UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997.
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) Class B Common Stock, (No Par Value)
- ------------------------------------ --------------------------------------
4,492,586 shares as of July 31, 1997 3,341,476 shares as of July 31, 1997
<PAGE>
INDEX
GRAY COMMUNICATIONS SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets (unaudited) - June 30,
1997 and December 31, 1996
Condensed consolidated statements of operations (unaudited)
Three months ended June 30, 1997 and 1996; Six months ended
June 30, 1997 and 1996
Condensed consolidated statement of stockholders' equity
(unaudited) Six months ended June 30, 1997
Condensed consolidated statements of cash flows (unaudited)
Six months ended June 30, 1997 and 1996
Notes to condensed consolidated financial statements
(unaudited) - June 30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 522,966 $ 1,051,044
Trade accounts receivable, less allowance for
doubtful accounts of $1,164,000 and $1,450,000,
respectively 16,700,091 17,373,839
Recoverable income taxes 4,166,287 1,747,687
Inventories 504,342 624,118
Current portion of program broadcast rights 1,504,424 2,362,742
Other current assets 946,824 379,793
----------------- -----------------
Total current assets 24,344,934 23,539,223
PROPERTY AND EQUIPMENT 61,695,878 53,993,742
Less allowance for depreciation (21,857,733) (18,209,891)
----------------- -----------------
39,838,145 35,783,851
OTHER ASSETS
Deferred acquisition costs (Note B) 485,303 -0-
Deferred loan costs (Note B) 8,664,593 9,141,262
Goodwill and other intangibles (Note B) 229,051,375 228,692,018
Other 1,625,317 1,507,488
----------------- -----------------
239,826,588 239,340,768
----------------- -----------------
$ 304,009,667 $ 298,663,842
================= =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (continued)
June 30, December 31,
1997 1996
----------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable (includes $1,408,000 and
$1,000,000 payable to Bull Run Corporation,
respectively) $ 3,883,050 $ 6,043,062
Accrued expenses 7,361,598 8,212,555
Accrued interest 4,384,610 4,858,775
Current portion of program broadcast obligations 1,822,100 2,862,434
Deferred revenue 1,818,513 1,764,509
Current portion of long-term debt 344,826 140,000
----------------- -----------------
Total current liabilities 19,614,697 23,881,335
LONG-TERM DEBT (Notes B and D) 181,281,661 173,228,049
NON-CURRENT LIABILITIES 7,808,234 6,328,942
STOCKHOLDERS' EQUITY (Notes B and C)
Serial Preferred Stock, no par value; authorized
20,000,000 shares; issued 2,000 shares, ($20,000,000
aggregate liquidation value) 20,000,000 20,000,000
Class A Common Stock, no par value; authorized
15,000,000 shares; issued 5,299,466 and 5,155,331
shares, respectively 9,828,780 7,994,235
Class B Common Stock, no par value; authorized
15,000,000 shares; issued 3,512,104 and 3,500,000
shares, respectively 66,282,581 66,065,762
Retained earnings 9,691,910 10,543,940
----------------- -----------------
105,803,271 104,603,937
Treasury Stock at cost:
Class A Common, 721,880 and 663,180 shares,
respectively (7,758,059) (6,638,284)
Class B Common, 172,300 shares (2,740,137) (2,740,137)
----------------- -----------------
95,305,075 95,225,516
----------------- -----------------
$ 304,009,667 298,663,842
================= =================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Broadcasting (net of agency commissions) $ 17,782,557 $ 12,802,256 $ 33,767,854 $ 24,251,901
Publishing 6,081,748 5,684,858 11,306,602 11,261,792
Paging 1,634,609 -0- 3,184,985 -0-
--------------- --------------- --------------- ---------------
25,498,914 18,487,114 48,259,441 35,513,693
EXPENSES
Broadcasting 9,604,608 7,108,335 19,299,392 14,418,200
Publishing 4,594,834 4,384,689 8,528,255 9,192,751
Paging 946,629 -0- 1,836,923 -0-
Corporate and administrative 740,991 795,220 1,374,319 1,570,806
Depreciation and amortization 3,488,301 1,505,470 6,760,244 2,900,724
Non-cash compensation paid in
common stock -O- 60,000 -0- 120,000
--------------- --------------- --------------- ---------------
19,375,363 13,853,714 37,799,133 28,202,481
--------------- --------------- --------------- ---------------
6,123,551 4,633,400 10,460,308 7,311,212
Miscellaneous income (expense), net 5,930 17,847 (39,833) 81,361
--------------- --------------- --------------- ---------------
6,129,481 4,651,247 10,420,475 7,392,573
Interest expense 5,081,505 2,215,763 10,057,198 4,444,878
--------------- --------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 1,047,976 2,435,484 363,277 2,947,695
Income tax expense 426,100 945,000 202,500 1,146,000
--------------- --------------- --------------- ---------------
NET INCOME 621,876 1,490,484 160,777 1,801,695
Preferred Dividends 350,000 -0- 700,000 -0-
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ 271,876 $ 1,490,484 $ (539,223) $ 1,801,695
=============== =============== =============== ===============
AVERAGE OUTSTANDING COMMON SHARES
Primary 8,061,241 4,707,564 7,891,432 4,656,691
Fully Diluted 8,120,606 4,750,117 7,891,432 4,693,046
EARNINGS (LOSS) PER COMMON SHARE
AVAILABLE TO COMMON STOCKHOLDERS:
Primary $ 0.03 $ 0.32 $ (0.07) $ 0.39
=============== =============== =============== ==============
Fully Diluted $ 0.03 $ 0.31 $ (0.07) $ 0.38
=============== =============== =============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited)
Preferred Class A Class B
Stock Common Stock Common Stock Retained
Shares Amount Shares Amount Shares Amount Earnings
------ ------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 2,000 $20,000,000 5,155,331 $ 7,994,235 3,500,000 $66,065,762 $10,543,940
Net income for the six months
June 30, 1997 160,777
Common stock dividends ($.04
per share) (312,807)
Preferred stock dividends (700,000)
Income tax benefits relating to
stock award 393,000
Issuance of Class A Common
Stock:
Stock award 122,034 1,200,000
Directors stock plan 501 9,645
Non-qualified stock plan 21,600 231,900
Issuance of Class B Common
Stock:
401(k) plan 12,104 216,819
Purchase of treasury stock -
Class A Common
---------------------------------------------------------------------------------
Balance at June 30, 1997 2,000 $20,000,000 5,299,466 $ 9,828,780 3,512,104 $66,282,581 $ 9,691,910
=================================================================================
<CAPTION>
Class A Class B
Treasury Stock Treasury Stock
Shares Amount Shares Amount Total
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 (663,180) $(6,638,284) (172,300) $(2,740,137) $ 95,225,516
Net income for the six months
June 30, 1997 160,777
Common stock dividends ($.04
per share) (312,807)
Preferred stock dividends (700,000)
Income tax benefits relating to
stock award 393,000
Issuance of Class A Common
Stock:
Stock award 1,200,000
Directors stock plan 9,645
Non-qualified stock plan 231,900
Issuance of Class B Common
Stock:
401(k) plan 216,819
Purchase of treasury stock -
Class A Common (58,700) (1,119,775) (1,119,775)
---------------------------------------------------------------
Balance at June 30, 1997 (721,880) $(7,758,059) (172,300) $(2,740,137) $ 95,305,075
===============================================================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended
June 30,
---------------------------------------
1997 1996
----------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 160,777 $ 1,801,695
Items which did not use (provide) cash:
