<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A-1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)
--------------------------------------
4,469,339 SHARES AS OF SEPTEMBER 9, 1996
----------------------------------------
CLASS B COMMON STOCK, NO PAR VALUE - NONE
1
<PAGE>
INDEX
-------
GRAY COMMUNICATIONS SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Condensed consolidated balance sheets (unaudited) - December 31, 1995
and June 30, 1996
Condensed consolidated statements of income (unaudited) -
Three months ended June 30, 1995 and 1996;
Six months ended June 30, 1995 and 1996
Condensed consolidated statement of stockholders' equity (unaudited) -
Six months ended June 30, 1996
Condensed consolidated statements of cash flows (unaudited) -
Six months ended June 30, 1995 and 1996
Notes to condensed consolidated financial statements (unaudited) -
June 30, 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)
DECEMBER 31, JUNE 30,
1995 1996
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 559,991 $ 1,287,096
Trade accounts receivable less
allowance for doubtful accounts of
$450,000 and $537,000, respectively 9,560,274 10,817,791
Recoverable income taxes 1,347,007 797,455
Inventories 553,032 109,028
Current portion of program broadcast rights 1,153,058 710,424
Other current assets 263,600 758,808
------------- ------------
13,436,962 14,480,602
PROPERTY AND EQUIPMENT 37,618,893 40,178,694
Less allowance for depreciation (20,601,819) (21,380,407)
------------- -------------
17,017,074 18,798,287
OTHER ASSETS
Deferred acquisition costs (includes
$910,000 and $1,050,000 to Bull Run
Corporation at December 31, 1995 and
June 30, 1996, respectively) (Note C) 3,330,481 2,818,851
Deferred loan costs (Note C) 1,232,261 1,881,648
Goodwill and other intangibles (Note C) 42,004,050 73,299,223
Other 1,219,650 1,237,021
------------- -------------
47,786,442 79,236,743
------------- -------------
$ 78,240,478 $ 112,515,632
------------- -------------
3
<PAGE>
December 31, June 30,
1995 1996
------------- -------------
CURRENT LIABILITIES
Trade accounts payable (includes $670,000
and $950,000 payable to Bull Run
Corporation at December 31, 1995 and
June 30, 1996, respectively) $ 3,752,742 $ 3,169,283
Accrued expenses 5,839,007 7,063,971
Current portion of program broadcast
obligations 1,205,784 709,782
Current portion of long-term debt 2,861,672 -0-
------------ -------------
13,659,205 10,943,036
LONG-TERM DEBT (includes $7,544,000, 8%
Note to Bull Run Corporation at
June 30, 1996)(Notes C and D) 51,462,645 82,845,688
NON-CURRENT LIABILITIES 4,133,030 4,913,624
COMMITMENTS AND CONTINGENCIES (Note E)
STOCKHOLDERS' EQUITY (Notes B and D)
Class A Common Stock, no par value;
authorized 10,000,000 shares;
issued 5,082,756 and 5,130,385
shares, respectively 6,795,976 10,000,365
Retained earnings 8,827,906 10,451,203
------------- -------------
15,623,882 20,451,568
Treasury stock, 663,180 shares at cost (6,638,284) (6,638,284)
------------- -------------
8,985,598 13,813,284
------------- -------------
$ 78,240,478 $ 112,515,632
------------ -------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- ------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES
Broadcasting
(net of agency commissions) $ 9,911,279 $ 12,802,256 $ 18,260,940 $ 24,251,901
Publishing 5,245,470 5,684,858 10,046,114 11,261,792
------------ ------------- ------------ ------------
15,156,749 18,487,114 28,307,054 35,513,693
EXPENSES
Broadcasting 5,819,735 7,108,335 11,409,511 14,418,200
Publishing 4,628,298 4,384,689 8,589,861 9,192,751
Corporate and administrative 519,075 795,220 1,012,024 1,570,806
Depreciation and amortization 942,951 1,505,470 1,821,700 2,900,724
Non-cash compensation paid in
common stock (Note B) 580,314 60,000 816,474 120,000
------------ ------------- ------------ ------------
12,490,373 13,853,714 23,649,570 28,202,481
------------ ------------- ------------ ------------
2,666,376 4,633,400 4,657,484 7,311,212
Miscellaneous income 25,201 17,847 68,514 81,361
------------ ------------- ------------ ------------
2,691,577 4,651,247 4,725,998 7,392,573
Interest expense 1,391,723 2,215,763 2,768,187 4,444,878
------------ ------------- ------------ ------------
INCOME BEFORE INCOME TAXES 1,299,854 2,435,484 1,957,811 2,947,695
Income tax expense 522,000 945,000 776,000 1,146,000
------------ ------------- ------------ ------------
NET INCOME $ 777,854 $ 1,490,484 $ 1,181,811 $ 1,801,695
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
AVERAGE OUTSTANDING COMMON SHARES
Primary 4,411,995 4,707,564 4,383,263 4,656,691
Fully Diluted 4,452,889 4,750,117 4,417,362 4,693,046
NET EARNINGS PER COMMON SHARE
Primary $0.18 $0.32 $0.27 $0.39
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Fully Diluted $ 0.17 $0.31 $0.27 $0.38
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
</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 $8,985,598
Net income for the six
months ended
June 30, 1996 0 0 0 0 1,801,695 1,801,695
Cash dividends
($.04 per share) 0 0 0 0 (178,398) (178,398)
Issuance of common stock
warrants (Notes C and D) 0 2,600,000 0 0 0 2,600,000
Income tax benefits relating to
stock plans 0 62,000 0 0 0 62,000
Issuance of Class A Common Stock:
401(k) Plan 7,129 139,640 0 0 0 139,640
Directors stock plan 22,500 228,749 0 0 0 228,749
Non-qualified stock plan 18,000 174,000 0 0 0 174,000
--------- ----------- ---------- ----------- ----------- -----------
Balance at
