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 September 30, 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
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(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)
- -------------------------------------- ------------------------------------
6,847,042 shares as of November 5,131,778 shares as of November
13, 1998 13, 1998
INDEX
- -----
GRAY COMMUNICATIONS SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Condensed consolidated balance sheets (unaudited) - September 30, 1998
and December 31, 1997
Condensed consolidated statements of operations (unaudited) Three
months ended September 30, 1998 and 1997; Nine months ended
September 30, 1998 and 1997
Condensed consolidated statement of stockholders' equity (unaudited) -
Nine months ended September 30, 1998
Condensed consolidated statements of cash flows (unaudited) Nine
months ended September 30, 1998 and 1997
Notes to condensed consolidated financial statements (unaudited) -
September 30, 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)
September 30, December 31,
1998 1997
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,934,777 $ 2,367,300
Trade accounts receivable, less allowance for
doubtful accounts of $1,802,000 and $1,253,000, respectively 20,026,127 19,527,316
Recoverable income taxes 2,914,128 2,132,284
Inventories 1,153,868 846,891
Current portion of program broadcast rights 4,304,231 2,850,023
Other current assets 1,139,467 968,180
----------- ------------
Total current assets 31,472,598 28,691,994
PROPERTY AND EQUIPMENT:
Land 2,196,021 889,696
Buildings and improvements 12,702,632 11,951,700
Equipment 63,376,848 52,899,547
----------- -----------
78,275,501 65,740,943
Allowance for depreciation (25,676,551) (23,635,256)
----------- -----------
52,598,950 42,105,687
OTHER ASSETS:
Deferred loan costs 8,508,057 8,521,356
Goodwill and other intangibles 376,661,395 263,425,447
Other 1,955,762 2,306,143
----------- ------------
387,125,214 274,252,946
----------- ------------
$471,196,762 $345,050,627
============ ============
3
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (continued)
September 30, December 31,
1998 1997
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable (includes $1,030,000 and
$850,000 payable to Bull Run Corporation,
respectively) $ 2,876,617 $ 3,321,903
Employee compensation and benefits 5,391,076 3,239,694
Accrued expenses 3,094,259 2,265,725
Accrued interest 10,048,004 4,533,366
Current portion of program broadcast obligations 4,148,782 2,876,060
Deferred revenue 2,652,521 1,966,166
Current portion of long-term debt 581,530 400,000
------------ -------------
Total current liabilities 28,792,789 18,602,914
LONG-TERM DEBT 262,555,097 226,676,377
OTHER LONG-TERM LIABILITIES:
Program broadcast obligations, less current
portion 886,150 617,107
Supplemental employee benefits 1,159,821 1,161,218
Deferred income taxes 41,276,522 1,203,847
Other acquisition related liabilities 4,955,254 4,494,016
------------ -------------
48,277,747 7,476,188
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Serial Preferred Stock, no par value;
authorized 20,000,000 shares
respectively; issued and outstanding 1,850
and 2,060 shares ($18,500,000 and
$20,600,000 aggregate liquidation value,
respectively) 18,500,000 20,600,000
Class A Common Stock, no par value; authorized
15,000,000 shares; issued and outstanding
7,961,574 shares, respectively 10,568,660 10,358,031
Class B Common Stock, no par value; authorized
15,000,000 shares; issued and outstanding
5,273,046 shares, respectively 66,764,499 66,397,804
Retained earnings 45,957,669 6,603,191
------------ -------------
141,790,828 103,959,026
Treasury Stock at cost, Class A Common, 1,141,532
and 1,172,882 shares, respectively (8,683,424) (9,011,369)
Treasury Stock at cost, Class B Common, 144,902
and 250,185 shares, respectively (1,536,275) (2,652,509)
------------ -------------
131,571,129 92,295,148
------------ -------------
$471,196,762 $345,050,627
============ =============
See notes to condensed consolidated financial statements.
4
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
OPERATING REVENUES
Broadcasting (net of agency
commissions) $ 22,346,463 $ 17,969,694 $ 64,547,517 $ 51,737,548
Publishing 7,378,818 6,278,540 21,295,267 17,585,142
Paging 2,119,635 1,736,158 6,044,508 4,921,143
------------ ------------ ------------ ------------
31,844,916 25,984,392 91,887,292 74,243,833
EXPENSES
Broadcasting 13,447,709 10,869,586 38,227,117 30,168,978
Publishing 6,022,912 5,311,999 17,463,852 13,840,254
Paging 1,498,855 965,497 4,081,955 2,802,420
Corporate and administrative 810,902 716,736 2,127,831 2,091,055
Depreciation and amortization 5,044,603 3,849,777 12,887,910 10,610,021
------------ ------------ ------------ ------------
26,824,981 21,713,595 74,788,665 59,512,728
------------ ------------ ------------ ------------
5,019,935 4,270,797 17,098,627 14,731,105
Gain on exchange of television
station 70,572,128 -0- 70,572,128 -0-
Miscellaneous income (expense), net (35,300) 13,455 (349,576) (26,378)
------------ ------------ ------------ ------------
75,556,763 4,284,252 87,321,179 14,704,727
Interest expense 6,624,799 5,728,331 18,591,538 15,785,529
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 68,931,964 (1,444,079) 68,729,641 (1,080,802)
Income tax expense (benefit) 27,102,280 (281,500) 27,545,657 (79,000)
------------ ------------ ------------ ------------
NET INCOME (LOSS) 41,829,684 (1,162,579) 41,183,984 (1,001,802)
Preferred Dividends 345,682 350,690 1,063,678 1,050,690
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ 41,484,002 $ (1,513,269) $ 40,120,306 $ (2,052,492)
============ ============ ============ ============
AVERAGE OUTSTANDING COMMON SHARES:
Basic 11,931,029 11,755,032 11,909,660 11,870,387
Stock compensation awards 595,362 -0- 521,346 -0-
------------ ------------ ------------ ------------
Diluted 12,526,391 11,755,032 12,431,006 11,870,387
