UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________ . COMMISSION FILE NUMBER 1-13796 GRAY COMMUNICATIONS SYSTEMS, INC. ---------------------------------------------------------------------- (Exact name of registrant as specified in its charter) GEORGIA 58-0285030 - -------------------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 126 N. WASHINGTON ST., ALBANY, GEORGIA 31701 - ---------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (912) 888-9390 - ---------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - ---------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. CLASS A COMMON STOCK, (NO PAR VALUE) CLASS B COMMON STOCK, (NO PAR VALUE) - ---------------------------------------------- ------------------------------------------- 4,619,486 SHARES AS OF APRIL 28, 1997 3,334,193 SHARES AS OF APRIL 28, 1997 INDEX GRAY COMMUNICATIONS SYSTEMS, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed consolidated balance sheets (unaudited) - March 31, 1997 and December 31, 1996 Condensed consolidated statements of operations (unaudited) - Three months ended March 31, 1997 and 1996 Condensed consolidated statement of stockholders' equity (unaudited) - Three months ended March 31, 1997 Condensed consolidated statements of cash flows (unaudited) - Three months ended March 31, 1997 and 1996 Notes to condensed consolidated financial statements (unaudited) - March 31, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURES 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) March 31, December 31, 1997 1996 ------------- -------------- CURRENT ASSETS Cash and cash equivalents $ 354,504 $ 1,051,044 Trade accounts receivable, less allowance for doubtful accounts of $1,360,000 and $1,450,000, respectively 14,680,766 17,373,839 Recoverable income taxes 4,050,387 1,747,687 Inventories 747,289 624,118 Current portion of program broadcast rights 1,987,743 2,362,742 Other current assets 885,720 379,793 ------------- -------------- 22,706,409 23,539,223 PROPERTY AND EQUIPMENT 58,039,212 53,993,742 Less allowance for depreciation (19,934,524) (18,209,891) ------------- -------------- 38,104,688 35,783,851 OTHER ASSETS Deferred acquisition costs 69,969 -0- Deferred loan costs (Note B) 8,880,587 9,141,262 Goodwill and other intangibles (Note B) 227,044,543 228,692,018 Other 1,882,283 1,507,488 ------------- -------------- 237,877,382 239,340,768 ------------- -------------- $ 298,688,479 $ 298,663,842 ============= ============== 3 March 31, December 31, 1997 1996 -------------- -------------- CURRENT LIABILITIES Trade accounts payable (includes $1,200,000 and $1,000,000 payable to Bull Run Corporation at March 31, 1997 and December 31, 1996, respectively) $ 3,938,498 $ 6,043,062 Accrued expenses 7,359,687 8,212,555 Accrued interest 8,869,788 4,858,775 Current portion of program broadcast obligations 2,419,780 2,862,434 Deferred revenue 1,904,793 1,764,509 Current portion of long-term debt 140,000 140,000 ------------- -------------- 24,632,546 23,881,335 LONG-TERM DEBT (Notes B and D) 170,196,045 173,228,049 NON-CURRENT LIABILITIES 7,843,116 6,328,942 STOCKHOLDERS' EQUITY (Notes B, and C) Serial Preferred Stock, no par value; authorized 20,000,000 shares; issued 2,000 shares, ($20,000,000 aggregate liquidation value) 20,000,000 20,000,000 Class A Common Stock, no par value; authorized 15,000,000 shares; issued 5,281,616 and 5,155,331 shares, respectively 9,633,130 7,994,235 Class B Common Stock, no par value; authorized 15,000,000 shares; issued 3,506,493 and 3,500,000 shares, respectively 66,183,335 66,065,762 Retained earnings 9,578,728 10,543,940 ------------- -------------- 105,395,193 104,603,937 Treasury stock at cost, Class A Common Stock 663,180 shares (6,638,284) (6,638,284) Treasury stock at cost, Class B Common Stock 172,300 shares (2,740,137) (2,740,137) ------------- -------------- 96,016,772 95,225,516 ------------- -------------- $ 298,688,479 $ 298,663,842 ============= ============= SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) THREE MONTHS ENDED MARCH 31, ------------------------------------------- 1997 1996 ---- ---- OPERATING REVENUES Broadcasting (net of agency commissions) $ 15,985,297 $ 11,449,645 Publishing 5,224,854 5,576,934 Paging 1,550,376 -0- ----------- ------------- 22,760,527 17,026,579 EXPENSES Broadcasting 9,694,784 7,309,865 Publishing 3,933,421 4,808,062 Paging 890,294 -0- Corporate and administrative 633,328 775,586 Depreciation and amortization 3,271,943 1,395,254 Non-cash compensation paid in common stock -0- 60,000 ----------- ------------ 18,423,770 14,348,767 ----------- ------------ 4,336,757 2,677,812 Miscellaneous income (expense), net (45,763) 63,514 ----------- ----------- 4,290,994 2,741,326 Interest expense 4,975,693 2,229,115 ----------- ------------ INCOME (LOSS) BEFORE INCOME TAXES (684,699) 512,211 Income tax expense (benefit) (223,600) 201,000 ----------- ----------- NET INCOME (LOSS) (461,099) 311,211 Preferred Dividends 350,000 -0- ----------- ------------ NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (811,099) $ 311,211 ============ ============ AVERAGE OUTSTANDING COMMON SHARES Primary 7,836,097 4,606,773 Fully Diluted 7,836,097 4,636,997 PRIMARY AND FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE: Net income (loss) available to common stockholders $ (0.10) $ 0.07 ========== ============ SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited) Preferred Class A Class B Stock Common Stock Common Stock Retained Shares Amount Shares Amount Shares Amount Earnings ------ ------ ------ ------ ------ ------ -------- Balance at December 31, 1996 2,000 $20,000,000 5,155,331 $ 7,994,235 3,500,000 $66,065,762 $10,543,940 Net (loss) for the three months ended March 31, 1997 (461,099) Cash Dividends ($.02 per share) (154,113) Preferred stock dividends (350,000) Income tax benefits relating to stock award 393,000 Issuance of Class A Common Stock: Stock award 122,034 1,200,000 Directors stock plan 501 9,645 Non-qualified stock plan 3,750 36,250 Issuance of Class B Common Stock: 401(k) plan 6,493 117,573 ----- ----------- ---------- ------------ ---------- ----------- ---------- Balance at March 31, 1997 2,000 $20,000,000 5,281,616 $ 9,633,130 3,506,493 $66,183,335 $9,578,728 ====== =========== ========= =========== ========= =========== ========== Class A Class B Treasury Stock Treasury Stock Shares Amount Shares Amount Total ------ ------ ------ ------ ----- Balance at December 31, 1996 (663,180) $(6,638,284) (172,300) $(2,740,137) $95,225,516 Net (loss) for the three months ended March 31, 1997 (461,099) Cash Dividends ($.02 per share) (154,113) Preferred stock dividends (350,000) Income tax benefits relating to stock award 393,000 Issuance of Class A Common Stock: Stock award 1,200,000 Directors stock plan 9,645 Non-qualified stock plan 36,250 Issuance of Class B Common Stock: 401(k) plan 117,573 ------------ ----------- ---------- ----------- ----------- Balance at March 31, 1997 (663,180) $(6,638,284) (172,300) $(2,740,137) $96,016,772 ============ =========== ========= =========== =========== SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) THREE MONTHS ENDED MARCH 31, 1997 1996 ------------ ------------- OPERATING ACTIVITIES Net income (loss) $ (461,099) $ 311,211 Items which did not use (provide) cash: Depreciation 1,712,147 848,427 Amortization of intangible assets 1,559,796 546,827 Amortization of deferred loan costs 269,074 -0- Amortization of program broadcast rights 796,817 646,820 Amortization of original issue discount on subordinated note -0- 72,222 Amortization of deferred interest rate swap liability (13,980) -0- Payments for program broadcast rights (938,009) (661,603) Compensation paid in Class A common stock -0- 60,000 Supplemental employee benefits (66,941) (135,755) Class A common stock contributed to 401(k) Plan -0- 78,369 Class B common stock contributed to 401(k) Plan 117,573 -0- Deferred