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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A-1
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________.
COMMISSION FILE NUMBER 1-13796
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GRAY COMMUNICATIONS SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
GEORGIA 58-0285030
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
126 N. WASHINGTON ST. 31701
ALBANY, GA (Zip code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (912) 888-9390
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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CLASS A COMMON STOCK (NO PAR VALUE) NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 8, 1996: CLASS A COMMON STOCK; NO PAR VALUE - $39,391,000
The number of shares outstanding of the registrant's classes of common stock as
of March 8, 1996: CLASS A COMMON STOCK; NO PAR VALUE - 4,453,429, CLASS B COMMON
STOCK; NO PAR VALUE - 0
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
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ITEM 1. BUSINESS
AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS
GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET
CONSUMMATED THE PHIPPS ACQUISITION OR THE KTVE SALE (EACH AS DEFINED) AND THERE
CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION OR THE KTVE SALE WILL BE
CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND
UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS
INCLUDED IN, AND KTVE (AS DEFINED) IS EXCLUDED FROM, THE DESCRIPTION OF THE
COMPANY. UNLESS OTHERWISE INDICATED, THE INFORMATION HEREIN HAS BEEN ADJUSTED TO
GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE COMPANY'S CLASS A COMMON STOCK, NO PAR
VALUE (THE "CLASS A COMMON STOCK"), EFFECTED IN THE FORM OF A STOCK DIVIDEND
DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK,
IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED
FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS
PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN").
GENERAL
The Company owns and operates seven network-affiliated television stations
in medium-size markets in the southeastern United States, six of which are
ranked number one in their respective markets. Five of the stations are
affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and
two are affiliated with the NBC Television Network, a division of the National
Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps
Acquisition (described below), the Company will be required under current
regulations of the Federal Communications Commission (the "FCC") to divest its
NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of
the Company's plans regarding such divestiture, see "-- Divestiture
Requirements" and "-- The Phipps Acquisition, the KTVE Sale and the Financing."
The Company also owns and operates three daily newspapers, two weekly,
advertising only publications ("shoppers"), and a paging business, all located
in the Southeast. The Company derives significant operating advantages and cost
saving synergies through the size of its television station group and the
regional focus of its television and publishing operations. These advantages and
synergies include (i) sharing television production facilities, equipment and
regionally oriented programming, (ii) the ability to purchase television
programming for the group as a whole, (iii) negotiating network affiliation
agreements on a group basis and (iv) purchasing newsprint and other supplies in
bulk. In addition, the Company believes that its regional focus can provide
advertisers with an efficient network through which to advertise in the
fast-growing Southeast.
In 1993, after the acquisition of a large block of Class A Common Stock by a
new investor, the Company implemented a strategy to foster growth through
strategic acquisitions. Since 1994, the Company's significant acquisitions have
included three television stations and two newspapers, all located in the
Southeast. As a result of the Company's acquisitions and in support of its
growth strategy, the Company has added certain key members of management and has
greatly expanded its operations in the television broadcasting and newspaper
publishing businesses.
In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV
("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In
December 1995, the Company entered into an asset purchase agreement to acquire
(the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving
Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville,
Tennessee, a satellite broadcasting business and a paging business
(collectively, the "Phipps Business"). The Company believes that the Phipps
Acquisition will further enhance the Company's position as a major regional
television broadcaster and is highly attractive for a number of reasons,
including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading
station market position and WKXT's significant growth potential, (iii) strong
station broadcast cash flows, (iv) opportunities for revenue growth utilizing
the Company's extensive management expertise with medium-size stations and (v)
opportunities for synergies between WCTV and WKXT and the Company's existing
stations with regard to revenue enhancement and cost controls. The consummation
of the Phipps Acquisition is currently expected to occur by September 1996,
although there can be no assurance with respect thereto.
2
In May 1996, the Company entered into an agreement to sell (the "KTVE Sale")
KTVE Inc. ("KTVE") serving Monroe, Louisiana/El Dorado, Arkansas for
approximately $9.5 million in cash plus the amount of the accounts receivable on
the date of the closing, which is expected to occur by September 1996, although
there can be no assurance with respect thereto.
For the year ended December 31, 1995, on a pro forma basis, the Company had
net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash
flow and paging cash flow), operating cash flow and net (loss) of $90.6 million,
$30.3 million, $28.1 million and $(3.8) million, respectively. Net revenues,
Media Cash Flow and operating cash flow on a pro forma basis for the year ended
December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net
income decreased 238.7% from the historical amounts for the year ended December
31, 1994.
The following table sets forth certain information for each of the Company's
television stations.
PRO FORMA
-------------------
IN-MARKET
SHARE YEAR ENDED DECEMBER
STATION OF 31, 1995
RANK HOUSEHOLDS -------------------
NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING
STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6)
- -------- ------- ------------- ------- -------- --------- -------- --------- --------- --------
(IN THOUSANDS)
WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247
WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831
WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853
WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795
Panama City,
WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270
PHIPPS
ACQUISITION
WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,479
Tallahassee,
WCTV CBS FL/ 116 6/VHF 1 60 11,862 3,953
Thomasville,
GA
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(1) Ranking of designated market area as defined by Nielsen ("DMA") served by a
station among all DMAs is measured by the number of television households
within the DMA based on the November 1995 Nielsen estimates.
(2) Represents station rank in DMA as determined by November 1995 Nielsen
estimates of the number of television sets tuned to the Company's station
as a percentage of the number of television sets in use in the market for
the Sunday through Saturday 6 a.m. to 2 a.m. time period.
(3) All stations in the market are UHF stations.
(4) The market area served by WYMT is an 18-county trading area, as defined by
Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station
rank is based upon its position in the 18-county trading area.
(5) The Company will be required under current FCC regulations to divest WALB
and WJHG in connection with the Phipps Acquisition.
(6) Represents pro forma income before miscellaneous income (expense),
allocation of corporate overhead, interest expense and income taxes.
The following table sets forth certain information for each of the Company's
publications:
PUBLISHED
PUBLICATION COVERAGE AREA CIRCULATION PER WEEK
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THE ALBANY HERALD 25 counties in Southwest Georgia 34,000 daily 7
40,000 Sunday
THE ROCKDALE CITIZEN 2 counties in Georgia (metro Atlanta) 10,000 5
GWINNETT DAILY POST 1 county in Georgia (metro Atlanta) 13,000 5
SOUTHWEST GEORGIA SHOPPERS 10 counties in Southwest Georgia and 10 counties 52,000 1
in North Florida
PRO FORMA
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YEAR ENDED DECEMBER 31, 1995
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OPERATING
NET INCOME
PUBLICATION REVENUES (LOSS) (1)
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(IN THOUSANDS)
THE ALBANY HERALD $13,535 $2,010
THE ROCKDALE CITIZEN 3,854 (212)
GWINNETT DAILY POST 2,432 (913)
SOUTHWEST GEORGIA SHOPPERS 2,045 (224)
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(1) Represents pro forma income before miscellaneous income (expense),
allocation of corporate overhead, interest expense and income taxes.
3
The satellite broadcasting business and paging business, which are a part of
the Phipps Business, had net revenues and operating income (income before
miscellaneous income (expense), allocation of corporate overhead, interest
expense and income taxes) of $6.2 million and $542,000, respectively, for the
year ended December 31, 1995.
THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING
The Company has entered into an agreement to acquire WCTV and WKXT, a
satellite broadcasting business and a paging business in the Southeast. The
purchase price for the Phipps Acquisition is approximately $185 million,
including fees, expenses and working capital and other adjustments. The
consummation of the Phipps Acquisition is expected to occur by September 1996,
although there can be no assurance with respect thereto.
The Company has entered into an agreement, dated as of May 15, 1996 (the
"KTVE Agreement"), with GOCOM Television of Ouachita, L.P. to sell KTVE for
approximately $9.5 million in cash plus the amount of the accounts receivable on
the date of the closing (estimated to be approximately $750,000), to the extent
collected by the buyer, to be paid to the Company 150 days following the date of
closing. The closing of the KTVE Sale is expected to occur by September 1996,
although there can be no assurance with respect thereto. For the year ended
December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income
(income before miscellaneous income (expense), allocation of corporate overhead,
interest expense and income taxes) of $4.2 million, $916,000 and $279,000,
respectively.
In addition to the consummation of the Phipps Acquisition and the KTVE Sale,
the Company intends to implement a financing plan (the "Financing") to increase
liquidity and improve operating and financial flexibility. Pursuant to the
Financing, the Company will (i) retire approximately $52.6 million aggregate
principal amount of outstanding indebtedness under its senior secured bank
credit facility (the "Old Credit Facility"), together with accrued interest
thereon, (ii) retire approximately $25.0 million aggregate principal amount of
outstanding indebtedness under its senior note due 2003 (the "Senior Note"),
together with accrued interest thereon and a prepayment fee, (iii) issue $10
million liquidation preference of its Series A preferred stock (the "Series A
Preferred Stock") in exchange for its outstanding $10.0 million aggregate
principal amount 8% subordinated note (the "8% Note") issued to Bull Run
Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to
Bull Run $10.0 million liquidation preference of its Series B preferred stock
(the "Series B Preferred Stock" and together with the Series A Preferred Stock,
the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A
Common Stock (representing 10.1% of the currently issued and outstanding Class A
Common Stock after giving effect to the exercise of such warrants) for cash
proceeds of $10.0 million and (v) enter into a new senior secured bank credit
facility (the "Senior Credit Facility") to provide for a term loan and revolving
credit facility aggregating $125.0 million. The cash required for the
consummation of the Phipps Acquisition, the repayment of indebtedness and
related transaction costs will be provided by the net proceeds of a proposed
offering (the "Note Offering") of $150,000,000 principal amount of the Company's
Senior Subordinated Notes due 2006 (the "Notes") and a proposed concurrent
offering (the "Stock Offering") of 3,500,000 shares of the Company's Class B
Common Stock, no par value (the "Class B Common Stock"), the sale of the Series
B Preferred Stock and the warrants and the KTVE Sale. There can be no assurance
that any of the foregoing transactions will be consummated.
4
The following table sets forth the estimated sources and uses of funds
relating to the KTVE Sale, the Phipps Acquisition and the Financing:
(IN MILLIONS) AMOUNT
----------
SOURCES OF FUNDS:
The Note Offering $150.0
The Stock Offering 66.5
Sale of Series B Preferred Stock and Warrants 10.0
Borrowings under the Senior Credit Facility 42.2
The KTVE Sale 9.5
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TOTAL $278.2
----------
----------
USES OF FUNDS:
Consummation of the Phipps Acquisition $185.0
Retire indebtedness under the Old Credit Facility (1) 52.6
Retire indebtedness under the Senior Note(2) 25.0
Fees and expenses (3) 15.6
----------
TOTAL $278.2
----------
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(1) Borrowings under the Old Credit Facility bear interest at formula rates
based upon the applicable London inter-bank offered rate ("LIBOR") or prime
rate at the time of borrowing plus a fixed spread and have a final maturity
of 2003. As of March 31, 1996, the interest rate was 8.96%.
(2) The indebtedness under the Senior Note bears interest at 10.7%.
(3) Fees and expenses include underwriting costs for the Note Offering and the
Stock Offering, fees payable in connection with the negotiation and
execution of the Senior Credit Facility, fees payable in connection with the
retirement of the Senior Note and legal, accounting and other transaction
fees. Does not include estimated taxes of $2.8 million with respect to the
KTVE Sale.
DIVESTITURE REQUIREMENTS
In connection with the Phipps Acquisition, the Company will be required to
divest WALB and WJHG under current FCC regulations due to common ownership
restrictions on stations with overlapping signals. However, these rules may be
revised by the FCC upon conclusion of pending rulemaking proceedings. In order
to satisfy applicable FCC requirements, the Company, subject to FCC approval,
intends to swap such assets for assets of one or more television stations of
comparable value and with comparable broadcast cash flow in a transaction
qualifying for deferred capital gains treatment under the "like-kind exchange"
provision of Section 1033 of the Internal Revenue Code of 1986, as amended (the
"Code"). If the Company is unable to effect such a swap on satisfactory terms
within the time period granted by the FCC under the waivers, the Company may
transfer such assets to a trust with a view towards the trustee effecting a swap
or sale of such assets. Any such trust arrangement would be subject to the
approval of the FCC. It is anticipated that the Company would be required to
relinquish operating control of such assets to a trustee while retaining the
economic risks and benefits of ownership. If the Company or such trust is
required to effect a sale of WALB, the Company would incur a significant gain
and related tax liability, the payment of which could have a material adverse
effect on the Company's ability to acquire comparable assets without incurring
additional indebtedness. No assurance can be given that the Company will be able
to identify or enter into arrangements regarding suitable assets for a swap or
sale satisfying the FCC divestiture requirements. In addition, there can be no
assurance that the Company could effect a sale or swap on a timely basis or
establish a trust on satisfactory terms.
5
REGIONAL FOCUS
The Company's television stations and publications are all located in the
fast-growing southeastern United States. The Company believes that this regional
focus provides it with significant competitive advantages and has enabled it to
develop an expertise in serving medium-size southeastern markets. As a result of
its ownership of seven network-affiliated television stations in the Southeast,
the Company believes that there are opportunities to sell advertising to certain
sponsors on all or several of its stations as a single buy. Further, the
Company's ownership of multiple publications in several adjacent southeastern
communities provides an attractive and efficient channel through which to sell
local print advertising. The Company capitalizes on its regional presence by
transferring management personnel, equipment, programming and news content among
its stations and publications.
OPERATING STRATEGY
The Company has begun to introduce various operating strategies that have
been successfully implemented at WKYT in Lexington, Kentucky throughout its
station group. The Company's current President served as the general manager of
WKYT from 1989 to 1995 and developed and successfully implemented many of the
strategies being adopted at the Company's other stations. Set forth below are
the Company's operating strategies.
STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to
achieve a distinct local identity principally through the depth and focus of its
local news programming and by targeting specific audience groups with special
programs and marketing events. Each station's local news franchise is the core
component of the Company's strategy to strengthen audience loyalty and increase
revenues and Media Cash Flow for each station. Strong local news generates high
viewership and results in higher ratings both for programs preceding and
following the news. All of the Company's stations that offer comprehensive local
news coverage are the dominant local broadcast news source. WKXT in Knoxville,
Tennessee currently does not offer significant local news coverage; the Company
intends to significantly expand the news broadcast at this station after the
consummation of the Phipps Acquisition.
Strong local news product also differentiates local broadcast stations from
cable system competitors, which generally do not provide this service. The cost
of producing local news programming generally is lower than other sources of
programming and the amount of such local news programming can be increased or
decreased on very short notice, providing the Company with greater programming
flexibility.
The Company believes that its strong commitment to local broadcasting is
integral to its ability to serve each of the communities in which it operates.
In each of its markets, the Company develops information-oriented programming
which expands the Company's hours of commercially valuable local programming
with relatively small increases in operating expenses. In addition, each station
utilizes special programming and marketing events, such as prime-time
programming of local interest or sponsored community events, to strengthen
community relations and increase advertising revenues. For example, certain of
the Company's stations offer state governor call-in shows, local medical shows
and cover local sporting events. The Company requires its senior staff to become
actively involved in community affairs in an effort to better understand the
issues in each community in which it operates.
A key component of the Company's publishing strategy is an emphasis on
strong local content in its publications. Consequently, the Company focuses on
local news, sports and lifestyle issues in order to foster reader loyalty with
the objective of raising circulation and advertising rates. The Company's
publications also sponsor community events such as bridal expositions with the
objective of strengthening community relationships and building advertising
revenues.
TARGETED MARKETING. The Company seeks to increase its advertising revenues and
Media Cash Flow by expanding existing relationships with local and national
advertisers and by attracting new advertisers through targeted marketing
techniques and carefully tailored programming. The Company sells
6
advertising locally through its sales employees and nationally through
representative firms with which the Company enters into representation
agreements. The Company works closely with advertisers to develop advertising
campaigns that match specifically targeted audience segments with the
advertisers' overall marketing strategies. With this information, the Company
regularly refines its programming mix among network, syndicated and
locally-produced shows in a focused effort to attract audiences with demographic
characteristics desirable to advertisers. As a result of implementing this
strategy, WKYT's share of advertising dollars exceeded its in-market share of
households viewing television by 15% in 1995.
The Company's success in increasing advertising revenues at both its
stations and publications is also attributable, in part, to the implementation
of training programs for its marketing consultants that focus on innovative
sales techniques, such as events marketing and demographic-specific projects,
that target specific advertisers. The Company trains its marketing consultants
to sell not only advertising spots, but also non-traditional advertising such as
billboards for sponsored sports events and weather forecasts within newscasts.
In addition, performance based compensation arrangements and performance
accountability systems have contributed to the Company's success in increasing
local advertising revenues. The Company has also benefitted from sharing ideas
and information for increasing advertising revenues among its station group and
publications. The Company's targeted marketing focus also includes the following
key elements:
-NON-TRADITIONAL REVENUE SOURCES. The Company uses its stations' and
publications' local promotional power in order to increase revenues from
non-traditional sources by sponsoring and staging various special events,
such as boat shows, fitness shows, bridal expositions and fishing
tournaments. The Company derives revenues through the promotion, production
and advertising sales generated by these events.
-VENDOR MARKETING. The Company engages in targeted vendor marketing whereby
it contacts major vendors that supply a particular store or retail chain,
and the management at a particular store or retail chain in order to
arrange for the vendors to purchase local television advertising. The store
or retail chain in turn agrees to purchase additional products from the
vendor and also benefits from the increased local television advertising
presence. As a result of this vendor marketing, the Company's stations are
able to sell advertising to promote a local retailer, which the local
retailer would not normally have purchased for itself.
COST CONTROLS. Through its strategic planning and annual budgeting processes,
the Company continually seeks to identify and implement cost savings
opportunities at each of its stations and publications in order to increase
Media Cash Flow. The Company closely monitors expenses incurred by each of its
stations and publications and continually reviews their performance and
productivity. Additionally, the Company seeks to minimize its use of outside
firms and consultants by relying on its in-house production and design
capability.
In order to further reduce costs, the Company capitalizes on its regional
focus through its ability to produce programming at one station which can be
used by many of the Company's other stations. Further, the size of the Company's
station group and its ownership of multiple publications gives it the ability to
negotiate favorable terms with programming syndicators, newsprint suppliers,
national sales representatives and other vendors. For example, the Company
recently entered into a new agreement with its national sales representative,
which significantly reduced the commissions payable by the Company for national
advertising. Due to the proximity of the Company's operations, the Company's
stations and publications share equipment, programming and management expertise.
In addition, each station and publication reduces its corporate overhead costs
by utilizing group benefits such as insurance and employee benefit plans
provided by the Company.
ACQUISITION STRATEGY
The Company focuses on medium-size markets in the Southeast because the
Company believes these markets offer superior opportunities in terms of
projected population and economic growth, leading to higher advertising and
circulation revenues. The Company intends to continue to consider
7
additional acquisitions of television stations and publications that serve these
markets. The Company has focused on acquiring television stations where it
believes there is potential for improvements in revenue share, audience share
and cost control. In assessing acquisitions, the Company targets stations where
it sees specific opportunities for revenue enhancement utilizing management's
significant experience in local and national advertising sales and in operating
similar stations in the Southeast. In addition, projections of growth in the
particular market are taken into account. The Company also targets stations and
publications for which it can control expenditures as it expands the operation's
revenue base. Typical cost savings arise from (i) reducing staffing levels and
sharing management with other stations and publications, (ii) utilizing in-house
production and design expertise, (iii) substituting more cost effective employee
benefit programs, (iv) reducing travel and other non-essential expenses and (v)
optimizing the purchase of newsprint and other supplies. Other than the Phipps
Acquisition, the Company does not presently have any agreements to acquire any
television stations or publications. In appropriate circumstances, the Company
will dispose of assets that it deems non-essential to its operating or growth
strategy.
TELEVISION BROADCASTING
THE COMPANY'S STATIONS AND THEIR MARKETS
AS USED IN THE TABLES FOR EACH OF THE COMPANY'S STATIONS IN THE FOLLOWING
SECTION (I) "GROSS REVENUES" REPRESENT ALL OPERATING REVENUES EXCLUDING BARTER
REVENUES; (II) "MARKET REVENUES" REPRESENT GROSS ADVERTISING REVENUES, EXCLUDING
8
BARTER REVENUES, FOR ALL COMMERCIAL TELEVISION STATIONS IN THE MARKET, AS
REPORTED IN INVESTING IN TELEVISION 1995 MARKET REPORT, 4TH EDITION JULY 1995
RATINGS PUBLISHED BY BIA PUBLICATIONS, INC., EXCEPT FOR REVENUES IN WYMT-TV'S
("WYMT") 18-COUNTY TRADING AREA WHICH IS NOT SEPARATELY REPORTED IN SUCH BIA
PUBLICATIONS, INC.'S REPORT; (III) "IN-MARKET SHARE OF HOUSEHOLDS VIEWING
TELEVISION" REPRESENTS THE PERCENTAGE OF THE STATION'S AUDIENCE AS A PERCENTAGE
OF ALL VIEWING BY HOUSEHOLDS IN THE MARKET FROM 6 A.M. TO 2 A.M. SUNDAY THROUGH
SATURDAY, INCLUDING VIEWING OF NON-COMMERCIAL STATIONS, NATIONAL CABLE CHANNELS
AND OUT-OF-MARKET STATIONS BROADCAST OR CARRIED BY CABLE IN THE MARKET; AND (IV)
"STATION RANK IN DMA" IS BASED ON NIELSEN ESTIMATES FOR NOVEMBER OF EACH YEAR
FOR THE PERIOD FROM 6 A.M. TO 2 A.M. SUNDAY THROUGH SATURDAY.
IN-MARKET
COMMERCIAL STATION SHARE OF
DMA STATIONS RANK IN TELEVISION MARKET REVENUES HOUSEHOLDS
STATION MARKET RANK(1) IN DMA(2) DMA HOUSEHOLDS(3) IN DMA FOR 1995 VIEWING TV
- -------- ---------------- ------- ---------- ------- ------------- --------------- ----------
(IN THOUSANDS)
WKYT Lexington, KY 68 5 1 387,000 $46,100 33%
WYMT (4) Hazard, KY 68 N/A 1 169,000 4,100 24
WRDW Augusta, GA 111 4 1 221,000 26,300 36
WALB (5) Albany, GA 152 3 1 132,000 12,200 80
WJHG (5) Panama City, FL 159 4 1 110,000 8,500 53
PHIPPS ACQUISITION(6)
WKXT Knoxville, TN 62 4 3 429,000 57,900 22
WCTV Tallahassee, FL/ 116 4 1 210,000 19,900 60
Thomasville, GA
- ------------------------------
(1) Ranking of DMA served by a station among all DMAs is measured by the number
of television households based within the DMA on the November 1995 Nielsen
estimates.
(2) Includes independent broadcasting stations.
(3) Based upon the approximate number of television households in the DMA as
reported by the November 1995 Nielsen index.
(4) The market area served by WYMT is an 18-county trading area, as defined by
Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station
rank is based upon its position in the 18-county trading area.
(5) The Company will be required to divest WALB and WJHG in connection with the
Phipps Acquisition. For a discussion of the Company's plans, see "--
Divestiture Requirements" and "-- The Phipps Acquisition, the KTVE Sale and
the Financing."
(6) The closing of the Phipps Acquisition is expected to occur by September
1996, although there can be no assurance with respect thereto.
The following is a description of each of the Company's stations:
WKYT, THE CBS AFFILIATE IN LEXINGTON, KENTUCKY
WKYT, acquired by the Company in September 1994, began operations in 1957.
Lexington, Kentucky is the 68th largest DMA in the United States, with
approximately 387,000 television households and a total population of
approximately 1.1 million. Total Market Revenues in the Lexington DMA in 1995
were approximately $46.1 million, a 6% increase over 1994. WKYT's gross revenues
for the year ended December 31, 1995 were approximately $17.6 million, an
increase of 14.6% from the corresponding prior period. WKYT's net income (before
the allocation of corporate and administrative expenses and after estimated
income taxes computed at statutory rates) for the year ended December 31, 1995
was approximately $1.2 million, an increase of 93.8% for the corresponding prior
period. The Lexington DMA has five licensed commercial television stations,
including WYMT, WKYT's sister station, all of which are affiliated with major
networks. The Lexington DMA also has one public television station.
9
The following table sets forth Market Revenues for the Lexington DMA and
in-market share and ranking information for WKYT:
YEAR ENDED DECEMBER 31
-------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
--------- --------- ---------
Market Revenues in DMA $ 39,500 $ 43,500 $ 46,100
Market Revenues growth over prior year 13% 10% 6%
In-market share of households viewing television 38% 37% 33%
Rank in market 1 1 1
MARKET DESCRIPTION. The Lexington DMA consists of 38 counties in central and
eastern Kentucky. The Lexington area is a regional hub for shopping, business,
healthcare, education, and cultural activities and has a comprehensive
transportation network and low commercial utility rates. Major employers in the
Lexington area include Toyota Motor Corp., Lexmark International, Inc., GTE
Corporation, Square D Company, Ashland, Inc. and International Business Machines
Corporation. Toyota Motor Corp. operates a large production facility near
Lexington, employing 6,000 people and in May 1995 announced plans to build its
next generation mini-van at this facility. Eight hospitals and numerous medical
clinics are located in Lexington, reinforcing Lexington's position as a regional
medical center. The University of Kentucky which is located in Lexington, is
also a major employer with approximately 10,000 employees, and has a full time
enrollment of approximately 24,000 students. In addition, Lexington is an
international center of the equine industry with the Kentucky Horse Park, a
1,000 acre park that attracts approximately 700,000 visitors annually.
STATION PERFORMANCE. WKYT, which operates on channel 27, is a CBS affiliate.
WKYT can be viewed on 86 cable systems in its DMA and 51 cable systems outside
its DMA. In 1995, WKYT celebrated its 20th consecutive year as the Lexington
DMA's most watched local news program. Every broadcast of "27 Newsfirst" -- at 6
a.m., noon, 5 p.m., 5:30 p.m., 6 p.m. and 11 p.m. -- continues to be the number
one rated program in its time period. WKYT's news programs also provide support
and coverage of local events through public service announcements, on-air
bulletin boards and special reports, such as CRIMESTOPPERS, 27 ON THE TOWN and
HOMETOWN HEROES. Based on the November 1995 Nielsen index, WKYT is ranked number
one in its market, with a 33% in-market share of households viewing television,
which is five percentage points ahead of the competition. WKYT received 38% of
the Lexington DMA's Market Revenues in 1995. The station attributes its success
to the experience of its senior management and local sales staff, which focus on
developing strong relationships with local advertisers and devoting significant
attention to the quality and content of WKYT's local news programming.
Since the 1970's WKYT has been the flagship station for the University of
Kentucky Sports Network, producing sports events and coaches' shows, such as the
RICK PITINO COACH'S SHOW a half-hour show featuring the University of Kentucky
Basketball coach, that air on a 10-station network across Kentucky. Although
WKYT focuses on the most popular University of Kentucky Wildcat sports,
basketball and football, the station also features other intercollegiate sports,
such as baseball, tennis and swimming/diving.
WKYT has a full mobile production unit that produces a variety of events,
including sports events, beauty pageants and horse racing. In addition, WKYT has
a Doppler Weather Radar System, the latest technology available in weather
forecasting. In 1995, WKYT spent over $1.3 million on capital improvements,
including a complete studio and master control room renovation and the addition
of Maxigrid, an inventory management system.
Cross-promotion and partnerships with radio, newspapers and businesses are a
source of non-traditional revenue as well as a means of community involvement.
WKYT is also party to the first joint
10
venture in the Lexington market through its production of a 10 p.m. newscast for
WDKY-TV, an affiliate of the Fox Broadcasting Company ("Fox") in Lexington,
which provides additional exposure for the station's news talent as well as a
new source of revenue for WKYT.