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER COMMON
SHARE:
Net income (loss) available
to common stockholders $ 3.48 $ (0.13) $ 3.37 $ (0.17)
============ ============ ============ ============
DILUTED EARNINGS (LOSS) PER COMMON
SHARE:
Net income (loss) available
to common stockholders $ 3.31 $ (0.13) $ 3.23 $ (0.17)
============ ============ ============ ============
See notes to condensed consolidated financial statements
5
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited)
Class A Class B
Preferred Stock Common Stock Common Stock
------------------------ --------------------------- -------------------------
Shares Amounts Shares Amounts Shares Amounts
--------- ------------ --------- ------------ --------- ------------
Balance at December 31, 1997 2,060 $ 20,600,000 7,961,574 $ 10,358,031 5,273,046 $ 66,397,804
Net income for the
nine months ended
September 30, 1998
Common stock dividends ($.06
per share)
Preferred stock dividends
Income tax expense relating
to stock plans 210,629 173,482
Issuance of treasury stock:
401 (k) plan 152,964
Non-qualified stock plan 40,249
Purchase of Class A
Common Stock
Issuance of Series B
Preferred Stock 51 509,384
Purchase of Series B
Preferred Stock (261) (2,609,384)
----- ------------ --------- ------------ --------- ------------
Balance at September 30, 1998 1,850 $ 18,500,000 7,961,574 $ 10,568,660 5,273,046 $ 66,764,499
===== ============ ========= ============ ========= ============
Class A Class B
Treasury Stock Treasury Stock
Retained --------------------------- ------------------------
Earnings Shares Amounts Shares Amounts Total
------------ ---------- ------------ -------- ------------ ------------
Balance at December 31, 1997 $ 6,603,191 (1,172,882) $ (9,011,369) (250,185) $ (2,652,509) $ 92,295,148
Net income for the
nine months ended
September 30, 1998 41,183,984 41,183,984
Common stock dividends ($.06
per share) (476,160) (476,160)
Preferred stock dividends (1,063,678) (1,063,678)
Income tax expense relating
to stock plans 384,111
Issuance of treasury stock:
401 (k) plan 19,483 206,568 359,532
Non-qualified stock plan (289,668) 47,100 639,008 85,800 909,666 1,299,255
Purchase of Class A
Common Stock (15,750) (311,063) (311,063)
Issuance of Series B
Preferred Stock 509,384
Purchase of Series B
Preferred Stock (2,609,384)
------------ ---------- ------------ -------- ------------ ------------
Balance at September 30, 1998 $ 45,957,669 (1,141,532) $ (8,683,424) (144,902) $ (1,536,275) $131,571,129
============ ========== ============ ======== ============ ============
See notes to condensed consolidated financial statements.
6
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended
September 30,
------------------------------
1998 1997
------------- -------------
OPERATING ACTIVITIES
Net income (loss) $ 41,183,984 $ (1,001,802)
Items which did not use (provide) cash:
Depreciation 6,873,709 5,776,756
Amortization of intangible assets 6,014,201 4,833,265
Amortization of deferred loan costs 821,528 813,340
Amortization of program broadcast rights 3,011,826 2,510,305
Payments for program broadcast rights (2,963,487) (2,897,498)
Supplemental employee benefits (220,994) (146,910)
Common stock contributed to 401(k) Plan 359,532 316,145
Deferred income taxes 26,521,675 1,681,000
(Gain) on disposition of television
station (70,572,128) -0-
Loss on disposal of assets 406,957 14,766
Changes in operating assets and
liabilities:
Receivables, inventories and other
current assets 1,023,569 (1,728,005)
Accounts payable and other current
liabilities 7,216,473 619,133
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 19,676,845 10,790,495
INVESTING ACTIVITIES
Acquisition of television businesses (120,597,438) (41,130,557)
Exchange of television station 76,508,009 -0-
Purchase of FCC License (837,160) -0-
Acquisition of satellite uplink business -0- (4,127,530)
Purchases of property and equipment (7,316,945) (7,600,897)
Deferred acquisition costs -0- (219,652)
Payments on purchase liabilities (337,779) (322,693)
Proceeds from asset sales 182,721 7,814
Other (664,345) (519,288)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (53,062,937) (53,912,803)
FINANCING ACTIVITIES
Dividends paid (1,076,164) (1,070,608)
Common Stock transactions 384,111 1,101,798
Purchase of treasury stock-preferred (2,609,384) -0-
Purchase of treasury stock-common (311,063) (3,455,476)
Sale of treasury stock 1,299,255 523,917
Proceeds from borrowings of long-term debt 71,570,000 56,950,000
Payments on long-term debt (35,502,750) (9,706,204)
Loan acquisition costs (800,436) (510,008)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 32,953,569 43,833,419
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (432,523) 711,111
Cash and cash equivalents at beginning of
period 2,367,300 1,051,044
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,934,777 $ 1,762,155
============= =============
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 nine and three month periods ended September
30, 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 AND DISPOSITION
Recent Transactions
On July 31, 1998, the Company completed the purchase of all of the
outstanding capital stock of Busse Broadcasting Corporation ("Busse"). The net
purchase price was $112 million plus associated transaction costs. The purchase
price includes the assumption of Busse's indebtedness, including its 11 5/8%
Senior Secured Notes due 2000. Immediately prior to the Company's acquisition of
Busse, Cosmos Broadcasting Corporation acquired the assets of WEAU-TV ("WEAU")
from Busse and exchanged them for the assets of WALB-TV, Inc. ("WALB"), the
Company's NBC affiliate in Albany, Georgia. In exchange for the assets of WALB,
the Company received the assets of WEAU, which were valued at $66 million, and
approximately $12 million in cash for a total value of $78 million. The Company
recognized a pre-tax gain of approximately $70.6 million and estimated deferred
income taxes of approximately $27.5 million in connection with the exchange of
WALB.
