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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________.
COMMISSION FILE NUMBER 1-13796
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GRAY COMMUNICATIONS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 52-0285030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
126 N. WASHINGTON ST. 31701
ALBANY, GA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (912) 888-9390
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Securities registered pursuant to Section 12(b) of the Act:
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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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 February 23, 1998: CLASS A AND CLASS B COMMON STOCK; NO PAR
VALUE - $139,915,154
The number of shares outstanding of the registrant's classes of common
stock as of February 23, 1998: CLASS A COMMON STOCK; NO PAR VALUE - 4,534,195
SHARES; CLASS B COMMON STOCK, NO PAR VALUE - 3,402,755 SHARES
DOCUMENTS INCORPORATED BY REFERENCE: The registrant's definitive proxy
statement for the annual meeting of shareholders to be filed with the Commission
pursuant to Regulation 14A is incorporated by reference into part III herein.
PART 1
ITEM 1. BUSINESS
AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS
GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY CONSUMMATED
THE GULFLINK ACQUISITION AND THE WITN ACQUISITION (EACH AS HEREINAFTER DEFINED)
ON APRIL 24, 1997 AND AUGUST 1, 1997, RESPECTIVELY. EXCEPT WITH RESPECT TO
HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE
GULFLINK ACQUISITION AND THE WITN ACQUISITION (AS HEREINAFTER DEFINED) ARE
INCLUDED IN THE DESCRIPTION OF THE COMPANY. UNLESS OTHERWISE INDICATED, THE
INFORMATION HEREIN HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR2 SPLIT OF THE
COMPANY'S CLASS A COMMON STOCK, NO PAR VALUE (THE "CLASS A COMMON STOCK"),
EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS
OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD
DATA HEREIN ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE,
DATED NOVEMBER 1997, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN").
GENERAL
The Company owns eight network-affiliated television stations in
medium-size markets in the southeastern United States (the "Southeast"), six of
which are ranked number one in their respective markets. Five of the stations
are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS"),
and three are affiliated with the NBC Television Network, a division of the
National Broadcasting Company, Incorporated ("NBC"). In connection with the
First American Acquisition (as hereinafter defined) the Company will be required
under current regulations of the Federal Communications Commission (the "FCC")
to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a
discussion of the Company's plans regarding such divestiture, see "Divestiture
Requirements." The Company also owns and operates three daily newspapers, two
weekly, advertising only publications ("shoppers"), and a paging business, all
located in the Southeast.
In 1993 after the acquisition of a large block of the Class A Common Stock
by a new investor, the Company implemented a strategy to foster growth through
strategic acquisitions. Since January 1, 1994, the Company's significant
acquisitions have included six television stations and two newspapers, all
located in the Southeast. As a result of the Company's acquisitions and in
support of its growth strategy, the Company has added certain key members of
management and has greatly expanded its operations in the television
broadcasting and newspaper publishing businesses.
In August 1997 the Company acquired WITN-TV ("WITN"), a NBC-affiliate
serving the Greenville-Washington-New Bern, North Carolina market which is
ranked as the 106th largest designated market area ("DMA") in the United States
(the "WITN Acquisition").
In April 1997 the Company acquired (the "GulfLink Acquisition") the stock
of GulfLink Communications, Inc. ("GulfLink") of Baton Rouge, Louisiana. The
GulfLink operations include nine transportable satellite uplink trucks.
In January 1996 the Company acquired (the "Augusta Acquisition") WRDW-TV
("WRDW"), a CBS-affiliate serving Augusta, Georgia ( the "Augusta Business"). In
September 1996, the Company purchased from First American Media, Inc. (the
"First American Acquisition") substantially all of the assets of two
CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee,
Florida-Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a
satellite uplink business and a paging business (collectively, the "First
American Business"). Subsequent to the First American Acquisition, the Company
rebranded WKXT with the call letters WVLT ("WVLT').
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In August 1996 the Company sold the assets of KTVE Inc. ("KTVE") serving
Monroe, Louisiana-El Dorado, Arkansas (the "KTVE Sale") for approximately $9.5
million in cash plus the amount of accounts receivable on the date of the
closing (approximately $829,000).
For the year ended December 31, 1997, on a pro forma basis giving effect
to the WITN Acquisition and the GulfLink Acquisition as if they had occurred on
January 1, 1997, the Company had net revenues, Media Cash Flow (the sum of
broadcast cash flow, publishing cash flow and paging cash flow), operating cash
flow and a net loss of $109.1 million, $40.2 million, $37.7 million and $(2.4)
million, respectively. On a pro forma basis giving effect to the WITN
Acquisitions, the GulfLink Acquisition, the First American Acquisition and
the KTVE Sale, as if they had occurred on January 1, 1996, net revenues and net
loss for the year ended December 31, 1997, increased 0.2% and 136.6%,
respectively, while Media Cash Flow and operating cash flow decreased 2.9% and
1.3%, from the pro forma amounts for the year ended December 31, 1996.
PENDING ACQUISITION
In February 1998 the Company announced that it had signed a definitive
purchase agreement to acquire all of the outstanding capital stock of Busse
Broadcasting Corporation ("Busse"). The purchase price is approximately $112.0
million plus Busse's cash and cash equivalents less Busse's indebtedness
including its 11 5/8% Senior Secured Notes due 2000. Busse owns and operates
three VHF television stations: KOLN-TV, the CBS-affiliate operating on Channel
10 in the Lincoln-Hastings-Kearney, Nebraska television market, and its
satellite station KGIN-TV, the CBS-affiliate operating on Channel 11 serving
Grand Island, Nebraska; and WEAU-TV, the NBC-affiliate operating on Channel 13
serving the Eau Claire-La Crosse, Wisconsin market. The purchase of Busse is
subject to FCC approval, and the acquisition is expected to close on or before
September 1, 1998.
WITN ACQUISITION
On August 1, 1997, the Company completed the WITN Acquisition. The
purchase price for the WITN Acquisition was approximately $41.7 million,
including fees, expenses, and working capital and other adjustments. The Company
funded the costs of this acquisition through borrowings under its senior credit
facility (the "Senior Credit Facility").
THE FIRST AMERICAN ACQUISITION, THE KTVE SALE AND THE FINANCING
On September 30, 1996, the Company completed the First American
Acquisition and acquired WCTV and WVLT, a satellite broadcasting business and a
paging business in the Southeast. The purchase price for the First American
Acquisition was approximately $183.9 million, including fees, expenses, and
working capital and other adjustments.
The Company completed the KTVE Sale, on August 20, 1996. The sales price
included $9.5 million in cash plus the amount of accounts receivable on the date
of closing to the extent collected by the buyer (approximately $829,000). The
Company recognized a pre-tax gain of approximately $5.7 million and estimated
income taxes of approximately $2.8 million.
DIVESTITURE REQUIREMENTS
In connection with the First American Acquisition, the FCC ordered the
Company to divest itself of WALB-TV ("WALB") in Albany, Georgia and WJHG-TV
("WJHG") in Panama City, Florida by March
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31, 1997 to comply with regulations governing common ownership of television
stations with overlapping service areas. The FCC is currently reexamining these
regulations, and if it revises them in accordance with the interim policy it has
adopted, divestiture of WJHG would not be required. Accordingly, the Company
requested and in July 1997 received an extension of the divestiture deadline
with regard to WJHG, conditioned upon the outcome of the rulemaking proceedings.
It can not be determined when the FCC will complete its rulemaking on this
subject. Also in July 1997, the Company obtained FCC approval to transfer
control of WALB to a trust with a view towards the trustee effecting (i) a swap
of WALB's assets for assets of one or more television stations of comparable
value and with comparable broadcast cash flow in a transaction qualifying for
deferred capital gains treatment under the "like-kind exchange" provision of
Section 1031 of the Internal Revenue Code of 1986, or (ii) a sale of such
assets. Under the trust arrangement, the Company relinquished operating control
of the station to a trustee while retaining the economic risks and benefits of
ownership. If the trustee is required to effect a sale of WALB, the Company
would incur a significant gain and related tax liability. The FCC allowed up to
six months for the trustee to file an application seeking the agency's approval
of a swap or sale. This six month period expired in January 1998 without a swap
or sale being executed. The trustee has filed an application requesting a six
month extension to effect a swap or sale. The FCC has not yet ruled on this
extension application.
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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 1997 MARKET REPORT, FOURTH EDITION
NOVEMBER 1997 RATINGS PUBLISHED BY BIA PUBLICATIONS, INC., EXCEPT FOR REVENUES
IN WYMT-TV'S ("WYMT") 18-COUNTY TRADING AREA WHICH IS NOT SEPARATELY REPORTED IN
SUCH BIA PUBLICATIONS, INC.'S REPORT; (II) "IN-MARKET SHARE OF HOUSEHOLDS
VIEWING TELEVISION" REPRESENTS THE PERCENTAGE OF THE STATION'S AUDIENCE AS A
PERCENTAGE OF ALL VIEWING BY HOUSEHOLDS IN THE MARKET FROM 6 A.M. TO 2 A.M.
SUNDAY THROUGH SATURDAY, INCLUDING VIEWING OF NON-COMMERCIAL STATIONS, NATIONAL
CABLE CHANNELS AND OUT-OF-MARKET STATIONS BROADCAST OR CARRIED BY CABLE IN THE
MARKET;(III) "STATION RANK IN DMA" IS BASED ON NIELSEN ESTIMATES FOR NOVEMBER
1997 FOR THE PERIOD FROM 6 A.M. TO 2 A.M. SUNDAY THROUGH SATURDAY; AND (IV)
AVERAGE HOUSEHOLD INCOME, EFFECTIVE BUYING INCOME AND RETAIL BUSINESS SALES
GROWTH PROJECTIONS ARE AS REPORTED IN INVESTING IN TELEVISION 1997 MARKET
REPORT, FOURTH EDITION NOVEMBER 1997 RATINGS AS PUBLISHED BY BIA PUBLICATIONS,
INC. (THE "BIA GUIDE").
Total In-Market
Commercial Station Market Share of
DMA Stations in Rank in Television Revenues in Households
Station Market Rank (1) DMA(2) DMA Households(3) DMA for 1997 Viewing TV
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(IN THOUSANDS)
WVLT Knoxville, TN 64 5 2 441,000 $62,100 24%
WKYT Lexington, KY 67 6 1 403,000 53,300 36
WYMT(4) Hazard, KY 67 N/A 1 175,000 4,800 28
WITN Greenville-Washington-106 4 2 234,000 27,700 29
New Bern, NC
WRDW Augusta, GA 109 4 1 226,000 30,500 38
WCTV Tallahassee,FL- 112 4 1 221,000 22,000 56
Thomasville, GA
WALB (5) Albany, GA 148 4 1 138,000 13,800 77
WJHG(5) Panama City, FL 157 4 1 117,000 10,900 53
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(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 1997
Nielsen estimates.
(2) Includes independent broadcasting stations.
(3) Based upon the approximate number of television households in the DMA as
reported by the November 1997 Nielsen index.
(4) The market area served by WYMT is an 18-county trading area, as defined by
Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station
rank is based upon its ratings position in the 18-county trading area.
(5) The Company is required to divest WALB and WJHG under current FCC
regulations. For a discussion of the Company's plan, see "Divestiture
Requirements."
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The percentage of the Company's total revenues contributed by the
Company's television broadcasting segment was approximately 69.8%, 69.3% and
62.7% for each of the years ended December 31, 1997, 1996 and 1995,
respectively.
In the following description of each of the Company's stations, all
information set forth below concerning Total Market Revenues, average household
income, projected effective buying income and projected retail business sales
growth has been derived from the BIA Guide.
WVLT, THE CBS-AFFILIATE IN KNOXVILLE, TENNESSEE
WVLT, acquired by the Company in September 1996, began operations in 1988.
Knoxville, Tennessee is the 64th DMA in the United States, with approximately
441,000 television households and a total population of approximately 1.1
million. Total Market Revenues in the Knoxville DMA in 1997 were approximately
$62.1 million, a 2% increase over 1996. According to the BIA Guide, the average
household income in the Knoxville DMA in 1995 was $33,774, with effective buying
income projected to grow at an annual rate of 5.6% through 2000. Retail business
sales growth in the Knoxville DMA is projected by the BIA Guide to average 5.9%
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 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. Area tourist
attractions are the Great Smokey Mountains National Park and Dollywood, a
country-western theme park sponsored by Dolly Parton.
WKYT, THE CBS-AFFILIATE IN LEXINGTON, KENTUCKY
WKYT, acquired by the Company in September 1994, began operations in 1957.
Lexington, Kentucky is the 67th largest DMA in the United States, with
approximately 403,000 television households and a total population of
approximately 1.1 million. Total Market Revenues in the Lexington DMA in 1997
were approximately $53.3 million, a 3% increase over 1996. According to the BIA
Guide, the average household income in the Lexington DMA in 1995 was $32,836,
with effective buying income projected to grow at an annual rate of 5.8% through
2000. Retail business sales growth in the Lexington DMA is projected by the BIA
Guide to average 5.8% 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 40 counties in central
and eastern Kentucky. The Lexington area is a regional hub for shopping,
business, healthcare, education, and cultural activities and has a comprehensive
transportation network and low commercial utility rates. Major employers in the
Lexington area include Toyota Motor Corp., Lexmark International, Inc., GTE
Corporation, Square D Company, Ashland, Inc., 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 is also
located in Lexington. In
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addition, Lexington is an international center of the equine industry with the
Kentucky Horse Park, a 1,000 acre park that attracts approximately 730,000
visitors annually.
WYMT, THE CBS-AFFILIATE IN HAZARD, KENTUCKY
WYMT, acquired by the Company in September 1994, began operations in 1985.
WYMT has carved out a niche trading area comprising 18 counties in eastern and
southeastern Kentucky. This trading area is a separate marketing area of the
Lexington, Kentucky DMA with approximately 175,000 television households and a
total population of approximately 460,000. WYMT is the only commercial
television station in this 18-county trading area. Total Market Revenues in the
18-county trading area for the year ended December 31, 1997, were approximately
$4.8 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 broadcast station which can be received
over the air in a large portion of its 18-county trading area and may now be
viewed on 93 cable systems.
The trading area's economy is centered around coal and related industries
and some light manufacturing. In recent years, the coal industry has undergone a
major restructuring due to consolidation in the industry and advances in
technology. Approximately 12,000 manufacturing jobs exist in the Hazard trading
area, most of which are concentrated in the Cumberland Valley area, a Kentucky
Area Development District located in the southern portion of the 18-county
trading area.
WITN, THE NBC-AFFILIATE IN GREENVILLE-WASHINGTON-NEW BERN, NORTH CAROLINA
WITN, acquired by the Company in August 1997, began operations in 1955.
Greenville-Washington-New Bern, North Carolina is the 106th largest DMA in the
United States, with approximately 234,000 television households and a total
population of approximately 673,000. Total Market Revenues in the
Greenville-Washington-New Bern DMA in 1997 were approximately $27.7 million, a
4% increase over 1996. According to the BIA Guide, the average household income
in the Greenville-Washington-New Bern DMA in 1995 was $35,260, with effective
buying income projected to grow at an annual rate of 5.9% through 2000. Retail
business sales growth in the Greenville-Washington-New Bern DMA is projected by
the BIA Guide to average 5.9% annually during the same period. The
Greenville-Washington-New Bern DMA has four licensed commercial television
stations, all of which are affiliated with major networks. The
Greenville-Washington-New Bern DMA also has two public television stations.
MARKET DESCRIPTION. The Greenville-Washington-New Bern 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. The Greenville-Washington-New Bern economy centers
around education, manufacturing, and agriculture. Leading employers in the area
include: East Carolina University, Catalytica Pharmaceuticals, Inc., PCS
Phosphate, Rubber Maid Cleaning Products, Inc., and Weyerhauser Co.
WRDW, THE CBS-AFFILIATE IN AUGUSTA, GEORGIA
WRDW, acquired by the Company in January 1996, began operations in 1954.
Augusta, Georgia is the 109th largest DMA in the United States, with
approximately 226,000 television households and a total
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population of approximately 637,000. Total Market Revenues in the Augusta DMA in
1997 were approximately $30.5 million, a 2% increase over 1996. According to the
BIA Guide, the average household income in the Augusta DMA in 1995 was $32,830,
with effective buying income projected to grow at an annual rate of 3.5% through
2000. Retail business sales growth in the Augusta DMA is projected by the BIA
Guide to average 3.5% annually during the same period. The Augusta DMA has four
licensed commercial television stations, all of which are affiliated with a
major network. The Augusta DMA also has two public television stations.
MARKET DESCRIPTION. The Augusta DMA consists of 19 counties in eastern
Georgia and western South Carolina, including the cities of Augusta, Georgia and
North Augusta and Aiken, South Carolina. The Augusta, Georgia area is one of
Georgia's major metropolitan/regional centers, with a particular emphasis on
health services, manufacturing and the military. The Federal government employs
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 42 years.
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 112th largest DMA in the United
States, with approximately 221,000 television households and a total population
of approximately 619,000. Total Market Revenues in the Tallahassee-Thomasville
DMA in 1997 were approximately $22.0 million, a 3% increase over 1996. According
to the BIA Guide, the average household income in the Tallahassee,
Florida-Thomasville, Georgia DMA in 1995 was $33,687, with effective buying
income projected to grow at an annual rate of 5.2% through 2000. Retail business
sales growth in the Tallahassee, Florida-Thomasville, Georgia DMA is projected
by the BIA Guide to average 5.4% annually during the same period. The
Tallahassee-Thomasville DMA has four licensed commercial television stations,
all of which are affiliated with major networks. The Tallahassee-Thomasville DMA
also has one public 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, Florida A&M University, Tallahassee Community College, Thomas
College and Valdosta State University. Florida State University is the largest
university located in the DMA and its main campus is located within the city of
Tallahassee.
WALB, THE NBC-AFFILIATE IN ALBANY, GEORGIA
WALB was founded by the Company and began operations in 1954. Albany,
Georgia is the 148th largest DMA in the United States with approximately 138,000
television households and a total population of approximately 395,000. Total
Market Revenues in the Albany DMA in 1997 were approximately $13.8 million, a 2%
increase over 1996. According to the BIA Guide, the average household income in
the Albany DMA in 1995 was $28,830, with effective buying income projected to
grow at an annual rate of 4.5% through 2000. Retail business sales growth in the
Albany DMA is projected by the BIA Guide to average 4.5% annually during the
same period. The Albany DMA has four licensed commercial television stations,
three of which are affiliated with networks. The Albany DMA also has one public
television station.
MARKET DESCRIPTION. The Albany DMA, consists of 18 counties in southwest
Georgia. Albany, 170 miles south of Atlanta, is a regional center for
manufacturing, agriculture, education, health care and
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military service. Leading employers in the area include: The Marine Corps
Logistics Base, Phoebe Putney Memorial Hospital, the Proctor & Gamble Company,
Miller Brewing Company, Cooper Tire & Rubber Company, Bob's Candies, Coats and
Clark Inc., Merck & Co., Inc., MacGregor (USA) Inc. and M&M/Mars. Albany State
College and Darton College are also located within this area.
WJHG, THE NBC-AFFILIATE IN PANAMA CITY, FLORIDA
WJHG, acquired by the Company in 1960, began operations in 1953. Panama
City, Florida is the 157th largest DMA in the United States, with approximately
117,000 television households and a total population of approximately 318,000.
Total Market Revenues in the Panama City DMA in 1997 were approximately $10.9
million, a 3% increase over 1996. According to the BIA Guide, the average
household income in the Panama City DMA in 1995 was $33,357, with effective
buying income projected to grow at an annual rate of 5.9% through 2000. Retail
business sales growth in the Panama City DMA is projected by the BIA Guide to
average 5.7% annually during the same period. The Panama City DMA has four
licensed commercial television stations, three of which are affiliated with
major networks. In addition, a CBS signal is provided by a station in Dothan,
Alabama, an adjacent DMA.
The Panama City DMA also has one public television station.
MARKET DESCRIPTION. The Panama City DMA consists of nine counties in
northwest Florida. The Panama City market stretches north from Florida's Gulf
Coast to Alabama's southern border. The Panama City economy centers around
tourism, military bases, manufacturing, education and financial services. Panama
City is the county seat and principal city of Bay County. Leading employers in
the area include: Tyndall Air Force Base, the Navy Coastal Systems Station,
Sallie Mae Servicing Corp., Stone Container Corporation, Arizona Chemical
Corporation and Gulf Coast Community College.
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 The Golf
Channel, USA Network, Turner Cable Network Services, NBC, CBS, ABC, Home Box
Office, MTV, The Children's Miracle Network and many other broadcast and cable
services. In April 1997 the Company acquired GulfLink of Baton Rouge, Louisiana.
INDUSTRY BACKGROUND
There are currently a limited number of channels available for
broadcasting in any one geographic area, and the license to operate a television
station is granted by the FCC. Television stations which broadcast over the very
high frequency ("VHF") band (channels 2-13) of the spectrum generally have some
competitive advantage over television stations which broadcast over the
ultra-high frequency ("UHF") band (channels above 13) of the spectrum, because
the former usually have better signal coverage and operate at a lower
transmission cost. However, the improvement of UHF transmitters and receivers,
the complete elimination from the marketplace of VHF-only receivers and the
expansion of cable television systems have reduced the VHF signal advantage.
