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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GRAY COMMUNICATIONS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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GEORGIA 4833 58-0285030
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
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4370 PEACHTREE ROAD, NE JAMES C. RYAN
ATLANTA, GEORGIA 30319 4370 PEACHTREE ROAD, NE
(404) 504-9828 ATLANTA, GEORGIA 30319
(Address, including zip code, (404) 504-9828
and telephone number, including (Name, address, including zip code, and
area code, of registrant's telephone number, including area code, of
principal executive offices) agent for service)
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COPY TO:
HENRY O. SMITH III, ESQ.
PROSKAUER ROSE LLP
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 969-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective and the
effective time of the proposed acquisitions by Gray Communications Systems, Inc.
of each of KWTX Broadcasting Company and Brazos Broadcasting Co. and the assets
of KXII Broadcasters Ltd., and K-Twelve, Ltd., as described in the (1) Agreement
and Plan of Merger among Gray Communications Systems, Inc., KWTX Broadcasting
Company and a wholly-owned subsidiary of Gray Communications Systems, Inc., (2)
Agreement and Plan of Merger among Gray Communication Systems, Inc., Brazos
Broadcasting Co. and a wholly-owned subsidiary of Gray Communications Systems,
Inc. and (3) the Asset Purchase Agreement among Gray Communications Systems,
Inc. and KXII Broadcasters, Ltd., K-Twelve, Ltd. and certain other parties,
attached as Appendices A, B and C to the proxy statement/prospectus contained in
this Registration Statement. [ ]
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If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
registration statement for the same offering. [ ]
If this form is post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT(2) PRICE(2) REGISTRATION FEE(3)(4)
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Class B Common Stock, par value $.01
per share.......................... 7,926,000 -- $25,526,399 $7,096.34
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(1) Represents the maximum number of shares of Gray class B common stock that
may be issued in connection with the proposed acquisition based on the price
of Gray class B common stock on August 12, 1999.
(2) Estimated solely for purposes of calculation of the registration fee.
(3) Calculated pursuant to Rule 457(f)(2).
(4) The registrant has previously paid a registration fee of $4,881.71 in
connection with the filing of its preliminary proxy materials contained in
this Registration Statement.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 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> 3
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
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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:
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- 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> 4
TABLE OF CONTENTS
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NO.
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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
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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
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PAGE
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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
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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
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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
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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
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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.
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iii
<PAGE> 7
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.
1
<PAGE> 8
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.
2
<PAGE> 9
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.
3
<PAGE> 10
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.
4
<PAGE> 11
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.
5
<PAGE> 12
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
6
<PAGE> 13
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>
7
<PAGE> 14
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.
8
<PAGE> 15
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
9
<PAGE> 16
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;
10
<PAGE> 17
- 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.
11
<PAGE> 18
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;
12
<PAGE> 19
- 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.
13
<PAGE> 20
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.
14
<PAGE> 21
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
15
<PAGE> 22
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
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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
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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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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> 33
<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> 34
- 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> 35
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> 36
<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> 37
- -------------------------
(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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
$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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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
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<PAGE> 63
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.
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<PAGE> 64
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> 65
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 EQUIT
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> 66
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>
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<PAGE> 67
(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.
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<PAGE> 68
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> 69
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> 70
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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<PAGE> 71
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> 72
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> 73
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
67
<PAGE> 74
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.
68
<PAGE> 75
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> 76
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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<PAGE> 77
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>
71
<PAGE> 78
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
72
<PAGE> 79
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.
73
<PAGE> 80
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> 81
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> 82
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
76
<PAGE> 83
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>
77
<PAGE> 84
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.
78
<PAGE> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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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<PAGE> 92
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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<PAGE> 93
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.
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<PAGE> 94
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.
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<PAGE> 95
(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.
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<PAGE> 96
(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."
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<PAGE> 97
(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.
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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>
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<PAGE> 99
- -------------------------
(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.
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<PAGE> 100
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
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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
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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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<PAGE> 104
$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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<PAGE> 105
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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<PAGE> 108
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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<PAGE> 109
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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<PAGE> 110
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.
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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.
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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 Securities and Exchange Securities and Exchange
Commission Commission 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
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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.
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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> 118
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> 119
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> 120
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> 121
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> 122
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> 123
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> 124
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> 125
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> 126
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> 127
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> 128
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> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
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> 139
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> 140
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> 141
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> 142
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> 143
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> 144
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> 145
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> 146
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> 147
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> 148
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> 149
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> 150
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> 151
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> 152
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> 153
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> 154
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> 155
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> 156
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> 157
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> 158
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> 159
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> 160
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> 161
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> 162
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> 163
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> 164
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> 165
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
<PAGE> 166
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
GRAY COMMUNICATIONS SYSTEMS, INC.,
GRAY COMMUNICATIONS OF TEXAS, INC.
AND
KWTX BROADCASTING COMPANY
DATED AS OF APRIL 13, 1999
<PAGE> 167
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
A-1
SECTION 1. DEFINITIONS............................................
1.1 Affiliate................................................... A-1
1.2 Agreement................................................... A-1
1.3 Assignment Application...................................... A-2
1.4 Brazos Broadcasting Company................................. A-2
1.5 Brazos Shares............................................... A-2
1.6 Closing..................................................... A-2
1.7 Closing Date................................................ A-2
1.8 Code........................................................ A-2
1.9 Company..................................................... A-2
1.10 Company Common Stock........................................ A-2
1.11 Earnest Money............................................... A-2
1.12 Effective Time.............................................. A-2
1.13 Encumbrances................................................ A-2
1.14 Environmental Claim......................................... A-2
1.15 Environmental Matter........................................ A-2
1.16 Escrow Agent................................................ A-2
1.17 FCC......................................................... A-2
1.18 FCC Consent................................................. A-2
1.19 FCC Licenses................................................ A-3
1.20 Final Order................................................. A-3
1.21 Gray........................................................ A-3
1.22 Gray Common Stock........................................... A-3
1.23 Governmental Authority...................................... A-3
1.24 HSR Act..................................................... A-3
1.25 Intangible Property......................................... A-3
1.26 KBTX Agreement.............................................. A-3
1.27 Knowledge, Know, Known...................................... A-3
1.28 Law......................................................... A-3
1.29 Leased Property............................................. A-3
1.30 Lorena Property............................................. A-4
1.31 Material Adverse Change or Material Adverse Effect.......... A-4
1.32 Merger...................................................... A-4
1.33 Merger Consideration........................................ A-4
1.34 NYSE........................................................ A-4
1.35 Permits..................................................... A-4
1.36 Permitted Liens............................................. A-4
1.37 Person...................................................... A-4
1.38 Preliminary Balance Sheets.................................. A-4
1.39 Program Rights.............................................. A-4
1.40 Real Property............................................... A-4
1.41 SEC......................................................... A-5
1.42 Schedule.................................................... A-5
1.43 Shareholder Representative.................................. A-5
1.44 Shareholders................................................ A-5
1.45 Shares...................................................... A-5
1.46 Station..................................................... A-5
</TABLE>
i
<PAGE> 168
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1.47 Tangible Personal Property.................................. A-5
1.48 Tax or Taxes................................................ A-5
1.49 Tax Returns................................................. A-5
1.50 Tradeout Agreement.......................................... A-5
1.51 Working Capital Surplus..................................... A-5
A-6
SECTION 2. MERGER.................................................
2.1 Merger...................................................... A-6
2.2 Time and Place of Closing................................... A-6
2.3 Effective Time.............................................. A-6
2.4 Articles of Incorporation................................... A-6
2.5 Bylaws...................................................... A-6
2.6 Directors and Officers...................................... A-7
2.7 Reorganization.............................................. A-7
A-7
SECTION 3. MERGER CONSIDERATION; EXCHANGE PROCEDURES..............
3.1 Merger Consideration........................................ A-7
3.2 Cash Percentage Election.................................... A-8
3.3 Rights As Shareholders; Share Transfers..................... A-10
3.4 Fractional Shares........................................... A-10
3.5 Exchange Procedures......................................... A-11
3.6 Treasury Shares............................................. A-12
3.7 Earnest Money............................................... A-12
3.8 Determination of Working Capital Surplus.................... A-12
3.9 Accounting Principles....................................... A-13
A-14
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
SHAREHOLDERS.....................................................
4.1 Organization, Corporate Power, and Qualifications of the
Company..................................................... A-14
4.2 Authorization and Validity.................................. A-14
4.3 Ownership of Shares......................................... A-15
4.4 Capitalization of the Company............................... A-15
4.5 Ownership of Brazos Shares; Investments and Subsidiaries.... A-15
4.6 Noncontravention............................................ A-15
4.7 Consents, Approvals......................................... A-16
4.8 Financial Statements........................................ A-16
4.9 Title to and Condition of Real Property..................... A-16
4.10 Title to and Condition of Tangible Personal Property........ A-17
4.11 Litigation.................................................. A-18
4.12 Environmental Matters....................................... A-18
4.13 Trade Names, Trade Marks, etc............................... A-20
4.14 Governmental Authorization and Compliance With Laws......... A-20
4.15 FCC Licenses................................................ A-20
4.16 Labor Relations............................................. A-21
4.17 Insurance................................................... A-21
4.18 Accounts Receivable......................................... A-22
4.19 Accounts Payable............................................ A-22
4.20 Tax Returns, Audits, and Liabilities........................ A-22
4.21 Bank Accounts............................................... A-22
4.22 Certain Contracts........................................... A-22
4.23 Employees................................................... A-23
4.24 Employee Benefit Plans...................................... A-23
</TABLE>
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<TABLE>
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<S> <C> <C>
4.25 No Brokers.................................................. A-24
4.26 Computer Software and Database.............................. A-24
4.27 Interested Transactions..................................... A-25
4.28 Full Disclosure............................................. A-25
4.29 Reliance and Survival....................................... A-25
A-25
SECTION 5. REPRESENTATIONS AND WARRANTIES OF GRAY AND MERGER
CORP.............................................................
5.1 Organization and Existence.................................. A-25
5.2 Authorization and Validity.................................. A-25
5.3 Noncontravention............................................ A-25
5.4 Consents, Approvals......................................... A-26
5.5 No Brokers.................................................. A-26
5.6 Capitalization.............................................. A-26
5.7 SEC Filings; Financial Statements........................... A-27
5.8 Financial Ability........................................... A-27
A-27
SECTION 6. FCC APPROVAL...........................................
6.1 Filing and Prosecution of Application....................... A-27
6.2 Expenses.................................................... A-27
6.3 Time for FCC Consent........................................ A-28
6.4 Control of Station.......................................... A-28
6.5 No Reversion of Licenses.................................... A-28
6.6 Regulatory Matters.......................................... A-28
A-28
SECTION 7. SPECIAL COVENANTS AND AGREEMENTS.......................
7.1 HSR Act..................................................... A-28
7.2 Confidentiality............................................. A-29
7.3 Cooperation................................................. A-29
7.4 Access to Books and Records................................. A-29
7.5 Certain Investments......................................... A-29
7.6 Acquisition Proposals....................................... A-29
7.7 Meetings of Shareholders.................................... A-30
7.8 Meetings of Gray and Merger Corp. Shareholders.............. A-30
7.9 Registration Statements..................................... A-30
7.10 Publicity................................................... A-32
7.11 Registration and Listing of Gray Common Stock............... A-32
7.12 Supplying of Financial Statements........................... A-32
7.13 Supplements to Schedules.................................... A-32
7.14 Affiliates of the Company................................... A-33
A-33
SECTION 8. CONDITIONS PRECEDENT FOR THE COMPANY...................
8.1 Representations and Warranties.............................. A-33
8.2 Performance of this Agreement............................... A-33
8.3 Proceedings................................................. A-33
8.4 FCC Consent................................................. A-33
8.5 Litigation.................................................. A-34
8.6 Expiration of HSR Waiting Periods........................... A-34
8.7 Effective Registration Statement............................ A-34
8.8 Legal Opinion............................................... A-34
8.9 Tax Opinion................................................. A-35
8.10 NYSE Listing................................................ A-36
8.11 Voting Agreement and Irrevocable Proxy...................... A-36
</TABLE>
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A-36
SECTION 9. CONDITIONS PRECEDENT FOR GRAY AND MERGER CORP..........
9.1 Representations and Warranties.............................. A-36
9.2 Performance of this Agreement............................... A-36
9.3 Proceedings................................................. A-36
9.4 FCC Consent................................................. A-36
9.5 Litigation.................................................. A-37
9.6 Opinions of Counsel for the Company......................... A-37
9.7 Title Insurance Policies.................................... A-37
9.8 Environmental Audit......................................... A-38
9.9 Expiration of HSR Waiting Periods........................... A-38
9.10 Consummation of Related Transactions........................ A-38
9.11 Effective Registration Statement............................ A-38
9.12 Tax Opinion................................................. A-38
9.13 NYSE Listing................................................ A-39
9.14 Gray Shareholder Approval................................... A-39
9.15 Affiliates of the Company................................... A-39
9.16 Voting Agreement and Irrevocable Proxy...................... A-39
9.17 Shareholder Approval........................................ A-39
9.18 Due Diligence and Schedules................................. A-39
A-39
SECTION 10. CLOSING...............................................
10.1 Deliveries by the Company................................... A-39
10.2 Postponement of Closing Date................................ A-40
A-40
SECTION 11. INDEMNIFICATION.......................................
11.1 By the Shareholders......................................... A-40
11.2 By Gray and Merger Corp..................................... A-41
11.3 Procedure for Indemnification............................... A-41
11.4 Escrow Fund................................................. A-43
11.5 Limitation on Damages....................................... A-43
A-44
SECTION 12. CONDUCT OF BUSINESS PENDING CLOSING...................
A-45
SECTION 13. TERMINATION...........................................
A-46
SECTION 14. MISCELLANEOUS PROVISIONS..............................
14.1 Expenses of Negotiation and Transfer........................ A-46
14.2 Schedules................................................... A-46
14.3 Survival.................................................... A-46
14.4 Entire Agreement; Amendment; Waivers........................ A-46
14.5 Headings.................................................... A-47
14.6 Further Assurances.......................................... A-47
14.7 Situs and Construction...................................... A-47
14.8 Notices..................................................... A-47
14.9 Binding Effect.............................................. A-47
14.10 Execution in Counterparts................................... A-48
14.11 Shareholder Representative.................................. A-48
</TABLE>
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INDEX OF SCHEDULES
<TABLE>
<S> <C> <C>
Schedule 4.3 -- Stock Ownership
Schedule 4.5 -- Ownership of Brazos Shares; Investments and Subsidiaries
Schedule 4.8 -- Financial Statements
Schedule 4.9(1) -- Description of Real Property
Schedule 4.9(3) -- Ground Leases
Schedule 4.9(4) -- Tenant Leases
Schedule 4.10(1) -- Tangible Personal Property
Schedule 4.10(2) -- Leased Tangible Personal Property
Schedule 4.11 -- Litigation
Schedule 4.12 -- Hazardous Substance Sites
Schedule 4.13 -- Trade Names, Trade Marks, Etc.
Schedule 4.14 -- Governmental Licenses, Certificates, Permits and
Approvals
Schedule 4.15 -- FCC Licenses
Schedule 4.16 -- Employment and Related Agreements
Schedule 4.17 -- Insurance
Schedule 4.20 -- Tax Matters
Schedule 4.21 -- Bank Accounts
Schedule 4.22 -- Certain Contracts
Schedule 4.23 -- Employees
Schedule 4.24 -- Employee Benefit Plans
Schedule 4.28 -- Interested Transactions
</TABLE>
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INDEX OF EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit A -- Form of Shareholder Representative Appointment Agreement
Exhibit B -- Form of Escrow Agreement (Indemnification)
Exhibit C -- Form of Escrow Agreement (Earnest Money)
Exhibit D -- Form of Preliminary Balance Sheets
Exhibit E -- Form of Final Balance Sheets
Exhibit F -- Form of Opinion of Deaver & Deaver
Exhibit G -- Form of Opinion of Dennis Kelly
</TABLE>
vi
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and executed
as of April 13, 1999, by and among GRAY COMMUNICATIONS SYSTEMS, INC., a Georgia
corporation ("Gray"), GRAY COMMUNICATIONS OF TEXAS, INC., a Georgia corporation
and wholly-owned subsidiary of Gray ("Merger Corp.") and KWTX BROADCASTING
COMPANY, a Texas corporation (the "Company").
RECITALS
The Company is the licensee of television station KWTX-TV, Channel 10, in
Waco, Texas (the "Station") pursuant to authorizations issued by the Federal
Communications Commission ("FCC"). The Boards of Directors of Gray, Merger Corp.
and the Company are of the opinion that the transactions described in this
Agreement are in the best interests of the parties and their respective
shareholders. This Agreement provides for the acquisition of the Company by Gray
through the merger of the Company with and into Merger Corp. At the Effective
Time of such merger, the outstanding shares of capital stock of the Company will
be converted into the right to receive shares of the common stock of Gray and
cash. As a result (i) the Shareholders will become shareholders of Gray, and
(ii) Merger Corp. will conduct the business and operations of the Company as a
wholly-owned subsidiary of Gray. It is the intention of the parties to this
Agreement that the merger contemplated by this Agreement qualify as a
"reorganization" within the meaning of Section 368 of the Code for federal
income tax purposes. Certain terms used in this Agreement are defined in Section
1 hereof.
The acquisition of the Company by Gray through the merger of the Company
with and into Merger Corp. is one of two related transactions involving the
acquisition of two television stations owned by the Company and Brazos
Broadcasting Company. Gray anticipates completing the acquisition of both
television stations after the parties have received approval from the FCC.
NOW, THEREFORE, in consideration of the foregoing, the mutual agreements,
covenants, representations and warranties contained herein, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and subject to the terms and conditions hereinafter set forth, the
parties hereto agree as follows:
SECTION 1. DEFINITIONS.
The following terms, when used in capitalized form within this Agreement,
or within any Exhibit or Schedule to this Agreement in which the terms are not
otherwise defined, shall have the following meanings:
1.1 "AFFILIATE" of a Person shall mean: (i) any Person directly, or
indirectly through one or more intermediaries, controlling, controlled by or
under common control with such Person; (ii) any officer, director, partner,
employee, agent, or representative or direct or indirect beneficial or legal
owner of any 10% or greater equity or voting interest of such Person; (iii) any
entity for which a Person described in (ii) above acts in any such capacity.
1.2 "AGREEMENT" shall mean this Agreement and Plan of Merger, and all
Exhibits, Schedules, certificates, and instruments attached hereto or referred
to herein.
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1.3 "ASSIGNMENT APPLICATION" shall have the meaning specified in Section
6.1 below.
1.4 "BRAZOS BROADCASTING COMPANY" shall mean Brazos Broadcasting Company,
a Texas corporation, with its principal offices at 4141 East 29th Street, Bryan,
Texas 77802, which owns television station KBTX, Channel 3, licensed to Bryan,
Texas.
1.5 "BRAZOS SHARES" shall mean 250 shares of the capital stock in Brazos
Broadcasting Company, owned by the Company, which constitute 50% of the shares
of capital stock issued and outstanding in Brazos Broadcasting Company.
1.6 "CLOSING" shall mean the consummation of the Merger pursuant to this
Agreement in accordance with the provisions of Section 10.
1.7 "CLOSING DATE" shall mean the date on which the Closing occurs, as
determined pursuant to Section 2.2.
1.8 "CODE" shall mean the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
1.9 "COMPANY" shall mean KWTX Broadcasting Company, as identified above, a
Texas corporation with its principal offices at 6700 American Plaza, Waco, Texas
76712.
1.10 "COMPANY COMMON STOCK" shall mean the common stock, no par value, of
the Company.
1.11 "EARNEST MONEY" shall mean the cash deposit in the amount of One
Million Dollars ($1,000,000) paid by Gray to the Escrow Agent upon the execution
of this Agreement, in the amount and in accordance with provisions set forth in
Section 3.7 below, together with interest thereon, if any.
1.12 "EFFECTIVE TIME" shall mean the later of (i) the date and time that
the Articles of Merger reflecting the Merger are filed with the Secretary of
State of the State of Texas (or such later date and time as may be specified in
the Articles of Merger) and (ii) the date and time that the Articles of Merger
reflecting the Merger are filed with the Secretary of State of the State of
Georgia (or such later date and time as may be specified in the Articles of
Merger).
1.13 "ENCUMBRANCES" shall mean security interests, mortgages, liens,
pledges, options, rights of first refusal, and other restrictions on the use or
transferability of property and claims or charges on any interest in property in
favor of a person other than the owner of the property, whether or not relating
to the extension of credit or the borrowing of money and whether or not existing
by reason of statute, contract, or common law.
1.14 "ENVIRONMENTAL CLAIM" shall have the meaning ascribed in Section
4.12(6)(a).
1.15 "ENVIRONMENTAL MATTER" shall have the meaning ascribed in Section
4.12(6)(a).
1.16 "ESCROW AGENT" shall mean American Bank, N.A., Waco, Texas.
1.17 "FCC" shall mean the Federal Communications Commission, as defined in
the recitals to this Agreement.
1.18 "FCC CONSENT" shall mean action by the FCC in the form of a public
notice or some other written document granting its consent to the Assignment
Application.
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1.19 "FCC LICENSES" shall mean all licenses and authorizations issued by
the FCC to the Company in connection with the business or operations of the
Station, including the right to use the call letters "KWTX-TV."
1.20 "FINAL ORDER" means action of the FCC approving the transfer of
control of the Company to Gray or Merger Corp., which action is no longer
subject to reconsideration or court review under the provisions of the
Communications Act of 1934, as amended, and with respect to which no timely
filed request for administrative or judicial review or stay is pending and as to
which the time for filing any such request, or for the FCC to set aside the
action on its own motion, has expired.
1.21 "GRAY" shall mean Gray Communications Systems, Inc., as identified
above, a Georgia corporation, with its principal offices at 4370 Peachtree Road,
Atlanta, Georgia 30319.
1.22 "GRAY COMMON STOCK" shall mean the Class B Common Stock, no par
value, of Gray, with identical rights to those shares issued under the initial
public offering of 3,500,000 shares as described in that one certain prospectus
dated September 24, 1996.
1.23 "GOVERNMENTAL AUTHORITY" shall mean any federal, state, county, local
or other governmental or public agency, instrumentality, commission, authority,
board or body.
1.24 "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and regulations promulgated thereunder.
1.25 "INTANGIBLE PROPERTY" shall mean all copyrights, trademarks, trade
names, service marks, service names, the call letters "KWTX-TV," licenses,
patents, permits, jingles, proprietary information, technical information and
data, computer software, formats, customer lists, advertiser lists, machinery
and equipment warranties, and other similar intangible property rights and
interests (other than the FCC Licenses)(and any goodwill associated with any of
the foregoing) applied for, issued to, or owned by the Company or under which
the Company is licensed or franchised and which are used or useful in the
business and operations of the Station, together with any additions thereto
between the date of this Agreement and the Closing Date.
1.26 "KBTX AGREEMENT" shall mean the Agreement and Plan of Merger dated
the same date as this Agreement for the merger of Brazos Broadcasting Company
with and into Merger Corp. or, in the event Gray and Merger Corp. exercise the
Cash Election Option (as defined in Section 3.1(3) herein), the merger of Merger
Corp. (or its permitted assignee) with and into Brazos Broadcasting Company.
1.27 "KNOWLEDGE," "KNOW," "KNOWN" and words of similar import, with
respect to the Company, shall mean collectively those facts actually known, now
or in the past, by the Company, Ray M. Deaver, Jim Baronet and M.N. Bostick.
1.28 "LAW" shall mean any federal, state, or local code, law, legal
principal, order, ordinance, regulation, rule, or statute of any Governmental
Authority.
1.29 "LEASED PROPERTY" shall mean any and all Real Property used or
occupied by the Company as lessee under any oral or written lease, together with
any additions thereto, and extensions or renewals thereof, between the date of
this Agreement and the Closing Date.
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1.30 "LORENA PROPERTY" shall mean a tract of 120.19 acres located near the
town of Lorena, Texas which the Company presently owns but which the Company
will transfer to Milford N. Bostick prior to the Closing.
1.31 "MATERIAL ADVERSE CHANGE" or "MATERIAL ADVERSE EFFECT" shall mean a
significant negative impact on the Company taken as a whole or the business of
the Station, excluding any negative impact attributable to (i) factors affecting
the television broadcasting industry generally, (ii) general national, regional,
or local economic conditions, or (iii) governmental or legislative laws, rules,
or regulations affecting the television broadcasting industry generally.
1.32 "MERGER" shall mean the merger of the Company with and into Merger
Corp. or, in the event Gray and Merger Corp. exercise the Cash Election Option
(as defined in Section 3.1(3) herein), the merger of Merger Corp. (or its
permitted assignee) with and into the Company.
1.33 "MERGER CONSIDERATION" shall mean the aggregate consideration to be
paid to the Shareholders pursuant to the Merger, as more fully defined in
Section 3.1(l).
1.34 "NYSE" shall mean the New York Stock Exchange.
1.35 "PERMITS" shall mean all licenses, permits, and other authorizations
(other than the FCC Licenses), issued to the Company by the Federal Aviation
Administration or any other federal, state, or local governmental authority in
connection with the conduct of the business and operations of the Station,
together with any additions, extensions, or renewals of same between the date of
this Agreement and the Closing Date.
1.36 "PERMITTED LIENS" shall mean (i) liens for Taxes and assessments not
yet due and payable, mechanics' and other statutory liens arising in the
ordinary course of business that secure obligations not delinquent, (ii)
restrictions or rights granted to Governmental Authorities under applicable Law,
that are not otherwise objectionable to Gray, and (iii) liens, restrictions and
easements on the Real Property (as defined below) that, in Gray's reasonable
judgment, do not detract from the value or impair the use of the property
subject thereto; provided, however, in no event shall "Permitted Liens" include
Encumbrances relating to the extension of credit or the borrowing of money.
1.37 "PERSON" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a business association,
corporation, general partnership, joint venture, limited partnership, limited
liability company, trust, or any person acting in a representative capacity.
1.38 "PRELIMINARY BALANCE SHEETS" shall have the meaning set forth in
Section 3.8(1) below.
1.39 "PROGRAM RIGHTS" shall mean all rights of the Company, presently
existing or obtained prior to the Closing, to broadcast television programs,
movies, and films, including all film and program rights under barter
agreements, as a part of the programming for the Station, for which the Company
is obligated to compensate the vendor of such Program Rights.
1.40 "REAL PROPERTY" shall mean all of the Company's real property and
interests in real property, purchase options, easements, licenses, rights to
access, rights of way, all buildings and other improvements thereon, and all
other real property interests which are used in the business or operations of
the Station, together with any additions thereto
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between the date of this Agreement and the Closing Date, but shall exclude the
Lorena Property.
1.41 "SEC" shall mean the Securities and Exchange Commission.
1.42 "SCHEDULE" shall mean those Schedules referred to in this Agreement
delivered concurrently with the execution of this Agreement and attached hereto
(or bound separately) or delivered pursuant to Section 9.18, all of which
Schedules are incorporated in and made a part hereof by reference.
1.43 "SHAREHOLDER REPRESENTATIVE" shall mean the Person(s) appointed as
the Shareholder Representative pursuant to the Shareholder Representative
Appointment Agreement, substantially in the form of Exhibit A to this Agreement,
which initially shall be Ray Deaver.
1.44 "SHAREHOLDERS" shall mean the shareholders of the Company.
1.45 "SHARES" shall mean One Thousand Five Hundred Fifty (1,550) shares of
the capital stock in the Company, owned by the Shareholders, which constitutes
one hundred percent (100%) of the shares of capital stock issued and outstanding
in the Company.
1.46 "STATION" shall mean KWTX-TV, Channel 10, a CBS affiliate licensed to
Waco, Texas, as identified above.
1.47 "TANGIBLE PERSONAL PROPERTY" shall mean all of the Company's fixed
assets, furniture, fixtures, equipment, machinery, motor vehicles, leasehold
improvements, office equipment, computer hardware, spare parts, inventory, and
other such tangible personal property which is used or useful in the conduct of
the business or operations of the Station, together with any additions,
replacements, or improvements thereto between the date of this Agreement and the
Closing Date.
1.48 "TAX" OR "TAXES" means taxes of any kind, levies or other like
assessments, customs, duties, imposts, charges or fees imposed or payable to the
United States, or any state, county, or local government, subdivision or agency
thereof, and in each instance, such term shall include any interest, penalties,
or additions to tax attributable to any such Tax.
1.49 "TAX RETURNS" means any returns, statements, filings, reports,
estimates, declarations, and forms relating to Taxes that the Company is
required to file, record, or deposit with any Governmental Authority, including
any attachment thereto or amendment thereof.
1.50 "TRADEOUT AGREEMENT" shall mean any written or oral contract,
agreement, or commitment of the Company, pursuant to which the Company has sold
or traded commercial air time of the Station in consideration of any property or
services in lieu of or in addition to cash, excluding all film and program
barter agreements.
1.51 "WORKING CAPITAL SURPLUS" shall mean the amount by which the current
assets and certain other assets of the Company or Brazos Broadcasting Company,
as the case may be, exceed its current liabilities, as reflected on the books of
the Company or Brazos Broadcasting Company, as the case may be, as of the close
of business on the day immediately preceding the Closing Date, determined in
accordance with the provisions of Section 3.8 and 3.9 below.
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SECTION 2. MERGER.
2.1 MERGER. Subject to the terms and conditions of this Agreement and
subject to Gray's and Merger Corp.'s exercise of the Cash Election Option
pursuant to Section 3.1(3), at the Effective Time, the Company shall be merged
with and into Merger Corp. in accordance with the applicable provisions of the
Georgia Business Corporation Code (the "GBCC") and the Texas Business
Corporation Act (the "TBCA") (the "Merger"). The separate corporate existence of
the Company shall cease and Merger Corp. shall be the surviving corporation
resulting from the Merger and continue to be a wholly-owned subsidiary of Gray
and shall continue to be governed by the Laws of the State of Georgia (Merger
Corp., as the surviving corporation in the Merger, sometimes being referred
herein as the "Surviving Corporation"). The Merger shall be consummated pursuant
to the terms of this Agreement, which has been approved and adopted by the
respective Boards of Directors of the Company, Merger Corp. and Gray. In the
event that Gray and Merger Corp. exercise the Cash Election Option, (i) the
Merger shall automatically without any further action by the parties be deemed
to be the merger of Merger Corp. (or its permitted assignee) with and into the
Company in accordance with the applicable provisions of the GBCC and the TBCA
and (ii) accordingly, the separate existence of Merger Corp. shall cease and the
Company (rather than Merger Corp.) shall be the surviving corporation resulting
from the Merger and shall continue to be governed by the Laws of the State of
Texas. In the event that Gray and Merger Corp. exercise the Cash Election
Option, the term "Surviving Corporation" shall automatically without any further
action by the parties be deemed to mean the Company and not Merger Corp. as
stated above.
2.2 TIME AND PLACE OF CLOSING. The closing (the "Closing") will take
place at 9:00 A.M. on the date that the Effective Time occurs at the offices of
Deaver & Deaver, 200 West Highway 6, Suite 501, Waco, Texas 76712, or at such
other time and date as the Company and Gray may mutually agree or such date to
which the Closing may be postponed pursuant to Section 10.2 (such actual date of
Closing, the "Closing Date").
2.3 EFFECTIVE TIME. The parties shall cause the Effective Time to occur
on the tenth (10th) day after the last of the conditions set forth in Sections 8
and 9 of this Agreement have been satisfied or waived in accordance with the
terms of this Agreement. Subject to the provisions of this Agreement, the
parties shall file Articles of Merger executed in accordance with the relevant
provisions of the TBCA and the GBCC and shall make all other filings or
recordings required under the TBCA and the GBCC. The Merger and other
transactions contemplated by this Agreement shall become effective on the date
and at the time the Articles of Merger reflecting the Merger become effective
with the Secretaries of State of the States of Texas and Georgia.
2.4 ARTICLES OF INCORPORATION. Subject to Gray's and Merger Corp.'s
exercise of the Cash Election Option described in Section 3.1(3) below, the
Articles of Incorporation of Merger Corp. in effect immediately prior to the
Effective Time shall be the Articles of Incorporation of the Surviving
Corporation until otherwise amended or repealed. In the event that Gray and
Merger Corp. exercise the Cash Election Option, the Articles of Incorporation of
the Company in effect immediately prior to the Effective Time shall be the
Articles of Incorporation of the Surviving Corporation until otherwise amended
or repealed.
2.5 BYLAWS. Subject to Gray's and Merger Corp.'s exercise of the Cash
Election Option described in Section 3.1(3) below, the Bylaws of Merger Corp. in
effect
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immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation until otherwise amended or repealed. In the event that Gray and
Merger Corp. exercise the Cash Election Option, the Bylaws of the Company in
effect immediately prior to the Effective Time shall be the Bylaws of the
Surviving Corporation until otherwise amended or repealed.
2.6 DIRECTORS AND OFFICERS. Whether or not the Cash Election Option is
exercised by Gray and Merger Corp., the directors and officers of Merger Corp.
in office immediately prior to the Effective Time, together with such additional
persons as may thereafter be elected, will serve as the directors and officers,
respectively, of the Surviving Corporation from and after the Effective Time in
accordance with the Bylaws of the Surviving Corporation and in accordance with
the terms of their original election.
2.7 REORGANIZATION. Subject to Gray's and Merger Corp.'s exercise of the
Cash Election Option described in Section 3.1(3) below, the parties hereby adopt
this Agreement as a plan of reorganization intended to qualify for tax-deferred
treatment under Section 368(a) of the Code. In the event that the Cash Election
Option is exercised by Gray and Merger Corp., the parties hereby adopt this
Agreement to be treated for federal income tax purposes as an acquisition of the
capital stock of the Company.
SECTION 3. MERGER CONSIDERATION; EXCHANGE PROCEDURES.
3.1. MERGER CONSIDERATION. Subject to the provisions of this Agreement,
at the Effective Time, automatically by virtue of the Merger and without any
action on the part of any party or Shareholder:
(1) Outstanding Company Common Stock. Subject to Gray's and Merger
Corp.'s exercise of the Cash Election Option described in Section 3.1(3)
below, each share (excluding shares held by the Company or any of its
subsidiaries or by Gray or any of its subsidiaries, in each case other than
in a fiduciary capacity ("Treasury Shares")) of the Company Common Stock,
issued and outstanding immediately prior to the Effective Time shall become
and be converted into the right to receive an amount in a combination of
cash and Gray Common Stock (as described in Sections 3.1(2) and 3.2 below)
equal to (A) the sum of (a) Seventy-Four Million Six Hundred Eighty
Thousand Dollars ($74,680,000) plus (b) the Working Capital Surplus of the
Company determined based on the Preliminary Balance Sheets plus (c) fifty
percent (50%) of the Working Capital Surplus of Brazos Broadcasting Company
determined based on the Preliminary Balance Sheets (such sum of clauses (a)
through (c) being referred to as the "Merger Consideration") divided by (B)
1,550 (such result of dividing (A) by (B) being referred to as the "Merger
Consideration Per Share").
(2) Cash and Gray Common Stock Components of Merger Consideration.
Subject to Gray's and Merger Corp.'s exercise of the Cash Election Option
described in Section 3.1(3) below, the Merger Consideration will be paid in
a combination of cash and Gray Common Stock. Pursuant to Section 3.2, each
Shareholder will have the right to elect the percentage of the Merger
Consideration that he, she or it receives in the form of cash (the "Cash
Percentage") and the percentage to be received in the form of Gray Common
Stock (the "Stock Percentage"); provided, however, that in no event shall
the Stock Percentage be less than forty percent (40%). The Cash Percentage
of the Merger Consideration for each Shareholder electing to receive any of
the Merger Consideration in cash shall be reduced on a pro rata basis
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(calculated on the basis of the aggregate amount of cash to be received by
each Shareholder) by Seven Hundred Fifty Thousand Dollars ($750,000) to be
held in the Escrow Fund pursuant to Section 11.4 below. The Escrow Fund
shall be disbursed pursuant to the terms of Section 11.4 below and the
Escrow Agreement substantially in the form of Exhibit B attached hereto.
(3) Cash Election Option. In the event that either the average Market
Value (as defined in Section 3.2(1)(ii)) during the Valuation Period (as
defined in Section 3.2(1)(iii)) or the Market Value at the Closing Date is
less than $12 per share, Gray and Merger Corp. shall have the option in
their sole and absolute discretion to pay the Merger Consideration in cash,
in which event the Merger Consideration shall be reduced from the amount
specified in Section 3.1(1) by $1,530,000. In addition, the parties agree
that if the Cash Election Option is exercised, they intend for the Merger
to be treated as an acquisition of the capital stock of the Company for
federal income tax purposes. Gray and Merger Corp. may exercise the Cash
Election Option at any time prior to the Closing by providing oral and
written notice to the Company of such exercise as promptly as practicable
after making the decision to exercise such Cash Election Option. Each of
the parties shall use their commercially reasonable best efforts to effect
the Cash Election Option, including without limitation, revising this
Agreement in any way reasonably necessary or desirable to accomplish the
Cash Election Option consistent with this paragraph and cooperating in
seeking any additional required approvals of the FCC or other Governmental
Authorities.
(4) Outstanding Merger Corp. Common Stock. Subject to the Cash
Election Option on the part of Gray described in Section 3.1(3) above, each
share of the common stock of Merger Corp. ("Merger Corp. Common Stock")
issued and outstanding immediately prior to the Effective Time shall be
unchanged and shall remain issued and outstanding as common stock of the
Surviving Corporation. In the event that Gray and Merger Corp. exercise the
Cash Option Election, each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time shall be unchanged and
shall remain issued and outstanding as common stock of the Surviving
Corporation.
3.2. CASH PERCENTAGE ELECTION.
(1) Holders of the Company Common Stock shall be provided with an
opportunity to elect to receive as much as sixty percent (60%) of the
Merger Consideration Per Share in cash with the remainder of the Merger
Consideration Per Share in the form of Gray Common Stock, in accordance
with the election procedures set forth below in this Section 3.2; provided,
however, that in the event the Market Value on the Closing Date is less
than $14.00 per share, each holder of Company Common Stock shall be deemed
to have elected to receive sixty percent (60%) of the Merger Consideration
Per Share in cash and forty percent (40%) of the Merger Consideration Per
Share in the form of Gray Common Stock. The number of shares of Gray Common
Stock to be paid as part of the Merger Consideration Per Share will be
calculated by dividing the dollar amount of the stock portion of the Merger
Consideration Per Share by the Valuation Period Market Value (as defined
below). For purposes of this Section 3.2:
(i) "Valuation Period Market Value" shall mean the average Market
Value during the Valuation Period; provided, however, that in the event
the average
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Market Value during the Valuation Period is less than $14.00 per share,
the Valuation Period Market Value shall be deemed to be $14.00 per share
and in the event the average Market Value during the Valuation Period is
greater than $15.00 per share, the Valuation Period Market Value shall
be deemed to be $15.00 per share;
(ii) "Market Value" shall mean the closing sales price for Gray
Common Stock as reported on the NYSE Composite Transactions reporting
system (as reported in The Wall Street Journal or, if not reported
therein, in another authoritative source); and
(iii) "Valuation Period" shall mean the twenty (20) consecutive
trading day period during which the shares of Gray Common Stock are
traded on the NYSE ending on the last trading day prior to the Closing
Date.
(2) An election form and other appropriate and customary transmittal
materials (which shall specify that delivery shall be effected, and risk of
loss and title to the certificates theretofore representing Company Common
Stock ("Old Certificates") shall pass, only upon proper delivery of such
Old Certificates to an exchange agent designated by Gray (the "Exchange
Agent")) in such form as Gray and the Company shall mutually agree
("Election Form") shall be mailed at the time of the mailing of the Proxy
Statement/Prospectus provided for in Section 7.9 hereof or on such other
date as the Company and Gray shall mutually agree ("Mailing Date") to each
holder of record of Company Common Stock as of the record date for the
Shareholder Meeting (as defined in Section 7.7) ("Election Form Record
Date").
(3) Each Election Form shall permit a holder (or the beneficial owner
through appropriate and customary documentation and instructions) of
Company Common Stock to elect to receive as much as sixty percent (60%) of
the Merger Consideration Per Share in cash with the remainder of the Merger
Consideration Per Share in the form of Gray Common Stock; provided,
however, that in the event the Market Value on the Closing Date is less
than $14.00 per share, each holder of Company Common Stock shall be deemed
to have elected to receive sixty percent (60%) of the Merger Consideration
Per Share in cash and forty percent (40%) of the Merger Consideration Per
Share in the form of Gray Common Stock.
(4) Any shares of Company Common Stock with respect to which the
holder (or the beneficial owner, as the case may be) shall not have
submitted to the Exchange Agent an effective, properly completed Election
Form on or before 5:00 p.m. on the day of the Shareholder Meeting (the
"Election Deadline") shall be entitled to receive the Merger Consideration
Per Share sixty percent (60%) in cash and forty percent (40%) in Gray
Common Stock (such shares being "No Election Shares").
(5) Gray shall make available one or more Election Forms as may be
reasonably requested by all Persons who become holders (or beneficial
owners) of Company Common Stock between the Election Form Record Date and
the close of business on the business day prior to the Election Deadline,
and the Company shall provide to the Exchange Agent all information
reasonably necessary for it to perform as specified herein.
(6) Any such election shall have been properly made only if the
Exchange Agent shall have actually received a properly completed Election
Form by the
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Election Deadline. An Election Form shall be deemed properly completed only
if accompanied by one or more certificates (or customary affidavits and
indemnification regarding the loss or destruction of such certificates or
the guaranteed delivery of such certificates) representing all shares of
the Company Common Stock covered by such Election Form, together with duly
executed transmittal materials included in the Election Form. Any Election
Form may be revoked or changed by the Person submitting such Election Form
at or prior to the Election Deadline. In the event an Election Form is
revoked prior to the Election Deadline, the shares of Company Common Stock
represented by such Election Form shall become No Election Shares and Gray
shall cause the certificates representing Company Common Stock to be
promptly returned without charge to the Person submitting the Election Form
upon written request to that effect from the Person who submitted the
Election Form. Such Person may submit a new Election Form with respect to
such shares at any time prior to the Election Deadline. If no new Election
Form is submitted with respect to such shares, they shall become No
Election Shares. Subject to the terms of this Agreement and of the Election
Form, the Exchange Agent shall have reasonable discretion to determine
whether any election, revocation or change has been properly or timely made
and to disregard immaterial defects in the Election Forms, and any good
faith decisions of the Exchange Agent regarding such matters shall be
binding and conclusive. Neither Gray nor the Exchange Agent shall be under
any obligation to notify any person of any defect in an Election Form.
(7) Subject to Gray's and Merger Corp.'s exercise of the Cash Election
Option described in Section 3.1(3) above, in the event that the Market
Value at Closing is less than the Valuation Period Market Value, Gray shall
increase the number of shares of Gray Common Stock to be issued to each
Shareholder by a sufficient number to ensure that the value of the Stock
Portion of the Merger Consideration received by each Shareholder at Closing
will be no less than 40% of the Merger Consideration received by that
Shareholder at Closing.
3.3. RIGHTS AS SHAREHOLDERS; SHARE TRANSFERS. At the Effective Time,
holders of Company Common Stock shall cease to be, and shall have no rights as,
Shareholders of the Company, other than to receive any dividend or other
distribution with respect to such Company Common Stock with a record date
occurring prior to the date hereof and the Merger Consideration provided under
this Section 3. After the Effective Time, there shall be no transfers on the
share transfer books of the Company or the Surviving Corporation of shares of
Company Common Stock.
3.4. FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fractional shares of Gray Common Stock and no certificates or scrip therefor, or
other evidence of ownership thereof, will be issued in the Merger; instead, Gray
shall pay to each holder of Company Common Stock who would otherwise be entitled
to a fractional share of Gray Common Stock (after taking into account all Old
Certificates delivered by such holder) an amount in cash (without interest)
determined by multiplying such fraction by the average of the last sale prices
of Gray Common Stock, as reported by the NYSE Composite Transactions reporting
system (as reported in The Wall Street Journal or, if not reported therein, in
another authoritative source), for the five (5) NYSE trading days immediately
preceding the Effective Date.
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3.5. EXCHANGE PROCEDURES.
(1) At or prior to the Effective Time, Gray shall deposit, or shall
cause to be deposited, with the Exchange Agent, for the benefit of the
holders of Old Certificates, for exchange in accordance with this Section
3, certificates representing the shares of Gray Common Stock ("New
Certificates") and an estimated amount of cash (such cash and New
Certificates, together with any dividends or distributions with respect
thereto (without any interest thereon), being hereinafter referred to as
the "Exchange Fund") to be paid pursuant to this Section 3 in exchange for
outstanding shares of Company Common Stock.
(2) As promptly as practicable after the Effective Date, Gray shall
send or cause to be sent to each former holder of record of shares (other
than Treasury Shares) of Company Common Stock immediately prior to the
Effective Time transmittal materials for use in exchanging such
Shareholder's Old Certificates for the consideration set forth in this
Section 3. Gray shall cause the New Certificates into which shares of a
Shareholder's Company Common Stock are converted on the Effective Date and
any check in respect of the cash portion of the Merger Consideration Per
Share and any fractional share interests or dividends or distributions
which such Person shall be entitled to receive to be delivered to such
Shareholder upon delivery to the Exchange Agent of Old Certificates
representing such shares of Company Common Stock (or an affidavit and
indemnity in form reasonably satisfactory to Gray and the Exchange Agent,
if any of such certificates are lost, stolen or destroyed) owned by such
Shareholder. No interest will be paid on any such cash to be paid pursuant
to this Section 3 upon such delivery.
(3) Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to any former holder of Company Common Stock
for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(4) No dividends or other distributions with respect to Gray Common
Stock with a record date occurring after the Effective Time shall be paid
to the holder of any unsurrendered Old Certificate representing shares of
Company Common Stock converted in the Merger into the right to receive
shares of such Gray Common Stock until the holder thereof shall surrender
such Old Certificate in accordance with this Section 3. After the surrender
of an Old Certificate in accordance with this Section 3, the record holder
thereof shall be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Gray Common Stock represented by such Old
Certificate.
(5) Any portion of the Exchange Fund that remains unclaimed by the
Shareholders of the Company for twelve months after the Effective Time
shall be paid to Gray. Any Shareholders of the Company who have not
theretofore complied with this Section 3 shall thereafter look only to Gray
for payment of the shares of Gray Common Stock, cash, cash in lieu of any
fractional shares and unpaid dividends and distributions on the Gray Common
Stock deliverable in respect of each share of Company Common Stock such
Shareholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon.
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3.6. TREASURY SHARES. Each of the shares of Company Common Stock held as
Treasury Shares immediately prior to the Effective Time shall be canceled and
retired at the Effective Time and no consideration shall be issued in exchange
therefor.
3.7 EARNEST MONEY. The Earnest Money, in the form of cash, shall be paid
to the Escrow Agent for the account of the Company within three (3) business
days after the date hereof. The cash Earnest Money shall be held in accordance
with the provisions of the Escrow Agreement substantially in the form of Exhibit
C attached hereto and shall be paid to Merger Corp. at the Closing.
3.8 DETERMINATION OF WORKING CAPITAL SURPLUS.
(1) At least seven (7) days prior to the Closing Date, the Company
shall prepare and deliver to Gray pro forma statements of estimated assets
and liabilities of the Company and of Brazos Broadcasting Company as of the
close of business at 11:59 p.m. midnight on the day preceding the Closing
Date (the "Preliminary Balance Sheets"), substantially in the form of
Exhibit D attached hereto, containing estimates of the Working Capital
Surplus of each corporation.
(2) Within ninety (90) days after the Closing, Gray shall prepare
final statements of assets and liabilities of the Company and of Brazos
Broadcasting Company as of the Closing Date (the "Final Balance Sheets"),
substantially in the form of Exhibit E attached hereto, and shall submit
such statements to the Shareholder Representative for review and approval.
Gray shall also provide all information reasonably necessary to determine
the correct amount of Working Capital Surplus of each corporation,
including appropriate supporting documents and such other information as
may be reasonably requested by the Shareholder Representative. The Final
Balance Sheets shall be certified by an officer on behalf of Gray to be
true and complete. The Shareholder Representative (and his authorized
representatives) shall have the right to visit the Station during normal
business hours to verify and review such documentation upon providing
reasonable notice to Gray. If the Shareholder Representative disputes the
amounts of Working Capital Surplus determined by Gray, he shall so notify
Gray within thirty (30) days after receipt of the Final Balance Sheets and
provide Gray with his own Final Balance Sheets. If the Shareholder
Representative notifies Gray that he accepts the Final Balance Sheets, or
fails to deliver his own alternate Final Balance Sheets within the thirty
(30) day period specified in the preceding sentence, Gray's determination
of the amounts of Working Capital Surplus shall be conclusive and binding
on the parties upon the expiration of such period.
(3) Gray and the Shareholder Representative shall use good faith
efforts to resolve any dispute involving the determination of the amounts
of Working Capital Surplus and the Final Balance Sheets. If the parties are
unable to resolve any dispute within fifteen days following the delivery of
the Shareholder Representative's notice concerning disputed adjustments,
Gray and the Shareholder Representative shall jointly designate a qualified
Big 5 firm of independent certified public accountants (the "Neutral
Auditors") to resolve such dispute. If the parties are unable to agree on
the designation of the Neutral Auditors, then an accounting firm will be
selected by lot from two names submitted by the Shareholder Representative
and two names submitted by Gray, none of which shall be employed by the
Shareholder Representative or Gray. The Neutral Auditors' resolution of the
dispute shall be made within sixty (60) days of their selection, shall be
based on presentations by the
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Shareholder Representative and Gray and not by independent financial audit,
and shall be final and binding on the parties. The Neutral Auditors'
resolution of the dispute may be enforced by any court of competent
jurisdiction. Fees of the Neutral Auditors shall be split equally between
the parties.
(4) If the amount of Working Capital Surplus of the Company plus
one-half of the Working Capital Surplus of Brazos Broadcasting Company
reflected on the Final Balance Sheets as finally determined in accordance
with the preceding provisions of this Section 3.8 are more than $10,000
less than such amounts reflected on the Preliminary Balance Sheets, then
the Escrow Agent shall refund the entire difference (without regard to the
$10,000 threshold) to the Surviving Corporation out of the Escrow Fund. The
payment required hereunder shall be made within seven (7) days after all of
the procedures specified in this Section 3.8 have run their course.
(5) If Neutral Auditors should be appointed by the parties to the KBTX
Agreement, then the Neutral Auditors so appointed shall serve as the
Neutral Auditors under this Agreement, and all proceedings before the
Neutral Auditors shall be consolidated to promote efficiency and reduce
expenses of the parties.
3.9 ACCOUNTING PRINCIPLES. Completion of the Preliminary Balance Sheets
and Final Balance Sheets, and determination of the amounts of Working Capital
Surplus, shall be made by the application of the following accounting
principles:
(1) Current assets shall be reduced by an amount equal to two (2%)
percent of the value of accounts receivable included within the
computation. For purposes of this Section 3.9, accounts receivable shall
include accounts receivable due from trade, but shall exclude accounts
receivable due from network and affiliated stations (as the terms "trade,"
"network," and "affiliated stations" have been customarily used by the
Company and Brazos Broadcasting Company for the purpose of preparing their
financial statements).
(2) The account balances for deferred trade expense and cash value
life insurance shall be included in the computation.
(3) The book value of the Company's tube inventory, Television
Alliance Group stock, and Brazos Shares and one share of stock in Ridgewood
Country Club shall be excluded from the computation.
(4) Current liabilities shall contain an accrual for any Taxes due on
account of the sale, liquidation, or other disposition of any investment
securities in the period ending on the Closing Date.
(5) Otherwise, all revenues and all expenses arising from the
operation of the Company and Brazos Broadcasting Company, including
business and nongovernmental license fees, utility charges, real and
personal property taxes and assessments levied against the Company and
Brazos Broadcasting Company, property and equipment rentals, applicable
copyright or other fees, sales and service charges, taxes, programming fees
and expenses, employee compensation, including wages, commissions, bonus
pay, payroll taxes, accrued vacation, sick leave, holiday, and compensatory
pay for all employees of the Company and Brazos Broadcasting Company,
prepaid and deferred items, and dividends, shall be charged or credited in
accordance with the methods historically used by the Company and Brazos
Broadcasting Company as disclosed in their annual audited financial
statements, and prorated as of
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the close of business at 12:00 a.m. midnight on the day preceding the
Closing Date. All special assessments and similar charges or liens, or
installments thereof, imposed against the Real Property or the Station, or
against the real property belonging to Brazos Broadcasting Company or
station KBTX, and payable on or prior to the Closing Date shall be
reflected on the Preliminary Balance Sheets and Final Balance Sheets, and
amounts payable with respect to such assessments and similar charges or
liens or installments thereof, imposed against the Real Property or the
Station, or against the real property belonging to Brazos Broadcasting
Company or station KBTX, and payable after the Closing Date, shall be
excluded. Ad valorem real and personal property taxes assessed or
assessable for the year in which the Closing takes place shall be prorated
based upon the number of days elapsed from January 1 to the Closing Date,
divided by 365 days.
(6) Any and all rebates due after the Closing Date to any advertiser
or other user of the Station's facilities, or of the facilities of Brazos
Broadcasting Company, based on business, advertising, or services purchased
or rendered prior to the Closing Date, shall be reflected on the
Preliminary Balance Sheets and Final Balance Sheets ratably in proportion
to revenues received or volume of business done during the applicable
period. Agency commissions shall be adjusted based upon revenue, volume of
business done, or services rendered in part before the Closing Date and in
part after the Closing Date and charged to the Preliminary Balance Sheets
ratably in proportion to the revenue, volume of business done, or services
rendered, as the case may be, during the applicable period. All payments
relating to Program Rights will be allocated ratably in accordance with the
payment terms of the contract or agreement for such properties, and
prorated to the Closing Date.
(7) The Preliminary Balance Sheets and Final Balance Sheets shall be
adjusted to the extent any liabilities on the books of the Company and
Brazos Broadcasting Company under Tradeout Agreements exceed the value of
assets from Tradeout Agreements as of the date received, but no increase
shall be made in Working Capital Surplus if the value of assets from
Tradeout Agreements exceeds the liabilities from Tradeout Agreements, as of
the Closing Date.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SHAREHOLDERS.
The Company represents and warrants unto Gray and Merger Corp., and this
Agreement is made and expressly conditioned upon, the following representations
and warranties:
4.1 ORGANIZATION, CORPORATE POWER, AND QUALIFICATIONS OF THE COMPANY. The
Company is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Texas and has the full corporate power and
authority to own all of its properties and assets and to carry on its business
as it is now being conducted. The Company is duly qualified as a foreign
corporation in each jurisdiction where the nature and extent of its business
requires such qualification.
4.2 AUTHORIZATION AND VALIDITY. The Company has the full corporate power,
capacity and authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein, including without
limitation, the Merger, have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of the Company, subject to the
approval of this Agreement by the
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holders of two-thirds (2/3) of the Shares, which is the only shareholder vote
required for approval of this Agreement and the consummation of the Merger by
the Company. This Agreement has been executed and delivered by duly authorized
officers of the Company and constitutes the legal, valid, and binding obligation
of the Company. This Agreement is enforceable with respect to the Company in
accordance with its terms.
4.3 OWNERSHIP OF SHARES. Each of the Shareholders owns (beneficially and
legally) the number of Shares specified on Schedule 4.3, opposite his, her, or
its name, free and clear of any Encumbrance of any kind.
4.4 CAPITALIZATION OF THE COMPANY. The authorized capital stock of the
Company consists of One Thousand Five Hundred Fifty (1,550) shares of common
stock, without par value, of which One Thousand Five Hundred Fifty (1,550)
shares are issued and outstanding, and Five Hundred (500) shares of preferred
stock, with a par value of One Hundred Dollars ($100.00) per share, of which no
shares are issued and outstanding. The number of shares of common stock issued
to each of the Shareholders is accurately set forth on Schedule 4.3 to this
Agreement. All issued and outstanding Shares of capital stock in the Company
have been duly authorized and validly issued, are fully paid and nonassessable,
were issued without violation of any preemptive rights, are free of any
preemptive rights and were issued pursuant to a valid exemption from
registration under the Securities Act of 1933, as amended, (the "Securities
Act"), and all applicable state securities laws. There are no options, warrants,
or other rights, nor any agreements, commitments, or arrangements of any kind
relating to the subscription to or the issuance, voting, acquisition, sale,
repurchase, transfer, or disposition of (i) any capital stock of the Company or
securities convertible into or exchangeable for capital stock of the Company, or
(ii) any options, warrants, or subscription rights relating to any such capital
stock or securities of the Company. No Person has any contract or agreement or
any right or privilege capable of becoming a binding contract for the purchase
from any of the Shareholders of any of the Shares. The consummation of the
transactions contemplated in this Agreement will convey to Gray good title to
the Shares free and clear of all Encumbrances, security interests, charges, or
restrictions on transfer of any nature whatsoever.
4.5 OWNERSHIP OF BRAZOS SHARES; INVESTMENTS AND SUBSIDIARIES. The Company
is the owner of the Brazos Shares as defined in Section 1.5 of the Agreement.
The Brazos Shares will be conveyed free and clear of any Encumbrance of any
kind. Other than the Brazos Shares and other than as disclosed on Schedule 4.5,
the Company has not in the past owned and does not currently own, directly or
indirectly, any capital stock or other equity, ownership, proprietary or voting
interest in any Person.
4.6 NONCONTRAVENTION. The execution and delivery by the Company of this
Agreement and the other agreements contemplated on its part hereby does not, and
the consummation by the Company of the transactions contemplated hereby and
thereby will not, (i) violate any provision of the Articles of Incorporation or
Bylaws of the Company, (ii) violate, or result (with the passage of time, the
giving of notice or both) in a violation of, or result in the acceleration of or
entitle any party to accelerate any obligation under, or result in the creation
or imposition of, any Encumbrance upon any of the property of the Company
pursuant to any provision of any mortgage, lien, lease, agreement, license, or
instrument to which the Company is a party or is subject, (iii) constitute an
event permitting termination or acceleration of any mortgage, lien, lease,
agreement, license, or instrument to which the Company is a party, or (iv)
violate (A) any judgment, order,
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writ, injunction, decree, regulation, or rule of any court or Governmental
Authority applicable to the Company or the Station or (B) any Law.
4.7 CONSENTS, APPROVALS. Except for filings with and approvals of the
transactions contemplated hereby by the FCC and the expiration of applicable
waiting periods under the HSR Act, and except for consent from the CBS
Television Network, neither the Shareholders nor the Company is required to make
or obtain any consent, approval, notification, authorization or order of, or
declaration, filing, or registration with any third party, including, without
limitation, any Governmental Authority (i) in connection with the consummation
of the transactions contemplated hereby, (ii) to avoid the loss of any license
or the violation, breach, or termination of, or any default under, or the
creation of any lien on any of the assets of the Station pursuant to the terms
of any Law, order, or other requirement or any contract binding upon the Company
or to which assets of the Station may be subject, or (iii) to enable Merger
Corp. to continue the operation of the Station after the Closing substantially
as conducted prior to the Closing.
4.8 FINANCIAL STATEMENTS. Schedule 4.8 contains true and complete copies
of (i) the audited financial statements of the Company for calendar years
1994-1998, prepared by its independent auditors, Pattillo, Brown and Hill,
Certified Public Accountants, Waco, Texas (the "Tax Basis Statements") and (ii)
(A) the audited balance sheet of the Company as of December 31, 1998 and the
audited statements of income and cash flows for the year then ended and (B) the
unaudited balance sheet of the Company as of December 31, 1997 and 1996 and the
unaudited statements of income and cash flows of the Company for the years ended
December 31, 1996 and 1997, prepared by its independent auditors, Pattillo,
Brown and Hill, Certified Public Accountants, Waco Texas (collectively, the
"GAAP Basis Statements"). The Tax Basis Statements have been prepared, and when
prepared, the Preliminary Balance Sheets and Final Balance Sheets will have been
prepared, in accordance with the accounting principles described in the
independent auditors' reports and footnotes accompanying said Tax Basis
Statements and fairly present the financial condition of the Company as of the
respective dates thereof, and the results of operations, cash flows and retained
earnings, and changes in financial position, respectively, of the Company, for
the respective periods thereof. In addition, the Preliminary Balance Sheets and
Final Balance Sheets, when prepared, will be based on the Company's historical
accounting practices, consistently applied. The GAAP Basis Statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied and fairly present the financial condition of the Company
as of the respective dates thereof, and the results of operations, cash flows
and retained earnings, and changes in financial position, respectively, of the
Company, for the respective periods thereof. Since December 31, 1998, (i) the
Company has carried on its business only in the ordinary course of business
consistent with past practice, (ii) there has been no Material Adverse Change,
and (iii) the Company has not made any change in any method of accounting or any
accounting practice.