Depreciation 3,646,840 1,648,014
Amortization of intangible assets 3,113,404 1,252,710
Amortization of deferred loan costs 542,139 -0-
Amortization of program broadcast rights 1,619,198 1,279,357
Amortization of original issue discount on 8%
subordinated note -0- 144,444
Amortization of deferred interest rate swap
settlement liability (191,055) -0-
Payments for program broadcast rights (1,830,304) (1,309,364)
Compensation paid in Class A Common Stock -0- 120,000
Supplemental employee benefits (117,749) (203,708)
Class A common stock contributed to 401(k) Plan -0- 139,640
Class B common stock contributed to 401(k) Plan 216,819 -0-
Deferred income taxes 2,200,000 676,059
(Gain) on disposal of assets (5,314) (17,968)
Changes in operating assets and liabilities:
Receivables, inventories and other current assets (1,203,550) 1,143,052
Accounts payable and other current liabilities (2,691,321) 126,622
--------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,459,884 6,800,553
INVESTING ACTIVITIES
Acquisition of television business -0- (34,330,365)
Acquisition of satellite uplink business (4,074,031) -0-
Purchases of property and equipment (6,757,526) (1,317,345)
Deferred acquisition costs (485,303) (1,797,772)
Proceeds from asset sales 5,314 113,297
Other (472,359) (157,538)
--------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (11,783,905) (37,489,723)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)(continued)
Six Months Ended
June 30,
---------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
FINANCING ACTIVITIES
Dividends paid to common stockholders (312,807) (178,398)
Dividends paid to preferred stockholders (400,000) -0-
Class A Common Stock transactions 241,545 402,749
Proceeds from settlement of interest rate swap -0- 215,000
Purchase of treasury stock - Class A Common (1,119,775) -0-
Proceeds from borrowings of long-term debt 13,500,000 36,725,000
Payments on long-term debt (6,113,020) (5,748,076)
--------------- ---------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 5,795,943 31,416,275
--------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(528,078) 727,105
Cash and cash equivalents at beginning of period 1,051,044 559,991
--------------- ---------------
CASH AND EQUIVALENTS AT END OF PERIOD
$ 522,966 $ 1,287,096
================ ================
</TABLE>
See notes to condensed consolidated financial statements.
<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, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted by
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
128 on the calculation of primary and fully diluted earnings per share for the
second quarter and six month period ended June 30, 1997 and 1996 would not be
material.
Certain amounts in the accompanying unaudited condensed consolidated
financial statements have been reclassified to conform to the 1997 format.
NOTE B--BUSINESS ACQUISITIONS
The Company's acquisitions have been accounted for under the purchase
method of accounting. Under the purchase method of accounting, the results of
operations of the acquired businesses are included in the accompanying 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.
1996 Acquisitions
On September 30, 1996, the Company purchased from First American Media,
Inc. substantially all of the assets used in the operation of two CBS-affiliated
television stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville,
Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, as well as those assets
used in the operation of a satellite uplink and production services business and
a communications and paging business (the "First American Acquisition").
Subsequent to the First American Acquisition, the Company rebranded WKXT with
the call letters WVLT ("WVLT") as a component of its strategy to promote the
station's upgraded news product. The purchase price of approximately $183.9
million consisted of $175.5 million cash, $1.8 million in acquisition-related
costs, and the assumption of approximately $6.6 million of liabilities. 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
$159.8 million. The Company's Board of Directors has agreed to pay Bull Run
Corporation ("Bull Run"), a principal stockholder of the Company, a fee equal to
$1.7 million for services performed in connection with the First American
Acquisition. At June 30, 1997, $1.1 million of this fee remains payable and is
included in accounts payable.
The First American Acquisition and the early retirement of the
Company's existing bank credit facility and other senior indebtedness, were
funded as follows: net proceeds of $66.1 million from the sale of 3.5 million
shares of the Company's Class B Common Stock; net proceeds of $155.2 million
from the sale of $160.0 million principal amount of the Company's 10 5/8% Senior
Subordinated Notes due 2006; $16.9 million of borrowings under a senior credit
facility (the "Senior Credit Facility"); and $10.0 million net proceeds from the
sale of 1,000 shares of the Company's Series B Preferred Stock with warrants to
purchase 500,000 shares of the Company's Class A Common Stock at $24 per share.
The shares of Series B Preferred Stock were issued to Bull Run and to
9
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
NOTE B--BUSINESS ACQUISITIONS (continued)
1996 Acquisitions (continued)
J. Mack Robinson, Chairman of the Board of Bull Run and President and Chief
Executive Officer of the Company, and certain of his affiliates. The Company
obtained an opinion from an investment banker as to the fairness of the terms of
the sale of such Series B Preferred Stock with warrants.
In connection with the First American Acquisition, the Federal
Communications Commission (the "FCC") ordered the Company to divest itself of
WALB-TV ("WALB") in Albany, Georgia and WJHG-TV ("WJHG") in Panama City, Florida
by March 31, 1997 to comply with regulations governing common ownership of
television stations with overlapping service areas. The FCC is currently
reexamining these regulations, and if it revises them in accordance with the
interim policy it has adopted, divestiture of WJHG would not be required. The
FCC is not expected to complete its rulemaking on this subject until later in
1997. Accordingly, the Company requested and in July of 1997 received an
extension of the divestiture deadline with regard to WJHG conditioned upon the
outcome of the rulemaking proceedings. Also in July of 1997, the Company
obtained FCC approval to transfer control of WALB to a trust with a view
towards the trustee effecting i) a swap of WALB's assets for assets of one
or more television stations of comparable value and with comparable
broadcast cash flow in a transaction qualifying for deferred capital gains
treatment under the "like-kind exchange" provision of Section 1031 of the
Internal Revenue Code of 1986, or ii) a sale of such assets. Under the trust
arrangement, the Company relinquished operating control of the station to a
trustee while retaining the economic risks and benefits of ownership. If the
trustee is required to effect a sale of WALB, the Company would incur a
significant gain and related tax liability, the payment of which could
have an adverse effect on the Company's ability to acquire comparable assets
without incurring additional indebtedness. The FCC has allowed up to six months
for the trustee to file an application seeking the agency's approval of a
swap or sale. The approval process is expected to take between two and six
months.