June 30, 1996 5,130,385 $10,000,365 (663,180) $(6,638,284) $10,451,203 $13,813,284
--------- ----------- ---------- ----------- ----------- -----------
--------- ----------- ---------- ----------- ----------- -----------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
<TABLE>
<CAPTION>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30
---------------------------------
1995 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,181,811 $ 1,801,695
Items which did not use (provide) cash:
Depreciation 1,233,847 1,648,014
Amortization of intangible assets 587,853 1,252,710
Amortization of program broadcast rights 767,964 1,279,357
Amortization of original issue discount on
subordinated note -0- 144,444
Payments for program broadcast rights (902,858) (1,309,364)
Income tax benefit relating to stock plan -0- 62,000
Compensation paid in Class A common
stock 816,474 120,000
Supplemental employee benefits (154,216) (203,708)
Class A common stock contributed to 401(k) Plan 168,023 139,640
Deferred income taxes 109,000 676,059
(Gain) loss on disposal of assets 1,952 (17,968)
Changes in operating assets and liabilities:
Receivables, inventories, and
other current assets (599,165) 1,081,052
Accounts payable and other
current liabilities 616,978 126,622
------------ -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 3,827,663 6,800,553
INVESTING ACTIVITIES
Acquisition of newspaper business (1,232,509) 0
Acquisition of television business 0 (34,330,365)
Purchases of property and equipment (1,852,431) (1,317,345)
Deferred acquisition costs (2,033,892) (1,797,772)
Proceeds from asset sales 2,742 113,297
Other (261,233) (157,538)
------------ -------------
NET CASH USED IN INVESTING
ACTIVITIES (5,377,323) (37,489,723)
FINANCING ACTIVITIES
Dividends paid (172,110) (178,398)
Class A common stock transactions 0 402,749
Proceeds from settlement of interest rate swap 0 215,000
Proceeds from borrowings of long-term debt 2,200,000 36,725,000
Payments on long-term debt (820,281) (5,748,076)
------------ -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,207,609 31,416,275
------------ -------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (342,051) 727,105
Cash and cash equivalents at beginning of period 558,520 559,991
------------ -------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 216,469 $ 1,287,096
------------ -------------
------------ -------------
</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 condensed 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 six month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K/A-1 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
$520,000 and $696,000 was recognized for these awards in the three months and
six months ended June 30, 1995, respectively.
The Company has an employment agreement with its current President which
provides for an award of 122,034 shares of Class A Common Stock if his
employment with the Company continues until September 1999. Approximately
$60,000 of expense was recognized in each quarter of 1995 and 1996 relating to
this award and approximately $1.2 million of expense will be recognized over the
five-year period ending in 1999.
NOTE C--BUSINESS ACQUISITIONS
The Company's acquisitions in 1995 and 1996 have been accounted for under the
purchase method of accounting. Under the purchase method of accounting, the
results of operations of the acquired businesses are included in the
accompanying unaudited condensed consolidated financial statements as of their
respective acquisition dates. The assets and liabilities of acquired businesses
are included based on an allocation of the purchase price.
PENDING ACQUISITIONS
In December 1995 and as amended in March 1996, the Company entered into an asset
purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated
stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and
WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and
a paging business (collectively, the "Phipps Business"). The purchase price is
estimated at approximately $185.0 million. The Company's Board of Directors has
agreed to pay Bull Run Corporation ("Bull Run"), a principal stockholder of the
Company, a finder's fee equal to 1% of the proposed purchase price for services
performed, of which $1,050,000 is included in deferred acquisition costs and
$950,000 is due and included in accounts payable at June 30, 1996.
The consummation of the Phipps Acquisition, which is expected to occur by
September 1996, is subject to approval by the appropriate regulatory agencies.
In connection with the Phipps Acquisition, the Company is seeking approval from
the Federal Communications Commission ("FCC") of the assignment of the
television broadcast licenses for WCTV and WKXT. Current FCC regulations will
require the Company to divest itself of WALB-TV ("WALB") in Albany, Georgia and
WJHG-TV ("WJHG") in Panama City, Florida due to common ownership restrictions on
stations with overlapping signals. In order to satisfy applicable FCC
requirements, the Company, subject to FCC approval, intends to swap such assets
for assets of one or more television stations of comparable value and with
comparable broadcast cash flow in a transaction qualifying for deferred
8
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE C--BUSINESS ACQUISITIONS (CONTINUED)
PENDING ACQUISITIONS (CONTINUED)
capital gains treatment under the "like-kind exchange" provision of Section 1031
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.
