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, 2002.
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 TELEVISION, 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)
4370 PEACHTREE ROAD, NE, ATLANTA, GEORGIA 30319
(Address of principal executive offices)
(Zip code)
(404) 504-9828
(Registrant's telephone number, including area code)
GRAY COMMUNICATIONS SYSTEMS, INC.
(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.
COMMON STOCK, (NO PAR VALUE) CLASS A COMMON STOCK, (NO PAR VALUE)
38,923,263 SHARES AS OF NOVEMBER 13, 2002 6,848,467 SHARES AS OF NOVEMBER 13, 2002
INDEX
GRAY TELEVISION, INC.
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed consolidated balance sheets - September 30,
2002 (Unaudited) and December 31, 2001 3
Condensed consolidated statements of operations
(Unaudited) - Three months ended September 30, 2002
and 2001 Nine months ended September 30, 2002 and 2001 5
Condensed consolidated statement of stockholders'
equity (Unaudited) - Nine months ended September
30, 2002 6
Condensed consolidated statements of cash flows
(Unaudited) - Nine months ended September 30, 2002
and 2001 7
Notes to condensed consolidated financial statements
(Unaudited) - September 30, 2002 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 24
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 27
CERTIFICATIONS 28
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAY TELEVISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents $ 19,089,610 $ 557,521
Restricted cash for redemption of long-term debt -0- 168,557,417
Trade accounts receivable, less allowance for doubtful accounts
of $689,000 and $743,000, respectively 25,145,795 29,722,141
Recoverable income taxes 808,741 552,177
Inventories 1,092,331 763,430
Current portion of program broadcast rights 5,420,937 3,809,238
Other current assets 1,077,585 742,150
------------- -------------
Total current assets 52,634,999 204,704,074
------------- -------------
Property and equipment:
Land 4,975,003 4,905,121
Buildings and improvements 17,335,868 16,904,976
Equipment 119,424,095 113,018,560
------------- -------------
141,734,966 134,828,657
Allowance for depreciation (81,492,576) (71,412,314)
------------- -------------
60,242,390 63,416,343
Deferred loan costs, net 13,263,113 14,305,495
Licenses and network affiliation agreements 403,794,201 424,384,811
Goodwill 53,150,505 72,025,145
Consulting and noncompete agreements 582,010 901,216
Other 23,346,465 14,599,894
------------- -------------
$ 607,013,683 $ 794,336,978
============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
GRAY TELEVISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Trade accounts payable $ 4,021,345 $ 7,632,778
Employee compensation and benefits 6,203,893 6,002,892
Accrued expenses 2,163,367 1,588,302
Accrued interest 8,765,732 7,872,585
Current portion of program broadcast obligations 5,272,234 3,655,881
Deferred revenue 3,226,343 2,783,069
Unrealized loss on derivatives -0- 1,581,000
Current portion of long-term debt 66,120 155,262,277
------------- -------------
Total current liabilities 29,719,034 186,378,784
Long-term debt, less current portion 378,740,078 396,182,025
Program broadcast obligations, less current portion 500,480 619,320
Supplemental employee benefits 426,712 397,720
Deferred income taxes 56,866,563 66,790,563
Other 950,216 1,772,989
------------- -------------
467,203,083 652,141,401
------------- -------------
Commitments and contingencies
Redeemable Serial Preferred Stock, no par value; cumulative;
convertible; designated 5,000 shares, issued and outstanding
4,000 shares ($40,000,000 aggregate liquidation value) 39,156,069 -0-
------------- -------------
Stockholders' equity:
Serial Preferred Stock, no par value; authorized 20,000,000
shares; undesignated 19,995,000 shares, issued and
outstanding 861 shares ($8,605,788 aggregate liquidation
value) -0- 4,636,663
Common Stock, no par value; authorized 50,000,000 and 15,000,000
shares, respectively; issued 8,916,683 and 8,792,227 shares,
respectively 119,086,654 117,634,928
Class A Common Stock, no par value; authorized 15,000,000
shares; issued 7,961,574 shares, respectively 20,172,959 20,172,959
Retained (deficit) earnings (30,266,364) 8,089,745
------------- -------------
108,993,249 150,534,295
Treasury Stock at cost, Class A Common Stock, 1,113,107 shares, respectively (8,338,718) (8,338,718)
------------- -------------
100,654,531 142,195,577
------------- -------------
$ 607,013,683 $ 794,336,978
============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
GRAY TELEVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------ ------------- ------------- -------------
Operating revenues:
Broadcasting (net of agency commissions) $ 29,534,793 $ 24,422,498 $ 84,541,110 $ 76,997,268
Publishing 10,857,782 10,138,437 32,073,735 30,065,472
Paging 2,115,821 2,204,927 6,198,622 6,609,611
------------ ------------- ------------- -------------
42,508,396 36,765,862 122,813,467 113,672,351
------------ ------------- ------------- -------------
Expenses:
Broadcasting 16,645,852 16,429,627 48,621,302 48,804,415
Publishing 7,790,656 7,979,787 23,210,261 23,639,124
Paging 1,360,335 1,391,892 4,114,218 4,203,436
Corporate and administrative 1,168,665 833,099 3,284,808 2,661,874
Depreciation and amortization 3,632,183 7,923,329 11,064,968 23,619,730
------------ ------------- ------------- -------------
30,597,691 34,557,734 90,295,557 102,928,579
------------ ------------- ------------- -------------
Operating income 11,910,705 2,208,128 32,517,910 10,743,772
Miscellaneous income (41,632) (59,902) 54,931 38,302
Appreciation (depreciation) in value of derivatives 851,355 (424,117) 1,581,000 (1,384,841)
------------ ------------- ------------- -------------
12,720,428 1,724,109 34,153,841 9,397,233
Interest expense 8,048,702 8,606,909 24,914,365 26,773,788
------------ ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY CHARGE AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 4,671,726 (6,882,800) 9,239,476 (17,376,555)
Income tax expense (benefit) 1,554,999 (2,246,000) 3,171,199 (5,478,000)
------------ ------------- ------------- -------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 3,116,727 (4,636,800) 6,068,277 (11,898,555)
Extraordinary charge on extinguishment of debt, net of
income tax benefit of $3,957,800 -0- -0- (7,317,517) -0-
------------ ------------- ------------- -------------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 3,116,727 (4,636,800) $ (1,249,240) (11,898,555)
Cumulative effect of accounting change, net of income tax
benefit of $8,873,400 -0- -0- (30,591,800) -0-
------------ ------------- ------------- -------------
NET INCOME (LOSS) 3,116,727 (4,636,800) (31,841,040) (11,898,555)
Preferred dividends 800,000 154,084 1,603,362 462,258
Non-cash preferred dividends associated with exchange of
preferred stock -0- -0- 3,969,125 -0-
------------ ------------- ------------- -------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ 2,316,727 $ (4,790,884) $ (37,413,527) $ (12,360,813)
============ ============= ============= =============
Basic per share information:
Net income (loss) before extraordinary charge and
cumulative effect of accounting change available
to common stockholders $ 0.15 $ (0.31) $ 0.03 $ (0.79)
Extraordinary charge on extinguishment of debt, net
of income taxes 0.00 0.00 (0.46) 0.00
Cumulative effect of accounting change, net of income
taxes 0.00 0.00 (1.95) 0.00
------------ ------------- ------------- -------------
Net income (loss) available to common stockholders $ 0.15 $ (0.31) $ (2.38) $ (0.79)
============ ============= ============= =============
Weighted average shares outstanding 15,751,856 15,615,253 15,692,066 15,596,595
============ ============= ============= =============
Diluted per share information:
Net income (loss) before extraordinary charge and
cumulative effect of accounting change available
to common stockholders $ 0.14 $ (0.31) $ 0.03 $ (0.79)
Extraordinary charge on extinguishment of debt, net
of income taxes 0.00 0.00 (0.46) 0.00
Cumulative effect of accounting change, net of income
taxes 0.00 0.00 (1.91) 0.00
------------ ------------- ------------- -------------
Net income (loss) available to common stockholders $ 0.14 $ (0.31) $ (2.34) $ (0.79)
============ ============= ============= =============
Weighted average shares outstanding 16,027,049 15,615,253 16,022,349 15,596,595
============ ============= ============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
GRAY TELEVISION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
CLASS A
PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------------- ------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- ------------
Balance at December 31, 2001 861 $ 4,636,663 7,961,574 $20,172,959 8,792,227 $117,634,928
