1
EXHIBIT 99.2
GRAY COMMUNICATIONS SYSTEMS, INC.
4370 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30319
YOUR VOTE IS VERY IMPORTANT
At the annual meeting, shareholders will consider and vote upon a proposal
relating to the approval of the issuance of shares of Gray's class B common
stock in connection with the proposed acquisition by Gray of three television
stations. Gray class B common stock is listed on The New York Stock Exchange
under the symbol "GCS.B."
At the annual meeting, shareholders will also elect directors and consider
and vote upon proposals to amend the 1992 Long Term Incentive Plan to increase
the number of shares issuable thereunder and confirm the appointment of the
independent auditors and consider and act upon such other business as may
properly come before the meeting.
This proxy statement/prospectus provides shareholders with detailed
information about the matters to be considered at the annual meeting.
Shareholders are encouraged to read this entire document carefully.
The board of directors believes that the matters to be presented at the
annual meeting are in the best interests of Gray and its shareholders.
Therefore, the board of directors urges shareholders to vote in favor of each of
the proposals to be presented at the annual meeting.
J. Mack Robinson
President and Chief Executive
Officer
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 8 OF THIS
PROXY STATEMENT/ PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. A REGISTRATION STATEMENT RELATING TO THE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES MAY NOT BE SOLD
UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE. THIS PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES AND IT IS NOT SOLICITING
AN OFFER TO BUY SECURITIES IN ANY STATE WHERE OFFERS OR SALES ARE NOT PERMITTED.
PROXY STATEMENT/PROSPECTUS DATED AUGUST 16, 1999
AND FIRST MAILED TO SHAREHOLDERS ON OR ABOUT AUGUST 23, 1999
2
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Time: 9:30 a.m., local time
Date: September 23, 1999
Place: The Peachtree Insurance Center
The Executive Board Room, 5th Floor
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319
Purpose:
- to consider and vote upon a proposal to approve the issuance of
shares of Gray class B common stock in connection with certain proposed
acquisitions;
- to elect nine directors;
- to consider and vote upon a proposal to approve the amendment of the
1992 Long Term Incentive Plan to increase the number of shares of Gray
class B common stock issuable thereunder;
- to consider and vote upon a proposal to confirm the appointment of
Ernst & Young LLP as the independent auditors; and
- to consider and act upon such other business and matters or
proposals as may properly come before the meeting.
The board of directors has fixed the close of business on August 13, 1999
as the record date for determining the holders of Gray class A common stock and
class B common stock having the right to receive notice of, and to vote at, the
meeting. Only holders of record of Gray class A common stock and class B common
stock at the close of business on such date are entitled to notice of, and to
vote at, the meeting.
Your vote is very important. We encourage you to vote as soon as possible
by one of three convenient methods: by calling the toll-free number listed on
the form of proxy, by accessing the Internet site listed on the form of proxy or
by signing, dating and returning the form of proxy in the enclosed postage-paid
envelope.
By Order of the Board of Directors,
J. Mack Robinson
President and Chief Executive
Officer
Atlanta, Georgia
August 23, 1999
3
TABLE OF CONTENTS
PAGE
NO.
----
SUMMARY.................................. 1
Shareholders Meeting................... 1
Votes Required and Recommendation of
the Board of Directors............... 1
The Proposed Acquisitions.............. 2
Summary of the Acquisitions.......... 2
The Parties to the Acquisition
Agreements........................ 2
Consideration to be paid by Gray in
the KWTX and Brazos
Acquisitions...................... 3
Consideration to be paid by Gray in
the KXII Acquisition.............. 4
Conditions to the Obligation of the
Parties to Complete the
Acquisitions...................... 4
Conditions to the Obligation of Gray
to Complete the Acquisitions...... 5
Circumstances where the Parties can
Terminate the Acquisition
Agreements........................ 5
Regulatory Matters................... 5
Material Federal Income Tax
Consequences of the
Acquisitions...................... 6
Gray's Accounting Treatment of the
Acquisitions...................... 6
Market Price Information............. 6
Unaudited Comparative Per Share
Data.............................. 6
RISK FACTORS............................. 8
Risks Relating to Gray's Current
Businesses........................... 8
Risks Relating to KWTX, Brazos, KXII
and the Acquisitions................. 9
THE SHAREHOLDERS MEETING................. 10
Purpose of the Meeting................. 10
Required Votes......................... 11
Record Date and Voting Rights.......... 11
Voting and Revocation of Proxies....... 12
PROPOSAL 1: APPROVAL OF THE ISSUANCE OF
SHARES OF CLASS B COMMON STOCK IN THE
ACQUISITIONS........................... 12
Recommendation of the Gray Board of
Directors and Reasons for the
Recommendation....................... 12
Reasons of KWTX, Brazos and KXII for
Recommending the Acquisitions........ 13
Background of the Acquisitions......... 14
Interests of Certain Persons in the
Acquisitions......................... 15
The Acquisition Agreements............. 15
PAGE
NO.
----
Material Federal Income Tax
Consequences......................... 21
Accounting Treatment................... 26
Regulatory Matters..................... 26
Financing of the Acquisitions.......... 26
Resale of Gray Class B Common Stock
Following the Acquisitions........... 28
Shareholders' Agreements............... 28
No Appraisal Rights Available to Gray
Shareholders......................... 28
SELECTED FINANCIAL INFORMATION OF GRAY... 29
SELECTED FINANCIAL INFORMATION OF KWTX... 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF KWTX..................... 33
Introduction........................... 33
Broadcasting Revenues.................. 34
Six Months Ended June 30, 1999 Compared
to Six Months Ended June 30, 1998.... 34
Year Ended December 31, 1998 Compared
to Year Ended December 31, 1997...... 35
Year Ended December 31, 1997 Compared
to Year Ended December 31, 1996...... 35
Liquidity and Capital Resources........ 36
Year 2000 Issue........................ 37
SELECTED FINANCIAL INFORMATION OF
BRAZOS................................. 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BRAZOS................... 40
Introduction........................... 40
Broadcasting Revenues.................. 41
Six Months Ended June 30, 1999 Compared
to Six Months Ended June 30, 1998.... 41
Year Ended December 31, 1998 Compared
to Year Ended December 31, 1997...... 42
Year Ended December 31, 1997 Compared
to Year Ended December 31, 1996...... 42
Liquidity and Capital Resources........ 43
Year 2000 Issue........................ 43
SELECTED COMBINED FINANCIAL INFORMATION
OF KXII................................ 45
i
4
PAGE
NO.
----
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF KXII..................... 46
Introduction........................... 46
Broadcasting Revenues.................. 47
Six Months Ended June 30, 1999 Compared
to Six Months Ended June 30, 1998.... 47
Year Ended December 31, 1998 Compared
to Year Ended December 31, 1997...... 47
Year Ended December 31, 1997 Compared
to Year Ended December 31, 1996...... 48
Liquidity and Capital Resources........ 48
Year 2000 Issue........................ 48
PRO FORMA CONDENSED COMBINED FINANCIAL
DATA................................... 50
GENERAL BACKGROUND INFORMATION RELATING
TO THE TELEVISION BROADCAST INDUSTRY... 63
Revenues............................... 63
Market Designations and Audience Rating
Information.......................... 63
Network Affiliations and Other
Programming Information.............. 63
Competition............................ 64
Federal Regulation of Television
Broadcasting......................... 65
INFORMATION CONCERNING KWTX.............. 69
General................................ 69
Market Information..................... 69
Employees.............................. 70
Network Affiliation Agreement.......... 70
FCC License............................ 70
Digital Television (High Definition
Television).......................... 70
Primary Properties..................... 71
Share Ownership........................ 71
INFORMATION CONCERNING BRAZOS............ 72
General................................ 72
Market Information..................... 72
Employees.............................. 73
Network Affiliation Agreement.......... 73
FCC License............................ 73
Digital Television (High Definition
Television).......................... 73
Primary Properties..................... 74
Share Ownership........................ 74
PAGE
NO.
----
INFORMATION CONCERNING KXII.............. 75
General................................ 75
Market Information..................... 75
Employees.............................. 76
Network Affiliation Agreement.......... 76
FCC License............................ 76
Digital Television (High Definition
Television).......................... 76
Primary Properties..................... 76
Equity Ownership....................... 77
COMPARISON OF THE SHAREHOLDERS' RIGHTS,
ARTICLES OF INCORPORATION AND BYLAWS OF
GRAY, KWTX AND BRAZOS.................. 78
General................................ 78
Authorized Capital Stock............... 78
Directors.............................. 79
Removal of Directors................... 79
Special Meetings of Shareholders....... 79
Amendment of Bylaws.................... 80
Amendments to the Articles of
Incorporation........................ 80
Dividends, Redemptions and
Repurchases.......................... 80
Transactions with Interested
Directors............................ 81
Indemnification........................ 81
Appraisal Rights....................... 82
PROPOSAL 2: ELECTION OF DIRECTORS........ 84
Nominees............................... 84
Compliance with Section 16(a) of the
Securities Exchange Act of 1934...... 86
Board Committees and Membership........ 86
Share Ownership........................ 87
Executive Compensation................. 90
Stock Options Granted.................. 92
Stock Options Exercised................ 94
Supplemental Pension Plan.............. 94
Retirement Plan........................ 94
Capital Accumulation Plan.............. 95
Compensation of Directors.............. 96
Employment Agreements.................. 96
Compensation Committee Interlocks and
Insider Participation................ 97
Report of the Management Personnel
Committee............................ 98
Certain Relationships and Related
Transactions......................... 99
Performance Graph...................... 100
ii
5
PAGE
NO.
----
PROPOSAL 3: AMENDMENT OF THE GRAY 1992
LONG TERM INCENTIVE PLAN............... 102
Vote Required and Board
Recommendation....................... 107
PROPOSAL 4: CONFIRMATION OF APPOINTMENT
OF AUDITORS............................ 108
EXPERTS.................................. 108
LEGAL MATTERS............................ 108
PAGE
NO.
----
SHAREHOLDER PROPOSALS.................... 108
WHERE TO FIND ADDITIONAL INFORMATION..... 109
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE.............................. 109
FORWARD-LOOKING STATEMENTS............... 110
INDEX TO FINANCIAL STATEMENTS............ F-1
-------------------------
Appendix A Agreement and Plan of Merger, dated as of April 13, 1999, by
and among Gray Communications Systems, Inc., Gray
Communications of Texas, Inc. and KWTX Broadcasting Company
Appendix B Agreement and Plan of Merger, dated as of April 13, 1999, by
and among Gray Communications Systems, Inc., Gray
Communications of Texas, Inc. and Brazos Broadcasting Co.
Appendix C Asset Purchase Agreement, dated as of April 26, 1999, by and
among Gray Communications Systems, Inc., Gray Communications
of Texas-Sherman, Inc., KXII Licensee Corp., KXII
Broadcasters, Ltd., KXII Television, Ltd., K-Twelve, Ltd.,
KBI 1, Inc., KBI 2, Inc., KXII Properties, Inc., and the
Shareholders of KXII Properties, Inc.
iii
6
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand better the matters to be considered at the
shareholders meeting and for a more complete description of the legal terms of
the proposed acquisitions and related transactions, you should read carefully
this entire document and the documents to which you are referred. See "Where To
Find Additional Information" on page 109.
SHAREHOLDERS MEETING (SEE PAGE 10)
The annual meeting of shareholders of Gray will be held at 9:30 a.m., local
time, on September 23, 1999, at The Peachtree Insurance Center, The Executive
Board Room, 5th Floor, 4370 Peachtree Rd., N.E., Atlanta, Georgia 30319. At the
meeting, holders of Gray class A common stock and class B common stock will
consider and vote upon:
- a proposal to approve the issuance of shares of Gray class B common stock
in connection with certain proposed acquisitions (see page 12);
- the election of directors (see page 84);
- a proposal to amend the 1992 Long Term Incentive Plan to increase by
1,000,000 shares the number of shares of Gray class B common stock
issuable thereunder (see page 102);
- a proposal to confirm the appointment of Ernst & Young LLP as the
independent auditors (see page 108); and
- any other matters that may properly come before the meeting.
VOTES REQUIRED AND RECOMMENDATION OF THE BOARD OF DIRECTORS
Approval of the issuance of shares of Gray class B common stock in
connection with the proposed acquisitions, the amendment of the 1992 Long Term
Incentive Plan and the confirmation of Ernst & Young LLP as the independent
auditors requires the affirmative vote of the holders of a majority of the votes
represented by the shares of Gray class A common stock and class B common stock,
voting together as a single class, present in person or represented by proxy at
the meeting and entitled to vote on the proposal. Election of directors requires
a plurality of votes cast by holders of shares of Gray class A common stock and
class B common stock, voting together as a single class. Gray's board of
directors believes that the foregoing proposals are in the best interests of its
shareholders and recommends that shareholders vote "FOR" each of these proposals
and "FOR" the election of those directors specified in this proxy
statement/prospectus.
1
7
THE PROPOSED ACQUISITIONS
The agreements relating to Gray's proposed acquisitions are attached as
Appendices A, B and C to this proxy statement/prospectus. Shareholders should
read these agreements, because they are the legal documents which govern these
acquisitions.
SUMMARY OF THE ACQUISITIONS
Gray is a party to two merger agreements and an asset purchase agreement
that provide for the acquisition by Gray of three network-affiliated television
stations in Texas for a combination of cash and Gray class B common stock.
THE PARTIES TO THE ACQUISITION AGREEMENTS
Gray Communications Systems, Inc.
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319
(404) 504-9828
Gray Communications Systems, Inc. operates 10 television stations located
in the Southeast and Midwest; three of which are NBC affiliates and seven of
which are CBS affiliates; four daily newspapers (one in Albany, Georgia, two in
suburban Atlanta, Georgia, and one in Goshen, Indiana); a weekly advertising
shopper in southwest Georgia; a communications and paging business in the
Southeast and one of the largest fleets of satellite uplink trucks in the
Southeast.
KWTX Broadcasting Company
200 West Highway 6
Suite 210
Waco, Texas 76712
KWTX operates television station KWTX, a CBS affiliate located in Waco,
Texas, which is part of the Waco-Temple-Bryan television market, the 95th
largest television market in the United States.
Brazos Broadcasting Co.
200 West Highway 6
Suite 210
Waco, Texas 76712
Brazos operates television station KBTX, a CBS affiliated satellite station
of KWTX located in Bryan, Texas, which is part of the Waco-Temple-Bryan
television market, the 95th largest television market in the United States. As a
satellite station, KBTX rebroadcasts substantial amounts of network and
syndicated programming from its parent station, KWTX.
KXII Broadcasters, Ltd. and affiliates
4201 Texoma Parkway
Sherman, Texas 75090
KXII operates television station KXII, a CBS affiliate located in Sherman,
Texas, which is part of the Sherman, Texas-Ada, Oklahoma television market, the
161st largest television market in the United States.
2
8
CONSIDERATION TO BE PAID BY GRAY IN THE KWTX AND BRAZOS ACQUISITIONS (SEE PAGE
16)
The KWTX acquisition agreement provides that the KWTX shareholders will
receive in exchange for each share of KWTX stock each shareholder holds: cash
and Gray class B common stock equal to the sum of (1) $74,680,000, (2) the
amount by which the current assets and certain other assets of KWTX exceed its
current liabilities and (3) 50% of the amount by which the current assets and
certain other assets of Brazos exceed its current liabilities divided by (4)
1,550 (the number of outstanding shares of KWTX common stock). In general and
subject to the election of Gray to pay all of the acquisition consideration in
cash and the limitations discussed below, each holder will have the right to
elect the percentage of the consideration to be received in cash and the
percentage to be received in Gray class B common stock, provided that each KWTX
shareholder must take at least 40% of the total consideration in stock.
The Brazos acquisition agreement provides that the Brazos shareholders
(other than KWTX) will receive in exchange for each share of Brazos stock each
shareholder holds: cash and Gray class B common stock equal to the sum of (1)
$22,820,000 and (2) 50% of the amount by which the current assets and certain
other assets of Brazos exceed its current liabilities divided by (3) 250 (the
number of outstanding shares of Brazos common stock not held by KWTX). In
general and subject to the election of Gray to pay all of the acquisition
consideration in cash and the limitations discussed below, each holder will have
the right to elect the percentage of the consideration to be received in cash
and the percentage to be received in Gray class B common stock, provided that
each Brazos shareholder must take at least 40% of the total consideration in
stock.
The KWTX and Brazos acquisition agreements provide that the number of
shares of Gray class B common stock to be issued as merger consideration will be
determined by dividing the amount of the merger consideration to be paid in Gray
class B common stock by its average closing price on The New York Stock Exchange
for the 20 consecutive trading days immediately preceding the closing date,
except that:
- if the average price, as so determined, is less than $14 per share, Gray
class B common stock will be valued at $14 per share, and if the average
price is greater than $15 per share, Gray class B common stock will be
valued at $15 per share;
- notwithstanding the average per share price of Gray class B common stock
during the 20 trading day period immediately preceding the closing date,
if the price of Gray class B common stock on the day immediately
preceding the closing date is less than $14 per share, the number of
shares of Gray class B common stock to be issued will be increased, so
that each shareholder of KWTX and Brazos will receive at least 40% of the
consideration in Gray class B common stock, valued as of the trading day
immediately preceding the closing date, and the remainder in cash; and
- if (1) the average per share price of Gray class B common stock during
the 20 trading day period immediately preceding the closing date is less
than $10 or (2) the price per share on the day immediately preceding the
closing date is less than $10, the acquisition agreements provide that
Gray may extend the closing date to obtain its shareholders' approval of
the issuance of such number of shares of Gray class B common stock as may
be required under the agreements so that each of the KWTX and Brazos
shareholders will receive at least 40% of the merger consideration in
Gray class B common stock.
3
9
If the average per share price of Gray class B common stock during the 20
trading day period immediately preceding the closing date of the KWTX and Brazos
acquisitions or the price of Gray class B common stock on the closing date is
less than $12 per share, Gray may pay all of the acquisition consideration for
KWTX and Brazos in cash, in which event the total acquisition price will be
reduced by $1,530,000 in the case of KWTX and $470,000 in the case of Brazos.
CONSIDERATION TO BE PAID BY GRAY IN THE KXII ACQUISITION (SEE PAGE 16)
The KXII acquisition agreement provides that Gray will pay the sellers cash
equal to the sum of (1) $41,500,000 and (2) the value of all accounts
receivable, notes receivable and other monies due to KXII for sales and
deliveries of goods, performance of services and other business transactions on
the date of the acquisition, reduced by: (a) an amount equal to two percent of
such value and (b) all reserves for doubtful accounts or similar reserves. Gray
will also assume specified liabilities of KXII. At June 30, 1999, such
liabilities were $259,000.
CONDITIONS TO THE OBLIGATION OF THE PARTIES TO COMPLETE THE ACQUISITIONS (SEE
PAGE 17)
The obligation of each party to complete the acquisitions depends upon the
satisfaction or waiver of a number of conditions relating to the correctness of
the representations and warranties of the parties, the absence of a material
adverse change with respect to the parties, the receipt of customary opinions
and closing documents, and the following material conditions:
- the shares of Gray class B common stock issuable pursuant to the
acquisition of KWTX and Brazos shall have been approved for listing on
The New York Stock Exchange;
- the shareholders of KWTX and Brazos shall have adopted the acquisition
agreements;
- consent of the Federal Communications Commission shall have been granted
and become final, without the imposition of any condition adverse to any
of the parties;
- all applicable Hart-Scott-Rodino Antitrust Improvements Act waiting
periods shall have expired or otherwise terminated;
- there shall not be in effect any order of any court or administrative
agency which restrains or prohibits the acquisitions;
- there shall not be pending any action or proceeding by or before any
court or administrative agency challenging any of the acquisitions; and
- Gray's registration statement, of which this proxy statement/prospectus
is a part, relating to the shares of Gray class B common stock to be
issued to shareholders of KWTX and Brazos shall have become effective.
4
10
CONDITIONS TO THE OBLIGATION OF GRAY TO COMPLETE THE ACQUISITIONS (SEE PAGE 17)
The obligation of Gray to complete the acquisitions also depends upon the
satisfaction or waiver of the following material conditions:
- receipt of environmental audits, satisfactory to Gray, of KWTX's, Brazos'
and KXII's real property; and
- receipt of policies of owner's or lessee's title insurance for the real
properties to be acquired or leased by Gray.
CIRCUMSTANCES WHERE THE PARTIES CAN TERMINATE THE ACQUISITION AGREEMENTS (SEE
PAGE 20)
The acquisition agreements provide that they may be terminated and the
acquisitions may be abandoned at any time before the acquisitions have been
completed, even if all requisite shareholder approvals have been obtained, under
the following circumstances:
- by mutual written consent of the parties;
- by any party if any material representation, warranty, covenant or
agreement of another party to the acquisition agreement has been
materially breached or is incorrect and such breach is not cured within
10 days of receiving written notice of such breach; or
- if the closing date has not occurred by December 31, 1999, unless the
assignment applications jointly filed by the parties are still pending
before the FCC on that date, in which case the transactions may not be
terminated until May 31, 2000, but after which date they may be
terminated by any of the parties.
If the acquisition agreements are terminated, the acquisition agreements
provide that they will become void and there will be no liability on the part of
any party, except that if termination occurs as a result of a breach or default
by Gray, then each of KWTX, Brazos and KXII may retain as liquidated damages
$1,000,000 of Gray's $3,000,000 deposit being held in escrow.
REGULATORY MATTERS (SEE PAGE 26)
Under the Communications Act of 1934, the acquisitions may not be
consummated until the FCC has approved the assignment of the FCC licenses of
KWTX, Brazos and KXII to Gray. The FCC's approval has been obtained and has
become final without the imposition of an adverse material condition.
Under the Hart-Scott-Rodino Act, the acquisitions may not be consummated
until notifications have been given and information has been furnished to the
Federal Trade Commission and the Anti-Trust Division of the United States
Department of Justice and specified waiting period requirements have expired. On
July 23, 1999, Gray, KWTX and Brazos filed the required notification and report
forms under the Hart-Scott-Rodino Act with the FTC and the Anti-Trust Division,
and the applicable waiting period is scheduled to expire at midnight on August
22, 1999, unless earlier termination is granted. The FTC and the Anti-Trust
Division have the authority to challenge the acquisitions on antitrust grounds
before or after the acquisitions are completed.
5
11
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITIONS (SEE PAGE 21)
For federal income tax purposes, the KWTX and Brazos acquisitions have been
structured as "reorganizations" under Section 368(a) of the Internal Revenue
Code so that the KWTX and Brazos shareholders will not recognize any taxable
income with respect to the Gray class B common stock that such shareholders will
receive in the acquisitions. Such shareholders, however, will be subject to
federal income tax on any gain realized to the extent the acquisition
consideration is received in cash. If Gray elects to pay all of the acquisition
consideration in cash in accordance with the terms of the acquisition
agreements, the KWTX or Brazos shareholders, as the case may be, will be treated
as having sold their KWTX stock or Brazos stock to Gray in a taxable sale in
which gain or loss will be recognized.
GRAY'S ACCOUNTING TREATMENT OF THE ACQUISITIONS (SEE PAGE 26)
Gray expects to account for the acquisitions of KWTX, Brazos, and KXII
using the purchase method of accounting. Generally, under the purchase method of
accounting, assets acquired and liabilities assumed are recorded at their fair
value.
MARKET PRICE INFORMATION
Gray class B common stock is listed on The New York Stock Exchange. On
April 13, 1999, the last trading day before the public announcement of the
proposed acquisitions of KWTX, Brazos and KXII, the last reported sales price
per share of Gray class B common stock was $13 9/16. On August 13, 1999, the
last trading day before the date of this proxy statement/prospectus, the last
reported sales price per share of Gray class B common stock was $14 3/16. Since
the securities of KWTX, Brazos and KXII are not publicly traded, they have no
readily ascertainable market value.
UNAUDITED COMPARATIVE PER SHARE DATA
The following summary presents per share information for Gray, KWTX and
Brazos on an historical, pro forma combined and pro forma diluted equivalent
basis for the periods and as of the dates indicated below. The pro forma
information gives effect to the acquisitions using the purchase method of
accounting. This information should be read in conjunction with the companies'
historical financial statements and related notes and pro forma condensed
combined financial data included elsewhere or incorporated by reference in this
proxy statement/prospectus. The pro forma information should not be relied upon
as being indicative of the historical results that the companies would have had
if the acquisitions had occurred before such periods or the future results that
the companies will experience after the acquisitions.
The pro forma combined income (loss) per diluted share has been computed
based on the diluted number of outstanding shares of Gray, adjusted for the Gray
class B common stock to be issued in the acquisitions of KWTX and Brazos. The
merger equivalent income (loss) per share of KWTX and Brazos is based on the
number of shares of Gray class B common stock into which each share of KWTX and
Brazos common stock will be converted in the mergers as follows, KWTX: 1,558
shares; and Brazos: 3,024 shares.
The pro forma merger equivalent dividends per common share of KWTX and
Brazos are based on the historical dividends per common share of Gray multiplied
by the number
6
12
of shares of Gray class B common stock into which each share of KWTX and Brazos
common stock will be converted in the acquisitions, as follows, KWTX: 1,558
shares; and Brazos: 3,024 shares.
The pro forma combined book value per share is based upon the pro forma
combined equity of Gray, less the liquidation preference of Gray preferred
stock, divided by the pro forma number of outstanding shares of Gray class A
common stock and class B common stock as of June 30, 1999. The merger equivalent
book value per share of KWTX and Brazos is based on the number of shares of Gray
class B common stock into which each share of KWTX and Brazos common stock will
be converted in the acquisitions, as follows, KWTX: 1,558 shares; and Brazos:
3,024 shares.
The summary assumes that the shares of Gray class B common stock to be
issued will have a value of $14.125 per share, the closing price of the Gray
class B common stock on June 30, 1999, and that the shareholders of KWTX and
Brazos, as a group, will elect to receive 40% of their consideration in Gray
class B common stock and the remainder in cash.
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
STATEMENT OF OPERATIONS DATA:
Income (loss) per weighted average diluted share:
Gray........................................... $ 3.25 $ (0.26)
KWTX........................................... 2,142.41 940.34
Brazos......................................... 4,032.99 1,689.35
Gray pro forma combined........................ 2.13 (0.34)
KWTX merger equivalent......................... 3,322.57 (523.61)
Brazos merger equivalent....................... 6,450.96 (1,016.62)
Dividends per common share:
Gray........................................... $ 0.06 $ 0.04
KWTX........................................... 1,000.00 1,400.00
Brazos......................................... 2,000.00 3,000.00
Gray pro forma combined........................ 0.06 0.04
KWTX merger equivalent......................... 93.46 62.32
Brazos merger equivalent....................... 181.45 120.96
AS OF
JUNE 30, 1999
-------------
BALANCE SHEET DATA:
Net book value per share:
Gray...................................................... $ 9.16
KWTX...................................................... 10,700.38
Brazos.................................................... 17,881.62
Gray pro forma combined................................... 10.20
KWTX merger equivalent.................................... 15,883.99
Brazos merger equivalent.................................. 30,839.64
7
13
RISK FACTORS
In addition to the other information contained in this proxy
statement/prospectus, shareholders should consider the following risk factors
before they decide whether or not to vote in favor of the proposals described in
this proxy statement/prospectus.
RISKS RELATING TO GRAY'S CURRENT BUSINESSES
Gray's Leverage May Adversely Affect its Cash Flow, its Ability to Obtain
Financing and React to Changes in its Industries. Gray has substantial
indebtedness and, upon the completion of the acquisitions, Gray's indebtedness
will increase materially. If the average per share price of Gray class B common
stock during the 20 day trading period immediately preceding the closing date is
below $12 per share, the acquisition agreements provide that Gray may elect to
pay all of the acquisition consideration for KWTX and Brazos in cash, in which
case, Gray's indebtedness would significantly increase further. Gray may incur
substantial indebtedness in the future, including acquisition-related
indebtedness. The degree to which Gray will be leveraged may have important
consequences to holders of Gray stock, including the following:
- Gray's ability to obtain financing in the future for working capital,
capital expenditures and general corporate purposes may be impaired;
- a substantial portion of Gray's cash flow must be dedicated to the
payment of principal and interest on its indebtedness and to the payment
of dividends on its preferred stock; and
- a high degree of leverage may limit Gray's ability to react to changes in
the broadcast television, publishing and paging industries, making it
more vulnerable to economic downturns and limiting its ability to
withstand competitive pressures.
Implementation of Digital Television Service May Adversely Affect Gray's
Television Operations. The FCC has adopted rules and regulations, which require
television stations to implement digital television service (including high
definition) in the United States. Conversion to digital television service may
reduce the geographic reach of Gray's television stations or result in increased
interference with, in either case, a corresponding loss of population coverage.
In addition, implementation of digital television service will impose
significant additional costs on Gray's television stations, primarily due to the
capital costs associated with the construction of digital television facilities
and increased operating costs both during and after the transition to digital
television service. Gray's television stations are required to begin
broadcasting on their digital channels in addition to their analog channels in
2002.
Gray's Business May Be Affected by Adverse Regional and Local Business
Conditions and Cyclical and Seasonal Fluctuations. Gray's television and
newspaper businesses are affected by prevailing economic conditions. Since Gray
relies on sales of advertising at its television stations and in its
publications for substantially all of its revenues, Gray's operating results are
sensitive to general economic conditions and regional conditions in each of the
local markets served by its television stations and publications. In addition,
most of Gray's stations and publications are located in the Southeast. As a
result, Gray's results of operations may be adversely affected by recessionary
economic conditions in the Southeast, nationally and, due to the substantial
portion of revenues derived from local advertisers, the local economies in areas
served by its television stations and publications.
8
14
Gray's results usually are subject to seasonal fluctuations, which result
in fourth quarter broadcast operating income being greater usually than first,
second and third quarter broadcast operating income. This seasonality is
primarily attributable to increased expenditures by advertisers in anticipation
of holiday season spending and an increase in viewership during this period. In
addition, revenues from political advertising tend to be higher in even numbered
years.
Gray's Business Depends in Large Part on the Success of Its Network
Affiliations. All of Gray's television stations are affiliated with national
networks. The television viewership levels for each of Gray's stations are
dependent upon programming provided by the network with which each station is
affiliated. Gray currently operates seven CBS affiliated stations and three NBC
affiliated stations, and KWTX, Brazos and KXII operate CBS affiliated stations.
The concentration of CBS affiliates makes Gray sensitive to adverse changes in
its business relationship with, and the general success of, CBS.
Expiration of Network Affiliation Agreements. The network affiliation
agreements for all of Gray's stations expire over the next several years. Gray
may not be able to enter into new affiliation agreements that provide Gray with
as much compensation from the networks as the present agreements.
Governmental Regulation Could Restrict, Suspend or Terminate Gray's Ability
to Operate a Television Station. The operation of television stations is
subject to regulation by the FCC, which has the power to suspend, or refuse to
renew, television stations' licenses. The failure of the FCC to renew Gray's
licenses would have a material adverse effect upon Gray and therefore would
materially adversely affect an investment in Gray.
Gray's Businesses Are Very Competitive. The businesses engaged in by Gray
are highly competitive. Competitors include companies with considerably greater
financial, technical and marketing resources.
Technological innovation and the resulting proliferation of programming
alternatives, such as the Internet, cable television, wireless cable, in home
satellite-to-home distribution services, pay-per-view and home video and
entertainment systems have fractionalized television viewing audiences and have
subjected free over-the-air television broadcast stations to new types of
competition.
RISKS RELATING TO KWTX, BRAZOS, KXII AND THE ACQUISITIONS
Adverse Regional and Local Business Conditions May Affect the Operations of
KWTX, Brazos and KXII. The operations of KWTX, Brazos, and KXII are subject to
regional and local business conditions. All three of these stations operate in
Texas and KWTX and KBTX operate in the same market. Since the three stations
rely on sales of advertising time for substantially all of their revenue, their
operating results may be adversely effected by recessionary economic conditions
primarily in Texas, nationally and, due to the substantial portion of revenues
from local advertisers, the local economies in the areas served by KWTX, Brazos
or KXII.
Acquisition Agreements Provide for the Issuance of a Currently
Unquantifiable Number of Shares of Class B Common Stock. The acquisition
agreements for KWTX and Brazos provide that the number of shares of Gray class B
common stock to be issued will be based upon the market price of the Gray class
B common stock: (1) during the 20 trading days immediately preceding the closing
date of the acquisitions and (2) on the trading day immediately preceding the
closing date. The acquisition agreements also
9
15
provide that shareholders of KWTX and Brazos may elect to receive all of the
consideration in Gray class B common stock and that the amount of consideration
to be paid by Gray will be increased by a portion of working capital amounts at
KWTX and Brazos immediately prior to the closings. Accordingly, when voting to
approve the issuance of shares of Gray class B common stock in these
acquisitions, Gray shareholders will not know the exact number of shares of Gray
class B common stock that ultimately may be issued. The pro forma financial
statements contained in this proxy statement/prospectus are based upon
assumptions concerning the number of shares of Gray class B common stock to be
issued in the acquisitions, which assumptions may not prove to be accurate.
If Gray Cannot Successfully Integrate KWTX, Brazos and KXII, Gray's
Business and the Combined Business Could Be Adversely Affected. To combine
Gray, KWTX, Brazos, and KXII, Gray will need to integrate and coordinate the
management and administrative functions, and sales, marketing and development
efforts of each company. Combining these companies will present a number of
challenges, including integrating the management of these companies who may have
different approaches to sales and service, and the integration of a number of
geographically separated facilities. In addition, Gray's management will be
occupied with integrating these companies' operations following the acquisitions
and this may temporarily distract management from day-to-day business. If Gray
cannot successfully integrate these companies, Gray's business and the results
of operations of the combined businesses could be adversely affected.
The Combined Company Will Depend on Senior Management Who May Not Continue
to Work for the Combined Company. The success of the combined company depends
to a significant extent on the efforts of the senior management of the combined
company. As a result, if any of these individuals were to leave, the combined
company could face substantial difficulty in hiring qualified successors and
could experience a loss in productivity while any such successors gain the
necessary experience.
THE SHAREHOLDERS MEETING
This proxy statement/prospectus is being furnished to the holders of Gray
class A common stock and class B common stock in connection with the
solicitation of proxies by the Gray board of directors for use at the annual
meeting of shareholders to be held at 9:30 a.m., local time, on September 23,
1999, at The Peachtree Insurance Center, The Executive Board Room, 5th Floor,
4370 Peachtree Road, N.E., Atlanta, Georgia 30319, or any adjournment or
postponement thereof.
This proxy statement/prospectus is first being mailed to Gray shareholders
on or about August 23, 1999.
PURPOSE OF THE MEETING
The meeting has been called to consider and vote upon:
- a proposal to approve the issuance of shares of Gray class B common stock
in connection with certain proposed acquisitions;
- the election of directors;
10
16
- a proposal to amend the 1992 Long Term Incentive Plan to increase by
1,000,000 shares the number of shares of Gray class B common stock
issuable thereunder;
- a proposal to confirm the appointment of Ernst & Young LLP as the
independent auditors; and
- the transaction of such other business as may properly come before the
meeting.
REQUIRED VOTES
Approval of the issuance of shares of Gray class B common stock in
connection with the proposed acquisitions, the amendment of the 1992 Long Term
Incentive Plan and the confirmation of Ernst & Young LLP as the independent
auditors requires the affirmative vote of the holders of a majority of the votes
represented by the shares of Gray class A common stock and class B common stock,
voting together as a single class, present in person or represented by proxy at
the meeting and entitled to vote on the proposal. Election of directors requires
a plurality of votes cast by holders of shares of Gray class A common stock and
class B common stock, voting together as a single class.
RECORD DATE AND VOTING RIGHTS
The Gray board of directors has fixed the close of business on August 13,
1999 as the record date for determining holders of Gray class A common stock and
class B common stock entitled to notice of, and to vote at, the meeting. Only
holders of record of Gray class A common stock and class B common stock on that
date will be entitled to notice of, and to vote at, the meeting. On the record
date, 6,832,042 shares of Gray class A common stock and 5,147,522 shares of
class B common stock were outstanding and entitled to vote. Each record holder
of Gray class A common stock on the record date is entitled to cast 10 votes per
share and each record holder of Gray class B common stock on the record date is
entitled to cast one vote per share, in each case, exercisable in person,
telephonically, by Internet or by properly executed proxy, on each matter
properly submitted for the vote of the shareholders at the meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the votes represented by the outstanding Gray class A common stock
and class B common stock entitled to vote at the meeting is necessary to
constitute a quorum and transact business at the meeting. Abstentions will be
counted for purposes of determining a quorum, but will have the effect of a vote
against the matters being voted upon. If a broker holding shares in street name
returns an executed proxy that indicates that the broker does not have
discretionary authority to vote certain shares on one or more matters, those
shares will count towards determining a quorum, but will have the effect of a
vote against the matters being voted upon.
On August 9, 1999, Gray's directors, executive officers and affiliates of
these directors and executive officers, beneficially owned in the aggregate
4,937,864 shares of Gray class A common stock and 439,750 shares of class B
common stock, or approximately 57.8% of the votes represented by all outstanding
shares of Gray class A common stock and class B common stock. Except for
shareholders identified under "Proposal 2: Election of Directors -- Share
Ownership," to the knowledge of Gray, no other person beneficially owned more
than five percent of the outstanding shares of Gray class A common stock or
class B common stock as on August 9, 1999.
11
17
VOTING AND REVOCATION OF PROXIES
All shares of Gray class A common stock and class B common stock that are
entitled to vote and are represented at the meeting by valid proxies, and not
duly and timely revoked, will be voted at the meeting in accordance with the
instructions indicated on the proxies. If no instructions are indicated, the
proxies will be voted "FOR" approval of the issuance of shares of Gray class B
common stock in the acquisitions, the election of the directors specified in
this proxy statement/prospectus, the amendment of the 1992 Long Term Incentive
Plan and the confirmation of Ernst & Young LLP as the independent auditors of
Gray. If any other matters are properly presented for consideration at the
meeting, including consideration of a motion to adjourn or postpone the meeting
to another time or place, the persons named in the enclosed form of proxy will
have discretion to vote on those matters in accordance with their best judgment.
A Gray shareholder may revoke his or her proxy at any time before its use
by delivering to the Secretary of Gray, a signed notice of revocation or a
later, dated, signed proxy or by attending the meeting and voting in person.
Attendance at the meeting will not, in itself, constitute the revocation of a
proxy. All written notices of revocation and other communications with respect
to revocation of proxies should be sent to: Gray Communications Systems, Inc.,
4370 Peachtree Road, N.E., Atlanta, Georgia 30319, Attention: Corporate
Secretary.
The cost of solicitation of proxies will be paid by Gray. In addition to
solicitation by mail, proxies may be solicited in person by directors, officers
and employees of Gray, without additional compensation, and by telephone,
telegram, facsimile or similar method. Arrangements will be made with brokerage
houses and other custodians, nominees and fiduciaries to send proxy material to
beneficial owners. Gray will, upon request, reimburse them for their reasonable
expenses in doing so.
PROPOSAL 1: APPROVAL OF THE ISSUANCE OF SHARES OF
CLASS B COMMON STOCK IN THE ACQUISITIONS
RECOMMENDATION OF THE GRAY BOARD OF DIRECTORS AND REASONS FOR THE RECOMMENDATION
At its meeting held on April 29, 1999, the Gray board of directors,
approved the acquisitions, declared advisable the issuance of shares of Gray
class B common stock in the acquisitions and determined that the terms of the
issuance of such shares were fair to and in the best interests of the
shareholders. Therefore, the Gray board recommends that its shareholders vote in
favor of the proposal to approve the issuance of such shares.
In reaching its decision to approve the acquisitions and the issuance of
shares of Gray class B common stock, the Gray board considered the following
material factors:
- the acquisitions will create a stronger company and will diversify the
geographic range of Gray's television stations;
- the acquisitions provide Gray access to additional operating cash flow
for the purposes of funding debt service, as well as future acquisitions
and investments;
- the terms of the acquisition agreements;
12
18
- the demographic characteristics and competitive dynamics of the markets
served by KWTX, Brazos and KXII; and
- the strong management teams and local news operations of KWTX, Brazos and
KXII.
The foregoing discussion of the factors considered by the Gray board is not
intended to be exhaustive. In view of the variety of factors considered in
connection with its evaluation of the acquisitions, the Gray board did not find
it practicable to, and did not, quantify or otherwise assign relative weights to
the specific factors considered in reaching its determination. In addition,
individual members of the Gray board may have given different weight to
different factors.
REASONS OF KWTX, BRAZOS AND KXII FOR RECOMMENDING THE ACQUISITIONS
At their meeting held on April 13, 1999, the KWTX, Brazos and KXII (which
was then organized as a Texas corporation) boards of directors approved and
declared advisable the acquisition agreements with Gray and determined that the
terms of the acquisitions were fair to and in the best interests of their
respective shareholders.
In evaluating the acquisitions, the boards of KWTX, Brazos and KXII
considered the following material factors:
- the significant experience of Gray's management in operating television
stations;
- current industry, economic and market conditions, including, in
particular, the recent consolidation trend in the broadcast industry;
- the terms of the acquisition agreements;
- the tax-free nature of the shares of Gray class B common stock to be
received in the KWTX and Brazos acquisitions;
- a significant portion of the consideration to be received by shareholders
of KWTX and Brazos and all of the consideration to be received by
shareholders of KXII will be in cash;
- the non-cash consideration to be received by shareholders of KWTX and
Brazos will consist of Gray class B common stock, which trades on The New
York Stock Exchange, thereby resulting in greater liquidity for such
shareholders;
- the current and historical trading prices and values of the Gray class B
common stock; and
- the expressed desire of the shareholders of KWTX, Brazos and KXII to sell
the companies.
The foregoing discussion of the factors considered by the KWTX, Brazos and
KXII boards is not intended to be exhaustive. In view of the variety of factors
considered in connection with their respective evaluation of the acquisitions,
the KWTX, Brazos and KXII boards did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors considered
in reaching their respective determinations. In addition, individual members of
the KWTX, Brazos and KXII boards may have given different weight to different
factors.
13
19
BACKGROUND OF THE ACQUISITIONS
In 1998, the shareholders of KWTX, Brazos and KXII indicated that in light
of the potential costs involved in converting the television stations to digital
format, they would be interested in exploring strategic alternatives for the
companies. Milford N. Bostick, Chairman of each of KWTX, Brazos and KXII and Ray
M. Deaver, President of each of KWTX, Brazos and KXII, engaged in preliminary
discussions with several potential acquisition candidates. Ultimately, the
boards of directors of KWTX, Brazos and KXII did not reach an agreement with any
of these candidates.
Hilton H. Howell, Jr., a director of Gray and a shareholder of KWTX, was
generally aware that the owners of each of KWTX, Brazos and KXII were interested
in pursuing possible business combination transactions with respect to these
businesses, including mergers or the sale of substantially all of the assets of
these businesses. In his capacity as a shareholder of KWTX, Mr. Howell was also
aware that previous attempts by KWTX, Brazos and KXII to effect such
transactions had been unsuccessful. In January 1999, Mr. Howell informed J. Mack
Robinson, Gray's President, and Robert S. Prather, Jr., Gray's Executive Vice
President -- Acquisitions, that he believed that senior management of each of
KWTX, Brazos and KXII would be receptive to an acquisition proposal by Gray.
During February 1999, in telephone calls between Messrs. Robinson and
Prather, on behalf of Gray, and Mr. Bostick, the potential acquisitions of KWTX,
Brazos and KXII were explored. These telephone discussions led to exchanges of
information over the next several weeks. On February 24, 1999, Messrs. Robinson,
Prather and Howell met with Messrs. Bostick and Deaver. At this meeting, general
terms of the potential acquisitions were discussed. Subsequent to this meeting,
the parties continued to exchange information and to negotiate the terms of the
acquisitions. On March 19, 1999 representatives of Gray also met with
representatives of a principal shareholder of KWTX to discuss general terms of
the acquisitions and related matters.
At its regularly scheduled meeting on February 25, 1999, the Gray board of
directors approved in principle the acquisitions of KWTX, Brazos and KXII.
Because Gray will pay a fee to Bull Run for advisory services in connection with
the acquisitions, Mr. Robinson (Chairman of the Board of Bull Run), Harriett J.
Robinson (Mr. Robinson's wife), Mr. Prather (President of Bull Run) and Mr.
Howell (Vice President and Secretary of Bull Run and a shareholder of KWTX),
abstained from voting on the proposal relating to the acquisitions. On April 13,
1999, the boards of directors of KWTX, Brazos and KXII (which was then organized
as a Texas corporation) met and approved the acquisitions. At these meetings,
the respective shareholders of KWTX and Brazos were invited to observe, for
information purposes only, the board of directors meetings. The shareholders who
attended the meetings were not solicited for any vote, nor did they vote, upon
the proposed transactions. Mr. Prather attended a portion of the meetings to
answer any questions regarding the business of Gray.
The definitive agreements for KWTX and Brazos were completed and signed on
April 13, 1999. The parties to the KXII acquisition agreement entered into an
enabling agreement, whereby each agreed to execute the definitive asset purchase
agreement as soon as practicable. The definitive agreement for KXII was signed
on April 26, 1999. The definitive agreements, as executed, were ratified by the
Gray board of directors on April 29, 1999. Mr. and Mrs. Robinson and Messrs.
Prather and Howell also abstained from this vote.
14
20
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITIONS
In considering the recommendation of the Gray board of directors with
respect to the acquisitions, shareholders of Gray should be aware that certain
persons may have direct and indirect interests in the acquisitions separate from
the shareholders of Gray, including those interests discussed below.
It is anticipated that Ray M. Deaver, the President of each of KWTX, Brazos
and KXII will enter into an employment agreement with Gray, which will become
effective upon the consummation of the acquisitions. It is anticipated that this
employment agreement will provide for Mr. Deaver's employment as Regional Vice
President -- Texas of Gray at an annual salary of not less than $230,000 with a
bonus of $125,000 for each year during his employment by Gray that KWTX, Brazos
and KXII reach the annual budget set by Gray for the three stations. In
addition, it is expected that the employment agreement will provide that Mr.