Condensed balance sheets of WALB and WJHG are as follows (in thousands):
JUNE 30, 1996
------------------------
WALB WJHG
---------- ----------
Current assets..................... $ 1,801 $ 913
Property and equipment............. 1,714 1,014
Other assets....................... 66 3
--------- --------
Total assets....................... $ 3,581 $ 1,930
--------- --------
--------- --------
Current liabilities................ $ 1,756 $ 474
Other liabilities.................. 214 0
Stockholders' equity............... 1,611 1,456
Total liabilities and stockholder's
equity............................ $ 3,581 $ 1,930
--------- --------
--------- --------
Condensed income statement data of WALB is as follows (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1995 1996 1995 1996
---------------------- --------------------
Broadcasting revenues...... $ 2,533 $ 2,759 $ 4,715 $ 5,098
Expenses................... 1,166 1,199 2,356 2,440
-------- -------- -------- --------
Operating income........... 1,367 1,560 2,359 2,658
Other income............... 5 0 9 9
-------- -------- -------- --------
Income before income taxes. 1,372 1,560 2,368 2,667
-------- -------- -------- --------
-------- -------- -------- --------
Net income................. $ 850 $ 968 $ 1,468 $ 1,654
-------- -------- -------- --------
-------- -------- -------- --------
Condensed income statement data of WJHG is as follows (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1995 1996 1995 1996
---------------------- --------------------
Broadcasting revenues....... $ 975 $ 1,310 $ 1,826 $ 2,409
Expenses.................... 888 984 1,690 1,933
-------- -------- -------- --------
Operating income............ 87 326 136 476
Other income................ 16 0 31 16
-------- -------- -------- --------
Income before income taxes.. 103 326 167 492
-------- -------- -------- --------
-------- -------- -------- --------
Net income.................. $ 63 $ 202 $ 103 $ 305
-------- -------- -------- --------
-------- -------- -------- --------
9
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE C--BUSINESS ACQUISITIONS (CONTINUED)
PENDING ACQUISITIONS (CONTINUED)
The Phipps Acquisition will be funded with a portion of the anticipated net
proceeds of proposed public offerings by the Company of $150.0 million principal
amount of the Company's senior subordinated notes and 3.5 million shares of the
Company's Class B Common Stock, the sale of 1,000 shares of the Company's Series
B Preferred Stock ($10.0 million) and warrants to Bull Run and the sale of KTVE
Inc., the Company's broadcast station in Monroe, Louisiana/El Dorado, Arkansas.
Additionally, the Company plans to retire its existing bank credit facility and
other senior indebtedness (See Notes E and F) and enter into a new bank credit
facility.
In connection with the Phipps Acquisition, a bank has provided a $10.0 million
stand-by letter of credit to the seller of the Phipps Business on behalf of the
Company. The letter of credit will be payable under certain conditions if the
Phipps Acquisition is not completed. In connection with the issuance of the
letter of credit, a stockholder of the Company has executed a put agreement
which the bank can exercise if the Company defaults on repayment of any amounts
that might be paid in accordance with the terms of the letter of credit.
1996 ACQUISITIONS
On January 4, 1996, the Company purchased substantially all of the assets of
WRDW-TV, a CBS television affiliate serving the Augusta, Georgia television
market (the "Augusta Acquisition"). The purchase price of approximately
$35.9 million, excluding assumed liabilities of approximately $1.3 million,
was financed primarily through long-term borrowings. The assets acquired
consisted of office equipment and broadcasting operations located in North
Augusta, South Carolina. Based on the preliminary allocation of the purchase
price, the excess of the purchase price over the fair value of net tangible
assets acquired was approximately $32.5 million. In connection with the
Augusta Acquisition, the Company's Board of Directors approved the payment of
a $360,000 finder's fee to Bull Run.
Funds for the Augusta Acquisition were obtained from the modification of the
Company's existing bank debt to a variable rate reducing revolving credit
facility (the "Senior Credit Facility") and the sale to Bull Run of an 8%
subordinated note due January 3, 2005 in the principal amount of $10.0
million (the "8% Note"). In connection with the sale of the 8% Note, the
Company also issued warrants to Bull Run to purchase 487,500 shares of Class
A Common Stock at $17.88 per share, 300,000 shares of which are currently
vested, with the remainder vesting in five equal annual installments
commencing in 1997 provided that the 8% Note is outstanding. The Senior
Credit Facility provides for a credit line up to $54.2 million, of which
$49.5 million was outstanding at June 30, 1996. This transaction also
required a modification of the interest rate of the Company's $25.0 million
senior secured note (the "Senior Note") with an institutional investor from
10.08% to 10.7%.
As part of the financing arrangements for the Phipps Acquisition, the 8% Note
will be retired and the Company will issue to Bull Run, in exchange for the 8%
Note, 1,000 shares of Series A Preferred Stock. The warrants issued with the 8%
Note will vest in accordance with the schedule described above provided the
Series A Preferred Stock remains outstanding.
10
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE C--BUSINESS ACQUISITIONS (CONTINUED)
1996 ACQUISITION (CONTINUED)
An unaudited pro forma statement of income for the three months and six months
ended June 30, 1995 is presented below and assumes that the Augusta Acquisition
occurred on January 1, 1995.
