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 June 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________ .
Commission File Number 1-13796
Gray Communications Systems, Inc.
-------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-0285030
------------------------------- ------------------------------
(State or other jurisdiction
of (I.R.S. Employer
incorporation or organization) Identification Number)
4370 Peachtree Road, NE, Atlanta, Georgia 30319
-------------------------------------------------
(Address of principal executive offices)
(Zip code)
(404) 504-9828
-------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class A Common Stock (No Par Class B Common Stock (No Par
Value) Value)
- --------------------------------- -------------------------------
6,832,042 shares as of 5,144,393 shares as of
August 4, 1999 August 4, 1999
<PAGE>
INDEX
- -----
GRAY COMMUNICATIONS SYSTEMS, INC.
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Financial Statements
Condensed consolidated balance sheets - June 30, 1999 3
(Unaudited), and December 31, 1998
Condensed consolidated statements of operations 5
(Unaudited) - Three months ended June 30, 1999 and 1998;
Six months ended June 30, 1999 and 1998
Condensed consolidated statement of stockholders' 6
equity (Unaudited) - Six months ended June 30, 1999
Condensed consolidated statements of cash flows 7
(Unaudited) - Six months ended June 30, 1999 and 1998
Notes to condensed consolidated financial statements 8
(Unaudited) - June 30, 1999
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES
- ----------
2
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
----------- --------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 5,084,986 $ 1,886,723
Trade accounts receivable, less allowance for
doubtful accounts of $1,239,000 and
$1,212,000, respectively 22,794,918 22,859,119
Recoverable income taxes 1,586,515 1,725,535
Inventories 877,689 1,191,284
Current portion of program broadcast rights 1,206,179 3,226,359
Other current assets 1,013,609 741,007
----------- -----------
Total current assets 32,563,896 31,630,027
PROPERTY AND EQUIPMENT:
Land 2,456,020 2,196,021
Buildings and improvements 13,555,417 12,812,112
Equipment 70,878,159 65,226,835
----------- -----------
86,889,596 80,234,968
Allowance for depreciation (34,005,075) (28,463,460)
----------- -----------
52,884,521 51,771,508
OTHER ASSETS:
Deferred loan costs 7,691,525 8,235,432
Goodwill and other intangibles:
Licenses and network affiliation agreements 342,021,586 346,433,820
Goodwill 40,836,795 28,766,950
Consulting and noncompete agreements 2,116,783 814,202
Other 2,712,607 1,322,483
----------- -----------
395,379,296 385,572,887
----------- -----------
$480,827,713 $468,974,422
============ ============
See notes to condensed consolidated financial statements.
3
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
June 30, December 31,
1999 1998
----------- --------------
(Unaudited)
CURRENT LIABILITIES:
Trade accounts payable (includes $0 and
$880,000 payable to Bull Run Corporation,
respectively) $ 804,580 $ 2,540,770
Employee compensation and benefits 4,717,646 5,195,777
Accrued expenses 2,310,503 1,903,226
Accrued interest 5,049,157 5,608,134
Current portion of program broadcast obligations 1,027,539 3,070,598
Deferred revenue 3,247,597 2,632,564
Current portion of long-term debt 385,000 430,000
----------- -----------
Total current liabilities 17,542,022 21,381,069
LONG-TERM DEBT 291,286,715 270,225,255
OTHER LONG-TERM LIABILITIES:
Program broadcast obligations, less current
portion 416,685 735,594
Supplemental employee benefits 1,052,384 1,128,204
Deferred income taxes 43,119,641 44,147,642
Other acquisition related liabilities 4,227,595 4,653,788
----------- -----------
48,816,305 50,665,228
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Serial Preferred Stock, no par value; authorized
20,000,000 shares; issued and outstanding 1,350
shares, respectively ($13,500,000 aggregate
liquidation value, respectively) 13,500,000 13,500,000
Class A Common Stock, no par value; authorized
15,000,000 shares; issued 7,961,574 shares,
respectively 10,683,709 10,683,709
Class B Common Stock, no par value; authorized
15,000,000 shares; issued 5,273,046 shares,
respectively 66,866,468 66,792,385
Retained earnings 42,112,478 45,737,601
----------- -----------
133,162,655 136,713,695
Treasury Stock at cost, Class A Common Stock,
1,129,532 shares, respectively (8,578,682) (8,578,682)
Treasury Stock at cost, Class B Common Stock,
128,653 and 135,080 shares, respectively (1,401,302) (1,432,143)
----------- -----------
123,182,671 126,702,870
----------- -----------
$480,827,713 $468,974,422
============ ============
See notes to condensed consolidated financial statements.
