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 MARCH 31, 1998.
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)
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GEORGIA 58-0285030
- -------------------------------------------- -------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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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.
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CLASS A COMMON STOCK, (NO PAR VALUE) CLASS B COMMON STOCK, (NO PAR VALUE)
- ---------------------------------------------- --------------------------------------------
4,537,695 SHARES AS OF MAY 8, 1998 3,407,204 SHARES AS OF MAY 8, 1998
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INDEX
GRAY COMMUNICATIONS SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets (unaudited) - March 31,
1998 and December 31, 1997
Condensed consolidated statements of operations (unaudited)
Three months ended March 31, 1998 and 1997;
Condensed consolidated statement of stockholders' equity
(unaudited) Three months ended March 31, 1998
Condensed consolidated statements of cash flows (unaudited)
Three months ended March 31, 1998 and 1997
Notes to condensed consolidated financial statements (unaudited)-
March 31, 1998
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
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PART I. FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
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GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
------------------- -------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,051,009 $ 2,367,300
Trade accounts receivable, less allowance for doubtful accounts
of $1,295,000 and $1,253,000, respectively 18,288,309 19,527,316
Recoverable income taxes 2,047,980 2,132,284
Inventories 1,137,514 846,891
Current portion of program broadcast rights 2,129,358 2,850,023
Other current assets 1,687,008 968,180
----------- -----------
Total current assets 26,341,178 28,691,994
PROPERTY AND EQUIPMENT:
Land 1,050,448 889,696
Buildings and improvements 11,896,511 11,951,700
Equipment 53,926,757 52,899,547
------------ ------------
66,873,716 65,740,943
Allowance for depreciation (24,201,474) (23,635,256)
------------ ------------
42,672,242 42,105,687
OTHER ASSETS:
Deferred loan costs 8,257,975 8,521,356
Goodwill and other intangibles 261,972,682 263,425,447
Other 3,090,861 2,306,143
----------- ------------
273,321,518 274,252,946
----------- ------------
$342,334,938 $345,050,627
============ ============
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
MARCH 31, DECEMBER 31,
1998 1997
------------------- -------------------
CURRENT LIABILITIES:
Trade accounts payable (includes $600,000 and $850,000 payable
to Bull Run Corporation, respectively) $ 3,987,854 $ 3,321,903
Employee compensation and benefits 3,296,662 3,239,694
Accrued expenses 2,144,833 2,265,725
Accrued interest 8,855,834 4,533,366
Current portion of program broadcast obligations 2,067,007 2,876,060
Deferred revenue 2,095,903 1,966,166
Current portion of long-term debt 573,340 400,000
------------- ------------
Total current liabilities 23,021,433 18,602,914
LONG-TERM DEBT 220,915,482 226,676,377
OTHER LONG-TERM LIABILITIES:
Program broadcast obligations, less current portion 416,647 617,107
Supplemental employee benefits 1,086,367 1,161,218
Deferred income taxes 1,101,728 1,203,847
Other acquisition related liabilities 4,283,376 4,494,016
------------- -----------
6,888,118 7,476,188
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Serial Preferred Stock, no par value; authorized 20,000,000 shares;
issued 2,060 shares ($20,600,000 aggregate liquidation value) 20,600,000 20,600,000
Class A Common Stock, no par value; authorized 15,000,000
shares; issued 5,307,716 shares 10,404,874 10,358,031
Class B Common Stock, no par value; authorized 15,000,000
shares; issued 3,515,364 shares 66,593,805 66,397,804
Retained earnings 4,517,915 6,603,191
------------ ------------
102,116,594 103,959,026
Treasury Stock at cost, Class A Common, 773,521 and 781,921
shares, respectively (8,843,492) (9,011,369)
Treasury Stock at cost, Class B Common, 110,870 and 166,790
shares, respectively (1,763,197) (2,652,509)
------------- ------------
91,509,905 92,295,148
------------ -----------
$342,334,938 $345,050,627
============ ============
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
1998 1997
----------------- -----------------
OPERATING REVENUES
Broadcasting (net of agency commissions) $ 19,511,064 $ 15,985,297
Publishing 6,537,335 5,224,854
Paging 1,933,466 1,550,376
-------------- ---------------
27,981,865 22,760,527
EXPENSES
Broadcasting 12,118,387 9,694,784
Publishing 5,457,505 3,933,421
Paging 1,255,605 890,294
Corporate and administrative 660,480 633,328
