AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER , 1996 REGISTRATION NO. 333-4338 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- GRAY COMMUNICATIONS SYSTEMS, INC. (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER) 126 NORTH WASHINGTON STREET ALBANY, GEORGIA 31701 (912) 888-9390 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) SUBSIDIARY GUARANTOR REGISTRANTS
GEORGIA 4833 58-0285030 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification Number) incorporation or Classification Code Number) organization) -------------------------- WILLIAM A. FIELDER, III 126 NORTH WASHINGTON STREET ALBANY, GEORGIA 31701 (912) 434-8732 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES OF COMMUNICATIONS TO:
EXACT NAME OF SUBSIDIARY GUARANTOR PRIMARY STANDARD I.R.S REGISTRANT AS INDUSTRIAL EMPLOYER SPECIFIED IN ITS STATE OF CLASSIFICATION IDENTIFICATION CHARTER INCORPORATION CODE NUMBER NUMBER - --------------------- ------------ ----------------- ------------ The Albany Herald Publishing Company, Inc................. Georgia 2711 58-1020695 The Rockdale Citizen Publishing Company............. Georgia 2711 58-2113856 WALB-TV, Inc......... Georgia 4833 58-1048743 WJHG-TV, Inc......... Georgia 4833 59-1233914 Gray Real Estate & Development Company............. Georgia 6519 58-1653626 WKXT Licensee Corp................ Delaware 4833 51-0376774 WCTV Operating Corp................ Georgia 4833 58-2254141 WKXT-TV, Inc......... Georgia 4833 Applied For Gray Television Management, Inc..... Delaware 4833 51-0376607 Gray Kentucky Television, Inc..... Georgia 4833 61-1267738 The Southwest Georgia Shopper, Inc........ Georgia 2741 58-2135527 EXACT NAME OF SUBSIDIARY GUARANTOR PRIMARY STANDARD I.R.S REGISTRANT AS INDUSTRIAL EMPLOYER SPECIFIED IN ITS STATE OF CLASSIFICATION IDENTIFICATION CHARTER INCORPORATION CODE NUMBER NUMBER - --------------------- ------------ ----------------- ------------ WRDW-TV, Inc......... Georgia 4833 58-2165671 KTVE Inc............. Arkansas 4833 71-0327940 Gray Transportation Company, Inc........ Georgia 4700 58-1162362 WALB Licensee Corp................ Delaware 4833 51-0376603 WJHG Licensee Corp................ Delaware 4833 51-0376606 WKYT Licensee Corp................ Delaware 4833 51-0376629 WRDW Licensee Corp................ Delaware 4833 Applied For WYMT Licensee Corp................ Delaware 4833 Applied For Porta-Phone Paging Licensee Corp....... Delaware 4812 51-0376605 Porta-Phone Paging, Inc................. Georgia 4812 58-2254140 WCTV Licensee Corp................ Delaware 4833 51-0376604 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT. -------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / - ---------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / - ---------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- THE CO-REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE CO-REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Henry O. Smith III, Esq. Daniel J. Zubkoff, Esq. Proskauer Rose Goetz & Mendelsohn LLP Cahill Gordon & Reindel 1585 Broadway 80 Pine Street New York, New York 10036 New York, New York 10005 (212) 969-3000 (212) 701-3000 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS SUBJECT TO COMPLETION DATED SEPTEMBER , 1996 GRAY COMMUNICATIONS SYSTEMS, INC. $150,000,000 % SENIOR SUBORDINATED NOTES DUE 2006 INTEREST PAYABLE AND ISSUE PRICE: % The % Senior Subordinated Notes due 2006 (the "Notes") are being offered (this "Offering") by Gray Communications Systems, Inc. (the "Company"). Concurrently herewith, the Company is offering (the "Concurrent Offering") 3,500,000 shares of its Class B Common Stock, no par value (the "Class B Common Stock"). The Concurrent Offering is being made by separate prospectus. The closing of this Offering is conditioned upon the consummation of the Concurrent Offering. The Notes will be guaranteed, jointly and severally, fully and unconditionally by: Gray Kentucky Television, Inc., Gray Real Estate & Development Company, KTVE Inc., The Albany Herald Publishing Company, Inc., The Rockdale Citizen Publishing Company, The Southwest Georgia Shopper, Inc., WALB-TV, Inc., WJHG-TV, Inc., WRDW-TV, Inc., Gray Transportation Company, Inc., WALB Licensee Corp., WJHG Licensee Corp., WKYT Licensee Corp., WRDW Licensee Corp., WYMT Licensee Corp., WKXT Licensee Corp., WCTV Operating Corp., WCTV Licensee Corp., WKXT-TV, Inc., Gray Television Management, Inc., Porta-Phone Paging, Inc. and Porta-Phone Paging Licensee Corp. (collectively, the "Subsidiary Guarantors"). The Subsidiary Guarantors constitute all of the Company's subsidiaries. The Company expects to use the net proceeds of this Offering, together with the proceeds of the Concurrent Offering and certain other funds, to consummate the Phipps Acquisition (as defined) and to repay certain indebtedness. If the Phipps Acquisition is not consummated prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. The Notes mature on , 2006, unless previously redeemed. Interest on the Notes is payable semiannually on and , commencing , 1997. The Notes are redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings (as defined), other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $97.5 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. Upon a Change of Control (as defined), the Company has the obligation to offer to purchase all outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Notes are general unsecured obligations of the Company and are subordinated in right of payment to all existing and future Senior Debt (as defined) of the Company, including all indebtedness of the Company under the Senior Credit Facility (as defined). The Company does not currently have, and does not currently intend to issue, significant indebtedness to which the Notes would be senior. The Subsidiary Guarantees (as defined) are general unsecured obligations of the Subsidiary Guarantors and are subordinated in right of payment to all existing and future Guarantor Senior Debt (as defined) of the Subsidiary Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering and the other transactions described herein, the Company would have had approximately $183.3 million of indebtedness outstanding, of which $33.3 million would be Senior Debt. There is currently no trading market for the Notes and the Company does not intend to list the Notes on any securities exchange. SEE "RISK FACTORS" ON PAGE 18 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- (1) Plus accrued interest, if any, from the date of issuance. (2) The Company and the Subsidiary Guarantors have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (3) Before deducting expenses payable by the Company estimated at $ . The Notes are being offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to approval of certain legal matters by Cahill Gordon & Reindel, counsel for the Underwriters, and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Notes will be made through the book-entry facilities of The Depository Trust Company, against payment therefor on or about , 1996. J.P. MORGAN & CO. ALLEN & COMPANY INCORPORATED THE ROBINSON-HUMPHREY COMPANY, INC. , 1996
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC (1) COMPENSATION (2) COMPANY (3) - --------------------------------------------------------------------------------------------------------------------- Per Note % % % - --------------------------------------------------------------------------------------------------------------------- Total $ $ $ - --------------------------------------------------------------------------------------------------------------------- [The graphic material to be included is a map of the southeastern part of the United States with logos of the television stations owned by the Company or that are part of the Phipps Business marking where the stations are located.] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 FOR CALIFORNIA RESIDENTS: WITH RESPECT TO SALES OF THE NOTES OFFERED HEREBY TO CALIFORNIA RESIDENTS, AS OF THE DATE OF THIS PROSPECTUS, SUCH NOTES MAY BE SOLD ONLY TO: (1) "ACCREDITED INVESTORS" WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, (2) BANKS, SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES, INVESTMENT COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, PENSION AND PROFIT-SHARING TRUSTS, CORPORATIONS OR OTHER ENTITIES WHICH, TOGETHER WITH THE CORPORATION'S OR OTHER ENTITY'S AFFILIATES, HAVE A NET WORTH ON A CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY AUDITED, BY OUTSIDE ACCOUNTANTS) OR NOT LESS THAN $14,000,000 AND SUBSIDIARIES OF THE FOREGOING OR (3) ANY PERSON (OTHER THAN A PERSON FORMED FOR THE SOLE PURPOSE OF PURCHASING THE NOTES OFFERED HEREBY) WHO PURCHASES AT LEAST $1,000,000 AGGREGATE AMOUNT OF THE NOTES OFFERED HEREBY. THE INDENTURE DOES NOT CONTAIN A SINKING FUND. No person has been authorized to give any information or to make any representation other than those contained in this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or by any of the Underwriters. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, the Notes in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof. THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY, INCLUDING STATEMENTS UNDER THE CAPTIONS "PRO FORMA FINANCIAL DATA," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." THESE FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH MATTERS WILL BE REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) COMPETITIVE PRESSURE IN THE COMPANY'S INDUSTRY INCREASES; (2) COSTS RELATED TO THE PHIPPS ACQUISITION ARE GREATER THAN EXPECTED; AND (3) GENERAL ECONOMIC CONDITIONS ARE LESS FAVORABLE THAN EXPECTED. FOR FURTHER INFORMATION ON OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE COMPANY AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS." TABLE OF CONTENTS 3
PAGE Available Information........................... 4 Prospectus Summary.............................. 5 Risk Factors.................................... 18 The Phipps Acquisition, the KTVE Sale and the Financing........................... 24 Capitalization.................................. 27 Pro Forma Financial Data........................ 28 Selected Historical Financial Data.............. 40 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 44 PAGE Business........................................ 57 Management...................................... 84 Security Ownership of Certain Beneficial Owners and Management....................... 92 Certain Relationships and Related Transactions.. 93 Description of Certain Indebtedness............. 94 Description of the Notes........................ 95 Underwriting.................................... 118 Legal Matters................................... 118 Experts......................................... 118 Index to Consolidated Financial Statements...... F-1 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act. This Prospectus does not contain all of the information set forth in the Registration Statement and the schedules and exhibits thereto. For further information with respect to the Company and the Notes, reference is hereby made to the Registration Statement and to the schedules and exhibits thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to herein are not necessarily complete and where such contract or other document is an exhibit to the Registration Statement, each such statement is qualified in all respects by the provisions of such exhibit, to which reference is hereby made for a full statement of the provisions thereof. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance therewith, files reports, proxy statements and other information with the Commission. Such Registration Statements, reports, proxy statements and other information filed by the Company with the Commission may be inspected and copied at the public reference facilities of the Commission at its principal office at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and at Room 3190, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60061. Copies of each such document may be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company is required under the terms of the Indenture to furnish the holders of the Notes with copies of the annual reports and other reports and information required by Sections 13 and 15(d) of the Exchange Act for so long as any Notes remain outstanding. The Company currently has outstanding Class A common stock, no par value (the "Class A Common Stock"), which is listed on the New York Stock Exchange (the "NYSE"). Reports, proxy statements and other information concerning the Company can be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. 4 PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. 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 (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION 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 THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF 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"). THE COMPANY 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 (which includes two television stations that are part of the Phipps Business). 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 "Risk Factors -- FCC Divestiture Requirement" 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 (which is part of the Phipps 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. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. 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 5 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 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station 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. 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 $(3.4) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $322,000, 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 224.7% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 72.8% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.7 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. - ------------------------------ (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. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps 6
------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - 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 works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - 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's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. 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 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. 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 $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve 7 operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 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 $10.0 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, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $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 this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering is conditioned upon the consummation of the Financing and the Concurrent Offering but is not conditioned upon the consummation of the Phipps Acquisition. However, the Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if the Phipps Acquisition is not consummated prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Financing described above will be implemented in connection with the closing of this Offering, but the Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: - ------------------------------ (1) The source of these funds was the KTVE Sale. (2) 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 June 30, 1996, the weighted average interest rate was 8.94%. (3) The indebtedness under the Senior Note bears interest at 10.7%. (4) Fees and expenses include underwriting costs for the Notes and the Concurrent 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. 8
---------- (IN MILLIONS) AMOUNT ---------- SOURCES OF FUNDS: The Notes offered hereby $150.0 The Concurrent Offering 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 32.6 Working capital (1) 9.5 ---------- TOTAL $275.6 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (2) 49.5 Retire indebtedness under the Senior Note (3) 25.0 Fees and expenses (4) 16.1 ---------- TOTAL $275.6 ---------- ---------- Prior to the consummation of the Phipps Acquisition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. Prior to the consummation of the Phipps Acquisition, the proceeds of the Concurrent Offering will be used to fund part of the Trust Funds, to repay indebtedness under the Old Credit Facility and to retire the Senior Note. THE OFFERING 9
SECURITIES OFFERED.......................... $150,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $97.5 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. 10
CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.3 million of indebtedness outstanding, of which $33.3 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. RISK FACTORS See "Risk Factors" for a discussion of certain information that should be considered by prospective investors. ------------------------ The Company was incorporated in Georgia in 1897. The principal executive offices of the Company are located at 126 North Washington Street, Albany, Georgia 31701, telephone number (912) 888-9390. 11
USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption." SUMMARY PRO FORMA FINANCIAL DATA The following table sets forth (i) unaudited condensed consolidated historical financial information of the Company and certain data derived therefrom and (ii) unaudited condensed consolidated pro forma combined financial information of the Company and certain data derived therefrom. The unaudited condensed consolidated pro forma combined financial statements of the Company give effect to the Augusta Acquisition, the KTVE Sale, the Concurrent Offering, the Phipps Acquisition, the Financing and this Offering as if such transactions had occurred as of January 1, 1995 with respect to the statement of operations and data derived therefrom for the year ended December 31, 1995 and as of January 1, 1996 with respect to the statement of operations and data derived therefrom for the six months ended June 30, 1996 and as of December 31, 1995 and June 30, 1996 with respect to the balance sheet data derived therefrom as of such dates. The Augusta Acquisition and the Phipps Acquisition are reflected using the purchase method of accounting for business combinations. The pro forma financial information is provided for comparative purposes only and does not purport to be indicative of the results that actually would have been obtained if the events set forth above had been effected on the dates indicated or of those results that may be obtained in the future. The pro forma financial statements are based on preliminary estimates of values and transaction costs. The actual recording of the transactions will be based on final appraisals, values and transaction costs. Accordingly, the actual recording of the transactions can be expected to differ from these pro forma financial statements. 12
----------------------------------------------- YEAR ENDED DECEMBER SIX MONTHS ENDED 31, 1995 JUNE 30, 1996 ---------------------- ---------------------- HISTORICAL PRO FORMA HISTORICAL PRO FORMA (IN THOUSANDS EXCEPT RATIOS AND PER SHARE DATA) COMPANY COMBINED COMPANY COMBINED ---------- --------- ---------- --------- STATEMENT OF OPERATIONS DATA: Operating revenues: Broadcasting (less agency commissions) $36,750 $ 63,874 $ 24,252 $ 33,295 Publishing 21,866 21,866 11,262 11,262 Paging -- 4,897 -- 2,744 ---------- --------- ---------- --------- Total revenues 58,616 90,637 35,514 47,301 Total expenses 51,756 75,224 28,203 36,603 ---------- --------- ---------- --------- Operating income 6,860 15,413 7,311 10,698 Miscellaneous income (expense), net 143 36 81 75 ---------- --------- ---------- --------- Income before interest expense and income taxes 7,003 15,449 7,392 10,773 Interest expense 5,438 20,664 4,445 10,236 ---------- --------- ---------- --------- Income (loss) before income taxes 1,565 (5,215) 2,947 537 Income tax expense (benefit) 634 (1,766) 1,146 215 ---------- --------- ---------- --------- Net income (loss) 931 (3,449) 1,801 322 Preferred stock dividends -- 1,400 -- 700 ---------- --------- ---------- --------- Net income (loss) available to common stockholders $ 931 $ (4,849) $ 1,801 $ (378) ---------- --------- ---------- --------- ---------- --------- ---------- --------- Average shares outstanding 4,481 7,854 4,657 7,954 ---------- --------- ---------- --------- Earnings (loss) per common share $ 0.21 $ (0.62) $ 0.39 $ (0.05) ---------- --------- ---------- --------- ---------- --------- ---------- --------- BALANCE SHEET DATA (AT END OF PERIOD): Working capital (deficiency) $ (222) $ 7,161 $ 3,538 $ 7,116 Total assets 78,240 299,786 112,516 299,267 Total debt 54,324 186,103 82,846 183,351 Total stockholders' equity $ 8,986 $ 95,609 $ 13,813 $ 98,217 - ------------------------------ (1) Media Cash Flow represents operating income plus depreciation and amortization (including amortization of program license rights), non-cash compensation and corporate overhead, less payments of program license liabilities. (2) Operating cash flow represents operating income plus depreciation, amortization (including amortization of program license rights) and non-cash compensation less payments for program license liabilities. (3) EBITDA represents operating income plus (i) depreciation and amortization (excluding amortization of program license rights) and (ii) non-cash compensation paid in common stock (excluding such payments made to the 401(k) plan). EBITDA is presented not as a measure of operating results, but rather to provide additional information related to the Company's ability to service debt. EBITDA should not be considered as an alternative to either (x) operating income determined in accordance with generally accepted accounting principles ("GAAP") as an indicator of operating performance or (y) cash flows from operating activities (determined in accordance with GAAP) as a measure of liquidity. (4) For purposes of this item "fixed charges" represent interest, the interest element of rental expense, capitalized interest and amortization of debt issuance costs and "earnings" represent income (loss) before income taxes, discontinued operations, extraordinary items, cumulative effect of change in accounting principles and fixed charges. Pro forma combined earnings would be insufficient to cover fixed charges for the year ended December 31, 1995 by $5.2 million. (5) Represents applicable ratios for the 12 month period ended June 30, 1996. 13
----------------------------------------------- YEAR ENDED DECEMBER SIX MONTHS ENDED 31, 1995 JUNE 30, 1996 ---------------------- ---------------------- HISTORICAL PRO FORMA HISTORICAL PRO FORMA (IN THOUSANDS EXCEPT RATIOS) COMPANY COMBINED COMPANY COMBINED ---------- --------- ---------- --------- OTHER DATA: Media Cash Flow (1) $15,559 $ 30,345 $ 12,004 $ 17,888 Operating cash flow (2) 13,309 28,094 10,442 16,326 EBITDA (3) 13,140 28,134 10,332 16,363 Cash flows provided by (used in): Operating activities 7,600 9,136 6,801 7,562 Investing activities (8,929) (8,011) (37,490) (4,029) Financing activities 1,331 (2,945) 31,416 (3,012) Capital expenditures $ 3,280 $ 6,390 $ 1,317 $ 2,960 Ratio of Media Cash Flow to interest expense 2.9 1.5 2.7 1.7 Ratio of operating cash flow to interest expense 2.4 1.4 2.3 1.6 Ratio of total debt to Media Cash Flow 3.5 6.1 4.3(5) 5.6(5) Ratio of total debt to operating cash flow 4.1 6.6 5.0(5) 6.2(5) Ratio of earnings to fixed charges (4) 1.3 -- 1.6 1.1 SUMMARY HISTORICAL FINANCIAL DATA GRAY COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES Set forth below are certain selected historical consolidated financial data of the Company. This information should be read in conjunction with the consolidated financial statements of the Company and related notes thereto appearing elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations of the Company." The selected consolidated financial data for, and as of the end of, each of the years in the 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 end. The selected consolidated financial data for, and as of the six months ended June 30, 1995 and 1996 are derived from the unaudited accounting records of the Company and have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of the management of the Company, include all normal and recurring adjustments and accruals necessary for a fair presentation of such information. 14
------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30 YEAR ENDED DECEMBER 31 1991 1992 1993 1994 1995 1995 1996 ------------ -------- -------- --------- --------- ---------- ----------- (IN THOUSANDS) (UNAUDITED) (UNAUDITED) STATEMENT OF INCOME DATA: Operating revenues: Broadcasting (less agency commissions) $13,553 $15,131 $15,004 $22,826 $36,750 $18,261 $24,252 Publishing 8,968 9,512 10,109 13,692 21,866 10,046 11,262 ------------ -------- -------- --------- --------- ---------- ----------- Total revenues 22,521 24,643 25,113 36,518 58,616 28,307 35,514 Expenses: Broadcasting 9,672 9,753 10,029 14,864 23,202 11,410 14,418 Publishing 6,444 6,752 7,662 11,198 20,016 8,590 9,193 Corporate and administrative 1,889 2,627 2,326 1,959 2,258 1,012 1,571 Depreciation 1,487 1,197 1,388 1,745 2,633 1,234 1,648 Amortization of intangible assets 14 44 177 396 1,326 588 1,253 Non-cash compensation paid in common stock -- -- -- 80 2,321 816 120 ------------ -------- -------- --------- --------- ---------- ----------- Total expenses 19,506 20,373 21,582 30,242 51,756 23,650 28,203 ------------ -------- -------- --------- --------- ---------- ----------- Operating income 3,015 4,270 3,531 6,276 6,860 4,657 7,311 Miscellaneous income (expense), net 778 (1,519) 202 189 143 69 81 ------------ -------- -------- --------- --------- ---------- ----------- Income from continuing operations before interest expense and income taxes 3,793 2,751 3,733 6,465 7,003 4,726 7,392 Interest expense 787 1,486 985 1,923 5,438 2,768 4,445 ------------ -------- -------- --------- --------- ---------- ----------- Income from continuing operations before income taxes 3,006 1,265 2,748 4,542 1,565 1,958 2,947 Income tax expense 1,156 869 1,068 1,776 634 776 1,146 ------------ -------- -------- --------- --------- ---------- ----------- Income from continuing operations 1,850 396 1,680 2,766 931 1,182 1,801 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 $ 1,182 $ 1,801 ------------ -------- -------- --------- --------- ---------- ----------- ------------ -------- -------- --------- --------- ---------- ----------- BALANCE SHEET DATA (AT END OF PERIOD): Working capital (deficiency) $ 6,740 $ 2,976 $ 2,579 $ 1,075 $ (222) $ 237 $ 3,538 Total assets 31,548 24,173 21,372 68,789 78,240 73,932 112,516 Total debt 20,378 12,412 7,759 52,940 54,324 54,319 82,846 Total stockholders' equity $ 5,853 $ 4,850 $ 7,118 $ 5,001 $ 8,986 $ 7,375 $13,813 - ------------------------------ (1) Media Cash Flow represents operating income plus depreciation and amortization (including amortization of program license rights), non-cash compensation and corporate overhead, less payments of program license liabilities. (2) Operating cash flow represents operating income plus depreciation, amortization (including amortization of program license rights) and non- cash compensation less payments for program license liabilities. (3) EBITDA represents operating income plus (i) depreciation and amortization (excluding amortization of program license rights) and (ii) non-cash compensation paid in common stock (excluding such payments made to the 401(k) plan). EBITDA is presented not as a measure of operating results, but rather to provide additional information related to the Company's ability to service debt. EBITDA should not be considered as an alternative to either (x) operating income determined in accordance with GAAP as an indicator of operating performance or (y) cash flows from operating activities (determined in accordance with GAAP) as a measure of liquidity. (4) For purposes of this item, "fixed charges" represent interest, the interest element of rental expense, capitalized interest and amortization of debt issuance costs and "earnings" represent income (loss) before income taxes, discontinued operations, extraordinary items, cumulative effect of change in accounting principles and fixed charges. (5) Represents applicable ratios for the 12 month periods ended June 30, 1995 and 1996. 15
------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30 YEAR ENDED DECEMBER 31 1991 1992 1993 1994 1995 1995 1996 ------------ -------- -------- --------- --------- ---------- ----------- (IN THOUSANDS EXCEPT RATIOS) (UNAUDITED) (UNAUDITED) OTHER DATA: Media Cash Flow (1) $ 6,405 $ 8,079 $ 7,371 $10,522 $15,559 $ 8,333 $12,004 Operating cash flow (2) 4,516 5,452 5,044 8,567 13,309 7,329 10,442 EBITDA (3) 4,516 5,512 5,095 8,498 13,140 7,296 10,332 Cash flows provided by (used in): Operating activities $ 3,499 $ 4,832 $ 1,324 $ 5,798 $ 7,600 $ 3,828 $ 6,801 Investing activities (2,073) (1,041) 3,062 (42,770) (8,929) (5,377) (37,490) Financing activities (10,424) (9,300) (4,932) 37,200 1,331 1,208 31,416 Capital expenditures $ 2,235 $ 2,216 $ 2,582 $ 1,768 $ 3,280 $ 1,852 $ 1,317 Ratio of Media Cash Flow to interest expense 8.1 5.4 7.5 5.5 2.9 3.0 2.7 Ratio of operating cash flow to interest expense 5.7 3.7 5.1 4.5 2.4 2.6 2.3 Ratio of total debt to Media Cash Flow 3.2 1.5 1.1 5.0 3.5 3.5(5) 4.3(5) Ratio of total debt to operating cash flow 4.5 2.3 1.5 6.2 4.1 4.1(5) 5.0(5) Ratio of earnings to fixed charges (4) 4.7 1.8 3.4 3.2 1.3 1.7 1.6 THE PHIPPS BUSINESS Set forth below are certain selected historical financial data of the Phipps Business. This information should be read in conjunction with the Financial Statements of the Phipps Business and related notes thereto appearing elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations of the Phipps Business." The selected financial data for, and as of the end of, each of the years in the three-year period ended December 31, 1995 are derived from the audited financial statements of the Phipps Business. The selected financial data for, and as of the end of, each of the years ended December 31, 1991 and 1992 are derived from the unaudited accounting records of the Phipps Business. The selected financial data for, and as of the six months ended June 30, 1995 and 1996 are derived from the unaudited financial statements of the Phipps Business and have been prepared on the same basis as the audited financial statements and, in the opinion of management of the Company, include all normal and recurring adjustments and accruals necessary for a fair presentation of such information. 16
---------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31 30 1991 1992(1) 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) (UNAUDITED) (UNAUDITED) STATEMENT OF INCOME DATA: Operating revenues: Broadcasting (less agency commission) $ 10,492 $ 14,523 $ 19,460 $ 21,524 $ 22,424 $ 10,774 $ 11,346 Paging 3,369 3,646 3,788 4,277 4,897 2,423 2,744 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total revenues 13,861 18,169 23,248 25,801 27,321 13,197 14,090 Expenses: Broadcasting 5,298 7,518 10,734 10,211 10,487 5,065 5,412 Paging 2,356 2,298 2,529 2,764 3,052 1,411 1,780 Management fee 579 973 2,462 2,486 3,280 1,539 735 Depreciation and amortization 1,513 1,734 2,836 2,672 3,120 1,436 1,530 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total expenses 9,746 12,523 18,561 18,133 19,939 9,451 9,457 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating income 4,115 5,646 4,687 7,668 7,382 3,746 4,633 Miscellaneous income (expense), net 5 8 16 666 12 (4) (5) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before interest expense and minority interests 4,120 5,654 4,703 8,334 7,394 3,742 4,628 Interest expense 162 442 632 480 499 223 159 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before minority interests 3,958 5,212 4,071 7,854 6,895 3,519 4,469 Minority interests -- 331 140 635 547 256 296 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 3,958 $ 4,881 $ 3,931 $ 7,219 $ 6,348 $ 3,263 $ 4,173 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Supplemental unaudited pro forma information: (2) Net income, as above $ 3,958 $ 4,881 $ 3,931 $ 7,219 $ 6,348 $ 3,263 $ 4,173 Pro forma provision for income tax expense 1,504 1,855 1,500 2,743 2,413 1,240 1,586 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma net income $ 2,454 $ 3,026 $ 2,431 $ 4,476 $ 3,935 $ 2,023 $ 2,587 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA (AT END OF PERIOD): Working capital $ 595 $ 615 $ 1,257 $ 1,421 $ 2,622 $ 2,228 $ 2,902 Total assets 8,931 25,068 24,819 25,298 27,562 27,633 26,306 Total debt 1,388 7,697 6,542 6,065 4,810 5,198 4,034 Minority interests -- 1,154 824 728 586 648 655 Owner's equity $ 6,351 $ 13,276 $ 14,306 $ 15,465 $ 18,794 $ 18,764 $ 18,666 - ------------------------------ (1) Includes the acquisition of a majority interest in WKXT in July 1992, which was accounted for using the purchase method of accounting. (2) John H. Phipps, Inc. and its subsidiaries file a consolidated federal income tax return and separate state tax returns. Income tax expense for the Phipps Business is not presented in the financial statements as such amounts are computed and paid by John H. Phipps, Inc. Pro forma federal and state income taxes for the Phipps Business are calculated on a pro forma, separate return basis. (3) Media Cash Flow represents operating income plus depreciation, amortization (including amortization of program license rights) and corporate overhead, less payments of program license liabilities. (4) Operating cash flow represents operating income plus depreciation and amortization (including amortization of program license rights) less payments for program license liabilities. (5) EBITDA represents operating income plus depreciation and amortization (excluding amortization of program license rights). EBITDA is presented not as a measure of operating results, but rather to provide additional information related to the Phipps Business' ability to service debt. EBITDA should not be considered as an alternative to either (x) operating income determined in accordance with GAAP as an indicator of operating performance or (y) cash flows from operating activities (determined in accordance with GAAP) as a measure of liquidity. 17
----------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31 JUNE 30 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS) OTHER DATA: Media Cash Flow (3) $ 10,466 $ 12,983 $ 13,696 $ 6,678 $ 6,769 Operating cash flow (4) 8,003 10,498 10,416 5,140 6,035 EBITDA (5) 7,523 10,340 10,502 5,182 6,163 Cash flows provided by (used in): Operating activities 7,397 9,808 9,259 4,136 6,191 Investing activities (2,953) (2,506) (3,828) (3,152) (840) Financing activities (4,418) (7,233) (4,906) (917) (5,309) Capital expenditures $ 3,538 $ 3,353 $ 3,188 $ 1,902 $ 1,647 RISK FACTORS IN ADDITION TO CONSIDERING THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, PROSPECTIVE PURCHASERS OF THE NOTES SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS BEFORE DECIDING TO INVEST IN THE NOTES. SUBSTANTIAL LEVERAGE. The Company will have substantial indebtedness upon the consummation of this Offering and the Concurrent Offering. As of June 30, 1996, on a pro forma basis after giving effect to the KTVE Sale, the Concurrent Offering, the Financing, the Phipps Acquisition and this Offering, the Company and the Subsidiary Guarantors, on a consolidated basis, would have had outstanding $183.3 million of indebtedness, of which $33.3 million would have ranked senior to the Notes, and stockholders' equity of $98.2 million, with the ability, subject to certain limitations described herein, to incur approximately $92.5 million of additional indebtedness pursuant to the Senior Credit Facility, $10.1 million of which could have been borrowed thereunder. As part of the Financing and as a condition of this Offering, the Company will enter into the Senior Credit Facility and the Company has entered into a commitment letter with respect thereto. See "Description of Certain Indebtedness." On a pro forma basis after giving effect to the Augusta Acquisition, the KTVE Sale, the Concurrent Offering, the Financing, the Phipps Acquisition and this Offering for the year ended December 31, 1995 and the six months ended June 30, 1996, the Company's pro forma combined earnings would have been insufficient to cover fixed charges by $5.2 million and sufficient to cover fixed charges by $537,000, respectively. In addition, upon the consummation of this Offering, the Company will issue Series A and Series B Preferred Stock having annual dividend requirements of $800,000 and $600,000, respectively, which in the case of the Series B Preferred Stock, may, at the option of the Company, be paid in shares of Series B Preferred Stock. See "Certain Relationships and Related Transactions--Issuances of Preferred Stock." The Company intends to pursue additional acquisitions of television stations, publications or related businesses and, in connection therewith, may incur substantial additional indebtedness or issue substantial additional preferred stock. The degree to which the Company will be leveraged could have important consequences to holders of the Notes, including the following: (i) the Company's ability to obtain financing in the future for working capital, capital expenditures and general corporate purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness and the payment of cash dividends on the Series A Preferred Stock; and (iii) a high degree of leverage may limit the Company's ability to react to changes in the industry, make the Company more vulnerable to economic downturns and limit its ability to withstand competitive pressures. The Company's ability to pay interest on the Notes and to service its other debt and dividend obligations will depend upon its future operating performance which will be affected by prevailing economic conditions and financial and business factors, many of which are beyond the Company's control. If the Company cannot generate sufficient cash flow from operations to meet its obligations, then the Company may be required to restructure or refinance its debt, raise additional capital or take other actions such as selling assets or reducing or delaying capital expenditures. There can be no assurance, however, that any of such actions could be effected on satisfactory terms, if at all, or would be permitted by the terms of the Old Credit Facility, the Senior Credit Facility, the Indenture or the Company's other credit arrangements. The Company's Old Credit Facility contains, and the Senior Credit Facility and the Notes will contain, restrictive covenants that, among other things, limit the Company's ability to incur additional indebtedness, create liens and make investments and capital expenditures. The Old Credit Facility also requires, and the Senior Credit Facility will require, the Company to comply with certain financial ratios and tests, under which the Company is required to achieve certain financial and operating results. The Company's ability to meet these financial ratios and tests may be affected by events beyond its control, and there can be no assurance that they will be met. In the event of a default under such Senior Debt, the lenders thereunder may terminate their lending commitments and declare the indebtedness immediately due and payable, resulting in a default under the Notes. As a result of the priority afforded the Senior Debt, there can be no assurance that the Company would have sufficient assets to pay indebtedness then outstanding thereunder and under the Notes. SUBORDINATION OF THE NOTES. The Notes will be subordinated in right of payment to all Senior Debt of the Company. In the event of the bankruptcy, liquidation or reorganization of the Company, the assets of the Company will be available to pay obligations on the Notes only after all Senior Debt has been paid in full and sufficient assets may 18 not remain to pay amounts due on any or all of the Notes then outstanding. Similarly, the Subsidiary Guarantees will be subordinated in right of payment to all Guarantor Senior Debt of the respective Subsidiary Guarantors. In certain circumstances, provisions of the Senior Debt could prohibit payments of amounts due to holders of the Notes. As of June 30, 1996, on a pro forma basis after giving effect to the KTVE Sale, the Concurrent Offering, the Financing, the Phipps Acquisition and this Offering, the Company and the Subsidiary Guarantors would have had Senior Debt in an aggregate amount of approximately $33.3 million. Additional Senior Debt may be incurred by the Company from time to time, subject to certain limitations. See "Description of the Notes-Covenants-Limitation on Incurrence of Indebtedness." CONSUMMATION OF THE PHIPPS ACQUISITION PRIOR TO FINAL FCC APPROVAL. If the requisite FCC approval is obtained, the Company intends to consummate the Phipps Acquisition prior to the time such approval becomes "final" (that is, during the time a third party may file a petition for reconsideration of, or the FCC itself may reconsider, such approval) and the Company may cause the Trustee to release the proceeds of the Trust Funds for such purpose. If any such appeals are filed, the FCC may, under certain circumstances, reconsider its approval of the Phipps Acquisition. If any such appeal is successful, the FCC may impose a variety of remedies, including, among other things, requiring the Company to divest one or both of the acquired stations. FCC DIVESTITURE REQUIREMENT. In connection with the Phipps Acquisition, the Company is seeking FCC approval granting the assignment of the television broadcast licenses for WCTV, which serves Tallahassee, Florida/Thomasville, Georgia, and WKXT, which serves Knoxville, Tennessee. The television broadcast signal of WCTV overlaps with the Company's existing stations, WALB-TV ("WALB") and WJHG-TV ("WJHG"). Due to such overlap, common ownership of such stations is prohibited by current FCC regulations. Such regulations will require the Company to divest its ownership interest in WALB and WJHG in connection with the Phipps Acquisition. However, these rules may be revised by the FCC upon conclusion of pending rulemaking proceedings. The Company has applied for six month waivers of such regulations. There can be no assurance that these waivers will be granted. Opposition to such waiver requests has been filed by a competing television station in Panama City, Florida. If granted, the waivers will afford the Company six months to divest WALB and WJHG following the consummation of the Phipps Acquisition (if such divestiture is necessary in order to comply with FCC rules in effect at the expiration of the waiver period). If these waivers are not granted, it is unlikely that the Company will be able to consummate the Phipps Acquisition. 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. WALB and WJHG accounted for 10.4% and 4.3%, respectively, of the Company's pro forma total revenues and 16.8% and 1.8%, respectively, of the Company's pro forma Media Cash Flow for the year ended December 31, 1995. On a pro forma basis for the year ended December 31, 1995, the stations had net income of $3.2 million and $218,000, respectively, while the Company had a net (loss) of $(3.4) million. WALB and WJHG accounted for 10.8% and 5.1%, respectively of the Company's pro forma total revenues and 15.7% and 3.5%, respectively of the Company's pro forma Media Cash Flow for the six months ended June 30, 1996. On a pro forma basis for the six months ended June 30, 1996, the stations had net income of $1.6 million and $295,000, respectively, while the Company had net income of $322,000. 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. See "Pro Forma Financial Data" and "Business-Federal Regulation of the Company's Business." POSSIBLE NON-CONSUMMATION OF THE PHIPPS ACQUISITION. The consummation of the Phipps Acquisition, which is anticipated to occur by September 30, 1996, is subject to certain closing conditions, including receipt of FCC 19 approval. The Asset Purchase Agreement (as defined) for the Phipps Acquisition provides that either party may terminate the Phipps Acquisition if it has not been consummated by September 30, 1996. If the Phipps Acquisition has not been consummated by such date, the Company does not currently intend to terminate the Phipps Acquisition, but the Company has not discussed with the seller an extension of such date. The Company filed an application seeking FCC approval of the Phipps Acquisition on January 16, 1996. Opposition to such application has been filed by certain competitors of the Company and the Company has filed amendments to its application in response thereto. The Company has not yet received FCC approval of its application. There can be no assurance that FCC approval will be obtained prior to September 30, 1996 or at all, that the other closing conditions will be satisfied or waived or that the closing will occur. The Notes will be subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if the Phipps Acquisition is not consummated prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." DEPENDENCE ON ADVERTISING REVENUES; EFFECT OF ECONOMIC CONDITIONS. The television and newspaper industries are cyclical in nature and are affected by prevailing economic conditions. Since the Company relies on sales of advertising time at its television stations and in its publications for substantially all of its revenues, the Company's operating results are sensitive to general economic conditions and regional conditions in each of the local markets served by its television stations and publications. In addition, all of the Company's stations and publications are located in the Southeast. As a result, the Company's results of operations may be adversely affected by recessionary economic conditions either in the Southeast, nationally or, due to the substantial portion of revenues derived from local advertisers, the local economies in areas served by its television stations and publications. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." DEPENDENCE ON NETWORK AFFILIATIONS. Five of the Company's television stations are affiliated with CBS and two are affiliated with NBC. The television viewership levels for each of the stations are materially dependent upon programming provided by the network with which each station is affiliated. There can be no assurance that such programming will achieve or maintain satisfactory viewership levels in the future. Although the Company expects to continue to be able to renew these affiliation agreements, no assurance can be given that such renewals will be obtained. Some of the Company's network affiliation agreements are to be renewed during the term of the Notes. The non-renewal or termination of one or more of the Company's stations' network affiliation agreements may have a material adverse effect on the Company's results of operations. See "Business-Network Affiliation of the Stations." COMPETITIVE NATURE OF AND RISK OF CHANGES IN THE TELEVISION INDUSTRY. The television industry is highly competitive and the Company's stations compete with other television stations as well as other media for viewers and advertising revenues, such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail and local cable systems. During the past decade, the entry of strong independent broadcast stations and programming alternatives such as cable television, home satellite delivery, home video and, more recently, direct broadcast satellite ("DBS") television and video signals delivered over telephone lines have subjected traditional network-affiliated television stations to new types of competition. Competition for programming involves negotiating with national program distributors or syndicators for exclusive rights to broadcast first-run or rerun packages of programming in a particular DMA. The ability of each of the Company's stations to generate advertising revenues is dependent, to a significant degree, upon its audience ratings which, in turn, are dependent upon successful programming. There can be no assurance that any of the Company's stations will be able to maintain or increase its current quality of programming, audience share or advertising revenues. To the extent that certain of the Company's competitors have, or may in the future obtain, greater resources than the Company, the Company's ability to compete successfully in its broadcasting markets may be impeded. See "Business-Competition." Further advances in technology and changes in the regulatory climate may increase competition for household audiences, programs and advertisers. In addition, the Warner Brothers Network ("WB") and the United Paramount Network ("UPN") recently have begun operations. Video compression technology currently under development, as well as other technological developments, have the potential to provide vastly expanded programming to highly targeted audiences. In addition, competition in the television industry in the future may come from interactive video and data services that may provide two-way interaction. The Company is unable to predict the effect that these or other technological changes will have on the television industry or the future results of the Company's operations. 20 The FCC has proposed the adoption of rules for implementing advanced (including high-definition television or HDTV) television service ("ATV") in the United States. Implementation of ATV will improve the technical quality of television. Under certain circumstances, however, conversion to ATV operations may reduce a station's geographical coverage area. While implementation of ATV will impose additional costs on the Company's television stations providing the new service primarily due to increased equipment costs, there is a potential for increased revenues. On July 26, 1995, the FCC announced the issuance of a Notice of Proposed Rule Making ("NPRM") to invite comment on a broad range of issues related to the implementation of ATV, particularly the transition to digital broadcasting. 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 sometime in 1997. The Company cannot predict how the combination of business, regulatory and technological change will affect the broadcast industry or the Company's results of operations. See "Business-Federal Regulation of the Company's Business." COMPETITIVE NATURE OF THE NEWSPAPER INDUSTRY. Revenue in the newspaper industry is derived primarily from advertising revenue and paid circulation. Competition for advertising and circulation revenue comes from local and regional newspapers, radio, broadcast and cable television, direct mail and other communications and advertising media. The extent and nature of such competition is in large part determined by the demographics and location of the markets and the media alternatives in those markets. To the extent that certain of the Company's competitors have, or may in the future obtain, greater resources than the Company, the Company's ability to compete successfully in its publishing markets may be impeded. See "Business-Competition." The newspaper industry requires the availability of significant quantities of newsprint. The variability of newsprint costs in recent years has been a material factor in the profitability of the newspaper industry generally and has affected the results of the Company's newspaper operations. REGULATORY MATTERS. The broadcasting and paging industries are subject to regulation by the FCC under the Communications Act of 1934, as amended (the "Communications Act") and the Telecommunications Act of 1996 (the "Telecommunications Act"). Approval by the FCC is required for the issuance, renewal, transfer or assignment of television station operating licenses. In particular, the Company's television business is dependent upon its continuing ability to hold television broadcast licenses from the FCC, which generally are issued for five-year terms. However, the Telecommunications Act now directs the FCC to extend the term of television broadcast licenses to eight years for license applications filed after May 1, 1995. The Company's existing television station licenses expire between 1997 and 1999. Although in substantially all cases such licenses are renewed by the FCC, there can be no assurance that any of the Company's television broadcast licenses will be renewed at their expiration dates for the full terms or at all. The non-renewal or limitation of one or more of the Company's television broadcast licenses could have a material adverse effect on the Company. The Telecommunications Act also addresses a wide variety of matters (including technological changes) that affect the operation and ownership of the Company's television stations. The Telecommunications Act eliminates the restrictions on the number of television stations an entity may own, operate or control and increases the national audience reach limitations to 35%. The FCC has been directed to adopt rules relating to the retention, modification or elimination of local ownership limitations and spectrum flexibility, including how to establish and collect fees from broadcasters for the implementation of ancillary and supplementary services. The FCC has been directed to revise its rules to permit cross-ownership interests between a broadcast network and a cable system, and if necessary, to revise its rules to ensure carriage, channel positioning and non-discriminatory treatment of non-affiliated broadcast stations by cable systems affiliated with a broadcast network. The FCC has been directed to review all of its ownership rules every two years and currently has several broadcast related rulemaking proceedings underway. There can be no assurance that any such rulemakings or resulting changes would not materially adversely affect the Company. The Company's paging operations (which are part of the Phipps Business) are also subject to regulation by the FCC. 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. 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 21 of competing applications or will be renewed by the FCC. Futhermore, the FCC has the authority to restrict the operation of licensed facilities or to revoke or modify licenses. See "Business-Federal Regulation of the Company's Business." RECENT ACQUISITION OF TELEVISION STATIONS AND PUBLICATIONS. The Company acquired one newspaper and three shoppers in 1995 and consummated the Augusta Acquisition in 1996. The Company consummated the KTVE Sale in August 1996. The Phipps Acquisition is pending and the Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. As a result, the majority of the Company's assets have, or will have been, recently acquired. Accordingly, there is no meaningful opportunity for prospective purchasers of the Notes to evaluate the performance of these assets under the Company's management and there can be no assurance that the Company's operating strategy can be successfully implemented with respect to its newly acquired assets. See "Business." RISK OF INABILITY TO FINANCE CHANGE OF CONTROL OFFER. A Change of Control under the Indenture would require the Company to refinance substantial amounts of indebtedness. In the event of a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. As of June 30, 1996, on a pro forma basis after giving effect to the KTVE Sale, the Concurrent Offering, the Financing, the Phipps Acquisition and this Offering, the Company would not have sufficient funds available to purchase all of the outstanding Notes if they were tendered as a result of a Change of Control. In addition, covenants in the Senior Credit Facility would restrict the Company's ability to make any such purchase. In the event of a Change of Control, there can be no assurance that the Company would have available, or be able to obtain, sufficient funds through a refinancing of the Notes to be purchased or otherwise, or that the lenders under the Senior Credit Facility would permit any such purchase. A Change of Control of the Company also may cause an acceleration under other Senior Debt (including the Senior Credit Facility), in which case the subordination provisions of the Notes would require payment in full of all such accelerated Senior Debt before repurchase of the Notes. The inability to repay Senior Debt, if accelerated, and to effect an offer to repurchase the Notes upon a Change of Control would constitute events of default under the Indenture. Also, the requirement that the Company offer to repurchase the Notes and the obligation to prepay the amounts owing under the Company's existing indebtedness and the reduction of the commitments thereunder to zero in the event of a Change of Control may have the effect of deterring a third party from acquiring the Company in a transaction that would constitute a Change of Control. See "Description of the Notes-Change of Control." FRAUDULENT CONVEYANCE RISKS. The Company's obligations under the Notes will be guaranteed, jointly and severally, on a senior subordinated basis by each of the Subsidiary Guarantors. Various fraudulent conveyance laws have been enacted for the protection of creditors and may be applied by a court on behalf of any unpaid creditor or a representative of the Company's creditors in a lawsuit to subordinate or avoid the Notes or any Subsidiary Guarantee in favor of other existing or future creditors of the Company or a Subsidiary Guarantor. To the extent that a court were to find that: (i) the Notes or a Subsidiary Guarantee was incurred with intent to hinder, delay or defraud any present or future creditor of the Company or the Subsidiary Guarantor, as the case may be, or contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (ii) the Company or a Subsidiary Guarantor did not receive fair consideration or reasonably equivalent value for issuing the Notes or a Subsidiary Guarantee, as the case may be, and the Company or a Subsidiary Guarantor (a) was insolvent, (b) was rendered insolvent by reason of the issuance of the Notes or a Subsidiary Guarantee, (c) was engaged or about to engage in a business or transaction for which the remaining assets of the Company or such Subsidiary Guarantor constituted unreasonably small capital to carry on its business, (d) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature or (e) was a defendant in an action for money damages or had a judgment for money damages docketed against it (if in either case, after final judgment, the judgment is unsatisfied), then in each such case, a court could avoid or subordinate the Notes or a Subsidiary Guarantee in favor of other creditors of the Company or a Subsidiary Guarantor, as the case may be. Among other things, a legal challenge of the Notes or a Subsidiary Guarantee on fraudulent conveyance grounds may focus on the benefits, if any, realized by the Company or the Subsidiary Guarantor as a result of the issuance by the Company of the Notes. To the extent that any Subsidiary Guarantee were to be avoided as a fraudulent conveyance or held unenforceable for any other reason, holders of the Notes would cease to have any claim in respect of such Subsidiary Guarantor 22 and would be creditors solely of the Company and any Subsidiary Guarantor whose Subsidiary Guarantee was not avoided or held unenforceable. In such event, the claims of the holders of the Notes against the issuer of an invalid Subsidiary Guarantee would be subject to the prior payment of all liabilities of such Subsidiary Guarantor. There can be no assurance that, after providing for all prior claims, there would be sufficient assets to satisfy the claims of the holders of the Notes relating to any voided Subsidiary Guarantee. Based upon financial and other information currently available to it, the Company believes that the Notes and the Subsidiary Guarantees are being incurred for proper purposes and in good faith, and that the Company and each of the Subsidiary Guarantors (i) is solvent and will continue to be solvent after issuing the Notes or its Subsidiary Guarantee, as the case may be, (ii) will have sufficient capital for carrying on its business after such issuance and (iii) will be able to pay its debts as they mature. There can be no assurance that the assumptions and methodologies used by the Company in reaching its conclusions about its solvency would be adopted by a court or that a court would concur with those conclusions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." VOTING RIGHTS; POSSIBLE ANTI-TAKEOVER EFFECT. Bull Run and its affiliates collectively beneficially own 47.1% of the outstanding shares of Class A Common Stock representing approximately 43.7% of the total voting power of the Company's capital stock after giving effect to the Concurrent Offering. See "Security Ownership of Certain Beneficial Owners and Management." In connection with certain FCC applications, Bull Run and its affiliates have (i) agreed not to cause more than three of its designees to be elected to the Board of Directors of the Company, (ii) stated that Bull Run and its affiliates have acquired the common stock of the Company for investment purposes only and not with the intent to control the Company and (iii) agreed not to solicit proxies for votes on matters before the Company's shareholders. However, if such agreement is terminated for any reason, subject to applicable FCC regulations that require the FCC's prior consent, Bull Run and its affiliates could effectively control the election of a majority of the Company's directors and, thus, the operations and business of the Company as a whole. In addition, such shareholders may have the ability to prevent certain types of material transactions, including a change of control of the Company. The disproportionate voting rights of the Class A Common Stock relative to the Class B Common Stock may make the Company a less attractive target for a takeover than it otherwise might be, or render more difficult or discourage a merger proposal or a tender offer. POTENTIAL CONFLICTS OF INTEREST. Bull Run is in the business of making significant investments in existing companies and may from time to time acquire and hold controlling or noncontrolling interests in broadcasting or broadcasting-related businesses other than through the Company, some of which may compete with the Company. Bull Run and its affiliates may from time to time identify, pursue and consummate acquisitions of television stations or other broadcasting related businesses that would be complementary to the business of the Company and therefore such acquisition opportunities will not be available to the Company. In addition, Bull Run may from time to time identify and structure acquisitions for the Company and may receive customary finders fees in connection with such transactions. Certain affiliates of Bull Run have entered, and in the future may enter, into business relationships with the Company or its subsidiaries. See "Management--Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions." LACK OF PUBLIC MARKET. There is currently no trading market for the Notes. The Company does not intend to list the Notes on any securities exchange. The Company has been advised by the Underwriters that the Underwriters currently intend to make a market in the Notes; however, the Underwriters are not obligated to do so and may discontinue any such market making activities at any time without notice. No assurance can be given as to the development or liquidity of any trading market for the Notes. 23 THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING THE PHIPPS ACQUISITION GENERAL The Company has entered into an agreement (the "Asset Purchase Agreement") to acquire two CBS-affiliated television stations, WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The consummation of the Phipps Acquisition is subject to certain closing conditions, including FCC approval. Either party may terminate the Asset Purchase Agreement if the Phipps Acquisition has not been consummated by September 30, 1996. The Phipps Acquisition is currently expected to occur by September 30, 1996; however, there can be no assurance that FCC approval will be obtained, that the other closing conditions will be satisfied or waived or that the Phipps Acquisition will be consummated. However, the Notes are subject to mandatory redemption on the Special Redemption Date at the Special Redemption Price if the Phipps Acquisition is not consummated prior to December 23, 1996. See "Risk Factors--Possible Non-Consummation of the Phipps Acquisition" and "Description of the Notes-Redemption-Special Redemption." THE ASSET PURCHASE AGREEMENT On December 15, 1995 the Company entered into the Asset Purchase Agreement, which was amended on March 15, 1996 and provides for the purchase of the Phipps Business from Media Acquisition Partners, L.P. ("MAP"). The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and certain other adjustments. Upon execution of the Asset Purchase Agreement, the Company deposited $200,000 with MAP, which will be credited toward the purchase price or, if the Phipps Acquisition is not consummated, refunded to the Company net of MAP's out-of-pocket expenses incurred in connection with the transaction. The parties have agreed that $15 million of the purchase price will be deposited into an escrow account to fund indemnification payments under the Asset Purchase Agreement. To the extent not utilized to fund such payments, the escrow funds shall be released to MAP over a seven-year period. Pursuant to the Asset Purchase Agreement, the Company will acquire the assets constituting the Phipps Business and assume certain liabilities relating to the Phipps Business. MAP has agreed to indemnify the Company for certain liabilities incurred by the Company relating to the Phipps Business, including taxes, liabilities relating to certain employee benefit plans, certain environmental matters and undisclosed liabilities. However, the Asset Purchase Agreement provides that no party thereto shall be liable for indemnification (which is the exclusive legal remedy thereunder) in an amount in excess of the balance of escrowed funds. There can be no assurance that the escrowed funds will be sufficient to satisfy liabilities of the Phipps Business assumed by the Company. Simultaneously with the execution of the Asset Purchase Agreement, MAP entered into agreements (the "Stock Purchase Agreements") to acquire all of the capital stock of John H. Phipps, Inc. ("Phipps"), which currently owns and operates the Phipps Business, together with certain limited partnership interests in the partnership that owns and operates WKXT (the general partner of which is Phipps), for an aggregate purchase price of approximately $166 million, subject to working capital and certain other adjustments (of approximately $10 million). The Company established a $10 million standby letter of credit which may be drawn upon in full as liquidated damages if the Phipps Acquisition is not consummated as a result of a default by the Company. The Asset Purchase Agreement and the Stock Purchase Agreements include representations and warranties with respect to the condition and operation of the Phipps Business, covenants as to the conduct of the Phipps Business prior to the closing and various closing conditions (including approval by the FCC). The Indenture provides that the Trust Funds will be released to the Company on the date of the closing under the Stock Purchase Agreements. 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 1031 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 24 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. THE KTVE SALE In August 1996, the Company sold the assets of KTVE, a television station serving Monroe, Louisiana/El Dorado, Arkansas, for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. THE FINANCING In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and 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 $49.5 million aggregate principal amount of outstanding 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, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B Preferred Stock with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% 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 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 this Offering, the Concurrent Offering and the sale of Series B Preferred Stock, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management-Compensation Committee Interlocks and Insider Participation." The consummation of this Offering is conditioned upon the consummation of the Financing and the Concurrent Offering but is not conditioned upon the consummation of the Phipps Acquisition. However, the Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if the Phipps Acquisition is not consummated prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Financing described above will be implemented in connection with the closing of this Offering, but the Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. 25 SOURCES AND USES OF FUNDS FOR THE PHIPPS ACQUISITION AND THE FINANCING The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the KTVE Sale, the Phipps Acquisition and the Financing. The actual amounts of sources and uses of funds may differ at the closing due to, among other things, the actual amount payable under the Asset Purchase Agreement and the amount of indebtedness outstanding under the Old Credit Facility.
(IN MILLIONS) ------------ SOURCES OF FUNDS: AMOUNT ------------ The Notes offered hereby $150.0 The Concurrent Offering 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 32.6 Working capital (1) 9.5 ------------ TOTAL $275.6 ------------ ------------ - ------------------------------ (1) The source of these funds was the KTVE Sale. (2) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable LIBOR or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, the weighted average interest rate was 8.94%. (3) The indebtedness under the Senior Note bears interest at 10.7% (4) Fees and expenses include underwriting costs for the Notes and the Concurrent 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. Prior to the consummation of the Phipps Acquisition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. Prior to the consummation of the Phipps Acquisition, the proceeds of the Concurrent Offering will be used to fund part of the Trust Funds, to repay indebtedness under the Old Credit Facility and to retire the Senior Note. 26
USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (2) 49.5 Retire indebtedness under the Senior Note (3) 25.0 Fees and expenses (4) 16.1 ------------ TOTAL $275.6 ------------ ------------ CAPITALIZATION The following table sets forth: (i) the historical consolidated capitalization of the Company as of June 30, 1996 and (ii) the historical consolidated capitalization of the Company as adjusted to give effect, as of June 30, 1996, to the KTVE Sale, the Concurrent Offering, the Financing, the Phipps Acquisition and this Offering. This table should be read in conjunction with the consolidated financial statements of the Company, including the notes thereto, and the Pro Forma Financial Statements and other information contained in this Prospectus. - ------------------------------ (1) Excludes (i) 53,500 shares of Class A Common Stock issuable upon exercise of options outstanding under the Company's stock option plans as of June 30, 1996 (ii) 487,500 shares of Class A Common Stock issuable upon exercise of an outstanding warrant of the Company and (iii) 500,000 shares of Class A Common Stock issuable upon the exercise of the warrant to be issued as part of the Financing. See "Management" and "Certain Relationships and Related Transactions." 27
-------------------------------- AS OF JUNE 30, 1996 PRO FORMA, HISTORICAL COMBINED COMPANY AS ADJUSTED --------------- --------------- (IN THOUSANDS) LONG-TERM DEBT: Old Credit Facility $49,500 -- Senior Credit Facility -- $ 32,550 Senior Note due 2003 25,000 -- The Notes -- 150,000 The 8% Note 7,545 -- Other 801 801 --------------- --------------- Total long-term debt (including current portion) 82,846 183,351 --------------- --------------- STOCKHOLDERS' EQUITY: Series A Preferred Stock -- 9,896 Series B Preferred Stock -- 10,000 Class A Common Stock, no par value; historical Company and pro forma as adjusted 5,130,385 shares (1) 10,000 7,545 Class B Common Stock, no par value; historical Company no shares; pro forma as adjusted 3,500,000 shares -- 67,600 Retained earnings 10,451 9,814 Treasury stock, 663,180 shares of Class A Common Stock (6,638) (6,638) --------------- --------------- Total stockholders' equity 13,813 98,217 --------------- --------------- Total capitalization $96,659 $281,568 --------------- --------------- --------------- --------------- PRO FORMA FINANCIAL DATA The following unaudited condensed combined pro forma financial statements of the Company give effect to the Augusta Acquisition, the KTVE Sale, the Concurrent Offering, the Phipps Acquisition, the Financing and this Offering as if such transactions had occurred (i) with respect to the statement of operations, as of January 1, 1995 for the year ended December 31, 1995, as of July 1, 1995 for the 12 months ended June 30, 1996, and as of January 1, 1996 for the six months ended June 30, 1996 and (ii) with respect to the balance sheet, as of June 30, 1996. The Augusta Acquisition and the Phipps Acquisition are reflected using the purchase method of accounting for business combinations. The pro forma financial information is provided for comparative purposes only and does not purport to be indicative of the results that actually would have been obtained if the events set forth above had been effected on the dates indicated or of those results that may be obtained in the future. The pro forma financial statements are based on preliminary estimates of values and transaction costs. The actual recording of the transactions will be based on final appraisals, values and transaction costs. Accordingly, the actual recording of the transactions can be expected to differ from these pro forma financial statements. 28 29
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS ------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1995 HISTORICAL PRO FORMA ----------------------- ADJUSTMENTS PRO AUGUSTA FOR AUGUSTA FORMA CONCURRENT PRO FORMA COMPANY BUSINESS ACQUISITION COMPANY OFFERING COMPANY -------- ----------- ----------- -------- ----------- ------------ (IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Operating revenues: Broadcasting (less agency commissions) $36,750 $8,660 $ 228(1) $45,638 $ -- $45,638 Publishing 21,866 -- -- 21,866 -- 21,866 Paging -- -- -- -- -- -- -------- ----------- ----------- -------- ----------- ------------ Total revenues 58,616 8,660 228 67,504 -- 67,504 Expenses: Broadcasting 23,202 5,774 228(1) 29,204 -- 29,204 Publishing 20,016 -- -- 20,016 -- 20,016 Paging -- -- -- -- -- -- Corporate and administrative 2,258 -- -- 2,258 -- 2,258 Depreciation 2,633 272 (52)(2) 2,853 -- 2,853 Amortization of intangible assets 1,326 152 769(3) 2,247 (97)(7) 2,150 Non-cash compensation paid in common stock 2,321 -- -- 2,321 -- 2,321 Management fee -- -- -- -- -- -- -------- ----------- ----------- -------- ----------- ------------ Total expenses 51,756 6,198 945 58,899 (97) 58,802 -------- ----------- ----------- -------- ----------- ------------ Operating income 6,860 2,462 (717) 8,605 97 8,702 Miscellaneous income (expense), net 143 (220) 128(4) 51 -- 51 -------- ----------- ----------- -------- ----------- ------------ Income before interest expense, minority interests and income taxes 7,003 2,242 (589) 8,656 97 8,753 Interest expense 5,438 -- 3,644(5) 9,082 (8,172) (7) 910 -------- ----------- ----------- -------- ----------- ------------ Income (loss) before minority interests and income taxes 1,565 2,242 (4,233) (426) 8,269 7,843 Minority interests -- -- -- -- -- -- -------- ----------- ----------- -------- ----------- ------------ Income (loss) before income taxes 1,565 2,242 (4,233) (426) 8,269 7,843 Income tax expense (benefit) 634 -- (773) (6) (139) 3,283(6) 3,144 -------- ----------- ----------- -------- ----------- ------------ Net income (loss) 931 2,242 (3,460) (287) 4,986 4,699 Preferred stock dividends -- -- -- -- 1,400(8) 1,400 -------- ----------- ----------- -------- ----------- ------------ Net income (loss) available to common stockholders $ 931 $2,242 $(3,460) $ (287) $ 3,586 $ 3,299 -------- ----------- ----------- -------- ----------- ------------ -------- ----------- ----------- -------- ----------- ------------ Average shares outstanding (19) 4,481 4,354 7,981 -------- -------- ------------ -------- -------- ------------ Earnings (loss) per share $ 0.21 $ (0.07) $ 0.41 -------- -------- ------------ -------- -------- ------------ PRO FORMA PHIPPS PRO FORMA PRO FORMA KTVE SALE(9) COMPANY BUSINESS ADJUSTMENTS COMBINED(20) ------------ ------------ ----------- ------------- ------------ (IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Operating revenues: Broadcasting (less agency commissions) $(4,188) $41,450 $22,424 $ -- $63,874 Publishing -- 21,866 -- -- 21,866 Paging -- -- 4,897 -- 4,897 ------ ------------ ----------- ------------- ------------ Total revenues (4,188) 63,316 27,321 -- 90,637 Expenses: Broadcasting (3,313) 25,891 10,487 220(10) 37,034 436(11) Publishing -- 20,016 -- -- 20,016 Paging -- -- 3,052 143(11) 3,195 Corporate and administrative -- 2,258 -- -- 2,258 Depreciation (438) 2,415 2,385 (625)(12) 4,175 Amortization of intangible assets -- 2,150 735 3,514(13) 6,225 (174)(14) Non-cash compensation paid in common stock -- 2,321 -- -- 2,321 Management fee -- -- 3,280 (3,280)(15) -- ------ ------------ ----------- ------------- ------------ Total expenses (3,751) 55,051 19,939 234 75,224 ------ ------------ ----------- ------------- ------------ Operating income (437) 8,265 7,382 (234) 15,413 Miscellaneous income (expense), net (27) 24 12 -- 36 ------ ------------ ----------- ------------- ------------ Income before interest expense, minority interests and income taxes (464) 8,289 7,394 (234) 15,449 Interest expense -- 910 499 (499)(16) 20,664 19,754(17) ------ ------------ ----------- ------------- ------------ Income (loss) before minority interests and income taxes (464) 7,379 6,895 (19,489) (5,215) Minority interests -- -- 547 (547)(18) -- ------ ------------ ----------- ------------- ------------ Income (loss) before income taxes (464) 7,379 6,348 (18,942) (5,215) Income tax expense (benefit) (186) 2,958 -- (4,724)(6) (1,766) ------ ------------ ----------- ------------- ------------ Net income (loss) (278) 4,421 6,348 (14,218) (3,449) Preferred stock dividends -- 1,400 -- -- 1,400 ------ ------------ ----------- ------------- ------------ Net income (loss) available to common stockholders $ (278) $ 3,021 $6,348 $(14,218) $(4,849) ------ ------------ ----------- ------------- ------------ ------ ------------ ----------- ------------- ------------ Average shares outstanding (19) 7,981 7,854 ------------ ------------ ------------ ------------ Earnings (loss) per share $ 0.38 $ (0.62) ------------ ------------ ------------ ------------ The pro forma adjustments to reflect the Augusta Acquisition, the Concurrent Offering, the KTVE Sale, the Phipps Acquisition, the Financing and this Offering are as follows: STATEMENT OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1995 1. Reflects the classification of national sales representative commissions as an expense consistent with the presentation by the Company. 2. Reflects decreased annual depreciation resulting from the change in asset lives in connection with the preliminary allocation of the Augusta Acquisition purchase price to the newly acquired property and equipment, at fair market value. 3. Reflects annual amortization of $107,000 on the Augusta Business' financing costs over a seven-year period. Also reflects the annual amortization of $813,000 on the intangible assets associated with the Augusta Acquisition over a 40-year period. 4. Reflects the elimination of the corporate allocation to the Augusta Business by its previous owner which will not be incurred by the Company. 5. Reflects increased annual interest expense of $155,000 for an interest rate adjustment on the Senior Note; increased annual interest expense of $2.4 million on the Old Credit Facility at LIBOR plus 3.5%, based on an increase in the debt level subsequent to the Augusta Acquisition; and annual interest expense of $1.1 million on the 8% Note. Three month LIBOR on January 4, 1996 was approximately 5.625%. 6. Reflects the adjustment of the income tax provision to the estimated effective tax rate. 7. Reflects decreased annual amortization of deferred financing costs in connection with retirement of the Senior Note. Also reflects decreased annual interest expense of $4.4 million on the Old Credit Facility resulting from the repayment of $49.2 million in principal on the Old Credit Facility, bearing interest at an estimated weighted average interest rate of 8.96% per annum with the proceeds of the Concurrent Offering. Also reflects a reduction of annual interest expense of $2.7 million resulting from the retirement of the Senior Note and a reduction of annual interest expense of $1.1 million on the 8% Note which will be converted into Series A Preferred Stock. The pro forma statement of operations for the year ended December 31, 1995 does not include an extraordinary loss relating to a prepayment fee associated with the retirement of the Senior Note. See Pro Forma Statement of Operations for the Six Months Ended June 30, 1996. Also see "The Phipps Acquisition, the KTVE Sale and the Financing -- The Financing" with respect to the retirement of the Senior Note. 8. Reflects annual dividends on the Series A and Series B Preferred Stock. 9. Reflects the elimination of the results of operations of KTVE. The pro forma adjustments exclude an estimated gain before income taxes of $5.6 million and estimated income taxes of $2.8 million from the KTVE Sale. 10. Reflects additional accounting and administrative expenses associated with the Phipps Business. 11. Reflects increased pension expense for the Phipps Business subsequent to the Phipps Acquisition. Historical pension expense for the Phipps Business was a credit of $449,000 while pension expense for these operations subsequent to the Phipps Acquisition is expected to be an expense of approximately $130,000. 12. Reflects decreased annual depreciation resulting from the change in asset lives in connection with the newly acquired property and equipment (at fair market value) of the Phipps Acquisition. 13. Reflects annual amortization of intangible assets associated with the Phipps Acquisition over a 40-year period. 14. Reflects decreased annual amortization of debt acquisition costs resulting from the retirement of the Old Credit Facility. The pro forma statement of operations for the year ended December 31, 1995 does not include an extraordinary loss relating to deferred financing costs associated with the assumed retirement of the Old Credit Facility. See Pro Forma Statement of Operations for the Six Months Ended June 30, 1996. Also see "The Phipps Acquisition, the KTVE Sale and the Financing--The Financing" with respect to the retirement of the Old Credit Facility. 15. Reflects elimination of the corporate allocation to the Phipps Business. Such amounts will not be incurred by the Company in connection with its operations of the Phipps Business. 16. Reflects the elimination of interest expense associated with borrowings of the Phipps Business which will not be assumed by the Company. 17. Reflects increased annual interest expense of $16.7 million on the Notes, which includes annual amortization expense of $525,000 resulting from the transaction costs relating to the issuance of the Notes, annual interest expense of $2.9 million relating to additional borrowings under the Senior Credit Facility of $32.3 million at an estimated weighted average interest rate of 8.96% plus amortization of additional deferred financing costs of $214,000. See "The Phipps Acquisition, the KTVE Sale and the Financing -- The Financing" with respect to the retirement of the Old Credit Facility. 18. Reflects the elimination of minority interests associated with the Phipps Business, because such minority interests will be acquired as a part of the Phipps Acquisition. 19. Average outstanding shares used to calculate pro forma earnings (loss) per share are based on weighted average common shares outstanding during the period, adjusted for the Concurrent Offering. 20. In connection with the Phipps Acquisition, the Company is seeking FCC approval of the assignment of the television broadcast licenses for WCTV and WKXT. Current FCC regulations will require the Company to divest its ownership interest in WALB and WJHG. 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 30 the "like-kind exchange" provision of Section 1031 of the Code. If the Company is unable to effect such a swap on satisfactory terms within the time period granted by the FCC, 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. See "Risk Factors--FCC Divestiture Requirement" and "Business--Federal Regulation of the Company's Business." 31
Condensed income statement data of WALB and WJHG are as follows: ---------------------- YEAR ENDED DECEMBER 31, 1995 WALB WJHG --------- ----------- (IN THOUSANDS) Broadcasting revenues $ 9,445 $ 3,843 Expenses 4,650 3,573 --------- ----------- Operating income 4,795 270 Other income 17 60 --------- ----------- Income before income taxes 4,812 330 --------- ----------- --------- ----------- Net income $ 2,984 $ 205 --------- ----------- --------- ----------- Media Cash Flow $ 5,103 $ 549 --------- ----------- --------- ----------- 32
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS ----------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS EXCEPT PER HISTORICAL CONCURRENT PRO FORMA PRO FORMA PHIPPS PRO FORMA PRO FORMA SHARE DATA) COMPANY OFFERING COMPANY KTVE SALE(4) COMPANY BUSINESS ADJUSTMENTS COMBINED(15) --------- ------------ --------- ------------ --------- -------- ------------ ------------ STATEMENT OF OPERATIONS DATA: Operating revenues: Broadcasting (less agency commissions) $24,252 $ -- $24,252 $(2,303) $21,949 $11,346 $ -- $33,295 Publishing 11,262 -- 11,262 -- 11,262 -- -- 11,262 Paging -- -- -- -- -- 2,744 -- 2,744 --------- ------------ --------- ------ --------- -------- ------------ ------------ Total revenues 35,514 -- 35,514 (2,303) 33,211 14,090 -- 47,301 Expenses: Broadcasting 14,418 -- 14,418 (1,723) 12,695 5,412 110(5) 18,350 133(6) Publishing 9,193 -- 9,193 -- 9,193 -- -- 9,193 Paging -- -- -- -- -- 1,780 44(6) 1,824 Corporate and administrative 1,571 -- 1,571 -- 1,571 -- -- 1,571 Depreciation 1,648 -- 1,648 (220) 1,428 1,168 (312)(7) 2,284 Amortization of intangible assets 1,253 (49)(1) 1,204 -- 1,204 362 1,768(8) 3,261 (73)(9) Non-cash compensation paid in common stock 120 -- 120 -- 120 -- 120 Management fee -- -- -- -- -- 735 (735)(10) -- --------- ------------ --------- ------ --------- -------- ------------ ------------ Total expenses 28,203 (49) 28,154 (1,943) 26,211 9,457 935 36,603 --------- ------------ --------- ------ --------- -------- ------------ ------------ Operating income 7,311 49 7,360 (360) 7,000 4,633 (935) 10,698 Miscellaneous income (expense), net 81 -- 81 (1) 80 (5) -- 75 --------- ------------ --------- ------ --------- -------- ------------ ------------ Income before interest expense, minority interests and income taxes 7,392 49 7,441 (361) 7,080 4,628 (935) 10,773 Interest expense 4,445 (4,086) (1) 359 -- 359 159 (159)(11) 10,236 9,877(12) --------- ------------ --------- ------ --------- -------- ------------ ------------ Income (loss) before minority interests and income taxes 2,947 4,135 7,082 (361) 6,721 4,469 (10,653) 537 Minority interests -- -- -- -- -- 296 (296)(13) -- --------- ------------ --------- ------ --------- -------- ------------ ------------ Income (loss) before income taxes 2,947 4,135 7,082 (361) 6,721 4,173 (10,357) 537 Income tax expense (benefit) 1,146 1,693(2) 2,839 (145) 2,694 -- (2,479)(2) 215 --------- ------------ --------- ------ --------- -------- ------------ ------------ Net income (loss) 1,801 2,442 4,243 (216) 4,027 4,173 (7,878) 322 Preferred stock dividends -- 700(3) 700 -- 700 -- -- 700 --------- ------------ --------- ------ --------- -------- ------------ ------------ Net income (loss) available to common stockholders $ 1,801 $ 1,742 $ 3,543 $ (216) $ 3,327 $ 4,173 $ (7,878) $ (378) --------- ------------ --------- ------ --------- -------- ------------ ------------ --------- ------------ --------- ------ --------- -------- ------------ ------------ Average shares outstanding (14) 4,657 8,157 8,157 7,954 --------- --------- --------- ------------ --------- --------- --------- ------------ Earnings (loss) per share - primary $ 0.39 $ 0.43 $ 0.41 $ (0.05) --------- --------- --------- ------------ --------- --------- --------- ------------ Earnings (loss) per share - fully diluted $ 0.38 $ 0.43 $ 0.41 $ (0.05) --------- --------- --------- ------------ --------- --------- --------- ------------ The pro forma adjustments to reflect the Concurrent Offering, the KTVE Sale, the Phipps Acquisition, the Financing and this Offering are as follows: STATEMENT OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1996 1. Reflects decreased semiannual amortization of deferred financing costs in connection with retirement of the Senior Note. Also reflects decreased semiannual interest expense of $2.2 million on the Old Credit Facility resulting from repayment from the proceeds of the Concurrent Offering of $49.2 million in principal at an estimated weighted average interest rate of 8.96% per annum; decreased semiannual interest expense of $1.3 million resulting from the retirement of the Senior Note; and a reduction of semiannual interest expense of $544,000 on the 8% Note which will be converted into Series A Preferred Stock. The Pro Forma Statement of Operations for the Six Months Ended June 30, 1996 does not include an extraordinary loss of approximately $2.7 million (net of estimated income tax benefit of $1.4 million) relating to deferred financing costs and a prepayment fee associated with the assumed retirement of the Senior Note. See "The Phipps Acquisition, the KTVE Sale and the Financing -- The Financing" with respect to the retirement of the Senior Note. 2. Reflects the adjustment of the income tax provision to the estimated effective tax rate. 3. Reflects semiannual dividends on the Series A and Series B Preferred Stock. 4. Reflects the elimination of the results of operations of KTVE. The pro forma adjustments exclude an estimated gain before income taxes of $5.6 million and estimated income taxes of $2.8 million from the KTVE Sale. 5. Reflects accounting and administrative expenses associated with the Phipps Business. 6. Reflects increased pension expense for the Phipps Business subsequent to the Phipps Acquisition. Historical semiannual pension expense for the Phipps Business was a credit of $113,000 while pension expense for the Phipps Business subsequent to the Phipps Acquisition is expected to be a semiannual expense of approximately $64,000. 7. Reflects decreased semiannual depreciation resulting from the change in asset lives in connection with the newly acquired property and equipment (at fair market value) of the Phipps Acquisition. 8. Reflects semiannual amortization of intangible assets associated with the Phipps Acquisition over a 40-year period. 9. Reflects decreased semiannual amortization of debt acquisition costs resulting from the retirement of the Old Credit Facility. The Pro Forma Statement of Operations for the Six Months Ended June 30, 1996 does not include an extraordinary loss of approximately $712,000 (net of estimated tax benefit of $366,000) relating to deferred financing costs associated with the assumed retirement of the Old Credit Facility. See "The Phipps Acquisition, the KTVE Sale and the Financing -- The Financing" with respect to the retirement of the Old Credit Facility. 10. Reflects elimination of the corporate allocation to the Phipps Business. Such amounts will not be incurred by the Company in connection with its operations of the Phipps Business. 11. Reflects the elimination of interest expense associated with the Phipps Business which will not be incurred by the Company. 12. Reflects increased semiannual interest expense of $8.3 million on the Notes, which includes semiannual amortization expense of $263,000 resulting from the transaction costs relating to the issuance of the Notes, and increased semiannual interest expense of $1.4 million relating to additional borrowings under the Senior Credit Facility at an estimated weighted average interest rate of 8.96% plus amortization of additional deferred financing costs of $107,000. See "The Phipps Acquisition, the KTVE Sale and the Financing -- The Financing" with respect to the retirement of the Old Credit Facility. 13. Reflects the elimination of minority interests associated with the Phipps Business, because such minority interests will be acquired as part of the Phipps Acquisition. 14. Average outstanding shares used to calculate pro forma earnings (loss) per share are based on weighted average common shares outstanding during the period, adjusted for the Concurrent Offering. 15. In connection with the Phipps Acquisition, the Company is seeking FCC approval of the assignment of the television broadcast licenses for WCTV and WKXT. Current FCC regulations will require the Company to divest its ownership interest in WALB and WJHG. 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 1031 of the Code. If the Company is unable to effect such a swap on satisfactory terms within the time period granted by the FCC, 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. See "Risk Factors -- FCC Divestiture Requirement" and "Business -- Federal Regulation of the Company's Business." Condensed income statement data of WALB and WJHG are as follows: 33
---------------------- SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS) WALB WJHG --------- ----------- Broadcasting revenues $ 5,098 $ 2,409 Expenses 2,440 1,933 --------- ----------- Operating income 2,658 476 Other income 9 16 --------- ----------- Income before income taxes $ 2,667 $ 492 --------- ----------- --------- ----------- Net income $ 1,654 $ 305 --------- ----------- --------- ----------- Media Cash Flow $ 2,809 $ 624 --------- ----------- --------- ----------- 34
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS ------------------------------------------------------------------------------------- TWELVE MONTHS ENDED JUNE 30, 1996 HISTORICAL PRO FORMA ----------------------- ADJUSTMENTS PRO (IN THOUSANDS, EXCEPT PER AUGUSTA FOR AUGUSTA FORMA CONCURRENT PRO FORMA SHARE DATA) COMPANY BUSINESS ACQUISITION COMPANY OFFERING COMPANY -------- ----------- ----------- -------- ----------- ------------ STATEMENT OF OPERATIONS DATA: Operating revenues: Broadcasting (less agency commissions) $42,741 $4,419 $ 110(1) $47,270 $ -- $47,270 Publishing 23,082 -- -- 23,082 -- 23,082 Paging -- -- -- -- -- -- -------- ----------- ----------- -------- ----------- ------------ Total revenues 65,823 4,419 110 70,352 -- 70,353 Expenses: Broadcasting 26,211 2,997 110(1) 29,318 -- 29,318 Publishing 20,619 -- -- 20,619 -- 20,619 Paging -- -- -- -- -- -- Corporate and administrative 2,817 -- -- 2,817 -- 2,817 Depreciation 3,048 135 (26)(2) 3,157 -- 3,157 Amortization of intangible assets 1,990 76 384(3) 2,450 (97)(7) 2,353 Non-cash compensation paid in common stock 1,625 -- -- 1,625 -- 1,625 Management fee -- -- -- -- -- -- -------- ----------- ----------- -------- ----------- ------------ Total expenses 56,310 3,208 461 59,986 (97) 59,889 -------- ----------- ----------- -------- ----------- ------------ Operating income 9,513 1,211 (358) 10,366 97 10,463 Miscellaneous income (expense), net 157 (126) 69(4) 100 -- 100 -------- ----------- ----------- -------- ----------- ------------ Income before interest expense, minority interests and income taxes 9,670 1,085 (289) 10,466 97 10,563 Interest expense 7,115 -- 1,859(5) 8,974 (8,172) (7) 802 -------- ----------- ----------- -------- ----------- ------------ Income (loss) before minority interests and income taxes 2,555 1,085 (2,148) 1,492 8,269 9,761 Minority interests -- -- -- -- -- -- -------- ----------- ----------- -------- ----------- ------------ Income (loss) before income taxes 2,555 1,085 (2,148) 1,492 8,269 9,761 Income tax expense (benefit) 1,004 -- (412)(6) 592 3,316(6) 3,908 -------- ----------- ----------- -------- ----------- ------------ Net income (loss) 1,551 1,085 (1,736) 900 4,953 5,853 Preferred stock dividends -- -- -- -- 1,400(8) 1,400 -------- ----------- ----------- -------- ----------- ------------ Net income (loss) available to common stockholders $ 1,551 $1,085 $(1,736) $ 900 $ 3,553 $ 4,453 -------- ----------- ----------- -------- ----------- ------------ -------- ----------- ----------- -------- ----------- ------------ Average shares outstanding (19) 4,624 8,124 8,124 -------- -------- ------------ -------- -------- ------------ Earnings (loss) per share $ 0.34 $ 0.11 $ 0.55 -------- -------- ------------ -------- -------- ------------ (IN THOUSANDS, EXCEPT PER PRO FORMA PHIPPS PRO FORMA PRO FORMA SHARE DATA) KTVE SALE(9) COMPANY BUSINESS ADJUSTMENTS COMBINED(20) ------------ ------------ ----------- ------------- ------------ STATEMENT OF OPERATIONS DATA: Operating revenues: Broadcasting (less agency commissions) $(4,533) $42,737 $22,995 $ -- $65,733 Publishing -- 23,082 -- -- 23,082 Paging -- -- 5,219 -- 5,219 ------ ------------ ----------- ------------- ------------ Total revenues (4,533) 65,819 28,214 -- 94,033 Expenses: Broadcasting (3,399) 25,919 10,835 220(10) 37,326 352(11) Publishing -- 20,619 -- -- 20,619 Paging -- -- 3,420 115(11) 3,535 Corporate and administrative -- 2,817 -- -- 2,817 Depreciation (442) 2,715 2,462 (625)(12) 4,552 Amortization of intangible assets -- 2,353 753 3,525(13) 6,521 (110)(14) Non-cash compensation paid in common stock -- 1,625 -- -- 1,625 Management fee -- -- 2,476 (2,476)(15) -- ------ ------------ ----------- ------------- ------------ Total expenses (3,841) 56,048 19,946 1,001 76,995 ------ ------------ ----------- ------------- ------------ Operating income (692) 9,771 8,268 (1,001) 17,038 Miscellaneous income (expense), net (20) 80 13 -- 93 ------ ------------ ----------- ------------- ------------ Income before interest expense, minority interests and income taxes (712) 9,851 8,281 (1,001) 17,131 Interest expense -- 802 435 (435)(16) 20,556 19,754(17) ------ ------------ ----------- ------------- ------------ Income (loss) before minority interests and income taxes (712) 9,049 7,846 (20,320) (3,425) Minority interests -- -- 587 (587)(18) -- ------ ------------ ----------- ------------- ------------ Income (loss) before income taxes (712) 9,049 7,259 (19,733) (3,425) Income tax expense (benefit) (285) 3,623 -- (4,788)(6) (1,165) ------ ------------ ----------- ------------- ------------ Net income (loss) (427) 5,426 7,259 (14,945) (2,260) Preferred stock dividends -- 1,400 -- -- 1,400 ------ ------------ ----------- ------------- ------------ Net income (loss) available to common stockholders $ (427) $ 4,026 $7,259 $(14,945) $(3,660) ------ ------------ ----------- ------------- ------------ ------ ------------ ----------- ------------- ------------ Average shares outstanding (19) 8,124 7,926 ------------ ------------ ------------ ------------ Earnings (loss) per share $ 0.50 $ (0.46) ------------ ------------ ------------ ------------ The pro forma adjustments to reflect the Concurrent Offering, the KTVE Sale, the Phipps Acquisition, the Financing and this Offering are as follows: STATEMENT OF OPERATIONS - TWELVE MONTHS ENDED JUNE 30, 1996 1. Reflects the classification of national sales representative commissions as an expense consistent with the presentation by the Company. 2. Reflects decreased depreciation prior to acquisition resulting from the change in asset lives in connection with the preliminary allocation of the Augusta Acquisition purchase price to the newly acquired property and equipment, at fair market value, for the six months ended December 31, 1995. 3. Reflects amortization prior to acquisition of $54,000 on the Augusta Business' financing costs over a seven-year period. Also reflects the amortization prior to acquisition of $406,000 on the intangible assets associated with the Augusta Acquisition over a 40-year period. 4. Reflects the elimination of overhead allocated to the Augusta Business prior to acquisition by its previous owner which will not be incurred by the Company. 5. Reflects increased interest expense prior to the acquisition of the Augusta Business of $77,000 for an interest rate adjustment on the Senior Note; increased interest expense prior to the acquisition of the Augusta Business of $1.2 million on the Old Credit Facility at LIBOR plus 3.5%, based on an increase in the debt level subsequent to the Augusta Acquisition; and interest expense prior to the acquisition of the Augusta Business of $544,000 on the 8% Note. 6. Reflects the adjustment of the income tax provision to the estimated effective tax rate. 7. Reflects decreased annual amortization of deferred financing costs in connection with retirement of the Senior Note. Also reflects decreased annual interest expense of $4.4 million on the Old Credit Facility resulting from repayment of $49.2 million in principal at an estimated weighted average interest rate of 8.96% per annum from the proceeds of the Concurrent Offering; decreased annual interest expense of $2.7 million resulting from the retirement of the Senior Note; and a reduction of annual interest expense of $1.1 million on the 8% Note which will be converted to Series A Preferred Stock. The Pro Forma Statement of Operations for the Twelve Months Ended June 30, 1996 does not include an extraordinary loss of approximately $2.7 million (net of estimated income tax benefit of $1.4 milion) relating to deferred financing costs and a prepayment fee associated with the assumed retirement of the Senior Note. See "The Phipps Acquisition, the KTVE Sale and the Financing -- The Financing" with respect to the retirement of the Senior Note. 8. Reflects annual dividends on the Series A and Series B Preferred Stock. 9. Reflects the elimination of the results of operations of KTVE. The pro forma adjustments exclude an estimated gain before income taxes of $5.6 million and estimated income taxes of $2.8 million from the KTVE Sale. 10. Reflects accounting and administrative expenses associated with the Phipps Business. 11. Reflects increased pension expense for the Phipps Business subsequent to the Phipps Acquisition. Historical pension expense for the Phipps Business was a credit of $337,000 while pension expense for these operations subsequent to the Phipps Acquisition is expected to be an expense of approximately $130,000. 12. Reflects decreased annual depreciation resulting from the change in asset lives in connection with the newly acquired property and equipment (at fair market value) of the Phipps Acquisition. 13. Reflects annual amortization of intangible assets associated with the Phipps Acquisition over a 40-year period. 14. Reflects decreased annual amortization of debt acquisition costs resulting from the retirement of the Old Credit Facility at June 30, 1996. The Pro Forma Statement of Operations for the Twelve Months Ended June 30, 1996 does not include an extraordinary loss of approximately $712,000 (net of estimated tax benefit of $366,000) relating to deferred financing costs associated with the assumed retirement of the Old Credit Facility. See "The Phipps Acquisition, the KTVE Sale and the Financing -- The Financing" with respect to the retirement of the Old Credit Facility. 15. Reflects elimination of the corporate allocation to the Phipps Business. Such amounts will not be incurred by the Company in connection with its operations of the Phipps Business. 16. Reflects the elimination of interest expense associated with the Phipps Business which will not be assumed by the Company. 17. Reflects increased annual interest expense of $16.7 million on the Notes, which includes annual amortization expense of $525,000 resulting from the transaction costs relating to the issuance of the Notes, annual interest expense of $2.9 million relating to the additional borrowings under the Senior Credit Facility at an estimated weighted average interest rate of 8.96% plus amortization of additional deferred financing costs of $214,000. See "The Phipps Acquisition, the KTVE Sale and the Financing -- The Financing" with respect to the retirement of the Old Credit Facility. 18. Reflects the elimination of minority interests associated with the Phipps Business, because such minority interests will be acquired as a part of the Phipps Acquisition. 19. Average outstanding shares used to calculate pro forma earnings (loss) per share are based on weighted average common shares outstanding during the period, adjusted for the Concurrent Offering. 35 20. In connection with the Phipps Acquisition, the Company is seeking FCC approval of the assignment of the television broadcast licenses for WCTV and WKXT. Current FCC regulations will require the Company to divest its ownership interest in WALB and WJHG. 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 1031 of the Code. If the Company is unable to effect such a swap on satisfactory terms within the time period granted by the FCC, 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. See "Risk Factors -- FCC Divestiture Requirement" and "Business -- Federal Regulation of the Company's Business." Condensed income statement data of WALB and WJHG are as follows: 36
---------------------- TWELVE MONTHS ENDED JUNE 30, 1996 WALB WJHG --------- ----------- (IN THOUSANDS) Broadcasting revenues $ 9,829 $ 4,426 Expenses 4,735 3,816 --------- ----------- Operating income 5,094 610 Other income 17 45 --------- ----------- Income before income taxes $ 5,111 $ 655 --------- ----------- --------- ----------- Net income $ 3,170 $ 407 --------- ----------- --------- ----------- Media Cash Flow $ 5,409 $ 912 --------- ----------- --------- ----------- 37
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET -------------------------------------------------------------------------------- JUNE 30, 1996 HISTORICAL CONCURRENT PRO FORMA KTVE PRO FORMA PHIPPS (DOLLARS IN THOUSANDS) COMPANY OFFERING COMPANY SALE(4) COMPANY BUSINESS --------- ---------- --------- ----------- --------- -------- ASSETS: Cash $1,287 $ -- $1,287 $9,500 $10,787 $663 Trade accounts receivable 10,818 -- 10,818 -- 10,818 5,188 Recoverable income taxes 797 1,394(1) 2,191 (2,191) -- -- Inventories 109 -- 109 -- 109 -- Current portion of program broadcast rights 711 -- 711 (56) 655 924 Prepaid expenses and other current assets 759 -- 759 (50) 709 338 --------- ---------- --------- ----------- --------- -------- Total current assets 14,481 1,394 15,875 7,203 23,078 7,113 Property and equipment-net 18,798 -- 18,798 (1,531) 17,267 9,985 Other assets Deferred acquisition costs 2,819 -- 2,819 -- 2,819 -- Deferred loan costs 1,882 (804)(1) 1,078 -- 1,078 -- Goodwill and other intangibles 73,299 -- 73,299 (2,322) 70,977 9,097 Other 1,237 -- 1,237 (8) 1,229 111 --------- ---------- --------- ----------- --------- -------- Total other assets 79,237 (804) 78,433 (2,330) 76,103 9,208 --------- ---------- --------- ----------- --------- -------- Total assets $112,516 $590 $113,106 $3,342 $116,448 $26,306 --------- ---------- --------- ----------- --------- -------- --------- ---------- --------- ----------- --------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY: Trade accounts payable $3,169 $-- $3,169 $-- $3,169 $308 Employee compensation and benefits 4,114 -- 4,114 -- 4,114 -- Accrued expenses 924 -- 924 -- 924 996 Accrued interest 2,026 -- 2,026 -- 2,026 -- Income taxes payable -- -- -- 617 617 -- Current portion of broadcast program obligations 710 -- 710 (53) 657 458 Deferred paging service income -- -- -- -- -- 975 Current portion of long-term debt -- -- -- -- -- 1,474 --------- ---------- --------- ----------- --------- -------- Total current liabilities 10,943 -- 10,943 564 11,507 4,211 Long-term debt 82,846 (7,545)(2) 1,101 -- 1,101 2,560 (74,200)(3) Deferred credits 4,914 -- 4,914 (3) 4,911 214 Minority interests -- -- -- -- -- 655 Stockholders' equity Series A Preferred Stock -- 9,896(2) 9,896 -- 9,896 -- Series B Preferred Stock -- 10,000(2) 10,000 -- 10,000 -- Class A Common Stock, no par value 10,000 (2,455)(2) 7,545 -- 7,545 -- Class B Common Stock, no par value -- 67,600(2) 67,600 -- 67,600 -- Retained earnings 10,451 (2,706)(1) 7,745 2,781 10,526 -- Net equity of acquired operations -- -- -- -- -- 18,666 --------- ---------- --------- ----------- --------- -------- 20,451 82,335 102,786 2,781 105,567 18,666 Treasury stock (6,638) -- (6,638 ) -- (6,638) -- --------- ---------- --------- ----------- --------- -------- 13,813 82,335 96,148 2,781 98,929 18,666 --------- ---------- --------- ----------- --------- -------- Total liabilities and stockholders' equity $112,516 $590 $113,106 $3,342 $116,448 $26,306 --------- ---------- --------- ----------- --------- -------- --------- ---------- --------- ----------- --------- -------- PRO FORMA PRO FORMA (DOLLARS IN THOUSANDS) ADJUSTMENTS COMBINED(10) -------------- -------------- ASSETS: Cash $(185,000)(5) $1,287 144,750(7) 30,750(8) (663)(6) Trade accounts receivable -- 16,006 Recoverable income taxes -- -- Inventories -- 109 Current portion of program broadcast rights -- 1,579 Prepaid expenses and other current assets (338)(6) 709 -------------- -------------- Total current assets (10,501) 19,690 Property and equipment-net -- 27,252 Other assets Deferred acquisition costs -- 2,819 Deferred loan costs 5,250(7) 6,750 1,500(8) (1,078)(9) Goodwill and other intangibles (9,097)(6) 241,416 170,439(5) Other -- 1,340 -------------- -------------- Total other assets 167,014 252,325 -------------- -------------- Total assets $156,513 $299,267 -------------- -------------- -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Trade accounts payable $(308)(6) $3,169 Employee compensation and benefits -- 4,114 Accrued expenses (996)(6) 924 Accrued interest -- 2,026 Income taxes payable (366)(9) 251 Current portion of broadcast program obligations -- 1,115 Deferred paging service income -- 975 Current portion of long-term debt (1,474)(6) -- -------------- -------------- Total current liabilities (3,144) 12,574 Long-term debt (2,560)(6) 183,351 32,250(8) 150,000(7) Deferred credits -- 5,125 Minority interests (655)(6) -- Stockholders' equity Series A Preferred Stock -- 9,896 Series B Preferred Stock -- 10,000 Class A Common Stock, no par value -- 7,545 Class B Common Stock, no par value -- 67,600 Retained earnings (712)(9) 9,814 Net equity of acquired operations (18,666)(5) -- -------------- -------------- (19,378) 104,855 Treasury stock -- (6,638) -------------- -------------- (19,378) 98,217 -------------- -------------- Total liabilities and stockholders' equity $156,513 $299,267 -------------- -------------- -------------- -------------- The pro forma adjustments to reflect the Concurrent Offering, the KTVE Sale, the Phipps Acquisition, the Financing and this Offering are as follows: BALANCE SHEET - JUNE 30, 1996 1. Reflects the prepayment fee associated with the retirement of the Senior Note, the write-off of deferred loan costs in connection with the retirement of the Senior Note and the exchange of the Series A Preferred Stock for the 8% Note, and the income tax benefit associated with the prepayment fee and write-off of deferred loan costs. 2. Reflects the issuances, net of fees and expenses, of (i) approximately 3,500,000 shares of Class B Common Stock at an estimated $21 per share pursuant to the Concurrent Offering, (ii) Series A Preferred Stock in exchange for the 8% Note and (iii) $10.0 million of Series B Preferred Stock to certain affiliates of the Company. 3. Reflects retirement of $25.0 million in aggregate principal amount and a prepayment fee of $3.4 million on the Senior Note and a retirement of $49.2 million on the Old Credit Facility with the net proceeds from the Concurrent Offering and the sale of Series B Preferred Stock of $77.6 million. 4. Reflects the KTVE Sale for $9.5 million plus the amount of the accounts receivable on the date of the closing. The transaction was consummated in August 1996. 5. Reflects the purchase of the Phipps Business and a preliminary allocation of the purchase price of $185.0 million to the tangible assets and liabilities based upon estimates of fair market value at June 30, 1996 as follows: The excess of purchase price over amounts allocated to net tangible assets will be amortized on a straight-line basis over a 40-year period. The allocation of the purchase price is subject to adjustment based upon the results of pending appraisals. 6. Reflects the elimination of certain of the assets and liabilities of the Phipps Business, which were not included in the Phipps Acquisition. 7. Reflects the issuance of the Notes pursuant to this Offering and fees and expenses associated with this Offering. 8. Reflects borrowings of $32.3 million under the Senior Credit Facility in order to complete the Phipps Acquisition and estimated expenses of $1.5 million in connection with the negotiation and execution of Senior Credit Facility. See "Description of Certain Indebtedness -- Senior Credit Facility." 9. Reflects the write-off of debt acquisition costs and related tax benefit resulting from the retirement of the Old Credit Facility at June 30, 1996. 10. In connection with the Phipps Acquisition, the Company is seeking FCC approval of the assignment of the television broadcast licenses for WCTV and WKXT. Current FCC regulations will require the Company to divest its ownership interest in WALB and WJHG. 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 1031 of the Code. If the Company is unable to effect such a swap on satisfactory terms within the time period granted by the FCC, 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. See "Risk Factors--FCC Divestiture Requirement" and "Business--Federal Regulation of the Company's Business." 38
---------- AMOUNT ---------- (IN THOUSANDS) Trade accounts receivable $ 5,188 Current portion of program broadcast rights 924 Property and equipment 9,985 Goodwill and other intangibles 170,439 Other 111 Current portion of program broadcast obligations (458) Deferred paging service income (975) Deferred credits (214) ---------- Purchase price of Phipps Business including expenses $ 185,000 ---------- ---------- Historical book value of Phipps Business $ (18,666) Assets not acquired and liabilities not assumed--net 4,105 ---------- Net assets acquired (14,561) Purchase price of Phipps Business 185,000 ---------- Goodwill and other intangibles $ 170,439 ---------- ---------- Condensed balance sheets of WALB and WJHG are as follows: 39
