<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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.
<TABLE>
<S> <C>
CLASS A COMMON STOCK, (NO PAR VALUE) CLASS B COMMON STOCK, (NO PAR VALUE)
- ---------------------------------------------- -------------------------------------------
4,619,486 SHARES AS OF APRIL 28, 1997 3,334,193 SHARES AS OF APRIL 28, 1997
</TABLE>
<PAGE>
INDEX
GRAY COMMUNICATIONS SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets (unaudited) - March 31,
1997 and December 31, 1996
Condensed consolidated statements of operations (unaudited) -
Three months ended March 31, 1997 and 1996
Condensed consolidated statement of stockholders' equity
(unaudited) - Three months ended March 31, 1997
Condensed consolidated statements of cash flows (unaudited) -
Three months ended March 31, 1997 and 1996
Notes to condensed consolidated financial statements
(unaudited) - March 31, 1997
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
<S> <C> <C>
1997 1996
------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 354,504 $ 1,051,044
Trade accounts receivable, less
allowance for doubtful accounts of
$1,360,000 and $1,450,000, respectively 14,680,766 17,373,839
Recoverable income taxes 4,050,387 1,747,687
Inventories 747,289 624,118
Current portion of program broadcast rights 1,987,743 2,362,742
Other current assets 885,720 379,793
------------- --------------
22,706,409 23,539,223
PROPERTY AND EQUIPMENT 58,039,212 53,993,742
Less allowance for depreciation (19,934,524) (18,209,891)
------------- --------------
38,104,688 35,783,851
OTHER ASSETS
Deferred acquisition costs 69,969 -0-
Deferred loan costs (Note B) 8,880,587 9,141,262
Goodwill and other intangibles (Note B) 227,044,543 228,692,018
Other 1,882,283 1,507,488
------------- --------------
237,877,382 239,340,768
------------- --------------
$ 298,688,479 $ 298,663,842
============= ==============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
<S> <C> <C>
1997 1996
-------------- --------------
CURRENT LIABILITIES
Trade accounts payable (includes $1,200,000 and
$1,000,000 payable to Bull Run Corporation at
March 31, 1997 and December 31, 1996,
respectively) $ 3,938,498 $ 6,043,062
Accrued expenses 7,359,687 8,212,555
Accrued interest 8,869,788 4,858,775
Current portion of program broadcast obligations 2,419,780 2,862,434
Deferred revenue 1,904,793 1,764,509
Current portion of long-term debt 140,000 140,000
------------- --------------
24,632,546 23,881,335
LONG-TERM DEBT (Notes B and D) 170,196,045 173,228,049
NON-CURRENT LIABILITIES 7,843,116 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 5,281,616 and 5,155,331
shares, respectively 9,633,130 7,994,235
Class B Common Stock, no par value;
authorized 15,000,000 shares;
issued 3,506,493 and 3,500,000
shares, respectively 66,183,335 66,065,762
Retained earnings 9,578,728 10,543,940
------------- --------------
105,395,193 104,603,937
Treasury stock at cost,
Class A Common Stock 663,180 shares (6,638,284) (6,638,284)
Treasury stock at cost,
Class B Common Stock 172,300 shares (2,740,137) (2,740,137)
------------- --------------
96,016,772 95,225,516
------------- --------------
$ 298,688,479 $ 298,663,842
============= =============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING REVENUES
Broadcasting
(net of agency commissions) $ 15,985,297 $ 11,449,645
Publishing 5,224,854 5,576,934
Paging 1,550,376 -0-
----------- -------------
22,760,527 17,026,579
EXPENSES
Broadcasting 9,694,784 7,309,865
Publishing 3,933,421 4,808,062
Paging 890,294 -0-
Corporate and administrative 633,328 775,586
Depreciation and amortization 3,271,943 1,395,254
Non-cash compensation paid in
common stock -0- 60,000
----------- ------------
18,423,770 14,348,767
----------- ------------
4,336,757 2,677,812
Miscellaneous income (expense), net (45,763) 63,514
----------- -----------
4,290,994 2,741,326
Interest expense 4,975,693 2,229,115
----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (684,699) 512,211
Income tax expense (benefit) (223,600) 201,000
----------- -----------
NET INCOME (LOSS) (461,099) 311,211
Preferred Dividends 350,000 -0-
----------- ------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (811,099) $ 311,211
============ ============
AVERAGE OUTSTANDING COMMON SHARES
Primary 7,836,097 4,606,773
Fully Diluted 7,836,097 4,636,997
PRIMARY AND FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) available to common stockholders $ (0.10) $ 0.07
========== ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited)
<TABLE>
<CAPTION>
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 $10,543,940
Net (loss) for
the three months
ended March
31, 1997 (461,099)
Cash Dividends
($.02 per share) (154,113)
Preferred stock
dividends (350,000)
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 3,750 36,250
Issuance of
Class B
Common Stock:
401(k) plan 6,493 117,573
