<PAGE> 1
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, 2000.
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 VALUE) CLASS B COMMON STOCK, (NO PAR VALUE)
--------------------------------------- ---------------------------------------
6,848,467 SHARES AS OF OCTOBER 31, 2000 8,672,881 SHARES AS OF OCTOBER 31, 2000
<PAGE> 2
INDEX
GRAY COMMUNICATIONS SYSTEMS, INC.
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
------- --------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Condensed consolidated balance sheets - September 30, 2000 (Unaudited) 3
and December 31, 1999
Condensed consolidated statements of operations (Unaudited) - 5
Three months ended September 30, 2000 and 1999
Nine months ended September 30, 2000 and 1999
Condensed consolidated statement of stockholders' equity (Unaudited) - 6
Nine months ended September 30, 2000
Condensed consolidated statements of cash flows (Unaudited) - 7
Nine months ended September 30, 2000 and 1999
Notes to condensed consolidated financial statements (Unaudited) - 8
September 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,730,439 $ 1,787,446
Trade accounts receivable, less allowance for doubtful accounts
of $843,000 and $1,008,000, respectively 26,133,753 30,338,425
Recoverable income taxes 1,760,025 2,053,025
Inventories 1,683,478 1,051,960
Current portion of program broadcast rights 5,019,765 3,538,441
Other current assets 938,499 803,410
-------------- --------------
Total current assets 37,265,959 39,572,707
PROPERTY AND EQUIPMENT:
Land 4,985,121 4,385,286
Buildings and improvements 16,725,955 16,675,110
Equipment 105,860,601 98,760,379
-------------- --------------
127,571,677 119,820,775
Allowance for depreciation (51,793,717) (39,443,291)
-------------- --------------
75,777,960 80,377,484
OTHER ASSETS:
Deferred loan costs 8,588,544 9,656,586
Goodwill and other intangibles, net:
Licenses and network affiliation agreements 439,223,512 448,346,122
Goodwill 74,475,573 76,218,410
Consulting and noncompete agreements 1,503,501 1,869,368
Other 3,673,767 2,115,847
-------------- --------------
527,464,897 538,206,333
-------------- --------------
$ 640,508,816 $ 658,156,524
============== ==============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable (includes $600,000 and $0 payable
to Bull Run Corporation, respectively) $ 1,931,267 $ 4,275,411
Employee compensation and benefits 4,660,828 5,163,973
Accrued expenses 2,219,884 3,161,581
Accrued interest 9,678,224 9,233,909
Current portion of program broadcast obligations 4,923,659 3,870,893
Deferred revenue 3,199,442 3,212,814
Current portion of long-term debt 300,000 316,000
-------------- --------------
Total current liabilities 26,913,304 29,234,581
LONG-TERM DEBT 372,653,313 381,385,942
OTHER LONG-TERM LIABILITIES:
Program broadcast obligations, less current portion 327,382 428,867
Supplemental employee benefits 776,736 921,832
Deferred income taxes 72,567,829 75,389,829
Other deferred liabilities 3,643,087 -0-
Other acquisition related liabilities 2,406,477 2,607,492
-------------- --------------
79,721,511 79,348,020
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Serial Preferred Stock, no par value; authorized 20,000,000 shares;
issued and outstanding 1,361 and 1,350 shares, respectively
($13,605,788 and $13,500,000 aggregate liquidation value,
respectively) 13,605,788 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 8,708,820 shares, respectively 116,452,872 116,379,482
Retained earnings 29,216,991 37,373,183
-------------- --------------
169,959,360 177,936,374
Treasury Stock at cost, Class A Common Stock, 1,113,107 and
1,127,282 shares, respectively (8,338,718) (8,546,285)
Treasury Stock at cost, Class B Common Stock, 35,939 and
110,365 shares, respectively (399,954) (1,202,108)
-------------- --------------
161,220,688 168,187,981
-------------- --------------
$ 640,508,816 $ 658,156,524
============== ==============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Broadcasting (net of agency commissions) $ 29,186,753 $ 21,553,777 $ 86,546,809 $ 65,859,769
Publishing 10,173,210 9,686,360 30,517,918 27,244,021
Paging 2,249,816 2,289,759 6,840,919 6,847,345
-------------- -------------- -------------- --------------
41,609,779 33,529,896 123,905,646 99,951,135
EXPENSES
Broadcasting 15,606,731 13,846,243 49,232,691 40,519,290
Publishing 7,588,094 7,260,176 23,181,053 20,970,246
Paging 1,359,861 1,567,138 4,379,269 4,805,266
Corporate and administrative 675,752 869,655 2,641,498 2,556,805
Depreciation and amortization 7,816,932 5,697,081 23,326,633 16,816,445
-------------- -------------- -------------- --------------
33,047,370 29,240,293 102,761,144 85,668,052
-------------- -------------- -------------- --------------
8,562,409 4,289,603 21,144,502 14,283,083
Miscellaneous income, net 154,950 103,914 162,649 560,275
