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Gray: Unaudited Pro Forma Condensed Combined Financial Information

The following excerpt is from the company's SEC filing.

The following unaudited pro forma condensed combined financial statements of Gray Television Inc. (“

” or the “

Company

”) give effect to the Company’s previously announced February 16, 2016 acquisition of the television and radio broadcast assets of Schurz Communications, Inc. (“

”) for an adjusted purchase price of $443.4 million plus transaction related expenses (the “

Schurz Acquisition

”), and the Related Transactions, and the Divestiture of Radio (each as described below). In connection with the Schurz Acquisition, the Company (i) sold a television station on each of F ebruary 1, 2016 and February 16, 2016 and acquired a television station on each of February 1, 2016 and February 16, 2016 to facilitate regulatory approvals for the Schurz Acquisition (collectively, the “

”) and (ii) divested the Schurz radio stations to three radio broadcasters on February 16, 2016 (the “

The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2015 and the year ended December 31, 2014 were prepared based on the historical: (i) condensed consolidated statements of operations of the Company; and (ii) condensed combined statements of income of Schurz, giving pro forma effect to the Schurz Acquisition, the Related Transactions, and the Divestiture of Radio as if they had all been consummated on January 1, 2014. The unaudited pro forma condensed combined balance sheet was prepared based on the historical: (i) condensed consolidated balance sheet

of the Company and (ii) condensed combined balance sheet of

Schurz, each as of September 30, 2015, giving pro forma effect to the Schurz Acquisition, the Related Transactions, and the Divestiture of Radio

as if they had all been consummated on September 30, 2015.

Unaudited Pro Forma Condensed Combined Financial Statement Considerations

The following unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting, with Gray considered the acquirer of the stations obtained from Schurz and via the Related Transactions.

Under the acquisition method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition, with any excess purchase price allocated to goodwill. To date, Gray has completed only a preliminary allocation of the purchase price to the assets acquired and liabilities assumed in the Schurz Acquisition and Related Transactions, and is in the process of completing a final allocation of such purchase price. The final purchase price allocation may differ from that reflected in the following unaudited pro forma condensed combined financial statements, and these differences may be material.

Gray has incurred significant costs, and expects to achieve certain revenue and other synergies in connection with the completion of the Schurz Acquisition and Related Transactions and the integration of the acquired operations. The following unaudited pro forma condensed combined financial statements do not reflect the costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies, or any revenue, tax or other synergies expected to result from the Schurz Acquisition.

The following unaudited pro forma condensed combined financial information is being provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations of Gray would have been had the Schurz Acquisition and Related Transactions occurred on the date assumed or any other date, nor is it necessarily indicative of Gray’s future results of operations. The following unaudited pro forma condensed combined financial information is based upon currently available information and estimates and assumptions that Gray management believes are reasonable as of the date hereof. Any of the factors underlying these estimates and assumptions may change or prove to be materially different.

The following unaudited pro forma condensed combined financial information should be read in conjunction with the unaudited interim historical consolidated financial statements as of and for the nine month period ended September 30, 2015 and the audited historical consolidated financial statements as of and for the year ended December 31, 2014 of Gray, which have been filed with the Securities and Exchange Commission (“

”), and the unaudited interim historical combined financial statements as of and for the nine month period ended September 30, 2015 and the audited historical combined financial statements as of and for the year ended December 31, 2014 of Schurz, which are incorporated by reference in this Current Report on Form 8-K/A.

GRAY TELEVISION, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Nine Months Ended September 30, 2015

Schurz (a)

Transactions (b)

of Radio (c)

Adjustments

Revenues (less agency commissions)

427,869

100,528

(10,836

(9,481

508,080

Operating expenses before depreciation,

amortization and (gain) loss on disposal

of assets, net:

Broadcast

272,213

75,373

(10,932

(8,072

328,582

Corporate and administrative

23,313

5,108

(5,569

22,852

Depreciation and amortization

35,621

9,707

(2,301

2,989

45,687

Loss (gain) on disposal of assets, net

1,130

331,709

90,799

(13,269

(8,408

(2,580

398,251

Operating income (loss)

96,160

9,729

2,433

(1,073

2,580

109,829

Other income (expense):

Miscellaneous income (expense), net

Interest (expense) income

(55,762

(11,002

1,811

1,531

(7,975

(71,397

Income (loss) before income taxes

40,500

(1,294

4,263

(5,395

38,477

Income tax expense (benefit)

16,186

15,391

Net income (loss)

24,314

(4,600

23,086

Basic per share information:

