Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________.
COMMISSION FILE NUMBER 1-13796
GRAY COMMUNICATIONS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 52-0285030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4370 PEACHTREE ROAD, NE
ATLANTA, GA 30319
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 504-9828
Securities registered pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK (NO PAR VALUE) NEW YORK STOCK EXCHANGE
CLASS B COMMON STOCK (NO PAR VALUE) NEW YORK STOCK EXCHANGE
Title of each class Name of each exchange on which registered
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 15, 2002: CLASS A AND CLASS B COMMON STOCK; NO PAR
VALUE - $151,411,369
The number of shares outstanding of the registrant's classes of common
stock as of March 15, 2002: CLASS A COMMON STOCK; NO PAR VALUE - 6,848,467
SHARES; CLASS B COMMON STOCK, NO PAR VALUE - 8,803,810 SHARES
DOCUMENTS INCORPORATED BY REFERENCE: None
PART 1
ITEM 1. BUSINESS
As used herein, unless the context otherwise requires, the "Company" or
"Gray" mean Gray Communications Systems, Inc. and its subsidiaries. Unless
otherwise indicated, the information herein has been adjusted to give effect to
a three-for-two stock split of the Company's Class A Common Stock, no par value
(the "Class A Common Stock"), and the Company's Class B Common Stock, no par
value (the "Class B Common Stock"), effected in the form of a stock dividend
declared on the respective class of common stock on August 20, 1998. Unless
otherwise indicated, all station rank, in-market share and television household
data herein are derived from the Nielsen Station Index, Viewers in Profile,
dated November 2001, as prepared by A.C. Nielsen Company ("Nielsen").
GENERAL
The Company currently owns and operates 13 network-affiliated television
stations in 11 medium-size markets in the southeastern ("Southeast"),
southwestern ("Southwest") and midwestern (`Midwest") United States. Twelve of
the Company's 13 stations are ranked first in total viewing audience and news
audience, with the remaining station ranked second in total viewing audience and
third in news audience. Ten of the stations are affiliated with CBS Inc., or
"CBS," and three are affiliated with National Broadcasting Company, Inc., or
"NBC." The Company also owns and operates four daily newspapers, three located
in Georgia and one in Goshen, Indiana, with a total circulation of over 126,000.
The Company also owns and operates a paging business located in the Southeast
that had approximately 75,000 units in service at December 31, 2001. The Company
also owns and operates a satellite uplink business based in Tallahassee, Florida
and Baton Rouge, Louisiana.
In 1993, after the acquisition of a large block of the Class A Common
Stock by Bull Run Corporation ("Bull Run"), the Company implemented a strategy
to foster growth through strategic acquisitions and certain select divestitures.
Bull Run continues to be a principal shareholder of the Company since its
investment in 1993. Since January 1, 1994, the Company's significant
acquisitions have included 12 television stations, three newspapers, a
transportable satellite uplink business and a paging business located in the
Southeast, Southwest and Midwest and the divestiture of two stations 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.
ACQUISITIONS, INVESTMENTS AND DIVESTITURES
2001 Acquisition of Equity Investment in Sarkes Tarzian, Inc.
On December 3, 2001, the Company exercised its option to acquire 301,119
shares of the outstanding common stock of Sarkes Tarzian, Inc. ("Tarzian") from
Bull Run. Bull Run had purchased these same shares from U.S. Trust Company of
Florida Savings Bank as Personal Representative of the Estate of Mary Tarzian
(the "Estate") in January 1999.
The acquired shares of Tarzian represent 33.5% of the total outstanding
common stock of Tarzian (both in terms of the number of shares of common stock
outstanding and in terms of voting rights), but such investment represents 73%
of the equity of Tarzian for purposes of dividends if paid as well as
distributions in the event of any liquidation, dissolution or other sale of
Tarzian.
Tarzian is a closely held private company that owns and operates two
television stations and four radio stations: WRCB-TV Channel 3 in Chattanooga,
Tennessee, an NBC affiliate; KTVN-TV Channel 2
2
in Reno, Nevada, a CBS affiliate; WGCL-AM and WTTS-FM in Bloomington, Indiana;
and WAJI-FM and WLDE-FM in Fort Wayne, Indiana. The Chattanooga and Reno markets
are the 86th and the 110th largest television markets ("DMA's") in the United
States, respectively, as ranked by the A.C. Nielsen Company.
Gray paid $10 million to Bull Run to complete the acquisition of the
301,119 shares of Tarzian. The Company has previously capitalized and paid to
Bull Run $3.2 million of costs associated with the Company's option to acquire
these shares. This acquisition has been accounted for under the cost method of
accounting and reflected as a non-current other asset.
On February 12, 1999, Tarzian filed a complaint against Bull Run and the
Estate in the United States District Court for the Southern District of Indiana.
Tarzian claims that it had a binding and enforceable contract to purchase the
Tarzian shares from the Estate prior to Bull Run's purchase of the shares, and
requests judgment providing that the contract be enforced. On May 3, 1999, the
action was dismissed without prejudice against Bull Run, leaving the Estate as
the sole defendant. The litigation between the Estate and Tarzian is ongoing and
the Company cannot predict when the final resolution of the litigation will
occur. The purchase agreement with the Estate provides that if a court of
competent jurisdiction awards title to the Tarzian shares to a person or entity
other than the purchaser (or its successors or assigns), the purchase agreement
will be rescinded and the Estate will be required to pay for the benefit of
Gray, as successor in interest, the full $10 million purchase price, plus
interest.
Acquisition of the Texas Stations
On October 1, 1999, the Company completed its acquisition of all the
outstanding capital stock of KWTX Broadcasting Company and Brazos Broadcasting
Company, as well as the assets of KXII Broadcasters Ltd. The Company acquired
the capital stock of KWTX Broadcasting Company and Brazos Broadcasting Company
in merger transactions with the shareholders of KWTX Broadcasting Company and
Brazos Broadcasting Company receiving a combination of cash and the Company's
Class B Common Stock for their shares. The Company acquired the assets of KXII
Broadcasters Ltd. in an all cash transaction. These transactions are referred to
herein as the "Texas Acquisitions."
Aggregate consideration (net of cash acquired) paid in the Company's Class
B Common Stock and cash was approximately $146.4 million which included a base
purchase price of $139.0 million, transaction expenses of $2.8 million and
certain net working capital adjustments (excluding cash) of $4.6 million. In
addition to the amount paid, the Company assumed approximately $600,000 in
liabilities in connection with the asset purchase of KXII Broadcasters Ltd. The
Company funded the acquisitions by issuing 3,435,774 shares of the Company's
Class B Common Stock (valued at $49.5 million) to the sellers, borrowing an
additional $94.4 million under its Senior Credit Facility and using cash on hand
of approximately $2.5 million.
With the Texas Acquisitions the Company added the following television
stations to its broadcast segment: KWTX-TV, the CBS affiliate located in Waco,
Texas; KBTX-TV, the CBS affiliate located in Bryan, Texas, each serving the
Waco-Temple-Bryan, Texas television market and KXII-TV, the CBS affiliate
serving Sherman, Texas and Ada, Oklahoma. Under Federal Communications Commision
(the "FCC") regulations, KBTX-TV is operated as a satellite station of KWTX-TV.
The stations are collectively referred to herein as the "Texas Stations."
Acquisition of The Goshen News
On March 1, 1999, the Company acquired substantially all of the assets of
The Goshen News from News Printing Company, Inc. and affiliates thereof, for
aggregate cash consideration of approximately $16.7 million including a
non-compete agreement (the "Goshen Acquisition"). The Goshen News is
3
currently a 16,000-circulation newspaper published Monday through Sunday and
serves Goshen, Indiana and surrounding areas. The Company financed the
acquisition through borrowings under its Senior Credit Facility.
Busse - WALB Transactions
On July 31, 1998, the Company completed the purchase of all of the
outstanding capital stock of Busse Broadcasting Corporation ("Busse"). The
purchase price was approximately $126.6 million, less the accreted value of
Busse's 11 5/8 % Senior Secured Notes due 2000 (the "Busse Senior Notes"). The
purchase price of the capital stock consisted of the contractual purchase price
of $112.0 million, associated transaction costs of $3.9 million, acquisition
costs associated with the Busse Senior Notes of $5.1 million and Busse's cash
and cash equivalents of $5.6 million. Immediately following the acquisition of
Busse, the Company exercised its right to satisfy and discharge the Busse Senior
Notes, effectively prefunding the Busse Senior Notes at the October 15, 1998
call price of 106, plus accrued interest. The amount necessary to satisfy and
discharge the Busse Senior Notes was approximately $69.9 million.
Immediately prior to the Company's acquisition of Busse, Cosmos
Broadcasting Corporation acquired the assets of WEAU-TV ("WEAU") from Busse and
exchanged them for the assets of WALB-TV, Inc. ("WALB"), the Company's NBC
affiliate in Albany, Georgia. In exchange for the assets of WALB, the Company
received the assets of WEAU, which were valued at $66.0 million, and
approximately $12.0 million in cash for a total value of $78.0 million. The
Company recognized a pre-tax gain of approximately $72.6 million and estimated
deferred income taxes of approximately $28.3 million in connection with the
exchange of WALB. The Company funded the remaining costs of the acquisition of
Busse's capital stock through borrowings under the Company's Senior Credit
Facility.
As a result of these transactions, the Company acquired the following
television stations: KOLN-TV ("KOLN"), the CBS affiliate serving the
Lincoln-Hastings-Kearney, Nebraska market; its satellite station KGIN-TV
("KGIN"), the CBS affiliate serving Grand Island, Nebraska; and WEAU, an NBC
affiliate serving the La Crosse-Eau Claire, Wisconsin market. These transactions
also satisfied the FCC's requirement for the Company to divest itself of WALB.
These transactions are referred to as the "Busse-WALB Transactions."
WITN Acquisition
In August 1997, the Company acquired substantially all of the assets of
WITN-TV ("WITN"), a NBC affiliate serving the Greenville-New Bern-Washington,
North Carolina market (the "WITN Acquisition"). The purchase price for the WITN
Acquisition was approximately $41.7 million, including fees, expenses, working
capital and other adjustments.
GulfLink Acquisition
In April 1997, the Company acquired all of the issued and outstanding
common stock of GulfLink Communications, Inc. ("GulfLink") of Baton Rouge,
Louisiana (the "GulfLink Acquisition"). The GulfLink operations included nine
transportable satellite uplink trucks. The purchase price for the GulfLink
Acquisition approximated $5.2 million, including fees, expenses, and certain
assumed liabilities. Subsequent to the GulfLink Acquisition, certain other
satellite uplink truck operations of the Company were combined with GulfLink and
the operating name was changed to Lynqx Communications.
4
TELEVISION BROADCASTING
The Company's Stations and their Markets
As used in the tables for each of the Company's stations and in this
section (i) "Total Market Revenues" represent gross advertising revenues,
excluding barter revenues, for all commercial television stations in the market,
as reported in Investing in Television 2001 Market Report, Fourth Edition
November 2001 Ratings published by BIA Publications, Inc. (the "BIA Guide"),
except for revenues in WYMT-TV's ("WYMT") 16-county trading area which is not
separately reported in the BIA Guide; (ii) "in-market share of households
viewing television" represents the percentage of the station's audience as a
percentage of all viewing by households of local commercial stations in the
market from 7 a.m. to 1 a.m. Sunday through Saturday, as reported by Nielsen for
November 2001; (iii) "station rank in DMA" is based on Nielsen estimates for
November 2001 for the period from 7 a.m. to 1 a.m. Sunday through Saturday;
(iv)"station news rank in DMA" is based on management's review of the Nielsen
estimates for November 2001, (v) estimates of population, average household
income, effective buying income and retail business sales growth projections are
as reported in the BIA Guide; and (vi) television households are as reported by
Nielsen for November 2001. Designated Market Area is defined herein as "DMA."
Station Total In-Market
Commercial Station News Market Share of
DMA Stations in Rank in Rank in Television Revenues in Households
Station Market Rank(1) DMA(2) DMA DMA Households(3) DMA for 2001 Viewing TV
- ------- ------ ------- ------ --- --- ------------- ------------ ----------
(in thousands)
WVLT(4) Knoxville, TN 62 5 2 3 478,000 74,900 27%
WKYT Lexington, KY 66 6 1 1 436,000 55,000 35
WYMT(5) Hazard, KY 66 N/A 1 1 169,000 5,000 33
KWTX/ Waco - Temple -
KBTX(6) Bryan, TX 94 5 1 1 299,000 31,400 38
KOLN/ Lincoln-Hastings
KGIN(7) -Kearney, NE 102 5 1 1 269,000 27,200 47
WITN(4) Greenville-
New Bern-Washington, NC 106 6 1 1 251,000 33,700 31
WCTV Tallahassee, FL-
Thomasville, GA 113 5 1 1 237,000 26,200 56
WRDW Augusta, GA 114 6 1 1 234,000 31,400 33
WEAU La Crosse-
Eau Claire, WI 127 5 1 1 198,000 25,500 33
WJHG Panama City, FL 159 5 1 1 121,000 14,600 50
KXII Sherman,TX-Ada,OK 160 2 1 1 119,000 8,600 67
(1) Ranking of DMA served by a station among all DMAs is measured by the
number of television households based within the DMA in the November 2001
Nielsen estimates.
(2) Includes independent broadcasting stations and excludes satellite stations
such as KBTX and KGIN.
(3) Based upon the approximate number of television households in the DMA as
reported by Nielsen for November 2001.
(4) Tied in "Station Rank in DMA."
(5) The market area served by WYMT is a 16-county trading area, as defined by
Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station
rank is based upon its ratings position in the 16-county trading area.
(6) KBTX is a VHF station located in Bryan, Texas and is operated primarily as
a satellite station of KWTX, which is located in Waco, Texas.
(7) KGIN is a VHF station located in Grand Island, Nebraska and is operated
primarily as a satellite station of KOLN, which is located in Lincoln,
Nebraska.
5
The percentage of the Company's total revenues contributed by the
Company's television broadcasting segment was approximately 68.1%, 70.5% and
67.4% for the years ended December 31, 2001, 2000 and 1999, respectively.
In the following description of each of the Company's stations,
information set forth below concerning estimates of population, Total Market
Revenues, average household income, projected effective buying income and
projected retail business sales growth has been derived from the BIA Guide.
Estimates of television households are as reported by Nielsen for November 2001.
WVLT, the CBS affiliate in Knoxville, Tennessee
WVLT, acquired by the Company in September 1996, began operations in 1988.
Knoxville, Tennessee is the 62nd DMA in the United States, with approximately
478,000 television households and a total population of approximately 1.2
million. Total Market Revenues in the Knoxville DMA in 2001 were approximately
$74.9 million. According to the BIA Guide, the average household income in the
Knoxville DMA in 1999 was $39,299, with effective buying income projected to
grow at an annual rate of 5.3% through 2004. Retail business sales growth in the
Knoxville DMA is projected by the BIA Guide to average 6.3% annually during the
same period. The Knoxville DMA has five licensed commercial television stations,
four of which are affiliated with major networks. The Knoxville DMA also has two
public broadcasting stations.
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 with approximately 26,000 students is located within the city of
Knoxville. Leading manufacturing employers in the area include: Lockheed Martin
Energy Systems, Inc., DeRoyal Industries, Aluminum Company of North America,
Phillips Consumer Electronics North America Corp., Clayton Homes and Sea Ray
Boats, Inc.
WKYT, the CBS affiliate in Lexington, Kentucky
WKYT, acquired by the Company in September 1994, began operations in 1957.
Lexington, Kentucky is the 66th largest DMA in the United States, with
approximately 436,000 television households and a total population of
approximately 1.2 million. Total Market Revenues in the Lexington DMA in 2001
were approximately $55.0 million. According to the BIA Guide, the average
household income in the Lexington DMA in 1999 was $37,411, with effective buying
income projected to grow at an annual rate of 5.3% through 2004. Retail business
sales growth in the Lexington DMA is projected by the BIA Guide to average 5.3%
annually during the same period. The Lexington DMA has six licensed commercial
television stations, including WYMT, WKYT's sister station, five of which are
affiliated with major networks. The Lexington DMA also has one public television
station.
Market Description. The Lexington DMA consists of 39 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., Verizon
Communications Inc., Square D Company, Ashland, Inc., the University of Kentucky
and International Business Machines Corporation. Eight hospitals and numerous
medical clinics are located in Lexington, reinforcing Lexington's position as a
regional medical center. The University of Kentucky's main campus with
approximately 25,000 students is also located in Lexington. Frankfort, the
capital of Kentucky is also located within WKYT's service area.
6
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 16 counties in eastern and
southeastern Kentucky. This trading area is a separate marketing area of the
Lexington, Kentucky DMA with approximately 169,000 television households and a
total population of approximately 456,000. WYMT is the only commercial
television station in this 16-county trading area. Total Market Revenues in the
16-county trading area for the year ended December 31, 2001, were approximately
$5.0 million. WYMT is the sister station of WKYT and shares many resources and
simulcasts some local programming with WKYT.
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 local broadcast station received in its
16-county trading area. The trading area's economy is primarily centered around
coal and related industries, such as natural gas and oil.
KWTX and KBTX, the CBS affiliates in Waco-Temple-Bryan, Texas
KWTX and KBTX, acquired by the Company in October 1999, began operations
in 1955 and 1957, respectively. KWTX is a full power VHF television station
located in Waco, Texas. KBTX is a full power VHF television station located in
Bryan, Texas and, under FCC rules, is operated primarily as a satellite station
to KWTX in order to serve the entire broadcast market. Waco-Temple-Bryan, Texas
is the 94th largest DMA in the United States, with approximately 299,000
television households and a total population of approximately 848,000. Total
Market Revenues in the Waco-Temple-Bryan DMA in 2001 were approximately $31.4
million. According to the BIA Guide, the average household income in the
Waco-Temple-Bryan DMA in 1999 was $38,822, with effective buying income
projected to grow at an annual rate of 4.3% through 2004. Retail business sales
growth in the Waco-Temple-Bryan DMA is projected by the BIA Guide to average
4.7% annually during the same period. The Waco-Temple-Bryan DMA has five
licensed commercial television stations (excluding KBTX), four of which are
affiliated with major networks. The Waco-Temple-Bryan DMA also has three public
television stations.
Market Description. The Waco-Temple-Bryan DMA consists of 14 counties
covering a large portion of central Texas and the Brazos Valley. The cities of
Waco, Temple, Killeen, Bryan and College Station are the primary economic
centers of the region. College Station, Texas is the home of Texas A&M
University with approximately 45,000 students and Baylor University is located
in Waco, Texas with approximately 13,000 students. The Waco-Temple-Bryan economy
centers on education, medical services and U.S. military installations. Leading
employers in the area include: Texas A&M University, Raytheon, Baylor
University, St. Joseph's Regional Medical Center, Killeen ISD, Scott and White
Hospital and the U.S. Army base at Fort Hood, Texas.
KOLN\KGIN, the CBS affiliates in Lincoln-Hastings-Kearney, Nebraska
KOLN and KGIN, acquired by the Company in July 1998, began operations in
1953 and 1961, respectively. KOLN is a full power VHF television station located
in Lincoln, Nebraska. KGIN is a full power VHF television station located in
Grand Island, Nebraska and, under FCC rules, is operated primarily as a
satellite station to KOLN in order to serve the western portion of the
Lincoln-Hastings-Kearney DMA. Lincoln-Hastings-Kearney, Nebraska is the 102nd
largest DMA in the United States, with approximately 269,000 television
households and a total population of approximately 687,000. Total Market
Revenues in the Lincoln-Hastings-Kearney DMA in 2001 were approximately $27.2
million. According to the BIA Guide, the average household income in the
Lincoln-Hastings-Kearney DMA in
7
1999 was $43,726, with effective buying income projected to grow at an annual
rate of 4.8% through 2004. Retail business sales growth in the
Lincoln-Hastings-Kearney DMA is projected by the BIA Guide to average 5.0%
annually during the same period. The Lincoln-Hastings-Kearney DMA has five
licensed commercial television stations, all of which are affiliated with major
networks. The Lincoln-Hastings-Kearney DMA also has one public television
station.
Market Description. The Lincoln-Hastings-Kearney DMA consists of 51
counties covering a large portion of the western two thirds of Nebraska and the
northern tier of Kansas. The city of Lincoln is the primary economic center of
the region, the capital of Nebraska and home to the University of Nebraska with
approximately 23,000 students. The Lincoln-Hastings-Kearney economy centers
around state government, education, medical services and agriculture. Leading
employers in the area include: the State of Nebraska, the University of
Nebraska, Gallup Inc., the Lincoln Public School System and several area
hospitals.
WITN, the NBC affiliate in Greenville-New Bern-Washington, North Carolina
WITN, acquired by the Company in August 1997, began operations in 1955.
Greenville-New Bern-Washington, North Carolina is the 106th largest DMA in the
United States, with approximately 251,000 television households and a total
population of approximately 710,000. Total Market Revenues in the Greenville-New
Bern-Washington DMA in 2001 were approximately $33.7 million. According to the
BIA Guide, the average household income in the Greenville-New Bern-Washington
DMA in 1999 was $39,721, with effective buying income projected to grow at an
annual rate of 4.8% through 2004. Retail business sales growth in the
Greenville-New Bern-Washington DMA is projected by the BIA Guide to average 3.8%
annually during the same period. The Greenville-New Bern-Washington DMA has six
licensed commercial television stations, four of which are affiliated with major
networks. The Greenville-New Bern-Washington DMA also has three public
television stations.
Market Description. The Greenville-New Bern-Washington DMA consists of 15
counties in eastern North Carolina. Greenville, North Carolina (located 100
miles east of Raleigh) is the primary economic center of the region and home to
East Carolina University with approximately 19,000 students. The Greenville-New
Bern-Washington economy centers around education, manufacturing and agriculture.
Leading employers in the area include: Pitt County Memorial Hospital, NADEP
(Naval Rework Facility), East Carolina University, Catalytica Pharmaceuticals,
Inc., PCS Phosphate, Rubber Maid Cleaning Products, Inc. and Weyerhaeuser Co.
WCTV, the CBS affiliate in Tallahassee, Florida-Thomasville, Georgia
WCTV, acquired by the Company in September 1996, began operations in 1955.
Tallahassee, Florida-Thomasville, Georgia is the 113th largest DMA in the United
States, with approximately 237,000 television households and a total population
of approximately 655,000. Total Market Revenues in the Tallahassee-Thomasville
DMA in 2001 were approximately $26.2 million. According to the BIA Guide, the
average household income in the Tallahassee, Florida-Thomasville, Georgia DMA in
1999 was $38,678, with effective buying income projected to grow at an annual
rate of 4.5% through 2004. Retail business sales growth in the Tallahassee,
Florida-Thomasville, Georgia DMA is projected by the BIA Guide to average 6.4%
annually during the same period. The Tallahassee-Thomasville DMA has five
licensed commercial television stations, four of which are affiliated with major
networks. The Tallahassee-Thomasville DMA also has one public television
station.
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 with approximately 33,000 students, Florida A&M University with
8
approximately 12,000 students, Tallahassee Community College, Thomas College and
Valdosta State University. Florida State University and Florida A&M University
each have their main campus located within the city of Tallahassee.
WRDW, the CBS affiliate in Augusta, Georgia
WRDW, acquired by the Company in January 1997, began operations in 1954.
Augusta, Georgia is the 114th largest DMA in the United States, with
approximately 234,000 television households and a total population of
approximately 647,000. Total Market Revenues in the Augusta DMA in 2001 were
approximately $31.4 million. According to the BIA Guide, the average household
income in the Augusta DMA in 1999 was $36,606, with effective buying income
projected to grow at an annual rate of 3.5% through 2004. Retail business sales
growth in the Augusta DMA is projected by the BIA Guide to average 4.8% annually
during the same period. The Augusta DMA has six licensed commercial television
stations, four of which are affiliated with a major network. The Augusta DMA
also has two public television stations.
Market Description. The Augusta DMA consists of 18 counties in eastern
Georgia and western South Carolina, including the cities of Augusta, Georgia and
North Augusta and Aiken, South Carolina. The Augusta, Georgia area is one of
Georgia's major metropolitan/regional centers, with a particular emphasis on
health services, manufacturing and the military. The federal government employs
military and 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
approximately 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 46 years.
WEAU, the NBC affiliate in La Crosse-Eau Claire, Wisconsin
WEAU, acquired by the Company in July 1998, began operations in 1953. La
Crosse-Eau Claire, Wisconsin is the 127th largest DMA in the United States, with
approximately 198,000 television households and a total population of
approximately 532,000. Total Market Revenues in the La Crosse-Eau Claire,
Wisconsin DMA in 2001 were approximately $25.5 million. According to the BIA
Guide, the average household income in the La Crosse-Eau Claire, Wisconsin DMA
in 1999 was $37,490, with effective buying income projected to grow at an annual
rate of 3.8% through 2004. Retail business sales growth in the La Crosse-Eau
Claire, Wisconsin DMA is projected by the BIA Guide to average 5.3% annually
during the same period. The La Crosse-Eau Claire, Wisconsin DMA has five
licensed commercial television stations, four of which are affiliated with major
networks. The La Crosse-Eau Claire, Wisconsin DMA also has one public television
station.