-------------- -------------- -------------- --------------
8,717,359 4,393,517 21,307,151 14,843,358
Interest expense 10,068,302 7,115,829 29,909,000 20,890,500
-------------- -------------- -------------- --------------
LOSS BEFORE INCOME TAXES (1,350,943) (2,722,312) (8,601,849) (6,047,142)
Income tax benefit (217,000) (754,585) (2,249,000) (1,438,585)
-------------- -------------- -------------- --------------
NET LOSS (1,133,943) (1,967,727) (6,352,849) (4,608,557)
Preferred dividends 253,288 252,498 758,288 757,500
-------------- -------------- -------------- --------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (1,387,231) $ (2,220,225) $ (7,111,137) $ (5,366,057)
============== ============== ============== ==============
AVERAGE OUTSTANDING COMMON SHARES:
Basic and diluted 15,510,756 11,978,583 15,487,273 11,966,642
============== ============== ============== ==============
LOSS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS:
Basic and diluted $ (0.09) $ (0.19) $ (0.46) $ (0.45)
============== ============== ============== ==============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
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>
Balance at December 31, 1999 1,350 $ 13,500,000 7,961,574 $ 10,683,709 8,708,820 $116,379,482 $ 37,373,183
Net loss for the
nine months ended
September 30, 2000 (6,352,849)
Common stock dividends ($.06
per share) (929,345)
Preferred stock dividends (758,288)
Issuance of treasury stock:
401(k) plan 19,343 (34,143)
Non-qualified stock plan 54,047 (81,567)
Purchase of Class B
common stock
Issuance of preferred stock 11 105,788
----- ------------ ---------- ------------ ---------- ------------ ------------
Balance at September 30, 2000 1,361 $ 13,605,788 7,961,574 $ 10,683,709 8,708,820 $116,452,872 $ 29,216,991
===== ============ ========== ============ ========== ============ ============
<CAPTION>
CLASS A CLASS B
TREASURY STOCK TREASURY STOCK
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT TOTAL
---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 (1,127,282) $ (8,546,285) (110,365) $(1,202,108) $168,187,981
Net loss for the
nine months ended
September 30, 2000 (6,352,849)
Common stock dividends ($.09
per share) (929,345)
Preferred stock dividends (758,288)
Issuance of treasury stock:
401(k) plan 48,287 536,285 521,485
Non-qualified stock plan 14,175 207,567 37,500 408,453 588,500
Purchase of Class B
common stock (11,361) (142,584) (142,584)
Issuance of preferred stock 105,788
---------- ------------ ---------- ------------ ------------
Balance at September 30, 2000 (1,113,107) $ (8,338,718) (35,939) $ (399,954) $161,220,688
========== ============ ========== ============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,352,849) $ (4,608,557)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 12,588,792 8,768,827
Amortization of intangible assets 10,737,841 8,047,618
Amortization of deferred loan costs 1,151,558 871,471
Amortization of program broadcast rights 3,956,662 3,643,787
Payments for program broadcast rights (4,241,589) (3,622,283)
Supplemental employee benefits (145,096) (113,730)
Common stock contributed to 401(k) Plan 521,485 459,598
Deferred income taxes (2,822,000) (2,018,001)
(Gain) loss on disposal of assets 92,995 (363,430)
Changes in operating assets and liabilities:
Receivables, inventories and other current assets 4,018,749 1,451,921
Accounts payable and other current liabilities (2,699,041) 2,194,421
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,807,507 14,711,642
INVESTING ACTIVITIES
Purchase of newspaper business -0- (16,512,231)
Purchases of property and equipment (4,509,074) (6,418,041)
Investment and deferred acquisition costs (1,474,093) (2,752,310)
Payments on purchase liabilities (490,361) (786,840)
Proceeds from asset sales 69,896 1,646,503
Other (30,308) (707,073)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (6,433,940) (25,529,992)
FINANCING ACTIVITIES
Dividends paid (1,581,845) (1,743,889)
Proceeds from sale of treasury stock - common 126,000 -0-
Purchase of treasury stock - common (142,584) (257,004)
Proceeds from borrowings of long-term debt 22,700,000 36,200,000
Payments on long-term debt (31,448,629) (21,052,092)
Deferred loan costs (83,516) (345,375)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (10,430,574) 12,801,640
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (57,007) 1,983,290
Cash and cash equivalents at beginning of period 1,787,446 1,886,723
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,730,439 $ 3,870,013
============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE> 8
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 nine-month and three-month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. 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, 1999.