Condensed unaudited balance sheets of WALB and WJHG are as follows (in
thousands):
<TABLE>
<CAPTION>
WALB WJHG
----------------------------------------------------------------------
June 30, December 31, June 30, December 31,
1997 1996 1997 1996
----------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Current assets $ 2,076 $ 2,058 $ 1,024 $ 1,079
Property and equipment 1,444 1,579 908 981
Other assets 68 100 4 55
======================================================================
Total assets $ 3,588 $ 3,737 $ 1,936 $ 2,115
======================================================================
Current liabilities $ 1,855 $ 1,189 $ 489 $ 497
Other liabilities 209 242 -0- -0-
Stockholder's equity 1,524 2,306 1,447 1,618
----------------------------------------------------------------------
Total liabilities and
stockholder's equity $ 3,588 $ 3,737 $ 1,936 $ 2,115
======================================================================
</TABLE>
10
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
NOTE B--BUSINESS ACQUISITIONS (continued)
1996 Acquisitions (continued)
Condensed unaudited income statement data for the three months and six
months ended June 30, 1997 and 1996 for WALB is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------------------------------------------
June 30, June 30,
1997 1996 1997 1996
----------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Broadcasting revenues $ 2,584 $ 2,759 $ 4,931 $ 5,098
Expenses 1,162 1,199 2,255 2,440
----------------------------------------------------------------------
Operating income 1,422 1,560 2,676 2,658
Other income -0- -0- -0- 9
----------------------------------------------------------------------
Income before income taxes $ 1,422 $ 1,560 $ 2,676 $ 2,667
======================================================================
Net income $ 883 $ 968 $ 1,660 $ 1,654
======================================================================
</TABLE>
Condensed unaudited income statement data for the three months and six
months ended June 30, 1997 and 1996 for WJHG is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------------------------------------------
June 30, June 30,
1997 1996 1997 1996
----------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Broadcasting revenues $ 1,338 $ 1,310 $ 2,441 $ 2,409
Expenses 934 984 1,840 1,933
----------------------------------------------------------------------
Operating income 404 326 601 476
Other income -0- -0- -0- 16
----------------------------------------------------------------------
Income before income taxes $ 404 $ 326 $ 601 $ 492
======================================================================
Net income $ 250 $ 202 $ 372 $ 305
======================================================================
</TABLE>
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 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
fee to Bull Run.
Funds for the Augusta Acquisition were obtained from the modification
of the Company's existing bank debt on January 4, 1996 (the "Bank Loan") to a
variable rate reducing revolving credit facility (the "Old Credit Facility") and
the sale to Bull Run of an 8% subordinated note due January 3, 2005 in the
principal amount of $10.0 million (the "8% Note"). In connection with the sale
of the 8% Note, the Company also issued warrants to Bull Run to purchase 487,500
shares of Class A Common Stock at $17.88 per share, 337,500 shares of which were
vested at June 30, 1997. The remainder vests in four annual installments of
37,500 shares each. Approximately $2.6 million of the $10.0 million of proceeds
from the 8% Note was allocated to the warrants and increased Class A Common
Stock. The Old Credit Facility provided for a credit line up to $54.2 million.
This transaction also required a modification of the interest rate of the
Company's $25.0 million senior secured note with an institutional investor
11
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
NOTE B--BUSINESS ACQUISITIONS (continued)
1996 Acquisitions (continued)
(the "Senior Note") from 10.08% to 10.7%.
As part of the financing arrangements for the First American
Acquisition, the Old Credit Facility and the Senior Note were retired and the
Company issued to Bull Run, in exchange for the 8% Note, 1,000 shares of Series
A Preferred Stock. The warrants issued with the 8% Note will vest in accordance
with the schedule described above provided the Series A Preferred Stock remains
outstanding. The Company recorded an extraordinary charge of $5.3 million ($3.2
million after taxes or $0.56 per common share for the year ended December 31,
1996) in connection with the early retirement of the $25.0 million Senior Note
and the write-off of loan acquisition costs from the early extinguishment of
debt.
The Company sold the assets of KTVE Inc. (the "KTVE Sale"), its
NBC-affiliated television station, in Monroe, Louisiana/El Dorado,
Arkansas to GOCOM Television of Ouachita, L.P. on August 20, 1996. Unaudited
pro forma operating data for the six months ended June 30, 1996, are presented
below and assumes that the Augusta Acquisition, the First American Acquisition,
and the KTVE Sale occurred on January 1, 1996. This unaudited pro forma
operating data does not purport to represent the Company's actual results of
operations had the Augusta Acquisition, the First American Acquisition, and
the KTVE Sale occurred on January 1, 1996, and should not serve as a forecast
of the Company's operating results for any future periods. The pro forma
adjustments are based solely upon certain assumptions that management
believes are reasonable under the circumstances at this time.
Unaudited pro forma operating data for the three months and six months
ended June 30, 1996 are as follows (in thousands, except per common share data):
<TABLE>
<CAPTION>
Three Months Ended June 30, 1996
------------------------------------------------------------------------
KTVE First American Pro forma Adjusted
Gray Sale Acquisition Adjustments Pro forma
-------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net $ 18,487 $ (1,237) $ 7,543 $ -0- $ 24,793
=========================================================================
Net earnings (loss) $ 1,490 $ (163) $ 2,447 $ (3,217) $ 557
=========================================================================
Earnings per share available to
common stockholders:
Primary $ 0.32 $ 0.03
============= ==============
Fully diluted $ 0.31 $ 0.03
============= ==============
</TABLE>
12
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
NOTE B--BUSINESS ACQUISITIONS (continued)
1996 Acquisitions (continued)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1996
-----------------------------------------------------------------------
First
KTVE American Pro forma Adjusted
Gray Sale Acquisition Adjustments Pro forma
------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net $ 35,514 $ (2,303) $ 14,089 $ -0- $ 47,300
========================================================================
Net earnings (loss) $ 1,802 $ 224 $ 4,173 $ (6,738) $ (539)
========================================================================
Earnings (loss) per share available to
common stockholders:
Primary $ 0.39 $ (0.16)
============= =============
Fully diluted $ 0.38 $ (0.16)
============= =============
</TABLE>
The pro forma results presented above include adjustments to reflect
(i) the incurrence of interest expense to fund the 1996 Acquisitions, (ii)
depreciation and amortization of assets acquired, (iii) the elimination of the
corporate expense allocation net of additional accounting and administrative
expenses for the First American Acquisition, (iv) increased pension expense for
the First American Acquisition, and (v) the income tax effect of such pro forma
adjustments. Average outstanding shares used to calculate pro forma earnings per
share data for 1996 include the 3.5 million Class B Common shares issued in
connection with the First American Acquisition.