Market Description. The La Crosse-Eau Claire, Wisconsin DMA, consists of
12 counties in west central Wisconsin and two counties in eastern Minnesota. The
La Crosse and Eau Claire, Wisconsin economy centers around medical services,
agriculture, education and retail businesses. The University of Wisconsin
maintains a 11,000-student campus in Eau Claire. Leading employers include
Hutchinson Technologies, the University of Wisconsin at Eau Claire and several
area hospitals.
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
121,000 television households and a total population of approximately 328,000.
Total Market Revenues in the Panama City DMA in 2001 were approximately $14.6
million. According to the BIA Guide, the average household income in the Panama
City DMA in 1999 was $36,902, with effective buying income projected to grow at
an annual rate of
9
4.8% through 2004. Retail business sales growth in the Panama City DMA is
projected by the BIA Guide to average 5.4% annually during the same period. The
Panama City DMA has five licensed commercial television stations, three of which
are affiliated with major networks. In addition, a station in Dothan, Alabama,
an adjacent DMA, provides a CBS signal. The Panama City DMA also has one public
television station.
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 U.S. Navy Coastal Systems Station,
Sallie Mae Servicing Corp., Stone Container Corporation, Arizona Chemical
Corporation and Gulf Coast Community College.
KXII, the CBS affiliate in Sherman, Texas - Ada, Oklahoma
KXII, acquired by the Company in October 1999, began operations in 1956.
Sherman, Texas-Ada, Oklahoma is the 160th largest DMA in the United States, with
approximately 119,000 television households and a total population of
approximately 312,000. Total Market Revenues in the Sherman, Texas-Ada, Oklahoma
DMA in 2001 were approximately $8.6 million. According to the BIA Guide, the
average household income in the Sherman, Texas-Ada, Oklahoma DMA in 1999 was
$34,745, with effective buying income projected to grow at an annual rate of
5.1% through 2004. Retail business sales growth in the Sherman, Texas-Ada,
Oklahoma DMA is projected by the BIA Guide to average 4.8% annually during the
same period. The Sherman, Texas-Ada, Oklahoma DMA has two licensed commercial
television stations, both of which are affiliated with major networks.
Market Description. The Sherman, Texas-Ada, Oklahoma DMA, consists of one
county in north central Texas and 10 counties in south central Oklahoma. The
Sherman, Texas-Ada, Oklahoma economy centers around medical services,
manufacturing and distribution services. Leading employers include Michelin,
MEMC Southwest, Globitech, Raytheon, CIGNA, Johnson & Johnson and Texas
Instruments.
Satellite Transmission and Production Services
The Company's satellite transmission and production services business,
Lynqx Communications, operates C-band and Ku-band transportable satellite uplink
units and provides production management services. Clients include NBC, CBS, ABC
and other broadcast and cable services. Currently Lynqx operates 13 mobile
satellite uplink units.
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.
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
10
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.
Four major broadcast networks, ABC, NBC, CBS and FOX dominate broadcast
television. Additionally, United Paramount Network ("UPN"), Warner Brothers
Network ("WB") and the Pax TV Network have been launched as additional
television networks. An affiliate of FOX, UPN, WB or Pax TV receives a smaller
portion of each day's programming from its network compared to an affiliate of
ABC, NBC or CBS.
The affiliation of a station with ABC, NBC or CBS has a significant impact
on the composition of the station's programming, revenues, expenses and
operations. A typical affiliate of these networks receives the majority of each
day's programming from the network. This programming, along with cash payments
("network compensation") in certain instances, is provided to the affiliate by
the network in exchange for a substantial majority of the advertising time
available for sale during the airing of network programs. The network then sells
this advertising time and retains the revenues. The affiliate retains the
revenues from time sold during breaks in and between network programs and
programs the affiliate produces or purchases from non-network sources. In
acquiring programming to supplement programming supplied by the affiliated
network, the 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, a national program
distributor may receive advertising time in exchange for the programming it
supplies, with the station paying a reduced or no fee for such programming. Most
successful commercial television stations obtain their brand identity from
locally produced news programs.
In contrast to a station affiliated with a network, a fully independent
station purchases or produces all of the programming that it broadcasts,
resulting in generally higher programming costs. An independent station,
however, retains its entire inventory of advertising time and all the revenues
obtained therefrom. As a result of the smaller amount of programming provided by
its network, an affiliate of FOX, UPN, WB or Pax TV must purchase or produce a
greater amount of 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.
Cable-originated programming is 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 has
increased 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.
11
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 fee, 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 CBS affiliation agreements expire as follows:
(i) WVLT, WKYT, WYMT and WCTV, on December 31, 2004, (ii) WRDW on March 31, 2005
and (iii) KWTX, KBTX, KOLN, KGIN and KXII on December 31, 2005. The Company has
tentatively agreed with NBC to extend the affiliation agreements of WEAU, WITN
and WJHG through December 31, 2011 and is currently working with NBC to finalize
the definitive affiliation agreements. The CBS affiliation agreements for KWTX,
KBTX and KXII were renegotiated during the fourth quarter of 2000 and were
extended through December 31, 2005. For the year ended December 31, 2001,
combined network compensation for our three NBC affiliates and the three
CBS-affiliated Texas stations was $1.8 million and $1.3 million, respectively.
As a result of these negotiations with NBC and CBS, network compensation for our
three NBC affiliates and our CBS affiliates, KWTX, KBTX and KXII will be phased
out over the next few years. Although network affiliation agreements have
historically been renewed by the Company and the respective networks, the
Company can not guarantee that any agreements will be renewed in the future
under their current terms.
NEWSPAPER PUBLISHING
At December 31, 2001, the Company owned and operated five publications
comprising four daily newspapers and an advertising shopper, located in the
Southeast and Midwest. The percentage of total Company revenues contributed by
the newspaper publishing segment was approximately 26.3%, 24.2% and 26.3% for
each of the years ended December 31, 2001, 2000 and 1999, respectively.
The Albany Herald
The Albany Herald Publishing Company, Inc. ("The Albany Herald"), located
in Albany, Georgia, publishes The Albany Herald, which is published seven days a
week and serves southwest Georgia. The Albany Herald's circulation approximates
31,000 Sunday subscribers and 28,000 daily. The Albany Herald also produces a
weekly advertising shopper and other niche publications.
Gwinnett Daily Post and Rockdale Citizen/Newton Citizen
The Gwinnett Daily Post and Rockdale Citizen/Newton Citizen are newspapers
that serve communities in the metro Atlanta area with complete local news,
sports and lifestyles coverage together with national stories that directly
impact their local communities.
The Gwinnett Daily Post is published Tuesday through Sunday and has a
circulation of approximately 65,000 subscribers. The Gwinnett Daily Post is
located northeast of Atlanta in Gwinnett County, one of the fastest growing
areas in the nation with an estimated population of approximately 650,000.
According to Woods and Poole 2000 MSA Profile, Gwinnett County's population is
projected to grow by 25% between 1999 and 2004. Since the purchase of the
Gwinnett Daily Post in 1995, the frequency of publication has increased from
three to six days per week and circulation has grown from 13,000 to 65,000
subscribers.
12
Rockdale Citizen/Newton Citizen is published seven days per week with a
circulation of approximately 17,000. In 2000, the Company began publication of
the Newton Citizen for distribution into neighboring Newton County. The Rockdale
Citizen is located in Conyers, Georgia, the county seat of Rockdale County,
which is 19 miles east of downtown Atlanta. Rockdale County and Newton County's
combined population is estimated to be approximately 132,000.
The Goshen News
The Goshen News is published seven days a week with a circulation of
16,000 and serves Goshen, Indiana and surrounding areas. The Goshen News also
produces a weekly advertising shopper. Since the Company acquired The Goshen
News in 1999, it has added a Sunday edition and converted the Saturday edition
to morning delivery.
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 an important
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 larger retailers and consolidations among large retail chains can result 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. While the newspaper publishing industry is impacted by
the economic cycles, it is not generally affected by the cyclical nature of
political advertising revenue.
PAGERS AND WIRELESS SERVICES
The Paging Business
The paging business, acquired by the Company in September 1996, is based
in Tallahassee, Florida and operates in Columbus, Macon, Albany, Thomasville,
Valdosta and Savannah, Georgia, in Dothan, Alabama, in Tallahassee, Gainesville,
Orlando and Panama City, Florida and in certain contiguous areas. In 2001, the
Company's paging operations had approximately 75,000 units in service compared
to approximately 90,000 units in service in 2000. The percentage of total
Company revenues contributed by the paging segment was approximately 5.6%, 5.3%
and 6.3% for the years ended December 31, 2001, 2000 and 1999, respectively.
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 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. During 1999, the
Company introduced services which allow its paging customers to receive
electronic mail on their pagers. In addition, the Company expanded its
13
capability so that individuals may send text messages via the Internet to the
Company's paging customers by accessing the paging businesses web page. In 2001,
the Company introduced WebTouch, allowing its customers to access their account
information through the web to make changes and payments.
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 70% are customer owned
and maintained ("COAM") with the remainder being leased. 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.
Industry Background
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 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; and (iii) sales
agents who solicit customers and are compensated on a salary and commission
basis.
ADDITIONAL INFORMATION ON BUSINESS SEGMENTS
Reference is made to Note I of notes to consolidated financial statements
of the Company for additional information regarding business segments.
COMPETITION
Television Industry
Competition in the television industry exists on several levels:
competition for audience, competition for programming (including news) and
competition for advertisers. Additional factors that are material to a
television station's competitive position include signal coverage and assigned
frequency.
Audience. Stations compete for audience based on 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
affiliate. 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 locally produced news, public affairs and other
entertainment programming, including news and syndicated programs purchased for
cash, cash and barter, or barter only.
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.
14
Other sources of competition include home entertainment systems, "wireless
cable" services, satellite master antenna television systems, low power
television stations, television translator stations, direct broadcast satellite
("DBS") video distribution services and the internet.
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
Seinfeld) and first-run product (such as Entertainment Tonight). Competition
exists for exclusive news stories and features as well. 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.
Advertising. Advertising rates are based upon the size of the market in
which the station operates, a station's overall ratings, 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. The stations also compete for advertising revenue with other media,
such as newspapers, radio stations, magazines, outdoor advertising, transit
advertising, yellow page directories, direct mail, internet 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, television and the internet, as well
as other newspapers, which also compete for readers with the Company's
publications. One of the Company's newspaper competitors is significantly larger
than the Company and operates in two of its newspaper markets. The Company
differentiates its publications from the other newspaper by focusing on local
news and local sports coverage in order to compete with its larger competitor.
The Company clearly identifies the markets it wishes to target and seeks to
become the primary source for local news and advertising information within
those markets.
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 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; however, many of the Company's competitors
have experienced financial difficulty in the past two years.
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. In addition, technological
developments in the wireless communications industry and enhancements of current
technology have created new products and services, such as personal
communications services and mobile satellite
15
services, which are also competitive with the paging services currently offered
by the Company. FCC policies are aimed at encouraging such technological
developments, 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.
FEDERAL REGULATION OF THE COMPANY'S BUSINESS
Television Broadcasting
Existing Regulation. Television broadcasting is subject to the
jurisdiction of the FCC under the Communications Act of 1934, as amended (the
"Communications Act") and the Telecommunications Act of 1996 (the
"Telecommunications Act"). The Communications Act prohibits the operation of
television broadcasting stations except under a license issued by the FCC and
empowers the FCC, among other things, to issue, revoke and modify broadcasting
licenses, determine the locations of stations, regulate the equipment used by
stations, adopt regulations to carry out the provisions of the Communications
Act and the Telecommunications Act and impose penalties for violation of such
regulations. The Communications Act prohibits the assignment of a license or the
transfer of control of a licensee without prior approval of the FCC.
License Grant and Renewal. Television broadcasting licenses generally are
granted or renewed for a period of eight years 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 each station are
effective through the following dates: WVLT - August 1, 2005; WKYT - August 1,
2005; WYMT- August 1, 2005; KOLN and KGIN - June 1, 2006; WITN - December 1,
2004; WRDW - April 1, 2005; WCTV - April 1, 2005; WEAU - December 1, 2005, WJHG
- - February 1, 2005, KBTX and KWTX - August 1, 2006, and KXII - August 1, 2006.
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 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 broadcast 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 co-owned television stations whose
aggregate audience reach exceeds 35% of all United States households. Owners of
television stations that have an attributable interest in another TV station in
the same Nielsen DMA, or that operate a satellite station in the same market, do
not have to include those additional same-market outlets in calculating its 35%
aggregate television audience reach cap. A station owner with an attributable
interest in a station in a separate market (including time-brokered local
marketing agreements
16
("LMAs") and satellite stations) must count that additional audience as part of
its national aggregate audience. The U.S. Court of Appeals for the D.C. Circuit
has recently ordered the FCC to review the rule to determine whether it is
necessary to protect the public interest.
On a local basis, the FCC has revised its local market television
ownership rules, permitting station owners to realize the efficiencies of
certain types of common ownership. The FCC currently allows the common ownership
of two television stations without regard to broadcast signal contour overlap if
the stations are in separate DMAs. The FCC continues to allow common ownership
of two stations in the same DMA if their Grade B contours do not overlap.
Entities are permitted to own two television stations within the same DMA if
eight full-power independently owned television stations (commercial and
noncommercial) will remain post-merger, and one of the co-owned stations is not
among the top four-ranked stations in the market based on audience share. In
order for a television station to count toward the minimum number of independent
stations necessary for FCC approval of a proposed duopoly, its Grade B signal
contour must overlap the Grade B signal contour of a at least one of the TV
stations involved in the proposed combination. The common ownership of two
television stations in the same market with an overlapping contour is permitted
where the same-market licensee is the only reasonably available buyer and the
station purchased is a "failed station" (either off the air for at least four
months prior to the waiver application or involved in involuntary bankruptcy or
insolvency proceedings) or a "failing" station (having a low audience share and
financially struggling during the previous several years). A waiver of the FCC's
ownership restrictions is possible if the applicants for waiver can show that
the combination will result in the construction of a previously unbuilt station.
A challenge to the rule limiting duopolies to markets whose eight separate
voices would remain after a merger or combination is pending in the U. S. Court
of Appeals for the D.C. Circuit.
The FCC also substantially modified its rules implementing TV-radio
cross-ownership restrictions (the so-called "one-to-a-market" rule). Depending
upon the particular circumstances an entity may own up to two television
stations and six radio stations or one television station and seven radio
stations in a market.
In addition, the FCC decided to retain the cable/television
cross-ownership rule, which effectively prohibits joint ownership of a broadcast
television station and cable system in the same market. An appeal challenging
the FCC's decision to retain this rule was filed in the U. S. Court of Appeals
for the D. C. Circuit, which recently vacated the rule and ordered the
Commission to provide a stronger justification for the rule before it attempts
to reinstate it.
The FCC has also initiated a proceeding to determine whether any changes
should be made to its newspaper/broadcast cross-ownership rule. The rule,
adopted by the FCC in the 1970s, generally prohibits one entity from owning both
a commercial broadcast station and a daily newspaper in situations in which the
predicted or measured contours of the station encompass entirely the community
in which the newspaper is published.
Expansion of the Company's broadcast operations in particular areas and
nationwide will continue to be subject to the FCC's ownership rules and any
changes the FCC or Congress may adopt. Any relaxation of the FCC's ownership
rules may increase the level of competition in one or more of the markets in
which the Company's stations are located, particularly to the extent that the
Company's competitors may have greater resources and thereby be in a better
position to capitalize on such changes.
Under the FCC's ownership rules, a direct or indirect purchaser of certain
types of securities of the Company could violate FCC regulations if that
purchaser owned or acquired an "attributable" or "meaningful" interest in other
media properties in the same areas as stations owned by the Company or in a
manner otherwise prohibited by the FCC. All officers and directors of a
licensee, as well as general partners, uninsulated limited partners or members
of a limited liability company and stockholders who
17
own 5% 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 20% of the voting
power of the outstanding common stock before attribution occurs.
The FCC has recently revised its broadcast ownership attribution rules.
The attribution rules define what constitutes a "cognizable interest" for
purposes of applying the ownership rules. The FCC's attribution rules now
include a new "equity/debt plus" attribution rule that functions in addition to
the current attribution rules. Under the new rule, a holder of a financial
interest, whether equity or debt or both, of 33% of licensee's total assets will
have an attributable interest in that licensee if it is either a major program
supplier to that licensee (supplying more than 15% of a station's total weekly
broadcast programming hours) or if it is a same media market entity (including
broadcasters, cable operators and newspapers). All stock, including common and
preferred, voting and nonvoting stock, will be counted toward the 33% threshold.
Time brokerage of another television station in the same market (including LMAs)
for more than 15% of the brokered station's broadcast hours per week will result
in the attribution of the time brokerage arrangement. Except for certain LMAs,
any interest acquired on or after November 7, 1996, is subject to the FCC's
revised ownership and attribution rules. To the best of the Company's knowledge,
no officer, director or 5% stockholder of the Company currently holds an
attributable 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. 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 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 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.
Recent Developments. Congress has recently enacted legislation and the FCC
currently has under consideration or is implementing new regulations and
policies regarding a wide variety of matters that could affect, directly or
indirectly, the operation and ownership of the Company's broadcast properties.
In addition to the proposed changes noted above, such matters include, for
example, spectrum use fees, political advertising rates, potential advertising
restrictions on the advertising of certain products (such as hard liquor), the
rules and policies to be applied in enforcing the FCC's equal employment
opportunity regulations, cable carriage of digital television signals and
viewing of distant network signals by direct broadcast satellite services. 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.
In response to a decision of the U.S. Court of Appeals for the D.C.
Circuit, the FCC suspended its requirement that licensees widely disseminate
information about job openings to all segments of the
18
community to ensure that all qualified applicants, including minorities and
women, have sufficient opportunities to compete for jobs in the broadcast
industry. Recently the FCC voted to open a new proceeding to re-establish equal
employment opportunity rules for broadcasters, which would reinstate the
requirement that licensees widely disseminate information about job openings to
all segments of the community and periodically disclose details concerning
recruiting and outreach activities.
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 implemented the requirements of the 1992 Cable Act. 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 certain "super stations" delivered via satellite. Under
rules adopted to implement these "must carry" and retransmission consent
provisions, local television stations are required to make an election of "must
carry" or retransmission consent at three year intervals. Stations that fail to
elect are deemed to have elected carriage under the "must carry" provisions.
Other issues addressed in the FCC rules are market designations, the scope of
retransmission consent and procedural requirements for implementing the signal
carriage provisions. Each of the Company's stations has elected "must carry"
status on certain cable systems in its DMA. On other cable systems the Company's
stations have entered into retransmission consent agreements. This election
entitles the Company's stations to carriage on those systems until at least
December 31, 2002.
The 1992 Cable Act was amended in several important respects by the
Telecommunications Act. Most notable, the Telecommunications Act repeals the
cross-ownership ban between cable and telephone entities as well as the FCC's
former video dial-tone rules (permitting telephone companies to enter the video
distribution services market under several new regulatory options). The
Telecommunications Act also (a) eliminated the broadcast network/cable
cross-ownership limitation and (b) lifted the statutory ban on TV/cable
cross-ownership within the same market area (without, however, eliminating the
separate FCC regulatory restrictions on TV/cable cross-ownership, discussed
above).
Digital Television Service. In December 1996, the FCC formally approved
technical standards for digital advanced television ("DTV"). DTV is a flexible
system that will permit broadcasters to utilize a single digital channel in
various ways, including providing one channel of high-definition television
programming with greatly enhanced image and sound quality or several channels of
lower-definition television programming ("multicasting"), and is capable of
accommodating subscription video and data services. Broadcasters may offer a
combination of services, so long as they transmit at least one stream of
19
free video programming on the DTV channel. The FCC has assigned to each existing
full power television station (including each station owned by the Company) a
second channel to implement DTV while present television operations are
continued on that station's existing analog channel. Although in some cases a
station's DTV channel may only permit operation over a smaller geographic
service area than that available using its existing channel, the FCC's stated
goal in assigning channels was to provide stations with DTV service areas that
will replicate their existing service areas. The FCC's DTV rules also permit
stations to request new channel assignments and other modifications to their
assigned DTV facilities, allowing them to expand their DTV service areas if
certain interference criteria are met. Under FCC rules and the Balanced Budget
Act of 1997, station owners may be required to surrender one channel in 2006 and
thereafter provide service solely in the DTV format. Generally, under current
FCC rules each of the Company's stations must construct DTV facilities and
commence operations by May 2002. The Company completed its DTV implementation at
WRDW, its Augusta, Georgia station, in early 2000. In 2001, the Company
completed its DTV implementation at KWTX, its Waco, Texas station and WEAU, its
Eau Claire, Wisconsin station. The Company currently intends to begin digital
broadcast on KXII in Sherman, Texas by May 2002. It plans to complete the
necessary DTV construction at all of its remaining stations within the next year
and has sought six-month extensions of the May 2002 deadline.
In November 1998, the FCC issued a decision to implement the requirement
of the Telecommunications Act that it charge broadcasters a fee for offering
subscription services on the DTV channel. The FCC decision was to impose a fee
of 5% of the gross revenues generated by such services. The FCC also is
considering whether and how to extend cable systems' obligations for mandatory
carriage of broadcast stations' DTV channels. Finally, the FCC is considering
additional public interest obligations on broadcasters' digital operations. The
FCC has asked for comment on four general categories of issues: (1) the
application of television stations' public interest obligations to the new
flexibility and capabilities of digital television, such as multiple channel
transmission; (2) how television stations could best serve their communities in
terms of providing their viewers information on their public interest
activities, and using digital technology to provide emergency information in new
ways; (3) how DTV broadcasters could increase access to television programming
by people with disabilities, and further the longstanding legislative and
regulatory goals of diversity; and (4) whether broadcasters could enhance the
quality of political discourse through uses of the airwaves for political issues
and debate.
In January 2001, the FCC issued an order addressing the must-carry rights
of digital television broadcasters in which it determined the following:
(i) Digital-only television stations may immediately assert carriage
rights on local cable systems;
(ii) Television stations that return their analog spectrum and convert to
digital operations are entitled to must-carry rights; and
(iii) A digital-only station asserting must-carry rights is entitled only
to carriage of a single programming stream and other
"program-related" content, regardless of the number of programs it
broadcasts simultaneously on its digital spectrum.
The FCC deferred making a decision as to whether broadcasters are entitled
to simultaneous carriage of both their digital and analog signals during the
transition to DTV. Nevertheless, the agency did announce its tentative
conclusion that, although neither forbidden nor mandated by the Communications
Act, dual carriage obligations would appear to impose an unconstitutional burden
on a cable operator's First Amendment rights. The FCC is also considering
whether rules for carriage of digital television signals by cable system
operators should also apply to direct broadcast satellite operators.
Several parties have filed petitions for reconsideration of the FCC's DTV
must-carry decision. Those petitions remain pending before the FCC, and we
cannot predict what changes, if any, the FCC will make to its DTV must-carry
rules on reconsideration.
20
Direct Broadcasting Satellite Systems. The FCC has authorized DBS, a
service which provides video programming via satellite directly to home
subscribers. Congress has enacted the Satellite Home Viewer Improvement Act
("SHVIA") that gives satellite companies the option of providing local broadcast
stations to subscribers living in the station's local market area. This is
referred to as "local-into-local."
Beginning January 1, 2002 DBS operators became subject to a requirement
for mandatory carriage of local television stations, similar to that applicable
to cable systems, for those markets in which a satellite carrier chooses to
provide any local signal. Stations in affected markets were required to make
must-carry elections by June 2001. SHVIA also extended the current system of
satellite distribution of distant network signals to unserved households (i.e.
those that do not receive a Grade B signal from a local network affiliate). In
response to a challenge to certain provisions of SHVIA, a panel of the U.S.
Court of Appeals for the Fourth Circuit upheld the requirement that DBS
operators carry the signal of all local television stations in markets where
they elect to carry any local signals. The court also upheld an FCC rule that
permits DBS operators to offer all local television stations on a single tier or
an a la carte basis. The rule allows consumers to choose between the two
options.
In response to broadcasters' June 2001 elections, DBS operators issued a
large number of carriage denial letters, prompting the FCC to issue an order in
September 2001 clarifying the DBS mandatory carriage rules. In particular, the
FCC emphasized that a satellite carrier must have a "reasonable basis" for
rejecting a broadcast station's request for carriage. The Company cannot predict
the impact of DBS service upon the Company's business.
Paging
Federal Regulation. The Company's paging operations, acquired by the
Company in September 1996, 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.
License Grant and Renewal. The FCC paging 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 holds various FCC radio
licenses which are used in connection with its paging operations. Paging
licenses will expire during calendar year 2009. Licensees in the paging services
normally enjoy a license renewal expectancy and the vast majority of license
renewal applications are granted in the normal course. 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 operations of licensed facilities or
to revoke or modify licenses. None of the Company's licenses has ever been
revoked or modified involuntarily, and such proceedings by the FCC are rarely
undertaken.
EMPLOYEES
As of March 1, 2002, the Company had 1,203 full-time employees, of which
802 were employees of the Company's television stations and satellite business,
335 were employees of the Company's publications, 51 were employees of the
Company's paging operations and 15 were corporate and administrative personnel.
