWTX:
<TABLE>
<CAPTION>
OWNED OR
PROPERTY LOCATION USE LEASED APPROXIMATE SIZE
- ----------------- --- -------- ----------------
<S> <C> <C> <C>
Waco, Texas......................... Studio and offices Owned 34,000 sq. ft. building on
4.0 acres
Moody, McLeaman County, Texas....... Transmitter building Owned 1,200 sq. ft. building and
and main tower 1,678 ft. tower and
antenna on 27.9 acres
</TABLE>
SHARE OWNERSHIP
As of July 31, 1999, management of KWTX knew of no person, other than those
set forth below, who is the beneficial owner of more than 5% of KWTX's common
stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS
- ------------------------------------ -------------------- -------------------
<S> <C> <C>
Ellen Bostick Deaver...................... 96.603 shares 6.23
3420 North Ridge Drive
Waco, Texas 76710
Ray M. Deaver............................. 96.603 shares 6.23
3420 North Ridge Drive
Waco, Texas 76710
Donald Howell............................. 80.50275 shares 5.19
c/o First City Tower
1001 Fannin Street, Suite 2300
Houston, Texas 77002-6760
First Stock Company, Norwest Trust
Texas N.A. Waco......................... 133.969 shares 8.64
Attn: Lori Rizo, P.O. Box 2626
Waco, Texas 76702-2626
Thomas Stribling.......................... 122.562 shares 7.91
P.O. Box 8518
Waco, Texas 76714
The LBJ Holding Company................... 420 shares 27.10
c/o J.E. Ricks
Hogan & Hartson
555 13th Street N.W.
Washington, D.C. 20004
</TABLE>
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INFORMATION CONCERNING BRAZOS
GENERAL
Brazos Broadcasting Co. owns television station KBTX located in Bryan,
Texas. KBTX broadcasts on channel 3 and is affiliated with the CBS television
network. KBTX began operations in 1957. KBTX is designated as a satellite
station of KWTX under the rules of the FCC. This means that it receives most of
its programming from KWTX and that the senior management of KWTX is also
responsible for the operations of KBTX. KBTX broadcasts 16.5 hours of locally
produced newscasts each week. The remainder of the program schedule is filled
with programming provided by the CBS network and syndicated programming
purchased from various program suppliers and generally supplied to KBTX by KWTX.
Bryan, Texas is part of the Waco-Temple-Bryan television market. The market
is considered to be the 95th largest television market in the country.
MARKET INFORMATION
The table below and the discussion that follows contain information
regarding Brazos and the television markets in which it operates. Unless noted
otherwise, all station rank, in-market share and television household data is
from the Nielsen Station Index, Viewers in Profile, dated November 1998, as
prepared by Nielsen. The station's rank in the television market area is based
on Nielsen estimates for November 1998 for the period from 6 a.m. to 2 a.m.
Sunday through Saturday. Estimates of population are as reported by the
September 1998, Nielsen Station Index-U.S. Television Household Estimates
published by Nielsen. "In-market share of households viewing television"
represents the percentage of the station's audience as a percentage of all
viewing by households in the market from 6 a.m. to 2 a.m. Sunday through
Saturday, including viewing of non-commercial stations, national cable channels
and out-of-market stations broadcast or carried by cable in the market as
reported by Nielsen for November 1998. Total Market Revenues represent gross
advertising revenues, excluding barter revenues, for all commercial television
stations in the market, as reported in Investing in Television 1998 Market
Report, Fourth Edition November 1998 Ratings published by BIA Publications, Inc.
Average household income, effective buying income and retail business sales
growth projections are as reported in the BIA Guide.
<TABLE>
<CAPTION>
TOTAL MARKET IN-MARKET
MARKET COMMERCIAL STATION REVENUES SHARE OF
RANK PER STATIONS IN RANK IN TELEVISION FOR 1998 HOUSEHOLDS
STATION MARKET NIELSEN MARKET(1) MARKET HOUSEHOLDS (IN THOUSANDS) VIEWING TV
- ------- ------ -------- ----------- ------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
KBTX................. Waco-Temple- 95 5 1 279,000 $28,800 9%
Bryan, Texas
</TABLE>
- -------------------------
(1) Includes independent broadcasting stations and excludes satellite stations
such as KBTX.
The Waco-Temple-Bryan television market has a total population of
approximately 790,000. According to the BIA Guide, the average household income
in the Waco-Temple-Bryan television market in 1996 was $35,062. The television
market consists of 14 counties covering a large portion of central Texas. The
cities of Waco, Temple and Bryan are the primary economic centers of the region.
In addition, College Station, Texas
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<PAGE> 78
is the home of Texas A&M University. The area's economy centers on medical
services, agriculture, colleges and universities and U.S. military
installations. Leading employers in the Bryan area include Texas A&M University
and St. Joseph's Regional Medical Center.
EMPLOYEES
As of July 31, 1999, Brazos had approximately 47 full-time and 30 part-time
employees. Brazos believes its relations with its employees are good. No
employees are represented under any collective bargaining agreements.
NETWORK AFFILIATION AGREEMENT
Brazos' current CBS network affiliation agreement expires December 31,
2000. The affiliation agreement allows for an automatic five-year renewal. The
station or the network can cancel the automatic renewal, by giving notice to the
other party at least 12 months before the then current expiration date. Also,
when there is a change in control of an affiliated station, like the proposed
acquisition by Gray, the network must give its consent to maintain an existing
affiliation agreement in force. Generally, such consent is routinely granted.
FCC LICENSE
The FCC license for Brazos will expire August 1, 2006, subject to routine
renewal applications.
DIGITAL TELEVISION (HIGH DEFINITION TELEVISION)
In connection with introduction of digital television to the United States,
the FCC has assigned all existing television licensees a second channel on which
to provide digital television simultaneously with their current non-digital
service. The implementation of digital television is based upon an FCC timetable
that generally requires the largest television markets to begin digital
operations and then phase in progressively smaller markets over a period of
several years. The table below provides the current FCC digital channel
assignment and implementation schedule for Brazos.
<TABLE>
<CAPTION>
REQUEST DIGITAL LICENSE
FCC PROPOSED FROM THE FCC COMMENCE DIGITAL BROADCAST
STATION DIGITAL CHANNEL NOT LATER THAN OPERATIONS NOT LATER THAN
- ------- --------------- ----------------------- --------------------------
<S> <C> <C> <C>
KBTX................. 59 November 1, 1999 May 1, 2002
</TABLE>
Brazos intends to comply with the FCC timetable outlined above. The
introduction of digital television at Brazos will involve material amounts of
capital expenditures. Brazos is currently evaluating the initial costs of
digital services. Brazos anticipates that the initial costs to commence digital
broadcasting may require a minimum investment of several million dollars.
The conversion to digital operations may reduce a station's geographical
coverage area but the majority of stations will obtain service areas that match
or exceed the limits of existing operations. Brazos currently anticipates that
its digital operations will produce coverage areas substantially similar to
their non-digital operations.
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<PAGE> 79
PRIMARY PROPERTIES
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. A station's studios are
generally housed with its offices in business districts. The transmitter sites
and antenna are generally located in elevated areas to provide optimal signal
strength and coverage. The primary offices of Brazos are located at 4141 East
29th Street, Bryan, Texas 77802. Its mailing address is Brazos Broadcasting Co.,
P.O. Box 3730, Bryan, Texas 77805.
The following table provides information regarding the significant
properties involved in the operation of Brazos:
<TABLE>
<CAPTION>
OWNED OR
PROPERTY LOCATION USE LEASED APPROXIMATE SIZE EXPIRATION OF LEASE
- ----------------- --- -------- ---------------- -------------------
<S> <C> <C> <C> <C>
Bryan, Texas......... Studio and offices Owned 7,000 sq. ft. building not applicable
on 23.4 acres
Grimes County, Transmitter building and Leased 1,300 sq. ft. building March 15, 2033
Texas.............. main tower and 1,705 ft. tower
and antenna on 560
acres
</TABLE>
SHARE OWNERSHIP
As of July 31, 1999, management of Brazos knew of no person, other than
those set forth below, who is the beneficial owner of more than 5% of Brazos'
common stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS
- ------------------------------------ -------------------- -------------------
<S> <C> <C>
KWTX Broadcasting Company................. 250 shares 50
P.O. Box 2636
Waco, Texas 76702-2636
Ellen Bostick Deaver...................... 25 shares 5
3420 North Ridge Drive
Waco, Texas 76710
Ray M. Deaver............................. 25 shares 5
3420 North Ridge Drive
Waco, Texas 76710
Dorothy Varisco Donaho.................... 25 shares 5
2901 Bammel #28
San Antonio, Texas 78229
Antoinette Varisco Guido.................. 25 shares 5
7335 Ashton Place Court
San Antonio, Texas 78229
</TABLE>
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<PAGE> 80
INFORMATION CONCERNING KXII
GENERAL
KXII Broadcasters, Ltd., a Texas limited partnership, owns and operates
television station KXII located in Sherman, Texas. KXII broadcasts on channel 12
and is affiliated with the CBS television network. KXII began operations in
1956. This station is part of the Sherman, Texas -- Ada, Oklahoma television
market and is considered to be the 161st largest television market in the
country. KXII Television Ltd., a Texas limited partnership affiliated with KXII
Broadcasters, Ltd., provides sales personnel and various sales services to KXII.
KXII broadcasts 15.5 hours of locally produced newscasts each week. The
remainder of the program schedule is filled with programming provided by the CBS
network and syndicated programming purchased from various program suppliers.
MARKET INFORMATION
The table below and the discussion that follows contain information
regarding KXII and the television markets in which it operates. Unless noted
otherwise, all station rank, in-market share and television household data is
from the Nielsen Station Index, Viewers in Profile, dated November 1998, as
prepared by Nielsen. The station's rank in the television market area is based
on Nielsen estimates for November 1998 for the period from 6 a.m. to 2 a.m.
Sunday through Saturday. Estimates of population are as reported by the
September 1998, Nielsen Station Index-U.S. Television Household Estimates
published by Nielsen. "In-market share of households viewing television"
represents the percentage of the station's audience as a percentage of all
viewing by households in the market from 6 a.m. to 2 a.m. Sunday through
Saturday, including viewing of non-commercial stations, national cable channels
and out-of-market stations broadcast or carried by cable in the market as
reported by Nielsen for November 1998. Total Market Revenues represent gross
advertising revenues, excluding barter revenues, for all commercial television
stations in the market, as reported in Investing in Television 1998 Market
Report, Fourth Edition November 1998 Ratings published by BIA Publications, Inc.
Average household income, effective buying income and retail business sales
growth projections are as reported in the BIA Guide.
<TABLE>
<CAPTION>
TOTAL MARKET IN-MARKET
MARKET COMMERCIAL STATION REVENUES SHARE OF
RANK PER STATIONS IN RANK IN TELEVISION FOR 1998 HOUSEHOLDS
MARKET NIELSEN MARKET (1) MARKET HOUSEHOLDS (IN THOUSANDS) VIEWING TV
------ -------- ----------- ------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
KXII................. Sherman, Texas 161 2 1 112,000 $8,300 78%
-- Ada,
Oklahoma
</TABLE>
- -------------------------
(1) Includes independent broadcasting stations and excludes satellite stations.
The Sherman, Texas -- Ada, Oklahoma television market has a total
population of approximately 278,000. According to the BIA Guide, the average
household income in this television market in 1996 was $30,884. The television
market consists of one county in north central Texas and 11 counties in south
central Oklahoma. The cities of Sherman, Texas and Ada and Ardmore, Oklahoma are
the primary economic centers of the region. The area's economy centers around
medical services, manufacturing and distribution services. Leading employers in
the area include Johnson & Johnson and Texas Instruments.
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<PAGE> 81
EMPLOYEES
As of July 31, 1999, KXII had 57 full-time and seven part-time employees.
KXII believes its relations with its employees are good. No employees are
represented under any collective bargaining agreements.
NETWORK AFFILIATION AGREEMENT
KXII's current CBS network affiliation agreement expires December 31, 2000.
The affiliation agreement allows for an automatic five-year renewal. The station
or the network can cancel the automatic renewal, by giving notice to the other
party at least 12 months before the then current expiration date. Also, when
there is a change in control of an affiliated station, like the proposed
acquisition by Gray, the network must give its consent to maintain an existing
affiliation agreement in force. Generally, such consent is routinely granted.
FCC LICENSE
The FCC license for KXII will expire on August 1, 2006, subject to routine
renewal applications.
DIGITAL TELEVISION (HIGH DEFINITION TELEVISION)
In connection with the introduction of digital television to the United
States, the FCC has assigned all existing television licensees a second channel
on which to provide digital television simultaneously with their current
non-digital service. The implementation of digital television is based upon an
FCC timetable that generally requires the largest television markets to begin
digital operations and then phase in progressively smaller markets over a period
of several years. The table below provides the current FCC digital channel
assignment and implementation schedule for KXII.
<TABLE>
<CAPTION>
REQUEST DIGITAL LICENSE
FCC PROPOSED FROM THE FCC COMMENCE DIGITAL BROADCAST
DIGITAL CHANNEL NOT LATER THAN OPERATIONS NOT LATER THAN
--------------- ----------------------- --------------------------
<S> <C> <C> <C>
KXII................. 20 November 1, 1999 May 1, 2002
</TABLE>
KXII intends to comply with the FCC timetable outlined above. The
introduction of digital television at KXII will involve material amounts of
capital expenditures. KXII is currently evaluating the initial costs of digital
services. KXII anticipates that the initial costs to commence digital
broadcasting may require a minimum investment of several million dollars per
station.
The conversion to digital operations may reduce a station's geographical
coverage area but the majority of stations will obtain service areas that match
or exceed the limits of existing operations. KXII currently anticipates that its
digital operations will produce coverage areas substantially similar to their
non-digital operations.
PRIMARY PROPERTIES
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. A station's studios are
generally housed with its offices in business districts. The transmitter sites
and antenna are generally located in elevated
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<PAGE> 82
areas to provide optimal signal strength and coverage. The primary offices of
KXII are located at 4201 Texoma Parkway, Sherman, Texas 75090 and 2624 South
Commerce, Ardmore, Oklahoma 73401. Its mailing address is P.O. Box 1175,
Sherman, Texas 75091.
The following table provides information regarding the significant
properties involved in the operation of KXII:
<TABLE>
<CAPTION>
OWNED OR
STATION/APPROXIMATE PROPERTY LOCATION USE LEASED APPROXIMATE SIZE
- ------------------------------------- --- --------- ----------------
<S> <C> <C> <C>
Sherman, Texas....................... Studio and offices Leased(1) 12,813 sq. ft. building on
2.97 acres
Madill, Oklahoma..................... Transmitter building Leased(1) 1,200 sq. ft. building and
and main tower 1,692 ft. tower and
antenna on 95 acres
Ardmore, Oklahoma.................... Studio and offices Leased(1) 3,000 sq. ft. building on
1.5 acres
</TABLE>
- ---------------------
(1) These properties will be conveyed in fee to Gray upon the closing of the
acquisitions.
EQUITY OWNERSHIP
KXII is a Texas limited partnership. As of July 31, 1999, management knew
of no person, other than those set forth below, who is directly or indirectly
the owner of more than 5% of the equity interests of KXII.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF OWNER PERCENTAGE OF EQUITY INTERESTS
------------------------- ------------------------------
<S> <C>
Richard Adams......................................... 11.11
2806 Wellington Drive
Sherman, Texas 75092
Ellen Bostick Deaver.................................. 26.67
3420 North Ridge Drive
Waco, Texas 76710
Kyle Deaver........................................... 17.78
3430 North Ridge Drive
Waco, Texas 76710
John Lee Deaver....................................... 17.77
1805 Trinity Street
Waco, Texas 76710
Martha Bostick Phipps................................. 26.67
Rt 5 Mesa Road
Ardmore, Oklahoma 73401
</TABLE>
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<PAGE> 83
COMPARISON OF THE SHAREHOLDERS' RIGHTS,
ARTICLES OF INCORPORATION AND BYLAWS OF GRAY, KWTX AND BRAZOS
GENERAL
If the acquisitions are completed, shareholders of KWTX and Brazos will
become shareholders of Gray, which will result in their rights as shareholders
being governed by the articles of incorporation and bylaws of Gray. For
shareholders of KWTX and Brazos, this will result in their rights as
shareholders being governed by the law of Georgia rather than the law of Texas,
which governs their rights as shareholders of KWTX and Brazos. It is not
practical to describe all the differences between Georgia law and Texas law and
between the articles of incorporation and bylaws of Gray and the articles of
incorporation and bylaws or similar organizational documents of each of KWTX and
Brazos.
The following is a summary of the differences which may affect the rights
of shareholders of KWTX and Brazos. This summary is qualified in its entirety by
reference to the full text of such documents. For information as to how such
documents may be obtained, see "Where To Find Additional Information" on page
109.
AUTHORIZED CAPITAL STOCK
Gray. The authorized capital stock of Gray is 50,000,000 shares,
consisting of 15,000,000 shares of Gray class A common stock, and 15,000,000
shares of Gray class B common stock. The Gray board has the authority to issue,
at any time or from time to time, without further shareholder approval, up to
20,000,000 shares of preferred stock and to determine the powers, rights,
privileges and preferences of those shares, which may be senior to the rights of
holders of Gray common stock. Such issuance could adversely affect the holders
of Gray common stock and could have the effect of making more difficult the
acquisition of control of Gray by means of a hostile tender offer, open market
purchases, a proxy contest or otherwise.
Under Georgia law, shareholders have no preemptive rights unless these
rights are provided for in the corporation's articles of incorporation. Holders
of Gray common stock do not have preemptive rights.
KWTX. The authorized capital stock of KWTX consists of 1,550 shares of
common stock, no par value. Under Texas law the shareholders of a corporation
have preemptive rights to acquire additional unissued shares of the corporation,
except to the extent limited or denied by Section 2.22-1 of the Texas Business
Corporation Act or by the corporation's articles of incorporation. KWTX's
articles of incorporation contain no provision with regard to preemptive rights.
Brazos. The authorized capital stock of Brazos consists of 500 shares of
common stock, par value $100.00 per share. Under Texas law the shareholders of a
corporation have preemptive rights to acquire additional unissued shares of the
corporation, except to the extent limited or denied by Section 2.22-1 of the
Texas Business Corporation Act or by the corporation's articles of
incorporation. Brazos's articles of incorporation contain no provision with
regard to preemptive rights.
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<PAGE> 84
DIRECTORS
Gray. The bylaws of Gray provide that the Gray board of directors is
authorized to fix the number of members of the board and to increase or decrease
the number of directors from time to time provided there are not less than three
nor more than 15 directors. A majority of directors constitutes a quorum for the
transaction of business. The bylaws of Gray provide that a vacancy among the
directors may be filled by a majority vote of the remaining directors then in
office, though less than a quorum, or by the sole remaining director.
KWTX. The bylaws of KWTX provide that a majority of the total number of
directors constitutes a quorum for the transaction of business.
Brazos. The bylaws of Brazos provide that a majority of the total number
of directors constitutes a quorum for the transaction of business.
REMOVAL OF DIRECTORS
Under Georgia law (which governs Gray), the shareholders may remove one or
more directors with or without cause unless the articles of incorporation or a
bylaw adopted by the shareholders provides that directors may be removed only
for cause. Directors, unless removed in accordance with Georgia law, shall hold
office until the annual meeting of the shareholders and until their successors
shall have been elected and qualified. At each annual meeting, the holders of
shares entitled to vote in the election of directors shall elect directors to
hold office until the next succeeding annual meeting.
Under Texas law (which governs KWTX and Brazos), directors, unless removed
in accordance with the provisions of the bylaws or the articles of
incorporation, shall hold office until the annual meeting of the shareholders
and until their successors shall have been elected and qualified. At each annual
meeting, the holders of shares entitled to vote in the election of directors
shall elect directors to hold office until the next succeeding annual meeting.
SPECIAL MEETINGS OF SHAREHOLDERS
Gray. The bylaws of Gray provide that special meetings of shareholders may
be called at any time by the Chairman of the Board, or by the President, or by
the board of directors or the holders of not less than one-third of all
outstanding shares of the corporation entitled to vote.
KWTX. The bylaws of KWTX do not contain provisions regarding special
meetings of shareholders.
Brazos. The bylaws of Brazos do not contain provisions regarding special
meetings of shareholders.
Under Texas law (which governs KWTX and Brazos) special meetings of the
shareholders may be called by (1) the president, the board of directors, or such
other persons as may be authorized in the articles of incorporation or the
bylaws or (2) by the holders of at least 10 percent of all the shares entitled
to vote at the proposed special meeting, unless a greater percentage is provided
for in the articles of incorporation, but in no event greater than 50 percent.
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<PAGE> 85
AMENDMENT OF BYLAWS
Georgia law states that both a corporation's board of directors and
shareholders may amend, repeal or adopt bylaws unless a particular bylaw
provides expressly that the board of directors may not amend or repeal that
bylaw or the articles of incorporation reserve such power exclusively to the
shareholders in whole or in part.
Texas law grants to shareholders the power to amend, adopt or repeal
bylaws. Texas law also grants the board of directors the power to amend or
repeal the corporation's bylaws unless the articles of incorporation reserve
this power exclusively to the shareholders, or the shareholders (in amending or
repealing a particular bylaw) expressly provide that the board may not amend or
repeal that bylaw.
The bylaws of KWTX and Brazos each provide that on a written application of
a majority of its shareholders, the bylaws may be altered, changed or amended by
a majority vote of the shareholders at any election or special meeting ordered
for that purpose by the board of directors, written notice thereof having been
given to all shareholders at least 10 days before such meeting. The bylaws of
KWTX and Brazos each additionally provide that the bylaws may be altered,
changed or amended by two-thirds of the directors at any meeting called for that
purpose by the president of the KWTX or Brazos after giving at least 10 days'
written notice thereof to all of the directors.
AMENDMENTS TO THE ARTICLES OF INCORPORATION
Under Georgia law (which governs Gray), most amendments to a corporation's
articles of incorporation must be adopted by the board of directors and approved
by holders of a majority of the stock entitled to vote on such matters. Under
Texas law (which governs KWTX and Brazos), amendments to a corporation's
articles of incorporation must be adopted by the board of directors and approved
by holders of two-thirds of the outstanding shares entitled to vote on such
matters.
DIVIDENDS, REDEMPTIONS AND REPURCHASES
Georgia law provides that Georgia corporations, such as Gray may make legal
distributions to its shareholders subject to restriction by the articles of
incorporation. Distributions may not be legally made if the corporation would
not be able to pay its debts in the usual course of business; or if the
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved at
the time of the distribution, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are superior to those
receiving the dividend.
The Gray series A preferred stock and series B preferred stock are senior
to the Gray class A common stock and class B common stock, as to the payment of
dividends and distribution of assets. Gray's indebtedness also restricts the
amount of dividends that may be paid on Gray's capital stock.
Texas law provides that Texas corporations may make legal distributions to
its shareholders subject to restriction by the articles of incorporation.