Depreciation and amortization 3,621,584 3,271,943
-------------- --------------
23,113,561 18,423,770
------------- -------------
4,868,304 4,336,757
Miscellaneous expense 241,067 45,763
--------------- ----------------
4,627,237 4,290,994
Interest expense 5,927,481 4,975,693
-------------- --------------
LOSS BEFORE INCOME TAXES (1,300,244) (684,699)
Income tax expense (benefit) 182,563 (223,600)
--------------- ---------------
NET LOSS (1,482,807) (461,099)
Preferred Dividends 358,998 350,000
--------------- ---------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (1,841,805) $ (811,099)
============== ==============
AVERAGE OUTSTANDING COMMON SHARES:
Basic 7,920,428 7,947,284
Diluted 7,920,428 7,947,284
BASIC LOSS PER COMMON SHARE:
Net loss available to common
stockholders $ (0.23) $ (0.10)
=============== ==============
DILUTED LOSS PER COMMON SHARE:
Net loss available to common
stockholders $ (0.23) $ (0.10)
=============== ==============
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Preferred Class A Class B
Stock Common Stock Common Stock
----------------------- --------------------------- ------------------------
Shares Amounts Shares Amounts Shares Amounts
------- -------- ------ -------- ------- --------
Balance at December 31, 1997 2,060 $ 20,600,000 5,307,716 $ 10,358,031 3,515,364 $ 66,397,804
Net loss for the
three months ended
March 31, 1998
Common stock dividends ($.02
per share)
Preferred stock dividends
Income tax benefits relating
to stock plans 46,843 166,550
Issuance of treasury stock:
401 (k) plan 29,451
Non-qualified stock plan
--------- -------------- ----------- ------------- ---------- -------------
Balance at March 31, 1998 2,060 $ 20,600,000 5,307,716 $ 10,404,874 3,515,364 $ 66,593,805
========= ============== =========== ============= ========== =============
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Class A Class B
Treasury Stock Treasury Stock
Retained ---------------------- ----------------------
Earnings Shares Amounts Shares Amounts Total
--------- ------ ------- ------ -------- -------
Balance at December 31, 1997 $ 6,603,191 (781,921) $ (9,011,369) (166,790) $(2,652,509) $ 92,295,148
Net loss for the
three months ended
March 31, 1998 (1,482,807) (1,482,807)
Common stock dividends ($.02
per share) (158,609) (158,609)
Preferred stock dividends (358,998) (358,998)
Income tax benefits relating
to stock plans 213,393
Issuance of treasury stock:
401 (k) plan 3,420 54,389 83,840
Non-qualified stock plan (84,862) 8,400 167,877 52,500 834,923 917,938
------------- ----------- --------- --------- ---------- ----------
Balance at March 31, 1998 $ 4,517,915 (773,521) $(8,843,492) (110,870) $(1,763,197) $ 91,509,905
============= =========== ============ ========== ============ ============
</TABLE>
6
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
1998 1997
----------------- ------------------
OPERATING ACTIVITIES
Net loss $ (1,482,807) $ (461,099)
Items which did not use (provide) cash:
Depreciation 1,827,823 1,712,147
Amortization of intangible assets 1,793,761 1,559,796
Amortization of deferred loan costs 271,174 269,074
Amortization of program broadcast rights 940,319 796,817
Payments for program broadcast rights (995,668) (938,009)
Supplemental employee benefits (74,851) (66,941)
Common Stock contributed to 401(k) Plan 83,840 117,573
Deferred income taxes (102,119) 1,662,000
Loss on disposal of assets 260,930 -0-
Changes in operating assets and liabilities:
Receivables, inventories and other current assets 272,743 275,971
Accounts payable and other current liabilities 4,850,232 2,243,865
-------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,645,377 7,171,194
INVESTING ACTIVITIES
Purchase of FCC license (829,600) -0-
Purchases of property and equipment (2,656,786) (4,206,376)
Deferred acquisition costs (93,972) (78,369)
Payments on purchase liabilities (210,640) (93,848)
Other (355,839) (148,919)
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (4,146,837) (4,527,512)
FINANCING ACTIVITIES
Dividends paid (358,607) (354,113)
Class A Common Stock transactions 46,843 45,895
Class B Common Stock transactions 166,550 -0-
Proceeds from sale of treasury shares 917,938 -0-
Proceeds from borrowings of long-term debt 500,000 -0-
Payments on long-term debt (6,087,555) (3,032,004)
---------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES (4,814,831) (3,340,222)
--------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,316,291) (696,540)
Cash and cash equivalents at beginning of period 2,367,300 1,051,044
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,051,009 $ 354,504
=============== ================
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
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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, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.