----- ----------- ---------- ------------ ---------- ----------- ----------
Balance at
March 31, 1997 2,000 $20,000,000 5,281,616 $ 9,633,130 3,506,493 $66,183,335 $9,578,728
====== =========== ========= =========== ========= =========== ==========
</TABLE>
<TABLE>
<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) $95,225,516
Net (loss) for
the three months
ended March
31, 1997 (461,099)
Cash Dividends
($.02 per share) (154,113)
Preferred stock
dividends (350,000)
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 36,250
Issuance of
Class B
Common Stock:
401(k) plan 117,573
------------ ----------- ---------- ----------- -----------
Balance at
March 31, 1997 (663,180) $(6,638,284) (172,300) $(2,740,137) $96,016,772
============ =========== ========= =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
<S> <C> <C>
------------ -------------
OPERATING ACTIVITIES
Net income (loss) $ (461,099) $ 311,211
Items which did not use (provide) cash:
Depreciation 1,712,147 848,427
Amortization of intangible assets 1,559,796 546,827
Amortization of deferred loan costs 269,074 -0-
Amortization of program broadcast rights 796,817 646,820
Amortization of original issue discount on
subordinated note -0- 72,222
Amortization of deferred interest rate
swap liability (13,980) -0-
Payments for program broadcast rights (938,009) (661,603)
Compensation paid in Class A common
stock -0- 60,000
Supplemental employee benefits (66,941) (135,755)
Class A common stock contributed to 401(k) Plan -0- 78,369
Class B common stock contributed to 401(k) Plan 117,573 -0-
Deferred income taxes 1,662,000 343,850
(Gain) on disposal of assets -0- (20,406)
Changes in operating assets and liabilities:
Receivables, inventories, and
other current assets 275,971 1,550,389
Accounts payable and other
current liabilities 2,243,865 (521,496)
------------ -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 7,157,214 3,118,855
INVESTING ACTIVITIES
Acquisition of television businesses -0- (34,300,713)
Purchases of property and equipment (4,206,376) (813,588)
Deferred acquisition costs (78,369) (931,623)
Proceeds from asset sales -0- 113,297
Other (228,787) (80,188)
------------- -------------
NET CASH USED IN INVESTING
ACTIVITIES (4,513,532) (36,012,815)
</TABLE>
7
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
--------- ----------
<S> <C> <C>
FINANCING ACTIVITIES
Dividends paid to common stockholders (154,113) (89,076)
Dividends paid to preferred stockholders (200,000) -0-
Class A Common Stock transactions 45,895 388,249
Proceeds from borrowings of long-term debt -0- 36,725,000
Payments on long-term debt (3,032,004) (2,608,577)
---------- ----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (3,340,222) 34,415,596
---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (696,540) 1,521,636
Cash and cash equivalents at beginning of period 1,051,044 559,991
---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 354,504 $2,081,627
========== ==========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
8
<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 three month period ended March 31, 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 on
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
first quarter ended March 31, 1997 and March 31, 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
a 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 March 31, 1997, $1.2 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 3,500,000
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
9
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
NOTE B--BUSINESS ACQUISITIONS (continued)
1996 ACQUISITIONS (continued)
Run and to J. Mack Robinson, Chairman of the Board of Bull Run and interim
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.
The Federal Communications Commission's (the "FCC") approval of the
First American Acquisition required 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-TV would not be required. The
FCC is not expected to complete its rulemaking on this subject until later in
1997. Accordingly, the Company has requested, and expects to receive, an
extension of the divestiture deadline pending the outcome of the rulemaking
proceedings. In order to satisfy applicable FCC requirements with respect to
WALB-TV, 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
Internal Revenue Code of 1986. The Company was unable to enter into an agreement
to effect such a swap by March 31, 1997, therefore the Company is seeking FCC
approval to transfer the station to a trust with a view towards the trustee
effecting a swap or sale of such assets. Under such trust arrangement, which
would be subject to the approval of the FCC, the Company would be required to
relinquish operating control of the station 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-TV, 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.