Local programming produced by WKYT includes SCOTT'S PLACE, a weekly
half-hour children's show which is carried on WALB, WJHG and WRDW, and
DIRECTIONS and 27 NEWSMAKERS, two weekly public affairs programs dealing with
minority and government and political issues, respectively. In addition, WKYT
also carries programming provided by CBS and syndicated programming, including
OPRAH!, JEOPARDY!, WHEEL OF FORTUNE and THE ANDY GRIFFITH SHOW.
The Company's President and the current station manager at WALB are both
former members of senior management at WKYT.
WYMT, THE CBS AFFILIATE IN HAZARD, KENTUCKY
WYMT, acquired by the Company in September 1994, began operations in 1985.
WYMT has carved out a niche trading area comprising 18 counties in eastern and
southeastern Kentucky. This trading area is a separate market area of the
Lexington, Kentucky DMA with approximately 169,000 television households and a
total population of approximately 463,000. WYMT is the only commercial
television station in this 18-county trading area. Total Market Revenues in the
18-county trading area and WYMT's gross revenues in the 18-county trading area
for the year ended December 31, 1995 were approximately $4.1 million, an
increase of 9% from the corresponding prior period. WYMT's net income (before
the allocation of corporate and administrative expenses and after estimated
income taxes computed at statutory rates) for the year ended December 31, 1995
was approximately $32,000, a decrease of 38.1% from the corresponding prior
period. WYMT is the sister station of WKYT and shares many resources and
simulcasts some local programming with WKYT.
The following table sets forth Market Revenues for the 18-county trading
area and ranking information for WYMT (based upon its position in its 18-county
trading area):
YEAR ENDED DECEMBER 31
-------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
--------- --------- ---------
Market Revenues in the 18-county trading area (1) $ 3,500 $ 3,800 $ 4,100
Market Revenues growth over prior year 12% 8% 9%
In-market share of households viewing television 25% 20% 24%
Rank in market 1 1 1
(1) Represents the gross revenues of WYMT, which is the only commercial
television station in the 18-county trading area. The Company is unable to
determine the amount of Market Revenue for the 18-county trading area which
may be attributable to other television stations serving the Lexington DMA.
MARKET DESCRIPTION. The mountain region of eastern and southeastern Kentucky
where Hazard is located is on the outer edges of four separate markets:
Bristol-Kingsport-Johnson City, Charleston-Huntington, Knoxville and Lexington.
Prior to 1985, mountain residents relied primarily on satellite dishes and cable
television carrying distant signals for their television entertainment and news.
Established in 1985, WYMT is the only broadcast station which can be received
over the air in a large portion of its 18-county trading area and may now be
viewed on 100 cable systems.
The trading area's economy is centered around coal and related industries
and some light manufacturing. In recent years, the coal industry has undergone a
major restructuring due to consolidation in the industry and advances in
technology. Approximately 10,700 manufacturing jobs exist in the Hazard trading
area, most of which are concentrated in the Cumberland Valley area, a Kentucky
Area Development District located in the southern portion of the 18-county
trading area.
STATION PERFORMANCE. WYMT, which operates on channel 57, is a CBS affiliate.
WYMT is ranked number one, based on November 1995 Nielsen estimates, in its
trading area with a 24% in-market
11
share of households viewing television, which is nine points ahead of the
competition. WYMT's Mountain News at 6:30 a.m., 6 p.m. and 11 p.m. is ranked
number one in the 18-county trading area. WYMT's Mountain News at 6 p.m. is
ranked number two in the entire Lexington DMA by Nielsen, behind only its sister
station WKYT. In addition to the Mountain News, WYMT simulcasts WKYT's 6 a.m.,
noon, 5 p.m. and 5:30 p.m. newscasts Monday through Friday, all of which rank
number one in the 18-county trading area. WYMT includes local inserts into these
simulcasted news programs in order to add an enhanced degree of local content.
The station attributes its success to its position as the only commercial
broadcaster in the 18-county trading area and to customer and community loyalty.
WYMT considers its news department to be a key component of its operations.
The station is strategically positioned with a central newsroom in Hazard and
two satellite news bureaus, one in Middlesboro, Kentucky (the Cumberland Valley)
and one in Harold, Kentucky (the Big Sandy region). Microwave links to these
regional news bureaus and to WYMT's sister station WKYT in Lexington, Kentucky,
provide the news operation with the ability to report on, coordinate and share
the latest news information and coverage throughout the mountain region and from
Lexington.
In 1994 WYMT installed a state-of-the-art digital playback system in its
master control room. This new system has allowed WYMT to adopt a computer-based
playback format that has resulted in significant cost savings and an improved
on-air appearance.
Strong local business and general community relations are an important
component of WYMT's success. WYMT continues to develop partnerships with current
and potential new clients through the production of various special annual
events that also serve to strengthen community ties and enhance advertising
revenue. Examples of such events include the Mountain Basketball Classic, the
Charity Golf Classic and the Boat and RV Show.
WRDW, THE CBS AFFILIATE IN AUGUSTA, GEORGIA
WRDW, acquired by the Company in January 1996, began operations in 1954.
Augusta, Georgia is the 111th largest DMA in the United States, with
approximately 221,000 television households and a total population of
approximately 627,000. Total Market Revenues in the Augusta DMA in 1995 were
approximately $26.3 million, a 6% increase over 1994. WRDW's gross revenues for
the year ended December 31, 1995 were approximately $9.6 million, an increase of
5.7% from the corresponding prior period. WRDW's net income (loss) (before the
allocation of corporate and administrative expenses and after estimated income
taxes computed at statutory rates) for the year ended December 31, 1995 was
approximately $2.2 million, an increase of 4.9% from the corresponding prior
period. The Augusta DMA has four licensed commercial television stations, all of
which are affiliated with a major network. The Augusta DMA also has two public
television stations.
The following table sets forth Market Revenues for the Augusta DMA and
in-market share and ranking information for WRDW:
YEAR ENDED DECEMBER 31
-------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
--------- --------- ---------
Market Revenues in DMA $ 22,800 $ 24,800 $ 26,300
Market Revenues growth over prior year 8% 9% 6%
In-market share of households viewing television 36% 36% 36%
Rank in market 1 1 1
MARKET DESCRIPTION. The Augusta DMA consists of 19 counties in eastern Georgia
and western South Carolina, including the cities of Augusta, Georgia and North
Augusta and Aiken, South Carolina. The Augusta, Georgia area is one of Georgia's
major metropolitan/regional centers, with a particular emphasis on health
services, manufacturing and the military. The Federal government employs over
12,500 military and 4,600 civilian personnel at the Department of Energy's
Savannah River Site, a
12
nuclear processing plant, and Fort Gordon, a U.S. Army military installation.
Augusta has eight large hospitals which collectively employ 20,000 and reinforce
Augusta's status as a regional healthcare center. Augusta is also home to the
Masters Golf Tournament, which has been broadcast by CBS for 41 years.
STATION PERFORMANCE. WRDW, which operates on channel 12, is a CBS affiliate.
Based on November 1995 Nielsen estimates, WRDW is ranked number one in its
market, with a 36% in-market share of households viewing television, which is
one share point ahead of the competition. WRDW also received 36% of the Augusta
DMA's Market Revenues in 1995. WRDW can be viewed on all 29 cable systems in its
DMA and nine cable systems outside of its DMA. Since 1992, WRDW has risen from a
weak second-place ranking to the number one position. WRDW's weekday news
programs at 6 a.m., noon, 5 p.m., 11 p.m., and four weekend slots are ranked
number one in household rating and share. WRDW attributes its number one
position in the market to its strong syndicated programming which leads into and
out of its weekly news programs as well as its expanded local news coverage.
WRDW was also the leader in prime time in the November 1995 Nielsen estimates.
WRDW has positioned itself as "Your 24 Hour News Source" in the DMA. In January
1996, WRDW began providing local cut-ins to the CNN news slots on cable, with
all revenues from commercial inserts going to the station. In addition, as the
local CBS affiliate in the DMA, WRDW produces local Masters programming, such as
THE GREEN JACKET PROGRAM, a show hosted by Paul Davis that includes interviews
with many golf celebrities.
The station also produces its own local programming, including INSIDE
AGRICULTURE, a weekly program and PAINE COLLEGE PRESENTS, a bi-monthly local
public affairs show. In addition to carrying the programming provided by CBS,
WRDW carries syndicated programming including: OPRAH!, INSIDE EDITION, WHEEL OF
FORTUNE and JEOPARDY!
WALB, THE NBC AFFILIATE IN ALBANY, GEORGIA
WALB was founded by the Company and began operations in 1954. Albany,
Georgia is the 152nd largest DMA in the United States with approximately 132,000
television households and a total population of approximately 380,000. Total
Market Revenues in the Albany DMA in 1995 were approximately $12.2 million, a 5%
increase over 1994. WALB's gross revenues for the year ended December 31, 1995
were approximately $10.5 million, an increase of 3.5% from the corresponding
prior period. WALB's net income (before the allocation of corporate and
administrative expenses and after estimated income taxes computed at statutory
rates) for the year ended December 31, 1995 was approximately $3.0 million, a
decrease of 14.6% from the corresponding prior period. The Albany DMA has three
licensed commercial television stations, two of which are affiliated with major
networks. The Albany DMA also has two public television stations.
The following table sets forth Market Revenues for the Albany DMA and
in-market share and ranking information for WALB:
YEAR ENDED DECEMBER 31
-------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
--------- --------- ---------
Market Revenues in DMA $ 10,900 $ 11,600 $ 12,200
Market Revenues growth over prior year 8% 6% 5%
In-market share of households viewing television 81% 80% 80%
Rank in market 1 1 1
MARKET DESCRIPTION. The Albany DMA, consists of 17 counties in southwest
Georgia. Albany, 170 miles south of Atlanta, is a regional center for
manufacturing, agriculture, education, health care and military service. Leading
employers in the area include: The Marine Corps Logistics Base, Phoebe Putney
Memorial Hospital, The Proctor & Gamble Company, Miller Brewing Company, Cooper
Tire &
13
Rubber Company, Bob's Candies, Coats and Clark Inc., Merck & Co., Inc.,
MacGregor (USA) Inc. and M&M/Mars. Albany State College, Darton College and
Albany Technical Institute are located within this area.
STATION PERFORMANCE. WALB, which operates on channel 10, is the only VHF
station in the Albany DMA and is an NBC affiliate. Based on the November 1995
Nielsen estimates, WALB is ranked number one in its market, with an 80%
in-market share of households viewing television, which is 63 share points ahead
of the competition. WALB has the strongest signal in its DMA and can be viewed
on all of the 26 cable systems in its DMA and 51 cable systems outside of its
DMA. WALB received 86% of the Albany DMA's Market Revenues in 1995.
WALB is known as "South Georgia's Number One News Source." The station's
news is its primary focus. WALB is the number one local news source in all of
its time slots. WALB is the only station in its market with both electronic and
satellite news gathering trucks, allowing the Company to provide live coverage.
WALB broadcasts three hours and 20 minutes of news weekdays and one hour of news
each weekend day.
WALB considers its dedication to the community to be a key component of its
operations. For example, WALB devoted substantial resources in 1994 to expand
its local news coverage and programming. Such investment allowed WALB to provide
the most extensive flood coverage available to viewers during the flood in July
1994, which was one of the largest natural disasters to occur in Georgia in
recent history. This coverage made WALB one of the top-rated stations in the
United States in terms of in-market share of households viewing television in
July 1994, as measured by Nielsen. In addition, the Georgia Broadcasters
Association presented WALB with two of its top awards in 1994: the "1994 TV
Community Service Award" for its dedication to providing local community service
and the "1994 TV Station Promotion of the Year" award for the station's nearly
year long broadcast of its "Learn to Read" program.
The station produces its own local programming including TOWN AND COUNTRY, a
live morning show that travels to various locations in Georgia and DIALOG, a
weekly public affairs show focusing on minority issues. In addition to carrying
programming supplied by NBC, WALB carries syndicated programming, including
OPRAH!, ENTERTAINMENT TONIGHT, THE ANDY GRIFFITH SHOW, MONTEL WILLIAMS, RICKI
LAKE, AMERICAN JOURNAL, and HARD COPY.
The Company will be required to divest this station pursuant to existing FCC
regulations. See
"-- FCC Divestiture Requirements" and "-- The Phipps Acquisition, the KTVE Sale
and the Financing."
WJHG, THE NBC AFFILIATE IN PANAMA CITY, FLORIDA
WJHG, acquired by the Company in 1960, began operations in 1953. Panama
City, Florida is the 159th largest DMA in the United States, with approximately
110,000 television households and a total population of approximately 298,000.
Total Market Revenues in the Panama City DMA in 1995 were approximately $8.5
million, a 6% increase over 1994. WJHG's gross revenues for the year ended
December 31, 1995 were approximately $4.3 million, an increase of 7.7% from the
corresponding prior period. WJHG's net income (before the allocation of
corporate and administrative expenses and after estimated income taxes computed
at statutory rates) for the year ended December 31, 1995 was approximately
$205,000, a decrease of 1.4% from the corresponding prior periods. The Panama
City DMA has four licensed commercial television stations, three of which are
affiliated with major networks. In addition, a CBS signal is provided by a
station in Dothan, Alabama, an adjacent DMA. The Panama City DMA also has one
public television station.
14
The following table sets forth Market Revenues for the Panama City DMA and
in-market share and ranking information for WJHG:
YEAR ENDED DECEMBER 31
-------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
--------- --------- ---------
Market Revenues in DMA $ 7,400 $ 8,000 $ 8,500
Market Revenues growth over prior year 11% 8% 6%
In-market share of households viewing television 51% 46% 53%
Rank in market 1 1 1
MARKET DESCRIPTION. The Panama City DMA consists of nine counties in northwest
Florida. The Panama City market stretches north from Florida's Gulf Coast to
Alabama's southern border. The Panama City economy centers around tourism,
military bases, manufacturing, education and financial services. Panama City is
the county seat and principal city of Bay County. Leading employers in the area
include: Tyndall Air Force Base, the Navy Coastal Systems Station, Sallie Mae
Servicing Corp., Stone Container Corporation, Arizona Chemical Corporation,
Russell Corporation and Gulf Coast Community College. Panama City is also a
spring break destination for college students and drew approximately 550,000
students during 1995.
STATION PERFORMANCE. WJHG, which operates on channel 7, is an NBC affiliate.
Based on November 1995 Nielsen estimates, WJHG is ranked number one in its
market, with a 53% in-market share of households viewing television, which is 17
share points ahead of the competition. WJHG received 50% of the Panama City
DMA's Market Revenues in 1995. WJHG can be viewed on all of the 36 cable systems
in its DMA and on 29 cable systems outside its DMA.
WJHG dominates the Panama City market in all popular news time periods and
has twice the audience viewership at 5 p.m. and 10 p.m. as does the competition.
WJHG also has the number one news ranking in its market at 6:30 a.m., 6 p.m. and
on weekends. WJHG's ratings success in its newscasts have allowed it to increase
its overall unit rates and to negotiate for larger shares of advertisers'
national budgets. WJHG considers its news department to be a key component of
its operations and in 1994, devoted substantial resources to redesign the set,
purchase new cameras, add new graphics, develop a new logo and reformat
newscasts. As part of the continuing growth of its news product, WJHG recently
introduced the first noon newscast in Panama City.
WJHG has also launched a direct mail campaign to attract new advertisers to
the station. As a result of these factors, WJHG increased its gross revenues by
7.7% in 1995. WJHG is also focusing on other non-traditional revenue sources,
such as developing a health exposition, a children's fair and a wedding show,
all of which are scheduled to occur in 1996.
In addition to carrying programming provided by NBC, WJHG carries syndicated
programming, including WHEEL OF FORTUNE, JEOPARDY!, HARD COPY, MAURY POVICH,
JENNY JONES and RICKI LAKE.
The Company will be required to divest this station pursuant to existing FCC
regulations. See
"-- FCC Divestiture Requirements" and "-- The Phipps Acquisition, the KTVE Sale
and the Financing."
15
WKXT, THE CBS AFFILIATE IN KNOXVILLE, TENNESSEE
WKXT, which will be acquired pursuant to the Phipps Acquisition, began
operations in 1988. Knoxville, Tennessee is the 62nd largest DMA in the United
States, with approximately 429,000 television households and a total population
of approximately 1.1 million. Total Market Revenues in the Knoxville DMA in 1995
were approximately $57.9 million, a 6% increase over 1994. WKXT's gross revenues
for the year ended December 31, 1995 were approximately $10.6 million, an
increase of 2.3% from the corresponding prior period. WKXT's net income (before
the allocation of corporate and administrative expenses and after estimated
income taxes computed at statutory rates) for the year ended December 31, 1995
was approximately $1.4 million, an increase of 15.2% from the corresponding
prior period. The Knoxville DMA has four licensed commercial television
stations, all of which are affiliated with major networks. The Knoxville DMA
also has two public broadcasting stations.
The following table sets forth Market Revenues for the Knoxville DMA and
in-market share and ranking information for WKXT:
YEAR ENDED DECEMBER 31
----------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
---------- ---------- ----------
Market Revenues in DMA $47,900 $54,600 $57,900
Market Revenues growth over prior year 14% 14% 6%
In-market share of households viewing television 24% 23% 22%
Rank in market 3 3 3
MARKET DESCRIPTION. The Knoxville DMA, consisting of 22 counties in eastern
Tennessee and southeastern Kentucky, includes the cities of Knoxville, Oak Ridge
and Gatlinburg, Tennessee. The Knoxville area is a center for education,
manufacturing, healthcare and tourism. The University of Tennessee's main campus
is located within the city of Knoxville. It employs approximately 6,400 people
and has an enrollment of approximately 26,000 students. Leading manufacturing
employers in the area include: Lockheed Martin Energy Systems, Inc., Levi
Strauss & Company, DeRoyal Industries, Aluminum Company of North America,
Phillips Consumer Electronics North America Corp., Clayton Homes and Sea Ray
Boats, Inc. which employ approximately 26,800 people, collectively. The
Knoxville area also has eight hospitals which employ approximately 16,900
employees. Area tourist attractions are the Great Smokey Mountains National Park
and Dollywood, a country-western theme park sponsored by Dolly Parton. The Great
Smokey Mountains National Park and Dollywood had approximately 9.1 million and
2.2 million visitors, respectively during 1995. Dollywood employs approximately
1,800 people.
STATION PERFORMANCE. WKXT is a CBS affiliate and operates on channel 8. WKXT is
one of three commercial VHF stations in the Knoxville DMA. Based on November
1995 Nielsen estimates, WKXT is ranked third in its market, with a 22% in-market
share of households viewing television. WKXT can be viewed on 52 cable systems
in its DMA and on 15 cable systems outside its DMA. WKXT received 18% of the
Knoxville DMA's Market Revenues in 1995.
WKXT produces only one hour of news each day. The Company plans to implement
its operating strategy at WKXT by developing comprehensive news programming upon
consummation of the Phipps Acquisition.
In addition to carrying network programming supplied by CBS, WKXT carries
syndicated programming including BAYWATCH, NORTHERN EXPOSURE, REGIS & KATHIE
LEE, MAURY POVICH, AMERICAN JOURNAL, ENTERTAINMENT TONIGHT, HARD COPY, and THE
ANDY GRIFFITH SHOW.
WCTV, THE CBS AFFILIATE IN TALLAHASSEE, FLORIDA/THOMASVILLE, GEORGIA
WCTV, which will be acquired pursuant to the Phipps Acquisition, began
operations in 1955. Tallahassee, Florida/Thomasville, Georgia is the 116th
largest DMA in the United States, with approximately 210,000 television
households and total population of approximately 586,000. Total Market Revenues
in the Tallahassee/Thomasville DMA in 1995 were approximately $19.9 million, a
15
5% increase over 1994. WCTV's gross revenues for the year ended December 31,
1995 were approximately $13.3 million, an increase of 3.2% from the
corresponding prior period. WCTV's net income (before the allocation of
corporate and administrative expenses and after estimated income taxes computed
at statutory rates) for the year ended December 31, 1995 was approximately $3.7
million, an increase of 1.4% from the corresponding prior period. The
Tallahassee/Thomasville DMA has four licensed commercial television stations,
all of which are affiliated with major networks. The Tallahassee/Thomasville DMA
also has one public station that is owned by the Florida State University Board
of Regents.
The following table sets forth Market Revenues in the
Tallahassee/Thomasville DMA and in-market share and ranking information for
WCTV:
YEAR ENDED DECEMBER 31
----------------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
------------ ------------ ------------
Market Revenues in DMA $17,200 $18,900 $19,900
Market Revenues growth over prior year 4% 10% 5%
In-market share of households viewing television 64% 65% 60%
Rank in market 1 1 1
MARKET DESCRIPTION. The Tallahassee/Thomasville DMA, consisting of 18 counties
in the panhandle of Florida and southwest Georgia, includes Tallahassee, the
capital of Florida, and Thomasville, Valdosta and Bainbridge, Georgia. The
Tallahassee/Thomasville economy centers around state and local government as
well as state and local universities which include Florida State University,
Florida A&M, Tallahassee Community College and Valdosta State College. Florida
State University is the largest university located in the DMA with total
enrollment of approximately 29,000 students. Florida State University's main
campus is located within the city of Tallahassee. State and local government
agencies employ approximately 36,700 and 8,500 people, respectively, in the
Tallahassee area.
STATION PERFORMANCE. WCTV is a CBS affiliate and operates on channel 6. WCTV is
the only VHF station in the Tallahassee/Thomasville DMA. Based on November 1995
Nielsen estimates, WCTV is ranked number one in its market, with a 60% in-market
share of households viewing television. WCTV can be viewed on 47 cable systems
in its DMA and 32 cable systems outside of its DMA. WCTV received 67% of the
Tallahassee/Thomasville DMA's Market Revenues in 1995.
WCTV considers its news department to be a key component of its operations;
approximately 43% of its employees are devoted to its news department and
approximately 40% of the WCTV's revenues are generated by news programming. The
station attributes its successful news programming in part to its bureaus in
Tallahassee, Valdosta and Thomasville and its news gathering vehicle. WCTV
produces five news programs and six news cut-ins each day which total three and
one-half hours of news per weekday. All news programs are closed-captioned. The
station has the number one in-market share in news at 6 a.m., noon, 5:30 p.m., 6
p.m. and 11 p.m. on weekdays and 6 p.m. and 11 p.m. on weekends.
The station produces the BOBBY BOWDEN SHOW, a coach's show for Florida State
University. In addition to carrying network programming supplied by CBS, WCTV
carries syndicated programming including WHEEL OF FORTUNE, JEOPARDY!, OPRAH! and
SEINFELD.
INDUSTRY BACKGROUND
There are currently a limited number of channels available for broadcasting
in any one geographic area, and the license to operate a television station is
granted by the FCC. Television stations which broadcast over the very high
frequency ("VHF") band (channels 2-13) of the spectrum generally have some
competitive advantage over television stations which broadcast over the
ultra-high frequency ("UHF") band (channels above 13) of the spectrum, because
the former usually have better signal coverage and operate at a lower
transmission cost. However, the improvement of UHF transmitters and receivers,
the complete elimination from the marketplace of VHF-only receivers and the
expansion of cable television systems have reduced the VHF signal advantage.
16
Television station revenues are primarily derived from local, regional and
national advertising and, to a much lesser extent, from network compensation and
revenues from studio and tower space rental and commercial production
activities. Advertising rates are based upon a variety of factors, including a
program's popularity among the viewers an advertiser wishes to attract, the
number of advertisers competing for the available time, the size and demographic
makeup of the market served by the station and the availability of alternative
advertising media in the market area. Rates are also determined by a station's
overall ratings and in-market share, as well as the station's ratings and share
among particular demographic groups which an advertiser may be targeting.
Because broadcast stations rely on advertising revenues, they are sensitive to
cyclical changes in the economy. The size of advertisers' budgets, which are
affected by broad economic trends, affect the broadcast industry in general and
the revenues of individual broadcast television stations.
All television stations in the country are grouped by Nielsen, a national
audience measuring service, into approximately 210 generally recognized
television markets that are ranked in size according to various formulae based
upon actual or potential audience. Each DMA is an exclusive geographic area
consisting of all counties in which the home-market commercial stations receive
the greatest percentage of total viewing hours. Nielsen periodically publishes
data on estimated audiences for the television stations in the various
television markets throughout the country. The estimates are expressed in terms
of the percentage of the total potential audience in the market viewing a
station (the station's "rating") and of the percentage of households using
television actually viewing the station (the station's "share"). Nielsen
provides such data on the basis of total television households and selected
demographic groupings in the market. Nielsen uses two methods of determining a
station's ability to attract viewers. In larger geographic markets, ratings are
determined by a combination of meters connected directly to selected television
sets and weekly diaries of television viewing, while in smaller markets only
weekly diaries are utilized. All of the Company's stations operate in markets
where only weekly diaries are used.
Historically, three major broadcast networks, Capital Cities/ABC, Inc.
("ABC"), NBC and CBS, dominated broadcast television. In recent years, Fox has
evolved into the fourth major network by establishing a network of independent
stations whose operating characteristics are similar to the major network
affiliate stations, although the number of hours of network programming produced
by Fox for its affiliates is less than that of the three major networks. In
addition, United Paramount Network ("UPN") and Warner Brothers Network ("WB")
recently have been launched as new television networks. An affiliate of UPN or
WB receives a smaller portion of each day's programming from its network
compared to an affiliate of a major network. Currently, UPN and WB provide 10
and 11.5 hours of programming per week to their affiliates, respectively.
The affiliation of a station with one of the four major networks has a
significant impact on the composition of the station's programming, revenues,
expenses and operations. A typical affiliate of a major network receives the
majority of each day's programming from the network. This programming, along
with cash payments ("network compensation"), is provided to the affiliate by the
network in exchange for a substantial majority of the advertising time sold
during the airing of network programs. The network then sells this advertising
time and retains the revenues. The affiliate retains the revenues from time sold
during breaks in and between network programs and programs the affiliate
produces or purchases from non-network sources. In acquiring programming to
supplement programming supplied by the affiliated network, network affiliates
compete primarily with other affiliates and independent stations in their
markets. Cable systems generally do not compete with local stations for
programming, although various national cable networks from time to time have
acquired programs that would have otherwise been offered to local television
stations. In addition, a television station may acquire programming through
barter arrangements. Under barter arrangements, which are becoming increasingly
popular with both network affiliates and independents, a national program
distributor may receive advertising time in exchange for the programming it
supplies, with the station paying a reduced fee for such programming.
17
In contrast to a station affiliated with a network, a fully independent
station purchases or produces all of the programming that it broadcasts,
resulting in generally higher programming costs. An independent station,
however, retains its entire inventory of advertising time and all of the
revenues obtained therefrom. As a result of the smaller amount of programming
provided by its network, an affiliate of UPN or WB must purchase or produce a
greater amount of its programming, resulting in generally higher programming
costs. These affiliate stations, however, retain a larger portion of the
inventory of advertising time and the revenues obtained therefrom compared to
stations affiliated with the major networks.
Through the 1970s, network television broadcasting enjoyed virtual dominance
in viewership and television advertising revenues, because network-affiliated
stations competed only with each other in most local markets. Beginning in the
1980s, this level of dominance began to change as the FCC authorized more local
stations and marketplace choices expanded with the growth of independent
stations and cable television services. See "-Federal Regulation of the
Company's Business."
Cable television systems were first installed in significant numbers in the
1970s and were initially used to retransmit broadcast television programming to
paying subscribers in areas with poor broadcast signal reception. In the
aggregate, cable-originated programming has emerged as a significant competitor
for viewers of broadcast television programming, although no single cable
programming network regularly attains audience levels amounting to more than a
small fraction of any single major broadcast network. The advertising share of
cable networks increased during the 1970s and 1980s as a result of the growth in
cable penetration (the percentage of television households which are connected
to a cable system). Notwithstanding such increases in cable viewership and
advertising, over-the-air broadcasting remains the dominant distribution system
for mass market television advertising.
NEWSPAPER PUBLISHING
The Company owns and operates five publications comprising three newspapers
and two shoppers, all located in the Southeast.