Net loss for the nine months ended
September 30, 2002 -0- -0- -0- -0- -0- -0-
Common stock cash dividends
($0.06) per share -0- -0- -0- -0- -0- -0-
Preferred stock dividends -0- -0- -0- -0- -0- -0-
Non-cash preferred dividends associated
with the exchange of preferred stock -0- -0- -0- -0- -0- -0-
Issuance of common stock:
401(k) plan -0- -0- -0- -0- 46,451 571,694
Non-qualified stock plan -0- -0- -0- -0- 78,005 792,032
Exchange of series A and series B preferred
stock (861) (4,636,663) -0- -0- -0- -0-
Income tax benefit relating to stock plans -0- -0- -0- -0- -0- 88,000
----------- ----------- ----------- ----------- ----------- ------------
Balance at September 30, 2002 -0- $ -0- 7,961,574 $20,172,959 8,916,683 $119,086,654
----------- ----------- ----------- ----------- ----------- ------------
CLASS A
TREASURY STOCK
RETAINED --------------------------
EARNINGS SHARES AMOUNT TOTAL
------------ ----------- ----------- -------------
Balance at December 31, 2001 $ 8,089,745 (1,113,107) $(8,338,718) $ 142,195,577
Net loss for the nine months ended
September 30, 2002 (31,841,040) -0- -0- (31,841,040)
Common stock cash dividends
($0.06) per share (942,582) -0- -0- (942,582)
Preferred stock dividends (1,603,362) -0- -0- (1,603,362)
Non-cash preferred dividends associated
with the exchange of preferred stock (3,969,125) -0- -0- (3,969,125)
Issuance of common stock:
401(k) plan -0- -0- -0- 571,694
Non-qualified stock plan -0- -0- -0- 792,032
Exchange of series A and series B preferred
stock -0- -0- -0- (4,636,663)
Income tax benefit relating to stock plans -0- -0- -0- 88,000
------------ ----------- ----------- -------------
Balance at September 30, 2002 $(30,266,364) (1,113,107) $(8,338,718) $ 100,654,531
------------ ----------- ----------- -------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
GRAY TELEVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
------------- ------------
Operating activities
Net loss $ (31,841,040) $(11,898,555)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Cumulative effect of accounting change 30,591,800 -0-
Amortization of bond discount 108,135 -0-
Depreciation 10,745,764 12,884,340
Amortization of intangible assets 319,206 10,735,390
Amortization of deferred loan costs 1,082,565 1,156,469
Amortization of program broadcast rights 4,043,552 4,157,850
Write-off of loan acquisition costs related to debt extinguished 3,030,266 -0-
Payments for program broadcast rights (4,095,343) (4,109,234)
Supplemental employee benefits (68,031) (162,372)
Common stock contributed to 401(k) Plan 571,694 530,795
(Appreciation) depreciation in value of derivatives, net (1,581,000) 1,384,841
Deferred income taxes (1,050,550) (5,945,996)
Loss on disposal of assets 107,297 67,301
Changes in operating assets and liabilities:
Receivables, inventories and other current assets 3,655,446 5,428,874
Accounts payable and other current liabilities 1,700,068 (923,777)
------------- ------------
Net cash provided by operating activities 17,319,829 13,305,926
------------- ------------
Investing activities
Restricted cash for redemption of long-term debt 168,557,417 -0-
Deferred acquisition costs (8,770,017) -0-
Purchases of property and equipment (11,385,680) (5,200,074)
Other (257,141) 197,387
------------- ------------
Net cash provided by (used in) investing activities 148,144,579 (5,002,687)
------------- ------------
Financing activities
Dividends paid (2,545,944) (1,398,791)
Deferred loan costs (3,070,449) (2,557,426)
Proceeds from issuance of common stock 792,032 556,891
Proceeds from sale of treasury stock -0- 166,917
Proceeds from issuance of preferred stock 30,556,069 -0-
Proceeds from borrowings of long-term debt 6,272,346 24,950,000
Payments on long-term debt (179,018,585) (29,585,141)
Other 82,212 -0-
------------- ------------
Net cash used in financing activities (146,932,319) (7,867,550)
------------- ------------
Increase in cash and cash equivalents 18,532,089 435,689
Cash and cash equivalents at beginning of period 557,521 2,214,838
------------- ------------
Cash and cash equivalents at end of period $ 19,089,610 $ 2,650,527
============= ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7
GRAY TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 nine-month and three-month periods ended September 30,
2002 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002. 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, 2001.
Accounting for Derivatives
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," as amended ("SFAS 133"). SFAS 133 provides a comprehensive standard
for the recognition and measurement of derivatives and hedging activities. SFAS
133 requires all derivatives to be recorded on the balance sheet at fair value
and establishes "special accounting" for the different types of hedges. Changes
in the fair value of derivatives that do not meet the hedged criteria are
included in earnings in the same period of the change.
In 1999, the Company entered into an interest rate swap agreement that is
designated as a hedge against fluctuations in interest expense resulting from a
portion of its variable rate debt. Due to the terms of the interest rate swap
agreement, it does not qualify for hedge accounting under SFAS 133. Therefore,
the changes in the fair value of the interest rate swap agreement are recorded
in the Company's earnings as income or expense in the period in which the change
in value occurs.
Earnings Per Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("EPS"). The
following table reconciles net income (loss) before extraordinary charge and
cumulative effect of accounting change to net income (loss) before extraordinary
charge and cumulative effect of accounting change available to common
stockholders for the three months and nine months ended September 30, 2002 and
2001 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2002 2001 2002 2001
------- -------- ------- --------
Net income (loss) before extraordinary charge and cumulative
effect of accounting change $ 3,117 $ (4,637) $ 6,068 $(11,899)
Preferred dividends 800 154 1,603 462
Non-cash preferred dividends associated with exchange of preferred stock -0- -0- 3,969 -0-
------- -------- ------- --------
Net income (loss) before extraordinary charge and cumulative
effect of accounting change available to common stockholders $ 2,317 $ (4,791) $ 496 $(12,361)
======= ======== ======= ========
Weighted average shares outstanding - basic 15,752 15,615 15,692 15,597
Stock options and warrants 275 -0- 330 -0-
------- -------- ------- --------
Weighted average shares outstanding - diluted 16,027 15,615 16,022 15,597
======= ======== ======= ========
For the three and nine month periods ended September 30, 2001, the
Company incurred a net loss before extraordinary charge and cumulative effect of
accounting change available to common stockholders. As a result common shares
related to employee stock-based compensation plans and warrants 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 periods. For the three and nine month periods ended September 30,
2002, 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 any antidilutive effect for the
periods. The number of antidilutive common shares excluded from
8
diluted earnings per share for the respective periods are as follows (in
thousands):
NOTE A--BASIS OF PRESENTATION (CONTINUED)
Earnings Per Share (Continued)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2002 2001 2002 2001
----- ----- ----- -----
Antidilutive common shares excluded from diluted
earnings per share 2,779 451 1,631 615
The weighted average shares used to calculated basic and diluted earnings
per share for the three months and the nine months ended September 30, 2002 does
not include 885,269 class B common shares that were issued to an escrow agent in
connection with the acquisition of GMAT. Subsequent to the completion of the
acquisition on October 25, 2002, these shares were returned to the Company and
then cancelled.
Implementation of New Accounting Principles
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit of Disposal Activities" ("SFAS 146"), effective for exit or
disposal activities that are initiated after December 31, 2002. The Company's
adoption of this new standard is not expected to have a material impact on the
results of operating and financial position.
In April 2002, the FASB issued Statements of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment
of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"), effective for
fiscal years beginning after May 15, 2002. For most companies, SFAS 145 will
require gains and losses on extinguishments of debt to be classified as income
or loss from continuing operations rather than as extraordinary items as
previously required under Statement 4.
