<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________ .
COMMISSION FILE NUMBER 1-13796
GRAY COMMUNICATIONS SYSTEMS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-0285030
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
126 N. WASHINGTON ST., ALBANY, GEORGIA 31701
------------------------------------------------------
(Address of principal executive offices) (Zip code)
(912) 888-9390
------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
CLASS A COMMON STOCK, (NO PAR VALUE)
4,463,994 SHARES AS OF MAY 7, 1996
1
<PAGE>
INDEX
GRAY COMMUNICATIONS SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Condensed consolidated balance sheets (unaudited) - December 31, 1995
and March 31, 1996
Condensed consolidated statements of income (unaudited) -
Three months ended March 31, 1995 and 1996
Condensed consolidated statement of stockholders' equity (unaudited) -
Three months ended March 31, 1996
Condensed consolidated statements of cash flows (unaudited) -
Three months ended March 31, 1995 and 1996
Notes to condensed consolidated financial statements (unaudited) -
March 31, 1996
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- ----------
2
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
------------ -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 559,991 $ 2,081,627
Trade accounts receivable less
allowance for doubtful accounts of
$450,000 and $623,000, respectively 9,560,274 10,145,128
Recoverable income taxes 1,347,007 957,246
Inventories 553,032 231,964
Current portion of program broadcast
rights 1,153,058 1,326,825
Other current assets 263,600 651,407
------------ -------------
13,436,962 15,394,197
PROPERTY AND EQUIPMENT 37,618,893 40,505,148
Less allowance for depreciation (20,601,819) (21,406,793)
------------ -------------
17,017,074 19,098,355
OTHER ASSETS
Deferred acquisition costs (Note C) 3,330,481 1,951,164
Deferred loan costs (Note C) 1,232,261 1,939,173
Goodwill and other intangibles
(Note C) 42,004,050 73,938,623
Other 1,219,650 1,195,139
------------ -------------
47,786,442 79,024,099
------------ -------------
$ 78,240,478 $ 113,516,651
------------ -------------
------------ -------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable $ 3,752,742 $ 3,372,917
Accrued expenses 5,839,007 6,226,119
Current portion of program broadcast obligations 1,205,784 1,222,983
Current portion of long-term debt 2,861,672 1,516,325
------------ ------------
13,659,205 12,338,344
LONG-TERM DEBT 51,462,645 86,924,415
NON-CURRENT LIABILITIES 4,133,030 4,535,319
COMMITMENTS AND CONTINGENCIES (Note D)
STOCKHOLDERS' EQUITY (Note B)
Class A Common Stock, no par value;
authorized 10,000,000 shares;
issued 5,082,756 and 5,126,012
shares, respectively 6,795,976 7,262,594
Retained earnings 8,827,906 9,094,263
------------ -----------
15,623,882 16,356,857
Treasury stock, 663,180 shares at cost (6,638,284) (6,638,284)
------------ -----------
8,985,598 9,718,573
------------ -----------
$ 78,240,478 $113,516,651
------------ -----------
------------ -----------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
1995 1996
------------ -----------
<S> <C> <C>
OPERATING REVENUES
Broadcasting (net of agency commissions) $ 8,349,661 $11,449,645
Publishing 4,800,644 5,576,934
------------ -----------
13,150,305 17,026,579
EXPENSES
Broadcasting 5,589,776 7,309,865
Publishing 3,961,563 4,808,062
Corporate and administrative 492,951 775,586
Depreciation and amortization 878,749 1,395,254
Non-cash compensation paid in
Class A common stock (Note B) 236,158 60,000
------------ -----------
11,159,197 14,348,767
------------ -----------
1,991,108 2,677,812
Miscellaneous income 43,313 63,514
------------ -----------
2,034,421 2,741,326
Interest expense 1,376,464 2,156,893
------------ -----------
INCOME BEFORE INCOME TAXES 657,957 584,433
Income tax expense 254,000 229,000
------------ -----------
NET EARNINGS $ 403,957 $ 355,433
------------ -----------
------------ -----------
Average outstanding common shares 4,307,595 4,606,773
------------ -----------
------------ -----------
NET EARNINGS PER
COMMON SHARE $.09 $.08
---- ----
---- ----
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Class A
Common Stock Treasury Stock
-------------------------- ---------------------------
Retained
Shares Amount Shares Amount Earnings Total
--------- ---------- --------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 5,082,756 $6,795,976 (663,180) $(6,638,284) $8,827,906 $8,985,598
Net income for the three
months ended
March 31, 1996 0 0 0 0 355,433 355,433