None of the Company's employees are represented by unions. The Company believes
that its relations with its employees are satisfactory.
21
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 4370 Peachtree
Road, NE, Atlanta, Georgia, 30319.
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. A station's studios are
generally housed with its offices in business districts. The transmitter sites
and antenna are generally located in elevated areas to provide optimal signal
strength and coverage. The types of properties required to support newspaper
publishing include offices, facilities for printing presses and production and
storage. Paging properties include leased retail, office and tower space.
The following table sets forth certain information regarding the Company's
significant properties.
TELEVISION BROADCASTING
Station/ Owned or Expiration of
Property Location Use Leased Approximate Size Lease
- --------------------- ------------------------ -------- -------------------------------- --------------
WVLT
Knoxville, TN Office and studio Owned 18,000 sq. ft. --
building
Transmission tower site Leased Tower space Month to Month
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 on 2 acres
Hazard, KY Transmission tower site Leased -- June 2005
Hazard, KY Transmitter buildings Owned 816 sq. ft. building --
and improvements and 864 sq.ft.
building
KWTX
Waco, TX Office and studio Owned 34,000 sq. ft. --
building on 4 acres
Moody, TX Transmission tower site Owned 27.9 acres --
22
Station/ Owned or Expiration of
Property Location Use Leased Approximate Size Lease
- --------------------- ------------------------ -------- -------------------------------- --------------
KBTX
Bryan, TX Office and studio Owned 7,000 sq. ft. building --
on 23.4 acres
Grimes County, TX Transmission tower site Owned 1,300 sq. ft. building
Leased on 560 acres March 2023
Calvert, TX Transmission tower site Owned 80 sq. ft. building --
and 96 sq. ft.
building on 3.1 acres
Falls County, TX Transmission tower site Owned 128 sq. ft. building on --
2 acres
KOLN
Beaver Crossing, NE Transmission tower site Owned 120 acres --
Lincoln, NE Office and studio Owned 28,044 sq. ft. --
building on 5 acres
Bradshaw, NE Transmission tower site Owned 8 acres --
KGIN
Heartwell, NE Transmission tower site Owned 71 acres --
Grand Island, NE Office and studio Leased 5,153 sq. ft. Dec. 2003
WITN
Washington, NC Office and studio Owned 19,600 sq. ft. building --
Greenville, NC Office and studio Leased 1,707 sq. ft. Sept. 2002
Grifton, NC Transmitter building Owned 4,190 sq. ft. building --
Grifton, NC Transmission tower site Leased 9 acres Jan. 2029
WCTV
Tallahassee, FL Office and studio Owned 20,000 sq. ft. --
building on
Leased 37 acres Dec. 2014
Metcalf, GA Transmission tower site Owned 182 acres --
WRDW
North Augusta, SC Office and studio Owned 17,000 sq. ft. --
building
Beech Island, SC Transmission tower site Owned 143 acres --
23
Station/ Owned or Expiration of
Property Location Use Leased Approximate Size Lease
- --------------------- ------------------------ -------- -------------------------------- --------------
WEAU
Eau Claire, WI Office and studio Owned 16,116 sq. ft. of --
buildings on 2 acres
Township of Fairchild, Transmitter building & Owned with 2,304 sq. ft. building --
WI Transmission tower site easement on 6 acres
WJHG
Panama City, FL Office and studio Owned 14,000 sq. ft. building on 4 acres --
Youngstown, FL Transmission tower site Owned 17 acres --
KXII
Sherman, TX Office and studio Owned 12,813 sq. ft. --
building on 3 acres
Madill, OK Transmission tower site Owned 1,200 sq. ft. --
building on 97 acres
Ardmore,OK Studio and offices Owned 3,000 sq. ft. --
building on 1.5 acres
Paris, TX Translator tower site Owned 65 sq. ft. building on --
4.1 acres
Lynqx Communications
Baton Rouge, LA Office and repair site Leased 3,400 sq. ft. Dec. 2003
Tallahassee, FL Office Owned 1,000 sq. ft. --
PUBLISHING
Newspaper/ Owned or Expiration of
Property Location Use Leased Approximate Size Lease
- --------------------- ------------------------ -------- -------------------------------- --------------
The Albany Herald
Publishing Company,
Inc.,
Albany, GA Offices and production Owned 83,000 sq. ft. building --
facility for The Albany
Herald
Post Citizen Media, Inc.
Conyers, GA Offices for Rockdale Owned 20,000 sq. ft. building --
Citizen/ Newton Citizen
24
Newspaper/ Owned or Expiration of
Property Location Use Leased Approximate Size Lease
- --------------------- ------------------------ -------- -------------------------------- --------------
Post Citizen Media, Inc.
Conyers, GA (Cont.)
Conyers, GA Offices and production Leased 20,000 sq. ft. building May 2002
facility for Rockdale
Citizen/ Newton Citizen and
the Gwinnett Daily Post
Lawrenceville, GA Offices for the Gwinnett Leased 11,000 sq. ft. building Month to Month
Daily Post
Goshen. IN Offices and production Owned 21,000 sq. ft. --
facility for The Goshen building on 0.6 acres
News
PAGING
Owned or Expiration of
Property Location Use Leased Approximate Size Lease
- --------------------- ------------------------ -------- -------------------------------- --------------
Albany, GA Sales Office Leased 3,200 sq. ft. May 2004
Columbus, GA Sales Office Leased 2,200 sq. ft. Dec. 2002
Lumpkin Road Sales Office Leased 2,800 sq. ft. May 2002
Dothan, AL Sales Office Leased 800 sq. ft. Feb. 2005
Macon, GA Sales Office Leased 1,260 sq. ft. Month to Month
Tallahassee, FL Sales Office Leased 1,800 sq. ft. Aug. 2002
Tallahassee, FL Corporate Office Leased 2,400 sq. ft. Mar. 2002
Thomasville, GA Sales Office Leased 1,200 sq. ft. June 2002
Valdosta, GA Sales Office Leased 1,250 sq. ft. Feb. 2005
Panama City, FL Sales Office Leased 1,050 sq. ft. Month to Month
Gainesville, FL Sales Office Leased 1,100 sq. ft. Month to Month
The paging operations also lease space on various towers in Florida,
Georgia and Alabama. These tower lease terms range from month-to-month to
expiration dates through 2006.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a 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 except for the income tax matter described below.
25
The Internal Revenue Service (the "IRS") is auditing the Company's federal
tax return for the year ended December 31, 1996. In conjunction with this
examination, the Company extended the time period that the IRS has to audit the
Company's federal tax returns for the 1996 and 1997 tax years until December 31,
2001.
In October 2001, the Company received a notice of deficiency from the IRS
associated with its audit of the Company's 1996 federal income tax return. The
IRS alleges in the notice that the Company owes approximately $12.1 million of
tax plus interest and penalties stemming from certain acquisition related
transactions, which occurred in 1996. Additionally, if the IRS were successful
in its claims, the Company would be required to account for these acquisition
transactions as stock purchases instead of asset purchases, which would
significantly lower the tax basis in the assets acquired. The Company believes
the IRS claims are without merit and on January 18, 2002 filed a petition to
contest the matter in United States Tax Court. The Company cannot predict when
the tax court will conclude its ruling on this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered.
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the executive
officers of the Company as of March 15, 2002:
J. MACK ROBINSON, age 78, has been the Company's President and Chief
Executive Officer since 1996. Mr. Robinson has served as Chairman of the Board
of Bull Run Corporation, a principal stockholder of the Company, since 1994,
Chairman of the Board and President of Delta Life Insurance Company and Delta
Fire and Casualty Insurance Company since 1958, President of Atlantic American
Corporation, an insurance holding company, from 1988 until 1995 and Chairman of
the Board of Atlantic American Corporation since 1974. Mr. Robinson serves as a
director of the following companies: Bankers Fidelity Life Insurance Company,
American Independent Life Insurance Company, Georgia Casualty & Surety Company,
American Southern Insurance Company and American Safety Insurance Company. He is
a director emeritus of Wachovia Corporation. He is the Chairman of the Executive
Committee and a member of the Management Personnel Committee of the Company's
Board of Directors. Mr. Robinson is the husband of Mrs. Harriett J. Robinson and
the father-in-law of Mr. Hilton H. Howell, Jr., both members of the Company's
Board of Directors.
ROBERT S. PRATHER, JR., age 57, has been Executive Vice
President-Acquisitions of the Company since 1996. He has served as President and
Chief Executive Officer and a director of Bull Run Corporation, a principal
stockholder of the Company, since 1992. He serves as a director of Swiss Army
Brands, Inc. and The Morgan Group, Inc. and serves on the Board of Trustees of
the Georgia World Congress Center Authority. He is a member of the Executive
Committee and Management Personnel Committee of the Company's Board of
Directors.
HILTON H. HOWELL, JR., age 40, has been the Company's Executive Vice
President since September 2000. He has served as President and Chief Executive
Officer of Atlantic American Corporation, an insurance holding company, since
1995 and Executive Vice President from 1992 to 1995. He has been Executive Vice
President and General Counsel of Delta Life Insurance Company and Delta Fire and
Casualty Insurance Company since 1991, and Vice Chairman of Bankers Fidelity
Life Insurance Company and Georgia Casualty & Surety Company since 1992. He has
been a director, Vice President and Secretary of Bull Run Corporation, a
principal stockholder of the Company, since 1994. Mr. Howell also serves as a
director of the following companies: Atlantic American Corporation, Bankers
Fidelity
26
Life Insurance Company, Delta Life Insurance Company, Delta Fire and Casualty
Insurance Company, Georgia Casualty & Surety Company, American Southern
Insurance Company, American Safety Insurance Company, Association Casualty
Insurance Company and Association Risk Management General Agency. He is the
son-in-law of J. Mack Robinson and Harriett J. Robinson, both members of the
Company's Board of Directors.
ROBERT A. BEIZER, age 62, has served as Vice President for Law and
Development and Secretary of the Company since 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 in the law firm of Sidley & Austin and was head of their
communications practice group in Washington, D.C. He is a past president of the
Federal Communications Bar Association and has served as a member of the ABA
House of Delegates.
JAMES C. RYAN, age 41, has served as the Company's Vice President and
Chief Financial Officer since October 1998. He was the Chief Financial Officer
of Busse Broadcasting Corporation from 1987 until its acquisition by the Company
in 1998.
THOMAS J. STULTZ, age 50, has served as Vice President of the Company and
President of the Company's Publishing Division since 1996. Prior to joining the
Company, he served as Vice President of Multimedia Newspaper Company, a division
of Multimedia, Inc. from 1988 to 1995. Mr. Stultz has approximately 32 years of
experience in the newspaper industry.
RICH D. ADAMS, age 54, assumed the positions of the Company's Regional
Vice President-Texas and General Manager of KWTX-TV, Waco, Texas, in January
2002. He replaced Mr. Ray Deaver who retired from these positions on December
31, 2001. Prior to his appointment in January 2002 to these positions, Mr.
Adams, served as General Manager of KXII-TV, the Company's Sherman, Texas
station, since 1980. The Company acquired KXII and KWTX in October 1999. Mr.
Adams has approximately 31 years of experience in the broadcast industry.
FRANK J. JONAS, age 55, has served as the Company's Regional Vice
President-Midwest since June 2000. He has served as the President and General
Manager of KOLN/KGIN-TV, Lincoln and Grand Island, Nebraska, since 1985. The
Company acquired KOLN/KGIN-TV in 1998. Mr. Jonas has approximately 29 years of
experience in the broadcast industry.
WAYNE M. MARTIN, age 55, has served as the Company's Regional Vice
President-Television since 1998. In 1998, he was also appointed President of
WVLT-TV, the Company's subsidiary in Knoxville, Tennessee. Since 1993, Mr.
Martin has served as President of the Company's subsidiary, Gray Kentucky
Television, Inc., which operates WKYT-TV, in Lexington, Kentucky and WYMT-TV, in
Hazard, Kentucky. Mr. Martin has approximately 16 years of experience in the
broadcast industry.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since June 30, 1995, the Company's Class A Common Stock, no par value,
(the "Class A Common Stock') has been listed and traded on The New York Stock
Exchange (the "NYSE") under the symbol "GCS." Since September 24, 1996, the date
of its initial issuance, the Company's Class B Common Stock, no par value, (the
"Class B Common Stock") has also been listed and traded on the NYSE under the
symbol "GCS.B." The following table sets forth the high and low sale prices of
the Class A Common Stock and Class B Common Stock as well as the cash dividend
declared for the periods indicated. The high and low sales prices of the Class A
Common Stock and the Class B Common Stock are as reported by the NYSE.
CLASS A COMMON STOCK CLASS B COMMON STOCK
----------------------------------- --------------------------------
CASH CASH
DIVIDENDS DIVIDENDS
DECLARED DECLARED
HIGH LOW PER SHARE HIGH LOW PER SHARE
------ ------ --------- ------ ------ ---------
2001
First Quarter $19.04 $15.63 $0.02 $17.65 $14.50 $0.02
Second Quarter 19.05 15.27 0.02 16.40 14.20 0.02
Third Quarter 18.79 15.20 0.02 15.45 13.10 0.02
Fourth Quarter 15.20 12.20 0.02 13.23 9.60 0.02
2000
First Quarter $18.13 $11.75 $0.02 $13.69 $10.75 $0.02
Second Quarter 12.38 9.75 0.02 11.75 9.50 0.02
Third Quarter 11.50 9.94 0.02 11.13 9.50 0.02
Fourth Quarter 16.25 11.00 0.02 15.50 10.38 0.02
As of March 15, 2002, the Company had 6,848,467 outstanding shares of
Class A Common Stock held by approximately 674 stockholders and 8,803,810
outstanding shares of Class B Common Stock held by approximately 744
stockholders. The number of stockholders includes stockholders of record and
individual participants in security position listings as furnished to the
Company pursuant to Rule 17Ad-8 under the Exchange Act.
The Company has paid a dividend on its Class A Common Stock since 1967 and
its Class B Common Stock since its initial offering in 1996. The Company's
Articles of Incorporation provide that each share of Class A Common Stock is
entitled to 10 votes and each share of Class B Common Stock is entitled to one
vote. The Articles of Incorporation require that the Class A Common Stock and
the Class B Common Stock receive dividends on a pari passu basis. There can be
no assurance of the Company's ability to continue to pay any dividends on either
class of Common Stock.
The Senior Credit Facility and the Company's 9 1/4% Notes due 2011 each
contain covenants that restrict the ability of the Company to pay dividends on
its capital stock. However, the Company does not believe that such covenants
currently limit its ability to pay dividends at the recent quarterly rate of
$0.02 per share. In addition to the foregoing, the declaration and payment of
dividends on the Class A Common Stock and the Class B Common Stock are subject
to the discretion of the Board of Directors. Any future payments of dividends
will depend on the earnings and financial position of the Company and such other
factors as the Board of Directors deems relevant.
28
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is certain selected historical consolidated financial data
of the Company. This information should be read in conjunction with the
Company's audited consolidated financial statements and related notes thereto
appearing elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2001 2000 1999(1) 1998(2) 1997(3)
--------- --------- --------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenues $ 156,343 $ 171,213 $ 143,953 $128,890 $ 103,548
Operating income(4) 17,880 31,098 22,060 24,927 20,730
Net income (loss) (13,318) (6,212) (6,315) 41,659 (1,402)
Net income (loss) available to common stockholders (13,934) (9,384) (7,325) 36,981 (2,812)
Net income (loss) available to common stockholders per
common share(5):
Basic (0.89) (0.61) (0.57) 3.10 (0.24)
Diluted (0.89) (0.61) (0.57) 2.98 (0.24)
Cash dividends per common share(5) $ 0.08 $ 0.08 $ 0.08 $ 0.06 $ 0.05
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $ 794,337 $ 636,772 $ 658,157 $468,974 $ 345,051
Long-term debt(including current portion) 551,444 374,887 381,702 270,655 227,076
Total stockholders' equity 142,196 $ 155,961 $ 168,188 $126,703 $ 92,295
(1) Reflects the operating results of the Texas Acquisitions, completed
October 1, 1999 and the Goshen Acquisition, completed on March 1, 1999, as
of their respective acquisition dates. See Note B to the Company's audited
consolidated financial statements included elsewhere herein.
(2) Reflects the operating results of the Busse-WALB Transactions as of July
31, 1998, the closing date of the respective transactions.
(3) Reflects the operating results of the WITN Acquisition and the GulfLink
Acquisition, as of their respective acquisition dates, August 1, 1997 and
April 24, 1997, respectively.
(4) Operating income excludes gain on disposition of television stations of
$72.6 million recognized for the exchange of WALB in 1998. Operating
income also excludes charges relating to valuation adjustments of goodwill
and other assets of $2.1 million for the year ended December 31, 1998.
(5) On August 20, 1998, the Company's Board of Directors declared a 50% stock
dividend, payable on September 30, 1998, to stockholders of record of the
Class A Common Stock and Class B Common Stock on September 16, 1998. This
stock dividend effected a three for two stock split. All applicable share
and per share data have been adjusted to give effect to the stock split.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS OF THE COMPANY
Introduction
The following analysis of the financial condition and results of
operations of Gray Communications Systems, Inc. (the "Company") should be read
in conjunction with the Company's audited consolidated financial statements and
notes thereto included elsewhere herein.
As discussed below, the Company has acquired several television stations,
a newspaper and an equity investment in Sarkes Tarzian, Inc. ("Tarzian") since
January 1, 1999. 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. The equity investment in
Tarzian is accounted for under the cost method of accounting.
On October 1, 1999, the Company completed its acquisition of all the
outstanding capital stock of KWTX Broadcasting Company and Brazos Broadcasting
Company, as well as the assets of KXII Broadcasters Ltd. The Company acquired
the capital stock of KWTX Broadcasting Company and Brazos Broadcasting Company
in merger transactions with the shareholders of KWTX Broadcasting Company and
Brazos Broadcasting Company receiving a combination of cash and the Company's
Class B Common Stock for their shares. The Company acquired the assets of KXII
Broadcasters Ltd. in an all cash transaction. These transactions are referred to
herein as the "Texas Acquisitions."
On March 1, 1999, the Company acquired substantially all of the assets of
The Goshen News from News Printing Company, Inc. and affiliates thereof, (the
"Goshen Acquisition").
See Note B of the Notes to the Company's audited consolidated financial
statements included elsewhere herein for more information concerning its Texas
Acquisitions, its Goshen Acquisition and its equity investment in Tarzian.
General
The Company derives its revenues from its television broadcasting,
publishing and paging operations. The operating revenues of the Company's
television stations are derived from broadcast advertising revenues and, to a
much lesser extent, from compensation paid by the networks to the stations for
broadcasting network programming. The operating revenues of the Company's
publishing operations are derived from advertising, circulation and classified
revenue. Paging revenue is derived primarily from the leasing and sale of
pagers. Certain information concerning the relative contributions of the
Company's television broadcasting, publishing and paging operations is provided
in Note I of the Notes to the Company's audited consolidated financial
statements included elsewhere herein.
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 Media Research ("Nielsen"). In addition, broadcast
advertising rates are affected by the number of advertisers competing for the
available time, the size and demographic makeup of the market served by the
station and the availability of alternative advertising media in the market
area. Broadcast advertising rates are the highest during the most desirable
viewing hours, with corresponding reductions during other
30
hours. The ratings of a local station affiliated with a major network can be
affected by ratings of network programming.
Most broadcast advertising contracts are short-term, and generally run
only for a few weeks. Approximately 59% of the gross revenues of the Company's
television stations for the year ended December 31, 2001, were generated from
local advertising, which is sold primarily by a station's sales staff directly
to local accounts, and the remainder represented primarily by 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 each year, due in part to increases in consumer advertising in
the spring and retail advertising in the period leading up to and including the
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 Company's publishing operations' advertising contracts are generally
entered into annually and provide for a commitment as to the volume of
advertising to be purchased by an advertiser during the year. The publishing
operations' advertising revenues are primarily generated from local advertising.
As with the broadcasting operations, the publishing operations' revenues are
generally highest in the second and fourth quarters of each year.
The Company's paging subscribers either own pagers, thereby paying solely
for the use of the Company's paging services, or lease pagers, thereby paying a
periodic charge for both the pagers and the paging services. The terms of the
lease contracts are month-to-month, three months, six months or twelve months in
duration. Paging revenues are generally equally distributed throughout the year.
The broadcasting operations' primary operating expenses are employee
compensation, related benefits and programming costs. The publishing operations'
primary operating expenses are employee compensation, related benefits and
newsprint costs. The paging operations' primary operating expenses are employee
compensation and other communications costs. In addition, the broadcasting,
publishing and paging operations incur overhead expenses, such as maintenance,
supplies, insurance, rent and utilities. A large portion of the operating
expenses of the broadcasting, publishing and paging operations is fixed,
although the Company has experienced significant variability in its newsprint
costs in recent years.
Broadcasting, Publishing and Paging Revenues
Set forth below are the principal types of broadcasting, publishing and
paging revenues earned by the Company's broadcasting, publishing and paging
operations for the periods indicated and the percentage contribution of each of
the Company's total broadcasting, publishing and paging revenues, respectively
(dollars in thousands):
31
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
BROADCASTING
Net Revenues:
Local $ 63,012 40.3% $ 65,152 38.1% $ 57,078 39.7%
National 31,164 19.9% 31,043 18.1% 26,742 18.6%
Network compensation 6,902 4.4% 8,311 4.9% 6,480 4.5%
Political 287 0.2% 9,021 5.3% 622 0.4%
Production and other 5,065 3.3% 7,113 4.1% 6,093 4.2%
-------- ----- -------- ----- -------- -----
$106,430 68.1% $120,640 70.5% $ 97,015 67.4%
======== ===== ======== ===== ======== =====
PUBLISHING
Revenues:
Retail $ 20,132 12.9% $ 19,569 11.4% $ 17,760 12.3%
Classifieds 12,396 7.9% 13,031 7.6% 12,039 8.4%
Circulation 7,730 4.9% 7,659 4.5% 6,791 4.7%
Other 931 0.6% 1,240 0.7% 1,218 0.9%
-------- ----- -------- ----- -------- -----
$ 41,189 26.3% $ 41,499 24.2% $ 37,808 26.3%
======== ===== ======== ===== ======== =====
PAGING
Revenues:
Paging lease, sales and service $ 8,724 5.6% $ 9,074 5.3% $ 9,130 6.3%
======== ===== ======== ===== ======== =====
TOTAL $156,343 100.0% $171,213 100.0% $143,953 100.0%
======== ===== ======== ===== ======== =====
YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000
Revenues. Total revenues for the year ended December 31, 2001 decreased
$14.9 million, or 8.7%, over the prior year, to $156.3 million from $171.2
million. The operating results for the year ended December 31, 2001 when
compared to the year ended December 31, 2000 reflect a general economic
slowdown, the cyclical decline in broadcast political revenue and the economic
effects of the September 11, 2001 terrorist acts on the Company's broadcast
revenues, as discussed below. The majority of the revenue decline occurred in
the Company's broadcast operations.
Broadcasting revenues decreased $14.2 million, or 11.8%, over the prior
year, to $106.4 million from $120.6 million. The decline in broadcast revenues
reflects, in part, the cyclical decline in political revenue. For the year 2001,
the Company had revenues from political advertising of only $287,000 compared to
$9.0 million for the year ended 2000. The decline in broadcast revenues also
reflected a generally soft advertising market at each of the Company's
television stations during 2001. For the year ended 2001 compared to 2000, local
sales revenues declined 3.3%, or $2.1 million, to $63.0 million from $65.1
million. National revenues increased 0.4%, or $121,000 to $31.2 million from
$31.0 million for the year ended 2001 compared to the year ended 2000. The
Company believes that its share of the television advertising expenditures
earned in each of its markets remained relatively consistent between the years
ended 2001 and 2000. In addition, the Company estimates its Broadcast revenue
loss attributable to the multi-day continuous commercial free coverage of the
September 11, 2001 terrorist acts and the cancellation of certain broadcasting
advertising contracts resulting from the attacks totaled $1.0 million. The
revenue losses resulting from the terrorist attacks were isolated to the third
quarter of 2001. Furthermore, network compensation declined approximately $1.4
million for the year ended December 31, 2001 compared to the year ended December
31, 2000, primarily reflecting the terms of the renewed CBS affiliation
agreements for the Company's three stations in Texas.
32
Publishing revenues decreased $310,000, or 0.7%, over the same period of
the prior year, to $41.2 million from $41.5 million. Revenue declines were
recorded at all of the Company's newspapers except The Gwinnett Daily Post,
located in eastern suburban Atlanta. Revenues for that paper increased
approximately 5.4%. The overall Publishing segment's decline in revenues
reflected a relatively soft advertising market in each paper's local service
area. Aggregate classified advertising revenues decreased 4.9% while aggregate
retail advertising increased 2.9% and aggregate circulation revenues increased
0.9%. The increase in retail advertising reflects the continuing growth of both
The Gwinnett Daily Post, which recorded a 11.1% increase and the Rockdale
Citizen which recorded a 9.9% increase for the year ended 2001 as compared to
the same period of 2000.
Paging revenue decreased $350,000, or 3.8%, over the same period of the
prior year, to $8.7 million from $9.1 million. The decline reflected, in part,
increasing competition for subscribers from alternate service providers
including cellular phone providers. The Company had approximately 75,000 pagers
and 90,000 pagers in service at December 31, 2001 and 2000, respectively.
