<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 JUNE 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.
<TABLE>
<CAPTION>
<S> <C>
CLASS A COMMON STOCK, (NO PAR VALUE) CLASS B COMMON STOCK, (NO PAR VALUE)
------------------------------------------------- ----------------------------------------------
6,848,467 SHARES AS OF JULY 31, 2000 8,656,908 SHARES AS OF JULY 31, 2000
</TABLE>
<PAGE> 2
INDEX
GRAY COMMUNICATIONS SYSTEMS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - June 30, 2000 (Unaudited) 3
and December 31, 1999
Condensed consolidated statements of operations (Unaudited) - 5
Three months ended June 30, 2000 and 1999 Six months ended
June 30, 2000 and 1999
Condensed consolidated statement of stockholders' equity (Unaudited) - 6
Six months ended June 30, 2000
Condensed consolidated statements of cash flows (Unaudited) - 7
Six months ended June 30, 2000 and 1999
Notes to condensed consolidated financial statements (Unaudited) - 8
June 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
SIGNATURES
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,460,741 $ 1,787,446
Trade accounts receivable, less allowance for doubtful accounts
of $813,000 and $1,008,000, respectively 28,395,640 30,338,425
Recoverable income taxes 1,906,025 2,053,025
Inventories 1,259,847 1,051,960
Current portion of program broadcast rights 1,515,230 3,538,441
Other current assets 1,052,244 803,410
-------------- --------------
Total current assets 35,589,727 39,572,707
PROPERTY AND EQUIPMENT:
Land 4,985,121 4,385,286
Buildings and improvements 16,544,046 16,675,110
Equipment 103,914,610 98,760,379
-------------- --------------
125,443,777 119,820,775
Allowance for depreciation (47,555,576) (39,443,291)
-------------- --------------
77,888,201 80,377,484
OTHER ASSETS:
Deferred loan costs 8,974,035 9,656,586
Goodwill and other intangibles:
Licenses and network affiliation agreements 442,407,676 448,346,122
Goodwill 74,627,168 76,218,410
Consulting and noncompete agreements 1,625,456 1,869,368
Other 3,225,816 2,115,847
-------------- --------------
530,860,151 538,206,333
$ 644,338,079 $ 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>
JUNE 30, DECEMBER 31,
2000 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable (includes $750,000 and $0 payable
to Bull Run Corporation, respectively) $ 3,658,098 $ 4,275,411
Employee compensation and benefits 5,352,701 5,163,973
Accrued expenses 4,925,847 3,161,581
Accrued interest 5,859,793 9,233,909
Current portion of program broadcast obligations 1,646,075 3,870,893
Deferred revenue 3,241,387 3,212,814
Current portion of long-term debt 300,000 316,000
-------------- --------------
Total current liabilities 24,983,901 29,234,581
LONG-TERM DEBT 380,251,929 381,385,942
OTHER LONG-TERM LIABILITIES:
Program broadcast obligations, less current portion 156,410 428,867
Supplemental employee benefits 835,968 921,832
Deferred income taxes 73,030,829 75,389,829
Other acquisition related liabilities 2,426,638 2,607,492
-------------- --------------
76,449,845 79,348,020
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 8,708,820 shares, respectively 116,452,872 116,379,482
Retained earnings 30,932,241 37,373,183
-------------- --------------
171,568,822 177,936,374
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, 51,912 and 110,365 shares,
respectively (577,700) (1,202,108)
-------------- --------------
162,652,404 168,187,981
-------------- --------------
$ 644,338,079 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Broadcasting (net of agency commissions) $ 30,691,603 $ 23,137,952 $ 57,360,056 $ 44,305,992
Publishing 10,423,481 9,535,608 20,344,708 17,557,661
Paging 2,292,982 2,355,609 4,591,103 4,557,586
------------ ------------ ------------ ------------
43,408,066 35,029,169 82,295,867 66,421,239
EXPENSES
Broadcasting 16,710,210 13,684,523 33,625,960 26,673,047
Publishing 7,928,049 7,355,448 15,592,959 13,710,070
Paging 1,515,384 1,724,483 3,019,408 3,238,128
Corporate and administrative 937,566 940,644 1,965,746 1,687,150
Depreciation and amortization 7,835,369 5,663,547 15,509,701 11,119,364
------------ ------------ ------------ ------------
34,926,578 29,368,645 69,713,774 56,427,759
------------ ------------ ------------ ------------
8,481,488 5,660,524 12,582,093 9,993,480