Distributions may not be made if after giving effect to the distribution, the
corporation would be insolvent or the distribution exceeds the surplus of the
corporation. Under Texas law a corporation may by resolution of its board of
directors, subject to the provisions of its articles of incorporation,
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<PAGE> 86
redeem any or all outstanding shares. If less than all such shares are to be
redeemed, the shares to be redeemed shall be selected for redemption in
accordance with the provisions in the articles of incorporation. Shares may not
be redeemed if after giving effect to the redemption, the corporation would be
insolvent or the proceeds distributed in connection with the redemption exceed
the surplus of the corporation.
TRANSACTIONS WITH INTERESTED DIRECTORS
Under Georgia law (which governs Gray), a transaction effected or proposed
to be effected by the corporation respecting which a director or directors has
an interest, may not be enjoined, set aside, or give rise to an award of
damages, if any of the following are satisfied: (1) the transaction received the
affirmative vote of a majority (but not less than two) of those disinterested
directors who voted on the transaction after disclosure of the director or
directors' interest; (2) if the material facts of the interest and the contract
or transaction are disclosed to or are known to the shareholders entitled to
vote on such matter, and the shareholders approve the contract or transaction;
and (3) the transaction, judged in the circumstances at the time of commitment,
is established to have been fair to the corporation. Disclosure is sufficient if
the interested director or directors disclose to the board and the shareholders
the existence and nature of the conflict and all facts known respecting the
subject matter of the transaction that an ordinarily prudent person would
reasonably believe to be material to the judgment as to whether or not to
proceed with the transaction.
Under Texas law (which governs KWTX and Brazos), a contract or transaction
between a corporation and one or more of its directors or officers, or between
an entity in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be valid even if the director or
officer is present and participates or votes at the meeting of the board or
committee that approved the contract or transaction, if any of the following are
satisfied: (1) the material facts of the interest and the contract or
transaction are disclosed to or are known by the board or a committee, and a
majority of the disinterested members of the board or committee, even though
less than a quorum, authorizes the contract or transaction in good faith; (2)
the material facts of the interest and the contract or transaction are disclosed
to or are known to the shareholders entitled to vote on such matter, and the
shareholders specifically approve the contract or transaction in good faith; or
(3) the contract or transaction is fair to the corporation at the time it is
authorized, approved or ratified. There is no provision under Texas law,
however, that absolutely precludes a claim by the corporation or its
shareholders against the interested director or officer for damages, if any,
even if the contract or transaction has been so authorized or approved.
INDEMNIFICATION
Georgia law (which governs Gray) contains provisions setting forth
conditions under which a corporation may indemnify directors, officers and
others who act on behalf of the corporation. If such directors are successful in
defending a claim for which indemnification is permitted, Georgia requires the
corporation to provide indemnification of expenses incurred in such defense.
Georgia law also permits a corporation to advance expenses to such indemnified
officers and directors and to purchase insurance on behalf of any such person
against any liability asserted against and incurred by him or her in such
capacity, regardless of whether the corporation would be permitted to indemnify
against such liability.
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<PAGE> 87
Gray's articles of incorporation and bylaws provide that Gray will
indemnify, to the fullest extent permitted by law, directors, officers,
employees or agents of Gray. Gray will also indemnify any person who had agreed
to serve as a director, officer, employee or agent on behalf of Gray, or is or
was or has agreed to serve as a director, officer, employee or agent of another
entity at Gray's request.
Each of Georgia law (which governs Gray) and Texas law (which governs KWTX
and Brazos) contains provisions setting forth conditions under which a
corporation may indemnify or advance expenses to directors, officers and others
who act on behalf of the corporation. A corporation is required to indemnify a
director in connection with a proceeding in which he is a named defendant
because he is or was a director if he has been wholly successful in the defense
of a proceeding. Each of Georgia law and Texas law also permits a corporation to
purchase insurance on behalf of any person who is or was or has agreed to serve
as a director, officer, employee or agent of the corporation, against any
liability asserted against him or her in such capacity, whether or not the
corporation would have the power to indemnify him or her against such liability.
KWTX's articles of incorporation do not provide for the indemnification of
either its officers or directors.
Brazos's articles of incorporation do not provide for the indemnification
of either its officers or directors.
APPRAISAL RIGHTS
Under Georgia law (which governs Gray) no appraisal rights are granted to
shareholders who dissent from a sale, lease or exchange of all or substantially
all of the assets of a corporation. Georgia law further provides that generally
no appraisal rights are granted to shareholders who dissent from an acquisition
or consolidation for which a shareholder vote is required if the shares of the
class of stock voting are listed on a national securities exchange or are held
of record by more than 2,000 shareholders. However, shareholders who follow
prescribed statutory procedures and who have not voted in favor of the
applicable transition nor consented thereto in writing will have appraisal
rights if the shareholders are required in connection with the acquisition or
consolidation to accept for their stock anything other than:
- stock of the corporation surviving or resulting from the acquisition or
consolidation;
- stock of any other corporation listed on a national securities exchange
or the Nasdaq National Market System or held of record by more than 2,000
shareholders; or
- cash in lieu of fractional shares.
The shareholders of Gray are not entitled to appraisal rights in connection
with the transactions to be considered by shareholders at the annual meeting.
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<PAGE> 88
Under Texas law (which governs KWTX and Brazos), a shareholder does not
have the right to dissent from any plan of acquisition in which there is a
single surviving corporation, or from any plan of acquisition or plan of
exchange, if:
- the shares of the corporation being acquired are, on the record date
fixed to determine the shareholders entitled to vote on the plan of
acquisition: (1) listed on a national securities exchange; (2) listed on
the Nasdaq Stock Market or designated as a national market security on an
interdealer quotation system by the NASD; or (3) held of record by not
less than 2,000 holders;
- the shareholder is not required to accept any consideration that is
different from the consideration to be received by all other holders of
such shares; or
- the shareholder is not required to accept consideration other than: (1)
shares of a corporation which are: (i) listed on a national securities
exchange; (ii) approved for quotation as a national market security on an
interdealer quotation system by the NASD; or (iii) held of record by not
less than 2,000 holders; (2) cash in lieu of fractional shares; or (3)
any combination of cash and securities listed above.
Generally, in the absence of fraud, dissenters' rights are a shareholder's
sole remedy for objecting to an acquisition or consolidation under Texas law.
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<PAGE> 89
PROPOSAL 2: ELECTION OF DIRECTORS
NOMINEES
At the shareholders meeting, nine directors are to be elected to hold
office (subject to Gray's bylaws) until the next annual meeting of shareholders
and until their successors have been elected and qualified. In case any nominee
listed in the table below should be unavailable for any reason, which management
of Gray has no reason to anticipate, the proxy will be voted for any substitute
nominee or nominees who may be selected by management prior to or at the meeting
or, if no substitute is selected by management prior to or at the meeting, a
motion to reduce the membership of the board to the number of nominees available
will be presented.
Set forth below is information concerning each of the nominees.
<TABLE>
<CAPTION>
DIRECTOR
NAME SINCE AGE POSITION
- ---- -------- --- --------
<S> <C> <C> <C>
J. Mack Robinson.................. 1993 76 Director, President and Chief Executive
Officer
Robert S. Prather, Jr. ........... 1993 54 Director and Executive Vice
President -- Acquisitions
William E. Mayher, III............ 1990 60 Chairman of the Board of Directors
Richard L. Boger.................. 1991 52 Director
Hilton H. Howell, Jr. ............ 1993 38 Director
Zell Miller....................... 1999 67 Director
Howell W. Newton.................. 1991 52 Director
Hugh Norton....................... 1987 67 Director
Harriett J. Robinson.............. 1997 68 Director
</TABLE>
J. MACK ROBINSON has been Gray's President and Chief Executive Officer
since 1996. Mr. Robinson has been Chairman of the Board of Bull Run Corporation,
a diversified company and a principal shareholder of Gray, since 1994, Chairman
of the Board and President of Delta Life Insurance Company and Delta Fire and
Casualty Insurance Company since 1958, President of Atlantic American
Corporation, an insurance holding company, from 1995 until 1998 and Chairman of
the Board of Atlantic American Corporation since 1974. He is a director of the
following companies: Bankers Fidelity Life Insurance Company, American
Independent Life Insurance Company, Georgia Casualty & Surety Company, American
Southern Insurance Company and American Safety Insurance Company. He is director
emeritus of Wachovia Corporation. He is a member of the Executive Committee and
Management Personnel Committee of Gray's board of directors. Mr. Robinson is the
husband of Harriett J. Robinson and the father-in-law of Hilton H. Howell.
ROBERT S. PRATHER, JR. has been Executive Vice President -- Acquisitions of
Gray since 1996. He has been President and Chief Executive Officer and a
director of Bull Run Corporation, a diversified company and principal
shareholder of Gray, since 1992. He is a director of the following companies:
Host Communications, Inc., Capital Sports Properties, Inc., Universal Sports
America, Inc., Rawlings Sporting Goods Company, Inc. and The
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<PAGE> 90
Morgan Group, Inc. He is a member of the Executive Committee and the Management
Personnel Committee of Gray's board of directors.
WILLIAM E. MAYHER III was a neurosurgeon in Albany, Georgia from 1970 to
1998. He is a director of the following: Medical College of Georgia Foundation,
American Association of Neurological Surgeons, Gaston Loughlin, Inc. and Palmyra
Medical Centers. Dr. Mayher is a member of the Executive Committee and
Management Personnel Committee of Gray's board of directors and has served as
Chairman of Gray's board of directors since August 1993.
RICHARD L. BOGER has been President and Chief Executive Officer of Export
Insurance Services, Inc., an insurance organization, and a director of CornerCap
Group of Funds, a "series" investment company since prior to 1992. Mr. Boger is
a member of the Executive Committee of Gray's board of directors and is the
Chairman of the Management Personnel Committee of Gray's board of directors.
HILTON H. HOWELL, JR. has been President and Chief Executive Officer of
Atlantic American Corporation, an insurance holding company, since 1995 and
Executive Vice President of Atlantic American Corporation from 1992 to 1995. He
has been Executive Vice President and General Counsel of Delta Life Insurance
Company and Delta Fire and Casualty Insurance Company since 1991, and Vice
Chairman and Executive Vice President of Bankers Fidelity Life Insurance Company
and Georgia Casualty & Surety Company since 1992. He has been a director, Vice
President and Secretary of Bull Run Corporation since 1994. He is a director of
the following companies: Atlantic American Corporation, Bankers Fidelity Life
Insurance Company, American Independent Life Insurance Company, Delta Life
Insurance Company, Delta Fire and Casualty Insurance Company, Georgia Casualty &
Surety Company, American Southern Insurance Company, American Safety Insurance
Company, Association Casualty Insurance Company and Association Risk Management
General Agency. He is the son-in-law of J. Mack Robinson and Harriett J.
Robinson.
ZELL MILLER was Governor of Georgia from January 1991 to January 1999. He
is Chairman of the Board of Kollmann (USA) Inc. and a director of the following
companies: Norfolk Southern Corporation, Post Properties, Inc., Georgia Power
Company, United Community Banks, Inc. and Law Companies Group. He is a professor
of Young Harris College, a Distinguished Professor of Higher Education of the
University of Georgia and a Presidential Distinguished Fellow of Emory
University. Governor Miller is a member of the Audit Committee of Gray's board
of directors.
HOWELL W. NEWTON has been President and Treasurer of Trio Manufacturing
Co., a textile manufacturing company, since 1978. Mr. Newton is Chairman of the
Audit Committee of Gray's board of directors.
HUGH NORTON has been President of Norco, Inc., an insurance agency, since
1973. He is one of the founders and directors of Community Bank of Georgia. Mr.
Norton is also a real estate developer in Destin, Florida. He is a member of the
Management Personnel Committee of Gray's board of directors.
HARRIETT J. ROBINSON has been a director of Atlantic American Corporation
since 1989 and a director of Delta Life Insurance Company and Delta Fire and
Casualty Insurance Company since 1967. Mrs. Robinson is the wife of J. Mack
Robinson and the mother-in-law of Hilton H. Howell, Jr.
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COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
directors, executive officers and persons who own more than 10 percent of a
registered class of a company's equity securities to file with the SEC initial
reports of ownership (Form 3) and reports of changes in ownership (Forms 4 and
5) of such class of equity securities. Such officers, directors and greater than
10 percent shareholders of a company are required by SEC regulations to furnish
the company with copies of all such Section 16(a) reports that they file.
To Gray's knowledge, based solely on its review of the copies of such
reports furnished to Gray during the year ended December 31, 1998, all Section
16(a) filing requirements applicable to its officers, directors and 10 percent
beneficial owners were met.
BOARD COMMITTEES AND MEMBERSHIP
The Gray board has an Executive Committee. The Executive Committee held no
meetings during 1998. The members of the Executive Committee are Messrs.
Robinson, Prather, Mayher and Boger.
The Gray board has an Audit Committee, the purpose of which is to review
and evaluate the results and scope of the audit and other services provided by
Gray's independent auditors, as well as Gray's accounting principles and system
of internal accounting controls, and to review and approve any transactions
between Gray and its directors, officers or significant shareholders. The Audit
Committee held two meetings during 1998. The members of the Audit Committee are
Messrs. Miller and Newton.
The Gray board has a Management Personnel Committee, the purpose of which
is to make recommendations with respect to executive salaries, bonuses and
compensation and to serve as the nominating committee with respect to the
principal officers and other committees of the board of directors, as well as
making nominations respecting membership of the board of directors of Gray. The
Management Personnel Committee will consider recommendations for nominees for
directorship submitted by shareholders. Shareholders wishing to recommend
director candidates for consideration by the Management Personnel Committee may
do so by writing to the Secretary of Gray, giving the candidate's name,
biographical data and qualifications. The Management Personnel Committee held
five meetings in 1998, and its members are Messrs. Robinson, Prather, Mayher,
Boger and Norton.
Gray does not have a nominating committee. The Gray board held four
meetings during 1998. During 1998, each of the directors attended at least 75%
of the aggregate number of meetings of the board and meetings of all committees
of the board on which such directors served.
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SHARE OWNERSHIP
The following table sets forth information regarding the ownership of Gray
class A common stock and class B common stock as of August 9, 1999 by (1) any
person who is known to Gray to be the beneficial owner of more than five percent
of the Gray class A common stock or class B common stock, (2) all directors, (3)
all executive officers named in the Summary Compensation Table and (4) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
CLASS A CLASS B COMBINED
COMMON STOCK COMMON STOCK VOTING POWER
BENEFICIALLY OWNED BENEFICIALLY OWNED AS A PERCENTAGE
------------------- ------------------- OF COMMON
NAME SHARES PERCENT SHARES PERCENT STOCK
- ---- --------- ------- --------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Robert A. Beizer(1)................... -- -- 33,635 * *
Richard L. Boger(1)................... 11,651 * 13,744 * *
Joseph A. Carriere.................... 6,075 * -- -- *
Hilton H. Howell, Jr.(1),(2),(3),(4).. 3,566,782 45.7 36,500 * 43.0
Wayne M. Martin(1).................... 362 * 12,063 * *
William E. Mayher, III(1)............. 13,500 * 18,750 * *
Zell Miller(1)........................ -- -- 7,500 * *
Howell W. Newton(1)................... 2,625 * 9,500 * *
Hugh Norton(1)........................ 13,500 * 18,750 * *
Robert S. Prather,
Jr.(1),(2),(5),(6).................. 3,170,073 40.8 99,800 1.9 38.4
Harriett J. Robinson(1),(2),(4),(7)... 4,575,382 56.6 192,400 3.7 53.4
J. Mack Robinson(1),(2),(4),(5),(8)... 4,575,382 56.6 192,400 3.7 53.4
James C. Ryan(5)...................... -- -- 2,019 * *
Thomas J. Stultz(1)................... 2,250 * 24,500 * *
Bull Run Corporation(9)............... 2,931,397 38.0 11,750 * 35.7
The Capital Group Companies, Inc.(10). -- -- 401,600 7.8 *
Mario J. Gabelli(11).................. -- -- 1,243,399 24.2 1.7
George H. Nader(12)................... 359,998 5.3 -- 0.0 4.9
Shapiro Capital Management Company,
Inc.(13)............................ 11,350 * 1,693,039 32.9 2.5
Standish Ayer and Wood, Inc.(14)...... -- -- 474,100 9.2 *
All directors and executive officers
as a group(15)...................... 4,937,846 61.1 439,750 8.1 57.8
</TABLE>
- -------------------------
* Less than 1%
(1) Includes options to purchase Gray class B common stock as follows: each of
Messrs. Boger, Howell, Mayher, Newton, Norton, Miller and Mrs. Robinson --
7,500 shares, Mr. Robinson -- 75,000 shares, Mr. Prather -- 75,000 shares,
Mr. Beizer -- 33,000 shares, Mr. Martin -- 11,250 shares and Mr. Stultz --
22,500 shares. Excludes Mr. Beizer's options to purchase 21,000 shares of
Gray class B common stock that are not exercisable within 60 days of August
9, 1999.
(2) Includes 2,017,647 shares of Gray class A common stock and 11,750 shares of
Gray class B common stock owned by Bull Run Corporation and warrants to
purchase 933,750 shares of Gray class A common stock owned by Bull Run
Corporation as described in footnote (9) below, because Messrs. Howell,
Prather and Robinson are directors and officers of Bull Run Corporation and
Messrs. Prather and Robinson are principal shareholders of Bull Run
Corporation and Mrs. Robinson is the spouse of Mr. Robinson and, as such,
may be deemed to be beneficial owners of such shares.
87
<PAGE> 93
Each of Messrs. Howell, Prather and Robinson and Mrs. Robinson disclaims
beneficial ownership of the shares owned by Bull Run Corporation. Excludes
(1) warrants owned by Bull Run Corporation to purchase 172,500 shares of
Gray class A common stock and warrants to purchase 100,000 shares of Gray
class B common stock that are not exercisable within 60 days of August 9,
1999 and (2) 1,000 shares of Gray series A preferred stock and 175 shares
of Gray series B preferred stock owned by Bull Run Corporation and 175
shares of Gray series B preferred stock owned by Mrs. Robinson's husband
and his affiliates, which securities are non-voting and are not convertible
into Gray class A common stock or Gray class B common stock.
(3) Includes 58,575 shares of Gray class A common stock owned by Mr. Howell's
wife, as to which shares he disclaims beneficial ownership. Excludes
105,000 shares of Gray class A common stock and 5,000 shares of Gray class
B common stock held in trust for Mr. Howell's wife.
(4) Includes as to Messrs. Robinson and Howell and Mrs. Robinson, an aggregate
of 490,060 shares of Gray class A common stock and 6,000 shares of Gray
class B common stock owned by certain companies of which Mr. Howell is an
officer and a director. Mr. Robinson is also an officer, director and a
principal or sole shareholder and Mrs. Robinson is also a director of these
companies. Also includes warrants to purchase 31,500 shares of Gray class A
common stock owned by one of the above described companies. Excludes
warrants to purchase 6,000 shares of Gray class A common stock that are not
exercisable within 60 days of August 9, 1999.
(5) Excludes options to purchase Gray class B common stock that are not
exercisable within 60 days of August 9, 1999 as follows: Mr.
Prather -- 41,000 and Mr. Ryan -- 11,250. Also excludes Mr. Robinson's and
Mr. Prather's options to purchase 10,000 and 9,337 shares, respectively, of
Gray class A common stock that are not exercisable within 60 days of August
9, 1999.
(6) Includes 225 shares of Gray class A common stock and 100 shares of Gray
class B common stock owned by Mr. Prather's wife, as to which shares he
disclaims beneficial ownership.
(7) Includes: (1) 381,975 shares of Gray class A common stock, 79,750 shares of
Gray class B common stock and warrants to purchase 63,000 shares of Gray
class A common stock owned by Mrs. Robinson's husband, as to which
securities Mrs. Robinson disclaims beneficial ownership; (2) warrants to
purchase 94,500 shares of Gray class A common stock; (3) 256,950 shares of
Gray class A common stock, 10,000 shares of Gray class B common stock and
warrants to purchase 126,000 shares of Gray class A common stock owned by
Mrs. Robinson, as trustee for her daughters, as to which securities Mrs.
Robinson disclaims beneficial ownership. Excludes: (1) options held by Mrs.
Robinson's husband to purchase 10,000 shares of Gray class A common stock
and 41,000 shares of Gray class B common stock which are not exercisable
within 60 days of August 9, 1999; (2) warrants held by Mrs. Robinson, Mrs.
Robinson's husband and certain of his affiliates to purchase 60,000 shares
of Gray class A common stock that are not exercisable within 60 days of
August 9, 1999; and (3) 175 shares of Gray series B preferred stock owned
by Mrs. Robinson's husband and his affiliates, which securities are
nonvoting and are not convertible into Gray class A common stock or class B
common stock. Mrs. Robinson's address is 3500 Tuxedo Road, NW, Atlanta,
Georgia 30305.
88
<PAGE> 94
(8) Includes: (1) 436,950 shares of Gray class A common stock and 12,400 shares
of Gray class B common stock owned by Mr. Robinson's wife, directly and as
trustee for their daughters, warrants to purchase 94,500 shares of Gray
class A common stock held by Mr. Robinson's wife, and warrants to purchase
126,000 shares of Gray class A common stock held by Mr. Robinson's wife, as
trustee for their daughters, as to which securities Mr. Robinson disclaims
beneficial ownership; (2) warrants to purchase 63,000 shares of Gray class
A common stock held by Mr. Robinson. Excludes: (1) options held by Mr.
Robinson to purchase 10,000 shares of Gray class A common stock and 40,000
shares of Gray class B common stock which are not exercisable within 60
days of August 9, 1999; (2) warrants held by Mrs. Robinson, Mr. Robinson
and certain of his affiliates to purchase 60,000 shares of Gray class A
common stock that are not exercisable within 60 days of August 9, 1999; and
(3) 175 shares of Gray series B preferred stock owned by Mr. Robinson and
his affiliates, which securities are nonvoting and are not convertible into
Gray class A common stock or class B common stock. Mr. Robinson's address
is 3500 Tuxedo Road, NW, Atlanta, Georgia 30305.
(9) Includes warrants to purchase 933,750 shares of Gray class A common stock
which are exercisable within 60 days. Excludes (1) 1,000 shares of Gray
series A preferred stock and 175 shares of Gray series B preferred stock,
none of which is voting or convertible into shares of Gray class A common
stock or class B common stock and (2) warrants to purchase 172,500 shares
of Gray class A common stock and 100,000 shares of Gray class B common
stock that are not exercisable within 60 days of August 9, 1999. The
address of Bull Run Corporation is 4370 Peachtree Road NE, Atlanta, Georgia
30319.
(10) This information was furnished to Gray on a Schedule 13G filed by Capital
Guardian Trust Company. Capital Guardian Trust Company, a wholly owned
subsidiary of The Capital Group Companies, Inc., is the beneficial owner of
these shares as a result of its serving as the investment manager of
various institutional accounts, but has authority to vote only 167,750
shares of Gray class B common stock. The address of Capital Guardian Trust
Company is 11100 Santa Monica Boulevard, Los Angeles, California 90025.