Operating expenses. Operating expenses for the year ended December 31,
2001 decreased $1.7 million, or 1.2%, over the prior year, to $138.5 million
from $140.1 million. The decrease resulted primarily from the Company's focus on
cost control in the current year.
Broadcasting expenses decreased $1.5 million or 2.3%, over the year ended
December 31, 2001, to $66.2 million from $67.8 million. This focus on cost
control generated decreases in broadcast payroll expense of $833,000 and
decreased other broadcast expense of $941,000.
Publishing expenses for the year ended December 31, 2001 increased
$507,000, or 1.6%, from the same period of the prior year, to $31.9 million from
$31.4 million. The increase was primarily attributable to increased newsprint
costs approximating $500,000 for the year ended 2001 as compared to the year
ended 2000.
Paging expenses decreased $259,000, or 4.2%, over the same period of the
prior year, to $5.9 million from $6.1 million. The decrease in paging expenses
reflected an expense reduction plan instituted by the Company in the prior year.
Corporate and administrative expenses remained consistant with that of the
prior year at $3.6 million.
Depreciation of property and equipment and amortization of intangible
assets was $30.8 million for the year ended December 31, 2001, as compared to
$31.2 million for the prior year, a decrease of $383,000, or 1.2%.
Depreciation in value of derivatives, net. On January 1, 2001, the Company
adopted SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," as amended ("SFAS 133"). Under SFAS 133, the Company is required to
record its interest rate swap agreement at market value. It also requires the
Company to record any changes in market value of the interest rate swap
agreement after January 1, 2001 as income or expense in its statement of
operations. As a result of the general decrease in market interest rates during
the year ended December 31, 2001, the Company recognized a non-cash derivative
valuation expense of $1.6 million.
Miscellaneous income (expense), net. Miscellaneous income decreased
$587,000, or 75.2%, to $194,000 for the year ended December 31, 2001 from
$781,000 for the year ended December 31, 2000. The change in miscellaneous
income (expense) was due primarily to the gain of $522,000 recognized upon the
sale of a real estate investment in December 2000.
33
Interest expense. Interest expense decreased $4.2 million, or 10.4%, to
$35.8 million for the year ended December 31, 2001 from $40.0 million for the
year ended December 31, 2000. The decrease was due primarily to lower interest
rates.
Income tax expense (benefit). Income tax benefit for the year ended
December 31, 2001 and 2000 was $6.0 million and $1.9 million, respectively. The
increase in the current year income tax benefit was due to an increased loss
before income tax as well as a higher effective income tax rate in 2001 as
compared to 2000. The higher effective income tax rate was due primarily to the
differences in the amount of losses and the state income tax rates in the states
in which those losses were generated.
Preferred Dividends. Preferred Dividends decreased $396,000, or 39.1%, to
$616,000 for the year ended December 31, 2001 from $1.0 million for the year
ended December 31, 2000. The decrease was due to fewer weighted average shares
outstanding in 2000 as compared to 2001. The Company redeemed a portion of its
preferred stock in 2000.
Non-cash preferred dividends associated with the redemption of preferred
stock. Non-cash preferred dividends associated with the redemption of preferred
stock was $2.2 million for the year ended December 31, 2000. The dividend was
recorded in association with a partial redemption of preferred stock in 2000. No
such redemption occurred in 2001.
Net loss available to common stockholders. Net loss available to common
stockholders of the Company for the year ended December 31, 2001 and 2000 was
$13.9 million and $9.4 million, respectively.
YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999
Revenues. Total revenues for the year ended December 31, 2000 increased
$27.2 million, or 18.9%, over the prior year, to $171.2 million from $144.0
million. This increase was primarily attributable to the effect of (i) increased
revenues resulting from the acquisition of three television stations in Texas
(the "Texas Stations") and The Goshen News, (ii) increased political broadcast
revenue and (iii) increased publishing revenues from existing publishing
operations. The current year results include 12 months of operations for the
Texas Stations and The Goshen News as compared to three months and ten months,
respectively, in the prior year.
Broadcasting revenues increased $23.6 million, or 24.4%, over the prior
year, to $120.6 million from $97.0 million. Revenue from the Texas Stations,
which were acquired on October 1, 1999, increased broadcasting revenues by $17.9
million over that of the prior year. Revenues from the Company's existing
broadcasting operations continuously owned since January 1, 1999, increased $5.7
million, or 6.3%, over the prior year, to $96.5 million from $90.8 million. This
$5.7 million increase was due primarily to increased political advertising
revenue of $7.9 million and increased production and other revenues of $783,000
offset, in part, by decreased local revenues of $2.5 million, decreased national
revenues of $156,000 and decreased network compensation of $267,000. For all
locations, political advertising revenue was $9.0 million for the year ended
December 31, 2000, compared to $622,000 for the prior year.
Publishing revenues increased $3.7 million, or 9.8%, over the same period
of the prior year, to $41.5 million from $37.8 million. The increase in
publishing revenues was due primarily to increased revenues from the Company's
existing publishing operations and from the revenues generated by The Goshen
News, which was acquired on March 1, 1999. Revenues from the Company's existing
publishing operations continuously owned since January 1, 1999 increased $3.0
million, or 9.0%, over the same period of the prior year, to $35.8 million from
$32.8 million. The primary components of the $3.0 million increase in revenues
from existing operations were increases in retail advertising, classified
advertising
34
and circulation revenue of $1.4 million, $920,000 and $651,000, respectively.
Revenue from The Goshen News increased publishing revenues by $724,000 over that
of the prior year.
Paging revenue remained at $9.1 million for 2000 and 1999. The Company had
approximately 90,000 pagers and 88,000 pagers in service at December 31, 2000
and 1999, respectively.
Operating expenses. Operating expenses for the year ended December 31,
2000 increased $18.2 million, or 14.9%, over the prior year, to $140.1 million
from $121.9 million. The increase resulted primarily from the Company's
acquisitions in 1999.
Broadcasting expenses increased $9.1 million or 15.5%, over the year ended
December 31, 2000, to $67.8 million from $58.7 million. The expenses of the
Texas Stations accounted for an increase in broadcasting expenses of $9.0
million. Operating expenses of the stations continuously owned since January 1,
1999, had increases in payroll and general operating expenses that were largely
offset by decreases in syndicated film expense. The increase in payroll expenses
of the stations continuously owned since January 1, 1999 was limited to 0.7% as
a result of a cost reduction plan instituted by the Company in 2000.
Publishing expenses for the year ended December 31, 2000 increased $2.6
million, or 9.1%, from the same period of the prior year, to $31.4 million from
$28.8 million. The increase in publishing expenses was due primarily to
increased expenses from the Company's existing publishing operations and from
the expenses of The Goshen News, which was acquired on March 1, 1999. Expenses
of the Company's publishing operations owned since January 1, 1999 increased
$2.3 million, or 9.0%, over the same period of the prior year, to $27.6 million
from $25.3 million. The increase in expenses at the Company's existing
publishing operations was due primarily to increased payroll of $715,000,
increased newsprint expense of $637,000 and increased other operating expenses
of $933,000.
Paging expenses decreased $415,000, or 6.3%, over the same period of the
prior year, to $6.1 million from $6.6 million. The decrease in paging expenses
reflected an expense reduction plan instituted by the Company in the current
year.
Corporate and administrative expenses increased $146,000 or 4.2%, over the
prior year, to $3.6 million from $3.4 million. This increase was primarily
attributable to increased payroll expense.
Depreciation of property and equipment and amortization of intangible
assets was $31.2 million for the year ended December 31, 2000, as compared to
$24.5 million for the prior year, an increase of $6.7 million, or 27.6%. This
increase was primarily the result of higher depreciation and amortization costs
resulting from the Texas Acquisitions and the Goshen Acquisition in 1999.
Miscellaneous income (expense), net. Miscellaneous income increased
$445,000, or 132.4%, to $781,000 for the year ended December 31, 2000 from
$336,000 for the year ended December 31, 1999. The change in miscellaneous
income (expense) of $445,000 was due primarily to the gain of $522,000
recognized upon the sale of a real estate investment in December 2000.
Interest expense. Interest expense increased $9.0 million, or 28.8%, to
$40.0 million for the year ended December 31, 2000 from $31.0 million for the
year ended December 31, 1999. This increase was attributable primarily to
increased levels of debt resulting from the financing of the Texas Acquisitions
and the Goshen Acquisition in 1999 and higher interest rates.
Income tax expense (benefit). Income tax benefit for the year ended
December 31, 2000 and 1999 was $1.9 million and $2.3 million, respectively.
35
Net loss available to common stockholders. Net loss available to common
stockholders of the Company for the year ended December 31, 2000 and 1999 was
$9.4 million and $7.3 million, respectively.
GUIDANCE ON THE FULL YEAR OF 2002
The Company currently believes that the general economic conditions
including the general decrease in advertising expenditures experienced during
2001 will gradually improve during 2002. Accordingly, the Company currently
anticipates that broadcast local and national revenue, excluding political
revenue, and publishing revenues will demonstrate modest low to mid single digit
percentage increases over 2001 results throughout 2002. In addition, 2002 is a
political election year and the Company expects its broadcast operations to
benefit from the cyclical return of political advertising. The Company notes
that in both 1998 and 2000 its television stations recorded approximately $9
million of political revenue in each year.
Revenue generation, especially in light of current general economic
conditions, is subject to many factors beyond the control of the Company.
Accordingly, the Company's ability to forecast future revenue, within the
current economic environment, is limited and actual results may vary
substantially from current expectations.
At present, the Company anticipates that total operating expenses,
excluding depreciation and amortization, for each of the Company's operating
segments for the full year 2002, will be approximately equal to 2001 results.
These generally favorable operating expense expectations reflect the Company's
on-going expense reduction efforts at all of its operating locations.
Assuming variable interest rates remain at relatively low levels through
out 2002, the Company currently expects that its interest expense for the full
year of 2002 will be at least $2.0 million less than the comparable amounts for
the full year of 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital was $18.3 million and $13.2 million at
December 31, 2001, and 2000, respectively. The Company's cash provided from
operations was $20.5 million, $22.8 million and $20.8 million in 2001, 2000 and
1999, respectively. Management believes that current cash balances, cash flows
from operations and available funds under its Senior Credit Facility will be
adequate to provide for the Company's capital expenditures, debt service, cash
dividends and working capital requirements.
The Company amended and restated its Senior Credit Facility on September
25, 2001. The revised facility provides the Company with a $200 million term
facility and a $50 million reducing revolving credit facility. In addition, the
agreement provides the Company with the ability to access up to $100 million of
incremental senior secured term loans upon the consent of the lenders. The
Company may request this incremental senior secured term loan on any business
day on or before December 31, 2003. Prior to the amendment on September 25,
2001, the Senior Credit Facility consisted of a $100.0 million revolving
commitment and two $100.0 million term loan commitments.
Proceeds from the amended and restated facility were used to refinance
existing senior secured indebtedness, transaction fees and for other general
corporate purposes. The Company incurred $2.6 million in lender fees and other
costs to amend and restate the facility.
Under the amended revolving and term facilities, the Company, at its
option, can borrow funds at an interest rate equal to the London Interbank
Offered Rate ("LIBOR") plus a margin or at the lenders' base rate plus a margin.
The base rate will generally be equal to the lenders' prime rate. Interest rates
under the amended revolving facility are base rate plus a margin ranging from
0.25% to 1.75% or LIBOR plus a margin ranging from 1.5% to 3.0%. Interest rates
under the amended term facility are base plus a margin
36
ranging from 1.75% to 2.0% or LIBOR plus a margin ranging from 3.0% to 3.25%.
The applicable margin payable by the Company will be determined by the Company's
operating leverage ratio that is calculated quarterly.
At December 31, 2001, the Company had approximately $217.5 million
outstanding under the Senior Credit Facility with approximately $32.5 million
available under the agreement. Also as of December 31, 2001, interest rates were
at a rate of base plus 1.75% and/or LIBOR plus 3.0% for funds borrowed under the
revolving facility. For funds borrowed under the term facility, interest was at
base plus 2.0% and/or LIBOR plus 3.25%. The effective interest rate on the
Senior Credit Facility at December 31, 2001 and 2000 was 5.8% and 9.7%,
respectively. The Company is charged a commitment fee on the excess of the
aggregate average daily available credit limit less the amount outstanding. At
December 31, 2001, the commitment fee was 0.50% per annum.
The lenders' commitments for the revolving facility will reduce quarterly,
as specified in the credit agreement, beginning March 31, 2004 and final
repayment of any outstanding amounts under the revolving facility is due
December 31, 2008. The term facility commences amortization in quarterly
installments of $500,000 beginning March 31, 2003 through December 31, 2008 with
the remaining outstanding balance payable in three equal quarterly installments
beginning March 31, 2009. The final maturity date for any outstanding amounts
under the term facility is September 30, 2009.
On December 21, 2001, the Company completed its sale of $180 million
aggregate principal amount of Senior Subordinated Notes due 2011 (the "9 1/4%
Notes"). The net proceeds from the sale of the 9 1/4% Notes were approximately
$173.6 million. The 9 1/4% Notes have a coupon of 9 1/4% and was priced at a
discount to yield 9.375%. Interest on the 9 1/4% Notes is payable semi-annually
on December 15 and June 15, commencing June 15, 2002. The 9 1/4% Notes mature on
December 15, 2011 and are redeemable, in whole or in part, at the Company's
option after December 15, 2006.
The amended and restated senior credit facilities are collateralized by
substantially all of the assets, excluding real estate, of the Company and its
subsidiaries. In addition, the Company's subsidiaries are joint and several
guarantors of the obligations and the Company's ownership interests in its
subsidiaries are pledged to collateralize the obligations. The agreement
contains certain restrictive provisions which include but are not limited to,
requiring the Company to maintain certain financial ratios and limits upon the
Company's ability to incur additional indebtedness, make certain acquisitions or
investments, sell assets or make other restricted payments, including dividends,
(all as are defined in the loan agreement). The 9 1/4% Notes also contain
similar restrictive provisions limiting the Company's ability to, among other
things incur additional indebtedness make certain acquisitions or investments,
sell assets or make certain restricted payments that include but are not limited
to purchases or redemptions of the Company's capital stock. Failure to comply
with any of these restrictions may cause an event of default under the
respective agreements and if not waived by the lenders could cause the
acceleration of the Company's indebtedness.
In October of 2001, the Company purchased $4.8 million of its existing 10
5/8% Senior Subordinated Notes due 2006 (the "10 5/8% Notes"). On December 21,
2001, Gray instructed the trustee for the 10 5/8% Notes to commence the
redemption, in full, of the remaining 10 5/8% Notes outstanding. Gray deposited
cash of approximately $168.6 million with the 10 5/8% Notes' trustee, to redeem
the aggregate principal amount of the 10 5/8% Notes outstanding of $155.2
million and to fund associated premium costs of $8.2 million, accrued interest
of $3.7 million and certain other related expenses of $1.5 million. This cash
was funded from the net proceeds of the 9 1/4% Notes and is included in
consolidated balance sheet at December 31, 2001 as "restricted cash for
redemption of long-term debt". The redemption was completed on January 22, 2002
and all obligations associated with the 10 5/8% Notes as well as the rights
associated with the restricted cash were extinguished on that date. The Company
recorded an extraordinary charge of approximately 11.3 million ($6.8 million
after income tax) in January 2002 in connection with this early extinguishment
of debt.
37
The 9 1/4% Notes are 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 is
subordinated, to the same extent as the obligations of the Company in respect of
the 9 1/4% 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's net cash used in investing activities was $189.8 million,
$8.3 million and $126.8 million in 2001, 2000 and 1999, respectively. Cash used
in investing activities in 2001 included the prefunding of the $168.6 of
restricted cash for redemption of long-term debt, the purchase of the investment
in Sarkes Tarzian, Inc. and the purchase of equipment. Cash used in investing
activities in 2000 resulted primarily from equipment purchases. Cash used in
investing activities in 1999 resulted primarily from the acquisition of
television and newspaper businesses.
The Company provided $167.7 million in financing activities in 2001, used
$14.1 million in cash financing activities in 2000 and provided $105.8 million
in cash by financing activities in 1999, respectively. In 2001, cash was
provided primarily from the issuance of the 9 1/4% Notes. In 2000, cash used in
financing activities resulted primarily from a net long-term debt payment of
$6.8 million, dividend payments of $2.1 million and a preferred stock redemption
of $5.0 million. In 1999, the net cash provided by financing activities resulted
primarily from borrowing under the Senior Credit Facility to finance the Texas
Acquisitions and the Goshen Acquisition.
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. 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 the 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 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, 2001,
payments on program license liabilities due in 2002, which will be paid with
cash from operations, were approximately $6.2 million. The Company paid $5.4
million for program broadcast rights in 2001.
During 2001, the Company completed the installation of digital television
broadcast systems at its Waco, Texas and Eau Claire, Wisconsin television
stations. The Company has commenced installation of similar systems at several
of its other television stations. The Company currently intends to have all such
required installations completed as soon as practicable and currently expects
all stations to be operational by the end of 2002 but can give no assurance that
such timetable will be achieved. Currently the Federal Communications Commission
(the "FCC") requires that all stations be operational by May of 2002. As
necessary, the Company has requested the FCC to extend such deadline for certain
of its stations. Such extension requests are currently anticipated to be for
relatively short time periods of up to six months to allow for the completion of
the installation of the digital television broadcast equipment. Given the
Company's good faith efforts to comply with the existing deadline and the facts
specific to each extension request, the Company believes the FCC will grant any
deadline extension requests that become necessary.
38
The estimated total multi-year (1999 through 2002) capital expenditures
required to implement initial digital television broadcast systems will
approximate $31.4 million which includes a capital lease with an initial
capitalization cost of approximately $2.5 million for tower facilities at
WVLT-TV, the Company's station in Knoxville, TN. As of December 31, 2001, the
Company has incurred $10.6 million of such costs and of this amount $8.6 million
was incurred in 2001. The remaining $20.8 million of expenditures is expected to
be incurred at various times throughout 2002 as the Company completes
construction of its digital television broadcast systems. The remaining cash
payments relating to such expenditures are expected to occur at various dates
throughout 2002 and 2003.
In October 2001, the Company received a notice of deficiency from the IRS
associated with its audit of the Company's 1996 federal income tax return. The
IRS alleges in the notice that the Company owes approximately $12.1 million of
tax plus interest and penalties stemming from certain acquisition related
transactions, which occurred in 1996. Additionally, if the IRS were successful
in its claims, the Company would be required to account for these acquisition
transactions as stock purchases instead of asset purchases which would
significantly lower the tax basis in the assets acquired. The Company believes
the IRS claims are without merit and on January 18, 2002 filed a petition to
contest the matter in United States Tax Court. The Company cannot predict when
the tax court will conclude its ruling on this matter.
The Company and its subsidiaries file a consolidated federal income tax
return and such state or local tax returns as are required. As of December 31,
2001, the Company anticipates, for federal and certain state income taxes, that
it will generate taxable operating losses for the foreseeable future.
ACQUISITION OF EQUITY INVESTMENT IN SARKES TARZIAN, INC.
On December 3, 2001, the Company exercised its option to acquire 301,119
shares of the outstanding common stock of Tarzian from Bull Run. Bull Run had
purchased these same shares from U.S. Trust Company of Florida Savings Bank as
Personal Representative of the Estate of Mary Tarzian (the "Estate") in January
1999.
The acquired shares of Tarzian represent 33.5% of the total outstanding
common stock of Tarzian (both in terms of the number of shares of common stock
outstanding and in terms of voting rights), but such investment represents 73%
of the equity of Tarzian for purposes of dividends if paid as well as
distributions in the event of any liquidation, dissolution or other sale of
Tarzian.
Tarzian is a closely held private company that owns and operates two
television stations and four radio stations: WRCB-TV Channel 3 in Chattanooga,
Tennessee, an NBC affiliate; KTVN-TV Channel 2 in Reno, Nevada, a CBS affiliate;
WGCL-AM and WTTS-FM in Bloomington, Indiana; and WAJI-FM and WLDE-FM in Fort
Wayne, Indiana. The Chattanooga and Reno markets are the 86th and the 110th
largest television markets ("DMA's") in the United States, respectively, as
ranked by the A.C. Nielsen Company.
Gray paid $10 million to Bull Run to complete the acquisition of the
301,119 shares of Tarzian. The Company has previously capitalized and paid to
Bull Run $3.2 million of costs associated with the Company's option to acquire
these shares. This acquisition has been accounted for under the cost method of
accounting and reflected as a non-current other asset.
On February 12, 1999, Tarzian filed a complaint against Bull Run and the
Estate in the United States District Court for the Southern District of Indiana.
Tarzian claims that it had a binding and enforceable contract to purchase the
Tarzian shares from the Estate prior to Bull Run's purchase of the shares, and
requests judgment providing that the contract be enforced. On May 3, 1999, the
action was dismissed without prejudice against Bull Run, leaving the Estate as
the sole defendant. The litigation between the Estate and Tarzian is ongoing and
the Company cannot predict when the final resolution of the litigation
39
will occur. The purchase agreement with the Estate provides that if a court of
competent jurisdiction awards title to the Tarzian shares to a person or entity
other than the purchaser (or its successors or assigns), the purchase agreement
will be rescinded and the Estate will be required to pay for the benefit of
Gray, as successor in interest, the full $10 million purchase price, plus
interest.
COMMITMENTS
The Company has future minimum annual commitments under bank and other
debt agreements, noncancelable operating leases, various television film
exhibition rights and for digital television ("DTV") equipment. Future minimum
payments under bank and other debt agreements, operating leases with initial or
remaining noncancelable lease terms in excess of one year, obligations under
film exhibition rights for which the license period had not yet commenced and
commitments for DTV equipment that had been ordered but not yet been received
are as follows (in thousands):
BANK AND OTHER DTV
YEAR DEBT AGREEMENTS EQUIPMENT LEASE FILM TOTAL
---- --------------- --------- ----- ---- -----
2002 155,262 $ 12,452 $ 1,512 $ 2,504 $ 171,730
2003 68 3,436 911 4,740 9,155
2004 56 -0- 679 3,688 4,423
2005 -0- -0- 544 1,857 2,401
2006 -0- -0- 460 227 687
Thereafter 396,058 -0- 6,982 -0- 403,040
---------- -------- -------- -------- ---------
$ 551,444 $ 15,888 $ 11,088 $ 13,016 $ 591,436
========== ======== ======== ======== =========
Through a partnership agreement with Host Communications, Inc., a wholly
owned subsidiary of Bull Run, the Company has also acquired certain collegiate
broadcast rights for sporting events through a five-year marketing agreement
that commenced April 1, 2000. The Company's annual obligation will be
determined, in part, by the number of events broadcast under the agreement;
however, the Company's obligation will not exceed $2.2 million annually.
CERTAIN RELATIONSHIPS
J. Mack Robinson, President, Chief Executive Officer and a director of
Gray, is Chairman of the Board of Bull Run Corporation, our principal
stockholder, and a beneficial owner of Bull Run's common stock. Robert S.
Prather, Jr., Executive Vice President-Acquisitions and a director of Gray, is
President, Chief Executive Officer and a director of Bull Run and a beneficial
owner Bull Run's common stock. Hilton H. Howell, Jr., Executive Vice President
and a director of Gray, is Vice President, Secretary and a director of Bull Run.
J. Mack Robinson, President, Chief Executive Officer and a director of
Gray and certain of his affiliates are the holders of all of Gray's currently
outstanding Series A and Series B preferred stock.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
judgments and estimations that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. The Company considers the following accounting policies to be
critical policies that require judgments or estimations in their application
where variances in those judgments or estimations could make a significant
difference to future reported results.
40
Intangible Assets
Intangible assets are stated at cost and are amortized using the
straight-line method. Goodwill, licenses and network affiliation agreements are
amortized over 40 years. Non-compete agreements are amortized over the life of
the specific agreement. Intangible assets, net of accumulated amortization,
resulting from business acquisitions were $497.3 million and $511.6 million as
of December 31, 2001 and 2000, respectively.
If facts and circumstances indicate that these assets may be impaired, an
evaluation of continuing value would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with these assets would
be compared to their carrying amount to determine if a write down to fair market
value or discounted cash flow value is required.
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, "Business Combinations", and No.
142,"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001 and therefore will be implemented by the Company in
2002. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company is required to
adopt the new rules effective January 1, 2002. During 2002, the Company will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets. The initial valuation date is January 1, 2002. The
Company has not completed these initial valuation tests and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.
Income Taxes
The Company has deferred tax assets related to (a) approximately $68
million in federal operating loss carryforwards which expire during the years
2012 through 2021 and (b) a portion of approximately $125 million of various
state operating loss carryforwards. Recoverability of these deferred tax assets
requires at least in part, generation of sufficient taxable income prior to
expiration of the loss carryforwards. The calculation of the Company's deferred
tax assets and deferred tax liabilities are based, in part, upon certain
assumptions and estimations by the Company's management.
Accounting for Derivatives
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," as amended ("SFAS 133"). SFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes "special accounting"
for those that qualify as hedges. Changes in the fair value of derivatives that
do not meet the hedged criteria are included in earnings in the same period of
the change.