Miscellaneous income (expense), net (55,602) 34,613 7,699 456,361
------------ ------------ ------------ ------------
8,425,886 5,695,137 12,589,792 10,449,841
Interest expense 10,116,190 7,004,508 19,840,698 13,774,671
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,690,304) (1,309,371) (7,250,906) (3,324,830)
Income tax benefit (320,000) (229,000) (2,032,000) (684,000)
------------ ------------ ------------ ------------
NET LOSS (1,370,304) (1,080,371) (5,218,906) (2,640,830)
Preferred dividends 252,500 252,501 505,000 505,002
------------ ------------ ------------ ------------
NET LOSS AVAILABLE TO
COMMON STOCKHOLDERS $ (1,622,804) $ (1,332,872) $ (5,723,906) $ (3,145,832)
============ ============ ============ ============
AVERAGE OUTSTANDING COMMON SHARES:
Basic and diluted 15,493,990 11,966,489 15,475,337 11,960,572
============ ============ ============ ============
LOSS PER SHARE AVAILABLE TO COMMON
STOCKHOLDERS:
Basic and diluted $ (0.10) $ (0.11) $ (0.37) $ (0.26)
============ ============ ============ ============
</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
------------------------- ----------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
-------- ------------ ------------ ------------ ------------ ------------
<S> <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 $116,379,482
Net loss for the
six months ended
June 30, 2000
Common stock dividends ($.04
per share)
Preferred stock dividends
Issuance of treasury stock:
401 (k) plan 19,343
Non-qualified stock plan 54,047
Purchase of Class B
Common Stock
-------- ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 1,350 $ 13,500,000 7,961,574 $ 10,683,709 8,708,820 $116,452,872
======== ============ ============ ============ ============ ============
<CAPTION>
Class A Class B
Retained Treasury Stock Treasury Stock
------------ ------------------------------ -----------------------------
Earnings Shares Amount Shares Amount Total
------------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 37,373,183 (1,127,282) $ (8,546,285) (110,365) $ (1,202,108) $168,187,981
Net loss for the
six months ended
June 30, 2000 (5,218,906) (5,218,906)
Common stock dividends ($.04
per share) (619,344) (619,344)
Preferred stock dividends (505,000) (505,000)
Issuance of treasury stock:
401 (k) plan (16,125) 32,314 358,539 361,757
Non-qualified stock plan (81,567) 14,175 207,567 37,500 408,453 588,500
Purchase of Class B
Common Stock (11,361) (142,584) (142,584)
------------ ------------ ------------ ----------- ------------ ------------
Balance at June 30, 2000 $ 30,932,241 (1,113,107) $ (8,338,718) (51,912) $ (577,700) $162,652,404
============ ============ ============ =========== ============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,218,906) $ (2,640,830)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 8,329,861 5,772,877
Amortization of intangible assets 7,179,840 5,346,487
Amortization of deferred loan costs 766,066 574,282
Amortization of program broadcast rights 2,620,900 2,400,745
Payments for program broadcast rights (2,897,568) (2,430,524)
Supplemental employee benefits (85,864) (75,820)
Common Stock contributed to 401(k) Plan 361,757 361,928
Deferred income taxes (2,359,000) (1,028,001)
(Gain) loss on disposal of assets 76,599 (331,157)
Changes in operating assets and liabilities:
Receivables, inventories and other current assets 1,860,125 715,870
Accounts payable and other current liabilities (2,340,983) (2,199,854)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,292,827 6,466,003
INVESTING ACTIVITIES
Purchase of newspaper business -0- (16,512,231)
Purchases of property and equipment (5,975,603) (4,499,224)
Deferred acquisition costs (523,480) (1,190,978)
Payments on purchase liabilities (213,650) (584,098)
Other 415,158 41,504
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (6,297,575) (22,745,027)
FINANCING ACTIVITIES
Dividends paid (1,071,844) (1,251,794)
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 17,000,000 36,200,000
Payments on long-term debt (18,150,013) (15,183,540)
Deferred loan costs (83,516) (30,375)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,321,957) 19,477,287
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (326,705) 3,198,263
Cash and cash equivalents at beginning of period 1,787,446 1,886,723