Net income available to stockholders

Weighted average shares outstanding

67,215

Diluted per share information:

67,824

508,134

152,279

(14,672

(14,067

631,674

amortization and loss (gain) on disposal

285,990

101,427

(13,806

(11,753

361,858

29,203

5,949

(5,949

38,545

11,365

(2,841

5,224

51,858

1,326

354,361

119,446

(16,649

(12,188

444,245

153,773

32,833

1,977

(1,879

187,429

(68,913

(13,065

2,342

2,039

(12,598

(90,195

Loss from early extinguishment of debt

(5,086

79,797

19,763

4,345

(11,873

92,388

31,736

5,034

36,770

48,061

(16,907

55,618

57,862

58,364

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

(in thousands)

Schurz (h)

Transactions (i)

of Radio (j)

ASSETS

Current assets:

Cash and cash equivalents

81,169

1,247

11,453

(19,009

74,196

Receivables, net

110,812

21,063

(2,557

(1,871

127,447

Other current assets

36,136

7,470

42,989

Total current assets

228,117

29,780

8,436

(2,692

244,632

Property and equipment, net

229,384

105,125

(30,848

(4,183

25,340

324,818

Deferred loan costs, net

16,252

8,205

24,457

Broadcast licenses

1,058,250

57,753

(7,999

175,034

1,282,484

Goodwill

398,235

48,635

32,390

(2,508

(17,091

459,661

Other intangible assets, net

51,084

12,274

2,202

8,103

70,822

Other assets

110,756

24,743

(19,164

115,751

Total assets

2,092,078

278,310

11,065

(20,246

161,418

2,522,625

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

4,380

2,845

6,766

Accrued expenses

71,883

9,940

80,022

Current portion of program broadcast obligations

13,144

3,606

16,423

Deferred revenue

2,248

Current portion of long term debt

Total current liabilities

91,655

17,143

(1,348

(1,239

105,459

Long term debt, less current portion

1,235,753

295,778

(48,387

(42,998

220,607

1,660,753

Deferred income taxes

313,511

Other long term liabilities

33,921

15,341

(14,683

34,119

Total liabilities

1,674,840

328,262

(49,930

(58,920

219,590

2,113,842

417,238

(49,952

60,995

38,674

(58,172

408,783

Total liabilities and stockholders' equity

NOTES TO UNAUDITED PRO FORMA CONDENSED

COMBINED FINANCIAL statements

The accompanying unaudited pro forma condensed combined financial statements present the pro forma results of operations of Gray based upon the historical financial statements of each of Gray and Schurz, after giving effect to the Schurz Acquisition, the Related Transactions and the Divestiture of Radio

, and is intended to reflect their impact on Gray’s historical consolidated results of operations. The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2015 combines the historical consolidated statements of operations of Gray with the historical condensed combined statements of income of

Schurz, also giving effect to the Related Transactions and the Divestiture of Radio, as if all of such transactions had occurred as of January 1, 2014. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2014 combines the historical consolidated statements of operations of Gray with the historical condensed combined statements of income of

Schurz, also giving effect to the Related Transactions and the Divestiture of Radio, as if all of such transactions had occurred as of January 1, 2014. The unaudited pro forma condensed combined balance sheet as of September 30, 2015 combines the historical consolidated balance sheet of Gray with the historical condensed combined balance sheet of

Schurz also giving effect to the Related Transactions and the Divestiture of Radio, as if all of such transactions had occurred as of September 30, 2015. The accompanying unaudited pro forma condensed combined financial information has been prepared using, and should be read in conjunction with, the unaudited interim consolidated financial statements of Gray and the unaudited interim condensed combined financial statements of Schurz as of and for the nine month period ended September 30, 2015, and the audited consolidated financial statements of Gray and the audited condensed combined financial statements of Schurz for their fiscal years ended December 31, 2014.

The accompanying unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not reflect the costs of any integration activities or benefits that may result from realization of future costs savings due to operating efficiencies or revenue synergies expected to result from the Schurz Acquisition and Related Transactions.

The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting with Gray considered the acquirer of the stations obtained from Schurz and via the Related Transactions. The following adjustments are reflected:

The unaudited historical combined financial information of Schurz has been adjusted to reflect certain reclassifications in order to conform to Gray’s financial statement presentation. Specifically, Schurz operating expense was allocated among three line items: broadcast operating expenses; corporate and administrative operating expenses; and loss (gain) on disposal of assets, net. Schurz depreciation expense and amortization expense were combined into a single line. Schurz interest expense – on debt due to parent and interest expense were combined into a single line item. Schurz other expense (income) was renamed miscellaneous income (expense), net. Such adjustments had no impact on combined historical amounts.