Recent and Pending Acquisitions
On April 24, 1997, the Company acquired GulfLink Communications, Inc. of
Baton Rouge, Louisiana. The operations include nine transportable satellite
uplink trucks. The purchase price of approximately $5.1 million included a
cash payment and assumed liabilities but excluded expenses associated with the
transaction. The Company funded the costs of this acquisition through its Senior
Credit Facility. In connection with the purchase of the assets of GulfLink
Communications, Inc., the Company will pay Bull Run a fee equal to 1%
of the purchase price for services performed, of which $58,000 was due
and included in accounts payable at June 30, 1997.
On August 1, 1997, the Company purchased the assets of WITN-TV ("WITN").
The purchase price was approximately $40.7 million, excluding assumed
liabilities of approximately $500,000. The Company funded the costs of this
acquisition through its Senior Credit Facility. WITN operates on Channel 7 and
is the NBC affiliate in the Greenville-Washington-New Bern, North Carolina
market. In connection with the purchase of the assets of WITN, the Company
will pay Bull Run a fee equal to 1% of the purchase price for services
performed, of which $300,000 was due and included in accounts payable at
June 30, 1997.
NOTE C--STOCKHOLDERS' EQUITY
During 1996 a portion of the funds for the Augusta Acquisition were
obtained from the 8% Note, which included the issuance of detachable warrants to
Bull Run to purchase 487,500 shares of Class A Common Stock at $17.88 per share,
337,500 shares of which are currently vested, with the remainder vesting in four
annual installments of 37,500 shares each. Approximately $2.6 million of the
$10.0 million of proceeds from the 8% Note was allocated to the warrants and
increased Class A Common Stock. This allocation of the proceeds was based on an
estimate of the relative fair values of the 8% Note and the warrants on the date
of issuance. The Company amortized the original issue discount on a ratable
basis in accordance with the original terms of the 8% Note through September 30,
1996. During the three 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.
13
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
NOTE C--STOCKHOLDERS' EQUITY (continued)
In September 1996, the Company exchanged the 8% Note with Bull Run for 1,000
shares of Series A Preferred Stock yielding 8%. The warrants issued with the 8%
Note will vest in accordance with their original schedule provided the Series A
Preferred Stock remains outstanding.
As part of the financing for the First American Acquisition, the
Company also issued 1,000 shares of Series B Preferred Stock, with warrants to
purchase an aggregate of 500,000 shares of Class A Common Stock at an exercise
price of $24.00 per share. Of these warrants 300,000 vested upon issuance, with
the remaining warrants vesting in five equal annual installments commencing on
the first anniversary of the date of issuance. The shares of Series B Preferred
Stock were issued to Bull Run and to J. Mack Robinson, Chairman of the Board of
Bull Run and President and Chief Executive Officer of the Company, and certain
of his affiliates. The Company has obtained a written opinion from an investment
banking firm as to the fairness of the terms of the sale of such Series B
Preferred Stock and warrants.
On September 24, 1996, the Company issued 3.5 million shares of its
Class B Common Stock at a price of $20.50 per share in a public offering. The
net proceeds from this issuance of Class B Common Stock were used in the
financing of the First American Acquisition.
During the three months ended June 30, 1997, the Company purchased
58,700 shares of Class A Common stock at an average cost of $19.08 per share.
The Company placed these shares in treasury.
NOTE D--LONG-TERM DEBT
On September 20, 1996, the Company sold $160.0 million principal amount
of the Company's 10 5/8% Senior Subordinated Notes due 2006. The net proceeds of
$155.2 million from this offering, along with the net proceeds from (i) the KTVE
Sale, (ii) the issuance of Class B Common Stock, (iii) the issuance of Series B
Preferred Stock and (iv) borrowings under the Senior Credit Facility, were used
in financing the First American Acquisition as well as the early retirement of
the Company's Senior Note and the Old Credit Facility. Interest on the Senior
Subordinated Notes is payable semi-annually on April 1 and October 1, commencing
April 1, 1997.
In the quarter ended September 30, 1996, the Company recorded an
extraordinary charge of $5.3 million ($3.2 million after taxes or $0.56 per
share for the year ended December 31, 1996) in connection with the early
retirement of the Senior Note and the write-off of unamortized loan acquisition
costs of the Senior Note and the Old Credit Facility resulting from the early
extinguishment of debt.
In September 1996, the Company entered into a $125.0 million senior
credit facility (the "Senior Credit Facility") with KeyBank National
Association, NationsBank, N.A. (South), CIBC, Inc., CoreStates Bank, N.A., and
the Bank of New York. At June 30, 1997, the Company had approximately $20.2
million outstanding on the Senior Credit Facility and the interest rate was
based on a spread over LIBOR of 2.00% and/or Prime.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations of Gray Communications Systems, Inc.
Introduction
The following analysis of the financial condition and results of
operations of Gray Communications Systems, Inc. (the "Company") should be read
in conjunction with the Company's unaudited Condensed Consolidated Financial
Statements and notes thereto included elsewhere herein.
The Company derives its revenues from its television broadcasting,
publishing and paging operations. On August 1, 1997 the Company purchased
substantially all of the assets of WITN-TV, the NBC affiliate in the
Greenville-Washington-New Bern, North Carolina market. On April 24, 1997, the
Company purchased GulfLink Communications, Inc. (the "GulfLink Acquisition"),
which is in the transportable satellite uplink business, a business in which the
Company is already engaged. In September 1996, the Company acquired
substantially all of the assets of WKXT-TV, WCTV-TV, a satellite production and
services business and a communications and paging business (the "First American
Acquisition"). Subsequent to the First American Acquisition, the Company
rebranded WKXT-TV with the call letters WVLT ("WVLT") as a component of its
strategy to promote the station's upgraded news product. On January 4, 1996, the
Company purchased substantially all of the assets of WRDW-TV (the "Augusta
Acquisition"). The First American Acquisition and the Augusta Acquisition are
collectively referred to as the "1996 Broadcasting Acquisitions." As a result of
these acquisitions, the proportion of the Company's revenues derived from
television broadcasting has increased significantly. The Company anticipates
that the proportion of the Company's revenues derived from television
broadcasting will increase further as a result of the acquisition of WITN-TV and
GulfLink Communications, Inc. As a result of the higher operating margins
associated with the Company's television broadcasting operations, the profit
contribution of these operations as a percentage of revenues, has exceeded, and
is expected to continue to exceed, the profit contributions of the Company's
publishing and paging operations. Set forth below, for the periods indicated, is
certain information concerning the relative contributions of the Company's
television broadcasting, publishing and paging operations.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------------------------------
1997 1996
----------------------------------------- -----------------------------------------
Percent of Percent of
Amount Total Amount Total
-------------------- ---------------- -------------------- ----------------
<S> <C> <C> <C> <C>
(dollars in thousands)
TELEVISION BROADCASTING
Revenues $ 17,783 69.7% $ 12,802 69.2%
Operating income (1) 5,520 80.2 4,630 84.2
PUBLISHING
Revenues $ 6,082 23.9% $ 5,685 30.8%
Operating income (1) 1,035 15.0 871 15.8
PAGING
Revenues $ 1,634 6.4% $ -0- -0-%
Operating income (1) 324 4.8 -0- -0-
</TABLE>
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations of Gray Communications Systems, Inc. (continued)
Introduction (continued)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------------------------
1997 1996
----------------------------------------- -----------------------------------------
Percent of Percent of
Amount Total Amount Total
-------------------- ---------------- -------------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Television Broadcasting
Revenues $ 33,768 70.0% $ 24,252 68.3%
Operating income (1) 9,281 78.3 7,757 85.9
Publishing
Revenues $ 11,306 23.4% $ 11,262 31.7%
Operating income (1) 1,922 16.2 1,273 14.1
Paging
Revenues $ 3,185 6.6% $ -0- -0-%
Operating income (1) 657 5.5 -0- -0-
</TABLE>
(1) Represents income before miscellaneous income (expense), allocation of
corporate overhead, interest expense and income taxes.