Immediately following the acquisition of Busse, the Company exercised its
right to satisfy and discharge the Busse 11 5/8% Senior Secured Notes ("Busse
Senior Notes"), effectively prefunding the Busse Senior Notes at the October 15,
1998 call price of 106 plus accrued interest. The amount necessary to satisfy
and discharge the Busse Senior Notes was approximately $69.9 million. As a
result of these transactions, the Company added the following television
stations to its existing broadcast group: KOLN-TV("KOLN"), the CBS affiliate
serving the Lincoln-Hastings-Kearney, Nebraska market; its satellite station
KGIN-TV ("KGIN"), the CBS affiliate serving Grand Island, Nebraska; and WEAU, an
NBC affiliate serving the Eau Claire-La Crosse, Wisconsin market. These
transactions also satisfy the Federal Communication Commission's requirement for
the Company to divest itself of WALB. The transactions described above are
referred to herein as the "Busse-WALB Transactions."
The Company will pay Bull Run Corporation, a principal stockholder of the
Company, a fee equal to 1% of the transaction values for services performed, of
which $1,030,000 was included in accounts payable at September 30, 1998.
Pro forma financial data (unaudited)
On April 24, 1997, the Company purchased GulfLink Communications, Inc. and
on August 1, 1997, the Company purchased the assets of
WITN-TV("WITN")(collectively referred to as the "1997 Acquisitions"). Unaudited
pro forma operating data for the three months and nine months ended September
30, 1998 and 1997 is presented below and assumes that the Busse-WALB
Transactions and the 1997 Acquisitions were completed on January 1, 1997. The
above described unaudited pro forma operating data excludes a pre-tax gain of
approximately $70.6 million and estimated deferred income taxes of approximately
$27.5 million in connection with the exchange of WALB.
This unaudited pro forma operating data does not purport to represent the
Company's actual results of
8
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
NOTE B--BUSINESS ACQUISITIONS AND DISPOSITION (continued)
operations had the Busse-WALB Transactions and the 1997 Acquisitions been
completed on January 1, 1997, and should not serve as a forecast of the
Company's operating results for any future periods. The pro forma adjustments
are based solely upon certain assumptions that management believes are
reasonable under the circumstances at this time. Unaudited pro forma operating
data for the three months and nine months ended September 30, 1998 and 1997, is
as follows:
Three Months Ended Nine months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(dollars in thousands)
Revenues, net $ 32,059 $ 28,364 $ 96,659 $ 86,263
Expenses 35,841 31,490 103,430 92,836
--------- --------- --------- ---------
Loss before income taxes $ (3,782) $ (3,126) $ (6,771) $ (6,573)
========= ========= ========= =========
Net loss available to common
stockholders $ (2,842) $ (2,413) $ (5,533) $ (5,388)
========= ========= ========= =========
Basic and diluted loss per
share available to
common stockholders $ (0.24) $ (0.21) $ (0.46) $ (0.45)
========= ========= ========= =========
The pro forma results presented above include adjustments to reflect (i)
the incurrence of interest expense to fund the respective acquisitions, (ii)
depreciation and amortization of assets acquired, (iii) the elimination of the
corporate expense allocation net of additional accounting and administrative
expenses and (iv) the income tax effect of such pro forma adjustments.
NOTE C--LONG-TERM DEBT
In September 1996, the Company entered into the $125.0 million senior
credit facility (the "Senior Credit Facility") with a consortium of banks. 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. 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.
Effective July 31, 1998, the Senior Credit Facility was modified to
increase the committed credit limit of $125.0 million to $200.0 million. This
modification also allows for an additional uncommitted $100.0 million in
available credit which is in addition to the committed $200.0 million credit
limit. This $100.0 million in uncommitted available credit can be borrowed by
the Company only after unanimous approval of the bank consortium. The
modification also extended the maturity date from June 30, 2004 to June 30,
2005. The modification required a one-time fee of approximately $750,000.
Immediately following the acquisition of Busse, the Company exercised its
right to satisfy and discharge the Busse 11 5/8% Senior Secured Notes,
effectively prefunding the notes at the October 15, 1998 call price of 106 plus
accrued interest. The amount necessary to satisfy and discharge the notes was
approximately $69.9 million.
At September 30, 1998, the Company had approximately $102.0 million
borrowed under the Senior Credit Facility with approximately $98.0 million
available under the agreement. The interest rate on the balance outstanding was
based on a spread over LIBOR and Prime of 2.00% and 0.25%, respectively.
9
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
NOTE D - STOCKHOLDER'S EQUITY
On August 20, 1998, the Board of Directors declared a 50% stock dividend,
payable on September 30, 1998, to stockholders of record of the Class A Common
Stock and Class B Common Stock on September 16, 1998. This stock dividend
effected a three for two stock split. All applicable share and per share data
have been adjusted to give effect to the stock split.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations of Gray Communications Systems, Inc.
Introduction
The following analysis of the financial condition and results of
operations of Gray Communications Systems, Inc. (the "Company") should be read
in conjunction with the Company's unaudited Condensed Consolidated Financial
Statements and notes thereto included elsewhere herein.
The Company derives its revenues from its television broadcasting,
publishing and paging operations. On July 31, 1998, the Company completed the
purchase of all of the outstanding capital stock of Busse Broadcasting
Corporation ("Busse"). The net purchase price was $112 million plus associated
transaction costs. The purchase price includes the assumption of Busse's
indebtedness, including its 11 5/8% Senior Secured Notes due 2000. Immediately
prior to the Company's acquisition of Busse, Cosmos Broadcasting Corporation
acquired the assets of WEAU-TV ("WEAU") from Busse and exchanged them for the
assets of WALB-TV, Inc. ("WALB"), the Company's NBC affiliate in Albany,
Georgia. In exchange for the assets of WALB, the Company received the assets of
WEAU, which were valued at $66 million, and approximately $12 million in cash
for a total value of $78 million. The Company recognized a pre-tax gain of
approximately $70.6 million and estimated deferred income taxes of approximately
$27.5 million in connection with the exchange of WALB. Immediately following the
acquisition of Busse, the Company exercised its right to satisfy and discharge
the Busse 11 5/8% Senior Secured Notes ("Busse Senior Notes"), effectively
prefunding the Busse Senior Notes at the October 15, 1998 call price of 106 plus
accrued interest. The amount necessary to satisfy and discharge the Busse Senior
Notes was approximately $69.9 million. The transactions described above are
referred to herein as the "Busse-WALB Transactions."