Deaver will receive a bonus equal to 10% of the amount by which the net
operating profit of those three stations, on an aggregate basis, exceeds the
annual budget set by Gray. It is also anticipated that Gray will grant Mr.
Deaver a stock option to purchase 15,000 shares of Gray class B common stock
under Gray's 1992 Long Term Incentive Plan at an exercise price equal to the
fair market value of the Gray class B common stock on the date of grant and that
one-third of this option will vest on each anniversary of the date of grant.
For advisory services rendered by Bull Run to Gray in connection with the
proposed acquisitions of KWTX, Brazos and KXII, Gray paid Bull Run $400,000 on
May 19, 1999, $800,000 on August 11, 1999 and will pay Bull Run an additional
$190,000 upon the consummation of these acquisitions. For additional information
regarding related transactions with Bull Run, see pages 97 and 99.
Hilton H. Howell, Jr., a director of Gray, owns approximately 1.04% of the
issued and outstanding capital stock of KWTX. In addition, members of Mr.
Howell's family own approximately 13.21% of the issued and outstanding capital
stock of KWTX.
THE ACQUISITION AGREEMENTS
Set forth below is a summary of the material terms and provisions of the
acquisition agreements. A copy of the acquisition agreements are attached as
Appendices A, B and C to this proxy statement/prospectus and are incorporated in
this proxy statement/prospectus by reference. Gray shareholders are urged to
read the acquisition agreements in their entirety for a more complete
description of the acquisitions.
The Acquisitions. Immediately after the approval by Gray shareholders of
the issuance of shares of Gray class B common stock in accordance with the
acquisition agreements, on the terms and subject to the conditions of the
acquisition agreements and subject to the right of Gray to pay all cash under
certain circumstances, (1) KWTX and Brazos will merge into a wholly owned
subsidiary of Gray and (2) a wholly owned subsidiary of Gray will purchase all
of the assets of KXII. As a result of the acquisitions, KWTX and Brazos will
become a wholly owned subsidiary of Gray and a wholly owned subsidiary of Gray
will own all of the assets of KXII. In the acquisitions, KWTX and Brazos
shareholders will receive a combination of cash and shares of Gray class B
common stock in exchange for their shares, while the sellers of KXII will
receive solely cash. If Gray elects to pay all of the acquisition consideration
in cash, in accordance with the terms of the acquisition agreements, then wholly
owned subsidiaries of Gray will merge
15
21
into KWTX and Brazos and KWTX and Brazos will become wholly owned subsidiaries
of Gray.
Effective Time. The KWTX and Brazos acquisitions will become effective
upon the filing of articles of merger with the Secretaries of State of the
States of Georgia and Texas. These filings are anticipated to take place as soon
as practicable after (1) the receipt of Gray, KWTX and Brazos shareholder
approvals and all required regulatory approvals and (2) the satisfaction or
waiver of the other conditions to the acquisitions. The KXII acquisition will
occur when all of the assets of KXII are transferred to Gray's subsidiary. It is
currently anticipated that the effective time of the acquisitions will occur as
soon as practicable after the annual meeting of Gray shareholders.
Consideration to be paid by Gray. If the acquisitions of KWTX, Brazos and
KXII are completed:
- KWTX shareholders will receive in exchange for each share of KWTX stock
each shareholder holds: cash and Gray class B common stock (or under
certain circumstances described below, all cash) equal to the sum of (1)
$74,680,000, (2) the amount by which the current assets and certain other
assets of KWTX exceed its current liabilities and (3) 50% of the amount
by which the current assets and certain other assets of Brazos exceed its
current liabilities divided by (4) 1,550 (the number of outstanding
shares of KWTX common stock). In general and subject to the election of
Gray to pay all of the acquisition consideration in cash and certain
limitations discussed below, each holder will have the right to elect the
percentage of the consideration to be received in cash and the percentage
to be received in Gray class B common stock, provided that each KWTX
shareholder must take at least 40% of the total consideration in stock.
- Brazos shareholders (other than KWTX) will receive in exchange for each
share of Brazos stock each shareholder holds: cash and Gray class B
common stock (or under certain circumstances described below, all cash)
equal to the sum of (1) $22,820,000 and (2) 50% of the amount by which
the current assets and certain other assets of Brazos exceed its current
liabilities divided by (3) 250 (the number of outstanding shares of
Brazos common stock not held by KWTX). In general and subject to the
election of Gray to pay all of the acquisition consideration in cash and
certain limitations discussed below, each holder will have the right to
elect the percentage of the consideration to be received in cash and the
percentage to be received in Gray class B common stock, provided that
each Brazos shareholder must take at least 40% of the total consideration
in stock.
- Gray will pay the sellers of KXII cash equal to the sum of (1)
$41,500,000 and (2) the value of all accounts receivable, notes
receivable and other monies due to KXII for sales and deliveries of
goods, performance of services and other business transactions on the
date of the acquisition, reduced by: (a) an amount equal to two percent
of such value and (b) all reserves for doubtful accounts or similar
reserves. Gray will also assume specified liabilities of KXII. At June
30, 1999, such liabilities were approximately $259,000.
Valuation of Gray Class B Common Stock and Limitations on Elections. The
KWTX and Brazos acquisition agreements provide that the number of shares of Gray
class B common stock to be issued as merger consideration will be determined by
dividing the merger consideration to be paid in Gray class B common stock by its
average closing
16
22
price on The New York Stock Exchange for the 20 consecutive trading days
immediately preceding the closing date, except that:
- if the average price, as so determined, is less than $14 per share, Gray
class B common stock will be valued at $14 per share, and if the average
price is greater than $15 per share, Gray class B common stock will be
valued at $15 per share;
- notwithstanding the average per share price of Gray class B common stock
during the 20 trading day period immediately preceding the closing, if
the price of Gray class B common stock on the day immediately preceding
the closing date is less than $14 per share, the number of shares of Gray
class B common stock to be issued will be increased, so that each
shareholder of KWTX and Brazos will receive at least 40% of the
consideration in Gray class B common stock, valued as of the trading day
immediately preceding the closing date, and the remainder in cash; and
- if (1) the average per share price of Gray class B common stock during
the 20 trading day period immediately preceding the closing is less than
$10 or (2) the closing price per share on the day immediately preceding
the closing date is less than $10, the acquisition agreements provide
that Gray may extend the closing date to obtain its shareholders'
approval of the issuance of such number of shares of class B common stock
as may be required under the agreements so that each of the KWTX and
Brazos shareholders receive at least 40% of the merger consideration in
Gray class B common stock.
Gray Election to Pay Cash Only. If the average per share price of Gray
class B common stock during the 20 trading day period immediately preceding the
closing date of the KWTX or Brazos acquisitions or the price of Gray class B
common stock on the closing date is less than $12 per share, Gray may pay all of
the acquisition consideration for KWTX and Brazos in cash, in which event the
total acquisition price will be reduced by $1,530,000 in the case of KWTX and
$470,000 in the case of Brazos.
No Fractional Shares. No fractional shares of Gray class B common stock
will be issued to holders of KWTX or Brazos stock. Instead, the shareholders
otherwise entitled to a fractional share of Gray class B common stock will
receive the cash value of the fractional share.
Officers and Directors. The acquisition agreements provide that the
officers and directors of the wholly owned subsidiaries of Gray immediately
prior to the acquisitions, together with such additional persons as may be
elected, will serve as the officers and directors of the surviving corporation
(in the case of the mergers of KWTX and Brazos) or Gray's subsidiary which is
purchasing assets (in the case of KXII).
Conditions to the Acquisitions. The closing of the acquisitions of KWTX
and Brazos are mutually dependent, so that if both acquisitions are not
consummated, neither may be consummated. The closing of the acquisition of KXII
is dependent on the consummation of the acquisitions of KWTX and Brazos. Under
the acquisition agreements, the respective obligations of each party to effect
the acquisitions are subject to the satisfaction or waiver of the following
material conditions:
- the representations and warranties of the parties in the acquisition
agreements shall be true and correct as of the closing date in all
material respects and the parties shall have performed in all material
respects their obligations required to be performed by them under the
acquisition agreements;
17
23
- the receipt of FCC approval;
- no stop order suspending the effectiveness of the registration statement,
of which this proxy statement/prospectus is a part, shall have been
issued by the Securities and Exchange Commission and no proceedings for
that purpose, and no similar proceeding in respect of this proxy
statement/prospectus, shall have been initiated or threatened by the
Securities and Exchange Commission;
- the shareholders of Gray, KWTX and Brazos shall have approved the
acquisitions;
- no temporary restraining order, injunction or other order, binding legal
restraint or prohibition preventing the consummation of the acquisitions
shall be in effect;
- legal opinions with respect to certain aspects of the acquisitions shall
have been received;
- the shares of Gray class B common stock issuable pursuant to the
acquisition agreements shall have been approved for listing on The New
York Stock Exchange; and
- all applicable waiting periods relating to the Hart-Scott-Rodino Act
shall have expired or otherwise terminated.
The obligations of each of KWTX and Brazos to complete the acquisitions are
also subject to the following material conditions:
- a legal opinion with respect to certain tax consequences of the
acquisitions shall have been delivered to KWTX and Brazos; and
- certain principal shareholders of Gray shall have agreed to vote their
shares in favor of the acquisition.
The obligations of Gray to complete the acquisitions are also subject to
the following material conditions:
- each director, officer or 5% shareholder of KWTX and Brazos shall have
agreed to vote his shares in favor of the acquisition;
- written results of an environmental audit of KWTX's and Brazos's real
property acceptable to Gray shall have been received by Gray; and
- standard form policies of owner's or lessee's title insurance, insuring
the applicable party's title as owner or as lessee, shall have been
received by Gray.
Representations and Warranties. The acquisition agreements contain various
customary representations and warranties of the parties, including
representations and warranties made by each of the parties with respect to its:
- organization, standing and power;
- capital structure;
- financial statements;
- authority relative to the acquisition agreement;
- certificate of incorporation and bylaws;
18
24
- absence of litigation;
- compliance with law and permits;
- employee benefit plans;
- consents and approvals; and
- absence of brokers.
In addition, each of KWTX, Brazos and KXII made representations and
warranties with respect to its:
- subsidiaries;
- contracts and commitments;
- real property;
- environmental, health and safety matters;
- personnel information;
- certain business practices and potential conflicts of interest;
- labor relations;
- FCC licenses;
- title to and condition of assets;
- intellectual property;
- insurance; and
- taxes.
In addition, Gray made a representation and warranty with respect to the
accuracy and completeness of its filings with the Securities and Exchange
Commission.
Covenants. The acquisition agreements contain several covenants concerning
the conduct of the parties including the following material covenants relating
to:
- agreement by KWTX, Brazos and KXII not to solicit, or take any other
action to facilitate, any proposal or offer from any person for the
acquisition of KWTX and Brazos or KXII or any proposal to acquire in any
manner a substantial equity interest in, or a substantial portion of the
assets of, KWTX, Brazos or KXII;
- meetings of the shareholders of Gray, KWTX and Brazos to approve the
acquisitions;
- recommendation of the respective boards of directors of Gray, KWTX and
Brazos to their shareholders to vote in favor of the acquisitions;
- confidentiality of information obtained in connection with the proposed
acquisitions;
- access to information;
- coordination and cooperation with respect to meetings of shareholders;
19
25
- preparing and filing disclosure documents and a registration statement of
which this proxy statement/prospectus is a part;
- actions and filings with governmental bodies, agencies, officials or
other authorities and third parties;
- public announcements; and
- government authorizations.
Further Action. The acquisition agreements provide that each of the
parties to the acquisition agreements will in good faith use all commercially
reasonable efforts to take all actions and to do all other things necessary,
proper or advisable to:
- consummate and make effective as promptly as practicable the transactions
contemplated by the acquisition agreements;
- obtain in a timely manner all necessary waivers, consents and approvals;
- effect all necessary registrations and filings; and
- otherwise satisfy or cause to be satisfied all conditions precedent to
its obligations under the acquisition agreements.
Termination. The acquisition agreements provide that they may be
terminated and the acquisitions may be abandoned at any time before the
effective time of the acquisitions, even if all requisite shareholder approvals
have been obtained, under the following circumstances:
- by mutual consent of the parties;
- by any party, if any material representation, warranty, covenant or
agreement of another party shall have been incorrect or breached and
shall not have been cured or otherwise resolved to the reasonable
satisfaction of the other party on or before the closing date; provided,
however, that prior to such termination the party in default shall be
given written notice by the other party, and shall have 10 days in which
to cure such default;
- by any party, if the acquisitions have not occurred by December 31, 1999,
unless the assignment applications jointly filed by the parties are still
pending before the FCC on that date, in which case the acquisition
agreements shall not be terminated until May 31, 2000, but after which,
any party may terminate the acquisition agreements; and
- by KWTX or Brazos, if Gray fails to obtain shareholder approval of the
issuance of the Gray class B common stock in the acquisitions within 40
days after the registration statement, of which this proxy
statement/prospectus is a part, has been declared effective by the SEC.
If the acquisition agreements are terminated, the acquisition agreements
provide that they will become void and there will be no liability on the part of
any party except:
- if the termination occurs as a result of a breach or default by any of
KWTX, Brazos or KXII then Gray shall be entitled to seek specific
performance of any of KWTX's, Brazos' or KXII's obligation to effect the
acquisition in accordance with the provisions of the acquisition
agreements; and
20
26
- if the termination occurs as a result of a breach or default by Gray,
then each of KWTX, Brazos and KXII may retain as liquidated damages
$1,000,000 of Gray's $3,000,000 deposit being held in escrow.
Fees and Expenses. Whether or not the acquisitions are consummated, each
party will pay its own costs and expenses in connection with preparing, entering
into and carrying out the acquisition agreements and related transactions,
except that Gray, KWTX, Brazos and KXII shall share equally in the payment of
FCC and Hart-Scott-Rodino Act filing fees, and the fees of any certified public
accountants used in connection with the determination of the net working capital
of KWTX and Brazos.
Indemnification. Under the acquisition agreements, the shareholders of
KWTX and Brazos and the sellers of the assets of KXII agreed to indemnify Gray
against any damages arising from breaches of the representations, warranties,
agreements and covenants of KWTX, Brazos and the sellers of the assets of KXII,
as the case may be, provided that these parties' indemnification liabilities may
not exceed $750,000 (in the case of KWTX), $250,000 (in the case of Brazos), and
$300,000 (in the case of KXII). A total of $1,300,000 will be escrowed at the
closings of the acquisitions to support these indemnification provisions.
One-half of this amount will be released one year after the closings, subject to
any claims pending at that time. Four years after the closing dates of the
acquisitions, any escrowed funds not distributed or reserved for distribution to
satisfy these indemnification obligations will be distributed among the former
shareholders of KWTX and Brazos and the sellers of the assets of KXII. The
acquisition agreements also provide for indemnification by Gray for four years
for breaches by Gray of its representations, warranties, covenants and
agreements, subject to the same monetary limitations, although Gray will not
escrow any funds to support these indemnification obligations.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of the KWTX and Brazos acquisitions. The discussion is not
exhaustive as to all possible tax considerations and does not include a
discussion of any state, local or foreign tax considerations. In addition, the
discussion is intended to address only those federal income tax considerations
that are generally applicable to U.S. shareholders of Gray, KWTX and Brazos and
does not discuss all of the aspects of federal income taxation that may be
relevant to shareholders, including insurance companies, tax-exempt entities,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States who are subject to special
treatment under the federal income tax laws.
The following discussion assumes that the KWTX and Brazos shareholders hold
their respective shares of KWTX or Brazos stock as capital assets within the
meaning of Section 1221 of the Internal Revenue Code. It is based upon current
provisions of the Internal Revenue Code and its legislative history, existing,
temporary and currently proposed Treasury Regulations, existing administrative
rulings and practices of the Internal Revenue Service and judicial decisions. No
assurance can be given that legislative, judicial or administrative changes will
not affect the accuracy of this discussion, possibly on a retroactive basis. In
addition, no rulings from the IRS with respect to the tax consequences of the
acquisitions will be sought. Accordingly, no assurance can be given that the
21
27
statements set forth in this discussion will not be challenged by the IRS and
sustained by the courts if so challenged.
This discussion is not intended as a substitute for careful tax planning.
Each KWTX and Brazos shareholder is urged to consult his own tax advisor
regarding the specific tax consequences of the acquisitions, including the
federal, state, local and foreign tax consequences that may be applicable to
such shareholder.
Unless Gray elects to pay all of the acquisition consideration for KWTX or
Brazos in cash, each of these acquisitions should qualify as a reorganization
under Section 368(a) of the Internal Revenue Code, and consummation of each of
these acquisitions is conditioned upon the receipt by the parties of an opinion
from King & Spalding, tax counsel to Gray, substantially to the effect that each
of the acquisitions should constitute a reorganization under Section 368(a) of
the Internal Revenue Code.
If the KWTX and Brazos acquisitions constitute "reorganizations" under
Section 368(a) of the Internal Revenue Code, the acquisitions generally will
have the following federal income tax consequences:
- No gain or loss will be recognized by a holder of KWTX stock or of Brazos
stock whose shares of such stock are exchanged solely for shares of Gray
class B common stock.
- A KWTX or Brazos shareholder who exchanges his KWTX or Brazos stock for a
combination of Gray class B common stock and cash (other than cash in
lieu of a fractional share of Gray class B common stock) will recognize
gain, if any, realized on the exchange, but in an amount which does not
exceed the amount of cash received. Any such gain recognized should
generally be taxable to KWTX or Brazos shareholders as capital gain and
should be long-term capital gain if the shareholder has held his KWTX or
Brazos stock for more than one year at the time of the acquisitions. It
is possible, however, that such gain will be taxable as dividend income
to a particular shareholder if the cash received by him does not result
in a "meaningful reduction" in the percentage ownership of Gray class B
common stock that he otherwise would have received had he not elected to
receive the cash. Any such determination would take into account both his
actual and constructive ownership of Gray class B common stock under the
constructive ownership rules of Section 318 of the Internal Revenue Code.
A KWTX or Brazos shareholder who receives both Gray class B common stock
and cash will not be permitted to recognize any loss on the exchange with
respect to which the cash was received.
- The tax basis of the Gray class B common stock received by a KWTX or
Brazos shareholder in the acquisitions will be the same as the
shareholder's tax basis in the KWTX or Brazos stock surrendered in
exchange therefor (reduced by an amount allocable to a fractional share
of Gray class B common stock for which cash is received), less the amount
of any cash consideration received by the shareholder (other than cash
received in lieu of a fractional share of Gray class B common stock),
plus any amount that is treated as gain or as a dividend to the
shareholder.
- The holding period of the Gray class B common stock received by the KWTX
and Brazos shareholders in the acquisitions (including a fractional share
of Gray class B common stock deemed to have been received and then
redeemed) will include the holding period of the KWTX or Brazos stock
surrendered in exchange therefor.
22
28
- Cash received by a KWTX or Brazos shareholder in lieu of a fractional
share of Gray class B common stock will be treated as having been
received in exchange for such fractional share, and capital gain or loss
will be recognized by such shareholder in an amount equal to the
difference between the amount of cash received and the portion of the tax
basis of the share of KWTX or Brazos stock allocable to such fractional
interest. Any such gain or loss will be long term capital gain or loss if
the share of KWTX or Brazos stock exchanged for the fractional share of
Gray class B stock was held for more than one year at the time of the
acquisitions.
- No gain or loss will be recognized by Gray, the Gray merger subsidiaries,
Gray's shareholders, KWTX or Brazos in connection with the acquisitions.
In rendering its tax opinions, King & Spalding will make customary factual
assumptions and will rely upon customary representations of appropriate officers
of Gray, KWTX and Brazos, including a representation that the aggregate fair
market value of the Gray class B common stock that will be issued to KWTX
shareholders in the KWTX acquisition and to Brazos shareholders in the Brazos
acquisition will represent not less than 40% of the aggregate value of the total
consideration that will be received by the respective shareholders of KWTX and
Brazos (taking into account any cash paid in lieu of fractional shares of Gray
class B common stock). In addition, King & Spalding will assume and rely on
representations that the fair market value of the Gray class B common stock and
other consideration that will be received by each shareholder in the KWTX and
Brazos acquisitions will be approximately equal to the fair market value of the
KWTX or Brazos stock surrendered in exchange therefor. King & Spalding's
opinions cannot be relied upon if any of the assumptions or representations upon
which the opinions are based is, or later becomes, inaccurate.
Gray's Election to Pay Cash Only. If Gray elects to pay all of the
acquisition consideration for KWTX and Brazos in cash, a wholly owned subsidiary
of Gray will merge with and into KWTX and another wholly owned subsidiary of
Gray will merge with and into Brazos, and KWTX and Brazos will be the surviving
corporations in such mergers. For federal income tax purposes, the KWTX
shareholders and Brazos shareholders will be treated as having sold their shares
to Gray for cash and will recognize capital gain or loss in an amount equal to
the difference between the amount of cash received and the shareholder's
adjusted tax basis in his KWTX or Brazos stock, but no gain or loss will be
recognized by Gray, the Gray merger subsidiaries, Gray's shareholders, KWTX or
Brazos.
Escrow to Secure Representations and Warranties. A portion of the cash
consideration otherwise payable to the KWTX and Brazos shareholders will be
deposited into an escrow account at closing to secure such shareholders'
indemnification obligations to Gray. A KWTX or Brazos shareholder's right to
receive distributions from the escrow account in the future should be treated as
an installment obligation for federal income tax purposes. Accordingly, any gain
recognized by a KWTX or Brazos shareholder in the KWTX or Brazos acquisition
will be required to be taken into account by such shareholder under the
installment method of tax accounting unless (1) the shareholder affirmatively
elects out of the installment method or (2) the cash consideration paid to the
shareholder is taxable as a dividend, in which case the installment method will
not be available.
If the installment method applies, any taxable gain recognized by a KWTX or
Brazos shareholder generally will be taken into account at the time that
payments, including
23
29
distributions from the escrow account, if any are received. In the case of a
"reorganization" qualifying under Section 368(a) of the Internal Revenue Code in
which (1) a KWTX or Brazos shareholder receives a combination of Gray class B
common stock and cash and (2) the amount of cash to be received by the
shareholder does not exceed the shareholder's realized gain, the entire amount
of each cash payment to the shareholder (other than amounts treated as interest
for federal income tax purposes) will be taken into account as taxable gain at
the time of receipt. Conversely, if the shareholder has a basis in his KWTX or
Brazos stock that exceeds the fair market value of the Gray class B common stock
received, a portion of the cash consideration received by the shareholder equal
to such excess will be treated as a tax-free recovery of basis. The
determination of the portion of each payment treated as basis recovery would be
determined under the Treasury Regulations discussed below. In addition, if Gray
elects to pay all cash in the KWTX or Brazos acquisition, a portion of each cash
payment to shareholders reporting their taxable gain under the installment
method will be treated as a tax-free recovery of basis under the rules discussed
below.
Under the Treasury Regulations governing the installment method of
reporting, the KWTX and Brazos acquisitions, because of the payments from the
escrow account, likely will be treated as "contingent payment" transactions in
which there is neither a stated maximum selling price nor a fixed maximum period
during which payments will be received. In such circumstances, a shareholder who
realizes gain and does not elect out of the installment method might be able to
recover only 1/15 of the basis of his KWTX or Brazos stock in each taxable year.
This would include the taxable year in which the KWTX and Brazos acquisitions
close, even though the shareholder will have received in such year substantially
all of the consideration payable to him by Gray. Shareholders should consult
their tax advisors regarding the basis recovery rules under the installment
method and may wish to consider electing out of the installment method to avoid
the potentially adverse consequences of such rules.
The right to receive distributions from the escrow account likely will be
treated as a "contingent payment debt instrument" subject to Section 1274 of the
Internal Revenue Code and the regulations thereunder, and shareholders will be
required to include in gross income the imputed interest attributable to the
debt instrument. Imputed interest is taxable at ordinary income rates. The
amount of imputed interest with respect to the debt instrument will equal the
difference between (1) the amount of distributions from the escrow account,
including earnings on amounts in the escrow account, and (2) the present value
of such distributions, discounted back to the closing date of the acquisitions
at the "applicable federal rate" (the "AFR").
Gray intends to take the position that the possibility of a claim being
made against the escrow account is a "remote" contingency and that distributions
from the escrow account (other than distributions attributable to earnings on
the escrow account) are thus "noncontingent" payments. Under applicable Treasury
Regulations, imputed interest with respect to noncontingent payments is treated
as original issue discount ("OID") and must be accrued by the former KWTX and
Brazos shareholders on a constant yield basis, regardless of the shareholder's
regular method of tax accounting. Gray's determination that distributions from
the escrow account are noncontingent payments is binding on shareholders who do
not explicitly disclose to the IRS in their tax returns that they are taking a
contrary position.
Gray intends also to take the position that distributions of the earnings
on the escrow account should be treated as contingent payments. Imputed interest
with respect to a
24
30
contingent payment is not determined until the payment becomes fixed and is not
includible in the gross income of a KWTX or Brazos shareholder until the taxable
year in which the contingent payment is made.
If a shareholder elects out of the installment method, the contingent
payment debt instrument deemed to have been received will have to be included in
the shareholder's "amount realized" for purposes of computing gain or loss. In
general, the "amount realized" with respect to a contingent payment debt
instrument is equal to the "issue price" of any noncontingent payments required
by the debt instrument (which is the difference between any such noncontingent
payments and their present value, using the AFR as the discount rate), increased
by the "fair market value" of the contingent payments required by the
instrument. If the contingent payments treated as principal exceed the
shareholder's basis in the right to receive such payments, the excess will be
treated as gain from the sale or exchange of the debt instrument. Conversely,
any unrecovered basis in the right to receive contingent payments remaining at
the time the final contingent payment is made generally will be treated as a
loss from the sale or exchange of the debt instrument. In general, a
shareholder's basis in the right to receive the contingent payments should equal
the fair market value of such contingent payments determined as of the date that
the debt instrument was deemed to have been issued.
The rules governing the installment method of reporting, as well as the
imputed interest rules, are extremely complex. KWTX and Brazos shareholders are
encouraged to discuss the treatment of the escrow account with their personal
tax advisors in order to acquire a complete understanding of the effects of
installment reporting and the imputed interest rules.
Backup Withholding and Information Reporting. Any cash received in the
KWTX or Brazos acquisitions by a KWTX or Brazos shareholder may be subject to
backup withholding at a 31% rate. Backup withholding will not apply, however, to
a taxpayer who (1) furnishes a correct taxpayer identification number on IRS
Form W-9 or an appropriate substitute form and certifies on such Form that he or
she is not subject to backup withholding, (2) provides a certificate of foreign
status on IRS Form W-8 or an appropriate substitute form, or (3) is otherwise
exempt from backup withholding. Any amount paid as backup withholding will be
credited against the holder's federal income tax liability.
KWTX and Brazos shareholders who receive Gray class B common stock also
must comply with the information reporting requirements of the Treasury
Regulations under Section 368 of the Internal Revenue Code. In general, these
regulations require any taxpayer who receives stock, securities or other
property, including cash, in a "reorganization" described in Section 368(a) of
the Internal Revenue Code to include with his income tax return a complete
statement of the facts pertaining to the nonrecognition of gain or loss
including (1) the cost or other basis of the stock or securities transferred in
the exchange and (2) the amount of stock, securities, or other property received
in the exchange. In addition, the statement must include the fair market value,
as of the date of the exchange, of each type of stock, securities or other
property received by the taxpayer, and the taxpayer is required to maintain
permanent records. All KWTX and Brazos shareholders are encouraged to consult
their own tax advisors to determine the specific information that may be needed
to file pursuant to the Treasury Regulations under Section 368 of the Internal
Revenue Code.
25
31
THIS DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE KWTX AND BRAZOS ACQUISITIONS AND DOES NOT PROVIDE A COMPLETE
ANALYSIS OF SUCH CONSEQUENCES. IN ADDITION, THIS DISCUSSION DOES NOT ADDRESS TAX
CONSEQUENCES WHICH MAY VARY WITH, OR ARE CONTINGENT UPON, INDIVIDUAL
CIRCUMSTANCES. MOREOVER, THE DISCUSSION DOES NOT ADDRESS ANY NON-INCOME TAX OR
FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE ACQUISITIONS. ACCORDINGLY, KWTX
AND BRAZOS SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
PARTICULAR FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES
RESULTING FROM THE ACQUISITIONS.
ACCOUNTING TREATMENT
The acquisitions of KWTX, Brazos and KXII will be accounted for under the
purchase method of accounting. Generally, under the purchase method of
accounting, assets acquired and liabilities assumed are recorded at their fair
value.
REGULATORY MATTERS
Under the Communications Act, the acquisitions may not be consummated until
the FCC has approved the assignment of the FCC licenses of KWTX, Brazos and KXII
to Gray. This approval has been obtained.
Under the Hart-Scott-Rodino Act, the acquisitions may not be consummated
until notifications have been given and information has been furnished to the
Federal Trade Commission and the Anti-Trust Division of the United States
Department of Justice and specified waiting period requirements have expired. On
July 23, 1999, Gray, KWTX and Brazos filed the required notification and report
forms under the Hart-Scott-Rodino Act with the FTC and Anti-Trust Division, and
the applicable waiting period scheduled to expire at midnight on August 22,
1999, unless earlier termination is granted. At any time before or after the
effective time of the acquisitions, the FTC or the Antitrust Division could take
any action under the United States antitrust laws that it deems necessary or
desirable in the public interest. This could include seeking to enjoin the
acquisitions or seeking the divestiture of KWTX, Brazos or KXII by Gray, in
whole or in part, or the divestiture or compulsory licensing of substantial
assets of Gray, KWTX, Brazos or KXII or their respective subsidiaries. State
attorneys general and private parties may also bring legal actions under the
federal or state antitrust laws in some cases.
FINANCING OF THE ACQUISITIONS
The total amount of funds required by Gray to consummate the acquisitions
and pay related fees and expenses is estimated to be approximately $100 million.
Gray intends to finance the cash consideration required by the acquisition
agreements by issuing long-term debt. Gray is analyzing various financing
alternatives and is in discussions with its lenders to provide the financing.
While exact financing terms have not been finalized, Gray currently believes the
financing will be completed incorporating the general terms outlined below.
Additional funds, if any, necessary to complete the financing are expected to be
borrowed under Gray's existing revolving credit facility.
Principal Amount: $100,000,000
26
32
Interest Rate: Variable -- based on LIBOR plus an additional
percentage based upon Gray's overall ratio of
indebtedness to its operating cash flow
Interest Payable: Quarterly in arrears
Repayment and
Final Maturity: .25% of principal quarterly each March 31, June
30, September 30 and December 31 beginning March
31, 2001 through September 30, 2005, with the
remaining outstanding principal due and payable on
December 31, 2005
Ranking and
Security: The indebtedness will be senior secured
indebtedness of Gray and Gray and its subsidiaries
will jointly and severally pledge their assets to
guarantee the indebtedness
Covenants: The credit agreement is expected to contain normal
and customary debt covenants, such as debt service
coverage ratios and the requirement of Gray to
maintain certain financial ratios, and will limit
Gray's ability to incur additional indebtedness
The actual amount of cash that will be needed to complete the acquisitions
is unknown at this time and is dependent on the following factors:
- the election of each of the KWTX and Brazos shareholders regarding the
proportion of cash and Gray class B common stock to be received in the
acquisitions;
- the final amount of the specified working capital accounts as to which
the acquisition agreements require Gray to increase the consideration
payable;
- the election by Gray to pay all of the merger consideration in cash if
the per share price of the Gray class B common stock for the 20 trading
days preceding the closing date is less than $12; and
- the actual amount of the transaction and closing costs.
If additional financing is required, Gray currently intends to fund such
amounts by drawing on its existing bank revolving credit facility. As of June
30, 1999, Gray had availability of approximately $69.3 million under the terms
of that facility. Gray would be required to explore alternative financing
arrangements if its borrowing ability under the revolving credit facility was
insufficient to meet any additional financing necessary to complete the
acquisitions.
If KWTX and Brazos shareholders elect to receive more than 40% of their
respective consideration in Gray class B common stock, the cash consideration
will be correspondingly reduced. In such circumstances, Gray would either:
- reduce the planned $100 million new debt issuance to an appropriate
lesser amount;
- fund the cash consideration required by exclusively drawing on its
existing bank revolving credit facility; or
27
33
- issue a smaller principal amount of new debt and draw on its existing
revolving credit facility.
Gray will require modifications to its existing bank senior credit facility
to allow for the expected increase in Gray's total indebtedness and the issuance
of the planned additional senior debt. These actions will require the approval
of over two-thirds of the senior credit facility's participants. Gray currently
believes that such approval will be obtained. If the approval were not obtained,
Gray would explore alternate financing arrangements.
RESALE OF GRAY CLASS B COMMON STOCK FOLLOWING THE ACQUISITIONS
In general the shares of the Gray class B common stock issuable upon
conversion of the KWTX and Brazos stock in the acquisitions will be freely
transferable. However, securities received by any shareholder who is an
"affiliate" of KWTX or Brazos for purposes of Rule 145 under the Securities Act
of 1933 will not be transferable, except pursuant to an effective registration
statement or an exemption from the registration requirements of the Securities
Act of 1933. An affiliate, as defined under the Securities Act of 1933,
generally includes, without limitation, directors, certain executive officers
and beneficial owners of 10% or more of a class of capital stock. This proxy
statement/prospectus does not cover sales of Gray class B common stock issued to
any person who is an affiliate of KWTX or Brazos. However, the acquisition
agreements require Gray to register for resale the shares of Gray class B common
stock received by affiliates of KWTX and Brazos.
SHAREHOLDERS' AGREEMENTS
Each director, officer and five percent shareholder of each of KWTX and
Brazos and certain principal shareholders of Gray have agreed to vote their
shares in favor of the acquisitions. As of June 30, 1999, the shares subject to
such voting agreements represented 66.9% of the outstanding shares of KWTX,
69.2% of the outstanding shares of Brazos and 48.9% of the votes represented by
the outstanding shares of Gray class A common stock and class B common stock.
NO APPRAISAL RIGHTS AVAILABLE TO GRAY SHAREHOLDERS
Under Georgia law, Gray shareholders who object to the proposal to approve
the issuance of shares of Gray class B common stock pursuant to the acquisition
agreements will not be afforded statutory appraisal rights.
28
34
SELECTED FINANCIAL INFORMATION OF GRAY
The following selected consolidated financial data for, and as of the end
of, each of the years in the five-year period ended December 31, 1998 are
derived from the audited consolidated financial statements of Gray. The
consolidated financial statements as of December 31, 1997 and 1998 and for each
of the years in the three-year period ended December 31, 1998 have been audited
by Ernst & Young LLP, independent auditors, which consolidated financial
statements and auditors' report thereon are incorporated by reference in this
proxy statement/prospectus. The selected consolidated financial data as of June
30, 1998 and 1999 and for the six-month periods then ended are derived from the
unaudited condensed consolidated financial statements of Gray incorporated by
reference in this proxy statement/prospectus which, in the opinion of management
of Gray, include all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the data for such periods. The results of operations
for the six months ended June 30, 1999 are not necessarily indicative of the
results to be expected for the year ending December 31, 1999.
The selected consolidated financial data of Gray should be read in
conjunction with Gray's annual report on Form 10-K for the year ended December
31, 1998 and quarterly report on Form 10-Q for the quarter ended June 30, 1999,
which are incorporated by reference in this proxy statement/prospectus.
29
35
IN THOUSANDS EXCEPT PER SHARE DATA
------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- -------------------
1994(1) 1995(2) 1996(3) 1997(4) 1998(5) 1998 1999
------- ------- -------- -------- -------- -------- --------
(UNAUDITED)
STATEMENT OF INCOME DATA:
Net revenues:
Broadcasting............... $22,826 $36,750 $ 54,981 $ 72,301 $ 91,007 $ 42,201 $ 44,306
Publishing................. 13,692 21,866 22,845 24,536 29,330 13,917 17,558
Paging..................... -- -- 1,479 6,711 8,553 3,925 4,557
------- ------- -------- -------- -------- -------- --------
Total net
revenues........ 36,518 58,616 79,305 103,548 128,890 60,043 66,421
Expenses:
Broadcasting............. 14,864 23,202 32,437 41,967 52,967 24,780 26,673
Publishing............... 11,198 20,016 17,949 19,754 24,197 11,441 13,710
Paging................... -- -- 1,078 4,051 5,618 2,583 3,238
Corporate and
administrative......... 1,959 2,258 3,219 2,528 3,063 1,317 1,687
Depreciation............. 1,745 2,633 4,078 7,800 9,691 4,176 5,773
Amortization of
intangible assets...... 396 1,326 3,585 6,718 8,426 3,667 5,346
Non-cash compensation
paid in common stock... 80 2,321 880 -- -- -- --
------- ------- -------- -------- -------- -------- --------
30,242 51,756 63,226 82,818 103,962 47,964 56,427
------- ------- -------- -------- -------- -------- --------
6,276 6,860 16,079 20,730 24,928 12,079 9,994
Gain on disposition of
television station....... -- -- 5,671 -- 70,572 -- --
Miscellaneous income and
(expense)................ 189 143 33 (31) (242) (314) 456
------- ------- -------- -------- -------- -------- --------
6,465 7,003 21,783 20,699 95,258 11,765 10,450
Interest expense........... 1,923 5,438 11,689 21,861 25,455 11,967 13,775
------- ------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary
charge................... 4,542 1,565 10,094 (1,162) 69,803 (202) (3,325)
Federal and state income
taxes.................... 1,776 634 4,416 240 28,144 443 (684)
Extraordinary charge on
extinguishment of debt,
net of tax benefit of
$2,157................... -- -- 3,159 -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net income (loss).......... 2,766 931 2,519 (1,402) 41,659 (645) (2,641)
Preferred dividends........ -- -- 377 1,410 1,318 718 505
------- ------- -------- -------- -------- -------- --------
Net income (loss) available
to common stockholders... $ 2,766 $ 931 $ 2,142 $ (2,812) $ 40,341 $ (1,363) $ (3,146)
======= ======= ======== ======== ======== ======== ========
Average outstanding common
shares:
Basic.................... 7,034 6,531 8,098 11,853 11,923 11,899 11,961
Diluted.................. 7,034 6,722 8,438 11,853 12,404 11,899 11,961
Net income (loss) per share
available to common
stockholders:
Basic.................... $ 0.39 $ 0.14 $ 0.26 $ (0.24) $ 3.38 $ (0.11) $ (0.26)
Diluted.................. $ 0.39 $ 0.14 $ 0.25 $ (0.24) $ 3.25 $ (0.11) $ (0.26)
BALANCE SHEET DATA AT END
OF PERIOD:
Working capital
(deficiency)............. $ 1,075 $ (222) $ (158) $ 10,089 $ 10,249 $ 9,949 $ 15,022
Total assets............... 68,789 78,240 298,664 345,051 468,974 343,683 480,828
Total debt................. 52,940 54,324 173,368 227,076 270,655 226,901 291,672
Total stockholders
equity................... $ 5,001 $ 8,986 $ 95,226 $ 92,295 $126,703 $ 91,669 $123,183
30
36
- -------------------------
(1) Reflects the operating results of WKYT-TV, WYMT-TV and The Rockdale Citizen
as of their respective acquisition dates.
(2) Reflects the operating results of The Gwinnett Post-Tribune as of its date
of acquisition.
(3) Reflects the operating results of WRDW-TV, WCTV-TV, WVLT-TV, a satellite
uplink and production business and a communications and paging business as
of their respective acquisition dates. Also reflects the sale of KTVE Inc.,
as of its date of disposition. Gray also incurred an extraordinary charge in
connection with the early extinguishment of debt.
(4) Reflects the operating results of WITN-TV and Gulflink Communications, Inc.,
as of their respective acquisition dates.
(5) Reflects the operating results of Busse Broadcasting Corporation as of its
date of acquisition. Also reflects the sale of WALB-TV as of its date of
disposition.
31
37
SELECTED FINANCIAL INFORMATION OF KWTX
The following selected financial data for, and as of the end of, each of
the years in the five-year period ended December 31, 1998 are derived from the
financial statements of KWTX. The financial statements as of and for the year
ended December 31, 1998 have been audited by Pattillo, Brown & Hill, LLP,
independent auditors. The financial statements as of December 31, 1997 and for
the years ended December 31, 1996 and 1997 were compiled by Pattillo, Brown &
Hill, LLP, independent auditors. These financial statements and the auditors'
report thereon are included elsewhere in this proxy statement/ prospectus. The
selected financial data as of June 30, 1998 and 1999 and for the six month
periods ended June 30, 1998 and 1999 are derived from the unaudited condensed
financial statements of KWTX included elsewhere in this proxy
statement/prospectus which, in the opinion of management of KWTX, include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the data for such periods. The results of operations for the six months
ended June 30, 1999 are not necessarily indicative of the results to be expected
for the year ending December 31, 1999.
The selected financial data of KWTX should be read in conjunction with
KWTX's audited financial statements and related notes for the year ended
December 31, 1998 and the unaudited financial statements and related notes for
the years ended December 31, 1996 and 1997 and the six months ended June 30,
1998 and 1999, included elsewhere in this proxy statement/prospectus.
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
---------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF INCOME DATA:
Net revenues...................... $ 8,215 $ 8,797 $ 9,590 $ 8,796 $ 9,222 $ 4,290 $ 4,639
Expenses:
Broadcasting..................... 5,772 5,968 6,260 5,550 5,507 2,700 2,780
Depreciation..................... 418 463 553 495 607 288 336
--------- --------- --------- --------- --------- ------- -------
Total operating expenses... 6,190 6,431 6,813 6,045 6,114 2,988 3,116
--------- --------- --------- --------- --------- ------- -------
Operating income................. 2,025 2,366 2,777 2,751 3,108 1,302 1,523
Miscellaneous income............. 745 855 1,196 1,281 1,601 676 587
--------- --------- --------- --------- --------- ------- -------
Income before income taxes....... 2,770 3,221 3,973 4,032 4,709 1,978 2,110
Federal and state income taxes... 838 1,002 1,205 1,305 1,388 543 652
Gain on disposition of radio
station, net................... -- -- 2,392 -- -- -- --
--------- --------- --------- --------- --------- ------- -------
Net income................. $ 1,932 $ 2,219 $ 5,160 $ 2,727 $ 3,321 $ 1,435 $ 1,458
========= ========= ========= ========= ========= ======= =======
Average outstanding common shares:
Basic and diluted................ 1,550 1,550 1,550 1,550 1,550 1,550 1,550
Net income per share of common
stock:
Basic and diluted $1,246.45 $1,431.62 $3,329.35 $1,759.09 $2,142.41 $925.92 $940.34
BALANCE SHEET DATA AT END OF
PERIOD:
Working capital................... $ 4,857 $ 5,351 $ 9,655 $ 7,070 $ 7,888 $ 6,830 $ 7,322
Total assets...................... 13,303 14,394 19,968 17,621 19,319 17,270 17,956
Total stockholders equity......... $ 11,538 $ 12,517 $ 17,057 $ 15,527 $ 17,298 $15,722 $16,586
32
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF KWTX
INTRODUCTION
The following analysis of the financial condition and results of operations
of KWTX should be read in conjunction with KWTX's audited financial statements
and related notes for the year ended December 31, 1998 and the unaudited
financial statements and related notes for the years ended December 31, 1996 and
1997 and the six months ended June 30, 1998 and 1999.
In November 1996, KWTX sold all of the assets and operations of radio
stations KWTX-AM and KWTX-FM to a third party resulting in a pre-tax gain of
$3.6 million. These were the only radio broadcasting stations operated by KWTX.
The operating revenues of KWTX for 1998 and 1997 were derived from
broadcast advertising revenues and, to a much lesser extent, from compensation
paid by the networks to KWTX for broadcasting network programming. In addition,
KWTX obtains revenue from other incidental services such as the production of
television commercials. The 1996 operating revenues also include advertising
revenues from the radio stations that were sold in November of that year.
In KWTX's operations, broadcast advertising is sold for placement either
preceding or following a television station's network programming and within
local and syndicated programming. Broadcast advertising is sold in time
increments and is priced primarily on the basis of a program's popularity among
the specific audience an advertiser desires to reach, as measured by Nielsen
Media Research. In addition, broadcast-advertising rates are affected by the
number of advertisers competing for the available time, the size and demographic
makeup of the market served by the station and the availability of alternative
advertising media in the market area. Broadcast advertising rates are the
highest during the most desirable viewing hours, with corresponding reductions
during other hours. The ratings of a local station affiliated with a major
network can be affected by ratings of network programming.
Most broadcast advertising contracts are short-term and generally run only
for a few weeks. Approximately 47% of the net revenues of KWTX for the year
ended December 31, 1998 were generated from local advertising, which is sold
primarily by a station's sales staff directly to local accounts. The remainder
represents primarily national advertising, which is sold by a station's national
advertising sales representative. The stations generally pay commissions to
advertising agencies on local, regional and national advertising and the
stations also pay commissions to the national sales representative on national
advertising.
Broadcast advertising revenues are generally highest in the second and
fourth quarters of each year, due in part to increases in consumer advertising
in the spring and retail advertising in the period leading up to and including
the winter holiday season. In addition, broadcast advertising revenues are
generally higher during even numbered election years due to spending by
political candidates, which spending typically is heaviest during the fourth
quarter.
33
39
KWTX's primary operating expenses are programming costs, employee
compensation and related benefits and programming costs. In addition,
broadcasting operations incur overhead expenses, such as maintenance, supplies,
insurance, rent and utilities.