The Company recognized depreciation in the value of its derivative during
the year ended December 31, 2001 and a liability as of December 31, 2001 in the
amount of $1.6 million, respectively. This amount is based upon an estimate made
by the Company's management after consulting with the bank who is providing the
derivative. In future periods, changes to this estimate will not only affect the
recorded liability but also the amount of depreciation or appreciation in the
value of the derivative recognized.
41
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT
This annual report on Form 10-K contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. When
used in this annual report, the words "believes," "expects," "anticipates,"
"estimates" and similar words and expressions are generally intended to identify
forward-looking statements. Statements that describe the Company's future
strategic plans, goals, or objectives are also forward-looking statements.
Readers of this annual report are cautioned that any forward-looking statements,
including those regarding the intent, belief or current expectations of the
Company or management, are not guarantees of future performance, results or
events and involve risks and uncertainties, and that actual results and events
may differ materially from those in the forward-looking statements as a result
of various factors including, but not limited to, (i) general economic
conditions in the markets in which the Company operates, (ii) competitive
pressures in the markets in which the Company operates, (iii) the effect of
future legislation or regulatory changes on the Company's operations, (iv) high
debt levels and (v) other factors described from time to time in the Company's
filings with the Securities and Exchange Commission. The forward-looking
statements included in this annual report are made only as of the date hereof.
The Company undertakes no obligation to update such forward-looking statements
to reflect subsequent events or circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Based on the Company's floating rate debt outstanding at December 31,
2001, a 100 basis point increase in market interest rates would increase the
Company's interest expense and the Company's loss before income taxes for the
year by approximately $1.8 million.
The fair market value of long-term fixed interest rate debt is also
subject to interest rate risk. Generally, the fair market value of fixed
interest rate debt will increase as interest rates fall and decrease as interest
rates rise. The estimated fair value of the Company's total long-term fixed rate
debt at December 31, 2001 was approximately $333.9 million, which was
approximately $92,000 more than its carrying value. A hypothetical 100 basis
point decrease in the prevailing interest rates at December 31, 2001 would
result in an increase in fair value of total long-term debt by approximately
$7.5 million. Fair market values are determined from quoted market prices where
available or based on estimates made by investment bankers.
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Audited Consolidated Financial Statements of Gray Communications Systems, Inc.
Report of Independent Accountants 44
Report of Independent Auditors 45
Consolidated Balance Sheets at December 31, 2001 and 2000 46
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 48
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 49
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 50
Notes to Consolidated Financial Statements 51
43
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders of
Gray Communications Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Gray
Communications Systems, Inc. and its subsidiaries at December 31, 2001, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Atlanta, Georgia
February 4, 2002
44
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Gray Communications Systems, Inc.
We have audited the accompanying consolidated balance sheet of Gray
Communications Systems, Inc., as of December 31, 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 2000 and December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 2000, and the consolidated results
of its operations and its cash flows for the years in the period ended December
31, 2000 and December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
Atlanta, Georgia
January 29, 2001
45
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
2001 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 557,521 $ 2,214,838
Restricted cash for redemption of long-term debt 168,557,417 -0-
Trade accounts receivable, less allowance for doubtful accounts
of $743,000 and $845,000, respectively 29,722,141 30,321,372
Recoverable income taxes 552,177 1,196,408
Inventories 763,430 1,472,377
Current portion of program broadcast rights, net 3,809,238 3,723,988
Other current assets 742,150 670,718
------------- -------------
Total current assets 204,704,074 39,599,701
------------- -------------
Property and equipment:
Land 4,905,121 4,905,121
Buildings and improvements 16,904,976 16,639,424
Equipment 113,018,560 106,783,692
------------- -------------
134,828,657 128,328,237
Allowance for depreciation (71,412,314) (55,730,599)
------------- -------------
63,416,343 72,597,638
Deferred loan costs, net 14,305,495 8,203,055
Licenses and network affiliation agreements 424,384,811 436,255,773
Goodwill 72,025,145 73,978,230
Consulting and noncompete agreements 901,216 1,381,545
Other 14,599,894 4,755,793
------------- -------------
$ 794,336,978 $ 636,771,735
============= =============
46
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31,
--------------------------------
2001 2000
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Trade accounts payable (includes $0 and $200,000 payable
to Bull Run Corporation, respectively) $ 7,632,778 $ 4,452,911
Employee compensation and benefits 6,002,892 6,630,078
Accrued expenses 1,588,302 1,631,490
Accrued interest 7,872,585 6,875,294
Current portion of program broadcast obligations 3,655,881 3,605,960
Deferred revenue 2,783,069 3,015,044
Unrealized loss on derivatives 1,581,000 -0-
Current portion of long-term debt 155,262,277 200,000
------------- -------------
Total current liabilities 186,378,784 26,410,777
Long-term debt, less current portion 396,182,025 374,687,052
Program broadcast obligations, less current portion 619,320 303,308
Supplemental employee benefits 397,720 525,151
Deferred income taxes 66,790,563 72,935,799
Other 1,772,989 5,948,849
------------- -------------
652,141,401 480,810,936
------------- -------------
Commitments and contingencies
Stockholders' equity
Serial Preferred Stock, no par value; authorized 20,000,000 shares;
issued and outstanding 861 shares, respectively ($8,605,788
aggregate liquidation value, respectively) 4,636,663 4,636,663
Class A Common Stock, no par value; authorized 15,000,000
shares; issued 7,961,574 shares, respectively 20,172,959 20,172,959
Class B Common Stock, no par value; authorized 15,000,000
shares; issued 8,792,227 and 8,708,820 shares, respectively 117,634,928 116,486,600
Retained earnings 8,089,745 23,273,239
------------- -------------
150,534,295 164,569,461
Treasury Stock at cost, Class A Common, 1,113,107 shares, respectively (8,338,718) (8,338,718)
Treasury Stock at cost, Class B Common, -0- and 24,257 shares, respectively -0- (269,944)
------------- -------------
142,195,577 155,960,799
------------- -------------
$ 794,336,978 $ 636,771,735
============= =============
See accompanying notes.
47
GRAY COMMUNCIATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2001 2000 1999
------------- ------------- -------------
Operating revenues:
Broadcasting (less agency commissions) $ 106,429,524 $ 120,639,853 $ 97,014,737
Publishing 41,189,183 41,499,521 37,808,328
Paging 8,724,743 9,073,629 9,129,702
------------- ------------- -------------
156,343,450 171,213,003 143,952,767
Expenses:
Broadcasting 66,232,307 67,770,063 58,660,663
Publishing 31,915,101 31,408,235 28,781,501
Paging 5,877,010 6,136,157 6,550,529
Corporate and administrative 3,615,117 3,594,113 3,448,203
Depreciation 16,512,198 16,889,172 12,855,449
Amortization of intangible assets 14,312,069 14,317,733 11,595,919
------------- ------------- -------------
138,463,802 140,115,473 121,892,264
------------- ------------- -------------
Operating income 17,879,648 31,097,530 22,060,503
Depreciation in value of derivatives, net (1,581,000) -0- -0-
Miscellaneous income, net 194,131 781,251 335,871
------------- ------------- -------------
16,492,779 31,878,781 22,396,374
Interest expense 35,782,547 39,957,362 31,021,039
------------- ------------- -------------
LOSS BEFORE INCOME TAXES (19,289,768) (8,078,581) (8,624,665)
Federal and state income tax benefit (5,971,919) (1,866,767) (2,309,966)
------------- ------------- -------------
NET LOSS (13,317,849) (6,211,814) (6,314,699)
Preferred dividends 616,346 1,012,374 1,010,000
Non-cash preferred dividends associated with the redemption of preferred
stock -0- 2,159,625 -0-
------------- ------------- -------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (13,934,195) $ (9,383,813) $ (7,324,699)
============= ============= =============
Weighted average outstanding common shares:
Basic 15,605,133 15,496,847 12,837,912
============= ============= =============
Diluted 15,605,133 15,496,847 12,837,912
============= ============= =============
Basic and diluted net loss per share available to common stockholders $ (0.89) $ (0.61) $ (0.57)
============= ============= =============
See accompanying notes.
48
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK
----------- --------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
Balance at December 31, 1998 1,350 7,371,250 7,961,574 20,172,959 5,273,046 66,792,385
Net loss -0- -0- -0- -0- -0- -0-
Common Stock cash dividends
($0.08) per share -0- -0- -0- -0- -0- -0-
Preferred Stock dividends -0- -0- -0- -0- -0- -0-
Issuance of Common Stock:
401(k) plan -0- -0- -0- -0- -0- 126,944
Non-qualified stock plan -0- -0- -0- -0- -0- -0-
Issuance of Class B Common Stock -0- -0- -0- -0- 3,435,774 49,452,053
Purchase of Class B Common Stock -0- -0- -0- -0- -0- -0-
Income tax benefits relating to stock plans -0- -0- -0- -0- -0- 8,100
------- ---------- --------- ----------- --------- ------------
Balance at December 31, 1999 1,350 7,371,250 7,961,574 20,172,959 8,708,820 116,379,482
Net loss -0- -0- -0- -0- -0- -0-
Common Stock cash dividends
($0.08) per share -0- -0- -0- -0- -0- -0-
Preferred Stock dividends -0- -0- -0- -0- -0- -0-
Non-cash preferred dividends associated
with the redemption of preferred stock -0- -0- -0- -0- -0- -0-
Issuance of Common Stock:
401(k) plan -0- -0- -0- -0- -0- 53,071
Non-qualified stock plan -0- -0- -0- -0- -0- 54,047
Purchase of Class B Common Stock -0- -0- -0- -0- -0- -0-
Issuance of Series B Preferred Stock 11 105,788 -0- -0- -0- -0-
Purchase of Series A Preferred Stock (500) (2,840,375) -0- -0- -0- -0-
------- ---------- --------- ----------- --------- ------------
Balance at December 31, 2000 861 4,636,663 7,961,574 20,172,959 8,708,820 116,486,600
Net loss -0- -0- -0- -0- -0- -0-
Common Stock cash dividends
($0.08) per share -0- -0- -0- -0- -0- -0-
Preferred Stock dividends -0- -0- -0- -0- -0- -0-
Issuance of Common Stock:
401(k) plan -0- -0- -0- -0- 41,207 585,316
Non-qualified stock plan -0- -0- -0- -0- 42,200 556,891
Income tax benefits relating to stock plans -0- -0- -0- -0- -0- 6,121
------- ---------- --------- ----------- --------- ------------
Balance at December 31, 2001 861 $4,636,663 7,961,574 $20,172,959 8,792,227 $117,634,928
======= ========== ========= =========== ========= ============
CLASS A CLASS B
TREASURY STOCK TREASURY STOCK
RETAINED ------------------- --------------------
EARNINGS SHARES AMOUNT SHARES AMOUNT TOTAL
-------- ------ ------ ------ ------ -----
Balance at December 31, 1998 42,377,101 (1,129,532) (8,578,682) (135,080) (1,432,143) 126,702,870
Net loss (6,314,699) -0- -0- -0- -0- (6,314,699)
Common Stock cash dividends
($0.08) per share (1,027,322) -0- -0- -0- -0- (1,027,322)
Preferred Stock dividends (1,010,000) -0- -0- -0- -0- (1,010,000)
Issuance of Common Stock:
401(k) plan -0- -0- -0- 44,715 487,039 613,983
Non-qualified stock plan (12,397) 2,250 32,397 -0- -0- 20,000
Issuance of Class B Common Stock -0- -0- -0- -0- -0- 49,452,053
Purchase of Class B Common Stock -0- -0- -0- (20,000) (257,004) (257,004)
Income tax benefits relating to stock plans -0- -0- -0- -0- -0- 8,100
---------- ---------- ----------- -------- ----------- ------------
Balance at December 31, 1999 34,012,683 (1,127,282) (8,546,285) (110,365) (1,202,108) 168,187,981
Net loss (6,211,814) -0- -0- -0- -0- (6,211,814)
Common Stock cash dividends
($0.08) per share (1,239,921) -0- -0- -0- -0- (1,239,921)
Preferred Stock dividends (1,012,374) -0- -0- -0- -0- (1,012,374)
Non-cash preferred dividends associated
with the redemption of preferred stock (2,159,625) -0- -0- -0- -0- (2,159,625)
Issuance of Common Stock:
401(k) plan (34,143) -0- -0- 59,969 666,295 685,223
Non-qualified stock plan (81,567) 14,175 207,567 37,500 408,453 588,500
Purchase of Class B Common Stock -0- -0- -0- (11,361) (142,584) (142,584)
Issuance of Series B Preferred Stock -0- -0- -0- -0- -0- 105,788
Purchase of Series A Preferred Stock -0- -0- -0- -0- -0- (2,840,375)
---------- ---------- ----------- -------- ----------- ------------
Balance at December 31, 2000 23,273,239 (1,113,107) (8,338,718) (24,257) (269,944) 155,960,799
Net loss (13,317,849) -0- -0- -0- -0- (13,317,849)
Common Stock cash dividends
($0.08) per share (1,249,299) -0- -0- -0- -0- (1,249,299)
Preferred Stock dividends (616,346) -0- -0- -0- -0- (616,346)
Issuance of Common Stock:
401(k) plan -0- -0- -0- 9,257 103,027 688,343
Non-qualified stock plan -0- -0- -0- 15,000 166,917 723,808
Income tax benefits relating to stock plans -0- -0- -0- -0- -0- 6,121
---------- ---------- ----------- -------- ----------- ------------
Balance at December 31, 2001 $8,089,745 (1,113,107) $(8,338,718) -0- $ -0- $142,195,577
========== ========== =========== ======== =========== ============
See accompanying notes.
49
GRAY COMMUNCIATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
------------- ------------ -------------
OPERATING ACTIVITIES
Net loss $ (13,317,849) $ (6,211,814) $ (6,314,699)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 16,512,198 16,889,172 12,855,449
Amortization of intangible assets 14,312,069 14,317,733 11,595,919
Amortization of deferred loan costs 1,535,747 1,537,047 1,253,277
Amortization of program broadcast rights 5,518,852 5,306,672 5,340,187
Payments for program broadcast rights (5,422,959) (5,614,129) (4,953,672)
Supplemental employee benefits (184,427) (242,662) (206,372)
Common Stock contributed to 401(K) Plan 688,343 685,223 613,983
Deferred income taxes (6,145,236) (2,454,030) (2,738,500)
Depreciation in value of derivatives, net 1,581,000 -0- -0-
(Gain) loss on asset sales 157,159 (391,549) (114,063)
Other 98,653 -0- -0-
Changes in operating assets and liabilities:
Trade accounts receivable 599,231 17,053 (2,865,849)
Recoverable income taxes 562,250 856,617 (327,490)
Inventories 708,947 (139,437) 255,897
Other current assets (71,432) 139,392 106,829
Trade accounts payable 3,188,426 185,677 1,734,641
Employee compensation and benefits (627,186) 1,361,105 (260,827)
Accrued expenses 13,808 (921,133) 1,147,105
Accrued interest 997,291 (2,358,615) 3,625,775
Deferred revenue (231,975) (197,770) 94,328
------------- ------------ -------------
Net cash provided by operating activities 20,472,910 22,764,552 20,841,918
------------- ------------ -------------
INVESTING ACTIVITIES
Restricted cash for redemption of long-term debt (168,557,417) -0- -0-
Acquisition of television businesses -0- -0- (97,079,854)
Acquisition of investment in television business (9,751,840) -0- -0-
Acquisition of newspaper business -0- -0- (16,869,140)
Purchases of property and equipment (11,242,758) (5,702,494) (11,711,893)
Proceeds from asset sales 104,582 634,832 1,722,932
Payments on purchase liabilities (443,769) (592,570) (900,688)
Other 76,281 (2,615,431) (1,941,081)
------------- ------------ -------------
Net cash used in investing activities (189,814,921) (8,275,663) (126,779,724)
------------- ------------ -------------
FINANCING ACTIVITIES
Proceeds from borrowings on long-term debt 239,008,200 49,700,000 164,200,000
Repayments of borrowings on long-term debt (62,450,950) (56,514,890) (53,153,313)
Deferred loan costs (7,736,840) (83,516) (2,674,431)
Dividends paid (1,865,645) (2,146,507) (2,304,823)
Income tax benefit relating to stock plans 6,121 -0- 8,100
Proceeds from issuance of Common Stock 723,808 126,000 20,000
Purchase of Common Stock -0- (142,584) (257,004)
Redemption of Preferred Stock -0- (5,000,000) -0-
------------- ------------ -------------
Net cash provided by (used in) financing activities 167,684,694 (14,061,497) 105,838,529
------------- ------------ -------------
Increase (decrease) in cash and cash equivalents (1,657,317) 427,392 (99,277)
Cash and cash equivalents at beginning of year 2,214,838 1,787,446 1,886,723
------------- ------------ -------------
Cash and cash equivalents at end of year $ 557,521 $ 2,214,838 $ 1,787,446
============= ============ =============
See accompanying notes.
50
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company's operations, which are located in thirteen southern,
southwestern and midwestern states, include thirteen television stations, four
daily newspapers, a wireless messaging and paging business and a transportable
satellite uplink business.
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 revenue from three industries: broadcasting,
publishing and paging. Broadcasting revenue is generated primarily from the sale
of television advertising time. Publishing revenue is generated primarily from
circulation and advertising revenue. Paging revenue results primarily from the
sale of pagers and paging services. Advertising revenue is billed to the
customer and recognized when the advertisement is aired or published. Gray bills
its customers in advance for newspaper subscriptions and paging services and the
related revenues are recognized over the period the service is provided on the
straight-line basis. Revenue from the sale of cellular telephones and pagers is
recognized at the time of sale.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 banks. Deposits
with banks 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 first-in, first-out method of
determining costs for substantially all of its inventories.
Program Broadcast Rights
Rights to programs available for broadcast under program license
agreements are initially recorded at the beginning of the license period for the
amounts of total license fees payable under the license agreements and are
charged to operating expense as each episode is broadcast. The cost of each
episode is determined by dividing the total cost of the program license
agreement by the number of episodes per the agreement. 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 the license fees payable under the
program license agreements is classified as current or long-term, in accordance
with the payment terms of the various license agreements. The capitalized costs
of the rights are recorded at the lower of unamortized costs or estimated net
realizable value.
51
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Buildings, improvements and
equipment are generally depreciated over estimated useful lives of approximately
35 years, 10 years and 5 years, respectively.
Deferred Loan Costs
Loan acquisition costs are amortized over the life of the applicable
indebtedness. As of December 31, 2001, the life of the senior bank loan
agreement (the "Senior Credit Facility") is 8 years and the life of the 9 1/4 %
Senior Subordinated Notes Due 2011 (the "9 1/4% Notes") is 10 years. The final
maturity dates of the Senior Credit Facility and the 9 1/4% Notes are September
2009 and December 2011, respectively.
Intangible Assets
Intangible assets are stated at cost and are amortized using the
straight-line method. Goodwill, licenses and network affiliation agreements are
amortized over 40 years. Non-compete agreements are amortized over the life of
the specific agreement. Accumulated amortization of intangible assets resulting
from business acquisitions was $58.9 million and $44.6 million as of December
31, 2001 and 2000, respectively.
If facts and circumstances indicate that the goodwill, property and
equipment or other assets may be impaired, an evaluation of continuing value
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with these assets would be compared to their
carrying amount to determine if a write down to fair market value or discounted
cash flow value is required.
Income Taxes
Deferred income taxes are provided on the differences between the
financial statement and income tax basis of assets and liabilities. The Company
and its subsidiaries file a consolidated federal income tax return. Consolidated
state income tax returns are filed when appropriate and separate state tax
returns are filed when consolidation is not available. Local tax returns are
filed separately.
Stock Based Compensation
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.
Accounting for Derivatives
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," as amended ("SFAS 133"). The effect as of January 1, 2001, of
adopting SFAS 133 was not material and, accordingly, it is not presented as a
cumulative effect adjustment. SFAS 133 provides a comprehensive standard for the
recognition and measurement of derivatives and hedging activities. SFAS 133
requires all derivatives to be recorded on
52
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting for Derivatives (Continued)
the balance sheet at fair value and establishes "special accounting" for those
that qualify as hedges. Changes in the fair value of derivatives that do not
meet the hedged criteria are included in earnings in the same period of the
change.
In 1999, the Company entered into an interest rate swap agreement to hedge
against fluctuations in interest expense resulting from a portion of its
variable rate debt. Due to the terms of the interest rate swap agreement, it
does not qualify for hedge accounting under SFAS 133. As a result of the
adoption of SFAS 133 and the general decrease in market interest rates during
the current year, the Company recognized depreciation in the value of its
derivative during the year ended December 31, 2001 of $1,581,000.
Concentration of Credit Risk
The Company provides print advertising and 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.
Fair Value of Financial Instruments
The estimated fair value of the Company's long-term debt at December 31,
2001 and 2000 was $551.5 million and $370.5 million, respectively. Currently,
the Company does not anticipate settlement of long-term debt, except for its
10 5/8% Senior Subordinated Notes due 2006, at other than book value. The fair
value of other financial instruments classified as current assets or liabilities
approximates their carrying value.
Earnings Per Share
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings Per Share" ("EPS"). The weighted average number of shares used in
computing basic and diluted earnings or loss per share was 15,605,133,
15,496,847 and 12,837,912 in the years ended December 31, 2001, 2000 and 1999,
respectively. Dilutive securities of 511,882, 140,063 and 356,971 are not
included in the calculation of diluted EPS in the years ending December 31,
2001, 2000 and 1999, respectively, because they are antidilutive.
Implementation of New Accounting Principle
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, "Business Combinations", and No.
142,"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001 and therefore will be implemented by the Company in
2002. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company is required to
adopt the new rules effective January 1, 2002. During 2002, the Company will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets. The initial valuation date is January 1, 2002. The
Company has
53
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Implementation of New Accounting Principle (Continued)
not completed these initial valuation tests and has not yet determined what the
effect of these tests will be on the earnings and financial position of the
Company.
B. BUSINESS ACQUISITIONS
Acquisition of Equity Investment in Sarkes Tarzian, Inc.
On December 3, 2001, the Company exercised its option to acquire 301,119
shares of the outstanding common stock of Sarkes Tarzian, Inc. ("Tarzian") from
Bull Run Corporation ("Bull Run"), a principal shareholder of the Company. Bull
Run had purchased these same shares from U.S. Trust Company of Florida Savings
Bank as Personal Representative of the Estate of Mary Tarzian (the "Estate") in
January 1999.
The acquired shares of Tarzian represent 33.5% of the total outstanding
common stock of Tarzian (both in terms of the number of shares of common stock
outstanding and in terms of voting rights), but such investment represents 73%
of the equity of Tarzian for purposes of dividends if paid as well as
distributions in the event of any liquidation, dissolution or other sale of
Tarzian.
Tarzian is a closely held private company that owns and operates two
television stations and four radio stations: WRCB-TV Channel 3 in Chattanooga,
Tennessee, an NBC affiliate; KTVN-TV Channel 2 in Reno, Nevada, a CBS affiliate;
WGCL-AM and WTTS-FM in Bloomington, Indiana; and WAJI-FM and WLDE-FM in Fort
Wayne, Indiana. The Chattanooga and Reno markets are the 86th and the 110th
largest television markets ("DMA's") in the United States, respectively, as
ranked by the A.C. Nielsen Company.
Gray paid $10 million to Bull Run to complete the acquisition of the
301,119 shares of Tarzian. The Company has previously capitalized and paid to
Bull Run $3.2 million of costs associated with the Company's option to acquire
these shares. This acquisition has been accounted for under the cost method of
accounting and reflected as a non-current other asset.
On February 12, 1999, Tarzian filed a complaint against Bull Run and the
Estate in the United States District Court for the Southern District of Indiana.
Tarzian claims that it had a binding and enforceable contract to purchase the
Tarzian shares from the Estate prior to Bull Run's purchase of the shares, and
requests judgment providing that the contract be enforced. On May 3, 1999, the
action was dismissed without prejudice against Bull Run, leaving the Estate as
the sole defendant. The litigation between the Estate and Tarzian is ongoing and
the Company cannot predict when the final resolution of the litigation will
occur. The purchase agreement with the Estate provides that if a court of
competent jurisdiction awards title to the Tarzian shares to a person or entity
other than the purchaser (or its successors or assigns), the purchase agreement
will be rescinded and the Estate will be required to pay for the benefit of
Gray, as successor in interest, the full $10 million purchase price, plus
interest.
1999 Acquisitions
On October 1, 1999, the Company completed its acquisition of all the
outstanding capital stock of KWTX Broadcasting Company ("KWTX") and Brazos
Broadcasting Company ("Brazos"), as well as the assets of KXII Broadcasters Ltd.
("KXII"). The Company acquired the capital stock of KWTX and Brazos in merger
transactions with the shareholders of KWTX and Brazos receiving a combination of
54
B. BUSINESS ACQUISITIONS (CONTINUED)
1999 Acquisitions (Continued)
cash and the Company's Class B Common Stock for their shares. The Company
acquired the assets of KXII in an all cash transaction. These transactions are
referred to herein as the "Texas Acquisitions."