In the first quarter of 2002, the Company redeemed its then outstanding
10.625% senior subordinated notes and recorded an extraordinary charge of
approximately $11.3 million ($7.3 million after income tax) in connection with
this early extinguishment of debt. Also, in the fourth quarter of 2002, The
Company amended its bank loan agreement and expects to record an extraordinary
charge of approximately $5.6 million (approximately $3.6 million after income
tax) in connection with this early extinguishment of debt. The Company will
adopt SFAS 145 in the first quarter of 2003. Accordingly, the Company will
reclassify as an expense in income from continuing operations the $16.9 million
it had recorded in 2002 as an extraordinary loss on extinguishment of debt.
In June 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). These standards change the accounting for business
combinations by, among other things, prohibiting the prospective use of
pooling-of-interests accounting and requiring companies to stop amortizing
goodwill and certain intangible assets with an indefinite useful life. Instead,
goodwill and intangible assets deemed to have an indefinite useful life will be
subject to an annual review for impairment. The new standards were effective for
the Company on January 1, 2002. Upon adoption of SFAS 142, the Company recorded
a one-time, non-cash charge of approximately $39.5 million ($30.6 million after
income taxes) to reduce the carrying value of its goodwill, licenses and network
affiliation agreements. Such charge is reflected as a cumulative effect of an
accounting change in the accompanying condensed consolidated statement of
operations for the nine months ended September 30, 2002. For additional
discussion on the impact of adopting SFAS 142, see Note D.
9
Reclassifications
Certain prior year amounts in the accompanying condensed consolidated
financial statements have been reclassified to conform with the 2002
presentation.
NOTE B--BUSINESS ACQUISITION
Pending Acquisition of KOLO-TV
On September 4, 2002, Gray announced that it had signed a definitive
purchase agreement to acquire certain assets and assume certain liabilities of
KOLO-TV from Smith Television Group, Inc. KOLO-TV operates on Channel 8 in the
Reno, Nevada television market. KOLO-TV is a VHF television station that is
affiliated with the ABC television network. KOLO-TV is the number one rated
station in its market. The Reno market ranks as the 114th largest television
market in the U.S. with 242,000 television households. Carson City, the state
capital of Nevada is included in the market served by KOLO-TV.
The purchase price for KOLO-TV is $41.5 million. The Company intends to
finance this transaction by utilizing cash on hand and, to the extent necessary,
borrowings under the Company's revolving credit facility.
Acquisition of Gray MidAmerica Television
On October 25, 2002, Gray completed its acquisition of Stations Holding
Company, Inc. ("Stations Holding"). Gray acquired Stations Holding by merging
Gray's newly formed wholly owned subsidiary, Gray MidAmerica Television, Inc.
with and into Stations Holding. The newly acquired subsidiary is referred to
herein as Gray MidAmerica Television or "GMAT". Prior to the merger, GMAT owned
and operated 15 network affiliated broadcast television stations.
Aggregate consideration paid or assumed was approximately $513.4 million
which included a base purchase price of $502.5 million, transaction expenses of
approximately $7.0 million and certain net working capital adjustments of $3.9
million. Gray funded the acquisition by issuing 30,000,000 shares of Gray Common
Stock (NYSE ticker: GTN) to the public for proceeds, net of underwriting fee, of
approximately $231.7 million, with additional borrowings of $275.0 million under
its amended bank loan agreement and with cash on hand.
For advisory services rendered by Bull Run Corporation, Inc., a principal
investor, in connection with the merger, the Company paid to Bull Run an
advisory fee of $5.0 million on June 10, 2002. This amount is included in the
fees described above.
Upon completion of the KOLO-TV acquisition mentioned above, the Company
will own a total of 29 stations serving 25 television markets. The stations will
include 15 CBS affiliates, seven NBC affiliates and seven ABC affiliates. The
combined station group will have 23 stations ranked #1 in local news audience
and 22 stations ranked #1 in overall audience within their respective markets.
The combined TV station group will reach approximately 5.3% of total U.S. TV
households. In addition, with 15 CBS affiliated stations, the Company is the
largest independent owner of CBS affiliates in the country. The combined station
group has a significant presence in the Southeast, Southwest, Midwest and Great
Lakes regions of the United States.
NOTE C--LONG-TERM DEBT
On September 16, 2002, Gray completed the sale of $100 million principal
amount of senior subordinated notes (the "Notes"). The coupon on the Notes was 9
1/4% and the Notes were issued at par. These Notes are in addition to the $180
million principal amount of Gray's 9 1/4% Senior Subordinated Notes due 2011
that were issued on December 21, 2001. The Notes were issued under the same
indenture and have the same terms. They form a single series with Gray's
existing notes. The Notes were offered pursuant to Gray's existing effective
shelf registration statement. Gray used the net proceeds of this offering
primarily to repay $100 million of borrowings under its amended bank loan
agreement, without a corresponding reduction in the credit commitment under the
facility. The Company incurred approximately $3.4 million in underwriting costs
and other fees associated with the issuance of the additional $100 million of
senior subordinated notes.
10
NOTE C--LONG-TERM DEBT (CONTINUED)
In connection with the acquisition of GMAT, Gray entered into an amended
bank loan agreement on October 25, 2002 with a group of lenders. The primary
modifications to the loan agreement effected by the amendment were an increase
in committed available credit and a decrease in interest rates. Under the
amended loan agreement, committed available credit increased from $250.0 million
to $450.0 million. Prior to the amendment, the loan agreement consisted of a
$50.0 million revolving facility and a $200.0 million term facility. The
revolving facility was increased to $75.0 million and the term facility was
increased to $375.0 million. The Company currently expects to record an
extraordinary charge of approximately $5.6 million (approximately $3.6 million
after income tax) in the fourth quarter of 2002 in connection with this early
extinguishment of debt.
Under the amended revolving and term facilities, Gray, at its option, can
borrow funds at an interest rate equal to the London Interbank Offered Rate
("LIBOR") plus a margin or at the lenders' base rate plus a margin. The base
rate will generally be equal to the lenders' prime rate. Interest rates under
the amended revolving facility are base rate plus a margin ranging from 0.50% to
1.75% or LIBOR plus a margin ranging from 1.75% to 3.0%. Interest rates under
the amended term facility are base plus a margin ranging from 1.25% to 1.75% or
LIBOR plus a margin ranging from 2.50% to 3.00%. The applicable margin payable
by Gray will be determined by Gray's operating leverage ratio that is calculated
quarterly.
At September 30, 2002, the balance outstanding and the balance available
under the Company's amended bank loan agreement were $100.0 million and $37.5
million, respectively, and the interest rate on the balance outstanding was
5.1%. After the acquisition, Gray had $375.0 million outstanding under the
amended bank loan agreement with $75 million remaining available. The interest
rate on this balance after the acquisition was 4.8%.
The lenders' commitments for the revolving facility will reduce quarterly,
as specified in the amended bank loan agreement, beginning March 31, 2004 and
final repayment of any outstanding amounts under the revolving facility is due
December 31, 2009. The term facility commences amortization in quarterly
installments of $937,500 beginning March 31, 2004 through December 31, 2009 with
the remaining outstanding balance payable in four equal quarterly installments
beginning March 31, 2010. The final maturity date for any outstanding amounts
under the term facility is December 31, 2010.
In connection with the amendment to the amended bank loan agreement, Gray
incurred approximately $5.6 million in additional financing costs. These
financing costs were funded through borrowings under the amended bank loan
agreement.
NOTE D--GOODWILL AND INTANGIBLE ASSETS
As discussed in Note A, in January 2002, the Company adopted SFAS 142,
which requires companies to discontinue amortizing goodwill and certain
intangible assets with indefinite useful lives. Instead, SFAS 142 requires that
goodwill and intangible assets deemed to have an indefinite useful life be
reviewed for impairment upon adoption of SFAS 142 and annually thereafter. The
Company will perform its annual impairment review during the fourth quarter of
each year, commencing in the fourth quarter of 2002. Other intangible assets
will continue to be amortized over their useful lives.
Under SFAS 142, goodwill impairment is deemed to exist if the net book
value of a reporting unit exceeds its estimated fair value. As of January 1,
2002, the Company performed the first of the required impairment tests of
goodwill and indefinite lived intangible assets. Under SFAS 142, the annual
impairment tests are performed at the lowest level for which there are
identifiable cash flows. As a result of implementing SFAS 142 and the required
impairment tests at January 1, 2002, the Company recognized a non-cash
impairment of goodwill and other intangible assets of $39.5 million ($30.6
million net of income taxes). Such charge is reflected as a cumulative effect of
an accounting change in the accompanying condensed consolidated statement of
operations. In calculating the impairment charge, the fair value of the
reporting units underlying the segments were estimated using a discounted cash
flow methodology.