On August 1, 1997 the Company purchased substantially all of the assets of
WITN-TV ("WITN"), the NBC affiliate serving 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 September 30,
----------------------------------------------------------
1998 1997
----------------------------- ---------------------------
Percent of Percent of
Amount Total Amount Total
-------------- ------------ -------------- ----------
(dollars in thousands)
Television
Broadcasting
Revenues $22,346 70.2% $17,970 69.2%
Operating income (1)(2) 4,833 82.7 4,149 83.1
Publishing
Revenues $ 7,379 23.2% $ 6,278 24.2%
Operating income (1) 847 14.5 460 9.2
Paging
Revenues $ 2,120 6.6% $ 1,736 6.6%
Operating income (1) 164 2.8 385 7.7
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations of Gray Communications Systems, Inc. (continued)
Introduction (continued)
Nine months Ended September 30,
-----------------------------------------------
1998 1997
---------------------- -----------------------
Percent of Percent of
Amount Total Amount Total
------- ---------- ------- ----------
(dollars in thousands)
Television Broadcasting
Revenues $64,548 70.2% $51,738 69.7%
Operating income (1) (2) 15,971 82.8 13,430 79.7
Publishing
Revenues $21,295 23.2% $17,585 23.7%
Operating income (1) 2,647 13.7 2,382 14.1
Paging
Revenues $ 6,044 6.6% $ 4,921 6.6%
Operating income (1) 663 3.5 1,042 6.2
(1)Represents income before miscellaneous income (expense), allocation of
corporate overhead, interest expense and income taxes.
(2)For the three month and nine month periods ended September 30, 1998,
operating income does not include the pre-tax gain on exchange of WALB of
approximately $70.6 million.
The operating revenues of the Company's television stations are derived
primarily from broadcast advertising revenues and, to a much lesser extent, from
compensation paid by the networks to the stations for broadcasting network
programming. The operating revenues of the Company's publishing operations are
derived from retail advertising, circulation and classified revenue. Paging
revenue is derived primarily from the leasing and sale of pagers.
In the Company's broadcasting operations, broadcast advertising is sold
for placement either preceding or following a television station's network
programming and within local and syndicated programming. Broadcast advertising
is sold in time increments and is priced primarily on the basis of a program's
popularity among the specific audience an advertiser desires to reach, as
measured by Nielsen Media Research ("Nielsen"). In addition, broadcast
advertising rates are affected by the number of advertisers competing for the
available time, the size and demographic makeup of the market served by the
station and the availability of alternative advertising media in the market
area. Broadcast advertising rates are the highest during the most desirable
viewing hours, with corresponding reductions during other hours. The ratings of
a local station affiliated with a major network can be affected by ratings of
network programming.
Most broadcast advertising contracts are short-term, and generally run
only for a few weeks. Approximately 50.9% of the gross revenues of the Company's
television stations for the nine months ended September 30, 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
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations of Gray Communications Systems, Inc. (continued)
years due to spending by political candidates and other political advocacy
groups, which spending typically is heaviest during the fourth quarter.
Introduction (continued)
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.
Media Cash Flow
The following table sets forth certain operating data for the broadcast,
publishing and paging operations for the three months and nine months ended
September 30, 1998 and 1997:
Three Months Ended Nine months Ended
September 30, September 30,
---------------------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands)
Operating income (1) $ 5,020 $ 4,271 $ 17,099 $ 14,731
Add:
Amortization of program
license rights 1,113 891 3,012 2,510
Depreciation and
amortization 5,045 3,850 12,888 10,610
Corporate overhead 811 717 2,128 2,091
Non-cash compensation and
contributions to the
Company's 401(k) plan,
paid in common stock 112 94 344 304
Less:
Payments for program
license liabilities (1,009) (1,067) (2,963) (2,897)
-------- -------- -------- --------
Media Cash Flow (2) $ 11,092 $ 8,756 $ 32,508 $ 27,349
======== ======== ======== ========
(1) For the three month and nine month periods ended September 30, 1998,
operating income does not include the pre-tax gain on exchange of WALB of
approximately $70.6 million.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations of Gray Communications Systems, Inc. (continued)
Media Cash Flow (continued)
(2) Of Media Cash Flow for the three months ended September 30, 1998 and 1997,
$9.1 million and $7.0 million, respectively, was attributable to the
Company's broadcasting operations; $1.4 million and $1.0 million,
respectively, was attributable to the Company's publishing operations; and
$629,000 and $778,000, respectively, was attributable to the Company's
paging operations. Of Media Cash Flow for the nine months ended September
30, 1998 and 1997, $26.6 million and $21.4 million, respectively, was
attributable to the Company's broadcasting operations; $3.9 million and
$3.8 million, respectively, was attributable to the Company's publishing
operations; and $2.0 million and $2.1 million, 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.
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 nine months ended September 30, 1998 and 1997.