4.9 TITLE TO AND CONDITION OF REAL PROPERTY.
(1) Schedule 4.9(1) contains a complete and accurate description of
all the Real Property and the Company's interest therein.
(2) The Company has good, marketable and insurable fee simple title to
all of the Real Property free and clear of all Encumbrances, except for
Permitted Liens, and no portion of the Real Property is included in a Tax
parcel that includes property other than Real Property.
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(3) Schedule 4.9(3) contains a complete and accurate description of
all the Leased Property and of the applicable lease creating the Company's
interest in the Leased Property (the "Ground Leases") and the terms of the
Company's interest therein. The Company has good, marketable and insurable
leasehold title to all of the Leased Property described on Schedule 4.9(3)
free and clear of all Encumbrances, except for Permitted Liens. The Company
has delivered to Gray true and complete copies of all of the Ground Leases.
(4) Schedule 4.9(4) contains a complete and accurate description of
all leases of the Real Property and Leased Property pursuant to which the
Company is the landlord or sublandlord, (the "Tenant Leases") and the
Company has delivered true and complete copies of the Tenant Leases to
Gray. There are no leases or other agreements relating to occupancy of the
Real Property or Leased Property, except for the Tenant Leases and no
Person other than the tenants under the Tenant Leases has any right to
occupancy of any portion of the Real Property or Leased Property. The
Company is the lessor or landlord or the successor lessor or landlord under
the Tenant Leases free and clear of all Encumbrances except for the
Permitted Liens and is entitled to receive the rents, issues and profits
from the Tenant Leases.
(5) Except as disclosed on Schedule 4.9(1), all towers, guy anchors,
buildings, and other improvements owned by the Company are located entirely
on the Real Property listed on Schedule 4.9(1).
(6) All Real Property (i) is available for immediate use in the
conduct of the business and operations of the Station and (ii) complies in
all material respects with all applicable building, fire, health,
handicapped persons, sanitation, use and occupancy or zoning Laws and the
regulations of any Governmental Authority having jurisdiction thereof.
There is no pending or, to the Company's Knowledge, threatened condemnation
or eminent domain proceedings that would affect the Real Property, or any
part thereof and the Company has full legal and practical access to the
Real Property and all utilities are available to the Real Property from a
publicly dedicated right of way or through a valid private easement. The
Company has furnished to Gray copies of any and all notices or reports
received from any insurance company, engineer, or Governmental Authority
with respect to any violations (or potential violations) of any applicable
law affecting the Real Property or otherwise requiring or recommending work
be performed on or at any of the Real Property (or improvements thereon),
and all of the violations and requirements set forth in any such notices
and reports have been cured or fulfilled to the satisfaction of those
entities.
(7) The Real Property listed on Schedule 4.9(1) and the Tenant Leases
listed on Schedule 4.9(4) comprise all real property interests necessary to
conduct the business and operations of the Company as now conducted.
4.10 TITLE TO AND CONDITION OF TANGIBLE PERSONAL PROPERTY.
(1) Schedule 4.10(1) lists all material items of Tangible Personal
Property owned by the Company, which together with the leased Tangible
Personal Property comprises all material items of Tangible Personal
Property necessary to conduct the business and operations of the Station as
now conducted. Except as specified on Schedule 4.10(1) the Company owns and
has good title to each item of Tangible Personal Property, and none of the
Tangible Personal Property owned by the
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Company is subject to any Encumbrance, other than Permitted Liens. Each
item of Tangible Personal Property is available for immediate use in the
business and operations of the Station. Each item of Tangible Personal
Property is in good condition and repair, reasonable wear and tear
excepted, and is usable in the ordinary course of business consistent with
past practices. Each item of Tangible Personal Property is adequate for its
present and intended uses and operation. All items of transmitting
equipment included in the Tangible Personal Property permit the Station to
operate in all material respects in compliance with the terms of the FCC
Licenses, the rules and regulations of the FCC, and with all other
applicable Laws.
(2) Schedule 4.10(2) contains a complete and accurate description of
all the leased Tangible Personal Property and of the applicable lease
creating the Company's interest in the leased Tangible Personal Property,
which includes the leases for motor vehicles (collectively, the "Personal
Property Leases") and the terms of the Company's interest therein. The
Company has good leasehold title to the leased Tangible Personal Property
subject to the terms of the applicable Personal Property Lease and free of
any Encumbrances, other than Permitted Liens. The Company has delivered to
Gray true and complete copies of all of the Personal Property Leases. The
owned Tangible Personal Property listed on Schedule 4.10(1) and the leased
Tangible Personal Property listed on Schedule 4.10(2) comprise all personal
property interests necessary to conduct the business and operations of the
Company as now conducted.
4.11 LITIGATION. There are no actions, suits, claims, investigations, or
proceedings (legal, administrative, or arbitrative) pending, or to the Company's
Knowledge threatened, against the Company, and to the Company's Knowledge no
basis for any of the foregoing exists, whether at law or in equity and whether
civil or criminal in nature, before or by any Federal, State, municipal, or
other court, arbitrator, governmental department, commission, agency, or
instrumentality, domestic or foreign, nor are there are any judgments, decrees,
or orders of any such court, arbitrator, governmental department, commission,
agency, or instrumentality outstanding against the Company. Except as disclosed
on Schedule 4.11, no litigation (as described in the preceding sentence) has
been pending during the three (3) years prior to the date hereof that,
individually or in the aggregate, resulted in losses, damages, costs or expenses
(whether or not covered by insurance) in excess of $10,000 or granted any
injunctive relief against the Company.
4.12 ENVIRONMENTAL MATTERS.
(1) To the Company's Knowledge, none of the Real Property, assets or
premises of the Company or the assets or premises formerly owned, leased,
operated or managed, directly or indirectly, by the Company or any of its
predecessors or any of its current or former subsidiaries (which are
identified on Schedule 4.5), contains, nor is there present at any such
Real Property, assets or premises of the Company or the assets or premises
formerly owned, leased, operated or managed, directly or indirectly, by the
Company or any of its predecessors or any of its current or former
subsidiaries (which are identified on Schedule 4.5), any (i) "hazardous
substances" (as defined in the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, 42 U.S.C. 9601 et seq., as
amended), (ii) asbestos, (iii) radon gas, (iv) underground storage tanks,
(v) items or equipment containing polychlorinated biphenyls in excess of 50
parts per million, (vi) stored, spilled, or leaked petroleum products, or
(vii) accumulation of rubbish, debris, or other solid waste; nor is any of
the Real Property, assets or premises of the Company or the assets or
premises
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formerly owned, leased, operated or managed, directly or indirectly, by the
Company or any of its predecessors or any of its current or former
subsidiaries (which are identified on Schedule 4.5), the subject of
governmental regulation or liability because of the past release, threat of
release, discharge, storage, treatment, generation, or disposal of such
substances.
(2) To the Company's Knowledge, the Company is in compliance with all
laws, rules, and regulations of all federal, state, and local governments
(and all agencies thereof) concerning the environment, except for any
noncompliance which could not reasonably be expected to have a Material
Adverse Effect, and neither the Company nor any of its predecessors or any
of its current or former subsidiaries has received any written notice of a
charge, complaint, action, suit, proceeding, hearing, investigation, claim,
demand, or notice having been filed or commenced against the Company or any
of its predecessors or any of its current or former subsidiaries in
connection with its operation of the Station alleging any failure to comply
with any such law, rule, or regulation.
(3) To the Company's Knowledge, neither the Company nor any of its
predecessors or any of its current or former subsidiaries has any liability
that could reasonably be expected to have a Material Adverse Effect under
any law, rule, or regulation of any federal, state, or local government (or
agency thereof) concerning the (i) release or threatened release of
hazardous substances, (ii) pollution, or (iii) protection of the
environment.
(4) To the Company's Knowledge, all waste containing any hazardous
substances generated, used, handled, stored, treated or disposed of
(directly or indirectly) by the Company or any of its predecessors or any
of its current or its former subsidiaries has been released or disposed of
in compliance with all applicable reporting requirements under any Law, and
neither the Company nor the Shareholders have Knowledge of any
Environmental Claim (as herein defined) with respect to any such release or
disposal.
(5) To the Company's Knowledge, without limiting the generality of any
of the foregoing, (i) all on-site and off-site locations where the Company
or any of its predecessors or any of its current or former subsidiaries has
stored, disposed or arranged for the disposal of hazardous substances are
identified in Schedule 4.12, and (ii) no polychlorinated biphenyls (PCB's)
are used or stored on or in any Real Property owned, leased, operated or
managed by the Company or any of its predecessors or any of its current or
former subsidiaries.
(6) For purposes of this Agreement:
(a) "Environmental Claim" shall mean any Litigation in any court or
before or by any Governmental Authority or private arbitrator, mediator
or tribunal against the Company (including, without limitation, notice
or other communication written or oral by any Person alleging potential
liability for investigatory costs, cleanup costs, private or
governmental response or remedial costs, natural resources damages,
property damages, personal injuries, or penalties) arising out of, based
upon, or resulting from (i) any Environmental Matter or (ii) any
circumstances or state of facts forming the basis of any Liability, or
alleged Liability under, or violation or alleged violation under, any
Environmental Law.
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(b) "Environmental Matter" shall mean any matter or circumstances
existing prior to Closing related in any manner whatsoever to (i) the
emission, discharge, disposal, release or threatened release of any
hazardous substance into the environment, or (ii) the treatment,
storage, recycling or other handling of any hazardous substance or (iii)
the placement of structures or materials into waters of the United
States, or (iv) the presence of any hazardous substance, including, but
not limited to, asbestos, in any building, structure or workplace or on
any of the Real Property.
4.13 TRADE NAMES, TRADE MARKS, ETC. The Company has and owns, or has the
right to use, all trademarks, service marks, trade names, business names,
copyrights, designs, trade secrets, and know-how used in the operation of the
Station, including, but not limited to, the items listed on Schedule 4.13 as a
part of the Intangible Property. There are no claims or proceedings pending, or
to the Company's Knowledge threatened, against the Company asserting that its
use of any Intangible Property infringes the rights of any other Person and the
Company has no Knowledge of any use by the Company that may, with notice or
passage of time, give rise to such a claim. The Company has not licensed or
otherwise assigned any Intangible Property to any third party and, to the
Company's Knowledge, there are no existing infringing uses of the Intangible
Property by any third parties. All royalties, limitations, restrictions, or
other obligations of the Company with respect to the ownership or use of the
Intangible Property are set forth on Schedule 4.13.
4.14 GOVERNMENTAL AUTHORIZATION AND COMPLIANCE WITH LAWS. All
governmental licenses, certificates, permits, and approvals required for the
conduct of the Company's business as now conducted are listed on Schedule 4.14.
The Company has obtained all such licenses, permits, and approvals and all are
in full force and effect. The business of the Station has been operated in
compliance with all applicable Laws, orders, regulations, policies, and
guidelines of all Governmental Authorities (including, without limitation, those
relating to FCC matters and environmental laws and regulations), except for
violations of such Laws, orders, regulations, policies, and guidelines which do
not affect and cannot reasonably be expected to have a Material Adverse Effect
on the Station or the business, financial condition, assets, liabilities,
results of operations or cash flows of the Company. The Company has received no
notice of, and no investigation or review is pending before, or to the Company's
Knowledge threatened by, any Governmental Authority (i) with respect to any
alleged violation by the Company of any Law, order, regulation, policy, or
guideline of any Governmental Authority related to the operation of the Station,
or (ii) with respect to any alleged failure to have all permits, certificates,
licenses, approvals, and other authorizations required in connection with the
operation of the Station.
4.15 FCC LICENSES. The Company is now and on the Closing Date will be the
holder of the FCC Licenses as listed in Schedule 4.15, with regular
unconditional renewals thereof having been granted for the full license term.
The FCC Licenses constitute all of the licenses and authorizations required for
and/or used in the operation of the Station as now operated, and the FCC
Licenses are now and on the Closing Date will be in full force and effect and
unimpaired by any act or omission of the Company, or its officers, directors,
employees, or agents. There is not now pending, or to the Company's Knowledge,
threatened, any action by or before the FCC to revoke, cancel, rescind, modify,
or refuse to renew in the ordinary course any of the FCC Licenses, or any
investigation, Order to Show Cause, Notice of Violation, Notice of Apparent
Liability, or a forfeiture or material complaint against the Station or the
Company. The Company does not Know of any
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reason why the FCC would not renew the FCC Licenses in the ordinary course. In
the event of any such action, or the filing or issuance of any such order,
notice, or complaint or Knowledge of the threat thereof, the Company shall
notify Gray of same in writing within five (5) days, and shall take all
reasonable measures to contest in good faith or seek removal or rescission of
such action, order, notice, or complaint, and shall pay any sanctions imposed.
All material reports, forms, and statements required to be filed by the Company
with the FCC with respect to the Station have been filed and are complete and
accurate in all material respects. The Station is now and on the Closing Date
will be operating in accordance with the FCC Licenses, and in compliance with
the Communications Act of 1934, as amended, and the Rules and Regulations of the
FCC. The operation of the Station, including, but not limited to, the Company's
use and operation of its existing tower sites, conforms to the standards adopted
by the FCC in Guidelines Evaluating the Environmental Effects of Radio Frequency
Radiation, Report and Order, IT Docket 93-62 (August 1, 1996) (FCC 96-326), as
modified on reconsideration, Second Memorandum Opinion and Order, FCC 97-303
(released August 23, 1997).
4.16 LABOR RELATIONS.
(1) The Company has paid or made provision for payment of all salaries
and wages of employees accrued through the date of this Agreement. The
Company is in compliance with all federal and state Laws respecting
employment and employment practices, terms and conditions of employment,
safety of the workplace, wages and hours, and nondiscrimination in
employment, and is not Knowingly engaged in any unfair or illegal
employment practice;
(2) There is no charge, complaint, other claim, compliance review,
audit or investigation pending before, being conducted by or, to the
Company's Knowledge, threatened by any court, agency, arbitral panel or
other tribunal alleging, or that could result in an allegation of, unlawful
discrimination, unauthorized employment, harassment, any unfair labor
practice or violation of any Law or legal principle by the Company relating
to any aspect of employment or the workplace, nor to the Company's
Knowledge is there a basis for any such claims;
(3) There is no labor strike, dispute, slowdown, or stoppage actually
pending or, to the Company's Knowledge, threatened against or involving the
Company;
(4) There are no collective bargaining agreements binding on the
Company;
(5) To Company's Knowledge, no employee representative or labor
organization is seeking to represent the Company's employees or has
requested an election or a collective bargaining agreement, nor is the
Company currently negotiating or contemplating negotiating such an
agreement; and
(6) Except as listed specifically on Schedule 4.16, the Company has no
written contract of employment, change of control agreement or other
agreement with any employee of the Station, and the Company has no
unwritten contract of employment, change of control agreement or other
agreement that is not terminable at will without any payment or other
obligation on the part of Company or any successor, including Merger Corp.
4.17 INSURANCE. Schedule 4.17 is a true and complete list, showing
company and type and amount of coverage, of all insurance policies providing
coverage for the Company or the operation of the Station, its employees, or
third parties. The Company has provided correct and complete copies of each such
policy to Gray on or before the date hereof. The Company is neither in default
with respect to any provision of any of its insurance policies nor has it failed
to give any notice or present any claim thereunder in due or timely
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fashion or as required by any of such insurance policies which would result in
failure to recover in full under such policies. The Company has complied with
the insurance requirements of (i) all leases related to the Station to which it
is a party; (ii) all other contracts and agreements to which the Company is a
party; and (iii) all Laws.
4.18 ACCOUNTS RECEIVABLE. All accounts receivable of the Company
reflected on its financial statements, as prepared and maintained through the
Closing Date, arose from bona fide transactions in the ordinary course of
business, and constitute valid and binding obligations of the account debtors
for the full face amount thereof, without discount, offset, or other claim or
allowance. The reserve for doubtful accounts contained in the financial
statements is adequate to protect the Company from losses by reason of
noncollection of such accounts.
4.19 ACCOUNTS PAYABLE. All accounts payable of the Company reflected on
its financial statements, as prepared and maintained through the Closing Date,
arose from bona fide transactions in the ordinary course of business, and
constitute valid debts or obligations of the Company for the full face amount
thereof.
4.20 TAX RETURNS, AUDITS, AND LIABILITIES.
(1) The Company has: (i) timely filed all Tax Returns in accordance
with all applicable laws (including any applicable extensions); (ii) paid
all Taxes shown to have become due pursuant to such Tax Returns; (iii)
properly accrued for all Taxes due or payable in respect of the current
period in the Financial Statements; and (iv) paid all Taxes for which a
notice of, or assessment or demand for, payment has been received or which
are otherwise due and payable, other than Taxes being contested in good
faith, as identified on Schedule 4.20 for which an adequate reserve has
been established. All such Tax Returns are true and correct in all material
respects and reflected the true facts regarding the income, business,
assets, operations, activities, and status of the Company and any other
information required to be shown therein.
(2) Except as disclosed on Schedule 4.20, in the past five (5) years,
none of the Company's Tax Returns has been audited by any Governmental
Authority. There is no action, suit, proceeding, investigation, audit,
claim, or assessment pending or proposed with respect to Taxes or with
respect to any Tax Return for the Company; (ii) there are no liens for
Taxes upon the assets of the Company, other than liens for taxes not yet
past due; (iii) there are no waivers or extensions of any applicable
statute of limitations for the assessment or collection of Taxes with
respect to any Tax Return that remains in effect; and (iv) there are no Tax
rulings, request for rulings, or closing agreements relating to the Company
that could affect its liability for Taxes for any period after the Closing
Date.
4.21 BANK ACCOUNTS. All of the Company's bank accounts, and the names of
all authorized signatories on all such accounts are set forth on Schedule 4.21
to this Agreement.
4.22 CERTAIN CONTRACTS.
(1) Except as listed on Schedule 4.22:
(a) the Company does not have any employment agreements or any
incentive compensation, profit-sharing, stock option, stock appreciation
rights, stock purchase, savings, deferred compensation, retirement,
pension, or other
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plans or benefit arrangements or practices with or for the benefit of
any officer, employee, or any other person, or any consulting agreement
or other arrangement with any officer, employee, former officer, or
former employee;
(b) no officer, director or Shareholder of the Company has any
other agreement with the Company or any interest in any real, personal,
or intellectual property used in or pertaining to the operation of the
Station; and
(c) except for contracts for the sale of advertising time entered
into in the normal course of business, the Company is not a party to or
bound by any contract, commitment, purchase order, or sales order, oral
or written, related to the operation of the Station. All leases,
agreements, licenses, or instruments to which the Company is a party are
in full force and effect and are binding obligations of the parties
thereto, and no event or condition has occurred or exists, or is alleged
by any of the other parties thereto to have occurred or existed, which
constitutes, or with lapse of time or the giving of notice or both,
might constitute a material default or a basis for acceleration of any
obligation, force majeure, or other claim of excusable delay or
nonperformance thereunder or in respect thereof, whether on the part of
the Company or any other party. In connection with the Merger or
otherwise, there are no consents, approvals, notifications, or other
actions required to be taken pursuant to the terms of any contract or
commitment to which the Company is a party, except as described on
Schedule 4.22.
(2) Schedule 4.22 contains a list and correct and complete copies of
the following contracts and agreements:
(a) all powers of attorney given by the Company;
(b) all programming and network affiliation agreements of the
Company or that relate to the Station;
(c) all Tradeout Agreements; and
(d) any contract or agreement that (i) provides for monthly
payments in excess of $1,000 or yearly payments in excess of $12,000;
(ii) requires performance by the Company of any obligation for a period
of time extending beyond six (6) months from the Effective Time or is
not terminable by the Company without penalty upon sixty (60) days or
less notice; (iii) evidences, creates or guarantees indebtedness of the
Company; or (iv) guarantees or endorses the liabilities or obligations
of any other Person.
4.23 EMPLOYEES. Schedule 4.23 is a true and complete list of all
personnel employed by the Company as of the date of this Agreement, including
the names and current addresses of all such persons, their job classifications,
rates of pay, length of service, and a brief description of the employment
benefits provided to them, including group insurance, vacation, severance,
health and accident benefits, and retirement pay, if any.
4.24 EMPLOYEE BENEFIT PLANS.
(1) Schedule 4.24 contains an accurate and complete list of each
employee benefit plan established, maintained, or contributed to by the
Company. Each such plan is maintained and administered in material
compliance with the Employee
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Retirement Income Security Act of 1974, as amended ("ERISA"), the Code and
any other applicable Laws, its governing documents and any oral or written
communications from the Company to any participant in or beneficiary of
such plan. Neither the Company nor any such employee benefit plan is liable
for any material fine, excise tax, or loss of income tax deduction with
respect to the operation of any such employee benefit plan. No reportable
event, as defined in Section 4043 of ERISA, that could have a Material
Adverse Effect on the Company, has occurred with respect to any employee
benefit plan of the Company. The consummation of the transactions
contemplated by this Agreement will not result in any withdrawal liability
on the part of the Company under a multi-employer plan. No plan or benefit
arrangement established or maintained by the Company or to which the
Company is obligated to contribute has any "accumulated funding deficiency"
as defined by ERISA. The Company has not incurred any liability to the
Pension Benefit Guaranty Corporation with respect to any such plan. There
are no material claims (other than routine claims for benefits), lawsuits
or governmental proceedings pending or, to the Company's Knowledge,
threatened with respect to any employee benefit plan of the Company. No
claims or liabilities in respect of any of the Company's employee benefit
plans shall be imposed upon Gray or Merger Corp. as a result of the
transactions described herein.
(2) The Company has filed all returns and reports required to be filed
with respect to its employee benefit plans, and has paid or made provision
for the payment of all fees, interest, penalties, assessments, or
deficiencies that may have become due pursuant to those returns or reports
or pursuant to any assessment or adjustment that has been made relating to
those returns or reports. All other fees, interest, penalties, and
assessments that are payable by or for the Company have been timely
reported, fully paid, and discharged. There are no unpaid fees, penalties,
interest, or assessments due from the Company relating to any employee
benefit plan that are or could become an Encumbrance on any assets of the
Station or are otherwise material. The Company has furnished to Gray true
and complete copies of all documents setting forth the terms and funding of
each employee benefit plan.
(3) The Company is not liable for any welfare benefits (as defined in
ERISA Section 3(1)) to its employees or other individuals associated with
the Company after retirement or other separation from service other than to
the extent required by Code Section 4980B and Part VI of Title I of ERISA
(COBRA).
(4) For purposes of this Section 4.24, "Company" means the Company and
any entity which, together with the Company, would be treated as a single
employer under Section 414(n) of the Code.
4.25 NO BROKERS. Neither the Company nor any of its Shareholders has
employed any brokers or finders, or incurred any liability for any brokerage
fees, commissions, finders' fees, or financial advisory fees in connection with
the transactions contemplated hereby, and the Shareholders agree to hold Gray
and Merger Corp. harmless from any claim relating to such fees or compensation
made by the Company or the Shareholders or anyone employed by the Company or the
Shareholders.
4.26 COMPUTER SOFTWARE AND DATABASE. All computer software licensed,
leased or otherwise used in connection with the Station is standard,
pre-packaged and licensed and none of such computer software is proprietary,
internally developed or owned by the Company. The Company has, and upon
consummation of the transactions contemplated by this Agreement, Merger Corp.
will have, all computer software and databases that are
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necessary to operate the Station as presently conducted by the Company and all
documentation and necessary licenses relating to all such computer software and
databases.
4.27 INTERESTED TRANSACTIONS. Except as set forth in Schedule 4.27, the
Company is not a party to any contract or other transaction with any Affiliate
of the Company, any Related Party of any Affiliate of the Company (other than as
a Shareholder or employee of the Company), or any Person in which any of the
foregoing (individually or in the aggregate) beneficially or legally owns,
directly or indirectly, five percent (5%) or more of the equity or voting
interests. Each of such contracts and other transactions described in the
preceding sentence was negotiated on an arm's length basis, contains pricing
terms that reflected fair market value at the time entered into and otherwise
contains terms and conditions comparable to those customarily contained in
similar transactions between unrelated parties. Except as described in Schedule
4.27, none of the Persons described in the first sentence of this Section 4.27
owns, or during the last three (3) years has owned, directly or indirectly,
beneficially or legally (individually or in the aggregate), five percent (5%) or
more of the equity or voting interests of any Person that competes with the
Company or the Station.
4.28 FULL DISCLOSURE. No statement contained herein or in any document,
certificate, or other writing furnished or to be furnished by the Company to
Gray pursuant to the provisions of this Agreement contains or shall contain any
untrue statement of a material fact or shall omit to state any material fact
necessary, in the light of the circumstances under which it was made, to make
the statements therein not misleading. The due diligence materials delivered by
the Company to Gray and Merger Corp. are correct and complete in all material
respects and do not omit any material facts necessary to make the facts
disclosed by such materials not misleading.
4.29 RELIANCE AND SURVIVAL. The foregoing representations and warranties
have been made by the Company with the knowledge and expectation that Gray and
Merger Corp. are placing complete reliance thereon, and all such representations
and warranties shall survive the Closing.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF GRAY AND MERGER CORP.
Each of Gray and Merger Corp. represents and warrants to the Company as
follows:
5.1 ORGANIZATION AND EXISTENCE. Each of Gray and Merger Corp. is a
corporation duly organized and validly existing under the laws of the State of
Georgia and has the power and authority to own all of its properties and assets
and to carry on its business as it is now being conducted.
5.2 AUTHORIZATION AND VALIDITY. Each of Gray and Merger Corp. has the
full power and authority to execute and deliver this Agreement and the other
agreements and instruments contemplated on its part hereby and to consummate the
transactions contemplated on its part hereby and thereby; each of Gray's and
Merger Corp.'s execution and delivery of this Agreement and consummation of the
transactions contemplated hereby and thereby have been duly authorized by its
Board of Directors; and this Agreement has been duly executed and delivered and
constitutes the valid and binding agreement of each of Gray and Merger Corp.
enforceable in accordance with its terms.
5.3 NONCONTRAVENTION. Neither the execution nor delivery of this
Agreement by either Gray or Merger Corp. nor the consummation by either Gray or
Merger Corp. of the transactions contemplated hereby and thereby will violate
any provision of the Articles of
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Incorporation or Bylaws of either Gray or Merger Corp., or of any other material
instrument, agreement, order, or decree binding on either Gray or Merger Corp.
the effect of which violation would be the prevention, delay, avoidance, or
voidableness of this Agreement or the transactions contemplated hereby.
5.4 CONSENTS, APPROVALS. Except for filings with and approvals of the
transactions contemplated hereby by the FCC and expiration of applicable waiting
periods under the HSR Act, neither Gray nor Merger Corp. is required to make or
obtain any consent, approval, notification, authorization or order of, or
declaration, filing, or registration with any Governmental Authority or any
other third party in connection with consummation by either Gray or Merger Corp.
of the transactions contemplated hereby.
5.5 NO BROKERS. Other than an approximately 1% fee paid by Gray to Bull
Run Corporation (which does not affect the Merger Consideration hereunder),
neither Gray nor Merger Corp. has employed any brokers or finders or incurred
any liability for any brokerage fees, commissions, finders' fees, or financial
advisory fees in connection with the transactions contemplated hereby and each
of Gray and Merger Corp. agrees to hold the Company harmless from any claim
relating to such fees or compensation made by either Gray or Merger Corp. or
anyone employed by either of them.
5.6 CAPITALIZATION.
(1) The authorized capital stock of Gray consists of 15,000,000 shares
of Gray Common Stock, 15,000,000 shares of Class A Common Stock, no par
value ("Class A Common Stock"), and 20,000,000 shares of Preferred Stock,
no par value ("Preferred Stock"), of which as of March 11, 1999 there were
issued and outstanding 5,125,465 shares of Gray Common Stock, 6,832,042
shares of Class A Common Stock and 1,000 shares of Series A Preferred Stock
and 350 shares of Series B Preferred Stock. As of December 31, 1998,
135,080 issued shares of Gray Common Stock, 1,129,532 issued shares of
Class A Common Stock and no shares of Preferred Stock were held as treasury
shares. All issued shares of Gray Common Stock, Class A Common Stock and
Preferred Stock are duly authorized and validly issued and are fully paid
and nonassessable and no holder thereof is entitled to preemptive rights.
All shares of Gray Common Stock to be issued pursuant to the Merger, when
issued in accordance with this Agreement, will be duly authorized and
validly issued, fully paid and nonassessable and will not violate the
preemptive rights of any person.
(2) All outstanding shares of capital stock of the consolidated
subsidiaries of Gray (the "Gray Subsidiaries") (A) are owned by Gray or a
wholly owned subsidiary of Gray, free and clear of all liens, charges,
encumbrances, adverse claims and options of any nature except for pledge of
the capital stock of the Gray Subsidiaries to secure certain debt of Gray,
(B) were duly authorized and validly issued and are fully paid and
nonassessable, and (C) have not been issued in violation of any preemptive
rights. There are not now, and at the Effective Time there will not be, any
outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of any class of capital
stock of the Gray Subsidiaries, or contracts, understandings or
arrangements to which Gray or a Gray Subsidiary is a party, or by which any
of them is or may be bound, to issue additional shares of capital stock or
options, warrants, scrip or rights to subscribe for, or securities or
rights convertible
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into or exchangeable for, any additional shares of capital stock of any
Gray Subsidiary.
(3) As of the date hereof, the authorized capital stock of Merger
Corp. consists of 1,000 shares of common stock, no par value per share, all
of which were duly authorized and validly issued and are fully paid and
nonassessable and are owned by Gray.
5.7 SEC FILINGS; FINANCIAL STATEMENTS. Gray and each of the Gray
Subsidiaries have timely filed all reports, registration statements and other
filings, together with any amendments required to be made with respect thereto,
that they have been required to file with the SEC under the Securities Act and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
reports, registration statements and other filings (including all notes,
exhibits and schedules thereto and documents incorporated by reference therein)
filed by Gray with the SEC since January 1, 1998, through the date of this
Agreement, together with any amendments thereto, are sometimes collectively
referred to as the "Gray SEC Filings." As of the respective dates of their
filing with the SEC, the Gray SEC Filings complied in all material respects with
the Securities Act, the Exchange Act and the rules and regulations of the SEC
thereunder, and did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
Each of the consolidated financial statements (including any related notes
or schedules) included in the Gray SEC Filings was prepared in accordance with
generally accepted accounting principles applied on a consistent basis (except
as may be noted therein or in the notes or schedules thereto) and complied with
all applicable rules and regulations of the SEC. Such consolidated financial
statements fairly present the consolidated financial position of Gray and the
Gray Subsidiaries as of the dates thereof and the results of operations, cash
flows and changes in stockholders' equity for the periods then ended (subject,
in the case of the unaudited interim financial statements, to normal year end
audit adjustments on a basis consistent with past periods).
5.8 FINANCIAL ABILITY. Gray has the financial ability to close the
transactions contemplated under this Agreement, and will close those
transactions according to the terms of, and subject to the conditions contained
in, this Agreement.
SECTION 6. FCC APPROVAL.
6.1 FILING AND PROSECUTION OF APPLICATION. Within ten (10) days after the
execution of this Agreement, Gray and the Company shall each file applications
with the FCC requesting the transfer and assignment of the FCC Licenses of the
Station from the Company to Merger Corp. or its assignee (the "Assignment
Application"). Gray and the Company shall take all steps reasonably necessary to
the expeditious prosecution of the Assignment Application to a favorable
conclusion, using their commercially reasonable best efforts throughout. The
parties acknowledge that the Assignment Application to be filed by Gray will
need to include a request for satellite designation of KBTX-TV so as to
authorize continued common control of KBTX-TV and KWTX-TV, and Gray agrees to
prepare and file said request contemporaneously with its Assignment Application.
6.2 EXPENSES. Each party shall bear its own expenses in connection with
the preparation of the applicable sections of the Assignment Application and in
connection
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with the prosecution of such application. The Company and Gray will divide and
pay equally any filing fee or grant fee imposed by the FCC.
6.3 TIME FOR FCC CONSENT. If the FCC rejects the Assignment Application
for incompleteness, it shall be completed by the party (or parties) whose
portion of the Assignment Application was incomplete and then shall be promptly
resubmitted. If the Assignment Application is rejected by the FCC for a reason
which precludes resubmission, this Agreement shall terminate without notice or
other action by the parties. If the FCC accepts the Assignment Application,
whether as initially filed or as resubmitted, then, if the FCC has not given its
written consent to the transfer of the FCC Licenses by December 31, 1999, the
time for FCC consent shall be automatically extended until May 31, 2000, so long
as no party is otherwise in default hereunder. In the event that the FCC consent
has not been granted on or before May 31, 2000, either party may terminate this
Agreement pursuant to Section 13.4. If the Closing has not occurred prior to
August 15, 1999, the Company shall apply to the FCC prior to such date for all
necessary authorizations to construct and operate digital television facilities
on or before May 1, 2002.
6.4 CONTROL OF STATION. Until the Closing, Gray shall not, directly or
indirectly, control, supervise, or direct the operation of the Station, but such
operation shall be the sole responsibility of the Company. Pending the Closing,
Gray shall not represent that it is acting as agent or representative of the
Company in connection with the operation of the Station or any personnel actions
affecting the Station's employees.
6.5 NO REVERSION OF LICENSES. Neither the Shareholders, nor any person
affiliated with the Shareholders, has retained any right of reversion of the FCC
Licenses. Further, no person affiliated with the Shareholders has the right to a
reassignment of the FCC Licenses in the future, and the Shareholders or their
affiliates have not reserved the right to use the facilities of the Station for
any period whatsoever. There is no contract, arrangement, or understanding,
express or implied, pursuant to which, as consideration or partial consideration
for the transactions contemplated hereby, such rights as stated above are
retained.
6.6 REGULATORY MATTERS. Gray and the Shareholders will cooperate and use
their best efforts to prepare all documentation, to make all filings, and to
obtain all permits, consents, approvals, and authorizations of all third parties
and governmental bodies necessary to consummate the transactions contemplated by
this Agreement. Each party shall be primarily responsible for accomplishing all
such matters applicable to it (or them) but shall take all such further action
in that regard as the other party shall reasonably request.
SECTION 7. SPECIAL COVENANTS AND AGREEMENTS.
7.1 HSR ACT. Within thirty (30) days after the execution of this
Agreement, each of the Company and Gray shall make the filings required by the
HSR Act. The Company and Gray (i) will cooperate with each other in connection
with such HSR Act filings by furnishing each other with any information or
documents that may be reasonably required in connection with such filing; (ii)
will promptly file, after any request by the Federal Trade Commission ("FTC") or
Department of Justice ("DOJ") and after appropriate negotiation with the FTC or
DOJ of the scope of such request, any information or documents requested by the
FTC or DOJ; and (iii) will furnish each other with any correspondence from or
to, and notify each other of any other communications with, the
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FTC or DOJ that relates to the transactions contemplated hereunder, and to the
extent practicable, to permit each other to participate in any conferences with
the FTC or DOJ. The consummation of the transactions described in this Agreement
is expressly conditioned upon the waiting period relating to any such filings
having duly expired or been terminated by the appropriate Governmental
Authorities without the enforcement of any action by any such agencies to
restrain or postpone the transactions contemplated hereby. The Company and Gray
shall share equally in the payment of filing fees required for the HSR Act
filings. In addition, Gray shall make its legal counsel available to the Company
to assist in the preparation of the Company's filings required by the HSR Act
and Gray shall pay the first $10,000 of the fees of its legal counsel incurred
in connection with the Company's HSR filings.
7.2 CONFIDENTIALITY. Except as necessary for the consummation of the
transactions contemplated by this Agreement, except as and to the extent
required by law or securities filings, and except as permitted by Section 7.10,
each party will keep confidential any information obtained from the other party
in connection with the transactions contemplated by this Agreement. If this
Agreement is terminated, each party will return to the other party all
information obtained by such party from the other party in connection with the
transactions contemplated by this Agreement.
7.3 COOPERATION. Gray and the Company shall cooperate fully with each
other and their respective counsel and accountants in connection with any
actions required to be taken as part of their respective obligations under this
Agreement, and Gray and the Company shall execute such other documents as may be
necessary and desirable to implement and consummate this Agreement, and shall
otherwise use their commercially reasonable efforts to consummate the
transaction contemplated hereby and to fulfill their obligations under this
Agreement, including without limitation accomplishing the events listed in
Section 13.6 by the dates identified in such Section.
7.4 ACCESS TO BOOKS AND RECORDS. Gray shall provide the Shareholder
Representatives reasonable access and the right to copy for a period of three
years from the Closing Date any books and records relating to the Company.
7.5 CERTAIN INVESTMENTS. Prior to the Closing, the Company will liquidate
any and all investment securities and cash equivalents which it owns so that the
current assets of the Company at the time of the Closing will consist only of
cash, accounts receivable and prepaid expenses. Prior to the Closing, Employee
accounts will be liquidated or written off at the election of the Company.
7.6 ACQUISITION PROPOSALS. None of the Shareholders, the Company or any
of its officers and directors shall, and the Company and each of the
Shareholders will use its best efforts to cause its respective employees,
agents, and representatives (including, without limitation, any investment
banker, attorney or accountant retained by the Company or the Shareholders) not
to, initiate, solicit or encourage, directly or indirectly, any inquiries or the
making of any proposal with respect to a merger, consolidation, share exchange
or similar transaction involving the Company, or any purchase of all or any
significant portion of the assets of the Company, or any equity interest in the
Company, other than the transactions contemplated hereby (an "Acquisition
Proposal"), or engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any person
relating to an Acquisition Proposal.
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7.7 MEETINGS OF SHAREHOLDERS. The Company will take all action necessary
in accordance with applicable law and its Articles of Incorporation and By-Laws
to convene a meeting of the Shareholders (the "Shareholder Meeting") as promptly
as practicable to consider and vote upon the approval of the Merger.
7.8 MEETINGS OF GRAY AND MERGER CORP. SHAREHOLDERS. Gray and Merger Corp.
will each take all actions necessary in accordance with applicable law and its
Articles of Incorporation and By-Laws to convene a meeting of its shareholders
as promptly as practicable to consider and vote upon the approval of the Merger,
and to convene subsequent meetings of its shareholders as necessary to consider
and vote upon such other matters as may be required by this Agreement.
7.9 REGISTRATION STATEMENTS.
(1) Gray will, at its sole cost and expense, as promptly as
practicable, prepare and file with the SEC a registration statement on Form
S-4 or other appropriate form (the "Registration Statement"), containing a
proxy statement/prospectus, in connection with the registration under the
Securities Act of the Gray Common Stock issuable upon conversion of the
Shares and the other transactions contemplated hereby. The Company will, as
promptly as practicable, prepare a proxy statement that will be the same
proxy statement/prospectus contained in the Registration Statement and form
of proxy, in connection with the vote of the Company's Shareholders with
respect to the Merger (such proxy statement/prospectus, together with any
amendments thereof or supplements thereto, in each case in the form or
forms mailed to the Company's Shareholders, is herein called the "Proxy
Statement/Prospectus"). Gray and the Company will use their commercially
reasonable best efforts to have or cause the Registration Statement
declared effective as promptly as practicable, and also will take any other
action required to be taken under federal or state securities laws, and the
Company will use its commercially reasonable best efforts to cause the
Proxy Statement/Prospectus to be mailed to the Shareholders at the earliest
practicable date including without limitation, by providing to Gray all
financial statements, financial information and business information
required or desirable for the Registration Statement and the Proxy
Statement/Prospectus.
(2) Gray will, at its sole cost and expense, as promptly as
practicable after the Closing Date, prepare and file with the SEC a
registration statement on Form S-3 or other appropriate form (the "Resale
Registration Statement"), containing a prospectus, in connection with the
registration under the Securities Act of the resale by the Shareholders of
the Gray Common Stock issued in the Merger that are not otherwise eligible
for public resale without limitation without an effective resale
registration statement. Gray and the Company will use their commercially
reasonable best efforts to have or cause the Resale Registration Statement
declared effective as promptly as practicable, and also will take any other
action required to be taken under federal or state securities laws, and the
Company and the Shareholders will provide to Gray all financial statements,
financial information and business information required or desirable for
the Resale Registration Statement. In the event that the Company and the
Shareholders whose Gray Common Stock is to be resold under the Resale
Registration Statement do not comply with the terms of this Section 7.9(2),
including without limitation, by providing information regarding such
selling Shareholders, the Company, Brazos Broadcasting Company and the
means of distribution of all Gray Common Stock to be resold pursuant
thereto, then Gray automatically shall be excused from its obligations
pursuant to this Section 7.9(2). Notwithstanding any
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other provision of this Section 7.9 to the contrary, Gray shall not pay
for, or otherwise be responsible for, any brokerage or similar expenses
associated with the resale of any of the Gray Common Stock. Promptly upon
request from Gray no more frequently than once each 12 month period, the
Shareholder Representative shall provide Gray with the identity of such
Shareholder who has resold any of the Gray Common Stock issued in the
Merger and the number of shares of Gray Common Stock sold by each such
Shareholder. Gray shall use its commercially reasonable best efforts to
keep the Resale Registration Statement effective until the earlier of (i)
the date on which all of the Gray Common Stock initially covered by the
Resale Registration Statement has been sold by the Shareholders or (ii) the
date on which all of the Gray Common Stock initially covered by the Resale
Registration Statement is eligible for public resale without limitation
without an effective resale registration statement. During such time as the
effectiveness of the Resale Registration Statement is required to be
maintained pursuant to the preceding sentence, Gray timely shall make all
filings with the SEC and the NYSE necessary to maintain the effectiveness
of the Resale Registration Statement.
(3) Gray shall cause (i) the Registration Statement and the Resale
Registration Statement to comply as to form in all material respects with
the requirements of the Securities Act and the Exchange Act and the
respective rules and regulations adopted thereunder, and (ii) the
Registration Statement and the Resale Registration Statement (except with
respect to information concerning the Company and the Brazos Broadcasting
Company furnished in writing by or on behalf of the Company specifically
for use therein, for which information the Shareholders shall be
responsible) and the Proxy Statement (but only with respect to information
concerning Gray and the Gray Subsidiaries furnished in writing by or on
behalf of Gray specifically for use therein, for which information Gray
shall be responsible) to not contain any untrue statement of any material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements made therein not misleading. Gray will
advise the Company in writing if prior to the Effective Time it shall
obtain knowledge of any fact that would, in its opinion, make it necessary
to amend or supplement the Registration Statement or the Resale
Registration Statement in order to make the statements therein not
misleading or to comply with applicable law.
(4) Prior to Closing, the Company will indemnify Gray, its directors,
officers, employees and agents, and each Person who controls Gray within
the meaning of Section 15 of the Securities Act against all expenses,
claims, losses, damages and liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained (or incorporated by reference) in
the Registration Statement, the Proxy Statement/Prospectus or the Resale
Registration Statement or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse Gray and such
directors, officers, employees and agents and control Persons for any legal
or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action, in each
case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made (or
incorporated by reference) in the Registration Statement, the Proxy
Statement/Prospectus or the Resale Registration Statement in reliance upon
and in
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conformity with information furnished to Gray by the Company or any of the
Shareholders for use therein.
(5) After Closing, each of the Shareholders will indemnify the Company
and Gray, each of their respective directors, officers, employees and
agents, and each Person who controls the Company or Gray within the meaning
of Section 15 of the Securities Act against all expenses, claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a material
fact contained (or incorporated by reference) in the Registration
Statement, the Proxy Statement/Prospectus or the Resale Registration
Statement or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company and Gray and such
directors, officers, employees and agents and control Persons for any legal
or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action, in each
case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made (or
incorporated by reference) in the Registration Statement, the Proxy
Statement/Prospectus or the Resale Registration Statement in reliance upon
and in conformity with information furnished to Gray by the Company or any
of the Shareholders for use therein.
7.10 PUBLICITY. The parties hereto agree that they will consult with each
other concerning any proposed press release or public announcement pertaining to
the Merger and shall use their best efforts to agree upon the text of any such
press release or the making of such public announcement.
7.11 REGISTRATION AND LISTING OF GRAY COMMON STOCK. Gray will use its
commercially reasonable best efforts to file the Registration Statement with
respect to the Gray Common Stock to be issued pursuant to this Agreement under
the applicable provisions of the Securities Act, and Gray will use its
commercially reasonable best efforts to cause the Gray Common Stock to be issued
pursuant to this Agreement to be listed for trading on the NYSE.
7.12 SUPPLYING OF FINANCIAL STATEMENTS. The Company shall deliver to Gray
within twenty (20) days following the end of each month true and complete copies
of all unaudited monthly financial statements of the Company for each calendar
month ending subsequent to December 31, 1998 and prior to the Closing Date in
the format historically utilized internally by the Company and, to the extent
applicable, within ninety (90) days following the end of each year true and
completed copies of annual audited financial statements of the Company for each
year subsequent to 1998.
7.13 SUPPLEMENTS TO SCHEDULES. The Company shall from time to time after
the date hereof, supplement or amend the Schedules referred to in Section 4 with
respect to any matter arising after the date hereof which, if existing or
occurring at the date hereof, would have been required to be set forth or
described in such Schedules. Gray may unilaterally extend the Closing Date if
necessary to allow Gray ten (10) business days to review such supplements to the
Schedules prior to the Closing Date. If, in Gray's reasonable determination, any
such supplements to the Schedules reveal any Material Adverse Change, or any
condition or event that reasonably threatens to result in a Material Adverse
Change, Gray shall give written notice to the Company of its determination. The
Company shall then have a period of ten (10) business days to reasonably satisfy
Gray
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that there has been no Material Adverse Change, or to remedy such Material
Adverse Change, or such condition or event, to Gray's reasonable satisfaction.
If, following such ten (10) business day cure period, in Gray's reasonable
determination, such Material Adverse Change, or such condition or event that
reasonably threatens to result in a Material Adverse Change, still exists, Gray
may terminate this Agreement pursuant to Section 13.5.
7.14 AFFILIATES OF THE COMPANY. Prior to the Closing Date, the Company
shall deliver to Gray a letter identifying all Persons who are reasonably and in
good faith believed to be, at the time of the Shareholder Meeting, "affiliates"
of the Company for purposes of Rule 145 under the Securities Act. The Company
shall use its best efforts to cause each Person who is so identified as an
affiliate to deliver to Gray, on or prior to the Closing Date, a written
agreement, in form reasonably satisfactory to Gray, that such Person will not
offer to sell or otherwise dispose of any of the shares of Gray Common Stock
issued in connection with the Merger in violation of the Securities Act.
SECTION 8. CONDITIONS PRECEDENT FOR THE COMPANY.
The Company's obligation to effect the Merger shall be subject, to the
extent not waived, to the satisfaction of each of the following conditions at or
prior to the Closing.
8.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Gray and Merger Corp. contained in this Agreement shall be true, complete, and
correct in all material respects as of the date when made and, except for
changes expressly contemplated by this Agreement, on and as of the Closing Date
as though such representations and warranties had been made on and as of the
Closing Date, and Gray and Merger Corp. shall have delivered to the Shareholder
Representatives a certificate, signed by the Chairman or the President of Gray
and Merger Corp. and dated the Closing Date, to such effect.
8.2 PERFORMANCE OF THIS AGREEMENT. Each of Gray and Merger Corp. shall
have performed and complied in all material respects with all covenants,
conditions, and agreements required by this Agreement to be performed or
complied with by it prior to or on the Closing Date and Gray and Merger Corp.
shall have delivered to the Company and its counsel all of the documents
specified or required to be delivered in accordance with the provisions hereof.
8.3 PROCEEDINGS. All corporate and other proceedings to be taken by Gray
and Merger Corp. in connection with the transactions contemplated hereby shall
have been completed and all such proceedings and all documents incident thereto
shall be reasonably satisfactory in substance and form to the Company, and the
Company shall have received all such counterpart originals or certified or other
copies of such documents as the Company may reasonably request.
8.4 FCC CONSENT. The FCC Consent shall have been granted without the
imposition of any condition thereon adverse to the Company or the Shareholders
and (unless waived by the Company) shall have become a Final Order. All other
consents and authorizations by third parties and all governmental consents,
approvals, licenses, and permits, the granting of which are necessary for the
consummation of the transactions contemplated hereby or for preventing the
termination of any material right, privilege, license, or agreement of the
Company or Merger Corp. related to the Station, or any material loss or
disadvantage to the Company or Merger Corp., upon the consummation of the
transactions contemplated hereby, shall have been obtained or made.
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8.5 LITIGATION. No order of any court or administrative agency shall be
in effect which restrains or prohibits the transactions contemplated hereby,
there shall not be pending any action, inquiry, investigation, or proceeding by
or before any court or governmental agency or other regulatory or administrative
agency or commission challenging any of the transactions contemplated by this
Agreement.
8.6 EXPIRATION OF HSR WAITING PERIODS. All applicable waiting periods,
including any extensions thereof, relating to the HSR Act, shall have expired or
otherwise terminated.
8.7 EFFECTIVE REGISTRATION STATEMENT. The Registration Statement shall
have become effective and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
Governmental Authority.
8.8 LEGAL OPINION. The Company shall have received a favorable opinion
from Alston & Bird LLP, Heyman & Sizemore or Proskauer Rose LLP (or a
combination thereof), counsel for Gray and Merger Corp., dated as of the Closing
Date, in form and substance satisfactory to the Company, to the effect that:
(1) each of Gray and Merger Corp. is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Georgia and has the corporate power and authority to own and operate its
properties and to carry on its business as being conducted and to execute,
deliver and perform this Agreement and to consummate the transactions
contemplated by this Agreement;
(2) all necessary corporate, stockholder and other action has been
taken on the part of each of Gray and Merger Corp. to authorize and approve
this Agreement and the transactions contemplated hereby; and this Agreement
has been duly executed and delivered by each of Gray and Merger Corp.;
(3) Gray has full legal power and authority to issue and deliver the
shares of Gray Common Stock to the Shareholders in the manner contemplated
by this Agreement; such shares are duly authorized and, upon consummation
of the Merger, will be validly issued, fully paid and nonassessable and
free of any lien, encumbrance, equity or claim created or suffered to exist
by Gray or Merger Corp.;
(4) the execution, delivery and performance of this Agreement by Gray
and Merger Corp. and the consummation by Gray and Merger Corp. of the
transactions contemplated by this Agreement (i) will not result in a breach
or violation by Gray or Merger Corp. of, or constitute a default by Gray or
Merger Corp. under, any statute, rule, regulation, judgment, decree, order,
governmental permit or license, agreement, indenture or instrument included
as an exhibit to the Gray SEC Filings to which Gray or any of its
subsidiaries, including Merger Corp., is a party or by which Gray or any of
its subsidiaries is bound or the Certificate or Articles of Incorporation
or Bylaws of Gray or any of its subsidiaries and (ii) do not require any
consents, approvals, authorizations, registrations or filings by Gray or
Merger Sub that have not been obtained or completed;
(5) the shares of Gray Common Stock which will be delivered to the
Shareholders pursuant to this Agreement are authorized for listing on the
New York Stock Exchange upon official notice of issuance; and the
stockholders of Gray have no preemptive rights with respect to such shares;
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(6) the Registration Statement with respect to the shares of Gray
Common Stock which will be delivered to the Shareholders pursuant to this
Agreement has become effective; to the best of such counsel's knowledge no
stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been initiated or
threatened by the SEC;
(7) except only for matters set forth in the Agreement or Schedules
thereto or in the Gray SEC Filings, to the best of such counsel's knowledge
there is no legal action or governmental proceeding or investigation
pending or threatened against or affecting Gray or any of its subsidiaries
or their respective businesses, properties, assets or goodwill which if
determined adversely to Gray or any of its subsidiaries would individually
or in the aggregate have a material adverse effect on the consolidated
financial condition or results of operations of Gray or would materially
adversely affect or prevent the Merger;
(8) as of the effective time specified in the Certificate of Merger
each issued and outstanding share of Company Common Stock will be converted
into the consideration provided in Section 3.1 of the Agreement.
In addition, such opinion shall state that such counsel has participated in
the preparation of the Registration Statement and in conferences with officers
and other representatives of the Company, representatives of the independent
public accountants for the Company, and representatives of the Shareholders, at
which the contents of the Registration Statement and related matters were
discussed and, although such counsel has made certain inquiries and
investigations in connection with the preparation of the Registration Statement,
such counsel did not independently verify the accuracy or completeness of the
statements made in the Registration Statement and the limitations inherent in
the role of outside counsel are such that such counsel cannot and does not
assume responsibility for or pass on the accuracy and completeness of such
statements, except insofar as such statements relate to such counsel and to the
extent set forth in certain specified paragraphs of the Registration Statement.
Subject to the foregoing, such counsel shall state to the Shareholders that such
counsel's work in connection with this matter did not disclose any information
that caused such counsel to believe that the Registration Statement as of its
date or as of the Effective Time, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances in which they
were made, not misleading (other than financial statement and other information
of a statistical or financial nature which are or should be contained therein
and other than FCC and other regulating matters, as to which such counsel need
express no view).
8.9 TAX OPINION. Unless Gray and Merger Corp. exercise the Cash Election
Option described in Section 3.1(3) above, the Company shall have received an
opinion from King & Spalding or such other tax counsel as is reasonably
acceptable to the Company, dated as of the Effective Time, substantially to the
effect that, on the basis of the facts, representations and assumptions set
forth in such opinions that are consistent with the state of facts existing at
the Effective Time, the Merger will be treated for Federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code and that
accordingly:
(i) No gain or loss should be recognized by Gray, the Company or
Merger Corp. as a result of the Merger; and
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(ii) No gain or loss should be recognized by the Shareholders to the
extent that they exchange their Company Common Stock for Gray Common Stock
pursuant to the Merger (except with respect to cash received in lieu of a
fractional share interest in Gray Common Stock).
In rendering such opinion, such counsel may require and rely upon
representations and covenants including those contained in certificates of
officers of Gray, the Company and Merger Corp. and others.
8.10 NYSE LISTING. The shares of Gray Common Stock issuable pursuant to
this Agreement shall have been approved for listing on the New York Stock
Exchange.
8.11 VOTING AGREEMENT AND IRREVOCABLE PROXY. Simultaneously with the
execution of this Agreement, each of Hilton H. Howell, Jr., Robert S. Prather,
Jr., J. Mack Robinson, Harriet J. Robinson and Bull Run Corporation shall enter
into a Voting Agreement and Irrevocable Proxy in form and substance reasonably
acceptable to the Company.
SECTION 9. CONDITIONS PRECEDENT FOR GRAY AND MERGER CORP.
Gray's and Merger Corp.'s obligations to effect the Merger shall be
subject, to the extent not waived, to the satisfaction of each of the following
conditions at or prior to the Closing.
9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company contained in this Agreement shall be true, complete, and correct in
all material respects as of the date when made and, except for changes expressly
contemplated by this Agreement, on and as of the Closing Date, as though such
representations and warranties had been made on and as of the Closing Date, and
the Company shall have delivered to Gray and Merger Corp. a certificate, signed
by the Chairman or the President of the Company and dated the Closing Date, to
such effect.
9.2 PERFORMANCE OF THIS AGREEMENT. The Company and the Shareholders shall
have performed and complied in all material respects with all covenants,
conditions, and agreements required by this Agreement to be performed or
complied with by it prior to or on the Closing Date and the Company and the
Shareholders shall have delivered to Gray and Merger Corp. and their counsel all
of the instruments of transfer, certificates, Exhibits, Schedules, and other
documents specified or required to be delivered in accordance with the
provisions hereof.
9.3 PROCEEDINGS. All corporate and other proceedings to be taken by the
Company, its Board of Directors and the Shareholders in connection with the
transactions contemplated hereby shall have been completed and all such
proceedings and all documents incident thereto shall be reasonably satisfactory
in substance and form to Gray and Merger Corp., and Gray and Merger Corp. shall
have received all such counterpart originals or certified or other copies of
such documents as Gray may reasonably request.
9.4 FCC CONSENT. The FCC Consent shall have been granted without the
imposition of any condition thereon adverse to Gray or Merger Corp. and (unless
waived by Gray) shall have become a Final Order. All other consents and
authorizations by third parties and all governmental consents, approvals,
licenses, and permits, the granting of which are necessary for the consummation
of the transactions contemplated hereby or for preventing the termination of any
material right, privilege, license, or agreement of the Company or Merger Corp.
related to the Station, or any material loss or disadvantage to
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Gray or Merger Corp., upon the consummation of the transactions contemplated
hereby, shall have been obtained or made. Gray hereby agrees that a
determination by the Mass Media Bureau of the FCC that KBTX-TV is a satellite of
KWTX-TV does not constitute an adverse condition. The Company hereby agrees that
a determination by the Mass Media Bureau of the FCC that KBTX-TV is not a
satellite of KWTX-TV does constitute an adverse condition.
9.5 LITIGATION. No order of any court or administrative agency shall be
in effect which restrains or prohibits the transactions contemplated hereby or
which would limit or affect Gray's ownership or control of the Company, the
Station or Merger Corp., and there shall not be pending any action, inquiry,
investigation, or proceeding by or before any court or governmental agency or
other regulatory or administrative agency or commission challenging any of the
transactions contemplated by this Agreement.
9.6 OPINIONS OF COUNSEL FOR THE COMPANY. Gray and Merger Corp. shall have
received opinions from Deaver & Deaver, counsel to the Company, and from Dennis
Kelly, special FCC counsel to the Company, dated as of the Closing Date, in
substantially the forms attached hereto as Exhibits F and G, respectively.
9.7 TITLE INSURANCE POLICIES. Gray or Merger Corp., at Gray's sole cost
and expense, shall have received standard form policies of owner's or lessee's
title insurance, issued by a title insurance company doing business in the state
in which such property is located, acceptable to Gray, insuring the Company's
title as owner or as lessee, as the case may be, with current survey coverage,
based on a current ALTA Survey, in form and substance reasonably satisfactory to
Gray, in all of the Real Property in amounts specified by Gray, containing only
those exceptions, conditions, and reservations acceptable to Gray and its
counsel in their reasonable discretion (collectively, the "Permitted
Exceptions"), together with legible copies of the documents creating the
Permitted Exceptions.
9.8 ENVIRONMENTAL AUDIT.
(1) Gray, at Gray's sole cost and expense, shall have received the
written results of an environmental audit, prepared at the direction of
Gray, confirming that:
(i) The Real Property does not contain any hazardous wastes,
hazardous substances, toxic substances, hazardous air pollutants, or
toxic pollutants, as those terms are defined in state and federal
environmental laws and regulations promulgated pursuant to such laws, in
amounts which are in violation of such laws or regulations;
(ii) No part of the Real Property is currently or potentially
subject to any federal, state, or local compliance or enforcement
action, clean-up action, or other action because of the presence of
stored, leaked, spilled, or disposed petroleum products, waste materials
or debris, "PCB's" or "PCB items," underground storage tanks,
"asbestos," or any dangerous, hazardous, or toxic substance as defined
in or regulated by any federal or state or local laws, regulations, or
orders;
(iii) No part of the Real Property has been filled with debris,
garbage, stumps, or other similar waste materials; and
(iv) No condition currently exists on the Real Property, whether
owned or leased, which is or may be characterized by any federal, state,
or local
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government or agency as an actual or potential threat or danger to
public health or the environment.
(2) If the environmental audit obtained by Gray recommends remedial
measures to clean up contamination identified in the environmental audit,
the Company may complete the remedial measures at its sole cost and expense
so long as such cost and expense is less than the Working Capital Surplus
of the Company, in which case, the time for the Closing hereunder shall be
extended up to 120 days as reasonably necessary to allow for such
remediation. If the Company refuses to complete such remedial measures,
Gray may, at Gray's option,
(i) complete the remedial measures at Gray's sole cost and expense,
in which case, the time for Closing hereunder shall be extended as
reasonably necessary to allow for such remediation and the cash portion
of the Merger Consideration shall be reduced by such cost and expense,
or
(ii) cancel and terminate this Agreement without further liability
to Gray or the Company.
9.9 EXPIRATION OF HSR WAITING PERIODS. All applicable waiting periods,
including any extensions thereof, relating to the HSR Act, shall have expired or
otherwise terminated.
9.10 CONSUMMATION OF RELATED TRANSACTIONS. All conditions and approvals
necessary for the consummation of related transactions under the KBTX Agreement
shall have occurred or been performed or fulfilled, so that the transactions
described under this Agreement can be closed simultaneously with or immediately
prior to the closing under the KBTX Agreement.
9.11 EFFECTIVE REGISTRATION STATEMENT. The Registration Statement shall
have become effective and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
Governmental Authority.