4
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Broadcasting (net of agency
commissions) $23,137,952 $22,689,990 $44,305,992 $42,201,054
Publishing 9,535,608 7,379,114 17,557,661 13,916,449
Paging 2,355,609 1,991,407 4,557,586 3,924,873
---------- ---------- ---------- ----------
35,029,169 32,060,511 66,421,239 60,042,376
EXPENSES
Broadcasting 13,684,523 12,661,021 26,673,047 24,779,408
Publishing 7,355,448 5,983,435 13,710,070 11,440,940
Paging 1,724,483 1,327,495 3,238,128 2,583,100
Corporate and administrative 940,644 656,449 1,687,150 1,316,929
Depreciation and amortization 5,663,547 4,221,723 11,119,364 7,843,307
---------- ---------- ---------- ----------
29,368,645 24,850,123 56,427,759 47,963,684
---------- ---------- ---------- ----------
5,660,524 7,210,388 9,993,480 12,078,692
Miscellaneous income (expense), net 34,613 (73,209) 456,361 (314,276)
---------- ---------- ---------- ----------
5,695,137 7,137,179 10,449,841 11,764,416
Interest expense 7,004,508 6,039,258 13,774,671 11,966,739
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES(1,309,371) 1,097,921 (3,324,830) (202,323)
Income tax expense (benefit) (229,000) 260,814 (684,000) 443,377
---------- ---------- ---------- ----------
NET INCOME(LOSS) (1,080,371) 837,107 (2,640,830) (645,700)
Preferred Dividends 252,501 358,998 505,002 717,996
---------- ---------- ---------- ----------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $(1,332,872) $ 478,109 $(3,145,832)$(1,363,696)
=========== ========== ========== ==========
AVERAGE OUTSTANDING COMMON SHARES:
Basic 11,966,489 11,916,754 11,960,572 11,898,798
Stock compensation awards -0- 599,413 -0- -0-
---------- ---------- ---------- ----------
Diluted 11,966,489 12,516,167 11,960,572 11,898,798
=========== ========== ========== ==========
BASIC EARNINGS (LOSS) PER COMMON
SHARE:
Net income (loss) available
to common stockholders $ (0.11) $ 0.04 $ (0.26) $(0.11)
========== ========== ========== ==========
DILUTED EARNINGS (LOSS) PER COMMON
SHARE:
Net income (loss) available
to common stockholders $ (0.11) $ 0.04 $ (0.26) $(0.11)
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
Preferred Class A Class B
Stock Common Stock Common Stock
---------------------- ------------------------- ------------------------ Retained
Shares Amount Shares Amount Shares Amount Earnings
------- -------------- ----------- ------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 1,350 $ 13,500,000 7,961,574 $ 10,683,709 5,273,046 $ 66,792,385 $ 45,737,601
Net loss for the six months ended
June 30, 1999 (2,640,830)
Common stock dividends ($.04
per share) (479,291)
Preferred stock dividends (505,002)
Issuance of treasury stock:
401 (k) plan 74,083
Purchase of Class B
Common Stock
------- -------------- ----------- ------------- ---------- ------------- -------------
Balance at June 30, 1999 1,350 $ 13,500,000 7,961,574 $ 10,683,709 5,273,046 $ 66,866,468 $ 42,112,478
======= ============== =========== ============= ========== ============= =============
Class A Class B
Treasury Stock Treasury Stock
------------------------- ----------------------
Shares Amount Shares Amount Total
----------- ------------- --------- ----------- ------------
Balance at December 31, 1998 (1,129,532) $ (8,578,682) (135,080) $(1,432,143) $126,702,870
Net loss for the
six months ended
June 30, 1999 (2,640,830)
Common stock dividends ($.04
per share) (479,291)
Preferred stock dividends (505,002)
Issuance of treasury stock:
401 (k) plan 26,427 287,845 361,928
Purchase of Class B
Common Stock (20,000) (257,004) (257,004)
----------- ------------- --------- ----------- ------------
Balance at June 30, 1999 (1,129,532) $ (8,578,682) (128,653) $(1,401,302) $123,182,671
=========== ============= ========= =========== ============
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1999 1998
------------ ------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(2,640,830) $ (645,700)
Items which did not use (provide) cash:
Depreciation 5,772,877 4,175,981
Amortization of intangible assets 5,346,487 3,667,326
Amortization of deferred loan costs 574,282 541,723
Amortization of program broadcast rights 2,400,745 1,899,189
Payments for program broadcast rights (2,430,524) (1,954,588)
Supplemental employee benefits (75,820) (154,657)
Common Stock contributed to 401(k) Plan 361,928 241,761
Deferred income taxes (1,028,001) 68,686
(Gain) loss on disposal of assets (331,157) 348,310
Changes in operating assets and liabilities:
Receivables, inventories and other current assets 715,870 (1,012,774)
Accounts payable and other current liabilities (2,199,854) 1,260,198
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,466,003 8,435,455
INVESTING ACTIVITIES
Purchase of newspaper business (16,512,231) -0-
Purchase of FCC license -0- (829,600)
Purchases of property and equipment (4,499,224) (5,766,160)
Deferred acquisition costs (1,190,978) (200,745)
Payments on purchase liabilities (584,098) (269,018)
Deferred costs associated with the exchange of
television station -0- (859,534)
Proceeds from asset sales -0- 182,421
Other 41,504 (241,707)
------ --------
NET CASH USED IN INVESTING ACTIVITIES (22,745,027) (7,984,343)
FINANCING ACTIVITIES
Dividends paid (1,251,794) (717,400)
Class A Common Stock transactions -0- 27,564
Class B Common Stock transactions -0- 26,326
Purchase of treasury stock (257,004) (311,063)
Sale of treasury stock -0- 1,070,272
Proceeds from borrowings of long-term debt 36,200,000 10,200,000
Payments on long-term debt (15,183,540) (10,374,923)
Deferred loan costs (30,375) -0-
---------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 19,477,287 (79,224)
---------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 3,198,263 371,888
Cash and cash equivalents at beginning of period 1,886,723 2,367,300
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,084,986 $2,739,188
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Gray Communications Systems, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. 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, 1998.
NOTE B--BUSINESS ACQUISITIONS
On April 14, 1999, the Company announced that it had entered into agreements
to acquire the CBS affiliates KWTX-TV ("KWTX") located in Waco, Texas and
KBTX-TV ("KBTX"), a satellite station of KWTX located in Bryan, Texas, each
serving the Waco-Temple-Bryan, Texas television market. In addition, the Company
has agreed to acquire KXII-TV ("KXII"), which is the CBS affiliate serving
Sherman, Texas and Ada, Oklahoma. These transactions are referred to herein as
the "Texas Acquisition." Aggregate consideration for the Texas Acquisition will
be approximately $139 million before payment for certain net working capital
amounts and other fees and expenses. The Company will acquire the assets of KWTX
and KBTX in merger transactions with the KWTX and KBTX shareholders receiving a
combination of cash and the Company's Class B Common Stock for their shares. The
Company will acquire KXII in an all cash transaction. The Texas Acquisition is
subject to a number of conditions, including the approval by the shareholders of
the Company. Approval for the Texas Transaction was granted by the Federal
Communications Commission (the "FCC") during the second quarter of 1999. The
Company currently believes that the Texas Transaction will close on October 1,
1999.