Certain amounts in the accompanying unaudited condensed consolidated
financial statements have been reclassified to conform to the 1998 format.
NOTE B--BUSINESS ACQUISITIONS
Pending Acquisitions
On May 4, 1998, Cosmos Broadcasting Corporation ("Cosmos"), a
subsidiary of the Liberty Corporation signed a letter of intent to acquire
WALB-TV, the Company's NBC affiliate operating on Channel 10 in Albany, Georgia
in a transaction valued at approximately $78.0 million. Under the proposed
agreement, Cosmos will purchase a Wisconsin television station that the Company
had intended to acquire and exchange it for WALB-TV in a like-kind exchange
transaction. The station, WEAU-TV the NBC-affiliate operating on Channel 13
serving the Eau Claire-La Crosse market, is currently owned by Busse
Broadcasting Corporation. On February 13, 1998, the Company signed a definitive
purchase agreement to acquire all of the outstanding capital stock of Busse
Broadcasting Corporation ("Busse"). The purchase price is approximately $112.0
million plus Busse's cash and cash equivalents less Busse's indebtedness
including its 11 5/8% Senior Secured Notes due 2000. Busse owns and operates
three VHF television stations: KOLN-TV, the CBS-affiliate operating on Channel
10 in the Lincoln-Hastings-Kearney, Nebraska television market, and its
satellite station KGIN-TV, the CBS-affiliate operating on Channel 11 serving
Grand Island, Nebraska; and WEAU-TV. The exchange of WALB-TV for WEAU-TV and the
purchase of Busse is subject to FCC approval. These transactions are expected to
close on or before September 1, 1998. In connection with the proposed exchange
of WALB-TV for WEAU-TV and the purchase of Busse, the Company will pay Bull Run
Corporation, a principal stockholder of the Company, a finder's fee equal to 1%
of the transaction values for services performed, none of which was due and
included in accounts payable at March 31, 1998.
8
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GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Condensed unaudited balance sheets of WALB-TV as of March 31, 1998 and December
31, 1997 are as follows:
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MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
(IN THOUSANDS)
Current assets $ 2,104 $ 2,379
Property and equipment, net 1,448 1,473
Other assets 756 471
----------- -----------
Total assets $ 4,308 $ 4,323
=========== ===========
Current liabilities $ 1,332 $ 994
Other liabilities 192 215
Stockholder's equity 2,784 3,114
----------- ----------
Total liabilities and stockholder's equity $ 4,308 $ 4,323
=========== ==========
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Condensed unaudited income statement data for the three months ended March 31,
1998 and 1997 for WALB-TV are as follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Broadcasting revenues $ 2,423 $ 2,347
Expenses 1,137 1,093
---------- ----------
Income before income taxes $ 1,286 $ 1,254
========== ==========
Net income $ 797 $ 777
========== ==========
1997 ACQUISITIONS
On April 24, 1997, the Company purchased GulfLink Communications, Inc.
and on August 1, 1997, the Company purchased the assets of WITN-TV. Assuming
that these acquisitions had been completed on January 1, 1997, on a pro forma
basis for the three months ended March 31, 1997, the Company reported revenue,
net loss available to common stockholders and diluted net loss per share
available to common stockholders of $25.3 million, $1.2 million and $0.15,
respectively.