THE ALBANY HERALD
THE ALBANY HERALD, located in Albany, Georgia, is the only seven-day-a-week
newspaper that serves southwestern Georgia. The Company changed THE ALBANY
HERALD from an afternoon newspaper to a morning newspaper in 1993 and improved
its graphics and layout. These changes enabled the Company to increase THE
ALBANY HERALD's newsstand and subscription prices as well as its advertising
rates, resulting in an increase of revenues from $10.1 million in 1993 to $13.5
million in 1995, a 33.8% increase. The Company intends to increase selectively
the price and advertising rates of THE ALBANY HERALD in the future. The Albany
market has four other daily newspapers with a limited circulation and market
area.
THE ALBANY HERALD also publishes three other weekly editions in Georgia, THE
LEE COUNTY HERALD, THE WORTH COUNTY HERALD and THE CALHOUN-CLAY HERALD, all of
which provide regional news coverage. Other niche publications include (i) FARM
AND PLANTATION, an agricultural paper, (ii) a monthly COUPON CLIPPER, (iii) a
quarterly, direct mail coupon book called CASH CUTTERS, (iv) an annual dining
guide and (v) an annual bridal book. The Company introduced these weeklies and
other niche product publications in order to better utilize THE ALBANY HERALD's
printing presses and infrastructure (such as sales and advertising). The
printing press is approximately 19 years old and is in good working order. THE
ALBANY HERALD cross-merchandises its publications, thereby increasing total
revenues with only a small increase in related expenditures. The Company also
seeks to increase THE ALBANY HERALD's circulation and revenues through its
sponsorship of special events of local interest, such as bass fishing
tournaments.
THE ROCKDALE CITIZEN AND THE GWINNETT DAILY POST
THE ROCKDALE CITIZEN and the GWINNETT DAILY POST are five-day-a-week
newspapers that serve communities in the metro Atlanta area with complete local
news, sports and lifestyles coverage together with national stories that
directly impact their local communities.
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THE ROCKDALE CITIZEN is located in Conyers, Georgia, the county seat of
Rockdale County, which is 19 miles east of downtown Atlanta. Rockdale County's
population is estimated to be 64,000 in 1996. Conyers is the site of the 1996
Olympic equestrian competition.
The GWINNETT DAILY POST, which was purchased by the Company in January 1995,
is located north of Atlanta in Gwinnett County, one of the fastest growing areas
in the nation. Gwinnett's population, which has more than doubled during each of
the past two census periods, was estimated at 457,000 in 1995. In September
1995, the Company increased the frequency of publication of the GWINNETT DAILY
POST from three to five days per week in an effort to increase circulation.
The Company's operating strategy with respect to THE ROCKDALE CITIZEN and
the GWINNETT DAILY POST is to increase circulation by improving the print
quality, increasing the local news content and increasing its telemarketing and
promotional efforts. The Rockdale Citizen's printing press is approximately 24
years old and is in good working order. The Company has hired a new president of
publishing for THE ROCKDALE CITIZEN and the GWINNETT DAILY POST in order to
implement its operating strategy at these newspapers.
SOUTHWEST GEORGIA SHOPPER
The Southwest Georgia Shopper, Inc., prints and distributes two shoppers,
which are direct mailed and rack distributed throughout north Florida and
southwest Georgia. These two shoppers represent a consolidation of the seven
shoppers that the Company purchased in 1994 and 1995. The Company believes that
print quality is an important criterion to advertisers and consumers and, since
their acquisition, the Company has accordingly improved the graphics of the
shoppers.
INDUSTRY BACKGROUND
Newspaper publishing is the oldest segment of the media industry and, as a
result of the focus on local news, newspapers in general, remain one of the
leading media for local advertising. Newspaper advertising revenues are cyclical
and have generally been affected by changes in national and regional economic
conditions. Financial instability in the retail industry, including bankruptcies
of large retailers and consolidations among large retail chains has recently
resulted in reduced retail advertising expenditures. Classified advertising,
which makes up approximately one-third of newspaper advertising expenditures,
can be affected by an economic slowdown and its effect on employment, real
estate transactions and automotive sales. However, growth in housing starts and
automotive sales, although cyclical in nature, generally provide continued
growth in newspaper advertising expenditures.
PAGERS AND PAGING SERVICES
THE PAGING BUSINESS
The paging business, which is a part of the Phipps Business, is based in
Tallahassee, Florida and operates in Columbus, Macon, Albany and Valdosta,
Georgia, in Dothan, Alabama, in Tallahassee and Panama City, Florida and in
certain contiguous areas. In 1995 the population of this geographic coverage
area was approximately 2.3 million. In June 1996, the Company's paging business
had approximately 44,000 units in service, representing a penetration rate of
approximately 1.9%.
The Company's paging system operates by connecting a telephone call placed
to a local telephone number with a local paging switch. The paging switch
processes a caller's information and sends the information to a link transmitter
which relays the processed information to paging transmitters, which in turn
alert an individual pager by means of a coded radio signal. This process
provides service to a "local coverage area." To enhance coverage further to its
customer base, all of the Company's local coverage areas are interconnected or
networked, providing for "wide area coverage" or "network coverage." A pager's
coverage area is programmable and can be customized to include or exclude any
particular paging switch and its respective geographic coverage area, thereby
allowing the Company's paging customers a choice of coverage areas. In addition,
the Company is able to network with other
19
paging companies which share the Company's paging frequencies in other markets,
by means of an industry standard network paging protocol, in order to increase
the geographic coverage area in which the Company's customers can receive paging
service.
A subscriber to the Company's paging services either owns a pager, thereby
paying solely for the use of the Company's paging services, or leases a pager,
thereby paying a periodic charge for both the pager and the paging services. Of
the Company's pagers currently in service, approximately 72% are owned and
maintained by subscribers ("COAM") with the remainder being leased. In recent
years, prices for pagers have fallen considerably, and thus there has been a
trend toward subscriber ownership of pagers, allowing the Company to maintain
lower inventory and fixed asset levels. COAM customers historically stay on
service longer, thus enhancing the stability of the subscriber base and
earnings. The Company is focusing its marketing efforts on increasing its base
of COAM users. The Company purchases all of its pagers from two suppliers,
Panasonic and Motorola, with Motorola supplying a majority of such pagers. Due
to the high demand from the Company's customers for Motorola pagers, the Company
believes that its ability to offer Motorola pagers is important to its business.
The Company's goal is to increase the number of pagers in service, revenues
and cash flow from operations by implementing a plan that focuses on improved
operating methods and controls and innovative marketing programs. The Company's
paging business has grown in recent years by: (i) increasing the number of
business customers; (ii) expanding its resale program; (iii) increasing its
retail operations; and (iv) increasing geographical coverage.
INDUSTRY BACKGROUND
Paging is a method of wireless communication which uses an assigned radio
frequency to contact a paging subscriber within a designated service area. A
subscriber carries a pager which receives messages by the broadcast of a radio
signal. To contact a subscriber, a message is usually sent by placing a
telephone call to the subscriber's designated telephone number. The telephone
call is received by an electronic paging switch which generates a signal that is
sent to radio transmitters in the subscriber's service area. The transmitters
broadcast a coded signal that is unique to the pager carried by the subscriber
and alerts the subscriber through a tone or vibration that there is a voice,
numeric, alphanumeric or other message. Depending upon the topography of the
service area, the operating radius of a radio transmitter typically ranges from
three to 20 miles.
Three tiers of carriers have emerged in the paging industry: (i) large
nationwide providers serving multiple markets throughout the United States; (ii)
regional carriers, like the Company's paging business, which operate in regional
markets such as several contiguous states in one geographic region of the United
States; and (iii) small, single market operators. The Company believes that the
paging industry is undergoing consolidation.
The paging industry has traditionally marketed its services through direct
distribution by sales representatives. In recent years, additional channels of
distribution have evolved, including: (i) carrier-operated retail stores; (ii)
resellers, who purchase paging services on a wholesale basis from carriers and
resell those services on a retail basis to their own customers; (iii)
independent sales agents who solicit customers for carriers and are compensated
on a commission basis; and (iv) retail outlets that often sell a variety of
merchandise, including pagers and other telecommunications equipment.
SATELLITE BROADCASTING
The Company's satellite broadcasting business provides broadcast and
production services through mobile and fixed production units as well as C-band
and Ku-band satellite transmission facilities. Clients include The Walt Disney
Company, The Golf Channel, USA Network, Turner Broadcasting System, CBS, ABC,
PGA Tour Productions and The Children's Miracle Network.
20
ADDITIONAL INFORMATION ON BUSINESS SEGMENTS
Reference is made to Note J of Notes to Consolidated Financial Statements of
the Company for additional information regarding business segments.
COMPETITION
TELEVISION INDUSTRY
Competition in the television industry exists on several levels: competition
for audience, competition for programming (including news) and competition for
advertisers. Additional factors that are material to a television station's
competitive position include signal coverage and assigned frequency. The
broadcasting industry is faced continually with technological change and
innovation, the possible rise in popularity of competing entertainment and
communications media and governmental restrictions or actions of federal
regulatory bodies, including the FCC and the Federal Trade Commission, any of
which could have a material effect on the Company's operations. In addition,
since early 1994, there have been a number of network affiliation changes in
many of the top 100 television markets. As a result, the major networks have
sought longer terms in their affiliation agreements with local stations and
generally have increased the compensation payable to the local stations in
return for such longer term agreements. During the same time period, the rate of
change of ownership of local television stations has increased over past
periods.
AUDIENCE. Stations compete for audience on the basis of program popularity,
which has a direct effect on advertising rates. A substantial portion of the
daily programming on each of the Company's stations is supplied by the network
with which each station is affiliated. During those periods, the stations are
totally dependent upon the performance of the network programs to attract
viewers. There can be no assurance that such programming will achieve or
maintain satisfactory viewership levels in the future. Non-network time periods
are programmed by the station with a combination of self-produced news, public
affairs and other entertainment programming, including news and syndicated
programs purchased for cash, cash and barter, or barter only.
Independent stations, whose number has increased significantly over the past
decade, have also emerged as viable competitors for television viewership
shares. In addition, UPN and WB have been launched recently as new television
networks. The Company is unable to predict the effect, if any, that such
networks will have on the future results of the Company's operations.
In addition, the development of methods of television transmission of video
programming other than over-the-air broadcasting, and in particular cable
television, has significantly altered competition for audience in the television
industry. These other transmission methods can increase competition for a
broadcasting station by bringing into its market distant broadcasting signals
not otherwise available to the station's audience and also by serving as a
distribution system for non-broadcast programming. Through the 1970s, television
broadcasting enjoyed virtual dominance in viewership and television advertising
revenues because network-affiliated stations competed only with each other in
most local markets. Although cable television systems initially retransmitted
broadcast television programming to paying subscribers in areas with poor
broadcast signal reception, significant increases in cable television
penetration in areas that did not have signal reception problems occurred
throughout the 1970s and 1980s. As the technology of satellite program delivery
to cable systems advanced in the late 1970s, development of programming for
cable television accelerated dramatically, resulting in the emergence of
multiple, national-scale program alternatives and the rapid expansion of cable
television and higher subscriber growth rates. Historically, cable operators
have not sought to compete with broadcast stations for a share of the local news
audience. Recently, however, certain cable operators have elected to compete for
such audiences and the increased competition could have an adverse effect on the
Company's advertising revenues.
Other sources of competition include home entertainment systems (including
video cassette recorder and playback systems, video discs and television game
devices), "wireless cable" services,
21
satellite master antenna television systems, low power television stations,
television translator stations and, more recently, direct broadcast satellite
("DBS") video distribution services, which transmit programming directly to
homes equipped with special receiving antennas, and video signals delivered over
telephone lines. Public broadcasting outlets in most communities compete with
commercial television stations for audience but not for advertising dollars,
although this may change as the United States Congress considers alternative
means for the support of public television.
Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques are expected to reduce
the bandwidth required for television signal transmission. These compression
techniques, as well as other technological developments, are applicable to all
video delivery systems, including over-the-air broadcasting, and have the
potential to provide vastly expanded programming to highly targeted audiences.
Reduction in the cost of creating additional channel capacity could lower entry
barriers for new channels and encourage the development of increasingly
specialized "niche" programming. This ability to reach very narrowly defined
audiences is expected to alter the competitive dynamics for advertising
expenditures. In addition, competition in the television industry in the future
may come from interactive video and information and data services that may be
delivered by commercial television stations, cable television, DBS, multipoint
distribution systems, multichannel multipoint distribution systems or other
video delivery systems. The Company is unable to predict the effect that these
or other technological changes will have on the broadcast television industry or
the future results of the Company's operations.
PROGRAMMING. Competition for programming involves negotiating with national
program distributors or syndicators that sell first-run and rerun packages of
programming. Each station competes against the broadcast station competitors in
its market for exclusive access to off-network reruns (such as ROSEANNE) and
first-run product (such as ENTERTAINMENT TONIGHT). Cable systems generally do
not compete with local stations for programming, although various national cable
networks from time to time have acquired programs that would have otherwise been
offered to local television stations. Competition exists for exclusive news
stories and features as well.
ADVERTISING. Advertising rates are based upon the size of the market in which
the station operates, a program's popularity among the viewers that an
advertiser wishes to attract, the number of advertisers competing for the
available time, the demographic makeup of the market served by the station, the
availability of alternative advertising media in the market area, aggressive and
knowledgeable sales forces and the development of projects, features and
programs that tie advertiser messages to programming. Advertising revenues
comprise the primary source of revenues for the Company's stations. The
Company's stations compete for such advertising revenues with other television
stations and other media in their respective markets. Typically, independent
stations achieve a greater proportion of the television market advertising
revenues than network affiliated stations relative to their share of the
market's audience, because independent stations have greater amounts of
available advertising time. The stations also compete for advertising revenues
with other media, such as newspapers, radio stations, magazines, outdoor
advertising, transit advertising, yellow page directories, direct mail and local
cable systems. Competition for advertising dollars in the broadcasting industry
occurs primarily within individual markets.
NEWSPAPER INDUSTRY
The Company's newspapers compete for advertisers with a number of other
media outlets, including magazines, radio and television, as well as other
newspapers, which also compete for readers with the Company's publications. Many
of the Company's newspaper competitors are significantly larger than the
Company. The Company attempts to differentiate its publications from other
newspapers by focusing on local news and local sports coverage in order to
compete with its larger competitors. The Company also seeks to establish its
publications as the local newspaper by sponsoring special events of particular
community interest.
22
PAGING INDUSTRY
The paging industry is highly competitive. Companies in the industry compete
on the basis of price, coverage area offered to subscribers, available services
offered in addition to basic numeric or tone paging, transmission quality,
system reliability and customer service. The Company competes by maintaining
competitive pricing of its product and service offerings, by providing
high-quality, reliable transmission networks and by furnishing subscribers a
superior level of customer service.
The Company's primary competitors include those paging companies that
provide wireless service in the same geographic areas in which the Company
operates. The Company experiences competition from one or more competitors in
all locations in which it operates. Some of the Company's competitors have
greater financial and other resources than the Company.
The Company's paging services also compete with other wireless
communications services such as cellular service. The typical customer uses
paging as a low cost wireless communications alternative either on a stand-alone
basis or in conjunction with cellular services. Future technological
developments in the wireless communications industry and enhancements of current
technology, however, could create new products and services, such as personal
communications services and mobile satellite services, which are competitive
with the paging services currently offered by the Company. Recent and proposed
regulatory changes by the FCC are aimed at encouraging such technological
developments and new services and promoting competition. There can be no
assurance that the Company's paging business would not be adversely affected by
such technological developments or regulatory changes.
NETWORK AFFILIATION OF THE STATIONS
Each of the Company's stations is affiliated with a major network pursuant
to an affiliation agreement. Each affiliation agreement provides the affiliated
station with the right to broadcast all programs transmitted by the network with
which the station is affiliated. In return, the network has the right to sell a
substantial majority of the advertising time during such broadcasts. In exchange
for every hour that a station elects to broadcast network programming, the
network pays the station a specific network compensation payment which varies
with the time of day. Typically, prime-time programming generates the highest
hourly network compensation payments. Such payments are subject to increase or
decrease by the network during the term of an affiliation agreement with
provisions for advance notices and right of termination by the station in the
event of a reduction in such payments. The NBC affiliation agreements for WALB
and WJHG are renewed automatically every five years on September 1 unless the
station notifies NBC otherwise. The CBS affiliation agreements for WKYT, WYMT,
WRDW, WCTV and WKXT expire on December 31, 2004, December 31, 2004, March 31,
2005, December 31, 1999, and December 31, 1999, respectively.
FEDERAL REGULATION OF THE COMPANY'S BUSINESS
TELEVISION BROADCASTING
EXISTING REGULATION. Television broadcasting is subject to the jurisdiction of
the FCC under the Communications Act of 1934, as amended (the "Communications
Act") and the Telecommunications Act of 1996 (the "Telecommunications Act"). The
Communications Act prohibits the operation of television broadcasting stations
except under a license issued by the FCC and empowers the FCC, among other
things, to issue, revoke and modify broadcasting licenses, determine the
locations of stations, regulate the equipment used by stations, adopt
regulations to carry out the provisions of the Communications Act and the
Telecommunications Act and impose penalties for violation of such regulations.
The Communications Act prohibits the assignment of a license or the transfer of
control of a licensee without prior approval of the FCC.
LICENSE GRANT AND RENEWAL. Television broadcasting licenses generally are
granted or renewed for a period of five years; recently extended to eight years
by the Telecommunications Act, but may be renewed for a shorter period upon a
finding by the FCC that the "public interest, convenience, and necessity" would
be served thereby. The broadcast licenses for WALB, WJHG, WKYT, WYMT, WRDW, WCTV
and WKXT are effective until April 1, 1997, February 1, 1997, August 1, 1997,
August 1, 1997,
23
April 1, 1997, February 1, 1997 and August 1, 1997, respectively. The
Telecommunications Act requires a broadcast license to be renewed if the FCC
finds that: (i) the station has served the public interest, convenience and
necessity; (ii) there have been no serious violations of either the
Telecommunications Act or the FCC's rules and regulations by the licensee; and
(iii) there have been no other violations, which taken together would constitute
a pattern of abuse. At the time an application is made for renewal of a
television license, parties in interest may file petitions to deny, and such
parties, including members of the public, may comment upon the service the
station has provided during the preceding license term and urge denial of the
application. If the FCC finds that the licensee has failed to meet the
above-mentioned requirements, it could deny the renewal application or grant a
conditional approval, including renewal for a lesser term. The FCC will not
consider competing applications contemporaneously with a renewal application.
Only after denying a renewal application can the FCC accept and consider
competing applications for the license. Although in the vast majority of cases
broadcast licenses are renewed by the FCC even when petitions to deny or
competing applications are filed against broadcast license renewal applications,
there can be no assurance that the Company's stations' licenses will be renewed.
The Company is not aware of any facts or circumstances that could prevent the
renewal of the licenses for its stations at the end of their respective license
terms.
MULTIPLE OWNERSHIP RESTRICTIONS. Currently, the FCC has rules that limit the
ability of individuals and entities to own or have an ownership interest above a
certain level (an "attributable" interest, as defined more fully below) in
broadcast stations, as well as other mass media entities. The current rules
limit the number of radio and television stations that may be owned both on a
national and a local basis. On a national basis, the rules preclude any
individual or entity from having an attributable interest in more than 12
television stations. Moreover, the aggregate audience reach of co-owned
television stations may not exceed 25% of all United States households. An
individual or entity may hold an attributable interest in up to 14 television
stations (or stations with an aggregate audience reach of 30% of all United
States households) if at least two of the stations are controlled by a member of
an ethnic minority. The Telecommunications Act directs the FCC to eliminate the
restriction on the number of television stations which may be owned or
controlled nationally and to increase the national audience reach limitation for
television stations to 35%.
On a local basis, FCC rules currently allow an individual or entity to have
an attributable interest in only one television station in a market. In
addition, FCC rules and the Telecommunications Act generally prohibit an
individual or entity from having an attributable interest in a television
station and a radio station, daily newspaper or cable television system that is
located in the same local market area served by the television station.
Proposals currently before the FCC could substantially alter these standards.
For example, in a recently initiated rulemaking proceeding, the FCC suggested
narrowing the geographic scope of the local television cross-ownership rule (the
so-called "duopoly rule") from Grade B to Grade A contours and possibly
permitting some two-station combinations in certain markets. The FCC has also
proposed eliminating the TV/radio cross-ownership restriction (the so-called
"one-to-a-market" rule) entirely or at least exempting larger markets. In
addition, the FCC is seeking comment on issues of control and attribution with
respect to local marketing agreements entered into by television stations. It is
unlikely that this rulemaking will be concluded until late 1996 or later, and
there can be no assurance that any of these rules will be changed or what will
be the effect of any such change. The Telecommunications Act expressly does not
prohibit any local marketing agreements in compliance with FCC regulations.
Furthermore, the Telecommunications Act directs the FCC to conduct a rulemaking
proceeding to determine whether restricting ownership of more than one
television station in the same area should be retained, modified or eliminated.
It is the intent of Congress that if the FCC revises the multiple ownership
rules, it should permit co-located VHF-VHF combinations only in compelling
circumstances, where competition and diversity will not be harmed.
The Telecommunications Act also directs the FCC to extend its
one-to-a-market waiver policy from the top 25 to any of the top 50 markets. In
addition, the Telecommunications Act directs the FCC to permit a television
station to affiliate with two or more networks unless such dual or multiple
24
networks are composed of (i) two or more of the four existing networks (ABC,
CBS, NBC or Fox) or, (ii) any of the four existing networks and one of the two
emerging networks (UPN or WBN). The Company believes that Congress does not
intend for these limitations to apply if such networks are not operated
simultaneously, or if there is no substantial overlap in the territory served by
the group of stations comprising each of such networks. The Telecommunications
Act also directs the FCC to revise its rules to permit cross-ownership interests
between a broadcast network and a cable system. The Telecommunications Act
further authorizes the FCC to consider revising its rules to permit common
ownership of co-located broadcast stations and cable systems.
Expansion of the Company's broadcast operations in particular areas and
nationwide will continue to be subject to the FCC's ownership rules and any
changes the FCC or Congress may adopt. Any relaxation of the FCC's ownership
rules may increase the level of competition in one or more of the markets in
which the Company's stations are located, particularly to the extent that the
Company's competitors may have greater resources and thereby be in a better
position to capitalize on such changes.
Under the FCC's ownership rules, a direct or indirect purchaser of certain
types of securities of the Company could violate FCC regulations if that
purchaser owned or acquired an "attributable" or "meaningful" interest in other
media properties in the same areas as stations owned by the Company or in a
manner otherwise prohibited by the FCC. All officers and directors of a
licensee, as well as general partners, uninsulated limited partners and
stockholders who own five percent or more of the voting power of the outstanding
common stock of a licensee (either directly or indirectly), generally will be
deemed to have an "attributable" interest in the licensee. Certain institutional
investors which exert no control or influence over a licensee may own up to 10%
of the voting power of the outstanding common stock before attribution occurs.
Under current FCC regulations, debt instruments, non-voting stock, certain
limited partnership interests (provided the licensee certifies that the limited
partners are not "materially involved" in the management and operation of the
subject media property) and voting stock held by minority stockholders in cases
in which there is a single majority stockholder generally are not subject to
attribution. The FCC's cross-interest policy, which precludes an individual or
entity from having a "meaningful" (even though not "attributable") interest in
one media property and an "attributable" interest in a broadcast, cable or
newspaper property in the same area, may be invoked in certain circumstances to
reach interests not expressly covered by the multiple ownership rules.
In January 1995, the FCC released a Notice of Proposed Rule Making ("NPRM")
designed to permit a "thorough review of [its] broadcast media attribution
rules." Among the issues on which comment was sought are (i) whether to change
the voting stock attribution benchmarks from five percent to 10% and, for
passive investors, from 10% to 20%; (ii) whether there are any circumstances in
which non-voting stock interests, which are currently considered
non-attributable, should be considered attributable; (iii) whether the FCC
should eliminate its single majority shareholder exception (pursuant to which
voting interests in excess of five percent are not considered cognizable if a
single majority shareholder owns more than 50% of the voting power); (iv)
whether to relax insulation standards for business development companies and
other widely-held limited partnerships; (v) how to treat limited liability
companies and other new business forms for attribution purposes; (vi) whether to
eliminate or codify the cross-interest policy; and, (vii) whether to adopt a new
policy which would consider whether multiple "cross interests" or other
significant business relationships (such as time brokerage agreements, debt
relationships or holdings of nonattributable interests), which individually do
not raise concerns, raise issues with respect to diversity and competition. It
is unlikely that this inquiry will be concluded until late 1996 at the earliest
and there can be no assurance that any of these standards will be changed.
Should the attribution rules be changed, the Company is unable to predict what,
if any, effect it would have on the Company or its activities. To the best of
the Company's knowledge, no officer, director or five percent stockholder of the
Company currently holds an interest in another television station, radio
station, cable television system or daily newspaper that is inconsistent with
the FCC's ownership rules and policies or with ownership by the Company of its
stations.
25
ALIEN OWNERSHIP RESTRICTIONS. The Communications Act restricts the ability of
foreign entities or individuals to own or hold interests in broadcast licenses.
Foreign governments, representatives of foreign governments, non-citizens,
representatives of non-citizens, and corporations or partnerships organized
under the laws of a foreign nation are barred from holding broadcast licenses.
Non-citizens, collectively, may directly or indirectly own or vote up to 20% of
the capital stock of a licensee but are prohibited from serving as officers or
directors of such licensee. In addition, a broadcast license may not be granted
to or held by any corporation that is controlled, directly or indirectly, by any
other corporation (i) that has a non-citizen as an officer, (ii) more than
one-fourth of whose directors are non-citizens or (iii) more than one-fourth of
whose capital stock is owned or voted by non-citizens or their representatives
or by foreign governments or their representatives, or by non-U.S. corporations,
if the FCC finds that the public interest will be served by the refusal or
revocation of such license. The Company has been advised that the FCC staff has
interpreted this provision of the Communications Act to require an affirmative
public interest finding before a broadcast license may be granted to or held by
any such corporation and the FCC has made such an affirmative public interest
finding before a broadcast license may be granted to or held by any such
corporation and the FCC has made such an affirmative finding only in limited
circumstances. The Company, which serves as a holding company for wholly-owned
subsidiaries that are licensees for its stations, therefore may be restricted
from having (i) more than one-fourth of its stock owned or voted directly or
indirectly by non-citizens, foreign governments, representatives of non-citizens
or foreign governments, or foreign corporations; (ii) an officer who is a
non-citizen; or (iii) more than one-fourth of its board of directors consisting
of non-citizens.
RECENT DEVELOPMENTS. The FCC recently decided to eliminate the prime time
access rule ("PTAR"), effective August 30, 1996. PTAR currently limits a
station's ability to broadcast network programming (including syndicated
programming previously broadcast over a network) during prime time hours. The
elimination of PTAR could increase the amount of network programming broadcast
over a station affiliated with ABC, NBC, CBS or Fox. Such elimination also could
result in (i) an increase in the compensation paid by the network (due to the
additional prime time during which network programming could be aired by a
network-affiliated station) and (ii) increased competition for syndicated
network programming that previously was unavailable for broadcast by network
affiliates during prime time. The FCC also recently announced that it was
rescinding its remaining financial interest and syndication ("fin\syn") rules.
The original rules, first adopted in 1970, severely restricted the ability of a
network to obtain financial interests in, or participate in syndication of,
prime-time entertainment programming created by independent producers for airing
during the networks' evening schedules. The FCC previously lifted the financial
interest rules and restraints on foreign syndication.