NOTE C--LONG-TERM DEBT
The Company's bank loan agreement (the "Senior Credit Facility") provides
for $200.0 million of committed credit and $100.0 million of uncommitted credit.
The Company can borrow the $100.0 million in uncommitted available credit only
after approval of the bank consortium. At June 30, 1999, the balance outstanding
and the balance available under the $200.0 million committed portion of the
Senior Credit Facility were $130.7 million and $69.3 million, respectively, and
the interest rate on the balance outstanding was 7.01%. At June 30, 1999, the
bank consortium had not committed, nor had the Company borrowed, any funds under
the uncommitted $100.0 million portion of the Senior Credit Facility.
NOTE D--INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: broadcasting, publishing
and paging. The broadcasting segment operates ten television stations located in
the southeastern and mid-western United States at June 30, 1999. The publishing
segment operates four daily newspapers in three different markets, and an area
weekly advertising only publication in Georgia. The paging operations are
located in Florida, Georgia, and Alabama. The following tables present certain
financial information concerning the Company's three operating segments:
8
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
NOTE D--INFORMATION ON BUSINESS SEGMENTS (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Operating revenues:
Broadcasting $23,138 $22,690 $44,306 $42,201
Publishing 9,536 7,379 17,558 13,916
Paging 2,355 1,991 4,557 3,925
------- ------- -------- --------
$35,029 $32,060 $66,421 $60,042
======= ======= ======== ========
Operating income:
Broadcasting $ 4,269 $ 6,317 $ 7,389 $10,181
Publishing 1,291 701 2,323 1,486
Paging 101 192 282 412
--- --- --- ---
Total operating income 5,661 7,210 9,994 12,079
Miscellaneous income and
(expense), net 35 (73) 456 (314)
Interest expense 7,005 6,039 13,775 11,967
------- ------- -------- --------
Income (loss) before income
taxes $(1,309) $ 1,098 $(3,325) $ (202)
======= ======= ======== ========
Operating income is total operating revenues less operating expenses,
excluding miscellaneous income and expense (net) and interest. Corporate and
administrative expenses are allocated to operating income based on net segment
revenues.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
(in thousands)
Media Cash Flow:
Broadcasting $ 9,584 $10,118 $17,881 $17,546
Publishing 2,211 1,416 3,901 2,513
Paging 637 670 1,336 1,357
------- ------- -------- --------
12,432 12,204 23,118 21,416
======= ======= ======== ========
Media Cash Flow reconciliation:
Operating income $ 5,661 $ 7,210 $ 9,994 $12,079
Add:
Amortization of program
broadcast rights 1,198 959 2,401 1,899
Depreciation and
amortization 5,664 4,221 11,119 7,843
Corporate overhead 940 658 1,687 1,317
Non-cash compensation and
contributions to the
Company's 401(k) plan,
paid in common stock 209 115 348 233
Less:
Payments for program
broadcast obligations (1,240) (959) (2,431) (1,955)
------- ------- -------- --------
Media Cash Flow $12,432 $12,204 $23,118 $21,416
======= ======= ======== ========
</TABLE>
9
<PAGE>
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
NOTE D--INFORMATION ON BUSINESS SEGMENTS (Continued)
"Media Cash Flow" is defined as operating income, plus depreciation and
amortization (including amortization of program broadcast rights), non-cash
compensation and corporate overhead, less payments for program broadcast
obligations. The Company has included Media Cash Flow data because such data are
commonly used as a measure of performance for media companies and are also used
by investors to measure a company's ability to service debt. Media Cash Flow is
not, and should not be used as, an indicator or alternative to operating income,
net income or cash flow as reflected in the Company's financial statements.
Media Cash Flow is not a measure of financial performance under generally
accepted accounting principles and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Introduction
The following analysis of the financial condition and results of operations
of Gray Communications Systems, Inc. (the "Company") should be read in
conjunction with the Company's unaudited Condensed Consolidated Financial
Statements and notes thereto included elsewhere herein.
On March 1, 1999, the Company acquired substantially all of the assets of
The Goshen News (the "Goshen Acquisition") for aggregate cash consideration of
approximately $16.7 million. The Goshen News is a 17,000 circulation afternoon
newspaper serving Goshen, Indiana and surrounding areas. The Company financed
the acquisition through borrowings under its bank loan agreement (the "Senior
Credit Facility").