NOTE C--LONG-TERM DEBT
In September 1996, the Company entered into the $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. The Senior Credit Facility included scheduled reductions
in the $125.0 million credit limit which commenced on March 31, 1997, interest
rates based upon a spread over LIBOR and/or Prime, an unused commitment fee of
0.50% applied to available funds and a maturity date of June 30, 2003. Effective
September 17, 1997, the Senior Credit Facility was modified to reinstate the
original credit limit of $125.0 million which had been reduced by the scheduled
reductions. The modification also reduced the interest rate spread over LIBOR
and/or Prime and reduced the fee applied to available funds from 0.50% to
0.375%. The modification also extended the maturity date from June 30, 2003 to
June 30, 2004. The modification required a one-time fee of $250,000. At March
31, 1998, the Company had approximately $60.1 million outstanding under the
Senior Credit Facility, which did not include a letter of credit in the amount
of $5.9 million which had been established but not yet drawn upon. On March 31,
1998, the balance available under the Senior Credit Facility was $57.2 million
and the interest rate on the balance outstanding was based on a spread over
LIBOR and Prime of 2.00% and 0.25%, respectively. As of March 31, 1998, the
credit limit of $125.0 million as amended on September 17, 1997 had been reduced
by $1.8 million due to scheduled reductions as specified in the Senior Credit
Facility.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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 ("WITN"), the NBC affiliate in the
Greenville-Washington-New Bern, North Carolina market (the "WITN Acquisition").
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 was already engaged. 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.
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THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------------
1998 1997
----------------------------------------- -----------------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
-------------------- ---------------- -------------------- -----------------
(DOLLARS IN THOUSANDS)
TELEVISION BROADCASTING
Revenues $ 19,511 69.7% $ 15,985 70.2%
Operating income (1) 4,336 78.2 3,761 75.5
PUBLISHING
Revenues $ 6,537 23.4% $ 5,225 23.0%
Operating income (1) 944 17.0 887 17.8
PAGING
Revenues $ 1,934 6.9% $ 1,551 6.8%
Operating income (1) 268 4.8 333 6.7
</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
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
INTRODUCTION (CONTINUED)
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 55.6% of the gross revenues of the Company's
television stations for the three months ended March 31, 1998 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, nine 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.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (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,
1998 and 1997:
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THREE MONTHS ENDED
MARCH 31,
--------------------------------------
1998 1997
----------------- -----------------
(IN THOUSANDS)
Operating income $ 4,868 $ 4,337
Add:
Amortization of program license rights 940 797
Depreciation and amortization 3,622 3,272
Corporate overhead 661 633
Non-cash compensation and contributions to the Company's 401(k) plan,
paid in common stock 117 114
Less:
Payments for program license liabilities (996) (938)
---------- --------
Media Cash Flow (1) $ 9,212 $ 8,215
========== ========
</TABLE>
(1) Of Media Cash Flow for the three months ended March 31, 1998 and 1997,
$7.4 million and $6.2 million, respectively, was attributable to the
Company's broadcasting operations; $1.1 million and $1.3 million,
respectively, was attributable to the Company's publishing operations;
and $687,000 and $667,000, 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.
As discussed in the INTRODUCTION, the Company completed two
broadcasting acquisitions during 1997. The financial results of the Company
reflect increases between the three month period ended March 31, 1998 and 1997
in substantially all broadcast line items.
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 three months ended March 31, 1998 and 1997.
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THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
1998 1997
--------------------- --------------------
(IN THOUSANDS)
Cash flows provided by (used in)
Operating activities $ 7,645 $ 7,171
Investing activities (4,147) (4,528)
Financing activities (4,815) (3,340)
</TABLE>
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (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:
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THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
----------------- ----------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
BROADCASTING
NET REVENUES:
Local $ 10,898 38.9% $ 9,112 40.0%
National 5,570 19.9 4,765 20.9
Network compensation 1,215 4.3 1,133 5.0
Political 193 0.7 47 0.2
Production and other 1,635 5.9 928 4.1
----------- ------ -------- -------
$ 19,511 69.7% $ 15,985 70.2%
========= ===== ======== =======
PUBLISHING
NET REVENUES:
Retail advertising $ 2,977 10.6% $ 2,490 10.9%
Classified 2,085 7.5 1,617 7.1
Circulation 1,279 4.6 990 4.3
Other 196 0.7 128 0.7
--------- ------- -------- --------
$ 6,537 23.4% $ 5,225 23.0%
========= ======= ========= ========
PAGING
NET REVENUES:
Paging lease and service $ 1,934 6.9% $ 1,551 6.8%
========= ======= ========= =======
$ 27,982 100.0% $ 22,761 100.0%
========= ======= ======== =======
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUES. Total revenues for the three months ended March 31, 1998
increased $5.2 million, or 22.9%, over the same period of the prior year, to
$28.0 million from $22.8 million. This increase was primarily attributable to
the net effect of (i) increased revenues resulting from the WITN Acquisition and
the GulfLink Acquisition, (ii) increased publishing revenues and (iii) increased
paging revenues. The WITN Acquisition and the GulfLink Acquisition accounted for
$1.9 million and $699,000, respectively, of the revenue increase.