11
NOTE D--GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
The Company expects to receive future benefits from previously acquired
goodwill and licenses over an indefinite period of time. Upon adoption of SFAS
142 on January 1, 2002, the Company stopped amortizing these assets.
Amortization of these assets totaled $3.5 million ($2.8 million after income
taxes) for the three months ended September 30, 2001 and $10.4 million ($8.3
million after income tax) for the nine months ended September 30, 2001.
A summary of changes in the Company's goodwill and other intangible assets
during the nine month period ended September 30, 2002, by business segment is as
follows (in thousands):
DECEMBER 31, SEPTEMBER 30,
2001 IMPAIRMENTS AMORTIZATION 2002
--------- ----------- ------------ ---------
Goodwill:
Broadcasting $ 55,241 $ (18,874) $-0- $ 36,367
Publishing 16,779 -0- -0- 16,779
Paging 5 -0- -0- 5
--------- --------- --------- ---------
$ 72,025 $ (18,874) $-0- $ 53,151
========= ========= ========= =========
Licenses and network affiliation agreements:
Broadcasting $ 407,592 $ (10,291) $-0- $ 397,301
Paging 16,793 (10,300) -0- 6,493
--------- --------- --------- ---------
$ 424,385 $ (20,591) $-0- $ 403,794
========= ========= ========= =========
Consulting and noncompete agreements:
Publishing $ 901 $-0- $ (319) $ 582
========= ========= ========= =========
Total intangible assets net of accumulated amortization $ 497,311 $ (39,465) $ (319) $ 457,527
========= ========= ========= =========
As of September 30, 2002 and December 31, 2001, the Company's intangible
assets and related accumulated amortization consisted of the following (in
thousands):
AS OF SEPTEMBER 30, 2002 AS OF DECEMBER 31, 2001
------------------------------------- -------------------------------------
ACCUMULATED ACCUMULATED
GROSS AMORTIZATION NET GROSS AMORTIZATION NET
--------- ------------ --------- --------- ------------ ---------
Intangible assets not
subject to amortization:
Licenses and network affiliation agreements $ 454,245 $ (50,451) $ 403,794 $ 474,836 $ (50,451) $ 424,385
Goodwill 59,441 (6,290) 53,151 78,315 (6,290) 72,025
--------- --------- --------- --------- --------- ---------
$ 513,686 $ (56,741) $ 456,945 $ 553,151 $ (56,741) $ 496,410
========= ========= ========= ========= ========= =========
Intangible assets subject to amortization:
Consulting and noncompete agreements $ 3,105 $ (2,523) $ 582 $ 3,105 $ (2,204) $ 901
========= ========= ========= ========= ========= =========
Total intangibles $ 516,791 $ (59,264) $ 457,527 $ 556,256 $ (58,945) $ 497,311
========= ========= ========= ========= ========= =========
The Company recorded amortization expense of $107,000 during the three
months ended September 30, 2002 compared to $119,000 on a pro forma basis during
the three months ended September 30, 2001. The Company recorded amortization
expense of $322,000 during the nine months ended September 30, 2002 compared to
$362,000 on a pro forma basis during the nine months ended September 30, 2001.
Based on the current amount of intangible
12
NOTE D--GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
assets subject to amortization, the estimated amortization expense for the
succeeding 5 years are as follows: 2002: $425,616; 2003: $425,600; and 2004:
$50,000. As acquisitions and dispositions occur in the future, these amounts may
vary.
The results for the quarter and nine months ended September 30, 2001 on a
historical basis do not reflect the provisions of SFAS 142. Had the Company
adopted SFAS 142 on January 1, 2001, the historical amounts would have been
changed to the adjusted amounts as indicated in the table below (in thousands
except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income (loss) before extraordinary charge and
cumulative effect of accounting change $ 3,117 $ (4,637) $ 6,068 $ (11,899)
Elimination of amortization of goodwill, net of income tax -0- 437 -0- 1,310
Elimination of amortization of licenses and network affiliation
agreements, net of income tax -0- 2,321 -0- 6,964
---------- ---------- ---------- ----------
Adjusted net income (loss) before extraordinary charge and
cumulative effect of accounting change $ 3,117 $ (1,879) $ 6,068 $ (3,625)
========== ========== ========== ==========
Basic per share information:
Net income (loss) before extraordinary charge and cumulative
effect of accounting change available to common stockholders $ 0.15 $ (0.31) $ 0.03 $ (0.79)
Elimination of amortization of goodwill, net of income tax 0.00 0.03 0.00 0.08
Elimination of amortization of licenses and network
affiliation agreements, net of income tax 0.00 0.15 0.00 0.45
---------- ---------- ---------- ----------
Adjusted net income (loss) before extraordinary charge and
cumulative effect of accounting change available to common
stockholders $ 0.15 $ (0.13) $ 0.03 (0.26)
========== ========== ========== ==========
Basic weighted average shares outstanding 15,752 15,615 15,692 15,597
Diluted per share information:
Net income (loss) before extraordinary charge and cumulative
effect of accounting change available to common stockholders $ 0.14 $ (0.31) $ 0.03 $ (0.79)
Elimination of amortization of goodwill, net of income tax 0.00 0.03 0.00 0.08
Elimination of amortization of licenses and network
affiliation agreements, net of income tax 0.00 0.15 0.00 0.45
---------- ---------- ---------- ----------
Adjusted net income (loss) before extraordinary charge and
cumulative effect of accounting change available to common
stockholders $ 0.14 $ (0.13) $ 0.03 $ (0.26)
========== ========== ========== ==========
Diluted weighted average shares outstanding 16,027 15,615 16,022 15,597
NOTE E--INFORMATION ON BUSINESS SEGMENTS
13
NOTE E--INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
The Company operates in three business segments: broadcasting, publishing
and paging. As of September 30, 2002, the broadcasting segment operates 13
television stations located in the southern and mid-western United States. The
publishing segment operates four 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):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Operating revenues:
Broadcasting $ 29,535 $ 24,423 $ 84,541 $ 76,997
Publishing 10,858 10,138 32,074 30,065
Paging 2,116 2,205 6,199 6,610
--------- --------- --------- ---------
$ 42,509 $ 36,766 $ 122,814 $ 113,672
========= ========= ========= =========
Operating income:
Broadcasting $ 9,119 $ 632 $ 24,665 $ 6,145
Publishing 2,366 1,341 6,751 3,900
Paging 426 235 1,102 699
--------- --------- --------- ---------
Total operating income 11,911 2,208 32,518 10,744
Miscellaneous income (expense), net (41) (60) 55 38
Appreciation (depreciation) in value of derivatives, net 851 (424) 1,581 (1,385)
Interest expense 8,049 8,607 24,915 26,774
--------- --------- --------- ---------
Income (loss) before income taxes $ 4,672 $ (6,883) $ 9,239 $ (17,377)
========= ========= ========= =========
Media Cash Flow:
Broadcasting $ 12,971 $ 8,154 $ 36,263 $ 28,607
Publishing 3,110 2,195 8,989 6,539
Paging 762 820 2,111 2,434
--------- --------- --------- ---------
$ 16,843 $ 11,169 $ 47,363 $ 37,580
========= ========= ========= =========
Media Cash Flow reconciliation:
Operating income $ 11,911 $ 2,208 $ 32,518 $ 10,744
Add:
Amortization of program broadcast rights 1,383 1,433 4,044 4,158
Depreciation and amortization 3,632 7,923 11,065 23,620
Corporate overhead 1,169 833 3,285 2,662
Non-cash compensation and contributions to the Company's
401(k) plan, paid in common stock 179 155 546 505
Less:
Payments for program broadcast obligations (1,431) (1,383) (4,095) (4,109)
--------- --------- --------- ---------
Media Cash Flow $ 16,843 $ 11,169 $ 47,363 $ 37,580
========= ========= ========= =========
Operating income is total operating revenues less operating expenses,
excluding miscellaneous income and expense (net), appreciation (depreciation) in
value of derivatives, net and interest. Corporate and administrative expenses
are allocated to operating income based on net segment revenues.