Congress has recently enacted legislation and the FCC currently has under
consideration or is implementing new regulations and policies regarding a wide
variety of matters that could affect, directly or indirectly, the operation and
ownership of the Company's broadcast properties. In addition to the proposed
changes noted above, such matters include, for example, the license renewal
process (particularly the weight to be given to the expectancy of renewal for an
incumbent broadcast licensee and the criteria to be applied in deciding
contested renewal applications), spectrum use fees, political advertising rates,
potential advertising restrictions on the advertising of certain products (beer
and wine, for example), the rules and policies to be applied in enforcing the
FCC's equal employment opportunity regulations, reinstitution of the Fairness
Doctrine (which requires broadcasters airing programming concerning
controversial issues of public importance to afford a reasonable opportunity for
the expression of contrasting viewpoints), and the standards to govern
evaluation of television programming directed toward children and violent and
indecent programming (including the possible requirement of what is commonly
referred to as the "v-chip," which would permit parents to program television
sets so that certain programming would not be accessible by children). Other
matters that could affect the Company's broadcast properties include
technological innovations and developments
26
generally affecting competition in the mass communications industry, such as the
recent initiation of direct broadcast satellite service, and the continued
establishment of wireless cable systems and low power television stations.
The FCC presently is seeking comment on its policies designed to increase
minority ownership of mass media facilities. Congress also recently enacted
legislation that eliminated the minority tax certificate program of the FCC,
which gave favorable tax treatment to entities selling broadcast stations to
entities controlled by an ethnic minority. In addition, a recent Supreme Court
decision has cast doubt upon the continued validity of many of the congressional
programs designed to increase minority ownership of mass media facilities.
DISTRIBUTION OF VIDEO SERVICES BY TELEPHONE COMPANIES. Recent actions by the
FCC, Congress and the courts all presage significant future involvement in the
provision of video services by telephone companies. The Company cannot predict
either the timing or the extent of such involvement.
THE 1992 CABLE ACT. On October 5, 1992, Congress enacted the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). The FCC
began implementing the requirements of the 1992 Cable Act in 1993 and final
implementation proceedings remain pending regarding certain of the rules and
regulations previously adopted. Certain statutory provisions, such as signal
carriage, retransmission consent and equal employment opportunity requirements,
have a direct effect on television broadcasting. Other provisions are focused
exclusively on the regulation of cable television but can still be expected to
have an indirect effect on the Company because of the competition between
over-the-air television stations and cable systems.
The signal carriage, or "must carry," provisions of the 1992 Cable Act
require cable operators to carry the signals of local commercial and
non-commercial television stations and certain low power television stations.
Systems with 12 or fewer usable activated channels and more than 300 subscribers
must carry the signals of at least three local commercial television stations. A
cable system with more than 12 usable activated channels, regardless of the
number of subscribers, must carry the signals of all local commercial television
stations, up to one-third of the aggregate number of usable activated channels
of such system. The 1992 Cable Act also includes a retransmission consent
provision that prohibits cable operators and other multi-channel video
programming distributors from carrying broadcast stations without obtaining
their consent in certain circumstances. The "must carry" and retransmission
consent provisions are related in that a local television broadcaster, on a
cable system-by-cable system basis, must make a choice once every three years
whether to proceed under the "must carry" rules or to waive that right to
mandatory but uncompensated carriage and negotiate a grant of retransmission
consent to permit the cable system to carry the station's signal, in most cases
in exchange for some form of consideration from the cable operator. Cable
systems must obtain retransmission consent to carry all distant commercial
stations other than "super stations" delivered via satellite.
Under rules adopted to implement these "must carry" and retransmission
consent provisions, local television stations were required to make an initial
election of "must carry" or retransmission consent by June 17, 1993. Stations
that failed to elect were deemed to have elected carriage under the "must carry"
provisions. Other issues addressed in the FCC rules were market designations,
the scope of retransmission consent and procedural requirements for implementing
the signal carriage provisions. Each of the Company's stations elected "must
carry" status on certain cable systems in its DMA. This election entitles the
Company's stations to carriage on those systems until at least December 31,
1996. In certain other situations, the Company's stations entered into
"retransmission consent" agreements with cable systems. The Company is unable to
predict whether or not these retransmission consent agreements will be extended
and, if so, on what terms.
On April 8, 1993, a special three-judge panel of the U.S. District Court for
the District of Columbia upheld the constitutionality of the "must carry"
provisions of the 1992 Cable Act. However, on June 27, 1994, the United States
Supreme Court in a 5-4 decision vacated the lower court's judgment and remanded
the case to the District Court for further proceedings. Although the Supreme
Court
27
found the "must carry" rules to be content-neutral and supported by legitimate
governmental interests under appropriate constitutional tests, it also found
that genuine issues of material fact still remained that must be resolved in a
more detailed evidentiary record. On December 12, 1995, the United States
District Court for the District of Columbia upheld the "must carry" requirements
compelling cable systems to carry broadcast signals. The cable industry plans to
appeal this decision. In the meantime, however, the FCC's new "must carry"
regulations implementing the 1992 Cable Act remain in effect.
The 1992 Cable Act also codified the FCC's basic equal employment
opportunity ("EEO") rules and the use of certain EEO reporting forms currently
filed by television broadcast stations. In addition, pursuant to the 1992 Cable
Act's requirements, the FCC has adopted new rules providing for a review of the
EEO performance of each television station at the mid-point of its license term
(in addition to renewal time). Such a review will give the FCC an opportunity to
evaluate whether the licensee is in compliance with the FCC's processing
criteria and notify the licensee of any deficiency in its employment profile.
Among the other rulemaking proceedings conducted by the FCC to implement
provisions of the 1992 Cable Act have been those concerning cable rate
regulation, cable technical standards, cable multiple ownership limits and
competitive access to programming.
Among other provisions, the Telecommunications Act redefines the term "cable
system" as "a facility that serves subscribers without using any public right of
way." It eliminates a single subscriber's ability to initiate a rate complaint
proceeding at the FCC and allows a cable operator to move any service off the
basic tier in its discretion, other than local broadcast signals and access
channels required to be carried on the basic tier.
ADVANCED TELEVISION SERVICE. The FCC has proposed the adoption of rules for
implementing advanced television ("ATV") service in the United States.
Implementation of digital ATV will improve the technical quality of television
signals receivable by viewers and will provide broadcasters the flexibility to
offer new services, including high-definition television ("HDTV"), simultaneous
broadcasting of multiple programs of standard definition television ("SDTV") and
data broadcasting.
The FCC must adopt ATV service rules and a table of ATV allotments before
broadcasters can provide these services enabled by the new technology. On July
28, 1995, the FCC announced the issuance of a NPRM to invite comment on a broad
range of issues related to the implementation of ATV, particularly the
transition to digital broadcasting. The FCC announced that the anticipated role
of digital broadcasting will cause it to revisit certain decisions made in an
earlier order. The FCC also announced that broadcasters will be allowed greater
flexibility in responding to market demand by transmitting a mix of HDTV, SDTV
and perhaps other services. The FCC also stated that the NPRM would be followed
by two additional proceedings and that a Final Report and Order which will
launch the ATV system is anticipated in 1996.
The Telecommunications Act directs the FCC, if it issues licenses for ATV,
to limit the initial eligibility for such licenses to incumbent broadcast
licensees. It also authorizes the FCC to adopt regulations that would permit
broadcasters to use such spectrum for ancillary or supplementary services. It is
expected that the FCC will assign all existing television licensees a second
channel on which to provide ATV simultaneously with their current NTSC service.
It is possible after a period of years that broadcasters would be required to
cease NTSC operations, return the NTSC channel to the FCC, and broadcast only
with the newer digital technology. Some members of Congress have advocated
authorizing the FCC to auction either NTSC or ATV channels; however, the
Telecommunications Act allows the FCC to determine when such licenses will be
returned and how to allocate returned spectrum.
Under certain circumstances, conversion to ATV operations would reduce a
station's geographical coverage area but the majority of stations will obtain
service areas that match or exceed the limits of existing operations. Due to
additional equipment costs, implementation of ATV will impose some near-term
financial burdens on television stations providing the service. At the same
time, there is a potential for increased revenues to be derived from ATV.
Although the Company believes the FCC will
28
authorize ATV in the United States, the Company cannot predict precisely when or
under what conditions such authorization might be given, when NTSC operations
must cease, or the overall effect the transition to ATV might have on the
Company's business.
DIRECT BROADCASTING SATELLITE SYSTEMS. The FCC has authorized DBS, a service
which provides video programming via satellite directly to home subscribers.
Local broadcast stations and broadcast network programming are not carried on
DBS systems. Proposals recently advanced in the Telecommunications Act include a
prohibition on restrictions that inhibit a viewer's ability to receive video
programming through DBS services. The FCC has exclusive jurisdiction over the
regulation of DBS service. The Company cannot predict the impact of this new
service upon the Company's business.
PAGING
FEDERAL REGULATION. The Company's paging operations are subject to regulation
by the FCC under the Communications Act. The FCC has granted the Company
licenses to use the radio frequencies necessary to conduct its paging
operations. Licenses issued by the FCC to the Company set forth the technical
parameters, such as signal strength and tower height, under which the Company is
authorized to use those frequencies.
LICENSE GRANT AND RENEWAL. The FCC licenses granted to the Company are for
varying terms of up to 10 years, at the end of which renewal applications must
be approved by the FCC. The Company currently has 23 FCC licenses for its paging
business. Five of such licenses will expire in 1997, 12 will expire in 1999,
four will expire in 2000, one will expire in 2001 and one is currently awaiting
renewal. In the past, paging license renewal applications generally have been
granted by the FCC in most cases upon a demonstration of compliance with FCC
regulations and adequate service to the public. Although the Company is unaware
of any circumstances which could prevent the grant of renewal applications, no
assurance can be given that any of the Company's licenses will be free of
competing applications or will be renewed by the FCC. Furthermore, the FCC has
the authority to restrict the operation of licensed facilities or to revoke or
modify licenses. None of the Company's licenses has ever been revoked or
modified involuntarily.
The FCC has enacted regulations regarding auctions for the award of radio
spectrum licenses. Pursuant to such rules, the FCC at any time may require
auctions for new or existing services prior to the award of any license.
Accordingly, there can be no assurance that the Company will be able to procure
additional frequencies, or to expand existing paging networks operating on
frequencies for which the Company is currently licensed into new geographical
areas. In March 1994, the FCC adopted rules pursuant to which the FCC will
utilize competitive bidding to select Commercial Mobile Radio Service ("CMRS")
licensees when more than one entity has filed a timely application for the same
license. These competitive bidding rules could require that FCC licensees make
significant investments in order to obtain spectrum. While the FCC has not yet
applied these rules to paging licenses, it could do so at any time. The Company
also believes that this rule change may increase the number of competitors which
have significant financial resources and may provide an added incentive to build
out their systems quickly.
RECENT DEVELOPMENTS. On February 8, 1996, the FCC announced a temporary
cessation in the acceptance of applications for new paging stations, and placed
certain restrictions on the extent to which current licensees can expand into
new territories on an existing channel. The FCC has initiated an expedited
comment period in which it will consider whether these interim processing
procedures should be relaxed. The FCC is also considering whether CMRS operators
should be obligated to interconnect their systems with others and be prohibited
from placing restrictions on the resale of their services.
The FCC recently adopted rules generally revising the classification of the
services offered by paging companies. Traditionally, paging companies have been
classified either as Private Common Carriers or Private Carrier Paging Operators
or as resellers. Pursuant to the FCC's recently adopted rules, which aim to
reduce the disparities in the regulatory treatment of similar mobile services,
the
29
Company's paging services are or will be classified as CMRS. The Company
believes that such parity will remove certain regulatory advantages which
private carrier paging competitors have enjoyed under the previous
classification scheme, although private carrier paging companies will be subject
to a transition period through August 1996 before these new rules are
applicable.
The Telecommunications Act may affect the Company's paging business. Some
aspects of the new statute could have beneficial effect on the Company's paging
business. For example, proposed federal guidelines regarding antenna siting
issues may remove local and state barriers to the construction of communications
facilities, and efforts to increase competition in the local exchange and
interexchange industries may reduce the cost to the Company of acquiring
necessary communications services and facilities. On the other hand, some
provisions relating to common carrier interconnection, telephone number
portability, equal access, the assignment of new area codes, resale requirements
and auction authority may place additional burdens upon the Company or subject
the Company to increased competition.
In addition to regulation by the FCC, paging systems are subject to certain
Federal Aviation Administration regulations with respect to the height,
location, construction, marking and lighting of towers and antennas.
STATE REGULATION. As a result of the enactment by Congress of the Omnibus
Budget Reconciliation Act of 1993, the authority of the states to regulate the
Company's paging operations was severely curtailed as of August 1994. At this
time the Company is not aware of any proposed state legislation or regulations
which would have a material adverse impact on the Company's paging business.
There can be no assurance, however, that such legislation or regulations will
not be passed in the future.
EMPLOYEES
As of March 1996, the Company (excluding the Phipps Business) had 740
full-time employees, of which 450 were employees of the Company's stations, 280
were employees of the Company's publications and 10 were corporate and
administrative personnel. None of the Company's employees are represented by
unions. The Company believes that its relations with its employees are
satisfactory.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 126 North
Washington Street, Albany, Georgia 31701, which is owned by The Albany Herald
Publishing Company, Inc. (the "Albany Herald"). The Albany Herald also owns the
adjacent building on the corner of Pine Avenue in Albany. The building located
at 126 North Washington Street contains administration, news and advertising
offices and the adjacent buildings located on Pine Avenue contain the printing
press and production facilities, as well as paper storage and maintenance. These
buildings contain approximately 83,000 square feet. In addition, the parking lot
for the employees and customers of THE ALBANY HERALD is located immediately
across Pine Avenue from the administration offices.
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. The types of properties
required to support newspaper publishing include offices, facilities for the
printing press and production and storage. A station's studios are generally
housed with its offices in business districts. The transmitter sites and antenna
are generally located in elevated areas to provide optimal signal strength and
coverage.
30
The following table sets forth certain information regarding the Company's
properties.
TELEVISION BROADCASTING
STATION/APPROXIMATE
PROPERTY OWNED APPROXIMATE EXPIRATION
LOCATION USE OR LEASED SIZE OF LEASE
- ------------------------- ------------------------- --------------- --------------- ---------------
WKYT
Lexington, KY Office, studio and Owned 34,500 sq. ft. -
transmission tower site building on 20
acres
WYMT
Hazard, KY Office and studio Owned 21,200 sq. ft. -
building
Hazard, KY Transmission tower site Leased - June 2015
Hazard, KY Transmitter building and Owned 1,248 sq. ft. -
improvements
WRDW
North Augusta, SC Office and studio Owned 17,000 sq. ft. -
Transmission tower site Owned 143 acres -
WALB
Albany, GA Office and studio Owned 13,700 sq. ft. -
Albany, GA Transmission tower site Owned 21 acres -
WJHG
Panama City, FL Office and studio Owned 14,000 sq. ft. -
Youngstown, FL Transmission tower site Owned 17 acres -
WKXT
Knoxville, TN Office and studio Owned 18,300 sq. ft. --
Knoxville, TN Transmission tower site Leased Tower space Dec. 1998
WCTV
Tallahassee, FL Office and studio Leased 22,000 sq. ft. Dec. 2014
Metcalf, GA Transmission tower site Owned 182 acres --
PUBLISHING
OWNED APPROXIMATE EXPIRATION
COMPANY/PROPERTY LOCATION USE OR LEASED SIZE OF LEASE
- ----------------------------------- ------------------------- --------------- --------------- ---------------
The Albany Herald Publishing See above See above See above See above
Company, Inc.
The Rockdale Citizen Publishing
Company Offices, printing press Owned 20,000 sq. ft. -
Conyers, GA and production facility
for THE ROCKDALE CITIZEN
Lawrenceville, GA Offices and production Leased 11,000 sq. ft. Nov. 1997
facilities of the
GWINNETT DAILY POST
The Southwest Georgia Shoppers Inc.
Tallahassee, FL Offices Owned 5,500 sq. ft. --
PAGING
OWNED APPROXIMATE EXPIRATION
COMPANY/PROPERTY LOCATION USE OR LEASED SIZE OF LEASE
----------------------------------- ------------------------- --------------- --------------- ---------------
Albany GA Office Leased 800 sq. ft. March 1996
Columbus, GA Office Leased 1,000 sq. ft. July 1997
Dothan, AL Office Leased 800 sq. ft. Feb. 1995
Macon, GA Office Leased 1,260 sq. ft. July 1998
Tallahassee, GA Office Leased 2,400 sq. ft. Month to month
Thomasville, GA Office Leased 300 sq. ft. Month to month
Valdosta, GA Office Leased 400 sq. ft. May 1997
Panama City, FL Office Leased 1,050 sq. ft. Jan. 1998
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings in which an adverse
outcome would have a material adverse effect, either individually or in the
aggregate, upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the year ended December 31, 1995.
31
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since June 30, 1995, the Company's Class A Common Stock has been listed and
traded on The New York Stock Exchange (the "NYSE") under the symbol "GCS." The
following table sets forth the high and low sale prices (restated to give effect
to the three-for-two stock split) of the Class A Common Stock as reported by the
NYSE for the period after June 30, 1995 and, prior to such time, the high and
low bid quotations as reported on the NASDAQ Small Cap Market.
CLASS A
COMMON STOCK CASH
-------------------- DIVIDENDS
HIGH LOW DECLARED PER SHARE
--------- --------- ------------------
FISCAL 1994
First Quarter........................................................ $ 9.67 $ 8.67 $ .0133
Second Quarter....................................................... 9.33 8.50 .0133
Third Quarter........................................................ 9.83 9.33 .0133
Fourth Quarter....................................................... 11.00 9.83 .0267
FISCAL 1995
First Quarter........................................................ $ 14.50 $ 10.67 $ .02
Second Quarter....................................................... 19.33 14.50 .02
Third Quarter........................................................ 24.33 16.75 .02
Fourth Quarter....................................................... 22.38 16.38 .02
As of March 31, 1996, the Company had 4,462,832 outstanding shares of Class
A Common Stock held by approximately 228 shareholders of record.
The Company has paid a dividend on its Class A Common Stock since 1967.
Prior to the Stock Offering the Company intends, subject to the receipt of
shareholder approval, to amend its Articles of Incorporation to increase the
voting power of the Class A Common Stock and the Class B Common Stock to 10
votes per share and one vote per share, respectively. The Articles of
Incorporation, as amended, will require that the Class A Common Stock and the
Class B Common Stock receive dividends on a PARI PASSU basis. There can be no
assurance of the Company's ability to continue to pay any dividends on either
class of Common Stock.
The Senior Credit Facility and the Notes each contain covenants that
restrict the ability of the Company to pay dividends on its capital stock.
However, the Company does not believe that such covenants currently materially
limit its ability to pay dividends at the recent quarterly rate of $.02. In
addition to the foregoing, the declaration and payment of dividends on the Class
A Common Stock and the Class B Common Stock are subject to the discretion of the
Board of Directors. Any future payments of dividends will depend on the earnings
and financial position of the Company and such other factors as the Board of
Directors deems relevant.
32
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are certain selected historical consolidated financial data
of the Company. This information should be read in conjunction with the
consolidated financial statements of the Company and related notes thereto
appearing elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected consolidated
financial data for, and as of the end of, each of the years in the four-year
period ended December 31, 1995 are derived from the audited consolidated
financial statements of the Company. The selected consolidated financial data
for and as of the year ended December 31, 1991 are derived from unaudited
financial statements, since the Company had a June 30 fiscal year.
YEAR ENDED DECEMBER 31
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
STATEMENT OF INCOME DATA:
Operating revenues:
Broadcasting (less agency commissions) $ 13,553 $ 15,131 $ 15,004 $ 22,826 $ 36,750
Publishing 8,968 9,512 10,109 13,692 21,866
--------- --------- --------- --------- ---------
Total revenues 22,521 24,643 25,113 36,518 58,616
Expenses:
Broadcasting 9,672 9,753 10,029 14,864 23,202
Publishing 6,444 6,752 7,662 11,198 20,016
Corporate and administrative 1,889 2,627 2,326 1,959 2,258
Depreciation 1,487 1,197 1,388 1,745 2,633
Amortization of intangible assets 14 44 177 396 1,326
Non-cash compensation paid in common stock -- -- -- 80 2,321
--------- --------- --------- --------- ---------
Total expenses 19,506 20,373 21,582 30,242 51,756
--------- --------- --------- --------- ---------
Operating income 3,015 4,270 3,531 6,276 6,860
--------- --------- --------- --------- ---------
Miscellaneous income (expense), net 778 (1,519) 202 189 143
--------- --------- --------- --------- ---------
Income from continuing operations before interest expense and
income taxes 3,793 2,751 3,733 6,465 7,003
Interest expense 787 1,486 985 1,923 5,438
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes 3,006 1,265 2,748 4,542 1,565
Federal and state income taxes 1,156 869 1,068 1,776 634
--------- --------- --------- --------- ---------
Income from continuing operations 1,850 396 1,680 2,766 931
Discontinued business:
Income (loss) from operations of discontinued business, net of
applicable income tax expense (benefit) of ($55), ($79) and
$30, respectively (90) (129) 48 -- --
Gain on disposal of discontinued business, net of applicable
income tax expense of $501 -- -- 818 -- --
--------- --------- --------- --------- ---------
Net income $ 1,760 $ 267 $ 2,546 $ 2,766 $ 931
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Average outstanding common shares 6,469 4,668 4,611 4,689 4,481
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income from continuing operations per common share $ 0.29 $ 0.09 $ 0.36 $ 0.59 $ 0.21
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cash dividends per common share $ 0.05 $ 0.07 $ 0.07 $ 0.07 $ 0.08
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficiency) $ 6,740 $ 2,976 $ 2,579 $ 1,075 $ (221)
Total assets 31,548 24,173 21,372 68,789 78,240
Total debt 20,378 12,412 7,759 52,940 54,325
Total stockholders' equity $ 5,853 $ 4,850 $ 7,118 $ 5,001 $ 8,986
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS OF THE COMPANY
INTRODUCTION
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere herein.
The Company derives its revenues from its television broadcasting and
publishing operations. As a result of the Kentucky Acquisition (as defined) in
1994 and the Augusta Acquisition, which was completed in January 1996, the
proportion of the Company's revenues derived from television broadcasting has
increased and this proportion will continue to increase as a result of the
Phipps Acquisition, which is expected to occur by September 1996. As a result of
the higher operating margins associated with the Company's television
broadcasting operations, the profit contribution of these operations as a
percentage of revenues, has exceeded, and is expected to continue to exceed, the
profit contribution of the Company's publishing operations. Set forth below, for
the periods indicated, is certain information concerning the relative
contributions of the Company's television broadcasting and publishing
operations.
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1993 1994 1995
-------------------- -------------------- --------------------
(DOLLARS IN PERCENT PERCENT PERCENT
THOUSANDS) AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- --------- --------- --------- --------- ---------
TELEVISION
BROADCASTING
Revenues $15,003.7 59.8% $22,826.4 62.5% $36,750.0 62.7%
Operating
income (1) 4,070.6 66.9 6,556.0 78.4 10,585.2 94.1
PUBLISHING
Revenues $10,109.4 40.2% $13,692.0 37.5% $21,866.2 37.3%
Operating
income (1) 2,009.1 33.1 1,804.0 21.6 660.2 5.9
- ------------------------
(1) Excludes any allocation of corporate and administrative expenses.
TELEVISION BROADCASTING
Set forth below are the principal types of broadcasting revenues earned by
the Company's television stations for the periods indicated and the percentage
contribution of each to total Company revenues:
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1993 1994 1995
-------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
(DOLLARS IN COMPANY COMPANY COMPANY
THOUSANDS) AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- --------- --------- --------- --------- ---------
Net revenues:
Local $ 7,312.3 29.2% $12,191.4 33.4% $20,888.1 35.6%
National 6,102.8 24.3 7,804.4 21.4 10,881.1 18.6
Network
compensation 1,286.1 5.1 1,297.5 3.5 2,486.8 4.2
Political 17.7 0.1 1,029.0 2.8 1,174.2 2.0
Production
and other 284.8 1.1 504.1 1.4 1,319.8 2.3
--------- --------- --------- --------- --------- ---------
$15,003.7 59.8% $22,826.4 62.5% $36,750.0 62.7%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
In the Company's broadcasting operations, broadcast advertising is sold for
placement either preceding or following a television stations' network
programming and within local and syndicated programming. Broadcast advertising
is sold in time increments and is priced primarily on the basis of
34
a program's popularity among the specific audience an advertiser desires to
reach, as measured by Nielsen. In addition, broadcast advertising rates are
affected by the number of advertisers competing for the available time, the size
and demographic makeup of the market served by the station and the availability
of alternative advertising media in the market area. Broadcast advertising rates
are the highest during the most desirable viewing hours, with corresponding
reductions during other hours. The ratings of a local station affiliated with a
major network can be affected by ratings of network programming.
Most broadcast advertising contracts are short-term, and generally run only
for a few weeks. The Company estimates that approximately 56.5% of the gross
revenues of the Company's television stations for the year ended December 31,
1995 were generated from local advertising, which is sold by a station's sales
staff directly to local accounts, and the remainder represents 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 retail advertising in
the spring and in the period leading up to and including the holiday season. In
addition, broadcast advertising revenues are generally higher during even
numbered election years due to spending by political candidates, which spending
typically is heaviest during the fourth quarter.
The broadcasting operations' primary operating expenses are employee
compensation, related benefits and programming costs. In addition, the
broadcasting operations incur overhead expenses such as maintenance, supplies,
insurance, rent and utilities. A large portion of the operating expenses of the
broadcasting operations is fixed.
PUBLISHING
Set forth below are the principal types of publishing revenues earned by the
Company's publishing operations for the periods indicated and the percentage
contribution of each to total Company revenues.
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1993 1994 1995
-------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
COMPANY COMPANY COMPANY
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- --------- --------- --------- --------- ---------
(DOLLARS IN
THOUSANDS)
Revenues:
Retail
advertising $ 5,734.3 22.8% $ 7,460.3 20.4% $11,044.2 18.8%
Classified 2,336.5 9.3 3,174.2 8.7 5,323.8 9.1
Circulation 2,011.8 8.0 2,628.9 7.2 3,783.8 6.5
Other 26.8 0.1 428.6 1.2 1,714.4 2.9
--------- --------- --------- --------- --------- ---------
$10,109.4 40.2% $13,692.0 37.5% $21,866.2 37.3%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
In the Company's publishing operations, advertising contracts are generally
annual and primarily provide for a commitment as to the volume of advertising
purchased by a customer. The publishing operations' advertising revenues are
primarily generated from retail advertising. As with the broadcasting
operations, the publishing operations' revenues are generally highest in the
second and fourth quarters of each year.
The publishing operations' primary operating expenses are employee
compensation, related benefits and newsprint costs. In addition, publishing
operations incur overhead expenses such as
35
maintenance, supplies, insurance, rent and utilities. A large portion of the
operating expenses of the publishing operations is fixed, although the Company
has experienced significant variability in its newsprint costs in recent years.
MEDIA CASH FLOW
The following table sets forth certain operating data for both the broadcast
and publishing operations for the years ended December 31, 1993, 1994 and 1995.
YEAR ENDED DECEMBER 31
-------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
--------- --------- ---------
Operating income $ 3,530.7 $ 6,276.4 $ 6,859.7
Add:
Amortization of program license rights 924.9 1,218.0 1,647.0
Depreciation and amortization 1,564.8 2,141.6 3,958.9
Corporate overhead 2,326.7 1,958.4 2,258.3
Non-cash compensation and contributions to the Company's
401(k) plan,
paid in common stock - 109.5 2,612.2
Less:
Payments for program license liabilities (976.2) (1,181.6) (1,776.8)
--------- --------- ---------
Media Cash Flow (1) $ 7,370.9 $10,522.3 $15,559.3
--------- --------- ---------
--------- --------- ---------
- ------------------------
(1) Of Media Cash Flow, $4.9 million, $8.0 million and $13.6 million was
attributable to the Company's broadcasting operations in 1993, 1994 and
1995, respectively.
