UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark one)
For the transition period from to .
Commission file number 1-13796
Gray Television, Inc.
(404) 504-9828
Not Applicable
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 [ü] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ü] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
INDEX
GRAY TELEVISION, INC.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
See notes to condensed consolidated financial statements.
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GRAY TELEVISION, INC.CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (Unaudited)(in thousands)
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NOTE A—BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Gray Television, Inc. (“Gray” or “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, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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, 2003.
Stock-Based Compensation
The Company follows the provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). The provisions of SFAS No. 123 allow companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, (“APB25”), but disclose the pro forma effects on net income (loss) had the fair value of the options been expensed. The Company has elected to continue to apply APB 25 in accounting for its stock option incentive plans.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information follows (in thousands, except per common share data):
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GRAY TELEVISION, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
NOTE A—BASIS OF PRESENTATION (Continued)
Earnings Per Share
The Company computes earnings per share in accordance with FASB Statement No. 128, “Earnings Per Share” (“EPS”). The following table reconciles net income to net income available to common stockholders for the three months ended March 31, 2004 and 2003 (in thousands):
For the three month period ended March 31, 2003, the Company incurred a net loss available to common stockholders. As a result, common stock equivalents related to employee stock-based compensation plans, warrants and the effects of convertible preferred stock that could potentially dilute basic earnings per share in the future were not included in the computation of diluted earnings per share as they would have an antidilutive effect for the period. The number of antidilutive common stock equivalents excluded from diluted earnings per share for the respective periods are as follows (in thousands):
Reclassifications
Certain prior year amounts in the accompanying condensed consolidated financial statements have been reclassified to conform with the 2004 presentation.
NOTE B—LONG-TERM DEBT
As of March 31, 2004, the balance outstanding and the balance available under the Company’s senior credit facility were $374.0 million and $74.1 million, respectively, and the interest rate on the balance outstanding was 3.64%.
As of March 31, 2004, the Company’s Senior Subordinated Notes due 2011 (the “9¼% Notes”) had a balance outstanding of $278.9 million excluding unamortized discount of $1.1 million.
The 9¼% Notes are jointly and severally guaranteed (the “Subsidiary Guarantees”) by all of the Company’s subsidiaries (the “Subsidiary Guarantors”). The obligations of the Subsidiary Guarantors under the Subsidiary Guarantees is subordinated, to the same extent as the obligations of the Company in respect of the 9¼% Notes, to the prior payment in full of all existing and future senior debt of the Subsidiary Guarantors (which will include any guarantee issued by such Subsidiary Guarantors of any senior debt).
The Company is a holding company with no material independent assets or operations, other than its investment in its subsidiaries. The aggregate assets, liabilities, earnings and equity of the Subsidiary Guarantors are substantially equivalent to the assets, liabilities, earnings and equity of the Company on a consolidated basis. The
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NOTE B—LONG-TERM DEBT (Continued)
Subsidiary Guarantors are, directly or indirectly, wholly owned subsidiaries of the Company and the Subsidiary Guarantees are full, unconditional and joint and several. All of the current and future direct and indirect subsidiaries of the Company are guarantors of the 9¼% Notes. Accordingly, separate financial statements and other disclosures of each of the Subsidiary Guarantors are not presented because the Company has no independent assets or operations, the guarantees are full and unconditional and joint and several and any subsidiaries of the parent company other than the Subsidiary Guarantors are minor. The senior credit facility is collateralized by substantially all of the Company’s existing and hereafter acquired assets except real estate.
NOTE C—RETIREMENT PLANS
The following table provides the components of net periodic benefit cost for the Company’s pension plan for the three months ended March 31, 2004 and 2003 (in thousands):
The Company previously disclosed in its financial statements for the year ended December 31, 2003 that it expected to contribute $1.6 million to its pension plan in 2004. As of March 31, 2004, no contributions have yet been made to the plan by the Company.