NOTE B--LONG-TERM DEBT
At September 30, 2000, the balance outstanding and the balance
available under the Company's bank loan agreement were $212.5 million and $72.5
million, respectively, and the interest rate on the balance outstanding was
9.6%.
NOTE C--INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: broadcasting,
publishing and paging. 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2000 1999 2000 1999
-------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenues:
Broadcasting $ 29,187 $ 21,554 $ 86,547 $ 65,860
Publishing 10,173 9,686 30,518 27,244
Paging 2,250 2,290 6,841 6,847
-------- -------- --------- --------
$ 41,610 $ 33,530 $ 123,906 $ 99,951
======== ======== ========= ========
Operating income:
Broadcasting $ 6,524 $ 2,551 $ 15,569 $ 9,939
Publishing 1,795 1,555 4,816 3,878
Paging 243 184 760 467
-------- -------- --------- --------
Total operating income 8,562 4,290 21,145 14,284
Miscellaneous income, net 155 104 162 560
Interest expense 10,068 7,116 29,909 20,891
-------- -------- --------- --------
Loss before income taxes $ (1,351) $ (2,722) $ (8,602) $ (6,047)
======== ======== ========= ========
</TABLE>
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.
8
<PAGE> 9
GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE C--INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Media Cash Flow:
Broadcasting $ 13,687 $ 7,835 $ 37,406 $ 25,716
Publishing 2,617 2,443 7,437 6,344
Paging 897 728 2,484 2,064
-------- --------- --------- --------
$ 17,201 $ 11,006 $ 47,327 $ 34,124
======== ========= ========= ========
Media Cash Flow reconciliation:
Operating income $ 8,562 $ 4,290 $ 21,145 $ 14,284
Add:
Amortization of program broadcast
rights 1,336 1,243 3,957 3,644
Depreciation and amortization 7,817 5,697 23,327 16,816
Corporate overhead 676 870 2,641 2,557
Non-cash compensation and
contributions to the Company's
401(k) plan, paid in common stock 154 98 499 445
Less:
Payments for program broadcast
obligations (1,344) (1,192) (4,242) (3,622)
-------- --------- --------- --------
Media Cash Flow $ 17,201 $ 11,006 $ 47,327 $ 34,124
======== ========= ========= ========
</TABLE>
"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 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 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 unaudited Condensed
Consolidated 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.
9
<PAGE> 10
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.
As discussed below, the Company has acquired several television
stations and a newspaper since January 1, 1999. The Company's acquisitions have
been accounted for under the purchase method of accounting. Under the purchase
method of accounting, the results of operations of the acquired businesses are
included in the accompanying consolidated financial statements as of their
respective acquisition dates. The assets and liabilities of acquired businesses
are included based on an allocation of the purchase price.
1999 Acquisitions
On October 1, 1999, the Company completed its acquisition of all the
outstanding capital stock of KWTX Broadcasting Company and Brazos Broadcasting
Company, as well as the assets of KXII Broadcasters Ltd. The Company acquired
the capital stock of KWTX Broadcasting Company and Brazos Broadcasting Company
in merger transactions with the shareholders of KWTX Broadcasting Company and
Brazos Broadcasting Company receiving a combination of cash and the Company's
Class B Common Stock for their shares. The Company acquired the assets of KXII
Broadcasters Ltd. in an all cash transaction. These transactions are referred to
herein as the "Texas Acquisitions."