9.12 TAX OPINION. Unless Gray and Merger Corp. exercise the Cash Election
Option described in Section 3.1(3) above, Gray and Merger Corp. shall have
received an opinion from King & Spalding or such other tax counsel as is
reasonably acceptable to Gray and Merger Corp., dated as of the Effective Time,
substantially to the effect that, on the basis of the facts, representations and
assumptions set forth in such opinions that are consistent with the state of
facts existing at the Effective Time, the Merger will be treated for Federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code and that accordingly:
(i) No gain or loss should be recognized by Gray, the Company or
Merger Corp. as a result of the Merger; and
(ii) No gain or loss should be recognized by the Shareholders who
exchange their Company Common Stock for Gray Common Stock pursuant to the
Merger (except with respect to cash received in lieu of a fractional share
interest in Gray Common Stock).
In rendering such opinion, such counsel may require and rely upon
representations and covenants including those contained in certificates of
officers of Gray, the Company and Merger Corp. and others.
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9.13 NYSE LISTING. The shares of Gray Common Stock issuable pursuant to
this Agreement shall have been approved for listing on the New York Stock
Exchange.
9.14 GRAY SHAREHOLDER APPROVAL. The shareholders of Gray shall have
approved the issuance of the Gray Common Stock as required by this Agreement.
9.15 AFFILIATES OF THE COMPANY. On or prior to the Closing Date, Gray
shall have received the agreements and instruments referred to in Section 7.13.
9.16 VOTING AGREEMENT AND IRREVOCABLE PROXY. Simultaneously with the
execution of this Agreement, each Shareholder of the Company who is an officer
or director of the Company or who holds at least 5% of the outstanding Company
Common Stock shall enter into a Voting Agreement and Irrevocable Proxy in form
and substance reasonably acceptable to Gray and Merger Corp.
9.17 SHAREHOLDER APPROVAL. This Agreement and the merger contemplated
hereby shall have been approved by an affirmative vote of all of the
Shareholders.
9.18 DUE DILIGENCE AND SCHEDULES. Gray and Merger Corp. shall be
reasonably satisfied with their due diligence review of the Company and the
Station, including the information disclosed on the Schedules. This condition
shall be deemed to have been satisfied if notice to the contrary has not been
given to the Company no later than ten (10) business days after receipt by Gray
and Merger Corp. of all of the due diligence information reasonably requested by
the them and receipt by Gray and Merger Corp. of all of the Schedules.
SECTION 10. CLOSING.
10.1 DELIVERIES BY THE COMPANY. At the Closing, Gray will release and pay
or cause the payment of the Merger Consideration upon receipt of the following
instruments and documents executed by the Company, where appropriate, in form
and content satisfactory to Gray and its counsel:
(1) All original minute book(s) and stock transfer book(s) of the
Company;
(2) The corporate seal of the Company;
(3) A true and complete copy of the Articles of Incorporation of the
Company and all amendments thereto certified by its state of incorporation;
(4) A Certificate of Account Status for the Company from the Texas
Comptroller of Public Accounts, dated no more than thirty (30) days prior
to the Closing Date;
(5) A true and complete copy of the Bylaws and all amendments thereto
of the Company certified by its secretary;
(6) A certificate of the secretary of the Company stating that the
Articles of Incorporation have not been amended since the date of the
certificate described in Subsection 10.1(3) above and that nothing has
occurred since the date of issuance of the Certificate of Account Status
specified in Subsection 10.1(4) above that would adversely affect the
Company's corporate existence or good standing;
(7) The Closing Certificate referred to in Section 9.1 of this
Agreement;
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(8) An Owner's and Contractor's Affidavit and such other form
documents, instruments or information as may be requested by the title
insurance company which is providing owner's or lessee's title insurance
coverage for the Real Property;
(9) The opinions of the Company's counsel and the Company's special
FCC counsel; and
(10) Such other documents as Gray or its Counsel may reasonably
request for the complete fulfillment of the Company's and the Shareholders'
obligation hereunder.
10.2 POSTPONEMENT OF CLOSING DATE.
(1) If either the average Market Value (as defined in Section
3.2(1)(ii)) during the Valuation Period (as defined in Section 3.2(1)(iii))
or the Market Value at the Closing Date is less than $10 per share and
additional shares of Gray Common Stock are required to be issued pursuant
to Section 3.2(7), Gray may unilaterally extend the Closing Date for as
much time as reasonably may be required to allow Gray to obtain approval of
Gray's shareholders for the issuance of additional shares of Gray Common
Stock sufficient to allow the Closing to occur and to effect the
registration of such Gray Common Stock under the Securities Act and the
listing of such Gray Common Stock for trading on the NYSE.
(2) In the event that Gray and Merger Corp. elect in their sole and
absolute discretion to pay the Merger Consideration pursuant to the Cash
Election Option (as defined in Section 3.1(3)), Gray in its sole and
absolute discretion may unilaterally extend the Closing Date for thirty
(30) days from the time of the exercise of the Cash Election Option.
SECTION 11. INDEMNIFICATION.
11.1 BY THE SHAREHOLDERS. After the Closing Date, to the limit of the
Escrow Fund described in Section 11.4, below, the Shareholders shall indemnify
and hold harmless each of Gray and Merger Corp. and their respective officers,
directors, employees, agents, representatives, successors, and permitted assigns
against:
(1) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by Gray or Merger Corp. and arising
from a breach of any representation or warranty of the Company or the
Shareholders contained in this Agreement;
(2) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by Gray or Merger Corp. and arising
from a breach of any agreement of the Company or the Shareholders contained
in this Agreement;
(3) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by Gray or Merger Corp. and arising
from any debt, obligation, or liability of the Company not specifically and
expressly reflected on the Company's December 31, 1998 Balance Sheet, or if
incurred in the ordinary course of business thereafter, on the Final
Balance Sheets, including any Taxes relating to the period ending on the
Closing Date;
(4) any damages, losses, obligations, liabilities, claims, actions or
causes or action sustained or suffered by Gray or Merger Corp. and arising
from a breach of any representation, warranty or agreement of the Company
or the Shareholders
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relating to the sale of the Brazos Shares or arising under corresponding
provisions of this Section 11 contained in the KBTX Agreement;
(5) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by Gray or Merger Corp. and arising
from any Environmental Claim or any Environmental Matter;
(6) all ordinary and necessary costs, expenses, or settlement payments
(including, without limitation, reasonable attorneys', accountants', and
other professional fees) incurred by Gray in connection with any action,
claim, suit, proceeding, demand, assessment, or judgment incident to any of
the matters indemnified against under this Section 11.
The Company and the Shareholders acknowledge and agree that the provisions
of this Section 11 are intended to complement corresponding provisions of the
KBTX Agreement so that Gray and Merger Corp. shall be entitled to
indemnification for and recovery of any damages, losses, obligations,
liabilities, claims, actions or causes of action sustained or suffered by Gray
or Merger Corp. on account of acquisition of Brazos Broadcasting Company,
payable one-half from the Shareholders and one-half from the persons named as
the Shareholders in the KBTX Agreement, on a several and pro-rata basis.
11.2 BY GRAY AND MERGER CORP. After the Closing Date, to the limit of the
amount of the Escrow Fund, from time to time, described in Section 11.4 below,
each of Gray and Merger Corp. shall indemnify and hold harmless the Shareholders
and their respective successors and permitted assigns against:
(1) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by the Shareholders and arising from
a breach of any representation or warranty of Gray or Merger Corp.
contained in this Agreement;
(2) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by the Shareholders and arising from
a breach of any agreement of Gray or Merger Corp. contained in this
Agreement;
(3) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by the Shareholders and arising from
(a) any debt, obligation, or liability of the Company properly reflected on
the Final Balance Sheets; or, (b) the conduct of the business of the
Company after the Closing Date;
(4) any taxes incurred by the Company, Gray or Merger Corp., resulting
from the merger contemplated hereby; and
(5) all ordinary and necessary costs, expenses, or settlement payments
(including, without limitation, reasonable attorneys', accountants', and
other professional fees) incurred by the Shareholders or the Shareholder
Representative in connection with any action, suit, proceeding, demand,
assessment, or judgment incident to any of the matters indemnified against
under this Section 11.
11.3 PROCEDURE FOR INDEMNIFICATION. The procedure for indemnification
shall be as follows:
(1) The party claiming indemnification (the "Claimant") shall promptly
give notice to the party from which indemnification is claimed (the
"Indemnifying Party") of any claim, whether between the parties or brought
by a third party, specifying in
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reasonable detail the factual basis for the claim. If the claim relates to
an action, suit, or proceeding filed by a third party against Claimant,
such notice shall be given by Claimant within ten (10) days after written
notice of such action, suit, or proceeding was given to Claimant, provided
that any failure to give notice of such action, suit, or proceeding within
such ten (10) day period shall not relieve the Indemnifying Party of its
obligations hereunder except to the extent such failure shall have
prejudiced such party in the defense or resolution of any such claim. The
notice of a claim may be amended on one or more occasions with respect to
the amount of the claim at any time prior to final resolution of the
obligation to indemnify relating to the claim.
(2) With respect to claims solely between the parties, following
receipt of notice from the Claimant of the claim, the Indemnifying Party
shall have thirty (30) days to make such investigation of the claim as the
Indemnifying Party deems necessary or desirable. For the purposes of such
investigation, the Claimant agrees to make available to the Indemnifying
Party and/or its authorized representatives the information relied upon by
the Claimant to substantiate the claim. If the Claimant and the
Indemnifying Party agree at or prior to the expiration of the thirty-day
(30) period (or any mutually agreed upon extension thereof) to the validity
and amount of such claim, the Indemnifying Party shall immediately pay to
the Claimant the amount of the claim. If the Claimant and the Indemnifying
Party do not agree within the thirty-day (30) period (or any mutually
agreed upon extension thereof), the Claimant may seek an appropriate remedy
at law or equity.
(3) With respect to any claim by a third party as to which the
Claimant is entitled to indemnification under this Agreement, the
Indemnifying Party shall have the right, at its own expense, to participate
in or assume control of the defense of such claim, and the Claimant shall
cooperate fully with the Indemnifying Party, subject to reimbursement for
actual out-of-pocket expenses incurred by the Claimant as the result of a
request by the Indemnifying Party. The Indemnifying Party may elect to
compromise or contest, at its own expense and with counsel reasonably
acceptable to the Claimant, any third party claim. If the Indemnifying
Party elects to compromise or contest such third party claim, it shall
within thirty (30) days after receipt of the notice of the claim (or
sooner, if the nature of the third party claim so requires) notify the
Claimant of its intent to do so by sending a notice to the Indemnified
Party (the "Contest Notice"), and the Claimant shall cooperate, at the
expense of the Indemnifying Party, in the compromise or contest of such
third party claim. If the Indemnifying Party elects not to compromise or
contest the third party claim, fails to notify the Claimant of its election
as herein provided or contests its obligation to indemnify under this
Agreement, the Claimant (upon further notice to the Indemnifying Party)
shall have the right to pay, compromise or contest such third party claim
on behalf of and for the account and risk of the Indemnifying Party.
Anything in this Section 11.3 to the contrary notwithstanding, (i) the
Claimant shall have the right, at its own cost and for its own account, to
compromise or contest any third party claim, and (ii) the Indemnifying
Party shall not, without the Claimant's written consent, settle or
compromise any third party claim or consent to entry of any judgment which
does not include an unconditional term releasing the Claimant from all
liability in respect of such third party claim. In any event, the Claimant
and the Indemnifying Party may participate, at their own expense, in the
contest of such third party claim. In addition, with respect to any claim
related to Taxes, Gray and Merger Corp. shall have the right to participate
in and attend any meeting or proceeding (at Gray's and Merger Corp.'s own
cost and expense) with respect thereto, shall be
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provided with copies of any written communication or information regarding
any oral communication with respect thereto as soon as possible after the
receipt thereof (including, but not limited to, information with respect to
any proposed meeting or proceeding) and shall have the right to approve any
settlement thereof if the terms of such settlement could increase, directly
or indirectly, any liability for Taxes of Gray or Merger Corp. in any
period following the Closing. If the Indemnifying Party elects to assume
control of the defense of a third-party claim, the Claimant shall have the
right to participate in the defense of such claim at its own expense. If
the Indemnifying Party does not elect to assume control or otherwise
participate in the defense of any third party claim, it shall be bound by
the results obtained by the Claimant with respect to such claim.
(4) If a claim, whether between the parties or by a third party,
requires immediate action, the parties will make every effort to reach a
decision with respect thereto as expeditiously as possible.
(5) The indemnification rights provided in Sections 11.1 and 11.2
shall extend to the shareholders, directors, officers, members, employees,
and representatives of any Claimant.
11.4 ESCROW FUND. At the Closing, the sum of Seven Hundred Fifty Thousand
Dollars ($750,000.00) out of the Merger Consideration (the "Escrow Fund") shall
be deposited with the Escrow Agent. The Escrow Fund shall be held in accordance
with the terms hereof and the terms of the Escrow Agreement substantially in the
form of Exhibit B attached hereto. The Escrow Fund shall be used as a source of
funds to satisfy indemnification claims by Gray and Merger Corp. under this
Section 11. Upon final determination of a claim in favor of Gray and Merger
Corp. by a court of competent jurisdiction or by mutual agreement of Gray,
Merger Corp. and the Shareholder Representative, Gray and Merger Corp. shall be
entitled to the amount of such claim from the Escrow Fund. On the first
anniversary of the Closing Date, the Escrow Fund shall be reduced to Three
Hundred Seventy-Five Thousand Dollars ($375,000.00), unless there are
outstanding claims presented by Gray or Merger Corp. against the Escrow Fund, in
which case, the Escrow Fund shall be reduced to the sum which is Three Hundred
Seventy-Five Thousand Dollars ($375,000.00) more than the pending claims of Gray
and Merger Corp. All claims by Gray and Merger Corp. against the Escrow Fund
must be made by Gray or Merger Corp. before the date which is four (4) years
after the Closing Date (the "Indemnity Termination Date"). On the Indemnity
Termination Date, the Escrow Agent shall disburse to the Shareholder
Representative the Indemnity Fund together with all interest earned thereon less
the amount of any claims made by Gray or Merger Corp. against the Escrow Fund
prior to such date (the "Claim Amount"). The Claim Amount shall be retained by
the Escrow Agent in escrow until the underlying claim or claims related thereto
have been finally determined by a court of competent jurisdiction or by mutual
agreement of Gray and the Shareholder Representative. Gray and the Shareholder
Representative hereby agree to jointly direct the Escrow Agent to disburse any
portion of the Escrow Fund to any party which is entitled thereto pursuant to
the terms hereof.
11.5 LIMITATION ON DAMAGES. Notwithstanding any provision of this
Agreement to the contrary, the Shareholders' liability to Gray and Merger Corp.
for any breach of any representation, warranty or other applicable provision of
this Agreement shall be several and divided pro-rata among the Shareholders, in
accordance with their percentage ownership of the Shares, and, after Closing,
shall be limited to the Escrow Fund described in Section 11.4. In no event,
after the Closing hereof, shall the total amount of monetary
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damages that Gray and Merger Corp. may collect from Shareholders as damages for
one or more breaches by the Shareholders or the Company under this Agreement
exceed said Escrow Fund. Notwithstanding any other provision of this Agreement
to the contrary, after the Closing, Merger Corp., as successor to the Company,
shall not be liable to the Shareholders for any inaccuracy in any representation
or warranty or any breach of any covenant or agreement made or to be performed
by the Company pursuant to this Agreement and the Shareholders shall have no
right of contribution from or any other claim or action against Merger Corp., as
successor to the Company.
SECTION 12. CONDUCT OF BUSINESS PENDING CLOSING.
The Company covenants, represents, and warrants in favor of Gray and Merger
Corp. that, pending the Closing, unless otherwise agreed to in writing by Gray:
12.1 The Company will not sell, transfer, or otherwise dispose of, or
enter into any transaction, contract, or commitment for the sale or disposition
of all or any portion of the assets of the Station, except in the ordinary
course of business, none of which transactions shall materially affect Merger
Corp. or the Station from and after the Closing Date.
12.2 The Company will carry and continue in full force through the Closing
such fire and extended coverage, and theft, liability, and other insurance in
substantially the same form and amount as are currently in force.
12.3 The Company will use its best efforts to preserve the business
organization and all equipment and records thereof in good order, to keep
available for Merger Corp. all of the present employees of the Company, and to
preserve for Merger Corp. the goodwill of suppliers, customers, advertisers, and
others having business relationships with the Company.
12.4 The Company will maintain, repair and replace the Leased Property,
Real Property and the Tangible Personal Property in accordance with its
customary practices, in substantially the same condition and state of repair as
all such property is in on the date of this Agreement, ordinary wear and tear
excepted.
12.5 The Company shall permit Gray and its representatives, independent
accountants, and attorneys, reasonable access during normal business hours to
its properties, books, records, and other information with respect to the
Company as Gray may request, and to make copies of such books, records, and
other documents that Gray considers necessary or appropriate for the purposes of
familiarizing itself with the Company.
12.6 Between the date of this Agreement and the Closing Date, the Company
will deliver to Gray information necessary to update the Schedules hereto and
the lists, documents, and other information furnished by the Company as
contemplated by this Agreement, and updated copies of new or changed documents
relating to or included as a part of such Schedules, in order that all such
Schedules, lists, documents, and other information and items shall be complete
and accurate in all respects as of the Closing Date.
12.7 Except for written employment agreements in existence on the date
hereof and listed in Schedule 4.22, none of the Company, any of the Shareholders
or any of their respective representatives has made or will make oral, written
or other representations to any employee of the Company or to any other Person
regarding the benefits, compensation or other terms or conditions of employment
that will be provided to such individuals after
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the Closing Date. Whether or not a particular individual will or will not be
retained in employment after the Closing Date constitutes a term or condition of
employment.
SECTION 13. TERMINATION.
This Agreement may be terminated at any time prior to the Closing Date in
the following manner:
13.1 by mutual written consent of Gray, Merger Corp. and the Company;
13.2 if any representation, warranty, covenant or agreement of the
Company, or if any representation, warranty, covenant or agreement of Gray or
Merger Corp., contained herein (that materially affects the financial condition
or business of Gray or the Company) 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 ten (10) days in which to cure such default;
13.3 by Gray and Merger Corp., if any condition to the consummation of the
transactions contemplated hereby which must be fulfilled to its satisfaction has
(in their good faith judgment) not been fulfilled, or has become impossible to
fulfill;
13.4 without any action by Gray and Merger Corp. or the Company, if the
Closing Date has not occurred by December 31, 1999, unless the Assignment
Application jointly filed by the Company or the Shareholders and Gray and Merger
Corp. is still pending before the FCC on that date, in which case this Agreement
shall not be terminated until May 31, 2000 pursuant to this Section 13.4, but
after which, either the Company or Gray and Merger Corp. may terminate the
Agreement;
13.5 by Gray and Merger Corp. pursuant to Section 7.13; or
13.6 by the Company if Gray fails to accomplish the following events by
the dates indicated:
(a) filing the Registration Statement by the later of (i) thirty (30)
days after Gray receives from the Company, Brazos Broadcasting Company,
KXII Broadcasters, Inc., KXII Broadcasters, Ltd., KXII Television, Ltd. and
K-Twelve, Ltd. all of the financial statements, financial information and
business information required or desirable for inclusion in the
Registration Statement or (ii) sixty (60) days after the date of this
Agreement;
(b) obtaining Gray shareholder approval of the issuance of the Gray
Common Stock in the Merger within forty (40) days after the Registration
Statement has been declared effective by the SEC; and
(c) file the Resale Registration Statement by the later of (i) twenty
(20) days after the approval of the Merger by the Shareholders or (ii)
twenty (20) days after the Closing Date.
If the termination of this Agreement occurs without breach or default of
the Company or Gray and Merger Corp., then this Agreement shall become wholly
void and shall have no further force and effect, and neither Gray or Merger
Corp., on the one hand, nor the Company, on the other, shall have any liability
or obligation with respect to each other. Upon such termination, the Escrow
Agent shall refund the Earnest Money to Gray
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within three (3) days after the date upon which the termination becomes
effective. If the termination occurs as a result of a breach or default by the
Company, then Gray and Merger Corp. shall be entitled to seek specific
performance of the Company's obligation to effect the Merger in accordance with
the provisions hereof, or obtain the return of the Earnest Money. If the
termination occurs as a result of a breach or default by Gray or Merger Corp.,
the Company may request the Earnest Money from the Escrow Agent and retain the
Earnest Money as liquidated damages to compensate the Company and the
Shareholders for the damages resulting from such breach or default. The parties
agree that actual damages pursuant to a breach of this Agreement prior to
Closing would be impossible to measure. Receipt of the Earnest Money shall be
the sole and exclusive remedy that the Company shall have in the event of such
breach or default and shall constitute a waiver of any and all other legal or
equitable rights or remedies that the Company may otherwise have as a result of
Gray's or Merger Corp.'s breach or default, and that in consideration for the
receipt of the Earnest Money as liquidated damages, the Company may not obtain
any further legal or equitable relief, including specific performance, to which
it may otherwise have been entitled and neither Gray nor Merger Corp. shall have
any further liability to the Company or the Shareholders as a result of such
breach or default or the non-occurrence of Closing. If the Closing does not
occur due to the nonfulfillment of any of the conditions in Section 9 or for any
other reason except Gray's or Merger Corp.'s material breach or default in the
performance of any of its obligations under this Agreement, the Company shall
not be entitled to the proceeds of the Earnest Money and, promptly after the
termination of this Agreement, the proceeds of the Earnest Money shall be
returned to Gray.
SECTION 14. MISCELLANEOUS PROVISIONS.
14.1 EXPENSES OF NEGOTIATION AND TRANSFER.
(1) The Company and Gray shall share equally in the payment of FCC
filing fees, and the HSR filing fees, and the Shareholders and Gray shall
share equally in the payment of the fees of the Neutral Auditors.
(2) Except as provided above, each party to this Agreement shall pay
its own expenses and other costs incidental to or resulting from this
Agreement, whether or not the transactions contemplated hereby are
consummated.
14.2 SCHEDULES. Any disclosure with respect to a Section or Schedule of
this Agreement shall be deemed to be disclosure for each of the other Sections
or Schedules of this Agreement with respect to which the substance of the
disclosure is clear and unambiguous on the face of the disclosure.
14.3 SURVIVAL. All of the covenants, agreements, representations, and
warranties made in this Agreement or made pursuant hereto shall survive the
Closing and the consummation of the transactions contemplated by this Agreement.
14.4 ENTIRE AGREEMENT; AMENDMENT; WAIVERS. This Agreement and the
documents referred to herein and to be delivered pursuant hereto constitute the
entire agreement of the parties pertaining to the subject matter hereof, and
supersede all prior and contemporaneous agreements understandings, negotiations,
and discussions of the parties, whether oral or written, and there are no
warranties, representations, or other agreements between the parties in
connection with the subject matter hereof, except as specifically set forth
herein. No amendment, supplement, modification, waiver, or termination of this
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Agreement shall be binding unless executed in writing by the party to be bound
thereby. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provision or breach of this Agreement,
whether or not similar, unless otherwise expressly provided.
14.5 HEADINGS. The descriptive headings of the Sections and Subsections
of this Agreement and the Table of Contents are for convenience only and do not
constitute a part of this Agreement.
14.6 FURTHER ASSURANCES. Each party agrees to execute and deliver such
further certificates, agreements, and other documents and it shall take such
other actions as the other party may reasonably request to consummate or
implement the transactions contemplated hereby or to evidence such events or
matters.
14.7 SITUS AND CONSTRUCTION. This Agreement and any other agreements to
be made and entered into pursuant hereto shall be construed in accordance with
and governed by the laws of the State of Texas.
14.8 NOTICES. All notices under this Agreement shall be made in writing
and shall be delivered by U.S. Mail, overnight courier, facsimile, or other
means calculated to give prompt, actual notice to the recipient party, in the
following manner:
<TABLE>
<S> <C>
If to the Milford N. Bostick, Chairman
Company:
KWTX Broadcasting Company
200 West Highway 6
Suite 210
Waco, TX 76712
Phone: 254-772-9155
Fax: 254-772-7350
with a copy Kyle Deaver and John Lee Deaver
to:
Deaver & Deaver
200 West Highway 6
Suite 501
Waco, TX 76712
Phone: 254-741-0400
Fax: 254-751-8369
If to the Robert S. Prather, Jr.
Gray:
Gray Communications Systems, Inc.
4370 Peachtree Road
Atlanta, Georgia 30319
Phone: 404-266-8333
Fax: 404-261-9067
with a copy Alston & Bird LLP
to:
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attention: Stephen A. Opler
Phone: 404-881-7000
Fax: 404-881-4777
</TABLE>
14.9 BINDING EFFECT. All of the covenants, conditions, agreements, and
undertakings set forth in this Agreement shall extend to and be binding upon the
Company, the Shareholders, Gray and Merger Corp. and their respective successors
and assigns. No party
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to this Agreement may assign any of its rights or obligations hereunder, except
that Merger Corp. may assign its rights and obligations to any other entity of
which Gray owns a majority of the equity interests.
14.10 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, and all of which
shall be deemed but one instrument.
14.11 SHAREHOLDER REPRESENTATIVE.
(1) By approving this Merger Agreement and accepting the Merger
Consideration, each of the Shareholders hereby irrevocably makes,
constitutes, and appoints Ray M. Deaver as the representative, agent and
true and lawful attorney in fact of and for each of the Shareholders in
connection with this Agreement (the "Shareholder Representative"). Each of
the Shareholders hereby authorizes and empowers the Shareholder
Representative to make or give any approval, waiver, request, consent,
instruction or other communication on behalf of each of the Shareholders as
each such Shareholder could do for himself, itself or herself, including
with respect to the amendment of any provision of this Agreement. Each of
the Shareholders further authorizes and empowers the Shareholder
Representative to (i) receive all demands, notices or other communications
directed to such Shareholder under this Agreement and to take any action
(or to determine to refrain from taking any action) with respect thereto as
he may deem appropriate as effectively as such Shareholder could act for
himself, itself or herself (including, without limitation, the settlement
or compromise of any dispute or controversy) and (ii) execute and deliver
all instruments and documents of every kind incident to the foregoing with
the same effect as if such Shareholder had executed and delivered such
instruments and documents personally. Accordingly, any demands, notices or
other communications directed to the Shareholders hereunder shall be deemed
effective if given to the Shareholder Representative. Upon the death,
resignation or incapacity of the Shareholder Representative, or at any
other time, a successor may be appointed by the vote of the holders of a
majority of the Shares outstanding immediately prior to the Effective Time,
and such successor shall agree in writing to accept such appointment in
accordance with the terms hereof. Notice of the selection of a successor
Shareholder Representative appointed in the manner permitted in this
Section 14.11 shall be provided to Gray and Merger Corp. promptly.
(2) Without limiting the generality of the foregoing paragraph (1), if
Gray, Merger Corp. or any of the other Persons specified in Section 11.1
asserts a claim for indemnification based upon the provisions of Section
11, the notice requirements of Sections 11.3 and 14.8 shall be satisfied by
delivery of any required notice to the Shareholder Representative as
representative of and on behalf of each of the Shareholders, and the
Shareholder Representative shall exercise all rights of the Shareholders,
as indemnifying parties under Section 11, and shall cause all obligations
of the Shareholders, as indemnifying parties under Section 11, to be
performed. Each of the Shareholders agrees to be bound by all actions and
failures to act of the Shareholder Representative in accordance with this
Section 14.11. Notwithstanding the foregoing, it shall be the obligation of
each Shareholder, and not of the Shareholder Representative, to indemnify
Gray, Merger Corp. and the other Persons specified in Section 11.1 based
upon the provisions of Section 11. By approving this Merger Agreement and
by accepting the Merger Consideration, each Shareholder hereby agrees to
indemnify and to save and hold harmless the Shareholder
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<PAGE> 221
Representative from any liability incurred by the Shareholder
Representative based upon or arising out of any act, whether of omission or
commission, of the Shareholder Representative pursuant to the authority
herein granted, other than acts, whether of omission or commission, of the
Shareholder Representative that constitute gross negligence or willful
misconduct in the exercise by the Shareholder Representative of the
authority herein granted.
[SIGNATURES ON FOLLOWING PAGE]
A-49
<PAGE> 222
IN WITNESS WHEREOF, the Company, Gray and Merger Corp. have executed this
Agreement and Plan of Merger by their duly authorized officers on and as of the
date set forth above.
<TABLE>
<S> <C>
GRAY:
ATTEST: Gray Communications Systems, Inc.
- --------------------------------------------- By: /s/ ROBERT S. PRATHER, JR.
--------------------------------------------
Title: -------------------------------------- Title: Executive Vice President
--------------------------------------------
MERGER CORP.:
ATTEST: Gray Communications of Texas, Inc.
- --------------------------------------------- By: /s/ ROBERT S. PRATHER, JR.
--------------------------------------------
Title: -------------------------------------- Title: President
--------------------------------------------
THE COMPANY:
ATTEST: KWTX Broadcasting Company
/s/ ROSS SAMS, JR. By: /s/ RAY DEAVER
- ---------------------------------------------
--------------------------------------------
Title: Secretary Title: President
--------------------------------------------
- --------------------------------------------
</TABLE>
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<PAGE> 223
APPENDIX B
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
GRAY COMMUNICATIONS SYSTEMS, INC.,
GRAY COMMUNICATIONS OF TEXAS, INC.
AND
BRAZOS BROADCASTING COMPANY
DATED AS OF APRIL 13, 1999
<PAGE> 224
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
B-1
SECTION 1. DEFINITIONS............................................
1.1 Affiliate................................................... B-1
1.2 Agreement................................................... B-1
1.3 Assignment Application...................................... B-2
1.4 Closing..................................................... B-2
1.5 Closing Date................................................ B-2
1.6 Code........................................................ B-2
1.7 Company..................................................... B-2
1.8 Company Common Stock........................................ B-2
1.9 Earnest Money............................................... B-2
1.10 Effective Time.............................................. B-2
1.11 Encumbrances................................................ B-2
1.12 Environmental Claim......................................... B-2
1.13 Environmental Matter........................................ B-2
1.14 Escrow Agent................................................ B-2
1.15 FCC......................................................... B-2
1.16 FCC Consent................................................. B-2
1.17 FCC Licenses................................................ B-2
1.18 Final Order................................................. B-2
1.19 Governmental Authority...................................... B-3
1.20 Gray........................................................ B-3
1.21 Gray Common Stock........................................... B-3
1.22 HSR Act..................................................... B-3
1.23 Intangible Property......................................... B-3
1.24 Knowledge, Know, Known...................................... B-3
1.25 KWTX Agreement.............................................. B-3
1.26 KWTX Broadcasting Company................................... B-3
1.27 Law......................................................... B-3
1.28 Leased Property............................................. B-3
1.29 Material Adverse Change or Material Adverse Effect.......... B-3
1.30 Merger...................................................... B-4
1.31 Merger Consideration........................................ B-4
1.32 NYSE........................................................ B-4
1.33 Permits..................................................... B-4
1.34 Permitted Liens............................................. B-4
1.35 Person...................................................... B-4
1.36 Preliminary Balance Sheets.................................. B-4
1.37 Program Rights.............................................. B-4
1.38 Real Property............................................... B-4
1.39 Schedule.................................................... B-4
1.40 SEC......................................................... B-4
1.41 Shareholder Representative.................................. B-5
1.42 Shareholders................................................ B-5
1.43 Shares...................................................... B-5
1.44 Station..................................................... B-5
1.45 Tangible Personal Property.................................. B-5
1.46 Tax Or Taxes................................................ B-5
1.47 Tax Returns................................................. B-5
</TABLE>
i
<PAGE> 225
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1.48 Tradeout Agreement.......................................... B-5
1.49 Working Capital Surplus..................................... B-5
B-5
SECTION 2. MERGER.................................................
2.1 Merger...................................................... B-5
2.2 Time and Place of Closing................................... B-6
2.3 Effective Time.............................................. B-6
2.4 Articles of Incorporation................................... B-6
2.5 Bylaws...................................................... B-6
2.6 Directors and Officers...................................... B-6
2.7 Reorganization.............................................. B-7
B-7
SECTION 3. MERGER CONSIDERATION; EXCHANGE PROCEDURES..............
3.1 Merger Consideration........................................ B-7
3.2 Cash Percentage Election.................................... B-8
3.3 Rights as Shareholders; Share Transfers..................... B-10
3.4 Fractional Shares........................................... B-10
3.5 Exchange Procedures......................................... B-10
3.6 Treasury Shares............................................. B-11
3.7 Earnest Money............................................... B-11
3.8 Determination of Working Capital Surplus.................... B-11
3.9 Accounting Principles....................................... B-13
B-14
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
SHAREHOLDERS.....................................................
4.1 Organization, Corporate Power, and Qualifications of the
Company..................................................... B-14
4.2 Authorization and Validity.................................. B-14
4.3 Ownership of Shares......................................... B-14
4.4 Capitalization of the Company............................... B-14
4.5 Investments and Subsidiaries................................ B-15
4.6 Noncontravention............................................ B-15
4.7 Consents, Approvals......................................... B-15
4.8 Financial Statements........................................ B-15
4.9 Title to and Condition of Real Property..................... B-16
4.10 Title to and Condition of Tangible Personal Property........ B-17
4.11 Litigation.................................................. B-17
4.12 Environmental Matters....................................... B-18
4.13 Trade Names, Trade Marks, etc............................... B-19
4.14 Governmental Authorization and Compliance with Laws......... B-19
4.15 FCC Licenses................................................ B-20
4.16 Labor Relations............................................. B-20
4.17 Insurance................................................... B-21
4.18 Accounts Receivable......................................... B-21
4.19 Accounts Payable............................................ B-21
4.20 Tax Returns, Audits, and Liabilities........................ B-21
4.21 Bank Accounts............................................... B-22
4.22 Certain Contracts........................................... B-22
4.23 Employees................................................... B-23
4.24 Employee Benefit Plans...................................... B-23
4.25 No Brokers.................................................. B-24
4.26 Computer Software and Database.............................. B-24
4.27 Interested Transactions..................................... B-24
4.28 Full Disclosure............................................. B-24
4.29 Reliance and Survival....................................... B-25
</TABLE>
ii
<PAGE> 226
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
B-25
SECTION 5. REPRESENTATIONS AND WARRANTIES OF GRAY AND MERGER
CORP...............................................................
5.1 Organization and Existence.................................. B-25
5.2 Authorization and Validity.................................. B-25
5.3 Noncontravention............................................ B-25
5.4 Consents, Approvals......................................... B-25
5.5 No Brokers.................................................. B-25
5.6 Capitalization.............................................. B-26
5.7 SEC Filings; Financial Statements........................... B-26
5.8 Financial Ability........................................... B-27
B-27
SECTION 6. FCC APPROVAL...........................................
6.1 Filing and Prosecution of Application....................... B-27
6.2 Expenses.................................................... B-27
6.3 Time for FCC Consent........................................ B-27
6.4 Control of Station.......................................... B-27
6.5 No Reversion of Licenses.................................... B-28
6.6 Regulatory Matters.......................................... B-28
B-28
SECTION 7. SPECIAL COVENANTS AND AGREEMENTS.......................
7.1 HSR Act..................................................... B-28
7.2 Confidentiality............................................. B-28
7.3 Cooperation................................................. B-29
7.4 Access to Books and Records................................. B-29
7.5 Certain Investments......................................... B-29
7.6 Acquisition Proposals....................................... B-29
7.7 Meetings of Shareholders.................................... B-29
7.8 Meetings of Gray and Merger Corp. Shareholders.............. B-29
7.9 Registration Statements..................................... B-29
7.10 Publicity................................................... B-32
7.11 Registration and Listing of Gray Common Stock............... B-32
7.12 Supplying of Financial Statements........................... B-32
7.13 Supplements to Schedules.................................... B-32
7.14 Affiliates of the Company................................... B-32
B-32
SECTION 8. CONDITIONS PRECEDENT FOR THE COMPANY...................
8.1 Representations and Warranties.............................. B-32
8.2 Performance of this Agreement............................... B-33
8.3 Proceedings................................................. B-33
8.4 FCC Consent................................................. B-33
8.5 Litigation.................................................. B-33
8.6 Expiration of HSR Waiting Periods........................... B-33
8.7 Effective Registration Statement............................ B-33
8.8 Legal Opinion............................................... B-33
8.9 Tax Opinion................................................. B-35
8.10 NYSE Listing................................................ B-35
8.11 Voting Agreement and Irrevocable Proxy...................... B-35
B-36
SECTION 9. CONDITIONS PRECEDENT FOR GRAY AND MERGER CORP..........
9.1 Representations and Warranties.............................. B-36
9.2 Performance of this Agreement............................... B-36
9.3 Proceedings................................................. B-36
9.4 FCC Consent................................................. B-36
9.5 Litigation.................................................. B-36
9.6 Opinions of Counsel for the Company......................... B-36
</TABLE>
iii
<PAGE> 227
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
9.7 Title Insurance Commitments................................. B-37
9.8 Environmental Audit......................................... B-37
9.9 Expiration of HSR Waiting Periods........................... B-38
9.10 Consummation of Related Transactions........................ B-38
9.11 Effective Registration Statement............................ B-38
9.12 Tax Opinion................................................. B-38
9.13 NYSE Listing................................................ B-38
9.14 Gray Shareholder Approval................................... B-38
9.15 Affiliates of the Company................................... B-38
9.16 Voting Agreement and Irrevocable Proxy...................... B-38
9.17 Shareholder Approval........................................ B-38
9.18 Due Diligence and Schedules................................. B-39
B-39
SECTION 10. CLOSING...............................................
10.1 Deliveries by the Company................................... B-39
10.2 Postponement of Closing Date................................ B-39
B-40
SECTION 11. INDEMNIFICATION.......................................
11.1 By the Shareholders......................................... B-40
11.2 By Gray and Merger Corp..................................... B-40
11.3 Procedure for Indemnification............................... B-41
11.4 Escrow Fund................................................. B-42
11.5 Limitation on Damages....................................... B-43
B-43
SECTION 12. CONDUCT OF BUSINESS PENDING CLOSING...................
B-44
SECTION 13. TERMINATION...........................................
B-46
SECTION 14. MISCELLANEOUS PROVISIONS..............................
14.1 Expenses of Negotiation and Transfer........................ B-46
14.2 Schedules................................................... B-46
14.3 Survival.................................................... B-46
14.4 Entire Agreement; Amendment; Waivers........................ B-46
14.5 Headings.................................................... B-46
14.6 Further Assurances.......................................... B-46
14.7 Situs and Construction...................................... B-46
14.8 Notices..................................................... B-47
14.9 Binding Effect.............................................. B-47
14.10 Execution in Counterparts................................... B-47
14.11 Shareholder Representative.................................. B-47
</TABLE>
iv
<PAGE> 228
INDEX OF SCHEDULES
<TABLE>
<S> <C> <C>
Schedule 4.3 -- Stock Ownership
Schedule 4.5 -- Investments and Subsidiaries
Schedule 4.8 -- Financial Statements
Schedule 4.9(1) -- Description of Real Property
Schedule 4.9(3) -- Ground Leases
Schedule 4.9(4) -- Tenant Leases
Schedule 4.10(1) -- Tangible Personal Property
Schedule 4.10(2) -- Leased Tangible Personal Property
Schedule 4.11 -- Litigation
Schedule 4.12 -- Hazardous Substance Sites
Schedule 4.13 -- Trade Names, Trade Marks, Etc.
Schedule 4.14 -- Governmental Licenses, Certificates, Permits and
Approvals
Schedule 4.15 -- FCC Licenses
Schedule 4.16 -- Employment and Related Agreements
Schedule 4.17 -- Insurance
Schedule 4.20 -- Tax Matters
Schedule 4.21 -- Bank Accounts
Schedule 4.22 -- Certain Contracts
Schedule 4.23 -- Employees
Schedule 4.24 -- Employee Benefit Plans
Schedule 4.27 -- Interested Transactions
</TABLE>
v
<PAGE> 229
INDEX OF EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit A -- Form of Shareholder Representative Appointment Agreement
Exhibit B -- Form of Escrow Agreement (Indemnification)
Exhibit C -- Form of Escrow Agreement (Earnest Money)
Exhibit D -- Form of Preliminary Balance Sheets
Exhibit E -- Form of Final Balance Sheets
Exhibit F -- Form of Opinion of Deaver & Deaver
Exhibit G -- Form of Opinion of Dennis Kelly
</TABLE>
vi
<PAGE> 230
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and executed
as of April 13, 1999, by and among GRAY COMMUNICATIONS SYSTEMS, INC., a Georgia
corporation ("Gray"), GRAY COMMUNICATIONS OF TEXAS, INC., a Georgia corporation
and wholly-owned subsidiary of Gray ("Merger Corp.") and BRAZOS BROADCASTING
COMPANY, a Texas corporation (the "Company").
RECITALS
The Company is the licensee of television station KBTX-TV, Channel 3, in
Bryan, Texas (the "Station") pursuant to authorizations issued by the Federal
Communications Commission ("FCC"). The Boards of Directors of Gray, Merger Corp.
and the Company are of the opinion that the transactions described in this
Agreement are in the best interests of the parties and their respective
shareholders. This Agreement provides for the acquisition of the Company by Gray
through the merger of the Company with and into Merger Corp. At the Effective
Time of such merger, the outstanding shares of capital stock of the Company will
be converted into the right to receive shares of the common stock of Gray and
cash. As a result (i) the Shareholders will become shareholders of Gray, and
(ii) Merger Corp. will conduct the business and operations of the Company as a
wholly-owned subsidiary of Gray. It is the intention of the parties to this
Agreement that the merger contemplated by this Agreement qualify as a
"reorganization" within the meaning of Section 368 of the Code for federal
income tax purposes. Certain terms used in this Agreement are defined in Section
1 hereof.
The acquisition of the Company by Gray through the merger of the Company
with and into Merger Corp. is one of two related transactions involving the
acquisition of two television stations owned by KWTX Broadcasting Company and
the Company. Gray anticipates completing the acquisition of both television
stations after the parties have received approval from the FCC.
NOW, THEREFORE, in consideration of the foregoing, the mutual agreements,
covenants, representations and warranties contained herein, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and subject to the terms and conditions hereinafter set forth, the
parties hereto agree as follows:
SECTION 1. DEFINITIONS.
The following terms, when used in capitalized form within this Agreement,
or within any Exhibit or Schedule to this Agreement in which the terms are not
otherwise defined, shall have the following meanings:
1.1 "AFFILIATE" of a Person shall mean: (i) any Person directly, or
indirectly through one or more intermediaries, controlling, controlled by or
under common control with such Person; (ii) any officer, director, partner,
employee, agent, or representative or direct or indirect beneficial or legal
owner of any 10% or greater equity or voting interest of such Person; (iii) any
entity for which a Person described in (ii) above acts in any such capacity.
1.2 "AGREEMENT" shall mean this Agreement and Plan of Merger, and all
Exhibits, Schedules, certificates, and instruments attached hereto or referred
to herein.
B-1
<PAGE> 231
1.3 "ASSIGNMENT APPLICATION" shall have the meaning specified in Section
6.1 below.
1.4 "CLOSING" shall mean the consummation of the Merger pursuant to this
Agreement in accordance with the provisions of Section 10.
1.5 "CLOSING DATE" shall mean the date on which the Closing occurs, as
determined pursuant to Section 2.2.
1.6 "CODE" shall mean the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
1.7 "COMPANY" shall mean Brazos Broadcasting Company, as identified above,
a Texas corporation with its principal offices at 4141 East 29th Street, Bryan,
Texas 77802.
1.8 "COMPANY COMMON STOCK" shall mean the common stock, $100 par value, of
the Company.
1.9 "EARNEST MONEY" shall mean the cash deposit in the amount of One
Million Dollars ($1,000,000) paid by Gray to the Escrow Agent upon the execution
of this Agreement, in the amount and in accordance with provisions set forth in
Section 3.7 below, together with interest thereon, if any.
1.10 "EFFECTIVE TIME" shall mean the later of (i) the date and time that
the Articles of Merger reflecting the Merger are filed with the Secretary of
State of the State of Texas (or such later date and time as may be specified in
the Articles of Merger) and (ii) the date and time that the Articles of Merger
reflecting the Merger are filed with the Secretary of State of the State of
Georgia (or such later date and time as may be specified in the Articles of
Merger).
1.11 "ENCUMBRANCES" shall mean security interests, mortgages, liens,
pledges, options, rights of first refusal, and other restrictions on the use or
transferability of property and claims or charges on any interest in property in
favor of a person other than the owner of the property, whether or not relating
to the extension of credit or the borrowing of money and whether or not existing
by reason of statute, contract, or common law.
1.12 "ENVIRONMENTAL CLAIM" shall have the meaning ascribed in Section
4.12(6)(a).
1.13 "ENVIRONMENTAL MATTER" shall have the meaning ascribed in Section
4.12(6)(b).
1.14 "ESCROW AGENT" shall mean American Bank, N.A., Waco, Texas.
1.15 "FCC" shall mean the Federal Communications Commission, as defined in
the recitals to this Agreement.
1.16 "FCC CONSENT" shall mean action by the FCC in the form of a public
notice or some other written document granting its consent to the Assignment
Application.
1.17 "FCC LICENSES" shall mean all licenses and authorizations issued by
the FCC to the Company in connection with the business or operations of the
Station, including the right to use the call letters "KBTX-TV."
1.18 "FINAL ORDER" means action of the FCC approving the transfer of
control of the Company to Gray or Merger Corp., which action is no longer
subject to reconsideration or court review under the provisions of the
Communications Act of 1934, as amended, and with respect to which no timely
filed request for administrative or judicial review or stay is
B-2
<PAGE> 232
pending and as to which the time for filing any such request, or for the FCC to
set aside the action on its own motion, has expired.
1.19 "GOVERNMENTAL AUTHORITY" shall mean any federal, state, county, local
or other governmental or public agency, instrumentality, commission, authority,
board or body.
1.20 "GRAY" shall mean Gray Communications Systems, Inc., as identified
above, a Georgia corporation, with its principal offices at 4370 Peachtree Road,
Atlanta, Georgia 30319.
1.21 "GRAY COMMON STOCK" shall mean the Class B Common Stock, no par
value, of Gray, with identical rights to those shares issued under the initial
public offering of 3,500,000 shares as described in that one certain prospectus
dated September 24, 1996.
1.22 "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and regulations promulgated thereunder.
1.23 "INTANGIBLE PROPERTY" shall mean all copyrights, trademarks, trade
names, service marks, service names, the call letters "KBTX-TV," licenses,
patents, permits, jingles, proprietary information, technical information and
data, computer software, formats, customer lists, advertiser lists, machinery
and equipment warranties, and other similar intangible property rights and
interests (other than the FCC Licenses)(and any goodwill associated with any of
the foregoing) applied for, issued to, or owned by the Company or under which
the Company is licensed or franchised and which are used or useful in the
business and operations of the Station, together with any additions thereto
between the date of this Agreement and the Closing Date.
1.24 "KNOWLEDGE," "KNOW," "KNOWN" and words of similar import, with
respect to the Company, shall mean collectively those facts actually known, now
or in the past, by the Company, Ray M. Deaver, Jim Baronet and M.N. Bostick.
1.25 "KWTX AGREEMENT" shall mean the Agreement and Plan of Merger dated
the same date as this Agreement for the merger of KWTX Broadcasting Company with
and into Merger Corp. or, in the event Gray and Merger Corp. exercise the Cash
Election Option (as defined in Section 3.1(3) herein), the merger of Merger
Corp. (or its permitted assignee) with and into Brazos Broadcasting Company.
1.26 "KWTX BROADCASTING COMPANY" shall mean KWTX Broadcasting Company, a
Texas corporation, with its principal offices at 6700 American Plaza, Waco,
Texas 76712, which owns television station KWTX, Channel 10, licensed to Waco,
Texas.
1.27 "LAW" shall mean any federal, state, or local code, law, legal
principal, order, ordinance, regulation, rule, or statute of any Governmental
Authority.
1.28 "LEASED PROPERTY" shall mean any and all Real Property used or
occupied by the Company as lessee under any oral or written lease, together with
any additions thereto, and extensions or renewals thereof, between the date of
this Agreement and the Closing Date.
1.29 "MATERIAL ADVERSE CHANGE" or "MATERIAL ADVERSE EFFECT" shall mean a
significant negative impact on the Company taken as a whole or the business of
the Station, excluding any negative impact attributable to (i) factors affecting
the television broadcasting industry generally, (ii) general national, regional,
or local economic
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conditions, or (iii) governmental or legislative laws, rules, or regulations
affecting the television broadcasting industry generally.
1.30 "MERGER" shall mean the merger of the Company with and into Merger
Corp. or, in the event Gray and Merger Corp. exercise the Cash Election Option
(as defined in Section 3.1(3) herein), the merger of Merger Corp. (or its
permitted assignee) with and into the Company.
1.31 "MERGER CONSIDERATION" shall mean the aggregate consideration to be
paid to the Shareholders pursuant to the Merger, as more fully defined in
Section 3.1(l).
1.32 "NYSE" shall mean the New York Stock Exchange.
1.33 "PERMITS" shall mean all licenses, permits, and other authorizations
(other than the FCC Licenses), issued to the Company by the Federal Aviation
Administration or any other federal, state, or local governmental authority in
connection with the conduct of the business and operations of the Station,
together with any additions, extensions, or renewals of same between the date of
this Agreement and the Closing Date.
1.34 "PERMITTED LIENS" shall mean (i) liens for Taxes and assessments not
yet due and payable, mechanics' and other statutory liens arising in the
ordinary course of business that secure obligations not delinquent, (ii)
restrictions or rights granted to Governmental Authorities under applicable Law,
that are not otherwise objectionable to Gray, and (iii) liens, restrictions and
easements on the Real Property (as defined below) that, in Gray's reasonable
judgment, do not detract from the value or impair the use of the property
subject thereto; provided, however, in no event shall "Permitted Liens" include
Encumbrances relating to the extension of credit or the borrowing of money.
1.35 "PERSON" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a business association,
corporation, general partnership, joint venture, limited partnership, limited
liability company, trust, or any person acting in a representative capacity.
1.36 "PRELIMINARY BALANCE SHEETS" shall have the meaning set forth in
Section 3.8(1) below.
1.37 "PROGRAM RIGHTS" shall mean all rights of the Company, presently
existing or obtained prior to the Closing, to broadcast television programs,
movies, and films, including all film and program rights under barter
agreements, as a part of the programming for the Station, for which the Company
is obligated to compensate the vendor of such Program Rights.
1.38 "REAL PROPERTY" shall mean all of the Company's real property and
interests in real property, purchase options, easements, licenses, rights to
access, rights of way, all buildings and other improvements thereon, and all
other real property interests which are used in the business or operations of
the Station, together with any additions thereto between the date of this
Agreement and the Closing Date.
1.39 "SCHEDULE" shall mean those Schedules referred to in this Agreement
delivered concurrently with the execution of this Agreement and attached hereto
(or bound separately) or delivered pursuant to Section 9.18, all of which
Schedules are incorporated in and made a part hereof by reference.
1.40 "SEC" shall mean the Securities and Exchange Commission.
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1.41 "SHAREHOLDER REPRESENTATIVE" shall mean the Person(s) appointed as
the Shareholder Representative pursuant to the Shareholder Representative
Appointment Agreement, substantially in the form of Exhibit A to this Agreement,
which initially shall be Ray Deaver.
1.42 "SHAREHOLDERS" shall mean the shareholders of the Company.
1.43 "SHARES" shall mean Five Hundred (500) shares of the capital stock in
the Company, owned by the Shareholders, which constitutes one hundred percent
(100%) of the shares of capital stock issued and outstanding in the Company.
1.44 "STATION" shall mean KBTX-TV, Channel 3, a CBS affiliate licensed to
Bryan, Texas, as identified above.
1.45 "TANGIBLE PERSONAL PROPERTY" shall mean all of the Company's fixed
assets, furniture, fixtures, equipment, machinery, motor vehicles, leasehold
improvements, office equipment, computer hardware, spare parts, inventory, and
other such tangible personal property which is used or useful in the conduct of
the business or operations of the Station, together with any additions,
replacements, or improvements thereto between the date of this Agreement and the
Closing Date.
1.46 "TAX" or "TAXES" means taxes of any kind, levies or other like
assessments, customs, duties, imposts, charges or fees imposed or payable to the
United States, or any state, county, or local government, subdivision or agency
thereof, and in each instance, such term shall include any interest, penalties,
or additions to tax attributable to any such Tax.
1.47 "TAX RETURNS" means any returns, statements, filings, reports,
estimates, declarations, and forms relating to Taxes that the Company is
required to file, record, or deposit with any Governmental Authority, including
any attachment thereto or amendment thereof.
1.48 "TRADEOUT AGREEMENT" shall mean any written or oral contract,
agreement, or commitment of the Company, pursuant to which the Company has sold
or traded commercial air time of the Station in consideration of any property or
services in lieu of or in addition to cash, excluding all film and program
barter agreements.
1.49 "WORKING CAPITAL SURPLUS" shall mean the amount by which the current
assets and certain other assets of the Company exceed its current liabilities,
as reflected on the books of the Company as of the close of business on the day
immediately preceding the Closing Date, determined in accordance with the
provisions of Section 3.8 and 3.9 below.
SECTION 2. MERGER.
2.1 MERGER. Subject to the terms and conditions of this Agreement and
subject to Gray's and Merger Corp.'s exercise of the Cash Election Option
pursuant to Section 3.1(3), at the Effective Time, the Company shall be merged
with and into Merger Corp. in accordance with the applicable provisions of the
Georgia Business Corporation Code (the "GBCC") and the Texas Business
Corporation Act (the "TBCA") (the "Merger"). The separate corporate existence of
the Company shall cease and Merger Corp. shall be the surviving corporation
resulting from the Merger and continue to be a wholly-owned subsidiary of Gray
and shall continue to be governed by the Laws of the State of Georgia (Merger
Corp., as the surviving corporation in the Merger, sometimes
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being referred herein as the "Surviving Corporation"). The Merger shall be
consummated pursuant to the terms of this Agreement, which has been approved and
adopted by the respective Boards of Directors of the Company, Merger Corp. and
Gray. In the event that Gray and Merger Corp. exercise the Cash Election Option,
(i) the Merger shall automatically without any further action by the parties be
deemed to be the merger of Merger Corp. (or its permitted assignee) with and
into the Company in accordance with the applicable provisions of the GBCC and
the TBCA and (ii) accordingly, the separate existence of Merger Corp. shall
cease and the Company (rather than Merger Corp.) shall be the surviving
corporation resulting from the Merger and shall continue to be governed by the
Laws of the State of Texas. In the event that Gray and Merger Corp. exercise the
Cash Election Option, the term "Surviving Corporation" shall automatically
without any further action by the parties be deemed to mean the Company and not
Merger Corp. as stated above.
2.2 TIME AND PLACE OF CLOSING. The closing (the "Closing") will take
place at 9:00 A.M. on the date that the Effective Time occurs at the offices of
Deaver & Deaver, 200 West Highway 6, Suite 501, Waco, Texas 76712, or at such
other time and date as the Company and Gray may mutually agree or such date to
which the Closing may be postponed pursuant to Section 10.2 (such actual date of
Closing, the "Closing Date").
2.3 EFFECTIVE TIME. The parties shall cause the Effective Time to occur
on the tenth (10th) day after the last of the conditions set forth in Sections 8
and 9 of this Agreement have been satisfied or waived in accordance with the
terms of this Agreement. Subject to the provisions of this Agreement, the
parties shall file Articles of Merger executed in accordance with the relevant
provisions of the TBCA and the GBCC and shall make all other filings or
recordings required under the TBCA and the GBCC. The Merger and other
transactions contemplated by this Agreement shall become effective on the date
and at the time the Articles of Merger reflecting the Merger become effective
with the Secretaries of State of the States of Texas and Georgia.
2.4 ARTICLES OF INCORPORATION. Subject to Gray's and Merger Corp.'s
exercise of the Cash Election Option described in Section 3.1(3) below, the
Articles of Incorporation of Merger Corp. in effect immediately prior to the
Effective Time shall be the Articles of Incorporation of the Surviving
Corporation until otherwise amended or repealed. In the event that Gray and
Merger Corp. exercise the Cash Election Option, the Articles of Incorporation of
the Company in effect immediately prior to the Effective Time shall be the
Articles of Incorporation of the Surviving Corporation until otherwise amended
or repealed.
2.5 BYLAWS. Subject to Gray's and Merger Corp.'s exercise of the Cash
Election Option described in Section 3.1(3) below, the Bylaws of Merger Corp. in
effect immediately prior to the Effective Time shall be the Bylaws of the
Surviving Corporation until otherwise amended or repealed. In the event that
Gray and Merger Corp. exercise the Cash Election Option, the Bylaws of the
Company in effect immediately prior to the Effective Time shall be the Bylaws of
the Surviving Corporation until otherwise amended or repealed.
2.6 DIRECTORS AND OFFICERS. Whether or not the Cash Election Option is
exercised by Gray and Merger Corp., the directors and officers of Merger Corp.
in office immediately prior to the Effective Time, together with such additional
persons as may thereafter be elected, will serve as the directors and officers,
respectively, of the Surviving
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Corporation from and after the Effective Time in accordance with the Bylaws of
the Surviving Corporation and in accordance with the terms of their original
election.
2.7 REORGANIZATION. Subject to Gray's and Merger Corp.'s exercise of the
Cash Election Option described in Section 3.1(3) below, the parties hereby adopt
this Agreement as a plan of reorganization intended to qualify for tax-deferred
treatment under Section 368(a) of the Code. In the event that the Cash Election
Option is exercised by Gray and Merger Corp., the parties hereby adopt this
Agreement to be treated for federal income tax purposes as an acquisition of the
capital stock of the Company.
SECTION 3. MERGER CONSIDERATION; EXCHANGE PROCEDURES.
3.1. MERGER CONSIDERATION. Subject to the provisions of this Agreement,
at the Effective Time, automatically by virtue of the Merger and without any
action on the part of any party or Shareholder:
(1) Outstanding Company Common Stock. Subject to Gray's and Merger
Corp.'s exercise of the Cash Election Option described in Section 3.1(3)
below, each share (excluding shares held by the Company or any of its
subsidiaries or by Gray or any of its subsidiaries, in each case other than
in a fiduciary capacity ("Treasury Shares") and specifically excluding the
Two Hundred Fifty (250) shares held by KWTX Broadcasting Company, which
shares shall be cancelled at the Effective Time) of the Company Common
Stock, issued and outstanding immediately prior to the Effective Time shall
become and be converted into the right to receive an amount in a
combination of cash and Gray Common Stock (as described in Sections 3.1(2)
and 3.2 below) equal to (A) the sum of (a) Twenty-Two Million Eight Hundred
Twenty Thousand Dollars ($22,820,000) plus (b) fifty percent (50%) of the
Working Capital Surplus of the Company determined based on the Preliminary
Balance Sheets (such sum of clauses (a) and (b) being referred to as the
"Merger Consideration") divided by (B) 250 (such result of dividing (A) by
(B) being referred to as the "Merger Consideration Per Share").
(2) Cash and Gray Common Stock Components of Merger Consideration.
Subject to Gray's and Merger Corp.'s exercise of the Cash Election Option
described in Section 3.1(3) below, the Merger Consideration will be paid in
a combination of cash and Gray Common Stock. Pursuant to Section 3.2, each
Shareholder will have the right to elect the percentage of the Merger
Consideration that he, she or it receives in the form of cash (the "Cash
Percentage") and the percentage to be received in the form of Gray Common
Stock (the "Stock Percentage"); provided, however, that in no event shall
the Stock Percentage be less than forty percent (40%). The Cash Percentage
of the Merger Consideration for each Shareholder electing to receive any of
the Merger Consideration in cash shall be reduced on a pro rata basis
(calculated on the basis of the aggregate amount of cash to be received by
each Shareholder) by Two Hundred Fifty Thousand Dollars ($250,000) to be
held in the Escrow Fund pursuant to Section 11.4 below. The Escrow Fund
shall be disbursed pursuant to the terms of Section 11.4 below and the
Escrow Agreement substantially in the form of Exhibit B attached hereto.