(11) This information was furnished to Gray on a Schedule 13D filed by Gabelli
Funds, Inc. and also by Mario J. Gabelli and various entities which he
directly or indirectly controls or for which he acts as chief investment
officer. The Schedule 13D reports the beneficial ownership of Gray class B
common stock as follows: Gabelli Funds, LLC -- 536,300 shares; GAMCO
Investors, Inc. -- 677,349 shares; and Gabelli International
Limited -- 24,750 shares and Gabelli Advisors 5,000 shares. GAMCO
Investors, Inc. only has the authority to vote 646,599 of the shares
beneficially held by it. The address of Mr. Gabelli and Gabelli Funds, Inc.
is One Corporate Center, Rye, New York 10580.
(12) Mr. Nader's address is P.O. Box 271, 1011 Fifth Avenue, West Point, Georgia
31833.
(13) This information was furnished to Gray by a representative of Shapiro
Capital Management Company, Inc., an investment adviser. The address of
Shapiro Capital Management Company, Inc. is 3060 Peachtree Road NW,
Atlanta, Georgia 30306.
(14) This information was furnished to Gray on a Schedule 13G filed by Standish,
Ayer & Wood, Inc., One Financial Center, Boston, Massachusetts 02111-2662.
89
<PAGE> 95
(15) Includes all options and warrants to purchase Gray class A or class B
common stock which are exercisable within 60 days of August 9, 1999 and
excludes such options and warrants not exercisable within the same 60 day
period.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation of Gray's
President and Chief Executive Officer and the other executive officers whose
annual compensation exceeded $100,000 during the year ended December 31, 1998
(the "named executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------------------------
--------------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS SARS(#)(1) COMPENSATION($)
- --------------------------- ---- --------- -------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
J. Mack Robinson(3)....... 1998 72,308 -- 125,000(2) 13,000(4)
President, Chief 1997 -- -- 75,000(5) 14,620(4)
Executive Officer and a 1996 -- -- 11,250(6) 9,300(4)
Director
Robert S. Prather,
Jr.(7).................. 1998 -- -- 125,337(2) 13,000(4)
Executive Vice 1997 -- -- 75,000(5) 14,620(4)
President -- Acquisitions
and a Director 1996 -- -- 11,250(6) 8,800(4)
Robert A. Beizer.......... 1998 215,000 -- 21,000(2) 13,080(9)
Vice President -- Law 1997 210,000 -- 10,500 6,619(9)
and Development 1996 169,231 -- 22,500 --
James C. Ryan(10)......... 1998 34,269 5,000 22,500(2) 15,603(11)
Vice President --
Finance and Chief
Financial Officer
Thomas J. Stultz.......... 1998 196,000 35,000 22,500(2) 7,166(8)
Vice President, 1997 187,000 25,000 22,500(5) 59,199(8)
President -- Publishing 1996 152,788 150,000 -- --
Division
Wayne M. Martin(12)....... 1998 219,326 170,454 11,250(2) 8,829(13)
Regional Vice
President --
Television
Joseph A. Carriere(14).... 1998 125,524 -- --(2) 203,766(15)
Vice President -- 1997 187,000 -- 7,500(16) 6,245(17)
Television 1996 172,692 100,000 -- 5,698(17)
</TABLE>
- -------------------------
(1) On August 20, 1998, the board of directors declared a 50% stock dividend,
payable on September 30, 1998, to shareholders of record of the Gray class
A common stock and class B common stock on September 16, 1998. This stock
dividend was effected by means of a three-for-two stock split. All
applicable share and per share data have been adjusted to give effect to
the stock split.
(2) These awards are set forth below in detail in the table titled "Option/SAR
Grants in 1998."
90
<PAGE> 96
(3) Mr. Robinson was appointed President and Chief Executive Officer in
September 1996 but received no salary for this position until September
1998. Mr. Robinson is currently compensated at an annual salary of
$200,000.
(4) Represents compensation paid for services rendered as a member of Gray's
board of directors.
(5) Represents stock options to purchase Gray class B common stock pursuant to
Gray's 1992 Long Term Incentive Plan. This 1997 stock option grant was
replaced by a repricing grant, effective December 11, 1998. The December
11, 1998 grant repriced the 1997 grant at a price which approximated the
market price of the Gray class B common stock on December 11, 1998. The
repriced grant was included in 1998 stock options granted as a 1998 grant.
(6) Represents stock options to purchase Gray class B common stock under the
Non-Employee Director Stock Option Plan.
(7) Mr. Prather became an officer in September 1996.
(8) $4,000, $1,963 and $1,203 represent payments or accruals by Gray in 1998
for matching contributions to Gray's 401(k) plan, term life insurance
premiums and long term disability premiums, respectively. $54,700, $3,596
and $903 represent payments or accruals by Gray in 1997 for relocation
costs, matching contributions to Gray's 401(k) plan and long term
disability premiums, respectively.
(9) $4,000, $5,589 and $3,491 represent payments or accruals by Gray in 1998
for matching contributions to Gray's 401(k) plan, term life insurance
premiums and long term disability premiums, respectively. $4,000 and $2,619
represent payments or accruals by Gray in 1997 for premiums, respectively.
(10) Mr. Ryan joined Gray on October 1, 1998, compensated at an annual salary of
$135,000.
(11) Represents payments or accruals by Gray for relocation costs.
(12) Mr. Martin has served as Gray's Regional Vice-President -- Television since
July 1998. He was also appointed President of WVLT-TV, the Company's
subsidiary in Knoxville, Tennessee. Prior to his appointment as an
executive officer, Mr. Martin has served as President of Gray Kentucky
Television, Inc., a subsidiary of the Company, which operates WKYT-TV, in
Lexington, Kentucky and WYMT-TV, in Hazard, Kentucky.
(13) $4,000, $3,249 and $1,580 represent payments or accruals by Gray for
matching contributions to Gray's 401(k) plan, term life insurance premiums
and long term disability premiums, respectively.
(14) Mr. Carriere resigned, effective August 1, 1998.
(15) $190,000, $2,919, $5,291 and $5,556 represent payments or accruals by Gray
for consulting, matching contributions to Gray's 401(k) plan, term life
insurance premiums and health insurance premiums, respectively.
(16) Upon Mr. Carriere's resignation, this unvested stock option grant was
forfeited.
(17) $4,000 and $2,245 represent payments or accruals by Gray in 1997 for
matching contributions to Gray's 401(k) plan and term life insurance
premiums, respectively. $3,750 and $1,948 represent payment or accruals by
Gray in 1996 for matching contributions to Gray's 401(k) plan and term life
insurance premiums, respectively.
91
<PAGE> 97
STOCK OPTIONS GRANTED
The following table contains information on stock options granted during
the year ended December 31, 1998. Under Gray's 1992 Long Term Incentive Plan,
all officers and key employees are eligible for grants of stock options and
other stock-based awards. Options granted are exercisable over a three-year
period beginning on the second anniversary of the grant date and expire one
month after termination of employment. The total number of shares issuable under
the Incentive Plan is not to exceed 900,000 shares, of which 300,000 shares are
Gray class A common stock and 600,000 shares are Gray class B common stock,
subject to adjustment in the event of any change in the outstanding shares of
such stock by reason of a stock dividend, stock split, recapitalization,
acquisition, consolidation or other similar changes generally affecting
shareholders. See "Proposal 3: Amendment of the Gray 1992 Long Term Incentive
Plan" for information concerning a proposal to amend the Incentive Plan to
increase the number of shares of Gray class B common stock issuable thereunder.
The Incentive Plan is administered by the Incentive Plan Committee which
consists of members of the Management Personnel Committee of the board of
directors who are not eligible to participate under the Incentive Plan. The
Incentive Plan is intended to provide additional incentives and motivation for
Gray's employees. The Incentive Plan Committee, by majority action thereof, is
authorized in its sole discretion to determine the individuals to whom the
benefits will be granted, the type and amount of such benefits and the terms
thereof; and to prescribe, amend and rescind rules and regulations relating to
the Incentive Plan.
On August 20, 1998, the board of directors declared a 50% stock dividend,
payable on September 30, 1998, to shareholders of record of the Gray class A
common stock and class B common stock on September 16, 1998. This stock dividend
was effected by means of a three-for-two stock split. All applicable share and
per share data have been adjusted to give effect to the stock split.
OPTION/SAR GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
CLASS OF UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
COMMON OPTIONS EMPLOYEES BASE PRICE EXPIRATION --------------------
STOCK GRANTED IN 1998 ($/SHARE) DATE 5%($) 10%($)
------- ---------- ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Mack Robinson........ Class A 10,000(2) 1.8 17.81 11/19/03 49,213 108,747
Class B 40,000(2) 7.1 14.00 11/19/03 154,718 341,886
Class B 75,000(3) 13.3 14.50 9/25/02 234,363 504,709
Robert S. Prather, Jr... Class A 9,337(2) 1.7 17.81 11/19/03 45,950 101,537
Class B 41,000(2) 7.3 14.00 11/19/03 158,586 350,433
Class B 75,000(3) 13.3 14.50 9/25/02 234,363 504,709
Robert A. Beizer........ Class B 10,500(4) 1.9 16.08 2/12/03 46,647 103,079
Class B 10,500(5) 1.9 14.50 2/12/03 42,064 92,950
James C. Ryan........... Class B 11,250(6) 2.0 16.13 10/5/03 50,119 110,750
Class B 11,250(5) 2.0 14.50 10/5/03 45,068 99,589
Thomas J. Stultz........ Class B 22,500(3) 4.0 14.50 9/25/02 70,309 151,413
Wayne M. Martin......... Class B 11,250(3) 2.0 14.50 9/25/02 35,154 75,706
Joseph A. Carriere...... N/A N/A N/A N/A N/A N/A N/A
</TABLE>
92
<PAGE> 98
- -------------------------
(1) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
Gray class A common stock or class B common stock over the term of the
options. These numbers are calculated based on rules promulgated by the SEC
and do not reflect Gray's estimate of future stock price growth. Actual
gains, if any, on stock option exercises and Gray class A common stock or
Gray class B common stock holdings will be dependent on the timing of such
exercise and the future performance of the Gray class A common stock or Gray
class B common stock. There can be no assurance that the rates of
appreciation assumed in this table can be achieved or that the amounts
reflected will be received by the option holder.
(2) Stock options granted effective November 19, 1998 pursuant to the Incentive
Plan.
(3) Effective December 11, 1998, Gray repriced certain Gray class B common stock
option grants made in 1997 pursuant to the Incentive Plan, at a price which
approximated the market price of Gray's class B common stock on that day.
These repriced grants effectively replaced the stock option grants made on
September 25, 1997.
(4) Stock options granted effective February 12, 1998 pursuant to Gray's
Incentive Plan that were repriced on December 11, 1998 as described in note
(5) below.
(5) Effective December 11, 1998, Gray repriced certain Gray class B common stock
option grants made in 1998 pursuant to the Incentive Plan, at a price which
approximated the market price of the Gray class B common stock on that day.
These repriced grants effectively replaced the earlier 1998 stock option
grants.
(6) Stock options granted effective October 5, 1998 pursuant to the Incentive
Plan. This stock option grant was replaced on December 11, 1998, by a
repricing grant as described in note (5) above.
93
<PAGE> 99
STOCK OPTIONS EXERCISED
The following table sets forth information about stock options that were
exercised during 1998 and the number of shares and the value of grants
outstanding as of December 31, 1998 for each named executive.
AGGREGATED OPTION EXERCISES IN 1998
AND DECEMBER 31, 1998 OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS AT 12/31/98
CLASS OF ACQUIRED OPTIONS AT 12/31/98 ($)(1)
COMMON ON VALUE --------------------------- ---------------------------
NAME STOCK EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Mack Robinson(2)....... Class A -- -- -- 10,000 -- 5,000
Class B 11,250 61,875 -- 115,000 -- --
Robert S. Prather, Jr.(2). Class A -- -- -- 9,337 -- 4,669
Class B 11,250 61,875 -- 116,000 -- --
Robert A. Beizer.......... Class B -- -- 22,500 21,000 69,845 12,469
James C. Ryan............. Class B -- -- -- 11,250 -- --
Thomas J. Stultz.......... Class B -- -- -- 22,500 -- --
Wayne M. Martin(3)........ Class A 6,750 68,531 -- -- -- --
Class B -- -- -- 11,250 -- --
Joseph A. Carriere(3)..... Class A 5,625 65,547 -- -- -- --
</TABLE>
- -------------------------
(1) Value is based on the closing price of Gray class A common stock and class B
common stock of $18.31 and $13.69, respectively at December 31, 1998, less
the exercise price.
(2) On December 12, 1996, Gray granted each of Messrs. Robinson and Prather an
option to purchase 11,250 shares of Gray class B common stock, at an
exercise price of $10.58 per share, pursuant to Gray's Non-employee Director
Stock Option Plan. The options were exercised in 1998.
(3) On March 30, 1995, Gray granted Messrs. Martin and Carriere an option to
purchase 6,750 and 5,625 shares of Gray class A common stock, respectively,
at an exercise price of $8.89 per share, pursuant to the Incentive Plan. The
options were exercised in 1998.
SUPPLEMENTAL PENSION PLAN
Gray has entered into agreements with certain key employees to provide
these employees with supplemental retirement benefits. The benefits will be
disbursed after retirement in contractually predetermined payments of equal
monthly amounts over the employee's life, or the life of a surviving eligible
spouse, for a maximum of 15 years. Gray maintains life insurance coverage on
these individuals in adequate amounts to reimburse Gray for the cost of the
agreements.
RETIREMENT PLAN
Gray sponsors a defined benefit pension plan, intended to be tax qualified,
for certain of its employees and the employees of any of its subsidiaries which
have been designated
94
<PAGE> 100
as participating companies under the plan. A participating employee who retires
on or after attaining age 65 and who has completed five years of service upon
retirement may be eligible to receive during his lifetime, in the form of
monthly payments, an annual pension equal to (1) 22% of the employee's average
earnings for the highest five consecutive years during the employee's final 10
years of employment multiplied by a factor, the numerator of which is the
employee's years of service credited under the plan, plus (2) 0.9% of the
employee's monthly average earnings for the highest five consecutive years in
the employee's final 10 years of employment added to 0.6% of monthly average
earnings in excess of Social Security covered compensation, and multiplied by
the employee's years of service credited under the plan after 1993, with a
maximum of 25 years minus years of service credited under (1) above. For
participants as of December 31, 1998, there was a minimum benefit equal to the
projected benefit. For purposes of illustration, pensions estimated to be
payable upon retirement of participating employees in specified salary
classifications are shown in the following table:
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------------
REMUNERATION(1) 10 15 20 25 30 35
- --------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$ 15,000.................... $ 1,335 $ 1,995 $ 2,655 $ 3,315 $ 3,300 $ 3,300
25,000.................... 2,225 3,325 4,425 5,525 5,500 5,500
50,000.................... 5,016 7,216 9,416 11,616 11,000 11,000
75,000.................... 7,991 11,291 14,591 17,891 16,500 16,500
100,000.................... 10,966 15,366 19,766 24,166 22,000 22,000
150,000.................... 16,916 23,516 30,116 36,716 33,000 33,000
200,000.................... 19,416 28,216 37,016 45,816 36,667 37,714
250,000 and above.......... 20,262 29,908 39,554 49,199 40,191 41,339
</TABLE>
- -------------------------
(1) Five-year average annual compensation.
Employees may become participants in the plan, provided that they have
attained age 21 and have completed one year of service. Average earnings are
based upon the salary paid to a participating employee by a participating
company. Pension compensation for a particular year as used for the calculation
of retirement benefits includes salaries, overtime pay, commissions and
incentive payments received during the year and the employee's contribution to
the Gray Capital Accumulation Plan. Pension compensation for 1998 differs from
compensation reported in the Summary Compensation Table in that pension
compensation includes any annual incentive awards received in 1998 for services
in 1997 rather than the incentive awards paid in 1999 for services in 1998. The
maximum annual compensation considered for pension benefits under the plan in
1998 was $160,000.
As of December 31, 1998, the named executive officers of Gray have the
following years of credited service:
<TABLE>
<CAPTION>
NAME YEARS OF CREDITED SERVICE
- ---- -------------------------
<S> <C>
Thomas J. Stultz.......................................... 2
Robert A. Beizer.......................................... 2
Wayne M. Martin........................................... 4
Joseph A. Carriere........................................ 4
</TABLE>
CAPITAL ACCUMULATION PLAN
Effective October 1, 1994, Gray adopted the Gray Communications Systems,
Inc. Capital Accumulation Plan for the purpose of providing additional
retirement benefits for
95
<PAGE> 101
substantially all employees. The Capital Accumulation Plan is intended to meet
the requirements of Section 401(k) of the Internal Revenue Code of 1986, as
amended.
Contributions to the Capital Accumulation Plan are made by employees. Gray
matches a percentage of each employee's contribution which does not exceed 6% of
the employee's gross pay. The percentage match is declared by the board of
directors before the beginning of each Capital Accumulation Plan Year and was
made with a contribution of Gray class A common stock through the year ended
December 31, 1996 and since 1996 has been and will be made with Gray class B
common stock. The percentage match declared for the year ended December 31, 1998
was 50%. Gray's matching contributions vest based upon an employee's number of
years of service, over a period not to exceed five years.
COMPENSATION OF DIRECTORS
The standard arrangement for directors' fees is set forth in the table
below.
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- -------
<S> <C>
Chairman of the Board annual retainer fee................... $18,000
Director's annual retainer fee.............................. $12,000
Director's fee per board of directors meeting............... $ 1,000
Chairman of the Board fee per board of directors meeting.... $ 1,200
Committee Chairman fee per committee meeting................ $ 1,200
Committee member fee per committee meeting.................. $ 1,000
</TABLE>
Directors are paid 40% of the above fee arrangement for participation by
telephone in any meeting of the board of directors or any committee thereof.
EMPLOYMENT AGREEMENTS
Robert A. Beizer and Gray entered into an employment agreement, dated
February 12, 1996, for a two-year term which automatically extends for three
successive one-year periods, subject to termination provisions. The agreement
provides that Mr. Beizer shall be employed as Vice President for Law and
Development of Gray with an initial annual base salary of $200,000 and a grant
of options to purchase 22,500 shares of Gray class A common stock with an
exercise price of $12.917 per share under the Incentive Plan at the inception of
his employment. The agreement also provides that Mr. Beizer's base salary will
be increased yearly based upon a cost of living index and he will receive
non-qualified options to purchase 10,500 shares of Gray class B common stock
annually during the term of the agreement at an exercise price per share equal
to the fair market value of the Gray class B common stock on the date of the
grant. In December 1996, the board of directors approved an amendment to Mr.
Beizer's contract which replaced the initial option grant of 22,500 shares of
Gray class A common stock with the grant of an option to purchase 22,500 shares
of Gray class B common stock with an exercise price of $10.583 per share. On
February 12, 1997, 1998, and 1999, Mr. Beizer was granted options to purchase an
additional 10,500 shares of Gray class B common stock at $12.50, $16.08 and
$14.1875 per share, respectively. All options granted are exercisable over a
three-year period beginning upon the second anniversary of the grant date. If
there is a "change of control" of Gray, Mr. Beizer will be paid a lump sum
amount equal to his then current base salary for the remaining term of the
agreement and will be granted any remaining stock options to which he would have
been entitled. For purposes of the
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agreement, "change of control" is defined as any change in the control of Gray
that would be required to be reported in response to Item 6(e) of Schedule 14A
promulgated under the Securities Exchange Act of 1934. Mr. Beizer has agreed
that during the term of his agreement and for two years after the termination of
the agreement he will be subject to non-competition provisions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Richard L. Boger, William E. Mayher III, Hugh Norton, Robert S. Prather,
Jr. and J. Mack Robinson are the members of the Management Personnel Committee
which serves as the Compensation Committee. Messrs. Robinson and Prather are
President and Chief Executive Officer and Executive Vice President --
Acquisitions of Gray, respectively.
J. Mack Robinson, President of the Company serves on the Compensation
Committee of Bull Run Corporation. Mr. Robinson and Robert S. Prather, Jr.,
President of Bull Run and Executive Vice President -- Acquisitions of Gray serve
on the Compensation Committee of Gray.
Gray Kentucky Television, Inc., a subsidiary of Gray, is a party to a
rights sharing agreement with Host Communications, Inc. and certain other
parties not affiliated with Gray, pursuant to which the parties agreed to
exploit Host's rights to broadcast and market certain University of Kentucky
football and basketball games and related activities. Pursuant to such
agreement, Gray Kentucky Television is licensed to broadcast certain University
of Kentucky football and basketball games and related activities. Under this
agreement, Gray Kentucky Television also provides Host with production and
marketing services and Host provides accounting and various marketing services.
During the year ended December 31, 1998, Gray received approximately $100,000
from this joint venture.
Bull Run currently owns 51.5% of the outstanding common stock of Capital
Sports Properties, Inc. Capital's assets consist of all of the outstanding
preferred stock of Host and 49.0% of Host's outstanding common stock. Bull Run's
direct common equity ownership in Host, plus Bull Run's indirect common equity
ownership in Host through its investment in Capital, was 32.6% as of December
31, 1998. Robert S. Prather, Jr., Executive Vice President -- Acquisitions and a
member of Gray's board of directors, is a member of the board of directors of
both Capital, Bull Run and Host.
Gray's board of directors approved payments to Bull Run of a finders fee of
approximately $1,980,000 in connection with the acquisition of all of the
outstanding capital stock of Busse Broadcasting Corporation. The purchase price
was $112,000,000 plus Busse's cash balance as of June 30, 1998. The purchase
price includes the assumption of Busse's indebtedness, including its 11 5/8%
Senior Secured Notes due 2000. Immediately prior to Gray's acquisition of Busse,
Cosmos Broadcasting Corporation acquired the assets of WEAU-TV from Busse in
exchange for the assets of WALB-TV, Inc., Gray's NBC affiliate in Albany,
Georgia. In exchange for the assets of WALB, Gray received the assets of WEAU,
which were valued at $66,000,000 and approximately $12,000,000 in cash for a
total value of $78,000,000. The finders fee was allocated at $1,200,000 for the
Busse transaction and $780,000 for the WALB transaction. For advisory services
rendered by Bull Run to Gray in connection with the acquisition of The Goshen
News, Gray paid Bull Run $167,000.
For advisory services rendered by Bull Run to Gray in connection with the
proposed acquisitions of KWTX, Brazos and KXII, Gray paid Bull Run $400,000 on
May 19, 1999,
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$800,000 on August 11, 1999 and will pay Bull Run an additional $190,000 upon
the consummation of the acquisitions.
Gray paid cash dividends on its series A preferred stock and series B
preferred stock of $800,000 and $63,750, respectively to Bull Run in 1998. Bull
Run is the only owner of the series A preferred stock and owns 50% of the
outstanding series B preferred stock. Mr. Robinson and certain affiliates own
the remaining 50% of the series B preferred stock. In addition, Gray issued
25.4692 shares of series B preferred stock to Bull Run and 25.4692 shares of
series B preferred stock pro rata to Mr. Robinson and certain affiliates as
dividends on the series B preferred stock in 1998. Each share of series B
preferred stock is valued at $10,000 per share. Of the total amount of
1,110.9384 series B preferred stock outstanding during 1998, Gray redeemed
760.9384 shares pro rata at a total redemption price of $7,609,384.