Cash dividends
($.02 per share) 0 0 0 0 (89,076) (89,076)
Issuance of Class A Common Stock:
401(k) Plan 4,256 78,369 0 0 0 78,369
Directors stock plan 22,500 228,749 0 0 0 228,749
Non-qualified stock plan 16,500 159,500 0 0 0 159,500
--------- ---------- -------- ---------- ---------- ----------
Balance at
March 31, 1996 5,126,012 $7,262,594 (663,180) $(6,638,284) $9,094,263 $9,718,573
--------- ---------- -------- ------------ ---------- ----------
--------- ---------- -------- ------------ ---------- ----------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------------
1995 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 403,957 $ 355,433
Items which did not use (provide) cash:
Depreciation 584,988 848,427
Amortization of intangible assets 293,761 546,827
Amortization of program broadcast rights 401,838 646,820
Payments for program broadcast rights (481,311) (661,603)
Compensation paid in Class A common
stock 236,158 60,000
Supplemental employee benefits (76,643) (135,755)
Class A Common stock contributed to 401(k) Plan 70,417 78,369
Deferred income taxes 91,000 343,850
(Gain) loss on disposal of assets (725) (20,406)
Changes in operating assets and liabilities:
Receivables, inventories, and
other current assets 687,323 1,578,389
Accounts payable and other
current liabilities (690,692) (521,496)
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,520,071 3,118,855
INVESTING ACTIVITIES
Acquisition of newspaper business (1,232,509) 0
Acquisition of television business 0 (34,300,713)
Purchases of property and equipment (973,437) (813,588)
Deferred acquisition costs 0 (931,623)
Proceeds from asset sales 1,293 113,297
Other (164,563) (80,188)
------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES (2,369,216) (36,012,815)
FINANCING ACTIVITIES
Dividends paid (84,496) (89,076)
Class A Common stock transactions 0 388,249
Proceeds from borrowings of long-term debt 700,000 36,725,000
Payments on long-term debt (33,652) (2,608,577)
------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 581,852 34,415,596
------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (267,293) 1,521,636
Cash and cash equivalents at beginning
of period 558,520 559,991
CASH AND CASH EQUIVALENTS ------------ ------------
AT END OF PERIOD $ 291,227 $ 2,081,627
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Gray
Communications Systems, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1996, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1995.
Certain amounts in the accompanying unaudited consolidated financial statements
have been reclassified to conform to the 1996 format.
NOTE B--EMPLOYMENT AGREEMENTS
During the quarter ended March 31, 1995, the Company awarded 150,000 shares
of its Class A Common Stock to its former president and chief executive
officer under his employment agreement. Compensation expense of
approximately $176,000 was recognized for these awards in the quarter ended
March 31, 1995.
The Company has an employment agreement with its current President which
provides for an award of 122,034 shares of Class A Common Stock if his
employment with the Company continues until September 1999. Approximately
$60,000 of expense was recognized in the first quarter of each of 1995 and
1996 relating to this award and approximately $1.2 million of expense will be
recognized over the five-year period ending in 1999.
NOTE C--BUSINESS ACQUISITIONS
The Company's acquisitions in 1995 and 1996 have been accounted for under the
purchase method of accounting. Under the purchase method of accounting, the
results of operations of the acquired businesses are included in the
accompanying unaudited consolidated financial statements as of their respective
acquisition dates. The assets and liabilities of acquired businesses are
included based on an allocation of the purchase price.
Pending Acquisitions
In December 1995, the Company entered into an asset purchase agreement to
acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV
("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV
("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a
paging business (collectively, the "Phipps Business"). The purchase price
is estimated at approximately $185.0 million. The Company's Board of
Directors has agreed to pay Bull Run Corporation ("Bull Run"), a principal
stockholder of the Company, a finder's fee equal to 1% of the proposed
purchase price for services performed, of which $1.05 million was due and
included in accounts payable at March 31, 1996.