BROADCASTING REVENUES
Set forth below are the principal types of broadcasting revenues earned by
KWTX for the periods indicated and the percentage contribution of each of the
revenues (dollars in thousands):
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------- ---------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net revenues:
Local............... $3,696 38.54% $4,097 46.58% $4,293 46.56% $1,927 44.92% $2,179 46.97%
National............ 2,851 29.73 3,104 35.29 2,955 32.04 1,545 36.01 1,659 35.76
Network
compensation...... 1,480 15.43 1,500 17.05 1,439 15.60 693 16.15 755 16.28
Political........... 311 3.24 22 .25 452 4.90 77 1.79 5 0.11
Radio............... 1,123 11.71 -- -- -- -- -- -- -- --
Other............... 129 1.35 73 .83 83 .90 48 1.14 41 0.88
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net
revenue..... $9,590 100.00% $8,796 100.00% $9,222 100.00% $4,290 100.00% $4,639 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net revenue increased $349,000, or 8.1%, from $4.3 million to $4.6 million
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998. This increase reflected an increase in net local advertising sales of
approximately $252,000, due to increased advertiser demand for commercial time.
Political net revenue decreased approximately $72,000 between the six months
ended June 30, 1999 and 1998 reflecting a decrease in political announcements
associated with local elections. In addition, network compensation increased
approximately $62,000 between the six months ended June 30, 1999 and 1998.
During the 1998 period, the network did not compensate its affiliates for
carrying the Olympic broadcasts. Net national revenues increased approximately
$114,000 between the six months ended June 30, 1999 and 1998, reflecting
increased demand for commercial time by national advertisers.
Operating costs and expenses increased $128,000, or 4.3%, from $3.0 million
to $3.1 million for the six months ended June 30, 1999 compared to the six
months ended June 30, 1998. The increase primarily reflected additional charges
of approximately $38,000 for programming and $50,000 for increased sales
salaries.
Income from operations increased $221,000, or 17.0%, from $1.3 million to
$1.5 million for the six months ended June 30, 1999 compared to the six months
ended June 30, 1998 reflecting the net effect of the increased revenue and
expenses both discussed above.
Miscellaneous income decreased $89,000, or 13.2%, from $676,000 to $587,000
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998 reflecting non-recurring miscellaneous income from the 1998 period.
34
40
Federal income tax expense for the six months ended June 30, 1999 and 1998
generally reflected KWTX's application of a 34% federal tax rate to pre-tax
income. The pre-tax income is adjusted for the deduction of state franchise
taxes, an 80% exclusion on income from the Brazos equity investment and other
items calculating the federal income tax expense.
Net earnings increased $23,000, or 1.6%, from $1,435,000 to $1,458,000 for
the six months ended June 30, 1999 compared to the six months ended June 30,
1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net revenue increased $426,000, or 4.8%, from $8.8 million to $9.2 million
for the year ended December 31, 1998 compared to the year ended December 31,
1997. This increase reflected an increase of $430,000 in net political revenue
to $452,000 in 1998 from $22,000 in 1997. Political revenue is generally
cyclical and coincides with the general election cycle during even numbered
years. Net local revenue increased by $196,000 from $4.1 million in 1997 to $4.3
million in 1998, reflecting a general increase in local sales. Net national
revenue decreased by $149,000 from $3.1 million in 1998 to $3.0 million in 1997,
reflecting a decrease in national advertising spots to allow for increased
political advertising. Network compensation decreased $61,000 from 1997 to 1998
reflecting the station's share of CBS's network wide reduction in compensation
due to the network's acquisition of broadcast rights for NFL football.
Income from operations increased $357,000, or 13.0%, from $2.8 million in
1997 to $3.1 million in 1998, reflecting the increased revenue discussed above.
Miscellaneous income increased $321,000, or 25.1%, from $1.3 million in
1997 to $1.6 million in 1998. The increase was partially attributable to an
increase of $109,000 in the income from KWTX's 50% interest in Brazos reflecting
Brazos' 1998 financial performance relative to 1997. In addition, other income
increased $177,000 between 1997 and 1998, reflecting a gain on the sale of fixed
assets in 1998.
Federal income tax expense for 1998 and 1997 generally reflected KWTX's
application of a 34% federal tax rate to pre tax income. The pre-tax income is
adjusted for the deduction of state franchise tax, an 80% exclusion on income
from the Brazos equity investment and other items in calculating the federal
income tax expense.
Net earnings increased $594,000, or 21.8%, from $2.7 million in 1997 to
$3.3 million in 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenue decreased $794,000, or 8.3%, from $9.6 million in 1996 to $8.8
million in 1997. This decrease was attributable to the sale of KWTX's radio
stations in November 1996. The sale of the radio stations decreased net revenue
by $1.1 million for 1997. This decrease was partially offset by increases in
television broadcasting net revenues. Net political revenue decreased $289,000,
or 93%, from $311,000 in 1996 to $22,000 in 1997 reflecting the "off" year of
the biennial election cycle. Net local revenue increased $401,000 from $3.7
million in 1996 to $4.1 million in 1997 reflecting an overall sales increase.
Net national revenue increased $253,000 from $2.8 million in 1996 to $3.1
million in 1997 reflecting an increase in national spots sold due to decreased
local political advertising.
35
41
Operating costs and expenses decreased $768,000, or 11.3%, from $6.8
million in 1996 to $6.0 million in 1997. The decrease reflected the sale of the
radio operations in November 1996. This sale reduced 1997 expenses by
approximately $1.1 million. Increases in television operating expenses offset,
in part, the reduction of expenses due to the sale of the radio stations.
Miscellaneous income increased $85,000, or 7.1%, from $1.2 million in 1996
to $1.3 million in 1997. The increase was attributable to an increase of
$116,000 in the income from KWTX's 50% interest in Brazos reflecting Brazos'
financial performance during 1997 compared to 1996.
Federal income tax expense for 1997 and 1996 generally reflected KWTX's
application of a 34% federal tax rate to pre-tax income. Pre-tax income was
adjusted for the deduction of state franchise taxes, an 80% exclusion on income
from the Brazos equity investment and other items in calculating the federal
income tax expense.
Net earnings decreased $2.4 million, or 47.2%, from $5.2 million in 1996 to
$2.7 million in 1997. The 1996 net earnings included a net of tax gain of $2.4
million relating to the discontinuance and disposition of KWTX's radio stations.
LIQUIDITY AND CAPITAL RESOURCES
KWTX's working capital approximated $9.7 million, $7.1 million, $7.8
million and $7.3 million at December 31, 1996, 1997, 1998 and June 30, 1999,
respectively. KWTX's cash provided from operations was approximately $6.2
million, $1.4 million, $3.2 million and $1.7 million in 1996, 1997, 1998 and the
six months ended June 30, 1999, respectively. Management of KWTX believes that
current cash balances and cash flows from operations will be adequate to provide
for KWTX's capital expenditures, cash dividends and working capital requirements
respectively.
KWTX used cash for capital expenditures in the amount of $369,000,
$911,000, $1.3 million, and $414,000 in 1996, 1997, 1998 and the six months
ended June 30, 1999, respectively.
KWTX paid dividends of $620,000, $4.3 million, $1.6 million and $2.2
million in 1996, 1997, 1998 and during the six months ended June 30, 1999,
respectively. The 1997 dividends reflect, in part, a special dividend in the
amount of the net proceeds from the sale of KWTX's radio stations which were
sold in November 1996.
KWTX regularly enters into program contracts for the right to broadcast
television programs produced by others and programming commitments for the right
to broadcast programs in the future. Such programming commitments are generally
made to replace expiring or canceled program rights. Payments under such
contracts are made in cash or the concession of advertising spots for the
program provider to resell, or a combination of both. At June 30, 1999, payments
on program license liabilities due in 1999, which will be paid with cash from
operations, were approximately $20,000.
Management does not believe that inflation in past years has had a
significant impact on KWTX's results of operations nor is inflation expected to
have a significant effect upon KWTX's business in the near future.
36
42
YEAR 2000 ISSUE
The problems created by systems that are unable to interpret dates
accurately after December 31, 1999 is referred to as the "Year 2000 Issue." Many
software programs have historically categorized the "year" in a two-digit format
rather than a four-digit format. As a result, those computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. The Year 2000 Issue creates potential risks for KWTX,
including potential problems in KWTX's Information Technology and
non-Information Technology systems. The Year 2000 Issue could cause a system
failure, miscalculations or disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. KWTX may also be exposed to risks from
third parties who fail to adequately address their own Year 2000 Issue.
KWTX has implemented a multiphase program designed to address the Year 2000
Issue. Each phase of this program and its state of completion are described
below:
Assessment: This phase of the program includes the identification of
KWTX's IT and non-IT systems. After these systems have been identified,
they are evaluated to determine whether they will correctly recognize dates
after December 31, 1999 ("Year 2000 Compliant"). If it is determined that
they are not Year 2000 Compliant, they are replaced or modified in the
remediation phase of the program. KWTX's systems are non-proprietary. KWTX
is in the process of obtaining from each system vendor a written or oral
representation as to each significant system's status of compliance. KWTX
has commenced an ongoing process of contacting suppliers and other key
third parties to assess their Year 2000 Compliance status. It appears that
all of these third parties are currently Year 2000 Compliant or they plan
to be Year 2000 Compliant prior to December 31, 1999. This phase is
substantially complete and KWTX has identified the majority of the systems
that need to be replaced.
Remediation: For those systems which are not Year 2000 Compliant, a
plan is derived to make the systems Year 2000 Compliant. These solutions
have included modification or replacement of existing systems. The
remediation phase is approximately 85% complete.
Testing: Test remediated systems to assure normal function when
placed in their original operating environment and further test for Year
2000 Compliance. The Testing phase of the program is approximately 85%
complete and KWTX anticipates that it will be completed by October 1, 1999.
Contingency: As a result of KWTX's Year 2000 Compliance program, KWTX
does not believe that it has significant risk resulting from this issue.
However, KWTX is in the process of developing contingency plans for the
possibility that one of its systems or one of a third party's systems may
not be Year 2000 Compliant.
KWTX does not presently believe that the estimated total Year 2000 project
cost will exceed $15,000. Most of this cost will be realized over the estimated
useful lives of the new hardware and software; however, any third party
consulting fees would be expended in the period the services are rendered. To
date, KWTX has identified several minor systems that are not Year 2000 Compliant
and these systems are in the process of being replaced. However, KWTX has not
incurred significant expenses associated with the Year 2000 Issue. As of
December 31, 1998, no IT projects have been deferred due to KWTX's efforts
related to the Year 2000 Issue.
37
43
The costs of the project and the date on which KWTX believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
38
44
SELECTED FINANCIAL INFORMATION OF BRAZOS
The following table sets forth selected financial data for, and as of the
end of, each of the years in the five-year period ended December 31, 1998 are
derived from the financial statements of Brazos. The financial statements as of
and for the year ended December 31, 1998 have been audited by Pattillo, Brown &
Hill, LLP, independent auditors. The financial statements as of December 31,
1997 and for the years ended December 31, 1996 and 1997 were compiled by
Pattillo, Brown & Hill, LLP, independent auditors. These financial statements
and the auditor's report thereon are included elsewhere in this proxy
statement/prospectus. The selected financial data as of June 30, 1998 and 1999
and for the six-month periods ended June 30, 1998 and 1999 are derived from the
unaudited condensed financial statements of Brazos included elsewhere in this
proxy statement/ prospectus which, in the opinion of management of Brazos,
include all adjustments, consisting of normal recurring adjustments, necessary
to present fairly the data for such periods. The results of operations for the
six months ended June 30, 1999 are not necessarily indicative of the results to
be expected for the year ending December 31, 1999.
The selected financial data of Brazos should be read in conjunction with
Brazos' audited financial statements and related notes for the year ended
December 31, 1998 and the unaudited financial statements and related notes for
the years ended December 31, 1996 and 1997 and the six months ended June 30,
1998 and 1999, included elsewhere in this proxy statement/prospectus.
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
---------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF INCOME DATA:
Net revenues.................... $ 5,018 $ 5,201 $ 6,146 $ 6,624 $ 7,301 $ 3,509 $ 3,357
Expenses:
Broadcasting.................. 3,024 3,228 3,477 3,719 4,021 1,983 2,012
Depreciation.................. 428 469 424 381 392 196 192
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.... 3,452 3,697 3,901 4,100 4,413 2,179 2,204
--------- --------- --------- --------- --------- --------- ---------
Operating income................ 1,566 1,504 2,245 2,524 2,888 1,330 1,153
Miscellaneous income............ 135 238 198 287 263 149 141
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes...... 1,701 1,742 2,443 2,811 3,151 1,479 1,294
Federal and state income
taxes......................... 611 656 875 1,012 1,135 502 449
--------- --------- --------- --------- --------- --------- ---------
Net income.................. $ 1,090 $ 1,086 $ 1,568 $ 1,799 $ 2,016 $ 977 $ 845
========= ========= ========= ========= ========= ========= =========
Average outstanding common
shares:
Basic and Diluted............. 500 500 500 500 500 500 500
Net income per share of common
stock:
Basic and Diluted............. $2,179.52 $2,171.55 $3,135.42 $3,598.63 $4,032.99 $1,954.09 $1,689.35
BALANCE SHEET DATA AT END OF
PERIOD:
Working capital................. $ 4,087 $ 4,589 $ 5,385 $ 6,548 $ 7,845 $ 6,601 $ 7,197
Total assets.................... 7,006 7,489 8,517 9,842 10,914 9,543 9,735
Total stockholders equity....... $ 5,702 $ 6,288 $ 7,280 $ 8,580 $ 9,596 $ 8,557 $ 8,941
39
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BRAZOS
INTRODUCTION
The following analysis of the financial condition and results of operations
of Brazos should be read in conjunction with Brazos' audited financial
statements and related notes for the year ended December 31, 1998 and the
unaudited financial statements and related notes for the years ended December
31, 1996 and 1997 and the six months ended June 30, 1998 and 1999.
The operating revenues of Brazos are derived from broadcast advertising
revenues and, to a lesser extent, compensation paid by the networks to Brazos
for broadcasting network programming. In addition, Brazos obtains revenue from
other incidental services, such as the production of television commercials.
In Brazos' operations, broadcast advertising is sold for placement either
preceding or following a television station's network programming and within
local and syndicated programming. Broadcast advertising is sold in time
increments and is priced primarily on the basis of a program's popularity among
the specific audience an advertiser desires to reach, as measured by A.C.
Nielsen Media Research. In addition, broadcast advertising rates are affected by
the number of advertisers competing for the available time, the size and
demographic makeup of the market served by the station and the availability of
alternative advertising media in the market area. Broadcast advertising rates
are the highest during the most desirable viewing hours, with corresponding
reductions during other hours. The ratings of a local station affiliated with a
major network can be affected by ratings of network programming.
Most broadcast advertising contracts are short-term and generally run only
for a few weeks. Approximately 42% of the net revenues of Brazos for the year
ended December 31, 1998 were generated from local advertising, which is sold
primarily by a station's sales staff directly to local accounts. The remainder
represents primarily national advertising, which is sold by a station's national
advertising sales representative. The stations generally pay commissions to
advertising agencies on local, regional and national advertising and the
stations also pay commissions to the national sales representative on national
advertising.
Broadcast advertising revenues are generally highest in the second and
fourth quarters of each year, due in part to increases in consumer advertising
in the spring and retail advertising in the period leading up to and including
the winter holiday season. In addition, broadcast advertising revenues are
generally higher during even numbered election years due to spending by
political candidates, which spending typically is heaviest during the fourth
quarter.
Brazos' primary operating expenses are employee compensation and related
benefits and programming costs. In addition, broadcasting operations incur
overhead expenses, such as maintenance, supplies, insurance, rent and utilities.
40
46
BROADCASTING REVENUES
Set forth below are the principal types of broadcasting revenues earned by
Brazos for the periods indicated and the percentage contribution of each of the
revenues (dollars in thousands):
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------- ---------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net revenues:
Local.............. $3,038 49.43% $2,904 43.84% 3,053 41.82% 1,505 42.89% $1,661 49.48
National........... 2,246 36.54 3,006 45.38 3,255 44.58 1,647 46.94 1,403 41.79
Network
compensation..... 566 9.21 573 8.65 539 7.38 262 7.47 287 8.55
Political.......... 195 3.17 43 .65 360 4.93 95 2.70 6 0.18
Production and
other............ 101 1.65 98 1.48 94 1.29 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net
revenue.... $6,146 100.00% $6,624 100.00% $7,301 100.00% $3,509 100.00% $3,357 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net revenue decreased $153,000, or 4.3%, from $3.5 million to $3.4 million
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998. This decrease reflected an increase in net local advertising sales of
approximately $156,000 offset, in part, by a decrease in national advertising
sales of $244,000. Political net revenue decreased approximately $89,000 between
the six months ended June 30, 1999 and 1998 reflecting the "off year" of the
biannual election cycle. Network compensation increased approximately $25,000
between the six months ended June 30, 1998 and 1999. During the 1998 period the
network did not compensate its affiliates for carrying the Olympic broadcasts.
Operating costs and expenses increased $25,000, or 1.1%, from $2,179,000 to
$2,204,000 for the six months ended June 30, 1999 compared to the six months
ended June 30, 1998.
Income from operations decreased $177,000, or 13.3%, from $1.3 million to
$1.1 million for the six months ended June 30, 1999 compared to the six months
ended June 30, 1998, reflecting the net effect of the decreased revenue and
increased expenses both discussed above.
Miscellaneous income decreased $8,000, or 5.4%, from $149,000 to $141,000
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998 reflecting decreased interest income from cash investments.
Federal income tax expense for the six months ended June 30, 1999 and 1998
generally reflected Brazos' application of a 34% federal tax rate to pre-tax
income. The pre-tax income is adjusted for the deduction of state franchise
taxes.
Net earnings decreased $132,000, or 13.5%, from $977,000 to $845,000 for
the six months ended June 30, 1999 compared to the six months ended June 30,
1998.
41
47
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net revenue increased $677,000, or 10.2%, from $6.6 million to $7.3 million
for the year ended December 31, 1998 compared to the year ended December 31,
1997. This increase reflected an increase of $317,000 in net political revenue
to $360,000 for 1998 from $43,000 for 1997. Net local revenue increased $149,000
from $2.9 million in 1997 to $3.1 million in 1998, reflecting a normal increase
in sales. Net national revenue increased $249,000 from $3.0 million in 1997 to
$3.3 million in 1998, reflecting a general sales increase due to rising
advertising prices. Network compensation decreased approximately $34,000 in
1998, reflecting the station's share of CBS's network wide reduction in
compensation due to the network's acquisition of broadcast rights for NFL
football.
Operating costs and expenses increased $313,000, or 7.6%, from $4.1 million
in 1997 to $4.4 million in 1998, reflecting, in part, increased general and
administrative expenses of $142,000, and increased sales compensation costs of
$44,000. In addition, management bonus expense increased $59,000 between the
fiscal years.
Income from operations increased $364,000, or 14.4%, from $2.5 million in
1997 to $2.9 million in 1998, reflecting the net effect of the changes in
revenue and expenses discussed above.
Miscellaneous income decreased $24,000, or 8.4%, from $287,000 in 1997 to
$263,000 in 1998. The decrease reflected a loss on the disposal of fixed assets
recognized in 1998 versus a gain recognized in 1997.
Federal income tax expense for 1998 and 1997 generally reflected the
application of a 34% federal tax rate to pre tax income. The pre-tax income is
adjusted for the deduction of state franchise taxes.
Net earnings increased $217,000, or 12.1%, from $1.8 million in 1997 to
$2.0 million in 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenue increased $478,000, or 7.8%, from $6.1 million in 1996 to $6.6
million in 1997. Net political revenue decreased $152,000, or 77.9%, from
$195,000 in 1996 to $43,000 in 1997 reflecting the "off" year of the biennial
election cycle. Net local revenue decreased by $134,000 from $3.0 million in
1996 to $2.9 million in 1997 reflecting a shift from local sales to national
sales. Net national revenue increased by $760,000 from $2.2 million in 1996 to
$3.0 million in 1997 reflecting increased national advertising space due to
decreased political and local revenue as well as a general increase in sales.
Operating costs and expenses increased $199,000, or 5.1%, from $3.9 million
in 1996 to $4.1 million in 1997. The increase reflects, in part, a $100,000
increase in news costs reflecting increased staff and news programming and a
$70,000 increase in general and administrative expenses. Management bonus
expense increased $23,000, or 5.7%, from $403,000 in 1996 to $426,000 in 1997,
reflecting increased performance compensation based on the improved operating
results for the year ended December 31, 1997.
Income from operations increased $279,000, or 12.4%, from $2.2 million in
1996 to $2.5 million in 1997, reflecting the net effect of the changes in
revenue and expenses discussed above.
42
48
Miscellaneous income increased $89,000, or 44.9%, from $198,000 in 1996 to
$287,000 in 1997. The increase reflected a gain recognized in 1997 on the
disposal of fixed assets verses a loss recognized in 1996.
Federal income tax expense for the years ended December 31, 1997 and 1996
generally reflected the application of a 34% federal tax rate to pre tax income.
The pre tax income is adjusted for the deduction of state franchise taxes.
Net earnings increased $232,000, or 14.8%, from $1.6 million in 1997 to
$1.8 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Brazos' working capital was approximately $5.4 million, $6.5 million, $7.8
million and $7.2 million at December 31, 1996, 1997, 1998 and June 30, 1999,
respectively. Brazos' cash provided from operations approximated $1.7 million,
$1.8 million, $2.4 million and $778,000 in 1996, 1997, 1998 and the six months
ended June 30, 1999, respectively. Management of Brazos believes that current
cash balances and cash flows from operations will be adequate to provide for
Brazos' capital expenditures, cash dividends and working capital requirements
respectively.
Brazos used cash for capital expenditures in the amount of $392,000,
$482,000, $154,000 and $127,000 in 1996, 1997, 1998 and the six months ended
June 30, 1999, respectively.
Brazos paid dividends of $575,000, $500,000, $1 million and $1.5 million in
1996, 1997, 1998 and during the six months ended June 30, 1999, respectively.
Brazos regularly enters into program contracts for the right to broadcast
television programs produced by others and programming commitments for the right
to broadcast programs in the future. Such programming commitments are generally
made to replace expiring or canceled program rights. Payments under such
contracts are made in cash or the concession of advertising spots for the
program provider to resell, or a combination of both. At June 30, 1999, payments
on program license liabilities due in 1999, which will be paid with cash from
operations, were approximately $20,000.
Management does not believe that inflation in past years has had a
significant impact on Brazos' results of operations nor is inflation expected to
have a significant effect upon Brazos' business in the near future.
YEAR 2000 ISSUE
The problems created by systems that are unable to interpret dates
accurately after December 31, 1999 is referred to as the "Year 2000 Issue." Many
software programs have historically categorized the "year" in a two-digit format
rather than a four-digit format. As a result, those computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. The Year 2000 Issue creates potential risks for Brazos,
including potential problems in Brazos' IT and non-IT systems. The Year 2000
Issue could cause a system failure, miscalculations or disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Brazos may also be exposed to risks from third parties who fail to adequately
address their own Year 2000 Issue.
43
49
Brazos has implemented a multiphase program designed to address the Year
2000 Issue. Each phase of this program and its state of completion is described
below:
Assessment: This phase of the program includes the identification of
Brazos' IT and non-IT systems. After these systems have been identified,
they are evaluated to determine whether they will correctly recognize dates
after December 31, 1999 ("Year 2000 Compliant"). If it is determined that
they are not Year 2000 Compliant, they are replaced or modified in the
remediation phase of the program. Brazos' systems are non-proprietary.
Brazos is in the process of obtaining from each system vendor a written or
oral representation as to each significant system's status of compliance.
Brazos has commenced an ongoing process of contacting suppliers and other
key third parties to assess their Year 2000 Compliance status. It appears
that all of these third parties are currently Year 2000 Compliant or they
plan to be Year 2000 Compliant prior to December 31, 1999. This phase is
substantially complete and Brazos has identified the majority of the
systems that need to be replaced.
Remediation: For those systems which are not Year 2000 Compliant, a
plan is derived to make the systems Year 2000 Compliant. These solutions
have included modification or replacement of existing systems. The
remediation phase is approximately 60% complete.
Testing: Test remediated systems to assure normal function when
placed in their original operating environment and further test for Year
2000 Compliance. The Testing phase of the program is approximately 60%
complete and Brazos anticipates that it will be completed by October 1,
1999.
Contingency: As a result of Brazos' Year 2000 Compliance program,
Brazos does not believe that it has significant risk resulting from this
issue. However, Brazos is in the process of developing contingency plans
for the possibility that one of its systems or one of a third party's
systems may not be Year 2000 Compliant.
Brazos does not presently believe that the estimated total Year 2000
project cost will exceed $18,000. Most of this cost will be realized over the
estimated useful lives of the new hardware and software; however, any third
party consulting fees would be expended in the period the services are rendered.
To date, Brazos has identified several minor systems that are not Year 2000
Compliant and these systems are in the process of being replaced. However,
Brazos has not incurred significant expenses associated with the Year 2000
Issue. As of December 31, 1998, no IT projects have been deferred due to Brazos'
efforts related to the Year 2000 Issue.
The costs of the project and the date on which Brazos believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
44
50
SELECTED COMBINED FINANCIAL INFORMATION OF KXII
The following table sets forth selected combined financial data for, and as
of the end of, each of the years in the five-year period ended December 31, 1998
are derived from the combined financial statements of KXII. The combined
financial statements as of and for the year ended December 31, 1998, have been
audited by Jaynes, Reitmeier, Boyd & Therrell, P.C., independent auditors. The
combined financial statements as of December 31, 1997 and for the years December
31, 1996 and 1997 were compiled by Jaynes, Reitmeier, Boyd & Therrell, P.C.
These combined financial statements and the auditor's report thereon are
included elsewhere in this proxy statement/prospectus. The selected combined
financial data as of June 30, 1998 and 1999 and for the six-month periods ended
June 30, 1998 and 1999 are derived from the unaudited condensed combined
financial statements of KXII included elsewhere in the proxy statement/
prospectus which, in the opinion of management of KXII, include all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the data
for such periods. The combined results of operations for the six months ended
June 30, 1999 are not necessarily indicative of the results to be expected for
the year ending December 31, 1999.
The selected combined financial data of KXII should be read in conjunction
with KXII's audited combined financial statements and related notes for the year
ended December 31, 1998 and the unaudited combined financial statements and
related notes thereto for the years ended December 31, 1996 and 1997 and the six
months ended June 30, 1998 and 1999, included elsewhere in this proxy
statement/prospectus.
IN THOUSANDS
---------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF INCOME DATA:
Net revenues............... $4,426 $4,936 $5,604 $5,604 $6,102 $2,835 $3,209
Expenses:
Broadcasting............. 2,864 3,102 3,502 3,514 3,638 1,776 1,846
Depreciation............. 379 377 426 409 442 174 198
Amortization of
intangible assets...... 106 106 106 106 106 53 53
------ ------ ------ ------ ------ ------ ------
Total operating
expenses............. 3,349 3,585 4,034 4,029 4,186 2,003 2,097
------ ------ ------ ------ ------ ------ ------
Operating income........... 1,077 1,351 1,570 1,575 1,916 832 1,112
Miscellaneous income....... -- 7 2 7 33 -- 90
Interest expense........... 496 492 497 478 472 234 232
------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................... 581 866 1,075 1,104 1,477 598 970
State income taxes......... 24 36 29 21 36 13 4
------ ------ ------ ------ ------ ------ ------
Net income............. $ 557 $ 830 $1,046 $1,083 $1,441 $ 585 $ 966
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA AT END
OF PERIOD:
Working capital............ $ 270 $ 363 $ 904 $ 978 $1,790 $ 935 $1,839
Total assets............... 6,864 7,096 7,203 7,054 8,343 7,781 8,469
Total stockholders
equity................... $ 910 $1,354 $1,844 $1,976 $2,946 $2,205 $3,289
- -------------------------
Information with respect to basic and diluted average outstanding common shares
and related income per share data has been omitted, because the selected
combined financial information for KXII combines corporate and partnership
entities. Accordingly share and per share data would not be meaningful.
45
51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF KXII
INTRODUCTION
The following analysis of the financial condition and results of operations
of KXII should be read in conjunction with KXII's audited financial statements
and related notes for the year ended December 31, 1998 and the unaudited
financial statements and related notes for the years ended December 31, 1996 and
1997 and the six months ended June 30, 1998 and 1999.
The operating revenues of KXII are derived from broadcast advertising
revenues and, to a lesser extent, compensation paid by the networks to KXII for
broadcasting network programming. In addition, KXII obtains revenue from other
incidental services, such as production of television commercials.
In KXII's operations, broadcast advertising is sold for placement either
preceding or following a television station's network programming and within
local and syndicated programming. Broadcast advertising is sold in time
increments and is priced primarily on the basis of a program's popularity among
the specific audience an advertiser desires to reach, as measured by Nielsen
Media Research. In addition, broadcast advertising rates are affected by the
number of advertisers competing for the available time, the size and demographic
makeup of the market served by the station and the availability of alternative
advertising media in the market area. Broadcast advertising rates are highest
during the most desirable viewing hours, with corresponding reductions during
other hours. The ratings of a local station affiliated with a major network can
be affected by ratings of network programming.
Most broadcast advertising contracts are short-term and generally run only
for a few weeks. Approximately 59% of the net revenues of KXII for the year
ended December 31, 1998, were generated from local and regional advertising,
which is sold primarily by a station's sales staff directly to local accounts.
The remainder represents primarily national advertising, which is sold by a
station's national advertising sales representative. The stations generally pay
commissions to advertising agencies on local, regional and national advertising
and the stations also pay commissions to the national sales representative on
national advertising.
Broadcast advertising revenues are generally highest in the second and
fourth quarters of each year, due in part to increases in consumer advertising
in the spring and retail advertising in the period leading up to and including
the winter holiday season. In addition, broadcast advertising revenues are
generally higher during even numbered election years due to spending by
political candidates, which spending typically is heaviest during the fourth
quarter.
KXII's primary operating expenses are programming costs, employee
compensation and related benefits and programming costs. In addition,
broadcasting operations incur overhead expenses, such as maintenance, supplies,
insurance, rent and utilities.
46
52
BROADCASTING REVENUES
Set forth below are the principal types of broadcasting revenues earned by
KXII for the periods indicated and the percentage contribution of each of the
revenues (dollars in thousands):
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -------------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Net revenues:
Local......................... $3,194 57.01% $3,326 59.35% $3,631 59.50% $1,814 63.99% $2,022 63.01%
National...................... 1,219 21.75 1,280 22.84 1,197 19.62 535 18.87 688 21.44
Network compensation.......... 935 16.68 943 16.83 897 14.70 432 15.24 468 14.58
Political..................... 179 3.19 3 0.05 327 5.36 -- -- -- --
Production and other.......... 77 1.37 52 0.93 50 0.82 54 1.90 31 0.97
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total net revenue....... $5,604 100.0% $5,604 100.0% $6,102 100.0% $2,835 100.0% $3,209 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net revenue increased $374,000, or 13.2%, from $2.8 million to $3.2 million
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998. This increase reflected an increase in net local and national advertising
sales of approximately $208,000 and $153,000, respectively, due to increased
advertiser demand for commercial time. Network compensation increased
approximately $36,000 from the six months ended June 30, 1998 to the six months
ended June 30, 1999. During the 1998 period the network did not compensate its
affiliates for carrying the Olympic broadcasts.
Income from operations increased $280,000, or 33.7%, from $832,000 to $1.1
million for the six months ended June 30, 1999 compared to the six months ended
June 30, 1998, reflecting increased revenue as discussed above.
Net earnings increased $381,000, or 65.1%, from $585,000 to $966,000 for
the six months ended June 30, 1999 compared to the six months ended June 30,
1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net revenue increased $498,000, or 8.9%, from $5.6 million to $6.1 million
for the year ended December 31, 1998 compared to the year ended December 31,
1997. This increase reflected an increase of $324,000 in net political revenue
to $327,000 for 1998 from $3,000 for 1997. Net local revenue increased $305,000
from $3.3 million in 1997 to $3.6 million in 1998, reflecting a significant
increase in the advertising budget for several local and regional advertisers in
the KXII broadcasting area. Net national revenue decreased $83,000 from $1.2
million in 1997 to $1.1 million in 1998, reflecting a national account which
significantly reduced its advertising in KXII's broadcast area. Network
compensation decreased approximately $46,000 from $943,000 in 1997 to $897,000
in 1998 reflecting KXII's share of CBS's network-wide reduction in compensation
due to the network's acquisition of broadcast rights for NFL football.
Income from operations increased $341,000, or 21.6%, from $1.6 million in
1997 to $1.9 million in 1998, reflecting an increase in production salaries and
broadcast rights expenses. In addition, management bonus expense increased
$30,000, or 34.9%, from
47
53
$86,000 to $116,000, reflecting increased performance compensation based on the
improved operating results of KXII for 1998.
Net earnings increased $358,000, or 33%, from $1.1 million in 1997 to $1.4
million in 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenue was unchanged from 1996 to 1997. Net political revenue
decreased $176,000, or 98.3%, from $179,000 in 1996 to $3,000 in 1997,
reflecting the "off" year of the biannual election cycle. Net local revenue
increased by $132,000 from $3.2 million in 1996 to $3.3 million in 1997,
reflecting the addition of local sales staff and the focus of existing sales
staff on new business development. Net national revenue increased by $61,000
from $1.2 million in 1996 to $1.3 million in 1997, reflecting moderate increases
in the KXII's advertising rates.
Net earnings increased $37,000, or 3.5%, from $1.0 million in 1996 to $1.1
million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
KXII's working capital was approximately $904,000, $978,000, $1.8 million
and $1.8 million at December 31, 1996, 1997, 1998 and June 30, 1999,
respectively. KXII's cash provided from operations approximated $1.4 million,
$1.5 million, $1.9 million, and $1.0 million in 1996, 1997, 1998 and the six
months ended June 30, 1999, respectively. Management of KXII believes that
current cash balances and cash flows from operations will be adequate to provide
for KXII's capital expenditures, cash dividends and working capital
requirements, respectively.
KXII had capital expenditures in the amount of $313,000, $405,000, $418,000
and $336,000 in 1996, 1997, 1998 and the six months ended June 30, 1999,
respectively.
KXII paid $556,000, $951,000, $471,000 and $622,590 in dividends in 1996,
1997, 1998 and the six months ended June 30, 1999, respectively.
KXII regularly enters into program contracts for the right to broadcast
television programs produced by others and programming commitments for the right
to broadcast programs in the future. Such programming commitments are generally
made to replace expiring or canceled program rights. Payments under such
contracts are made in cash or the concession of advertising spots for the
program provider to resell, or a combination of both. At June 30, 1999, payments
on program license liabilities due in 1999, which will be paid with cash from
operations, were approximately $156,000.
Management does not believe that inflation in past years has had a
significant impact on KXII's results of operations nor is inflation expected to
have a significant effect upon KXII's business in the near future.
YEAR 2000 ISSUE
The problems created by systems that are unable to interpret dates
accurately after December 31, 1999 is referred to as the "Year 2000 Issue." Many
software programs have historically categorized the "year" in a two-digit format
rather than a four-digit format. As a result, those computer programs that have
time-sensitive software may recognize a date
48
54
using "00" as the year 1900 rather than the year 2000. The Year 2000 Issue
creates potential risks for KXII, including potential problems in KXII's IT and
non-IT systems. The Year 2000 Issue could cause a system failure,
miscalculations or disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities. KXII may also be exposed to risks from third parties
who fail to adequately address their own Year 2000 Issue.
KXII has implemented a multiphase program designed to address the Year 2000
Issue. Each phase of this program and its state of completion is described
below:
Assessment: This phase of the program includes the identification of
KXII's IT and non-IT systems. After these systems have been identified,
they are evaluated to determine whether they will correctly recognize dates
after December 31, 1999 ("Year 2000 Compliant"). If it is determined that
they are not Year 2000 Compliant, they are replaced or modified in the
remediation phase of the program. KXII's systems are non-proprietary. KXII
is in the process of obtaining from each system vendor a written or oral
representation as to each significant system's status of compliance. KXII
has commenced an ongoing process of contacting suppliers and other key
third parties to assess their Year 2000 Compliance status. It appears that
all of these third parties are currently Year 2000 Compliant or they plan
to be Year 2000 Compliant prior to December 31, 1999. This phase is
substantially complete and KXII has identified the majority of the systems
that need to be replaced.
Remediation: For those systems which are not Year 2000 Compliant, a
plan is derived to make the systems Year 2000 Compliant. These solutions
have included modification or replacement of existing systems. The
remediation phase is 100% complete.
Testing: Test remediated systems to assure normal function when
placed in their original operating environment and further test for Year
2000 Compliance. The Testing phase of the program is approximately 95%
complete and KXII anticipates that it will be completed by August 31, 1999.
Contingency: As a result of KXII's Year 2000 Compliance program, KXII
does not believe that it has significant risk resulting from this issue.
However, KXII is in the process of developing contingency plans for the
possibility that one of its systems or one of a third party's systems may
not be Year 2000 Compliant.
49
55
PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma condensed combined financial statements
of Gray give effect to the acquisitions of KWTX, Brazos and KXII and the related
financing. In addition to reflecting these transactions, the statements of
operations also reflect certain other recently completed transactions. The
statement of operations for the six months ended June 30, 1999 reflects the
acquisition of KWTX, Brazos and KXII, the related financing and the acquisition
of The Goshen News as if these transactions had occurred on January 1, 1999. The
statement of operations for the year ended December 31, 1998 reflects the
acquisition of KWTX, Brazos and KXII, the related financing, the acquisition of
The Goshen News, the acquisition of Busse Broadcasting Corporation and the
divestiture of WALB-TV as if these transactions had occurred on January 1, 1998.
The balance sheet as of June 30, 1999 reflects the acquisition of KWTX, Brazos
and KXII and the related financing as if these transactions had occurred on June
30, 1999. The acquisitions of KWTX, Brazos, KXII, The Goshen News and Busse
Broadcasting Corporation are reflected using the purchase method of accounting
for business combinations.
Gray completed the acquisition of The Goshen News and Busse Broadcasting
Corporation on March 1, 1999 and July 31, 1998, respectively. The divestiture of
WALB-TV was completed on July 31, 1998.
The pro forma financial information is provided for comparative purposes
only and does not purport to be indicative of the results that actually would
have been obtained if the transactions set forth above had occurred as of the
dates indicated or results that may be obtained in the future. The acquisition
agreements with KWTX and Brazos provide that: (1) each shareholder of KWTX and
Brazos may elect to receive up to 100% of his merger consideration, but must
elect to receive at least 40% of his merger consideration, in shares of Gray
class B common stock and (2) the number of shares of Gray class B common stock
to be received by KWTX and Brazos shareholders will be dependent on the market
price of Gray class B common stock at a specified time and for a specified
period immediately preceding the closing date. The acquisition agreements for
KWTX, Brazos and KXII also require Gray to increase the amount of the merger
consideration to pay for certain specified net working capital accounts as of
the closing date.
Accordingly, the pro forma financial statements are based on preliminary
estimates of the number of shares of Gray class B common stock to be issued and
their related value, indebtedness to be incurred and related financing terms,
the amounts of the specified net working capital accounts of KWTX, Brazos and
KXII as of the closing date, and transaction costs, all determined as of the
closing date. Accordingly, the actual recording of these transactions are
expected to differ from the pro forma financial statements.
50
56
GRAY COMMUNICATIONS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
ACQUISITION OF THE
GOSHEN NEWS COMPLETED KWTX BRAZOS
------------------------ TRANSACTION BROADCASTING BROADCASTING
PRO FORMA PRO FORMA COMPANY CO.
STATEMENT OF OPERATIONS DATA GRAY HISTORICAL ADJUSTMENTS COMBINED HISTORICAL HISTORICAL
- ---------------------------- ------- ---------- ----------- ----------- ------------ ------------
OPERATING REVENUES:
Broadcasting.......................... $44,306 $ -- $ -- $44,306 $4,639 $3,356
Publishing............................ 17,558 652 30(1) 18,240 -- --
Paging................................ 4,557 -- -- 4,557 -- --
------- ---- ----- ------- ------ ------
66,421 652 30 67,103 4,639 3,356
EXPENSES:
Broadcasting.......................... 26,673 -- -- 26,673 2,780 2,011
Publishing............................ 13,710 621 (30)(1) 14,296 -- --
(5)(2)
Paging................................ 3,238 -- -- 3,238 -- --
Corporate and administrative.......... 1,687 -- -- 1,687 -- --
Depreciation and amortization......... 11,119 62 103(3) 11,284 336 192
------- ---- ----- ------- ------ ------
56,427 683 68 57,178 3,116 2,203
------- ---- ----- ------- ------ ------
9,994 (31) (38) 9,925 1,523 1,153
Miscellaneous income (expense), net... 456 7 7(4) 470 587 141
------- ---- ----- ------- ------ ------
10,450 (24) (31) 10,395 2,110 1,294
Interest expense...................... 13,775 -- 221(5) 13,996 -- --
------- ---- ----- ------- ------ ------
Income (loss) before income taxes..... (3,325) (24) (252) (3,601) 2,110 1,294
Federal and state income taxes........ (684) -- (94)(6) (778) 652 449
------- ---- ----- ------- ------ ------
Net income (loss)..................... (2,641) (24) (158) (2,823) 1,458 845
Preferred dividends................... 505 -- -- 505 -- --
------- ---- ----- ------- ------ ------
Net income (loss) available to common
stockholders........................ $(3,146) $(24) $(158) $(3,328) $1,458 $ 845
======= ==== ===== ======= ====== ======
Average outstanding common shares --
basic and diluted................... 11,961 11,961
======= =======
Basic and diluted loss per common
share............................... $ (0.26) $ (0.28)
======= =======
KXII
BROADCASTERS, INC.
KXII
BROADCASTERS, LTD.
COMBINED PRO FORMA PRO FORMA
STATEMENT OF OPERATIONS DATA HISTORICAL ADJUSTMENTS COMBINED
- ---------------------------- ------------------ ----------- ---------
OPERATING REVENUES:
Broadcasting.......................... $3,209 $ 225(7) $55,735
Publishing............................ -- -- 18,240
Paging................................ -- -- 4,557
------ ------- -------
3,209 225 78,532
EXPENSES:
Broadcasting.......................... 1,846 225(7) 32,845
(690)(2)
Publishing............................ -- -- 14,296
Paging................................ -- -- 3,238
Corporate and administrative.......... -- -- 1,687
Depreciation and amortization......... 251 1,934(3) 13,997
------ ------- -------
2,097 1,469 66,063
------ ------- -------
1,112 (1,244) 12,469
Miscellaneous income (expense), net... 90 (790)(4) 498
------ ------- -------
1,202 (2,034) 12,967
Interest expense...................... 232 (232)(8) 19,233
5,237(9)
------ ------- -------
Income (loss) before income taxes..... 970 (7,039) (6,266)
Federal and state income taxes........ 4 (2,012)(6) (1,685)
------ ------- -------
Net income (loss)..................... 966 (5,027) (4,581)
Preferred dividends................... -- -- 505
------ ------- -------
Net income (loss) available to common
stockholders........................ $ 966 $(5,027) $(5,086)
====== ======= =======
Average outstanding common shares --
basic and diluted................... 15,131(10)
=======
Basic and diluted loss per common
share............................... $ (0.34)(10)
=======
51
57
GRAY COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(1) Reflects the reclassification of certain revenue to conform to Gray's
financial statement presentation.
(2) Reflects elimination of certain historical related party rental expenses
that Gray will not incur subsequent to the acquisition of The Goshen News
since such rental expense was eliminated as part of the transaction. With
respect to KWTX, Brazos and KXII, reflects elimination of historical
corporate overhead expenses, including director's fees, certain management
bonuses and other management fees paid to related parties whose involvement
with the businesses will terminate at closing. Gray does not anticipate
that it will incur such expenses subsequent to the respective acquisitions.
(3) Reflects the increased depreciation and amortization charges associated
with the allocation of the total consideration among the assets acquired
and the liabilities assumed. Depreciation of property, plant and equipment
is calculated using the straight-line method applied over the estimated
useful lives of the assets. Such lives range from five to 35 years.
Amortization of intangible assets, including FCC licenses, network
affiliation agreements and goodwill, is calculated using the straight-line
method over an estimated useful life of 40 years. Also, with respect to The
Goshen News, a non-compete agreement with a value of $1.5 million is being
amortized using the straight-line method over its stated life of five
years.
(4) Reflects (a) adjustment of certain other historical expenses and interest
income that Gray will not incur or does not anticipate it will earn
subsequent to the acquisitions and (b) elimination of KWTX's income of
$442,000 derived from its equity investment in Brazos under the equity
method.
(5) Reflects interest expense on $16.7 million of incremental indebtedness
incurred in connection with the purchase of The Goshen News, assuming an
effective interest rate of 8%.
(6) Income tax benefits have been estimated assuming an effective tax rate of
34%. Gray is assumed to be in a net operating loss position on a combined
pro forma basis.
(7) Reflects reclassification of certain sales commission expenses to
broadcasting expenses to conform to Gray's financial statement
presentation.
(8) Reflects the elimination of historical interest expense.
(9) Reflects: (a) interest charges on the estimated $100 million of newly
issued indebtedness with an assumed effective interest rate of 8.8%; (b)
amortization of an estimated $1.8 million of deferred financing charges
associated with the new indebtedness issued; (c) incremental interest due
to an assumed increase in the effective interest rate of 1% on Gray's
$130.7 million term loan and revolving credit facility due to the increased
overall leverage of Gray after completion of the acquisitions and (d)
interest on an incremental $1.6 million of borrowing under the revolving
credit facility used to complete the financing of the acquisitions at an
assumed effective interest rate of 8.3%. A 1/8% change in the effective
interest rates
52
58
on variable rate debt paid by Gray would produce a corresponding change in
Gray's interest expense of approximately $145,000 for the six months ended
June 30, 1999.