KWTX operates CBS affiliate KWTX-TV located in Waco, Texas and Brazos
operates KBTX-TV, a satellite station of KWTX-TV located in Bryan, Texas, each
serving the Waco-Temple-Bryan, Texas television market. KXII operates KXII-TV,
which is the CBS affiliate serving Sherman, Texas and Ada, Oklahoma. The Texas
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.
Aggregate consideration (net of cash acquired) paid in the Company's Class
B Common Stock and cash was approximately $146.4 million, which included a base
purchase price of $139.0 million, transaction expenses of $2.8 million and
certain net working capital adjustments (excluding cash) of $4.6 million. In
addition to the amount paid, the Company assumed approximately $600,000 in
liabilities in connection with the asset purchase of KXII. The Company funded
the acquisitions by issuing 3,435,774 shares of the Company's Class B Common
Stock (valued at $49.5 million) to the sellers, borrowing an additional $94.4
million under its Senior Credit Facility and using cash on hand of approximately
$2.5 million. Based on the allocation of the purchase price, the excess of the
purchase price over the fair value of the net tangible assets was approximately
$148.9 million. The Company paid Bull Run a fee of $1.39 million for advisory
services performed for the Company in connection with the Texas Acquisitions
(excluding a $300,000 advisory fee in connection with the Company's Senior
Credit Facility agreement). This fee was paid in full as of the acquisition date
and included in the fee portion of the aggregate consideration for the Texas
Acquisitions described above.
On March 1, 1999, the Company acquired substantially all of the assets of
The Goshen News from News Printing Company, Inc. and affiliates thereof, for
aggregate cash consideration of approximately $16.7 million including a
non-compete agreement (the "Goshen Acquisition"). Based on the allocation of the
purchase price, the excess of the purchase price over the fair value of the net
tangible assets was approximately $14.1 million. The Goshen News is currently an
16,000 circulation newspaper published Monday through Sunday and serves Goshen,
Indiana and surrounding areas. The Company paid Bull Run a fee of $167,000 for
services rendered in connection with the Goshen Acquisition. The Company
financed the acquisition through borrowings under its Senior Credit Facility.
The Texas Acquisitions and the Goshen Acquisition 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.
55
C. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
------------------------
2001 2000
--------- ---------
Senior Credit Facility $ 217,500 $ 214,500
9 1/4% Senior Subordinated Notes due 2011 180,000 -0-
10 5/8 % Senior Subordinated Notes due 2006 (retired on
January 22, 2002) 155,200 160,000
Other 186 387
--------- ---------
552,886 374,887
Less unamortized discount (1,442) -0-
--------- ---------
551,444 374,887
Less current portion (155,262) (200)
--------- ---------
$ 396,182 $ 374,687
========= =========
The Company amended and restated its Senior Credit Facility on September
25, 2001. The revised facility provides the Company with a $200 million term
facility and a $50 million reducing revolving credit facility. In addition, the
agreement provides the Company with the ability to access up to $100 million of
incremental senior secured term loans upon the consent of the lenders. The
Company may request this incremental senior secured term loan on any business
day on or before December 31, 2003. Prior to the amendment on September 25,
2001, the Senior Credit Facility consisted of a $100.0 million revolving
commitment and two $100.0 million term loan commitments.
Proceeds from the amended and restated facility were used to refinance
existing senior secured indebtedness, transaction fees and for other general
corporate purposes. The Company incurred $2.6 million in lender fees and other
costs to amend and restate the facility.
Under the amended revolving and term facilities, the Company, at its
option, can borrow funds at an interest rate equal to the London Interbank
Offered Rate ("LIBOR") plus a margin or at the lenders' base rate plus a margin.
The base rate will generally be equal to the lenders' prime rate. Interest rates
under the amended revolving facility are base rate plus a margin ranging from
0.25% to 1.75% or LIBOR plus a margin ranging from 1.5% to 3.0%. Interest rates
under the amended term facility are base plus a margin ranging from 1.75% to
2.0% or LIBOR plus a margin ranging from 3.0% to 3.25%. The applicable margin
payable by the Company will be determined by the Company's operating leverage
ratio that is calculated quarterly.
At December 31, 2001, the Company had approximately $217.5 million
outstanding under the Senior Credit Facility with approximately $32.5 million
available under the agreement. Also as of December 31, 2001, interest rates were
at a rate of base plus 1.75% and/or LIBOR plus 3.0% for funds borrowed under the
revolving facility. For funds borrowed under the term facility, interest was at
base plus 2.0% and/or LIBOR plus 3.25%. The effective interest rate on the
Senior Credit Facility at December 31, 2001 and 2000 was 5.8% and 9.7%,
respectively. The Company is charged a commitment fee on the excess of the
aggregate average daily available credit limit less the amount outstanding. At
December 31, 2001, the commitment fee was 0.50% per annum.
The lenders' commitments for the revolving facility will reduce quarterly,
as specified in the credit agreement, beginning March 31, 2004 and final
repayment of any outstanding amounts under the revolving facility is due
December 31, 2008. The term facility commences amortization in quarterly
56
C. LONG-TERM DEBT (CONTINUED)
installments of $500,000 beginning March 31, 2003 through December 31, 2008 with
the remaining outstanding balance payable in three equal quarterly installments
beginning March 31, 2009. The final maturity date for any outstanding amounts
under the term facility is September 30, 2009.
The amended and restated senior credit facilities are collateralized by
substantially all of the assets, excluding real estate, of the Company and its
subsidiaries. In addition, the Company's subsidiaries are joint and several
guarantors of the obligations and the Company's ownership interests in its
subsidiaries are pledged to collateralize the obligations. The agreement
contains certain restrictive provisions which include but are not limited to,
requiring the Company to maintain certain financial ratios and limits upon the
Company's ability to incur additional indebtedness, make certain acquisitions or
investments, sell assets or make other restricted payments, including dividends,
(all as are defined in the loan agreement). The 9 1/4 % Notes also contain
similar restrictive provisions limiting the Company's ability to, among other
things incur additional indebtedness make certain acquisitions or investments,
sell assets or make certain restricted payments that include but are not limited
to purchases or redemptions of the Company's capital stock.
On December 21, 2001, the Company completed its sale of $180 million
aggregate principal amount of Senior Subordinated Notes due 2011 (the "9 1/4%
Notes"). The net proceeds from the sale of the 9 1/4% Notes were approximately
$173.6 million. The 9 1/4% Notes have a coupon of 9 1/4% and was priced at a
discount to yield 9.375 %. Interest on the 9 1/4 % Notes is payable
semi-annually on December 15 and June 15, commencing June 15, 2002. The 9 1/4%
Notes mature on December 15, 2011 and are redeemable, in whole or in part, at
the Company's option after December 15, 2006. If the 9 1/4% Notes are redeemed
during the twelve-month period beginning on December 15 of the years indicated
below, they will be redeemed at the redemption prices set forth below, plus
accrued and unpaid interest to the date fixed for redemption.
PERCENTAGE OF THE PRINCIPAL
YEAR AMOUNT OUTSTANDING
-------------------- ---------------------------
2006 104.625%
2007 103.083%
2008 101.542%
2009 and thereafter 100.000%
Under certain circumstances, the Company at its option can redeem all or a
portion of the 9 1/4% Notes prior to December 15, 2006. If the 9 1/4% Notes were
to be redeemed prior to December 15, 2006, the Company would have to pay the
principal amount, accrued but unpaid interest and certain premiums.
In October of 2001, the Company purchased $4.8 million of its existing 10
5/8% Senior Subordinated Notes due 2006 (the "10 5/8% Notes"). On December 21,
2001, Gray instructed the trustee for the 10 5/8% Notes to commence the
redemption, in full, of the remaining 10 5/8% Notes outstanding. Gray deposited
cash of approximately $168.6 million with the 10 5/8% Notes' trustee, to redeem
the aggregate principal amount of the 10 5/8% Notes outstanding of $155.2
million and to fund associated premium costs of $8.2 million, accrued interest
of $3.7 million and certain other related expenses of $1.5 million. This cash
was funded from the net proceeds of the 9 1/4% Notes and is included in
consolidated balance sheet at December 31, 2001 as "restricted cash for
redemption of long-term debt". The redemption was completed on January 22, 2002
and all obligations associated with the 10 5/8% Notes as well as the rights
associated with the restricted cash were extinguished on that date. The Company
recorded an
57
C. LONG-TERM DEBT (CONTINUED)
extraordinary charge of approximately 11.3 million ($6.8 million after income
tax) in January 2002 in connection with this early extinguishment of debt.
The 9 1/4% Notes are 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 is
subordinated, to the same extent as the obligations of the Company in respect of
the 9 1/4% 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 assets or
operations, other than its investment in its subsidiaries. The aggregate assets,
liabilities, earnings and equity of the Subsidiary Guarantors are substantially
equivalent to the assets, liabilities, earnings and equity of the Company on a
consolidated basis. The Subsidiary Guarantors are, directly or indirectly,
wholly owned subsidiaries of the Company and the Subsidiary Guarantees are full,
unconditional and joint and several. All of the current and future direct and
indirect subsidiaries of the Company are guarantors of the Senior Subordinated
Notes. Accordingly, separate financial statements and other disclosures of each
of the Subsidiary Guarantors are not presented because the Company has no
independent assets or operations, the guarantees are full and unconditional and
joint and several and any subsidiaries of the parent company other than the
Subsidiary Guarantors are minor. The Senior Credit Facility is collateralized by
substantially all of the Company's existing and hereafter acquired assets except
real estate.
The Company entered into an interest rate swap agreement to modify the
interest characteristics of a portion of its outstanding debt. The agreement
involves the exchange of an amount based on a variable interest rate for an
amount based on a fixed interest rate over the life of the agreement without an
exchange of the notional amount upon which the payments are based.
The interest rate swap agreement converts $40.0 million of the Company's
floating rate debt under the Senior Credit Facility to a fixed rate basis at a
rate of 6.155%. The initial term of the interest rate swap agreement was
effective on October 6, 1999 and terminated on October 6, 2001. However, the
bank providing the interest rate swap agreement had an option to extend the
termination date. The bank chose to exercise its option and extended the term of
the swap agreement to October 6, 2002. As a result of the agreement's unilateral
option component, the agreement does not qualify for hedge accounting under SFAS
133.
The Company recognizes interest differentials as adjustments to interest
expense in the period they occur. 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 related amount payable to, or receivable from,
counter-parties is included in other liabilities or assets. The fair value of
the swap agreements is recognized in the financial statements.
58
C. LONG-TERM DEBT (CONTINUED)
Aggregate minimum principal maturities on long-term debt as of December
31, 2001, were as follows (in thousands):
YEAR MINIMUM PRINCIPAL MATURITIES
----------- ----------------------------
2002 155,262
2003 68
2004 56
2005 -0-
2006 -0-
Thereafter 396,058
----------
$ 551,444
==========
The Company made interest payments of approximately $36.8 million, $40.8
million and $26.1 million during 2001, 2000 and 1999, respectively.
D. STOCKHOLDERS' EQUITY
The Company is authorized to issue 50,000,000 shares of all classes of
stock, of which, 15,000,000 shares are designated Class A Common Stock,
15,000,000 shares are designated Class B Common Stock, and 20,000,000 shares are
designated "blank check" preferred stock for which the Board of Directors has
the authority to determine the rights, powers, limitations and restrictions. The
rights of the Company's Class A and Class B Common Stock are identical, except
that the Class A Common Stock has 10 votes per share and the Class B Common
Stock has one vote per share. The Class A and Class B Common Stock receive cash
dividends on an equal per share basis.
The Series A Preferred Stock includes detachable warrants issued to Bull
Run to purchase 731,250 shares of Class A Common Stock for $11.92 per share. Of
these warrants, 450,000 vested upon issuance, with the remaining warrants
vesting in five equal annual installments commencing January 3, 1997, providing
the Series A Preferred Stock remains outstanding. The Series A Preferred Stock
was originally issued to Bull Run; however, these shares were sold by Bull Run
to one of its affiliates in 2001. The holder of the Series A Preferred Stock
receives cash dividends at an annual rate of $800 per share. During 2000, the
Company redeemed 500 shares of Series A Preferred Stock at a cost of $5.0
million. The liquidation or redemption price of the Series A Preferred Stock is
$10,000 per share.
The Series B Preferred Stock includes warrants to purchase an aggregate of
750,000 shares of Class A Common Stock at an exercise price of $16.00 per share.
Of these warrants 450,000 vested upon issuance, with the remaining warrants
vesting in five equal annual installments commencing on September 24, 1997. The
shares of Series B Preferred Stock were originally issued to Bull Run and to J.
Mack Robinson, Chairman of the Board of Bull Run and President and Chief
Executive Officer of the Company, and certain of his affiliates. The Company
obtained a written opinion from an investment banker as to the fairness of the
terms of the sale of such Series B Preferred Stock with warrants. During 2001,
Bull Run sold its shares of Series B Preferred Stock to one of the other
original Series B Preferred Stock shareholders. The holders of the Series B
Preferred Stock receive dividends at an annual rate of $600 per share, with the
Company having the option to pay these dividends in cash or in additional
shares. The liquidation or redemption price of the Series B Preferred Stock is
$10,000 per share. During 2000, the Company issued 11 shares of Series B
Preferred Stock as payment of dividends to the holders of its then outstanding
Series B Preferred Stock. The liquidation or redemption price of the Series B
Preferred Stock is $10,000 per share.
59
D. STOCKHOLDERS' EQUITY (CONTINUED)
In addition to the $13.2 million paid for the Tarzian shares, the Company
granted warrants to Bull Run to purchase up to 100,000 shares of the Company's
Class B Common Stock at $13.625 per share. These warrants are fully vested and
will expire in 10 years if not exercised.
The Company is authorized by its Board of Directors to purchase up to two
million shares of the Company's Class A or Class B Common Stock to either be
retired or reissued in connection with the Company's benefit plans, including
the Capital Accumulation Plan and the Incentive Plan. During 2000 and 1999, the
Company purchased 11,361 shares and 20,000 shares of its Class B Common Stock,
respectively, under this authorization. The 2000 and 1999 treasury shares were
purchased at prevailing market prices with an average effective price of $12.55
and $12.85 per share, respectively, and were funded from the Company's operating
cash flow.
E. LONG-TERM INCENTIVE PLAN AND STOCK PURCHASE 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 employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized.
The Company has a long-term incentive plan (the "Incentive Plan") that was
amended by the Company's shareholders during 2001. The amendment increased the
aggregate number of shares of the Company's common stock subject to awards under
the Incentive Plan to 2.9 million from 1.9 million. As a result of this
amendment, the Incentive Plan has 300,000 shares of the Company's Class A Common
Stock and 2.6 million shares of the Company's Class B Common Stock reserved for
grants to key personnel for (i) incentive stock options, (ii) non-qualified
stock options, (iii) stock appreciation rights, (iv) restricted stock awards and
(v) performance awards, as defined by the Incentive Plan. Shares of Common 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 typically vest after a two year
period and expire three years after full vesting. However, options will vest
immediately upon a "change in control" of the Company as such term is defined in
the Incentive Plan. Options granted through December 31, 2001, have been granted
at a price, which approximates fair market value on the date of the grant.
The Company also has a Stock Purchase Plan, which grants non-employee
directors up to 11,250 shares of the Company's Class B Common Stock. Under this
Stock Purchase Plan, the options granted vest at the beginning of the upcoming
calendar year and expire at the end of January following that calendar year.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123") which also requires that the information be determined as if the Company
had accounted for its employee stock options granted under the fair value method
of SFAS No. 123. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2001, 2000 and 1999, respectively: risk-free
interest rates of 3.52%, 6.55% and 6.04%; dividend yields of 0.78%, 0.78% and
0.63%; volatility factors of the expected market price of the Company's Class B
Common Stock of 0.32, 0.27 and 0.27; and a weighted-average expected life of the
options of 3.4, 4.9 and 4.0 years.
60
E. LONG-TERM INCENTIVE PLAN AND STOCK PURCHASE PLAN (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except per common share data):
YEAR ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
-------- -------- -------
Pro forma loss available to common stockholders $(15,077) $(10,404) $(8,329)
Pro forma loss per common share:
Basic $ (0.97) $ (0.67) $ (0.65)
Diluted $ (0.97) $ (0.67) $ (0.65)
A summary of the Company's stock option activity for Class A Common Stock,
and related information for the years ended December 31, 2001, 2000 and 1999 is
as follows (in thousands, except weighted average data):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2001 2000 1999
------------------- -------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTION PRICE OPTION PRICE OPTIONS PRICE
------ -------- ------ --------- ------- --------
Stock options outstanding - 19 $17.81 34 $14.04 36 $13.71
beginning of year
Options granted 0 0 0
Options exercised 0 (15) 8.89 (2) 8.89
Options forfeited 0 0 0
---- ---- ----
Stock options outstanding - end of year 19 $17.81 19 $17.81 34 $14.04
==== ==== ====
Exercisable at end of year 19 $17.81 19 $17.81 14 $ 8.89
The exercise price for Class A Common Stock options outstanding as of
December 31, 2001 is $17.81. The weighted-average remaining contractual life of
the Class A Common Stock options outstanding is 1.9 years.
61
E. LONG-TERM INCENTIVE PLAN AND STOCK PURCHASE PLAN (CONTINUED)
A summary of the Company's stock option activity for Class B Common Stock,
and related information for the years ended December 31, 2001, 2000, and 1999 is
as follows (in thousands, except weighted average data):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2001 2000 1999
------------------- -------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTION PRICE OPTION PRICE OPTIONS PRICE
------ -------- ------ --------- ------- --------
Stock options outstanding -
beginning of year 1,697 $11.86 820 $13.78 659 $14.36
Options granted 60 10.23 965 10.37 241 12.85
Options exercised (57) 12.65 0 0
Options forfeited (47) 11.21 (36) 12.52 (18) 14.41
Options expired (19) 10.58 (52) 14.00 (62) 16.13
----- ----- ----
Stock options outstanding - end of year 1,634 $11.81 1,697 $11.86 820 $13.78
===== ===== ====
Exercisable at end of year 699 $13.89 569 $14.05 449 $14.20
Weighted-average fair value of
options granted during the year $ 2.58 $3.40 $ 3.67
Exercise prices for Class B Common Stock options outstanding as of
December 31, 2001, ranged from $9.95 to $14.50. The weighted-average remaining
contractual life of the Class B Common Stock options outstanding is 2.6.
F. INCOME TAXES
The Company uses the liability method in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Federal and state income tax expense (benefit) included in the
consolidated financial statements is summarized as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
---------- --------- ---------
Current
Federal $ -0- $ -0- $ 6
State and local 173 587 423
Deferred (6,145) (2,454) (2,739)
---------- --------- ---------
$ (5,972) $ (1,867) $ (2,310)
========== ========= =========
62
F. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and
assets are as follows (in thousands):
DECEMBER 31,
----------------------
2001 2000
-------- --------
Deferred tax liabilities:
Net book value of property and equipment $ 9,059 $ 11,272
Goodwill and other intangibles 82,330 78,456
Other 122 122
-------- --------
Total deferred tax liabilities 91,511 89,850
Deferred tax assets:
Liability under supplemental retirement plan 188 (257)
Allowance for doubtful accounts 286 322
Federal operating loss carryforwards 20,048 13,163
State and local operating loss carryforwards 3,734 3,319
Other 804 707
-------- --------
Total deferred tax assets 25,060 17,254
Valuation allowance for deferred tax assets (340) (340)
-------- --------
Net deferred tax assets 24,720 16,914
-------- --------
Deferred tax liabilities, net $ 66,791 $ 72,936
======== ========
The Company has approximately $68 million in federal operating loss
carryforwards which expire during the years 2012 through 2021. Additionally, the
Company has an aggregate of approximately $125 million of various state
operating loss carryforwards.
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):
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
------- ------- -------
Statutory rate applied to loss $(6,559) $(2,746) $(2,932)
State and local taxes, net of federal tax benefits (37) 368 296
Other items, net 624 511 326
------- ------- -------
$(5,972) $(1,867) $(2,310)
======= ======= =======
The Company received income tax refunds (net of payments) of $307,000 and
$269,000 in 2001 and 2000, respectively and the Company made income tax payments
(net of refunds) of approximately $643,000 and $800,000 during 2000 and 1999,
respectively. At December 31, 2001 and 2000, the Company had current recoverable
income taxes of approximately $552,000 and $1.2 million, respectively.
The Internal Revenue Service (the "IRS") is auditing the Company's federal
tax return for the year ended December 31, 1996. In conjunction with this
examination, the Company extended the time period that the IRS has to audit the
Company's federal tax returns for the 1996 and 1997 tax years until December 31,
2001.
63
F. INCOME TAXES (CONTINUED)
In October 2001, the Company received a notice of deficiency from the IRS
associated with its audit of the Company's 1996 federal income tax return. The
IRS alleges in the notice that the Company owes approximately $12.1 million of
tax plus interest and penalties stemming from certain acquisition related
transactions, which occurred in 1996. Additionally, if the IRS were successful
in its claims, the Company would be required to account for these acquisition
transactions as stock purchases instead of asset purchases which would
significantly lower the tax basis in the assets acquired. The Company believes
the IRS claims are without merit and on January 18, 2002 filed a petition to
contest the matter in United States Tax Court. The Company cannot predict when
the tax court will conclude its ruling on this matter.
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 amount deductible for federal income tax purposes.
The following summarizes the plan's funded status and related assumptions
(dollars in thousands):
DECEMBER 31,
-----------------------
2001 2000
-------- --------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 10,208 $ 8,951
Service cost 1,161 931
Interest cost 685 598
Actuarial (gains) losses 160 141
Benefits paid (412) (413)
-------- --------
Benefit obligation at end of year $ 11,802 $ 10,208
======== ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 8,203 $ 8,059
Actual return on plan assets 96 334
Company contributions 883 223
Benefits paid (412) (413)
-------- --------
Fair value of plan assets at end of year $ 8,770 $ 8,203
======== ========
COMPONENTS OF ACCRUED BENEFIT COSTS:
Underfunded status of the plan $ (3,032) $ (2,005)
Unrecognized net actuarial loss 1,097 456
Unrecognized net transition amount (27) (81)
Unrecognized prior service cost 0 (1)
-------- --------
Accrued benefit cost $ (1,962) $ (1,631)
======== ========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 6.8% 6.8%
Expected long-term rate of return on plan assets 7.0% 7.0%
Estimated rate of increase in compensation levels 5.0% 5.0%
64
G. RETIREMENT PLANS (CONTINUED)
Pension Plan (Continued)
The net periodic pension cost includes the following components (in
thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- ----- -----
COMPONENTS OF NET PERIODIC PENSION COST:
Service cost $ 1,161 $ 931 $ 750
Interest cost 685 598 529
Expected return on plan assets (577) (553) (516)
Amortization of prior service cost (1) (1) (1)
Amortization of transition (asset) or obligation (54) (54) (54)
------- ----- -----
Pension cost $ 1,214 $ 921 $ 708
======= ===== =====
Capital Accumulation Plan
The Gray Communications Systems, Inc. Capital Accumulation Plan (the
"Capital Accumulation Plan") provides 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 of 1986.
The Capital Accumulation Plan allows an investment option in the Company's
Class B Common Stock and allows for the Company's percentage match to be made by
a contribution of the Company's Class B Common Stock. The Company reserved
300,000 shares of the Company's Class B Common Stock for issuance under the
Capital Accumulation Plan.
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 amount is declared by the Company's Board of Directors before
the beginning of each plan year and is made by a contribution of the Company's
Class B Common Stock. The Company's percentage match was 50% for the three years
ended December 31, 2001. The Company contributions vest, based upon each
employee's number of years of service, over a period not to exceed five years.
Company matching contributions aggregating $688,343, $685,223 and $613,983
were charged to expense for 2001, 2000 and 1999, respectively, for the issuance
of 50,464, 59,969 and 44,715 shares of Class B Common Stock, respectively.
H. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease commitments for equipment, land
and office space. The Company also has commitments for various television film
exhibition rights and for digital television ("DTV") equipment. The license
periods for the film exhibition rights had not yet commenced nor had a portion
of the DTV equipment been delivered as of December 31, 2001. Rent expense
resulting from operating leases for the years ended December 31, 2001, 2000 and
1999 were $1.6 million, $1.5 million and $1.8 million, respectively. Future
minimum payments under operating leases with initial or remaining noncancelable
lease terms in excess of one year, obligations under film exhibition rights for
which the license period had not yet commenced and commitments for DTV equipment
that had ordered but not yet been received are as follows (in thousands):
65
H. COMMITMENTS AND CONTINGENCIES (CONTINUED)
DTV
YEAR EQUIPMENT LEASE FILM TOTAL
------------- --------- -------- -------- --------
2002 $ 12,452 $ 1,512 $ 2,504 $ 16,468
2003 3,436 911 4,740 9,087
2004 -0- 679 3,688 4,367
2005 -0- 544 1,857 2,401
2006 -0- 460 227 687
Thereafter -0- 6,982 -0- 6,982
-------- -------- -------- --------
$ 15,888 $ 11,088 $ 13,016 $ 39,992
======== ======== ======== ========
Through a partnership agreement with Host Communications, Inc., a wholly
owned subsidiary of Bull Run, the Company has also acquired certain collegiate
broadcast rights for sporting events through a five-year marketing agreement
that commenced April 1, 2000. The Company's annual obligation will be
determined, in part, by the number of events broadcast under the agreement;
however, the Company's obligation will not exceed $2.2 million annually.