"Media Cash Flow" is defined as operating income from broadcast and
publishing operations (and includes paging with regard to the Phipps Business)
before income taxes and interest expense, plus depreciation and amortization
(including amortization of program license rights), non-cash compensation and
corporate overhead, less payments for program license liabilities. The Company
has included Media Cash Flow data because such data are commonly used as a
measure of performance for broadcast companies and are also used by investors to
measure a company's ability to service debt. Media Cash Flow is not, and should
not be used as, an indicator or alternative to operating income, net income or
cash flow as reflected in the consolidated financial statements of the Company
and is not a measure of financial performance under generally accepted
accounting principles ("GAAP") and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP.
ACQUISITIONS
Since 1994, the Company has completed several broadcasting and publishing
acquisitions. The operating results of the Company reflect significant increases
in substantially all line items between the years ended December 31, 1994 and
1995. The principal reason for these increases is the acquisition by the Company
in September 1994 of WKYT and WYMT (together, the "Kentucky Business") for $38.1
million and the assumption of $2.3 million of liabilities (the "Kentucky
Acquisition"). In addition, during 1994 the Company acquired THE ROCKDALE
CITIZEN for approximately $4.8 million (May 1994) and four shoppers for
approximately $1.5 million (October 1994) (collectively the "1994 Publishing
Acquisitions"), and during 1995 the Company acquired the GWINNETT DAILY POST for
approximately $3.7 million (January 1995) and three shoppers for an aggregate
purchase price of approximately $1.4 million (September 1995) (collectively the
"1995 Publishing Acquisitions"). The 1994 Publishing Acquisitions and the 1995
Publishing Acquisitions are collectively referred to as the "Publishing
Acquisitions."
36
CASH FLOW PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCING ACTIVITIES.
The following table sets forth certain operating data for the Company for
the years ended December 31, 1993, 1994 and 1995.
YEAR ENDED DECEMBER 31
-------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995
--------- --------- ---------
Cash flows provided by (used in):
Operating activities $ 1,324 $ 5,798 $ 7,600
Investing activities 3,062 (42,770) (8,929)
Financing activities (4,932) 37,200 1,331
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Total revenues for the year ended December 31, 1995 increased $22.1
million, or 60.5%, over the year ended December 31, 1994, from $36.5 million to
$58.6 million. This increase was attributable to (i) the effect of owning the
Kentucky Business for all of 1995 versus the last four months of 1994 ($12.9
million), (ii) the Publishing Acquisitions ($6.4 million) and (iii) increases in
total revenues of the Company of $2.8 million (excluding the Kentucky Business
and the Publishing Acquisitions). The Kentucky Acquisition and the Publishing
Acquisitions accounted for $19.3 million, or 87.3%, of the revenue increase.
Broadcast net revenues increased $13.9 million, or 61.0%, over the prior
year, from $22.8 million to $36.7 million. Revenues generated by the Kentucky
Acquisition accounted for $12.9 million, or 92.8%, of the increase. On a pro
forma basis, broadcast net revenues for the Kentucky Business for the year ended
December 31, 1995 increased $2.7 million, or 16.1%, over the year ended December
31, 1994, from $16.6 million to $19.3 million. Broadcast net revenues, excluding
the Kentucky Acquisition, increased 6.1%, or $1.0 million, over the prior year.
Approximately $889,000 and $304,000 of the $1.0 million increase in total
broadcast net revenues, excluding the Kentucky Acquisition, were due to higher
local and national advertising spending, respectively. Approximately $417,000 of
the $1.0 million increase in total broadcast net revenues, excluding the
Kentucky Acquisition, is a result of higher network compensation negotiated by
the Company with CBS and NBC. These increases were offset by a $617,000 decrease
in political advertising revenues associated with cyclical political activity.
Publishing revenues increased $8.2 million, or 59.7%, over the prior year,
from $13.7 million to $21.9 million. Approximately $6.4 million, or 77.8%, of
the increase was due to the Publishing Acquisitions. Publishing revenues,
excluding the Publishing Acquisitions, increased $1.8 million, or 15.5%, over
the prior year. Advertising and circulation revenue, excluding the Publishing
Acquisitions, comprised approximately $885,000 and $511,000, respectively, of
the revenue increase. This increase in circulation revenue can be attributed
primarily to price increases over the prior year. This increase in classified
advertising, excluding the Publishing Acquisitions, was primarily the result of
rate and linage increases. Approximately $417,000 of the revenue increase,
excluding the Publishing Acquisitions, was the result of higher special events
and commercial printing revenues.
OPERATING EXPENSES. Operating expenses for the year ended December 31, 1995
increased $21.5 million, or 71.1%, over the year ended December 31, 1994, from
$30.2 million to $51.7 million, primarily due to the Kentucky Acquisition ($9.8
million) and the Publishing Acquisitions ($7.6 million).
Broadcasting expenses increased $8.3 million, or 56.1%, over the prior year,
from $14.9 million to $23.2 million. The increase was attributable primarily to
the Kentucky Acquisition. On a pro forma basis, broadcast expenses for the
Kentucky Business for the year ended December 31, 1995 increased $1.5 million,
or 14.3%, over the year ended December 31, 1994, from $10.7 million to $12.2
million.
37
The increase in broadcast expenses for the Kentucky Business can be attributed
primarily to increased payroll related costs and sales commissions. Broadcasting
expenses, excluding the Kentucky Acquisition, remained relatively constant
primarily as a result of lower syndicated film programming costs offset by
higher payroll related costs.
Publishing expenses increased $8.8 million, or 78.7%, over the prior year,
from $11.2 million to $20.0 million. Approximately $7.1 million, or 80.6%, of
the increase was due to the Publishing Acquisitions. Publishing expenses,
excluding the Publishing Acquisitions, increased $1.7 million, or 18.5%,
primarily due to a 40% increase in newsprint cost, increased payroll related
costs and product delivery and promotion costs.
Corporate and administrative expenses increased $300,000, or 15.3%, over the
prior year, from $2.0 million to $2.3 million. This increase was attributable
primarily to the amendment of an employment agreement with the Company's former
chief executive officer, which resulted in a $440,000 charge to expense.
Depreciation of property and equipment and amortization of intangible assets
was $3.9 million for the year ended December 31, 1995, compared to $2.1 million
for the prior year, an increase of $1.8 million, or 84.9%. This increase was
primarily the result of higher depreciation and amortization costs related to
the Kentucky Acquisition and the Publishing Acquisitions.
Non-cash compensation paid in Class A Common Stock resulted from the
Company's employment agreements with its current President and its former chief
executive officer. The current President's employment agreement provides him
with 122,034 shares of Class A Common Stock if his employment continues until
September 1999. The Company will recognize $1.2 million of compensation expense
for this award ratably over such five-year period. This agreement resulted in a
charge to expense of $240,000 for the year ended December 31, 1995 as compared
to $80,000 for the year ended December 31, 1994. In addition, the Company
awarded 150,000 shares of Class A Common Stock, pursuant to the amended
employment agreement with its former chief executive officer, which resulted in
an expense of $2.1 million, all of which was recognized in 1995.
INTEREST EXPENSE. Interest expense increased $3.5 million, or 182.8%, from $1.9
million for the year ended December 31, 1994 to $5.4 million for the year ended
December 31, 1995. This increase was attributable primarily to increased levels
of debt resulting from the financing of the Kentucky Acquisition and the
Publishing Acquisitions. The Company entered into a $25 million notional amount
five year interest rate swap agreement on June 2, 1995, to effectively convert a
portion of its floating rate debt to a fixed rate basis. The interest rate swap
fixed the LIBOR base rate of the Old Credit Facility at 6.105% for the notional
amount. Additional interest was due to or received from the bank based upon a
comparison of the fixed base rate to the bank's three-month LIBOR rate on a
quarterly basis. The Company recorded approximately $34,000 of interest expense
relative to the interest rate swap in 1995. The effective interest rate of the
Old Credit Facility and interest rate swap at December 31, 1995 was
approximately 8.64% and 9.10%, respectively.
NET INCOME. Net income for the Company was $931,000 for the year ended December
31, 1995, compared with $2.8 million for the year ended December 31, 1994, a
decrease of $1.9 million.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUES. Total revenues for the year ended December 31, 1994 increased $11.4
million or 45.4% over the year ended December 31, 1993, from $25.1 million to
$36.5 million. Excluding the Kentucky Acquisition and the 1994 Publishing
Acquisitions, the increase was $3.1 million or 12.3%.
Broadcast net revenues increased $7.8 million or 52.1% over the prior year,
from $15.0 million to $22.8 million. Broadcast net revenues, excluding the
Kentucky Acquisition, increased 9.8% or $1.5 million over the prior year. The
Kentucky Acquisition contributed $6.3 million to this increase. Excluding the
Kentucky Acquisition, approximately $921,000 of the $1.5 million increase was a
result of higher levels of political advertising spending due to cyclical
election activity in the Company's
38
broadcast markets. Excluding the Kentucky Acquisition, local and national
advertising contributed an additional $668,000 to the revenue increase. These
increases were offset by decreased network compensation related to the
preemption of network programming in favor of local advertising.
Publishing revenues increased $3.6 million or 35.4% over the prior year,
from $10.1 million to $13.7 million. The 1994 Publishing Acquisitions
contributed $2.0 million to this increase. Publishing revenues, excluding the
1994 Publishing Acquisitions, increased $1.6 million over the prior year.
Advertising and circulation revenues comprised $833,000 and $436,000,
respectively, of the revenue increase. Special events and commercial printing
services accounted for $344,000 of the revenue increase.
OPERATING EXPENSES. Operating expenses for the year ended December 31, 1994
increased $8.7 million or 40.1% over the year ended December 31, 1993, from
$21.6 million to $30.3 million, attributable primarily to the Kentucky
Acquisition ($4.4 million) and the 1994 Publishing Acquisitions ($2.1 million).
Broadcasting expenses increased $4.8 million or 48.2% over the prior year,
from $10.0 million to $14.8 million primarily due to the Kentucky Acquisition.
Broadcasting expenses, excluding the Kentucky Acquisition, increased
approximately $1.0 million, or 10.0%, over the prior year from $10.0 million to
$11.0 million. This increase was attributable to increased payroll related costs
associated with improvement of news programming, costs associated with coverage
of the 1994 flood in Albany, Georgia and other costs related to on-air product
upgrades at the stations.
Publishing expenses increased $3.5 million or 46.1% over the prior year,
from $7.7 million to $11.2 million primarily as a result of the 1994 Publishing
Acquisitions. Publishing expenses, excluding the 1994 Publishing Acquisitions,
increased approximately $1.6 million or 20.9% during the year ended December 31,
1994, as compared to the prior year. This increase was primarily attributable to
an 11.9% increase in newsprint usage, payroll related costs and other product
improvement costs associated with format changes and expanded market coverage of
THE ALBANY HERALD.
Corporate and administrative expenses decreased $368,000 or 15.8% during the
year ended December 31, 1994, from $2.3 million to $1.9 million. This decrease
can be attributed to lower professional fees and related expenses.
Depreciation of property and equipment and amortization of intangible assets
was $2.2 million for the year ended December 31, 1994 compared to $1.6 million
for the prior year, an increase of $577,000 or 36.9%. This increase was due
principally from the depreciation and amortization expense related to the assets
acquired in the Kentucky Acquisition and 1994 Publishing Acquisitions.
INTEREST EXPENSE. Interest expense was $1.9 million for the year ended December
31, 1994 compared to $985,000 for the prior year, an increase of $938,000 or
95.3%. This increase was due primarily to increased levels of debt resulting
from the financing of the Kentucky Acquisition and the 1994 Publishing
Acquisitions. At December 31, 1993 and 1994 the Company's outstanding debt was
$7.3 million and $52.9 million, respectively.
NET INCOME. Net income for the Company was $2.8 million for the year ended
December 31, 1994, compared with $2.5 million for the year ended December 31,
1993, an increase of $300,000.
LIQUIDITY AND CAPITAL RESOURCES
Following the consummation of the KTVE Sale, the Phipps Acquisition, the
Financing, the Note Offering and the Stock Offering, the Company will be highly
leveraged. The Company anticipates that its principal uses of cash for the next
several years will be working capital and debt service requirements, cash
dividends, capital expenditures and expenditures related to additional
acquisitions. The Company anticipates that its operating cash flow, together
with borrowings available under the Senior Credit Facility, will be sufficient
for such purposes for the remainder of 1996 and for 1997.
39
The Company's working capital (deficiency) was $1.1 million and $(221,000)
at December 31, 1994 and 1995, respectively. The Company's cash provided from
operations was $5.8 million and $7.6 million for the years ended December 31,
1994 and 1995, respectively.
The Company was provided $3.0 million in cash in 1993 from investing
activities and used $42.8 million and $8.9 million of cash in investing
activities in 1994 and 1995, respectively. The change of $45.9 million from 1993
to 1994 was due primarily to the Kentucky Acquisition and the 1994 Publishing
Acquisitions. The change of $33.9 million from 1994 to 1995 was due primarily to
the Kentucky Acquisition and the 1994 Publishing Acquisitions, partially offset
by the 1995 Publishing Acquisitions and the deferred costs related to the
Augusta Acquisition.
The Company used $4.9 million in cash in 1993, and was provided $37.2
million and $1.3 million in cash by financing activities in 1994 and 1995,
respectively. The use of cash in 1993 resulted primarily from the repayment of
debt while cash provided by financing activities in 1994 and 1995 was
principally due to increased borrowings in 1994 to finance the Kentucky
Acquisition and the 1994 Publishing Acquisitions, as well as increased
borrowings in 1995 to finance the 1995 Publishing Acquisitions and the funding
of the deposit for the Augusta Acquisition. On January 4, 1996, the Company
acquired the Augusta Business. The cash consideration of approximately $35.9
million, including acquisition costs of approximately $600,000, was financed
primarily through long-term borrowings under the Old Credit Facility and through
the sale of the 8% Note to Bull Run. Long-term debt was $54.3 million and $88.4
million at December 31, 1995 and March 31, 1996, respectively. The balance of
the Old Credit Facility was $28.4 million and $52.6 million, at December 31,
1995 and March 31, 1996, respectively. The effective interest rate of the Old
Credit Facility was 8.96% at March 31, 1996. Principal maturities on long-term
debt at December 31, 1995 included $2.9 million and $5.0 million for the years
ended 1996 and 1997 respectively. The Company anticipates that its operating
cash flows, together with borrowings available under the Senior Credit Facility
will be sufficient to provide for such payments. For the year ended December 31,
1995, the Augusta Business reported net revenues and broadcast cash flow of $8.7
million and $2.8 million, respectively.
Under the terms of the Old Credit Facility, the Company had additional
borrowing capacity at March 31, 1996 of approximately $4.0 million. Under the
Old Credit Facility, after giving effect to the consummation of the Stock
Offering, and the Note Offering, the KTVE Sale and the Phipps Acquisition, the
Company would not have been able to incur additional indebtedness as of March
31, 1996. Under the terms of the Old Credit Facility, the Company is allowed to
make $3.0 million of capital expenditures annually. The terms of the Senior
Credit Facility allow for $5.0 million of capital expenditures annually. The
Company believes that cash flow from operations will be sufficient to fund such
expenditures, which will be adequate for the Company's normal replacement
requirements.
The Company regularly enters into program contracts for the right to
broadcast television programs produced by others and program commitments for the
right to broadcast programs in the future. Such programming commitments are
generally made to replace expiring or canceled program rights. Payments under
such contracts are made in cash or the concession of advertising spots for the
program provider to resell, or a combination of both. At December 31, 1995,
payments on program license liabilities due in 1996 and 1997, which will be paid
with cash from operations, were $491,000 and $1.4 million, respectively.
In 1995, the Company made $3.3 million in capital expenditures, relating
primarily to the broadcasting operations and paid $1.8 million for program
broadcast rights. The Company anticipates making an aggregate of $3.0 million in
capital expenditures and $2.7 million in payments for program broadcast rights
during 1996. Subsequent to the consummation of the Phipps Acquisition, the
Company anticipates that its annual capital expenditures will approximate $5.0
million.
In addition to the consummation of the Phipps Acquisition, the Company
intends to implement the Financing to increase liquidity and improve operating
and financial flexibility. Pursuant to the Financing, the Company will (i)
retire approximately $52.6 million principal amount of outstanding
40
indebtedness under the Old Credit Facility, together with accrued interest
thereon, (ii) retire approximately $25.0 million aggregate principal amount of
outstanding indebtedness under the Senior Note, together with accrued interest
thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference
of its Series A Preferred Stock in exchange for the 8% Note issued to Bull Run,
(iv) issue to Bull Run $10.0 million liquidation preference of its Series B
Preferred Stock with warrants to purchase up to 500,000 shares of Class A Common
Stock (representing 10.1% of the currently issued and outstanding Class A Common
Stock, after giving effect to the exercise of such warrants) for cash proceeds
of $10.0 million and (v) enter into the Senior Credit Facility which will
provide for a term loan and revolving credit facility aggregating $125.0
million.
The Old Credit Facility is a $55.0 million line of credit available for
working capital requirements and general corporate purposes. The Old Credit
Facility matures in March 2003, provides for increasing quarterly amortization,
includes certain customary financial covenants and bears interest at a rate of
3.5% over LIBOR, subject to adjustment based on the Company's leverage ratio.
The Old Credit Facility also requires the Company to use its annual Excess Cash
Flow (as defined) to repay indebtedness thereunder at the end of each year. The
Senior Credit Facility will be guaranteed by each of the Company's subsidiaries
and will be secured by liens on substantially all of the assets of the Company
and its subsidiaries. As part of the Financing and as a condition of this
Offering, the Company will replace the Old Credit Facility with the Senior
Credit Facility and the Company has entered into a commitment letter with
respect thereto.
The Company has entered into the KTVE Agreement to sell KTVE for
approximately $9.5 million in cash plus the amount of the accounts receivable on
the date of the closing, which is expected to occur by September 1996, although
there can be no assurance with respect thereto. The Company anticipates the
taxes for the KTVE Sale will aggregate approximately $2.8 million.
In connection with the Phipps Acquisition, the Company will be required to
divest WALB and WJHG under current FCC regulations. However, these rules may be
revised by the FCC upon conclusion of pending rulemaking proceedings. In order
to satisfy applicable FCC requirements, the Company, subject to FCC approval,
intends to swap such assets for assets of one or more television stations of
comparable value and with comparable broadcast cash flow in a transaction
qualifying for deferred capital gains treatment under the "like-kind exchange"
provision of Section 1033 of the Code. If the Company is unable to effect such a
swap on satisfactory terms within the time period granted by the FCC under the
waivers, the Company may transfer such assets to a trust with a view towards the
trustee effecting a swap or sale of such assets. Any such trust arrangement
would be subject to the approval of the FCC. It is anticipated that the Company
would be required to relinquish operating control of such assets to a trustee
while retaining the economic risks and benefits of ownership. If the Company or
such trust is required to effect a sale of WALB, the Company would incur a
significant gain and related tax liability, the payment of which could have a
material adverse effect on the Company's ability to acquire comparable assets
without incurring additional indebtedness.
The Company and its subsidiaries file a consolidated federal income tax
return and such state or local tax returns as are required. On a pro forma basis
after giving effect to the Augusta Acquisition, the KTVE Sale, the Stock
Offering, the Financing, the Phipps Acquisition and the Note Offering, the
Company anticipates that it will generate taxable operating losses for the
foreseeable future.
The Company does not believe that inflation in past years has had a
significant impact on the Company's results of operations nor is inflation
expected to have a significant effect upon the Company's business in the near
future.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited Consolidated Financial Statements
Report of Independent Auditors..................................................... 43
Consolidated Balance Sheets at December 31, 1994 and 1995.......................... 44
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and
1995.............................................................................. 45
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995............................................................... 46
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995.......................................................................... 47
Notes to Consolidated Financial Statements......................................... 48
Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts................................... 80
42
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Gray Communications Systems, Inc.
We have audited the accompanying consolidated balance sheets of Gray
Communications Systems, Inc. as of December 31, 1994 and 1995 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gray
Communications Systems, Inc. at December 31, 1994 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Ernst & Young LLP
Columbus, Georgia
February 14, 1996
43
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
1994 1995
--------------- ---------------
ASSETS
Current assets (NOTE C):
Cash and cash equivalents....................... $558,520 $559,991
Trade accounts receivable, less allowance for
doubtful accounts of $694,000 and $450,000,
respectively................................... 8,448,366 9,560,274
Recoverable income taxes........................ -0- 1,347,007
Inventories..................................... 368,202 553,032
Current portion of program broadcast rights..... 1,195,633 1,153,058
Other current assets............................ 247,687 263,600
--------------- ---------------
Total current assets........................ 10,818,408 13,436,962
Property and equipment (NOTES B AND C):
Land............................................ 646,562 758,944
Buildings and improvements...................... 8,594,343 8,630,694
Equipment....................................... 24,781,964 28,229,255
--------------- ---------------
34,022,869 37,618,893
Allowance for depreciation...................... (17,999,752) (20,601,819)
--------------- ---------------
16,023,117 17,017,074
Other assets (NOTE C):
Deferred acquisition costs (including $860,000
to Bull Run Corporation) (NOTE B).............. -0- 3,330,481
Deferred loan costs............................. 1,381,908 1,232,261
Goodwill and other intangibles (NOTE B)......... 38,538,413 42,004,050
Other........................................... 2,026,938 1,219,650
--------------- ---------------
41,947,259 47,786,442
--------------- ---------------
$68,788,784 $78,240,478
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable (including $670,000
payable to Bull Run Corporation at December 31,
1995).......................................... $2,114,008 $3,752,742
Employee compensation and benefits.............. 3,150,154 4,213,639
Accrued expenses................................ 512,483 560,877
Accrued interest................................ 985,955 1,064,491
Current portion of program broadcast
obligations.................................... 1,687,481 1,205,784
Current portion of long term debt............... 1,293,481 2,861,672
--------------- ---------------
Total current liabilities................... 9,743,562 13,659,205
Long-term debt (NOTE C)........................... 51,646,265 51,462,645
Other long-term liabilities:
Program broadcast obligations, less current
portion........................................ 54,489 109,971
Supplemental employee benefits (NOTE D)......... 2,343,379 2,212,685
Deferred income taxes (NOTE F).................. -0- 201,348
Other acquisition related liabilities (NOTES B
AND C)......................................... -0- 1,609,026
--------------- ---------------
2,397,868 4,133,030
Commitments and contingencies (NOTES B, C AND H)
Stockholders' equity (NOTES B, C AND E)
Class A Common Stock, no par value; authorized
10,000,000 shares; issued 4,841,785 and
5,082,756 shares, respectively................. 3,393,747 6,795,976
Retained earnings............................... 8,245,626 8,827,906
--------------- ---------------
11,639,373 15,623,882
Treasury Stock, 663,180 shares, at cost......... (6,638,284) (6,638,284)
--------------- ---------------
5,001,089 8,985,598
--------------- ---------------
$68,788,784 $78,240,478
--------------- ---------------
--------------- ---------------
See accompanying notes.
44
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
Operating revenues:
Broadcasting (less agency commissions).......... $15,003,752 $22,826,392 $36,750,035
Publishing...................................... 10,109,368 13,692,073 21,866,220
--------------- --------------- ---------------
25,113,120 36,518,465 58,616,255
Expenses:
Broadcasting.................................... 10,028,837 14,864,011 23,201,990
Publishing...................................... 7,662,127 11,198,011 20,016,137
Corporate and administrative.................... 2,326,691 1,958,449 2,258,261
Depreciation.................................... 1,387,698 1,745,293 2,633,360
Amortization of intangible assets............... 177,063 396,342 1,325,526
Non-cash compensation paid in common stock (NOTE
D)............................................. -0- 80,000 2,321,250
--------------- --------------- ---------------
21,582,416 30,242,106 51,756,524
--------------- --------------- ---------------
3,530,704 6,276,359 6,859,731
Miscellaneous income, net......................... 202,465 188,307 143,612
--------------- --------------- ---------------
3,733,169 6,464,666 7,003,343
Interest expense.................................. 984,706 1,922,965 5,438,374
--------------- --------------- ---------------
Income from continuing operations before income
taxes............................................ 2,748,463 4,541,701 1,564,969
Federal and state income taxes (NOTE F)........... 1,068,000 1,776,000 634,000
--------------- --------------- ---------------
INCOME FROM CONTINUING OPERATIONS............. 1,680,463 2,765,701 930,969
Discontinued business (NOTE I):
Income from operations of discontinued business,
net of applicable income tax expense
of $30,000...................................... 48,174 -0- -0-
Gain on disposal of discontinued business, net of
applicable income tax expense of
$501,000........................................ 817,717 -0- -0-
--------------- --------------- ---------------
NET EARNINGS.................................. $2,546,354 $2,765,701 $930,969
--------------- --------------- ---------------
--------------- --------------- ---------------
Average outstanding common shares................. 4,610,625 4,689,453 4,481,317
--------------- --------------- ---------------
--------------- --------------- ---------------
Earnings per common share
Continuing operations........................... $.36 $.59 $.21
Discontinued operations......................... .01 -0- -0-
Gain on disposal of discontinued operations..... .18 -0- -0-
--------------- --------------- ---------------
NET EARNINGS
PER COMMON SHARE............................. $.55 $.59 $.21
--------------- --------------- ---------------
--------------- --------------- ---------------
See accompanying notes.
45
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS A COMMON STOCK RESTRICTED TREASURY STOCK
-------------------------- STOCK -------------------------- RETAINED
SHARES AMOUNT DEFERRALS SHARES AMOUNT EARNINGS TOTAL
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1992.. 4,610,625 $1,307,071 $-0- -0- $-0- $3,542,901 $4,849,972
Net income.................... -0- -0- -0- -0- -0- 2,546,354 2,546,354
Cash dividends ($.07 per
share)....................... -0- -0- -0- -0- -0- (307,376) (307,376)
Issuance of Common Stock-
Directors Stock Plan (NOTE
E)........................... 3,000 29,000 -0- -0- -0- -0- 29,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1993.. 4,613,625 1,336,071 -0- -0- -0- 5,781,879 7,117,950
Net income.................... -0- -0- -0- -0- -0- 2,765,701 2,765,701
Cash dividends ($.07 share)... -0- -0- -0- -0- -0- (301,954) (301,954)
Purchase of Common Stock (NOTE
E)........................... -0- -0- -0- (663,180) (6,638,284) -0- (6,638,284)
Issuance of Common Stock
(NOTES B AND G):
401(k) Plan................. 3,160 32,676 -0- -0- -0- -0- 32,676
Rockdale Acquisition........ 225,000 2,025,000 -0- -0- -0- -0- 2,025,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994.. 4,841,785 3,393,747 -0- (663,180) (6,638,284) 8,245,626 5,001,089
Net income.................... -0- -0- -0- -0- -0- 930,969 930,969
Cash dividends ($.08 share)... -0- -0- -0- -0- -0- (348,689) (348,689)
Issuance of Common Stock
(NOTES B, D, E, AND G):
401(k) Plan................. 18,354 298,725 -0- -0- -0- -0- 298,725
Directors' Stock Plan....... 23,500 238,919 -0- -0- -0- -0- 238,919
Non-qualified Stock Plan.... 5,000 48,335 -0- -0- -0- -0- 48,335
Gwinnett Acquisition........ 44,117 500,000 -0- -0- -0- -0- 500,000
Restricted Stock Plan....... 150,000 2,081,250 (2,081,250) -0- -0- -0- -0-
Amortization of Restricted
Stock Plan deferrals......... -0- -0- 2,081,250 -0- -0- -0- 2,081,250
Income tax benefits relating
to stock plans............... -0- 235,000 -0- -0- -0- -0- 235,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995.. 5,082,756 $6,795,976 $-0- (663,180) $(6,638,284) $8,827,906 $8,985,598
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes.