NOTE F--PREFERRED STOCK
14
NOTE F--PREFERRED STOCK (CONTINUED)
On April 22, 2002, the Company issued $40 million (4,000 shares) of
redeemable and convertible preferred stock to a group of private investors. The
preferred stock was designated as Series C Preferred Stock and has a liquidation
value of $10,000 per share.
The Series C Preferred Stock is convertible into the Company's Class B
Common Stock at a conversion price of $14.39 per share subject to certain
adjustments. The Series C Preferred Stock will be redeemable at the Company's
option on or after April 22, 2007 and will be subject to mandatory redemption on
April 22, 2012 at liquidation value. Dividends on the Series C Preferred Stock
will accrue at 8% per annum until April 22, 2009 after which the dividend rate
shall be 8.5% per annum. Dividends, when declared by the Company's board of
directors may be paid at the Company's option in cash or additional shares of
Series C Preferred Stock.
As part of the transaction, holders of the Company's Series A and Series B
Preferred Stock have exchanged all of the outstanding shares of each respective
series, an aggregate fair value of approximately $8.6 million, for an equal
number of shares of the Series C Preferred Stock. The excess of the $8.6 million
liquidation value of the Series A and Series B Preferred Stock over its carrying
value of $4.6 million was charged to retained earnings upon the exchange in
April 2002. Upon closing this transaction, the Series C Preferred Stock is the
only currently outstanding preferred stock of the Company.
Net cash proceeds approximated $30.5 million, after transaction fees and
expenses and excluding the value of the Series A and Series B Preferred Stock
exchanged into the Series C Preferred Stock. The Company used the net cash
proceeds to repay all of the then current outstanding borrowings of $13.5
million under the Company's amended bank loan agreement and intends to use the
remaining net cash proceeds for other general corporate purposes.
NOTE G--INCOME TAXES
The Internal Revenue Service, which we refer to as the "IRS," is auditing
our federal tax returns for the years ended December 31, 1996 and 1998. In
conjunction with this examination, we extended the time period that the IRS has
to audit our federal tax returns for the 1996 and 1997 tax years until December
31, 2001.
In connection with an audit of our 1996 and 1998 federal income tax
returns, the IRS has asserted a deficiency in income taxes of $12.1 million,
plus related interest and penalties. The asserted deficiency relates principally
to our acquisition in 1996 of certain assets of First American Media, Inc. If
the IRS is successful in its claims, we would be required to account for the
1996 acquisition transaction as a stock purchase instead of an asset purchase
which would significantly lower the tax basis in the assets acquired. On January
18, 2002, we filed a petition in the United States Tax Court to contest this
deficiency, and we believe that we have a meritorious position with respect to
the issues related to the deficiency. We cannot be certain when, and if, this
matter will be resolved in our favor, and if it is not, we could incur negative
consequences in future years.
15
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. (formerly known as Gray Communications
Systems, 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, 2001.
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):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- -----------------------------------------
2002 2001 2002 2001
----------------- ----------------- ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ -------- ------ --------
BROADCASTING NET REVENUES:
Local $15,958 37.5% $14,657 39.9% $ 47,871 39.0% $ 45,458 40.0%
National 8,082 19.0 7,022 19.1 24,095 19.6 22,147 19.5
Network compensation 1,368 3.2 1,642 4.4 3,981 3.2 5,147 4.5
Political 3,211 7.6 85 0.2 5,399 4.4 212 0.2
Production and other 916 2.2 1,017 2.8 3,195 2.6 4,033 3.5
------- ----- ------- ----- -------- ----- -------- -----
$29,535 69.5% $24,423 66.4% $ 84,541 68.8% $ 76,997 67.7%
======= ===== ======= ===== ======== ===== ======== =====
PUBLISHING NET REVENUES:
Retail $ 5,258 12.4% $ 4,678 12.7% $ 15,660 12.8% $ 14,164 12.5%
Classified 3,310 7.8 3,299 9.0 9,605 7.8 9,470 8.3
Circulation 2,011 4.7 1,937 5.3 6,043 4.9 5,684 5.0
Other 278 0.6 224 0.6 766 0.7 747 0.7
------- ----- ------- ----- -------- ----- -------- -----
$10,857 25.5% $10,138 27.6% $ 32,074 26.2% $ 30,065 26.5%
======= ===== ======= ===== ======== ===== ======== =====
PAGING NET REVENUES:
Paging lease, sales and service $ 2,116 5.0% $ 2,205 6.0% $ 6,198 5.0% $ 6,610 5.8%
======= ===== ======= ===== ======== ===== ======== =====
TOTAL $42,508 100.0% $36,766 100.0% $122,813 100.0% $113,672 100.0%
======= ===== ======= ===== ======== ===== ======== =====
16
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Revenues. Total revenues for the three months ended September 30, 2002
increased 16% to $42.5 million as compared to the same period of the prior year.
- Broadcasting revenues increased 20.9% to $29.5 million. This
increase in broadcasting revenues reflects the cyclical increase in
political revenue. In the third quarter of 2002, the Company had
revenues from political advertising of $3.2 million compared to
$85,000 during the third quarter of 2001. Local and national
advertising revenue, excluding political revenues, increased 9% and
15%, respectively, from the same period of the prior year. These
increases in advertising revenues are due in part to an improving
economy. These increases were partially offset by a decrease in
network compensation and production and other revenue. The decrease
in network compensation reflected the ongoing phase out of network
compensation at certain of our television stations. Production and
other revenue decreased reflecting, in part, lower revenues from our
satellite uplink business.
- Publishing revenues increased 7% to $10.9 million. Retail
advertising revenue increased 12% and it was the primary reason for
the increase in publishing revenues. Circulation revenue increased
increased 4%. Classified advertising revenue was slightly higher
than that of the prior year. The increase in retail advertising
revenue was due largely to systematic account development, rate
increases and an improved economy. The increase in circulation was
due primarily to subscription price increases.
- Paging revenues decreased 4% to $2.1 million. The decrease was due
primarily to price competition and a reduction of units in service.
The Company had approximately 72,000 and 81,000 units in service at
September 30, 2002 and 2001, respectively. The decrease in the
number of units in service decreased due to increased competition
from other communication services.
Operating expenses. Operating expenses decreased 12% to $30.6 million due
primarily to the reduction in amortization of intangibles and lower depreciation
expense partially offset by increased broadcasting expenses and corporate
expenses.
- Broadcasting expenses increased 1% to $16.6 million. Other expenses
not associated with employee compensation or syndicated film costs
increased $459,000. This increase was partially offset by decreases
in employee compensation costs and syndicated film costs of $180,000
and 62,000, respectively.
- Publishing expenses decreased 2% to $7.8 million. Newsprint expenses
decreased $286,000 due to a decline in newsprint prices. This
decrease was offset by an increase in non-newsprint expenses of
$96,000.
- Paging expenses remained consistent with that of the prior year at
approximately $1.4 million.
- Corporate and administrative expenses increased 40% to $1.2 million
due to increased payroll-related costs and increased professional
fees.
- Depreciation of property and equipment and amortization of
intangible assets was $3.6 million for the three months ended
September 30, 2002, as compared to $7.9 million for the same period
of the prior year, a decrease of $4.3 million, or 54%. Depreciation
of property and equipment decreased 19% to $3.5 million. This
decrease can be attributed to certain assets becoming fully
depreciated in the fourth quarter of 2001. Effective January 1,
2002, the Company implemented the Statement of Financial Accounting
Standards No. 141, "Business Combinations", and No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). Under these new rules,
goodwill and intangible assets deemed to have indefinite lives will
no longer be amortized but will be subject to annual impairment
tests in accordance with these standards. In accordance with these
standards, amortization of intangibles decreased $3.5 million or 97%
from the third quarter of the prior year. Amortization expense of
$3.6 million was recorded in the three months ended September 30,
2001 for
17
goodwill and other intangibles that are no longer being amortized in
the three months ended September 30, 2002.
Appreciation (depreciation) in value of derivatives, net. The Company
records changes in market value of the interest rate swap agreement as income or
expense. Accordingly, the Company recognized income of $851,355 in the three
months ended September 30, 2002 and recognized depreciation expense of $424,117
for the three months ended September 30, 2001. In the prior year, depreciation
was experienced primarily due to decreasing market interest rates. In the
current year, market interest rates have remained low however as interest
payments on the swap agreement are made the remaining estimated liability has
decreased.