The consummation of the Phipps Acquisition, which is expected to occur by
September 1996, is subject to approval by the appropriate regulatory
agencies. In connection with the Phipps Acquisition, the Company is seeking
approval from the Federal Communications Commission ("FCC") of the assignment
of the television broadcast licenses for WCTV and WKXT. Current FCC
regulations will require the Company to divest itself of WALB-TV ("WALB") in
Albany, Georgia and WJHG-TV ("WJHG") in Panama City, Florida due to common
ownership restrictions on stations with overlapping signals. In order to
satisfy applicable FCC requirements, the Company, subject to FCC approval,
intends to swap such assets for assets of one or more television stations of
comparable value and with comparable broadcast cash flow in a transaction
qualifying for deferred capital gains treatment under the "like-kind
exchange" provision of Section 1033 of the Internal Revenue Code of 1986 (the
"Code"). If the Company is unable to effect such a swap on satisfactory
terms within the time period granted by the FCC, the Company may transfer
such assets to a trust with a view towards the trustee effecting a swap or
sale of such assets. Any such trust arrangement would be subject to the
approval of the FCC.
8
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE C--BUSINESS ACQUISITIONS (CONTINUED)
Condensed balance sheets of WALB and WJHG are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------
WALB WJHG
--------- --------
<S> <C> <C>
Current assets......................................... $ 1,667 $ 855
Property and equipment................................. 1,769 1,078
Other assets........................................... 76 3
--------- --------
Total assets........................................... $ 3,512 $ 1,936
--------- --------
--------- --------
Current liabilities.................................... $ 1,127 $ 428
Other liabilities...................................... 228 0
Stockholders' equity................................... 2,157 1,508
--------- --------
Total liabilities and stockholders' equity............. $ 3,512 $ 1,936
--------- --------
--------- --------
</TABLE>
Condensed income statement data of WALB and WJHG are as follows (in thousands):
<TABLE>
<CAPTION>
WALB WJHG
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
----------------- ---------------
1995 1996 1995 1996
------- ------- ----- -------
<S> <C> <C> <C> <C>
Broadcasting revenues......................... $ 2,182 $ 2,340 $ 851 $ 1,099
Expenses...................................... 1,190 1,242 802 949
------- ------- ----- -------
Operating income.............................. 992 1,098 49 150
Other income.................................. 4 9 15 16
------- ------- ----- -------
Income before income taxes.................... 996 1,107 64 166
------- ------- ----- -------
------- ------- ----- -------
Net income.................................... $ 618 $ 686 $ 40 $ 103
------- ------- ----- -------
------- ------- ----- -------
</TABLE>
The Phipps Acquisition will be funded with a portion of the anticipated net
proceeds of proposed public offerings by the Company of $150.0 million
principal amount of the Company's senior subordinated notes, and 3.5 million
shares of the Company's Class B Common Stock, the sale of 1,000 shares of the
Company's Series B Preferred Stock ($10.0 million) and warrants to Bull Run
and the sale of KTVE Inc., the Company's broadcast station in Monroe,
Louisiana/El Dorado, Arkansas. Additionally, the Company plans to amend its
existing bank credit facility and other senior indebtedness (See Notes D and
E).
In connection with the Phipps Acquisition, a bank has provided a $10.0
million standby letter of credit to the seller of the Phipps Business on
behalf of the Company. The letter of credit will be payable under certain
conditions if the Phipps Acquisition is not completed. In connection with
the issuance of the letter of credit, a stockholder of the Company has
executed a put agreement which the bank can exercise if the Company defaults
on repayment of any amounts that might be paid in accordance with the terms
of the letter of credit.
9
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE C--BUSINESS ACQUISITIONS (CONTINUED)
1996 Acquisitions
On January 4, 1996, the Company purchased substantially all of the assets of
WRDW-TV, a CBS television affiliate serving the Augusta, Georgia television
market (the "Augusta Acquisition"). The purchase price of approximately $35.9
million, excluding assumed liabilities of approximately $1.3 million, was
financed primarily through long-term borrowings. The assets acquired consisted
of office equipment and broadcasting operations located in North Augusta, South
Carolina. Based on a preliminary allocation of the purchase price, the excess
of the purchase price over the fair value of net tangible assets acquired was
approximately $32.5 million. In connection with the Augusta Acquisition, the
Company's Board of Directors approved the payment of a $360,000 finders fee to
Bull Run.