The operating revenues of the Company's television stations are derived
primarily from broadcast advertising revenues and, to a much lesser extent, from
compensation paid by the networks to the stations for broadcasting network
programming. The operating revenues of the Company's publishing operations are
derived from retail advertising, circulation and classified revenue. Paging
revenue is derived primarily from the leasing and sale of pagers.
In the Company's broadcasting operations, broadcast advertising is sold
for placement either preceding or following a television station's network
programming and within local and syndicated programming. Broadcast advertising
is sold in time increments and is priced primarily on the basis of a program's
popularity among the specific audience an advertiser desires to reach, as
measured by Nielsen Media Research ("Nielsen"). In addition, broadcast
advertising rates are affected by the number of advertisers competing for the
available time, the size and demographic makeup of the market served by the
station and the availability of alternative advertising media in the market
area. Broadcast advertising rates are the highest during the most desirable
viewing hours, with corresponding reductions during other hours. The ratings of
a local station affiliated with a major network can be affected by ratings of
network programming.
Most broadcast advertising contracts are short-term, and generally run
only for a few weeks. Approximately 55.5% of the gross revenues of the Company's
television stations for the three months and six months ended June 30, 1997,
respectively, were generated from local advertising, which is sold primarily by
a station's sales staff directly to local accounts, and the remainder
represented primarily national advertising, which is sold by a station's
national advertising sales representative. The stations generally pay
commissions to advertising agencies on local, regional and national advertising.
The stations also pay commissions to the national sales representative on
national advertising.
Broadcast advertising revenues are generally highest in the second and
fourth quarters each year, due in part to increases in consumer advertising in
the spring and retail advertising in the period leading up to and including the
holiday season. In addition, broadcast advertising revenues are generally higher
during even
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations of Gray Communications Systems, Inc. (continued)
Introduction (continued)
numbered election years due to spending by political candidates, which spending
typically is heaviest during the fourth quarter.
The Company's publishing operations' advertising contracts are
generally entered into annually and provide for a commitment as to the volume of
advertising to be purchased by an advertiser during the year. The publishing
operations' advertising revenues are primarily generated from local advertising.
As with the broadcasting operations, the publishing operations' revenues are
generally highest in the second and fourth quarters of each year.
The Company's paging subscribers either own pagers, thereby paying
solely for the use of the Company's paging services, or lease pagers, thereby
paying a periodic charge for both the pagers and the paging services. Of the
Company's pagers currently in service, approximately 75% are owned and
maintained by subscribers with the remainder being leased. The terms of the
lease contracts are month-to-month, three months, six months or twelve months in
duration. Paging revenues are generally equally distributed throughout the year.
The broadcasting operations' primary operating expenses are employee
compensation, related benefits and programming costs. The publishing operations'
primary operating expenses are employee compensation, related benefits and
newsprint costs. The paging operations' primary operating expenses are employee
compensation and telephone and other communications costs. In addition, the
broadcasting, publishing and paging operations incur overhead expenses, such as
maintenance, supplies, insurance, rent and utilities. A large portion of the
operating expenses of the broadcasting, publishing and paging operations is
fixed, although the Company has experienced significant variability in its
newsprint costs in recent years.
Media Cash Flow
The following table sets forth certain operating data for the
broadcast, publishing and paging operations for the three months and six months
ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ --------------------------------------
1997 1996 1997 1996
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
(in thousands)
Operating income $ 6,124 $ 4,633 $ 10,460 $ 7,311
Add:
Amortization of program license rights 822 633 1,619 1,279
Depreciation and amortization 3,488 1,506 6,760 2,901
Corporate overhead 741 795 1,374 1,571
Non-cash compensation and
contributions to the Company's
401-(k) plan, paid in common stock
95 119 210 251
Less:
Payments for program license
liabilities (892) (648) (1,830) (1,309)
--------- -------- --------- ---------
Media Cash Flow (1) $ 10,378 $ 7,038 $ 18,593 $ 12,004
========= ======== ========= =========
</TABLE>
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations of Gray Communications Systems, Inc. (continued)
Media Cash Flow (continued)
(1) Of Media Cash Flow for the three months ended June 30, 1997 and 1996,
$8.2 million and $5.7 million, respectively, was attributable to the
Company's broadcasting operations; $1.5 million and $1.3 million,
respectively, was attributable to the Company's publishing operations;
and $694,000 and $-0-, respectively, was attributable to the Company's
paging operations. Of Media Cash Flow for the six months ended June 30,
1997 and 1996, $14.4 million and $9.9 million, respectively, was
attributable to the Company's broadcasting operations; $2.8 million and
$2.1 million, respectively, was attributable to the Company's
publishing operations; and $1.4 million and $-0-, respectively was
attributable to the Company's paging operations.
"Media Cash Flow" is defined as operating income, plus depreciation and
amortization (including amortization of program license rights), non-cash
compensation and corporate overhead, less payments for program license
liabilities. The Company has included Media Cash Flow data because such data are
commonly used as a measure of performance for media companies and are also used
by investors to measure a company's ability to service debt. Media Cash Flow is
not, and should not be used as, an indicator or alternative to operating income,
net income or cash flow as reflected in the Company's unaudited Condensed
Consolidated Financial Statements, and is not a measure of financial performance
under generally accepted accounting principles and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles.
Since 1994, the Company has completed several broadcasting and
publishing acquisitions and a broadcasting disposition. The financial results of
the Company reflect significant increases between the three month and six month
periods ended June 30, 1997 and 1996 in substantially all line items. The
principal reason for these increases was the completion by the Company of the
First American Acquisition on September 30, 1996. The purchase price for the
First American Acquisition was approximately $183.9 million, of which, $175.5
million was cash, $1.8 million was in the form of acquisition-related costs, and
approximately $6.6 million resulted from assumed liabilities. The Company sold
the assets of KTVE Inc. (the "KTVE Sale"), its NBC-affiliated television
station, in Monroe, Louisiana/El Dorado, Arkansas on August 20, 1996. The sales
price included $9.5 million in cash plus the amount of the accounts receivable
on the date of closing (approximately $829,000).