On July 31, 1998, the Company completed the purchase of all of the
outstanding capital stock of Busse Broadcasting Corporation ("Busse"). The
purchase price was $126.6 million, less the accreted value of Busse's 11 5/8 %
Senior Secured Notes due 2000. The purchase price of the capital stock consisted
of the contractual purchase price of $112.0 million, associated transaction
costs of $3.9 million, acquisition costs associated with Busse's 11 5/8 % Senior
Secured Notes due 2000 of $5.1 million, and Busse's cash and cash equivalents of
$5.6 million. Immediately prior to the Company's acquisition of Busse, Cosmos
Broadcasting Corporation acquired the assets of WEAU-TV ("WEAU") from Busse and
exchanged them for the assets of WALB-TV, Inc. ("WALB"), the Company's NBC
affiliate in Albany, Georgia. In exchange for the assets of WALB, the Company
received the assets of WEAU, which were valued at $66.0 million, and
approximately $12.0 million in cash for a total value of $78.0 million. The
Company recognized a pre-tax gain of approximately $70.6 million and estimated
deferred income taxes of approximately $27.5 million in connection with the
exchange of WALB. As a result of these transactions, the Company added the
following television stations to its existing broadcasting group:
KOLN-TV("KOLN"), the CBS affiliate serving the Lincoln-Hastings-Kearney,
Nebraska market; its satellite station KGIN-TV ("KGIN"), the CBS affiliate
serving Grand Island, Nebraska; and WEAU, an NBC affiliate serving the La
Crosse-Eau Claire, Wisconsin market. These transactions also satisfied the
Federal Communications Commission's (the "FCC") requirement for the Company to
divest itself of WALB.
The Company recognizes revenue from three sources: broadcasting, publishing
and paging. Broadcasting revenue is generated primarily from the sale of
television advertising time. Publishing revenue is generated primarily from
circulation revenue and advertising revenue. Paging revenue is generated
primarily from the sale of pagers and paging services. Advertising revenue is
billed to the customer and recognized when the advertisement is aired or
published. The Company bills its customers in advance for newspaper
subscriptions and paging services and the related revenues are recognized over
the period the service is provided on the straight-line basis. Revenue from the
sale of pagers is recognized at the time of sale.
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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Broadcasting, Publishing and Paging Revenues
- ---------------------------------------------
Set forth below are the principal types of broadcasting, publishing and
paging revenues earned by the Company's broadcasting, publishing and paging
operations for the periods indicated and the percentage contribution of each to
the Company's total revenues:
Three Months Ended June 30,
-------------------------------------------------------
1999 1998
-------------------------- --------------------------
Percent of Percent of
Amount Total Amount Total
------------ ------------ ------------ ------------
(dollars in thousands)
Broadcasting
Net revenues:
Local $ 13,378 38.2% $ 11,167 34.8%
National 6,917 19.8 6,530 20.4
Network compensation 1,442 4.1 1,358 4.2
Political 140 0.4 1,992 6.2
Production and other 1,261 3.6 1,643 5.2
-------- ------- --------- -------
$ 23,138 66.1% $22,690 70.8%
========= ======= ========= =======
Publishing
Net revenues:
Retail $ 4,302 12.3% $ 3,447 10.8%
Classified 3,189 9.0 2,413 7.5
Circulation 1,736 5.0 1,340 4.2
Other 309 0.9 179 0.5
-------- ------- --------- -------
$ 9,536 27.2% $ 7,379 23.0%
========= ======= ========= =======
Paging
Net revenues:
Paging lease, sales
and service $ 2,355 6.7% $ 1,991 6.2%
========= ======= ========= =======
Total $ 35,029 100.0% $ 32,060 100.0%
========= ======= ========= =======
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Broadcasting, Publishing and Paging Revenues (Continued)
- --------------------------------------------------------
Six Months Ended June 30,
-------------------------------------------------------
1999 1998
-------------------------- --------------------------
Percent of Percent of
Amount Total Amount Total
------------ ------------ ------------ ------------
(dollars in thousands)
Broadcasting
Net revenues:
Local $ 25,902 39.0% $ 22,065 36.7%
National 12,420 18.7 12,100 20.2
Network compensation 2,838 4.3 2,573 4.3
Political 189 0.3 2,185 3.6
Production and other 2,957 4.4 3,278 5.5
-------- ------- --------- -------
$ 44,306 66.7% $ 42,201 70.3%
========= ======= ========= =======
Publishing
Net revenues:
Retail $ 7,984 12.0% $ 6,424 10.7%
Classified 5,743 8.6 4,498 7.5
Circulation 3,238 4.9 2,619 4.4
Other 593 0.9 375 0.6
-------- ------- --------- -------
$ 17,558 26.4% $ 13,916 23.2%
========= ======= ========= =======
Paging
Net revenues:
Paging lease, sales
and service $ 4,557 6.9% 3,925 6.5%
========= ======= ========= =======
Total $ 66,421 100.0% $ 60,042 100.0%
======== ======= ========= =======
Three Months Ended June 30, 1999 compared to Three Months Ended June 30, 1998
REVENUES. Total revenues for the three months ended June 30, 1999 increased
$3.0 million, or 9.3%, over the same period of the prior year, to $35.0 million
from $32.1 million. This increase was primarily attributable to (i) revenues
resulting from the acquisition of KOLN, KGIN and WEAU (the "Busse Stations")
which were purchased on July 31, 1998, (ii) increased publishing revenues and
(iii) increased paging revenues, offset in part by a decrease in revenues due to
the disposition on July 31, 1998 of WALB.
Broadcasting revenues increased $448,000, or 2.0%, over the same period of
the prior year, to $23.1 million from $22.7 million. The acquisition of the
Busse Stations accounted for an increase of $5.0 million. This increase was
partially offset by a decrease in revenues of $3.2 million resulting from the
sale of WALB and by a decrease in political advertising revenue of $1.5 million.
On a pro forma basis, assuming the acquisition of the Busse Stations had been
effective on January 1, 1998, broadcasting revenues for the Busse Stations for
the three months ended June 30, 1999 decreased $446,000, or 8.1%, to $5.0
million from $5.5 million, when compared to the same period of the prior year.
The $446,000 decrease in revenue of the Busse Stations was primarily
attributable to a decrease in political revenue of $381,000. Broadcasting
revenues, excluding the results of the Busse Stations and WALB, decreased $1.4
million, or 7.0%, over the same period of the prior year, to $18.1 million from
$19.5 million. This decrease was due primarily to decreased political
advertising revenue of $1.5 million.