46
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
OPERATING ACTIVITIES
Net income............................ $2,546,354 $2,765,701 $930,969
Items which did not use (provide)
cash:
Depreciation........................ 1,612,040 1,745,293 2,633,360
Amortization of intangible assets... 177,063 396,342 1,325,526
Amortization of program broadcast
rights............................. 924,878 1,217,976 1,647,035
Payments for program broadcast
rights............................. (976,150) (1,181,598) (1,776,796)
Compensation paid in Common Stock... -0- 80,000 2,321,250
Supplemental employee benefits...... (608,729) (454,703) (370,694)
Common Stock contributed to 401(k)
Plan............................... -0- 32,676 298,725
Deferred income taxes............... 196,000 523,000 863,000
(Gain) loss on asset sales.......... (52,819) (21,419) 1,652
Changes in operating assets and
liabilities:
Trade accounts receivable......... (116,526) (1,444,159) (852,965)
Recoverable income taxes.......... (1,066,422) 589,942 (1,347,007)
Inventories....................... (92,526) (179,930) (181,034)
Other current assets.............. (352,174) (24,361) (11,208)
Trade accounts payable............ 701,556 (306,493) 1,441,745
Employee compensation and
benefits......................... 10,755 1,246,726 1,011,667
Accrued expenses.................. (163,458) (45,335) (414,087)
Accrued interest.................. (97,419) 858,164 78,536
Reduction in value of net assets of
discontinued business.............. 1,135,394 -0- -0-
Gain on disposal of warehouse
operations......................... (2,454,111) -0- -0-
--------------- --------------- ---------------
Net cash provided by operating
activities............................. 1,323,706 5,797,822 7,599,674
INVESTING ACTIVITIES
Acquisitions of newspaper
businesses........................... -0- (3,442,836) (2,084,621)
Acquisition of television business.... (1,505,655) (37,492,643) -0-
Purchases of property and equipment... (2,582,225) (1,767,800) (3,279,721)
Proceeds from asset sales............. 3,076,764 103,434 2,475
Deferred acquisition costs............ -0- -0- (3,330,481)
Deferred loan costs................... -0- (1,251,287) -0-
Proceeds from disposals of operating
units................................ 2,922,893 1,222,697 -0-
Other................................. 1,150,104 (141,767) (236,904)
--------------- --------------- ---------------
Net cash provided by (used in) investing
activities............................. 3,061,881 (42,770,202) (8,929,252)
FINANCING ACTIVITIES
Proceeds from borrowings:
Short-term debt..................... 650,000 -0- 1,200,000
Long-term debt...................... -0- 55,826,260 2,950,000
Repayments of borrowings:
Short-term debt..................... (170,000) (480,000) (1,200,000)
Long-term debt...................... (5,133,349) (11,206,281) (1,792,516)
Dividends paid...................... (307,376) (301,954) (348,689)
Common Stock transactions........... 29,000 (6,638,284) 522,254
--------------- --------------- ---------------
Net cash provided by (used in)
financing activities................. (4,931,725) 37,199,741 1,331,049
--------------- --------------- ---------------
Increase (decrease) in cash and cash
equivalents.......................... (546,138) 227,361 1,471
Cash and cash equivalents at beginning
of year.............................. 877,297 331,159 558,520
--------------- --------------- ---------------
Cash and cash equivalents at end of
year................................. $331,159 $558,520 $559,991
--------------- --------------- ---------------
--------------- --------------- ---------------
See accompanying notes.
47
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company's operations, which are located in six southeastern states,
include six television stations, three daily newspapers, and six area weekly
advertising only direct mail publications.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenues as services are performed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit with a bank. Deposits with
the bank are generally insured in limited amounts.
INVENTORIES
Inventories, principally newsprint and supplies, are stated at the lower of
cost or market. The Company uses the last-in, first-out ("LIFO") method of
determining costs for substantially all of its inventories. Current cost
exceeded the LIFO value of inventories by approximately $36,000 and $170,000 at
December 31, 1994 and 1995, respectively.
PROGRAM BROADCAST RIGHTS
Rights to programs available for broadcast are initially recorded at the
amounts of total license fees payable under the license agreements and are
charged to operating expense on the basis of total programs available for use on
the straight-line method. The portion of the unamortized balance expected to be
charged to operating expense in the succeeding year is classified as a current
asset, with the remainder classified as a non-current asset. The liability for
program broadcast rights is classified as current or long-term, in accordance
with the payment terms of the various licenses. The liability is not discounted
for imputation of interest.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed
principally by the straight-line method for financial reporting purposes and by
accelerated methods for income tax purposes.
INTANGIBLE ASSETS
Intangible assets are stated at cost, and with the exception of goodwill
acquired prior to November 1, 1970 (approximately $2.47 million at December 31,
1994 and 1995), are amortized using the straight-line method. Goodwill is
amortized over 40 years. Loan acquisition fees are amortized over the life of
the applicable indebtedness. Non-compete agreements are amortized over the life
of the specific agreement. Accumulated amortization of intangible assets
resulting from business acquisitions was $0.4 million and $1.7 million as of
December 31, 1994 and 1995, respectively.
48
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If facts and circumstances indicate that the goodwill may be impaired, an
evaluation of continuing value would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with this asset would be
compared to its carrying amount to determine if a write down to fair market
value or discounted cash flow value is required.
INCOME TAXES
Deferred income taxes are provided on the differences between the financial
statement and income tax basis of assets and liabilities. The Company and its
subsidiaries file a consolidated federal income tax return and separate state
and local tax returns.
CAPITAL STOCK
The Company has authorized 10 million shares of Class B Common Stock and 20
million shares of Preferred Stock, none of which have been issued at December
31, 1995. All references made to Common Stock in the December 31, 1995 Audited
Consolidated Financial Statements of the Company and the Notes thereto refer to
the Company's Class A Common Stock.
On August 17, 1995, the Board of Directors declared a 50% stock dividend on
the Company's Common Stock payable October 2, 1995 to stockholders of record on
September 8, 1995 to effect a three for two stock split. All applicable share
and per share data have been adjusted to give effect to the stock split.
EARNINGS PER COMMON SHARE
Earnings per common share are based on the weighted average common and
common equivalent shares outstanding during the period determined using the
treasury stock method. Common equivalent shares are attributable to a Common
Stock award to be paid in 1999 and outstanding stock options (SEE NOTES D AND
E).
STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options. Under APB 25, if the
exercise price of the stock options granted by the Company equals the market
price of the underlying stock on the date of the grant, no compensation expense
is recognized.
CONCENTRATION OF CREDIT RISK
The Company provides advertising air time to national, regional and local
advertisers within the geographic areas in which the Company operates. Credit is
extended based on an evaluation of the customer's financial condition, and
generally advance payment is not required. Credit losses are provided for in the
financial statements and consistently have been within management's
expectations.
INTEREST SWAP
The Company has entered into an interest rate swap agreement to modify the
interest characteristics of a portion of its outstanding debt (see Note C). The
agreement involves the exchange of amounts based on a fixed interest rate for
amounts based on variable interest rates over the life of the agreement without
an exchange of the notional amount upon which the payments are based. The
differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the debt (the accrual
accounting method). The related amount payable to or receivable from
counter-parties is included in other liabilities or assets. The fair value of
the swap agreement is not recognized in the financial statements. In the event
of the early extinguishment of a designated debt obligation, any realized or
unrealized gain or loss from the swap would be recognized in income coincident
with the extinguishment.
49
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has adopted FASB Statement No. 107, DISCLOSURE ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS, which requires disclosure of fair value, to the extent
practical, of certain of the Company's financial instruments. The fair value
amounts do not necessarily represent the amount that could be realized in a sale
or settlement. The Company's financial instruments are comprised principally of
an interest rate swap and long-term debt.
The estimated fair value of long-term bank debt at December 31, 1995
approximated book value since, in management's opinion, such obligations are
subject to fluctuating market rates of interest and can be settled at their face
amounts. The fair value of the Senior Note at December 31, 1995 was estimated by
management to be its carrying value at that date. The Company amended its Senior
Note at January 4, 1996 and among other things, changed its effective interest
rate. The Company does not anticipate settlement of long-term debt at other than
book value.
The fair value of other financial instruments classified as current assets
or liabilities approximates their carrying values due to the short-term
maturities of these instruments.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
("Statement 121"), which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the asset's carrying amount. Statement 121 also addresses the accounting for
long-lived assets which are expected to be disposed. The Company does not
believe that the adoption of Statement 121 will have a material impact on the
Company's financial position.
RECLASSIFICATIONS
Certain amounts in the accompanying consolidated financial statements have
been reclassified to conform to the 1995 format.
B. BUSINESS ACQUISITIONS
The Company's acquisitions have been accounted for under the purchase method
of accounting. Under the purchase method of accounting, the results of
operations of the acquired businesses are included in the accompanying
consolidated financial statements as of their respective acquisition dates. The
assets and liabilities of acquired businesses are included based on an
allocation of the purchase price.
PENDING ACQUISITIONS
In December 1995, the Company agreed to acquire certain assets owned by John
H. Phipps, Inc. ("Phipps"). The assets include WCTV-TV, the CBS network
affiliate serving the Tallahassee, Florida and Thomasville, Georgia television
market, WKXT-TV, the CBS network affiliate in Knoxville, Tennessee, and a
communications and paging business located in three southeastern states. The
purchase price is estimated at approximately $185.0 million. The transaction,
which is expected to close in 1996, is subject to approval by the appropriate
regulatory agencies. If approved, the Company will be required to divest of
certain of its broadcasting operations due to a signal overlap with WCTV, unless
the rules of the Federal Communications Commission are modified to permit common
ownership of television stations with overlapping signals.
The Company plans to fund the costs of this acquisition through the issuance
of debt and equity securities. Additionally, the Company will amend or replace
its existing bank credit facilities.
50
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
In connection with this acquisition, a bank has provided a $10.0 million
letter of credit to Phipps on behalf of the Company. The letter of credit will
be payable under certain conditions if this acquisition is not completed. In
connection with the issuance of the letter of credit, a stockholder of the
Company has executed a put agreement which the bank can exercise if the Company
defaults on repayment of any amounts that might be paid in accordance with the
terms of the letter of credit.
In connection with the proposed acquisition of assets owned by Phipps, the
Company's Board of Directors has agreed to pay Bull Run Corporation ("Bull
Run"), a stockholder, a finder's fee equal to 1% of the proposed purchase price
for services performed, of which $550,000 was due and included in accounts
payable at December 31, 1995.
On January 4, 1996, the Company purchased substantially all of the assets of
WRDW-TV, a CBS television affiliate serving the Augusta, Georgia television
market (the "Augusta Acquisition"). The purchase price of approximately $35.9
million, excluding assumed liabilities of approximately $4.0 million, was
financed primarily through long-term borrowings. The assets acquired consisted
of office equipment and broadcasting operations located in North Augusta, South
Carolina. Based on a preliminary allocation of the purchase price, the excess of
the purchase price over the fair value of net tangible assets acquired was
approximately $32.4 million. In connection with the Augusta Acquisition, the
Company's Board of Directors approved the payment of a $360,000 finders fee to
Bull Run.
Funds for the Augusta Acquisition were obtained from the sale to Bull Run of
an 8% subordinated note due January 3, 2005 in principal amount of $10.0 million
(the "Subordinated Note"). In connection with the sale of the Subordinated Note,
the Company also issued warrants to Bull Run to purchase 487,500 shares of
Common Stock at $17.88 per share, 300,000 of which are currently vested, with
the remaining warrants vesting in five equal installments commencing in 1997
provided that the Subordinated Note is outstanding. The warrants may not be
exercised prior to January 3, 1998 and expire in January 2006. The Company
modified its existing bank debt to a variable rate reducing revolving credit
facility providing a credit line of $55.0 million (see Note C). The outstanding
credit facility balance subsequent to the Augusta Acquisition was approximately
$54.0 million; including $28.4 million, which was outstanding under the credit
facility at December 31, 1995, $25.2 million used for the Augusta Acquisition,
and $425,000 used for the Company's working capital. The transaction also
required a modification of the interest rate of the Company's $25.0 million
senior secured note with an institutional investor (the "Senior Note") from
10.08% to 10.7%.
An unaudited pro forma balance sheet as of December 31, 1995 and income
statements for the years ended December 31, 1994 and 1995 are presented below
giving effect to the Augusta Acquisition as though it had occurred on January 1,
1994.
51
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
Pro forma December 31, 1995 balance sheet (in 000's):
AUGUSTA PRO FORMA ADJUSTED
GRAY ACQUISITION ADJUSTMENTS PRO FORMA
--------------- --------------- --------------- ---------------
(Unaudited)
Current assets.................................... $13,437 $3,061 $(594) $15,904
Property and equipment............................ 17,017 1,778 402 19,197
Goodwill and other intangibles.................... 46,566 4,129 26,152 76,847
Other long-term assets............................ 1,220 2,571 (2,518) 1,273
--------------- --------------- --------------- ---------------
$78,240 $11,539 $23,442 $113,221
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Current liabilities............................... $13,659 $1,131 $(41) $14,749
Long-term debt.................................... 51,462 -0- 33,729 85,191
Other long-term liabilities....................... 4,133 2,680 (2,518) 4,295
Stockholders' equity.............................. 8,986 7,728 (7,728) 8,986
--------------- --------------- --------------- ---------------
$78,240 $11,539 $23,442 $113,221
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
These pro forma unaudited results of operations do not purport to represent
what the Company's actual results of operations would have been if the Augusta
Acquisition had occurred on January 1, 1994, and should not serve as a forecast
of the Company's operating results for any future periods. The pro forma
adjustments are based solely upon certain assumptions that management believes
are reasonable under the circumstances at this time. Subsequent adjustments are
expected upon final determination of the allocation of the purchase price. Pro
forma statement of operations for the year ended December 31, 1994 are as
follows (in 000's, except per share data):
AUGUSTA PRO FORMA ADJUSTED
GRAY ACQUISITION ADJUSTMENTS PRO FORMA
--------------- --------------- --------------- ---------------
(Unaudited)
Revenues, net..................................... $36,518 $8,046 $255 $44,819
Expenses.......................................... 30,242 5,854 935 37,031
--------------- --------------- --------------- ---------------
6,276 2,192 (680) 7,788
Miscellaneous income (expense), net............... 189 (55) 90 224
Interest expense.................................. 1,923 -0- 3,156 5,079
--------------- --------------- --------------- ---------------
4,542.......... 2,137 (3,746) 2,933
Income tax expense (benefit)...................... 1,776 -0- (603) 1,173
--------------- --------------- --------------- ---------------
NET EARNINGS.................................. $2,766 $2,137 $(3,143) $1,760
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Average shares outstanding........................ 4,689 4,689
--------------- ---------------
--------------- ---------------
Earnings per share................................ $.59 $.38
--------------- ---------------
--------------- ---------------
52
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
Pro forma statement of operations for the year ended December 31, 1995 are
as follows (in 000's, except per share data):
AUGUSTA PRO FORMA ADJUSTED
GRAY ACQUISITION ADJUSTMENTS PRO FORMA
--------------- --------------- --------------- ---------------
(Unaudited)
Revenues, net..................................... $58,616 $8,660 $227 $67,503
Expenses.......................................... 51,756 6,198 944 58,898
--------------- --------------- --------------- ---------------
6,860 2,462 (717) 8,605
Miscellaneous income (expense), net............... 143 (220) 128 51
Interest expense.................................. 5,438 -0- 3,355 8,793
--------------- --------------- --------------- ---------------
1,565 2,242 (3,944) (137)
Income tax expense (benefit)...................... 634 -0- (675) (41)
--------------- --------------- --------------- ---------------
NET EARNINGS (LOSS)........................... $931 $2,242 $(3,269) $(96)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Average shares outstanding........................ 4,481 4,354
--------------- ---------------
--------------- ---------------
Earnings (loss) per share......................... $.21 $(.02)
--------------- ---------------
--------------- ---------------
The pro forma results presented above include adjustments to reflect (i) the
reclassification of national representative commissions as an expense consistent
with the presentation of the Company, (ii) the incurrence of interest expense to
fund the Augusta Acquisition, (iii) depreciation and amortization of assets
acquired, and (iv) the income tax effect of such pro forma adjustments and
income taxes on the earnings of the Augusta Acquisition. With respect to the
Augusta Acquisition, the pro forma adjustments are based upon a preliminary
allocation of the purchase price.
1995 ACQUISITIONS
On January 6, 1995, the Company purchased substantially all of the assets of
The Gwinnett Post-Tribune and assumed certain liabilities (the "Gwinnett
Acquisition"). The assets consisted of office equipment and publishing
operations located in Lawrenceville, Georgia. The purchase price of
approximately $3.7 million, including assumed liabilities of approximately
$370,000, was paid by approximately $1.2 million in cash (financed through
long-term borrowings and cash from operations), issuance of 44,117 shares of the
Company's Common Stock (having fair value of $500,000), and $1.5 million payable
to the sellers pursuant to non-compete agreements. The excess of the purchase
price over the fair value of net tangible assets acquired was approximately $3.4
million. In connection with the Gwinnett Acquisition, the Company's Board of
Directors approved the payment of a $75,000 finders fee to Bull Run. Pro forma
results of the Gwinnett Acquisition have not been presented as the effect on
prior periods is not significant.
On September 1, 1995, the Company purchased substantially all of the assets
of three area weekly advertising only direct mail publications, and assumed
certain liabilities (the "Tallahassee Acquisition"). The tangible assets
acquired consist of land and office buildings, office equipment, mechanical
equipment and automobiles used in operations located in southwest Georgia and
north Florida. The purchase price of approximately $1.4 million consisted of
$833,000 in cash and approximately $583,000 in assumed liabilities. The excess
of the purchase price over the fair value of net tangible assets acquired was
approximately $934,000. Pro forma results giving effect to the Tallahassee
Acquisition have not been presented as the effect on prior periods is not
significant.
1994 ACQUISITIONS
On September 2, 1994, the Company purchased substantially all of the assets
of Kentucky Central Television, Inc. ("Kentucky Central") and assumed certain of
its liabilities (the "Kentucky
53
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
Acquisition"). Kentucky Central operated two television stations, WKYT located
in Lexington, Kentucky and WYMT located in Hazard, Kentucky, both of which are
affiliates of the CBS television network. The purchase price of approximately
$38.1 million, excluding acquisition costs of approximately $2.1 million and
assumed liabilities of approximately $2.3 million, was financed primarily
through long-term borrowings. The excess of the purchase price over the fair
value of net tangible assets acquired was approximately $31.4 million.
On May 31, 1994, the Company purchased substantially all of the assets of
Citizens Publishing Company, Inc. and assumed certain of its liabilities (the
"Rockdale Acquisition"). The acquired assets consist of land and an office
building located in Conyers, Georgia, containing The Rockdale Citizen newspaper
and other assets relating to the newspaper publishing business. The purchase
price of approximately $4.8 million consisted of a $2.8 million cash payment
financed through long-term bank borrowings, and 225,000 shares of the Company's
Common Stock (with a fair value of $2.0 million at the closing date). The excess
of the purchase price over the fair value of net tangible assets acquired was
approximately $4.0 million.
On October 18, 1994, the Company purchased substantially all of the assets
of four area weekly advertising only direct mail publications and assumed
certain of their liabilities. The assets consist of land and an office building,
office equipment, automobiles, and publishing operations located in southwest
Georgia. The purchase price of approximately $1.5 million consisted of a
$545,000 cash payment and approximately $1.0 million financed by the sellers.
The excess of the purchase price over the fair value of net tangible assets
acquired was approximately $1.2 million. Pro forma results giving effect to this
acquisition have not been presented below as the effect on prior periods is not
significant.
Unaudited pro forma statements of income from continuing operations for the
years ended December 31, 1993 and 1994, are presented below, giving effect to
the Rockdale Acquisition and the Kentucky Acquisition (collectively the "1994
Acquisitions") as though they had occurred on January 1, 1993.
These pro forma unaudited results of operations do not purport to represent
what the Company's actual results of operations would have been if the 1994
Acquisitions had occurred on January 1, 1993, and should not serve as a forecast
of the Company's operating results for any future periods. The pro
54
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
forma adjustments are based upon certain assumptions that management believes
are reasonable under the circumstances. The unaudited pro forma results of
continuing operations are as follows (in 000's, except per share data):
YEAR ENDED DECEMBER 31, 1993
--------------------------------------------------------------------
KENTUCKY ROCKDALE PRO FORMA ADJUSTED
GRAY ACQUISITION ACQUISITION ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Operating revenues................................ $25,113 $14,526 $2,660 $-0- $42,299
Operating expenses................................ 21,582 10,827 2,646 877 35,932
------------ ------------ ------------ ------------ ------------
Operating income................................ 3,531 3,699 14 (877) 6,367
Miscellaneous income, net......................... 202 219 -0- -0- 421
------------ ------------ ------------ ------------ ------------
3,733 3,918 14 (877) 6,788
Interest expense.................................. 985 4 9 3,187 4,185
------------ ------------ ------------ ------------ ------------
Income from continuing operations before income
taxes.......................................... 2,748 3,914 5 (4,064) 2,603
Income tax expense (benefit)...................... 1,068 1,326 -0- (1,405) 989
------------ ------------ ------------ ------------ ------------
Income from continuing operations................. $1,680 $2,588 $5 $2,659 $1,614
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Average shares outstanding........................ 4,611 4,836
------------ ------------
------------ ------------
Earnings per common share from continuing
operations....................................... $.36 $.33
------------ ------------
------------ ------------
YEAR ENDED DECEMBER 31, 1994
--------------------------------------------------------------------
KENTUCKY ROCKDALE PRO FORMA ADJUSTED
GRAY ACQUISITION ACQUISITION ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Operating revenues................................ $36,518 $10,237 $980 $-0- $47,735
Operating expenses................................ 30,242 7,382 930 559 39,113
------------ ------------ ------------ ------------ ------------
Operating income................................ 6,276 2,855 50 (559) 8,622
Miscellaneous income, net......................... 189 19 -0- -0- 208
------------ ------------ ------------ ------------ ------------
6,465 2,874 50 (559) 8,830
Interest expense.................................. 1,923 -0- 4 2,412 4,339
------------ ------------ ------------ ------------ ------------
Income from continuing operations before income
taxes.......................................... 4,542 2,874 46 (2,971) 4,491
Income tax expense (benefit)...................... 1,776 237 -0- (208) 1,805
------------ ------------ ------------ ------------ ------------
Net income from continuing operations........... $2,766 $2,637 $46 $(2,763) $2,686
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Average shares outstanding........................ 4,689 4,780
------------ ------------
------------ ------------
Earnings per common share from continuing
operations....................................... $.59 $.56
------------ ------------
------------ ------------
The pro forma results presented above include adjustments to reflect (i) the
incurrence of interest expense to fund the 1994 Acquisitions, (ii) depreciation
and amortization of assets acquired, and
55
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS ACQUISITIONS (CONTINUED)
(iii) the income tax effect of such pro forma adjustments. Average outstanding
shares used to calculate earnings per share from continuing operations for 1994
and 1993 include the 225,000 shares issued in connection with the Rockdale
Acquisition.
C. LONG-TERM DEBT
Long-term debt consists of the following (in 000's):
DECEMBER 31,
--------------------------------
1994 1995
--------------- ---------------
Senior Note....................................... $25,000 $25,000
Bank Loan......................................... 26,926 28,375
Other............................................. 1,013 950
--------------- ---------------
52,939 54,325
Less current portion.............................. (1,293) (2,862)
--------------- ---------------
$51,646 $51,463
--------------- ---------------
--------------- ---------------
On September 2, 1994, the Company issued through a private placement with an
institutional investor, a $25.0 million 9.33% note (the "Senior Note"). The
Senior Note provides for semi-annual principal payments of $2.5 million
beginning March 1999. Interest is payable semi-annually in arrears and the
Senior Note, as amended on January 4, 1996, bears interest at 10.7% (see Note
B). The agreement pursuant to which the Senior Note was issued contains certain
restrictive provisions, which, among other things, limit capital expenditures
and additional indebtedness, and require minimum levels of net worth and cash
flows.
On September 2, 1994, the Company entered into a bank term loan agreement
(the "Bank Loan") which provided for borrowings of approximately $21.4 million.
On November 30, 1994, the Bank Loan was amended to provide for additional
borrowings of $6.7 million which were used to purchase 663,180 shares of the
Company's Common Stock (SEE NOTE E). The Bank Loan, as amended on January 4,
1996, bears interest, at the Company's option, at a spread over LIBOR, or at a
spread over the bank's prime rate (8.96% at January 4, 1996) (see Note B). The
Bank Loan is due in varying, quarterly principal payments of $750,000 to $2.0
million through September 2002 with two quarterly installments of $7 million
payable starting December 2002. The Bank Loan provides for an annual loan
prepayment based on the Company's cash flow as defined by the Bank Loan.
Additionally, the effective interest rate of the Bank Loan can be changed based
upon the Company's maintenance of certain operating ratios as defined by the
Bank Loan, not to exceed the bank's prime rate plus 1.25% or LIBOR plus 3.5%.
The Bank Loan contains restrictive provisions similar to the provisions of the
Senior Note.
The Senior Note and the Bank Loan are secured by substantially all of the
Company's existing and hereafter acquired assets.
The Company entered into a five year interest rate swap agreement on June 2,
1995, to effectively convert a portion of its floating rate debt to a fixed rate
basis. Approximately $25.0 million of the Company's outstanding debt under the
Bank Loan was subject to this interest rate swap agreement at December 31, 1995.
The effective rate of the Bank Loan and interest rate swap at December 31, 1995,
was approximately 8.64% and 9.10%, respectively. The unrealized loss for the
interest rate swap was approximately $565,000 at December 31, 1995, based upon
comparison to treasury bond yields for bonds with similar maturity dates as the
interest rate swap.
At December 31, 1995, retained earnings of approximately $500,000 were
available for dividends.
56
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. LONG-TERM DEBT (CONTINUED)
Aggregate minimum principal maturities on long-term debt as of December 31,
1995, were as follows (in 000's):
1996.................................................... $2,862
1997.................................................... 5,039
1998.................................................... 6,634
1999.................................................... 12,615
2000.................................................... 11,303
Thereafter.............................................. 15,872
----------
$54,325
----------
----------
The Company made interest payments of approximately $902,000, $1.2 million,
and $5.4 million during 1993, 1994 and 1995, respectively.
D. SUPPLEMENTAL EMPLOYEE BENEFITS AND OTHER AGREEMENTS
The Company has an employment agreement with its President which provides
him 122,034 shares of the Company's Common Stock if his employment with the
Company continues until September 1999. The Company will recognize approximately
$1.2 million of compensation expense for this award over the five year period
ending in 1999 ($80,000 and $240,000 of expense was recorded in 1994 and 1995,
respectively).
In December 1995, the Company amended an existing employment agreement to
pay consulting fees to its former chief executive officer. The Company has
recorded approximately $596,000 of corporate and administrative expenses during
the year ended December 31, 1995 in accordance with the terms of the employment
agreement. Additionally, in December 1995 the Company issued 150,000 shares of
Common Stock to this former chief executive officer in accordance with his
employment agreement which was amended to remove certain restrictions,
including, among others, a time requirement for continued employment.
Compensation expense of approximately $2.1 million (including $865,000 during
the quarter ended December 31, 1995), was recognized in 1995 for the 150,000
shares of Common Stock issued pursuant to this agreement.
The Company has entered into supplemental retirement benefit agreements with
certain key employees. These benefits are to be paid in equal monthly amounts
over the employees' life for a period not to exceed 15 years after retirement.
The Company charges against operations amounts sufficient to fund the present
value of the estimated lifetime supplemental benefit over each employee's
anticipated remaining period of employment. The Company maintains life insurance
coverage on these individuals (with a cash surrender value of approximately
$280,000 at December 31, 1995) in adequate amounts to fund the agreements.