Gray executed an option agreement with Bull Run in March 1999, whereby Gray
has the option to purchase Bull Run's investment in the common stock of Sarkes
Tarzian, Inc., an operator of two broadcast television stations and four radio
stations. Upon exercise of the option, Gray will pay Bull Run an amount equal to
Bull Run's purchase price for the Tarzian investment plus related costs. In
connection with the option agreement, Gray granted to Bull Run warrants to
purchase up to 100,000 shares of Gray class B common stock at $13.625 per share
which was the closing price of such stock on the date of grant. The warrants
will vest immediately upon Gray's exercise of its option to purchase the Tarzian
investment. The option agreement expired on May 31, 1999; however, Gray and Bull
Run extended the option period through September 30, 1999 and Gray paid Bull Run
$266,800 for such extension. The option period may be extended, at Gray's
election, in additional 30-day increments for a fee of $66,700 per extension.
REPORT OF THE MANAGEMENT PERSONNEL COMMITTEE
Gray's executive compensation program is administered by the Management
Personnel Committee of the board of directors.
The goals of Gray's executive compensation program for 1998 were to
attract, retain, motivate and reward qualified persons serving as executive
officers. To achieve such goals Gray relies primarily on salaries, bonuses,
options and other compensation for each of Gray's executive officers, except
that the salary of Mr. Beizer is specified in his employment agreement with
Gray. Under current policy, the chief executive officer of Gray determines the
recommended annual compensation level, including bonuses, for all other officers
of Gray and its subsidiaries, and then submits these recommendations to the
Management Personnel Committee for its review and approval. Such determinations
of the Management Personnel Committee are reported to the full board, which then
has the opportunity to consider and amend such determinations concerning the
compensation payable to executive officers. In 1998, the full board approved the
determinations of the Management Personnel Committee with respect to
compensation without making any changes thereto. The Management Personnel
Committee's policy for determining an executive's salary, bonus and stock option
grants is based on the responsibility of such executive, his or her impact on
the operations and profitability of Gray or the business unit for which such
executive has operating responsibility and the knowledge and experience of such
executive.
In 1998, the Management Personnel Committee utilized the foregoing criteria
to determine executive salaries, bonuses and option grants and such salaries,
bonuses and
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option grants are consistent with the foregoing policy. An executive's annual
bonus is based on a percentage of his or her annual base salary. These
considerations are subjective in nature and the Management Personnel Committee
does not assign relative weights thereto. For 1998, bonuses ranged from 0% to
78% of an executive's base salary. Whether or not a bonus is in fact earned by
an executive is linked to the attainment, by Gray or the business unit for which
such executive has operating responsibility, of predetermined operating profit
targets based on budgeted operating revenues (which is an objective analysis)
and the individual's contribution to Gray or the business unit (which is a
subjective analysis). The operating profit targets are approved annually by the
Management Personnel Committee. When measuring an executive's individual
contribution and performance, the Management Personnel Committee examines
quantitative factors, as well as qualitative factors that necessarily involve a
subjective judgment by the Management Personnel Committee. In making such
subjective determination, the Management Personnel Committee does not base its
determination on any single performance factor nor does it assign relative
weights to factors, but considers a mix of factors, including evaluations of
superiors, and evaluates an individual's performance against such mix in
absolute terms in relation to other executives at Gray. In deciding whether or
not to grant an option to an individual and in determining the number of shares
subject to an option so granted, the Management Personnel Committee takes into
account subjective considerations, including the level of such executive's
position and the individual's contribution to Gray. Although the Management
Personnel Committee believes that its compensation structure is similar to that
of other comparable communications companies, it did not specifically compare
such structure with that of other companies in 1998.
Mr. Robinson's annual compensation was set by the Management Personnel
Committee at $200,000 per annum. In addition, he was awarded options for the
purchase of up to 10,000 shares of Gray class A common stock and 40,000 shares
of Gray class B common stock in recognition of Gray's overall performance,
record of increase in shareholder value, success in meeting strategic objectives
and the Chief Executive Officer's personal leadership and accomplishments.
Mr. Prather does not receive an annual salary as Executive Vice
President -- Acquisitions, however, in 1998 he was granted options to purchase
9,337 shares of Gray class A common stock and 41,000 shares of Gray class B
common stock in recognition of Gray's overall performance, success in meeting
strategic objectives and his leadership and accomplishments.
Submitted by Management Personnel Committee of the board of directors
Richard L. Boger, Chairman
William E. Mayher, III
Robert S. Prather, Jr.
Hugh Norton
J. Mack Robinson
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
J. Mack Robinson, President, Chief Executive Officer and a director of
Gray, is Chairman of the Board of Bull Run and the beneficial owner of
approximately 30.7% of the outstanding shares of common stock of Bull Run,
including certain shares as to which Mr. Robinson disclaims beneficial
ownership. Robert S. Prather, Jr., Executive Vice President-Acquisitions and a
director of Gray, is President, Chief Executive Officer and a
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director of Bull Run corporation and the beneficial owner of approximately 13.3%
of the outstanding shares of Bull Run common stock, including certain shares as
to which Mr. Prather disclaims beneficial ownership. Bull Run is a principal
shareholder of Gray. Mr. Prather is also a member of the board of directors of
Capital and Host. Hilton H. Howell, Jr., a director of Gray, is Vice President,
Secretary and a director of Bull Run. See "Compensation Committee Interlocks and
Insider Participation" for a description of the business relationships between
Gray and Messrs. Prather and Robinson, Host, Capital and Bull Run.
PERFORMANCE GRAPH
The following graph compares the cumulative total return of Gray class A
common stock from December 1994 and Gray class B common stock from September
1996 (when the Gray class B common stock first became publicly traded) to
December 31, 1998 as compared to the stock market total return indexes for (1)
The New York Stock Exchange Market Index and (2) The New York Stock Exchange
Industry Index based upon the Television Broadcasting Stations Standard
Industrial Classification Code. In July 1995, the Gray class A common stock was
listed on The New York Stock Exchange.
The graph assumes the investment of $100 in the Gray class A common stock
and class B common stock in the New York Stock Exchange Market Index and the
NYSE Television Broadcasting Stations Index on December 31, 1993 and September
1996, respectively. Dividends are assumed to have been reinvested as paid.
COMPARISON OF CUMULATIVE TOTAL RETURN OF GRAY CLASS A COMMON STOCK, NYSE MARKET
INDEX AND SIC CODE INDEX
<TABLE>
<CAPTION>
GRAY CLASS NYSE
MEASUREMENT PERIOD A COMMON SIC CODE MARKET
(FISCAL YEAR COVERED) STOCK INDEX INDEX
<S> <C> <C> <C>
12/31/93 100.00 100.00 100.00
12/30/94 110.65 77.71 98.06
12/29/95 183.10 92.48 127.15
12/31/96 194.10 102.86 153.16
12/31/97 270.96 134.27 201.50
12/31/98 284.30 96.25 239.77
</TABLE>
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COMPARISON OF CUMULATIVE TOTAL RETURN OF GRAY CLASS B COMMON STOCK, NYSE MARKET
INDEX AND SIC CODE INDEX
<TABLE>
<CAPTION>
GRAY CLASS NYSE
MEASUREMENT PERIOD B COMMON SIC CODE MARKET
(FISCAL YEAR COVERED) STOCK INDEX INDEX
<S> <C> <C> <C>
9/25/96 100.00 100.00 100.00
12/31/96 87.29 97.87 106.91
12/31/97 132.74 127.75 140.66
12/31/98 106.16 91.58 167.37
</TABLE>
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PROPOSAL 3: AMENDMENT OF THE GRAY 1992 LONG TERM INCENTIVE PLAN
At the meeting, the Gray shareholders will be asked to approve the adoption
of an amendment to the 1992 Long Term Incentive Plan to provide that the
aggregate number of shares of Gray common stock subject to awards under the 1992
Long Term Incentive Plan be increased from 900,000 to 1,900,000. The board
approved the amendment to the Incentive Plan, subject to shareholder approval.
The following description of the Incentive Plan is a summary of the
material provisions of the Incentive Plan.
Types of Awards. The Incentive Plan provides for the granting of incentive
stock options, nonqualified stock options, restricted stock awards, stock
appreciation rights ("SARs") and performance awards (collectively, the "Awards")
to officers and key employees of Gray and its subsidiaries to purchase shares of
Gray class A common stock and class B common stock.
Purpose. The Incentive Plan is designed to encourage officers and key
employees to achieve goals, which are mutually beneficial to Gray and the
officer or employee, thereby strengthening their desire to remain with Gray,
while simultaneously providing an incentive to work for the success of Gray.
Administration. The Incentive Plan is administered by the Management
Personnel Committee which consists of persons appointed by Gray's board of
directors. Subject to any general guidelines established by the Gray board, the
determinations of the Management Personnel Committee are made in accordance with
their judgment as to the best interests of Gray and its shareholders.
Determinations, interpretations or other actions made or taken by the Management
Personnel Committee pursuant to the provisions of the Incentive Plan are final
and binding for all purposes and upon all participants.
Incentive Stock Options. The incentive stock options granted under the
Incentive Plan may not be exercised earlier than six months and not later than
10 years from the date of grant. The purchase price per share of Gray common
stock purchasable under any incentive stock option may not be less than 100% of
the fair market value of the shares on the date the option is granted. The
aggregate fair market value of the stock which an incentive stock option is
exercisable for the first time during any calendar year shall not exceed
$100,000.
Nonqualified Stock Options. The nonqualified stock options granted under
the Incentive Plan may not be exercised earlier than six months and not later
than 10 years from the date of grant. The purchase price per share of Gray
common stock purchasable under any nonqualified stock option is such price as is
fixed by the Management Personnel Committee. The Management Personnel Committee
has the right to determine at the time an option is granted whether shares
issued upon exercise of a nonqualified stock option will be subject to
restrictions, and if so, the nature of the restrictions.
Stock Appreciation Rights. Upon the exercise of an SAR, the holder thereof
will be entitled to receive the excess of the fair market value (calculated as
of the exercise date) of a specified number of shares over the exercise price of
the SAR. The exercise price (which may not be less than the fair market value of
the shares on the date of grant) and other terms of the SAR will be determined
by the Management Personal Committee. At the time of grant, the Management
Personnel Committee may establish a maximum amount per share which will be
payable upon exercise of an SAR. Payment by Gray upon
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exercise of an SAR may be in cash or stock, or any combination thereof, as the
Management Personnel Committee determines. The following will apply upon the
exercise of a SAR:
- Exercise of SARs in Lieu of Exercise of Options. SARs exercisable in
lieu of any related stock option may be exercised for all or part of the
shares of stock for which its related option is then exercisable. Such
number of shares equal to the number of SARs exercised will no longer be
available for Awards under the Incentive Plan, provided that if SARs are
exercised for cash, shares of stock equal to the number of SARs exercised
will be restored to the number of shares available for issuance under the
Incentive Plan.
- Exercise of SARs in Conjunction with Exercise of Options. SARs
exercisable in conjunction with the exercise of stock options will be
deemed to have been exercised upon the exercise of the related stock
options, and shares of stock equal to the sum of the number of shares
acquired by exercise of the stock option plus the number of SARs
exercised will no longer be available for Awards under the Incentive
Plan, provided that if SARs are exercised for cash, shares of stock equal
to the number of SARs exercised will be restored to the number of shares
available for issuance under the Incentive Plan.
- Exercise of SARs Upon Lapse of Options. SARs exercisable upon lapse of
stock options will be deemed to have been exercised upon the lapse of the
related stock options as to the number of shares of stock subject to the
stock options. Shares of stock equal to the number of SARs deemed to have
been exercised will not be available again for Awards under the Incentive
Plan, provided that if SARs are exercised for cash, shares of stock equal
to the number of SARs exercised will be restored to the number of shares
available for issuance under the Incentive Plan.
- Exercise of SARs Independent of Options. SARs exercisable independent of
stock options may be exercised upon whatever terms and conditions the
Management Personnel Committee imposes upon the SARs, and shares of stock
equal to the number of SARs exercised will no longer be available for
Awards under the Incentive Plan, provided that if SARs are exercised for
cash, shares of stock equal to the number of SARs exercised will be
restored to the number of shares available for issuance under the
Incentive Plan.
Restricted Stock. Restricted stock consists of stock issued or transferred
under the Plan at any purchase price less than the fair market value thereof on
the date of issuance or transfer, or as a bonus. Restricted stock awards may not
be disposed of by the recipient until the restrictions established by the
Management Personnel Committee lapse, and in any event, such restricted stock
may not be disposed of for not less than six months following the date of grant.
Participants are entitled to all dividends paid with respect to restricted stock
during the period which the sale of such stock is restricted and will not be
required to return any such dividends to Gray in the event of the forfeiture of
the restricted stock.
Performance Awards. Performance awards consist of stock to be issued
without payment therefor, in the event that the performance goals established by
the Management Personnel Committee are achieved during the applicable
performance period. The goals established by the Management Personnel Committee
may include return on average total capital employed, earnings per share, return
on shareholders' equity and such other goals
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as may be established by the Management Personnel Committee. Actual payment of
the award earned shall be in cash or in stock or in combination of both, in a
single sum or in periodic installments, as determined by the Management
Personnel Committee. If the award includes stock, such stock may not be disposed
of for six months from the date of issuance pursuant to such award. If the award
is paid in cash instead of stock, the number of shares reserved for issuance
under the Incentive Plan and in the form of restricted stock or performance
awards will be reduced by the number of shares issued.
Adjustments and Amendments of the 1992 Plan. Adjustments in the Incentive
Plan and in outstanding options will be made to reflect stock dividends,
recapitalizations and similar events. The board of directors has the right to
amend or terminate the Incentive Plan at any time; provided, however, that
unless first duly approved by the holders of Gray common stock entitled to vote
on such matter, no amendment or change may be made in the Incentive Plan: (1)
increasing the total number of shares that may be issued under the 1992 Plan or
increasing the amount of type of awards that may be granted under the Incentive
Plan; (2) changing the minimum purchase price of shares of common stock which
may be made subject to awards under the Incentive Plan; or (3) changing the
eligibility requirements.
The Incentive Plan is not subject to any of the requirements of the
Employee Retirement Income Security Act of 1974, as amended. The Incentive Plan
is not, nor is it intended to be, qualified under Section 401(a) of the Internal
Revenue Code.
Change in Control. The Incentive Plan provides that in the event of a
change of control outstanding awards shall become immediately and fully
exercisable or payable according to the following terms:
- Any outstanding and unexercised option shall become immediately and fully
exercisable, and shall remain exercisable until it would otherwise expire
by reason of lapse of time.
- For six months and seven days following a change in control a holder of
an option, unless provided otherwise at the time of grant, shall have the
option to receive in cash an amount equal to the amount by which the
highest reported price per share of stock, on the date of exercise, shall
exceed the base price per share of stock under the option multiplied by
the number of shares granted under the option for which this right has
been exercised;
- Any outstanding and unexercised SARs shall become exercisable as follows:
(1) SARs exercisable in lieu of any related stock option or in conjunction
with the exercise of stock options may be exercised for all or part of
the shares of stock for which its related option is then exercisable
in the same manner as prior to the change in control;
(2) SARs exercisable independent of stock options shall be deemed to have
been exercised if and when the participant advises the Management
Personnel Committee in writing that he or she elects to have options
with respect to which the SAR was granted treated as lapsed and shall
have been held for six months prior to exercise; and
(3) SARs exercisable independent of stock options shall be exercisable
immediately, without regard to limitations imposed in the Incentive
Plan.
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- Any restricted stock shall become immediately and fully transferable. The
Management Personnel Committee shall have been deemed to have waived any
automatic forfeitures.
- Any performance award which has not expired shall be deemed to have been
earned on the assumption that all performance goals have been achieved.
- A "change in control" means a change in control of Gray of a nature that
would be required to be reported on Schedule 14A under the Securities
Exchange Act. A change of control is deemed to have occurred if (1) any
person becomes the beneficial owner of 20 percent or more of the combined
voting power of Gray's then outstanding shares; (2) during any period of
two consecutive years individuals who at the beginning of such period
constitute the board cease for any reason to constitute at least a
majority thereof, unless the election of such new directors was approved
by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period; (3) there is
consummated any consolidation or acquisition in which Gray is not the
continuing or surviving corporation or pursuant to which shares of Gray
common stock are converted into cash, securities, or other property; (4)
there is consummated any consolidation or acquisition of Gray in which
Gray is the continuing corporation in which the holders of Gray common
stock immediately prior to the acquisition do not own 70 percent or more
of the stock of the surviving corporation immediately after the
acquisition; (5) there is consummated any sale, lease, exchange, or other
transfer of substantially all of Gray's assets; or (6) the shareholders
of Gray approve any plan or proposal for the liquidation or dissolution
of Gray.
Non-Assignability of Plan Awards. No Incentive Plan Award may be assigned
or transferred by the recipient, except by will or by the laws of descent and
distribution, or pursuant to a Qualified Domestic Relations Order, and are
exercisable, during the participant's lifetime, only by the participant.
Certain Federal Income Tax Consequences. The following discussion is
designed to provide a summary of the material tax consequences with respect to
Awards granted under the Incentive Plan as of the date of this proxy statement.
In addition to the tax consequences described below, (1) officers and directors
of Gray subject to Section 16(b) of the Securities Exchange Act of 1934, may be
subject to special rules regarding the income tax consequences concerning their
incentive stock options; nonqualified stock options and restricted shares and
(2) any entitlement to a tax deduction on the part of Gray is subject to the
applicable Federal tax rules, including, those relating to the $1 million
limitation on deductible compensation.
Incentive Stock Options. Certain options granted or that may be granted
under the Incentive Plan will be incentive stock options as defined in the
Internal Revenue Code, provided that such options satisfy the requirements under
the Internal Revenue Code applicable to incentive stock options. In general,
neither the grant nor the exercise of an incentive stock option will result in
taxable income to the optionee or a deduction to Gray. The sale of Gray common
stock received upon the exercise of an option which satisfies all the
requirements of an incentive stock option, as well as the holding period
requirement described below, will result in a long-term capital gain or loss to
the optionee equal to the difference between the amount realized on the sale and
the option price and will not result in a tax deduction to Gray. The exercise of
an incentive stock option may have implications in the computation of the
optionee's alternative minimum tax. To receive
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capital gain or loss treatment upon the disposition of Gray common stock
acquired through exercise of an incentive stock option, the optionee must not
dispose of the Gray common stock purchased pursuant to the exercise of an
incentive stock option within two years after the option is granted and must
hold such Gray common stock for at least one year after the transfer of such
Gray common stock to the optionee.
If all requirements for incentive stock option treatment other than the
holding period rules are satisfied, the recognition of income by the optionee is
deferred until disposition of the Gray common stock, but, in general, any gain
in an amount equal to the lesser of (1) the fair market value of the Gray common
stock on the date of exercise minus the option price or (2) the amount realized
on the disposition minus the option price is treated as ordinary income. Any
remaining gain is treated as long-term or short-term capital gain depending on
the optionee's holding period for the stock that has been sold. Gray will
generally be entitled to a deduction at that time equal to the amount of
ordinary income realized by the optionee.
The Incentive Plan provides that an optionee may pay for Gray common stock
received upon the exercise of an option (including an incentive stock option)
with other shares of Gray common stock. In general, an optionee's transfer of
stock acquired pursuant to the exercise of an incentive stock option to acquire
other stock in connection with the exercise of an incentive stock option may
result in ordinary income if the transferred stock has not met the minimum
statutory holding period necessary for favorable tax treatment as an incentive
stock option. For example, if an optionee exercises an incentive stock option
and uses the stock so acquired to exercise another incentive stock option within
the two-year or one-year holding periods discussed above, the optionee may
realize ordinary income under the rules summarized above.
Nonqualified Stock Options. An optionee will realize no taxable income
upon the grant of a non-qualified stock option and Gray will not receive a
deduction at the time of such grant unless the option has a readily
ascertainable fair market value (as determined under applicable tax law) at the
time of grant. Upon exercise of a non-qualified stock option, the optionee
generally will realize ordinary income in an amount equal to the excess of the
fair market value of the Gray common stock on the date of exercise over the
exercise price. Upon a subsequent sale of the Gray common stock by the optionee,
the optionee will recognize short-term or long-term capital gain or loss
depending upon his or her holding period for the Gray common stock. Gray will
generally be allowed a deduction equal to the amount recognized by the optionee
as ordinary income.
SARs. Generally, no Federal income tax consequences are incurred by Gray
or the holder at the time an SAR is granted pursuant to the Incentive Plan.
However, upon the exercise of an SAR, the holder will generally realize ordinary
income for Federal income tax purposes equal to the amount of cash or the value
of property received by him or her. Gray generally will be entitled at such time
to a deduction for Federal income tax purposes in the same amount realized as
ordinary income. If a holder of an SAR receives Gray common stock upon the
exercise of such right and subsequently disposes of such Gray common stock, any
gain or loss realized upon the sale will be either long-term or short-term
capital gain or loss, depending on the holder's holding period for the Gray
common stock that has been sold.
Restricted Stock Awards. The Federal income tax consequences of a
restricted stock award granted under the Incentive Plan will depend, in large
measure, on the restrictions placed on the stock.
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In general, if the stock is "not transferable" and subject to a
"substantial risk of forfeiture," as described above, then, unless the recipient
makes an 83(b) election, he or she will recognize ordinary income equal to the
fair market value of the stock in the year the stock is either transferable or
not subject to a substantial risk of forfeiture over the price, if any, paid for
the stock. If the recipient makes an 83(b) election, he or she will recognize
ordinary income equal to the fair market value of the stock at the time of the
award over the price, if any, paid for the stock. Any gain or loss on a
subsequent sale of the stock will be his or her long-or short-term capital gain
or loss depending on the recipient's holding period for the stock. Gray will
generally be entitled to a deduction equal to the amount of ordinary income
recognized by the recipient.
VOTE REQUIRED AND BOARD RECOMMENDATION
Approval of the amendment to the Incentive Plan requires the affirmative
vote of the holders of a majority of votes represented by the shares of Gray
class A common stock and class B common stock, voting together as a single
class, present in person or represented by proxy at the Gray meeting and
entitled to vote on the proposal. The board recommends that shareholders of Gray
vote their shares "FOR" approval of the amendment to the Incentive Plan.
107
<PAGE> 113
PROPOSAL 4: CONFIRMATION OF APPOINTMENT OF AUDITORS
The Gray board of directors recommends that the shareholders confirm the
appointment of Ernst & Young LLP to audit the books and accounts of Gray for the
year ending December 31, 1999.
Representatives of Ernst & Young LLP are expected to be available at the
meeting to respond to appropriate questions and will be given the opportunity to
make a statement if they so desire.
EXPERTS
The consolidated financial statements of Gray at December 31, 1997 and
1998, and for each of the three years in the period ended December 31, 1998,
incorporated by reference in this proxy statement/prospectus have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
incorporated by reference, and are so incorporated by reference in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
The financial statements of each of KWTX and Brazos at December 31, 1998,
and for the year ended December 31, 1998, included in this proxy
statement/prospectus have been audited by Pattillo, Brown & Hill LLP,
independent auditors, as set forth in their reports appearing elsewhere in this
proxy statement/prospectus, and are included in reliance upon such reports given
on the authority of such firm as experts in accounting and auditing.