Television station revenues are primarily derived from local, regional and
national advertising and, to a much lesser extent, from network compensation and
revenues from studio and tower space rental and commercial production
activities. Advertising rates are based upon a variety of factors, including a
program's popularity among the viewers an advertiser wishes to attract, the
number of advertisers competing for the available time, the size and demographic
makeup of the market served by the station and the availability of alternative
advertising media in the market area. Rates are also determined by a station's
overall ratings and in-market share, as well as the station's ratings and share
among particular demographic groups which an advertiser may be targeting.
Because broadcast
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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, Inc. ("ABC"), NBC, CBS, and Fox
dominate broadcast television. Additionally, United Paramount Network ("UPN")
and Warner Brothers Network ("WB") have been launched as new television
networks. An affiliate of UPN or WB receives a smaller portion of each day's
programming from its network compared to an affiliate of the four major
networks.
The affiliation of a station with one of the four major networks has a
significant impact on the composition of the station's programming, revenues,
expenses and operations. A typical affiliate of a major network receives the
majority of each day's programming from the network. This programming, along
with cash payments (`network compensation"), is provided to the affiliate by the
network in exchange for a substantial majority of the advertising time sold
during the airing of network programs. The network then sells this advertising
time and retains the revenues. The affiliate retains the revenues from time sold
during breaks in and between network programs and programs the affiliate
produces or purchases from non-network sources. In acquiring programming to
supplement programming supplied by the affiliated network, network affiliates
compete primarily with other affiliates and independent stations in their
markets. Cable systems generally do not compete with local stations for
programming, although various national cable networks from time to time have
acquired programs that would have otherwise been offered to local television
stations. In addition, a television station may acquire programming through
barter arrangements. Under barter arrangements, which are becoming increasingly
popular with both network affiliates and independents, a national program
distributor may receive advertising time in exchange for the programming it
supplies, with the station paying a reduced fee for such programming. 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 UPN or WB must purchase or produce a greater amount
of its programming, resulting in generally higher programming costs. These
affiliate stations, however, retain a larger portion of the inventory of
advertising time and the revenues obtained therefrom compared to stations
affiliated with the major networks.
Cable-originated programming has emerged as a significant competitor for
viewers of broadcast television programming, although no single cable
programming network regularly attains audience levels amounting to more than a
small fraction of any single major broadcast network. The advertising share of
cable networks 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.
10
NETWORK AFFILIATION OF THE STATIONS
Each of the Company's stations is affiliated with a major network pursuant
to an affiliation agreement. Each affiliation agreement provides the affiliated
station with the right to broadcast all programs transmitted by the network with
which the station is affiliated. In return, the network has the right to sell a
substantial majority of the advertising time during such broadcasts. In exchange
for every hour that a station elects to broadcast network programming, the
network pays the station a specific network compensation payment which varies
with the time of day. Typically, prime-time programming generates the highest
hourly network compensation payments. Such payments are subject to increase or
decrease by the network during the term of an affiliation agreement with
provisions for advance notices and right of termination by the station in the
event of a reduction in such payments. The NBC affiliation agreements for WALB
and WJHG are renewed automatically every five years unless the station notifies
NBC otherwise. The NBC affiliation agreement with WITN expires on June 30, 2006.
The CBS affiliation agreements for WKYT, WYMT, WRDW, WCTV and WVLT expire on
December 31, 2004, December 31, 2004, March 31, 2005, December 31, 1999, and
December 31, 2004, respectively.
NEWSPAPER PUBLISHING
The Company owns and operates five publications comprising three
newspapers and two shoppers, all located in the Southeast. The percentage of
total company revenues contributed by the newspaper publishing segment was
approximately 23.7%, 28.8% and 37.3% for each of the years ended December 31,
1997, 1996 and 1995, respectively.
THE ALBANY HERALD
The Albany Herald Publishing Company, Inc. ("The Albany Herald"), located
in Albany, Georgia, publishes THE ALBANY HERALD, which is the only
seven-day-a-week newspaper that serves southwest Georgia. The Company converted
THE ALBANY HERALD from an afternoon newspaper to a morning newspaper in 1993 and
over the last five years has improved THE ALBANY HERALD'S graphics and layout,
expanded local news coverage and expanded delivery zones on peak advertising
days. These changes have allowed the Company to increase THE ALBANY HERALD'S
newsstand and subscription prices as well as its advertising rates. The Company
intends to increase selectively the price and advertising rates of THE ALBANY
HERALD in the future.
The Albany Herald also publishes three other weekly editions in Georgia,
THE LEE COUNTY HERALD, THE WORTH COUNTY HERALD, and THE CALHOUN-CLAY HERALD, all
of which provide regional news coverage. Other niche publications include FARM
AND PLANTATION, an agricultural paper; a monthly coupon clipper and an annual
bridal book. The Company introduced these weeklies and other niche product
publications in order to better utilize The Albany Herald's printing presses and
infrastructure (such as sales and advertising). The printing press is
approximately 20 years old and is in good working order. The Albany Herald
cross-merchandises its publications, thereby increasing total revenues with only
a small increase in related expenditures. The Company also seeks to increase THE
ALBANY HERALD'S circulation and revenues through its sponsorship of special
events of local interest.
THE ROCKDALE CITIZEN and the GWINNETT DAILY POST
THE ROCKDALE CITIZEN and the GWINNETT DAILY POST are six-day-a-week
newspapers that serve communities in the metro Atlanta area with complete local
news, sports and lifestyles coverage together with national stories that
directly impact their local communities.
11
The Rockdale Citizen Publishing Company is located in Conyers, Georgia,
the county seat of Rockdale County, which is 19 miles east of downtown Atlanta.
Rockdale County's population is estimated to be approximately 65,000.
The Gwinnett Daily Post, which was purchased by the Company in January
1995, is located north of Atlanta in Gwinnett County, one of the fastest growing
areas in the nation. Since the purchase of the Gwinnett Daily Post, the
frequency of publication has increased from three to six days per week in an
effort to establish a daily newspaper and increase market share.
In 1997, the Gwinnett Daily Post entered into an agreement with
CableVision Communications, Inc. ("Cable Vision"), a local cable provider, that
resulted in a subscription to the GWINNETT DAILY POST being included in the
basic cable package purchased by cable subscribers. As a result, the GWINNETT
DAILY POST'S paid circulation tripled to 49,000 in 1997, and the Company started
a local Gwinnett TV news channel, Gwinnett News and Entertainment Television
("GNET"), which is produced by the Company and broadcast on the local cable
system.
On October 30, 1997, the Gwinnett Daily Post entered into a similar
agreement with Genesis Cable Communications LLC ("Genesis"). Upon the completion
of this alliance on March 1, 1998, paid circulation for the GWINNETT DAILY POST
will be approximately 64,000.
The Company's operating strategy with respect to The Rockdale Citizen
and the Gwinnett Daily Post is to increase circulation by improving the print
quality, increasing the local news content and increasing their promotional
efforts. Additionally, the Gwinnett Daily Post is increasing its circulation
through the cable alliances with Cable Vision and Genesis. The Gwinnett Daily
Post intends to build upon this additional circulation in order to increase
advertising revenues. In 1997, the Company made a capital investment of
approximately $3.9 million to upgrade and expand the newspaper and GNET
production facilities including the installation of a new press at The Rockdale
Citizen.
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 has recently
resulted in reduced retail advertising expenditures. Classified advertising,
which makes up approximately one-third of newspaper advertising expenditures,
can be affected by an economic slowdown and its effect on employment, real
estate transactions and automotive sales. However, growth in housing starts and
automotive sales, although cyclical in nature, generally provide continued
growth in newspaper advertising expenditures.
PAGERS AND PAGING SERVICES
THE PAGING BUSINESS
The paging business, acquired by the Company in September 1996 is based in
Tallahassee, Florida and operates in Columbus, Macon, Albany, and Valdosta,
Georgia, in Dothan, Alabama, in Tallahassee, Gainesville, Orlando and Panama
City, Florida and in certain contiguous areas. The population of the paging
business geographic coverage area is approximately 5.9 million. In 1997, the
Company's paging and specialized mobile radio ("SMR") business had approximately
67,000 units in service, representing a penetration rate of approximately 2.5%.
The percentage of total Company revenues contributed by the
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paging segment was approximately 6.5% and 1.9% for each of the years ended
December 31, 1997, and 1996, 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.
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 75% are customer owned
and maintained ("COAM") with the remainder being leased. In recent years, prices
for pagers have fallen considerably, and thus there has been a trend toward
subscriber ownership of pagers, allowing the Company to maintain lower inventory
and fixed asset levels. COAM customers historically stay on service longer, thus
enhancing the stability of the subscriber base and earnings. The Company is
focusing its marketing efforts on increasing its base of COAM users. The Company
purchases the majority of its pagers from two suppliers, INTEK and Motorola,
with Motorola supplying a majority of such pagers. Due to the high demand from
the Company's customers for Motorola pagers, the Company believes that its
ability to offer Motorola pagers is important to its business.
The Company's goal is to increase the number of pagers in service,
revenues and cash flow from operations by implementing a plan that focuses on
improved operating methods and controls and innovative marketing programs. The
Company's paging business has grown in recent years by: (i) increasing the
number of business customers; (ii) expanding its resale program; (iii)
increasing its retail operations, and (iv) increasing the Company's geographical
coverage.
INDUSTRY BACKGROUND
Paging is a method of wireless communication which uses an assigned radio
frequency to contact a paging subscriber within a designated service area. A
subscriber carries a pager which receives messages by the broadcast of a radio
signal. To contact a subscriber, a message is usually sent by placing a
telephone call to the subscriber's designated telephone number. The telephone
call is received by an electronic paging switch which generates a signal that is
sent to radio transmitters in the subscriber's service area. The transmitters
broadcast a coded signal that is unique to the pager carried by the subscriber
and alerts the subscriber through a tone or vibration that there is a voice,
numeric, alphanumeric or other message. Depending upon the topography of the
service area, the operating radius of a radio transmitter typically ranges from
three to 20 miles.
Three tiers of carriers have emerged in the paging industry: (i) large
nationwide providers serving multiple markets throughout the United States; (ii)
regional carriers, like the Company's paging business, which operate in regional
markets such as several contiguous states in one geographic region of the United
States; and (iii) small, single market operators. The Company believes that the
paging industry is undergoing consolidation.
13
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 K 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 on the basis of program
popularity, which has a direct effect on advertising rates. A substantial
portion of the daily programming on each of the Company's stations is supplied
by the network with which each station is affiliated. During those periods, the
stations are totally dependent upon the performance of the network programs to
attract viewers. There can be no assurance that such programming will achieve or
maintain satisfactory viewership levels in the future. Non-network time periods
are programmed by the station with a combination of self-produced news, public
affairs and other entertainment programming, including news and syndicated
programs purchased for cash, cash and barter, or barter only.
Independent stations, whose number has increased significantly over the
past decade, have also emerged as viable competitors for television viewership
shares. In addition, UPN and WB have been launched recently as new television
networks. The Company is unable to predict the effect, if any, that such
networks will have on the future results of the Company's operations.
In addition, the development of methods of television transmission of
video programming other than over-the-air broadcasting, and in particular cable
television, has significantly altered competition for audience in the television
industry. These other transmission methods can increase competition for a
broadcasting station by bringing into its market distant broadcasting signals
not otherwise available to the station's audience and also by serving as a
distribution system for non-broadcast programming. Historically, cable operators
have not sought to compete with broadcast stations for a share of the local news
audience. Recently, however, certain cable operators do compete for such
audiences and the increased competition could have an adverse effect on the
Company's advertising revenues.
Other sources of competition include home entertainment systems, "wireless
cable" services, satellite master antenna television systems, low power
television stations, television translator stations and direct broadcast
satellite ("DBS") video distribution services.
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). Cable systems
generally do not compete
14
with local stations for programming, although various national cable networks
from time to time have acquired programs that would have otherwise been offered
to local television stations. Competition exists for exclusive news stories and
features as well.
ADVERTISING. Advertising rates are based upon the size of the market in
which the station operates, a 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 and local cable systems.
Competition for advertising dollars in the broadcasting industry occurs
primarily within individual markets.
NEWSPAPER INDUSTRY
The Company's newspapers compete for advertisers with a number of other
media outlets, including magazines, radio and television, as well as other
newspapers, which also compete for readers with the Company's publications. 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 also seeks
to establish its publications as the local newspaper by sponsoring special
events of particular community interest.
PAGING INDUSTRY
The paging industry is highly competitive. Companies in the industry
compete on the basis of price, coverage area offered to subscribers, available
services offered in addition to basic numeric or tone paging, transmission
quality, system reliability and customer service. The Company competes by
maintaining competitive pricing of its product and service offerings, by
providing high-quality, reliable transmission networks and by furnishing
subscribers a superior level of customer service.
The Company's primary competitors include those paging companies that
provide wireless service in the same geographic areas in which the Company
operates. The Company experiences competition from one or more competitors in
all locations in which it operates. Some of the Company's competitors have
greater financial and other resources than the Company.
The Company's paging services also compete with other wireless
communications services such as cellular service. The typical customer uses
paging as a low cost wireless communications alternative either on a stand-alone
basis or in conjunction with cellular services. However, future technological
developments in the wireless communications industry and enhancements of current
technology could create new products and services, such as personal
communications services and mobile satellite services, which are competitive
with the paging services currently offered by the Company. Recent and proposed
regulatory changes by the FCC are aimed at encouraging such technological
developments and new services and promoting competition. There can be no
assurance that the Company's paging business would not be adversely affected by
such technological developments or regulatory changes.
15
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 WALB, WJHG, WITN,
WKYT, WYMT, WRDW, WCTV and WVLT are effective until April 1, 2005, February 1,
2005, December 1, 2004, August 1, 2005, August 1, 2005, April 1, 2005, April 1,
2005 and August 1, 2005, respectively. The Telecommunications Act requires a
broadcast license to be renewed if the FCC finds that: (i) the station has
served the public interest, convenience and necessity; (ii) there have been no
serious violations of either the Telecommunications Act or the FCC's rules and
regulations by the licensee; and (iii) there have been no other violations,
which taken together would constitute a pattern of abuse. At the time an
application is made for renewal of a television license, parties in interest may
file petitions to deny, and such parties, including members of the public, may
comment upon the service the station has provided during the preceding license
term and urge denial of the application. If the FCC finds that the licensee has
failed to meet the above-mentioned requirements, it could deny the renewal
application or grant a conditional approval, including renewal for a lesser
term. The FCC will not consider competing applications contemporaneously with a
renewal application. Only after denying a renewal application can the FCC accept
and consider competing applications for the license. Although in substantially
all cases broadcast licenses are renewed by the FCC even when petitions to deny
or competing applications are filed against broadcast license renewal
applications, there can be no assurance that the Company's stations' licenses
will be renewed. The Company is not aware of any facts or circumstances that
could prevent the renewal of the licenses for its stations at the end of their
respective license terms.
MULTIPLE OWNERSHIP RESTRICTIONS. Currently, the FCC has rules that limit
the ability of individuals and entities to own or have an ownership interest
above a certain level (an "attributable" interest, as defined more fully below)
in broadcast stations, as well as other mass media entities. The current rules
limit the number of radio and television stations that may be owned both on a
national and a local basis. On a national basis, the rules preclude any
individual or entity from having an attributable interest in co-owned television
stations whose aggregate audience reach exceeds 35% of all United States
households.
On a local basis, FCC rules currently allow an individual or entity to
have an attributable interest in only one television station in a market. In
addition, FCC rules and the Telecommunications Act generally prohibit an
individual or entity from having an attributable interest in a television
station and a radio station, daily newspaper or cable television system that is
located in the same local market area served by the television station.
Proposals currently before the FCC could substantially alter these standards.
For example, in a pending rulemaking proceeding, the FCC suggested narrowing the
geographic scope of the local television cross-ownership rule (the so-called
"duopoly rule") from Grade B to Grade A contours for stations in adjacent
markets and possibly permitting some two-station combinations within certain
markets. The FCC has also proposed eliminating the TV-radio cross-ownership
restriction (the so-called
16
"one-to-a-market" rule) entirely or at least exempting larger markets. In
addition, the FCC is seeking comment on issues of control and attribution with
respect to local marketing agreements entered into by television stations. It is
unlikely that this rulemaking will be concluded until late 1998 or later, and
there can be no assurance that any of these rules will be changed or what will
be the effect of any such change.
The Telecommunications Act also directs the FCC to extend its
one-to-a-market (TV-Radio) waiver policy from the top 25 to any of the top 50
markets. In addition, the Telecommunications Act directs the FCC to permit a
television station to affiliate with two or more networks unless such dual or
multiple networks are composed of (i) two or more of the four existing networks
(ABC, CBS, NBC, or FOX) or, (ii) any of the four existing networks and one of
the two emerging networks (UPN or WBN). The Company believes that Congress does
not intend for these limitations to apply if such networks are not operated
simultaneously, or if there is no substantial overlap in the territory served by
the group of stations comprising each of such networks. The Telecommunications
Act also directs the FCC to revise its rules to permit cross-ownership interests
between a broadcast network and cable system. The Telecommunications Act further
authorizes the FCC to consider revising its rules to permit common ownership of
co-located broadcast stations and cable systems.
Expansion of the Company's broadcast operations in particular areas and
nationwide will continue to be subject to the FCC's ownership rules and any
changes the FCC or Congress may adopt. Any relaxation of the FCC's ownership
rules may increase the level of competition in one or more of the markets in
which the Company's stations are located, particularly to the extent that the
Company's competitors may have greater resources and thereby be in a better
position to capitalize on such changes.
Under the FCC's ownership rules, a direct or indirect purchaser of certain
types of securities of the Company could violate FCC regulations if that
purchaser owned or acquired an "attributable" or "meaningful" interest in other
media properties in the same areas as stations owned by the Company or in a
manner otherwise prohibited by the FCC. All officers and directors of a
licensee, as well as general partners, uninsulated limited partners and
stockholders who own five percent or more of the voting power of the outstanding
common stock of a licensee (either directly or indirectly), generally will be
deemed to have an "attributable" interest in the licensee. Certain institutional
investors which exert no control or influence over a licensee may own up to 10%
of the voting power of the outstanding common stock before attribution occurs.
Under current FCC regulations, debt instruments, non-voting stock, certain
limited partnership interests (provided the licensee certifies that the limited
partners are not "materially involved" in the management and operation of the
subject media property) and voting stock held by minority stockholders in cases
in which there is a single majority stockholder generally are not subject to
attribution. The FCC's cross-interest policy, which precludes an individual or
entity from having a "meaningful" (even though not "attributable") interest in
one media property and an "attributable" interest in a broadcast cable or
newspaper property in the same area, may be invoked in certain circumstances to
reach interests not expressly covered by the multiple ownership rules.
In January 1995, the FCC released a Notice of Proposed Rule Making
("NPRM") designed to permit a "thorough review of [its] broadcast media
attribution rules." Among the issues on which comment was sought are (i) whether
to change the voting stock attribution benchmarks from five percent to 10% and,
for passive investors, from 10% to 20%; (ii) whether there are any circumstances
in which non-voting stock interests, which are currently considered
non-attributable, should be considered attributable; (iii) whether the FCC
should eliminate its single majority shareholder exception (pursuant to which
voting interests in excess of five percent are not considered cognizable if a
single majority shareholder owns more than 50% of the voting power); (iv)
whether to relax insulation standards for business development companies and
other widely-held limited partnerships; (v) how to treat limited liability
companies and other new business forms for attribution purposes; (vi) whether to
eliminate or codify the cross-interest policy; and, (vii) whether to adopt a new
policy which would consider whether multiple "cross interests" or other
significant business relationships (such as time brokerage agreements, debt
relationships or
17
holdings of nonattributable interests), which individually do not raise
concerns, raise issues with respect to diversity and competition. At this time,
the Company is unable to predict when this inquiry will be completed and there
can be no assurance that any of these standards will be changed. Should the
attribution rules be changed, the Company is unable to predict what, if any,
effect it would have on the Company or its activities. To the best of the
Company's knowledge, no officer, director or five percent stockholder of the
Company currently holds an interest in another television station, radio
station, cable television system or daily newspaper that is inconsistent with
the FCC's ownership rules and policies or with ownership by the Company of its
stations.