57
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. SUPPLEMENTAL EMPLOYEE BENEFITS AND OTHER AGREEMENTS (CONTINUED)
The following summarizes activity relative to certain officers' agreements
and the supplemental employee benefits (in 000's):
DECEMBER 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
Beginning liability............................... $3,495 $2,960 $2,518
--------------- --------------- ---------------
Provision....................................... 166 184 976
Forfeitures..................................... (399) (266) (169)
--------------- --------------- ---------------
Net (income) expense............................ (233) (82) 807
Payments........................................ (302) (360) (387)
--------------- --------------- ---------------
Net change.................................... (535) (442) 420
--------------- --------------- ---------------
Ending liability.................................. 2,960 2,518 2,938
Less current portion.............................. (162) (175) (725)
--------------- --------------- ---------------
$2,798 $2,343 $2,213
--------------- --------------- ---------------
--------------- --------------- ---------------
E. STOCKHOLDERS' EQUITY
The Company has a Stock Purchase Plan which allows outside directors to
purchase up to 7,500 shares of the Company's Common Stock directly from the
Company before the end of January following each calendar year. The purchase
price per share approximates the market price of the Common Stock at the time of
the grant. During 1993, 1994 and 1995, certain directors purchased an aggregate
of 3,000, -0- and 23,500 shares of Common Stock, respectively, under this plan.
The Company has a long-term incentive plan (the "Incentive Plan") under
which 600,000 shares of the Company's Common Stock are reserved for grants to
key personnel for (i) incentive stock options, (ii) non-qualified stock options,
(iii) stock appreciation rights, (iv) restricted stock and (v) performance
awards, as defined by the Incentive Plan. Stock underlying outstanding options
or performance awards are counted against the Incentive Plan's maximum shares
while such options or awards are outstanding. Under the Incentive Plan, the
options granted vest after a two year period and expire three years after full
vesting. Options granted through December 31, 1995, have been granted at a price
which approximates fair market value on the date of the grant.
EXERCISE PRICE PER SHARE
--------------------------------
$9.67 $13.33
Stock options granted on November 18, 1993........ 92,250 -0-
Forfeitures....................................... (3,000) -0-
--------------- ---------------
Stock options outstanding at
December 31, 1993............................... 89,250 -0-
Options granted................................. 73,559 -0-
Forfeitures..................................... (16,500) -0-
--------------- ---------------
Stock options outstanding at
December 31, 1994............................... 146,309 -0-
Options granted................................. -0- 58,050
Options exercised............................... (5,000) -0-
Forfeitures..................................... (14,250) (3,900)
--------------- ---------------
Stock options outstanding at December 31, 1995.... 127,059 54,150
--------------- ---------------
--------------- ---------------
At December 31, 1995, 56,500 of the $9.67 options issued in 1993 were
exercisable.
58
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. STOCKHOLDERS' EQUITY (CONTINUED)
On December 1, 1994, the Company repurchased 663,180 shares of its Common
Stock at a price of $10.00 per share for a total purchase price before expenses,
of $6.63 million. The trading value of the Common Stock on the NASDAQ Small Cap
Issues Market was $10.83 on December 1, 1994. The Common Stock was purchased
from The Prudential Insurance Company of America and Sandler Associates (420,000
and 243,180 shares, respectively). The purchase was funded by a bank loan (SEE
NOTE C).
F. INCOME TAXES
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Federal and state income tax expense (benefit) included in the consolidated
financial statements are summarized as follows (in 000's):
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
Current
Federal......................................... $982 $1,093 $(253)
State........................................... 181 160 24
Deferred.......................................... 436 523 863
--------------- --------------- ---------------
$1,599 $1,776 $634
--------------- --------------- ---------------
--------------- --------------- ---------------
The total provision for income taxes for 1993 included $531,000 for
discontinued operations.
The components of deferred income tax expense for federal and state and
local income taxes resulted from the following (in 000's):
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
Accelerated depreciation for tax purposes......... $50 $19 $349
Accelerated amortization for tax purposes......... -0- 164 726
Employee benefits and other agreements............ 181 96 (150)
Temporary difference related to loss on sales of
assets........................................... 174 248 -0-
Excess of book over tax deductions for lease...... 7 91 -0-
Other............................................. 24 (95) (62)
--------------- --------------- ---------------
$436 $523 $863
--------------- --------------- ---------------
--------------- --------------- ---------------
59
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
are as follows (in 000's):
DECEMBER 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
Deferred tax liabilities:
Net book value of property and equipment........ $704 $723 $1,069
Goodwill........................................ -0- 164 890
Other........................................... 120 120 120
--------------- --------------- ---------------
Total deferred tax liabilities................ 824 1,007 2,079
Deferred tax assets:
Liability under supplemental retirement plan.... 1,125 1,029 1,127
Allowance for doubtful accounts................. 168 335 195
Difference in basis of assets held for sale..... 1,189 941 941
Other........................................... 135 117 368
--------------- --------------- ---------------
Total deferred tax assets..................... 2,617 2,422 2,631
Valuation allowance for deferred tax assets..... (753) (753) (753)
--------------- --------------- ---------------
Net deferred tax assets....................... 1,864 1,669 1,878
--------------- --------------- ---------------
Deferred tax assets (liabilities)............... $1,040 $662 $(201)
--------------- --------------- ---------------
--------------- --------------- ---------------
A reconciliation of income tax expense at the statutory federal income tax
rate and income taxes as reflected in the consolidated financial statements is
as follows (in 000's):
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
Statutory rate applied to income.................. $1,409 $1,544 $532
State and local taxes, net of federal tax
benefits......................................... 164 195 91
Other items, net.................................. 26 37 11
--------------- --------------- ---------------
$1,599 $1,776 $634
--------------- --------------- ---------------
--------------- --------------- ---------------
The Company made income tax payments of approximately $2.1 million, $1.5
million and $742,000 during 1993, 1994 and 1995, respectively. At December 31,
1995, the Company had current recoverable income taxes of approximately $1.3
million.
G. RETIREMENT PLANS
PENSION PLAN
The Company has a retirement plan covering substantially all full-time
employees. Retirement benefits are based on years of service and the employees'
highest average compensation for five consecutive years during the last ten
years of employment. The Company's funding policy is to contribute annually the
minimum amounts deductible for federal income tax purposes.
60
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. RETIREMENT PLANS (CONTINUED)
The net pension expense includes the following (in 000's):
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
Service costs-benefits earned during the year..... $224 $204 $221
Interest cost on projected benefit obligation..... 374 359 384
Actual return on plan assets...................... (377) (91) (655)
Net amortization and deferral..................... (63) (338) 187
--------------- --------------- ---------------
Net pension expense............................... $158 $134 $137
--------------- --------------- ---------------
--------------- --------------- ---------------
Assumptions:
Discount rate................................... 8.0% 7.0% 8.0%
Expected long-term rate of return on assets..... 8.0% 7.0% 8.0%
Estimated rate of increase in compensation
levels......................................... 6.0% 5.0% 6.0%
The following summarizes the plan's funded status and related assumptions
(in 000's):
DECEMBER 31,
--------------------------------
1994 1995
--------------- ---------------
Actuarial present value of accumulated benefit
obligation is as follows:
Vested.......................................... $4,452 $5,308
Other........................................... 66 135
--------------- ---------------
$4,518 $5,443
--------------- ---------------
--------------- ---------------
Plan assets at fair value, primarily mutual funds
and an unallocated insurance contract............ $5,307 $5,680
Projected benefit obligation...................... (5,015) (5,904)
--------------- ---------------
Plan assets in excess of (less than) projected
benefit obligation............................... 292 (224)
Unrecognized net (gain) loss...................... (135) 190
Unrecognized net asset............................ (409) (355)
--------------- ---------------
Pension liability included in consolidated balance
sheet............................................ $(252) $(389)
--------------- ---------------
--------------- ---------------
Assumptions:
Discount rate................................... 8.0% 7.0%
Estimated rate of increase in compensation
levels......................................... 6.0% 5.0%
Effective December 31, 1995, the Company changed certain assumptions
utilized in the actuarially computed costs and liabilities. The effect of such
changes was to increase the present value of the projected benefit obligations
by approximately $613,000.
CAPITAL ACCUMULATION PLAN
Effective October 1, 1994, the Company adopted the Gray Communications
Systems, Inc. Capital Accumulation Plan (the "Capital Accumulation Plan") for
the purpose of providing additional retirement benefits for substantially all
employees. The Capital Accumulation Plan is intended to meet the requirements of
section 401(k) of the Internal Revenue Code.
61
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. RETIREMENT PLANS (CONTINUED)
Employee contributions to the Capital Accumulation Plan, not to exceed 6% of
the employees' gross pay, are matched by Company contributions. The Company's
percentage match is made by a contribution of the Company's Common Stock, in an
amount declared by the Company's Board of Directors before the beginning of each
plan year. The Company's percentage match was 50% for both the year ended
December 31, 1995 and the three months ended December 31, 1994. The Company
contributions vest, based upon each employee's number of years of service, over
a period not to exceed five years. The Company has reserved 150,000 shares of
its Common Stock for issuance under the Capital Accumulation Plan.
Company matching contributions aggregating $32,676 and $298,725 were charged
to expense for 1994 and 1995, respectively, for the issuance of 3,160 and 18,354
shares, respectively of the Company's Common Stock.
H. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease commitments for equipment, land and
office space which expire through the year 2027. Future minimum payments under
operating leases with initial or remaining non-cancelable lease terms in excess
of one year are not material.
The Company has entered into commitments for various television film
exhibition rights for which the license periods have not yet commenced.
Obligations under these commitments are payable in the following years:
1996.............................................. $491,360
1997.............................................. 1,431,983
1998.............................................. 1,351,273
1999.............................................. 1,133,860
2000.............................................. 456,733
---------------
$4,865,209
---------------
---------------
The Company is subject to legal proceedings and claims which arise in the
normal course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the Company's financial position.
I. DISCONTINUED OPERATIONS
On April 13, 1994, the Company completed the sale of the assets of Gray Air
Service (an operation discontinued in 1993) for approximately $1.2 million, and
used the proceeds to reduce the Company's outstanding debt. During the year
ended December 31, 1993, the Company sold its investment in undeveloped
farmland, another asset held for sale, for approximately $2.0 million.
On March 31, 1993, the Company completed the sale of its warehouse
operations to Gray Distribution Services, Inc., a Georgia corporation, owned by
a former director and officer of the Company. The net sales price of
approximately $2.9 million was paid in cash at the date of closing. The Company
recognized a gain of approximately $1.5 million, net of income tax expense of
approximately $932,000, relative to the disposal of the warehouse operations. A
special independent committee of the Company's Board of Directors approved the
terms and conditions of the sale.
62
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. DISCONTINUED OPERATIONS (CONTINUED)
The following summarizes information relative to the discontinued business
segment for the year ended December 31, 1993 (in 000's):
Operating revenues................................ $1,695
---------------
---------------
Operating earnings................................ $100
---------------
---------------
Net earnings...................................... $48
---------------
---------------
J. INFORMATION ON BUSINESS SEGMENTS
The Company operates in two business segments: broadcasting and publishing.
A transportation segment was discontinued in 1993 (see Note I). The broadcasting
segment operates five television stations at December 31, 1995. The Publishing
segment operates three daily newspapers in three different markets, and six area
weekly advertising only direct mail publications in southwest Georgia and north
Florida. The following tables present certain financial information concerning
the Company's two operating segments and its discontinued segment (in 000's).
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
OPERATING REVENUE
Broadcasting.................................... $15,004 $22,826 $36,750
Publishing...................................... 10,109 13,692 21,866
--------------- --------------- ---------------
$25,113 $36,518 $58,616
--------------- --------------- ---------------
--------------- --------------- ---------------
OPERATING PROFIT (LOSS) FROM CONTINUING OPERATIONS
Broadcasting.................................... $2,491 $5,241 $7,822
Publishing...................................... 1,040 1,036 (962)
--------------- --------------- ---------------
Total operating profit from continuing
operations....................................... 3,531 6,277 6,860
Miscellaneous income and expense, net............. 202 188 144
Interest expense.................................. (985) (1,923) (5,439)
--------------- --------------- ---------------
Income from continuing operations before income
taxes............................................ $2,748 $4,542 $1,565
--------------- --------------- ---------------
--------------- --------------- ---------------
63
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
Operating profit is total operating revenue less operating expenses,
excluding miscellaneous income and expense (net) and interest. Corporate
administrative expenses are allocated to operating profit based on net segment
revenues.
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
DEPRECIATION AND AMORTIZATION EXPENSE
Broadcasting.................................... $904 $1,326 $2,723
Publishing...................................... 438 690 1,190
--------------- --------------- ---------------
1,342 2,016 3,913
Corporate....................................... 223 126 46
--------------- --------------- ---------------
1,565 2,142 3,959
Discontinued operations......................... 224 -0- -0-
--------------- --------------- ---------------
Total depreciation and amortization expense....... $1,789 $2,142 $3,959
--------------- --------------- ---------------
--------------- --------------- ---------------
CAPITAL EXPENDITURES
Broadcasting.................................... $787 $1,330 $2,285
Publishing...................................... 755 366 973
--------------- --------------- ---------------
1,542 1,696 3,258
Corporate....................................... 124 72 22
--------------- --------------- ---------------
1,666 1,768 3,280
Discontinued operations......................... 916 -0- -0-
--------------- --------------- ---------------
Total capital expenditures........................ $2,582 $1,768 $3,280
--------------- --------------- ---------------
--------------- --------------- ---------------
DECEMBER 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
IDENTIFIABLE ASSETS
Broadcasting.................................... $9,984 $53,173 $54,022
Publishing...................................... 4,753 11,878 18,170
--------------- --------------- ---------------
14,737 65,051 72,192
Corporate....................................... 5,699 3,738 6,048
--------------- --------------- ---------------
20,436 68,789 78,240
Discontinued operations......................... 936 -0- -0-
--------------- --------------- ---------------
Total identifiable assets......................... $21,372 $68,789 $78,240
--------------- --------------- ---------------
--------------- --------------- ---------------
64
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning each of the directors and
executive officers of the Company and its subsidiaries.
NAME AGE TITLE
- -------------------------------------------------- --- ----------------------------------------------
Ralph W. Gabbard* 50 Director and President of the Company
William A. Fielder III 37 Vice President and Chief Financial Officer
Sabra H. Cowart 29 Controller, Chief Accounting Officer and
Assistant Secretary
Robert A. Beizer 56 Vice President for Law and Development and
Secretary
Thomas J. Stultz 44 Vice President
Joseph A. Carriere 62 Vice President-Corporate Sales
William E. Mayher III* 56 Chairman of the Board of Directors
Richard L. Boger*+ 49 Director
Hilton H. Howell, Jr.** 34 Director
Howell W. Newton** 49 Director
Hugh Norton 63 Director
Robert S. Prather, Jr.*+ 51 Director
J. Mack Robinson*+ 72 Director
- ------------------------
* Member of the Executive Committee
** Member of the Audit Committee
+ Member of the Management Personnel Committee
MR. GABBARD has been President and director of the Company since December 1,
1995. He served as a Vice President of the Company and as President and Chief
Operating Officer of the Company's broadcast operations from September 2, 1994
until his election as President of the Company. He was president and general
manager of Kentucky Central Television, Inc., the former owner of WKYT and WYMT,
from 1982 to 1994. Mr. Gabbard is Chairman of the National Association of
Broadcasters Television Board of Directors and Chairman of the CBS Affiliates
Advisory Board.
MR. FIELDER has been a Vice President and the Chief Financial Officer of the
Company since August 1993. From April 1991 until his appointment as Chief
Financial Officer, he was Controller of the Company. Prior to being appointed
controller of the Company in April 1991, he was employed by Ernst & Young LLP,
an accounting firm, which are the independent auditors of the Company.
MS. COWART has been Controller and Chief Accounting Officer of the Company
since April 1995. In February 1996 Ms. Cowart was appointed Assistant Secretary
of the Company. From March 1994 until her appointment as Controller and Chief
Accounting Officer, Ms. Cowart was the corporate accounting manager for the
Company. Prior to joining the Company, she was employed by Deloitte & Touche
LLP, an accounting firm, from 1989 to 1994.
MR. BEIZER has been Vice President for Law and Development and Secretary of
the Company since February 1996. From June 1994 to February 1996, he was of
counsel to Venable, Baetjer, Howard & Civiletti, a law firm, in its regulatory
and legislative practice group. From 1990 to 1994, Mr. Beizer was a partner at
the law firm of Sidley & Austin and was head of its communications practice
group in Washington, D.C. He has represented newspaper and broadcasting
companies, including the Company, before the Federal Communications Commission
for over 25 years. He is a past president of the Federal Communications Bar
Association and a member of the ABA House of Delegates.
65
MR. STULTZ has been a Vice President of the Company and the President of the
Company's publishing division since February 1996. From 1990 to 1995, he was
employed by Multimedia, Inc. as a vice president and from 1988 to 1990, as vice
president of marketing.
MR. CARRIERE has been Vice President of Corporate Sales since February 1996.
From November 1994 until his appointment as Vice President, he served as
President and General Manager of KTVE Inc., a subsidiary of the Company. Prior
to joining the Company in 1994, Mr. Carriere was employed by Withers
Broadcasting Company of Colorado as General Manager from 1991 to 1994. He has
served as a past chairman of the CBS Advisory Board and the National Association
of Broadcasters.
DR. MAYHER has been a surgeon since prior to 1991 and has been a director of
the Company since 1990. He has served as Chairman of the Board of Directors
since August 1993.
MR. BOGER has been the President and chief executive officer of Export
Insurance Services, Inc., an insurance company, and a director of CornerCap
Group of Funds, a "Series" investment company since prior to 1991. He has been a
director of the Company since 1991.
MR. HOWELL has been President and Chief Executive Officer of Atlantic
American Corporation, an insurance holding company, since May 1995. He has been
Executive Vice President of Delta Life Insurance Company and Delta Fire and
Casualty Insurance Company since 1994, and Executive Vice President of Atlantic
American Life Insurance Company, Bankers Fidelity Life Insurance Company and
Georgia Casualty & Surety Company since 1992. In addition, since 1994, he has
served as a Vice President and Secretary of Bull Run, a designer and
manufacturer of dot matrix printers. He is also a director of the following
corporations: Bull Run, Atlantic American Corporation, Atlantic American Life
Insurance Company, Bankers Fidelity Life Insurance Company, Delta Life Insurance
Company, Delta Fire and Casualty Insurance Company, Georgia Casualty & Surety
Company, American Southern Insurance Company and American Safety Insurance
Company. From 1989 to 1991, Mr. Howell practiced law in Houston, Texas with the
law firm of Liddell, Sapp, Zivley, Hill & LaBoon. He has been a director of the
Company since 1993. He is the son-in-law of J. Mack Robinson.
MR. NEWTON has been the President and Treasurer of Trio Manufacturing Co., a
textile manufacturing company, since prior to 1991 and a director of the Company
since 1991.
MR. NORTON has been the President of Norco, Inc., an insurance agency, since
prior to 1991 and a director of the Company since 1987.
MR. PRATHER has been the President and chief executive officer of Bull Run
since July 1992 and a director of Bull Run since 1992. Prior to that time, he
was President and chief executive officer of Phoenix Corporation, a steel
service center. Mr. Prather has been a director of the Company since 1993.
MR. ROBINSON has been chairman of the board of Bull Run since March 1994,
chairman of the board and President of Delta Life Insurance Company and Delta
Fire and Casualty Insurance Company since 1958, President of Atlantic American
Corporation, an insurance holding company, from 1988 until 1995 and chairman of
the board of Atlantic American Corporation since 1995. He is also a director of
the following corporations: Bull Run, Atlantic American Life Insurance Company,
Bankers Fidelity Life Insurance Company, Delta Life Insurance Company, Delta
Fire and Casualty Insurance Company, Georgia Casualty & Surety Company, American
Southern Insurance Company and American Safety Insurance Company and director
EMERITUS of Wachovia Corporation. He has been a director of the Company since
1993.
Each director holds office until the Company's next annual meeting of the
shareholders and until his successor is elected and qualified. Officers are
elected annually by the Board of Directors and hold office at the discretion of
the Board.
66
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Act of 1934 requires the Company's directors
and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission initial reports of ownership (Form 3) and reports of
changes in ownership (Forms 4 and 5) of the Class A Common Stock. Officers,
directors and greater than ten percent shareholders are required by regulation
of the Securities and Exchange Commission to furnish the Company with copies of
all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company during the fiscal year ended December 31, 1995
all Section 16(a) filing requirements applicable to its officers, directors and
ten percent beneficial owners were met, except for Mr. John T. William's
inadvertent failure to file Forms 4 for three stock awards made by the Company
under his employment agreement. These awards of 37,500, 37,500 and 75,000 shares
were made on January 24, March 2, and March 14, 1995, respectively. Mr. Williams
also inadvertently failed to file a Form 4 disclosing the sale of 75,000 shares
which occurred in December 1995. These transactions were reported on his Form 5
filed timely in February 1996. Mr. Ralph W. Gabbard inadvertently failed to file
a timely Form 4 regarding the purchase of 150 shares in 1995. This transaction
was reported on his Form 5 filed in February 1996. Mr. Gabbard also
inadvertently failed to file timely a Form 3 in 1994 upon election as an officer
to the Company to report 300 shares owned by him prior to that election.
ITEM 11. EXECUTIVE COMPENSATION
GENERAL. The following table sets forth a summary of the compensation of the
Company's President, its former chief executive officer and the other executive
officers whose total annual compensation exceeded $100,000 during the year ended
December 31, 1995 ("named executives"). Mr. John T. Williams resigned as
President, Chief Executive Officer and director and was replaced by Mr. Ralph W.
Gabbard effective December 1, 1995.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
------------------------------
AWARDS
------------------------------
ANNUAL COMPENSATION SECURITIES
UNDERLYING
NAME AND --------------------- RESTRICTED OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS SARS(#) COMPENSATION
- ---------------------------------------- ------- --------- --------- ------------ --------------- -------------
John T. Williams, 1995 $ 285,000 $ - $2,081,250(2) - $ 606,266(3)
Former President, Chief Executive 1994 286,867 71,910 - - 2,112(4)
Officer and Director (1) 1993 258,400 112,500 - - 1,950(4)
Ralph W. Gabbard, 1995(5) 261,000 150,000 - 15,000 12,628(6)
President, Director 1994 77,000 118,941 - 30,509 1,200,000(7)
1993(8) - - - - -
William A. Fielder, III, 1995 105,000 22,050 - 3,000 9,188(9)
Vice President and Chief Financial 1994 95,000 - - - 6,055(10)
Officer 1993 88,161 - - 7,500 6,040(11)
Joseph A. Carriere, 1995 115,000 65,922 - 3,750 878(4)
Vice President Corporate Sales 1994(12) 6,635 - - - -
1993(8) - - - - -
- ------------------------------
(1) Mr. Williams resigned his position as President, Chief Executive Officer
and director of the Company effective December 1, 1995.
(2) Pursuant to Mr. Williams' employment agreement, Mr. Williams received three
restricted stock awards (the "Common Stock Award") from the Company
aggregating 150,000 shares of Class A Common Stock in 1995. In connection
with Mr. Williams' resignation from the Company, the Company removed the
restrictions on the Common Stock Award in December 1995 and the shares
subject to such Common Stock Award became fully vested.
67
(3) Upon Mr. Williams' resignation, the Company entered into a separation
agreement dated December 1, 1995 (the "Separation Agreement"), which
provided, among other things, for the payment of $596,000 over a two-year
period ending November 1997 as consideration for consulting services, his
resignation and certain non-compete and confidentiality agreements. $3,415,
$2,117 and $4,734 represent payments by the Company for matching
contributions to the 401(k) plan, term life insurance premiums and long
term disability premiums, respectively. The Company expensed the entire
$596,000 in 1995.
(4) Represents payments by the Company for term life insurance premiums.
(5) Mr. Gabbard was elected President and director of the Company in December
1995. Prior to this election he served as Vice President of the Company and
President and Chief Operating Officer of the Company's broadcast operations
from September 2, 1994 to December 1995.
(6) $3,750, $2,736 and $6,142 represent payments by the Company for matching
contributions to the 401(k) plan, term life insurance premiums and long
term disability premiums, respectively.
(7) Mr. Gabbard has an employment agreement with the Company which provides him
with 122,034 shares of Class A Common Stock if his employment with the
Company continues until September 1999. The Company will recognize
approximately $1.2 million of compensation expense for this award over the
five-year period. Approximately $80,000 and $240,000 of expense was
recorded in 1994 and 1995, respectively.
(8) Not employed by the Company during this year.
(9) $5,765, $2,406, $378 and $639 represent payments or accruals by the Company
for supplemental retirement benefits, matching contributions to the 401(k)
plan, term life insurance premiums and long term disability premiums,
respectively.
(10) $5,717 and $338 represent payments or accruals by the Company for
supplemental retirement benefits and term life insurance premiums,
respectively.
(11) $5,700 and $340 represent payments or accruals by the Company for
supplemental retirement benefits and term life insurance premiums,
respectively.
(12) Mr. Carriere joined the Company in November 1994 as President and General
Manager of KTVE.
STOCK OPTIONS GRANTED. The following table contains information on stock
options granted to the Company's President and the named executives during the
year ended December 31, 1995. Under the Company's 1992 Long Term Incentive Plan
(the "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 of
Class A Common Stock issuable under the Incentive Plan is not to exceed 600,000
shares, 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, merger, consolidation or other similar changes generally
affecting stockholders of the Company.
The Incentive Plan is administered by the members of the Management
Personnel Committee of the Board of Directors (the "Committee") who are not
eligible for selection as participants under the Incentive Plan. The Incentive
Plan is intended to provide additional incentives and motivation for the
Company's employees. The 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, among other things.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES
OPTIONS OF
NUMBER OF GRANTED TO STOCK PRICE
SECURITIES EMPLOYEES EXERCISE APPRECIATION FOR
UNDERLYING IN OR OPTION TERM(1)
OPTIONS FISCAL BASE PRICE EXPIRATION ----------------------
NAME GRANTED YEAR ($/SHARE) DATE 5%($) 10%($)
- --------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Ralph W. Gabbard 15,000 25.8% $13.33 3/30/00 $55,242 $122,071
William A. Fielder, III 3,000 5.2% $13.33 3/30/00 $11,048 $24,414
Joseph A. Carriere 3,750 6.5% $13.33 3/30/00 $13,811 $30,518
- ------------------------
(1) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
Class A Common Stock over the term of the options. These numbers are
calculated
68
based on rules promulgated by the Commission and do not reflect the
Company's estimate of future stock price growth. Actual gains, if any, on
stock option exercises and Class A Common Stock holdings are dependent on
the timing of such exercise and the future performance of the Class A Common
Stock. There can be no assurance that the rates of appreciation assumed in
this table can be achieved or that the amounts reflected will be received by
the option holder.
STOCK OPTIONS EXERCISED. The following table sets forth information about
unexercised stock options held by the named executives. No stock options were
exercised by such officers during 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
VALUE OF UNEXERCISED IN-
NUMBER OF UNEXERCISED THE-MONEY OPTIONS AT FY
OPTIONS AT FY END(#) END($) EXERCISABLE/
NAME EXERCISABLE/UNEXERCISABLE UNEXERCISABLE(1)
- ------------------------------ ------------------------- -------------------------
Ralph W. Gabbard 0/45,509 $0/$318,553
William A. Fielder, III 7,500/3,000 $61,562/$13,625
Joseph A. Carriere 0/3,750 $0/$17,031
- ------------------------
(1) Closing price of Class A Common Stock at December 31, 1995 was $17 7/8 per
share.
SUPPLEMENTAL PENSION PLAN. The Company has entered into agreements with certain
key employees to provide these employees with supplemental retirement benefits.
The benefits are 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. The Company maintains life
insurance coverage on these individuals in adequate amounts to fund the
agreements.