Interest expense. Interest expense decreased $558,000 to $8.0 million.
This decrease was due to lower interest rates partially offset by an increased
average debt balance.
Income tax expense (benefit). An income tax expense of $1.5 million was
recorded for the three months ended September 30, 2002 as compared to an income
tax benefit of $2.2 million for the three months ended September 30, 2001. The
recording of the expense in the current year as compared to the benefit in the
prior year was attributable to having income in the current period as compared
to a loss in the prior period.
Preferred dividends. Preferred dividends increased to $800,000 for the
three months ended September 30, 2002 as compared to $154,084 for the three
months ended September 30, 2001. The increase was due to the additional
outstanding preferred stock in the current quarter.
Net income (loss) available to common stockholders. Net income available
to common stockholders of the Company for the three months ended September 30,
2002 was $2.3 million as compared to a net loss available to common stockholders
of $4.8 million for the three months ended September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
Revenues. Total revenues for the nine months ended September 30, 2002
increased 8% to $122.8 million as compared to the same period of the prior year.
- Broadcasting revenues increased 10% to $84.5 million. This increase
in broadcasting revenues reflects the cyclical increase in political
revenue. In the nine months of 2002, the Company had revenues from
political advertising of $5.4 million compared to $212,000 during
the first nine months of 2001. Local and national advertising
revenue, excluding political revenues, increased 5% and 9%,
respectively. These increases in advertising revenues are due in
part to an improving economy. These increases were partially offset
by a decrease in network compensation and production and other
revenue. The decrease in network compensation reflected the ongoing
phase out of network compensation at certain of our television
stations. Production and other revenue decreased due in part to a
decrease in revenues from our satellite uplink business.
- Publishing revenues increased 7% to $32.1 million. This increase was
due to increases in retail advertising, classified advertising and
circulation revenue. Retail advertising revenue and classified
advertising revenue increased 11% and 1%, respectively. The
increases in retail and classified advertising were due largely to
systematic account development, rate increases and an improved
economy. Circulation revenue increased 6% due primarily to
subscription price increases.
- Paging revenues decreased 6% to $6.2 million. The decrease was due
primarily to price competition and a reduction of units in service.
The Company had approximately 72,000 and 81,000 units in service at
September 30, 2002 and 2001, respectively.
Operating expenses. Operating expenses for the nine months ended September
30, 2002 decreased 12% from the same period of the prior year to $90.3 million
due primarily to a decrease in broadcast expense, publishing expense,
amortization of intangibles and depreciation expense partially offset by
increased corporate expenses.
18
- Broadcasting expenses decreased less than 1% to $48.6 million. Other
expenses not associated with employee compensation or syndicated
film costs increased $437,000. This increase was partially offset by
decreases in employee compensation costs and syndicated film costs
of $501,000 and 119,000, respectively.
- Publishing expenses decreased 2% to $23.2 million. Newsprint
expenses decreased $699,000 due to a decline in newsprint prices.
This decrease was offset by an increase in non-newsprint expenses of
$270,000.
- Paging decreased 2% to $4.1 million due to primarily to decreased
employee compensation costs and decreased repairs and maintenance
costs.
- Corporate and administrative expenses increased 23% to $3.3 million
due to increased employee compensation costs and additional costs
associated with the acquisition of GMAT.
- Depreciation of property and equipment and amortization of
intangible assets was $11.1 million for the nine months ended
September 30, 2002, as compared to $23.6 million for the same period
of the prior year, a decrease of $12.6 million, or 53%. Depreciation
of property and equipment decreased $2.1 million or 17% from the
same period of the prior year. This decrease can be attributed to
certain assets becoming fully depreciated in the fourth quarter of
2001. Effective January 1, 2002, the Company implemented the
Statement of Financial Accounting Standards No. 141, "Business
Combinations", and No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). Under these new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will
be subject to annual impairment tests in accordance with these
standards. In accordance with these standards, amortization of
intangibles decreased $10.4 million or 97% from the same period of
the prior year. Amortization expense of $10.7 million was recorded
in the nine months ended September 30, 2001 for goodwill and other
intangibles that are no longer being amortized in the nine months
ended September 30, 2002.
Appreciation (depreciation) in value of derivatives, net. The Company
records changes in market value of the interest rate swap agreement as income or
expense. Accordingly, the Company recognized income associated with the
derivative of $1.6 million in the nine months ended September 30, 2002 and
recognized depreciation expense associated with the derivative of $1.4 million
for the nine months ended September 30, 2001. In the prior year, depreciation
was experienced primarily due to decreasing market interest rates. In the
current year, market interest rates have remained low however as interest
payments on the swap agreement are made the remaining estimated liability has
decreased.
Interest expense. Interest expense decreased 7% to $24.9 million. This
decrease was due to lower interest rates partially offset by higher average debt
balances.
Income tax expense (benefit). An income tax expense of $3.2 million was
recorded for the nine months ended September 30, 2002 as compared to an income
tax benefit of $5.5 million for the nine months ended September 30, 2001. The
recording of the expense in the current year as compared to the benefit in the
prior year was attributable to having income in the current period as compared
to a loss in the prior period.
Extraordinary charge on extinguishment of debt, net of income tax benefit.
On December 21, 2001, the Company completed its sale of $180 million aggregate
principal amount of its 9 1/4% Senior Subordinated Notes due 2011 (the "9 1/4%
Notes"). On this same date, the Company instructed the trustee for its 10?%
Senior Subordinated Notes due 2006 (the "10?% Notes") to commence the redemption
in full of the 10?% Notes. The net proceeds from the sale of the 9 1/4% Notes
was used for the redemption of the 10?% Notes. The redemption was completed on
January 22, 2002 and all obligations associated with the 10?% Notes were
extinguished on that date. The Company recorded an extraordinary charge of
approximately $11.3 million ($7.3 million after income tax) in the nine months
ended September 30, 2002 in connection with this early extinguishment of debt.
Cumulative effect of accounting change, net of income tax benefit. On
January 1, 2002, the Company adopted SFAS 142, which requires companies to stop
amortizing goodwill and certain intangible assets with an indefinite
19
useful life. Instead, SFAS 142 requires that goodwill and intangible assets
deemed to have an indefinite useful life be reviewed for impairment upon
adoption of SFAS 142 and annually thereafter. Under SFAS 142, goodwill
impairment is deemed to exist if the net book value of a reporting unit exceeds
its estimated fair value. As of January 1, 2002, the Company performed the first
of the required impairment tests of goodwill and indefinite lived intangible
assets. As a result of the required impairment test, in the quarter ended March
31, 2002, the Company recognized a non-cash impairment of goodwill and other
intangible assets of $39.5 million ($30.6 million net of income taxes). Such
charge is reflected as a cumulative effect of an accounting change in the
accompanying condensed consolidated statement of operations. In calculating the
impairment charge, the fair value of the reporting units underlying the segments
were estimated using a discounted cash flow methodology.
Preferred dividends and non-cash preferred dividends associated with
exchange of preferred stock. On April 22, 2002, the Company issued $40 million
(4,000 shares) of a redeemable and convertible preferred stock to a group of
private investors. As part of the transaction, holders of the Company's Series A
and Series B Preferred Stock exchanged all of the outstanding shares of each
respective series, an aggregate fair value of approximately $8.6 million, for an
equal number of shares of the Series C Preferred Stock. In connection with such
exchange, the Company recorded a non-cash constructive dividend of $4.0 million
during the nine months ended September 30, 2002. Preferred dividends increased
to $1.6 million for the nine months ended September 30, 2002 as compared to
$462,258 for the nine months ended September 30, 2001. The increase was due to
the additional outstanding preferred stock in the current year.
Net loss available to common stockholders. Net loss available to common
stockholders of the Company for the nine months ended September 30, 2002 and
September 30, 2001 was $37.4 million and $12.4 million, respectively.
GUIDANCE ON THE FOURTH QUARTER OF 2002
The acquisition of Gray MidAmerica Television, Inc. ("GMAT") on October
25, 2002 (as discussed below in Liquidity and Capital Resources), will be
accounted for under the purchase method of accounting. Under this method, the
results of operations of GMAT will be included in the Company's results of
operations from the date of acquisition and forward. Unless otherwise stated,
these estimates do not include the results of KOLO-TV(discussed below in
Liquidity and Capital Resources).