Adjustments to reflect the addition or elimination, as applicable, of the results of operations of the stations purchased (WBXX in Knoxville, Tennessee on February 1, 2016 and WLUC in Marquette, Michigan on February 16, 2016), and sold (KAKE in Wichita, Kansas on February 1, 2016 and WSBT in South Bend, Indiana on February 16, 2016) in the Related Transactions.

Adjustments to reflect the elimination of the results of operations of the Divestiture of Radio from Schurz’s historical financial statements, as such assets were not retained by Gray.

For the nine month period ended September 30, 2015, an adjustment to eliminate $0.5 million in legal and other professional fees related to the Schurz Acquisition which were incurred by Gray, and an adjustment to eliminate $5.1 million of corporate administrative expense which had been allocated to Schurz television stations from Schurz’s parent company and will not recur under Gray ownership. Such corporate assets were not acquired and related costs were not assumed by Gray. For the year ended December 31, 2014, an adjustment to eliminate $5.9 million of corporate administrative expense which had been allocated to Schurz television stations from Schurz’s parent company and will not recur under Gray ownership.

Adjustments to depreciation and amortization expense of stations acquired and retained by Gray in the Schurz Acquisition. The adjustment replaces historical depreciation and amortization expense for these stations with depreciation and amortization expense calculated using Gray’s preliminary fair value estimates for assets acquired and useful lives for those assets in accordance with Gray’s depreciation and amortization policies as follows (in thousands):

Prior depreciation

(5,736

(6,644

Prior amortization

New depreciation

7,057

9,409

New amortization

2,577

3,436

Net adjustment

The following table reconciles the base purchase price for the Schurz Acquisition to the amount allocated, on a preliminary basis, to the estimated fair values of the assets acquired and retained as well as liabilities assumed and retained in the Schurz Acquisition (

Base purchase price

442,500

Purchase price adjustment

Adjusted purchase price

443,448

Less: consideration received for Divestiture of Radio

(16,000

Net purchase price

427,448

The following table summarizes the preliminary allocation of the net purchase price to (i) the estimated fair values of the assets acquired and liabilities assumed in the Schurz Acquisition and (ii) the non-cash exchange of WSBT for WLUC which was included in the Related Transactions (in thousands):

Accounts receivable

19,317

3,030

Property and equipment

97,804

Broadcast licenses

231,391

Goodwill

61,371

Other intangible assets

19,738

Other assets

3,430

Current liabilities

(8,202

Long term broadcast obligations

The preliminary allocation of the purchase price is based upon management’s estimate of fair values using valuation techniques including the income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.

Property and equipment will be depreciated over their estimated useful lives ranging from 3 years to 40 years.

The amount related to other intangible assets represents the estimated fair values of retransmission agreements of $15.1 million; advertising contracts of $0.4 million; advertising relationships of $1.6 million; and favorable leases of $2.6 million. These intangible assets are being amortized over their estimated useful lives of approximately 4.9 years for retransmission agreements; approximately 2

.0 years for advertising contracts; approximately 5.5 years for advertising relationships; and approximately 9.6 years for leases

Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed, and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, as well as future synergies that we expect to generate from the Schurz Acquisition. We have preliminarily recorded $61.4 million of goodwill in connection with the Schurz Acquisition, all of which we expect to be deductible for income tax purposes.

The fair values of assets acquired and liabilities assumed were based upon preliminary valuations and the estimates and assumptions are subject to change within the measurement period as additional information is obtained. A decrease in the fair value of the assets acquired or liabilities assumed in the Schurz Acquisition from the preliminary valuations presented would result in a dollar-for-dollar corresponding increase in the amount of goodwill resulting from the Schurz Acquisition. In addition, if the value of the property and equipment and other intangible assets is higher than the amount included in these unaudited pro forma condensed combined financial statements, it may result in higher depreciation and amortization expense than is presented herein. Any such increases could be material, and could result in the Company’s actual future financial condition or results of operations differing materially from that presented herein.