NOTE D—INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: broadcasting, publishing and paging. As of March 31, 2004, the broadcasting segment operates 29 television stations located in the United States. The publishing segment operates five daily newspapers located in Georgia and Indiana. The paging operations are located in Florida, Georgia and Alabama. The following tables present certain financial information concerning the Company’s three operating segments (in thousands):
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NOTE D—INFORMATION ON BUSINESS SEGMENTS (Continued)
Corporate and administrative expenses as well as amortization of restricted stock are allocated to operating income based on segment net revenues.
NOTE E—CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in the normal course of its business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not materially affect the Company’s financial position.
The Company has an equity investment in Sarkes Tarzian, Inc. (“Tarzian”) representing shares in Tarzian which were originally held by the estate of Mary Tarzian (the “Estate”). As described more fully below, the Company’s ownership of the Tarzian shares is subject to certain litigation.
On February 12, 1999, Tarzian filed suit in the United States District Court for the Southern District of Indiana against U.S. Trust Company of Florida Savings Bank as Personal Representative of the Estate, claiming that Tarzian had a binding and enforceable contract to purchase the Tarzian shares from the Estate. On February 3, 2003, the Court entered judgment on a jury verdict in favor of Tarzian for breach of contract and awarding Tarzian $4.0 million in damages. On June 23, 2003, the Court denied the Estate’s renewed motion for judgment as a matter of law, and alternatively, for a new trial on the issue of liability; denied Tarzian’s motion to amend the judgment to award Tarzian specific performance of the contract and title to the Tarzian shares; and granted Tarzian’s motion to amend the judgment to include pre-judgment interest on the $4.0 million damage award. The Estate has appealed the judgment and the Court’s rulings on the post-trial motions, and Tarzian has cross-appealed. The Company cannot predict when the final resolution of this litigation will occur.
On March 7, 2003, Tarzian filed suit in the United States District Court for the Northern District of Georgia against Bull Run Corporation and the Company for tortious interference with contract and conversion. The lawsuit alleges that Bull Run Corporation and Gray purchased the Tarzian shares with actual knowledge that Tarzian had a binding agreement to purchase the stock from the Estate. The lawsuit seeks damages in an amount equal to the liquidation value of the interest in Tarzian that the stock represents, which Tarzian claims to be as much as $75 million, as well as attorneys’ fees, expenses, and punitive damages. The lawsuit also seeks an order requiring the Company and Bull Run Corporation to turn over the stock certificates to Tarzian and relinquish all claims to the stock. The stock purchase agreement with the Estate would permit the Company to make a claim against the Estate in the event that title to the Tarzian Shares is ultimately awarded to Tarzian. There is no assurance that the Estate would have sufficient assets to honor any or all of such potential claims. The Company filed its answer to the lawsuit on May 14, 2003 denying any liability for Tarzian’s claims. The Company believes it has meritorious defenses and intends to vigorously defend the lawsuit. The Company cannot predict when the final resolution of this litigation will occur.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Introduction
The following analysis of the financial condition and results of operations of Gray Television, Inc. should be read in conjunction with the Company’s financial statements contained in this report and in the Company’s Form 10-K for the year ended December 31, 2003.
Cyclicality
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 and other political advocacy groups, which spending typically is heaviest during the fourth quarter.
Broadcasting, Publishing and Paging Revenues
Set forth below are the principal types of 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 (dollars in thousands):
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Three Months Ended March 31, 2004 Compared To Three Months Ended March 31, 2003
Revenues. Total revenues for the three months ended March 31, 2004 increased 15% to $74.7 million as compared to the same period of the prior year.
Operating expenses. Operating expenses increased 4% to $55.4 million due primarily to inflation and business growth.
Interest expense. Interest expense decreased $0.8 million to $10.5 million. This decrease was due to lower interest rates on the Company’s senior credit facility.
Income tax expense. An income tax expense of $3.6 million was recorded for the three months ended March 31, 2004 as compared to an income tax expense of $0.3 million for the three months ended March 31, 2003. The
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increased expense in the current year as compared to that of the prior year was attributable to having increased income in the current period as compared to the prior period, partially offset by a lower effective income tax rate.