For the fourth quarter of 2002 including the results of operations of GMAT
from October 25, 2002, the Company anticipates that total net revenues will
range between approximately $70.0 million and $71.5 million. We believe total
Media Cash Flow will range between approximately $29 million and $30.0 million
and that total Operating Cash Flow for the fourth quarter of 2002 will range
between approximately $27.0 million and $28.0 million. We also believe our
broadcast net revenues for the fourth quarter of 2002 will range between $57
million and $58 million and broadcast Media Cash Flow will range between
approximately $26 million and $27 million. Included in the estimates above, we
believe that the newly acquired stations of GMAT will contribute approximately
$23 million of broadcast net revenue and $10.5 million of broadcast Media Cash
Flow in the fourth quarter of 2002. The Company (including GMAT) estimates that
it will earn approximately $10.5 million in political advertising revenue during
the fourth quarter of 2002.
The Company estimates fourth quarter 2002 publishing revenues will exceed
the results of the fourth quarter of 2001 by approximately 1% with a
corresponding increase in publishing Media Cash Flow of approximately 3% over
the results of the fourth quarter of 2001. We currently believe our publishing
revenues for full year 2002 compared to 2001 will increase by approximately 4%
and publishing Media Cash Flow will increase by approximately 25% over full year
2001 results.
On a pro forma basis, assuming that the acquisition of GMAT and the
pending acquisition of KOLO-TV had been completed on January 1, 2002, the
Company anticipates that the total pro forma net revenues for the year ended
December 31, 2002 would have ranged between $296 million and $298 million and
that the related total Operating Cash Flow would have ranged between $110
million and $112 million. Also on a pro forma basis, the Company would have
earned approximately $22 million in political revenue for the year ended
December 31, 2002. Previous guidance as released by the Company on September 27,
2002, anticipated that the total pro forma net revenues for the year ended
December 31, 2002 would have ranged between $290 million and $295 million and
that the related total Operating Cash Flow would have ranged between $109
million and $111 million.
20
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).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -----------------
2002 2001 2002 2001
-------- -------- ------- -------
Media Cash Flow:
Broadcasting $ 12,971 $ 8,154 $36,263 $28,607
Publishing 3,110 2,195 8,989 6,539
Paging 762 820 2,111 2,434
-------- -------- ------- -------
$ 16,843 $ 11,169 $47,363 $37,580
Corporate overhead 1,169 833 3,285 2,662
-------- -------- ------- -------
Operating cash flow $ 15,674 $ 10,336 $44,078 $34,918
Less:
Interest expense, excluding amortization of
deferred loan costs and bond discounts 7,636 8,221 23,724 25,617
Preferred dividends declared payable in cash 800 154 1,603 462
Common dividends declared payable in cash 315 312 943 937
Capital expenditures 3,253 2,603 11,386 5,200
-------- -------- ------- -------
$ 3,670 $ (954) $ 6,422 $ 2,702
======== ======== ======= =======
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Cash and cash equivalents $ 19,090 $ 558
Restricted cash for redemption of long-term debt -0- 168,557
Long-term debt including current portion 378,806 551,444
Preferred stock 39,156 4,637
Available credit under senior credit agreement 37,500 32,500
Letter of credit issued under senior credit agreement $ 12,500 $ -0-
The Company has included Media Cash Flow, Operating Cash Flow and certain
related calculations because such data is commonly used as a measure of
performance for media companies and is also used by investors to measure a
company's ability to service debt. Media Cash Flow, Operating Cash Flow and
certain related calculations are 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 condensed consolidated financial statements. Media Cash Flow,
Operating Cash Flow and certain related calculations are not measures 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. For a
reconciliation of media cash flow to operating income, see Note E of the notes
to the condensed consolidated financial statements of the Company included in
Part I of this quarterly report.
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,
2002, the Company anticipates, for federal and certain state income taxes, that
it will generate taxable operating losses for the foreseeable future.
Management believes that current cash balances, cash flows from operations
and available funds under its senior credit agreement will be adequate to
provide for the Company's capital expenditures, debt service, cash dividends and
working capital requirements for the forseeable future.
21
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.
Pending Acquisition of KOLO-TV
On September 4, 2002, Gray announced that it had signed a definitive
purchase agreement to acquire certain assets and assume certain liabilities of
KOLO-TV from Smith Television Group, Inc. The purchase price for KOLO-TV is
$41.5 million. The Company intends to finance this transaction by utilizing cash
on hand and, to the extent necessary, borrowings under the Company's revolving
credit facility.
Acquisition of Gray MidAmerica Television
On October 25, 2002, Gray completed its acquisition of Stations Holding
Company, Inc. ("Stations Holding"). Gray acquired Stations Holding by merging
Gray's newly formed wholly owned subsidiary, Gray MidAmerica Television, Inc.
with and into Stations Holding. The newly acquired subsidiary is referred to as
Gray MidAmerica Television or "GMAT." Prior to the merger, GMAT owned and
operated 15 network affiliated broadcast television stations.
Aggregate consideration paid or assumed was approximately $513.4 million
which included a base purchase price of $502.5 million, transaction expenses of
approximately $7.0 million and certain net working capital adjustments of $3.9
million. Gray funded the acquisition by issuing 30,000,000 shares of Gray Common
Stock (NYSE ticker: GTN) to the public for proceeds, net of underwriting fees,
of approximately $231.7 million, with additional borrowings of $275.0 million
under its amended bank loan agreement and with cash on hand.
For advisory services rendered by Bull Run Corporation, Inc., a principal
investor, in connection with the merger, the Company paid to Bull Run an
advisory fee of $5.0 million on June 10, 2002. This amount is included in the
fees described above.
Issuance of Additional Senior Subordinated Notes
On September 16, 2002, Gray completed the sale of $100 million principal
amount of senior subordinated notes (the "Notes"). The coupon on the Notes was 9
1/4% and the Notes were issued at par. These Notes are in addition to the $180
million principal amount of Gray's 9 1/4% Senior Subordinated Notes due 2011
that were issued on December 21, 2001. The Notes were issued under the same
indenture and have the same terms. They form a single series with Gray's
existing notes. The Notes were offered pursuant to Gray's existing effective
shelf registration statement. Gray used the net proceeds of this offering
primarily to repay $100 million of borrowings under its amended bank loan
agreement, without a corresponding reduction in the credit commitment under the
facility. The Company incurred approximately $3.4 million in underwriting costs
and other fees associated with the issuance of the additional $100 million of
senior subordinated notes.
Amendment of Bank Loan Agreement
In connection with the acquisition GMAT, Gray entered into an amended bank
loan agreement on October 25, 2002 with a group of lenders. The primary
modifications to the loan agreement effected by the amendment were an increase
in committed available credit and a decrease in interest rates. Under the
amended loan agreement, committed available credit increased from $250.0 million
to $450.0 million. Prior to the amendment, the loan agreement consisted of a
$50.0 million revolving facility and a $200.0 million term facility. The
revolving facility was increased to $75.0 million and the term facility was
increased to $375.0 million. The Company expects to record an extraordinary
charge of approximately $5.6 million (approximately $3.6 million after income
tax) in the fourth quarter of 2002 in connection with this early extinguishment
of debt.
After the GMAT acquisition, Gray had $375.0 million outstanding under the
amended bank loan agreement with $75 million remaining available. The effective
interest rate on this balance after the acquisition was 4.8%.
22
At September 30, 2002, the balance outstanding and the balance available
under the Company's amended bank loan agreement were $100.0 million and $37.5
million, respectively, and the effective interest rate on the balance
outstanding was 5.1%. Also as of September 30, 2002, the Company had established
a $12.5 million letter of credit in connection with the acquisition of GMAT. The
Company cancelled the letter of credit subsequent to the completion of the
acquisition on October 25, 2002. At September 30, 2001, the balance outstanding
and the balance available under the Company's amended bank loan agreement were
$210.0 million and $40.0 million, respectively, and the effective interest rate
on the balance outstanding was 5.9%.
In connection with the amendment to the bank loan agreement, Gray incurred
approximately $5.6 million in additional financing costs. These financing costs
were funded through borrowings under the amended bank loan agreement.