(10) The pro forma weighted average shares outstanding and loss per share assume
that:
- the price of the Gray class B common stock as of the day immediately
preceding the closing date of the acquisitions will be $14.125 per share;
- KWTX and Brazos shareholders will receive 40% of the aggregate merger
consideration in shares of Gray class B common stock; and
- a total of 3,170,000 shares of Gray class B common stock will be issued
in the acquisitions of KWTX and Brazos.
The merger agreements provide that the shareholders of KWTX and Brazos may
elect to receive up to 100% of their respective merger consideration in Gray
class B common stock and that each shareholder of KWTX and Brazos must receive
at least 40% of the aggregate consideration in shares of Gray class B common
stock with the stock being valued as of the close of business on the day
immediately preceding the closing date. Accordingly, the number of shares of
Gray class B common stock to be issued can not be determined until the closing
date of the acquisitions.
The following table illustrates the effect that the issuance of varying
numbers of shares of Gray class B common stock in the acquisitions would have on
Gray's pro forma basic and diluted loss per share for the six months ended June
30, 1999, based upon:
- varying assumptions as to the percentage of aggregate merger
consideration such shareholders elect to receive in Gray class B common
stocks; and
- varying assumptions as to the market value per share of Gray class B
common stock as of the day immediately preceding the closing date of the
acquisitions.
Weighted average basic and diluted loss per common share (rounded to the
nearest cent):
AGGREGATE PERCENTAGE OF KWTX AND
BRAZOS MERGER CONSIDERATION TO BE
RECEIVED IN SHARES OF GRAY CLASS B
COMMON STOCK:
-------------------------------------
40% 60% 80% 100%
------- ------- ------- -------
Price per Share: Loss Per Common Share
$15.......................................... $(0.34) $(0.31) $(0.28) $(0.26)
$14.125(a)................................... (0.34) (0.30) (0.28) (0.26)
$14.......................................... (0.34) (0.30) (0.28) (0.25)
$13.......................................... (0.33) (0.30) (0.27) (0.25)
$12.......................................... (0.32) (0.29) (0.26) (0.24)
$11.......................................... (0.32) (0.28) (0.25) (0.23)
$10.......................................... (0.31) (0.27) (0.24) (0.22)
- -------------------------
(a) The closing price of Gray class B common stock on June 30, 1999
53
59
If the average price per share of Gray class B common stock during the 20
trading day period immediately preceding the closing date of the KWTX and Brazos
acquisitions or the price of Gray class B common stock on the day immediately
preceding the closing date is less than $12 per share, then Gray at its option
may pay the aggregate merger consideration for KWTX and Brazos in cash. Such
amount would be $95.5 million before the payment for any specified net working
capital adjustments required under the acquisition agreements, transaction fees
and related expenses.
54
60
GRAY COMMUNICATIONS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
ACQUISITION OF ACQUISITION OF
BUSSE BROADCASTING CORPORATION BUSSE/WALB THE GOSHEN NEWS
DISPOSITION --------------------------------- TRANSACTIONS --------------
OF WALB PRO FORMA PRO FORMA
GRAY HISTORICAL HISTORICAL ADJUSTMENTS COMBINED HISTORICAL
-------- ----------- ---------------- -------------- ------------ --------------
STATEMENT OF OPERATIONS
DATA:
OPERATING REVENUES:
Broadcasting.......... $ 91,007 $(6,773) $11,544 $ -- $ 95,778 $ --
Publishing............ 29,330 -- -- -- 29,330 4,550
Paging................ 8,553 -- -- -- 8,553 --
-------- ------- ------- ------- -------- ------
128,890 (6,773) 11,544 -- 133,661 4,550
EXPENSES:
Broadcasting.......... 52,967 (2,923) 5,309 -- 55,353 --
Publishing............ 24,197 -- -- -- 24,197 3,425
Paging................ 5,618 -- -- -- 5,618 --
Corporate and
administrative...... 3,063 -- 2,177 (2,177)(1) 3,063 --
Depreciation and
amortization........ 18,117 (206) 3,347 (520)(2) 20,738 190
-------- ------- ------- ------- -------- ------
103,962 (3,129) 10,833 (2,697) 108,969 3,615
-------- ------- ------- ------- -------- ------
24,928 (3,644) 711 2,697 24,692 935
Gain on exchange of
television station.... 70,572 -- -- -- 70,572 --
Miscellaneous income
(expense), net........ (242) -- 249 (249)(3) (242) 59
-------- ------- ------- ------- -------- ------
95,258 (3,644) 960 2,448 95,022 994
Interest expense....... 25,455 -- 4,892 (4,892)(4) 29,365 --
3,910(5)
-------- ------- ------- ------- -------- ------
Income (loss) before
income taxes.......... 69,803 (3,644) (3,932) 3,430 65,657 994
Federal and state
income taxes.......... 28,144 (1,410)(6) 26,734 --
-------- ------- ------- ------- -------- ------
Net income (loss)...... 41,659 (3,644) (3,932) 4,840 38,923 994
Preferred dividends.... 1,318 -- 2,813 (2,813)(7) 1,318 --
-------- ------- ------- ------- -------- ------
Net income (loss)
available to common
stockholders.......... $ 40,341 $(3,644) $(6,745) $ 7,653 $ 37,605 $ 994
======== ======= ======= ======= ======== ======
Average outstanding
common shares-basic... 11,923 11,923
Stock compensation
awards................ 481 481
-------- --------
Average outstanding
common shares-
diluted............... 12,404 12,404
======== ========
Basic earnings per
common share.......... $ 3.38 $ 3.15
======== ========
Diluted earnings per
common share.......... $ 3.25 $ 3.03
======== ========
ACQUISITION OF KXII
THE GOSHEN NEWS COMPLETED KWTX BRAZOS BROADCASTERS,
--------------- TRANSACTIONS BROADCASTING BROADCASTING LTD.
PRO FORMA PRO FORMA COMPANY CO. COMBINED PRO FORMA
ADJUSTMENTS COMBINED HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS
--------------- ------------ ------------ ------------ ------------------ -----------
STATEMENT OF OPERATIONS
DATA:
OPERATING REVENUES:
Broadcasting.......... $ -- $ 95,778 $9,222 $7,301 $6,102 $ 479(10)
Publishing............ 230(8) 34,110 -- -- -- --
Paging................ -- 8,553 -- -- -- --
------- -------- ------ ------ ------ --------
230 138,441 9,222 7,301 6,102 479
EXPENSES:
Broadcasting.......... -- 55,353 5,507 4,021 3,638 479(10)
(1,402)(1)
Publishing............ 230(8) 27,852 -- -- -- --
Paging................ -- 5,618 -- -- -- --
Corporate and
administrative...... -- 3,063 -- -- -- --
Depreciation and
amortization........ 664(2) 21,592 607 392 548 3,868(2)
------- -------- ------ ------ ------ --------
894 113,478 6,114 4,413 4,186 2,945
------- -------- ------ ------ ------ --------
(664) 24,963 3,108 2,888 1,916 (2,466)
Gain on exchange of
television station.... -- 70,572 -- -- -- --
Miscellaneous income
(expense), net........ (59)(3) (242) 1,601 263 33 (1,850)(3)
------- -------- ------ ------ ------ --------
(723) 95,293 4,709 3,151 1,949 (4,316)
Interest expense....... 1,335(9) 30,700 -- -- 472 (472)(4)
11,069(11)
------- -------- ------ ------ ------ --------
Income (loss) before
income taxes.......... (2,058) 64,593 4,709 3,151 1,477 (14,913)
Federal and state
income taxes.......... (362)(6) 26,372 1,388 1,135 36 (4,455)(6)
------- -------- ------ ------ ------ --------
Net income (loss)...... (1,696) 38,221 3,321 2,016 1,441 $(10,458)
Preferred dividends.... -- 1,318 -- -- -- --
------- -------- ------ ------ ------ --------
Net income (loss)
available to common
stockholders.......... $(1,696) $ 36,903 $3,321 $2,016 $1,441 $(10,458)
======= ======== ====== ====== ====== ========
Average outstanding
common shares-basic... 11,923
Stock compensation
awards................ 481
--------
Average outstanding
common
shares-diluted........ 12,404
========
Basic earnings per
common share.......... $ 3.10
========
Diluted earnings per
common share.......... $ 2.98
========
PRO FORMA
COMBINED
---------
STATEMENT OF OPERATIONS
DATA:
OPERATING REVENUES:
Broadcasting.......... $118,882
Publishing............ 34,110
Paging................ 8,553
--------
161,545
EXPENSES:
Broadcasting.......... 67,596
Publishing............ 27,852
Paging................ 5,618
Corporate and
administrative...... 3,063
Depreciation and
amortization........ 27,007
--------
131,136
--------
30,409
Gain on exchange of
television station.... 70,572
Miscellaneous income
(expense), net........ (195)
--------
100,786
Interest expense....... 41,769
--------
Income (loss) before
income taxes.......... 59,017
Federal and state
income taxes.......... 24,476
--------
Net income (loss)...... 34,541
Preferred dividends.... 1,318
--------
Net income (loss)
available to common
stockholders.......... $ 33,223
========
Average outstanding
common shares-basic... 15,093(12)
Stock compensation
awards................ 481
--------
Average outstanding
common
shares-diluted........ 15,574
========
Basic earnings per
common share.......... $ 2.20(12)
========
Diluted earnings per
common share.......... $ 2.13
========
55
61
GRAY COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(1) Reflects elimination of historical corporate overhead expense of Busse
Broadcasting Corporation, including executive officer compensation,
professional fees and office overhead costs. With respect to KWTX, Brazos
and KXII, reflects elimination of historical expenses, including director's
fees, certain management bonuses and other management fees paid to related
parties whose involvement with the businesses will terminate at closing.
Gray does not anticipate that it will incur such expenses subsequent to the
respective acquisitions.
(2) Reflects adjustment of depreciation and amortization charges associated
with the allocation of the total acquisition cost among the assets acquired
and the liabilities assumed. Depreciation of property plant and equipment
is calculated using the straight-line method applied over the estimated
useful lives of the assets. Such lives range from five to 35 years.
Amortization of intangible assets, including FCC licenses, network
affiliation agreements and goodwill, is calculated using the straight-line
method over an estimated useful life of 40 years. Also, with respect to The
Goshen News, a non-compete agreement with a value of $1.5 million is being
amortized using the straight-line method over its stated life of five
years.
(3) Reflects elimination of (a) certain other historical expenses and interest
income, that Gray will not incur or does not anticipate it will earn
subsequent to the acquisitions and (b) KWTX's income of $1 million derived
from its equity investment in Brazos under the equity method.
(4) Reflects elimination of historical interest expense.
(5) Reflects increased interest expense associated with the $42.7 million
incremental debt incurred for the acquisition of Busse, assuming an
effective interest rate of 8%. The pro forma increase of interest expense
includes $1.9 million of historical net interest expense eliminated in Note
(4) above from January 1, 1998 through July 31, 1998 associated with
certain Busse indebtedness that was retired in October 1998.
(6) Income tax benefits associated with the respective acquisition and
disposition transactions have been estimated assuming an effective tax rate
of 34%.
(7) Reflects elimination of Busse historical preferred stock dividends.
(8) Reflects the reclassification of certain revenue to conform to Gray's
financial statement presentation.
(9) Reflects interest expense on $16.7 million of incremental indebtedness
incurred in connection with the purchase of The Goshen News, assuming an
effective interest rate of 8%.
(10) Reflects reclassification of certain sales commission expense to
broadcasting expenses to conform to Gray's financial statement
presentation.
(11) Reflects: (a) interest charges on the estimated $100 million of newly
issued indebtedness, with an assumed effective interest rate of 8.8%; (b)
amortization of an estimated $1.8 million of deferred financing charges
associated with the new
56
62
indebtedness issued; (c) incremental interest due to an assumed increase in
the effective interest rate of 1.4% on Gray's $130.7 million term loan and
revolving credit facility due to the increased overall leverage of Gray
after completion of the acquisitions and (d) interest on an incremental
$1.6 million of borrowing under the revolving credit facility used to
complete the financing of the acquisitions at an assumed effective interest
rate of 8.3%. A 1/8% change in the effective interest rates on variable
rate debt paid by Gray would produce a corresponding change in Gray's
interest expense of approximately $290,000 for the year ended December 31,
1998.
(12) The pro forma weighted average shares outstanding and earnings per common
share assume that:
- the price of the Gray class B common stock as of the day immediately
preceding the closing date of the acquisitions will be $14.125 per share;
- KWTX and Brazos shareholders will receive 40% of the aggregate merger
consideration in shares of Gray class B common stock; and
- a total of 3,170,000 shares of Gray class B common stock will be issued
in the acquisitions of KWTX and Brazos.
The merger agreements provide that the shareholders of KWTX and Brazos may elect
to receive up to 100% of their respective merger consideration in Gray class B
common stock and that each shareholder of KWTX and Brazos must receive at least
40% of the aggregate consideration in shares of Gray class B common stock with
the stock being valued as of the close of business on the day immediately
preceding the closing date. Accordingly, the number of shares of Gray class B
common stock to be issued can not be determined until the closing date of the
acquisitions.
The following table illustrates the effect that the issuance of varying numbers
of shares of Gray class B common stock in the acquisitions would have on Gray's
pro forma diluted earnings per share for the year ended December 31, 1998, based
upon:
- varying assumptions as to the percentage of aggregate merger
consideration such shareholders elect to receive in Gray class B common
stock; and
- varying assumptions as to the market value per share of Gray class B
common stock as of the day immediately preceding the closing date of the
acquisitions.
57
63
Weighted average diluted earnings per common share (rounded to the nearest
cent):
AGGREGATE PERCENTAGE OF KWTX AND
BRAZOS MERGER CONSIDERATION TO BE
RECEIVED IN SHARES OF GRAY CLASS B
COMMON STOCK:
------------------------------------
40% 60% 80% 100%
------ ------ ------ ------
PRICE PER SHARE: EARNINGS PER COMMON SHARE
------------------------------------
$15......................................... $2.16 $1.97 $1.81 $1.67
$14.125(a).................................. 2.13 1.94 1.77 1.63
$14......................................... 2.13 1.93 1.77 1.63
$13......................................... 2.10 1.89 1.72 1.58
$12......................................... 2.06 1.85 1.67 1.53
$11......................................... 2.02 1.79 1.62 1.47
$10......................................... 1.97 1.74 1.56 1.41
- -------------------------
(a) The closing price of Gray class B common stock on June 30, 1999
If the average price per share of Gray class B common stock during the 20
trading day period immediately preceding the closing date of the KWTX and Brazos
acquisitions or the price of Gray class B common stock on the day immediately
preceding the closing date is less than $12 per share, then Gray at its option
may pay the aggregate merger consideration for KWTX and Brazos in cash. Such
amount would be $95.5 million before the payment for any specified net working
capital adjustments required under the acquisition agreements, transaction fees
and related expenses.
58
64
GRAY COMMUNICATIONS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1999
(DOLLARS IN THOUSANDS)
KWTX BROADCASTING
COMPANY BRAZOS BROADCASTING CO.
------------------------ ------------------------
PRO FORMA PRO FORMA
GRAY HISTORICAL ADJUSTMENTS HISTORICAL ADJUSTMENTS
-------- ---------- ----------- ---------- -----------
ASSETS:
CURRENT ASSETS:
Cash............................... $ 5,085 $ 6,020 $ (6,020)(1) $6,059 $(6,059)(1)
Trade accounts receivable.......... 22,795 1,660 (30)(2) 1,505 --
Recoverable income taxes........... 1,587 -- -- -- --
Inventories........................ 878 -- -- --
Current portion of program
broadcast rights.................. 1,206 81 -- 78 --
Other current assets............... 1,013 275 -- 52 --
-------- ------- -------- ------ -------
Total current assets........ 32,564 8,036 (6,050) 7,694 (6,059)
Property and equipment, net........ 52,885 5,187 (187)(3) 1,921 2,079(3)
Deferred loan costs................ 7,691 -- -- -- --
Intangibles........................ 384,975 -- 62,903(4) -- 58,191(4)
Other long term assets............. 2,713 263 -- 120 --
Equity investment.................. -- 4,470 (4,470)(5) -- --
-------- ------- -------- ------ -------
Total assets................ $480,828 $17,956 $ 52,196 $9,735 $54,211
======== ======= ======== ====== =======
LIABILITIES AND STOCKHOLDER'S EQUITY:
CURRENT LIABILITIES:
Trade payables..................... $ 805 $ 298 $ -- $ 115 $ --
Employee compensation and
benefits.......................... 4,718 386 -- 317 --
Accrued expenses................... 2,310 10 -- 45 (27)(2)
Accrued interest................... 5,049 -- -- -- --
Current portion of program
broadcasting obligations.......... 1,028 20 -- 20 --
Deferred revenue................... 3,247 -- -- -- --
Current portion of long-term
debt.............................. 385 -- -- -- --
-------- ------- -------- ------ -------
Total current liabilities... 17,542 714 -- 497 (27)
Long term debt..................... 291,287 -- (6,020)(1) -- (6,059)(1)
Other long-term liabilities:
Program broadcast obligations, less
current portion................... 417 17 -- 17 --
Supplemental employee benefits..... 1,052 -- -- -- --
Deferred income taxes.............. 43,120 639 15,562(6) 280 15,211(6)
Other acquisition related
liabilities....................... 4,227 -- -- -- --
Other long term liabilities........ -- -- 59,240(4) -- 54,027(4)
-------- ------- -------- ------ -------
48,816 656 74,802 297 69,238
Commitments and contingencies
STOCKHOLDERS EQUITY:
Net equity of acquired
operations........................ -- 16,586 (16,586)(4) 8,941 (8,941)(4)
Series A preferred stock........... 10,000 -- -- -- --
Series B preferred stock........... 3,500 -- -- -- --
Class A common stock............... 10,684 -- -- -- --
Class B common stock............... 66,867 -- -- -- --
Retained earnings.................. 42,112 -- -- -- --
Treasury stock -- class A.......... (8,579) -- -- -- --
Treasury stock -- class B.......... (1,401) -- -- -- --
-------- ------- -------- ------ -------
123,183 16,586 (16,586) 8,941 (8,941)
-------- ------- -------- ------ -------
Liabilities and
Stockholder's Equity....... $480,828 $17,956 $ 52,196 $9,735 $54,211
======== ======= ======== ====== =======
KXII BROADCASTERS, INC. AND
KXII BROADCASTERS, LTD.
----------------------------
COMBINED PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS FINANCING COMBINED
------------ ------------- --------- ---------
ASSETS:
CURRENT ASSETS:
Cash............................... $1,118 $(1,118)(7) $ -- $ 5,085
Trade accounts receivable.......... 1,380 -- -- 27,310
Recoverable income taxes........... -- -- -- 1,587
Inventories........................ -- -- -- 878
Current portion of program
broadcast rights.................. 121 -- -- 1,486
Other current assets............... 70 -- -- 1,410
------ ------- --------- --------
Total current assets........ 2,689 (1,118) -- 37,756
Property and equipment, net........ 2,135 624(3) -- 64,644
Deferred loan costs................ -- -- 1,750(8) 9,441
Intangibles........................ 3,559 (3,559)(7) -- 545,343
39,274(4)
Other long term assets............. 86 -- -- 3,182
Equity investment.................. -- -- -- --
------ ------- --------- --------
Total assets................ $8,469 $35,221 $ 1,750 $660,366
====== ======= ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY:
CURRENT LIABILITIES:
Trade payables..................... $ 165 $ (165)(7) $ -- $ 1,218
Employee compensation and
benefits.......................... -- -- -- 5,421
Accrued expenses................... 263 (263) (7) -- 2,338
Accrued interest................... -- -- 5,049
Current portion of program
broadcasting obligations.......... 156 -- -- 1,224
Deferred revenue................... -- -- -- 3,247
Current portion of long-term
debt.............................. 265 (265)(7) -- 385
------ ------- --------- --------
Total current liabilities... 849 (693) -- 18,882
Long term debt..................... 4,228 (4,228)(7) 113,667(9) 392,875
Other long-term liabilities:
Program broadcast obligations, less
current portion................... 103 -- -- 554
Supplemental employee benefits..... -- -- -- 1,052
Deferred income taxes.............. -- -- -- 74,812
Other acquisition related
liabilities....................... -- -- -- 4,227
Other long term liabilities........ -- 43,431(4) (156,698)(4) --
------ ------- --------- --------
103 43,431 (156,698) 80,645
Commitments and contingencies
STOCKHOLDERS EQUITY:
Net equity of acquired
operations........................ 3,289 (3,289)(4) -- --
Series A preferred stock........... -- -- -- 10,000
Series B preferred stock........... -- -- -- 3,500
Class A common stock............... -- -- -- 10,684
Class B common stock............... -- -- 44,781(10) 111,648
Retained earnings.................. -- -- -- 42,112
Treasury stock -- class A.......... -- -- -- (8,579)
Treasury stock -- class B.......... -- -- -- (1,401)
------ ------- --------- --------
3,289 (3,289) 44,781 167,964
------ ------- --------- --------
Liabilities and
Stockholder's Equity....... $8,469 $35,221 $ 1,750 $660,366
====== ======= ========= ========
59
65
GRAY COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEET
JUNE 30, 1999
The pro forma adjustments for the acquisitions of KWTX, Brazos and KXII and
the related financing are as follows:
(1) Reflects the use of cash to pay down long-term debt. This cash was
acquired with the acquisitions of KWTX and Brazos.
(2) Reflects elimination of certain intercompany accounts.
(3) Reflects adjustment of property, plant and equipment to estimated fair
market value.
(4) Reflects the purchase of KWTX, Brazos and KXII and the allocation of the
purchase price of $156.7 million to the tangible assets and liabilities
based upon estimates of fair value at June 30, 1999. The total cost
includes the base price, cash on hand at KWTX and Brazos, working capital
adjustments and acquisition related fees, which as of June 30, 1999 were
$139.0 million, $12.1 million, $3.7 million and $1.9 million,
respectively. The allocation of the total cost is as follows (dollars in
thousands):
DESCRIPTION KWTX BRAZOS KXII TOTAL
- ----------- -------- -------- ------- --------
Cash..................................... $ 6,020 $ 6,059 $ -- $ 12,079
Accounts receivable...................... 1,630 1,505 1,380 4,515
Other current assets..................... 356 130 191 677
Property and equipment................... 5,000 4,000 2,759 11,759
Other long term assets................... 263 120 86 469
FCC licenses, network affiliation
agreements and other intangible
assets................................. 62,903 58,191 39,274 160,368
Trade payables........................... (298) (115) -- (413)
Employee compensation and benefits....... (386) (317) -- (703)
Current portion of program broadcast
obligations............................ (20) (20) (156) (196)
Other current liabilities................ (10) (18) (28)
Deferred tax liabilities................. (16,201) (15,491) -- (31,692)
Other long term liabilities.............. (17) (17) (103) (137)
-------- -------- ------- --------
Purchase price including expenses........ $ 59,240 $ 54,027 $43,431 $156,698
======== ======== ======= ========
Historical book value.................... $(16,586) $ (8,941) $(3,289) $(28,816)
Assets not acquired and liabilities not
assumed................................ -- -- (244) (244)
Adjustment to eliminate certain
intercompany accounts.................. 30 (27) -- 3
Adjustment to equity investment.......... 4,470 -- -- 4,470
Adjustment of property, plant and
equipment to fair market value......... 187 (2,079) (624) (2,516)
Adjustment to deferred taxes............. 15,562 15,211 -- 30,773
-------- -------- ------- --------
Net value of assets acquired or
liabilities assumed.................... 3,663 4,164 (4,157) 3,670
Purchase price including expenses........ 59,240 54,027 43,431 156,698
-------- -------- ------- --------
FCC licenses, network affiliation
agreements and other intangible
assets................................. $ 62,903 $ 58,191 $39,274 $160,368
======== ======== ======= ========
60
66
(5) Reflects elimination of KWTX's equity investment in Brazos.
(6) Reflects the deferred tax liability associated with recording assets and
liabilities at fair value and recording intangibles which are not
deductible for income tax purposes. The adjustment is calculated using an
assumed effective tax rate of 34%.
(7) Reflects the elimination of certain assets and liabilities of KXII, which
will not be included in the acquisition.
(8) Reflects estimated financing fees to be incurred in connection with the
acquisitions of KWTX, Brazos and KXII.
(9) Reflects assumed incremental borrowings of $101.6 million to complete the
acquisitions. Cash acquired at KWTX and Brazos will be used to reduce
aggregate borrowing requirements. Gray currently intends to borrow $100
million of new senior indebtedness to fund the acquisitions and to borrow
additional funds, as necessary, under the existing revolving credit
facility to complete any funding requirements. The amount borrowed to
complete the acquisitions assumes the shareholders of KWTX and Brazos
elect to receive 60% of their respective merger consideration in cash.
(10) Reflects assumed issuance of 3,170,000 shares of Gray class B common
stock at an assumed price of $14.125 per share, the closing price of such
stock on June 30, 1999. Such amount assumes the shareholders of KWTX and
Brazos elect to receive 40% of their respective merger consideration in
shares of Gray class B common stock.
The respective merger agreements establish the minimum value of the Gray
class B common stock at $14.00 per share and the maximum value at $15.00 per
share. However, Gray is obligated to provide at least 40% of the aggregate
merger consideration for KWTX and Brazos in shares of Gray class B common stock
with the stock being valued at a specified time and for a specified period
immediately preceding the closing date.
The following table illustrates the aggregate number of shares which would
be issued to the KWTX and Brazos shareholders as of June 30, 1999, based upon:
- varying assumptions as to the percentage of aggregate merger
consideration such shareholders elect to receive in Gray class B common
stock; and
- varying assumptions as to the market value per share of Gray class B
common stock as of the close of business on the day immediately preceding
the closing date.
61
67
Shares in thousands, price per share in dollars:
AGGREGATE PERCENTAGE OF KWTX AND
BRAZOS CONSIDERATION TO BE RECEIVED
IN SHARES OF GRAY CLASS B COMMON
STOCK
--------------------------------------
40% 60% 80% 100%
------- ------- ------- --------
NUMBER OF SHARES OF
PRICE PER SHARE: GRAY CLASS B COMMON STOCK
--------------------------------------
$15............................................ 2,985 4,478 5,971 7,463
$14.125(a)..................................... 3,170 4,755 6,341 7,926
$14............................................ 3,199 4,798 6,397 7,997
$13............................................ 3,445 5,167 6,889 8,612
$12............................................ 3,732 5,598 7,463 9,329
$11............................................ 4,071 6,106 8,142 10,177
$10............................................ 4,478 6,717 8,956 11,195
- -------------------------
(a) The closing price of Gray class B common stock on June 30, 1999
If the average price per share of Gray class B common stock during the 20
trading day period immediately preceding the closing date of the KWTX and Brazos
acquisitions or the price of Gray class B common stock on the day immediately
preceding the closing date is less than $12 per share, then Gray at its option
may pay the aggregate merger consideration for KWTX and Brazos in cash. Such
amount would be $95.5 million before the payment for any specified net working
capital adjustments required under the acquisition agreements, transaction fees
and related expenses.
62
68
GENERAL BACKGROUND INFORMATION RELATING TO THE
TELEVISION BROADCAST INDUSTRY
REVENUES
Television station revenues are primarily derived from local, regional and
national advertising. To a lesser extent, television stations derive revenues
from network compensation, studio and tower space rental and commercial
production activities.
Advertising rates are based upon a variety of factors, including:
- a program's popularity among the viewers an advertiser wishes to attract;
- the number of advertisers competing for the available time;
- the size and demographic makeup of the market served by the station;
- the availability in the market area of alternative advertising media,
such as radio, newspapers and billboards;
- overall image of a station in a market;
- the station's ratings and share among particular demographic groups which
an advertiser may be targeting; and
- aggressive and knowledgeable sales forces and the development of
projects, features and programs that tie advertiser messages to
programming.
Because broadcast stations rely on advertising revenues, they are sensitive
to cyclical changes in the economy. Advertisers' budgets are affected by broad
economic trends and in turn affect the broadcast industry in general and the
revenues of individual broadcast television stations.
MARKET DESIGNATIONS AND AUDIENCE RATING INFORMATION
The A.C. Nielsen Company groups all television stations in the country into
approximately 210 generally recognized television markets that are ranked in
size according to various formulae based upon actual or potential audience. Each
television market is an exclusive geographic area consisting of all counties in
which the home-market commercial stations receive the greatest percentage of
total viewing hours.
Nielsen periodically publishes data on estimated audiences for the
television stations in the various television markets throughout the country.
This information contains, among other items, data relating to the size of the
viewing audience and demographic characteristics such as sex and age.
At present, Nielsen is the only company collecting and reporting television
viewing data on a nationally recognized basis.
NETWORK AFFILIATIONS AND OTHER PROGRAMMING INFORMATION
Four major broadcast networks, ABC, CBS, NBC and Fox, dominate broadcast
television. Additionally, United Paramount Network and Warner Brothers Network
have emerged as additional television networks. An affiliate of UPN or WB
receives a smaller
63
69
portion of each day's programming from its network compared to an affiliate of
one of the four major networks.
In general, affiliation agreements provide the affiliated station with the
right to broadcast all programs transmitted by the network. In return, the
network has the right to sell a substantial majority of the advertising time
during such broadcasts. The affiliate retains the revenues from time sold during
breaks in and between network programs and programs the affiliate produces or
purchases from non-network sources.
In exchange for every hour of network programming a station elects to
broadcast, ABC, CBS, NBC and to a lesser extent, Fox pay their affiliated
station a specific network compensation payment. The payment varies with the
time of day. Typically, prime-time programming generates the highest hourly
network compensation payments. Such payments are subject to increase or decrease
by the network during the term of an affiliation agreement with provisions for
advance notices and right of termination by the station in the event of a
reduction in such payments.
To fill in the time periods not programmed by the network, the local
station will either produce local programs or purchase rights to air programs
from national program distributors. A station's local news and public affairs
programs are the most often locally produced programs. Successful commercial
television stations will often build a strong market brand identity from locally
produced news programs.
In contrast to a station affiliated with a network, a fully independent
station purchases or produces all of the programming that it broadcasts,
resulting in generally higher programming costs. An independent station,
however, retains its entire inventory of advertising time and all the revenues
obtained therefrom.
COMPETITION
Competition in the television industry exists on several levels:
competition for audience, competition for programming, including news and
competition for advertisers.
Audience. Stations compete for audience on the basis of program
popularity, which has a direct effect on advertising rates. An affiliated
station is supplied a large portion of its programming by the network. During
those periods, the affiliate is dependent upon the performance of the network
programs to attract viewers. A station programs non-network time periods with a
combination of self-produced news, public affairs and other entertainment
programming.
Cable-originated programming has emerged as a significant competitor for
viewers of broadcast television programming. However, no single cable network
regularly attains audience levels amounting to more than a small fraction of any
single major broadcast network. The advertising share of cable networks has
increased as a result of the growth in cable subscribers and viewers. Even with
the increases in cable viewership and advertising, over-the-air broadcasting
remains the dominant distribution system for mass market television advertising.
In addition to cable, the development of other methods of television
transmission of video programming has significantly altered competition for
audience in the television industry. These other transmission methods can
increase competition for a broadcasting station by bringing into its market
distant broadcasting signals not otherwise available to
64
70
the station's audience and also by serving as a distribution system for
non-broadcast programming. These sources of competition include:
- home entertainment systems such as VCRs and digital video disk players;
- wireless cable services and satellite master antenna television systems;
- low power television stations and television translator stations;
- direct broadcast satellite video distribution services; and
- the Internet.
Also, television stations compete with all other forms of leisure activities for
the attention of viewers.
Programming. Competition for programming involves negotiating with
national program distributors or syndications that sell first-run and rerun
packages of programming. Each station competes against the broadcast station
competitors in its market for exclusive access to off-network reruns such as
Seinfeld and first-run product such as Entertainment Tonight. Cable systems
generally do not compete with local stations for programming, although various
national cable networks acquire programs that would otherwise be offered to
local television stations. Competition exists for exclusive news stories and
features as well. In purchasing rights to non-network programs affiliates
compete primarily with other affiliates and independent stations in their
markets.
A television station may acquire programming through barter arrangements.
Under barter arrangements a national program distributor may receive advertising
time in exchange for the programming it supplies, with the station paying a
reduced or zero cash fee for such programming.
Advertising. Stations compete for advertising revenues with other
television stations. Stations also compete for advertising revenue with other
media, such as newspapers, radio stations, magazines, outdoor advertising,
transit advertising, yellow page directories, direct mail, local cable systems
and the Internet. Competition for advertising dollars in the broadcasting
industry occurs primarily within individual markets.
FEDERAL REGULATION OF TELEVISION BROADCASTING
The FCC regulates television broadcast stations and related facilities
consistent with its interpretation of the public interest, convenience and
necessity, as required by the Communications Act of 1934, as amended. Its
regulatory jurisdiction includes:
- the technical operation of broadcast stations, including the initial
allotment and assignment of frequencies;
- the approval of transfers of licenses and assignment of licenses;
- the assignment of call letters to stations;
- the designation of operating power, sign-on and sign-off times; and
- the enforcement of statutes, rules and policies relating to program
content, including indecent programming limitations, games and lotteries,
and providing a core amount
65
71
of children's television programming with limited commercial matter while
identifying sponsors.
In addition, the FCC requires that licensees make available equal
opportunities for use of broadcast facilities by political candidates or
opposing political candidates, station identification and identification of
recorded programs or program segments. Licensees which have violated FCC
statutes, rules or policies are subject to sanctions, including loss of license
and fines.
Television broadcasting licenses generally are granted or renewed for a
period of eight years. When a television license is subject to renewal parties
in interest may file petitions to deny, and such parties, including members of
the public, may comment upon the service the station has provided during the
preceding license term and urge denial of the application. If the FCC finds that
the licensee has failed to meet the above-mentioned requirements, it could deny
the renewal application or grant a conditional approval, including renewal for a
term of less than eight years. Only after denying a renewal application can the
FCC accept and consider competing applications for the license. There can be no
assurance that a station's licenses will be renewed. However, in almost all
cases, the FCC will renew a license.
The FCC has many rules and regulations for the television broadcast
industry, which include, but are not limited to:
- Rules limiting the ability of individuals and entities to own or have an
ownership interest above a certain level in broadcast stations as well as
other mass media entities. For example, these rules preclude any
individual or entity from having an attributable interest in television
stations whose aggregate audience reach exceeds 35% of all United States
households.
- Rules prohibiting an individual or entity from having an attributable
interest in more than one television station in a market. An exception to
this general rule prohibiting the ownership of more than one television
station in a market is when one of the stations qualifies as a "satellite
station" under FCC rules, i.e, a station that rebroadcasts substantial
amounts of programming supplied by, and is often economically tied to, a
"parent station" in the same market. The ownership of more than one
television station in a market is also permitted when (1) one of the
stations with common ownership is a failing station or an authorized but
unbuilt station, (2) the television stations with common ownership have
overlapping signals; provided they are licensed to serve communities in
separate markets as defined by A.C. Nielsen or (3) there are eight
independently owned stations in the market and one of the stations with
common ownership is not among the top four most highly viewed stations in
the market.
- Rules and the Telecommunications Act generally prohibiting an individual
or entity from having an attributable interest in a television station
and a radio station, daily newspaper or cable television system that is
located in the same local market area served by the television station,
although waivers will be entertained. In addition, the FCC has revised
the TV-radio cross-ownership restriction (the so-called "one-
to-a-market" rule) to permit such ownership combinations in larger
markets provided at least 20 independent media voices would remain
following the merger and the combined entity owned no more than two
television stations and six radio stations (any combination of AM or FM
stations) in the market. Further, the FCC
66
72
has adopted new rules regarding issues of control and attribution with
respect to local marketing and similar agreements entered into by
television stations with other stations in the same market.
- The Communications Act restricts the ability of foreign entities,
corporations or individuals to own or hold interests in broadcast
licenses. Foreign governments, representatives of foreign governments,
non-citizens, representatives of non-citizens, and corporations or
partnerships organized under the laws of a foreign nation are barred from
holding broadcast licenses.
- Pursuant to the 1992 Cable Act, cable operators must carry the signals of
local commercial television stations, with certain exceptions. A cable
system with more than 12 usable activated channels, regardless of the
number of subscribers, must carry the signals of all local commercial
television stations, up to one-third of the aggregate number of usable
activated channels. The 1992 Cable Act also includes a retransmission
consent provision that prohibits cable operators and other multi-channel
video programming distributors from carrying broadcast stations without
obtaining their consent in certain circumstances. The "must carry" and
retransmission consent provisions are related in that a local television
broadcaster, on a cable system-by-cable-system basis, must make a choice
once every three years whether to proceed under the "must carry" rules or
to waive that right to mandatory but uncompensated carriage and negotiate
a grant of retransmission consent to permit the cable system to carry the
station's signal, in exchange for some form of consideration from the
cable operator. Cable systems must obtain retransmission consent to carry
all distant commercial stations other than certain "super stations"
delivered via satellite. Under rules adopted to implement these "must
carry" and retransmission consent provisions, local television stations
are required to make an election of "must carry" or retransmission
consent at three-year intervals. Stations that fail to elect are deemed
to have elected carriage under the "must carry" provisions.
Under the FCC's ownership rules, a direct or indirect purchaser of certain
types of securities of Gray could violate FCC regulations if that purchaser
owned or acquired an "attributable" or "meaningful" interest in other media
properties in the same areas as stations owned by Gray or in a manner otherwise
prohibited by the FCC. All officers and directors of a licensee, as well as
general partners, uninsulated limited partners and shareholders who own five
percent or more of the voting power of the outstanding common stock of a
licensee either directly or indirectly, generally will be deemed to have an
"attributable" interest in the licensee. Certain institutional investors who
exert no control or influence over a licensee may own up to 20% of the voting
power of the outstanding common stock before attribution occurs. Under current
FCC regulations the following are not subject to attribution, debt instruments,
non-voting stock, voting stock held by minority shareholders in cases in which
there is a single majority shareholder and limited partnership interests
provided the licensee certifies that the limited partners are not "materially
involved" in the management and operation of the subject media property. To
determine whether a program supplier or another station in the market has an
attributable interest in a station, the FCC will determine whether the entity in
question holds equity or debt equal to 33% of the station's assets.
In response to legislation and judicial determinations, the FCC currently
has under consideration new regulations and policies regarding a wide variety of
matters that could
67
73
affect, directly or indirectly, the operation and ownership of television
broadcast properties, including:
- the license renewal processes, particularly the weight to be given to the
expectancy of renewal for an incumbent broadcast licensee and the
criteria to be applied in deciding contested renewal applications;
- spectrum use fees;
- political advertising practices;
- potential advertising restrictions on the advertising of products such as
liquor;
- the rules to be applied in enforcing the FCC's equal employment
opportunity policies;
- cable carriage of digital television signals;
- viewing of distant network signals by subscribers to direct broadcast
satellite services; and
- the standards to govern evaluation of television programming directed
toward children and violent and indecent programming, including the
possible requirement of what is commonly referred to as the "v-chip,"
which would permit parents to program television sets so that certain
programming would not be accessible by children.
There can be no assurance that any of these rules will not be changed by
Congress or by the FCC. The impact of any such changes affecting the broadcast
industry cannot be predicted.
Under FCC rules, the entire television broadcast industry has commenced the
introduction of digital television to the United States. Implementation of
digital television will improve the technical quality of television signals
receivable by viewers and will provide broadcasters the flexibility to offer new
services, including: high-definition television which is comparable to 35mm film
in quality; simultaneous broadcasting of multiple programs of standard
definition television; and digitally broadcasting other forms of data, such as
stock quotes.
Based upon current pronouncements of the FCC and Congress, it is expected,
after a period of years, that: (1) broadcasters will be required to cease
non-digital operations; (2) return the non-digital channel to the FCC and (3)
broadcast only with the newer digital technology.
68
74
INFORMATION CONCERNING KWTX
GENERAL
KWTX Broadcasting Company, a Texas corporation, owns and operates
television station KWTX located in Waco, Texas. KWTX broadcasts on channel 10
and is affiliated with the CBS television network. KWTX began operations in
1955. In addition to station KWTX, KWTX Broadcasting Company owns 50% of the
stock of Brazos Broadcasting Company, a Texas corporation. KWTX broadcasts 16.5
hours of locally produced newscasts each week. The remainder of the program
schedule is filled with programming provided by the CBS network and syndicated
programming purchased from various program suppliers.
Waco, Texas is part of the Waco-Temple-Bryan television market. The market
is considered to be the 95th largest television market in the country.
MARKET INFORMATION
The table below and the discussion that follows contain information
regarding KWTX and the television markets in which it operates. Unless noted
otherwise, all station rank, in-market share and television household data is
from the Nielsen Station Index, Viewers in Profile, dated November 1998, as
prepared by Nielsen. The station's rank in the television market area is based
on Nielsen estimates for November 1998 for the period from 6 a.m. to 2 a.m.
Sunday through Saturday. Estimates of population are as reported by the
September 1998, Nielsen Station Index-U.S. Television Household Estimates
published by Nielsen. "In-market share of households viewing television"
represents the percentage of the station's audience as a percentage of all
viewing by households in the market from 6 a.m. to 2 a.m. Sunday through
Saturday, including viewing of non-commercial stations, national cable channels
and out-of-market stations broadcast or carried by cable in the market as
reported by Nielsen for November 1998. Total Market Revenues represent gross
advertising revenues, excluding barter revenues, for all commercial television
stations in the market, as reported in Investing in Television 1998 Market
Report, Fourth Edition November 1998 Ratings published by BIA Publications, Inc.
Average household income, effective buying income and retail business sales
growth projections are as reported in the BIA Guide.
TOTAL MARKET IN-MARKET
MARKET COMMERCIAL STATION REVENUES SHARE OF
RANK PER STATIONS IN RANK IN TELEVISION FOR 1998 HOUSEHOLDS
STATION MARKET NIELSEN MARKET(1) MARKET HOUSEHOLDS (IN THOUSANDS) VIEWING TV
- ------- ------ -------- ----------- ------- ---------- -------------- ----------
KWTX................. Waco-Temple- 95 5 1 279,000 $28,800 32%
Bryan, Texas
- -------------------------
(1) Includes independent broadcasting stations and excludes satellite stations.
The Waco-Temple-Bryan television market has a total population of
approximately 790,000. According to the BIA Guide, the average household income
in the Waco-Temple-Bryan television market in 1996 was $35,062. The television
market consists of 14 counties covering a large portion of central Texas. The
cities of Waco, Temple and Bryan are the primary economic centers of the region.
In addition, College Station, Texas is the home of Texas A&M University. The
area's economy centers on medical services, colleges
69
75
and universities and U.S. military installations. Leading employers in the
Waco-Temple area include Baylor University, Raytheon and the U.S. Army Base at
Fort Hood.
EMPLOYEES
As of July 31, 1999, KWTX had 90 full-time and 12 part-time employees. KWTX
believes its relations with its employees are good. No employees are represented
under any collective bargaining agreements.
NETWORK AFFILIATION AGREEMENT
KWTX's current CBS network affiliation agreement expires December 31, 2000.
The affiliation agreement allows for an automatic five-year renewal. The station
or the network can cancel the automatic renewal, by giving notice to the other
party at least 12 months before the then current expiration date. Also, when
there is a change in control of an affiliated station, like the proposed
acquisition by Gray, the network must give its consent to maintain an existing
affiliation agreement in force. Generally, such consent is routinely granted.
FCC LICENSE
The FCC license for KWTX will expire on August 1, 2006, subject to routine
renewal applications.
DIGITAL TELEVISION (HIGH DEFINITION TELEVISION)
In connection with the introduction of digital television to the United
States, the FCC has assigned all existing television licensees a second channel
on which to provide digital television simultaneously with their current
non-digital service. The implementation of digital television is based upon an
FCC timetable that generally requires the largest television markets to begin
digital operations and then phase in progressively smaller markets over a period
of several years. The table below provides the current FCC digital channel
assignment and implementation schedule for KWTX.
REQUEST DIGITAL LICENSE
FCC PROPOSED FROM THE FCC COMMENCE DIGITAL BROADCAST
STATION DIGITAL CHANNEL NOT LATER THAN OPERATIONS NOT LATER THAN
- ------- --------------- ----------------------- --------------------------
KWTX................. 53 November 1, 1999 May 1, 2002
KWTX intends to comply with the FCC timetable outlined above. The
introduction of digital television at KWTX will involve material amounts of
capital expenditures. KWTX is currently evaluating the initial costs of digital
services. KWTX anticipates that the initial costs to commence digital
broadcasting may require a minimum investment of several million dollars.
The conversion to digital operations may reduce a station's geographical
coverage area but the majority of stations will obtain service areas that match
or exceed the limits of existing operations. KWTX currently anticipates that its
digital operations will produce coverage areas substantially similar to their
non-digital operations.
70
76
PRIMARY PROPERTIES
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. A station's studios are
generally housed with its offices in business districts. The transmitter sites
and antenna are generally located in elevated areas to provide optimal signal
strength and coverage. The primary offices of KWTX are located at 6700 American
Plaza, Waco, Texas 76712. Its mailing address is KWTX Broadcasting Company, P.O.
Box 2636, Waco, Texas 76702-2636.
The following table provides information regarding the significant
properties involved in the operation of KWTX:
OWNED OR
PROPERTY LOCATION USE LEASED APPROXIMATE SIZE
- ----------------- --- -------- ----------------
Waco, Texas......................... Studio and offices Owned 34,000 sq. ft. building on
4.0 acres
Moody, McLeaman County, Texas....... Transmitter building Owned 1,200 sq. ft. building and
and main tower 1,678 ft. tower and
antenna on 27.9 acres
SHARE OWNERSHIP
As of July 31, 1999, management of KWTX knew of no person, other than those
set forth below, who is the beneficial owner of more than 5% of KWTX's common
stock.
