<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 MARCH 31, 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 APRIL 28, 2000 8,640,215 SHARES AS OF APRIL 28, 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 - March 31, 2000 (Unaudited) 3
and December 31, 1999
Condensed consolidated statements of operations (Unaudited) - 5
Three months ended March 31, 2000 and 1999
Condensed consolidated statement of stockholders' equity 6
(Unaudited) - Three months ended March 31, 2000
Condensed consolidated statements of cash flows (Unaudited) - 7
Three months ended March 31, 2000 and 1999
Notes to condensed consolidated financial statements (Unaudited) - 8
March 31, 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 15
SIGNATURES
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. STATEMENTS
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,826,156 $ 1,787,446
Trade accounts receivable, less allowance for doubtful accounts
of $1,112,000 and $1,008,000, respectively 25,314,634 30,338,425
Recoverable income taxes 2,169,025 2,053,025
Inventories 906,339 1,051,960
Current portion of program broadcast rights 2,811,313 3,538,441
Other current assets 1,202,892 803,410
------------- -------------
Total current assets 34,230,359 39,572,707
PROPERTY AND EQUIPMENT:
Land 4,385,286 4,385,286
Buildings and improvements 16,821,480 16,675,110
Equipment 100,644,078 98,760,379
------------- -------------
121,850,844 119,820,775
Allowance for depreciation (43,366,600) (39,443,291)
------------- -------------
78,484,244 80,377,484
OTHER ASSETS:
Deferred loan costs 9,274,780 9,656,586
Goodwill and other intangibles:
Licenses and network affiliation agreements 445,376,903 448,346,122
Goodwill 75,118,977 76,218,410
Consulting and noncompete agreements 1,747,412 1,869,368
Other 2,121,659 2,115,847
------------- -------------
533,639,731 538,206,333
------------- -------------
$ 646,354,334 $ 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>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable $ 3,292,350 $ 4,275,411
Employee compensation and benefits 5,098,581 5,163,973
Accrued expenses 2,298,148 3,161,581
Accrued interest 11,208,666 9,233,909
Current portion of program broadcast obligations 2,930,403 3,870,893
Deferred revenue 3,286,127 3,212,814
Current portion of long-term debt 300,000 316,000
------------- -------------
Total current liabilities 28,414,275 29,234,581
LONG-TERM DEBT 376,327,920 381,385,942
OTHER LONG-TERM LIABILITIES:
Program broadcast obligations, less current portion 275,013 428,867
Supplemental employee benefits 878,900 921,832
Deferred income taxes 73,613,829 75,389,829
Other acquisition related liabilities 2,506,635 2,607,492
------------- -------------
77,274,377 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 32,928,564 37,373,183
------------- -------------
173,565,145 177,936,374
Treasury Stock at cost, Class A Common, 1,121,657 and 1,127,282 shares,
respectively (8,463,917) (8,546,285)
Treasury Stock at cost, Class B Common, 68,605 and 110,365 shares,
respectively (763,466) (1,202,108)
------------- -------------
164,337,762 168,187,981
------------- -------------
$ 646,354,334 $ 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
MARCH 31,
-----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING REVENUES
Broadcasting (net of agency commissions) $ 26,668,453 $ 21,168,040
Publishing 9,921,227 8,022,053
Paging 2,298,121 2,201,977
------------ ------------
38,887,801 31,392,070
EXPENSES
Broadcasting 16,915,750 12,988,524
Publishing 7,664,910 6,354,622
Paging 1,504,024 1,513,645
Corporate and administrative 1,028,180 746,506
Depreciation and amortization 7,674,332 5,455,817
------------ ------------
34,787,196 27,059,114
------------ ------------
4,100,605 4,332,956
Miscellaneous income, net 63,301 421,748
------------ ------------
4,163,906 4,754,704
Interest expense 9,724,508 6,770,163
------------ ------------