Issuance of 30,000,000 Shares of Additional Gray Common Stock
On October 22, 2002, the Company issued and sold an additional 30,000,000
shares of Gray Common Stock to the public for gross proceeds of $247.5 million.
The Company incurred an underwriting fee of $14.9 million and additional costs
of approximately $1.0 million in connection with the offering. The net proceeds
of the offering were used as a portion of the financing needed to complete the
acquisition of GMAT.
Issuance of Series C Preferred Stock
On April 22, 2002, the Company issued $40 million (4,000 shares) of
redeemable and convertible preferred stock to a group of private investors. The
preferred stock was designated as Series C Preferred Stock and has a liquidation
value of $10,000 per share.
The Series C Preferred Stock is convertible into the Company's Class B
Common Stock at a conversion price of $14.39 per share subject to certain
adjustments. The Series C Preferred Stock will be redeemable at the Company's
option on or after April 22, 2007 and will be subject to mandatory redemption on
April 22, 2012 at liquidation value. Dividends on the Series C Preferred Stock
will accrue at 8% per annum until April 22, 2009 after which the dividend rate
shall be 8.5% per annum. Dividends, when declared by the Company's board of
directors may be paid at the Company's option in cash or additional shares of
Series C Preferred Stock.
As part of the transaction, holders of the Company's Series A and Series B
Preferred Stock have exchanged all of the outstanding shares of each respective
series, an aggregate fair value of approximately $8.6 million, for an equal
number of shares of the Series C Preferred Stock. The excess of the $8.6 million
liquidation value of the Series A and Series B Preferred Stock over its carrying
value of $4.6 million was charged to retained earnings upon the exchange in
April 2002. Upon closing this transaction, the Series C Preferred Stock is the
only currently outstanding preferred stock of the Company.
Net cash proceeds approximated $30.6 million, after transaction fees and
expenses and excluding the value of the Series A and Series B Preferred Stock
exchanged into the Series C Preferred Stock. The Company used the net cash
proceeds to repay all current outstanding borrowings of $13.5 million under the
Company's revolving credit facility and intends to use the remaining net cash
proceeds for other general corporate purposes.
Digital Television Conversion
As of November 14, 2002, the Company is currently broadcasting a digital
signal at 8 of its 28 stations including the stations acquired in the GMAT
acquisition. The Company currently intends to have all such required
installations completed as soon as practicable. Currently the FCC requires that
all stations be operational by May of 2002. As necessary, the Company has
requested and received approval from the FCC to extend the May 2002 deadline by
six months for all of the Company's remaining stations that are not currently
broadcasting in digital. Given the
23
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.
As of September 30, 2002, the Company has paid in cash during 2002
approximately $8.1 million toward the cost of digital television broadcast
systems. The Company currently anticipates an additional $23.5 million of cash
payments for equipment and services to be paid at various times throughout the
remainder of 2002, 2003 and 2004.
Internal Revenue Service Audit
The Internal Revenue Service, which we refer to as the "IRS," is
auditing our federal tax returns for the years ended December 31, 1996 and 1998.
In conjunction with this examination, we extended the time period that the IRS
has to audit our federal tax returns for the 1996 and 1997 tax years until
December 31, 2001.
In connection with an audit of our 1996 and 1998 federal income tax
returns, the IRS has asserted a deficiency in income taxes of $12.1 million,
plus related interest and penalties. The asserted deficiency relates principally
to our acquisition in 1996 of certain assets of First American Media, Inc. If
the IRS is successful in its claims, we would be required to account for the
1996 acquisition transaction as a stock purchase instead of an asset purchase
which would significantly lower the tax basis in the assets acquired. On January
18, 2002, we filed a petition in the United States Tax Court to contest this
deficiency, and we believe that we have a meritorious position with respect to
the issues related to the deficiency. We cannot be certain when, and if, this
matter will be resolved in our favor, and if it is not, we could incur negative
consequences in future years.
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."
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, the statements
included in this report under the heading "Guidance on the Fourth Quarter of
2002" are 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) high debt levels. 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 September 30, 2002 has not materially changed since December
31, 2002. The market risk profile on December 31, 2002 is disclosed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of 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. 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. Subsequent to this
evaluation, there were
24
no significant changes in the Company's internal controls or in other factors
that could significantly affect the disclosure controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the 2002 Annual Meeting of Shareholders
of the Company, on September 16, 2002, and votes were cast as indicated.
(a) The amendment of the Company's articles of incorporation to increase the
number of authorized shares of Gray Common Stock from 15,000,000
authorized shares to 50,000,000 authorized shares was approved as follows:
Class A Votes Common Stock Votes
--------------------------------- -------------------------------
For Against Abstain For Against Abstain
---------- --------- ------- ---------- ------- -------
50,810,200 6,122,560 8,150 5,110,488 654,058 36,818
(b) The amendment of the Company's articles of incorporation to rename the
Gray Class B Common Stock as Gray Common Stock was approved as follows:
Class A Votes Common Stock Votes
--------------------------------- -------------------------------
For Against Abstain For Against Abstain
---------- --------- ------- ---------- ------- -------
62,919,530 481,370 10,500 7,776,017 8,506 38,318
(c) The following directors were elected:
Class A Votes Common Stock Votes
-------------------------- -------------------------
Nominee For Withhold For Withhold
---------- --------- --------- --------
Richard L. Boger 61,035,570 2,375,840 7,701,863 120,978
Ray M. Deaver 61,035,570 2,375,840 7,701,963 120,878
Hilton H. Howell, Jr 61,035,350 2,376,060 7,701,932 120,909
William E. Mayher, III 61,035,570 2,375,840 7,701,932 120,909
Howell W. Newton 61,035,570 2,375,840 7,701,932 120,909
Hugh Norton 61,035,570 2,375,840 7,701,463 121,378
Robert S. Prather, Jr 58,184,040 5,227,370 7,514,509 308,332
Harriett J. Robinson 61,009,350 2,402,060 7,701,432 121,409
J. Mack Robinson 58,175,040 5,236,370 7,514,378 308,463
(c) The Gray Television, Inc. 2002 Long Term Incentive Plan was approved as
follows:
Class A Votes Common Stock Votes
--------------------------------- -------------------------------
For Against Abstain For Against Abstain
---------- --------- ------- ---------- ------- -------
47,077,880 8,866,010 953,020 4,837,566 921,589 42,209
(d) The issuance of shares of Gray Series C convertible preferred stock was
ratified as follows:
Class A Votes Common Stock Votes
--------------------------------- -------------------------------
For Against Abstain For Against Abstain
---------- --------- ------- ---------- ------- -------
57,287,890 356,330 369,420 5,728,789 35,633 36,942
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
On November 8, 2002, the Company filed a current report on Form 8-K where
it reported that on October 25, 2002 it had completed its acquisition of
Stations Holding Co.
On October 17, 2002, the Company filed a current report on Form 8-K where
it filed as exhibits certain underwriting agreements, certain legal
opinions and certain accountant's consents.
On September 30, 2002, the Company filed a current report on Form 8-K
where it issued a news release which announced that it was raising
guidance estimates.
On September 30, 2002, the Company filed a current report on Form 8-K
where it issued a news release which announced that it planned to commence
a public offering of 27,500,000 shares of its Common Stock (ticker GTN),
plus up to 4,125,000 shares to cover over-allotments, if any.
On September 27, 2002, the Company filed a current report on Form 8-K
where it filed as exhibits a form of lockup agreement, certain legal
opinions and certain accountant's consents.
On September 9, 2002, the Company filed a current report on Form 8-K where
it filed as exhibits a form of supplemental indenture, certain legal
opinions and certain accountant's consents.
On September 4, 2002, the Company filed a current report on Form 8-K where
it filed as exhibits a certain underwriting agreement, a form of
indenture, certain legal opinions and certain accountant's consents.
26
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 TELEVISION, INC.
(Registrant)
Date: November 14, 2002 By: /s/ James C. Ryan
----------------- -------------------------------------------
James C. Ryan,
Vice President and Chief Financial Officer
27
CERTIFICATION
I, J. Mack Robinson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gray Television,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report was prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ J. Mack Robinson
----------------------------
J. Mack Robinson
Chief Executive Officer
(Principal Executive Officer)
28
CERTIFICATION
I, James C. Ryan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gray Television,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report was prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ James C. Ryan
-------------------------------
James C. Ryan
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
29