Publishing revenues increased $2.1 million, or 29.2%, over the same period
of the prior year, to $9.5 million from $7.4 million. The increase in publishing
revenues was due primarily to increased revenues from the
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Three Months Ended June 30, 1999 compared to Three Months Ended June 30, 1998
(Continued)
Company's existing publishing operations and from the revenues provided by The
Goshen News which was acquired on March 1, 1999. Revenues from the Company's
existing publishing operations increased $718,000, or 9.7%, over the same period
of the prior year, to $8.1 million from $7.4 million. The primary components of
the $718,000 increase in revenues from existing operations were increases in
retail advertising and classified advertising revenues of $232,000 and $379,000,
respectively. The Goshen News had revenues of $1.4 million for the three months
ended June 30, 1999.
Paging revenues increased $364,000, or 18.3%, over the same period of the
prior year, to $2.3 million from $2.0 million. The increase was attributable
primarily to an increase in the number of pagers in service. The Company had
approximately 87,000 pagers and 78,500 pagers in service at June 30, 1999 and
1998, respectively.
OPERATING EXPENSES. Operating expenses for the three months ended June 30,
1999 increased $4.5 million, or 18.2%, over the same period of the prior year,
to $29.4 million from $24.9 million, due primarily to increased broadcasting
expenses, publishing expenses, paging expenses, depreciation expense, and
amortization expense.
Broadcasting expenses increased $1.0 million, or 8.0%, over the three months
ended June 30, 1999, to $13.7 million from $12.7 million. The acquisition of the
Busse Stations accounted for an increase of $2.4 million. This increase was
partially offset by a decrease in expenses of $1.3 million resulting from the
sale of WALB. On a pro forma basis, assuming the acquisition of the Busse
Stations had been effective on January 1, 1998, broadcasting expenses for the
Busse Stations for the three months ended June 30, 1999 increased $254,000, or
11.7%, to $2.4 million from $2.2 million. Broadcasting expenses, excluding the
results of the Busse Stations and WALB, decreased $140,000, or 1.2 %, over the
same period of the prior year, to $11.2 million from $11.3 million.
Publishing expenses for the three months ended June 30, 1999 increased $1.4
million, or 22.9%, from the same period of the prior year, to $7.4 million from
$6.0 million. The increase in publishing expenses was due primarily to increased
expenses from the Company's existing publishing operations and from the expenses
of The Goshen News. Expenses of the Company's existing publishing operations
increased $357,000, or 6.0%, over the same period of the prior year, to $6.3
million from $6.0 million. The increase in expenses of the Company's existing
publishing operations was due primarily to payroll and transportation costs
associated with increased circulation at one of the Company's daily newspapers.
The Goshen News recorded expenses of $1.0 million for the three months ended
June 30, 1999.
Paging expenses increased $397,000, or 30.1%, over the same period of the
prior year, to $1.7 million from $1.3 million. The increase was attributable
primarily to an increase in costs associated with expansion of the Company's
coverage area.
Corporate and administrative expenses increased $284,000, or 43.3%, to
$940,000 for the three months ended June 30, 1999 from $656,000 for the three
months ended June 30, 1998. The increase was due primarily to increased payroll
expense and other operating expenses.
Depreciation of property and equipment and amortization of intangible assets
was $5.7 million for the three months ended June 30, 1999, as compared to $4.2
million for the same period of the prior year, an increase of $1.5 million, or
34.2%. This increase was primarily the result of higher depreciation and
amortization costs related to the acquisition of the Busse Stations and The
Goshen News.
MISCELLANEOUS INCOME (EXPENSE). Miscellaneous income for the three months
ended June 30, 1999 was $34,000 and miscellaneous expense for the three months
ended June 30, 1998 was $73,000. The change in miscellaneous income (expense) of
$107,000 was due primarily to lower losses on disposal of property in the
current year as compared to that of the prior year.
INTEREST EXPENSE. Interest expense increased $1.0 million, or 16.0%, to $7.0
million for the three months ended June 30, 1999 from $6.0 million for the three
months ended June 30, 1998. This increase was attributable primarily
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Three Months Ended June 30, 1999 compared to Three Months Ended June 30, 1998
(Continued)
to increased levels of debt resulting from the financing of the acquisitions of
the Busse Stations and The Goshen News.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit for the three months ended
June 30, 1999 was $229,000 and income tax expense for the three months ended
June 30, 1998 was $260,000. The decrease in income tax expense of $489,000 was
due primarily to the recognition of a net loss before tax in the current year as
compared to net income before tax recognized in the prior year.
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS. Net loss available to
common stockholders of the Company was $1.3 million for the three months ended
June 30, 1999 as compared to net income available to common stockholders of the
Company of $479,000 for the three months ended June 30, 1998, a decrease of $1.8
million.
Six Months Ended June 30, 1999 compared to Six Months Ended June 30, 1998
REVENUES. Total revenues for the six months ended June 30, 1999 increased
$6.4 million, or 10.6%, over the same period of the prior year, to $66.4 million
from $60.0 million. This increase was primarily attributable to (i) revenues
resulting from the acquisition of the Busse Stations which were purchased on
July 31, 1998, (ii) increased publishing revenues and (iii) increased paging
revenues, offset in part by a decrease in revenues due to the disposition on
July 31, 1998 of WALB.
