<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q/A-2
---------------
/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)
<TABLE>
<S> <C>
GEORGIA 58-0285030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
126 NORTH 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
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<PAGE>
INDEX
GRAY COMMUNICATIONS SYSTEMS, INC.
<TABLE>
<S> <C>
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
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<S> <C> <C>
DECEMBER 31, MARCH 31,
CURRENT ASSETS 1995 1996
------------ -------------
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................................................. 1,347,007 985,246
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 15,422,197
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 (includes $910,000 and $1,050,000 to Bull
Run Corporation at December 31, 1995 and March 31, 1996, respectively)
(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 $ 113,544,651
------------ -------------
------------ -------------
CURRENT LIABILITIES
Trade accounts payable (includes $670,000 and $1,050,000 payable to Bull
Run Corporation at December 31, 1995 and March 31, 1996,
respectively)........................................................... $ 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 (including a $7,472,222 8% Note to Bull Run Corporation at
March 31, 1996) (Notes C and D)......................................... 51,462,645 84,396,637
Non-current liabilities.................................................. 4,133,030 4,535,319
Commitments and contingencies (Notes C and E)
Stockholders' equity (Notes B and D)
Class A Common Stock, no par value; authorized 10,000,000 shares;
issued 5,082,756 and 5,126,012 shares, respectively................... 6,795,976 9,862,594
Retained earnings...................................................... 8,827,906 9,050,041
------------ -------------
15,623,882 18,912,635
Treasury stock, 663,180 shares at cost................................. (6,638,284) (6,638,284)
------------ -------------
8,985,598 12,274,351
------------ -------------
$ 78,240,478 $ 113,544,651
------------ -------------
------------ -------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<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 2,229,115
-------------- --------------
INCOME BEFORE INCOME TAXES................................................... 657,957 512,211
Income tax expense............................................................... 254,000 201,000
-------------- --------------
NET EARNINGS............................................................... $ 403,957 $ 311,211
-------------- --------------
-------------- --------------
Average outstanding common shares................................................ 4,307,595 4,606,773
-------------- --------------
-------------- --------------
NET EARNINGS PER COMMON SHARE.............................................. $ .09 $ .07
-------------- --------------
-------------- --------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<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 0 311,211 311,211
Cash dividends ($.02 per share).... 0 0 0 0 (89,076) (89,076)
Issuance of Common Stock Warrants
(Notes C and D)................... 0 2,600,000 0 0 0 2,600,000
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 $ 9,862,594 (663,180) $ (6,638,284) $ 9,050,041 $ 12,274,351
----------- ------------- ---------- -------------- ------------- --------------
----------- ------------- ---------- -------------- ------------- --------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<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 $ 311,211
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
Amortization of original issue discount on subordinated note................. 0 72,222
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 1,550,389
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.
6
<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 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.
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, 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 $1.05 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
7
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE C -- BUSINESS ACQUISITIONS (CONTINUED)
comparable broadcast cash flow in a transaction qualifying for deferred capital
gains treatment under the "like-kind exchange" provision of Section 1031 of the
Internal Revenue Code of 1986, as amended (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):
<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 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.
8
<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):
<TABLE>
<S> <C>
Operating revenues................................................ $ 15,106
Operating expenses................................................ 12,906
---------
2,200
Miscellaneous income (expense), net............................... 45
Interest expense.................................................. 2,269
---------
Pro forma loss before income taxes................................ (24)
Income tax benefit................................................ (8)
---------
Pro forma net loss................................................ $ (16)
---------
---------
Pro forma average shares outstanding.............................. 4,221
---------
---------
Pro forma earnings per share...................................... $ .00
---------
---------
</TABLE>
9
<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 -- 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 ended March 31, 1996, the Company recognized
approximately $72,000 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 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 8.96% 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.
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.
10
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE E -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
A condensed balance sheet of KTVE is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1996
-----------
<S> <C>
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
-----------
-----------
</TABLE>
Condensed statement of operations data of KTVE is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
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) $ 59
--------- ---------
--------- ---------
</TABLE>
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 2006. On May 13, July 9, and August 9, 1996, the Company
filed amendments to such Registration Statements.