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,460,741 $ 5,084,986
============ ============
</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 six-month and three-month periods ended June
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 June 30, 2000, the balance outstanding and the balance available
under the Company's bank loan agreement were $220.0 million and $72.5 million,
respectively, and the interest rate on the balance outstanding was 9.7%.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenues:
Broadcasting $ 30,692 $ 23,138 $ 57,360 $ 44,306
Publishing 10,423 9,536 20,345 17,558
Paging 2,293 2,355 4,591 4,557
-------- -------- -------- --------
$ 43,408 $ 35,029 $ 82,296 $ 66,421
======== ======== ======== ========
Operating income:
Broadcasting $ 6,542 $ 4,269 $ 9,046 $ 7,389
Publishing 1,644 1,291 3,021 2,323
Paging 295 101 515 282
-------- -------- -------- --------
Total operating income 8,481 5,661 12,582 9,994
Miscellaneous income (expense), net (56) 35 8 456
Interest expense 10,115 7,005 19,841 13,775
-------- -------- -------- --------
Loss before income taxes $ (1,690) $ (1,309) $ (7,251) $ (3,325)
======== ======== ======== ========
</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)
NOTE C--INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Media Cash Flow:
Broadcasting $ 14,009 $ 9,584 $ 23,719 $ 17,881
Publishing 2,527 2,211 4,819 3,901
Paging 785 637 1,587 1,336
-------- -------- -------- --------
$ 17,321 $ 12,432 $ 30,125 $ 23,118
======== ======== ======== ========
Media Cash Flow reconciliation:
Operating income $ 8,481 $ 5,661 $ 12,582 $ 9,994
Add:
Amortization of program broadcast
rights 1,311 1,198 2,621 2,401
Depreciation and amortization 7,835 5,664 15,510 11,119
Corporate overhead 938 940 1,966 1,687
Non-cash compensation and
contributions to the Company's
401(k) plan, paid in common stock 164 209 344 348
Less:
Payments for program broadcast
obligations (1,408) (1,240) (2,898) (2,431)
-------- -------- -------- --------
Media Cash Flow $ 17,321 $ 12,432 $ 30,125 $ 23,118
======== ======== ======== ========
</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 JUNE 30,
------------------------------------------------------------
2000 1999
-------------------------- --------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BROADCASTING
NET REVENUES:
Local $ 17,225 39.7% $ 13,378 38.2%
National 8,896 20.5 6,917 19.8
Network compensation 2,103 4.8 1,442 4.1
Political 773 1.8 140 0.4
Production and other 1,695 3.9 1,261 3.6
-------- -------- -------- --------
$ 30,692 70.7% $ 23,138 66.1%
======== ======== ======== ========
PUBLISHING
NET REVENUES:
Retail $ 4,812 11.1% $ 4,302 12.3%
Classified 3,407 7.8 3,189 9.0
Circulation 1,898 4.4 1,736 5.0
Other 306 0.7 309 0.9
-------- -------- -------- --------
$ 10,423 24.0% $ 9,536 27.2%
======== ======== ======== ========
PAGING
NET REVENUES:
Paging lease, sales and
service $ 2,293 5.3% $ 2,355 6.7%
======== ======== ======== ========
TOTAL $ 43,408 100.0% $ 35,029 100.0%
======== ======== ======== ========
</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>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------
2000 1999
------------------------- -------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BROADCASTING
NET REVENUES:
Local $ 32,170 39.1% $ 25,902 39.0%
National 16,083 19.5 12,420 18.7
Network compensation 4,120 5.0 2,838 4.3
Political 1,297 1.6 189 0.3
Production and other 3,690 4.5 2,957 4.4
-------- -------- -------- --------
$ 57,360 69.7% $ 44,306 66.7%
======== ======== ======== ========
PUBLISHING
NET REVENUES:
Retail $ 9,297 11.2% $ 7,984 12.0%
Classified 6,554 8.0 5,743 8.6
Circulation 3,837 4.7 3,238 4.9
Other 657 0.8 593 0.9
-------- -------- -------- --------
$ 20,345 24.7% $ 17,558 26.4%
======== ======== ======== ========
PAGING
NET REVENUES:
Paging lease, sales and
service $ 4,591 5.6% $ 4,557 6.9%
======== ======== ======== ========
TOTAL $ 82,296 100.0% $ 66,421 100.0%
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues for the three months ended June 30, 2000
increased $8.4 million, or 23.9%, over the same period of the prior year, to
$43.4 million from $35.0 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 32.6%, over the same