(3) Cash Election Option. In the event that either the average Market
Value (as defined in Section 3.2(1)(ii)) during the Valuation Period (as
defined in Section 3.2(1)(iii)) or the Market Value at the Closing Date is
less than $12 per share, Gray and Merger Corp. shall have the option in
their sole and absolute
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discretion to pay the Merger Consideration in cash, in which event the
Merger Consideration shall be reduced from the amount specified in Section
3.1(1) by $470,000. In addition, the parties agree that if the Cash
Election Option is exercised, they intend for the Merger to be treated as
an acquisition of the capital stock of the Company for federal income tax
purposes. Gray and Merger Corp. may exercise the Cash Election Option at
any time prior to the Closing by providing oral and written notice to the
Company of such exercise as promptly as practicable after making the
decision to exercise such Cash Election Option. Each of the parties shall
use their commercially reasonable best efforts to effect the Cash Election
Option, including without limitation, revising this Agreement in any way
reasonably necessary or desirable to accomplish the Cash Election Option
consistent with this paragraph and cooperating in seeking any additional
required approvals of the FCC or other Governmental Authorities.
(4) Outstanding Merger Corp. Common Stock. Subject to Gray's and
Merger Corp's exercise of the Cash Election Option described in Section
3.1(3) above, each share of the common stock of Merger Corp. ("Merger Corp.
Common Stock") issued and outstanding immediately prior to the Effective
Time shall be unchanged and shall remain issued and outstanding as common
stock of the Surviving Corporation. In the event that Gray and Merger Corp.
exercise the Cash Option Election, each share of Company Common Stock
issued and outstanding immediately prior to the Effective Time shall be
unchanged and shall remain issued and outstanding as common stock of the
Surviving Corporation.
3.2. CASH PERCENTAGE ELECTION.
(1) Holders of the Company Common Stock shall be provided with an
opportunity to elect to receive as much as sixty percent (60%) of the
Merger Consideration Per Share in cash with the remainder of the Merger
Consideration Per Share in the form of Gray Common Stock, in accordance
with the election procedures set forth below in this Section 3.2; provided,
however, that in the event the Market Value on the Closing Date is less
than $14.00 per share, each holder of Company Common Stock shall be deemed
to have elected to receive sixty percent (60%) of the Merger Consideration
Per Share in cash and forty percent (40%) of the Merger Consideration Per
Share in the form of Gray Common Stock. The number of shares of Gray Common
Stock to be paid as part of the Merger Consideration Per Share will be
calculated by dividing the dollar amount of the stock portion of the Merger
Consideration Per Share by the Valuation Period Market Value (as defined
below). For purposes of this Section 3.2:
(i) "Valuation Period Market Value" shall mean the average Market
Value during the Valuation Period; provided, however, that in the event
the average Market Value during the Valuation Period is less than $14.00
per share, the Valuation Period Market Value shall be deemed to be
$14.00 per share and in the event the average Market Value during the
Valuation Period is greater than $15.00 per share, the Valuation Period
Market Value shall be deemed to be $15.00 per share;
(ii) "Market Value" shall mean the closing sales price for Gray
Common Stock as reported on the NYSE Composite Transactions reporting
system (as reported in The Wall Street Journal or, if not reported
therein, in another authoritative source); and
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(iii) "Valuation Period" shall mean the twenty (20) consecutive
trading day period during which the shares of Gray Common Stock are
traded on the NYSE ending on the last trading day prior to the Closing
Date.
(2) An election form and other appropriate and customary transmittal
materials (which shall specify that delivery shall be effected, and risk of
loss and title to the certificates theretofore representing Company Common
Stock ("Old Certificates") shall pass, only upon proper delivery of such
Old Certificates to an exchange agent designated by Gray (the "Exchange
Agent")) in such form as Gray and the Company shall mutually agree
("Election Form") shall be mailed at the time of the mailing of the Proxy
Statement/Prospectus provided for in Section 7.9 hereof or on such other
date as the Company and Gray shall mutually agree ("Mailing Date") to each
holder of record of Company Common Stock as of the record date for the
Shareholder Meeting (as defined in Section 7.7) ("Election Form Record
Date").
(3) Each Election Form shall permit a holder (or the beneficial owner
through appropriate and customary documentation and instructions) of
Company Common Stock to elect to receive as much as sixty percent (60%) of
the Merger Consideration Per Share in cash with the remainder of the Merger
Consideration Per Share in the form of Gray Common Stock; provided,
however, that in the event the Market Value on the Closing Date is less
than $14.00 per share, each holder of Company Common Stock shall be deemed
to have elected to receive sixty percent (60%) of the Merger Consideration
Per Share in cash and forty percent (40%) of the Merger Consideration Per
Share in the form of Gray Common Stock.
(4) Any shares of Company Common Stock with respect to which the
holder (or the beneficial owner, as the case may be) shall not have
submitted to the Exchange Agent an effective, properly completed Election
Form on or before 5:00 p.m. on the day of the Shareholder Meeting (the
"Election Deadline") shall be entitled to receive the Merger Consideration
Per Share sixty percent (60%) in cash and forty percent (40%) in Gray
Common Stock (such shares being "No Election Shares").
(5) Gray shall make available one or more Election Forms as may be
reasonably requested by all Persons who become holders (or beneficial
owners) of Company Common Stock between the Election Form Record Date and
the close of business on the business day prior to the Election Deadline,
and the Company shall provide to the Exchange Agent all information
reasonably necessary for it to perform as specified herein.
(6) Any such election shall have been properly made only if the
Exchange Agent shall have actually received a properly completed Election
Form by the Election Deadline. An Election Form shall be deemed properly
completed only if accompanied by one or more certificates (or customary
affidavits and indemnification regarding the loss or destruction of such
certificates or the guaranteed delivery of such certificates) representing
all shares of the Company Common Stock covered by such Election Form,
together with duly executed transmittal materials included in the Election
Form. Any Election Form may be revoked or changed by the Person submitting
such Election Form at or prior to the Election Deadline. In the event an
Election Form is revoked prior to the Election Deadline, the shares of
Company Common Stock represented by such Election Form shall become No
Election Shares and Gray shall cause the certificates representing Company
Common Stock to be
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promptly returned without charge to the Person submitting the Election Form
upon written request to that effect from the Person who submitted the
Election Form. Such Person may submit a new Election Form with respect to
such shares at any time prior to the Election Deadline. If no new Election
Form is submitted with respect to such shares, they shall become No
Election Shares. Subject to the terms of this Agreement and of the Election
Form, the Exchange Agent shall have reasonable discretion to determine
whether any election, revocation or change has been properly or timely made
and to disregard immaterial defects in the Election Forms, and any good
faith decisions of the Exchange Agent regarding such matters shall be
binding and conclusive. Neither Gray nor the Exchange Agent shall be under
any obligation to notify any person of any defect in an Election Form.
(7) Subject to Gray's and Merger Corp.'s exercise of the Cash Election
Option described in Section 3.1(3) above, in the event that the Market
Value at Closing is less than the Valuation Period Market Value, Gray shall
increase the number of shares of Gray Common Stock to be issued to each
Shareholder by a sufficient number to ensure that the value of the Stock
Portion of the Merger Consideration received by each Shareholder at Closing
will be no less than 40% of the Merger Consideration received by that
Shareholder at Closing.
3.3. RIGHTS AS SHAREHOLDERS; SHARE TRANSFERS. At the Effective Time,
holders of Company Common Stock shall cease to be, and shall have no rights as,
Shareholders of the Company, other than to receive any dividend or other
distribution with respect to such Company Common Stock with a record date
occurring prior to the date hereof and the Merger Consideration provided under
this Section 3. After the Effective Time, there shall be no transfers on the
share transfer books of the Company or the Surviving Corporation of shares of
Company Common Stock.
3.4. FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fractional shares of Gray Common Stock and no certificates or scrip therefor, or
other evidence of ownership thereof, will be issued in the Merger; instead, Gray
shall pay to each holder of Company Common Stock who would otherwise be entitled
to a fractional share of Gray Common Stock (after taking into account all Old
Certificates delivered by such holder) an amount in cash (without interest)
determined by multiplying such fraction by the average of the last sale prices
of Gray Common Stock, as reported by the NYSE Composite Transactions reporting
system (as reported in The Wall Street Journal or, if not reported therein, in
another authoritative source), for the five (5) NYSE trading days immediately
preceding the Effective Date.
3.5. EXCHANGE PROCEDURES.
(1) At or prior to the Effective Time, Gray shall deposit, or shall
cause to be deposited, with the Exchange Agent, for the benefit of the
holders of Old Certificates, for exchange in accordance with this Section
3, certificates representing the shares of Gray Common Stock ("New
Certificates") and an estimated amount of cash (such cash and New
Certificates, together with any dividends or distributions with respect
thereto (without any interest thereon), being hereinafter referred to as
the "Exchange Fund") to be paid pursuant to this Section 3 in exchange for
outstanding shares of Company Common Stock.
(2) As promptly as practicable after the Effective Date, Gray shall
send or cause to be sent to each former holder of record of shares (other
than Treasury Shares) of
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Company Common Stock immediately prior to the Effective Time transmittal
materials for use in exchanging such Shareholder's Old Certificates for the
consideration set forth in this Section 3. Gray shall cause the New
Certificates into which shares of a Shareholder's Company Common Stock are
converted on the Effective Date and any check in respect of the cash
portion of the Merger Consideration Per Share and any fractional share
interests or dividends or distributions which such Person shall be entitled
to receive to be delivered to such Shareholder upon delivery to the
Exchange Agent of Old Certificates representing such shares of Company
Common Stock (or an affidavit and indemnity in form reasonably satisfactory
to Gray and the Exchange Agent, if any of such certificates are lost,
stolen or destroyed) owned by such Shareholder. No interest will be paid on
any such cash to be paid pursuant to this Section 3 upon such delivery.
(3) Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to any former holder of Company Common Stock
for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(4) No dividends or other distributions with respect to Gray Common
Stock with a record date occurring after the Effective Time shall be paid
to the holder of any unsurrendered Old Certificate representing shares of
Company Common Stock converted in the Merger into the right to receive
shares of such Gray Common Stock until the holder thereof shall surrender
such Old Certificate in accordance with this Section 3. After the surrender
of an Old Certificate in accordance with this Section 3, the record holder
thereof shall be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Gray Common Stock represented by such Old
Certificate.
(5) Any portion of the Exchange Fund that remains unclaimed by the
Shareholders of the Company for twelve months after the Effective Time
shall be paid to Gray. Any Shareholders of the Company who have not
theretofore complied with this Section 3 shall thereafter look only to Gray
for payment of the shares of Gray Common Stock, cash, cash in lieu of any
fractional shares and unpaid dividends and distributions on the Gray Common
Stock deliverable in respect of each share of Company Common Stock such
Shareholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon.
3.6. TREASURY SHARES. Each of the shares of Company Common Stock held as
Treasury Shares immediately prior to the Effective Time shall be canceled and
retired at the Effective Time and no consideration shall be issued in exchange
therefor.
3.7 EARNEST MONEY. The Earnest Money, in the form of cash, shall be paid
to the Escrow Agent for the account of the Company within three (3) business
days after the date hereof. The cash Earnest Money shall be held in accordance
with the provisions of the Escrow Agreement substantially in the form of Exhibit
C attached hereto and shall be paid to Merger Corp. at the Closing.
3.8 DETERMINATION OF WORKING CAPITAL SURPLUS.
(1) At least seven (7) days prior to the Closing Date, the Company
shall prepare and deliver to Gray pro forma statements of estimated assets
and liabilities of the Company as of the close of business at 11:59 p.m. on
the day preceding the Closing Date (the "Preliminary Balance Sheets"),
substantially in the form of
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Exhibit D attached hereto, containing estimates of the Working Capital
Surplus of each corporation.
(2) Within ninety (90) days after the Closing, Gray shall prepare
final statements of assets and liabilities of the Company as of the Closing
Date (the "Final Balance Sheets"), substantially in the form of Exhibit E
attached hereto, and shall submit such statements to the Shareholder
Representative for review and approval. Gray shall also provide all
information reasonably necessary to determine the correct amount of Working
Capital Surplus of each corporation, including appropriate supporting
documents and such other information as may be reasonably requested by the
Shareholder Representative. The Final Balance Sheets shall be certified by
an officer on behalf of Gray to be true and complete. The Shareholder
Representative (and his authorized representatives) shall have the right to
visit the Station during normal business hours to verify and review such
documentation upon providing reasonable notice to Gray. If the Shareholder
Representative disputes the amounts of Working Capital Surplus determined
by Gray, he shall so notify Gray within thirty (30) days after receipt of
the Final Balance Sheets and provide Gray with his own Final Balance
Sheets. If the Shareholder Representative notifies Gray that he accepts the
Final Balance Sheets, or fails to deliver his own alternate Final Balance
Sheets within the thirty (30) day period specified in the preceding
sentence, Gray's determination of the amounts of Working Capital Surplus
shall be conclusive and binding on the parties upon the expiration of such
period.
(3) Gray and the Shareholder Representative shall use good faith
efforts to resolve any dispute involving the determination of the amounts
of Working Capital Surplus and the Final Balance Sheets. If the parties are
unable to resolve any dispute within fifteen days following the delivery of
the Shareholder Representative's notice concerning disputed adjustments,
Gray and the Shareholder Representative shall jointly designate a qualified
Big 5 firm of independent certified public accountants (the "Neutral
Auditors") to resolve such dispute. If the parties are unable to agree on
the designation of the Neutral Auditors, then an accounting firm will be
selected by lot from two names submitted by the Shareholder Representative
and two names submitted by Gray, none of which shall be employed by the
Shareholder Representative or Gray. The Neutral Auditors' resolution of the
dispute shall be made within sixty (60) days of their selection, shall be
based on presentations by the Shareholder Representative and Gray and not
by independent financial audit, and shall be final and binding on the
parties. The Neutral Auditors' resolution of the dispute may be enforced by
any court of competent jurisdiction. Fees of the Neutral Auditors shall be
split equally between the parties.
(4) If the amount of Working Capital Surplus of the Company reflected
on the Final Balance Sheet as finally determined in accordance with the
preceding provisions of this Section 3.8 is more than $10,000 less than
such amount reflected on the Preliminary Balance Sheet, then the Escrow
Agent shall refund fifty percent (50%) of the difference (without regard to
the $10,000 threshold) to the Surviving Corporation out of the Escrow Fund.
The payment required hereunder shall be made within seven (7) days after
all of the procedures specified in this Section 3.8 have run their course.
(5) If Neutral Auditors should be appointed by the parties to the KWTX
Agreement, then the Neutral Auditors so appointed shall serve as the
Neutral Auditors under this Agreement, and all proceedings before the
Neutral Auditors shall be consolidated to promote efficiency and reduce
expenses of the parties.
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3.9 ACCOUNTING PRINCIPLES. Completion of the Preliminary Balance Sheets
and Final Balance Sheets, and determination of the amounts of Working Capital
Surplus, shall be made by the application of the following accounting
principles:
(1) Current assets shall be reduced by an amount equal to two (2%)
percent of the value of accounts receivable included within the
computation. For purposes of this Section 3.9, accounts receivable shall
include accounts receivable due from trade, but shall exclude accounts
receivable due from network and affiliated stations (as the terms "trade,"
"network," and "affiliated stations" have been customarily used by the
Company for the purpose of preparing their financial statements).
(2) The account balances for deferred trade expense and cash value
life insurance shall be included in the computation.
(3) Current liabilities shall contain an accrual for any Taxes due on
account of the sale, liquidation, or other disposition of any investment
securities in the period ending on the Closing Date.
(4) Otherwise, all revenues and all expenses arising from the
operation of the Company, including business and nongovernmental license
fees, utility charges, real and personal property taxes and assessments
levied against the Company, property and equipment rentals, applicable
copyright or other fees, sales and service charges, taxes, programming fees
and expenses, employee compensation, including wages, commissions, bonus
pay, payroll taxes, accrued vacation, sick leave, holiday, and compensatory
pay for all employees of the Company, prepaid and deferred items, and
dividends, shall be charged or credited in accordance with the methods
historically used by the Company as disclosed in its annual audited
financial statements, and prorated as of the close of business at 12:00
a.m. midnight on the day preceding the Closing Date. All special
assessments and similar charges or liens, or installments thereof, imposed
against the Real Property or the Station, and payable on or prior to the
Closing Date shall be reflected on the Preliminary Balance Sheets and Final
Balance Sheets, and amounts payable with respect to such assessments and
similar charges or liens or installments thereof, imposed against the Real
Property or the Station, and payable after the Closing Date, shall be
excluded. Ad valorem real and personal property taxes assessed or
assessable for the year in which the Closing takes place shall be prorated
based upon the number of days elapsed from January 1 to the Closing Date,
divided by 365 days.
(5) Any and all rebates due after the Closing Date to any advertiser
or other user of the Station's facilities, based on business, advertising,
or services purchased or rendered prior to the Closing Date, shall be
reflected on the Preliminary Balance Sheets and Final Balance Sheets
ratably in proportion to revenues received or volume of business done
during the applicable period. Agency commissions shall be adjusted based
upon revenue, volume of business done, or services rendered in part before
the Closing Date and in part after the Closing Date and charged to the
Preliminary Balance Sheets and Final Balance Sheets ratably in proportion
to the revenue, volume of business done, or services rendered, as the case
may be, during the applicable period. All payments relating to Program
Rights will be allocated ratably in accordance with the payment terms of
the contract or agreement for such properties, and prorated to the Closing
Date.
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(6) The Preliminary Balance Sheets and Final Balance Sheets shall be
adjusted to the extent any liabilities on the books of the Company under
Tradeout Agreements exceed the value of assets from Tradeout Agreements as
of the date received, but no increase shall be made in Working Capital
Surplus if the value of assets from Tradeout Agreements exceeds the
liabilities from Tradeout Agreements, as of the Closing Date.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SHAREHOLDERS.
The Company represents and warrants unto Gray and Merger Corp., and this
Agreement is made and expressly conditioned upon, the following representations
and warranties:
4.1 ORGANIZATION, CORPORATE POWER, AND QUALIFICATIONS OF THE COMPANY. The
Company is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Texas and has the full corporate power and
authority to own all of its properties and assets and to carry on its business
as it is now being conducted. The Company is duly qualified as a foreign
corporation in each jurisdiction where the nature and extent of its business
requires such qualification.
4.2 AUTHORIZATION AND VALIDITY. The Company has the full corporate power,
capacity and authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein, including without
limitation, the Merger, have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of the Company, subject to the
approval of this Agreement by the holders of two-thirds (2/3) of the Shares,
which is the only shareholder vote required for approval of this Agreement and
the consummation of the Merger by the Company. This Agreement has been executed
and delivered by duly authorized officers of the Company and constitutes the
legal, valid, and binding obligation of the Company. This Agreement is
enforceable with respect to the Company in accordance with its terms.
4.3 OWNERSHIP OF SHARES. Each of the Shareholders owns (beneficially and
legally) the number of Shares specified on Schedule 4.3, opposite his, her, or
its name, free and clear of any Encumbrance of any kind.
4.4 CAPITALIZATION OF THE COMPANY. The authorized capital stock of the
Company consists of Five Hundred (500) shares of common stock, $100 par value,
of which Five Hundred (500) shares are issued and outstanding. The number of
shares of common stock issued to each of the Shareholders is accurately set
forth on Schedule 4.3 to this Agreement. All issued and outstanding Shares of
capital stock in the Company have been duly authorized and validly issued, are
fully paid and nonassessable, were issued without violation of any preemptive
rights, are free of any preemptive rights and were issued pursuant to a valid
exemption from registration under the Securities Act of 1933, as amended, (the
"Securities Act"), and all applicable state securities laws. There are no
options, warrants, or other rights, nor any agreements, commitments, or
arrangements of any kind relating to the subscription to or the issuance,
voting, acquisition, sale, repurchase, transfer, or disposition of (i) any
capital stock of the Company or securities convertible into or exchangeable for
capital stock of the Company, or (ii) any options, warrants, or subscription
rights relating to any such capital stock or securities of the Company. No
Person has any contract or agreement or any right or privilege capable of
becoming a binding contract for the purchase from any of the Shareholders of any
of the
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Shares. The consummation of the transactions contemplated in this Agreement will
convey to Gray good title to the Shares free and clear of all Encumbrances,
security interests, charges, or restrictions on transfer of any nature
whatsoever.
4.5 INVESTMENTS AND SUBSIDIARIES. The Company has not in the past owned
and does not currently own, directly or indirectly, any capital stock or other
equity, ownership, proprietary or voting interest in any Person.
4.6 NONCONTRAVENTION. The execution and delivery by the Company of this
Agreement and the other agreements contemplated on its part hereby does not, and
the consummation by the Company of the transactions contemplated hereby and
thereby will not, (i) violate any provision of the Articles of Incorporation or
Bylaws of the Company, (ii) violate, or result (with the passage of time, the
giving of notice or both) in a violation of, or result in the acceleration of or
entitle any party to accelerate any obligation under, or result in the creation
or imposition of, any Encumbrance upon any of the property of the Company
pursuant to any provision of any mortgage, lien, lease, agreement, license, or
instrument to which the Company is a party or is subject, (iii) constitute an
event permitting termination or acceleration of any mortgage, lien, lease,
agreement, license, or instrument to which the Company is a party, or (iv)
violate (A) any judgment, order, writ, injunction, decree, regulation, or rule
of any court or Governmental Authority applicable to the Company or the Station
or (B) any Law.
4.7 CONSENTS, APPROVALS. Except for filings with and approvals of the
transactions contemplated hereby by the FCC and the expiration of applicable
waiting periods under the HSR Act, and except for consent from the CBS
Television Network, neither the Shareholders nor the Company is required to make
or obtain any consent, approval, notification, authorization or order of, or
declaration, filing, or registration with any third party, including, without
limitation, any Governmental Authority (i) in connection with the consummation
of the transactions contemplated hereby, (ii) to avoid the loss of any license
or the violation, breach, or termination of, or any default under, or the
creation of any lien on any of the assets of the Station pursuant to the terms
of any Law, order, or other requirement or any contract binding upon the Company
or to which assets of the Station may be subject, or (iii) to enable Merger
Corp. to continue the operation of the Station after the Closing substantially
as conducted prior to the Closing.
4.8 FINANCIAL STATEMENTS. Schedule 4.8 contains true and complete copies
of (i) the audited financial statements of the Company for calendar years
1994-1998, prepared by its independent auditors, Pattillo, Brown and Hill,
Certified Public Accountants, Waco, Texas (the "Tax Basis Statements") and (ii)
(A) the audited balance sheet of the Company as of December 31, 1998 and the
audited statements of income and cash flows for the year then ended and (B) the
unaudited balance sheet of the Company as of December 31, 1997 and 1996 and the
unaudited statements of income and cash flows of the Company for the years ended
December 31, 1996 and 1997, prepared by its independent auditors, Pattillo,
Brown and Hill, Certified Public Accountants, Waco Texas (collectively, the
"GAAP Basis Statements"). The Tax Basis Statements have been prepared, and when
prepared, the Preliminary Balance Sheets and Final Balance Sheets will have been
prepared, in accordance with the accounting principles described in the
independent auditors' reports and footnotes accompanying said Tax Basis
Statements and fairly present the financial condition of the Company as of the
respective dates thereof, and the results of operations, cash flows and retained
earnings, and changes in financial position, respectively, of the Company, for
the respective periods thereof. In addition, the Preliminary Balance Sheets and
Final Balance Sheets, when prepared, will be based on the
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Company's historical accounting practices, consistently applied. The GAAP Basis
Statements have been prepared in accordance with generally accepted accounting
principles, consistently applied and fairly present the financial condition of
the Company as of the respective dates thereof, and the results of operations,
cash flows and retained earnings, and changes in financial position,
respectively, of the Company, for the respective periods thereof. Since December
31, 1998, (i) the Company has carried on its business only in the ordinary
course of business consistent with past practice, (ii) there has been no
Material Adverse Change, and (iii) the Company has not made any change in any
method of accounting or any accounting practice.
4.9 TITLE TO AND CONDITION OF REAL PROPERTY.
(1) Schedule 4.9(1) contains a complete and accurate description of
all the Real Property and the Company's interest therein.
(2) The Company has good, marketable and insurable fee simple title to
all of the Real Property free and clear of all Encumbrances, except for
Permitted Liens, and no portion of the Real Property is included in a Tax
parcel that includes property other than Real Property.
(3) Schedule 4.9(3) contains a complete and accurate description of
all the Leased Property and of the applicable lease creating the Company's
interest in the Leased Property (the "Ground Leases") and the terms of the
Company's interest therein. The Company has good, marketable and insurable
leasehold title to all of the Leased Property described on Schedule 4.9(3)
free and clear of all Encumbrances, except for Permitted Liens. The Company
has delivered to Gray true and complete copies of all of the Ground Leases.
(4) Schedule 4.9(4) contains a complete and accurate description of
all leases of the Real Property and Leased Property pursuant to which the
Company is the landlord or sublandlord, (the "Tenant Leases") and the
Company has delivered true and complete copies of the Tenant Leases to
Gray. There are no leases or other agreements relating to occupancy of the
Real Property or Leased Property, except for the Tenant Leases and no
Person other than the tenants under the Tenant Leases has any right to
occupancy of any portion of the Real Property or Leased Property. The
Company is the lessor or landlord or the successor lessor or landlord under
the Tenant Leases free and clear of all Encumbrances except for the
Permitted Liens and is entitled to receive the rents, issues and profits
from the Tenant Leases.
(5) Except as disclosed on Schedule 4.9(l), all towers, guy anchors,
buildings, and other improvements owned by the Company are located entirely
on the Real Property listed on Schedule 4.9(1).
(6) All Real Property (i) is available for immediate use in the
conduct of the business and operations of the Station and (ii) complies in
all material respects with all applicable building, fire, health,
handicapped persons, sanitation, use and occupancy or zoning Laws and the
regulations of any Governmental Authority having jurisdiction thereof.
There is no pending or, to the Company's Knowledge, threatened condemnation
or eminent domain proceedings that would affect the Real Property, or any
part thereof and the Company has full legal and practical access to the
Real Property and all utilities are available to the Real Property from a
publicly dedicated right of way or through a valid private easement. The
Company has furnished to Gray copies of any and all notices or reports
received from any insurance company,
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engineer, or Governmental Authority with respect to any violations (or
potential violations) of any applicable law affecting the Real Property or
otherwise requiring or recommending work be performed on or at any of the
Real Property (or improvements thereon), and all of the violations and
requirements set forth in any such notices and reports have been cured or
fulfilled to the satisfaction of those entities.
(7) The Real Property listed on Schedule 4.9(1) and the Tenant Leases
listed on Schedule 4.9(4) comprise all real property interests necessary to
conduct the business and operations of the Company as now conducted.
4.10 TITLE TO AND CONDITION OF TANGIBLE PERSONAL PROPERTY.
(1) Schedule 4.10(1) lists all material items of Tangible Personal
Property owned by the Company, which together with the leased Tangible
Personal Property comprises all material items of Tangible Personal
Property necessary to conduct the business and operations of the Station as
now conducted. Except as specified on Schedule 4.10(1) the Company owns and
has good title to each item of Tangible Personal Property, and none of the
Tangible Personal Property owned by the Company is subject to any
Encumbrance, other than Permitted Liens. Each item of Tangible Personal
Property is available for immediate use in the business and operations of
the Station. Each item of Tangible Personal Property is in good condition
and repair, reasonable wear and tear excepted, and is usable in the
ordinary course of business consistent with past practices. Each item of
Tangible Personal Property is adequate for its present and intended uses
and operation. All items of transmitting equipment included in the Tangible
Personal Property permit the Station to operate in all material respects in
compliance with the terms of the FCC Licenses, the rules and regulations of
the FCC, and with all other applicable Laws.
(2) Schedule 4.10(2) contains a complete and accurate description of
all the leased Tangible Personal Property and of the applicable lease
creating the Company's interest in the leased Tangible Personal Property,
which includes the leases for motor vehicles (collectively, the "Personal
Property Leases") and the terms of the Company's interest therein. The
Company has good leasehold title to the leased Tangible Personal Property
subject to the terms of the applicable Personal Property Lease and free of
any Encumbrances, other than Permitted Liens. The Company has delivered to
Gray true and complete copies of all of the Personal Property Leases. The
owned Tangible Personal Property listed on Schedule 4.10(1) and the leased
Tangible Personal Property listed on Schedule 4.10(2) comprise all personal
property interests necessary to conduct the business and operations of the
Company as now conducted.
4.11 LITIGATION. There are no actions, suits, claims, investigations, or
proceedings (legal, administrative, or arbitrative) pending, or to the Company's
Knowledge threatened, against the Company, and to the Company's Knowledge no
basis for any of the foregoing exists, whether at law or in equity and whether
civil or criminal in nature, before or by any Federal, State, municipal, or
other court, arbitrator, governmental department, commission, agency, or
instrumentality, domestic or foreign, nor are there are any judgments, decrees,
or orders of any such court, arbitrator, governmental department, commission,
agency, or instrumentality outstanding against the Company. Except as disclosed
on Schedule 4.11, no litigation (as described in the preceding sentence) has
been pending during the three (3) years prior to the date hereof that,
individually or in the aggregate, resulted in losses,
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damages, costs or expenses (whether or not covered by insurance) in excess of
$10,000 or granted any injunctive relief against the Company.
4.12 ENVIRONMENTAL MATTERS.
(1) To the Company's Knowledge, none of the Real Property, assets or
premises of the Company or the assets or premises formerly owned, leased,
operated or managed, directly or indirectly, by the Company or any of its
predecessors or any of its current or former subsidiaries (which are
identified on Schedule 4.5), contains, nor is there present at any such
Real Property, assets or premises of the Company or the assets or premises
formerly owned, leased, operated or managed, directly or indirectly, by the
Company or any of its predecessors or any of its current or former
subsidiaries (which are identified on Schedule 4.5), any (i) "hazardous
substances" (as defined in the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, 42 U.S.C. 9601 et seq., as
amended), (ii) asbestos, (iii) radon gas, (iv) underground storage tanks,
(v) items or equipment containing polychlorinated biphenyls in excess of 50
parts per million, (vi) stored, spilled, or leaked petroleum products, or
(vii) accumulation of rubbish, debris, or other solid waste; nor is any of
the Real Property, assets or premises of the Company or the assets or
premises formerly owned, leased, operated or managed, directly or
indirectly, by the Company or any of its predecessors or any of its current
or former subsidiaries (which are identified on Schedule 4.5), the subject
of governmental regulation or liability because of the past release, threat
of release, discharge, storage, treatment, generation, or disposal of such
substances.
(2) To the Company's Knowledge, the Company is in compliance with all
laws, rules, and regulations of all federal, state, and local governments
(and all agencies thereof) concerning the environment, except for any
noncompliance which could not reasonably be expected to have a Material
Adverse Effect, and neither the Company nor any of its predecessors or any
of its current or former subsidiaries has received any written notice of a
charge, complaint, action, suit, proceeding, hearing, investigation, claim,
demand, or notice having been filed or commenced against the Company or any
of its predecessors or any of its current or former subsidiaries in
connection with its operation of the Station alleging any failure to comply
with any such law, rule, or regulation.
(3) To the Company's Knowledge, neither the Company nor any of its
predecessors or any of its current or former subsidiaries has any liability
that could reasonably be expected to have a Material Adverse Effect under
any law, rule, or regulation of any federal, state, or local government (or
agency thereof) concerning the (i) release or threatened release of
hazardous substances, (ii) pollution, or (iii) protection of the
environment.
(4) To the Company's Knowledge, all waste containing any hazardous
substances generated, used, handled, stored, treated or disposed of
(directly or indirectly) by the Company or any of its predecessors or any
of its current or its former subsidiaries has been released or disposed of
in compliance with all applicable reporting requirements under any Law, and
neither the Company nor the Shareholders have Knowledge of any
Environmental Claim (as herein defined) with respect to any such release or
disposal.
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(5) To the Company's Knowledge, without limiting the generality of any
of the foregoing, (i) all on-site and off-site locations where the Company
or any of its predecessors or any of its current or former subsidiaries has
stored, disposed or arranged for the disposal of hazardous substances are
identified in Schedule 4.12, and (ii) no polychlorinated biphenyls (PCB's)
are used or stored on or in any Real Property owned, leased, operated or
managed by the Company or any of its predecessors or any of its current or
former subsidiaries.
(6) For purposes of this Agreement:
(a) "Environmental Claim" shall mean any Litigation in any court or
before or by any Governmental Authority or private arbitrator, mediator
or tribunal against the Company (including, without limitation, notice
or other communication written or oral by any Person alleging potential
liability for investigatory costs, cleanup costs, private or
governmental response or remedial costs, natural resources damages,
property damages, personal injuries, or penalties) arising out of, based
upon, or resulting from (i) any Environmental Matter or (ii) any
circumstances or state of facts forming the basis of any Liability, or
alleged Liability under, or violation or alleged violation under, any
Environmental Law.
(b) "Environmental Matter" shall mean any matter or circumstances
existing prior to Closing related in any manner whatsoever to (i) the
emission, discharge, disposal, release or threatened release of any
hazardous substance into the environment, or (ii) the treatment,
storage, recycling or other handling of any hazardous substance or (iii)
the placement of structures or materials into waters of the United
States, or (iv) the presence of any hazardous substance, including, but
not limited to, asbestos, in any building, structure or workplace or on
any of the Real Property.
4.13 TRADE NAMES, TRADE MARKS, ETC. The Company has and owns, or has the
right to use, all trademarks, service marks, trade names, business names,
copyrights, designs, trade secrets, and know-how used in the operation of the
Station, including, but not limited to, the items listed on Schedule 4.13 as a
part of the Intangible Property. There are no claims or proceedings pending, or
to the Company's Knowledge threatened, against the Company asserting that its
use of any Intangible Property infringes the rights of any other Person and the
Company has no Knowledge of any use by the Company that may, with notice or
passage of time, give rise to such a claim. The Company has not licensed or
otherwise assigned any Intangible Property to any third party and, to the
Company's Knowledge, there are no existing infringing uses of the Intangible
Property by any third parties. All royalties, limitations, restrictions, or
other obligations of the Company with respect to the ownership or use of the
Intangible Property are set forth on Schedule 4.13.
4.14 GOVERNMENTAL AUTHORIZATION AND COMPLIANCE WITH LAWS. All
governmental licenses, certificates, permits, and approvals required for the
conduct of the Company's business as now conducted are listed on Schedule 4.14.
The Company has obtained all such licenses, permits, and approvals and all are
in full force and effect. The business of the Station has been operated in
compliance with all applicable Laws, orders, regulations, policies, and
guidelines of all Governmental Authorities (including, without limitation, those
relating to FCC matters and environmental laws and regulations), except for
violations of such Laws, orders, regulations, policies, and guidelines which do
not affect and cannot reasonably be expected to have a Material Adverse Effect
on the Station or the business, financial condition, assets, liabilities,
results of operations or cash flows of the
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Company. The Company has received no notice of, and no investigation or review
is pending before, or to the Company's Knowledge threatened by, any Governmental
Authority (i) with respect to any alleged violation by the Company of any Law,
order, regulation, policy, or guideline of any Governmental Authority related to
the operation of the Station, or (ii) with respect to any alleged failure to
have all permits, certificates, licenses, approvals, and other authorizations
required in connection with the operation of the Station.
4.15 FCC LICENSES. The Company is now and on the Closing Date will be the
holder of the FCC Licenses as listed in Schedule 4.15, with regular
unconditional renewals thereof having been granted for the full license term.
The FCC Licenses constitute all of the licenses and authorizations required for
and/or used in the operation of the Station as now operated, and the FCC
Licenses are now and on the Closing Date will be in full force and effect and
unimpaired by any act or omission of the Company, or its officers, directors,
employees, or agents. There is not now pending, or to the Company's Knowledge,
threatened, any action by or before the FCC to revoke, cancel, rescind, modify,
or refuse to renew in the ordinary course any of the FCC Licenses, or any
investigation, Order to Show Cause, Notice of Violation, Notice of Apparent
Liability, or a forfeiture or material complaint against the Station or the
Company. The Company does not Know of any reason why the FCC would not renew the
FCC Licenses in the ordinary course. In the event of any such action, or the
filing or issuance of any such order, notice, or complaint or Knowledge of the
threat thereof, the Company shall notify Gray of same in writing within five (5)
days, and shall take all reasonable measures to contest in good faith or seek
removal or rescission of such action, order, notice, or complaint, and shall pay
any sanctions imposed. All material reports, forms, and statements required to
be filed by the Company with the FCC with respect to the Station have been filed
and are complete and accurate in all material respects. The Station is now and
on the Closing Date will be operating in accordance with the FCC Licenses, and
in compliance with the Communications Act of 1934, as amended, and the Rules and
Regulations of the FCC. The operation of the Station, including, but not limited
to, the Company's use and operation of its existing tower sites, conforms to the
standards adopted by the FCC in Guidelines Evaluating the Environmental Effects
of Radio Frequency Radiation, Report and Order, IT Docket 93-62 (August 1, 1996)
(FCC 96-326), as modified on reconsideration, Second Memorandum Opinion and
Order, FCC 97-303 (released August 23, 1997).
4.16 LABOR RELATIONS.
(1) The Company has paid or made provision for payment of all salaries
and wages of employees accrued through the date of this Agreement. The
Company is in compliance with all federal and state Laws respecting
employment and employment practices, terms and conditions of employment,
safety of the workplace, wages and hours, and nondiscrimination in
employment, and is not Knowingly engaged in any unfair or illegal
employment practice;
(2) There is no charge, complaint, other claim, compliance review,
audit or investigation pending before, being conducted by or, to the
Company's Knowledge, threatened by any court, agency, arbitral panel or
other tribunal alleging, or that could result in an allegation of, unlawful
discrimination, unauthorized employment, harassment, any unfair labor
practice or violation of any Law or legal principle by the Company relating
to any aspect of employment or the workplace, nor to the Company's
Knowledge is there a basis for any such claims;
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(3) There is no labor strike, dispute, slowdown, or stoppage actually
pending or, to the Company's Knowledge, threatened against or involving the
Company;
(4) There are no collective bargaining agreements binding on the
Company;
(5) To Company's Knowledge, no employee representative or labor
organization is seeking to represent the Company's employees or has
requested an election or a collective bargaining agreement, nor is the
Company currently negotiating or contemplating negotiating such an
agreement; and
(6) Except as listed specifically on Schedule 4.16, the Company has no
written contract of employment, change of control agreement or other
agreement with any employee of the Station, and the Company has no
unwritten contract of employment, change of control agreement or other
agreement that is not terminable at will without any payment or other
obligation on the part of Company or any successor, including Merger Corp.
4.17 INSURANCE. Schedule 4.17 is a true and complete list, showing
company and type and amount of coverage, of all insurance policies providing
coverage for the Company or the operation of the Station, its employees, or
third parties. The Company has provided correct and complete copies of each such
policy to Gray on or before the date hereof. The Company is neither in default
with respect to any provision of any of its insurance policies nor has it failed
to give any notice or present any claim thereunder in due or timely fashion or
as required by any of such insurance policies which would result in failure to
recover in full under such policies. The Company has complied with the insurance
requirements of (i) all leases related to the Station to which it is a party;
(ii) all other contracts and agreements to which the Company is a party; and
(iii) all Laws.
4.18 ACCOUNTS RECEIVABLE. All accounts receivable of the Company
reflected on its financial statements, as prepared and maintained through the
Closing Date, arose from bona fide transactions in the ordinary course of
business, and constitute valid and binding obligations of the account debtors
for the full face amount thereof, without discount, offset, or other claim or
allowance. The reserve for doubtful accounts contained in the financial
statements is adequate to protect the Company from losses by reason of
noncollection of such accounts.
4.19 ACCOUNTS PAYABLE. All accounts payable of the Company reflected on
its financial statements, as prepared and maintained through the Closing Date,
arose from bona fide transactions in the ordinary course of business, and
constitute valid debts or obligations of the Company for the full face amount
thereof.
4.20 TAX RETURNS, AUDITS, AND LIABILITIES.
(1) The Company has: (i) timely filed all Tax Returns in accordance
with all applicable laws (including any applicable extensions); (ii) paid
all Taxes shown to have become due pursuant to such Tax Returns; (iii)
properly accrued for all Taxes due or payable in respect of the current
period in the Financial Statements; and (iv) paid all Taxes for which a
notice of, or assessment or demand for, payment has been received or which
are otherwise due and payable, other than Taxes being contested in good
faith, as identified on Schedule 4.20 for which an adequate reserve has
been established. All such Tax Returns are true and correct in all material
respects and reflected the true facts regarding the income, business,
assets, operations,
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activities, and status of the Company and any other information required to
be shown therein.
(2) Except as disclosed on Schedule 4.20, in the past five (5) years,
none of the Company's Tax Returns has been audited by any Governmental
Authority. There is no action, suit, proceeding, investigation, audit,
claim, or assessment pending or proposed with respect to Taxes or with
respect to any Tax Return for the Company; (ii) there are no liens for
Taxes upon the assets of the Company, other than liens for taxes not yet
past due; (iii) there are no waivers or extensions of any applicable
statute of limitations for the assessment or collection of Taxes with
respect to any Tax Return that remains in effect; and (iv) there are no Tax
rulings, request for rulings, or closing agreements relating to the Company
that could affect its liability for Taxes for any period after the Closing
Date.
4.21 BANK ACCOUNTS. All of the Company's bank accounts, and the names of
all authorized signatories on all such accounts are set forth on Schedule 4.21
to this Agreement.
4.22 CERTAIN CONTRACTS.
(1) Except as listed on Schedule 4.22:
(a) the Company does not have any employment agreements or any
incentive compensation, profit-sharing, stock option, stock appreciation
rights, stock purchase, savings, deferred compensation, retirement,
pension, or other plans or benefit arrangements or practices with or for
the benefit of any officer, employee, or any other person, or any
consulting agreement or other arrangement with any officer, employee,
former officer, or former employee;
(b) no officer, director or Shareholder of the Company has any
other agreement with the Company or any interest in any real, personal,
or intellectual property used in or pertaining to the operation of the
Station; and
(c) except for contracts for the sale of advertising time entered
into in the normal course of business, the Company is not a party to or
bound by any contract, commitment, purchase order, or sales order, oral
or written, related to the operation of the Station. All leases,
agreements, licenses, or instruments to which the Company is a party are
in full force and effect and are binding obligations of the parties
thereto, and no event or condition has occurred or exists, or is alleged
by any of the other parties thereto to have occurred or existed, which
constitutes, or with lapse of time or the giving of notice or both,
might constitute a material default or a basis for acceleration of any
obligation, force majeure, or other claim of excusable delay or
nonperformance thereunder or in respect thereof, whether on the part of
the Company or any other party. In connection with the Merger or
otherwise, there are no consents, approvals, notifications, or other
actions required to be taken pursuant to the terms of any contract or
commitment to which the Company is a party, except as described on
Schedule 4.22.
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(2) Schedule 4.22 contains a list and correct and complete copies of
the following contracts and agreements:
(a) all powers of attorney given by the Company;
(b) all programming and network affiliation agreements of the
Company or that relate to the Station;
(c) all Tradeout Agreements; and
(d) any contract or agreement that (i) provides for monthly
payments in excess of $1,000 or yearly payments in excess of $12,000;
(ii) requires performance by the Company of any obligation for a period
of time extending beyond six (6) months from the Effective Time or is
not terminable by the Company without penalty upon sixty (60) days or
less notice; (iii) evidences, creates or guarantees indebtedness of the
Company; or (iv) guarantees or endorses the liabilities or obligations
of any other Person.
4.23 EMPLOYEES. Schedule 4.23 is a true and complete list of all
personnel employed by the Company as of the date of this Agreement, including
the names and current addresses of all such persons, their job classifications,
rates of pay, length of service, and a brief description of the employment
benefits provided to them, including group insurance, vacation, severance,
health and accident benefits, and retirement pay, if any.
4.24 EMPLOYEE BENEFIT PLANS.
(1) Schedule 4.24 contains an accurate and complete list of each
employee benefit plan established, maintained, or contributed to by the
Company. Each such plan is maintained and administered in material
compliance with the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), the Code and any other applicable Laws, its governing
documents and any oral or written communications from the Company to any
participant in or beneficiary of such plan. Neither the Company nor any
such employee benefit plan is liable for any material fine, excise tax, or
loss of income tax deduction with respect to the operation of any such
employee benefit plan. No reportable event, as defined in Section 4043 of
ERISA, that could have a Material Adverse Effect on the Company, has
occurred with respect to any employee benefit plan of the Company. The
consummation of the transactions contemplated by this Agreement will not
result in any withdrawal liability on the part of the Company under a
multi-employer plan. No plan or benefit arrangement established or
maintained by the Company or to which the Company is obligated to
contribute has any "accumulated funding deficiency" as defined by ERISA.
The Company has not incurred any liability to the Pension Benefit Guaranty
Corporation with respect to any such plan. There are no material claims
(other than routine claims for benefits), lawsuits or governmental
proceedings pending or, to the Company's Knowledge, threatened with respect
to any employee benefit plan of the Company. No claims or liabilities in
respect of any of the Company's employee benefit plans shall be imposed
upon Gray or Merger Corp. as a result of the transactions described herein.
(2) The Company has filed all returns and reports required to be filed
with respect to its employee benefit plans, and has paid or made provision
for the payment of all fees, interest, penalties, assessments, or
deficiencies that may have become due pursuant to those returns or reports
or pursuant to any assessment or adjustment that
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has been made relating to those returns or reports. All other fees,
interest, penalties, and assessments that are payable by or for the Company
have been timely reported, fully paid, and discharged. There are no unpaid
fees, penalties, interest, or assessments due from the Company relating to
any employee benefit plan that are or could become an Encumbrance on any
assets of the Station or are otherwise material. The Company has furnished
to Gray true and complete copies of all documents setting forth the terms
and funding of each employee benefit plan.
(3) The Company is not liable for any welfare benefits (as defined in
ERISA Section 3(1)) to its employees or other individuals associated with
the Company after retirement or other separation from service other than to
the extent required by Code Section 4980B and Part VI of Title I of ERISA
(COBRA).
(4) For purposes of this Section 4.24, "Company" means the Company and
any entity which, together with the Company, would be treated as a single
employer under Section 414(n) of the Code.
4.25 NO BROKERS. Neither the Company nor any of its Shareholders has
employed any brokers or finders, or incurred any liability for any brokerage
fees, commissions, finders' fees, or financial advisory fees in connection with
the transactions contemplated hereby, and the Shareholders agree to hold Gray
harmless from any claim relating to such fees or compensation made by the
Company or the Shareholders or anyone employed by the Company or the
Shareholders.
4.26 COMPUTER SOFTWARE AND DATABASE. All computer software licensed,
leased or otherwise used in connection with the Station is standard,
pre-packaged and licensed and none of such computer software is proprietary,
internally developed or owned by the Company. The Company has, and upon
consummation of the transactions contemplated by this Agreement, Merger Corp.
will have, all computer software and databases that are necessary to operate the
Station as presently conducted by the Company and all documentation and
necessary licenses relating to all such computer software and databases.
4.27 INTERESTED TRANSACTIONS. Except as set forth in Schedule 4.27, the
Company is not a party to any contract or other transaction with any Affiliate
of the Company, any Related Party of any Affiliate of the Company (other than as
a Shareholder or employee of the Company), or any Person in which any of the
foregoing (individually or in the aggregate) beneficially or legally owns,
directly or indirectly, five percent (5%) or more of the equity or voting
interests. Each of such contracts and other transactions described in the
preceding sentence was negotiated on an arm's length basis, contains pricing
terms that reflected fair market value at the time entered into and otherwise
contains terms and conditions comparable to those customarily contained in
similar transactions between unrelated parties. Except as described in Schedule
4.27, none of the Persons described in the first sentence of this Section 4.27
owns, or during the last three (3) years has owned, directly or indirectly,
beneficially or legally (individually or in the aggregate), five percent (5%) or
more of the equity or voting interests of any Person that competes with the
Company or the Station.
4.28 FULL DISCLOSURE. No statement contained herein or in any document,
certificate, or other writing furnished or to be furnished by the Company to
Gray pursuant to the provisions of this Agreement contains or shall contain any
untrue statement of a material fact or shall omit to state any material fact
necessary, in the light of the circumstances under which it was made, to make
the statements therein not misleading. The due
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diligence materials delivered by the Company to Gray and Merger Corp. are
correct and complete in all material respects and do not omit any material facts
necessary to make the facts disclosed by such materials not misleading.
4.29 RELIANCE AND SURVIVAL. The foregoing representations and warranties
have been made by the Company with the knowledge and expectation that Gray and
Merger Corp. are placing complete reliance thereon, and all such representations
and warranties shall survive the Closing.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF GRAY AND MERGER CORP.
Each of Gray and Merger Corp. represents and warrants to the Company as
follows:
5.1 ORGANIZATION AND EXISTENCE. Each of Gray and Merger Corp. is a
corporation duly organized and validly existing under the laws of the State of
Georgia and has the power and authority to own all of its properties and assets
and to carry on its business as it is now being conducted.
5.2 AUTHORIZATION AND VALIDITY. Each of Gray and Merger Corp. has the
full power and authority to execute and deliver this Agreement and the other
agreements and instruments contemplated on its part hereby and to consummate the
transactions contemplated on its part hereby and thereby; each of Gray's and
Merger Corp.'s execution and delivery of this Agreement and consummation of the
transactions contemplated hereby and thereby have been duly authorized by its
Board of Directors; and this Agreement has been duly executed and delivered and
constitutes the valid and binding agreement of each of Gray and Merger Corp.
enforceable in accordance with its terms.
5.3 NONCONTRAVENTION. Neither the execution nor delivery of this
Agreement by either Gray or Merger Corp. nor the consummation by either Gray or
Merger Corp. of the transactions contemplated hereby and thereby will violate
any provision of the Articles of Incorporation or Bylaws of either Gray or
Merger Corp., or of any other material instrument, agreement, order, or decree
binding on either Gray or Merger Corp. the effect of which violation would be
the prevention, delay, avoidance, or voidableness of this Agreement or the
transactions contemplated hereby.
5.4 CONSENTS, APPROVALS. Except for filings with and approvals of the
transactions contemplated hereby by the FCC and expiration of applicable waiting
periods under the HSR Act, neither Gray nor Merger Corp. is required to make or
obtain any consent, approval, notification, authorization or order of, or
declaration, filing, or registration with any Governmental Authority or any
other third party in connection with consummation by either Gray or Merger Corp.
of the transactions contemplated hereby.
5.5 NO BROKERS. Other than an approximately 1% fee paid by Gray to Bull
Run Corporation (which does not affect the Merger Consideration hereunder),
neither Gray nor Merger Corp. has employed any brokers or finders or incurred
any liability for any brokerage fees, commissions, finders' fees, or financial
advisory fees in connection with the transactions contemplated hereby and each
of Gray and Merger Corp. agrees to hold the Company harmless from any claim
relating to such fees or compensation made by either Gray or Merger Corp. or
anyone employed by either of them.
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5.6 CAPITALIZATION.
(1) The authorized capital stock of Gray consists of 15,000,000 shares
of Gray Common Stock, 15,000,000 shares of Class A Common Stock, no par
value ("Class A Common Stock"), and 20,000,000 shares of Preferred Stock,
no par value ("Preferred Stock"), of which as of March 11, 1999 there were
issued and outstanding 5,125,465 shares of Gray Common Stock, 6,832,042
shares of Class A Common Stock and 1,000 shares of Series A Preferred Stock
and 350 shares of Series B Preferred Stock. As of December 31, 1998,
135,080 issued shares of Gray Common Stock, 1,129,532 issued shares of
Class A Common Stock and no shares of Preferred Stock were held as treasury
shares. All issued shares of Gray Common Stock, Class A Common Stock and
Preferred Stock are duly authorized and validly issued and are fully paid
and nonassessable and no holder thereof is entitled to preemptive rights.
All shares of Gray Common Stock to be issued pursuant to the Merger, when
issued in accordance with this Agreement, will be duly authorized and
validly issued, fully paid and nonassessable and will not violate the
preemptive rights of any person.
(2) All outstanding shares of capital stock of the consolidated
subsidiaries of Gray (the "Gray Subsidiaries") (A) are owned by Gray or a
wholly owned subsidiary of Gray, free and clear of all liens, charges,
encumbrances, adverse claims and options of any nature except for pledge of
the capital stock of the Gray Subsidiaries to secure certain debt of Gray,
(B) were duly authorized and validly issued and are fully paid and
nonassessable, and (C) have not been issued in violation of any preemptive
rights. There are not now, and at the Effective Time there will not be, any
outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of any class of capital
stock of the Gray Subsidiaries, or contracts, understandings or
arrangements to which Gray or a Gray Subsidiary is a party, or by which any
of them is or may be bound, to issue additional shares of capital stock or
options, warrants, scrip or rights to subscribe for, or securities or
rights convertible into or exchangeable for, any additional shares of
capital stock of any Gray Subsidiary.
(3) As of the date hereof, the authorized capital stock of Merger
Corp. consists of 1,000 shares of common stock, no par value per share, all
of which were duly authorized and validly issued and are fully paid and
nonassessable and are owned by Gray.
5.7 SEC FILINGS; FINANCIAL STATEMENTS. Gray and each of the Gray
Subsidiaries have timely filed all reports, registration statements and other
filings, together with any amendments required to be made with respect thereto,
that they have been required to file with the SEC under the Securities Act and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
reports, registration statements and other filings (including all notes,
exhibits and schedules thereto and documents incorporated by reference therein)
filed by Gray with the SEC since January 1, 1998, through the date of this
Agreement, together with any amendments thereto, are sometimes collectively
referred to as the "Gray SEC Filings." As of the respective dates of their
filing with the SEC, the Gray SEC Filings complied in all material respects with
the Securities Act, the Exchange Act and the rules and regulations of the SEC
thereunder, and did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or
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necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
Each of the consolidated financial statements (including any related notes
or schedules) included in the Gray SEC Filings was prepared in accordance with
generally accepted accounting principles applied on a consistent basis (except
as may be noted therein or in the notes or schedules thereto) and complied with
all applicable rules and regulations of the SEC. Such consolidated financial
statements fairly present the consolidated financial position of Gray and the
Gray Subsidiaries as of the dates thereof and the results of operations, cash
flows and changes in stockholders' equity for the periods then ended (subject,
in the case of the unaudited interim financial statements, to normal year end
audit adjustments on a basis consistent with past periods).
5.8 FINANCIAL ABILITY. Gray has the financial ability to close the
transactions contemplated under this Agreement, and will close those
transactions according to the terms of, and subject to the conditions contained
in, this Agreement.
SECTION 6. FCC APPROVAL.
6.1 FILING AND PROSECUTION OF APPLICATION. Within ten (10) days after the
execution of this Agreement, Gray and the Company shall each file applications
with the FCC requesting the transfer and assignment of the FCC Licenses of the
Station from the Company to Merger Corp. or its assignee (the "Assignment
Application"). Gray and the Company shall take all steps reasonably necessary to
the expeditious prosecution of the Assignment Application to a favorable
conclusion, using their commercially reasonable best efforts throughout. The
parties acknowledge that the Assignment Application to be filed by Gray will
need to include a request for satellite designation of KBTX-TV so as to
authorize continued common control of KWTX-TV and KBTX-TV, and Gray agrees to
prepare and file said request contemporaneously with its Assignment Application.
6.2 EXPENSES. Each party shall bear its own expenses in connection with
the preparation of the applicable sections of the Assignment Application and in
connection with the prosecution of such application. The Company and Gray will
divide and pay equally any filing fee or grant fee imposed by the FCC.
6.3 TIME FOR FCC CONSENT. If the FCC rejects the Assignment Application
for incompleteness, it shall be completed by the party (or parties) whose
portion of the Assignment Application was incomplete and then shall be promptly
resubmitted. If the Assignment Application is rejected by the FCC for a reason
which precludes resubmission, this Agreement shall terminate without notice or
other action by the parties. If the FCC accepts the Assignment Application,
whether as initially filed or as resubmitted, then, if the FCC has not given its
written consent to the transfer of the FCC Licenses by December 31, 1999, the
time for FCC consent shall be automatically extended until May 31, 2000, so long
as no party is otherwise in default hereunder. In the event that the FCC consent
has not been granted on or before May 31, 2000, either party may terminate this
Agreement pursuant to Section 13.4. If the Closing has not occurred prior to
August 15, 1999, the Company shall apply to the FCC prior to such date for all
necessary authorizations to construct and operate digital television facilities
on or before May 1, 2002.
6.4 CONTROL OF STATION. Until the Closing, Gray shall not, directly or
indirectly, control, supervise, or direct the operation of the Station, but such
operation shall be the
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sole responsibility of the Company. Pending the Closing, Gray shall not
represent that it is acting as agent or representative of the Company in
connection with the operation of the Station or any personnel actions affecting
the Station's employees.
6.5 NO REVERSION OF LICENSES. Neither the Shareholders, nor any person
affiliated with the Shareholders, has retained any right of reversion of the FCC
Licenses. Further, no person affiliated with the Shareholders has the right to a
reassignment of the FCC Licenses in the future, and the Shareholders or their
affiliates have not reserved the right to use the facilities of the Station for
any period whatsoever. There is no contract, arrangement, or understanding,
express or implied, pursuant to which, as consideration or partial consideration
for the transactions contemplated hereby, such rights as stated above are
retained.
6.6 REGULATORY MATTERS. Gray and the Shareholders will cooperate and use
their best efforts to prepare all documentation, to make all filings, and to
obtain all permits, consents, approvals, and authorizations of all third parties
and governmental bodies necessary to consummate the transactions contemplated by
this Agreement. Each party shall be primarily responsible for accomplishing all
such matters applicable to it (or them) but shall take all such further action
in that regard as the other party shall reasonably request.
SECTION 7. SPECIAL COVENANTS AND AGREEMENTS.
7.1 HSR ACT. Within thirty (30) days after the execution of this
Agreement, each of the Company and Gray shall make the filings required by the
HSR Act. The Company and Gray (i) will cooperate with each other in connection
with such HSR Act filings by furnishing each other with any information or
documents that may be reasonably required in connection with such filing; (ii)
will promptly file, after any request by the Federal Trade Commission ("FTC") or
Department of Justice ("DOJ") and after appropriate negotiation with the FTC or
DOJ of the scope of such request, any information or documents requested by the
FTC or DOJ; and (iii) will furnish each other with any correspondence from or
to, and notify each other of any other communications with, the FTC or DOJ that
relates to the transactions contemplated hereunder, and to the extent
practicable, to permit each other to participate in any conferences with the FTC
or DOJ. The consummation of the transactions described in this Agreement is
expressly conditioned upon the waiting period relating to any such filings
having duly expired or been terminated by the appropriate Governmental
Authorities without the enforcement of any action by any such agencies to
restrain or postpone the transactions contemplated hereby. The Company and Gray
shall share equally in the payment of filing fees required for the HSR Act
filings. In addition, Gray shall make its legal counsel available to the Company
to assist in the preparation of the Company's filings required by the HSR Act
and Gray shall pay the first $10,000 of the fees of its legal counsel incurred
in connection with the Company's HSR filings.
7.2 CONFIDENTIALITY. Except as necessary for the consummation of the
transactions contemplated by this Agreement, except as and to the extent
required by law or securities filings, and except as permitted by Section 7.10,
each party will keep confidential any information obtained from the other party
in connection with the transactions contemplated by this Agreement. If this
Agreement is terminated, each party will return to the other party all
information obtained by such party from the other party in connection with the
transactions contemplated by this Agreement.
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7.3 COOPERATION. Gray and the Company shall cooperate fully with each
other and their respective counsel and accountants in connection with any
actions required to be taken as part of their respective obligations under this
Agreement, and Gray and the Company shall execute such other documents as may be
necessary and desirable to implement and consummate this Agreement, and shall
otherwise use their commercially reasonable efforts to consummate the
transaction contemplated hereby and to fulfill their obligations under this
Agreement, including without limitation accomplishing the events listed in
Section 13.6 by the dates identified in such Section.
7.4 ACCESS TO BOOKS AND RECORDS. Gray shall provide the Shareholder
Representatives reasonable access and the right to copy for a period of three
years from the Closing Date any books and records relating to the Company.
7.5 CERTAIN INVESTMENTS. Prior to the Closing, the Company will liquidate
any and all investment securities and cash equivalents which it owns so that the
current assets of the Company at the time of the Closing will consist only of
cash, accounts receivable and prepaid expenses. Prior to the Closing, Employee
accounts will be liquidated or written off at the election of the Company.
7.6 ACQUISITION PROPOSALS. None of the Shareholders, the Company or any
of its officers and directors shall, and the Company and each of the
Shareholders will use its best efforts to cause its respective employees,
agents, and representatives (including, without limitation, any investment
banker, attorney or accountant retained by the Company or the Shareholders) not
to, initiate, solicit or encourage, directly or indirectly, any inquiries or the
making of any proposal with respect to a merger, consolidation, share exchange
or similar transaction involving the Company, or any purchase of all or any
significant portion of the assets of the Company, or any equity interest in the
Company, other than the transactions contemplated hereby (an "Acquisition
Proposal"), or engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any person
relating to an Acquisition Proposal.