Funds for the Augusta Acquisition were obtained from the modification of the
Company's existing bank debt to a variable rate reducing revolving credit
facility (the "Senior Credit Facility") and the sale to Bull Run of an 8%
subordinated note due January 3, 2005 in the principal amount of $10.0
million (the "8% Note"). In connection with the sale of the 8% Note, the
Company also issued warrants to Bull Run to purchase 487,500 shares of Class
A Common Stock at $17.88 per share, 300,000 shares of which are currently
vested, with the remainder vesting in five equal annual installments
commencing in 1997 provided that the 8% Note is outstanding. The Senior
Credit Facility provides for a credit line up to $55.0 million, of which
$52.6 million was outstanding at March 31, 1996. This transaction also
required a modification of the interest rate of the Company's $25.0 million
senior secured note with an institutional investor from 10.08% to 10.7%.
As part of the financing arrangements for the Phipps Acquisition, the 8% Note
will be retired and the Company will issue to Bull Run, in exchange for the
8% Note, 1,000 shares of Series A Preferred Stock. The warrants issued with
the 8% Note will vest in accordance with the schedule described above
provided the Series A Preferred Stock remains outstanding.
An unaudited pro forma statement of income for the three months ended March 31,
1995, is presented below and assumes that the Augusta Acquisition occurred on
January 1, 1995.
This pro forma unaudited statement of income does not purport to represent
the Company's actual results of operations had the Augusta Acquisition
occurred on January 1, 1995, and should not serve as a forecast of the
Company's operating results for any future periods. The pro forma adjustments
are based solely upon certain assumptions that management believes are
reasonable under the circumstances at this time. Subsequent adjustments are
expected upon final determination of the allocation of the purchase price. An
unaudited pro forma statement of income for the three months ended March 31,
1995 is as follows (in thousands, except per share data):
Operating revenues............................... $15,106
Operating expenses............................... 12,906
-------
2,200
Miscellaneous income (expense), net.............. 45
Interest expense................................. 2,197
-------
Pro forma income before income taxes............. 48
Income tax expense............................... 21
-------
Pro forma net income............................. $ 27
-------
-------
Pro forma average shares outstanding 4,308
-------
-------
Pro forma earnings per share $ .01
-------
-------
10
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE C--BUSINESS ACQUISITIONS (CONTINUED)
1995 Acquisition
On January 6, 1995, the Company purchased substantially all of the assets of
the Gwinnett Post-Tribune and assumed certain liabilities (the "Gwinnett
Acquisition"). The assets consist of office equipment and publishing
operations located in Lawrenceville, Georgia. The purchase price of $3.7
million, including assumed liabilities of approximately $370,000, was paid by
approximately $1.2 million in cash (financed through long-term borrowings and
cash from operations), the issuance of 44,117 shares of Class A Common Stock
(having fair value of $500,000), and $1.5 million payable to the sellers
pursuant to non-compete agreements. The excess of the purchase price over
the fair value of net tangible assets acquired was approximately $3.4
million. In connection with the Gwinnett Acquisition, the Company's Board of
Directors approved the payment of a $75,000 finders fee to Bull Run.
NOTE D--COMMITMENTS AND CONTINGENCIES
The Company entered into an interest rate swap agreement on June 2, 1995, to
effectively convert a portion of its floating rate debt to a fixed rate
basis. The interest rate swap is effective for five years. Approximately
$25.0 million of the Company's outstanding long-term debt was subject to this
interest rate swap agreement at March 31, 1996. The effective rate of the
Senior Credit Facility and interest rate swap at March 31, 1996, was
approximately 8.95% and 9.61%, respectively. The unrealized gain for the
interest rate swap was approximately $109,000 at March 31, 1996, based upon
comparison to treasury bond yields for bonds with similar maturity dates as
the interest rate swap.
The Company has entered into a non-binding letter of intent to sell KTVE Inc.,
the Company's NBC-affiliated station serving Monroe, Louisiana/El Dorado,
Arkansas, for approximately $9.5 million in cash plus the amount of the accounts
receivable on the date of closing (estimated to be approximately $750,000).
This transaction, which is expected to occur by September 1996, is subject to
approval by the appropriate regulatory agencies.