---------------------- JUNE 30, 1996 (IN THOUSANDS) WALB WJHG --------- ----------- Current assets $ 1,801 $ 913 Property and equipment 1,714 1,014 Other assets 66 3 --------- ----------- Total assets $ 3,581 $ 1,930 --------- ----------- --------- ----------- Current liabilities $ 1,756 $ 474 Other liabilities 214 -- Stockholder's equity 1,611 1,456 --------- ----------- Total liabilities and stockholder's equity $ 3,581 $ 1,930 --------- ----------- --------- ----------- SELECTED HISTORICAL FINANCIAL DATA SELECTED FINANCIAL DATA OF THE COMPANY 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-Results of Operations of the Company." 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 end. The selected consolidated financial data for, and as of the six months ended June 30, 1995 and 1996 are derived from the unaudited accounting records of the Company and have been prepared on the same basis as the audited consolidated financial statements and in the opinion of the management of the Company include all normal and recurring adjustments and accruals necessary for a fair presentation of such information. 40
------------------------------------------------------------------------------ SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31 30 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) (UNAUDITED) STATEMENT OF INCOME DATA: Operating revenues: Broadcasting (less agency commissions) $13,553 $15,131 $15,004 $22,826 $36,750 $18,261 $24,252 Publishing 8,968 9,512 10,109 13,692 21,866 10,046 11,262 -------- -------- -------- -------- -------- ---------- ---------- Total revenues 22,521 24,643 25,113 36,518 58,616 28,307 35,514 Expenses: Broadcasting 9,672 9,753 10,029 14,864 23,202 11,410 14,418 Publishing 6,444 6,752 7,662 11,198 20,016 8,590 9,193 Corporate and administrative 1,889 2,627 2,326 1,959 2,258 1,012 1,571 Depreciation 1,487 1,197 1,388 1,745 2,633 1,234 1,648 Amortization of intangible assets 14 44 177 396 1,326 588 1,253 Non-cash compensation paid in common stock -- -- -- 80 2,321 816 120 -------- -------- -------- -------- -------- ---------- ---------- Total expenses 19,506 20,373 21,582 30,242 51,756 23,650 28,203 -------- -------- -------- -------- -------- ---------- ---------- Operating income 3,015 4,270 3,531 6,276 6,860 4,657 7,311 Miscellaneous income (expense), net 778 (1,519) 202 189 143 69 81 -------- -------- -------- -------- -------- ---------- ---------- Income from continuing operations before interest expense and income taxes 3,793 2,751 3,733 6,465 7,003 4,726 7,392 Interest expense 787 1,486 985 1,923 5,438 2,768 4,445 -------- -------- -------- -------- -------- ---------- ---------- Income from continuing operations before income taxes 3,006 1,265 2,748 4,542 1,565 1,958 2,947 Federal and state income taxes 1,156 869 1,068 1,776 634 776 1,146 -------- -------- -------- -------- -------- ---------- ---------- Income from continuing operations 1,850 396 1,680 2,766 931 1,182 1,801 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 $ 1,182 $ 1,801 -------- -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- -------- ---------- ---------- Average outstanding common shares 6,469 4,668 4,611 4,689 4,481 4,383 4,657 -------- -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- -------- ---------- ---------- Income from continuing operations per common share-primary $ 0.29 $ 0.09 $ 0.36 $ 0.59 $ 0.21 $ 0.27 $ 0.39 -------- -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- -------- ---------- ---------- Income from continuing operations per common share-fully diluted $ 0.29 $ 0.09 $ 0.36 $ 0.59 $ 0.21 $ 0.27 $ 0.38 -------- -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- -------- ---------- ---------- Cash dividends per common share $ 0.05 $ 0.07 $ 0.07 $ 0.07 $ 0.08 $ 0.04 $ 0.04 -------- -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- -------- ---------- ---------- - ------------------------------ (1) Media Cash Flow represents operating income plus depreciation and amortization (including amortization of program license rights), non-cash compensation and corporate overhead, less payments of program license liabilities. (2) Operating cash flow represents operating income plus depreciation, amortization (including amortization of program license rights) and non- cash compensation, less payments for program license liabilities. (3) EBITDA represents operating income plus (i) depreciation and amortization (excluding amortization of program license rights) and (ii) non-cash compensation paid in common stock (excluding stock payments made to the 401(k) plan). EBITDA is presented not as a measure of operating results, but rather to provide additional information related to the Company's ability to service debt. EBITDA should not be considered as an alternative to either (x) operating income determined in accordance with GAAP as an indicator of operating performance or (y) cash flows from operating activities (determined in accordance with GAAP) as a measure of liquidity. (4) For purposes of this item, "fixed charges" represent interest, the interest element of rental expense, capitalized interest and amortization of debt issuance costs and "earnings" represent net income (loss) before income taxes, discontinued operations, extraordinary items, cumulative effect of change in accounting principles and fixed charges. (5) Represents applicable ratios for the 12 month periods ended June 30, 1995 and 1996. 41
------------------------------------------------------------------------------ SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31 30 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- ---------- ---------- (IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED) (UNAUDITED) BALANCE SHEET DATA (AT END OF PERIOD): Working capital (deficiency) $ 6,740 $ 2,976 $ 2,579 $ 1,075 $ (222) $ 237 $ 3,538 Total assets 31,548 24,173 21,372 68,789 78,240 73,932 112,516 Total debt 20,378 12,412 7,759 52,940 54,324 54,319 82,846 Total stockholders' equity $ 5,853 $ 4,850 $ 7,118 $ 5,001 $ 8,986 $ 7,375 $13,813 OTHER DATA: Media Cash Flow (1) $ 6,405 $ 8,079 $ 7,371 $10,522 $15,559 $ 8,333 $12,004 Operating cash flow (2) 4,516 5,452 5,044 8,567 13,309 7,329 10,442 EBITDA (3) 4,516 5,512 5,095 8,498 13,140 7,296 10,332 Cash flows provided by (used in): Operating activities 3,499 4,832 1,324 5,798 7,600 3,828 6,801 Investing activities (2,073) (1,041) 3,062 (42,770) (8,929) (5,377) (37,490) Financing activities (10,424) (9,300) (4,932) 37,200 1,331 1,208 31,416 Capital expenditures $ 2,235 $ 2,216 $ 2,582 $ 1,768 $ 3,280 $1,852 $ 1,317 Ratio of Media Cash Flow to interest expense 8.1 5.4 7.5 5.5 2.9 3.0 2.7 Ratio of operating cash flow to interest expense 5.7 3.7 5.1 4.5 2.4 2.6 2.3 Ratio of total debt to Media Cash Flow 3.2 1.5 1.1 5.0 3.5 3.5(5) 4.3(5) Ratio of total debt to operating cash flow 4.5 2.3 1.5 6.2 4.1 4.1(5) 5.0(5) Ratio of earnings to fixed charges (4) 4.7 1.8 3.4 3.2 1.3 1.7 1.6 SELECTED FINANCIAL DATA OF THE PHIPPS BUSINESS Set forth below are certain selected historical financial data of the Phipps Business. This information should be read in conjunction with the financial statements of the Phipps Business and related notes thereto appearing elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations of the Phipps Business." The selected historical financial data for, and as of the end of, each of the years in the three-year period ended December 31, 1995 are derived from the audited financial statements of the Phipps Business. The selected financial data for, and as of the end of, each of the years ended December 31, 1991 and 1992 are derived from the unaudited accounting records of the Phipps Business. The selected financial data for, and as of the six months ended June 30, 1995 and 1996 are derived from the unaudited financial statements of the Phipps Business and have been prepared on the same basis as the audited financial statements and in the opinion of management of the Company include all normal and recurring adjustments and accruals necessary for a fair presentation of such information. 42
------------------------------------------------------------------------------ SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31 30 1991 1992(1) 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- ---------- ---------- (IN THOUSANDS) (UNAUDITED) (UNAUDITED) STATEMENT OF INCOME DATA: Operating revenues: Broadcasting (less agency commissions) $ 10,492 $ 14,523 $ 19,460 $ 21,524 $ 22,424 $ 10,774 $ 11,346 Paging 3,369 3,646 3,788 4,277 4,897 2,423 2,744 -------- -------- -------- -------- -------- ---------- ---------- Total revenues 13,861 18,169 23,248 25,801 27,321 13,197 14,090 Expenses: Broadcasting 5,298 7,518 10,734 10,211 10,487 5,065 5,412 Paging 2,356 2,298 2,529 2,764 3,052 1,411 1,780 Management fees 579 973 2,462 2,486 3,280 1,539 735 Depreciation and amortization 1,513 1,734 2,836 2,672 3,120 1,436 1,530 -------- -------- -------- -------- -------- ---------- ---------- Total expenses 9,746 12,523 18,561 18,133 19,939 9,451 9,457 -------- -------- -------- -------- -------- ---------- ---------- Operating income 4,115 5,646 4,687 7,668 7,382 3,746 4,633 Miscellaneous income (expense), net 5 8 16 666 12 )(4 )(5 -------- -------- -------- -------- -------- ---------- ---------- Income before interest expense and minority interests 4,120 5,654 4,703 8,334 7,394 3,742 4,628 Interest expense 162 442 632 480 499 223 159 -------- -------- -------- -------- -------- ---------- ---------- Income before minority interests 3,958 5,212 4,071 7,854 6,895 3,519 4,469 Minority interests -- 331 140 635 547 256 296 -------- -------- -------- -------- -------- ---------- ---------- Net income $ 3,958 $ 4,881 $ 3,931 $ 7,219 $ 6,348 $ 3,263 $ 4,173 -------- -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- -------- ---------- ---------- Supplemental unaudited pro forma information: (2) Net income, as above $ 3,958 $ 4,881 $ 3,931 $ 7,219 $ 6,348 $ 3,263 $ 4,173 Pro forma provision for income tax expense 1,504 1,855 1,500 2,743 2,413 1,240 1,586 -------- -------- -------- -------- -------- ---------- ---------- Pro forma net income $ 2,454 $ 3,026 $ 2,431 $ 4,476 $ 3,935 $ 2,023 $ 2,587 -------- -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- -------- ---------- ---------- BALANCE SHEET DATA (AT END OF PERIOD): Working capital $ 595 $ 615 $ 1,257 $ 1,421 $ 2,622 $ 2,228 $ 2,902 Total assets 8,931 25,068 24,819 25,298 27,562 27,633 26,306 Total debt 1,388 7,697 6,542 6,065 4,810 5,198 4,034 Minority interests -- 1,154 824 728 586 648 655 Owner's equity 6,351 13,276 14,306 15,465 18,794 18,764 18,666 - ------------------------------ (1) Includes the acquisition of a majority interest in WKXT in July 1992, which was accounted for using the purchase method of accounting. (2) John H. Phipps, Inc. and its subsidiaries file a consolidated federal income tax return and separate state tax returns. Income tax expense for the Phipps Business is not presented in the financial statements as such amounts are computed and paid by John H. Phipps, Inc. Pro forma federal and state income taxes for the Phipps Business are calculated on a pro forma, separate return basis. (3) Media Cash Flow represents operating income plus depreciation, amortization (including amortization of program license rights) and corporate overhead less payments of program license liabilities. (4) Operating cash flow represents operating income plus depreciation and amortization (including amortization of program license rights) less payments for program license liabilities. (5) EBITDA represents operating income plus depreciation and amortization (excluding amortization of program license rights). EBITDA is presented not as a measure of operating results, but rather to provide additional information related to the Phipps Business' ability to service debt. EBITDA should not be considered as an alternative to either (x) operating income determined in accordance with GAAP as an indicator of operating performance or (y) cash flows from operating activities (determined in accordance with GAAP) as a measure of liquidity. 43
---------------------------------------------------------- SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31 30 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) (UNAUDITED) OTHER DATA: Media Cash Flow (3) $ 10,466 $ 12,983 $ 13,696 $ 6,678 $ 6,769 Operating cash flow (4) 8,003 10,498 10,416 5,140 6,035 EBITDA (5) 7,523 10,340 10,502 5,182 6,163 Net cash flows provided by (used in): Operating activities 7,397 9,808 9,259 4,136 6,191 Investing activities (2,953) (2,506) (3,828) (3,152) (840) Financing activities (4,418) (7,233) (4,906) (917) (5,309) Capital expenditures $ 3,538 $ 3,353 $ 3,188 $ 1,902 $ 1,647 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 in this Prospectus. 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 30, 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. - ------------------------ (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 SIX MONTHS ENDED JUNE 30 1993 1994 1995 1995 1996 -------------------- -------------------- -------------------- -------------------- -------------------- (DOLLARS IN PERCENT PERCENT PERCENT PERCENT PERCENT THOUSANDS) AMOUNT OF TOTAL AMOUNT OF TOTAL 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% $18,260.9 64.5% $24,251.9 68.3% Operating income (1) 4,070.6 66.9 6,556.0 78.4 10,585.2 94.1 5,416.1 84.8 7,757.3 85.9 PUBLISHING Revenues $10,109.4 40.2% $13,692.0 37.5% $21,866.2 37.3% $10,046.1 35.5% $11,261.8 31.7% Operating income (1) 2,009.1 33.1 1,804.0 21.6 660.2 5.9 972.2 15.2 1,272.7 14.1 In the Company's broadcasting operations, broadcast advertising is sold for placement either preceding or following a television station's network programming and within local and syndicated programming. Broadcast advertising is sold in time increments and is priced primarily on the basis of a program's popularity among the specific audience an advertiser desires to reach, as measured by Nielsen. 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 44
------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30 1993 1994 1995 1995 1996 -------------------- -------------------- -------------------- -------------------- -------------------- PERCENT PERCENT PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL (DOLLARS IN COMPANY COMPANY COMPANY COMPANY COMPANY THOUSANDS) AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net revenues: Local $ 7,312.3 29.2% $12,191.4 33.4% $20,888.1 35.6% $10,294.6 36.4% $13,745.3 38.7% National 6,102.8 24.3 7,804.4 21.4 10,881.1 18.6 5,497.4 19.4 6,967.9 19.6 Network compensation 1,286.1 5.1 1,297.5 3.5 2,486.8 4.2 1,247.2 4.4 1,761.0 5.0 Political 17.7 0.1 1,029.0 2.8 1,174.2 2.0 437.9 1.5 786.3 2.2 Production and other 284.8 1.1 504.1 1.4 1,319.8 2.3 783.8 2.8 991.4 2.8 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- $15,003.7 59.8% $22,826.4 62.5% $36,750.0 62.7% $18,260.9 64.5% $24,251.9 68.3% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- the station and the availability of alternative advertising media in the market area. Broadcast advertising rates are the highest during the most desirable viewing hours, with corresponding reductions during other hours. The ratings of a local station affiliated with a major network can be affected by ratings of network programming. Most broadcast advertising contracts are short-term, and generally run only for a few weeks. Approximately 56.5% of the gross revenues of the Company's television stations for the year ended December 31, 1995 and the six months ended June 30, 1996, were generated from local advertising, which is sold by a station's sales staff directly to local accounts, and the remainder primarily 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. 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 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. 45
------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30 1993 1994 1995 1995 1996 -------------------- -------------------- -------------------- -------------------- -------------------- PERCENT PERCENT PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL COMPANY COMPANY COMPANY COMPANY COMPANY AMOUNT REVENUES AMOUNT REVENUES 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% $ 5,089.5 18.0% $ 5,299.8 14.9% Classified 2,336.5 9.3 3,174.2 8.7 5,323.8 9.1 2,493.7 8.8 3,036.5 8.5 Circulation 2,011.8 8.0 2,628.9 7.2 3,783.8 6.5 1,821.6 6.4 2,188.6 6.2 Other 26.8 0.1 428.6 1.2 1,714.4 2.9 641.3 2.3 736.9 2.1 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- $10,109.4 40.2% $13,692.0 37.5% $21,866.2 37.3% $10,046.1 35.5% $11,261.8 31.7% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- 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, and the six months ended June 30, 1995 and 1996. - ------------------------------ (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; and $6.8 million and $9.9 million was attributable to the Company's broadcasting operations during the six months ended June 30, 1995 and 1996, 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 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 six months ended June 30, 1995 and 1996, and the years ended December 31, 1994 and 1995. The principal reason for these increases is the acquisition by the Company in January 1996 of the Augusta Business for $35.9 million and the assumption of $1.3 million of liabilities, and 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." 46
--------------------------------------------------------- SIX MONTHS ENDED JUNE (DOLLARS IN YEAR ENDED DECEMBER 31 30 THOUSANDS) 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- Operating income $3,530.7 $ 6,276.4 $ 6,859.7 $4,657.5 $7,311.2 Add: Amortization of program license rights 924.9 1,218.0 1,647.0 768.0 1,279.4 Depreciation and amortization 1,564.8 2,141.6 3,958.9 1,821.7 2,900.7 Corporate overhead 2,326.7 1,958.4 2,258.3 1,012.0 1,570.8 Non-cash compensation and contributions to the Company's 401(k) plan, paid in common stock - 109.5 2,612.2 976.4 250.8 Less: Payments for program license liabilities (976.2) (1,181.6) (1,776.8) (902.8) (1,309.3) --------- --------- --------- --------- --------- Media Cash Flow (1) $7,370.9 $10,522.3 $15,559.3 $8,332.8 $12,003.6 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- 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 and for the six months ended June 30, 1995 and 1996. SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 REVENUES. Total revenues for the six months ended June 30, 1996 increased $7.2 million, or 25.5%, over the six months ended June 30, 1995, from $28.3 million to $35.5 million. This increase was attributable to (i) the Augusta Acquisition, which occurred on January 4, 1996 and (ii) increases in publishing and broadcasting (excluding the Augusta Acquisition) revenues. The Augusta Acquisition accounted for $4.5 million, or 62.3%, of the revenue increase. Broadcast net revenues increased $6.0 million, or 32.8%, over the same period of the prior year, from $18.3 million to $24.3 million. Revenues generated by WRDW accounted for $4.5 million, or 74.9%, of the increase. On a pro forma basis, broadcast net revenues for WRDW for the six months ended June 30, 1996 increased $130,000, or 3.0%, over the same period of the prior year. Broadcast net revenues, excluding the Augusta Acquisition, increased $1.5 million, or 8.2%, over the six months ended June 30, 1995. Approximately $1.1 million, $94,000 and $171,000 of the $1.5 million increase in total broadcast net revenues, excluding the Augusta Acquisition, were due to higher local, national and political advertising spending, respectively. The remaining increase was due to greater tower rental and special projects revenue. Publishing revenues increased $1.2 million, or 12.1%, over the six months ended June 30, 1995 from $10.1 million to $11.3 million. Advertising and circulation revenues comprised $766,000 and $367,000, respectively, of the revenue increase. The increase in advertising revenue was primarily the result of linage increases in classified advertising and retail rate increases. The increase in circulation revenue can be attributed primarily to price increases over the same period of the prior year at two of the Company's publishing operations and the conversion of the GWINNETT DAILY POST to a five-day-a-week paper. Approximately $81,000 of the publishing revenue increase was the result of higher special events revenue. OPERATING EXPENSES. Operating expenses for the six months ended June 30, 1996 increased $4.6 million, or 19.3%, over the six months ended June 30, 1995 from $23.6 million to $28.2 million, due to the Augusta Acquisition and increased expenses at the broadcasting and publishing operations, as well as increased corporate and administrative expenses, depreciation and amortization, offset by a reduction in non-cash compensation paid in Class A Common Stock. Broadcasting expenses for the six months ended June 30, 1996 increased $3.0 million, or 26.4%, over the same period of the prior year from $11.4 million to $14.4 million. This increase was primarily attributable to the Augusta Acquisition. On a pro forma basis, broadcast expenses for WRDW for the six months ended June 30, 1996 decreased $129,000, or 4.5%, over the same period of 1995, from $2.9 million to $2.8 million. Broadcasting expenses, excluding WRDW, increased $243,000, or 2.1%, primarily as the result of higher payroll related costs. Publishing expenses for the six months ended June 30, 1996 increased $603,000, or 7.0%, over the same period of the prior year, from $8.6 million to $9.2 million. This increase resulted primarily from the conversion of the GWINNETT DAILY POST to a five day-a-week paper and the acquisition of advertising only publications in September 1995. Newsprint costs increased approximately 12% while consumption of newsprint increased approximately 7%. Payroll related costs, promotional costs, product delivery costs and outside service costs increased over the same period of the prior year. Corporate and administrative expenses for the six months ended June 30, 1996 increased $559,000, or 55.2%, over the same period of the prior year from $1.0 million to $1.6 million. This increase was attributable primarily to the addition of several new officers. 47
--------------------------------------------------------- (DOLLARS IN YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE THOUSANDS) 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- Cash flows provided by (used in): Operating activities $1,324 $5,798 $7,600 $3,828 $6,801 Investing activities 3,062 (42,770) (8,929) (5,377) (37,490) Financing activities (4,932) 37,200 1,331 1,208 31,416 Depreciation of property and equipment and amortization of intangible assets was $2.9 million for the six months ended June 30, 1996, compared to $1.8 million for the same period of the prior year, an increase of $1.1 million or 59.2%. This increase was primarily the result of higher depreciation and amortization costs related to the Augusta Acquisition and $3.3 million of capital expenditures made in 1995. Non-cash compensation paid in Class A Common Stock resulting from the Company's employment agreement with its former President and the Separation Agreement (as defined) with its former chief executive officer decreased $696,000, or 85.3%, for the six months ended June 30, 1996, from $816,000 to $120,000. This decrease resulted from the Company's award in 1995 of 150,000 shares of Class A Common Stock to its former chief executive officer. The expense for such award was recognized in 1995 (including $696,000 recognized in the six months ended June 30, 1995). INTEREST EXPENSE. Interest expense increased $1.7 million, or 60.6%, from $2.8 million for the six months ended June 30, 1995 to $4.4 million for the six months ended June 30, 1996. This increase was attributable primarily to increased levels of debt resulting from the financing of the Augusta Acquisition. NET INCOME. Net income for the Company was $1.8 million for the six months ended June 30, 1996, compared with $1.2 million for the same period in 1995, an increase of $620,000 or 52.5%. 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. The increase in broadcast expenses for the Kentucky 48 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 Separation 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 former President and its former chief executive officer. The former President's employment agreement provided him with 122,034 shares of Class A Common Stock if his employment continued until September 1999. This agreement resulted in a charge to expense of $240,000 for the year ended December 31, 1995 as compared to $80,000 for the year ended December 31, 1994. In addition, the Company awarded 150,000 shares of Class A Common Stock, pursuant to an 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. Under the terms of the interest rate swap, amounts were paid to or received from Society National Bank ("Society"), the other party to the swap, on a quarterly basis. The calculation of these amounts was based upon a comparison of the results of multiplying the notional amount by (i) 6.105% and (ii) Society's current three-month LIBOR rate. If Society's current three-month LIBOR rate was lower than 6.105%, the Company paid Society the difference. If Society's current three-month LIBOR rate was higher than 6.105%, Society paid the Company the difference. Since the inception of the interest rate swap agreement, the three-month LIBOR rates charged by Society have been consistent with the three-month LIBOR rates published in THE WALL STREET JOURNAL. The Company recorded approximately $34,000 of interest expense relative to the interest rate swap in 1995. The 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 $1.8 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 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. 49 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 $2.6 million for the year ended December 31, 1993, an increase of $200,000. RESULTS OF OPERATIONS OF THE PHIPPS BUSINESS INTRODUCTION The following analysis of the financial condition and results of operations of the Phipps Business should be read in conjunction with the Phipps Business's consolidated financial statements and notes thereto included elsewhere in this Prospectus. The Phipps Business derives its revenues from its television broadcasting operations which consist of two CBS-affiliated television stations serving Tallahassee, Florida/Thomasville, Georgia and Knoxville, Tennessee, a satellite broadcasting business based in Tallahassee, Florida and a paging business also based in Tallahassee, Florida. 50 Set forth below, for the periods indicated, is certain information concerning the relative contributions of the Phipps Business's broadcasting (including satellite broadcasting) and paging operations. - ------------------------ (1) Excludes any allocation of corporate and administrative expenses. TELEVISION BROADCASTING AND PAGING REVENUES Set forth below are the principal types of broadcast net revenues earned by the Phipps Business's television stations (including the satellite broadcasting operation) for the periods indicated and the percentage contribution of each to the Phipps Business's total revenues.
------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30 1993 1994 1995 1995 1996 ------------------ ------------------ ------------------ ----------------- ----------------- PERCENT PERCENT PERCENT PERCENT PERCENT (DOLLARS IN THOUSANDS) AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL --------- -------- --------- -------- --------- -------- -------- -------- -------- -------- TELEVISION BROADCASTING Revenues $19,460.1 83.7% $21,524.3 83.4% $22,424.1 82.1% $10,774.3 81.6% $11,345.7 80.5% Operating income (1) 6,636.4 92.8 9,297.9 91.6 9,635.3 90.4 4,656.5 88.1 4,740.0 88.3 PAGING Revenues $ 3,787.9 16.3% $ 4,276.6 16.6% $ 4,897.5 17.9% $2,422.9 18.4% $2,743.5 19.5% Operating income (1) 512.7 7.2 855.1 8.4 1,026.9 9.6 628.8 11.9 627.1 11.7 - ------------------------ (1) Includes satellite broadcasting business. Set forth below are the principal types of revenues earned by the Phipps Business's paging operations for the periods indicated and the percentage contribution of each to the Phipps Business's total revenues.
------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30 1993 1994 1995 1995 1996 ------------------ ------------------ ------------------ ----------------- ----------------- PERCENT PERCENT PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL REVENUES REVENUES REVENUES REVENUES REVENUES OF OF OF OF OF PHIPPS PHIPPS PHIPPS PHIPPS PHIPPS (DOLLARS IN THOUSANDS) AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS --------- -------- --------- -------- --------- -------- -------- -------- -------- -------- TELEVISION BROADCASTING Net revenues: Local $ 9,732.8 41.9% $10,412.2 40.4% $11,149.2 40.8% $5,359.3 40.6% $5,788.6 41.1% National 7,057.2 30.4 7,217.0 27.9 7,844.9 28.7 3,808.7 28.9 3,597.7 25.5 Network compensation 1,164.6 5.0 1,433.2 5.6 1,740.1 6.4 802.2 6.1 819.5 5.8 Political 9.1 0.0 1,147.1 4.4 33.9 0.1 7.7 -- 239.2 1.7 Production and other (1) 1,496.4 6.4 1,314.8 5.1 1,656.0 6.1 796.4 6.0 900.7 6.4 --------- -------- --------- -------- --------- -------- -------- -------- -------- -------- $19,460.1 83.7% $21,524.3 83.4% $22,424.1 82.1% $10.774.3 81.6% $11,345.7 80.5% --------- -------- --------- -------- --------- -------- -------- -------- -------- -------- --------- -------- --------- -------- --------- -------- -------- -------- -------- -------- 51
------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30 1993 1994 1995 1995 1996 ------------------ ------------------ ------------------ ----------------- ----------------- PERCENT PERCENT PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL REVENUES REVENUES REVENUES REVENUES REVENUES OF OF OF OF OF PHIPPS PHIPPS PHIPPS PHIPPS PHIPPS (DOLLARS IN THOUSANDS) AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS AMOUNT BUSINESS --------- -------- --------- -------- --------- -------- -------- -------- -------- -------- PAGING Net revenues: Paging lease and service $ 3,741.6 16.1% $ 4,201.4 16.3% $ 5,004.9 18.3% $2,485.3 18.9% $2,922.8 20.8% Other 46.3 0.2 75.2 0.3 (107.4) (0.4) (62.4) (0.5) (179.3) (1.3) --------- -------- --------- -------- --------- -------- -------- -------- -------- -------- $ 3,787.9 16.3% $ 4,276.6 16.6% $ 4,897.5 17.9% $2,422.9 18.4 $2,743.5 19.5% --------- -------- --------- -------- --------- -------- -------- -------- -------- -------- --------- -------- --------- -------- --------- -------- -------- -------- -------- -------- MEDIA CASH FLOW The following table sets forth certain operating data for the broadcast and paging operations for the years ended December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996. - ------------------------ (1) Of Media Cash Flow, $9.2 million, $11.5 million and $11.9 million was attributable to the Phipps Business's broadcasting operations in 1993, 1994 and 1995, respectively. Of Media Cash Flow, $5.7 million and $5.8 million was attributable to the Phipps Business's broadcasting operations for the six months ended June 30, 1995 and 1996, respectively. CASH FLOW PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCING ACTIVITIES The following table sets forth certain operating data for the Phipps Business for the years ended December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996.
------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30 (DOLLARS IN THOUSANDS) 1993 1994 1995 1995 1996 ----------- ----------- ----------- ------------- ------------- Operating income $4,686.9 $7,667.6 $7,381.8 $3,746.4 $4,632.6 Add: Amortization of program license rights 1,552.4 1,021.4 844.8 422.4 463.9 Depreciation and amortization 2,836.0 2,672.2 3,120.4 1,435.5 1,530.0 Corporate overhead 2,462.2 2,485.4 3,280.4 1,538.7 734.5 Less: Payments for program license liabilities (1,072.0) (863.3) (931.0) (464.5) (592.0) ----------- ----------- ----------- ------------- ------------- Media Cash Flow (1) $10,465.5 $12,983.3 $13,696.4 $6,678.5 $6,769.0 ----------- ----------- ----------- ------------- ------------- ----------- ----------- ----------- ------------- ------------- SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 REVENUES. Total revenues for the six months ended June 30, 1996 increased $893,000, or 6.8%, over the six months ended June 30, 1995, from $13.2 million to $14.1 million. This increase was attributable to an improvement in local and political advertising revenue in the broadcasting operations and the implementation of a reseller program in the paging operations. Broadcast net revenues increased $572,000, or 5.3%, over the same period of the prior year, from $10.8 million to $11.4 million. Approximately $429,000, $17,000, $232,000 and $104,000 of the increase in total broadcast net revenues was due to higher local advertising revenue, network compensation, political advertising revenue and production revenues, respectively, offset by a $211,000 decrease in national advertising revenue. In addition, revenues generated from satellite broadcasting operations increased due to additional equipment coming on line. Net paging revenues increased $321,000, or 13.2%, over the same period of the prior year, from $2.4 million to $2.7 million. The increase was attributable primarily to higher sales volume generated by a reseller program implemented during 1995. OPERATING EXPENSES. Operating expenses for the six months ended June 30, 1996 remained relatively unchanged from the six months ended June 30, 1995. An increase of $716,000 in broadcast and paging expenses was offset by a reduction in management fees of $804.000. Broadcasting expenses increased $347,000, or 6.9%, over the same period of the prior year, from $5.1 million to $5.4 million. The increase was attributable primarily to higher payroll and related costs, higher levels of other expenditures in the sales and news departments and additional costs associated with new equipment. 52
------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31 JUNE 30 (DOLLARS IN THOUSANDS) 1993 1994 1995 1995 1996 ----------- ----------- ----------- ------------- ------------- Cash flows provided by (used in): Operating activities $7,397 $9,808 $9,259 $4,136 $6,191 Investing activities (2,953) (2,506) (3,828) (3,152) (840) Financing activities (4,418) (7,233) (4,906) (917) (5,309) Paging expenses increased $369,000, or 26.1%, over the same period of the prior year, from $1.4 million to $1.8 million. The increase was attributable primarily to higher payroll, sales and operating costs associated with revenue growth. Management fees for the six months ended June 30, 1996 decreased $804,000, or 52.3%, from the same period of the prior year, from $1.5 million to $734,000. The decrease was attributable to lower personnel costs and the termination of certain executive benefit plans. Depreciation of property and equipment and amortization of intangible assets for the six months ended June 30, 1996 increased $94,000, or 6.6%, over the same period of the prior year, from $1.4 million to $1.5 million. This increase was primarily the result of higher depreciation costs relating to property and equipment purchases and higher amortization of intangible assets in connection with the purchase of certain minority interests of WKXT in Knoxville, Tennessee. INTEREST EXPENSE. Interest expense decreased $64,000, or 29.1%, from the same period of the prior year from $223,000 to $158,000. NET INCOME. The net income for the Phipps Business was $4.2 million for the six months ended June 30, 1996 compared with $3.3 million for the six months ended June 30, 1995, an increase of $910,000, or 27.9%. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 REVENUES. Total revenues for the year ended December 31, 1995 increased $1.5 million, or 5.9%, over the year ended December 31, 1994, from $25.8 million to $27.3 million. This increase was attributable to an improvement in local and national advertising revenue in the broadcasting operations and the implementation of a reseller program in the paging operations. Broadcast net revenues increased $900,000, or 4.2%, over the prior year, from $21.5 million to $22.4 million. Approximately $737,000, $628,000, $307,000 and $341,000 of the increase in total broadcast net revenues was due to higher local advertising revenue, national advertising revenue, network compensation and production revenues, respectively, offset by a $1.1 million decrease in political advertising spending associated with cyclical political activity. In addition, revenues generated from satellite broadcasting operations increased due to additional equipment coming on line. Net paging revenues increased $620,000, or 14.5%, over the prior year, from $4.3 million to $4.9 million. The increase was attributable primarily to higher sales volume generated by a reseller program implemented during 1995. OPERATING EXPENSES. Operating expenses for the year ended December 31, 1995 increased $1.8 million, or 10.0%, over the year ended December 31, 1994, from $18.1 million to $19.9 million. The increase was attributable primarily to higher payroll and related costs and sales expenses and commissions associated with higher sales volumes, increased corporate overhead and depreciation and amortization costs. Broadcasting expenses increased $276,000, or 2.7%, over the prior year, from $10.2 million to $10.5 million. The increase was attributable primarily to higher payroll and related costs offset by lower syndicated film programming costs. Paging expenses increased $288,000, or 10.4%, over the prior year, from $2.8 million to $3.1 million. The increase was attributable primarily to higher payroll, sales and operating costs associated with revenue growth. Management fees for the year ended December 31, 1995 increased $794,000, or 32.0%, over the year ended December 31, 1994, from $2.5 million to $3.3 million. The increase was attributable to higher personnel costs and overhead allocation. Depreciation of property and equipment and amortization of intangible assets for the year ended December 31, 1995 increased $448,000, or 16.8%, over the year ended December 31, 1994, from $2.7 million to $3.1 million. This increase was primarily the result of higher depreciation costs relating to property and equipment purchases and higher amortization of intangible assets in connection with the purchase of certain minority interests of WKXT in Knoxville, Tennessee. INTEREST EXPENSE. Interest expense remained relatively unchanged from year to year. NET INCOME. Net income for the Phipps broadcasting and paging operations was $6.3 million for the year ended December 31, 1995 compared with $7.2 million for the year ended December 31, 1994, a decrease of $871,000. 53 YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 REVENUES. Total revenues for the year ended December 31, 1994 increased $2.6 million, or 11.0%, over the year ended December 31, 1993, from $23.2 million to $25.8 million. This increase was attributable to higher local, national and political advertising as well as an increase in network compensation. In addition, paging revenues increased as geographic coverage expanded. Broadcast net revenues increased $2.1 million, or 10.6%, over the prior year, from $19.4 million to $21.5 million. Approximately $679,000 and $160,000 of the $2.1 million increase in total broadcast net revenues is due to higher local and national advertising spending, respectively. Approximately $269,000 and $1.1 million of the $2.1 million increase is due to higher network compensation and political advertising revenues associated with cyclical political activity, respectively, offset by a $182,000 decrease in satellite broadcasting revenues. Net paging revenues increased $489,000, or 12.9%, over the prior year, from $3.8 million to $4.3 million. The increase was attributable primarily to higher sales volume due to increased geographical coverage. OPERATING EXPENSES. Operating expenses for the year ended December 31, 1994 decreased $428,000, or 2.3%, from the year ended December 31, 1993, from $18.6 million to $18.2 million. The decrease was attributable primarily to lower syndicated programming costs, offset by slightly higher paging expenses due to higher sales volume and lower depreciation. Broadcasting expenses decreased $523,000, or 4.9%, from the prior year, from $10.7 million to $10.2 million. The decrease was attributable primarily to the write-off of certain syndicated programming in 1993 that was not being utilized. Paging expenses increased $235,000, or 9.3%, over the prior year, from $2.5 million to $2.7 million. The increase was attributable primarily to costs associated with higher sales volume. Corporate and administrative expenses remained relatively unchanged from year to year. Depreciation of property and equipment and amortization of intangible assets for the year ended December 31, 1994 decreased $164,000, or 5.8%, from the year ended December 31, 1993, from $2.8 million to $2.6 million. This decrease was primarily the result of the completion of depreciation for certain items of equipment purchased in 1988. INTEREST EXPENSE. Interest expense for the year ended December 31, 1994 decreased $152,000, or 24.0%, from the year ended December 31, 1993, from $632,000 to $480,000. This decrease was attributable primarily to lower levels of debt associated with WKXT. NET INCOME. Net income for the Phipps Business was $7.2 million for the year ended December 31, 1994, compared with $3.9 million for the year ended December 31, 1993, an increase of $3.3 million. LIQUIDITY AND CAPITAL RESOURCES Following the consummation of the Phipps Acquisition, the Financing, the Offering and the Concurrent 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 Old Credit Facility or the Senior Credit Facility, will be sufficient for such purposes for the remainder of 1996 and for 1997. The Company's working capital (deficiency) was $1.1 million, $(222,000) and $3.5 million at December 31, 1994 and 1995, and June 30, 1996, respectively. The working capital of the Phipps Business was $1.4 million, $2.6 million and $2.9 million at December 31, 1994 and 1995, and June 30, 1996, 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, and $3.8 million and $6.8 million for the six months ended June 30, 1995 and 1996, respectively. The Phipps Business's cash provided from operations was $9.8 million and $9.3 million for the years ended December 31, 1994 and 1995, respectively, and $4.1 million and $6.2 million for the six months ended June 30, 1995 and 1996, respectively. 54 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 $45.8 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 Phipps Business's cash used in investing activities was $2.5 million and $3.8 million in 1994 and 1995, respectively. The Company's cash used in investing activities was $5.4 million and $37.5 million for the six months ended June 30, 1995 and 1996, respectively. The increased usage of $32.1 million was due primarily to the Augusta Acquisition. The Phipps Business's cash used in investing activities was $3.2 million and $840,000 for the six months ended June 30, 1995 and 1996, respectively. 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 $82.8 million at December 31, 1995 and June 30, 1996, respectively. The balance of the Old Credit Facility was $28.4 million and $49.5 million, at December 31, 1995 and June 30, 1996, respectively. The weighted average interest rate of the Old Credit Facility was 8.94% at June 30, 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. The Phipps Business used $7.2 million and $4.9 million in cash for financing activities in 1994 and 1995, respectively. The Company was provided with $1.2 million and $31.4 million in cash by financing activities for the six months ended June 30, 1995 and 1996, respectively, due primarily to the funding of the Gwinnett Acquisition in 1995 and the Augusta Acquisition in 1996. The Phipps Business used $917,000 and $5.3 million in cash for financing activities for the six months ended June 30, 1995 and 1996, respectively. Under the terms of the Old Credit Facility, the Company had additional borrowing capacity at June 30, 1996 of approximately $4.8 million. Borrowings under the Senior Credit Facility will be available upon the consummation of the Phipps Acquisition. The availability of funds under the Senior Credit Facility will also be subject to certain conditions, including the maintenance by the Company of certain financial ratios consisting, among others, of a total debt to operating cash flow ratio, a senior debt to operating cash flow ratio, an operating cash flow to total interest expense ratio and an operating cash flow to pro forma debt service ratio. See "Description of Certain Indebtedness-- The Senior Credit Facility." Under the Senior Credit Facility, after giving effect to the consummation of this Offering, the Concurrent Offering, the KTVE Sale and the Phipps Acquisition (of which there can be no assurance), the Company would have additional borrowing capacity of $10.1 million as of June 30, 1996. Under the terms of the Old Credit Facility, the Company was allowed to make $3.0 million of capital expenditures in 1996. The terms of the Senior Credit Facility will 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 $1.2 million and $110,000, 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. During the six months ended June 30, 1996, the Company 55 made $1.3 million in capital expenditures, relating primarily to broadcasting operations, and paid $1.3 million for program broadcast rights. During 1995, the Phipps Business made $3.2 million in capital expenditures and paid $931,000 for program broadcast rights. During the six months ended June 30, 1996, the Phipps Business made $1.6 million in capital expenditures and paid $592,000 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 $49.5 million principal amount of outstanding 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. See "The Phipps Acquisition, the KTVE Sale and the Financing-The Financing." The Old Credit Facility is a $54.3 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 3.25% over LIBOR at July 31, 1996, 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 Old Credit Facility and the Senior Credit Facility is and will be guaranteed by each of the Company's subsidiaries and is and will be secured by liens on substantially all of the assets of the Company and its subsidiaries. As part of the Financing the Company will enter into the Senior Credit Facility and the Company has entered into a commitment letter with respect thereto. See "Description of Certain Indebtedness -- The Senior Credit Facility." In August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. The Company estimates that the gain, net of estimated taxes, and the estimated taxes for the KTVE Sale will aggregate approximately $2.8 million and $2.8 million, respectively. 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 1031 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. As of June 30, 1996, on a pro forma basis after giving effect to the KTVE Sale, the Concurrent Offering, the Financing, the Phipps Acquisition and this Offering (of which there can be no assurance), 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. 56 BUSINESS 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 (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with CBS and two are affiliated with NBC. In connection with the Phipps Acquisition, the Company will be required under current regulations of 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 "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two shoppers and a paging business (which is part of the Phipps 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 WRDW serving Augusta, Georgia for approximately $35.9 million in cash, including acquisition costs of approximately $600,000, but excluding assumed liabilities of approximately $1.3 million. In December 1995, the Company entered into an asset purchase agreement to acquire two CBS-affiliated stations, WCTV serving Tallahassee, Florida/Thomasville, Georgia and WKXT in Knoxville, Tennessee, a satellite broadcasting business and a paging 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 within 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 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets of KTVE, a television station 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. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.4) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $322,000, 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 224.7% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 72.8% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.7 million and $1.4 million, respectively. 57 The following table sets forth certain information for each of the Company's television stations. - -------------------------------------------------------------------------------- - ------------------------ (1) Ranking of 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. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before allocation of miscellaneous income (expense), corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are 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) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. The following table sets forth certain information for each of the Company's publications:
PRO FORMA ------------------------------- IN-MARKET YEAR ENDED SHARE OF DECEMBER 31, 1995 STATION HOUSEHOLDS ------------------------------- NETWORK YEAR DMA CHANNEL/ RANK IN VIEWING OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV NET 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 WJHG(5) NBC Panama City, FL 1960 159 7/VHF 1 53 3,843 270 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 WCTV CBS Tallahassee, FL 116 6/VHF 1 60 11,862 4,229 Thomasville, GA SIX MONTHS ENDED JUNE 30, 1996 ------------------------------- OPERATING STATION NET REVENUES INCOME (6) - -------- -------------- -------------- (IN THOUSANDS) WKYT $7,845 $2,701 WYMT 2,107 530 WRDW 4,489 1,149 WALB(5) 5,099 2,658 WJHG(5) 2,409 476 PHIPPS A WKXT 4,387 903 WCTV 6,212 2,254 - ------------------------------ (1) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. 58
------------------------------------------------------------------------------------------------ PRO FORMA -------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 1995 JUNE 30, 1996 ---------------------- -------------------- OPERATING OPERATING INCOME INCOME PUBLISHED NET (LOSS) NET (LOSS) PUBLICATION COVERAGE AREA CIRCULATION PER WEEK REVENUES (1) REVENUES (1) - -------------------- ------------------------ ------------- --------- ----------- --------- --------- --------- (IN THOUSANDS) THE ALBANY HERALD 25 counties in Southwest 34,000 daily 7 $13,535 $2,010 $7,250 $1,929 Georgia 40,000 Sunday THE ROCKDALE CITIZEN 2 counties in Georgia 10,000 6 3,854 (212) 1,739 34 (metro Atlanta) GWINNETT DAILY POST 1 county in Georgia 13,000 5 2,432 (913) 1,400 (298) (metro Atlanta) SOUTHWEST GEORGIA 10 counties in Southwest 52,000 1 2,045 (224) 873 (392) SHOPPERS Georgia and 10 counties in North Florida 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 1982 to 1994 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 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 59 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 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. See "The Phipps Acquisition, the KTVE Sale and the Financing." In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. 60 [Map of certain states in the southeast United States that sets forth state capitals and locations of the Company's stations] 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 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. - ------------------------------ (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 "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) The closing of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. 61
------------------------------------------------------------------------------------------ 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 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 and the six months ended June 30, 1996 were approximately $17.6 million and $8.8 million, respectively, an increase of 14.6% and a decrease of 1.2% from the corresponding prior periods. 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 and the six months ended June 30, 1996 was approximately $1.2 million and $630,000, respectively, a decrease of 36.7% and 19.4%, respectively, for the corresponding prior periods. 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. The following table sets forth Market Revenues for the Lexington DMA and in-market share and ranking information for WKYT: 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. 62
---------------------------------- 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 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 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 former 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. WYMT's gross revenues for the year ended December 31, 1995 and the six months ended June 30, 1996 were approximately $4.1 million and $2.3 million, respectively, an increase of 8.8% and 15.8%, respectively, from the corresponding prior periods. 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 and the six months ended June 30, 1996 was approximately $32,000 and $75,000, respectively, a decrease of 88.9% and an increase of 32.6%, respectively, from the corresponding prior periods. 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): (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 63
---------------------------------- 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 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 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 and the six months ended June 30, 1996 were approximately $9.6 million and $5.0 million, respectively, an increase of 5.7% and 6.3%, respectively, from the corresponding prior periods. WRDW'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 4.9%, from the corresponding prior period. WRDW's net loss (before the allocation of corporate and administrative expenses and after estimated income taxes computed at statutory rates) for the six months ended June 30, 1996 was approximately $372,000 as compared to net income of approximately $717,000, 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: 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 64
---------------------------------- 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 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 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 and for six months ended June 30, 1996 were approximately $10.5 million and $5.6 million, respectively, an increase of 3.5% and 7.9%, respectively, from the corresponding prior periods. 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 and the six months ended June 30, 1996 was approximately $3.0 million and $1.7 million, respectively, an increase of 3.8% and 11.3%, respectively, from the corresponding prior periods. 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: MARKET DESCRIPTION. The Albany DMA, consists of 17 counties in southwest Georgia. Albany, 170 miles south of Atlanta, is a regional center for manufacturing, agriculture, education, health care and military service. Leading employers in the area include: The Marine Corps Logistics Base, Phoebe Putney Memorial Hospital, The Proctor & Gamble Company, Miller Brewing Company, Cooper Tire & Rubber Company, Bob's Candies, Coats and Clark Inc., Merck & Co., Inc., MacGregor (USA) Inc. and M&M/Mars. Albany State College, Darton College and Albany Technical Institute are located within this area. 65
---------------------------------- 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 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 "Risk Factors-FCC Divestiture Requirement" 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 and for the six months ended June 30, 1996 were approximately $4.3 million and $2.7 million, respectively, an increase of 7.7% and 32.2%, respectively, from the corresponding prior periods. 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 and for the six months ended June 30, 1996 was approximately $205,000 and $305,000, respectively, an increase of 84.8% and 184.1%, respectively, 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. The following table sets forth Market Revenues for the Panama City DMA and in-market share and ranking information for WJHG: 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. 66
------------------------------------- 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 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 "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." WKXT, THE CBS AFFILIATE IN KNOXVILLE, TENNESSEE WKXT, which is part of the Phipps Business, began operations in 1988. The Phipps Acquisition is expected to occur in September 1996, although there can be no assurance with respect thereto. 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 and the six months ended June 30, 1996 were approximately $10.6 million and $5.0 million, respectively, an increase of 2.3% and a decrease of 2.2%, respectively, from the corresponding prior periods. 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 and the six months ended June 30, 1996 was approximately $1.8 million and $836,000, respectively, an increase of 8.3% and a decrease of 4.4%, respectively, from the corresponding prior periods. 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: 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 67
---------------------------------- 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 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 is part of the Phipps Business, began operations in 1955. The Phipps Acquisition is expected to occur in September 1996, although these can be no assurance with respect thereto. 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 5% increase over 1994. WCTV's gross revenues for the year ended December 31, 1995 and the six months ended June 30, 1996 were approximately $13.3 million and $7.0 million, respectively, an increase of 3.2% and 9.8%, respectively, from the corresponding prior periods. 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 and the six months ended June 30, 1996 was approximately $3.8 million and $1.9 million, respectively, an increase of 1.4% and 6.3%, respectively, from the corresponding prior periods. 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: 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 a significant portion of WCTV's revenues is generated by news programming. 68
---------------------------------- 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 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. 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, UPN and 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 69 revenues. The affiliate retains the revenues from time sold during breaks in and between network programs and programs the affiliate produces or purchases from non-network sources. In acquiring programming to supplement programming supplied by the affiliated network, network affiliates compete primarily with other affiliates and independent stations in their markets. Cable systems generally do not compete with local stations for programming, although various national cable networks from time to time have acquired programs that would have otherwise been offered to local television stations. In addition, a television station may acquire programming through barter arrangements. Under barter arrangements, which are becoming increasingly popular with both network affiliates and independents, a national program distributor may receive advertising time in exchange for the programming it supplies, with the station paying a reduced fee for such programming. In contrast to a station affiliated with a network, a fully independent station purchases or produces all of the programming that it broadcasts, resulting in generally higher programming costs. An independent station, however, retains its entire inventory of advertising time and all of the revenues obtained therefrom. As a result of the smaller amount of programming provided by its network, an affiliate of UPN or WB must purchase or produce a greater amount of its programming, resulting in generally higher programming costs. These affiliate stations, however, retain a larger portion of the inventory of advertising time and the revenues obtained therefrom compared to stations affiliated with the major networks. Through the 1970s, network television broadcasting enjoyed virtual dominance in viewership and television advertising revenues, because network-affiliated stations competed only with each other in most local markets. Beginning in the 1980s, this level of dominance began to change as the FCC authorized more local stations and marketplace choices expanded with the growth of independent stations and cable television services. See "-Federal Regulation of the Company's Business." Cable television systems were first installed in significant numbers in the 1970s and were initially used to retransmit broadcast television programming to paying subscribers in areas with poor broadcast signal reception. In the aggregate, cable-originated programming has emerged as a significant competitor for viewers of broadcast television programming, although no single cable programming network regularly attains audience levels amounting to more than a small fraction of any single major broadcast network. The advertising share of cable networks increased during the 1970s and 1980s as a result of the growth in cable penetration (the percentage of television households which are connected to a cable system). Notwithstanding such increases in cable viewership and advertising, over-the-air broadcasting remains the dominant distribution system for mass market television advertising. 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. 70 THE ROCKDALE CITIZEN AND THE GWINNETT DAILY POST THE ROCKDALE CITIZEN and the GWINNETT DAILY POST, a six-day-a-week newspaper and a five-day-a-week newspaper, respectively, serve communities in the metro Atlanta area with complete local news, sports and lifestyles coverage together with national stories that directly impact their local communities. THE ROCKDALE CITIZEN is located in Conyers, Georgia, the county seat of Rockdale County, which is 19 miles east of downtown Atlanta. Rockdale County's population is estimated to be 64,000 in 1996. Conyers was 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 paging 71 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. 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. Reference is made to Note 11 of Notes to Financial Statements of the Phipps Business for additional information regarding business segments. 72 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, satellite master antenna television systems, low power television stations, television translator stations and, more recently, 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. 73 Reduction in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized "niche" programming. This ability to reach very narrowly defined audiences is expected to alter the competitive dynamics for advertising expenditures. In addition, competition in the television industry in the future may come from interactive video and information and data services that may be delivered by commercial television stations, cable television, DBS, multipoint distribution systems, multichannel multipoint distribution systems or other video delivery systems. The Company is unable to predict the effect that these or other technological changes will have on the broadcast television industry or the future results of the Company's operations. PROGRAMMING. Competition for programming involves negotiating with national program distributors or syndicators that sell first-run and rerun packages of programming. Each station competes against the broadcast station competitors in its market for exclusive access to off-network reruns (such as ROSEANNE) and first-run product (such as ENTERTAINMENT TONIGHT). Cable systems generally do not compete with local stations for programming, although various national cable networks from time to time have acquired programs that would have otherwise been offered to local television stations. Competition exists for exclusive news stories and features as well. ADVERTISING. Advertising rates are based upon the size of the market in which the station operates, a program's popularity among the viewers that an advertiser wishes to attract, the number of advertisers competing for the available time, the demographic makeup of the market served by the station, the availability of alternative advertising media in the market area, aggressive and knowledgeable sales forces and the development of projects, features and programs that tie advertiser messages to programming. Advertising revenues comprise the primary source of revenues for the Company's stations. The Company's stations compete for such advertising revenues with other television stations and other media in their respective markets. Typically, independent stations achieve a greater proportion of the television market advertising revenues than network affiliated stations relative to their share of the market's audience, because independent stations have greater amounts of available advertising time. The stations also compete for advertising revenues with other media, such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail and local cable systems. Competition for advertising dollars in the broadcasting industry occurs primarily within individual markets. NEWSPAPER INDUSTRY The Company's newspapers compete for advertisers with a number of other media outlets, including magazines, radio and television, as well as other newspapers, which also compete for readers with the Company's publications. Many of the Company's newspaper competitors are significantly larger than the Company. The Company attempts to differentiate its publications from other newspapers by focusing on local news and local sports coverage in order to compete with its larger competitors. The Company also seeks to establish its publications as the local newspaper by sponsoring special events of particular community interest. PAGING INDUSTRY The paging industry is highly competitive. Companies in the industry compete on the basis of price, coverage area offered to subscribers, available services offered in addition to basic numeric or tone paging, transmission quality, system reliability and customer service. The Company competes by maintaining competitive pricing of its product and service offerings, by providing high-quality, reliable transmission networks and by furnishing subscribers a superior level of customer service. The Company's primary competitors include those paging companies that provide wireless service in the same geographic areas in which the Company operates. The Company experiences competition from 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 74 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 and 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, 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 substantially all cases broadcast licenses are renewed by the FCC even when petitions to deny or competing applications are filed against broadcast license renewal applications, there can be no assurance that the Company's stations' licenses will be renewed. The Company is not aware of any facts or circumstances that could prevent the renewal of the licenses for its stations at the end of their respective license terms. MULTIPLE OWNERSHIP RESTRICTIONS. Currently, the FCC has rules that limit the ability of individuals and entities to own or have an ownership interest above a certain level (an "attributable" interest, as defined more fully below) in broadcast stations, as well as other mass media entities. The current rules limit the number of radio and television stations that may be owned both on a national and a local basis. On a national basis, the rules preclude any individual or entity from having an attributable interest in 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 75 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 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 (but not including the Notes offered hereby) 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 76 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 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. 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 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 limited 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 77 ownership of the Company's broadcast properties. In addition to the proposed changes noted above, such matters include, for example, the license renewal process (particularly the weight to be given to the expectancy of renewal for an incumbent broadcast licensee and the criteria to be applied in deciding contested renewal applications), spectrum use fees, political advertising rates, potential advertising restrictions on the advertising of certain products (beer and wine, for example), the rules and policies to be applied in enforcing the FCC's equal employment opportunity regulations, reinstitution of the Fairness Doctrine (which requires broadcasters airing programming concerning controversial issues of public importance to afford a reasonable opportunity for the expression of contrasting viewpoints), and the standards to govern evaluation of television programming directed toward children and violent and indecent programming (including the possible requirement of what is commonly referred to as the "v-chip," which would permit parents to program television sets so that certain programming would not be accessible by children). Other matters that could affect the Company's broadcast properties include technological innovations and developments generally affecting competition in the mass communications industry, such as the recent initiation of direct broadcast satellite service, and the continued establishment of wireless cable systems and low power television stations. The FCC presently is seeking comment on its policies designed to increase minority ownership of mass media facilities. Congress also recently enacted legislation that eliminated the minority tax certificate program of the FCC, which gave favorable tax treatment to entities selling broadcast stations to entities controlled by an ethnic minority. In addition, a recent Supreme Court decision has cast doubt upon the continued validity of many of the congressional programs designed to increase minority ownership of mass media facilities. DISTRIBUTION OF VIDEO SERVICES BY TELEPHONE COMPANIES. Recent actions by the FCC, Congress and the courts all presage significant future involvement in the provision of video services by telephone companies. The Company cannot predict either the timing or the extent of such involvement. THE 1992 CABLE ACT. On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). The FCC began implementing the requirements of the 1992 Cable Act in 1993 and final implementation proceedings remain pending regarding certain of the rules and regulations previously adopted. Certain statutory provisions, such as signal carriage, retransmission consent and equal employment opportunity requirements, have a direct effect on television broadcasting. Other provisions are focused exclusively on the regulation of cable television but can still be expected to have an indirect effect on the Company because of the competition between over-the-air television stations and cable systems. The signal carriage, or "must carry," provisions of the 1992 Cable Act require cable operators to carry the signals of local commercial and non-commercial television stations and certain low power television stations. Systems with 12 or fewer usable activated channels and more than 300 subscribers must carry the signals of at least three local commercial television stations. A cable system with more than 12 usable activated channels, regardless of the number of subscribers, must carry the signals of all local commercial television stations, up to one-third of the aggregate number of usable activated channels of such system. The 1992 Cable Act also includes a retransmission consent provision that prohibits cable operators and other multi-channel video programming distributors from carrying broadcast stations without obtaining their consent in certain circumstances. The "must carry" and retransmission consent provisions are related in that a local television broadcaster, on a cable system-by-cable system basis, must make a choice once every three years whether to proceed under the "must carry" rules or to waive that right to mandatory but uncompensated carriage and negotiate a grant of retransmission consent to permit the cable system to carry the station's signal, in most cases in exchange for some form of consideration from the cable operator. Cable systems must obtain retransmission consent to carry all distant commercial stations other than "super stations" delivered via satellite. 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 78 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 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. 79 Although the Company believes the FCC will authorize ATV in the United States, the Company cannot predict precisely when or under what conditions such authorization might be given, when NTSC operations must cease, or the overall effect the transition to ATV might have on the Company's business. DIRECT BROADCASTING SATELLITE SYSTEMS. The FCC has authorized DBS, a service which provides video programming via satellite directly to home subscribers. Local broadcast stations and broadcast network programming are not carried on DBS systems. Proposals recently advanced in the Telecommunications Act include a prohibition on restrictions that inhibit a viewer's ability to receive video programming through DBS services. The FCC has exclusive jurisdiction over the regulation of DBS service. The Company cannot predict the impact of this new service upon the Company's business. PAGING FEDERAL REGULATION. The Company's paging operations (which are part of the Phipps Business) 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 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. The recently enacted 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 80 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 June 30, 1996, the Company (excluding KTVE) had 648 full-time employees, of which 376 were employees of the Company's stations, 260 were employees of the Company's publications and 12 were corporate and administrative personnel. As of June 30, 1996, the Phipps Business had 201 employees. None of the Company's employees are represented by unions. The Company believes that its relations with its employees are satisfactory. 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. 81 The following table sets forth certain information regarding the Company's properties. TELEVISION BROADCASTING 82
---------------------------------------------------------------------------- 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 PAGING
---------------------------------------------------------------------------- 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 Conyers, GA Offices, printing press Owned 20,000 sq. ft. - 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. -- 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. 83
---------------------------------------------------------------------------- OWNED APPROXIMATE EXPIRATION PROPERTY LOCATION USE OR LEASED SIZE OF LEASE ----------------------------------- ------------------------- --------------- --------------- --------------- Albany GA Office Leased 800 sq. ft. March 1997 Columbus, GA Office Leased 1,000 sq. ft. July 1997 Dothan, AL Office Leased 800 sq. ft. Feb. 1997 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 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information concerning each of the directors and executive officers of the Company and its subsidiaries. - ------------------------------ * Member of the Executive Committee ** Member of the Audit Committee + Member of the Management Personnel Committee MR. ROBINSON was appointed President and Chief Executive Officer on September 10, 1996 to succeed the late Ralph W. Gabbard. 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 1974 until 1995 and chairman of the board of Atlantic American Corporation since 1974. 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. MR. PRATHER was appointed Executive Vice President-Acquisitions on September 11, 1996. 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. 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. 84
------------------------------------------ NAME AGE TITLE - ----------------------------------- ----- ----------------------------------- J. Mack Robinson*+ 73 President, Chief Executive Officer and Director Robert S. Prather, Jr.*+ 51 Executive Vice President-Acquisitions and Director 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 45 Vice President Joseph A. Carriere 62 Vice President-Corporate Sales William E. Mayher III* 57 Chairman of the Board of Directors Richard L. Boger*+ 49 Director Hilton H. Howell, Jr.** 34 Director Howell W. Newton** 49 Director Hugh Norton 64 Director 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. 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. EXECUTIVE COMPENSATION GENERAL. The following table sets forth a summary of the compensation of the Company's former 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"). John T. Williams resigned as President, Chief Executive Officer and director and was replaced by Ralph W. Gabbard effective December 1, 1995. Mr. Gabbard died in September 1996. 85 SUMMARY COMPENSATION TABLE - ------------------------------ (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. The Company paid dividends on such shares. (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. $3,750, $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 and served as such until his death in September 1996. 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 had an employment agreement with the Company which provided him with 122,034 shares of Class A Common Stock if his employment with the Company continued until September 1999. The market value of such shares at December 31, 1995 was $2,181,358. Approximately $80,000 and $240,000 of compensation expense was recorded in 1994 and 1995, respectively. The Company paid dividends on such shares. (8) Not employed by the Company during this year. (9) $5,765, $2,625, $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 $291 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. 86
------------------------------------------------------------------------------- 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 $ - $2,700,000(2) - $ 606,601(3) Former President, Chief Executive 1994 286,867 71,910 - - 2,112(4) Officer and Director (1) 1993 258,400 112,500 - - 1,252(4) Ralph W. Gabbard, 1995(5) 261,000 150,000 - 15,000 12,628(6) Former President and Director 1994 76,611 168,117 1,200,000(7) 30,509 - 1993(8) - - - - William A. Fielder, III, 1995 106,050 21,000 - 3,000 9,407(9) Vice President and Chief Financial 1994 75,127 - - - 6,055(10) Officer 1993 84,600 - - 7,500 5,991(11) Joseph A. Carriere, 1995 115,075 65,922 - 3,750 878(4) Vice President Corporate Sales 1994(12) 6,635 - - - - 1993(8) - - - - - 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 - ------------------------ (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 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
---------------------------------------------------------------------- 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) Closing price of Class A Common Stock at December 31, 1995 was $17 7/8 per share. SUPPLEMENTAL PENSION PLAN. The Company has entered into agreements with certain key employees to provide these employees with supplemental retirement benefits. The benefits are disbursed after retirement in contractually predetermined payments of equal monthly amounts over the employee's life, or the life of a surviving eligible spouse for a maximum of 15 years. The Company maintains life insurance coverage on these individuals in adequate amounts to fund the agreements. RETIREMENT PLAN. The Company sponsors a defined benefit pension plan, intended to be tax qualified, for certain of its employees and the employees of any of its subsidiaries which have been designated as participating companies under the plan. A participating employee who retires on or after attaining age 65 and who has completed five years of service upon retirement may be eligible to receive during his lifetime, in the form of monthly payments, an annual pension equal to (i) 22% of the employee's average earnings for the highest five consecutive years during the employee's final 10 years of employment multiplied by a factor, the numerator of which is the employee's years of service credited under the plan before 1994, the denominator of which is the greater of 25 or the years of service 87
---------------------------------------------------- VALUE OF UNEXERCISED IN- NUMBER OF UNEXERCISED THE-MONEY OPTIONS AT FY OPTIONS AT FY END(#) END($) 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 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 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 - ------------------------ (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. Non-employee 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 88
---------------------------------------------------------------------- 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 attend. Any outside director who serves as Chairman of 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. In addition, the Company has a Non-Qualified Stock Option Plan for non-employee directors that currently provides for the annual grant of options to purchase up to 7,500 shares of Class A Common Stock at a price per share approximating the recent market price at the time of grant. Such options are exercisable until the end of the first month following the close of the Company's fiscal year. The Company, subject to approval by the Company's shareholders, intends to amend such Non-Qualified Stock Option Plan to provide for the issuance of Class B Common Stock in lieu of Class A Common Stock. 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 provided 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 reached or exceeded certain goals. Under the Incentive Plan, Mr. Gabbard received non-qualified stock options to purchase 30,509 shares of Class A Common Stock. The exercise price for such options is $9.66. 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 was to be established by the Board of Directors. Under the Annual Compensation Plan, if the Company achieved the targeted amount of operating profit in any given year, Mr. Gabbard would receive $200,000 as additional compensation. The Annual Compensation Plan further provided that if the Company exceeded the targeted amount of operating profit in any given year, Mr. Gabbard would be entitled to receive additional compensation in excess of $200,000, as determined by the Board of Directors. 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 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 beginning 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 Exchange Act. 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. 89 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Richard L. Boger, Robert S. Prather, Jr. and J. Mack Robinson are the members of the Management Personnel Committee of the Board of Directors. Gray Kentucky Television, Inc., a subsidiary of the Company ("Gray Kentucky") is a party to a rights sharing agreement with Host Communications, Inc. ("Host") and certain other parties not affiliated with the Company, pursuant to which the parties agreed to exploit Host's rights to broadcast and market certain University of Kentucky football and basketball games and related activities. Pursuant to such agreement, Gray Kentucky is licensed to broadcast certain 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%. Robert S. Prather, Jr., Executive Vice President-Acquisitions and a director of the Company, is also a member of the boards 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 the 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 and $950,000 was due and included in accounts payable at December 31, 1995 and June 30, 1996, respectively. 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 9.8% 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 1996 annual meeting of shareholders. The Company obtained an opinion from The Robinson-Humphrey Company, Inc., one of the underwriters of this Offering and the Concurrent 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 (and subsequently appointed the President and Chief Executive Officer 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 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, cumulative 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 90 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, or on a parity with, 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. 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, J. Mack Robinson and certain of his affiliates 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, cumulative dividends at an annual rate of $600 per share, except that the Company at its option may pay such dividends in cash or in additional shares of Series B Preferred Stock valued, for the purpose of determining the number of shares (or fraction thereof) of such Series B Preferred Stock to be issued, at $10,000 per share. The 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 to 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, or on a parity with, the Series B 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 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. The shares of the Series A Preferred Stock and Series B Preferred Stock will rank pari passu as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up of the Company. In connection with the issuance of the Series B Preferred Stock as part of the Financing, (i) the Company will issue to the purchasers of the Series B Preferred Stock warrants entitling the holders thereof to purchase an aggregate of 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, an aggregate of 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 warrants 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 has obtained a written opinion from The Robinson-Humphrey Company, Inc., one of the underwriters of this Offering and the Concurrent 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. 91 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 July 31, 1996. Except as indicated below, none of such shareholders own, or have the right to acquire any shares of Class B Common Stock. - ------------------------------ * Less than 1%. (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 to be issued as part of the Financing. See "Management -- 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) Includes 1,211,590 shares owned by Bull Run as described in footnote (1) above, because Messrs. Howell, Prather and Robinson are directors and officers of Bull Run and Messrs. Prather and Robinson are principal shareholders of Bull Run and as such, may be deemed to have the right to vote or dispose of such shares. However, each of Messrs. Howell, Prather and Robinson disclaims beneficial ownership of the shares owned by 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. 92
------------------------------------ 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 31,427 * William A. Fielder III (3) 8,629 * Sabra H. Cowart 216 * Robert A. Beizer -- * Thomas J. Stultz 1,500 * Joseph A. Carriere 642 * William E. Mayher III (3) 16,500 * Richard L. Boger (3) 24,150 * Hilton H. Howell, Jr. (3)(4)(5)(6) 1,280,740 28.6% Howell W. Newton (3) 9,250 * Hugh Norton (3) 16,500 * Robert S. Prather, Jr. (3)(4)(7) 1,242,340 27.8% J. Mack Robinson (3)(4)(6)(8) 2,003,530 44.8% John T. Williams (9) 78,752 1.8% All directors and executive 2,290,996(4)-(8), officers as a group (14 persons) (10) 50.6% CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS J. Mack Robinson, President, Chief Exeuctive Officer and 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., Executive Vice President-Acquisitions and 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 "Management -- 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. 93 DESCRIPTION OF CERTAIN INDEBTEDNESS THE SENIOR CREDIT FACILITY The Company has executed a commitment letter with respect to the Senior Credit Facility. However, there can be no assurance that the Company will enter into the Senior Credit Facility on the terms described herein or at all. As of June 30, 1996, approximately $49.5 million of indebtedness (excluding accrued interest) was outstanding under the Old Credit Facility. As part of the Financing, the Company will retire all of the outstanding indebtedness under the Old Credit Facility and will enter into the Senior Credit Facility. The Senior Credit Facility will provide for borrowings of up to an aggregate of $125.0 million in the form of a seven-year reducing revolving credit facility in the amount of $53.5 million ("Facility A") and a seven-year reducing revolving credit/term facility in the amount of $71.5 million ("Facility B"). The Senior Credit Facility will also provide for the issuance of standby letters of credit in an aggregate amount of up to $15.0 million to the extent that there is borrowing availability under the Senior Credit Facility. Funds available under the Senior Credit Facility will be available upon consummation of the Phipps Acquisition to retire indebtedness under the Old Credit Facility and under the Senior Note, to finance certain acquisitions, to fund the optional redemption of the Notes and for capital expenditures and working capital needs. In addition, the Senior Credit Facility may be used to fund, in part, the Phipps Acquisition. Commitments under Facility A will be reduced in quarterly amounts commencing on March 31, 1997 with a final maturity of June 30, 2003. Facility B will convert to a term loan at December 31, 1998, the outstanding balance of which must thereafter be repaid on a quarterly basis with a final maturity of June 30, 2003. Interest under the Senior Credit Facility will be payable, at the Company's option, at LIBOR or the prime rate, in each case, plus a floating percentage tied to the Company's ratio of total debt to operating cash flow, ranging from LIBOR plus 3.25% or the prime rate plus 1.0%, based upon a 6.50 to 1 ratio, to LIBOR plus 1.50% or the prime rate, based upon a 4 to 1 ratio. Pursuant to the Senior Credit Facility, the Company will be required to enter into interest rate swap agreements for the purpose of interest rate protection covering an amount of borrowings thereunder of no less than 50% of the outstanding principal amount of all indebtedness. The Senior Credit Facility will be secured by the pledge of all of the stock of the subsidiaries of the Company and a first lien on all of the assets of the Company and its subsidiaries. Each of the subsidiaries of the Company will guarantee the Company's obligations under the Senior Credit Facility. The Senior Credit Facility will contain restrictions on the Company's ability to pay dividends and make certain acquisitions. The Senior Credit Facility will also contain provisions requiring the Company to maintain certain financial ratios, including a total debt to operating cash flow ratio, a senior debt to operating cash flow ratio, an operating cash flow to total interest expense ratio, an operating cash flow to pro forma debt service ratio and a fixed charge coverage ratio. The Senior Credit Facility will require the Company to apply at the end of each fiscal year, commencing on December 31, 1997, 50% (if the Company's total debt to operating cash flow ratio at the end of such year is 4.5 to 1 or greater) of its "Excess Cash Flow" to reduce outstanding debt, on a pro rata basis, under Facilities A and B. In addition, the Company will be required to apply from the proceeds of any permitted equity issuance an amount sufficient to reduce the Company's leverage to specified levels. The Senior Credit Facility will require the Company to use the proceeds from certain asset sales to repay indebtedness under the Senior Credit Facility. The Senior Credit Facility will also contain a number of customary covenants including, among others, limitations on investments and advances, mergers and sales of assets, liens on assets, affiliate transactions and changes in business. 94 DESCRIPTION OF THE NOTES GENERAL The Notes will be issued under an Indenture (the "Indenture"), to be dated as of , 1996, by and among the Company, the Subsidiary Guarantors and Bankers Trust Company, as trustee (the "Trustee"). The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), as in effect on the date of the Indenture. The Notes are subject to all such terms, and holders of Notes are referred to the Indenture and the Trust Indenture Act for a statement of those terms. The following is a summary of the material provisions of the Notes and the Indenture. This summary does not purport to be complete and is subject to the detailed provisions of, and is qualified in its entirety by reference to, the Notes and the Indenture. A copy of the proposed form of Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The definitions of terms used in the following summary, if not defined in such summary, are set forth below under "-Certain Definitions." MATURITY AND INTEREST The Notes will be general unsecured obligations of the Company limited in aggregate principal amount to $150.0 million and will mature on , 2006. Interest on the Notes will accrue at the rate of % per annum and will be payable semi-annually in arrears on and in each year, commencing on , 1997, to holders of record on the immediately preceding and , respectively. Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from the date of the original issuance of the Notes (the "Issue Date"). Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal of, premium, if any, and interest on the Notes will be payable at the office or agency of the Company maintained for such purpose within the City of New York or, at the option of the Company, payment of interest may be made by check mailed to the holders of the Notes at their respective addresses as set forth in the register of holders of Notes. Until otherwise designated by the Company, the Company's office or agency in the City of New York will be the office of the Trustee maintained for such purpose. The Notes will be issued in fully registered form, without coupons, and in denominations of $1,000 and integral multiples thereof. SUBORDINATION The payment of principal of, premium, if any, and interest on the Notes will be subordinated in right of payment, to the extent and in the manner provided in the Indenture, to the prior payment in full in cash or any other form acceptable to the holders of Senior Debt, of all Senior Debt of the Company, whether outstanding on the Issue Date or incurred thereafter. As of June 30, 1996, after giving pro forma effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing, and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $33.3 million of Senior Debt outstanding. The Indenture will, subject to certain financial tests, permit the Company and its Subsidiaries to incur additional Indebtedness, including Senior Debt. See "Description of Certain Indebtedness--The Senior Credit Facility" and "-Covenants-Limitation on Incurrence of Indebtedness." Upon any payment or distribution of cash, securities or other property of the Company to creditors upon any liquidation, dissolution or winding up of the Company, or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property or securities, the holders of any Senior Debt of the Company will be entitled to receive payment in full, in cash or any other form acceptable to the holders of Senior Debt, of all Obligations due in respect of such Senior Debt before the holders of the Notes will be entitled to receive any payment or distribution with respect to the Notes (excluding certain equity or subordinated debt securities). The Company also may not make any payment or distribution of any assets or securities of the Company or any Subsidiary Guarantor of any kind or character (including, without limitation, cash, property and any payment or distribution which may be payable or deliverable by reason of the payment of any other debt of the Company or the Subsidiary Guarantors being subordinated to the payment of the Notes) upon or in respect of the Notes (excluding certain equity or subordinated debt securities) if the Trustee has received written notice (a "Payment Blockage 95 Notice") from the representative of any holders of Designated Senior Debt that (x) a default (whether or not any requirement for the giving of notice, the lapse of time or both, or any other condition to such default becoming an event of default, has occurred) in the payment of principal of (or premium if any) or interest on or any other amount payable in connection with any Designated Senior Debt has occurred and is continuing (a "Payment Default") or (y) any other default has occurred and is continuing with respect to any Designated Senior Debt (whether or not any requirement for the giving of notice, the lapse of time or both, or any other condition to such default becoming an event of default, has occurred) (a "Non-Payment Default"). Payments on the Notes shall resume (and all past due amounts on the Notes, with interest thereon as specified in the Indenture, shall be paid) (i) in the case of a Payment Default, on the date on which such Payment Default is cured or waived, and (ii) in the case of a Non-Payment Default, on the earliest of (a) the date on which such Non-Payment Default is cured or waived or shall have ceased to exist or the Designated Senior Debt related thereto shall have been discharged or paid in full in cash or any other manner acceptable to the holders of such Designated Senior Debt, (b) 179 days after the date on which the Payment Blockage Notice with respect to such default was received by the Trustee, unless the maturity of the Designated Senior Debt under the Senior Credit Facility has been accelerated and (c) the date such Payment Blockage Notice is terminated by written notice to the Trustee from a representative of the holders of the Designated Senior Debt that gave such Payment Blockage Notice. During any consecutive 365-day period, the aggregate number of days in which payments due on the Notes may not be made as a result of Non-Payment Defaults on Designated Senior Debt (a "Payment Blockage Period") shall not exceed 179 days, only one Payment Blockage Period may be commenced and there shall be a period of at least 186 consecutive days when such payments are not prohibited. No event or circumstance that creates a default under any Designated Senior Debt that (i) gives rise to the commencement of a Payment Blockage Period or (ii) exists at the commencement of or during any Payment Blockage Period shall be made the basis for the commencement of any subsequent Payment Blockage Period, whether or not within a period of 365 consecutive days, unless such default has been cured or waived for a period of not less than 90 consecutive days following the commencement of the initial Payment Blockage Period. If the Company fails to make any payment on the Notes when due or within any applicable grace period, whether or not on account of the payment blockage provisions referred to above, such failure will constitute an Event of Default under the Indenture and will enable the holders of the Notes to accelerate the maturity thereof. See "-Events of Default." As a result of the subordination provisions described above, in the event of liquidation or insolvency of the Company, holders of Notes may recover less ratably than unsubordinated creditors of the Company. In such circumstances, funds which would otherwise be payable to the holders of the Notes will be paid to the holders of the Senior Debt to the extent necessary to pay the Senior Debt in full in cash or any other manner acceptable to the holders of such Senior Debt, and the Company may be unable to meet its obligations fully with respect to the Notes. The subordination provisions described above will cease to be applicable to the Notes upon any defeasance or covenant defeasance of the Notes. See "-Defeasance." SUBSIDIARY GUARANTEES The Company's payment obligations under the Notes will be guaranteed, jointly and severally and fully and unconditionally, on a senior subordinated basis (the "Subsidiary Guarantees") by the Subsidiary Guarantors. The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee will be unconditional and absolute, irrespective of any invalidity, illegality, unenforceability of any Note or the Indenture or any extension, compromise, waiver or release in respect of any obligation of the Company or any other Subsidiary Guarantor under any Note or the Indenture, or any modification or amendment of or supplement to the Indenture. The obligations of any Subsidiary Guarantor under its Subsidiary Guarantee will be subordinated, to the same extent as the obligations of the Company in respect of the Notes, to the prior payment in full of all Guarantor Senior Debt of such Subsidiary Guarantor (which will include any guarantee issued by such Subsidiary Guarantor of any Senior Debt, including Indebtedness represented by guarantees under the Senior Credit Facility) in cash or any other manner acceptable to the holders of such Guarantor Senior Debt. See "-Subordination." Upon the sale or disposition (whether by merger, stock purchase, asset sale or otherwise) of a Subsidiary Guarantor (or substantially all of its assets) to an entity which is not a Subsidiary of the Company, which sale or other disposition is otherwise in compliance with the Indenture, such Subsidiary Guarantor shall be deemed released from 96 all its obligations under its Subsidiary Guarantee; PROVIDED that any such termination shall occur only to the extent that all obligations of such Subsidiary Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests which secure, other Indebtedness of the Company shall also terminate upon such release, sale or transfer. In addition, each Subsidiary Guarantor may consolidate with or merge into or sell its assets to the Company or another Subsidiary Guarantor without limitation. The Indenture will further provide that a Subsidiary Guarantor may consolidate with or merge into or sell its assets to a corporation other than the Company or another Subsidiary Guarantor (whether or not affiliated with such Subsidiary Guarantor, but subject to the provisions described in the immediately preceding paragraph), provided that (a) if the surviving person is not the Subsidiary Guarantor, the surviving person agrees to assume such Subsidiary Guarantor's obligations under its Subsidiary Guarantee and all its obligations under the Indenture and (b) such transaction does not (i) violate any covenants set forth in the Indenture or (ii) result in a Default or Event of Default under the Indenture immediately thereafter that is continuing. REDEMPTION SPECIAL REDEMPTION. If the Phipps Acquisition is not consummated prior to December 23, 1996, the Company will be obligated to redeem the Notes (the "Special Redemption") on the Special Redemption Date at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Pursuant to the Indenture, on the Issue Date the Company will deposit with the Trustee the net proceeds from the sale of the Notes plus an additional amount of cash in an amount sufficient to consummate the Special Redemption on the Special Redemption Date at the Special Redemption Price. All amounts so deposited with the Trustee (collectively, the "Trust Funds") will be pledged to and held by the Trustee pursuant to the Indenture as security for the Notes. The Indenture will provide that if, prior to the Special Redemption Date, the Company delivers to the Trustee the documentation required under the Indenture, then the Trustee will release the Trust Funds to the Company for application to the concurrent consummation of the Phipps Acquisition. Upon release of the Trust Funds, all of the Notes remaining outstanding immediately thereafter will be unsecured obligations of the Company. Pending release of the Trust Funds as provided in the Indenture, the Trust Funds will be invested in cash equivalents and any investment income therefrom will be available to the Company following release of the Trust Funds. If redemption of the Notes occurs on or prior to the Special Redemption Date, the Notes will be redeemed with the Trust Funds and any portion of the Trust Funds not required to be used for such redemption will be returned to the Company. OPTIONAL REDEMPTION. Except as set forth under "-Special Redemption" and as described below, the Notes are not redeemable at the Company's option prior to , 2001. On and after such date, the Notes will be subject to redemption at the option of the Company, in whole or in part, at the redemption prices (expressed as percentages of the principal amount of the Notes) set forth below, plus accrued and unpaid interest to the date fixed for redemption, if redeemed during the twelve-month period beginning on of the years indicated below. Notwithstanding the foregoing, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued, with the net proceeds of one or more Public Equity Offerings, other than the Concurrent Offering (including the exercise by the underwriters of the Concurrent Offering of any over-allotment option granted by the Company to such underwriters in connection therewith) at a 97