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS
- ------------------------------------ -------------------- -------------------
Ellen Bostick Deaver...................... 96.603 shares 6.23
3420 North Ridge Drive
Waco, Texas 76710
Ray M. Deaver............................. 96.603 shares 6.23
3420 North Ridge Drive
Waco, Texas 76710
Donald Howell............................. 80.50275 shares 5.19
c/o First City Tower
1001 Fannin Street, Suite 2300
Houston, Texas 77002-6760
First Stock Company, Norwest Trust
Texas N.A. Waco......................... 133.969 shares 8.64
Attn: Lori Rizo, P.O. Box 2626
Waco, Texas 76702-2626
Thomas Stribling.......................... 122.562 shares 7.91
P.O. Box 8518
Waco, Texas 76714
The LBJ Holding Company................... 420 shares 27.10
c/o J.E. Ricks
Hogan & Hartson
555 13th Street N.W.
Washington, D.C. 20004
71
77
INFORMATION CONCERNING BRAZOS
GENERAL
Brazos Broadcasting Co. owns television station KBTX located in Bryan,
Texas. KBTX broadcasts on channel 3 and is affiliated with the CBS television
network. KBTX began operations in 1957. KBTX is designated as a satellite
station of KWTX under the rules of the FCC. This means that it receives most of
its programming from KWTX and that the senior management of KWTX is also
responsible for the operations of KBTX. KBTX broadcasts 16.5 hours of locally
produced newscasts each week. The remainder of the program schedule is filled
with programming provided by the CBS network and syndicated programming
purchased from various program suppliers and generally supplied to KBTX by KWTX.
Bryan, Texas is part of the Waco-Temple-Bryan television market. The market
is considered to be the 95th largest television market in the country.
MARKET INFORMATION
The table below and the discussion that follows contain information
regarding Brazos and the television markets in which it operates. Unless noted
otherwise, all station rank, in-market share and television household data is
from the Nielsen Station Index, Viewers in Profile, dated November 1998, as
prepared by Nielsen. The station's rank in the television market area is based
on Nielsen estimates for November 1998 for the period from 6 a.m. to 2 a.m.
Sunday through Saturday. Estimates of population are as reported by the
September 1998, Nielsen Station Index-U.S. Television Household Estimates
published by Nielsen. "In-market share of households viewing television"
represents the percentage of the station's audience as a percentage of all
viewing by households in the market from 6 a.m. to 2 a.m. Sunday through
Saturday, including viewing of non-commercial stations, national cable channels
and out-of-market stations broadcast or carried by cable in the market as
reported by Nielsen for November 1998. Total Market Revenues represent gross
advertising revenues, excluding barter revenues, for all commercial television
stations in the market, as reported in Investing in Television 1998 Market
Report, Fourth Edition November 1998 Ratings published by BIA Publications, Inc.
Average household income, effective buying income and retail business sales
growth projections are as reported in the BIA Guide.
TOTAL MARKET IN-MARKET
MARKET COMMERCIAL STATION REVENUES SHARE OF
RANK PER STATIONS IN RANK IN TELEVISION FOR 1998 HOUSEHOLDS
STATION MARKET NIELSEN MARKET(1) MARKET HOUSEHOLDS (IN THOUSANDS) VIEWING TV
- ------- ------ -------- ----------- ------- ---------- -------------- ----------
KBTX................. Waco-Temple- 95 5 1 279,000 $28,800 9%
Bryan, Texas
- -------------------------
(1) Includes independent broadcasting stations and excludes satellite stations
such as KBTX.
The Waco-Temple-Bryan television market has a total population of
approximately 790,000. According to the BIA Guide, the average household income
in the Waco-Temple-Bryan television market in 1996 was $35,062. The television
market consists of 14 counties covering a large portion of central Texas. The
cities of Waco, Temple and Bryan are the primary economic centers of the region.
In addition, College Station, Texas
72
78
is the home of Texas A&M University. The area's economy centers on medical
services, agriculture, colleges and universities and U.S. military
installations. Leading employers in the Bryan area include Texas A&M University
and St. Joseph's Regional Medical Center.
EMPLOYEES
As of July 31, 1999, Brazos had approximately 47 full-time and 30 part-time
employees. Brazos believes its relations with its employees are good. No
employees are represented under any collective bargaining agreements.
NETWORK AFFILIATION AGREEMENT
Brazos' current CBS network affiliation agreement expires December 31,
2000. The affiliation agreement allows for an automatic five-year renewal. The
station or the network can cancel the automatic renewal, by giving notice to the
other party at least 12 months before the then current expiration date. Also,
when there is a change in control of an affiliated station, like the proposed
acquisition by Gray, the network must give its consent to maintain an existing
affiliation agreement in force. Generally, such consent is routinely granted.
FCC LICENSE
The FCC license for Brazos will expire August 1, 2006, subject to routine
renewal applications.
DIGITAL TELEVISION (HIGH DEFINITION TELEVISION)
In connection with introduction of digital television to the United States,
the FCC has assigned all existing television licensees a second channel on which
to provide digital television simultaneously with their current non-digital
service. The implementation of digital television is based upon an FCC timetable
that generally requires the largest television markets to begin digital
operations and then phase in progressively smaller markets over a period of
several years. The table below provides the current FCC digital channel
assignment and implementation schedule for Brazos.
REQUEST DIGITAL LICENSE
FCC PROPOSED FROM THE FCC COMMENCE DIGITAL BROADCAST
STATION DIGITAL CHANNEL NOT LATER THAN OPERATIONS NOT LATER THAN
- ------- --------------- ----------------------- --------------------------
KBTX................. 59 November 1, 1999 May 1, 2002
Brazos intends to comply with the FCC timetable outlined above. The
introduction of digital television at Brazos will involve material amounts of
capital expenditures. Brazos is currently evaluating the initial costs of
digital services. Brazos anticipates that the initial costs to commence digital
broadcasting may require a minimum investment of several million dollars.
The conversion to digital operations may reduce a station's geographical
coverage area but the majority of stations will obtain service areas that match
or exceed the limits of existing operations. Brazos currently anticipates that
its digital operations will produce coverage areas substantially similar to
their non-digital operations.
73
79
PRIMARY PROPERTIES
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. A station's studios are
generally housed with its offices in business districts. The transmitter sites
and antenna are generally located in elevated areas to provide optimal signal
strength and coverage. The primary offices of Brazos are located at 4141 East
29th Street, Bryan, Texas 77802. Its mailing address is Brazos Broadcasting Co.,
P.O. Box 3730, Bryan, Texas 77805.
The following table provides information regarding the significant
properties involved in the operation of Brazos:
OWNED OR
PROPERTY LOCATION USE LEASED APPROXIMATE SIZE EXPIRATION OF LEASE
- ----------------- --- -------- ---------------- -------------------
Bryan, Texas......... Studio and offices Owned 7,000 sq. ft. building not applicable
on 23.4 acres
Grimes County, Transmitter building and Leased 1,300 sq. ft. building March 15, 2033
Texas.............. main tower and 1,705 ft. tower
and antenna on 560
acres
SHARE OWNERSHIP
As of July 31, 1999, management of Brazos knew of no person, other than
those set forth below, who is the beneficial owner of more than 5% of Brazos'
common stock.
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS
- ------------------------------------ -------------------- -------------------
KWTX Broadcasting Company................. 250 shares 50
P.O. Box 2636
Waco, Texas 76702-2636
Ellen Bostick Deaver...................... 25 shares 5
3420 North Ridge Drive
Waco, Texas 76710
Ray M. Deaver............................. 25 shares 5
3420 North Ridge Drive
Waco, Texas 76710
Dorothy Varisco Donaho.................... 25 shares 5
2901 Bammel #28
San Antonio, Texas 78229
Antoinette Varisco Guido.................. 25 shares 5
7335 Ashton Place Court
San Antonio, Texas 78229
74
80
INFORMATION CONCERNING KXII
GENERAL
KXII Broadcasters, Ltd., a Texas limited partnership, owns and operates
television station KXII located in Sherman, Texas. KXII broadcasts on channel 12
and is affiliated with the CBS television network. KXII began operations in
1956. This station is part of the Sherman, Texas -- Ada, Oklahoma television
market and is considered to be the 161st largest television market in the
country. KXII Television Ltd., a Texas limited partnership affiliated with KXII
Broadcasters, Ltd., provides sales personnel and various sales services to KXII.
KXII broadcasts 15.5 hours of locally produced newscasts each week. The
remainder of the program schedule is filled with programming provided by the CBS
network and syndicated programming purchased from various program suppliers.
MARKET INFORMATION
The table below and the discussion that follows contain information
regarding KXII and the television markets in which it operates. Unless noted
otherwise, all station rank, in-market share and television household data is
from the Nielsen Station Index, Viewers in Profile, dated November 1998, as
prepared by Nielsen. The station's rank in the television market area is based
on Nielsen estimates for November 1998 for the period from 6 a.m. to 2 a.m.
Sunday through Saturday. Estimates of population are as reported by the
September 1998, Nielsen Station Index-U.S. Television Household Estimates
published by Nielsen. "In-market share of households viewing television"
represents the percentage of the station's audience as a percentage of all
viewing by households in the market from 6 a.m. to 2 a.m. Sunday through
Saturday, including viewing of non-commercial stations, national cable channels
and out-of-market stations broadcast or carried by cable in the market as
reported by Nielsen for November 1998. Total Market Revenues represent gross
advertising revenues, excluding barter revenues, for all commercial television
stations in the market, as reported in Investing in Television 1998 Market
Report, Fourth Edition November 1998 Ratings published by BIA Publications, Inc.
Average household income, effective buying income and retail business sales
growth projections are as reported in the BIA Guide.
TOTAL MARKET IN-MARKET
MARKET COMMERCIAL STATION REVENUES SHARE OF
RANK PER STATIONS IN RANK IN TELEVISION FOR 1998 HOUSEHOLDS
MARKET NIELSEN MARKET (1) MARKET HOUSEHOLDS (IN THOUSANDS) VIEWING TV
------ -------- ----------- ------- ---------- -------------- ----------
KXII................. Sherman, Texas 161 2 1 112,000 $8,300 78%
-- Ada,
Oklahoma
- -------------------------
(1) Includes independent broadcasting stations and excludes satellite stations.
The Sherman, Texas -- Ada, Oklahoma television market has a total
population of approximately 278,000. According to the BIA Guide, the average
household income in this television market in 1996 was $30,884. The television
market consists of one county in north central Texas and 11 counties in south
central Oklahoma. The cities of Sherman, Texas and Ada and Ardmore, Oklahoma are
the primary economic centers of the region. The area's economy centers around
medical services, manufacturing and distribution services. Leading employers in
the area include Johnson & Johnson and Texas Instruments.
75
81
EMPLOYEES
As of July 31, 1999, KXII had 57 full-time and seven part-time employees.
KXII believes its relations with its employees are good. No employees are
represented under any collective bargaining agreements.
NETWORK AFFILIATION AGREEMENT
KXII's current CBS network affiliation agreement expires December 31, 2000.
The affiliation agreement allows for an automatic five-year renewal. The station
or the network can cancel the automatic renewal, by giving notice to the other
party at least 12 months before the then current expiration date. Also, when
there is a change in control of an affiliated station, like the proposed
acquisition by Gray, the network must give its consent to maintain an existing
affiliation agreement in force. Generally, such consent is routinely granted.
FCC LICENSE
The FCC license for KXII will expire on August 1, 2006, subject to routine
renewal applications.
DIGITAL TELEVISION (HIGH DEFINITION TELEVISION)
In connection with the introduction of digital television to the United
States, the FCC has assigned all existing television licensees a second channel
on which to provide digital television simultaneously with their current
non-digital service. The implementation of digital television is based upon an
FCC timetable that generally requires the largest television markets to begin
digital operations and then phase in progressively smaller markets over a period
of several years. The table below provides the current FCC digital channel
assignment and implementation schedule for KXII.
REQUEST DIGITAL LICENSE
FCC PROPOSED FROM THE FCC COMMENCE DIGITAL BROADCAST
DIGITAL CHANNEL NOT LATER THAN OPERATIONS NOT LATER THAN
--------------- ----------------------- --------------------------
KXII................. 20 November 1, 1999 May 1, 2002
KXII intends to comply with the FCC timetable outlined above. The
introduction of digital television at KXII will involve material amounts of
capital expenditures. KXII is currently evaluating the initial costs of digital
services. KXII anticipates that the initial costs to commence digital
broadcasting may require a minimum investment of several million dollars per
station.
The conversion to digital operations may reduce a station's geographical
coverage area but the majority of stations will obtain service areas that match
or exceed the limits of existing operations. KXII currently anticipates that its
digital operations will produce coverage areas substantially similar to their
non-digital operations.
PRIMARY PROPERTIES
The types of properties required to support television stations include
offices, studios, transmitter sites and antenna sites. A station's studios are
generally housed with its offices in business districts. The transmitter sites
and antenna are generally located in elevated
76
82
areas to provide optimal signal strength and coverage. The primary offices of
KXII are located at 4201 Texoma Parkway, Sherman, Texas 75090 and 2624 South
Commerce, Ardmore, Oklahoma 73401. Its mailing address is P.O. Box 1175,
Sherman, Texas 75091.
The following table provides information regarding the significant
properties involved in the operation of KXII:
OWNED OR
STATION/APPROXIMATE PROPERTY LOCATION USE LEASED APPROXIMATE SIZE
- ------------------------------------- --- --------- ----------------
Sherman, Texas....................... Studio and offices Leased(1) 12,813 sq. ft. building on
2.97 acres
Madill, Oklahoma..................... Transmitter building Leased(1) 1,200 sq. ft. building and
and main tower 1,692 ft. tower and
antenna on 95 acres
Ardmore, Oklahoma.................... Studio and offices Leased(1) 3,000 sq. ft. building on
1.5 acres
- ---------------------
(1) These properties will be conveyed in fee to Gray upon the closing of the
acquisitions.
EQUITY OWNERSHIP
KXII is a Texas limited partnership. As of July 31, 1999, management knew
of no person, other than those set forth below, who is directly or indirectly
the owner of more than 5% of the equity interests of KXII.
NAME AND ADDRESS OF OWNER PERCENTAGE OF EQUITY INTERESTS
------------------------- ------------------------------
Richard Adams......................................... 11.11
2806 Wellington Drive
Sherman, Texas 75092
Ellen Bostick Deaver.................................. 26.67
3420 North Ridge Drive
Waco, Texas 76710
Kyle Deaver........................................... 17.78
3430 North Ridge Drive
Waco, Texas 76710
John Lee Deaver....................................... 17.77
1805 Trinity Street
Waco, Texas 76710
Martha Bostick Phipps................................. 26.67
Rt 5 Mesa Road
Ardmore, Oklahoma 73401
77
83
COMPARISON OF THE SHAREHOLDERS' RIGHTS,
ARTICLES OF INCORPORATION AND BYLAWS OF GRAY, KWTX AND BRAZOS
GENERAL
If the acquisitions are completed, shareholders of KWTX and Brazos will
become shareholders of Gray, which will result in their rights as shareholders
being governed by the articles of incorporation and bylaws of Gray. For
shareholders of KWTX and Brazos, this will result in their rights as
shareholders being governed by the law of Georgia rather than the law of Texas,
which governs their rights as shareholders of KWTX and Brazos. It is not
practical to describe all the differences between Georgia law and Texas law and
between the articles of incorporation and bylaws of Gray and the articles of
incorporation and bylaws or similar organizational documents of each of KWTX and
Brazos.
The following is a summary of the differences which may affect the rights
of shareholders of KWTX and Brazos. This summary is qualified in its entirety by
reference to the full text of such documents. For information as to how such
documents may be obtained, see "Where To Find Additional Information" on page
109.
AUTHORIZED CAPITAL STOCK
Gray. The authorized capital stock of Gray is 50,000,000 shares,
consisting of 15,000,000 shares of Gray class A common stock, and 15,000,000
shares of Gray class B common stock. The Gray board has the authority to issue,
at any time or from time to time, without further shareholder approval, up to
20,000,000 shares of preferred stock and to determine the powers, rights,
privileges and preferences of those shares, which may be senior to the rights of
holders of Gray common stock. Such issuance could adversely affect the holders
of Gray common stock and could have the effect of making more difficult the
acquisition of control of Gray by means of a hostile tender offer, open market
purchases, a proxy contest or otherwise.
Under Georgia law, shareholders have no preemptive rights unless these
rights are provided for in the corporation's articles of incorporation. Holders
of Gray common stock do not have preemptive rights.
KWTX. The authorized capital stock of KWTX consists of 1,550 shares of
common stock, no par value. Under Texas law the shareholders of a corporation
have preemptive rights to acquire additional unissued shares of the corporation,
except to the extent limited or denied by Section 2.22-1 of the Texas Business
Corporation Act or by the corporation's articles of incorporation. KWTX's
articles of incorporation contain no provision with regard to preemptive rights.
Brazos. The authorized capital stock of Brazos consists of 500 shares of
common stock, par value $100.00 per share. Under Texas law the shareholders of a
corporation have preemptive rights to acquire additional unissued shares of the
corporation, except to the extent limited or denied by Section 2.22-1 of the
Texas Business Corporation Act or by the corporation's articles of
incorporation. Brazos's articles of incorporation contain no provision with
regard to preemptive rights.
78
84
DIRECTORS
Gray. The bylaws of Gray provide that the Gray board of directors is
authorized to fix the number of members of the board and to increase or decrease
the number of directors from time to time provided there are not less than three
nor more than 15 directors. A majority of directors constitutes a quorum for the
transaction of business. The bylaws of Gray provide that a vacancy among the
directors may be filled by a majority vote of the remaining directors then in
office, though less than a quorum, or by the sole remaining director.
KWTX. The bylaws of KWTX provide that a majority of the total number of
directors constitutes a quorum for the transaction of business.
Brazos. The bylaws of Brazos provide that a majority of the total number
of directors constitutes a quorum for the transaction of business.
REMOVAL OF DIRECTORS
Under Georgia law (which governs Gray), the shareholders may remove one or
more directors with or without cause unless the articles of incorporation or a
bylaw adopted by the shareholders provides that directors may be removed only
for cause. Directors, unless removed in accordance with Georgia law, shall hold
office until the annual meeting of the shareholders and until their successors
shall have been elected and qualified. At each annual meeting, the holders of
shares entitled to vote in the election of directors shall elect directors to
hold office until the next succeeding annual meeting.
Under Texas law (which governs KWTX and Brazos), directors, unless removed
in accordance with the provisions of the bylaws or the articles of
incorporation, shall hold office until the annual meeting of the shareholders
and until their successors shall have been elected and qualified. At each annual
meeting, the holders of shares entitled to vote in the election of directors
shall elect directors to hold office until the next succeeding annual meeting.
SPECIAL MEETINGS OF SHAREHOLDERS
Gray. The bylaws of Gray provide that special meetings of shareholders may
be called at any time by the Chairman of the Board, or by the President, or by
the board of directors or the holders of not less than one-third of all
outstanding shares of the corporation entitled to vote.
KWTX. The bylaws of KWTX do not contain provisions regarding special
meetings of shareholders.
Brazos. The bylaws of Brazos do not contain provisions regarding special
meetings of shareholders.
Under Texas law (which governs KWTX and Brazos) special meetings of the
shareholders may be called by (1) the president, the board of directors, or such
other persons as may be authorized in the articles of incorporation or the
bylaws or (2) by the holders of at least 10 percent of all the shares entitled
to vote at the proposed special meeting, unless a greater percentage is provided
for in the articles of incorporation, but in no event greater than 50 percent.
79
85
AMENDMENT OF BYLAWS
Georgia law states that both a corporation's board of directors and
shareholders may amend, repeal or adopt bylaws unless a particular bylaw
provides expressly that the board of directors may not amend or repeal that
bylaw or the articles of incorporation reserve such power exclusively to the
shareholders in whole or in part.
Texas law grants to shareholders the power to amend, adopt or repeal
bylaws. Texas law also grants the board of directors the power to amend or
repeal the corporation's bylaws unless the articles of incorporation reserve
this power exclusively to the shareholders, or the shareholders (in amending or
repealing a particular bylaw) expressly provide that the board may not amend or
repeal that bylaw.
The bylaws of KWTX and Brazos each provide that on a written application of
a majority of its shareholders, the bylaws may be altered, changed or amended by
a majority vote of the shareholders at any election or special meeting ordered
for that purpose by the board of directors, written notice thereof having been
given to all shareholders at least 10 days before such meeting. The bylaws of
KWTX and Brazos each additionally provide that the bylaws may be altered,
changed or amended by two-thirds of the directors at any meeting called for that
purpose by the president of the KWTX or Brazos after giving at least 10 days'
written notice thereof to all of the directors.
AMENDMENTS TO THE ARTICLES OF INCORPORATION
Under Georgia law (which governs Gray), most amendments to a corporation's
articles of incorporation must be adopted by the board of directors and approved
by holders of a majority of the stock entitled to vote on such matters. Under
Texas law (which governs KWTX and Brazos), amendments to a corporation's
articles of incorporation must be adopted by the board of directors and approved
by holders of two-thirds of the outstanding shares entitled to vote on such
matters.
DIVIDENDS, REDEMPTIONS AND REPURCHASES
Georgia law provides that Georgia corporations, such as Gray may make legal
distributions to its shareholders subject to restriction by the articles of
incorporation. Distributions may not be legally made if the corporation would
not be able to pay its debts in the usual course of business; or if the
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved at
the time of the distribution, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are superior to those
receiving the dividend.
The Gray series A preferred stock and series B preferred stock are senior
to the Gray class A common stock and class B common stock, as to the payment of
dividends and distribution of assets. Gray's indebtedness also restricts the
amount of dividends that may be paid on Gray's capital stock.
Texas law provides that Texas corporations may make legal distributions to
its shareholders subject to restriction by the articles of incorporation.
Distributions may not be made if after giving effect to the distribution, the
corporation would be insolvent or the distribution exceeds the surplus of the
corporation. Under Texas law a corporation may by resolution of its board of
directors, subject to the provisions of its articles of incorporation,
80
86
redeem any or all outstanding shares. If less than all such shares are to be
redeemed, the shares to be redeemed shall be selected for redemption in
accordance with the provisions in the articles of incorporation. Shares may not
be redeemed if after giving effect to the redemption, the corporation would be
insolvent or the proceeds distributed in connection with the redemption exceed
the surplus of the corporation.
TRANSACTIONS WITH INTERESTED DIRECTORS
Under Georgia law (which governs Gray), a transaction effected or proposed
to be effected by the corporation respecting which a director or directors has
an interest, may not be enjoined, set aside, or give rise to an award of
damages, if any of the following are satisfied: (1) the transaction received the
affirmative vote of a majority (but not less than two) of those disinterested
directors who voted on the transaction after disclosure of the director or
directors' interest; (2) if the material facts of the interest and the contract
or transaction are disclosed to or are known to the shareholders entitled to
vote on such matter, and the shareholders approve the contract or transaction;
and (3) the transaction, judged in the circumstances at the time of commitment,
is established to have been fair to the corporation. Disclosure is sufficient if
the interested director or directors disclose to the board and the shareholders
the existence and nature of the conflict and all facts known respecting the
subject matter of the transaction that an ordinarily prudent person would
reasonably believe to be material to the judgment as to whether or not to
proceed with the transaction.
Under Texas law (which governs KWTX and Brazos), a contract or transaction
between a corporation and one or more of its directors or officers, or between
an entity in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be valid even if the director or
officer is present and participates or votes at the meeting of the board or
committee that approved the contract or transaction, if any of the following are
satisfied: (1) the material facts of the interest and the contract or
transaction are disclosed to or are known by the board or a committee, and a
majority of the disinterested members of the board or committee, even though
less than a quorum, authorizes the contract or transaction in good faith; (2)
the material facts of the interest and the contract or transaction are disclosed
to or are known to the shareholders entitled to vote on such matter, and the
shareholders specifically approve the contract or transaction in good faith; or
(3) the contract or transaction is fair to the corporation at the time it is
authorized, approved or ratified. There is no provision under Texas law,
however, that absolutely precludes a claim by the corporation or its
shareholders against the interested director or officer for damages, if any,
even if the contract or transaction has been so authorized or approved.
INDEMNIFICATION
Georgia law (which governs Gray) contains provisions setting forth
conditions under which a corporation may indemnify directors, officers and
others who act on behalf of the corporation. If such directors are successful in
defending a claim for which indemnification is permitted, Georgia requires the
corporation to provide indemnification of expenses incurred in such defense.
Georgia law also permits a corporation to advance expenses to such indemnified
officers and directors and to purchase insurance on behalf of any such person
against any liability asserted against and incurred by him or her in such
capacity, regardless of whether the corporation would be permitted to indemnify
against such liability.
81
87
Gray's articles of incorporation and bylaws provide that Gray will
indemnify, to the fullest extent permitted by law, directors, officers,
employees or agents of Gray. Gray will also indemnify any person who had agreed
to serve as a director, officer, employee or agent on behalf of Gray, or is or
was or has agreed to serve as a director, officer, employee or agent of another
entity at Gray's request.
Each of Georgia law (which governs Gray) and Texas law (which governs KWTX
and Brazos) contains provisions setting forth conditions under which a
corporation may indemnify or advance expenses to directors, officers and others
who act on behalf of the corporation. A corporation is required to indemnify a
director in connection with a proceeding in which he is a named defendant
because he is or was a director if he has been wholly successful in the defense
of a proceeding. Each of Georgia law and Texas law also permits a corporation to
purchase insurance on behalf of any person who is or was or has agreed to serve
as a director, officer, employee or agent of the corporation, against any
liability asserted against him or her in such capacity, whether or not the
corporation would have the power to indemnify him or her against such liability.
KWTX's articles of incorporation do not provide for the indemnification of
either its officers or directors.
Brazos's articles of incorporation do not provide for the indemnification
of either its officers or directors.
APPRAISAL RIGHTS
Under Georgia law (which governs Gray) no appraisal rights are granted to
shareholders who dissent from a sale, lease or exchange of all or substantially
all of the assets of a corporation. Georgia law further provides that generally
no appraisal rights are granted to shareholders who dissent from an acquisition
or consolidation for which a shareholder vote is required if the shares of the
class of stock voting are listed on a national securities exchange or are held
of record by more than 2,000 shareholders. However, shareholders who follow
prescribed statutory procedures and who have not voted in favor of the
applicable transition nor consented thereto in writing will have appraisal
rights if the shareholders are required in connection with the acquisition or
consolidation to accept for their stock anything other than:
- stock of the corporation surviving or resulting from the acquisition or
consolidation;
- stock of any other corporation listed on a national securities exchange
or the Nasdaq National Market System or held of record by more than 2,000
shareholders; or
- cash in lieu of fractional shares.
The shareholders of Gray are not entitled to appraisal rights in connection
with the transactions to be considered by shareholders at the annual meeting.
82
88
Under Texas law (which governs KWTX and Brazos), a shareholder does not
have the right to dissent from any plan of acquisition in which there is a
single surviving corporation, or from any plan of acquisition or plan of
exchange, if:
- the shares of the corporation being acquired are, on the record date
fixed to determine the shareholders entitled to vote on the plan of
acquisition: (1) listed on a national securities exchange; (2) listed on
the Nasdaq Stock Market or designated as a national market security on an
interdealer quotation system by the NASD; or (3) held of record by not
less than 2,000 holders;
- the shareholder is not required to accept any consideration that is
different from the consideration to be received by all other holders of
such shares; or
- the shareholder is not required to accept consideration other than: (1)
shares of a corporation which are: (i) listed on a national securities
exchange; (ii) approved for quotation as a national market security on an
interdealer quotation system by the NASD; or (iii) held of record by not
less than 2,000 holders; (2) cash in lieu of fractional shares; or (3)
any combination of cash and securities listed above.
Generally, in the absence of fraud, dissenters' rights are a shareholder's
sole remedy for objecting to an acquisition or consolidation under Texas law.
83
89
PROPOSAL 2: ELECTION OF DIRECTORS
NOMINEES
At the shareholders meeting, nine directors are to be elected to hold
office (subject to Gray's bylaws) until the next annual meeting of shareholders
and until their successors have been elected and qualified. In case any nominee
listed in the table below should be unavailable for any reason, which management
of Gray has no reason to anticipate, the proxy will be voted for any substitute
nominee or nominees who may be selected by management prior to or at the meeting
or, if no substitute is selected by management prior to or at the meeting, a
motion to reduce the membership of the board to the number of nominees available
will be presented.
Set forth below is information concerning each of the nominees.
DIRECTOR
NAME SINCE AGE POSITION
- ---- -------- --- --------
J. Mack Robinson.................. 1993 76 Director, President and Chief Executive
Officer
Robert S. Prather, Jr. ........... 1993 54 Director and Executive Vice
President -- Acquisitions
William E. Mayher, III............ 1990 60 Chairman of the Board of Directors
Richard L. Boger.................. 1991 52 Director
Hilton H. Howell, Jr. ............ 1993 38 Director
Zell Miller....................... 1999 67 Director
Howell W. Newton.................. 1991 52 Director
Hugh Norton....................... 1987 67 Director
Harriett J. Robinson.............. 1997 68 Director
J. MACK ROBINSON has been Gray's President and Chief Executive Officer
since 1996. Mr. Robinson has been Chairman of the Board of Bull Run Corporation,
a diversified company and a principal shareholder of Gray, since 1994, Chairman
of the Board and President of Delta Life Insurance Company and Delta Fire and
Casualty Insurance Company since 1958, President of Atlantic American
Corporation, an insurance holding company, from 1995 until 1998 and Chairman of
the Board of Atlantic American Corporation since 1974. He is a director of the
following companies: Bankers Fidelity Life Insurance Company, American
Independent Life Insurance Company, Georgia Casualty & Surety Company, American
Southern Insurance Company and American Safety Insurance Company. He is director
emeritus of Wachovia Corporation. He is a member of the Executive Committee and
Management Personnel Committee of Gray's board of directors. Mr. Robinson is the
husband of Harriett J. Robinson and the father-in-law of Hilton H. Howell.
ROBERT S. PRATHER, JR. has been Executive Vice President -- Acquisitions of
Gray since 1996. He has been President and Chief Executive Officer and a
director of Bull Run Corporation, a diversified company and principal
shareholder of Gray, since 1992. He is a director of the following companies:
Host Communications, Inc., Capital Sports Properties, Inc., Universal Sports
America, Inc., Rawlings Sporting Goods Company, Inc. and The
84
90
Morgan Group, Inc. He is a member of the Executive Committee and the Management
Personnel Committee of Gray's board of directors.
WILLIAM E. MAYHER III was a neurosurgeon in Albany, Georgia from 1970 to
1998. He is a director of the following: Medical College of Georgia Foundation,
American Association of Neurological Surgeons, Gaston Loughlin, Inc. and Palmyra
Medical Centers. Dr. Mayher is a member of the Executive Committee and
Management Personnel Committee of Gray's board of directors and has served as
Chairman of Gray's board of directors since August 1993.
RICHARD L. BOGER has been President and Chief Executive Officer of Export
Insurance Services, Inc., an insurance organization, and a director of CornerCap
Group of Funds, a "series" investment company since prior to 1992. Mr. Boger is
a member of the Executive Committee of Gray's board of directors and is the
Chairman of the Management Personnel Committee of Gray's board of directors.
HILTON H. HOWELL, JR. has been President and Chief Executive Officer of
Atlantic American Corporation, an insurance holding company, since 1995 and
Executive Vice President of Atlantic American Corporation from 1992 to 1995. He
has been Executive Vice President and General Counsel of Delta Life Insurance
Company and Delta Fire and Casualty Insurance Company since 1991, and Vice
Chairman and Executive Vice President of Bankers Fidelity Life Insurance Company
and Georgia Casualty & Surety Company since 1992. He has been a director, Vice
President and Secretary of Bull Run Corporation since 1994. He is a director of
the following companies: Atlantic American Corporation, Bankers Fidelity Life
Insurance Company, American Independent Life Insurance Company, Delta Life
Insurance Company, Delta Fire and Casualty Insurance Company, Georgia Casualty &
Surety Company, American Southern Insurance Company, American Safety Insurance
Company, Association Casualty Insurance Company and Association Risk Management
General Agency. He is the son-in-law of J. Mack Robinson and Harriett J.
Robinson.
ZELL MILLER was Governor of Georgia from January 1991 to January 1999. He
is Chairman of the Board of Kollmann (USA) Inc. and a director of the following
companies: Norfolk Southern Corporation, Post Properties, Inc., Georgia Power
Company, United Community Banks, Inc. and Law Companies Group. He is a professor
of Young Harris College, a Distinguished Professor of Higher Education of the
University of Georgia and a Presidential Distinguished Fellow of Emory
University. Governor Miller is a member of the Audit Committee of Gray's board
of directors.
HOWELL W. NEWTON has been President and Treasurer of Trio Manufacturing
Co., a textile manufacturing company, since 1978. Mr. Newton is Chairman of the
Audit Committee of Gray's board of directors.
HUGH NORTON has been President of Norco, Inc., an insurance agency, since
1973. He is one of the founders and directors of Community Bank of Georgia. Mr.
Norton is also a real estate developer in Destin, Florida. He is a member of the
Management Personnel Committee of Gray's board of directors.
HARRIETT J. ROBINSON has been a director of Atlantic American Corporation
since 1989 and a director of Delta Life Insurance Company and Delta Fire and
Casualty Insurance Company since 1967. Mrs. Robinson is the wife of J. Mack
Robinson and the mother-in-law of Hilton H. Howell, Jr.
85
91
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
directors, executive officers and persons who own more than 10 percent of a
registered class of a company's equity securities to file with the SEC initial
reports of ownership (Form 3) and reports of changes in ownership (Forms 4 and
5) of such class of equity securities. Such officers, directors and greater than
10 percent shareholders of a company are required by SEC regulations to furnish
the company with copies of all such Section 16(a) reports that they file.
To Gray's knowledge, based solely on its review of the copies of such
reports furnished to Gray during the year ended December 31, 1998, all Section
16(a) filing requirements applicable to its officers, directors and 10 percent
beneficial owners were met.
BOARD COMMITTEES AND MEMBERSHIP
The Gray board has an Executive Committee. The Executive Committee held no
meetings during 1998. The members of the Executive Committee are Messrs.
Robinson, Prather, Mayher and Boger.
The Gray board has an Audit Committee, the purpose of which is to review
and evaluate the results and scope of the audit and other services provided by
Gray's independent auditors, as well as Gray's accounting principles and system
of internal accounting controls, and to review and approve any transactions
between Gray and its directors, officers or significant shareholders. The Audit
Committee held two meetings during 1998. The members of the Audit Committee are
Messrs. Miller and Newton.
The Gray board has a Management Personnel Committee, the purpose of which
is to make recommendations with respect to executive salaries, bonuses and
compensation and to serve as the nominating committee with respect to the
principal officers and other committees of the board of directors, as well as
making nominations respecting membership of the board of directors of Gray. The
Management Personnel Committee will consider recommendations for nominees for
directorship submitted by shareholders. Shareholders wishing to recommend
director candidates for consideration by the Management Personnel Committee may
do so by writing to the Secretary of Gray, giving the candidate's name,
biographical data and qualifications. The Management Personnel Committee held
five meetings in 1998, and its members are Messrs. Robinson, Prather, Mayher,
Boger and Norton.
Gray does not have a nominating committee. The Gray board held four
meetings during 1998. During 1998, each of the directors attended at least 75%
of the aggregate number of meetings of the board and meetings of all committees
of the board on which such directors served.
86
92
SHARE OWNERSHIP
The following table sets forth information regarding the ownership of Gray
class A common stock and class B common stock as of August 9, 1999 by (1) any
person who is known to Gray to be the beneficial owner of more than five percent
of the Gray class A common stock or class B common stock, (2) all directors, (3)
all executive officers named in the Summary Compensation Table and (4) all
directors and executive officers as a group.
CLASS A CLASS B COMBINED
COMMON STOCK COMMON STOCK VOTING POWER
BENEFICIALLY OWNED BENEFICIALLY OWNED AS A PERCENTAGE
------------------- ------------------- OF COMMON
NAME SHARES PERCENT SHARES PERCENT STOCK
- ---- --------- ------- --------- ------- ---------------
Robert A. Beizer(1)................... -- -- 33,635 * *
Richard L. Boger(1)................... 11,651 * 13,744 * *
Joseph A. Carriere.................... 6,075 * -- -- *
Hilton H. Howell, Jr.(1),(2),(3),(4).. 3,566,782 45.7 36,500 * 43.0
Wayne M. Martin(1).................... 362 * 12,063 * *
William E. Mayher, III(1)............. 13,500 * 18,750 * *
Zell Miller(1)........................ -- -- 7,500 * *
Howell W. Newton(1)................... 2,625 * 9,500 * *
Hugh Norton(1)........................ 13,500 * 18,750 * *
Robert S. Prather,
Jr.(1),(2),(5),(6).................. 3,170,073 40.8 99,800 1.9 38.4
Harriett J. Robinson(1),(2),(4),(7)... 4,575,382 56.6 192,400 3.7 53.4
J. Mack Robinson(1),(2),(4),(5),(8)... 4,575,382 56.6 192,400 3.7 53.4
James C. Ryan(5)...................... -- -- 2,019 * *
Thomas J. Stultz(1)................... 2,250 * 24,500 * *
Bull Run Corporation(9)............... 2,931,397 38.0 11,750 * 35.7
The Capital Group Companies, Inc.(10). -- -- 401,600 7.8 *
Mario J. Gabelli(11).................. -- -- 1,243,399 24.2 1.7
George H. Nader(12)................... 359,998 5.3 -- 0.0 4.9
Shapiro Capital Management Company,
Inc.(13)............................ 11,350 * 1,693,039 32.9 2.5
Standish Ayer and Wood, Inc.(14)...... -- -- 474,100 9.2 *
All directors and executive officers
as a group(15)...................... 4,937,846 61.1 439,750 8.1 57.8
- -------------------------
* Less than 1%
(1) Includes options to purchase Gray class B common stock as follows: each of
Messrs. Boger, Howell, Mayher, Newton, Norton, Miller and Mrs. Robinson --
7,500 shares, Mr. Robinson -- 75,000 shares, Mr. Prather -- 75,000 shares,
Mr. Beizer -- 33,000 shares, Mr. Martin -- 11,250 shares and Mr. Stultz --
22,500 shares. Excludes Mr. Beizer's options to purchase 21,000 shares of
Gray class B common stock that are not exercisable within 60 days of August
9, 1999.
(2) Includes 2,017,647 shares of Gray class A common stock and 11,750 shares of
Gray class B common stock owned by Bull Run Corporation and warrants to
purchase 933,750 shares of Gray class A common stock owned by Bull Run
Corporation as described in footnote (9) below, because Messrs. Howell,
Prather and Robinson are directors and officers of Bull Run Corporation and
Messrs. Prather and Robinson are principal shareholders of Bull Run
Corporation and Mrs. Robinson is the spouse of Mr. Robinson and, as such,
may be deemed to be beneficial owners of such shares.
87
93
Each of Messrs. Howell, Prather and Robinson and Mrs. Robinson disclaims
beneficial ownership of the shares owned by Bull Run Corporation. Excludes
(1) warrants owned by Bull Run Corporation to purchase 172,500 shares of
Gray class A common stock and warrants to purchase 100,000 shares of Gray
class B common stock that are not exercisable within 60 days of August 9,
1999 and (2) 1,000 shares of Gray series A preferred stock and 175 shares
of Gray series B preferred stock owned by Bull Run Corporation and 175
shares of Gray series B preferred stock owned by Mrs. Robinson's husband
and his affiliates, which securities are non-voting and are not convertible
into Gray class A common stock or Gray class B common stock.
(3) Includes 58,575 shares of Gray class A common stock owned by Mr. Howell's
wife, as to which shares he disclaims beneficial ownership. Excludes
105,000 shares of Gray class A common stock and 5,000 shares of Gray class
B common stock held in trust for Mr. Howell's wife.
(4) Includes as to Messrs. Robinson and Howell and Mrs. Robinson, an aggregate
of 490,060 shares of Gray class A common stock and 6,000 shares of Gray
class B common stock owned by certain companies of which Mr. Howell is an
officer and a director. Mr. Robinson is also an officer, director and a
principal or sole shareholder and Mrs. Robinson is also a director of these
companies. Also includes warrants to purchase 31,500 shares of Gray class A
common stock owned by one of the above described companies. Excludes
warrants to purchase 6,000 shares of Gray class A common stock that are not
exercisable within 60 days of August 9, 1999.
(5) Excludes options to purchase Gray class B common stock that are not
exercisable within 60 days of August 9, 1999 as follows: Mr.
Prather -- 41,000 and Mr. Ryan -- 11,250. Also excludes Mr. Robinson's and
Mr. Prather's options to purchase 10,000 and 9,337 shares, respectively, of
Gray class A common stock that are not exercisable within 60 days of August
9, 1999.
(6) Includes 225 shares of Gray class A common stock and 100 shares of Gray
class B common stock owned by Mr. Prather's wife, as to which shares he
disclaims beneficial ownership.
(7) Includes: (1) 381,975 shares of Gray class A common stock, 79,750 shares of
Gray class B common stock and warrants to purchase 63,000 shares of Gray
class A common stock owned by Mrs. Robinson's husband, as to which
securities Mrs. Robinson disclaims beneficial ownership; (2) warrants to
purchase 94,500 shares of Gray class A common stock; (3) 256,950 shares of
Gray class A common stock, 10,000 shares of Gray class B common stock and
warrants to purchase 126,000 shares of Gray class A common stock owned by
Mrs. Robinson, as trustee for her daughters, as to which securities Mrs.
Robinson disclaims beneficial ownership. Excludes: (1) options held by Mrs.
Robinson's husband to purchase 10,000 shares of Gray class A common stock
and 41,000 shares of Gray class B common stock which are not exercisable
within 60 days of August 9, 1999; (2) warrants held by Mrs. Robinson, Mrs.
Robinson's husband and certain of his affiliates to purchase 60,000 shares
of Gray class A common stock that are not exercisable within 60 days of
August 9, 1999; and (3) 175 shares of Gray series B preferred stock owned
by Mrs. Robinson's husband and his affiliates, which securities are
nonvoting and are not convertible into Gray class A common stock or class B
common stock. Mrs. Robinson's address is 3500 Tuxedo Road, NW, Atlanta,
Georgia 30305.
88
94
(8) Includes: (1) 436,950 shares of Gray class A common stock and 12,400 shares
of Gray class B common stock owned by Mr. Robinson's wife, directly and as
trustee for their daughters, warrants to purchase 94,500 shares of Gray
class A common stock held by Mr. Robinson's wife, and warrants to purchase
126,000 shares of Gray class A common stock held by Mr. Robinson's wife, as
trustee for their daughters, as to which securities Mr. Robinson disclaims
beneficial ownership; (2) warrants to purchase 63,000 shares of Gray class
A common stock held by Mr. Robinson. Excludes: (1) options held by Mr.
Robinson to purchase 10,000 shares of Gray class A common stock and 40,000
shares of Gray class B common stock which are not exercisable within 60
days of August 9, 1999; (2) warrants held by Mrs. Robinson, Mr. Robinson
and certain of his affiliates to purchase 60,000 shares of Gray class A
common stock that are not exercisable within 60 days of August 9, 1999; and
(3) 175 shares of Gray series B preferred stock owned by Mr. Robinson and
his affiliates, which securities are nonvoting and are not convertible into
Gray class A common stock or class B common stock. Mr. Robinson's address
is 3500 Tuxedo Road, NW, Atlanta, Georgia 30305.
(9) Includes warrants to purchase 933,750 shares of Gray class A common stock
which are exercisable within 60 days. Excludes (1) 1,000 shares of Gray
series A preferred stock and 175 shares of Gray series B preferred stock,
none of which is voting or convertible into shares of Gray class A common
stock or class B common stock and (2) warrants to purchase 172,500 shares
of Gray class A common stock and 100,000 shares of Gray class B common
stock that are not exercisable within 60 days of August 9, 1999. The
address of Bull Run Corporation is 4370 Peachtree Road NE, Atlanta, Georgia
30319.
(10) This information was furnished to Gray on a Schedule 13G filed by Capital
Guardian Trust Company. Capital Guardian Trust Company, a wholly owned
subsidiary of The Capital Group Companies, Inc., is the beneficial owner of
these shares as a result of its serving as the investment manager of
various institutional accounts, but has authority to vote only 167,750
shares of Gray class B common stock. The address of Capital Guardian Trust
Company is 11100 Santa Monica Boulevard, Los Angeles, California 90025.
(11) This information was furnished to Gray on a Schedule 13D filed by Gabelli
Funds, Inc. and also by Mario J. Gabelli and various entities which he
directly or indirectly controls or for which he acts as chief investment
officer. The Schedule 13D reports the beneficial ownership of Gray class B
common stock as follows: Gabelli Funds, LLC -- 536,300 shares; GAMCO
Investors, Inc. -- 677,349 shares; and Gabelli International
Limited -- 24,750 shares and Gabelli Advisors 5,000 shares. GAMCO
Investors, Inc. only has the authority to vote 646,599 of the shares
beneficially held by it. The address of Mr. Gabelli and Gabelli Funds, Inc.
is One Corporate Center, Rye, New York 10580.
(12) Mr. Nader's address is P.O. Box 271, 1011 Fifth Avenue, West Point, Georgia
31833.
(13) This information was furnished to Gray by a representative of Shapiro
Capital Management Company, Inc., an investment adviser. The address of
Shapiro Capital Management Company, Inc. is 3060 Peachtree Road NW,
Atlanta, Georgia 30306.
(14) This information was furnished to Gray on a Schedule 13G filed by Standish,
Ayer & Wood, Inc., One Financial Center, Boston, Massachusetts 02111-2662.
89
95
(15) Includes all options and warrants to purchase Gray class A or class B
common stock which are exercisable within 60 days of August 9, 1999 and
excludes such options and warrants not exercisable within the same 60 day
period.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation of Gray's
President and Chief Executive Officer and the other executive officers whose
annual compensation exceeded $100,000 during the year ended December 31, 1998
(the "named executives").