Nine months Ended
September 30,
-------------------------
1998 1997
----------- ----------
(in thousands)
Cash flows provided by (used in)
Operating activities $ 19,677 $ 10,790
Investing activities (53,063) (53,913)
Financing activities 32,954 43,833
Broadcasting, Publishing and Paging Revenues
As discussed in the Introduction, the Company exchanged the assets of WALB
for the assets of WEAU, acquired Busse which included KOLN-TV("KOLN") and
KGIN-TV ("KGIN") during 1998 and completed the WITN Acquisition and the GulfLink
Acquisition during 1997. WEAU, KOLN and KGIN are collectively referred to as the
"Busse Stations." The financial results of the Company reflect increases between
the three month and nine month periods ended September 30, 1998 and 1997 in
substantially all broadcast line items.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations of Gray Communications Systems, Inc. (continued)
Broadcasting, Publishing and Paging Revenues (continued)
Set forth below are the principal types of operating 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 September 30,
------------------------------------------------------------
1998 1997
---------------------------- -----------------------------
Percent of Percent of
Amount Total Amount Total
-------------- ------------ -------------- ------------
(dollars in thousands)
Broadcasting
Net revenues:
Local $ 11,285 35.5% $ 10,165 39.1%
National 5,911 18.6 5,156 19.8
Network compensation 1,208 3.8 1,362 5.2
Political 2,243 7.0 (109) (0.4)
Production and other 1,699 5.3 1,396 5.4
-------- ------- -------- -------
$ 22,346 70.2% 17,970 69.1%
======== ======= ======== =======
Publishing
Net revenues:
Retail advertising $ 3,448 10.8% $ 2,885 11.1%
Classified 2,410 7.6 1,967 7.6
Circulation 1,343 4.2 1,306 5.0
Other 178 0.6 121 0.5
-------- ------- -------- -------
$ 7,379 23.2% $ 6,279 24.2%
======== ======= ======== =======
Paging
Net revenues:
Paging lease and service $ 2,120 6.6% $ 1,735 6.7%
======== ======= ======== =======
$ 31,845 100.0% $ 25,984 100.0%
======== ======= ======== =======
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations of Gray Communications Systems, Inc. (continued)
Broadcasting, Publishing and Paging Revenues (continued)
Nine months Ended September 30,
------------------------------------------------------------
1998 1997
---------------------------- -----------------------------
Percent of Percent of
Amount Total Amount Total
-------------- ------------ -------------- ------------
(dollars in thousands)
Broadcasting
Net revenues:
Local $33,350 36.3% $29,081 39.2%
National 18,011 19.6 15,387 20.7
Network
compensation 3,781 4.1 3,643 4.9
Political 4,429 4.8 44 0.1
Production and other 4,977 5.4 3,583 4.8
------- ------- ------- -------
$64,548 70.2% $51,738 69.7%
======= ======= ======= =======
Publishing
Net revenues:
Retail advertising $ 9,872 10.8% $ 8,269 11.1%
Classified 6,908 7.5 5,434 7.3
Circulation 3,962 4.3 3,523 4.7
Other 553 0.6 359 0.6
------- ------- ------- -------
$21,295 23.2% $17,585 23.7%
======= ======= ======= =======
Paging
Net revenues:
Paging lease and service $ 6,044 6.6% $ 4,921 6.6%
======= ======= ======= =======
$91,887 100.0% $74,244 100.0%
======= ======= ======= =======
Three Months Ended September 30, 1998 compared to Three Months Ended September
30, 1997
Revenues. Total revenues for the three months ended September 30, 1998
increased $5.8 million, or 22.3%, over the same period of the prior year, from
$26.0 million to $31.8 million. This increase was primarily attributable to the
net effect of (i) increased revenues resulting from the Acquisition of the Busse
Stations, (ii) increased political revenue, (iii) increased publishing revenues
and (iv) increased paging revenues. The acquisition of the Busse Stations and
the WITN Acquisition accounted for $3.4 million and $872,000 of the broadcast
net revenue increase, respectively. This increase in total revenues was
partially offset by the disposition of WALB which reduced total revenues by
approximately $1.4 million.
Broadcast net revenues increased $4.4 million, or 24.4%, over the same
period of the prior year, to $22.3 million from $18.0 million. The acquisition
of the Busse Stations and the WITN Acquisition accounted for $3.4 million and
$872,000 of the broadcast net revenue increase, respectively. On a pro forma
basis, assuming the Busse-WALB Transactions had been effective on January 1,
1997, broadcast net revenues for the Busse Stations for the three months ended
September 30 1998, increased $399,000, or 9.1%, over the same period of the
prior year, to $4.8 million from $4.4 million. On a pro forma basis, assuming
the WITN Acquisition had been effective on January 1, 1997, broadcast net
revenues for WITN for the three months ended September 30, 1998 increased
$342,000, or 18.9%, over the same period of the prior year, to $2.1 million from
$1.8 million. Broadcast net revenues, excluding the acquisition of the Busse
Stations, the WITN Acquisition and the GulfLink Acquisition and excluding the
operating results of WALB, increased $1.3 million, or 9.4%, over the same period
of the prior year, to $15.0 million from $13.7 million. This increase was due
primarily to an increase in political advertising revenue of $1.5 million
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Three Months Ended September 30, 1998 compared to Three Months Ended September
30, 1997 (continued)
partially offset by a decrease in local advertising. The disposition of WALB
resulted in a decrease in net broadcast revenue of approximately $1.4 million.
Publishing revenues increased $1.1 million, or 17.5%, over the same period
of the prior year, to $7.4 million from $6.3 million. The increase in revenues
was due primarily to an increase in retail advertising, classified advertising,
circulation and other revenue of $563,000, $442,000 $38,000 and $57,000,
respectively. The increase in retail advertising and classified advertising
revenue was due primarily to linage increases.
Paging revenue increased $383,000 or 22.0%, over the same period of the
prior year, to $2.1 million from $1.7 million. The increase was attributable
primarily to an increase in the number of pagers in service. The Company had
approximately 86,000 pagers and 61,000 pagers in service at September 30, 1998
and 1997, respectively.