ALIEN OWNERSHIP RESTRICTIONS. The Communications Act restricts the ability
of foreign entities or individuals to own or hold interests in broadcast
licenses. Foreign governments, representatives of foreign governments,
non-citizens, representatives of non-citizens, and corporations or partnerships
organized under the laws of a foreign nation are barred from holding broadcast
licenses. Non-citizens, collectively, may directly or indirectly own or vote up
to 20% of the capital stock of a licensee. 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, the license renewal process (particularly the weight to be given to the
expectancy of renewal for an incumbent broadcast licensee and the criteria to be
applied in deciding contested renewal applications), spectrum use fees,
political advertising rates, potential advertising restrictions on the
advertising of certain products (beer and wine, for example), the rules and
policies to be applied in enforcing the FCC's equal employment opportunity
regulations, reinstitution of the Fairness Doctrine (which requires broadcasters
airing programming concerning controversial issues of public importance to
afford a reasonable opportunity for the expression of contrasting viewpoints),
and the standards to govern evaluation of television programming directed toward
children and violent and indecent programming (including the possible
requirement of what is commonly referred to as the "v-chip," which would permit
parents to program television sets so that certain programming would not be
accessible by children). Other matters that could affect the Company's broadcast
properties include technological innovations and developments generally
affecting competition in the mass communications industry, such as the recent
initiation of direct broadcast satellite service, and the continued
establishment of wireless cable systems and low power television stations.
The FCC presently is seeking comment on its policies designed to increase
minority ownership of mass media facilities. Congress also recently enacted
legislation that eliminated the minority tax certificate program of the FCC,
which gave favorable tax treatment to entities selling broadcast stations to
entities controlled by an ethnic minority. In addition, a recent Supreme Court
decision has cast doubt upon the continued validity of many of the congressional
programs designed to increase minority ownership of mass media facilities.
18
DISTRIBUTION OF VIDEO SERVICES BY TELEPHONE COMPANIES. Recent actions by
the FCC, Congress and the courts all presage significant future involvement in
the provision of video services by telephone companies. The Company cannot
predict either the timing or the extent of such involvement.
THE 1992 CABLE ACT. On October 5, 1992, Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"). The FCC began implementing the requirements of the 1992 Cable Act in 1993
and final implementation proceedings remain pending regarding certain of the
rules and regulations previously adopted. Certain statutory provisions, such as
signal carriage, retransmission consent and equal employment opportunity
requirements, have a direct effect on television broadcasting. Other provisions
are focused exclusively on the regulation of cable television but can still be
expected to have an indirect effect on the Company because of the competition
between over-the-air television stations and cable systems.
The signal carriage, or "must carry," provisions of the 1992 Cable Act
require cable operators to carry the signals of local commercial and
non-commercial television stations and certain low power television stations.
Systems with 12 or fewer usable activated channels and more than 300 subscribers
must carry the signals of at least three local commercial television stations. A
cable system with more than 12 usable activated channels, regardless of the
number of subscribers, must carry the signals of all local commercial television
stations, up to one-third of the aggregate number of usable activated channels
of such system. The 1992 Cable Act also includes a retransmission consent
provision that prohibits cable operators and other multi-channel video
programming distributors from carrying broadcast stations without obtaining
their consent in certain circumstances. The "must carry" and retransmission
consent provisions are related in that a local television broadcaster, on a
cable system-by-cable-system basis, must make a choice once every three years
whether to proceed under the "must carry" rules or to waive that right to
mandatory but uncompensated carriage and negotiate a grant of retransmission
consent to permit the cable system to carry the station's signal, in most cases
in exchange for some form of consideration from the cable operator. Cable
systems must obtain retransmission consent to carry all distant commercial
stations other than "super stations" delivered via satellite.
Under rules adopted to implement these "must carry" and retransmission
consent provisions, local television stations 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 others the Company's
stations have entered into retransmission consent agreements. This election
entitled the Company's stations to carriage on those systems until at least
December 31, 1999.
ADVANCE TELEVISION SERVICE. The FCC has proposed the adoption of rules
for implementing advanced television ("ATV") service in the United States.
Implementation of digital ATV will improve the technical quality of television
signals receivable by viewers and will provide broadcasters the flexibility to
offer new services, including high-definition television ("HDTV"), simultaneous
broadcasting of multiple programs of standard definition television ("SDTV") and
data broadcasting.
The FCC must adopt ATV service rules and a table of ATV allotments before
broadcasters can provide these services enabled by the new technology. On July
28, 1995, the FCC announced the issuance of a NPRM to invite comment on a broad
range of issues related to the implementation of ATV, particularly the
transition to digital broadcasting. The FCC announced that the anticipated role
of digital broadcasting will cause it to revisit certain decisions made in an
earlier order. The FCC also announced that broadcasters will be allowed greater
flexibility in responding to market demand by transmitting a mix of HDTV, SDTV
and perhaps other services. In February 1998, the FCC acted on numerous
petitions for
19
reconsideration and issued a new table of allotments that expands the channels
(2-51) available for permanent digital broadcasting operations.
The Telecommunications Act directs the FCC, if it issues licenses for ATV,
to limit the initial eligibility for such licenses to incumbent broadcast
licensees. It also authorizes the FCC to adopt regulations that would permit
broadcasters to use such spectrum for ancillary or supplementary services. It is
expected that the FCC will assign all existing television licensees a second
channel on which to provide ATV simultaneously with their current NTSC service.
It is possible after a period of years that broadcasters would be required to
cease NTSC operations, return the NTSC channel to the FCC, and broadcast only
with the newer digital technology. Some members of Congress have advocated
authorizing the FCC to auction either NTSC or ATV channels; however, the
Telecommunications Act allows the FCC to determine when such licenses will be
returned and how to allocate returned spectrum.
Under certain circumstances, conversion to ATV operations would reduce a
station's geographical coverage area but the majority of stations will obtain
service areas that match or exceed the limits of existing operations. Due to
additional equipment costs, implementation of ATV will impose some near-term
financial burdens on television stations providing the service. At the same
time, there is a potential for increased revenues to be derived from ATV.
Although the Company believes the FCC will authorize ATV in the United States,
the Company cannot predict precisely when or under what conditions such
authorization might be given, when NTSC operations must cease, or the overall
effect the transition to ATV might have on the Company's business.
DIRECT BROADCASTING SATELLITE SYSTEMS. The FCC has authorized DBS, a
service which provides video programming via satellite directly to home
subscribers. Local broadcast stations and broadcast network programming are not
carried on DBS systems. Proposals recently advanced in the Telecommunications
Act include a prohibition on restrictions that inhibit a viewer's ability to
receive video programming through DBS services. The FCC has exclusive
jurisdiction over the regulation of DBS service. The Company cannot predict the
impact of this new service upon the Company's business or the impact of possible
legislation on the growth of DBS service.
PAGING
FEDERAL REGULATION. The Company's paging operations, including its SMR
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 and SMR
operations. Licenses issued by the FCC to the Company set forth the technical
parameters, such as signal strength and tower height, under which the Company is
authorized to use those frequencies.
LICENSE GRANT AND RENEWAL. The FCC licenses granted to the Company are
for varying terms of up to 10 years, at the end of which renewal applications
must be approved by the FCC. The Company holds various FCC radio licenses which
are used in connection with its paging and SMR operations. The license
expiration dates for these licenses are staggered, with only a portion of the
licenses expiring in any particular calendar year. The largest group of licenses
will expire during calendar year 1999. Licensees in the paging and SMR 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 have ever been
revoked or modified involuntarily, and such proceedings by the FCC are rarely
undertaken.
20
The FCC has enacted regulations regarding auctions for the award of
radio licenses. Pursuant to such rules, the FCC may, at any time, require
auctions for new or existing services prior to the award of any license, and has
done so in the 800 and 900 MHz SMR service band widths. Accordingly, there can
be no assurance that the Company will be able to procure additional frequencies,
or expand existing paging and SMR networks into new service areas.
In March 1994, the FCC adopted rules pursuant to which the FCC auctions
licenses for blocks of spectrum on a "market area basis." The winner of the
license is given the right to use a certain frequency or group of frequencies
throughout a defined geographic area and can construct and operate its
transmitters throughout this market area without FCC licensing of individual
stations. Existing users of the designated frequencies will be protected from
interference. The FCC has completed auctions to license various radio services
on a market area basis including the first phase of the 800 MHz trunked SMR
auction, which concluded in December 1997. In these auctions, successful bidders
have made significant auction payments in order to obtain spectrum. In the SMR
auction which just closed, the Company was the high bidder for the Tallahassee
and Panama City, Florida; Albany, Valdosta and Tifton, Georgia; and Columbus,
Georgia and Auburn, Alabama markets. The Company filed its long-form auction
application on December 23, 1997, and is not aware of any protests. The time
period for filing protests against the pending application has expired.
Once the Company's application for its licenses is granted, the Company
will be required to meet certain coverage bench marks in order to retain its
licenses. The Company believes that it will be able to build out the markets won
at the auction to meet these bench marks.
With respect to its paging operations, the Company may chose to
participate in the market area licensing auctions for the paging services. The
first such auction, for the 900 MHz paging band is tentatively scheduled for the
third quarter of calendar year 1998. The lower paging bands, e.g., the exclusive
150 Mhz frequencies on which the Company is licensed, are likely to be the
subject of market area licensing auctions in calendar year 1999. There is no
assurance that the Company will be able to successfully bid on its existing
frequencies; however, users of the designated frequencies will be protected from
interference.
EMPLOYEES
As of February 23, 1998, the Company had 1,020 full-time employees, of
which 671 were employees of the Company's stations, 290 were employees of the
Company's publications, 49 were employees of the Company's paging operations and
10 were corporate and administrative personnel. None of the Company's employees
are represented by unions. The Company believes that its relations with its
employees are satisfactory.
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 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 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
21
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 and (iv) 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 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 2. PROPERTIES
The Company's principal executive offices are located at 126 North
Washington Street, Albany, Georgia.
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. The types of properties
required to support newspaper publishing include offices, facilities for the
printing press and production and storage. A station's studios are generally
housed with its offices in business districts. The transmitter sites and antenna
are generally located in elevated areas to provide optimal signal strength and
coverage.
The following table sets forth certain information regarding the Company's
properties.
TELEVISION BROADCASTING
Station/Approximate Owned or
Property Location Use Leased Approximate Size Expiration of Lease
- ---------------------------------------------------------------------------------------------------------------------
WKYT
Lexington, KY Office, studio and Owned 34,500 sq. ft. --
transmission tower site building on 20 acres
WYMT
Hazard, KY Office and studio Owned 21,200 sq. ft. --
building on 2 acres
Hazard, KY Transmission tower site Leased -- June 2005
Hazard, KY Transmitter building and
improvements Owned 1,248 sq. ft. --
WRDW
North Augusta, SC Office and studio Owned 17,000 sq. ft. --
Transmission tower site Owned 143 acres --
WALB
Albany, GA Office and studio Owned 13,700 sq. ft. --
Transmission tower site Owned 23 acres --
WJHG
Panama City, FL Office and studio Owned 14,000 sq. ft. --
Youngstown, FL Transmission tower site Owned 17 acres --
- -----------------------------------------------------------------------------------------------------------------------
22
TELEVISION BROADCASTING (CONTINUED)
Station/Approximate Owned or
Property Location Use Leased Approximate Size Expiration of Lease
- ---------------------------------------------------------------------------------------------------------------------
WVLT
Knoxville, TN Office and studio Owned 18,000 sq. ft. --
Transmission tower site Leased Tower space Dec. 1998
WCTV
Tallahassee, FL Office and studio Leased 21,000 sq. ft. of Dec. 2014
buildings on 37 acres
Metcalf, GA Transmission tower site Leased 182 acres Nov. 1999
WITN
Washington, NC Office and studio Owned 19,600 sq. ft. --
Grifton, NC Transmitter building Owned 4,190 sq. ft. --
Grifton, NC Transmission tower site Leased 9 acres Jan. 1999
Lynqx Communications
Baton Rouge, LA Office and repair site Leased 6,800 sq. ft. Dec. 1999
Tallahassee, FL Office Owned 1,000 sq. ft. --
- -----------------------------------------------------------------------------------------------------------------------
PUBLISHING
Owned or
Company/Property Location Use Leased Approximate Size Expiration of Lease
- -----------------------------------------------------------------------------------------------------------------------
The Albany Herald
Publishing Company,
Inc.
Albany, GA Offices, printing press and Owned 83,000 sq. ft. --
production facility for The
Albany Herald Publishing
Company, Inc.
The Rockdale Citizen
Publishing Company
Conyers, GA Offices for THE ROCKDALE Owned 20,000 sq. ft. --
CITIZEN
Conyers, GA Offices, printing press and Leased 20,000 sq. ft. May 2002
production facility for THE
ROCKDALE CITIZEN and the
GWINNETT DAILY POST
Lawrenceville, GA Offices and production Leased 11,000 sq. ft. Nov 1999
facilities of the GWINNETT
DAILY POST
The Southwest Georgia Offices Owned 5,500 sq. ft. --
Shoppers, Inc.
Tallahassee, FL
23
PAGING
Owned or
Property Location Use Leased Approximate Size Expiration of Lease
- -----------------------------------------------------------------------------------------------------------------------
Albany, GA Sales Office Leased 800 sq. ft. May 2000
Columbus, GA Sales Office Leased 1,000 sq. ft. July 1998
Dothan, AL Sales Office Leased 800 sq. ft. Feb. 2000
Macon, GA Sales Office Leased 1,260 sq. ft. July 1998
Tallahassee, FL Sales Office Leased 1,800 sq. ft. Sept. 2000
Tallahassee, FL General and Administrative Leased 2,400 sq. ft. March 2002
Office
Thomasville, GA Sales Office Leased 300 sq. ft. May 2000
Valdosta, GA Sales Office Leased 400 sq. ft. Sept. 2000
Panama City, FL Sales Office Leased 1,050 sq. ft. Jan. 2000
Gainsville, FL Sales Office Leased 800 sq. ft. Oct. 2000
Central, FL (1) Various Sales Offices (1) Leased (1) (1)
(1) The paging operations have five sales office locations in the Central
Florida region. These offices are leased and average approximately 600 sq.
ft. Three of the leases are month to month with the remaining two leases
expiring in April and October 1999.
The paging operations also lease space on various towers in Florida,
Georgia and Alabama. These tower leases have expiration dates ranging from 1998
to 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings in which an adverse
outcome would have a material adverse effect, either individually or in the
aggregate, upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered.
24
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the executive
officers of the Company:
J. Mack Robinson, age 74, has been President and Chief Executive Officer,
of the Company since September 1996. Mr. Robinson has been Chairman of the Board
of Bull Run Corporation since March 1994, Chairman of the Board and President of
Delta Life Insurance Company and Delta Fire and Casualty Insurance Company since
1958, President of Atlantic American Corporation, an insurance holding company,
from 1988 until 1995 and Chairman of the Board of Atlantic American Corporation
since 1974.
Robert S. Prather, age 53, has been Executive Vice President-Acquisitions
of the Company since September 1996. He has been President and Chief Executive
Officer of Bull Run Corporation since July 1992.
Robert A. Beizer, age 58, has been Vice President for Law and Development
and Secretary of the Company since February 1996. From June 1994 to February
1996 he was of counsel to Venable, Baetjer, Howard & Civiletti, a law firm, in
its regulatory and legislative practice group. From 1990 to 1994 Mr. Beizer was
a partner at the law firm of Sidley & Austin and was head of its communications
practice group in Washington, D.C. He is a past president of the Federal
Communications Bar Association and a member of the ABA House of Delegates.
Joseph A. Carriere, age 65, has been Vice President-Television of the
Company since September 1996. Prior to that appointment, he served as Vice
President-Corporate Sales from February 1996. He has been President and General
Manager of WVLT-TV, Inc., a subsidiary of the Company, since September 1996.
From November 1994 until his appointment as Vice President-Corporate Sales, he
served as President and General Manager of KTVE Inc., a subsidiary of the
Company. Prior to joining the Company in 1994, Mr. Carriere was employed by
Withers Broadcasting Company of Colorado as General Manager from 1991 to 1994.
He has served as a past chairman of the CBS Affiliates Advisory Board and as a
member of the Television Board of Directors of the National Association of
Broadcasters.
William A. Fielder, III, age 39, had been Vice President and Chief
Financial Officer of the Company since August 1993. Prior to this position, he
served as Controller of the Company from April 1991 to August 1993. Effective
March 9, 1998, Mr. Fielder resigned to accept a position with a software
company.
Thomas J. Stultz, age 46, has been Vice President of the Company and
President of the Company's publishing division since February 1996. Prior to
joining the Company, he was employed by Multimedia Newspaper Company, where he
served as Vice President from 1988 to 1995.
25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since June 30, 1995, the Company's Class A Common Stock has been listed
and traded on The New York Stock Exchange (the "NYSE") under the symbol "GCS."
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 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 B Common Stock are as reported by the NYSE since the date of
its initial issuance.
CLASS A COMMON STOCK CLASS B COMMON STOCK
------------------------------------------------------------------------------------
CASH CASH
DIVIDENDS DIVIDENDS
DECLARED PER DECLARED
HIGH LOW SHARE HIGH LOW PER SHARE
-------------------------------------------------------- ------------- -------------
FISCAL 1996
First Quarter $20.38 $15.75 $0.02 --- --- ---
Second Quarter 23.25 18.75 0.02 --- --- ---
Third Quarter 23.13 20.25 0.02 $20.50 $18.00 ---
Fourth Quarter 21.25 17.50 0.02 19.50 14.88 $0.02
FISCAL 1997
First Quarter $20.75 $17.63 $0.02 $19.50 $16.38 $0.02
Second Quarter 22.43 16.75 0.02 20.88 15.38 0.02
Third Quarter 25.63 20.31 0.02 25.50 18.88 0.02
Fourth Quarter 27.88 25.00 0.02 26.13 24.06 0.02
As of February 23, 1998, the Company had 4,534,195 outstanding shares of
Class A Common Stock held by 1,209 shareholders and 3,402,755 outstanding shares
of Class B Common Stock held by 825 shareholders. The number of shareholders
includes shareholders 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. In
1996 the Company amended its Articles of Incorporation to 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, as amended,
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 Senior Subordinated Notes due
2006 (the "Notes") each contain covenants that restrict the ability of the
Company to pay dividends on its capital stock. However, the Company does not
believe that such convenants 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.
26
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are certain selected historical consolidated financial
data of the Company. This information should be read in conjunction with the
Audited Consolidated Financial Statements of the Company and related notes
thereto appearing elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Results of Operations of the
Company." The selected consolidated financial data for, and as of the end of,
each of the years in the five-year period ended December 31, 1997, are derived
from the Audited Consolidated Financial Statements of the Company and its
subsidiaries. Also see pro forma data for the WITN Acquisition, the GulfLink
Acquisition, the First American Acquisition and the Augusta Acquisition in Note
C and the KTVE Sale in Note B to the Company's Audited Consolidated Financial
Statements included elsewhere herein.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997(1) 1996 (2) 1995 (3) 1994 (3) 1993
------------- ------------ -------------------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENTS OF INCOME DATA
Revenues $ 103,548 $ 79,305 $58,616 $36,518 $25,113
Operating Income 20,730 16,079 6,860 6,276 3,531
Income (loss) from continuing operations (1,402) 5,678 931 2,766 1,680
Income (loss) from continuing operations
available to common stockholders (2,812) 5,302 931 2,766 1,680
Income (loss) from continuing operations
available to common stockholders
per common share (4):
Basic (0.36) 0.98 0.21 0.59 0.36
Diluted (0.36) 0.94 0.21 0.59 0.36
Cash dividends per common share (4) $ 0.08 $ 0.08 $ 0.08 $ 0.07 $ 0.07
BALANCE SHEET DATA (AT END OF PERIOD):
Total Assets $ 345,051 $298,664 $78,240 $68,789 $21,372
Long-term Debt $ 227,076 $173,368 $54,324 $52,940 $ 7,759
- ---------------------------------------------------
(1) The financial data reflects the operating results of the WITN Acquisition
and the GulfLink Acquisition, which were completed in 1997, as of their
respective acquisition dates. See Note C to the Company's Audited
Consolidated Financial Statements included elsewhere herein.
(2) The financial data reflects the operating results of the Augusta
Acquisition and the First American Acquisition, as well as the KTVE Sale,
all of which were completed in 1996, as of their respective acquisition,
or disposition, dates. The Company also incurred an extraordinary charge
in connection with the early extinguishment of debt. See Notes B, C and D
to the Company's Audited Consolidated Financial Statements included
elsewhere herein.
(3) The financial data reflects the operating results of various acquisitions
completed in 1994 and 1995 as of their respective acquisition dates. See
Note C of the Company's Audited Consolidated Financial Statements included
elsewhere herein.
(4) On August 17, 1995, the Company's Board of Directors authorized a 50%
stock dividend on the Company's Class A Common Stock payable October 2,
1995 to stockholders of record on September 8, 1995 to effect a three for
two stock split. All applicable share and per share data have been
adjusted to give effect to the stock split.
27
THESE SUMMARIES SHOULD BE READ IN CONJUNCTION WITH THE RELATED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED UNDER ITEM 8.
28
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.
The Company derives its revenues from its television broadcasting,
publishing and paging operations. On February 13, 1998, the Company signed a
definitive purchase agreement to acquire all of the outstanding capital stock of
Busse Broadcasting Corporation ("Busse"). Busse owns and operates three VHF
television stations: KOLN-TV, the CBS affiliate operating on Channel 10 in the
Lincoln-Hastings-Kearney, Nebraska television market, and its satellite station
KGIN-TV, the CBS affiliate operating on Channel 11 serving Grand Island,
Nebraska; and WEAU-TV, the NBC affiliate operating on Channel 13 serving the Eau
Claire-La Crosse, Wisconsin market. The purchase of Busse is subject to FCC
approval; however, the parties expect to close the transaction on or before
September 1, 1998.