The financial statements of KXII at December 31, 1998, and for the year
ended December 31, 1998, included in this proxy statement/prospectus have been
audited by Jaynes, Reitmeier, Boyd & Therrell PC, independent auditors, as set
forth in their report appearing elsewhere in this proxy statement/prospectus,
and are included in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the shares of Gray class B common stock to be issued in
connection with the acquisitions have been passed upon for Gray by Heyman &
Sizemore, Atlanta, Georgia.
SHAREHOLDER PROPOSALS
If a Gray shareholder notifies Gray after July 9, 2000 of an intent to
present a proposal at Gray's 2000 Annual Meeting, Gray will have the right to
exercise its discretionary voting authority with respect to such proposal, if
presented at the meeting, without including information regarding such proposal
in its proxy materials. Shareholder proposals to be presented at the 2000 Annual
Meeting must be received by Gray on or before December 15, 1999 for inclusion in
the proxy statement and proxy card relating to that meeting. Such proposals must
also meet the other requirements of the rules of the Securities and Exchange
Commission relating to shareholders' proposals.
108
<PAGE> 114
WHERE TO FIND ADDITIONAL INFORMATION
Gray files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. Shareholders may read and copy this information
at the following locations of the Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
Securities and Exchange Commission Securities and Exchange Commission Securities and Exchange Commission
Judiciary Plaza, Room 1024 Seven World Trade Center, Citicorp Center
450 Fifth Street, N.W. Suite 1300 500 West Madison Street,
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661
</TABLE>
Shareholders can also obtain copies of this information by mail from the
Public Reference Section of the Securities and Exchange Commission, 450 Fifth
Street, N.W., Room 10024, Washington D.C. 20549, at prescribed rates.
The Securities and Exchange Commission also maintains an Internet world
wide web site that contains reports, proxy statements and other information
about issuers, like Gray, who file electronically with the Securities and
Exchange Commission. The address of that site is http://www.sec.gov.
Gray has filed with the Securities and Exchange Commission a registration
statement on Form S-4 that registers the shares of Gray class B common stock to
be issued in exchange for shares of KWTX and Brazos stock upon completion of the
acquisitions. That registration statement, including the attached exhibits and
schedules, contains additional relevant information about Gray, and the Gray
class B common stock. The rules and regulations of the Securities and Exchange
Commission allow Gray to omit certain information included in the registration
statement from this proxy statement/prospectus.
Shareholders can obtain any of the documents incorporated by reference in
this document and copies of the Amended and Restated Gray 1992 Long Term
Incentive Plan through Gray without charge, excluding any exhibits to those
documents unless the exhibit is specifically incorporated by reference as an
exhibit to this proxy statement/prospectus. Documents incorporated by reference
in this proxy statement/prospectus can be obtained by requesting them in writing
or by telephone from Gray at the following address:
Gray Communications Systems, Inc.
126 North Washington St.
P.O. Box 48
Albany, Georgia 31702-0048
(912) 888-9378
Attention: Investor Relations
Shareholders requesting documents should do so by September 13, 1999 to
receive them before the Gray shareholders' meeting.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission allows Gray to "incorporate by
reference" information into this proxy statement/prospectus. This means that
Gray can disclose important information by referring to another document filed
separately with the Securities and Exchange Commission. The information
incorporated by reference is considered to be
109
<PAGE> 115
part of this proxy statement/prospectus, except for any information that is
superseded by information that is included directly in this document.
This proxy statement/prospectus incorporates by reference the documents
listed below that Gray has previously filed with the Securities and Exchange
Commission and that are not included in or delivered with this document. They
contain important information about Gray and its financial condition.
<TABLE>
<CAPTION>
FILINGS PERIOD
- ------- ------
<S> <C>
Annual Report on Form 10-K...................... Year ended December 31, 1998
Quarterly Report on Form 10-Q................... Quarter ended March 31, 1999
Quarterly Report on Form 10-Q................... Quarter ended June 30, 1999
The description of Gray class A common stock and
class B common stock set forth in Gray's Forms
8-A filed with the Securities and Exchange
Commission
</TABLE>
Gray incorporates by reference additional documents that it may file with
the Securities and Exchange Commission between the date of this proxy
statement/prospectus and the date of the Gray shareholders meeting. These
documents include periodic reports, such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy
statements.
GRAY HAS NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ABOUT THE PROPOSED ACQUISITIONS OR GRAY THAT IS DIFFERENT FROM,
OR IN ADDITION TO, THAT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS OR IN ANY
OF THE MATERIALS THAT GRAY HAS INCORPORATED BY REFERENCE INTO THIS PROXY
STATEMENT/PROSPECTUS. THEREFORE, IF ANYONE DOES PROVIDE INFORMATION OF THIS
SORT, IT SHOULD NOT BE RELIED ON. IF A PERSON IS IN A JURISDICTION WHERE OFFERS
TO EXCHANGE OR SELL, OR SOLICITATIONS OF OFFERS TO EXCHANGE OR PURCHASE, THE
SECURITIES OFFERED BY THIS DOCUMENT OR THE SOLICITATION OF PROXIES IS UNLAWFUL,
OR IF IT IS UNLAWFUL TO DIRECT THESE TYPES OF ACTIVITIES, THEN THE OFFER
PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS DOES NOT EXTEND TO THAT PERSON. THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS SPEAKS ONLY AS OF THE
DATE OF THIS PROXY STATEMENT/PROSPECTUS, UNLESS THE INFORMATION SPECIFICALLY
INDICATES THAT ANOTHER DATE APPLIES.
FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements. These
statements relate to future events or the future financial performance of Gray.
In some cases, forward-looking statements can be identified by terminology such
as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
and other comparable terminology. These statements only reflect management's
expectations and estimates. Actual events or results may differ materially. In
evaluating these statements, shareholders should specifically consider various
factors, including the risks outlined under "Risk Factors." These factors may
cause Gray's actual results to differ materially from any forward-looking
statements. Gray is not undertaking any obligations to update any
forward-looking statements contained in this proxy statement/prospectus to
reflect any future events or developments.
110
<PAGE> 116
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KWTX BROADCASTING COMPANY ("KWTX")
Interim Condensed Financial Statements (unaudited):
Balance Sheets at June 30, 1999 and 1998.................. F-3
Statements of Income for the six months ended June 30,
1999 and 1998.......................................... F-4
Statements of Retained Earnings for the six months ended
June 30, 1999 and 1998................................. F-5
Statements of Cash Flows for the six months ended June 30,
1999 and 1998.......................................... F-6
Notes to Condensed Financial Statements................... F-7
Audited Financial Statements (unaudited for 1997 and 1996):
Independent Auditors' Report.............................. F-9
Balance Sheets at December 31, 1998, 1997 and 1996........ F-10
Statements of Income for the years ended December 31,
1998, 1997 and 1996.................................... F-11
Statements of Retained Earnings for the years ended
December 31, 1998, 1997 and 1996....................... F-12
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................... F-13
Notes to Financial Statements............................. F-14
BRAZOS BROADCASTING CO. ("BRAZOS")
Interim Condensed Financial Statements (unaudited):
Balance Sheets at June 30, 1999 and 1998.................. F-20
Statements of Income for the six months ended June 30,
1999 and 1998.......................................... F-21
Statements of Retained Earnings for the six months ended
June 30, 1999 and 1998................................. F-22
Statements of Cash Flows for the six months ended June 30,
1999 and 1998.......................................... F-23
Notes to Condensed Financial Statements................... F-24
Audited Financial Statements (unaudited for 1997 and 1996):
Independent Auditors' Report.............................. F-25
Balance Sheets at December 31, 1998, 1997 and 1996........ F-26
Statements of Income for the years ended December 31,
1998, 1997 and 1996.................................... F-27
Statements of Retained Earnings for the years ended
December 31, 1998, 1997 and 1996....................... F-28
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................... F-29
Notes to Financial Statements............................. F-30
KXII BROADCASTERS, INC. AND KXII TELEVISION, LTD. ("KXII")
Interim Condensed Combined Financial Statements (unaudited):
Condensed Combined Balance Sheets at June 30, 1999 and
1998................................................... F-35
Condensed Combined Statements of Income and Stockholders'
and Partners' Equity for the six months ended June 30,
1999 and 1998.......................................... F-36
Condensed Combined Statements of Cash Flow for the six
months ended June 30, 1999 and 1998.................... F-37
Notes to Condensed Combined Financial Statements.......... F-38
</TABLE>
F-1
<PAGE> 117
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Combined Financial Statements (audited for 1998 and
unaudited for 1997 and 1996):
Independent Auditors' Report.............................. F-40
Combined Balance Sheets at December 31, 1998, 1997 and
1996................................................... F-41
Combined Statements of Income and Stockholders' and
Partners' Equity for the years ended December 31, 1998,
1997 and 1996.......................................... F-42
Combined Statements of Cash Flow for the years ended
December 31, 1998, 1997 and 1996....................... F-43
Notes to Combined Financial Statements.................... F-44
</TABLE>
F-2
<PAGE> 118
KWTX BROADCASTING COMPANY
BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, including interest bearing accounts................. $ 902,668 $ 234,176
Investments............................................... 5,117,224 5,389,480
Accrued interest receivable............................... 47,198 59,243
Accounts receivable:
Trade................................................... 1,466,892 1,583,163
Network................................................. 116,498 119,000
Affiliated companies.................................... 29,647 53,295
Program broadcast rights -- current....................... 80,836 64,503
Federal income tax receivable............................. -- --
Prepaid expenses.......................................... 274,924 196,678
----------- -----------
Total Current Assets............................ 8,035,887 7,699,538
----------- -----------
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES AT COSTS....... 4,470,404 4,278,341
----------- -----------
PROPERTY AND EQUIPMENT, AT COST --
NET OF ACCUMULATED DEPRECIATION......................... 5,187,241 4,780,355
PROGRAM BROADCAST RIGHTS -- NONCURRENT.................... 43,776 124,612
OTHER ASSETS:
Cash surrender value of insurance on life of officer.... 81,138 78,767
Due from employees...................................... 34,339 39,500
Deferred charges........................................ 30,572 43,542
Deposits and other assets............................... 72,743 225,028
----------- -----------
Total Other Assets.............................. 218,792 386,837
----------- -----------
Total Assets.................................... $17,956,100 $17,269,683
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade................................................... $ 297,803 $ 172,942
Accrued salaries and wages................................ 115,637 103,595
Accrued management bonus.................................. 270,763 236,703
Program broadcast obligations -- current.................. 19,883 91,554
Federal income tax payable................................ 10,238 242,582
Other liabilities......................................... -- 21,842
----------- -----------
Total Current Liabilities....................... 714,324 869,218
----------- -----------
LONG-TERM LIABILITIES:
Program broadcast obligations -- noncurrent............... 16,829 36,712
Deferred federal income tax payable....................... 639,354 641,257
----------- -----------
Total Long-term Liabilities..................... 656,183 677,969
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, stated value $130.50, 1,550 shares
authorized, issued and outstanding................... 202,269 202,269
Paid-in capital......................................... 10,173 10,173
Retained earnings....................................... 16,373,151 15,510,054
----------- -----------
Total Stockholders' Equity...................... 16,585,593 15,722,496
----------- -----------
Total Liabilities and Stockholders' Equity...... $17,956,100 $17,269,683
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 119
KWTX BROADCASTING COMPANY
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
REVENUE................................................. $5,325,177 $4,928,754
Less agency and representatives' commissions.......... 686,060 638,861
---------- ----------
Net Revenue................................... 4,639,117 4,289,893
---------- ----------
COSTS AND EXPENSES:
Technical expenses.................................... 293,554 288,245
Production expenses................................... 674,878 251,941
News expenses......................................... 238,940 654,169
Program expenses...................................... 211,622 187,580
Sales expenses........................................ 401,998 329,310
Management Bonus...................................... 270,763 236,703
General and administrative expenses................... 688,436 752,613
Depreciation expense.................................. 336,301 287,812
---------- ----------
Total Costs and Expenses...................... 3,116,492 2,988,373
---------- ----------
Earnings from operations................................ 1,522,625 1,301,520
OTHER INCOME:
Other income.......................................... 11,700 39,793
Investment in subsidiary income....................... 422,338 488,523
Interest income....................................... 153,278 148,162
---------- ----------
Total Other Income............................ 587,316 676,478
---------- ----------
Earnings before income tax
expense............................................... 2,109,941 1,977,998
Income tax expense...................................... 652,410 542,821
---------- ----------
Net earnings.................................. $1,457,531 $1,435,177
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 120
KWTX BROADCASTING COMPANY
STATEMENTS OF RETAINED EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Balance at beginning of year.......................... $17,085,620 $15,314,877
Add net earnings.................................... 1,457,531 1,435,177
----------- -----------
18,543,151 16,750,054
Less dividends paid................................. (2,170,000) (1,240,000)
----------- -----------
Balance at end of year................................ $16,373,151 $15,510,054
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 121
KWTX BROADCASTING COMPANY
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 1,457,531 $ 1,435,177
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 336,301 287,812
(Gain) Loss on disposal of equipment................ 567 (1,818)
Income tax deferred................................. (73,175) 19,832
Changes in operating assets and liabilities:
Accounts receivable.............................. 169,120 62,314
Network receivable............................... (1,110) (1,976)
Intercompany receivable.......................... (27,268) (53,295)
Due from employees............................... 6,183 5,247
Prepaid expenses................................. (19,672) 73,848
Accrued interest................................. 11,807 (16,117)
Program broadcast rights......................... 96,927 55,411
Other assets..................................... (20,917) (215,509)
Accounts payable................................. (188,006) (366,777)
Accrued liabilities.............................. (283,219) (368,750)
Income tax payable............................... 10,238 309,377
Intercompany payable............................. -- (12,328)
Program broadcast obligations.................... (111,630) (79,493)
Investment in subsidiary......................... 327,663 11,477
Other liabilities................................ (4,762) 18,828
----------- -----------
Net cash provided by operating activities... 1,686,578 1,163,260
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Net purchase of short-term investments................ (1,865,581) (20,623)
Purchase of equipment................................. (414,458) (528,628)
Proceeds from sale of equipment....................... -- 1,200
Purchase of held-to-maturity securities............... (308,317) (801,633)
Sale of held-to maturity securities................... 2,480,000 400,000
----------- -----------
Net cash used in investing activities....... (108,356) (949,684)
----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payment of dividends.................................. (2,170,000) (1,240,000)
----------- -----------
Net decrease in cash.................................. (591,778) (1,026,424)
Cash at beginning of year............................. 1,494,446 1,260,600
----------- -----------
Cash at end of year................................... $ 902,668 $ 234,176
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid..................................... $ 574,320 $ 168,630
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 122
KWTX BROADCASTING COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1. GENERAL
The accompanying unaudited condensed financial statements of KWTX
Broadcasting Company (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. These
condensed financial statements should be read in conjunction with the financial
statements of the Company for the year ended December 31, 1998. Results of
operations for the period ended June 30, 1999 are not necessarily indicative of
results to be expected for the fiscal year ended December 31, 1999.
2. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The Company's investment in Brazos Broadcasting Co. (50% owned) is
accounted for using the equity method of accounting for investments. This method
requires that the investment is recorded at the proportionate percentage of
stockholders' equity of the subsidiary and adjusted each period for the
proportionate percentage of net income of the subsidiary. Dividends received are
treated as a reduction in the basis of the Company's investment in the year
received.
The Company received dividends from Brazos Broadcasting Co. of $750,000 and
$500,000 for the six months ended June 30, 1999 and 1998, respectively.
Pertinent financial information for Brazos Broadcasting Co. for the six
months ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
BALANCE SHEET:
Assets
Current assets........................................ $7,694,314 $7,273,461
Property and equipment................................ 1,921,155 2,143,081
Program broadcast -- noncurrent....................... 41,080 118,938
Other assets.......................................... 78,148 7,045
---------- ----------
Total assets.................................. $9,734,697 $9,542,525
========== ==========
Liabilities and equity
Current liabilities................................... $ 497,407 $ 672,615
Long-term liabilities................................. 296,482 313,229
Stockholders equity................................... 8,940,808 8,556,681
---------- ----------
Total liabilities and equity.................. $9,734,697 $9,542,525
========== ==========
</TABLE>
F-7
<PAGE> 123
KWTX BROADCASTING COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
INCOME STATEMENT:
Revenue................................................. $4,639,117 $4,289,893
Costs and expenses...................................... 3,116,492 2,988,373
Other income............................................ 587,316 676,478
Federal income tax...................................... 652,410 542,821
---------- ----------
Net income.................................... 1,457,531 1,435,177
Company's ownership interest............................ 50% 50%
---------- ----------
Company's share of net income........................... $ 728,766 $ 717,589
========== ==========
</TABLE>
3. OTHER TRANSACTIONS WITH RELATED PARTIES
The Company has deposits with a bank of which two majority shareholders of
the bank are related to two minority stockholders of the Company. As of June 30,
1999 and 1998, deposits with this bank were $5,711,313 and $1,306,448,
respectively, and interest earned on these deposits was $82,612 and $40,122 for
the six months ended June 30, 1999 and 1998, respectively.
As of June 30, 1999 and 1998, the Company had a receivable from Brazos
Broadcasting Co. of $26,773 and $51,406, respectively. Each station is
responsible for its own costs and expenses. Expenses incurred on behalf of an
affiliated station are charged to such station based upon its direct usage.
4. PENDING TRANSACTION
On April 13, 1999, the Company entered into an agreement and plan of merger
with Gray Communications Systems, Inc. ("Gray") which provides for the
acquisition of the Company by Gray. This agreement provides that the Company's
stockholders will receive a combination of cash and Gray class B common stock
aggregating $74,680,000, plus additional consideration for certain net working
capital of the Company. Consummation of the transaction is conditioned upon,
among other things, the requisite approvals of the Federal Communications
Commission and the stockholders of the Company and Gray.
F-8
<PAGE> 124
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
KWTX Broadcasting Company
Waco, Texas
We have audited the accompanying balance sheet of KWTX Broadcasting Company
as of December 31, 1998, and the related statement of income, retained earnings,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of KWTX Broadcasting Company as
of December 31, 1998, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
We have compiled the accompanying balance sheets of KWTX Broadcasting
Company as of December 31, 1997 and 1996, and the related statements of income,
retained earnings, and cash flows for the years then ended, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. These financial statements
were compiled by us from financial statements for the same period, that we
previously compiled, on an income tax basis, as indicated in our reports dated
February 20, 1998 and February 26, 1997, respectively.
A compilation is limited to presenting, in the form of financial
statements, information that is the representation of management. We have not
audited or reviewed these accompanying financial statements and, accordingly, do
not express an opinion or any other form of assurance on them.
As more fully discussed in Note 10, the Company has approved a merger
agreement that provides for the acquisition of the Company, subject to a number
of conditions, including the approval of Federal Communications Commission.
PATTILLO, BROWN & HILL, L.L.P.
March 24, 1999,
except for Note 10 which
is as of April 13, 1999
F-9
<PAGE> 125
KWTX BROADCASTING COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, including interest bearing accounts......... $ 1,494,446 $ 1,260,600 $ 1,314,182
Investments....................................... 5,423,326 4,967,224 8,664,239
Accrued interest receivable....................... 59,005 43,126 96,483
Accounts receivable
Trade........................................... 1,531,131 1,645,477 1,406,829
Network......................................... 115,388 117,024 147,827
Affiliated companies............................ 2,379 -- 26,749
Program broadcast rights -- current............... 187,929 146,312 --
Federal income tax receivable..................... 104,881 66,795 145,623
Prepaid expenses.................................. 255,252 270,526 138,416
----------- ----------- -----------
Total Current Assets..................... 9,173,737 8,517,084 11,940,348
----------- ----------- -----------
Investments in unconsolidated subsidiaries at
costs........................................... 4,798,067 4,289,818 3,640,161
----------- ----------- -----------
Property and equipment, at cost -- net of
accumulated depreciation........................ 5,109,650 4,538,921 4,130,961
Program broadcast rights -- noncurrent............ 33,610 98,214 126,164
OTHER ASSETS:
Cash surrender value of insurance on life of
officer......................................... 81,138 78,767 76,396
Due from employees................................ 40,522 44,747 3,675
Deferred charges.................................. 39,406 42,569 39,937
Deposits and other assets......................... 42,992 10,492 10,493
----------- ----------- -----------
Total Other Assets....................... 204,058 176,575 130,501
----------- ----------- -----------
Total Assets............................. $19,319,122 $17,620,612 $19,968,135
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade........................................... $ 485,809 $ 539,719 $ 214,809
Affiliated companies............................ -- 12,328 --
Accrued salaries and wages........................ 121,070 257,862 248,659
Accrued management bonus.......................... 548,548 451,186 491,087
Program broadcast obligations -- current.......... 125,881 182,735 190,808
Federal income tax payable........................ -- -- 1,134,839
Other liabilities................................. 4,762 3,014 5,128
----------- ----------- -----------
Total Current Liabilities................ 1,286,070 1,446,844 2,285,330
----------- ----------- -----------
LONG-TERM LIABILITIES:
Program broadcast obligations -- noncurrent....... 22,461 25,024 106,743
Deferred federal income tax payable............... 712,529 621,425 518,686
----------- ----------- -----------
Total Long-term Liabilities.............. 734,990 646,449 625,429
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, stated value $130.50, 1,550 shares
authorized, issued and outstanding.............. 202,269 202,269 202,269
Paid-in capital................................... 10,173 10,173 10,173
Retained earnings................................. 17,085,620 15,314,877 16,844,934
----------- ----------- -----------
Total Stockholders' Equity............... 17,298,062 15,527,319 17,057,376
----------- ----------- -----------
Total Liabilities and Stockholders'
Equity................................. $19,319,122 $17,620,612 $19,968,135
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 126
KWTX BROADCASTING COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUE....................................... $10,578,028 $10,048,780 $10,871,564
Less agency and representatives'
commissions................................. (1,356,171) (1,253,094) (1,281,409)
----------- ----------- -----------
Net Revenue................................... 9,221,857 8,795,686 9,590,155
----------- ----------- -----------
COSTS AND EXPENSES:
Technical expenses............................ 616,727 609,089 550,847
Production expenses........................... 522,386 480,416 439,138
News expenses................................. 1,359,894 1,336,021 1,296,110
Program expenses.............................. 415,211 380,777 725,820
Sales expenses................................ 715,757 708,405 914,352
Management bonus.............................. 548,548 451,186 491,087
General and administrative expenses........... 1,328,664 1,583,749 1,842,475
Depreciation expense.......................... 607,127 494,915 553,047
----------- ----------- -----------
Total Costs and Expenses............ 6,114,314 6,044,558 6,812,876
----------- ----------- -----------
Earnings from operations...................... 3,107,543 2,751,128 2,777,279
OTHER INCOME:
Other income.................................. 253,849 77,229 102,600
Investment in subsidiary income............... 1,008,249 899,657 783,854
Interest income............................... 339,447 303,767 309,381
----------- ----------- -----------
Total Other Income.................. 1,601,545 1,280,653 1,195,835
----------- ----------- -----------
Earnings before income tax expense............ 4,709,088 4,031,781 3,973,114
Income tax expense............................ (1,388,345) (1,305,187) (1,204,836)
----------- ----------- -----------
Net earnings before discontinued operations... 3,320,743 2,726,594 2,768,278
Discontinued operations-gain on disposal of
radio stations, less applicable income taxes
of $1,232,351............................... -- -- 2,392,211
----------- ----------- -----------
Net earnings........................ $ 3,320,743 $ 2,726,594 $ 5,160,489
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 127
KWTX BROADCASTING COMPANY
STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C>
Balance at beginning of year.............. $15,314,877 $16,844,934 $12,304,445
Add net earnings........................ 3,320,743 2,726,594 5,160,489
----------- ----------- -----------
18,635,620 19,571,528 17,464,934
Less dividends paid..................... (1,550,000) (4,256,651) (620,000)
----------- ----------- -----------
Balance at end of year.................... $17,085,620 $15,314,877 $16,844,934
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE> 128
KWTX BROADCASTING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $3,320,743 $2,726,594 $5,160,489
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................. 607,127 494,915 553,047
Gain on sale of equipment.................... (206,830) (1,179) (16,295)
Barter acquisition of equipment.............. -- -- (38,898)
Income tax deferred.......................... 91,104 102,738 22,682
Changes in operating assets and liabilities:
Accounts receivable........................ 113,606 (181,096) (107,903)
Income tax receivable...................... (38,086) (66,795) --
Due from employees......................... 4,225 (41,072) 77
Prepaid expenses........................... 15,274 (132,110) 88,584
Accrued interest........................... (15,879) 53,357 (52,365)
Program broadcast rights................... 22,987 (108,552) 109,895
Other assets............................... (31,708) (5,003) (15,347)
Accounts payable........................... (66,238) 337,238 (92,692)
Accrued liabilities........................ (39,430) (30,698) 88,761
Income tax payable......................... -- (1,134,839) 1,125,538
Program broadcast obligations.............. (59,417) 46,020 (109,596)
Investment in subsidiary................... (508,249) (649,657) (496,354)
Other liabilities.......................... 1,748 (2,114) (906)
---------- ---------- ----------
Net cash provided by operating
activities...................... 3,210,977 1,407,747 6,218,717
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of short-term investments....... (1,893,859) 3,743,212 (4,232,337)
Purchase of equipment........................ (1,300,441) (910,694) (369,246)
Proceeds from sale of equipment.............. 329,413 9,000 178,515
Purchase of held-to-maturity securities...... (800,000) (3,915,000) (2,185,000)
Sale of held-to maturity securities.......... 2,237,756 3,868,804 1,747,755
---------- ---------- ----------
Net cash provided by (used in)
investing activities............ (1,427,131) 2,795,322 (4,860,313)
---------- ---------- ----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payment of dividends......................... (1,550,000) (4,256,651) (620,000)
---------- ---------- ----------
Net increase (decrease) in cash.............. 233,846 (53,582) 738,404
Cash at beginning of year.................... 1,260,600 1,314,182 575,778
---------- ---------- ----------
Cash at end of year.......................... $1,494,446 $1,260,600 $1,314,182
========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid............................ $1,248,680 $2,139,839 $1,198,037
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE> 129
KWTX BROADCASTING COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED FOR 1997 AND 1996)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
KWTX Broadcasting Company (the "Company") owns and operates television
station KWTX in Waco, Texas. The Company also is a 50% owner in Brazos
Broadcasting Co., which owns and operates television station KBTX located in
Bryan, Texas.