Operating expenses. Operating expenses for the three months ended
September 30, 1998 increased $5.1 million, or 23.5%, over the same period of the
prior year, to $26.8 million from $21.7 million, due primarily to the
acquisition of the Busse Stations, the WITN Acquisition, increased expenses at
the Company's existing television stations (exclusive of the Busse Stations and
WALB) and the expense associated with the increase in circulation at the
Gwinnett Daily Post. The acquisition of the Busse Stations, the WITN
Acquisition, increased expenses at existing television stations and the cost
associated with the increase in circulation at the Gwinnett Daily Post accounted
for $1.5 million, $595,000, $1.0 million and $613,000 (exclusive of depreciation
and amortization), respectively, of the operating expense increase. The increase
in operating expenses was partially offset by the disposition of WALB which
reduced operating expenses by approximately $598,000.
Broadcast expenses increased $2.6 million, or 23.7%, over the three months
ended September 30, 1998, to $13.4 million from $10.9 million. The Acquisition
of the Busse Stations and the WITN Acquisition accounted for $1.5 million and
$595,000 of the broadcast expenses increase, respectively. On a pro forma basis,
assuming the Busse-WALB Transactions had been effective on January 1, 1997,
broadcast expenses for the Busse Stations for the three months ended September
30 1998, increased $220,000, or 10.2%, over the same period of the prior year,
to $2.4 million from $2.2 million. On a pro forma basis, assuming the WITN
Acquisition had been effective on January 1, 1997, broadcast expenses for WITN
for the three months ended September 30, 1998 increased $326,000, or 33.6%, over
the same period of the prior year, to $1.3 million from $1.0 million. Broadcast
expenses, excluding the acquisition of the Busse Stations, the WITN Acquisition
and the GulfLink Acquisition and excluding the operating results of WALB,
increased $1.0 million, or 11.9%, over the same period of the prior year, to
$9.6 million from $8.6 million. This increase was due primarily to an increase
in payroll expense and other expense of $581,000 and $369,000, respectively. The
increase in broadcast expenses was partially offset by the disposition of WALB
which reduced broadcast expenses by approximately $598,000.
Publishing expenses for the three months ended September 30, 1998
increased $711,000, or 13.4%, from the same period of the prior year, to $6.0
million from $5.3 million. This increase resulted primarily from an increase in
the expense associated with the increase in circulation at the Gwinnett Daily
Post to 67,000 at September, 30 1998 from 50,000 at September 30, 1997 and
higher newsprint pricing. Average newsprint costs increased approximately 6.4%
while newsprint consumption increased approximately 6.9%.
Paging expenses increased $534,000 or 55.3%, over the same period of the
prior year, to $1.5 million from $965,000. The increase was attributable
primarily to an increase in payroll and other costs associated with an increase
in the number of pagers in service.
Corporate and administrative expenses increased $94,000 or 13.1%, over the
same period of the prior year, to $811,000 from $717,000.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Three Months Ended September 30, 1998 compared to Three Months Ended September
30, 1997 (continued)
Depreciation of property and equipment and amortization of intangible
assets was $5.0 million for the three months ended September 30, 1998, as
compared to $3.8 million for the same period of the prior year, an increase of
$1.2 million, or 31.1%. This increase was primarily the result of higher
depreciation and amortization costs resulting from the WITN Acquisition and the
acquisition of the Busse Stations.
Gain on exchange of television station. The Company recognized a pre-tax
gain of approximately $70.6 million and estimated deferred income taxes of
approximately $27.5 million in connection with the exchange of WALB.
Interest expense. Interest expense increased $897,000, or 15.7%, to $6.6
million for the three months ended September 30, 1998 from $5.7 million for the
three months ended September 30, 1997. This increase was attributable primarily
to increased levels of debt resulting from the financing of the acquisition of
the Busse Stations and WITN.
Income tax expense (benefit). Income tax expense for the three months
ended September 30, 1998 primarily reflects the provision of approximately $27.5
million of deferred income taxes recognized in conjunction with the exchange of
WALB.
Net income (loss) available to common stockholders. Net income available
to common stockholders of the Company was $41.5 million for the three months
ended September 30, 1998, as compared with a net loss to common stockholders of
$1.5 million for the same period of the prior year, reflecting the $43.1 million
gain net of related tax provisions on the exchange of WALB.
Nine months Ended September 30, 1998 compared to Nine months Ended September 30,
1997
Revenues. Total revenues for the nine months ended September 30, 1998
increased $17.6 million, or 24.4%, over the same period of the prior year, to
$91.9 million from $74.2 million. This increase was primarily attributable to
the net effect of (i) increased revenues resulting from the acquisition of the
Busse Stations, the WITN Acquisition and the GulfLink Acquisition, (ii)
increased publishing revenues (iii) increased political broadcast revenue and
(iv) increased paging revenues. The acquisition of the Busse Stations, the WITN
Acquisition and the GulfLink Acquisition accounted for $3.4 million, $5.0
million and $1.2 million of the revenue increase, respectively. The increase in
total revenues was partially offset by the disposition of WALB which reduced
total revenues by approximately $671,000.
Broadcast net revenues increased $12.8 million, or 24.7%, over the same
period of the prior year, to $64.5 million from $51.7 million. The acquisition
of the Busse Stations, the WITN Acquisition and the GulfLink Acquisition
accounted for $3.4 million, $5.0 million and $1.2 million of the broadcast net
revenue increase, respectively. On a pro forma basis, assuming the Busse-WALB
Transactions had been effective on January 1, 1997, broadcast net revenues for
the Busse Stations for the nine months ended September 30 1998, increased $1.1
million, or 7.7%, over the same period of the prior year, to $15.0 million from
$13.9 million. On a pro forma basis, assuming the WITN Acquisition had been
effective on January 1, 1997, broadcast net revenues for WITN for the nine
months ended September 30, 1998 increased $466,000, or 8.0%, over the same
period of the prior year, to $6.3 million from $5.8 million.. Broadcast net
revenues, excluding the acquisition of the Busse Stations, the WITN Acquisition
and the GulfLink Acquisition and excluding the operating results of WALB,
increased $3.8 million, or 9.1%, over the same period of the prior year, to
$46.0 million from $42.2 million. This increase was due primarily to an increase
in political and national advertising revenue of $3.1 million and $944,000,
respectively. The disposition of WALB resulted in a decrease in net broadcast
revenue of approximately $671,000.