On August 1, 1997 the Company purchased substantially all of the assets
of WITN-TV ("WITN"), the NBC affiliate in the Greenville-Washington-New Bern,
North Carolina market (the "WITN Acquisition"). On April 24, 1997, the Company
purchased GulfLink Communications, Inc. (the "GulfLink Acquisition"), which is
in the transportable satellite uplink business, a business in which the Company
was already engaged.
In September 1996, the Company acquired substantially all of the assets
of WKXT-TV ("WKXT"), WCTV-TV ("WCTV"), a satellite uplink and production
services business and a communications and paging business (the "First American
Acquisition"). Subsequent to the First American Acquisition, the Company
rebranded WKXT with the call letters WVLT ("WVLT") as a component of its
strategy to promote the station's upgraded news product. On January 4, 1996, the
Company purchased substantially all of the assets of WRDW-TV (the "Augusta
Acquisition"). The First American Acquisition and the Augusta Acquisition are
collectively referred to as the "1996 Broadcasting Acquisitions." As a result of
these acquisitions, the proportion of the Company's revenues derived from
television broadcasting has increased significantly. The Company anticipates
that the proportion of the Company's revenues derived from television
broadcasting will increase further as a result of the announced acquisition of
Busse, and the completed acquisitions of WITN and GulfLink Communications, Inc.
As a result of the higher operating margins associated with the Company's
television broadcasting operations, the profit contribution of these operations
as a percentage of revenues, has exceeded, and is expected to continue to
exceed, the profit contributions of the Company's publishing and paging
operations. Set forth below, for the periods indicated, is certain information
concerning the relative contributions of the Company's television broadcasting,
publishing and paging operations.
29
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------- -------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------------- ------------------------------------ ------------- -----------
(DOLLARS IN THOUSANDS)
BROADCASTING
Revenues $72,300 69.8% $54,981 69.3% $36,750 62.7%
Operating income(1) 19,309 82.9% 16,989 84.0% 10,585 94.1%
PUBLISHING
Revenues $24,536 23.7% $22,845 28.8% $21,866 37.3%
Operating income(1) 2,810 12.1% 3,167 15.7% 660 5.9%
PAGING
Revenues $ 6,711 6.5% $ 1,479 1.9% $ -0- -0-%
Operating income(1) 1,181 5.0% 71 0.3% -0- -0-%
- ------------------------
(1) Represents income before miscellaneous income (expense), allocation of
corporate overhead, interest expense, income taxes and extraordinary
charge.
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.
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 hours. The ratings of
a local station affiliated with a major network can be affected by ratings of
network programming.
Most broadcast advertising contracts are short-term, and generally run
only for a few weeks. Approximately 56% of the gross revenues of the Company's
television stations for the year ended December 31, 1997, 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
30
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 telephone 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.
The following table sets forth certain operating data for the broadcast,
publishing and paging operations for the years ended December 31, 1997, 1996 and
1995.
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
------------------------------ ---------------
(IN THOUSANDS)
Operating income $20,730 $16,079 $ 6,860
Add:
Amortization of program license rights 3,501 2,743 1,647
Depreciation and amortization 14,519 7,663 3,959
Corporate overhead 2,528 3,219 2,258
Non-cash compensation and contribution
to 401(k) plan, paid in Common Stock 412 1,125 2,612
Less:
Payments for program license liabilities (3,629) (2,877) (1,777)
------ ------ -------
Media cash flow (1) $38,061 $27,952 $15,559
======= ======= =======
- ----------------------
(1) Of media cash flow, $30.5 million, $22.6 million and $13.6 million was
attributable to the Company's broadcasting operations in 1997, 1996, and
1995, respectively; $4.9 million, $5.0 million and $2.0 million was
attributable to the Company's publishing operations in 1997, 1996 and
1995, respectively; and $2.7 million, $401,000 and $-0- was attributable
to the Company's paging operations in 1997, 1996 and 1995, respectively.
"MEDIA CASH FLOW" IS DEFINED AS OPERATING INCOME, PLUS DEPRECIATION AND
AMORTIZATION (INCLUDING AMORTIZATION OF PROGRAM LICENSE RIGHTS), NON-CASH
COMPENSATION AND CORPORATE OVERHEAD, LESS PAYMENTS FOR PROGRAM LICENSE
LIABILITIES. THE COMPANY HAS INCLUDED MEDIA CASH FLOW DATA BECAUSE SUCH DATA ARE
COMMONLY USED AS A MEASURE OF PERFORMANCE FOR MEDIA COMPANIES AND ARE ALSO USED
BY INVESTORS TO MEASURE A COMPANY'S ABILITY TO SERVICE DEBT. MEDIA CASH FLOW IS
NOT, AND SHOULD NOT BE USED AS, AN
31
INDICATOR OR ALTERNATIVE TO OPERATING INCOME, NET INCOME OR CASH FLOW AS
REFLECTED IN THE COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS, AND IS NOT
A MEASURE OF FINANCIAL PERFORMANCE UNDER GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND SHOULD NOT BE CONSIDERED IN ISOLATION OR AS A SUBSTITUTE FOR
MEASURES OF PERFORMANCE PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES.
Since 1995, the Company has completed several broadcasting and publishing
acquisitions and a broadcasting disposition. The financial results of the
Company reflect significant increases between the years ended December 31, 1997,
December 31, 1996 and December 31, 1995, in substantially all line items. The
principal reason for these increases was the completion by the Company of the
WITN Acquisition (August 1997), the First American Acquisition (September 1996)
and the Augusta Acquisition (January 1996). The purchase prices for the WITN
Acquisition, the First American Acquisition and the Augusta Acquisition were
approximately $41.7 million, $183.9 million and $37.2 million, respectively. The
Company sold the assets of KTVE Inc. (the "KTVE Sale"), its NBC-affiliated
television station, in Monroe, Louisiana-El Dorado, Arkansas on August 20, 1996.
The sales price included $9.5 million in cash plus the amount of the accounts
receivable (approximately $829,000).
In addition, during 1995 the Company acquired the GWINNETT DAILY POST for
approximately $3.7 million (January 1995) and three area weekly advertising only
direct mail publications ("Shoppers") for an aggregate purchase price of
approximately $1.4 million (September 1995) (the "1995 Publishing
Acquisitions").
CASH FLOW PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCING ACTIVITIES
The following table sets forth certain cash flow data for the Company
for the years ended December 31, 1997, 1996 and 1995.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
(IN THOUSANDS)
Cash flows provided by (used in)
Operating activities $ 9,744 $ 12,092 $ 7,600
Investing activities (57,498) (205,068) (8,929)
Financing activities 49,071 193,467 1,331
32
BROADCASTING, PUBLISHING AND PAGING REVENUES
Set forth below are the principal types of broadcasting, publishing and
paging revenues earned by the Company's television stations, 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:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------- -------------------------
AMOUNT % AMOUNT % AMOUNT %
------------- ------------------------- ---------- ------------- -----------
(DOLLARS IN THOUSANDS)
BROADCASTING
Net Revenues:
Local $ 40,486 39.1% $30,046 37.9% $20,888 35.6%
National 21,563 20.8% 15,611 19.7% 10,881 18.6%
Network compensation 4,977 4.8% 3,661 4.6% 2,487 4.2%
Political 137 0.1% 3,612 4.6% 1,174 2.0%
Production and other 5,137 5.0% 2,051 2.5% 1,320 2.3%
-------- ----- ------- ----- -------- ------
$ 72,300 69.8% $54,981 69.3% $36,750 62.7%
======== ====== ======= ====== ======== ======
PUBLISHING
Revenues:
Retail $ 11,936 11.5% $11,090 14.0% $11,044 18.8%
Classifieds 7,344 7.1% 6,150 7.8% 5,324 9.1%
Circulation 4,779 4.6% 4,271 5.4% 3,784 6.5%
Other 477 0.5% 1,334 1.6% 1,714 2.9%
-------- ----- -------- ------ -------- -------
$ 24,536 23.7% $22,845 28.8% $21,866 37.3%
======== ===== ======== ====== ======== =======
PAGING
Revenues:
Paging lease, sales and service $ 6,712 6.5% $ 1,479 1.9% $ 0.0 0.0%
======== ======= ======== ======= ======== =========
TOTAL $103,548 100.0% $79,305 100.0% $58,616 100.0%
======== ====== ======= ====== ======= ======
YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Total revenues for the year ended December 31, 1997, increased
$24.2 million, or 30.6%, over the year ended December 31, 1996, from $79.3
million to $103.5 million. This increase was attributable to the net effect of
(i) increased revenues as a result of the WITN Acquisition, the GulfLink
Acquisition and the First American Acquisition, (ii) increases in total
non-political revenues of the Company (excluding the WITN Acquisition, the
GulfLink Acquisition and the First American Acquisition) and (iii) increased
publishing revenue, all of which were partially offset by decreased political
revenues and decreased revenues as a result of the KTVE Sale. The net increase
in revenue due to the WITN Acquisition, the GulfLink Acquisition and the First
American Acquisition less the effect of the KTVE Sale was $23.4 million, or
96.7% of the $24.2 million increase.
Broadcast net revenues increased $17.3 million, or 31.5%, over the prior
year, from $55.0 million to $72.3 million. The First American Acquisition, the
WITN Acquisition and the GulfLink Acquisition accounted for $16.5 million, $3.3
million and $1.4 million, respectively, of the broadcast net revenue increase.
On a pro forma basis, assuming the First American Acquisition had been effective
on January 1, 1996, broadcast net revenues for the First American Acquisition
for the year ended December 31, 1997, decreased $700,000, or 3.0%, over the year
ended December 31, 1996, from $23.9 million to $23.2
33
million. On a pro forma basis, assuming the WITN Acquisition had been effective
on January 1, 1996, broadcast net revenues for the WITN Acquisition for the year
ended December 31, 1997, decreased $600,000, or 7.0%, over the year ended
December 31, 1996, from $8.4 million to $7.8 million. On a pro forma basis,
political revenue for the First American Acquisition and the WITN Acquisition
decreased $1.3 million and $650,000, respectively, over the prior year. The KTVE
Sale resulted in a decrease in broadcast net revenues of $3.0 million. Broadcast
net revenues, excluding the First American Acquisition, the WITN Acquisition and
the GulfLink Acquisition and the operating results of KTVE, decreased $800,000,
or 1.8%, over the prior year. This decrease of $800,000 resulted primarily from
decreased political spending of $3.1 million partially offset by increased local
advertising spending and national advertising spending of $1.5 million and
$600,000, respectively.
Publishing revenues increased $1.7 million, or 7.4%, over the prior year,
from $22.8 million to $24.5 million. Retail advertising, classified advertising
and circulation revenue increased approximately $850,000, $1.2 million and
$500,000, respectively, which was partially offset by a decrease in other
revenue of $860,000. The increase in retail advertising and classified
advertising was primarily the result of increased rates partially offset by
decreased linage. The increase in circulation revenue was attributable primarily
to the increase in subscribers at the GWINNETT DAILY POST from 13,000 at
December 31, 1996, to 49,000 at December 31, 1997. The increases in retail
advertising, classified advertising and circulation revenue were offset by a
decrease of $800,000 in commercial printing and events marketing revenue.
Paging revenue increased $5.2 million, or 353.8%, from $1.5 million to
$6.7 million primarily due to the First American Acquisition. On a pro forma
basis, assuming the First American Acquisition had been effective January 1,
1996, paging revenue for the year ended December 31, 1997, increased $1.2
million, or 21.6%, over the year ended December 31, 1996, from $5.5 million to
$6.7 million. The increase was attributable primarily to an increase in the
number of units in service. The Company had approximately 67,000 units in
service at December 31, 1997, and 49,500 units in service at December 31, 1996.
OPERATING EXPENSES. Operating expenses for the year ended December 31,
1997, increased $19.6 million, or 31.0%, over the year ended December 31, 1996,
from $63.2 million to $82.8 million. This increase was attributable to the net
effect of (i) increased expenses resulting from the WITN Acquisition, the
GulfLink Acquisition and the First American Acquisition, (ii) increased
publishing expenses, (iii) decreased broadcast expense of the Company (excluding
the WITN Acquisition, and the GulfLink Acquisition, the First American
Acquisition and the effects of the KTVE Sale), (iv) decreased expenses resulting
from the KTVE Sale and (v) decreased non-cash compensation. The net increase in
operating expenses (exclusive of depreciation and amortization) due to the WITN
Acquisition, the GulfLink Acquisition and the First American Acquisition less
the effects of the KTVE Sale was $13.7 million.
Broadcast expenses increased $9.5 million, or 29.4%, over the prior year,
from approximately $32.4 million to approximately $42.0 million. The increase
was attributable primarily to the WITN Acquisition, the GulfLink Acquisition and
the First American Acquisition partially offset by the KTVE Sale. The First
American Acquisition, the WITN Acquisition and the GulfLink Acquisition
accounted for $9.9 million, $1.9 million and $1.2 million, respectively, of the
broadcast expense increase. On a pro forma basis, assuming the First American
Acquisition had been effective on January 1, 1996, broadcast expense for First
American Acquisition for the year ended December 31, 1997, increased $1.2
million, or 9.8%, over the year ended December 31, 1996, from $12.2 million to
$13.4 million. On a pro forma basis, assuming the WITN Acquisition had been
effective on January 1, 1996, broadcast expense for the WITN Acquisition for the
year ended December 31, 1997, decreased $200,000, or 4.2%, over the year ended
December 31, 1996, from $4.8 million to $4.6 million. The KTVE Sale resulted in
a decrease in broadcast expenses of $2.2 million. Broadcast expenses, excluding
the results of the WITN Acquisition, the GulfLink Acquisition and the First
American Acquisition and the KTVE Sale, decreased $1.3 million, or 4.9%, as a
result of lower payroll and other costs.
34
Publishing expenses increased $1.8 million, or 10.1%, over the prior year,
from approximately $17.9 million to approximately $19.8 million. This increase
resulted primarily from an increase in expenses associated with an expansion of
the news product and circulation at one of the Company's properties partially
offset by a decrease in work force related costs and improved newsprint pricing.
Average newsprint costs decreased approximately 14.4% while newsprint
consumption increased approximately 27.7%.
Paging expenses increased $3.0 million, or 275.8%, over the prior year,
from $1.1 million to $4.1 primarily due to the First American Acquisition. On a
pro forma basis, assuming the First American Acquisition had been effective
January 1, 1996, paging expenses for the year ended December 31, 1997, increased
$220,000, or 5.7%, over the year ended December 31, 1996, from $3.8 million to
$4.1 million. This increase was attributable primarily to increased payroll
expenses.
Corporate and administrative expenses decreased $700,000, or 21.5%, over
the prior year, from $3.2 million to $2.5 million. This decrease was
attributable primarily to a reduction of compensation expense at the corporate
level.
DEPRECIATION AND AMORTIZATION. Depreciation of property and equipment and
amortization of intangible assets was $14.5 million for the year ended December
31, 1997, compared to $7.7 million for the prior year, an increase of $6.8
million, or 89.5%. This increase was primarily the result of higher depreciation
and amortization costs related to the WITN Acquisition, the GulfLink Acquisition
and the First American Acquisition.
NON-CASH COMPENSATION. Non-cash compensation for the year ended December
31, 1996, resulted from the Company's employment agreement with its former
President, Ralph W. Gabbard, who died unexpectedly in September 1996.
MISCELLANEOUS INCOME AND EXPENSE, NET: Miscellaneous income and expense
decreased $5.7 million from income of $5.7 million for the year ended December
31, 1996, to expense of $31,000 for the year ended December 31, 1997. The
decrease was primarily attributable to the KTVE Sale which resulted in a gain
before income tax of $5.7 million for the year ended December 31, 1996.
INTEREST EXPENSE. Interest expense increased $10.2 million, or 87.0%, from
$11.7 million for the year ended December 31, 1996, to $21.9 million for the
year ended December 31, 1997. This increase was attributable primarily to
increased levels of debt resulting from the financing of the the WITN
Acquisition, the GulfLink Acquisition and the First American Acquisition. The
effective interest rate of the Company's senior subordinated notes at December
31, 1997 and December 31, 1996, was approximately 10.6%. The effective interest
rate of the Company's Senior Credit Facility at December 31, 1997, and December
31, 1996, was approximately 7.9% and 8.4%, respectively.
EXTRAORDINARY CHARGE: An extraordinary charge of $5.3 million ($3.2
million after taxes) was recorded for the year ended December 31, 1996, in
connection with the early retirement of the Company's former bank credit
facility and the $25.0 million senior secured note with an institutional
investor (the "Senior Note").
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS. Net loss available to
common shareholders for the Company was $2.8 million for the year ended December
31, 1997, compared with net income available to common shareholders of $2.1
million for the year ended December 31, 1996, a decrease of $4.9 million, or
231.2%.
35
YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Total revenues for the year ended December 31, 1996, increased
$20.7 million, or 35.3%, over the year ended December 31, 1995, from $58.6
million to $79.3 million. This increase was attributable to the net effect of
(i) increased revenues as a result of the 1996 Broadcasting Acquisitions, (ii)
increases in total revenues of the Company (excluding the 1996 Broadcasting
Acquisitions) and (iii) decreased revenues as a result of the KTVE Sale. The
1996 Broadcasting Acquisitions, net of the effects of the KTVE Sale, accounted
for $16.4 million, or 79.3%, of the revenue increase.
Broadcast net revenues increased $18.2 million, or 49.6%, over the prior
year, from approximately $36.7 million to approximately $55.0 million. The 1996
Broadcasting Acquisitions, net of the effects of the KTVE Sale, accounted for
$14.9 million, or 81.9%, of the broadcast net revenue increase. On a pro forma
basis, assuming the 1996 Broadcasting Acquisitions had been effective on January
1, 1995, broadcast net revenues for the 1996 Broadcasting Acquisitions for the
year ended December 31, 1996, increased $2.0 million, or 6.4%, over the year
ended December 31, 1995, from $31.3 million to $33.3 million. The KTVE Sale
resulted in a decrease in broadcast net revenues of $1.2 million. Broadcast net
revenues, excluding the 1996 Broadcasting Acquisitions and the operating results
of KTVE, increased $3.3 million, or 9.0%, over the prior year. Approximately
$1.4 million, $1.4 million, $267,000 and $224,000 of the $3.3 million increase
in broadcast net revenues, excluding the 1996 Broadcasting Acquisitions and the
operating results of KTVE, was due to increased political advertising spending,
local advertising spending, network compensation and other revenue,
respectively.
Publishing revenues increased approximately $1.0 million, or 4.5%, over
the prior year, from approximately $21.9 million to approximately $22.8 million.
Circulation and classified advertising revenue comprised approximately $486,000
and $826,000, respectively, of the revenue increase. This increase in
circulation revenue was attributable primarily to price increases in 1996 at two
of the Company's publishing operations and the conversion of the GWINNETT DAILY
POST to a five-day-a-week paper. The increase in classified advertising was
primarily the result of linage increases. These increases were offset by a
decrease of $267,000 in commercial printing revenue.
Paging revenue increased $1.5 million due to the 1996 Broadcasting
Acquisitions. On a pro forma basis, assuming the 1996 Broadcasting Acquisitions
had been effective January 1, 1995, paging revenue for the year ended December
31, 1996, increased $621,000, or 12.7%, over the year ended December 31, 1995,
from $4.9 million to $5.5 million. The increase was attributable primarily to
higher sales volume generated by a reseller program implemented during 1995.
OPERATING EXPENSES. Operating expenses for the year ended December 31,
1996, increased $11.5 million, or 22.2%, over the year ended December 31, 1995,
from approximately $51.8 million to approximately $63.2 million. This increase
was attributable to the net effect of (i) increased expenses resulting from the
1996 Broadcasting Acquisitions, (ii) increases in total expenses of the Company
(excluding the 1996 Broadcasting Acquisitions), (iii) decreased expenses
resulting from the KTVE Sale, (iv) decreased publishing expenses and (v)
decreased non-cash compensation. The 1996 Broadcasting Acquisitions net of the
effects of the KTVE Sale accounted for $9.3 million, or 80.7%, of the increase
in operating expenses.
Broadcast expenses increased $9.2 million, or 39.8%, over the prior year,
from $23.2 million to $32.4 million. The increase was attributable primarily to
the 1996 Broadcasting Acquisitions partially offset by the KTVE Sale. The 1996
Broadcasting Acquisitions, net of the effects of the KTVE Sale, accounted for
approximately $8.2 million, or 88.5%, of the broadcast expense increase. On a
pro forma basis, assuming the 1996 Broadcasting Acquisitions had been effective
on January 1, 1995, broadcast expenses for the 1996 Broadcasting Acquisitions
for the year ended December 31, 1996, increased
36
$432,000, or 2.4%, over the year ended December 31, 1995, from $17.5 million to
$18.0 million. The KTVE Sale resulted in a decrease in broadcast expenses of
$1.1 million. Broadcast expenses, excluding the results of the 1996 Broadcasting
Acquisitions and the KTVE Sale, increased $1.1 million, or 5.3%, as a result of
higher payroll costs partially offset by lower syndicated film expense.