LOSS BEFORE INCOME TAXES (5,560,602) (2,015,459)
Income tax benefit (1,712,000) (455,000)
------------ ------------
NET LOSS (3,848,602) (1,560,459)
Preferred Dividends 252,500 252,501
------------ ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (4,101,102) $ (1,812,960)
============ ============
AVERAGE OUTSTANDING COMMON SHARES:
Basic and Diluted 15,456,476 11,954,590
============ ============
LOSS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS:
Basic and Diluted $ (0.27) $ (0.15)
============ ============
</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
three months ended
March 31, 2000 (3,848,602)
Common stock dividends ($.02
per share) (309,393)
Preferred stock dividends (252,500)
Issuance of treasury stock:
401 (k) plan 19,343
Non-qualified stock plan 54,047 (34,124)
Purchase of Class B
Common Stock
----- ------------ --------- ------------ --------- ------------- ------------
Balance at March 31, 2000 1,350 $ 13,500,000 7,961,574 $ 10,683,709 8,708,820 $ 116,452,872 $ 32,928,564
===== ============ ========= ============ ========= ============= ============
</TABLE>
<TABLE>
<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
three months ended
March 31, 2000 (3,848,602)
Common stock dividends ($.02
per share) (309,393)
Preferred stock dividends (252,500)
Issuance of treasury stock:
401 (k) plan 15,621 172,773 192,116
Non-qualified stock plan 5,625 82,368 37,500 408,453 510,744
Purchase of Class B
Common Stock (11,361) (142,584) (142,584)
---------- ------------ -------- ---------- -------------
Balance at March 31, 2000 (1,121,657) $ (8,463,917) (68,605) $ (763,466) $ 164,337,762
========== ============ ======== ========== =============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,848,602) $ (1,560,459)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 4,077,529 2,832,799
Amortization of intangible assets 3,596,803 2,623,018
Amortization of deferred loan costs 381,804 285,128
Amortization of program broadcast rights 1,309,740 1,202,465
Payments for program broadcast rights (1,489,954) (1,190,132)
Supplemental employee benefits (42,932) (51,443)
Common Stock contributed to 401(k) Plan 192,116 144,859
Deferred income taxes (1,776,000) (582,000)
Gain on disposal of assets (9,290) (378,097)
Changes in operating assets and liabilities:
Receivables, inventories and other current assets 4,841,182 2,029,673
Accounts payable and other current liabilities 557,563 2,513,733
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,789,959 7,869,544
INVESTING ACTIVITIES
Purchase of newspaper business -0- (16,520,701)
Purchases of property and equipment (2,228,979) (2,436,979)
Deferred acquisition costs -0- (66,558)
Payments on purchase liabilities (133,653) (404,756)
Other 341,638 395,023
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,020,994) (19,033,971)
FINANCING ACTIVITIES
Dividends paid (561,893) (759,825)
Proceeds from sale of treasury stock - common 48,244 -0-
Purchase of treasury stock - common (142,584) (257,004)
Proceeds from borrowings of long-term debt 5,500,000 23,700,000
Payments on long-term debt (10,574,022) (11,092,887)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,730,255) 11,590,284
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 38,710 425,857
Cash and cash equivalents at beginning of period 1,787,446 1,886,723
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,826,156 $ 2,312,580
============ ============
</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 three-month period ended March 31, 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.
Certain amounts reported for the prior year have been reclassified to
conform to the 2000 format.
NOTE B--LONG-TERM DEBT
At March 31, 2000, the balance outstanding and the balance available
under the Company's bank loan agreement were $216.0 million and $79.0 million,
respectively, and the interest rate on the balance outstanding was 8.84%.