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------------------------
--------------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS SARS(#)(1) COMPENSATION($)
- --------------------------- ---- --------- -------- --------------------- ---------------
J. Mack Robinson(3)....... 1998 72,308 -- 125,000(2) 13,000(4)
President, Chief 1997 -- -- 75,000(5) 14,620(4)
Executive Officer and a 1996 -- -- 11,250(6) 9,300(4)
Director
Robert S. Prather,
Jr.(7).................. 1998 -- -- 125,337(2) 13,000(4)
Executive Vice 1997 -- -- 75,000(5) 14,620(4)
President -- Acquisitions
and a Director 1996 -- -- 11,250(6) 8,800(4)
Robert A. Beizer.......... 1998 215,000 -- 21,000(2) 13,080(9)
Vice President -- Law 1997 210,000 -- 10,500 6,619(9)
and Development 1996 169,231 -- 22,500 --
James C. Ryan(10)......... 1998 34,269 5,000 22,500(2) 15,603(11)
Vice President --
Finance and Chief
Financial Officer
Thomas J. Stultz.......... 1998 196,000 35,000 22,500(2) 7,166(8)
Vice President, 1997 187,000 25,000 22,500(5) 59,199(8)
President -- Publishing 1996 152,788 150,000 -- --
Division
Wayne M. Martin(12)....... 1998 219,326 170,454 11,250(2) 8,829(13)
Regional Vice
President --
Television
Joseph A. Carriere(14).... 1998 125,524 -- --(2) 203,766(15)
Vice President -- 1997 187,000 -- 7,500(16) 6,245(17)
Television 1996 172,692 100,000 -- 5,698(17)
- -------------------------
(1) On August 20, 1998, the board of directors declared a 50% stock dividend,
payable on September 30, 1998, to shareholders of record of the Gray class
A common stock and class B common stock on September 16, 1998. This stock
dividend was effected by means of a three-for-two stock split. All
applicable share and per share data have been adjusted to give effect to
the stock split.
(2) These awards are set forth below in detail in the table titled "Option/SAR
Grants in 1998."
90
96
(3) Mr. Robinson was appointed President and Chief Executive Officer in
September 1996 but received no salary for this position until September
1998. Mr. Robinson is currently compensated at an annual salary of
$200,000.
(4) Represents compensation paid for services rendered as a member of Gray's
board of directors.
(5) Represents stock options to purchase Gray class B common stock pursuant to
Gray's 1992 Long Term Incentive Plan. This 1997 stock option grant was
replaced by a repricing grant, effective December 11, 1998. The December
11, 1998 grant repriced the 1997 grant at a price which approximated the
market price of the Gray class B common stock on December 11, 1998. The
repriced grant was included in 1998 stock options granted as a 1998 grant.
(6) Represents stock options to purchase Gray class B common stock under the
Non-Employee Director Stock Option Plan.
(7) Mr. Prather became an officer in September 1996.
(8) $4,000, $1,963 and $1,203 represent payments or accruals by Gray in 1998
for matching contributions to Gray's 401(k) plan, term life insurance
premiums and long term disability premiums, respectively. $54,700, $3,596
and $903 represent payments or accruals by Gray in 1997 for relocation
costs, matching contributions to Gray's 401(k) plan and long term
disability premiums, respectively.
(9) $4,000, $5,589 and $3,491 represent payments or accruals by Gray in 1998
for matching contributions to Gray's 401(k) plan, term life insurance
premiums and long term disability premiums, respectively. $4,000 and $2,619
represent payments or accruals by Gray in 1997 for premiums, respectively.
(10) Mr. Ryan joined Gray on October 1, 1998, compensated at an annual salary of
$135,000.
(11) Represents payments or accruals by Gray for relocation costs.
(12) Mr. Martin has served as Gray's Regional Vice-President -- Television since
July 1998. He was also appointed President of WVLT-TV, the Company's
subsidiary in Knoxville, Tennessee. Prior to his appointment as an
executive officer, Mr. Martin has served as President of Gray Kentucky
Television, Inc., a subsidiary of the Company, which operates WKYT-TV, in
Lexington, Kentucky and WYMT-TV, in Hazard, Kentucky.
(13) $4,000, $3,249 and $1,580 represent payments or accruals by Gray for
matching contributions to Gray's 401(k) plan, term life insurance premiums
and long term disability premiums, respectively.
(14) Mr. Carriere resigned, effective August 1, 1998.
(15) $190,000, $2,919, $5,291 and $5,556 represent payments or accruals by Gray
for consulting, matching contributions to Gray's 401(k) plan, term life
insurance premiums and health insurance premiums, respectively.
(16) Upon Mr. Carriere's resignation, this unvested stock option grant was
forfeited.
(17) $4,000 and $2,245 represent payments or accruals by Gray in 1997 for
matching contributions to Gray's 401(k) plan and term life insurance
premiums, respectively. $3,750 and $1,948 represent payment or accruals by
Gray in 1996 for matching contributions to Gray's 401(k) plan and term life
insurance premiums, respectively.
91
97
STOCK OPTIONS GRANTED
The following table contains information on stock options granted during
the year ended December 31, 1998. Under Gray's 1992 Long Term Incentive Plan,
all officers and key employees are eligible for grants of stock options and
other stock-based awards. Options granted are exercisable over a three-year
period beginning on the second anniversary of the grant date and expire one
month after termination of employment. The total number of shares issuable under
the Incentive Plan is not to exceed 900,000 shares, of which 300,000 shares are
Gray class A common stock and 600,000 shares are Gray class B common stock,
subject to adjustment in the event of any change in the outstanding shares of
such stock by reason of a stock dividend, stock split, recapitalization,
acquisition, consolidation or other similar changes generally affecting
shareholders. See "Proposal 3: Amendment of the Gray 1992 Long Term Incentive
Plan" for information concerning a proposal to amend the Incentive Plan to
increase the number of shares of Gray class B common stock issuable thereunder.
The Incentive Plan is administered by the Incentive Plan Committee which
consists of members of the Management Personnel Committee of the board of
directors who are not eligible to participate under the Incentive Plan. The
Incentive Plan is intended to provide additional incentives and motivation for
Gray's employees. The Incentive Plan Committee, by majority action thereof, is
authorized in its sole discretion to determine the individuals to whom the
benefits will be granted, the type and amount of such benefits and the terms
thereof; and to prescribe, amend and rescind rules and regulations relating to
the Incentive Plan.
On August 20, 1998, the board of directors declared a 50% stock dividend,
payable on September 30, 1998, to shareholders of record of the Gray class A
common stock and class B common stock on September 16, 1998. This stock dividend
was effected by means of a three-for-two stock split. All applicable share and
per share data have been adjusted to give effect to the stock split.
OPTION/SAR GRANTS IN 1998
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
CLASS OF UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
COMMON OPTIONS EMPLOYEES BASE PRICE EXPIRATION --------------------
STOCK GRANTED IN 1998 ($/SHARE) DATE 5%($) 10%($)
------- ---------- ---------- ----------- ---------- -------- --------
J. Mack Robinson........ Class A 10,000(2) 1.8 17.81 11/19/03 49,213 108,747
Class B 40,000(2) 7.1 14.00 11/19/03 154,718 341,886
Class B 75,000(3) 13.3 14.50 9/25/02 234,363 504,709
Robert S. Prather, Jr... Class A 9,337(2) 1.7 17.81 11/19/03 45,950 101,537
Class B 41,000(2) 7.3 14.00 11/19/03 158,586 350,433
Class B 75,000(3) 13.3 14.50 9/25/02 234,363 504,709
Robert A. Beizer........ Class B 10,500(4) 1.9 16.08 2/12/03 46,647 103,079
Class B 10,500(5) 1.9 14.50 2/12/03 42,064 92,950
James C. Ryan........... Class B 11,250(6) 2.0 16.13 10/5/03 50,119 110,750
Class B 11,250(5) 2.0 14.50 10/5/03 45,068 99,589
Thomas J. Stultz........ Class B 22,500(3) 4.0 14.50 9/25/02 70,309 151,413
Wayne M. Martin......... Class B 11,250(3) 2.0 14.50 9/25/02 35,154 75,706
Joseph A. Carriere...... N/A N/A N/A N/A N/A N/A N/A
92
98
- -------------------------
(1) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
Gray class A common stock or class B common stock over the term of the
options. These numbers are calculated based on rules promulgated by the SEC
and do not reflect Gray's estimate of future stock price growth. Actual
gains, if any, on stock option exercises and Gray class A common stock or
Gray class B common stock holdings will be dependent on the timing of such
exercise and the future performance of the Gray class A common stock or Gray
class B common stock. There can be no assurance that the rates of
appreciation assumed in this table can be achieved or that the amounts
reflected will be received by the option holder.
(2) Stock options granted effective November 19, 1998 pursuant to the Incentive
Plan.
(3) Effective December 11, 1998, Gray repriced certain Gray class B common stock
option grants made in 1997 pursuant to the Incentive Plan, at a price which
approximated the market price of Gray's class B common stock on that day.
These repriced grants effectively replaced the stock option grants made on
September 25, 1997.
(4) Stock options granted effective February 12, 1998 pursuant to Gray's
Incentive Plan that were repriced on December 11, 1998 as described in note
(5) below.
(5) Effective December 11, 1998, Gray repriced certain Gray class B common stock
option grants made in 1998 pursuant to the Incentive Plan, at a price which
approximated the market price of the Gray class B common stock on that day.
These repriced grants effectively replaced the earlier 1998 stock option
grants.
(6) Stock options granted effective October 5, 1998 pursuant to the Incentive
Plan. This stock option grant was replaced on December 11, 1998, by a
repricing grant as described in note (5) above.
93
99
STOCK OPTIONS EXERCISED
The following table sets forth information about stock options that were
exercised during 1998 and the number of shares and the value of grants
outstanding as of December 31, 1998 for each named executive.
AGGREGATED OPTION EXERCISES IN 1998
AND DECEMBER 31, 1998 OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS AT 12/31/98
CLASS OF ACQUIRED OPTIONS AT 12/31/98 ($)(1)
COMMON ON VALUE --------------------------- ---------------------------
NAME STOCK EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ------------ ----------- ------------- ----------- -------------
J. Mack Robinson(2)....... Class A -- -- -- 10,000 -- 5,000
Class B 11,250 61,875 -- 115,000 -- --
Robert S. Prather, Jr.(2). Class A -- -- -- 9,337 -- 4,669
Class B 11,250 61,875 -- 116,000 -- --
Robert A. Beizer.......... Class B -- -- 22,500 21,000 69,845 12,469
James C. Ryan............. Class B -- -- -- 11,250 -- --
Thomas J. Stultz.......... Class B -- -- -- 22,500 -- --
Wayne M. Martin(3)........ Class A 6,750 68,531 -- -- -- --
Class B -- -- -- 11,250 -- --
Joseph A. Carriere(3)..... Class A 5,625 65,547 -- -- -- --
- -------------------------
(1) Value is based on the closing price of Gray class A common stock and class B
common stock of $18.31 and $13.69, respectively at December 31, 1998, less
the exercise price.
(2) On December 12, 1996, Gray granted each of Messrs. Robinson and Prather an
option to purchase 11,250 shares of Gray class B common stock, at an
exercise price of $10.58 per share, pursuant to Gray's Non-employee Director
Stock Option Plan. The options were exercised in 1998.
(3) On March 30, 1995, Gray granted Messrs. Martin and Carriere an option to
purchase 6,750 and 5,625 shares of Gray class A common stock, respectively,
at an exercise price of $8.89 per share, pursuant to the Incentive Plan. The
options were exercised in 1998.
SUPPLEMENTAL PENSION PLAN
Gray has entered into agreements with certain key employees to provide
these employees with supplemental retirement benefits. The benefits will be
disbursed after retirement in contractually predetermined payments of equal
monthly amounts over the employee's life, or the life of a surviving eligible
spouse, for a maximum of 15 years. Gray maintains life insurance coverage on
these individuals in adequate amounts to reimburse Gray for the cost of the
agreements.
RETIREMENT PLAN
Gray sponsors a defined benefit pension plan, intended to be tax qualified,
for certain of its employees and the employees of any of its subsidiaries which
have been designated
94
100
as participating companies under the plan. A participating employee who retires
on or after attaining age 65 and who has completed five years of service upon
retirement may be eligible to receive during his lifetime, in the form of
monthly payments, an annual pension equal to (1) 22% of the employee's average
earnings for the highest five consecutive years during the employee's final 10
years of employment multiplied by a factor, the numerator of which is the
employee's years of service credited under the plan, plus (2) 0.9% of the
employee's monthly average earnings for the highest five consecutive years in
the employee's final 10 years of employment added to 0.6% of monthly average
earnings in excess of Social Security covered compensation, and multiplied by
the employee's years of service credited under the plan after 1993, with a
maximum of 25 years minus years of service credited under (1) above. For
participants as of December 31, 1998, there was a minimum benefit equal to the
projected benefit. For purposes of illustration, pensions estimated to be
payable upon retirement of participating employees in specified salary
classifications are shown in the following table:
YEARS OF SERVICE
---------------------------------------------------------
REMUNERATION(1) 10 15 20 25 30 35
- --------------- ------- ------- ------- ------- ------- -------
$ 15,000.................... $ 1,335 $ 1,995 $ 2,655 $ 3,315 $ 3,300 $ 3,300
25,000.................... 2,225 3,325 4,425 5,525 5,500 5,500
50,000.................... 5,016 7,216 9,416 11,616 11,000 11,000
75,000.................... 7,991 11,291 14,591 17,891 16,500 16,500
100,000.................... 10,966 15,366 19,766 24,166 22,000 22,000
150,000.................... 16,916 23,516 30,116 36,716 33,000 33,000
200,000.................... 19,416 28,216 37,016 45,816 36,667 37,714
250,000 and above.......... 20,262 29,908 39,554 49,199 40,191 41,339
- -------------------------
(1) Five-year average annual compensation.
Employees may become participants in the plan, provided that they have
attained age 21 and have completed one year of service. Average earnings are
based upon the salary paid to a participating employee by a participating
company. Pension compensation for a particular year as used for the calculation
of retirement benefits includes salaries, overtime pay, commissions and
incentive payments received during the year and the employee's contribution to
the Gray Capital Accumulation Plan. Pension compensation for 1998 differs from
compensation reported in the Summary Compensation Table in that pension
compensation includes any annual incentive awards received in 1998 for services
in 1997 rather than the incentive awards paid in 1999 for services in 1998. The
maximum annual compensation considered for pension benefits under the plan in
1998 was $160,000.
As of December 31, 1998, the named executive officers of Gray have the
following years of credited service:
NAME YEARS OF CREDITED SERVICE
- ---- -------------------------
Thomas J. Stultz.......................................... 2
Robert A. Beizer.......................................... 2
Wayne M. Martin........................................... 4
Joseph A. Carriere........................................ 4
CAPITAL ACCUMULATION PLAN
Effective October 1, 1994, Gray adopted the Gray Communications Systems,
Inc. Capital Accumulation Plan for the purpose of providing additional
retirement benefits for
95
101
substantially all employees. The Capital Accumulation Plan is intended to meet
the requirements of Section 401(k) of the Internal Revenue Code of 1986, as
amended.
Contributions to the Capital Accumulation Plan are made by employees. Gray
matches a percentage of each employee's contribution which does not exceed 6% of
the employee's gross pay. The percentage match is declared by the board of
directors before the beginning of each Capital Accumulation Plan Year and was
made with a contribution of Gray class A common stock through the year ended
December 31, 1996 and since 1996 has been and will be made with Gray class B
common stock. The percentage match declared for the year ended December 31, 1998
was 50%. Gray's matching contributions vest based upon an employee's number of
years of service, over a period not to exceed five years.
COMPENSATION OF DIRECTORS
The standard arrangement for directors' fees is set forth in the table
below.
DESCRIPTION AMOUNT
- ----------- -------
Chairman of the Board annual retainer fee................... $18,000
Director's annual retainer fee.............................. $12,000
Director's fee per board of directors meeting............... $ 1,000
Chairman of the Board fee per board of directors meeting.... $ 1,200
Committee Chairman fee per committee meeting................ $ 1,200
Committee member fee per committee meeting.................. $ 1,000
Directors are paid 40% of the above fee arrangement for participation by
telephone in any meeting of the board of directors or any committee thereof.
EMPLOYMENT AGREEMENTS
Robert A. Beizer and Gray entered into an employment agreement, dated
February 12, 1996, for a two-year term which automatically extends for three
successive one-year periods, subject to termination provisions. The agreement
provides that Mr. Beizer shall be employed as Vice President for Law and
Development of Gray with an initial annual base salary of $200,000 and a grant
of options to purchase 22,500 shares of Gray class A common stock with an
exercise price of $12.917 per share under the Incentive Plan at the inception of
his employment. The agreement also provides that Mr. Beizer's base salary will
be increased yearly based upon a cost of living index and he will receive
non-qualified options to purchase 10,500 shares of Gray class B common stock
annually during the term of the agreement at an exercise price per share equal
to the fair market value of the Gray class B common stock on the date of the
grant. In December 1996, the board of directors approved an amendment to Mr.
Beizer's contract which replaced the initial option grant of 22,500 shares of
Gray class A common stock with the grant of an option to purchase 22,500 shares
of Gray class B common stock with an exercise price of $10.583 per share. On
February 12, 1997, 1998, and 1999, Mr. Beizer was granted options to purchase an
additional 10,500 shares of Gray class B common stock at $12.50, $16.08 and
$14.1875 per share, respectively. All options granted are exercisable over a
three-year period beginning upon the second anniversary of the grant date. If
there is a "change of control" of Gray, Mr. Beizer will be paid a lump sum
amount equal to his then current base salary for the remaining term of the
agreement and will be granted any remaining stock options to which he would have
been entitled. For purposes of the
96
102
agreement, "change of control" is defined as any change in the control of Gray
that would be required to be reported in response to Item 6(e) of Schedule 14A
promulgated under the Securities Exchange Act of 1934. Mr. Beizer has agreed
that during the term of his agreement and for two years after the termination of
the agreement he will be subject to non-competition provisions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Richard L. Boger, William E. Mayher III, Hugh Norton, Robert S. Prather,
Jr. and J. Mack Robinson are the members of the Management Personnel Committee
which serves as the Compensation Committee. Messrs. Robinson and Prather are
President and Chief Executive Officer and Executive Vice President --
Acquisitions of Gray, respectively.
J. Mack Robinson, President of the Company serves on the Compensation
Committee of Bull Run Corporation. Mr. Robinson and Robert S. Prather, Jr.,
President of Bull Run and Executive Vice President -- Acquisitions of Gray serve
on the Compensation Committee of Gray.
Gray Kentucky Television, Inc., a subsidiary of Gray, is a party to a
rights sharing agreement with Host Communications, Inc. and certain other
parties not affiliated with Gray, pursuant to which the parties agreed to
exploit Host's rights to broadcast and market certain University of Kentucky
football and basketball games and related activities. Pursuant to such
agreement, Gray Kentucky Television is licensed to broadcast certain University
of Kentucky football and basketball games and related activities. Under this
agreement, Gray Kentucky Television also provides Host with production and
marketing services and Host provides accounting and various marketing services.
During the year ended December 31, 1998, Gray received approximately $100,000
from this joint venture.
Bull Run currently owns 51.5% of the outstanding common stock of Capital
Sports Properties, Inc. Capital's assets consist of all of the outstanding
preferred stock of Host and 49.0% of Host's outstanding common stock. Bull Run's
direct common equity ownership in Host, plus Bull Run's indirect common equity
ownership in Host through its investment in Capital, was 32.6% as of December
31, 1998. Robert S. Prather, Jr., Executive Vice President -- Acquisitions and a
member of Gray's board of directors, is a member of the board of directors of
both Capital, Bull Run and Host.
Gray's board of directors approved payments to Bull Run of a finders fee of
approximately $1,980,000 in connection with the acquisition of all of the
outstanding capital stock of Busse Broadcasting Corporation. The purchase price
was $112,000,000 plus Busse's cash balance as of June 30, 1998. The purchase
price includes the assumption of Busse's indebtedness, including its 11 5/8%
Senior Secured Notes due 2000. Immediately prior to Gray's acquisition of Busse,
Cosmos Broadcasting Corporation acquired the assets of WEAU-TV from Busse in
exchange for the assets of WALB-TV, Inc., Gray's NBC affiliate in Albany,
Georgia. In exchange for the assets of WALB, Gray received the assets of WEAU,
which were valued at $66,000,000 and approximately $12,000,000 in cash for a
total value of $78,000,000. The finders fee was allocated at $1,200,000 for the
Busse transaction and $780,000 for the WALB transaction. For advisory services
rendered by Bull Run to Gray in connection with the acquisition of The Goshen
News, Gray paid Bull Run $167,000.
For advisory services rendered by Bull Run to Gray in connection with the
proposed acquisitions of KWTX, Brazos and KXII, Gray paid Bull Run $400,000 on
May 19, 1999,
97
103
$800,000 on August 11, 1999 and will pay Bull Run an additional $190,000 upon
the consummation of the acquisitions.
Gray paid cash dividends on its series A preferred stock and series B
preferred stock of $800,000 and $63,750, respectively to Bull Run in 1998. Bull
Run is the only owner of the series A preferred stock and owns 50% of the
outstanding series B preferred stock. Mr. Robinson and certain affiliates own
the remaining 50% of the series B preferred stock. In addition, Gray issued
25.4692 shares of series B preferred stock to Bull Run and 25.4692 shares of
series B preferred stock pro rata to Mr. Robinson and certain affiliates as
dividends on the series B preferred stock in 1998. Each share of series B
preferred stock is valued at $10,000 per share. Of the total amount of
1,110.9384 series B preferred stock outstanding during 1998, Gray redeemed
760.9384 shares pro rata at a total redemption price of $7,609,384.
Gray executed an option agreement with Bull Run in March 1999, whereby Gray
has the option to purchase Bull Run's investment in the common stock of Sarkes
Tarzian, Inc., an operator of two broadcast television stations and four radio
stations. Upon exercise of the option, Gray will pay Bull Run an amount equal to
Bull Run's purchase price for the Tarzian investment plus related costs. In
connection with the option agreement, Gray granted to Bull Run warrants to
purchase up to 100,000 shares of Gray class B common stock at $13.625 per share
which was the closing price of such stock on the date of grant. The warrants
will vest immediately upon Gray's exercise of its option to purchase the Tarzian
investment. The option agreement expired on May 31, 1999; however, Gray and Bull
Run extended the option period through September 30, 1999 and Gray paid Bull Run
$266,800 for such extension. The option period may be extended, at Gray's
election, in additional 30-day increments for a fee of $66,700 per extension.
REPORT OF THE MANAGEMENT PERSONNEL COMMITTEE
Gray's executive compensation program is administered by the Management
Personnel Committee of the board of directors.
The goals of Gray's executive compensation program for 1998 were to
attract, retain, motivate and reward qualified persons serving as executive
officers. To achieve such goals Gray relies primarily on salaries, bonuses,
options and other compensation for each of Gray's executive officers, except
that the salary of Mr. Beizer is specified in his employment agreement with
Gray. Under current policy, the chief executive officer of Gray determines the
recommended annual compensation level, including bonuses, for all other officers
of Gray and its subsidiaries, and then submits these recommendations to the
Management Personnel Committee for its review and approval. Such determinations
of the Management Personnel Committee are reported to the full board, which then
has the opportunity to consider and amend such determinations concerning the
compensation payable to executive officers. In 1998, the full board approved the
determinations of the Management Personnel Committee with respect to
compensation without making any changes thereto. The Management Personnel
Committee's policy for determining an executive's salary, bonus and stock option
grants is based on the responsibility of such executive, his or her impact on
the operations and profitability of Gray or the business unit for which such
executive has operating responsibility and the knowledge and experience of such
executive.
In 1998, the Management Personnel Committee utilized the foregoing criteria
to determine executive salaries, bonuses and option grants and such salaries,
bonuses and
98
104
option grants are consistent with the foregoing policy. An executive's annual
bonus is based on a percentage of his or her annual base salary. These
considerations are subjective in nature and the Management Personnel Committee
does not assign relative weights thereto. For 1998, bonuses ranged from 0% to
78% of an executive's base salary. Whether or not a bonus is in fact earned by
an executive is linked to the attainment, by Gray or the business unit for which
such executive has operating responsibility, of predetermined operating profit
targets based on budgeted operating revenues (which is an objective analysis)
and the individual's contribution to Gray or the business unit (which is a
subjective analysis). The operating profit targets are approved annually by the
Management Personnel Committee. When measuring an executive's individual
contribution and performance, the Management Personnel Committee examines
quantitative factors, as well as qualitative factors that necessarily involve a
subjective judgment by the Management Personnel Committee. In making such
subjective determination, the Management Personnel Committee does not base its
determination on any single performance factor nor does it assign relative
weights to factors, but considers a mix of factors, including evaluations of
superiors, and evaluates an individual's performance against such mix in
absolute terms in relation to other executives at Gray. In deciding whether or
not to grant an option to an individual and in determining the number of shares
subject to an option so granted, the Management Personnel Committee takes into
account subjective considerations, including the level of such executive's
position and the individual's contribution to Gray. Although the Management
Personnel Committee believes that its compensation structure is similar to that
of other comparable communications companies, it did not specifically compare
such structure with that of other companies in 1998.
Mr. Robinson's annual compensation was set by the Management Personnel
Committee at $200,000 per annum. In addition, he was awarded options for the
purchase of up to 10,000 shares of Gray class A common stock and 40,000 shares
of Gray class B common stock in recognition of Gray's overall performance,
record of increase in shareholder value, success in meeting strategic objectives
and the Chief Executive Officer's personal leadership and accomplishments.
Mr. Prather does not receive an annual salary as Executive Vice
President -- Acquisitions, however, in 1998 he was granted options to purchase
9,337 shares of Gray class A common stock and 41,000 shares of Gray class B
common stock in recognition of Gray's overall performance, success in meeting
strategic objectives and his leadership and accomplishments.
Submitted by Management Personnel Committee of the board of directors
Richard L. Boger, Chairman
William E. Mayher, III
Robert S. Prather, Jr.
Hugh Norton
J. Mack Robinson
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
J. Mack Robinson, President, Chief Executive Officer and a director of
Gray, is Chairman of the Board of Bull Run and the beneficial owner of
approximately 30.7% of the outstanding shares of common stock of Bull Run,
including certain shares as to which Mr. Robinson disclaims beneficial
ownership. Robert S. Prather, Jr., Executive Vice President-Acquisitions and a
director of Gray, is President, Chief Executive Officer and a
99
105
director of Bull Run corporation and the beneficial owner of approximately 13.3%
of the outstanding shares of Bull Run common stock, including certain shares as
to which Mr. Prather disclaims beneficial ownership. Bull Run is a principal
shareholder of Gray. Mr. Prather is also a member of the board of directors of
Capital and Host. Hilton H. Howell, Jr., a director of Gray, is Vice President,
Secretary and a director of Bull Run. See "Compensation Committee Interlocks and
Insider Participation" for a description of the business relationships between
Gray and Messrs. Prather and Robinson, Host, Capital and Bull Run.
PERFORMANCE GRAPH
The following graph compares the cumulative total return of Gray class A
common stock from December 1994 and Gray class B common stock from September
1996 (when the Gray class B common stock first became publicly traded) to
December 31, 1998 as compared to the stock market total return indexes for (1)
The New York Stock Exchange Market Index and (2) The New York Stock Exchange
Industry Index based upon the Television Broadcasting Stations Standard
Industrial Classification Code. In July 1995, the Gray class A common stock was
listed on The New York Stock Exchange.
The graph assumes the investment of $100 in the Gray class A common stock
and class B common stock in the New York Stock Exchange Market Index and the
NYSE Television Broadcasting Stations Index on December 31, 1993 and September
1996, respectively. Dividends are assumed to have been reinvested as paid.
COMPARISON OF CUMULATIVE TOTAL RETURN OF GRAY CLASS A COMMON STOCK, NYSE MARKET
INDEX AND SIC CODE INDEX
GRAY CLASS NYSE
MEASUREMENT PERIOD A COMMON SIC CODE MARKET
(FISCAL YEAR COVERED) STOCK INDEX INDEX
12/31/93 100.00 100.00 100.00
12/30/94 110.65 77.71 98.06
12/29/95 183.10 92.48 127.15
12/31/96 194.10 102.86 153.16
12/31/97 270.96 134.27 201.50
12/31/98 284.30 96.25 239.77
100
106
COMPARISON OF CUMULATIVE TOTAL RETURN OF GRAY CLASS B COMMON STOCK, NYSE MARKET
INDEX AND SIC CODE INDEX
GRAY CLASS NYSE
MEASUREMENT PERIOD B COMMON SIC CODE MARKET
(FISCAL YEAR COVERED) STOCK INDEX INDEX
9/25/96 100.00 100.00 100.00
12/31/96 87.29 97.87 106.91
12/31/97 132.74 127.75 140.66
12/31/98 106.16 91.58 167.37
101
107
PROPOSAL 3: AMENDMENT OF THE GRAY 1992 LONG TERM INCENTIVE PLAN
At the meeting, the Gray shareholders will be asked to approve the adoption
of an amendment to the 1992 Long Term Incentive Plan to provide that the
aggregate number of shares of Gray common stock subject to awards under the 1992
Long Term Incentive Plan be increased from 900,000 to 1,900,000. The board
approved the amendment to the Incentive Plan, subject to shareholder approval.
The following description of the Incentive Plan is a summary of the
material provisions of the Incentive Plan.
Types of Awards. The Incentive Plan provides for the granting of incentive
stock options, nonqualified stock options, restricted stock awards, stock
appreciation rights ("SARs") and performance awards (collectively, the "Awards")
to officers and key employees of Gray and its subsidiaries to purchase shares of
Gray class A common stock and class B common stock.
Purpose. The Incentive Plan is designed to encourage officers and key
employees to achieve goals, which are mutually beneficial to Gray and the
officer or employee, thereby strengthening their desire to remain with Gray,
while simultaneously providing an incentive to work for the success of Gray.
Administration. The Incentive Plan is administered by the Management
Personnel Committee which consists of persons appointed by Gray's board of
directors. Subject to any general guidelines established by the Gray board, the
determinations of the Management Personnel Committee are made in accordance with
their judgment as to the best interests of Gray and its shareholders.
Determinations, interpretations or other actions made or taken by the Management
Personnel Committee pursuant to the provisions of the Incentive Plan are final
and binding for all purposes and upon all participants.
Incentive Stock Options. The incentive stock options granted under the
Incentive Plan may not be exercised earlier than six months and not later than
10 years from the date of grant. The purchase price per share of Gray common
stock purchasable under any incentive stock option may not be less than 100% of
the fair market value of the shares on the date the option is granted. The
aggregate fair market value of the stock which an incentive stock option is
exercisable for the first time during any calendar year shall not exceed
$100,000.
Nonqualified Stock Options. The nonqualified stock options granted under
the Incentive Plan may not be exercised earlier than six months and not later
than 10 years from the date of grant. The purchase price per share of Gray
common stock purchasable under any nonqualified stock option is such price as is
fixed by the Management Personnel Committee. The Management Personnel Committee
has the right to determine at the time an option is granted whether shares
issued upon exercise of a nonqualified stock option will be subject to
restrictions, and if so, the nature of the restrictions.
Stock Appreciation Rights. Upon the exercise of an SAR, the holder thereof
will be entitled to receive the excess of the fair market value (calculated as
of the exercise date) of a specified number of shares over the exercise price of
the SAR. The exercise price (which may not be less than the fair market value of
the shares on the date of grant) and other terms of the SAR will be determined
by the Management Personal Committee. At the time of grant, the Management
Personnel Committee may establish a maximum amount per share which will be
payable upon exercise of an SAR. Payment by Gray upon
102
108
exercise of an SAR may be in cash or stock, or any combination thereof, as the
Management Personnel Committee determines. The following will apply upon the
exercise of a SAR:
- Exercise of SARs in Lieu of Exercise of Options. SARs exercisable in
lieu of any related stock option may be exercised for all or part of the
shares of stock for which its related option is then exercisable. Such
number of shares equal to the number of SARs exercised will no longer be
available for Awards under the Incentive Plan, provided that if SARs are
exercised for cash, shares of stock equal to the number of SARs exercised
will be restored to the number of shares available for issuance under the
Incentive Plan.
- Exercise of SARs in Conjunction with Exercise of Options. SARs
exercisable in conjunction with the exercise of stock options will be
deemed to have been exercised upon the exercise of the related stock
options, and shares of stock equal to the sum of the number of shares
acquired by exercise of the stock option plus the number of SARs
exercised will no longer be available for Awards under the Incentive
Plan, provided that if SARs are exercised for cash, shares of stock equal
to the number of SARs exercised will be restored to the number of shares
available for issuance under the Incentive Plan.
- Exercise of SARs Upon Lapse of Options. SARs exercisable upon lapse of
stock options will be deemed to have been exercised upon the lapse of the
related stock options as to the number of shares of stock subject to the
stock options. Shares of stock equal to the number of SARs deemed to have
been exercised will not be available again for Awards under the Incentive
Plan, provided that if SARs are exercised for cash, shares of stock equal
to the number of SARs exercised will be restored to the number of shares
available for issuance under the Incentive Plan.
- Exercise of SARs Independent of Options. SARs exercisable independent of
stock options may be exercised upon whatever terms and conditions the
Management Personnel Committee imposes upon the SARs, and shares of stock
equal to the number of SARs exercised will no longer be available for
Awards under the Incentive Plan, provided that if SARs are exercised for
cash, shares of stock equal to the number of SARs exercised will be
restored to the number of shares available for issuance under the
Incentive Plan.
Restricted Stock. Restricted stock consists of stock issued or transferred
under the Plan at any purchase price less than the fair market value thereof on
the date of issuance or transfer, or as a bonus. Restricted stock awards may not
be disposed of by the recipient until the restrictions established by the
Management Personnel Committee lapse, and in any event, such restricted stock
may not be disposed of for not less than six months following the date of grant.
Participants are entitled to all dividends paid with respect to restricted stock
during the period which the sale of such stock is restricted and will not be
required to return any such dividends to Gray in the event of the forfeiture of
the restricted stock.
Performance Awards. Performance awards consist of stock to be issued
without payment therefor, in the event that the performance goals established by
the Management Personnel Committee are achieved during the applicable
performance period. The goals established by the Management Personnel Committee
may include return on average total capital employed, earnings per share, return
on shareholders' equity and such other goals
103
109
as may be established by the Management Personnel Committee. Actual payment of
the award earned shall be in cash or in stock or in combination of both, in a
single sum or in periodic installments, as determined by the Management
Personnel Committee. If the award includes stock, such stock may not be disposed
of for six months from the date of issuance pursuant to such award. If the award
is paid in cash instead of stock, the number of shares reserved for issuance
under the Incentive Plan and in the form of restricted stock or performance
awards will be reduced by the number of shares issued.
Adjustments and Amendments of the 1992 Plan. Adjustments in the Incentive
Plan and in outstanding options will be made to reflect stock dividends,
recapitalizations and similar events. The board of directors has the right to
amend or terminate the Incentive Plan at any time; provided, however, that
unless first duly approved by the holders of Gray common stock entitled to vote
on such matter, no amendment or change may be made in the Incentive Plan: (1)
increasing the total number of shares that may be issued under the 1992 Plan or
increasing the amount of type of awards that may be granted under the Incentive
Plan; (2) changing the minimum purchase price of shares of common stock which
may be made subject to awards under the Incentive Plan; or (3) changing the
eligibility requirements.
The Incentive Plan is not subject to any of the requirements of the
Employee Retirement Income Security Act of 1974, as amended. The Incentive Plan
is not, nor is it intended to be, qualified under Section 401(a) of the Internal
Revenue Code.
Change in Control. The Incentive Plan provides that in the event of a
change of control outstanding awards shall become immediately and fully
exercisable or payable according to the following terms:
- Any outstanding and unexercised option shall become immediately and fully
exercisable, and shall remain exercisable until it would otherwise expire
by reason of lapse of time.
- For six months and seven days following a change in control a holder of
an option, unless provided otherwise at the time of grant, shall have the
option to receive in cash an amount equal to the amount by which the
highest reported price per share of stock, on the date of exercise, shall
exceed the base price per share of stock under the option multiplied by
the number of shares granted under the option for which this right has
been exercised;
- Any outstanding and unexercised SARs shall become exercisable as follows:
(1) SARs exercisable in lieu of any related stock option or in conjunction
with the exercise of stock options may be exercised for all or part of
the shares of stock for which its related option is then exercisable
in the same manner as prior to the change in control;
(2) SARs exercisable independent of stock options shall be deemed to have
been exercised if and when the participant advises the Management
Personnel Committee in writing that he or she elects to have options
with respect to which the SAR was granted treated as lapsed and shall
have been held for six months prior to exercise; and
(3) SARs exercisable independent of stock options shall be exercisable
immediately, without regard to limitations imposed in the Incentive
Plan.
104
110
- Any restricted stock shall become immediately and fully transferable. The
Management Personnel Committee shall have been deemed to have waived any
automatic forfeitures.
- Any performance award which has not expired shall be deemed to have been
earned on the assumption that all performance goals have been achieved.
- A "change in control" means a change in control of Gray of a nature that
would be required to be reported on Schedule 14A under the Securities
Exchange Act. A change of control is deemed to have occurred if (1) any
person becomes the beneficial owner of 20 percent or more of the combined
voting power of Gray's then outstanding shares; (2) during any period of
two consecutive years individuals who at the beginning of such period
constitute the board cease for any reason to constitute at least a
majority thereof, unless the election of such new directors was approved
by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period; (3) there is
consummated any consolidation or acquisition in which Gray is not the
continuing or surviving corporation or pursuant to which shares of Gray
common stock are converted into cash, securities, or other property; (4)
there is consummated any consolidation or acquisition of Gray in which
Gray is the continuing corporation in which the holders of Gray common
stock immediately prior to the acquisition do not own 70 percent or more
of the stock of the surviving corporation immediately after the
acquisition; (5) there is consummated any sale, lease, exchange, or other
transfer of substantially all of Gray's assets; or (6) the shareholders
of Gray approve any plan or proposal for the liquidation or dissolution
of Gray.
Non-Assignability of Plan Awards. No Incentive Plan Award may be assigned
or transferred by the recipient, except by will or by the laws of descent and
distribution, or pursuant to a Qualified Domestic Relations Order, and are
exercisable, during the participant's lifetime, only by the participant.
Certain Federal Income Tax Consequences. The following discussion is
designed to provide a summary of the material tax consequences with respect to
Awards granted under the Incentive Plan as of the date of this proxy statement.
In addition to the tax consequences described below, (1) officers and directors
of Gray subject to Section 16(b) of the Securities Exchange Act of 1934, may be
subject to special rules regarding the income tax consequences concerning their
incentive stock options; nonqualified stock options and restricted shares and
(2) any entitlement to a tax deduction on the part of Gray is subject to the
applicable Federal tax rules, including, those relating to the $1 million
limitation on deductible compensation.
Incentive Stock Options. Certain options granted or that may be granted
under the Incentive Plan will be incentive stock options as defined in the
Internal Revenue Code, provided that such options satisfy the requirements under
the Internal Revenue Code applicable to incentive stock options. In general,
neither the grant nor the exercise of an incentive stock option will result in
taxable income to the optionee or a deduction to Gray. The sale of Gray common
stock received upon the exercise of an option which satisfies all the
requirements of an incentive stock option, as well as the holding period
requirement described below, will result in a long-term capital gain or loss to
the optionee equal to the difference between the amount realized on the sale and
the option price and will not result in a tax deduction to Gray. The exercise of
an incentive stock option may have implications in the computation of the
optionee's alternative minimum tax. To receive
105
111
capital gain or loss treatment upon the disposition of Gray common stock
acquired through exercise of an incentive stock option, the optionee must not
dispose of the Gray common stock purchased pursuant to the exercise of an
incentive stock option within two years after the option is granted and must
hold such Gray common stock for at least one year after the transfer of such
Gray common stock to the optionee.
If all requirements for incentive stock option treatment other than the
holding period rules are satisfied, the recognition of income by the optionee is
deferred until disposition of the Gray common stock, but, in general, any gain
in an amount equal to the lesser of (1) the fair market value of the Gray common
stock on the date of exercise minus the option price or (2) the amount realized
on the disposition minus the option price is treated as ordinary income. Any
remaining gain is treated as long-term or short-term capital gain depending on
the optionee's holding period for the stock that has been sold. Gray will
generally be entitled to a deduction at that time equal to the amount of
ordinary income realized by the optionee.
The Incentive Plan provides that an optionee may pay for Gray common stock
received upon the exercise of an option (including an incentive stock option)
with other shares of Gray common stock. In general, an optionee's transfer of
stock acquired pursuant to the exercise of an incentive stock option to acquire
other stock in connection with the exercise of an incentive stock option may
result in ordinary income if the transferred stock has not met the minimum
statutory holding period necessary for favorable tax treatment as an incentive
stock option. For example, if an optionee exercises an incentive stock option
and uses the stock so acquired to exercise another incentive stock option within
the two-year or one-year holding periods discussed above, the optionee may
realize ordinary income under the rules summarized above.
Nonqualified Stock Options. An optionee will realize no taxable income
upon the grant of a non-qualified stock option and Gray will not receive a
deduction at the time of such grant unless the option has a readily
ascertainable fair market value (as determined under applicable tax law) at the
time of grant. Upon exercise of a non-qualified stock option, the optionee
generally will realize ordinary income in an amount equal to the excess of the
fair market value of the Gray common stock on the date of exercise over the
exercise price. Upon a subsequent sale of the Gray common stock by the optionee,
the optionee will recognize short-term or long-term capital gain or loss
depending upon his or her holding period for the Gray common stock. Gray will
generally be allowed a deduction equal to the amount recognized by the optionee
as ordinary income.
SARs. Generally, no Federal income tax consequences are incurred by Gray
or the holder at the time an SAR is granted pursuant to the Incentive Plan.
However, upon the exercise of an SAR, the holder will generally realize ordinary
income for Federal income tax purposes equal to the amount of cash or the value
of property received by him or her. Gray generally will be entitled at such time
to a deduction for Federal income tax purposes in the same amount realized as
ordinary income. If a holder of an SAR receives Gray common stock upon the
exercise of such right and subsequently disposes of such Gray common stock, any
gain or loss realized upon the sale will be either long-term or short-term
capital gain or loss, depending on the holder's holding period for the Gray
common stock that has been sold.
Restricted Stock Awards. The Federal income tax consequences of a
restricted stock award granted under the Incentive Plan will depend, in large
measure, on the restrictions placed on the stock.
106
112
In general, if the stock is "not transferable" and subject to a
"substantial risk of forfeiture," as described above, then, unless the recipient
makes an 83(b) election, he or she will recognize ordinary income equal to the
fair market value of the stock in the year the stock is either transferable or
not subject to a substantial risk of forfeiture over the price, if any, paid for
the stock. If the recipient makes an 83(b) election, he or she will recognize
ordinary income equal to the fair market value of the stock at the time of the
award over the price, if any, paid for the stock. Any gain or loss on a
subsequent sale of the stock will be his or her long-or short-term capital gain
or loss depending on the recipient's holding period for the stock. Gray will
generally be entitled to a deduction equal to the amount of ordinary income
recognized by the recipient.
VOTE REQUIRED AND BOARD RECOMMENDATION
Approval of the amendment to the Incentive Plan requires the affirmative
vote of the holders of a majority of votes represented by the shares of Gray
class A common stock and class B common stock, voting together as a single
class, present in person or represented by proxy at the Gray meeting and
entitled to vote on the proposal. The board recommends that shareholders of Gray
vote their shares "FOR" approval of the amendment to the Incentive Plan.
107
113
PROPOSAL 4: CONFIRMATION OF APPOINTMENT OF AUDITORS
The Gray board of directors recommends that the shareholders confirm the
appointment of Ernst & Young LLP to audit the books and accounts of Gray for the
year ending December 31, 1999.
Representatives of Ernst & Young LLP are expected to be available at the
meeting to respond to appropriate questions and will be given the opportunity to
make a statement if they so desire.
EXPERTS
The consolidated financial statements of Gray at December 31, 1997 and
1998, and for each of the three years in the period ended December 31, 1998,
incorporated by reference in this proxy statement/prospectus have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
incorporated by reference, and are so incorporated by reference in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
The financial statements of each of KWTX and Brazos at December 31, 1998,
and for the year ended December 31, 1998, included in this proxy
statement/prospectus have been audited by Pattillo, Brown & Hill LLP,
independent auditors, as set forth in their reports appearing elsewhere in this
proxy statement/prospectus, and are included in reliance upon such reports given
on the authority of such firm as experts in accounting and auditing.
The financial statements of KXII at December 31, 1998, and for the year
ended December 31, 1998, included in this proxy statement/prospectus have been
audited by Jaynes, Reitmeier, Boyd & Therrell PC, independent auditors, as set
forth in their report appearing elsewhere in this proxy statement/prospectus,
and are included in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the shares of Gray class B common stock to be issued in
connection with the acquisitions have been passed upon for Gray by Heyman &
Sizemore, Atlanta, Georgia.
SHAREHOLDER PROPOSALS
If a Gray shareholder notifies Gray after July 9, 2000 of an intent to
present a proposal at Gray's 2000 Annual Meeting, Gray will have the right to
exercise its discretionary voting authority with respect to such proposal, if
presented at the meeting, without including information regarding such proposal
in its proxy materials. Shareholder proposals to be presented at the 2000 Annual
Meeting must be received by Gray on or before December 15, 1999 for inclusion in
the proxy statement and proxy card relating to that meeting. Such proposals must
also meet the other requirements of the rules of the Securities and Exchange
Commission relating to shareholders' proposals.
108
114
WHERE TO FIND ADDITIONAL INFORMATION
Gray files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. Shareholders may read and copy this information
at the following locations of the Securities and Exchange Commission:
Securities and Exchange Commission Securities and Exchange Commission Securities and Exchange Commission
Judiciary Plaza, Room 1024 Seven World Trade Center, Citicorp Center
450 Fifth Street, N.W. Suite 1300 500 West Madison Street,
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661
Shareholders can also obtain copies of this information by mail from the
Public Reference Section of the Securities and Exchange Commission, 450 Fifth
Street, N.W., Room 10024, Washington D.C. 20549, at prescribed rates.