A condensed balance sheet of KTVE is as follows (in thousands):
MARCH 31, 1996
--------------
Current assets.............................. $ 893
Property and equipment...................... 1,647
Other assets................................ 557
------
Total assets................................ $3,097
------
------
Current liabilities......................... $ 298
Other liabilities........................... 476
Stockholders' equity........................ 2,323
------
Total liabilities and stockholders' equity.. $3,097
------
------
11
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE D--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Condensed income statement data of KTVE is as follows (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
1995 1996
---- ------
Broadcasting revenues.................... $919 $1,066
Expenses................................. 931 970
---- ------
Operating income (loss).................. (12) 96
Other income............................. 4 3
---- ------
Income (loss) before income taxes........ (8) 99
---- ------
---- ------
Net income (loss) ....................... $ (5) $ 61
---- ------
---- ------
NOTE E--SUBSEQUENT EVENTS
On May 2, 1996, the Company filed two registration statements with the
Securities and Exchange Commission for a public offering of $150.0 million
principal amount of its senior subordinated notes due 2006 and 3.5 million
shares of its Class B Common Stock. The Company intends to use the net
proceeds from these offerings in part to fund the Phipps Acquisition and to
repay indebtedness under the Senior Credit Facility. The remainder thereof
will be used for working capital and general corporate purposes.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS OF THE COMPANY
INTRODUCTION
The Company derives its revenues from its television broadcasting and
publishing operations. As a result of the Augusta Acquisition, the proportion
of the Company's revenues derived from television broadcasting has increased.
As a result of the higher operating margins associated with the Company's
television broadcasting operations, the profit contribution of these
operations as a percentage of revenues has exceeded, and is expected to
continue to exceed, the profit contribution of the Company's publishing
operations. Set forth below, for the periods indicated, is certain
information concerning the relative contributions of the Company's television
broadcasting and publishing operations (dollars in thousands).
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
1995 1996
--------------------- ----------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ---------- --------- ----------
TELEVISION BROADCASTING
Revenues $8,349.7 63.5% $11,449.6 67.2%
Operating income (1) 2,067.4 77.4 3,127.4 88.6
PUBLISHING
Revenues $4,800.6 36.5% $ 5,576.9 32.8%
Operating income (1) 603.9 22.6 401.3 11.4
(1) Excludes any allocation of corporate and administrative expenses.
TELEVISION BROADCASTING
Set forth below are the principal types of broadcasting revenues earned by
the Company's television stations for the periods indicated and the
percentage contribution of each to total Company revenues (dollars in
thousands):
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
1995 1996
--------------------- ----------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
COMPANY COMPANY
AMOUNT REVENUES AMOUNT REVENUES
-------- ---------- --------- ----------
NET REVENUES:
Local $4,964.4 37.7% $ 6,675.4 39.2%
National 2,470.0 18.9 3,089.3 18.1
Network compensation 595.7 4.5 866.6 5.1
Political 25.4 .2 212.9 1.2
Production and other 294.2 2.2 605.4 3.6
-------- ---------- --------- ----------
$8,349.7 63.5% $11,449.6 67.2%
-------- ---------- --------- ----------
-------- ---------- --------- ----------
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
RESULTS OF OPERATIONS OF THE COMPANY (CONTINUED)
TELEVISION BROADCASTING (CONTINUED)
In the Company's broadcasting operations, broadcast advertising is sold for
placement either preceding or following a television station's network
programming and within local and syndicated programming. Broadcast advertising
is sold in time increments and is priced primarily on the basis of a program's
popularity among the specific audience an advertiser desires to reach, as
measured by Nielsen. In addition, broadcast advertising rates are affected by
the number of advertisers competing for the available time, the size and
demographic makeup of the market served by the station and the availability of
alternative advertising media in the market area. Broadcast advertising rates
are the highest during the most desirable viewing hours, with corresponding
reductions during other hours. The ratings of a local station affiliated with a
major network can be affected by ratings of network programming.
Most broadcast advertising contracts are short-term, and generally run only for
a few weeks. The Company estimates that approximately 57.6% of the gross
revenues of the Company's television stations for the three months ended March
31, 1996 were generated from local advertising. Broadcast advertising revenues
are generally higher during even numbered election years due to spending by
political candidates.
The broadcasting operations' primary operating expenses are employee
compensation, related benefits and programming costs. In addition, the
broadcasting operations incur overhead expenses such as maintenance, supplies,
insurance, rent and utilities. A large portion of the operating expenses of the
broadcasting operations is fixed.