In connection with the completion of the Schurz Acquisition, the Company, as borrower, and the other parties thereto entered into the Second Amendment and Incremental Facility Agreement to the Company’s Second Amended and Restated Credit Agreement, dated as of June 13, 2014, with Wells Fargo Bank, National Association, as Administrative Agent and the lenders party thereto

(the “Credit Agreement”). On February 16, 2016, the Company borrowed $425.0 million under the Credit Agreement at an effective interest rate of 4.25%, and used borrowings thereunder to pay the purchase price to complete the Schurz Acquisition and to pay related fees and expenses. As a consequence of this incremental borrowing, the effective interest rate on Gray’s existing balance under the Credit Agreement increased from 3.75% to 3.9375%. Adjustments reflect:

the elimination of interest expense of $7.6 million and $8.7 million for the nine months ended September 30, 2015 and the year ended December 31, 2014, respectively, in each case relating to credit facilities for the Schurz stations which Gray did not assume;

the inclusion of incremental interest expense of $14.5 million and $19.8 million for the nine months ended September 30, 2015 and the year ended December 31, 2014, respectively, in each case relating to the amounts outstanding under the Credit Agreement; and

amortization expense of $1.1 million and $1.5 million for the nine months ended September 30, 2015 and the year ended December 31, 2014, respectively, in each case relating to the deferred financing charges incurred in connection with this amendment to the Credit Agreement.

Adjustments to reflect income tax benefit of $0.8 million for the nine months ended September 30, 2015 and income tax expense of $5.9 million for the year ended December 31, 2014, resulting from the Schurz Acquisition, the Related Transactions, the Divestiture of Radio and pro forma adjustments to the condensed combined statements of operations based on estimated combined federal and state effective income tax rates of 40.0% and 39.8% for the nine months ended September 30, 2015 and the year ended December 31, 2014, respectively.

The audited historical combined financial information of Schurz has been adjusted to reflect certain reclassifications in order to conform to Gray’s financial statement presentation. Specifically, intangible assets – net was allocated among broadcast licenses and other intangibles, net. Accounts receivable, less allowance for doubtful accounts $503, and $635 was renamed receivables, net. Prepaid expenses and other current assets, and Current portion of television program rights were combined into other current assets. Due from parent and television program rights – less current portion, and other assets were combined into other assets. Accrued expenses and unexpired subscriptions and deposits were combined into accrued expenses and deferred revenue. Long-term debt – due to parent and long-term debt – less current portion were combined into long term debt, less current portion. Other liabilities, supplemental deferred compensation plan and other nonqualified benefit plans were combined into other long term liabilities. Parent’s equity in broadcast was renamed stockholders’ equity. Such adjustments had no impact on combined historical amounts.

Reflects:

elimination of the historical book value of the assets and liabilities of television stations KAKE in Wichita, Kansas and WSBT in South Bend, Indiana included in the Gray and Schurz historical financial information, respectively, which were divested as part of the Related Transactions; and

inclusion of the assets and liabilities at fair value of additional television stations WBXX in Knoxville, Tennessee and WLUC in Marquette, Michigan, which Gray acquired from third parties as part of the Related Transactions.

Reflects the elimination of asset and liability balances associated with the Divestiture of Radio. These balances are included in Schurz historical financial information.

Adjustments to Gray’s cash on hand, as a result of the use of $18.2 million of cash on hand to fund in part deal expenses and the purchase price required to complete the

Schurz Acquisition, and adjustments to opening balances of acquired stations to exclude $0.6 million in cash which was not included in the purchased assets.

Adjustment to reflect the value of property and equipment acquired at preliminary estimated fair values as follows (in thousands):

Historical Book Value

Preliminary Estimated Fair

Value at Acquisition Date

9,359

9,267

Buildings and improvements

41,829

36,458

Equipment

75,779

48,022

126,967

93,747

Accumulated depreciation

(58,560

68,407

Adjustments to include incremental deferred loan costs. As noted in (f) above, the Company, in connection with the completion of the Schurz Acquisition borrowed $425.0 million under the Credit Agreement and, as a consequence, incurred $8.2 million in deferred financing costs which will be amortized over the life of the Credit Agreement.

Adjustments to reflect the preliminary estimated fair value of broadcast licenses acquired.

Adjustments to reflect the incremental value of goodwill (calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed) acquired.

Adjustments to reflect the net incremental value of other intangible assets acquired from Schurz. The historical net book value of the other intangible assets associated with these acquired stations was adjusted to the appraised fair value of these licenses as of the acquisition date.

Adjustments to the opening balances of stations acquired from Schurz to exclude certain assets and liabilities which were not acquired or assumed.

Adjustments to reflect incremental debt incurred. See note (f).

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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Other recent filings from the company include the following:

Regulation FD - April 15, 2016
Statement of acquisition of beneficial ownership by individuals - April 11, 2016
Gray Television director just disposed of 7,000 shares - April 7, 2016