Condensed unaudited balance sheets of WALB and WJHG are as follows (in
thousands):
<TABLE>
<CAPTION>
WALB WJHG
-------------------------------
MARCH 31,
1997 1996 1997 1996
-------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Current assets $1,945 $1,667 $ 907 $ 855
Property and equipment 1,526 1,769 912 1,078
Other assets 84 76 54 3
------ ------- ------ ------
Total assets $3,555 $3,512 $1,873 $1,936
====== ======= ====== ======
Current liabilities $1,315 $1,127 $ 433 $ 428
Other liabilities 225 228 -0- -0-
Stockholder's equity 2,015 2,157 1,440 1,508
------ ------- ------ -----
Total liabilities and stockholder's
equity $3,555 $3,512 $1,873 $1,936
====== ====== ====== ======
</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 ended
March 31, 1997 and 1996 for WALB and WJHG are as follows (in thousands):
WALB WJHG
------------- -------------
THREE MONTHS ENDED MARCH 31,
1997 1996 1997 1996
-------------------------------
(Unaudited)
Broadcasting revenues $2,347 $2,340 $1,103 $1,099
Expenses 1,093 1,242 906 949
------ ----- ------ ------
Operating income 1,254 1,098 197 150
Other income -0- 9 -0- 16
------ ------ ------ ------
Income before income taxes $1,254 $1,107 $ 197 $ 166
====== ====== ====== ======
Net income $ 777 $ 686 $ 122 $ 103
====== ====== ====== ======
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 March 31, 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 (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, LA/El Dorado, AR to GOCOM
Television of Ouachita, L.P. on August 20, 1996. Unaudited pro forma operating
data for the three months ended March 31, 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
11
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE B--BUSINESS ACQUISITIONS (Continued)
1996 ACQUISITIONS (Continued)
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 ended March 31,
1996 are as follows (in thousands, except per common share data):
<TABLE>
<CAPTION>
FIRST
KTVE AMERICAN PRO FORMA ADJUSTED
GRAY SALE ACQUISITION ADJUSTMENTS PRO FORMA
----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net $ 17,027 $ (1,066) $ 6,547 $ -0- $ 22,508
============================================================================
Net earnings (loss) $ 311 $ (59) $ 1,726 $ (3,385) $ (1,407)
============================================================================
Earnings (loss) per share
available to common
stockholders $ 0.07 $ (0.22)
====== ==============
</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 3,500,000 Class B Common shares issued in
connection with the First American Acquisition.
RECENT AND PENDING ACQUISITIONS
In April 1997, the Company acquired GulfLink Communications, Inc. of
Baton Rouge, Louisiana. The operations include nine transportable satellite
uplink trucks. The purchase price was approximately $5.1 million including a
cash payment and assumed liabilities and excluding expenses associated with the
transaction. The Company funded the costs of this acquisition through its
Senior Credit Facility.
In February 1997, the Company announced that it had signed a letter of
intent with Raycom-US, Inc. to purchase the assets of WITN-TV ("WITN"). The
purchase price is estimated at approximately $39.5 million plus the assumption
of certain liabilities. WITN operates on Channel 7 and is the NBC affiliate in
the Greenville-Washington-New Bern, North Carolina market. The purchase of WITN
is subject to a number of conditions, including the negotiation and execution
of a definitive purchase agreement. In connection with the proposed purchase
of the assets of WITN, the Company will pay Bull Run a finder's fee equal to
1% of the purchase price for services performed, none of which was due or
included in accounts payable at March 31, 1997.
NOTE C--STOCKHOLDERS' EQUITY
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
12
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE C--STOCKHOLDERS' EQUITY (Continued)
discount on a ratable basis in accordance with the original terms of the 8% Note
through September 30, 1996. During the three months ended March 31, 1997 and
1996, the Company recognized approximately $-0- and $72,000, respectively in
amortization costs for the $2.6 million original issue discount. 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 Interim 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 3,500,000 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 was used in the financing of
the First American Acquisition.
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.