REVENUE RECOGNITION
The Company's policy is to recognize revenue as services are performed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH
Cash includes cash on hand and cash in checking and money market accounts
which approximates fair market value.
INVESTMENTS
The Company invests in treasury bills, treasury notes and certificates of
deposit. These investments are held to maturity and are recorded at amortized
cost, where appropriate.
PROGRAM BROADCAST RIGHTS
Rights to programs available for broadcast under program license agreements
are initially recorded at the beginning of the license period for the amounts of
total license fees payable under the license agreements and are charged to
operating expense on the basis of total programs available for use compared to
the total number of programs run during the period. The portion of the
unamortized balance expected to be charged to operating expense in succeeding
periods is classified as a current asset, with the remainder classified as a
noncurrent asset. The liability for the license fees payable under the program
license agreement is classified as current or long-term, in accordance with the
payment terms of the various license agreements. The capitalized costs of the
rights are recorded at the lower of unamortized costs or net realizable value.
All payments made on programs not yet available for broadcast are recorded as
other assets until the time the license agreement begins and the program becomes
available for broadcast.
F-14
<PAGE> 130
KWTX BROADCASTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AFFILIATED STATIONS RECEIVABLES/PAYABLE
The Company has two affiliated stations which it records receivables from
and payables to throughout the year. The affiliates are Brazos Broadcasting Co.
in Bryan, Texas and KXII Broadcasters, Inc. in Sherman, Texas. Each station is
responsible for its costs and expenses. Expense incurred on the behalf of an
affiliated station is charged to such station based upon its direct usage.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method for financial reporting purposes over the estimated
useful lives of the related assets ranging from three to thirty-one and one-half
years and by accelerated methods for income tax purposes.
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost and related accumulated depreciation of assets retired or
otherwise disposed of are eliminated from the accounts and the resulting gain or
loss is included in income or expense.
INCOME TAXES
Deferred federal income taxes are provided on the differences between the
financial statement and income tax basis of assets and liabilities. The Company
and its unconsolidated subsidiary (see Note 2) file separate federal income tax
returns.
BARTER TRANSACTIONS
The Company barters unsold advertising time for products and services. The
asset or expense is recorded at the fair market value of the product or service
when received and a liability is recognized for unearned revenue at the end of
each period. Barter revenue is recognized when commercials are broadcast.
CONCENTRATION OF CREDIT RISK
The Company provides advertising air time to national, regional and local
advertisers within the geographic areas in which the Company operates. Credit is
extended based on an evaluation of the customer's financial condition and
generally advance payment is not required. Credit losses are provided for in the
financial statements and historically have been within management's
expectations.
2. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The Company's investment in Brazos Broadcasting Co. (50% owned) is
accounted for using the equity method of accounting for investments. This method
requires that the investment is recorded at the proportionate percentage of
stockholders' equity of the subsidiary and adjusted each period for the
proportionate percentage of net income of the
F-15
<PAGE> 131
KWTX BROADCASTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
subsidiary. Dividends received are treated as a reduction in the basis of the
Company's investment in the year received.
The Company received dividends from Brazos Broadcasting Co. of $500,000 in
1998, $250,000 in 1997 and $287,500 in 1996.
Pertinent financial information for Brazos Broadcasting Co. as of December
31, 1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
BALANCE SHEET:
Assets
Current assets............................ $ 8,849,348 $7,516,843 $6,274,540
Property and equipment.................... 1,987,844 2,233,333 2,121,226
Program broadcast -- noncurrent........... 36,602 82,429 113,433
Other assets.............................. 40,012 9,588 7,520
----------- ---------- ----------
Total assets...................... $10,913,806 $9,842,193 $8,516,719
=========== ========== ==========
Liabilities and equity
Current liabilities....................... 1,004,177 968,899 889,061
Long-term liabilities..................... 313,496 293,658 347,335
Stockholders equity....................... 9,596,133 8,579,636 7,280,323
----------- ---------- ----------
Total liabilities and equity...... $10,913,806 $9,842,193 $8,516,719
----------- ---------- ----------
INCOME STATEMENT:
Revenue..................................... $ 7,300,941 $6,623,663 $6,146,401
Costs and expenses.......................... 4,412,923 4,099,996 3,901,746
Other income................................ 262,953 287,132 198,312
Federal income tax.......................... 1,134,474 1,011,486 875,259
----------- ---------- ----------
Net income........................ 2,016,497 1,799,313 1,567,708
Company's ownership interest................ 50% 50% 50%
----------- ---------- ----------
Company's share of net income............... $ 1,008,249 $ 899,657 $ 783,854
=========== ========== ==========
</TABLE>
3. OTHER TRANSACTIONS WITH RELATED PARTIES
The Company has deposits with a bank of which two majority shareholders of
the bank are related to two minority stockholders of the Company. As of December
31, 1998, 1997 and 1996, deposits with this bank were $4,486,679, $2,370,876 and
$6,327,093, respectively, and interest earned on these deposits was $88,922,
$109,503, and $57,225, in 1998, 1997, and 1996, respectively.
As of December 31, 1998, 1997 and 1996, the Company had a receivable from
Brazos Broadcasting Co. of $1,805, a net payable of $11,997 and a receivable of
$25,882 respectively.
F-16
<PAGE> 132
KWTX BROADCASTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS
Investments consist primarily of term bank deposits and government
securities. Government securities held at December 31, 1998 have maturity dates
ranging from February 1, 1999 to May 31, 1999. Term bank deposits held at
December 31, 1998 have maturity dates ranging from January 1, 1999 to July 29,
1999. All securities are carried at amortized cost, which approximates fair
market value. The following schedule summarizes the Company's investments at
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Government securities........................ $2,479,902 $3,915,264 $3,869,067
Term bank deposits........................... 2,943,424 1,051,960 4,795,172
---------- ---------- ----------
$5,423,326 $4,967,224 $8,664,239
========== ========== ==========
</TABLE>
The Company intends to hold all investments until maturity.
5. PROPERTY AND EQUIPMENT
At December 31, 1998, 1997, and 1996, property and equipment consisted of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Land...................................... $ 509,188 $ 523,847 $ 523,847
Buildings................................. 2,272,710 2,496,270 2,485,251
Broadcast equipment....................... 7,497,535 8,527,153 7,695,631
Transportation equipment.................. 217,034 294,508 280,748
Furniture and fixtures.................... 324,979 661,623 624,382
----------- ----------- -----------
10,821,446 12,503,401 11,609,859
Less accumulated depreciation............. (5,711,796) (7,964,480) (7,478,898)
----------- ----------- -----------
Net Property and Equipment...... $ 5,109,650 $ 4,538,921 $ 4,130,961
=========== =========== ===========
</TABLE>
6. INCOME TAXES
At December 31, 1998, 1997 and 1996, the provision for income taxes
consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
FEDERAL TAX EXPENSE:
Current.................................... $1,210,594 $ 938,206 $1,091,223
Deferred................................... 91,104 102,738 22,682
---------- ---------- ----------
Total Federal Tax.................. 1,301,698 1,040,944 1,113,905
State franchise tax........................ 86,647 264,243 90,931
---------- ---------- ----------
Total Income Tax Expense........... $1,388,345 $1,305,187 $1,204,836
========== ========== ==========
</TABLE>
F-17
<PAGE> 133
KWTX BROADCASTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, 1997, 1996, components of deferred tax liabilities
and assets consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
DEFERRED TAX LIABILITY -- CURRENT:
Investment in subsidiary -- KBTX.................. $ 34,561 $ 44,177 $ 33,752
Depreciation expense.............................. 32,788 37,526 --
Compensated absences.............................. 319 -- 820
Amortization of broadcast rights.................. 23,436 21,261 --
-------- -------- --------
Current Deferred Tax Liability.................. 91,104 102,964 34,572
-------- -------- --------
DEFERRED TAX ASSET -- CURRENT:
Depreciation expense.............................. -- -- 11,788
Compensated absences.............................. -- 226 --
Amortization of broadcast rights.................. -- -- 102
-------- -------- --------
Current Deferred Tax Asset...................... -- 226 11,890
-------- -------- --------
Net Current Deferred Tax Liability...... 91,104 102,738 22,682
-------- -------- --------
DEFERRED TAX LIABILITY -- NONCURRENT:
Investment in subsidiary -- KBTX.................. 283,208 239,031 187,960
Depreciation expense.............................. 332,241 294,716 306,504
Amortization of broadcast rights.................. 12,501 -- 8,659
-------- -------- --------
Noncurrent Deferred Tax Liability............... 627,950 533,747 503,123
-------- -------- --------
DEFERRED TAX ASSET -- NONCURRENT:
Compensated absences.............................. 6,525 6,300 7,119
Amortization of broadcast rights.................. -- 8,760 --
-------- -------- --------
Noncurrent Deferred Tax Asset................... 6,525 15,060 7,119
-------- -------- --------
Net Noncurrent Deferred Tax Liability........... 621,425 518,687 496,004
-------- -------- --------
Total Deferred Federal Income Tax....... $712,529 $621,425 $518,686
======== ======== ========
</TABLE>
A reconciliation between taxes computed at the federal statutory rate and
the consolidated effective tax rate for the following years was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory tax
rate................ $1,601,090 34.00% $1,370,806 34.00% $1,350,859 34.00%
Deduction of state
franchise tax....... (29,460) (0.63)% (89,843) (2.23)% (30,917) (0.78)%
Exclusion of 80% of
earnings in
subsidiary special
deduction........... (274,244) (5.82)% (244,707) (6.07)% (213,208) (5.37)%
Other................. 4,312 (0.09)% 4,688 0.12% 7,171 0.18%
---------- ----- ---------- ----- ---------- -----
Total
Federal
Tax...... $1,301,698 27.46% $1,040,944 25.82% $1,113,905 28.03%
========== ===== ========== ===== ========== =====
</TABLE>
F-18
<PAGE> 134
KWTX BROADCASTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RETIREMENT PLAN FOR EMPLOYEES
The Company has a retirement plan for employees. Eligible employees of the
Company may participate in this plan after completing three years of employment.
Under the plan, the Company is required to contribute to the trust fund an
amount equal to $4 for each $3 which is contributed to the trust fund by the
participants for the year, up to a maximum of $800 per employee per year. The
Company contributed to the plan $22,544 for 1998, $20,704 for 1997, and $27,248
for 1996. The Internal Revenue Service has determined that the plan and its
trust are qualified under Section 408(c) of the Internal Revenue Code and that
the trust is exempt from federal income taxes under Section 408(e) of the Code.
8. OPERATING LEASES
The Company has entered into various operating lease agreements for
automobiles. Total lease expense incurred by the Company was $94,088, $95,252,
and $93,107 in 1998, 1997, and 1996, respectively. As of December 31, 1998 the
future minimum rental payments under non cancellable operating leases were as
follows:
<TABLE>
<S> <C>
1999........................................................ $ 861
2000........................................................ 55,790
2001........................................................ 14,904
-------
$71,555
=======
</TABLE>
9. DISPOSAL OF AM/FM RADIO STATIONS
In November 1996, the Company sold all of the assets and operations of
KWTX-AM and KWTX-FM to Gulfstar Communications of Waco, Inc., resulting in a
before tax gain of $3,624,562. As of December 31, 1996, the Company had a
receivable of $61,320 from Gulfstar Communications of Waco, Inc. related to this
sale. On January 2, 1997, a special dividend in an amount representing the net
proceeds from this sale was paid to the Company's shareholders.
10. SUBSEQUENT EVENTS
On April 13, 1999, the Company entered into an agreement and plan of merger
with Gray Communications Systems, Inc. ("Gray") which provides for the
acquisition of the Company by Gray. This agreement provides that the Company's
shareholders will receive a combination of cash and Gray class B common stock
aggregating $74,680,000, plus additional consideration for certain net working
capital of the Company. Consummation of the transaction is conditioned upon,
among other things, the requisite approvals of the Federal Communications
Commission and the stockholders of the Company and Gray.
F-19
<PAGE> 135
BRAZOS BROADCASTING CO.
BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, including interest bearing accounts................... $ 837,743 $ 382,483
Investments................................................. 5,221,604 5,046,765
Accrued interest receivable................................. 18,968 60,303
Accounts receivable:
Trade..................................................... 1,441,411 1,569,533
Network................................................... 44,848 53,574
Federal income tax receivable............................. -- 46,021
Program broadcast rights -- current......................... 77,858 67,093
Prepaid expenses............................................ 51,882 47,689
---------- ----------
Total Current Assets............................... 7,694,314 7,273,461
---------- ----------
Property and equipment, at cost -- net of accumulated
depreciation.............................................. 1,921,155 2,143,081
---------- ----------
Program broadcast -- noncurrent............................. 41,080 118,938
Deposits and other assets................................... 78,148 7,045
---------- ----------
Total Assets....................................... $9,734,697 $9,542,525
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other liabilities...................... $ 115,929 $ 170,187
Program broadcast obligations -- current.................... 19,883 90,239
Accrued salaries and wages.................................. 64,515 69,598
Accrued management bonus.................................... 252,144 291,185
Federal income tax payable.................................. 18,163 --
Affiliated companies payable................................ 26,773 51,406
---------- ----------
Total Current Liabilities.......................... 497,407 672,615
---------- ----------
LONG-TERM LIABILITIES:
Program broadcast obligations -- noncurrent................. 16,829 36,711
Deferred federal income tax payable......................... 279,653 276,518
---------- ----------
Total Long-term Liabilities........................ 296,482 313,229
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $100 par value, 500 shares authorized, issued
and outstanding........................................... 50,000 50,000
Retained earnings........................................... 8,890,808 8,506,681
---------- ----------
Total Stockholders' Equity......................... 8,940,808 8,556,681
---------- ----------
Total Liabilities and Stockholders' Equity......... $9,734,697 $9,542,525
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 136
BRAZOS BROADCASTING CO.
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
REVENUE................................................. $3,749,252 $3,943,610
Less agency and representatives' commissions............ 392,628 434,421
---------- ----------
Net Revenue................................... 3,356,624 3,509,189
---------- ----------
Costs and Expenses:
Technical expenses...................................... 161,201 148,364
News expenses........................................... 367,125 374,406
Production expenses..................................... 283,902 278,313
Sales expenses.......................................... 316,251 296,863
Management bonus........................................ 226,825 226,813
General and administrative expenses..................... 656,359 657,501
Depreciation expense.................................... 191,744 196,466
---------- ----------
Total Costs and Expenses...................... 2,203,407 2,178,726
---------- ----------
Earnings from operations................................ 1,153,217 1,330,463
OTHER INCOME/EXPENSE:
Other income (expense).................................. 14,133 6,338
Interest income......................................... 126,720 142,545
---------- ----------
Total Other Income............................ 140,853 148,883
---------- ----------
Earnings before income tax expense...................... 1,294,070 1,479,346
Income tax expense...................................... 449,395 502,301
---------- ----------
Net earnings.................................. $ 844,675 $ 977,045
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 137
BRAZOS BROADCASTING CO.
STATEMENTS OF RETAINED EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Balance at beginning of year.......................... $ 9,546,133 $ 8,529,636
Add net earnings.................................... 844,675 977,045
----------- -----------
10,390,808 9,506,681
Less dividends paid................................. (1,500,000) (1,000,000)
----------- -----------
Balance at end of year................................ $ 8,890,808 $ 8,506,681
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 138
BRAZOS BROADCASTING CO.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 844,675 $ 977,045
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 191,744 196,466
Loss on sale of fixed assets............................ 2,134 11,839
Income tax deferred..................................... (11,382) 7,884
Changes in operating assets and liabilities:
Accounts receivable.................................. 207,844 (15,195)
Network receivable................................... 816 (5,905)
Prepaid expenses..................................... (23,152) (23,195)
Accrued interest receivable.......................... 16,487 (23,894)
Federal income tax receivable........................ -- (46,021)
Other assets......................................... (38,713) 2,543
Intercompany receivable.............................. -- 12,866
Program broadcast rights............................. 98,917 57,551
Accounts payable..................................... (142,975) 2,081
Accrued liabilities.................................. (231,781) (241,414)
Income tax payable................................... (50,984) (14,992)
Intercompany payable................................. 24,968 50,537
Program broadcast obligations........................ (111,630) (80,809)
Other liabilities.................................... 577 --
----------- -----------
Net cash provided by operating activities....... 777,545 867,387
----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchase of equipment..................................... (127,189) (118,053)
Net sale of short-term investments........................ 233,378 614,519
Purchase of held-to-maturity securities................... (867,516) (1,350,734)
Sale of held-to maturity securities....................... 1,697,888 845,000
----------- -----------
Net cash provided by (used in) investing
activities.................................... 936,561 (9,268)
----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payment of dividends...................................... (1,500,000) (1,000,000)
----------- -----------
Net increase (decrease) in cash........................... 214,106 (141,881)
Cash at beginning of year................................. 623,637 524,364
----------- -----------
Cash at end of year....................................... $ 837,743 $ 382,483
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid......................................... $ 467,363 $ 507,502
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 139
BRAZOS BROADCASTING CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited condensed financial statements of Brazos
Broadcasting Co. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These condensed financial
statements should be read in conjunction with the financial statements of Brazos
Broadcasting Co. for the year ended December 31, 1998. Results of operations for
the period ended June 30, 1999 are not necessarily indicative of results to be
expected for the fiscal year ending December 31, 1999.
2. TRANSACTIONS WITH RELATED PARTIES
Fifty percent of the Company's capital stock is owned by KWTX Broadcasting
Company.
As of June 30, 1999 and 1998, the Company had a payable to KWTX
Broadcasting Company of $26,773 and $51,406, respectively. Each station is
responsible for its own costs and expenses. Expenses incurred on behalf of an
affiliated station are charged to such station based upon its direct usage.
The Company has deposits with a bank of which a major shareholder of the
bank is also a major shareholder of the Company. As of June 30, 1999, deposits
with this bank were $3,842,938 and interest earned on these deposits was $68,568
for the six months then ended.
3. PENDING TRANSACTION
On April 13, 1999, the Company entered into an agreement and plan of merger
with Gray Communications Systems, Inc. ("Gray") which provides for the
acquisition of the Company by Gray. This agreement provides that the Company's
stockholders other than KWTX Broadcasting Company (who will be compensated
through a related transaction) will receive a combination of cash and Gray class
B common stock aggregating $22,820,000, plus additional consideration for
certain net working capital of the Company. Consummation of the transaction is
conditioned upon, among other things, the requisite approvals of the Federal
Communications Commission and the stockholders of the Company and Gray.
F-24
<PAGE> 140
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Brazos Broadcasting Co.
Bryan, Texas
We have audited the accompanying balance sheet of Brazos Broadcasting Co.
as of December 31, 1998, and the related statement of income, retained earnings,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brazos Broadcasting Co. as
of December 31, 1998, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
We have compiled the accompanying balance sheets of Brazos Broadcasting Co.
as of December 31, 1997 and 1996, and the related statements of income, retained
earnings, and cash flows for the years then ended, in accordance with Statements
on Standards for Accounting and Review Services issued by the American Institute
of Certified Public Accountants. These financial statements were compiled by us
from financial statements for the same period that we previously audited on an
income-tax basis, as indicated in our reports dated February 20, 1998 and
February 21, 1997, respectively.
A compilation is limited to presenting, in the form of financial
statements, information that is the representation of management. We have not
audited or reviewed these accompanying financial statements and, accordingly, do
not express an opinion or any other form of assurance on them.
As more fully discussed in Note 8, the Company has approved a merger
agreement that provides for the acquisition of the Company, subject to a number
of conditions, including the approval of the Federal Communications Commission.
PATTILLO, BROWN & HILL, L.L.P.