This pro forma unaudited statement of income does not purport to represent the
Company's actual results of operations had the Augusta Acquisition occurred on
January 1, 1995, and should not serve as a forecast of the Company's operating
results for any future periods. The pro forma adjustments are based solely upon
certain 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 and six months ended June 30, 1995 is
as follows (in thousands, except per share data):
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1995
------------- -------------
Operating revenues............. $ 17,560 $ 32,666
Expenses....................... 12,400 23,906
Depreciation and amortization.. 1,232 2,396
Non-cash compensation paid in
Class A Common Stock.......... 580 816
---------- ---------
3,348 5,548
Miscellaneous income (expense),
net............................ (12) 33
Interest expense................ 2,303 4,572
---------- ---------
Pro forma income before income
taxes.......................... 1,033 1,009
Income tax expense.............. 415 407
---------- ---------
Pro forma net income............ $ 618 $ 602
---------- ---------
Pro forma average shares
outstanding.................... 4,490 4,436
---------- ---------
---------- ---------
Pro forma earnings per share.... $ 0.14 $ 0.14
---------- ---------
---------- ---------
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 finder's fee to Bull Run.
11
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE D--STOCKHOLDERS' EQUITY
A portion of the funds for the Augusta Acquisition was obtained from the 8%
Note, which included the issuance of detachable warrants to Bull Run to
purchase 487,500 shares of Class A Common Stock at $17.88 per share, 300,000
shares of which are currently vested, with the remainder vesting in five equal
annual installments commencing in 1997 provided that the 8% Note is
outstanding. Approximately $2.6 million of the $10.0 million of proceeds from
the 8% Note was allocated to the warrants and increased Class A Common Stock.
This allocation of the proceeds was based on an estimate of the relative fair
values of the 8% Note and the warrants on the date of issuance. The Company
is amortizing the original issue discount over the period of time that the 8%
Note is to be outstanding, During the three months and six months ended June
30, 1996, the Company recognized approximately $72,000 and $144,000,
respectively in amortization costs for the $2.6 million original issue
discount.
NOTE E--COMMITMENTS AND CONTINGENCIES
The Company entered into an interest rate swap agreement (the "Interest
Swap") on June 2, 1995, to effectively convert a portion of its floating rate
debt to a fixed rate basis. The Interest Swap was effective for five years.
Approximately $25.0 million of the Company's outstanding long-term debt was
subject to this Interest Swap. Effective May 14, 1996, the Company received
$215,000 as settlement of this Interest Swap, which will be reflected as a
reduction of interest expense over the remaining term of the original
five-year Interest Swap.
Upon termination of the five-year Interest Swap, the Company entered into an
interest rate cap agreement (the "Interest Cap") on May 16, 1996, which
expires on September 6, 1996. Approximately $25.0 million of the Company's
outstanding long-term debt is subject to this Interest Cap. This Interest
Cap serves to cap the base rate of the Company's Senior Credit Facility at 7%.
The base rate used to compare against the Interest Cap at June 30, 1996 was
approximately 5.5%. Accordingly, the Interest Cap had no value at June 30,
1996. The effective rate of the Senior Credit Facility at June 30, 1996
was approximately 8.94%. Effective July 19, 1996, the Company's interest
rates, based on a spread over LIBOR, were reduced 0.25% as the result of the
attainment of certain debt provisions.
On May 15, 1996, the Company entered into an agreement with GOCOM Television
of Ouachita, L.P., to sell the assets of KTVE Inc., the Company's
NBC-affiliated station serving Monroe, Louisiana/El Dorado, Arkansas, for
approximately $9.5 million in cash plus the amount of the accounts receivable
on the date of closing (estimated to be approximately $750,000) to the extent
collected by the buyer, to be paid to the Company 150 days following the date
of closing. The sale agreement regarding KTVE included a number of closing
conditions. The Company completed the sale of the assets of KTVE Inc. on
August 20, 1996. The Company anticipates recognizing in the quarter ended
September 30, 1996, the gain, net of income taxes, and the estimated income
taxes on the sale of KTVE of approximately $2.8 million and $2.8
million, respectively.
A condensed balance sheet of KTVE is as follows (in thousands):
JUNE 30, 1996
-------------
Current assets............................. $ 864
Property and equipment..................... 1,540
Other assets............................... 550
-------------
Total assets............................... $ 2,954
-------------
-------------
Current liabilities........................ $ 333
Other liabilities.......................... 476
Stockholders' equity....................... 2,145
-------------
Total liabilities and stockholders' equity. $ 2,954
-------------
-------------
12
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE E--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Condensed income statement data of KTVE is as follows (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1995 1996 1995 1996
-------------------- --------------------
Broadcasting revenues..........$ 1,039 $ 1,237 $ 1,958 $ 2,303
Expenses........................ 960 973 1,891 1,943
------- -------- ------- -------
Operating income................ 79 264 67 360
Other income (expense).......... 5 (2) 9 1
------- -------- ------- -------
Income before income taxes...... 84 262 76 361
------- -------- ------- -------
------- -------- ------- -------
Net income......................$ 52 $ 163 $ 47 $ 224
------- -------- ------- -------
------- -------- ------- -------
NOTE F--SUBSEQUENT EVENTS
On May 2, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission (the "SEC") on Form S-1 to register the
sale of 4,025,000 shares of Class B Common Stock, including an over-allotment
option granted by the Company to the underwriters of such offering, subject
to shareholder approval. Also on May 2, 1996, the Company filed a
Registration Statement with the SEC on Form S-1 to register the sale of
$150,000,000 Senior Subordinated Notes due in 2006. On May 13, July 9, and
August 9, 1996, the Company filed amendments to such Registration Statements.