Broadcasting revenues increased $2.1 million, or 5.0%, over the same period
of the prior year, to $44.3 million from $42.2 million. The acquisition of the
Busse Stations accounted for an increase of $9.6 million. This increase was
partially offset by a decrease in revenues of $5.7 million resulting from the
sale of WALB and by a decrease in political advertising revenue. On a pro forma
basis, assuming the acquisition of the Busse Stations had been effective on
January 1, 1998, broadcasting revenues for the Busse Stations for the six months
ended June 30, 1999 decreased $637,000, or 6.2%, when compared to the same
period of the prior year to $9.6 million from $10.2 million. The $637,000
decrease in revenue of the Busse Stations was primarily attributable to a
decrease in political revenue of $501,000. Broadcasting revenues, excluding the
results of the Busse Stations and WALB, decreased $1.8 million, or 5.0%, over
the same period of the prior year, to $34.7 million from $36.5 million. This
decrease was due primarily to decreased political advertising revenue of $1.7
million.
Publishing revenues increased $3.6 million, or 26.2%, over the same period
of the prior year, to $17.6 million from $13.9 million. The increase in
publishing revenues was due primarily to increased revenues from the Company's
existing publishing operations and from the revenues provided by The Goshen News
which was acquired on March 1, 1999. Revenues from the Company's existing
publishing operations increased $1.7 million, or 12.0%, over the same period of
the prior year, to $15.6 million from $13.9 million. The primary components of
the $1.7 million increase in revenues from existing operations were increases in
retail advertising, classified advertising and circulation revenue of $698,000,
$731,000 and $199,000, respectively. The Goshen News had revenues of $2.0
million from the date of its purchase through June 30, 1999.
Paging revenues increased $632,000, or 16.1%, over the same period of the
prior year, to $4.6 million from $3.9 million. The increase was attributable
primarily to an increase in the number of pagers in service. The Company had
approximately 87,000 pagers and 78,500 pagers in service at June 30, 1999 and
1998, respectively.
OPERATING EXPENSES. Operating expenses for the six months ended June 30,
1999 increased $8.5 million, or 17.6%, over the same period of the prior year,
to $56.4 million from $48.0 million, due primarily to increased broadcasting
expenses, publishing expenses, paging expenses, depreciation expense and
amortization expense.
Broadcasting expenses increased $1.9 million, or 7.6%, over the six months
ended June 30, 1999, to $26.7 million from $24.8 million. The acquisition of the
Busse Stations accounted for an increase of $4.7 million. This
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
(CONTINUED)
increase was partially offset by a decrease in expenses of $2.4 million
resulting from the sale of WALB. On a pro forma basis, assuming the acquisition
of the Busse Stations had been effective on January 1, 1998, broadcasting
expenses of $4.7 million for the Busse Stations for the six months ended June
30, 1999 were slightly higher than the $4.4 million experienced in the prior
year. Broadcasting expenses, excluding the results of the Busse Stations and
WALB, decreased $431,000, or 1.9%, to $22.0 million from $22.4 million. This
decrease was due primarily to decreases in payroll and other expenses of
$307,000 and $386,000, respectively, partially offset by an increase in
syndicated film costs of $213,000.
Publishing expenses for the six months ended June 30, 1999 increased $2.3
million, or 19.8%, from the same period of the prior year, to $13.7 million from
$11.4 million. The increase in publishing expenses was due primarily to
increased expenses from the Company's existing publishing operations and from
the expenses of The Goshen News. Expenses of the Company's existing publishing
operations increased $908,000, or 7.9%, over the same period of the prior year,
to $12.3 million from $11.4 million. The increase in expenses of the Company's
existing publishing operations was due primarily to payroll and transportation
costs associated with increased circulation at one of the Company's daily
newspapers. The Goshen News recorded expenses of $1.4 million for the six months
ended June 30, 1999.
Paging expenses increased $655,000, or 25.5%, over the same period of the
prior year, to $3.2 million from $2.6 million. The increase was attributable
primarily to an increase in the number of pagers in service.
Corporate and administrative expenses increased $370,000, or 28.4%, to $1.7
million for the six months ended June 30, 1999 from $1.3 million for the six
months ended June 30, 1998. The increase was due primarily to increased payroll
expense and other operating expenses.
Depreciation of property and equipment and amortization of intangible assets
was $11.1 million for the six months ended June 30, 1999, as compared to $7.8
million for the same period of the prior year, an increase of $3.3 million, or
41.8%. This increase was primarily the result of higher depreciation and
amortization costs related to the acquisition of the Busse Stations and The
Goshen News.
MISCELLANEOUS INCOME (EXPENSE). Miscellaneous income for the six months
ended June 30, 1999 was $456,000 and miscellaneous expense for the six months
ended June 30, 1998 was $314,000. The change in miscellaneous income (expense)
of $770,000 was due primarily to the gain of $450,000 recognized upon the sale
of one of the Company's weekly advertising publications in February 1999.
INTEREST EXPENSE. Interest expense increased $1.8 million, or 15.1%, to
$13.8 million for the six months ended June 30, 1999 from $12.0 million for the
six months ended June 30, 1998. This increase was attributable primarily to
increased levels of debt resulting from the financing of the acquisitions of the
Busse Stations and The Goshen News.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit for the six months ended
June 30, 1999 was $684,000 and income tax expense for the six months ended June
30, 1998 was $443,000. The decrease in income tax expense of $1.1 million was
due primarily to the recognition of a net loss before tax in the current year as
compared to net income before tax recognized in the prior year.
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS. Net loss available to common
stockholders of the Company was $3.1 million and $1.4 million for the six months
ended June 30, 1999 and 1998, respectively, an increase of $1.8 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's bank loan agreement, (the "Senior Credit Facility") provides
for $200.0 million of committed credit and $100.0 million of uncommitted credit.