The Securities and Exchange Commission also maintains an Internet world
wide web site that contains reports, proxy statements and other information
about issuers, like Gray, who file electronically with the Securities and
Exchange Commission. The address of that site is http://www.sec.gov.
Gray has filed with the Securities and Exchange Commission a registration
statement on Form S-4 that registers the shares of Gray class B common stock to
be issued in exchange for shares of KWTX and Brazos stock upon completion of the
acquisitions. That registration statement, including the attached exhibits and
schedules, contains additional relevant information about Gray, and the Gray
class B common stock. The rules and regulations of the Securities and Exchange
Commission allow Gray to omit certain information included in the registration
statement from this proxy statement/prospectus.
Shareholders can obtain any of the documents incorporated by reference in
this document and copies of the Amended and Restated Gray 1992 Long Term
Incentive Plan through Gray without charge, excluding any exhibits to those
documents unless the exhibit is specifically incorporated by reference as an
exhibit to this proxy statement/prospectus. Documents incorporated by reference
in this proxy statement/prospectus can be obtained by requesting them in writing
or by telephone from Gray at the following address:
Gray Communications Systems, Inc.
126 North Washington St.
P.O. Box 48
Albany, Georgia 31702-0048
(912) 888-9378
Attention: Investor Relations
Shareholders requesting documents should do so by September 13, 1999 to
receive them before the Gray shareholders' meeting.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission allows Gray to "incorporate by
reference" information into this proxy statement/prospectus. This means that
Gray can disclose important information by referring to another document filed
separately with the Securities and Exchange Commission. The information
incorporated by reference is considered to be
109
115
part of this proxy statement/prospectus, except for any information that is
superseded by information that is included directly in this document.
This proxy statement/prospectus incorporates by reference the documents
listed below that Gray has previously filed with the Securities and Exchange
Commission and that are not included in or delivered with this document. They
contain important information about Gray and its financial condition.
FILINGS PERIOD
- ------- ------
Annual Report on Form 10-K...................... Year ended December 31, 1998
Quarterly Report on Form 10-Q................... Quarter ended March 31, 1999
Quarterly Report on Form 10-Q................... Quarter ended June 30, 1999
The description of Gray class A common stock and
class B common stock set forth in Gray's Forms
8-A filed with the Securities and Exchange
Commission
Gray incorporates by reference additional documents that it may file with
the Securities and Exchange Commission between the date of this proxy
statement/prospectus and the date of the Gray shareholders meeting. These
documents include periodic reports, such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy
statements.
GRAY HAS NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ABOUT THE PROPOSED ACQUISITIONS OR GRAY THAT IS DIFFERENT FROM,
OR IN ADDITION TO, THAT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS OR IN ANY
OF THE MATERIALS THAT GRAY HAS INCORPORATED BY REFERENCE INTO THIS PROXY
STATEMENT/PROSPECTUS. THEREFORE, IF ANYONE DOES PROVIDE INFORMATION OF THIS
SORT, IT SHOULD NOT BE RELIED ON. IF A PERSON IS IN A JURISDICTION WHERE OFFERS
TO EXCHANGE OR SELL, OR SOLICITATIONS OF OFFERS TO EXCHANGE OR PURCHASE, THE
SECURITIES OFFERED BY THIS DOCUMENT OR THE SOLICITATION OF PROXIES IS UNLAWFUL,
OR IF IT IS UNLAWFUL TO DIRECT THESE TYPES OF ACTIVITIES, THEN THE OFFER
PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS DOES NOT EXTEND TO THAT PERSON. THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS SPEAKS ONLY AS OF THE
DATE OF THIS PROXY STATEMENT/PROSPECTUS, UNLESS THE INFORMATION SPECIFICALLY
INDICATES THAT ANOTHER DATE APPLIES.
FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements. These
statements relate to future events or the future financial performance of Gray.
In some cases, forward-looking statements can be identified by terminology such
as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
and other comparable terminology. These statements only reflect management's
expectations and estimates. Actual events or results may differ materially. In
evaluating these statements, shareholders should specifically consider various
factors, including the risks outlined under "Risk Factors." These factors may
cause Gray's actual results to differ materially from any forward-looking
statements. Gray is not undertaking any obligations to update any
forward-looking statements contained in this proxy statement/prospectus to
reflect any future events or developments.
110
116
INDEX TO FINANCIAL STATEMENTS
PAGE
----
KWTX BROADCASTING COMPANY ("KWTX")
Interim Condensed Financial Statements (unaudited):
Balance Sheets at June 30, 1999 and 1998.................. F-3
Statements of Income for the six months ended June 30,
1999 and 1998.......................................... F-4
Statements of Retained Earnings for the six months ended
June 30, 1999 and 1998................................. F-5
Statements of Cash Flows for the six months ended June 30,
1999 and 1998.......................................... F-6
Notes to Condensed Financial Statements................... F-7
Audited Financial Statements (unaudited for 1997 and 1996):
Independent Auditors' Report.............................. F-9
Balance Sheets at December 31, 1998, 1997 and 1996........ F-10
Statements of Income for the years ended December 31,
1998, 1997 and 1996.................................... F-11
Statements of Retained Earnings for the years ended
December 31, 1998, 1997 and 1996....................... F-12
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................... F-13
Notes to Financial Statements............................. F-14
BRAZOS BROADCASTING CO. ("BRAZOS")
Interim Condensed Financial Statements (unaudited):
Balance Sheets at June 30, 1999 and 1998.................. F-20
Statements of Income for the six months ended June 30,
1999 and 1998.......................................... F-21
Statements of Retained Earnings for the six months ended
June 30, 1999 and 1998................................. F-22
Statements of Cash Flows for the six months ended June 30,
1999 and 1998.......................................... F-23
Notes to Condensed Financial Statements................... F-24
Audited Financial Statements (unaudited for 1997 and 1996):
Independent Auditors' Report.............................. F-25
Balance Sheets at December 31, 1998, 1997 and 1996........ F-26
Statements of Income for the years ended December 31,
1998, 1997 and 1996.................................... F-27
Statements of Retained Earnings for the years ended
December 31, 1998, 1997 and 1996....................... F-28
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................... F-29
Notes to Financial Statements............................. F-30
KXII BROADCASTERS, INC. AND KXII TELEVISION, LTD. ("KXII")
Interim Condensed Combined Financial Statements (unaudited):
Condensed Combined Balance Sheets at June 30, 1999 and
1998................................................... F-35
Condensed Combined Statements of Income and Stockholders'
and Partners' Equity for the six months ended June 30,
1999 and 1998.......................................... F-36
Condensed Combined Statements of Cash Flow for the six
months ended June 30, 1999 and 1998.................... F-37
Notes to Condensed Combined Financial Statements.......... F-38
F-1
117
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
PAGE
----
Audited Combined Financial Statements (audited for 1998 and
unaudited for 1997 and 1996):
Independent Auditors' Report.............................. F-40
Combined Balance Sheets at December 31, 1998, 1997 and
1996................................................... F-41
Combined Statements of Income and Stockholders' and
Partners' Equity for the years ended December 31, 1998,
1997 and 1996.......................................... F-42
Combined Statements of Cash Flow for the years ended
December 31, 1998, 1997 and 1996....................... F-43
Notes to Combined Financial Statements.................... F-44
F-2
118
KWTX BROADCASTING COMPANY
BALANCE SHEETS
JUNE 30, 1999 AND 1998
1999 1998
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash, including interest bearing accounts................. $ 902,668 $ 234,176
Investments............................................... 5,117,224 5,389,480
Accrued interest receivable............................... 47,198 59,243
Accounts receivable:
Trade................................................... 1,466,892 1,583,163
Network................................................. 116,498 119,000
Affiliated companies.................................... 29,647 53,295
Program broadcast rights -- current....................... 80,836 64,503
Federal income tax receivable............................. -- --
Prepaid expenses.......................................... 274,924 196,678
----------- -----------
Total Current Assets............................ 8,035,887 7,699,538
----------- -----------
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES AT COSTS....... 4,470,404 4,278,341
----------- -----------
PROPERTY AND EQUIPMENT, AT COST --
NET OF ACCUMULATED DEPRECIATION......................... 5,187,241 4,780,355
PROGRAM BROADCAST RIGHTS -- NONCURRENT.................... 43,776 124,612
OTHER ASSETS:
Cash surrender value of insurance on life of officer.... 81,138 78,767
Due from employees...................................... 34,339 39,500
Deferred charges........................................ 30,572 43,542
Deposits and other assets............................... 72,743 225,028
----------- -----------
Total Other Assets.............................. 218,792 386,837
----------- -----------
Total Assets.................................... $17,956,100 $17,269,683
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade................................................... $ 297,803 $ 172,942
Accrued salaries and wages................................ 115,637 103,595
Accrued management bonus.................................. 270,763 236,703
Program broadcast obligations -- current.................. 19,883 91,554
Federal income tax payable................................ 10,238 242,582
Other liabilities......................................... -- 21,842
----------- -----------
Total Current Liabilities....................... 714,324 869,218
----------- -----------
LONG-TERM LIABILITIES:
Program broadcast obligations -- noncurrent............... 16,829 36,712
Deferred federal income tax payable....................... 639,354 641,257
----------- -----------
Total Long-term Liabilities..................... 656,183 677,969
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, stated value $130.50, 1,550 shares
authorized, issued and outstanding................... 202,269 202,269
Paid-in capital......................................... 10,173 10,173
Retained earnings....................................... 16,373,151 15,510,054
----------- -----------
Total Stockholders' Equity...................... 16,585,593 15,722,496
----------- -----------
Total Liabilities and Stockholders' Equity...... $17,956,100 $17,269,683
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
119
KWTX BROADCASTING COMPANY
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
---------- ----------
(UNAUDITED)
REVENUE................................................. $5,325,177 $4,928,754
Less agency and representatives' commissions.......... 686,060 638,861
---------- ----------
Net Revenue................................... 4,639,117 4,289,893
---------- ----------
COSTS AND EXPENSES:
Technical expenses.................................... 293,554 288,245
Production expenses................................... 674,878 251,941
News expenses......................................... 238,940 654,169
Program expenses...................................... 211,622 187,580
Sales expenses........................................ 401,998 329,310
Management Bonus...................................... 270,763 236,703
General and administrative expenses................... 688,436 752,613
Depreciation expense.................................. 336,301 287,812
---------- ----------
Total Costs and Expenses...................... 3,116,492 2,988,373
---------- ----------
Earnings from operations................................ 1,522,625 1,301,520
OTHER INCOME:
Other income.......................................... 11,700 39,793
Investment in subsidiary income....................... 422,338 488,523
Interest income....................................... 153,278 148,162
---------- ----------
Total Other Income............................ 587,316 676,478
---------- ----------
Earnings before income tax
expense............................................... 2,109,941 1,977,998
Income tax expense...................................... 652,410 542,821
---------- ----------
Net earnings.................................. $1,457,531 $1,435,177
========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
120
KWTX BROADCASTING COMPANY
STATEMENTS OF RETAINED EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
----------- -----------
(UNAUDITED)
Balance at beginning of year.......................... $17,085,620 $15,314,877
Add net earnings.................................... 1,457,531 1,435,177
----------- -----------
18,543,151 16,750,054
Less dividends paid................................. (2,170,000) (1,240,000)
----------- -----------
Balance at end of year................................ $16,373,151 $15,510,054
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
121
KWTX BROADCASTING COMPANY
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 1,457,531 $ 1,435,177
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 336,301 287,812
(Gain) Loss on disposal of equipment................ 567 (1,818)
Income tax deferred................................. (73,175) 19,832
Changes in operating assets and liabilities:
Accounts receivable.............................. 169,120 62,314
Network receivable............................... (1,110) (1,976)
Intercompany receivable.......................... (27,268) (53,295)
Due from employees............................... 6,183 5,247
Prepaid expenses................................. (19,672) 73,848
Accrued interest................................. 11,807 (16,117)
Program broadcast rights......................... 96,927 55,411
Other assets..................................... (20,917) (215,509)
Accounts payable................................. (188,006) (366,777)
Accrued liabilities.............................. (283,219) (368,750)
Income tax payable............................... 10,238 309,377
Intercompany payable............................. -- (12,328)
Program broadcast obligations.................... (111,630) (79,493)
Investment in subsidiary......................... 327,663 11,477
Other liabilities................................ (4,762) 18,828
----------- -----------
Net cash provided by operating activities... 1,686,578 1,163,260
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Net purchase of short-term investments................ (1,865,581) (20,623)
Purchase of equipment................................. (414,458) (528,628)
Proceeds from sale of equipment....................... -- 1,200
Purchase of held-to-maturity securities............... (308,317) (801,633)
Sale of held-to maturity securities................... 2,480,000 400,000
----------- -----------
Net cash used in investing activities....... (108,356) (949,684)
----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payment of dividends.................................. (2,170,000) (1,240,000)
----------- -----------
Net decrease in cash.................................. (591,778) (1,026,424)
Cash at beginning of year............................. 1,494,446 1,260,600
----------- -----------
Cash at end of year................................... $ 902,668 $ 234,176
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid..................................... $ 574,320 $ 168,630
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
122
KWTX BROADCASTING COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1. GENERAL
The accompanying unaudited condensed financial statements of KWTX
Broadcasting Company (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. These
condensed financial statements should be read in conjunction with the financial
statements of the Company for the year ended December 31, 1998. Results of
operations for the period ended June 30, 1999 are not necessarily indicative of
results to be expected for the fiscal year ended December 31, 1999.
2. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The Company's investment in Brazos Broadcasting Co. (50% owned) is
accounted for using the equity method of accounting for investments. This method
requires that the investment is recorded at the proportionate percentage of
stockholders' equity of the subsidiary and adjusted each period for the
proportionate percentage of net income of the subsidiary. Dividends received are
treated as a reduction in the basis of the Company's investment in the year
received.
The Company received dividends from Brazos Broadcasting Co. of $750,000 and
$500,000 for the six months ended June 30, 1999 and 1998, respectively.
Pertinent financial information for Brazos Broadcasting Co. for the six
months ended June 30, 1999 and 1998 is as follows:
1999 1998
---------- ----------
BALANCE SHEET:
Assets
Current assets........................................ $7,694,314 $7,273,461
Property and equipment................................ 1,921,155 2,143,081
Program broadcast -- noncurrent....................... 41,080 118,938
Other assets.......................................... 78,148 7,045
---------- ----------
Total assets.................................. $9,734,697 $9,542,525
========== ==========
Liabilities and equity
Current liabilities................................... $ 497,407 $ 672,615
Long-term liabilities................................. 296,482 313,229
Stockholders equity................................... 8,940,808 8,556,681
---------- ----------
Total liabilities and equity.................. $9,734,697 $9,542,525
========== ==========
F-7
123
KWTX BROADCASTING COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 -- (CONTINUED)
1999 1998
---------- ----------
INCOME STATEMENT:
Revenue................................................. $4,639,117 $4,289,893
Costs and expenses...................................... 3,116,492 2,988,373
Other income............................................ 587,316 676,478
Federal income tax...................................... 652,410 542,821
---------- ----------
Net income.................................... 1,457,531 1,435,177
Company's ownership interest............................ 50% 50%
---------- ----------
Company's share of net income........................... $ 728,766 $ 717,589
========== ==========
3. OTHER TRANSACTIONS WITH RELATED PARTIES
The Company has deposits with a bank of which two majority shareholders of
the bank are related to two minority stockholders of the Company. As of June 30,
1999 and 1998, deposits with this bank were $5,711,313 and $1,306,448,
respectively, and interest earned on these deposits was $82,612 and $40,122 for
the six months ended June 30, 1999 and 1998, respectively.
As of June 30, 1999 and 1998, the Company had a receivable from Brazos
Broadcasting Co. of $26,773 and $51,406, respectively. Each station is
responsible for its own costs and expenses. Expenses incurred on behalf of an
affiliated station are charged to such station based upon its direct usage.
4. PENDING TRANSACTION
On April 13, 1999, the Company entered into an agreement and plan of merger
with Gray Communications Systems, Inc. ("Gray") which provides for the
acquisition of the Company by Gray. This agreement provides that the Company's
stockholders will receive a combination of cash and Gray class B common stock
aggregating $74,680,000, plus additional consideration for certain net working
capital of the Company. Consummation of the transaction is conditioned upon,
among other things, the requisite approvals of the Federal Communications
Commission and the stockholders of the Company and Gray.
F-8
124
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
KWTX Broadcasting Company
Waco, Texas
We have audited the accompanying balance sheet of KWTX Broadcasting Company
as of December 31, 1998, and the related statement of income, retained earnings,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of KWTX Broadcasting Company as
of December 31, 1998, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
We have compiled the accompanying balance sheets of KWTX Broadcasting
Company as of December 31, 1997 and 1996, and the related statements of income,
retained earnings, and cash flows for the years then ended, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. These financial statements
were compiled by us from financial statements for the same period, that we
previously compiled, on an income tax basis, as indicated in our reports dated
February 20, 1998 and February 26, 1997, respectively.
A compilation is limited to presenting, in the form of financial
statements, information that is the representation of management. We have not
audited or reviewed these accompanying financial statements and, accordingly, do
not express an opinion or any other form of assurance on them.
As more fully discussed in Note 10, the Company has approved a merger
agreement that provides for the acquisition of the Company, subject to a number
of conditions, including the approval of Federal Communications Commission.
PATTILLO, BROWN & HILL, L.L.P.
March 24, 1999,
except for Note 10 which
is as of April 13, 1999
F-9
125
KWTX BROADCASTING COMPANY
BALANCE SHEETS
DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(AUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash, including interest bearing accounts......... $ 1,494,446 $ 1,260,600 $ 1,314,182
Investments....................................... 5,423,326 4,967,224 8,664,239
Accrued interest receivable....................... 59,005 43,126 96,483
Accounts receivable
Trade........................................... 1,531,131 1,645,477 1,406,829
Network......................................... 115,388 117,024 147,827
Affiliated companies............................ 2,379 -- 26,749
Program broadcast rights -- current............... 187,929 146,312 --
Federal income tax receivable..................... 104,881 66,795 145,623
Prepaid expenses.................................. 255,252 270,526 138,416
----------- ----------- -----------
Total Current Assets..................... 9,173,737 8,517,084 11,940,348
----------- ----------- -----------
Investments in unconsolidated subsidiaries at
costs........................................... 4,798,067 4,289,818 3,640,161
----------- ----------- -----------
Property and equipment, at cost -- net of
accumulated depreciation........................ 5,109,650 4,538,921 4,130,961
Program broadcast rights -- noncurrent............ 33,610 98,214 126,164
OTHER ASSETS:
Cash surrender value of insurance on life of
officer......................................... 81,138 78,767 76,396
Due from employees................................ 40,522 44,747 3,675
Deferred charges.................................. 39,406 42,569 39,937
Deposits and other assets......................... 42,992 10,492 10,493
----------- ----------- -----------
Total Other Assets....................... 204,058 176,575 130,501
----------- ----------- -----------
Total Assets............................. $19,319,122 $17,620,612 $19,968,135
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade........................................... $ 485,809 $ 539,719 $ 214,809
Affiliated companies............................ -- 12,328 --
Accrued salaries and wages........................ 121,070 257,862 248,659
Accrued management bonus.......................... 548,548 451,186 491,087
Program broadcast obligations -- current.......... 125,881 182,735 190,808
Federal income tax payable........................ -- -- 1,134,839
Other liabilities................................. 4,762 3,014 5,128
----------- ----------- -----------
Total Current Liabilities................ 1,286,070 1,446,844 2,285,330
----------- ----------- -----------
LONG-TERM LIABILITIES:
Program broadcast obligations -- noncurrent....... 22,461 25,024 106,743
Deferred federal income tax payable............... 712,529 621,425 518,686
----------- ----------- -----------
Total Long-term Liabilities.............. 734,990 646,449 625,429
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, stated value $130.50, 1,550 shares
authorized, issued and outstanding.............. 202,269 202,269 202,269
Paid-in capital................................... 10,173 10,173 10,173
Retained earnings................................. 17,085,620 15,314,877 16,844,934
----------- ----------- -----------
Total Stockholders' Equity............... 17,298,062 15,527,319 17,057,376
----------- ----------- -----------
Total Liabilities and Stockholders'
Equity................................. $19,319,122 $17,620,612 $19,968,135
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-10
126
KWTX BROADCASTING COMPANY
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(AUDITED) (UNAUDITED)
REVENUE....................................... $10,578,028 $10,048,780 $10,871,564
Less agency and representatives'
commissions................................. (1,356,171) (1,253,094) (1,281,409)
----------- ----------- -----------
Net Revenue................................... 9,221,857 8,795,686 9,590,155
----------- ----------- -----------
COSTS AND EXPENSES:
Technical expenses............................ 616,727 609,089 550,847
Production expenses........................... 522,386 480,416 439,138
News expenses................................. 1,359,894 1,336,021 1,296,110
Program expenses.............................. 415,211 380,777 725,820
Sales expenses................................ 715,757 708,405 914,352
Management bonus.............................. 548,548 451,186 491,087
General and administrative expenses........... 1,328,664 1,583,749 1,842,475
Depreciation expense.......................... 607,127 494,915 553,047
----------- ----------- -----------
Total Costs and Expenses............ 6,114,314 6,044,558 6,812,876
----------- ----------- -----------
Earnings from operations...................... 3,107,543 2,751,128 2,777,279
OTHER INCOME:
Other income.................................. 253,849 77,229 102,600
Investment in subsidiary income............... 1,008,249 899,657 783,854
Interest income............................... 339,447 303,767 309,381
----------- ----------- -----------
Total Other Income.................. 1,601,545 1,280,653 1,195,835
----------- ----------- -----------
Earnings before income tax expense............ 4,709,088 4,031,781 3,973,114
Income tax expense............................ (1,388,345) (1,305,187) (1,204,836)
----------- ----------- -----------
Net earnings before discontinued operations... 3,320,743 2,726,594 2,768,278
Discontinued operations-gain on disposal of
radio stations, less applicable income taxes
of $1,232,351............................... -- -- 2,392,211
----------- ----------- -----------
Net earnings........................ $ 3,320,743 $ 2,726,594 $ 5,160,489
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-11
127
KWTX BROADCASTING COMPANY
STATEMENTS OF RETAINED EARNINGS
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(AUDITED) (UNAUDITED)
Balance at beginning of year.............. $15,314,877 $16,844,934 $12,304,445
Add net earnings........................ 3,320,743 2,726,594 5,160,489
----------- ----------- -----------
18,635,620 19,571,528 17,464,934
Less dividends paid..................... (1,550,000) (4,256,651) (620,000)
----------- ----------- -----------
Balance at end of year.................... $17,085,620 $15,314,877 $16,844,934
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-12
128
KWTX BROADCASTING COMPANY
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(AUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $3,320,743 $2,726,594 $5,160,489
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................. 607,127 494,915 553,047
Gain on sale of equipment.................... (206,830) (1,179) (16,295)
Barter acquisition of equipment.............. -- -- (38,898)
Income tax deferred.......................... 91,104 102,738 22,682
Changes in operating assets and liabilities:
Accounts receivable........................ 113,606 (181,096) (107,903)
Income tax receivable...................... (38,086) (66,795) --
Due from employees......................... 4,225 (41,072) 77
Prepaid expenses........................... 15,274 (132,110) 88,584
Accrued interest........................... (15,879) 53,357 (52,365)
Program broadcast rights................... 22,987 (108,552) 109,895
Other assets............................... (31,708) (5,003) (15,347)
Accounts payable........................... (66,238) 337,238 (92,692)
Accrued liabilities........................ (39,430) (30,698) 88,761
Income tax payable......................... -- (1,134,839) 1,125,538
Program broadcast obligations.............. (59,417) 46,020 (109,596)
Investment in subsidiary................... (508,249) (649,657) (496,354)
Other liabilities.......................... 1,748 (2,114) (906)
---------- ---------- ----------
Net cash provided by operating
activities...................... 3,210,977 1,407,747 6,218,717
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of short-term investments....... (1,893,859) 3,743,212 (4,232,337)
Purchase of equipment........................ (1,300,441) (910,694) (369,246)
Proceeds from sale of equipment.............. 329,413 9,000 178,515
Purchase of held-to-maturity securities...... (800,000) (3,915,000) (2,185,000)
Sale of held-to maturity securities.......... 2,237,756 3,868,804 1,747,755
---------- ---------- ----------
Net cash provided by (used in)
investing activities............ (1,427,131) 2,795,322 (4,860,313)
---------- ---------- ----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payment of dividends......................... (1,550,000) (4,256,651) (620,000)
---------- ---------- ----------
Net increase (decrease) in cash.............. 233,846 (53,582) 738,404
Cash at beginning of year.................... 1,260,600 1,314,182 575,778
---------- ---------- ----------
Cash at end of year.......................... $1,494,446 $1,260,600 $1,314,182
========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid............................ $1,248,680 $2,139,839 $1,198,037
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-13
129
KWTX BROADCASTING COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED FOR 1997 AND 1996)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
KWTX Broadcasting Company (the "Company") owns and operates television
station KWTX in Waco, Texas. The Company also is a 50% owner in Brazos
Broadcasting Co., which owns and operates television station KBTX located in
Bryan, Texas.
REVENUE RECOGNITION
The Company's policy is to recognize revenue as services are performed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH
Cash includes cash on hand and cash in checking and money market accounts
which approximates fair market value.
INVESTMENTS
The Company invests in treasury bills, treasury notes and certificates of
deposit. These investments are held to maturity and are recorded at amortized
cost, where appropriate.
PROGRAM BROADCAST RIGHTS
Rights to programs available for broadcast under program license agreements
are initially recorded at the beginning of the license period for the amounts of
total license fees payable under the license agreements and are charged to
operating expense on the basis of total programs available for use compared to
the total number of programs run during the period. The portion of the
unamortized balance expected to be charged to operating expense in succeeding
periods is classified as a current asset, with the remainder classified as a
noncurrent asset. The liability for the license fees payable under the program
license agreement is classified as current or long-term, in accordance with the
payment terms of the various license agreements. The capitalized costs of the
rights are recorded at the lower of unamortized costs or net realizable value.
All payments made on programs not yet available for broadcast are recorded as
other assets until the time the license agreement begins and the program becomes
available for broadcast.
F-14
130
KWTX BROADCASTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AFFILIATED STATIONS RECEIVABLES/PAYABLE
The Company has two affiliated stations which it records receivables from
and payables to throughout the year. The affiliates are Brazos Broadcasting Co.
in Bryan, Texas and KXII Broadcasters, Inc. in Sherman, Texas. Each station is
responsible for its costs and expenses. Expense incurred on the behalf of an
affiliated station is charged to such station based upon its direct usage.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method for financial reporting purposes over the estimated
useful lives of the related assets ranging from three to thirty-one and one-half
years and by accelerated methods for income tax purposes.
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost and related accumulated depreciation of assets retired or
otherwise disposed of are eliminated from the accounts and the resulting gain or
loss is included in income or expense.
INCOME TAXES
Deferred federal income taxes are provided on the differences between the
financial statement and income tax basis of assets and liabilities. The Company
and its unconsolidated subsidiary (see Note 2) file separate federal income tax
returns.
BARTER TRANSACTIONS
The Company barters unsold advertising time for products and services. The
asset or expense is recorded at the fair market value of the product or service
when received and a liability is recognized for unearned revenue at the end of
each period. Barter revenue is recognized when commercials are broadcast.
CONCENTRATION OF CREDIT RISK
The Company provides advertising air time to national, regional and local
advertisers within the geographic areas in which the Company operates. Credit is
extended based on an evaluation of the customer's financial condition and
generally advance payment is not required. Credit losses are provided for in the
financial statements and historically have been within management's
expectations.
2. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The Company's investment in Brazos Broadcasting Co. (50% owned) is
accounted for using the equity method of accounting for investments. This method
requires that the investment is recorded at the proportionate percentage of
stockholders' equity of the subsidiary and adjusted each period for the
proportionate percentage of net income of the
F-15
131
KWTX BROADCASTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
subsidiary. Dividends received are treated as a reduction in the basis of the
Company's investment in the year received.
The Company received dividends from Brazos Broadcasting Co. of $500,000 in
1998, $250,000 in 1997 and $287,500 in 1996.
Pertinent financial information for Brazos Broadcasting Co. as of December
31, 1998, 1997 and 1996, is as follows:
1998 1997 1996
----------- ---------- ----------
BALANCE SHEET:
Assets
Current assets............................ $ 8,849,348 $7,516,843 $6,274,540
Property and equipment.................... 1,987,844 2,233,333 2,121,226
Program broadcast -- noncurrent........... 36,602 82,429 113,433
Other assets.............................. 40,012 9,588 7,520
----------- ---------- ----------
Total assets...................... $10,913,806 $9,842,193 $8,516,719
=========== ========== ==========
Liabilities and equity
Current liabilities....................... 1,004,177 968,899 889,061
Long-term liabilities..................... 313,496 293,658 347,335
Stockholders equity....................... 9,596,133 8,579,636 7,280,323
----------- ---------- ----------
Total liabilities and equity...... $10,913,806 $9,842,193 $8,516,719
----------- ---------- ----------
INCOME STATEMENT:
Revenue..................................... $ 7,300,941 $6,623,663 $6,146,401
Costs and expenses.......................... 4,412,923 4,099,996 3,901,746
Other income................................ 262,953 287,132 198,312
Federal income tax.......................... 1,134,474 1,011,486 875,259
----------- ---------- ----------
Net income........................ 2,016,497 1,799,313 1,567,708
Company's ownership interest................ 50% 50% 50%
----------- ---------- ----------
Company's share of net income............... $ 1,008,249 $ 899,657 $ 783,854
=========== ========== ==========
3. OTHER TRANSACTIONS WITH RELATED PARTIES
The Company has deposits with a bank of which two majority shareholders of
the bank are related to two minority stockholders of the Company. As of December
31, 1998, 1997 and 1996, deposits with this bank were $4,486,679, $2,370,876 and
$6,327,093, respectively, and interest earned on these deposits was $88,922,
$109,503, and $57,225, in 1998, 1997, and 1996, respectively.
As of December 31, 1998, 1997 and 1996, the Company had a receivable from
Brazos Broadcasting Co. of $1,805, a net payable of $11,997 and a receivable of
$25,882 respectively.
F-16
132
KWTX BROADCASTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS
Investments consist primarily of term bank deposits and government
securities. Government securities held at December 31, 1998 have maturity dates
ranging from February 1, 1999 to May 31, 1999. Term bank deposits held at
December 31, 1998 have maturity dates ranging from January 1, 1999 to July 29,
1999. All securities are carried at amortized cost, which approximates fair
market value. The following schedule summarizes the Company's investments at
December 31, 1998, 1997 and 1996.
1998 1997 1996
---------- ---------- ----------
Government securities........................ $2,479,902 $3,915,264 $3,869,067
Term bank deposits........................... 2,943,424 1,051,960 4,795,172
---------- ---------- ----------
$5,423,326 $4,967,224 $8,664,239
========== ========== ==========
The Company intends to hold all investments until maturity.
5. PROPERTY AND EQUIPMENT
At December 31, 1998, 1997, and 1996, property and equipment consisted of
the following:
1998 1997 1996
----------- ----------- -----------
Land...................................... $ 509,188 $ 523,847 $ 523,847
Buildings................................. 2,272,710 2,496,270 2,485,251
Broadcast equipment....................... 7,497,535 8,527,153 7,695,631
Transportation equipment.................. 217,034 294,508 280,748
Furniture and fixtures.................... 324,979 661,623 624,382
----------- ----------- -----------
10,821,446 12,503,401 11,609,859
Less accumulated depreciation............. (5,711,796) (7,964,480) (7,478,898)
----------- ----------- -----------
Net Property and Equipment...... $ 5,109,650 $ 4,538,921 $ 4,130,961
=========== =========== ===========
6. INCOME TAXES
At December 31, 1998, 1997 and 1996, the provision for income taxes
consisted of the following:
1998 1997 1996
---------- ---------- ----------
FEDERAL TAX EXPENSE:
Current.................................... $1,210,594 $ 938,206 $1,091,223
Deferred................................... 91,104 102,738 22,682
---------- ---------- ----------
Total Federal Tax.................. 1,301,698 1,040,944 1,113,905
State franchise tax........................ 86,647 264,243 90,931
---------- ---------- ----------
Total Income Tax Expense........... $1,388,345 $1,305,187 $1,204,836
========== ========== ==========
F-17
133
KWTX BROADCASTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, 1997, 1996, components of deferred tax liabilities
and assets consisted of the following:
1998 1997 1996
-------- -------- --------
DEFERRED TAX LIABILITY -- CURRENT:
Investment in subsidiary -- KBTX.................. $ 34,561 $ 44,177 $ 33,752
Depreciation expense.............................. 32,788 37,526 --
Compensated absences.............................. 319 -- 820
Amortization of broadcast rights.................. 23,436 21,261 --
-------- -------- --------
Current Deferred Tax Liability.................. 91,104 102,964 34,572
-------- -------- --------
DEFERRED TAX ASSET -- CURRENT:
Depreciation expense.............................. -- -- 11,788
Compensated absences.............................. -- 226 --
Amortization of broadcast rights.................. -- -- 102
-------- -------- --------
Current Deferred Tax Asset...................... -- 226 11,890
-------- -------- --------
Net Current Deferred Tax Liability...... 91,104 102,738 22,682
-------- -------- --------
DEFERRED TAX LIABILITY -- NONCURRENT:
Investment in subsidiary -- KBTX.................. 283,208 239,031 187,960
Depreciation expense.............................. 332,241 294,716 306,504
Amortization of broadcast rights.................. 12,501 -- 8,659
-------- -------- --------
Noncurrent Deferred Tax Liability............... 627,950 533,747 503,123
-------- -------- --------
DEFERRED TAX ASSET -- NONCURRENT:
Compensated absences.............................. 6,525 6,300 7,119
Amortization of broadcast rights.................. -- 8,760 --
-------- -------- --------
Noncurrent Deferred Tax Asset................... 6,525 15,060 7,119
-------- -------- --------
Net Noncurrent Deferred Tax Liability........... 621,425 518,687 496,004
-------- -------- --------
Total Deferred Federal Income Tax....... $712,529 $621,425 $518,686
======== ======== ========
A reconciliation between taxes computed at the federal statutory rate and
the consolidated effective tax rate for the following years was as follows:
1998 1997 1996
------------------ ------------------ ------------------
Federal statutory tax
rate................ $1,601,090 34.00% $1,370,806 34.00% $1,350,859 34.00%
Deduction of state
franchise tax....... (29,460) (0.63)% (89,843) (2.23)% (30,917) (0.78)%
Exclusion of 80% of
earnings in
subsidiary special
deduction........... (274,244) (5.82)% (244,707) (6.07)% (213,208) (5.37)%
Other................. 4,312 (0.09)% 4,688 0.12% 7,171 0.18%
---------- ----- ---------- ----- ---------- -----
Total
Federal
Tax...... $1,301,698 27.46% $1,040,944 25.82% $1,113,905 28.03%
========== ===== ========== ===== ========== =====
F-18
134
KWTX BROADCASTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RETIREMENT PLAN FOR EMPLOYEES
The Company has a retirement plan for employees. Eligible employees of the
Company may participate in this plan after completing three years of employment.
Under the plan, the Company is required to contribute to the trust fund an
amount equal to $4 for each $3 which is contributed to the trust fund by the
participants for the year, up to a maximum of $800 per employee per year. The
Company contributed to the plan $22,544 for 1998, $20,704 for 1997, and $27,248
for 1996. The Internal Revenue Service has determined that the plan and its
trust are qualified under Section 408(c) of the Internal Revenue Code and that
the trust is exempt from federal income taxes under Section 408(e) of the Code.
8. OPERATING LEASES
The Company has entered into various operating lease agreements for
automobiles. Total lease expense incurred by the Company was $94,088, $95,252,
and $93,107 in 1998, 1997, and 1996, respectively. As of December 31, 1998 the
future minimum rental payments under non cancellable operating leases were as
follows:
1999........................................................ $ 861
2000........................................................ 55,790
2001........................................................ 14,904
-------
$71,555
=======
9. DISPOSAL OF AM/FM RADIO STATIONS
In November 1996, the Company sold all of the assets and operations of
KWTX-AM and KWTX-FM to Gulfstar Communications of Waco, Inc., resulting in a
before tax gain of $3,624,562. As of December 31, 1996, the Company had a
receivable of $61,320 from Gulfstar Communications of Waco, Inc. related to this
sale. On January 2, 1997, a special dividend in an amount representing the net
proceeds from this sale was paid to the Company's shareholders.
10. SUBSEQUENT EVENTS
On April 13, 1999, the Company entered into an agreement and plan of merger
with Gray Communications Systems, Inc. ("Gray") which provides for the
acquisition of the Company by Gray. This agreement provides that the Company's
shareholders will receive a combination of cash and Gray class B common stock
aggregating $74,680,000, plus additional consideration for certain net working
capital of the Company. Consummation of the transaction is conditioned upon,
among other things, the requisite approvals of the Federal Communications
Commission and the stockholders of the Company and Gray.
F-19
135
BRAZOS BROADCASTING CO.
BALANCE SHEETS
JUNE 30, 1999 AND 1998
1999 1998
---------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash, including interest bearing accounts................... $ 837,743 $ 382,483
Investments................................................. 5,221,604 5,046,765
Accrued interest receivable................................. 18,968 60,303
Accounts receivable:
Trade..................................................... 1,441,411 1,569,533
Network................................................... 44,848 53,574
Federal income tax receivable............................. -- 46,021
Program broadcast rights -- current......................... 77,858 67,093
Prepaid expenses............................................ 51,882 47,689
---------- ----------
Total Current Assets............................... 7,694,314 7,273,461
---------- ----------
Property and equipment, at cost -- net of accumulated
depreciation.............................................. 1,921,155 2,143,081
---------- ----------
Program broadcast -- noncurrent............................. 41,080 118,938
Deposits and other assets................................... 78,148 7,045
---------- ----------
Total Assets....................................... $9,734,697 $9,542,525
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other liabilities...................... $ 115,929 $ 170,187
Program broadcast obligations -- current.................... 19,883 90,239
Accrued salaries and wages.................................. 64,515 69,598
Accrued management bonus.................................... 252,144 291,185
Federal income tax payable.................................. 18,163 --
Affiliated companies payable................................ 26,773 51,406
---------- ----------
Total Current Liabilities.......................... 497,407 672,615
---------- ----------
LONG-TERM LIABILITIES:
Program broadcast obligations -- noncurrent................. 16,829 36,711
Deferred federal income tax payable......................... 279,653 276,518
---------- ----------
Total Long-term Liabilities........................ 296,482 313,229
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $100 par value, 500 shares authorized, issued
and outstanding........................................... 50,000 50,000
Retained earnings........................................... 8,890,808 8,506,681
---------- ----------
Total Stockholders' Equity......................... 8,940,808 8,556,681
---------- ----------
Total Liabilities and Stockholders' Equity......... $9,734,697 $9,542,525
========== ==========
The accompanying notes are an integral part of these financial statements.
F-20
136
BRAZOS BROADCASTING CO.
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
---------- ----------
(UNAUDITED)
REVENUE................................................. $3,749,252 $3,943,610
Less agency and representatives' commissions............ 392,628 434,421
---------- ----------
Net Revenue................................... 3,356,624 3,509,189
---------- ----------
Costs and Expenses:
Technical expenses...................................... 161,201 148,364
News expenses........................................... 367,125 374,406
Production expenses..................................... 283,902 278,313
Sales expenses.......................................... 316,251 296,863
Management bonus........................................ 226,825 226,813
General and administrative expenses..................... 656,359 657,501
Depreciation expense.................................... 191,744 196,466
---------- ----------
Total Costs and Expenses...................... 2,203,407 2,178,726
---------- ----------
Earnings from operations................................ 1,153,217 1,330,463
OTHER INCOME/EXPENSE:
Other income (expense).................................. 14,133 6,338
Interest income......................................... 126,720 142,545
---------- ----------
Total Other Income............................ 140,853 148,883
---------- ----------
Earnings before income tax expense...................... 1,294,070 1,479,346
Income tax expense...................................... 449,395 502,301
---------- ----------
Net earnings.................................. $ 844,675 $ 977,045
========== ==========
The accompanying notes are an integral part of these financial statements.
F-21
137
BRAZOS BROADCASTING CO.
STATEMENTS OF RETAINED EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
----------- -----------
(UNAUDITED)
Balance at beginning of year.......................... $ 9,546,133 $ 8,529,636
Add net earnings.................................... 844,675 977,045
----------- -----------
10,390,808 9,506,681
Less dividends paid................................. (1,500,000) (1,000,000)
----------- -----------
Balance at end of year................................ $ 8,890,808 $ 8,506,681
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-22
138
BRAZOS BROADCASTING CO.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 844,675 $ 977,045
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 191,744 196,466
Loss on sale of fixed assets............................ 2,134 11,839
Income tax deferred..................................... (11,382) 7,884
Changes in operating assets and liabilities:
Accounts receivable.................................. 207,844 (15,195)
Network receivable................................... 816 (5,905)
Prepaid expenses..................................... (23,152) (23,195)
Accrued interest receivable.......................... 16,487 (23,894)
Federal income tax receivable........................ -- (46,021)
Other assets......................................... (38,713) 2,543
Intercompany receivable.............................. -- 12,866
Program broadcast rights............................. 98,917 57,551
Accounts payable..................................... (142,975) 2,081
Accrued liabilities.................................. (231,781) (241,414)
Income tax payable................................... (50,984) (14,992)
Intercompany payable................................. 24,968 50,537
Program broadcast obligations........................ (111,630) (80,809)
Other liabilities.................................... 577 --
----------- -----------
Net cash provided by operating activities....... 777,545 867,387
----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchase of equipment..................................... (127,189) (118,053)
Net sale of short-term investments........................ 233,378 614,519
Purchase of held-to-maturity securities................... (867,516) (1,350,734)
Sale of held-to maturity securities....................... 1,697,888 845,000
----------- -----------
Net cash provided by (used in) investing
activities.................................... 936,561 (9,268)
----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payment of dividends...................................... (1,500,000) (1,000,000)
----------- -----------
Net increase (decrease) in cash........................... 214,106 (141,881)
Cash at beginning of year................................. 623,637 524,364
----------- -----------
Cash at end of year....................................... $ 837,743 $ 382,483
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid......................................... $ 467,363 $ 507,502
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-23
139
BRAZOS BROADCASTING CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited condensed financial statements of Brazos
Broadcasting Co. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These condensed financial
statements should be read in conjunction with the financial statements of Brazos
Broadcasting Co. for the year ended December 31, 1998. Results of operations for
the period ended June 30, 1999 are not necessarily indicative of results to be
expected for the fiscal year ending December 31, 1999.
2. TRANSACTIONS WITH RELATED PARTIES
Fifty percent of the Company's capital stock is owned by KWTX Broadcasting
Company.
As of June 30, 1999 and 1998, the Company had a payable to KWTX
Broadcasting Company of $26,773 and $51,406, respectively. Each station is
responsible for its own costs and expenses. Expenses incurred on behalf of an
affiliated station are charged to such station based upon its direct usage.
The Company has deposits with a bank of which a major shareholder of the
bank is also a major shareholder of the Company. As of June 30, 1999, deposits
with this bank were $3,842,938 and interest earned on these deposits was $68,568
for the six months then ended.
3. PENDING TRANSACTION
On April 13, 1999, the Company entered into an agreement and plan of merger
with Gray Communications Systems, Inc. ("Gray") which provides for the
acquisition of the Company by Gray. This agreement provides that the Company's
stockholders other than KWTX Broadcasting Company (who will be compensated
through a related transaction) will receive a combination of cash and Gray class
B common stock aggregating $22,820,000, plus additional consideration for
certain net working capital of the Company. Consummation of the transaction is
conditioned upon, among other things, the requisite approvals of the Federal
Communications Commission and the stockholders of the Company and Gray.
F-24
140
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Brazos Broadcasting Co.
Bryan, Texas
We have audited the accompanying balance sheet of Brazos Broadcasting Co.
as of December 31, 1998, and the related statement of income, retained earnings,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brazos Broadcasting Co. as
of December 31, 1998, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
We have compiled the accompanying balance sheets of Brazos Broadcasting Co.
as of December 31, 1997 and 1996, and the related statements of income, retained
earnings, and cash flows for the years then ended, in accordance with Statements
on Standards for Accounting and Review Services issued by the American Institute
of Certified Public Accountants. These financial statements were compiled by us
from financial statements for the same period that we previously audited on an
income-tax basis, as indicated in our reports dated February 20, 1998 and
February 21, 1997, respectively.
A compilation is limited to presenting, in the form of financial
statements, information that is the representation of management. We have not
audited or reviewed these accompanying financial statements and, accordingly, do
not express an opinion or any other form of assurance on them.
As more fully discussed in Note 8, the Company has approved a merger
agreement that provides for the acquisition of the Company, subject to a number
of conditions, including the approval of the Federal Communications Commission.
PATTILLO, BROWN & HILL, L.L.P.
March 24, 1999,
except for Note 8 which
is as of April 13, 1999
F-25
141
BRAZOS BROADCASTING CO.