PUBLISHING
Set forth below are the principal types of publishing revenues earned by the
Company's publishing operations for the periods indicated and the percentage
contribution of each to total Company revenues (dollars in thousands):
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
1995 1996
--------------------- ----------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
COMPANY COMPANY
AMOUNT REVENUES AMOUNT REVENUES
-------- ---------- --------- ----------
NET REVENUES:
Retail advertising $2,443.7 18.6% $2,607.6 15.3%
Classified 1,175.4 8.9 1,482.2 8.7
Circulation 928.3 7.1 1,114.9 6.6
Other 253.2 1.9 372.2 2.2
-------- ---------- --------- ----------
$4,800.6 36.5% $5,576.9 32.8%
-------- ---------- --------- ----------
-------- ---------- --------- ----------
In the Company's publishing operations, advertising contracts are generally
annual and primarily provide for a commitment as to the volume of advertising
purchased by a customer. The publishing operations' advertising revenues are
primarily generated from retail advertising.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
RESULTS OF OPERATIONS OF THE COMPANY (CONTINUED)
PUBLISHING (CONTINUED)
The publishing operations' primary operating expenses are employee
compensation, related benefits and newsprint costs. In addition, the
publishing operations incur overhead expenses such as maintenance, supplies,
insurance, rent and utilities. A large portion of the operating expenses of
the publishing operations is fixed, although the Company has experienced
significant variability in its newsprint costs.
MEDIA CASH FLOW
The following table sets forth certain operating data for both the broadcast and
publishing operations for the three months ended March 31, 1995 and 1996
(dollars in thousands):
THREE MONTHS ENDED MARCH 31,
1995 1996
-----------------------------
Operating income $1,991.1 $2,677.8
Add:
Amortization of program license rights 401.8 646.8
Depreciation and amortization 878.7 1,395.3
Corporate overhead 493.0 775.6
Non-cash compensation and contributions to the
Company's 401(k) plan,
paid in Class A Common Stock 301.4 131.5
Less:
Payments for program license liabilities (481.3) (661.6)
-------- --------
Media Cash Flow (1) $3,584.7 $4,965.4
-------- --------
-------- --------
(1) Of Media Cash Flow, $2.7 million and $4.2 million was attributable to the
Company's broadcasting operations during the three months ended March 31, 1995
and 1996, respectively.
"Media Cash Flow" is defined as operating income from broadcast and
publishing operations before income taxes and interest expense, plus
depreciation and amortization (including amortization of program license
rights), non-cash compensation and corporate overhead, less payments for
program license liabilities. The Company has included Media Cash Flow data
because such data are commonly used as a measure of performance for broadcast
companies and are also used by investors to measure a company's ability to
service debt. Media Cash Flow is not, and should not be used as, an indicator
or alternative to operating income, net income or cash flow as reflected in
the consolidated financial statements of the Company and is not a measure of
financial performance under generally accepted accounting principles and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996 AND THE THREE MONTHS ENDED
MARCH 31, 1995.
REVENUES. Total revenues for the quarter ended March 31, 1996, increased
$3.9 million, or 29.5%, over the quarter ended March 31, 1995, from $13.1
million to $17.0 million. This increase was attributable to (i) the Augusta
Acquisition, which occurred on January 4, 1996, and (ii) increases in
publishing and broadcasting (excluding the Augusta Acquisition) revenues. The
Augusta Acquisition accounted for $2.1 million or 53.6% of the revenue
increase.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996 AND THE THREE MONTHS ENDED
MARCH 31, 1995 (CONTINUED).
Broadcast net revenues increased $3.1 million or 37.1% over the same period
of the prior year, from $8.3 million to $11.4 million. Revenues generated by
the Augusta Acquisition accounted for $2.1 million or 67.1% of the increase.
On a pro forma basis, broadcast net revenues for WRDW-TV for the three months
ended March 31, 1996 increased $125,000 or 6.4% over the same period of the
prior year. Broadcast net revenues, excluding the Augusta Acquisition,
increased $1.0 million or 12.2%, over the three months ended March 31, 1995.
Approximately $627,000 and $117,000 of the $1.0 million increase in total
broadcast net revenues, excluding the Augusta Acquisition, were due to higher
local and political advertising spending, respectively. The Company's
broadcast operations also experienced increased revenues of approximately
$200,000 associated with a sports programming joint venture which covered the
University of Kentucky's NCAA basketball championship.