7.7 MEETINGS OF SHAREHOLDERS. The Company will take all actions necessary
in accordance with applicable law and its Articles of Incorporation and By-Laws
to convene a meeting of the Shareholders (the "Shareholder Meeting") as promptly
as practicable to consider and vote upon the approval of the Merger.
7.8 MEETINGS OF GRAY AND MERGER CORP. SHAREHOLDERS. Gray and Merger Corp.
will each take all actions necessary in accordance with applicable law and its
Articles of Incorporation and By-Laws to convene a meeting of its shareholders
as promptly as practicable to consider and vote upon the approval of the Merger,
and to convene subsequent meetings of its shareholders as necessary to consider
and vote upon such other matters as may be required by this Agreement.
7.9 REGISTRATION STATEMENTS.
(1) Gray will, at its sole cost and expense, as promptly as
practicable, prepare and file with the SEC a registration statement on Form
S-4 or other appropriate form (the "Registration Statement"), containing a
proxy statement/prospectus, in connection with the registration under the
Securities Act of the Gray Common Stock issuable upon conversion of the
Shares and the other transactions contemplated hereby. The Company will, as
promptly as practicable, prepare a proxy statement that will be the same
proxy statement/prospectus contained in the Registration Statement and form
of proxy, in connection with the vote of the Company's Shareholders with
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respect to the Merger (such proxy statement/prospectus, together with any
amendments thereof or supplements thereto, in each case in the form or
forms mailed to the Company's Shareholders, is herein called the "Proxy
Statement/Prospectus"). Gray and the Company will use their commercially
reasonable best efforts to have or cause the Registration Statement
declared effective as promptly as practicable, and also will take any other
action required to be taken under federal or state securities laws, and the
Company will use its commercially reasonable best efforts to cause the
Proxy Statement/Prospectus to be mailed to the Shareholders at the earliest
practicable date including without limitation, by providing to Gray all
financial statements, financial information and business information
required or desirable for the Registration Statement and the Proxy
Statement/Prospectus.
(2) Gray will, at its sole cost and expense, as promptly as
practicable after the Closing Date, prepare and file with the SEC a
registration statement on Form S-3 or other appropriate form (the "Resale
Registration Statement"), containing a prospectus, in connection with the
registration under the Securities Act of the resale by the Shareholders of
the Gray Common Stock issued in the Merger that are not otherwise eligible
for public resale without limitation without an effective resale
registration statement. Gray and the Company will use their commercially
reasonable best efforts to have or cause the Resale Registration Statement
declared effective as promptly as practicable, and also will take any other
action required to be taken under federal or state securities laws, and the
Company and the Shareholders will provide to Gray all financial statements,
financial information and business information required or desirable for
the Resale Registration Statement. In the event that the Company and the
Shareholders whose Gray Common Stock is to be resold under the Resale
Registration Statement do not comply with the terms of this Section 7.9(2),
including without limitation, by providing information regarding such
selling Shareholders, the Company and the means of distribution of all Gray
Common Stock to be resold pursuant thereto, then Gray automatically shall
be excused from its obligations pursuant to this Section 7.9(2).
Notwithstanding any other provision of this Section 7.9 to the contrary,
Gray shall not pay for, or otherwise be responsible for, any brokerage or
similar expenses associated with the resale of any of the Gray Common
Stock. Promptly upon request from Gray no more frequently than once each 12
month period, the Shareholder Representative shall provide Gray with the
identity of such Shareholder who has resold any of the Gray Common Stock
issued in the Merger and the number of shares of Gray Common Stock sold by
each such Shareholder. Gray shall use its commercially reasonable best
efforts to keep the Resale Registration Statement effective until the
earlier of (i) the date on which all of the Gray Common Stock initially
covered by the Resale Registration Statement has been sold by the
Shareholders or (ii) the date on which all of the Gray Common Stock
initially covered by the Resale Registration Statement is eligible for
public resale without limitation without an effective resale registration
statement. During such time as the effectiveness of the Resale Registration
Statement is required to be maintained pursuant to the preceding sentence,
Gray timely shall make all filings with the SEC and the NYSE necessary to
maintain the effectiveness of the Resale Registration Statement.
(3) Gray shall cause (i) the Registration Statement and the Resale
Registration Statement to comply as to form in all material respects with
the requirements of the Securities Act and the Exchange Act and the
respective rules and regulations adopted thereunder, and (ii) the
Registration Statement and the Resale Registration
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Statement (except with respect to information concerning the Company
furnished in writing by or on behalf of the Company specifically for use
therein, for which information the Shareholders shall be responsible) and
the Proxy Statement (but only with respect to information concerning Gray
and the Gray Subsidiaries furnished in writing by or on behalf of Gray
specifically for use therein, for which information Gray shall be
responsible) to not contain any untrue statement of any material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements made therein not misleading. Gray will advise the
Company in writing if prior to the Effective Time it shall obtain knowledge
of any fact that would, in its opinion, make it necessary to amend or
supplement the Registration Statement or the Resale Registration Statement
in order to make the statements therein not misleading or to comply with
applicable law.
(4) Prior to Closing, the Company will indemnify Gray, its directors,
officers, employees and agents, and each Person who controls Gray within
the meaning of Section 15 of the Securities Act against all expenses,
claims, losses, damages and liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained (or incorporated by reference) in
the Registration Statement, the Proxy Statement/Prospectus or the Resale
Registration Statement or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse Gray and such
directors, officers, employees and agents and control Persons for any legal
or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action, in each
case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made (or
incorporated by reference) in the Registration Statement, the Proxy
Statement/Prospectus or the Resale Registration Statement in reliance upon
and in conformity with information furnished to Gray by the Company or any
of the Shareholders for use therein.
(5) After Closing, each of the Shareholders will indemnify the Company
and Gray, each of their respective directors, officers, employees and
agents, and each Person who controls the Company or Gray within the meaning
of Section 15 of the Securities Act against all expenses, claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a material
fact contained (or incorporated by reference) in the Registration
Statement, the Proxy Statement/Prospectus or the Resale Registration
Statement or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company and Gray and such
directors, officers, employees and agents and control Persons for any legal
or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action, in each
case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made (or
incorporated by reference) in the Registration Statement, the Proxy
Statement/Prospectus or the Resale Registration Statement in reliance upon
and in conformity with information furnished to Gray by the Company or any
of the Shareholders for use therein.
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7.10 PUBLICITY. The parties hereto agree that they will consult with each
other concerning any proposed press release or public announcement pertaining to
the Merger and shall use their best efforts to agree upon the text of any such
press release or the making of such public announcement.
7.11 REGISTRATION AND LISTING OF GRAY COMMON STOCK. Gray will use its
commercially reasonable best efforts to file the Registration Statement with
respect to the Gray Common Stock to be issued pursuant to this Agreement under
the applicable provisions of the Securities Act, and Gray will use its
commercially reasonable best efforts to cause the Gray Common Stock to be issued
pursuant to this Agreement to be listed for trading on the NYSE.
7.12 SUPPLYING OF FINANCIAL STATEMENTS. The Company shall deliver to Gray
within twenty (20) days following the end of each month true and complete copies
of all unaudited monthly financial statements of the Company for each calendar
month ending subsequent to December 31, 1998 and prior to the Closing Date in
the format historically utilized internally by the Company and, to the extent
applicable, within ninety (90) days following the end of each year true and
completed copies of annual audited financial statements of the Company for each
year subsequent to 1998.
7.13 SUPPLEMENTS TO SCHEDULES. The Company shall from time to time after
the date hereof, supplement or amend the Schedules referred to in Section 4 with
respect to any matter arising after the date hereof which, if existing or
occurring at the date hereof, would have been required to be set forth or
described in such Schedules. Gray may unilaterally extend the Closing Date if
necessary to allow Gray ten (10) business days to review such supplements to the
Schedules prior to the Closing Date. If, in Gray's reasonable determination, any
such supplements to the Schedules reveal any Material Adverse Change, or any
condition or event that reasonably threatens to result in a Material Adverse
Change, Gray shall give written notice to the Company of its determination. The
Company shall then have a period of ten (10) business days to reasonably satisfy
Gray that there has been no Material Adverse Change, or to remedy such Material
Adverse Change, or such condition or event, to Gray's reasonable satisfaction.
If, following such ten (10) business day cure period, in Gray's reasonable
determination, such Material Adverse Change, or such condition or event that
reasonably threatens to result in a Material Adverse Change, still exists, Gray
may terminate this Agreement pursuant to Section 13.5.
7.14 AFFILIATES OF THE COMPANY. Prior to the Closing Date, the Company
shall deliver to Gray a letter identifying all Persons who are reasonably and in
good faith believed to be, at the time of the Shareholder Meeting, "affiliates"
of the Company for purposes of Rule 145 under the Securities Act. The Company
shall use its best efforts to cause each Person who is so identified as an
affiliate to deliver to Gray, on or prior to the Closing Date, a written
agreement, in form reasonably satisfactory to Gray, that such Person will not
offer to sell or otherwise dispose of any of the shares of Gray Common Stock
issued in connection with the Merger in violation of the Securities Act.
SECTION 8. CONDITIONS PRECEDENT FOR THE COMPANY.
The Company's obligation to effect the Merger shall be subject, to the
extent not waived, to the satisfaction of each of the following conditions at or
prior to the Closing.
8.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Gray and Merger Corp. contained in this Agreement shall be true, complete, and
correct in all
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material respects as of the date when made and, except for changes expressly
contemplated by this Agreement, on and as of the Closing Date as though such
representations and warranties had been made on and as of the Closing Date, and
Gray and Merger Corp. shall have delivered to the Shareholder Representatives a
certificate, signed by the Chairman or the President of Gray and Merger Corp.
and dated the Closing Date, to such effect.
8.2 PERFORMANCE OF THIS AGREEMENT. Each of Gray and Merger Corp. shall
have performed and complied in all material respects with all covenants,
conditions, and agreements required by this Agreement to be performed or
complied with by it prior to or on the Closing Date and Gray and Merger Corp.
shall have delivered to the Company and its counsel all of the documents
specified or required to be delivered in accordance with the provisions hereof.
8.3 PROCEEDINGS. All corporate and other proceedings to be taken by Gray
and Merger Corp. in connection with the transactions contemplated hereby shall
have been completed and all such proceedings and all documents incident thereto
shall be reasonably satisfactory in substance and form to the Company, and the
Company shall have received all such counterpart originals or certified or other
copies of such documents as the Company may reasonably request.
8.4 FCC CONSENT. The FCC Consent shall have been granted without the
imposition of any condition thereon adverse to the Company or the Shareholders
and (unless waived by the Company) shall have become a Final Order. All other
consents and authorizations by third parties and all governmental consents,
approvals, licenses, and permits, the granting of which are necessary for the
consummation of the transactions contemplated hereby or for preventing the
termination of any material right, privilege, license, or agreement of the
Company or Merger Corp. related to the Station, or any material loss or
disadvantage to the Company or Merger Corp., upon the consummation of the
transactions contemplated hereby, shall have been obtained or made.
8.5 LITIGATION. No order of any court or administrative agency shall be
in effect which restrains or prohibits the transactions contemplated hereby,
there shall not be pending any action, inquiry, investigation, or proceeding by
or before any court or governmental agency or other regulatory or administrative
agency or commission challenging any of the transactions contemplated by this
Agreement.
8.6 EXPIRATION OF HSR WAITING PERIODS. All applicable waiting periods,
including any extensions thereof, relating to the HSR Act, shall have expired or
otherwise terminated.
8.7 EFFECTIVE REGISTRATION STATEMENT. The Registration Statement shall
have become effective and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
Governmental Authority.
8.8 LEGAL OPINION. The Company shall have received a favorable opinion
from Alston & Bird LLP, Heyman & Sizemore or Proskauer Rose LLP (or a
combination thereof), counsel for Gray and Merger Corp., dated as of the Closing
Date, in form and substance satisfactory to the Company, to the effect that:
(1) each of Gray and Merger Corp. is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Georgia and has the
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corporate power and authority to own and operate its properties and to
carry on its business as being conducted and to execute, deliver and
perform this Agreement and to consummate the transactions contemplated by
this Agreement;
(2) all necessary corporate, stockholder and other action has been
taken on the part of each of Gray and Merger Corp. to authorize and approve
this Agreement and the transactions contemplated hereby; and this Agreement
has been duly executed and delivered by each of Gray and Merger Corp.;
(3) Gray has full legal power and authority to issue and deliver the
shares of Gray Common Stock to the Shareholders in the manner contemplated
by this Agreement; such shares are duly authorized and, upon consummation
of the Merger, will be validly issued, fully paid and nonassessable and
free of any lien, encumbrance, equity or claim created or suffered to exist
by Gray or Merger Corp.;
(4) the execution, delivery and performance of this Agreement by Gray
and Merger Corp. and the consummation by Gray and Merger Corp. of the
transactions contemplated by this Agreement (i) will not result in a breach
or violation by Gray or Merger Corp. of, or constitute a default by Gray or
Merger Corp. under, any statute, rule, regulation, judgment, decree, order,
governmental permit or license, agreement, indenture or instrument included
as an exhibit to the Gray SEC Filings to which Gray or any of its
subsidiaries, including Merger Corp., is a party or by which Gray or any of
its subsidiaries is bound or the Certificate or Articles of Incorporation
or Bylaws of Gray or any of its subsidiaries and (ii) do not require any
consents, approvals, authorizations, registrations or filings by Gray or
Merger Sub that have not been obtained or completed;
(5) the shares of Gray Common Stock which will be delivered to the
Shareholders pursuant to this Agreement are authorized for listing on the
New York Stock Exchange upon official notice of issuance; and the
stockholders of Gray have no preemptive rights with respect to such shares;
(6) the Registration Statement with respect to the shares of Gray
Common Stock which will be delivered to the Shareholders pursuant to this
Agreement has become effective; to the best of such counsel's knowledge no
stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been initiated or
threatened by the SEC;
(7) except only for matters set forth in the Agreement or Schedules
thereto or in the Gray SEC Filings, to the best of such counsel's knowledge
there is no legal action or governmental proceeding or investigation
pending or threatened against or affecting Gray or any of its subsidiaries
or their respective businesses, properties, assets or goodwill which if
determined adversely to Gray or any of its subsidiaries would individually
or in the aggregate have a material adverse effect on the consolidated
financial condition or results of operations of Gray or would materially
adversely affect or prevent the Merger;
(8) as of the effective time specified in the Certificate of Merger
each issued and outstanding share of Company Common Stock will be converted
into the consideration provided in Section 3.1 of the Agreement.
In addition, such opinion shall state that such counsel has participated in
the preparation of the Registration Statement and in conferences with officers
and other
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representatives of the Company, representatives of the independent public
accountants for the Company, and representatives of the Shareholders, at which
the contents of the Registration Statement and related matters were discussed
and, although such counsel has made certain inquiries and investigations in
connection with the preparation of the Registration Statement, such counsel did
not independently verify the accuracy or completeness of the statements made in
the Registration Statement and the limitations inherent in the role of outside
counsel are such that such counsel cannot and does not assume responsibility for
or pass on the accuracy and completeness of such statements, except insofar as
such statements relate to such counsel and to the extent set forth in certain
specified paragraphs of the Registration Statement. Subject to the foregoing,
such counsel shall state to the Shareholders that such counsel's work in
connection with this matter did not disclose any information that caused such
counsel to believe that the Registration Statement as of its date or as of the
Effective Time, included or includes an untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances in which they were made,
not misleading (other than financial statement and other information of a
statistical or financial nature which are or should be contained therein and
other than FCC and other regulating matters, as to which such counsel need
express no view).
8.9 TAX OPINION. The Company shall have received an opinion from King &
Spalding or such other tax counsel as is reasonably acceptable to the Company,
dated as of the Effective Time, substantially to the effect that, on the basis
of the facts, representations and assumptions set forth in such opinions that
are consistent with the state of facts existing at the Effective Time, the
Merger will be treated for Federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code and that accordingly:
(i) No gain or loss should be recognized by Gray, the Company or
Merger Corp. as a result of the Merger; and
(ii) No gain or loss should be recognized by the Shareholders to the
extent that they exchange their Company Common Stock for Gray Common Stock
pursuant to the Merger (except with respect to cash received in lieu of a
fractional share interest in Gray Common Stock).
In rendering such opinion, such counsel may require and rely upon
representations and covenants including those contained in certificates of
officers of Gray, the Company and Merger Corp. and others.
8.10 NYSE LISTING. The shares of Gray Common Stock issuable pursuant to
this Agreement shall have been approved for listing on the New York Stock
Exchange.
8.11 VOTING AGREEMENT AND IRREVOCABLE PROXY. Simultaneously with the
execution of this Agreement, each of Hilton H. Howell, Jr., Robert S. Prather,
Jr., J. Mack Robinson, Harriet J. Robinson and Bull Run Corporation shall enter
into a Voting Agreement and Irrevocable Proxy in form and substance reasonably
acceptable to the Company.
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SECTION 9. CONDITIONS PRECEDENT FOR GRAY AND MERGER CORP.
Gray's and Merger Corp.'s obligations to effect the Merger shall be
subject, to the extent not waived, to the satisfaction of each of the following
conditions at or prior to the Closing.
9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company contained in this Agreement shall be true, complete, and correct in
all material respects as of the date when made and, except for changes expressly
contemplated by this Agreement, on and as of the Closing Date, as though such
representations and warranties had been made on and as of the Closing Date, and
the Company shall have delivered to Gray and Merger Corp. a certificate, signed
by the Chairman or the President of the Company and dated the Closing Date, to
such effect.
9.2 PERFORMANCE OF THIS AGREEMENT. The Company and the Shareholders shall
have performed and complied in all material respects with all covenants,
conditions, and agreements required by this Agreement to be performed or
complied with by it prior to or on the Closing Date and the Company and the
Shareholders shall have delivered to Gray and Merger Corp. and their counsel all
of the instruments of transfer, certificates, Exhibits, Schedules, and other
documents specified or required to be delivered in accordance with the
provisions hereof.
9.3 PROCEEDINGS. All corporate and other proceedings to be taken by the
Company, its Board of Directors and the Shareholders in connection with the
transactions contemplated hereby shall have been completed and all such
proceedings and all documents incident thereto shall be reasonably satisfactory
in substance and form to Gray and Merger Corp., and Gray and Merger Corp. shall
have received all such counterpart originals or certified or other copies of
such documents as Gray may reasonably request.
9.4 FCC CONSENT. The FCC Consent shall have been granted without the
imposition of any condition thereon adverse to Gray or Merger Corp. and (unless
waived by Gray) shall have become a Final Order. All other consents and
authorizations by third parties and all governmental consents, approvals,
licenses, and permits, the granting of which are necessary for the consummation
of the transactions contemplated hereby or for preventing the termination of any
material right, privilege, license, or agreement of the Company or Merger Corp.
related to the Station, or any material loss or disadvantage to Gray or Merger
Corp., upon the consummation of the transactions contemplated hereby, shall have
been obtained or made. Gray hereby agrees that a determination by the Mass Media
Bureau of the FCC that KBTX-TV is a satellite of KWTX-TV does not constitute an
adverse condition. The Company hereby agrees that a determination by the Mass
Media Bureau of the FCC that KBTX-TV is not a satellite of KWTX-TV does
constitute an adverse condition.
9.5 LITIGATION. No order of any court or administrative agency shall be
in effect which restrains or prohibits the transactions contemplated hereby or
which would limit or affect Gray's ownership or control of the Company, the
Station or Merger Corp., and there shall not be pending any action, inquiry,
investigation, or proceeding by or before any court or governmental agency or
other regulatory or administrative agency or commission challenging any of the
transactions contemplated by this Agreement.
9.6 OPINIONS OF COUNSEL FOR THE COMPANY. Gray and Merger Corp. shall have
received opinions from Deaver & Deaver, counsel to the Company, and from Dennis
Kelly,
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special FCC counsel to the Company, dated as of the Closing Date, in
substantially the forms attached hereto as Exhibits F and G, respectively.
9.7 TITLE INSURANCE POLICIES. Gray or Merger Corp., at Gray's sole cost
and expense, shall have received standard form policies of owner's or lessee's
title insurance, issued by a title insurance company doing business in the state
in which such property is located, acceptable to Gray, insuring the Company's
title as owner or as lessee, as the case may be, with current survey coverage,
based on a current ALTA Survey, in form and substance reasonably satisfactory to
Gray, in all of the Real Property in amounts specified by Gray, containing only
those exceptions, conditions, and reservations acceptable to Gray and its
counsel in their reasonable discretion (collectively, the "Permitted
Exceptions"), together with legible copies of the documents creating the
Permitted Exceptions.
9.8 ENVIRONMENTAL AUDIT.
(1) Gray, at Gray's sole cost and expense, shall have received the
written results of an environmental audit, prepared at the direction of
Gray, confirming that:
(i) The Real Property does not contain any hazardous wastes,
hazardous substances, toxic substances, hazardous air pollutants, or
toxic pollutants, as those terms are defined in state and federal
environmental laws and regulations promulgated pursuant to such laws, in
amounts which are in violation of such laws or regulations;
(ii) No part of the Real Property is currently or potentially
subject to any federal, state, or local compliance or enforcement
action, clean-up action, or other action because of the presence of
stored, leaked, spilled, or disposed petroleum products, waste materials
or debris, "PCB's" or "PCB items," underground storage tanks,
"asbestos," or any dangerous, hazardous, or toxic substance as defined
in or regulated by any federal or state or local laws, regulations, or
orders;
(iii) No part of the Real Property has been filled with debris,
garbage, stumps, or other similar waste materials; and
(iv) No condition currently exists on the Real Property, whether
owned or leased, which is or may be characterized by any federal, state,
or local government or agency as an actual or potential threat or danger
to public health or the environment.
(2) If the environmental audit obtained by Gray recommends remedial
measures to clean up contamination identified in the environmental audit,
the Company may complete the remedial measures at its sole cost and expense
so long as such cost and expense is less than the Working Capital Surplus
of the Company, in which case, the time for the Closing hereunder shall be
extended up to 120 days as reasonably necessary to allow for such
remediation. If the Company refuses to complete such remedial measures,
Gray may, at Gray's option,
(i) complete the remedial measures at Gray's sole cost and expense,
in which case, the time for Closing hereunder shall be extended as
reasonably necessary to allow for such remediation and the cash portion
of the Merger Consideration shall be reduced by such cost and expense,
or
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(ii) cancel and terminate this Agreement without further liability
to Gray or the Company.
9.9 EXPIRATION OF HSR WAITING PERIODS. All applicable waiting periods,
including any extensions thereof, relating to the HSR Act, shall have expired or
otherwise terminated.
9.10 CONSUMMATION OF RELATED TRANSACTIONS. All conditions and approvals
necessary for the consummation of related transactions under the KWTX Agreement
shall have occurred or been performed or fulfilled, so that the transactions
described under this Agreement can be closed simultaneously with or immediately
after the closing under the KWTX Agreement.
9.11 EFFECTIVE REGISTRATION STATEMENT. The Registration Statement shall
have become effective and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
Governmental Authority.
9.12 TAX OPINION. Gray and Merger Corp. shall have received an opinion
from King & Spalding or such other tax counsel as is reasonably acceptable to
Gray and Merger Corp., dated as of the Effective Time, substantially to the
effect that, on the basis of the facts, representations and assumptions set
forth in such opinions that are consistent with the state of facts existing at
the Effective Time, the Merger will be treated for Federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code and that
accordingly:
(i) No gain or loss should be recognized by Gray, the Company or
Merger Corp. as a result of the Merger; and
(ii) No gain or loss should be recognized by the Shareholders who
exchange their Company Common Stock for Gray Common Stock pursuant to the
Merger (except with respect to cash received in lieu of a fractional share
interest in Gray Common Stock).
In rendering such opinion, such counsel may require and rely upon
representations and covenants including those contained in certificates of
officers of Gray, the Company and Merger Corp. and others.
9.13 NYSE LISTING. The shares of Gray Common Stock issuable pursuant to
this Agreement shall have been approved for listing on the New York Stock
Exchange.
9.14 GRAY SHAREHOLDER APPROVAL. The shareholders of Gray shall have
approved the issuance of the Gray Common Stock as required by this Agreement.
9.15 AFFILIATES OF THE COMPANY. On or prior to the Closing Date, Gray
shall have received the agreements and instruments referred to in Section 7.13.
9.16 VOTING AGREEMENT AND IRREVOCABLE PROXY. Simultaneously with the
execution of this Agreement, each Shareholder of the Company who is an officer
or director of the Company or who holds at least 5% of the outstanding Company
Common Stock shall enter into a Voting Agreement and Irrevocable Proxy in form
and substance reasonably acceptable to Gray and Merger Corp.
9.17 SHAREHOLDER APPROVAL. This Agreement and the merger contemplated
hereby shall have been approved by an affirmative vote of all of the
Shareholders.
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9.18 DUE DILIGENCE AND SCHEDULES. Gray and Merger Corp. shall be
reasonably satisfied with their due diligence review of the Company and the
Station, including the information disclosed on the Schedules. This condition
shall be deemed to have been satisfied if notice to the contrary has not been
given to the Company no later than ten (10) business days after receipt by Gray
and Merger Corp. of all of the due diligence information reasonably requested by
them and receipt by Gray and Merger Corp. of all of the Schedules.
SECTION 10. CLOSING.
10.1 DELIVERIES BY THE COMPANY. At the Closing, Gray will release and pay
or cause the payment of the Merger Consideration upon receipt of the following
instruments and documents executed by the Company, where appropriate, in form
and content satisfactory to Gray and its counsel:
(1) All original minute book(s) and stock transfer book(s) of the
Company;
(2) The corporate seal of the Company;
(3) A true and complete copy of the Articles of Incorporation of the
Company and all amendments thereto certified by its state of incorporation;
(4) A Certificate of Account Status for the Company from the Texas
Comptroller of Public Accounts, dated no more than thirty (30) days prior
to the Closing Date;
(5) A true and complete copy of the Bylaws and all amendments thereto
of the Company certified by its secretary;
(6) A certificate of the secretary of the Company stating that the
Articles of Incorporation have not been amended since the date of the
certificate described in Subsection 10.1(3) above and that nothing has
occurred since the date of issuance of the Certificate of Account Status
specified in Subsection 10.1(4) above that would adversely affect the
Company's corporate existence or good standing;
(7) The Closing Certificate referred to in Section 9.1 of this
Agreement;
(8) An Owner's and Contractor's Affidavit and such other form
documents, instruments or information as may be requested by the title
insurance company which is providing owner's or lessee's title insurance
coverage for the Real Property;
(9) The opinions of the Company's counsel and the Company' special FCC
counsel; and
(10) Such other documents as Gray or its Counsel may reasonably
request for the complete fulfillment of the Company's and the Shareholders'
obligation hereunder.
10.2 POSTPONEMENT OF CLOSING DATE.
(1) If either the average Market Value (as defined in Section
3.2(1)(ii)) during the Valuation Period (as defined in Section 3.2(1)(iii))
or the Market Value at the Closing Date is less than $10 per share and
additional shares of Gray Common Stock are required to be issued pursuant
to Section 3.2(7), Gray may unilaterally extend the Closing Date for as
much time as reasonably may be required to allow Gray to obtain approval of
Gray's shareholders for the issuance of additional shares of Gray Common
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Stock sufficient to allow the Closing to occur and to effect the
registration of such Gray Common Stock under the Securities Act and the
listing of such Gray Common Stock for trading on the NYSE.
(2) In the event that Gray and Merger Corp. elect in their sole and
absolute discretion to pay the Merger Consideration pursuant to the Cash
Election Option (as defined in Section 3.1(3)), Gray in its sole and
absolute discretion may unilaterally extend the Closing Date for thirty
(30) days from the time of the exercise of the Cash Election Option.
SECTION 11. INDEMNIFICATION.
11.1 BY THE SHAREHOLDERS. After the Closing Date, to the limit of the
Escrow Fund described in Section 11.4, below, the Shareholders shall indemnify
and hold harmless each of Gray and Merger Corp. and their respective officers,
directors, employees, agents, representatives, successors, and permitted assigns
against:
(1) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by Gray or Merger Corp. and arising
from a breach of any representation or warranty of the Company or the
Shareholders contained in this Agreement;
(2) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by Gray or Merger Corp. and arising
from a breach of any agreement of the Company or the Shareholders contained
in this Agreement;
(3) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by Gray or Merger Corp. and arising
from any debt, obligation, or liability of the Company not specifically and
expressly reflected on the Company's December 31, 1998 Balance Sheet, or if
incurred in the ordinary course of business thereafter, on the Final
Balance Sheets, including any Taxes relating to the period ending on the
Closing Date;
(4) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by Gray or Merger Corp. and arising
from any Environmental Claim or any Environmental Matter;
(5) all ordinary and necessary costs, expenses, or settlement payments
(including, without limitation, reasonable attorneys', accountants', and
other professional fees) incurred by Gray in connection with any action,
claim, suit, proceeding, demand, assessment, or judgment incident to any of
the matters indemnified against under this Section 11.
The Company and the Shareholders acknowledge and agree that the provisions
of this Section 11 are intended to complement corresponding provisions of the
KWTX Agreement so that Gray and Merger Corp. shall be entitled to
indemnification for and recovery of any damages, losses, obligations,
liabilities, claims, actions or causes of action sustained or suffered by Gray
or Merger Corp. on account of acquisition of Brazos Broadcasting Company,
payable one-half from the Shareholders and one-half from the persons named as
the Shareholders in the KWTX Agreement, on a several and pro-rata basis.
11.2 BY GRAY AND MERGER CORP. After the Closing Date, to the limit of the
amount of the Escrow Fund, from time to time, described in Section 11.4 below,
each of Gray and
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Merger Corp. shall indemnify and hold harmless the Shareholders and their
respective successors and permitted assigns against:
(1) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by the Shareholders and arising from
a breach of any representation or warranty of Gray or Merger Corp.
contained in this Agreement;
(2) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by the Shareholders and arising from
a breach of any agreement of Gray or Merger Corp. contained in this
Agreement;
(3) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by the Shareholders and arising from
(a) any debt, obligation, or liability of the Company properly reflected on
the Final Balance Sheets; or, (b) the conduct of the business of the
Company after the Closing Date;
(4) any taxes incurred by the Company, Gray or Merger Corp., resulting
from the merger contemplated hereby; and
(5) all ordinary and necessary costs, expenses, or settlement payments
(including, without limitation, reasonable attorneys', accountants', and
other professional fees) incurred by the Shareholders or the Shareholder
Representative in connection with any action, suit, proceeding, demand,
assessment, or judgment incident to any of the matters indemnified against
under this Section 11.
11.3 PROCEDURE FOR INDEMNIFICATION. The procedure for indemnification
shall be as follows:
(1) The party claiming indemnification (the "Claimant") shall promptly
give notice to the party from which indemnification is claimed (the
"Indemnifying Party") of any claim, whether between the parties or brought
by a third party, specifying in reasonable detail the factual basis for the
claim. If the claim relates to an action, suit, or proceeding filed by a
third party against Claimant, such notice shall be given by Claimant within
ten (10) days after written notice of such action, suit, or proceeding was
given to Claimant, provided that any failure to give notice of such action,
suit, or proceeding within such ten (10) day period shall not relieve the
Indemnifying Party of its obligations hereunder except to the extent such
failure shall have prejudiced such party in the defense or resolution of
any such claim. The notice of a claim may be amended on one or more
occasions with respect to the amount of the claim at any time prior to
final resolution of the obligation to indemnify relating to the claim.
(2) With respect to claims solely between the parties, following
receipt of notice from the Claimant of the claim, the Indemnifying Party
shall have thirty (30) days to make such investigation of the claim as the
Indemnifying Party deems necessary or desirable. For the purposes of such
investigation, the Claimant agrees to make available to the Indemnifying
Party and/or its authorized representatives the information relied upon by
the Claimant to substantiate the claim. If the Claimant and the
Indemnifying Party agree at or prior to the expiration of the thirty-day
(30) period (or any mutually agreed upon extension thereof) to the validity
and amount of such claim, the Indemnifying Party shall immediately pay to
the Claimant the amount of the claim. If the Claimant and the Indemnifying
Party do not agree within the thirty-day (30) period (or any mutually
agreed upon extension thereof), the Claimant may seek an appropriate remedy
at law or equity.
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(3) With respect to any claim by a third party as to which the
Claimant is entitled to indemnification under this Agreement, the
Indemnifying Party shall have the right, at its own expense, to participate
in or assume control of the defense of such claim, and the Claimant shall
cooperate fully with the Indemnifying Party, subject to reimbursement for
actual out-of-pocket expenses incurred by the Claimant as the result of a
request by the Indemnifying Party. The Indemnifying Party may elect to
compromise or contest, at its own expense and with counsel reasonably
acceptable to the Claimant, any third party claim. If the Indemnifying
Party elects to compromise or contest such third party claim, it shall
within thirty (30) days after receipt of the notice of the claim (or
sooner, if the nature of the third party claim so requires) notify the
Claimant of its intent to do so by sending a notice to the Indemnified
Party (the "Contest Notice"), and the Claimant shall cooperate, at the
expense of the Indemnifying Party, in the compromise or contest of such
third party claim. If the Indemnifying Party elects not to compromise or
contest the third party claim, fails to notify the Claimant of its election
as herein provided or contests its obligation to indemnify under this
Agreement, the Claimant (upon further notice to the Indemnifying Party)
shall have the right to pay, compromise or contest such third party claim
on behalf of and for the account and risk of the Indemnifying Party.
Anything in this Section 11.3 to the contrary notwithstanding, (i) the
Claimant shall have the right, at its own cost and for its own account, to
compromise or contest any third party claim, and (ii) the Indemnifying
Party shall not, without the Claimant's written consent, settle or
compromise any third party claim or consent to entry of any judgment which
does not include an unconditional term releasing the Claimant from all
liability in respect of such third party claim. In any event, the Claimant
and the Indemnifying Party may participate, at their own expense, in the
contest of such third party claim. In addition, with respect to any claim
related to Taxes, Gray and Merger Corp. shall have the right to participate
in and attend any meeting or proceeding (at Gray's and Merger Corp.'s own
cost and expense) with respect thereto, shall be provided with copies of
any written communication or information regarding any oral communication
with respect thereto as soon as possible after the receipt thereof
(including, but not limited to, information with respect to any proposed
meeting or proceeding) and shall have the right to approve any settlement
thereof if the terms of such settlement could increase, directly or
indirectly, any liability for Taxes of Gray or Merger Corp. in any period
following the Closing. If the Indemnifying Party elects to assume control
of the defense of a third-party claim, the Claimant shall have the right to
participate in the defense of such claim at its own expense. If the
Indemnifying Party does not elect to assume control or otherwise
participate in the defense of any third party claim, it shall be bound by
the results obtained by the Claimant with respect to such claim.
(4) If a claim, whether between the parties or by a third party,
requires immediate action, the parties will make every effort to reach a
decision with respect thereto as expeditiously as possible.
(5) The indemnification rights provided in Sections 11.1 and 11.2
shall extend to the shareholders, directors, officers, members, employees,
and representatives of any Claimant.
11.4 ESCROW FUND. At the Closing, the sum of Two Hundred Fifty Thousand
Dollars ($250,000.00) out of the Merger Consideration (the "Escrow Fund") shall
be deposited with the Escrow Agent. The Escrow Fund shall be held in accordance
with the
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terms hereof and the terms of the Escrow Agreement substantially in the form of
Exhibit B attached hereto. The Escrow Fund shall be used as a source of funds to
satisfy indemnification claims by Gray and Merger Corp. under this Section 11.
Upon final determination of a claim in favor of Gray and Merger Corp. by a court
of competent jurisdiction or by mutual agreement of Gray, Merger Corp. and the
Shareholder Representative, Gray and Merger Corp. shall be entitled to the
amount of such claim from the Escrow Fund. On the first anniversary of the
Closing Date, the Escrow Fund shall be reduced to One Hundred Twenty-Five
Thousand Dollars ($125,000.00), unless there are outstanding claims presented by
Gray or Merger Corp. against the Escrow Fund, in which case, the Escrow Fund
shall be reduced to the sum which is One Hundred Twenty-Five Thousand Dollars
($125,000.00) more than the pending claims of Gray and Merger Corp. All claims
by Gray and Merger Corp. against the Escrow Fund must be made by Gray or Merger
Corp. before the date which is four (4) years after the Closing Date (the
"Indemnity Termination Date"). On the Indemnity Termination Date, the Escrow
Agent shall disburse to the Shareholder Representative the Indemnity Fund
together with all interest earned thereon less the amount of any claims made by
Gray or Merger Corp. against the Escrow Fund prior to such date (the "Claim
Amount"). The Claim Amount shall be retained by the Escrow Agent in escrow until
the underlying claim or claims related thereto have been finally determined by a
court of competent jurisdiction or by mutual agreement of Gray and the
Shareholder Representative. Gray and the Shareholder Representative hereby agree
to jointly direct the Escrow Agent to disburse any portion of the Escrow Fund to
any party which is entitled thereto pursuant to the terms hereof.
11.5 LIMITATION ON DAMAGES. Notwithstanding any provision of this
Agreement to the contrary, the Shareholders' liability to Gray and Merger Corp.
for any breach of any representation, warranty or other applicable provision of
this Agreement shall be several and divided pro-rata among the Shareholders, in
accordance with their percentage ownership of the Shares, and, after Closing,
shall be limited to the Escrow Fund described in Section 11.4. In no event,
after the Closing hereof, shall the total amount of monetary damages that Gray
and Merger Corp. may collect from Shareholders as damages for one or more
breaches by the Shareholders or the Company under this Agreement exceed said
Escrow Fund. Notwithstanding any other provision of this Agreement to the
contrary, after the Closing, Merger Corp., as successor to the Company, shall
not be liable to the Shareholders for any inaccuracy in any representation or
warranty or any breach of any covenant or agreement made or to be performed by
the Company pursuant to this Agreement and the Shareholders shall have no right
of contribution from or any other claim or action against Merger Corp., as
successor to the Company.
SECTION 12. CONDUCT OF BUSINESS PENDING CLOSING.
The Company covenants, represents, and warrants in favor of Gray and Merger
Corp. that, pending the Closing, unless otherwise agreed to in writing by Gray:
12.1 The Company will not sell, transfer, or otherwise dispose of, or
enter into any transaction, contract, or commitment for the sale or disposition
of all or any portion of the assets of the Station, except in the ordinary
course of business, none of which transactions shall materially affect Merger
Corp. or the Station from and after the Closing Date.
12.2 The Company will carry and continue in full force through the Closing
such fire and extended coverage, and theft, liability, and other insurance in
substantially the same form and amount as are currently in force.
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12.3 The Company will use its best efforts to preserve the business
organization and all equipment and records thereof in good order, to keep
available for Merger Corp. all of the present employees of the Company, and to
preserve for Merger Corp. the goodwill of suppliers, customers, advertisers, and
others having business relationships with the Company.
12.4 The Company will maintain, repair and replace the Leased Property,
Real Property and the Tangible Personal Property in accordance with its
customary practices, in substantially the same condition and state of repair as
all such property is in on the date of this Agreement, ordinary wear and tear
excepted.
12.5 The Company shall permit Gray and its representatives, independent
accountants, and attorneys, reasonable access during normal business hours to
its properties, books, records, and other information with respect to the
Company as Gray may request, and to make copies of such books, records, and
other documents that Gray considers necessary or appropriate for the purposes of
familiarizing itself with the Company.
12.6 Between the date of this Agreement and the Closing Date, the Company
will deliver to Gray information necessary to update the Schedules hereto and
the lists, documents, and other information furnished by the Company as
contemplated by this Agreement, and updated copies of new or changed documents
relating to or included as a part of such Schedules, in order that all such
Schedules, lists, documents, and other information and items shall be complete
and accurate in all respects as of the Closing Date.
12.7 Except for written employment agreements in existence on the date
hereof and listed in Schedule 4.22, none of the Company, any of the Shareholders
or any of their respective representatives has made or will make oral, written
or other representations to any employee of the Company or to any other Person
regarding the benefits, compensation or other terms or conditions of employment
that will be provided to such individuals after the Closing Date. Whether or not
a particular individual will or will not be retained in employment after the
Closing Date constitutes a term or condition of employment.
SECTION 13. TERMINATION.
This Agreement may be terminated at any time prior to the Closing Date in
the following manner:
13.1 by mutual written consent of Gray, Merger Corp. and the Company;
13.2 if any representation, warranty, covenant or agreement of the
Company, or if any representation, warranty, covenant or agreement of Gray or
Merger Corp., contained herein (that materially affects the financial condition
or business of Gray or the Company) 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 ten (10) days in which to cure such default;
13.3 by Gray and Merger Corp., if any condition to the consummation of the
transactions contemplated hereby which must be fulfilled to its satisfaction has
(in their good faith judgment) not been fulfilled, or has become impossible to
fulfill;
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13.4 without any action by Gray and Merger Corp. or the Company, if the
Closing Date has not occurred by December 31, 1999, unless the Assignment
Application jointly filed by the Company or the Shareholders and Gray and Merger
Corp. is still pending before the FCC on that date, in which case this Agreement
shall not be terminated until May 31, 2000 pursuant to this Section 13.4, but
after which, either the Company or Gray and Merger Corp. may terminate the
Agreement;
13.5 by Gray and Merger Corp. pursuant to Section 7.13; or
13.6 by the Company if Gray fails to accomplish the following events by
the dates indicated:
(a) filing the Registration Statement by the later of (i) thirty (30)
days after Gray receives from the Company, KWTX Broadcasting Company, KXII
Broadcasters, Inc., KXII Broadcasters, Ltd., KXII Television, Ltd. and
K-Twelve, Ltd. all of the financial statements, financial information and
business information required or desirable for inclusion in the
Registration Statement or (ii) sixty (60) days after the date of this
Agreement;
(b) obtaining Gray shareholder approval of the issuance of the Gray
Common Stock in the Merger within forty (40) days after the Registration
Statement has been declared effective by the SEC; and
(c) file the Resale Registration Statement by the later of (i) twenty
(20) days after the approval of the Merger by the Shareholders or (ii)
twenty (20) days after the Closing Date.
If the termination of this Agreement occurs without breach or default of
the Company or Gray and Merger Corp., then this Agreement shall become wholly
void and shall have no further force and effect, and neither Gray or Merger
Corp., on the one hand, nor the Company, on the other, shall have any liability
or obligation with respect to each other. Upon such termination, the Escrow
Agent shall refund the Earnest Money to Gray within three (3) days after the
date upon which the termination becomes effective. If the termination occurs as
a result of a breach or default by the Company, then Gray and Merger Corp. shall
be entitled to seek specific performance of the Company's obligation to effect
the Merger in accordance with the provisions hereof, or obtain the return of the
Earnest Money. If the termination occurs as a result of a breach or default by
Gray or Merger Corp., the Company may request the Earnest Money from the Escrow
Agent and retain the Earnest Money as liquidated damages to compensate the
Company and the Shareholders for the damages resulting from such breach or
default. The parties agree that actual damages pursuant to a breach of this
Agreement prior to Closing would be impossible to measure. Receipt of the
Earnest Money shall be the sole and exclusive remedy that the Company shall have
in the event of such breach or default and shall constitute a waiver of any and
all other legal or equitable rights or remedies that the Company may otherwise
have as a result of Gray's or Merger Corp.'s breach or default, and that in
consideration for the receipt of the Earnest Money as liquidated damages, the
Company may not obtain any further legal or equitable relief, including specific
performance, to which it may otherwise have been entitled and neither Gray nor
Merger Corp. shall have any further liability to the Company or the Shareholders
as a result of such breach or default or the non-occurrence of Closing. If the
Closing does not occur due to the nonfulfillment of any of the conditions in
Section 9 or for any other reason except Gray's or Merger Corp.'s material
breach or default in the performance of any of its
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obligations under this Agreement, the Company shall not be entitled to the
proceeds of the Earnest Money and, promptly after the termination of this
Agreement, the proceeds of the Earnest Money shall be returned to Gray.
SECTION 14. MISCELLANEOUS PROVISIONS.
14.1 EXPENSES OF NEGOTIATION AND TRANSFER.
(1) The Company and Gray shall share equally in the payment of FCC
filing fees, and the HSR filing fees, and the Shareholders and Gray shall
share equally in the payment of the fees of the Neutral Auditors.
(2) Except as provided above, each party to this Agreement shall pay
its own expenses and other costs incidental to or resulting from this
Agreement, whether or not the transactions contemplated hereby are
consummated.
14.2 SCHEDULES. Any disclosure with respect to a Section or Schedule of
this Agreement shall be deemed to be disclosure for each of the other Sections
or Schedules of this Agreement with respect to which the substance of the
disclosure is clear and unambiguous on the face of the disclosure.
14.3 SURVIVAL. All of the covenants, agreements, representations, and
warranties made in this Agreement or made pursuant hereto shall survive the
Closing and the consummation of the transactions contemplated by this Agreement.
14.4 ENTIRE AGREEMENT; AMENDMENT; WAIVERS. This Agreement and the
documents referred to herein and to be delivered pursuant hereto constitute the
entire agreement of the parties pertaining to the subject matter hereof, and
supersede all prior and contemporaneous agreements understandings, negotiations,
and discussions of the parties, whether oral or written, and there are no
warranties, representations, or other agreements between the parties in
connection with the subject matter hereof, except as specifically set forth
herein. No amendment, supplement, modification, waiver, or termination of this
Agreement shall be binding unless executed in writing by the party to be bound
thereby. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provision or breach of this Agreement,
whether or not similar, unless otherwise expressly provided.
14.5 HEADINGS. The descriptive headings of the Sections and Subsections
of this Agreement and the Table of Contents are for convenience only and do not
constitute a part of this Agreement.
14.6 FURTHER ASSURANCES. Each party agrees to execute and deliver such
further certificates, agreements, and other documents and it shall take such
other actions as the other party may reasonably request to consummate or
implement the transactions contemplated hereby or to evidence such events or
matters.
14.7 SITUS AND CONSTRUCTION. This Agreement and any other agreements to
be made and entered into pursuant hereto shall be construed in accordance with
and governed by the laws of the State of Texas.
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14.8 NOTICES. All notices under this Agreement shall be made in writing
and shall be delivered by U. S. Mail, overnight courier, facsimile, or other
means calculated to give prompt, actual notice to the recipient party, in the
following manner:
<TABLE>
<S> <C>
If to the Company: Milford N. Bostick, Chairman
Brazos Broadcasting Company
200 West Highway 6
Suite 210
Waco, TX 76712
Phone: 254-772-9155
Fax: 254-772-7350
with a copy to: Kyle Deaver and John Lee Deaver
Deaver & Deaver
200 West Highway 6
Suite 501
Waco, TX 76712
Phone: 254-741-0400
Fax: 254-751-8369
If to the Gray: Robert S. Prather, Jr.
Gray Communications Systems, Inc.
4370 Peachtree Road
Atlanta, Georgia 30319
Phone: 404-266-8333
Fax: 404-261-9067
with a copy to: Alston & Bird LLP
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attention: Stephen A. Opler
Phone: 404-881-7000
Fax: 404-881-4777
</TABLE>
14.9 BINDING EFFECT. All of the covenants, conditions, agreements, and
undertakings set forth in this Agreement shall extend to and be binding upon the
Company, the Shareholders, Gray and Merger Corp. and their respective successors
and assigns. No party to this Agreement may assign any of its rights or
obligations hereunder, except that Merger Corp. may assign its rights and
obligations to any other entity of which Gray owns a majority of the equity
interests.
14.10 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, and all of which
shall be deemed but one instrument.
14.11 SHAREHOLDER REPRESENTATIVE.
(1) By approving this Merger Agreement and accepting the Merger
Consideration, each of the Shareholders hereby irrevocably makes,
constitutes, and appoints Ray M. Deaver as the representative, agent and
true and lawful attorney in fact of and for each of the Shareholders in
connection with this Agreement (the "Shareholder Representative"). Each of
the Shareholders hereby authorizes and empowers the Shareholder
Representative to make or give any approval, waiver, request, consent,
instruction or other communication on behalf of each of the
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Shareholders as each such Shareholder could do for himself, itself or
herself, including with respect to the amendment of any provision of this
Agreement. Each of the Shareholders further authorizes and empowers the
Shareholder Representative to (i) receive all demands, notices or other
communications directed to such Shareholder under this Agreement and to
take any action (or to determine to refrain from taking any action) with
respect thereto as he may deem appropriate as effectively as such
Shareholder could act for himself, itself or herself (including, without
limitation, the settlement or compromise of any dispute or controversy) and
(ii) execute and deliver all instruments and documents of every kind
incident to the foregoing with the same effect as if such Shareholder had
executed and delivered such instruments and documents personally.
Accordingly, any demands, notices or other communications directed to the
Shareholders hereunder shall be deemed effective if given to the
Shareholder Representative. Upon the death, resignation or incapacity of
the Shareholder Representative, or at any other time, a successor may be
appointed by the vote of the holders of a majority of the Shares
outstanding immediately prior to the Effective Time, and such successor
shall agree in writing to accept such appointment in accordance with the
terms hereof. Notice of the selection of a successor Shareholder
Representative appointed in the manner permitted in this Section 14.11
shall be provided to Gray and Merger Corp. promptly.
(2) Without limiting the generality of the foregoing paragraph (1), if
Gray, Merger Corp. or any of the other Persons specified in Section 11.1
asserts a claim for indemnification based upon the provisions of Section
11, the notice requirements of Sections 11.3 and 14.8 shall be satisfied by
delivery of any required notice to the Shareholder Representative as
representative of and on behalf of each of the Shareholders, and the
Shareholder Representative shall exercise all rights of the Shareholders,
as indemnifying parties under Section 11, and shall cause all obligations
of the Shareholders, as indemnifying parties under Section 11, to be
performed. Each of the Shareholders agrees to be bound by all actions and
failures to act of the Shareholder Representative in accordance with this
Section 14.11. Notwithstanding the foregoing, it shall be the obligation of
each Shareholder, and not of the Shareholder Representative, to indemnify
Gray, Merger Corp. and the other Persons specified in Section 11.1 based
upon the provisions of Section 11. By approving this Merger Agreement and
by accepting the Merger Consideration, each Shareholder hereby agrees to
indemnify and to save and hold harmless the Shareholder Representative from
any liability incurred by the Shareholder Representative based upon or
arising out of any act, whether of omission or commission, of the
Shareholder Representative pursuant to the authority herein granted, other
than acts, whether of omission or commission, of the Shareholder
Representative that constitute gross negligence or willful misconduct in
the exercise by the Shareholder Representative of the authority herein
granted.
[SIGNATURES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, the Company, Gray and Merger Corp. have executed this
Agreement and Plan of Merger by their duly authorized officers on and as of the
date set forth above.
<TABLE>
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GRAY:
ATTEST: Gray Communications Systems, Inc.
By: /s/ ROBERT S. PRATHER, JR.
--------------------------------------------
- ---------------------------------------------
Title: Executive Vice President
Title: -------------------------------------- --------------------------------------------
MERGER CORP.:
ATTEST: Gray Communications of Texas, Inc.
By: /s/ ROBERT S. PRATHER, JR.
--------------------------------------------
- ---------------------------------------------
Title: President
Title: -------------------------------------- --------------------------------------------
THE COMPANY:
ATTEST: Brazos Broadcasting Company
/s/ ROSS SAMS, JR. By: /s/ RAY DEAVER
- --------------------------------------------- --------------------------------------------
Title: Secretary Title: President
- -------------------------------------------- --------------------------------------------
</TABLE>
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APPENDIX C
ASSET PURCHASE AGREEMENT
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.
DATED AS OF APRIL 26, 1999
<PAGE> 280
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C> <C>
C-1
SECTION 1. DEFINITIONS............................................
1.1 Accounts Payable............................................ C-1
1.2 Accounts Receivable......................................... C-1
1.3 Affiliate................................................... C-2
1.4 Agreement................................................... C-2
1.5 Assets...................................................... C-2
1.6 Assignment Application...................................... C-2
1.7 Assumed Liabilities......................................... C-2
1.8 Audited Balance Sheets...................................... C-3
1.9 Audited Balance Sheet Date.................................. C-3
1.10 Business.................................................... C-3
1.11 Closing..................................................... C-3
1.12 Closing Date................................................ C-3
1.13 Code........................................................ C-3
1.14 Contract.................................................... C-3
1.15 Default..................................................... C-3
1.16 Earnest Money............................................... C-3
1.17 Earnest Money Escrow Agent.................................. C-3
1.18 Employee Benefit Plan....................................... C-3
1.19 Encumbrances................................................ C-4
1.20 Environmental Claim......................................... C-4
1.21 Environmental Matter........................................ C-4
1.22 ERISA....................................................... C-4
1.23 ERISA Plan.................................................. C-4
1.24 FCC......................................................... C-4
1.25 FCC Consent................................................. C-4
1.26 FCC Licenses................................................ C-4
1.27 Final Order................................................. C-4
1.28 Financial Statements........................................ C-4
1.29 GAAP........................................................ C-4
1.30 GAAP Basis Financial Statements............................. C-5
1.31 Gray........................................................ C-5
1.32 Governmental Authority...................................... C-5
1.33 Historical Financial Statements............................. C-5
1.34 Indemnity Escrow Agent...................................... C-5
1.35 Intangible Property......................................... C-5
1.36 KBI 1....................................................... C-5
1.37 KBI 2....................................................... C-5
1.38 KXII Parties................................................ C-5
1.39 KXII Properties............................................. C-5
1.40 KXII Television............................................. C-5
1.41 KBTX Merger Agreement....................................... C-5
1.42 Knowledge, Know, Known...................................... C-5
1.43 K-Twelve.................................................... C-5
1.44 KWTX Merger Agreement....................................... C-6
1.45 Law......................................................... C-6
1.46 Leased Property............................................. C-6
</TABLE>
i
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<TABLE>
<CAPTION>
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<S> <C> <C>
1.47 Liability................................................... C-6
1.48 Licensee.................................................... C-6
1.49 Litigation.................................................. C-6
1.50 Material or Materially...................................... C-6
1.51 Material Adverse Change or Material Adverse Effect.......... C-6
1.52 Order....................................................... C-6
1.53 Other Agreements............................................ C-6
1.54 Owners...................................................... C-6
1.55 Permits..................................................... C-6
1.56 Permitted Liens............................................. C-7
1.57 Person...................................................... C-7
1.58 Preliminary Statement of Accounts Receivable................ C-7
1.59 Program Rights.............................................. C-7
1.60 Purchase Price.............................................. C-7
1.61 Purchaser................................................... C-7
1.62 Real Property............................................... C-7
1.63 Related Person.............................................. C-8
1.64 Retained Assets............................................. C-8
1.65 Retained Liabilities........................................ C-8
1.66 Schedule.................................................... C-9
1.67 Seller...................................................... C-9
1.68 Station..................................................... C-9
1.69 Subsidiary.................................................. C-9
1.70 Tangible Personal Property.................................. C-9
1.71 Tax or Taxes................................................ C-9
1.72 Tax Returns................................................. C-10
1.73 Third Party or Third Parties................................ C-10
1.74 Tradeout Agreement.......................................... C-10
1.75 Unaudited Balance Sheets.................................... C-10
1.76 Unaudited Balance Sheet Date................................ C-10
1.77 Undisclosed Liabilities..................................... C-10
C-10
SECTION 2. PURCHASE AND SALE OF ASSETS............................
2.1 Purchase of the Assets and the FCC Licenses................. C-10
2.2 Purchase Price.............................................. C-10
2.3 Determination of Accounts Receivable........................ C-11
2.4 Payment of the Cash Portion of the Purchase Price........... C-12
2.5 Prorations and Certain Payments............................. C-12
2.6 Closing..................................................... C-13
2.7 Deliveries.................................................. C-13
C-13
SECTION 3. ASSUMPTION OF LIABILITIES..............................
3.1 General..................................................... C-13
3.2 Assumption of the Liabilities............................... C-13
3.3 Assignment of Certain Contracts............................. C-14
3.4 Payment of Accounts Payable and Other Liabilities of
Seller...................................................... C-14
3.5 No Intention to Benefit Third Parties....................... C-14
C-15
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE KXII PARTIES.....
4.1 Organization, Power, and Qualifications of Seller........... C-15
4.2 Organization, Power, and Qualifications of K-Twelve......... C-15
</TABLE>
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<TABLE>
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<S> <C> <C>
4.3 Organization, Power, and Qualifications of KXII
Television.................................................. C-15
4.4 Organization, Corporate Power, and Qualifications of KBI
1........................................................... C-15
4.5 Organization, Corporate Power, and Qualifications of KBI
2........................................................... C-15
4.6 Organization, Corporate Power, and Qualifications of KXII
Properties.................................................. C-15
4.7 Authorization and Validity.................................. C-15
4.8 Ownership of Equity Interests............................... C-16
4.9 Noncontravention............................................ C-16
4.10 Consents, Approvals......................................... C-16
4.11 Subsidiaries and Investments................................ C-16
4.12 Financial Statements........................................ C-16
4.13 Title to and Condition of Real Property..................... C-17
4.14 Title to and Condition of Tangible Personal Property........ C-18
4.15 Litigation.................................................. C-18
4.16 Environmental Matters....................................... C-19
4.17 Trade Names, Trade Marks, Etc............................... C-20
4.18 Governmental Authorization and Compliance with Laws......... C-20
4.19 FCC Licenses................................................ C-21
4.20 Labor Relations............................................. C-21
4.21 Insurance................................................... C-22
4.22 Accounts Receivable......................................... C-22
4.23 Accounts Payable............................................ C-22
4.24 Tax Returns, Audits, and Liabilities........................ C-22
4.25 Certain Contracts........................................... C-23
4.26 Employees................................................... C-24
4.27 Employee Benefit Plans...................................... C-24
4.28 No Brokers.................................................. C-25
4.29 Computer Software and Database.............................. C-25
4.30 Interested Transactions..................................... C-25
4.31 Full Disclosure............................................. C-26
4.32 Absence of Undisclosed Liabilities.......................... C-26
4.33 Compliance With the Immigration Reform and Control Act...... C-26
4.34 Absence of Changes.......................................... C-26
4.35 Reliance and Survival....................................... C-26
C-27
SECTION 5. REPRESENTATIONS AND WARRANTIES OF GRAY, PURCHASER AND
LICENSEE.........................................................
5.1 Organization and Existence of Gray, Purchaser and
Licensee.................................................... C-27
5.2 Authorization and Validity.................................. C-27
5.3 Noncontravention............................................ C-27
5.4 Consents, Approvals......................................... C-27
5.5 No Brokers.................................................. C-27
5.6 Financial Ability........................................... C-28
C-28
SECTION 6. FCC APPROVAL...........................................
6.1 Filing and Prosecution of Application....................... C-28
6.2 Expenses.................................................... C-28
6.3 Time for FCC Consent........................................ C-28
6.4 Control of Station.......................................... C-28
6.5 No Reversion of Licenses.................................... C-28
6.6 Regulatory Matters.......................................... C-28
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C> <C>
C-29
SECTION 7. SPECIAL COVENANTS AND AGREEMENTS.......................
7.1 Confidentiality............................................. C-29
7.2 Cooperation................................................. C-29
7.3 Access to Books and Records................................. C-29
7.4 Certain Investments......................................... C-29
7.5 Acquisition Proposals....................................... C-29
7.6 Publicity................................................... C-29
7.7 Supplying of Financial Statements........................... C-29
7.8 Cooperation in Preparation of Filings....................... C-30
7.9 Supplements to Schedules.................................... C-30
7.10 Use of Name................................................. C-30
7.11 Certain Tax Matters......................................... C-30
7.12 Other Expenses.............................................. C-31
7.13 Further Assurances.......................................... C-31
7.14 Title Search; Discharge of Encumbrances; Title Insurance.... C-31
7.15 Transfer of Real Property................................... C-31
7.16 Transfer of Certain Assets.................................. C-31
7.17 Digital Television Applications............................. C-31
7.18 Earnest Money............................................... C-32
C-32
SECTION 8. CONDITIONS PRECEDENT FOR SELLER AND THE OWNERS.........
8.1 Representations and Warranties.............................. C-32
8.2 Performance of this Agreement............................... C-32
8.3 Proceedings................................................. C-32
8.4 FCC Consent................................................. C-32
8.5 Litigation.................................................. C-32
8.6 Closing of Mergers.......................................... C-33
C-33
SECTION 9. CONDITIONS PRECEDENT FOR GRAY, PURCHASER AND
LICENSEE.........................................................