The Company is subject to legal proceedings and claims that 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. INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: broadcasting, publishing
and paging. The broadcasting segment operates thirteen television stations
located in the southern, southwestern and midwestern United States. The
publishing segment operates four daily newspapers in four different markets
located in Georgia and Indiana, and an area weekly advertising only publication
in Georgia. The paging operations are located in Florida, Georgia, and Alabama.
The following tables present certain financial information concerning the
Company's three operating segments (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
Operating revenues:
Broadcasting $ 106,430 $ 120,640 $ 97,015
Publishing 41,189 41,499 37,808
Paging 8,724 9,074 9,130
--------- --------- ---------
$ 156,343 $ 171,213 $ 143,953
========= ========= =========
Operating income:
Broadcasting $ 11,365 $ 23,719 $ 15,763
Publishing 5,929 6,726 5,792
Paging 586 653 505
--------- --------- ---------
Total operating income 17,880 31,098 22,060
Depreciation in value of derivatives, net (1,581) -0- -0-
Miscellaneous income, net 194 781 336
Interest expense (35,783) (39,957) (31,021)
--------- --------- ---------
Loss before income taxes $ (19,290) $ (8,078) $ (8,625)
========= ========= =========
66
I. INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
Operating income is total operating revenue less operating expenses,
excluding SFAS 133 derivative valuation expense, net, miscellaneous income and
expense (net) and interest. Corporate and administrative expenses are allocated
to operating income based on net segment revenues.
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Depreciation and amortization expense:
Broadcasting $ 26,226 $ 26,490 $ 20,199
Publishing 2,336 2,451 2,302
Paging 2,048 2,083 1,848
-------- -------- --------
30,610 31,024 24,349
Corporate 214 183 102
-------- -------- --------
Total depreciation and amortization expense $ 30,824 $ 31,207 $ 24,451
======== ======== ========
Media cash flow:
Broadcasting $ 40,768 $ 53,053 $ 39,207
Publishing 9,423 10,227 9,130
Paging 2,883 2,967 2,607
-------- -------- --------
Total media cash flow $ 53,074 $ 66,247 $ 50,944
======== ======== ========
Media cash flow reconciliation:
Operating income $ 17,880 $ 31,098 $ 22,060
Add:
Amortization of program license rights 5,519 5,307 5,340
Depreciation and amortization 30,824 31,207 24,451
Corporate overhead 3,615 3,594 3,448
Non-cash compensation and contribution to 401(k)
Plan, paid in Common Stock 659 655 599
Less:
Payments for program license liabilities (5,423) (5,614) (4,954)
-------- -------- --------
Total media cash flow $ 53,074 $ 66,247 $ 50,944
======== ======== ========
Capital expenditures:
Broadcasting $ 6,280 $ 7,632 $ 9,152
Publishing 461 625 967
Paging 877 902 1,029
-------- -------- --------
7,618 9,159 11,148
Corporate 114 194 564
-------- -------- --------
Total capital expenditures $ 7,732 $ 9,353 $ 11,712
======== ======== ========
67
I. INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Identifiable assets:
Broadcasting $544,947 $564,323 $584,694
Publishing 29,448 33,260 34,584
Paging 20,632 22,404 23,822
-------- -------- --------
595,027 619,987 643,100
Corporate(1) 199,310 16,785 15,057
-------- -------- --------
Total identifiable assets $794,337 $636,772 $658,157
======== ======== ========
(1) At December 31, 2001, the corporate balance includes $168.6 million
of restricted cash used to redeem the 10 5/8% Notes on January 22,
2002. See Note C. Long-term Debt
J. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL QUARTERS
--------------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2001:
Operating revenues $ 36,929 $ 39,978 $ 36,766 $ 42,671
Operating income 2,488 6,048 2,208 7,136
Net loss (5,028) (2,234) (4,637) (1,419)
Net loss available to common stockholders (5,182) (2,388) (4,791) (1,573)
Basic and diluted loss available to common
stockholders per share $ (0.33) $ (0.15) $ (0.31) $ (0.10)
YEAR ENDED DECEMBER 31, 2000:
Operating revenues $ 38,888 $ 43,408 $ 41,610 $ 47,307
Operating income 4,101 8,481 8,562 9,954
Net income (loss) (3,849) (1,370) (1,134) 141
Net loss available to common stockholders (4,101) (1,623) (1,387) (2,273)
Basic and diluted loss available to common
stockholders per share $ (0.27) $ (0.10) $ (0.09) $ (0.15)
Because of the method used in calculating per share data, the quarterly
per share data will not necessarily add to the per share data as computed for
the year.
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANTS
(a) The following sets forth the information required by Item 304of Regulation
S-K:
(i) On January 2, 2002 Ernst & Young LLP was dismissed as the Company's
principal accountant.
(ii) The reports of Ernst & Young LLP on the Company's financial
statements for the years ended December 31, 2000 and 1999 did not
contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting
principles.
(iii) The decision to change accountants was recommended by the Company's
Audit Committee and approved by the Company's Board of Directors.
(iv) During the years ended December 31, 2000 and 1999 and through
January 2, 2002, there were no disagreements with Ernst & Young LLP
on any matter of accounting principles or practices, financial
statement disclosures or audit scope or procedure, which
disagreements if not resolved to the satisfaction of Ernst & Young
LLP would have caused them to make reference thereto in their
reports on the financial statements for such periods.
(v) During the years ended December 31, 2000 and 1999 and through
January 2, 2002, there have occurred none of the "reportable events"
listed in Item 304(a)(1)(v) of Regulation S-K.
(b) The Company has requested that Ernst & Young LLP furnish a letter
addressed to the SEC stating whether or not it agrees with the above
statements. A copy of such letter, dated January 8, 2002, is filed as
Exhibit 16 to this Form 10-K.
(c) The Company has retained PricewaterhouseCoopers LLP as its principal
independent accountants, effective January 7, 2002.
There have been no disagreements with accountants on accounting and financial
disclosures.
69
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning each of the directors of
the Company as of March 15, 2002. See Part I, Executive Officers of the
Registrant for information concerning each of the executive officers of the
Company.
EXECUTIVE
DIRECTOR OFFICER
NAME SINCE SINCE AGE POSITION
- ------------------------- --------- --------- --- --------------------------------------------------
Richard L. Boger 1991 NA 55 Director
Ray M. Deaver 2002 NA 61 Director
Hilton H. Howell, Jr. 1993 2000 40 Director and Executive Vice President
William E. Mayher, III 1990 NA 63 Chairman of the Board of Directors
Howell W. Newton 1991 NA 55 Director
Hugh Norton 1987 NA 69 Director
Robert S. Prather, Jr. 1993 1996 57 Director and Executive Vice President-Acquisitions
J. Mack Robinson 1993 1996 78 Director, President and Chief Executive Officer
Harriett J. Robinson 1997 NA 71 Director
RICHARD L. BOGER has served as a director of the Company since 1991. Mr.
Boger is a member of the Executive Committee and the Audit Committee of the
Company's Board of Directors and he is Chairman of the Management Personnel
Committee and the 1992 Long Term Incentive Plan Committee of the Company's Board
of Directors. Mr. Boger has been President and Chief Executive Officer of Export
Insurance Services, Inc., an insurance brokerage and agency until February 15,
2002, President and Chief Executive Officer of Lex-Tek International, Inc., an
insurance software company, and a director of CornerCap Group of Funds, a
"Series" investment company since prior to 1992.
RAY M. DEAVER has served as a director of the Company since January 2002.
Prior to his appointment to the Company's Board of Directors, Mr. Deaver served
as the Company's Regional Vice President-Texas since October 1999. He was the
President and General Manager of KWTX Broadcasting Company and President of
Brazos Broadcasting Company from November 1997 until their acquisition by the
Company in October 1999. Prior to 1995, he was Vice President of KWTX
Broadcasting Company and Brazos Broadcasting Company. He has approximately 40
years of experience in the broadcast industry. Mr. Deaver is currently the
Chairman of the CBS Television Network Affiliates Advisory Board.
HILTON H. HOWELL, JR. has been the Company's Executive Vice President
since September 2000 and a director of the Company since 1993. He has served as
President and Chief Executive Officer of Atlantic American Corporation, an
insurance holding company, since 1995 and Executive Vice President from 1992 to
1995. He has been Executive Vice President and General Counsel of Delta Life
Insurance Company and Delta Fire and Casualty Insurance Company since 1991, and
Vice Chairman of Bankers Fidelity Life Insurance Company and Georgia Casualty &
Surety Company since 1992. He has been a director, Vice President and Secretary
of Bull Run Corporation, a principal stockholder of the Company, since 1994. Mr.
Howell also serves as a director of the following companies: Atlantic American
Corporation, Bankers Fidelity Life Insurance Company, Delta Life Insurance
Company, Delta Fire and Casualty Insurance Company, Georgia Casualty & Surety
Company, American Southern Insurance
70
Company, American Safety Insurance Company, Association Casualty Insurance
Company and Association Risk Management General Agency. He is the son-in-law of
J. Mack Robinson and Harriett J. Robinson, both members of the Company's Board
of Directors.
WILLIAM E. MAYHER, III is a member of the 1992 Long Term Incentive Plan
Committee, the Executive Committee and the Management Personnel Committee of the
Company's Board of Directors and has served as Chairman of the Company's Board
of Directors since August 1993. Dr. Mayher was a neurosurgeon in Albany, Georgia
from 1970 to 1998. Dr. Mayher is Chairman of the Medical College of Georgia
Foundation and a past member of the American Association of Neurological
Surgeons. He also serves as a director of Gaston Loughlin, Inc. and Palmyra
Medical Centers.
HOWELL W. NEWTON has served as a director of the Company since 1991. Mr.
Newton is Chairman of the Audit Committee of the Company's Board of Directors.
Mr. Newton has been President and Treasurer of Trio Manufacturing Co., a textile
manufacturing company, since 1978.
HUGH E. NORTON has served as a director of the Company since 1987. He is a
member of the 1992 Long Term Incentive Plan Committee, the Management Personnel
Committee and the Audit Committee of the Company's Board of Directors. Mr.
Norton has been President of Norco, Inc., an insurance agency since 1973. Mr.
Norton is also a real estate developer in Destin, Florida.
ROBERT S. PRATHER, JR. has served as Executive Vice President-Acquisitions
of the Company since 1996. He has served as a director of the Company since
1993. He is a member of the Executive Committee and the Management Personnel
Committee of the Company's Board of Directors. He has served as President and
Chief Executive Officer and a director of Bull Run Corporation, a principal
stockholder of the Company, since 1992. He serves as a director of Swiss Army
Brands, Inc. and The Morgan Group, Inc. and serves on the Board of Trustees of
the Georgia World Congress Center Authority.
J. MACK ROBINSON has been the Company's President and Chief Executive
Officer since 1996. He has served as a director of the Company since 1993. He is
the Chairman of the Executive Committee and a member of the Management Personnel
Committee of the Company's Board of Directors. Mr. Robinson has served as
Chairman of the Board of Bull Run Corporation, a principal stockholder of the
Company, since 1994, Chairman of the Board and President of Delta Life Insurance
Company and Delta Fire and Casualty Insurance Company since 1958, President of
Atlantic American Corporation, an insurance holding company, from 1988 until
1995 and Chairman of the Board of Atlantic American Corporation since 1974. Mr.
Robinson also serves as a director of the following companies: Bankers Fidelity
Life Insurance Company, American Independent Life Insurance Company, Georgia
Casualty & Surety Company, American Southern Insurance Company and American
Safety Insurance Company. He is a director emeritus of Wachovia Corporation. Mr.
Robinson is the husband of Mrs. Harriett J. Robinson and the father-in-law of
Mr. Hilton H. Howell, Jr., both members of the Company's Board of Directors.
HARRIETT J. ROBINSON has served as a director of the Company since 1997.
Mrs. Robinson has been a director of Atlantic American Corporation since 1989.
Mrs. Robinson has also been a director of Delta Life Insurance Company and Delta
Fire and Casualty Insurance Company since 1967. Mrs. Robinson is the wife of Mr.
J. Mack Robinson and the mother-in-law of Mr. Hilton H. Howell, Jr.
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934 requires the
directors, executive officers and persons who own more than 10 percent of a
registered class of a company's equity securities to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership (Form 3) and
reports of
71
changes in ownership (Forms 4 and 5) of such class of equity securities. Such
officers, directors and greater than 10 percent shareholders of a company are
required by SEC regulations to furnish the company with copies of all such
Section 16(a) reports that they file.
To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company during the year ended December 31, 2001,
all Section 16(a) filing requirements applicable to its officers, directors and
10 percent beneficial owners were met, except directors, Harriett J. Robinson,
William E. Mayher, Hugh E. Norton, Richard L. Boger and Howell W. Newton, did
not disclose in a timely manner that on December 6, 2001, the Company granted
them each an option to acquire 5,000 shares of the Company's Class B Common
stock at $9.95 per share. Richard L. Boger, a director, was late in filing his
Form 4 disclosing that during the period of August 15, 2001 through October 17,
2001 he disposed of 8,276 shares of the Company's Class B Common stock at prices
ranging from $11.47 to $14.50 per share. Ray M. Deaver, an executive officer,
was late in filing his Form 5 disclosing that during the period of August 10,
2001 through August 15, 2001 he disposed of 10,000 shares of the Company's Class
B Common stock at prices ranging from $14.62 to $14.78 per share and that he
donated 1,625 shares of the Company's Class B Common stock to charity. Robert
Beizer, Vice President - Law and Development, was late in disclosing in his Form
5 dated February 12, 2002, that during the period of August 17, 2001 through
August 21, 2001 he disposed of 3,500 shares of the Company's Class B Common
stock at prices ranging from $14.30 to $14.58 per share.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth a summary of the compensation of the
Company's President and Chief Executive Officer and the four other most highly
compensated officers for the year ended December 31, 2001 (the "named
executives").
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION AWARDS
-------------------------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
NAME AND ----------------------------- STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARDS SARS (#) COMPENSATION ($)
- --------------------------- ---- ---------- --------- ----------- ---------- -----------------
J. Mack Robinson, 2001 200,000 -0- -0- -0- 28,455(1)
President, Chief 2000 200,000 -0- -0- 100,000 26,860(1)
Executive Officer and
a Director 1999 200,000 -0- -0- 50,000 21,520(1)
Robert A. Beizer, 2001 245,000 -0- -0- 29,500 7,878(2)
Vice President-Law 2000 231,000 -0- -0- 21,000 11,455(2)
& Development 1999 222,000 -0- -0- 10,500 17,270(2)
Ray M. Deaver, 2001 252,000 -0- -0- -0- 11,449(4)
Director and 2000 240,000 50,000 -0- 15,000 5,788(4)
formerly Regional 1999 53,077(3) 35,000 -0- 15,000 1,349(4)
Vice President-Texas
Wayne M. Martin, 2001 260,000 10,000 -0- -0- 11,306(5)
Regional Vice 2000 248,000 130,513 -0- 25,000 9,746(5)
President-Television 1999 236,000 67,556 -0- -0- 11,512(5)
Thomas J. Stultz, 2001 250,000 10,000 -0- -0- 7,866(6)
Vice President, 2000 240,000 50,000 -0- 25,000 7,179(6)
President-Publishing 1999 205,000 150,000 -0- -0- 7,655(6)
Division
72
(1) For 2001, includes term life insurance premiums of $6,205, matching
contributions by the Company's 401(k) plan of $4,250 and director's fees
of $18,000. For 2000, includes term life insurance premiums of $6,180 and
director's fees of $20,680. For 1999, represents director's fees only.
(2) Includes matching contributions by the Company to its 401(k) plan of
$3,741 and $4,000, for 2000 and 1999, respectively. Also includes term
life insurance premiums of $5,148, $5,148 and $8,775 paid or accrued 2001,
2000 and 1999, respectively. Long-term disability insurance premium
payments or accruals of $2,730, $2,566, and $4,495 for 2001, 2000 and
1999, respectively.
(3) Mr. Deaver joined the Company on October 1, 1999 and in 1999 was
compensated at an annual salary of $230,000.
(4) Includes matching contributions by the Company to its 401(k) plan of
$4,250, $4,250 and $1,349 for 2001, 2000 and 1999, respectively. The
amount for 2001 and 2000 includes $2,051and $1,538 of long-term disability
insurance premium payments or accruals. Also includes term life insurance
premiums of $5,148 for 2001.
(5) Includes matching contributions by the Company to its 401(k) plan of
$4,250, $4,250 and $4,000, for 2001, 2000 and 1999, respectively. Also
includes term life insurance premiums of $3,354, $1,794 and $3,600 paid or
accrued for 2001, 2000 and 1999, respectively, and long-term disability
insurance premium payments or accruals of $3,702, $3,702 and $3,912 for
2001, 2000 and 1999, respectively.
(6) Includes matching contributions by the Company to its 401(k) plan of
$4,250, $4,250 and $4,000, for 2001, 2000 and 1999, respectively. Also
includes term life insurance premiums of $1,794, $1,107 and $2,053 paid or
accrued for 2001, 2000 and 1999, respectively, and long-term disability
insurance premium payments or accruals of $1,822, $1,822 and $1,602 for
2001, 2000 and 1999, respectively.
STOCK OPTIONS GRANTED IN 2001
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 also expire one
month after termination of employment. Currently, the total number of shares
issuable under the Incentive Plan is not to exceed 2,900,000 shares of which
300,000 are the Company's Class A Common Stock and 2,600,000 are the Company's
Class B Common Stock, subject to adjustment in the event of any change in the
outstanding shares of such stock by reason of a stock dividend, stock split,
recapitalization, merger, consolidation or other similar changes generally
affecting shareholders of the Company.
The Incentive Plan is administered by the Incentive Plan Committee, which
consists of members of the Management Personnel Committee of the Board of
Directors who are not eligible 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 Incentive Plan Committee is
authorized in its sole discretion to determine the individuals to whom options
will be granted, the type and amount of such options and awards and the terms
thereof; and to prescribe, amend and rescind rules and regulations relating to
the Incentive Plan, among other things. The following table contains information
on stock options granted during the year ended December 31, 2001. All options
granted during 2001 were options to purchase the Company's Class B Common Stock.
No stock appreciation rights were granted in 2001.
73
OPTION GRANTS IN 2001
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED 2001 ($/SHARE) DATE 5% ($) 10% ($)
----------------- ------------- ------------ ------------ ----------- -------- --------
Robert A. Beizer 29,500 83.1 9.95 12/6/06 81,096 179,200
(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 Company's Class B Common Stock over the term of the options. These
numbers are calculated based on rules promulgated by the SEC and do not
reflect the Company's estimate of future stock price growth. Actual gains,
if any, on stock option exercises and the Company's Class B Common Stock
holdings will be dependent on the timing of such exercise and the future
performance of the Company's Class B Common Stock. There can be no
assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected would be received by the option
holder.
STOCK OPTIONS EXERCISED
The following table sets forth information about stock options that were
exercised during 2001 and the number of shares and the value of grants
outstanding as of December 31, 2001 for each named executive.
AGGREGATED OPTION EXERCISES IN 2001
AND DECEMBER 31, 2001 OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
CLASS OF ACQUIRED VALUE OPTIONS AT 12/31/01 OPTIONS AT 12/31/01 ($) (1)
COMMON ON REALIZED ---------------------------- -----------------------------
NAME STOCK EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----- -------- --- ----------- ------------- ----------- -------------
J. Mack Robinson Class A -0- -0- 10,000 -0- -0- -0-
Class B -0- -0- 165,000 100,000 -0- 26,500
Robert A. Beizer Class B 3,500 13,148 31,500 50,500 -0- 12,980
Thomas J. Stultz Class B -0- -0- 22,500 25,000 -0- 6,625
Ray M. Deaver Class B -0- -0- 15,000 15,000 -0- 3,975
Wayne M. Martin Class B -0- -0- 11,250 25,000 -0- 6,625
(1) Value is based on the closing price of the Company's Class A Common Stock
and Class B Common Stock of $13.88 and $10.39, respectively at December
31, 2001, less the exercise price.
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 and the denominator of which is the greater of 25 or the years
of service credited under the plan, plus (ii) 0.9% of the employee's monthly
average earnings for the
74
highest five consecutive years in the employee's final 10 years of employment
added to 0.6% of monthly average earnings in excess of Social Security covered
compensation, 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, annual estimated pension payments upon retirement of participating
employees in specified salary classifications are shown in the following table:
PENSION PLAN TABLE
YEARS OF SERVICE
-------------------------------------------------------------------------------------
REMUNERATION(1) 10 15 20 25 30 35
- --------------- -------- -------- -------- -------- -------- --------
$ 15,000 $ 1,344 $ 2,004 $ 2,664 $ 3,324 $ 3,300 $ 3,300
25,000 2,240 3,340 4,440 5,540 5,500 5,500
50,000 5,094 7,294 9,494 11,694 11,000 11,000
75,000 8,534 11,834 15,134 18,434 16,500 16,500
100,000 11,974 16,374 20,774 25,174 22,000 22,000
150,000 18,854 25,454 32,054 38,654 33,000 33,000
200,000 21,414 30,214 39,014 47,814 38,977 36,080
250,000 and above 21,752 31,398 41,044 50,690 42,078 37,205
(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 pension compensation 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 herein). Pension
compensation for 2001 differs from compensation reported in the Summary
Compensation Table in that pension compensation includes any annual incentive
awards received in 2001 for services in 2000 rather than the incentive awards
paid in 2002 for services in 2001. The maximum annual compensation considered
for pension benefits under the plan in 2001 was $170,000.
Benefits are computed on a straight life annuity basis and are not subject
to any deduction for Social Security or other offset amounts.
As of December 31, 2001, the named executive officers of the Company have
the following years of credited service:
NAME YEARS OF CREDITED SERVICE
---------------- -------------------------
J. Mack Robinson 3
Robert A. Beizer 6
Thomas J. Stultz 6
Ray M. Deaver 2
Wayne M. Martin 7
75
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 of 1986, as amended.
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 to be
matched by the Company is determined by the Board of Directors before the
beginning of each calendar year and is made with a contribution of the Company's
Class B Common Stock. The percentage of the employee's contribution (up to 6% of
the employees gross pay) matched by the Company for the year ended December 31,
2001 was 50%. The Company's matching contributions vest based upon an employee's
number of years of service, over a period not to exceed five years.
COMPENSATION OF DIRECTORS
The standard arrangement for directors' fees is set forth in the table
below.
DESCRIPTION AMOUNT
------------------------------------------- -------
Chairman of the Board's annual retainer fee $18,000
Director's annual retainer fee 12,000
Director's fee per Board meeting 1,000
Chairman of the Board fee per Board meeting 1,200
Committee chairman fee per committee meeting 1,200
Committee member fee per committee meeting 1,000
Directors are paid 40% of the above fee arrangement for participation by
telephone in any meeting of the Board of Directors or any committee thereof.
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 11,250 shares of the Company's Class B Common Stock at a price
per share equal to the market price at the time of grant. Such options are
exercisable until the end of the first month following the end of the year of
the grant.
EMPLOYMENT AGREEMENTS
Ray M. Deaver and the Company were parties to an employment agreement
dated October 1, 1999 and having a three-year term ending on December 31, 2002;
however, Mr. Deaver retired on December 31, 2001. The agreement provided that
Mr. Deaver be employed as Regional Vice President - Texas with an initial annual
base salary of $230,000 and a grant of options to purchase 15,000 shares of the
Company's Class B Common Stock with an exercise price of $12.75 per share. The
option is exercisable over a three-year period beginning upon the second
anniversary of the grant date. The agreement provided that Mr. Deaver was
entitled to receive a bonus of not less than $125,000 for each year of his
employment that television stations KWTX, KBTX and KXII attained budget goals as
set annually by the Company. The budget goals would be calculated in the
aggregate. In addition, Mr. Deaver was entitled to receive 10% of any amount by
which those three stations in the aggregate exceeded the budget goals. Mr.
Deaver has agreed that during the term of his agreement and for two years
thereafter, he will be subject to certain confidentiality and non-disclosure
obligations. He had also agreed that during the term
76
of his agreement and for a one-year period thereafter, he would be subject to
certain non-competition obligations.
Wayne M. Martin has a written commitment with the Company that if control
of the Company changes while he is an officer and manager at the Company, he
will be entitled to one year's salary as severance pay if the new control group
does not retain him in a similar position with similar compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Richard L. Boger, William E. Mayher, III, Robert S. Prather, Jr., Hugh
Norton and J. Mack Robinson are the members of the Management Personnel
Committee, which serves as the Compensation Committee of the Company. Mr.
Robinson, President, Chief Executive Officer and a director of the Company,
serves on the Compensation Committee of Bull Run Corporation, a principal
shareholder of the Company. Mr. Prather, Executive Vice President-Acquisitions
and a director of the Company, also serves as President, Chief Executive Officer
and director of Bull Run Corporation. Hilton H. Howell, Jr., Executive
Vice-President and a director of the Company, also serves as Vice President,
Secretary and a director of Bull Run Corporation.
REPORT OF MANAGEMENT PERSONNEL COMMITTEE
The Management Personnel Committee of the Board of Directors administers
the Company's executive compensation program.