Publishing revenues increased $776,000 or 16.2% over the three months ended
March 31, 1995, from $4.8 million to $5.6 million. Advertising and
circulation revenues comprised $471,000 and $187,000, respectively, of the
revenue increase. The increase in advertising revenue was primarily the
result of rate and linage increases in classified advertising. The increase
in circulation revenue can be attributed primarily to price increases over
the same period of the prior year and the conversion of the Gwinnett Daily
Post to a five-day-a-week paper. Approximately $95,000 of the publishing
revenue increase was the result of higher special events revenue.
OPERATING EXPENSES. Operating expenses for the three months ended March 31,
1996 increased $3.2 million or 28.6% over the same three month period ended
March 31, 1995, from $11.2 million to $14.4 million, due to the Augusta
Acquisition and increased expenses at the broadcasting and publishing
operations.
Broadcasting expenses for the three months ended March 31, 1996, increased $1.7
million or 30.8% over the same period of the prior year, from $5.6 million to
$7.3 million. This increase was primarily attributable to the Augusta
Acquisition. On a pro forma basis, broadcast expenses for the Augusta
Acquisition for the three months ended March 31, 1996 decreased $133,000 or 9.1%
over the same period of 1995, from $1.4 million to $1.3 million. Broadcasting
expenses, excluding the Augusta Acquisition, increased $391,000 or 7.0%,
primarily as the result of higher payroll related costs.
Publishing expenses for the three months ended March 31, 1996, increased
$846,000 or 21.4% over the same period of the prior year, from $4.0 million
to $4.8 million. This increase resulted primarily from the conversion of the
Gwinnett Daily Post to a five-day-a-week paper and the acquisition of
advertising only publications in September 1995. Newsprint costs increased
27% while consumption was up 11%. Payroll related costs, promotional costs,
product delivery costs and outside service costs were up over the same
quarter of the prior year.
Corporate and administrative expenses for the three months ended March 31,
1996, increased $283,000 or 57.3% over the same period of the prior year,
from $493,000 to $776,000. This increase was attributable primarily to the
addition of several new officers.
Depreciation of property and equipment and amortization of intangible assets was
$1.4 million for the three months ended March 31, 1996, compared to $879,000 for
the same period of the prior year, an increase of $516,000 or 58.8%. This
increase was primarily the result of higher depreciation and amortization costs
related to the Augusta Acquisition and $3.3 million of capital expenditures made
in 1995.
Non-cash compensation paid in Class A Common Stock resulting from the Company's
employment agreements with its current President and its former chief executive
officer decreased $176,000, or 74.6% for the three months ended March 31, 1996,
from $236,000 to $60,000. This decrease results from the Company's award in
1995 of 150,000 shares of Class A Common Stock to the former chief executive
officer, of which all of the expense was recognized in 1995 ($176,000 in the
quarter ended March 31, 1995).
INTEREST EXPENSE. Interest expense increased $780,000 or 56.7%, from $1.4
million for the three months ended March 31, 1995 to $2.2 million for the three
months ended March 31, 1996. This increase was attributable primarily to
increased levels of debt resulting from the financing of the Augusta
Acquisition.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital (deficiency) was $(222,000) and $3.1 million at
December 31, 1995 and March 31, 1996, respectively. The Company's cash
provided from operations was $1.5 million and $3.1 million for the three months
ended March 31, 1995 and 1996, respectively.
The Company's cash used in investing activities was $2.4 million and $36.0
million for the three months ended March 31, 1995 and 1996, respectively. The
increased usage of $33.6 million was due primarily to the Augusta Acquisition.
The Company was provided $582,000 and $34.4 million in cash by financing
activities for the three months ended March 31, 1995 and 1996, respectively, due
primarily to the funding of the Gwinnett Acquisition in 1995 and the Augusta
Acquisition in 1996. Long-term debt was $88.4 million at March 31, 1996.
In the three months ended March 31, 1996, the Company made $814,000 in capital
expenditures, relating primarily to broadcasting operations and paid $662,000
for program broadcast rights. The Company anticipates making $3.0 million in
capital expenditures and $2.7 million in payments for program broadcast rights
for the year 1996.