Cash flow provided by (used in) operating, investing and financing activities
The following table sets forth certain cash flow data for the Company
for the six months ended June 30, 1997 and 1996.
Six Months Ended June 30,
--------------------------------------
1997 1996
---------------- ----------------
(in thousands)
Cash flows provided by (used in)
Operating activities $ 5,460 $ 6,801
Investing activities (11,784) (37,490)
Financing activities 5,796 31,416
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations of Gray Communications Systems, Inc. (continued)
Broadcasting, Publishing and Paging Revenues
Set forth below are the principal types of broadcasting, publishing and
paging revenues earned by the Company's broadcasting, publishing and paging
operations for the periods indicated and the percentage contribution of each to
the Company's total revenues:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------------------------------
1997 1996
----------------------------------------- -----------------------------------------
Percent of Percent of
Amount Total Amount Total
-------------------- ---------------- -------------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Broadcasting
Net revenues:
Local $ 9,804 38.5% $ 7,070 38.2%
National 5,466 21.4 3,879 21.0
Network compensation 1,148 4.5 894 4.8
Political 106 0.4 573 3.1
Production and other 1,259 4.9 386 2.1
---------- ------ ---------- -------
$ 17,783 69.7% $ 12,802 69.2%
======== ===== ======== ======
Publishing
Net revenues:
Retail advertising $ 2,895 11.4% $ 2,692 14.6%
Classified 1,850 7.3 1,554 8.4
Circulation 1,227 4.8 1,074 5.8
Other 110 0.4 365 2.0
----------- ------- ---------- --------
$ 6,082 23.9% $ 5,685 30.8%
========= ======== ========== ========
Paging
Net revenues:
Paging lease and service $ 1,664 6.5% $ -0- -0-%
Other (30) ( 0.1) -0- -0-
----------- -------- ------------ ---------
$ 1,634 6.4% $ -0- -0-%
========== ======== ============ =========
$ 25,499 100.0% $ 18,487 100.0%
======== ===== ======== =====
</TABLE>
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations of Gray Communications Systems, Inc. (continued)
Broadcasting, Publishing and Paging Revenues (continued)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------------------------
1997 1996
----------------------------------------- -----------------------------------------
Percent of Percent of
Amount Total Amount Total
-------------------- ---------------- -------------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Broadcasting
Net revenues:
Local $ 18,916 39.2% $ 13,745 38.7%
National 10,231 21.2 6,968 19.6
Network compensation 2,281 4.7 1,761 5.0
Political 153 0.3 786 2.2
Production and other 2,187 4.6 992 2.8
--------- ------ --------- -----
$ 33,768 70.0% $ 24,252 68.3%
========= ===== ========= ======
Publishing
Net revenues:
Retail advertising $ 5,384 11.1% $ 5,300 14.9%
Classified 3,467 7.2 3,036 8.5
Circulation 2,217 4.6 2,189 6.2
Other 238 0.5 737 2.1
----------- ------- ----------- -------
$ 11,306 23.4% $ 11,262 31.7%
======== ====== ======== =======
Paging
Net revenues:
Paging lease and service $ 3,260 6.8% $ -0- -0-%
Other (75) (0.2) -0- -0-
------------ -------- ----------- --------
$ 3,185 6.6% $ -0- -0-%
========= ======= =========== =======
$ 48,259 100.0% $ 35,514 100.0%
======== ===== ======== ======
</TABLE>
Three Months Ended June 30, 1997 compared to Three Months Ended June 30, 1996
Revenues. Total revenues for the three months ended June 30, 1997
increased $7.0 million, or 37.9%, over the same period of the prior year, from
$18.5 million to $25.5 million. This increase was attributable to the net effect
of (i) increased revenues resulting from the First American Acquisition and the
GulfLink Acquisition, (ii) increased publishing revenues, (iii) decreased
broadcasting revenues (excluding the First American Acquisition and the GulfLink
Acquisition) and (iv) decreased revenues resulting from the KTVE Sale. The First
American Acquisition and the GulfLink Acquisition accounted for $7.7 million and
$350,000, respectively, of the revenue increase.
Broadcast net revenues increased $5.0 million, or 38.9%, over the same
period of the prior year, from $12.8 million to $17.8 million. The First
American Acquisition and the GulfLink Acquisition accounted for $6.0 million and
$350,000, respectively, of the broadcast net revenue increase. On a pro forma
basis, assuming the First American Acquisition had been effective on January 1,
1996, broadcast net revenues for the First American Acquisition for the three
months ended June 30, 1997 decreased $120,000, or 1.9%, when compared to the
same period of the prior year from $6.1 million to $6.0 million. The KTVE Sale
resulted in a decrease in broadcast net revenues of $1.2 million. Broadcast net
revenues, excluding the First American Acquisition, the GulfLink Acquisition and
the operating results of KTVE, decreased $150,000, or 1.3%, when compared to the
prior year.
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Three Months Ended June 30, 1997 compared to Three Months Ended June 30, 1996
(continued)
This decrease was due primarily to decreased political advertising spending of
$500,000 partially offset by increases in local advertising and other revenue of
$200,000 and $140,000, respectively.
Publishing revenues increased $400,000, or 7.0%, over the same period
of the prior year, from $5.7 million to $6.1 million. The increase in revenues
was due primarily to an increase in retail, classified and circulation revenue
of $200,000, 300,000 and $150,000, respectively, offset by a decrease in other
revenue of $250,000.
Paging revenue increased $1.6 million due to the First American
Acquisition. On a pro forma basis, assuming the First American Acquisition had
been effective on January 1, 1996, paging revenue for the three months ended
June 30, 1997 increased $230,000, or 16.3%, over the same period of the prior
year from $1.4 million to $1.6 million. The increase was attributable primarily
to an increase in the number of pagers in service. The Company had approximately
57,000 pagers and 44,000 pagers in service at June 30, 1997 and 1996,
respectively.
Operating expenses. Operating expenses for the three months ended June
30, 1997 increased $5.5 million, or 39.8%, over the same period of the prior
year, from $13.9 million to $19.4 million, due primarily to the First American
Acquisition and the GulfLink Acquisition, partially offset by the KTVE Sale. The
First American Acquisition and the GulfLink Acquisition accounted for $4.1
million and $300,000 (exclusive of depreciation and amortization), respectively,
of the operating expense increase.
Broadcast expenses increased $2.5 million, or 35.1%, over the three
months ended June 30, 1996, from $7.1 million to $9.6 million. The increase was
attributable primarily to the First American Acquisition and GulfLink
Acquisition partially offset by the KTVE Sale. On a pro forma basis, assuming
the First American Acquisition had been effective on January 1, 1996, broadcast
expenses for the First American Acquisition for the three months ended June 30,
1997 increased $300,000, or 9.1%, over the three months ended June 30, 1996 from
$2.9 million to $3.2 million. The KTVE Sale resulted in a decrease in broadcast
expenses of $900,000. Broadcast expenses, excluding the results of the First
American Acquisition, the GulfLink Acquisition and the KTVE Sale, decreased
$100,000, or 1.6%.