March 24, 1999,
except for Note 8 which
is as of April 13, 1999
F-25
<PAGE> 141
BRAZOS BROADCASTING CO.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1998 1997 1996
----------- ---------- ----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, including interest bearing accounts............ $ 623,637 $ 524,364 $ 221,175
Investments.......................................... 6,285,354 5,155,550 4,637,804
Accrued interest receivable.......................... 35,455 36,409 36,945
Accounts receivable:
Trade.............................................. 1,649,255 1,554,338 1,131,104
Network............................................ 45,664 47,669 57,146
Affiliated companies............................... -- 12,866 --
Program broadcast rights -- current.................. 181,253 161,153 165,006
Prepaid expenses..................................... 28,730 24,494 25,360
----------- ---------- ----------
Total Current Assets........................ 8,849,348 7,516,843 6,274,540
Property and equipment, at cost -- net of accumulated
depreciation....................................... 1,987,844 2,233,333 2,121,226
Program broadcast -- noncurrent...................... 36,602 82,429 113,433
Deposits and other assets............................ 40,012 9,588 7,520
----------- ---------- ----------
Total Assets....................................... $10,913,806 $9,842,193 $8,516,719
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other liabilities............... $ 258,904 $ 168,106 $ 5,640
Program broadcast obligations -- current............. 125,881 182,735 190,808
Accrued salaries and wages........................... 62,120 176,448 154,658
Accrued management bonus............................. 486,320 425,749 402,842
Federal income tax payable........................... 69,147 14,992 108,674
Affiliated companies payable......................... 1,805 869 25,882
Other liabilities.................................... -- -- 557
----------- ---------- ----------
Total Current Liabilities................... 1,004,177 968,899 889,061
----------- ---------- ----------
LONG-TERM LIABILITIES:
Program broadcast obligations -- noncurrent.......... 22,461 25,024 106,743
Deferred federal income tax payable.................. 291,035 268,634 240,592
----------- ---------- ----------
Total Long-term Liabilities................. 313,496 293,658 347,335
----------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $100 par value, 500 shares authorized,
issued and outstanding............................. 50,000 50,000 50,000
Retained earnings.................................... 9,546,133 8,529,636 7,230,323
----------- ---------- ----------
Total Stockholders' Equity.................. 9,596,133 8,579,636 7,280,323
----------- ---------- ----------
Total Liabilities and Stockholders'
Equity.................................... $10,913,806 $9,842,193 $8,516,719
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 142
BRAZOS BROADCASTING CO.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUE..................................... $ 8,223,429 $7,383,495 $6,774,080
Less agency and representatives'
commissions............................... (922,488) (759,832) (627,679)
----------- ---------- ----------
Net Revenue....................... 7,300,941 6,623,663 6,146,401
----------- ---------- ----------
COSTS AND EXPENSES:
Technical expenses.......................... 300,853 291,255 272,258
News expenses............................... 739,582 701,631 601,203
Production expenses......................... 589,197 572,807 583,531
Sales expenses.............................. 631,245 594,722 554,448
Management bonus............................ 484,441 425,749 402,842
General and administrative expenses......... 1,275,310 1,133,330 1,063,385
Depreciation expense........................ 392,295 380,502 424,079
----------- ---------- ----------
Total Costs and Expenses.......... 4,412,923 4,099,996 3,901,746
----------- ---------- ----------
Earnings from operations.................... 2,888,018 2,523,667 2,244,655
Other income................................ 262,953 287,132 198,312
----------- ---------- ----------
Earnings before income tax expense.......... 3,150,971 2,810,799 2,442,967
Income tax expense.......................... 1,134,474 1,011,486 875,259
----------- ---------- ----------
Net earnings...................... $ 2,016,497 $1,799,313 $1,567,708
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 143
BRAZOS BROADCASTING CO.
STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C>
Balance at beginning of year................ $ 8,529,636 $7,230,323 $6,237,615
Add net earnings.......................... 2,016,497 1,799,313 1,567,708
----------- ---------- ----------
10,546,133 9,029,636 7,805,323
Less dividends paid....................... (1,000,000) (500,000) (575,000)
----------- ---------- ----------
Balance at end of year...................... $ 9,546,133 $8,529,636 $7,230,323
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 144
BRAZOS BROADCASTING CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 2,016,497 $ 1,799,313 $ 1,567,708
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................ 392,295 380,502 424,079
(Gain) loss on sale of fixed assets..... 7,269 (10,509) 34,254
Barter acquisition of equipment......... -- -- (205,424)
Income tax deferred..................... 22,401 28,042 (28,922)
Changes in operating assets and
liabilities:
Accounts receivable.................. (92,912) (413,757) (286,223)
Prepaid expenses..................... (4,236) 866 (5,485)
Accrued interest receivable.......... 954 536 2,303
Other assets......................... (30,424) (2,068) (1,508)
Intercompany receivable.............. 12,866 (12,866) --
Program broadcast rights............. 25,727 34,857 114,582
Accounts payable and other
liabilities........................ 90,798 162,466 (4,145)
Accrued liabilities.................. (53,757) 44,697 145,662
Income tax payable................... 54,155 (93,682) 6,621
Intercompany payable................. 936 (25,013) 24,716
Program broadcast obligations........ (59,417) (89,792) (109,596)
Other liabilities.................... -- (557) 557
----------- ----------- -----------
Net cash provided by operating
activities......................... 2,383,152 1,803,035 1,679,179
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment..................... (154,075) (482,100) (392,352)
Proceeds from sale of equipment........... -- -- 9,050
Net purchase of short-term investments.... (2,960,804) (441,746) (44,990)
Purchase of held-to-maturity securities... (1,860,000) (4,041,000) (3,615,000)
Sale of held-to maturity securities....... 3,691,000 3,965,000 3,000,000
----------- ----------- -----------
Net cash used in investing
activities......................... (1,283,879) (999,846) (1,043,292)
----------- ----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payment of dividends...................... (1,000,000) (500,000) (575,000)
----------- ----------- -----------
Net increase in cash...................... 99,273 303,189 60,887
Cash at beginning of year................. 524,364 221,175 160,288
----------- ----------- -----------
Cash at end of year....................... $ 623,637 $ 524,364 $ 221,175
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid......................... $ 1,020,927 $ 903,653 $ 840,266
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 145
BRAZOS BROADCASTING CO.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED 1997 AND 1996)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Brazos Broadcasting Co. (the "Company") owns and operates television
station KBTX located in Bryan, Texas. The Company is a 50% owned,
unconsolidated, subsidiary of KWTX Broadcasting Company, which operates
television station KWTX in Waco, Texas.
REVENUE RECOGNITION
The Company's policy is to recognize revenue as services are performed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH
Cash includes cash on hand and cash in checking and money market accounts
which approximates fair market value.
INVESTMENTS
The Company invests in treasury bills, treasury notes and other government
securities. These investments are recorded at cost, which approximates market
value.
PROGRAM BROADCAST RIGHTS
Rights to programs available for broadcast under program license agreements
are initially recorded at the beginning of the license period for the amounts of
total license fees payable under the license agreements and are charged to
operating expense on the basis of total programs available for use compared to
the total number of programs run during the period. The portion of the
unamortized balance expected to be charged to operating expense in succeeding
periods is classified as a current asset, with the remainder classified as a
noncurrent asset. The liability for the license fees payable under the program
license agreement is classified as current or long-term, in accordance with the
payment terms of the various license agreements. The capitalized costs of the
rights are recorded at the lower of unamortized costs or net realizable value.
All payments made on programs not yet available for broadcast are recorded as
other assets until the time the license agreement begins and the program becomes
available for broadcast.
F-30
<PAGE> 146
BRAZOS BROADCASTING CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method for financial reporting purposes over the estimated
useful lives of the related assets ranging from five to thirty-five years and by
accelerated methods for income tax purposes.
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost and related accumulated depreciation of assets retired or
otherwise disposed of are eliminated from the accounts and the resulting gain or
loss is included in income or expense.
INCOME TAXES
Deferred federal income taxes are provided on the differences between the
financial statement and income tax basis of assets and liabilities. The Company
and its parent, KWTX Broadcasting Company, file separate federal income tax
returns.
BARTER TRANSACTIONS
The Company barters unsold advertising time for products and services. The
asset or expense is recorded at the fair market value of the product or service
when received and a liability is recognized for unearned revenue at the end of
each period. Barter revenue is recognized when commercials are broadcast.
CONCENTRATION OF CREDIT RISK
The Company provides advertising air time to national, regional, and local
advertisers within the geographic area in which the Company operates. Credit is
extended based on evaluation of the customer's financial condition and generally
advance payment is not required. Credit losses are provided for in the financial
statements and historically have been within management's expectations.
2. INVESTMENTS
Investments consist primarily of term bank deposits and government
securities. Government securities held at December 31, 1998 have maturity dates
ranging from February 22, 1999 to July 1, 1999. Term bank deposits held at
December 31, 1998, have maturity dates ranging from January 1, 1999 to February
28, 1999. All securities are
F-31
<PAGE> 147
BRAZOS BROADCASTING CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
carried at amortized cost, which approximates fair market value. The following
schedule summarizes the Company's investments at December 31, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Government securities........................ $2,209,038 $4,041,365 $3,928,970
Term bank deposits........................... 4,076,316 1,114,185 708,834
---------- ---------- ----------
$6,285,354 $5,155,550 $4,637,804
========== ========== ==========
</TABLE>
The Company intends to hold all investments until maturity.
3. PROPERTY AND EQUIPMENT
At December 31, 1998, 1997, and 1996, property and equipment consisted of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Land...................................... $ 14,937 $ 14,937 $ 14,937
Buildings................................. 445,368 439,866 439,866
Radio and television equipment............ 5,334,788 5,347,451 4,951,573
Transportation equipment.................. 632,565 622,789 560,407
Furniture and fixtures.................... 311,353 309,913 308,844
----------- ----------- -----------
6,739,011 6,734,956 6,275,627
Less accumulated depreciation............. (4,751,167) (4,501,623) (4,154,401)
----------- ----------- -----------
Net Property and Equipment...... $ 1,987,844 $ 2,233,333 $ 2,121,226
=========== =========== ===========
</TABLE>
4. INCOME TAXES
At December 31, 1998, 1997 and 1996, the provision for income taxes for the
Company consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
FEDERAL TAX EXPENSE:
Current........................................ $1,020,927 $ 903,653 $840,266
Deferred....................................... 22,400 28,042 (28,922)
---------- ---------- --------
Total Federal Tax.................... 1,043,327 931,695 811,344
State franchise tax............................ 91,147 79,791 63,915
---------- ---------- --------
Total Income Tax Expense............. $1,134,474 $1,011,486 $875,259
========== ========== ========
</TABLE>
F-32
<PAGE> 148
BRAZOS BROADCASTING CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, 1997, and 1996, components of deferred tax
liabilities and assets consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
DEFERRED TAX LIABILITY -- CURRENT:
Depreciation expense.............................. $ 445 $ 10,961 $ --
Compensated absences.............................. -- -- 467
Amortization of broadcast rights.................. 22,505 18,678 --
-------- -------- --------
Current Deferred Tax Liability.......... 22,950 29,639 467
-------- -------- --------
DEFERRED TAX ASSET -- CURRENT:
Depreciation expense.............................. -- -- 27,694
Compensated absences.............................. 550 1,597 --
Amortization of broadcast rights.................. -- -- 1,695
-------- -------- --------
Current Deferred Tax Asset.............. 550 1,597 29,389
-------- -------- --------
Net Current Deferred Tax Liability...... 22,400 28,042 (28,922)
-------- -------- --------
DEFERRED TAX LIABILITY -- NONCURRENT:
Depreciation expense.............................. 260,991 250,030 277,724
Amortization of broadcast rights.................. 12,180 -- --
-------- -------- --------
Noncurrent Deferred Tax Liability....... 273,171 250,030 277,724
-------- -------- --------
DEFERRED TAX ASSET -- NONCURRENT:
Compensated absences.............................. 4,536 2,940 3,407
Amortization of broadcast rights.................. -- 6,498 4,803
-------- -------- --------
Noncurrent Deferred Tax Asset........... 4,536 9,438 8,210
-------- -------- --------
Net Noncurrent Deferred Tax Liability... 268,635 240,592 269,514
-------- -------- --------
Total Deferred Federal Income Tax....... $291,035 $268,634 $240,592
======== ======== ========
</TABLE>
Differences between the statutory and effective tax rates are due to small
differences resulting from the meals and entertainment deduction limitation for
income tax purposes.
5. RETIREMENT PLAN FOR EMPLOYEES
The Company has a retirement plan for employees. Eligible employees of the
Company may participate in this plan after completing three years of employment.
Under the plan, the Company is required to contribute to the trust fund an
amount equal to $4 for each $3 which is contributed to the trust fund by the
participants for the year, up to a maximum of $800 per employee per year. The
Company contributed to such plan $11,700 for 1998, $10,206 for 1997 and $11,800
for 1996. The Internal Revenue Service has determined that the plan and its
trust are qualified under Section 408(c) of the Internal Revenue Code and that
the trust is exempt from federal income taxes under Section 408(e) of the Code.
F-33
<PAGE> 149
BRAZOS BROADCASTING CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. TRANSACTIONS WITH RELATED PARTIES
Fifty percent of the Company's capital stock is owned by KWTX Broadcasting
Company.
As of December 31, 1998, 1997 and 1996, the Company had a payable to KWTX
Broadcasting Company of $1,805, a net receivable of $11,997, and a payable of
$25,882, respectively. Each station is responsible for its costs and expenses.
Expenses incurred on the behalf of an affiliated station are charged to such
station based upon the direct usage.
The Company has deposits with a bank of which a major shareholder of the
bank is also a major shareholder of the Company. As of December 31, 1998,
deposits with this bank were $2,400,380, and interest earned on these deposits
earned in 1998 was $40,774.
7. LEASE COMMITMENTS
On April 13, 1982, Brazos Broadcasting Company, entered into a contract to
lease a tower location for a 1,705 foot tower, situated in Grimes County, Texas.
This lease is for a term of 50 years, at $12,000 per year, adjusted for the
consumer price index. The cost of this lease was $19,951, $19,516 and $19,081 in
1998, 1997 and 1996, respectively.
The Company has entered into various operating lease agreements for
automobiles. Total lease expense was $12,270, $12,156, and $14,060 in 1998,
1997, and 1996, respectively. As of December 31, 1998, future minimum lease
payments under non-cancellable operating leases were as follows:
<TABLE>
<S> <C>
1999........................................................ $12,327
2000........................................................ 3,082
-------
$15,409
=======
</TABLE>
8. SUBSEQUENT EVENTS
On April 13, 1999, the Company entered into an agreement and plan of merger
with Gray Communications Systems, Inc. ("Gray") which provides for the
acquisition of the Company by Gray. This agreement provides that the Company's
stockholders other than KWTX Broadcasting Company (who will be compensated
through a related transaction) will receive a combination of cash and Gray class
B common stock aggregating $22,820,000, plus additional consideration for
certain net working capital of the Company. Consummation of the transaction is
conditioned upon, among other things, the requisite approvals of the Federal
Communications Commission and the stockholders of the Company and Gray.
F-34
<PAGE> 150
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
CONDENSED COMBINED BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,118,284 $ 674,312
Accounts receivable less allowance for doubtful accounts
of $17,867 and $20,839.................................. 1,379,603 1,204,890
Employee accounts receivable.............................. 11,437 15,465
Prepaid expenses.......................................... 58,619 46,324
Broadcast rights.......................................... 120,661 42,920
----------- -----------
Total current assets............................ 2,688,604 1,983,911
----------- -----------
Property, plant and equipment (Note 2).................... 5,337,114 5,681,163
Less accumulated depreciation............................. (3,202,120) (3,551,940)
----------- -----------
Total property, plant and equipment............. 2,134,994 2,129,223
----------- -----------
Broadcast rights, less current portion.................... 83,748 --
----------- -----------
Goodwill, less accumulated amortization of $690,559 and
$584,319................................................ 3,559,032 3,665,272
----------- -----------
Other assets.............................................. 2,530 2,530
----------- -----------
Total assets.................................... $ 8,468,908 $ 7,780,936
=========== ===========
LIABILITIES AND STOCKHOLDERS' AND PARTNERS' EQUITY
Current liabilities:
Notes payable -- related parties (Notes 2 and 3).......... $ 9,349 $ 99,524
Current portion of long-term debt -- related party (Note
2)...................................................... 77,525 102,834
Current portion of long-term capital leases -- related
party (Note 2).......................................... 178,236 160,551
Current portion of contracts payable for broadcast
rights.................................................. 156,370 45,056
Accounts payable -- trade................................. 165,474 458,923
Accrued liabilities (Notes 2 and 3)....................... 262,506 181,954
----------- -----------
Total current liabilities....................... 849,460 1,048,842
Long-term debt -- related party, less current portion
(Notes 2 and 4)......................................... 3,818,267 3,895,792
Long-term capital lease obligations, less current
portion -- related party (Note 2)....................... 409,566 587,920
Contracts payable for broadcast rights, less current
portion................................................. 102,260 43,198
----------- -----------
Total liabilities............................... 5,179,553 5,575,752
----------- -----------
Commitments
STOCKHOLDERS' AND PARTNERS' EQUITY:
Common stock -- no par value; 10,000 shares authorized
4,500 issued............................................ -- 142,641
Retained earnings......................................... -- 1,186,168
Partners' equity.......................................... 3,289,355 876,375
----------- -----------
Total stockholders' and partners' equity........ 3,289,355 2,205,184
----------- -----------
Total liabilities and stockholders' and
partners' equity.............................. $ 8,468,908 $ 7,780,936
=========== ===========
</TABLE>
See accompanying notes to condensed combined financial statements.
F-35
<PAGE> 151
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
CONDENSED COMBINED STATEMENTS OF INCOME AND STOCKHOLDERS'
AND PARTNERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Sales:
Local................................................. $ 873,700 $ 837,227
Regional.............................................. 1,492,621 1,263,044
National.............................................. 784,014 615,408
Barter transactions................................... 14,880 24,750
---------- ----------
Total sales................................... 3,165,215 2,740,429
---------- ----------
Less commissions:
Agency................................................ (387,501) (324,861)
Representatives....................................... (53,313) (41,848)
---------- ----------
Total commissions............................. (440,814) (366,709)
---------- ----------
Net sales..................................... 2,724,401 2,373,720
CBS income............................................ 467,542 431,760
Production income..................................... 16,235 19,225
Other................................................. 610 9,801
---------- ----------
Total revenues................................ 3,208,788 2,834,506
---------- ----------
OPERATING EXPENSES:
Technical............................................. 126,972 147,118
Programming........................................... 618,026 565,790
Sales................................................. 245,641 243,591
General (Note 2)...................................... 854,925 818,918
Depreciation.......................................... 198,266 174,458
Amortization of goodwill.............................. 53,120 53,120
---------- ----------
Total operating expenses...................... 2,096,950 2,002,995
---------- ----------
Income from operations.................................. 1,111,838 831,511
Gain on sale of equipment............................... 90,000 --
Interest expense...................................... (232,184) (234,063)
---------- ----------
Income before income taxes............................ 969,654 597,448
Income taxes -- state................................. 4,106 12,493
---------- ----------
Net income.................................... 965,548 584,955
Distributions......................................... (622,590) (355,898)
Stockholders' and partners' equity -- beginning of
year............................................... 2,946,397 1,976,127
---------- ----------
Stockholders' and partners' equity -- end of year..... $3,289,355 $2,205,184
========== ==========
</TABLE>
See accompanying notes to condensed combined financial statements.
F-36
<PAGE> 152
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
CONDENSED COMBINED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 965,548 $ 584,955
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 198,266 174,458
Gain on sale of equipment.............................. (90,000) --
Amortization of goodwill............................... 53,120 53,120
Amortization of broadcast rights....................... 78,185 58,086
Payments on contracts payable for broadcast rights..... (67,334) (28,890)
Change in operating assets and liabilities:
Increase in accounts receivable..................... (167,437) (185,216)
Decrease (increase) in employee accounts............ 25,987 (8,503)
Decrease in prepaid expenses........................ (27,906) (11,810)
Increase in accounts payable -- trade............... 125,881 429,438
Decrease in accrued expenses........................ (66,649) (59,117)
---------- ---------
Net cash provided by operating activities...... 1,027,661 1,006,521
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment................................... (335,567) (371,569)
---------- ---------
Net cash used in investing activities.......... (335,567) (371,569)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.................... (82,421) (60,602)
Payments of notes payable -- related party............... (90,175) --
Payments of long-term debt............................... (35,984) --
Distributions to shareholders and partners............... (622,590) (355,898)
---------- ---------
Net cash used in financing activities.......... (831,170) (416,500)
---------- ---------
Net increase (decrease) in cash.......................... (139,076) 218,452
Cash at beginning of year................................ 1,257,360 455,860
---------- ---------
Cash at end of year...................................... $1,118,284 $ 674,312
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................. $ 212,367 $ 209,970
========== =========
Income taxes -- state.................................... $ 36,391 $ 20,628
========== =========
</TABLE>
See accompanying notes to condensed combined financial statements.
F-37
<PAGE> 153
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. GENERAL
The accompanying unaudited condensed combined financial statements of KXII
Broadcasters, Inc. ("KXII, Inc.") and KXII Television, Ltd. ("KXII, Ltd.")
(collectively, the "Companies") have been prepared in accordance with generally
accepted accounting principles for interim financial information and rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These condensed combined
financial statements should be read in conjunction with the combined financial
statements of the Companies for the year ended December 31, 1998. Results of
operations for the period ended June 30, 1999 are not necessarily indicative of
results to be expected for the fiscal year ending December 31, 1999.
2. RELATED PARTY TRANSACTIONS
K-Twelve, Ltd. is a limited partnership, which is largely owned by the same
shareholders as KXII, Inc. KXII, Inc. remitted $166,698 to K-Twelve, Ltd. during
each of the six months ended June 30, 1999 and 1998 in connection with the use
of various assets and services provided by K-Twelve, Ltd. Because this
transaction is between related parties, it has been recorded as a capital lease
and management fee for financial statement purposes. Principal and interest
payments of $56,808 have been recorded to represent a capital lease for the
broadcast studios and equipment in Sherman, Texas and Ardmore, Oklahoma, with
the remainder, $111,890, reflected as management fees. KXII, Inc. also has a
note payable to K-Twelve, Ltd. for the transfer of certain assets in 1992, which
is discussed further in Note 4.
KXII, Inc. leases certain equipment and buildings under capital leases from
a related entity that is owned in part by a shareholder of KXII, Inc. The
equipment is capitalized in the combined balance sheets at net book value of
$894,127 and $976,558 at June 30, 1999 and 1998, respectively.
Other transactions resulting in payments to related parties were as
follows:
- Note payable of $9,349 and $99,524, respectively, at June 30, 1999 and
1998 and accrued interest payable of $27,444 and $21,473 at June 30, 1999
and 1998, respectively, to a director of the Companies. Interest expense
of $2,986 was incurred during the six months ended June 30, 1999 and
1998.
- Management fees of $99,600 and $124,500 were paid during the six months
ended June 30, 1999 and 1998, respectively, to officers of KXII, Inc.
Management fees of $24,900 were paid during the six months ended June 30,
1999 to officers of KXII, Ltd. No such fees were paid in the six months
ended June 30, 1998 to officers of KXII, Ltd.