Publishing expenses decreased $2.1 million, or 10.3%, over the prior year,
from $20.0 million to $17.9 million. This decrease resulted primarily from a
decrease in work force related costs, improved newsprint pricing, fewer
promotions and restructuring of the advertising publications, partially offset
by higher product delivery and outside service costs associated with the
conversion of the GWINNETT DAILY POST to a five-day-a-week newspaper. Average
newsprint costs decreased approximately 9.6%, while newsprint consumption
remained relatively constant with that of the prior year.
Paging expenses increased $1.1 million due to the 1996 Broadcasting
Acquisitions. On a pro forma basis, assuming the 1996 Broadcasting Acquisitions
had been effective January 1, 1995, paging expenses for the year ended December
31, 1996, increased $637,000, or 19.9%, over the year ended December 31, 1995,
from $3.2 million to $3.8 million. This increase was attributable primarily to
increased trade expense, administrative expense and other communication
expenses.
Corporate and administrative expenses increased $960,000, or 42.5%, over
the prior year, from $2.3 to $3.2 million. This increase was attributable
primarily to the addition of several officers at the corporate level.
DEPRECIATION AND AMORTIZATION. Depreciation of property and equipment and
amortization of intangible assets was $7.7 million for the year ended December
31, 1996, compared to $3.9 million for the prior year, an increase of
approximately $3.8 million, or 93.6%. This increase was primarily the result of
higher depreciation and amortization costs related to the 1996 Broadcasting
Acquisitions.
NON-CASH COMPENSATION. Non-cash compensation paid in Class A Common Stock
resulted from the Company's employment agreements with its former President,
Ralph W. Gabbard, who died unexpectedly in September 1996 and its former chief
executive officer, John T. Williams, who resigned in December 1995. Non-cash
compensation was $880,000 for the year ended December 31, 1996, compared to $2.3
million for the prior year, a decrease of $1.4 million, or 62.1%. The decrease
was primarily attributable to a restricted stock award to the estate of Ralph W.
Gabbard, for which the Company incurred expense of $880,000 for the year ended
December 31, 1996, and the 1995 restricted stock award of 150,000 shares of
Class A Common Stock to John T. Williams, for which the Company incurred expense
of $2.1 million for the year ended December 31, 1995.
MISCELLANEOUS INCOME AND EXPENSE, NET: Miscellaneous income and expense
increased $5.6 million from $143,600 for the year ended December 31, 1995, to
$5.7 million for the year ended December 31, 1996. The increase was primarily
attributable to the KTVE Sale which resulted in a gain before income tax of $5.7
million.
INTEREST EXPENSE. Interest expense increased $6.3 million, or 114.9%, from
$5.4 million for the year ended December 31, 1995, to $11.7 million for the year
ended December 31, 1996. This increase was attributable primarily to increased
levels of debt resulting from the financing of the 1996 Broadcasting
Acquisitions. The Company entered into a $25.0 million notional amount five year
interest rate swap agreement of June 2, 1995, to effectively convert a portion
of its floating rate debt to a fixed rate basis. Effective May 14, 1996, the
Company received $254,000 as settlement of this interest rate swap agreement.
The effective interest rate of the Company's senior subordinated notes and
Senior Credit Facility at December 31, 1996, was approximately 10.6% and 8.4%,
respectively.
37
EXTRAORDINARY CHARGE: An extraordinary charge of $5.3 million ($3.2
million after taxes) was recorded for the year ended December 31, 1996, in
connection with the early retirement of the Company's former credit facility and
Senior Note.
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS. Net income available to
common shareholders for the Company was $2.1 million for the year ended December
31, 1996, compared with $931,000 for the year ended December 31, 1995, an
increase of $1.2 million, or 130.2%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $10.1 million and $158,000 at December
31, 1997, and 1996, respectively. The Company's cash provided from operations
was $9.7 million, $12.1 million and $7.6 million in 1997, 1996 and 1995,
respectively. Management believes that current cash balances, cash flows from
operations and the 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 agreement pursuant to which the
Senior Credit Facility was issued contains certain restrictive provisions,
which, among other things, limit capital expenditures and additional
indebtedness and require minimum levels of cash flows. Additionally, the
effective interest rate of the Senior Credit Facility can be changed based upon
the Company's maintenance of certain operating ratios as defined by the Senior
Credit Facility, not to exceed the lender's prime rate plus 0.5% or LIBOR plus
2.25%. The Senior Credit Facility contains restrictive provisions similar to the
provisions of the Company's 105/8 % Senior Subordinated Notes due 2006. The
amount borrowed by the Company and the amount available to the Company under the
Senior Credit Facility at December 31, 1997, was $65.6 million and $59.4
million, respectively.
The Company's cash used in investing activities was $57.5 million, $205.1
million and $8.9 million in 1997, 1996 and 1995, respectively. The decrease of
$147.6 million from 1996 to 1997 was primarily due to the net impact of the WITN
Acquisition and the GulfLink Acquisition in 1997 offset by the 1996 Broadcasting
Acquisitions in 1996. The increase of $196.2 million from 1995 to 1996 was
primarily due to the 1996 Broadcasting Acquisitions.
The Company was provided $49.1 million, $193.5 million and $1.3 million in
cash by financing activities in 1997, 1996 and 1995, respectively. In 1997, the
decrease in cash provided by financing activities resulted primarily from the
funding obtained for the 1996 Broadcasting Acquisitions in 1996 partially offset
by the borrowings for the WITN Acquisition and the GulfLink Acquisition,
purchase of treasury stock and increased payments on long-term debt in 1997.
During the year ended December 31, 1997, the Company purchased 172,900 shares of
Class A Common Stock at an average cost of $19.99 per share. The Company placed
these shares in treasury. The cash provided in 1996 resulted primarily from the
(i) the issuance of $160.0 million principal amount of 105/8 % Senior
Subordinated Notes due 2006, (ii) borrowings under the Company's revolving
credit agreements, (iii) public sale of Class B Common Stock and (iv) the
private placement of preferred stock, partially offset by the repayment of
certain long-term debt and the purchase of Class B Common Stock by the Company.
During the year ended December 31, 1996, the Company purchased 172,300 shares of
Class B Common Stock at an average cost of $15.90 per share.
On August 1, 1997, the Company completed the WITN Acquisition. The
purchase price of approximately $41.7 million consisted of $40.7 million cash,
$600,000 in acquisition related costs, and approximately $400,000 in liabilities
which were assumed by the Company. On April 24, 1997, the Company completed the
GulfLink Acquisition. The purchase price of approximately $5.2 million consisted
of $4.1 million cash, $127,000 in acquisition related costs, and approximately
$1.0 million in liabilities which were assumed by the Company.
38
On September 30, 1996, the Company completed the First American
Acquisition. The purchase price for the First American Acquisition was
approximately $183.9 million and consisted of $175.5 million cash, $1.8 million
in acquisitions-related costs, and the assumption of approximately $6.6 million
of liabilities.
In addition to the consummation of the First American Acquisition, the
Company implemented a financing plan to increase liquidity and improve operating
and financial flexibility. Pursuant to the financing plan, the Company (i)
retired approximately $45.3 million principal amount of outstanding indebtedness
under its former credit facility, together with accrued interest thereon, (ii)
retired approximately $25.0 million aggregate principal amount of outstanding
indebtedness under its senior note, together with accrued interest thereon and a
prepayment fee, (iii) issued $10.0 million of its Series A Preferred Stock in
exchange for the Company's 8% note owned by the Company's principal stockholder,
with warrants to purchase up to 487,500 shares of Class A Common Stock
(representing 9.7% of the Class A Common Stock issued and outstanding at
December 31, 1997, after giving effect to the exercise of such warrants), (iv)
issued to Bull Run Corporation, J. Mack Robinson (Chairman of the Board of Bull
Run Corporation and the President and Chief Executive Officer of the Company)
and certain of his affiliates $10.0 million of its Series B Preferred Stock with
warrants to purchase up to 500,000 shares of Class A Common Stock (representing
9.9% of the Class A Common Stock issued and outstanding at December 31, 1997,
after giving effect to the exercise of such warrants) for cash proceeds of $10.0
million and (v) entered into the Senior Credit Facility which is comprised of a
term loan of $71.5 million and a revolving credit facility of $53.5 million
aggregating $125.0 million.
Effective September 17, 1997, the Senior Credit Facility was modified to
reinstate the original credit limit of $125.0 million, which had been reduced by
the scheduled reductions. The modification also reduced the interest rate spread
over LIBOR and/or Prime and reduced the fee applied to available funds from
0.50% to 0.375%. The modification also extended the maturity date from June 30,
2003 to June 30, 2004. The modification required a one-time fee of $250,000.
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 completed the KTVE Sale, on August 20, 1996. The sales price
included $9.5 million in cash plus the amount of the accounts receivable on the
date of closing to the extent collected by the buyer, (approximately $829,000).
The company recognized a pre-tax gain of approximately $5.7 million and
estimated income taxes of approximately $2.8 million.
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, 1997,
payments on program license liabilities due in 1998, which will be paid with
cash from operations, were approximately $4.0 million.
39
In 1997 the Company's paging operations acquired a 800 Mhz SMR license for
$1,037,000. The Company made a down payment of $207,400 during 1997 with the
remaining balance of $829,600 becoming due in 1998.
In 1997, the Company made $10.4 million in capital expenditures, relating
primarily to the broadcasting and publishing operations, and paid $3.6 million
for program broadcast rights. The Company anticipates making $5.0 million in
capital expenditures in 1998.
In connection with the First American Acquisition, the FCC ordered the
Company to divest itself of WALB-TV ("WALB") and WJHG-TV ("WJHG") by March 31,
1997 to comply with regulations governing common ownership of television
stations with overlapping service areas. The FCC is currently reexamining these
regulations, and if it revises them in accordance with the interim policy it has
adopted, divestiture of WJHG-TV would not be required. Accordingly, the Company
requested and in July of 1997 received an extension of the divestiture deadline
with regard to WJHG conditioned upon the outcome of the rulemaking proceedings.
It can not be determined when the FCC will complete its rulemaking on this
subject. Also in July of 1997, the Company obtained FCC approval to transfer
control of WALB to a trustee with a view towards the trustee effecting (i) a
swap of WALB's assets for assets of one or more television stations of
comparable value and with comparable broadcast cash flow in a transaction
qualifying for deferred capital gains treatment under the "like-kind exchange"
provision of Section 1031 of the Internal Revenue Code of 1986, or (ii) a sale
of such assets. Under the trust arrangement, the Company relinquished operating
control of the station to a trustee while retaining the economic risks and
benefits of ownership. If the trustee is required to effect a sale of WALB, the
Company would incur a significant gain and related tax liability, the payment of
which could have an adverse effect on the Company's ability to acquire
comparable assets without incurring additional indebtedness. The FCC allowed up
to six months for the trustee to file an application seeking the agency's
approval of a swap or sale. This six month period expired in January 1998,
without a swap or sale being executed. The trustee filed an application
requesting a six-month extension to effect a swap or sale. The FCC has not yet
ruled on this extension application.
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,
1997, the Company anticipates that it will generate taxable operating losses for
the foreseeable future.
Management does not believe that inflation in past years has had a
significant impact on the Company's results of operations nor is inflation
expected to have a significant effect upon the Company's business in the near
future.
In February 1998, the Company announced that it had signed a definitive
purchase agreement to purchase all of the outstanding capital stock of Busse
Broadcasting Corporation ("Busse"). The purchase price of approximately $112.0
million includes cash and the assumption of Busse's 11 5/8% Senior Secured
Notes. If completed, the Company currently believes that funding for this
acquisition could be provided primarily through cash flow from operations and
borrowing under the Senior Credit Facility, although there can be no assurances
that this acquisition would not require the sale by the Company of any debt or
equity securities.
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 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 Report are cautioned that any forward-
40
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 and (iv) 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 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.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
Audited Consolidated Financial Statements of Gray Communications Systems, Inc.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Consolidated Balance Sheets at December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . 44
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 50
42
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Gray Communications Systems, Inc.
We have audited the accompanying consolidated balance sheets of Gray
Communications Systems, Inc., as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gray
Communications Systems, Inc., at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
January 27, 1998 except for the Pending Acquisition of
Note C, as to which the date is February 13, 1998
43
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------------
1997 1996
------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,367,300 $ 1,051,044
Trade accounts receivable, less allowance for doubtful accounts
of $1,253,000 and $1,450,000, respectively 19,527,316 17,373,839
Recoverable income taxes 2,132,284 1,747,687
Inventories 846,891 624,118
Current portion of program broadcast rights 2,850,023 2,362,742
Other current assets 968,180 379,793
--------------- --------------
Total current assets 28,691,994 23,539,223
Property and equipment (NOTES C AND D):
Land 889,696 785,682
Buildings and improvements 11,951,700 11,253,559
Equipment 52,899,547 41,954,501
-------------- -------------
65,740,943 53,993,742
Allowance for depreciation (23,635,256) (18,209,891)
-------------- -------------
42,105,687 35,783,851
Other assets:
Deferred loan costs (NOTE D) 8,521,356 9,141,262
Goodwill and other intangibles (NOTE C) 263,425,447 228,692,018
Other 2,306,143 1,507,488
-------------- -------------
274,252,946 239,340,768
-------------- ------------
$345,050,627 $298,663,842
============= ===========
See accompanying notes.
44
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31,
--------------------------------------
1997 1996
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable (includes $850,000 and $1,000,000 payable
to Bull Run Corporation, respectively) $ 3,321,903 $ 6,043,062
Employee compensation and benefits 3,239,694 7,152,786
Accrued expenses 2,265,725 1,059,769
Accrued interest 4,533,366 4,858,775
Current portion of program broadcast obligations 2,876,060 2,362,144
Deferred revenue 1,966,166 1,764,509
Current portion of long-term debt 400,000 140,000
-------------- -------------
Total current liabilities 18,602,914 23,381,045
Long-term debt (NOTES C AND D) 226,676,377 173,228,049
Other long-term liabilities:
Program broadcast obligations, less current portion 617,107 545,889
Supplemental employee benefits (NOTE E) 1,161,218 1,357,275
Deferred income taxes (NOTE H) 1,203,847 -0-
Deferred interest swap -0- 191,055
Other acquisition related liabilities (NOTES C AND D) 4,494,016 4,735,013
-------------- --------------
7,476,188 6,829,232
Commitments and contingencies (NOTES C, D AND J)
Stockholders' equity (NOTES C, D AND F)
Serial Preferred Stock, no par value; authorized 20,000,000 shares;
issued 2,060 and 2,000, respectively ($20,600,000 and
$20,000,000 aggregate liquidation value, respectively) 20,600,000 20,000,000
Class A Common Stock, no par value; authorized 15,000,000
shares; issued 5,307,716 and 5,155,331 shares, respectively 10,358,031 7,994,235
Class B Common Stock, no par value; authorized 15,000,000
shares; issued 3,515,364 and 3,500,000 shares, respectively 66,397,804 66,065,762
Retained earnings 6,603,191 10,543,940
-------------- --------------
103,959,026 104,603,937
Treasury Stock at cost, Class A Common, 781,921 and 663,180 shares,
respectively (9,011,369) (6,638,284)
Treasury Stock at cost, Class B Common, 166,790 and 172,300 shares,
respectively (2,652,509) (2,740,137)
--------------- --------------
92,295,148 95,225,516
-------------- --------------
$345,050,627 $298,663,842
============== ==============
See accompanying notes.
45
GRAY COMMUNCIATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
----------------- ---------------- -----------------
Operating revenues:
Broadcasting (less agency commissions) $72,300,105 $54,981,317 $36,750,035
Publishing 24,536,348 22,845,274 21,866,220
Paging 6,711,426 1,478,608 -0-
----------- ----------- -----------
103,547,879 79,305,199 58,616,255
Expenses:
Broadcasting 41,966,493 32,438,405 23,201,990
Publishing 19,753,387 17,949,064 20,016,137
Paging 4,051,359 1,077,667 -0-
Corporate and administrative 2,528,461 3,218,610 2,258,261
Depreciation 7,800,217 4,077,696 2,633,360
Amortization of intangible assets 6,718,302 3,584,845 1,325,526
Non-cash compensation paid in common stock
(NOTE E) -0- 880,000 2,321,250
---------- ------------ -----------
82,818,219 63,226,287 51,756,524
---------- ------------ ----------
20,729,660 16,078,912 6,859,731
Miscellaneous income and (expense), net (NOTE B) (30,851) 5,704,582 143,612
---------- ------------ ----------
20,698,809 21,783,494 7,003,343
Interest expense 21,861,267 11,689,053 5,438,374
---------- ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY CHARGE (1,162,458) 10,094,441 1,564,969
Federal and state income taxes (NOTE H) 240,000 4,416,000 634,000
---------- ------------ ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE (1,402,458) 5,678,441 930,969
Extraordinary charge on extinguishment of debt, net of
applicable income tax benefit of $2,157,000 (NOTE D) -0- 3,158,960 -0-
--------- ------------- ---------
NET INCOME (LOSS) (1,402,458) 2,519,481 930,969
Preferred dividends (NOTE F) 1,409,690 376,849 -0-
----------- -------------- ---------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (2,812,148) $ 2,142,632 $ 930,969
============= ============ =============
Average outstanding common shares-basic 7,901,697 5,398,436 4,354,183
Average outstanding common shares-diluted 7,901,697 5,625,548 4,481,317
Basic earnings per common share:
Income (loss) before extraordinary charge available to
common stockholders $ (0.36) 0.98 0.21
Extraordinary charge -0- (0.58) -0-
--------- ---------- -------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (0.36) $ 0.40 $ 0.21
========== ============ ============
Diluted earnings per common share:
Income (loss) before extraordinary charge available to
common stockholders $ (0.36) $ 0.94 $ 0.21
Extraordinary charge -0- (0.56) -0-
----------- ------------- -------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (0.36) $ 0.38 $ 0.21
=========== ============ ============
See accompanying notes.