The Company has entered into a non-binding letter of intent to sell KTVE for
approximately $9.5 million in cash plus the amount of the accounts receivable on
the date of the closing, which is expected to occur by September 1996. The
Company anticipates the taxes resulting from the sale of KTVE will aggregate
approximately $2.8 million.
In connection with the Phipps Acquisition, the Company will be required to
divest WALB and WJHG under current FCC regulations. However, these rules may be
revised by the FCC upon conclusion of pending rule-making proceedings. In order
to satisfy applicable FCC requirements, the Company, subject to FCC approval,
intends to swap such assets for assets of one or more television stations of
comparable value and with comparable broadcast cash flow in a transaction
qualifying for deferred capital gains treatment under the "like-kind exchange"
provision of Section 1033 of the Code. If the Company is unable to effect such
a swap on satisfactory terms within the time period granted by the FCC under the
waivers, the Company may transfer such assets to a trust with a view towards the
trustee effecting a swap or sale of such assets. Any such trust arrangement
would be subject to the approval of the FCC. It is anticipated that the Company
would be required to relinquish operating control of such assets to a trustee
while retaining the economic risks and benefits of ownership. If the Company or
such trust is required to effect a sale of WALB, the Company would incur a
significant gain and related tax liability, the payment of which could have a
material adverse effect on the Company's ability to acquire comparable assets
without incurring additional indebtedness.
Following the consummation of the sale of KTVE, the Phipps Acquisition, and
the public offerings, the Company will be highly leveraged. The Company
anticipates that its principal uses of cash will be working capital and debt
service requirements, cash dividends, capital expenditures and expenditures
related to additional acquisitions. The Company anticipates that its
operating cash flow, together with borrowings available under the Senior
Credit Facility, will be sufficient for such purposes.
The Company does not believe that inflation in past years has had a significant
impact on the Company's results of operations nor is inflation expected to have
a significant effect upon the Company's business in the near future.
17
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 - Statement re: Computation of Earnings Per Share
27 - Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 18, 1996, reporting the
purchase of WRDW from Television Station Partners, L.P. and WRDW
Associates.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRAY COMMUNICATIONS SYSTEMS, INC.
(Registrant)
Date: MAY 15, 1996 By: /s/ WILLIAM A. FIELDER, III
---------------------------------
William A. Fielder, III,
Vice President & CFO
(Chief Financial Officer)
Date: MAY 15, 1996 By: /s/ SABRA H. COWART
---------------------------------
Sabra H. Cowart, Controller & CAO
(Chief Accounting Officer)
19
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
1995 1996
---- ----
<S> <C> <C>
Primary:
Weighted average shares outstanding 4,221,705 4,443,617
Common Stock Equivalents - based on the treasury
stock method using average market price 85,890 163,156
---------- ----------
Totals 4,307,595 4,606,773
========== ==========
Net income $ 403,957 $ 355,433
========== ==========
Per share amount $ .09 $ .08
========== ==========
Fully diluted:
Weighted average shares outstanding 4,221,705 4,443,617
Common Stock Equivalents - based on the treasury
stock method using quarter-end market price which
is greater than average market price 127,968 193,380
---------- ----------
Totals 4,349,673 4,636,997
========== ==========
Net income $ 403,957 $ 355,433
========== ==========
Per share amount $ .09 $ .08
========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1996 UNAUDITED FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,081,627
<SECURITIES> 0
<RECEIVABLES> 10,768,128
<ALLOWANCES> 623,000
<INVENTORY> 231,964
<CURRENT-ASSETS> 15,394,197
<PP&E> 40,505,148
<DEPRECIATION> 21,406,793
<TOTAL-ASSETS> 113,516,651
<CURRENT-LIABILITIES> 12,338,344
<BONDS> 86,924,415
0
0
<COMMON> 7,262,594
<OTHER-SE> 2,455,979
<TOTAL-LIABILITY-AND-EQUITY> 113,516,651
<SALES> 0
<TOTAL-REVENUES> 17,026,579
<CGS> 0
<TOTAL-COSTS> 14,348,767
<OTHER-EXPENSES> (63,514)
<LOSS-PROVISION> 210,941
<INTEREST-EXPENSE> 2,156,893
<INCOME-PRETAX> 584,433
<INCOME-TAX> 229,000
<INCOME-CONTINUING> 355,433
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 355,433
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