Publishing revenues increased $3.7 million, or 21.1%, over the same period
of the prior year, to $21.3 million from $17.6 million. The increase in revenues
was due primarily to an increase in retail advertising, classified advertising
and circulation revenue of $1.6 million, $1.5 million, and $439,000,
respectively. The increase in retail and classified advertising revenue was due
primarily to linage increases.
18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Nine months Ended September 30, 1998 compared to Nine months Ended September 30,
1997 (continued)
Paging revenue increased $1.1 million or 22.8%, over the same period of
the prior year, to $6.0 million from $4.9 million. The increase was attributable
primarily to an increase in the number of pagers in service. The Company had
approximately 86,000 and 61,000 pagers in service at September 30, 1998 and
1997, respectively.
Operating expenses. Operating expenses for the nine months ended September
30, 1998 increased $15.3 million, or 25.7%, over the same period of the prior
year, to $74.8 million from $59.5 million, due primarily to the acquisition of
the Busse Stations, WITN Acquisition, the GulfLink Acquisition, and the expense
associated with the increase in circulation at the Gwinnett Daily Post. The
acquisition of the Busse Stations, WITN Acquisition, the GulfLink Acquisition
and the cost associated with the increase in circulation at the Gwinnett Daily
Post accounted for $1.5 million, $3.1 million, $856,000 and $2.6 million
(exclusive of depreciation and amortization), respectively, of the operating
expense increase. The increase in operating expenses was partially offset by the
disposition of WALB which reduced operating expenses by approximately $321,000.
Broadcast expenses increased $8.1 million, or 26.7%, over the nine months
ended September 30, 1998, to $38.2 million from $30.2 million. The acquisition
of the Busse Stations, the WITN Acquisition and the GulfLink Acquisition
accounted for $1.5 million, $3.1 million and $856,000 of the broadcast expenses
increase, respectively. On a pro forma basis, assuming the Busse-WALB
Transactions had been effective on January 1, 1997, broadcast expenses for the
Busse Stations for the nine months ended September 30 1998, increased $382,000,
or 5.9%, over the same period of the prior year, to $6.8 million from $6.5
million. On a pro forma basis, assuming the WITN Acquisition had been effective
on January 1, 1997, broadcast expenses for WITN for the nine months ended
September 30, 1998 increased $372,000, or 10.9%, over the same period of the
prior year, to $3.8 million from $3.4 million. Broadcast expenses, excluding the
acquisition of the Busse Stations, the WITN Acquisition and the GulfLink
Acquisition and excluding the operating results of WALB, increased $2.9 million,
or 11.4%, over the same period of the prior year, to $28.4 million from $25.5
million. This increase was due primarily to an increase in payroll expense and
other expense of $1.7 million and $1.1 million, respectively. The increase in
broadcast expenses was partially offset by the disposition of WALB which reduced
broadcast expenses by approximately $321,000.
Publishing expenses for the nine months ended September 30, 1998 increased
$3.6 million, or 26.2%, from the same period of the prior year, to $17.5 million
from $13.8 million. This increase resulted primarily from an increase in the
expense associated with the increase in circulation at the Gwinnett Daily Post
to 67,000 at September 30, 1998 from 50,000 at September 30, 1997 and higher
newsprint pricing. Average newsprint costs increased approximately 8.7% while
newsprint consumption increased approximately 21.0%.
Paging expenses increased $1.3 million or 45.7%, over the same period of
the prior year, to $4.1 million from $2.8 million. The increase was attributable
primarily to an increase in payroll and other costs associated with an increase
in the number of pagers in service.
Corporate and administrative expenses for the nine months ended September
30, 1998 increased $37,000, or 1.8%, over the same period of the prior year, to
$2,128,000 from $2,091,000.
Depreciation of property and equipment and amortization of intangible
assets for the nine months ended September 30, 1998, increased $2.3 million, or
21.5%, over the same period of the prior year, to $12.9 million from $10.6
million. This increase was primarily the result of higher depreciation and
amortization costs related to the acquisition of the Busse Stations, WITN
Acquisition and the GulfLink Acquisition.
Gain on exchange television station. The Company recognized a pre-tax gain
of approximately $70.6 million and estimated deferred income taxes of
approximately $27.5 million in connection with the exchange of WALB.
Interest expense. Interest expense increased $2.8 million, or 17.8%, to
$18.6 million for the nine months ended September 30, 1997 from $15.8 million
for the nine months ended September 30, 1998. This increase was
19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Nine months Ended September 30, 1998 compared to Nine months Ended September 30,
1997 (continued)
attributable primarily to increased levels of debt resulting from the financing
of the acquisition of the Busse Stations, the WITN Acquisitions and the GulfLink
Acquisition.
Net income (loss) Available to Common Stockholders. Net income available
to common stockholders of the Company was $40.1 million for the nine months
ended September 30, 1998, as compared with a net loss available to common
stockholders of $2.1 million for the same period of the prior year, reflecting
the $43.1 million gain net of related tax provisions on the exchange of WALB.
Liquidity and Capital Resources
On August 20, 1998, the Board of Directors declared a 50% stock dividend,
payable on September 30, 1998, to stockholders of record of the Class A Common
Stock and Class B Common Stock on September 16, 1998. This stock dividend
effected a three for two stock split. All applicable share and per share data
have been adjusted to give effect to the stock split.
In September 1996, the Company entered into the $125.0 million senior
credit facility (the "Senior Credit Facility") with a consortium of banks. 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. 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.