----------- YEAR PERCENTAGE - -------------------------------------------------- ----------- 2001 % 2002 % 2003 % 2004 and thereafter 100.0% redemption price equal to % of the principal amount thereof, together with accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $97.5 million in aggregate principal amount of the Notes remains outstanding immediately after any such redemption. SELECTION AND NOTICE. If less than all of the Notes are to be redeemed at any time, selection of the Notes to be redeemed will be made by the Trustee, on behalf of the Company, in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not listed on a securities exchange by the Trustee, on behalf of the Company, on a pro rata basis, by lot or by any other method as the Trustee shall deem fair and appropriate; PROVIDED that a redemption pursuant to the provisions relating to Public Equity Offerings will be on a pro rata basis. Notes redeemed in part shall only be redeemed in integral multiples of $1,000. Notices of any redemption (other than a redemption pursuant to the provisions described under "-Special Redemption") shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each holder of Notes to be redeemed at such holder's registered address. Notices of any redemption pursuant to the provisions described under "-Special Redemption" shall be mailed by first class mail at least five business days before the redemption date to each holder of Notes to be redeemed at such holder's registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed, and the Trustee shall authenticate and mail to the holder of the original Note a new Note in principal amount equal to the unredeemed portion of the original Note promptly after the original Note has been cancelled. On and after the redemption date, interest will cease to accrue on Notes or portions thereof called for redemption. CHANGE OF CONTROL In the event of a Change of Control (as defined herein), the Company will make an offer to purchase all of the then outstanding Notes at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase, in accordance with the terms set forth below (a "Change of Control Offer"). Within 30 days following the occurrence of any Change of Control, the Company shall mail to each holder of Notes at such holder's registered address a notice stating: (i) that a Change of Control has occurred and that such holder has the right to require the Company to purchase all or a portion (equal to $1,000 or an integral multiple thereof) of such holder's Notes at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase (the "Change of Control Purchase Date"), which shall be a business day, specified in such notice, that is not earlier than 30 days or later than 60 days from the date such notice is mailed, (ii) the amount of accrued and unpaid interest as of the Change of Control Purchase Date, (iii) that any Note not tendered will continue to accrue interest, (iv) that, unless the Company defaults in the payment of the purchase price for the Notes payable pursuant to the Change of Control Offer, any Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date, (v) the procedures, consistent with the Indenture, to be followed by a holder of Notes in order to accept a Change of Control Offer or to withdraw such acceptance, and (vi) such other information as may be required by the Indenture and applicable laws and regulations. On the Change of Control Purchase Date, the Company will (i) accept for payment all Notes or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the paying agent the aggregate purchase price of all Notes or portions thereof accepted for payment and any accrued and unpaid interest on such Notes as of the Change of Control Purchase Date, and (iii) deliver or cause to be delivered to the Trustee all Notes tendered pursuant to the Change of Control Offer. The paying agent shall promptly mail to each holder of Notes or portions thereof accepted for payment an amount equal to the purchase price for such Notes plus any accrued and unpaid interest thereon, and the Trustee shall promptly authenticate and mail to such holder of Notes accepted for payment in part a new Note equal in principal amount to any unpurchased portion of the Notes, and any Note not accepted for payment in whole or in part for any reason consistent with the Indenture shall be promptly returned to the holder of such Note. On and after a Change of Control Purchase Date, interest will cease to accrue on the Notes or portions thereof accepted for payment, unless the Company defaults in the payment of the purchase price therefor. The Company will announce the results of the Change of Control Offer to holders of the Notes on or as soon as practicable after the Change of Control Purchase Date. 98 The Company will comply with the applicable tender offer rules, including the requirements of Rule 14e-1 under the Exchange Act, and all other applicable securities laws and regulations in connection with any Change of Control Offer. None of the provisions relating to a repurchase upon a Change of Control may be waived by the Board of Directors of the Company. The Change of Control provision will not require the Company to make a Change of Control Offer upon the consummation of any transaction contemplated by clause (b) of the definition of Change of Control if the party that will own, directly or indirectly, more than 35% of the Voting Stock of the Company as a result of such transaction is J. Mack Robinson, Robert S. Prather, Jr. or certain other persons or entities affiliated with or controlled by either of them. See " - Certain Definitions - Permitted Holders." J. Mack Robinson and Robert S. Prather are directors of the Company. As a result of the definition of Permitted Holders, a concentration of control in the hands of Permitted Holders would not give rise to a situation where holders could have their Notes repurchased pursuant to a Change of Control Offer. As of July 31, 1996, Mr. Robinson was the beneficial owner of approximately 44.8% of the outstanding Class A Common Stock. See "Security Ownership of Certain Beneficial Owners and Management." In addition, the Change of Control provision and the other convenants that limit the ability of the Company to incur debt may not necessarily afford holders protection in the event of a highly leveraged transaction, such as a reorganization, merger or similar transaction involving the Company that may adversely affect holders, because such transactions may not involve a concentration in voting power or beneficial ownership, or, if there were such a concentration, may not involve a concentration of the magnitude required under the definition of Change of Control. COVENANTS LIMITATION ON INCURRENCE OF INDEBTEDNESS. The Indenture will provide that the Company will not, and will not permit any of its Subsidiaries to, create, incur, assume or directly or indirectly guarantee or in any other manner become directly or indirectly liable for ("incur") any Indebtedness (including Acquired Debt) if, at the time of and immediately after giving pro forma effect to such incurrence, the Debt to Operating Cash Flow Ratio of the Company and its Subsidiaries is more than (x) 7.0 to 1.0 if the Indebtedness is incurred prior to , 1998 or (y) 6.5 to 1.0 if the Indebtedness is incurred on or after , 1998. The foregoing limitations will not apply to the incurrence of any of the following (collectively, "Permitted Indebtedness"): (i) Indebtedness of the Company incurred under the Senior Credit Facility in an aggregate principal amount at any time outstanding not to exceed $60.0 million less (A) the aggregate amount of all principal payments made in respect of any term loans thereunder and (B) the aggregate amount of any other principal payments thereunder constituting permanent reductions of such Indebtedness pursuant to and in accordance with the covenant described under "-Limitation on Asset Sales;" (ii) Indebtedness of any Subsidiary Guarantor consisting of a guarantee of Indebtedness of the Company under the Senior Credit Facility; (iii) Indebtedness of the Company represented by the Notes and Indebtedness of any Subsidiary Guarantor represented by a Subsidiary Guarantee; (iv) Indebtedness owed by any Subsidiary Guarantor to the Company or to another Subsidiary Guarantor, or owed by the Company to any Subsidiary Guarantor; PROVIDED that any such Indebtedness shall be held by a Person which is either the Company or a Subsidiary Guarantor and PROVIDED, FURTHER, that an incurrence of additional Indebtedness which is not permitted under this clause (iv) shall be deemed to have occurred upon either (a) the transfer or other disposition of any such Indebtedness to a Person other than the Company or another Subsidiary Guarantor or (b) the sale, lease, transfer or other disposition of shares of Capital Stock (including by consolidation or merger) of any such Subsidiary Guarantor to a Person other than the Company or another Subsidiary Guarantor such that such Subsidiary Guarantor ceases to be a Subsidiary Guarantor; (v) Indebtedness of any Subsidiary Guarantor consisting of guarantees of any Indebtedness of the Company which Indebtedness of the Company has been incurred in accordance with the provisions of the Indenture; 99 (vi) Indebtedness arising with respect to Interest Rate Agreement Obligations incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of the Indenture to be outstanding; PROVIDED, HOWEVER, that the notional principal amount of such Interest Rate Agreement Obligation does not exceed the principal amount of the Indebtedness to which such Interest Rate Agreement Obligation relates; (vii) any Indebtedness of the Company or a Subsidiary of the Company incurred in connection with or given in exchange for the renewal, extension, substitution, refunding, defeasance, refinancing or replacement of any Indebtedness of the Company or such Subsidiary permitted to be incurred or outstanding under the Indenture other than Indebtedness described in clauses (i), (ii), (iv), (v) and (vi) above or clause (viii) below ("Refinancing Indebtedness"); PROVIDED that (a) the principal amount of such Refinancing Indebtedness shall not exceed the principal amount of the Indebtedness so renewed, extended, substituted, refunded, defeased, refinanced or replaced (plus the premiums or other payments paid in connection therewith (which shall not exceed the stated amount of any premium or other payments required to be paid in connection with such a refinancing pursuant to the terms of the Indebtedness being renewed, extended, substituted, refunded, defeased, refinanced or replaced) and the expenses incurred in connection therewith); (b) with respect to Refinancing Indebtedness of any Indebtedness other than Senior Debt, the Refinancing Indebtedness shall have a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being renewed, extended, substituted, refunded, defeased, refinanced or replaced; and (c) with respect to Refinancing Indebtedness of Indebtedness other than Senior Debt incurred by (1) the Company, such Refinancing Indebtedness shall rank no more senior, and shall be at least as subordinated, in right of payment to the Notes as the Indebtedness being renewed, extended, substituted, refunded, defeased, refinanced or replaced, and (2) a Subsidiary Guarantor, such Refinancing Indebtedness shall rank no more senior, and shall be at least as subordinated, in right of payment to the Subsidiary Guarantee as the Indebtedness being renewed, extended, substituted, refunded, defeased, refinanced or replaced; and (viii) Indebtedness of the Company and its Subsidiaries in addition to that described in clauses (i) through (vii) above, and any renewals, extensions, substitutions, refundings, refinancings or replacements of such Indebtedness, so long as the aggregate principal amount of all such Indebtedness incurred pursuant to this clause (viii) does not exceed $15.0 million at any one time outstanding. LIMITATION ON RESTRICTED PAYMENTS. The Indenture will provide that the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, make any Restricted Payment, unless at the time of and immediately after giving effect to the proposed Restricted Payment (with the value of any such Restricted Payment, if other than cash, to be determined by the Board of Directors of the Company in good faith and which determination shall be conclusive and evidenced by a board resolution), (i) no Default or Event of Default (and no event that, after notice or lapse of time, or both, would become an "event of default" under the terms of any other Indebtedness of the Company or its Subsidiaries) shall have occurred and be continuing or would occur as a consequence thereof, (ii) the Company could incur at least $1.00 of additional Indebtedness pursuant to the first paragraph under "-Covenants-Limitation on Incurrence of Indebtedness" and (iii) the aggregate amount of all Restricted Payments made after the Issue Date shall not exceed the sum of (a) an amount equal to the Company's Cumulative Operating Cash Flow less 1.4 times the Company's Cumulative Consolidated Interest Expense, PLUS (b) the aggregate amount of all net cash proceeds received after the Issue Date by the Company (but excluding the net cash proceeds received by the Company from the Concurrent Offering) from the issuance and sale (other than to a Subsidiary of the Company) of Capital Stock of the Company (other than Disqualified Stock) to the extent that such proceeds are not used to redeem, repurchase, retire or otherwise acquire Capital Stock or any Indebtedness of the Company or any Subsidiary of the Company pursuant to clause (ii) of the next paragraph, PLUS (c) in the case of the disposition or repayment of any Investment for cash, which Investment constituted a Restricted Payment made after the Issue Date, an amount equal to the lesser of the return of capital with respect to such Investment and the cost of such Investment, in either case, reduced (but not below zero) by the excess, if any, of the cost of the disposition of such Investment over the gain, if any, realized by the Company or such Subsidiary in respect of such disposition. 100 The foregoing provisions will not prohibit, so long as there is no Default or Event of Default continuing, the following actions (collectively, "Permitted Payments"): (i) the payment of any dividend within 60 days after the date of declaration thereof, if at such declaration date such payment would have been permitted under the Indenture, and such payment shall be deemed to have been paid on such date of declaration for purposes of clause (iii) of the preceding paragraph; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any Capital Stock or any Indebtedness of the Company in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of Capital Stock of the Company (other than any Disqualified Stock); (iii) the repurchase, redemption or other repayment of any Subordinated Debt of the Company or a Subsidiary Guarantor in exchange for, by conversion into or solely out of the proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of Subordinated Debt of the Company or such Subsidiary Guarantor with a Weighted Average Life to Maturity equal to or greater than the then remaining Weighted Average Life to Maturity of the Subordinated Debt repurchased, redeemed or repaid; (iv) the payment of ordinary dividends by the Company in respect of its Capital Stock in the ordinary course of business on a basis consistent with past practice in an aggregate amount not exceeding $1.0 million; and (v) Restricted Investments received as consideration in connection with an Asset Sale made in compliance with the Indenture. In computing the amount of Restricted Payments for purposes of clause (iii) of the second preceding paragraph, Restricted Payments made under clauses (iv) and (v) of the preceding paragraph shall be included and Restricted Payments made under clauses (i), (ii) and (iii) of the preceding paragraph shall not be included. LIMITATION ON ASSET SALES. The Indenture will provide that the Company will not, and will not permit any of its Subsidiaries to, make any Asset Sale unless (i) the Company or such Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value (determined by the Board of Directors of the Company in good faith, which determination shall be evidenced by a board resolution) of the assets or other property sold or disposed of in the Asset Sale, and (ii) at least 75% of such consideration is in the form of cash or Cash Equivalents; PROVIDED that for purposes of this covenant "cash" shall include the amount of any liabilities (other than liabilities that are by their terms subordinated to the Notes or any Subsidiary Guarantee) of the Company or such Subsidiary (as shown on the Company's or such Subsidiary's most recent balance sheet or in the notes thereto) that are assumed by the transferee of any such assets or other property in such Asset Sale (and excluding any liabilities that are incurred in connection with or in anticipation of such Asset Sale), but only to the extent that such assumption is effected on a basis under which there is no further recourse to the Company or any of its Subsidiaries with respect to such liabilities. Notwithstanding clause (ii) above, (a) all or a portion of the consideration for any such Asset Sale may consist of all or substantially all of the assets or a majority of the Voting Stock of an existing television business, franchise or station (whether existing as a separate entity, subsidiary, division, unit or otherwise) or any business directly related thereto, and (b) Asset Sales involving assets which are not television or publishing businesses, franchises or stations and having an aggregate value (as measured by the value of the consideration being paid for such assets) not in excess of $35.0 million may be made without regard to clause (ii) above; provided, that, in the case of either (a) or (b) of this sentence after giving effect to any such Asset Sale and related acquisition of assets or Voting Stock, (x) no Default or Event of Default shall have occurred or be continuing; and (y) the Net Proceeds of any such Asset Sale, if any, are applied in accordance with this covenant. Within 360 days after any Asset Sale, the Company may elect to apply or cause to be applied the Net Proceeds from such Asset Sale to (a) permanently reduce any Senior Debt of the Company or any Guarantor Senior Debt, and/or (b) make an investment in, or acquire assets directly related to, the business of the Company and its Subsidiaries existing on the Issue Date. Pending the final application of any such Net Proceeds, the Company may temporarily reduce Senior Debt of the Company or any Guarantor Senior Debt or temporarily invest such Net Proceeds in any manner permitted by the Indenture. Any Net Proceeds from an Asset Sale not applied or invested as provided in the first sentence of this paragraph within 360 days of such Asset Sale will be deemed to constitute "Excess Proceeds" on the 361st day after such Asset Sale. 101 As soon as practical, but in no event later than 10 business days after any date (an "Asset Sale Offer Trigger Date") that the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company shall commence an offer to purchase the maximum principal amount of Notes that may be purchased out of all such Excess Proceeds (an "Asset Sale Offer") at a price in cash equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. To the extent that any Excess Proceeds remain after completion of an Asset Sale Offer, the Company may use the remaining amount for general corporate purposes and such amount shall no longer constitute "Excess Proceeds." Within 30 days following any Asset Sale Offer Trigger Date, the Company shall mail to each holder of Notes at such holder's registered address a notice stating: (i) that an Asset Sale Offer Trigger Date has occurred and that the Company is offering to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds, at an offer price in cash equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase (the "Asset Sale Offer Purchase Date"), which shall be a business day, specified in such notice, that is not earlier than 30 days or later than 60 days from the date such notice is mailed, (ii) the amount of accrued and unpaid interest as of the Asset Sale Offer Purchase Date, (iii) that any Note not tendered will continue to accrue interest, (iv) that, unless the Company defaults in the payment of the purchase price for the Notes payable pursuant to the Asset Sale Offer, any Notes accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest after the Asset Sale Offer Purchase Date, (v) the procedures, consistent with the Indenture, to be followed by a holder of Notes in order to accept an Asset Sale Offer or to withdraw such acceptance, and (vi) such other information as may be required by the Indenture and applicable laws and regulations. On the Asset Sale Offer Purchase Date, the Company will (i) accept for payment the maximum principal amount of Notes or portions thereof tendered pursuant to the Asset Sale Offer that can be purchased out of Excess Proceeds from such Asset Sale, (ii) deposit with the Paying Agent the aggregate purchase price of all Notes or portions thereof accepted for payment and any accrued and unpaid interest on such Notes as of the Asset Sale Offer Purchase Date, and (iii) deliver or cause to be delivered to the Trustee all Notes tendered pursuant to the Asset Sale Offer. If less than all Notes tendered pursuant to the Asset Sale Offer are accepted for payment by the Company for any reason consistent with the Indenture, selection of the Notes to be purchased by the Company shall be in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not so listed, on a PRO RATA basis, by lot or by such method as the Trustee shall deem fair and appropriate; PROVIDED that Notes accepted for payment in part shall only be purchased in integral multiples of $1,000. The Paying Agent shall promptly mail to each holder of Notes or portions thereof accepted for payment an amount equal to the purchase price for such Notes plus any accrued and unpaid interest thereon, and the Trustee shall promptly authenticate and mail to such holder of Notes accepted for payment in part a new Note equal in principal amount to any unpurchased portion of the Notes, and any Note not accepted for payment in whole or in part shall be promptly returned to the holder of such Note. On and after an Asset Sale Offer Purchase Date, interest will cease to accrue on the Notes or portions thereof accepted for payment, unless the Company defaults in the payment of the purchase price therefor. The Company will announce the results of the Asset Sale Offer to holders of the Notes on or as soon as practicable after the Asset Sale Offer Purchase Date. The Company will comply with the applicable tender offer rules, including the requirements of Rule 14e-1 under the Exchange Act, and all other applicable securities laws and regulations in connection with any Asset Sale Offer. LIMITATION ON LIENS. The Indenture will provide that the Company will not, and will not permit any Subsidiary Guarantor to, directly or indirectly, create, incur, assume or suffer to exist any Lien (other than Permitted Liens) on any asset now owned or hereafter acquired, or any income or profits therefrom or assign or convey any right to receive income therefrom to secure any Indebtedness; PROVIDED that in addition to creating Permitted Liens on its properties or assets, (i) the Company may create any Lien upon any of its properties or assets (including, but not limited to, any Capital Stock of its Subsidiaries) if the Notes are equally and ratably secured therewith, and (ii) a Subsidiary Guarantor may create any Lien upon any of its properties or assets (including, but not limited to, any Capital Stock of its Subsidiaries) if its Subsidiary Guarantee is equally and ratably secured therewith; PROVIDED, HOWEVER, that if (a) the Company creates any Lien on its assets to secure any Subordinated Indebtedness of the Company, the Company shall also create a Lien to secure the Notes and the Lien securing such Subordinated Indebtedness shall be subordinated and junior to the Lien securing the Notes with the same or lesser priorities as the Subordinated Indebtedness shall have with respect to the Notes, and (b) a Subsidiary Guarantor creates any Lien on 102 its assets to secure any Subordinated Indebtedness of such Subsidiary Guarantor, the Subsidiary Guarantor shall also create a Lien to secure the Subsidiary Guarantee and the Lien securing such Subordinated Indebtedness shall be subordinated and junior to the Lien securing the Subsidiary Guarantee of such Subsidiary Guarantor with the same or lesser priorities as the Subordinated Indebtedness shall have with respect to the Subsidiary Guarantee of such Subsidiary Guarantor. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Indenture will provide that the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Subsidiary of the Company to (i) pay dividends or make any other distributions to the Company or any other Subsidiary of the Company on its Capital Stock or with respect to any other interest or participation in, or measured by, its profits, or pay any Indebtedness owed to the Company or any other Subsidiary of the Company, (ii) make loans or advances to the Company or any other Subsidiary of the Company, or (iii) transfer any of its properties or assets to the Company or any other Subsidiary of the Company (collectively, "Payment Restrictions"), except for such encumbrances or restrictions existing under or by reason of (a) the Senior Credit Facility as in effect on the Issue Date, and any amendments, restatements, renewals, replacements or refinancings thereof; PROVIDED that such amendments, restatements, renewals, replacements or refinancings are no more restrictive in the aggregate with respect to such dividend and other payment restrictions than those contained in the Senior Credit Facility immediately prior to any such amendment, restatement, renewal, replacement or refinancing, (b) applicable law, (c) any instrument governing Indebtedness or Capital Stock of an Acquired Person acquired by the Company or any of its Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with such acquisition); PROVIDED that such restriction is not applicable to any Person, or the properties or assets of any Person, other than the Acquired Person, (d) customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (e) purchase money Indebtedness for property acquired in the ordinary course of business that only impose restrictions on the property so acquired, (f) an agreement for the sale or disposition of the Capital Stock or assets of such Subsidiary; PROVIDED that such restriction is only applicable to such Subsidiary or assets, as applicable, and such sale or disposition otherwise is permitted under the covenant described under "-- Covenants -- Limitation on Asset Sales"; and PROVIDED, FURTHER, that such restriction or encumbrance shall be effective only for a period from the execution and delivery of such agreement through a termination date not later than 270 days after such execution and delivery, and (g) Refinancing Indebtedness permitted under the Indenture; PROVIDED that the restrictions contained in the agreements governing such Refinancing Indebtedness are not more restrictive in the aggregate than those contained in the agreements governing the Indebtedness being refinanced immediately prior to such refinancing. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Indenture will provide that the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into or suffer to exist any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or services) with any Affiliate of the Company or any beneficial owner of ten percent or more of any class of Capital Stock of the Company or any Subsidiary Guarantor unless (i) such transaction or series of transactions is on terms that are no less favorable to the Company or such Subsidiary, as the case may be, than would be available in a comparable transaction in arm's-length dealings with an unrelated third party, and (ii) (a) with respect to any transaction or series of transactions involving aggregate payments in excess of $1.0 million, the Company delivers an officers certificate to the Trustee certifying that such transaction or series of related transactions complies with clause (i) above and such transaction or series of related transactions has been approved by a majority of the members of the Board of Directors of the Company (and approved by a majority of the Independent Directors or, in the event there is only one Independent Director, by such Independent Director), and (b) with respect to any transaction or series of transactions involving aggregate payments in excess of $5.0 million, the Company delivers to the Trustee an opinion to the effect that such transaction or series of transactions is fair to the Company or such Subsidiary from a financial point of view issued by an investment banking firm of national standing. Notwithstanding the foregoing, this provision will not apply to (i) employment agreements or compensation or employee benefit arrangements with any officer, director or employee of the Company entered into in the ordinary course of business (including customary benefits thereunder), (ii) any transaction entered into by or among the Company or any Subsidiary Guarantor and one or more Subsidiary Guarantors, and (iii) transactions pursuant to agreements existing on the Issue Date. 103 LIMITATION ON INCURRENCE OF SENIOR SUBORDINATED INDEBTEDNESS. The Indenture will provide that (i) the Company will not, directly or indirectly, incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinated or junior in right of payment to any Indebtedness of the Company and senior in any respect in right of payment to the Notes, and (ii) the Company will not, directly or indirectly, permit any Subsidiary Guarantor to incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinated or junior in right of payment to any Indebtedness of such Subsidiary Guarantor and senior in any respect in right of payment to the Subsidiary Guarantee of such Subsidiary Guarantor. LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF SUBSIDIARIES. The Indenture will provide that the Company (a) will not, and will not permit any Subsidiary of the Company to, transfer, convey, sell or otherwise dispose of any shares of Capital Stock of such Subsidiary or any other Subsidiary (other than to the Company or a Subsidiary Guarantor) except that the Company and any Subsidiary may, in any single transaction, sell all, but not less than all, of the issued and outstanding Capital Stock of any subsidiary to any Person, subject to complying with the provisions of the Indenture applicable to such sale and (b) will not permit any Subsidiary of the Company to issue shares of its Capital Stock (other than directors' qualifying shares), or securities convertible into, or warrants, rights or options to subscribe for or purchase shares of, its Capital Stock to any Person other than to the Company or a Subsidiary Guarantor. FUTURE SUBSIDIARY GUARANTORS. The Indenture will provide that the Company shall cause each Subsidiary of the Company formed or acquired after the Issue Date to issue a Subsidiary Guarantee and execute and deliver an indenture supplemental to the Indenture as a Subsidiary Guarantor. PROVISION OF FINANCIAL STATEMENTS. The Indenture will provide that, whether or not the Company is then subject to Section 13(a) or 15(d) of the Exchange Act, the Company will file with the Commission, so long as the Notes are outstanding, the annual reports, quarterly reports and other periodic reports which the Company would have been required to file with the Commission pursuant to such Section 13(a) or 15(d) if the Company were so subject, and such documents shall be filed with the Commission on or prior to the respective dates (the "Required Filing Dates") by which the Company would have been required so to file such documents if the Company were so subject. The Company will also in any event (i) within 15 days of each Required Filing Date, (a) transmit by mail to all holders of Notes, as their names and addresses appear in the Note register, without cost to such holders and (b) file with the Trustee copies of the annual reports, quarterly reports and other periodic reports which the Company would have been required to file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company were subject to such Sections and (ii) if filing such documents by the Company with the Commission is prohibited under the Exchange Act, promptly upon written request and payment of the reasonable cost of duplication and delivery, supply copies of such documents to any prospective holder at the Company's cost. ADDITIONAL COVENANTS. The Indenture also contains covenants with respect to the following matters: (i) payment of principal, premium and interest; (ii) maintenance of an office or agency in the City of New York; (iii) maintenance of corporate existence; (iv) payment of taxes and other claims; (v) maintenance of properties; and (vi) maintenance of insurance. MERGER, CONSOLIDATION AND SALE OF ASSETS The Indenture will provide that the Company shall not consolidate or merge with or into (whether or not the Company is the Surviving Person), or, directly or indirectly through one or more Subsidiaries, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person or Persons unless (i) the Surviving Person is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Surviving Person (if other than the Company) assumes all the obligations of the Company under the Notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) at the time of and immediately after such Disposition, no Default or Event of Default shall have occurred and be continuing; and (iv) the Surviving Person will (A) have Consolidated Net Worth (immediately after giving effect to the Disposition on a pro forma basis) equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction, and (B) at the time of such Disposition and after giving pro forma effect thereto, the Surviving Person would be permitted to incur at least $1.00 of additional Indebtedness pursuant to the first paragraph of the covenant described under "-- Covenants -- Limitation on Incurrence of Indebtedness." 104 In the event of any transaction (other than a lease) described in and complying with the conditions listed in the immediately preceding paragraph in which the Company is not the Surviving Person and the Surviving Person is to assume all the obligations of the Company under the Notes and the Indenture pursuant to a supplemental indenture, such Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of, the Company, and the Company would be discharged from its obligations under the Indenture and the Notes; PROVIDED that solely for the purpose of calculating amounts described in clause (iii) under "-- Covenants -- Limitation on Restricted Payments," any such Surviving Person shall only be deemed to have succeeded to and be substituted for the Company with respect to the period subsequent to the effective time of such transaction (and the Company (before giving effect to such transaction) shall be deemed to be the "Company" for such purposes for all prior periods). EVENTS OF DEFAULT The Indenture will provide that each of the following constitutes an Event of Default: (i) a default for 30 days in the payment when due of interest on any Note (whether or not prohibited by the subordination provisions of the Indenture); (ii) a default in the payment when due of principal on any Note (whether or not prohibited by the subordination provisions of the Indenture), whether upon maturity, acceleration, optional or mandatory redemption, required repurchase or otherwise; (iii) failure to perform or comply with any covenant, agreement or warranty in the Indenture (other than the defaults specified in clauses (i) and (ii) above) which failure continues for 30 days after written notice thereof has been given to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the then outstanding Notes; (iv) the occurrence of one or more defaults under any agreements, indentures or instruments under which the Company or any Subsidiary of the Company then has outstanding Indebtedness in excess of $5.0 million in the aggregate and, if not already matured at its final maturity in accordance with its terms, such Indebtedness shall have been accelerated; (v) except as permitted by the Indenture, any Subsidiary Guarantee shall for any reason cease to be, or be asserted in writing by any Subsidiary Guarantor or the Company not to be, in full force and effect and enforceable in accordance with its terms; (vi) one or more judgments, orders or decrees for the payment of money in excess of $5.0 million, either individually or in the aggregate shall be entered against the Company or any Subsidiary of the Company or any of their respective properties and which judgments, orders or decrees are not paid, discharged, bonded or stayed for a period of 60 days after their entry; (vii) any holder or holders of at least $5.0 million in aggregate principal amount of Indebtedness of the Company or any Subsidiary of the Company after a default under such Indebtedness (a) shall notify the Company or the Trustee of the intended sale or disposition of any assets of the Company or any Subsidiary of the Company with an aggregate fair market value (as determined in good faith by the Company's Board of Directors, which determination shall be evidenced by a board resolution), individually or in the aggregate, of at least $5.0 million that have been pledged to or for the benefit of such holder or holders to secure such Indebtedness or (b) shall commence proceedings, or take any action (including by way of set-off), to retain in satisfaction of such Indebtedness, or to collect on, seize, dispose of or apply in satisfaction of such Indebtedness, such assets of the Company or any Subsidiary of the Company (including funds on deposit or held pursuant to lock-box and other similar arrangements); (viii) there shall have been the entry by a court of competent jurisdiction of (a) a decree or order for relief in respect of the Company or any Subsidiary of the Company in an involuntary case or proceeding under any applicable Bankruptcy Law or (b) a decree or order adjudging the Company or any Subsidiary of the Company bankrupt or insolvent, or seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any Subsidiary of the Company under any applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the 105 Company or any Subsidiary of the Company or of any substantial part of their respective properties, or ordering the winding up or liquidation of their affairs, and any such decree or order for relief shall continue to be in effect, or any such other decree or order shall be unstayed and in effect, for a period of 60 days; or (ix) (a) the Company or any Subsidiary of the Company commences a voluntary case or proceeding under any applicable Bankruptcy Law or any other case or proceeding to be adjudicated bankrupt or insolvent, (b) the Company or any Subsidiary of the Company consents to the entry of a decree or order for relief in respect of the Company or such Subsidiary of the Company in an involuntary case or proceeding under any applicable Bankruptcy Law or to the commencement of any bankruptcy or insolvency case or proceeding against it, (c) the Company or any Subsidiary of the Company files a petition or answer or consent seeking reorganization or relief under any applicable federal or state law, (d) the Company or any Subsidiary of the Company (x) consents to the filing of such petition or the appointment of or taking possession by, a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or such Subsidiary of the Company or of any substantial part of their respective property, (y) makes an assignment for the benefit of creditors or (z) admits in writing its inability to pay its debts generally as they become due or (e) the Company or any Subsidiary of the Company takes any corporate action in furtherance of any such actions in this paragraph (ix). If any Event of Default (other than as specified in clause (viii) or (ix) of the preceding paragraph with respect to the Company or any Subsidiary Guarantor) occurs and is continuing, the Trustee or the holders of at least 25% in aggregate principal amount of the then outstanding Notes may, and the Trustee at the request of such holders shall, declare all the Notes to be due and payable immediately. In the case of an Event of Default arising from the events specified in clause (viii) or (ix) of the preceding paragraph with respect to the Company or any Subsidiary Guarantor, the principal of, premium, if any, and any accrued and unpaid interest on all outstanding Notes shall IPSO FACTO become immediately due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the holders of all the Notes waive any existing Default or Event of Default and its consequences under the Indenture except (i) a continuing Default or Event of Default in the payment of the principal of, or premium, if any, or interest on, the Notes (which may only be waived with the consent of each holder of Notes affected), or (ii) in respect of a covenant or provision which under the Indenture cannot be modified or amended without the consent of each holder of Notes affected. Subject to certain limitations, holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal, premium or interest) if it determines that withholding notice is in their interest. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required, upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. DEFEASANCE The Company may, at its option and at any time, elect to have the obligations of the Company discharged with respect to the outstanding Notes and the Subsidiary Guarantees ("legal defeasance"). Such legal defeasance means that the Company and the Subsidiary Guarantors shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Notes and the Subsidiary Guarantees and to have satisfied all other obligations under the Notes, the Subsidiary Guarantees and the Indenture, except for (i) the rights of holders of the outstanding Notes to receive, solely from the trust fund described below, payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due, (ii) the Company's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes, and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee under the Indenture and (iv) the defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the 106 obligations of the Company and the Subsidiary Guarantors released with respect to certain covenants that are described in the Indenture ("covenant defeasance") and any omission to comply with such obligations shall not constitute a Default or an Event of Default with respect to the Notes. In order to exercise either legal defeasance or covenant defeasance, (i) the Company shall irrevocably deposit with the Trustee, as trust funds in trust for the benefit of the holders of the Notes, cash in United States dollars, U.S. Government Obligations, or a combination thereof, maturing as to principal and interest in such amounts as will be sufficient, without consideration of any reinvestment of such interest, in the opinion of a nationally recognized firm of independent public accountants or a nationally recognized investment banking firm, to pay and discharge the principal of, premium, if any, and interest on the outstanding Notes on the stated maturity of such principal or installment of principal or interest; (ii) in the case of legal defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the holders of the Notes will not recognize income, gain or loss for federal income tax purposes as a result of such legal defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred; (iii) in the case of covenant defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the holders of the Notes will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as clauses (viii) and (ix) under the first paragraph under "-Events of Default" are concerned, at any time during the period ending on the 91st day after the date of deposit; (v) such legal defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a Default under, the Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound; (vi) the Company shall have delivered to the Trustee an opinion of counsel to the effect that (A) the trust funds will not be subject to any rights of holders of Senior Debt or Guarantor Senior Debt of any Subsidiary Guarantor, including, without limitation, those arising under the Indenture, after the 91st day following the deposit and (B) after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Company shall have delivered to the Trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the holders of the Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; (viii) no event or condition shall exist that would prevent the Company from making payments of the principal of, premium, if any, and interest on the Notes on the date of such deposit or at any time ending on the 91st day after the date of such deposit; (ix) the Company shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to either the legal defeasance or the covenant defeasance, as the case may be, have been complied with; and (x) such deposit shall not violate the provisions described under "-Subordination." SATISFACTION AND DISCHARGE The Indenture will cease to be of further effect (except as to surviving rights of registration, transfer or exchange of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when (i) either (a) all the Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid) have been delivered to the Trustee for cancellation or (b) all Notes not theretofore delivered for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee an amount in United States dollars sufficient to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for the principal of, premium, if any, and interest to the date of payment; (ii) the Company has paid or caused to be paid all other sums payable under the Indenture by the Company; and (iii) the Company has delivered to the Trustee an officers' certificate and an opinion of counsel each stating that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with and that such deposit does not violate the provisions described under "-Subordination." 107 MODIFICATIONS AND AMENDMENTS Modifications and amendments of the Indenture or the Notes may be made by the Company, the Subsidiary Guarantors and the Trustee with the written consent of the holders of not less than a majority in aggregate principal amount of the then outstanding Notes; PROVIDED, HOWEVER, that no such modification or amendment may, without the consent of the holder of each outstanding Note affected thereby: (i) change the stated maturity of the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency or the manner in which the principal of any Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the stated maturity thereof (or, in the case of redemption, on or after the redemption date); (ii) extend the time for payment of interest on the Notes; (iii) alter the redemption provisions in the Notes or the Indenture in a manner adverse to any holder of the Notes; (iv) amend, change or modify the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control or modify any of the provisions or definitions with respect thereto; (v) reduce the percentage in principal amount of outstanding Notes, the consent of whose holders is required for any amended or supplemental indenture or the consent of whose holders is required for any waiver of compliance with any provision of the Indenture or any Default thereunder and their consequences provided for in the Indenture; (vi) modify any of the provisions of the Indenture relating to any amended or supplemental indentures requiring the consent of holders or relating to the waiver of past defaults or relating to the waiver of any covenant, except to increase the percentage of outstanding Notes required for such actions or to provide that any other provision of the Indenture cannot be modified or waived without the consent of the holder of each Note affected thereby; (vii) except as otherwise permitted under "-Merger, Consolidation and Sale of Assets," consent to the assignment or transfer by the Company of any of its rights and obligations under the Indenture; (viii) modify any of the provisions of the Indenture relating to the subordination of the Notes or the Subsidiary Guarantees in a manner adverse to the holders of the Notes; (ix) release any Subsidiary Guarantor from any of its obligations under its Subsidiary Guarantee other than in accordance with the terms of the Indenture; or (x) modify certain provisions of the Indenture with respect to the redemption of the Notes on or prior to the Special Redemption Date or, on or prior to the Special Redemption Date, any of the definitions related thereto in a manner adverse to any holder or Notes; and PROVIDED, FURTHER, that no such modification or amendment to any of the subordination provisions of the Indenture or the Notes may be made without the consent of a majority in interest of the holders of Senior Debt. Notwithstanding the foregoing, without the consent of any holder of Notes, the Company, the Subsidiary Guarantors and the Trustee may amend or supplement the Indenture or the Notes to (i) cure any ambiguity, defect or inconsistency, (ii) provide for uncertificated Notes in addition to or in place of certificated Notes, (iii) provide for the assumption of the Company's obligations to the holders of the Notes in the event of any Disposition involving the Company that is permitted under the provisions of "-Merger, Consolidation and Sale of Assets" in which the Company is not the Surviving Person, (iv) make any change that would provide any additional rights or benefits to the holders of the Notes or does not adversely affect the interests of any holder, (v) comply with the requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act or (vi) add additional Subsidiary Guarantors. THE TRUSTEE In the event that the Trustee becomes a creditor of the Company, the Indenture contains certain limitations on the rights of the Trustee to obtain payment of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue as Trustee, or resign. The holders of a majority in aggregate principal amount of the then outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that, in case an Event of Default has occurred and has not been cured, the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. The Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any holder of Notes, unless such holder shall have offered to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense. 108 BOOK-ENTRY; DELIVERY AND FORM The Notes will be represented by one or more fully registered global notes (each a "Global Note"). Each Global Note will be deposited on the date of the closing of the sale of the Notes offered hereby with, or on behalf of, The Depository Trust Company ( "DTC") and registered in the name of a nominee of DTC. THE GLOBAL NOTE Ownership of beneficial interests in a Global Note will be limited to persons that have accounts with DTC ("participants") or persons that may hold interests through participants. The Company expects that pursuant to procedures established by DTC (i) upon deposit of a Global Note, DTC will credit the accounts of participants designated by the Underwriters with the respective principal amount of the Global Note beneficially owned by such participant and (ii) ownership of the Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons holding through participants). So long as DTC, or its nominee, is the registered owner or holder of the Notes, DTC or such nominee will be considered the sole owner or holder of the Notes represented by the Global Note for all purposes under the Indenture. No beneficial owner of an interest in the Global Note will be able to transfer such interest except in accordance with DTC's applicable procedures, in addition to those provided for under the Indenture with respect to the Notes. Payments of the prinicipal of, premium (if any) and interest on the Global Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. None of the Company, the Trustee nor any paying agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest. The Company expects that DTC or its nominee, upon receipt of any payment of the principal of, premium (if any) and interest on the Global Note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Note as shown on the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in any such Global Note held through such participants will be governed by standing instructions and customary practice, as is now the case with securities held for the accounts of customers registered to the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in same day funds. The laws of some states may require that certain purchasers of securities take physical delivery of such securities in certificated form. Such laws may impair the ability to own, transfer or pledge beneficial interests in a Global Note. If a holder requires physical delivery of a certificated note for any reason, including to sell Notes to persons in states which require physical delivery of such securities or to pledge such securities, such holder must transfer its interest in the applicable Global Note in accordance with the normal procedures of DTC and, with respect to the Notes, with the procedures set forth in the Indenture. DTC has advised the Company that it will take any action permitted to be taken by a holder of Notes only at the direction of one or more participants to whose account interests in the Global Note are credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Indenture, DTC will exchange the Global Note for certificated notes representing the Notes, which it will distribute to its participants. DTC has advised the Company as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and certain other organizations. 109 Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Note among participants of DTC, it is under no obligation to perform such procedures, and such procedures may be discontinued at any time. Neither the Company nor the Trustee will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. CERTIFICATED NOTES If DTC is at any time unwilling or unable to continue as a depositary for any Global Note and a successor depositary is not appointed by the Company within 30 days, certificated notes will be issued in exchange for Global Notes. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for the definition of all other terms used in the Indenture. "ACQUIRED DEBT" means, with respect to any specified Person, Indebtedness of any other Person (the "Acquired Person") existing at the time the Acquired Person merges with or into, or becomes a Subsidiary of, such specified Person, including Indebtedness incurred in connection with, or in contemplation of, the Acquired Person merging with or into, or becoming a Subsidiary of, such specified Person. "AFFILIATE" means, with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with") of any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "ASSET SALE" means (i) any sale, lease, conveyance or other disposition by the Company or any Subsidiary of the Company of any assets (including by way of a sale-and-leaseback) other than in the ordinary course of business (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company shall not be an "Asset Sale" but instead shall be governed by the provisions of the Indenture described under "-Merger, Consolidation and Sale of Assets") or (ii) the issuance or sale of Capital Stock of any Subsidiary of the Company, in each case, whether in a single transaction or a series of related transactions, to any Person (other than to the Company or a Subsidiary Guarantor); PROVIDED that the term "Asset Sale" shall not include any disposition or dispositions during any twelve-month period of assets or property having a fair market value of less than $300,000 in the aggregate. "BANKRUPTCY LAW" means Title 11, United States Bankruptcy Code of 1978, as amended, or any similar United States federal or state law relating to bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or relief of debtors, or any amendment to, succession to or change in any such law. "CAPITAL LEASE OBLIGATIONS" of any Person means the obligations to pay rent or other amounts under a lease of (or other Indebtedness arrangements conveying the right to use) real or personal property of such Person which are required to be classified and accounted for as a capital lease or liability on the face of a balance sheet of such Person in accordance with GAAP. The amount of such obligations shall be the capitalized amount thereof in accordance with GAAP and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "CAPITAL STOCK" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock or other equity participations, including partnership interests, whether general or limited, of such Person, including any Preferred Stock. 110 "CASH EQUIVALENTS" means (i) marketable direct obligations issued or guaranteed by the United States of America, or any governmental entity or agency or political subdivision thereof (PROVIDED, that the full faith and credit of the United States of America is pledged in support thereof) maturing within one year of the date of purchase; (ii) commercial paper issued by corporations, each of which shall have a consolidated net worth of at least $500 million, maturing within 180 days from the date of the original issue thereof, and rated "P-1" or better by Moody's Investors Service or "A-1" or better by Standard & Poor's Corporation or an equivalent rating or better by any other nationally recognized securities rating agency; and (iii) certificates of deposit issued or acceptances accepted by or guaranteed by any bank or trust company organized under the laws of the United States of America or any state thereof or the District of Columbia, in each case having capital, surplus and undivided profits totalling more than $500 million, maturing within one year of the date of purchase and (iv) any money market fund sponsored by a registered broker dealer or mutual fund distributor (including the Trustee) that invests solely in the securities specified in the foregoing clauses (i), (ii) or (iii). "CHANGE OF CONTROL" means the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), disregarding the Permitted Holders, becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have beneficial ownership of all shares of Capital Stock that such person or group has the right to acquire regardless of when such right is first exercisable), directly or indirectly, of more than 35% of the total voting power represented by the outstanding Voting Stock of the Company; (b) the Company merges with or into another Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person merges with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (x) the outstanding Voting Stock of the Company is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee corporation and (y) immediately after such transaction no "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), disregarding the Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have beneficial ownership of all shares of Capital Stock that such person or group has the right to acquire regardless of when such right is first exercisable), directly or indirectly, of more than 35% of the total voting power represented by the outstanding Voting Stock of the surviving or transferee corporation; (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by the Board of Directors of the Company or whose nomination for election by the stockholders of the Company was approved by (x) a vote of at least a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved (as described in this clause (x) or in the following clause (y)) or (y) Permitted Holders that are "beneficial owners" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of a majority of the total voting power represented by the outstanding Voting Stock of the Company) cease for any reason to constitute a majority of the Board then in office; or (d) the Company is liquidated or dissolved or adopts a plan of liquidation. "CONSOLIDATED INTEREST EXPENSE" means, with respect to any period, the sum of (i) the interest expense of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP consistently applied, including, without limitation, (a) amortization of debt discount, (b) the net payments, if any, under interest rate contracts (including amortization of discounts), (c) the interest portion of any deferred payment obligation and (d) accrued interest, plus (ii) the interest component of the Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the Company during such period, and all capitalized interest of the Company and its Subsidiaries plus (iii) cash dividends declared or paid in respect of any Preferred Stock of the Company and its Subsidiaries during such period, in each case as determined on a consolidated basis in accordance with GAAP consistently applied. For purposes of this definition, the amount of any cash dividends declared or paid 111 will be deemed to be equal to the amount of such dividends multiplied by a fraction, the numerator of which is one and the denominator of which is one minus the maximum statutory combined Federal, state, local and foreign income tax rate then applicable to the Company and its Subsidiaries (expressed as a decimal between one and zero) on a consolidated basis. "CONSOLIDATED NET INCOME" means, with respect to any period, the net income (or loss) of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP consistently applied, adjusted, to the extent included in calculating such net income (or loss), by excluding, without duplication, (i) all extraordinary gains but not losses, (ii) the portion of net income (or loss) of the Company and its Subsidiaries allocable to interests in unconsolidated Persons, except to the extent of the amount of dividends or distributions actually paid to the Company or its Subsidiaries by such other Person during such period, (iii) net income (or loss) of any Person combined with the Company or any of its Subsidiaries on a "pooling of interests" basis attributable to any period prior to the date of combination, (iv) net gain but not losses in respect of Asset Sales, or (v) the net income of any Subsidiary to the extent that the declaration of dividends or similar distributions by that Subsidiary of that income to the Company is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders. "CONSOLIDATED NET WORTH" means, with respect to any Person on any date, the equity of the common and preferred stockholders of such Person and its Subsidiaries as of such date, determined on a consolidated basis in accordance with GAAP consistently applied. "CUMULATIVE CONSOLIDATED INTEREST EXPENSE" means, as of any date of determination, Consolidated Interest Expense from the last day of the month immediately preceding the Issue Date to the last day of the most recently ended month prior to such date, taken as a single accounting period. "CUMULATIVE OPERATING CASH FLOW" means, as of any date of determination, Operating Cash Flow from the last day of the month immediately preceding the Issue Date to the last day of the most recently ended month prior to such date, taken as a single accounting period. "DEBT TO OPERATING CASH FLOW RATIO" means, with respect to any date of determination, the ratio of (i) the aggregate principal amount of all outstanding Indebtedness of the Company and its Subsidiaries as of such date on a consolidated basis to (ii) Operating Cash Flow of the Company and its Subsidiaries on a consolidated basis for the four most recent full fiscal quarters ending on or immediately prior to such date, determined on a pro forma basis after giving pro forma effect to (a) the incurrence of all Indebtedness to be incurred on such date and (if applicable) the application of the net proceeds therefrom, including to refinance other Indebtedness, as if such Indebtedness was incurred, and the application of such proceeds occurred, at the beginning of such four-quarter period; (b) the incurrence, repayment or retirement of any other Indebtedness by the Company and its Subsidiaries since the first day of such four-quarter period as if such Indebtedness was incurred, repaid or retired at the beginning of such four-quarter period (except that, in making such computation, the amount of Indebtedness under any revolving credit facility shall be computed based upon the average balance of such Indebtedness at the end of each month during such four-quarter period); (c) in the case of Acquired Debt, the related acquisition as if such acquisition had occurred at the beginning of such four-quarter period; and (d) any acquisition or disposition by the Company and its Subsidiaries of any company or any business or any assets out of the ordinary course of business, or any related repayment of Indebtedness, in each case since the first day of such four-quarter period, assuming such acquisition or disposition had been consummated on the first day of such four-quarter period. In addition, the consolidated net income of a Person with outstanding Indebtedness or Capital Stock providing for a Payment Restriction which is permitted to exist by reason of clause (c) of the covenant described under "-Covenants-Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries" shall not be taken into account in determining whether any Indebtedness is permitted to be incurred under the Indenture. "DEFAULT" means any event that is, or after the giving of notice or passage of time or both would be, an Event of Default. 112 "DESIGNATED SENIOR DEBT" means (i) any Senior Debt outstanding under the Senior Credit Facility and (ii) if no Senior Debt is outstanding under the Senior Credit Facility, any other Senior Debt of the Company permitted to be incurred under the Indenture the principal amount of which is $50.0 million or more at the time of the designation of such Senior Debt as "Designated Senior Debt" by the Company in a written instrument delivered to the Trustee. "DISPOSITION" means, with respect to any Person, any merger, consolidation or other business combination involving such Person (whether or not such Person is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of such Person's assets. "DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part on or prior to the stated maturity of the Notes. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FILM CONTRACTS" means contracts with suppliers that convey the right to broadcast specified films, videotape motion pictures, syndicated television programs or sports or other programming. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Issue Date. "GUARANTEE" by any Person means any obligation, contingent or otherwise, of such Person guaranteeing any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (ii) to purchase property, securities or services for the purpose of assuring the holder of such Indebtedness of the payment of such Indebtedness, or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness (and "guaranteed," "guaranteeing" and "guarantor" shall have meanings correlative to the foregoing); PROVIDED, HOWEVER, that the guarantee by any Person shall not include endorsements by such Person for collection or deposit, in either case, in the ordinary course of business. "GUARANTOR SENIOR DEBT" means, with respect to any Subsidiary Guarantor, (i) the principal of, premium, if any, and interest on and all other monetary Obligations of every kind or nature due on or in connection with any Indebtedness of such Subsidiary Guarantor outstanding under or in respect of the Senior Credit Facility that is permitted to be incurred under the Indenture, (ii) principal of and premium, if any, and interest on and all other monetary Obligations of every kind or nature due on or in connection with all Indebtedness of such Subsidiary Guarantor that is permitted to be incurred under the Indenture that is not by its terms PARI PASSU with or subordinated to the Subsidiary Guarantee of such Subsidiary Guarantor, (iii) all Obligations of such Subsidiary Guarantor with respect to the Indebtedness referred to in the foregoing clauses (i) and (ii), including, in the case of Indebtedness outstanding under the Senior Credit Facility, Post-Petition Interest, and (iv) all (including all subsequent) renewals, extensions, amendments, refinancings, repurchases or redemptions, modifications, supplements, replacements, increases or refundings thereof (whether or not coincident therewith), in whole or in part under one or more agreements or instruments, that are not prohibited by the Indenture. Notwithstanding the foregoing, Guarantor Senior Debt shall not include (a) any Indebtedness for federal, state, local or other taxes, (b) any Indebtedness among or between the Company, any Subsidiary and/or their Affiliates, (c) any accounts payable or other liability to trade creditors arising in the ordinary course of business, (d) any Indebtedness that is incurred in violation of the Indenture, (e) Indebtedness evidenced by the Subsidiary Guarantee of such Subsidiary Guarantor, (f) Indebtedness of a Subsidiary Guarantor that is expressly subordinate or junior in right of payment to any other Indebtedness of such Subsidiary Guarantor or (g) Indebtedness of such Subsidiary Guarantor representing a guarantee of Subordinated Debt or Pari Passu Indebtedness. "INDEBTEDNESS" means, with respect to any Person, without duplication, and whether or not contingent, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services or which 113 is evidenced by a note, bond, debenture or similar instrument, (ii) all Capital Lease Obligations of such Person, (iii) all obligations of such Person in respect of letters of credit or bankers' acceptances issued or created for the account of such Person, (iv) all Interest Rate Agreement Obligations of such Person, (v) all liabilities secured by any Lien on any property owned by such Person even if such Person has not assumed or otherwise become liable for the payment thereof to the extent of the lesser of (x) the amount of the Obligation so secured and (y) the fair market value of the property subject to such Lien, (vi) all obligations to purchase, redeem, retire, or otherwise acquire for value any Capital Stock of such Person, or any warrants, rights or options to acquire such Capital Stock, now or hereafter outstanding, (vii) to the extent not included in (vi), all Disqualified Stock issued by such Person, valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends thereon, and (viii) to the extent not otherwise included, any guarantee by such Person of any other Person's indebtedness or other obligations described in clauses (i) through (vii) above. "Indebtedness" of the Company and its Subsidiaries shall not include current trade payables incurred in the ordinary course of business and payable in accordance with customary practices, and non-interest bearing installment obligations and accrued liabilities incurred in the ordinary course of business which are not more than 90 days past due. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture, and if such price is based upon, or measured by the fair market value of, such Disqualified Stock, such fair market value is to be determined in good faith by the board of directors of the issuer of such Disqualified Stock. "INDEPENDENT DIRECTOR" means a director of the Company other than a director (i) who (apart from being a director of the Company or any Subsidiary) is an employee, associate or Affiliate of the Company or a Subsidiary or has held any such position during the previous five years, or (ii) who is a director, employee, associate or Affiliate of another party to the transaction in question. "INSOLVENCY OR LIQUIDATION PROCEEDING" means, with respect to any Person, any liquidation, dissolution or winding up of such Person, or any bankruptcy, reorganization, insolvency, receivership or similar proceeding with respect to such Person, whether voluntary or involuntary. "INTEREST RATE AGREEMENT OBLIGATIONS" means, with respect to any Person, the Obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "INVESTMENTS" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates of such Person) in the form of loans, guarantees, advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business) purchases or other acquisitions for consideration of Indebtedness, Capital Stock or other securities and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "Investments" shall exclude extensions of trade credit (including extensions of credit in respect of equipment leases) by the Company and its Subsidiaries in the ordinary course of business in accordance with normal trade practices of the Company or such Subsidiary, as the case may be. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in any asset and any filing of, or agreement to give, any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "NET PROCEEDS" means, with respect to any Asset Sale by any Person, the aggregate cash proceeds received by such Person and/or its Affiliates in respect of such Asset Sale, which amount is equal to the excess, if any, of (i) the cash received by such Person and/or its Affiliates (including any cash payments received by way of deferred payment pursuant to, or monetization of, a note or installment receivable or otherwise, but only as and when received) in connection with such Asset Sale, over (ii) the sum of (a) the amount of any Indebtedness that is secured by such asset and which is required to be repaid by such Person in connection with such Asset Sale, plus (b) all fees, commissions and other expenses incurred by such Person in connection with such Asset Sale, plus (c) provision for taxes, including income taxes, attributable to the Asset Sale or attributable to required prepayments or repayments of 114 Indebtedness with the proceeds of such Asset Sale, plus (d) a reasonable reserve for the after-tax cost of any indemnification payments (fixed or contingent) attributable to seller's indemnities to purchaser in respect of such Asset Sale undertaken by the Company or any of its Subsidiaries in connection with such Asset Sale plus (e) if such Person is a Subsidiary of the Company, any dividends or distributions payable to holders of minority interests in such Subsidiary from the proceeds of such Asset Sale. "OBLIGATIONS" means any principal, interest (including, without limitation, in the case of Senior Debt under the Senior Credit Facility, Post-Petition Interest), penalties, fees, indemnifications, reimbursement obligations, damages and other liabilities payable under the documentation governing any Indebtedness. "OPERATING CASH FLOW" means, with respect to any period, the Consolidated Net Income of the Company and its Subsidiaries for such period, plus (i) extraordinary net losses and net losses realized on any sale of assets during such period, to the extent such losses were deducted in computing Consolidated Net Income, plus (ii) provision for taxes based on income or profits, to the extent such provision for taxes was included in computing such Consolidated Net Income, and any provision for taxes utilized in computing the net losses under clause (i) hereof, plus (iii) Consolidated Interest Expense of the Company and its Subsidiaries for such period, to the extent deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization and all other non-cash charges, to the extent such depreciation, amortization and other non-cash charges were deducted in computing such Consolidated Net Income (including amortization of goodwill and other intangibles, including Film Contracts and write-downs of Film Contracts), but excluding any such charges which represent any accrual of, or a reserve for, cash charges for a future period, minus (v) any cash payments contractually required to be made with respect to Film Contracts (to the extent not previously included in computing such Consolidated Net Income), minus (vi) non-cash items increasing Consolidated Net Income (to the extent included in computing such Consolidated Net Income). "PARI PASSU INDEBTEDNESS" means any Indebtedness of the Company or a Subsidiary Guarantor which ranks PARI PASSU in right of payment with the Notes or the Subsidiary Guarantee of such Subsidiary Guarantor, as the case may be (whether or not such Indebtedness is secured by any Lien). "PERMITTED HOLDERS" means (i) each of J. Mack Robinson and Robert S. Prather, Jr.; (ii) their spouses and lineal descendants; (iii) in the event of the incompetence or death of any of the Persons described in clauses (i) and (ii), such Person's estate, executor, administrator, committee or other personal representative; (iv) any trusts created for the benefit of the Persons described in clause (i) or (ii); or (v) any Person controlled by any of the Persons described in clause (i), (ii), or (iv). For purposes of this definition, "control," as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of voting securities or by agreement or otherwise. "PERMITTED INVESTMENTS" means (i) any Investment in the Company or any Subsidiary Guarantor; (ii) any Investments in Cash Equivalents; (iii) any Investment in a Person (an "Acquired Person") if, as a result of such Investment, (a) the Acquired Person becomes a Subsidiary Guarantor, or (b) the Acquired Person either (1) is merged, consolidated or amalgamated with or into the Company or a Subsidiary Guarantor and the Company or such Subsidiary Guarantor is the Surviving Person, or (2) transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Subsidiary Guarantor; (iv) Investments in accounts and notes receivable acquired in the ordinary course of business; and (v) Interest Rate Agreement Obligations permitted pursuant to the second paragraph of the covenant described under "-Covenants-LIMITATION ON INCURRENCE OF INDEBTEDNESS". "PERMITTED LIENS" means (i) Liens on assets or property of the Company that secure Senior Debt of the Company, either existing on the Issue Date or which such Senior Debt is permitted to be incurred under the Indenture, and Liens on assets or property of a Subsidiary Guarantor that secure Guarantor Senior Debt of such Subsidiary Guarantor, either existing on the Issue Date or which such Guarantor Senior Debt is permitted to be incurred under the Indenture; (ii) Liens securing Indebtedness of a Person existing at the time that such Person is merged into or consolidated with the Company or a Subsidiary of the Company, PROVIDED that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of such Person; (iii) Liens on property acquired by the Company or a Subsidiary, PROVIDED that such Liens were in existence prior to the contemplation of such acquisition and do not extend to any other property; (iv) Liens in favor of the Company or any Subsidiary of the Company; (v) Liens incurred, or pledges and deposits in connection with, workers' compensation, unemployment insurance and other social security benefits, and leases, appeal bonds and other 115 obligations of like nature incurred by the Company or any Subsidiary of the Company in the ordinary course of business; (vi) Liens imposed by law, including, without limitation, mechanics', carriers', warehousemen's, materialmen's, suppliers' and vendors' Liens, incurred by the Company or any Subsidiary of the Company in the ordinary course of business; (vii) Liens for ad valorem, income or property taxes or assessments and similar charges which either are not delinquent or are being contested in good faith by appropriate proceedings for which the Company has set aside on its books reserves to the extent required by GAAP; (viii) Liens securing Senior Debt or Guarantor Senior Debt under the Senior Credit Facility; (ix) Liens created under the Indenture and (x) Liens permitted under the Senior Credit Facility. "PERSON" means any individual, corporation, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof. "POST-PETITION INTEREST" means, with respect to any Indebtedness of any Person, all interest accrued or accruing on such Indebtedness after the commencement of any Insolvency or Liquidation Proceeding against such Person in accordance with and at the contract rate (including, without limitation, any rate applicable upon default) specified in the agreement or instrument creating, evidencing or governing such Indebtedness whether or not the claim for such interest is allowed as a claim in such Insolvency or Liquidation Proceeding. "PREFERRED STOCK" as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over Capital Stock of any other class of such Person. "PUBLIC EQUITY OFFERING" means an underwritten public offering of Capital Stock (other than Disqualified Stock) of the Company subsequent to the Issue Date (excluding Capital Stock which may be issued upon exercise of any over-allotment option exercisable after the Issue Date and granted to in connection with the Concurrent Offering), pursuant to an effective registration statement filed under the Securities Act, the net proceeds of which to the Company (after deducting any underwriting discounts and commissions) exceed $25.0 million. "RESTRICTED INVESTMENT" means an Investment other than a Permitted Investment. "RESTRICTED PAYMENT" means (i) any dividend or other distribution declared or paid on any Capital Stock of the Company or any of its Subsidiaries (other than dividends or distributions payable solely in Capital Stock (other than Disqualified Stock) of the Company or such Subsidiary or dividends or distributions payable to the Company or any Subsidiary Guarantor); (ii) any payment to purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any Subsidiary of the Company or other Affiliate of the Company (other than any Capital Stock owned by the Company or any Subsidiary Guarantor); (iii) any payment to purchase, redeem, defease or otherwise acquire or retire for value any Subordinated Indebtedness prior to the scheduled maturity thereof; or (iv) any Restricted Investment. "SENIOR CREDIT FACILITY" means the credit agreement, entered into as of , 1996, among the Company, the lenders named therein, KeyBank National Association, as Agent and NationsBank, N.A. (South), as Co-Agent, as the same may be amended, modified, renewed, refunded, replaced or refinanced from time to time, including (i) any related notes, letters of credit, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time, and (ii) any notes, guarantees, collateral documents, instruments and agreements executed in connection with any such amendment, modification, renewal, refunding, replacement or refinancing. "SENIOR DEBT" means (i) the principal of, premium, if any, and interest on and all other monetary Obligations of every kind or nature due on or in connection with any Indebtedness outstanding under the Senior Credit Facility that is permitted to be incurred under the Indenture, (ii) principal of and premium, if any, and interest on and all other monetary Obligations of every kind or nature due on or in connection with all Indebtedness that is permitted to be incurred under the Indenture that is not by its terms PARI PASSU with or subordinated to the Notes, (iii) all Obligations of the Company with respect to Indebtedness referred to in the foregoing clauses (i) and (ii), including, in the case of Indebtedness outstanding under the Senior Credit Facility, Post-Petition Interest, and (iv) all (including all subsequent) renewals, extensions, amendments, refinancings, repurchases or redemptions, modifications, supplements, replacements, increases or refundings thereof (whether or not coincident therewith), in whole or in part under one or 116 more agreements or instruments, that are not prohibited by the Indenture. Notwithstanding the foregoing, Senior Debt shall not include (a) any Indebtedness for federal, state, local or other taxes, (b) any Indebtedness among or between the Company, any Subsidiary of the Company and/or their Affiliates, (c) any accounts payable or other liability to trade creditors arising in the ordinary course of business, (d) any Indebtedness that is incurred in violation of the Indenture, (e) Indebtedness evidenced by the Notes or (f) Indebtedness of the Company that is expressly subordinate or junior in right of payment to any other Indebtedness of the Company. "SUBORDINATED INDEBTEDNESS" means any Indebtedness of the Company or a Subsidiary Guarantor if the instrument creating or evidencing such Indebtedness or pursuant to which such Indebtedness is outstanding expressly provides that such Indebtedness is subordinated in right of payment to the Notes or the Subsidiary Guarantee of such Subsidiary Guarantor, as the case may be. "SUBSIDIARY" of any Person means (i) any corporation more than 50% of the outstanding Voting Stock of which is owned or controlled, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person, or by such Person and one or more other Subsidiaries thereof, or (ii) any limited partnership of which such Person or any Subsidiary of such Person is a general partner, or (iii) any other Person (other than a corporation or limited partnership) in which such Person, or one or more other Subsidiaries of such Person, or such Person and one or more other Subsidiaries thereof, directly or indirectly, has more than 50% of the outstanding partnership or similar interests or has the power, by contract or otherwise, to direct or cause the direction of the policies, management and affairs thereof. "SUBSIDIARY GUARANTOR" means (i) each Subsidiary of the Company existing on the Issue Date, (ii) each of the Company's Subsidiaries which becomes a guarantor of the Notes in compliance with the provisions set forth under "-Covenants-Future Subsidiary Guarantors," and (iii) each of the Company's Subsidiaries executing a supplemental indenture in which such Subsidiary agrees to be bound by the terms of the Indenture. "VOTING STOCK" means, with respect to any Person, Capital Stock of such Person of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such Person (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "WEIGHTED AVERAGE LIFE TO MATURITY" means, with respect to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required scheduled payment of principal, including payment as final maturity, in respect thereof, with (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding aggregate principal amount of such Indebtedness. 117 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 1996 (the "Underwriting Agreement"), J.P. Morgan Securities Inc. ("J.P. Morgan"), Allen & Company Incorporated ("Allen & Company"), and The Robinson-Humphrey Company, Inc. ("Robinson-Humphrey" and, collectively with J.P. Morgan and Allen & Company, the "Underwriters") have severally agreed to purchase from the Company, and the Company has agreed to sell to them, severally, the principal amount of Notes set forth opposite their names below. Under the terms and conditions of the Underwriting Agreement, the Underwriters are obligated to take and pay for the entire principal amount of the Notes if any Notes are purchased. The Underwriters propose initially to offer the Notes directly to the public at the price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of % of the principal amount of the Notes. The Underwriters may allow, and such dealers may reallow, a concession not in excess of % of the principal amount of the Notes to certain other dealers. After the initial public offering of the Notes, the offering price and such concession may be changed. Each of the Company and the Subsidiary Guarantors has agreed, jointly and severally, to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. There is currently no trading market for the Notes. The Company does not intend to list the Notes on any securities exchange. The Company has been advised by the Underwriters that the Underwriters currently intend to make a market in the Notes, however, the Underwriters are not obligated to do so and may discontinue any such market making activities at any time without notice. No assurance can be given as to the development or liquidity of any trading market for the Notes. J.P. Morgan, Allen & Company and Robinson-Humphrey are acting as underwriters in connection with the Concurrent Offering and will receive customary fees in connection therewith. Robinson-Humphrey will be rendering investment banking services with regard to the conversion of the 8% Note to the Series A Preferred Stock and the Company's sale of the Series B Preferred Stock and warrants and will receive customary fees in connection therewith. In addition, Robinson-Humphrey has previously rendered investment banking services to the Company and certain of its affiliates and received customary fees in connection therewith. LEGAL MATTERS The validity of the Notes offered hereby will be passed upon for the Company by Proskauer Rose Goetz & Mendelsohn LLP, New York, New York. Certain legal matters in connection with the offering made hereby will be passed upon for the Underwriters by Cahill Gordon & Reindel (a partnership including a professional corporation), New York, New York. EXPERTS The consolidated financial statements and schedule of Gray Communications Systems, Inc. at December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of WRDW-TV at December 31, 1995 and for the year then ended appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth 118
------------------------ PRINCIPAL AMOUNT ------------------------ J.P. Morgan Securities Inc. $ Allen & Company Incorporated The Robinson-Humphrey Company, Inc. ------------------------ Total $150,000,000 ------------------------ ------------------------ in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of WRDW-TV (an operating station of Television Station Partners, L.P.) at December 31, 1994 and for the years ended December 31, 1993 and 1994 included in this Prospectus and Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report thereon appearing elsewhere herein and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements and schedule of the Broadcasting and Paging Operations of John H. Phipps, Inc. at December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 119 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
GRAY COMMUNICATIONS SYSTEMS, INC. (THE "COMPANY") Interim Condensed Consolidated Financial Statements (unaudited): Condensed Consolidated Balance Sheets at December 31, 1995 and June 30, 1996........ F-2 Condensed Consolidated Statements of Income for the six months ended June 30, 1995 and 1996........................................................................... F-3 Condensed Consolidated Statement of Stockholders' Equity for the six months ended June 30, 1996...................................................................... F-4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and 1996...................................................................... F-5 Notes to Condensed Consolidated Financial Statements................................ F-6 Audited Consolidated Financial Statements: Report of Independent Auditors...................................................... F-12 Consolidated Balance Sheets at December 31, 1994 and 1995........................... F-13 Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995............................................................................... F-14 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995................................................................ F-15 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995........................................................................... F-16 Notes to Consolidated Financial Statements.......................................... F-17 WRDW-TV (THE "AUGUSTA BUSINESS") Audited Financial Statements: Report of Independent Auditors...................................................... F-33 Balance Sheet at December 31, 1995.................................................. F-34 Statement of Income for the year ended December 31, 1995............................ F-35 Statement of Partnership's Equity for the year ended December 31, 1995.............. F-36 Statement of Cash Flows for the year ended December 31, 1995........................ F-37 Notes to Financial Statements....................................................... F-38 Independent Auditors' Report........................................................ F-41 Balance Sheet at December 31, 1994.................................................. F-42 Statements of Income for the years ended December 31, 1993 and 1994................. F-43 Statements of Partnership's Equity for the years ended December 31, 1993 and 1994... F-44 Statements of Cash Flows for the years ended December 31, 1993 and 1994............. F-45 Notes to Financial Statements....................................................... F-46 BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE "PHIPPS BUSINESS") Interim Condensed Financial Statements (unaudited): Condensed Balance Sheets at December 31, 1995 and June 30, 1996..................... F-50 Condensed Statements of Income for the six months ended June 30, 1995 and 1996...... F-51 Condensed Statements of Cash Flows for the six months ended June 30, 1995 and 1996............................................................................... F-52 Notes to Condensed Financial Statements............................................. F-53 Audited Financial Statements: Report of Independent Auditors...................................................... F-54 Balance Sheets at December 31, 1994 and 1995........................................ F-55 Statements of Income for the years ended December 31, 1993, 1994 and 1995........... F-56 Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995....... F-57 Notes to Financial Statements....................................................... F-58 GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) See notes to condensed consolidated financial statements. F-2
-------------------------------- DECEMBER 31, JUNE 30, 1995 1996 --------------- --------------- Current Assets Cash and cash equivalents $559,991 $1,287,096 Trade accounts receivable, less allowance for doubtful accounts of $450,000 and $537,000, respectively 9,560,274 10,817,791 Recoverable income taxes 1,347,007 797,455 Inventories 553,032 109,028 Current portion of program broadcast rights 1,153,058 710,424 Other current assets 263,600 758,808 --------------- --------------- 13,436,962 14,480,602 Property and equipment 37,618,893 40,178,694 Less allowance for depreciation (20,601,819) (21,380,407) --------------- --------------- 17,017,074 18,798,287 Other assets Deferred acquisition costs (includes $910,000 and $1,050,000 to Bull Run Corporation at December 31, 1995 and June 30, 1996, respectively) (NOTE C) 3,330,481 2,818,851 Deferred loan costs (NOTE C) 1,232,261 1,881,648 Goodwill and other intangibles (NOTE C) 42,004,050 73,299,223 Other 1,219,650 1,237,021 --------------- --------------- 47,786,442 79,236,743 --------------- --------------- $78,240,478 $112,515,632 --------------- --------------- --------------- --------------- Current liabilities: Trade accounts payable (includes $670,000 and $950,000 payable to Bull Run Corporation at December 31, 1995 and June 30, 1996, respectively) $3,752,742 $3,169,283 Accrued expenses 5,839,007 7,063,971 Current portion of program broadcast obligations 1,205,784 709,782 Current portion of long-term debt 2,861,672 0 --------------- --------------- 13,659,205 10,943,036 Long-term debt (including a $10,000,000 principal amount 8% Note to Bull Run Corporation at June 30, 1996) (NOTES C AND D) 51,462,645 82,845,688 Non-current liabilities 4,133,030 4,913,624 Commitments and Contingencies (NOTE E) Stockholders' Equity (NOTE B AND D) Class A Common Stock, no par value; authorized 10,000,000 shares; issued 5,082,756 and 5,130,385 shares, respectively 6,795,976 10,000,365 Retained earnings 8,827,906 10,451,203 --------------- --------------- 15,623,882 20,451,568 Treasury stock, 663,180 shares at cost (6,638,284) (6,638,284) --------------- --------------- 8,985,598 13,813,284 --------------- --------------- $78,240,478 $112,515,632 --------------- --------------- --------------- --------------- GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) See notes to condensed consolidated financial statements. F-3
---------------------- SIX MONTHS ENDED JUNE 30 ---------------------- 1995 1996 ---------- ---------- Operating revenues: Broadcasting (net of agency commissions) $18,260,940 $24,251,901 Publishing 10,046,114 11,261,792 ---------- ---------- 28,307,054 35,513,693 Expenses: Broadcasting 11,409,511 14,418,200 Publishing 8,589,861 9,192,751 Corporate and administrative 1,012,024 1,570,806 Depreciation and amortization 1,821,700 2,900,724 Non-cash compensation paid in common stock (NOTE B) 816,474 120,000 ---------- ---------- 23,649,570 28,202,481 ---------- ---------- 4,657,484 7,311,212 Miscellaneous income 68,514 81,361 ---------- ---------- 4,725,998 7,392,573 Interest expense 2,768,187 4,444,878 ---------- ---------- Income before income taxes 1,957,811 2,947,695 Income tax expense 776,000 1,146,000 ---------- ---------- Net earnings $1,181,811 $1,801,695 ---------- ---------- ---------- ---------- Average outstanding common shares 4,383,263 4,656,691 ---------- ---------- ---------- ---------- Net earnings per common share-primary $0.27 $0.39 ---------- ---------- ---------- ---------- Net earnings per common share-fully diluted $0.27 $0.38 ---------- ---------- ---------- ---------- GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) See notes to condensed consolidated financial statements. F-4
---------------------------------------------------------------------------------- CLASS A COMMON STOCK TREASURY STOCK -------------------------- -------------------------- RETAINED SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1995 5,082,756 $6,795,976 (663,180) $(6,638,284) $8,827,906 $8,985,598 Net income for the six months ended June 30, 1996 -0- -0- -0- -0- 1,801,695 1,801,695 Cash dividends ($.04 per share) -0- -0- -0- -0- (178,398) (178,398) Issuance of common stock warrants (Note C) -0- 2,600,000 -0- -0- -0- 2,600,000 Income tax benefits relating to stock plans -0- 62,000 -0- -0- -0- 62,000 Issuance of Class A Common Stock: 401(k) Plan 7,129 139,640 -0- -0- -0- 139,640 Directors stock plan 22,500 228,749 -0- -0- -0- 228,749 Non-qualified stock plan 18,000 174,000 -0- -0- -0- 174,000 ------------ ------------ ------------ ------------ ------------ ------------ Balance at June 30, 1996 5,130,385 $10,000,365 (663,180) $(6,638,284) $10,451,203 $13,813,284 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) See notes to condensed consolidated financial statements. F-5
-------------------------------- SIX MONTHS ENDED JUNE 30 1995 1996 --------------- --------------- Operating activities Net income $1,181,811 $1,801,695 Items which did not use (provide) cash: Depreciation 1,233,847 1,648,014 Amortization of intangible assets 587,853 1,252,710 Amortization of program broadcast rights 767,964 1,279,357 Amortization of original issue discount on subordinated note 0 144,444 Payments for program broadcast rights (902,858) (1,309,364) Income tax benefit relating to stock plan 0 62,000 Compensation paid in Class A common stock 816,474 120,000 Supplemental employee benefits (154,216) (203,708) Class A common stock contributed to 401(k) Plan 168,023 139,640 Deferred income taxes 109,000 676,059 (Gain) loss on disposal of assets 1,952 (17,968) Changes in operating assets and liabilities: Receivables, inventories, and other current assets (599,165) 1,081,052 Accounts payable and other current liabilities 616,978 126,622 --------------- --------------- Net cash provided by operating activities 3,827,663 6,800,553 Investing activities Acquisition of newspaper business (1,232,509) 0 Acquisition of television business 0 (34,330,365) Purchases of property and equipment (1,852,431) (1,317,345) Deferred acquisition costs (2,033,892) (1,797,772) Proceeds from asset sales 2,742 113,297 Other (261,233) (157,538) --------------- --------------- Net cash used in investing activities (5,377,323) (37,489,723) Financing activities Dividends paid (172,110) (178,398) Class A common stock transactions 0 402,749 Proceeds from settlement of interest rate swap 0 215,000 Proceeds from borrowings of long-term debt 2,200,000 36,725,000 Payments on long-term debt (820,281) (5,748,076) --------------- --------------- Net cash provided by financing activities 1,207,609 31,416,275 --------------- --------------- Increase (decrease) in cash and cash equivalents (342,051) 727,105 Cash and cash equivalents at beginning of period 558,520 559,991 --------------- --------------- Cash and cash equivalents at end of period $216,469 $1,287,096 --------------- --------------- --------------- --------------- GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Gray Communications Systems, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1996, are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included herein. Certain amounts in the accompanying unaudited consolidated financial statements have been reclassified to conform to the 1996 format. NOTE B -- EMPLOYMENT AGREEMENTS During the quarter ended March 31, 1995, the Company awarded 150,000 shares of its Class A Common Stock to its former president and chief executive officer under his employment agreement. Compensation expense of approximately $696,000 was recognized for these awards in the six months ended June 30, 1995. The Company has an employment agreement with its current President which provides for an award of 122,034 shares of Class A Common Stock if his employment with the Company continues until September 1999. Approximately $60,000 of expense was recognized in each quarter of 1995 and 1996 relating to this award and approximately $1.2 million of expense will be recognized over the five-year period ending in 1999. NOTE C -- BUSINESS ACQUISITIONS The Company's acquisitions in 1995 and 1996 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 unaudited condensed 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 and as amended in March 1996, 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 purchase price is estimated at approximately $185.0 million. The Company's Board of Directors has agreed to pay Bull Run Corporation ("Bull Run"), a principal stockholder of the Company, a finder's fee equal to 1% of the proposed purchase price for services performed, of which $1.05 million is included in deferred acquisition costs and $950,000 is due and included in accounts payable at June 30, 1996. The consummation of the Phipps Acquisition, which is expected to occur by September 1996, is subject to approval by the appropriate regulatory agencies. In connection with the Phipps Acquisition, the Company is seeking approval from the Federal Communications Commission ("FCC") of the assignment of the television broadcast licenses for WCTV and WKXT. Current FCC regulations will require the Company to divest itself of WALB-TV ("WALB") in Albany, Georgia and WJHG-TV ("WJHG") in Panama City, Florida due to common ownership restrictions on stations with overlapping signals. 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 1031 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, 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. F-6 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE C -- BUSINESS ACQUISITIONS (CONTINUED) Condensed balance sheets of WALB and WJHG are as follows (in thousands): Condensed income statement data of WALB is as follows (in thousands):
-------------------------------- JUNE 30, 1996 -------------------------------- WALB WJHG --------------- --------------- Current assets $1,801 $ 913 Property and equipment 1,714 1,014 Other assets 66 3 --------------- --------------- Total assets $3,581 $1,930 --------------- --------------- --------------- --------------- Current liabilities $1,756 $ 474 Other liabilities 214 0 Stockholder's equity 1,611 1,456 --------------- --------------- Total liabilities and stockholder's equity $3,581 $1,930 --------------- --------------- --------------- --------------- Condensed income statement data of WJHG is as follows (in thousands):
-------------------------------- 1995 1996 --------------- --------------- SIX MONTHS ENDED JUNE 30, -------------------------------- Broadcasting revenues $4,715 $5,098 Expenses 2,356 2,440 --------------- --------------- Operating income 2,359 2,658 Other income 9 9 --------------- --------------- Income before income taxes 2,368 2,667 --------------- --------------- --------------- --------------- Net income $1,468 $1,654 --------------- --------------- --------------- --------------- The Phipps Acquisition will be funded with a portion of the anticipated net proceeds of proposed public offerings by the Company of $150.0 million principal amount of the Company's senior subordinated notes and 3.5 million shares of the Company's Class B Common Stock, the sale of 1,000 shares of the Company's Series B Preferred Stock ($10.0 million) and warrants to Bull Run and the sale of KTVE Inc., the Company's broadcast station in Monroe, Louisiana/El Dorado, Arkansas. Additionally, the Company plans to retire its existing bank credit facility and other senior indebtedness (See Notes E and F) and enter into a new bank credit facility. F-7
-------------------------------- SIX MONTHS ENDED JUNE 30, -------------------------------- 1995 1996 --------------- --------------- Broadcasting revenues $1,826 $2,409 Expenses 1,690 1,933 --------------- --------------- Operating income 136 476 Other income 31 16 --------------- --------------- Income before income taxes 167 492 --------------- --------------- --------------- --------------- Net income $ 103 $ 305 --------------- --------------- --------------- --------------- GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE C -- BUSINESS ACQUISITIONS (CONTINUED) In connection with the Phipps Acquisition, a bank has provided a $10.0 million stand-by letter of credit to the seller of the Phipps Business on behalf of the Company. The letter of credit will be payable under certain conditions if the Phipps 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. 1996 ACQUISITIONS On January 4, 1996, the Company purchased substantially all of the assets of WRDW-TV, a CBS television affiliate serving the Augusta, Georgia television market (the "Augusta Acquisition"). The purchase price of approximately $35.9 million, excluding assumed liabilities of approximately $1.3 million, was financed primarily through long-term borrowings. The assets acquired consisted of office equipment and broadcasting operations located in North Augusta, South Carolina. Based on a preliminary allocation of the purchase price, the excess of the purchase price over the fair value of net tangible assets acquired was approximately $32.5 million. In connection with the Augusta Acquisition, the Company's Board of Directors approved the payment of a $360,000 finder's fee to Bull Run. Funds for the Augusta Acquisition were obtained from the modification of the Company's existing bank debt to a variable rate reducing revolving credit facility (the "Senior Credit Facility") and the sale to Bull Run of an 8% subordinated note due January 3, 2005 in the principal amount of $10.0 million (the "8% Note"). In connection with the sale of the 8% Note, the Company also issued warrants to Bull Run to purchase 487,500 shares of Class A Common Stock at $17.88 per share, 300,000 shares of which are currently vested, with the remainder vesting in five equal annual installments commencing in 1997 provided that the 8% Note is outstanding. The Senior Credit Facility provides for a credit line up to $54.2 million, of which $49.5 million was outstanding at June 30, 1996. This transaction also required a modification of the interest rate of the Company's $25.0 million senior secured note (the "Senior Note") with an institutional investor from 10.08% to 10.7%. As part of the financing arrangements for the Phipps Acquisition, the 8% Note will be retired and the Company will issue to Bull Run, in exchange for the 8% Note, 1,000 shares of Series A Preferred Stock. The warrants issued with the 8% Note will vest in accordance with the schedule described above provided the Series A Preferred Stock remains outstanding. An unaudited pro forma statement of income for the six months ended June 30, 1995, is presented below and assumes that the Augusta Acquisition occurred on January 1, 1995. This pro forma unaudited statement of income does not purport to represent the Company's actual results of operations had the Augusta Acquisition occurred on January 1, 1995, and should not serve as a forecast of the Company's operating results for any future periods. The pro forma adjustments are based solely upon certain F-8 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE C -- BUSINESS ACQUISITIONS (CONTINUED) 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. An unaudited pro form statement of income for the six months ended June 30, 1995 is as follows (in thousands, except per share data): 1995 ACQUISITION On January 6, 1995, the Company purchased substantially all of the assets of the GWINNET POST-TRIBUNE and assumed certain liabilities (the "Gwinnett Acquisition"). The assets consist of office equipment and publishing operations located in Lawrenceville, Georgia. The purchase price of $3.7 million, including assumed liabilities of approximately $370,000, was paid by approximately $1.2 million in cash (financed through long-term borrowings and cash from operations), the issuance of 44,117 shares of Class A Common Stock (having fair value of $500,000), and $1.5 million payable to the sellers pursuant to non-compete agreements. The excess of the purchase price over the fair value of net tangible assets acquired was approximately $3.4 million. In connection with the Gwinnett Acquisition the Company's Board of Directors approved the payment of a $75,000 finder's fee to Bull Run. NOTE D -- STOCKHOLDERS' EQUITY A portion of the funds for the Augusta Acquisition was obtained from the 8% Note, which included the issuance of detachable warrants to Bull Run to purchase 487,500 shares of Class A Common Stock at $17.88 per share, 300,000 shares of which are currently vested, with the remainder vesting in five equal annual installments commencing in 1997 provided the the 8% Note is outstanding. Approximately $2.6 million of the $10.0 million of proceeds from the 8% Note was allocated to the warrants and increased Class A Common Stock. This allocation of the proceeds was based on an estimate of the relative fair values of the 8% Note and the warrants on the date of issuance. The Company is amortizing the original issue discount over the period of time that the 8% Note is to be outstanding. During the six months ended June 30, 1996, the Company recognized approximately $144,000 in amortization costs for the $2.6 million original issue discount. NOTE E -- COMMITMENTS AND CONTINGENCIES The Company entered into an interest rate swap agreement (the "Interest Swap") on June 2, 1995, to effectively convert a portion of its floating rate debt to a fixed rate basis. The Interest Swap is effective for five years. F-9
SIX MONTHS ENDED JUNE 30, 1995 ---------- Operating revenues $32,666 Expenses 23,906 Depreciation and amortization 2,396 Non-cash compensation paid in Class A Common Stock 816 ---------- 5,548 Miscellaneous income, net 33 Interest expense 4,572 ---------- Pro forma income before income taxes 1,009 Income tax expense 407 ---------- Pro forma net income $ 602 ---------- ---------- Pro forma average shares outstanding 4,436 ---------- ---------- Pro forma earnings per share $ 0.14 ---------- ---------- GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE E -- COMMITMENTS AND CONTINGENCIES (CONTINUED) Approximately $25.0 million of the Company's outstanding long-term debt was subject to this Interest Swap. Effective May 14, 1996, the Company received $215,000 as settlement of this Interest Swap, which will be reflected as a reduction of interest expense over the remaining term of the original five-year Interest Swap. Upon termination of the five-year Interest Swap, the Company entered into an interest rate cap agreement (the "Interest Cap") on May 16, 1996, which expires on September 6, 1996. Approximately $25.0 million of the Company's outstanding long-term debt is subject to this Interest Cap. This Interest Cap serves to cap the base rate of the Company's Senior Credit Facility at 7%. The base rate used to compare against the Interest Cap at June 30, 1996 was approximately 5.5%. Accordingly, the Interest Cap had no value at June 30, 1996. The effective rate of the Senior Credit Facility at June 30, 1996 was approximately 8.94%. Effective July 19, 1996 the Company's interest rates, based on a spread over LIBOR, were reduced 0.25% as the result of the attainment of certain debt provisions. On May 15, 1996 the Company entered into an agreement with GOCOM Television of Ouachita, L.P. to sell the assets of KTVE Inc., the Company's NBC-affiliated station serving Monroe, Louisiana/El Dorado, Arkansas, for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of 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 sale agreement regarding KTVE included a number of closing conditions. The Company completed the sale of the assets of KTVE, Inc. on August 20, 1996. The Company anticipates recognizing in the quarter ended September 30, 1996, the gain, net of estimated income taxes, and the estimated income taxes on the KTVE Sale of approximately $2.8 million and $2.8 million, respectively. A condensed balance sheet of KTVE is as follows (in thousands): F-10
--------------- JUNE 30, 1996 --------------- Current assets $ 864 Property and equipment 1,540 Other assets 550 --------------- Total assets $2,954 --------------- Current liabilities $ 333 Other liabilities 476 Stockholders' equity 2,145 --------------- Total liabilities and stockholders' equity $2,954 --------------- --------------- GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE E -- COMMITMENTS AND CONTINGENCIES (CONTINUED) Condensed statement of operations data of KTVE is as follows (in thousands): NOTE F -- SUBSEQUENT EVENTS On May 2, 1996, the Company filed a Registration Statement (subsequently amended) with the Securities and Exchange Commission (the "SEC") on Form S-1 to register the sale of 4,025,000 shares of Class B Common Stock, including an over-allotment option granted by the Company to the underwriters of such offering, subject to shareholder approval. Also on May 2, 1996, the Company filed a Registration Statement (subsequently amended) with the SEC on Form S-1 to register the sale of $150,000,000 Senior Subordinated Notes due in 2006 (the "Notes"). F-11
---------------------- SIX MONTHS ENDED JUNE 30, ---------------------- 1995 1996 ---------- ---------- Broadcasting revenues $1,958 $2,303 Expenses 1,891 1,943 ---------- ---------- Operating income 67 360 Other income 9 1 ---------- ---------- Income before income taxes 76 361 ---------- ---------- ---------- ---------- Net income $ 47 $ 224 ---------- ---------- ---------- ---------- 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. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gray Communications Systems, Inc. at December 31, 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. ERNST & YOUNG LLP Columbus, Georgia February 14, 1996, except for Note K, as to which the date is August 9, 1996 F-12 GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS See accompanying notes. F-13
-------------------------------- 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 --------------- --------------- --------------- --------------- GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME See accompanying notes. F-14
------------------------------------------------- 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 --------------- --------------- --------------- --------------- --------------- --------------- GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY See accompanying notes. F-15
------------------------------------------------------------------------------------------------ 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 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ GRAY COMMUNICATIONS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS See accompanying notes. F-16
------------------------------------------------- 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 --------------- --------------- --------------- --------------- --------------- --------------- 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. 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. F-17 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 F-18 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 F-19 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) B. BUSINESS ACQUISITIONS (CONTINUED) 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 finder's 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. Pro forma December 31, 1995 balance sheet (in thousands): 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 F-20
------------------------------------------------------------------ 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 --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) B. BUSINESS ACQUISITIONS (CONTINUED) 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 thousands, except per share data): Pro forma statement of operations for the year ended December 31, 1995 are as follows (in thousands, 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 --------------- --------------- --------------- --------------- 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 F-21
------------------------------------------------------------------ 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) --------------- --------------- --------------- --------------- GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) B. BUSINESS ACQUISITIONS (CONTINUED) 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 finder's 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 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 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 F-22 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) B. BUSINESS ACQUISITIONS (CONTINUED) forecast of the Company's operating results for any future periods. The pro forma adjustments are based upon certain assumptions that management believes are reasonable under the circumstances. The unaudited pro forma results of continuing operations are as follows (in thousands, 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 ------------ ------------ ------------ ------------ The pro forma results presented above include adjustments to reflect (i) the incurrence of interest expense to fund the 1994 Acquisitions, (ii) depreciation and amortization of assets acquired, and (iii) the income tax effect of such pro forma adjustments. Average outstanding shares used to calculate earnings per share from continuing operations for 1994 and 1993 include the 225,000 shares issued in connection with the Rockdale Acquisition. F-23
-------------------------------------------------------------------- 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 ------------ ------------ ------------ ------------ GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) C. LONG-TERM DEBT Long-term debt consists of the following (in thousands): 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. F-24
-------------------------------- 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 --------------- --------------- --------------- --------------- 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 thousands): 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). Pursuant to the terms of his employment agreement, Mr. Williams was awarded an aggregate of 150,000 shares of Class A Common Stock in three separate grants (the "Common Stock Award") based upon the Class A Common Stock attaining certain designated values. Upon Mr. Williams' resignation from the Company in December 1995, the Company entered into a separation agreement with him, which provided, among other things, for the payment of $596,000 over a two-year period ending November 1997 as consideration for consulting services, Mr. Williams' resignation and certain non-compete and confidentiality agreements. 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 separation agreement. In addition, the separation agreement provided for the removal of the restrictions on the Common Stock Award and such Common Stock Award became fully vested. Compensation expense of approximately $2.1 million (including $865,000 during the quarter ended December 31, 1995), was recognized in 1995 for the Common Stock Award. 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. The following summarizes activity relative to certain officers' agreements and the supplemental employee benefits (in thousands):
1996 $2,862 1997 5,039 1998 6,634 1999 12,615 2000 11,303 Thereafter 15,872 ---------- $54,325 ---------- ---------- F-25
------------------------------------------------- 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 --------------- --------------- --------------- --------------- --------------- --------------- GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. At December 31, 1995, 56,500 of the $9.67 options issued in 1993 were exercisable. 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. F-26
-------------------------------- 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 --------------- --------------- --------------- --------------- GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F. INCOME TAXES (CONTINUED) Federal and state income tax expense (benefit) included in the consolidated financial statements are summarized as follows (in thousands): 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 thousands):
------------------------------------------------- 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 --------------- --------------- --------------- --------------- --------------- --------------- Significant components of the Company's deferred tax liabilities and assets are as follows (in thousands):
------------------------------------------------- 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 --------------- --------------- --------------- --------------- --------------- --------------- F-27
------------------------------------------------- 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) --------------- --------------- --------------- --------------- --------------- --------------- GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F. INCOME TAXES (CONTINUED) A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the consolidated financial statements is as follows (in thousands): 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. The net pension expense includes the following (in thousands):
------------------------------------------------- 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 --------------- --------------- --------------- --------------- --------------- --------------- F-28
------------------------------------------------- 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% GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) G. RETIREMENT PLANS (CONTINUED) The following summarizes the plan's funded status and related assumptions (in thousands): 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. 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. F-29
-------------------------------- 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% GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) H. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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: 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. The following summarizes information relative to the discontinued business segment for the year ended December 31, 1993 (in thousands):
1996 $491,360 1997 1,431,983 1998 1,351,273 1999 1,133,860 2000 456,733 --------------- $4,865,209 --------------- --------------- 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 thousands).