Broadcast net revenues increased $3.5 million, or 22.1%, over the same
period of the prior year, to $19.5 million from $16.0 million. The WITN
Acquisition and the GulfLink Acquisition accounted for $1.9 million and
$699,000, respectively, of the broadcast net revenue increase. On a pro forma
basis, assuming the acquisition of WITN had been effective on January 1, 1997,
broadcast net revenues for WITN for the three months ended March 31, 1998
increased $111,000, or 6.3%, when compared to the same period of the prior year
to $1.9 million from $1.8 million. Broadcast net revenues, excluding the WITN
Acquisition and the GulfLink Acquisition, increased $963,000, or 6.0%, over the
same period of the prior year, to $16.9 million from $16.0 million. This
increase was due primarily to an increase in local advertising revenue of
$722,000.
Publishing revenues increased $1.3 million, or 25.1%, over the same
period of the prior year, to $6.5 million from $5.2 million. The increase in
revenues was due primarily to an increase in retail advertising, classified
advertising, circulation and other revenue of $487,000, $468,000 $289,000 and
$68,000, respectively. The increase in retail advertising and circulation
revenue was due primarily to an increase in circulation at the Gwinnett Daily
Post to 64,000 at March 31, 1998 from 13,000 at March 31, 1997. The increase in
classified advertising revenue was due primarily to rate and linage increases.
The increase in other revenue was due primarily to increased commercial printing
revenue and increased other advertising revenue.
Paging revenue increased $383,000 or 24.7%, over the same period of the
prior year, to $1.9 million from $1.6 million. The increase was attributable
primarily to an increase in the number of pagers in service. The Company had
approximately 73,000 pagers and 54,000 pagers in service at March 31, 1998 and
1997, respectively.
OPERATING EXPENSES. Operating expenses for the three months ended March
31, 1998 increased $4.7 million, or 25.5%, over the same period of the prior
year, to $23.1 million from $18.4 million, due primarily to the WITN
Acquisition, the GulfLink Acquisition, and the expense associated with the
increase in circulation at the Gwinnett Daily Post. The WITN Acquisition, the
GulfLink Acquisition and the cost associated with the increase in circulation at
the Gwinnett Daily Post accounted for $1.2 million, $588,000 and $1.5 million
(exclusive of depreciation and amortization), respectively, of the operating
expense increase.
Broadcast expenses increased $2.4 million, or 25.0%, over the three
months ended March 31, 1998, to $12.1 million from $9.7 million. The increase
was attributable primarily to the WITN Acquisition and GulfLink Acquisition. On
a pro forma basis, assuming the acquisition of WITN had been effective on
January 1, 1997, broadcast expenses for WITN for the three months ended March
31, 1998 increased $82,000, or 7.3%, over the three months ended March 31, 1997
to $1.2 million from $1.1 million. Broadcast expenses, excluding the results of
the WITN Acquisition and the GulfLink Acquisition, increased $633,000, or 6.5%,
to $10.3 million from $9.7 million. This increase was due primarily to an
increase in payroll expense of $482,000.
Publishing expenses for the three months ended March 31, 1998 increased
$1.5 million, or 38.8%, from the same period of the prior year, to $5.5 million
from $3.9 million. This increase resulted primarily from an increase in the
expense associated with the increase in circulation at the Gwinnett Daily Post
and higher newsprint pricing. Average newsprint costs increased approximately
11.1% while newsprint consumption increased approximately 33.9%.
Paging expenses increased $366,000 or 41.1%, over the same period of
the prior year, to $1.3 million from $890,000. The increase was attributable
primarily to an increase in the number of pagers in service.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
(CONTINUED)
Corporate and administrative expenses for the three months ended March
31, 1998 and the three months ended March 31, 1997, were approximately $650,000.
Depreciation of property and equipment and amortization of intangible
assets was $3.6 million for the three months ended March 31, 1998, as compared
to $3.3 million for the same period of the prior year, an increase of $350,000,
or 10.7%. This increase was primarily the result of higher depreciation and
amortization costs related to the WITN Acquisition and the GulfLink Acquisition.