NOTE E--LONG-TERM DEBT (CONTINUED)
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 March 31, 1997, the Company had approximately $9.7
million outstanding on the Senior Credit Facility and the interest rate was
based on a spread over LIBOR and/or Prime, of 2.25% and 0.00%, respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS OF THE COMPANY
INTRODUCTION
The following analysis of the financial condition and results of
operations of 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. 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 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 currently has
signed a letter of intent to purchase 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.,
which is in the transportable satellite uplink business, a business in which the
Company is already engaged. The Company anticipates that the proportion of the
Company's revenues derived from television broadcasting will increase further if
the acquisition of WITN-TV is completed. 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 MARCH 31,
---------------------------------------------------------------------------------------
1997 1996
----------------------------------------- -----------------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
-------------------- ---------------- -------------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
TELEVISION BROADCASTING
Revenues $ 15,985 70.2% $ 11,450 67.2%
Operating income (1) 3,761 75.5 3,127 88.6
PUBLISHING
Revenues $ 5,225 23.0% $ 5,577 32.8%
Operating income (1) 887 17.8 401 11.4
PAGING
Revenues $ 1,551 6.8% $ -0- -0-%
Operating income (1) 333 6.7 -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 advertising, circulation and classified revenue. Paging revenue is
derived primarily from the leasing and sale of pagers.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS OF THE COMPANY (CONTINUED)
In the Company's broadcasting operations, broadcast advertising is sold
for placement either preceding or following a television station's network
programming and within local and syndicated programming. Broadcast advertising
is sold in time increments and is priced primarily on the basis of a program's
popularity among the specific audience an advertiser desires to reach, as
measured by Nielsen 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 56.5% of the gross revenues of the Company's
television stations for the three months ended March 31, 1997 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 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.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS OF THE COMPANY (CONTINUED)
MEDIA CASH FLOW
The following table sets forth certain operating data for the
broadcast, publishing and paging operations for the three months ended
March 31, 1997 and 1996:
THREE MONTHS ENDED MARCH 31,
-------------------------------
1997 1996
-------------- -----------
(IN THOUSANDS)
Operating income $ 4,337 $ 2,678
Add:
Amortization of program license rights 797 647
Depreciation and amortization 3,272 1,395
Corporate overhead 633 776
Non-cash compensation and
contributions to the Company's
401-k plan, paid in common
stock 114 131
Less:
Payments for program license
liabilities (938) (662)
------ ------
Media Cash Flow (1) $ 8,215 $ 4,965
====== ======
(1) Of Media Cash Flow, $6.2 million and $4.2 million was attributable to
the Company's broadcasting operations during the three months ended March
31, 1997 and 1996, respectively; $1.3 million and $783,000 was attributable
to the Company's publishing operations for the three months ended March 31,
1997 and 1996, respectively; and $667,000 and $-0- was attibutable to the
Company's paging operations for the three months ended March 31, 1997 and
1996, respective
"Media cash flow" is defined as operating income from broadcast,
publishing and paging 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, publishing and
paging 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 periods ended
March 31, 1997 and March 31, 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).
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS OF THE COMPANY (CONTINUED)
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 months ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------
1997 1996
----------------------- -------------------------
(in thousands)
<S> <C> <C>
Cash flows provided by (used in)
Operating activities $ 7,157 $ 3,119
Investing activities (4,514) (36,013)
Financing activities (3,340) 34,416
</TABLE>
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 MARCH 31,
---------------------------------------------------------------------------------------
1997 1996
----------------------------------------- -----------------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
-------------------- ---------------- -------------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BROADCASTING
NET REVENUES:
Local $ 9,112 40.0% $ 6,675 39.2%
National 4,765 20.9 3,089 18.1
Network compensation 1,133 5.0 867 5.1
Political 47 0.2 213 1.2
Production and other 928 4.1 606 3.6
-------- ---- ------- -------
$ 15,985 70.2% $11,450 67.2%
======== ==== ======= ======
PUBLISHING
NET REVENUES:
Retail advertising $ 2,490 10.9% $ 2,608 15.3%
Classified 1,617 7.1 1,482 8.7
Circulation 990 4.3 1,115 6.6
Other 128 0.7 372 2.2
--------- ---- ------- -------
$ 5,225 23.0% $ 5,577 32.8%
========= ===== ======= ======
PAGING
NET REVENUES:
Paging lease and service $ 1,596 7.0% $ -0- -0-%
Other (45) (0.2) -0- -0-
--------- ----- ------- -------
$ 1,551 6.8% $ -0- -0-%
========= ===== ======= =======
$ 22,761 100.0% $17,027 100.0%
========= ===== ======= ======
</TABLE>
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
REVENUES. Total revenues for the three months ended March 31, 1997,
increased $5.7 million, or 33.7%, over the same period of the prior year, from
$17.0 million to $22.8 million. This increase was attributable to the net effect
of (i) increased revenues resulting from the First American Acquisition, (ii)
increases in broadcasting revenues (excluding the First American Acquisition),
(iii) decreased revenues resulting from the KTVE Sale and (iv) decreased
publishing revenues. The First American Acquisition accounted for $6.9 million
of the revenue increase.