46
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS A CLASS B CLASS A
PREFERRED STOCK COMMON STOCK COMMON STOCK RESTRICTED TREASURY STOCK
--------------------- --------------------- --------------------- STOCK --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFERRALS SHARES AMOUNT
--------- ----------- --------- ----------- --------- ----------- -------------------------------
Balance at December 31, 1994 -0- $ -0- 4,841,785 $3,393,747 -0- $ -0- $ -0- (663,180) (6,638,284)
Net Income -0- -0- -0- -0- -0- -0- -0- -0- -0-
Class A Common Stock Cash Dividends
($0.08) per share -0- -0- -0- -0- -0- -0- -0- -0- -0-
Issuance of Class A Common Stock
(NOTES C, E, F, G AND I):
401(k) Plan -0- -0- 18,354 298,725 -0- -0- -0- -0- -0-
Directors' Stock Plan -0- -0- 23,500 238,919 -0- -0- -0- -0- -0-
Non-qualified Stock Plan -0- -0- 5,000 48,335 -0- -0- -0- -0- -0-
Gwinnett Acquisition -0- -0- 44,117 500,000 -0- -0- -0- -0- -0-
Restricted Stock Plan -0- -0- 150,000 2,081,250 -0- -0- (2,081,250) -0- -0-
Amortization of Restricted Stock
Plan deferrals -0- -0- -0- -0- -0- -0- 2,081,250 -0- -0-
Income tax benefits relating to
stock plans -0- -0- -0- 235,000 -0- -0- -0- -0- -0-
------- ----------- ---------- ------------------- ----------- ---------- --------- ------------
Balance at December 31, 1995 -0- -0- 5,082,756 6,795,976 -0- -0- -0- (663,180) (6,638,284)
Net Income -0- -0- -0- -0- -0- -0- -0- -0- -0-
Common Stock Cash Dividends:
Class A ($0.08 per share) -0- -0- -0- -0- -0- -0- -0- -0- -0-
Class B ($0.02 per share) -0- -0- -0- -0- -0- -0- -0- -0- -0-
Purchase of Class B Common Stock
(NOTE F) -0- -0- -0- -0- -0- -0- -0- -0- -0-
Issuance of Class A Common Stock
(NOTES F, G AND I):
401(k) Plan -0- -0- 13,225 262,426 -0- -0- -0- -0- -0-
Directors' Stock Plan -0- -0- 22,500 228,749 -0- -0- -0- -0- -0-
Non-qualified Stock Plan -0- -0- 36,850 358,417 -0- -0- -0- -0- -0-
Preferred Stock Dividends -0- -0- -0- -0- -0- -0- -0- -0- -0-
Issuance of Class A Common Stock
Warrants (NOTES C AND F) -0- -0- -0- 2,600,000 -0- -0- -0- -0- -0-
Issuance of Series A Preferred
Stock in exchange for
Subordinated Note
(NOTES C AND F) 1,000 10,000,000 -0- (2,383,333) -0- -0- -0- -0- -0-
Issuance of Series B Preferred
Stock (NOTES C AND F) 1,000 10,000,000 -0- -0- -0- -0- -0- -0- -0-
Issuance of Class B Common Stock,
net of expenses
(NOTES C AND F) -0- -0- -0- -0- 3,500,000 66,065,762 -0- -0- -0-
Income tax benefits relating to
stock plans -0- -0- -0- 132,000 -0- -0- -0- -0- -0-
----- ------------ --------- ----------- --------- ----------- ----- --------- ------------
Balance at December 31, 1996 2,000 $20,000,000 5,155,331 $7,994,235 3,500,000 $66,065,762 $ -0- (663,180) $(6,638,284)
CLASS B
TREASURY STOCK
--------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------------------- ----------- ------------
Balance at December 31, 1994 $ -0- $ -0- $8,245,626 $5,001,089
Net Income -0- -0- 930,969 930,969
Class A Common Stock Cash Dividends
($0.08) per share -0- -0- (348,689) (348,689)
Issuance of Class A Common Stock
(NOTES C, E, F, G AND I):
401(k) Plan -0- -0- -0- 298,725
Directors' Stock Plan -0- -0- -0- 238,919
Non-qualified Stock Plan -0- -0- -0- 48,335
Gwinnett Acquisition -0- -0- -0- 500,000
Restricted Stock Plan -0- -0- -0- -0-
Amortization of Restricted Stock
Plan deferrals -0- -0- -0- 2,081,250
Income tax benefits relating to
stock plans -0- -0- -0- 235,000
--------------------- ----------- ------------
Balance at December 31, 1995 -0- -0- 8,827,906 8,985,598
Net Income -0- -0- 2,519,481 2,519,481
Common Stock Cash Dividends:
Class A ($0.08 per share) -0- -0- (357,598) (357,598)
Class B ($0.02 per share) -0- -0- (69,000) (69,000)
Purchase of Class B Common Stock
(NOTE F) (172,300) (2,740,137) -0- (2,740,137)
Issuance of Class A Common Stock
(NOTES F, G AND I):
401(k) Plan -0- -0- -0- 262,426
Directors' Stock Plan -0- -0- -0- 228,749
Non-qualified Stock Plan -0- -0- -0- 358,417
Preferred Stock Dividends -0- -0- (376,849) (376,849)
Issuance of Class A Common Stock
Warrants (NOTES C AND F) -0- -0- -0- 2,600,000
Issuance of Series A Preferred
Stock in exchange for
Subordinated Note
(NOTES C AND F) -0- -0- -0- 7,616,667
Issuance of Series B Preferred
Stock (NOTES C AND F) -0- -0- -0- 10,000,000
Issuance of Class B Common Stock,
net of expenses
(NOTES C AND F) -0- -0- -0- 66,065,762
Income tax benefits relating to
stock plans -0- -0- -0- 132,000
------------ ------------ ----------- -----------
Balance at December 31, 1996 (172,300) $(2,740,137) $10,543,940 $95,225,516
See accompanying notes.
47
GRAY COMMUNICATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK RESTRICTED
--------------------- -------------------- -------------------- STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFERRALS
--------- ----------- --------- ---------- ----------- ------------------
Balance at December 31, 1996 2,000 $20,000,000 5,155,331 $7,994,235 3,500,000 $66,065,762 $ -0-
Net Loss -0- -0- -0- -0- -0- -0- -0-
Common Stock Cash Dividends
($0.08) per share -0- -0- -0- -0- -0- -0- -0-
Preferred Stock Dividends -0- -0- -0- -0- -0- -0- -0-
Issuance of Class A Common Stock
(NOTES F AND G):
Directors' Stock Plan -0- -0- 501 9,645 -0- -0- -0-
Non-qualified Stock Plan -0- -0- 29,850 317,151 -0- -0- -0-
Stock Award Restricted Stock
Plan -0- -0- 122,034 1,200,000 -0- -0- -0-
Issuance of Class B Common Stock
(NOTES F AND I):
401(k) Plan -0- -0- -0- -0- 15,364 282,384 -0-
Issuance of Series B Preferred
Stock (NOTE F) 60 600,000 -0- -0- -0- -0- -0-
Issuance of Treasury Stock
(NOTES F, G, AND I):
401(k) Plan -0- -0- -0- -0- -0- 49,658 -0-
Non-qualified Stock Plan -0- -0- -0- -0- -0- -0- -0-
Purchase of Class A Common Stock
(NOTE F): -0- -0- -0- -0- -0- -0- -0-
Income tax benefits relating to
stock plans -0- -0- -0- 837,000 -0- -0- -0-
------ ---------- ---------- ----------- --------- ------------ -------
Balance at December 31, 1997 2,060 $20,600,000 5,307,716 $10,358,031 3,515,364 $66,397,804 $ -0-
====== ========== ========== ========== ========= =========== ========
CLASS A CLASS B
TREASURY STOCK TREASURY STOCK
-------------------- --------------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------------------------ --------------------- ----------- ------------
Balance at December 31, 1996 (663,180) $(6,638,284) (172,300) $(2,740,137) $10,543,940 $95,225,516
Net Loss -0- -0- -0- -0- (1,402,458) (1,402,458)
Common Stock Cash Dividends
($0.08) per share -0- -0- -0- -0- (628,045) (628,045)
Preferred Stock Dividends -0- -0- -0- -0- (1,409,690) (1,409,690)
Issuance of Class A Common Stock
(NOTES F AND G):
Directors' Stock Plan -0- -0- -0- -0- -0- 9,645
Non-qualified Stock Plan -0- -0- -0- -0- -0- 317,151
Stock Award Restricted Stock
Plan -0- -0- -0- -0- -0- 1,200,000
Issuance of Class B Common Stock
(NOTES F AND I):
401(k) Plan -0- -0- -0- -0- -0- 282,384
Issuance of Series B Preferred
Stock (NOTE F) -0- -0- -0- -0- -0- 600,000
Issuance of Treasury Stock
(NOTES F, G, AND I):
401(k) Plan -0- -0- 5,510 87,628 -0- 137,286
Non-qualified Stock Plan 54,159 1,082,390 -0- -0- (500,556) 581,834
Purchase of Class A Common Stock
(NOTE F): (172,900) (3,455,475) -0- -0- -0- (3,455,475)
Income tax benefits relating to
stock plans -0- -0- -0- -0- -0- 837,000
--------- ------------ -------- ----------- ---------- -----------
Balance at December 31, 1997 (781,921) $(9,011,369) (166,790) $(2,652,509) $6,603,191 $92,295,148
========= ============ ========= ============ =========== ============
See accompanying notes.
48
GRAY COMMUNCIATIONS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- ------------- ---------------
OPERATING ACTIVITIES
Net income (loss) $ (1,402,458) 2,519,481 930,969
Items which did not use (provide) cash:
Depreciation 7,800,217 4,077,696 2,633,360
Amortization of intangible assets 6,718,302 3,584,845 1,325,526
Amortization of deferred loan costs 1,083,303 270,813 -0-
Amortization of program broadcast rights 3,501,330 2,742,712 1,647,035
Amortization of original issue discount on 8% subordinated note -0- 216,667 -0-
Write-off of loan acquisition costs from early extinguishment
of debt -0- 1,818,840 -0-
Gain on disposition of television station -0- (5,671,323) -0-
Payments for program broadcast rights (3,629,350) (2,877,128) (1,776,796)
Compensation paid in Common Stock -0- 880,000 2,321,250
Supplemental employee benefits (196,057) (855,410) (370,694)
Common Stock contributed to 401(K) Plan 419,670 262,426 298,725
Deferred income taxes 1,283,000 (44,000) 863,000
Loss on asset sales 108,998 201,792 1,652
Changes in operating assets and liabilities:
Trade accounts receivable (369,675) (1,575,723) (852,965)
Recoverable income taxes (384,597) (400,680) (1,347,007)
Inventories (101,077) 254,952 (181,034)
Other current assets (569,745) (21,248) (11,208)
Trade accounts payable (2,825,099) 2,256,795 1,441,745
Employee compensation and benefits (2,848,092) 2,882,379 1,011,667
Accrued expenses 1,279,164 (2,936,155) (414,087)
Accrued interest (325,409) 3,794,284 78,536
Deferred revenue 201,657 710,286 -0-
----------- ---------- --------
Net cash provided by operating activities 9,744,082 12,092,301 7,599,674
INVESTING ACTIVITIES
Acquisitions of newspaper businesses -0- -0- (2,084,621)
Acquisition of television businesses (45,644,942) (210,944,547) -0-
Disposition of television business -0- 9,480,699 -0-
Purchases of property and equipment (10,371,734) (3,395,635) (3,279,721)
Proceeds from asset sales 24,885 174,401 2,475
Deferred acquisition costs (89,056) -0- (3,330,481)
Payments on purchase liabilities (764,658) (243,985) (111,548)
Other (652,907) (139,029) (125,356)
-------- -------- --------
Net cash used in investing activities (57,498,412) (205,068,096) (8,929,252)
FINANCING ACTIVITIES
Proceeds from borrowings:
Short-term debt -0- -0- 1,200,000
Long-term debt 75,350,000 238,478,310 2,950,000
Repayments of borrowings:
Short-term debt -0- -0- (1,200,000)
Long-term debt (22,678,127) (109,434,577) (1,792,516)
Deferred loan costs (463,397) (9,410,078) -0-
Dividends paid (1,428,045) (426,598) (348,689)
Class A Common Stock transactions 1,163,796 719,166 522,254
Proceeds from equity offering - Class B Common Stock, net of expenses -0- 66,065,762 -0-
Proceeds from offering of Series B Preferred Stock -0- 10,000,000 -0-
Proceeds from settlement of interest rate swap agreement -0- 215,000 -0-
Proceeds from sale of treasury shares 581,834 -0- -0-
Purchase of Class A Common Stock (3,455,475) -0- -0-
Purchase of Class B Common Stock -0- (2,740,137) -0-
---------- ----------- ------------
Net Cash provided by financing activities 49,070,586 193,466,848 1,331,049
----------- ------------ ------------
Increase in cash and cash equivalents 1,316,256 491,053 1,471
Cash and cash equivalents at beginning of year 1,051,044 559,991 558,520
----------- ------------ ------------
Cash and cash equivalents at end of year $ 2,367,300 $ 1,051,044 $ 559,991
=========== ============ ============
See accompanying notes.
49
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 eight southeastern states,
include eight television stations, three daily newspapers, two area weekly
advertising only publications, and paging operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenues as services are performed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit with a bank. Deposits
with the bank are generally insured in limited amounts.
INVENTORIES
Inventories, principally newsprint and supplies, are stated at the lower
of cost or market. The Company uses the last-in, first-out ("LIFO") method of
determining costs for substantially all of its inventories. Current cost
exceeded the LIFO value of inventories by approximately $15,000 and $13,000 at
December 31, 1997, and 1996, respectively.
PROGRAM BROADCAST RIGHTS
Rights to programs available for broadcast under program license
agreements are initially recorded at the beginning of the license period for the
amounts of total license fees payable under the license agreements and are
charged to operating expense on the basis of total programs available for use on
the straight-line method. The portion of the unamortized balance expected to be
charged to operating expense in the succeeding year is classified as a current
asset, with the remainder classified as a non-current asset. The liability for
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.
50
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 depreciated over estimated useful lives of approximately 35 years,
10 years and 5 years, respectively.
INTANGIBLE ASSETS
Intangible assets are stated at cost and are amortized using the
straight-line method. Goodwill is amortized over 40 years. Loan acquisition fees
are amortized over the life of the applicable indebtedness. Non-compete
agreements are amortized over the life of the specific agreement. Accumulated
amortization of intangible assets resulting from business acquisitions was $11.5
million and $4.9 million as of December 31, 1997, and 1996, 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.
CAPITAL STOCK
On August 17, 1995, the Board of Directors declared a 50% stock dividend
on the Company's Class A Common Stock payable October 2, 1995 to stockholders of
record on September 8, 1995, to effect a three for two stock split. All
applicable share and per share data have been adjusted to give effect to the
stock split.
EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
Statement 128 requirements.
51
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 Company has adopted FASB Statement No. 107, DISCLOSURE ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, which requires disclosure of fair value, to the
extent practical, of certain of the Company's financial instruments. The fair
value amounts do not necessarily represent the amount that could be realized in
a sale or settlement. The Company's financial instruments are comprised
principally of long-term debt and preferred stock.
The estimated fair value of long-term debt at December 31, 1997, and 1996
exceeded book value by $13.2 million and $9.6 million, respectively. The fair
value of the Preferred Stock at December 31, 1997, and 1996 approximates its
carrying value at that date. The Company does not anticipate settlement of
long-term debt or preferred stock at other than book value.
The fair value of other financial instruments classified as current assets
or liabilities approximates their carrying values due to the short-term
maturities of these instruments.
RECLASSIFICATIONS
Certain amounts in the accompanying consolidated financial statements have
been reclassified to conform to the 1997 format.
B. BUSINESS DISPOSITION
The Company sold the assets of KTVE Inc. (the "KTVE Sale"), its
NBC-affiliated television station, in Monroe, Louisiana-El Dorado, Arkansas on
August 20, 1996. The sales price included $9.5 million in cash plus the amount
of the accounts receivable on the date of closing to the extent collected by the
buyer, to be paid to the Company within 150 days following the closing date
(approximately $829,000). The Company recognized a pre-tax gain of approximately
$5.7 million and estimated income taxes of approximately $2.8 million in
connection with the sale.
52
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. BUSINESS ACQUISITIONS
The Company's acquisitions have been accounted for under the purchase
method of accounting. Under the purchase method of accounting, the results of
operations of the acquired businesses are included in the accompanying
consolidated financial statements as of their respective acquisition dates. The
assets and liabilities of acquired businesses are included based on an
allocation of the purchase price.
PENDING ACQUISITION
On February 13, 1998, the Company signed a definitive purchase agreement
to acquire all of the outstanding capital stock of Busse Broadcasting
Corporation ("Busse"). The purchase price is approximately $112.0 million plus
Busse's cash and cash equivalents less Busse's indebtedness including its 11 5/8
% Senior Secured Notes due 2000. Busse owns and operates three VHF television
stations: KOLN-TV, the CBS-affiliate operating on Channel 10 in the
Lincoln-Hastings-Kearney, Nebraska television market, and its satellite station
KGIN-TV, the CBS-affiliate operating on Channel 11 serving Grand Island,
Nebraska; and WEAU-TV, the NBC-affiliate operating on Channel 13 serving the Eau
Claire-La Crosse, Wisconsin market. The purchase of Busse is subject to FCC
approval. The acquisition is expected to close on or before September 1, 1998.
In connection with the proposed purchase of Busse, the Company will pay Bull Run
Corporation ("Bull Run"), a principal stockholder of the Company, a finder's fee
equal to 1% of the purchase price for services performed, none of which was due
and included in accounts payable at December 31, 1997.
1997 ACQUISITIONS
On August 1, 1997, the Company purchased the assets of WITN-TV ("WITN").
The purchase price of approximately $41.7 million consisted of $40.7 million
cash, $600,000 in acquisition related costs, and approximately $400,000 in
liabilities which were assumed by the Company. Based on the preliminary
allocation of the purchase price, the excess of the purchase price over the fair
value of net tangible assets acquired was approximately $37.4 million. The
Company funded the costs of this acquisition through its senior credit facility
(the "Senior Credit Facility"). WITN operates on Channel 7 and is the
NBC-affiliate in the Greenville-Washington-New Bern, North Carolina market. In
connection with the purchase of the assets of WITN ("WITN Acquisition"), the
Company will pay Bull Run a fee equal to 1% of the purchase price for services
performed, of which $400,000 was due and included in accounts payable at
December 31, 1997.
On April 24, 1997, the Company acquired all of the issued and outstanding
common stock of GulfLink Communications, Inc. ("GulfLink") of Baton Rouge,
Louisiana. The GulfLink operations include nine transportable satellite uplink
trucks. The purchase price of approximately $5.2 million consisted of $4.1
million cash, $127,000 in acquisition related costs, and approximately $1.0
million in liabilities which were assumed by the Company. Based on the
preliminary allocation of the purchase price, the excess of the purchase price
over the fair value of net tangible assets acquired was approximately $3.6
million. The Company funded the costs of this acquisition through its Senior
Credit Facility. In connection with the purchase of the common stock of GulfLink
Communications, Inc. (the "GulfLink Acquisition"), the Company paid Bull Run a
fee equal to $58,000 for services performed.
Unaudited pro forma operating data for the year ended December 31, 1997,
and 1996 is presented below and assumes that the WITN Acquisition and the
GulfLink Acquisition occurred on January 1, 1996.
53
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. BUSINESS ACQUISITIONS (CONTINUED)
1997 ACQUISITIONS (CONTINUED)
This unaudited pro forma operating data does not purport to represent the
Company's actual results of operations had the WITN Acquisition and the GulfLink
Acquisition occurred on January 1, 1996, and should not serve as a forecast of
the Company's operating results for any future periods. The pro forma
adjustments are based solely upon certain assumptions that management believes
are reasonable under the circumstances at this time. Unaudited pro forma
operating data for the year ended December 31, 1997, are as follows (in
thousands, except per common share data):
WITN GULFLINK
ACQUISITION ACQUISITION PRO FORMA ADJUSTED
GRAY ADJUSTMENTS PRO FORMA
-------------- ------------ --------------------------- ------------
(UNAUDITED)
Revenues, net $ 103,548 $ 4,551 $ 1,000 $ -0- $109,099
========= ========= ========= ========= ========
Net income (loss) available to common
stockholders $ (2,812) $ 146 $ 74 $ (1,177) $ (3,769)
========== ========== =========== =========== =========
Income (loss) per share available to
common stockholders:
Basic $ (0.36) $ (0.48)
=========== ==========
Diluted $ (0.36) $ (0.48)
=========== ==========
Unaudited pro forma operating data for the year ended December 31, 1996, are as
follows (in thousands, except per common share data):
FIRST
WITN GULFLINK KTVE AMERICAN PRO FORMA ADJUSTED
GRAY ACQUISITION ACQUISITION SALE ACQUISITION ADJUSTMENTS PRO FORMA
----------- ---------------------------------------------------------------- ------------
(UNAUDITED)
Revenues, net $ 79,305 $ 8,431 $ 2,937 $ (2,968) $ 21,203 $ -0- $108,908
======== ========== ========== ======== ========= =========== ========
Net income (loss)
available to common
stockholders $ 2,143 $ 2,566 $ 197 $ (3,173) $ (1,773) $ (2,357) $ (2,397)
======== ========== ========== ======== ========= ========== ==========
Income (loss) per share
available to common
stockholders:
Basic $ 0.40 (0.30)
====== ======
Diluted 0.38 (0.30)
====== ======
The pro forma results presented above include adjustments to reflect (i)
the incurrence of interest expense to fund the GulfLink Acquisition, the WITN
Acquisition, and the First American Acquisition (as defined in 1996
ACQUISITIONS), (ii) depreciation and amortization of assets acquired, (iii) the
reduction of employee compensation related to severance and vacation
compensation for 1996, (iv) the elimination of the corporate expense allocation
net of additional accounting and administrative expenses for the WITN
Acquisition and the First American Acquisition, (v) increased pension expense
for the First American Acquisition, and (vi) the income tax effect of such pro
forma adjustments. Average outstanding shares used to calculate pro forma
earnings per share data for 1996 include the 3,500,000 Class B Common shares
issued in connection with the First American Acquisition.
54
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. BUSINESS ACQUISITIONS (CONTINUED)
1996 ACQUISITIONS
On September 30, 1996, the Company purchased from First American Media,
Inc. substantially all of the assets used in the operation of two CBS-affiliated
television stations, WCTV-TV ("WCTV") serving Tallahassee, Florida-Thomasville,
Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, as well as those assets
used in the operations of a satellite uplink and production services business
and a communications and paging business (the "First American Acquisition").
Subsequent to the First American Acquisition, the Company rebranded WKXT with
the call letters WVLT ("WVLT") as a component of its strategy to promote the
station's upgraded news product. The purchase price of approximately $183.9
million consisted of $175.5 million cash, $1.8 million in acquisition related
costs, and the assumption of approximately $6.6 million of liabilities. The
excess of the purchase price over the fair value of net tangible assets acquired
was approximately $160.2 million. The Company's Board of Directors has agreed to
pay Bull Run, a fee equal to approximately $1.7 million for services performed
in connection with this acquisition. At December 31, 1997, $450,000 of this fee
remains payable and is included in accounts payable.
The First American Acquisition and the early retirement of the Company's
existing bank credit facility and other senior indebtedness (SEE NOTES D AND F),
were funded as follows: net proceeds of $66.1 million from the sale of 3,500,000
shares of the Company's Class B Common Stock; net proceeds of $155.2 million
from the sale of $160.0 million principal amount of the Company's 10 5/8% Senior
Subordinated Notes due 2006; $16.9 million of borrowings under the Senior Credit
Facility; and $10.0 million net proceeds from the sale of 1,000 shares of the
Company's Series B Preferred Stock with warrants to purchase 500,000 shares of
the Company's Class A Common Stock at $24 per share. The shares of Series B
Preferred Stock were 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 an opinion from an investment
banker as to the fairness of the terms of the sale of such Series B Preferred
Stock with warrants.