13
<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, which was
completed in January 1996, and the acquisition of WKYT-TV and WYMT-TV in
September 1994, the proportion of the Company's revenues derived from
television broadcasting has increased and will continue to increase as a
result of the Phipps Acquisition, which is expected to occur by September
1996. As a result of the higher operating margins associated with the
Company's television broadcasting operations, the profit contribution of
these operations as a percentage of revenues has exceeded, and is expected to
continue to exceed, the profit contribution of the Company's publishing
operations. Set forth below, for the periods indicated, is certain
information concerning the relative contributions of the Company's television
broadcasting and publishing operations.
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------
1995 1996
--------------------- ----------------------
AMOUNT PERCENT OF AMOUNT PERCENT OF
TOTAL TOTAL
--------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
TELEVISION BROADCASTING
Revenues $ 9,911.2 65.4% $ 12,802.3 69.2%
Operating income (1) 3,348.7 90.1 4,629.9 84.2
PUBLISHING
Revenues $ 5,245.5 34.6% $ 5,684.9 30.8%
Operating income (1) 368.4 9.9 871.4 15.8
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------
1995 1996
--------------------- ----------------------
AMOUNT PERCENT OF AMOUNT PERCENT OF
TOTAL TOTAL
--------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
TELEVISION BROADCASTING
Revenues $18,260.9 64.5% $ 24,251.9 68.3%
Operating income (1) 5,416.1 84.8 7,757.3 85.9
PUBLISHING
Revenues $10,046.1 35.5% $ 11,261.8 31.7%
Operating income (1) 972.2 15.2 1,272.7 14.1
(1) Excludes any allocation of corporate and administrative expenses.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS OF THE COMPANY (CONTINUED)
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:
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------
1995 1996
--------------------- ----------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
COMPANY COMPANY
AMOUNT REVENUES AMOUNT REVENUES
--------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
NET REVENUES:
Local $ 5,330.2 35.2% $ 7,069.9 38.2%
National 3,027.4 20.0 3,878.6 21.0
Network compensation 651.5 4.3 894.4 4.8
Political 412.5 2.7 573.4 3.1
Production and other 489.6 3.2 386.0 2.1
--------- ---------- ----------- ----------
$ 9,911.2 65.4% $12,802.3 69.2%
--------- ---------- ----------- ----------
--------- ---------- ----------- ----------
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------
1995 1996
--------------------- ----------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
COMPANY COMPANY
AMOUNT REVENUES AMOUNT REVENUES
--------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
NET REVENUES:
Local $10,294.6 36.4% $13,745.3 38.7%
National 5,497.4 19.4 6,967.9 19.6
Network compensation 1,247.2 4.4 1,761.0 5.0
Political 437.9 1.5 786.3 2.2
Production and other 783.8 2.8 991.4 2.8
--------- ---------- ----------- ----------
$18,260.9 64.5% $24,251.9 68.3%
-------- ---- -------- ----
-------- ---- -------- ----
15
<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 54.9% and 56.2%,
respectively of the gross revenues of the Company's television stations for
the three months and six months ended June 30, 1996, respectively were
generated from local advertising, which is sold by a station's sales staff
directly to local accounts, and the remainder primarily represents national
advertising, which is sold by a station's national advertising
representative. The stations generally pay commissions to advertising
agencies on local, regional and national advertising and the stations also
pay commissions to the national sales representative on national advertising.
Broadcast advertising revenues are generally highest in the second and fourth
quarters of each year, due in part to increases in retail advertising in the
spring and in the period leading up to and including the holiday season. In
addition, broadcast advertising revenues are generally higher during even
numbered election years due to spending by political candidates, which
spending typically is heaviest during the fourth quarter.
The broadcasting operations' primary operating expenses are employee
compensation, related benefits and programming costs. In addition, the
broadcasting operations incur overhead expenses such as maintenance,
supplies, insurance, rent and utilities. A large portion of the operating
expenses of the broadcasting operations is fixed.
PUBLISHING
Set forth below are the principal types of publishing revenues earned by the
Company's publishing operations for the periods indicated and the percentage
contribution of each to total Company revenues:
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------
1995 1996
------------------------ ------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
COMPANY COMPANY
AMOUNT REVENUES AMOUNT REVENUES
--------- ---------- -------- -----------
(DOLLARS IN THOUSANDS)
NET REVENUES:
Retail advertising $2,645.8 17.4% $2,692.2 14.6%
Classified 1,318.3 8.7 1,554.3 8.4
Circulation 893.3 5.9 1,073.7 5.8
Other 388.1 2.6 364.7 2.0
------- ---- ------- ----
$5,245.5 34.6% $5,684.9 30.8%
------- ---- ------- ----
------- ---- ------- ----
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS OF THE COMPANY (CONTINUED)
PUBLISHING (CONTINUED)
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------
1995 1996
------------------------ ------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
COMPANY COMPANY
AMOUNT REVENUES AMOUNT REVENUES
--------- ---------- -------- -----------
(DOLLARS IN THOUSANDS)
NET REVENUES:
Retail advertising $ 5,089.5 18.0% $ 5,299.8 14.9%
Classified 2,493.7 8.8 3,036.5 8.5
Circulation 1,821.6 6.4 2,188.6 6.2
Other 641.3 2.3 736.9 2.1
--------- ---------- --------- -----------
$10,046.1 35.5% $11,261.8 31.7%
--------- ---------- --------- -----------
--------- ---------- --------- -----------
In the Company's publishing operations, advertising contracts are generally
annual and primarily provide for a commitment as to the volume of advertising
purchased by a customer. The publishing operations' advertising revenues are
primarily generated from retail advertising. As with the broadcasting
operations, the publishing operations' revenues are generally highest in the
second and fourth quarters of each year.