INTEREST EXPENSE. Interest expense increased $951,000, or 19.1%, to
$5.9 million for the three months ended March 31, 1998 from $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 WITN Acquisition
and the GulfLink Acquisition.
INCOME TAX EXPENSE (BENEFIT). Income tax expense for the three months
ended March 31, 1998 was 183,000 and income tax benefit for the three months
ended March 31, 1997 was $224,000. The increase in income tax expense of
$407,000 was due primarily to the utilization of all benefits from available net
operating loss carrybacks in 1997.
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS. Net loss available to common
stockholders of the Company was $1.8 million for the three months ended March
31, 1998, as compared with net loss of $811,000 for the same period of the prior
year, an increase of $1.0 million.
LIQUIDITY AND CAPITAL RESOURCES
In September 1996, the Company entered into the $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. The Senior Credit Facility included scheduled reductions
in the $125.0 million credit limit which commenced on March 31, 1997, interest
rates based upon a spread over LIBOR and/or Prime, an unused commitment fee of
0.50% applied to available funds and a maturity date of June 30, 2003. Effective
September 17, 1997, the Senior Credit Facility was modified to reinstate the
original credit limit of $125.0 million which had been reduced by the scheduled
reductions. The modification also reduced the interest rate spread over LIBOR
and/or Prime and reduced the fee applied to available funds from 0.50% to
0.375%. The modification also extended the maturity date from June 30, 2003 to
June 30, 2004. The modification required a one-time fee of $250,000. At March
31, 1998, the Company had approximately $60.1 million outstanding on the Senior
Credit Facility, which did not include a letter of credit in the amount of $5.9
million which had been established but not yet drawn upon. On March 31, 1998,
the balance available under the Senior Credit Facility was $57.2 million and the
interest rate on the balance outstanding was based on a spread over LIBOR and
Prime of 2.00% and 0.25%, respectively. As of March 31, 1998, the credit limit
of $125.0 million as amended on September 17, 1997 had been reduced by $1.8
million due to scheduled reductions as specified in the Senior Credit Facility.
The Company's working capital was $3.3 million and $10.1 million at
March 31, 1998 and December 31, 1997, respectively. The Company's cash provided
from operations was $7.6 million and $7.2 million for the three months ended
March 31, 1998 and 1997, 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 0.5% or LIBOR plus
2.25%. The Senior Credit Facility contains restrictive provisions similar to the
provisions of the Company's 10 5/8% Senior Subordinated Notes due 2006.
15
<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 used in investing activities was $4.1 million and
$4.5 million for the three months ended March 31, 1998 and 1997, respectively.
The decreased usage of $381,000 from 1997 to 1998 was primarily due to the
payment of $829,600 to the Federal Communications Commission for a special
mobile radio license ("SMR") partially offset by decreased capital expenditures
in 1998.
The Company's cash used in financing activities was $4.8 million and
$3.3 million for the three months ended March 31, 1998 and 1997, respectively.
The increase in cash used by financing activities resulted primarily from
increased payments on long term debt partially offset by funds provided by
common stock transactions. During the three months ended March 31, 1998, the
Company issued 8,400 shares of Class A Common Stock and 55,920 shares of Class B
Common Stock from treasury to fulfill obligations under its employee benefit
plan, non-employee director stock purchase plan and long-term incentive plan.
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, 1998, the Company paid $996,000 for such program broadcast
rights.
In connection with the acquisition of WCTV-TV during 1996, the FCC
ordered the Company to divest itself of WALB-TV in Albany, Georgia and WJHG-TV
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. Accordingly, the Company requested and in July of 1997 received an
extension of the divestiture deadline with regard to WJHG-TV conditioned upon
the outcome of the rulemaking proceedings. It can not be determined when the FCC
will complete its rulemaking on this subject. Also in July of 1997, the Company
obtained FCC approval to transfer control of WALB-TV to a trust with a view
towards the trustee effecting (i) a swap of WALB-TV'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-TV, 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.