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
MARCH 31,
-----------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Operating revenues:
Broadcasting $ 26,669 $ 21,168
Publishing 9,921 8,022
Paging 2,298 2,202
-------- --------
$ 38,888 $ 31,392
======== ========
Operating income:
Broadcasting $ 2,506 $ 3,120
Publishing 1,376 1,032
Paging 219 181
-------- --------
Total operating income 4,101 4,333
Miscellaneous income, net 63 422
Interest expense (9,725) (6,770)
-------- --------
Loss before income taxes $ (5,561) $ (2,015)
======== ========
</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
NOTE C--INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Media Cash Flow:
Broadcasting $ 9,710 $ 8,297
Publishing 2,292 1,690
Paging 802 699
-------- --------
$ 12,804 $ 10,686
======== ========
Media Cash Flow reconciliation:
Operating income $ 4,101 $ 4,333
Add:
Amortization of program broadcast rights 1,310 1,202
Depreciation and amortization 7,674 5,456
Corporate overhead 1,028 747
Non-cash compensation and contributions
to the Company's 401(k) plan, paid in
common stock 181 138
Less:
Payments for program broadcast
obligations (1,490) (1,190)
-------- --------
Media Cash Flow $ 12,804 $ 10,686
======== ========
</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 MARCH 31,
------------------------------------------------
2000 1999
---------------------- ----------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BROADCASTING
NET REVENUES:
Local $14,946 38.4% $12,524 39.9%
National 7,187 18.5 5,503 17.5
Network compensation 2,017 5.2 1,396 4.4
Political 524 1.4 49 0.2
Production and other 1,995 5.1 1,696 5.4
------- ----- ------- -----
$26,669 68.6% $21,168 67.4%
======= ===== ======= =====
PUBLISHING
NET REVENUES:
Retail $ 4,484 11.5% $ 3,682 11.7%
Classified 3,147 8.1 2,554 8.1
Circulation 1,939 5.0 1,502 4.8
Other 351 0.9 284 1.0
------- ----- ------- -----
$ 9,921 25.5% $ 8,022 25.6%
======= ===== ======= =====
PAGING
NET REVENUES:
Paging lease, sales and service $ 2,298 5.9% $ 2,202 7.0%
======= ===== ======= =====
TOTAL $38,888 100.0% $31,392 100.0%
======= ===== ======= =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Revenues. Total revenues for the three months ended March 31, 2000
increased $7.5 million, or 23.9%, over the same period of the prior year, to
$38.9 million from $31.4 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, (iii) increased revenues from existing publishing operations
and (iv) increased paging revenues.
Broadcasting revenues increased $5.5 million or 26.0%, over the same
period of the prior year, to $26.7 million from $21.2 million. The Texas
Acquisitions accounted for an increase of $5.2 million. 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 March
31, 2000 were consistent at $5.2 million, when compared to the same period of
the prior year. Political advertising revenue was $524,000 for the three months
ended March 31, 2000, compared to $49,000 for the same period of the prior
year. Broadcasting revenues, excluding the results of the Texas Acquisitions,
increased $267,000, or 1.3%, over the same period of the prior year, to $21.4
million from $21.2 million. This increase was due primarily to increased
political advertising revenue.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
(CONTINUED)
Publishing revenues increased $1.9 million, or 23.7%, over the same
period of the prior year, to $9.9 million from $8.0 million. The increase in
publishing revenues was due primarily to increased revenues from the Company's
existing publishing operations and from the revenues generated by The Goshen
News which was acquired on March 1, 1999. Revenues from the Company's existing
publishing operations increased $1.0 million, or 13.4%, over the same period of
the prior year, to $8.5 million from $7.5 million. The primary components of
the increase in revenues from existing operations were increases in retail
advertising, classified advertising and circulation revenues of $432,000,
$327,000 and $205,000, respectively. The Goshen News provided revenues of $1.4
million for the three months ended March 31, 2000. On a pro forma basis,
assuming that the Goshen Acquisition had been completed on January 1, 1999,
revenue for The Goshen News increased $215,000, or 17.7%, to $1.4 million from
$1.2 million, as compared to the same period of the prior year.
Paging revenues increased $96,000, or 4.4%, over the same period of
the prior year, to $2.3 million from $2.2 million due primarily to an increase
in the number of pagers. The Company had approximately 90,000 pagers and 87,000
pagers in service at March 31, 2000 and 1999, respectively.
Operating expenses. Operating expenses for the three months ended
March 31, 2000 increased $7.7 million, or 28.6%, over the same period of the
prior year, to $34.8 million from $27.1 million, due primarily to increased
broadcasting expenses, publishing expenses and depreciation and amortization
expense.
Broadcasting expenses increased $3.9 million, or 30.2%, over the three
months ended March 31, 1999, to $16.9 million from $13.0 million. The
acquisition of the Texas Stations accounted for an increase of $2.9 million. 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 March 31, 2000 decreased $253,000, or 8.0%, to $2.9
million from $3.2 million. Broadcasting expenses, excluding the results of the
Texas Stations, increased $1.0 million, or 7.9 %, over the same period of the
prior year, to $14.0 million from $13.0 million. The increase was due primarily
to increased employee compensation expense.