9.1 Representations and Warranties.............................. C-33
9.2 Performance of this Agreement............................... C-33
9.3 Proceedings................................................. C-33
9.4 FCC Consent................................................. C-33
9.5 Litigation.................................................. C-33
9.6 Opinions of Counsel for Seller.............................. C-33
9.7 Title Insurance Commitments................................. C-34
9.8 Environmental Audit......................................... C-34
9.9 No Material Adverse Change.................................. C-34
9.10 Zoning Certificate.......................................... C-35
9.11 Closing of Mergers.......................................... C-35
9.12 Transfer of Real Property................................... C-35
9.13 Transfer of Certain Assets.................................. C-35
9.14 Due Diligence and Schedules................................. C-35
C-35
SECTION 10. CLOSING...............................................
10.1 Deliveries by Seller........................................ C-35
10.2 Deliveries by Gray, Purchaser and Licensee.................. C-37
C-37
SECTION 11. INDEMNIFICATION.......................................
11.1 By Seller................................................... C-37
11.2 By Gray, Purchaser and Licensee............................. C-38
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
11.3 Procedure for Indemnification............................... C-38
11.4 Escrow Fund................................................. C-39
11.5 Limitation on Damages....................................... C-40
C-40
SECTION 12. CONDUCT OF BUSINESS PENDING CLOSING...................
12.1 Conduct of Business Pending Closing......................... C-40
C-41
SECTION 13. TERMINATION...........................................
13.1 Termination................................................. C-41
13.2 Risk of Loss................................................ C-42
C-43
SECTION 14. MISCELLANEOUS PROVISIONS..............................
14.1 Expenses of Negotiation and Transfer........................ C-43
14.2 Schedules................................................... C-43
14.3 Survival.................................................... C-43
14.4 Entire Agreement; Amendment; Waivers........................ C-43
14.5 Headings.................................................... C-43
14.6 Further Assurances.......................................... C-43
14.7 Situs and Construction...................................... C-44
14.8 Notices..................................................... C-44
14.9 Binding Effect.............................................. C-44
14.10 Execution in Counterparts................................... C-44
</TABLE>
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INDEX OF SCHEDULES
<TABLE>
<S> <C> <C>
Schedule 2.2(b) -- Purchase Price Allocation
Schedule 4.1 -- Foreign Qualifications
Schedule 4.8 -- Stock Ownership
Schedule 4.12 -- Financial Statements
Schedule 4.13(a) -- Description of Real Property
Schedule 4.13(c) -- Ground Leases
Schedule 4.13(d) -- Tenant Leases
Schedule 4.14(a) -- Owned Tangible Personal Property
Schedule 4.14(b) -- Leased Tangible Personal Property
Schedule 4.15 -- Litigation
Schedule 4.16 -- Environmental Sites
Schedule 4.17 -- Trade Names, Trade Marks, etc.
Schedule 4.18 -- Governmental Licenses, Certificates, Permits and
Approvals
Schedule 4.19 -- FCC Licenses
Schedule 4.20 -- Employment and Related Agreements
Schedule 4.21 -- Insurance
Schedule 4.24 -- Tax Matters
Schedule 4.25 -- Certain Contracts
Schedule 4.26 -- Employees
Schedule 4.27 -- Employee Benefit Plans
Schedule 4.30 -- Interested Transactions
Schedule 4.34 -- Absence of Changes
</TABLE>
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INDEX OF EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit A -- Form of Escrow Agreement (Earnest Money)
Exhibit B -- Form of Opinion of Deaver & Deaver
Exhibit C -- Form of Opinion of Dennis Kelly
Exhibit D -- Bill of Sale
Exhibit E -- Assignment and Assumption Agreement
Exhibit F -- Form of Escrow Agreement (Indemnity)
</TABLE>
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and executed as of
April 26, 1999, by and among GRAY COMMUNICATIONS SYSTEMS, INC., a Georgia
corporation ("Gray"), GRAY COMMUNICATIONS OF TEXAS-SHERMAN, INC., a Georgia
corporation and wholly-owned subsidiary of Gray ("Purchaser"), KXII LICENSEE
CORP., a Delaware corporation ("Licensee"), KXII BROADCASTERS LTD., a Texas
limited partnership ("Seller"), KXII TELEVISION, LTD., a Texas limited
partnership ("KXII Television"), K-TWELVE, LTD., a Texas limited partnership
("K-Twelve"), KBI 1, INC., a Delaware corporation ("KBI 1"), KBI 2, INC., a
Delaware corporation ("KBI 2"), KXII PROPERTIES, INC., a Texas corporation
("KXII Properties"), and Rich Adams, Ellen Deaver, John Deaver, Kyle Deaver (all
residents of the State of Texas) and Martha Phipps, a resident of the State of
Oklahoma (individually, a "Shareholder" and collectively, the "Shareholders" and
together with KBI 1, KBI 2 and KXII Properties, sometimes individually referred
to as an "Owner" and collectively as the "Owners").
RECITALS
Seller owns and operates television station KXII in Sherman, Texas pursuant
to authorizations issued by the Federal Communications Commission ("FCC"). The
Owners are the direct and indirect owners of all of the partnership interests of
Seller. KBI 1 is the 1% general partner of Seller and KBI 2 is the 99% limited
partner of Seller. Each of KBI 1 and KBI 2 are wholly-owned subsidiaries of KXII
Properties. KXII Properties is owned by the Shareholders.
KXII Television is owned by Seller and the Shareholders and, pursuant to a
contract with Seller, operates the sales of advertising for Seller. K-Twelve
owns certain real estate used by Seller in its operation of the Station. Seller
is the owner of, and desires to sell, and Purchaser desires to purchase,
substantially all of the assets of Seller related to the Business upon the terms
and subject to the conditions set forth herein. Certain defined terms used in
this Agreement are defined in Section 1 hereof.
IN CONSIDERATION OF the foregoing, the mutual covenants, agreements,
representations and warranties contained in this Agreement, $10.00 in hand paid,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and subject to the terms and conditions hereinafter set
forth, the parties hereto agree as follows:
SECTION 1. DEFINITIONS
The following terms, when used in capitalized form within this Agreement,
or within any Exhibit or Schedule to this Agreement in which the terms are not
otherwise defined, shall have the following meanings:
1.1 "ACCOUNTS PAYABLE" means all accounts payable (trade and otherwise)
and all other monies due from Seller, KXII Television and, solely with respect
to the Real Property, K-Twelve for purchases of goods and the performance of
services.
1.2 "ACCOUNTS RECEIVABLE" means all accounts receivable, notes receivable
and other monies due to Seller for sales and deliveries of goods, sale of
advertising or broadcasting
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time, performance of services and other business transactions (whether or not on
the books of Seller) on the Closing Date;
1.3 "AFFILIATE" of a Person means: (i) any Person directly, or indirectly
through one or more intermediaries, controlling, controlled by or under common
control with such Person; (ii) any officer, director, partner, employee, agent,
or representative or direct or indirect beneficial or legal owner of any 10% or
greater equity or voting interest of such Person; and (iii) any entity for which
a Person described in (ii) above acts in any such capacity.
1.4 "AGREEMENT" means this Asset Purchase Agreement and all Exhibits,
Schedules, certificates, and instruments attached hereto or referred to herein.
1.5 "ASSETS" means all of the assets, properties and rights of Seller,
KXII Television and, solely with respect to the Real Property, K-Twelve, of
every kind, nature, character and description, whether real, personal or mixed,
whether tangible or intangible, whether accrued, contingent or otherwise (other
than the Retained Assets) relating to or utilized in the Business, directly or
indirectly, in whole or in part, in existence on the date hereof and any
additions thereto on or before the Closing Date, whether or not carried on the
books and records of Seller or KXII Television, and whether or not owned in the
name of Seller or KXII Television or any Affiliate of Seller or KXII Television
and wherever located, including but not limited to the following:
(i) the Real Property;
(ii) the Tangible Personal Property;
(iii) the Inventory;
(iv) the Accounts Receivable;
(v) the Intangible Property of Seller and KXII Television;
(vi) the Contracts of Seller, KXII Television and, solely with respect
to the Real Property, K-Twelve;
(vii) the Permits of Seller, K-Twelve and KXII Television;
(viii) the Goodwill of the Business, including, but not limited to,
goodwill associated with trademarks, service marks, and tradenames and
assumed names; and
(ix) the customer lists, advertiser lists, mailing lists, customer
files, advertiser files, supplier files, electronic data files, sales agent
and representative files, credit files, and credit data relating to the
Assets and the Assumed Liabilities, all other files, records, drawings,
catalogues, stationery, advertising materials and other documents (or
copies thereof) related to the Assets or the Business, and the use of any
telephone numbers that are used in the operation of the Business and any
other tangible assets owned by Seller or KXII Television on the Closing
Date and used in the Business.
1.6 "ASSIGNMENT APPLICATION" has the meaning specified in Section 6.1
below.
1.7 "ASSUMED LIABILITIES" means Liabilities for which an obligation to pay
or perform becomes due on or after the Closing Date under or pursuant to
Contracts of Seller, K-Twelve or KXII Television assigned to Purchaser pursuant
to this Agreement (including, without limitation, outstanding purchase orders
and sales commitments of
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Seller or KXII Television); provided, however, such Liabilities shall not
include any Liabilities resulting from or arising out of any Default by Seller,
K-Twelve or KXII Television prior to the Closing Date under or with respect to
any of such Contracts.
1.8 "AUDITED BALANCE SHEETS" means the audited balance sheets of Seller
and KXII Television as of December 31, 1998 included in the Financial
Statements.
1.9 "AUDITED BALANCE SHEET DATE" means the date of the Audited Balance
Sheet.
1.10 "BUSINESS" means Seller's business of owning and operating television
station KXII in Sherman, Texas and related operations in Ardmore, Oklahoma.
1.11 "CLOSING" means the consummation of the asset acquisitions and the
other transactions contemplated by this Agreement in accordance with Section 10.
1.12 "CLOSING DATE" means the date on which the closing occurs, as
determined pursuant to Section 2.6.
1.13 "CODE" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
1.14 "CONTRACT" means any written or oral contract, agreement,
understanding, lease, usufruct, license, plan, instrument, commitment,
restriction, arrangement, obligation, undertaking, practice or authorization of
any kind or character or other document to which any Person is a party or that
is binding on any Person or its securities, assets or business.
1.15 "DEFAULT" means (1) a breach of, default under, or misrepresentation
in or with respect to any Contract, Permit or FCC License, (2) the occurrence of
an event that with the passage of time or the giving of notice or both would
constitute a breach of, default under, or misrepresentation in any Contract,
Permit or FCC License, or (3) the occurrence of an event that with or without
the passage of time or the giving of notice or both would give rise to a right
to terminate, change the terms of or renegotiate any Contract, Permit or FCC
License or to accelerate, increase, or impose any Liability under any Contract,
Permit or FCC License.
1.16 "EARNEST MONEY" means the cash deposit in the amount of One Million
Dollars ($1,000,000) paid by Gray to the Earnest Money Escrow Agent upon the
execution of this Agreement, in the amount and in accordance with the provisions
set forth in Section 7.18 below, together with interest thereon, if any.
1.17 "EARNEST MONEY ESCROW AGENT" means American Bank, N.A., Waco, Texas.
1.18 "EMPLOYEE BENEFIT PLAN" means collectively, each pension, retirement,
profit-sharing, deferred compensation, stock option, employee stock ownership,
severance pay, vacation, bonus or other incentive plan, any other written or
unwritten employee program, arrangement, agreement or understanding, whether
arrived at through collective bargaining or otherwise, any medical, vision,
dental or other health plan, any life insurance plan, or any other employee
benefit plan or fringe benefit plan, including, without limitation, any
"employee benefit plan," as that term is defined in Section 3(3) of ERISA
currently or previously adopted, maintained by, sponsored in whole or in part
by, or contributed to by Seller or KXII Television or any Subsidiary of either
of them or Affiliate of either of them for the benefit of employees, retirees,
dependents, spouses, directors, independent contractors, or other beneficiaries
and under which employees, retirees, dependents, spouses, directors, independent
contractors or other beneficiaries are eligible to participate.
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The "employee benefit plans" as defined in section 3(3) of ERISA and any other
plan, fund, policy, program, practice, custom, understanding or arrangement
providing compensation or other benefits to any current or former officer or
employee of Seller or KXII Television or any Subsidiary of either of them, or
any dependent or beneficiary of either of them, maintained by Seller or KXII
Television or any Subsidiary of either of them or under which Seller or KXII
Television or any Subsidiary of either of them has any obligation or Liability,
whether or not they are or are intended to be (i) covered or qualified under the
Code, ERISA or any other applicable Law, (ii) written or oral, (iii) funding or
unfunded, (iv) actual or contingent, or (v) generally available to any or all
employees (or former employees) of Seller or KXII Television or any Subsidiary
of either of them (or their beneficiaries or dependents), including, without
limitation, all incentive, bonus, deferred compensation, flexible spending
accounts, cafeteria plans, vacation, holiday, medical, disability, share
purchase or other similar plans, policies, programs, practices or arrangements.
1.19 "ENCUMBRANCES" means security interests, mortgages, liens, pledges,
options, rights of first refusal, and other restrictions on the use or
transferability of property and claims or charges on any interest in property in
favor of a Person other than the owner of the property, whether or not relating
to the extension of credit or the borrowing of money and whether or not existing
by reason of statute, contract, or common law.
1.20 "ENVIRONMENTAL CLAIM" shall have the meaning ascribed in Section
4.16(f)(i).
1.21 "ENVIRONMENTAL MATTER" shall have the meaning ascribed in Section
4.16(f)(iv).
1.22 "ERISA" means Employee Retirement Income Security Act of 1974, as
amended.
1.23 "ERISA PLAN" means any Employee Benefit Plan which is an "employee
pension benefit plan," as that term is defined in Section 3(2) of ERISA, or an
"employee welfare benefit plan" as that term is defined in Section 3(1) of
ERISA.
1.24 "FCC" means the Federal Communications Commission, as defined in the
recitals to this Agreement.
1.25 "FCC CONSENT" means action by the FCC in the form of a public notice
or some other written document granting its consent to the Assignment
Application.
1.26 "FCC LICENSES" shall mean all licenses and authorizations issued by
the FCC to Seller in connection with the business or operations of the Station,
including the right to use the call letters "KXII-TV," along with goodwill
associated therewith.
1.27 "FINAL ORDER" means action of the FCC approving the transfer of the
FCC Licenses of Seller to Licensee, which action is no longer subject to
reconsideration or court review under the provisions of the Communications Act
of 1934, as amended, and with respect to which no timely filed request for
administrative or judicial review or stay is pending and as to which the time
for filing any such request, or for the FCC to set aside the action on its own
motion, has expired.
1.28 "FINANCIAL STATEMENTS" means the combined financial statements of
Seller and KXII Television set forth in Schedule 4.12 and to be delivered
pursuant to Section 7.7.
1.29 "GAAP" means generally accepted accounting principles consistently
applied.
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1.30 "GAAP BASIS FINANCIAL STATEMENTS" means the combined audited
financial statements of Seller and KXII Television for the calendar year ended
December 31, 1998 and the combined unaudited financial statements of Seller and
KXII Television for the calendar years ended December 31, 1997 and 1996. Such
financial statements shall include the balance sheet at such dates and
statements of operations, retained earnings and cash flows for the periods then
ended.
1.31 "GRAY" means Gray Communications Systems, Inc., as identified above,
a Georgia corporation, with its principal offices at 4370 Peachtree Road,
Atlanta, Georgia 30319.
1.32 "GOVERNMENTAL AUTHORITY" means any federal, state, county, local,
foreign or other governmental or public agency, instrumentality, commission,
authority, board or body.
1.33 "HISTORICAL FINANCIAL STATEMENTS" means the combined unaudited tax
basis financial statements of Seller and KXII Television for the calendar years
1998, 1997 and 1996. Such financial statements shall include the balance sheet
at such dates and statements of operations, retained earnings and cash flows for
the periods then ended.
1.34 "INDEMNITY ESCROW AGENT" means American Bank, N.A., Waco, Texas.
1.35 "INTANGIBLE PROPERTY" means all copyrights, trademarks, trade names,
service marks, service names, the call letters "KXII-TV," licenses, patents,
permits, jingles, proprietary information, technical information and data,
electronic data files, computer software, formats, customer lists, advertiser
lists, machinery and equipment warranties, and other similar intangible property
rights and interests (other than the FCC Licenses) (and any goodwill associated
with any of the foregoing) applied for, issued to, or owned by Seller or KXII
Television or, solely with respect to the Real Property, K-Twelve or under which
Seller or KXII Television or, solely with respect to the Real Property, K-Twelve
is licensed or franchised and which are used or useful in the Business and
operations of the Station, together with any additions thereto between the date
of this Agreement and the Closing Date.
1.36 "KBI 1" means KBI 1, Inc., a Delaware corporation.
1.37 "KBI 2" means KBI 2, Inc., a Delaware corporation.
1.38 "KXII PARTIES" means Seller, K-Twelve, KXII Television and the
Owners.
1.39 "KXII PROPERTIES" means KXII Properties, Inc., a Texas corporation.
1.40 "KXII TELEVISION" means KXII Television, Ltd., a Texas limited
partnership.
1.41 "KBTX MERGER AGREEMENT" means that certain Agreement and Plan of
Merger, dated as of April 13, 1999, by and among Gray, Gray Communications of
Texas, Inc., and Brazos Broadcasting Company.
1.42 "KNOWLEDGE," "KNOW," "KNOWN" and words of similar import, with
respect to Seller, K-Twelve and KXII Television, mean collectively those facts
actually known, now or in the past, by Seller, K-Twelve, KXII Television, KBI 1,
KBI 2, Rich Adams, Ray M. Deaver and M.N. Bostick.
1.43 "K-TWELVE" means K-Twelve, Ltd., a Texas limited partnership.
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1.44 "KWTX MERGER AGREEMENT" means that certain Agreement and Plan of
Merger, dated as of April 13, 1999, by and among Gray, Gray Communications of
Texas, Inc., and KWTX Broadcasting Company.
1.45 "LAW" means any federal, state, local or foreign code, law, legal
principal, order, ordinance, regulation, rule, or statute of any Governmental
Authority.
1.46 "LEASED PROPERTY" means any and all Real Property used or occupied by
Seller as lessee under any oral or written lease, together with any additions
thereto, and extensions or renewals thereof, between the date of this Agreement
and the Closing Date.
1.47 "LIABILITY" means any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, expense (including, without
limitation, costs of investigation, collection and defense), claim, deficiency,
guaranty or endorsement of or by any Person (other than endorsements of notes,
bills and checks presented to banks for collection or deposit in the ordinary
course of business) of any type, whether accrued, absolute, contingent,
liquidated, unliquidated, matured, unmatured or otherwise.
1.48 "LICENSEE" means KXII Licensee Corp., a Delaware corporation.
1.49 "LITIGATION" means any action, administrative or other proceeding,
arbitration, cause of action, claim, complaint, criminal prosecution, inquiry,
hearing, investigation (governmental or otherwise), notice (written or oral) by
any Person alleging potential Liability or requesting information relating to or
affecting Seller, the Business, the Assets (including, without limitation,
Contracts or FCC Licenses of or relating to Seller or KXII Television or, solely
with respect to the Real Property K-Twelve), or the transactions contemplated by
this Agreement.
1.50 "MATERIAL" or "MATERIALLY" shall be determined in light of the facts
and circumstances of the matter in question; provided, however, that any
specific monetary amount cited in this Agreement shall be deemed to determine
materiality in that instance.
1.51 "MATERIAL ADVERSE CHANGE" or "MATERIAL ADVERSE EFFECT" means a
significant negative impact on Seller, KXII Television and, solely with respect
to the Real Property, K-Twelve, taken as a whole or the Business of the Station,
excluding any negative impact attributable to (i) factors affecting the
television broadcasting industry generally, (ii) general national, regional, or
local economic conditions, or (iii) governmental or legislative laws, rules, or
regulations affecting the television broadcasting industry generally.
1.52 "ORDER" means any decree, injunction, judgment, order, ruling, writ,
quasi-judicial decision or award or administrative decision or award of any
federal, state, local, foreign or other court, arbitrator, mediator, tribunal,
administrative agency or Governmental Authority to which any Person is a party
or that is or may be binding on any Person or its securities, assets or
business.
1.53 "OTHER AGREEMENTS" means the agreements, documents, assignments and
instruments to be executed and delivered by any of the KXII Parties, Gray,
Licensee and Purchaser pursuant to this Agreement.
1.54 "OWNERS" means KBI 1, KBI 2, KXII Properties, Rich Adams, Ellen
Deaver, John Deaver, Kyle Deaver and Martha Phipps.
1.55 "PERMITS" means all licenses, permits, and other authorizations
(other than the FCC Licenses), issued to Seller or KXII Television or, solely
with respect to the Real
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Property, K-Twelve by the Federal Aviation Administration or any other federal,
state, or local governmental authority in connection with the conduct of the
Business and operations of the Station, together with any additions, extensions,
or renewals of same between the date of this Agreement and the Closing Date.
1.56 "PERMITTED LIENS" means (i) liens for taxes and assessments not yet
due and payable, mechanics' and other statutory liens arising in the ordinary
course of business that secure obligations not delinquent, (ii) restrictions or
rights granted to Governmental Authorities under applicable Law that are not
otherwise objectionable to Gray, and (iii) liens, restrictions and easements on
the Real Property (as defined below) that in Gray's reasonable judgment, do not
detract from the value or impair the use of the property subject thereto;
provided, however, in no event shall "Permitted Liens" include Encumbrances
relating to the extension of credit or the borrowing of money.
1.57 "PERSON" means a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a business association,
corporation, general partnership, joint venture, limited partnership, limited
liability company, trust, or any person acting in a representative capacity.
1.58 "PRELIMINARY STATEMENT OF ACCOUNTS RECEIVABLE" shall have the meaning
set forth in Section 2.3.
1.59 "PROGRAM RIGHTS" means all rights of Seller, presently existing or
obtained prior to the Closing, to broadcast television programs, movies, and
films, including all film and program rights under barter agreements, as a part
of the programming for the Station, for which Seller is obligated to compensate
the vendor of such Program Rights.
1.60 "PURCHASE PRICE" means the total consideration to be paid to Seller
by Purchaser and Licensee for the purchase of the Assets and the FCC Licenses
pursuant to this Agreement and which shall be calculated in accordance with
Section 2.2 and paid in accordance with Section 2.4 of this Agreement.
1.61 "PURCHASER" means Gray Communications of Texas-Sherman, Inc., a
Georgia corporation and wholly-owned subsidiary of Gray.
1.62 "REAL PROPERTY" means collectively all of the real property or
interests in real property used in or necessary to conduct the Business,
including, without limitation, the real property or interests in real property
listed on Schedule 4.13(a), together with (i) all rights, easements, tenements,
hereditaments, appurtenances, privileges, immunities, mineral rights and other
benefits belonging or appertaining to the real property or interests in real
property listed on Schedule 4.13(a) which have not been previously reserved or
conveyed, and which run with said real property and (ii) all right, title and
interest, if any, of Seller or K-Twelve in and to (A) any land lying in the bed
of any street, road, avenue, open or proposed, adjoining said real property, (B)
any award made or to be made in lieu of the land described in the preceding
clause (A), (C) any unpaid award for damage to said real property, (D) all
strips and rights-of-way abutting or adjoining said real property, if any, and
(E) all other real property interests which are used in the Business or
operations of the Station, together with any additions thereto between the date
of this Agreement and the Closing Date. The Real Property includes, without
limitation, all buildings, structures, fixtures and other improvements located
on the land described in the preceding sentence. Notwithstanding anything to the
contrary contained herein, the parties hereto agree that the real property owned
by K-Twelve which is located in the State of Louisiana and in
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McLennan County, Texas is not used or necessary to conduct the Business, and
forms no part of the Real Property.
1.63 "RELATED PERSON" means, with regard to any Person, his spouse,
parent, sibling, child, aunt, uncle, niece, nephew, in-law, grandparent and
grandchild (including by adoption) and any trustees or other fiduciaries for the
benefit of such relatives.
1.64 "RETAINED ASSETS" means the following assets, none of which are being
purchased by Purchaser or Licensee pursuant to this Agreement:
(i) all of Sellers' and KXII Television's cash or cash equivalents and
Tax refunds;
(ii) records and reports maintained by Seller pertaining exclusively
to other Retained Assets or Retained Liabilities; and
(iii) the Beechcraft King Air F-90 airplane, Serial Number LJ-64, FAA
registration number N322GK.
1.65 "RETAINED LIABILITIES" means any Liability of Seller, KXII Television
or K-Twelve that is not an Assumed Liability, including, without limitation, the
following:
(i) any Liabilities for any Taxes of any KXII Party;
(ii) any Liabilities relating to current or former assets of Seller,
KXII Television or K-Twelve not being acquired by Purchaser or Licensee
pursuant to this Agreement, including, without limitation, the Retained
Assets;
(iii) any Contract of Seller, KXII Licensee or K-Twelve not validly
assigned to Purchaser;
(iv) any Liability incurred by the KXII Parties as a result of any
Default by any KXII Party under any provision of this Agreement or the
Other Agreements;
(v) any Liability of Seller or KXII Television for severance payments
or other severance obligations relating to any Person employed by Seller or
KXII Television on or before the Closing Date;
(vi) any Liability of Seller or KXII Television for continuation of
coverage under any group health plan maintained by Seller or KXII
Television required under the provisions of Code sec. 4980B or Sections
601-608 of ERISA with respect to any Person employed by Seller or KXII
Television who experiences a "qualifying event" (as defined in the Code and
ERISA) on or before the Closing Date;
(vii) any Liability of Seller or KXII Television to pay bonuses or
other compensation on account of the transactions contemplated by this
Agreement;
(viii) any Undisclosed Liability;
(ix) any Liability of Seller, KXII Television or K-Twelve, of any
nature whatsoever, to any current or former Owner or Affiliate of Seller,
KXII Television or K-Twelve;
(x) any Liability (including without limitation, any Liability
relating to any Litigation) relating to, based upon, or arising out of (A)
the conduct of the Business or the ownership of the Assets or the FCC
Licenses prior to the Closing Date or
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(B) any act, omission, transaction, circumstance, sale of goods, services,
advertising or broadcasting time, state of facts or other condition which
occurred or existed prior to the Closing Date, whether or not then known,
due or payable and whether or not disclosed in this Agreement or the Other
Agreements;
(xi) any Liability that Purchaser may incur in connection with any
Litigation brought against Purchaser under the Worker Adjustment and
Retraining Notification Act or any similar Law that relates to actions
taken by Seller or KXII Television with regard to any employees or any site
of employment;
(xii) any of the events, circumstances, or conditions described in
Schedule 4.16, or any Environmental Claim, or Liability arising from any
Environmental Matter;
(xiii) any Liability of Seller or KXII Television under or relating to
any Employee Benefit Plan;
(xiv) any Liability to or Encumbrance of any Third Party pursuant to
the bulk sales or fraudulent conveyance or other Laws of any jurisdiction
that may be asserted against any of the Assets or the FCC Licenses (whether
asserted against Seller, any of the Owners, K-Twelve, the Assets, the FCC
Licenses, Gray, Purchaser or Licensee);
(xv) any claim by any broker, finder or other Person employed or
allegedly employed by Seller, K-Twelve or any of the Owners in connection
with the transactions contemplated by this Agreement; or
(xvi) any Accounts Payable.
1.66 "SCHEDULE" means those Schedules referred to in this Agreement
delivered concurrently with the execution of this Agreement and attached hereto
(or bound separately) or delivered pursuant to Section 9.14, all of which
Schedules are incorporated in and made a part hereof by reference.
1.67 "SELLER" means KXII Broadcasters, Ltd., as identified above, a Texas
limited partnership with its principal offices at 4201 Texoma Parkway, Sherman,
Texas.
1.68 "STATION" means KXII-TV, Channel 12, a CBS affiliate licensed to
Seller, as identified above.
1.69 "SUBSIDIARY" means any Person of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect a majority of the board of directors or others performing similar
functions with respect to such Person which is at the time directly or
indirectly owned or controlled by another Person, or by any one or more
Subsidiaries.
1.70 "TANGIBLE PERSONAL PROPERTY" means all of Seller's and KXII
Television's fixed assets, furniture, fixtures, equipment, machinery, motor
vehicles, leasehold improvements, office equipment, computer hardware, spare
parts, inventory, and other such tangible personal property which is used or
useful in the conduct of the business or operations of the Station, together
with any additions, replacements, or improvements thereto between the date of
this Agreement and the Closing Date.
1.71 "TAX" or "TAXES" means taxes of any kind, levies or other like
assessments, customs, duties, imposts, charges or fees imposed or payable to the
United States, or any state, county, local, or foreign government, subdivision
or agency thereof, and in each
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instance, such term shall include any interest, penalties, or additions to tax
attributable to any such Tax.
1.72 "TAX RETURNS" means any returns, statements, filings, reports,
estimates, declarations, and forms relating to Taxes that Seller, KXII
Television or, solely with respect to the Real Property, K-Twelve is required to
file, record, or deposit with any Governmental Authority, including any
attachment thereto or amendment thereof.
1.73 "THIRD PARTY" or "THIRD PARTIES" means any Person that is not
Purchaser, Gray, Licensee, or a KXII Party.
1.74 "TRADEOUT AGREEMENT" means any written contract, agreement, or
commitment of Seller or KXII Television, pursuant to which Seller or KXII
Television has sold or traded commercial air time of the Station in
consideration of any property or services in lieu of or in addition to cash,
excluding all film and program barter agreements.
1.75 "UNAUDITED BALANCE SHEETS" means the combined unaudited balance
sheets of Seller and KXII Television as of December 31, 1997 and 1996 included
in the Financial Statements.
1.76 "UNAUDITED BALANCE SHEET DATE" means the date of the Unaudited
Balance Sheets.
1.77 "UNDISCLOSED LIABILITIES" means any Liability that is not fully
reflected or reserved against in the Financial Statements or fully disclosed in
a Schedule.
SECTION 2. PURCHASE AND SALE OF ASSETS.
2.1 PURCHASE OF THE ASSETS AND THE FCC LICENSES.
(a) Subject to the terms and conditions of this Agreement, at the
Closing, (i) Seller shall sell, convey, transfer, assign and deliver to
Purchaser and Purchaser shall purchase and accept from Seller all of the
Assets, free and clear of any and all Encumbrances other than the Permitted
Liens and (ii) Seller shall sell, convey, transfer and deliver to Licensee
and Licensee shall purchase and accept from Seller the FCC Licenses, free
and clear of any and all Encumbrances other than the Permitted Liens.
(b) None of the Retained Assets are being purchased by Purchaser or
Licensee pursuant to this Agreement.
2.2 PURCHASE PRICE.
(a) The total Purchase Price for the acquisition of the Assets and the
FCC Licenses shall be equal to the sum of (i) the amount of the Assumed
Liabilities plus (ii) Forty-One Million Five Hundred Thousand Dollars
($41,500,000) plus (iii) the value of the Accounts Receivable set forth on
the Preliminary Statement of Accounts Receivable reduced by an amount equal
to two percent (2%) of such value minus all reserves for doubtful accounts
or similar reserves (Accounts Receivable as so reduced being called herein
the "Accounts Receivable Adjustment").
(b) The Purchase Price shall be allocated among the Assets and the FCC
Licenses as set forth in Schedule 2.2(b) and Purchaser, Licensee and Seller
shall execute and file with the IRS in a timely manner Form 8594 with
respect to such
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allocation. None of Purchaser, Licensee or any of the KXII Parties shall
file a Tax Return or take any position with any Taxing Authority that is
inconsistent with such final allocation.
2.3 DETERMINATION OF ACCOUNTS RECEIVABLE.
(a) On the day immediately prior to the Closing Date, Seller shall
prepare and deliver to Gray, Purchaser and Licensee pro forma statements of
the estimated Accounts Receivable of Seller (including all Accounts
Receivable of KXII Television, if any) as of 11:59 p.m. on the day
immediately preceding the Closing Date (the "Preliminary Statement of
Accounts Receivable"). The Preliminary Statement of Accounts Receivable,
when prepared, will be based on Seller's historical accounting practices,
consistently applied.
(b) Within ninety (90) days after the Closing, Gray, Purchaser and
Licensee shall prepare a final statement of Accounts Receivable of Seller
as of the Closing Date (the "Final Statement of Accounts Receivable") and
shall submit such statement to Seller for review and approval. Gray,
Purchaser and Licensee shall also provide all information reasonably
necessary to determine the correct amount of the Accounts Receivable,
including appropriate supporting documents and such other information as
may be reasonably requested by Seller. The Final Statement of Accounts
Receivable shall be based on Seller's historical accounting practices,
consistently applied and shall be certified by an officer on behalf of
Gray, Purchaser and Licensee to be true and complete. Seller shall have the
right to visit the Station during normal business hours to verify and
review such documentation upon providing reasonable notice to Gray,
Purchaser and Licensee. If Seller disputes the amount of Accounts
Receivable determined by Gray, Purchaser and Licensee, it shall so notify
Gray, Purchaser and Licensee within thirty (30) days after receipt of the
Final Statement of Accounts Receivable and provide Gray, Purchaser and
Licensee with its own Final Statement of Accounts Receivable. If Seller
notifies Gray that it accepts the Final Statement of Accounts Receivable,
or fails to deliver its own alternate Final Statement of Accounts
Receivable within the thirty (30) day period specified in the preceding
sentence, Gray's, Purchaser's and Licensee's determination of the amount of
Accounts Receivable shall be conclusive and binding on the parties upon the
expiration of such period.
(c) Gray and Seller shall use good faith efforts to resolve any
dispute involving the determination of the amount of Accounts Receivable
and the Final Statement of Accounts Receivable. If the parties are unable
to resolve any dispute within fifteen days following the delivery of
Seller's notice concerning disputed adjustments, Gray and Seller shall
jointly designate a qualified Big 5 firm of independent certified public
accountants (the "Neutral Auditors") to resolve such dispute. If the
parties are unable to agree on the designation of the Neutral Auditors,
then an accounting firm will be selected by lot from two names submitted by
Seller and two names submitted by Gray, none of which shall be employed by
Seller or Gray. The Neutral Auditors' resolution of the dispute shall be
made within sixty (60) days of their selection, shall be based on
presentations by Seller and Gray and not by independent financial audit,
and shall be final and binding on the parties. The Neutral Auditors'
resolution of the dispute may be enforced by any court of competent
jurisdiction. Fees of the Neutral Auditors shall be split equally between
the parties.
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(d) If the amount of Accounts Receivable reflected on the Final
Statement of Accounts Receivable as finally determined in accordance with
the preceding provisions of this Section 2.3 are more than $500 less than
the amount reflected on the Preliminary Statement of Accounts Receivable,
then the Indemnity Escrow Agent shall refund the entire difference (without
regard to the $500 threshold) to Purchaser out of the Escrow Fund;
provided, however, that payments received on the Closing Date shall become
the property of Purchaser, and any corresponding Account Receivable
reflected on the Preliminary Statement of Accounts Receivable shall be
deemed to be outstanding for the purposes of the calculations set forth in
this Section 2.3. If the amount of the Accounts Receivable as finally
determined in accordance with the preceding provisions of this Section 2.3
are more than $500 more than the amounts reflected on the Preliminary
Statement of Accounts Receivable, then Gray shall pay the entire difference
by wire transfer to Seller. The payment required hereunder shall be made
within seven (7) days after all of the procedures specified in this Section
2.3 have run their course.
(e) If Neutral Auditors should be appointed by the parties to the KWTX
Merger Agreement or KBTX Merger Agreement, then the Neutral Auditors so
appointed shall serve as the Neutral Auditors under this Agreement, and all
proceedings before the Neutral Auditors shall be consolidated to promote
efficiency and reduce expenses of the parties.
2.4 PAYMENT OF THE CASH PORTION OF THE PURCHASE PRICE. On the Closing
Date, Purchaser and Licensee shall pay the cash portion of the Purchase Price to
Seller by delivering to Seller the sum of Forty One Million Five Hundred
Thousand Dollars ($41,500,000) plus the Accounts Receivable Adjustment, by wire
transfer of immediately available funds, or in such other form and manner as may
be mutually satisfactory less the amount of the Earnest Money, which shall be
paid by the Earnest Money Escrow Agent to Seller.
2.5 PRORATIONS AND CERTAIN PAYMENTS. The following prorations relating to
the Assets will be made as of the Closing Date, with Seller liable to the extent
such items relate to any time period prior to the Closing and Purchaser liable
to the extent such items relate to periods on or after the Closing:
(i) personal and real property ad valorem or other similar Taxes, if
any, on or with respect to the Assets;
(ii) business and occupation or other similar Taxes related to the
Business;
(iii) the amount of sewer rents and charges for water, telephone,
electricity and other utilities and fuel; and
(iv) all other items that shall be paid by Purchaser or otherwise
affect the Business or the Assets and that relate, in whole or in part, to
periods prior to the Closing Date (other than the Assumed Liabilities).
The net amount of all such prorations will be settled and paid on the
Closing Date. In the event that the amount of any of the items to be prorated
pursuant to this Section 2.5 is not known by Seller and Purchaser at the
Closing, the proration shall be made based upon the amount of the most recent
cost of such item to Seller. After Closing, Purchaser and Seller each shall
provide to the other, within five (5) business days after receipt, each Third
Party invoice relating to any item so estimated. Within ten (10) business days
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thereafter, Purchaser and Seller each shall make any payments to the other that
are necessary to compensate for any difference between the proration made at the
Closing and the correct proration based on the Third Party invoice.
2.6 CLOSING. The Closing shall take place contemporaneously with the
closing of the transactions contemplated in the KWTX Merger Agreement and KBTX
Merger Agreement, at the offices of Deaver & Deaver, 200 West Highway 6, Suite
501, Waco, Texas, or at such place as may be mutually agreed upon by the parties
on the Closing Date. For purposes of this Agreement, "Closing Date" shall have
the meaning assigned thereto in the KWTX Merger Agreement. Title to the Assets
shall pass from Seller to Purchaser effective as of 11:59 p.m. on the day
immediately preceding the Closing Date and title to the FCC Licenses shall pass
from Seller to Licensee effective as of 11:59 p.m. on the day immediately
preceding the Closing Date in each case unless the parties shall otherwise have
agreed in writing.
2.7 DELIVERIES. All deliveries, payments and other transactions and
documents relating to the Closing (i) shall be interdependent and none shall be
effective unless and until all are effective (except to the extent that the
party entitled to the benefit thereof has waived satisfaction or performance
thereof as a condition precedent to Closing), and (ii) shall be deemed to be
consummated simultaneously.
SECTION 3. ASSUMPTION OF LIABILITIES.
3.1. GENERAL.
(a) Neither Purchaser nor Licensee is assuming and shall not be liable
for or with respect to any Retained Liability.
(b) Notwithstanding anything in this Agreement to the contrary, in no
event shall any Liability due to any Affiliate of Seller or due to the
Owners be assumed by Purchaser or Licensee.
(c) Nothing contained in this Section 3.1 or in any instrument of
assumption executed by Purchaser at the Closing shall be deemed to release
or relieve any of the KXII Parties from their respective representations,
warranties, covenants and agreements contained in this Agreement or any of
the Other Agreements, including, without limitation, the obligations of the
KXII Parties to indemnify Gray, Purchaser and Licensee (and the other
specified parties) in accordance with the provisions of Section 11.
Further, Seller shall pay, satisfy and perform all of the Retained
Liabilities and no disclosures made or exceptions noted with respect to the
representations, warranties, covenants and agreements of Seller and the
Owners contained in this Agreement or any of the Other Agreements shall
affect Seller's obligation to pay, satisfy and perform all of the Retained
Liabilities.
3.2. ASSUMPTION OF THE ASSUMED LIABILITIES.
(a) Purchaser shall assume the Assumed Liabilities on the terms
provided in subsection 3.2(b), except as set forth in Section 3.3.
(b) Purchaser expressly agrees, effective on the Closing Date, to
assume the Assumed Liabilities and thereafter to pay, perform and discharge
in full, in accordance with their terms where applicable, the Assumed
Liabilities. Nothing contained in this Agreement shall require Purchaser to
pay, perform or discharge any
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of the Assumed Liabilities so long as Purchaser shall in good faith contest
or cause to be contested the amount or validity thereof or shall in good
faith assert any defense or offset thereto, and Seller and the Owners shall
provide reasonable assistance to Purchaser in so contesting and defending
such claims. Notwithstanding anything contained in this Agreement to the
contrary, Purchaser shall not assume, pay, satisfy or discharge any of the
Assumed Liabilities to the extent that such Liabilities are insured against
(or but for the transfer of the Assets and assignment and assumption of the
Assumed Liabilities pursuant to this Agreement, would have been insured
against) by a Third Party under policies of insurance which Seller, KXII
Television or, solely with respect to the Real Property, K-Twelve is unable
to assign to Purchaser and which are maintained by Seller.
3.3. ASSIGNMENT OF CERTAIN CONTRACTS.
(a) Nothing contained in this Agreement shall be construed as an
attempt to agree to assign any Contract which is in Law non-assignable
without the consent of any other party thereto, unless such consent shall
have been given. Each of Seller, KXII Television and, solely with respect
to the Real Property, K-Twelve shall use its commercially reasonable
efforts to obtain all such necessary consents prior to the Closing, and to
the extent any such necessary consent has not been obtained, each of
Seller, KXII Television and, solely with respect to the Real Property,
K-Twelve shall continue its commercially reasonable efforts to obtain such
consent after the Closing, except that receipt of the FCC Consent and Final
Order is a condition precedent to Closing. In order, however, that the full
value of every such Contract which is included within the Assets may be
realized, at Purchaser's request, direction and expense, Seller shall take
all such commercially reasonable action as shall in the opinion of
Purchaser be necessary or proper (i) in order to preserve for the benefit
of Purchaser the rights and obligations of Seller under such Contracts, and
(ii) to facilitate the collection of the monies due and payable, or to
become due and payable, to Seller pursuant to every such Contract, and
Seller shall remit such monies to Purchaser within five (5) business days
of collection.
(b) Purchaser shall be entitled to the benefits accruing after the
Closing Date of any such non-assigned Contract. Purchaser, at its expense,
shall perform all of Seller's, KXII Television's or, solely with respect to
the Real Property, K-Twelve's obligations due to be performed under any
such non-assigned Contract that is included among the Assumed Liabilities
to the extent (i) Purchaser can perform such obligations without violating
the terms of such non-assigned Contract, and (ii) Purchaser is being
provided the benefits of such non-assigned Contract.
3.4. PAYMENT OF ACCOUNTS PAYABLE AND OTHER LIABILITIES OF SELLER. On or
before the Closing Date, Seller shall pay all Accounts Payable out of its cash
(and not through the proceeds of liquidating any of the Assets or using any of
the Assets themselves). On the Closing Date Seller shall have no Accounts
Payable.
3.5. NO INTENTION TO BENEFIT THIRD PARTIES. This Agreement is not
intended to, and shall not, (i) benefit any Person other than the KXII Parties,
Purchaser, Licensee and Gray or (ii) create any third party beneficiary right in
any Person.
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SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE KXII PARTIES.
Each of the KXII Parties jointly and severally represents and warrants unto
Gray, Licensee and Purchaser, and this Agreement is made and expressly
conditioned upon, the following representations and warranties:
4.1 ORGANIZATION, POWER, AND QUALIFICATIONS OF SELLER. Seller is a
limited partnership duly organized, validly existing, and in good standing under
the laws of the State of Texas and has the full power and authority to own all
of its properties and assets and to carry on its business as it is now being
conducted. Seller is duly qualified as a foreign limited partnership in each
jurisdiction where the nature and extent of its Business requires such
qualification, as set forth on Schedule 4.1.
4.2 ORGANIZATION, POWER, AND QUALIFICATIONS OF K-TWELVE. K-Twelve is a
limited partnership duly organized, validly existing, and in good standing under
the laws of the State of Texas and has the full power and authority to own all
of its properties and assets and to carry on its business as it is now being
conducted. K-Twelve is duly qualified as a foreign limited partnership in each
jurisdiction where the nature and extent of its Business requires such
qualification.
4.3 ORGANIZATION, POWER, AND QUALIFICATIONS OF KXII TELEVISION. KXII
Television is a limited partnership duly organized, validly existing, and in
good standing under the laws of the State of Texas and has the full power and
authority to own all of its properties and assets and to carry on its business
as it is now being conducted. KXII Television is duly qualified as a foreign
limited partnership in each jurisdiction where the nature and extent of its
Business requires such qualification.
4.4 ORGANIZATION, CORPORATE POWER, AND QUALIFICATIONS OF KBI 1. KBI 1 is
a corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware and has the full corporate power and authority to
own all of its properties and assets and to carry on its business as it is now
being conducted. KBI 1 is duly qualified as a foreign corporation in each
jurisdiction where the nature and extent of its Business requires such
qualification.
4.5 ORGANIZATION, CORPORATE POWER, AND QUALIFICATIONS OF KBI 2. KBI 2 is
a corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware and has the full corporate power and authority to
own all of its properties and assets and to carry on its business as it is now
being conducted. KBI 2 is duly qualified as a foreign corporation in each
jurisdiction where the nature and extent of its business requires such
qualification.
4.6 ORGANIZATION, CORPORATE POWER, AND QUALIFICATIONS OF KXII
PROPERTIES. KXII Properties is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Texas and has the full
corporate power and authority to own all of its properties and assets and to
carry on its business as it is now being conducted. KXII Properties is duly
qualified as a foreign corporation in each jurisdiction where the nature and
extent of its business requires such qualification.
4.7 AUTHORIZATION AND VALIDITY. Each of the KXII Parties has the
requisite corporate or other power, capacity and authority necessary to enter
into and perform its obligations under this Agreement and the Other Agreements
and to consummate the transactions contemplated hereby and thereby. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been
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duly and validly authorized by all necessary corporate or other appropriate
action in respect thereof on the part of each of the KXII Parties. This
Agreement has been executed and delivered by each KXII Party who is an
individual, the duly authorized general partners of each KXII Party that is a
limited partnership and by the duly authorized officers of each KXII Party that
is a corporation and constitutes the legal, valid, and binding obligation of
each of the KXII Parties. This Agreement is enforceable against each of the KXII
Parties in accordance with its terms.
4.8 OWNERSHIP OF EQUITY INTERESTS. Each of the Owners owns (beneficially
and legally) the number and types of equity interests specified on Schedule 4.8
with respect to any other KXII Party, opposite his, her, or its name, free and
clear of any Encumbrance of any kind.
4.9 NONCONTRAVENTION. The execution and delivery by the KXII Parties of
this Agreement and the other agreements contemplated on its part hereby does
not, and the consummation by the KXII Parties of the transactions contemplated
hereby and thereby will not, (i) violate any provision of the Articles of
Incorporation, Partnership Agreement, or Bylaws, as applicable, of any of the
KXII Parties, (ii) violate, or result (with the passage of time, the giving of
notice or both) in a violation of, or result in the acceleration of or entitle
any party to accelerate any obligation under, or result in the creation or
imposition of, any Encumbrance upon any of the property of any of the KXII
Parties pursuant to any provision of any mortgage, lien, lease, agreement,
license, or instrument to which any KXII Party is a party or is subject, (iii)
constitute an event permitting termination or acceleration of any mortgage,
lien, lease, agreement, license, or instrument to which any KXII Party is a
party, or (iv) violate (A) any judgment, order, writ, injunction, decree,
regulation, or rule of any court or Governmental Authority applicable to any
KXII Party, the Assets or the Station or (B) any Law.
4.10 CONSENTS, APPROVALS. Except for filings with and approvals of the
transactions contemplated hereby by the FCC and except for consent from the CBS
Television Network, none of the KXII Parties is required to make or obtain any
consent, approval, notification, authorization or order of, or declaration,
filing, or registration with any third party, including, without limitation, any
Governmental Authority (i) in connection with the consummation of the
transactions contemplated hereby, (ii) to avoid the loss of any license or the
violation, breach, or termination of, or any default under, or the creation of
any lien on any of the Assets pursuant to the terms of any Law, order, or other
requirement or any contract binding upon any KXII Party or to which Assets may
be subject, or (iii) to enable Gray, Purchaser and Licensee to continue the
operation of the Business after the Closing substantially as conducted prior to
the Closing.
4.11 SUBSIDIARIES AND INVESTMENTS. Seller has no Subsidiaries and Seller
has not in the past and does not currently own, directly or indirectly, any
capital stock or other equity, ownership, proprietary or voting interest in any
Person.
4.12 FINANCIAL STATEMENTS. Schedule 4.12 contains true and complete
copies of the Historical Financial Statements. GAAP Basis Financial Statements,
prepared by Seller's independent auditors Jaynes, Reitmeier, Boyd & Therrell,
PC, Certified Public Accountants, Waco, Texas shall be delivered in accordance
with Section 7.8. The GAAP Basis Financial Statements will have been prepared in
accordance with GAAP, consistently applied and will fairly present the financial
condition of Seller and KXII Television as of the respective dates thereof, and
the results of operations, cash flows and retained earnings, and changes in
financial position, respectively, of Seller and KXII Television, for the
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respective periods thereof. The Historical Financial Statements have been
prepared based on Seller's and KXII Television's historical accounting
practices, consistently applied and fairly present the financial condition of
Seller and KXII Television as of the respective dates thereof, and the results
of operations, cash flows and retained earnings, and changes in financial
position, respectively, of Seller and KXII Television, for the respective
periods thereof. Since December 31, 1998, (i) each of Seller and KXII Television
have carried on its business only in the ordinary course of business consistent
with past practice, (ii) there has been no Material Adverse Change, and (iii)
neither Seller nor KXII Television has made any change in any method of
accounting or any accounting practice.
4.13 TITLE TO AND CONDITION OF REAL PROPERTY.
(a) Schedule 4.13(a) contains a complete and accurate description of
all the Real Property to be conveyed by Seller to Gray, indicating each
KXII Party's interest therein. The Real Property comprises all of the real
property necessary to conduct the Business and operations of the Station as
now conducted.
(b) Each KXII Party indicated on Schedule 4.13(a) to have a fee simple
interest in any of the Real Property has good, marketable, and insurable
fee simple title to the Real Property to which that KXII Party is indicated
to have a fee simple interest. Such interest is free and clear of all
Encumbrances, except for Permitted Liens, and no portion of the Real
Property is included in a Tax parcel that includes property other than the
Real Property.
(c) Schedule 4.13(c) contains a complete and accurate description of
all the Leased Property and of the applicable lease creating each KXII
Party's interest in the Leased Property (the "Ground Leases") and the terms
of the KXII Party's interest therein. Each KXII Party has good, marketable
and insurable leasehold title to all of the Leased Property described on
Schedule 4.13(c) free and clear of all Encumbrances, except for Permitted
Liens. Each KXII Party has delivered to Gray true and complete copies of
all of the Ground Leases.
(d) Schedule 4.13(d) contains a complete and accurate description of
all leases of the Real Property and Leased Property pursuant to which any
KXII Party is the landlord or sublandlord, (the "Tenant Leases") and the
KXII Parties have delivered true and complete copies of the Tenant Leases
to Gray. There are no leases or other agreements relating to occupancy of
the Real Property or Leased Property, except for the Tenant Leases and no
Person other than the tenants under the Tenant Leases has any right to
occupancy of any portion of the Real Property or Leased Property. The KXII
Party that is party to any Tenant Lease is the lessor or landlord or the
successor lessor or landlord under such Tenant Lease free and clear of all
Encumbrances except for the Permitted Liens and is entitled to receive the
rents, issues and profits from such Tenant Lease.
(e) Except as disclosed on Schedule 4.13(a), all towers, guy anchors,
buildings, and other improvements owned by any KXII Party are located
entirely on the Real Property listed on Schedule 4.13(a).
(f) All Real Property (i) is available for immediate use in the
conduct of the Business and operations of the Station and (ii) complies in
all material respects with all applicable building, fire, health,
handicapped persons, sanitation, use and occupancy or zoning Laws and the
regulations of any Governmental Authority having jurisdiction thereof.
There is no pending or, to any KXII Party's Knowledge,
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threatened condemnation or eminent domain proceedings that would affect the
Real Property, or any part thereof and the KXII Parties have full legal and
practical access to the Real Property and all utilities are available to
the Real Property from a publicly dedicated right of way or through a valid
private easement. The KXII Parties have furnished to Gray copies of any and
all notices or reports received from any insurance company, engineer, or
Governmental Authority with respect to any violations (or potential
violations) of any applicable law affecting the Real Property or otherwise
requiring or recommending work be performed on or at any of the Real
Property (or improvements thereon), and all of the violations and
requirements set forth in any such notices and reports have been cured or
fulfilled to the satisfaction of those entities.
(g) The Real Property listed on Schedule 4.13(a) and the Leased
Property listed on Schedule 4.13(d) comprise all real property interests
necessary to conduct the Business and operations of Seller as now
conducted.
4.14 TITLE TO AND CONDITION OF TANGIBLE PERSONAL PROPERTY.
(a) Schedule 4.14(a) lists all material items of Tangible Personal
Property owned by any KXII Party, which comprises all material items of
Tangible Personal Property necessary to conduct the Business and operations
of the Station as now conducted. Except as specified on Schedule 4.14(a)
such KXII Party owns and has good title to each item of Tangible Personal
Property, and none of the Tangible Personal Property owned by such KXII
Party is subject to any Encumbrance, other than Permitted Liens. Each item
of Tangible Personal Property is available for immediate use in the
Business and operations of the Station. Each item of Tangible Personal
Property is in good condition and repair, reasonable wear and tear
excepted, and is usable in the ordinary course of business consistent with
past practices. Each item of Tangible Personal Property is adequate for its
present and intended uses and operation. All items of transmitting
equipment included in the Tangible Personal Property permit the Station to
operate in all material respects in compliance with the terms of the FCC
Licenses, the rules and regulations of the FCC, and with all other
applicable Laws.
(b) Schedule 4.14(b) contains a complete and accurate description of
all the leased Tangible Personal Property and of the applicable lease
creating any KXII Party's interest in the leased Tangible Personal
Property, which includes the leases for motor vehicles (collectively, the
"Personal Property Leases") and the terms of such KXII Party's interest
therein. Such KXII Party has good leasehold title to the Leased Tangible
Personal Property subject to the terms of the applicable Personal Property
Leases and free of any Encumbrances, other than Permitted Liens. The KXII
Parties have delivered to Gray true and complete copies of all of the
Personal Property Leases. The owned Tangible Personal Property listed on
Schedule 4.14(a) and the leased Tangible Personal Property listed on
Schedule 4.14(b) comprise all personal property interests necessary to
conduct the business and operations of Seller as now conducted.
4.15 LITIGATION. There are no actions, suits, claims, investigations, or
proceedings (legal, administrative, or arbitrative) pending, or to the KXII
Parties' Knowledge threatened, against the KXII Parties, and to the KXII
Parties' Knowledge no basis for any of the foregoing exists, whether at law or
in equity and whether civil or criminal in nature, before or by any Federal,
State, municipal, or other court, arbitrator, governmental
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department, commission, agency, or instrumentality, domestic or foreign, nor are
there are any judgments, decrees, or orders of any such court, arbitrator,
governmental department, commission, agency, or instrumentality outstanding
against the KXII Parties. Except as disclosed on Schedule 4.15, no litigation
(as described in the preceding sentence) has been pending during the three (3)
years prior to the date hereof that, individually or in the aggregate, resulted
in losses, damages, costs or expenses (whether or not covered by insurance) in
excess of $10,000 or granted any injunctive relief against the KXII Parties.
4.16 ENVIRONMENTAL MATTERS.
(a) To the KXII Parties' Knowledge, none of the Real Property, assets
or premises of the KXII Parties pertaining to the Business, or the assets
or premises formerly owned, leased, operated or managed, directly or
indirectly, by the KXII Parties pertaining to the Business, or any of their
predecessors or any of their current or former subsidiaries, contains, nor
is there present at any such Real Property, assets or premises of the KXII
Parties, or the assets or premises formerly owned, leased, operated or
managed, directly or indirectly, by the KXII Parties, or any of their
predecessors or any of their current or former subsidiaries, any (i)
"hazardous substances" (as defined in the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, 42 U.S.C. 9601 et seq.,
as amended), (ii) asbestos, (iii) radon gas, (iv) underground storage
tanks, (v) items or equipment containing polychlorinated biphenyls in
excess of 50 parts per million, (vi) stored, spilled, or leaked petroleum
products, or (vii) accumulation of rubbish, debris, or other solid waste;
nor is any of the Real Property, assets or premises pertaining to the
Business of the KXII Parties, or the assets or premises pertaining to the
Business formerly owned, leased, operated or managed, directly or
indirectly, by the KXII Parties, or any of their predecessors or any of
their current or former subsidiaries, the subject of governmental
regulation or liability because of the past release, threat of release,
discharge, storage, treatment, generation, or disposal of such substances.
(b) To the KXII Parties' Knowledge, the KXII Parties are in compliance
with all laws, rules, and regulations of all federal, state, and local
governments (and all agencies thereof) concerning the environment, except
for any noncompliance which could not reasonably be expected to have a
Material Adverse Effect, and none of the KXII Parties, nor any of their
predecessors or any of their current or former subsidiaries has received
any written notice of a charge, complaint, action, suit, proceeding,
hearing, investigation, claim, demand, or notice having been filed or
commenced against any of the KXII Parties, or any of their predecessors or
any of their current or former subsidiaries in connection with their
operation of the Station alleging any failure to comply with any such law,
rule, or regulation.
(c) To the KXII Parties' Knowledge, none of the KXII Parties, nor any
of their predecessors or any of their current or former subsidiaries has
any liability that could reasonably be expected to have a Material Adverse
Effect under any law, rule, or regulation of any federal, state, or local
government (or agency thereof) concerning the (i) release or threatened
release of hazardous substances, (ii) pollution, or (iii) protection of the
environment.
(d) To the KXII Parties' Knowledge, all waste containing any hazardous
substances generated, used, handled, stored, treated or disposed of
(directly or indirectly) by the KXII Parties, or any of their predecessors
or any of their current or their former subsidiaries has been released or
disposed of in compliance with all
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applicable reporting requirements under any Law, and none of the KXII
Parties has Knowledge of any Environmental Claim (as herein defined) with
respect to any such release or disposal.
(e) To the KXII Parties' Knowledge, without limiting the generality of
any of the foregoing, (i) all on-site and off-site locations where the KXII
Parties, or any of their predecessors or any of their current or former
subsidiaries has stored, disposed or arranged for the disposal of hazardous
substances are identified in Schedule 4.16, and (ii) no polychlorinated
biphenyls (PCB's) are used or stored on or in any Real Property owned,
leased, operated or managed by the KXII Parties, or any of their
predecessors or any of their current or former subsidiaries.
(f) For purposes of this Agreement:
(i) "Environmental Claim" shall mean any Litigation in any court or
before or by any Governmental Authority or private arbitrator, mediator
or tribunal against any of the KXII Parties (including, without
limitation, notice or other communication written or oral by any Person
alleging potential liability for investigatory costs, cleanup costs,
private or governmental response or remedial costs, natural resources
damages, property damages, personal injuries, or penalties) arising out
of, based upon, or resulting from (i) any Environmental Matter or (ii)
any circumstances or state of facts forming the basis of any Liability,
or alleged Liability under, or violation or alleged violation under, any
Environmental Law.
(ii) "Environmental Matter" shall mean any matter or circumstances
existing prior to Closing related in any manner whatsoever to (i) the
emission, discharge, disposal, release or threatened release of any
hazardous substance into the environment, or (ii) the treatment,
storage, recycling or other handling of any hazardous substance or (iii)
the placement of structures or materials into waters of the United
States, or (iv) the presence of any hazardous substance, including, but
not limited to, asbestos, in any building, structure or workplace or on
any of the Real Property.
4.17 TRADE NAMES, TRADE MARKS, ETC. Seller has and owns, or has the right
to use, all trademarks, service marks, trade names, business names, copyrights,
designs, trade secrets, and know-how used in the Business, including, but not
limited to, the items listed on Schedule 4.17 as a part of the Intangible
Property. There are no claims or proceedings pending, or to Seller's Knowledge
threatened, against Seller asserting that its use of any Intangible Property
infringes the rights of any other Person and Seller has no Knowledge of any use
by Seller that may, with notice or passage of time, give rise to such a claim.
Seller has not licensed or otherwise assigned any Intangible Property to any
third party and, to Seller's Knowledge, there are no existing infringing uses of
the Intangible Property by any third parties. All royalties, limitations,
restrictions, or other obligations of Seller with respect to the ownership or
use of the Intangible Property are set forth on Schedule 4.17.