BALANCE SHEETS
DECEMBER 31
-------------------------------------
1998 1997 1996
----------- ---------- ----------
(AUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash, including interest bearing accounts............ $ 623,637 $ 524,364 $ 221,175
Investments.......................................... 6,285,354 5,155,550 4,637,804
Accrued interest receivable.......................... 35,455 36,409 36,945
Accounts receivable:
Trade.............................................. 1,649,255 1,554,338 1,131,104
Network............................................ 45,664 47,669 57,146
Affiliated companies............................... -- 12,866 --
Program broadcast rights -- current.................. 181,253 161,153 165,006
Prepaid expenses..................................... 28,730 24,494 25,360
----------- ---------- ----------
Total Current Assets........................ 8,849,348 7,516,843 6,274,540
Property and equipment, at cost -- net of accumulated
depreciation....................................... 1,987,844 2,233,333 2,121,226
Program broadcast -- noncurrent...................... 36,602 82,429 113,433
Deposits and other assets............................ 40,012 9,588 7,520
----------- ---------- ----------
Total Assets....................................... $10,913,806 $9,842,193 $8,516,719
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other liabilities............... $ 258,904 $ 168,106 $ 5,640
Program broadcast obligations -- current............. 125,881 182,735 190,808
Accrued salaries and wages........................... 62,120 176,448 154,658
Accrued management bonus............................. 486,320 425,749 402,842
Federal income tax payable........................... 69,147 14,992 108,674
Affiliated companies payable......................... 1,805 869 25,882
Other liabilities.................................... -- -- 557
----------- ---------- ----------
Total Current Liabilities................... 1,004,177 968,899 889,061
----------- ---------- ----------
LONG-TERM LIABILITIES:
Program broadcast obligations -- noncurrent.......... 22,461 25,024 106,743
Deferred federal income tax payable.................. 291,035 268,634 240,592
----------- ---------- ----------
Total Long-term Liabilities................. 313,496 293,658 347,335
----------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $100 par value, 500 shares authorized,
issued and outstanding............................. 50,000 50,000 50,000
Retained earnings.................................... 9,546,133 8,529,636 7,230,323
----------- ---------- ----------
Total Stockholders' Equity.................. 9,596,133 8,579,636 7,280,323
----------- ---------- ----------
Total Liabilities and Stockholders'
Equity.................................... $10,913,806 $9,842,193 $8,516,719
=========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-26
142
BRAZOS BROADCASTING CO.
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
(AUDITED) (UNAUDITED)
REVENUE..................................... $ 8,223,429 $7,383,495 $6,774,080
Less agency and representatives'
commissions............................... (922,488) (759,832) (627,679)
----------- ---------- ----------
Net Revenue....................... 7,300,941 6,623,663 6,146,401
----------- ---------- ----------
COSTS AND EXPENSES:
Technical expenses.......................... 300,853 291,255 272,258
News expenses............................... 739,582 701,631 601,203
Production expenses......................... 589,197 572,807 583,531
Sales expenses.............................. 631,245 594,722 554,448
Management bonus............................ 484,441 425,749 402,842
General and administrative expenses......... 1,275,310 1,133,330 1,063,385
Depreciation expense........................ 392,295 380,502 424,079
----------- ---------- ----------
Total Costs and Expenses.......... 4,412,923 4,099,996 3,901,746
----------- ---------- ----------
Earnings from operations.................... 2,888,018 2,523,667 2,244,655
Other income................................ 262,953 287,132 198,312
----------- ---------- ----------
Earnings before income tax expense.......... 3,150,971 2,810,799 2,442,967
Income tax expense.......................... 1,134,474 1,011,486 875,259
----------- ---------- ----------
Net earnings...................... $ 2,016,497 $1,799,313 $1,567,708
=========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-27
143
BRAZOS BROADCASTING CO.
STATEMENTS OF RETAINED EARNINGS
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
(AUDITED) (UNAUDITED)
Balance at beginning of year................ $ 8,529,636 $7,230,323 $6,237,615
Add net earnings.......................... 2,016,497 1,799,313 1,567,708
----------- ---------- ----------
10,546,133 9,029,636 7,805,323
Less dividends paid....................... (1,000,000) (500,000) (575,000)
----------- ---------- ----------
Balance at end of year...................... $ 9,546,133 $8,529,636 $7,230,323
=========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-28
144
BRAZOS BROADCASTING CO.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(AUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 2,016,497 $ 1,799,313 $ 1,567,708
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................ 392,295 380,502 424,079
(Gain) loss on sale of fixed assets..... 7,269 (10,509) 34,254
Barter acquisition of equipment......... -- -- (205,424)
Income tax deferred..................... 22,401 28,042 (28,922)
Changes in operating assets and
liabilities:
Accounts receivable.................. (92,912) (413,757) (286,223)
Prepaid expenses..................... (4,236) 866 (5,485)
Accrued interest receivable.......... 954 536 2,303
Other assets......................... (30,424) (2,068) (1,508)
Intercompany receivable.............. 12,866 (12,866) --
Program broadcast rights............. 25,727 34,857 114,582
Accounts payable and other
liabilities........................ 90,798 162,466 (4,145)
Accrued liabilities.................. (53,757) 44,697 145,662
Income tax payable................... 54,155 (93,682) 6,621
Intercompany payable................. 936 (25,013) 24,716
Program broadcast obligations........ (59,417) (89,792) (109,596)
Other liabilities.................... -- (557) 557
----------- ----------- -----------
Net cash provided by operating
activities......................... 2,383,152 1,803,035 1,679,179
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment..................... (154,075) (482,100) (392,352)
Proceeds from sale of equipment........... -- -- 9,050
Net purchase of short-term investments.... (2,960,804) (441,746) (44,990)
Purchase of held-to-maturity securities... (1,860,000) (4,041,000) (3,615,000)
Sale of held-to maturity securities....... 3,691,000 3,965,000 3,000,000
----------- ----------- -----------
Net cash used in investing
activities......................... (1,283,879) (999,846) (1,043,292)
----------- ----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payment of dividends...................... (1,000,000) (500,000) (575,000)
----------- ----------- -----------
Net increase in cash...................... 99,273 303,189 60,887
Cash at beginning of year................. 524,364 221,175 160,288
----------- ----------- -----------
Cash at end of year....................... $ 623,637 $ 524,364 $ 221,175
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid......................... $ 1,020,927 $ 903,653 $ 840,266
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-29
145
BRAZOS BROADCASTING CO.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED 1997 AND 1996)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Brazos Broadcasting Co. (the "Company") owns and operates television
station KBTX located in Bryan, Texas. The Company is a 50% owned,
unconsolidated, subsidiary of KWTX Broadcasting Company, which operates
television station KWTX in Waco, Texas.
REVENUE RECOGNITION
The Company's policy is to recognize revenue as services are performed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH
Cash includes cash on hand and cash in checking and money market accounts
which approximates fair market value.
INVESTMENTS
The Company invests in treasury bills, treasury notes and other government
securities. These investments are recorded at cost, which approximates market
value.
PROGRAM BROADCAST RIGHTS
Rights to programs available for broadcast under program license agreements
are initially recorded at the beginning of the license period for the amounts of
total license fees payable under the license agreements and are charged to
operating expense on the basis of total programs available for use compared to
the total number of programs run during the period. The portion of the
unamortized balance expected to be charged to operating expense in succeeding
periods is classified as a current asset, with the remainder classified as a
noncurrent asset. The liability for the license fees payable under the program
license agreement is classified as current or long-term, in accordance with the
payment terms of the various license agreements. The capitalized costs of the
rights are recorded at the lower of unamortized costs or net realizable value.
All payments made on programs not yet available for broadcast are recorded as
other assets until the time the license agreement begins and the program becomes
available for broadcast.
F-30
146
BRAZOS BROADCASTING CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method for financial reporting purposes over the estimated
useful lives of the related assets ranging from five to thirty-five years and by
accelerated methods for income tax purposes.
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost and related accumulated depreciation of assets retired or
otherwise disposed of are eliminated from the accounts and the resulting gain or
loss is included in income or expense.
INCOME TAXES
Deferred federal income taxes are provided on the differences between the
financial statement and income tax basis of assets and liabilities. The Company
and its parent, KWTX Broadcasting Company, file separate federal income tax
returns.
BARTER TRANSACTIONS
The Company barters unsold advertising time for products and services. The
asset or expense is recorded at the fair market value of the product or service
when received and a liability is recognized for unearned revenue at the end of
each period. Barter revenue is recognized when commercials are broadcast.
CONCENTRATION OF CREDIT RISK
The Company provides advertising air time to national, regional, and local
advertisers within the geographic area in which the Company operates. Credit is
extended based on evaluation of the customer's financial condition and generally
advance payment is not required. Credit losses are provided for in the financial
statements and historically have been within management's expectations.
2. INVESTMENTS
Investments consist primarily of term bank deposits and government
securities. Government securities held at December 31, 1998 have maturity dates
ranging from February 22, 1999 to July 1, 1999. Term bank deposits held at
December 31, 1998, have maturity dates ranging from January 1, 1999 to February
28, 1999. All securities are
F-31
147
BRAZOS BROADCASTING CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
carried at amortized cost, which approximates fair market value. The following
schedule summarizes the Company's investments at December 31, 1998, 1997 and
1996.
1998 1997 1996
---------- ---------- ----------
Government securities........................ $2,209,038 $4,041,365 $3,928,970
Term bank deposits........................... 4,076,316 1,114,185 708,834
---------- ---------- ----------
$6,285,354 $5,155,550 $4,637,804
========== ========== ==========
The Company intends to hold all investments until maturity.
3. PROPERTY AND EQUIPMENT
At December 31, 1998, 1997, and 1996, property and equipment consisted of
the following:
1998 1997 1996
----------- ----------- -----------
Land...................................... $ 14,937 $ 14,937 $ 14,937
Buildings................................. 445,368 439,866 439,866
Radio and television equipment............ 5,334,788 5,347,451 4,951,573
Transportation equipment.................. 632,565 622,789 560,407
Furniture and fixtures.................... 311,353 309,913 308,844
----------- ----------- -----------
6,739,011 6,734,956 6,275,627
Less accumulated depreciation............. (4,751,167) (4,501,623) (4,154,401)
----------- ----------- -----------
Net Property and Equipment...... $ 1,987,844 $ 2,233,333 $ 2,121,226
=========== =========== ===========
4. INCOME TAXES
At December 31, 1998, 1997 and 1996, the provision for income taxes for the
Company consisted of the following:
1998 1997 1996
---------- ---------- --------
FEDERAL TAX EXPENSE:
Current........................................ $1,020,927 $ 903,653 $840,266
Deferred....................................... 22,400 28,042 (28,922)
---------- ---------- --------
Total Federal Tax.................... 1,043,327 931,695 811,344
State franchise tax............................ 91,147 79,791 63,915
---------- ---------- --------
Total Income Tax Expense............. $1,134,474 $1,011,486 $875,259
========== ========== ========
F-32
148
BRAZOS BROADCASTING CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, 1997, and 1996, components of deferred tax
liabilities and assets consisted of the following:
1998 1997 1996
-------- -------- --------
DEFERRED TAX LIABILITY -- CURRENT:
Depreciation expense.............................. $ 445 $ 10,961 $ --
Compensated absences.............................. -- -- 467
Amortization of broadcast rights.................. 22,505 18,678 --
-------- -------- --------
Current Deferred Tax Liability.......... 22,950 29,639 467
-------- -------- --------
DEFERRED TAX ASSET -- CURRENT:
Depreciation expense.............................. -- -- 27,694
Compensated absences.............................. 550 1,597 --
Amortization of broadcast rights.................. -- -- 1,695
-------- -------- --------
Current Deferred Tax Asset.............. 550 1,597 29,389
-------- -------- --------
Net Current Deferred Tax Liability...... 22,400 28,042 (28,922)
-------- -------- --------
DEFERRED TAX LIABILITY -- NONCURRENT:
Depreciation expense.............................. 260,991 250,030 277,724
Amortization of broadcast rights.................. 12,180 -- --
-------- -------- --------
Noncurrent Deferred Tax Liability....... 273,171 250,030 277,724
-------- -------- --------
DEFERRED TAX ASSET -- NONCURRENT:
Compensated absences.............................. 4,536 2,940 3,407
Amortization of broadcast rights.................. -- 6,498 4,803
-------- -------- --------
Noncurrent Deferred Tax Asset........... 4,536 9,438 8,210
-------- -------- --------
Net Noncurrent Deferred Tax Liability... 268,635 240,592 269,514
-------- -------- --------
Total Deferred Federal Income Tax....... $291,035 $268,634 $240,592
======== ======== ========
Differences between the statutory and effective tax rates are due to small
differences resulting from the meals and entertainment deduction limitation for
income tax purposes.
5. RETIREMENT PLAN FOR EMPLOYEES
The Company has a retirement plan for employees. Eligible employees of the
Company may participate in this plan after completing three years of employment.
Under the plan, the Company is required to contribute to the trust fund an
amount equal to $4 for each $3 which is contributed to the trust fund by the
participants for the year, up to a maximum of $800 per employee per year. The
Company contributed to such plan $11,700 for 1998, $10,206 for 1997 and $11,800
for 1996. The Internal Revenue Service has determined that the plan and its
trust are qualified under Section 408(c) of the Internal Revenue Code and that
the trust is exempt from federal income taxes under Section 408(e) of the Code.
F-33
149
BRAZOS BROADCASTING CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. TRANSACTIONS WITH RELATED PARTIES
Fifty percent of the Company's capital stock is owned by KWTX Broadcasting
Company.
As of December 31, 1998, 1997 and 1996, the Company had a payable to KWTX
Broadcasting Company of $1,805, a net receivable of $11,997, and a payable of
$25,882, respectively. Each station is responsible for its costs and expenses.
Expenses incurred on the behalf of an affiliated station are charged to such
station based upon the direct usage.
The Company has deposits with a bank of which a major shareholder of the
bank is also a major shareholder of the Company. As of December 31, 1998,
deposits with this bank were $2,400,380, and interest earned on these deposits
earned in 1998 was $40,774.
7. LEASE COMMITMENTS
On April 13, 1982, Brazos Broadcasting Company, entered into a contract to
lease a tower location for a 1,705 foot tower, situated in Grimes County, Texas.
This lease is for a term of 50 years, at $12,000 per year, adjusted for the
consumer price index. The cost of this lease was $19,951, $19,516 and $19,081 in
1998, 1997 and 1996, respectively.
The Company has entered into various operating lease agreements for
automobiles. Total lease expense was $12,270, $12,156, and $14,060 in 1998,
1997, and 1996, respectively. As of December 31, 1998, future minimum lease
payments under non-cancellable operating leases were as follows:
1999........................................................ $12,327
2000........................................................ 3,082
-------
$15,409
=======
8. SUBSEQUENT EVENTS
On April 13, 1999, the Company entered into an agreement and plan of merger
with Gray Communications Systems, Inc. ("Gray") which provides for the
acquisition of the Company by Gray. This agreement provides that the Company's
stockholders other than KWTX Broadcasting Company (who will be compensated
through a related transaction) will receive a combination of cash and Gray class
B common stock aggregating $22,820,000, plus additional consideration for
certain net working capital of the Company. Consummation of the transaction is
conditioned upon, among other things, the requisite approvals of the Federal
Communications Commission and the stockholders of the Company and Gray.
F-34
150
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
CONDENSED COMBINED BALANCE SHEETS
JUNE 30, 1999 AND 1998
1999 1998
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash...................................................... $ 1,118,284 $ 674,312
Accounts receivable less allowance for doubtful accounts
of $17,867 and $20,839.................................. 1,379,603 1,204,890
Employee accounts receivable.............................. 11,437 15,465
Prepaid expenses.......................................... 58,619 46,324
Broadcast rights.......................................... 120,661 42,920
----------- -----------
Total current assets............................ 2,688,604 1,983,911
----------- -----------
Property, plant and equipment (Note 2).................... 5,337,114 5,681,163
Less accumulated depreciation............................. (3,202,120) (3,551,940)
----------- -----------
Total property, plant and equipment............. 2,134,994 2,129,223
----------- -----------
Broadcast rights, less current portion.................... 83,748 --
----------- -----------
Goodwill, less accumulated amortization of $690,559 and
$584,319................................................ 3,559,032 3,665,272
----------- -----------
Other assets.............................................. 2,530 2,530
----------- -----------
Total assets.................................... $ 8,468,908 $ 7,780,936
=========== ===========
LIABILITIES AND STOCKHOLDERS' AND PARTNERS' EQUITY
Current liabilities:
Notes payable -- related parties (Notes 2 and 3).......... $ 9,349 $ 99,524
Current portion of long-term debt -- related party (Note
2)...................................................... 77,525 102,834
Current portion of long-term capital leases -- related
party (Note 2).......................................... 178,236 160,551
Current portion of contracts payable for broadcast
rights.................................................. 156,370 45,056
Accounts payable -- trade................................. 165,474 458,923
Accrued liabilities (Notes 2 and 3)....................... 262,506 181,954
----------- -----------
Total current liabilities....................... 849,460 1,048,842
Long-term debt -- related party, less current portion
(Notes 2 and 4)......................................... 3,818,267 3,895,792
Long-term capital lease obligations, less current
portion -- related party (Note 2)....................... 409,566 587,920
Contracts payable for broadcast rights, less current
portion................................................. 102,260 43,198
----------- -----------
Total liabilities............................... 5,179,553 5,575,752
----------- -----------
Commitments
STOCKHOLDERS' AND PARTNERS' EQUITY:
Common stock -- no par value; 10,000 shares authorized
4,500 issued............................................ -- 142,641
Retained earnings......................................... -- 1,186,168
Partners' equity.......................................... 3,289,355 876,375
----------- -----------
Total stockholders' and partners' equity........ 3,289,355 2,205,184
----------- -----------
Total liabilities and stockholders' and
partners' equity.............................. $ 8,468,908 $ 7,780,936
=========== ===========
See accompanying notes to condensed combined financial statements.
F-35
151
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
CONDENSED COMBINED STATEMENTS OF INCOME AND STOCKHOLDERS'
AND PARTNERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
---------- ----------
(UNAUDITED)
REVENUES:
Sales:
Local................................................. $ 873,700 $ 837,227
Regional.............................................. 1,492,621 1,263,044
National.............................................. 784,014 615,408
Barter transactions................................... 14,880 24,750
---------- ----------
Total sales................................... 3,165,215 2,740,429
---------- ----------
Less commissions:
Agency................................................ (387,501) (324,861)
Representatives....................................... (53,313) (41,848)
---------- ----------
Total commissions............................. (440,814) (366,709)
---------- ----------
Net sales..................................... 2,724,401 2,373,720
CBS income............................................ 467,542 431,760
Production income..................................... 16,235 19,225
Other................................................. 610 9,801
---------- ----------
Total revenues................................ 3,208,788 2,834,506
---------- ----------
OPERATING EXPENSES:
Technical............................................. 126,972 147,118
Programming........................................... 618,026 565,790
Sales................................................. 245,641 243,591
General (Note 2)...................................... 854,925 818,918
Depreciation.......................................... 198,266 174,458
Amortization of goodwill.............................. 53,120 53,120
---------- ----------
Total operating expenses...................... 2,096,950 2,002,995
---------- ----------
Income from operations.................................. 1,111,838 831,511
Gain on sale of equipment............................... 90,000 --
Interest expense...................................... (232,184) (234,063)
---------- ----------
Income before income taxes............................ 969,654 597,448
Income taxes -- state................................. 4,106 12,493
---------- ----------
Net income.................................... 965,548 584,955
Distributions......................................... (622,590) (355,898)
Stockholders' and partners' equity -- beginning of
year............................................... 2,946,397 1,976,127
---------- ----------
Stockholders' and partners' equity -- end of year..... $3,289,355 $2,205,184
========== ==========
See accompanying notes to condensed combined financial statements.
F-36
152
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
CONDENSED COMBINED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
---------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 965,548 $ 584,955
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 198,266 174,458
Gain on sale of equipment.............................. (90,000) --
Amortization of goodwill............................... 53,120 53,120
Amortization of broadcast rights....................... 78,185 58,086
Payments on contracts payable for broadcast rights..... (67,334) (28,890)
Change in operating assets and liabilities:
Increase in accounts receivable..................... (167,437) (185,216)
Decrease (increase) in employee accounts............ 25,987 (8,503)
Decrease in prepaid expenses........................ (27,906) (11,810)
Increase in accounts payable -- trade............... 125,881 429,438
Decrease in accrued expenses........................ (66,649) (59,117)
---------- ---------
Net cash provided by operating activities...... 1,027,661 1,006,521
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment................................... (335,567) (371,569)
---------- ---------
Net cash used in investing activities.......... (335,567) (371,569)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.................... (82,421) (60,602)
Payments of notes payable -- related party............... (90,175) --
Payments of long-term debt............................... (35,984) --
Distributions to shareholders and partners............... (622,590) (355,898)
---------- ---------
Net cash used in financing activities.......... (831,170) (416,500)
---------- ---------
Net increase (decrease) in cash.......................... (139,076) 218,452
Cash at beginning of year................................ 1,257,360 455,860
---------- ---------
Cash at end of year...................................... $1,118,284 $ 674,312
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................. $ 212,367 $ 209,970
========== =========
Income taxes -- state.................................... $ 36,391 $ 20,628
========== =========
See accompanying notes to condensed combined financial statements.
F-37
153
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. GENERAL
The accompanying unaudited condensed combined financial statements of KXII
Broadcasters, Inc. ("KXII, Inc.") and KXII Television, Ltd. ("KXII, Ltd.")
(collectively, the "Companies") have been prepared in accordance with generally
accepted accounting principles for interim financial information and rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These condensed combined
financial statements should be read in conjunction with the combined financial
statements of the Companies for the year ended December 31, 1998. Results of
operations for the period ended June 30, 1999 are not necessarily indicative of
results to be expected for the fiscal year ending December 31, 1999.
2. RELATED PARTY TRANSACTIONS
K-Twelve, Ltd. is a limited partnership, which is largely owned by the same
shareholders as KXII, Inc. KXII, Inc. remitted $166,698 to K-Twelve, Ltd. during
each of the six months ended June 30, 1999 and 1998 in connection with the use
of various assets and services provided by K-Twelve, Ltd. Because this
transaction is between related parties, it has been recorded as a capital lease
and management fee for financial statement purposes. Principal and interest
payments of $56,808 have been recorded to represent a capital lease for the
broadcast studios and equipment in Sherman, Texas and Ardmore, Oklahoma, with
the remainder, $111,890, reflected as management fees. KXII, Inc. also has a
note payable to K-Twelve, Ltd. for the transfer of certain assets in 1992, which
is discussed further in Note 4.
KXII, Inc. leases certain equipment and buildings under capital leases from
a related entity that is owned in part by a shareholder of KXII, Inc. The
equipment is capitalized in the combined balance sheets at net book value of
$894,127 and $976,558 at June 30, 1999 and 1998, respectively.
Other transactions resulting in payments to related parties were as
follows:
- Note payable of $9,349 and $99,524, respectively, at June 30, 1999 and
1998 and accrued interest payable of $27,444 and $21,473 at June 30, 1999
and 1998, respectively, to a director of the Companies. Interest expense
of $2,986 was incurred during the six months ended June 30, 1999 and
1998.
- Management fees of $99,600 and $124,500 were paid during the six months
ended June 30, 1999 and 1998, respectively, to officers of KXII, Inc.
Management fees of $24,900 were paid during the six months ended June 30,
1999 to officers of KXII, Ltd. No such fees were paid in the six months
ended June 30, 1998 to officers of KXII, Ltd.
F-38
154
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- Fees to the Board of Directors of KXII, Inc. of $15,000 were incurred
during the six months ended June 30, 1999 and 1998.
3. NOTE PAYABLE -- RELATED PARTY
As of January 1995, KXII, Inc. repurchased 500 shares of stock of KXII,
Inc. from a former stockholder for $109,524. This amount was to be paid in
installments through December 31, 1998 with interest on the unpaid balance at a
rate of 6% per annum; however, it was still outstanding at June 30, 1999. At
June 30, 1999 and 1998, there was a balance of $9,349 and $99,524, respectively,
owed to the former stockholder, plus accrued interest of $27,444 and $21,473 at
June 30, 1999 and 1998, respectively.
4. LONG-TERM DEBT -- RELATED PARTY
On December 31, 1992, KXII, Inc. purchased certain assets of K-Twelve, Ltd.
for a note payable in the amount of $4,249,591. The note, which bears interest
at an annual rate of 10%, is due in quarterly payments of $116,064, including
interest, with the final payment due on December 31, 2017. The balance of the
note was $3,895,792 and $3,998,626 at June 30, 1999 and 1998, and interest
expense of $196,145 and $199,529 was accrued for the six months ended June 30,
1999 and 1998, respectively.
5. SALE OF THE COMPANIES
KXII Broadcasters, Ltd. (see Note 6 below) and KXII, Ltd. have signed an
agreement to sell substantially all of the assets of the Companies for an
aggregate purchase price of approximately $41.5 million. An application for the
transfer of the broadcasting license has been granted by the Federal
Communications Commission.
6. REORGANIZATION
On April 19, 1999, the shareholders of KXII, Inc. contributed their stock
to a newly formed corporation that subsequently contributed the stock to two
newly formed subsidiaries. As permitted under the Texas Business Corporation Act
and the Texas Revised Partnership Act, KXII, Inc. then was converted to a Texas
limited partnership, KXII Broadcasters, Ltd. The broadcast operations of KXII
Channel 12 will remain in the new partnership.
F-39
155
INDEPENDENT AUDITORS' REPORT
To the Board of Directors, Stockholders and Partners
KXII Broadcasters, Inc.
KXII Television, Ltd.
We have audited the accompanying combined balance sheet of KXII
Broadcasters, Inc. and KXII Television, Ltd. (a limited partnership) (the
Companies) as of December 31, 1998, and the related combined statements of
income and stockholders' and partners' equity, and cash flows for the year ended
December 31, 1998. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of KXII Broadcasters,
Inc. and KXII Television, Ltd. as of December 31, 1998, and the results of their
combined operations and their combined cash flows for the year ended December
31, 1998 in conformity with generally accepted accounting principles.
As more fully discussed in Note 10, the Companies have approved the sale of
substantially all their assets. The transfer of certain broadcast licenses must
be approved by the Federal Communications Commission before the sale is
consummated.
The accompanying combined balance sheets of the Companies as of December
31, 1997 and 1996 and the related combined statements of income and
stockholders' and partners' equity, and cash flows for the years then ended were
not audited by us and, accordingly, we do not express an opinion on them.
Jaynes, Reitmeier, Boyd & Therrell PC
April 9, 1999, except for Notes 10 and 11
which are as of April 19, 1999
F-40
156
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
COMBINED BALANCE SHEETS
DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash..................................................... $ 1,257,360 $ 455,860 $ 443,404
Trade accounts receivable, less allowance for doubtful
accounts of $14,827, $12,966 and $12,949............... 1,212,165 1,019,674 1,019,232
Employee accounts receivable (Note 2).................... 37,424 6,962 4,239
Prepaid expenses......................................... 30,713 34,514 28,488
Broadcast rights......................................... 120,661 61,718 76,914
----------- ---------- ----------
Total current assets............................... 2,658,323 1,578,728 1,572,277
----------- ---------- ----------
Property, plant and equipment (Notes 2, 3 and 8)......... 5,141,573 5,092,773 4,929,149
Less accumulated depreciation............................ (3,233,879) (3,377,482) (3,209,563)
----------- ---------- ----------
Property, plant and equipment...................... 1,907,694 1,715,291 1,719,586
----------- ---------- ----------
Broadcast rights, less current portion................... 161,933 39,288 84,416
----------- ---------- ----------
Goodwill, less accumulated amortization of $637,439,
$531,199 and $424,959.................................. 3,612,152 3,718,392 3,824,632
----------- ---------- ----------
Other assets............................................. 2,530 2,530 2,530
----------- ---------- ----------
Total assets.................................... $ 8,342,632 $7,054,229 $7,203,441
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' AND PARTNERS' EQUITY
Current liabilities:
Note payable -- related party (Notes 2 and 4)............ $ 99,524 $ 99,524 $ 99,524
Current portion of long-term debt-related party (Notes 2
and 6)................................................. 73,791 66,850 60,563
Current portion of long-term capital lease
obligations -- related party (Notes 2 and 8)........... 169,191 119,053 120,621
Current portion of contracts payable for broadcast rights
(Note 5)............................................... 156,370 45,056 61,752
Accounts payable:
Trade.................................................. 39,593 29,485 42,216
Related party.......................................... -- -- 32,509
Accrued liabilities (Notes 2 and 4)...................... 329,155 241,071 251,224
----------- ---------- ----------
Total current liabilities.......................... 867,624 601,039 668,409
Long-term debt -- related party less current portion
(Notes 2
and 6)................................................. 3,857,985 3,931,776 3,998,626
Long-term capital lease obligations -- related party less
current portion (Notes 2 and 8)........................ 501,032 473,200 592,253
Contracts payable for broadcast rights less current
portion (Note 5)....................................... 169,594 72,087 100,094
----------- ---------- ----------
Total liabilities............................... 5,396,235 5,078,102 5,359,382
----------- ---------- ----------
Commitments (Note 9)
STOCKHOLDERS' AND PARTNERS' EQUITY:
Common stock -- no par value; 10,000 shares authorized;
issued 4,500 shares.................................... 142,641 142,641 142,641
Retained earnings........................................ 1,650,193 1,097,533 1,203,466
Partners' equity......................................... 1,153,563 735,953 497,952
----------- ---------- ----------
Total stockholders' and partners' equity........... 2,946,397 1,976,127 1,844,059
----------- ---------- ----------
Total liabilities and stockholders' and
partners' equity.............................. $ 8,342,632 $7,054,229 $7,203,441
=========== ========== ==========
See accompanying notes to combined financial statements.
F-41
157
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
COMBINED STATEMENTS OF INCOME AND STOCKHOLDERS'
AND PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
REVENUES:
Sales:
Local................................... $1,596,135 $ 1,631,390 $ 1,566,600
Regional................................ 2,823,514 2,157,497 2,222,178
National................................ 1,511,000 1,397,332 1,390,684
Barter transactions..................... 69,420 108,880 105,914
---------- ----------- -----------
Total sales..................... 6,000,069 5,295,099 5,285,376
---------- ----------- -----------
LESS COMMISSIONS:
Agency.................................. (743,803) (590,481) (599,079)
Representatives......................... (101,094) (94,995) (94,464)
---------- ----------- -----------
Total commissions............... (844,897) (685,476) (693,543)
---------- ----------- -----------
Net sales....................... 5,155,172 4,609,623 4,591,833
CBS income................................ 897,179 942,554 935,319
Production income......................... 38,789 48,330 69,020
Other..................................... 10,818 3,595 7,912
---------- ----------- -----------
Total revenues.................. 6,101,958 5,604,102 5,604,084
---------- ----------- -----------
OPERATING EXPENSES:
Technical................................. 282,261 302,984 281,425
Programming............................... 1,166,608 1,075,167 1,058,516
Sales..................................... 549,422 525,582 614,435
General (Note 2).......................... 1,639,130 1,610,016 1,547,380
Depreciation.............................. 442,290 408,918 426,101
Amortization of goodwill.................. 106,240 106,240 106,240
---------- ----------- -----------
Total operating expenses........ 4,185,951 4,028,907 4,034,097
---------- ----------- -----------
Income from operations.................... 1,916,007 1,575,195 1,569,987
OTHER INCOME (EXPENSES):
Interest expense (Notes 2 and 6).......... (472,213) (478,070) (497,159)
Gain on sale of equipment................. 33,765 6,850 2,575
---------- ----------- -----------
Income before income taxes................ 1,477,559 1,103,975 1,075,403
Income taxes -- state..................... 36,391 20,628 29,091
---------- ----------- -----------
Net income...................... 1,441,168 1,083,347 1,046,312
Distributions............................. (470,898) (951,279) (556,354)
Stockholders' and partners' equity,
beginning of year....................... 1,976,127 1,844,059 1,354,101
---------- ----------- -----------
Stockholders' and partners' equity, end of
year.................................... $2,946,397 $ 1,976,127 $ 1,844,059
========== =========== ===========
See accompanying notes to combined financial statements.
F-42
158
KXII BROADCASTERS, INC.
KXII TELEVISION, LTD.
COMBINED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $1,441,168 $ 1,083,347 $1,046,312
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 442,290 408,918 426,101
Amortization of goodwill.................. 106,240 106,240 106,240
Amortization of broadcast rights.......... 115,917 87,774 90,544
Gain on sale of equipment................. (33,765) (6,850) (2,575)
Payments on contracts payable for
broadcast rights....................... (88,684) (72,153) (64,981)
Change in operating assets and
liabilities:
Increase in trade accounts
receivable........................... (192,491) (442) (69,480)
Increase in employee accounts
receivable........................... (30,462) (2,723) (4,165)
Decrease (increase) in prepaid expenses
and other assets..................... 3,801 (6,026) 708
Increase (decrease) in accounts
payable.............................. 10,108 (45,240) (234,731)
Increase (decrease) in accrued
liabilities.......................... 88,084 (10,153) 103,285
---------- ----------- ----------
Net cash provided by operating
activities..................... 1,862,206 1,542,692 1,397,258
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment............. 33,765 6,850 2,575
Capital expenditures........................ (417,873) (404,623) (313,298)
---------- ----------- ----------
Net cash used in investing
activities..................... (384,108) (397,773) (310,723)
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations....... (138,850) (120,621) (128,575)
Payments on long-term debt.................. (66,850) (60,563) (104,867)
Distributions to shareholders and
partners.................................. (470,898) (951,279) (556,354)
---------- ----------- ----------
Net cash used in financing
activities..................... (676,598) (1,132,463) (789,796)
---------- ----------- ----------
Net increase in cash........................ 801,500 12,456 296,739
Cash at beginning of year................... 455,860 443,404 146,665
---------- ----------- ----------
Cash at end of year......................... $1,257,360 $ 455,860 $ 443,404
========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest.................................. $ 437,883 $ 472,787 $ 530,497
========== =========== ==========
Income taxes -- state..................... $ 20,628 $ 29,091 $ 36,189
========== =========== ==========
See accompanying notes to combined financial statements.
F-43
159
KXII BROADCASTING, INC.
KXII TELEVISION, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED FOR 1997 AND 1996)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPAL BUSINESS ACTIVITY
These combined financial statements include the accounts of KXII
Broadcasters, Inc. ("KXII, Inc.") and KXII Television, Ltd. ("KXII, Ltd.")
(collectively, the "Companies"). KXII, Inc. is an S Corporation that was created
in December 1992 to hold the assets, FCC license and CBS network affiliation
agreement for the operation of KXII Television Channel 12 ("KXII Channel 12").
KXII Channel 12 is a television broadcasting station with studios in Sherman,
Texas and Ardmore, Oklahoma. KXII Channel 12's broadcast signal covers a radius
of 75 miles in north Texas and south Oklahoma. As part of the broadcast
operations, KXII, Inc. extends credit to advertising clients in the broadcast
area.
KXII, Ltd.(a limited partnership) was formed in January 1996 to support the
operations of KXII, Inc. by supplying the sales and marketing activities of KXII
Channel 12. KXII, Inc. is the general partner of KXII, Ltd., while the other
limited partners of KXII, Ltd. are the same individuals as the shareholders of
KXII, Inc.
(B) PRINCIPLES OF COMBINATION
The accompanying combined financial statements present the combination of
the financial statements of KXII, Inc. and KXII, Ltd. in order to give a more
accurate presentation of the operations of KXII Channel 12. Material
intercompany transactions and balances have been eliminated in combination.
(C) CASH EQUIVALENTS
The Companies consider all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents. There were no cash
equivalents at December 31, 1998, 1997 or 1996.
(D) PROPERTY, PLANT AND EQUIPMENT
Property and equipment are valued at cost. Plant and equipment under
capital leases are stated at the present value of minimum lease payments.
Maintenance and repair costs are charged to expense as incurred. Gains and
losses on disposition of property and equipment are reflected in income.
Depreciation is computed on the straight-line and accelerated methods for
financial accounting purposes, based on the estimated useful lives of the assets
which range from five to thirty nine years.
(E) GOODWILL
Goodwill represents the excess cost over net assets acquired when KXII
Channel 12 was purchased by a related entity in 1986. On December 31, 1992, the
operating assets of
F-44
160
KXII BROADCASTING, INC.
KXII TELEVISION, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
KXII Channel 12 were transferred to KXII, Inc. In addition, certain assets of
K-Twelve, Ltd. were purchased for $4,249,591 by KXII, Inc. for a note payable to
the related entity. The goodwill is being amortized on a straight-line basis
over 40 years. KXII, Inc. assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation.
(F) BARTER TRANSACTIONS
The Companies enter into agreements in which advertising time is traded for
various products or services. Barter transactions are reported at the normal
advertising rates in effect. Revenue or expense and a corresponding asset or
liability are reported when advertisements are aired or when goods and services
are received.
(G) ADVERTISING
Advertising costs, which are principally included in sales expenses, are
expensed as incurred. Advertising expense was $26,373, $42,059, and $7,210 for
the years ended December 31, 1998, 1997, and 1996, respectively.
(H) INCOME TAXES
KXII, Inc. is an S corporation pursuant to the Internal Revenue Service
Code. In general, the federal income tax which results from taxable income
generated in an S corporation is the liability of the individual stockholders.
KXII, Ltd. is taxed as a partnership. No provision is made for income
taxes, since a partnership is not a taxable entity. The income of the
partnership flows through to the partners to be taxed at the individual level.
Taxes on income which are reflected in the combined financial statements
represent current state franchise taxes for Texas and Oklahoma.
(I) FCC LICENSE AND CBS NETWORK AFFILIATION AGREEMENT
KXII, Inc. has received an FCC license dated July 24, 1998 which expires in
August 2006. This license allows KXII, Inc. to broadcast its signal for KXII
Channel 12.
KXII, Inc. also has a network affiliation agreement with CBS for the period
January 1, 1996 to December 31, 2000. Under the agreement, KXII, Inc. will
receive various payments as well as television programs and advertising from CBS
as part of the agreement to air CBS programming.
(J) BROADCAST RIGHTS
Broadcast rights consist principally of rights to broadcast syndicated
programs, sports and feature films and are stated at the lower of cost or
estimated net realizable value. The
F-45
161
KXII BROADCASTING, INC.
KXII TELEVISION, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
total cost of these rights is recorded as an asset and a liability when the
program becomes available for broadcast. The amount recorded as an asset is
charged to operations based on the number of programs to be aired over the
broadcast period. The liability is reduced as payments are made on the contract.
The current portion of broadcast rights represents those rights available for
broadcast that are expected to be amortized in the succeeding year.
(K) USE OF ESTIMATES
The preparation of the accompanying combined financial statements in
conformity with generally accepted accounting principles requires management to
make certain estimates and assumptions that directly affect the results of
reported assets, liabilities, revenue and expenses. Actual results may differ
from these estimates.
(L) CREDIT RISK CONCENTRATIONS
At December 31, 1998, and at various times during the three years then
ended, the balance of cash at one financial institution exceeded the amount of
federal deposit insurance coverage.
2. RELATED PARTY TRANSACTIONS
K-Twelve, Ltd. is a limited partnership, which is largely owned by the same
shareholders as KXII, Inc. KXII, Inc. remitted $335,396 to K-Twelve, Ltd. in
each of 1998, 1997 and 1996 in connection with the use of various assets and
services provided. Because this transaction is between related parties, it has
been recorded as a capital lease and management fee for financial statements
purposes. Principal and interest payments of $113,617 have been recorded to
represent a capital lease for the broadcast studios and equipment in Sherman,
Texas and Ardmore, Oklahoma, with the remainder, $221,779, reflected as
management fees. KXII, Inc. also has a note payable to K-Twelve, Ltd. for the
purchase of certain assets in 1992, which is discussed further in Note 6.
KXII, Inc. also leases certain equipment under capital lease arrangements
from an entity which is owned in part by a shareholder of KXII, Inc., as
discussed in Note 8.
Other transactions resulting in payments to related parties were as
follows:
- Note payable of $99,524 as of December 31, 1998, 1997, and 1996 and
accrued interest payable of $24,458, $18,487, and $12,515 at December 31,
1998, 1997, and 1996, respectively, to a director of KXII, Inc. Interest
expense of $5,971 was accrued during each of 1998, 1997, and 1996.
- Management fees of $199,200, $199,200, and $124,500 were paid during
1998, 1997, and 1996, respectively, to officers of KXII, Inc. Management
fees of $49,800, $49,800, and $124,500 were paid during 1998, 1997, and
1996, respectively, to officers of KXII, Ltd.
F-46
162
KXII BROADCASTING, INC.
KXII TELEVISION, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- Fees to the Board of Directors of KXII, Inc. of $30,000 were paid during
each of 1998, 1997, and 1996.
- At December 31, 1998, there was an advance of $32,388 due from a
shareholder of KXII, Inc.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998, 1997 and 1996 consisted
of the following:
ESTIMATED
1998 1997 1996 USEFUL LIVES
---------- ---------- ---------- --------------
Buildings.......................... $ 562,318 562,318 559,566 15 to 39 years
Transmitter and tower.............. 1,447,816 1,041,592 1,040,467 5 to 39 years
Equipment.......................... 2,267,128 2,546,230 2,452,027 5 to 7 years
Furniture and fixtures............. 261,880 367,917 350,183 5 to 7 years
Automobiles........................ 372,405 344,690 296,880 5 years
Airplane........................... 230,026 230,026 230,026 5 years
---------- ---------- ----------
$5,141,573 5,092,773 4,929,149
========== ========== ==========
4. NOTE PAYABLE -- RELATED PARTY
As of January, 1995, KXII, Inc. purchased 500 shares of stock from a former
stockholder for $109,524. This amount was to be paid in installments through
December 31, 1998, with interest on the unpaid balance at a per annum rate of
6%; however, it was still outstanding at December 31, 1998. At December 31,
1998, 1997, and 1996, there was a balance of $99,524 owed to the former
stockholder, plus accrued interest of $24,458, $18,487, and $12,515 at December
31, 1998, 1997, and 1996, respectively.
5. CONTRACTS PAYABLE FOR BROADCAST RIGHTS
Contracts payable for broadcast rights are classified as current or
long-term liabilities in accordance with the payment terms of the contracts.
Required payments under contractual agreements for broadcast rights recorded at
December 31, 1998 were as follows:
1999........................................................ $156,370
2000........................................................ 99,394
2001........................................................ 10,530
2002........................................................ 14,040
2003........................................................ 14,040
Thereafter.................................................. 31,590
--------
$325,964
========
F-47
163
KXII BROADCASTING, INC.
KXII TELEVISION, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT -- RELATED PARTY
On December 31, 1992, KXII, Inc., purchased certain assets of K-Twelve,
Ltd. for a note payable in the amount of $4,249,591. The note, which bears
interest at 10% per annum, is due in quarterly payments of $116,064, including
interest, with the final payment due on December 31, 2017. The balance of the
note was $3,931,776, $3,998,626, and $4,059,189 at December 31, 1998, 1997, and
1996, respectively, and interest expense of $397,407, $403,695, and $409,390 was
accrued during 1998, 1997, and 1996, respectively. Following is a schedule of
future debt payments at December 31, 1998.
1999........................................................ $ 73,791
2000........................................................ 81,450
2001........................................................ 89,906
2002........................................................ 99,239
2003........................................................ 109,541
Thereafter.................................................. 3,477,849
----------
3,931,776
Less current portion........................................ 73,791
----------
$3,857,985
==========
7. RETIREMENT PLAN
The Companies have an Individual Retirement Account Plan and Trust (the
"Plan") for their employees. All employees who have completed at least three
years of continuous service with one or more of the Companies are eligible to
participate. In order to participate in the Plan, eligible employees are
required to contribute to the trust a portion of their base annual compensation,
which will be matched by the Companies' contribution of $4.00 for every $3.00
contributed by the employees. The maximum annual per-employee contribution to
the Plan is $600. The employees are fully vested in all contributions made to
their trust accounts. The Companies made contributions of $13,526, $9,922, and
$11,520 for the years ended December 31, 1998, 1997, and 1996, respectively.
8. LEASES
KXII, Inc. leases certain equipment and buildings from related entities
under capital leases. The equipment is capitalized in the combined balance sheet
at net book value of $902,975, $596,994 and $704,650 at December 31, 1998, 1997
and 1996, respectively. The following is a schedule by years of future minimum
lease payments under capital leases together with the present value of the net
minimum lease payments as of December 31, 1998:
Year Ending December 31,
1999................................................... $230,480
2000................................................... 220,637
2001................................................... 169,556
F-48
164
KXII BROADCASTING, INC.
KXII TELEVISION, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2002................................................... 169,556
2003................................................... 23,308
--------
Total minimum lease payments................................ 813,537
Less: amount representing interest at 10.0% to 12.0%........ 143,314
Less: current portion....................................... 169,191
--------
Long-term capital lease obligations less current portion.... $501,032
========
9. COMMITMENTS
KXII, Inc. has a buy-sell agreement to purchase the stock of the station
manager (500 shares) for book value as of the prior year-end, when and if
certain "triggering events" occur. As of December 31, 1998, none of the
"triggering events" had occurred.
KXII, Inc. has employment contracts with three key members of its broadcast
team. These contracts provide stated annual salaries for two and three-year
periods ending in 2000 and 2001.
Under various program license agreements, KXII, Inc. is obligated to
broadcast certain programs a specified number of times. In addition, as stated
in Note 1, KXII, Inc. has certain broadcast and other requirements in order to
maintain its FCC license and CBS network affiliation.
10. SALE OF THE COMPANIES
KXII Broadcasters, Ltd. (see Note 11 below) and KXII, Ltd. have signed an
agreement with Gray Communications Systems, Inc. to sell substantially all of
the assets of the Companies for an aggregate purchase price of approximately
$41.5 million. An application for the transfer of license has been submitted to
the Federal Communications Commission for approval.
11. SUBSEQUENT EVENTS
On April 19, 1999, the shareholders of KXII, Inc. contributed their stock
to a newly formed corporation that subsequently contributed the stock to two
newly formed subsidiaries. As permitted under the Texas Business Corporation Act
and the Texas Revised Partnership Act, KXII, Inc. then was converted to a Texas
limited partnership, KXII Broadcasters, Ltd. The broadcast operations of KXII
Channel 12 will remain in the new partnership.
F-49