Aggregate consideration (net of cash acquired) paid in the Company's
Class B Common Stock and cash was approximately $146.4 million which included a
base purchase price of $139.0 million, transaction expenses of $2.8 million and
certain net working capital adjustments (excluding cash) of $4.6 million. In
addition to the amount paid, the Company assumed approximately $600,000 in
liabilities in connection with the asset purchase of KXII Broadcasters Ltd. The
Company funded the acquisitions by issuing 3,435,774 shares of the Company's
Class B Common Stock (valued at $49.5 million) to the sellers, borrowing an
additional $94.4 million under its bank loan agreement and using cash on hand of
approximately $2.5 million.
With the Texas Acquisitions the Company added the following television
stations to its broadcast segment: KWTX-TV, the CBS affiliate located in Waco,
Texas; KBTX-TV, the CBS affiliate located in Bryan, Texas, each serving the
Waco-Temple-Bryan, Texas television market and KXII-TV, the CBS affiliate
serving Sherman, Texas and Ada, Oklahoma. Under Federal Communications
Commission (the "FCC") regulations, KBTX-TV is operated as a satellite station
of KWTX-TV. The three stations are collectively referred to herein as the "Texas
Stations."
On March 1, 1999, the Company acquired substantially all of the assets
of The Goshen News from News Printing Company, Inc. and affiliates thereof, for
aggregate cash consideration of approximately $16.7 million including a
non-compete agreement (the "Goshen Acquisition"). The Goshen News is currently
an 18,000-circulation newspaper published Monday through Sunday and serves
Goshen, Indiana and surrounding areas. The Company financed the acquisition
through borrowings under its bank loan agreement.
General
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.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
2000 1999
------------------------ ------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
--------- ----------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BROADCASTING
NET REVENUES:
Local $15,844 38.1% $12,384 36.9%
National 7,336 17.6 6,210 18.5
Network compensation 2,083 5.0 1,444 4.3
Political 2,418 5.8 35 0.1
Production and other 1,506 3.6 1,481 4.5
------- ----- ------- -----
$29,187 70.1% $21,554 64.3%
======= ===== ======= =====
PUBLISHING
NET REVENUES:
Retail $ 4,567 11.0% $ 4,259 12.7%
Classified 3,388 8.1 3,347 10.0
Circulation 1,897 4.6 1,760 5.2
Other 321 0.8 320 1.0
------- ----- ------- -----
$10,173 24.5% $ 9,686 28.9%
======= ===== ======= =====
PAGING
NET REVENUES:
Paging lease, sales and service $ 2,250 5.4% $ 2,290 6.8%
======= ===== ======= =====
TOTAL $41,610 100.0% $33,530 100.0%
======= ===== ======= =====
</TABLE>
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Broadcasting, Publishing and Paging Revenues (Continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2000 1999
-------------------------------- ------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
--------- ------------ --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BROADCASTING
NET REVENUES:
Local $ 48,014 38.8% $ 38,286 38.3%
National 23,419 18.9 18,630 18.6
Network compensation 6,203 5.0 4,282 4.3
Political 3,715 3.0 224 0.2
Production and other 5,196 4.2 4,438 4.4
-------- ----- --------- -----
$ 86,547 69.9% $ 65,860 65.8%
======== ===== ========= =====
PUBLISHING
NET REVENUES:
Retail $ 13,864 11.2% $ 12,243 12.2%
Classified 9,942 8.0 9,090 9.1
Circulation 5,734 4.6 4,998 5.1
Other 978 0.8 913 0.9
-------- ----- --------- -----
$ 30,518 24.6% $ 27,244 27.3%
======== ===== ========= =====
PAGING
NET REVENUES:
Paging lease, sales and
service $ 6,841 5.5% $ 6,847 6.9%
======== ===== ========= =====
TOTAL $123,906 100.0% $ 99,951 100.0%
======== ===== ========= =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues. Total revenues for the three months ended September 30, 2000
increased $8.1 million, or 24.1%, over the same period of the prior year, to
$41.6 million from $33.5 million. This increase was primarily attributable to
the (i) revenues resulting from the Texas Stations that were acquired on October
1, 1999 and (ii) increased revenues from existing broadcasting and publishing
operations.