On May 4, 1998, Cosmos Broadcasting Corporation ("Cosmos"), a
subsidiary of the Liberty Corporation signed a letter of intent to acquire
WALB-TV, in a transaction valued at approximately $78.0 million. Under the
proposed agreement, Cosmos will purchase a Wisconsin television station that the
Company had intended to acquire and exchange it for WALB-TV in a like-kind
exchange transaction. The station, WEAU-TV the NBC-affiliate operating on
Channel 13 serving the Eau Claire-La Crosse market, is currently owned by Busse
Broadcasting Corporation ("Busse"). On February 13, 1998, the Company signed a
definitive purchase agreement to acquire all of the outstanding capital stock of
Busse. The purchase price is approximately $112.0 million plus Busse's cash and
cash equivalents less Busse's indebtedness including its 11 5/8 % Senior Secured
Notes due 2000. Busse owns and operates three VHF television stations: KOLN-TV,
the CBS-affiliate operating on Channel 10 in the Lincoln-Hastings-Kearney,
Nebraska television market, and its satellite station KGIN-TV, the CBS-affiliate
operating on Channel 11 serving Grand Island, Nebraska; and WEAU-TV. The
exchange of WALB-TV for WEAU-TV and the purchase of Busse is subject to FCC
approval. These transactions are expected to close on or before September 1,
1998. In connection with the proposed exchange of WALB-TV for WEAU-TV and the
purchase of Busse, the Company will pay Bull Run Corporation, a principal
stockholder of the Company, a finder's fee equal to 1% of the
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
transaction values for services performed, none of which was due and included in
accounts payable at March 31, 1998. If completed, the Company currently believes
that funding for this acquisition could be provided primarily through cash flow
from operations and borrowing under the Senior Credit Facility, although there
can be no assurances that this acquisition would not require the sale by the
Company of debt or equity securities.
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,
1998, 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.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT
This quarterly report on Form 10-Q contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. When used in this report, the words "believes," "expects,"
"anticipates," "estimates" and similar words and expressions are generally
intended to identify forward-looking statements. Statements that describe the
Company's future strategic plans, goals, or objectives are also forward-looking
statements. Readers of this Report are cautioned that any forward-looking
statements, including those regarding the intent, belief or current expectations
of the Company or management, are not guarantees of future performance, results
or events and involve risks and uncertainties, and that actual results and
events may differ materially from those in the forward-looking statements as a
result of various factors including, but not limited to, (i) general economic
conditions in the markets in which the Company operates, (ii) competitive
pressures in the markets in which the Company operates, (iii) the effect of
future legislation or regulatory changes on the Company's operations and (iv)
other factors described from time to time in the Company's filings with the
Securities and Exchange Commission. The forward-looking statements included in
this report are made only as of the date hereof. The Company undertakes no
obligation to update such forward-looking statements to reflect subsequent
events or circumstances.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment and will have to modify or
replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The Company does
not believe that the estimated total Year 2000 project cost will have a material
impact upon its financial position. Most of this cost will be realized over the
estimated useful lives of the new hardware and software. To date, the Company
has not incurred significant expenses associated with the Year 2000 issue.
The project is estimated to be completed no later than December 31,
1998, which is prior to any anticipated impact on its operating systems. The
Company believes that with modifications to existing software and conversions to
new software, the Year 2000 issue will not pose significant operational problems
for its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF YEAR 2000 (CONTINUED)
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
19
<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 14, 1998 By: /s/ Frederick J. Erickson
-----------------------------------
Frederick J. Erickson,
interim Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
March 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,051,009
<SECURITIES> 0
<RECEIVABLES> 19,583,309
<ALLOWANCES> 1,295,000
<INVENTORY> 1,137,514
<CURRENT-ASSETS> 26,341,178
<PP&E> 66,873,716
<DEPRECIATION> 24,201,474
<TOTAL-ASSETS> 342,334,938
<CURRENT-LIABILITIES> 23,021,433
<BONDS> 220,915,482
0
20,600,000
<COMMON> 66,391,990
<OTHER-SE> 4,517,915
<TOTAL-LIABILITY-AND-EQUITY> 342,334,938
<SALES> 27,981,865
<TOTAL-REVENUES> 27,981,865
<CGS> 0
<TOTAL-COSTS> 23,113,561
<OTHER-EXPENSES> 241,067
<LOSS-PROVISION> 116,613
<INTEREST-EXPENSE> 5,927,481
<INCOME-PRETAX> (1,300,244)
<INCOME-TAX> 182,563
<INCOME-CONTINUING> (1,482,807)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,841,805)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