The publishing operations' primary operating expenses are employee
compensation, related benefits and newsprint costs. In addition, 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 in recent years.
MEDIA CASH FLOW
The following table sets forth certain operating data for both the broadcast
and publishing operations for the three months and six months ended June 30,
1995 and 1996:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1995 1996 1995 1996
-------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
Operating income $2,666.4 $4,633.4 $4,657.5 $ 7,311.2
Add:
Amortization of program
license rights 366.1 632.5 768.0 1,279.4
Depreciation and
amortization 942.9 1,505.5 1,821.7 2,900.7
Corporate overhead 519.1 795.2 1,012.0 1,570.8
Non-cash compensation
and contributions to
the Company's 401-k
plan, paid in Class A
Common Stock 675.0 119.4 976.4 250.8
Less:
Payments for program
license liabilities (421.5) (647.8) (902.8) (1,309.3)
-------- -------- -------- ---------
Media Cash Flow (1) $4,748.0 $7,038.2 $8,332.8 $12,003.6
-------- -------- -------- ---------
-------- -------- -------- ---------
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS OF THE COMPANY (CONTINUED)
MEDIA CASH FLOW (CONTINUED)
(1) Of Media Cash Flow, $4.1 million and $5.7 million was attributable to
the Company's broadcasting operations during the three months ended June 30,
1995 and 1996, respectively; and $6.8 million and $9.9 million was
attributable to the Company's broadcasting operations during the six months
ended June 30, 1995 and 1996, respectively.
"Media Cash Flow" is defined as operating income from broadcast and
publishing operations 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.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
REVENUES. Total revenues for the three months ended June 30, 1996 increased
$3.3 million, or 22.0%, over the three months ended June 30, 1995, from $15.2
million to $18.5 million. This increase was attributable to (i) the Augusta
Acquisition, which occurred on January 4, 1996 and (ii) increases in
publishing and broadcasting (excluding the Augusta Acquisition) revenues.
The Augusta Acquisition accounted for $2.4 million, or 72.3%, of the revenue
increase.
Broadcast net revenues increased $2.9 million, or 29.2%, over the same period
of the prior year, from $9.9 million to $12.8 million. Revenues generated by
the Augusta Acquisition accounted for $2.4 million, or 72.3%, of the increase.
On a pro forma basis, broadcast net revenues for WRDW for the three months
ended June 30, 1996 remained relatively constant with the same period of the
prior year, due to increased political spending offset by a decline in local
advertising. Broadcast net revenues, excluding the Augusta Acquisition,
increased $482,000, or 4.8%, over the three months ended June 30, 1995.
Approximately $449,000 and $132,000 of the $482,000 increase in total
broadcast net revenues, excluding the Augusta Acquisition, were due to higher
local and national advertising spending, respectively. The Company's
broadcast operations also experienced a $178,000 decrease in second quarter
revenues associated with an investment in a sports programming joint venture.
Publishing revenues increased $439,000, or 8.4%, over the three months ended
June 30, 1995, from $5.3 million to $5.7 million. Advertising and
circulation revenues comprised $277,000 and $180,000, respectively, of the
revenue increase. The increase in advertising revenue was primarily the
result of linage increases in classified advertising and rate increases in
retail advertising. The increase in circulation revenue can be attributed
primarily to price increases over the same period of the prior year at two of
the publishing operations and the conversion of the GWINNETT DAILY POST to a
five-day-a-week paper.
OPERATING EXPENSES. Operating expenses for the three months ended June 30,
1996 increased $1.4 million, or 10.9%, over the three months ended June 30,
1995, from $12.5 million to $13.9 million, due to the Augusta Acquisition and
increased corporate overhead and depreciation and amortization, offset by
decreased expenses at the broadcasting and publishing operations and non-cash
compensation paid in Class A Common Stock.
Broadcasting expenses for the three months ended June 30, 1996, increased
$1.3 million, or 22.1%, over the same period of the prior year, from $5.8
million to $7.1 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 June 30, 1996 of $1.4 million
remained relatively constant compared to the same period of 1995.
Broadcasting expenses, excluding the Augusta Acquisition, decreased $148,000,
or 2.5%, primarily due to lower outside consulting services and promotional
costs.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
(CONTINUED)
Publishing expenses for the three months ended June 30, 1996 decreased
$244,000, or 5.3%, from the same period of the prior year, from $4.6 million to
$4.4 million. This decrease resulted primarily from a decrease in work force
related costs, improved newsprint pricing, and restructuring of the
advertising publications, offset by higher product delivery and outside
service costs associated with the conversion of the GWINNETT DAILY POST to a
five-day-a-week newspaper. Newsprint consumption increased approximately
3%.
Corporate and administrative expenses for the three months ended June 30,
1996 increased $276,000, or 53.2%, over the same period of the prior year,
from $519,000 to $795,000. This increase was attributable primarily to the
addition of several new officers.
Depreciation of property and equipment and amortization of intangible assets
was $1.5 million for the three months ended June 30, 1996, compared to
$943,000 for the same period of the prior year, an increase of $563,000, or
59.7%. 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 a separation
agreement with its former chief executive officer decreased $520,000, or
89.7%, for the three months ended June 30, 1996, from $580,000 to $60,000.