Broadcasting revenues increased $7.6 million, or 35.4%, over the same
period of the prior year, to $29.2 million from $21.6 million. The Texas
Acquisitions accounted for an increase of $6.1 million. Political advertising
revenue was $2.4 million for the three months ended September 30, 2000, compared
to $35,000 for the same period of the prior year. Broadcasting revenues,
excluding the results of the Texas Acquisitions, increased $1.5 million, or
7.0%, over the same period of the prior year, to $23.1 million from $21.6
million. This increase was due primarily to increased political advertising
revenue of $2.4 million, partially offset by decreased local revenues of
$377,000, decreased national revenues of $318,000 and decreased production and
other revenues of $71,000.
Publishing revenues increased $487,000, or 5.0%, over the same period
of the prior year, to $10.2 million from $9.7 million. This increase was due
primarily to an increase in revenues from retail advertising, classified
advertising and circulation revenues of $307,000, $41,000 and $138,000,
respectively.
Paging revenues decreased $40,000, or 1.7%, over the same period of the
prior year due primarily to price competition. The Company had approximately
90,000 pagers and 88,000 pagers in service at September 30, 2000 and 1999,
respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999 (CONTINUED)
Operating expenses. Operating expenses for the three months ended
September 30, 2000 increased $3.8 million, or 13.0%, over the same period of the
prior year, to $33.0 million from $29.2 million, due primarily to increased
broadcasting expenses and depreciation and amortization expense.
Broadcasting expenses for the three months ended September 30, 2000
increased $1.8 million, or 12.7%, over the same period of the prior year, to
$15.6 million from $13.8 million. The acquisition of the Texas Stations
accounted for an increase of $2.9 million. Broadcasting expenses, excluding the
results of the Texas Stations, decreased $1.1 million, or 7.9%, to $12.8 million
from $13.8 million reflecting, in part, expense reduction programs instituted by
the Company during the second and third quarters of 2000.
Publishing expenses for the three months ended September 30, 2000
increased $328,000, or 4.5%, over the same period of the prior year, to $7.6
million from $7.3 million. This increase in expenses was due primarily to
increased newsprint costs.
Paging expenses for the three months ended September 30, 2000 decreased
$207,000, or 13.2%, over the same period of the prior year, to $1.4 million from
$1.6 million. The decrease in paging expenses reflects an expense reduction plan
instituted by the Company.
Corporate and administrative expenses for the three months ended
September 30, 2000 decreased $195,000, or 22.4%, over the same period of the
prior year to $676,000 from $870,000.
Depreciation of property and equipment and amortization of intangible
assets was $7.8 million for the three months ended September 30, 2000, as
compared to $5.7 million for the same period of the prior year, an increase of
$2.1 million, or 37.2%. This increase was primarily the result of higher
depreciation and amortization costs related to the acquisition of the Texas
Stations.
Miscellaneous income. Miscellaneous income for the three months ended
September 30, 2000 was $155,000 compared to $104,000 of miscellaneous income for
the three months ended September 30, 1999.
Interest expense. Interest expense increased $3.0 million, or 41.5%, to
$10.1 million for the three months ended September 30, 2000 from $7.1 million
for the three months ended September 30, 1999. This increase was attributable
primarily to increased levels of debt resulting from the financing of the
acquisition of the Texas Stations and to increased interest rates on the
Company's variable interest rate debt.
Income tax benefit. Income tax benefit for the three months ended
September 30, 2000 and September 30, 1999 was $217,000 and $755,000,
respectively. The decrease in the income tax benefit was directly attributable
to the decrease in net loss before tax in the current quarter as compared to the
third quarter of the prior year.
Net loss available to common stockholders. Net loss available to common
stockholders of the Company for the three months ended September 30, 2000 and
September 30, 1999 was $1.4 million and $2.2 million, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues. Total revenues for the nine months ended September 30, 2000
increased $23.9 million, or 24.0%, over the same period of the prior year, to
$123.9 million from $100.0 million. This increase was primarily attributable to
the (i) revenues resulting from the Texas Stations that were acquired on October
1, 1999, (ii) revenues resulting from The Goshen News that was acquired on March
1, 1999 and (iii) increased revenues from existing broadcasting and publishing
operations.