4.18 GOVERNMENTAL AUTHORIZATION AND COMPLIANCE WITH LAWS. All
governmental licenses, certificates, permits, and approvals required for the
conduct of the Business as now conducted are listed on Schedule 4.18. Seller has
obtained all such licenses, permits, and approvals and all are in full force and
effect. The Business of the Station has been operated in compliance with all
applicable Laws, orders, regulations, policies, and
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guidelines of all Governmental Authorities (including, without limitation, those
relating to FCC matters and environmental laws and regulations), except for
violations of such Laws, orders, regulations, policies, and guidelines which do
not affect and cannot reasonably be expected to have a Material Adverse Effect
on the Assets or the Business, financial condition, Assets, liabilities, results
of operations or cash flows of Seller. Seller has received no notice of, and no
investigation or review is pending before, or to Seller's Knowledge threatened
by, any Governmental Authority (i) with respect to any alleged violation by
Seller of any Law, order, regulation, policy, or guideline of any Governmental
Authority related to the operation of the Station, or (ii) with respect to any
alleged failure to have all permits, certificates, licenses, approvals, and
other authorizations required in connection with the Business, Assets or
operation of the Station.
4.19 FCC LICENSES. Seller is now and on the Closing Date will be the
holder of the FCC Licenses as listed in Schedule 4.19, with regular
unconditional renewals thereof having been granted for the full license term.
The FCC Licenses constitute all of the licenses and authorizations required for
and/or used in the operation of the Business as now operated, and the FCC
Licenses are now and on the Closing Date will be in full force and effect and
unimpaired by any act or omission of Seller, or its officers, directors,
employees, or agents. There is not now pending, or to Seller's or any of the
Owners' Knowledge, threatened, any action by or before the FCC to revoke,
cancel, rescind, modify, or refuse to renew in the ordinary course any of the
FCC Licenses, or any investigation, Order to Show Cause, Notice of Violation,
Notice of Apparent Liability, or a forfeiture or material complaint against the
Station or Seller. None of Seller or any of the Owners Knows of any reason why
the FCC would not renew the FCC Licenses in the ordinary course. In the event of
any such action, or the filing or issuance of any such order, notice, or
complaint or Knowledge of the threat thereof, Seller shall notify Purchaser of
same in writing within five (5) days, and shall take all reasonable measures to
contest in good faith or seek removal or rescission of such action, order,
notice, or complaint, and shall pay any sanctions imposed. All material reports,
forms, and statements required to be filed by Seller with the FCC with respect
to the Station have been filed and are complete and accurate in all material
respects. The Station is now and on the Closing Date will be operating in
accordance with the FCC Licenses, and in compliance with the Communications Act
of 1934, as amended, and the Rules and Regulations of the FCC. The operation of
the Station, including, but not limited to, Seller's use and operation of its
existing tower sites, conforms to the standards adopted by the FCC in Guidelines
Evaluating the Environmental Effects of Radio Frequency Radiation, Report and
Order, IT Docket 93-62 (August 1, 1996) (FCC 96-326), as modified on
reconsideration, Second Memorandum Opinion and Order, FCC 97-303 (released
August 23, 1997).
4.20 LABOR RELATIONS.
(a) Seller and KXII Television have paid or made provision for payment
of all salaries and wages of employees accrued through the date of this
Agreement. Seller and KXII Television are in compliance with all federal
and state Laws respecting employment and employment practices, terms and
conditions of employment, safety of the workplace, wages and hours, and
nondiscrimination in employment, and is not Knowingly engaged in any unfair
or illegal employment practice;
(b) There is no charge, complaint, other claim, compliance review,
audit or investigation pending before, being conducted or, to Seller's and
KXII Television's Knowledge, threatened by any court, agency, arbitral
panel or other tribunal alleging,
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or that could result in an allegation of, unlawful discrimination,
unauthorized employment, harassment, any unfair labor practice or violation
of any Law or legal principle by Seller and KXII Television relating to any
aspect of employment or the workplace, nor to Seller and KXII Television's
Knowledge is there a basis for any such claims;
(c) There is no labor strike, dispute, slowdown, or stoppage actually
pending or, to Seller's and KXII Television's Knowledge, threatened against
or involving Seller and KXII Television;
(d) There are no collective bargaining agreements binding on Seller
and KXII Television;
(e) To Seller's and KXII Television's Knowledge, no employee
representative or labor organization is seeking to represent Seller's and
KXII Television's employees or has requested an election or a collective
bargaining agreement, nor are Seller or KXII Television currently
negotiating or contemplating negotiating such an agreement; and
(f) Except as listed specifically on Schedule 4.20, Seller and KXII
Television have no written contract of employment, change of control
agreement or other agreement with any employee of the Station, and Seller
and KXII Television have no unwritten contract of employment, change of
control agreement or other agreement that is not terminable at will without
any payment or other obligation on the part of Seller or KXII Television or
any successor.
4.21 INSURANCE. Schedule 4.21 is a true and complete list, showing
company and type and amount of coverage, of all insurance policies providing
coverage for the KXII Parties, the Assets, the Business or the operation of the
Station, its employees, or third parties. The KXII Parties have provided correct
and complete copies of each such policy to Gray on or before the date hereof.
The KXII Parties are neither in default with respect to any provision of any of
its insurance policies nor has it failed to give any notice or present any claim
thereunder in due or timely fashion or as required by any of such insurance
policies which would result in failure to recover in full under such policies.
The KXII Parties have complied with the insurance requirements of (A) all leases
related to the Station to which it is a party; (B) all other contracts and
agreements to which the KXII Parties are a party; and (C) all Laws.
4.22 ACCOUNTS RECEIVABLE. All accounts receivable of Seller reflected on
its financial statements, as prepared and maintained through the Closing Date,
arose from bona fide transactions in the ordinary course of business, and
constitute valid and binding obligations of the account debtors for the full
face amount thereof, without discount, offset, or other claim or allowance. The
reserve for doubtful accounts contained in the financial statements is adequate
to protect the Purchaser from losses by reason of non-collection of such
accounts.
4.23 ACCOUNTS PAYABLE. All accounts payable of each of Seller and KXII
Television reflected on its financial statements, as prepared and maintained
through the Closing Date, arose from bona fide transactions in the ordinary
course of business, and constitute valid debts or obligations of Seller and KXII
Television for the full face amount thereof.
4.24 TAX RETURNS, AUDITS, AND LIABILITIES.
(a) Seller (or its predecessor) and KXII Television have: (i) timely
filed all Tax Returns in accordance with all applicable laws (including any
applicable extensions);
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(ii) paid all Taxes shown to have become due pursuant to such Tax Returns;
(iii) properly accrued for all Taxes due or payable in respect of the
current period in the Financial Statements; and (iv) paid all Taxes for
which a notice of, or assessment or demand for, payment has been received
or which are otherwise due and payable, other than Taxes being contested in
good faith, as identified on Schedule 4.24 for which an adequate reserve
has been established. All such Tax Returns are true and correct in all
material respects and reflected the true facts regarding the income,
business, assets, operations, activities, and status of Seller (or its
predecessor) and KXII Television and any other information required to be
shown therein.
(b) Except as disclosed on Schedule 4.24, in the past five (5) years,
none of Seller's or KXII Television's Tax Returns has been audited by any
Governmental Authority. There is no action, suit, proceeding,
investigation, audit, claim, or assessment pending or proposed with respect
to Taxes or with respect to any Tax Return for Seller or KXII Television;
(ii) there are no liens for Taxes upon the assets of Seller or KXII
Television, other than liens for taxes not yet past due; (iii) there are no
waivers or extensions of any applicable statute of limitations for the
assessment or collection of Taxes with respect to any Tax Return that
remains in effect; and (iv) there are no Tax rulings, request for rulings,
or closing agreements relating to Seller or KXII Television that could
affect its liability for Taxes for any period after the Closing Date.
4.25 CERTAIN CONTRACTS.
(a) Except as listed on Schedule 4.25:
(i) the KXII Parties do not have any employment agreements or any
incentive compensation, profit-sharing, stock option, stock appreciation
rights, stock purchase, savings, deferred compensation, retirement,
pension, or other plans or benefit arrangements or practices with or for
the benefit of any officer, employee, or any other person, or any
consulting agreement or other arrangement with any officer, employee,
former officer, or former employee;
(ii) no officer, director or any KXII Party has any other agreement
with Seller or any interest in any of the Assets; and
(iii) except for contracts for the sale of advertising time entered
into in the normal course of business, none of the KXII Parties is a
party to or bound by any contract, commitment, purchase order, or sales
order, oral or written, related to the Business or operation of the
Station. All leases, agreements, licenses, or instruments related to the
Business to which any of the KXII Parties is a party are in full force
and effect and are binding obligations of the parties thereto, and no
event or condition has occurred or exists, or is alleged by any of the
other parties thereto to have occurred or existed, which constitutes, or
with lapse of time or the giving of notice or both, might constitute a
material default or a basis for acceleration of any obligation, force
majeure, or other claim of excusable delay or nonperformance thereunder
or in respect thereof, whether on the part of the KXII Parties or any
other party. In connection with the consummation of the transactions
contemplated by this Agreement or otherwise, there are no consents,
approvals, notifications, or other actions required to be taken pursuant
to the terms of any contract or commitment to which any of the KXII
Parties is a party, except as described on Schedule 4.25.
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(b) Schedule 4.25 contains a list and correct and complete copies of
the following contracts and agreements:
(i) all powers of attorney given by the KXII Parties;
(ii) all programming and network affiliation agreements of Seller
or that relate to the Business, the Assets or the Station;
(iii) all Tradeout Agreements; and
(iv) any contract or agreement that (i) provides for monthly
payments in excess of $1,000 or yearly payments in excess of $12,000;
(ii) requires performance by Seller, K-Twelve and KXII Television of any
obligation for a period of time extending beyond six (6) months from the
Closing Date or is not terminable by Seller, K-Twelve and KXII
Television without penalty upon sixty (60) days or less notice; (iii)
evidences, creates or guarantees indebtedness of Seller, K-Twelve and
KXII Television; or (iv) guarantees or endorses the liabilities or
obligations of any other Person.
4.26 EMPLOYEES. Schedule 4.26 is a true and complete list of all
personnel employed by Seller as of the date of this Agreement, including the
names and current addresses of all such persons, their job classifications,
rates of pay, length of service, and a brief description of the employment
benefits provided to them, including group insurance, vacation, severance,
health and accident benefits, and retirement pay, if any.
4.27 EMPLOYEE BENEFIT PLANS.
(a) Schedule 4.27 contains an accurate and complete list of each
employee benefit plan established, maintained, or contributed to by Seller
or KXII Television. Each such plan is maintained and administered in
material compliance with the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), the Code and any other applicable Laws, its
governing documents and any oral or written communications from Seller or
KXII Television to any participant in or beneficiary of such plan. Neither
Seller nor KXII Television nor any such employee benefit plan is liable for
any material fine, excise tax, or loss of income tax deduction with respect
to the operation of any such employee benefit plan. No reportable event, as
defined in Section 4043 of ERISA, that could have a Material Adverse Effect
on Seller or KXII Television, has occurred with respect to any employee
benefit plan of Seller or KXII Television. The consummation of the
transactions contemplated by this Agreement will not result in any
withdrawal liability on the part of Seller or KXII Television under a
multi-employer plan. No plan or benefit arrangement established or
maintained by Seller or KXII Television or to which Seller or KXII
Television is obligated to contribute has any "accumulated funding
deficiency" as defined by ERISA. Seller and KXII Television have not
incurred any liability to the Pension Benefit Guaranty Corporation with
respect to any such plan. There are no material claims (other than routine
claims for benefits), lawsuits or governmental proceedings pending or, to
Seller's and KXII Television's Knowledge, threatened with respect to any
employee benefit plan of Seller or KXII Television. No claims or
liabilities in respect of any of Seller's and KXII Television's employee
benefit plans shall be imposed upon Purchaser or Gray as a result of the
transactions described herein.
(b) Seller and KXII Television have filed all returns and reports
required to be filed with respect to its employee benefit plans, and has
paid or made provision for the
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payment of all fees, interest, penalties, assessments, or deficiencies that
may have become due pursuant to those returns or reports or pursuant to any
assessment or adjustment that has been made relating to those returns or
reports. All other fees, interest, penalties, and assessments that are
payable by or for Seller or KXII Television have been timely reported,
fully paid, and discharged. There are no unpaid fees, penalties, interest,
or assessments due from Seller or KXII Television relating to any employee
benefit plan that are or could become an Encumbrance on any assets of the
Station or are otherwise material. Seller and KXII Television have
furnished to Purchaser true and complete copies of all documents setting
forth the terms and funding of each employee benefit plan.
(c) Neither Seller nor KXII Television is liable for any welfare
benefits (as defined in ERISA Section 3(1)) to its employees or other
individuals associated with Seller and KXII Television after retirement or
other separation from service other than to the extent required by Code
Section 4980B and Part VI of Title I of ERISA (COBRA).
(d) For purposes of this Section 4.27, "Seller" and "KXII Television"
mean Seller and KXII Television and any entity which, together with Seller
or KXII Television, would be treated as a single employer under Section
414(n) of the Code.
4.28 NO BROKERS. None of the KXII Parties has employed any brokers or
finders, or incurred any liability for any brokerage fees, commissions, finders'
fees, or financial advisory fees in connection with the transactions
contemplated hereby, and the KXII Parties agree to hold Gray, Purchaser and
Licensee harmless from any claim relating to such fees or compensation made by
the KXII Parties or anyone employed by the KXII Parties.
4.29 COMPUTER SOFTWARE AND DATABASE. All computer software licensed,
leased or otherwise used in connection with the Business and the Station is
standard, pre-packaged and licensed and none of such computer software is
proprietary, internally developed or owned by Seller or KXII Television. Each of
Seller and KXII Television has, and upon consummation of the transactions
contemplated by this Agreement, Purchaser will have, all computer software and
databases that are necessary to operate the Business as presently conducted by
Seller and KXII Television and all documentation and necessary licenses relating
to all such computer software and databases.
4.30 INTERESTED TRANSACTIONS. Except as set forth in Schedule 4.30,
neither Seller nor KXII Television is a party to any contract or other
transaction with any Affiliate of Seller or KXII Television, any Related Party
of any Affiliate of Seller or KXII Television (other than as an Owner or
employee of Seller or KXII Television), or any Person in which any of the
foregoing (individually or in the aggregate) beneficially or legally owns,
directly or indirectly, five percent (5%) or more of the equity or voting
interests. Each of such contracts and other transactions described in the
preceding sentence was negotiated on an arm's length basis, contains pricing
terms that reflected fair market value at the time entered into and otherwise
contains terms and conditions comparable to those customarily contained in
similar transactions between unrelated parties. Except as described in Schedule
4.30, none of the Persons described in the first sentence of this Section 4.30
owns, or during the last three (3) years has owned, directly or indirectly,
beneficially or legally (individually or in the aggregate), five percent (5%) or
more of the equity or voting interests of any Person that competes with Seller
or the Station.
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4.31 FULL DISCLOSURE. No statement contained herein or in any document,
certificate, or other writing furnished or to be furnished by the KXII Parties
to Gray, the Licensee and the Purchaser pursuant to the provisions of this
Agreement contains or shall contain any untrue statement of a material fact or
shall omit to state any material fact necessary, in the light of the
circumstances under which it was made, to make the statements therein not
misleading. The due diligence materials delivered by the KXII Parties to Gray,
the Licensee and Purchaser are correct and complete in all material respects and
do not omit any material facts necessary to make the facts disclosed by such
materials not misleading.
4.32 ABSENCE OF UNDISCLOSED LIABILITIES. None of the KXII Parties has
Knowledge of any Undisclosed Liabilities or any basis for or threat of an
assertion against any of the KXII Parties, the Business or the Assets of any
Undisclosed Liability, except for Liabilities incurred since the Unaudited
Balance Sheet Date in the ordinary course of business consistent with past
practice, none of which are Material.
4.33 COMPLIANCE WITH THE IMMIGRATION REFORM AND CONTROL ACT. Each of KXII
Television and Seller is in full compliance with and has not violated the terms
and provisions of the Immigration Reform and Control Act of 1986, and all
related regulations promulgated thereunder (the "Immigration Laws"). With
respect to each employee (as defined in Section 274a.1(f) of Title 8, Code of
Federal Regulations) of Seller and KXII Television for whom compliance with the
Immigration Laws by an employer (as defined in Section 274a.1(g) of Title 8,
Code of Federal Regulations) is required, Seller and KXII Television have
supplied, or shall supply prior to the Closing Date, to Purchaser such
employee's Form I-9 (Employment Eligibility Verification Form) and all other
records, documents or papers which are retained with the Form I-9 by the
employer pursuant to the Immigration Laws. Neither KXII Television nor Seller
has ever been the subject of any inspection or investigation relating to its
compliance with or violation of the Immigration Laws, nor has either been
warned, fined or otherwise penalized by reason of any failure to comply with the
Immigration Laws, nor is any such proceeding pending or threatened.
4.34 ABSENCE OF CHANGES. Except as disclosed on Schedule 4.34, since the
Unaudited Balance Sheet Date, (i) the Business has been carried on only in the
ordinary course of business consistent with past practice, (ii) there has been
no Material Adverse Change, and there has been no event or circumstance which is
reasonably anticipated to result in a Material Adverse Change with respect to
Seller, KXII Television, the Business, the Station or the Assets, (iii) neither
Seller nor KXII Television has directly or indirectly declared or authorized any
dividends or other distributions or payments in respect of its partnership
interests which have not been paid in full, (iv) neither Seller nor KXII
Television has made any change in any method of accounting or accounting
practice, and (v) neither Seller nor KXII Television has cancelled, modified or
waived, without receiving payment or performance in full, any (a) Liability owed
to Seller or KXII Television, including without limitation, any receivable of
Seller or KXII Television from any Affiliate or any Related Party to an
Affiliate, (b) Litigation Seller or KXII Television may have against other
Persons, or (c) other rights of Seller or KXII Television.
4.35 RELIANCE AND SURVIVAL. The foregoing representations and warranties
have been made by the KXII Parties with the knowledge and expectation that each
of Purchaser, Licensee and Gray is placing complete reliance thereon, and all
such representations and warranties shall survive the Closing.
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SECTION 5. REPRESENTATIONS AND WARRANTIES OF GRAY, PURCHASER AND LICENSEE.
Each of Gray, Purchaser and Licensee represents and warrants to the KXII
Parties as follows:
5.1 ORGANIZATION AND EXISTENCE OF GRAY, PURCHASER AND LICENSEE.
(a) Gray is a corporation duly organized and validly existing under
the laws of the State of Georgia and has the power and authority to own all
of its properties and assets and to carry on its business as it is now
being conducted.
(b) Purchaser is a corporation duly organized and validly existing
under the laws of the State of Georgia and has the power and authority to
own all of its properties and assets and to carry on its business as it is
now being conducted.
(b) Licensee is a corporation duly organized and validly existing
under the laws of the State of Delaware and has the power and authority to
own all of its properties and assets and to carry on its business as it is
now being conducted.
5.2 AUTHORIZATION AND VALIDITY. Each of Gray, Purchaser and Licensee has
the full power and authority to execute and deliver this Agreement and the other
agreements and instruments contemplated on its part hereby and to consummate the
transactions contemplated on its part hereby and thereby; each of Gray's,
Purchaser's and Licensee's execution and delivery of this Agreement and
consummation of the transactions contemplated hereby and thereby have been duly
authorized by its Board of Directors; and this Agreement has been duly executed
and delivered and constitutes the valid and binding agreement of each of Gray,
Purchaser and Licensee, enforceable in accordance with its terms.
5.3 NONCONTRAVENTION. Neither the execution nor delivery of this
Agreement by any of Gray, Purchaser or Licensee nor the consummation by any of
Gray, Purchaser or Licensee of the transactions contemplated hereby and thereby
will violate any provision of the Articles of Incorporation or Bylaws of any of
Gray, Purchaser or Licensee, or of any other material instrument, agreement,
order, or decree binding on any of Gray, Purchaser or Licensee, the effect of
which violation would be the prevention, delay, avoidance, or voidableness of
this Agreement or the transactions contemplated hereby.
5.4 CONSENTS, APPROVALS. Except for filings with and approvals of the
transactions contemplated hereby by the FCC, none of Gray, Purchaser nor
Licensee is required to make or obtain any consent, approval, notification,
authorization or order of, or declaration, filing, or registration with any
Governmental Authority or any other third party in connection with consummation
by any of Gray, Purchaser or Licensee of the transactions contemplated hereby.
5.5 NO BROKERS. Other than an approximately 1% fee paid by Gray to Bull
Run Corporation (which does not affect the Purchase Price hereunder), none of
Gray, Purchaser nor Licensee has employed any brokers or finders or incurred any
liability for any brokerage fees, commissions, finders' fees, or financial
advisory fees in connection with the transactions contemplated hereby, and each
of Gray, Purchaser and Licensee agrees to hold Seller harmless from any claim
relating to such fees or compensation made by any of Gray, Purchaser or anyone
employed by either of them.
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5.6 FINANCIAL ABILITY. Gray, Purchaser and Licensee have the financial
ability to close the transactions contemplated under this Agreement, and will
close those transactions according to the terms of, and subject to the
conditions contained in, this Agreement.
SECTION 6. FCC APPROVAL.
6.1 FILING AND PROSECUTION OF APPLICATION. Within ten (10) days after the
execution of this Agreement, Licensee and Seller shall each file applications
with the FCC requesting the transfer and assignment of the FCC Licenses of the
Station from Seller to Licensee. (the "Assignment Applications"). Licensee and
Seller shall take all steps reasonably necessary to the expeditious prosecution
of the Assignment Applications to a favorable conclusion, using their best
efforts throughout.
6.2 EXPENSES. Each party shall bear its own expenses in connection with
the preparation of the applicable sections of the Assignment Application and in
connection with the prosecution of such application. Seller and Gray will divide
and pay equally any filing fee or grant fee imposed by the FCC.
6.3 TIME FOR FCC CONSENT. If the FCC rejects the Assignment Application
for incompleteness, it shall be completed by the party (or parties) whose
portion of the Assignment Application was incomplete and then shall be promptly
resubmitted. If the Assignment Application is rejected by the FCC for a reason
which precludes resubmission, this Agreement shall terminate without notice or
other action by the parties. If the FCC accepts the Assignment Application,
whether as initially filed or as resubmitted, then, if the FCC has not given its
written consent to the transfer of the FCC Licenses by December 31, 1999, the
time for FCC consent shall be automatically extended until May 31, 2000, so long
as no party is otherwise in default hereunder. In the event that the FCC consent
has not been granted on or before May 31, 2000, either party may terminate this
Agreement pursuant to Section 13.1. If the Closing has not occurred prior to
August 15, 1999, the Company shall apply to the FCC prior to such date for all
necessary authorizations to construct and operate digital television facilities
on or before May 1, 2002.
6.4 CONTROL OF STATION. Until the Closing, none of Purchaser, Gray nor
Licensee shall, directly or indirectly, control, supervise, or direct the
operation of the Station, but such operation shall be the sole responsibility of
Seller. Pending the Closing, none of Purchaser, Gray nor Licensee shall
represent that it is acting as agent or representative of Seller in connection
with the operation of the Station or any personnel actions affecting the
Station's employees.
6.5 NO REVERSION OF LICENSES. Neither the Owners, nor any person
affiliated with the Owners, has retained any right of reversion of the FCC
Licenses. Further, no person affiliated with the Owners has the right to a
reassignment of the FCC Licenses in the future, and the Owners or their
affiliates have not reserved the right to use the facilities of the Station for
any period whatsoever. There is no contract, arrangement, or understanding,
express or implied, pursuant to which, as consideration or partial consideration
for the transactions contemplated hereby, such rights as stated above are
retained.
6.6 REGULATORY MATTERS. Gray, Purchaser, Licensee and the KXII Parties
will cooperate and use their best efforts to prepare all documentation, to make
all filings, and to obtain all permits, consents, approvals, and authorizations
of all third parties and governmental bodies necessary to consummate the
transactions contemplated by this
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Agreement. Each party shall be primarily responsible for accomplishing all such
matters applicable to it (or them) but shall take all such further action in
that regard as the other party shall reasonably request.
SECTION 7. SPECIAL COVENANTS AND AGREEMENTS.
7.1 CONFIDENTIALITY. Except as necessary for the consummation of the
transactions contemplated by this Agreement, except as and to the extent
required by law or securities filings, and except as permitted by Section 7.8,
each party will keep confidential any information obtained from the other party
in connection with the transactions contemplated by this Agreement. If this
Agreement is terminated, each party will return to the other party all
information obtained by such party from the other party in connection with the
transactions contemplated by this Agreement.
7.2 COOPERATION. Gray, Purchaser, Licensee and the KXII Parties shall
cooperate fully with each other and their respective counsel and accountants in
connection with any actions required to be taken as part of their respective
obligations under this Agreement, and Gray, Purchaser, Licensee and the KXII
Parties shall execute such other documents as may be necessary and desirable to
implement and consummate this Agreement, and shall otherwise use their
commercially reasonable efforts to consummate the transaction contemplated
hereby and to fulfill their obligations under this Agreement.
7.3 ACCESS TO BOOKS AND RECORDS. Gray, Licensee and Purchaser shall
provide Seller reasonable access and the right to copy for a period of three
years from the Closing Date any books and records relating to Seller.
7.4 CERTAIN INVESTMENTS. Prior to the Closing, Employee accounts will be
liquidated or written off at the election of Seller.
7.5 ACQUISITION PROPOSALS. None of the KXII Parties or any of their
officers and directors, as the case may be, shall, and each of the KXII Parties
will, use its best efforts to cause its respective employees, agents, and
representatives (including, with limitation, any investment banker, attorney or
accountant retained by the KXII Parties) not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making of any proposal with respect
to a merger, consolidation, share exchange or similar transaction involving
Seller, or any purchase of all or any significant portion of the Assets of
Seller, or any equity interest in Seller, other than the transactions
contemplated hereby (an "Acquisition Proposal"), or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition.
7.6 PUBLICITY. The parties hereto agree that they will consult with each
other concerning any proposed press release or public announcement pertaining to
the Agreement and the transactions contemplated thereby and shall use their best
efforts to agree upon the text of any such press release or the making of such
public announcement.
7.7 SUPPLYING OF FINANCIAL STATEMENTS. Seller and KXII Television shall
deliver to Gray and Purchaser promptly upon completion of the audit at Gray's or
Purchaser's cost and expense, audited Financial Statements of Seller and KXII
Television for the year ended December 31, 1998, prepared by its independent
auditors, Jaynes, Reitmeier, Boyd & Therrell, PC, Certified Public Accountants,
Waco, Texas, which Financial Statements will have been prepared in accordance
with GAAP. Furthermore, Seller and KXII Television shall deliver to Gray and
Purchaser within twenty (20) days following the end
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of each month true and complete copies of all unaudited monthly financial
statements of Seller and KXII Television for each calendar month ending
subsequent to December 31, 1998 and prior to the Closing Date in the format
historically utilized internally by Seller and KXII Television and, to the
extent applicable, within ninety (90) days following the end of each year true
and completed copies of annual audited financial statements of Seller and KXII
Television for each year subsequent to 1998.
7.8 COOPERATION IN PREPARATION OF FILINGS. The KXII Parties shall
cooperate in providing to Gray all information required or reasonably desirable
for the preparation of the Registration Statements described in the KWTX Merger
Agreement and KBTX Merger Agreement and such other filings with the Securities
and Exchange Commission as Gray deems necessary or appropriate.
7.9 SUPPLEMENTS TO SCHEDULES. Seller shall from time to time after the
date hereof, supplement or amend the Schedules referred to in Section 4 with
respect to any matter arising after the date hereof which, if existing or
occurring at the date hereof, would have been required to be set forth or
described in such Schedules. Gray and Purchaser may unilaterally extend the
Closing Date if necessary to allow Gray and Purchaser ten (10) business days to
review such supplements to the Schedules prior to the Closing Date. If, in
Gray's reasonable determination, any such supplements to the Schedules reveal
any Material Adverse Change, Gray and Purchaser shall give written notice to
Seller of its determination. Seller shall then have a period of ten (10)
business days to reasonably satisfy Gray and Purchaser that there has been no
Material Adverse Change, or to remedy such Material Adverse Change. If,
following such ten (10) business day cure period, in Gray's and Purchaser's
reasonable determination, such Material Adverse Change still exists, Gray and
Purchaser may terminate this Agreement pursuant to Section 13.1(e).
7.10 USE OF NAME. Within 10 days after the Closing Date, each of the KXII
Parties, other than K-Twelve, as applicable, (i) shall change its name and cause
any and all Affiliates to change their names to a name wholly dissimilar to
"KXII," and any variation or derivation thereof; (ii) shall provide such
evidence of such name change as Purchaser may reasonably request; and (iii)
shall not thereafter use, or permit any of its Affiliates to use, the name
"KXII", or any similar name or variation or derivation thereof in any
circumstances. In connection with enabling Purchaser, at or after the Closing,
to use the name "KXII," and any variation or derivation thereof, the KXII
Parties shall execute and deliver to Purchaser all consents related to such use
of names as may be reasonably requested by Purchaser from time to time. All
rights to the name "KXII," and any variation or derivation thereof, and all
rights to all names used in connection with the Business are being conveyed to
Purchaser as part of the Assets.
7.11 CERTAIN TAX MATTERS.
(a) Seller shall file all Tax Returns required to be filed by it on or
before the Closing Date.
(b) Purchaser, on the one hand, and the KXII Parties, on the other
hand, shall provide the other parties to this Agreement, at the expense of
the requesting party, with such assistance as may reasonably be requested
by any of them in connection with the preparation of any Tax Return, any
audit or other examination by any Governmental Authority, or any judicial
or administrative proceedings relating to Liability for Taxes, and each
will retain and provide the requesting party with any records or
information that may be relevant to any of the foregoing.
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(c) At the Closing, Seller shall pay out of the Purchase Price all
Taxes relating to the Transfer of the Assets to Purchaser. Seller shall
file all necessary documentation and Tax Returns required to be filed by it
with respect to such Taxes.
7.12 OTHER EXPENSES.
(a) Seller or the Owners (after the Closing and not from or out of the
Assets) shall pay any fees and expenses in connection with the prepayment,
release, satisfaction or removal of any Encumbrances affecting the Assets
other than Permitted Liens.
(b) Gray shall pay all costs and fees relating to the environmental
report or reports required by Section 9.8.
7.13 FURTHER ASSURANCES. At any time and from time to time after the
Closing, the KXII Parties shall, at the request of Purchaser, Licensee or Gray,
take any and all actions necessary to fulfill their respective obligations
hereunder, to put Purchaser in actual possession and operating control of the
Assets and execute and deliver such further instruments of conveyance, sale,
transfer and assignment, and take such other actions necessary or desirable to
effectuate, record of perfect the transfer of the Assets to Purchaser free and
clear of all Encumbrances (other than Permitted Encumbrances), to confirm the
title of the Assets to Purchaser, to assist Purchaser in exercising rights
relating thereto, or to otherwise effectuate or consummate any of the
transactions contemplated hereby.
7.14 TITLE SEARCH; DISCHARGE OF ENCUMBRANCES; TITLE INSURANCE. As soon as
practicable after the date hereof, the KXII Parties shall (i) each use
commercially reasonable efforts to ascertain all Encumbrances, if any, to which
any of the Assets or the FCC Licenses is subject, (ii) notify Gray, Purchaser
and Licensee in writing of the nature and extent thereof, and (iii) discharge
all such Encumbrances (other than Permitted Liens). Without limiting the
generality of the foregoing, the KXII Parties shall provide to Gray, Purchaser
and Licensee Uniform Commercial Code searches (conducted as soon as possible
after the date hereof and updated through a date not more than ten (10) days
prior to the Closing Date) of filings made pursuant to Article 9 thereof in all
jurisdictions where Seller or K-Twelve has any Assets. The KXII Parties agree to
provide the title insurance company issuing title insurance policies or
commitments to Purchaser with any and all certificates, affidavits, indemnities
or other assurances that it may reasonably request for the purpose of permitting
such title insurer to delete the standard, general or printed exceptions set
forth in the title policy or title commitment and any Encumbrances other than
Permitted Liens.
7.15 TRANSFER OF REAL PROPERTY. Prior to the Closing Date, K-Twelve and
each other KXII party indicated on Schedule 4.13(a) shall deliver to Seller a
general warranty deed transferring all of K-Twelve's and each such other KXII
Party's right, title and interest in the Real Property to Seller.
7.16 TRANSFER OF CERTAIN ASSETS. Prior to the Closing Date, KXII
Television shall transfer to Seller all of its rights, title and interest in and
to each of the Assets that it owns, free and clear of all Encumbrances other
than Permitted Liens.
7.17 DIGITAL TELEVISION APPLICATIONS. If the Closing has not occurred
prior to August 15, 1999, Seller agrees to apply to the FCC prior to such date
for all necessary
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authorizations to construct and operate digital television facilities on or
before May 1, 2002.
7.18 EARNEST MONEY. The Earnest Money, in the form of cash, shall be paid
to the Earnest Money Escrow Agent for the account of Seller within three (3)
business days after the date hereof. The cash Earnest Money shall be held in
accordance with the provisions of the Escrow Agreement substantially in the form
of Exhibit A attached hereto and shall be paid to Seller at the Closing.
SECTION 8. CONDITIONS PRECEDENT FOR SELLER AND THE OWNERS.
Seller's and the Owners' obligation to effect the transactions contemplated
by this Agreement shall be subject, to the extent not waived, to the
satisfaction of each of the following conditions at or prior to the Closing.
8.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Gray, Licensee and Purchaser contained in this Agreement shall be true,
complete, and correct in all material respects as of the date when made and,
except for changes expressly contemplated by this Agreement, on and as of the
Closing Date as though such representations and warranties had been made on and
as of the Closing Date, and Gray, Licensee and Purchaser shall have delivered to
Seller a certificate or certificates, signed by the Chairman or the President of
Gray, Licensee and Purchaser and dated the Closing Date, to such effect.
8.2 PERFORMANCE OF THIS AGREEMENT. Each of Gray, Licensee and Purchaser
shall have performed and complied in all material respects with all covenants,
conditions, and agreements required by this Agreement to be performed or
complied with by it prior to or on the Closing Date and Gray, Licensee and
Purchaser shall have delivered to Seller and its counsel all of the documents
specified or required to be delivered in accordance with the provisions hereof.
8.3 PROCEEDINGS. All corporate and other proceedings to be taken by Gray,
Licensee and Purchaser in connection with the transactions contemplated hereby
shall have been completed and all such proceedings and all documents incident
thereto shall be reasonably satisfactory in substance and form to Seller, and
Seller shall have received all such counterpart originals or certified or other
copies of such documents as Seller may reasonably request.
8.4 FCC CONSENT. The FCC Consent shall have been granted without the
imposition of any condition thereon adverse to Seller or the Owners and (unless
waived by the Purchaser) shall have become a Final Order. All other consents and
authorizations by third parties and all governmental consents, approvals,
licenses, and permits, the granting of which are necessary for the consummation
of the transactions contemplated hereby or for preventing the termination of any
material right, privilege, license, or agreement of Seller or Purchaser related
to the Business, the Station, or any material loss or disadvantage to Seller or
Purchaser, upon the consummation of the transactions contemplated hereby, shall
have been obtained or made.
8.5 LITIGATION. No order of any court or administrative agency shall be
in effect which restrains or prohibits the transactions contemplated hereby,
there shall not be pending any action, inquiry, investigation, or proceeding by
or before any court or governmental agency or other regulatory or administrative
agency or commission challenging any of the transactions contemplated by this
Agreement.
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8.6 CLOSING OF MERGERS. The transactions contemplated by the KWTX Merger
Agreement and the KBTX Merger Agreement shall have been consummated.
SECTION 9. CONDITIONS PRECEDENT FOR GRAY, PURCHASER AND LICENSEE.
Gray's, Purchaser's and Licensee's obligations to effect the consummation
of the transactions contemplated by the Agreement shall be subject, to the
extent not waived, to the satisfaction of each of the following conditions at or
prior to the Closing.
9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the KXII Parties contained in this Agreement shall be true, complete, and
correct in all material respects as of the date when made and, except for
changes expressly contemplated by this Agreement, on and as of the Closing Date,
as though such representations and warranties had been made on and as of the
Closing Date, and the KXII Parties each shall have executed and delivered to
Gray, Purchaser and Licensee a certificate, dated the Closing Date, to such
effect.
9.2 PERFORMANCE OF THIS AGREEMENT. The KXII Parties shall have performed
and complied in all material respects with all covenants, conditions, and
agreements required by this Agreement to be performed or complied with by it
prior to or on the Closing Date and the KXII Parties shall have delivered to
Gray, Purchaser and Licensee and their counsel all of the instruments of
transfer, certificates, Exhibits, Schedules, and other documents specified or
required to be delivered in accordance with the provisions hereof.
9.3 PROCEEDINGS. All corporate and other proceedings to be taken by the
KXII Parties in connection with the transactions contemplated hereby shall have
been completed and all such proceedings and all documents incident thereto shall
be reasonably satisfactory in substance and form to Gray, Purchaser and
Licensee, and Gray, Purchaser and Licensee shall have received all such
counterpart originals or certified or other copies of such documents as Gray may
reasonably request.
9.4 FCC CONSENT. The FCC Consent shall have been granted without the
imposition of any condition thereon adverse to Gray, Purchaser or Licensee and
(unless waived by Gray) shall have become a Final Order. All other consents and
authorizations by third parties and all governmental consents, approvals,
licenses, and permits, the granting of which are necessary for the consummation
of the transactions contemplated hereby or for preventing the termination of any
material right, privilege, license, or agreement of Seller or Purchaser related
to the Station, the Assets or the Business, or any material loss or disadvantage
to Gray, Purchaser or Licensee, upon the consummation of the transactions
contemplated hereby, shall have been obtained or made.
9.5 LITIGATION. No order of any court or administrative agency shall be
in effect which restrains or prohibits the transactions contemplated hereby or
which would limit or affect Purchaser's ownership of the Assets or the Business,
and there shall not be pending any action, inquiry, investigation, or proceeding
by or before any court or governmental agency or other regulatory or
administrative agency or commission challenging any of the transactions
contemplated by this Agreement.
9.6 OPINIONS OF COUNSEL FOR SELLER. Gray, Purchaser and Licensee shall
have received opinions from Deaver & Deaver, counsel to Seller, and from Dennis
Kelly, special FCC counsel to Seller, dated as of the Closing Date, in
substantially the forms attached hereto as Exhibits C and D, respectively.
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9.7 TITLE INSURANCE COMMITMENTS. Gray or Purchaser, at Gray's sole cost
and expense, shall have received commitments for standard form policies of
owner's or lessee's title insurance, issued by a title insurance company doing
business in the State of Texas, acceptable to Gray, insuring Seller's title as
owner or as lessee, as the case may be, with current survey coverage, based on a
current ALTA Survey, in form and substance reasonably satisfactory to Gray, in
all of the Real Property in amounts specified by Gray, containing only those
exceptions, conditions, and reservations acceptable to Gray and its counsel in
their reasonable discretion (collectively, the "Permitted Exceptions"), together
with legible copies of the documents creating the Permitted Exceptions.
9.8 ENVIRONMENTAL AUDIT.
(a) Gray, at Gray's sole cost and expense, shall have received the
written results of an environmental audit, prepared at the direction of
Gray, confirming that:
(i) The Real Property does not contain any hazardous wastes,
hazardous substances, toxic substances, hazardous air pollutants, or
toxic pollutants, as those terms are defined in state and federal
environmental laws and regulations promulgated pursuant to such Laws, in
amounts which are in violation of, or might give rise to Liability
under, such Laws or regulations;
(ii) No part of the Real Property is currently or potentially
subject to any federal, state, or local compliance or enforcement
action, clean-up action, or other action because of the presence of
stored, leaked, spilled, or disposed petroleum products, waste materials
or debris, "PCB's" or "PCB items," underground storage tanks,
"asbestos," or any dangerous, hazardous, or toxic substance as defined
in or regulated by any federal or state or local laws, regulations, or
orders;
(iii) No part of the Real Property has been filled with debris,
garbage, stumps, or other similar waste materials; and
(iv) No condition currently exists on the Real Property, whether
owned or leased, which is or may be characterized by any federal, state,
or local government or agency as an actual or potential threat or danger
to public health or the environment.
(b) If the environmental audit obtained by Gray recommends remedial
measures to clean up contamination identified in the environmental audit,
Seller may complete the remedial measures at its sole cost and expense, in
which case, the time for the Closing hereunder shall be extended up to 120
days as reasonably necessary to allow for such remediation. If Seller
refuses to complete such remedial measures, Gray may, at Gray's option,
(i) complete the remedial measures at Gray's sole cost and expense,
in which case, the time for Closing hereunder shall be extended as
reasonably necessary to allow for such remediation and the Purchase
Price shall be reduced by such cost and expense, or
(ii) cancel and terminate this Agreement without further liability
to Gray, Purchaser, Licensee and the KXII Parties.
9.9 NO MATERIAL ADVERSE CHANGE. There shall not have occurred any
Material Adverse Change with respect to Seller, the Assets, or the Business, or
any condition or
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event which threatens a Material Adverse Change with respect to Seller, the
Assets or the Business, from the Unaudited Audited Balance Sheet Date. Seller
and the Owners each shall have delivered to Purchaser a certificate dated as of
the Closing Date executed by Seller and the Owners, respectively, certifying the
foregoing statement.
9.10 ZONING CERTIFICATE. With respect to Real Property that is subject to
zoning ordinances, Seller shall have furnished to Purchaser no later than seven
(7) days prior to the Closing Date (i) a statement of the appropriate
Governmental Authority, that the Real Property, as improved and used, complies
with all applicable zoning Laws and (ii) certificate(s) of occupancy, as
applicable, with respect to the Real Property.
9.11 CLOSING OF MERGERS. The transactions contemplated by the KWTX Merger
Agreement and the KBTX Merger Agreement shall have been consummated.
9.12 TRANSFER OF REAL PROPERTY. K-Twelve and each other KXII Party
indicated on Schedule 4.13(a) shall have transferred all of its right, title and
interest in the Real Property, and any and all contracts related thereto, to
Seller pursuant to Section 7.15.
9.13 TRANSFER OF CERTAIN ASSETS. KXII Television shall have transferred
all of its right, title and interest in and to all of the Assets held by it to
Seller pursuant to Section 7.16.
9.14 DUE DILIGENCE AND SCHEDULES. Gray and Purchaser shall be reasonably
satisfied with their due diligence review of the Company and the Station,
including the information disclosed on the Schedules. This condition shall be
deemed to have been satisfied if notice to the contrary has not been given to
the Company no later than ten (10) business days after receipt by Gray and
Purchaser of all of the due diligence information reasonably requested by them
and receipt by Gray and Purchaser of all of the Schedules.
SECTION 10. CLOSING.
10.1 DELIVERIES BY SELLER. At the Closing, Purchaser will pay or cause
the payment of the Purchase Price upon receipt of the following instruments and
documents executed by the KXII Parties, where appropriate, in form and content
satisfactory to each of Gray, Purchaser, Licensee and their counsel:
(a) All original documents, books and records pertaining to the
Business (except minute books and stock records) and to the Assets that are
legally significant or useful to the Business and shall deliver copies of
all other documents, books and records pertaining to the Business and to
the Assets. Seller may retain copies of any of the foregoing for its own
use. Without limiting the generality of the foregoing, Seller shall deliver
to Purchaser at the Closing all documents and records relating to the
Intangible Property, including, without limitation, the original
Certificates of Registration for all Letters Patent, trademarks, service
marks and trade names listed on Schedule 4.13 and all such documents
relating thereto along with any other documents necessary to transfer title
thereto and to record such transfer before the respective patent and
trademark offices or Governmental Authorities.
(b) A Certificate of Account Status for Seller from the Texas
Comptroller of Public Accounts, dated no more than thirty (30) days prior
to the Closing Date;
(c) Certificate of KBI 1 as general partner of Seller dated the
Closing Date certifying the incumbency of all officers of KBI 1 who have
executed this Agreement
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or any of the Other Agreements. This Certificate shall contain specimens of
the signatures of each of such officers and shall be executed by an officer
of KBI 2 other than an officer whose incumbency or authority is certified.
(d) A true and complete copy of the Partnership Agreement and all
amendments thereto of Seller certified by its general partner;
(e) A certificate of the secretary of KBI 1 stating that the
partnership agreement of Seller has not been amended since the date of this
Agreement and that nothing has occurred since the date of issuance of the
Certificate of Account Status specified in Subsection 10.1(c) above that
would adversely affect Seller's existence or good standing;
(f) The Closing Certificate referred to in Section 9.1 of this
Agreement;
(g) The Certificate referred to in Section 9.10 of this Agreement;
(h) An executed Bill of Sale substantially in the form attached hereto
as Exhibit D;
(i) An executed Assignment and Assumption Agreement substantially in
the form attached hereto as Exhibit E;
(j) Copies of the resolutions adopted by the general partners of the
limited partnerships and the Boards of Directors and shareholders of the
corporations comprising the KXII Parties approving this Agreement, the
Other Agreements, and the consummation of the transactions contemplated
hereby and thereby, certified by the Secretary or general partner of each
such KXII Party, as applicable.
(k) A Certificate of Account Status from the Texas Comptroller of
Public Accounts stating that no sales or use Taxes are due and payable, if
such a Certificate has not previously been received by Gray.
(l) Certificate of the Secretary of the State of the State of Texas
dated not more than ten (10) days before the Closing Date, stating that
Seller is a partnership in existence under the laws of such state and has
paid all applicable Taxes due to such state and certificates of the
appropriate officials of the states and foreign jurisdictions listed on
Schedule 4.1, each dated not more than ten (10) days before the Closing
Date, stating that Seller is duly qualified and in good standing to
transact business as a foreign corporation and has paid all applicable
Taxes due to each such state or foreign jurisdiction;
(m) A general warranty deed in respect of the Real Property (which
general warranty deed shall include a transfer or assignment of any
warranties of title, whether general, statutory or limited, which Seller
has received from any of its grantors);
(n) An Owner's and Contractor's Affidavit and such other documents,
instruments and information as may be requested by the title insurance
company which is providing owner's or lessee's title insurance coverage for
the Real Property;
(o) The opinions of Seller's counsel and Seller's special FCC counsel;
and
(p) Such other documents as Gray, Purchaser, Licensee or their Counsel
may reasonably request for the complete fulfillment of the KXII Parties'
obligations hereunder.
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10.2 DELIVERIES BY GRAY, PURCHASER AND LICENSEE.
(a) The Closing Certificate referred to in Section 8.1 of this
Agreement;
(b) The opinion of Gray's, Purchaser's and Licensee's legal counsel;
(c) An executed Assignment and Assumption Agreement substantially in
the form attached hereto as Exhibit E.
(d) An incumbency certificate or certificates dated the Closing Date
certifying the incumbency of all officers of Purchaser, of Licensee and of
Gray who have executed this Agreement or any of the Other Agreements. These
certificates shall contain specimens of the signatures of each of such
officers and shall be executed by an officer of Purchaser other than an
officer whose incumbency or authority is certified.
SECTION 11. INDEMNIFICATION.
11.1 BY SELLER. After the Closing Date, to the limit of the Escrow Fund
described in Section 11.4, below, the KXII Parties shall indemnify and hold
harmless each of Gray, Purchaser and Licensee and their respective officers,
directors, employees, agents, representatives, successors, and permitted
assigns, against:
(i) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by Gray, Purchaser or Licensee and
arising from a breach of any representation or warranty of the KXII Parties
contained in this Agreement;
(ii) any damages, losses, obligations, liabilities, claims, actions,
or causes of action sustained or suffered by Gray, Purchaser or Licensee
and arising from a breach of any agreement of the KXII Parties contained in
this Agreement;
(iii) any damages, losses, obligations, liabilities, claims, actions,
or causes of action sustained or suffered by Gray, Purchaser or Licensee
and arising from any debt, obligation, or Liability of Seller not
specifically and expressly reflected on Seller's December 31, 1998 Audited
Balance Sheet, including any Taxes relating to the period ending on the
Closing Date;
(iv) any damages, losses, obligations, liabilities, claims, actions,
or causes of action sustained or suffered by Gray, Purchaser or Licensee
and arising from any Environmental Claim or any Environmental Matter;
(v) any Retained Liability; and
(vi) all ordinary and necessary costs, expenses, or settlement
payments (including, without limitation, reasonable attorneys',
accountants', and other professional fees) incurred by Gray, Purchaser or
Licensee in connection with any action, claim, suit, proceeding, demand,
assessment, or judgment incident to any of the matters indemnified against
under this Section 11.
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11.2 BY GRAY, PURCHASER AND LICENSEE. After the Closing Date, to the
limit of the amount of the Escrow Fund, each of Gray, Purchaser and Licensee
shall indemnify and hold harmless the KXII Parties and their respective
successors and permitted assigns, against:
(i) any damages, losses, obligations, liabilities, claims, actions, or
causes of action sustained or suffered by the KXII Parties and arising from
a breach of any representation or warranty of Gray, Purchaser or Licensee
contained in this Agreement;
(ii) any damages, losses, obligations, liabilities, claims, actions,
or causes of action sustained or suffered by the KXII Parties and arising
from a breach of any agreement of Gray, Purchaser or Licensee contained in
this Agreement;
(iii) any Assumed Liability; and
(iv) all ordinary and necessary costs, expenses, or settlement
payments (including, without limitation, reasonable attorneys',
accountants', and other professional fees) incurred by the KXII Parties in
connection with any action, suit, proceeding, demand, assessment, or
judgment incident to any of the matters indemnified against under this
Section 11.2.
11.3 PROCEDURE FOR INDEMNIFICATION. The procedure for indemnification
shall be as follows:
(a) The party claiming indemnification (the "Claimant") shall promptly
give notice to the Indemnity Escrow Agent and the party from which
indemnification is claimed (the "Indemnifying Party") of any claim, whether
between the parties or brought by a third party, specifying in reasonable
detail the factual basis for the claim. If the claim relates to an action,
suit, or proceeding filed by a third party against Claimant, such notice
shall be given by Claimant within ten (10) days after written notice of
such action, suit, or proceeding was received by Claimant, provided that
any failure to give notice of such action, suit, or proceeding within such
ten (10) day period shall not relieve the Indemnifying Party of its
obligations hereunder except to the extent such failure shall have
prejudiced such party in the defense or resolution of any such claim. The
notice of a claim may be amended on one or more occasions with respect to
the amount of the claim at any time prior to final resolution of the
obligation to indemnify relating to the claim.
(b) With respect to claims solely between the parties, following
receipt of notice from the Claimant of the claim, the Indemnifying Party
shall have thirty (30) days to make such investigation of the claim as the
Indemnifying Party deems necessary or desirable. For the purposes of such
investigation, the Claimant agrees to make available to the Indemnifying
Party and/or its authorized representatives the information relied upon by
the Claimant to substantiate the claim. If the Claimant and the
Indemnifying Party agree at or prior to the expiration of the thirty-day
(30) period (or any mutually agreed upon extension thereof) to the validity
and amount of such claim, the Indemnifying Party shall immediately pay to
the Claimant the amount of the claim. If the Claimant and the Indemnifying
Party do not agree within the thirty-day (30) period (or any mutually
agreed upon extension thereof), the Claimant may seek an appropriate remedy
at law or equity.
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(c) With respect to any claim by a third party as to which the
Claimant is entitled to indemnification under this Agreement, the
Indemnifying Party shall have the right, at its own expense, to participate
in or assume control of the defense of such claim, and the Claimant shall
cooperate fully with the Indemnifying Party, subject to reimbursement for
actual out-of-pocket expenses incurred by the Claimant as the result of a
request by the Indemnifying Party. The Indemnifying Party may elect to
compromise or contest, at its own expense and with counsel reasonably
acceptable to the Claimant, any third party claim. If the Indemnifying
Party elects to compromise or contest such third party claim, it shall
within thirty (30) days after receipt of the notice of the claim (or
sooner, if the nature of the third party claim so requires) notify the
Claimant of its intent to do so by sending a notice to the Indemnified
Party (the "Contest Notice"), and the Claimant shall cooperate, at the
expense of the Indemnifying Party, in the compromise or contest of such
third party claim. If the Indemnifying Party elects not to compromise or
contest the third party claim, fails to notify the Claimant of its election
as herein provided or contests its obligation to indemnify under this
Agreement, the Claimant (upon further notice to the Indemnifying Party)
shall have the right to pay, compromise or contest such third party claim
on behalf of and for the account and risk of the Indemnifying Party.
Anything in this Section 11.3 to the contrary notwithstanding, (i) the
Claimant shall have the right, at its own cost and for its own account, to
compromise or contest any third party claim, and (ii) the Indemnifying
Party shall not, without the Claimant's written consent, settle or
compromise any third party claim or consent to entry of any judgment which
does not include an unconditional term releasing the Claimant from all
liability in respect of such third party claim. In any event, the Claimant
and the Indemnifying Party may participate, at their own expense, in the
contest of such third party claim. In addition, with respect to any claim
related to Taxes, Gray, Purchaser and Licensee shall have the right to
participate in and attend any meeting or proceeding (at Gray's, Purchaser's
and Licensee's own cost and expense) with respect thereto, shall be
provided with copies of any written communication or information regarding
any oral communication with respect thereto as soon as possible after the
receipt thereof (including, but not limited to, information with respect to
any proposed meeting or proceeding) and shall have the right to approve any
settlement thereof if the terms of such settlement could increase, directly
or indirectly, any liability for Taxes of Gray, Purchaser or Licensee in
any period following the Closing. If the Indemnifying Party elects to
assume control of the defense of a third-party claim, the Claimant shall
have the right to participate in the defense of such claim at its own
expense. If the Indemnifying Party does not elect to assume control or
otherwise participate in the defense of any third party claim, it shall be
bound by the results obtained by the Claimant with respect to such claim.
(d) If a claim, whether between the parties or by a third party,
requires immediate action, the parties will make every effort to reach a
decision with respect thereto as expeditiously as possible.
(e) The indemnification rights provided in Sections 11.1 and 11.2
shall extend to the owners, shareholders, directors, officers, members,
employees, and representatives of any Claimant.
11.4 ESCROW FUND. At the Closing, the sum of Three Hundred Thousand
Dollars ($300,000) out of the Purchase Price (the "Escrow Fund") shall be
deposited with the Indemnity Escrow Agent. The Escrow Fund shall be held in
accordance with the terms
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hereof and the terms of the Escrow Agreement in the form of Exhibit F attached
hereto. The Escrow Fund shall be used as a source of funds to satisfy
indemnification claims by Purchaser, Gray and Licensee under this Section 11.
Upon final determination of a claim in favor of Gray, Purchaser and Licensee by
a court of competent jurisdiction or by mutual agreement of Gray, Purchaser,
Licensee and Seller, Gray, Purchaser and Licensee shall be entitled to the
amount of such claim from the Escrow Fund. On the first anniversary of the
Closing Date, the Escrow Fund shall be reduced to One Hundred Fifty Thousand
Dollars ($150,000), unless there are outstanding claims presented by Gray,
Purchaser or Licensee against the Escrow Fund, in which case, the Escrow Fund
shall be reduced to the sum which is One Hundred Fifty Thousand Dollars
($150,000) more than the pending claims of Gray, Purchaser and Licensee. All
claims by Gray, Purchaser and Licensee against the Escrow Fund must be made by
Gray, Purchaser or Licensee before the date which is four (4) years after the
Closing Date (the "Indemnity Termination Date"). On the Indemnity Termination
Date, the Indemnity Escrow Agent shall disburse to Seller the Indemnity Fund
together with all interest earned thereon less the amount of any claims made by
Gray, Purchaser or Licensee against the Escrow Fund prior to such date (the
"Claim Amount"). The Claim Amount shall be retained by the Indemnity Escrow
Agent in escrow until the underlying claim or claims related thereto have been
finally determined by a court of competent jurisdiction or by mutual agreement
of Gray, Purchaser, Licensee and Seller. Gray, Purchaser, Licensee and Seller
hereby agree to jointly direct the Indemnity Escrow Agent to disburse any
portion of the Escrow Fund to any party which is entitled thereto pursuant to
the terms hereof.
11.5 LIMITATION ON DAMAGES.
(a) Notwithstanding any provision of this Agreement to the contrary,
the KXII Parties' liability to Gray, Purchaser and Licensee for any breach
of any representation, warranty or other provision of this Agreement after
Closing, shall be limited to the Escrow Fund described in Section 11.4. In
no event, after the Closing hereof, shall the total amount of monetary
damages that Gray, Purchaser or Licensee may collect from the KXII Parties
as damages for one or more breaches by the KXII Parties under this
Agreement exceed said Escrow Fund.
(b) Notwithstanding any provision of this Agreement to the contrary,
Gray, Purchaser and Licensee's aggregate liability to the KXII Parties or
any of their Affiliates for any breach of any representation, warranty or
other provision of this Agreement after Closing shall be limited to
$300,000 until the first anniversary of the Closing Date and $150,000 for
the next three years. In no event, after the Closing hereof, shall the
total amount of monetary damages that the KXII Parties or any of their
Affiliates collect from Gray, Purchaser and Licensee under this Agreement
exceed $300,000 until the first anniversary of the Closing Date and
$150,000 for the next three years in the aggregate.
SECTION 12. CONDUCT OF BUSINESS PENDING CLOSING
12.1 CONDUCT OF BUSINESS PENDING CLOSING. Seller covenants, represents,
and warrants in favor of Gray, Purchaser and Licensee that, pending the Closing,
unless otherwise agreed to in writing by Gray:
(a) Seller will not sell, transfer, or otherwise dispose of, or enter
into any transaction, contract, or commitment for the sale or disposition
of all or any portion of
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the Assets, except in the ordinary course of business, none of which
transactions shall materially affect Purchaser, Licensee or the Assets from
and after the Closing Date.
(b) Seller will carry and continue in full force through the Closing
such fire and extended coverage, and theft, liability, and other insurance
in substantially the same form and amount as are currently in force.
(c) Seller will use its best efforts to preserve the business
organization and all equipment and records thereof in good order, to keep
available for Purchaser all of the present employees of Seller, and to
preserve for Purchaser the goodwill of suppliers, customers, advertisers,
and others having business relationships with Seller.
(d) Seller will maintain, repair and replace the Leased Property, Real
Property and the Tangible Personal Property in accordance with its
customary practices, in substantially the same condition and state of
repair as all such property is in on the date of this Agreement, ordinary
wear and tear excepted.
(e) Seller shall permit Gray, Purchaser and Licensee and their
representatives, independent accountants, and attorneys, reasonable access
during normal business hours to its properties, books, records, and other
information with respect to Seller as Gray, Purchaser or Licensee may
request, and to make copies of such books, records, and other documents
that Gray, Purchaser and Licensee consider necessary or appropriate for the
purposes of familiarizing themselves with Seller.
(f) Between the date of this Agreement and the Closing Date, Seller
will deliver to Gray information necessary to update the Schedules hereto
and the lists, documents, and other information furnished by Seller as
contemplated by this Agreement, and updated copies of new or changed
documents relating to or included as a part of such Schedules, in order
that all such Schedules, lists, documents, and other information and items
shall be complete and accurate in all respects as of the Closing Date.
(g) Except for written employment agreements in existence on the date
hereof and listed on Schedule 4.22, none of the KXII Parties or any of
their respective representatives has made or will make oral, written or
other representations to any employee of Seller or to any other Person
regarding the benefits, compensation or other terms or conditions of
employment that will be provided to such individuals after the Closing
Date. Whether or not a particular individual will or will not be hired by
Gray or Purchaser after the Closing Date constitutes a term or condition of
employment.
SECTION 13. TERMINATION.
13.1 TERMINATION. This Agreement may be terminated at any time prior to
the Closing Date in the following manner:
(a) by mutual written consent of Gray, Purchaser, Licensee and Seller;
(b) by Gray, Purchaser and Licensee, if any representation, warranty,
covenant or agreement of the KXII Parties, or by Seller if any
representation, warranty, covenant or agreement of Gray, Purchaser or
Licensee, contained herein (that materially affects the financial condition
or business of Gray or Seller) shall have been incorrect or breached and
shall not have been cured or otherwise resolved to the
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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 ten (10)
days in which to cure such default;
(c) by Gray, Purchaser or Licensee, if any condition to the
consummation of the transactions contemplated hereby which must be
fulfilled to its satisfaction has (in its good faith judgment) not been
fulfilled, or has become impossible to fulfill;
(d) without any action by Gray, the Purchaser, Licensee or Seller, if
the Closing Date has not occurred by December 31, 1999, unless the
Assignment Application jointly filed by Seller or other KXII Party and
Licensee is still pending before the FCC on that date, in which case this
Agreement shall not be terminated until May 31, 2000 pursuant to this
Section 13.1, but after which, either Seller or Gray may terminate the
Agreement;
(e) by Gray, Purchaser or Licensee pursuant to Section 7.9.