Publishing expenses for the three months ended March 31, 2000
increased $1.3 million, or 20.6%, from the same period of the prior year, to
$7.7 million from $6.4 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 from the
Company's existing publishing operations increased $664,000, or 11.1%, over the
same period of the prior year, to $6.7 million from $6.0 million. The increase
in expenses at the Company's existing publishing operations 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 $1.0 million for the
three months ended March 31, 2000. On a pro forma basis, assuming that the
Goshen Acquisition had been completed on January 1, 1999, expenses for The
Goshen News increased $59,000, or 6.3%, to $1.0 million from $0.9 million, as
compared to the same period of the prior year reflecting in part the
commencement of a Sunday edition as of August 1, 1999.
Paging expenses remained consistent with that of the prior year at
approximately $1.5 million.
Corporate and administrative expenses increased $281,000, or 37.6%, to
$1.0 million for the three months ended March 31, 2000 from $747,000 for the
three months ended March 31, 1999. 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 $7.7 million for the three months ended March 31, 2000, as compared
to $5.5 million for the same period of the prior year, an increase of $2.2
million, or 40.7%. This increase was primarily the result of higher
depreciation and amortization costs related to the acquisition of the Texas
Stations and The Goshen News.
12
<PAGE> 13
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
(CONTINUED)
Miscellaneous income. Miscellaneous income for the three months ended
March 31, 2000 was $63,000 compared to $422,000 for the three months ended
March 31, 1999. The decrease in miscellaneous income of $359,000 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 $3.0 million, or 43.7%,
to $9.7 million for the three months ended March 31, 2000 from $6.8 million for
the three months ended March 31, 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 three months ended
March 31, 2000 and March 31, 1999 was $1.7 million and $455,000, 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 first
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 March 31, 2000
and March 31, 1999 was $4.1 million and $1.8 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $5.8 million and $10.3 million at
March 31, 2000 and December 31, 1999, respectively. The Company's cash provided
from operations was $7.8 million and $7.9 million for the three months ended
March 31, 2000 and March 31, 1999, respectively.
The Company's cash used in investing activities was $2.0 million and
$19.0 million for the three months ended March 31, 2000 and March 31, 1999,
respectively. The decreased usage of $17.0 million from 1999 to 2000 was
primarily due to the acquisition of The Goshen News in 1999 and no similar
transactions ocurring in the current quarter.
The Company's financing activities used $5.7 million for the three
months ended March 31, 2000 while providing $11.6 million for the three months
ended March 31, 1999. The increase in cash used in financing activities
resulted primarily from increased payments on long-term debt in the current
quarter as compared to borrowings on long-term debt to fund the acquisition of
The Goshen News in 1999.
During the three months ended March 31, 2000, the Company issued 5,625
shares of Class A Common Stock and 53,121 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 three months ended March 31, 2000.
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 three months
ended March 31, 2000, the Company paid $1.5 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 March 31,
2000, the Company anticipates that it will generate taxable operating losses
for the foreseeable future.
At March 31, 2000, the balance outstanding and the balance available
under the bank loan agreement were $216.0 million and $79.0 million,
respectively, and the effective interest rate on the balance outstanding was
8.84%.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 will be payable in equal monthly installments of $50,000.
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 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.
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.
14
<PAGE> 15
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
15
<PAGE> 16
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: April 28, 2000 By: /s/ James C. Ryan
-------------- ----------------------------------
James C. Ryan,
Vice President - Finance &
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 2000 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF GRAY
COMMUNICATIONS SYSTEMS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,826,156
<SECURITIES> 0
<RECEIVABLES> 26,426,634
<ALLOWANCES> 1,112,000
<INVENTORY> 906,339
<CURRENT-ASSETS> 34,230,359
<PP&E> 121,850,844
<DEPRECIATION> 43,366,600
<TOTAL-ASSETS> 646,354,334
<CURRENT-LIABILITIES> 28,414,275
<BONDS> 376,627,920
0
13,500,000
<COMMON> 117,909,198
<OTHER-SE> 32,928,564
<TOTAL-LIABILITY-AND-EQUITY> 646,354,334
<SALES> 38,887,801
<TOTAL-REVENUES> 38,887,801
<CGS> 0
<TOTAL-COSTS> 34,787,196
<OTHER-EXPENSES> (63,301)
<LOSS-PROVISION> 132,896
<INTEREST-EXPENSE> 9,724,508
<INCOME-PRETAX> (5,560,602)
<INCOME-TAX> (1,712,000)
<INCOME-CONTINUING> (3,848,602)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,848,602)
<EPS-BASIC> (0.27)
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