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<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999 (CONTINUED)
Broadcasting revenues increased $20.6 million, or 31.4%, over the same
period of the prior year, to $86.5 million from $65.9 million. The Texas
Acquisitions accounted for an increase of $17.6 million. Political advertising
revenue was $3.7 million for the nine months ended September 30, 2000, compared
to $224,000 for the same period of the prior year. Broadcasting revenues,
excluding the results of the Texas Acquisitions, increased $3.1 million, or
4.7%, over the same period of the prior year, to $69.0 million from $65.9
million. This increase was due primarily to increases in political advertising
revenue of $3.3 million, national revenues of $451,000, production and other
revenues of $535,000 offset, in part, by decreased local revenues of $954,000
and decreased network compensation of $235,000.
Publishing revenues increased $3.3 million, or 12.0%, over the same
period of the prior year, to $30.5 million from $27.2 million. Revenues from the
Company's publishing operations, excluding The Goshen News, increased $2.5
million, or 10.4%, over the same period of the prior year, to $26.2 million from
$23.8 million. The primary components of the $2.5 million increase in revenues
were increases in retail advertising, classified advertising and circulation
revenues of $1.2 million, $688,000 and $508,000, respectively. The Goshen News
which was acquired on March 1, 1999 provided revenues of $4.3 million for the
nine months ended September 30, 2000 compared to $3.5 million for the nine
months ended September 30, 1999.
Paging revenues were consistent at $6.8 million for the nine months
ended September 30, 2000 compared to the same period of the prior year. The
Company had approximately 90,000 pagers and 88,000 pagers in service at
September 30, 2000 and 1999, respectively.
Operating expenses. Operating expenses for the nine months ended
September 30, 2000 increased $17.1 million, or 20.0%, over the same period of
the prior year, to $102.8 million from $85.7 million, due primarily to
increased broadcasting expenses, publishing expenses and depreciation and
amortization expense.
Broadcasting expenses for the nine months ended September 30, 2000
increased $8.7 million, or 21.5%, over the same period of the prior year, to
$49.2 million from $40.5 million. The acquisition of the Texas Stations
accounted for an increase of $8.8 million. Broadcasting expenses, excluding the
results of the Texas Stations, were $40.5 million in each of the respective
periods reflecting, in part, expense reduction programs instituted by the
Company in the second and third quarters of 2000.
Publishing expenses for the nine months ended September 30, 2000
increased $2.2 million, or 10.5%, from the same period of the prior year, to
$23.2 million from $21.0 million. Expenses from the Company's publishing
operations, excluding The Goshen News, increased $1.7 million, or 9.4%, over
the same period of the prior year, to $20.3 million from $18.6 million. The $1.7
million increase was due primarily to payroll and transportation costs
associated with increased circulation and commencement of a Sunday edition in
February, 2000, at one of the Company's daily newspapers. It also reflects
increases in newsprint costs. The Goshen News recorded expenses of $2.9 million
for the nine months ended September 30, 2000.
Paging expenses for the nine months ended September 30, 2000 decreased
$426,000, or 8.9%, over the same period of the prior year, to $4.4 million from
$4.8 million. The decrease in paging expenses reflects an expense reduction plan
instituted by the Company.
Corporate and administrative expenses for the nine months ended
September 30, 2000 increased $84,000, or 3.3%, over the same period of the prior
year, to $2.6 million. The increase was due primarily to increased payroll
expense and approximately $100,000 of non-recurring charges relating to
conversion and upgrades of its telecommunications systems. These increases were
partially offset by decreases in supply expense, insurance expense and other
general expenses.
Depreciation of property and equipment and amortization of intangible
assets was $23.3 million for the nine months ended September 30, 2000, as
compared to $16.8 million for the same period of the prior year, an increase of
$6.5 million, or 38.7%. This increase was primarily the result of higher
depreciation and amortization
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999 (CONTINUED)
costs related to the acquisition of the Texas Stations and The Goshen News.
Miscellaneous income. Miscellaneous income for the nine months ended
September 30, 2000 was $163,000 compared to $560,000 for the nine months ended
September 30, 1999. The decrease in miscellaneous income of $397,000 was due
primarily to the gain of $350,000 recognized upon the sale of a portion of the
Southwest Georgia Shopper, Inc. in February 1999.
