SEC Filing | Gray Television, Inc

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

2 INDEX GRAY COMMUNICATIONS SYSTEMS, INC. PART I. FINANCIAL INFORMATION PAGE - ------- --------------------- ---- 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 2

3 PART I. FINANCIAL INFORMATION ITEM 1. STATEMENTS GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31, 2000 1999 ------------- ------------- (UNAUDITED) 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 ============= ============= SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3

4 GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) MARCH 31, DECEMBER 31, 2000 1999 ------------- ------------- (UNAUDITED) 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 ============= ============= SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4

5 GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED MARCH 31, ----------------------------------- 2000 1999 ------------ ------------ 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) ============ ============ SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5

6 GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) Preferred Class A Class B Stock Common Stock Common Stock ----------------------- ------------------------- -------------------------- Retained Shares Amount Shares Amount Shares Amount Earnings -------- ------------ --------- ------------ --------- ------------- ------------ 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 ===== ============ ========= ============ ========= ============= ============ Class A Class B Treasury Stock Treasury Stock --------------------------- -------------------------- Shares Amount Shares Amount Total ----------- ------------- --------- ------------- ------------- 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 ========== ============ ======== ========== ============= SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6

7 GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------------------- 2000 1999 ------------ ------------ 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 ============ ============ SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 7

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: THREE MONTHS ENDED MARCH 31, ----------------------- 2000 1999 -------- -------- (IN THOUSANDS) 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) ======== ======== 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

9 NOTE C--INFORMATION ON BUSINESS SEGMENTS (CONTINUED) THREE MONTHS ENDED MARCH 31, ----------------------- 2000 1999 -------- -------- (IN THOUSANDS) 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 ======== ======== "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

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

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: THREE MONTHS ENDED MARCH 31, ------------------------------------------------ 2000 1999 ---------------------- ---------------------- PERCENT OF PERCENT OF AMOUNT TOTAL AMOUNT TOTAL ------- ---------- ------- ---------- (DOLLARS IN THOUSANDS) 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% ======= ===== ======= ===== 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

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

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

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

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

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

5 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.

3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 1,826,156 0 26,426,634 1,112,000 906,339 34,230,359 121,850,844 43,366,600 646,354,334 28,414,275 376,627,920 0 13,500,000 117,909,198 32,928,564 646,354,334 38,887,801 38,887,801 0 34,787,196 (63,301) 132,896 9,724,508 (5,560,602) (1,712,000) (3,848,602) 0 0 0 (3,848,602) (0.27) (0.27)