-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RnlVYk574pWoy2eIxzFfJLf8UxdOqpX6zcN0MvDgDWRVHQ6VzHbhqDzlDpsrloEt X8rgZzyen3zlX/n9fBLarA== 0000950168-98-001619.txt : 19980515 0000950168-98-001619.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950168-98-001619 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAY COMMUNICATIONS SYSTEMS INC /GA/ CENTRAL INDEX KEY: 0000043196 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 580285030 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13796 FILM NUMBER: 98620252 BUSINESS ADDRESS: STREET 1: 126 N WASHINGTON ST CITY: ALBANY STATE: GA ZIP: 31701 BUSINESS PHONE: 9128889390 MAIL ADDRESS: STREET 1: 126 N WASHINGTON ST CITY: ALBANY STATE: GA ZIP: 31701 10-Q 1 GRAY COMMUNICATIONS SYSTEMS, INC. 10-Q 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)
GEORGIA 58-0285030 - -------------------------------------------- ------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
126 N. WASHINGTON ST., ALBANY, GEORGIA 31701 ---------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (912) 888-9390 - ---------------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE - ---------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
CLASS A COMMON STOCK, (NO PAR VALUE) CLASS B COMMON STOCK, (NO PAR VALUE) - ---------------------------------------------- -------------------------------------------- 4,537,695 SHARES AS OF MAY 8, 1998 3,407,204 SHARES AS OF MAY 8, 1998
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 PART I. FINANCIAL INFORMATION - ------ --------------------- ITEM 1. FINANCIAL STATEMENTS
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 ============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3
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 ============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4
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) =============== ==============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5
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 ========= ============== =========== ============= ========== ============= 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 ============= =========== ============ ========== ============ ============
6 SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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 =============== ================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 7 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 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:
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 =========== ==========
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 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.
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
(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 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 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:
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 ========== ========
(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.
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)
12 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:
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% ========= ======= ======== =======
13 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 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 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 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 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 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 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 EX-27 2 FDS -- GRAY COMMUNICATIONS SYSTEMS, INC.
5 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. 1 U.S. Dollars 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1 1,051,009 0 19,583,309 1,295,000 1,137,514 26,341,178 66,873,716 24,201,474 342,334,938 23,021,433 220,915,482 0 20,600,000 66,391,990 4,517,915 342,334,938 27,981,865 27,981,865 0 23,113,561 241,067 116,613 5,927,481 (1,300,244) 182,563 (1,482,807) 0 0 0 (1,841,805) (0.23) (0.23)
-----END PRIVACY-ENHANCED MESSAGE-----