The goals of the Company's executive compensation program for 2001 were to
attract, retain, motivate and reward qualified persons serving as executive
officers. To achieve such goals the Company relies primarily on salaries,
bonuses, options and other compensation for each of the Company's executive
officers, except that the salary of Mr. Deaver was specified in his employment
agreement with the Company. Under current policy, the chief executive officer of
the Company determines the recommended annual compensation level, including
bonuses, for all other officers of the Company and its subsidiaries, and then
submits these recommendations to the Management Personnel Committee for its
review and approval. Such determinations of the Management Personnel Committee
are reported to the full board, which then has the opportunity to consider and
amend such determinations concerning the compensation payable to executive
officers. In 2001, the full board approved the determinations of the Management
Personnel Committee with respect to compensation without making any changes
thereto. The Management Personnel Committee's policy for determining an
executive's salary, bonus and stock option grants is based on the responsibility
of such executive, his or her impact on the operations and profitability of the
Company or the business unit for which such executive has operating
responsibility and the knowledge and experience of such executive.
In 2001, the Management Personnel Committee utilized the foregoing
criteria to determine executive salaries, bonuses and option grants and such
salaries, bonuses and option grants are consistent with the foregoing policy. An
executive's annual bonus is based on a percentage of his or her annual base
salary. These considerations are subjective in nature and the Management
Personnel Committee does not assign relative weights thereto. For 2001, bonuses
ranged from 0% to 31% of an executive's base salary. Whether or not a bonus is
in fact earned by an executive is linked to the attainment, by the Company or
the business unit for which such executive has operating responsibility, of
predetermined operating profit targets based on budgeted operating revenues
(which is an objective analysis) and the individual's contribution to the
Company or the business unit (which is a subjective analysis). The Management
Personnel Committee approves the operating profit targets annually. When
measuring an executive's individual contribution and performance, the Management
Personnel Committee examines the factors, as
77
well as qualitative factors that necessarily involve a subjective judgment by
the Management Personnel Committee. In making such subjective determination, the
Management Personnel Committee does not base its determination on any single
performance factor nor does it assign relative weights to factors, but considers
a mix of factors, including evaluations of superiors, and evaluates an
individual's performance against such mix in absolute terms in relation to other
executives at the Company. In deciding whether or not to grant an option to an
individual and in determining the number of shares subject to an option so
granted, the Management Personnel Committee takes into account subjective
considerations, including the level of such executive's position and the
individual's contribution to the Company. Although the Management Personnel
Committee believes that its compensation structure is similar to that of other
comparable communications companies, it did not specifically compare such
structure with that of other companies in 2001.
The annual compensation of Mr. Robinson, the Company's President and Chief
Executive Officer, was set by the Management Personnel Committee at $200,000 in
2001. His compensation was set after reviewing the Company's overall
performance, success in meeting strategic objectives and the Chief Executive
Officer's personal leadership and accomplishments.
Submitted by the Management Personnel Committee of the Board of Directors
Richard L. Boger, Chairman
William E. Mayher, III
Robert S. Prather, Jr.
Hugh Norton
J. Mack Robinson
78
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Class A Common Stock and Class B Common stock as of March 15,
2002 by (i) any person who is known to the Company to be the beneficial owner of
more than five percent of the Company's Class A Common Stock or the Class B
Common stock, (ii) all directors, (iii) all executive officers named in the
Summary Compensation Table herein and (iv) all directors and executive officers
as a group. Warrants and options to acquire the Company's Class A Common Stock
or Class B Common Stock included in the amounts listed below are currently
exercisable or will be exercisable within 60 days after March 15, 2002.
CLASS A CLASS B COMBINED
COMMON STOCK COMMON STOCK VOTING
BENEFICIALLY OWNED BENEFICIALLY OWNED PERCENT OF
------------------------ ---------------------- COMMON
NAME SHARES PERCENT SHARES PERCENT STOCK
- ----------------------------------- ---------- ------- ------ ------- -----
Robert A. Beizer(1) -0- * 42,691 * *
Richard L. Boger(1) 3,736 * 13,763 * *
Ray M. Deaver(2) -0- * 421,168 4.8% *
Hilton H. Howell, Jr.(3)(4)(5) 3,778,577 47.3% 296,247 3.3% 42.9%
Wayne M. Martin(1) 7,005 * 12,314 * *
William E. Mayher, III(1) 13,500 * 23,750 * *
Howell W. Newton(1) 2,625 * 7,500 * *
Hugh Norton(1) 13,500 * 23,750 * *
Robert S. Prather, Jr.(3)(6) 3,352,910 42.1% 296,650 3.2% 38.2%
Harriett J. Robinson(1)(3)(5)(7) 4,998,752 59.9% 463,600 5.1% 54.6%
J. Mack Robinson(3)(5)(8) 4,998,752 59.9% 463,600 5.1% 54.6%
Thomas J. Stultz(1) 2,250 * 26,011 * *
Bull Run Corporation(9) 3,123,897 39.3% 111,750 1.3% 35.4%
Mario J. Gabelli(10) 340,145 5.0% 2,357,741 26.8% 7.5%
George H. Nader(11) 359,998 5.3% -0- * 4.7%
Shapiro Capital Management Company, Inc.(12) -0- * 1,513,021 17.2% 2.0%
All directors and executive officers as a group 5,363,956 64.2% 1,403,562 15.0% 59.3%
* Less than 1%.
(1) Includes options to purchase the Company's Class B Common Stock, as
follows: each of Messrs. Boger, Mayher, Newton and Norton and Mrs.
Robinson - 5,000 shares of the Company's Class B Common Stock; Mr. Martin
- 11,250 shares of the Company's Class B Common Stock; Mr. Beizer - 42,000
shares of the Company's Class B Common Stock and Mr. Stultz - 22,500
shares of the Company's Class B Common Stock.
(2) Includes 213,228 shares of the Company's Class B Common Stock owned by Mr.
Deaver's wife, as to which shares he disclaims beneficial ownership.
Includes options to purchase 15,000 shares of the Company's Class B Common
Stock.
(3) Includes 2,017,647 shares of the Company's Class A Common Stock and 11,750
shares of the Company's Class B Common Stock owned by Bull Run Corporation
and warrants to purchase 1,106,250 shares of the Company's Class A Common
Stock and 100,000 shares of the Company's Class B Common Stock owned by
Bull Run Corporation, as described in footnote (9) below, because Messrs.
Howell, Prather and Robinson are directors and officers of Bull Run
79
Corporation and Messrs. Prather and Robinson are principal shareholders of
Bull Run Corporation. In addition, Mrs. Robinson is the spouse of Mr.
Robinson. Each of Messrs. Howell, Prather and Robinson and Mrs. Robinson
disclaims beneficial ownership of the shares owned by Bull Run
Corporation.
(4) Includes 59,075 shares of the Company's Class A Common Stock owned by Mr.
Howell's wife directly and as trustee for her children, as to which shares
he disclaims beneficial ownership.
(5) Includes as to Messrs. Robinson and Howell and Mrs. Robinson, an aggregate
of 523,605 shares of the Company's Class A Common Stock and 16,000 shares
of the Company's Class B Common Stock owned by certain companies of which
Mr. Howell is an officer and a director, Mr. Robinson is an officer,
director and a principal or sole shareholder and Mrs. Robinson is a
director. Also includes warrants to purchase 37,500 shares of the
Company's Class A Common Stock owned by one of these companies.
(6) Includes 225 shares of the Company's Class A Common Stock and 100 shares
of the Company's Class B Common Stock owned by Mr. Prather's wife, as to
which shares he disclaims beneficial ownership. Includes options to
purchase 9,337 shares of the Company's Class A Common Stock and options to
purchase 166,000 shares of the Company's Class B Common Stock.
(7) Includes: (1) an aggregate of 401,975 shares of the Company's Class A
Common Stock and 92,950 shares of the Company's Class B Common Stock,
options to purchase 10,000 shares of the Company's Class A Common Stock,
options to purchase 165,000 shares of the Company's Class B Common Stock
and warrants to purchase 75,000 shares of the Company's Class A Common
Stock owned by Mrs. Robinson's husband, as to which shares Mrs. Robinson
disclaims beneficial ownership; (2) warrants to purchase 112,500 shares of
the Company's Class A Common Stock; and (3) 336,950 shares of the
Company's Class A Common Stock, 40,000 shares of the Company's Class B
Common Stock and warrants to purchase 150,000 shares of the Company's
Class A Common Stock owned by Mrs. Robinson, as trustee for her daughters.
Mrs. Robinson disclaims beneficial ownership of all such securities. Mrs.
Robinson's address is 4370 Peachtree Road NE, Atlanta, Georgia 30319.
(8) Includes: (1) options to purchase 10,000 shares of the Company's Class A
Common Stock and options to purchase 165,000 shares of the Company's Class
B Common Stock; (2) warrants to purchase 75,000 shares of the Company's
Class A Common Stock held by Mr. Robinson; and (3) 564,275 shares of the
Company's Class A Common Stock and 72,900 shares of the Company's Class B
Common Stock owned by Mr. Robinson's wife directly and as trustee for
their daughters, options to purchase 5,000 shares of the Company's Class B
Common Stock and warrants to purchase 262,500 shares of the Company's
Class A Common Stock held by Mr. Robinson's wife directly and as trustee
for their daughters. Mr. Robinson disclaims beneficial ownership of all
such securities. Mr. Robinson's address is 4370 Peachtree Road NE,
Atlanta, Georgia 30319.
(9) Includes warrants to purchase 1,106,250 shares of the Company's Class A
Common Stock and 100,000 shares of the Company's Class B Common Stock. The
address of Bull Run Corporation is 4370 Peachtree Road NE, Atlanta,
Georgia 30319.
(10) This information was furnished to the Company on a Schedule 13D filed by
Gabelli Funds, Inc. and also by Mario J. Gabelli and various entities
which he directly or indirectly controls or for which he acts as chief
investment officer. The Schedule 13D reports the beneficial ownership of
the Company's Class A Common Stock as follows: Gabelli Funds, LLC -115,125
shares; GAMCO Investors, Inc.-180,200 shares; Gabelli Securities, Inc. -
4,070 shares and Gabelli
80
Performance Partnership, L.P.-40,750 shares. The Schedule 13D reports the
beneficial ownership of the Company's Class B Common Stock as follows:
Gabelli Funds, LLC -810,000 shares; GAMCO Investors, Inc.-1,449,201
shares; Gabelli Securities, Inc. - 13,440; Gabelli International
Limited-44,100 shares; Gabelli Advisers, Inc. -30,000 shares and Gabelli
Performance Partnership, L.P. -11,000 shares. GAMCO Investors, Inc. only
has the authority to vote 1,391,451 of the shares beneficially held by it.
The address of Mr. Gabelli and Gabelli Funds, Inc. is One Corporate
Center, Rye, New York 10580.
(11) Mr. Nader's address is P.O. Box 271, 1011 Fifth Avenue, West Point,
Georgia 31833.
(12) This information was furnished to the Company on a Schedule 13G filed by
Shapiro Capital Management Company, Inc., the address of which is 3060
Peachtree Road NW, Atlanta, Georgia 30306.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
J. Mack Robinson, President, Chief Executive Officer and a director of the
Company, is Chairman of the Board of Bull Run Corporation, a principal
shareholder of the Company ("Bull Run") and the beneficial owner of
approximately 23.4% of the outstanding shares of Bull Run common stock
(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 8.4% of the outstanding
shares of Bull Run common stock (including certain shares as to which such
beneficial ownership is disclaimed by Mr. Prather). Bull Run is the owner of
13.0% of the total outstanding common stock of the Company. Hilton H. Howell,
Jr., Executive Vice President and a director of the Company, is Vice President,
Secretary and a director of Bull Run. Bull Run and the executive officers and
directors mentioned above, and their affiliates, hold or have the right to vote
in the aggregate approximately 49.9% in voting power of the currently
outstanding common stock of the Company. Furthermore, if all options and
warrants that are currently outstanding were exercised, their voting power would
increase to approximately 57.7%.
Harriett J. Robinson serves as a director of Delta Life Insurance Company
and Delta Fire and Casualty Insurance Company that are both holders of a portion
of the Company's preferred stock.
Mr. J. Mack Robinson is the father-in-law and Mrs. Harriett J. Robinson is
the mother-in-law of Mr. Hilton H. Howell, Jr. Mr. and Mrs. Robinson are husband
and wife.
Gray Kentucky Television, Inc., a subsidiary of the Company ("Gray
Kentucky"), is a party to a rights sharing agreement with Host Communications,
Inc., a wholly owned subsidiary of Bull Run ("Host"). Pursuant to this
agreement, 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, 2001, the Company
paid approximately $125,000 under this rights sharing agreement.
During 2001, the Company paid preferred stock dividends of $616,347 to the
holders of the Company's Series A and Series B preferred stock which consisted
of Bull Run, J. Mack Robinson and certain of his affiliates.
81
On December 3, 2001, the Company exercised its option to acquire 301,119
shares of the outstanding common stock of Sarkes Tarzian, Inc. ("Tarzian") from
Bull Run. Bull Run had purchased these same shares from U.S. Trust Company of
Florida Savings Bank as Personal Representative of the Estate of Mary Tarzian
(the "Estate") in January 1999.
Gray paid $10 million to Bull Run to complete the acquisition of the
301,119 shares of Tarzian. The Company has previously capitalized and paid to
Bull Run $3.2 million of costs associated with the Company's option to acquire
these shares. In connection with the option agreement, the Company granted
warrants to Bull Run to purchase up to 100,000 shares of the Company's Class B
Common Stock at $13.625 per share. The warrants vested immediately upon the
Company's exercise of its option to purchase the Tarzian Shares. The warrants
expire on December 3, 2011 (10 years following the date on which the Company
exercised its option).
On February 12, 1999, Tarzian filed a complaint against Bull Run and the
Estate in the United States District Court for the Southern District of Indiana.
Tarzian claims that it had a binding and enforceable contract to purchase the
Tarzian shares from the Estate prior to Bull Run's purchase of the shares, and
requests judgment providing that the contract be enforced. On May 3, 1999, the
action was dismissed without prejudice against Bull Run, leaving the Estate as
the sole defendant. The litigation between the Estate and Tarzian is ongoing and
the Company cannot predict when the final resolution of the litigation will
occur. The purchase agreement with the Estate provides that if a court of
competent jurisdiction awards title to the Tarzian shares to a person or entity
other than the purchaser (or its successors or assigns), the purchase agreement
will be rescinded and the Estate will be required to pay for the benefit of
Gray, as successor in interest, the full $10 million purchase price, plus
interest.
82
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) AND (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
(1) FINANCIAL STATEMENTS.
The following consolidated financial statements of Gray Communications
Systems, Inc. are included in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of Gray Communications Systems,
Inc. and subsidiaries is included in Item 14(d):
Schedule II - Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
(B) REPORTS ON FORM 8-K.
8-K filed on December 21, 2001 relating to the closing of a $180 million
private placement of notes.
(C) EXHIBITS.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Restated Articles of Incorporation of Gray Communications Systems,
Inc., (incorporated by reference to Exhibit 3.1 to the Company's
Form 10-K for the fiscal year ended December 31, 1996)
3.2 By-Laws of Gray Communications Systems, Inc. as amended
(incorporated by reference to Exhibit 3.2 to the Company's Form
10-K for the year ended December 31, 1996)
83
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.3 Amendment of the Bylaws of Gray Communications Systems, Inc.,
January 6, 1999 (incorporated by reference to Exhibit 3.3 to the
Company's Form 10-K for the year ended December 31, 1998)
4.1 Indenture for the Company's 105/8% Senior Subordinated Notes due
2006 (incorporated by reference to Exhibit 4.1 to the Company's
registration statement on Form S-1 (Registration No. 333-4338)
(the "Form S-1"))
4.2 Amended and Restated Loan Agreement by and among Gray Communications
Systems, Inc. as Borrower, NationsBank, NA as Syndication Agent
and Administrative Agent, Key Corporate Capital Inc., as
Documentation Agent and The Financial Institutions Listed Herein
as of July 31, 1998 with NationsBanc Montgomery Securities LLC, as
Lead Arranger. (incorporated by reference to Exhibit 10.5 to the
Company's Form 10-Q for the quarter ended June 30, 1998)
4.3 Amended and Restated Borrower Security Agreement dated July 31, 1998
by and between Gray Communications Systems, Inc. and NationsBank
N.A. as Administrative Agent (incorporated by reference to Exhibit
4.3 to the Company's Form 10-K for the year ended December 31,
1998)
4.4 Subsidiary Security Agreement dated September 30, 1996 between Gray
Communications Systems, Inc., its subsidiaries and KeyBank
National Association (incorporated by reference to Exhibit 4(iii)
to the Company's Form 8-K, filed October 15, 1996)
4.5 Amended and Restated Borrower Pledge Agreement dated July 31, 1998
between Gray Communications Systems, Inc. and NationsBank N.A. as
Administrative Agent (incorporated by reference to Exhibit 4.5 to
the Company's Form 10-K for the year ended December 31, 1998)
4.6 Subsidiary Pledge Agreement dated September 30, 1996 by and among
WRDW-TV, Inc., WJHG-TV, Inc., Gray Kentucky Television, Inc. and
KeyBank National Association (incorporated by reference to Exhibit
4(v) to the Company's Form 8-K, filed October 15, 1996)
4.7 Subsidiary Guarantee dated September 30, 1996 between Gray
Communications Systems, Inc., its subsidiaries and KeyBank
National Association (incorporated by reference to Exhibit 4(vi)
to the Company's Form 8-K, filed October 15, 1996)
4.8 First Amendment to Amended and Restated Loan Agreement dated as of
the 13th day of November, 1998, by and among Gray Communications
Systems, Inc., as Borrower, the Banks (as defined in the loan
agreement) and NationsBank, N.A., as administrative agent (the
"Administrative Agent') on behalf of the Banks (incorporated by
reference to Exhibit 4.8 to the Company's Form 10-K for the year
ended December 31, 1998)
84
EXHIBIT
NO. DESCRIPTION
- ------- -----------
4.9 Second Amendment to Amended and Restated Loan Agreement dated as of
the 3rd day of March, 1999, by and among Gray Communications
Systems, Inc., as Borrower, the Banks (as defined in the loan
agreement) and NationsBank, N.A., as administrative agent on
behalf of the Banks (incorporated by reference to Exhibit 4.9 to
the Company's Form 10-K for the year ended December 31, 1998)
4.10 Consent Agreement entered into as of the 26th day of February, 1999
by and among Gray Communications Systems, Inc., as Borrower, the
Banks (as defined in the Loan Agreement) and NationsBank N.A. as
administrative agent on behalf of the Banks (incorporated by
reference to Exhibit 4.10 to the Company's Form 10-K for the year
ended December 31, 1998)
4.11 Second Amended and Restated Loan Agreement dated as of October 1,
1999 by and among Gray Communications Systems, Inc., as Borrower;
The Financial Institutions Signatory Hereto, as Lenders; and Bank
of America, N.A., as Administrative Agent for the Lenders with
Banc of America Securities LLC as Lead Arranger and Book Manager;
Key Corporate Capital, Inc., as documentation agent and First
Union National Bank, as Syndication Agent (incorporated by
reference to Exhibit 99.1 to the Company's Form 8-K dated October
15, 1999)
4.12 Third Amended and Restated Loan Agreement Dated as of September 25,
2001 by and among Gray Communications Systems, Inc., as Borrower;
The Financial Institutions Signatory Hereto, as Lenders; and Bank
of America, N.A., as Administrative Agent for the Lenders with
Banc of America Securities LLC and First Union Securities, Inc. as
Co-Lead Arrangers and Joint Book Managers; and First Union
National Bank, as Syndication Agent (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q dated September 30, 2001)
4.13 Indenture for the Company's 9 1/4% Senior Subordinated Notes due
2011, dated as of December 15, 2001.
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 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)
10.3 Warrant, dated January 4, 1996, to purchase 487,500 shares of Class
A Common Stock (incorporated by reference to the Form S-1)
10.4 Employment Agreement, dated February 12, 1996 between the Company
and Robert A. Beizer (incorporated by reference to the Form S-1)
10.5 Form of Preferred Stock Exchange and Purchase Agreement between the
Company and Bull Run Corporation (incorporated by reference to the
Form S-1)
10.6 Form of Warrant to purchase 500,000 shares of Class A Common Stock
(incorporated by reference to the Form S-1)
85
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.7 Form of amendment to employment agreement between the Company and
Robert A. Beizer, dated December 12, 1996 (incorporated by
reference to Exhibit 10.19 to the Company's Form 10-K for the year
ended December 31, 1996)
10.8 Amendment to the Company's Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.19 to the Company's Form 10-K for the year
ended December 31, 1996)
10.9 Asset Purchase Agreement by and among Gray Communications Systems,
Inc., Gray Communications of Indiana, Inc., News Printing Company,
Inc., Jane Gemmer and John Gemmer dated as of February 28, 1999
(incorporated by reference to Exhibit 10.16 to the Company's Form
10-K for the year ended December 31, 1998)
10.10 Agreement and Plan of Merger by and among Gray Communications
Systems, Inc., Gray Communications of Texas, Inc. and KWTX
Broadcasting Company dated as of April 13, 1999 (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended March 31, 1999)
10.11 Agreement and Plan of Merger by and among Gray Communications
Systems, Inc., Gray Communications of Texas, Inc. and Brazos
Broadcasting Company dated as of April 13, 1999 (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended March 31, 1999)
10.12 Asset Purchase Agreement by and among Gray Communications Systems,
Inc., Gray Communications of Texas-Sherman, Inc., KXII Licensee
Corp., KXII Television, Ltd., K-Twelve, Ltd., KBI 1, Inc., KBI 2
Inc., KXII Properties, Inc. and the Shareholders of KXII
Properties, Inc. dated as of April 26, 1999 (incorporated by
reference to Exhibit 10.3 to the Company's Form 10-Q for the
quarter ended March 31, 1999)
16 Letter re: Change in Certifying Accountant
21 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
- ----------
(d) FINANCIAL STATEMENT SCHEDULES - The response to this section is submitted
as a part of (a)(1) and (2).
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GRAY COMMUNICATIONS SYSTEMS, INC.
Date: March 27, 2002 By: /s/ J. MACK ROBINSON
------------------------------------------
J. Mack Robinson,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 27, 2002 By: /s/ WILLIAM E. MAYHER, III
------------------------------------------
William E. Mayher, III,
Chairman of the Board
Date: March 27, 2002 By: /s/ J. MACK ROBINSON
------------------------------------------
J. Mack Robinson, Director
Date: March 27, 2002 By: /s/ RICHARD L. BOGER
------------------------------------------
Richard L. Boger, Director
Date: March 27, 2002 By: /s/ RAY M. DEAVER.
------------------------------------------
Ray M. Deaver, Director
Date: March 27, 2002 By: /s/ HILTON H. HOWELL, JR.
------------------------------------------
Hilton H. Howell, Jr., Director
Date: March 27, 2002 By: /s/ HOWELL W. NEWTON
------------------------------------------
Howell W. Newton, Director
Date: March 27, 2002 By: /s/ HUGH NORTON
------------------------------------------
Hugh Norton, Director
Date: March 27, 2002 By: /s/ ROBERT S. PRATHER, JR.
------------------------------------------
Robert S. Prather, Jr., Director
Date: March 27, 2002 By: /s/ HARRIETT J. ROBINSON
------------------------------------------
Harriett J. Robinson, Director
Date: March 27, 2002 By: /s/ JAMES C. RYAN
------------------------------------------
James C. Ryan,
Vice President & Chief Financial Officer
Date: March 27, 2002 By: /s/ JACKSON S. COWART, IV
------------------------------------------
Jackson S. Cowart, IV,
Chief Accounting Officer
87
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the consolidated financial statements of Gray Communications
Systems, Inc. as of December 31, 2001 and for the year then ended, and have
issued our report thereon dated February 4, 2002, included elsewhere in this
Form 10-K. Our audit also included the financial statements schedule of Gray
Communications Systems, Inc. listed in Item 14(a) as to information provided as
of and for the year ended December 31, 2001. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audit.
In our opinion, based on our audit, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
PricewaterhouseCoopers LLP
Atlanta, Georgia
February 4, 2002
88
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Gray
Communications Systems, Inc. as of December 31, 2000, and for the years in the
period ended December 31, 2000 and December 31, 1999, and have issued our report
thereon dated January 29, 2001. Our audits also included the financial statement
schedule listed in Item 14(a) for the years ended December 31, 2000 and 1999.
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Atlanta, Georgia
January 29, 2001
89
GRAY COMMUNICATIONS SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------- ---------- ------------------------- -------------- -----------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS (1) PERIOD
- ----------- ---------- ---------- ----------- -------------- ----------
YEAR ENDED DECEMBER 31, 2001
Allowance for doubtful accounts $ 845,000 $726,000 -0- $ 828,000 $ 743,000
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts $1,008,000 $577,000 -0- $ 740,000 $ 845,000
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts $1,212,000 $629,000 $220,000 $1,053,000 $1,008,000
- ----------
(1) Deductions are write-offs of amounts not considered collectible.
(2) Represents amounts recorded in connection with acquisitions. (1)
90