Operating revenues $1,695 --------------- --------------- Operating earnings $100 --------------- --------------- Net earnings $48 --------------- --------------- F-30
------------------------------------------------- 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 --------------- --------------- --------------- --------------- --------------- --------------- 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 --------------- --------------- --------------- 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 --------------- --------------- --------------- --------------- --------------- --------------- F-31
------------------------------------------------- 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 --------------- --------------- --------------- --------------- --------------- --------------- GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) J. INFORMATION ON BUSINESS SEGMENTS (CONTINUED) K. SUBSEQUENT EVENTS On May 2, 1996, the Company filed a Registration Statement with the Securities and Exchange Commission (the "SEC") on Form S-1 to register the sale of 4,025,000 shares of Class B Common Stock, including an over-allotment option granted by the Company to the underwriters of such offering. Also on May 2, 1996, the Company filed a Registration Statement with the SEC on Form S-1 to register the sale of $150,000,000 Senior Subordinated Notes due in 2006 (the "Notes"). On May 13, July 9, and August 9, 1996, the Company filed amendments to such Registration Statements. The Notes will be jointly and severally guaranteed (the "Subsidiary Guarantees") by all of the Company's subsidiaries (the "Subsidiary Guarantors"). The obligations of the Subsidiary Guarantors under the Subsidiary Guarantees will be subordinated, to the same extent as the obligations of the Company in respect of the Notes, to the prior payment in full of all existing and future senior debt of the Subsidiary Guarantors (which will include any guarantee issued by such Subsidiary Guarantors of any senior debt). The Company is a holding company with no material independent asset or operations, other than its investment in its subsidiaries. The Subsidiary Guarantors are, directly or indirectly, wholly-owned subsidiaries of the Company and the Subsidiary Guarantees will be full, unconditional and joint and several. All of the current and future direct and indirect subsidiaries of the Company will be guarantors of the Notes. Accordingly, separate financial statements of each of the Subsidiary Guarantors are not presented because management has determined that they are not material to investors. F-32
------------------------------------------------- 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 --------------- --------------- --------------- --------------- --------------- --------------- REPORT OF INDEPENDENT AUDITORS Partners of Television Station Partners, L.P. We have audited the accompanying balance sheet of WRDW-TV, an operating station of Television Station Partners, L.P., as of December 31, 1995, and the related statements of income, partnership's equity, and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WRDW-TV at December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with the generally accepted accounting principles. ERNST & YOUNG LLP Atlanta, Georgia January 26, 1996 F-33 WRDW-TV (THE AUGUSTA BUSINESS) BALANCE SHEETS DECEMBER 31, 1995 SEE ACCOMPANYING NOTES. F-34
ASSETS Current assets: Cash $333,658 Accounts receivable, net of allowance for doubtful accounts of approximately $117,380 1,748,208 Television film exhibition rights 924,107 Prepaid and other current assets 55,342 ------------ Total current assets 3,061,315 Property, buildings and equipment-net (NOTE 3): 1,778,429 Television film exhibition rights 2,570,850 Intangible assets-net 4,128,730 ------------ Total $11,539,324 ------------ ------------ LIABILITIES AND PARTNERSHIP'S EQUITY Current liabilities: Accounts payable and accrued expenses (NOTE 4) $233,197 Obligations for television film exhibition rights 898,251 ------------ Total current liabilities 1,131,448 Obligations for television film exhibition rights 2,680,267 Commitments and contingencies (NOTE 5) Partnership's equity (NOTES 1 AND 7) 7,727,609 ------------ Total $11,539,324 ------------ ------------ WRDW-TV (THE AUGUSTA BUSINESS) STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1995 SEE ACCOMPANYING NOTES. F-35
REVENUES: Broadcasting revenues $10,059,555 Less: Advertising agency commissions 1,171,595 National sales representative commissions 227,368 ------------ Total advertising agency and national sales representative commissions 1,398,963 ------------ Net operating revenues 8,660,592 ------------ OPERATING EXPENSES: Operating, technical and programming costs 3,142,280 Selling, general and administrative 2,631,952 Depreciation 272,298 Amortization of intangible assets 151,620 ------------ Total operating expenses 6,198,150 ------------ INCOME BEFORE OTHER EXPENSES 2,462,442 Other-expenses, net 220,211 ------------ Net income $2,242,231 ------------ ------------ WRDW-TV (THE AUGUSTA BUSINESS) STATEMENT OF PARTNERSHIP'S EQUITY YEAR ENDED DECEMBER 31, 1995 SEE ACCOMPANYING NOTES. F-36
Balance at December 31, 1994 $7,410,422 Net income 2,242,231 Distribution to Television Station Partners, L.P. (1,925,044) ------------ Balance at December 31, 1995 $7,727,609 ------------ ------------ WRDW-TV (THE AUGUSTA BUSINESS) STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1995 SEE ACCOMPANYING NOTES. F-37
CASH FLOW FROM OPERATING ACTIVITIES Net income $2,242,231 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,359,415 Provision for bad debt (recoveries) (14,000) Net trade barter revenue (59,356) Gain on sale of property and equipment (12,868) Changes in operating assets and liabilities: Accounts receivable (60,155) Prepaid and other assets 102,937 Accounts payable and accrued expenses (359,296) Payments of obligations for television film exhibition rights (1,017,754) Other 274,956 ------------ Net cash provided by operating activities 2,456,110 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property and equipment 12,868 Capital expenditures (121,987) ------------ Net cash used in investing activities (109,119) CASH FLOWS FROM FINANCING ACTIVITIES Cash transferred to Partnership (2,200,000) ------------ Net cash used in financing activities (2,200,000) NET INCREASE IN CASH 146,991 CASH AT BEGINNING OF YEAR 186,667 ------------ CASH AT END OF YEAR $333,658 ------------ ------------ SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING, INVESTING AND FINANCIAL ACTIVITIES Television film exhibition obligations were incurred when the Station entered into contracts for film exhibition rights totaling: $387,450 ------------ ------------ Property and equipment was acquired in exchange for advertising time totaling: $59,356 ------------ ------------ WRDW-TV (THE AUGUSTA BUSINESS) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 1. STATION ORGANIZATION AND BASIS OF PRESENTATION WRDW-TV (the "Station") is a commercial television station located in North Augusta, South Carolina. The Station was owned and operated by Television Station Partners, L.P. (the "Partnership") from July 7, 1989 to January 4, 1996-See Note 8. The Partnership is a Delaware limited partnership which was organized on May 24, 1989 for the sole purpose of acquiring, owning, operating and, at such time as GP Station Partners (the "general partner" of the Partnership) determines is appropriate, reselling or otherwise disposing of its television stations. The Station was acquired by the Partnership on July 7, 1989 pursuant to an Exchange Agreement dated May 24, 1989 between the Partnership and Television Station Partners, a New York partnership ("TSP"). The Exchange Agreement provided for the transfer to the partnership of all of TSP's assets in exchange for all of the units of partnership interest in the Partnership, followed by the liquidation and distribution of those units to the partners of TSP. For tax and accounting purposes, the Partnership has been treated as a continuation of TSP. The Station had been operated by TSP since March 23, 1983. The financial statements of the Station are prepared on the accrual basis of accounting, and include only those assets, liabilities, and results of operations that relate to the business of the Station. 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES TELEVISION FILM EXHIBITION RIGHTS Television film exhibition rights are recorded at the amount of the license fees payable when purchased and amortized using the straight-line method based on the license period or usage, whichever yields the greater accumulated amortization. Television film exhibition rights are classified based upon the portion of the unamortized balance expected to be broadcast within the current year. PROPERTY, BUILDINGS AND EQUIPMENT Property, buildings and equipment is stated at cost less accumulated depreciation. Depreciation is provided principally by the straight-line method over the estimated useful lives of the assets. Any gains or losses realized on disposition are reflected in operations. Maintenance and repairs, as well as minor renewals and betterments, are charged to operating expenses directly as incurred. INTANGIBLE ASSETS Intangible assets are comprised principally of Federal Communications Commission licenses and network affiliation agreements and are amortized on the straight-line basis, primarily over 40 years. Intangible assets are periodically evaluated for impairments using a measurement of fair value, calculated at the current market multiple times operating income. If this review indicates that the intangible assets will not be recoverable, the Company's carrying value of the intangible assets would be reduced to its estimated fair value. TRADE/BARTER TRANSACTIONS Trade/barter transactions involve the exchange of advertising time for products and/or services and are recorded based on the fair market value of the products and/or services received. Revenue is recorded when advertising schedules air, and expense is recognized when products and/or services are used. F-38 WRDW-TV (THE AUGUSTA BUSINESS) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES No income tax provision has been included in the financial statements since income or loss of the Station is required to be reported by the partners of the Partnership on their respective income tax returns. 3. PROPERTY, BUILDINGS, AND EQUIPMENT The major classes of property, buildings and equipment at December 31, 1995 are as follows: 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31, 1995 consist of the following:
Land $190,000 Buildings and tower 2,062,613 Automobiles 136,245 Furniture and fixtures 5,999,846 Machinery and equipment 1,769,175 ---------- 10,157,879 Less accumulated depreciation 8,379,450 ---------- $1,778,429 ---------- ---------- 5. COMMITMENTS AND CONTINGENCIES FILM EXHIBITION RIGHTS The obligations for television film exhibition rights are payable in the following years:
Accounts payable $10,275 Accrued state taxes 9,096 Accrued payroll, commissions, and bonuses 152,201 Other accrued expenses 61,625 ---------- $233,197 ---------- ---------- LITIGATION The Station is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial statements of the Station. F-39
YEAR ENDING DECEMBER 31 AMOUNT - ---------------------------------------------------------------- ---------- 1996 $898,251 1997 875,838 1998 838,254 1999 672,724 2000 293,451 ---------- $3,578,518 ---------- ---------- WRDW-TV (THE AUGUSTA BUSINESS) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) DEBT The Partnership had indebtedness outstanding under an Amended and Restated Credit Agreement (the "Agreement"). The Agreement is secured by a first lien on substantially all the assets of the Partnership. The Agreement required the Partnership to enter into one or more binding sales contracts for the assets of each station, satisfactory to the Banks, on or before June 30, 1995. During the latter part of 1994, the Partnership contracted the services of Media Venture Partners for the purpose of marketing the stations. On January 4, 1996, the Partnership sold the assets of the Station. (Note 8). 6. TRANSACTIONS WITH RELATED PARTIES The Partnership pays various operating and non-operation expenses on behalf of the Station. These expenses have been allocated for the year ended December 31, 1995. The Station is allocated a portion of management fees and expenses in the amount of approximately $90,000 to RP Television for financial support services such as accounting. Additionally, the Station transfers excess cash to the Partnership's headquarters. Excess cash transferred was $2,200,000 for the year ended December 31, 1995. This money is primarily used for principal and interest payments on the Partnership's debt obligations. 7. PENSION PLAN Effective January 1, 1993, the defined contribution pension plan was converted to a 401(k) salaried deferral plan, covering substantially all employees, with a Partnership profit sharing contribution of 3 1/2 percent of the participants' salary per annum. Annual contributions aggregating approximately $53,803 were made to the Plan during 1995. 8. SUBSEQUENT EVENT On January 4, 1996, the Partnership sold the assets of WRDW-TV to Gray Communication Systems, Inc., for approximately $34 million plus an amount equal to the excess of the current assets over the current liabilities assumed by the buyer, as defined in the Asset Purchase Agreement. F-40 INDEPENDENT AUDITORS' REPORT To the Partners of Television Station Partners, L.P.: We have audited the accompanying balance sheets of WRDW-TV (an operating station of Television Station Partners, L.P.), (the "Station") as of December 31, 1994 and the related statements of income, partnership's equity, and cash flows for the years ended December 31, 1993 and 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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, such financial statements present fairly, in all material respects, the financial position of the Station as of December 31, 1994, and the results of their operations and their cash flows for the years ended December 31, 1993 and 1994 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York May 12, 1995 F-41 WRDW-TV (AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.) BALANCE SHEET DECEMBER 31, 1994 SEE NOTES TO FINANCIAL STATEMENTS. F-42
1994 ------------ ASSETS CURRENT ASSETS: Cash $186,667 Accounts receivable, net of allowance for doubtful accounts of approximately $131,000 1,674,053 Television film exhibition rights 874,495 Prepaid and other current assets 158,279 ------------ Total current assets 2,893,494 PROPERTY, BUILDINGS AND EQUIPMENT-Net (NOTE 3): 1,869,384 TELEVISION FILM EXHIBITION RIGHTS 3,168,509 INTANGIBLE ASSETS-Net 4,280,350 ------------ TOTAL $12,211,737 ------------ ------------ LIABILITIES AND PARTNERSHIP'S EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses (NOTE 4) $592,493 Obligations for television film exhibition rights (NOTE 5) 908,652 ------------ Total current liabilities 1,501,145 OBLIGATIONS FOR TELEVISION FILM EXHIBITION RIGHTS (NOTE 5) 3,300,170 COMMITMENTS AND CONTINGENCIES (NOTE 6) PARTNERSHIP'S EQUITY (NOTES 1 AND 8) 7,410,422 ------------ Total $12,211,737 ------------ ------------ WRDW-TV (AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.) STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1993 AND 1994 SEE NOTES TO FINANCIAL STATEMENTS. F-43
1993 1994 ------------ ------------ REVENUES: Broadcasting revenues $7,933,825 $9,460,307 Less: Advertising agency commissions 943,174 1,158,952 National sales representative commissions 194,516 255,379 ------------ ------------ Total advertising agency and national sales representative commissions 1,137,690 1,414,331 ------------ ------------ Net operating revenues 6,796,135 8,045,976 ------------ ------------ OPERATING EXPENSES: Operating, technical and programming costs 2,555,795 2,958,364 Selling, general and administrative 2,126,770 2,434,477 Depreciation 290,730 309,949 Amortization of intangible assets 151,620 151,620 ------------ ------------ Total operating expenses 5,124,915 5,854,410 ------------ ------------ INCOME BEFORE OTHER EXPENSES 1,671,220 2,191,566 Other-expenses, net 77,408 54,570 ------------ ------------ NET INCOME $1,593,812 $2,136,996 ------------ ------------ ------------ ------------ WRDW-TV (AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.) STATEMENTS OF PARTNERSHIP'S EQUITY YEARS ENDED DECEMBER 31, 1993 AND 1994 SEE NOTES TO FINANCIAL STATEMENTS. F-44
PARTNERSHIP'S EQUITY --------------- BALANCE, JANUARY 1, 1993 $7,829,582 Net income 1,593,812 Transfer to Television Station Partners, L.P. (1,909,588) --------------- BALANCE, DECEMBER 31, 1993 7,513,806 Net income 2,136,996 Transfer to Television Station Partners, L.P. (2,240,380) --------------- BALANCE, DECEMBER 31, 1994 $7,410,422 --------------- --------------- WRDW-TV (AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993 AND 1994 SEE NOTES TO FINANCIAL STATEMENTS. F-45
1993 1994 ------------ ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income $1,593,812 $2,136,996 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,355,485 1,345,658 Provision for bad debt 24,800 62,000 Net trade barter revenue (15,850) (30,105) Gain on sale of property and equipment (1,137) (400) Changes in operating assets and liabilities: Accounts receivable (413,414) (173,216) Prepaid and other assets (51,535) (34,480) Accounts payable and accrued expenses 155,264 2,443 Payments of obligations for television film exhibition rights (2,645,344) (3,048,878) ------------ ------------ Net cash provided by operating activities 2,081 260,018 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment 9,470 400 Capital expenditures (230,718) (176,374) ------------ ------------ Net cash used in investing activities (221,248) (175,974) ------------ ------------ NET INCREASE (DECREASE) IN CASH (219,167) 84,044 CASH, BEGINNING OF YEAR 321,790 102,623 ------------ ------------ CASH, END OF YEAR $102,623 $186,667 ------------ ------------ ------------ ------------ SUPPLEMENTAL INFORMATION: Cash transferred to Television Station Partners, L.P. $2,075,000 $2,417,500 ------------ ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING, INVESTING AND FINANCIAL ACTIVITIES: Television film exhibition obligations of $1,969,210 and 3,112,615 in 1993 and 1994, respectively, were incurred when the Station entered into contracts for film exhibition rights. Property and equipment totaling $15,850 and $30,105 was acquired in 1993 and 1994, respectively, in exchange for advertising time. WRDW-TV (AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.) NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993 AND 1994 1. STATION ORGANIZATION AND BASIS OF PRESENTATION WRDW-TV (the "Station") is a commercial television station located in North Augusta, South Carolina. The Station is owned and operated by Television Station Partners, L.P. (the "Partnership") since July 7, 1989, as one of four commercial television stations owned by the Partnership. The Partnership is a Delaware limited partnership which was organized on May 24, 1989 for the sole purpose of acquiring, owning, operating and, at such time as GP Station Partners (the "general partner" of the Partnership) determines is appropriate, reselling or otherwise disposing of its television stations. The Station was acquired by the Partnership on July 7, 1989 pursuant to an Exchange Agreement dated May 24, 1989 between the Partnership and Television Station Partners, a New York partnership ("TSP"). The Exchange Agreement provided for the transfer to the partnership of all of TSP's assets in exchange for all of the units of partnership interest in the Partnership, followed by the liquidation and distribution of those units to the partners of TSP. For tax and accounting purposes, the Partnership has been treated as a continuation of TSP. The Station has been operated by TSP since March 23, 1983. The financial statements of the Station are prepared on the accrual basis of accounting, and include only those assets, liabilities, and results of operations that relate to the business of the Station. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES TELEVISION FILM EXHIBITION RIGHTS -- Television film exhibition rights relating to films which are currently available for telecasting are recorded at the gross cost method when purchased and amortized using the straight-line method over the greater of the license period or usage. Television film exhibition rights are classified based upon the portion of the unamortized balance expected to be broadcast within the current year. PROPERTY, BUILDINGS AND EQUIPMENT -- Property, buildings and equipment are stated at cost less accumulated depreciation. Depreciation is provided principally by the straight-line method over the estimated useful lives of the assets. Any gains or losses realized on disposition are reflected in operations. Maintenance and repairs, as well as minor renewals and betterments, are charged to operating expenses directly as incurred. INTANGIBLE ASSETS -- Intangible assets are comprised principally of Federal Communications Commission licenses and network affiliation agreements and are amortized on the straight-line basis, primarily over 40 years. Intangible assets are periodically evaluated for impairments using a measurement of fair value, calculated at the current market multiple times operating income. The current market value multiple used at December 31, 1994 was 8.5 times. TRADE/BARTER TRANSACTIONS -- Trade/barter transactions involve the exchange of advertising time for products and/or services and are recorded based on the fair market value of the products and/or services received. Revenue is recorded when advertising schedules air, and expense is recognized when products and/or services are used. INCOME TAXES -- No income tax provision has been included in the financial statements since income or loss of the Station is required to be reported by the partners of the Partnership on their respective income tax returns. F-46 WRDW-TV (AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993 AND 1994 3. PROPERTY, BUILDINGS AND EQUIPMENT The major classes of property, buildings and equipment are as follows: 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
DECEMBER 31, 1994 --------------- Land $190,000 Buildings and Tower 2,043,123 Automobiles 153,378 Furniture and fixtures 5,994,475 Machinery and equipment 1,637,285 --------------- 10,018,261 Less accumulated depreciation 8,148,877 --------------- $1,869,384 --------------- --------------- 5. OBLIGATIONS FOR TELEVISION FILM EXHIBITION RIGHTS Obligation for television film exhibition rights at December 31, 1994 are as follows:
DECEMBER 31, 1994 --------------- Accounts payable $99,042 Accrued state taxes 25,126 Accrued payroll, commissions, and bonuses 133,473 Other accrued expenses 334,852 --------------- $592,493 --------------- --------------- 6. COMMITMENTS AND CONTINGENCIES LITIGATION -- In March 1990, a suit was commenced in the Superior Court of California, County of Alameda, against the Partnership, GP Station Partners, and certain individuals, in connection with the July 1989 transaction in which the assets of TSP were transferred to the Partnership and the Partnership distributed to the partners a major portion of the proceeds of a $72 million borrowing. The plaintiffs in the suit sought rescission F-47
YEAR ENDING DECEMBER 31 AMOUNT - ----------------------------------------------------------------------------------------- ------------ 1995 $908,652 1996 907,886 1997 822,655 1998 736,849 1999 539,332 Thereafter 293,448 ------------ 4,208,822 Current portion 908,652 ------------ Long-term obligations $3,300,170 ------------ ------------ WRDW-TV (AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993 AND 1994 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) of the asset transfer, the return by the general partner of all cash distributions made from the $72 million borrowing, damages and other relief. The suit was subsequently dismissed on the grounds that the California courts were an inconvenient forum. On April 8, 1992, the plaintiffs in the California suit and another plaintiff commenced an action in the United States District Court for the Southern District of New York against GP Station Partners and each of its general partners. The action, which the plaintiffs purported to bring individually and as representatives of the limited partners, sought damages and other relief. The Partnership Agreement contains exculpation and indemnification provisions relating to claims against GP Station Partners and its affiliates. In November 1992 the action was settled and discontinued following the court's denial of the plaintiff's motion for class certification. The settlement agreement provided for an exchange of general releases and for payment to the original plaintiffs of an amount equal to their share of the July 1989 distribution to partners (which the original Television Station Partners had been escrowing pending the outcome of the litigation), plus accrued interest, and those plaintiffs also agreed to waive all rights to any further distribution and to relinquish their interest in the Partnership without further consideration. No amount will be payable to the other plaintiff in the action. The agreement also provides for payment of $75,000 to the plaintiffs' counsel as partial reimbursement of legal fees and expenses incurred in prosecuting the action. As part of the settlement, the limited partners' original investment of $203,000, plus interest of approximately $63,000 was paid. As a result of the litigation, the Partnership incurred legal fees of approximately $579,000. The Station is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial statements of the Station. DEBT -- At December 31, 1994 the Partnership had $71,900,000 of principal indebtedness outstanding under an Amended and Restated Credit Agreement (the "Agreement"). The Agreement is secured by a first lien on substantially all the assets of the Partnership. The Agreement requires the Partnership to enter into one or more binding sales contracts for the assets of each station, satisfactory to the Banks, on or before June 30, 1995. During the latter part of 1994, the Partnership contracted the services of Media Venture Partners for the purpose of marketing the stations. In February 1995, the Partnership signed letters of intent for the sale of the assets of each station. (Note 9) 7. TRANSACTIONS WITH RELATED PARTIES The Partnership pays various operating and non-operating expenses on behalf of the Station. These expenses totaled approximately $165,000 and $177,000 for the years ended December 31, 1993 and 1994, respectively. Additionally, the Station transfers excess cash to the Partnership's headquarters. Excess cash transferred was $1,909,588 and $2,240,380 for the years ended December 31, 1993 and 1994, respectively. This money is primarily used for principal and interest payments on the Partnership's debt obligations. 8. PENSION PLAN Effective January 1, 1993, the defined contribution pension plan was converted to a 401(k) salaried deferral plan with a Partnership profit sharing contribution of 3 1/2 percent of the participants' salary per annum. Annual contributions aggregating approximately $40,585 and $57,314 were made to the Plan during 1993 and 1994, respectively. F-48 WRDW-TV (AN OPERATING STATION OF TELEVISION STATION PARTNERS, L.P.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993 AND 1994 9. SUBSEQUENT EVENT On February 10, 1995, the Partnership signed a letter of intent for the sale of the assets of WRDW-TV for approximately $34 million, plus an amount equal to the excess of the current assets over the current liabilities assumed by the buyer, as defined in the Asset Purchase Agreement, if applicable, to be paid in cash at the closing of the sale. F-49 BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) CONDENSED BALANCE SHEETS (UNAUDITED) See accompanying notes to condensed financial statements. F-50
-------------------------------- DECEMBER 31, 1995 JUNE 30, 1996 --------------- --------------- ASSETS Current assets: Cash and cash equivalents $620,015 $662,576 Accounts receivable, less allowance for doubtful accounts of $49,000 and $53,500, respectively 5,152,778 5,188,446 Program broadcast rights, current portion 919,281 924,281 Other current assets 347,785 337,452 --------------- --------------- 7,039,859 7,112,755 Property and equiment, net 10,492,583 9,985,084 Goodwill and other intangibles 9,454,775 9,096,855 Program broadcast rights, less current portion 575,111 111,230 --------------- --------------- 10,029,886 9,208,085 --------------- --------------- $27,562,328 $26,305,924 --------------- --------------- --------------- --------------- LIABILITIES AND OWNER'S EQUITY Current liabilities: Accounts payable and accrued expenses $365,468 $308,308 Program broadcast obligations, current portion 921,579 458,353 Deferred paging service income 833,264 975,000 Current portion of long-term debt 1,389,931 1,473,681 Other current liabilities 907,345 995,901 --------------- --------------- 4,417,587 4,211,243 Long-term debt 3,419,918 2,560,175 Program broadcast obligations, less current portion 345,140 213,906 Minority interest 585,768 654,918 Commitments and contingencies Owner's equity 18,793,915 18,665,682 --------------- --------------- $27,562,328 $26,305,924 --------------- --------------- --------------- --------------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) CONDENSED STATEMENTS OF INCOME (UNAUDITED) See accompanying notes to condensed financial statements. F-51
-------------------------------- SIX MONTHS ENDED JUNE 30, 1995 1996 --------------- --------------- Revenues: Broadcast revenues, net $9,977,857 $10,444,960 Paging operations 2,422,911 2,743,524 Production and other revenues 796,437 900,731 --------------- --------------- 13,197,205 14,089,215 --------------- --------------- Expenses: Operating, technical and programming 2,641,775 2,805,292 Selling, general and administrative 3,636,715 4,035,891 Amortization of program broadcast rights 422,408 463,890 Depreciation and amortization 1,435,474 1,530,027 Pension credit (NOTE 2) (224,500) (113,000) Management fees 1,538,720 734,502 --------------- --------------- 9,450,592 9,456,602 --------------- --------------- 3,746,613 4,632,613 Interest 222,592 158,491 Other expense, net 4,862 4,744 --------------- --------------- Income before minority interests 3,519,159 4,469,378 Minority interests (256,219) (296,387) --------------- --------------- Net income $3,262,940 $4,172,991 --------------- --------------- --------------- --------------- Supplemental pro-forma net income Net income, as above $3,262,940 $4,172,991 Pro-forma provision for income tax expense (1,239,900) (1,585,700) --------------- --------------- Pro-forma net income $2,023,040 $2,587,291 --------------- --------------- --------------- --------------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) See accompanying notes to condensed financial statements. F-52
-------------------------------- SIX MONTHS ENDED JUNE 30, 1995 1996 --------------- --------------- OPERATING ACTIVITIES: Net income $3,262,940 $4,172,991 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,435,474 1,530,027 Gain (loss) on disposition of fixed assets 44,011 179,264 Amortization of program broadcast rights 422,408 463,890 Payments of program broadcast rights obligations (464,553) (591,960) Minority interests 256,219 296,387 Changes in operating assets and liabilities: Accounts receivable (437,692) (35,668) Other current assets (283,242) 2,833 Accounts payable and accrued expenses (183,408) (57,160) Other current liabilities (43,074) 88,556 Deferred paging income 127,078 141,736 --------------- --------------- Net cash provided by operating activities 4,136,161 6,190,896 Investing activities: Purchases of property and equipment (1,901,966) (1,647,485) Proceeds from disposition of property and equipment 530,938 807,978 Purchase of minority interest (1,780,794) -- --------------- --------------- Net cash used in investing activities (3,151,822) (839,507) Financing activities: Indebtedness: Borrowings 1,671,015 386,152 Repayments (2,538,371) (1,162,145) Distributions to minority interests (186,384) (342,130) Other (1,235) (4,375) Payments to J.H. Phipps, Inc., net 137,992 (4,186,330) --------------- --------------- Net cash used in financing activities (916,983) (5,308,828) --------------- --------------- Increase (decrease) in cash and cash equivalents 67,356 42,561 Cash and cash equivalents at beginning of period 95,210 620,015 --------------- --------------- Cash and cash equivalents at end of period $162,566 $662,576 --------------- --------------- --------------- --------------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of the Broadcasting and Paging Operations of John H. Phipps, Inc. (the "Phipps Business") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1996, are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information, refer to the annual financial statements and footnotes thereto of the Phipps Business included herein. NOTE 2 -- EMPLOYEE BENEFIT PLANS Management of J.H. Phipps, Inc. has elected to terminate the defined benefit pension plan effective March 31, 1996 subject to obtaining approval from the appropriate regulatory agencies. NOTE 3 -- SALE OF PHIPPS BUSINESS Pursuant to an agreement dated December 15, 1995 as amended March 15, 1996, Gray Communications Systems, Inc. ("Gray") agreed to purchase substantially all of the assets and assume certain liabilities and commitments of certain operations owned by J.H. Phipps, Inc. ("Phipps"). The operations include (i) two CBS affiliates-a VHF television station (WCTV-TV located in Tallahassee, Florida), and 74.5% interest in a UHF television station (WKXT-TV located in Knoxville, Tennessee), (the "Broadcast Operations"); and (ii) a portable communications and paging service business (the "Paging Operations"), with operations in three southeastern states (collectively referred to as the "Broadcasting and Paging Operations"). The purchase is subject to regulatory approval. At June 30, 1996, a Phipps subsidiary held the 74.5% interest in the partnership that owns WKXT-TV (the "Knoxville Partnership"). The Knoxville Partnership's remaining 25.5% interest is owned by four limited partners and their ownership is shown as "minority interests" in the accompanying financial statements. Gray, in separate agreements, has also agreed to purchase the limited partners' interests. Phipps also owns and operates other businesses which are not being purchased by Gray. The condensed financial statements are intended to present the Broadcasting and Paging Operations which are to be acquired by Gray pursuant to the letter of intent described above and do not include the other operations of Phipps. The condensed financial statements are derived from the historical books and records of Phipps and do not give effect to any purchase accounting adjustments which Gray may record as a result of its acquisition. Certain current liabilities and long-term debt on the accompanying balance sheets will not be assumed by Gray. Such liabilities will be retained by Phipps or retired at the closing date of the acquisition by Gray. F-53 REPORT OF INDEPENDENT AUDITORS The Board of Directors John H. Phipps, Inc. We have audited the accompanying balance sheets of the Broadcasting and Paging Operations of John H. Phipps, Inc. (see Note 1) as of December 31, 1994 and 1995 and the related statements of operations and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the management of John H. Phipps, Inc. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Broadcasting and Paging Operations of John H. Phipps, Inc. at December 31, 1994 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Atlanta,Georgia February 19, 1996 F-54 BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) BALANCE SHEETS See accompanying notes. F-55
-------------------------------- DECEMBER 31, 1994 1995 --------------- --------------- ASSETS Current assets: Cash and cash equivalents $95,210 $620,015 Accounts receivable, less allowance of $49,000 for each year 4,474,754 5,152,778 Program broadcast rights, current portion 521,921 919,281 Other current assets 329,343 347,785 --------------- --------------- Total current assets 5,421,228 7,039,859 Program broadcast rights, excluding current portion 579,561 575,111 Property and equipment, net (NOTE 3) 10,720,196 10,492,583 Goodwill and other intangibles (NOTE 3) 8,576,721 9,454,775 --------------- --------------- Total assets $25,297,706 $27,562,328 --------------- --------------- --------------- --------------- LIABILITIES AND OWNER'S EQUITY Current liabilities: Accounts payable and accrued expenses $467,300 $365,468 Program broadcast obligations, current portion 722,676 921,579 Deferred paging service income 579,109 833,264 Current portion of long-term debt (NOTE 4) 1,206,483 1,389,931 Other current liabilities 1,025,042 907,345 --------------- --------------- Total current liabilities 4,000,610 4,417,587 Long-term debt, less current portion (NOTE 4) 4,858,433 3,419,918 Program broadcast obligations, less current portion 245,421 345,140 Commitment and contingencies (NOTES 9 AND 10) Minority interests 728,293 585,768 Owner's equity 15,464,949 18,793,915 --------------- --------------- Total liabilities and owner's equity $25,297,706 $27,562,328 --------------- --------------- --------------- --------------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) STATEMENTS OF INCOME See accompanying notes. F-56
------------------------------------------------- YEAR ENDED DECEMBER 31, 1993 1994 1995 --------------- --------------- --------------- Revenues: Broadcast revenues, net (NOTE 3) $17,963,667 $20,209,523 $20,768,121 Paging operations 3,787,946 4,276,640 4,897,522 Production and other revenues 1,496,417 1,314,779 1,655,940 --------------- --------------- --------------- 23,248,030 25,800,942 27,321,583 --------------- --------------- --------------- Expenses: Operating, technical and programming 5,221,729 5,306,801 5,449,435 Selling, general and administrative 6,919,769 7,056,510 7,693,715 Amortization of program broadcast rights 1,552,438 1,021,395 844,815 Depreciation and amortization 2,835,966 2,672,209 3,120,442 Pension credit (NOTE 5) (431,000) (409,000) (449,000) Management fees (NOTE 7) 2,462,195 2,485,423 3,280,354 --------------- --------------- --------------- 18,561,097 18,133,338 19,939,761 --------------- --------------- --------------- 4,686,933 7,667,604 7,381,822 Interest 631,333 479,852 498,714 Other (income) expense, net (15,765) (666,657) (12,526) --------------- --------------- --------------- Income before minority interests 4,071,365 7,854,409 6,895,634 Minority interests (140,586) (635,302) (547,045) --------------- --------------- --------------- Net income $3,930,779 $7,219,107 $6,348,589 --------------- --------------- --------------- --------------- --------------- --------------- Supplemental unaudited pro-forma information (NOTE 6): Net income, as above $3,930,779 $7,219,107 $6,348,589 Pro-forma provision for income tax expense (1,500,300) (2,743,300) (2,412,500) --------------- --------------- --------------- Pro-forma net income $2,430,479 $4,475,807 $3,936,089 --------------- --------------- --------------- --------------- --------------- --------------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) STATEMENTS OF CASH FLOWS See accompanying notes. F-57
------------------------------------------------- YEAR ENDED DECEMBER 31, 1993 1994 1995 --------------- --------------- --------------- OPERATING ACTIVITIES: Net income $3,930,779 $7,219,107 $6,348,589 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,835,966 2,672,209 3,120,442 Gain on disposition of fixed assets (13,408) (665,047) (9,023) Amortization of program broadcast rights 1,552,438 1,021,395 844,815 Payments of program broadcast rights obligations (1,072,008) (863,344) (931,004) Minority interests 140,586 635,302 547,045 Changes in operating assets and liabilities: Accounts receivable 40,092 (396,373) (678,024) Other current assets (12,091) (90,846) (18,442) Accounts payable and accrued expenses (292,863) (206,137) (101,832) Other current liabilities 219,336 277,681 (117,697) Deferred paging income 68,136 204,356 254,155 --------------- --------------- --------------- Net cash provided by operating activities 7,396,963 9,808,303 9,259,024 --------------- --------------- --------------- INVESTING ACTIVITIES: Purchases of minority interests -0- (818,000) (1,780,794) Purchases of property and equipment (3,537,592) (3,353,068) (3,187,596) Proceeds from disposition of property and equipment 584,187 1,665,504 1,140,520 --------------- --------------- --------------- Net cash used in investing activities (2,953,405) (2,505,564) (3,827,870) --------------- --------------- --------------- FINANCING ACTIVITIES: Indebtedness: Borrowings 6,266,780 5,761,977 3,422,586 Repayments (7,421,873) (6,239,305) (4,677,653) Distributions to minority interests (495,150) (539,596) (505,532) Other 134,536 (156,475) (126,128) Payments to J.H. Phipps, Inc., net (2,901,945) (6,060,036) (3,019,622) --------------- --------------- --------------- Net cash used in financing activities (4,417,652) (7,233,435) (4,906,349) --------------- --------------- --------------- Increase in cash and cash equivalents 25,906 69,304 524,805 Cash and cash equivalents at beginning of year -0- 25,906 95,210 --------------- --------------- --------------- Cash and cash equivalents at end of year $25,906 $95,210 $620,015 --------------- --------------- --------------- --------------- --------------- --------------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 1. BASIS OF PRESENTATION Pursuant to a letter of intent dated December 15, 1995, Gray Communications Systems, Inc. ("Gray") agreed to purchase substantially all of the assets and assume certain liabilities and commitments of certain operations owned by J.H. Phipps, Inc. ("Phipps"). The operations include (i) two CBS affiliates-a VHF television station (WCTV-TV located in Tallahassee, Florida), and 74.5% interest in a VHF television station (WKXT-TV located in Knoxville, Tennessee), (the "Broadcast Operations"); and (ii) a portable communications and paging service business (the "Paging Operations"), with operations in three southeastern states (collectively referred to as the "Broadcasting and Paging Operations"). The purchase is subject to regulatory approval. At December 31, 1995, a Phipps subsidiary held the 74.5% interest in the partnership that owns WKXT-TV (the "Knoxville Partnership"). The Knoxville Partnership's remaining 25.5% interest is owned by four limited partners and their ownership is shown as "minority interests" in the accompanying financial statements. Gray, in separate agreements, has also agreed to purchase the limited partners' interests. Phipps' ownership of the Knoxville Partnership has increased, from 65.8% during 1993 to the 74.5% ownership interest at December 31, 1995, through purchases of certain minority interests for approximately $818,000 in 1994 and approximately $1.78 million in 1995. Goodwill recorded related to these acquisitions of minority interests was approximately $200,000 and $1.78 million in 1994 and 1995, respectively. Phipps also owns and operates other businesses which are not being purchased by Gray. The accompanying financial statements are intended to present the Broadcasting and Paging Operations which are to be acquired by Gray pursuant to the letter of intent described above and do not include the other operations of Phipps. The accompanying financial statements are derived from the historical books and records of Phipps and do not give effect to any purchase accounting adjustments which Gray may record as a result of its acquisition. Certain current liabilities and long-term debt on the accompanying balance sheets will not be assumed by Gray. Such liabilities will be retained by Phipps or retired at the closing date of the acquisition by Gray. 2. ACCOUNTING POLICIES USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amount reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Broadcasting revenues are recognized as the related advertising broadcast services are rendered. Agency commissions are deducted from gross revenue, reflecting the net amount due for broadcast services. Revenues from paging and communications services are recognized over the applicable service period. Revenues from mobile broadcasting contracts are recognized as services are provided. CONCENTRATION OF CREDIT RISK The Broadcast Operations provide advertising air time to national, regional and local advertisers within the geographic areas in which the Broadcast Operations operate. Credit is extended based on an evaluation of the customer's financial condition, and generally advance payment is not required. The Paging Operations provide services to individuals and corporate customers in three southeastern states. Such services are generally billed in advance. Credit losses for the Broadcasting and Paging Operations are provided for in the financial statements and consistently have been within management's expectations. F-58 BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. ACCOUNTING POLICIES (CONTINUED) BARTER ARRANGEMENTS The Broadcasting and Paging Operations, in the ordinary course of business, provide services and advertising air time to certain customers in exchange for products or services. In addition, the Broadcasting Operations provide air time to certain program syndicators in exchange for program licenses or reductions in program license fees. Barter transactions are recorded on the basis of the estimated fair market value of the products or services received. Revenue is recognized as the related advertising is broadcast and expenses are recognized when the merchandise or services are received or utilized. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on deposit with banks. Deposits with banks are generally insured in limited amounts. All liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. 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 noncurrent 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 stated at cost, less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful life of the assets for financial reporting purposes and by accelerated methods for income tax purposes. INTANGIBLE ASSETS Intangible assets are stated at cost and are amortized using the straight-line method. Goodwill is amortized over 15 to 40 years. Intangible assets other than goodwill, which include broadcasting licenses, network affiliation agreements, and other intangibles carried at an allocated cost based on appraisals are amortized over 15 years. Loan acquisition fees are amortized over the life of the specific agreement. In the event that facts and circumstances indicate that the goodwill or other intangibles may be impaired, an evaluation of continuing value would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with this asset would be compared to its carrying amount to determine if a write down to fair market value or discounted cash flow value is required. INTEREST SWAP The Knoxville Partnership had an interest rate swap agreement to modify the interest characteristics of a portion of its outstanding debt (see Note 4. INDEBTEDNESS). The agreement, which expired during 1995, involved the exchange of amounts based on a fixed interest rate for amounts based on variable interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates changed was accrued and recognized as an adjustment of interest expense related to the debt (the accrual accounting method). Interest expense (income) adjustments resulting from the interest rate swap were $44,385 in 1993, $(986) in 1994 and $(2,805) in 1995. STOCK BASED COMPENSATION Phipps accounted for its stock Appreciation Rights Plan (see Note 7. PHIPPS' CORPORATE ALLOCATIONS) in accordance with APB Opinion No 25, Accounting for Stock Issued to Employees and related interpretations. F-59 BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. ACCOUNTING POLICIES (CONTINUED) INCOME TAXES Phipps and its subsidiaries file a consolidated federal income tax return and separate state tax returns. The operating results of the Knoxville Partnership are included in the income tax returns of Phipps based on their percentage ownership. All states where the Broadcast and Paging Operations are located have taxes based on income. Income tax expense for the Broadcasting and Paging Operations are not presented in the accompanying financial statements as such amounts are computed and paid by Phipps. Pro-forma federal and state income taxes for the Broadcast and Paging Operations are calculated on a pro-forma, separate return basis (see Note 6. PRO-FORMA INCOME TAXES). FAIR VALUES OF FINANCIAL INSTRUMENTS Phipps 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 Phipps' financial instruments. The fair value amounts do not necessarily represent the amount that could be realized in a sale or settlement. Phipps' 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 approximates 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 Company does not anticipate settlement of long-term debt at other than book value and currently intends to hold such financial instruments through maturity. The fair value of other financial instruments classified as current assets or liabilities approximate 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 impairments are present and the undiscounted cash flows estimated to be generated by those assets are less than the asset's carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. Phipps does not believe that the adoption of Statement 121 will have a material impact on Phipps' financial position. 3. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION Major classifications of property and equipment and their estimated useful lives are summarized as follows (in thousands): F-60
------------------------------------------------- ESTIMATED USEFUL LIVES DECEMBER 31, CLASSIFICATION (YEARS) 1994 1995 - -------------------------------------------------- --------------- --------------- --------------- Land $593 $593 Buildings and improvements 40 2,630 3,104 Broadcasting equipment and furniture 5-20 15,440 14,567 Communications and paging equipment 5-7 4,561 4,739 --------------- --------------- 23,224 23,003 Less accumulated depreciation (12,504) (12,510) --------------- --------------- $10,720 $10,493 --------------- --------------- --------------- --------------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION (CONTINUED) The composition of intangible assets was as follows (in thousands): The composition of other current liabilities is as follows (in thousands):
-------------------------------- DECEMBER 31, 1994 1995 --------------- --------------- Goodwill $3,050 $4,663 Broadcast licenses and network affiliation agreements 6,162 6,162 Other 812 812 Accumulated amortization (1,447) (2,182) --------------- --------------- $8,577 $9,455 --------------- --------------- --------------- --------------- The Broadcast Operations' revenues are presented net of agency commissions as follows (in thousands):
-------------------------------- DECEMBER 31, 1994 1995 --------------- --------------- Customer deposits $63 $85 Accrued bonuses 163 265 Other compensation related accruals 404 439 Other 395 118 --------------- --------------- $1,025 $907 --------------- --------------- --------------- --------------- Components of "Other (income) expense, net" are as follows (in thousands):
------------------------------------------------- YEAR ENDED DECEMBER 31, 1993 1994 1995 --------------- --------------- --------------- Broadcast revenues, gross $20,523 $23,131 $23,767 Agency commissions (2,559) (2,921) (2,999) --------------- --------------- --------------- Broadcast revenues, net $17,964 $20,210 $20,768 --------------- --------------- --------------- --------------- --------------- --------------- F-61
------------------------------------------------- YEAR ENDED DECEMBER 31, 1993 1994 1995 --------------- --------------- --------------- Interest income $(2) $(2) $(4) Gain on sale of assets (14) (665) (9) --------------- --------------- --------------- $(16) $(667) $(13) --------------- --------------- --------------- --------------- --------------- --------------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INDEBTEDNESS A summary of indebtedness is as follows (in thousands): BANK CREDIT AGREEMENT The Knoxville Partnership has a bank credit agreement (the "Bank Credit Agreement") which provides a term loan and a revolving credit facility. The loan has provisions which, among other things, requires that the loan be redeemed in the event of a change in control. Under the terms of the Bank Credit Agreement, the Knoxville Partnership may, at its option, have a Base Rate Advance or LIBOR (London Interbank Official Rate) Advance, as specified by the bank in the notice of borrowing. Base Rate Advances and LIBOR Advances may be outstanding at the same time with Base Rate Advances bearing interest at the bank's index rate (8.5% at December 31, 1995), plus .25% or .50% as applicable based on the Partnership's leverage ratio. LIBOR Advances bear interest at the LIBOR (5.88% at December 31, 1995), plus 1.25% or 1.5% as applicable based on the Knoxville Partnership's leverage ratio. Base Rate Advances and LIBOR Advances totaled $0 and $3.7 million, respectively, at December 31, 1995. The Bank Credit Agreement contains numerous financial covenants and other affirmative covenants with regard to payment of distributions to partners, operating and capitalized leases, and acquisition of property. The advances are guaranteed by Phipps and collateralized by substantially all the Knoxville Partnership's assets. In connection with the Phipps guarantee, Phipps charged the Knoxville Partnership guaranty fees, classified as interest expense in the accompanying financial statements, of approximately $55,000 in 1993, $54,000 in 1994 and $42,000 in 1995. PARTNERSHIP NOTE PAYABLE On September 30, 1994, Phipps acquired approximately 4.2% additional ownership interest in the Knoxville Partnership from a limited partner. The total amount to be paid to the former limited partner by the remaining partners is $2 million and is payable over 20 years at $100,000 a year. The payment of this amount is guaranteed by the Knoxville Partnership. The first payment of $100,000 was made at the time the assignment was executed. Subsequent payments are due annually at September 30. The present value of the total purchase price at September 30, 1994 was $1,098,841 based on an interest factor of 7.46% compounded annually. Phipps Tennessee has recorded a liability of approximately $725,000 at December 31, 1995 for its portion of the outstanding balance. PORTAPHONE ACQUISITION DEBT In connection with a 1988 asset acquisition, PortaPhone is required to pay the seller a consulting fee of $15,000 monthly for ten years. The liability for the monthly payments required under the agreement is recorded at a discounted present value in the accompanying financial statements. F-62
-------------------------------- DECEMBER 31, 1994 1995 --------------- --------------- Bank Credit Agreement: Revolving credit loan $302 $498 Term loan 4,500 3,202 Partnership Note Payable 744 725 PortaPhone Acquisition Debt 518 385 --------------- --------------- 6,064 4,810 Less current portion (1,206) (1,390) --------------- --------------- $4,858 $3,420 --------------- --------------- --------------- --------------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INDEBTEDNESS (CONTINUED) Future scheduled reductions of principal for indebtedness are as follows (in thousands): Cash payments of net interest expense were approximately $339,000 in 1993, $449,000 in 1994 and $564,000 in 1995. 5. EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PENSION PLAN Phipps has a defined benefit pension plan that covers substantially all its full-time employees. Benefits are based on years of service and each employee's compensation during the last ten years of employment (average final pay) up to a maximum of 50% of average final pay. Benefits become vested upon completion of five years of service. No vesting occurs until the employee has completed five years of service. Phipps' funding policy is to make the maximum contribution allowable by applicable regulations. Total pension credit for the Broadcasting and Paging Operations was ($431,000), ($409,000) and ($449,000) for 1993, 1994 and 1995, respectively. The following summarizes information for all Phipps operations including the plan's funded status as of the plan's September 30 year end and assumptions used to develop the net periodic pension expense credit (in thousands).
Year Ended December 31 1996 $ 1,390 1997 1,155 1998 1,557 1999 81 2000 and thereafter 627 ------ $ 4,810 ------ ------ F-63
------------------------------- DECEMBER 31, 1993 1994 1995 --------- --------- --------- Actuarial present value of accumulated benefit obligation is as follows: Vested $3,691 $3,451 $4,348 Other 382 284 358 --------- --------- --------- $4,073 $3,735 $4,706 --------- --------- --------- --------- --------- --------- Plan assets at fair value, primarily common stocks and bonds $9,582 $9,367 $10,206 Projected benefit obligation (4,993) (4,419) (5,568) --------- --------- --------- Plan assets in excess of projected benefit obligation 4,589 4,948 4,638 Unrecognized net loss 804 688 1,288 Unrecognized net asset (3,394) (3,149) (2,904) --------- --------- --------- Pension asset $1,999 $2,487 $3,022 --------- --------- --------- --------- --------- --------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. EMPLOYEE BENEFIT PLANS (CONTINUED) The net pension credit included in the accompanying financial statements is calculated as follows (in thousands): The assumptions used to develop the plan's funded status and expenses were as follows:
------------------------------- YEAR ENDED DECEMBER 31, 1993 1994 1995 --------- --------- --------- Service costs-benefits earned during the year $168 $207 $144 Interest cost on projected benefit obligation 280 306 303 Actual return on plan assets (670) (713) (687) Net amortization and deferral (209) (209) (209) --------- --------- --------- Net pension credit $(431) $(409) $(449) --------- --------- --------- --------- --------- --------- 401(K) PLAN The Company also sponsors two 401(k) plans which provide for discretionary employer contributions equal to 25% of the first 4% of an employee's contribution. Contributions by Phipps to the plans are not material. MANAGEMENT INCENTIVE BONUS PLAN Phipps maintains an incentive bonus plan in which managers participate in the performance of the division of Phipps which they manage. Eligible employees are selected by the Board of Directors, and the bonus formula is established and reviewed annually by the Board of Directors and key members of management. Bonuses are calculated in the year following the year earned, at which time one-half of the calculated bonus is paid as compensation. The remaining portion is deferred and earned by the employee over five years based on a vesting schedule adopted by the Board. Employees become eligible to receive payment of deferred amounts upon full vesting. Deferred amounts are recognized as an expense in the year earned. Expenses under this plan were approximately $128,000 in 1993, $170,000 in 1994 and $233,000 in 1995. Cumulative amounts vested for the Broadcasting and Paging Operations since the inception of the plan in 1990, total approximately $303,000 at December 31, 1995 and are included as a current liability in the accompanying financial statements. 6. PRO-FORMA INCOME TAXES Pro-forma income tax expense differed from the amounts computed by applying the statutory federal income tax rate of 34% as a result of the following (in thousands):
Assumptions: Discount rate 7.5% 8.5% 7.5% Expected long-term rate of return on assets 9.0% 9.0% 9.0% Estimated rate of increase in compensation levels 4.5% 4.5% 4.5% F-64
------------------------------- YEAR ENDED DECEMBER 31, 1993 1994 1995 --------- --------- --------- Computed "expected" tax rate $ 1,342 $ 2,454 $ 2,159 Increase resulting from: State income taxes 158 289 253 --------- --------- --------- $ 1,500 $ 2,743 $ 2,412 --------- --------- --------- --------- --------- --------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. PHIPPS' CORPORATE ALLOCATIONS Interest expense incurred by Phipps is allocated to the Broadcasting and Paging Operations based on specific borrowings. Such allocated interest expense totaled approximately $134,700 in 1993, $44,000 in 1994 and $64,500 in 1995. Pension expense (credit) is allocated based on an actuarial calculation (see Note 5. EMPLOYEE BENEFITS PLANS) The corporate operations and employees of Phipps provide certain services to the Broadcasting and Paging Operations including executive management, cash management, accounting, tax and other corporate services which are allocated to the operating units of Phipps. Corporate expenses of Phipps, including corporate officers salaries and related employee benefits (see Stock Appreciation Rights and Performance Incentive Agreement below), travel costs, and related support staff and operations, are allocated to the operating units of Phipps. The Broadcasting and Paging Operations were charged $2,462,195, $2,485,423 and $3,280,354 for these services during 1993, 1994 and 1995, respectively. In the opinion of Phipps management, these charges have been made on a basis which is reasonable, however, they are not necessarily indicative of the level of expenses which might have been incurred by the Broadcasting and Paging Operations on a stand-alone basis. Phipps maintains a Stock Appreciation Rights Plan and Performance Incentive Agreement for certain key corporate officers identified by the Board of Directors. The expenses incurred for these plans are allocated to the Broadcasting and Paging Operations as part of the management fee allocation for Phipps' corporate expenses as discussed above. All amounts due under these plans were paid in December 1995. Compensation expense recorded for these plans in 1993, 1994 and 1995 was approximately $2,828,000, $2,458,000 and $2,861,000, respectively. 8. SUMMARY ACTIVITY IN OWNER'S EQUITY Phipps provides centralized cash management for the Broadcasting and Paging Operations. Substantially all cash receipts are remitted to Phipps and substantially all disbursements are made by Phipps. There are no terms of settlement for interest charges on these intercompany accounts. The amounts due to/from Phipps are included as a part of owner's equity as the Broadcasting and Paging operations are not required to settle these amounts on a current basis. An analysis of the net transactions in the owner's equity accounts for each of the three years in the period ended December 31 is as follows (in thousands): 9. LITIGATION At December 31, 1995, the Broadcast and Paging Operations are involved in various lawsuits arising in the normal course of their business. However, management believes that any potential losses that may occur from such lawsuits would be covered by insurance and the final outcome of these lawsuits will not have a material effect to the accompanying combined financial statements. F-65
------------------------------------------------- 1993 1994 1995 --------------- --------------- --------------- Balance of the beginning of year $13,276 $14,306 $15,465 Payments to Phipps (5,067) (8,181) (7,696) Phipps' purchase of minority interests -0- -0- 1,781 Phipps allocations 2,166 2,121 2,895 Net earnings 3,931 7,219 6,349 --------------- --------------- --------------- Balance at the end of year $14,306 $15,465 $18,794 --------------- --------------- --------------- --------------- --------------- --------------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES Program rights payable for films and syndicated series, which are noninterest bearing, are due as follows at December 31, 1995 (in thousands): Payments related to commitments for films and syndicated series, rights which are not yet available for broadcast at December 31, 1995 are due as follows (in thousands):
1996 $922 1997 171 1998 and later 174 --------- $1,267 --------- --------- The Paging Operations lease office space, office equipment and paging network towers. The Broadcasting Operations lease land and broadcast towers. The operating leases with unaffiliated entities have various renewal options. Certain of the towers used in the Paging Operations are leased from Phipps. Written contracts do not exist for such leases but management has established that the leases are for five years and are renewable at the end of five years. Rental expense for operating leases was as follows (in thousands):
1996 $106 1997 631 1998 515 1999 440 2000 283 ---------- $1,975 ---------- ---------- The minimum aggregate rentals under noncancelable operating leases are payable the lessors as follows (in thousands):
---------------------------------- OTHER PHIPPS LESSORS TOTAL ---------- ---------- ---------- Year Ended December 31 1993 $58 $384 $442 1994 64 316 380 1995 83 385 468 F-66
---------------------------------- OTHER PHIPPS LESSORS TOTAL ---------- ---------- ---------- Year Ended December 31 1996 $118 $329 $447 1997 122 240 362 1998 125 190 315 1999 129 61 190 2000 and thereafter 133 59 192 ---------- ---------- ---------- $627 $879 $1,506 ---------- ---------- ---------- ---------- ---------- ---------- BROADCASTING AND PAGING OPERATIONS OF JOHN H. PHIPPS, INC. (THE PHIPPS BUSINESS) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. INFORMATION ON BUSINESS SEGMENTS (IN THOUSANDS): Operating profit is total operating revenue less expenses and before miscellaneous income and expense (net), interest expense and minority interests. F-67
---------------------------------- YEAR ENDED DECEMBER 31, 1993 1994 1995 ---------- ---------- ---------- REVENUES Broadcasting Operations $19,460 $21,524 $22,424 Paging Operations 3,788 4,277 4,898 ---------- ---------- ---------- Total revenues $23,248 $25,801 $27,322 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING PROFIT: Broadcasting Operations $4,631 $7,287 $7,040 Paging Operations 56 381 342 ---------- ---------- ---------- Total operating profit $4,687 $7,668 $7,382 ---------- ---------- ---------- ---------- ---------- ---------- DEPRECIATION AND AMORTIZATION EXPENSE: Broadcasting Operations $2,089 $2,015 $2,302 Paging Operations 747 657 818 ---------- ---------- ---------- Total depreciation and amortization expense $2,836 $2,672 $3,120 ---------- ---------- ---------- ---------- ---------- ---------- CAPITAL EXPENDITURES: Broadcasting Operations $2,429 $1,515 $1,216 Paging Operations 1,109 1,838 1,972 ---------- ---------- ---------- Total capital expenditures $3,538 $3,353 $3,188 ---------- ---------- ---------- ---------- ---------- ---------- IDENTIFIABLE ASSETS (AT END OF YEAR): Broadcasting Operations $21,003 $21,059 $23,036 Paging Operations 3,816 4,239 4,526 ---------- ---------- ---------- Total identifiable assets $24,819 $25,298 $27,562 ---------- ---------- ---------- ---------- ---------- ---------- GRAY COMMUNICATIONS SYSTEMS, INC. PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses and costs (other than underwriting discounts and commissions) expected to be incurred by the Company in connection with the issuance and distribution of the Notes. Except for the SEC and NASD filing fees, all expenses have been estimated and are subject to future contingencies. ITEM 14 INDEMNIFICATION OF DIRECTORS AND OFFICERS The Business Corporation Code of the State of Georgia and the Business Corporation Act of the State of Arkansas grant corporations incorporated thereunder (such as the Company and certain of the co-registrants) the power to indemnify its officers and directors against liability for certain of their acts. The Articles of Incorporation of the Company and certain of the co-registrants eliminate the liability of directors to stockholders or the Company and certain of the co-registrants for monetary damages arising out of the directors' breach of their fiduciary duty of care. The By-laws of the Company and certain of the co-registrants authorize indemnification of their directors, officers, incorporators, employees and agents with respect to certain costs, expenses and amounts incurred in connection with an action, suit or proceeding by reason of the fact that such person was serving as a director, officer, incorporator, employee or agent of the Company or certain of the co-registrants. The Underwriting Agreement provides for reciprocal indemnification between the Company, the co-registrants, and their controlling persons, on the one hand, and the Underwriters and their controlling persons, on the other hand, against certain liabilities in connection with this offering, including liabilities under the Securities Act. ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES On January 3, 1996, Bull Run purchased for $10 million from the Company (i) an 8% subordinated note in the principal amount of $10 million due in January 2005 (ii) warrants to purchase 487,500 shares of Class A Common Stock at $17.88 per share. On September 2, 1994, the Company sold to one institutional investor its note in the principal amount of $25 million due 2003 and received $25 million in cash. The Company believes that the foregoing transactions were exempt from the registration provisions of the Securities Act of 1933 pursuant to Section 4(2) of such Act. II-1
SEC registration fee $51,724 NASD fee 15,500 Legal fees and expenses 265,000 Printing and engraving expenses 269,000 Accounting fees and expenses 125,000 Blue sky fees and expenses 15,000 Trustee fees and expenses 1,000 Miscellaneous 7,776 ---------- Total $750,000 ---------- ---------- ITEM 16 EXHIBITS II-2
1** Form of Underwriting Agreement 3.1 Articles of Incorporation of Gray Communications Systems, Inc., as amended (incorporated by reference 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). 3.1.1** Articles of Amendment to the Articles of Incorporation of Gray Communication Systems, Inc. relating to the Class A Common Stock and the Class B Common Stock and the Series A Preferred Stock and Series B Preferred Stock. 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). 3.2.1** Amendment to the By-Laws of Gray Communications Systems, Inc., dated September 3, 1996. 3.3*** Articles of Incorporation of The Albany Herald Publishing Company, Inc. 3.4*** By-Laws of The Albany Herald Publishing Company, Inc. 3.5*** Articles of Incorporation of The Rockdale Citizen Publishing Company 3.6*** Bylaws of The Rockdale Citizen Publishing Company 3.7*** Articles of Incorporation of WALB-TV, Inc. 3.8*** By-Laws of WALB-TV, Inc. 3.9*** Articles of Incorporation of WJHG-TV, Inc. 3.10*** By-Laws of WJHG-TV, Inc. 3.11*** Articles of Incorporation of Gray Real Estate and Development Company 3.12*** By-Laws of Gray Real Estate and Development Company 3.13*** Articles of Incorporation of Gray Kentucky Television, Inc. 3.14*** By-Laws of Gray Kentucky Television, Inc. 3.15*** Articles of Incorporation of Southwest Georgia Shoppers, Inc. 3.16*** By-Laws of Southwest Georgia Shoppers, Inc. 3.17*** Articles of Incorporation of KTVE, Inc. 3.18*** By-Laws of KTVE, Inc. 3.19*** Articles of Incorporation of WRDW-TV, Inc. 3.20*** By-Laws of WRDW-TV, Inc. 3.21*** Articles of Incorporation of Gray Transportation Company, Inc. 3.22*** By-Laws of Gray Transportation Company, Inc. 3.23*** Form of Certificate of Incorporation of WKXT Licensee Corp. 3.24*** By-Laws of WKXT Licensee Corp. 3.25*** Form of Articles of Incorporation of WCTV Operating Corp. 3.26*** By-Laws of WCTV Operating Corp. 3.27*** Form of Articles of Incorporation of WKXT-TV, Inc. 3.28*** By-Laws of WKXT-TV, Inc. 3.29*** Form of Certificate of Incorporation of Gray Television Management, Inc. 3.30*** By-Laws of Gray Television Management, Inc. 3.31*** Form of Certificate of Incorporation of WALB Licensee Corp. 3.32*** By-Laws of WALB Licensee Corp. 3.33*** Form of Certificate of Incorporation of WJHG Licensee Corp. II-3
3.34*** By-Laws of WJHG Licensee Corp. 3.35*** Form of Certificate of Incorporation of WKYT Licensee Corp. 3.36*** By-Laws of WKYT Licensee Corp. 3.37*** Form of Certificate of Incorporation of WRDW Licensee Corp. 3.38*** By-Laws of WRDW Licensee Corp. 3.39*** Form of Certificate of Incorporation of WYMT Licensee Corp. 3.40*** By-Laws of WYMT Licensee Corp. 3.41*** Certificate of Incorporation of WCTV Licensee Corp. 3.42*** By-Laws of WCTV Lincensee Corp. 3.43*** Certificate of Incorporation of Porta-Phone Paging Licensee Corp. 3.44*** By-Laws of Porta-Phone Paging Licensee Corp. 3.45*** Articles of Incorporation of Porta-Phone Paging, Inc. 3.46*** By-Laws of Porta-Phone Paging, Inc. 4.1** Form of Indenture for the Notes 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). 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. 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 (incorporated by reference to 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). - ------------------------ **Filed herewith *** Previously filed II-4
5** Opinion of Proskauer Rose Goetz & Mendelsohn LLP re: validity of securities 10.1 Supplemental pension plan (incorporated by reference to Exhibit 10(a) to the Company's Form 10 filed October 7, 1991, as amended January 29, 1992 and March 2, 1992). 10.2 Employment Agreement, between the Company and John T. Williams (incorporated by reference to Exhibit 19 to the Company's Form 10-Q for the quarter ended March 31, 1992). 10.3 Amendment to employment agreement, between the Company and John T. Williams (incorporated by reference to Exhibit 19(b) to the Company's Form 10-Q for the quarter ended March 31, 1992). 10.4 Restricted stock agreement between the Company and John T. Williams (incorporated by reference to Exhibit 19(c) to the Company's Form 10-Q for the quarter ended March 31, 1992). 10.5 Long Term Incentive Plan (incorporated by reference to Exhibit 10(e) to the Company's Form 10-K for the fiscal year ended June 30, 1993). 10.6 Asset Purchase Agreement between the Company and The Citizen Publishing Company, Inc. (incorporated by reference to Exhibit 10 to the Company's Form 8-K, dated May 31, 1994). 10.7 Asset Purchase Agreement between the Company and Kentucky Central Television, Inc. (incorporated by reference to Exhibit 10 to the Company's Form 8-K, dated September 2, 1994). 10.8 Asset Purchase Agreement, dated January 6, 1995, between the Company and Still Publishing, Inc. (incorporated by reference to Exhibit 10(h) to the 1994 Form 10-K). 10.9 Asset Purchase Agreement, dated April 11, 1995, between the Company, Television Station Partners, L.P. and WRDW Associates (incorporated by reference to Exhibit 10(a) to the Company's 10-Q for the quarter ended June 30, 1995). 10.10 Capital Accumulation Plan, effective October 1, 1994 (incorporated by reference to Exhibit 10(i) to the 1994 Form 10-K). 10.11 Employment Agreement, dated September 3, 1994, between the Company and Ralph W. Gabbard (incorporated by reference to Exhibit 10(j) to the 1994 Form 10-K). 10.12 Asset Purchase Agreement, dated March 15, 1996, by and between the Company and Media Acquisition Partners, L.P. (incorporated by reference to Exhibit 10(l) to the 1995 Form 10-K). 10.13*** Warrant, dated January 4, 1996, to purchase 487,500 shares of Class A Common Stock. 10.14 Form of amendment to employment agreement between the Company and Ralph W. Gabbard, dated January 1, 1996 (incorporated by reference to the Exhibit 10(m) 1995 Form 10-K). 10.15*** Employment Agreement, dated February 12, 1996 between the Company and Robert A. Beizer 10.16*** Separation Agreement between the Company and John T. Williams. 10.17** Form of Preferred Stock Exchange and Purchase Agreement between the Company and Bull Run Corporation. 10.18** Form of Warrant to purchase 500,000 shares of Class A Common Stock. 12** Statement re computation of ratios 21** List of Subsidiaries 23.1** Consent of Ernst & Young LLP for the financial statements for Gray Communications Systems, Inc. 23.2** Consent of Proskauer Rose Goetz & Mendelsohn LLP (contained in opinion filed as Exhibit 5) 23.3** Consent of Ernst & Young LLP for certain financial statements of WRDW-TV. 23.4** Consent of Ernst & Young LLP for the financial statements of the Broadcasting and Paging Operations of John H. Phipps, Inc. 23.5** Consent of Deloitte & Touche LLP for certain financial statements of WRDW-TV. 24.1*** Power of Attorney (see signature page) 25*** Statement of eligibility of trustee (b) The financial statement schedules filed as a part of this Registration Statement are as follows: Gray Communications Systems, Inc.: Report of Independent Auditors Schedule II - Valuation and Qualifying Accounts All other schedules are omitted as the required information is inapplicable or is presented in the financial statements or related notes. Broadcasting and Paging Operations of John H. Phipps, Inc.: Report of Independent Auditors Schedule II - Valuation and Qualifying Accounts All other schedules are omitted as the required information is inapplicable or its presented in the financial statements or related notes. ITEM 17 UNDERTAKINGS Each of the undersigned registrants hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of a registrant pursuant to the provisions described in Item 14, or otherwise, each registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by a registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, each registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. GRAY COMMUNICATIONS SYSTEMS, INC. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-6
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director (principal September 13, 1996 J. Mack Robinson executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief Financial ------------------------------------------- Officer (principal financial September 13, 1996 William A. Fielder III officer) /s/ SABRA H. COWART Controller and Chief Accounting ------------------------------------------- Officer (principal accounting September 13, 1996 Sabra H. Cowart officer) * ------------------------------------------- Director September 13, 1996 Richard L. Boger * ------------------------------------------- Director September 13, 1996 Hilton H. Howell, Jr. * ------------------------------------------- Director September 13, 1996 William E. Mayher III * ------------------------------------------- Director September 13, 1996 Howell W. Newton II-7
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- * ------------------------------------------- Director September 13, 1996 Robert S. Prather, Jr. /s/ WILLIAM A. FIELDER III ------------------------------------------- William A. Fielder III September 13, 1996 *Attorney-in-fact SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. THE ALBANY HERALD PUBLISHING COMPANY, INC. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson CHAIRMAN OF THE BOARD SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-8
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- Chairman of the Board September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief Financial ------------------------------------------- Officer (principal financial and September 13, 1996 William A. Fielder III accounting officer) * ------------------------------------------- Director September 13, 1996 Richard L. Boger * ------------------------------------------- Director September 13, 1996 Hilton H. Howell, Jr. * ------------------------------------------- Director September 13, 1996 William E. Mayher III * ------------------------------------------- Director September 13, 1996 Howell W. Newton * ------------------------------------------- Director September 13, 1996 Robert S. Prather, Jr. /s/ WILLIAM A. FIELDER III ------------------------------------------- William A. Fielder III September 13, 1996 *Attorney-in-fact SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. THE ROCKDALE CITIZEN PUBLISHING COMPANY By /s/ J. MACK ROBINSON ------------------------------------ J. Mack Robinson CHAIRMAN OF THE BOARD SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-9
SIGNATURE TITLE DATE - -------------------------------------------- ---------------------------- ---------------- /s/ J. MACK ROBINSON Chairman of the Board - ------------------------------------------- (principal executive September 13, J. Mack Robinson officer) 1996 Vice President and Chief /s/ WILLIAM A. FIELDER III Financial Officer September 13, - ------------------------------------------- (principal financial and 1996 William A. Fielder III accounting officer) * - ------------------------------------------- Director September 13, Richard L. Boger 1996 * - ------------------------------------------- Director September 13, Hilton H. Howell, Jr. 1996 * - ------------------------------------------- Director September 13, William E. Mayher III 1996 * - ------------------------------------------- Director September 13, Howell W. Newton 1996 * - ------------------------------------------- Director September 13, Robert S. Prather, Jr. 1996 /s/ WILLIAM A. FIELDER III - ------------------------------------------- September 13, William A. Fielder III 1996 *Attorney-in-fact SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. WALB-TV, INC. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson CHAIRMAN OF THE BOARD SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-10
SIGNATURE TITLE DATE - -------------------------------------------- ---------------------------- ---------------- /s/ J. MACK ROBINSON Chairman of the Board - ------------------------------------------- (principal executive September 13, J. Mack Robinson officer) 1996 Vice President and Chief /s/ WILLIAM A. FIELDER III Financial Officer September 13, - ------------------------------------------- (principal financial and 1996 William A. Fielder III accounting officer) * - ------------------------------------------- Director September 13, Richard L. Boger 1996 * - ------------------------------------------- Director September 13, Hilton H. Howell, Jr. 1996 * - ------------------------------------------- Director September 13, William E. Mayher III 1996 * - ------------------------------------------- Director September 13, Howell W. Newton 1996 * - ------------------------------------------- Director September 13, Robert S. Prather, Jr. 1996 /s/ WILLIAM A. FIELDER III - ------------------------------------------- September 13, William A. Fielder III 1996 *Attorney-in-fact SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. WJHG-TV, INC. By /s/ J. MACK ROBINSON ------------------------------------ J. Mack Robinson CHAIRMAN OF THE BOARD SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-11
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- Chairman of the Board September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief Financial ------------------------------------------- Officer (principal financial and September 13, 1996 William A. Fielder III accounting officer) * ------------------------------------------- Director September 13, 1996 Richard L. Boger * ------------------------------------------- Director September 13, 1996 Hilton H. Howell, Jr. * ------------------------------------------- Director September 13, 1996 William E. Mayher III * ------------------------------------------- Director September 13, 1996 Howell W. Newton * ------------------------------------------- Director September 13, 1996 Robert S. Prather, Jr. /s/ WILLIAM A. FIELDER III ------------------------------------------- William A. Fielder III September 13, 1996 *Attorney-in-fact SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. GRAY REAL ESTATE & DEVELOPMENT COMPANY By /s/ J. MACK ROBINSON ------------------------------------ J. Mack Robinson CHAIRMAN OF THE BOARD SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-12
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- Chairman of the Board September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief Financial ------------------------------------------- Officer (principal financial and September 13, 1996 William A. Fielder III accounting officer) * ------------------------------------------- Director September 13, 1996 Richard L. Boger * ------------------------------------------- Director September 13, 1996 Hilton H. Howell, Jr. * ------------------------------------------- Director September 13, 1996 William E. Mayher III * ------------------------------------------- Director September 13, 1996 Howell W. Newton II-13
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- * ------------------------------------------- Director September 13, 1996 Robert S. Prather, Jr. /s/ WILLIAM A. FIELDER III ------------------------------------------- William A. Fielder III September 13, 1996 *Attorney-in-fact SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. GRAY KENTUCKY TELEVISION, INC. By /s/ J. MACK ROBINSON ------------------------------------ J. Mack Robinson CHAIRMAN OF THE BOARD SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-14
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- Chairman of the Board September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief Financial ------------------------------------------- Officer (principal financial and September 13, 1996 William A. Fielder III accounting officer) * ------------------------------------------- Director September 13, 1996 Richard L. Boger * ------------------------------------------- Director September 13, 1996 Hilton H. Howell, Jr. * ------------------------------------------- Director September 13, 1996 William E. Mayher III * ------------------------------------------- Director September 13, 1996 Howell W. Newton * ------------------------------------------- Director September 13, 1996 Robert S. Prather, Jr. /s/ WILLIAM A. FIELDER III ------------------------------------------- William A. Fielder III September 13, 1996 * Attorney-in-fact SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. THE SOUTHWEST GEORGIA SHOPPER, INC. By /s/ J. MACK ROBINSON ------------------------------------ J. Mack Robinson CHAIRMAN OF THE BOARD SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-15
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- Chairman of the Board September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief Financial ------------------------------------------- Officer (principal financial and September 13, 1996 William A. Fielder III accounting officer) * ------------------------------------------- Director September 13, 1996 Richard L. Boger * ------------------------------------------- Director September 13, 1996 Hilton H. Howell, Jr. * ------------------------------------------- Director September 13, 1996 William E. Mayher III * ------------------------------------------- Director September 13, 1996 Howell W. Newton * ------------------------------------------- Director September 13, 1996 Robert S. Prather, Jr. /s/ WILLIAM A. FIELDER III ------------------------------------------- William A. Fielder III September 13, 1996 * Attorney-in-fact SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. WRDW-TV, INC. By /s/ J. MACK ROBINSON ------------------------------------ J. Mack Robinson CHAIRMAN OF THE BOARD SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-16
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- Chairman of the Board September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief Financial ------------------------------------------- Officer (principal financial and September 13, 1996 William A. Fielder III accounting officer) * ------------------------------------------- Director September 13, 1996 Richard L. Boger * ------------------------------------------- Director September 13, 1996 Hilton H. Howell, Jr. * ------------------------------------------- Director September 13, 1996 William E. Mayher III * ------------------------------------------- Director September 13, 1996 Howell W. Newton * ------------------------------------------- Director September 13, 1996 Robert S. Prather, Jr. /s/ WILLIAM A. FIELDER III ------------------------------------------- William A. Fielder III September 13, 1996 * Attorney-in-fact SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. KTVE INC. By /s/ J. MACK ROBINSON ------------------------------------ J. Mack Robinson CHAIRMAN OF THE BOARD SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-17
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- Chairman of the Board September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief Financial ------------------------------------------- Officer (principal financial and September 13, 1996 William A. Fielder III accounting officer) * ------------------------------------------- Director September 13, 1996 Richard L. Boger * ------------------------------------------- Director September 13, 1996 Hilton H. Howell, Jr. * ------------------------------------------- Director September 13, 1996 William E. Mayher III * ------------------------------------------- Director September 13, 1996 Howell W. Newton * ------------------------------------------- Director September 13, 1996 Robert S. Prather, Jr. /s/ WILLIAM A. FIELDER ------------------------------------------- William A. Fielder III September 13, 1996 * Attorney-in-fact SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. WKXT LICENSEE CORP. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-18
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. WCTV OPERATING CORP. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-19
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. WKXT-TV, INC. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-20
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. GRAY TELEVISION MANAGEMENT, INC. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-21
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. WALB LICENSEE CORP. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-22
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. WJHG LICENSEE CORP. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-23
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. WKYT LICENSEE CORP. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-24
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. WRDW LICENSEE CORP. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-25
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. WYMT LICENSEE CORP. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-26
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. GRAY TRANSPORTATION COMPANY, INC. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-27
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. PORTA-PHONE PAGING LICENSEE CORP. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES AND POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-28
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------- -------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. PORTA-PHONE PAGING, INC. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES AND POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-29
SIGNATURE TITLE DATE - ------------------------------------------------------ ------------------------------ ------------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 13th day of September, 1996. WCTV LICENSEE CORP. By: /s/ J. MACK ROBINSON ----------------------------------- J. Mack Robinson PRESIDENT SIGNATURES AND POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-30
SIGNATURE TITLE DATE - ------------------------------------------------------ ------------------------------ ------------------------- /s/ J. MACK ROBINSON ------------------------------------------- President and Director September 13, 1996 J. Mack Robinson (principal executive officer) /s/ WILLIAM A. FIELDER III Vice President and Chief ------------------------------------------- Financial Officer (principal September 13, 1996 William A. Fielder III financial officer) /s/ SABRA H. COWART Controller and Chief ------------------------------------------- Accounting Officer (principal September 13, 1996 Sabra H. Cowart accounting officer) EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - --------- ---------------------------------------------------------------------------- --- 1** Form of Underwriting Agreement.............................................. 3.1 Articles of Incorporation of Gray Communications Systems, Inc., as amended (incorporated by reference 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)...................................................................... 3.1.1** Articles of Amendment to the Articles of Incorporation of Gray Communication Systems, Inc. relating to the Class A Common Stock and the Class B Common Stock and the Series A Preferred Stock and Series B Preferred Stock........ 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)...................................................................... 3.2.1** Amendment to the By-Laws of Gray Communication Systems, Inc. dated September 3, 1996.................................................................... 3.3*** Articles of Incorporation of The Albany Herald Publishing Company, Inc...... 3.4*** By-Laws of The Albany Herald Publishing Company, Inc........................ 3.5*** Articles of Incorporation of The Rockdale Citizen Publishing Company........ 3.6*** Bylaws of The Rockdale Citizen Publishing Company........................... 3.7*** Articles of Incorporation of WALB-TV, Inc................................... 3.8*** By-Laws of WALB-TV, Inc..................................................... 3.9*** Articles of Incorporation of WJHG-TV, Inc................................... 3.10*** By-Laws of WJHG-TV, Inc..................................................... 3.11*** Articles of Incorporation of Gray Real Estate and Development Company....... 3.12*** By-Laws of Gray Real Estate and Development Company......................... 3.13*** Articles of Incorporation of Gray Kentucky Television, Inc.................. 3.14*** By-Laws of Gray Kentucky Television, Inc.................................... 3.15*** Articles of Incorporation of Southwest Georgia Shoppers, Inc................ 3.16*** By-Laws of Southwest Georgia Shoppers, Inc.................................. 3.17*** Articles of Incorporation of KTVE, Inc...................................... 3.18*** By-Laws of KTVE, Inc........................................................ 3.19*** Articles of Incorporation of WRDW-TV, Inc................................... 3.20*** By-Laws of WRDW-TV, Inc..................................................... 3.21*** Articles of Incorporation of Gray Transportation Company, Inc............... 3.22*** By-Laws of Gray Transportation Company, Inc................................. 3.23*** Form of Certificate of Incorporation of WKXT Licensee Corp.................. 3.24*** By-Laws of WKXT Licensee Corp............................................... 3.25*** Form of Articles of Incorporation of WCTV Operating Corp.................... 3.26*** By-Laws of WCTV Operating Corp.............................................. 3.27*** Form of Articles of Incorporation of WKXT-TV, Inc........................... 3.28*** By-Laws of WKXT-TV, Inc..................................................... 3.29*** Form of Certificate of Incorporation of Gray Television Management, Inc..... 3.30*** By-Laws of Gray Television Management, Inc.................................. 3.31*** Form of Certificate of Incorporation of WALB Licensee Corp.................. 3.32*** By-Laws of WALB Licensee Corp............................................... 3.33*** Form of Certificate of Incorporation of WJHG Licensee Corp.................. 3.34*** By-Laws of WJHG Licensee Corp............................................... 3.35*** Form of Certificate of Incorporation of WKYT Licensee Corp..................
EXHIBIT NO. DESCRIPTION PAGE - --------- ---------------------------------------------------------------------------- --- 3.36*** By-Laws of WKYT Licensee Corp............................................... 3.37*** Form of Certificate of Incorporation of WRDW Licensee Corp.................. 3.38*** By-Laws of WRDW Licensee Corp............................................... 3.39*** Form of Certificate of Incorporation of WYMT Licensee Corp.................. 3.40*** By-Laws of WYMT Licensee Corp............................................... 3.41*** Certificate of Incorporation of WCTV Licensee Corp.......................... 3.42*** By-Laws of WCTV Lincensee Corp.............................................. 3.43*** Certificate of Incorporation of Porta-Phone Paging Licensee Corp............ 3.44*** By-Laws of Porta-Phone Paging Licensee Corp................................. 3.45*** Articles of Incorporation of Porta-Phone Paging, Inc........................ 3.46*** By-Laws of Porta-Phone Paging, Inc.......................................... 4.1** Form of Indenture for the Notes............................................. 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).......... 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...................................................... 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 (incorporated by reference to 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).................................................... 5** Opinion of Proskauer Rose Goetz & Mendelsohn LLP re: validity of securities................................................................. 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)............................................................. - ------------------------ ** Filed herewith *** Previously filed
EXHIBIT NO. DESCRIPTION PAGE - --------- ---------------------------------------------------------------------------- --- 10.2 Employment Agreement, between the Company and John T. Williams (incorporated by reference to Exhibit 19 to the Company's Form 10-Q for the quarter ended March 31, 1992)............................................................ 10.3 Amendment to employment agreement, between the Company and John T. Williams (incorporated by reference to Exhibit 19(b) to the Company's Form 10-Q for the quarter ended March 31, 1992).......................................... 10.4 Restricted stock agreement between the Company and John T. Williams (incorporated by reference to Exhibit 19(c) to the Company's Form 10-Q for the quarter ended March 31, 1992).......................................... 10.5 Long Term Incentive Plan (incorporated by reference to Exhibit 10(e) to the Company's Form 10-K for the fiscal year ended June 30, 1993)............... 10.6 Asset Purchase Agreement between the Company and The Citizen Publishing Company, Inc. (incorporated by reference to Exhibit 10 to the Company's Form 8-K, dated May 31, 1994).............................................. 10.7 Asset Purchase Agreement between the Company and Kentucky Central Television, Inc. (incorporated by reference to Exhibit 10 to the Company's Form 8-K, dated September 2, 1994)......................................... 10.8 Asset Purchase Agreement, dated January 6, 1995, between the Company and Still Publishing, Inc. (incorporated by reference to Exhibit 10(h) to the 1994 Form 10-K)............................................................ 10.9 Asset Purchase Agreement, dated April 11, 1995, between the Company, Television Station Partners, L.P. and WRDW Associates (incorporated by reference to Exhibit 10(a) to the Company's 10-Q for the quarter ended June 30, 1995).................................................................. 10.10 Capital Accumulation Plan, effective October 1, 1994 (incorporated by reference to Exhibit 10(i) to the 1994 Form 10-K).......................... 10.11 Employment Agreement, dated September 3, 1994, between the Company and Ralph W. Gabbard (incorporated by reference to Exhibit 10(j) to the 1994 Form 10-K)...................................................................... 10.12 Asset Purchase Agreement, dated March 15, 1996, by and between the Company and Media Acquisition Partners, L.P. (incorporated by reference to Exhibit 10(l) to the 1995 Form 10-K)............................................... 10.13*** Warrant, dated January 4, 1996, to purchase 487,500 shares of Class A Common Stock...................................................................... 10.14 Form of amendment to employment agreement between the Company and Ralph W. Gabbard, dated January 1, 1996 (incorporated by reference to the Exhibit 10(m) 1995 Form 10-K)...................................................... 10.15*** Employment Agreement, dated February 12, 1996 between the Company and Robert A. Beizer.................................................................. 10.16*** Separation Agreement between the Company and John T. Williams............... 10.17** Form of Preferred Stock Exchange and Purchase Agreement between the Company and Bull Run Corporation................................................... 10.18** Form of Warrant to purchase 500,000 shares of Class A Common Stock.......... 12** Statement re computation of ratios.......................................... 21** List of Subsidiaries........................................................ 23.1** Consent of Ernst & Young LLP for the financial statements for Gray Communications Systems, Inc................................................ 23.2** Consent of Proskauer Rose Goetz & Mendelsohn LLP (contained in opinion filed as Exhibit 5).............................................................. 23.3** Consent of Ernst & Young LLP for certain financial statements of WRDW-TV.... 23.4** Consent of Ernst & Young LLP for the financial statements of the Broadcasting and Paging Operations of John H. Phipps, Inc.................. 23.5** Consent of Deloitte & Touche LLP for certain financial statements of WRDW-TV.................................................................... 24.1*** Power of Attorney (see signature page)...................................... 25*** Statement of eligibility of trustee.........................................