The Company can borrow the $100.0 million in uncommitted
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
available credit only after approval of the bank consortium. At June 30, 1999,
the balance outstanding and the balance available under the $200.0 million
portion of the Senior Credit Facility were $130.7 million and $69.3 million,
respectively, and the interest rate on the balance outstanding was 7.01%. At
June 30, 1999, the bank consortium had not committed, nor had the Company
borrowed, any funds under the uncommitted $100.0 million portion of the Senior
Credit Facility.
The Company's working capital was $15.0 million and $10.2 million at June
30, 1999 and December 31, 1998, respectively. The Company's cash provided from
operations was $6.5 million and $8.4 million for the six months ended June 30,
1999 and 1998, respectively.
The Company's cash used in investing activities was $22.7 million and $8.0
million for the six months ended June, 1999 and 1998, respectively. The
increased usage of $14.7 million from 1998 to 1999 was primarily due to the
Goshen Acquisition.
The Company's cash provided by financing activities was $19.5 million for
the six months ended June 30, 1999 and the cash used in financing activities was
$79,000 for the same period of the prior year. The increase in cash provided by
financing activities resulted from increased borrowings under the Senior Credit
Facility, primarily to fund the Goshen Acquisition.
During the six months ended June 30, 1999, the Company issued 26,427 shares
of Class B Common Stock from treasury to fulfill obligations under its employee
benefit plan. The Company also purchased 20,000 shares of Class B Common Stock
for $257,004 during the six months ended June 30, 1999.
The Company regularly enters into program contracts for the right to
broadcast television programs produced by others and program commitments for the
right to broadcast programs in the future. Such programming commitments are
generally made to replace expiring or canceled program rights. Payments under
such contracts are made in cash or the concession of advertising spots for the
program provider to resell, or a combination of both. During the six months
ended June 30, 1999, the Company paid $2.4 million for such program broadcast
rights.
The Company and its subsidiaries file a consolidated federal income tax
return and such state or local tax returns as are required. As of June 30, 1999,
the Company anticipates that it will generate operating losses for the
foreseeable future.
On April 14, 1999, the Company announced that it had entered into agreements
to acquire the CBS affiliates KWTX-TV ("KWTX") located in Waco, Texas and
KBTX-TV ("KBTX"), a satellite station of KWTX located in Bryan, Texas. In
addition, the Company has agreed to acquire KXII-TV ("KXII"), which is the CBS
affiliate serving Sherman, Texas and Ada, Oklahoma. These transactions are
referred to herein as the "Texas Acquisition." Aggregate consideration for the
Texas Acquisition will be approximately $139 million before payment for certain
net working capital amounts and other fees and expenses. The aggregate
consideration for KWTX and KBTX will be $97.5 million before consideration for
certain net working capital amounts. The amount of consideration paid in shares
of the Company's Class B Common Stock will not be less than 40% of the aggregate
consideration for KWTX and KBTX. The Company will acquire substantially all of
the assets of KXII for $41.5 million in cash plus cash payments for certain
accounts receivable.
The total amount of funds required by the Company to consummate the Texas
Acquisition and pay related fees and expenses is estimated to be approximately
$100.0 million. The Company currently intends to issue long-term senior debt to
fund the Texas Acquisition. While exact financing terms have not been finalized,
the Company currently believes the financing will have a principal amount of
$100.0 million and have a variable interest rate based upon LIBOR plus an
additional percentage based upon the Company's overall ratio of indebtedness to
its operating cash flow. The Company currently expects the principal will be
repaid in scheduled quarterly installments with the final payment becoming due
prior to October 1, 2006. The Company anticipates that the indebtedness will
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
be senior secured indebtedness of the Company and that the Company and its
subsidiaries will jointly and severally pledge their assets to guarantee the
indebtedness. This additional indebtedness will also contain covenants that are
similar to those in the existing Senior Credit Facility.
The actual amount of cash that will be needed to complete the Texas
Acquisition can only be estimated at this time and it is dependent upon several
factors contained in the related acquisition agreements: (1) the proportion of
cash and Class B Common Stock elected to be received by the shareholders of KWTX
and KBTX, (2) working capital amounts and (3) the actual amount of the
transaction and closing costs. If the shareholders of KWTX and KBTX were to
elect to receive more than 40% of their respective consideration in Class B
Common Stock, the amount of cash requiring financing would be reduced. The
Company has the option, in certain limited circumstances, to pay all of the
consideration for KWTX and KBTX in cash for an aggregate price of $95.5 million
plus certain net working capital amounts. If the Company elects to pay all such
consideration in cash, then it would require a minimum of $37 million in
additional financing from existing credit facilities or other sources of
capital.
The Company will require modifications to its existing Senior Credit
Facility to allow for, among other things, the expected increase in the
Company's total indebtedness and the issuance of the planned additional senior
debt. Such modifications will require the approval of over two-thirds of the
Senior Credit Facility's participants. The Company currently believes such
approval will be obtained. If the approval were not obtained, the Company would
explore alternate financing arrangements.
On January 28, 1999, Bull Run Corporation ("Bull Run"), a principal
shareholder of the Company, acquired 301,119 shares of the common stock of
Sarkes Tarzian, Inc. ("Tarzian") from the Estate of Mary Tarzian (the "Estate")
for $10.0 million. These shares (the "Tarzian Shares") represent 33.5% of the
total outstanding common stock of Tarzian (both in terms of the number of shares
of common stock outstanding and in terms of voting rights), but such investment
represents 73% of the equity of Tarzian for purposes of dividends as well as
distributions in the event of any liquidation, dissolution or other termination
of Tarzian.