Publishing expenses for the three months ended June 30, 1997 increased
$200,000, or 4.8%, from the same period of the prior year, from $4.4 million to
$4.6 million. This increase resulted primarily from an increase in expenses
associated with an expansion of the news product at one of the Company's
properties partially offset by a decrease in work force related costs and
improved newsprint pricing. Average newsprint costs decreased approximately
9.8% while newsprint consumption increased approximately 16.4%.
Paging expenses increased $950,000 due to the First American
Acquisition. On a pro forma basis, assuming the First American Acquisition had
been effective on January 1, 1996, paging expenses for the three months ended
June 30, 1997 remained relatively constant at approximately $950,000.
Corporate and administrative expenses for the three months ended June
30, 1997 decreased $55,000, or 6.9%, over the same period of the prior year,
from $795,000 to $740,000. This decrease was attributable primarily to a
reduction of compensation expense at the corporate level.
Depreciation of property and equipment and amortization of intangible
assets was $3.5 million for the three months ended June 30, 1997, as compared to
$1.5 million for the same period of the prior year, an increase of $2.0 million,
or 131.6%. This increase was primarily the result of higher depreciation and
amortization costs related to the First American Acquisition and the GulfLink
Acquisition.
Interest expense. Interest expense increased $2.9 million, or 129.3%,
from $2.2 million for the three months ended June 30, 1996 to $5.1 million
for the three months ended June 30, 1997. This increase was
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Three Months Ended June 30, 1997 compared to Three Months Ended June 30, 1996
(continued)
attributable primarily to increased levels of debt resulting from the financing
of the First American Acquisition and the GulfLink Acquisition.
Net income. Net income available to common stockholders of the Company
was $272,000 for the three months ended June 30, 1997, as compared with net
income of $1.5 million for the same period of the prior year, a decrease of $1.2
million.
Six Months Ended June 30, 1997 compared to Six Months Ended June 30, 1996
Revenues. Total revenues for the six months ended June 30, 1997
increased $12.7 million, or 35.9%, over the same period of the prior year, from
$35.5 million to $48.3 million. This increase was attributable to the net effect
of (i) increased revenues resulting from the First American Acquisition and the
GulfLink Acquisition, (ii) increased publishing revenues, (iii) increased
broadcasting revenues (excluding the First American Acquisition and the GulfLink
Acquisition) and (iv) decreased revenues resulting from the KTVE Sale. The First
American Acquisition and the GulfLink Acquisition accounted for $14.5 million
and $350,000, respectively, of the revenue increase.
Broadcast net revenues increased $9.5 million, or 39.2%, over the same
period of the prior year, from $24.3 million to $33.8 million. The First
American Acquisition and the GulfLink Acquisition accounted for $11.3 million
and $350,000, respectively, of the broadcast net revenue increase. On a pro
forma basis, assuming the First American Acquisition had been effective on
January 1, 1996, broadcast net revenues for the First American Acquisition for
the six months ended June 30, 1997 and 1996 remained constant at $11.3 million.
The KTVE Sale resulted in an decrease in broadcast net revenues of $2.3 million.
Broadcast net revenues, excluding the First American Acquisition, the GulfLink
Acquisition and the operating results of KTVE, remained level due primarily to
increased local and national advertising revenue of $500,000 and $350,000,
respectively, partially offset by decreases in political advertising spending of
$650,000.
Publishing revenues as compared to the same period of the prior year,
remained constant at $11.3 million. While total publishing revenue did not
change, retail and classified revenue increased $100,000 and 400,000,
respectively, offset by a decrease in other revenue of $500,000.
Paging revenue increased $3.2 million due to the First American
Acquisition. On a pro forma basis, assuming the First American Acquisition had
been effective on January 1, 1996, paging revenue for the six months ended June
30, 1997 increased $450,000, or 16.1%, over the same period of the prior year
from $2.7 million to $3.2 million. The increase was attributable primarily to an
increase in the number of pagers in service. The Company had approximately
57,000 pagers and 44,000 pagers in service at June 30, 1997 and 1996,
respectively.
Operating expenses. Operating expenses for the six months ended June
30, 1997 increased $9.6 million, or 34.0%, over the same period of the prior
year, from $28.2 million to $37.8 million, due primarily to the First American
Acquisition and the GulfLink Acquisition, partially offset by the KTVE Sale. The
First American Acquisition and the GulfLink Acquisition accounted for $8.3
million and $300,000 (exclusive of depreciation and amortization), respectively,
of the operating expense increase.
Broadcast expenses increased $4.9 million, or 33.9%, over the six
months ended June 30, 1996, from $14.4 million to $19.3 million. The increase
was attributable primarily to the First American Acquisition and GulfLink
Acquisition partially offset by the KTVE Sale. On a pro forma basis, assuming
the First American Acquisition had been effective on January 1, 1996, broadcast
expenses for the First American Acquisition for the six months ended June 30,
1997 increased $600,000, or 10.1%, over the six months ended June 30, 1996 from
$5.9 million to $6.5 million. The KTVE Sale resulted in a decrease in broadcast
expenses of $1.7 million. Broadcast expenses, excluding the results of the First
American Acquisition, the GulfLink Acquisition and the KTVE Sale, decreased
$200,000, or 1.3%.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Six Months Ended June 30, 1997 compared to Six Months Ended June 30, 1996
(continued)
Publishing expenses for the six months ended June 30, 1997 decreased
$700,000, or 7.2%, from the same period of the prior year, from $9.2 million to
$8.5 million. This decrease resulted primarily from a decrease in work force
related costs, improved newsprint pricing, and restructuring of the advertising
publications partially offset by expenses associated with an expansion of the
news product at one of the Company's properties. Average newsprint costs
decreased approximately 16.8% while newsprint consumption increased
approximately 6.0%.
Paging expenses increased $1.8 million due to the First American
Acquisition. On a pro forma basis, assuming the First American Acquisition had
been effective on January 1, 1996, paging expenses for the six months ended June
30, 1997 remained relatively constant at approximately $1.8 million.
Corporate and administrative expenses for the six months ended June 30,
1997 decreased $200,000, or 12.5%, over the same period of the prior year, from
$1.6 million to $1.4 million. This decrease was attributable primarily to a
reduction of compensation expense at the corporate level.
Depreciation of property and equipment and amortization of intangible
assets was $6.8 million for the six months ended June 30, 1997, as compared to
$2.9 million for the same period of the prior year, an increase of $3.9 million,
or 133.0%. This increase was primarily the result of higher depreciation and
amortization costs related to the First American Acquisition and the GulfLink
Acquisition.