period of the prior year, to $30.7 million from $23.1 million. The Texas
Acquisitions accounted for an increase of $6.2 million. Political advertising
revenue was $773,000 for the three months ended June 30, 2000, compared to
$140,000 for the same period of the prior year. Broadcasting revenues, excluding
the results of the Texas Acquisitions, increased $1.3 million, or 5.7%, over the
same period of the prior year, to $24.5 million from $23.1 million. This
increase was due primarily to increased political advertising revenue of
$618,000, increased national revenues of $310,000 and increased production and
other revenues of $380,000. On a pro forma basis, assuming the Texas
Acquisitions had been effective on January 1, 1999, broadcasting revenues for
the Texas Stations for the three months ended June 30, 2000 increased $100,000
to $6.2 million from $6.1 million, when compared to the same period of the prior
year.
Publishing revenues increased $888,000, or 9.3%, over the same period
of the prior year, to $10.4 million from $9.5 million. This increase was due
primarily to an increase in revenues from retail advertising, classified
advertising and circulation revenues of $510,000, $218,000 and $162,000,
respectively.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
(CONTINUED)
Paging revenues decreased $62,000, or 2.6%, over the same period of the
prior year due primarily to price competition. The Company had approximately
90,000 pagers and 87,000 pagers in service at June 30, 2000 and 1999,
respectively.
Operating expenses. Operating expenses for the three months ended June
30, 2000 increased $5.5 million, or 18.9%, over the same period of the prior
year, to $34.9 million from $29.4 million, due primarily to increased
broadcasting expenses, publishing expenses and depreciation and amortization
expense.
Broadcasting expenses for the three months ended June 30, 2000
increased $3.0 million, or 22.1%, over the same period of the prior year, to
$16.7 million from $13.7 million. The acquisition of the Texas Stations
accounted for an increase of $3.0 million. Broadcasting expenses, excluding the
results of the Texas Stations, were $13.7 million in each of the respective
periods reflecting, in part, expense reduction programs instituted by the
Company during the second quarter of 2000. On a pro forma basis, assuming the
acquisition of the Texas Stations had been effective on January 1, 1999,
broadcasting expenses for the Texas Stations for the three months ended June 30,
2000 decreased $483,000, or 13.9%, to $3.0 million from $3.5 million.
Publishing expenses for the three months ended June 30, 2000 increased
$574,000, or 7.8%, over the same period of the prior year, to $7.9 million from
$7.4 million. This increase in expenses 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.
Paging expenses for the three months ended June 30, 2000 decreased
$208,000, or 12.1%, over the same period of the prior year, to $1.5 million from
$1.7 million. The decrease in paging expenses reflects an expense reduction plan
instituted by the Company.
Corporate and administrative expenses for the three months ended June
30, 2000 were $938,000 and were consistent with same period of the prior year.
Depreciation of property and equipment and amortization of intangible
assets was $7.8 million for the three months ended June 30, 2000, as compared to
$5.7 million for the same period of the prior year, an increase of $2.1 million,
or 38.3%. This increase was primarily the result of higher depreciation and
amortization costs related to the acquisition of the Texas Stations.
Miscellaneous income (expense). Miscellaneous expense for the three
months ended June 30, 2000 was $56,000 compared to $35,000 of miscellaneous
income for the three months ended June 30, 1999. The difference was primarily
attributable to a loss on disposal of fixed assets during the three months ended
June 30, 2000.
Interest expense. Interest expense increased $3.1 million, or 44.4%, to
$10.1 million for the three months ended June 30, 2000 from $7.0 million for the
three months ended June 30, 1999. This increase was attributable primarily to
increased interest rates on the Company's variable interest rate debt and to
increased levels of debt resulting from the financing of the acquisition of the
Texas Stations.