This decrease resulted from the Company's award in 1995 of 150,000 shares of
Class A Common Stock to its former chief executive officer, the expense for
such award was recognized in 1995 (including $520,000 recognized in the
quarter ended June 30, 1995).
INTEREST EXPENSE. Interest expense increased $824,000, or 59.2%, from $1.4
million for the three months ended June 30, 1995 to $2.2 million for the
three months ended June 30, 1996. This increase was attributable primarily
to increased levels of debt resulting from the financing of the Augusta
Acquisition.
NET INCOME. Net income for the Company was $1.5 million for the three months
ended June 30, 1996, compared with $778,000 for the same period in 1995, an
increase of $713,000, or 91.6%.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
REVENUES. Total revenues for the six months ended June 30, 1996 increased
$7.2 million, or 25.5%, over the six months ended June 30, 1995, from $28.3
million to $35.5 million. This increase was attributable to (i) the Augusta
Acquisition, which occurred on January 4, 1996 and (ii) increases in
publishing and broadcasting (excluding the Augusta Acquisition) revenues.
The Augusta Acquisition accounted for $4.5 million, or 62.3%, of the revenue
increase.
Broadcast net revenues increased $6.0 million, or 32.8%, over the same period
of the prior year, from $18.3 million to $24.3 million. Revenues generated
by WRDW accounted for $4.5 million, or 74.9%, of the increase. On a pro forma
basis, broadcast net revenues for WRDW for the six months ended June 30, 1996
increased $130,000, or 3.0%, over the same period of the prior year.
Broadcast net revenues, excluding the Augusta Acquisition, increased
$1.5 million, or 8.2%, over the six months ended June 30, 1995. Approximately
$1.1 million, $94,000 and $171,000 of the $1.5 million increase in total
broadcast net revenues, excluding the Augusta Acquisition, were due to higher
local, national and political advertising spending, respectively. The
remaining increase is due to greater tower rental and special projects revenue.
Publishing revenues increased $1.2 million, or 12.1%, over the six months ended
June 30, 1995 from $10.1 million to $11.3 million. Advertising and
circulation revenues comprised $766,000 and $367,000, respectively, of the
revenue increase. The increase in advertising revenue was primarily the
result of linage increases in classified advertising and retail rate
increases. The increase in circulation revenue can be attributed primarily to
price increases over the same period of the prior year at two of the
Company's publishing operations and the conversion of the GWINNETT DAILY POST
to a five-day-a-week paper. Approximately $81,000 of the publishing revenue
increase was the result of higher special events revenue.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
(CONTINUED)
OPERATING EXPENSES. Operating expenses for the six months ended June 30, 1996
increased $4.6 million, or 19.3%, over the six months ended June 30, 1995, from
$23.6 million to $28.2 million, due to the Augusta Acquisition and
increased expenses at the broadcasting and publishing operations, as well as
increased corporate and administrative expenses, depreciation and amortization,
offset by a reduction in non-cash compensation paid in Class A Common Stock.
Broadcasting expenses for the six months ended June 30, 1996 increased $3.0
million, or 26.4%, over the same period of the prior year from $11.4 million to
$14.4 million. This increase was primarily attributable to the Augusta
Acquisition. On a pro forma basis, broadcast expenses for WRDW for the six
months ended June 30, 1996 decreased $129,000, or 4.5%, over the same period of
1995, from $2.9 million to $2.8 million. Broadcasting expenses, excluding
WRDW, increased $243,000, or 2.1%, primarily as the result
of higher payroll related costs.
Publishing expenses for the six months ended June 30, 1996 increased $603,000,
or 7.0%, over the same period of the prior year, from $8.6 million to $9.2
million. This increase resulted primarily from the conversion of the GWINNETT
DAILY POST to a five-day-a-week paper and the acquisition of advertising only
publications in September 1995. Newsprint costs increased approximately 12%
while consumption of newsprint increased approximately 7%. Payroll related
costs, promotional costs, product delivery costs and outside service costs
increased over the same period of the prior year.
Corporate and administrative expenses for the six months ended June 30, 1996
increased $559,000, or 55.2%, over the same period of the prior year, from
$1.0 million to $1.6 million. This increase was attributable primarily to the
addition of several new officers.
Depreciation of property and equipment and amortization of intangible assets was
$2.9 million for the six months ended June 30, 1996, compared to $1.8 million
for the same period of the prior year, an increase of $1.1 million or 59.2%.
This increase was primarily the result of higher depreciation and amortization
costs related to the Augusta Acquisition and $3.3 million of capital
expenditures made in 1995.
Non-cash compensation paid in Class A Common Stock resulting from the Company's
employment agreement with its current President and a separation agreement
with its former chief executive officer decreased $696,000, or 85.3%, for the
six months ended June 30, 1996, from $816,000 to $120,000. This decrease
resulted from the Company's award in 1995 of 150,000 shares of Class A Common
Stock to its former chief executive officer. The expense for such award was
recognized in 1995 (including $696,000 recognized in the six months ended
June 30, 1995).
INTEREST EXPENSE. Interest expense increased $1.7 million, or 60.6%, from $2.8
million for the six months ended June 30, 1995 to $4.4 million for the six
months ended June 30, 1996. This increase was attributable primarily to
increased levels of debt and resulting from the financing of the Augusta
Acquisition.