Interest expense. Interest expense increased $5.7 million, or 126.3%,
from $4.4 million for the six months ended June 30, 1996 to $10.1 million for
the six months ended June 30, 1997. This increase was attributable primarily to
increased levels of debt resulting from the financing of the First American
Acquisition and the GulfLink Acquisition.
Net income (loss). Net loss available to common stockholders of the
Company was $539,000 for the six months ended June 30, 1997, as compared with a
net income of $1.8 million for the same period of the prior year, a decrease of
$2.3 million.
Liquidity and Capital Resources
The Company's working capital (deficiency) was $4.7 million and
($342,000) at June 30, 1997 and December 31, 1996, respectively. The Company's
cash provided from operations was $5.5 million and $6.8 million for the six
months ended June 30, 1997 and 1996, respectively. Management believes that
current cash balances, cash flows from operations and the available funds under
its Senior Credit Facility will be adequate to provide for the Company's capital
expenditures, debt service, cash dividends and working capital requirements for
the forseeable future. The Senior Credit Facility contains certain restrictive
provisions, which, among other things, limit capital expenditures and additional
indebtedness and require minimum levels of cash flows. Additionally, the
effective interest rate of the Senior Credit Facility can be changed based upon
the Company's maintenance of certain operating ratios as defined in the Senior
Credit Facility, not to exceed the lender's prime rate plus 1.0% or LIBOR plus
3.25%. The Senior Credit Facility contains restrictive provisions similar to the
provisions of the Company's 10 5/8% Senior Subordinated Notes due 2006. The
amount borrowed by the Company and the amount available to the Company under the
Senior Credit Facility at June 30, 1997 was $20.2 million and $101.1 million,
respectively.
The Company's cash used in investing activities was $11.8 million and
$37.5 million for the six months ended June 30, 1997 and 1996, respectively. The
decreased usage of $25.7 million from 1996 to 1997 was primarily due to the
Augusta Acquisition in 1996 partially offset by the GulfLink Acquisition and
increased capital expenditures in 1997.
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
The Company's cash provided by financing activities was $5.8 million
and $31.4 million for the six months ended June 30, 1997 and 1996, respectively.
The decrease in cash provided resulted primarily from the funding obtained for
the Augusta Acquisition in 1996 partially offset by the borrowings for the
GulfLink Acquisition, purchase of treasury stock and increased capital
expenditures in 1997. During the three months ended June 30, 1997, the Company
purchased 58,700 shares of Class A Common stock at an average cost of $19.08 per
share. The Company placed these shares in treasury.
.
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 six months
ended June 30, 1997, the Company paid $1.8 million for such program broadcast
rights.
In connection with the First American Acquisition, the Federal
Communications Commission (the "FCC") ordered the Company to divest itself of
WALB-TV ("WALB") in Albany, Georgia and WJHG-TV ("WJHG") in Panama City, Florida
by March 31, 1997 to comply with regulations governing common ownership of
television stations with overlapping service areas. The FCC is currently
reexamining these regulations, and if it revises them in accordance with the
interim policy it has adopted, divestiture of WJHG would not be required. The
FCC is not expected to complete its rulemaking on this subject until later in
1997. Accordingly, the Company requested and in July of 1997 received an
extension of the divestiture deadline with regard to WJHG conditioned upon the
outcome of the rulemaking proceedings. Also in July of 1997, the Company
obtained FCC approval to transfer control of WALB to a trust with a view
towards the trustee effecting i) a swap of WALB's assets for assets of one
or more television stations of comparable value and with comparable
broadcast cash flow in a transaction qualifying for deferred capital gains
treatment under the "like-kind exchange" provision of Section 1031 of the
Internal Revenue Code of 1986, or ii) a sale of such assets. Under the trust
arrangement, the Company relinquished operating control of the station to a
trustee while retaining the economic risks and benefits of ownership. If the
trustee is required to effect a sale of WALB, the Company would incur a
significant gain and related tax liability, the payment of which could
have an adverse effect on the Company's ability to acquire comparable assets
without incurring additional indebtedness. The FCC has allowed up to six months
for the trustee to file an application seeking the agency's approval of a
swap or sale. The approval process is expected to take between two and six
months.
The Company and its subsidiaries file a consolidated federal income tax
return and such state or local tax returns as are required. As of June 30, 1997,
the Company anticipates that it will generate taxable operating losses for the
foreseeable future.
Management does not believe that inflation in past years has had a
significant impact on the Company's results of operations nor is inflation
expected to have a significant effect upon the Company's business in the near
future.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted by
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
128 on the calculation of primary and fully diluted earnings per share for the
second quarter and six month period ended June 30, 1997 and 1996 would not be
material.
24
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were voted upon at the 1997 Annual Meeting of Stockholders
of Gray Communications Systems, Inc. on May 1, 1997, and votes were cast as
indicated:
(1) Election of Directors:
Nominee For Withheld Authority
-----------------------------------------------------------------------
Richard L. Boger 42,048,198 15,320
Hilton H. Howell, Jr. 42,048,198 15,320
William E. Mayher, III 42,032,748 30,770
Howell W. Newton 42,048,198 15,320
Hugh Norton 42,046,698 16,820
Robert S. Prather, Jr. 42,048,198 15,320
J. Mack Robinson 42,045,698 17,820
(2) Approval of the appointment of Ernst & Young, LLP as the independent
auditors of the Company and its subsidiaries for the year ending
December 31, 1997.
For Against Abstain
-----------------------------------------------------------------------
42,046,193 15,210 2,115
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
None
25
<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: August 11, 1997 By: /s/ William A. Fielder, III
--------------- ------------------------------------------
William A. Fielder, III, Vice President & CFO
(Chief Financial Officer)
26
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 7,943,309 4,464,459 7,891,432 4,454,038
Common Stock Equivalents - based on
Treasury stock method using average
market price 117,932 243,105 0 202,653
----------- ---------- ---------- ----------
Totals 8,061,241 4,707,564 7,891,432 4,656,691
=========== =========== =========== ===========
Net income (loss) available to common
Stockholders $ 271,876 $1,490,484 $ (539,223) $1,801,695
============ ========== =========== ==========
Primary per share amounts:
Net income (loss) available to
Common stockholders $ 0.03 $ 0.32 $ (0.07) $ 0.39
============ ========== =========== ===========
Fully diluted:
Weighted average shares outstanding 7,943,309 4,464,459 7,891,432 4,454,038
Common Stock Equivalents - based on the
Treasury stock method using the greater
of the quarter-end market price or the
average market price 177,297 285,658 0 239,008
----------- ----------- ----------- ----------
Totals 8,120,606 4,750,117 7,891,432 4,693,046
============ =========== =========== ==========
Net income (loss) available to
Common stockholders $ 271,876 $1,490,484 $ (539,223) $1,801,695
============= ========== ============ ==========
Fully diluted per share amounts:
Net income (loss) available to
Common stockholders $ 0.03 $ 0.31 $ (0.07) $ 0.38
============ ========== ============ =========
</TABLE>