Effective July 31, 1998, the Senior Credit Facility was modified to
increase the committed credit limit of $125.0 million to $200.0 million. This
modification also allows for an additional uncommitted $100.0 million in
available credit which is in addition to the committed $200.0 million credit
limit. This $100.0 million in uncommitted available credit can be borrowed by
the Company only after unanimous approval of the bank consortium. The
modification also extended the maturity date from June 30, 2004 to June 30,
2005. The modification required a one-time fee of approximately $750,000.
As discussed in the Introduction, on July 31, 1998, the Company completed
the Busse-WALB Transactions. These transactions resulted in a net increase in
long term debt of approximately $43.4 million. At September 30, 1998, the
Company had approximately $102.0 million borrowed under the Senior Credit
Facility with approximately $98.0 million available under the agreement. The
interest rate on the balance outstanding was based on a spread over LIBOR and
Prime of 2.00% and 0.25%, respectively.
The Company's working capital was $2.7 million and $10.1 million at
September 30, 1998 and December 31, 1997, respectively. The Company's cash
provided from operations was $19.7 million and $10.8 million for the nine months
ended September 30, 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 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.
The Company's cash used in investing activities was $53.1 million and
$53.9 million for the nine months ended September 30, 1998 and 1997,
respectively. Net cash used in investing activities for the nine months ended
20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
September 30, 1998 was primarily due to the net effect of the Busse-WALB
Transactions which were completed on July 31, 1998 and capital expenditures. For
the nine months ended September 30, 1998 net cash used in the Busse-WALB
Transactions and capital expenditures was $44.1 million and $7.3 million,
respectively.
It is anticipated that significant capital expenditures may be required in
the future to implement advanced television ("ATV"), at the Company's television
stations. The Federal Communication Commission ("FCC") has determined the
technical standards, the channel assignments and a time table for implementation
of ATV.
Generally, under the FCC's implementation schedule, the Company must apply
for ATV construction permits for each of its present television stations by
November 1, 1999 and then commence ATV operations by May 1, 2002. Under the
current FCC implementation schedule the Company would generally be required to
surrender to the government either the current channel or the ATV channel by
December 31, 2006 and continue its digital operations thereafter on the retained
channel. Recent legislation requires the FCC to extend the December 31, 2006
surrender date with respect to certain stations within a given television market
if (i) at least one network affiliate is not broadcasting a digital service in
the given market and has exercised "due diligence" in meeting the ATV buildout
requirements for that market or (ii) digital to analog converter technology is
not generally available in the given market or (iii) 15 percent or more of the
television households in a given market do not subscribe to a multichannel video
programming distributor that carries the digital service of each local station
and those television households do not have at least one advanced television set
or at least one digital to analog converter. The foregoing implementation
schedule is subject to review by the FCC every two years and may also be subject
to future legislation or judicial review, the effect of which cannot be
predicted by the Company.
The Company is currently studying the ATV channel assignments for its
television stations as well as the technical and capital expenditure
requirements to implement ATV at these television stations. The Company
currently intends to implement ATV at its television stations within the FCC
mandated implementation period. The Company cannot presently predict the cost of
such implementation but, based upon general industry estimates, currently
believes that such costs will be material and will require several million
dollars per station to commence initial ATV operations.
The Company's cash provided by financing activities for the nine months
ended September 30, 1998 and 1997 was $33.0 million and $43.8 million,
respectively. Net cash provided by financing activities for the nine months
ended September 30, 1998 resulted primarily from increased net borrowings of
long-term debt related to the Busse-WALB Transactions of $43.4 milllion
partially offset by the payment of $1.1 million in dividends and the purchase of
$2.6 million in preferred stock. During the nine months ended September 30,
1998, the Company issued 47,100 shares of Class A Common Stock and 105,283
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. During the nine months ended September 30, 1998, the Company
purchased 15,750 shares of Class A Common stock at a cost of $311,063.
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 nine months
ended September 30, 1998, the Company paid $3.0 million for such program
broadcast rights.
The Company and its subsidiaries file a consolidated federal income tax
return and such state or local tax returns as are required. As of September 30,
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
21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
results of operations nor is inflation expected to have a significant effect
upon the Company's business in the near future.
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,
miscalculations or disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities.
The Company is continuing an assessment of its software and computer
systems 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 is also in the process of assessing the Year 2000
compliance status of its significant suppliers and customers. The Company does
not presently believe that the estimated total Year 2000 project cost will
exceed $750,000. Most of this cost will be realized over the estimated useful
lives of the new hardware and software. To date, the Company has identified
several minor systems that are not Year 2000 compliant and these systems are in
the process of being replaced. However, the Company has not incurred significant
expenses associated with the Year 2000 issue.
This project is approximately 60% complete and the Company estimates that
it will be completed no later than September 30, 1999, 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.
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.
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.
22
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
27- Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on August 14, 1998, reporting the
exchange of the assets of WALB-TV for the assets of WEAU-TV. This
report on Form 8-K also reported the acquisition of all of the
outstanding common and preferred stock of Busse Broadcasting
Corporation. A current report on Form 8K/A was filed on October 14,
1998 as an amendment to the current report on Form 8-K that as filed
on August 14, 1998.
23
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: November 13, 1998 By: /s/ James C. Ryan
----------------- ----------------------------
James C. Ryan
Vice President and
Chief Financial Officer
24
5
0000043196
GRAY COMMUNICATIONS SYSTEMS, INC.
US DOLLARS
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
1
1,934,777
0
21,828,127
1,802,000
1,153,868
31,472,598
78,275,501
(25,676,551)
471,196,762
28,792,789
262,555,097
0
18,500,000
64,113,460
45,957,669
471,196,762
91,887,292
91,887,292
0
74,788,665
(70,222,552)
547,475
18,591,538
68,729,641
27,545,657
41,183,984
0
0
0
40,120,306
3.37
3.23
Includes pre-tax gain recognized on the exchange of WALB, one of the Company's
NBC affiliated television stations, of approximately $70.6 million.