Income tax benefit. Income tax benefit for the three months ended June
30, 2000 and June 30, 1999 was $320,000 and $229,000, respectively. The increase
in the income tax benefit was directly attributable to the increase in net loss
before tax in the current quarter as compared to the second 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 June 30, 2000 and June
30, 1999 was $1.6 million and $1.3 million, respectively.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues for the six months ended June 30, 2000
increased $15.9 million, or 23.9%, over the same period of the prior year, to
$82.3 million from $66.4 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.
Broadcasting revenues increased $13.1 million, or 29.5%, over the same
period of the prior year, to $57.4 million from $44.3 million. The Texas
Acquisitions accounted for an increase of $11.5 million. Political advertising
revenue was $1.3 million for the six months ended June 30, 2000, compared to
$189,000 for the same period of the prior year. Broadcasting revenues, excluding
the results of the Texas Acquisitions, increased $1.6 million, or 3.6%, over the
same period of the prior year, to $45.9 million from $44.3 million. This
increase was due primarily to increases in political advertising revenue of
$940,000, national revenues of $769,000, production and other revenues of
$606,000 offset, in part, by decreased local revenues of $577,000. On a pro
forma basis, assuming the Texas Acquisitions had been effective on January 1,
1999, broadcasting revenues for the Texas Stations for the six months ended June
30, 2000 increased $140,000, or 1.2%, to $11.5 million from $11.3 million, when
compared to the same period of the prior year.
Publishing revenues increased $2.8 million, or 15.9%, over the same
period of the prior year, to $20.3 million from $17.6 million. Revenues from the
Company's publishing operations, excluding The Goshen News, increased $1.8
million, or 11.7%, over the same period of the prior year, to $17.4 million from
$15.6 million. The primary components of the $1.8 million increase in revenues
were increases in retail advertising, classified advertising and circulation
revenues of $854,000, $559,000 and $353,000, respectively. The Goshen News which
was acquired on March 1, 1999 provided revenues of $2.9 million for the six
months ended June 30, 2000 compared to $2.0 million for the six months ended
June 30, 1999. On a pro forma basis, assuming that The Goshen Acquisition had
been completed on January 1, 1999, revenue for The Goshen News increased
$288,000, or 10.9%, to $2.9 million from $2.7 million, as compared to the same
period of the prior year.
Paging revenues were consistent at $4.6 million for the six months
ended June 30, 2000 compared to the same period of the prior year. The Company
had approximately 90,000 pagers and 87,000 pagers in service at June 30, 2000
and 1999, respectively.
Operating expenses. Operating expenses for the six months ended June
30, 2000 increased $13.3 million, or 23.5%, over the same period of the prior
year, to $69.7 million from $56.4 million, due primarily to increased
broadcasting expenses, publishing expenses and depreciation and amortization
expense.
Broadcasting expenses for the six months ended June 30, 2000 increased
$7.0 million, or 26.1%, over the same period of the prior year, to $33.6 million
from $26.7 million. The acquisition of the Texas Stations accounted for an
increase of $5.9 million. Broadcasting expenses, excluding the results of the
Texas Stations, increased $1.1 million, or 4.0%, over the same period of the
prior year, to $27.7 million from $26.7 million. The increase was due primarily
to increased employee compensation expense. On a pro forma basis, assuming the
acquisition of the Texas Stations had been effective on January 1, 1999,
broadcasting expenses for the Texas Stations for the six months ended June 30,
2000 decreased $736,000, or 11.0%, to $5.9 million from $6.6 million.
Publishing expenses for the six months ended June 30, 2000 increased
$1.9 million, or 13.7%, from the same period of the prior year, to $15.6 million
from $13.7 million. Expenses from the Company's publishing operations, excluding
The Goshen News, increased $1.3 million, or 10.3%, over the same period of the
prior year, to $13.6 million from $12.3 million. The $1.3 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. The Goshen News recorded expenses of $2.0
million for the six months ended June 30, 2000. On a pro forma basis, assuming
that the Goshen Acquisition had been completed on January 1, 1999, expenses for
The Goshen News increased $26,000, or 1.3%, to $2.0 million when compared to the
same period of the prior year reflecting in part the commencement of a Sunday
edition as of August 1, 1999.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
(CONTINUED)
Paging expenses for the six months ended June 30, 2000 decreased
$219,000, or 6.8%, over the same period of the prior year, to $3.0 million from
$3.2 million. The decrease in paging expenses reflects an expense reduction plan
instituted by the Company.