F-38
<PAGE> 154
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- Fees to the Board of Directors of KXII, Inc. of $15,000 were incurred
during the six months ended June 30, 1999 and 1998.
3. NOTE PAYABLE -- RELATED PARTY
As of January 1995, KXII, Inc. repurchased 500 shares of stock of KXII,
Inc. from a former stockholder for $109,524. This amount was to be paid in
installments through December 31, 1998 with interest on the unpaid balance at a
rate of 6% per annum; however, it was still outstanding at June 30, 1999. At
June 30, 1999 and 1998, there was a balance of $9,349 and $99,524, respectively,
owed to the former stockholder, plus accrued interest of $27,444 and $21,473 at
June 30, 1999 and 1998, respectively.
4. LONG-TERM DEBT -- RELATED PARTY
On December 31, 1992, KXII, Inc. purchased certain assets of K-Twelve, Ltd.
for a note payable in the amount of $4,249,591. The note, which bears interest
at an annual rate of 10%, is due in quarterly payments of $116,064, including
interest, with the final payment due on December 31, 2017. The balance of the
note was $3,895,792 and $3,998,626 at June 30, 1999 and 1998, and interest
expense of $196,145 and $199,529 was accrued for the six months ended June 30,
1999 and 1998, respectively.
5. SALE OF THE COMPANIES
KXII Broadcasters, Ltd. (see Note 6 below) and KXII, Ltd. have signed an
agreement to sell substantially all of the assets of the Companies for an
aggregate purchase price of approximately $41.5 million. An application for the
transfer of the broadcasting license has been granted by the Federal
Communications Commission.
6. REORGANIZATION
On April 19, 1999, the shareholders of KXII, Inc. contributed their stock
to a newly formed corporation that subsequently contributed the stock to two
newly formed subsidiaries. As permitted under the Texas Business Corporation Act
and the Texas Revised Partnership Act, KXII, Inc. then was converted to a Texas
limited partnership, KXII Broadcasters, Ltd. The broadcast operations of KXII
Channel 12 will remain in the new partnership.
F-39
<PAGE> 155
INDEPENDENT AUDITORS' REPORT
To the Board of Directors, Stockholders and Partners
KXII Broadcasters, Inc.
KXII Television, Ltd.
We have audited the accompanying combined balance sheet of KXII
Broadcasters, Inc. and KXII Television, Ltd. (a limited partnership) (the
Companies) as of December 31, 1998, and the related combined statements of
income and stockholders' and partners' equity, and cash flows for the year ended
December 31, 1998. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of KXII Broadcasters,
Inc. and KXII Television, Ltd. as of December 31, 1998, and the results of their
combined operations and their combined cash flows for the year ended December
31, 1998 in conformity with generally accepted accounting principles.
As more fully discussed in Note 10, the Companies have approved the sale of
substantially all their assets. The transfer of certain broadcast licenses must
be approved by the Federal Communications Commission before the sale is
consummated.
The accompanying combined balance sheets of the Companies as of December
31, 1997 and 1996 and the related combined statements of income and
stockholders' and partners' equity, and cash flows for the years then ended were
not audited by us and, accordingly, we do not express an opinion on them.
Jaynes, Reitmeier, Boyd & Therrell PC
April 9, 1999, except for Notes 10 and 11
which are as of April 19, 1999
F-40
<PAGE> 156
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
COMBINED BALANCE SHEETS
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 1,257,360 $ 455,860 $ 443,404
Trade accounts receivable, less allowance for doubtful
accounts of $14,827, $12,966 and $12,949............... 1,212,165 1,019,674 1,019,232
Employee accounts receivable (Note 2).................... 37,424 6,962 4,239
Prepaid expenses......................................... 30,713 34,514 28,488
Broadcast rights......................................... 120,661 61,718 76,914
----------- ---------- ----------
Total current assets............................... 2,658,323 1,578,728 1,572,277
----------- ---------- ----------
Property, plant and equipment (Notes 2, 3 and 8)......... 5,141,573 5,092,773 4,929,149
Less accumulated depreciation............................ (3,233,879) (3,377,482) (3,209,563)
----------- ---------- ----------
Property, plant and equipment...................... 1,907,694 1,715,291 1,719,586
----------- ---------- ----------
Broadcast rights, less current portion................... 161,933 39,288 84,416
----------- ---------- ----------
Goodwill, less accumulated amortization of $637,439,
$531,199 and $424,959.................................. 3,612,152 3,718,392 3,824,632
----------- ---------- ----------
Other assets............................................. 2,530 2,530 2,530
----------- ---------- ----------
Total assets.................................... $ 8,342,632 $7,054,229 $7,203,441
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' AND PARTNERS' EQUITY
Current liabilities:
Note payable -- related party (Notes 2 and 4)............ $ 99,524 $ 99,524 $ 99,524
Current portion of long-term debt-related party (Notes 2
and 6)................................................. 73,791 66,850 60,563
Current portion of long-term capital lease
obligations -- related party (Notes 2 and 8)........... 169,191 119,053 120,621
Current portion of contracts payable for broadcast rights
(Note 5)............................................... 156,370 45,056 61,752
Accounts payable:
Trade.................................................. 39,593 29,485 42,216
Related party.......................................... -- -- 32,509
Accrued liabilities (Notes 2 and 4)...................... 329,155 241,071 251,224
----------- ---------- ----------
Total current liabilities.......................... 867,624 601,039 668,409
Long-term debt -- related party less current portion
(Notes 2
and 6)................................................. 3,857,985 3,931,776 3,998,626
Long-term capital lease obligations -- related party less
current portion (Notes 2 and 8)........................ 501,032 473,200 592,253
Contracts payable for broadcast rights less current
portion (Note 5)....................................... 169,594 72,087 100,094
----------- ---------- ----------
Total liabilities............................... 5,396,235 5,078,102 5,359,382
----------- ---------- ----------
Commitments (Note 9)
STOCKHOLDERS' AND PARTNERS' EQUITY:
Common stock -- no par value; 10,000 shares authorized;
issued 4,500 shares.................................... 142,641 142,641 142,641
Retained earnings........................................ 1,650,193 1,097,533 1,203,466
Partners' equity......................................... 1,153,563 735,953 497,952
----------- ---------- ----------
Total stockholders' and partners' equity........... 2,946,397 1,976,127 1,844,059
----------- ---------- ----------
Total liabilities and stockholders' and
partners' equity.............................. $ 8,342,632 $7,054,229 $7,203,441
=========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-41
<PAGE> 157
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
COMBINED STATEMENTS OF INCOME AND STOCKHOLDERS'
AND PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Sales:
Local................................... $1,596,135 $ 1,631,390 $ 1,566,600
Regional................................ 2,823,514 2,157,497 2,222,178
National................................ 1,511,000 1,397,332 1,390,684
Barter transactions..................... 69,420 108,880 105,914
---------- ----------- -----------
Total sales..................... 6,000,069 5,295,099 5,285,376
---------- ----------- -----------
LESS COMMISSIONS:
Agency.................................. (743,803) (590,481) (599,079)
Representatives......................... (101,094) (94,995) (94,464)
---------- ----------- -----------
Total commissions............... (844,897) (685,476) (693,543)
---------- ----------- -----------
Net sales....................... 5,155,172 4,609,623 4,591,833
CBS income................................ 897,179 942,554 935,319
Production income......................... 38,789 48,330 69,020
Other..................................... 10,818 3,595 7,912
---------- ----------- -----------
Total revenues.................. 6,101,958 5,604,102 5,604,084
---------- ----------- -----------
OPERATING EXPENSES:
Technical................................. 282,261 302,984 281,425
Programming............................... 1,166,608 1,075,167 1,058,516
Sales..................................... 549,422 525,582 614,435
General (Note 2).......................... 1,639,130 1,610,016 1,547,380
Depreciation.............................. 442,290 408,918 426,101
Amortization of goodwill.................. 106,240 106,240 106,240
---------- ----------- -----------
Total operating expenses........ 4,185,951 4,028,907 4,034,097
---------- ----------- -----------
Income from operations.................... 1,916,007 1,575,195 1,569,987
OTHER INCOME (EXPENSES):
Interest expense (Notes 2 and 6).......... (472,213) (478,070) (497,159)
Gain on sale of equipment................. 33,765 6,850 2,575
---------- ----------- -----------
Income before income taxes................ 1,477,559 1,103,975 1,075,403
Income taxes -- state..................... 36,391 20,628 29,091
---------- ----------- -----------
Net income...................... 1,441,168 1,083,347 1,046,312
Distributions............................. (470,898) (951,279) (556,354)
Stockholders' and partners' equity,
beginning of year....................... 1,976,127 1,844,059 1,354,101
---------- ----------- -----------
Stockholders' and partners' equity, end of
year.................................... $2,946,397 $ 1,976,127 $ 1,844,059
========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-42
<PAGE> 158
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
COMBINED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $1,441,168 $ 1,083,347 $1,046,312
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 442,290 408,918 426,101
Amortization of goodwill.................. 106,240 106,240 106,240
Amortization of broadcast rights.......... 115,917 87,774 90,544
Gain on sale of equipment................. (33,765) (6,850) (2,575)
Payments on contracts payable for
broadcast rights....................... (88,684) (72,153) (64,981)
Change in operating assets and
liabilities:
Increase in trade accounts
receivable........................... (192,491) (442) (69,480)
Increase in employee accounts
receivable........................... (30,462) (2,723) (4,165)
Decrease (increase) in prepaid expenses
and other assets..................... 3,801 (6,026) 708
Increase (decrease) in accounts
payable.............................. 10,108 (45,240) (234,731)
Increase (decrease) in accrued
liabilities.......................... 88,084 (10,153) 103,285
---------- ----------- ----------
Net cash provided by operating
activities..................... 1,862,206 1,542,692 1,397,258
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment............. 33,765 6,850 2,575
Capital expenditures........................ (417,873) (404,623) (313,298)
---------- ----------- ----------
Net cash used in investing
activities..................... (384,108) (397,773) (310,723)
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations....... (138,850) (120,621) (128,575)
Payments on long-term debt.................. (66,850) (60,563) (104,867)
Distributions to shareholders and
partners.................................. (470,898) (951,279) (556,354)
---------- ----------- ----------
Net cash used in financing
activities..................... (676,598) (1,132,463) (789,796)
---------- ----------- ----------
Net increase in cash........................ 801,500 12,456 296,739
Cash at beginning of year................... 455,860 443,404 146,665
---------- ----------- ----------
Cash at end of year......................... $1,257,360 $ 455,860 $ 443,404
========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest.................................. $ 437,883 $ 472,787 $ 530,497
========== =========== ==========
Income taxes -- state..................... $ 20,628 $ 29,091 $ 36,189
========== =========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-43
<PAGE> 159
KXII BROADCASTING, INC.
KXII TELEVISION, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED FOR 1997 AND 1996)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPAL BUSINESS ACTIVITY
These combined financial statements include the accounts of KXII
Broadcasters, Inc. ("KXII, Inc.") and KXII Television, Ltd. ("KXII, Ltd.")
(collectively, the "Companies"). KXII, Inc. is an S Corporation that was created
in December 1992 to hold the assets, FCC license and CBS network affiliation
agreement for the operation of KXII Television Channel 12 ("KXII Channel 12").
KXII Channel 12 is a television broadcasting station with studios in Sherman,
Texas and Ardmore, Oklahoma. KXII Channel 12's broadcast signal covers a radius
of 75 miles in north Texas and south Oklahoma. As part of the broadcast
operations, KXII, Inc. extends credit to advertising clients in the broadcast
area.
KXII, Ltd.(a limited partnership) was formed in January 1996 to support the
operations of KXII, Inc. by supplying the sales and marketing activities of KXII
Channel 12. KXII, Inc. is the general partner of KXII, Ltd., while the other
limited partners of KXII, Ltd. are the same individuals as the shareholders of
KXII, Inc.
(B) PRINCIPLES OF COMBINATION
The accompanying combined financial statements present the combination of
the financial statements of KXII, Inc. and KXII, Ltd. in order to give a more
accurate presentation of the operations of KXII Channel 12. Material
intercompany transactions and balances have been eliminated in combination.
(C) CASH EQUIVALENTS
The Companies consider all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents. There were no cash
equivalents at December 31, 1998, 1997 or 1996.
(D) PROPERTY, PLANT AND EQUIPMENT
Property and equipment are valued at cost. Plant and equipment under
capital leases are stated at the present value of minimum lease payments.
Maintenance and repair costs are charged to expense as incurred. Gains and
losses on disposition of property and equipment are reflected in income.
Depreciation is computed on the straight-line and accelerated methods for
financial accounting purposes, based on the estimated useful lives of the assets
which range from five to thirty nine years.
(E) GOODWILL
Goodwill represents the excess cost over net assets acquired when KXII
Channel 12 was purchased by a related entity in 1986. On December 31, 1992, the
operating assets of
F-44
<PAGE> 160
KXII BROADCASTING, INC.
KXII TELEVISION, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
KXII Channel 12 were transferred to KXII, Inc. In addition, certain assets of
K-Twelve, Ltd. were purchased for $4,249,591 by KXII, Inc. for a note payable to
the related entity. The goodwill is being amortized on a straight-line basis
over 40 years. KXII, Inc. assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation.
(F) BARTER TRANSACTIONS
The Companies enter into agreements in which advertising time is traded for
various products or services. Barter transactions are reported at the normal
advertising rates in effect. Revenue or expense and a corresponding asset or
liability are reported when advertisements are aired or when goods and services
are received.
(G) ADVERTISING
Advertising costs, which are principally included in sales expenses, are
expensed as incurred. Advertising expense was $26,373, $42,059, and $7,210 for
the years ended December 31, 1998, 1997, and 1996, respectively.
(H) INCOME TAXES
KXII, Inc. is an S corporation pursuant to the Internal Revenue Service
Code. In general, the federal income tax which results from taxable income
generated in an S corporation is the liability of the individual stockholders.
KXII, Ltd. is taxed as a partnership. No provision is made for income
taxes, since a partnership is not a taxable entity. The income of the
partnership flows through to the partners to be taxed at the individual level.
Taxes on income which are reflected in the combined financial statements
represent current state franchise taxes for Texas and Oklahoma.
(I) FCC LICENSE AND CBS NETWORK AFFILIATION AGREEMENT
KXII, Inc. has received an FCC license dated July 24, 1998 which expires in
August 2006. This license allows KXII, Inc. to broadcast its signal for KXII
Channel 12.
KXII, Inc. also has a network affiliation agreement with CBS for the period
January 1, 1996 to December 31, 2000. Under the agreement, KXII, Inc. will
receive various payments as well as television programs and advertising from CBS
as part of the agreement to air CBS programming.
(J) BROADCAST RIGHTS
Broadcast rights consist principally of rights to broadcast syndicated
programs, sports and feature films and are stated at the lower of cost or
estimated net realizable value. The
F-45
<PAGE> 161
KXII BROADCASTING, INC.
KXII TELEVISION, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
total cost of these rights is recorded as an asset and a liability when the
program becomes available for broadcast. The amount recorded as an asset is
charged to operations based on the number of programs to be aired over the
broadcast period. The liability is reduced as payments are made on the contract.
The current portion of broadcast rights represents those rights available for
broadcast that are expected to be amortized in the succeeding year.
(K) USE OF ESTIMATES
The preparation of the accompanying combined financial statements in
conformity with generally accepted accounting principles requires management to
make certain estimates and assumptions that directly affect the results of
reported assets, liabilities, revenue and expenses. Actual results may differ
from these estimates.
(L) CREDIT RISK CONCENTRATIONS
At December 31, 1998, and at various times during the three years then
ended, the balance of cash at one financial institution exceeded the amount of
federal deposit insurance coverage.
2. RELATED PARTY TRANSACTIONS
K-Twelve, Ltd. is a limited partnership, which is largely owned by the same
shareholders as KXII, Inc. KXII, Inc. remitted $335,396 to K-Twelve, Ltd. in
each of 1998, 1997 and 1996 in connection with the use of various assets and
services provided. Because this transaction is between related parties, it has
been recorded as a capital lease and management fee for financial statements
purposes. Principal and interest payments of $113,617 have been recorded to
represent a capital lease for the broadcast studios and equipment in Sherman,
Texas and Ardmore, Oklahoma, with the remainder, $221,779, reflected as
management fees. KXII, Inc. also has a note payable to K-Twelve, Ltd. for the
purchase of certain assets in 1992, which is discussed further in Note 6.
KXII, Inc. also leases certain equipment under capital lease arrangements
from an entity which is owned in part by a shareholder of KXII, Inc., as
discussed in Note 8.
Other transactions resulting in payments to related parties were as
follows:
- Note payable of $99,524 as of December 31, 1998, 1997, and 1996 and
accrued interest payable of $24,458, $18,487, and $12,515 at December 31,
1998, 1997, and 1996, respectively, to a director of KXII, Inc. Interest
expense of $5,971 was accrued during each of 1998, 1997, and 1996.
- Management fees of $199,200, $199,200, and $124,500 were paid during
1998, 1997, and 1996, respectively, to officers of KXII, Inc. Management
fees of $49,800, $49,800, and $124,500 were paid during 1998, 1997, and
1996, respectively, to officers of KXII, Ltd.
F-46
<PAGE> 162
KXII BROADCASTING, INC.
KXII TELEVISION, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- Fees to the Board of Directors of KXII, Inc. of $30,000 were paid during
each of 1998, 1997, and 1996.
- At December 31, 1998, there was an advance of $32,388 due from a
shareholder of KXII, Inc.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998, 1997 and 1996 consisted
of the following:
<TABLE>
<CAPTION>
ESTIMATED
1998 1997 1996 USEFUL LIVES
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Buildings.......................... $ 562,318 562,318 559,566 15 to 39 years
Transmitter and tower.............. 1,447,816 1,041,592 1,040,467 5 to 39 years
Equipment.......................... 2,267,128 2,546,230 2,452,027 5 to 7 years
Furniture and fixtures............. 261,880 367,917 350,183 5 to 7 years
Automobiles........................ 372,405 344,690 296,880 5 years
Airplane........................... 230,026 230,026 230,026 5 years
---------- ---------- ----------
$5,141,573 5,092,773 4,929,149
========== ========== ==========
</TABLE>
4. NOTE PAYABLE -- RELATED PARTY
As of January, 1995, KXII, Inc. purchased 500 shares of stock from a former
stockholder for $109,524. This amount was to be paid in installments through
December 31, 1998, with interest on the unpaid balance at a per annum rate of
6%; however, it was still outstanding at December 31, 1998. At December 31,
1998, 1997, and 1996, there was a balance of $99,524 owed to the former
stockholder, plus accrued interest of $24,458, $18,487, and $12,515 at December
31, 1998, 1997, and 1996, respectively.
5. CONTRACTS PAYABLE FOR BROADCAST RIGHTS
Contracts payable for broadcast rights are classified as current or
long-term liabilities in accordance with the payment terms of the contracts.
Required payments under contractual agreements for broadcast rights recorded at
December 31, 1998 were as follows:
<TABLE>
<S> <C>
1999........................................................ $156,370
2000........................................................ 99,394
2001........................................................ 10,530
2002........................................................ 14,040
2003........................................................ 14,040
Thereafter.................................................. 31,590
--------
$325,964
========
</TABLE>
F-47
<PAGE> 163
KXII BROADCASTING, INC.
KXII TELEVISION, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT -- RELATED PARTY
On December 31, 1992, KXII, Inc., purchased certain assets of K-Twelve,
Ltd. for a note payable in the amount of $4,249,591. The note, which bears
interest at 10% per annum, is due in quarterly payments of $116,064, including
interest, with the final payment due on December 31, 2017. The balance of the
note was $3,931,776, $3,998,626, and $4,059,189 at December 31, 1998, 1997, and
1996, respectively, and interest expense of $397,407, $403,695, and $409,390 was
accrued during 1998, 1997, and 1996, respectively. Following is a schedule of
future debt payments at December 31, 1998.
<TABLE>
<S> <C>
1999........................................................ $ 73,791
2000........................................................ 81,450
2001........................................................ 89,906
2002........................................................ 99,239
2003........................................................ 109,541
Thereafter.................................................. 3,477,849
----------
3,931,776
Less current portion........................................ 73,791
----------
$3,857,985
==========
</TABLE>
7. RETIREMENT PLAN
The Companies have an Individual Retirement Account Plan and Trust (the
"Plan") for their employees. All employees who have completed at least three
years of continuous service with one or more of the Companies are eligible to
participate. In order to participate in the Plan, eligible employees are
required to contribute to the trust a portion of their base annual compensation,
which will be matched by the Companies' contribution of $4.00 for every $3.00
contributed by the employees. The maximum annual per-employee contribution to
the Plan is $600. The employees are fully vested in all contributions made to
their trust accounts. The Companies made contributions of $13,526, $9,922, and
$11,520 for the years ended December 31, 1998, 1997, and 1996, respectively.
8. LEASES
KXII, Inc. leases certain equipment and buildings from related entities
under capital leases. The equipment is capitalized in the combined balance sheet
at net book value of $902,975, $596,994 and $704,650 at December 31, 1998, 1997
and 1996, respectively. The following is a schedule by years of future minimum
lease payments under capital leases together with the present value of the net
minimum lease payments as of December 31, 1998:
<TABLE>
<S> <C>
Year Ending December 31,
1999................................................... $230,480
2000................................................... 220,637
2001................................................... 169,556
</TABLE>
F-48
<PAGE> 164
KXII BROADCASTING, INC.
KXII TELEVISION, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
2002................................................... 169,556
2003................................................... 23,308
--------
Total minimum lease payments................................ 813,537
Less: amount representing interest at 10.0% to 12.0%........ 143,314
Less: current portion....................................... 169,191
--------
Long-term capital lease obligations less current portion.... $501,032
========
</TABLE>
9. COMMITMENTS
KXII, Inc. has a buy-sell agreement to purchase the stock of the station
manager (500 shares) for book value as of the prior year-end, when and if
certain "triggering events" occur. As of December 31, 1998, none of the
"triggering events" had occurred.
KXII, Inc. has employment contracts with three key members of its broadcast
team. These contracts provide stated annual salaries for two and three-year
periods ending in 2000 and 2001.
Under various program license agreements, KXII, Inc. is obligated to
broadcast certain programs a specified number of times. In addition, as stated
in Note 1, KXII, Inc. has certain broadcast and other requirements in order to
maintain its FCC license and CBS network affiliation.
10. SALE OF THE COMPANIES
KXII Broadcasters, Ltd. (see Note 11 below) and KXII, Ltd. have signed an
agreement with Gray Communications Systems, Inc. to sell substantially all of
the assets of the Companies for an aggregate purchase price of approximately
$41.5 million. An application for the transfer of license has been submitted to
the Federal Communications Commission for approval.
11. SUBSEQUENT EVENTS
On April 19, 1999, the shareholders of KXII, Inc. contributed their stock
to a newly formed corporation that subsequently contributed the stock to two
newly formed subsidiaries. As permitted under the Texas Business Corporation Act
and the Texas Revised Partnership Act, KXII, Inc. then was converted to a Texas
limited partnership, KXII Broadcasters, Ltd. The broadcast operations of KXII
Channel 12 will remain in the new partnership.
F-49