Broadcast net revenues increased $4.5 million, or 39.6%, over the same
period of the prior year, from $11.5 million to $16.0 million. The First
American Acquisition, net of the effects of the KTVE Sale, accounted for $4.2
million, or 93.5%, 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 March 31, 1997 increased $100,000, or 2.0%, over the same period of the
prior year from $5.2 million to $5.3 million. The KTVE Sale resulted in a
decrease in broadcast net revenues of $1.1 million. Broadcast net revenues,
excluding the First American Acquisition and the operating results of KTVE,
increased $294,000, or 2.8%, over the prior year. The $294,000 increase in
broadcast net revenues, excluding the First American Acquisition and the
operating results of KTVE, was due primarily to increased local advertising
spending and national advertising spending of $278,000 and $302,000,
respectively, partially offset by decreased political advertising spending and
other revenue of $156,000 and $127,000, respectively.
Publishing revenues decreased $352,000, or 6.3%, over the same period
of the prior year, from $5.6 million to $5.2 million. The decrease in revenues
was due primarily to an increase in classified advertising revenues of $135,000
offset by decreases in circulation, retail and other advertising revenue
$125,000, $118,000 and 244,000, respectively.
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
March 31, 1997 increased $212,000, or 15.8%, over the same period of the prior
year from $1.3 million to $1.6 million. The increase was attributable primarily
to higher sales volume generated by a reseller program implemented during 1995.
OPERATING EXPENSES. Operating expenses for the three months ended March
31, 1997 increased $4.1 million, or 28.4%, over the same period of the prior
year, from $14.3 million to $18.4 million, due primarily to the First American
Acquisition partially offset by the KTVE Sale and decreased expenses at the
publishing operations. The First American Acquisition, net of the effects of the
KTVE Sale, accounted for $3.5 million, or 86.0%, of the increase in operating
expenses.
Broadcast expenses increased $2.4 million, or 32.6%, over the three
months ended March 31, 1996, from $7.3 million to $9.7 million. The increase
was attributable primarily to the First American 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 March 31, 1997 increased $505,000, or
18.2%, over the three months ended March 31, 1996 from $2.8 million to $3.3
million. The KTVE Sale resulted in a decrease in broadcast expenses of $860,000.
Broadcast expenses, excluding the results of the First American Acquisition and
the KTVE Sale, remained relatively level.
Publishing expenses for the three months ended March 31, 1997,
decreased $875,000 or 18.2%, from the same period of the prior year, from $4.8
million to $3.9 million. This decrease resulted primarily from a decrease in
work force related costs, improved newsprint pricing, and restructuring of the
advertising publications. Average newsprint costs decreased approximately 23%
while newsprint consumption decreased approximately 4%.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
(CONTINUED)
Paging expenses increased $890,000 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
March 31, 1997 increased $47,000, or 5.6%, over the same period of the prior
year from $843,000 to $890,000. The increase was attributable primarily to
higher payroll costs.
Corporate and administrative expenses for the three months ended March
31, 1997, decreased $142,000 or 18.3%, over the same period of the prior year,
from $776,000 to $634,000. 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 $3.3 million for the three months ended March 31, 1997, as compared
to $1.4 million for the same period of the prior year, an increase of $1.9
million or 134.6%. This increase was primarily the result of higher depreciation
and amortization costs related to the First American Acquisition.
INTEREST EXPENSE. Interest expense increased $2.7 million, or 123.2%,
from $2.2 million for the three months ended March 31, 1996 to $5.0 million for
the three months ended March 31, 1997. This increase was attributable primarily
to increased levels of debt resulting from the financing of the First American
Acquisition.