11
<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 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
1995 1996
------------------------- --------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
1995 1996
------------------------- --------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
COMPANY COMPANY
AMOUNT REVENUES AMOUNT REVENUES
---------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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 0.2 212.9 1.2
Production and other.......................................... 294.2 2.2 605.4 3.6
---------- --- ----------- ---
$ 8,349.7 63.5% $ 11,449.6 67.2%
---------- --- ----------- ---
---------- --- ----------- ---
</TABLE>
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
12
<PAGE>
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 which is sold by a station's
sales staff directly to local accounts, and the remainder 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------
1995 1996
------------------------- -------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
COMPANY COMPANY
AMOUNT REVENUES AMOUNT REVENUES
---------- ------------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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%
---------- --- ---------- ---
---------- --- ---------- ---
</TABLE>
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.
13
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1995 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(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.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
REVENUES. Total revenues for the three months ended March 31, 1996
increased $3.9 million, or 29.5%, over the three months 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.
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 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
14
<PAGE>
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 three months 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 a 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 shoppers
in September 1995. Newsprint costs increased 27% while consumption of newsprint
increased 11%. Payroll related costs, promotional costs, product delivery costs
and outside service costs increased 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 amorization 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 amorization 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 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
$176,000 recognized in the quarter ended March 31, 1995).
INTEREST EXPENSE. Interest expense increased $853,000, or 61.9%, 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.
NET INCOME. Net income for the Company was $311,000 for the three months
ended March 31, 1996, compared with $404,000 for the same period in 1995, a
decrease of $93,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital (deficiency) was $(221,000) 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.
15
<PAGE>
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 $85.9 million and the balance of the
Senior Credit Facility was $52.6 million, at March 31, 1996. The effective
interest rate of the Senior Credit Facility was 8.96% on March 31, 1996.
Principal maturities of long-term debt were $1.5 million at March 31, 1996. The
Company anticipates that its operating cash flows, together with borrowings
available under the Senior Credit Facility will be sufficient to provide for
such payments.
In the three months ended March 31, 1996, the Company made $814,000 in
capital expenditures relating primarily to broadcasting operations. The Company
anticipates making $3.0 million in capital expenditures for the year ending
December 31, 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.
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. During the three months
ended March 31, 1996 the Company paid $662,000 for such program broadcast
rights.
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.
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.
16
<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.
17
<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)
<TABLE>
<S> <C>
Date: September 9, 1996 By: /s/ WILLIAM A. FIELDER, III
------------------------------------------
William A. Fielder, III, Vice President &
Chief Financial Officer
(Chief Financial Officer)
Date: September 9, 1996 By: /s/ SABRA H. COWART
------------------------------------------
Sabra H. Cowart, Controller &
Chief Accounting Officer
(Chief Accounting Officer)
</TABLE>
18
<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 $ 311,211
------------- -------------
------------- -------------
Per share amount.................................................................... $ .09 $ .07
------------- -------------
------------- -------------
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 $ 311,211
------------- -------------
------------- -------------
Per share amount.................................................................... $ .09 $ .07
------------- -------------
------------- -------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONATINS 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> 15,422,197
<PP&E> 40,505,148
<DEPRECIATION> 21,406,793
<TOTAL-ASSETS> 113,544,651
<CURRENT-LIABILITIES> 12,338,344
<BONDS> 84,396,637
0
0
<COMMON> 9,862,594
<OTHER-SE> 2,411,757
<TOTAL-LIABILITY-AND-EQUITY> 113,544,651
<SALES> 0
<TOTAL-REVENUES> 17,026,579
<CGS> 0
<TOTAL-COSTS> 14,348,767
<OTHER-EXPENSES> (63,514)
<LOSS-PROVISION> 210,941
<INTEREST-EXPENSE> 2,229,115
<INCOME-PRETAX> 512,211
<INCOME-TAX> 201,000
<INCOME-CONTINUING> 311,211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 311,211
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