NET INCOME. Net income for the Company was $1.8 million for the six months ended
June 30, 1996, compared with $1.2 million for the same period in 1995, an
increase of $620,000, or 52.5%.
-20-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Following the consummation of the sale of KTVE, the Phipps Acquisition and
certain related financings and the public offerings, the Company will be
highly leveraged. The Company anticipates that its principal uses of cash
for the next several years will be working capital and debt service
requirements, cash dividends, capital expenditures and expenditures related to
additional acquisitions. The Company anticipates that its operating cash flow,
together with borrowings available under the Senior Credit Facility, will be
sufficient for such purposes for the remainder of 1996 and 1997.
The Company's working capital (deficiency) was $(221,000) and $3.5 million at
December 31, 1995 and June 30, 1996, respectively. The Company's cash provided
from operations was $3.8 million and $6.8 million for the six months ended June
30, 1995 and 1996, respectively.
The Company's cash used in investing activities was $5.4 million and $37.5
million for the six months ended June 30, 1995 and 1996, respectively. The
increased usage of $32.1 million was due primarily to the Augusta Acquisition.
The Company was provided $1.2 million and $31.4 million in cash by financing
activities for the six months ended June 30, 1995 and 1996, respectively, due
primarily to the funding of the Gwinnett Acquisition in 1995 and the Augusta
Acquisition in 1996. Long-term debt was $82.8 million and the balance of the
Senior Credit Facility was $49.5 million, at June 30, 1996. The weighted
average interest rate of the Senior Credit Facility was 8.94% on June 30, 1996.
The Company regularly enters into program contracts for the right to broadcast
television programs produced by others and program commitments for the right to
broadcast programs in the future. Such programming commitments are generally
made to replace expiring or canceled program rights. Payments under such
contracts are made in cash or the concession of advertising spots for the
program provider to resell, or a combination of both. At December 31, 1995,
payments on program license liabilities due in 1996 and 1997, which will be
paid with cash from operations, were $1.2 million and $110,000, respectively.
During the six months ended June 30, 1996, the Company made $1.3 million in
capital expenditures, relating primarily to broadcasting operations, and paid
$1.3 million for program broadcast rights. The Company anticipates making
an aggregate of $3.0 million in capital expenditures and $2.7 million in
payments for program broadcast rights during 1996. The Company believes that
cash flows from operations will be sufficient to fund such expenditures, which
will be adequate for the Company's normal replacement requirements.
On May 15, 1996, the Company entered into an agreement with GOCOM Television
of Ouachita, L.P., to sell the assets of KTVE Inc. for approximately $9.5
million in cash plus the amount of the accounts receivable on the date of the
closing. The Company completed the sale of the assets of KTVE Inc. on
August 20, 1996. The Company anticipates recognizing in the quarter ended
September 30, 1996, the gain, net of income taxes, and the income taxes
resulting from the sale of KTVE of approximately $2.8 million and $2.8
million, respectively.
In connection with the Phipps Acquisition, the Company will be required to
divest WALB and WJHG under current FCC regulations. However, these rules may be
revised by the FCC upon conclusion of pending 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 1031 of the Code. If the Company is unable to effect such
a swap on satisfactory terms within the time period granted by the FCC under the
waivers, the Company may transfer such assets to a trust with a view towards the
trustee effecting a swap or sale of such assets. Any such trust arrangement
would be subject to the approval of the FCC. It is anticipated that the Company
would be required to relinquish operating control of such assets to a trustee
while retaining the economic risks and benefits of ownership. If the Company or
such trust is required to effect a sale of WALB, the Company would incur a
significant gain and related tax liability, the payment of which could have a
material adverse effect on the Company's ability to acquire comparable assets
without incurring additional indebtedness.
-21-
<PAGE>
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.
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 amended in July 1996, reporting the purchase
of WRDW from Television Station Partners, L.P. and WRDW Associates.
-22-
<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: September 9, 1996 By: /s/ William A. Fielder, III
------------- ---------------------------
William A. Fielder, III, Vice President & CFO
(Chief Financial Officer)
Date: September 9, 1996 By: /s/ Sabra H. Cowart
------------- -------------------
Sabra H. Cowart, Controller & CAO
(Chief Accounting Officer)
-23-
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ -----------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average shares outstanding 4,229,894 4,464,459 4,249,299 4,454,038
Common Stock Equivalents - based on the
treasury stock method using average
market price 182,101 243,105 133,964 202,653
---------- ----------- ---------- ----------
Totals 4,411,995 4,707,564 4,383,263 4,656,691
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Net income $ 777,854 $ 1,490,484 $1,181,811 $1,801,695
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Per share amount $ 0.18 $ 0.32 $ 0.27 $ 0.39
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
FULLY DILUTED:
Weighted average shares outstanding 4,229,894 4,464,459 4,249,299 4,454,038
Common Stock Equivalents - based on the
treasury stock method using quarter-end
market price which is greater than
average market price 222,995 285,658 168,063 239,008
---------- ----------- ---------- ----------
Totals 4,452,889 4,750,117 4,417,362 4,693,046
---------- ----------- ---------- ----------
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Net income $ 777,854 $1,490,484 $1,181,811 $1,801,695
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Per share amount $ 0.17 $ 0.31 $ 0.27 $ 0.38
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
24