Interest expense. Interest expense increased $9.0 million, or 43.2%, to
$29.9 million for the nine months ended September 30, 2000 from $20.9 million
for the nine months ended September 30, 1999. This increase was attributable
primarily to increased levels of debt resulting from the financing of the
acquisition of the Texas Stations and The Goshen News and to increased interest
rates on the Company's variable interest rate debt.
Income tax benefit. Income tax benefit for the nine months ended
September 30, 2000 and September 30, 1999 was $2.2 million and $1.4 million,
respectively. The increase in the income tax benefit was directly attributable
to the increase in net loss before tax in the current period as compared to the
same period of the prior year.
Net loss available to common stockholders. Net loss available to common
stockholders of the Company for the nine months ended September 30, 2000 and
September 30, 1999 was $7.1 million and $5.4 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $10.4 million and $10.3 million at
September 30, 2000 and December 31, 1999, respectively. The Company's cash
provided from operations was $16.8 million and $14.7 million for the nine months
ended September 30, 2000 and September 30, 1999, respectively.
The Company's cash used in investing activities was $6.4 million and
$25.5 million for the nine months ended September 30, 2000 and September 30,
1999, respectively. The decreased usage of $19.1 million from 1999 to 2000 was
primarily due to the acquisition of The Goshen News in 1999 and no similar
transactions occurring in the current period.
The Company's financing activities used $10.4 million for the nine
months ended September 30, 2000 while providing $12.8 million for the nine
months ended September 30, 1999. The increase in cash used in financing
activities resulted primarily from increased payments on long-term debt in the
current period as compared to borrowings on long-term debt to fund the
acquisition of The Goshen News in 1999.
During the nine months ended September 30, 2000, the Company issued
14,175 shares of its Class A Common Stock and 85,787 shares of its Class B
Common Stock from treasury to fulfill obligations under its employee benefit
plan and certain employment agreements. The Company also purchased 11,361 shares
of its Class B Common Stock for $142,584 during the nine months ended September
30, 2000.
Pursuant to the Company's 1992 Long Term Incentive Plan, the Company's
Board of Directors authorized the issuance of options to acquire 818,500 shares
of the Company's Class B Common Stock. On May 25, 2000, these options were
granted to approximately 370 employees of the Company. These options will fully
vest on the second anniversary of the grant date and will expire on the fifth
anniversary of the grant date. The option exercise price is $10.125 per share.
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 the two.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
During the nine months ended September 30, 2000, the Company paid $4.2
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 September 30,
2000, the Company anticipates that it will generate taxable operating losses for
the foreseeable future.
At September 30, 2000, the balance outstanding and the balance
available under the Company's bank loan agreement were $212.5 million and $72.5
million, respectively, and the effective interest rate on the balance
outstanding was 9.6%.
On March 31, 2000, the Company's Board of Directors authorized payment
of a $1.0 million fee to Bull Run Corporation, a principal shareholder of the
Company, for services rendered in connection with the Company's option to
purchase Bull Run's equity investment in Sarkes Tarzian. Effective as of March
1, 2000, the fee was and continues to be payable in equal monthly installments
of $50,000. As of September 30, 2000, the unpaid portion of this fee was
$600,000 and was included in the Company's accounts payable balance.
In the first quarter of this year, the Company initiated digital
broadcasting at WRDW-TV, its CBS affiliated station located in Augusta,
Georgia. On October 16, 2000, the Company announced that it had selected Harris
Corporation to outfit its remaining stations with digital transmission systems,
which will facilitate initiation of digital broadcasting across all of the
Company's television properties. Approximately $19 million in orders of Harris
equipment will include transmitters, transmission lines, antennas, digital
encoders and related equipment, which will be phased in over the remainder of
2000, 2001 and early 2002. Additional costs to modify towers and transmitter
buildings are currently expected to increase the total project cost to
approximately $25 million.
Management believes that current cash balances, cash flows from
operations and the borrowings under its bank loan agreement will be adequate to
provide for the Company's capital expenditures, debt service, cash dividends and
working capital requirements for the foreseeable future.
Management does not believe that inflation in past years has had a
significant impact on the Company's results of operations nor is inflation
expected to have a significant effect upon the Company's business in the near
future.
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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRAY COMMUNICATIONS SYSTEMS, INC.
(Registrant)
Date: November 2, 2000 By: /s/ James C. Ryan
------------------------------------------
James C. Ryan,
Vice President and Chief Financial Officer
18