Corporate and administrative expenses for the six months ended June 30,
2000 increased $279,000, or 16.5%, over the same period of the prior year, to
$2.0 million from $1.7 million. The increase was due primarily to increased
payroll expense and other operating expenses. In addition, the Company incurred
approximately $100,000 of non-recurring charges relating to conversion and
upgrades of its telecommunications systems.
Depreciation of property and equipment and amortization of intangible
assets was $15.5 million for the six months ended June 30, 2000, as compared to
$11.1 million for the same period of the prior year, an increase of $4.4
million, or 39.5%. This increase was primarily the result of higher depreciation
and amortization costs related to the acquisition of the Texas Stations and The
Goshen News.
Miscellaneous income. Miscellaneous income for the six months ended
June 30, 2000 was $8,000 compared to $456,000 for the six months ended June 30,
1999. The decrease in miscellaneous income of $448,000 was due primarily to
lower gains on disposal of property in the current year as compared to that of
the prior year.
Interest expense. Interest expense increased $6.0 million, or 44.0%, to
$19.8 million for the six months ended June 30, 2000 from $13.8 million for the
six months ended June 30, 1999. This increase was attributable primarily to
increased interest rates on the Company's variable interest rate debt and to
increased levels of debt resulting from the financing of the acquisition of the
Texas Stations and The Goshen News.
Income tax benefit. Income tax benefit for the six months ended June
30, 2000 and June 30, 1999 was $2.0 million and $684,000, 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 six months ended June 30, 2000 and June 30,
1999 was $5.7 million and $3.1 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $10.6 million and $10.3 million at June
30, 2000 and December 31, 1999, respectively. The Company's cash provided from
operations was $8.3 million and $6.5 million for the six months ended June 30,
2000 and June 30, 1999, respectively.
The Company's cash used in investing activities was $6.3 million and $22.7
million for the six months ended June 30, 2000 and June 30, 1999, respectively.
The decreased usage of $16.4 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 $2.3 million for the six months
ended June 30, 2000 while providing $19.5 million for the six months ended June
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 six months ended June 30, 2000, the Company issued 14,175
shares of its Class A Common Stock and 69,814 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 six months ended June 30, 2000.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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. During the six months
ended June 30, 2000, the Company paid $2.9 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, 2000,
the Company anticipates that it will generate taxable operating losses for the
foreseeable future.
At June 30, 2000, the balance outstanding and the balance available under
the Company's bank loan agreement were $220.0 million and $72.5 million,
respectively, and the effective interest rate on the balance outstanding was
9.7%.
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 June 30, 2000, the unpaid portion of this fee was $750,000 and
was included in the Company's accounts payable balance.
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.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the 2000 Annual
Meeting of Shareholders of the Company, on May 25, 2000, and
votes were cast as indicated.
1.) Election of Directors:
<TABLE>
<CAPTION>
Nominee For Withheld Authority
----------------------- ---------- ------------------
<S> <C> <C>
Richard L. Boger 66,689,988 360,097
Hilton H. Howell, Jr. 66,684,358 365,727
William E. Mayher, III 66,688,858 361,227
Zell Miller 66,689,988 360,097
Howell W. Newton 66,679,858 370,227
Hugh Norton 66,689,988 360,097
Robert S. Prather, Jr. 64,422,318 2,627,767
Harriett J. Robinson 66,686,226 363,859
J. Mack Robinson 64,414,387 2,635,698
</TABLE>
2.) To confirm the appointment of Ernst & Young LLP as independent
auditors of the Company for the year ending December 31, 2000.
For Against Abstain
---------- ------- --------
66,797,106 6,478 246,501
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE> 18
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 1, 2000 By: /s/ James C. Ryan
-------------- ------------------------------------------
James C. Ryan,
Vice President and Chief Financial Officer
18