In connection with the First American Acquisition, the Federal
Communications Commission (the "FCC") ordered the Company to apply for FCC
approval to divest itself of WALB-TV ("WALB") in Albany, Georgia and WJHG-TV
("WJHG") in Panama City, Florida by March 31, 1997 to comply with regulations
governing common ownership of television stations with overlapping service
areas. The FCC is currently reexamining these regulations, and if it revises
them in accordance with the interim policy it has adopted, divestiture of WJHG
would not be required. Accordingly, the Company requested and in July of 1997
received an extension of the divestiture deadline with regard to WJHG
conditioned upon the outcome of the rulemaking proceedings. It can not be
determined when the FCC will complete its rulemaking on this subject. Also in
July of 1997, the Company obtained FCC approval to transfer control of WALB to a
trust with a view towards the trustee effecting (i) a swap of WALB's assets for
assets of one or more television stations of comparable value and with
comparable broadcast cash flow in a transaction qualifying for deferred capital
gains treatment under the "like-kind exchange" provision of Section 1031 of the
Internal Revenue Code of 1986, or (ii) a sale of such assets. Under the trust
arrangement, the Company relinquished operating control of the station to a
trustee while retaining the economic risks and benefits of ownership. If the
trustee is required to effect a sale of WALB, the Company would incur a
significant gain and related tax liability, the payment of which could have an
adverse effect on the Company's ability to acquire comparable assets without
incurring additional indebtedness. The FCC allowed up to six months for the
trustee to file an application seeking the agency's approval of a swap or sale.
This six month period expired in January 1998 without a swap or
55
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. BUSINESS ACQUISITIONS (CONTINUED)
1996 ACQUISITIONS (CONTINUED)
sale being executed. The trustee has filed an application requesting a six month
extension to effect a swap or sale. The FCC has not yet ruled on this extension
application.
Condensed unaudited balance sheets of WALB and WJHG are as follows (in
thousands):
WALB WJHG
------------------------------- -------------------------------
DECEMBER 31,
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(UNAUDITED)
Current assets $2,379 $2,058 $1,053 $1,079
Property and equipment 1,473 1,579 848 981
Other assets 471 100 346 55
------ ------ ------ ------
Total assets $4,323 $3,737 $2,247 $2,115
====== ====== ====== ======
Current liabilities $ 994 $1,189 $ 350 $ 497
Other liabilities 215 242 127 -0-
Stockholder's equity 3,114 2,306 1,770 1,618
------ ------ ------ ------
Total liabilities and stockholder's equity $4,323 $3,737 $2,247 $2,115
====== ====== ====== ======
Condensed unaudited income statement data for the three years ended
December 31, 1997, for WALB and WJHG are as follows (in thousands):
WALB WJHG
------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 1996 1995 1997 1996 1995
-------------------------------------------------------- ------------- -------------
(UNAUDITED)
Broadcasting revenues $ 10,090 $ 10,611 $ 9,445 $ 4,896 $5,217 $ 3,843
Expenses 4,770 5,070 4,650 3,757 4,131 3,573
-------- ------- ----- ------ ------ -------
Operating income 5,320 5,541 4,795 1,139 1,086 270
Other income (expense) 3 7 17 (5) 6 60
-------- -------- ------ ------ ------- -------
Income before income taxes $ 5,323 $ 5,548 $4,812 $1,134 $1,092 $ 330
======== ======== ====== ====== ====== =======
Net income $ 3,295 $ 3,465 $2,984 $ 737 $ 685 $ 205
======== ======== ====== ======= ======= =======
On January 4, 1996, the Company purchased substantially all of the assets
of WRDW-TV, a CBS television affiliate serving the Augusta, Georgia television
market (the "Augusta Acquisition"). The purchase price of approximately $37.2
million which included assumed liabilities of approximately $1.3 million, was
financed primarily through long-term borrowings. The assets acquired consisted
of office equipment and broadcasting operations located in North Augusta, South
Carolina. The excess of the purchase price over the fair value of net tangible
assets acquired was approximately $32.5 million. In connection with the Augusta
Acquisition, the Company's Board of Directors approved the payment of a $360,000
fee to Bull Run.
Funds for the Augusta Acquisition were obtained from the modification of
the Company's existing bank debt on January 4, 1996 (the "Bank Loan") to a
variable rate reducing revolving credit facility (the
56
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. BUSINESS ACQUISITIONS (CONTINUED)
1996 ACQUISITIONS (CONTINUED)
"Old Credit Facility") and the sale to Bull Run of an 8% subordinated note due
January 3, 2005 in the principal amount of $10.0 million (the "8% Note"). In
connection with the sale of the 8% Note, the Company also issued warrants to
Bull Run to purchase 487,500 shares of Class A Common Stock at $17.88 per share,
337,500 shares of which were vested at December 31, 1997. The remainder vests in
four equal annual installments of 37,500 shares through 2001. Approximately $2.6
million of the $10.0 million of proceeds from the 8% Note was allocated to the
warrants and increased Class A Common Stock. The Old Credit Facility provided
for a credit line up to $54.2 million. This transaction also required a
modification of the interest rate of the Company's $25.0 million senior secured
note with an institutional investor (the "Senior Note") from 10.08% to 10.7%.
As part of the financing arrangements for the First American Acquisition,
the Old Credit Facility and the Senior Note were retired and the Company issued
to Bull Run, in exchange for the 8% Note, 1,000 shares of Series A Preferred
Stock. The warrants issued with the 8% Note were retired and the warrants issued
with the Series A Preferred Stock will vest in accordance with the same schedule
described above provided the Series A Preferred Stock remains outstanding. The
Company recorded an extraordinary charge of $5.3 million ($3.2 million after
taxes or $0.58 per basic common share and $0.56 per diluted common share for
1996) in connection with the early retirement of the $25.0 million Senior Note
and the write-off of loan acquisition costs from the early extinguishment of
debt.
Unaudited pro forma operating data for the year ended December 31, 1996,
and 1995 is presented below and assumes that the Augusta Acquisition, the First
American Acquisition, and the KTVE Sale occurred on January 1, 1995.
This unaudited pro forma operating data does not purport to represent the
Company's actual results of operations had the Augusta Acquisition, the First
American Acquisition, and the KTVE Sale occurred on January 1, 1995, and should
not serve as a forecast of the Company's operating results for any future
periods. The pro forma adjustments are based solely upon certain assumptions
that management believes are reasonable under the circumstances at this time.
Unaudited pro forma operating data for the year ended December 31, 1996, are as
follows (in thousands, except per common share data):
FIRST
KTVE AMERICAN PRO FORMA ADJUSTED
GRAY SALE ACQUISITION ADJUSTMENTS PRO FORMA
------------- -------------------------- ------------- ----------------
(UNAUDITED)
Revenues, net $79,305 $(2,968) $21,203 $ -0- $ 97,540
======= ======= ======= =========== ========
Net income (loss) before extraordinary
charge available to common
stockholders $ 5,301 $(3,173) $(1,773) $ (1,743) $ (1,388)
======= ======= ======= ========== ========
Income (loss) per share available to
common stockholders before
extraordinary charge:
Basic $ 0.98 $ (0.17)
========= =========
Diluted $ 0.94 $ (0.17)
========= =========
57
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. BUSINESS ACQUISITIONS (CONTINUED)
1996 ACQUISITIONS (CONTINUED)
Unaudited pro forma operating data for the year ended December 31, 1995,
are as follows (in thousands, except per common share data):
FIRST
AUGUSTA KTVE AMERICAN PRO FORMA ADJUSTED
GRAY ACQUISITION SALE ACQUISITION ADJUSTMENTS PRO FORMA
------------- -------------------------- ------------ ---------------------------
(UNAUDITED)
Revenues, net $58,616 $8,660 $(4,188) $27,321 $ 228 $90,637
======= ====== ======= ======= ========= =======
Net income (loss) available
to common stockholders $ 931 $2,242 $ (278) $ 6,348 $(15,316) $(6,073)
======= ====== ======== ======== ======== ========
Income (loss) per share
available to common
stockholders:
Basic $ 0.21 $ (0.77)
======== ======
Diluted $ 0.21 $ (0.77)
======== ======
The pro forma results presented above include adjustments to reflect (i)
the incurrence of interest expense to fund the First American Acquisition and
the WRDW Acquisition, (ii) depreciation and amortization of assets acquired,
(iii) the reduction of employee compensation related to severance and vacation
compensation for 1996, (iv) the elimination of the corporate expense allocation
net of additional accounting and administrative expenses for the First American
Acquisition, (v) increased pension expense for the First American Acquisition,
and (vi) the income tax effect of such pro forma adjustments. Average
outstanding shares used to calculate pro forma earnings per share data for 1996
and 1995 include the 3,500,000 Class B Common shares issued in connection with
the First American Acquisition.
1995 ACQUISITIONS
On January 6, 1995, the Company purchased substantially all of the assets
of the Gwinnett Post-Tribune and assumed certain liabilities ( the "Gwinnett
Acquisition"). The assets consisted of office equipment and publishing
operations located in Lawrenceville, Georgia. The purchase price of $3.7
million, including assumed liabilities of approximately $370,000, was paid by
approximately $1.2 million in cash (financed through long-term borrowings and
cash from operations), the issuance of 44,117 shares of the Company's Class A
Common Stock (having fair value of $500,000), and $1.5 million payable to the
sellers pursuant to non-compete agreements. The excess of the purchase price
over the fair value of net tangible assets acquired was approximately $3.4
million. In connection with the Gwinnett Acquisition the Company's Board of
Directors approved the payment of a $75,000 fee to Bull Run.
58
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
-----------------------------
1997 1996
------------- ---------------
10 5/8% Senior Subordinated Notes due 2006 $160,000 $160,000
Senior Credit Facility 65,630 12,680
Other 1,446 688
----------- --------
227,076 173,368
Less current portion (400) (140)
----------- --------
$226,676 $173,228
========== =========
On September 20, 1996, the Company sold $160.0 million principal amount of
the Company's 10 5/8% Senior Subordinated Notes (the "Senior Subordinated
Notes") due 2006. The net proceeds of $155.2 million from this offering, along
with the net proceeds from (i) the KTVE Sale, (ii) the issuance of Class B
Common Stock, (iii) the issuance of Series B Preferred Stock and (iv) borrowings
under the Senior Credit Facility, were used in financing the First American
Acquisition as well as the early retirement of the Senior Note and the Old
Credit Facility. Interest on the Senior Subordinated Notes is payable
semi-annually on April 1 and October 1, commencing April 1, 1997.
The Senior Subordinated 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 Senior Subordinated 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 will be
full, unconditional and joint and several. All of the current and future direct
and indirect subsidiaries of the Company will be guarantors of the Notes.
Accordingly, separate financial statements and other disclosures of each of the
Subsidiary Guarantors are not presented because management has determined that
they are not material to investors.
The Company has a $125.0 million Senior Credit Facility, as amended, which
is comprised of a term loan (the "Term Commitment") of $71.5 million and a
revolving credit facility (the "Revolving Commitment") of $53.5 million. The
agreement pursuant to which the Senior Credit Facility was issued contains
certain restrictive provisions, which, among other things, limit capital
expenditures and additional indebtedness and require minimum levels of cash
flows. The Senior Subordinated Notes also contained similar restrictive
provisions. Additionally, the effective interest rate of the Senior Credit
Facility can be changed based upon the Company's maintenance of certain
operating ratios as defined by the Senior Credit Facility, not to exceed the
lender's prime rate plus 0.5% or LIBOR plus 2.25%. The effective interest rate
on the Senior Credit Facility at December 31, 1997, and 1996 was 7.9% and 8.4%,
respectively.
59
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. LONG-TERM DEBT (CONTINUED)
The amounts available under the Revolving Commitment will be reduced by
$7,356,000 in 1998; $8,025,000 in years 1999, 2000, 2001 and 2002; $9,363,000 in
2003; and $4,681,000 in 2004.
The amount borrowed by the Company on December 31, 1999 under the Term
Commitment will be converted to a four and one-half year term loan. The
principal of the term loan shall be repaid in nineteen consecutive quarterly
installments commencing on December 31, 1999. Each of the first five quarterly
installments are equal to 2.50% of the principal balance outstanding at December
31, 1999. Each of the next thirteen quarterly installments are equal to 3.75% of
the principal balance outstanding at December 31, 1999. The nineteenth and final
installment due June 30, 2004 will be equal to the remaining balance outstanding
and any outstanding interest due on June 30, 2004.
The Company is charged a commitment fee on the excess of the aggregate
average daily undisbursed amount of the Revolving Commitment and the Term
Commitment over the amount outstanding. At December 31, 1997, the commitment fee
was 0.375% per annum. At December 31, 1997, the Company has approximately $65.6
million outstanding on the Senior Credit Facility. At December 31, 1997, the
Company's interest rate for the Senior Credit Facility, was based on a spread
over LIBOR of 1.75% or Prime.
The Senior Subordinated Notes and the Senior Credit Facility are secured
by substantially all of the Company's existing and hereafter acquired assets.
At December 31, 1997, retained earnings of approximately $1.4 million and
$1.0 million were available for dividends to holders of preferred and common
stock, respectively.
Aggregate minimum principal maturities on long-term debt as of December
31, 1997, were as follows (in thousands):
1998 $ 400
1999 8,593
2000 10,300
2001 11,165
2002 11,058
Thereafter 185,560
-------
$227,076
========
The Company made interest payments of approximately $21.3 million, $7.6
million, and $5.4 million during 1997, 1996 and 1995, respectively.
In the quarter ended September 30, 1996, the Company recorded an
extraordinary charge of $5.3 million ($3.2 million after taxes or $0.58 per
basic common share or $0.56 per diluted common share) in connection with the
early retirement of the Senior Note and the write-off of unamortized loan
acquisition costs of the Senior Note and the Old Credit Facility resulting from
the early extinguishment of debt.
60
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. SUPPLEMENTAL EMPLOYEE BENEFITS AND OTHER AGREEMENTS
The Company had an employment agreement with its former President, Ralph
W. Gabbard, which provided for an award of 122,034 shares of the Company's Class
A Common Stock if his employment with the Company continued until September
1999. Mr. Gabbard died unexpectedly in September 1996. The Company awarded these
shares to the estate of Mr. Gabbard. Approximately $880,000 and $240,000 of
expense was recorded in 1996 and 1995, respectively.
In December 1995, the Company amended an existing employment agreement to
pay consulting fees to its former chief executive officer. The Company recorded
approximately $596,000 of corporate and administrative expenses during the year
ended December 31, 1995, in accordance with the terms of the amended employment
agreement. Additionally, in December 1995 the Company issued 150,000 shares of
the Company's Class A Common Stock to this former chief executive officer in
accordance with his employment agreement which was amended to remove certain
restrictions, including, among others, a time requirement for continued
employment. Compensation expense of approximately $2.1 million was recognized in
1995 for the 150,000 shares of Class A Common Stock issued pursuant to this
agreement.
The Company has entered into supplemental retirement benefit and other
agreements with certain key employees. These benefits are to be paid primarily
in equal monthly amounts over the employees' life for a period not to exceed 15
years after retirement. The Company charges against operations amounts
sufficient to fund the present value of the estimated lifetime supplemental
benefit over each employee's anticipated remaining period of employment.
The following summarizes activity relative to certain officers' agreements
and the supplemental employee benefits (in thousands):
DECEMBER 31,
-------------------------------------------------------
1997 1996 1995
------------------ -------------------- -------------
Beginning liability $ 3,158 $ 2,938 $ 2,518
--------- ----------- -----------
Provision 161 918 976
Forfeitures -0- -0- (169)
--------- ----------- -----------
Net expense 161 918 807
--------- ----------- -----------
Payments (1,793) (698) (387)
--------- ----------- -----------
Net change (1,632) 220 420
--------- ----------- ----------
Ending liability 1,526 3,158 2,938
Less current portion (365) (1,801) (725)
--------- ---------- ----------
$ 1,161 $ 1,357 $ 2,213
======== ========== ==========
F. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
The Company amended its Articles of Incorporation to increase to
50,000,000 the number of shares of all classes of stock which the Company has
the authority to issue, 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
61
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE (CONTINUED)
receive cash dividends on an equal per share basis. In September 1996, the
Company issued 1,000 shares each of Series A and Series B Preferred Stock
relating to the financing arrangements for the First American Acquisition.
As part of the financing for the Augusta Acquisition, funding was obtained
from the 8% Note, which included the issuance of detachable warrants to Bull Run
to purchase 487,500 shares of Class A Common Stock at $17.88 per share, 337,500
shares of which were vested at December 31, 1997. The remainder vests in four
equal annual installments of 37,500 through 2001. Approximately $2.6 million of
the $10.0 million of proceeds from the 8% Note was allocated to the warrants and
increased Class A Common Stock. This allocation of the proceeds was based on an
estimate of the relative fair values of the 8% Note and the warrants on the date
of issuance. The Company amortized the original issue discount on a ratable
basis in accordance with the original terms of the 8% Note through September 30,
1996. The Company recognized approximately $217,000 in amortization costs for
the $2.6 million original issue discount. In September 1996, the Company
exchanged the 8% Note with Bull Run for 1,000 shares of liquidation preference
Series A Preferred Stock yielding 8%. The warrants issued with the 8% Note were
retired and the warrants issued with the Series A Preferred Stock will vest in
accordance with the same schedule described above provided the Series A
Preferred Stock remains outstanding. The holder of the Series A Preferred Stock
will receive cash dividends at an annual rate of $800 per share. The liquidation
or redemption price of the Series A Preferred Stock is $10,000 per share.
As part of the financing for the First American Acquisition, the Company
also issued 1,000 shares of Series B Preferred Stock, with warrants to purchase
an aggregate of 500,000 shares of Class A Common Stock at an exercise price of
$24.00 per share. Of these warrants 300,000 vested upon issuance, with the
remaining warrants vesting in five equal annual installments commencing on the
first anniversary of the date of issuance. The shares of Series B Preferred
Stock were 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. The holders of the Series B Preferred Stock will receive
dividends at an annual rate of $600 per share, except the Company at its option
may 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. In
September 1997, the Company issued 60 shares of Series B Preferred Stock as
payment of dividends to the holders of its then outstanding Series B Preferred
Stock.
On September 24, 1996, the Company completed a public offering of 3.5
million shares of its Class B Common Stock at an offering price of $20.50 per
share. The proceeds, net of expenses, from this public offering of approximately
$66.1 million were used in the financing of the First American Acquisition.
The Company has a Stock Purchase Plan which allows outside directors to
purchase up to 7,500 shares of the Company's Common Stock directly from the
Company before the end of January following each calendar year. The purchase
price per share approximates the market price of the Common Stock at the time of
the grant. During 1997, 1996 and 1995, certain directors purchased an aggregate
of 501, 22,500, and 23,500 shares of Class A Common Stock, respectively, under
this plan.
62
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE (CONTINUED)
The Company's Board of Directors authorized the purchase of 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 1997 and the fourth
quarter of 1996, the Company purchased 172,900 Class A Common Stock shares and
172,300 Class B Common Stock shares, respectively, under this authorization. The
1997 and 1996 treasury shares were purchased at prevailing market prices with an
average effective price of $19.99 and $15.90 per share, respectively, and were
funded from the Company's operating cash flow.
Statement of Financial Accounting Standards No. 128. "Earnings Per Share"
is effective for full-year 1997 and subsequent periods. Statement 128 modifies
the method for calculations of net income per share applicable to common
stockholders and also requires a reconciliation between basic and diluted per
share amounts.
The following table presents the effect of Statement 128 (in thousands,
except per common share data):
1997 1996 1995
------------------ ----------------- -----------------
Net income (loss) available to common stockholders $ (2,812) $ 2,143 $ 931
=========== =========== ============
Basic average common shares outstanding 7,902 5,398 4,354
=========== ============ ============
Basic net income (loss) per share available
to common stockholders $ (0.36) $ 0.40 $ 0.21
=========== ============ ============
Basic average common shares outstanding 7,902 5,398 4,354
Stock compensation awards -0- 228 127
----------- ------------- -------------
Diluted average common shares outstanding 7,902 5,626 4,481
============ ============ ============
Diluted net income (loss) per share available
to common stockholders $ (0.36) $ 0.38 $ 0.21
============ ============ ============
G. 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 because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123 "Accounting for Stock-Based Compensation" ("Statement 123") requires use
of option valuation models that were not developed for use in valuing 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") under
which 200,000 shares of the Company's Class A Common Stock and 400,000 shares of
the Company's Class B Common Stock are reserved for grants to key personnel for
(i) incentive stock options, (ii) non-qualified stock options, (iii) stock
appreciation rights, (iv) restricted stock and (v) performance awards, as
defined by the Incentive Plan. 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.