The Company has an option agreement with Bull Run, whereby the Company has
the option to acquire the Tarzian Shares from Bull Run for an amount equal to
Bull Run's purchase price for the Tarzian Shares and related costs. The option
agreement expired on May 31, 1999, however, the Company extended the option
period with Bull Run through September 30, 1999 at a cost of $266,800. However,
if the Company has not exercised its option to acquire the Tarzian Shares prior
to September 30, 1999, the Company plans to extend the option period in
increments of 30 days. The Company can extend the option period until December
31, 2000 at a cost of $66,700 per 30 day extension. Neither Bull Run's
investment nor the Company's potential investment is presently attributable
under the ownership rules of the Federal Communications Commission. If the
Company exercises the option agreement, the Company plans to fund the
acquisition through its Senior Credit Facility.
Management believes that current cash balances, cash flow from operations,
borrowings under its Senior Credit Facility and additional borrowings necessary
to complete the Texas Acquisition will be adequate to provide for the Company's
capital expenditures, debt service, cash dividends and working capital
requirements for the forseeable future.
Management does not believe that inflation in past years has had a
significant impact on the Company's results of operations nor is inflation
expected to have a significant effect upon the Company's business in the near
future.
IMPACT OF YEAR 2000
The problems created by systems that are unable to interpret dates
accurately after December 31, 1999 is referred to as the "Year 2000 Issue." Many
software programs have historically categorized the "year" in a two-digit format
rather than a four-digit format. As a result, those computer programs that have
time-sensitive software
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
IMPACT OF YEAR 2000 (Continued)
may recognize a date using "00" as the year 1900 rather than the year 2000. The
Year 2000 Issue creates potential risks for the Company, including potential
problems in the Company's Information Technology ("IT") and non-IT systems. The
Year 2000 Issue could cause a system failure, miscalculations or disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company may also be exposed to risks from third parties who fail to
adequately address their own Year 2000 Issue.
The Company has implemented a multiphase program designed to address the
Year 2000 Issue. Each phase of this program and its state of completion are
described below:
ASSESSMENT: This phase of the program includes the identification of the
Company's IT and non-IT systems. After these systems have been identified,
they are evaluated to determine whether they will correctly recognize
dates after December 31, 1999 ("Year 2000 Compliant"). If it is determined
that they are not Year 2000 Compliant, they are replaced or modified in
the Remediation phase of the program. The majority of the Company's
systems are non-proprietary.
The Company is in the process of obtaining from each system vendor a
written or oral representation as to each significant system's status of
compliance. The Company has commenced an ongoing process of contacting
suppliers and other key third parties to assess their Year 2000 Compliance
status. It appears that all of these third parties are currently Year 2000
Compliant or they plan to be Year 2000 Compliant prior to December 31,
1999. This phase is substantially complete and the Company has identified
the majority of the systems that need to be replaced.
REMEDIATION: For those systems that are not Year 2000 Compliant, a plan is
derived to make the systems Year 2000 Compliant. These solutions have
included modification or replacement of existing systems. The Remediation
phase is approximately 75% complete and the Company anticipates that it
will be completed by November 1, 1999.
TESTING: Test remediated systems to assure normal function when placed in
their original operating environment and further test for Year 2000
Compliance. The Testing phase of the program is approximately 70% complete
and the Company anticipates that it will be completed by November 30,
1999.
CONTINGENCY: As a result of the Company's Year 2000 Compliance program,
the Company does not believe that it has significant risk resulting from
this issue. However, the Company is in the process of developing
contingency plans for the possibility that one of its systems or a third
party's systems may not be Year 2000 Compliant. The Company believes that
the most reasonable likely worst case scenario is a temporary loss of
functionality at one or more of the Company's operating units. In the
unlikely event that this was to occur, the Company would experience
decreased revenue and slightly higher operating costs at the affected
location. However, due to the decentralized nature of the Company's
operations, it is not likely that all locations would be affected by a
single non-functioning system.
The Company does not presently believe that the estimated total Year 2000
project cost will exceed $750,000. Most of this cost will be realized over the
estimated useful lives of the new hardware and software; however, any third
party consulting fees would be expensed in the period the services are rendered.
To date, the Company has identified several minor systems that are not Year 2000
Compliant and these systems are in the process of being replaced. However, the
Company has not incurred significant expenses associated with the Year 2000
Issue. As of June 30, 1999, no IT projects have been deferred due to the
Company's efforts related to the Year 2000 Issue.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
IMPACT OF YEAR 2000 (Continued)
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT
This quarterly report on Form 10-Q contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. When
used in this report, the words "believes," "expects," "anticipates," "estimates"
and similar words and expressions are generally intended to identify
forward-looking statements. Statements that describe the Company's future
strategic plans, goals, or objectives are also forward-looking statements.
Readers of this report are cautioned that any forward-looking statements,
including those regarding the intent, belief or current expectations of the
Company or management, are not guarantees of future performance, results or
events and involve risks and uncertainties, and that actual results and events
may differ materially from those in the forward-looking statements as a result
of various factors including, but not limited to, (i) general economic
conditions in the markets in which the Company operates, (ii) competitive
pressures in the markets in which the Company operates, (iii) the effect of
future legislation or regulatory changes on the Company's operations and (iv)
other factors described from time to time in the Company's filings with the
Securities and Exchange Commission. The forward-looking statements included in
this report are made only as of the date hereof. The Company undertakes no
obligation to update such forward-looking statements to reflect subsequent
events or circumstances.
20
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
21
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRAY COMMUNICATIONS SYSTEMS, INC.
(Registrant)
Date: August 4, 1999 By: /s/ James C. Ryan
-------------- ----------------------------------
James C. Ryan,
Vice President - Finance &
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the June 30,
1999 unaudited condensed consolidated financial statements of Gray
Communications Systems, Inc., and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
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<NAME> GRAY COMMUNICATIONS SYSTEMS, INC.
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<NET-INCOME> (3,145,832)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