EXHIBIT 1 UNDERWRITING AGREEMENT Gray Communications Systems, Inc. $150,000,000 % Senior Subordinated Notes due 2006 September , 1996 J.P. MORGAN SECURITIES INC. ALLEN & COMPANY INCORPORATED THE ROBINSON-HUMPHREY COMPANY, INC. c/o J.P. Morgan Securities Inc. 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Gray Communications Systems, Inc., a Georgia corporation (the "Company"), proposes to issue and sell to the underwriters listed on Schedule I hereto (collectively, the "Underwriters") $150,000,000 aggregate principal amount of its % Senior Subordinated Notes due 2006 (the "Notes"). The Notes will be issued pursuant to the provisions of an Indenture to be dated as of September , 1996 (the "Indenture") among the Company, the Guarantors (as hereinafter defined) and Bankers Trust Company, as Trustee (the "Trustee"). The Notes will be unconditionally guaranteed, jointly and severally, on a senior subordinated unsecured basis initially by the subsidiaries of the Company listed on Schedule II hereto (each a "Guarantor" and collectively the "Guarantors"). Such guarantees are hereinafter referred to as the "Guarantees," and the Notes and the Guarantees are hereinafter referred to as the "Securities." The Company and the Guarantors are collectively referred to herein as the "Registrants." The Registrants have prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Securities Act"), a registration statement on Form S-1 (File No. 333-4338), including a prospectus, relating to the Securities. The registration statement as amended at the time when it shall become effective, including in each case information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to -2- Rule 430A under the Securities Act, is hereinafter referred to as the "Registration Statement," and the prospectus in the form first used to confirm sales of Securities is hereinafter referred to as the "Prospectus." In connection with the offering of the Securities, the Company is (i) offering 3,500,000 shares of its Class B Common Stock, no par value (the "Class B Common Stock") (the "Concurrent Public Offering"), (ii) issuing $10 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10 million principal amount 8% subordinated note (the "Preferred Stock Exchange"), (iii) issuing $10 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock"), together with warrants (the "Warrants") to purchase up to 500,000 shares of the Company's Class A Common Stock, no par value (the "Class A Common Stock"), for gross cash proceeds of $10 million (the "Preferred Stock Sale"), (iv) repaying outstanding indebtedness under its $25 million principal amount senior note due 2003, together with accrued interest thereon and a prepayment fee, (v) repaying approximately $49.5 million aggregate principal amount outstanding under its existing senior secured bank credit facility and (vi) entering into a new senior secured bank credit facility (the "Senior Credit Facility"). The Company is a party to that certain Asset Purchase Agreement, dated as of December 15, 1996 and amended as of March 15, 1996, with Media Acquisition Partners, L.P. ("MAP") (the "Asset Purchase Agreement"), and MAP is a party to that certain Stock Purchase Agreement, dated as of December 15, 1995, with John H. Phipps, Inc. and the holders of common stock of John H. Phipps, Inc. (the "Phipps Signatories") (the "Stock Purchase Agreement"). The Company hereby agrees with each Underwriter as follows: 1. The Company hereby agrees to issue and sell the Securities to the several Underwriters as hereinafter provided, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees to purchase, severally and not jointly, from the Company the respective principal amount of Securities set forth opposite such Underwriter's name in -3- Schedule I hereto at a price equal to % of the principal amount of the Notes. 2. The Company understands that the Underwriters intend (i) to make a public offering of the Securities as soon as they deem advisable after the Registration Statement and this Agreement have become effective and the Indenture has been qualified under the Trust Indenture Act of 1939, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Trust Indenture Act") and (ii) initially to offer the Securities upon the terms set forth in the Prospectus. 3. Payment for the Securities shall be made to the Company or to its order by wire transfer of same day funds (less the cost to J.P. Morgan Securities, Inc. of obtaining such same day funds, if any) to an account which shall be specified in writing by the Company at least one full Business Day prior to the Closing Date at the office of Cahill Gordon & Reindel, 80 Pine Street, New York, New York at 10:00 A.M., New York City time, on September , 1996, or at such other time on the same or such other date, not later than the fifth Business Day thereafter, as the Underwriters and the Company may agree upon in writing. The time and date of such payment for the Securities are referred to herein as the "Closing Date." As used herein, the term "Business Day" means any day other than a day on which banks are permitted or required to be closed in New York City. Payment for the Securities to be purchased on the Closing Date shall be made against delivery to the account of J.P. Morgan Securities Inc., at The Depository Trust Company, on behalf of the Underwriters, of one or more global certificates for the Securities to be purchased on such date registered in such names and in such denominations as the Underwriters shall request in writing not later than two Business Days prior to the Closing Date, with any transfer taxes payable in connection with the transfer to the Underwriters of the Securities duly paid by the Company. The certificates for the Securities will be made available for inspection by the Underwriters in New York, New York not later than 1:00 P.M., New York City time, on the Business Day prior to the Closing Date. 4. Each of the Registrants, jointly and severally, represents and warrants as to itself and the Company represents as to itself and the Guarantors to each of the Underwriters that: -4- (a) no order preventing or suspending the use of any preliminary prospectus filed as part of the Registration Statement has been issued by the Commission, and each preliminary prospectus filed as part of the Registration Statement, as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, provided that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to any Registrant in writing by such Underwriter expressly for use therein; (b) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or, to the knowledge of any Registrant, threatened by the Commission; and the Registration Statement and the Prospectus (as amended or supplemented if the Registrants shall have furnished any amendments or supplements thereto) comply, and will comply as of the Closing Date, in all material respects with the Securities Act and the Trust Indenture Act and do not, and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the date of the Prospectus and any amendment or supplement thereto, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented at the Closing Date, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; except that the foregoing representations and warranties shall not apply to statements or omissions in the Registration Statement, the Prospectus or any amendments or supplements thereto made in reliance upon and in conformity with information relating to any Underwriter furnished to any Registrant in writing by such Underwriter expressly for use therein or to the Statement of -5- Eligibility on Form T-1 of the Trustee under the Trust Indenture Act filed as an exhibit to the Registration Statement; (c) the Company has not (i) taken, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale or resale of the Notes or (ii) since the filing of the Registration Statement (A) sold, bid for, purchased or paid anyone any compensation for soliciting purchases of the Notes or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company; (d) the audited financial statements, and the related notes thereto, included in the Registration Statement and the Prospectus present fairly the consolidated financial position of each of (i) the Company and its subsidiaries, (ii) the Augusta Business (as defined in the Registration Statement) and (iii) the Phipps Business (as defined in the Registration Statement), and the results of their respective operations and the changes in their respective consolidated cash flows as of the dates and for the periods indicated, and said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved; the financial statement schedules included in the Registration Statement include all the information required to be stated therein; the summary and selected financial and related statistical data included in the Registration Statement and the Prospectus present fairly the information shown therein and have been prepared and compiled on a basis consistent with the audited financial statements included therein; Ernst & Young LLP, whose reports on the audited financial statements of the Company and its subsidiaries, the Augusta Business with respect to the year ended December 31, 1995 and the Phipps Business are included in the Registration Statement and the Prospectus, are independent accountants with respect to the Company and its subsidiaries, the Augusta Business and the Phipps Business as required by the Securities Act; and Deloitte & Touche (together with Ernst & Young LLP, the "Independent Auditors"), whose report on the audited financial statements of the Augusta Business with respect to the years ended December 31, 1993 -6- and December 31, 1994 is included in the Registration Statement and the Prospectus, are independent accountants with respect to the Augusta Business as required by the Securities Act; (e) the pro forma financial statements (including the notes thereto) and the other pro forma financial information included in the Prospectus and Registration Statement (i) comply as to form in all material respects with the applicable requirements of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, and (iii) have been properly computed on the bases described therein; the Company believes that the assumptions used in the preparation of the pro forma financial statements and other pro forma financial information included in the Prospectus and Registration Statement are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein; (f) the Company has no subsidiaries other than those subsidiaries (the "Subsidiaries") listed on Schedule II hereto and all of the Subsidiaries are Guarantors; WALB-TV, Inc., WJHG-TV, Inc., Gray Kentucky Television, Inc., KTVE, Inc. and WRDW-TV, Inc. are collectively referred to herein as the "Broadcast Subsidiaries"; (g) except as set forth in the Prospectus with respect to the outstanding stock of the Subsidiaries pledged pursuant to the Existing Credit Facility (as defined in the Prospectus) and the Senior Credit Facility, the Company beneficially owns, directly or indirectly, free and clear of any mortgage, pledge, security interest, lien, claim or other encumbrance, all of the outstanding capital stock of the Subsidiaries; all of the outstanding capital stock of the Subsidiaries has been duly authorized and validly issued and is fully paid and nonassessable; (h) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been (A) any change in the Company's issued capital stock, warrants or options except pursuant to (i) the terms of the instruments governing the same, (ii) the exercise of such options or warrants, (iii) the issuance of certain options and (iv) the -7- arrangements relating to the Concurrent Public Offering, the Preferred Stock Exchange and the Preferred Stock Sale, or (B) any material adverse change, or any development involving a prospective material adverse change, in or affecting the business, prospects, financial position, stockholder's equity or results of operations of the Company and the Subsidiaries, taken as a whole (a "Material Adverse Change"); (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as disclosed therein, (i) there have been no transactions entered into by the Company or by any of the Subsidiaries, including those entered into in the ordinary course of business, which are material to the Company and the Subsidiaries taken as a whole; and (ii) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock (other than regular quarterly dividends on the Class A Common Stock); (j) each of the Company and the Subsidiaries has been duly incorporated under the laws of its jurisdiction of incorporation; each of the Company and the Subsidiaries is a validly existing corporation in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement and the Prospectus and is duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, except where the failure to be so qualified or in good standing would not, individually or in the aggregate, have a material adverse effect on the business, prospects, financial position, stockholders' equity or results of operations of the Company and the Subsidiaries, taken as a whole (a "Material Adverse Effect"); (k) this Agreement has been duly authorized, executed and delivered by each of the Registrants; (l) the execution and delivery of the Indenture has been duly and validly authorized by the Company and each of the Guarantors and the Indenture has been qualified under the Trust Indenture Act and, when executed and -8- delivered by the Company and each of the Guarantors (assuming due authorization, execution and delivery thereof by the Trustee), the Indenture will constitute a legal, valid and binding agreement of the Company and each of the Guarantors enforceable against the Company and each of the Guarantors in accordance with its terms except that the enforcement thereof may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity and the discretion of the court before which any proceeding therefor may be brought; and the Securities and the Indenture conform in all material respects to the descriptions thereof in the Prospectus; (m) the Notes have been duly authorized by the Company and the Guarantees have been duly authorized by each of the Guarantors and, when executed and authenticated in accordance with the terms of the Indenture and delivered to and paid for by the Underwriters, the Notes will constitute legal, valid and binding obligations of the Company and the Guarantees will constitute legal, valid and binding obligations of each Guarantor, in each case enforceable in accordance with their terms, except that the enforcement thereof may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity and the discretion of the court before which any proceeding therefor may be brought; (n) the execution and delivery of the Senior Credit Facility has been duly and validly authorized by the Company and each of the Guarantors a party thereto and, when executed and delivered by the Company and each of the Guarantors a party thereto (assuming due authorization, execution and delivery by the other parties thereto), the Senior Credit Facility will constitute a legal, valid and binding agreement of the Company and each of the Guarantors a party thereto enforceable against the Company and each of such Guarantors in accordance with its terms except that the enforcement thereof may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity and the discretion of the court before which any proceeding therefor may be brought; -9- (o) the shareholders of the Company have approved each of the matters voted on at the Company's Annual Meeting of Shareholders as set forth in the Company's proxy statement dated August 14, 1996; (p) the execution and delivery by the Company and each of the Guarantors of, and the performance by the Company and each of the Guarantors of all of the provisions of their respective obligations under, this Agreement, the Indenture, the Securities (including the Guarantees) and the Senior Credit Facility, and by the Company of the Preferred Stock Exchange, the Asset Purchase Agreement and the consummation by the Company and each of the Guarantors of the transactions contemplated herein and in the Indenture, and the issuance and sale by the Company of the Class B Common Stock in the Concurrent Public Offering, the Series A Preferred Stock in the Preferred Stock Exchange and the Series B Preferred Stock and Warrants in the Preferred Stock Sale, (i) have been duly authorized by all necessary corporate action on the part of the Company and each of the Guarantors (to the extent a party thereto), (ii) do not and will not result in any violation of the Articles of Incorporation (or other applicable charter document) or any shareholder's agreement or the By-laws of the Company or any Guarantor (to the extent a party thereto), (iii) do not and will not conflict with, or result in a breach or violation of any of the terms or provisions of, or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or give rise to any right to accelerate the maturity or require the prepayment of any indebtedness or the purchase of any capital stock under, or result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or of any Guarantor under, (A) any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, partnership agreement or other agreement or instrument to which the Company or any such Guarantor (to the extent a party thereto) is a party or by which any of them may be bound or to which any of their respective properties or assets may be subject, (B) (assuming, in the case of the offer and sale of the Securities, compliance with all applicable state securities or "Blue Sky" laws) any law or statute, rule or regulation applicable to the Company or any of the Guarantors (to the extent a party thereto) or any of their respective properties or assets (including, without limitation, the Communications Act of 1934, as amended (the -10- "Communications Act"), the Telecommunications Act of 1996 (the "Telecommunications Act") and the rules and regulations of the Federal Communications Commission (the "FCC") thereunder) or (C) any judgment, order or decree of any government, governmental instrumentality, agency, body or court, domestic or foreign, having jurisdiction over the Company or any such Guarantor (to the extent a party thereto) or any of their respective properties or assets and (iv) do not and will not result in the termination or revocation of any of the permits, licenses, approvals, orders, certificates, franchises or authorizations of governmental or regulatory authorities, including those relating to the Communications Act, the Telecommunications Act or the rules and regulations of the FCC, owned or held by the Company or any of the Subsidiaries or the Phipps Signatories (collectively the "FCC Licenses") or result in any other material impairment of the rights of the holder of such FCC License (except that upon consummation of the Asset Purchase Agreement, any FCC Licenses held by the Phipps Signatories shall be transferred to the Company or a Subsidiary); (q) the Company, the Subsidiaries and the Phipps Signatories have good and marketable title in fee simple to all items of real property and good title to all personal property owned by them that is material to the business of the Company and its Subsidiaries taken as a whole, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made or proposed to be made of such property by the Company and the Subsidiaries; and any real property and buildings held under lease by the Company, the Subsidiaries and the Phipps Business that are material to the business of the Company and its Subsidiaries taken as a whole are held by them under valid, existing and enforceable leases (against the Company or its subsidiary that is a party thereto) with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company and the Subsidiaries; each of the Phipps Signatories and MAP has duly authorized, executed and delivered the Asset Purchase Agreement and the Stock Purchase Agreement to which each is a party and each such agreement is a legal, valid and binding agreement of each such entity party thereto; -11- (r) no authorization, approval, consent, order, registration, qualification or license of, or filing with, any government, governmental instrumentality, agency (including, without limitation, the FCC), body or court, domestic or foreign, or third party is required for the valid authorization, issuance, sale and delivery of the Securities (including the Guarantees), the Class B Common Stock in the Concurrent Public Offering, the Series A Preferred Stock in the Preferred Stock Exchange and the Series B Preferred Stock and Warrants in the Preferred Stock Sale, or the performance by the Company or any Guarantor of all of its respective obligations under this Agreement, the Indenture, the Securities (including the Guarantees), the Senior Credit Facility and the Asset Purchase Agreement, or the consummation by the Company and each of the Guarantors of the transactions contemplated by this Agreement (other than (i) in the case of the Asset Purchase Agreement, as may be required under the Communications Act, the Telecommunications Act or the rules and regulations of the FCC, or (ii) in the case of the offering of the Securities and the Concurrent Public Offering, as has been or, if the respective registration statement has not been declared effective, will be obtained prior to the Closing Date under the Securities Act or the Trust Indenture Act or as may be required under the securities or Blue Sky laws of the various states of the United States of America and other jurisdictions where qualification or registration of the Securities or the Class B Common Stock may be required); (s) neither the Company nor any of the Subsidiaries is (i) in violation of its Articles of Incorporation (or other applicable charter document) or By-laws, (ii) in violation of any statute, judgment, decree, order, rule or regulation applicable to any of them or any of their respective properties or assets (including, without limitation, the Communications Act, the Telecommunications Act and the rules and regulations of the FCC thereunder), except for any such violation which would not, individually or in the aggregate, have a Material Adverse Effect, or (iii) in breach or violation of any of the terms or provisions of, or with the giving of notice or lapse of time, or both, would be in default under, any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, partnership agreement, or other agreement or instrument to which the Company or any Guarantor is a party or by which any of them may be bound or to which any -12- of their properties or assets may be subject, except for such violations or defaults that would not, individually or in the aggregate, have a Material Adverse Effect; (t) except as set forth in the Prospectus under "Risk Factors -- FCC Divestiture Requirement," "Business--Federal Regulation of the Company's Business" and "Legal Proceedings," there are no legal or governmental proceedings pending or, to the knowledge of any Registrant, threatened to which the Company or any of the Subsidiaries is or may be a party or to which any property of the Company or any of the Subsidiaries or the Phipps Business is or may be the subject which, if determined adversely to the Company or any of the Subsidiaries or any other person, could individually or in the aggregate be expected to have a Material Adverse Effect and, to the best knowledge of each Registrant, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (u) there are no legal or governmental proceedings or contracts or documents of a character required to be described or referred to in the Registration Statement or the Prospectus, or to be filed as exhibits to the Registration Statement, that are not described, referred to or filed as required and the descriptions of any legal or governmental proceedings or contracts or documents fairly summarize in all material respects such legal or regulatory proceedings, contracts or documents; (v) each of the Company and the Subsidiaries and the Phipps Signatories owns, possesses or has obtained all licenses, permits, certificates, consents, orders, approvals and other authorizations from, and has made all declarations and filings with, all federal, state, local and other governmental authorities (including, without limitation, the FCC), all self-regulatory organizations and all courts and other tribunals, domestic or foreign, necessary to own or lease, as the case may be, and to operate the properties and to carry on the business of the Company and its Subsidiaries after giving effect to the Phipps Acquisition (as defined in the Registration Statement) and each of them is in full force and effect, except in each case as otherwise disclosed in the Registration Statement or where the failure to obtain licenses, permits, certificates, consents, orders, approvals and other authorizations, or to make all declarations and filings, would not, individually or in the aggregate, have a Material Adverse Effect, and none of the Company or the Subsidiaries, MAP -13- or the Phipps Signatories has received any notice relating to revocation or modification of any such license, permit, certificate, consent, order, approval or other authorization, except where such revocation or modification would not, individually or in the aggregate, have a Material Adverse Effect; (w) no person has the right to require the Company to register any securities for offering and sale under the Securities Act by reason of the filing of the Registration Statement with the Commission or the issue and sale of the Securities or by reason of the filing of the registration statement relating to the Concurrent Public Offering; (x) all of the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable; and, except as described in the Prospectus, there are no outstanding rights (including, without limitation, preemptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Company or in any of the Subsidiaries, or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any capital stock of the Company or any such Subsidiary, any such convertible or exchangeable securities or any such rights, warrants or options; (y) there are no labor disputes or negotiations with employees of the Company or any of the Subsidiaries which could have, individually or in the aggregate, a Material Adverse Effect; (z) the Company and the Subsidiaries are in compliance with, and not subject to any liability under, all applicable federal, state, local and foreign laws, regulations, rules, codes, ordinances, directives, and orders relating to pollution or to protection of public or employee health or safety or to the environment, including, without limitation, those that relate to any Hazardous Material (as hereinafter defined) ("Environmental Laws"), except, in each case, where noncompliance or liability, individually or in the aggregate, would not have a Material Adverse Effect. The term "Hazardous Material" means any pollutant, contaminant or waste, or any hazardous, dangerous, or toxic chemical, material, waste, -14- substance or constituent subject to regulation under any Environmental Law; (aa) the fair salable value of the assets of each Registrant exceeds the amount that will be required to be paid on or in respect of its existing debts and other liabilities (including contingent liabilities) as they mature; the assets of each of the Registrants do not constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted; each Registrant does not intend to, and does not believe that it will, incur debts beyond its ability to pay such debts as they mature; upon the issuance of the Securities, the fair salable value of the assets of each of the Registrants will exceed the amount that will be required to be paid on or in respect of its existing debts and other liabilities (including contingent liabilities) as they mature; and upon the issuance of the Securities, the assets of each of the Registrants will not constitute unreasonably small capital to carry out its business as now conducted or as proposed to be conducted; (ab) each of the Company and the Subsidiaries owns or legally possesses the patents, patent licenses, trademarks, service marks, trade names, copyrights and know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) (collectively, the "Intellectual Property") employed by it in connection with the business conducted by it as of the date hereof, except to the extent that the failure to own or legally possess, any such Intellectual Property would not have, individually or in the aggregate, a Material Adverse Effect, and neither the Company nor any Subsidiary has received any notice of infringement of or conflict with asserted rights of others with respect to any Intellectual Property; (ac) none of the Company or the Guarantors has any liability for any prohibited transaction or funding deficiency or any complete or partial withdrawal liability with respect to any pension, profit sharing or other plan which is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to which the Company or any Guarantor makes or ever has made a contribution and in which any employee of the Company or any Guarantor is or has ever been a participant. With respect to such plans, the Company and each Guarantor is in -15- compliance in all material respects with all applicable provisions of ERISA; (ad) the affiliation agreement between each of the Broadcast Subsidiaries or each Phipps Signatory that owns a television broadcast station included in the Phipps Business, on the one hand, and NBC or CBS, as the case may be, on the other hand, has been duly authorized, executed and delivered by each of the Broadcast Subsidiaries and are the valid and legally binding obligations of the respective parties thereto; the description of the affiliation agreements in the Prospectus and Registration Statement under the caption "Business -- Network Affiliation of the Stations" fairly summarizes in all material respects such agreements; (ae) the Company is not, will not become as a result of the transactions contemplated hereby, and does not intend to conduct its business in a manner that would cause it to become, an "investment company" or any "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940; and (af) the Trustee, on behalf of the holders of the Notes, on the Closing Date and after the deposit with the Trustee of the net proceeds of the offering of the Notes and such other amounts as are required by the Indenture (the "Trust Funds"), will have a valid first priority perfected security interest in the Trust Funds. 5. The Registrants, jointly and severally, covenant and agree with each Underwriter as follows: (a) to use their respective best efforts to cause the Registration Statement to become effective (if the Registration Statement shall not have been declared effective prior to the execution hereof) at the earliest possible time and, if required, to file the Prospectus with the Commission in the manner and within the time periods specified by Rule 424(b) and Rule 430A under the Securities Act; (b) to deliver, at the expense of the Registrants, (i) four conformed copies of the Registration Statement (as originally filed) and each amendment thereto, including exhibits, to the Underwriters, and (ii) during the period mentioned in Section 5(e), to each of the -16- Underwriters as many copies of the Prospectus (including all amendments and supplements thereto) as the Underwriters may reasonably request; (c) before filing any amendment or supplement to the Registration Statement or the Prospectus, whether before or after the time the Registration Statement becomes effective, to furnish to the Underwriters and their counsel a copy of the proposed amendment or supplement for review within a reasonable time prior to the proposed filing thereof and not to file any such proposed amendment or supplement to which the Underwriters or their counsel reasonably object; (d) to advise the Underwriters promptly, and to confirm such advice in writing, (i) when the Registration Statement shall become effective, (ii) when any amendment to the Registration Statement shall have become effective, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for any additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation or to the best of the Company's knowledge threatening of any proceeding for that purpose and (v) of the receipt by any Registrant of any notification with respect to any suspension of the qualification of the Securities (including any Guarantee) for offer and sale in any jurisdiction or the initiation or to the best of the Company's knowledge threatening of any proceeding for such purpose; and to use their respective best efforts to prevent the issuance of any such stop order or notification and, if issued, to obtain promptly the withdrawal thereof; (e) if, during such period of time after the first date of the public offering of the Securities as in the opinion of counsel for the Underwriters a prospectus relating to the Securities is required by law to be delivered in connection with sales by an Underwriter or any dealer, any event shall occur which is known to any of the Registrants or information shall become known to any of the Registrants as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances at the time the Prospectus is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Prospectus to comply with law, forthwith to, at the -17- sole expense of the Registrants, prepare and, subject to Section 5(c) above, file with the Commission, and furnish to the Underwriters and to the dealers (whose names and addresses the Underwriters will furnish to the Registrants) to which Securities may have been sold by the Underwriters and to any other dealers upon request such amendments or supplements to the Prospectus as may be necessary so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances at the time the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus will comply with law; (f) (i) to endeavor to qualify the Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Underwriters shall reasonably request and to continue such qualification in effect so long as reasonably required for distribution of the Securities and (ii) to pay all fees and expenses (including fees and disbursements of counsel for the Underwriters) incurred in connection with such qualification and in connection with the determination of the eligibility of the Securities for investment under the laws of such jurisdictions as the Underwriters may designate; provided that no Registrant shall be required to file a general consent to service of process or to qualify as a foreign corporation in any jurisdiction; (g) to make generally available to the Registrants' security holders, and to the Underwriters as soon as practicable an earnings statement (which need not be audited) covering a period of at least twelve months beginning with the first fiscal quarter of the Registrants occurring after the effective date of the Registration Statement which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 of the Commission promulgated thereunder; (h) so long as the Securities are outstanding, to furnish to the Underwriters copies of all reports or other communications (financial or other) required to be furnished to holders of the Securities, and copies of any reports and financial statements required to be furnished to or filed with the Commission or any national securities exchange; -18- (i) to pay all costs and expenses incident to the performance of its obligations hereunder, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 8 hereof, including without limiting the generality of the foregoing, all costs and expenses (i) incident to the preparation, issuance, execution, authentication and delivery of the Securities (including any expenses of the Trustee and the Trustee's counsel), (ii) incident to the preparation, printing and filing under the Securities Act of the Registration Statement, the Prospectus and any preliminary prospectus (including in each case all exhibits, amendments and supplements thereto), (iii) incurred in connection with the registration or qualification and determination of eligibility for investment of the Securities under the laws of such jurisdictions as the Underwriters may designate (including fees and disbursements of Cahill Gordon & Reindel, counsel for the Underwriters, in connection with such registration or qualification), (iv) relating to any filing with, and determination of the fairness of the underwriting terms and arrangements by, the National Association of Securities Dealers, Inc. in connection with the offering of the Securities, (v) in connection with the printing (including word processing and duplication costs) and delivery of this Agreement, the Indenture, all other agreements relating to underwriting arrangements, Blue Sky Memoranda, any legal investment surveys and the furnishing to the Underwriters and dealers of copies of the Registration Statement and the Prospectus, including mailing and shipping, as herein provided, and (vi) payable to rating agencies in connection with the rating of the Securities; (j) the Company will not (i) take, directly or indirectly, prior to the termination of the underwriting syndicate contemplated by this Agreement, any action designed to cause or to result in, or that might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Notes, (ii) sell, bid for, purchase or pay anyone any compensation for soliciting purchases of the Notes or (iii) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company; (k) to use the net proceeds of the offering of Securities as set forth in the Registration Statement and the -19- Prospectus under the caption "The Phipps Acquisition, the KTVE Sale and the Financing -- Sources and Uses of Funds for the Phipps Acquisition, the KTVE Sale and the Financing"; and (l) to comply with the special redemption provisions of the Indenture in the event the Phipps Acquisition shall not have been consummated on or prior to December 23, 1996. 6. The several obligations of the Underwriters hereunder to purchase the Securities are subject to the performance by the Registrants of their obligations hereunder and to the following additional conditions: (a) if the Registration Statement has not been declared effective prior to the execution and delivery hereof, the Registration Statement shall have become effective (or if a post-effective amendment is required to be filed under the Securities Act, such post-effective amendment shall have become effective) not later than 5:00 P.M., New York City time, on the date hereof; and no stop order suspending the effectiveness of the Registration Statement shall be in effect, and no proceedings for such purpose shall be pending before or to the knowledge of the Company threatened by the Commission; and any requests for additional information shall have been complied with to the reasonable satisfaction of the Underwriters; (b) each of the representations and warranties of the Registrants contained herein shall be true and correct on and as of the Closing Date as if made on and as of the Closing Date, and the Registrants shall have complied with all agreements and all conditions on their part to be performed or satisfied hereunder at or prior to the Closing Date; (c) subsequent to the execution and delivery of this Agreement and prior to the Closing Date, there shall not have occurred any downgrading, nor shall any notice have been given of (i) any intended or potential downgrading or (ii) any review or possible change that does not indicate an improvement in the rating accorded any securities of or guaranteed by any of the Registrants by any "nationally recognized statistical rating organization," as such term -20- is defined for purposes of Rule 436(g)(2) under the Securities Act; (d) since the respective dates as of which information is given in the Prospectus, there shall not have been any Material Adverse Change, otherwise than as set forth in the Prospectus, the effect of which in the sole judgment of the Underwriters makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Securities on the terms and in the manner contemplated in the Prospectus; (e) the Underwriters shall have received on and as of the Closing Date a certificate, addressed to the Underwriters and dated the Closing Date, of an executive officer of the Company satisfactory to the Underwriters to the effect set forth in subsections (a) through (c) of this Section 6 and to the further effect that since the respective dates as of which information is given in the Prospectus there has not occurred any Material Adverse Change, otherwise than as set forth in the Prospectus; (f) the Underwriters shall have received on the Closing Date a signed opinion of Heyman & Sizemore, counsel for the Company, in form and substance satisfactory to Cahill Gordon & Reindel, counsel to the Underwriters, dated the Closing Date and addressed to the Underwriters, to the effect that: (i) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Georgia with full power and authority (corporate and other) to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus; (ii) the Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing in each jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification other than where the failure to be so qualified or in good standing would not have a Material Adverse Effect; (iii) each Subsidiary has been duly incorporated and is validly existing as a corporation under the -21- laws of its jurisdiction of incorporation with full power and authority (corporate and other) to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing in each jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification other than where the failure to be so qualified or in good standing would not have a Material Adverse Effect; (iv) the authorized capital stock of the Company is as set forth in the Registration Statement and the Prospectus; (v) all the outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable, and are owned beneficially by the Company free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements, voting trusts, defects, equities or claims of any nature whatsoever. Other than the Subsidiaries listed on Schedule II hereto, the Company does not own, directly or indirectly, any capital stock or other equity securities of any other corporation or any ownership interest in any partnership, joint venture or other association; (vi) Neither the Company nor any of the Subsidiaries is (A) in violation of its charter or by-laws or (B) in breach or violation of any of the terms or provisions of, or with the giving of notice or lapse of time, or both, would be in default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Company or any of the Subsidiaries is a party or by which it or any of them or any of their respective properties is bound, or any applicable law or statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company, the Subsidiaries or any of their respective properties, except for violations and defaults which -22- individually or in the aggregate would not have a Material Adverse Effect; (vii) the shareholders of the Company have approved each of the matters voted on at the Company's Annual Meeting of Shareholders as set forth in the Company's proxy statement dated August 14, 1996; (viii) the Indenture has been duly and validly authorized, executed and delivered by the Company, KTVE, Inc. and each of the Guarantors that is a Georgia corporation, as listed on a schedule to such opinion (collectively, the "Georgia Guarantors"); (ix) the Notes have been duly authorized by the Company and the Guarantees have been duly authorized by KTVE, Inc. and each of the Georgia Guarantors; (x) the execution and delivery by the Company, KTVE, Inc. and each of the Georgia Guarantors of, and the performance by the Company, KTVE, Inc. and each of the Georgia Guarantors of all of the provisions of their respective obligations under, this Agreement, the Indenture, the Securities (including the Guarantees), the Senior Credit Facility, the Preferred Stock Exchange and the Asset Purchase Agreement and the consummation by the Company, KTVE, Inc. and each of the Georgia Guarantors of the transactions herein and therein contemplated, and the issuance and sale by the Company of the Class B Common Stock in the Concurrent Public Offering, the Series A Preferred Stock in the Preferred Stock Exchange and the Series B Preferred Stock and Warrants in the Preferred Stock Sale, (i) have been duly authorized by all necessary corporate action on the part of the Company, KTVE, Inc. and each of the Georgia Guarantors (to the extent a party thereto), (ii) do not and will not result in any violation of the Articles of Incorporation or the By-laws of the Company, KTVE, Inc. or any Georgia Guarantor and (iii) do not and will not conflict with, or result in a breach or violation of any of the terms or provisions of, or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or give rise to any right to accelerate the maturity or require the prepayment of any indebtedness or the purchase of any capital stock under, or result in the -23- creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Company, KTVE, Inc. or any Georgia Guarantor under, (A) any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, partnership agreement or other agreement or instrument known to such counsel to which the Company, KTVE, Inc. or any such Georgia Guarantor is a party or by which any of them may be bound or to which any of their respective properties or assets may be subject, (B) any applicable law or statute, rule or regulation (other than the securities or Blue Sky laws of the various states of the United States of America) or (C) any judgment, order or decree known to such counsel of any government, governmental instrumentality, agency, body or court, domestic or foreign, having jurisdiction over the Company, KTVE, Inc. or any such Georgia Guarantor or any of their respective properties or assets; and (xi) the execution and delivery of the Senior Credit Facility has been duly and validly authorized by the Company, KTVE, Inc. and the Georgia Guarantors party thereto, and the Senior Credit Facility has been duly executed and delivered by the Company, KTVE, Inc. and the Georgia Guarantors party thereto; (g) the Underwriters shall have received on the Closing Date a signed opinion of Proskauer Rose Goetz & Mendelsohn LLP, counsel for the Company, in form and substance satisfactory to Cahill Gordon & Reindel, counsel to the Underwriters, dated the Closing Date and addressed to the Underwriters, to the effect that: (i) the Indenture has been duly and validly authorized, executed and delivered by each Guarantor that is a Delaware corporation, as listed on a schedule to such opinion (collectively, the "Delaware Guarantors") and assuming due authorization, execution and delivery of the Indenture by the Company, the Georgia Guarantors and the Trustee, the Indenture is a legal, valid and binding agreement of the Company and each of the Guarantors, enforceable against the Company and each of the Guarantors in accordance with its terms, except that the enforcement thereof may be subject to (1) bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or similar laws now or hereafter in effect relating to -24- creditors' rights generally and (2) general principles of equity and the discretion of the court before which any proceeding therefor may be brought (regardless of whether enforcement is considered in a proceeding in equity or at law); (ii) the Guarantees have been duly authorized by the Delaware Guarantors, and assuming due authorization of the Notes by the Company and of the Guarantees by KTVE, Inc. and the Georgia Guarantors, when the Notes and the Guarantees are executed and authenticated in accordance with the respective terms of the Indenture and delivered to and paid for by the Underwriters, the Notes will constitute legal, valid and binding obligations of the Company and the Guarantees will constitute legal, valid and binding obligations of the Guarantors, in each case enforceable in accordance with their respective terms, except that the enforcement thereof may be subject to (1) bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or similar laws now or hereafter in effect relating to creditors' rights generally and (2) general principles of equity and the discretion of the court before which any proceeding therefor may be brought (regardless of whether enforcement is considered in a proceeding in equity or at law); (iii) the Securities and the Indenture conform in all material respects to the descriptions thereof in the Prospectus; (iv) this Agreement has been duly authorized, executed and delivered by each of the Delaware Guarantors; (v) other than as set forth in the Prospectus, to such counsel's knowledge, there are no legal or governmental proceedings pending or threatened to which the Company or any of the Subsidiaries or the Phipps Business is or may be a party or to which any property of the Company or the Subsidiaries or the Phipps Business is or may be the subject which, if determined adversely, could individually or in the aggregate be expected to have a Material Adverse Effect; and such counsel does not know of any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be described or referred to in the Registration Statement or the Prospectus which are not filed, referred to or described as required; -25- (vi) the execution and delivery by the Delaware Guarantors of, and the performance by each of the Delaware Guarantors of all of the provisions of its respective obligations under, this Agreement, the Indenture, the Guarantees and the Senior Credit Facility and the consummation by each of the Delaware Guarantors of the transactions herein and therein contemplated (i) have been duly authorized by all necessary corporate action on the part of each of the Delaware Guarantors (to the extent a party thereto), (ii) do not and will not result in any violation of the Certificate of Incorporation or the By-laws of any Delaware Guarantor and (iii) do not and will not conflict with, or result in a breach or violation of any of the terms or provisions of, or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or give rise to any right to accelerate the maturity or require the prepayment of any indebtedness or the purchase of any capital stock under, or result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of any Delaware Guarantor under, (A) any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, partnership agreement or other agreement or instrument known to such counsel to which any such Delaware Guarantor is a party or by which any of them may be bound or to which any of their respective properties or assets may be subject, (B) any applicable law or statute or regulation (other than the securities or Blue Sky laws of the various states of the United States of America) or (C) any judgment, order or decree known to such counsel of any government, governmental instrumentality, agency, body or court, domestic or foreign, having jurisdiction over any such Delaware Guarantor or any of their respective properties or assets; (vii) the execution and delivery of the Senior Credit Facility has been duly and validly authorized by the Delaware Guarantors party thereto, and the Senior Credit Facility has been duly executed and delivered by each of the Delaware Guarantors party -26- thereto and, assuming due authorization, execution and delivery thereof by the other parties thereto, is a legal, valid and binding agreement of the Delaware Guarantors party thereto enforceable against such Delaware Guarantors in accordance with its terms, except that the enforcement thereof may be subject to (1) bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or similar laws now or hereafter in effect relating to creditors' rights generally and (2) general principles of equity and the discretion of the court before which any proceeding therefor may be brought (regardless of whether enforcement is considered in a proceeding in equity or at law); (viii) no authorization, approval, consent, order, registration, qualification or license of, or filing with, any government, governmental instrumentality, agency, body or court, domestic or foreign, or third party (other than as have been obtained under the Securities Act or the Trust Indenture Act or as may be required under the securities or Blue Sky laws of the various states of the United States of America) is required for the valid authorization, issuance, sale and delivery of the Securities (including the Guarantees), the Class B Common Stock in the Concurrent Public Offering, the Series A Preferred Stock in the Preferred Stock Exchange and the Series B Preferred Stock and Warrants in the Preferred Stock Sale, or the performance by the Company and each of the Guarantors of all of their obligations under this Agreement, the Indenture, the Securities (including the Guarantees), the Senior Credit Facility, the Asset Purchase Agreement and the Asset Sale Agreement, or the consummation by the Company and each of the Guarantors of the transactions contemplated by this Agreement; (ix) the Registration Statement has been declared effective under the Securities Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued and, to such counsel's knowledge, no proceeding for that purpose has been instituted or threatened by the Commission; the Indenture has been duly qualified under the Trust Indenture Act; any required filing of the Prospectus and any supplements thereto pursuant -27- to Rule 424(b) has been made in a manner and within the time period required by Rule 424(b); (x) the Registration Statement and the Prospectus and any amendments and supplements thereto (except for the financial statements and other financial and statistical data included therein or omitted therefrom as to which such counsel need not express an opinion) comply as to form in all material respects with the requirements of the Securities Act and the Trust Indenture Act; (xi) the Trustee, on behalf of the holders of the Notes, on the Closing Date and after the deposit with the Trustee of the the Trust Funds, will have a valid perfected security interest in the Trust Funds; and (xii) the Company is not, and will not be as a result of the consummation of any of the transactions contemplated by this Agreement, an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940. At the time the foregoing opinion is delivered, Proskauer Rose Goetz & Mendelsohn LLP shall additionally state that it has participated in conferences with officers and other representatives of the Company and the Guarantors, representatives of the independent auditors for each of the Company, the Augusta Business and the Phipps Business, and representatives of the Underwriters, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed, and, although it has not independently verified and is not passing upon and assumes no responsibility for the accuracy, completeness or fairness of the statements contained in the Prospectus and Registration Statement (except to the extent specified in Section 6(g)(iii)), no facts have come to its attention which lead it to believe that the Registration Statement as of its effective date contained any untrue statement of a material fact or omitted to state a material fact -28- required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus as of its date and as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading (it being understood that such firm need not express an opinion with respect to the financial statements and the other financial and statistical data included in or omitted from the Registration Statement and the Prospectus); Such counsel shall not be required to render any of the foregoing opinions or advice with respect to any matter covered by the Communications Act, the Telecommunications Act or the rules or regulations promulgated thereunder or any other FCC matters. (h) on the Closing Date, the Underwriters shall have received the opinion of Robert A. Beizer, Esq., Vice President for Law and Development and Secretary of the Company, in form and substance satisfactory to counsel for the Underwriters, to the effect that: (i) the execution and delivery by each of the Company, the Licensees (as defined below) and the Broadcast Subsidiaries of, and the performance by each of the Company and the Broadcast Subsidiaries of its obligations under, the Senior Credit Facility, the Asset Sale Agreement, this Agreement, the Indenture, the Notes and the Guarantees, as applicable, did not or will not result in a violation of the Communications Act, the Telecommunications Act or any order, rule or regulation of the FCC, and do not and will not cause any forfeiture or impairment by or before the FCC of any FCC license, permit or authorization of any of the Broadcast Subsidiaries; (ii) no consent, approval, authorization, order, registration or qualification of or with any governmental agency or body is required under the Communications Act, the Telecommunications Act or the rules and regulations of the FCC for the execution and delivery by each of the Company and the Broadcast Subsidiaries of, and the performance by each of the Company and the Broadcast Subsidiaries of its obligations under, the Senior Credit Facility, this Agreement, the Indenture, the Notes and the Guarantees, as applicable; (iii) WALB Licensee Corp., WJHG Licensee Corp., WRDW Licensee Corp., WYMT Licensee Corp., WKYT Licensee Corp. and certain of the Phipps Signatories -29- (collectively, the "Licensees") are the holders of the FCC Licenses listed in an attachment to such opinion, all of which are validly issued by the FCC and in full force and effect with no material restrictions or qualifications other than as described in the Prospectus and Registration Statement, and such FCC Licenses constitute all of the FCC Licenses necessary for the Company and the Licensees to own their properties and to conduct their businesses as proposed to be owned and conducted after giving effect to the Phipps Acquisition in the manner and to the full extent now operated or proposed to be operated as described in the Prospectus and Registration Statement; (iv) to the best of such counsel's knowledge, the business and operations of the Company and the Licensees comply in all material respects with the Communications Act, the Telecommunications Act and all published orders, rules and regulations of the FCC; (v) such counsel does not know of (A) any proceedings threatened, pending or contemplated before the FCC against or involving the properties, businesses or FCC Licenses of the Company and the Licensees, or (B) any communications laws or regulations of the United States applicable to such properties, businesses or FCC Licenses, which in either case could have a Material Adverse Effect; (vi) to the best of such counsel's knowledge, no event has occurred which permits, or with notice or lapse of time or both would permit, the revocation or non-renewal of any of the FCC Licenses, assuming the filing of timely license renewal applications and the timely payment of all applicable filing and regulatory fees to the FCC, or which might result in any other material impairment of the rights of the Company or the Licensees in the FCC Licenses; and (vii) the statements in the Registration Statement and Prospectus under the captions "Risk Factors -- Consummation of the Phipps Acquisition Prior to Final FCC Approval," "-- FCC Divestiture Requirement," "-- Competitive Nature of and Risk of Changes in the Television Industry," "-- Regulatory Matters" -30- and "Business--Federal Regulation of the Company's Business" (together, the "Regulatory Sections") insofar as such statements constitute summaries of legal or regulatory matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal or regulatory matters, documents and proceedings and fairly summarize the matters referred to therein; At the time the foregoing opinion is delivered, such counsel shall additionally state that it has participated in the preparation of the text included in the Regulatory Sections in the Registration Statement and Prospectus and has met with officers and other representatives of the Company and the Guarantors and representatives of counsel to the Company, the Underwriters and counsel to the Underwriters, and, although it has not independently verified and is not passing upon and assumes no responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus (except to the extent specified in Section 6(h)(vii)), no facts have come to its attention which lead it to believe that the text contained in the Regulatory Sections of the Registration Statement as of its effective date contained any untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the text contained in the Regulatory Sections of the Prospectus as of its date and as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need not express an opinion with respect to the financial statements and the other financial and statistical data included in or omitted from the Registration Statement and the Prospectus; (i) on the effective date of the Registration Statement and the effective date of the most recently filed post-effective amendment, if any, to the Registration Statement and also on the Closing Date, each of the Independent Auditors shall have furnished to the Underwriters letters, dated the respective dates of delivery thereof, in form and substance satisfactory to the Underwriters, containing statements and information of the type -31- customarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information of the Company contained in the Registration Statement and the Prospectus; (j) the Underwriters shall have received on and as of the Closing Date an opinion dated the Closing Date of Cahill Gordon & Reindel, counsel to the Underwriters, addressed to the Underwriters and in form and substance satisfactory to the Underwriters with respect to the validity of the Securities, the Indenture, the Registration Statement, the Prospectus and other related matters as the Underwriters may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (k) on or prior to the Closing Date the Company shall have furnished to the Underwriters such further certificates and documents as the Underwriters or their counsel, Cahill Gordon & Reindel, shall reasonably request; (l) on or prior to the Closing Date the Senior Credit Facility shall have been executed and delivered by each of the parties thereto and all conditions precedent to the initial funding under the Senior Credit Facility, other than the consummation of each of the Phipps Acquisition, the offering contemplated hereby and the Concurrent Public Offering, shall have been satisfied or waived; (m) on or prior to the Closing Date all conditions precedent to the closing of each of the Concurrent Public Offering, the Preferred Stock Exchange and the Preferred Stock Sale shall have been satisfied or waived and the Concurrent Public Offering, the Preferred Stock Exchange and the Preferred Stock Sale shall have been consummated on the Closing Date concurrent with the closing hereunder relating to the Securities; and (n) the Trust Funds shall have been deposited with the Trustee in accordance with the terms of the Indenture on the Closing Date. 7. The Registrants, jointly and severally, agree to indemnify and hold harmless each Underwriter, its officers and directors, and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the -32- Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, the legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to any Underwriter furnished to any Registrant in writing by such Underwriter expressly for use therein; provided, further, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting such losses, claims, damages or liabilities purchased Notes, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Notes to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless each of the Registrants, each of their directors, each of their officers who signed the Registration Statement and each person who controls any of the Registrants within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Registrants to each Underwriter, but only with reference to information relating to such Underwriter furnished to any Registrant in writing by such Underwriter expressly for use in the Registration Statement, the Prospectus, any amendment or supplement thereto, or any preliminary prospectus. For purposes of this Section 7 and Section 4(a) and 4(b) hereof, the only written information furnished by the Underwriters to any Registrant expressly for use in the Registration Statement and the Prospectus is the information in the last paragraph on the cover page of the -33- Prospectus, and the first paragraph preceding and following the table in the section titled "Underwriting" in the Prospectus. If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such person (the "Indemnified Person") shall promptly notify the person against whom such indemnity may be sought (the "Indemnifying Person") in writing, and the Indemnifying Person, upon request of the Indemnified Person, shall retain counsel satisfactory to the Indemnified Person to represent the Indemnified Person and any others the Indemnifying Person may designate in such proceeding and shall pay the fees and expenses of such counsel related to such proceeding. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the contrary, (ii) the Indemnifying Person after receipt of written notices from the Indemnified Party requesting indemnification and the retention of counsel has failed within a reasonable time to retain counsel satisfactory to the Indemnified Person or (iii) the named parties in any such proceeding (including any impleaded parties) include both the Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnifying Person shall not, in connection with any proceeding or related proceeding in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed as they are incurred. Any such separate firm for the Underwriters and such control persons of Underwriters shall be designated in writing by J.P. Morgan Securities Inc. and any such separate firm for any of the Registrants, each director of the Registrants, each officer of the Registrants who signed the Registration Statement and such control persons of the Registrants shall be designated in writing by the Company. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Person agrees to indemnify any Indemnified Person from and against any loss or liability by reason of such settlement or judgment. No Indemnifying Person shall, without -34- the prior written consent of the Indemnified Person, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement includes an unconditional written release, in form and substance satisfactory to the Indemnified Person, of such Indemnified Person from all liability on claims that are the subject matter of such proceeding. If the indemnification provided for in the first and second paragraphs of this Section 7 is for any reason unavailable to, or insufficient to hold harmless, an Indemnified Person in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Registrants on the one hand and the Underwriters on the other hand from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Registrants on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Registrants on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the net proceeds from the offering (before deducting expenses) received by the Company and the total underwriting discounts and the commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate public offering price of the Securities. The relative fault of the Registrants on the one hand and the Underwriters on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Registrants or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. -35- The Registrants and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by PRO RATA allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay or has paid by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7 are several in proportion to the respective principal amounts of Securities set forth opposite their names in Schedule I hereto, and not joint. The indemnity and contribution agreements contained in this Section 7 are in addition to any liability which the Indemnifying Persons may otherwise have to the Indemnified Persons referred to above. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Registrants as set forth in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of any Registrant, officer or director of any Registrant or any other person controlling any Registrant and (iii) acceptance of and payment for any of the Securities. 8. Notwithstanding anything herein contained, this Agreement may be terminated in the absolute discretion of the -36- Underwriters, by notice given to the Company, if after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc. or the Chicago Board Options Exchange, (ii) trading of any securities of or guaranteed by any of the Registrants shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities, or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in the judgment of the Underwriters, is material and adverse and which, in the judgment of the Underwriters, makes it impracticable to market the Securities on the terms and in the manner contemplated in the Prospectus. 9. If this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of any of the Registrants to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason any Registrant shall be unable to perform its obligations under this Agreement or any condition to the Underwriters' obligations cannot be fulfilled, the Registrants agree jointly and severally to reimburse the Underwriters for all out-of-pocket expenses (including the fees and expenses of their counsel) reasonably incurred by the Underwriters in connection with this Agreement or the offering contemplated hereunder. 10. Any action by the Underwriters hereunder may be taken by the Underwriters jointly or by J.P. Morgan Securities Inc. alone on behalf of the Underwriters, and any such action taken by J.P. Morgan Securities Inc. alone shall be binding upon the Underwriters. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or telecopied. Notices to the Underwriters shall be given to the Underwriters, c/o J.P. Morgan Securities Inc., 60 Wall Street, New York, New York 10260 (facsimile number (212) 648-5705); Attention: Syndicate Department. Notices to any Registrant shall be given to the Company at 126 North Washington Street, Albany, Georgia 31701 (facsimile number (912) 888-9374); Attention: Vice President and Chief Financial Officer with a copy to Proskauer Rose Goetz & Mendelsohn LLP, 1585 Broadway, New York, New York 10036-8299, Attention: Henry O. Smith III, Esq. -37- 11. This Agreement shall inure to the benefit of and be binding upon the Underwriters and the Registrants and any controlling person referred to herein and their respective successors, heirs and legal representatives. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters and the Registrants and their respective successors, heirs and legal representatives and the controlling persons and officers and directors referred to in Section 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. No purchaser of Securities from any Underwriter shall be deemed to be a successor merely by reason of such purchase. 12. This Agreement may be signed in counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 13. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PROVISIONS THEREOF. If the foregoing is in accordance with your understanding, please sign and return four counterparts hereof. Very truly yours, GRAY COMMUNICATIONS SYSTEMS, INC. By: ---------------------------------- Name: Title: THE ALBANY HERALD PUBLISHING COMPANY, INC. THE SOUTHWEST GEORGIA SHOPPER, INC. WALB-TV, INC. WJHG-TV, INC. GRAY KENTUCKY TELEVISION, INC. WRDW-TV, INC. THE ROCKDALE CITIZEN PUBLISHING COMPANY GRAY REAL ESTATE & DEVELOPMENT COMPANY GRAY TRANSPORTATION COMPANY, INC. WALB LICENSEE CORP. WJHG LICENSEE CORP. WKYT LICENSEE CORP. WRDW LICENSEE CORP. WYMT LICENSEE CORP. WKXT LICENSEE CORP. WCTV OPERATING CORP. WKXT-TV, INC. WCTV LICENSEE CORP. PORTA-PHONE PAGING, INC. PORTA-PHONE PAGING LICENSEE CORP. GRAY TELEVISION MANAGEMENT, INC. KTVE, INC. For each of the above: By: ---------------------------------- Name: Title: Accepted: , 1996 J.P. MORGAN SECURITIES INC. ALLEN & COMPANY INCORPORATED THE ROBINSON-HUMPHREY COMPANY, INC. By: J.P. MORGAN SECURITIES INC. By: ---------------------------------- Name: Title: SCHEDULE I Principal Amount of Securities Underwriter to be Purchased - ----------- ---------------- J.P. Morgan Securities Inc. ................ $ Allen & Company Incorporated ............... The Robinson-Humphrey Company, Inc. ........ ---------------- Total ............. $150,000,000 ---------------- SCHEDULE II Subsidiaries of the Company Jurisdiction of Name Incorporation ---- --------------- 11. The Albany Herald Publishing Georgia Company, Inc. 2. The Rockdale Citizen Georgia Publishing Company 3. WALB-TV, Inc. Georgia 4. WJHG-TV, Inc. Georgia 5. Gray Real Estate & Georgia Development Company 6. WKXT Licensee Corp. Delaware 7. WCTV Operating Corp. Georgia 8. WKXT-TV, Inc. Georgia 9. Gray Television Delaware Management, Inc. 10. Gray Kentucky Georgia Television, Inc. 11. The Southwest Georgia Georgia Shopper, Inc. 12. WRDW-TV, Inc. Georgia 13. Gray Transportation Georgia Company, Inc. 14. WALB Licensee Corp. Delaware 15. WJHG Licensee Corp. Delaware 16. WKYT Licensee Corp. Delaware 17. WRDW Licensee Corp. Delaware -2- Jurisdiction of Name Incorporation ---- --------------- 18. WYMT Licensee Corp. Delaware 19. Porta-Phone Paging Delaware Licensee Corp. 20. Porta-Phone Paging, Inc. Georgia 21. WCTV Licensee Corp. Delaware 22. KTVE, Inc. Arkansas
ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF GRAY COMMUNICATIONS SYSTEMS, INC. I. The name of the corporation is Gray Communications Systems, Inc. II. Effective the date hereof, the Section entitled "PREFERRED STOCK" of Article 4 of the Articles of Incorporation of Gray Communications Systems, Inc. is hereby amended by adding the subsections entitled "SERIES A PREFERRED STOCK" and "SERIES B PREFERRED STOCK" as set forth in Exhibit A attached hereto. III. All other provisions of the Articles of Incorporation, including the remaining sections of Article 4, shall remain in full force and effect. IV. This Amendment was duly adopted on September 3, 1996 by the Board of Directors in accordance with the provisions of Section 14-2-602(d) and Section 14-2-1002(9) of the Georgia Business Corporation Code, and pursuant to said code sections, shareholder action was not required. V. The Articles of Incorporation of the Corporation are further amended by striking paragraphs one and two of Article 4 and the section entitled "Common Stock" of Article 4 thereof in their entirety and inserting in lieu thereof amended paragraphs one and two of Article 4 and an amended section entitled "Common Stock" of Article 4 as set forth in Exhibit B attached hereto. 1 2 Upon the filing of these Articles of Amendment with the Secretary of State of the State of Georgia (the "Effective Date"), and without any further action on the part of the Corporation or its shareholders, each share of the Corporation's Class A Common Stock, no par value, one vote per share (the "Existing Class A Common Stock"), then issued (including shares held in the treasury of the Corporation) shall automatically be reclassified, changed and converted into one share of Class A Common Stock, no par value, having ten votes per share. Certificates previously representing shares of Existing Class A Common Stock shall be deemed to represent shares of Class A Common Stock. VII. Upon the Effective Date and without any further action on the part of the Corporation or its shareholders, each share of the Corporation's Class B Common Stock, no par value, non voting (the "Existing Class B Common Stock") then issued (including shares held in the treasury of the Corporation) shall automatically be reclassified, changed and converted into one share of Class B Common Stock, no par value, having one vote per share. Certificates previously representing shares of Existing Class B Common Stock shall be deemed to represent shares of Class B Common Stock. VIII. This amendment was duly adopted by the shareholders of the Corporation on September 3, 1996, in accordance with the provisions of O.C.G.A. Section 14-2- 1003. IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment to 3 be executed by its duly authorized officer on this the 3rd day of September, 1996. GRAY COMMUNICATIONS SYSTEMS, INC. By: ____________________________________ PRESIDENT 4 Exhibit A SERIES A PREFERRED STOCK Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Preferred Stock" (the "Series A Preferred Stock"), and the number of shares constituting the Series A Preferred Stock shall be 1,000. Section 2. RANK. All Series A Preferred Stock shall rank, as to payment of dividends and as to distribution of assets upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, (i) on a parity with the Series B Preferred Stock, no par value, of the Corporation, now or hereafter issued and (ii) senior to the Class A Common Stock, no par value (the "Class A Common Stock"), of the Corporation and the Class B Common Stock, no par value (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"), of the Corporation now or hereafter issued. Section 3. DIVIDENDS AND DISTRIBUTIONS. The holders of shares of Series A Preferred Stock shall be entitled to receive, when, as, and if declared by the Board of Directors of the Corporation (the "Board of Directors" or the "Board") out of funds legally available for such purpose, dividends at the rate of $800.00 per annum per share, and no more, which shall be fully cumulative, shall accrue without interest from the date of original issuance and shall be payable in cash quarterly on March 31, June 30, September 30 and December 31 of each year commencing December 31, 1996 (except that if any such date is a Saturday, Sunday, or legal holiday, then such dividend shall be payable on the next day that is not a Saturday, Sunday, or legal holiday) to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 50 nor less than 10 days preceding the payment dates for such dividends, as shall be fixed by the Board. The amount of dividends payable per share of Series 5 A Preferred Stock for each quarterly dividend period shall be computed by dividing the annual dividend amount by four. The amount of dividends payable for the initial dividend period and any period shorter than a full quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30- day months. No dividends or other distributions, other than dividends payable solely in shares of Common Stock or capital stock of the Corporation ranking junior as to dividends to the Series A Preferred Stock (collectively, the "Junior Dividend Stock"), shall be paid or set apart for payment on, and except for the use of Common Stock to pay for the exercise of stock options pursuant to the stock option plans of the Corporation and its subsidiaries, no purchase, redemption, or other acquisition shall be made by the Corporation of, any shares of Junior Dividend Stock unless and until all accrued and unpaid dividends on the Series A Preferred Stock shall have been paid or declared and set apart for payment. If at any time any dividend on any capital stock of the Corporation ranking senior as to dividends to the Series A Preferred Stock (the "Senior Dividend Stock") shall be in default, in whole or in part, no dividend shall be paid or declared and set apart for payment on the Series A Preferred Stock unless and until all accrued and unpaid dividends with respect to the Senior Dividend Stock, including the full dividends for the then current dividend period, shall have been paid or declared and set apart for payment, without interest. No full dividends shall be paid or declared and set apart for payment on any class or series of the Corporation's capital stock ranking, as to dividends, on a parity with the Series A Preferred Stock (the "Parity Dividend Stock") for any period unless all accrued but unpaid dividends have been , or contemporaneously are, paid or declared and set apart for such payment on the Series A Preferred Stock. No full dividends shall be paid or declared and set apart for payment on the Series A Preferred Stock for any period unless all accrued but unpaid dividends have been, or contemporaneously are, paid or 6 declared and set apart for payment on the Parity Dividend Stock for all dividend periods terminating on or prior to the date of payment of such full dividends. When dividends are not paid in full upon the Series A Preferred Stock and the Parity Dividend Stock, all dividends paid or declared and set apart for payment upon shares of Series A Preferred Stock and the Parity Dividend Stock shall be paid or declared and set apart for payment pro rata, so that the amount of dividends paid or declared and set apart for payment per share on the Series A Preferred Stock and the Parity Dividend Stock shall in all cases bear to each other the same ratio that accrued and unpaid dividends per share on the shares of Series A Preferred Stock and the Parity Dividend Stock bear to each other. Any reference to "distribution" contained in this Section 3 shall not be deemed to include any stock dividend or distributions made in connection with any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary. Section 4. LIQUIDATION PREFERENCE. In the event of a liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the holders of Series A Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets constitute stated capital or surplus of any nature, an amount equal to the dividends accrued and unpaid thereon to the date of final distribution to such holders, without interest, and a sum equal to $10,000.00 per share (the "Liquidation Preference"), and no more, before any payment shall be made or any assets distributed to the holders of Common Stock or any other class or series of the Corporation's capital stock ranking junior as to liquidation rights to the Series A Preferred Stock (collectively, the "Junior Liquidation Stock"); provided, however, that the holders of Series A Preferred Stock shall be entitled to such payment only in the event that the Corporation's payments with respect to the liquidation preference of the holders of capital stock 7 of the Corporation ranking senior as to liquidation rights to the Series A Preferred Stock (the "Senior Liquidation Stock") are fully met. After the liquidation preferences of the Senior Liquidation Stock are fully met, the entire assets of the Corporation available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock and any other class or series of the Corporation's capital stock having parity as to liquidation rights with the Series A Preferred Stock in proportion to the respective preferential amounts to which each is entitled (but only to the extent of such preferential amounts). After payment in full of the Liquidation Preference of the shares of the Series A Preferred Stock, the holders of such shares shall not be entitled to any further participation in any distribution of assets by the Corporation. Neither a consolidation or merger of the Corporation with another corporation nor a sale or transfer of all or part of the Corporation's assets for cash, securities, or other property will be considered a liquidation, dissolution, or winding up of the Corporation. Section 5. REDEMPTION AT OPTION OF THE CORPORATION. The Corporation at its option, may redeem at any time all, or from time to time a portion, of the Series A Preferred Stock on any date set by the Board of Directors, at the redemption price of $10,000.00 per share, plus an amount per share equal to all dividends on the Series A Preferred Stock accrued and unpaid on such share, pro rata to the date fixed for redemption (the "Redemption Price"). The Redemption Price shall be payable in cash or, at the option of the Corporation as long as the Class A Common Stock is registered pursuant to the Securities Exchange Act of 1934, in the number of shares (rounded up to the nearest whole share) of Class A Common Stock equal to the amount determined by dividing the Redemption Price by the Average Market Price. The "Average Market Price" shall mean the average of the last reported sales prices regular way of the Class A Common Stock on each day of the 10-day period preceding the date fixed for redemption or, in 8 case no sale takes place on any such day, the average of the closing bid and asked prices regular way on such day, in either case as reported on the New York Stock Exchange Composite Tape, or, if the Class A Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Class A Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market System, or, if not admitted for quotation on the NASDAQ National Market System, the average of the high bid and low asked prices on such day as recorded by the National Association of Securities Dealers, Inc. through NASDAQ or, if the National Association of Securities Dealers, Inc. through NASDAQ shall not have reported any bid and asked prices for the Class A Common Stock on such day, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm selected from time to time by the Corporation for such purpose, or, if no such bid and asked prices can be obtained from any such firm, the fair market value of one share of Class A Common Stock on such day as determined in good faith by the Board of Directors. Such determination by the Board of Directors shall be conclusive. In case of the redemption of less than all of the then outstanding Series A Preferred Stock, the Corporation shall designate by lot, or in such other manner as the Board of Directors may determine, the shares to be redeemed, or shall effect such redemption pro rata. Notwithstanding the foregoing, the Corporation shall not redeem less than all of the Series A Preferred Stock at any time outstanding until all accrued but unpaid dividends upon all Series A Preferred Stock then outstanding shall have been paid. Not more than 60 nor less than 30 days prior to the redemption date, notice by first class 9 mail, postage prepaid, shall be given to the holders of record of the Series A Preferred Stock to be redeemed, addressed to such shareholders at their last addresses as shown on the books of the Corporation. Each such notice of redemption shall specify the date fixed for redemption, the Redemption Price and the form of payment, the place or places of payment, that payment will be made upon presentation and surrender of the shares of Series A Preferred Stock, that accrued but unpaid dividends to the date fixed for redemption will be paid on the date fixed for redemption, and that on and after the redemption date, dividends will cease to accrue on such shares. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the holder of the Series A Preferred Stock receives such notice; and failure to give such notice by mail, or any defect in such notice, to the holders of any shares designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series A Preferred Stock. On or after the date fixed for redemption as stated in such notice, each holder of the shares called for redemption shall surrender the certificate (or certificates) evidencing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the Redemption Price. If fewer than all the shares represented by any such surrendered certificate (or certificates) are redeemed, a new certificate shall be issued representing the unredeemed shares. If, on the date fixed for redemption, funds or shares of Class A Common Stock necessary for the redemption shall be available therefor and shall have been irrevocably deposited or set aside, then, notwithstanding that the certificates evidencing any shares so called for redemption shall not have been surrendered, the dividends with respect to the shares so called shall cease to accrue after the date fixed for redemption, the shares shall no longer be deemed outstanding, the holders thereof shall cease to be shareholders, and all rights whatsoever with respect to the shares so called for 10 redemption (except the right of the holders to receive the Redemption Price without interest upon surrender of their certificates therefor) shall terminate. Any monies or shares of Class A Common Stock deposited by the Corporation pursuant to the foregoing provision and unclaimed at the end of one year from the date fixed for redemption shall, to the extent permitted by law, be returned to the Corporation, after which the holders of shares of Series A Preferred Stock so called for redemption shall look only to the Corporation for the payment thereof. Shares of Series A Preferred Stock redeemed by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock of the Corporation, without designation as to series, and may thereafter be reissued, but not as shares of Series A Preferred Stock. Section 6. NO SINKING FUND. The shares of Series A Preferred Stock shall not be subject to the operation of a purchase, retirement, or sinking fund. Section 7. VOTING RIGHTS. The holders of Series A Preferred Stock will not have any voting rights except as set forth below or as otherwise from time to time required by law. Whenever dividends on the Series A Preferred Stock or any other class or series of Parity Dividend Stock shall be in arrears in an amount equal to at least six quarterly dividends, (whether or not consecutive), the holders of the Series A Preferred Stock (voting separately as a class with all other affected classes or series of the Parity Dividend Stock upon which like voting rights have been conferred and are exercisable) will be entitled to vote for and elect two additional directors. Such right of the holders of Series A Preferred Stock to vote for the election of such two directors may be exercised at an annual meeting or at any special meeting called for such purposes as hereinafter provided or at any adjournment thereof, until dividends in default on such outstanding shares of Series A Preferred Stock shall have been paid in full (or such dividends shall have been declared and funds sufficient therefor set apart for payment), at which 11 time the term of office of the two directors so elected shall terminate automatically (subject to revesting in the event of each and every subsequent default of the character specified in the preceding sentence). So long as such right to vote continues, the Secretary of the Corporation may call, and upon the written request of the holders of record of 10% of the outstanding shares of Series A Preferred Stock addressed to him at the principal office of the Corporation shall call, a special meeting of the holders of such shares for the election of such two directors, as provided herein. Such meeting shall be held not less than 45 nor more than 90 days after the accrual of such right, at the place and upon the notice provided by law and in the By-laws of the Corporation for the holding of meetings of shareholders. No such special meeting or adjournment thereof shall be held on a date less than 30 days before an annual meeting of shareholders or any special meeting in lieu thereof, provided that at such annual meeting appropriate provisions are made to allow the holders of the Series A Preferred Stock to exercise such right at such meeting. If at any such annual or special meeting or any adjournment thereof the holders of a majority of the then outstanding shares of Series A Preferred Stock entitled to vote in such election shall be present or represented by proxy, then the authorized number of directors of the Corporation shall be increased by two, and the holders of Series A Preferred Stock shall be entitled to elect such two additional directors. Directors so elected shall serve until the next annual meeting or until their successors shall be elected and shall qualify, unless the term of office of the persons so elected as directors shall have terminated by virtue of the payment in full of all dividends in arrears (or such dividends shall have been declared and funds sufficient therefor set apart for payment.) In case of any vacancy occurring among the directors so elected by the holders of Series A Preferred Stock, the remaining director who shall have been so elected may appoint a successor to hold office for the unexpired term of the director whose 12 place shall be vacant, and such successor shall be deemed to have been elected by the holders of Series A Preferred Stock. If both directors so elected by the holders of Series A Preferred Stock shall cease to serve as directors before their terms shall expire, the holders of Series A Preferred Stock then outstanding and entitled to vote for such directors may, at a special meeting of such holders called as provided above, elect successors to hold office for the unexpired terms of the directors whose places shall be vacant. Without the consent or affirmative vote of the holders of at least a majority of the outstanding shares of Series A Preferred Stock, voting separately as a class, the Corporation shall not authorize, create, or issue any shares of any other class or series of capital stock ranking senior to or on a parity with the Series A Preferred Stock as to dividends or upon liquidation. The affirmative vote or consent of the holders of at least a majority of the outstanding shares of the Series A Preferred Stock, voting separately as a class, will be required for any amendment, alteration, or repeal, whether by merger or consolidation or otherwise, of the Corporation's Articles of Incorporation if the amendment, alteration, or repeal materially and adversely affects the powers, preferences, or special rights of the Series A Preferred Stock; provided, however, that any increase in the authorized Preferred Stock of the Corporation or the creation and issuance of any other capital Stock of the Corporation ranking senior to, on a parity with, or junior to the Series A Preferred Stock shall not be deemed to affect materially and adversely such powers, preferences, or special rights. Section 8. OUTSTANDING SHARES. For purposes hereof all shares of Series A Preferred Stock shall be deemed outstanding except that, from the date fixed for redemption pursuant to Section 5 hereof, all shares of Series A Preferred Stock which have been so called for redemption under Section 5, if funds or shares necessary for the redemption of such shares are 13 available, shall not be deemed to be outstanding. SERIES B PREFERRED STOCK Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series B Preferred Stock" (the "Series B Preferred Stock"), and the number of shares constituting the Series B Preferred Stock shall be 2,500 and if and to the extent further shares are needed in order to pay dividends in shares of Series B Preferred Stock as provided for in Section 3 hereof, the Board of Directors of the Corporation will authorize additional shares of Series B Preferred Stock so that at all times, so long as Series B Preferred Stock is outstanding, there will be a sufficient number of Series B Preferred Stock authorized and reserved to pay dividends as provided for in Section 3 hereof in shares of Series B Preferred Stock for the next succeeding four quarters. Section 2. RANK. All Series B Preferred Stock shall rank, as to payment of dividends and as to distribution of assets upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, (i) on a parity with the Series A Preferred Stock, no par value, of the Corporation, now or hereafter issued and (ii) senior to the Class A Common Stock, no par value (the "Class A Common Stock"), of the Corporation and the Class B Common Stock, no par value (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"), of the Corporation now or hereafter issued. Section 3. DIVIDENDS AND DISTRIBUTIONS. The holders of shares of Series B Preferred Stock shall be entitled to receive, when, as, and if declared by the Board of Directors of the Corporation (the "Board of Directors" or the "Board") out of funds legally available for such purpose, dividends at the rate of $600.00 per annum per share, which shall be fully cumulative, shall accrue without interest from the date of original issuance and shall be payable at the 14 Corporation's option in cash, or in additional shares (whether whole or fractional) of Series B Preferred Stock valued, for the purpose of determining the number of shares (or fraction thereof) of such Series B Preferred Stock to be issued at the value of $10,000 per whole share, quarterly on March 31, June 30, September 30 and December 31 of each year commencing December 31, 1996 (except that if any such date is a Saturday, Sunday, or legal holiday, then such dividend shall be payable on the next day that is not a Saturday, Sunday, or legal holiday) to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 50 nor less than 10 days preceding the payment dates for such dividends, as shall be fixed by the Board. The amount of dividends payable per share of Series B Preferred Stock for each quarterly dividend period shall be computed by dividing the annual dividend amount by four. The amount of dividends payable for the initial dividend period and any period shorter than a full quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. No dividends or other distributions, other than dividends payable solely in shares of Common Stock or capital stock of the Corporation ranking junior as to dividends to the Series B Preferred Stock (collectively, the "Junior Dividend Stock"), shall be paid or set apart for payment on, and except for the use of Common Stock to pay for the exercise of stock options pursuant to the stock option plans of the Corporation and its subsidiaries, no purchase, redemption, or other acquisition shall be made by the Corporation of, any shares of Junior Dividend Stock unless and until all accrued and unpaid dividends on the Series B Preferred Stock shall have been paid or declared and set apart for payment. If at any time any dividend on any capital stock of the Corporation ranking senior as to dividends to the Series B Preferred Stock (the "Senior Dividend Stock") shall be in default, in whole or in part, no dividend shall be paid or declared and set apart for payment on the Series B 15 Preferred Stock unless and until all accrued and unpaid dividends with respect to the Senior Dividend Stock, including the full dividends for the then current dividend period, shall have been paid or declared and set apart for payment, without interest. No full dividends shall be paid or declared and set apart for payment on any class or series of the Corporation's capital stock ranking, as to dividends, on a parity with the Series B Preferred Stock (the "Parity Dividend Stock") for any period unless all accrued but unpaid dividends have been , or contemporaneously are, paid or declared and set apart for such payment on the Series B Preferred Stock. No full dividends shall be paid or declared and set apart for payment on the Series B Preferred Stock for any period unless all accrued but unpaid dividends have been, or contemporaneously are, paid or declared and set apart for payment on the Parity Dividend Stock for all dividend periods terminating on or prior to the date of payment of such full dividends. When dividends are not paid in full upon the Series B Preferred Stock and the Parity Dividend Stock, all dividends paid or declared and set apart for payment upon shares of Series B Preferred Stock and the Parity Dividend Stock shall be paid or declared and set apart for payment pro rata, so that the amount of dividends paid or declared and set apart for payment per share on the Series B Preferred Stock and the Parity Dividend Stock shall in all cases bear to each other the same ratio that accrued and unpaid dividends per share on the shares of Series B Preferred Stock and the Parity Dividend Stock bear to each other. Any reference to "distribution" contained in this Section 3 shall not be deemed to include any stock dividend or distributions made in connection with any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary. Section 4. LIQUIDATION PREFERENCE. In the event of a liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the holders of Series B 16 Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets constitute stated capital or surplus of any nature, an amount equal to the dividends accrued and unpaid thereon to the date of final distribution to such holders, without interest, and a sum equal to $10,000.00 per share (the "Liquidation Preference") and no more, before any payment shall be made or any assets distributed to the holders of Common Stock or any other class or series of the Corporation's capital stock ranking junior as to liquidation rights to the Series B Preferred Stock (collectively, the "Junior Liquidation Stock"); provided, however, that the holders of Series B Preferred Stock shall be entitled to such payment only in the event that the Corporation's payments with respect to the liquidation preference of the holders of capital stock of the Corporation ranking senior as to liquidation rights to the Series B Preferred Stock (the "Senior Liquidation Stock") are fully met. After the liquidation preferences of the Senior Liquidation Stock are fully met, the entire assets of the Corporation available for distribution shall be distributed ratably among the holders of the Series B Preferred Stock and any other class or series of the Corporation's capital stock having parity as to liquidation rights with the Series B Preferred Stock in proportion to the respective preferential amounts to which each is entitled (but only to the extent of such preferential amounts). After payment in full of the Liquidation Preference of the shares of the Series B Preferred Stock, the holders of such shares shall not be entitled to any further participation in any distribution of assets by the Corporation. Neither a consolidation or merger of the Corporation with another corporation nor a sale or transfer of all or part of the Corporation's assets for cash, securities, or other property will be considered a liquidation, dissolution, or winding up of the Corporation. Section 5. REDEMPTION AT OPTION OF THE CORPORATION. The Corporation at its option, may redeem at any time all, or from time to time a portion, of the Series B Preferred Stock on 17 any date set by the Board of Directors, at a redemption price of $10,000 per share plus an amount per share equal to all dividends on the Series B Preferred Stock accrued and unpaid on such share, pro rata to the date fixed for redemption (the "Redemption Price"). The Redemption Price shall be payable in cash or, at the option of the Corporation as long as the Class A Common Stock is registered pursuant to the Securities Exchange Act of 1934, in the number of shares (rounded up to the nearest whole share) of Class A Common Stock equal to the amount determined by dividing the Redemption Price by the Average Market Price. The "Average Market Price" shall mean the average of the last reported sales prices regular way of the Class A Common Stock on each day of the 10-day period preceding the date fixed for redemption or, in case no sale takes place on any such day, the average of the closing bid and asked prices regular way on such day, in either case as reported on the New York Stock Exchange Composite Tape, or, if the Class A Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Class A Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market System, or, if not admitted for quotation on the NASDAQ National Market System, the average of the high bid and low asked prices on such day as recorded by the National Association of Securities Dealers, Inc. through NASDAQ or, if the National Association of Securities Dealers, Inc. through NASDAQ shall not have reported any bid and asked prices for the Class A Common Stock on such day, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm selected from time to time by the Corporation for such purpose, or, if no such bid and asked prices can be obtained from any such firm, the fair market value of one share of Class A Common Stock on such day as determined in 18 good faith by the Board of Directors. Such determination by the Board of Directors shall be conclusive. In case of the redemption of less than all of the then outstanding Series B Preferred Stock, the Corporation shall designate by lot, or in such other manner as the Board of Directors may determine, the shares to be redeemed, or shall effect such redemption pro rata. Notwithstanding the foregoing, the Corporation shall not redeem less than all of the Series B Preferred Stock at any time outstanding until all accrued but unpaid dividends upon all Series B Preferred Stock then outstanding shall have been paid. Not more than 60 nor less than 30 days prior to the redemption date, notice by first class mail, postage prepaid, shall be given to the holders of record of the Series B Preferred Stock to be redeemed, addressed to such shareholders at their last addresses as shown on the books of the Corporation. Each such notice of redemption shall specify the date fixed for redemption, the Redemption Price and the form of payment, the place or places of payment, that payment will be made upon presentation and surrender of the shares of Series B Preferred Stock, that accrued but unpaid dividends to the date fixed for redemption will be paid on the date fixed for redemption, and that on and after the redemption date, dividends will cease to accrue on such shares. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the holder of the Series B Preferred Stock receives such notice; and failure to give such notice by mail, or any defect in such notice, to the holders of any shares designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series B Preferred Stock. On or after the date fixed for redemption as stated in such notice, each holder of the shares called for redemption shall surrender the certificate (or certificates) evidencing such shares to the Corporation at the place designated in such notice and 19 shall thereupon be entitled to receive payment of the Redemption Price. If fewer than all the shares represented by any such surrendered certificate (or certificates) are redeemed, a new certificate shall be issued representing the unredeemed shares. If, on the date fixed for redemption, funds or shares of Class A Common Stock necessary for the redemption shall be available therefor and shall have been irrevocably deposited or set aside, then, notwithstanding that the certificates evidencing any shares so called for redemption shall not have been surrendered, the dividends with respect to the shares so called shall cease to accrue after the date fixed for redemption, the shares shall no longer be deemed outstanding, the holders thereof shall cease to be shareholders, and all rights whatsoever with respect to the shares so called for redemption (except the right of the holders to receive the Redemption Price without interest upon surrender of their certificates therefor) shall terminate. Any monies or shares of Class A Common Stock deposited by the Corporation pursuant to the foregoing provision and unclaimed at the end of one year from the date fixed for redemption shall, to the extent permitted by law, be returned to the Corporation, after which the holders of shares of Series B Preferred Stock so called for redemption shall look only to the Corporation for the payment thereof. Shares of Series B Preferred Stock redeemed by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock of the Corporation, without designation as to series, and may thereafter be reissued, but not as shares of Series B Preferred Stock. Section 6. NO SINKING FUND. The shares of Series B Preferred Stock shall not be subject to the operation of a purchase, retirement, or sinking fund. Section 7. VOTING RIGHTS. The holders of Series B Preferred Stock will not have any voting rights except as set forth below or as otherwise from time to time required by law. Whenever dividends on the Series B Preferred Stock or any other class or series of Parity 20 Dividend Stock shall be in arrears in an amount equal to at least six quarterly dividends, (whether or not consecutive), the holders of the Series B Preferred Stock (voting separately as a class with all other affected classes or series of the Parity Dividend Stock upon which like voting rights have been conferred and are exercisable) will be entitled to vote for and elect two additional directors. Such right of the holders of Series B Preferred Stock to vote for the election of such two directors may be exercised at an annual meeting or at any special meeting called for such purpose as hereinafter provided or at any adjournment thereof, until dividends in default on such outstanding shares of Series B Preferred Stock shall have been paid in full (or such dividends shall have been declared and funds sufficient therefor set apart for payment), at which time the term of office of the two directors so elected shall terminate automatically (subject to revesting in the event of each and every subsequent default of the character specified in the preceding sentence). So long as such right to vote continues, the Secretary of the Corporation may call, and upon the written request of the holders of record of 10% of the outstanding shares of Series B Preferred Stock addressed to him at the principal office of the Corporation shall call, a special meeting of the holders of such shares for the election of such two directors, as provided herein. Such meeting shall be held not less than 45 nor more than 90 days after the accrual of such right, at the place and upon the notice provided by law and in the By-laws of the Corporation for the holding of meetings of shareholders. No such special meeting or adjournment thereof shall be held on a date less than 30 days before an annual meeting of shareholders or any special meeting in lieu thereof, provided that at such annual meeting appropriate provisions are made to allow the holders of the Series B Preferred Stock to exercise such right at such meeting. If at any such annual or special meeting or any adjournment thereof the holders of a majority of the then outstanding shares of Series B Preferred Stock 21 entitled to vote in such election shall be present or represented by proxy, then the authorized number of directors of the Corporation shall be increased by two, and the holders of Series B Preferred Stock shall be entitled to elect such two additional directors. Directors so elected shall serve until the next annual meeting or until their successors shall be elected and shall qualify, unless the term of office of the persons so elected as directors shall have terminated by virtue of the payment in full of all dividends in arrears (or such dividends shall have been declared and funds sufficient therefor set apart for payment.) In case of any vacancy occurring among the directors so elected by the holders of Series B Preferred Stock, the remaining director who shall have been so elected may appoint a successor to hold office for the unexpired term of the director whose place shall be vacant, and such successor shall be deemed to have been elected by the holders of Series B Preferred Stock. If both directors so elected by the holders of Series B Preferred Stock shall cease to serve as directors before their terms shall expire, the holders of Series B Preferred Stock then outstanding and entitled to vote for such directors may, at a special meeting of such holders called as provided above, elect successors to hold office for the unexpired terms of the directors whose places shall be vacant. Without the consent or affirmative vote of the holders of at least a majority of the outstanding shares of Series B Preferred Stock, voting separately as a class, the Corporation shall not authorize, create, or issue any shares of any other class or series of capital stock ranking senior to or on a parity with the Series B Preferred Stock as to dividends or upon liquidation. The affirmative vote or consent of the holders of at least a majority of the outstanding shares of the Series B Preferred Stock, voting separately as a class, will be required for any amendment, alteration, or repeal, whether by merger or consolidation or otherwise, of the Corporation's Articles of Incorporation if the amendment, alteration, or repeal materially and 22 adversely affects the powers, preferences, or special rights of the Series B Preferred Stock; provided, however, that any increase in the authorized Preferred Stock of the Corporation or the creation and issuance of any other capital stock of the Corporation ranking senior to, on a parity with, or junior to the Series B Preferred Stock shall not be deemed to affect materially and adversely such powers, preferences, or special rights. Section 8. OUTSTANDING SHARES. For purposes hereof all shares of Series B Preferred Stock shall be deemed outstanding except that, from the date fixed for redemption pursuant to Section 5 hereof, all shares of Series B Preferred Stock which have been so called for redemption under Section 5, if funds or shares necessary for the redemption of such shares are available, shall not be deemed to be outstanding. Exhibit B 4. The total number of shares of all classes which the Corporation shall have authority to issue is 50,000,000 shares, consisting of 15,000,000 shares of Class A Common Stock, no par value ("Class A Common Stock"); 15,000,000 shares of Class B Common Stock, no par value ("Class B Common Stock"); and 20,000,000 shares of Preferred Stock ("Preferred Stock"). The designations and the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualification, and terms and conditions of redemptions of the shares of each class of stock are as follows: COMMON STOCK The powers, preferences and rights of the Class A Common Stock and the Class B Common Stock, and the qualifications, limitations or restrictions thereof, shall be as follows: (a) VOTING. Holders of Class A Common Stock are entitled to ten (10) votes per share. Holders of Class B Common Stock are entitled to one (1) vote per share. All actions submitted to a vote of shareholders are voted on by holders of Class A and Class B Common Stock voting together as a single class, except as otherwise provided herein or by law. (b) DIVIDENDS AND OTHER DISTRIBUTIONS. Holders of Class A Common Stock and holders of Class B Common Stock are entitled to receive dividends and other distributions in cash, stock or property of the Corporation as may be declared thereon by the Board of Directors out of funds legally available therefor. Each share of Class A Common Stock and each share of Class B Common Stock shall have identical rights with respect to dividends and distributions (including distributions in connection with any recapitalization, and upon liquidation, dissolution or winding up, either partial or complete, of the Corporation). 24 (c) CLASS B RIGHTS. (1) If, after the date the Articles of Amendment adding this provision to the Articles are filed with the Secretary of State of Georgia (the "Effective Date"), any person or group acquires beneficial ownership of 100% of the then issued and outstanding shares of Class A Common Stock (such acquisition making such person or group a "Significant Shareholder"), and such person or group does not immediately after such acquisition beneficially own an equal percentage of the then issued and outstanding Class B Common Stock, such Significant Shareholder must, within a 90-day period beginning the day after becoming a Significant Shareholder, commence a public tender offer in compliance with all applicable laws and regulations to acquire additional shares of Class B Common Stock (a "Class B Protection Transaction") as provided in this subsection (c) of the section entitled "Common Stock" of this Article 4. (2) In a Class B Protection Transaction, the Significant Shareholder must offer to acquire from all the other holders of the Class B Common Stock all of the issued and outstanding shares of Class B Common Stock beneficially owned by them. The Significant Shareholder must acquire all shares validly tendered. (3) The offer price for any shares of Class B Common Stock required to be purchased by a Significant Shareholder pursuant to a Class B Protection Transaction shall be the greater of (i) the highest price per share paid by the Significant Shareholder for any share of Class A Common Stock or Class B Common Stock (whichever is higher) in the six-month period ending on the date such person or group became a Significant Shareholder and (ii) the highest closing price of a share of Class A Common Stock or Class B Common Stock (whichever is higher) on The New York Stock Exchange (or 25 such other quotation system or securities exchange constituting the principal trading market for either class of Common Stock) during the 30 calendar days preceding the date such person or group became a Significant Shareholder. If the Significant Shareholder has acquired Class A Common Stock or Class B Common Stock in the six-month period ending on the date such person or group becomes a Significant Shareholder for consideration other than cash, the value of such consideration per share of Class A Common Stock or Class B Common Stock shall be as determined in good faith by the Board of Directors. (4) The requirement to engage in a Class B Protection Transaction is satisfied by making the requisite offer and purchasing validly tendered shares, even if the number of shares tendered is less than the number of shares for which tender was sought in the required offer. (5) If a Significant Shareholder fails to make an offer required by this such section (c) of the section entitled "Common Stock" of this Article 4, or to purchase shares validly tendered and not withdrawn, such Significant Shareholder shall not be entitled to vote any shares of Class A Common Stock beneficially owned by such Significant Shareholder and acquired by such Significant Shareholder after the Effective Date that exceeded such Significant Shareholder's comparable percentage of Class B Common Stock unless and until such requirements are complied with or unless and until all shares of Class A Common Stock which would require an offer to be made are no longer owned by such Significant Shareholder. To the extent that the voting power of any shares of Class A Common Stock is so suspended, such shares will not be included in the determination of aggregate voting shares for any purpose under these Articles of 26 Incorporation or the Georgia Business Corporation Code. (6) All calculations with respect to percentage ownership of issued and outstanding shares of either class of Common Stock will be based upon the numbers of issued and outstanding shares reported by the Corporation on the last filed of (i) the Corporation's most recent Annual Report on Form 10-K, (ii) its most recent definitive proxy statement, (iii) its most recent Quarterly Report on Form 10-Q , or (iv) if any, its most recent Current Report on Form 8-K. (7) For purposes of this subsection (c) of the section entitled " Common Stock" of this Article 4, the term "person" means a natural person, company, government, or political subdivision, agency or instrumentality of a government, or other entity. The terms "beneficial ownership" and "group" have the same meanings as used in Regulation 13D promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), subject to the following qualifications: (i) relationships by blood or marriage between or among any persons will not constitute any of such persons a member of a group with any other such persons, absent affirmative attributes of concerted action; (ii) any person acting in his official capacity as a director or officer of the Corporation shall not be deemed to beneficially own shares of Common Stock where such beneficial ownership exists solely by virtue of such person's status as a trustee (or similar position) with respect to shares of Common Stock held by plans or trusts for the general benefit of employees or retirees of the Corporation, and actions taken or agreed to be taken by him in such official capacity or in any other official capacity will not be deemed to constitute such a person a member of a group with any other person; and (iii) formation of a group will not be deemed to be an acquisition by the group (or any 27 member thereof) of beneficial ownership of any shares of Class A Common Stock then owned by a group member and acquired by such member from the Corporation, by operation of law, by will or the laws of descent or distribution, by charitable contribution or gift, or by foreclosure of a bona fide loan. Furthermore, for the purposes of calculating the number of shares of Class B Common Stock beneficially owned by such shareholder or group: (a) shares of Class B Common Stock acquired by gift shall be deemed to be beneficially owned by such shareholder or member of such group only if such gift is made in good faith and not for the purposes of circumventing the Class B Rights; (b) only shares of Class B Common Stock owned of record by such shareholder or member of such group, or held by others as nominees of such shareholder or member and identified as such to the Corporation, shall be deemed to be beneficially owned by such shareholder or group (provided that shares with respect to which such shareholder or member has sole investment and voting power shall be deemed to be beneficially owned thereby); and (c) only shares of Class B Common Stock acquired by such shareholder or member of such group for an "equitable price" shall be treated as being beneficially owned by such shareholder or group. An "equitable price" will be deemed to have been paid only when shares of Class B Common Stock have been acquired at a price at least equal to the greater of (i) the highest price per share paid by the Significant Shareholder in cash or in non-cash consideration for any shares of Class A Common Stock or Class B Common Stock (whichever is higher) in the six-month period ending on the date such person or group became a Significant Shareholder and (ii) the highest closing price of a share of Class A Common Stock or Class B Common Stock (whichever is higher) on The New York Stock Exchange (or such other quotation system or securities exchange constituting 28 the principal trading market for either class of Common Stock) during the 30 calendar days preceding the date such person or group became a Significant Shareholder with the value of any non-cash consideration in either case being determined by the Board of Directors acting in good faith. (d) PREEMPTIVE RIGHTS. The holders of the Class A Common Stock and Class B Common Stock do not have preemptive rights enabling them to subscribe for or receive shares of any class of stock of the Corporation or any other securities convertible into shares of any class of stock of the Corporation. (e) MERGER AND CONSOLIDATION. In the event of a merger or consolidation of the Corporation with or into another entity (whether or not the Corporation is the surviving entity), or a statutory share exchange involving the Common Stock, the holders of Class B Common Stock shall be entitled to receive the same amount and form of consideration per share as the per share consideration, if any, received by any holder of the Class A Common Stock in such merger or consolidation. (f) SUBDIVISION OF SHARES. If the Corporation shall in any manner split, subdivide or combine the outstanding shares of Class A Common Stock or Class B Common Stock, the outstanding shares of the other such class of Common Stock shall be proportionally split, subdivided or combined in the same manner and on the same basis as the outstanding shares of the other class of Common Stock have been split, subdivided, or combined. (g) POWER TO SELL AND PURCHASE SHARES. The Board of Directors shall have the power to cause the Corporation to issue and sell all or any part of any class of stock 29 herein or hereafter authorized to such persons, firms, associations, or corporations, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not greater consideration could be received upon the issue or sale of the same number of shares of another class, and as otherwise permitted by law. The Board of Directors shall have the power to cause the Corporation to purchase any class of stock herein or hereafter authorized from such persons, firms, associations, or corporations, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not less consideration could be paid upon the purchase of the same number of shares of another class, and as otherwise permitted by law. (h) AMENDMENTS. In addition to any other vote provided for by law, by these Articles or the By-Laws of the Corporation or by the Board of Directors, the affirmative vote of at least a majority of the vote cast by the holder of shares of Class B Common Stock, voting as a separate group, at any meeting of shareholders shall be required to amend, alter, or repeal any provision of Article 4(c). 30
Exhibit 3.2.1 AMENDMENT TO THE BYLAWS OF GRAY COMMUNICATIONS SYSTEMS, INC. SEPTEMBER 3, 1996 The Bylaws of Gray Communications Systems, Inc. were amended by the stockholders at the Annual Meeting held on September 3, 1996, by deleting the current Section 9 of Article II thereof in its entirety and substituting in liew thereof the following: Section 9. VOTING OF SHARES. All elections by stockholders shall be by ballot unless waived by the unanimous consent of those stockholders present in person or by proxy in the meeting. The vote on any questions, upon demand of a stockholder present in person or by proxy, shall be by a stock vote and by ballot. The stockholders shall have power by a majority vote at any meeting to remove any director or officer from office.
- ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ GRAY COMMUNICATIONS SYSTEMS, INC., As Issuer, THE SUBSIDIARY GUARANTORS named herein AND BANKERS TRUST COMPANY, As Trustee INDENTURE Dated as of September __, 1996 ------------------------ $150,000,000 % SENIOR SUBORDINATED NOTES DUE 2006 ------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ CROSS-REFERENCE TABLE* Trust Indenture Act Section Indenture Section 310(a)(1 . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2). . . . . . . . . . . . . . . . . . . . . 7.10 (a)(3). . . . . . . . . . . . . . . . . . . . . N.A.** (a)(4). . . . . . . . . . . . . . . . . . . . . N.A. (a)(5). . . . . . . . . . . . . . . . . . . . . 7.10 (b) . . . . . . . . . . . . . . . . . . . . . . 7.10 (c) . . . . . . . . . . . . . . . . . . . . . . N.A. 311(a) . . . . . . . . . . . . . . . . . . . . . . 7.11 (b) . . . . . . . . . . . . . . . . . . . . . . 7.11 (c) . . . . . . . . . . . . . . . . . . . . . . N.A. 312(a) . . . . . . . . . . . . . . . . . . . . . . 2.05 (b) . . . . . . . . . . . . . . . . . . . . . . 12.03 (c) . . . . . . . . . . . . . . . . . . . . . . 12.03 313(a) . . . . . . . . . . . . . . . . . . . . . . 7.06 (b)(1). . . . . . . . . . . . . . . . . . . . . 7.06 (b)(2). . . . . . . . . . . . . . . . . . . . . 7.06 (c) . . . . . . . . . . . . . . . . . . . . . . 7.06; 12.02 (d) . . . . . . . . . . . . . . . . . . . . . . 7.06 314(a) . . . . . . . . . . . . . . . . . . . . . . 4.02; 4.03; 12.02 (b) . . . . . . . . . . . . . . . . . . . . . . 4.20 (c)(1). . . . . . . . . . . . . . . . . . . . . 12.04 (c)(2). . . . . . . . . . . . . . . . . . . . . 12.04 (c)(3). . . . . . . . . . . . . . . . . . . . . N.A. (d) . . . . . . . . . . . . . . . . . . . . . . 4.20 (e) . . . . . . . . . . . . . . . . . . . . . . 12.05 (f) . . . . . . . . . . . . . . . . . . . . . . N.A. 315(a) . . . . . . . . . . . . . . . . . . . . . . 7.01 (b) . . . . . . . . . . . . . . . . . . . . . . 7.05 (c) . . . . . . . . . . . . . . . . . . . . . . 7.01 (d) . . . . . . . . . . . . . . . . . . . . . . 7.01 (e) . . . . . . . . . . . . . . . . . . . . . . 6.11 316(a)(last sentence). . . . . . . . . . . . . . . 2.09 (a)(1)(A) . . . . . . . . . . . . . . . . . . . 6.05 (a)(1)(B) . . . . . . . . . . . . . . . . . . . 6.04 (a)(2). . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . . 6.04; 6.07 317(a)(1). . . . . . . . . . . . . . . . . . . . . 6.08 (a)(2). . . . . . . . . . . . . . . . . . . . . 6.09 (b) . . . . . . . . . . . . . . . . . . . . . . 2.04 318(a) . . . . . . . . . . . . . . . . . . . . . . 12.01 __________ * This Cross-Reference Table is not part of the Indenture. ** Not applicable. TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions 1 SECTION 1.02. Other Definitions 17 SECTION 1.03. Incorporation by Reference of TIA 18 SECTION 1.04. Rules of Construction. 18 ARTICLE II THE NOTES SECTION 2.01. Form and Dating 18 SECTION 2.02. Execution and Authentication 19 SECTION 2.03. Registrar; Paying Agent; Depository 20 SECTION 2.04. Paying Agent to Hold Money in Trust 20 SECTION 2.05. Holder Lists 21 SECTION 2.06. Transfer and Exchange 21 SECTION 2.07. Replacement Notes 23 SECTION 2.08. Outstanding Notes 22 SECTION 2.09. Treasury Notes 23 SECTION 2.10. Temporary Notes 23 SECTION 2.11. Cancellation 23 SECTION 2.12. Defaulted Interest 24 SECTION 2.13. Record Date 24 SECTION 2.14. CUSIP Number 24 SECTION 2.15. Book-Entry Provisions for Global Notes 25 ARTICLE III REDEMPTIONS AND OFFERS TO PURCHASE SECTION 3.01. Redemption Provisions 26 SECTION 3.02. Notice to Trustee 27 SECTION 3.03. Selection of Notes to Be Redeemed or Purchased 27 SECTION 3.04. Notice of Redemption 28 SECTION 3.05. Effect of Notice of Redemption 29 SECTION 3.06. Deposit of Redemption Price 29 SECTION 3.07. Notes Redeemed in Part 30 -i- ARTICLE IV COVENANTS SECTION 4.01. Payment of Principal, Premium, and Interest 30 SECTION 4.02. Reports 31 SECTION 4.03. Compliance Certificate 31 SECTION 4.04. Stay, Extension and Usury Laws 32 SECTION 4.05. Limitation on Restricted Payments 32 SECTION 4.06. Corporate Existence 34 SECTION 4.07. Limitation on Incurrence of Indebtedness 34 SECTION 4.08. Limitation on Transactions with Affiliates 36 SECTION 4.09. Limitation on Liens 37 SECTION 4.10. Taxes 37 SECTION 4.11. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries 38 SECTION 4.12. Maintenance of Office or Agency 39 SECTION 4.13. Change of Control 39 SECTION 4.14. Limitation on Asset Sales 41 SECTION 4.15. Limitation on Incurrence of Senior Subordinated Indebtedness 43 SECTION 4.16. Limitation on Issuance and Sale of Capital Stock of Subsidiaries 43 SECTION 4.17. Future Subsidiary Guarantors 44 SECTION 4.18. Maintenance of Properties 43 SECTION 4.19. Maintenance of Insurance 44 SECTION 4.20. Deposit of Trust Funds with Trustee Pending Consummation of Phipps Acquisition 45 ARTICLE V SUCCESSORS SECTION 5.01. Merger, Consolidation and Sale of Assets 47 SECTION 5.02. Surviving Person Substituted 47 ARTICLE VI DEFAULTS AND REMEDIES SECTION 6.01. Events of Default 48 SECTION 6.02. Acceleration 50 SECTION 6.03. Other Remedies 50 -ii- SECTION 6.04. Waiver of Past Defaults 51 SECTION 6.05. Control by Majority of Holders 51 SECTION 6.06. Limitation of Suits by Holders 51 SECTION 6.07. Rights of Holders to Receive Payment 52 SECTION 6.08. Collection Suit by Trustee 52 SECTION 6.09. Trustee May File Proofs of Claim 52 SECTION 6.10. Priorities 53 SECTION 6.11. Undertaking for Costs 53 ARTICLE VII TRUSTEE SECTION 7.01. Duties of Trustee 54 SECTION 7.02. Rights of Trustee 55 SECTION 7.03. Individual Rights of Trustee 55 SECTION 7.04. Trustee's Disclaimer 56 SECTION 7.05. Notice to Holders of Defaults and Events of Default 56 SECTION 7.06. Reports by Trustee to Holders 56 SECTION 7.07. Compensation and Indemnity 57 SECTION 7.08. Replacement of Trustee 58 SECTION 7.09. Successor Trustee by Merger, Etc. 59 SECTION 7.10. Eligibility; Disqualification 59 SECTION 7.11. Preferential Collection of Claims Against Company 59 ARTICLE VIII DISCHARGE OF INDENTURE SECTION 8.01. Discharge of Liability on Notes; Defeasance 59 SECTION 8.02. Conditions to Defeasance 60 SECTION 8.03. Application of Trust Money 61 SECTION 8.04. Repayment to Company 62 SECTION 8.05. Indemnity for U.S. Government Obligations 62 SECTION 8.06. Reinstatement 62 -iii- ARTICLE IX AMENDMENTS SECTION 9.01. Amendments and Supplements Permitted Without Consent of Holders 63 SECTION 9.02. Amendments and Supplements Requiring Consent of Holders 63 SECTION 9.03. Compliance with TIA 65 SECTION 9.04. Revocation and Effect of Consents 65 SECTION 9.05. Notation on or Exchange of Notes 66 SECTION 9.06. Trustee Protected 66 ARTICLE X SUBORDINATION SECTION 10.01. Agreement to Subordinate 66 SECTION 10.02. Liquidation; Dissolution; Bankruptcy 67 SECTION 10.03. Default on Designated Senior Debt 67 SECTION 10.04. When Distributions Must Be Paid Over 69 SECTION 10.05. Notice 69 SECTION 10.06. Subrogation 70 SECTION 10.07. Relative Rights 70 SECTION 10.08. The Company and Holders May Not Impair Subordination 71 SECTION 10.09. Distribution or Notice to Representative 71 SECTION 10.10. Rights of Trustee and Paying Agent 72 SECTION 10.11. Authorization to Effect Subordination 72 SECTION 10.12. Payment 73 ARTICLE XI SUBSIDIARY GUARANTEES SECTION 11.01. Subsidiary Guarantees 73 SECTION 11.02. Trustee to Include Paying Agents 75 SECTION 11.03. Limits on Subsidiary Guarantees 75 SECTION 11.04. Execution of Subsidiary Guarantee 75 SECTION 11.05. Stay, Extension and Usury Laws 76 SECTION 11.06. Agreement To Subordinate Subsidiary Guarantees to Guarantor Senior Debt 76 SECTION 11.07. Liquidation; Dissolution; Bankruptcy 76 SECTION 11.08. Default on Certain Guarantor Senior Debt 77 -iv- SECTION 11.09. When Distributions Must Be Paid Over 79 SECTION 11.10. Notice 79 SECTION 11.11. Subrogation 80 SECTION 11.12. Relative Rights 80 SECTION 11.13. The Subsidiary Guarantors and Holders May Not Impair Subordination 81 SECTION 11.14. Distribution or Notice to Representative 82 SECTION 11.15. Rights of Trustee and Paying Agent 82 SECTION 11.16. Authorization To Effect Subordination 83 SECTION 11.17. Payment 81 ARTICLE XII MISCELLANEOUS SECTION 12.01. Trust Indenture Act Controls 83 SECTION 12.02. Notices 83 SECTION 12.03. Communication by Holders with Other Holders 85 SECTION 12.04. Certificate and Opinion as to Conditions Precedent 85 SECTION 12.05. Statements Required in Certificate or Opinion 85 SECTION 12.06. Rules by Trustee and Agents 85 SECTION 12.07. Legal Holidays 86 SECTION 12.08. No Recourse Against Others 86 SECTION 12.09. Counterparts 86 SECTION 12.10. Initial Appointments, Compliance Certificates 86 SECTION 12.11. Governing Law 86 SECTION 12.12. No Adverse Interpretation of Other Agreements 87 SECTION 12.13. Successors 87 SECTION 12.14. Severability 87 SECTION 12.15. Third Party Beneficiaries 87 SECTION 12.16. Table of Contents, Headings, Etc. 87 EXHIBIT A FORM OF NOTE EXHIBIT A-1 FORM OF NOTATION ON NOTE RELATING TO GUARANTEE EXHIBIT B FORM OF BOOK ENTRY LEGEND AND SCHEDULE FOR EXCHANGES OF GLOBAL NOTE -v- THIS INDENTURE, dated as of September __, 1996, is by and among (i) Gray Communications Systems, Inc. (the "COMPANY"), as issuer of the % Senior Subordinated Notes due 2006, (ii) The Albany Herald Publishing Company, Inc., a Georgia corporation, The Southwest Georgia Shopper, Inc., a Georgia corporation, WALB-TV, Inc., a Georgia corporation, WJHG-TV, Inc., a Georgia corporation, KTVE, Inc., an Arkansas corporation, Gray Kentucky Television, Inc., a Georgia corporation, WRDW-TV, Inc., a Georgia corporation, The Rockdale Citizen Publishing Company, a Georgia corporation, Gray Real Estate & Development Company, a Georgia corporation, Gray Transportation Company, Inc., a Georgia corporation, WALB Licensee Corp., a Delaware corporation, WJHG Licensee Corp., a Delaware corporation, WKYT Licensee Corp., a Delaware corporation, WRDW Licensee Corp., a Delaware corporation, WYMT Licensee Corp., a Delaware corporation, WKXT Licensee Corp., a Delaware corporation, WCTV Operating Corp., a Georgia corporation, WKXT-TV, Inc., a Georgia corporation, WCTV Licensee Corp., a Delaware corporation, Porta-Phone Paging, Inc., a Georgia corporation, Porta-Phone Paging Licensee Corp., a Delaware corporation, and Gray Television Management, Inc., a Delaware corporation, as guarantors of the Company's obligations under this Indenture and the Notes (each a "SUBSIDIARY GUARANTOR"), and (iii) Bankers Trust Company, as trustee (the "TRUSTEE"). The Company, each Subsidiary Guarantor and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the holders of the Notes: ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions. "ACQUIRED DEBT" means, with respect to any specified Person, Indebtedness of any other Person (the "ACQUIRED PERSON") existing at the time the Acquired Person merges with or into, or becomes a Subsidiary of, such specified Person, including Indebtedness incurred in connection with, or in contemplation of, the Acquired Person merging with or into, or becoming a Subsidiary of, such specified Person. "AFFILIATE" means, with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with") of any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. -1- "AGENT" means any Registrar, Paying Agent, or co-registrar. "ASSET PURCHASE AGREEMENT" means the Asset Purchase Agreement dated as of December 15, 1995, and amended on March 15, 1996, between Media Acquisition Partners, L.P. and the Company. "ASSET SALE" means (i) any sale, lease, conveyance or other disposition by the Company or any Subsidiary of the Company of any assets (including by way of a sale-and-leaseback) other than in the ordinary course of business (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company shall not be an "Asset Sale" but instead shall be governed by the provisions of Section 5.01), or (ii) the issuance or sale of Capital Stock of any Subsidiary of the Company, in each case, whether in a single transaction or a series of related transactions, to any Person (other than to the Company or a Subsidiary Guarantor), provided that the term "Asset Sale" shall not include any disposition or dispositions during any twelve-month period of assets or property having a fair market value of less than $300,000 in the aggregate. "BANKRUPTCY LAW" means Title 11, United States Bankruptcy Code of 1978, as amended, or any similar United States federal or state law relating to bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or relief of debtors, or any amendment to, succession to or change in any such law. "BOARD OF DIRECTORS" means the Company's board of directors or any authorized committee of such board of directors. "BUSINESS DAY" means any day other than a Legal Holiday. "CAPITAL LEASE OBLIGATIONS" of any Person means the obligations to pay rent or other amounts under a lease of (or other Indebtedness arrangements conveying the right to use) real or personal property of such Person which are required to be classified and accounted for as a capital lease or liability on the face of a balance sheet of such Person in accordance with GAAP. The amount of such obligations shall be the capitalized amount thereof in accordance with GAAP and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "CAPITAL STOCK" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock or other equity participations, including partnership interests, whether general or limited, of such Person, including any Preferred Stock. "CASH EQUIVALENTS" means (i) marketable direct obligations issued or guaranteed by the United States of America, or any governmental entity or agency or political subdivision thereof (PROVIDED, that the full faith and credit of the United States of America is pledged in -3- support thereof) maturing within one year of the date of purchase; (ii) commercial paper issued by corporations, each of which shall have a consolidated net worth of at least $500 million, maturing within 180 days from the date of the original issue thereof, and rated "P-1" or better by Moody's Investors Service or "A-1" or better by Standard & Poor's Corporation or an equivalent rating or better by any other nationally recognized securities rating agency; (iii) certificates of deposit issued or acceptances accepted by or guaranteed by any bank or trust company organized under the laws of the United States of America or any state thereof or the District of Columbia, in each case having capital, surplus and undivided profits totalling more than $500 million, maturing within one year of the date of purchase and (iv) any money market fund, sponsored by a registered broker dealer or mutual fund distributor (including the Trustee), that invests solely in the securities specified in the foregoing clauses (i), (ii), or (iii). "CHANGE OF CONTROL" means the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), disregarding the Permitted Holders, becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have beneficial ownership of all shares of Capital Stock that such person or group has the right to acquire regardless of when such right is first exercisable), directly or indirectly, of more than 35% of the total voting power represented by the outstanding Voting Stock of the Company; PROVIDED that the Permitted Holders "beneficially own" (as so defined) a lesser percentage of such Voting Stock than such other Person and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors of the Company; (b) the Company merges with or into another Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person merges with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (x) the outstanding Voting Stock of the Company is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee corporation and (y) immediately after such transaction no "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), disregarding the Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have beneficial ownership of all shares of Capital Stock that such person or group has the right to acquire regardless of when such right is first exercisable), directly or indirectly, of more than 35% of the total voting power represented by the outstanding Voting Stock of the surviving or transferee corporation; (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by the Board of Directors of the Company or whose nomination for -4- election by the stockholders of the Company was approved by (x) a vote of at least a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved (as described in this clause (x) or in the following clause (y)) or (y) Permitted Holders that are "beneficial owners" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of a majority of the total voting power represented by the outstanding Voting Stock of the Company) cease for any reason to constitute a majority of the Board then in office; or (d) the Company is liquidated or dissolved or adopts a plan of liquidation. "COMMISSION" means the Securities and Exchange Commission. "COMPANY" means Gray Communications Systems, Inc., a Georgia corporation, unless and until a successor replaces it in accordance with Article V and thereafter means such successor. "CONCURRENT OFFERING" means the public offering by the Company of up to 4,025,000 shares of its Class B Common Stock, no par value, for closing on or prior to the date hereof, including the sale of any such shares of Class B Common Stock in connection with the exercise of any over-allotment options granted to the underwriters of such public offering. "CONSOLIDATED INTEREST EXPENSE" means, with respect to any period, the sum of (i) the interest expense of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP consistently applied, including, without limitation, (a) amortization of debt discount, (b) the net payments, if any, under interest rate contracts (including amortization of discounts), (c) the interest portion of any deferred payment obligation and (d) accrued interest, plus (ii) the interest component of the Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the Company during such period, and all capitalized interest of the Company and its Subsidiaries, plus (iii) cash dividends declared or paid in respect of any Preferred Stock of the Company and its Subsidiaries during such period, in each case as determined on a consolidated basis in accordance with GAAP consistently applied. For purposes of this definition, the amount of any cash dividends declared or paid will be deemed to be equal to the amount of such dividends multiplied by a fraction, the numerator of which is one and the denominator of which is one minus the maximum statutory combined Federal, state, local and foreign income tax rate then applicable to the Company and its Subsidiaries (expressed as a decimal between one and zero) on a consolidated basis. "CONSOLIDATED NET INCOME" means, with respect to any period, the net income (or loss) of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP consistently applied, adjusted, to the extent included in calculating such net income (or loss), by excluding, without duplication, (i) all extraordinary gains but not -5- losses, (ii) the portion of net income (or loss) of the Company and its Subsidiaries allocable to interests in unconsolidated Persons, except to the extent of the amount of dividends or distributions actually paid to the Company or its Subsidiaries by such other Person during such period, (iii) net income (or loss) of any Person combined with the Company or any of its Subsidiaries on a "pooling of interests" basis attributable to any period prior to the date of combination, (iv) net gain but not losses in respect of Asset Sales, or (v) the net income of any Subsidiary to the extent that the declaration of dividends or similar distributions by that Subsidiary of that income to the Company is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders. "CONSOLIDATED NET WORTH" means, with respect to any Person on any date, the equity of the common and preferred stockholders of such Person and its Subsidiaries as of such date, determined on a consolidated basis in accordance with GAAP consistently applied. "CORPORATE TRUST OFFICE" shall be at the address of the Trustee specified in Section 12.02 or such other address as the Trustee may give notice to the Company. "CUMULATIVE CONSOLIDATED INTEREST EXPENSE" means, as of any date of determination, Consolidated Interest Expense from the last day of the month immediately preceding the Issue Date to the last day of the most recently ended month prior to such date, taken as a single accounting period. "CUMULATIVE OPERATING CASH FLOW" means, as of any date of determination, Operating Cash Flow from the last day of the month immediately preceding the Issue Date to the last day of the most recently ended month prior to such date, taken as a single accounting period. "CUSTODIAN" means any custodian, receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. "DEBT TO OPERATING CASH FLOW RATIO" means, with respect to any date of determination, the ratio of (i) the aggregate principal amount of all outstanding Indebtedness of the Company and its Subsidiaries as of such date on a consolidated basis, to (ii) Operating Cash Flow of the Company and its Subsidiaries on a consolidated basis for the four most recent full fiscal quarters ending on or immediately prior to such date, determined on a pro forma basis after giving pro forma effect to (a) the incurrence of all Indebtedness to be incurred on such date and (if applicable) the application of the net proceeds therefrom, including to refinance other Indebtedness, as if such Indebtedness was incurred, and the application of such proceeds occurred, at the beginning of such four-quarter period; (b) the incurrence, repayment or retirement of any other Indebtedness by the Company and its Subsidiaries since the first day of -6- such four-quarter period as if such Indebtedness was incurred, repaid or retired at the beginning of such four-quarter period (except that, in making such computation, the amount of Indebtedness under any revolving credit facility shall be computed based upon the average balance of such Indebtedness at the end of each month during such four-quarter period); (c) in the case of Acquired Debt, the related acquisition as if such acquisition had occurred at the beginning of such four-quarter period; and (d) any acquisition or disposition by the Company and its Subsidiaries of any company or any business or any assets out of the ordinary course of business, or any related repayment of Indebtedness, in each case since the first day of such four-quarter period, assuming such acquisition or disposition had been consummated on the first day of such four-quarter period. In addition, the consolidated net income of a Person with outstanding Indebtedness or Capital Stock providing for a Payment Restriction which is permitted to exist by reason of clause (c) of Section 4.11 shall not be taken into account in determining whether any Indebtedness is permitted to be incurred under this Indenture. "DEFAULT" means any event that is, or after the giving of notice or passage of time or both would be, an Event of Default. "DEPOSITARY" means, with respect to Notes issued in the form of one or more Global Notes, DTC or another Person designated as Depository by the Company, which Person must be a clearing agency registered under Section 17A of the Exchange Act. "DESIGNATED SENIOR DEBT" means (i) any Senior Debt outstanding under the Senior Credit Facility and (ii) if no Senior Debt is outstanding under the Senior Credit Facility, any other Senior Debt of the Company permitted to be incurred under this Indenture the principal amount of which is $50,000,000 or more at the time of the designation of such Senior Debt as "Designated Senior Debt" by the Company in a written instrument delivered to the Trustee. "DISPOSITION" means, with respect to any Person, any merger, consolidation or other business combination involving such Person (whether or not such Person is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of such Person's assets. "DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part on or prior to the stated maturity of the Notes. "DOLLARS" and "$" means lawful money of the United States of America. "DTC" means The Depository Trust Company. -7- "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FILM CONTRACTS" means contracts with suppliers that convey the right to broadcast specified films, videotape motion pictures, syndicated television programs or sports or other programming. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Issue Date. "GLOBAL NOTE" means a Note evidencing all or part of the Notes issued to the Depository in accordance with Section 2.15 and bearing the legend described in EXHIBIT B. "GUARANTEE" by any Person means any obligation, contingent or otherwise, of such Person guaranteeing any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purpose of) any security for the payment of such Indebtedness, (ii) to purchase property, securities or services for the purpose of assuring the holder of such Indebtedness of the payment of such Indebtedness, or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness (and "guaranteed," "guaranteeing" and "guarantor" shall have the meanings correlative to the foregoing); PROVIDED, HOWEVER, that the guarantee by any Person shall not include endorsements by such Person for collection or deposit, in either case, in the ordinary course of business. "GUARANTOR SENIOR DEBT" means, with respect to any Subsidiary Guarantor, (i) the principal of, premium, if any, and interest on and all other monetary Obligations of every kind or nature due on or in connection with any Indebtedness of such Subsidiary Guarantor outstanding under or in respect of the Senior Credit Facility that is permitted to be incurred under this Indenture, (ii) principal of and premium, if any, and interest on and all other monetary Obligations of every kind or nature due on or in connection with all Indebtedness of such Subsidiary Guarantor that is permitted to be incurred under this Indenture that is not by its terms PARI PASSU with or subordinated to the Subsidiary Guarantee of such Subsidiary Guarantor, (iii) all Obligations of such Subsidiary Guarantor with respect to the Indebtedness referred to in the foregoing clauses (i) and (ii), including, in the case of Indebtedness outstanding under the Senior Credit Facility, Post-Petition Interest, and (iv) all (including all subsequent) renewals, extensions, amendments, refinancings, repurchases or redemptions, modifications, supplements, replacements, increases or refundings thereof (whether or not -8- coincident therewith), in whole or in part under one or more agreements or instruments, that are not prohibited by this Indenture. Notwithstanding the foregoing, Guarantor Senior Debt shall not include (a) any Indebtedness for federal, state, local or other taxes, (b) any Indebtedness among or between the Company, any Subsidiary and/or their Affiliates, (c) any accounts payable or other liability to trade creditors arising in the ordinary course of business, (d) any Indebtedness that is incurred in violation of this Indenture, (e) Indebtedness evidenced by the Subsidiary Guarantee of such Subsidiary Guarantor, (f) Indebtedness of a Subsidiary Guarantor that is expressly subordinate or junior in right of payment to any other Indebtedness of such Subsidiary Guarantor or (g) Indebtedness of such Subsidiary Guarantor representing a guarantee of Subordinated Debt or Pari Passu Indebtedness. "HOLDER" means any person in whose name a Note is registered. "INDEBTEDNESS" means, with respect to any Person, without duplication, and whether or not contingent, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services or which is evidenced by a note, bond, debenture or similar instrument, (ii) all Capital Lease Obligations of such Person, (iii) all obligations of such Person in respect of letters of credit or bankers' acceptances issued or created for the account of such Person, (iv) all Interest Rate Agreement Obligations of such Person, (v) all liabilities secured by any Lien on any property owned by such Person even if such Person has not assumed or otherwise become liable for the payment thereof to the extent of the lesser of (x) the amount of the Obligations so secured and (y) the fair market value of the property subject to such Lien, (vi) all obligations to purchase, redeem, retire, or otherwise acquire for value any Capital Stock of such Person, or any warrants, rights or options to acquire such Capital Stock, now or hereafter outstanding, (vii) to the extent not included in (vi), all Disqualified Stock issued by such Person, valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends thereon, and (viii) to the extent not otherwise included, any guarantee by such Person of any other Person's indebtedness or other obligations described in clauses (i) through (vii) above. "Indebtedness" of the Company and its Subsidiaries shall not include current trade payables incurred in the ordinary course of business and payable in accordance with customary practices, and non-interest bearing installment obligations and accrued liabilities incurred in the ordinary course of business which are not more than 90 days past due. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by the fair market value of, such Disqualified Stock, such fair market value is to be determined in good faith by the board of directors of the issuer of such Disqualified Stock. "INDENTURE" means this Indenture as amended or supplemented from time to time. -9- "INDEPENDENT DIRECTOR" means a director of the Company other than a director (i) who (apart from being a director of the Company or any Subsidiary) is an employee, associate or Affiliate of the Company or a Subsidiary or has held any such position during the previous five years, or (ii) who is a director, employee, associate or Affiliate of another party to the transaction in question. "INSOLVENCY OR LIQUIDATION PROCEEDING" means, with respect to any Person, any liquidation, dissolution or winding up of such Person, or any bankruptcy, reorganization, insolvency, receivership or similar proceeding with respect to such Person, whether voluntary or involuntary. "INTEREST DIFFERENTIAL" means, with respect to any Insolvency or Liquidation Proceeding involving the Company, the difference between the rate of interest on the Notes and the rate of interest on the Senior Debt immediately prior to the commencement of such Insolvency or Liquidation Proceeding, excluding in each case any increase in the rate of interest resulting from any default or event of default. "INTEREST RATE AGREEMENT OBLIGATIONS" means, with respect to any Person, the Obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "INVESTMENTS" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates of such Person) in the form of loans, guarantees, advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Capital Stock or other securities and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "Investments" shall exclude extensions of trade credit (including extensions of credit in respect of equipment leases) by the Company and its Subsidiaries in the ordinary course of business in accordance with normal trade practices of the Company or such Subsidiary, as the case may be. "ISSUE" means create, issue, assume, guarantee, incur or otherwise become, directly or indirectly, liable for any Indebtedness or Capital Stock, as applicable; PROVIDED, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by designation, merger, consolidation, acquisition or otherwise) shall be deemed to be issued by such Subsidiary at the time it becomes a Subsidiary. For this definition, the terms "issuing," "issuer," "issuance" and "issued" have meanings correlative to the foregoing. "ISSUE DATE" means the date of original issuance of the Notes. -10- "LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking institutions in the City of New York, or in the city in which the principal office of the Trustee is located, are not required to be open. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in any asset and any filing of, or agreement to give, any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "NET PROCEEDS" means, with respect to any Asset Sale by any Person, the aggregate cash proceeds received by such Person and/or its Affiliates in respect of such Asset Sale, which amount is equal to the excess, if any, of (i) the cash received by such Person and/or its Affiliates (including any cash payments received by way of deferred payment pursuant to, or monetization of, a note, an equity security or installment receivable or otherwise, but only as and when received) in connection with such Asset Sale, over (ii) the sum of (a) the amount of any Indebtedness that is secured by such asset and which is required to be repaid by such Person in connection with such Asset Sale, plus (b) all fees, commissions and other expenses incurred by such Person in connection with such Asset Sale, plus (c) provision for taxes, including income taxes, attributable to the Asset Sale or attributable to required prepayments or repayments of Indebtedness with the proceeds of such Asset Sale, plus (d) a reasonable reserve for the after-tax cost of any indemnification payments (fixed or contingent) attributable to seller's indemnities to purchaser in respect of such Asset Sale undertaken by the Company or any of its Subsidiaries in connection with such Asset Sale plus (e) if such Person is a Subsidiary, any dividends or distributions payable to holders of minority interests in such Subsidiary from the proceeds of such Asset Sale. "NOTES" means the _______% Senior Subordinated Notes due 2006, including the Subsidiary Guarantees, as amended or supplemented from time to time in accordance with the terms hereof that are issued pursuant to this Indenture. "NOTES CUSTODIAN" means Bankers Trust Company, as custodian with respect to the Notes in global form, or any successor entity thereto. "OBLIGATIONS" means any principal, interest (including, without limitation, in the case of Senior Debt under the Senior Credit Facility, Post-Petition Interest), penalties, fees, indemnifications, reimbursement obligations, damages and other liabilities payable under the documentation governing any Indebtedness. -11- "OFFER" means a Change of Control Offer made pursuant to Section 4.13 or an Asset Sale Offer made pursuant to Section 4.14. "OFFICER" means, with respect to any Person, the Chairman, the President, the Treasurer, any Assistant Treasurer, the Controller, the Secretary, any Assistant Secretary or any Vice-President of such Person. "OFFICERS' CERTIFICATE" means a certificate signed by two Officers of the Company which shall include at least one of the Chairman, the President or any Vice President. "OPERATING CASH FLOW" means, with respect to any period, the Consolidated Net Income of the Company and its Subsidiaries for such period, plus (i) extraordinary net losses and net losses realized on any sale of assets during such period, to the extent such losses were deducted in computing Consolidated Net Income, plus (ii) provision for taxes based on income or profits, to the extent such provision for taxes was included in computing such Consolidated Net Income, and any provision for taxes utilized in computing the net losses under clause (i) hereof, plus (iii) Consolidated Interest Expense of the Company and its Subsidiaries for such period to the extent deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization and all other non-cash charges, to the extent such depreciation, amortization and other non-cash charges were deducted in computing such Consolidated Net Income (including amortization of goodwill and other intangibles, including Film Contracts and write-downs of Film Contracts), but excluding any such charges which represent any accrual of, or a reserve for, cash charges for a future period, minus (v) any cash payments contractually required to be made with respect to Film Contracts (to the extent not previously included in computing such Consolidated Net Income), minus (vi) non-cash items increasing Consolidated Net Income (to the extent included in computing such Consolidated Net Income). "OPINION OF COUNSEL" means a written opinion in form and substance satisfactory to, and from legal counsel acceptable to, the Trustee (such counsel may be an employee of or counsel to the Company or the Trustee). "PARI PASSU INDEBTEDNESS" means any Indebtedness of the Company or a Subsidiary Guarantor which ranks pari passu in right of payment with the Notes or the Subsidiary Guarantee of such Subsidiary Guarantor, as the case may be (whether or not such Indebtedness is secured by any Lien). "PERMITTED HOLDERS" means (i) each of J. Mack Robinson and Robert S. Prather, Jr.; (ii) their spouses and lineal descendants; (iii) in the event of the incompetence or death of any of the Persons described in clauses (i) and (ii), such Person's estate, executor, administrator, committee or other personal representative; (iv) any trusts created for the benefit of the Persons described in clause (i) or (ii); or (v) any Person controlled by any of the Persons -12- described in clause (i), (ii), or (iv). For purposes of this definition, "control," as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of voting securities or by contract or otherwise. "PERMITTED INVESTMENTS" means (i) any Investment in the Company or any Subsidiary Guarantor; (ii) any Investments in Cash Equivalents; (iii) any Investment in a Person (an "Acquired Person") if, as a result of such Investment, (a) the Acquired Person becomes a Subsidiary Guarantor, or (b) the Acquired Person either (1) is merged, consolidated or amalgamated with or into the Company or a Subsidiary Guarantor and the Company or such Subsidiary Guarantor is the Surviving Person, or (2) transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Subsidiary Guarantor; (iv) Investments in accounts and notes receivable acquired in the ordinary course of business; and (v) Interest Rate Agreement Obligations permitted pursuant to Section 4.07(b)(vi). "PERMITTED LIENS" means (i) Liens on assets or property of the Company that secure Senior Debt of the Company, either existing on the Issue Date or which is permitted to be incurred under this Indenture, and Liens on assets or property of a Subsidiary Guarantor that secure Guarantor Senior Debt of such Subsidiary Guarantor, either existing on the Issue Date or which is permitted to be incurred under this Indenture; (ii) Liens securing Indebtedness of a Person existing at the time that such Person is merged into or consolidated with the Company or a Subsidiary of the Company; PROVIDED that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of such Person; (iii) Liens on property acquired by the Company or a Subsidiary; PROVIDED that such Liens were in existence prior to the contemplation of such acquisition and do not extend to any other property; (iv) Liens in favor of the Company or any Subsidiary of the Company; (v) Liens incurred, or pledges and deposits in connection with, workers' compensation, unemployment insurance and other social security benefits, and leases, appeal bonds and other obligations of like nature incurred by the Company or any Subsidiary of the Company in the ordinary course of business; (vi) Liens imposed by law, including, without limitation, mechanics', carriers', warehousemen's, materialmen's, suppliers' and vendors' Liens, incurred by the Company or any Subsidiary of the Company in the ordinary course of business; (vii) Liens for ad valorem, income or property taxes or assessments and similar charges which either are not delinquent or are being contested in good faith by appropriate proceedings for which the Company has set aside on its books reserves to the extent required by GAAP; (viii) Liens securing Senior Debt or Guarantor Senior Debt under the Senior Credit Facility; (ix) Liens created under this Indenture; and (x) Liens permitted under the Senior Credit Facility. "PERSON" means any individual, corporation, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof. -13- "PHIPPS ACQUISITION" means the acquisition by the Company of the Phipps Business (as defined in the Prospectus) pursuant to the Asset Purchase Agreement. "PHYSICAL NOTES" has the meaning set forth in Section 2.15. "POST-PETITION INTEREST" means, with respect to any Indebtedness of any Person, all interest accrued or accruing on such Indebtedness after the commencement of any Insolvency or Liquidation Proceeding against such Person in accordance with and at the contract rate (including, without limitation, any rate applicable upon default) specified in the agreement or instrument creating, evidencing or governing such Indebtedness, whether or not the claim for such interest is allowed as a claim in such Insolvency or Liquidation Proceeding. "PREFERRED STOCK" as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over Capital Stock of any other class of such Person. "PROSPECTUS" means the final prospectus relating to the public offering of the Notes dated September __, 1996. "PUBLIC EQUITY OFFERING" means an underwritten public offering of Capital Stock (other than Disqualified Stock) of the Company subsequent to the Issue Date (excluding Capital Stock which may be issued upon exercise of any over-allotment option exercisable after the Issue Date and granted in connection with the Concurrent Offering), pursuant to an effective registration statement filed under the Securities Act, the net proceeds of which to the Company (after deducting any underwriting discounts and commissions) exceed $25,000,000. "PURCHASE DATE" means (i) in the case of a Change of Control Offer pursuant to Section 4.13, the Change of Control Purchase Date and (ii) in the case of an Asset Sale Offer pursuant to Section 4.14, the Asset Sale Offer Purchase Date. "PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company and its Subsidiaries incurred in connection with the purchase of property or assets for the business of the Company and its Subsidiaries. "REORGANIZATION SECURITIES" means, with respect to any Insolvency or Liquidation Proceeding involving the Company, Capital Stock or other securities of the Company as reorganized or readjusted (or Capital Stock or any other securities of any other Person provided for by a plan of reorganization or readjustment) that are subordinated, at least to the same extent as the Notes, to the payment of all outstanding Senior Debt after giving effect to such plan of reorganization or readjustment; PROVIDED, HOWEVER, that if debt securities (i) such securities shall not provide for amortization (including sinking fund and mandatory prepayment -14- provisions) commencing prior to six months following the final scheduled maturity of all Senior Debt of the Company (as modified by such plan of reorganization or readjustment), (ii) if the rate of interest on such securities is fixed, such rate of interest shall not exceed the greater of (x) the rate of interest on the Notes and (y) the sum of the rate of interest on the Senior Debt on the effective date of such plan of reorganization or readjustment and the Interest Differential, (iii) if the rate of interest on such securities floats, such interest rate shall not exceed at any time the sum of the interest rate on the Senior Debt at such time and the Interest Differential, and (iv) such securities shall not have covenants or default provisions materially more beneficial to Holders than those in effect with respect to the Notes on the Issue Date. "REPRESENTATIVE" means, with respect to any Designated Senior Debt, the indenture trustee or other trustee, agent or other representative(s), if any, of holders of such Designated Senior Debt. "RESTRICTED INVESTMENT" means an Investment other than a Permitted Investment. "RESTRICTED PAYMENT" means (i) any dividend or other distribution declared or paid on any Capital Stock of the Company or any of its Subsidiaries (other than dividends or distributions payable solely in Capital Stock (other than Disqualified Stock) of the Company or such Subsidiary or dividends or distributions payable to the Company or any Subsidiary Guarantor); (ii) any payment to purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any Subsidiary of the Company or other Affiliate of the Company (other than any Capital Stock owned by the Company or any Subsidiary Guarantor); (iii) any payment to purchase, redeem, defease or otherwise acquire or retire for value any Subordinated Indebtedness prior to the maturity thereof; or (iv) any Restricted Investment. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SENIOR CREDIT FACILITY" means the credit agreement, entered into as of September __, 1996, among the Company, the lenders named therein, KeyBank National Association, as Agent, and NationsBank N.A. (South), as Co-Agent, as the same may be amended, modified, renewed, refunded, replaced or refinanced from time to time, including (i) any related notes, letters of credit, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time, and (ii) any notes, guarantees, collateral documents, instruments and agreements executed in connection with any such amendment, modification, renewal, refunding, replacement or refinancing. "SENIOR DEBT" means (i) the principal of, premiums, if any, and interest on and all other monetary Obligations of every kind or nature due on or in connection with any Indebtedness outstanding under the Senior Credit Facility that is permitted to be incurred under -15- this Indenture, (ii) principal of and premium, if any, and interest on and all other monetary Obligations of every kind or nature due on or in connection with all Indebtedness that is permitted to be incurred under this Indenture that is not by its terms pari passu with or subordinated to the Notes, (iii) all Obligations of the Company with respect to Indebtedness referred to in the foregoing clauses (i) and (ii), including, in the case of Indebtedness outstanding under the Senior Credit Facility, Post-Petition Interest, and (iv) all (including all subsequent) renewals, extensions, amendments, refinancings, repurchases or redemptions, modifications, supplements, replacements, increases or refundings thereof (whether or not coincident therewith), in whole or in part under one or more agreements or instruments, that are not prohibited by this Indenture. Notwithstanding the foregoing, Senior Debt shall not include (a) any Indebtedness for federal, state, local or other taxes, (b) any Indebtedness among or between the Company, any Subsidiary of the Company and/or their Affiliates, (c) any accounts payable or other liability to trade creditors arising in the ordinary course of business, (d) any Indebtedness that is incurred in violation of this Indenture, (e) Indebtedness evidenced by the Notes or (f) Indebtedness of the Company that is expressly subordinate or junior in right of payment to any other Indebtedness of the Company. "SPECIAL REDEMPTION DATE" means December 31, 1996. "SUBORDINATED INDEBTEDNESS" means any Indebtedness of the Company or a Subsidiary Guarantor if the instrument creating or evidencing such Indebtedness or pursuant to which such Indebtedness is outstanding expressly provides that such Indebtedness is subordinated in right of payment to the Notes or the Subsidiary Guarantee of such Subsidiary Guarantor, as the case may be. "SUBSIDIARY" of any Person means (i) any corporation more than 50% of the outstanding Voting Stock of which is owned or controlled, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person, or by such Person and one or more other Subsidiaries thereof, or (ii) any limited partnership of which such Person or any Subsidiary of such Person is a general partner, or (iii) any other Person (other than a corporation or limited partnership) in which such Person, or one or more other Subsidiaries of such Person, or such Person and one or more other Subsidiaries thereof, directly or indirectly, has more than 50% of the outstanding partnership or similar interests or has the power, by contract or otherwise, to direct or cause the direction of the policies, management and affairs thereof. "SUBSIDIARY GUARANTEES" means the guarantees of the Notes issued by the Subsidiary Guarantors. "SUBSIDIARY GUARANTOR" means (i) each of The Albany Herald Publishing Company, Inc., a Georgia corporation, The Southwest Georgia Shopper, Inc., a Georgia corporation, WALB-TV, Inc., a Georgia corporation, WJHG-TV, Inc., a Georgia corporation, -16- KTVE, Inc., an Arkansas corporation, Gray Kentucky Television, Inc., a Georgia corporation, WRDW-TV, Inc., a Georgia corporation, The Rockdale Citizen Publishing Company, a Georgia corporation, Gray Real Estate & Development Company, a Georgia corporation, Gray Transportation Company, Inc., a Georgia corporation, WALB Licensee Corp., a Delaware corporation, WJHG Licensee Corp., a Delaware corporation, WKYT Licensee Corp., a Delaware corporation, WRDW Licensee Corp., a Delaware corporation, WYMT Licensee Corp., a Delaware corporation, WKXT Licensee Corp., a Delaware corporation, WCTV Operating Corp., a Georgia corporation, WKXT-TV, Inc., a Georgia corporation, WCTV Licensee Corp., a Delaware corporation, Porta-Phone Paging, Inc., a Georgia corporation, Porta-Phone Paging Licensee Corp., a Delaware corporation, and Gray Television Management, Inc., a Delaware corporation, (ii) each of the Company's Subsidiaries which becomes a guarantor of the Notes in compliance with the provisions set forth under Section 4.17, and (iii) each of the Company's Subsidiaries executing a supplemental indenture in which such Subsidiary agrees to be bound by the terms of this Indenture. "SURVIVING PERSON" means, with respect to any Person involved in or that makes any Disposition, the Person formed by or surviving such Disposition or the Person to which such Disposition is made. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb), as amended by the Trust Indenture Reform Act of 1990, and as in effect on the Issue Date. "TRUSTEE" means Bankers Trust Company until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means such successor. "TRUST OFFICER" means any officer within the Corporate Trust and Agency Group of the Trustee, including, without limitation, any vice president, assistant vice president, treasurer, assistant treasurer, assistant secretary or special assistant secretary or any other officer of the Trustee customarily performing functions similar to those performed by any of the above-designated officers, and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject. "UNIFORM FRAUDULENT CONVEYANCE ACT" means [to come]. "UNIFORM FRAUDULENT TRANSFER ACT" means [to come]. "U.S. GOVERNMENT OBLIGATIONS" means direct obligations of the United States of America for the payment of which the full faith and credit of the United States of America is pledged, PROVIDED that no U.S. Government Obligation shall be callable at the Issuer's option prior to the stated maturity date of the Notes. -17- "VOTING STOCK" means, with respect to any Person, Capital Stock of such Person of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such Person (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "WEIGHTED AVERAGE LIFE TO MATURITY" means, with respect to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required scheduled payment of principal, including payment at final maturity, in respect thereof, with (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding aggregate principal amount of such Indebtedness. SECTION 1.02. Other Definitions. DEFINED IN TERM SECTION "Asset Sale Offer" . . . . . . . . . . . 4.14 "Asset Sale Offer Purchase Date" . . . . 4.14 "Asset Sale Offer Trigger Date". . . . . 4.14 "Change of Control Offer". . . . . . . . 4.13 "Change of Control Purchase Date". . . . 4.13 "Collateral Account" . . . . . . . . . . 4.20 "Covenant Defeasance Option" . . . . . . 8.01 "Event of Default" . . . . . . . . . . . 6.01 "Excess Proceeds". . . . . . . . . . . . 4.14 "Guarantor Payment Blockage Period". . . 11.08 "Legal Defeasance Option". . . . . . . . 8.01 "Net Offering Proceeds". . . . . . . . . 4.20 "Non-Payment Default". . . . . . . . . . 10.03 "Notice of Default". . . . . . . . . . . 6.01 "Participants" . . . . . . . . . . . . . 2.15 "Paying Agent" . . . . . . . . . . . . . 2.03 "Payment Blockage Notice". . . . . . . . 10.03 "Payment Blockage Period". . . . . . . . 10.03 "Payment Default". . . . . . . . . . . . 10.03 "Payment Restriction". . . . . . . . . . 4.11 "Permitted Indebtedness" . . . . . . . . 4.07 -18- "Permitted Payments" . . . . . . . . . . 4.05 "Purchase Date". . . . . . . . . . . . . 3.08 "Refinancing Indebtedness" . . . . . . . 4.07 "Registrar". . . . . . . . . . . . . . . 2.03 "Required Filing Dates". . . . . . . . . 4.02 "Special Redemption" . . . . . . . . . . 3.01 "Special Redemption Price" . . . . . . . 3.01 "Trustee Expenses" . . . . . . . . . . . 6.08 "Trust Funds". . . . . . . . . . . . . . 4.20 SECTION 1.03. Incorporation by Reference of TIA. Whenever this Indenture refers to a provision of the Trust Indenture Act of 1939, as amended, the provision is incorporated by reference in, and made a part of, this Indenture. Any terms incorporated by reference in this Indenture that are defined by the TIA, defined by the TIA's reference to another statute or defined by Commission rule under the TIA have the meanings so assigned to them therein. SECTION 1.04. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it in this Indenture; (2) an accounting term not otherwise defined herein has the meaning assigned to it under GAAP; (3) "OR" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) unless otherwise specified, any reference to a Section or Article refers to such Section or Article of this Indenture. ARTICLE II THE NOTES SECTION 2.01. Form and Dating. The Notes and the Trustee's certificate of authentication shall be substantially in the form of EXHIBIT A, and the notation thereon relating to the Subsidiary Guarantees shall be substantially in the form of EXHIBIT A-1. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. The Company and the Trustee -19- shall approve the form of the Notes and any notation, legend or endorsement on them. Each Note shall be dated the date of its issuance and shall show the date of its authentication. Each note shall bear the corporate seal of the Company which shall be attested by the Company's secretary or an assistant secretary. The terms and provisions contained in the Notes and the Subsidiary Guarantees shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company, the Subsidiary Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. SECTION 2.02. Execution and Authentication. Two Officers of the Company shall sign each Note for the Company by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time the Note is authenticated, the Note shall nevertheless be valid. Each Subsidiary Guarantor shall execute the Subsidiary Guarantee in the manner set forth in Section 11.04. A Note shall not be valid until authenticated by the manual signature of the Trustee, and the Trustee's signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Notes shall be substantially as set forth in EXHIBIT A. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. Unless limited by the terms of such appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or any of its Affiliates. The Trustee shall authenticate Notes for original issue in the aggregate principal amount of $150,000,000 upon receipt of a written order of the Company in the form of an Officers' Certificate and an Opinion of Counsel, each complying with Section 314(c) of the TIA. The Officers' Certificate shall also specify the amount of Notes to be authenticated and the date on which the Notes are to be authenticated. The aggregate principal amount of Notes outstanding at any time may not exceed $150,000,000, except as provided in Section 2.07. Upon receipt of a written order of the Company in the form of an Officers' Certificate, the Trustee shall authenticate Notes in substitution of Notes originally issued to reflect any name change of the Company. The Notes shall initially be issued in the form of one or more permanent Global Notes, substantially in the form set forth in EXHIBIT A. Global Notes shall be registered in the name of a nominee of the Depository and deposited with the Trustee, at its New York office, in its capacity as Notes Custodian, duly executed by the Company and authenticated by the Trustee -20- as hereinafter provided. Each Global Note shall evidence such of the outstanding Notes as shall be specified therein and each shall provide that it shall evidence the aggregate principal amount of outstanding Notes from time to time endorsed thereon, and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be reduced or increased, as applicable, to reflect exchanges, redemptions, and other similar transactions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee or the Notes Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof. The Notes shall be issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. SECTION 2.03. Registrar; Paying Agent; Depositary. The Company shall maintain an office or agency (the "REGISTRAR") where Notes may be presented for registration of transfer or for exchange and an office or agency (the "PAYING AGENT") where Notes may be presented for payment. The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company may change the Paying Agent, Registrar or co-registrar without prior notice to any Holder. The Company shall notify the Trustee and the Trustee shall notify the Holders of the name and address of any Agent not a party to this Indenture. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, and such agreement shall incorporate the provisions of the TIA and implement the provisions of this Indenture that relate to such Agent. The Company initially appoints the Trustee as Registrar, Paying Agent and agent for service of notices and demands in connection with the Notes. If the Company fails to appoint or maintain a Registrar and/or Paying Agent, the Trustee shall act as such, and shall be entitled to appropriate compensation in accordance with Section 7.07. The Company initially appoints DTC to act as Depositary with respect to any Global Notes and initially appoints the Trustee to act as Notes Custodian with respect to any Global Notes. SECTION 2.04. Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of the Holders or the Trustee all -21- money the Paying Agent holds for the redemption or purchase of the Notes or for the payment of principal of, or premium, if any, or interest on, the Notes, and will notify the Trustee of any default by the Company in providing the Paying Agent with sufficient funds to redeem or purchase Notes or make any payment on the Notes as and to the extent required to be redeemed, purchased or paid under the terms of this Indenture. While any such default continues, the Trustee may require the Paying Agent to pay all money it holds to the Trustee. The Company at any time may require the Paying Agent to pay all money it holds to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or any of its Affiliates) shall have no further liability for the money it delivered to the Trustee. If the Company or any of its Subsidiaries acts as Paying Agent, it shall segregate and hold in a separate trust fund for the Holders' benefit all money it holds as Paying Agent. SECTION 2.05. Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders and shall otherwise comply with Section 312(a) of the TIA. If the Trustee is not the Registrar, the Company shall furnish to the Trustee, semiannually at least fifteen Business Days before each interest payment date and at such other times as the Trustee may request in writing, within 30 days after receipt by the Company of any such request, a list in such form and as of such date as the Trustee may reasonably require that sets forth the names and addresses of, and the aggregate principal amount of Notes held by, each Holder, and the Company shall otherwise comply with Section 312(a) of the TIA. SECTION 2.06. Transfer and Exchange. Subject to the provisions of Section 2.15, when Notes are presented to the Registrar or a co-registrar with a request to register a transfer or to exchange them for an equal principal amount of Notes of other denominations, the Registrar shall register the transfer or make the exchange if its requirements for such transaction are met; PROVIDED, HOWEVER, that any Note presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar and the Trustee duly executed by the Holder of such Note or by its attorney duly authorized in writing. To permit registrations of transfers and exchanges, the Company shall Issue (and the Subsidiary Guarantors shall execute the Subsidiary Guarantee endorsed thereon), and the Trustee shall authenticate, Notes at the Registrar's request. The Trustee shall notify the Company of all such registered transfers and exchanges contemporaneously with the occurrence of such transfer or exchange. -22- Neither the Company nor the Registrar shall be required to issue, register the transfer of or exchange any Note (i) during a period beginning at the opening of business 15 days before the day of the mailing of notice of any redemption from the Company and ending at the close of business on the day the notice of redemption is sent to Holders, (ii) selected for redemption, in whole or in part, except the unredeemed portion of any Note being redeemed in part may be transferred or exchanged, and (iii) during a Change of Control Offer or an Asset Sale Offer if such Note is tendered pursuant to such Change of Control Offer or Asset Sale Offer and not withdrawn. No service charge shall be made for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer tax or similar governmental charge payable upon exchange pursuant to Section 2.10, 3.07 or 9.05, which the Company shall pay). Prior to due presentment for registration of transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note (whether or not such Note shall be overdue and notwithstanding any notation of ownership or other writing on such Note made by anyone other than the Company, the Registrar or any co-registrar) for the purpose of receiving payment of principal of, and premium, if any, and interest on, such Note and for all other purposes, and notice to the contrary shall not affect the Trustee, any Agent or the Company. Any Holder of the Global Note shall, by acceptance of such Global Note, agree that transfers of beneficial interests in such Global Note may be effected only through a book-entry system (as described in Section 2.15) maintained by the Depository (or its agent), and that ownership of a beneficial interest in the Global Note shall be required to be reflected in a book entry. SECTION 2.07. Replacement Notes. If any mutilated Note is surrendered to the Trustee, or if the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note, the Company shall issue and the Trustee shall, upon receipt of a written order signed by two Officers of the Company, authenticate a replacement Note if the Trustee's requirements are met, and each such replacement Note shall be an additional obligation of the Company. If the Trustee or the Company requires, the Holder must supply an indemnity bond that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent or any authenticating agent from any loss that any of them may suffer if a Note is replaced. The Company and the Trustee may charge for its reasonable expenses in replacing a Note. -23- SECTION 2.08. Outstanding Notes. The Notes outstanding at any time are all the Notes the Trustee has authenticated except those it has cancelled, those delivered to it for cancellation, and those described in this Section 2.08 as not outstanding. If a Note is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that a BONA FIDE purchaser holds the replaced Note. If the entire principal of, and premium, if any, and accrued interest on, any Note is considered paid under Section 4.01, it ceases to be outstanding and interest on it ceases to accrue. Subject to Section 2.09, a Note does not cease to be outstanding because the Company or any Affiliate of the Company holds such Note. SECTION 2.09. Treasury Notes. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company or any Affiliate of the Company shall be considered as though they are not outstanding; PROVIDED, HOWEVER, that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that the Trustee knows are so owned shall be so disregarded. Notwithstanding the foregoing, Notes that the Company or any Affiliate of the Company offers to purchase or acquires pursuant to an exchange offer, tender offer or otherwise shall not be deemed to be owned by the Company or any Affiliate of the Company until legal title to such Notes passes to the Company or such Affiliate, as the case may be. SECTION 2.10. Temporary Notes. Until definitive Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have variations that the Company considers appropriate for temporary Notes. Without unreasonable delay, the Company shall prepare and the Trustee, upon receipt of a written order signed by two Officers of the Company, shall authenticate definitive Notes in exchange for temporary Notes. Until such exchange, temporary Notes shall be entitled to the same rights, benefits and privileges as definitive Notes. SECTION 2.11. Cancellation. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar, any co-registrar, the Paying Agent, the Company and its Subsidiaries shall forward to -24- the Trustee any Notes surrendered to them for registration of transfer, exchange, replacement, payment (including all Notes called for redemption and all Notes accepted for payment pursuant to an Offer) or cancellation, and the Trustee shall cancel all such Notes and shall destroy all cancelled Notes (subject to the record retention requirements of the Exchange Act) and deliver a certificate of their destruction to the Company unless, by written order signed by two Officers of the Company, the Company shall direct that cancelled Notes be returned to it. The Company may not issue new Notes to replace any Notes that have been cancelled by the Trustee or that have been delivered to the Trustee for cancellation. If the Company or any Affiliate of the Company acquires any Notes (other than by redemption pursuant to Section 3.01 or an Offer pursuant to Section 4.13 or 4.14), such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Notes unless and until such Notes are delivered to the Trustee for cancellation. SECTION 2.12. Defaulted Interest. If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to Holders on a subsequent special record date, in each case at the rate provided in the Notes and Section 4.01. The Company shall, with the Trustee's consent, fix or cause to be fixed each such special record date and payment date. At least 15 days before the special record date, the Company (or, at the request of the Company, the Trustee in the name of, and at the expense of, the Company) shall mail a notice that states the special record date, the related payment date and the amount of interest to be paid. SECTION 2.13 Record Date The record date for purposes of determining the identity of holders of Notes entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture shall be determined as provided for in Section 316(c) of the TIA. SECTION 2.14. CUSIP Number. A "CUSIP" number will be printed on the Notes, and the Trustee shall use the CUSIP number in notices of redemption, purchase or exchange as a convenience to Holders; PROVIDED that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Notes and that reliance may be placed only on the other identification numbers printed on the Notes. The Company will promptly notify the Trustee of any change in the CUSIP number. -25- SECTION 2.15. Book-Entry Provisions for Global Notes. (a) The Global Notes initially shall (i) be registered in the name of the Depository or the nominee of such Depository, (ii) be delivered to the Trustee as custodian for such Depository and (iii) bear legends as set forth in EXHIBIT B. Members of, or participants in, the Depository ("PARTICIPANTS") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Note, and the Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of the Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Participants, the operation of customary practices governing the exercise of the rights of a Holder of any Note. (b) Transfers of Global Notes shall be limited to transfers in whole, but not in part, to the Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Notes may be transferred or exchanged for certificated notes ("PHYSICAL NOTES") in accordance with the rules and procedures of the Depository. In addition, Physical Notes shall be transferred to all beneficial owners in exchange for their beneficial interests in Global Notes if (i) the Depository notifies the Company that it is unwilling or unable to continue as Depository for any Global Note and a successor depositary is not appointed by the Company within 30 days of such notice or (ii) an Event of Default has occurred and is continuing and the Registrar has received a request from the Depository to issue Physical Notes. (c) In connection with any transfer or exchange of a portion of the beneficial interest in any Global Note to beneficial owners pursuant to paragraph (b), the Registrar shall (if one or more Physical Notes are to be issued) reflect on its books and records the date and a decrease in the principal amount of the Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred or exchanged, and the Company shall execute (and the Subsidiary Guarantors shall execute the Subsidiary Guarantee endorsed thereon), and the Trustee, pursuant to instructions set forth in an Officers' Certificate from the Company, shall authenticate and deliver, one or more Physical Notes of like tenor and amount. (d) In connection with the transfer or exchange of Global Notes as an entirety to beneficial owners pursuant to paragraph (b), the Global Notes shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute (and the Subsidiary Guarantors shall execute the Subsidiary Guarantee endorsed thereon), and the Trustee, pursuant to instructions set forth in an Officers' Certificate from the Company, shall authenticate and -26- deliver, to each beneficial owner identified by the Depository in exchange for its beneficial interest in the Global Notes, an equal aggregate principal amount of Physical Notes of authorized denominations. (e) The Holder of any Global Note may grant proxies and otherwise authorize any person, including Participants and persons that may hold interests through Participants, to take any action which a Holder is entitled to take under this Indenture or the Notes. ARTICLE III REDEMPTIONS AND OFFERS TO PURCHASE SECTION 3.01. Redemption Provisions. (a) If the Phipps Acquisition is not consummated prior to December 23, 1996, the Company will be obligated to redeem the Notes (the "SPECIAL REDEMPTION") on or prior to the Special Redemption Date at a redemption price (the "SPECIAL REDEMPTION PRICE") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. (b) Except as set forth in Section 3.01(a) above and as described below, the Notes are not redeemable at the Company's option prior to , 2001. On and after such date, the Notes will be subject to redemption at the option of the Company, in whole or in part, at the redemption prices (expressed as percentages of the principal amount of the Notes) set forth below, plus accrued and unpaid interest to the date fixed for redemption, if redeemed during the twelve-month period beginning on , of the years indicated below. Year Percentage ---- ---------- 2001. . . . . . . . . . . . . . . . . . % 2002. . . . . . . . . . . . . . . . . . % 2003. . . . . . . . . . . . . . . . . . % 2004 and thereafter . . . . . . . . . . % Notwithstanding the foregoing, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net cash proceeds of one or more Public Equity Offerings, other than the -27- Concurrent Offering, at a redemption price equal to % of the principal amount thereof, together with accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $97.5 million in aggregate principal amount of the Notes remains outstanding immediately after any such redemption. SECTION 3.02. Notice to Trustee. If the Company elects or is required to redeem Notes pursuant to Section 3.01(a) or elects to redeem Notes pursuant to Section 3.01(b), it shall furnish to the Trustee, (i) at least seven Business Days before notice of any Special Redemption is to be mailed to Holders or (ii) at least 30 but not more than 60 days before notice of any other redemption is to be mailed to Holders, an Officers' Certificate stating that the Company is redeeming Notes pursuant to Section 3.01(a) or Section 3.01(b), as the case may be, the date notice of redemption is to be mailed to Holders, the redemption date, the aggregate principal amount of Notes to be redeemed, the redemption price for such Notes, the amount of accrued and unpaid interest on such Notes as of the redemption date and, if applicable, the manner in which Notes are to be selected for redemption, in accordance with Section 3.03, if less than all outstanding Notes are to be redeemed. If the Trustee is not the Registrar, the Company shall, concurrently with delivery of its notice to the Trustee of a redemption, cause the Registrar to deliver to the Trustee a certificate (upon which the Trustee may rely) setting forth the name of, and the aggregate principal amount of Notes held by each Holder. If the Company is required to offer to purchase Notes pursuant to Section 4.13 or 4.14, it shall furnish to the Trustee, at least seven Business Days before notice of the corresponding Offer is to be mailed to Holders, an Officers' Certificate setting forth that the Offer is being made pursuant to Section 4.13 or 4.14, as the case may be, the Purchase Date, the maximum principal amount of Notes the Company is offering to purchase pursuant to such Offer, the purchase price for such Notes, the amount of accrued and unpaid interest on such Notes as of the Purchase Date and, if applicable, the manner in which Notes are to be selected for purchase, in accordance with Section 3.03, if less than all outstanding Notes are to be purchased. The Company will also provide the Trustee with any additional information that the Trustee reasonably requests in connection with any redemption or Offer. SECTION 3.03. Selection of Notes to Be Redeemed or Purchased. If less than all outstanding Notes are to be redeemed or if less than all Notes tendered pursuant to an Offer are to be purchased by the Company, the Trustee, on behalf of -28- the Company, shall select the outstanding Notes to be redeemed or purchased by the Company, in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not listed on such an exchange the Trustee, on behalf of the Company, shall select the outstanding Notes to be redeemed or purchased, on a PRO RATA basis, by lot or by any other method that the Trustee deems fair and appropriate; PROVIDED that a redemption pursuant to the provisions relating to Public Equity Offerings will be on a PRO RATA basis. Notes redeemed or purchased in part shall only be redeemed or purchased in integral multiples of $1,000. If the Company elects to mail notice of a redemption to Holders, the Trustee shall at least five days prior to the date notice of redemption is to be mailed, (i) select, on behalf of the Company, the Notes to be redeemed from Notes outstanding not previously called for redemption, and (ii) notify the Company of the names of each Holder of Notes selected for redemption, the principal amount of Notes held by each such Holder and the principal amount of such Holder's Notes that are to be redeemed. If fewer than all Notes tendered pursuant to an Offer are to be purchased, the Trustee shall, on behalf of the Company, select on or prior to the Purchase Date for such Offer the Notes to be purchased. The Trustee shall select for redemption or purchase Notes or portions of Notes in principal amounts of $1,000 or integral multiples of $1,000. Except as provided in the preceding sentence, provisions of this Indenture that apply to Notes called for redemption or tendered pursuant to an Offer also apply to portions of Notes called for redemption or tendered pursuant to an Offer. The Trustee shall notify the Company promptly of the Notes or portions of Notes to be called for redemption or selected for purchase. The Company shall notify the Trustee of its acceptance for payment of the Notes selected for redemption or purchase. SECTION 3.04. Notice of Redemption. (a) At least (i) five Business Days before the date of any Special Redemption or (ii) 30 days but not more than 60 days before any other redemption date, the Company shall mail by first class mail a notice of redemption to each Holder of Notes that are to be redeemed. With respect to any redemption of Notes, the notice shall identify the Notes or portions thereof, if applicable, to be redeemed and shall state: (1) the redemption date; (2) the redemption price for the Notes and the amount of unpaid and accrued interest on such Notes as of the date of redemption; (3) the paragraph of the Notes pursuant to which the Notes called for redemption are being redeemed; (4) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the redemption date, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion will be issued; (5) the name and address of the Paying Agent; (6) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price for, and any accrued and unpaid interest on, such Notes; (7) that, unless the Company defaults in making such redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date; and (8) that no representation is made as to the correctness or accuracy of the CUSIP number listed in such notice and printed on the Notes. -29- (b) At the Company's request, the Trustee shall (at the Company's expense) give the notice of any redemption to Holders; PROVIDED, HOWEVER, that the Company shall deliver to the Trustee, at least 45 days prior to the date of any optional redemption and at least 10 days prior to the date that notice of such redemption is to be mailed to Holders, an Officers' Certificate that (i) requests the Trustee to give notice of the redemption to Holders, (ii) sets forth the information to be provided to Holders in the notice of redemption, as set forth in the preceding paragraph, and (iii) sets forth the aggregate principal amount of Notes to be redeemed and the amount of accrued and unpaid interest thereon as of the redemption date. If the Trustee is not a Registrar, the Company shall, concurrently with any such request, cause the Registrar to deliver to the Trustee a certificate (upon which the Trustee may rely) setting forth the name of, the address of, and the aggregate principal amount of Notes held by, each Holder; PROVIDED FURTHER that any such Officers' Certificate may be delivered to the Trustee on a date later than permitted under this Section 3.03(b) if such later date is acceptable to the Trustee. SECTION 3.05. Effect of Notice of Redemption. Subject to the provisions of Article X, and except if such redemption would violate the terms of the Senior Credit Facility, once notice of redemption is mailed, Notes called for redemption become due and payable on the redemption date at the price set forth in the Note. SECTION 3.06. Deposit of Redemption Price. (a) On or prior to any redemption date, the Company shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of, and accrued interest on, all Notes to be redeemed on that date. The Trustee or the Paying Agent shall return to the Company, no later than five days after any redemption date, any money (including accrued interest) that exceeds the amount necessary to pay the redemption price of, and accrued interest on, all Notes redeemed. (b) If the Company complies with Section 3.06(a), interest on the Notes to be redeemed will cease to accrue on such Notes on the applicable redemption date, whether or not such Notes are presented for payment. If a Note is redeemed on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest shall be paid to the Person in whose name such Note was registered at the close of business of such record date. If any Note called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, to the extent lawful, the Company shall pay interest (including Post-Petition Interest) on the overdue principal, premium, if any, and interest from the redemption date until such -30- principal, premium and interest are paid, at a rate equal to 2% per annum in excess of the then applicable interest rate on the Notes compounded semi-annually as provided in the Notes and Section 4.01. SECTION 3.07. Notes Redeemed in Part. Upon surrender of a Note that is redeemed in part, the Company shall issue and the Trustee shall authenticate for the Holder at the Company's expense a new Note equal in principal amount to the unredeemed portion of the Note surrendered. ARTICLE IV COVENANTS SECTION 4.01. Payment of Principal, Premium, and Interest. Subject to the provisions of Article X, the Company shall pay the principal of, and premium, if any, and interest on, the Notes on the dates and in the manner provided in the Notes. Holders must surrender their Notes to the Paying Agent to collect principal payments. Principal, premium, or interest shall be considered paid on the date due if, by 11 a.m. Eastern Standard Time on such date, the Company has deposited with the Paying Agent money in immediately available funds designated for and sufficient to pay such principal, premium or interest; PROVIDED, HOWEVER, that principal, premium or interest shall not be considered paid within the meaning of this Section 4.01 if money intended to pay such principal, premium or interest is held by the Paying Agent for the benefit of holders of Senior Debt of the Company pursuant to the provisions of Article X. The Paying Agent shall return to the Company, no later than five days following the date of payment, any money (including accrued interest) that exceeds the amount then due and payable on the Notes. The Company shall pay interest (including Post-Petition Interest) on overdue principal, premium and interest (without regard to any applicable grace period) at a rate equal to 2% per annum in excess of the then applicable interest rate on the Notes, compounded semiannually. Payments of the principal of, premium (if any) and interest on any Global Notes will be made to the Depository or its nominee, as the case may be, as the registered owner thereof. None of the Company, the Trustee nor any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial -31- ownership interests in any Global Notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest. SECTION 40.2. Reports. Whether or not the Company is then subject to Section 13(a) or 15(d) of the Exchange Act, the Company will file with the Commission, so long as any Notes are outstanding, the annual reports, quarterly reports and other periodic reports which the Company would have been required to file with the Commission pursuant to such Section 13(a) or 15(d) if the Company were so subject, and such documents shall be filed with the Commission on or prior to the respective dates (the "REQUIRED FILING DATES") by which the Company would have been required so to file such documents if the Company were so subject. The Company will also, in any event, (i) within 15 days of each Required Filing Date, (a) transmit by mail to all holders of Notes, as their names and addresses appear in the Note register, without cost to such holders and (b) file with the Trustee copies of the annual reports, quarterly reports and other periodic reports which the Company would have been required to file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company were subject to such Sections and (ii) if filing such documents by the Company with the Commission is prohibited under the Exchange Act, promptly upon written request and payment of the reasonable cost of duplication and delivery, supply copies of such documents to any prospective Holder at the Company's cost. In addition, the Company will file with the Commission and with the Trustee, in accordance with rules and regulations prescribed by the Commission, such additional information, documents and reports with respect to compliance with the conditions and covenants provided for herein as may be required by such rules and regulations. SECTION 4.03. Compliance Certificate. The Company shall deliver to the Trustee, within 135 days after the end of each fiscal year of the Company, an officers' certificate, which shall be executed, on behalf of the Company, by two Officers at least one of which shall be the principal executive officer, principal financial officer or principal accounting officer of the Company, stating that (i) a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made to determine whether the Company has kept, observed, performed and fulfilled all of its obligations under this Indenture and the Notes, (ii) such review was supervised by the Officers of the Company signing such certificate, and (iii) that to the best knowledge of each Officer signing such certificate, (a) the Company has kept, observed, performed and fulfilled each and every condition and covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default occurred, describing all such Defaults or Events of Default of which each such Officer may have knowledge and what action the Company has taken or proposes to take with respect thereto), and (b) no event has occurred and remains in existence by reason of which payments on account of the principal of, or premium, -32- if any, or interest on, the Notes are prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. For purposes of this paragraph, such compliance shall be determined without regard to any period of grace or requirement of notice provided hereunder. So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the annual financial statements delivered pursuant to Section 4.02 shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation reasonably satisfactory to the Trustee) that in making the examination necessary for certification of such financial statements nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Section 4.01, 4.05, 4.07, 4.08, 4.09, 4.11, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18 or 4.20 or Article V or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. The Company will, so long as any of the Notes are outstanding, deliver to the Trustee, promptly after any Officer of the Company becomes aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. The Company shall deliver to the Trustee such other information or documents reasonably requested by the Trustee in connection with the compliance by the Trustee or the Company with the TIA. SECTION 4.04. Stay, Extension and Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that might affect the covenants or the performance of its obligations under this Indenture and the Notes; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power granted to the Trustee pursuant to this Indenture, but will suffer and permit the execution of every such power as though no such law has been enacted. -33- SECTION 4.05. Limitation on Restricted Payments. (a) The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, make any Restricted Payment, unless at the time of and immediately after giving effect to the proposed Restricted Payment (with the value of any such Restricted Payment, if other than cash, to be determined by the Board of Directors, whose determination shall be conclusive and evidenced by a board resolution), (i) no Default or Event of Default (and no event that, after notice or lapse of time, or both, would become an "event of default" under the terms of any Indebtedness of the Company or its Subsidiaries) shall have occurred and be continuing or would occur as a consequence thereof, (ii) the Company could incur at least $1.00 of additional Indebtedness pursuant to the provisions of Section 4.07(a) and (iii) the aggregate amount of all Restricted Payments made after the Issue Date shall not exceed the sum of (x) an amount equal to the Company's Cumulative Operating Cash Flow less 1.4 times the Company's Cumulative Consolidated Interest Expense, plus (y) the aggregate amount of all net cash proceeds received after the Issue Date by the Company (but excluding the net cash proceeds received by the Company from the Concurrent Offering) from the issuance and sale (other than to a Subsidiary of the Company) of Capital Stock of the Company (other than Disqualified Stock) to the extent that such proceeds are not used to redeem, repurchase, retire or otherwise acquire Capital Stock or any Indebtedness of the Company or any Subsidiary pursuant to clause (ii) of Section 4.05(b), PLUS (z) in the case of the disposition or repayment of any Investment for cash, which Investment constituted a Restricted Payment made after the Issue Date, an amount equal to the lesser of the return of capital with respect to such Investment and the cost of such Investment, in either case, reduced (but not below zero) by the excess, if any, of the cost of the disposition of such Investment over the gain, if any, realized by the Company or such Subsidiary in respect of such disposition. (b) The provisions of Section 4.05(a) will not prohibit, so long as there is no Default or Event of Default continuing, the following actions (collectively, "PERMITTED PAYMENTS"): (i) the payment of any dividend within 60 days after the date of declaration thereof, if at such declaration date such payment would have been permitted under this Indenture, and such payment shall be deemed to have been paid on such date of declaration for purposes of clause (iii) of Section 4.05(a); (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any Capital Stock or any Indebtedness of the Company in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of Capital Stock of the Company (other than any Disqualified Stock); -34- (iii) the repurchase, redemption or other repayment of any Subordinated Debt of the Company or a Subsidiary Guarantor in exchange for, by conversion into or solely out of the proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of Subordinated Debt of the Company or such Subsidiary Guarantor with a Weighted Average Life to Maturity equal to or greater than the then remaining Weighted Average Life to Maturity of the Subordinated Debt repurchased, redeemed or repaid; (iv) the payment of ordinary dividends by the Company in respect of its Capital Stock in the ordinary course of business on a basis consistent with past practice in an aggregate amount not exceeding $1.0 million; and (v) Restricted Investments received as consideration in connection with an Asset Sale made in compliance with the Indenture. (c) In computing the amount of Restricted Payments for purposes of Section 4.05(a)(iii), Restricted Payments made under Sections 4.05(b)(iv) and 4.05(b)(v) shall be included and Restricted Payments made under Sections 4.05(b)(i), 4.05(b)(ii) and 4.05(b)(iii) shall be excluded. SECTION 4.06. Corporate Existence. Subject to Section 4.14 and Article V, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each of its Subsidiaries in accordance with the respective organizational documents of each of its Subsidiaries and the rights (charter and statutory), licenses and franchises of the Company and each of its Subsidiaries; PROVIDED, HOWEVER, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any Subsidiary, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders. SECTION 4.07. Limitation on Incurrence of Indebtedness. (a) The Company will not, and will not permit any of its Subsidiaries to, create, incur, assume or directly or indirectly guarantee or in any other manner become directly or indirectly liable for ("incur") any Indebtedness (including Acquired Debt) if, at the time of and immediately after giving pro forma effect to such incurrence, the Debt to Operating Cash Flow Ratio of the Company and its Subsidiaries is (i) more than 7.0:1.0 if the Indebtedness is -35- incurred prior to September __, 1998 or (ii) more than 6.5:1.0 if the Indebtedness is incurred on or after September __, 1998. (b) Section 4.07(a) will not apply to the incurrence of any of the following (collectively, "PERMITTED INDEBTEDNESS"): (i) Indebtedness of the Company incurred under the Senior Credit Facility in an aggregate principal amount at any time outstanding not to exceed $60,000,000 less (A) the aggregate amount of all principal payments made in respect of any term loans thereunder and (B) the aggregate amount of any other principal payments thereunder constituting permanent reductions of such Indebtedness pursuant to and in accordance with the covenant described under Section 4.14; (ii) Indebtedness of any Subsidiary Guarantor consisting of a guarantee of Indebtedness of the Company under the Senior Credit Facility; (iii) Indebtedness of the Company represented by the Notes and Indebtedness of any Subsidiary Guarantor represented by a Subsidiary Guarantee; (iv) Indebtedness owed by any Subsidiary Guarantor to the Company or to another Subsidiary Guarantor, or owed by the Company to any Subsidiary Guarantor; PROVIDED that any such Indebtedness shall be at all times held by a Person which is either the Company or a Subsidiary Guarantor; and PROVIDED, FURTHER that an incurrence of additional Indebtedness which is not permitted under this Section 4.07(b)(iv) shall be deemed to have occurred upon either (a) the transfer or other disposition of any such Indebtedness to a Person other than the Company or another Subsidiary Guarantor or (b) the sale, lease, transfer or other disposition of shares of Capital Stock (including by consolidation or merger) of any such Subsidiary Guarantor to a Person other than the Company or another Subsidiary Guarantor, such that such Subsidiary Guarantor ceases to be a Subsidiary Guarantor; (v) Indebtedness of any Subsidiary Guarantor consisting of guarantees of any Indebtedness of the Company which Indebtedness of the Company has been incurred in accordance with the provisions of the Indenture; (vi) Indebtedness arising with respect to Interest Rate Agreement Obligations incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding; PROVIDED, HOWEVER, that the notional principal amount of such Interest Rate Agreement Obligation does not exceed the principal amount of the Indebtedness to which such Interest Rate Agreement Obligation relates; -36- (vii) any Indebtedness of the Company or a Subsidiary of the Company incurred in connection with or given in exchange for the renewal, extension, substitution, refunding, defeasance, refinancing or replacement of any Indebtedness of the Company or such Subsidiary permitted to be incurred or outstanding under this Indenture other than Indebtedness described in clauses (i), (ii), (iv), (v), (vi) and (viii) of this Section 4.07(b) ("REFINANCING INDEBTEDNESS"); PROVIDED that (a) the principal amount of such Refinancing Indebtedness shall not exceed the principal amount of the Indebtedness so renewed, extended, substituted, refunded, defeased, refinanced or replaced (plus the premiums paid in connection therewith (which shall not exceed the stated amount of any premium or other payment required to be paid in connection with such a refinancing pursuant to the terms of the Indebtedness being renewed, extended, substituted, refunded, defeased, refinanced or replaced) and the expenses incurred in connection therewith); (b) with respect to Refinancing Indebtedness of any Indebtedness other than Senior Debt, the Refinancing Indebtedness shall have a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being renewed, extended, substituted, refunded, defeased, refinanced or replaced; and (c) with respect to Refinancing Indebtedness of Indebtedness other than Senior Debt incurred by (1) the Company, such Refinancing Indebtedness shall rank no more senior, and shall be at least as subordinated, in right of payment to the Notes as the Indebtedness being renewed, extended, substituted, refunded, defeased, refinanced or replaced, and (2) a Subsidiary Guarantor, such Refinancing Indebtedness shall rank no more senior, and shall be at least as subordinated, in right of payment to the Subsidiary Guarantee as the Indebtedness being renewed, extended, substituted, refunded, defeased, refinanced or replaced; and (viii) Indebtedness of the Company and its Subsidiaries in addition to that described in clauses (i) through (vii) above, and any renewals, extensions, substitutions, refinancings or replacements of such Indebtedness, so long as the aggregate principal amount of all such Indebtedness incurred pursuant to this clause (viii) does not exceed $15,000,000 at any one time outstanding. SECTION 4.08. Limitation on Transactions with Affiliates. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into or suffer to exist any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or services) with any Affiliate of the Company or any beneficial owner of ten percent or more of any class of Capital Stock of the Company or any Subsidiary Guarantor unless (i) such transaction or series of transactions is on terms that are no less favorable to the Company or such Subsidiary, as the case may be, than would be available in a comparable transaction in arm's-length dealings with an unrelated third party, and (ii) (a) with respect to any transaction -37- or series of transactions involving aggregate payments in excess of $1,000,000, the Company delivers an Officers Certificate to the Trustee certifying that such transaction or series of related transactions complies with clause (i) above and such transaction or series of related transactions has been approved by a majority of the members of the Board of Directors (and approved by a majority of the Independent Directors or, in the event there is only one Independent Director, by such Independent Director), and (b) with respect to any transaction or series of transactions involving aggregate payments in excess of $5,000,000, the Company delivers to the Trustee an Opinion of Counsel to the effect that such transaction or series of transactions is fair to the Company or such Subsidiary from a financial point of view issued by an investment banking firm of national standing. Notwithstanding the foregoing, this provision will not apply to (i) employment agreements or compensation or employee benefit arrangements with any officer, director or employee of the Company entered into in the ordinary course of business (including customary benefits thereunder), (ii) any transaction entered into by or among the Company or any Subsidiary Guarantor and one or more Subsidiary Guarantors, and (iii) transactions pursuant to agreements existing on the Issue Date. SECTION 4.09. Limitation on Liens. The Company will not, and will not permit any Subsidiary Guarantor to, directly or indirectly, create, incur, assume or suffer to exist any Lien (other than Permitted Liens) on any asset now owned or hereafter acquired, or any income or profits therefrom or assign or convey any right to receive income therefrom to secure any Indebtedness; PROVIDED that in addition to creating Permitted Liens on its properties or assets, (i) the Company may create any Lien upon any of its properties or assets (including, but not limited to, any Capital Stock of its Subsidiaries) if the Notes are equally and ratably secured therewith, and (ii) a Subsidiary Guarantor may create any Lien upon any of its properties or assets (including, but not limited to, any Capital Stock of its Subsidiaries) if its Subsidiary Guarantee is equally and ratably secured therewith; PROVIDED, HOWEVER, that if (a) the Company creates any Lien on its assets to secure any Subordinated Indebtedness of the Company, the Company shall also create a Lien to secure the Notes and the Lien securing such Subordinated Indebtedness shall be subordinated and junior to the Lien securing the Notes with the same or lesser priorities as the Subordinated Indebtedness shall have with respect to the Notes, and (b) a Subsidiary Guarantor creates any Lien on its assets to secure any Subordinated Indebtedness of such Subsidiary Guarantor, the Subsidiary Guarantor shall also create a Lien to secure the Subsidiary Guarantee and the Lien securing such Subordinated Indebtedness shall be subordinated and junior to the Lien securing the Subsidiary Guarantee of such Subsidiary Guarantor with the same or lesser priorities as the Subordinated Indebtedness shall have with respect to the Subsidiary Guarantee of such Subsidiary Guarantor. -38- SECTION 4.10. Taxes. The Company shall, and shall cause each of its Subsidiaries to, pay prior to delinquency all taxes, assessments and governmental levies the failure of which to pay could reasonably be expected to result in a material adverse effect on the condition (financial or otherwise), business or results of operations of the Company and its Subsidiaries taken as a whole, except for those taxes contested in good faith by appropriate proceedings. SECTION 4.11. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to (i) pay dividends or make any other distributions to the Company or any other Subsidiary of the Company on its Capital Stock or with respect to any other interest or participation in, or measured by, its profits, or pay any Indebtedness owed to the Company or any other Subsidiary of the Company, (ii) make loans or advances to the Company or any other Subsidiary of the Company, or (iii) transfer any of its properties or assets to the Company or any other Subsidiary of the Company (collectively, "PAYMENT RESTRICTIONS"), except for such encumbrances or restrictions existing under or by reason of (a) the Senior Credit Facility as in effect on the Issue Date and any amendments, restatements, renewals, replacements or refinancings thereof; PROVIDED that such amendments, restatements, renewals, replacement or refinancings are no more restrictive in the aggregate with respect to such dividend and other payment restrictions than those contained in the Senior Credit Facility immediately prior to any such amendment, restatement, renewal, replacement or refinancing, (b) applicable law, (c) any instrument governing Indebtedness or Capital Stock of an Acquired Person acquired by the Company or any of its Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with such acquisition); PROVIDED that such restriction is not applicable to any Person, or the properties or assets of any Person, other than the Acquired Person, (d) customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (e) Purchase Money Indebtedness for property acquired in the ordinary course of business that only impose restrictions on the property so acquired, (f) an agreement for the sale or disposition of the Capital Stock or assets of such Subsidiary; PROVIDED that such restriction is only applicable to such Subsidiary or assets, as applicable, and such sale or disposition otherwise is permitted under the covenant described under Section 4.14; and PROVIDED, FURTHER, that such restriction or encumbrance shall be effective only for a period from the execution and delivery of such agreement through a termination date not later than 270 days after such execution and delivery, and (g) Refinancing Indebtedness permitted under this Indenture; PROVIDED that the restrictions -39- contained in the agreements governing such Refinancing Indebtedness are no more restrictive in the aggregate than those contained in the agreements governing the Indebtedness being refinanced immediately prior to such refinancing. SECTION 4.12. Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan, the City of New York, an office or an agency (which may be an office of any Agent) where Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company will give prompt written notice to the Trustee of any change in the location of such office or agency. If at any time the Company shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED, HOWEVER, that no such designation or rescission shall in any matter relieve the Company of its obligations to maintain an office or agency in the Borough of Manhattan, the City of New York, for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.03. SECTION 4.13. Change of Control. (a) In the event of a Change of Control, Company will make an offer to purchase all of the then outstanding Notes at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase, in accordance with the terms set forth below (a "CHANGE OF CONTROL OFFER"). (b) Within 30 days following the occurrence of any Change of Control, the Company shall mail to each Holder of Notes at such Holder's registered address a notice stating: (i) that a Change of Control has occurred and that such Holder has the right to require the Company to repurchase all or a portion (equal to $1,000 or an integral multiple thereof) of such Holder's Notes at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase (the "CHANGE OF -40- CONTROL PURCHASE DATE"), which shall be a Business Day, specified in such notice, that is not earlier than 30 days or later than 60 days from the date such notice is mailed, (ii) the amount of accrued and unpaid interest as of the Change of Control Purchase Date, (iii) that any Note not tendered will continue to accrue interest, (iv) that, unless the Company defaults in the payment of the purchase price for the Notes payable pursuant to the Change of Control Offer, any Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date, (v) that Holders electing to tender any Note or portion thereof will be required to surrender their Note, with a form entitled "Option of Holder to Elect Purchase" completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day preceding the Change of Control Purchase Date; PROVIDED that Holders electing to tender only a portion of any Note must tender a principal amount of $1,000 or integral multiples thereof; (vi) that Holders will be entitled to withdraw their election to tender Notes if the Paying Agent receives, not later than the close of business on the third Business Day preceding the Change of Control Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have such Notes purchased; and (vii) that Holders whose Notes are accepted for payment in part will be issued new Notes equal in principal amount to the unpurchased portion of Notes surrendered; PROVIDED that only Notes in a principal amount of $1,000 or integral multiples thereof will be accepted for payment in part. (c) On the Change of Control Purchase Date, the Company will (i) accept for payment all Notes or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent the aggregate purchase price of all Notes or portions thereof accepted for payment and any accrued and unpaid interest on such Notes as of the Change of Control Purchase Date, and (iii) deliver or cause to be delivered to the Trustee all Notes tendered pursuant to the Change of Control Offer. The Paying Agent shall promptly mail to each Holder of Notes or portions thereof accepted for payment an amount equal to the purchase price for such Notes plus any accrued and unpaid interest thereon, and the Trustee shall promptly authenticate and mail to such Holder of Notes accepted for payment in part a new Note equal in principal amount to any unpurchased portion of the Notes, and any Note not accepted for payment in whole or in part for any reason consistent with this Indenture shall be promptly returned to the Holder of such Note. On and after a Change of Control Purchase Date, interest will cease to accrue on the Notes or portions thereof accepted for payment, unless the Company defaults in the payment of the purchase price therefor. The Company will announce the results of the Change of Control Offer to Holders of the Notes on or as soon as practicable after the Change of Control Purchase Date. (d) The Company will comply with the applicable tender offer rules, including the requirements of Rule 14e-1 under the Exchange Act, and all other applicable securities laws and regulations in connection with any Change of Control Offer. -41- SECTION 4.14. Limitation on Asset Sales. (a) The Company will not, and will not permit any of its Subsidiaries to, make any Asset Sale unless (i) the Company or such Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value (determined by the Board of Directors in good faith, which determination shall be evidenced by a board resolution) of the assets or other property sold or disposed of in the Asset Sale, and (ii) at least 75% of such consideration is in the form of cash or Cash Equivalents; PROVIDED that for purposes of this covenant "cash" shall include the amount of any liabilities (other than liabilities that are by their terms subordinated to the Notes or any Subsidiary Guarantee) of the Company or such Subsidiary (as shown on the Company's or such Subsidiary's most recent balance sheet or in the notes thereto) that are assumed by the transferee of any such assets or other property in such Asset Sale (and excluding any liabilities that are incurred in connection with or in anticipation of such Asset Sale), but only to the extent that such assumption is effected on a basis under which there is no further recourse to the Company or any of its Subsidiaries with respect to such liabilities. Notwithstanding clause (ii) above, (a) all or a portion of the consideration for any such Asset Sale may consist of all or substantially all of the assets or a majority of the Voting Stock of an existing television business, franchise or station (whether existing as a separate entity, subsidiary, division, unit or otherwise) or any business directly related thereto, and (b) Asset Sales involving assets which are not television or publishing businesses, franchises or stations and having an aggregate value (as measured by the value of the consideration being paid for such assets) not in excess of $35,000,000 may be made without regard to clause (ii) above; provided, that, in the case of either (a) or (b) of this sentence, after giving effect to any such Asset Sale and related acquisition of assets or Voting Stock, (x) no Default or Event of Default shall have occurred or be continuing; and (y) the Net Proceeds of any such Asset Sale, if any, are applied in accordance with this covenant. (b) Within 360 days after any Asset Sale, the Company may elect to apply or cause to be applied the Net Proceeds from such Asset Sale to (i) permanently reduce any Senior Debt of the Company or any Guarantor Senior Debt, and/or (ii) make an investment in, or acquire assets directly related to the business of the Company and its Subsidiaries existing on the Issue Date. Pending the final application of any such Net Proceeds, the Company may temporarily reduce Senior Debt of the Company or any Guarantor Senior Debt or temporarily invest such Net Proceeds in any manner permitted by this Indenture. Any Net Proceeds from an Asset Sale not applied or invested as provided in the first sentence of this paragraph within 360 days of such Asset Sale will be deemed to constitute "EXCESS PROCEEDS" on the 361st day after such Asset Sale. -42- (c) As soon as practical, but in no event later than 10 Business Days after any date (an "ASSET SALE OFFER TRIGGER DATE") that the aggregate amount of Excess Proceeds exceeds $5,000,000, the Company shall commence an offer to purchase the maximum principal amount of Notes that may be purchased out of all such Excess Proceeds (an "ASSET SALE OFFER") at a price in cash equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase (the "ASSET SALE OFFER PURCHASE DATE"). To the extent that any Excess Proceeds remain after completion of an Asset Sale Offer, the Company may use the remaining amount for general corporate purposes and such amount shall no longer constitute "Excess Proceeds." (d) Within 30 days following any Asset Sale Offer Trigger Date, the Company shall mail to each holder of Notes at such holder's registered address a notice stating: (i) that an Asset Sale Offer Trigger Date has occurred and that the Company is offering to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds at an offer price in cash equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the Asset Sale Offer Purchase Date, which shall be a Business Day, specified in such notice, that is not earlier than 30 days or later than 60 days from the date such notice is mailed, (ii) the amount of accrued and unpaid interest as of the Asset Sale Offer Purchase Date, (iii) that any Note not tendered will continue to accrue interest, (iv) that, unless the Company defaults in the payment of the purchase price for the Notes payable pursuant to the Asset Sale Offer, any Notes accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest after the Asset Sale Offer Purchase Date, (v) that Holders electing to tender any Note or portion thereof will be required to surrender their Note, with a form entitled "Option of Holder to Elect Purchase" completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day preceding the Asset Sale Offer Purchase Date; PROVIDED that Holders electing to tender only a portion of any Note must tender a principal amount of $1,000 or integral multiples thereof; (vi) that Holders will be entitled to withdraw their election to tender Notes if the Paying Agent receives, not later than the close of business on the third Business Day preceding the Asset Sale Offer Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have such Notes purchased; and (vii) that Holders whose Notes are accepted for payment in part will be issued new Notes equal in principal amount to the unpurchased portion of Notes surrendered; PROVIDED that only Notes in a principal amount of $1,000 or integral multiples thereof will be accepted for payment in part. (e) On the Asset Sale Offer Purchase Date, the Company will (i) accept for payment the maximum principal amount of Notes or portions thereof tendered pursuant to the Asset Sale Offer that can be purchased out of Excess Proceeds from such Asset Sale, (ii) deposit with the Paying Agent the aggregate purchase price of all Notes or portions thereof accepted for payment and any accrued and unpaid interest on such Notes as of the Asset Sale Offer Purchase Date, and (iii) deliver or cause to be delivered to the Trustee all Notes tendered pursuant to the Asset Sale -43- Offer. If less than all Notes tendered pursuant to the Asset Sale Offer are to be purchased by the Company, the Trustee, on behalf of the Company, shall select the outstanding Notes to be purchased by the Company in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not listed on such an exchange, the Trustee on behalf of the Company, shall select the outstanding Notes to be purchased, on a PRO RATA basis, by lot or by such method as the Trustee deems fair and appropriate; PROVIDED that Notes purchased in part shall only be purchased in integral multiples of $1,000. The Company shall notify the Trustee of its acceptance for payment of Notes selected for purchase. The Paying Agent shall promptly mail to each holder of Notes or portions thereof accepted for payment an amount equal to the purchase price for such Notes plus any accrued and unpaid interest thereon, and the Trustee shall promptly authenticate and mail to such Holder of Notes accepted for payment in part a new Note equal in principal amount to any unpurchased portion of the Notes, and any Note not accepted for payment in whole or in part shall be promptly returned to the Holder of such Note. On and after an Asset Sale Offer Purchase Date, interest will cease to accrue on the Notes or portions thereof accepted for payment, unless the Company defaults in the payment of the purchase price therefor. The Company will announce the results of the Asset Sale Offer to Holders on or as soon as practicable after the Asset Sale Offer Purchase Date. (f) The Company will comply with the applicable tender offer rules, including the requirements of Rule 14e-1 under the Exchange Act, and all other applicable securities laws and regulations in connection with any Asset Sale Offer. SECTION 4.15. Limitation on Incurrence of Senior Subordinated Indebtedness. The Company will not, directly or indirectly (a) incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinated or junior in right of payment to any Indebtedness of the Company and senior in any respect in right of payment to the Notes, and (b) permit any Subsidiary Guarantor to incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinated or junior in right of payment to any Indebtedness of such Subsidiary Guarantor and senior in any respect in right of payment to the Subsidiary Guarantee of such Subsidiary Guarantor. SECTION 4.16. Limitation on Issuance and Sale of Capital Stock of Subsidiaries. The Company (a) will not, and will not permit any Subsidiary of the Company to, transfer, convey, sell or otherwise dispose of any shares of Capital Stock of such Subsidiary or any other Subsidiary (other than to the Company or a Subsidiary Guarantor) except that the -44- Company and any Subsidiary may, in any single transaction, sell all, but not less than all, of the issued and outstanding Capital Stock of any subsidiary to any Person, subject to complying with the provisions of this Indenture applicable to such sale and (b) will not permit any Subsidiary of the Company to issue shares of its Capital Stock (other than directors' qualifying shares), or securities convertible into, or warrants, rights or options to subscribe for or purchase shares of, its Capital Stock to any person other than to the Company or a Subsidiary Guarantor. SECTION 4.17. Future Subsidiary Guarantors. The Company shall cause each Subsidiary of the Company formed or acquired after the date of this Indenture to execute and deliver an indenture supplemental to this Indenture and thereby become a Subsidiary Guarantor which shall be bound by the guarantee of the Notes in the form set forth in this Indenture (without such Subsidiary Guarantor being required to execute and deliver the guarantee endorsed on the Notes). SECTION 4.18. Maintenance of Properties. The Company will cause all properties used in the conduct of its business or the business of any Subsidiary of the Company to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company advantageously conducted at all times; PROVIDED, HOWEVER, that nothing in this Section shall prevent the Company or any Subsidiary of the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, as determined by the Board of Directors in good faith, desirable in the conduct of the business of the Company or of any of its Subsidiaries. SECTION 4.19. Maintenance of Insurance. The Company shall, and shall cause each of its Subsidiaries to, keep at all times all of their properties which are of an insurable nature insured against loss or damage with insurers believed by the Company to be responsible to the extent that property of similar character usually is so insured by corporations similarly situated and owning like properties in accordance with good business practice. -45- SECTION 4.20. Deposit of Trust Funds with Trustee Pending Consummation of Phipps Acquisition. (a) On the Issue Date, the Company shall deposit with the Trustee in the account specified in Section 4.20(b), (i) the net proceeds from the issuance of the Notes (the "NET OFFERING PROCEEDS"), plus (ii) such amount as, when added to the Net Offering Proceeds, equals 101% of the aggregate principal amount of the Notes, plus (iii) an amount equal to the interest that would accrue on the Notes from the Issue Date to the Special Redemption Date at an interest rate of [ ]% per annum (such deposited amounts collectively, the "TRUST FUNDS"). (b) The Company shall deposit the Trust Funds into, and shall maintain with the Trustee, an account (the "COLLATERAL ACCOUNT") designated "Bankers Trust Company, as Trustee," which account shall be under the sole dominion and control of the Trustee. Amounts on deposit in the Collateral Account shall be invested and reinvested from time to time in Cash Equivalents, as directed in writing by the Company, which shall be held in the Collateral Account. Any income, including any interest or capital gains received with respect to the balance from time to time standing to the credit of the Collateral Account, shall remain, or be deposited, in the Collateral Account. The Trustee shall have the power to sell or liquidate the investments in the Collateral Account whenever the Trustee shall be required to release all or any portion of the amounts in the Collateral Account to permit the consummation of the Phipps Acquisition or to employ such amounts to effect a Special Redemption of the Notes pursuant to Section 4.20(d). Subject to Article VII hereof, the Trustee, solely in its individual capacity, hereby waives any rights it may have in such individual capacity to the Collateral Account and all rights and interest therein, including, without limitation, any such rights arising through counterclaim, defense, recoupment, charge, lien or right of set-off. The Trustee shall not have any liability for any loss suffered as a result of any investment made as provided above, any liquidation of any such investment prior to its maturity, or the failure of any authorized person of the Company to give the Trustee written instruction to invest or reinvest the amounts in the Collateral Account or any earnings thereon. (c) In order to secure the full and punctual payment and performance of the Company's obligation to redeem the Notes upon a Special Redemption, if any, the Company hereby grants to the Trustee, for the benefit of the Holders, a continuing security interest in and to the Trust Funds, whether now owned or existing or hereafter acquired or arising. (d) The Trustee shall hold the Trust Funds, for the benefit of the Holders, until the earliest to occur of: -46- (A) (x) the date of consummation of the Phipps Acquisition as specified in an Officers' Certificate from the Company to the Trustee (1) stating that the Phipps Acquisition is to be consummated on a date specified therein, which shall be at least seven Business Days after the date of such Officers' Certificate and on or before December 23, 1996, (2) stating that such consummation will be, in all material respects, in accordance with the terms and conditions described in the Prospectus, and (3) requesting the Trustee to release the Trust Funds to the order of the Company or its assignee for application to the concurrent consummation of the Phipps Acquisition and (y) receipt by the Trustee of an Opinion of Counsel to the effect that all conditions precedent described in the preceding clause (x) have been satisfied; or (B) the date of any Special Redemption, which date shall be specified in an Officers' Certificate from the Company to the Trustee in accordance with Section 3.02 hereof; or (C) the Special Redemption Date, as specified in an Officers' Certificate from the Company to the Trustee in accordance with Section 3.02 hereof. (e) On the date of consummation of the Phipps Acquisition and following such acquisition, the Holders' security interest in the Collateral Account shall terminate and the Trustee shall release the Trust Funds in immediately available funds to the order of the Company or its assigns, as specified in the Officers' Certificate delivered pursuant to Section 4.20(d)(A). On the date of any Special Redemption or the Special Redemption Date as specified in an Officers' Certificate delivered pursuant to Section 4.20(d)(B) or Section 4.20(d)(C) above, the Trustee shall apply the Trust Funds to fund such Special Redemption and the Holders' security interest in the Collateral Account shall terminate on the date of such Special Redemption. (f) The Trustee shall pay any investment income received on the Trust Funds to the Company following release of the Trust Funds pursuant to subsection (d) above. If a Special Redemption occurs prior to the Special Redemption Date any amounts in the Collateral Account not required to be used for such Special Redemption shall be returned to the Company. (g) The Company will comply with Sections 314(b) and 314(d) of the TIA, as applicable, including, without limitation, providing an Opinion of Counsel with respect to Section (b) and the certificates or opinions of experts with respect to Section 314(d), in connection with the deposit and release of the Trust Funds. -47- ARTICLE V SUCCESSORS SECTION 5.01. Merger, Consolidation and Sale of Assets. (a) The Company shall not consolidate or merge with or into (whether or not the Company is the Surviving Person), or, directly or indirectly through one or more Subsidiaries, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person or Persons unless (i) the Surviving Person is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Surviving Person (if other than the Company) assumes all the obligations of the Company under this Indenture and the Notes pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) at the time of and immediately after such Disposition, no Default or Event of Default shall have occurred and be continuing; and (iv) the Surviving Person will (A) have Consolidated Net Worth (immediately after giving effect to the Disposition on a pro forma basis) equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction, and (B) at the time of such Disposition and after giving pro forma effect thereto, the Surviving Person would be permitted to issue at least $1.00 of additional Indebtedness pursuant to Section 4.07(a). (b) Prior to the consummation of any proposed Disposition, merger or consolidation of the Company or a Subsidiary Guarantor or the sale of all or substantially all of the assets of the Company or a Subsidiary Guarantor, the Company shall deliver to the Trustee an Officers Certificate stating that such transaction complies with Articles V or XI of this Indenture, as the case may be, and an Opinion of Counsel stating that such transaction and the supplemental indenture, if required, comply with Articles V or XI of this Indenture, as the case may be. SECTION 5.02. Surviving Person Substituted. In the event of any transaction (other than a lease) described in and complying with the conditions listed in Section 5.01(a) or Section 11.01(e) in which the Company or the Subsidiary Guarantor, as the case may be, is not the Surviving Person and the Surviving Person is to assume all the obligations of the Company or the Subsidiary Guarantor under the Notes, the Subsidiary Guarantee, as applicable, and this Indenture pursuant to a supplemental indenture, such Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of, the Company or the Subsidiary Guarantor, and the Company or the Subsidiary Guarantor would be discharged from its obligations under this Indenture, the Notes -48- or its Subsidiary Guarantee, as the case may be, PROVIDED that solely for the purpose of calculating amounts described in clause (iii) of Section 4.05(a), any such Surviving Person shall only be deemed to have succeeded to and be substituted for the Company with respect to the period subsequent to the effective time of such transaction (and the Company (before giving effect to such transaction) shall be deemed to be the "Company" for such purposes for all prior periods). ARTICLE VI DEFAULTS AND REMEDIES SECTION 5.01. Events of Default. (a) Each of the following constitutes an "EVENT OF DEFAULT": (i) a default for 30 days in the payment when due of interest on any Note (whether or not prohibited by the subordination provisions of this Indenture); (ii) a default in the payment when due of principal on any Note (whether or not prohibited by the subordination provisions of this Indenture), whether upon maturity, acceleration, optional or mandatory redemption, required repurchase or otherwise; (iii) failure to perform or comply with any covenant, agreement or warranty in this Indenture (other than the defaults specified in clauses (i) and (ii) above) which failure continues for 30 days after written notice thereof has been given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the then outstanding Notes; (iv) the occurrence of one or more defaults under any agreements, indentures or instruments under which the Company or any Subsidiary of the Company then has outstanding Indebtedness in excess of $5,000,000 in the aggregate and, if not already matured at its final maturity in accordance with its terms, such Indebtedness shall have been accelerated; (v) except as permitted by this Indenture, any Subsidiary Guarantee shall for any reason cease to be, or be asserted in writing by any Subsidiary Guarantor or the Company not to be, in full force and effect, and enforceable in accordance with its terms; (vi) one or more judgments, orders or decrees for the payment of money in excess of $5,000,000, either individually or in the aggregate shall be entered against the -49- Company or any Subsidiary of the Company or any of their respective properties and which judgments, orders or decrees are not paid, discharged, bonded or stayed for a period of 60 days after their entry; (vii) any holder or holders of at least $5,000,000 in aggregate principal amount of Indebtedness of the Company or any Subsidiary of the Company, after a default under such Indebtedness, (a) shall notify the Company or the Trustee of the intended sale or disposition of any assets of the Company or any Subsidiary of the Company with an aggregate fair market value (as determined in good faith by the Board of Directors, which determination shall be evidenced by a board resolution), individually or in the aggregate, of at least $5,000,000 that have been pledged to or for the benefit of such holder or holders to secure such Indebtedness or (b) shall commence proceedings, or take any action (including by way of set off), to retain in satisfaction of such Indebtedness or to collect on, seize, dispose of or apply in satisfaction of such Indebtedness, such assets of the Company or any Subsidiary of the Company (including funds on deposit or held pursuant to lock-box and other similar arrangements); (viii) there shall have been the entry by a court of competent jurisdiction of (a) a decree or order for relief in respect of the Company or any Subsidiary of the Company in an involuntary case or proceeding under any applicable Bankruptcy Law or (b) a decree or order adjudging the Company or any Subsidiary of the Company bankrupt or insolvent, or seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any Subsidiary of the Company under any applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or any Subsidiary of the Company or of any substantial part of their respective properties, or ordering the winding up or liquidation of their affairs, and any such decree or order for relief shall continue to be in effect, or any such other decree or order shall be unstayed and in effect, for a period of 60 days; or (ix) (a) the Company or any Subsidiary of the Company commences a voluntary case or proceeding under any applicable Bankruptcy Law or any other case or proceeding to be adjudicated bankrupt or insolvent, (b) the Company or any Subsidiary of the Company consents to the entry of a decree or order for relief in respect of the Company or such Subsidiary of the Company in an involuntary case or proceeding under any applicable Bankruptcy Law or to the commencement of any bankruptcy or insolvency case or proceeding against it, (c) the Company or any Subsidiary of the Company files a petition or answer or consent seeking reorganization or relief under any applicable federal or state law, (d) the Company or any Subsidiary of the Company (x) consents to the filing of such petition or the appointment of or taking possession by, a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of -50- the Company or such Subsidiary of the Company or of any substantial part of their respective property, (y) makes an assignment for the benefit of creditors or (z) admits in writing its inability to pay its debts generally as they become due or (e) the Company or any Subsidiary of the Company takes any corporate action in furtherance of any such actions in this paragraph (ix). (b) Any notice of default delivered to the Company by the Trustee or by Holders of Notes with a copy to the Trustee must specify the Default, demand that it be remedied and state that the notice is a "NOTICE OF DEFAULT." SECTION 6.02. Acceleration. (a) If any Event of Default (other than an Event of Default specified under Section 6.01(a)(viii) or (ix) with respect to the Company or any Subsidiary Guarantor) occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the then outstanding Notes may, and the Trustee at the request of such Holders shall, declare all the Notes to be due and payable immediately. In the case of an Event of Default arising from the events specified in Sections 6.01(a)(viii) or (ix) with respect to the Company or any Subsidiary Guarantor, the principal of, premium, if any, and any accrued and unpaid interest on all outstanding Notes shall IPSO FACTO become immediately due and payable without further action or notice. (b) The Holders of a majority in aggregate principal amount of the then outstanding Notes by notice to the Trustee may rescind any declaration of acceleration of such Notes and its consequences if the rescission would not conflict with any judgment or decree and if all existing Defaults and Events of Default (other than the nonpayment of principal or premium, if any, or interest on, the Notes which shall have become due by such declaration) shall have been cured or waived. SECTION 6.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of, or premium, if any, or interest on, the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. 51 SECTION 6.04. Waiver of Past Defaults. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under this Indenture except (i) a continuing Default or Event of Default in the payment of the principal of, or premium, if any, or interest on, the Notes (which may only be waived with the consent of each Holder of Notes affected), or (ii) in respect of a covenant or provision which under this Indenture cannot be modified or amended without the consent of each Holder of Notes affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefore shall deemed to have been cured for every purpose of this Indenture; PROVIDED that no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 6.05. Control by Majority of Holders. Subject to Section 7.01(e), the Holders of a majority in aggregate principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it by this Indenture. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Holders, or would involve the Trustee in personal liability. SECTION 6.06. Limitation of Suits by Holders. A Holder may pursue a remedy with respect to this Indenture or the Notes only if: (1) the Holder gives to the Trustee notice of a continuing Event of Default; (2) the Holders of at least 25% in principal amount of the then outstanding Notes make a request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (5) during such 60-day period the Holders of a majority in aggregate principal amount of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. Holders of the Notes may not enforce this Indenture, except as provided herein. 52 SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of, and premium, if any, and interest on, a Note, on or after a respective due date expressed in the Note, or to bring suit for the enforcement of any such payment on or after such respective date, shall not be impaired or affected without the consent of the Holder. SECTION 6.08. Collection Suit by Trustee. If an Event of Default specified in Section 6.01(a)(i) or (a)(ii) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for (i) the principal, premium, if any, and interest remaining unpaid on the Notes, (ii) interest on overdue principal and premium, if any, and, to the extent lawful, interest, and (iii) such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel ("TRUSTEE EXPENSES"). SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable to have the claims of the Trustee (including any claim for Trustee Expenses and for amounts due under Section 7.07) and the Holders allowed in any Insolvency or Liquidation Proceeding relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute to Holders any money or other property payable or deliverable on any such claims and each Holder authorizes any Custodian in any such Insolvency or Liquidation Proceeding to make such payments to the Trustee, and if the Trustee shall consent to the making of such payments directly to the Holders any such Custodian is hereby authorized to make such payments directly to the Holders, and to pay to the Trustee any amount due to it hereunder for Trustee Expenses, and any other amounts due the Trustee under Section 7.07; PROVIDED, HOWEVER, that the Trustee shall not be authorized to (i) consent to, accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or (ii) vote in respect of the claim of any Holder in any such Insolvency or Liquidation Proceeding. To the extent that the payment of any such Trustee Expenses, and any other amounts due the Trustee under Section 7.07 out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties which the 53 Holders may be entitled to receive in such proceeding, whether in liquidation or under any plan of reorganization or arrangement or otherwise. SECTION 6.10. Priorities. If the Trustee collects any money pursuant to this Article VI, it shall pay out the money in the following order: First: to the Trustee for Trustee Expenses for amounts due under Section 7.07; Second: to the holders of Senior Debt to the extent required by Articles X and XI; Third: to Holders for amounts due and unpaid on the Notes for principal, premium, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium, if any, and interest, respectively; and Fourth: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders. SECTION 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. 54 ARTICLE VII TRUSTEE SECTION 7.01. Duties of Trustee. (a) If an Event of Default occurs (and has not been cured) the Trustee shall (i) exercise the rights and powers vested in it by this Indenture, and (ii) use the same degree of care and skill in exercising such rights and powers as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee's duties shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether they conform to this Indenture's requirements. (c) The Trustee shall not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except, that: (i) this Section 7.01(c) does not limit the effect of Section 7.01(b); (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction it receives pursuant to Section 6.05. (d) Every provision of this Indenture that in any way relates to the Trustee shall be subject to paragraphs (a), (b), and (c) of this Section. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders unless such Holders shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. 55 (f) The Trustee shall not be liable for interest on any money received by it except as it may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on any document it believes to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in any such document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel; PROVIDED that such action or omission does not constitute gross negligence. The Trustee may consult with counsel and advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it under this Indenture in good faith and in reliance on such advice or opinion. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits in good faith that it believes to be authorized or within its rights or powers. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. SECTION 7.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or any of its Affiliates with the same rights it would have if it were not Trustee. However, if the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue as Trustee, or resign. Each Agent shall have the same rights as the Trustee under this Section 7.03. 56 SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture, the Notes or the Prospectus; it shall not be accountable for the Company's use of the proceeds from the Notes or for any money paid to the Company or upon the Company's direction under any provisions of this Indenture; it shall not be responsible for the use or application of any money that any Paying Agent other than the Trustee receives; and, it shall not be responsible for any statement or recital in this Indenture or any statement in the Notes or any other document executed in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. SECTION 7.05. Notice to Holders of Defaults and Events of Default. If a Default or Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to Holders a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment on any Note (including any failure to redeem Notes called for redemption or any failure to purchase Notes tendered pursuant to an Offer that are required to be purchased by the terms of this Indenture), the Trustee may withhold the notice if and so long as the board of directors, the executive committee or a committee of its Trust Officers determines in good faith that withholding such notice is in the Holders' interests. SECTION 7.06. Reports by Trustee to Holders. On or before June 15 in each year following the date hereof, so long as any Notes are outstanding hereunder, the Trustee shall mail to Holders a brief report dated as of such reporting date that complies with Section 313(a) of the TIA (but if no event described in Section 313(a) of the TIA has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with Section 313(b)(2) of the TIA. The Trustee shall also transmit by mail all reports as required by Section 313(c) of the TIA. Within 90 days after any Special Redemption, or after the consummation of the Phipps Acquisition, if applicable, the Trustee shall mail to Holders a brief report with respect to the release of the Trust Funds that complies with Section 313(b) of the TIA. 57 A copy of each report at the time of its mailing to Holders shall be filed with the Commission and each stock exchange, if any, on which the Notes are listed. The Company shall notify the Trustee when the Notes are listed on any stock exchange. SECTION 7.07. Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its services hereunder, as mutually agreed upon by the Company and the Trustee. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable disbursements, advances and expenses it incurs or makes in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee and each of its directors, officers, employees, agents, representatives and counsel against any and all losses, liabilities or expenses the Trustee incurs arising out of or in connection with the acceptance or administration of its duties under this Indenture, except as set forth below. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity; PROVIDED, HOWEVER, that failure by the Trustee to provide the Company with any such notice shall not relieve the Company of any of its obligations under this Section 7.07. The Trustee shall cooperate in the defense of any such claim. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The Company's obligations under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. The Company need not reimburse any expense or indemnify against any loss or liability the Trustee incurs as a result of its negligence or willful misconduct. To secure payment of the Company's obligations under this Section 7.07, the Trustee shall have a Lien prior to the Notes on all money or property the Trustee holds or collects, except the Trust Funds and any other funds from time to time held in trust or as security to pay principal of, and premium, if any, and interest on, particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(a)(viii) or (ix) occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute administrative expenses under any Bankruptcy Law without any need to demonstrate substantial contribution under Bankruptcy Law. 58 SECTION 7.08. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in aggregate principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (ii) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (iii) a Custodian or public officer takes charge of the Trustee or its property; or (iv) the Trustee becomes incapable of performing the services of the Trustee hereunder. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee; PROVIDED that the Holders of a majority in aggregate principal amount of the then outstanding Notes may appoint a successor Trustee to replace any successor Trustee appointed by Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its appointment to Holders. The retiring Trustee shall promptly transfer all property it holds as Trustee to the successor Trustee; provided that all sums owing to the retiring Trustee hereunder have been paid. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 shall continue for the retiring Trustee's benefit with respect to expenses and liabilities relating to the retiring Trustee's activities prior to being replaced. 59 SECTION 7.09. Successor Trustee by Merger, Etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 7.10. Eligibility; Disqualification. The Trustee shall at all times (i) be a corporation organized and doing business under the laws of the United States of America, of any state thereof, or the District of Columbia authorized under such laws to exercise corporate trust powers, (ii) be subject to supervision or examination by federal or state authority, (iii) have a combined capital and surplus of at least $100 million as set forth in its most recently published annual report of condition, and (iv) satisfy the requirements of Sections 310(a)(1),(2) and (5) of the TIA. The Trustee is subject to Section 310(b) of the TIA. SECTION 7.11. Preferential Collection of Claims Against Company. The Trustee is subject to Section 311(a) of the TIA, excluding any creditor relationship listed in Section 311(b) of the TIA. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the TIA to the extent indicated therein. ARTICLE VIII DISCHARGE OF INDENTURE SECTION 8.01. Discharge of Liability on Notes; Defeasance. (a) Subject to Sections 8.01(c), 8.02 and 8.06, this Indenture shall cease to be of any further effect as to all outstanding Notes and Subsidiary Guarantees after (i) either (a) all Notes heretofore authenticated and delivered (other than Notes replaced pursuant to Section 2.07) have been delivered to the Trustee for cancellation or (b) all Notes not previously delivered for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee an amount in United States dollars sufficient to pay and discharge the entire indebtedness on such Notes not previously delivered to the Trustee for cancellation, for the principal of, premium, if any, and interest to the date of repayment, (ii) the Company has paid or caused to be paid all other sums payable under this 60 Indenture and (iii) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that all conditions precedent under this Indenture relating to the satisfaction and discharge of this Indenture have been complied with and that such deposit does not violate the provisions of Article X or the subordination provisions of Article XI. (b) Subject to Sections 8.01(c), 8.02, and 8.06, the Company at any time may terminate (i) all its obligations under this Indenture and the Notes ("LEGAL DEFEASANCE OPTION"), or (ii) its obligations under Sections 4.02, 4.03, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18 and 4.19, Article V, Article X and the subordination provisions of Article XI ("COVENANT DEFEASANCE OPTION"). The Company may exercise its Legal Defeasance Option notwithstanding its prior exercise of its Covenant Defeasance Option. If the Company exercises its Legal Defeasance Option, payment of the Notes may not be accelerated because of an Event of Default. If the Company exercises its Covenant Defeasance Option, payment of the Notes may not be accelerated because of an Event of Default specified in Section 6.01(a)(iii). Upon satisfaction of the conditions set forth in Section 8.02 and upon the Company's request (and at the Company's expense), the Trustee shall acknowledge in writing the discharge of those obligations that the Company has terminated. (c) Notwithstanding Sections 8.01(a) and (b), the Company's obligations under Sections 2.03, 2.04, 2.05, 2.06, 2.07, 4.01, 4.04, 4.12, 4.20, 7.07, 7.08, 8.04, 8.05, and 8.06, and the obligations of the Trustee and the Paying Agent under Section 8.04 shall survive until the Notes have been paid in full. Thereafter, the Company's obligations under Sections 7.07 and 8.05 and the obligations of the Company, Trustee and Paying Agent under Section 8.04 shall survive. SECTION 8.02. Conditions to Defeasance. In order to exercise either its Legal Defeasance Option and give effect thereto ("LEGAL DEFEASANCE") or its Covenant Defeasance Option and give effect thereto ("COVENANT DEFEASANCE"), (i) the Company shall irrevocably deposit with the Trustee, as trust funds in trust, for the benefit of the Holders, cash in United States dollars, U.S. Government Obligations, or a combination thereof, maturing as to principal and interest in such amounts as will be sufficient, without consideration of any reinvestment of such interest, in the opinion of a nationally recognized firm of independent public accountants or a nationally recognized investment banking firm, to pay and discharge the principal of, premium, if any, and interest on the outstanding Notes on the stated maturity of such principal or installment of principal or interest; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee 61 an Opinion of Counsel confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of this Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an Opinion of Counsel confirming that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as clauses (viii) and (ix) under Section 6.01 are concerned, at any time during the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a Default under, this Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound; (vi) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that (A) the trust funds will not be subject to any rights of holders of Senior Debt or Guarantor Senior Debt of any Subsidiary Guarantor, including, without limitation, those arising under this Indenture, after the 91st day following the deposit and (B) after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of the Notes over the other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; (viii) no event or condition shall exist that would prevent the Company from making payments of the principal of, premium, if any, and interest on the Notes on the date of such deposit or at any time ending on the 91st day after the date of such deposit; (ix) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the Legal Defeasance or the Covenant Defeasance, as the case may be, have been complied with; and (x) such deposit shall not violate the provisions described in Article X or Article XI. SECTION 8.03. Application of Trust Money. The Trustee or Paying Agent shall hold in trust money and/or U.S. Government Obligations deposited with it pursuant to this Article VIII. The Trustee or Paying Agent shall apply the deposited money and the money from U.S. Government Obligations in accordance with this Indenture to the payment of principal of, and premium, if any, and interest on, the 62 Notes. Money deposited with the Trustee or a Paying Agent pursuant to this Article VIII shall not be subject to the provisions of Article X and Article XI. SECTION 8.04. Repayment to Company. After the Notes have been paid in full, the Trustee and the Paying Agent shall promptly turn over to the Company any excess money or securities held by them upon the written direction of the Company. Any money deposited with the Trustee or a Paying Agent pursuant to this Article VIII for the payment of the principal of, premium, if any, or interest on, any Note that remains unclaimed for two years after becoming due and payable shall be paid to the Company on its request; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such money shall cease; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make any such repayment, shall at the expense of the Company cause to be published once, in THE NEW YORK TIMES and THE WALL STREET JOURNAL (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 8.05. Indemnity for U.S. Government Obligations. The Company shall pay and shall indemnify the Trustee and any Paying Agent against any tax, fee or other charge imposed on or assessed against cash and/or U.S. Government Obligations deposited with it pursuant to this Article VIII or the principal and interest received on such cash and/or U.S. Government Obligations. SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article VIII by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to this Article VIII until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article VIII; PROVIDED, HOWEVER, that if the Company has made any payment of principal of, or premium, if 63 any, or interest on, any Notes because of the reinstatement of its obligations under this Indenture and the Notes, the Company shall be subrogated to the Holders' rights to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE IX AMENDMENTS SECTION 9.01. Amendments and Supplements Permitted Without Consent of Holders. (a) Notwithstanding Section 9.02, the Company, the Subsidiary Guarantors and the Trustee may amend or supplement this Indenture or the Notes without the consent of any Holder to: (i) cure any ambiguity, defect or inconsistency; (ii) provide for uncertificated Notes in addition to or in place of certificated Notes; (iii) provide for the assumption of the Company's obligations to the Holders in the event of any Disposition involving the Company that is permitted under Article V in which the Company is not the Surviving Person; (iv) make any change that would provide any additional rights or benefits to Holders or does not adversely affect the interests of any Holder; (v) comply with the requirements of the Commission in order to effect or maintain the qualification of this Indenture under the TIA; or (vi) add additional Subsidiary Guarantors pursuant to Section 4.17. (b) Upon the Company's request, after receipt by the Trustee of a resolution of the Board of Directors authorizing the execution of any amended or supplemental indenture, the Trustee shall join with the Company and the Subsidiary Guarantors in the execution of any amended or supplemental indenture authorized or permitted by the terms of this Indenture and to make any future appropriate agreements and stipulations that may be contained in any such amended or supplemental indenture, but the Trustee shall not be obligated to enter into an amended or supplemental indenture that affects its own rights, duties, or immunities under this Indenture or otherwise. SECTION 9.02. Amendments and Supplements Requiring Consent of Holders. (a) Except as otherwise provided in Sections 6.04, 9.01(a) and 9.02(c), this Indenture and the Notes may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for the Notes), and any existing Default or Event of Default or compliance with any provision of this Indenture or the Notes may be waived with the consent of Holders of at least a majority in principal 64 amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for the Notes). (b) Upon the Company's request and after receipt by the Trustee of a resolution of the Board of Directors authorizing the execution of any supplemental indenture, evidence of the Holders' consent, and the documents described in Section 9.06, the Trustee shall join with the Company and the Subsidiary Guarantors in the execution of such amended or supplemental indenture unless such amended or supplemental indenture affects the Trustee's own rights, duties, or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but not be obligated to, enter into such amended or supplemental indenture. (c) No such modification or amendment may, without the consent of the Holder of each outstanding Note affected thereby: (i) change the stated maturity of the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency or the manner in which the principal of any Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the stated maturity thereof (or, in the case of redemption, on or after the redemption date); (ii) extend the time for payment of interest on the Notes; (iii) alter the redemption provisions in the Notes or this Indenture in a manner adverse to any Holder of the Notes; (iv) amend, change or modify the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control or modify any of the provisions or definitions with respect thereto; (v) reduce the percentage in principal amount of outstanding Notes, the consent of whose holders is required for any amended or supplemental indenture or the consent of whose holders is required for any waiver of compliance with any provision of this Indenture or any Default hereunder and the consequences provided for hereunder; (vi) modify any of the provisions of this Indenture relating to any amended or supplemental indentures requiring the consent of Holders or relating to the waiver of past defaults or relating to the waiver of any covenant, except to increase the percentage of outstanding Notes required for such actions or to provide that any other provision of this Indenture cannot be modified or waived without the consent of the Holder of each Note affected thereby; (vii) except as otherwise permitted under Section 5.01, consent to the assignment or transfer by the Company of any of its rights and obligations under this Indenture; (viii) modify any of the provisions of this Indenture relating to the subordination of the Notes or the Subsidiary Guarantees in a manner adverse to the Holders;(ix) release any Subsidiary Guarantor from any of its obligations under its Subsidiary Guarantee other than in accordance with the terms of this Indenture or (x) modify the provisions of Section 4.20 or any of the definitions related thereto in a manner adverse to any Holder. Furthermore, no such modification or amendment to any of the subordination provisions of this Indenture or the Notes may be made without the consent of a majority in interest of the holders of Senior Debt. 65 (d) It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to each Holder affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental indenture or waiver. SECTION 9.03. Compliance with TIA. Every amendment or supplement to this Indenture or the Notes shall be set forth in an amended supplemental indenture that complies with the TIA as then in effect. SECTION 9.04. Revocation and Effect of Consents. (a) Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same Indebtedness as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to his or her Note or portion of a Note if the Trustee receives the notice of revocation before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Notes have consented to the amendment or waiver. (b) The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders of Notes entitled to consent to any amendment or waiver. If a record date is fixed, then notwithstanding the provisions of the immediately preceding paragraph, those Persons who were Holders of Notes at such record date (or their duly designated proxies), and only those Persons, shall be entitled to consent to such amendment or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders of Notes after such record date. No consent shall be valid or effective for more than 90 days after such record date unless consents from Holders of the principal amount of Notes required hereunder for such amendment or waiver to be effective shall have also been given and not revoked within such 90-day period. (c) After an amendment or waiver becomes effective it shall bind every Holder, unless it is of the type described in Section 9.02(c), in which case the amendment or 66 waiver shall only bind each Holder that consented to it and every subsequent Holder of a Note that evidences the same debt as the consenting Holder's Note. SECTION 9.05. Notation on or Exchange of Notes. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06. Trustee Protected. The Trustee shall sign any amendment or supplemental indenture authorized pursuant to this Article IX if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing such amendment or supplemental indenture, the Trustee shall be entitled to receive and, subject to Section 7.01, shall be fully protected in relying upon, an Officers' Certificate and Opinion of Counsel pursuant to Sections 12.04 and 12.05 as conclusive evidence that such amendment or supplemental indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company in accordance with its terms. ARTICLE X SUBORDINATION SECTION 10.01. Agreement to Subordinate. The Company agrees, and each Holder by accepting a Note agrees, that all Obligations owed under and in respect of the Notes are subordinated in right of payment, to the extent and in the manner provided in this Article X, to the prior payment in full in cash or in any other form acceptable to holders of Senior Debt of all Senior Debt of the Company, and that the subordination of the Notes pursuant to this Article X is for the benefit of all holders of all Senior Debt of the Company, whether outstanding on the Issue Date or issued thereafter; PROVIDED, HOWEVER, that the subordination provisions of this Article shall not apply to payments to the Trustee pursuant to Section 7.07 hereof. 67 SECTION 10.02. Liquidation; Dissolution; Bankruptcy. (a) Upon any payment or distribution of cash, securities or other property of the Company to creditors upon any Insolvency or Liquidation Proceeding with respect to the Company or its property or securities, the holders of any Senior Debt of the Company will be entitled to receive payment in full, in cash or any other form acceptable to the holders of Senior Debt, of all Obligations due in respect of such Senior Debt before the Holders will be entitled to receive any payment or distribution with respect to the Notes (other than Reorganization Securities), and until all Obligations with respect to such Senior Debt of the Company are paid in full, in cash or any other form acceptable to the holders of Senior Debt, any payment or distribution to which the Holders would be entitled shall be made to the holders of the Company's Senior Debt (PRO RATA to such holders on the basis of the amounts of Senior Debt held by them). Upon any Insolvency or Liquidation Proceeding with respect to the Company, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders or the Trustee would be entitled except for the provisions of this Indenture shall be paid by the Company, any Custodian or other Person making such payment or distribution, or by the Holders or by the Trustee if received by them, directly to the holders of the Company's Senior Debt (PRO RATA to such holders on the basis of the amounts of Senior Debt held by them) or their Representatives, as their interests may appear, for application to the payment of all outstanding Senior Debt of the Company until all such Senior Debt has been paid in full in cash or any other form acceptable to the holders of Senior Debt, after giving effect to all other payments or distributions to, or provisions made for, holders of the Company's Senior Debt. (b) Notwithstanding anything to the contrary in this Indenture, any Disposition by or involving the Company, or the liquidation or dissolution of the Company following any Disposition, shall not be deemed an Insolvency or Liquidation Proceeding for the purposes of this Section 10.02 if such Disposition is permitted under Article V. SECTION 10.03. Default on Designated Senior Debt. (a) Upon the occurrence of any default (whether or not any requirement for the giving of notice, the lapse of time or both, or any other condition to such default becoming an event of default, has occurred) in the payment of principal of (or premium if any) or interest on or any other amount payable in connection with any Designated Senior Debt (a "PAYMENT DEFAULT") and after the receipt by the Trustee from a Representative of the holders of such Designated Senior Debt of written notice (a "PAYMENT BLOCKAGE NOTICE") thereof, no payment or distribution of any assets or securities of the Company of any kind or character (including, without limitation, cash, property and any payment or distribution which may be payable or deliverable by reason of the payment of any other Indebtedness of the Company being 68 subordinated to the payment of the Notes) (other than Reorganization Securities) shall be made by the Company on account of the principal of, premium, if any, or interest on, or any other amount payable in connection with, the Notes or on account of the purchase, redemption, defeasance (other than any payments made by the Trustee pursuant to Article VIII) or other acquisition of or in respect of the Notes unless and until such Payment Default has been cured, waived or has ceased to exist or such Designated Senior Debt shall have been discharged or paid in full in cash or in any other manner acceptable to the holders of Designated Senior Debt. (b) Upon the occurrence and continuance of any other default with respect to any Designated Senior Debt (whether or not any requirement for the giving of notice, the lapse of time or both, or any other condition to such default becoming an event of default, has occurred) (a "NON-PAYMENT DEFAULT") and after the receipt by the Trustee from a Representative of the holders of such Designated Senior Debt of a Payment Blockage Notice with respect to such Non-Payment Default, no payment or distribution of any assets or securities of the Company of any kind or character (including, without limitation, cash, property and any payment or distribution which may be payable or deliverable by reason of the payment of any other Indebtedness of the Company being subordinated to the payment of the Notes) (other than Reorganization Securities) may be made by the Company on account of the principal of, premium, if any, or interest on, or any other amount payable in connection with, the Notes or on account of the purchase, redemption, defeasance (other than any payments made by the Trustee pursuant to Article VIII) or other acquisition of or in respect of the Notes for the period specified below (the "PAYMENT BLOCKAGE PERIOD"). (c) The Payment Blockage Period shall commence upon the receipt by the Trustee of a Payment Blockage Notice with respect to the Non-Payment Default from a Representative of the holders of any Designated Senior Debt and shall end on the earliest of (x) the date on which such Non-Payment Default is cured or waived or shall have ceased to exist or the Designated Senior Debt related thereto shall have been discharged or paid in full in cash or any other manner acceptable to holders of such Designated Senior Debt, (y) 179 days after the date on which the Payment Blockage Notice with respect to such default was received by the Trustee, unless the maturity of the Designated Senior Debt under the Senior Credit Facility has been accelerated and (z) the date such Payment Blockage Period is terminated by written notice to the Trustee from a Representative of the holders of the Designated Senior Debt that gave such Payment Blockage Notice, after which, in the case of clause (x), (y) or (z), the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. During any consecutive 365-day period, the aggregate number of days for which a Payment Blockage Period may exist shall not exceed 179 days, only one Payment Blockage Period may be commenced and there shall be a period of at least 186 consecutive days during which no Payment Blockage Period shall be in effect. No event or circumstance that creates a default under any Designated Senior Debt that (i) gives rise to the commencement of a Payment Blockage Period or (ii) exists at the commencement of or during any Payment 68 Blockage Period shall be made the basis for the com-mencement of any subsequent Payment Blockage Period, whether or not within a period of 365 consecutive days, unless such default has been cured or waived for a period of not less than 90 consecutive days following the commencement of the initial Payment Blockage Period. SECTION 10.04. When Distributions Must Be Paid Over. If the Company shall make any payment to the Trustee on account of the principal of, or premium, if any, or interest on, the Notes, or any other Obligation in respect to the Notes, or the Holders shall receive from any source any payment on account of the principal of, or premium, if any, or interest on, the Notes or any Obligation in respect of the Notes, at a time when such payment is prohibited by this Article X, the Trustee or such Holders shall hold such payment in trust for the benefit of, and shall pay over and deliver to, the holders of Senior Debt (PRO RATA as to each of such holders on the basis of the respective amounts of such Senior Debt held by them) or their Representative or the trustee under the indenture or other agreement (if any) pursuant to which such Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all outstanding Senior Debt until all such Senior Debt has been paid in full in cash or any other form acceptable to the holders of Senior Debt, after giving effect to all other payments or distributions to, or provisions made for, the holders of Senior Debt. With respect to the holders of Senior Debt, the Trustee undertakes to perform only such obligations on its part as are specifically set forth in this Article X, and no implied covenants or obligations with respect to any holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt, and shall not be liable to any holders of such Senior Debt, if the Trustee shall pay over or distribute to, or on behalf of, Holders or the Company or any other Person money or assets to which any holders of such Senior Debt are entitled pursuant to this Article X, except if such payment is made at a time (a) after the Trustee has received a Payment Blockage Notice or (b) when a Trust Officer has knowledge that the terms of this Article X prohibit such payment. SECTION 10.05. Notice. Neither the Trustee nor the Paying Agent shall at any time be charged with the knowledge of the existence of any facts that would prohibit the making of any payment to or by the Trustee or Paying Agent under this Article X, unless and until the Trustee or Paying Agent shall have received written notice thereof from the Company or one or more holders of Senior Debt or a Representative of any holders of such Senior Debt; and, prior to the receipt of any 70 such written notice, the Trustee or Paying Agent shall be entitled to assume conclusively that no such facts exist. The Trustee shall be entitled to rely on the delivery to it of written notice by a Person representing itself to be a holder of Senior Debt (or a Representative thereof) to establish that such notice has been given. The Company shall promptly notify the Trustee and the Paying Agent in writing of any facts it knows that would cause a payment of principal of, or premium, if any, or interest on, the Notes or any other Obligation in respect of the Notes to violate this Article X, but failure to give such notice shall not affect the subordination of the Notes to Senior Debt provided in this Article X or the rights of holders of such Senior Debt under this Article X. SECTION 10.06. Subrogation. After all Senior Debt has been paid in full in cash or any other form acceptable to the holders of Senior Debt, and until the Notes are paid in full, Holders shall be subrogated (equally and ratably with all other Indebtedness PARI PASSU with the Notes) to the rights of holders of such Senior Debt to receive distributions applicable to such Senior Debt to the extent that distributions otherwise payable to the Holders have been applied to the payment of such Senior Debt. A distribution made under this Article X to holders of Senior Debt that otherwise would have been made to the Holders is not, as between the Company and the Holders, a payment by the Company on its Senior Debt. SECTION 10.07. Relative Rights. This Article X defines the relative rights of Holders and holders of Senior Debt. Nothing in this Article X or elsewhere in this Indenture or in any Note is intended to or shall: (1) impair, as between the Company and the Holders, the Obligations of the Company which are absolute and unconditional, to pay to the Holders the principal of, and premium, if any, and interest on, the Notes as and when the same shall become due and payable in accordance with their terms; (2) affect the relative rights of the Holders and creditors of the Company other than holders of Senior Debt; or (3) prevent the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders of Senior Debt to receive distributions and payments otherwise payable to the Holders. The failure to make a payment on account of principal of, or interest on, the Notes by reason of any provision of this Article X shall not be construed as preventing the occurrence of an Event of Default under Section 6.01. 71 SECTION 10.08. The Company and Holders May Not Impair Subordination. (a) No right of any holder of Senior Debt to enforce the subordination as provided in this Article X shall at any time or in any way be prejudiced or impaired by any act or failure to act by the Company or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture or the Notes or any other agreement regardless of any knowledge thereof with which any such holder may have or be otherwise charged. (b) Without in any way limiting Section 10.08(a), the holders of any Senior Debt may, at any time and from time to time, without the consent of or notice to any Holders, without incurring any liabilities to any Holder and without impairing or releasing the subordination and other benefits provided in this Indenture or the Holders' obligations hereunder to the holders of such Senior Debt, even if any Holder's right of reimbursement or subrogation or other right or remedy is affected, impaired or extinguished thereby, do any one or more of the following: (i) amend, renew, exchange, extend, modify, increase or supplement in any manner such Senior Debt or any instrument evidencing or guaranteeing or securing such Senior Debt or any agreement under which such Senior Debt is outstanding (including, but not limited to, changing the manner, place or terms of payment or changing or extending the time of payment of, or renewing, exchanging, amending, increasing or altering, (1) the terms of such Senior Debt, (2) any security for, or any guarantee of, such Senior Debt, (3) any liability of any obligor on such Senior Debt (including any guarantor) or any liability issued in respect of such Senior Debt); (ii) sell, exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and in any order any property pledged, mortgaged or otherwise securing such Senior Debt or any liability of any obligor thereon, to such holder, or any liability issued in respect thereof; (iii) settle or compromise any such Senior Debt or any other liability of any obligor of such Senior Debt to such holder or any security therefor or any liability issued in respect thereof and apply any sums by whomsoever paid and however realized to any liability (including, without limitation, payment of any Senior Debt) in any manner or order; and (iv) fail to take or to record or otherwise perfect, for any reason or for no reason, any lien or security interest securing such Senior Debt by whomsoever granted, exercise or delay in or refrain from exercising any right or remedy against any obligor or any guarantor or any other Person, elect any remedy and otherwise deal freely with any obligor and any security for such Senior Debt or any liability of any obligor to the holders of such Senior Debt or any liability issued in respect of such Senior Debt. SECTION 10.09. Distribution or Notice to Representative. Whenever a distribution is to be made, or a notice given, to holders of Senior Debt pursuant to this Indenture, the distribution may be made and the notice given to their 72 Representative, if any. If any payment or distribution of the Company's assets is required to be made to holders of Senior Debt pursuant to this Article X, the Trustee and the Holders shall be entitled to rely upon any order or decree of any court of competent jurisdiction, or upon any certificate of a Representative of such Senior Debt or a Custodian, in ascertaining the holders of such Senior Debt entitled to participate in any such payment or distribution, the amount to be paid or distributed to holders of such Senior Debt and all other facts pertinent to such payment or distribution or to this Article X. SECTION 10.10. Rights of Trustee and Paying Agent. The Trustee or Paying Agent may continue to make payments on the Notes unless prior to any payment date it has received written notice of facts that would cause a payment of principal of, or premium, if any, or interest on, the Notes to violate this Article X. Only the Company, a Subsidiary Guarantor, a Representative of Senior Debt, or a holder of Senior Debt that has no Representative may give such notice. To the extent permitted by the TIA, the Trustee in its individual or any other capacity may hold Indebtedness of the Company (including Senior Debt) with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 10.11. Authorization to Effect Subordination. Each Holder of a Note by its acceptance thereof authorizes and directs the Trustee on its behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article X, and appoints the Trustee as such Holder's attorney-in-fact for any and all such purposes (including, without limitation, the timely filing of a claim for the unpaid balance of the Note that such Holder holds in the form required in any Insolvency or Liquidation Proceeding and causing such claim to be approved). If a proper claim or proof of debt in the form required in such proceeding is not filed by or on behalf of all Holders prior to 30 days before the expiration of the time to file such claims or proofs, then the holders or a Representative of any Senior Debt of the Company are hereby authorized, and shall have the right (without any duty), to file an appropriate claim for and on behalf of the Holders. 73 SECTION 10.12. Payment. A payment on account of or with respect to any Note shall include, without limitation, any direct or indirect payment of principal, premium or interest with respect to or in connection with any optional redemption or purchase provisions, any direct or indirect payment payable by reason of any other Indebtedness or Obligation being subordinated to the Notes, and any direct or indirect payment or recovery on any claim as a Holder relating to or arising out of this Indenture or any Note, or the issuance of any Note, or the transactions contemplated by this Indenture or referred to herein. ARTICLE XI SUBSIDIARY GUARANTEES SECTION 11.01. Subsidiary Guarantees. (a) Each Subsidiary Guarantor hereby, jointly and severally, unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee that: (i) the principal of, premium, if any, and interest on the Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Notes, if any, to the extent lawful, and all other Obligations of the Company to the Holders or the Trustee under this Indenture and the Notes will be promptly paid in full, all in accordance with the terms of this Indenture and the Notes; and (ii) in case of any extension of time of payment or renewal of any Notes or any of such other Obligations, that the Notes will be promptly paid in full when due in accordance with the terms of such extension or renewal, whether at stated maturity, by acceleration or otherwise. In the event that the Company fails to pay any amount guaranteed by the Subsidiary Guarantors for any reason whatsoever, the Subsidiary Guarantors will be jointly and severally obligated to pay such amount immediately. The Subsidiary Guarantors hereby further agree that their Obligations under this Indenture and the Notes shall be unconditional, regardless of the validity, regularity or enforceability of this Indenture or the Notes, the absence of any action to enforce this Indenture or the Notes, any waiver or consent by any Holder with respect to any provisions of this Indenture or the Notes, any modification or amendment of, or supplement to, this Indenture or the Notes, the recovery of any judgment against the Company or any action to enforce any such judgment, or any other circumstance that might otherwise constitute a legal or equitable discharge or defense of a Subsidiary Guarantor. Each Subsidiary Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that its Subsidiary Guarantee of the Company's Obligations under this Indenture and the Notes will not be 74 discharged except by complete performance by the Company or another Guarantor of such Obligations. If any Holder or the Trustee is required by any court or otherwise to return to the Company, any Subsidiary Guarantor or a Custodian of the Company or a Subsidiary Guarantor any amount paid by the Company or any Subsidiary Guarantor to the Trustee or such Holder, the Subsidiary Guarantee of the Company's Obligations under this Indenture and the Notes by each Subsidiary Guarantor shall, to the extent previously discharged as a result of any such payment, be immediately reinstated and be in full force and effect. Each Subsidiary Guarantor hereby acknowledges and agrees that, as between the Subsidiary Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the Company's Obligations under this Indenture and the Notes may be accelerated as provided in Article VI for purposes of the Subsidiary Guarantees notwithstanding any stay, injunction or other prohibition preventing such acceleration, and (y) in the event of any declaration of acceleration of the Company's Obligations under this Indenture and the Notes as provided in Article VI, such Obligations (whether or not due and payable) shall forthwith become due and payable by the Subsidiary Guarantors for the purpose of the Subsidiary Guarantees. (b) Each Subsidiary Guarantor hereby waives all rights of subrogation, contribution, reimbursement and indemnity, and all other rights, that such Subsidiary Guarantor would have against the Company at any time as a result of any payment in respect of its Subsidiary Guarantee (whether contractual, under section 509 of the Bankruptcy Code, or otherwise). (c) Each Subsidiary Guarantor that makes or is required to make any payment in respect of its Subsidiary Guarantee shall be entitled to seek contribution from the other Subsidiary Guarantors to the extent permitted by applicable law; PROVIDED that each Subsidiary Guarantor agrees that any such claim for contribution that such Subsidiary Guarantor may have against any other Subsidiary Guarantor shall be subrogated to the prior payment in full in cash of all Obligations owed to Holders under or in respect of the Notes. (d) Upon the sale or disposition (whether by merger, stock purchase, asset sale or otherwise) of a Subsidiary Guarantor (or substantially all of its assets) to an entity which is not a Subsidiary of the Company, which is otherwise in compliance with this Indenture, such Subsidiary Guarantor shall be deemed released from all its obligations under its Subsidiary Guarantee; PROVIDED that any such termination shall occur only to the extent that all obligations of such Subsidiary Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests which secure, other Indebtedness of the Company shall also terminate upon such release, sale or transfer. (e) Each Subsidiary Guarantor may consolidate with or merge into or sell its assets to the Company or another Subsidiary Guarantor without limitation. A Subsidiary Guarantor may consolidate with or merge into or sell its assets to a corporation other than the 75 Company or another Subsidiary Guarantor (whether or not affiliated with such Subsidiary Guarantor, but subject to the provisions described in Section 11.01(d)), provided that (a) if the Surviving Person is not the Subsidiary Guarantor, the Surviving Person agrees to assume such Subsidiary Guarantor's obligations under its Subsidiary Guarantee and all its obligations under this Indenture and (b) such transaction does not (i) violate any covenants set forth in this Indenture or (ii) result in a Default or Event of Default under this Indenture immediately thereafter that is continuing. SECTION 11.02. Trustee to Include Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company, the term "TRUSTEE" as used in this Article XI shall (unless the context shall otherwise require) be construed as extending to and including such Paying Agent within its meaning as fully and for all intents and purposes as if such Paying Agent were named in this Article XI in place of the Trustee. SECTION 11.03. Limits on Subsidiary Guarantees. Each Subsidiary Guarantor, and by its acceptance hereof each Holder, hereby confirms that it is the intention of all such parties that the guarantee by each Subsidiary Guarantor pursuant to its Subsidiary Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or state law. To effectuate the foregoing intention, the Holders and each Subsidiary Guarantor hereby irrevocably agree that the obligations of each Subsidiary Guarantor under the Subsidiary Guarantees shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of each Subsidiary Guarantor, result in the obligations of each Subsidiary Guarantor under the Subsidiary Guarantees not constituting such fraudulent transfer or conveyance. SECTION 11.04. Execution of Subsidiary Guarantee. To evidence its Subsidiary Guarantee set forth in this Article XI, each Subsidiary Guarantor hereby agrees to execute the Subsidiary Guarantee in substantially the form included in Exhibit A, which shall be endorsed on each Note ordered to be authenticated and delivered by the Trustee. Each Subsidiary Guarantor hereby agrees that its Subsidiary Guarantee set forth in this Article XI shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Subsidiary Guarantee. Each such Subsidiary Guarantee shall be signed on behalf of each Subsidiary Guarantor by an Officer (who shall have been duly authorized by all requisite corporate actions), and the delivery of such Note by the Trustee, 76 after the authentication thereof hereunder, shall constitute due delivery of such Subsidiary Guarantee on behalf of such Subsidiary Guarantor. Such signatures upon the Subsidiary Guarantee may be by manual or facsimile signature of such Officer and may be imprinted or otherwise reproduced on the Subsidiary Guarantee, and in case any such Officer who shall have signed the Subsidiary Guarantee shall cease to be such Officer before the Note on which such Subsidiary Guarantee is endorsed shall have been authenticated and delivered by the Trustee or disposed of by the Company, such Note nevertheless may be authenticated and delivered or disposed of as though the person who signed the Subsidiary Guarantee had not ceased to be such Officer of the Subsidiary Guarantor. SECTION 11.05. Stay, Extension and Usury Laws. Each Subsidiary Guarantor covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that would prohibit or forgive each Subsidiary Guarantor from performing its Subsidiary Guarantee as contemplated herein or which might affect the covenants or the performance of this Indenture and Notes; and each such Subsidiary Guarantor (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power granted to the Trustee pursuant to this Indenture, but will suffer and permit the execution of every such power as though no such law has been enacted. SECTION 11.06. Agreement To Subordinate Subsidiary Guarantees to Guarantor Senior Debt. Each Subsidiary Guarantor agrees, and each Holder by accepting a Subsidiary Guarantee agrees, that all Obligations owed under and in respect of such Subsidiary Guarantees are subordinated in right of payment, to the extent and in the manner provided in this Article XI, to the prior payment in full in cash or in any other form acceptable to holders of Guarantor Senior Debt, of all Guarantor Senior Debt of such Subsidiary Guarantor, and that the subordination of the Subsidiary Guarantees pursuant to this Article XI is for the benefit of all holders of all Guarantor Senior Debt of such Subsidiary Guarantor, whether outstanding on the Issue Date or issued thereafter. SECTION 11.07. Liquidation; Dissolution; Bankruptcy. (a) Upon any payment or distribution of cash, securities or other property of any Subsidiary Guarantor to creditors upon any Insolvency or Liquidation Proceeding with 77 respect to such Subsidiary Guarantor or its property or securities, the holders of any Guarantor Senior Debt of such Subsidiary Guarantor will be entitled to receive payment in full, in cash or any other form acceptable to the holders of Guarantor Senior Debt, of all Obligations due in respect of such Guarantor Senior Debt before the Holders will be entitled to receive any payment or distribution with respect to Subsidiary Guarantees (other than Reorganization Securities), and until all Obligations with respect to such Guarantor Senior Debt of such Subsidiary Guarantee are paid in full, in cash or any other form accept-able to the holders of such Guarantor Senior Debt, any payment or distribution to which the Holders would be entitled shall be made to the holders of such Subsidiary Guarantors' Guarantor Senior Debt (PRO RATA to such holders on the basis of the amounts of Guarantor Senior Debt held by them). Upon any Insolvency or Liquidation Proceeding with respect to any Subsidiary Guarantor, any payment or distribution of assets of such Subsidiary Guarantor of any kind or character, whether in cash, property or securities, to which the Holders or the Trustee would be entitled except for the provisions of this Indenture shall be paid by such Subsidiary Guarantor, any Custodian or other Person making such payment or distribution, or by the Holders or by the Trustee if received by them, directly to the holders of such Subsidiary Guarantors' Guarantor Senior Debt (PRO RATA to such holders on the basis of the amounts of Guarantor Senior Debt held by them) or their Representatives, as their interests may appear, for application to the payment of all outstanding Guarantor Senior Debt of such Subsidiary Guarantor until all such Guarantor Senior Debt has been paid in full in cash or any other form acceptable to the holders of Guarantor Senior Debt after giving effect to all other payments or distributions to, or provisions made for, holders of such Subsidiary Guarantors' Guarantor Senior Debt. (b) Notwithstanding anything to the contrary in this Indenture, any Disposition by or involving any Subsidiary Guarantor, or the liquidation or dissolution of such Subsidiary Guarantor following any Disposition, shall not be deemed an Insolvency or Liquidation Proceeding for the purposes of this Section 11.07 if such Disposition is permitted under Section 11.01(d) or Section 11.01(e). SECTION 11.08. Default on Certain Guarantor Senior Debt. (a) Upon the occurrence of any Payment Default by the Company with respect to any Designated Senior Debt guaranteed by a Subsidiary Guarantor (which guarantee constitutes Guarantor Senior Debt of such Subsidiary Guarantor) and after the receipt by the Trustee from a Representative of the holders of such Designated Senior Debt of a Payment Blockage Notice, no payment or distribution of any assets or securities of any Subsidiary Guarantor of any kind or character (including, without limitation, cash, property and any payment or distribution which may be payable or deliverable by reason of the payment of any other Indebtedness of the Subsidiary Guarantors being subordinated to the payment of the Notes) (other than Reorganization Securities) shall be made by such Subsidiary Guarantor on account of 78 the principal of, premium, if any, or interest on, or any other amount payable in connection with, the Notes or on account of the purchase, redemption, defeasance (other than any payments made by the Trustee pursuant to Article VIII) or other acquisition of or in respect of the Notes or any of the Obligations of such Subsidiary Guarantor under this Subsidiary Guarantee unless and until such Payment Default has been cured, waived or has ceased to exist or such Guarantor Senior Debt shall have been discharged or paid in full in cash or in any other manner acceptable to the holders of such Guarantor Senior Debt. (b) Upon the occurrence or continuance of any Non-Payment Default by the Company with respect to any Designated Senior Debt guaranteed by a Subsidiary Guarantor (which guarantee constitutes Guarantor Senior Debt of such Subsidiary Guarantor) and after the receipt by the Trustee from a Representative of the holders of such Designated Senior Debt of a Payment Blockage Notice, no payment or distribution of any assets or securities of any Subsidiary Guarantor of any kind or character (including, without limitation, cash, property and any payment or distribution which may be payable or deliverable by reason of the payment of any other Indebtedness of the Subsidiary Guarantors being subordinated to the payment of the Notes) (other than Reorganization Securities) may be made by such Subsidiary Guarantor on account of the principal of, premium, if any, or interest on, or any other amount payable in connection with, the Notes or on account of the purchase, redemption, defeasance (other than any payments made by the Trustee pursuant to Article VIII) or other acquisition of or in respect of the Notes or any of the Obligations of such Subsidiary Guarantor under this Subsidiary Guarantee for the period specified below (the "GUARANTOR PAYMENT BLOCKAGE PERIOD"). (c) The Guarantor Payment Blockage Period shall commence upon the receipt by the Trustee of a Payment Blockage Notice with respect to the Non-Payment Default from a Representative of the holders of any Desig-nated Senior Debt guaranteed by a Subsidiary Guarantor (which guarantee constitutes Guarantor Senior Debt of such Subsidiary Guarantor), and shall end on the earliest of (x) the date on which such Non-Payment Default is cured or waived or shall have ceased to exist or the Guarantor Senior Debt related thereto shall have been discharged or paid in full in cash or any other manner acceptable to holders of such Guarantor Senior Debt, (y) 179 days after the date on which the Payment Blockage Notice with respect to such default was received by the Trustee unless the maturity of the Designated Senior Debt guaranteed by the Subsidiary Guarantor (which guarantee constitutes Guarantor Senior Debt of such Subsidiary Guarantor) has been accelerated and (z) the date such Guarantor Payment Blockage Period is terminated by written notice to the Trustee from a Representative of the holders of the Guarantor Senior Debt that gave such Payment Blockage Notice, after which, in the case of clause (x), (y) or (z), the Subsidiary Guarantor shall resume making any and all required payments in respect of its obligations under this Subsidiary Guarantee, including any missed payments. During any consecutive 365-day period, the aggregate number of days for which a Guarantor Payment Blockage Period may exist shall not exceed 179 days, only one Guarantor Payment Blockage Period may be commenced and there shall be a period of 79 at least 186 consecutive days during which no Guarantor Payment Blockage Period shall be in effect. No Non-Payment Default with respect to Guarantor Senior Debt that (i) gives rise to the commencement of a Guarantor Payment Blockage Period or (ii) exists at the commencement of or during any Guarantor Payment Blockage Period shall be made the basis for the commencement of any subsequent Guarantor Payment Blockage Period, whether or not within a period of 365 consecutive days, unless such default has been cured or waived for a period of not less than 90 consecutive days following the commencement of the initial Guarantor Payment Blockage Period. SECTION 11.09. When Distributions Must Be Paid Over. If any Subsidiary Guarantor shall make any payment to the Trustee on account of the principal of, or premium, if any, or interest on, the Notes, or any other Obligations under this Subsidiary Guarantee, or the Holders shall receive from any source any payment on account of the principal of, or premium, if any, or interest on, the Notes or any Obligation in respect of the Notes, at a time when such payment is prohibited by this Article XI, the Trustee or such Holders shall hold such payment in trust for the benefit of, and shall pay over and deliver to, the holders of Guarantor Senior Debt (pro rata as to each of such holders on the basis of the respective amounts of such Guarantor Senior Debt held by them) or their Representative or the trustee under the indenture or other agreement (if any) pursuant to which such Guarantor Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all outstanding Guarantor Senior Debt until all such Guarantor Senior Debt has been paid in full in cash or any other form acceptable to the holders of Guarantor Senior Debt after giving effect to all other payments or distributions to, or provisions made for, the holders of Guarantor Senior Debt. With respect to the holders of Guarantor Senior Debt, the Trustee undertakes to perform only such obligations on its part as are specifically set forth in this Article XI, and no implied covenants or obligations with respect to any holders of Guarantor Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Guarantor Senior Debt, and shall not be liable to any holders of such Guarantor Senior Debt if the Trustee shall pay over or distribute to, or on behalf of, Holders or the Subsidiary Guarantors or any other Person money or assets to which any holders of such Guarantor Senior Debt are entitled pursuant to this Article XI, except if such payment is made at a time (a) after the Trustee has received a Payment Blockage Notice or (b) when a Trust Officer has knowledge that the terms of this Article XI prohibit such payment. 80 SECTION 11.10. Notice. Neither the Trustee nor the Paying Agent shall at any time be charged with the knowledge of the existence of any facts that would prohibit the making of any payment to or by the Trustee or Paying Agent under this Article XI, unless and until the Trustee or Paying Agent shall have received written notice thereof from the Company, any Subsidiary Guarantor or one or more holders of Guarantor Senior Debt or a Representative of any holders of such Guarantor Senior Debt; and, prior to the receipt of any such written notice, the Trustee or Paying Agent shall be entitled to assume conclusively that no such facts exist. The Trustee shall be entitled to rely on the delivery to it of written notice by a Person representing itself to be a holder of Guarantor Senior Debt (or a Representative thereof) to establish that such notice has been given. The Company or any Subsidiary Guarantor shall promptly notify the Trustee and the Paying Agent in writing of any facts it knows that would cause a payment of principal of, or premium, if any, or interest on, the Notes or any of the Subsidiary Guarantors' obligations under this Subsidiary Guarantee to violate this Article XI, but failure to give such notice shall not affect the subordination of the Subsidiary Guarantees to Guarantor Senior Debt provided in this Article XI or the rights of holders of such Guarantor Senior Debt under this Article XI. SECTION 11.11. Subrogation. After all Guarantor Senior Debt has been paid in full in cash or any other form acceptable to holders of Guarantor Senior Debt and until the Notes are paid in full, Holders shall be subrogated (equally and ratably with all other Indebtedness PARI PASSU with the Subsidiary Guarantees) to the rights of holders of such Guarantor Senior Debt to receive distributions applicable to such Guarantor Senior Debt to the extent that distributions otherwise payable to the Holders have been applied to the payment of such Guarantor Senior Debt. A distribution made under this Article XI to holders of Guarantor Senior Debt that otherwise would have been made to Holders is not, as between the Subsidiary Guarantors and Holders, a payment by such Subsidiary Guarantor on its Guarantor Senior Debt. SECTION 11.12. Relative Rights. This Article XI defines the relative rights of Holders and holders of Guarantor Senior Debt. Nothing contained in this Article XI or elsewhere in this Indenture or in any Subsidiary Guarantee is intended to or shall: (1) impair, as between the Subsidiary Guarantors and the Holders, the Obligations of the Subsidiary Guarantors, which are absolute and unconditional, to pay all amounts due and payable under the Subsidiary Guarantees as and when the same shall become due and payable in accordance with their terms; (2) affect the relative rights of the Holders and creditors of the Subsidiary Guarantors, other than holders of Guarantor 81 Senior Debt; or (3) prevent the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the rights of the holders of such Guarantor Senior Debt to receive distributions and payments otherwise payable to Holders. The failure to make a payment on account of all amounts due and payable under the Subsidiary Guarantees by reason of any provision of this Article XI shall not be construed as preventing the occurrence of an Event of Default under Section 6.01. SECTION 11.13. The Subsidiary Guarantors and Holders May Not Impair Subordination. (a) No right of any holder of Guarantor Senior Debt to enforce the subordination as provided in this Article XI shall at any time or in any way be prejudiced or impaired by any act or failure to act by any of the Subsidiary Guarantors or by any noncompliance by any of the Subsidiary Guarantors with the terms, provisions and covenants of this Indenture or the Subsidiary Guarantees or any other agreement regardless of any knowledge thereof with which any such holder may have or be otherwise charged. (b) Without in any way limiting Section 11.13(a), the holders of any Guarantor Senior Debt may, at any time and from time to time, without the consent of or notice to any Holders, without incurring any liabilities to any Holder and without impairing or releasing the subordination and other benefits provided in this Indenture or the Holders' obligations hereunder to the holders of such Guarantor Senior Debt, even if any Holder's right of reimbursement or subrogation or other right or remedy is affected, impaired or extinguished thereby, do any one or more of the following: (i) amend, renew, exchange, extend, modify, increase or supplement in any manner such Guarantor Senior Debt or any instrument evidencing or guaranteeing or securing such Guarantor Senior Debt or any agreement under which such Guarantor Senior Debt is outstanding (including, but not limited to, changing the manner, place or terms of payment or changing or extending the time of payment of, or renewing, exchanging, amending, increasing or altering, (1) the terms of such Guarantor Senior Debt, (2) any security for, or any guarantee of, such Guarantor Senior Debt, (3) any liability of any obligor on such Guarantor Senior Debt (including any guarantor) or any liability issued in respect of such Guarantor Senior Debt); (ii) sell, exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and in any order any property pledged, mortgaged or otherwise securing such Guarantor Senior Debt or any liability of any obligor thereon, to such holder, or any liability issued in respect thereof; (iii) settle or compromise any such Guarantor Senior Debt or any other liability of any obligor of such Guarantor Senior Debt to such holder or any security therefor or any liability issued in respect thereof and apply any sums by whomsoever paid and however realized to any liability (including, without limitation, payment of any Guarantor Senior Debt) in any manner or order; and (iv) fail to take or to record or otherwise perfect, for any reason or for no reason, any lien or security interest securing such 82 Guarantor Senior Debt by whomsoever granted, exercise or delay in or refrain from exercising any right or remedy against any obligor or any guarantor or any other Person, elect any remedy and otherwise deal freely with any obligor and any security for such Guarantor Senior Debt or any liability of any obligor to the holders of such Guarantor Senior Debt or any liability issued in respect of such Guarantor Senior Debt. SECTION 11.14. Distribution or Notice to Representative. Whenever a distribution is to be made, or a notice given, to holders of Guarantor Senior Debt pursuant to this Indenture, the distribution may be made and the notice given to their Representative, if any. If any payment or distribution of any Subsidiary Guarantor's assets is required to be made to holders of Guarantor Senior Debt pursuant to this Article XI, the Trustee and the Holders shall be entitled to rely upon any order or decree of any court of competent jurisdiction, or upon any certificate of a Representative of such Guarantor Senior Debt or a Custodian, in ascertaining the holders of such Guarantor Senior Debt entitled to participate in any such payment or distribution, the amount to be paid or distributed to holders of such Guarantor Senior Debt and all other facts pertinent to such payment or distribution or to this Article XI. SECTION 11.15. Rights of Trustee and Paying Agent. The Trustee or Paying Agent may continue to make payments on the Notes unless prior to any payment date it has received written notice of facts that would cause a payment of principal of, or premium, if any, or interest on, the Notes to violate this Article XI. Only the Company, a Subsidiary Guarantor, a Representative of Senior Debt or Guarantor Senior Debt, or a holder of Senior Debt or Guarantor Senior Debt that has no Representative may give such notice. To the extent permitted by the TIA, the Trustee in its individual or any other capacity may hold Guarantor Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 11.16. Authorization To Effect Subordination. Each Holder of a Subsidiary Guarantee by its acceptance thereof authorizes and directs the Trustee on its behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article XI, and appoints the Trustee as such Holder's attorney-in-fact for any and all such purposes (including, without limitation, the timely 83 filing of a claim for the unpaid balance on a Subsidiary Guarantee that such Holder holds in the form required in any Insolvency or Liquidation Proceeding and causing such claim to be approved). If a proper claim or proof of debt in the form required in such proceeding is not filed by or on behalf of all Holders prior to 30 days before the expiration of the time to file such claims or proofs, then the holders or a Representative of any Guarantor Senior Debt are hereby authorized, and shall have the right (without any duty), to file an appropriate claim for and on behalf of the Holders. SECTION 11.17. Payment. A payment on account of or with respect to any Subsidiary Guarantee shall include, without limitation, any direct or indirect payment of principal, premium or interest with respect to or in connection with any optional redemption or purchase provisions, any direct or indirect payment payable by reason of any other Indebtedness or Obligation being subordinated to the Subsidiary Guarantees, and any direct or indirect payment or recovery on any claim as a Holder relating to or arising out of this Indenture or any Subsidiary Guarantee, or the issuance of any Subsidiary Guarantee, or the transactions contemplated by this Indenture or referred to herein. ARTICLE XII MISCELLANEOUS SECTION 12.01. Trust Indenture Act Controls. If any provisions of this Indenture limits, qualifies, or conflicts with the duties imposed by operation of Section 318(c) of the TIA, the imposed duties shall control. SECTION 12.02. Notices. Any notice or communication by the Company, any Subsidiary Guarantor or the Trustee to the other is duly given if in writing and delivered in person, mailed by registered or certified mail, postage prepaid, return receipt requested or delivered by telecopier or overnight air courier guaranteeing next day delivery to the other's address: If to the Company or to any Subsidiary Guarantor: 84 Gray Communications Systems, Inc. 126 North Washington Street Albany, Georgia 31701 Attention: William A. Fielder Telephone: Facsimile: With a copy to: Proskauer Rose Goetz & Mendelsohn LLP 1585 Broadway New York, New York 10036 Attention: Henry O. Smith III, Esq. Telephone: Facsimile: If to the Trustee: Bankers Trust Company Corporate Trust and Agency Group Four Albany Street New York, New York 10006 Attention: Corporate Trust and Agency Group Telephone: 212-250-6161 Facsimile: 212-250-6392 With a copy to: LeBoeuf, Lamb, Greene & MacRae LLP 125 West 55th Street New York, New York 10019 Attention: David P. Bicks, Esq. Telephone: 212-424-8042 Facsimile: 212-424-8500 The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; the date receipt is acknowledged, if mailed by registered or certified mail; when answered back, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first-class mail to his or her address shown on the register maintained by the Registrar. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company 85 mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 12.03. Communication by Holders with Other Holders. Holders may communicate pursuant to Section 312(b) of the TIA with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and any other Person shall have the protection of Section 312(c) of the TIA. SECTION 12.04. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture that is subject to a condition precedent, the Company shall furnish to the Trustee: (a) an Officers Certificate (which shall include the statements set forth in Section 12.05) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel (which shall include the statements set forth in Section 12.05) stating that, in the opinion of such counsel, all such conditions precedent provided for in this Indenture relating to the proposed action have been complied with. SECTION 12.05. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to Section 314(a)(4) of the TIA) shall include: (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in such Person's opinion, such condition or covenant has been complied with. SECTION 12.06. Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. -86- SECTION 12.07. Legal Holidays. If a payment date is a Legal Holiday, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. SECTION 12.08. No Recourse Against Others. No director, officer, employee, incorporator or stockholder of the Company or any Subsidiary Guarantor shall have any liability for any obligation of the Company or any Subsidiary Guarantor under this Indenture, the Notes or the Subsidiary Guarantees. Each Holder by accepting a Note (including Subsidiary Guarantees) waives and releases such Persons from all such liability and such waiver and release is part of the consideration for the issuance of the Notes. SECTION 12.09. Counterparts. This Indenture may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 12.10. Initial Appointments, Compliance Certificates. The Company initially appoints the Trustee as Paying Agent, Registrar and authenticating agent. The first compliance certificate to be delivered by the Company to the Trustee pursuant to Section 4.03 shall be for the fiscal year ending on December 31, 1996. SECTION 12.11. Governing Law. The laws of the State of New York shall govern this Indenture and the Notes, without regard to the conflict of laws provisions thereof. -87- SECTION 12.12. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any of its Subsidiaries, and no other indenture, loan or debt agreement may be used to interpret this Indenture. SECTION 12.13. Successors. All agreements of the Company in this Indenture and the Notes shall bind any successor of the Company. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 12.13. Severability. If any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 12.14. Third Party Beneficiaries. Holders of Senior Debt of the Company and Guarantor Senior Debt of the Subsidiary Guarantors are third party beneficiaries of, and any of them (or their Representative) shall have the right to enforce the provisions of this Indenture that benefit such holders. SECTION 12.15. Table of Contents, Headings, Etc. The Table of Contents, Cross-Reference Table, and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture, and shall in no way modify or restrict any of the terms or provisions of this Indenture. SIGNATURES THE COMPANY: GRAY COMMUNICATIONS SYSTEMS, INC. By:_________________________________________ Name: Title: THE SUBSIDIARY GUARANTORS: THE ALBANY HERALD PUBLISHING COMPANY, INC. THE SOUTHWEST GEORGIA SHOPPER, INC. WALB-TV, INC. WJHG-TV, INC. KTVE, INC. GRAY KENTUCKY TELEVISION, INC. WRDW-TV, INC. THE ROCKDALE CITIZEN PUBLISHING COMPANY GRAY REAL ESTATE & DEVELOPMENT COMPANY GRAY TRANSPORTATION COMPANY, INC. WALB LICENSEE CORP. WJHG LICENSEE CORP. WKYT LICENSEE CORP. WRDW LICENSEE CORP. WYMT LICENSEE CORP. WKXT LICENSEE CORP. WCTV OPERATING CORP. WKXT-TV, INC. WCTV LICENSEE CORP. PORTA-PHONE PAGING, INC. PORTA-PHONE PAGING LICENSEE CORP. GRAY TELEVISION MANAGEMENT, INC. For each of the above: By:_________________________________________ Name: Title: BANKERS TRUST COMPANY, as Trustee By:_________________________________________ Name: Title: [FORM OF NOTE] EXHIBIT A (Face of Note) CUSIP No. 389190 AA 7 GRAY COMMUNICATIONS SYSTEMS, INC. % Senior Subordinated Note due 2006 No. ____________ $__________ Gray Communications Systems, Inc., a Georgia corporation (hereinafter called the "Company," which term includes any successor entity under the Indenture hereinafter referred to), for value received, hereby promises to pay to ________________ or registered assigns, the principal sum of _______________________ Dollars on , 2006. Interest Payment Dates: , and , commencing , 1997 Record Dates: Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officers and a facsimile of its seal to be affixed hereto or imprinted hereon. [SEAL] GRAY COMMUNICATIONS SYSTEMS, INC. By:_________________________________________ By:_________________________________________ CERTIFICATE OF AUTHENTICATION This is one of the ___% Senior Subordinated Notes due 2006 referred to in the within mentioned Indenture. BANKERS TRUST COMPANY, as Trustee By:________________________________ Authorized Signatory (Back of Note) % SENIOR SUBORDINATED NOTE DUE 2006 1. INTEREST. Gray Communications Systems, Inc. (the "COMPANY") promises to pay interest on the principal amount of this Note at the rate and in the manner specified below. Interest on this Note will accrue at % per annum from the date this Note is issued until maturity and will be payable semiannually in cash on and of each year, or if any such day is not a Business Day on the next succeeding Business Day (each an "INTEREST PAYMENT DATE"). Interest on this Note will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from the date of original issuance; PROVIDED that the first Interest Payment Date shall be _____________. The Company shall pay interest on overdue principal and premium, if any, from time to time on demand at the rate of 2% per annum in excess of the interest rate then in effect and shall pay interest on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. METHOD OF PAYMENT. The Company will pay interest on this Note (except defaulted interest) to the Person who is the registered Holder of this Note at the close of business on the record date for the next Interest Payment Date even if such Note is cancelled after such record date and on or before such Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments on such Notes. The Company will pay principal, premium, if any, and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal, premium, if any, and interest by check payable in such money, and any such check may be mailed to a Holder's registered address. 3. PAYING AGENT AND REGISTRAR. First Bank Systems of Minneapolis (the "TRUSTEE") will initially act as the Paying Agent and Registrar. The Company may appoint additional paying agents or co-registrars, and change the Paying Agent, any additional paying agent, the Registrar or any co-registrar without prior notice to any Holder. The Company or any of its Affiliates may act in any such capacity. 4. INDENTURE. The Company issued the Notes under an Indenture, dated as of , 1996 (the "INDENTURE"), by and among the Company, as issuer of the Notes, The Albany Herald Publishing Company, Inc., a Georgia corporation, The Southwest Georgia Shopper, Inc., a Georgia corporation, WALB-TV, Inc., a Georgia corporation, WJHG-TV, Inc., a Georgia corporation, KTVE, Inc., an Arkansas corporation, Gray Kentucky Television, Inc., a Georgia corporation, WRDW-TV, Inc., a Georgia corporation, The Rockdale Citizen Publishing Company, a Georgia corporation, -2- Gray Real Estate & Development Company, a Georgia corporation, Gray Transportation Company, Inc., a Georgia corporation, WALB Licensee Corp., a Delaware corporation, WJHG Licensee Corp., a Delaware corporation, WKYT Licensee Corp., a Delaware corporation, WRDW Licensee Corp., a Delaware corporation, WYMT Licensee Corp., a Delaware corporation, WKXT Licensee Corp., a Delaware corporation, WCTV Operating Corp., a Georgia corporation, WKXT-TV, Inc., a Georgia corporation, WCTV Licensee Corp., a Delaware corporation, Porta-Phone Paging, Inc., a Georgia corporation, Porta-Phone Paging Licensee Corp., a Delaware corporation, and Gray Television Management, Inc., a Delaware corporation, as guarantors of the Company's obligations under the Indenture and the Notes (each an "Subsidiary Guarantor") and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) as in effect on the date of the original issuance of the Notes (the "TRUST INDENTURE ACT"). The Notes are subject to, and qualified by, all such terms, certain of which are summarized herein, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms (all capitalized terms not defined herein shall have the meanings assigned them in the Indenture). The Notes are unsecured general obligations of the Company limited to $150,000,000 in aggregate principal amount. 5. REDEMPTION PROVISIONS. (a) If the Phipps Acquisition is not consummated prior to December 23, 1996, the Company will be required to redeem the Notes (the "SPECIAL REDEMPTION") on or prior to the Special Redemption Date at a redemption price (the "SPECIAL REDEMPTION PRICE") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. (b) Except as set forth in subsection 5(a) above and as described below, the Notes are not redeemable at the Company's option prior to , 2001. On and after such date, the Notes will be subject to redemption at the option of the Company, in whole or in part, at the redemption prices (expressed as percentages of the principal amount of the Notes) set forth below, plus any accrued and unpaid interest to the date of redemption, if redeemed during the twelve-month period beginning on of the years indicated below: -3- YEAR PERCENTAGE 2001 . . . . . . . . . . . . . . . % 2002 . . . . . . . . . . . . . . . % 2003 . . . . . . . . . . . . . . . % 2004 and thereafter. . . . . . . . % Notwithstanding the foregoing, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net cash proceeds of one or more Public Equity Offerings, other than the Concurrent Offering, at a redemption price equal to % of the principal amount thereof, together with accrued and unpaid interest to the date of redemption; PROVIDED, HOWEVER, that at least $97.5 million in aggregate principal amount of the Notes remains outstanding immediately after any such redemption. 6. MANDATORY OFFERS. (a) Within 30 days after any Change of Control or any Asset Sale Trigger Date, the Company shall mail a notice to each Holder stating a number of items as set forth in Sections 4.13 (with respect to Change of Control Offers) or 4.14 (with respect to Asset Sale Offers) of the Indenture. (b) Holders may tender all or, subject to Section 8 below, any portion of their Notes in an Offer by completing the form below entitled "OPTION OF HOLDER TO ELECT PURCHASE." (c) Promptly after consummation of an Offer, (i) the Paying Agent shall mail to each Holder of Notes or portions thereof accepted for payment an amount equal to the purchase price for, plus any accrued and unpaid interest on, such Notes, (ii) with respect to any tendered Note not accepted for payment in whole or in part, the Trustee shall return such Note to the Holder thereof, and (iii) with respect to any Note accepted for payment in part, the Trustee shall authenticate and mail to each such Holder a new Note equal in principal amount to the unpurchased portion of the tendered Note. (d) The Company will (i) announce the results of the Offer to Holders on or as soon as practicable after the Purchase Date, and (ii) comply with the applicable tender offer rules, including the requirements of Rule 14e-1 under the Securities Exchange Act of 1934, as amended, and all other applicable securities laws and regulations in connection with any Offer. -4- 7. NOTICE OF REDEMPTION OR PURCHASE. (a) At least seven Business Days before notice of any Special Redemption or (b) at least 30 days but not more than 60 days before any redemption date, the Company shall mail by first class mail a notice of redemption to each Holder of Notes or portions thereof that are to be redeemed. 8. NOTES TO BE REDEEMED OR PURCHASED. The Notes may be redeemed or purchased in part, but only in whole multiples of $1,000 unless all Notes held by a Holder are to be redeemed or purchased. On or after any date on which Notes are redeemed or purchased, interest ceases to accrue on the Notes or portions thereof called for redemption or accepted for purchase on such date. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. Holders seeking to transfer or exchange their Notes may be required, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. Neither the Company nor the Registrar shall be required to issue, register the transfer of or exchange any Note (i) during a period beginning at the opening of business 15 days before the day of the mailing of notice of any redemption from the Company and ending at the close of business on the day the notice of redemption is sent to Holders, (ii) selected for redemption, in whole or in part, except the unredeemed portion of any Note being redeemed in part may be transferred or exchanged, and (iii) during a Change of Control Offer or an Asset Sale Offer if such Note is tendered pursuant to such Change of Control Offer or Asset Sale Offer and not withdrawn. 10. PERSONS DEEMED OWNERS. The registered holder of a Note may be treated as its owner for all purposes. 11. AMENDMENTS AND WAIVERS. (a) Subject to certain exceptions, the Indenture and the Notes may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the then outstanding Notes, and any existing Default or Event of Default or compliance with any provision of the Indenture or the Notes may be waived with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes. (b) Notwithstanding Section 11(a) above, the Company and the Trustee may amend or supplement the Indenture or the Notes without the consent of any Holder to: cure any ambiguity, defect or inconsistency; provide for uncertificated Notes in -5- addition to or in place of certificated Notes; provide for the assumption of the Company's obligations to the Holders in the event of any Disposition involving the Company that is permitted under Article V and in which the Company is not the Surviving Person; make any change that would provide any additional rights or benefits to Holders or not adversely affect the interests of any Holder; comply with the requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act; or provide for additional Subsidiary Guarantors. (c) Certain provisions of the Indenture cannot be amended, supplemented or waived without the consent of each Holder of Notes affected. Additionally, certain provisions of the Indenture cannot be amended or modified without the consent of a majority in interest of the holders of Senior Debt. 12. DEFAULTS AND REMEDIES. Events of Default include: default for 30 days in the payment when due of interest on the Notes; default in the payment when due of principal on the Notes; failure to perform or comply with certain covenants, agreements or warranties in the Indenture which failure continues for 30 days after receipt of notice from the Trustee or Holders of at least 25% of the outstanding Notes; defaults under and acceleration prior to maturity, or failure to pay at maturity, of certain other Indebtedness; except as permitted under the Indenture, any Subsidiary Guarantee shall cease for any reason to be in full force and effect; certain judgments that remain undischarged for a period of 60 days after their entry; dispositions by holders of certain Indebtedness following a default under such Indebtedness of assets of the Company or any Subsidiary pledged to secure such Indebtedness and certain events of bankruptcy or insolvency involving the Company, any Subsidiary Guarantor or any other Subsidiary. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Notes may declare all outstanding Notes to be due and payable immediately in an amount equal to the principal amount of and premium on, if any, such Notes, plus any accrued and unpaid interest; PROVIDED, HOWEVER, that in the case of an Event of Default arising from certain events of bankruptcy or insolvency involving the Company or any Subsidiary Guarantor, the principal amount of and premium on, if any, and any accrued and unpaid interest on, the Notes becomes due and payable immediately without further action or notice. Subject to certain exceptions, Holders of a majority in aggregate principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it by the Indenture; PROVIDED that the Trustee may refuse to follow any direction that conflicts with law or the Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Holders, or would involve the Trustee in personal liability. The Trustee may withhold from Holders notice of any continuing default (except a payment Default) if it determines that such withholding is in their interests. -6- 13. SUBSIDIARY GUARANTEES. Payment of principal, premium, if any, and interest (including interest on overdue principal and overdue interest, to the extent lawful) on the Notes and all other Obligations of the Company to the Holders or the Trustee under the Indenture and the Notes is, jointly and severally, unconditionally guaranteed by each of the Subsidiary Guarantors pursuant to and subject to the terms of Article XI of the Indenture. 14. SUBORDINATION. (a) All Obligations owed under and in respect of the Notes are subordinated in right of payment, to the extent and in the manner provided in Article X of the Indenture, to the prior payment in full in cash of all Obligations owed under and in respect of all Senior Debt of the Company, and the subordination of the Notes is for the benefit of all holders of all Senior Debt of the Company, whether outstanding on the Issue Date or issued thereafter. The Company agrees, and each Holder by accepting a Note agrees, to the subordination. (b) All Obligations owed under and in respect of the Subsidiary Guarantees are subordinated in right of payment, to the extent and in the manner provided in Article XI of the Indenture, to the prior payment in full in cash of all Obligations owed under and in respect of all Guarantor Senior Debt of the Subsidiary Guarantors, and the subordination of the Subsidiary Guarantees is for the benefit of all holders of Guarantor Senior Debt, whether outstanding on the Issue Date or issued thereafter. The Subsidiary Guarantors agree and each Holder, by accepting a Subsidiary Guarantee agrees, to the subordination. 15. TRUSTEE DEALINGS WITH COMPANY. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or any of its Affiliates with the same rights it would have if it were not Trustee. 16. NO RECOURSE AGAINST OTHERS. No director, officer, employee, incorporator or stockholder of the Company shall have any liability for any obligation of the Company under the Indenture or the Notes. Each Holder by accepting a Note waives and releases such Persons from all such liability, and such waiver and release is part of the consideration for the issuance of the Notes. 17. SUCCESSOR SUBSTITUTED. Upon the merger, consolidation or other business combination involving the Company or one or more Subsidiary Guarantors of the Company, or upon the sale, assignment, transfer, conveyance or other disposition of all or substantially all of the Company's or a Subsidiary Guarantor's properties and assets, the Surviving Person (if other than the Company or a Subsidiary Guarantor, as the case may -7- be) resulting from such disposition shall assume all of the obligations of the Company or the Subsidiary Guarantor under the Notes, the Subsidiary Guarantee, as applicable, and the Indenture and shall succeed to, and be substituted for, and may exercise every right and power of, the Company or the Subsidiary Guarantor under the Indenture with the same effect as if such Surviving Person had been named as the Company or a Subsidiary Guarantor in the Indenture. 18. GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of laws provisions thereof. 19. AUTHENTICATION. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 20. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 21. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Note Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers printed on the securities. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture, which has in it the text of this Note in larger type. Request may be made to: Gray Communications Systems, Inc., 126 North Washington Street, Albany, Georgia 31701, Attention: Secretary ASSIGNMENT FORM To assign this Note, fill in the form below: FOR VALUE RECEIVED the undersigned hereby sell(s), assigns(s) and transfer(s) unto - ------------------------------------------------------------------------------ Please insert social security or other identifying number of assignee - ------------------------------------------------------------------------------ Please print or typewrite name and address including zip code of assignee - ------------------------------------------------------------------------------ the within Note and all rights thereunder, hereby irrevocably constituting and appointing ______________________________ to transfer said Note on the books of the Company. The Agent may substitute another to act for him. Date: Your Signature: ---------------------- --------------------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee:* --------------------------------- - ----------------- * The Holder's signature must be guaranteed by an eligible guarantor that is a member of one of the following recognized signature guarantee programs: (A) The SECURITIES TRANSFER AGENTS MEDALLION PROGRAM; (B) The NEW YORK STOCK EXCHANGE MEDALLION SIGNATURE PROGRAM; or (C) The STOCK EXCHANGES MEDALLION PROGRAM. EXHIBIT A-1 FORM OF NOTATION ON NOTE RELATING TO GUARANTEE Each Subsidiary Guarantor, jointly and severally, unconditionally guarantees, to the extent set forth in the Indenture and subject to the provisions of the Indenture that: (i) the principal of, premium, if any, and interest on the Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Notes, if any, to the extent lawful, and all other Obligations of the Company to the Holders or the Trustee under the Indenture and the Notes will be promptly paid in full, all in accordance with the terms of the Indenture and the Notes; and (ii) in case of any extension of time of payment or renewal of any Notes or any of such other Obligations, that the Notes will be promptly paid in full when due in accordance with the terms of such extension or renewal, whether at stated maturity, by acceleration or otherwise. The obligations of each Subsidiary Guarantor to the Holders of Notes and the Trustee pursuant to this guarantee and the Indenture are set forth in Article XI of the Indenture, to which reference is hereby made. Subsidiary Guarantors: THE ALBANY HERALD PUBLISHING COMPANY, INC. THE SOUTHWEST GEORGIA SHOPPER, INC. WALB-TV, INC. WJHG-TV, INC. KTVE, INC. GRAY KENTUCKY TELEVISION, INC. WRDW-TV, INC. THE ROCKDALE CITIZEN PUBLISHING COMPANY GRAY REAL ESTATE & DEVELOPMENT COMPANY GRAY TRANSPORTATION COMPANY, INC. WALB LICENSEE CORP. WJHG LICENSEE CORP. WKYT LICENSEE CORP. WRDW LICENSEE CORP. WYMT LICENSEE CORP. WKXT LICENSEE CORP. WCTV OPERATING CORP. WKXT-TV, INC. WCTV LICENSEE CORP. PORTA-PHONE PAGING, INC. PORTA-PHONE PAGING LICENSEE CORP. GRAY TELEVISION MANAGEMENT, INC. For each of the above: By:____________________________________ Name: Title: OPTION OF HOLDER TO ELECT PURCHASE If you elect to have this Note purchased by the Company pursuant to Section 4.13 of the Indenture, check the box: / / If you elect to have this Note purchased by the Company pursuant to Section 4.14 of the Indenture, check the box: / / If you elect to have only part of this Note purchased by the Company pursuant to Section 4.13 or 4.14 of the Indenture, state the amount (multiples of $1,000 only): $________________ Date: _________________ Your Signature: _________________________________ (Sign exactly as your name appears on the other side of this Note) Signature Guarantee:*____________________________ Your Signature: _________________________________ (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ____________________________ - ----------------- * The Holder's signature must be guaranteed by an eligible guarantor that is a member of one of the following recognized signature guarantee programs: (A) The SECURITIES TRANSFER AGENTS MEDALLION PROGRAM; (B) The NEW YORK STOCK EXCHANGE MEDALLION SIGNATURE PROGRAM; or (C) The STOCK EXCHANGES MEDALLION PROGRAM. EXHIBIT B FORM OF LEGEND FOR BOOK-ENTRY NOTES Any Global Note authenticated and delivered hereunder shall bear a legend in substantially the following form: THIS SECURITY IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUM- STANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. SCHEDULE OF EXCHANGES The following exchanges of a part of this Global Notes for Physical Note have been made:
Amount of increase Principal Amount of Signature of Amount of decrease in Principal this Global Note authorized officer Date of in Principal Amount Amount of this following such of Trustee or Note Exchange of this Global Note Global Note decrease (or increase) Custodian - -------- ------------------- ------------------ ---------------------- -------------------
EXHIBIT 5 September __, 1996 Gray Communications Systems, Inc. 126 North Washington Street Albany, New York 31701 Gentlemen: We are acting as counsel to Gray Communications Systems, Inc., a Georgia corporation (the "Company"), in connection with the Registration Statement on Form S-1 with exhibits thereto (the "Registration Statement") filed by the Company under the Securities Act of 1933, as amended (the "Securities Act"), relating to the registration under the Securities Act of $150,000,000 principal amount of the Company's Senior Subordinated Notes due 2006 (the "Notes"). The Notes are to be issued and sold by the Company pursuant to an underwriting agreement (the "Underwriting Agreement") among the Company and the underwriters party thereto (the "Underwriters"). A form of the Underwriting Agreement has been filed as an exhibit to the Registration Statement. As such counsel, we have reviewed the Registration Statement and certain corporate proceedings. We have also examined and relied upon originals or copies, certified or otherwise authenticated to our satisfaction, of certain public officials and of representatives of the Company and have made such investigations of law, and have discussed with representatives of the Company and such other persons such questions of fact, as we have deemed proper and necessary as a basis for rendering this opinion. Based upon, and subject to, the foregoing, we are of the opinion that the Notes have been duly authorized by the Company and when (i) the indenture (the "Indenture") between the Company, the Company's subsidiaries and Bankers Trust Company, as trustee (the "Trustee") (a form of which Indenture has been filed as an exhibit to the Registration Statement), has been duly executed and delivered by the parties thereto and (ii) the Notes have been duly Gray Communications Systems, Inc. September __, 1996 Page 2 authenticated by the Trustee and have been duly executed, issued and delivered by the Company in accordance with the Indenture and sold in accordance with the Underwriting Agreement, the Notes will constitute valid and binding obligations of the Company entitled to the benefits of the Indenture and will be enforceable against the Company in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws relating to or affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and except that certain of the remedies therein contained may not be enforceable or may be subject to available defenses and procedural requirements which are not necessarily reflected therein. In rendering the foregoing opinion as to the due authorization of the Notes, we have relied on the opinion of Georgia counsel, Heyman & Sizemore, a copy of which opinion is attached hereto. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm in the prospectus contained in the Registration Statement in the section entitled "Legal Matters." In giving such consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Very truly yours, [HEYMAN AND SIZEMORE LETTERHEAD] September 12, 1996 Gray Communications Systems, Inc. 126 North Washington Street Albany, Georgia 31701 Gentlemen: We are acting as your counsel in connection with the Registration Statement on Form S-1 with exhibits thereto (the "Registration Statement") filed by Gray Communications Systems, Inc., a Georgia corporation (the "Company"), under the Securities Act of 1933, as amended (the "Securities Act"), relating to the registration under the Securities Act of $150,000,000 principal amount of the Company's Senior Subordinated Notes due 2006 (the "Notes"). As such counsel, we have reviewed the Registration Statement and certain corporate proceedings. We have also examined and relied upon originals or copies, certified or otherwise authenticated to our satisfaction, of certain public officials and of representatives of the Company and have made such investigations of law, and have discussed with representatives of the Company and such other persons such questions of fact, as we have deemed proper and necessary as a basis for rendering this opinion. Based upon, and subject to, the foregoing, we are of the opinion that the Notes have been duly authorized by the Company by all requisite corporate action. Proskauer Rose Goetz & Mendelsohn LLP ("PRG&M") may rely on this opinion as though it had been addressed to such firm and PRG&M may file this opinion as an attachment or annex to the opinion of PRG&M to be filed as an exhibit to the Registration Statement. Very truly yours, HEYMAN & SIZEMORE /s/ Neal H. Ray Neal H. Ray
GRAY COMMUNICATIONS SYSTEMS, INC. 126 North Washington Street Albany, Georgia 31701 Telephone No.: (912) 888-9390 Telecopier No.: (912) 888-9374 ________________________________ PREFERRED STOCK EXCHANGE AND PURCHASE AGREEMENT ________________________________ Dated as of __________________, 1996 Bull Run Corporation 4370 Peachtree Road Atlanta, Georgia 30319 Ladies and Gentlemen: The undersigned, Gray Communications Systems, Inc., a Georgia corporation (the "Company"), hereby agrees with you as follows: ISSUANCE OF PREFERRED STOCK. CREATION AND AUTHORIZATION OF PREFERRED STOCK. The Company has created and authorized the issuance and sale of a Series A Preferred Stock and a Series B Preferred Stock, each of which has the designation, number of shares, powers and restrictions as set forth on EXHIBIT A (such preferred stock is hereby referred to collectively as the "Preferred Stock" and by series as the "Series A Preferred" and the "Series B Preferred"). EXCHANGE OF NOTE FOR SERIES A PREFERRED; CLOSING. On January 3, 1996 you purchased from the Company its 8.0% Subordinated Note due January 3, 2005 in the original principal amount of $10,000,000 (the "Note"). In connection with your purchase of the Note, the Company issued you a Warrant to Purchase Common Stock entitling you to purchase up to 487,500 shares of the Company's Class A Common Stock (the "Original Warrant"). The Company agrees to issue to you in exchange for the Note and, upon and subject to the terms and conditions hereof and in reliance upon the representations and warranties of the Company contained herein, you agree to transfer and exchange the Note for 1,000 shares of the Series A Preferred. In connection with the transfer of the Note for the Series A Preferred, you agree to surrender the Original Warrant for an amended warrant substantially on the terms and conditions of the warrant attached hereto as EXHIBIT B (the "New Warrant"). The 1,000 shares of the Series A Preferred are to be issued in exchange for the Note, and the New Warrant will be delivered, at a closing (the "Closing") to be held on ___________________, 1996 at 10:00 a.m., Atlanta, Georgia time (the "Closing Date"), at the offices of Alston & Bird, 1201 West Peachtree Street, Atlanta, Georgia 30309-3424. On the Closing Date, the Company will deliver to you a certificate or certificates dated the Closing Date representing the 1,000 shares of the Series A Preferred registered in your name, or in the name of such nominee as you shall have designated by notice to the Company. The delivery of such 1,000 shares of Series A Preferred to you shall be made against delivery of the Note to the Company. 1.3 PURCHASE AND SALE OF SERIES B PREFERRED; CLOSING. The Company agrees to sell to you, and upon and subject to the terms and conditions hereof and in reliance upon the representations and warranties of the Company contained herein, you agree to purchase from the Company, 1,000 shares of Series B Preferred for an aggregate price of $10 million (the "PURCHASE PRICE"). The Company also agrees to issue you a warrant to purchase up to 500,000 shares of the Company's Class A Common Stock substantially on the terms and conditions of the warrant attached hereto as EXHIBIT C (the "Series B Warrant" and collectively with the New Warrant, the "Warrants"). The 1,000 shares of Series B Preferred are to be sold and delivered, and the Series B Warrant will be delivered, at the Closing. On the Closing Date, the Company will deliver to you a certificate or certificates dated the Closing Date representing the 1,000 shares of the Series B Preferred registered in your name, or in the name of such nominee as you shall have designated by notice to the Company. The delivery of such 1,000 shares of Series B Preferred to you shall be made against payment in the amount of the Purchase Price by wire transfer of immediately available funds to the Company's account at NationsBank (ABA No. 061000078), Account No. 6225659, Reference: Gray Communications Systems, Inc., Notify: Natalie Duggan upon receipt (912) 434- 8730. 1.4 DEFINITIONS. Certain capitalized terms used in this Agreement are defined in Section 8.1 hereof. References to a "Schedule" or "Exhibit" are, unless otherwise specified, to the appropriate Schedule or Exhibit annexed to this Agreement, each of which is deemed to be a part hereof. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. 2.1 VALIDITY OF STOCK. The Preferred Stock has been duly authorized and when issued will be validly issued, fully paid and non-assessable, free and clear of all liens, charges, restrictions, claims and encumbrances, and shall not be subject to any preemptive rights, rights of first refusal or redemption rights. The Class A Common Stock to be issued pursuant to the Warrants has been duly authorized and, when issued in compliance with the provisions of the Warrants, will be validly issued, fully paid and nonassessable, will be free and clear of all liens, charges, restrictions, claims and encumbrances, and shall not be subject to any preemptive rights or rights of first refusal. The Class A Common Stock to be issued pursuant to the Warrants has been duly and validly reserved for issuance upon exercise of the Warrants. The designations, powers, preferences, rights, qualifications, limitations and restrictions in respect of each class and series of authorized capital stock of the Company are as set forth in the Articles of Incorporation of the Company, as amended, previously delivered to Purchaser, and all such designations, powers, preferences, rights, qualifications, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable laws. 2.2 CAPACITY AND VALIDITY. The Company has the full corporate power, capacity and authority necessary to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby and issue, sell and deliver the Preferred Stock and the Warrants and the Class A Common Stock to be issued upon exercise of the Warrants. The execution, delivery and performance of this Agreement have been approved by all necessary action of the Board of Directors and shareholders of the Company. This Agreement has been duly executed and delivered by duly authorized officers of the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally. 2.3 ORGANIZATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia and has full corporate power and authority to own, lease and operate its assets and to carry on its business. The character of the Company's assets or the nature of the Company's business do not require the Company to be qualified or licensed to transact business as a foreign corporation in good standing in any other jurisdiction, except where the failure to so qualify or be so licensed would not have a Material -2- Adverse Effect on the Company. Complete and correct copies of the Articles of Incorporation, and all amendments thereto, of the Company (certified by the Secretary of State of Georgia) and By-Laws of the Company, and all amendments thereto, (certified by the Secretary of the Company) have been previously provided to Purchaser. 2.4 CAPITALIZATION. The authorized capital stock of the Company consists of (i) 20,000,000 shares of preferred stock, of which 1,000 is Series A Preferred Stock, of which [_______________] are issued and outstanding, [______________] is Series B Preferred Stock, of which [________________] shares are issued and outstanding, and [________________] is undesignated; (ii) 15,000,000 shares of Class A Common Stock, of which [_________________] shares are issued and outstanding; and (iii) 15,000,000 shares of Class B Common Stock, of which [______________] shares are issued and outstanding. All of the issued and outstanding shares of preferred stock, Class A Common Stock and Class B Common Stock are duly and validly issued and outstanding, are fully paid and nonassessable and were issued pursuant to a valid registration, or a valid exemption from registration, under the Securities Act of 1933, as amended, and all applicable state securities laws. Other than the shares of Class A Common Stock reserved for issuance pursuant to the Warrants and other than shares of Class A Common Stock reserved for issuance pursuant employee benefit and stock option plans, no capital stock of the Company is reserved for issuance. The Company has no obligation to issue any additional preferred stock, Class A Common Stock, Class B Common Stock or securities convertible or exchangeable for preferred stock, Class A Common Stock, Class B Common Stock, or options or warrants for the purchase of (a) any preferred stock, Class A Common Stock or Class B Common Stock or (b) any securities convertible into or exchangeable for any preferred stock, Class A Common Stock or Class B Common Stock. Other than one individual with incidental registration rights that have been waived in connection with the transactions contemplated by this Agreement, there are no outstanding rights to either demand registration of any preferred stock, Class A Common Stock, or Class B Common Stock under the Securities Act of 1933, as amended, or to sell any preferred stock, Class A Common Stock, or Class B Common Stock in connection with such a registration of preferred stock, Class A Common Stock, or Class B Common Stock. 2.5 NO CONFLICT. Except as disclosed on SCHEDULE 2.5, neither the execution, delivery and performance of this Agreement by either the Company nor the consummation by the Company of the transactions contemplated hereby or thereby will (i) conflict with or result in a violation, contravention or breach of any of the terms, conditions or provisions of the Articles of Incorporation, as amended, or the By-Laws, as amended, of the Company, (ii) result in a violation, contravention or breach of or constitute (with due notice or lapse of time or both) a default under, or require the consent or approval of any party to, any agreement, contract, permit, license or other instrument of the Company, (iii) result in the violation of any law, statute, rule, regulation, ordinance or judicial or administrative decision or order, or (iv) result in the creation or imposition of any lien, charge, encumbrance, restriction or claim of any nature whatsoever upon any of the assets or securities of the Company. 2.6 SEC REPORTS AND FINANCIAL STATEMENTS. The Company has filed with the Securities and Exchange Commission (the "SEC"), and has heretofore provided to Purchaser, true and complete copies of, all forms, reports, schedules, statements and other documents and information required to be filed by it since January 1, 1990 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or the Securities Act of 1933, as amended (the "Securities Act"), (as such documents have been amended since the time of their filing, collectively, the "Company SEC Documents"). The Company SEC Documents , including without limitation any financial statements and schedules included therein, at the time filed or, in subsequently amended, as so amended, (i) did not contain -3- any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (ii) complied in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be, and the applicable rules and regulations of the SEC thereunder. The financial statements of the Company included in the Company SEC Documents comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present (subject, in the case of the unaudited financial statements, to customary year-end audit adjustments) the financial position of the Company as at the dates thereof and the results of its operations and cash flows for the periods then ended. 2.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 1995, or as disclosed in the Form 10-Q for the six month period ended June 30, 1996, as of June 30, 1996, the Company had no liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, that would be required by GAAP to be reflected on the balance sheet of the Company (including the notes thereto) as of such date. Since June 30, 1996, the Company has not incurred any liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, not in the ordinary course of business or which would have, individually or in the aggregate, a material adverse effect on the Company. 2.8 STATEMENTS TRUE AND CORRECT. No representation or warranty made by the Company in this Agreement nor any statement, certificate or instrument furnished or to be furnished to Purchaser pursuant to this Agreement or any other document, agreement or instrument referred to herein or therein, contains or will contain any untrue statement of fact or omits or will omit to state a fact necessary to make the statements contained therein not misleading. -4- REPRESENTATIONS OF THE PURCHASER. NO INTENT TO DISTRIBUTE. This Agreement is made with you in reliance upon your representation to the Company, which by your acceptance hereof you confirm, that you are purchasing the Preferred Stock for your own account and not with a view to the distribution thereof, and that you have no present intention of distributing any of the same; PROVIDED, HOWEVER, that the disposition of your property shall be at all times within your own control and that your right to sell or otherwise dispose of all or any part of the Preferred Stock purchased or acquired by you pursuant to an effective registration statement under the Securities Act or under an exemption from such registration available under the Securities Act (including but not limited to the exemption provided by Rule 144A promulgated under the Securities Act) and in accordance with any applicable state securities law shall not be prejudiced; PROVIDED, FURTHER, that you acknowledge that nothing in this Agreement is intended to impose an obligation on the Company to register the Preferred Stock or underlying Common Stock under the Securities Act or any state securities law. The Company covenants that it will, upon the request of the holder of any of the Preferred Stock, provide such holder, and any qualified institutional buyer designated by such holder, such financial and other information as such holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Preferred Stock. For the purpose of this Section 3.1., the term "qualified institutional buyer" shall have the meaning specified in Rule 144A under the Securities Act. You hereby represent that you have not engaged any Person to act as your agent, broker or dealer in connection with the purchase of the Preferred Stock hereunder. The Company and you each acknowledge that the shares of the Preferred Stock are securities (as defined in the Securities Act and the Exchange Act). 3.2 CAPACITY AND VALIDITY. Purchaser has the full corporate power, capacity and authority necessary to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement have been approved by all necessary action of the Board of Directors of the Company. This Agreement has been duly executed and delivered by duly authorized officers of Purchaser and constitutes the legal, valid and binding obligation of Purchaser enforceable against Purchaser in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally. 3.3 NO CONFLICT. Except as disclosed on SCHEDULE 3.3, neither the execution, delivery and performance of this Agreement by either Purchaser nor the consummation by Purchaser of the transactions contemplated hereby or thereby will (i) conflict with or result in a violation, contravention or breach of any of the terms, conditions or provisions of the Articles of Incorporation, as amended, or the By-Laws, as amended, of Purchaser, (ii) result in a violation, contravention or breach of or constitute (with due notice or lapse of time or both) a default under, or require the consent or approval of any party to, any agreement, contract, permit, license or other instrument of Purchaser, (iii) result in the violation of any law, statute, rule, regulation, ordinance or judicial or administrative decision or order, or (iv) result in the creation or imposition of any lien, charge, encumbrance, restriction or claim of any nature whatsoever upon any of the assets or securities of Purchaser. 3.4 ORGANIZATION. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia and has full corporate power and authority to own, lease and operate its assets and to carry on its business. -5- CONDITIONS OF OBLIGATION TO PURCHASE PREFERRED STOCK. Your obligation to exchange the Note for the Series A Preferred and to purchase and pay for the Series B Preferred on the Closing Date shall be subject to the satisfaction, prior to or concurrently with such exchange and purchase and payment, of the following conditions: (a) You shall have received an executed copy of this Agreement and certificates representing 1,000 shares of the Series A Preferred and 1,000 shares of the Series B Preferred. (b) You shall have received from Heyman & Sizemore, counsel for the Company, an opinion, dated the Closing Date, substantially in the form of EXHIBIT D hereto. (c) The representations and warranties of the Company contained herein shall be true on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date. You shall have received an Officer's Certificate, dated the Closing Date, to the effect of the foregoing sentence. (d) The New Warrant and the Series B Warrant shall have been executed by the Company and delivered to you. (e) To the extent required by the terms of the Teachers Note Agreement and the Bank Credit Agreement, you shall have received a written consent from Teachers Insurance and Annuity Association of America and NationsBank, N.A., in its capacity as the Administrative Agent pursuant to the Bank Credit Agreement, each in form and substance satisfactory to you and your Counsel in connection with the execution, delivery and performance of this Agreement, the Warrants and the transactions contemplated hereby and thereby. (f) Any taxes, fees and other charges due in connection with the issuance and exchange or sale of the Preferred Stock and the Warrants shall have been paid in full by the Company. (g) All proceedings and actions taken on or prior to the Closing Date in connection with the transactions contemplated by this Agreement and all instruments incident thereto, shall be in form and substance satisfactory to you and your counsel, and you and your counsel shall have received copies of all documents that you or they may reasonably request in connection with such proceedings, actions and transactions. EXPENSES. Whether or not the Preferred Stock shall be exchanged and sold as contemplated by this Agreement or whether or not this Agreement shall be terminated, the Company agrees to pay, and to hold you harmless against liability for, all reasonable costs and expenses relating to this Agreement any additional documents prepared in connection herewith, the Preferred Stock or any agreement or instrument contemplated hereby (whether or not the same shall have come into effect). The obligations of the Company under this Section 5 shall survive the termination of this Agreement. ISSUANCE TAXES. The Company will pay all taxes in connection with the execution and delivery of this Agreement, the issuance and exchange or sale of the Preferred Stock and the Warrants by the Company. The obligations of the Company under this Section 6 shall survive the termination of this Agreement. -6- 7.CERTAIN COVENANTS OF THE COMPANY. 7.1 FINANCIAL INFORMATION. From and after the date of this Agreement, the Company shall provide to Purchaser all financial information reasonably requested by Purchaser in such form and at such times as reasonably necessary to allow Purchaser to prepare and file any and all forms, reports, schedules, statements and other documents and information required to be filed by it under the Exchange Act or the Securities Act. 7.2 BASIC INFORMATION AND ACCESS. (a) The Company shall permit Purchaser and such persons as it may designate, at Purchaser's expense (i) to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss its and their affairs, finances and accounts with its and their officers, partners, employees and public accountants (and the Company hereby authorizes said accountants to discuss with the Purchaser and its designees such affairs, finances and accounts), all at such reasonable times and as often as may be reasonably requested; (ii) to examine the books and records of the Company and its subsidiaries, if any, and to take copies and extracts therefrom; and (iii) to consult with and advise the management of the Company and its subsidiaries, if any, as to their affairs, finances and accounts, all at reasonable times and upon reasonable notice. (b) Promptly following receipt by the Company, the Company shall furnish to Purchaser a copy of each audit response letter, accountant's management letter and other written report submitted to the Company by its independent public accountants in connection with an annual or interim audit of the books of the Company and its subsidiaries, if any. (c) Promptly after the commencement thereof, the Company shall furnish to Purchaser notice of all actions, suits, claims, proceedings, investigations and inquiries that could materially adversely affect the Company or any of its subsidiaries, if any. (d) Promptly upon sending, making available or filing the same, the Company shall furnish to Purchaser all press releases, reports and financial statements that the Company sends or makes available to its shareholders or directors or files with the SEC. (e) Promptly, from time to time, the Company shall furnish to Purchaser such other information regarding the business, prospects, financial condition, operations, property or affairs of the Company and its subsidiaries, if any, as such Purchaser reasonably may request. 8.INTERPRETATION OF AGREEMENT AND PREFERRED STOCK. 8.1. DEFINITIONS. Except as the context shall otherwise require, the following terms shall have the following meanings for all purposes of this Agreement (the definitions to be applicable to both the singular and the plural form of the terns defined, where either such form is used in this Agreement): "AFFILIATE," with respect to any Person (hereinafter "such Person"), shall mean any other Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such Person or another Affiliate of such Person, (ii) which beneficially owns or holds 5% or more of the shares of any class of the Voting Stock of such Person, or (iii) 5% or more of the shares of any class of Voting Stock of which is beneficially owned or held of record by such Person or any of its Subsidiaries. The term "control" means the possession, directly -7- or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock, by contract or otherwise. "AFFILIATE," when used herein without reference to any Person, shall mean an Affiliate of the Company. "BANK CREDIT AGREEMENT" shall mean that certain Credit Agreement dated as of April 22, 1994 by and among the Company, the Lenders listed therein, and Bank South (k/n/a NationsBank, N.A.), as Administrative Agent, as modified and amended and as the same may be further amended, supplemented or restated from time to time. "CLOSING DATE" shall have the meaning set forth in Section 1.2. hereof. "COMPANY" shall have the meaning set forth in the first sentence hereof. "DOLLARS" or "$" shall mean the lawful currency of the United States of America, and in relation to any payment under this Agreement, same day or immediately available funds. The terms "HEREOF," "HEREIN," "HEREUNDER" and other words of similar import shall be construed to refer to this Agreement as a whole and not to any particular Section or other subsection. "OFFICER'S CERTIFICATE" shall mean a certificate executed on behalf of the Company by the Chairman of the Board, the President or any Vice President of the Company. "PERSON" shall mean any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, estate, unincorporated organization or government (or any agency or political subsection thereof). "PURCHASE PRICE" shall have the meaning set forth in Section 1.3 hereof. "TEACHERS DEBT" shall mean all obligations, indebtedness or liabilities of the Company which may now or hereafter exist under the Teachers Note Agreement or any of the Company's Senior Notes issued thereunder. "TEACHERS NOTE AGREEMENT" shall mean that certain Note Purchase Agreement dated as of April 15, 1994, between the Company and Teachers Insurance and Annuity Association of America, and its successors and assigns, and any amendment, supplement or restatement thereof. The term "THIS AGREEMENT" shall mean this Preferred Stock Exchange and Purchase Agreement (including the annexed Exhibits and Schedules), as it may from time to time be amended, supplemented or modified in accordance with its terms. 8.2 DIRECTLY OR INDIRECTLY. Any provision in this Agreement referring to action to be taken by any Person, or that such Person is prohibited from taking, shall be applicable whether such action is taken directly or indirectly by such Person. 8.3 GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF GEORGIA. -8- 8.4 HEADINGS. The headings of the Sections and other subsections of this Agreement have been inserted for convenience of reference only and shall not be deemed to constitute a part hereof. 9.MISCELLANEOUS. 9.1 NOTICES. (a) All communications under this Agreement or the Preferred Stock shall be in writing and shall be delivered or mailed or sent by facsimile transmission (i) if to you, to you at your address set forth on the first page hereof, marked for the attention of Robert S. Prather, Jr., or at such other address as you may have furnished to the Company in writing, (ii) if to any other holder of the Preferred Stock, to it at its address listed in the stock books maintained by the Company or its transfer agent, or at such other address as such holder of Preferred Stock shall have furnished to the Company in writing and (iii) if to the Company, to it at its address shown at the head of this Agreement or at such other address or facsimile number as it shall have furnished in writing to you and all other holders of the Preferred Stock at the time outstanding. (b) Any written communication so addressed and mailed by certified or registered mail, return receipt requested, shall be deemed to have been given when so mailed. All other written communications shall be deemed to have been given upon receipt thereof. 9.2. SURVIVAL. All representations, warranties and covenants made by the Company herein delivered under or in connection with this Agreement shall be considered to have been relied upon by you and shall survive the delivery to you of the Preferred Stock regardless of any investigation made by you or on your behalf. All statements in any such certificate or other instrument shall constitute representations and warranties of the Company hereunder. 9.3 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the parties hereof and their respective successors and assigns, and shall inure to the benefit of and be enforceable by the parties hereof and their respective successors and assigns permitted hereunder; PROVIDED, HOWEVER, that you shall not have any obligation to exchange or purchase Preferred Stock of any Person other than Gray Communications Systems, Inc., a Georgia corporation. Whether or not expressly so stated and subject to the restrictions set forth herein, the provisions of this Agreement are intended to be for your benefit and for the benefit of all holders from time to time of the Preferred Stock, and shall be enforceable by you and any other such holder of the Preferred Stock whether or not an express assignment to such holder of rights under this Agreement shall have been made by you or your successors or assigns. 9.4 AMENDMENT AND WAIVER. (a) This Agreement may be amended or supplemented, and the observance of any term hereof or thereof may be waived, with the written consent of the Company and (i) on or prior to the Closing Date, you, and (ii) after the Closing Date, the holders of 67% of the shares of the Preferred Stock then outstanding; PROVIDED, HOWEVER, that no such amendment, supplement or waiver shall, without the written consent of the holders of all the Preferred Stock then outstanding, (x) change, with respect to the Preferred Stock, the amount or time of any payment of any dividend; or (y) reduce the percentage of the outstanding Preferred Stock required for any amendment, consent or waiver hereunder. -9- (b) Any amendment, supplement or waiver effected in accordance with this Section 9.4 shall be binding upon each holder of any Preferred Stock at the time outstanding, each future holder of any Preferred Stocks and the Company. Notwithstanding any other provision of this Agreement, no consent to any such amendment, supplement or waiver by any holder of Preferred Stock, shall have any effect for the purposes of this Section 9.4 if such amendment, supplement or waiver was obtained in connection with or in anticipation of the purchase by the Company, any Affiliate of the Company or any other Person of any Preferred Stock from the holder thereof, unless the holders of all Preferred Stock at the time outstanding have executed an amendment, supplement or waiver, as the case may be, to substantially the same effect as the amendment, supplement or waiver obtained from such holder of Preferred Stock. 9.5 COUNTERPARTS. This Agreement may be executed and delivered to you simultaneously in two or more counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute but one and the same instrument. 9.6 CONSENT TO JURISDICTION AND VENUE. The Company hereby irrevocably (i) agrees that any suit, action or other legal proceeding arising out of or relating to this Agreement or the Preferred Stock may be brought in a court of record in the State of Georgia or in the courts of the United States of America located in such State, (ii) consents to the jurisdiction of each such court in any such suit, action or proceeding, and (iii) waives any objection which it may have to the laying of venue of any such claim that any such suit, action or proceeding has been brought in an inconvenient forum and covenants that it will not seek to challenge the jurisdiction of any such court or seek to oust the jurisdiction of any such court, whether on the basis of inconvenient forum or otherwise. The Company irrevocably consents to the service of any and all process in any such suit, action or proceeding by mail copies of such process to the Company at its address for notices provided in Section 9.1 hereof. The Company agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. All mailings under this Section 9.6 shall be by registered or certified mail, return receipt requested. Nothing in this Section 9.6 shall affect your right to serve legal process in any other manner permitted by law or affect your right to bring any suit, action or proceeding against the Company or any of its properties in the courts of any other jurisdiction. [SIGNATURES ON FOLLOWING PAGE] -10- If the foregoing is satisfactory to you, please sign the form of acceptance on the enclosed counterparts hereof and return the same to the Company, whereupon this letter, as so accepted, shall become a binding contract between you and each of the undersigned. Very truly yours, GRAY COMMUNICATIONS SYSTEMS, INC. By: Name: Title: The foregoing Agreement is hereby accepted. BULL RUN CORPORATION By: Name: Title: -11- EXHIBITS AND SCHEDULES EXHIBIT A Preferred Stock Designation for Series A Preferred and Series B Preferred EXHIBIT B Form of Opinion of Counsel for the Company EXHIBIT C Form of New Warrant EXHIBIT D Form of Series B Warrant -12-
NEITHER THIS WARRANT, NOR THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF, HAVE BEEN REGISTERED FOR OFFER OR SALE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THE GEORGIA SECURITIES ACT OF 1973 OR ANY OTHER APPLICABLE SECURITIES LAWS. THIS WARRANT HAS BEEN ISSUED OR SOLD, AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF WILL BE ISSUED OR SOLD, IF AT ALL, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH LAWS FOR TRANSACTIONS NOT INVOLVING ANY PUBLIC OFFERING INCLUDING, BUT NOT LIMITED TO, PARAGRAPH (13) OF CODE SECTION 10-5-9 OF THE GEORGIA SECURITIES ACT OF 1973. THIS WARRANT HAS BEEN ACQUIRED, AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF WILL BE ACQUIRED, IF AT ALL, FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, HYPOTHECATED, PLEDGED OR DISPOSED OF IN ANY MANNER EXCEPT IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER SUCH LAWS OR PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH LAWS. GRAY COMMUNICATIONS SYSTEMS, INC. WARRANT GRAY COMMUNICATIONS SYSTEMS, INC., a Georgia corporation (the "Company"), hereby certifies that, for value received, BULL RUN CORPORATION, a Georgia corporation (together with its registered or authorized assigns, the "Holder"), is entitled, subject to the terms hereof, to purchase from the Company upon surrender of this Warrant (this "Warrant") at any time during the period described in Section 2 hereof, Four Hundred Eighty-Seven Thousand Five Hundred (487,500) shares of Common Stock (as defined below) of the Company (the "Warrant Shares") (as adjusted from time to time as provided in this Warrant), at the Warrant Exercise Price (as defined below) per share. DEFINITIONS SECTION 1. (a) DEFINITIONS. The following words and terms as used in this Warrant shall have the following meanings: "AFFILIATE" means, with respect to a Person, any other Person that, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such first Person. "BUSINESS DAY" means a day other than a Saturday, a Sunday, a day on which banking institutions in the State of Georgia are authorized or obligated by law or required by executive order to be closed, and a day on which the New York Stock Exchange is closed. "CLOSING DATE" means the date on which the Company's 8% Subordinated Note is exchanged for 1,000 shares of the Preferred Stock in accordance with the terms of the Preferred Stock Agreement. "COMMON STOCK," when used with reference to stock of the Company, means all shares now or hereafter authorized of Class A Common Stock, no par value, of the Company and stock of any other class of the common equity of the Company into which such shares may hereafter have been changed and other rights or securities convertible into shares of Class A Common Stock of the Company. "CONVERSION PRICE" means the price per share for which Common Stock is issuable upon the conversion or exchange of Convertible Securities, determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance of such Convertible Securities, plus the minimum aggregate amount of additional consideration payable to the Company upon the conversion or exchange of such Convertible Securities, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. "CONVERTIBLE SECURITIES" mean any securities issued by the Company or an Affiliate which are convertible into or exchangeable for, directly or indirectly, shares of Common Stock. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "EXPIRATION DATE" means the tenth anniversary of the date hereof. "MARKET PRICE" of a share of Common Stock on any day means the average closing price of a share of Common Stock for the twenty (20) consecutive trading days preceding such day on the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, the average of the reported bid and asked prices during such 10 trading day period in the over-the- counter market as furnished by the National Quotation Bureau, Inc., or, if such firm is not then engaged in the business of reporting such prices, as furnished by any similar firm then engaged in such business selected by the Company, or, if there is no such firm, as furnished by any member of the National Association of Securities Dealers, Inc. selected by the Company or, if the shares of Common Stock are not publicly traded, the Market Price for such day shall be the book value of a share of Common Stock of the Company as disclosed in the last balance sheet of the Company regularly prepared by the Company. "PERSON" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or any agency or political subdivision thereof) or other entity of any kind. "PREFERRED STOCK AGREEMENT" means that certain Preferred Stock Exchange and Purchase Agreement dated __________________, 1996, between the Company and the above-named Holder. "PREFERRED STOCK" means the Company's Series A Preferred Stock, no par value per share, issued to the above-named Holder pursuant to the Preferred Stock Agreement. "REGISTRABLE SECURITIES" means the Warrant Shares and any securities issued or issuable upon exercise of this Warrant. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been distributed to the public pursuant to Rule 144 (or any successor provision) or are saleable pursuant to Rule 144(k) (or any successor provision) under the Securities Act, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and -2- subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force, or (d) they shall have ceased to be outstanding. "REGISTRATION EXPENSES" means all expenses incident to the Company's performance of or compliance with Sections 20, 21 and 22 hereof, including, without limitation, all registration and filing fees, all fees and expenses of complying with securities or blue sky laws, fees and other expenses associated with filings with the National Association of Securities Dealers, Inc. (including, if required, the reasonable fees and expenses of any "qualified independent underwriter" and its counsel), all printing expenses, messenger, telephone, duplication, word processing and delivery expenses incurred by the Company, the fees and disbursements of counsel for the Company and of its independent public accountants, the fees and disbursements of counsel retained by the holders of Registrable Securities, Securities Act liability insurance if the Company so desires such insurance, rating agency fees and the fees and expenses incurred in connection with the listing of the securities to be registered on any securities exchange, fees and disbursements of all independent certified public accountants including, without limitation, the expenses of any special audits made by such accountants required by or incident to such performance and compliance, but not including such holders' proportionate share of underwriting discounts and commissions. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "STRIKE PRICE" means the price per share for which Common Stock is issuable upon the exercise of any rights, options or warrants for the purchase of Common Stock, determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the grant of such rights, options or warrants, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights, options or warrants, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of such rights, options or warrants. "WARRANT EXERCISE PRICE" initially shall be the Market Price as of the Closing Date. (b) OTHER DEFINITIONAL PROVISIONS. (i) Except as otherwise specified herein, all references herein (A) to any Person other than the Company shall be deemed to include such Person's successors and assigns, (B) to the Company shall be deemed to include the Company's successors and assigns, and (C) to any applicable law defined or referred to herein shall be deemed references to such applicable law as the same may have been or may be amended or supplemented from time to time. (ii) When used in this Agreement, the words "herein", "hereof" and "hereunder", and words of similar import, shall refer to this Agreement as a whole and not to any provision of this Agreement, and the words "Section" and "Exhibit" shall refer to Sections of and Exhibits to this Agreement unless otherwise specified. (iii) Whenever the context so requires, the neuter gender includes the masculine or feminine, and the singular number includes the plural, and vice versa. SECTION 2. EXERCISE OF WARRANT. -3- (a) Subject to the terms and conditions hereof, including, but not limited to, Sections 19, 33 and 34 hereof, this Warrant may be exercised, in whole or in part, at any time or from time to time during normal business hours on or after the second anniversary of the date hereof and prior to the close of business on the Expiration Date. The rights represented by this Warrant may be exercised by the Holder, in whole or from time to time in part (except that this Warrant shall not be exercisable as to a fractional share) by (i) delivery of a written notice of such Holder's election to exercise this Warrant to the Company's office located at the address set forth in Section 28 hereof, which notice shall specify the number of Warrant Shares to be purchased, (ii) payment to the Company of an amount equal to the Warrant Exercise Price multiplied by the number of Warrant Shares as to which the Warrant is being exercised in cash, by certified or official bank check or the cancellation of all or any of the shares of the Preferred Stock, (iii) surrender of this Warrant, properly endorsed, at the principal office of the Company (or at such other agency or office of the Company as the Company may designate by notice to the Holder), and (iv) if the Warrant Shares issuable upon the exercise of the rights represented by this Warrant have not been registered under the Securities Act, delivery to the Company by the Holder of a letter in the form of Exhibit A hereto; PROVIDED, HOWEVER, that if such Warrant Shares are to be issued in any name other than that of the registered holder of this Warrant, such issuance shall be deemed a transfer subject to the provisions of Section 18. In the event of any exercise of the rights represented by this Warrant, a certificate or certificates for the Warrant Shares so purchased, registered in the name of, or as directed by, the Holder, shall be delivered to, or as directed by, such Holder within a reasonable time after such rights shall have been so exercised. Unless the rights represented by this Warrant shall have expired or have been fully exercised, the Company shall issue a new Warrant identical in all respects to the Warrant exercised except it shall represent rights to purchase the number of Warrant Shares purchasable immediately prior to such exercise under the Warrant exercised, less the number of Warrant Shares with respect to which such Warrant was exercised. The entity in whose name any certificate for Warrant Shares is issued upon the exercise of this Warrant shall for all purposes be deemed to have become the holder of record of such Warrant Shares immediately prior to the close of business on the date on which the Warrant was surrendered and payment of the amount due in respect of such exercise and any applicable taxes was made, irrespective of the date of delivery of such share certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are properly closed, such person shall be deemed to have become the holder of such Warrant Shares at the opening of business on the next succeeding date on which the stock transfer books are open. If this Warrant is not exercised on or prior to the Expiration Date, this Warrant shall become void and all rights of the Holder hereunder shall cease. (b) Notwithstanding the provisions of Section 2(a) hereof to the contrary, this Warrant may be exercised, in whole or in part, at any time or from time to time during normal business hours on or after the date hereof and prior to the close of business on the Expiration Date upon the occurrence of any of the following: (i) any change in control of the Company by any means whatsoever, including without limitation, by acquisition of securities, merger, consolidation, recapitalization or reorganization of the Company; (ii) any partial or complete liquidation of the Company; (iii) any sale or disposition of fifty percent (50%) or more of the assets of the Company; (iv) any public offering of all or part of any class of securities issued by the Company pursuant to an effective registration statement under the Securities Act, other than a public offering consummated prior to December 31, 1996; (v) any tender offer for more than twenty percent (20%) of any outstanding class of securities issued by the Company; or (vi) any sale or other disposition by the Company of capital stock of the Company constituting (on a cumulative basis) more than fifty percent (50%) of the capital stock of the Company then outstanding. -4- SECTION 3. COVENANTS. The Company covenants and agrees that all securities which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable, free and clear of all taxes, liens, claims and encumbrances. The Company further covenants and agrees that (i) during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of the rights then represented by this Warrant and (ii) it will, at its expense, use its best efforts to cause such shares to be listed (subject to issuance or notice of issuance) on all stock exchanges, if any, on which the Common Stock may become listed during such period. SECTION 4. ADJUSTMENT OF WARRANT EXERCISE PRICE UPON STOCK SPLITS, DIVIDENDS, DISTRIBUTIONS AND COMBINATIONS. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares or issue a stock dividend or make a distribution with respect to outstanding shares of Common Stock or Convertible Securities payable in Common Stock or in Convertible Securities which are convertible with no additional consideration into shares of Common Stock, the Warrant Exercise Price in effect immediately prior to such subdivision or stock dividend or distribution shall be proportionately reduced (treating for such purpose any such shares of Convertible Securities outstanding or payable as being the number of shares of Common Stock issuable upon their conversion); and conversely, in case the shares of Common Stock of the Company shall be combined into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such combination shall be proportionately increased. SECTION 5. REORGANIZATION OR RECLASSIFICATION. In case of any capital reorganization, or of any reclassification of the capital stock of the Company (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a split-up or combination), or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of the assets of the Company shall be effected in a manner by which the holders of Common Stock shall be entitled to securities or assets with respect to or in exchange for Common Stock, then this Warrant shall, after such capital reorganization, reclassification of capital stock, merger or sale of assets, entitle the Holder hereof to purchase the kind and number of shares of stock or other securities or property of the Company, or of the corporation resulting from such consolidation to which the Holder hereof would have been entitled if it had held the Common Stock issuable upon the exercise hereof immediately prior to such capital reorganization, reclassification of capital stock, consolidation, merger or sale. The Company shall not effect any such capital reorganization, reclassification of capital stock, consolidation, merger or sale unless prior to the consummation thereof the successor corporation (if other than the Company) resulting therefrom or the corporation purchasing such assets shall, by written instrument executed and mailed to the Holder hereof at the last address of such Holder appearing on the books of the Company, (i) assume the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase, and (ii) agree to be bound by all the terms of this Warrant. SECTION 6. ANTI-DILUTION ADJUSTMENTS. _(a) ISSUANCE OF ADDITIONAL SHARES. In case at any time the Company shall issue or sell any shares of its Common Stock (excluding shares issued upon the exercise of this Warrant and excluding shares issued in a public offering) for a consideration per share less than the Market Price on the date of such issue or sale, the Warrant Exercise Price shall be reduced to the price determined by multiplying the Warrant Exercise Price in effect immediately prior -5- to the time of such issue or sale by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Market Price immediately prior to such issue or sale plus (ii) the aggregate consideration received by the Company upon such issue or sale, and the denominator of which shall be the product of (iii) the total number of shares of Common Stock outstanding immediately after such issue or sale, multiplied by (iv) the Market Price immediately prior to such issue or sale. _(b) ISSUANCE OF RIGHTS, OPTIONS OR WARRANTS. In case at any time the Company shall grant (whether directly or by assumption in a merger or otherwise) any rights (other than the rights represented by this Warrant), options or warrants to subscribe for or to purchase shares of Common Stock, whether or not such rights, options or warrants are immediately exercisable, and the Strike Price is less than the Market Price as of the date such rights, options or warrants are granted, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights, options or warrants shall be deemed to have been issued at the Strike Price. Except as otherwise provided in Section 6(d) below, no adjustments of the Warrant Exercise Price shall be made upon the actual issuance of the shares of Common Stock underlying such rights, options, warrants. _(c) ISSUANCE OF CONVERTIBLE SECURITIES. In case at any time the Company shall issue any Convertible Securities, whether or not the right to convert or exchange any such Convertible Securities are immediately exercisable, and the Conversion Price is less than the Market Price as of the date such Convertible Securities are issued, then the total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities shall be deemed to have been issued at the Conversion Price. Except as otherwise provided in Section 6(d) below, no adjustments of the Warrant Exercise Price shall be made upon the actual issuance of the shares of Common Stock underlying such Convertible Securities. _(d) CHANGE IN STRIKE PRICE, CONVERSION PRICE OR CONVERSION RATE. If (i) the Strike Price for any right, option or warrant for the purchase of Common Stock, (ii) the Conversion Price of any Convertible Security or (iii) the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock changes at any time (other than by reason of provisions designed to protect against dilution), the Warrant Exercise Price in effect at the time such event occurs shall be readjusted to the Warrant Exercise Price which would have been in effect at such time had such rights, options, warrants or Convertible Securities still outstanding provided for such changed Strike Price, Conversion Price or conversion rate, as the case may be, at the time such rights, options or warrants were initially granted or such Convertible Securities were initially issued. Upon the expiration of any such right, option or warrant or the termination of any such right to convert or exchange such Convertible Securities, the Warrant Exercise Price then in effect shall be increased to the Warrant Exercise Price which would have been in effect at the time of such expiration or termination had such right, option, warrant or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been granted or issued, and the Common Stock issuable thereunder shall no longer be deemed to be outstanding. _(e) CONSIDERATION FOR STOCK. In case any shares of Common Stock or Convertible Securities or any rights, options or warrants to purchase Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deducting any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights, options or warrants to purchase Common Stock or Convertible Securities shall be issued or sold in whole or in part for consideration other than cash, the amount of such consideration shall be deemed to be the fair value thereof as determined by the Board of Directors of the Company, without deducting any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In the event of any consolidation or merger of the Company in which the Company is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the -6- Company for stock or other securities of any corporation, the Company shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation as determined by the Board of Directors of the Company, and if any such calculation results in adjustment of the Warrant Exercise Price, the determination of the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such merger, conversion or sale, for purposes of Section 5 shall be made after giving effect to such adjustment of the Warrant Exercise Price. (f) EXCEPTIONS. Notwithstanding anything in this Section 6 to the contrary, the Company shall not be required to make any adjustment of the Warrant Exercise Price in connection with (i) the issuance of shares of Common Stock upon exercise of options granted to management employees of the Company pursuant to a stock option plan and (ii) any acquisition in which all or part of the purchase price is payable in Common Stock or Convertible Securities and the Company or an Affiliate of the Company is the surviving corporation. SECTION 7. RECORD DATE. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or (ii) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. SECTION 8. TREASURY SHARES. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the sale or other disposition of any such shares shall be deemed an issuance thereof for the purposes of Section 6. SECTION 9. CERTAIN EVENTS. If any event occurs as to which, in the opinion of the Board of Directors of the Company, the provisions of Sections 4, 5 or 6 are not strictly applicable or, if strictly applicable, would not fairly protect the purchase rights of the Holder of this Warrant in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an equitable adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such purchase rights. SECTION 10. NOTICE OF ADJUSTMENT OF WARRANT EXERCISE PRICE. Upon any adjustment of the Warrant Exercise Price or in the occurrence of any event which should result in an adjustment to the Warrant Exercise Price, the Company shall promptly give written notice thereof to the Holder of this Warrant, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. SECTION 11. ADJUSTMENTS. (a) COMPUTATION OF ADJUSTMENTS. Upon each computation of an adjustment in the Warrant Exercise Price, the Warrant Exercise Price shall be computed to the nearest cent (I.E., fractions of .5 of a cent, or greater, shall be rounded to the highest cent) and the shares which may be subscribed for and purchased upon exercise of this Warrant shall be calculated to the nearest whole share (I.E., fractions of less than one half of a share, or greater, shall be treated -7- as being a whole share). No such adjustment shall be made, however, if the change in the Warrant Exercise Price would be less than $.01 per share, but any such lesser adjustment shall be made at the time and together with the next subsequent adjustment which, together with any adjustments carried forward, shall amount to $.01 per share or more. (b) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant Exercise Price as provided above, the registered holder of this Warrant shall thereafter be entitled to purchase, at the Warrant Exercise Price resulting from such adjustment, the number of shares (calculated to the nearest tenth of a share) obtained by multiplying the Warrant Exercise Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Warrant Exercise Price after such adjustment. (c) CERTAIN PROHIBITED ADJUSTMENTS. Notwithstanding anything herein to the contrary, the Company agrees not to enter into any transaction which would cause an adjustment of the Warrant Exercise Price to less than the par value of the Common Stock. SECTION 12. FRACTIONAL SHARES. The Company shall not be required to issue fractional Warrant Shares upon the exercise of this Warrant. If the Holder would be entitled upon the exercise of any rights evidenced hereby to receive a fractional interest in a Warrant Share, the Company shall, upon such exercise, pay in lieu of such fractional interest an amount in cash equal to the value of such fractional interest, calculated based upon the Market Price as of the date this Warrant is exercised. SECTION 13. NOTICE OF CERTAIN EVENTS. In case at any time: (a) the Company shall pay any dividend upon, or make any distribution in respect of, its Common Stock; (b) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (c) there shall be any capital reorganization, or reclassification of the capital stock, of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to another corporation; or (d) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more said cases, the Company shall give notice to the Holder of the date on which (i) the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (ii) such reorganization, reclassification, consolidation, merger, sale of assets, involuntary dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall be given not less than ten (10) days prior to the record date or the date on which the transfer books of the Company are to be closed in respect thereto in the case of an action specified in clause (i) and at least thirty (30) days prior to the action in question in the case of an action specified in clause (ii). Notices of regular dividends provided by the Company in accordance with the requirements of the New York Stock Exchange shall constitute notice to the Holder of such dividends in accordance with this Section. SECTION 14. NO CHANGE IN WARRANT TERMS ON ADJUSTMENT. Irrespective of any adjustment in the Warrant Exercise Price or the number of shares of Common Stock issuable upon exercise hereof, this Warrant, whether theretofore or thereafter issued or reissued, may continue to express the same Warrant Exercise Price and number of shares as are stated herein and the Warrant Exercise Price and such number of shares specified herein shall be deemed -8- to have been so adjusted. SECTION 15. TAXES. The Company shall pay any tax or taxes attributable to the issuance of securities issuable upon the exercise of this Warrant, unless the certificates for such securities are to be issued in a name other than that of the Holder hereof. The Company shall not be required to pay any tax or taxes levied or assessed with respect to any transfer of this Warrant or any Warrant Shares. SECTION 16. WARRANT HOLDER NOT DEEMED A SHAREHOLDER. No Holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed a shareholder of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance of record to the Holder of this Warrant of the securities which it is then entitled to receive upon the due exercise of this Warrant. SECTION 17. NO LIMITATION ON CORPORATE ACTION. Except as otherwise specifically set forth herein, no provisions of this Warrant and no right or option granted or conferred hereunder shall in any way limit, affect or abridge the exercise by the Company of any of its corporate rights or powers to recapitalize, amend its Articles of Incorporation, reorganize, consolidate or merge with or into another corporation, or transfer all or any part of its property or assets, or the exercise of any other of its corporate rights and powers. SECTION 18. TRANSFER; RESTRICTIVE LEGENDS. (a) This Warrant may not be transferred or assigned to any Person without the express written consent of the Company, which consent shall not be unreasonably withheld, and without complying with the restrictions contained in Section 33 of this Warrant, if applicable. The Holder shall indemnify and hold harmless the Company from any transfer or assignment of this Warrant in violation of the terms hereof or in violation of applicable law. Further, this Warrant may be transferred separately from the Preferred Stock. (b) This Warrant is subject to the condition that if at any time the Board of Directors of the Company determines, in its reasonable discretion based upon the advice of its securities counsel, that the registration or qualification of the Registrable Securities is necessary under any state or federal law as a condition of or in connection with the issuance and delivery of such securities, the issuance and delivery of such securities may be withheld unless and until such registration or qualification shall have been effected. Upon the request of Holder, the Company shall promptly supply to such Holder all information regarding the Company required to be delivered in connection with a transfer pursuant to Rule 144 or Rule 144A of the Securities and Exchange Commission. If a registration statement is not in effect under the Securities Act or any applicable state securities laws with respect to the securities, the Board of Directors may require, as a condition of exercise and as a condition to the issuance and delivery of any such securities, that the Holder deliver to the Company a letter in the form of Exhibit A hereto, with any supplemental changes the Board of Directors feel are necessary to comply with federal and state securities laws. The Company may endorse on certificates representing such securities such legends referring to the representations and restrictions contained herein and in such letter, in addition to any other applicable restrictions on resale as the Company, as it in its discretion shall deem appropriate. SECTION 19. VESTING. Notwithstanding anything in Section 2 to the contrary, this Warrant shall be exercisable only with respect to the number of Warrant Shares which have vested in accordance with the following schedule: -9- (i) on the date hereof, three hundred thousand (300,000) Warrant Shares shall automatically vest; and (ii) for so long as any of the Preferred Stock remain outstanding, an additional thirty-seven thousand five hundred (37,500) Warrant Shares, up to an aggregate of one hundred eight-seven thousand (187,500) Warrant Shares, shall vest on each anniversary of the date hereof; provided, however, that upon the occurrence of an event described in Section 2(b) hereof, any Warrant Shares not then vested shall immediately vest; and provided further, that upon any adjustment of the number of Warrant Shares the Holder is entitled to purchase upon the exercise of this Warrant in accordance with Section 11(b) hereof, all numerical references to Warrant Shares contained in this Section 19 shall be proportionately adjusted. SECTION 20. REGISTRATION ON REQUEST OF HOLDER. (a) At any time within the first five (5) years after the date this Warrant first becomes exercisable, upon the delivery to the Company of a written request of the Holder and any holder of Registrable Securities, requesting that the Company effect a registration under the Securities Act, and specifying the intended method of disposition thereof, the Company will promptly give written notice of such requested registration to all other holders of Registrable Securities, and the Company thereupon on one occasion will use its best efforts to effect, as expeditiously as possible, a registration under the Securities Act (in accordance with the intended method of disposition specified in the notice from the Holder and any holder of Registrable Securities) of all of the Registrable Securities requested to be registered pursuant to this Section 20. Notwithstanding the foregoing provisions of this Section 20(a), the Company shall have no obligation to register any Registrable Securities during any period of time (not to exceed, in the case of (x) or (y), 60 days or, in the case of (z), 10 Business Days) when (x) the Company is contemplating a public offering of its securities and in the judgment of the managing underwriter thereof (or the Company, if such offering is not underwritten) such filing would have a material adverse effect on the contemplated offering, (y) the Company is in possession of material information that it deems advisable not to disclose in a registration statement, or (z) the Company is engaged in any program for the repurchase of stock of the Company. (b) If any requested registration pursuant to this Section 20 is in the form of an underwritten public offering, the holders of a majority of the Registrable Securities which are to be registered pursuant to this Section 20 shall have the right to select the manager or co-managers that will administer the offering, provided that such managers are reasonably satisfactory to the Company. (c) The Company's obligation to register Registrable Securities pursuant to Section 20(a) shall not be deemed satisfied if the registration statement does not become effective because of a material adverse change in the Company. In addition, if such registration statement does become effective and the method of disposition is an underwritten public offering, such obligation shall not be deemed satisfied if more than fifty percent (50%) of the Registrable Securities included in such registration statement are not sold because of a material adverse change in the Company. (d) From the date of receipt of a notice from the Company pursuant to Section 20(a) until the completion of the period of distribution of the registration contemplated therein, the Company will not file with the Commission any other registration statement with respect to its capital stock, whether for its own account or that of other security holders, provided that the Company shall not be prohibited from filing any registration statements on Forms S-4 or S-8 or any other form which is not available for registering capital stock for sale to the public. The Company shall be entitled to include in any registration statement referred to in this Section 20 shares of its capital stock to be sold by the Company for its own account or by other stockholders of the Company pursuant to other registration rights agreements, -10- provided the registration statement relates to an underwritten public offering and in the opinion of the managing underwriter such inclusion would not adversely affect the marketing of the securities to be sold by the holders of Registrable Securities. (e) Notwithstanding anything to the contrary in this Section 20, the amount of Registrable Securities to be included in an underwritten public offering may be reduced if and to the extent the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold in such underwritten public offering including the price at which such securities will be sold. If such a determination is made, (i) the number of equity securities (as defined in the Exchange Act) to be included by the Company and the number of equity securities to be included by stockholders other than the holder of Registrable Securities shall be reduced first; and then (ii) the number of Registrable Securities to be included by the holders thereof shall be reduced in a manner consistent with the provisions of Section 20(f) hereof. (f) If a requested registration pursuant to this Section 20 (x) involves an underwritten public offering and the number of Registrable Securities requested to be included in such registration exceeds the largest number of Registrable Securities which can be sold as determined by the managing underwriter pursuant to Section 20(e) (the "Maximum Offering Size"), or (y) the number of Registrable Securities requested to be included in such registration statement exceeds the number of Registrable Securities the Company is obligated to register under Section 20(a), then the Company will include in such registration the number of Registrable Securities requested to be included pro rata in proportion to the percentage of Registrable Securities held by the holders of Registrable Securities requesting registration; provided, however, that such holders may decide among themselves a different priority. SECTION 21. INCIDENTAL REGISTRATION RIGHTS. If the Company at any time proposes to register any of its equity securities (as defined in the Exchange Act) under the Securities Act (other than pursuant to a registration statement on Forms S-4 or S-8, or any successor forms), whether or not for sale for its own account, and the registration form to be used may be used for the registration of Registrable Securities, it shall at such time give the Holder and any holder of Registrable Securities prompt written notice of its intentions and, upon the written request of any such holder made within twenty (20) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such holder and the intended method of disposition thereof), the Company shall use its best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the holders thereof, to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered, PROVIDED that: (i) if, at any time after giving written notice of its intention to register any securities and, prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company may, at its election, give written notice of such determination to each holder of Registrable Securities and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith); and (ii) if such registration shall be in connection with an underwritten public offering and the managing underwriters shall advise the Company in writing that in their opinion the number of Registrable Securities requested to be included in such registration exceeds the number of such securities which can be sold in such offering, the Company shall include in such registration the number (if any) of Registrable Securities so requested to be included which in the opinion of such underwriters can be sold and shall not include in such registration any securities (other than securities being sold by the Company, which shall have priority in being -11- included in such registration) so requested to be included other than Registrable Securities unless all Registrable Securities requested to be so included are included therein (and if in the opinion of such underwriters, some but not all of the Registrable Securities may be so included, all holders of Registrable Securities requested to be included therein shall share pro rata in the number of shares of Registrable Securities included in such underwritten public offering on the basis of the number of Registrable Securities requested to be included therein), except that, in the case of a registration initially requested or demanded by a holder or holders of securities other than Registrable Securities, the holders of the Registrable Securities requested to be included therein and the holders of such other securities shall share pro rata (based on the number of shares if the requested or demanded registration is to cover only Common Stock and, if not, based on the proposed offering price of the total number of securities included in such underwritten public offering requested to be included therein); and the Company shall so provide in any registration agreement hereinafter entered into with respect to any of its securities. SECTION 22. REGISTRATION IN GENERAL. (a) PROCEDURES. If and whenever the Company is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act, the Company shall promptly: (i) prepare and file with the Securities and Exchange Commission a registration statement with respect to such securities, make all required filings with the NASD and use best efforts to cause such registration statement to become effective; (ii) prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement, but in no event for a period of more than six months after such registration statement becomes effective; (iii) furnish to counsel (if any) elected by holders of a majority (by number of shares) of the Registrable Securities covered by such registration statement copies of all documents proposed to be filed with the Securities and Exchange Commission in connection with such registration, which documents shall be subject to the review of such counsel; (iv) furnish to each seller of such securities such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits, except that the Company shall not be obligated to furnish any seller of securities with more than two copies of such exhibits), such number of copies of the prospectus included in such registration statement (including such preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request in order to facilitate the disposition of the securities owned by such seller; (v) use its best efforts to register or qualify such securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as each seller shall request, and do any and all other acts and things which may be necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the securities owned by such seller, except that the Company shall not for -12- any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, or to consent to service of process in any such jurisdiction other than process served in connection with alleged violations by the Company of the securities laws of such jurisdiction; (vi) furnish to each seller a signed counterpart, addressed to the sellers, of (A) an opinion of counsel for the Company, dated the effective date of the registration statement, and (B) subject to the accountants obtaining the necessary representations as specified in Statement on Auditing Standards No. 72, a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in the registration statement, covering substantially the same matters with respect to the registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to changes subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities; (vii) notify each seller of any securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and at the request of any such seller prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (viii) otherwise use its best efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first month after the effective date of the registration statement, which earnings statement shall satisfy the provisions of section 11(a) of the Securities Act; and (ix) use its best efforts to list such securities on any stock market on which the Common Stock is then listed, if such securities are not already so listed and if such listing is then permitted under the rules of such exchange, and to provide a transfer agent and registrar for such Registrable Securities not later than the effective date of such registration statement. The Company may require each seller of any securities as to which any registration is being effected to furnish to the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing and as shall be required by law in connection therewith. Each such holder agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such holder not materially misleading. -13- By acquisition of Registrable Securities, each holder of such Registrable Securities shall be deemed to have agreed that upon receipt of any notice from the Company of the happening of any event of the kind described in Section 22(b)(vii) hereof, such holder shall promptly discontinue such holder's disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 22(b)(vii) hereof. If so directed by the Company, each holder of Registrable Securities shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 22(b)(ii) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of any Registrable Securities covered by such registration statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 22(b)(vii) hereof. (b) INDEMNIFICATION. (i) INDEMNIFICATION BY THE COMPANY. The Company shall indemnify and hold harmless each holder of Registrable Securities, each person who controls such holder of Registrable Securities within the meaning of either Section 15 of the Securities Act or Section 20(a) of the Exchange Act and the officers, directors, employees and agents of each such holder and control Person (each such Person being sometimes hereinafter referred to as an "Indemnified Holder") from and against all losses, claims, damages, liabilities, costs (including costs of preparation and attorneys' fees) and expenses (including expenses of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or based upon any omission or alleged omission to state therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any such untrue statement or omission or allegation thereof based upon information relating to such Indemnified Holder and furnished in writing to the Company by such Indemnified Holder expressly for use therein. This indemnity shall be in addition to any liability which the Company may otherwise have. If any action or proceeding (including any governmental investigation or inquiry) shall be brought or asserted against an Indemnified Holder in respect of which indemnity may be sought from the Company, such Indemnified Holder shall promptly notify the Company in writing, and the Company shall, at its expense, assume the defense thereof, including the employment of counsel satisfactory to such Indemnified Holder and the payment of all expenses. The failure so to notify the Company shall not relieve the Company from any obligation or liability except to the extent (but only to the extent) that it shall finally be determined by a court of competent jurisdiction (which determination is not subject to appeal) that the Company has been materially prejudiced by such failure. Such Indemnified Holder shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Holder unless (A) the Company has agreed to pay such fees and expenses or (B) the Company shall have failed promptly to assume the defense of such action or proceeding or has failed to employ counsel satisfactory to such Indemnified Holder or (C) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Holder and the Company or an Affiliate of the Company, and there may be one or more defenses available to such Indemnified Holder which are additional to, or in conflict with, those available to the Company or such Affiliate (in which case, if such -14- Indemnified Holder notifies the Company in writing that it elects to employ separate counsel at the expense of the Company, the Company shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Holder, it being understood, however, that the Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings inthe same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for such Indemnified Holder). The Company shall not be liable for any settlement of any such action or proceeding effected without its written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Company agrees to indemnify and hold harmless such Indemnified Holders from and against any loss or liability by reason of such settlement or judgment. Whether or not such defense is assumed by the Company, no Indemnified Holder shall be subject to any liability for any settlement made without its consent (but such consent shall not be unreasonably withheld). The Company shall not consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to each Indemnified Holder of a release, in form and substance satisfactory to the Indemnified Holder, from all liability in respect of such proceeding for which such Indemnified Holder would be entitled to indemnification hereunder (whether or not any Indemnified Holder is a party thereto). (ii) INDEMNIFICATION BY HOLDER OF REGISTRABLE SECURITIES. Each holder of Registrable Securities agrees to indemnify and hold harmless the Company, its directors and officers and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such holders, but only with respect to information relating to such holders furnished in writing by such holders expressly for use in any registration statement or prospectus, or any amendment or supplement thereto, or any preliminary prospectus. In case any action or proceeding shall be brought against the Company or its directors or officers or any such controlling person, in respect of which indemnity may be sought against a holder of Registrable Securities, such holder shall have the rights and duties given to the Company and the Company or its directors or officers or such controlling person shall have the rights and duties given to each holder by the preceding paragraph. (iii) CONTRIBUTION If the indemnification provided for in this Section 22(b) is unavailable to or insufficient to hold harmless an indemnified party under Section 22(b)(i) or Section 22(b)(ii) hereof (other than by reason of exceptions provided in those Sections) in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Holders on the other hand from their sale of Registrable Securities or if such allocation is not permitted by applicable law, the relative fault of the Company on the one hand and of the Indemnified Holder on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the Indemnified Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Indemnified Holder and the parties' relative intent, knowledge, access to information and opportunity to correct -15- or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 22(b)(i), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company and each Holder of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 22(b)(iii) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (c) EXPENSES. The Company shall pay all Registration Expenses in connection with each registration of Registrable Securities. SECTION 23. LOCK-UP AGREEMENT. The Holder hereby agrees to enter into an agreement with the Company, in form and substance reasonably satisfactory to such Holder, restricting such Holder's ability to sell Warrant Shares for a period not to exceed one hundred eighty (180) days following any underwritten public offering of Common Stock pursuant to an effective registration statement under the Securities Act. SECTION 24. EXCHANGE OF WARRANT. This Warrant is exchangeable upon the surrender hereof by the holder hereof at such office or agency of the Company, for new warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder from time to time after giving effect to all the provisions hereof, each of such new warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said holder hereof at the time of such surrender. SECTION 25. FINANCIAL INFORMATION. Within one hundred twenty (120) days after the close of each fiscal year of the Company ending after the date of the issuance of this Warrant and prior to the Expiration Date, the Company shall furnish to the Holder the audited consolidated financial statements of the Company and its consolidated subsidiaries (including balance sheet and income statements) as at the end of each such fiscal year in comparative form certified by a firm of independent certified public accountants of recognized national standing, reasonably acceptable to the Holder and selected by the Company, which financial statements shall be accompanied by the opinion of such certified public accountants thereon. SECTION 26. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall, on such terms as to indemnify or otherwise as it may in its discretion impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. SECTION 27. REPRESENTATION OF HOLDER. The holder of this Warrant, by the acceptance hereof, represents that it is acquiring this Warrant for its own account for investment and not with a view to, or sale in connection with, any distribution hereof or of any of the shares of Common Stock or other securities issuable upon the exercise thereof, nor with any present intention of distributing any of the same. SECTION 28. NOTICE. All notices, demands and other communications under this Warrant shall be in writing (which shall include communications by telex and telecopy) and shall be delivered (a) in person or by courier or overnight service, (b) mailed by first class registered or certified mail, postage prepaid, return receipt requested, by -16- prepaid telex or telecopier, or by hand, courier or overnight service, and (c) be given at the following respective addresses and telecopier numbers and to the attention of the following Persons: (i) if to the Company, to: Gray Communications Systems, Inc. 126 North Washington Street Albany, Georgia 31701 Attn: Mr. Ralph W. Gabbard Telecopier No.: (912) 888-9374 with a copy (which shall not constitute notice) to: Heyman & Sizemore 2300 Cain Tower 229 Peachtree Street, NE Atlanta, Georgia 30303-1608 Attn: Neal H. Ray, Esq. Telecopier No.: (404) 521-2838 (ii) if to the Holder hereof, to: Bull Run Corporation 4370 Peachtree Road Atlanta, Georgia 30319 Attn: Mr. Robert S. Prather Telecopier No.: (404) 261-9607 with a copy (which shall not constitute notice) to: Alston & Bird One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 Attn: Stephen A. Opler, Esq. Telecopier No.: (404) 881-4777 or at such other address or telecopier number or to the attention of such other person as the party to whom such information pertains may hereafter specify for the purpose in a notice to the other specifically captioned "Notice of -17- Change of Address", and (d) be effective or deemed delivered or furnished (i) if given by mail, on the third Business Day after such communication is deposited in the mail, addressed as above provided, (ii) if given by telecopier, when such communication is transmitted to the appropriate number determined as above provided in this Section 28 and the appropriate answer back is received or receipt is otherwise acknowledged, and (iii) if given by hand delivery or overnight delivery service when left at the address of the addressee addressed as above provided, except that notices of a change of address or telecopier number, shall not be deemed furnished until received. SECTION 29. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged, or terminated only by an instrument in writing signed by the party or holder hereof against whom enforcement of such change, waiver, discharge or termination is sought. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. SECTION 30. REMEDIES. The Company stipulates that the remedies at law of the Holder in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. SECTION 31. GOVERNING LAW. This Warrant shall be governed by the laws of the State of Georgia, without regard to conflict of laws principles. SECTION 32. DATE. The date of this Warrant is January 3, 1996. This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Sections 20, 21 and 22 shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant. SECTION 33. CERTAIN LIMITATIONS ON EXERCISE OF WARRANT. This Warrant may not be exercised by the Holder to the extent, but only to the extent, that the exercise of this Warrant would result in the Holder and its Affiliates owning more than 49.9% of the outstanding shares of Common Stock, on a fully diluted basis. In the event the circumstances described in the foregoing sentence preclude the Holder from exercising any portion of this Warrant, the Holder may, in accordance with the provisions of Section 18 of this Warrant, freely sell or otherwise transfer this Warrant to any third party other than a third party to which the Holder has previously sold, in one or more installments, an aggregate of twenty-five percent (25%) or more of the outstanding Common Stock, on a fully diluted basis. SECTION 34. SHAREHOLDER APPROVAL. Notwithstanding anything in this Warrant to the contrary, this Warrant is not exerciseable until the holders of at least a majority of the securities of the Company entitled to vote have approved the issuance hereof, provided that the total vote cast represents at least fifty percent (50%) of all such securities. -18- [Signatures Continued On Next Page] -19- IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officers and its seal to be hereunto affixed as of January 3, 1996. GRAY COMMUNICATIONS SYSTEMS, INC. By: Name: Title: ATTEST: By: ______________________________ Secretary -20- EXHIBIT A NOTICE OF EXERCISE [Date] Gray Communications Systems, Inc. 126 North Washington Street Albany, Georgia 31701 Attn: Mr. Ralph W. Gabbard Re: Exercise of Warrant Pursuant to the provisions of that certain Warrant to Purchase Common Stock (the "Warrant") of Gray Communications Systems, Inc., a Georgia corporation (the "Company"), dated January 3, 1996, Bull Run Corporation, a Georgia corporation ("Bull Run"), hereby represents, warrants, covenants, and agrees with the Company as follows: The shares of common stock of the Company being acquired by Bull Run pursuant to this exercise of the Warrant (the "Warrant Shares") will be acquired for its own account without the participation of any other person, with the intent of holding the Warrant Shares for investment and without the intent of participating, directly or indirectly, in a distribution of the Warrant Shares and not with a view to, or for resale in connection with, any distribution of the Warrant Shares, nor is Bull Run aware of the existence of any distribution of the Warrant Shares; Bull Run is not acquiring the Warrant Shares based upon any representation, oral or written, by any person with respect to the future value of, or income from, the Warrant Shares but rather upon an independent examination and judgment as to the prospects of the Company; The Warrant Shares were not offered to Bull Run by means of publicly disseminated advertisements or sales literature; Bull Run is able to bear the economic risks of the investment in the Warrant Shares, including the risk of a complete loss of Bull Run's investment therein; Bull Run understands and agrees that the Warrant Shares will be issued and sold to Bull Run in reliance upon an exemption from, but without registration under any state law relating to the registration of securities for sale, and will be issued and sold in reliance on the exemptions from registration under the Securities Act of 1933 (the "1933 Act"), provided by Sections 3(b) and/or 4(2) thereof and the rules and regulations promulgated thereunder; Except as set forth in Section 18 of the Warrant, the Warrant Shares cannot be offered for sale, sold or transferred by Bull Run other than pursuant to: (A) an effective registration under the 1933 Act or in a transaction otherwise in compliance with the 1933 Act; and (B) evidence reasonably satisfactory to the Company of compliance with the applicable securities laws of other jurisdictions. The Company shall be entitled to rely upon an opinion of counsel reasonably satisfactory to it with respect to compliance with the above laws; Except as set forth in Sections 20, 21 and 22 of the Warrant, the Company will be under no obligation to register the Warrant Shares or to comply with any exemption available for sale of the Warrant Shares without registration or filing, and the information or conditions necessary to permit routine sales of securities of the Company under Rule 144 of the 1933 Act are not now available and no assurance has been given that it or they will become available. The Company is under no obligation to act in any manner so as to make Rule 144 available with respect to the Warrant Shares; Bull Run has and has had complete access to and the opportunity to review and make copies of all material documents related to the business of the Company, including, but not limited to, contracts, financial statements, tax returns, leases, deeds, and other books and records. Bull Run has examined such of these documents as it wished and is familiar with the business and affairs of the Company. Bull Run realizes that the purchase of the Warrant Shares is a speculative investment and that any possible profit therefrom is uncertain; Bull Run has had the opportunity to ask questions of and receive answers from the Company and any person acting on its behalf and to obtain all material information reasonably available with respect to the Company and its affairs. Bull Run has received all information and data with respect to the Company which it has requested and which it has deemed relevant in connection with the evaluation of the merits and risks of its investment in the Company; Bull Run has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the purchase of the Warrant Shares hereunder and it is able to bear the economic risk of such purchase; and The agreements, representations, warranties, and covenants made by Bull Run herein extends to and applies to all of the Warrant Shares. Acceptance by Bull Run of the certificate representing such Warrant Shares shall constitute a confirmation by Bull Run that all such agreements, representations, warranties, and covenants made herein shall be true and correct at that time. Bull Run understands that the certificates representing the Warrant Shares shall bear a legend referring to the foregoing covenants, representations and warranties and restrictions on transfer, and agrees that a legend to that effect may be placed on any certificate which may be issued to Bull Run as a substitute for the certificates representing the Warrant Shares. Very truly yours, BULL RUN CORPORATION By: Its: AGREED TO AND ACCEPTED: GRAY COMMUNICATIONS SYSTEMS, INC. - -2- By: Title: Number of Shares Exercised: Number of Shares Remaining: Date: - -3-
EXHIBIT 12 GRAY COMMUNICATIONS SYSTEMS, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS EXCEPT RATIO DATA) PRO FORMA COMBINED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS EXCEPT RATIO DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- Consolidated pretax income from continuing operations $ 3,006 $ 1,265 $ 2,748 $ 4,542 $ 1,565 $ 1,958 $ 2,947 Interest expense 787 1,486 985 1,923 5,438 2,768 4,445 Interest portion of rental expense 20 18 16 46 89 36 45 Amortization of debt discount 14 45 150 142 163 81 137 --------- --------- --------- --------- --------- --------- --------- Earnings $ 3,827 $ 2,814 $ 3,899 $ 6,653 $ 7,255 $ 4,843 $ 7,574 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Interest expense $ 787 $ 1,486 $ 985 $ 1,923 $ 5,438 $ 2,768 $ 4,445 Interest portion of rental expense 20 18 16 46 89 36 45 Amortization of debt discount 14 45 150 142 163 81 137 Capitalized interest 0 0 0 0 94 0 0 --------- --------- --------- --------- --------- --------- --------- Fixed Charges $ 821 $ 1,549 $ 1,151 $ 2,111 $ 5,784 $ 2,885 $ 4,627 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of Earnings to Fixed Charges 4.7 1.8 3.4 3.2 1.3 1.7 1.6 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 1995 JUNE 30, 1996 ----------------- -------------- Consolidated pretax income from continuing operations $ (5,215) $ 537 Interest expense 20,664 10,236 Interest portion of rental expense 255 145 Amortization of debt discount 0 15 ------- ------- Earnings $ 15,704 $ 10,933 ------- ------- ------- ------- Interest expense $ 20,664 $ 10,236 Interest portion of rental expense 255 145 Amortization of debt discount 0 15 Capitalized interest 0 0 ------- ------- Fixed Charges $ 20,919 $ 10,396 ------- ------- ------- ------- Ratio of Earnings to Fixed Charges (1) -- 1.1 ------- ------- ------- ------- (1) Fixed charges exceed earnings by $ 5,215 -- ------- ------- ------- -------
EXHIBIT 21 LIST OF SUBSIDIARIES OF GRAY COMMUNICATIONS SYSTEMS, INC. Jurisdiction ------------- Name of Incorporation ---- ----------------- The Albany Herald Georgia Publishing Company, Inc. The Rockdale Citizen Georgia Publishing Company WALB-TV, Inc. Georgia WJHG-TV, Inc. Georgia Gray Real Estate & Georgia Development Company WKXT Licensee Corp. Delaware WCTV Operating Corp. Georgia WKXT-TV, Inc. Georgia Gray Television Delaware Management, Inc. Gray Kentucky Georgia Television, Inc. The Southwest Georgia Georgia Shopper, Inc. WRDW-TV, Inc. Georgia KTVE Inc. Arkansas Gray Transportation Georgia Company, Inc. WALB Licensee Corp. Delaware WJHG Licensee Corp. Delaware WKYT Licensee Corp. Delaware WRDW Licensee Corp. Delaware WYMT Licensee Corp. Delaware WCTV Licensee Corp. Delaware Porta-Phone Paging Delaware Licensee Corp. Porta-Phone Paging, Inc. Georgia
EXHIBIT 23.1 We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated February 14, 1996, except for Note K, as to which the date is August 9, 1996, in Amendment No. 4 to the Registration Statement (Form S-1) and related Prospectus of Gray Communications Systems, Inc. dated September 13, 1996. ERNST & YOUNG LLP Columbus, Georgia September 13, 1996
EXHIBIT 23.3 We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 26, 1996 with respect to the financial statements of WRDW-TV included in Amendment No. 4 to the Registration Statement (Form S-1) and related Prospectus of Gray Communications Systems, Inc. dated September 13, 1996. ERNST & YOUNG LLP Atlanta, Georgia September 13, 1996
EXHIBIT 23.4 We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated February 19, 1996 with respect to the financial statements of the Broadcasting and Paging Operations of John H. Phipps, Inc. included in Amendment No. 4 to the Registration Statement (Form S-1) and related Prospectus of Gray Communications Systems, Inc. dated September 13, 1996. ERNST & YOUNG LLP Atlanta, Georgia September 13, 1996
EXHIBIT 23.5 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 4 to Registration Statement No. 333-4338 of Gray Communications Systems, Inc. of our report dated May 12, 1995 on the balance sheet of WRDW-TV (an operating station of Television Station Partners, L.P.), as of December 31, 1994 and the related statements of income, partnership's equity and cash flows for the years ended December 31, 1993 and 1994, appearing in the Prospectus, which is a part of such Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP New York, New York September 13, 1996