Preferred dividends. Preferred dividends remained consistent with that of the prior year because there were no changes to the preferred stock upon which the dividends are paid.
Net income (loss) available to common stockholders. Net income (loss) available to common stockholders of the Company for the three months ended March 31, 2004 and 2003 was $4.7 million and $(0.7) million, respectively.
Liquidity and Capital Resources
General
The following tables present certain data that the Company believes is helpful in evaluating the Company’s liquidity and capital resources (in thousands).
The Company and its subsidiaries file a consolidated federal income tax return and such state or local tax returns as are required. Although the Company may earn taxable operating income, as of March 31, 2004, the Company anticipates that through the use of its available loss carryforwards it will not pay significant amounts of federal or state income taxes in the next several years.
Management believes that current cash balances, cash flows from operations and available funds under its senior revolving credit facility will be adequate to provide for the Company’s capital expenditures, debt service, cash dividends and working capital requirements 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.
Net cash provided by operating activities increased $0.9 million. The increase was due primarily to an increase in net income partially offset by changes in operating assets and liabilities.
Net cash used in investing activities decreased $0.9 million. The decrease was due primarily to lower payments on acquisition related liabilities partially offset by increased purchases of property and equipment .
Net cash used in financing activities decreased $1.5 million. The decrease was primarily due to cash received from the exercise of stock options by employees and lower repayments of debt.
Digital Television Conversion
As of April 26, 2004, the Company was broadcasting a digital signal at 27 of its 29 stations. The Company currently intends to have all such required installations completed as soon as practicable. The Federal Communications
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Commission (the “FCC”) required that all commercial stations begin broadcasting a digital signal by May of 2002. As necessary, the Company has requested and received approval from the FCC to extend the May 2002 deadline by varying periods of time for all of the Company’s remaining stations that are not currently broadcasting in digital. Given the Company’s good faith efforts to comply with the existing deadline and the facts specific to each extension request, the Company believes the FCC will grant any further deadline extension requests that become necessary.
Capital Expenditures
The Company had capital expenditures of $8.2 million for the three months ended March 31, 2004 compared to $3.7 million for the corresponding period of 2003. Of the $8.2 million expended in the three months ended March 31, 2004, $4.6 million was accrued as a liability as of December 31, 2003. The increase in capital expenditures reflects, in part, the timing of certain payments relating to the Company’s on going digital television conversion. At present, the Company currently anticipates that total capital expenditures for the full year of 2004 will range between $20 million and $25 million including approximately $8 million to $9 million of payments relating to the digital television conversion.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make judgments and estimations that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The Company considers its accounting policies relating to intangible assets and income taxes to be critical policies that require judgments or estimations in their application where variances in those judgments or estimations could make a significant difference to future reported results. These critical accounting policies and estimates are more fully disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains “forward-looking statements.” When used in this report, the words “believes,” “expects,” “anticipates,” “estimates” and similar words and expressions are generally intended to identify forward-looking statements, but some of those statements may use other phrasing. Statements that describe the Company’s future strategic plans, goals or objectives are also forward-looking statements. In addition, we have included forward-looking statements regarding estimated future amortization expense and our testing for intangible asset impairment. 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) certain other risks relating to our business, including, our dependence on advertising revenues, our need to acquire non-network television programming, the impact of a loss of any of our FCC broadcast licenses, increased competition and capital costs relating to digital advanced television, pending litigation, our significant level of intangible assets and our ability to identify acquisitions successfully, (v) our high debt levels, and (vi) other factors described from time to time in our SEC filings. The forward-looking statements included in this report are made only as of the date hereof. The Company disclaims any obligation to update such forward-looking statements to reflect subsequent events or circumstances.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company believes that the market risk of the Company’s financial instruments as of March 31, 2004 has not materially changed since December 31, 2003. The market risk profile on December 31, 2003 is disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures.
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Based on that evaluation, the CEO and the CFO have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in the Company’s internal control over financial reporting identified in connection with this evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note E - Contingencies of the Notes to Condensed Consolidated Financial Statements filed as part of this Quarterly Report on Form 10-Q is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
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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.
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