NET INCOME (LOSS). Net loss available to common stockholders of the
Company was $811,000 for the three months ended March 31, 1997, as compared with
net income of $311,000 for the same period of the prior year, a decrease of $1.1
million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficiency was $1.9 million and $342,000
at March 31, 1997 and December 31, 1996, respectively. The Company's cash
provided from operations was $7.2 million and $3.1 million for the three months
ended March 31, 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 March 31, 1997 was $9.7 million and $115.3 million,
respectively.
The Company's cash used in investing activities was $4.5 million and
$36.0 million for the three months ended March 31, 1997 and 1996, respectively.
The decreased usage of $31.5 million from 1996 to 1997 was primarily due to the
Augusta Acquisition in 1996.
The Company used $3.3 million and was provided $34.4 million in cash by
financing activities for the three months ended March 31, 1997 and 1996,
respectively. The cash provided in 1996 resulted primarily from the funding
obtained for the Augusta Acquisition.
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, 1997, the Company paid $938,000 for such program broadcast
rights.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
In connection with the First American Acquisition, the FCC ordered the
Company to divest itself of WJHG-TV and WALB-TV 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-TV would not be required. The FCC is not expected to complete its
rulemaking on this subject until later in 1997. Accordingly the Company has
requested, and expects to receive, an extension of the divestiture deadline
pending the outcome of the rulemaking proceedings. In order to satisfy
applicable FCC requirements with respect to WALB-TV, 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 Internal Revenue Code of 1986. The
Company was unable to enter into an agreement to effect such a swap by March 31,
1997, therefore, the Company has requested FCC approval to transfer the station
to a trust with a view towards the trustee effecting a swap or sale of such
assets. Under such trust arrangement, which would be subject to the approval of
the FCC, the Company would be required to relinquish operating control of the
station 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-TV,
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.
The Company and its subsidiaries file a consolidated federal income tax
return and such state or local tax returns as are required. As of March 31,
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.
Additional acquisitions are under consideration by the Company. If
completed, the Company currently believes that funding for such acquisitions
would be provided primarily through cash flow from operations and borrowings
under the Senior Credit Facility, although there can be no assurances that any
such acquisitions would not require the sale by the Company of its debt or
equity securities.
20
<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
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRAY COMMUNICATIONS SYSTEMS, INC.
(Registrant)
Date: May 12, 1997 By: /s/ William A. Fielder, III
------------ -----------------------------
William A. Fielder, III, Vice President & CFO
(Chief Financial Officer)
22
<PAGE>
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
---- ----
PRIMARY:
Weighted average shares outstanding 7,836,097 4,443,617
Common Stock Equivalents - based on the
treasury stock method using average
market price 0 163,156
---------- ----------
Totals 7,836,097 4,606,773
========== ==========
Net income (loss) available to common
stockholders $ (811,099) $ 311,211
=========== ==========
PRIMARY PER SHARE AMOUNTS:
Net income (loss) available to
common stockholders $ (0.10) $ 0.07
========== =========
FULLY DILUTED:
Weighted average shares outstanding 7,836,097 4,443,617
Common Stock Equivalents - based on the
treasury stock method using quarter-end
market price which is greater than average
market price 0 193,380
---------- ----------
Totals 7,836,097 4,636,997
========== ==========
Net income (loss) available to
common stockholders $ (811,099) $ 311,211
=========== ==========
FULLY DILUTED PER SHARE AMOUNTS:
Net income (loss) available to
common stockholders $ (0.10) $ 0.07
========== =========
23
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1997 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
GRAY COMMUNICATIONS SYSTEMS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 354,504
<SECURITIES> 0
<RECEIVABLES> 16,040,766
<ALLOWANCES> 1,360,000
<INVENTORY> 747,289
<CURRENT-ASSETS> 22,706,409
<PP&E> 58,039,212
<DEPRECIATION> 19,934,524
<TOTAL-ASSETS> 298,688,479
<CURRENT-LIABILITIES> 24,632,546
<BONDS> 170,196,045
0
20,000,000
<COMMON> 66,438,044
<OTHER-SE> 9,578,728
<TOTAL-LIABILITY-AND-EQUITY> 298,688,479
<SALES> 0
<TOTAL-REVENUES> 22,760,527
<CGS> 0
<TOTAL-COSTS> 18,423,770
<OTHER-EXPENSES> 45,763
<LOSS-PROVISION> 49,425
<INTEREST-EXPENSE> 4,975,693
<INCOME-PRETAX> (684,699)
<INCOME-TAX> (223,600)
<INCOME-CONTINUING> (461,099)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (461,099)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