63
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. LONG-TERM INCENTIVE PLAN AND STOCK PURCHASE PLAN (CONTINUED)
Under the Incentive Plan, the options granted typically vest after a two year
period and expire three years after full vesting. Options granted through
December 31, 1997, 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 outside directors
up to 7,500 shares of the Company's 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.
Prior to 1996, grants under the Incentive Plan and the Stock Purchase Plan
were made with the Company's Class A Common Stock. In 1996, the Company amended
its Incentive Plan and Stock Purchase Plan for grants to be made with Class B
Common Stock. Therefore, all options granted subsequent to 1995, were made with
Class B Common Stock.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of Statement
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 1997, 1996 and 1995, respectively: risk-free interest rates of
5.82%, 5.43% and 6.06%; dividend yields of 0.32%, 0.50% and 0.53%; volatility
factors of the expected market price of the Company's Class A Common Stock of
0.28, 0.33 and 0.26; and a weighted-average expected life of the options of 4.5,
2.0 and 2.7 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and which are fully transferable. In addition, option valuation models require
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
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):
1997 1996 1995
----------- --------- ----------
Pro forma income (loss) before extraordinary charge available to common
stockholders $ (3,174) $ 5,190 $ 792
Pro forma income (loss) before extraordinary charge per common share:
Basic $ (0.40) $ 0.96 $ 0.18
Diluted $ (0.40) $ 0.92 $ 0.18
64
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. LONG-TERM INCENTIVE PLAN AND STOCK PURCHASE PLAN (CONTINUED)
A summary of the Company's stock option activity for Class A Common Stock, and
related information for the years ended December 31 follows (in thousands,
except weighted average data):
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------ ------------------------------------------------
OPTIONS WEIGHTED OPTIONS WEIGHTED OPTIONS WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
------------ ------------ ----------- ------------- ----------- -----------
Stock options outstanding -
beginning of year 198 $13.11 263 $12.39 199 $ 9.80
Options granted -0- -0- 111 16.14
Options exercised (85) 10.75 (52) 9.93 (29) 10.08
Options forfeited -0- (6) 12.44 (18) 10.45
Options expired (52) 19.25 (7) 10.17 -0-
----- ---- ----
Stock options outstanding - end of year 61 $11.15 198 $13.11 263 $12.39
===== ==== ===
Exercisable at end of year 61 $11.15 164 $13.06 86 $ 9.84
Weighted-average fair value of $ 3.37
options granted during the year
Exercise prices for Class A Common Stock options outstanding as of
December 31, 1997, ranged from $9.67 to $13.33 for the Incentive Plan. The
weighted-average remaining contractual life of the Class A Common Stock options
outstanding for the Incentive Plan is 1.4 years.
A summary of the Company's stock option activity for Class B Common Stock,
and related information for the years ended December 31 follows (in thousands,
except weighted average data):
YEAR ENDED DECEMBER 31,
1997 1996
------------------------ ------------------------
OPTIONS WEIGHTED OPTIONS WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
PRICE PRICE
------------ ----------- ----------- ------------
Stock options outstanding - beginning of year 68 $15.88 -0-
Options granted 352 25.20 68 $15.88
--- ---
Stock options outstanding - end of year 420 $23.70 68 $15.88
=== ====
Exercisable at end of year 53 $15.88 -0-
Weighted-average fair value of options granted during the
year $ 8.10 $ 3.22
Exercise prices for Class B Common Stock options outstanding as of December 31,
1997, ranged
65
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. LONG-TERM INCENTIVE PLAN AND STOCK PURCHASE PLAN (CONTINUED)
from $15.88 to $25.50 for the Incentive Plan and $15.88 to $24.19 for the Stock
Purchase Plan. The weighted-average remaining contractual life of the Class B
Common Stock options outstanding for the Incentive Plan and Stock Purchase Plan
is 4.7 and 0.5 years, respectively.
H. INCOME TAXES
The Company uses the liability method in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Federal and state income tax expense (benefit) included in the
consolidated financial statements are summarized as follows (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------- -------------
Current
Federal $ (1,620) $1,462 $ (253)
State and local 577 841 24
Deferred 1,283 (44) 863
--------- ------- -------
$ 240 $2,259 $ 634
========= ====== ======
The total provision for income taxes for 1996 included a tax benefit of
$2.2 million which related to an extraordinary charge on extinguishment of debt.
Significant components of the Company's deferred tax liabilities and
assets are as follows (in thousands):
1997 1996
------------- ---------------
Deferred tax liabilities:
Net book value of property and equipment $ 2,670 $1,165
Goodwill 6,281 2,370
Other 120 120
-------- ------
Total deferred tax liabilities 9,071 3,655
Deferred tax assets:
Liability under supplemental retirement plan 526 1,241
Allowance for doubtful accounts 499 619
Difference in basis of assets held for sale 941 941
Federal operating loss carryforwards 4,412 -0-
State and local operating loss carryforwards 1,952 1,164
Other 290 511
-------- ------
Total deferred tax assets 8,620 4,476
Valuation allowance for deferred tax assets (753) (753)
-------- ------
Net deferred tax assets 7,867 3,723
-------- -------
Deferred tax assets (liabilities) net $(1,204) $ 68
======= ========
66
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. INCOME TAXES (CONTINUED)
A substantial portion of the federal operating loss carryforwards will
expire in the year ended December 31, 2012.
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,
1997 1996 1995
------------ -------------- --------------
Statutory rate applied to income $ (395) $ 1,625 $ 532
State and local taxes, net of federal tax benefits 572 (7) 91
Permanent difference relating to sale of KTVE -0- 602 -0-
Other items, net 63 39 11
------ -------- --------
$ 240 $ 2,259 $ 634
====== ======== ========
The Company made income tax payments of approximately $275,000, $3.6
million and $742,000 during 1997, 1996 and 1995, respectively. At December 31,
1997, the Company had current recoverable income taxes of approximately $2.1
million.
I. RETIREMENT PLANS
PENSION PLAN
The Company has a retirement plan covering substantially all full-time
employees. Retirement benefits are based on years of service and the employees'
highest average compensation for five consecutive years during the last ten
years of employment. The Company's funding policy is to contribute annually the
minimum amounts deductible for federal income tax purposes.
The net pension expense includes the following (in thousands):
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------ ------------- -----------
Service costs - benefits earned during the year $ 429 $ 360 $ 221
Interest cost on projected benefit obligation 442 409 384
Actual return on plan assets (608) (574) (655)
Net amortization and deferral 121 126 187
----- ----- ------
Net pension expense $ 384 $ 321 $ 137
===== ====== =======
Assumptions:
Discount rate 7.0% 7.0% 8.0%
Expected long-term rate of return on assets 7.0% 7.0% 8.0%
Estimated rate of increase in compensation levels 5.0% 5.0% 6.0%
67
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. RETIREMENT PLANS (CONTINUED)
PENSION PLAN (CONTINUED)
The following summarizes the plan's funded status and related assumption
(in thousands):
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
Actuarial present value of accumulated benefit obligation is as follows:
Vested $5,962 $ 5,675
Other 491 291
------ -------
$6,453 $ 5,966
====== =======
Plan assets at fair value, primarily mutual funds and an unallocated
insurance contract $6,919 $ 6,282
Projected benefit obligation (7,053) (6,483)
------ -------
Plan assets less than projected benefit obligation (134) (201)
Unrecognized net (gain) loss (58) 72
Unrecognized net asset (246) (300)
------ ------
Pension liability included in consolidated balance sheet $ (438) $ (429)
====== =======
Assumptions:
Discount rate 7.0% 7.0%
Estimated rate of increase in compensation levels 5.0% 5.0%
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.
On November 14, 1996, the Company amended its Capital Accumulation Plan to
allow an investment option in the Company's Class B Common Stock. The amendment
also allows for the Company's percentage match to be made by a contribution of
the Company's Class B Common Stock, effective in 1997. On December 13, 1996, the
Company reserved 200,000 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. Until 1997,
the Company's percentage match was made by a contribution of the Company's Class
A Common Stock. The Company's percentage match amount is declared by the
Company's Board of Directors before the beginning of each plan year. In 1997,
the Company's percentage match has been 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, 1997. 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 $419,670, $262,426 and $298,725
were charged to expense for 1997, 1996 and 1995, respectively, for the issuance
of 20,874 Class B shares; 13,225 and 18,354 Class A shares, respectively.
68
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease commitments for equipment, land
and office space. The Company has also entered into commitments for various
television film exhibition rights for which the license periods have not yet
commenced. Rent expense resulting from operating leases for the years ended
December 31, 1997, 1996 and 1995 were $1.4 million, $501,000, and $267,000,
respectively. Future minimum payments under operating leases with initial or
remaining noncancelable lease terms in excess of one year and obligations under
film exhibition rights for which the license period have not yet commenced are
as follows (in thousands):
LEASE FILM TOTAL
---------- ------------- -----------
1998 $1,434 $1,083 $ 2,517
1999 1,255 3,128 4,383
2000 674 2,693 3,367
2001 505 1,650 2,155
2002 290 920 1,210
Thereafter 732 -0- 732
------ ------ -------
$4,890 $9,474 $14,364
====== ====== =======
The Company is subject to legal proceedings and claims which arise in the
normal course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the Company's financial position.
69
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: broadcasting, publishing
and paging. The broadcasting segment operates eight television stations at
December 31, 1997. The publishing segment operates three daily newspapers in
three different markets, and two area weekly advertising only publications in
southwest Georgia and north Florida. 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,
--------------------------------------
1997 1996 1995
------------ ------------- -----------
(IN THOUSANDS)
OPERATING REVENUES:
Broadcasting $ 72,300 $54,981 $36,750
Publishing 24,536 22,845 21,866
Paging 6,712 1,479 -0-
----- ------ -------
$ 103,548 $79,305 $58,616
======== ======= =======
OPERATING PROFIT:
Broadcasting $ 17,509 $ 14,106 $ 7,822
Publishing 2,206 1,980 (962)
Paging 1,015 (7) -0-
------- ------- -------
Total operating profit 20,730 16,079 6,860
Miscellaneous income and (expense), net (31) 5,704 144
Interest expense (21,861) (11,689) (5,439)
--------- ---------- --------
Income (loss) before income taxes $ (1,162) $ 10,094 $ 1,565
========= ========= =======
Operating profit is total operating revenue less operating expenses,
excluding miscellaneous income and expense (net) and interest. Corporate and
administrative expenses are allocated to operating profit based on net segment
revenues.
70
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ------------- -----------
(IN THOUSANDS)
DEPRECIATION AND AMORTIZATION EXPENSE:
Broadcasting $ 11,024 $ 5,554 $ 2,723
Publishing 1,973 1,730 1,190
Paging 1,480 329 -0-
--------- ----------- --------
14,477 7,613 3,913
Corporate 42 50 46
--------- ----------- --------
Total depreciation and amortization expense $ 14,519 $ 7,663 $ 3,959
========= =========== ========
CAPITAL EXPENDITURES:
Broadcasting $ 5,000 $ 2,674 $ 2,285
Publishing 4,235 692 973
Paging 975 -0- -0-
-------- ----------- --------
10,210 3,366 3,258
Corporate 162 30 22
--------- ----------- --------
Total capital expenditures $ 10,372 $ 3,396 $ 3,280
========= =========== ========
DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ------------- -----------
(IN THOUSANDS)
IDENTIFIABLE ASSETS:
Broadcasting $287,254 $ 245,614 $54,022
Publishing 19,818 16,301 18,170
Paging 23,950 23,764 -0-
-------- --------- -------
331,022 285,679 72,192
Corporate 14,029 12,985 6,048
-------- --------- -------
Total identifiable assets $345,051 $ 298,664 $78,240
======== ========= =======
71
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL QUARTERS
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ ------------
Year Ended December 31, 1997 (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
- ----------------------------
Operating revenues $ 22,761 $ 25,499 $ 25,984 $ 29,304
Operating income 4,337 6,124 4,271 5,998
Net income (loss) (461) 622 (1,162) (401)
Net income (loss) available to common stockholders (811) 272 (1,513) (760)
Basic income (loss) per share $ (0.10) $ 0.03 $ (0.19) $ (0.10)
Diluted income (loss) per share $ (0.10) $ 0.03 $ (0.19) $ (0.10)
FISCAL QUARTERS
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ ------------
Year Ended December 31, 1996 (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
- ----------------------------
Operating revenues $ 17,027 $ 18,487 $ 16,699 $ 27,092
Operating income 2,678 4,633 2,381 6,387
Income before extraordinary charge 311 1,490 2,947 930
Extraordinary charge -0- -0- 3,159 -0-
Net income (loss) 311 1,490 (212) 930
Net income (loss) available to common stockholders 311 1,490 (239) 580
Basic income (loss) per share
Income before extraordinary charge available to
common stockholders $ 0.07 $ 0.33 $ 0.62 $ 0.07
Extraordinary charge 0.00 0.00 (0.67) 0.00
Net income (loss) available to common stockholders $ 0.07 $ 0.33 $ (0.05) $ 0.07
Diluted income (loss) per share
Income before extraordinary charge available to
common stockholders $ 0.07 $ 0.32 $ 0.58 $ 0.07
Extraordinary charge 0.00 0.00 (0.63) 0.00
Net income (loss) available to common stockholders $ 0.07 $ 0.32 $ (0.05) $ 0.07
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.
The third quarter of 1996 includes the KTVE Sale and an extraordinary
charge. As a result of the KTVE Sale, the Company recognized a pre-tax gain of
approximately $5.7 million and estimated income taxes of approximately $2.8
million (SEE NOTE B). The Company recorded an extraordinary charge on
extinguishment of debt of $5.3 million and an income tax benefit of $2.2 million
(SEE NOTE D).
72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning executive officers, in response to this item, is
incorporated from PART I herein. Information concerning directors of the
registrant, in response to this item, is hereby incorporated by reference to the
information, relating thereto in the Company's proxy statement for its 1998
Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation, in response to this item,
is hereby incorporated by reference to the information, relating thereto in the
Company's proxy statement for its 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management, in response to this item, is hereby incorporated by reference to the
information, relating thereto in the Company's proxy statement for its 1998
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning Certain Relationships and Related Transactions, in
response to this item, is hereby incorporated by reference to the information,
relating thereto in the Company's proxy statement for its 1998 Annual Meeting of
Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) AND (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS
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, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
73
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
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.
A current report on Form 8-K was filed on August 14, 1997, reporting the
purchase of certain assets from Raycom-U.S., Inc. used in the operation of
WITN-TV in the Greenville-Washington-New Bern, North Carolina market area. A
current report on Form 8K/A was filed on October 14, 1997 as an amendment to the
current report on Form 8-K that was filed on August 14, 1997.
(C) EXHIBITS.
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ------------- ------
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)
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) (Exhibit 4.1 to the "Note S-1")
4.2 Loan Agreement dated September 23, 1996 by and among Gray
Communications Systems, Inc., as the borrower, KeyBank
National Association as agent, NationsBank, N.A. (South) as
Co-Agent and CIBC, Inc., CoreStates Bank, N.A., and the Bank
of New York (incorporated by reference to Exhibit 4(i) to the
Company's Form 8-K, filed October 15, 1996)
4.3 Borrower Security Agreement dated September 30, 1996 by and
between Gray Communications Systems, Inc. and KeyBank National
Association (incorporated by reference to Exhibit 4(ii) to the
Company's Form 8-K, filed October 15, 1996)
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)
74
EXHIBIT
NO. DESCRIPTION PAGE
- -------------- -------------- ------
4.5 Borrower Pledge Agreement dated September 30, 1996 between Gray
Communications Systems, Inc. and KeyBank National Association
(incorporated by reference to Exhibit 4(iv) to the Company's
Form 8-K, filed October 15, 1996)
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 Loan Agreement dated September 8, 1997, by
and among Gray Communications Systems, Inc., as the borrower,
KeyBank National Association as agent, NationsBank, N.A.
(South) as Co-Agent and CIBC, Inc., CoreStates Bank, N.A., and
the Bank of New York 80
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 Asset Purchase Agreement, dated January 6, 1995, between the
Company and Still Publishing, Inc. (incorporated by reference
to Exhibit 10(h) to the 1994 Form 10-K)
10.4 Capital Accumulation Plan, effective October 1, 1994
(incorporated by reference to Exhibit 10(i) to the 1994 Form
10-K)
10.5 Asset Purchase Agreement, dated March 15, 1996, by and between
the Company and Media Acquisition Partners, L.P. (incorporated
by reference to Exhibit 10(l) to the 1995 Form 10-K)
10.6 Warrant, dated January 4, 1996, to purchase 487,500
shares of Class A Common Stock (incorporated by reference to
the Note S-1)
10.7 Form of amendment to employment agreement between the Company
and Ralph W. Gabbard, dated January 1, 1996 (incorporated by
reference to Exhibit 10(m) to the 1995 Form 10-K)
10.8 Employment Agreement, dated February 12, 1996 between the
Company and Robert A. Beizer (incorporated by reference to the
Note S-1)
10.9 Form of Preferred Stock Exchange and Purchase Agreement between
the Company and Bull Run Corporation (incorporated by reference
to the Note S-1)
75
EXHIBIT
NO. DESCRIPTION PAGE
- -------------- ------------- -----
10.10 Form of Warrant to purchase 500,000 shares of Class A
Common Stock (incorporated by reference to the Note S-1)
10.11 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)
10.12 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)
10.13 First Amendment to the Company's Capital Accumulation Plan (
incorporated by reference to Exhibit 10.19 to the Company's
Form 10-K for the year ended December 31, 1996)
10.14 Asset Purchase Agreement by and among the Company and
Raycom-U.S., Inc. and WITN-TV, Inc. (incorporated by
reference to item 10 of the current report filed on Form 8-K
(Registration No. 001-13796) on August 14, 1997)
10.15 Stock Purchase Agreement by and Among Busse Broadcasting
Corporation, South Street Corporate Recovery Fund I, L.P.,
Greycliff Leveraged Fund 1993, L.P., South Street Leveraged
Corporate Recovery Fund, L.P. and Gray Communications Systems,
Inc., as dated February 13, 1998. 102
21 List of Subsidiaries
23 Consent of Ernst & Young L.L.P. for the financial statements
of Gray Communications Systems, Inc. 154
27 Financial data schedule for Gray Communications Systems, Inc. 155
(D) FINANCIAL STATEMENT SCHEDULES - The response to this section is submitted as
a part of (a)(1) and (2).
76
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 4, 1998 By: /s/ J. MACK ROBINSON
--------------------------------------------
J. Mack Robinson, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Date: March 4, 1998 By: /s/ WILLIAM A. FIELDER, III
--------------------------------------------
William A. Fielder, III
VICE PRESIDENT & CFO
(CHIEF FINANCIAL OFFICER)
Date: March 4, 1998 By: /s/ JACKSON S COWART, IV
--------------------------------------------
Jackson S. Cowart, IV
(CHIEF ACCOUNTING 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 4, 1998 By: /s/ WILLIAM E. MAYHER, III
--------------------------------------------
William E. Mayher, III
CHAIRMAN OF THE BOARD
Date: March 4, 1998 By: /s/ J. MACK ROBINSON
--------------------------------------------
J. Mack Robinson,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER AND DIRECTOR
Date: March 4, 1998 By: /s/ RICHARD L. BOGER
--------------------------------------------
Richard L. Boger, DIRECTOR
Date: March 4, 1998 By: /s/ HILTON H. HOWELL, JR.
--------------------------------------------
Hilton H. Howell, Jr., DIRECTOR
Date: March 4, 1998 By: /s/ HOWELL W. NEWTON
--------------------------------------------
Howell W. Newton, DIRECTOR
Date: March 4, 1998 By: /s/ HUGH NORTON
--------------------------------------------
Hugh Norton, DIRECTOR
Date: March 4, 1998 By: /s/ ROBERT S. PRATHER, JR.
--------------------------------------------
Robert S. Prather, Jr., DIRECTOR
Date: March 4, 1998 By: /s/ HARRIETT J. ROBINSON
--------------------------------------------
Harriett J. Robinson., DIRECTOR
77
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Gray
Communications Systems, Inc. as of December 31, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, and have issued our
report thereon dated January 27, 1998 (except for the Pending Acquisition of
Note C, as to which the date is February 13, 1998). Our audits also included the
financial statement schedule listed in Item 14(a). 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 27, 1998
78
GRAY COMMUNICATIONS SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. C
--------------------------
COL. A COL. B ADDITIONS COL. D COL. E
- ----------------------------------------- ------------- -------------------------- --------------- ---------------
DESCRIPTION BALANCE AT CHARGED TO CHARGED TO BALANCE AT
- ----------- BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS (1) PERIOD
------------- ------------ --------------- --------------- ---------------
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts $1,450,000 $188,000 $ 31,000(2) $416,000 $1,253,000
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts $ 450,000 $894,000 $ 583,000(2) $477,000 $1,450,000
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts $ 694,000 $384,000 $ 33,000(2) $661,000 $ 450,000
- ---------------------
(1) Deductions are write-offs of amounts not considered collectible.
(2) Represents amounts recorded in certain allocations of purchase prices for
the Company's acquisitions.
79