If the termination of this Agreement occurs without breach or default
of the KXII Parties or Gray, Licensee and Purchaser, then this Agreement
shall become wholly void and shall have no further force and effect, and
neither Gray, Licensee or Purchaser, on the one hand, nor any of the KXII
Parties, on the other, shall have any liability or obligation with respect
to each other. Upon such termination, the Earnest Money Escrow Agent shall
refund the Earnest Money to Gray within three (3) days after the date upon
which the termination becomes effective. If the termination occurs as a
result of breach or default of any of the KXII Parties, then Gray, Licensee
and Purchaser shall be entitled to seek specific performance of the KXII
Parties' obligation to effect the transaction contemplated herein in
accordance with the provisions hereof, or obtain the return of the Earnest
Money. If the termination occurs as a result of a breach or default by
Gray, Licensee or Purchaser, Seller may request the Earnest Money from the
Earnest Money Escrow Agent and retain the Earnest Money as liquidated
damages to compensate the KXII Parties for the damages resulting from such
breach or default. The parties agree that actual damages pursuant to a
breach of this Agreement prior to Closing would be impossible to measure.
Receipt of the Earnest Money shall be the sole and exclusive remedy that
the KXII Parties shall have in the event of such breach or default and
shall constitute a waiver of any and all other legal or equitable rights or
remedies that the KXII Parties may otherwise have as a result of Gray's,
Licensee's or Purchaser's breach or default, and that in consideration for
the receipt of the Earnest Money as liquidated damages, the KXII Parties
may not obtain any further legal or equitable relief, including specific
performance, to which it may otherwise have been entitled and none of Gray,
Licensee or Purchaser shall have any further liability to the KXII Parties
as a result of such breach or default or the non-occurrence of Closing. If
the Closing does not occur due to the nonfulfillment of any of the
conditions in Section 9 or for any other reason except Gray's, Licensee's
or Purchaser's material breach or default in the performance of any of its
obligations under this Agreement, the KXII Parties shall not be entitled to
the proceeds of the Earnest Money and, promptly after the termination of
this Agreement, the proceeds of the Earnest Money shall be returned to
Gray.
13.2 RISK OF LOSS. Seller assumes all risk of condemnation, destruction
or loss due to fire or other casualty from the date of this Agreement until the
Closing. If the condemnation, destruction or loss is such that the Business is
interrupted or curtailed or
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the Assets are Materially affected, then Purchaser shall have the right to
terminate this Agreement. If the condemnation, destruction or loss is such that
the Business is neither interrupted nor curtailed nor the Assets Materially
affected, or if the Business is interrupted or curtailed or the Assets are
Materially affected and Purchaser nevertheless foregoes the right to terminate
this Agreement, then all insurance or condemnation proceeds shall be assigned to
Purchaser and the Purchase Price shall be adjusted at the Closing to reflect
such condemnation, destruction or loss, to the extent that insurance or
condemnation proceeds paid or to be paid to Purchaser are not sufficient to
cover such destruction or Loss. If Purchaser and Seller are unable to agree upon
the amount of such adjustment, the dispute shall be resolved jointly by the
independent accounting firms then employed by Purchaser and Seller, and if said
accounting firms do not agree, an arbitrator shall be selected in the same
manner as provided in the Escrow Agreement.
SECTION 14. MISCELLANEOUS PROVISIONS
14.1 EXPENSES OF NEGOTIATION AND TRANSFER.
(a) Seller and Gray shall share equally in the payment of FCC filing
fees, and the Owners and Gray shall share equally in the payment of the
fees of the Neutral Auditors.
(b) Except as provided above, each party to this Agreement shall pay
its own expenses and other costs incidental to or resulting from this
Agreement, whether or not the transactions contemplated hereby are
consummated.
14.2 SCHEDULES. Any disclosure with respect to a Section or Schedule of
this Agreement shall be deemed to be disclosure for each other Sections or
Schedules of this Agreement with respect to which the substance of the
disclosure is clear and unambiguous on the face of the disclosure.
14.3 SURVIVAL. All of the covenants, agreements, representations, and
warranties made in this Agreement or made pursuant hereto shall survive the
Closing and the consummation of the transactions contemplated by this Agreement.
14.4 ENTIRE AGREEMENT; AMENDMENT; WAIVERS. This Agreement and the
documents referred to herein and to be delivered pursuant hereto constitute the
entire agreement of the parties pertaining to the subject matter hereof, and
supersede all prior and contemporaneous agreements understandings, negotiations,
and discussions of the parties, whether oral or written, and there are no
warranties, representations, or other agreements between the parties in
connection with the subject matter hereof, except specifically set forth herein.
No amendment, supplement, modification, waiver, or termination of this Agreement
shall be binding unless executed in writing by the party to be bound thereby. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision or breach of this Agreement, whether
or not similar, unless otherwise expressly provided.
14.5 HEADINGS. The descriptive headings of the Sections and Subsections
of this Agreement and the Table of Contents are for convenience only and do not
constitute a part of this Agreement.
14.6 FURTHER ASSURANCES. Each party agrees to execute and deliver such
further certificates, agreements, and other documents and it shall take such
other actions as the
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other party may reasonably request to consummate or implement the transactions
contemplated hereby or to evidence such events or matters.
14.7 SITUS AND CONSTRUCTION. This Agreement and any other agreements to
be made and entered into pursuant hereto shall be construed in accordance with
and governed by the laws of the State of Texas.
14.8 NOTICES. All notices under this Agreement shall be made in writing
and shall be delivered by U. S. Mail, overnight courier, facsimile, or other
means calculated to give prompt, actual notice to the recipient party, in the
following manner:
<TABLE>
<S> <C>
If to the KXII Parties: Milford N. Bostick, Chairman
KXII
4201 Texoma Parkway
Sherman, TX 75090
Phone:
Fax:
with a copy to: Kyle Deaver and John Lee Deaver
Deaver & Deaver
200 West Highway 6
Suite 501
Waco, TX 76712
Phone: 254-741-0400
Fax: 254-751-8369
If to Gray, Licensee or Robert S. Prather, Jr.
the Purchaser: Gray Communications Systems, Inc.
4370 Peachtree Road
Atlanta, Georgia 30319
Phone: 404-266-8333
Fax: 404-261-9067
with a copy to: Alston & Bird LLP
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attention: Stephen A. Opler
Phone: 404-881-7000
Fax: 404-881-4777
</TABLE>
14.9 BINDING EFFECT. All of the covenants, conditions, agreements, and
undertakings set forth in this Agreement shall extend to and be binding upon the
KXII Parties, Gray, Purchaser, Licensee and their respective successors and
assigns. No party to this Agreement may assign any of its rights or obligations
hereunder, except each of Licensee and Purchaser may assign its rights and
obligations to any other entity of which Gray owns a majority of the equity
interest.
14.10 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, and all of which
shall be deemed but one instrument. The Owners may sign separate original
signature pages for attachment to this Agreement, which shall be effective
against and binding upon each Owner as and when signed and delivered.
[SIGNATURES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, the KXII Parties, Gray, Purchaser and Licensee have
executed this Agreement individually or by their duly authorized officers or
general partners on and as of the date set forth above.
<TABLE>
<S> <C>
GRAY:
ATTEST: Gray Communications Systems, Inc.
/s/ JAMES C. RYAN By: /s/ ROBERT S. PRATHER, JR.
- ------------------------------------------------ -------------------------------------------
Title: Vice President and
Chief Financial Officer Title: Executive Vice President
PURCHASER:
ATTEST: Gray Communications of Texas-Sherman, Inc.
/s/ JAMES C. RYAN By: /s/ ROBERT S. PRATHER, JR.
- ------------------------------------------------ -------------------------------------------
Title: Vice President and
Chief Financial Officer Title: President
LICENSEE:
ATTEST: KXII Licensee Corp.
/s/ JAMES C. RYAN By: /s/ ROBERT S. PRATHER, JR.
- ------------------------------------------------ -------------------------------------------
Title: Vice President and
Chief Financial Officer Title: President
SELLER:
ATTEST: KXII Broadcasters, Ltd.
ATTEST: By: KIBI 1, Inc.
Its: General Partner
/s/ KYLE DEAVER By: /s/ RAY DEAVER
- ------------------------------------------------ -------------------------------------------
Title: Secretary Title: President
</TABLE>
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<TABLE>
<S> <C>
K-TWELVE:
K-Twelve, Ltd.
By: /s/ K-TWELVE MANAGEMENT LC
-------------------------------------------
ATTEST: Its: General Partner
/s/ JOHN L. DEAVER By: /s/ KYLE DEAVER
- ------------------------------------------------ -------------------------------------------
Title: Secretary Title: President
- ----------------------------------------------- -----------------------------------------------
KXII TELEVISION, LTD.:
KXII Television, Ltd.
By: /s/ KXII PROPERTIES, INC.
-------------------------------------------
ATTEST: Its: General Partner
/s/ KYLE DEAVER By: /s/ RAY DEAVER
- ------------------------------------------------ -------------------------------------------
Title: Secretary Title: President
- ----------------------------------------------- -----------------------------------------------
THE OWNERS:
ATTEST: KBI 1, Inc.
/s/ KYLE DEAVER By: /s/ RAY DEAVER
- ------------------------------------------------ -------------------------------------------
Title: Secretary Title: President
- ----------------------------------------------- -----------------------------------------------
ATTEST: KBI 2, Inc.
/s/ KYLE DEAVER By: /s/ RAY DEAVER
- ------------------------------------------------ -------------------------------------------
Title: Secretary Title: President
- ----------------------------------------------- -----------------------------------------------
</TABLE>
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<TABLE>
<S> <C>
ATTEST: KXII Properties, Inc.
/s/ KYLE DEAVER
- ------------------------------------------------
Kyle Deaver By: /s/ RAY DEAVER
-------------------------------------------
Title: Secretary Title: President
- ----------------------------------------- -----------------------------------------
/s/ RICH ADAMS
---------------------------------------- (seal)
Rich Adams
/s/ ELLEN DEAVER
---------------------------------------- (seal)
Ellen Deaver
/s/ JOHN DEAVER
---------------------------------------- (seal)
John Deaver
/s/ KYLE DEAVER
---------------------------------------- (seal)
Kyle Deaver
/s/ MARTHA PHIPPS
---------------------------------------- (seal)
Martha Phipps
</TABLE>
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 14-2-851 and 14-2-857 of the Georgia Business Corporation Code
(the "GBCC") permit, in general, a Georgia corporation to indemnify any person
made, or threatened to be made, a party to an action or proceeding by reason of
the fact that he or she is or was a director, officer, employee or agent of the
corporation, against any judgment, fines, amounts paid in settlement and
expenses, including attorney's fees actually and reasonably incurred as a result
of such action or proceeding, or any appeal therein, if such person acted in
good faith and in a manner he or she reasonably believed to be in or, not
opposed to the best interests of the corporation and, in criminal actions or
proceedings, in addition had no reasonable cause to believe that his or her
conduct was unlawful, provided a corporation may not indemnify a person in any
action brought by or in the right of the corporation. Sections 14-2-853 and
14-2-857 of the GBCC permit the corporation to pay in advance of a final
disposition of such action or proceeding the expenses incurred in defending such
action or proceeding upon receipt, in the case of a director or officer, of a
written affirmation of his or her good faith belief that he or she has met the
standard of conduct required by section 14-2-851 and of an undertaking by or on
behalf of the director or officer to repay such amount as, and to the extent,
required by statute.
The certificate of incorporation of Gray Communications Systems, Inc.
provides that Gray shall indemnify, to the fullest extent permitted by the GBCC,
all directors from and against any and all of the expenses, liabilities or other
matters referred to in, or covered by, the GBCC; provided, however, that to the
extent required by the GBCC, Gray shall not eliminate or limit the liability of
a director (1) for any appropriation, in violation of his duties, of any
business opportunity of Gray; (2) for acts of omissions which involve
intentional misconduct or a knowing violation of law; (3) for types of liability
set forth in Section 14-2-832 of the GBCC; or (4) for any transaction from which
the director derived an improper personal benefit.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following exhibits are filed herewith or incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1 Agreement and Plan of Acquisition, dated as of April 13,
1999, by and among Gray Communications Systems, Inc., Gray
Communications of Texas, Inc. and KWTX Broadcasting Company
(incorporated by reference to Appendix A to the proxy
statement/prospectus filed as part of this Registration
Statement).
2.2 Agreement and Plan of Acquisition, dated as of April 13,
1999, by and among Gray Communications Systems, Inc., Gray
Communications of Texas, Inc. and Brazos Broadcasting
Company (incorporated by reference to Appendix B to the
proxy statement/prospectus filed as part of this
Registration Statement).
</TABLE>
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<PAGE> 335
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.3 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. (incorporated by
reference to Appendix C to the proxy statement/prospectus
filed as part of this Registration Statement).
3.1 Articles of Incorporation of Gray Communications Systems,
Inc. (incorporated by reference to Exhibit 3.1 of Gray's
Annual Report on Form 10-K for the year ended December 31,
1996).
3.2 Bylaws of Gray Communications Systems, Inc., as amended
(incorporated by reference to Exhibit 3.2 of Gray's Annual
Report on Form 10-K for the year ended December 31, 1996).
3.3 Amendment to Bylaws of Gray Communications Systems, Inc.
(incorporated by reference to Gray's Annual Report on Form
10-K for the year ended December 31, 1998).
*5.1 Opinion of Heyman & Sizemore as to the Gray class B common
stock being registered hereby.
*8.1 Opinion of King & Spalding as to the federal tax
consequences of the acquisitions.
*10.1 Amended and Restated Gray 1992 Long-Term Incentive Plan.
*21.1 Subsidiaries of Gray Communications Systems, Inc.
23.1 Consent of King & Spalding (contained in Exhibit 8.1).
23.2 Consent of Heyman & Sizemore (contained in Exhibit 5.1).
*23.3 Consent of Ernst & Young LLP, independent auditors, with
respect to the financial statements and schedule of Gray
Communications Systems, Inc.
*23.4 Consent of Pattillo, Brown & Hill LLP, independent auditors,
with respect to certain financial statements of KWTX
Broadcasting Company.
*23.5 Consent of Pattillo, Brown & Hill LLP, independent auditors,
with respect to certain financial statements of Brazos
Broadcasting Company.
*23.6 Consent of Jaynes, Reitmeier, Boyd & Therrell PC,
independent auditors, with respect to certain financial
statements of KXII Broadcasting Company.
24.1 Power of Attorney (included on signature page of
Registration Statement).
*99.1 Form of Proxy to be used in connection with meeting of
shareholders of Gray Communications Systems, Inc.
</TABLE>
- -------------------------
* Filed herewith.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II -- "Valuation and Qualifying Accounts" and the independent
auditor's report thereon are incorporated herein by reference to such Schedule
II and report contained in Gray's Annual Report on Form 10-K for the year ended
December 31, 1998. All other schedules for which provision is made in the
applicable accounting regulation of
II-2
<PAGE> 336
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefor have been omitted.
(C) REPORTS, OPINIONS AND APPRAISALS
None.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
provided, however, that paragraphs (i) and (ii) do not apply if the
Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to
II-3
<PAGE> 337
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of the Registration Statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(d) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that such a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(f) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(g) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE> 338
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on the 16th day of August, 1999.
GRAY COMMUNICATIONS SYSTEMS, INC.
By: /s/ J. MACK ROBINSON
-----------------------------------
J. Mack Robinson
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert S. Prather, Jr. and James C. Ryan, and
each of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. MACK ROBINSON President, Chief Executive August 16, 1999
- ------------------------------------------------ Officer and Director
J. Mack Robinson (principal executive
officer)
/s/ JAMES C. RYAN Vice President -- Chief August 16, 1999
- ------------------------------------------------ Financial Officer
James C. Ryan (principal financial and
accounting officer)
/s/ WILLIAM E. MAYHER, III Chairman of the Board of August 16, 1999
- ------------------------------------------------ Directors
William E. Mayher, III
/s/ RICHARD L. BOGER Director August 16, 1999
- ------------------------------------------------
Richard L. Boger
/s/ HILTON M. HOWELL, JR. Director August 16, 1999
- ------------------------------------------------
Hilton M. Howell, Jr.
</TABLE>
II-5
<PAGE> 339
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ZELL MILLER Director August 16, 1999
- ------------------------------------------------
Zell Miller
/s/ HOWELL W. NEWTON Director August 16, 1999
- ------------------------------------------------
Howell W. Newton
/s/ HUGH NORTON Director August 16, 1999
- ------------------------------------------------
Hugh Norton
/s/ ROBERT S. PRATHER, JR. Director August 16, 1999
- ------------------------------------------------
Robert S. Prather, Jr.
/s/ HARRIETT J. ROBINSON Director August 16, 1999
- ------------------------------------------------
Harriett J. Robinson
</TABLE>
II-6
<PAGE> 340
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
2.1 -- Agreement and Plan of Acquisition, dated as of April 13,
1999, by and among Gray Communications Systems, Inc., Gray
Communications of Texas, Inc. and KWTX Broadcasting Company
(incorporated by reference to Appendix A to the proxy
statement/prospectus filed as part of this Registration
Statement).
2.2 -- Agreement and Plan of Acquisition, dated as of April 13,
1999, by and among Gray Communications Systems, Inc., Gray
Communications of Texas, Inc. and Brazos Broadcasting
Company (incorporated by reference to Appendix B to the
proxy statement/prospectus filed as part of this
Registration Statement).
2.3 -- 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. (incorporated by
reference to Appendix C to the proxy statement/prospectus
filed as part of this Registration Statement).
3.1 -- Articles of Incorporation of Gray Communications Systems,
Inc. (incorporated by reference to Exhibit 3.1 of Gray's
Annual Report on Form 10-K for the year ended December 31,
1996).
3.2 -- Bylaws of Gray Communications Systems, Inc. (incorporated by
reference to Exhibit 3.2 of Gray's Annual Report on Form
10-K for the year ended December 31, 1996).
3.3 -- Amendment to Bylaws of Gray Communications Systems, Inc.
(incorporated by reference to Gray's Annual Report of Form
10-K for the year ended December 31, 1998).
*5.1 -- Opinion of Heyman & Sizemore as to the Gray class B common
stock being registered hereby.
*8.1 -- Opinion of King & Spalding as to the federal tax
consequences of the acquisitions.
*10.1 -- Amended and Restated Gray 1992 Long-Term Incentive Plan.
*21.1 -- Subsidiaries of Gray Communications Systems, Inc.
23.1 -- Consent of King & Spalding (contained in Exhibit 8.1).
23.2 -- Consent of Heyman & Sizemore (contained in Exhibit 5.1).
*23.3 -- Consent of Ernst & Young LLP, independent auditors, with
respect to the financial statements and schedule of Gray
Communications Systems, Inc.
*23.4 -- Consent of Pattillo, Brown & Hill LLP, independent auditors,
with respect to certain financial statements of KWTX
Broadcasting Company.
*23.5 -- Consent of Pattillo, Brown & Hill LLP, independent auditors,
with respect to certain financial statements of Brazos
Broadcasting Company.
*23.6 -- Consent of Jaynes, Reitmeier, Boyd & Therrell PC,
independent auditors, with respect to certain financial
statements of KXII Broadcasting Company.
24.1 -- Power of Attorney (included on signature page of
Registration Statement).
*99.1 -- Form of Proxy to be used in connection with meeting of
shareholders of Gray Communications Systems, Inc.
</TABLE>
- ---------------
* Filed herewith.
II-7
<PAGE> 1
EXHIBIT 5.1
HEYMAN & SIZEMORE
ATTORNEYS AT LAW
2300 INTERNATIONAL TOWER
229 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30303-1608
TELEPHONE: (404) 521-2268
FACSIMILE: (404) 521-2838
August 12, 1999
NEAL H. RAY
Gray Communications Systems, Inc.
126 North Washington Street
Albany, Georgia 31701
Gentlemen:
We are acting as your counsel in connection with the Registration
Statement on Form S-4 with exhibits thereto (the "Registration Statement")
filed by Gray Communications Systems, Inc., a Georgia corporation (the
"Company"), under the Securities Act of 1933, as amended (the "Securities
Act"), relating to the registration under the Securities Act of shares (the
"Shares") of Class B Common Stock, no par value, of the Company to be issued in
connection with certain proposed acquisitions by the Company pursuant to the
provisions of an Agreement and Plan of Merger dated as of April 13, 1999 by and
among the Company, Gray Communications of Texas, Inc. and KWTX Broadcasting
Company and an Agreement and Plan of Merger dated as of April 13, 1999 by and
among the Company, Gray Communications of Texas, Inc. and Brazos Broadcasting
Company (the "Merger Agreements").
As such counsel, we have reviewed the Registration Statement, the Merger
Agreements and certain corporate proceedings. We have also examined and relied
upon originals or copies, certified or otherwise authenticated to our
satisfaction, of certain public officials and of representatives of the Company
and have made such investigations of law, and have discussed with
representatives of the Company and such other persons such questions of fact,
as we have deemed proper and necessary as a basis for rendering this opinion.
Based upon, and subject to, the foregoing, we are of the opinion that the
Shares are duly authorized and, upon issuance and sale of the Shares in
accordance with the terms of the Merger Agreements, will be legally issued,
fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm in the prospectus/proxy
statement contained in the Registration Statement in the section entitled
"Legal Matters". In giving such consent, we do not admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
Very truly yours,
HEYMAN & SIZEMORE
/s/ Neal H. Ray
-----------------------------------
Neal H. Ray
<PAGE> 1
EXHIBIT 8.1
[KING & SPALDING LETTERHEAD]
August 16, 1999
Gray Communications Systems, Inc.
Gray Communications of Texas, Inc.
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319
KWTX Broadcasting Company
200 West Highway 6
Suite 210
Waco, Texas 76712
Brazos Broadcasting Co.
200 West Highway 6
Suite 210
Waco, Texas 76712
Re: Certain U.S. Federal Income Tax Consequences of Proposed Mergers
Ladies and Gentlemen:
We have acted as special tax counsel to Gray Communications Systems,
Inc. ("Gray") and Gray Communications of Texas, Inc. ("Merger Sub") in
connection with (i) the preparation of the registration statement on Form S-4
(the "Registration Statement") relating to the proposed mergers (the "Mergers")
of KWTX Broadcasting Company ("KWTX") and Brazos Broadcasting Co. ("Brazos")
with and into Merger Sub pursuant to the Agreement and Plan of Merger, dated as
of April 13, 1999, by and among Gray, Merger Sub and KWTX (the "KWTX Merger
Agreement") and the Agreement and Plan of Merger, dated as of April 13, 1999, by
and among Gray, Merger Sub and Brazos (the "Brazos Merger Agreement," and
together with the KWTX Merger Agreement, the "Merger Agreements") and (ii) the
transactions contemplated by the Merger Agreements. You have requested our
opinion, in our capacity as special tax counsel to Gray and Merger Sub,
regarding the qualification of the Mergers as reorganizations under the Internal
Revenue Code of 1986, as amended (the "Code").
Capitalized terms used herein without definition have the meanings
specified in the Merger Agreements.
<PAGE> 2
Gray Communications Systems, Inc. et al.
August 16, 1999
Page 2
INFORMATION AND ASSUMPTIONS RELIED ON
In rendering the opinion expressed herein, we have examined such
documents as we have deemed appropriate, including the Merger Agreements and the
Registration Statement. In our examination of documents, we have assumed, with
your consent, that all documents submitted to us as photocopies or telecopies
faithfully reproduce the originals thereof, that such originals are authentic,
that all such documents have been or will be duly executed to the extent
required, and that all statements of fact set forth in such documents are
accurate. In addition, we have obtained such additional information and
representations as we have deemed relevant and necessary through consultation
with various representatives of Gray, Merger Sub, KWTX and Brazos, including
written certificates (the "Certificates") from officers of such corporations
verifying certain relevant facts that have been represented to us.
We have assumed, with your consent, that the statements contained in
the Certificates are true and correct on the date hereof and that any
representation made in any of the documents referred to herein "to the best of
the knowledge and belief" of any person (or with similar qualification) is true
and correct without such qualification. We have not attempted to verify such
representations independently.
With your consent, we also have assumed, solely for purposes of this
opinion letter, that Gray will not exercise the Cash Election Option described
in Section 3.1(3) of each of the Merger Agreements.
OPINION
Based upon the foregoing, it is our opinion that the KWTX Merger and
the Brazos Merger should constitute "reorganizations" within the meaning of
Section 368(a) of the Code. Accordingly, the KWTX and Brazos Mergers should
generally 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 the gain, if any, realized on
the exchange, but in an amount which does not exceed the
amount of cash received. Any such gain 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 Mergers. It is possible, however, that such gain will be
taxable as
<PAGE> 3
Gray Communications Systems, Inc. et al.
August 16, 1999
Page 3
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
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
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 Mergers 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 Mergers (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.
- 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 common stock was held for
more than one year at the time of the Mergers.
- No gain or loss will be recognized by Gray, Merger Sub, Gray's
shareholders, KWTX or Brazos in connection with the Mergers.
The opinion expressed herein is based upon existing statutory,
regulatory, and judicial authority, any of which may be changed at any time with
retroactive effect. In addition, our opinion is based solely on the documents
that we have examined, the additional information that we have obtained, and the
facts set out in the Certificates that we have assumed, with your consent, to be
true and correct. Our opinion cannot be relied upon if any of the facts
contained in such documents or in any such additional information is, or later
becomes, inaccurate or if any of the facts set out in the Certificates is, or
later becomes, inaccurate.
<PAGE> 4
Gray Communications Systems, Inc. et al.
August 16, 1999
Page 4
Our opinion is limited to the United States federal income tax matters
specifically covered thereby, and we have not been asked to address, nor have we
addressed, any other federal, state, local, or foreign income, estate, gift,
transfer, sales, use, or other tax consequences that may result from the Mergers
or any other transaction (including any transaction undertaken in connection
with the Mergers). We express no opinion regarding the tax consequences of the
Mergers to shareholders who are subject to special tax rules (including without
limitation the tax treatment of persons who acquired KWTX or Brazos stock
pursuant to the exercise of employee stock options or otherwise as
compensation).
This opinion letter has been requested by you, and is intended, to
satisfy the closing conditions set out in the Merger Agreements relating to the
receipt by you of a satisfactory opinion regarding the tax consequences of the
Mergers. In addition, we hereby consent to the filing of this opinion letter as
an Exhibit to the Registration Statement and to the reference to our firm in the
Registration Statement under the heading "Material Federal Income Tax
Consequences." In giving such consent, however, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Except as stated in this paragraph, this opinion letter may not be furnished to
or relied upon by any person or any entity for any purpose without our prior
written consent and may not be quoted in whole or in part or otherwise referred
to (other than in connection with the transactions contemplated by the Merger
Agreements).
Very truly yours,
/s/ King & Spalding
<PAGE> 1
EXHIBIT 10.1
1992 LONG TERM INCENTIVE PLAN
SECTION 1
ESTABLISHMENT AND PURPOSE
Gray Communications Systems, Inc. hereby establishes a long term incentive
plan to be named the Gray Communications Systems, Inc. 1992 Long Term Incentive
Plan, for certain employees of the Company and its subsidiaries. The purpose of
this Plan is to encourage certain employees of the Company, and of such
subsidiaries of the Company as the Committee administering the Plan designates,
to acquire Common Stock of the Company or to receive monetary payments based on
the value of such stock or based upon achieving certain goals on a basis
mutually advantageous to such employees and the Company and thus provide an
incentive for continuation of the efforts of employees for the success of the
Company and for continuity of employment.
SECTION 2
DEFINITIONS
Whenever used herein, the following terms shall have the respective
meanings set forth below:
(a) ACT means the Securities Exchange Act of 1934, as amended from time to
time.
(b) AWARD means any Stock Option, Stock Appreciation Right, Restricted Stock,
or Performance Award granted under the Plan.
(c) BASE PRICE means, in the case of an Option or a Stock Appreciation Right, a
price fixed by the Committee at which the Option or the Stock Appreciation
Right may be exercised, which in the case of an Incentive Stock Option or a
Stock Appreciation Right shall not be less than 100% of the Fair Market
Value of a share of Stock on the date of grant of such option or right.
(d) BOARD means the Board of Directors of the Company.
(e) CHANGE OF CONTROL is defined in Section 14.
(f) CODE means the Internal Revenue Code of 1986, as amended and in effect from
time to time.
(g) COMMITTEE means those members of the Compensation Committee of the Board
who are not eligible for participation in the Plan or any other plan of the
Company, except plans meeting the requirements of Rule
16b-3(c)(2)(i)(A)-(D) promulgated under the Act, and who during the one
year period prior to becoming a member of the Compensation Committee were
not eligible for selection as a Participant in the Plan or any other plan
of the Company, except plans meeting the requirements of Rule
16b-3(c)(2)(i)(A)-(D).
(h) COMPANY means Gray Communications Systems, Inc., a Georgia Corporation.
1
<PAGE> 2
(i) DISABILITY means permanent and total disability as defined in Section
22(e)(3) of the Code, as determined by the Committee in good faith, upon
receipt of and in reliance on sufficient competent medical advice.
(j) EMPLOYEE means a salaried employee (including officers and directors who
are also employees) of any member of the Group.
(k) FAIR MARKET VALUE means, for any particular date, (i) for any period during
which the Stock shall not be listed for trading on a national securities
exchange, but when prices for the Stock shall be reported by the National
Market System of the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"), the last transaction price per share as quoted
by National Market System of NASDAQ, (ii) for any period during which the
Stock shall not be listed for trading on a national securities exchange or
its price reported by the National Market System of NASDAQ, but when prices
for the Stock shall be reported by NASDAQ, the closing bid price as
reported by the NASDAQ, (iii) for any period during which the Stock shall
be listed for trading on a national securities exchange, the closing price
per share of stock on such exchange as of the close of such trading day or
(iv) the market price per share of Stock as determined by a nationally
recognized investment banking firm selected by the Board of Directors in
the event neither (i), (ii) or (iii) above shall be applicable. If Market
Price is to be determined as of a day when the securities markets are not
open, the Market Price on that day shall be the Market Price on the
preceding day when the markets were open.
(l) GROUP means the Company and every Subsidiary of the Company.
(m) OPTION means the right to purchase Stock at the Base Price for a specified
period of time. For purposes of the Plan, an Option may be an INCENTIVE
STOCK OPTION within the meaning of Section 422 of the code, a NONQUALIFIED
STOCK OPTION, or any other type of option encompassed by the Code.
(n) PARTICIPANT means any Employee designated by the Committee to participate
in the Plan.
(o) PERFORMANCE AWARD means a right to receive a payment equal to the value of
a unit or other measure as determined by the Committee based on performance
during a Performance Period.
(p) PERFORMANCE PERIOD means a period of not more than ten years established by
the Committee during which certain performance goals set by the Committee
are to be met.
(q) PERIOD OF RESTRICTION means the period during which a grant of shares of
Restricted Stock is restricted pursuant to Section 11 of the Plan.
(r) REPORTING PERSON means a person subject to Section 16 of the act.
(s) RESTRICTED STOCK means Stock granted pursuant to Section 11 of the Plan,
but a share of such Stock shall cease to be Restricted Stock when the
conditions to and limitations on transferability under Section 11 have been
satisfied or have expired, respectively.
(t) RETIREMENT (including NORMAL, EARLY, and DISABILITY Retirement) means
termination of employment with eligibility for normal, early or disability
retirement benefits under
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the terms of the Gray Communications Systems, Inc. Pension Plan, as amended
and in effect at the time of such termination of employment.
(u) STOCK means the authorized and unissued shares of the Company's Class A
Common stock and Class B Common Stock or shares of the Company's Class A
Common Stock or Class B Common Stock held in its treasury.
(v) STOCK APPRECIATION RIGHT or SAR means the right to receive a payment from
the Company equal to the excess of the Fair Market Value of a share of
Stock at the date of exercise over the Base Price. In the case of a Stock
Appreciation Right which is granted in conjunction with an Option, the Base
Price shall be the Option exercise price.
(w) SUBSIDIARY means a subsidiary corporation as defined in Section 425 of the
Code.
(x) WINDOW PERIOD means the third to the twelfth business day following the
release for publication of the Company's quarterly or annual earnings
report.
SECTION 3
ADMINISTRATION
The Plan will be administered by the Committee. The determinations of the
Committee shall be made in accordance with their judgment as to the best
interests of the Company and its stockholders and in accordance with the purpose
of the Plan. A majority of members of the Committee shall constitute a quorum,
and all determinations of the Committee shall be made by a majority of its
members. Any determination of the Committee under the Plan may be made without
notice or meeting of the Committee, by a writing signed by a majority of the
Committee members. Determinations, interpretations, or other actions made or
taken by the Committee pursuant to the provisions of the Plan shall be final and
binding and conclusive for all purposes and upon all persons whomsoever.
SECTION 4
SHARES RESERVED UNDER THE PLAN
THERE IS HEREBY RESERVED FOR ISSUANCE UNDER THE PLAN AN AGGREGATE OF
1,900,000 SHARES OF STOCKS, OF WHICH 300,000 SHARES SHALL BE THE COMPANY'S CLASS
A COMMON STOCK AND 1,600,000 SHARES SHALL BE THE COMPANY'S CLASS B COMMON STOCK.
No more than 100,000 of these shares may be issued as Restricted Stock. Stock
underlying outstanding Options or Performance Awards will be counted against the
Plan maximum while such options or awards are outstanding. Shares underlying
expired, canceled or forfeited options or awards (except Restricted Stock) may
be added back to the Plan maximum. When the exercise price of stock options is
paid by delivery of shares of Stock, the number of shares available for issuance
under the Plan shall continue to be reduced by the gross (rather than the net)
number of shares issued pursuant to such exercise, regardless of the number of
shares surrendered in payment. Restricted Stock issued pursuant to the Plan will
be counted against the Plan maximum while outstanding even while subject to
restrictions.
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SECTION 5
PARTICIPANTS
Participants will consist of such officers and key employees of the Company
or any designated subsidiary as the Committee in its sole discretion determines
have a major impact on the success and future growth and profitability of the
Company. Designation of a Participant in any year shall not require the
Committee to designate such person to receive an Award in any other year or to
receive the same type or amount of Award as granted to the Participant in any
other year or as granted to any other Participant in any year. The Committee
shall consider such factors as it deems pertinent in selecting Participants and
in determining the type and amount of their respective Awards.
SECTION 6
TYPES OF AWARDS
The following Awards may be granted under the Plan: (a) Incentive Stock
Options; (b) Nonqualified Stock Options; (c) Stock Appreciation Rights; (d)
Restricted Stock; and (e) Performance Awards; all as described below. Except as
specifically limited herein, the Committee shall have complete discretion in
determining the type and number of Awards to be granted to any Participant, and
the terms and conditions which attach to each Award, which terms and conditions
need not be uniform as between different participants. All Awards shall be in
writing.
SECTION 7
DATE OF GRANTING AWARDS
All Awards granted under the Plan shall be granted as of an Award Date.
Promptly after each Award Date, the Company shall notify the Participant of the
grant of the Award, and shall hand deliver or mail to the Participant an Award
Agreement, duly executed by and on behalf of the Company, with the request that
the Participant execute and return the Agreement within thirty days after the
date of mailing or delivery by the Company of the Agreement to the Participant.
If the Participant shall fail to execute and return the written Award Agreement
within said thirty day period, his or her Award shall be automatically
terminated, except that if the Participant dies within said thirty day period
such Option Agreement shall be effective notwithstanding the fact that it has
not been signed prior to death.
SECTION 8
INCENTIVE STOCK OPTIONS
Incentive Stock Options shall consist of options to purchase shares of
Stock at purchase prices not less than 100% of the Fair Market Value of the
shares on the date the option is granted. Said purchase price may be paid by
check or, in the discretion of the Committee, by the delivery of shares of Stock
then owned by the Participant. Incentive Stock Options will be exercisable not
earlier than six months and not later than ten years after the date they are
granted and, except as provided below, will terminate not later than three
months after termination of employment for any reason other than death or
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disability. In the event termination of employment occurs as a result of death
or Disability, such an option will be exercisable for 12 months after such
termination. If the optionee dies within 12 months after termination of
employment by reason of Disability, then the period of exercise following death
shall be the remainder of the 12-month period, or three months, whichever is
longer. If the optionee dies within three months after termination of employment
for any other reason, then the period of exercise following death shall be three
months. However, in no event shall any Incentive Stock Option be exercised more
than ten years after its grant. Leaves of absence granted by the Company for
military service, illness, and transfers of employment between the Company and
any subsidiary thereof shall not constitute termination of employment. The
aggregate Fair Market Value (determined as of the time an option is granted) of
the stock with respect to which an Incentive Stock Option is exercisable for the
first time during any calendar year (under all option plans of the Company and
its subsidiary corporations) shall not exceed $100,000 per participant.
SECTION 9
NONQUALIFIED STOCK OPTIONS
Nonqualified Stock Options shall consist of nonqualified options to
purchase shares of Stock at purchase prices determined by the Committee. The
purchase price may be paid by check or, in the discretion of the Committee, by
the delivery of shares of Stock then owned by the Participant. Nonqualified
Stock Options will be exercisable not earlier than six months and not later than
ten years after the date they are granted, and will terminate not later than
three months after termination of employment for any reason other than death,
Retirement or Disability. In the event termination of employment occurs as a
result of death, Retirement or Disability, such an option will be exercisable
for 12 months after such termination. If the optionee dies within 12 months
after termination of employment by Retirement or Disability, then the period of
exercise following death shall be three months. However, in no event shall any
option be exercised more than ten years after its grant. Leaves of absence
granted by the Company for military service, illness, and transfers of
employment between the Company and any subsidiary thereof shall not constitute
termination of employment. The Committee shall have the right to determine at
the time the option is granted whether shares issued upon exercise of a
Nonqualified Stock Option shall be subject to restrictions, and if so, the
nature of the restrictions.
SECTION 10
STOCK APPRECIATION RIGHTS
Stock Appreciation Rights may be granted which, at the discretion of the
Committee, may be exercised (1) in lieu of exercise of an Option, (2) in
conjunction with the exercise of an Option, (3) upon lapse of an Option, (4)
independent of an Option, or (5) each of the above in connection with a
previously awarded Option under the Plan. SARs issued to Reporting Persons shall
be held for at least six months prior to exercise. If the Option referred to in
(1), (2) or (3) above qualified as an Incentive Stock Option pursuant to Section
422 of the Code, the related SAR shall comply with the applicable provisions of
the Code and the regulations issued thereunder. At the time of grant, the
Committee may establish, in its sole discretion, a maximum amount per share
which will be payable upon exercise of a SAR, and may impose such conditions on
exercise of an SAR (including, without limitation, the right of the Committee to
limit the time of exercise to specified
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<PAGE> 6
periods) as may be required to satisfy the requirements of Rule 16b-3 (or any
successor rule), under the Act. At the discretion of the Committee, payment for
SARs may be made in cash or Stock, or in a combination thereof, provided,
however, that payment may be made in cash for SARs exercised by Reporting
Persons only upon the condition that such exercise is made during the Window
Period. The following will apply upon exercise of an SAR:
(a) Exercise of SARs in Lieu of Exercise of Options. SARs exercisable
in lieu of Options may be exercised for all or part of the shares of Stock
subject to the related Option upon the exercise of the right to exercise an
equivalent number of Options. A SAR may be exercised only with respect to
the shares of stock for which its related Option is then exercisable. Upon
exercise of a SAR in lieu of exercise of an Option, shares of Stock equal
to the number of SARs exercised shall no longer be available for Awards
under the Plan, provided that if SARs are exercised for cash, shares of
stock equal to the number of SARs exercised shall be restored to the number
of shares available for issuance under the Plan.
(b) Exercise of SARs in Conjunction with Exercise of Options. SARs
exercisable in conjunction with the exercise of Options shall be deemed to
be exercised upon the exercise of the related Options, and shares of Stock
equal to the sum of the number of shares acquired by exercise of the Option
plus the number of SARs exercised shall no longer be available for Awards
under the Plan, provided that if SARs are exercised for cash, shares of
stock equal to the number of SARs exercised shall be restored to the number
of shares available for issuance under the Plan.
(c) Exercise of SARs Upon Lapse of Options. SARs exercisable upon
lapse of Options shall be deemed to have been exercised upon the lapse of
the related Options as to the number of shares of Stock subject to the
Options. Shares of Stock equal to the number of SARs deemed to have been
exercised shall not be available again for Awards under the Plan, provided
that if SARs are exercised for cash, shares of stock equal to the number of
SARs exercised shall be restored to the number of shares available for
issuance under the Plan.
(d) Exercise of SARs Independent of Options. SARs exercisable
independent of Options may be exercised upon whatever terms and conditions
the Committee, in its sole discretion, imposes upon the SARs, and shares of
Stock equal to the number of SARs exercised shall no longer be available
for Awards under the Plan, provided that if SARs are exercised for cash,
shares of stock equal to the number of SARs exercised shall be restored to
the number of shares available for issuance under the Plan.
SECTION 11
RESTRICTED STOCK
Restricted Stock shall consist of Stock issued or transferred under the
Plan (other than upon exercise of Stock Options or as Performance Awards) at any
purchase price less than the Fair Market Value thereof on the date of issuance
or transfer, or as a bonus. In the case of any Restricted Stock:
(a) The purchase price, if any, will be determined by the Committee.
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(b) Restricted Stock may be subject to (i) restrictions on the sale or
other disposition thereof, provided, however, that Restricted Stock granted
to a Reporting Person shall, in addition to any other restrictions thereon,
not be sold or disposed of for not less than six (6) months following the
date of grant; (ii) rights of the Company to reacquire such Restricted
Stock at the purchase price, if any, originally paid therefor upon
termination of the employee's employment within specified periods, (iii)
representation by the employee that he or she intends to acquire Restricted
Stock for investment and not for resale, and (iv) such other restrictions,
conditions and terms as the Committee deems appropriate.
(c) The Participant shall be entitled to all dividends paid with
respect to Restricted Stock during the Period of Restriction and shall not
be required to return any such dividends to the company in the event of the
forfeiture of the Restricted Stock.
(d) The Participant shall be entitled to vote the Restricted Stock
during the Period of Restriction.
(e) The Committee shall determine whether Restricted Stock is to be
delivered to the Participant with an appropriate legend imprinted on the
certificate or if the shares are to be deposited in escrow pending removal
of the restrictions.
SECTION 12
PERFORMANCE AWARDS
Performance Awards shall consist of Stock, stock units or a combination
thereof, to be issued without any payment therefor, in the event that certain
performance goals established by the Committee are achieved during the
Performance Period. The goals established by the Committee may include return on
average total capital employed, earnings per share, return on stockholders'
equity and such other goals as may be established by the Committee. In the event
the minimum Corporate goal is not achieved at the conclusion of the Performance
Period, no payment shall be made to the Participant. Actual payment of the award
earned shall be in cash or in Stock or in a combination of both, in a single sum
or in periodic installments, all as the Committee in its sole discretion
determines. If Stock is used, the Participant shall not have the right to vote
and receive dividends until the goals are achieved and the actual shares are
issued. In the event a Reporting Person received a Performance Award which
includes Stock, such stock shall not be sold or disposed of for six (6) months
following the date of issuance pursuant to such award. In the event an Award is
paid in cash instead of Stock, the number of shares reserved for issuance
hereunder and the number of shares which may be granted in the form of
Restricted Stock or Performance Awards shall be reduced as if shares had been
issued.
SECTION 13
ADJUSTMENT PROVISIONS
(a) If the Company shall at any time change the number of issued
shares of Stock without new consideration to the Company (such as by stock
dividends or stock splits), the total number of shares reserved for
issuance under this Plan, the number
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<PAGE> 8
of shares which may be granted in the form of Restricted Stock or
Performance Awards, the maximum number of shares available to a particular
Participant, and the number of shares covered by each outstanding Award,
shall be adjusted so that the aggregate consideration payable to the
Company, if any, and the value of each such Award shall not be changed.
Awards may also contain provisions for their continuation or for other
equitable adjustments after changes in the Stock resulting from
reorganization, sale, merger, consolidation, issuance of stock rights or
warrants, or similar occurrence.
(b) Notwithstanding any other provision of this Plan, and without
affecting the number of shares reserved or available hereunder, the Board
of Directors may authorize the equitable adjustment of benefits in
connection with any merger, consolidation, acquisition of property or
stock, or reorganization upon such terms and conditions as it may deem
appropriate.
SECTION 14
CHANGE OF CONTROL
Notwithstanding any other provision of this Plan, if the terms of an
agreement under which the Committee has granted an Award under this Plan shall
so provide, upon a Change of Control outstanding Awards shall become immediately
and fully exercisable or payable according to the following terms:
(a) 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.
(b) During the six month and seven day period from and after a Change
of Control (the "Exercise Period"), unless the Committee shall determine
otherwise at the time of grant, a Participant shall have the right, in lieu
of the payment of the Base Price of the shares of Stock being purchased
under an Option and by giving notice to the Committee, to elect (within the
Exercise Period and, in the case of Reporting Persons, only within a Window
Period within such Exercise Period) in lieu of exercise thereof, provided
that if such Option is held by a Reporting Person more than six (6) months
have elapsed from the grant thereof to surrender all or part of the Option
to the Company and to receive in cash within 30 days of such notice, an
amount equal to the amount by which the Change in Control Price per share
of Stock on the date of such elections shall exceed the Base Price per
share of Stock under the Option multiplied by the number of shares of Stock
granted under the Option as to which the right granted under this
subsection 14(b) shall have been exercised. Change in Control Price shall
mean the higher of (i) (A) for any period during which the Stock shall not
be listed for trading on a national securities exchange, but when prices
for the Stock shall be reported by the National Market System of the Nasdaq
Market, the highest price per share as quoted by National Market System of
Nasdaq Market, (B) for any period during which the Stock shall not be
listed for trading on a national securities exchange or its price reported
by the National Market System of NASDAQ, but when prices for the Stock
shall be reported by NASDAQ, the highest average of the high bid and low
asked prices as reported by the NASDAQ, (C) for any period during which the
Stock shall be listed for trading on a national securities exchange, the
highest closing price per share of Stock on such
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exchange as of the close of such trading day or (D) the highest market
price per share of Stock as determined by a nationally recognized
investment banking firm selected by the Board of Directors in the event
neither (A), (B) or (C) above shall be applicable in each case during the
60 day period prior to and ending on the date of the Change of Control and
(ii) if the Change of Control is the result of a transaction or series of
transactions described in subsections 14(f)(i) or (iii) hereof, the highest
price per share of the Stock paid in such transaction or series of
transaction (which in the case of paragraph (i) shall be the highest price
per share of the Stock as reflected in a Schedule 13D by the person having
made the acquisition); provided, however, that with respect to any
Incentive Stock Option, the Change of Control Price shall not exceed the
market price of a share of Stock (to the extent required pursuant to
Section 422 of the Internal Revenue Code of 1986, as amended) on the date
of surrender thereof.
(c) Any outstanding and unexercised Stock Appreciation Rights (other
than such rights which arise pursuant to subsection 14(b) hereof) shall
become exercisable as follows:
(i) Any SAR described in subsections 10(a) or (b) shall continue to
be treated as provided in those subsections, except that SARs exercised
by Reporting Persons for cash shall be exercised only during a Window
Period, and shall have been held for six months prior to exercise.
(ii) Any SAR described in subsection 10(c) shall be deemed to have
been exercised if and when the Participant advises the Committee in
writing that he or she elects to have options with respect to which the
SAR was granted treated as having lapsed, except that SARs exercised by
Reporting Persons for cash shall be exercised only during a Window
Period, and shall have been held for six months prior to exercise.
(iii) Any SAR described in Subsection 10(d) shall be exercisable
immediately, without regard to limitations imposed; upon such exercise
which are related to the passage of time, except that SARs exercised by
Reporting Persons for cash shall be exercised only during a Window
Period, and shall have been held for six months prior to exercise.
(d) Any Restricted Stock granted pursuant to Section 11 shall become
immediately and fully transferable, and the Committee shall be deemed to
have exercised its discretion to waive any automatic forfeitures provided
with respect to such Restricted Stock. Any shares held in escrow shall be
delivered to the Participant, and the share certificates shall not contain
the legend specified by subsection 11(e). Reporting Persons shall not
dispose of any Restricted Stock until six (6) months following the date of
grant of such Restricted Stock.
(e) Any Performance Award granted pursuant to Section 12 which has not
expired or been forfeited shall be deemed to have been earned on the
assumption that all performance goals have been achieved to the fullest
extent scheduled in the Award. All payment shall be made promptly in a lump
sum, notwithstanding any other provision for installment or deferred
payment prescribed in the Award.
(f) For purposes of this Plan, Change of Control shall mean a change
in control of the Company of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Act; provided
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that, for purposes of this Agreement, a Change in Control shall be deemed
to have occurred if (i) any Person (other than the Company) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly
or indirectly, of securities of the Company which represent 20% or more of
the combined voting power of the Company's then outstanding securities;
(ii) during any period of two (2) 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, or the
nomination for election, by the Company's stockholders, of each new
director is approved by a vote of at least two-thirds ( 2/3) of the
directors then still in office who were directors at the beginning of the
period but excluding any individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest (as
such term is used in Rule 14a-11 of Regulation 14A promulgated under the
Act) or other actual or threatened solicitation of proxies or consents by
or on behalf of a person other than the Board; (iii) there is consummated
any consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of the
Company's Common Stock are converted into cash, securities, or other
property, other than a merger of the Company in which the holders of the
Company's Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger; (iv) there is consummated any consolidation
or merger of the Company in which the Company is the continuing or
surviving corporation in which the holders of the Company's Common Stock
immediately prior to the merger do not own seventy percent (70%) or more of
the stock of the surviving corporation immediately after the merger; (v)
there is consummated any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or substantially
all, of the assets of the Company, or (vi) the stockholders of the Company
approve any plan or proposal for the liquidation or dissolution of the
Company.
SECTION 15
NONTRANSFERABILITY
Each Award granted under the Plan to a Participant shall not be
transferable other wise than by will or the laws of descent and distribution or
pursuant to a Qualified Domestic Relations Order (as defined in Section
206(d)(3) of the Employee Retirement Income Security Act of 1974, as amended,
and the rules promulgated thereunder), and shall be exercisable, during the
Participant's lifetime, only by the Participant. In the event of the death of a
Participant, exercise of payment shall be made only:
(a) By or to the executor or administrator of the estate of the
deceased Participant or the person or persons to whom the deceased
Participant's rights under the Award shall pass by will or the laws of
descent and distribution; and
(b) To the extent that the deceased Participant was entitled thereto
at the date of his death, provided, however, that any otherwise applicable
six-month holding period shall not be required for exercise by or payment
to an executor or administrator of the estate of a deceased Reporting
Person.
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SECTION 16
TAXES
The Company shall be entitled to withhold the amount of any tax
attributable to any amounts payable or shares deliverable under the Plan after
giving the person entitled to receive such payment or delivery notice as far in
advance as practicable, and the Company may defer making payment or delivery as
to any Award if any such tax is payable until indemnified to its satisfaction.
The person entitled to any such delivery may, by notice to the Company at the
time the requirement for such delivery is first established, elect to have such
withholding satisfied by a reduction of the number of shares otherwise so
deliverable (a "Stock Withholding Election"), such reduction to be calculated
based on a closing market price on the date of such notice. Reporting Persons
may make a Stock Withholding Election either (i) during a Window Period, as to
an Option or SAR exercise during such Window Period, or (ii) six months in
advance of an Option or SAR exercise, which exercise need not occur during a
Window Period, and which election may not be suspended or revoked except by
another such election which shall not become effective until six months after it
is made.
SECTION 17
NO RIGHT TO EMPLOYMENT
A Participant's right, if any, to continue to serve the Company and its
subsidiaries as an officer, employee, or otherwise, shall not be enlarged or
otherwise affected by his or her designation as a Participant under the Plan.
SECTION 18
DURATION, AMENDMENT AND TERMINATION
No Award shall be granted more than ten years after the effective date of
this Plan; provided, however, that the terms and conditions applicable to any
Award granted within such period may thereafter be amended or modified by mutual
agreement between the Company and the Participant or such other person as may
then have an interest therein. Also, by mutual agreement between the Company and
a Participant hereunder, Stock Options or other Awards may be granted to such
Participant in substitution and exchange for, and in cancellation of, any Awards
previously granted such Participant under this Plan. To the extent that any
Stock Options or other Awards which may be granted within the terms of the Plan
would qualify under present or future laws for tax treatment that is beneficial
to a recipient, then any such beneficial treatment shall be considered within
the intent, purpose and operational purview of the Plan and the discretion of
the Committee and to the extent that any such Stock Options or other Awards
would so qualify within the terms of the Plan, the Committee shall have full and
complete authority to grant Stock Options or other Awards that so qualify
(including the authority to grant, simultaneously or otherwise, Stock Options or
other Awards which do not so qualify) and to prescribe the terms and conditions
(which need not be identical as among recipients) in respect to the grant or
exercise of any such Stock Option or other Awards under the Plan. The Board of
Directors may amend the Plan from time to time or terminate the Plan at any
time. However, no action authorized by this paragraph shall reduce the amount of
any existing Award or change the terms and conditions thereof without the
Participant's consent. No
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amendment of the Plan, shall, without approval of the stockholders of the
Company (a) increase the total number of shares which may be issued under the
Plan or increase the amount of type of Awards that may be granted under the
Plan; (b) change the minimum purchase price, if any, of shares of Common Stock
which may be made subject to Awards under the Plan; or (c) modify the
requirements as to eligibility for Awards under the Plan.
SECTION 19
STOCKHOLDER APPROVAL
The Plan shall be effective on July 1, 1992, and shall be submitted for
approval by the stockholders of the Company at the Annual Meeting of
Stockholders in 1992. If the stockholders do not approve the Plan, it, and any
action taken hereunder, shall be void and of no effect.
12
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EXHIBIT 21.1
SUBSIDIARIES OF
GRAY COMMUNICATIONS SYSTEMS, INC.
GEORGIA SUBSIDIARIES
The Albany Herald Publishing Company, Inc.
The Rockdale Citizen Publishing Company
Gray Real Estate and Development Company
Gray Kentucky Television, Inc.
The Southwest Georgia Shopper, Inc.
WRDW-TV, Inc.
Gray Transportation Company, Inc.
WVLT-TV, Inc.
WITN-TV, Inc.
Gray Florida Holdings, Inc.
WEAU-TV, Inc.
Gray Communications of Indiana, Inc.
Gray Communications of Texas, Inc.
Gray Communications of Texas-Sherman, Inc.
ARKANSAS SUBSIDIARY
KTVE, Inc.
LOUISIANA SUBSIDIARY
LYNQX Communications, Inc.
<PAGE> 2
DELAWARE CORPORATE SUBSIDIARIES
Gray MidAmerica Holdings, Inc.
KOLN/KGIN, Inc.
KWTX-KBTX LP Corp.
KXII LP Corp.
Gray Television Management, Inc.
KOLN/KGIN License, Inc.
WVLT Licensee Corp.
WJHG Licensee Corp.
WKYT Licensee Corp.
WRDW Licensee Corp.
WYMT Licensee Corp.
Porta-Phone Paging Licensee Corp.
WCTV Licensee Corp.
WITN Licensee Corp.
WEAU Licensee Corp.
KWTX-KBTX Licensee Corp.
KXII Licensee Corp.
DELAWARE LIMITED PARTNERSHIP SUBSIDIARIES
KWTX-KBTX L.P.
KXII L.P.
-2-
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4 No. 333- ) and related Proxy
Statement/Prospectus of Gray Communications Systems, Inc. for the registration
of 7,926,000 shares of its common stock and to the incorporation by reference
therein of our report dated January 26, 1999, with respect to the consolidated
financial statements and schedule of Gray Communications Systems, Inc. included
in its Annual Report (Form 10-K) for the year ended December 31, 1998, filed
with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Atlanta, Georgia
August 16, 1999
<PAGE> 1
EXHIBIT 23.4
[PATTILLO, BROWN & HILL, L.L.P. LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the reference of our firm under the caption "Experts" and to the
use of our report dated March 24, 1999 with respect to the financial statements
of KWTX Broadcasting Co., included in the Registration Statement (Form S-4) and
related Proxy Statement/Prospectus of Gray Communications Systems, Inc. dated
Monday, August 16, 1999.
/s/ Pattillo, Brown & Hill, L.L.P.
Pattillo, Brown & Hill, L.L.P.
Waco, Texas
August 16, 1999
<PAGE> 1
EXHIBIT 23.5
[PATTILLO, BROWN & HILL, L.L.P. LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the reference of our firm under the caption "Experts" and to the
use of our report dated March 24, 1999 with respect to the financial statements
of Brazos Broadcasting Co., included in the Registration Statement (Form S-4)
and related Proxy Statement/Prospectus of Gray Communications Systems, Inc.
dated Monday, August 16, 1999.
/s/ Pattillo, Brown & Hill, L.L.P.
Pattillo, Brown & Hill, L.L.P.
Waco, Texas
August 16, 1999
<PAGE> 1
EXHIBIT 23.6
Consent of Independent Accountants
KXII Broadcasters, Inc.
KXII Television, Ltd.
We consent to the reference to our firm under the captions "Selected Combined
Financial Information of KXII" and "Experts" and to the use of our report with
respect to the combined financial statements of KXII Broadcasters, Inc. and KXII
Television, Ltd. dated April 9, 1999, except for Notes 10 and 12, which are as
of April 19, 1999, in the Registration Statement on Form S-4 and related Proxy
Statement/Prospectus of Gray Communications Systems, Inc.
/s/ Jaynes, Reitmeier, Boyd & Therrell, P.C.
-------------------------------------------
Waco, Texas
August 16, 1999
<PAGE> 1
EXHIBIT 99.1
PROXY - GRAY COMMUNICATIONS SYSTEMS, INC.
ANNUAL MEETING OF SHAREHOLDERS - SEPTEMBER 23, 1999
The undersigned hereby appoints William E. Mayer, III and J. Mack Robinson,
and each of them with full power to appoint his substitute, attorneys and
proxies to represent the undersigned shareholder and to vote and act with
respect to all shares that the undersigned shareholder would be entitled to vote
on all matters which come before the annual meeting of shareholders of Gray
Communications Systems, Inc. referred to above and at any adjournment of that
meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. IF THIS PROXY
IS PROPERLY EXECUTED, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS
SPECIFIED. IF NO SPECIFICATIONS ARE MADE, THE SHARES WILL BE VOTED FOR EACH OF
THE PROPOSALS ON THIS PROXY. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED
IN THE DISCRETION OF THE PROXY HOLDERS ON ANY OTHER MATTER, INCLUDING
SUBSTITUTION OF DIRECTOR NOMINEES, WHICH MAY COME BEFORE THE MEETING.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE.)
Dear Shareholder
Gray Communications Systems, Inc. encourages you to take advantage of new and
convenient ways by which you can vote your shares. You can vote your shares
electronically through the Internet or the telephone. This eliminates the need
to return the proxy card.
To vote your shares electronically you must use the control number. The control
number is the series of numbers printed in the box above, just below the
perforation. This control number must be used to access the system.
1. To vote over the Internet:
- Log on to the Internet and go to the web site HTTP://WWW.EPROXY.COM/GCS
2. To vote over the telephone:
- - On a touch-tone telephone call 1-800-840-1208 24 hours a day, 7 days a week.
Your electronic vote authorizes the named proxies in the same manner as if you
marked, signed, dated and returned the proxy card.
If you choose to vote your shares electronically, there is no need for you to
mail back your proxy card.
<PAGE> 2
YOUR VOTE IS IMPORTANT. THANK YOU FOR VOTING.
1. To approve the issuance of shares of Gray class B common stock in connection
with the proposed acquisitions of KWTX and Brazos.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Election of Directors
<TABLE>
<CAPTION>
FOR WITHHELD
<C> <C> <S>
[ ] [ ] Nominees: Richard L. Boger, Hilton H. Howell, Jr.,
William E. Mayher, III, Zell Miller, Howell
W. Newton, Hugh Norton, Robert S. Prather,
Jr., Harriett J. Robinson, and J. Mack
Robinson
</TABLE>
To withhold authority to vote for any individual nominee(s) with his or their
names in the following space:
- --------------------------------------------------------------------------------
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.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. To confirm the appointment of Ernst & Young LLP as independent auditors of
Gray for the fiscal year ending December 31, 1999.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
SIGNATURE(S)
- ---------------------------------------- DATE -----------------, 1999
NOTE: Please sign exactly as your name appears on this proxy. If signed for
estates, trusts or corporations, title or capacity should be stated. If
shares are held jointly, each holder should sign.