RETIREMENT PLAN. The Company 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 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
(i) 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 before 1994, the denominator of which is the greater of 25 or the years of
service credited under the plan, plus (ii) .9% of the employee's monthly average
earnings for the highest five consecutive years in the employee's final ten
years of employment added to .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 (i) above. For participants as of December 31, 1993,
there is a minimum benefit equal to the
69
projected benefit under (i) at that time. For purposes of illustration, pensions
estimated to be payable upon retirement of participating employees in specified
salary classifications are shown in the following table:
PENSION PLAN TABLE
YEARS OF SERVICE
----------------------------------------------------------------------
REMUNERATION(1) 10 15 20 25 30 35
- -------------------- ---------- ---------- ---------- ---------- ---------- ----------
$ 15,000 $1,326 $1,986 $2,646 $3,306 $3,300 $3,300
25,000 2,210 3,310 4,410 5,510 5,500 5,500
50,000 4,709 6,909 9,109 11,309 11,000 11,000
75,000 7,219 10,519 13,819 17,119 16,500 16,500
100,000 9,729 14,129 18,529 22,929 22,000 22,000
150,000 14,749 21,349 27,949 34,549 33,000 33,000
200,000 18,269 27,069 35,869 44,669 41,067 41,486
250,000 and above 19,622 29,268 38,914 48,560 45,014 45,473
- ------------------------
(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 Capital Accumulation Plan (as defined). Pension compensation for 1995
differs from compensation reported in the Summary Compensation Table in that
pension compensation includes any annual incentive awards received in 1995 for
services in 1994 rather than the incentive awards paid in 1996 for services in
1995. The maximum annual compensation considered for pension benefits under the
plan in 1995 was $150,000.
As of December 31, 1995, full years of actual credited service in this plan
are Mr. Williams-3 years; Mr. Fielder-4 years; and Mr. Carriere-1 year. Mr.
Gabbard had no full years of credited service under the plan at December 31,
1995.
CAPITAL ACCUMULATION PLAN. Effective October 1, 1994, the Company adopted the
Gray Communications Systems, Inc. Capital Accumulation Plan (the "Capital
Accumulation Plan") for the purpose of providing additional retirement benefits
for substantially all employees. The Capital Accumulation Plan is intended to
meet the requirements of section 401(k) of the Code.
Contributions to the Capital Accumulation Plan are made by the employees of
the Company. The Company matches a percentage of each employee's contribution
which does not exceed 6% of the employee's gross pay. The percentage match is
made with a contribution of Class A Common Stock and is declared by the Board of
Directors before the beginning of each Capital Accumulation Plan year. The
percentage match declared for the year ended December 31, 1995 was 50%. The
Company's matching contributions vest based upon the employees' number of years
of service, over a period not to exceed five years. The Company has registered
150,000 shares of Class A Common Stock for issuance to the Capital Accumulation
Plan.
DIRECTORS' COMPENSATION
Directors who are not employed by the Company receive an annual fee of
$6,000. Nonemployee directors are paid $500 for attendance at meetings of the
Board of Directors and $500 for attendance at meetings of Committees of the
Board. Committee chairmen, not employed by the Company, receive an additional
fee of $800 for each meeting they attend. Any outside director who serves as
Chairman of
70
the Board receives an annual retainer of $12,000. Outside directors are paid 40%
of the usual fee arrangement for attending any special meeting of the Board of
Directors or any Committee thereof conducted by telephone.
EMPLOYMENT AGREEMENTS
In 1995, pursuant to Mr. Williams' employment agreement, Mr. Williams
received the Common Stock Award. In December 1995, Mr. Williams resigned his
position as President, Chief Executive Officer and director of the Company. Upon
his resignation, the Company entered into the Separation Agreement with Mr.
Williams which provides for the payment of $596,000 over a two-year period
ending November 1, 1997 as consideration for Mr. Williams' agreement to (i)
resign from the Company and terminate his employment agreement, (ii) be
available as a consultant to the Company from December 1, 1995 until November
30, 1997 and (iii) not compete with the Company's business and to keep all
information regarding the Company confidential while he is a consultant. In
addition, under the Separation Agreement, Mr. Williams is to receive health and
life insurance coverage with premiums paid by the Company while he is available
as a consultant. Finally, the Separation Agreement provides that the
restrictions on the Common Stock Award were removed and such Common Stock Award
became fully vested.
Ralph W. Gabbard and the Company entered into an employment agreement, dated
September 3, 1994, for a five year term. The agreement provides for annual
compensation of $250,000 during the term of the agreement (subject to yearly
inflation adjustment) and entitled Mr. Gabbard to certain fringe benefits. In
addition to his annual compensation, Mr. Gabbard was entitled to participate in
an annual incentive compensation plan and the Incentive Plan. Under the annual
incentive compensation plan, Mr. Gabbard was eligible to receive additional
compensation if the operating profits of the broadcasting group of the Company
reaches or exceeds certain goals. Under the Incentive Plan, Mr. Gabbard has
received non-qualified stock options to purchase 30,509 shares of Class A Common
Stock. These options are exercisable over a three year period beginning
September 1996. The exercise price for such options is $9.66. Upon the fifth
anniversary of Mr. Gabbard's employment with the Company, Mr. Gabbard shall
receive 122,034 shares of Class A Common Stock.
In February 1996, the Board of Directors approved an amendment to Mr.
Gabbard's employment agreement to increase Mr. Gabbard's base salary from
$250,000 to $300,000, effective January 1, 1996 and to establish a new annual
compensation plan (the "Annual Compensation Plan") to be based upon the
achievement by the Company of a certain operating profit, the amount of which is
to be established by the Board of Directors. Under the Annual Compensation Plan,
if the Company achieves the targeted amount of operating profit in a given year,
Mr. Gabbard shall receive $200,000 as additional compensation. The Annual
Compensation Plan further provides that if the Company exceeds the targeted
amount of operating profit in a given year, Mr. Gabbard shall be entitled to
receive additional compensation in excess of $200,000, as determined by the
Board of Directors. Mr. Gabbard has agreed that during the term of his agreement
and for two years thereafter, he will be subject to certain non-competition
provisions.
William A. Fielder, III, Vice President and Chief Financial Officer of the
Company, has an employment agreement with the Company dated April 1991, which
was amended March 1993, to provide for the continuation of his annual salary
(currently $135,000) for a period of one year in the event of termination
without cause.
Robert A. Beizer and the Company entered into an employment agreement dated
as of February 12, 1996, for a two-year term which automatically renews for
three successive one-year periods, subject to certain termination provisions.
The agreement provides that Mr. Beizer shall be employed as Vice President for
Law and Development of the Company, with an initial annual base salary of
$200,000 and a grant of options to purchase 15,000 shares of Class A Common
Stock with an exercise price of $19.375 per share under the Incentive Plan at
the inception of his employment. Mr. Beizer's base salary shall be increased
yearly, based upon a cost of living index and he will receive non-qualified
options to purchase 7,000 shares of Class A Common Stock annually during the
term of the agreement
71
at an exercise price per share equal to the fair market value of the Class A
Common Stock on the date of the grant. All options granted are exercisable over
a three year period upon the second anniversary of the grant date. If there is a
"change of control" of the Company, 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 agreement, "change of control" is defined as any
change in the control of the Company 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 thereafter, he will be subject to certain non-competition provisions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Gray Kentucky Television, Inc., a subsidiary of the Company ("Gray
Kentucky") is a party to a joint venture agreement with Host Communications,
Inc. ("Host") and certain other parties not affiliated with the Company,
pursuant to which the parties formed a joint venture to exploit Host's rights to
broadcast and market University of Kentucky football and basketball games and
related activities. Pursuant to such agreement, Gray Kentucky is licensed to
broadcast University of Kentucky football and basketball games and related
activities. Under this agreement, Gray Kentucky also provides Host with
production and certain marketing services and Host provides accounting and
various marketing services. During the year ended December 31, 1995, the Company
received approximately $332,000 from this joint venture.
Bull Run currently owns 51.5% of the outstanding common stock of Capital
Sports Properties, Inc. ("CSP"). CSP's assets consist of all of the outstanding
preferred stock of Host and warrants to purchase Host common stock. Bull Run
also owns approximately 9.4% of Host's currently outstanding common shares
directly, thereby giving Bull Run total direct and indirect ownership of Host of
approximately 29.7%, assuming conversion of all currently outstanding
exercisable stock options and warrants for Host common stock. Messrs. Ralph W.
Gabbard and Robert S. Prather, Jr., members of the Company's Board of Directors,
are also members of the board of directors of both CSP and Host.
The Company's Board of Directors approved payments to Bull Run of finders
fees for the acquisition of the GWINNETT DAILY POST, the Augusta Acquisition and
the Phipps Acquisition. The Company agreed to pay finders fees of $75,000 and
$360,000 for the acquisition of GWINNETT DAILY POST and Augusta Acquisitions,
respectively. The Board of Directors has agreed to pay a finders fee of 1% of
the proposed purchase price of the Phipps Acquisition for services performed, of
which $550,000 was due and included in accounts payable at December 31, 1995.
On January 3, 1996, Bull Run purchased for $10 million from the Company (i)
the 8% Note in the principal amount of $10 million due in January 2005, with
interest payable quarterly beginning March 31, 1996 and (ii) warrants to
purchase 487,500 shares of Class A Common Stock at $17.88 per share, (subject to
customary antidilution provisions) 300,000 of which are currently fully vested,
with the remaining warrants vesting in five equal annual installments commencing
January 3, 1997, provided that the 8% Note is outstanding. On January 3, 1996,
the closing price of the Class A Common Stock on the NYSE was $17.75. The
warrants (which represent 9.9% of the currently issued and outstanding shares of
Class A Common Stock, after giving effect to the exercise of such warrants)
expire in January 2006 and may not be exercised unless shareholder approval of
the issuance of the warrants is obtained, which is expected to occur at the
Company's next annual meeting of shareholders. The Company obtained an opinion
from The Robinson-Humphrey Company, Inc., one of the underwriters of the Note
Offering and the Stock Offering, stating that the terms and conditions of the 8%
Note were fair from a financial point of view to the shareholders of the
Company. The proceeds from the sale of the 8% Note and the warrants were used to
fund, in part, the Augusta Acquisition.
In connection with the issuance by the Company of the $10 million letter of
credit in the Phipps Acquisition, J. Mack Robinson, a director of the Company,
executed a put agreement in favor of the letter of credit issuer, for which he
received no consideration from the Company. Pursuant to such
72
agreement, in the event that such letter of credit is drawn upon by the sellers
of the Phipps Business and the Company defaults on the repayment of such amounts
so drawn under the letter of credit, Mr. Robinson has agreed to pay such amounts
to the issuer of the letter of credit.
ISSUANCES OF PREFERRED STOCK
As part of the Financing, the 8% Note will be retired and the Company will
issue to Bull Run, in exchange therefor, 1,000 shares of Series A Preferred
Stock. Subject to certain limitations, holders of the Series A Preferred Stock
are entitled to receive, when, as and if declared by the Board of Directors, out
of funds of the Company legally available for payment, cash dividends at an
annual rate of $800 per share. The Series A Preferred Stock has priority as to
dividends over the common stock and any other series or class of the Company's
stock which ranks junior as to dividends to the Series A Preferred Stock. In
case of the voluntary or involuntary liquidation, dissolution or winding up of
the Company, holders of the Series A Preferred Stock will be entitled to receive
a liquidation price of $10,000 per share, plus an amount equal to any accrued
and unpaid dividends to the payment date, before any payment or distribution is
made to the holders of common stock or any other series or class of the
Company's stock which ranks junior as to liquidation rights to the Series A
Preferred Stock. The Series A Preferred Stock may be redeemed at the option of
the Company, in whole or in part at any time, at $10,000 per share, plus an
amount equal to any accrued and unpaid dividends to the redemption date and such
redemption price may be paid, at the Company's option, in cash or in shares of
Class A Common Stock. The holders of shares of Series A Preferred Stock will not
be entitled to vote on any matter except (i) with respect to the authorization
or issuance of capital stock ranking senior to the Series A Preferred Stock and
with respect to certain amendments to the Company's Articles of Incorporation,
(ii) if the Company shall have failed to declare and pay dividends on the Series
A Preferred Stock for any six quarterly payment periods, in which event the
holders of the Series A Preferred Stock shall be entitled to elect two directors
to the Company's Board of Directors until the full dividends accumulated have
been declared and paid and (iii) as required by law. In addition, without the
affirmative vote of the holders of a majority of the outstanding shares of
Series A Preferred Stock, the Company may not authorize or issue a class or
series of, or security convertible into, capital stock ranking senior to the
Series A Preferred Stock as to the payment of dividends or the distribution of
assets upon liquidation, or adversely change the preferences or powers of the
Series A Preferred Stock. The warrants issued with the 8% Note will vest in
accordance with the schedule described above, provided that the Series A
Preferred Stock remains outstanding.
In addition, as part of the Financing, the Company will issue to Bull Run,
an affiliate of the Company, for $10 million, 1,000 shares of Series B Preferred
Stock. Subject to certain limitations, holders of the Series B Preferred Stock
are entitled to receive, when, as and if declared by the Board of Directors, out
of funds of the Company legally available for payment, dividends of Series B
Preferred Stock at an annual rate of $600 per share, except that the Company at
its option may pay such dividends in cash or in additional shares of Series B
Preferred Stock valued, for the purpose of determining the number of shares (or
fraction thereof) of such Series B Preferred Stock to be issued, at $10,000 per
share. The Series B Preferred Stock has priority as to dividends over the common
stock and any other series or class of the Company's stock which ranks junior as
to dividends as the Series B Preferred Stock. In case of the voluntary or
involuntary liquidation, dissolution or winding up of the Company, holders of
the Series B Preferred Stock will be entitled to receive a liquidation price of
$10,000 per share, plus an amount equal to any accrued and unpaid dividends to
the payment date, before any payment or distribution is made to the holders of
common stock or any other series or class of the Company's stock which ranks
junior as to liquidation rights to the Series B Preferred Stock. The Series B
Preferred Stock may be redeemed at the option of the Company, in whole or in
part at any time, at $10,000 per share, plus an amount equal to any accrued and
unpaid dividends to the redemption date and such redemption price may be paid,
at the Company's option, in cash or in shares of Class A Common Stock. The
holders of shares of Series B Preferred Stock will not be entitled to vote on
any matter except (i) with respect to the authorization or issuance of capital
stock ranking senior to the Series B Preferred Stock and with respect to certain
amendments to the Company's Articles of
73
Incorporation, (ii) if the Company shall have failed to declare and pay
dividends on the Series B Preferred Stock for any six quarterly payment periods,
in which event the holders of the Series B Preferred Stock shall be entitled to
elect two directors to the Company's Board of Directors until the full dividends
accumulated have been declared and paid and (iii) as required by law. In
addition, without the affirmative vote of the holders of a majority of the
outstanding shares of Series B Preferred Stock, the Company may not authorize or
issue a class or series of, or security convertible into, capital stock ranking
senior to the Series B Preferred Stock as to the payment of dividends or the
distribution of assets upon liquidation or adversely change the preferences or
powers of the Series B Preferred Stock.
In connection with the issuance of the Series B Preferred Stock as part of
the Financing, (i) the Company will issue to Bull Run warrants entitling the
holder thereof to purchase 500,000 shares of Class A Common Stock at an exercise
price of $24.00 per share, (subject to customary antidilution provisions),
representing 10.1% of the currently issued and outstanding shares of Class A
Common Stock, after giving effect to the exercise of such warrants. Of these
warrants, 300,000 will vest upon issuance, with the remaining warrants vesting
in five equal installments commencing on the first anniversary of the date of
issuance. The issuance of the warrants must be approved by the Company's
shareholders, which is expected to occur at the Company's next annual meeting of
shareholders. They may not be exercised prior to the second anniversary of the
date of issuance and will expire on the tenth anniversary of the date of
issuance. The Company expects to obtain a written opinion from The
Robinson-Humphrey Company, Inc., one of the proposed underwriters of the Stock
Offering and the Note Offering, stating that the terms and conditions of the
Series B Preferred Stock and the warrants are fair to the shareholders of the
Company from a financial point of view.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
stockholders who are known by the Company to be the beneficial owners of more
than 5% of the outstanding Class A Common Stock and the number of shares of
Class A Common Stock beneficially owned by directors and named executive
officers of the Company, individually, and all directors and executive officers
of the Company as a group as of June 15, 1996. Except as indicated below, none
of such stockholders own, or have the right to acquire any shares of Class B
Common Stock.
NAME AND ADDRESS OF SHARES BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED CLASS
- ---------------------------------- ------------ ----------
Bull Run Corporation (1) 1,211,590 27.1%
George H. Nader (2) 240,899 5.4%
Ralph W. Gabbard 918 *
William A. Fielder III (3) 8,563 *
Sabra H. Cowart 195 *
Robert A. Beizer -- *
Thomas J. Stultz 1,500 *
Joseph A. Carriere 594 *
William E. Mayher III (3) 16,500 *
Richard L. Boger (3) 24,150 *
Hilton H. Howell, Jr. (3)(4)(5)(6) 69,150 1.6%
Howell W. Newton (3) 9,250 *
Hugh Norton (3) 16,500 *
Robert S. Prather, Jr. (3)(4)(7) 30,750 *
J. Mack Robinson (3)(4)(6)(8) 791,940 17.7%
John T. Williams (9) 78,752 1.8%
All directors and executive (4)-1,048,762(8),
officers as a group (14 persons) (10) 23.2%
- ------------------------------
* Less than 1%.
74
(1) Owned by Bull Run through its wholly-owned subsidiary, Datasouth Computer
Corporation. The address of Bull Run is 4370 Peachtree Road, Atlanta,
Georgia 30319. Does not include warrants subject to shareholder approval.
See "Compensation Committee Interlocks and Insider Participation."
(2) Mr. Nader's address is P.O. Box 271, 1011 Fifth Avenue, West Point, Georgia
31833.
(3) Includes 7,500 shares subject to currently exercisable options.
(4) Excludes shares owned by Bull Run. Messrs. Howell, Prather and Robinson are
directors and officers of Bull Run. Messrs. Prather and Robinson are
principal shareholders of Bull Run.
(5) Includes 39,050 shares owned by Mr. Howell's wife, as to which shares Mr.
Howell disclaims beneficial ownership. Excludes 63,000 shares held in trust
for Mr. Howell's wife.
(6) Excludes as to Mr. Howell, and includes as to Mr. Robinson, an aggregate of
297,540 shares owned by certain companies of which Mr. Howell is an officer
and director and Mr. Robinson is an officer, director and a principal or
sole stockholder.
(7) Includes 150 shares owned by Mr. Prather's wife, as to which shares Mr.
Prather disclaims beneficial ownership.
(8) Includes an aggregate of 256,650 shares owned by Mr. Robinson's wife
directly and as trustee for their daughters, as to which shares Mr.
Robinson disclaims beneficial ownership. Mr. Robinson's address is 4370
Peachtree Road, Atlanta, Georgia 30319.
(9) Mr. Williams resigned his position as President and Chief Executive Officer
of the Company effective December 1, 1995.
(10) Includes 60,000 shares subject to currently exercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
J. Mack Robinson, a director of the Company, is Chairman of the Board of
Bull Run and the beneficial owner of approximately 28% of the outstanding shares
of common stock, par value $.01 per share ("Bull Run Common Stock"), of Bull Run
(including certain shares as to which such beneficial ownership is disclaimed by
Mr. Robinson). Robert S. Prather, Jr., a director of the Company, is President,
Chief Executive Officer and a director of Bull Run and the beneficial owner of
approximately 12% of the outstanding shares of Bull Run Common Stock (including
certain shares as to which such beneficial ownership is disclaimed by Mr.
Prather). Mr. Prather is also a member of the Board of Directors of CSP and
Host. Hilton H. Howell, Jr. a director of the Company, is Vice President,
Secretary and a director of Bull Run. See "Compensation Committee Interlocks and
Insider Participation" for a description of certain business relationships
between the Company and Messrs. Prather and Robinson, Host, CSP and Bull Run.
75
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS.
Audited Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1994 and 1995
Consolidated Statements of Income for the years ended December 31, 1993, 1994
and 1995
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules are included in Item 14(d):
Schedule II -- Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable or not required
under the related instructions, or because the required information is shown
either in the consolidated financial statements or in the notes thereto.
(B) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1995.
(C) EXHIBITS
3.1 Articles of Incorporation of Gray Communications Systems, Inc., as amended
(incorporated by references to Exhibit 3 to the Company's Form 10 dated October
7, 1991, as amended on January 29, 1992 and March 2, 1992, and Exhibit 3(i) to
the Company's Form 10-K for the fiscal year ended June 30, 1993).
3.2 By-Laws of Gray Communications Systems, Inc., as amended (incorporated by
references to Exhibit 3(i) to the Company's Form 10 dated October 7, 1991, as
amended on January 29, 1992 and March 2, 1992, Exhibit 3(i) to the Company's
10-K for the period ended June 30, 1993 and Exhibit 3(d) of the Company's 10-K
for the transition period from July 1, 1993 to December 31, 1993).
4.2 Credit Agreement and first modification of Credit Agreement, dated as of April
22, 1994, between the Company and Bank South, N.A., and Deposit Guaranty
National Bank (incorporated by reference to Exhibit 4(i) to the Company's Form
8-K, dated September 2, 1994).
4.3 Note Purchase Agreement and first modification of Note Purchase Agreement between
the Company and Teachers Insurance and Annuity Association of America
(incorporated by reference to Exhibit 4(ii) to the Company's Form 8-K, dated
September 2, 1994).
4.4 Second modification of Credit Agreement, dated November 30, 1994, between the
Company and Bank South, N.A. and Deposit Guaranty National Bank (incorporated by
reference to Exhibit 4(c) to the Company's Form 10-K for the year ended December
31, 1994 (the "1994 Form 10-K")).
4.5 Second modification of Note Purchase Agreement, dated November 30, 1994, between
the Company and Teachers Insurance and Annuity Association (incorporated by
reference to Exhibit 4(d) to the 1994 Form 10-K).
76
4.6 Third modification of Credit Agreement, dated January 6, 1995, between the
Company and Bank South, N.A. and Deposit Guaranty National Bank (incorporated by
reference to Exhibit 4(e) to the 1994 Form 10-K).
4.7 Fourth modification of Credit Agreement, dated January 27, 1995, between the
Company and Bank South, N.A. and Deposit Guaranty National Bank (incorporated by
reference to Exhibit 4(f) to the 1994 Form 10-K).
4.8 Third Modification of Note Purchase Agreement, dated June 15, 1995, between the
Company and Teachers Insurance and Annuity Association (incorporated by
reference to Exhibit 4(a) to the Company's Form 10-Q for the quarter ended June
30, 1995).
4.9 Form of Master Agreement, dated as of June 13, 1995, between the Company and
Society National Bank (incorporated by reference to Exhibit 4.9 to the Company's
registration statement on Form S-1 (Registration No. 333-4338) (the "Note S-1").
4.10 Amendment to Intercreditor Agreement, dated June 15, 1995, by and among the
Company, Bank South, N.A., Deposit Guaranty National Bank and Teachers Insurance
and Annuity Association (incorporated by reference to Exhibit 4(b) to the
Company's form 10-Q for the quarter ended June 30, 1995).
4.11 Fourth Modification of Note Purchase Agreement, dated as of January 3, 1996,
between the Company and Teachers Insurance Annuity Association previously filed
as Exhibit 4(h) to the Company's Form 10-K for the year ended December 31, 1995
(the "1995 10-K")).
4.12 First Consolidated Modification of Credit Agreement, dated as of January 3, 1996,
among the Company, Bank South, Deposit Guaranty National Bank and Society
National Bank (incorporated by reference to Exhibit 4(i) to the Company's Form
8-K, dated January 18, 1996).
4.13 Note Purchase between the Company and Bull Run, dated as of January 3, 1996
(incorporated by reference to Exhibit 4(ii) to the Company's Form 8-K, dated
January 18, 1996).
10.1 Supplemental pension plan (incorporated by reference to Exhibit 10(a) to the
Company's Form 10 filed October 7, 1991, as amended January 29, 1992 and March
2, 1992).
10.2 Employment Agreement, between the Company and John T. Williams (incorporated by
reference to Exhibit 19 to the Company's Form 10-Q for the quarter ended March
31, 1992).
10.3 Amendment to employment agreement, between the Company and John T. Williams
(incorporated by reference to Exhibit 19(b) to the Company's Form 10-Q for the
quarter ended March 31, 1992).
10.4 Restricted stock agreement between the Company and John T. Williams (incorporated
by reference to Exhibit 19(c) to the Company's Form 10-Q for the quarter ended
March 31, 1992).
10.5 Long Term Incentive Plan (incorporated by reference to Exhibit 10(e) to the
Company's Form 10-K for the fiscal year ended June 30, 1993).
10.6 Asset Purchase Agreement between the Company and The Citizen Publishing Company,
Inc. (incorporated by reference to Exhibit 10 to the Company's Form 8-K, dated
May 31, 1994).
10.7 Asset Purchase Agreement between the Company and Kentucky Central Television,
Inc. (incorporated by reference to Exhibit 10 to the Company's Form 8-K, dated
September 2, 1994).
10.8 Asset Purchase Agreement, dated January 6, 1995, between the Company and Still
Publishing, Inc. (incorporated by reference to Exhibit 10(h) to the 1994 Form
10-K).
77
10.9 Asset Purchase Agreement, dated April 11, 1995, between the Company, Television
Station Partners, L.P. and WRDW Associates (incorporated by reference to Exhibit
10(a) to the Company's 10-Q for the quarter ended June 30, 1995).
10.10 Capital Accumulation Plan, effective October 1, 1994 (incorporated by reference
to Exhibit 10(i) to the 1994 Form 10-K).
10.11 Employment Agreement, dated September 3, 1994, between the Company and Ralph W.
Gabbard (incorporated by reference to Exhibit 10(j) to the 1994 Form 10-K).
10.12 Asset Purchase Agreement, dated March 15, 1996, by and between the Company and
Media Acquisition Partners, L.P. previously filed as Exhibit 10(l) to the 1995
Form 10-K).
10.13 Warrant, dated January 4, 1996, to purchase 487,500 shares of Common Stock
(incorporated by reference to Exhibit 10.13 to the Note S-1).
10.14 Form of amendment to employment agreement between the Company and Ralph W.
Gabbard, dated January 1, 1996 (previously filed as the Exhibit 10(m) 1995 Form
10-K).
10.15 Employment Agreement, dated February 12, 1996 between the Company and Robert A.
Beizer (incorporated by reference to Exhibit 10.15 to the Note S-1).
10.16 Separation Agreement between the Company and John T. Williams (incorporated by
reference to Exhibit 10.16 to the Note S-1).
21 List of Subsidiaries (incorporated by reference to Exhibit 21 to the Note S-1).
23.1 Consent of Ernst & Young LLP.
(D) SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GRAY COMMUNICATIONS SYSTEMS, INC.
By: /s/ WILLIAM A. FIELDER III
-----------------------------------
William A. Fielder III
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
Date: July 11, 1996
79
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-84656) pertaining to the Gray Communications Systems, Inc. Capital
Accumulation Plan of our report dated February 14, 1996, with respect to the
consolidated financial statements and schedule of Gray Communications Systems,
Inc. included in the Annual Report (Form 10-K/A-1) for the year ended December
31, 1995.
ERNST & YOUNG LLP
Columbus, Georgia
July 11, 1996
GRAY COMMUNICATIONS SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COL. C
----------------------------------
COL. B
COL. A ------------------ ADDITIONS COL. D COL. E
- -------------------------- BALANCE AT ---------------------------------- ------------- -------------
BEGINNING OF CHARGED TO COSTS CHARGED TO DEDUCTIONS BALANCE AT
DESCRIPTION PERIOD AND EXPENSES OTHER ACCOUNTS (1) END OF PERIOD
- -------------------------- ------------------ ------------------ -------------- ------------- -------------
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful
accounts................. $ 453,000 $ 187,000 $ (83,000) $ 205,000 $ 352,000
---------- ---------- -------------- ------------- -------------
---------- ---------- -------------- ------------- -------------
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful
accounts................. $ 352,000 $ 211,000 $ 360,000(2) $ 229,000 $ 694,000
---------- ---------- -------------- ------------- -------------
---------- ---------- -------------- ------------- -------------
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful
accounts................. $ 694,000 $ 384,000 $ 33,000(2) $ 661,000 $ 450,000
---------- ---------- -------------- ------------- -------------
---------- ---------- -------------- ------------- -------------
- ------------------------
(1) Deductions are write-offs of amounts not considered collectible.
(2) Represents amounts recorded in certain allocations of purchase prices for
the Company's acquisitions.
80